Enerpac Tool Group Corp (EPAC) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, Wednesday, October 1st, 2003.

Certain of the following comments represent forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Management cautions that these statements are based on current estimates of future performance and are highly dependent upon a variety of factors, which could cause actual results to differ from these estimates.

Actuant's results are also subject to general economic conditions, variation in demand from customers, the impact on the economy of terrorist attacks, and other geopolitical activities, the length of the current recession in the Company's markets, continued market acceptance the Company's new product introductions, the successful integration of business unit aquisitions, and related restructuring operating margin due to competitive pricing and operating efficiencies, supply chain risks, material and labor cost increases, foreign currency fluctuations, and interest rate risk. See the Company's registration statements filed with the Securities and Exchange Commission for further information regarding risk factors.

We are conducting an e-meeting to coincide with the audio conference. If you'd like to view the presentation online, please log on to www.themeetingson.com, and go to join as a participant, and enter meeting number 711626852. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mr. Robert Arzbaecher, President and Chief Executive Officer of Actuant Corporation. Please go ahead, sir.

Thank you, April. And thank you and good morning. On today's call we are going to cover a lot of ground starting with our financial results, then moving to the Actuant business model, the Kwikee acquisition, a stock split, bond buyback, and lastly 2004 guidance. Now I'll turn it over to Andy to go through the financial results.

Thanks, Bob. Good morning everyone. We are pleased with our fourth quarter and full year results. Fourth-quarter sales were about $148 million, or 22 percent better than last year. This reflects both the acquisition of Kopp last fall, as well as favorable currency translations. Excluding the acquisition, sales were up 3 percent. The euro and other currency benefited sales by about 4 percent, meaning our core sales were down 1 percent. This compares to a 3 percent core sales declined last quarter, so a modest improvement.

In addition to the impact of the weak U.S. economy, the other factor impacting fourth quarter sales versus last year was the lower shipment to RV OEMs due to the loss of business with two RV accounts, which we had previously disclosed. The RV comparisons will get easier as we move into 2004.

Our EBITDA for the quarter was $24.3 million, or 16.4 percent of sales. This compares to 22.3 million last year, excluding a 2.1 million charge for the high yield bond repurchases last year. It was also essentially flat with a 24.3 million last quarter, and that was the highest EBITDA quarter for 2003.

As as been the case in each quarter this year, most of the margin reduction year-over-year, the EBITDA margin reduction year-over-year, was due to the impact of adding Kopp to the mix. If we exclude the impact of acquisitions, our EBITDA margins were up year-over-year as we had predicted.

Our fourth quarter included offsetting charges for downsizing costs in a foreign currency gain that we recognized when we dissolved the foreign subsidiary and closed it. Both of these were about $1 million, and both of them had been included in our fourth quarter guidance. Just to elaborate, $1 million charge for downsizing, $1 million foreign currency pickup, down in non-operating income. We take this all into account, our diluted EPS for the quarter was 82 cents a share, or 19 percent better than last year's fourth quarter EPS of 69 cents. The 69 cents excludes the charge last year for the bond buyback.

If we look at full year results our sales in 2003 increased 26 percent to $585 million. About 100 million of this growth came from acquisitions, with foreign currency rate changes adding another $20 million. Excluding both of these, 2000 sales were essentially flat with the prior year due to the challenging economic conditions here in North America. Our full year EBITDA before special charges this year was $90 million, compared to about 84 million last year. Our EBITDA margins declined 280 basis points due to margin mix from Kopp, as well as automotive startup costs that we have talked about in each of the last couple of quarters.

For the full year Actuant delivered diluted EPS of $2.81, excluding charges that we outlined in our press release. Specifically in the first quarter we recognized a charge for early extinguishment of debt, as well as a litigation charge relating to divested businesses. In the third quarter we recognized a pickup related to the litigation charges as well. This is an 18 percent improvement over last year's $2.39 EPS. As disclosed in the press release, last year's 2.39 also excluded an accounting change charge, discontinued operations, and bond buyback charges as well.

In summary, we are very happy with our fourth quarter results and full year. For the fourth quarter we drew diluted EPS from 69 cents to 82 cents a share. The 19 percent improvement continues the trend of quarterly EPS growth that Actuant is building. As Bob will discuss later on the call, we have been consistently generating similar 15 to 20 percent year-over-year EPS growth on a quarterly basis for the last few years.

Now everyone has been reading articles recently about the improvement in the economy, but we aren't exactly sure if it translated into improved demand for our products in the fourth quarter. We did see improving trends in GB in the tail end of the quarter in RV. In our overall sales decline for the quarter, on the core basis was down sequentially from minus 3 percent to minus 1 percent, but it was still negative. Given the negative core sales, the earnings growth through the quarter came from things we could manage, specifically cost reductions and lower interest expense.

I'm going to dig down a little bit into our financial results and provide a little bit of color, first starting with sales. Geographically, our sales trends the year tell an awful lot about the year we experienced. In a nutshell, U.S. sales were down, and non U.S. sales were up. Due to the economy the Americans' sales declined year-over-year in each of the last three quarters. The declines increased in the last half of the year due to the wind down in business at the two RV accounts.

Conversely, European sales grew each quarter. This was driven by Enerpac's success with infrastructure and construction initiatives, as well as Power-Packer's truck customers gaining market share, and Power-Packer ramping convertible top volume for the new platform awards over the last few years. The chart you now see excludes Kopp and currency. So the 5.7 percent growth in the fourth quarter was significantly -- understates what really happened because of Kopp.

Asia sales also grew in each quarter this year, benefiting from significant growth in China. We also saw growth in a few other regions, specifically in Australia and Singapore. When we look at China, part of the growth was an order for a hydraulic systems supplied by Enerpac that was used to move the Shanghai Concert Hall a few hundred meters away from a highway that was causing problems with the acoustics. You can see from this slide the scope of this project.

One thing to point out is a large Enerpac billboard hanging on the side of the building. We have received a number of calls from Americans that have visited Shanghai over the last quarter or so that have noticed the banner as well. Enerpac also received a lot of free publicity from the press in China on this project, as the building is very well-known and has historic significance. This is akin to lifting the Golden Gate Bridge in the U.S.; just a very visible project on a national landmark. This is the best form of advertising, and free too.

From a segment standpoint, our Tools and Supplies sales for the quarter were up 37 percent, all driven by currency and the impact of the Kopp acquisition. If we exclude both of these, sales were flat with the prior year, compared to a 2 percent decline less quarter. So again, modest improvement.

Enerpac's fourth quarter sales were up 2 percent, excluding currencies. As I mentioned earlier, growth in Asia and China continues to offset the impact of slow economy here in the States. Gardner Bender sales, excluding Kopp, were down in low single digits. We saw a modest growth in retail, but that was pretty much offset, or more than offset, by ongoing weakness in the wholesale market due to a continued sluggish commercial construction market.

Turning to our retail in Europe, Kopp's fourth quarter sales were even with last quarter in dollars, but were down sequentially in euros due to the distinct seasonality in this business, as this graph shows. For the full fiscal year, Kopp showed that topline core sales growth of 6 percent due to increased penetration at some of its German DIY accounts. Given the poor German economy this year, we were very happy with its year-over-year growth.

Turning to Engineered Solutions, it's fourth quarter sales were up 3 percent over last year, but down 3 percent if we exclude currency. This is roughly in line with last quarter. We continue to see nice growth coming out of automotive, including sales in the U.S. this quarter on the new Chevrolet SSR that you see on this slide, which went into production in July. However, Engineered Solutions' truck and off highway sales collectively were down modestly in the quarter due to softness in the U.S.

RV sales, as expected, were down 13 percent from a year ago due to the RV account loss. Excluding the two accounts that were lost, RV sales volume in the fourth quarter was down 2 percent, compared to 8 percent last quarter -- 8 percent decline last quarter. RV OEM builds increased as the quarter progressed, and reflected the retail sell through that was very strong during the quarter. We think that the dealer inventory glut, or the imbalance that we saw and discussed on last quarter's call, has pretty much been worked through the system, because of the slowdown in OEM production and the continued strength of retail sales.

Shifting now to profitability, we're happy with the underlying improvements in the second half of 2003. We saw a significant material and component cost down benefits coming through from Power Gear, Gardner Bender and Enerpac in the fourth quarter. Additionally, the downsizing programs that we talked about last March have been pretty much wrapped up.

On the surface, if you look at EBITDA and EBITDA margins on this slide, EBITDA margins are still below prior year levels. However, this ignores the impact of the Kopp acquisition, and the downsizing costs that have flowed through the P&L in the last two quarters.

Kopp has been profitable and additive to EBITDA, which has grown this year as this slide shows, but it has brought down our overall margins due to lower margins within Kopp. The good news is that as time goes on, and downsizing at Kopp continues, its overall margins will be increasing and bringing up Actuant's total margins.

If we exclude Kopp, our margins in the fourth quarter were higher than last year, especially in Tools and Supplies. Engineered Solutions margins continued to be impacted by learning curves associated with the rollout of new convertible platforms over the 120 days, including the SSR here in the U.S.

Now one of the big highlights for the quarter was cash flow, and I'm going to talk about that. We hit $170 million year-end debt target without the expected benefit of the Kopp sale leaseback. We still hope to complete the transaction, but was delighted. The good news is, we nailed our year-end debt target anyway with extra help from strong earnings and working capital improvement. Our year-end leverage is about 1.9 times trailing EBITDA.

We also moved down our bank's agreement pricing grid, and will be receiving a 25 basis point step down in our borrowing costs. Our credit stats have also all improved over the course of the year. One highlight I wanted to point out was the senior reduction in senior credit borrowings. We have less than $50 million at the end of the year, compared to $250 million at the time of the spinoff. So our bank group has been very supportive, and is interested in providing us financing flexibility going forward.

After year-end, we completed the Kwikee acquisition, and we borrowed $29 million under our revolver to fund it. We also repurchased $15 million of the high yield bonds in the open market. The funding for that also came from our revolver. So our senior borrowings are up at the end of September relative. Even with these borrowings, senior leverage is still approximately 1 turn of trailing EBITDA. This low-level provides us a lot of flexibility going forward.

The deleveraging we have been talking about it has come from strong fee cash flow. Before special items, we generated $48 million, or about $4.00 a share in fiscal 2003. This compares to our diluted earnings per share of $2.81 for the year. So our goal to deliver more cash flow than earnings was accomplished again in fiscal 2003.

One of the drivers for this was continued strength in primary working capital performance, especially in the fourth quarter. Excluding Kopp, primary working capital as a percentage of trailing 90 sales annualized improved to 18.5 percent, compared to 23 percent at the time of the spinoff. On a constant dollar basis, excluding the acquisition of Kopp, our inventory declined about $4 million for the year, while receivables were flat. And payables came down slightly as well. But this is in addition to the 4 to $5 million of working capital reduction at Kopp during the first 12 months of ownership.

From a capital expenditure standpoint, we ended the year at about 12.7 million, including a little bit over $2 million in the fourth quarter. A good portion of the full year's expenditures were for the convertible Kopp production sales to support the ramp up in volume. Our D&A for the year was about 15.1 million, consisting of 12.9 million of depreciation and a couple of million dollars of amortization.

Before passing the baton back to Bob, I wanted to quickly review the bond buyback that we talked about in our earnings release. In the month of September, we completed the repurchase on the open market of $15 million of our high yield bonds. This buyback is similar to the one that we completed last summer in the fall of 2002, and should be viewed simply as an opportunistic transaction on our part to reduce high coupon debt.

The buyback of these bonds will result in a pretax accounting charge of about 4.4 million in the first quarter, or about 23 cents a share. Interest savings however, will be significant as 13 percent debt is being replaced with 3 to 4 percent senior borrowings. So our annual interest savings will be in the neighborhood of 1.3 million a year, or about 7 cents a share.

With that, I am going to turn it back to Bob.

Thank you, Andy. As Andy said, we're very pleased with our fourth quarter and full year results. Both sales and APs were up for fiscal 2003 -- were records for Actuant. And given the economic background in North America, we think were excellent financial results for Actuant.

It is hard to believe that it has only been three years since the formation of the Actuant in August of 2000. While this time has flown by, I think it is important we all remember some of the accomplishments that we've had over the last 38 months. Debt has been reduced from 460 million to 170 million. And leverage, defined as debt to EBITDA ratio, has dropped from 4 times to under 2 times. This deleveraging was primarily accomplished with great cash flow from our operations, supplemented with some help from a secondary equity offering, which we used to reduce our high yield debt. At our current levels we have more than met our goal of getting to the 2 to 3 times trailing EBITDA ratio.

We have upgraded our management teams significantly and have positioned Actuant business units for growth, both internally and from bolt-on acquisitions. Actuant has generated consistent quarterly earnings growth over the past two years, and we think investors over the long time will reward this consistency. We believe the diversity within the Actuant business units offers investors a unique blend of end-user markets, which can consistently grow in excess of what traditional industrial companies grow.

The Company is focused on its LEAD process, which stands for lean enterprise across disciplines. This operating improvement program is rapidly becoming a core competency in the Actuant organization. And lastly, Actuant has embarked on a bolt-on acquisitions strategy, which are starting to see yield results.

We believe that there are ample acquisition targets in the markets we serve. More importantly than acquiring, we've believe we're starting to create a process that we can quickly and efficiently integrate these acquisitions into the Actuant culture.

All of these accomplishments have led to superior value creation for you, the shareholder. The stockprice has grown from $15 a share at the spinoff to the mid '50s a share, in a span of 38 months. If you step back and think about the economic environment over the same period, I think you'll agree Actuant has done been a terrific investment.

The stock appreciation has allowed us to proceed with a two-for-one stock split, which we announced today in our press release. We think this split will improve our long-term trading liquidity, position the stock for a more attractive price for the retail and employee purchaser, and obviously signal the degree of confidence that management has for the future.

What drives my optimism for this future of Actuant? It is really the business model you see on your screen now. This business model starts with internal growth, which we believe for Actuant is around two times GDP. This two times GDP is driven by our leading market position, and our belief that we serve some faster end-user markets in the industrial landscape. Convertibles and recreational vehicles are examples of this.

You then take this internal growth and complement it with bolt-on acquisitions. Actuant has completed three acquisitions in the last fourteen months. That is Kopp last September, Shanzen (ph), a small China one in April, and most recently this September our Kwikee acquisition. Our definition for a bolt-on acquisition is quite simple. It is a relatively small risk acquisition that extends our market presence, our product line, or our geographic expansion in one of the core markets of industrial tools, electrical tools, or actuation systems.

The combination of this internal growth and acquisitions leads to incremental earnings growth as the chart shows. We then add to it our LEAD process employee development program to generate cost reductions and improve our asset utilization. All of this creates cash flow. In the year we just finished, cost cash flow M&A activity was about $48 million, or $4.00 a share, as Andy referred to. This cash flow is then either used to reduce debt or fund additional acquisitions, which keeps the cycle going.

We believe this business model is capable of generating 15 to 20 percent EPS growth on a consistent basis. This has been the case over the last two years, if you exclude special charges, and we expect it to be the case again in 2004.

Moving to the Kwikee acquisition, I want to spend a couple of minutes and review this for you. Kwikee is approximately 25 million in sales, serving the recreational vehicle market. Kwikee was attracted to us for a number of reasons. First and foremost, it is the leader in actuation systems for motor homes. These steps will provide us good opportunity to increase our content per vehicle. On a combined basis, Power Gear and Kwikee now provide the top three actuation opportunities on RVs, mainly leveling, slide-outs and steps.

Second, Kwikee brings us a profitable track record of growth and experienced management team, which is going to integrate well into the Actuant organization. The combination of Kwikee and Power Gear creates some interesting opportunities for us to leverage customer relationships. Kwikee brings to us two new customers, and we bring them, meaning Power Gear brings them a number of relationships for Kwikee.

First and foremost is Winnebagos, which is Kwikee's largest customer. This has been a strategic account for us. And Winnebago will now be Actuant's third-largest RV customer. From an economic standpoint, we paid about six times EBITDA for this business. And at this level, based on forecasted results, the deal is expected to be accretive in the first year we own it, which is fiscal 2004, almost a full year.

Speaking of fiscal 2004, no earnings call would be complete without discussion of sales and earnings guidance. As today's press release indicated, we are increasing our sales and earnings guidance for fiscal 2004 to reflect the Kwikee acquisition and the buyback of the 13 percent notes, offset by slightly weaker euro against the dollar in the last 45 days.

Our new guidance is as follows. Sales 625 to 650 million, diluted earnings per share of $3.20 to $3.50. This excludes the 23 cents a share bond repurchase charge that Andy discussed earlier. This represents 14 to 25 percent growth over fiscal 2003, again excluding special charges. Obviously, this guidance is based on our present share count. It does not take into account the stock split that I have discussed already.

Some assumptions that go with this guidance, there are no further acquisitions or divestitures, other than repurchasing the remaining 20 percent of the Kopp equity, which we will do here in the first quarter. We expect 40 to $50 million of free cash flow prior to acquisition. This should yield interest expense of around $20 million for the year.

Our year-end debt would be in the 160 to $170 million range. This takes into account the Kwikee acquisition and the bond buybacks, which happened in September. Tax rate in the 35 percent range. And probably the most importantly, we're really not expecting much economic improvement from today's levels to reach this forecast.

As I look at the first quarter, the forecasted sales would be 155 to 160 million. This would yield an EPS of 71 to 76 cents. This compares to 148 million last year, and diluted EPS, excluding special charges of 64 cents a share. Again, this is on a presplit basis and excludes the charge for the bonds. The midpoint of this EPS range represents a 15 percent improvement over the 64 cents a share we did last year.

Operator, now I would like to turn the conference call back over to you to answer our investors' questions.

(OPERATOR INSTRUCTIONS). The first question will come from the line of Wendy Caplan with Wachovia Securities. Please proceed with your question.

Thank you. Good morning. Can you talk a little bit about margin expansion in Tools and Supplies? Specifically, when do you think you'll get to a double-digit EBITDA margin at Kopp? And when will we get some benefits from some of the programs that we have talked about before in the existing Enerpac and DB businesses as we look out through '04?

Okay. You know again I think we have given fairly consistent guidance that we will hit double digits for Kopp sometime during the fiscal '04 quarters. That is likely to be the second quarter, which is one of their heavier quarters at the Kopp location. And we will have the benefit of some of the downsizing that is happening as we speak. We will get the full quarter's benefit. I think it would be likely, Wendy, that it happens in the second quarter of this year.

Moving to some of the programs that we're running, I don't know if your question was more sales related or cost down related. We've got both going on as we speak. It is not something that starts or ends at a certain quarter, or begins at a quarter. It is going on at all the locations.

It was specifically about the cost downs. Can you a talk about those for '04?

Sure. You know we have embarked on something, what we called management by a factor, or MBF. This is something that actually got started at Stanley, and maybe even General Electric prior to Stanley. We adopted it first at Gardner Bender, and now have moved it across all the platforms within Actuant.

And what MVS is, is basically a problem solving tool that analyzes your costs, and specifically uses cost down tools to reduce your costs. We have been successful at that at Gardner Bender over the last two years. That is what has led to some of the incremental margins there.

We're pretty early in that process in Enerpac. We led this thing in a formal way, somewhere around the middle of the year. We got quite a bit traction in the fourth quarter. Our expectation is that this is going to generate 1 to $2 million of cost down activity across the Enerpac business in 2003. We're also doing it in Power Gear down in Mishawaka. We are also doing it in Europe. So this is a tool we used as part of the LEAD process to drive it ongoing.

And to follow up on your comments, your prepared comments, on GB you mentioned that trends seem to be improving as the quarter You He did talk about RV, but can you say something about GB, where you think improvement is? And what is happening with some of your larger DIY customers?

Sure. I think if you followed us last year, Wendy, there was a pretty good slowdown in the middle of the year, like around Christmas to March in the DIY channel with some of the big boxes. We really viewed that as an inventory correction. They were managing very aggressively -- probably more aggressively than we have seen in the past -- their inventories down. It seemed like the same store sales that they were talking about, we're not seeing in replenishment in the electrical aisle.

That seems to have reversed at some level, or at least equalized. And while it is hard to get data, I think our view is that they just had to restock inventory levels or they would have had empty pegs at the store. So I think we have seen in August and in September reasonable DIY activity. And I think we are at a point where the end-user use is the same as our use at this point.

And finally, and then I will let someone else have a chance, as we were listening to you go back and think about the last three years, it made us think about some of the legacy issues relative to Applied Power. Can you just comment on those at this point?

Yes, they obviously have a lot less meaning now that the debt is down than it did before. But we basically have two issues that are outstanding. We're under IRS audit. Under the original agreement, CW agreed to indemnify us for any previous issues under their bankruptcy. We now are on the hook for that. As you guys know, there was a tax refund that came in that gives us kind of an insurance policy on that.

No real new news on the audit. It is a full scope, typical IRS audit. It is not an unusual thing. We're very comfortable with our position, and we're just going to have to wait and go forward. My guess is that you will hear a decision from that maybe late fiscal '04, could be fiscal '05.

The second relates to leases and, Andy, maybe you can handle that one for me.

The leases relate to buildings that APW is using in its operations today, that were either leased in the name of Applied Power, or guaranteed at the parent company. We were not able to get the Applied Power name off those leases, so they followed us. We're essentially second in line on those. If APW units would not be able to pay the leases and would default on the leases, the landlord would turn to us.

We have never had that happen. There is about 10 properties. It has not happened. Even through APW's bankruptcy, they continued paying all the leases. So we view it clearly as a contingent liability today.

Probably the one thing to add that I didn't add to this tax thing is, as you know, Wendy, we received a tax refund; paid down debt with that. There will be an outflow of cash sometime in 2004 or 2005 in in the range of $17 million. It could either go to APW, which we think is likely case, or to the IRS, since they found some audit adjustments. So make sure you are modeling for cash flow. This would not be an earnings issue, but it would be a cash flow issue of $17 million outflow at some point, probably 2005.

Thank you very much.

The next question will come from the line of Deane Dray with Goldman Sachs. Please proceed with your question.

Good morning, Bob and Andy. First question is, and you may have said this, Bob, and I missed it, but what is the expectation regarding restructuring plans in fiscal '04 that we should be thinking about that you flow-through your operating results?

You know, I think the answer is, we don't seriously don't anticipate any restructuring. The restructuring we do for '04 is going to in the ordinary course of business. And we could probably quantify it for you, but it is not something that I view as one time, it is something that is going to come through all the time. A good example is we're doing some downsizing in Japan of our Enerpac unit. So there are pieces that are going on, but I don't view it as something that I want to call restructuring. It is more ordinary, normal downsizing, trying to aggressively manage our costs approach.

It is already embedded in our estimates.

Good. And then just along those lines with regard to Kwikee, what sort of margins are they coming in at, and what kind of cost takeouts and the timing for the ramp up there?

I think our approach, Deane, similar to Kopp, is not to give margin guidance specifically on acquisitions. It is a reasonable margin business, maybe a touch lower than our existing RV business; so in the midteens neighborhood. But it is not something we want to get specific. And the reason for that is there are some synergies between the businesses. And I think it is going to be hard to identify what Kwikee margins are versus what total RV margins are, because of synergies between the two.

That is fair. Last topic relates to the bond buybacks. What is your expectation going forward? You have said you would be doing this opportunistically. We have seen three of them now. What is the plans going forward? And how do you look at the bond premium, and when is it too expensive, and so forth?

It is hard to give you a lot of guidance there are without driving my bonds berserk in the marketplace. I think people understand that these bonds were a necessary part of our capital structure at the time of the spinoff. You just had to have subordinated debt when you had a four times debt to EBITDA. They are less relevant today at our current capital structure. We would love to get them all out of there, but they do have a make hole -- they have a no call feature that goes to what, '07?

May of 2007 is our first opportunity to call the bonds at 102.

So you what you end up with, Deane, is basically an open market situation. And the way you should view it is the way we view everything around here, we view it as a cash flow return. What is what is the cost to buy the bond back versus the interest savings you're going to get? And we obviously are constrained by the '07. You can just wait until '07 and buy them back at '02. So that limits the type of period of the return that you could do.

And that is probably all the guidance I want to give you. But it would be higher than our CMM rate. We would have to see a return less than are our CMM rate of 20 percent on a cash-flow basis. It would have to be greater than -- sorry, just the reverse. It would have to be a greater return than 20 percent, or we wouldn't do it.

Just to give you a little bit more color on this, Deane, there are other bondholders out there that have contacted us say, hey we will sale your bonds at X price. We have walked away because it did not have the paybacks. So there is a level out there where it makes sense and where it doesn't. And we will continue to be disciplined on it. And if it makes sense, we will pull the trigger.

Good. From the cash flow return that is good sense in how you're approaching back. What about on a reported basis, the idea of excluding that on a going forward basis? FAS 145 basically said you're supposed to be treating that as an ordinary course of restructuring, just like you do your business restructuring, but you're still at this point separating that. What is the accounting philosophy behind that?

I think what happened under 144, it was that it moved from extraordinary up into ordinary operating reporting. We're still reporting it up above. It is not an extraordinary item, it is an ordinary item. But I think it is appropriate for us to identify it to shareholders as a onetime event. It has very little to do with the day-to-day activities of, say, an Enerpac or of our normal debt structure.

So I think what you're going to see is us report it just as the FASB requires, but we are at least going to identify it for you to look at. And I have already claimed how we're going to evaluate it. I hope you guys evaluate it on a cash-flow basis like we do. I think we're doing it absolutely in conformance with GAAP, but we have to at least tell you what it is, so you can look at it as a specific item.

I understand. Thank you.

The next question will come from the line of Rob McCarthy with Robert W. Baird. Please proceed with your question.

Good morning guys. Actually, first I would like to get some help with a little bit of detail on --

We didn't give you enough on the call?

Actually, you gave us so much that it was hard to keep up with.

Okay, alright.

For example, I missed the change in working capital at Kopp since the time it was acquired.

It was close to 5 million, just a hair under $5 million. EUR5 million.

Not to beat you up about this again, but I'm going to anyway. I think originally we were targeting something like April or May for it to get the sale leaseback done?

Yes.

Yes.

I mean, what is the story behind the story here?

Okay. What has happened on this is the banking environment, the financing environment, in Germany is very difficult right now. Banks are cutting back credit on real estate and any type of real estate financing. That has had an impact on the ability of the other parties interest in doing a sale leaseback to finance this transaction. So that that is essentially the punchline on it.

I think the way you should look at it is very similar to the bond buyback that we just got done discussing. We look at it as a cash-flow basis. What is the property worth? What can we get in the terms of a sale leaseback transaction? And does that make sense versus borrowing on our revolver and our senior lines at 3 percent.

If you follow real estate financing, it is a lot more than 3 percent. So you are foregoing maybe short-term earnings benefit for long-term cash-flow benefit. And it is a fixed instrument versus a variable instrument. It is a normal type of financing decision we make. And what happened is the market tightened on us in the last six months. And I think we're patience.

This is a valuable piece of property. We don't feel with our current capital structure we have to have that money today or it is somehow a disappointment. I think I even guided you guys on the last call that it might not happen in the fourth quarter. So I don't think you should view -- yes, it is a negative. We would have liked to have had this. It is not in our philosophy to own real estate. But similar to the bonds, we got we have got to look at it on a cash flow return basis. And it didn't meet our attributes given that the market tightened.

Fair enough, Bob. And you did say something to that effect last quarter. But just so that I make sure that I come away with the right impression, what you're telling us is, subject to market conditions, it could be some quarters plural before this gets consummated.

I think that's correct.

It is possible. We could have completed the transaction in the last 30 days. We didn't like the economics on it. We didn't complete it.

That's fine. Andy, in your description of growth rates for Tools and Supplies, you gave us a number that excluded FX and acquisition. Can you separate the two, please?

We were flat -- on a core basis we were flat saleswise for the quarter. On a full year basis, I'm going to have to -- give me one second.

What I'm really asking, Andy, is what did currency do in the quarter for Tools and Supplies?

About 6 points.

Six points. Okay.

I'm sorry, hold on. About 3 points. Currency was about 3 points, excluding Kopp.

That is the currency piece. In other words there is additional currency that influenced the Kopp number that is separate?

We are reviewing Kopp because it was not in prior year numbers.

I agree with that treatment. I am just making sure I interpret it correctly.

Kopp would clearly have the benefit of the same currency, because it is an euro business.

It would be higher for Engineered Solutions because our mix is a little higher in terms of the size of the European business. (multiple speakers)

And one more little detail. D&A at Kwikee on an annual basis going forward, roughly?

We're still working out getting the evaluations, the appraisals on this thing. I think it is going to be somewhere between 1 million and $1.5 million.

Alright. Bigger picture. Bob, one of the things you have been willing to do in the past that has been very helpful is to talk about your expectations for full year performance, generally, in terms of maybe like a range of percentage changes for the major underlying businesses.

Alright. Let me take a crack at that. When we look at 2004 -- and I think I will start broadly about the economy. If you look under a microscope, we're seeing a little bit of improvement in August and September. Now there are always pluses and minuses in terms of businesses. Where I think we're seeing a little more improvement is in the things that are closer tied to the consumer. And that shouldn't be a surprise to you.

I think the tax refunds, the tax act that Bush put in -- I think the refinancing of housing, low-interest rate environment, people are still buying convertibles. They are still buying recreational vehicles. They are still doing things that are held through the DIY market.

So I think our businesses that are tied more to the consumer are starting to see some life. The businesses that are still softer, are the ones that are tied more to what, I guess I would call, industrial production, particularly in the U.S. This would be Enerpac in the Tool business and the workholding line. This would be Enerpac in the industrial tool line. This would be Gardner Bender in the professional electrician line. This will be Milwaukee Cylinder, things like that.

And that is my view. I think rate year we have done a lot to help this economy. But I don't think CEOs are adding capacity in the U.S. And I think you've got a situation where it is going to be a while before you see some of the capital spending cycle businesses come back. So I start with that overall view, and that is what leads me to say it will get a little better, because we have the mix that ties more to the consumer than traditional industrial companies.

If you go down it business by business, Enerpac, I think it had a terrific year this year, and it was down. But I think we gained market share just given the realities of what is happening in the capital spending cycle. Gardner Bender, I still like the DIY market. I like Kopp in Europe. The bulk of the DIY markets, both in the U.S. and Europe, are still winning some market share from traditional channels. And we benefit from that because of our strong position in those channels.

Recreational vehicles. The recent data out on RVs was pretty positive. I think there was a little bit of a pent-up demand. I know you guys were all worried sick in the February/March time about the war, and what that was going to do to RVs. It was over so quickly, it really didn't affect RVs that much. And RVs continue to truck along.

We're starting to get into the fall. That tends to be a little slower season for recreational vehicles. The next big data point is kind of January or February, because that is when all the models that were released at Louisville, and everybody is gearing up for their next buying season, which is the spring next year. That is probably your next big data point in RVs.

Convertibles continue to do great. I missed the Frankfurt show this year, but Arthur Kerk, who runs this business for me told me that there is really a whole new wave of things that are coming. This is outside the ones we talked to you about at Detroit last year. The whole concept of open air cars continues to be something that you can read about a lot in the press. And in fact, I think on our screen we showed one of the headlines from the Frankfurt show talking about that.

So we see another wave of cars coming that are probably maybe a little more specialty cars, a little smaller -- not 50,000 units a year, more like 10,000 units a year. But a lot of activity in that kind of neighborhood. And we continue to like our markets there. So I would boil all that together. I think you're going to muster some growth in our base core business without acquisitions. We were down 3 percent in the first quarter or -- sorry, third quarter last year, and improved to down 1 percent, as Andy talked about.

I think it is going to muster a little bit of growth as you come into the first and second quarter of this year, pending some other fall out that happens on a geopolitical basis. Did that answer your question?

That is fine, Bob. Thanks.

The next question will come from the line of Mas Saddiqui with Jeffries and Company. Please proceed with your question.

Thank you. Good morning. A lot of the questions have been asked. I just wanted to get a little bit more granularity on a couple of things. One, from your answer to an earlier question, Andy, should we assume then that the Kopp downsizing in terms of the plant closures and all the other headcount reductions and so on, would more or less be complete by the second quarter?

But by the second quarter -- I would say the February/ March timeframe of 2004, most of it most of the heavy lifting will be done. There will be minor things here and there, but that is where the big restructuring will be completed. Yes.

The second thing I would ask is, the negative impacts from the two RV accounts that were lost before, should we assume then that based on what we're hearing, this is more or less phased out in the first quarter?

There's a big difference between the fourth quarter impact and the first quarter. So there might be a couple of points impact just on RV year over year, but nothing like 13 percent. I would expect it to be minus 2 to 3 percent.

And then lastly, in the past you had been very good about this, you have clearly given some sense of visibility on how you're going to get the numbers next year. Can you talk a little bit about some of the business opportunities that you're seeing out there? Not necessarily obviously specifics, but the sorts of potential acquisition opportunities out there that you might be looking at, that you might be interested in? Just some color on where additional growth might come from?

I'm going to split the comment kind of internal and acquisitions. Internal, we continue to like some of infrastructure projects with Enerpac, new product introductions. At Enerpac, China growth. China was up over 100 percent this year for us at Enerpac. It is now about a $7 million business. So that is starting to grow and has been doing well.

GB, new products. You saw the Ergo (ph) Stripper. We've got a number of new things that are cycling out here as we go through the year. Recreational vehicles, got some light weight. Both slide-out and leveling systems, I think are going to create some growth. We talked about Damon (ph) that we won last year. There are a number of new things still cooking that, I think, the lightweight leveling and slide-out systems will be there. And convertibles, I think I've already covered.

When I look at acquisitions, probably the number one place that we would like to see more would be the expansion of the Enerpac site tool part of the business -- tried to get more attachments, things like torque wrenches and bolts tensioning etc. Things like that. Things that could expand that brand name where we could send it through our distribution channels, which we really dominate on a global basis.

In GB, there is products to add both in the internal electrical aisle, and some things that kind of cross over to other aisles. And I have talked to people about that in the past. There are different types of products that are sold both in electrical and in the tool aisle.

In Kopp, there is geographic expansion, outside of the Germanic world into other parts of Europe. I think that is an attractive program that we're looking at. RV, I am probably done for a while with the Kwikee acquisition. Automotive, not a lot to do there. We did the joint venture on latches last year. There is probably not much more to do on cars right now.

That is very helpful. Just one won last point to clarify on Kopp. The closure that you're getting done more or less with the downsizing by the second quarter, does that includes the potential for a move to the Czech or Tunisian regions?

Yes, part of that, Mas, is shifting manual type assembly over into lower cost areas, absolutely.

But we do that across all the businesses. We have a very -- very much a low-cost, what we call low-cost country LCC approach to really all the businesses. And I wouldn't single Kopp out as something we do differently than anybody else. It is always a make verses buy, low-cost verses high cost, value added verses commodity type approach to these things.

Okay, thanks very much.

The next question will come from the line of Scott Graham Bear Stearns. Please proceed with your question.

Good morning, Bob. Good morning, Andy. Two questions. The gross margin in the quarter, the decline of a little over of 200 basis points was much like the decline in the fiscal first quarter. And I'm wondering, is that because of Kopp seasonality, or is there something else going on in there?

No, it is definitely Kopp coming through. If you picture Europe, different countries in Europe take their summer holidays or vacation. We definitely hit that strong in the fourth quarter, so our production levels were lighter, and with the double whammy with the lower sales volume as well. So its margins were lower than the prior quarters.

Got you. And then secondly, the charge that we are going to take in the first quarter for the debt repurchase, I think you said in the press release $4.4 million, that is pretax?

That is pretax, yes it is.

Okay. That's all I had. Thanks.

The next question will come from the line of Jeffrey Brown with CS First Boston. Please proceed with your question.

Hi guys. Just a quick question. I guess this is for Andy mainly. What did the cap table look like at the end of year, and I guess including the AR? And if I were to just kind of assume what it looked like now, should I just add 29 million plus, I guess, 29 for the acquisition of Kwikee, and another 15 on the revolver for the buying of the notes?

That is fair. You would have to add a premium and on top of that.

Right.

The buy in. So essentially they hit on top of that. That is correct. In terms of where we were at from a debt standpoint, our revolver was zero. Our senior term debt in the U.S. was roughly 48 million. And we had 110 million of high yield bonds. The balance of the debt out there was term loans in Europe of about $10 million.

And the AR facility?

It was down 500,000 from last quarter.

It is around 23.5?

23ish, somewhere in that kind of range, yes.

And lastly, the forecast of 320 to the EPS of 320 to 350, is that about -- it looks like it is about 95 to 100 million in EBITDA. Is that in the ballpark?

That is in the ballpark, 98 to 101, somewhere in that kind of zone.

Okay. The incremental, I guess finally, the incremental impact of the Kwikee as far as from an EBITDA standpoint, last year it looks like they did around 4 million. Is there cost savings on top of that that you can think you can generate into that next year, so --

I think we gave you the guidance we wanted to give you, the midteens and sales of about 25 million. Your are going to have to -- that is about as tight as we are going to go.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). The next question will come from the line of Rob McCarthy with Robert W. Baird. Please proceed with your follow-up question.

He's back.

No problem.

Andy, you told us that RV was down about 13 percent in the fourth quarter, but up sequentially. I'm not sure -- I kind of got the impression --

When you said up sequentially, it was less negative. Sequentially it was still negative.

Yes, it improved sequentially.

The comparison improved sequentially?

Yes.

Okay. Excepting the lost business, how did the business do in the fourth quarter? In other words, how much of the 13 percent decline was simply this piece of business?

It would have been down a couple of points.

A couple of points? So you said the lost things were 11 and the 13 was higher?

Year-over-year, it would have been down a couple of points.

Okay. And similarly in the fourth quarter, how much was convertible up, and how much was -- what did truck do?

We put truck and the off highway together. It was down low single digits, 2 or 3 points. Our convertible, I believe, was up about mid 5 or 6 percent, something like that -- in that zone.

Was that a little weaker than you guys were expecting?

No, the unit volume absolutely was there. I mean, it is just mix issues coming in, with the high volume of some of these lower price point cars. (indiscernible) as an example.

Understood. They don't get a lot of attention. They're not very big. They are not very important overall numbers, but for the year, how did the combined Milwaukee Cylinder, Nielsen businesses do?

Actually, we were pretty happy with their sales for the year. We had nice growth coming out of Nielsen, and we were about flat at Cylinder year-over-year. Profits better than last year, still not where we want them to be, but they're better than last year.

Between the two, up a couple of hundred thousand in EBITDA. Most of that was Nielsen Sessions, which has done a great job of repositioning it to kind of a low-cost Chinese source latch business. And EBITDAs are starting to come up from that.

That is encouraging. And so what, combined like up mid single digits on revenue?

Yes.

Okay, how much of the $4.4 million first quarter charge it is non-cash?

About an half million.

And last, but not least, Bob, how about just a little more specific commentary on convertible. The word I have actually written down on my notes is contests. Was anything decided in the quarter? When is our next milestone? What should we be looking for?

Yes, I mean we still have -- I think I described that we have three big programs that continue to be on the tee. These are all programs in the 50,000 unit area. And I think we have communicated since the autoshow, we need to win one out of the three. The three are the BMW 3 Series; the combination of the Volvo and the Volkswagen Golf, which is controlled by Robasco (ph). And then the third one is the Sebring. All three we have designed products. All three are literally -- the decision was supposed to happen. It gets pushed off a couple weeks. It is all right in the ZIP code of probably the next three to six months. I feel good about our chances on all of them. I feel pretty confident we're going to win the one out of three we need to get the tripling of volume.

And just to follow that a little farther, if you had the screen on the show you saw we shipped 183,000 units for the year. That was a pretty big move from about 127,000 units the prior year. So convertible did exactly what we told you guys it was going to do. Probably a little stronger on some of the lower end cars like the Beetle, which is just been spectacular. But convertible feels great. My enthusiasm is exactly the same, not better or worse than it was three months ago.

I'm thinking you told us 182,000. I'm just kidding. Thanks, guys.

The last question will come from the line of Scott Graham with Bear Stearns. Please proceed with your follow-up question.

Just answered. Thanks.

Very good. Well, I appreciate your call. I am signing off now. I want to give you one last piece of information. We are having an investor conference next week. We're actually having two on the East Coast, Tuesday and Wednesday. Tuesday is in New York. Wednesday is in Boston. They run from 11:30 to 2:00. We will beginning the update of the Company. We've got Mark Goldstein and Bill Blackmore with Andy and I, so you get to see some of the operating guys. If you want to attend these conferences and haven't confirmed yet what Anne, please do so as soon as possible. There is room for both days, but we would like to get a final list together on that.

If you have any further questions, both Andy and I are here today and tomorrow to answer any of your questions. Thank you and goodbye.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation, and ask that you please disconnect your line.