MillerKnoll Inc (MLKN) 2003 Q4 法說會逐字稿

Good morning, everyone and welcome to this Herman Miller, Incorporated fourth quarter fiscal year 2003 earnings results conference call. This call is being recorded.

This conference call will include forward-looking statements that involve uncertainties and risks. There can be no assurance that the actual results will not differ from the company's expectation. Factors that could cause such differences include the company's ability to improve operations and realize cost savings. Competitive and general economic conditions, the future profitability of acquired companies and other risks described in the company's annual report on form 10K, its quarterly report on form 10Q and with other filings with the Securities and Exchange Commission.

Today's presentation will be hosted by Miss Beth Nickels, Chief Financial Officer and Mr. Michael Volkema, Chairman and Chief Executive Officer. They're joined by Mr. Joe Nowicki, Vice President of Investor Relations and Treasurer. Ms. Nickels and Mr. Mike Volkema will open the call will a brief presentation, followed by your questions. We will limit today's call to 60 minutes.

At this time, I'd like to turn the call over to Mr. Mike Volkema. Please go ahead, sir.

Good morning, everyone. I, too, would like to welcome you to our fouth quarter conference call.

As is our custom, I will open the conference call with a brief introduction, then turn it over to Beth Nickels and Joe Nowicki for a more detailed view of the financials. Then, we will use the remaining time for your questions.

The last time we were on this quarterly conference call, the conflict in Iraq had just begun which added a great deal of uncertainty to our business. During that call, I mentioned that if the conflict was short in duration it would set the stage for an industrywide recovery. As we sit here today, not all the uncertainty has gone away, but I'm very encouraged by some of the positive economic trends and the slight pickup in our business. I know that the market condition will continue to be challenging but from what I've seen in the last 90 days, I truly believe that Herman Miller is on the way back up, not only in volume, but also at a new level of profitability due to the reorganization of our business model over the past 18 months.

As Beth goes through the results today, you will hear some good news around our sequential quarterly orders growth and an increase in our customer activity. You will hear some promising information about gross margins. The changes that we've made to manufacturing operations are clearly positively impacting the cost of sales line and there is more benefit to come. As we announced last week, with the consolidation of our Canton, Georgia operations into west Michigan, we are continuing to make the moves that will not only enhance our ability to serve customers, but also lower the cost of doing business. Something I hope that will be both a win for our customers and our shareholders.

To conclude, I think that we made some good progress last year but everyone here is anxious to see how the actions taken over the past 18 months will enhance our ability to perform going forward, especially if we're fortunate enough to get a little economic tailwind.

And with that brief introduction, I will turn the conference call over to Beth and Joe.

Thanks, Mike. We'd like to remind everyone that this quarter's call is also being webcast and includes a slide presentation, which can be viewed on our web site at HermanMiller.com. If you haven't received a press release, it's also available on the web site. We've also changed the format of this conference call slightly to be sure all of the material we present and discuss here is in alignment with the new SEC regulation G, around disclosure of non-GAAP financial measures. If we struggle a little bit in the presentation of our material, please let us know. We want to be sure we help you to clearly understand our quarter's financial performance.

Sales for the quarter were $322 million and EPS was a loss of 2 cents per share. Which includes the negative impact of a restructuring charge of 14 cents per share. Excluding the impact of those charges, we again improved our year-over-year and quarter-to-quarter financial performance and reinforced the appropriateness of the actions taken last year to redesign our business model. Our growth margins continue to show great year-over-year improvement. Our cash flow from operations was again very strong.

Now let's get into the details of consolidated sales, orders and backlog. On a consolidated basis, net sales for the quarter totaled $322 million, which is at the high end of the guidance we initially provided. On a year-over-year basis, the sales for the quarter were roughly flat and actually increased about 4% from the third quarter levels. Our average weekly sales for the quarter were $24.8 million compared to $23.9 million in the third quarter. The increase is a reflection of our normal seasonality but is less than we would historically see due to the geopolitical uncertainty that existed at the beginning of the quarter. As the conflict in Iraq left us, we saw a definite rebound in orders and sales as the quarter progressed.

Consolidated new orders for the quarter totaled $338 million, which is down 5.8% compared to last year but represents an almost 20% increase from the third quarter. Orders during the fourth quarter equate to an average of $26 million per week as compared to $21.7 million per week in the third quarter. In addition, our eight-week order entry trend was $27.1 million per week and our four-week order trend was $28.6 million per week.

It's important to note that we did have a special new order incentive program under way during the fourth quarter in our North American sales team. We do believe this was one of the factors that helped to stimulate the high order growth at the end of the quarter. However, in the weeks after our quarter end, we continued to see strength in our weekly order trends very close to the fourth quarter weekly averages. The level of business activity during the quarter as measured by client visits continue to improve significantly. Up 22% over the prior year's same quarter and up over 78% from the third quarter levels. We haven't seen all this increased activity translate into orders yet, but we do believe that it is a promising sign of pent-up demand that will be released as the economy continues to recover.

Now let's move on now to backlog. For the quarter, our ending backlog of $182 million was up about 10% from the third quarter. On a year-over-year basis, it's down roughly 9% from last year's fourth quarter levels of $201 million. Historically, revenues and orders in the fourth quarter reflect a seasonal pickup and this year was consistent with that trend, although with the War in Iraq under way in the early part of the quarter, we did experience a significant improvement in the order flow throughout the quarter as the conflict lessened. Our ending backlog also benefited from two very large projects and our international business that are not scheduled to ship until our third quarter of fiscal '04. One is for $6 million in Tokyo. The other is for $10 million in the U.K.

Now I will give you some specifics around domestic and international operations. Domestic sales decreased 2% while new orders declined 6% on a year-over-year basis. On a sequential quarter basis, meaning third quarter to fourth quarter, domestic sales increased 1% but orders were up a very strong 23%. At the end of the fourth quarter, we really started to see the pick up our North American order rates. Specifically, the (inaudible) distribution network as well as our Geiger subsidiary showed very strong growth in orders during this quarter.

Our international business environment also showed some encouraging signs. On a year-over-year basis, sales for the quarter increased 11% while new orders decreased 7%. On a sequential quarter basis, international sales increased 19% and orders were up 3%. We saw year-to-year improvements of sales in almost all of our international locations, with significant improvements in Canada and Mexico.

Now let's discuss gross margin. This is clearly one of the most encouraging highlights of the quarter. With net sales basically flat on a year-to-year basis, we were still able to improve gross margins by over 320 basis points from the prior year fourth quarter. That's an 11% improvement in gross margin dollars with flat sales. Our gross margins improved from 30.1% last year to 33.3% in the current year. In addition, we recorded sequential improvement in gross margin from 30.1% in the third quarter to 33.3% in the fourth quarter. We did benefit in the fourth quarter from favorable adjustments of $4.8 million for LIFO inventory valuations as well as accrual reductions. But even excluding the items, we're clearly benefiting from the earlier cost reduction actions.

We saw improvements in just about all of our business units and almost all areas of cost of goods sold, domestically and internationally with notable increases within our North American plants and Geiger subsidiaries. Also notable were our continued improvements in overhead spending. On a pure dollar basis, overhead spending declined by $6 million compared to the same quarter last year. This represents a decline of almost 9% on basically flat sales. Overhead spending was also down by $4.4 million when compared to the third quarter, which is a decrease of 7%. Sales were up 4% for the quarter, therefore overhead as a percentage of sales decreased by 2 full percentage points from the third quarter. As mentioned already, overhead spending in the fourth quarter benefited from incentive and accrual reductions which represented approximately $3 million of the $4.8 million stated earlier.

Material costs for the quarter totaled 37.6% of sales, slightly higher than the prior year of 37.4%, but well below the level of 38.3% in the third quarter. A large part of the year-to-year increase in material cost was a result of steels, plastic and fuel costs that we discussed in past conference calls. Plus higher discounting in the fourth quarter as compared to a year ago. Steel costs were up approximately $700,000. Plastics up about $400,000 and fuel costs up $300,000.

Our procurement and supply chain management teams continued to do an excellent job of managing these costs throughout the year. Through negotiation and sourcing consolidations, they've been able to significantly reduce our initial estimates of the impact of these costs. And as mentioned earlier, material costs in the fourth quarter also benefited from a LIFO inventory adjustment of $1.8 million.

Our freight out and product distribution costs totaled 5.6% for the quarter, down .8 percentage points from last year and even down .3 percentage points from last quarter. This is great news in light of the significantly increased fuel costs, that are up over 20% from last year at this time. Our transportation and distribution teams have continued their pursuit of cost savings to reduce these increases and you can see it in the results they're achieving.

Pricing pressure has continued to compress gross margin. Higher discounting in the fourth quarter as compared to a year ago reduced our domestic margin by approximately $2 million. On a year to date basis, discounting has reduced domestic gross margin by approximately $18 million, as compared to the prior year. This continues to be an area that we will watch closely as we go through the next year.

Gross margin performance was definitely a bright spot for the quarter. You heard me outline the benefits that will not recur and we do continue to see pricing pressure have a negative impact. As we announced last week, we're continuing to take further steps to reduce costs in this area. We're in the process of moving our Canton, Georgia operations into an existing building at our Spring Lake, Michigan campus. We estimate this will generate cost savings of approximately $10 million before tax with restructuring charges of $23 million before tax. The pretax cash portion of these costs is estimated at $11 million. We know this will impact our efficiency slightly as we implement this over the next six to nine months, but we are very optimistic about our potential to continuously improve our manufacturing operations and gross margins as a result of all the actions we've taken.

Moving on now to operating expenses: We continue to demonstrate year-over-year improvement this area. For the quarter, operating expenses totaled $105.8 million, which includes restructuring charges of $15.9 million. This compares to $128.9 million in the prior year, which included restructuring charges of $23.4 million.

In total, our operating expenses were down $23.1 million on a year-to-year basis. $7.5 million of that reduction is explained by lower restructuring charges. And you might remember in fiscal '02, the company accelerated depreciation on some of its technology-related assets that added $7.7 million to the prior year's fourth quarter costs. Operating expenses for the quarter also benefited from the reduction of approximately $700,000 of incentive compensation accruals.

Now, compared to the third quarter levels, operating expenses increased $20 million. $15.6 million of this increase was due to an increase in restructuring charges and $4.4 million was due to increases in other operating expenses. These other increases were planned and they were discussed in our call last quarter. They related primarily to the annual NeoCon trade show, the launch of new products and the rollout of our new merchandising strategy.

Restructuring charges for the quarter totaled $15.9 million and included $13.5 million for the impairment of assets associated with the relocations of our Canton and (inaudible) facilities announced earlier this quarter. In addition, the charges include $3.6 million, related to the workforce reductions announced last quarter, offset by a reserve adjustment of a negative $1.2 million, primarily associated with the final sale of our Rockland California facility. In total, these charges negatively impacted earnings per share by 14 cents in the fourth quarter.

As you know from all the actions we've taken, we will continue to maintain close control over our Op Ex spending. At the same time, we intend to continue investing in those projects and programs that we think are essential to innovation and future sales growth, such as the three new products, like the Mirra chair and the 20 new product extensions rolled out at NeoCon last week.

Moving down the income statement to other income expenses, taxes and net income: Other expenses for the quarter, net of interest income, totaled $2.9 million, compared to $1 million last year. Included in this increase is $200,000 of interest savings from our interest rate swap arrangement. In the fourth quarter of last year, we also had approximately $900,000 in gains, associated with the sale of several U.S. and international dealerships.

Lastly, in the current year, our method of accounting for losses in our O.T. spectrum joint venture was changed. We're now required to recognize 100% of the joint venture's losses now and in the future and this amounted to an equity loss recognized in the fourth quarter of about $400,000.

The effective tax rate was 35% for the year. As explained in the previous quarters, the lower rate is compared to the prior year, driven primarily by the change in amortization of goodwill related to the adaption of FAS 142, the effective changes in international and state tax provisions and the size of permanent deductible items relative to our earnings.

When you roll this all up and include the restructuring charges, the net loss for the quarter was $1.3 million or a negative 2 cents per share. The negative impact of restructuring charges were $15.9 million or 14 cents per share for the quarter. This compares to a net loss of $18.8 million or 25 cents per share in the prior year fourth quarter, which included restructuring charges of $23.4 million or 20 cents per share.

Now I'd like to give you all a new voice to listen to. I'm going to turn the call over to Joe Nowicki, Treasurer and Vice President of Investor Relations, to talk about our cash flow and the quality of the balance sheet.

Good morning. For the quarter, operating cash flow continued to be positive and improve greatly from the prior year. We generated $4 million cash from operation. This amount includes the negative impact and additional $15 million voluntary contribution to the company's employee pension fund. This compares to negative $38 million for the same period last year. Year to date cash from operations is a very strong $145 million.

Just to reinforce what we said previously, one of the primary objectives of our restructuring plan last year was to strengthen our cash flow. Our results here demonstrate our success toward meeting that objective. In light of the current industry conditions, we continue to monitor our accounts receivable and credit exposure very closely and believe we are adequately reserved for bad debt expense.

Our collections of AR continue to remain relatively strong. During the first quarter, our inventory in AR balances increased slightly by $1.7 million driven by our higher volumes. Our DSO and inventory receivables improved by more than nine days from the same quarter in the prior year. In addition, our AR aging has continued to improve and we recorded our lowest level of past due there all year long.

We continue to monitor the health of our dealer networks, they're critical to the long-term strategy and are feeling the pain of the current economic environment. We continue to work with them and have developed action plans to be sure we have adequate coverage in key markets and also lower our risk exposure. As a result, we increased our notes receivable reserves by an additional $400,000 during the quarter.

Capital expenditures for the quarter were $9 million. Year to date, our cap expenses totaled $29 million, which is $23 million below last year, a spending rate of only 55% of last year. We continue to closely scrutinize capital spending to ensure we're making the right investments to sustain the business and to preserve our ability to introduce innovative, new products.

I'd like to give you an update on the status of the facility we've exited in the restructuring. We continue to have a high degree of success in selling the facilities we're vacating. During the quarter, we received $16.5 million for the sale of the Rockland California facility. As you may recall, we entered into the contract for sale last quarter and received a deposit of $750,000 in January. That transaction is now complete.

This quarter we also received a letter of intent on the Holland, Michigan plant. The anticipated price is in line with the current book value. We hope to receive a deposit shortly. As we discussed previously, we entered into a sublease for a good portion of the Deyoung, [ph] Michigan facility called the Deyoung. [ph] This quarter we finalized the sublease for another portion of the facility with the same tenant who took possession in April.

As we announced last week, we will be exiting the Canton, Georgia facility next year. The property has been appraised and listed.

Let's move on to our liquidity and cash position. Our increase in profitability and cash flow has continued to result in improvements in our coverage ratios. We're again, this quarter, in compliance with all debt covenance, the improved trends in profitability and cash flow, the $200 million available on our revolving credit facility and the significant cash balance provides us tremendous flexibility. During the quarter, we made a $10 million scheduled principal payment, bringing our outstanding private placement note balance to $45 million.

During the fourth quarter, we continued our share repurchase activity, buying approximately 370,500 shares for $5.8 million. This approximates an average price of $15.63 per share. We expect to continue our repurchase activity, consistent with the past practice, our level of purchases will be balanced against our cash flow, our desire to reinvest in the business and our mandate to maintain a high degree of financial flexibility.

As mentioned previously, this quarter we did make an additional $15 million voluntary contribution to our defined benefit cash balance pension plan. As you probably recall, at last fiscal year end we were in an underfunded position of approximately $54 million. During the current year, we've made a total of $32 million in additional contributions, but the combination of continued poor performance in the stock market, with a change in our discount rate from 7.25% down to 6%, we are ending underfunded liability of approximately $79 million.

We maintained a strong cash position, ending the quarter with a cash balance of $186 million.

Thanks, Joe. Now let's turn to the outlook for the balance of the fiscal year.

We're encouraged to see some of the positive trends in the economy and the slight improvement in our order entry rates. But we remain cautious on the near-term outlook because our industry performance normally lags the general economy by four to six months. In addition, we'll see increased costs due to a merit-wage program put into effect the first of this fiscal year, increased benefit costs that we're all facing and we will start to accrue for the payment of a bonus next year for our employees.

As a result, we expect our first quarter sales to be in a range of $320 million to $340 million. With earnings per share between 1 cent and 5 cents. Which includes restructuring charges of approximately 5 cents per share for the previously-announced actions.

Now, let me explain our assumptions around the guidance. In calculating the revenue range of 320 to $340 million, we start with a beginning backlog of $182 million. There are two large orders totaling $16 million that aren't scheduled to ship in the first quarter. This brings the beginning backlog available to ship to $166 million. We normally ship 80 to 90% of the backlog in the following quarter. We then add in an average for the number of weeks available to order and ship. For these weeks, we assumed a range of 26 to $28 million per week. This gives us the guidance of 320 to $340 million.

Our gross margin assumption is 31 to 32%. Our fourth quarter margin of 33% included approximately 150 basis points of adjustments that we don't expect to recur in the first quarter.

In addition, we have some new costs associated with the merit increases that just took effect, the increased benefit costs and the expected incentive accruals. We also expect some inefficiencies during the transition of the Canton operations to west Michigan. However, we believe we have additional margin opportunities because of the prior restructuring.

In summary, we believe our financial performance this quarter really demonstrated the power of the adjustments we made to our cost structure. We were able to generate a 320 basis point improvement in gross margins this quarter on the same level of volume as the prior year. In addition, the new products that we introduced at the NeoCon last week illustrated our commitment investing to grow our business. We said we'd continue to fund our strategic investments and we have. While the economy hasn't had the strong bounceback we would have liked, it does appears to be showing signs of improvement. We remain confident that we have the right leadership team in place and the right to see us through these difficult times and the right business model to position us for future market opportunity.

Now I'd like to turn the call back to the operator to open it up for your questions.

Thank you, ma'am. To ask a question on today's call, press star 1 on your touch-tone phone. Again, to ask a question, you may do so by pressing star 1 on your touch-tone phone. If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. We'll pause a moment to assemble our roster.

We'll take our first question from Susan McCleary with UBS.

Good morning.

Good morning, Susan.

Can you talk a little bit about the $4.8 million adjustment? At what point did you know about it? And why wasn't it considered a one-time event?

The $4.8 million, 1.8 of it is an annual LIFO adjustment and during the year, each quarter, we estimate where we expect the levels to be for the end of the year and adjust where we -- to our best knowledge. And this is an annual adjustment that you make when you throw up the inventory levels and LIFO calculations. I believe in the fourth quarter of last year we had about a $600,000 adjustment. The incentive accruals, we're booked to what we thought our best estimate was of what a payout would be at the end of the year and because of the additional restructuring actions that we decided to enter into in the fourth quarter, that payout ended up being less.

Okay, so, you're not expecting anything like this for the first quarter of next year?

Well, we don't have any incentive accruals on the books at this point, but there won't be a reversal. We do expect to accrue for incentives, also. And the LIFO adjustment, each quarter we do an estimate of the actual true-up occurs at the end of the year.

Okay. And then on the costs side, can you talk a little bit about what's going on there? I know you have rising labor costs. Are you doing anything to help that?

The restructuring actions that we're entering into should truly help our cost structure going forward. It does take a couple, two to three quarters for us to actually make the move. But our Herman Miller production systems, we've continue to find new and better ways to save costs as we continue to implement it. And on the operating expense side, we actually expect year-over-year operating expenses to remain relatively flat because we've made cuts to offset the wage benefit and incentive increases.

Okay, thank you.

We'll take our next question from Chris Hussey with Goldman Sachs.

Good morning, guys. Question, Mike, maybe you can talk a little bit about what you're looking for the whole year, 2004, I know it's not (inaudible) for companies to talk out any longer than three months, but it seems to me you've been suggesting that this market is starting to turn and I think it would be helpful for investors to get a sense of, you know, what type of rebound will you guys expect as we come off of this rather unprecedented decline in office furniture demand.

Chris, I think we're already on record to indicate that for many of the reasons you just mentioned, we're not going to make a financial prediction for the year. We will release those on a quarterly basis as we get greater visibility toward what we think the quarter looks like. We think that's prudent.

But my thought is that your question is a little broader than that. If I can predict how this is going to work in our fiscal year and again, that starts June 1st, so, if you take what we think is going to be this four to six-month lag before we think we're going to start to see, you know, some real turning and potentially even some of the pent-up demand released in a more significant way, you know, one could argue that -- that the first part of the year is going to be more of a mild recovery and then the question becomes what the second half of the year looks like.

And obviously intelligent people can come to different opinions about the second half, but in my view, I think it's going to be pretty strong because I do know that we have a lot of customers engagements that, you know, during this period have really been trying to figure out how to do with what they had. They made changed to their organization and they know that they need to do it in a different way than put a new work environment in place for the people who remain there. But they haven't gone off and done that work.

So... Again, I think that 'I were to predict to you, it would be the -- the first two quarters would be more of a mild recovery and that will be interesting to see, you know, some of the hard work we've done around re-organizing our business costs, how the business actually behaves during that period, but then I think we believe, anyway, that we will see a more significant uptick maybe in the second half of the fiscal year.

I think the only thing I'd add to that is that even though we hoped to see a more significant uptick in the later half of the year, we're not planning our expenses based on that. We planned our expenses based on just a very slow and moderate recovery because our goal is to be sure that we have a business model that's sustainable at today's levels and can be EBA positive with just very small increases.

Two questions out of that, Mike and Beth. Mike, maybe you can talk about the order rate that you've seen in June, relative to the assumptions that you baked in of 26 to $28 million a week in the first quarter. Are we already at that, are we above that order rate already? And how does this order rate compare to what you were seeing last June? And then, as relative to the expenses, what: Could you just give us a dollar number that you were going to plan to accrue for bonuses as you go into the year?

No, it's a little tough on the order rate because we had (inaudible) in there. So, June is always a tough month for us to determine trends based off of that. And we had the incentive program for the orders in for the end of the year. So, during the fourth quarter, our average order entry rate was about $26 million a week. And since then, we've seen order rates very close to that. But not as high as they were during the month of June. So, we did see a little bit of a drop-off, we anticipated that would happen, but still quite strong.

Not as high as the month of May, you mean?

Right. Right around -- right, month of May, yes. Thank you.

Not up to the $28 million you saw in the month of May. The more average would be the fourth quarter that you saw.

Correct.

And relative to last year, end of year incentives, when you think about June over June, is it better or worse than last year?

I think, Chris, probably if you look back, you know, that was a continued downslide, you know, we in the midst of when the business was continuing to go down, but I think on a -- on a -- on a pattern we would see the same character at the close of each year, where you're pushing to get these orders into the system. Obviously, the sales and comp programs that are built around those and then you will see a little bit of a wall because of the trade show and the first month of our new fiscal year in virtually each fiscal year. So, I don't see the pattern is different.

Year-over-year June orders are similar to last year pretty close.

And Beth, finally, on the (inaudible) accrual?

Our estimate for the year in total is about $14 million. And that's assuming that we are at, I think, a .5 x.

So, you will go into the first quarter accruing at an annual rate of $14 million for bonus.

Correct.

Thank you very much, guys.

And about half of that is in cost of goods and half is operating expenses.

Terrific. Thanks!

Thanks, Chris.

We'll take our next question from Bud Bugatch with Raymond James.

Good morning. This is Brian Gordon sitting in for Bud, who had to be on the road this morning. Mike, this question is for you. As you look at the business going forward and kind of speaking very broadly I guess at this point, what do you think are going to be the primary drivers of the industry given that, you know, in the '80s and the '90s, we had the move toward the open planned office and we put a computer on every desk. What's going to really drive industry growth from here?

Well, first of all, I think the economic drivers that we look at aren't going to radically change. I think you can look at things like -- and it's not really corporate profitability, as much as it is the perception of corporate profitability, in other words, what does the future forecast for corporate profitability look like? That often, as you know, has a big impact on our business. As well as, you know, there is a moderate growth in white collar workers, you know, the one that's been lagging is obviously the non-residental, you know, construction piece of it. So, you know, those are still going to be economic drivers that, you know, I think we need to attend to and -- and -- and we'll drive a big portion of the industry.

But your question, I think, is -- is more -- a little different than that, that it is their -- are there other drivers that can enter the system much like we had the dot-com new technology movement and before that it was probably financial services and you can keep going back and looking for some underlying driver that tended to create some momentum. And I think if I had to pick one for you that I think is -- is -- at least an encouragement us is that truly the technology, you know, much like with wireless and some other things are changing the character and nature of -- of what that work environment looks like and acts like. We're seeing a movement away from, you know, just an individual workstation and more dedicated space toward community and collaborative space.

So, I think as -- as there's greater mobility inside that work environment, there's been a long time ambition to see if they couldn't get more fluidity with what sits on the floor so that it could change more rapidly as the business makes its changes. So, I think you will see a new format come into play as -- as for the businesses that grow and across over all industry sectors. So, I don't think we will look at it necessarily as we did in previous decades, around a particular sector, but more probably a changing nature and character of work.

Thank you.

Okay.

Once again, that is star 1 if you would like to ask a question. We'll take our next question from Tucker Anderson with Cumberland Associates.

Yeah, good morning. My first question involves: As you look forward to the likely range of pockets that you consider, you know, the outcomes for the current fiscal year that you've just started and you combine your cash needs if the business starts to grow from AR and inventories and Cap Ex, can you see yourself being in a position where in some circumstances you might become a cash user versus a cash generator, given all the changes you've made in the business, even with growth coming our way, will you continue to generate cash?

We expect to continue to generate cash. Next year may not be quite as substantial as this year simply due to an investment in working capital that hopefully we will be needed as the business picks back up. But we still expect to be positive.

Given the changes in the tax code and the fact that dividends are now as efficiently to generate returning capital of stock market capital gains, have you thought about perhaps changing your emphasis on stock buybacks and putting some of the cash generation into dividends and such?

We have thought about that. It's an area that over the next year we will probably continue to look as we look at our capital structure and our uses of cash and what we believe is the most effective way to return cash to shareholders. We will continue to talk to you about it and if we make any decisions around changing it, we will let everyone know.

I would hope that part of your decisions on it would be conversations with coming to major shareholders about their preferences?

Yes, definitely.

And the last question is, you mentioned the change in the pension assumptions and therefore the fact that the liability was still relatively large because you had decreased crediting rate. Did you make any change in the assumptions regarding inflation and salary increases that might have partially offset that? Or not?

We've continued to use 4 to 5% for the salary increases and think that's still appropriate.

Thanks a lot.

Once again, that is star 1 if you would like to ask a question. We'll take our next question from Jerry Epperson with Ferris Baker One.

Good morning.

Good morning, Jerry.

With the big orders that you mentioned happening to be international, would you comment on what you're seeing internationally in terms of order trends? And secondly what you're doing on the currency situation?

Hi, Jerry, by the way, good job at the Bifma [ph] breakfast. You did a great job.

Thank you so much.

I will tell you, again, we have a very different posture than even some of our major competitors in international. Obviously have a significant presence in the U.K. and a more what I will call variable presence in different parts of the world. It's quite project-oriented in other parts of the world, other than the U.K. and yet we are, you know, clearly one of the market leaders in the U.K. So, from our perspective, the U.K., you know, is beginning to start to mirror image, you know, our presence here in the United States. And, you know, we think our position is strong there.

Obviously if you -- you know, you -- you moved to different parts of the world you get different answers to your question. Germany is really struggling, we don't have as much of a presence there. This is one of the times you are glad you don't have much of a presence there. And obviously you get the parts of Asia that have been struggling recently, you know, over the past couple of quarters because of some of the turmoil they've had around SARS and some other things, but, you know, for us again, ours is a very focused approach.

Which is, you know, in -- in selected markets we'll pursue market leadership and then I think you can start to see, you know, a business behavior that mirror images more of the one we have here in the United States. And then in the other areas of the world, you will see greater variability of both our cost structure and the business based on whether we land projects or not and, you know, overall I think, you know, the world economy, you know, seems to be feeling much like the economy at home right now.

Okay. I will take your question on currency, we will have Joe jump in. He was most recently Vice President of Finance for the international business and spent a lot of time working on that.

I think twofold answers to your questions, Jerry. The first one in regards to what -- what have we seen in the current year as a result of the FX and the changes -- you know, it's been a very volatile market on the FX side. And we have seen a benefit because of the strengthening of both the sterling and the euro. That's helped us increase the sales in both of those countries for us. So that's done quite well.

In the fourth quarter, as an example it was roughly around $2.5 million increase that it gave us in sales if you compare it to the year-ago period. So, it didn't increase our sales slightly in the fourth quarter internationally as well as on a year to date basis, too. Keep in mind, our cost structures in both of those are in the local currency, as well. So while we do get a benefit from an increased sale amount as a result of the currency fees, our cost structures are on those local currencies as well in the countries.

Thank you. And is it possible to compare the current incentive program to the old Scanlon plan?

Jerry, probably -- I know you're familiar with the long-term histories and Scanlon actually used a lot of different metrics over the years. So, even though we've, you know, moved to an EVA-based metric for our incentive plans, as you know, they had, you know, metrics around quality, sometimes metrics around sales. Sometimes metrics around customer surveys, profitability. So, those metrics have migrated, you know, many times over the decades. And it just happens to be that our current gain-sharing one is DVA. So, there is no way to compare it to what was the changing face of Scanlon over the many years.

It's just nice to hear the concept of bonuses again.

Yeah!

Thank you so much.

Thanks, Jerry.

Once again, that is star 1 if you would like to ask a question. Ms. Nickels and Mr. Volkema, there are no further questions at this time. I'd like to turn the call back over to you.

Thank you, everyone, for your time and attention today. We look forward to our next conference call and hope the economic climate will continue on a positive track. In the meantime, we hope you all have a very enjoyable summer. Thanks.

This does conclude today's conference call. At this time, you may disconnect.