Helios Technologies, Inc.
Q3 2008 Earnings Call Transcript

Published: 4 Nov 2008

[Operator:]

Greetings, ladies and gentlemen and welcome to the Sun Hydraulics third quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Rich Arter, Investor Relations Spokesperson for Sun Hydraulics. Thank you Mr. Arter, you may begin.

[Rich Arter:]

Thank you, Claudia. Good morning and thank you for joining us today. Allen Carlson, Sun’s President and CEO and Tricia Fulton, Sun’s Chief Financial Officer, are participating in today’s call. Please be aware that any statements made in today’s presentation that are not historical facts are considered forward-looking statements within the meaning of section 21-E of the Securities Exchange Act of 1934. For more information on forward-looking statements please see last night's press release. We will take questions once we have completed our prepared remarks. It is now my pleasure to introduce Allen Carlson.

[Allen Carlson:]

Good morning. We are pleased with the continued growth we saw in the third quarter. The incremental sales increase resulted in significant earnings growth. As stated in the press release, we saw business slowing in the third quarter and continuing into the fourth quarter. Sun’s products are tied to the capital goods industries, which is cyclical. We all know capital goods production is slowing all over the world and this will impact our fourth quarter results. However, we believe it’s important through out all phases of the business cycle to continue to invest and focus on creating opportunities for long-term profitable growth. Delivering our products to customers when they want them has been, and will continue to be a key contributing factor, as Sun’s market share gains. International sales will continue to be an important and larger part of our future growth. We are continuing to invest in product development, enhancing our product line and brand strength. Our balance sheet is strong and we have the financial strength to seek opportunities that we believe are consistent with our business and long-term vision. History has proven that every economic expansion pauses and sometimes goes negative before expanding again. We know that the largest gains go to those who are poised and agile enough to participate in the cycle long-term. Tricia will now discuss the specifics of the past quarter and will then take questions. Tricia.

[Tricia Fulton:]

Thank you, Al. All comparisons will be to the same period last year. Moderating order rates throughout the third quarter translated to 7% sales growth. Net income was up 29%. There was virtually no effect from foreign currency on sales this quarter. Basic and diluted earnings per share were $0.40, an increase of 25%. Comparing Q308 to Q307, we achieved sales increases throughout North America and Europe. Sales to North America increased 9%, while sales to Europe increased 12%. A significant slowdown at a single Korean customer, supplying products to a U.S. manufacturer, resulted in Asian sales decreasing 6%. Otherwise, business activity in Asia remains strong. Please note that these numbers reflect sales to each region. The sales reported in the second information of the press release, represents sales from each geographic operating unit. Gross profit increased 11% to 14.7 million. Gross profit as a percentage of sales was up 1 point to 33%. Margin increases were achieved largely by the additional sales volume. FDA increased 3.5% to 5.5 million. The increase was driven primarily by compensation of fringe benefit costs and professional fees related to the R&D tax credit studies. Our effective tax rate was 31.8% compared to 36.6%. The third quarter provision includes tax expense of 800,000 in related to the repatriation of cash from Sun Germany and a tax benefit of 900,000 for R&D tax credits related to 2004 through 2007. The tax benefit from the R&D tax credit was not included in Sun’s third quarter estimates. Net cash from operations was nearly 31 million, up 11 million from last year. The increase was due to higher net income of 6.2 million, offset by working capital changes. Day sales outstanding was 38 and inventory turns were 10.5. Capital expenditures for the quarter were 2.5 million and our estimate for the year remains at 12 million. Our quarterly past dividend of $0.09 per share was declared in the third quarter and paid in October. Fourth quarter sales are estimated to be approximately 34 million, an 18% decrease from last year. Fourth quarter earnings per share are estimated to be between $0.20 and $0.22 per share, compared to $0.31 per share last year. Given these fourth quarter estimates, we will end 2008 with sales of approximately 180 million, up 8% over 2007. Earnings per share for 2008 are estimated to be between $1.60 and $1.62. Thank you. We will now open the call for Q&A. Rich.

[Rich Arter:]

Okay, Claudia. Maybe if you could poll them and to get our first question.

[Operator:]

(Operator Instructions) Our first question is coming from Chris Weltzer. Please state your question.

[Chris Weltzer:]

Good morning, gentlemen. Given the sharp swings we’ve seen in currency recently, I just want to make sure I understand your currency exposure correctly. In addition to just the fewer translational effects of translating foreign revenue and earnings into U.S. dollars, you also ship product from Florida to be sold internationally. Are those sales priced in dollars or local currency?

[Tricia Fulton:]

Those sales are priced in dollars. Anything that comes from Sun Sarasota to our subs in UK, Germany, Korea, China, are all sold in U.S. Dollars, so as the dollar strengthens, their cost of sales go up.

[Chris Weltzer:]

I see, but the actual end product for the customer is sold in local currency?

[Tricia Fulton:]

In most cases, not all cases. We have over half of our sales in the U.K. are actually made in U.S. dollars. So, they are somewhat self hedged in that regard. But, everything coming out of Germany primarily is sold in Euros and Korea would be in won.

[Chris Weltzer:]

Okay, that’s very helpful. And then sort of relatedly, does the sharp slowdown in your business, you know you’ve seen throughout the quarter, does that change your pricing plans at all? I know you had a price increase expected to come into place in October. Does the strengthen of the U.S. dollar change your international pricing pointers?

[Allen Carlson:]

First part of the question is did it effect our pricing plan for October? No. We continued through with the price increase. It was a very modest price increase, in fact significantly less than what others in our industry have done during the course of the year and it was a catch up price increase based on material cost increases. So, we went forward with that. We are reviewing our plans for Europe and other parts of the world. Fundamentally, I don’t think we are going to change much. We might tweak it a little bit here or a little bit there. We’ve been in the process of analysis of pricing almost during the whole year, what we’re going to do, so I don’t think there will be any surprises.

[Chris Weltzer:]

Okay, have you seen any competitors getting more aggressive with price yet?

[Allen Carlson:]

Really, no.

[Chris Weltzer:]

Okay.

[Allen Carlson:]

More aggressive with price up or down?

[Chris Weltzer:]

Down.

[Allen Carlson:]

No. Up some.

[Chris Weltzer:]

Okay, that’s very helpful. And then last one, wondering does the R&D tax credit effect the tax rate you expect going forward?

[Tricia Fulton:]

We know that the 2008 R&D tax credit was passed. There will some effect of that on 2008, but it will be fairly small. As you can see, for four years it was about 900,000, so its not a lot of money every year. So, it won’t have a huge effect on the tax rate.

[Chris Weltzer:]

Okay, but you expect to recognize a catch up in the 4Q?

[Tricia Fulton:]

Yes, for 2008.

[Chris Weltzer:]

Got it. Okay. Thank you very much.

[Rich Arter:]

Thanks, Chris.

[Operator:]

Thank you, our next question is coming from Joe Mondillo with Sidoti and Company. Please state your question.

[Joe Mondillo:]

Good morning, everyone. Just to parlay off of the last question regarding currency, do you have any… is there any guidance of currency… or is there any currency in your guidance for the 4Q?

[Tricia Fulton:]

The fourth quarter estimates are based off of the exchange rates that we’re seeing currently.

[Joe Mondillo:]

So, how much would you say in you guidance, like EPSA, is currency in there? Do you have that number?

[Tricia Fulton:]

It really isn’t as the EPS line; we use it to do just the translation. We don’t base any foreign currency gain or loss into our forecast, just the translation portion.

[Joe Mondillo:]

Okay. In the press release, you site, we look at tightening our belts in the short-term. What do you mean by that? How are you…Is that something to do with expenses? Could you just elaborate on that?

[Tricia Fulton:]

We, there are a few things that we can do. One is related to expenses, obviously you can look at discretionary spending and cut out the things that you don’t necessarily have to spend money on at this time. The other thing is related more on the labor side to overtime, reduce overtime in all areas where we can. There are still some areas where we need to work the overtime, but if we can, we’ve reduced people back to 40 hours.

[Joe Mondillo:]

Oh, okay.

[Allen Carlson:]

A couple of other things that we’ve done, recognizing in August that there was uncertainty in the future, we stopped hiring production workers. So, today some attrition has taken place, which has taken our workforce down a slight amount. We will continue to be very cautious with additional hiring, even when we take a look at an upturn. Our production hiring needs, we are moving people around the company because Tricia commented that without working overtime, we still have areas of the company that are very strong product wise, and the way we’ve handled that is we’ve moved production workers from areas where we didn’t have quite as much need to areas where we higher need to balance out the workload. And our workforce is very flexible and agile and able to do that.

[Joe Mondillo:]

Okay, great. Could you just elaborate on how the quarter played out. Obviously, your guidance is quite a bit of a cliff. Could you just tell us how the quarter played out in terms of month to month? Did things really fall off in September, and how is October looking in terms of orders?

[Tricia Fulton:]

Yes, throughout the third quarter, we did see month to month orders declining. We are still seeing that a little bit into October they are stabilizing somewhat off of the September numbers at this point. But, September was definitely the lowest order month of the quarter and those levels are continuing into Q4.

[Joe Mondillo:]

Okay. And then lastly, could you just tell us how this downturn is comparing to the last downturn that you’ve seen? How Sun is different and if you guys will be able to weather it any better than you did in the last downturn?

[Allen Carlson:]

I think we’ve weathered it quite well in the last downturn. You know, we positioned ourselves for the last five years of growth, both in terms of revenue and earnings, so our model is very much similar to what we did last time. While we were tightening our belts, as we said, it’s on the expense side. We are continuing to invest in people and products and capital equipment. We do not intend to recover capital equipment plans. We will position ourselves for the upturn. We’re in a cyclical business. We know that. And we expect a downturn, this particular downturn was actually predicted by a number of people in the industry two years ago, that it was going to happen in rate 08 and continue into 09. So, this is not a surprise. And we will continue to follow the model we’ve used previously to invest in our business. This separates the difference between investors and speculators.

[Joe Mondillo:]

All right. Thanks a lot guys.

[Tricia Fulton:]

I was just going to add on to Al’s comments to Joe, that we are sitting very well, with a very strong balance sheet at this point, a lot stronger than we did in the last downturn, as well. And, you know, having a lot of cash at this point available to us and good business model and continuing to invest using the cash that we do have, will definitely help us through any downturn.

[Operator:]

Our next question is coming from Fred Russell with Fredrick E. Russell Investments. Please state your question.

[Fred Russell:]

Yes, good morning. I have a number of questions. Your CFO just used that phrase good business model. Would you… we hear that phrase a lot. What does it really mean?

[Tricia Fulton:]

Well, I think that it means that we know that we have our fundamentals in place. We have a very good distributor network. We have good products. We continue to do business the way that has made us successful for the last 38 years. And a cyclical downturn happens every few years, and you have to get through it. And this isn’t the type of business that is continued growth and as long as you plan for the long-term, you know, throughout any part of the business cycle, I think you are going to come out better in the end than the people that make short-term decisions, both on the upside of the market and the down.

[Fred Russell:]

In your analysis, have you seen any changes in market share, good or bad for Sun Hydraulics? And if so, in what areas? And what do you attribute those changes to?

[Allen Carlson:]

We continue to see market share growth. We plot our sales relative to the industry statistics and over the last two or three business cycles we’ve taken market share. We typically take the market share coming out of a downturn. It’s in the upturn, but you prepare the downturn for the eventual upturn, that’s when you take market share. What do I attribute it to? I would say our ability to ship products on time to customer requests when business is strong. During this last cycle, many of our competitors had problems shipping products and it created opportunities for us, because we had taken the steps to be prepared.

[Fred Russell:]

Would you say that your gains in market share and we’d love to have some quantification of those. Would you say your gains in market share can be attributed to more efficient delivery? More than the nature of the products? What do you think?

[Allen Carlson:]

You didn’t let me finish, I had five points, I was going to, I just got through number one.

[Fred Russell:]

Okay, good.

[Allen Carlson:]

Number two, is our website. We have the ability to pass information around the world in a way that allows our customers and distributors to configure product 24/7, around the clock. Our website has been designed to take products to the market. Number three is our electro-hydraulic products. It’s taking us into new markets and its in concert with number four, our ability to take packages to market with these electro-hydraulic products. And number five is our global footprint. Right now, 55% of our business is outside the United States. That’s helping us. Many of the people in our industry who are seeing a much more significant impact on incoming orders than what we are seeing. We’re balanced in terms of having a strong footprint in Europe and Asia, where the market still is strong.

[Fred Russell:]

You said that in the last quarter, as some of your markets were very strong, and that would might suggest that some of them were very weak. Could you give some indications, some details, on which were strong and which were weak, and why do you think that that occurred?

[Allen Carlson:]

First of all, the U.S. market has been going down for quite some time. So, I would say the U.S. market of the three, is the weakest. But, it started sort of slowing down, the capital goods market, probably right around the subprime era. Right after that. It’s been a year, year and a half. We were still strong throughout that period, but the market was weak. We had to work a lot harder to get the business we got. There was a very strong headwind in the U.S., has been for the last year and a half. Europe has been strong up until, I would say, this quarter, when we began to see a slowdown in Europe. But, there are still opportunities in Europe. Asia, except for, you know, I think Tricia mentioned in her financial analysis, except for one customer that exports to the U.S. in Korea, Asia is still quite strong for us.

[Fred Russell:]

Do you think that your dividend is safe?

[Allen Carlson:]

Yes.

[Fred Russell:]

Do you plan to increase it?

[Allen Carlson:]

That’s a board decision that hasn’t been made or even been discussed at this time.

[Fred Russell:]

Do you have any projection on that?

[Allen Carlson:]

No.

[Fred Russell:]

One question that was asked was this, asked of your CFO, where do you consider reducing your expenditures? And she gave an answer that I didn’t understand. She said, “We’re cutting out the things that are not necessary.” How do you define unnecessary? And does that include executive compensation?

[Tricia Fulton:]

I think that what I said were gains that were not necessary at this time. That would be defined as discretionary spending. There are things that we don't have to do right this minute but we eventually would like to do to further the business. Those are types of things like outside services when we have people come in to help with programming. There are a lot items that fall into that category, but I don't think that I meant to say or meant to infer that they were things that we don't really need to do that we would spend money on this we had more income, that's not the case.

[Fred Russell:]

I didn't throw that conclusion. What I was looking for was some examples, some facts, some details.

[Tricia Fulton:]

One of the biggest examples that I gave was outside services. When we have people come in and do consulting type services for Sun that we don't do internally, that's definitely discretionary spending. And most of the time they are projects that we would like to do and like to get done but we're tightening our belts. There are things that we look out probably a little closer than we would have otherwise.

[Fred Russell:]

That's not going to get done. They're going to get done at a later date.

[Operator:]

Thank you. Our next question is coming from George Prince with Voyager Asset Management. Please state your question.

[George Prince:]

Hey everybody.

[Allen Carlson:]

Hello George.

[Tricia Fulton:]

Hello George.

[George Prince:]

Hey, Al, I'm – well, call it impressed. Has the tightness of your guidance going forward with the what I call a fairly large change traces to how you get such a tight number, maybe you could explain a little bit of your building that number.

[Allen Carlson:]

Sure. You're right. We have had a pretty long track record of being able to predict the quarter and our guidance doesn't go beyond the quarter. Part of the reason for that is that we go back and take a look at when we miss it. Even if we missed it by a slight amount, what was the root cause and what corrections can we take for future projections and our financial people have a model that they're using and they keep refining the model as they go forward with this root cause corrective action approach. We also have to look at our book to ship rate. It's pretty close. So, we don't have a lot of orders out there hanging that could be cancelled and be a problem for us. So, we're projecting right now for example, the fourth quarter results. We are five weeks into the fourth quarter but in terms of orders, we're eight weeks into the third – maybe nine weeks into the fourth quarter. So our projections are based upon trends, trend analysis, and root cause. But when we miss it, even if it's a slight amount, one way or the other, why did we miss it and how can we improve the formula for the future.

[George Prince:]

So you would say this is very order tight. You're not necessarily throwing out the kitchen sink here 'cause your going to have one last quarter.

[Allen Carlson:]

Correct.

[George Prince:]

And if things were to change, first I was struck by the comment that August was weaker than July, September was weaker than August, but October and November seem to be stabilized in around September orders. If you were to see a pick up, would you announce that mid-quarter or you would just wait?

[Allen Carlson:]

We would just wait. Our approach is to do not send signals and do not take short-term knee jerk kind of reaction either up or down. But we'll sell off or something dramatically happens, we might consider it then but during the normal course of a quarter, I don't think it's wise to look at the ticker minute to minute or hour to hour and we just got another big order so we're going to announce that. I don't think that's wise.

[George Prince:]

Okay. And last question. Your input costs – have you seen a change? Can you incorporate the changes helpful to you? Given what we see with commodity prices, we would think that you'll be seeing some tailwinds now.

[Tricia Fulton:]

We are seeing a little bit of a downtake in our material costs and the percentage of sales. But we also didn't see the huge uptake that other people saw. We had surcharges that captured some of our purchased parts. We buy a lot of the purchase that go into the cartridges. We are seeing those surcharges go away now but because we didn't see a large upside, we won't see as much downside either.

[George Prince:]

Okay. Well, thank you and good luck.

[Tricia Fulton:]

Thanks.

[Allen Carlson:]

Thanks George.

[Operator:]

Our next question is coming from Holden Lewis with BB&T Capital Markets. Please state your question.

[Holden Lewis:]

Thank you, good morning.

[Allen Carlson:]

Good morning, Holden.

[Holden Lewis:]

A couple of things, first just back on the pricing really quickly, I think originally, were you talking about something like 3%-ish pricing, is that the number that you ultimately went out there with? Or did you scale back that price increase to a lower level?

[Allen Carlson:]

3% approximately. It varies by product but it’s approximately 3%.

[Holden Lewis:]

Right. That went ahead as expected. Do you not get any pushback or anything like that or are you not seeing any – doing any greater discounting or anything that might sort of eroded a bit of that, at this point?

[Allen Carlson:]

Actually there is some erosion but not significant and we had had discussions with many of our customers to explain that this price increase is relatively modest in the industry. Our costs have exceeded that and what we’re trying to do is to make up the difference between what we couldn’t get out of productivity gains. So we really didn’t have all of our cost on for a price increase. We’ve had the portion on, that we couldn’t absorb through productivity.

[Holden Lewis:]

Sure, okay. So, but when I look at your revenue growth, about 300 basis points, and that is from price or what’s the total pricing contribution when you consider all of your actions?

[Tricia Fulton:]

It’s in the fourth quarter, it will be right around 3%, it probably will be a little bit less than that – may be two-and-a-half.

[Holden Lewis:]

And what was it in Q3?

[Tricia Fulton:]

The only effect on Q3 was from the price increase that we put into effect January 1, and that was somewhere around 1% at this point.

[Holden Lewis:]

Okay, okay. Got it. And then, looking for a little historical perspective, I mean, as recently as 2002 which of course was the end of the last downturn, all of your margins in all of your operating units were in the mid-single digit range. Now obviously you’ve been – all your business, you’ve been doing high teens, even 20% somewhat – is there some reason why we wouldn’t assume that the bona fide downturn that’s unfolding, you would not return to those single-digit levels? In a world where the currency, where the dollar is now weakening or strengthening instead of weakening, or demand is falling off, are we going to do a complete round trip from the margins that we’ve been enjoying to back to those mid-single digit levels?

[Tricia Fulton:]

I think if sales goes on, we talked about this on the last conference call, if sales go down we have a fixed cost base that actually could be absorbed. And we will see margins decline as sales volume decline, but there’s no reason to think that when sales volume starts to go back up in the upturn that we cant’ get back to very significant margins especially with the measures that we take during the downturn to put productivity improvements in place, like we did the last time. I think that you look back at the 2003 and 2004 numbers, you’d see a pretty quick uptake of those growth margins as the volumes increase and we saw the benefit of that even more in 2007, 2008. But it definitely causes margin erosion when you lose your sales volume when you have the fixed cost base in place that we do.

[Holden Lewis:]

Right. But I guess – there’s no doubt that the margins would come off, I mean that would be expected, I guess I’m wondering about the order of magnitude. And I guess the question gets to, you’ve long been a very solid operating entity, I think that was the case in the last downturn, I think it’s the case at this downturn, is there anything different about your business today versus the last downturn that might give us some comfort that – okay if margins were in the mid-single digits before, maybe we’ve need to go back to that level, or is that – do you kind of view mid-single digits as being a cyclical norm?

[Tricia Fulton:]

I don’t think that we can accept that what happened in the last downturn would reflect the margins in the level that they got to, would happen this time. We’re at very much, very high sales level compared to where we were then. So we know that there’s already some margin that will be saved because of the additional sales volume now over what we saw in 2001, 2002 timeframes. So I wouldn’t try to make that correlation. A lot of change in that time, both in the equipment that we put in place and the processes that we put into place then, and things are different.

[Holden Lewis:]

Okay –

[Allen Carlson:]

I would add on to that, is that our capacity utilization is much higher going into this downturn than it was during the last downturn.

[Holden Lewis:]

Right. Is there a reason to think that obvious utilization is going to get weaker, right – is there a reason to think that utilization’s drop would be higher than it was than the last drop?

[Allen Carlson:]

I guess you’ll have to tell me how long and how deep the profits, but my bet is – yes –

[Holden Lewis:]

I would guess it going into the last downturn; you would’ve said the same thing that utilization was very high.

[Allen Carlson:]

No. We just completed a brand new facility. We doubled our output. Remember in 97 to 98 timeframe, we added another factory here in Sarasota right after hills is going public and the downturn hit us before we actually had that capacity being utilized or being sold in the marketplace.

[Tricia Fulton:]

And at the time that Al is talking about, our sales were about a third of what they are now which has created a completely different situation.

[Holden Lewis:]

Last summer, I’m aware that you’re also doing something with your IT systems.

[Allen Carlson:]

Yes, we’re preparing for Y2K.

[Holden Lewis:]

Okay. Was that disruptive then? I mean, is that – how should we? – That was an issue with respect to the margins during that period of time. Is that right?

[Allen Carlson:]

Sure. Absolutely. It was an issue. We spent a lot of time and energy on a new enterprise software package which we’re using today. That’s not going to be the case going forward.

[Holden Lewis:]

And in terms of what happened with that – was the disruption just because you were putting in place or was there actual issues that arose when you implemented it in terms of reducing productivity including growing pains of those systems at the time?

[Allen Carlson:]

Both –

[Holden Lewis:]

Okay, I guess the last thing I have is when you think about the opportunities, your balance sheet, and all that sort of thing, does this make you more interested in sort of the M&A side of things in expanding into maybe related but different product offerings, I mean, how do we – how should we view your interest in sort of expanding your footprint if will given your strength into a downturn?

[Allen Carlson:]

Well, you know that over the least couple of years, we’ve invested in two companies, one White Oak and High Country Tek, which provides us electronic products which are companion to what we do. Some of the products were actually imbedding into our own product, others are products that drive our product, so taking us into new market. I think you’ll continue to see us making those kinds of investments. We look at M&A as a means to grow but it’s not our primary focus in growing but it’s another way to grow. And we have the cash to make acquisitions if we find one that make sense strategically and help us to grow sustainably.

[Holden Lewis:]

Right. And are you seeing anything better out of that pipeline or are you still opportunistic to looking at and quite frankly there is – you would not anticipate anything of that sort anytime?

[Allen Carlson:]

I wouldn’t say that. But – But I can’t make any announcements right here.

[Holden Lewis:]

Alright. Thank you.

[Allen Carlson:]

Okay.

[Operator:]

Your next question is coming from John Braatz with Kansas City Capital. Please state you question.

[John Braatz:]

Good morning Tricia and Allen. When I look at the broad spectrum of the industrial companies reporting over the last two and half, three weeks, it seems like your fourth quarter numbers are coming off a little bit more than what the group has. I mean obviously there are some that are down as much. Do you see something peculiar in your business and the order flows that may account for that? For example how – what are the dealer distributor inventories like? Have they cut back your inventories and what can you tell me, sir, about the sell through of your product versus the inventory position of the distributors? I’m trying to get the sense as to why maybe your businesses appears to be, at least in my mind, appears to be a little bit weak in the fourth quarter than some of the other companies.

[Allen Carlson:]

What other companies would you be talking about John?

[John Braatz:]

Industrial companies and obviously not companies that are identical to you by any means, okay? But just a broad spectrum of industrial related type of companies.

[Allen Carlson:]

Okay, I’ll try to paint a picture for you on that, the best that I can.

[John Braatz:]

Okay.

[Allen Carlson:]

Many of the companies that you perhaps have been looking at, saw the downturn start earlier in 2008 than we saw it happening in August and September. So perhaps there are some of that but ours was delayed. Dealer inventory is not an issue. Our inventory in the network has pretty much liquidity. It has been through the last cycle. It hasn’t even – it hasn’t grown to keep up with the sale. This pretty much has been stagnant. Because we were able to ship products when customers want them, dealers haven’t had to turn a lot of inventory. I think if you look at what’s going on in the market today, there are two segments of the markets we’re playing, one is mobile and one is industrial. And when I talk to some of the industrial people and what I mean by industrial is products that end up in a plant somewhere without tires or wheels on them. That market still seems to be pretty strong. We’re not seeing a big downturn yet in that market. On the mobile side, anything that’s due to construction whether it’s light constructions or heavy constructions, that market has slowdown significantly in the U.S., beginning to slowdown in Europe, and hasn’t yet affected Asia. So that’s kind of what we’re seeing.

[John Braatz:]

Okay.

[Tricia Fulton:]

I think that we tend to see cycle upturns and downturns pretty quickly being a little further down the food chain. We saw it on the upturn faster than probably some of the companies that you’re speaking of saw the upturn and I think we’re seeing the downturn a little quicker as well.

[John Braatz:]

Okay. You mentioned Tricia that you had one customer in Asia that cut back significantly, was that just temporary and how much of an impact was that on revenues?

[Tricia Fulton:]

It was temporary. We don’t know how long it will last. I don’t think that they have made any announcements of how long it will last. The impact to the Korean operation is somewhat significant, it’s maybe 20% of their individual sales so it’s significant to them.

[John Braatz:]

Was that a mobile related product?

[Tricia Fulton:]

Yes, related to area work platform by a U.S. manufacture.

[John Braatz:]

Okay. Secondly, obviously we’re going to see some deleveraging of the expenses in the fourth quarter and sort of – you back through the numbers, maybe come up with like an operating margin around 15% for the fourth quarter. Sales sort of leverage off, will we see some growing benefit as we go into 2009 from some of the actions you’re taking to reduce expenses or – I guess, I’m going back to the lot of the margin questions if we just see a sort of stability from this point on, do we see margins – are there enough actions out there that can be taken and are going to be taken that we’ll see a sort of stability in the margin at sort of the mid teen area?

[Tricia Fulton:]

I think that that will be completely dependent on where our sales volumes end up in 2009. It is extremely difficult for us to see that. We don’t have any visibility so we don’t know. We can only see what we have provided for the fourth quarter. Obviously, anything you can do to benefit cost that would be carried forward would benefit you throughout the entire downturn but we don’t want to take any short-term knee-jerk reaction to reducing expenses that would hurt us for the long-term.

[John Braatz:]

Any sense on the magnitude of those as you would characterized nondiscretionary expenditures that you could postpone or delay when you look at the universe of thing that you may be able to? How sizeable are they?

[Tricia Fulton:]

They probably are not as sizeable as the items that we have a lot less control over like depreciation and property taxes, insurance –

[John Braatz:]

Sure.

[Tricia Fulton:]

All of those types of fixed cost but anything that we can do, we know will help, we saw that in the last downturn and just making people a little bit more aware of watching things help on a grand scale.

[John Braatz:]

One last question from the attrition stand point, you said you’ve lost a few people, I guess, what size of labor force are we at now going into play this quarter versus last quarter, how much attrition has there been.

[Tricia Fulton:]

Percentage wise, there has not been a lot of attrition. We’re somewhere in the U.S. a little below 700, I think we were maybe 15 or so people higher than that before.

[John Braatz:]

Okay.

[Tricia Fulton:]

It’s very small number.

[John Braatz:]

Okay. Thank you very much Tricia.

[Operator:]

Your next question is a follow up from Fred Russell with Frederick Russell Investments. Please state your question.

[Fred Russell:]

Yes. Thank you. Would you consider buying back any stock now?

[Allen Carlson:]

We had ongoing discussions over the years with our Board and at this time there are no plans for a stock buyback but we talk about it on a regular basis but there are no current plans.

[Fred Russell:]

But if you made an acquisition, what kind would you use

[Allen Carlson:]

The areas that are attracted to us are areas like electronic controls, companion products to ours, products that perhaps would drive ours, would take us in the new markets, systems integration capabilities, anything that will help to continue our international expansion would be useful. Whether we would use cash or stock, probably we would use some of both.

[Fred Russell:]

Thank you.

[Operator:]

Our next question is a follow up from Holden Lewis with BB&T. Please state your question.

[Holden Lewis:]

Thank you. Again, back to the margin question, was, in the quarter, most of your margin backed up sequentially with a notable exception being Germany which I think you had an all-time high in the quarter? What was different in Germany? What drove that?

[Tricia Fulton:]

Germany was a little unlike the rest of the business as far as where the orders and sales were coming in. They saw a dip in August. They saw it go back up in September. I think that their economy was just sort of in flux at that point and had some up periods where the rest of them didn’t.

[Holden Lewis:]

Okay, they just had better demand I guess and such than some of the other places.

[Tricia Fulton:]

Yes.

[Holden Lewis:]

Okay, and then I guess did you guys have any issues with shipping? We have one company that when they reported they said they had some issues with shipping stuff out of Sarasota. Did you have any shipping issues given how much you do?

[Rich Arter:]

No.

[Holden Lewis:]

Thank you.

[Rich Arter:]

Thanks.

[Operator:]

Gentlemen, it appears we have no further questions at this time. I’d like to turn the floor back over to management for closing comments.

[Rich Arter:]

Alright, thanks Claudia. We did have a couple of questions that came in over the internet and I believe we’ve answered all of them, but I’m going to repeat them, a couple of them, anyway, just to make sure. The speed at which your markets turn down from your second quarter conference call to your third quarter conference calls, is it normal cyclical pull-back or different?

[Allen Carlson:]

We’ve been through a number of cycles since the company was formed 38 years ago and this particular cycle, actually, from a duration stand-point has probably lasted longer than many of our cycles, but the change from the peek down is probably very similar to what we’ve seen in past business cycles. It’s not unusual. We are very close to the market in terms of lead time. So when the capital goods market turns down, which it clearly has, we’re going to see it turn down quicker, but the good news is, we’re also going to see it turn up quicker. But it happens. So I think this is very typical.

[Rich Arter:]

The other questions, I believe, we’ve probably addressed, one had to do with revenue break down geographically and growth rate in different regions, which I think Tricia addressed in her script. Industry segments that are busy and weakest, I believe Al answered that. And the final question was regarding a buyback policy and I think Al just answered that. So, we would like to thank you all for joining us and Al, did you have some concluding remarks you wanted to make?

[Allen Carlson:]

Sure, just very quickly, clearly we’re seeing headways in the market. And that’s not new to Sun. That’s new to anybody in the capital goods market. How long and how deep, how severe, hard to say, but the downturn and the cycles we’re going through is not new to us. At the peak of the last cycle, which was 2000, 2001 era, we had grown to an $80 million company. I think we commented earlier that prior to that we were in the $40 million heading up to 80. But 80 was the peak at the last cycle. Immediately following that peak, and we turned down very quickly in 2001. 9/11 was a factor, but we were already heading down prior to 9/11. 2001, 2002 we stabilized at 65 million from the 80 million peak; however, during the downturn of ’01, ’02, and perhaps even into early ’03, we worked very hard at being prepared for the upturn. And the upturn, when it occurred, actually was over five years of continuous growth. We were able to take advantage based on the investments that we made. Or challenge is to be prepared for the upturn, and it will come. The question all of us can’t answer is how deep, how severe, but we keep monitoring it. We provide you the best guidance we can and we will be ready for the next upturn.

[Rich Arter:]

Thank you, Al and thank you all for joining us today. We’ll talk to you next quarter.

[Operator:]

Ladies and gentlemen that does conclude today’s teleconference. (Operator Instructions) And we thank you for your participation.