Quanex Building Products Corp (NX) 2004 Q3 法說會逐字稿

Good afternoon and welcome to today's Quanex fiscal 2004 third quarter earnings conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host Mr. Raymond Jean, Chairman and CEO of Quanex. Sir, you may begin.

Good afternoon. And welcome to the Quanex third quarter conference call. Thank you for joining us. With me today are Terry Murphy, our Chief Financial Officer and Jeff Galow our Vice President of Investor Relations. We will be available after my remarks to take any of your questions. Today's call will include an overview of our third quarter results, the state of our key market drivers, a discussion of the Ferris scrap environment and its impact on us, and the outlook for the fourth quarter. The comments I'm making today include forward-looking statements about the future prospects of Quanex. Please refer to the Company's latest 10-K report filed December 29, 2003, for our complete forward-looking disclosure statement. The Company's third quarter earnings release dated August 26, 2004, is available on our Web site at Quanex.com.

During the third quarter, overall order entry rates from both our vehicular and housing market segments remained at very high levels. And at times, exceeded our capacity to meet demand. At the Vehicular Product segment, our engineered steel bar products business reported a healthy 17% increase in shipments over last year, excluding the excellent results from our acquisition of the Monroe facility. These higher shipments reflect the benefits of very strong demand and market share gains with both the big three automakers, and the automotive transplants. Market development initiatives, such as our active steel crankshaft projects, General Motors cam shaft, and Honda front wheel drive components program continue to grow. Demand from our heavy duty truck customers is also very strong and the industry expects to post bills this calendar year approaching 250,000 units, up from 175,000 units in 2003.

At our Building Products segment, housing starts and remodeling activity remained at high levels during the quarter, and in fact, new housing starts could set a record for calendar 2004, approaching 2 million starts. Both strong housing starts and remodeling activity continue to benefit us, the result of low interest rate, favorable demographic, and a recovering economy. Our engineered products and components business typically hits its stride in early spring and this year was no exception, as they delivered record quarterly sales and operating income. Our common alloy aluminum sheet business saw excellent demand not only from building and construction customers, but also from capital equipment and transportation customers. Ongoing strong customer demand, together with gains from lean initiatives, allowed us -- allowed our sheet business to improve operating margin by more than 60% over the last quarter.

Turning to the current scrap environment, the extreme volatility of Ferris scrap costs are significantly impairing our ability to forecast them. We experience the drop in costs in both the April and May time periods and June prices were basically sideways. Then July scrap prices were announced and they absolutely stunned us in the industry with a jump of some $90 per ton. There is no doubt that a large portion of scrap's huge price leap is grounded in fundamental supply and demand issues. But a sizable portion is also because of sheer speculation. For our third quarter, average steel scrap costs were about even with the second quarter. However, working in our favor for most of the quarter, was our April 1st scrap surcharge adjustment which was up some 225% over the previous adjustment. This increase in turn allowed our engineered steel bar products business to report a significant improvement in operating margin which were up over 80% from the second quarter. Our third quarter aluminum metal costs were essentially flat to the second quarter, but pricing was up, with spreads improving about 1 cent per pound over our second quarter.

The scrap outlook for the fourth quarter has our aluminum metal scrap costs essentially flat to third quarter levels. However, predicting the direction of steel scrap prices is far more perilous, but but we do know that our average raw material costs in August will be up about $30 per ton over July. At this time, we expect steel scrap to fall back a bit in September with October pricing an unknown at this time. We don't have enough opportunity to change our steel scrap surcharge until October 1, so at this point in the quarter, we are experiencing some margin compression at the engineered steel bar products business. However, it is too soon to say if third quarter results will be down from the third quarter. We will know more when we issue our update later in the quarter. Our steel scrap surcharge formula works, and it works well at protecting our margins over a cycle, but there is a time lag. Granted, this is not as satisfying as adjusting the surcharge on a monthly basis, as we have experienced this year, in a rising scrap environment, our margins are first compressed and then the surcharge recovery kicks in. Conversely, in a declining scrap cost situation, our margins are enhanced, and then eventually settled at a normalized rate. To appreciate the business's normalized earnings power, financial results that reach beyond quarterly time frames will need to be considered.

Rising raw material costs further obscure our earnings because of the effect those higher prices have on our LIFO-based inventories. For the third quarter, we recorded a pre-tax noncash LIFO charge of 5 million, with scrap prices moving up, we find that our inventories are valued considerably higher now as compared to fiscal year-end 2003 prices, our benchmark for this tax-driven strategy. At this time, we expect another significant LIFO adjustment in the fourth quarter. Taken together, Quanex reported diluted earnings per share from continuing operations of $1.26, which included a 34 cent benefit net of interest expense from the operating results of our recent acquisitions of Monroe and TruSeal, and a 19-cent LIFO charge. We reported 92 cents in the year-ago quarter, which included a 2 cent LIFO charge and a 13 cent life insurance benefit. Setting aside both quarter's LIFO charge and the insurance gain, third quarter 2004 earnings per share were up about 80% over the year-ago quarter.

The management teams are doing a great job of integrating the two recent acquisitions into Quanex. For the third time this year, we've raised our earnings per share guidance for their -- for their 2004 contribution. Today, we expect the combined businesses to contribute 75 to 85 cents of earnings per share, net of interest, and this range is based on 10 months of results. We are positively excited about further gains to be made at both businesses. The addition of the Monroe facility not only extended our steel bar range and capabilities, but also gave us the opportunity to increase the effective capacity of the three steel mills by keeping them more focused on the respective sweet spots of their productive capacity. We've also improved the product mix at Monroe by substituting more engineered alloys in place of low end SBQ service center businesses. Overall, spreads today are up about 25% since January, our first month of ownership. We've made excellent gains to date, but frankly, we don't think we're even halfway there yet. The addition of TruSeal greatly expanded our window and door customer base and provides an excellent opportunity for cost selling. The acquisition added considerably to our organic growth prospects, and we are only now beginning to execute plans to tap into those opportunities.

We previously announced a plan for restructuring Piper Impact which included consolidating its two plants by the end of August. The consolidation is on schedule and will increase Piper's efficiencies while further reducing overhead. As a result of this restructuring effort, Piper was reclassified as a discontinued operation during the quarter. We now have a letter of intent to sell the business, and we are currently working with the buyer to reach a definitive agreement. Because we expect proceeds from the sale of Piper to be below its net book value, we recorded a 3.1 million after-tax write-off to discontinued operations in the quarter.

Turning to asset management, our business leaders continue to do an excellent job of reducing working capital. We track our progress by calculating our conversion cycle days, which is the sum of inventory days, plus receivable days, less payable days, all based on average daily sales. For the quarter, our conversion cycle improved 25% over a year ago, as our days declined from 51 to 38. Looking at this progress from an operating cash flow standpoint, cash from operations improved about 75% over a year ago. For the year, we expect our operating cash flow to exceed 100 million.

Moving on to a discussion of our key drivers, light vehicle and heavy duty truck bills, and new home construction and remodeling, we continue to believe the near-term outlook as well as the longer-term prospects for these markets is excellent. At this point, we don't expect any meaningful changes to them in the fourth quarter.

North American light vehicle bills for calendar year 2004 are estimated to be about 16 million units, which would be down slightly from 2003, but they do remain at healthy levels. Light vehicle sales for July were above 17 million annualized units and August sales should improve over July's on a seasonally adjusted basis. Strong vehicle sales translate into strong vehicle bills, and we're further encouraged by the fact that light vehicle inventories came down almost 15% in July from June. Add robust heavy duty truck builds, expected to be up as much as 50% over 2003 levels into the mix, and you can see why we expect to be operating our engineered steel bar business at very high utilization rates for the fourth quarter. We also continue to see excellent demand in our other markets, construction and agricultural equipment, defense, and oil patch. Any way you look at this, the market dynamics with strong vehicular component demand remain excellent.

Switching to our building products markets, we expect both housing starts and remodeling activity to remain strong through the balance of the fiscal year. There is now an expectation that new housing for calendar 2004 will top last year's all-time record of 1.815 million starts. These are exceptionally bullish figures and we don't currently see any black clouds to reduce our enthusiasm at this time. Interest rates have moved up a bit, but as Sir Allen says, it is the fed's reaction to what they see as a slow and steady improvement in the overall economy. At this point in the economic recovery, we believe home ownership will continue to remain affordable. Should housing starts begin to moderate in the months ahead, we think there is more than enough backlog to keep the home builders busy through the remainder of this year's construction season. Taken together, we believe our sales and earnings outlook for the fourth quarter are very favorable.

Let me end my discussion with a few comments on financial issues. Today, the board approved a 12% increase in the Company's cash dividend to 76% per share on an annualized basis. The board also authorized us to reload our stock buyback program whereby the existing authorization was increased to 1 million shares. These actions are consistent with our excellent financial results, and our long-term prospects. On May 5 we closed on our 125 million contingent convertible debentures. The deal was done at what we consider to be excellent terms and protects the interest of our long-term shareholders. With a 2.5% coupon and a 57 dollar and 50 cent conversion price, we believe this financing significantly strengthened our financial structure.

As we have all been reading lately, the Emergent Issues Task Force or EITF of the Financial Accounting Standards Board, FASB, has been looking into the accounting treatment of these convertible financial instruments referred to these days as COCOs. The EITF made a preliminary recommendation this quarter that would require all issuing companies to show the full dilutive impact of their COCOs on their financial statement. There by neutralizing the contingent nature of these instruments all together. For Quanex, this could mean an additional 2.2 million shares of earnings delusion, and an annualized EPS impact of approximately 30 to 35 cents per share. However, our convertible debentures allow us the option of using either common stock, cash, or a combination there of to settle with bond holders. Should Quanex make a decision to settle its entire convertible obligation with cash, we would not be required to show the dilutive impact of the higher share count in the calculation of our earnings per share. At this point, we have not made a firm decision on this issue, and like you, we are waiting on a final pronouncement from FASB. Looking at the balance sheet, our total debt to capitalization now stands at about 28%, down from 32% we reported last quarter, and down from 34% from the first quarter. Short of making another acquisition, we expect our debt to capitalization ratio to fall significantly this quarter. Also, at the rate we obtained on our revolving credit facility, we could end 2004 with a balance approaching zero. That concludes my formal remarks today. We will now answer your questions.

Thank you. The floor is now open for questions. If you do have a question, or a comment, please press star followed by one on your phone's key pad at this time. Once again, if you do have a question, it is star followed by one on your telephone's key pad at this time. Please note that at management's request, please limit yourself to one question and one follow-up question before placing yourself back into the queue. Now, please hold while we tally our results. Thank you. Our first question comes from Bob Beck from Lord Abbett.

Good afternoon.

Hi, Bob.

Hey, Bob.

In regards to the issue on the COCO, in terms of settling the converts with the bond holders, is it at the Company's option to settle on cash or stock or is it more at the bond holders' discretion?

It is at the Company's discretion. Our indenture includes a provision that says that the Company can make an election, an irrevocable election, but can make an election to settle both the principal and any excess in either cash, stock, or a combination of cash and stock, and we're currently reviewing that to make some determination as to whether we ought to make that election. If we do, as Ray stated, we would not have to include the shares in our earnings per share count.

Right. I understand. Is that also one of the reasons why you're maybe not even being somewhat more aggressive on your dividend policy in terms of just maintaining some more powder until this is clarified?

Well, no, I don't think so. When you look at our cash profile, moving forward, I think that we -- we're not overly concerned that we would be able to refinance that debt if it were not converted or refinance that COCO if it weren't converted, so I don't think that would have impacted our dividend decision at all.

Just looking at it more from a cash generation that you have, I mean you guy could easily, at this point in time, have a higher supportive yield on say a dollar annualized dividend than a 77, 76 cent --

Hey, Bob, this is a 12% increase.

I know, I like the increase. But, you know, you did have a chance in the tax laws and companies have been slow I think to return to payout ratios that were closer to, you know, long-term historic levels prior to the '90s.

This returns us to the levels that -- near the levels that we were at historically.

Right. Okay. One other question then in regards to your alluding to new customer programs. Can you point out some of the more significant ones that could importantly impact results going forward, and any new products that will be helping to attract those same customers?

Well, we certainly have mentioned the steel crankshaft program, where there is conversion going on, on the part of the original equipment manufacturers to the use of steel from cast iron, and we continue to benefit from that, both with the domestic nameplates as well as the transplants, so, you know, we certainly like that. And with the transplants, we continue to do well with both the Honda and Toyota on drive line components, and we expect that to continue.

Thank you.

Thank you. Our next question is coming from Mike Harris of Robert W. Baird.

Good afternoon, everyone.

Hi, Mike.

Ray, just hopefully a simple clarification here regarding the accretion from the two acquisitions. In the press release, the comment was made on an annualized basis, the accretion is 75 to 85 but then in your prepared comments you talked about a 10 months contribution, and I'm thinking that it is the latter that is the 10 months accretion guidance. Is that correct?

The amount that was in the press release, the 75 to 85 cents, I think that's what the -- is that what you're referring to, Mike?

Yeah, because actually the sentence reads "on an annualized basis we believe the two acquisitions will generate 75 to 85 cents", which seemed kind of low to me, but then Ray said in his prepared comments, 75 to 85, so the range was the same, but then he made a comment that that's a 10 months contribution.

They're both 10 months figures. That annualized is a little misleading. It is annualized because it is only 10 months this year but it is -- both of them are meant to be 10-month figures.

Okay. Fair enough. Just wanted to clarify that. And just switching over to the steel scrap situation, I know that you mentioned already you expect a decline in September prices, I just wanted to talk more about that. You know, what are the people at MACSTEEL hearing regarding the magnitude of the decline in steel scrap in September? Any speculative comments?

I have not heard a number in the last, you know, 10 days or so, and, you know, I hear that there is, you know, a significant flow -- increase in flow of the shredded scrap, the variety that we buy a great deal of, and so we're -- you know, we're expecting a nice drop, but I really don't have a number, Mike, and it would be pure speculation on my part you know, even if I had one.

I understand. I think after living through 2004, everybody can understand that caution. And you know, I would be interested to know how order trends progressed during the quarter, fiscal Q3, at Nichols Aluminum on a sequential basis. I mean did the order rates end the quarter at the same level as how it started? And then maybe talk about how order trends at Nichols are tracking thus far in August.

Yeah Mike, this is Jeff Galow. The backlogs have been fairly consistent for most of the year. They tended to peak early summer and have backed off a bit, but the utilization at Nichols we expect for the fiscal year to be in the very high 90s. So we're going to end the fiscal year with a very strong backlog. Now, we all know that come winter time, the construction cycle starts so to slow, and the backlog becomes a bit questionable. But through this year, it has been very strong, and at times, record-setting through this fiscal year's third quarter.

Okay. And just one more question, and I promise I will get back in queue. Regarding the contingent convert, you estimated a range of dilution, potential dilution of 30 to 35 cents. What time period is this based on? Is that kind of a pro forma number, on a LTM basis?

Yeah, that's exactly what it is. It is just a best guess as I'm looking forward relative to an effective date on an annualized basis.

Okay. Thank you. I will hop back in the queue.

Thank you. Our next question is coming from [John Emrick] from [Birio Peeler Capital].

Thanks. A question and clarification on the acquisition accretion discussion. I caught two comments from your prepared text, further gains -- looking forward to further gains in both businesses, and I heard not halfway there yet, which I wasn't catching what that was referring to, but basically, maybe you could just clarify to the extent that I'm understanding that there is better days ahead than just the 75 to 85 cents of accretion in the 10 months of this year.

Yes, that's what we're -- we believe we're capable of delivering, moving forward, and I think the halfway there, I believe, was related to our vehicular business, or MACSTEEL, MACSTEEL Monroe business, and so I think there's runway left, plenty of runway left at MAC over the Monroe acquisition.

Okay. And then my follow-up is going to be the 100 to $150 million of cash flow for the year, that's the first section of the cash flow -- say cash provided by operating activities, what was 73.5 year to date, you are saying it is going to be 100 to 115?

Correct.

Okay. And cap ex is -- should I just annualized that, you know, $13 million number from the first nine months and feel pretty good that that's going to be right for the year?

It would be a little higher than annual annualizing that. I think it will be closer to 25 million for the year than it would be to an annualized 13.

Okay. Thank you very much.

Thank you. We have our next question comes from Mark Parr of Key Bank McDonald.

Thank you very much. Hey, gentlemen, can you hear me all right?

Yes, Mark.

Okay. Terrific. I was wondering if you could give a little color on the break down of the contribution between TruSeal and Monroe in the quarter, at least maybe from a revenue perspective, or from an earnings perspective, if you can?

Well, we don't typically go there, Mark.

Okay. Another question, if I could. Could you talk a little about what TruSeal provides? You mentioned that it gives you a lot of additional opportunities for cross-selling. I was wondering if you could give us some sense of what the underlying growth rate for building products, you know, how it has been enhanced by the acquisition of TruSeal, you know, from -- you know, from these cross-selling synergies on a, say a three to five-year basis or a two to four-year basis.

Yeah, well the business units that we have or had before the acquisition of true seal, you know, the core strategic business units that made up engineered products, their primary customer base has been the wood window manufacturers. And with TruSeal, we -- their primary customer base are the vinyl and the aluminum window manufacturers and you know, therein lies the opportunity for cross-selling. And you know, certainly, you know, the housing market has been an area where we've been able to do, you know, on an organic growth basis, oh, twice what GDP growth has been, and you know, given the growth prospects that we see now, we would expect that we would be able to do better than that on -- for organic growth.

Okay. I appreciate that comment. If I could just ask one more real quickly, could you comment a little bit about the availability of aluminum scrap over the next several months, and what you might see as far as the shift in mix between scrap and primary ingot as a raw material input into Nichols.

Well, right now, aluminum scrap is readily available. And in fact, the type of scrap that we like for our caster, there is a great deal of it, and so we like the scrap -- aluminum scrap environment right now. You know, as far as, you know, what the spread will be between the LME for prime and scrap, you know, we expect that spread to be maintained at current levels. That's what we're expecting now.

Okay. Terrific. Thank you very much. And congratulations on a great quarter.

Thank you.

Thank you.

Thank you. We have our next question coming from [James Gentile] from Sidoti and Company.

Good afternoon. I was wondering, I noticed that your building products operating margin was really strong in the quarter, and I was just wondering if you can kind of give us some insight into how much Nichols contributed to that, and then how much -- can we expect, you know, a double digit operating margin moving forward, or is this just kind of a one-shot deal -- if there are any one-timers in there?

Well, we don't expect -- I mean certainly we -- we gave you an indication of its growth versus the prior period, and, you know, right now, we do expect that given the supply demand situation, we expect to be able to maintain those operating margins moving forward.

Given the situation in terms of backlog for Nichols, you know, earning its cost of capital and what have you?

It is still not quite there, but it has narrowed the gap, I can tell you that.

And could you just go over -- I mean I understand that, you know, it is still tied to remodeling expenditures and you know, new construction, residential construction starts, but, you know, the aluminum business is always, you know, just kind of a one-off. Can we now expect, you know, moving forward, you know, do you have a reinvigorated view of that business, as you can see how it contributes, or has it just been -- was it just such a poor performer over F '03 and the beginning of this year, of this fiscal year, you know, that you just kind of are bouncing off of a low base kind of idea?

Well, we continue to ask ourselves those questions to some extent. I mean there seems to be a, you know, again, a new supply/demand balance out there which has certainly been helpful to us. You know, there's some data that would indicate that that the supply/demand change is somewhat permanent. That there will be, you know, more demand on average for this foreseeable future than there will be supply. We're still questioning that.

Is there any sort of competitive dynamic that is driving that or is it just, you know, increased economic demands?

Well, there certainly has been increased economic demand, but there has been capacity taken out as well.

Okay.

As recently as, you know, currently, there is capacity being taken out.

Sure.

So, you know, all of that is helping. And additionally, we have made improvements operationally that have helped increase the margin rate. So there is, -- you know, we've gained from, you know, the revenue side as well as the cost side.

Fantastic. Thanks a lot.

Thank you. Our next question is coming from Bill Baldwin from Baldwin Anthony Securities.

Good afternoon.

Hi, Bill.

Hello, Jean, Ray and everybody. Ray, can you comment on what your -- kind of your capacity would currently be at Monroe and MAC, and roughly what your operating rates, your utilization rates have been here, say in the last quarter, for those operations?

Well, we've been operating at the -- close to 100% lock has really where it's been. You know, we have some customers that would like more steel from us. And we don't expect that to change in the, you know, immediate future anyway, and our challenge is to, you know, increase the effective capacity of what we have, and that's where we're making some progress with moving production around, our customers are certainly being very cooperative in giving us the P-PAPS that are required on a real quick time basis in order for us to move production, to increase the utilization rates at each of the plants. And we expect to benefit from that moving forward. And, you know, when I said we're not halfway there, that is certainly one thing that I had in mind, where, you know, I've said that the effective capacity should be increased by some 5% and we expect to get there, but we're not there yet.

Are you still taking your maintenance downtime, you know, basically on Sundays?

We are. We have worked a few Sundays here and there, when it was absolutely necessary to avoid assembly plant shut downs, but, you know, MAC is the type of operation that -- the type of casting equipment we have that we know that it is best for us to do the routine preventive maintenance to maximize our output on a consistent basis. And we do it.

Well, good job. And congratulations on the dividend hike. And the share buyback. That's good news.

Thank you.

Thank you. We have our next question comes from Barry Vogel of Barry Vogel.

Good afternoon, gentlemen.

Hi, Barry.

Hi, Barry.

First question, is this accretion numbers that you give us for TruSeal and MAC, I just would like to review it briefly, because I'm not sure about my first and second quarter number. I know you gave us 34 cents for the third quarter. I had written down in my notes 5 cents for the first quarter, and 21 cents for the second quarter. Was that correct?

Yes, sir, that is correct.

All right. So if you -- so if we go to the midpoint of the 75 to 85 cents, and let's say use -- let me see here, what do you have so far? You have 5 plus 21 plus --

60 cents.

60 cents. That would mean if you did 85, you would have a 25-cent accretion in the fourth quarter. Is that because seasonally, the TruSeal goes down in activity versus the third quarter?

Yes, somewhat.

Okay. And does it mean you're cautious because of the scrap situation?

Good point, Barry.

Okay. So it is possible that you can do better than that?

Always possible.

Okay.

And we're trying to do better than that.

I know you are, Ray. I know you are. Now as far as Piper is concerned, you mentioned a $3.1 million write-off because of, you know, you expect that based on your current discussions and your letter of intent, that you will have a write-off versus book value. Can you tell us what that write-off gets you to in terms of net worth for Piper?

Well, let me make sure I clarify the question. The net book value of Piper is about 26 million or thereabouts.

Is that including the write-off?

Well, that was the net book value before the write-off.

Okay.

Okay.

And now we're at 23 million?

No, it is not quite that simple. There was a -- this were other issues, if you will notice in the -- that there is a reduction in an environmental reserve as well, that reduction in the environmental reserve offset part of the loss that would have been associated with Piper.

So are we talking about a net book value now at 26 million?

We are talking about a net book value of 26 million prior to the sale. After the sale, after the sale of the -- of all of the assets of Piper and the reversal of an environmental reserve, the net would be 3.1 million or 5.1 million pre-tax, 3.1 million after tax.

Well, what I'm getting at, I'm getting a little confused, what is -- what number is the net worth of Piper now on your books after those different net transactions? That you took in the third quarter.

The net book value of Piper after the write-down, you're saying after the sale, there is --

No after the write-down and after the reversal of the reserves, cause you didn't sell the thing yet.

Well, we're assuming -- we're assuming a sale.

Okay. If you assume the sale, what kind of dollars are we talking about?

We're assuming a sale of Piper that would -- that would result in about a $13 million loss, okay? And then that's offset by a $8 million gain coming from the reversal of the environmental reserve. That's the 5 million. Net after-taxes, it is 3.1 million.

So it is -- all right. But what I'm talking about is how much proceeds are you going to get from the sale? You're not answering the question.

Well, I did answer the question, Barry. I said that the -- that it is 26 million book value that are you going to have a $13 million write-off, you can do the math.

A $13 million write-off?

Before the reversal of the environmental reserve. So you have a $13 million write-off, offset by an $8 million reversal in the environmental reserve. That's a $5 million write-off. Pre-tax. After-taxes, 3 million.

Alright, so I get $21 million of proceeds.

Well, that's too high.

You can give us a better number?

14.

Okay. So you might get $14 million. What is the timing look like on the sale potentially?

We're trying -- we're making every effort to close this by the end of the fiscal year.

All right. Then that gets me to the comment you made that it is possible that you could pay down the rest of the revolver by the end of the fiscal year?

Well, we will have enough cash to make it possible to pay down the revolver, but I've got certain tranches of debt that if I pay down early, I will end up -- the penalty for paying down early is to pay the total amount of interest for the length of the tranche so I will pay it off as the tranches become due, but on a net cash position, that is, outstanding revolver, versus cash I have on the books, if we close the Piper deal, it is likely we will be close to being out of debt.

Okay. So that includes $14 million in potential proceeds from the sale of Piper?

Yes.

All right. Because I know you had $39 million in cash on your balance sheet.

That's correct.

And I know approximately what you might earn in net income plus the depreciation in the fourth quarter. And if we add them up, we needed some more numbers and that -- you just gave me the $14 million. Thank you very much. Ray, keep up -- and everybody else, keep up the great work.

Thank you.

Thank you.

Thank you. We have our next question coming from Mike Harris from Robert W. Baird.

Thank you. Just to go back to the guidance that was given, you commented you're maintaining your original guidance for fiscal '04 of 325 to 375 from continuing operations, so essentially, this guidance excludes Piper, or now excludes Piper, but I guess it really doesn't matter because Piper only lost one cent during the first half of the fiscal year. Am I understanding that right?

Yes.

Okay. Okay. Okay. And then -- And then the LIFO charge of 19 cents in the quarter, you know, when I first read that, my initial reaction was you guys were trying to take it on the chin here in fiscal Q3 but then Ray made the comment that expect a notable potential LIFO charge in the fourth quarter. I guess my question is, is if we've seen the peak in steel scrap, and it does decline in September, and October, I mean I would think that the LIFO charge would not be of that magnitude. I guess any color here would be helpful.

We're still -- just one comment. I will let Ray comment more, but we're using a price off the end of last year's prices.

Yeah.

So when you do your LIFO as an annual calculation, looking at last year's prices, and where they are this year, and so our expectation already is that there would be a significant write-off in the fourth quarter -- or a significant LIFO charge in the fourth quarter. Prices would have to come down significantly to get near the levels they were a year ago, which would then indicate that we wouldn't have to write off very much.

Well, and I -- I don't want to get in a discussion on LIFO, following that last question, so a lot of moving parts involved with that, but I mean didn't you take an 8 cent LIFO charge in last quarter?

We took a 2 -- what was it, I don't have my numbers here -- 2 million, so that would be close to 8 cents.

Yeah, okay.

More than that. It was 8 cents, I'm sorry, you're right.

And then do you have offhand what it was in Q1?

650 or 750,000.

Close to 3 cents I believe.

2 cents is how it rounded.

Okay. Well, I realize it is kind of an open-ended question, because there is a lot to be determined on where steel scrap goes here through the end of this quarter, so -- so but you're basically saying that as you see the world right now, expect a notable charge again in Q4?

Correct.

Okay. And just you've given an update on I divestiture activity with Piper. Is there an an update that you can give on any other divestiture activities worth mentioning here?

Not that at this time. We've got, you know, something going on, but it isn't definitive enough to make an announcement on it.

Fair enough. Good quarter, gentlemen.

Thank you.

Thank you. We have our next question coming from Bob Fetch from Lord Abbett.

Thanks again. In regards to the income statement, the discontinued losses of 3.5 million which possibly might be closer to 4 by the end of the year, should they largely be nonexistent next year?

Yes.

Okay.

You are going to -- we have to make a comparative basis, but assuming that we close on Piper, it won't exist, so there will be no discontinued operations.

Okay. And can you give us a sense as to what the year to date impact may have been from higher scrap costs on a dollar per share basis?

No, we really don't have that at our fingertips, Bob.

Just trying to get a sense that, you know, if prices just flattened for the next 12 months, you know, what the comparable pickup would be next year versus the current year. Just the absence of those continued higher costs.

Yeah, it is speculation I just don't want to enter into right now.

Okay. And as far as the acquisition, the benefits, we've just seen them now for a couple of quarters, we'll have one more quarter in the next fiscal year benefit from them that we didn't have this year, correct?

We had --

Versus 12.

10 versus 12.

So have you two more months. So just summarizing those three points, the discontinued operations, maybe costing you about a quarter per share this year, whatever one wants to plug in there for the scrap costs, and then a couple of more months from the acquisitions possibly could be another 20, 25 cents. I mean you could have a half dollar or more easily increment just from those factors without allowing for normal growth in the business and all the other good activities that you guys have under way.

And less interest expense.

And less interest expense. Okay. You can add that to it then, too. Okay thank you.

Okay. Bob.

Thank you. Once again if there are any further questions, please press star followed by one on your telephone's key pad at this time. There appear to be no further questions at this time.

Our long-term business strategy is directed at protecting our -- and growing our core businesses, and we will continue to do that, both through internal initiatives as well as through prudent acquisitions. When bought right and integrated well, acquisition serve as an excellent way to compliment organic growth, and growth combined with a passion for eliminating waste and driving productivity gains will fuel our earnings and returns. That concludes our third quarter conference call.

Thank you. This concludes today's call. Please disconnect all lines and have a great day.