Columbus McKinnon Corp (CMCO) 2004 Q2 法說會逐字稿

Hello and welcome to the Columbus McKinnon second quarter fiscal 2004 investor conference call. Following today's presentation, there will be a formal question-and-answer session and instructions will be given at that time. Until then, all lines will remain in a listen-only mode.

At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Tim Tevens. Sir, you may begin.

Thank you, Michelle. Good morning, all, and welcome to our conference call this morning. Earlier this morning you should have received our press release with our second quarter results and hopefully you have that in front of you because we'll certainly be referring to it.

With me today here in Amherst, New York, is Bob Montgomery, our Executive Vice President and Chief Financial Officer; Karen Howard, our Vice President, Controller; Joe Owen, our Vice President, Strategic Integration; and Ned Librock, our VP of Sales, who at this point I think it's the first time in a while he's actually joined us here in Amherst. He's been traveling and meeting with customers.

We do want to remind that the press release and this conference call may contain some forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. These statements contain known and unknown risks and other factors that could cause the actual results to vary. You should, in fact, read the periodic reports that CM files with the SEC to make sure you understand these risks.

I'll give you a brief overview and then turn it over to Bob. Our sales for the second quarter were lower than last year's same quarter by about 5.9%. Most of the shortfall is coming from our more capital-intensive products and solutions businesses, again.

The good news is that the second quarter is flat with the first quarter of the fiscal year overall and our evaluation of our market share data shows that we continue to lead the U.S. hoist and chain markets and we also have a very strong position in our forgings and indoor industrial crane.

Talking about the product segment for just a moment, sales for the second quarter were down 2.5% compared to the same quarter last year but I think we have a little piece of good news here is that the-- it's up 2.8% over the last quarter, which is our first quarter of fiscal '04.

Gross profit margin was up about 10 basis points compared to the second quarter of last year but down slightly, about 80 basis points, from the first quarter.

We're certainly cautiously optimistic here that we've hit the bottom, as indicated by this slight growth in sales comparing quarter-on-quarter, first quarter to second quarter basis.

The solutions segments continue to struggle, down 26% or so over the same quarter last year as higher cost capital equipment sales worldwide are very low at this point. Gross margin and operating income follow these depressed sales.

Another piece of good news is that our debt reduction continues to be on track with a reduction-- a $17.8m reduction, net of cash, this quarter and over $33m-- actually over $33m at $33.8m in reductions since last quarter-- last year, same quarter.

At this time I'll ask Bob Montgomery to give us a little more details on those financials.

Thanks, Tim. I'm just chuckling because most of what I wanted to say about sales was in your report. But the bright spot is, of course, the fact that the product sales, which is 86% or 85% of our business was up a little bit from the first quarter of '04. It's still down from last year, but up a little bit from first quarter of this year.

Solutions does continue to struggle, sales-wise, and, as Tim mentioned, it's a capital intensive business and I think that pretty well covers it. Sales were down 26% from last year and almost 18% from the first quarter of this year.

All of that adds up to about a 6%, 5.9%, decrease in total sales from last year's second quarter, but flat, which is not bad news in this economy, from the first quarter of '04.

Looking at gross profit numbers, the gross profit for products was 25% this year, this quarter. It was 24.9% of sales in second quarter '03, fiscal '03 -- which is last year for us -- so slightly better, a little bit down from the first quarter, which was 25.8%.

In solutions the drop in sales has had an impact on margins. Margins from-- let's see, the margin percentage for this year was-- this year's second quarter was 11.8%. Last year it was 15% and first quarter of '04 it was 14.9%. So that business-- those businesses continue to have a tough time in this economy. That all adds up to a gross profit that was flat with last year, 23.5%, and in this economy we think that's not bad news at all.

Selling, general and administrative expenses were down dollar-wise $650,000 or thereabouts. Last year's second quarter the percentage was 15.8%. Second quarter this year was 16.2%, reflecting, of course, lower sales in total. And in the first quarter of this year that percentage was 16.6%. So it's an area that we're paying a lot of attention to. In this business 16% is not bad, especially in a falling economy.

Interest and debt expense is a line that may need a little bit of explanation. The interest part of that is about $6.8m in the second quarter of fiscal '04, the one we just finished. Included in there was a reversal of some payment-in-kind interest and an annual fee, reflecting the borrowers-- or the borrowing that got taken out in July with the issuance of the new notes, of $1.1m. So that's how we get to $5.7m, but interest, for those who are interested in it-- pure interest, was about $6.8m. And that corresponds to about $7.2m in the second quarter of a year ago.

In the first quarter-- I won't go into the first quarter. We won't even do that. But those numbers are consistent.

Other income and expense, net, is not a large number. It's about $1.3m income and-- but the two numbers that make up the most of that, there's a gain on repurchase of sub-debt, which we did with the issuance of the new notes, of $5.6m and that's income, and then we also wrote off some deferred finance costs related to the extinguishment-- the debt that was extinguished of $4.9m and then there was another little item bringing us to $1.3m income.

On the balance sheet, days sales outstanding for accounts receivable were 64.5. That's down from last year, 67.9, and actually it's down from the first quarter, the end of the first quarter of '04, which is the end of June, 65.8 days.

So we're continuing to manage our working capital, I think, pretty well. Inventory reflects that. Inventory turns at the end of the second quarter-- for the second quarter were 4.4 times, 4.1 times second quarter of last year. So that's an improvement. You know that inventory has come down dramatically as shown on the balance sheet.

Days payables outstanding was 29-- a little over 29 days, 26.8, almost 27 days second quarter of last year, and that's just a consistent policy throughout the period and it has to do with timing of when invoices need to be paid.

Debt-to-equity went from-- at the end of the first quarter of '04 it was 84 and now it's, at the end of the second quarter, it's 83.4% debt. So debt has come down and you know, of course, that we have repaid debt to the extent of about $17.8m in this quarter. We think that's a major accomplishment.

Since last year, the end of second quarter last year to the end of second quarter this year, the repayment of debt is $33.8m. So that's been our focus and that's been, I think, a great success for us.

Included in our calculation of debt is-- we also net cash out so that we-- we are really talking about net debt and cash will be applied to debt in the normal course to the extent it can be.

There's also a hedge-- we also hedge part of our interest rate. All of our debt is fixed-- is variable now-- is fixed-- is fixed now and we've converted some of it to variable -- there we go -- with a hedge and the value of that hedge is $3m, so that has an impact on net debt, as well. But the bottom line is that we have-- we've repaid debt by a substantial amount of money in this last quarter and, in fact, since last year.

Depreciation was-- for this quarter was $2.6m. It was $2.7m second quarter of last year. Capital expenditures this quarter were $.6m, $1.3m last year's second quarter.

And I think the bright spots are the slight upturn in the product segment sales that we noticed this year from the first quarter, the note transaction that we were successful in completing in July. That we had access to the capital markets in this environment is, I think, noteworthy. We are very positive in terms of income and we have continued positive cash flow.

And with that, I'll turn it over to Ned.

Thanks, Bob, and good morning to everybody. I'll start out by talking a little bit about our distribution channels. Our general distribution channel, made up of industrial distributors, rigging shops and crane builders, were down 8% in the second quarter, but were even with our first quarter sales. Our specialty distributors were down-- also down 8%, but 4-1/2% ahead of last year. And these are channels that are subject to timing of larger orders -- the crane builders, the entertainment business and some of our material handling distributors -- and we get wide swings in this, but all those seem to be doing fairly well.

Our OEM and our government business is up 6% and that's two quarters in a row where that business has been up and some of that is the result of government spending on larger projects. Our service business is up 2% and it was up 10% in the first quarter, so that's trending in a great direction for us. And our international sales were up 7.4% this last quarter.

I have a note here that says, you know, we've had more of our distributor channels growing than not growing on a comparative basis. I'm not prepared to say that this is a major trend, but this is certainly an improvement and perhaps an early sign that things may be slowly recovering -- although we still see, month-to-month, a little bit of a roller coaster effect in orders.

Just a couple of brief comments on channels and markets. Continuing strong channels and markets for us are the entertainment side of the business worldwide, the North America utilities market in power plants. Our government business is strong. Our service and repair parts business is strong, along with our international sales.

Weaker channels include the rigging business today, the retail sales, our consumer sales, and catalog sales. And we do see a trend where our independent crane builders in North America seem to be stabilizing now. As you know, that was an industry that was devastated over the last four years and it seems to be stabilizing.

As Tim mentioned, stronger products revolve around products that are non-capital-related. These are our chain, our forgings, our hand-powered hoists. Powered hoists, such as cranes, electric chain hoists and wire rope hoists continue to be soft compared to the less expensive products.

Our market share remains stable at the midpoint of the year and actually in some of the non-capital categories we seem to be making some small but incremental progress. And overall it seems that the rate of the industry decline for both packaged and non-packaged hoist products seems to be bottoming out. But I-- it's not a pattern yet, but it does seem to be bottoming out and hopefully that will be-- it's reflected a little bit in what we've been telling you here this morning.

A couple of comments about the competitive landscape. We're seeing the weakening dollar has dampened a lot of our European competitors coming in to North America that were coming in on a price basis. That's actually helped us.

The Asian products remain very aggressive with continued price pressures, but we're doing very well with that, primarily based on having our four plants in China where we can bring in high or higher-quality product and be very aggressive.

Our U.S. manufacturers, our competitors, continue to be aggressive, but we're holding our market share against the domestic competitors. And as far as we can tell, we've seen no price increases in the industry over the last 90 to 120 days.

Going forward, what are we doing? We're constantly leveraging our product mix, depending on the distributor channel, really pulling together all of our products to give a complete offering and leveraging this portfolio of products. As I said earlier, we're counteracting the Asian price pressure by doing just a real good job, I think, with our China products coming from our four plants and we're becoming very aggressive in pricing where required.

It's a tough market place out there. There's more competitors than orders and we are being aggressive in that arena.

Let me finish with some bright spots. I talked a little bit about service and repair business. We've seen three consecutive quarters now where this business is growing, so at least it's an indication that folks are repairing products, they're using products and this is a positive sign.

I mentioned earlier that our crane builders seem to be on the path to stabilizing somewhat and our international business continues to do very, very well.

We also-- you know, while we're trying to work on the sales side, we are continuing to challenge our expenses in these tough revenue times and shuffling the cards to make sure we can do the best job we can while controlling this in these tougher economic times.

And I'll leave you with a very bright spot. We were-- we are a member of an organization called Affiliated Distributors, which is the largest marketing organization in North America. They represent 200-- or $2.8b in MROP sales and we were awarded the Supplier of Excellence in marketing for this year, competing with 105 other manufacturers, and we were one of three finalists for Supplier of the Year to this organization.

So I'd like to think that 105-- the largest distributors in North America voted on us and we're doing a pretty good job in these tough times. So I'm going to leave on that bright spot, Tim, and turn it back over to you.

Thanks, Ned. Let me just give you a quick operations review and talk about some of the strategic plans and then we'll open it up to questions.

I think historically we have been reporting that we have accelerated our pace of improvement and with a focus to generate cash and repay debt. You're seeing the results of that in these financials with, certainly, more to come.

We have completed, for all intents and purposes, all of the previously reported facility rationalization projects. We're now awaiting the closure of some sale of some of the properties that we have vacated and actually for sale, we're just waiting to close on those.

We also have some properties-- several properties for sale and basically are awaiting interest from the market place on those. Nothing closing just yet on many of those-- on several of those, at least.

You should be aware that planning continues for additional facility and product rationalization. We're in the midst of a fairly intense project to study exactly how we're going to operate many of our segments and we should have more to report on that in the future quarters.

As Bob mentioned, inventory continues to be reduced. As you know, we're going through Lean Manufacturing in 15 facilities. Inventories are down corporate wide another $2m and most of this is coming from those facilities that are focused in the Lean Manufacturing process.

It is our improvement process. It's the driving force for improvement at CM. We have completed over 100 of these rapid improvement events in 15 facilities so far this fiscal year and we would expect to keep that pace up. These are nice little projects that help us improve at the very fundamental levels of our business.

The strategic alternatives process that we have been speaking about now for probably a couple of quarters for certain less-synergistic business continues. We have nothing really to report just yet, but we're proceeding through the process with a half dozen of these businesses right now and we're very hopeful that we'll have something to report in the not-too-distant future.

A quick reminder -- our strategy as a company is to leverage our superior materials handling design and engineering know-how to continue our dominance in the U.S. markets as we expand our global presence. Our market share growth will be built upon new products designed specifically for various market needs, incorporating our high-quality standards and service.

And, Michelle, with that, we'll open it up to questions.

Thank you. At this time we're ready to begin the formal question-and-answer session. If you would like to ask a question, please press star-one on your Touch-Tone phone. You will be announced prior to asking your question. To withdraw your question, you may press star-two. Once again, to ask a question please press star-one. One moment, please.

Our first question comes from Sarah Thompson of Lehman Brothers.

Hi, good morning.

Hi, Sarah.

Hi, Sarah.

A couple of questions for you. First of all, when you guys were on the road with your bond offering, I think you had given EBITDA guidance. Can you just, perhaps, tell us what your update is on that?

I believe the guidance we had given was in the low 40s, 40 to 45 range or thereabouts.

OK. And that's still numbers you're comfortable with?

Yes.

OK. And then, on your bank agreement I think you have a minimum EBITDA covenant of $39m. Can you just tell us-- I'm not sure if the bank calculation is different from how we'd be calculating it, but what your EBITDA is per the banks for the most recent period ended September?

For the September quarter it was $10.5m.

OK, so an LTM period it's like $40.3 or--

$40.7m.

$40.7m? OK. Terrific. And then just one question for Ned. On the international sales being higher, is that 7.4% increase all volume or is there FX in there?

I don't--

Sarah, on a consolidated basis for the quarter the effect of currency translation compared to the prior year is about $1.5m.

OK, but I guess-- there was some comment that your sales-- the international sales were up about 7.4%?

Yes.

So I'm just trying to figure out if that increase is all due to FX movements or if there's actually a volume increase?

We'll have-- we can do that calculation.

OK. That's great. I'll follow up with you after the call.

I'm sorry, Sarah. Yeah, we just need to coordinate between the two of us.

That's OK. That's all I had. Thank you.

Thank you.

Our next question comes from Tom Klamka of Credit Suisse.

Good morning.

Hi, Tom.

Tim, you mentioned the possibility of additional consolidation or restructuring at the production side. Can you just kind of drop back for a second? How many manufacturing facilities do you have today? And I'm not sure if these are arranged by product, but maybe you can talk about how they are arranged and what kind of potential there is to-- you know, to lower the amount of manufacturing facilities you have?

Yeah. We-- let me just give you the global picture, if I can. We're probably in the 25 plant range today and I'm not counting all the little facilities that we might have, as well. And that long-term thinking some of that migration might happen where, you know, we would move products amongst these plants. Some plants are located in China, some are located in Mexico and also we have, as you know, many in the States.

So product would be moving amongst them and I would say that over the course of the next several years there's probably another, at least, several that can come out of that picture. I don't know how many square footage that would represent. I'm giving you just broad-based estimates at this point, because we really haven't completed the study, but hopefully that gives you a sense that, you know, 10% or so, ballpark, is something that we probably could anticipate.

Right. Are your Mexican plants still competitive versus your Chinese plants? And when you look at what you're producing in China, are you getting a significantly better margin on that versus the U.S.-produced stuff, or is that sort of lower dollar or lower-value-added product that's more competitive so the margins are kind of equivalent?

Yeah. Actually, the stuff we're making in Mexico now is very equivalent to imported Chinese product and that is because logistically Mexico, obviously, being closer to the U.S. and Canadian markets, the freight cost on steel -- in this case it's grade 30 and grade 43 chain -- offsets some of the cost savings that you'd have in China. So for those products it makes sense.

The manual-stamp steel products that we made in China today that come into the States probably would not be competitive to make in Mexico and, in fact, we don't make any of those in Mexico. I think that's because of the more high-value-added content than making chain. Hoist has more labor content.

Right. And if you look at your business as it stands today -- and it sounds like additional cost savings will be kind of over the longer term as opposed to, you know, over the next year, what kind of-- if revenue-- if we make the assumption that nothing happens in the economy or to your customer, so your revenues essentially stay flat, they flatten out, what kind of margin improvements can you get? Or does that essentially get eaten up by price pressure? How do you guys look at that?

You know, that's a tough question. We've done a lot of work on the cost side. We've actually held our margins fairly steady in a significant declining revenue environment, which is really the benefit that we have gained. But, you know, without-- without the increase in revenue, it's going to be tough to increase the margins, I think, going forward without some radical change in how we operate the business.

I would say that, you know, everything being equal and there's no more revenue change and let's say there's no more price pressure -- we are getting price pressure on certain products, not all of them, of course -- but let's assume that there is none, you know, we should expect to see another several million dollars of additional savings from facility rationalizations over the next several years, let's say, ballpark.

As we look to the market place, I guess I would look to Ned to comment, but we continue to have price pressures around. So I would expect a portion of that several million dollars to be eaten up with some price degradation.

I think you just have to be realistic that in an economy like this with more competitors than ever, some of that's going to have to be given back and we're in a position -- I think a very good position -- having our Mexican and Chinese facilities where we can react and still make very good margins and retain market share.

Right. OK. And last question, can you give us an update on the asset sale program?

Asset sales -- are you referring to properties or businesses at this point?

I was referring to businesses, but you can throw in properties, too.

OK. Business update is we have pretty much the solutions business for sale, I think, as we reported in the past, and a couple others and we have had them marketed. I think we have several of them in various stages of due diligence. Nothing's closed yet, nothing's completed yet and I don't want to jinx anything and I can't really give you any estimates at this point until we get through all those processes.

Though there-- some are looking promising in terms of towards the tail end of the due diligence and some are in the beginning. So it's-- I have to be vague because I don't know until we close.

OK. And actuators?

Same there.

Same thing?

Um-hmm [affirmative].

OK, great. Thank you.

Thank you.

Our next question comes from Alexi Koskaros of Bear Stearns.

Great, good morning. Thank you. Your guidance for the balance of the year in terms of the increase of free cash flow, I suspect, is predicated on working capital remaining flat or even improving. Considering the strong improvement in inventory management this quarter, how achievable do you think that is and what do you have-- I mean, in terms of inventory turns, what is, really, your target? And I have a couple of follow-ups, if possible.

I think our inventory turns for the quarter were probably in the 4.4 range at the end of the second quarter. We're targeted at least-- let me speak to the 15 plants that are going through Lean, to be in the high four turns, 4.7, 4.8-ish for the balance. Corporate range is probably more-- a little lower than that, because not all of our facilities are under this Lean process just yet. So we're probably pointing toward more like mid-4s, 4.5, 4.6 kind of range.

And do you think that's achievable by the end of the year or--

Yeah, I think, you know, based upon the progress we have made and the fundamental changes that we have implemented, you know, I would suspect that over the course of the next couple of quarters-- I think the last two quarters we've gotten $2m out of inventory each quarter or so, thereabouts. These are gross figures. And I would say that we could probably get another, let's say, $2m to $3m, in that range, for the rest of the year to hit that-- hit that target.

You know, this is changing our internal practices, basically changing how we manufacture and buy goods and, obviously, those changes are sometimes difficult to make, but I feel fairly confident that we should achieve that.

In terms of capital expenditures, you seem to be under-spending depreciation quite significantly. I mean, should we expect cap ex to be at these levels? I mean, do you think cap ex at these levels seems pretty sustainable?

I think it does for the near term. One of the benefits of the facility rationalization program that we have seen, it's actually a bit of a byproduct, is that we free up a fair amount of equipment, a fair amount of equipment and machine tools that we then, in turn, reinvest back into the various businesses that are remaining. That has put less pressure on cap ex going forward.

I would say for the next couple of quarters or so we would still be at this level. I don't foresee any huge increase, at this point, even into next fiscal year. I would say it would be marginally higher looking into, actually, next fiscal year.

I just had a quick question on gross margins. I may have missed it, but the sequential decline on essentially flat consolidated revenue, I was wondering what that was due to? And just stepping back to SG&A a little bit, it seems like it's at the lowest level it's been over the past couple of years. Can you give us a sense of the variability in there and whether we can see that, you know, pressured even further downwards?

Hang on one second. You had three questions there. One was gross margin.

And essentially, SG&A, really. Gross margin, really, why was gross margin -- I may have missed it in the call -- why was it essentially down sequentially on essentially flat consolidated revenue? And secondly, in terms of the SG&A, it's probably been the lowest it has been in a couple of years. In an absolute sense, can we see it go down even further? And what is the sort of element of variability in that number on a quarterly basis?

OK. Let me take the gross margin one first in the sequence you asked them. I think the gross margin difference is our solutions business is down substantially, predominantly because of volume. So that certainly has an impact. The products business is down sequentially about 80 basis points, quarter-on-quarter. That has more to do with mix than anything else. I think that as, maybe, some of the sales of cranes, which is a lower margin, pick up, which we have seen, by the way, quarter-on-quarter, you'll see that margin change a bit.

But I would expect it to stay in this range, this 25% to 26% range, just looking down the road. I don't see any major shifts in mix, just to clarify that.

Relative to the SG&A expense, it is very low. As Bob had mentioned, we've been working on this for quite a while and I guess that we need to continue to look at costs and look at all of the controllable costs and I can't-- I think that we can probably get a little bit more out of that, but I'm not sure how much more, at this point. And I'll look around the room and ask for people who control those expenditures closer than I do, how they would feel about that, as well.

Just one last question, if I may. In terms of, you know, the previous question-- questioners, I should say, you know, with regard to solution-- I think your solutions business, you had said that I think you were looking to announce something in this second quarter. I was wondering, is there anything out of the ordinary there or just literally a process which just seems to be taking a little bit longer than you'd anticipated?

That's a good question, Alexi, and you're right, we were anticipating something this quarter. You know, for some reason, the M&A world takes a heck of a lot longer than anybody ever wants it to take and we find ourselves, I think, in that mode in terms of just the process extending and taking longer.

OK.

I don't think there's anything hidden here or any issues or problems, but really it just takes longer than anybody thinks.

Thank you very much.

Thank you.

Our next question comes from Ross DeMont of Midwood Capital.

Hi, guys, congratulations.

Thank you, Ross.

Just a little more on the sale process. I know at-- I believe at one point you had bracketed around $35m to $50m, pretax, out of selling these divisions and $10m to $15m for the real estate. With the weakness in the solutions group or I guess just generally, can you just talk about those ranges and see if, you know, are they still holding?

Yeah, they're still in that vicinity.

OK.

The one thing that, and Alexi brought this up, is the one of timing. It just seems to be taking a lot longer.

Right. OK. And I noticed, I think you have around $13m in cash at the end of the quarter and the intent is generally to apply cash to debt. You have the junior notes and the more senior debt. Can you talk about where you're likely to apply that and where the highest sort of return to you guys is on an after-tax basis, knowing that you have to reckon that gain on sale on retirement of sub-debt if you get a bull market?

Sure. We would-- we're a little bit hampered in terms of the indentures that we now have in place as to how freely we can buy back the notes, either one, either the new ones or the old 8-1/2s. I think you may find cash building up on the balance sheet. That wouldn't be all that bad and it's possible that that would happen, if we're constrained.

We probably would like to buy back what we can in the market and can do it economically, but we're not likely to do a big redemption at this point. The 8-1/2s become due in '08 and I guess our goal would be not to have to refinance those at some point, have enough cash on hand to do that.

OK. Last question, on the pension is there a-- can you tell me, sort of, over the next quarters or next year what's likely to happen to that pension account and are there, sort of-- are there cash needs that are generated due to the current under-funding there? Do you need to contribute or anything?

Yeah. That's an issue that's received a lot of attention and we've gotten some very good help from external sources to analyze and understand our pension situation. We are likely to be making some fairly, for us, anyway, substantial contributions to the pension plans in response to what's happened to the market place -- not anything that's going to have a huge impact on the health of the company. We have certainly borrow-ability to do that and I think that it makes good sense to make some extraordinary or, let's say, other than minimum required contributions in the next-- for this year and, perhaps, next year.

OK, good. Appreciate it. Thanks for everything.

We have looked at that area carefully now and I think have it in good hands.

OK. Thank you.

Our next question comes from Joseph VonMeister of Jefferies.

Hi, guys.

Hi, Joe.

Good morning.

I just-- your revolving credit facility, what was the borrowing capacity at the end of the period?

At the end of September our availability on our revolver was about $26.5m. I just want to mention, that includes an $8m block that was put into place when we entered into our-- into a swap agreement in early August. So our availability is blocked by that $8m, just, you know, for your information.

So is it $26.5m minus $8m?

No. It would have been $8m higher.

OK. Due to swap arrangement. And I'm looking at your balance sheet and I see a relatively sharp increase in what I broadly refer to as other current liabilities, but it looks like it's in the accrued liabilities account, which was a source of about $10m in cash on the quarter. What is behind that? And, you know, I assume it has something, perhaps, to do with your businesses being held for sale, but can you tell us what's there and where we should model that to be a year from now?

Well, it does fluctuate, Joseph, and in all honesty, it doesn't really relate to the businesses that we have for sale. Part of it relates to pension. It's up about $3m relating to pension compared to the end of June. That basically reflects a classification for expected payments in the next 12 months.

We've got our taxes up about $2m relating to a tax refund that we received this quarter. Our interest is up a little over $2m just due to timing on a payment of interest and there's some other miscellaneous things that just really is timing. Those are the most significant items.

OK. So this-- I mean, there's isn't any unusual increase due to liabilities or accrued expenses for businesses held for sale?

No. No, that's correct. It is not. These are more-- I'll say more normal fluctuations and, you know, our accruals do fluctuate sometimes somewhat significantly based on, you know, these types of factors.

Now, I've been wondering this -- I've never said anything about it, but I guess I might as well. I pull up-- you know, there's some of these catalogs that specialize in selling products manufactured in China. I think Central Pneumatic is one of them. Northern Tool is another one. You know and I see-- I see chain and hoist products in those catalogs. Are those-- I mean, what kind of competition are you seeing from Chinese knock-offs and what's your strategy in handling their tendency to attack the high-volume products that you might have engineered, designed and popularized but they basically pick you off with some low-cost products that are designed to copy whatever you've innovated?

This is Ned. I'll give you a broad brush at what we're looking at. The catalog houses that you're referring to, they go from the full spectrum of selling to the end user to all the way up to selling to industrial production facilities.

Right.

Our concentration has primarily been with the higher end catalog houses, selling in the industrial market place, although we do sell customers that-- on our retail side of business like Northern Tool and some others. What we find is that the price pressure for Chinese products and Asian products coming in, these are the really low ones where you see a $30 or $50 lever tool or hand hoist. That's not production quality products. Those are primarily for home use, if you're a deer hunter or if you're pulling a motor out of a car.

But what we focused on with the catalog houses -- for instance, we sell Grainger, McMaster-Carr, C&H, Global, Lawson products -- these are the creme de la creme. And what we've been able to successfully do is our portfolio of products is at an all-time high with these catalog houses and many of them are benefiting from our production facilities both in Mexico and China. And we're introducing what I would consider to be high or higher-quality products at a little bit of a lower price, taking advantage of our manufacturing there to keep our big catalogs competitive in the industrial market place.

Fair answer. Thank you very much, guys.

Thank you.

Our next question comes from Julia Guarte of Bank of New York.

Hi.

Hi, Julia.

Hi. I just wanted to sort of get behind a little bit more on your international manufacturing. I was wondering if you could tell me what percent of your production currently comes from the Mexican plants and the Chinese plants and how that's changed, quarter over quarter?

Well, I wish I had those quarter-on-quarter changes in front of me. I do know that it's-- that the output of the Chinese plants is up considerably in the last several years since we've been introducing more and more products there, basically new products, a new hand lever-- two new lever tools and a new hand-chain hoist that we make there and import into Europe and the States.

I would say that in the last couple of years it's probably doubled and it's probably in the $10m revenue range out of China. They also make different products. They make some lifting products that get below the hook. They make some textile slings, as well, and they make pallet trucks. These are the hand-mobile trucks, manual trucks, that an individual would pump up and move a pallet around. Those are typically exported-- probably 85% of it is exported back to Europe or the States.

So I think if you-- I think it's probably doubled in the last two or three years, just to give you a sense of magnitude. But I don't have the quarter-on-quarter changes.

OK. So does that mean that about $10 of quarterly or annual revenue comes from the Chinese plants?

Annual.

Annual. And that's total, not just for those products?

Right.

OK. How about the Mexican plant.

The Mexican plant is in a similar category. It's probably about $12m-$13m. Karen's telling me $10m. The-- and there's been-- they make products for the Latin American market, which is basically what they've done for us for 25 years. Recently, in the last three or four years, we have added some chain making equipment there, specifically to make the lower grades of chain, grade 30 and 43, which is non-lifting chain. To better compete with the Chinese imports, we've relocated about 20 pieces of equipment there, 20 chain makers, which make steel welded chain.

And their volume is up, probably-- if it's $10m, I recall probably two or three years ago it was probably $4m or $5m. So it's probably doubled, as well, in that time period.

And how much excess capacity is there right now in your Chinese plants?

Boy, it's a difficult question to answer, because it varies.

Is there room to grow from that $10m base?

Oh, yes. Yes. I would estimate, just overall and this is an estimate, it's not a calculation, that we're probably somewhere in the 50% to 60% utilization category since I know we're only running one to two shifts.

OK. And what would you say is-- and I know this is probably difficult because there are so many different products, but what would you say is the differential in the cash contribution margin for products that you sell domestically that you manufacture domestically versus the ones that you manufacture in China?

These are all great questions and very difficult to answer.

OK.

Cash contribution margins from products in China or Mexico versus cash contribution margins from products made in the U.S. I couldn't even venture a guess at this point.

Would you say there's a substantial difference?

No.

OK.

Just off the top of my hand, no, I would say not.

We tend to put the lower-- the lower end products in China and the higher end products in the States, so, you know, where the market's willing to pay for that, for the U.S.-made products.

And just so I understand what the gross margin for this quarter versus the first quarter of the fiscal year, in the product segment, that sort of going from the 25.8% to the 25%, is that a cost-- was that a cost issue or was that a pricing issue?

It was-- in the product segment?

In the products.

It's cost/mix, I would say.

OK.

I think pricing is relatively stable, quarter-on-quarter.

And has there-- have there been any particular cost components that have gone up, quarter-over-quarter?

I don't-- none that stand out generally. You know, we like-- we have-- Just so you understand, we have a commodity management program in place where we have, probably pushing 40-different commodities. Joe, is that the right number? Forty commodities or so that are under contract. So what we have done is negotiated long-term agreements with steel suppliers and casting suppliers and motor suppliers, et cetera.

So, you know, those costs are, relatively speaking, under control. They do allow price increases, but they're all pre-negotiated. So, you know, I don't think there's anything out of the ordinary in those areas.

We, like every other company in the United States today, is seeing an increase in healthcare costs, a bit of an increase in energy costs, so I think that's probably not a surprise. But I guess I can't point to it, either, as something that really is the cause for this 80 basis point shift, quarter-on-quarter.

All right. Fair enough. Thank you very much.

Thank you.

Our next question comes from Robert McCarthy [ph] of Baird [ph].

Good morning, everybody.

Good morning.

In Ned's comments about business by market, I was a little confused about what he said about special distribution. Ned, did I hear you say down 8%?

Let me just checks. Yeah, down 8%. My only comment on that was that there's-- it's the timing of some of these orders with the channels of distribution that make up this category. We get spike orders. Our entertainment business, for instance, is up 33% this quarter and last quarter it was up 109%. They bounce and I guess what I was saying, that-- you know, I wouldn't-- I'm not surprised if that category isn't up 4% or down 4%, depending on timing of orders.

OK, because you-- because I did write down you said something about a 4-1/2% decline. That was--

It's actually up 4-1/2% over the previous quarter, even though--

Compared with the prior quarter?

Yes.

OK.

Yes.

But the 8% is from last year.

Yeah.

Compared with last year. OK and in the prior quarter, which was lower than the current quarter, what did that quarter do on a year-over-year basis?

I don't have that information with me.

OK, so you can't-- I'm was going to ask you the same thing on the general distribution. The minus 8% in the current quarter, flat with prior quarter, but you're not sure what prior quarter was compared with prior year?

I don't have it with me.

OK, that's fine.

If you want to call back, we could go out and get it for you.

All right. And similarly, do you have an idea if-- I mean, you know, adjusting for number of days and that kind of thing so that you could, you know, really be comparable, if we stay flat in the December quarter-- I mean, you're not-- I understand it's unlikely because of holidays, et cetera, but if activity stayed flat would you expect to have a smaller decline than the 8% that you just had in the September quarter?

Well, let me polish my crystal ball here. There's only a day difference between the quarters, between the first and the second. The third quarter--

What he's looking for is if the next quarter's going to be smaller shrink, smaller reduction, basically.

I can't--

I don't think we have the numbers.

Don't have the numbers. OK. I can get back with you and ask about it.

Let me ask you something that I bet you do have a handle on, though. Was there a noticeable change in volume or tone of business, particularly in the general distribution channels, in September?

Well, as I mentioned, we-- you know, this industry has kind of gone through a roller coaster.

Right.

And what happens is the ride up and the ride down aren't as steep as they used to be. You know, July started out OK and August seemed for ourselves and for many, many of our customers just to be horrible.

Terrible.

And then you come out after Labor Day, which is historically business tends to get a little more serious and, you know, it seems to be trending up.

Do you have any early read on October? Interestingly, UPS today is indicating that they've seen ongoing strength in volume out of manufacturing in early October.

Yeah, you know, I'll be-- I don't want to be too forward-looking, but I'm more optimistic about going into the third quarter than I am through the summer quarters and, you know, the bookings seemed, in some areas that have been soft, seemed to be a little bit better and I guess I'm cautiously optimistic.

Cautiously optimistic.

How's that for a non-committal statement?

You sound like an economist. OK. Thank you.

Thank you, Rob.

Our next question comes from Kathy Nolan Salomon Asset Management.

Yes. I have two questions. One is, could you just go through the outstanding debt balance by, you know, bank and term loan, revolver? Give us that data, please.

Sure. Go ahead, Karen. Well, the subordinated debt is $164.1. The new senior debt is $115 and it's looks like $13 would be the balance for bank debt.

Well, $3 of that-- OK, of the $128 on the balance sheet that's shown as senior debt, $115, like Tim mentioned, is the new debt, the new senior secured note. $3 of that relates to the market value adjustment associated with our swap. The remaining $10, the majority of that, is with our banks, either-- we've got a little bit of term debt and a little bit of revolver.

And the same with the current portion of long-term debt that's shown on the balance sheet, that $4.8m. A combination of those is senior and revolver and term A. Plus that also includes about a $1m of foreign debt.

OK. And my second question is if you could quantify what the pension contribution, actually cash contribution, is going to be in fiscal '04 and fiscal '05?

Yeah, we're talking about-- to the largest plan, which is the salary group plan -- the other ones are variably different. To that plan, we'll make probably a $6m contribution in December and we may make one, depending on what happens with the markets and so on, of similar size or even, maybe, a million more the following year.

The following fiscal year?

Yes.

OK. So the following fiscal year would be $6m to $7m?

Right.

And how does that compare with the pension expense you're accruing on your P&L?

It's higher. Our pension expense on our P&L is more stable, is more steady and that's more in the-- about the $5m range.

OK. So you're talking $1m to $2m over what you're going to be accruing on your income statement?

Right.

OK.

Right.

Thank you.

Thank you.

Once again, if you would like to ask a question, please press star, then one. At this time, Mr. Tevens, there are no further questions.

Thank you, Michelle. In summary, we continue to execute those plans that we've been speaking about, focus our efforts on debt reduction through cost control and managing our working capital. Our product and plant rationalization and Lean initiatives, along with normal operational effectiveness, will generate free cash flow and, along with our generally low cap ex, we expect another $5m to $10m of debt reduction over the remainder of this fiscal year. This is in addition to the almost $27m reduction in the first half of '04.

We continue to invest prudently in new markets and new products to protect our market share in the U.S. and grow sales internationally to keep Columbus McKinnon's position as the leader in the materials handling industry. I want to thank all of our CM associates for their efforts to make CM that leader.