派克漢尼汾 (PH) 2002 Q4 法說會逐字稿

Good morning. My name is Kim and I will be your conference facilitator today. At this time I would like to welcome everyone to Parker Hannifin's fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. During the Q and A session questions will be limited to one per person. Thank you. Mr. Pistell, you may begin your comments.

Thank you and good morning, this is Tim Pistell speaking. And I would also like to welcome you to Parker's teleconference and webcast for the end of fiscal O2. I will begin with some prepared remarks regarding the financial statement. And I'll do this in the following sequence. First the consolidated income statement. Next to talk briefly about our four business segments, i.e. industrial North America, industrial rest of world, aerospace, and the new other segment. I'll then make some brief remarks regarding the consolidated balance sheet, and finally I'll have some observations related to the consolidated statement of cash flows. I will then close my prepared remarks with the Parker outlook for earnings and our ranges for fiscal '03. The teleconference will then be open to your questions. And I will be available in my office the rest of today and all of tomorrow to answer any follow on questions. Before we begin with the consolidated income statement you should have noted had we have included some supplemental analyses for both of the fourth quarters and the fiscal years 02 and 01. These supplemental analyses are meant to try to give you an apples to apples comparison of our performance despite the many different items that were occurring these past two years, including first, business realignment charges contained in both the fiscal years; second, the gain on sale of real estate in aerospace occurred last year; third, the change in good will amortization that occurred this year due to implementation of FAS 141 and 142; and fourth other extraordinary items for asset impairment and corporate expenses. So, now to begin with the quarter. During the quarter we had net sales of 1 billion 658 million, an increase of 173 million or 11.6 percent over the prior year. Acquisitions added 186 million to the quarter. Otherwise sales would have been down zero point nine percent. Foreign currency actually added 23 million to the quarter. Significant event. A historical point of interest. The last time Parker had a favorable foreign currency adjustment on sales in a quarter was the fourth quarter of calendar year '95, or 25 quarters ago. Without this favorable adjustment sales would have been down another 1.6 percent in the quarter. Consequently, base sales were down 2.5 per in the quarter. Now, on June 19th the company reported that it would record an estimated 60 million dollars in business realignment and asset impairment costs. This was estimated to be also roughly 50 million dollars after tax or 42 cents per share. For those of you who may not have seen that press release or who didn't participate in our special teleconference web indicate related to that I'd like to take a few moments to provide a very brief summary of what was contained in that announcement in those charges. So very quickly here. Of the 60 million pretax charge, first, 40 million is for good will impairment. Therefore, a noncash item. And of that 40, 27 million is in North American industrial, with only about nine million of that being tax affected at a rate of 35 percent. Another two million is industrial rest of world, which is not tax affected, and another 11 million is in our other segment which is also not tax affected. The 27 million in North America is basically all tied to the semiconductor markets and what's happened there. And the 11 million in the other segment is tied to noncore businesses that are currently being held for sale. I would also say at this point, of note, that this write-off represented about 1.6 percent of all the acquisitions that Parker has made over the past ten years. The second component of this charge was seven million dollars of asset impairment, also noncash in nature. Six million in industrial North America, one million in industrial west of world. And these items would be tax affected. The third component is 13 million in realignment costs for severance payments and shut down expenses. Distribution and the savings on these is as follows by segment. Industrial North America has a three million dollars cost which should generate four million in savings starting next fiscal year. Industrial rest of world, four million cost, should generate four million in savings next fiscal year. And the other segment has a six million cost, and that will generate four million in savings next year. All of these realignment items, and of course savings, will be tax affected. Now, there also will be an additional follow on realignment charge in fiscal 03 which I will discuss in more detail when I give our outlook for that year. Accounting rules are very, very strict in this area. So despite the fact that we as managers have already taken some irrevocable decisions, the accounting rules edict that until all employees are notified and redundancy plans have been negotiated, these charges cannot be reported. And so thus they will carry into the next fiscal year. You will note that the 60 million dollars pretax and 50 million after tax items reconcile to the supplementary analyses that we have provided for you in this release. The actual special charges estimated at 42 cents on 6-19 actually computed to 44 cents when all was said and done and finalized. So a slight difference there in the computation. Adding back this 44 cents in extraordinary items to the quarter gave Parker had 44 cents in diluted EPS for the fourth quarter, significantly below the range that we had reaffirmed as late as June 19th, 42 cents to 54 cents. For Parker not to come within the range was a very unexpected and very unpleasant occurrence. We at Parker have always prided ourselves on our credibility with the investment community, and we think that it is imperative that we explain to you the key components of this shortfall. On June 19th when we announced the special charges that we planned to record in the quarter, the best information that we had available indicated that we would be comfortably within the range that we had given investment community. Let me be even more specific on this. We were at a run rate of 16 cents earnings per share per month during April and May. As June had two less workdays, which would lead to, of course, reduced lower sales volume, we confidently projected that we should be able to earn 12 to 14 cents of EPS for June, which would have brought us to 44 to 46 cents for the quarter. And as I say, comfortably within the range. When we closed the fiscal year on June 30, we had achieved both our sales and gross margin targets. Unfortunately, however, when we executed just our normal year-end processes to adjust inventories, reserves and accruals, it seemed that almost every item that we dealt with tended to come in unfavorable. With one note. And let me strongly note this here. This does not include the aerospace segment, which came in right on plan and had just a great, great year and a very, very difficult environment. So this is an industrial issue, not aerospace. As many of you know who have followed Parker for a while, at the end of most normal years of Parker our favorable year-end adjustments normally can be counted on to outweigh the favorable ones. In reviewing the current list of unfavorable items it is clear that the items are symptomatic of what's going on, and that's number one, working through the worst industrial recession in 20 years; two, leaning out our organization; three, reducing our base employment level by 6200 people or 15 percent over the last couple of years, closing over 50 facilities and relocating all this production to other plants; five, selling out two noncore businesses; and six, concluding our rationalization plan that led to the recently announced special charges in the fourth quarter, and will also lead to further reductions of about 1,000 people and the closures of six plants. So I think those are the culprits. In an effort to explain them in more detail, I give you the detail behind the unfavorable series of what really were normal operating item adjustments. And first, the largest, 5.3 million, related to noncore businesses being held for sale. Specifically, there was two and a half million of warranty reserves provided at [Astron] building systems, primarily due to some snow claims, some unusual snowfalls, and some warranty claims being there. Within the win warranty business which we very, very fortuitously sold in mid June, so this one was an unexpected event, but as we sold that business we had to provide for an additional 1.5 million possible trailing liabilities. And we also had to record about 1.3 million in sort of shut down expenses, if you will. The second biggest item, 4.2 million, relates to unfavorable production variances in tooling write-offs, as all these plants were closed and product lines were moved, and they just were greater than had been anticipated. Third, 3.2 million of employees benefits. And primarily this was due to increase reserves for workers' compensation. We had a do you believe phenomenon here. As both the number of claims increased as employment levels continued to be reduced, this is a natural thing that happens. And the cost per claim are escalating, indicative of the medical environment. Fourth, three million related to loss absorption on an acceleration of inventory reduction much greater than planned. That's good for us in the long run, but it hurt within the month. 2.2 million of obsolete inventory write-off, ones that had to be done. 1.8 million of general increases to litigation reserves. And 1.3 million in severance payments pertaining to the latest general employment reductions. Now, all of those collectively total 21 million dollars and equate to approximately 12 cents of earnings per share. Many of these items could in the have been anticipated, but I would tell you the actions have now been taken to better provide for the possibility of these contingencies occurring again in future periods. As I say, these were an embarrassment, something we didn't foresee. Again, some couldn't be, some maybe we should have done a better job. And we have put things into place to try never to have that happen again. So now to get back to the analysis of the current fourth quarter versus the prior year. Cost of goods sold was 84.8 percent this year versus 80.5 percent the prior year. This fourth quarter had nonrecurring items of 9 million 458,000, while last year had 8 million 744,000. The cost of goods sold comparison then becomes, we move those, 84.2 percent this year versus 79.9 percent the prior year. The erosion in performance is primarily from loss and absorption from decreased sales levels compounded by the inventory reductions that we were starting to make over the course of the year. SG and A as reported is 13.5 percent this year versus 12.7 the prior year. Within SG and A there is 41 million 768,000 of nonrecurring items this quarter versus 50 million 531,000 the last year. Plus, there was 15 million 834,000 of good will amortization last year. Adjusting for these items, the SG and A comparison is 11.0 percent this year versus 10.6 percent the prior year. The slight deterioration is all related to the decreased sales volumes in our base businesses. Interest expense this year improved to 1.2 percent of sales versus 1.3 percent of sales the prior year. Other expense includes 9 million 388,000 of nonrecurring items this year while the prior year had 3 million 733,000 of nonrecurring items. So the normalized comparison is, therefore, zero point two percent favorable this year versus zero point one percent unfavorable the prior year. For the quarter, the income tax rate as computed does not make a great deal of sense due to the nondeductible items, some of the nonrecurring items and the good will impairment. If you adjust for those, though, the underlying rate for this year, for the quarter, remains at 33 and a half percent versus the 34 and a half percent the last year. Again, after the elimination of good will amortization, most of which is nondeductible. Return on sales was minus zero point seven percent this quarter versus 3.3 percent the prior year. After nonrecurring item and good will adjustments, the comparison becomes 2.4 percent this year versus 5.4 percent the prior year. EPS is minus ten cents this quarter versus 42 cents the fourth quarter of last year. But after all adjustments, the EPS comparison is 34 cents this quarter versus 69 cents the fourth quarter of last year. Now looking year to date. Sales of 6 billion 149 million were a new record for Parker. And 170 million or 2.8 percent above the prior year. Acquisitions contributed 738 million. Otherwise sales would have been down nine and a half percent. Foreign currency which was 27 million unfavorable for the year, costing us zero point five percent. Therefore, base business sales were down nine point zero percent. Cost of goods sold were 83.2 percent versus the 79.1 percent the prior year. Year to date nonrecurring items and cost of goods sold are 23 million 977 this year and 12 million 071 the prior year. The adjusted comparison is, therefore, 82.8 percent this year versus 78.9 percent the prior year. All due to reduced absorption. SG and A as reported is 11.8 percent this year versus 11.4 percent the prior year. Within the current year there is 48 million 476,000 of nonrecurring items. And in the prior year, 18 million 109,000 of nonrecurring items and 59 million 582,000 of good will amortization. So adjusting for these, the SG and A comparison is 11.0 percent this year versus 10.1 percent the prior year, with the increase, again, primarily due to decreased sales in our base businesses. Interest expense was reduced from one and a half percent of sales to one point three percent of sales. Other expenses include 9 million 380,000 of nonrecurring items this year versus a credit of 45 million 586,000 the prior year. So other expenses after these adjustments remain at zero point one percent, favorable in both years. Now, again, the reported tax rate is 40.3 percent. But again, the underlying tax rate had year remains at 33.5 percent, excluding the nondeductible item. And that compares to the 34.5 percent the prior year after the elimination of the good will. Return on sales this year is 2.1 percent versus 5.7 percent the prior year. After adjusting for nonrecurring items and good will the comparison is 3.2 percent this year versus 6.5 percent the prior year. EPS as reported is a dollar 12 this year versus 2.96 the prior year. After adjustments, however, the comparison is 1.69 this year versus 3.35 the prior year now turning to the business segment and beginning with industrial North America. In the quarter had sales of 768 million, were up 77 million or 11.2 percent over the prior year. Acquisitions added 82 million. Otherwise sales would have been down zero point seven percent. FX was one million infavorable so base business was actually down zero point six percent. Operating margins were 5.1 percent this year versus 5.5 percent the prior year. But after adjusting for nonrecurring items of good will, the comparison becomes 5.4 percent this year versus 8.4 percent the prior year. Year to date net sales of 2 billion 792 million were down 149 million or 5.1 percent. Acquisitions added 302 million. Other wide sales would have been down 15.4 percent. Foreign currency was four million unfavorable. So base business was down 15.2 percent. Operating margins as reported are 5.1 percent this year versus 11.0 percent the prior year. After adjustments for nonrecurring items of good will the comparison becomes 5.4 percent this year versus 12.5 percent the prior year. And now going to industrial rest of world for the quarter. Net sales of 366 million were up 55 million or 17.7 percent over the prior year. Acquisitions added 40 million. Otherwise sales would have been up 4.8 percent. Foreign currency was 16 million favorable in the quarter. So base business was essentially flat with the prior year. Reported margins were 2.9 percent versus 4.7 percent the prior year. But after adjustments, the comparison is 4.5 percent versus 6.9 percent the prior year. Year to date in rest of world, net sales of a billion 279 million were up three million or zero point two percent over the prior year. Acquisitions however added 92 million. Otherwise sales would have been down 7.0 percent. FX for the year was 27 million unfavorable, so base business was down 4.9 percent. Reported operating margins were 4.4 percent this year versus 7.3 percent the prior year. After adjustments the comparison becomes 5.5 percent this year versus 8.7 percent the prior year. And now in aerospace, which again, had just a terrible challenging year to work through. But at the end of the day, again, experienced a very good year, finishing above plan that we had anticipated. In the quarter net sales of 287 million were down 37 million or 11.3 percent for the prior year. There were no acquisition or FX adjustments in aerospace. Reported operating margins were 13.0 percent. This year versus 18.9 percent the prior year. After adjustments the comparison becomes 13.4 percent this year versus 19.5 percent the prior year. Now, year to date net sales of 1 billion 173 million were down 33 million or 2.7 percent from the prior year. Again, no acquisition or FX effects in aerospace. Reported operating margins were 16.1 percent versus 18.2 percent the prior year. Adjust the operating margins were 16.5 percent versus 18.8 percent the prior year. And now for the other segment for the quarter, net sales of 236 million are up 77 million or 48.4 percent from the prior year. Acquisitions added 63 million. Otherwise sales would have been up 8.8 percent. The acquisitions include businesses previously held for sale. They were acquisitions but they were being reported or accounted for as businesses held for sale. They now come out of that category and have to be picked up as acquisitions, if you will, no. So again, added 63 million. Otherwise sales would have been up 8.8 percent. Foreign currency was 8 million favorable in the quarter. So base business was up 3.8 percent. Reported operating margins were 4.2 percent versus 6.9 percent the prior year. After adjustment the comparison is five percent this year versus 8.2 percent the prior year. Year to date net sales of 906 million were up 349 million or 62.6 percent. Acquisitions, and again those businesses previously held for sale, added 343 million. Otherwise sales would have been up 1.1 percent. Currency was four million favorable. So base business was up zero point four percent or essentially flat with the prior year. Reported operating margins were 6.0 percent versus 7.4 percent the prior year. But after adjustments the operating margins were 6.6 percent this year versus 8 percent the prior year. And now to look very briefly at the balance sheet. Accounts receivable were up 9.1 percent. All due to acquisition. As our days of sales outstanding was actually improved by a day which we think was a great achievement through a very tough environment, recessionary environment. And also became a nice addition or source of cash. Inventories are only up 4.3 percent, again due to acquisition, as our base business inventories were reduced about 60 million dollars. And our date of sales inventory was reduced by nine days. We think this reduction of nine days is definitely indicative of our lean initiatives in the manufacturing plant. This, of course, these reductions was another source of cash. Assets held for sale of 111 million of course have been eliminated and are now being accounted for in their proper place on the balance sheet and income statements. We also did sell two noncore businesses. And the ones that we are reporting on now are the [Astron] building systems and the win specialty chemical. And they are to be found down in that other segment. Fixed assets are up 148 million. Again, all from acquisition. Good will increased 130 million. Again from acquisition. And finally, other assets increased about 97 million, primarily intangibles from acquisition. Within accounts payable they are up 76 million. Some of this is from acquisition and some of this is that we worked aggressively to reduce nonstandard payment terms and also to generate some additional positive cash flow. Debt increased 102 million, a reflection of our acquisition activity, where we did over this, mostly in the first half, acquire around 60 million of addition ^ 630 million of additional sales volume. The pensions and other post retirement benefits is up 190 million dollars. And this is a direct reflection of the decrease in the value of our pension assets due to the worldwide decline in the equity market. Shareholders equity did increase 55 million in this most difficult year. And our debt to debt equity ratio improved to 35.7 percent, comfortably within our stated range of 34 to 37 percent. Now, briefly on the consolidated statement of cash flow. I'll just say that this probably is almost the most meaningful financial statement for Parker this year. I think we had told you before, most recently in the Asian crisis and before that in the earlier '90s, that when we get into downturns, recessionary modes, we shift to manage more for cash as opposed to earnings. And that's what we have been doing. I think as a result, during this most difficult year, this year probably being the four worst quarters of this recession, regenerated record cash flows from operating activities of 631 million dollars that actually exceeded ten percent of our revenue. So how do we do that? Well, net income generated 130 million dollars. Depreciation and amortization added 282 million dollars. Working capital initiatives contributed 171 million dollars. And even in the other category, which largely reflects disposal write downs and fixed assets, we picked up another 40 million. How did we spend the money. We spent on acquisitions 388 million. On capex we reduced all the way down to 207 million dollars or 3.4 percent of sales. We did pay out dividends, 83 million dollars. And I would note that this is the 46th consecutive year of an increase on the dividends. And we're well above the 200 mark in consecutive quarters of dividends being paid. We took in 20 million from sale of stock primarily of stock options. And we did sell additional debt of about 62 million. All that allowed us to have a little extra cash on the balance sheet at year end, another 23 million, which we try to keep that as skinny as possible. But we're in the displeased to have the cash on hand. And now, maybe most importantly, I want the turn to our outlook for fiscal 2003. In total we are projecting an overall sales increase of about four percent. This we feel will lead to an improvement to our earnings per share, diluted earnings per share in the range of 2.20 to 2.50. I want to point out that this range excludes the 23 million of already announced realignment costs that will be recorded this year, and that will then lead to an additional savings of 20 million per year starting in fiscal 2004. So now, how do we get to this range? I'll give you have some detail by segment. Industrial North America. We look to sales to improve in the range of six and a half to eight and a half percent. And on that we would expect the margins to improve in the range of 350 basis points. You know, plus or minus five percent. In industrial risk of world we're looking for sales volume to improve nine and a half to 11 and a half percent. They pick up a little more out of some acquisitions that we made, the ITR one, for example. Margin improvement in the range of up 250 basis points. Again, maybe plus or minus five percent. Aerospace. Sales down. Range of five and a half to seven and a half percent. And with their margins down about 400 basis points. The other segments, volume also down five percent to seven percent. We did divest some businesses out of there, down five to seven percent, but with our margins up around 200 basis points. Below the segments I would say to you that the corporate expense will probably, hopefully, because we took some very, very severe cuts on incentive pay around here, that hopefully that will actually recover a bit, and should run around 80 million dollars a year. Interest expense we think will also run at around 80 million dollars a year. For other expense it's always tough to budget because a lot of it depends on if we're gaining or losing on any disposal of assets. But we have gone ahead and plugged in about a 20 million dollars per year expense on that line. And we think the taxes will stay at that 33 and a half percent. So that's the key components of how we get to the model. Now, for the first quarter we are expecting a slow start to the fiscal year. With many customers still taking extend shutdowns, under an improving by still very weak economic condition. Especially in Europe. North America, we are seeing markets improve. We are seeing better things. But Europe really hasn't shown much signs of life. So we think it's going to be a sluggish first quarter. Therefore we're expecting to earn in the 34 to 35 cent range in the first quarter. We would then expect a slight improvement over that in the second quarter as holidays get behind us. And of course with more significant improvements over the third hand fourth fiscal quarters for the second fiscal half. I will now open the teleconference to your questions. Additionally I will tell you right now, though, our president and CEO Don [Washowitz] wanted to be here today but he's actually at a major customer, previous obligation, trying to secure some future business. So he has decided to make himself available for a brief time tomorrow for any follow-on questions that you might have. That should start at about ten a.m., last about a half hour tomorrow. Information how to access that teleconference webcast will be sent out today. But other than that, as I say, I will now open it up for your questions. 00:36:12 Kim.

At this time I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from David [Bluestein] of UBS Warburg.

Good morning, Tim.

Good morning, David.

Can you talk through the 47 million of medical pension and insurance costs and what you expect the increment to be in 2003.

Yeah. I mean, again, collectively, I don't think this is probably a big supervise to any of you, I know more and more you people are picking up on this, we've got some outside of our control. The insurance markets are largely outside of our controls. The pensions are being impacted by the equity markets also outside of our control. The medical is something that you can do something about, and we have. So the 47 million is just from last year to this year, the increases on those three categories that went right to the P and L. And for next year we're going to have pretty substantial increases again we think on insurance and pensions but we've put some things in place to mitigate the medical. That's the biggest chunk of it. And I don't quite have that final number on that. But it's not going to be as severe as the 47 million, I don't believe. But it could be, you know, in the 30 million range.

All right. And could you walk through any of the other major assumptions built into your 2003 out look. For instance, what have you assumed for auto builds or truck builds over the next couple quarters.

I can't specifically give you those. I really can't have all of those just fresh on top of my head. There's a lot of numbers running around in too many markets. I could get back to you on that.

That would be great. Thanks, Ted.

Okay.

Your next question comes from Andrew Casey of Prudential security.

Good morning, Tim.

Hi, Andy.

With your outlook for the first fiscal quarter are you expecting the same sort of revenue trend year over year that you experienced the fourth quarter.

Frankly, again, a little anemic. A little anemic in the first quarter. But actually when we looked at the development quarter by quarter, it will pretty much, all were four percent increases over the comparable quarter the prior year. But as I say, it was the first quarter being a little more anemic. We're real nervous on this first quarter in that we've just seen a lot of people, you know, taking advantage of the final shutdowns here.

Okay. So would you expect further market compression in the first quarter then.

Again, as I said, we are expecting some difficulty, yes, I guess, if you will, on making some of the sales in that first quarter. The indications right now are okay, but we're pretty nervous about what's going to happen these next couple of months.

Okay. And then lastly, on the items that you called out at the beginning of the call, and thanks for the detail. What inning are we in this terms of having that type of stuff behind us, in your opinion.

We're not thinking completely behind us. What we are doing in the last two years, and doing a lot of that without having to take anyplace sort of these special charges because they were sort of just being run through and through the results. And this last thing got to be too big of material. We had to do that. These things at year end, the 21 million at year end, we do that every quarter to the best of our ability and we do it every year end. And it just seemed like it was one of those years. And again, I think symptomatic of the environment that we're in that, you know, everything just seemed to be kind of going against us. And as I said, I think it's sort of symptomatic of being in a recession. The workers' comp is a good example of laying people off. Okay, they go file a claim. And layered on top of that you have this rising medical cost. But we're feeling that as of this, we are completely up to snuff. There is not anything there that we have not anticipated or tried to provide for as best we could. We would have booked the 23 million this year on the realignment if we had been allowed to. But the accounting rules edict that you have to wait and book it next year. So be it. But other than that we think that we've got everything possible recorded.

Thanks, Tim.

Right.

Your next question comes from David Rosseau of Solomon Smith Barney.

Hi, good morning. Tim, on the guidance, I'm trying to get a better handle on where the margins expansion can come from. Obviously there's been some operational issues this year when you look at pulling out the restructural charges adjusting for everything, the top [inaudible] base business at least the historical pattern for the company would suggest, we saw the margins, for example North America, from 12 and a half down to 5.4. Your guidance for next year in the top line, seems to me the comparisons in the calendar first half of 03, it may be doable as more of a macro call. But the company specific issue are those large margin expansion goals. What's coming up, especially coming up to more restructural activity in front of you, is there something coming to suggest that's really a doable margin expansion that maybe I'm missing.

That's a very good question, David. And here is how manic depressive these times can be. In April and May, as I'll mention again, in April and May, and leaving aerospace out because those guys have performed just to plan, better than plan all year long, so we set them aside. In the industrial world and tracking their results, in April and May we were seeing the improvements. And as I said, putting it all together, we were generating 16 cents a month on average. And an I say, we were going to lose a couple days, shipping days in June. So okay, we might lose a few pennies. But if you just obviously would multiply 16 by three, it would be 48. If you knock a little bit over you're in the mid 40s. We think already that is the run rate. Now, the first quarter we're tempering down because of the summer vacations and shutdowns. But we really think that that's where we were, and we were doing that even though we were still, you know, taking decisions on laying off people and closing plants and all these very, very tough and unpleasant things to be done. A lot of moving parts. So that gives us the confidence on a go forward basis.

What's challenging though the second half of the fiscal year has to generate roughly 1.45 if you do 40 and then 50 first two quarters, versus the past year fiscal half only gave you 79 cents. At the same time aerospace only begins to hit during the fiscal second, third, probably the fiscal fourth quarter as well.

I think this quarter aerospace kind of got gown to about where they are going to be. We're seeing a little bit in the last, if you look at what we said, we're saying a little bit less for aerospace next year than what they did this fourth quarter, but not a lot. But your point is well taken. The industrial groups have to step up big time in the third and fourth quarter. And first of all, they have got to get the orders. We've got to get the volume. Secondly, the increments on that volume have been pretty healthy. But I would say to you that the incrementals on the decreases were pretty, what's the word, ugly. Were not pretty. And we would expect certainly there the earlier stage of recovery to generate some very healthy margins on the upside. But that is what we're banking on, the North America industrial recovery has begun. It will, we'll see more of it in the fall. That will feed into our third and fourth quarter. And yes, but goodness, these units will have those healthy marginel returns.

Thank you very much.

Right.

Your next question comes from Anne [Dikeman] of Sanford ben stein.

Hi, Tim, this is Anne.

Hi, Anne [Dikeman].

Yes, Anne [Dikeman]. I was just wondering if you could give us some more insight into the other category and what your intent is with the noncore businesses for the next year, and how we should think about forecasting that.

Well, I guess, again, to be very blunt, these clearly are not noncore business - in the other these three things. There is the climate industrial control group which is, of course, very core.

Right.

And then we have these two, we have [Astron] billing systems and we have win specialty chemical who are noncore. Fortunately they are good businesses that make good money and generate cash. So that's okay. But they are a distraction. We have to allocate resources, management resources and others to kind of keep them going. And as soon as the markets are right and we can find a buyer who is willing to pay a fair price, they are not going to stay. You know, I can't be more blunt than that. Some people might want me to be more subtle. But that's the bottom line. Now, timing on that, we don't need to do anything. We're not desperate. And so it just waits waits for someone to come along and pay us a fair price. That's what happened on win warranty. And voila, all of a sudden in June we could do that deal.

And building off of that your cash generation was pretty impressive given your end markets. Should we be looking at more acquisitions next year or pick up in acquisition activity.

Well, Anne, to be truthful, there are so many people knocking at our door. But we obviously have so many moving parts within Parker right now, still trying to do all that we're doing. The primary focus is to get that all settled down. Get everything integrated, get all these plants closed, get the product lines moved, so on and so on and so forth. So that's the primary emphasis. Having said that, people are knocking on the door. There are some very nice properties that we have been interested in for a long time. And we will take a look at those. But we're going to go very slow and cautiously. I would say that come the second fiscal half, if everything comes to fruition that we have said here today, that's the third and fourth quarter are much better, we could pick that activity up a lot more. But I think it will be fairly quite here still for a while.

Okay. And could you just comment, two things, restructural for next year, we're going to assume that it's going to be front-end loaded.

Actually, I hate to say it. Actually, it sort of trickles out over the course of the year. It is a little more front-end loaded. We're going to try, of course, to accelerate it and get it done as fast as we can. Some are a little hard because this has to happen first before you can do that. But some of it does spread out over the course of the year. But it is front-end loaded.

And then just finally, on your international operating margins, they were a little lower than we night have anticipated. Is there any fundamental mix change happening there.

No, not really. Not really. We didn't talk about the acquisitions in this. I think there's enough to talk about with driving ourselves crazy with and without acquisitions. But that is part of the influence. We did make, we brought ITR in, and they came in making a little lower margins than we at Parker would like to make. But they are in Italy. And traditionally remake very good margins in Italy. And we think we know how to get those margins up pretty quickly. So that did partly drag theirs down some.

Okay, Tim.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Please limit questions to one per person. Your next question comes from Gary McMinnis of JP Morgan.

Hey, Tim.

Hi Gary.

You provided in the sales by segment which you provided for 03, it sound like there's some acquisition and divestitures. Could you flush it out for us when you look at north, six and a half to eight and a half percent, how much is organic in acquisition and the same thing for the other three segments.

Yes. I could if I have it. I don't got it. But you're right. There is some follow on like on the dayco deal in there. And. And international there's some on the far. I'd have to work that out, Gary.

Are you just assuming acquisitions you made to date or are you assuming additional acquisitions as of 03.

No, just the ones we made to date. You have the numbers yourself. You know the run rates of those businesses, you could plus or minus them.

And you gave the laundry list of all the, you know, year-end adjustments that worked against you, 21 million dollars I guess you said or 12 cents a share. Again, I would have to assume some of this had to be anticipated. I'm wondering whether some of this was done just because it was a tough year and you just, you know, are kitchen sinking it. And I'm wondering if you could break out the 21 million dollars by the different segments.

Yeah. In terms of anticipated kitchen sink, again, as I say, we obviously had a wonderful opportunity on June 19 to do any adjustments that we might want to do. And we didn't think we had to do anything. So these truly were not foreseen. They all went against us. You know, a kitchen sink mentality, I can't speak for every unit out there, but we stress that when every unit in every quarter that their book should be totally clean and everything should be booked that should be booked. I think, though, with that philosophy general we that we, please, you know, be very conservative, you know. Book all possible expenses, anticipate no possible revenues, you know, hammering away. That is their upbringing. And you put it in this environment. Then, you know, maybe more negatives come out in the recessionary time. But nothing - we did the normal things. There were some things. I mean, the sale of the warning business was a surprise. That directly led to some expenses. The warranty problems on the [Astron] businesses due to snow, that was due to a court case that got lost late in the game. Also was brand new. They really were that. There were some things as I say we're going to try to put in place the maybe watch these things a little more ongoing realtime and hopefully avoid it there. In terms of breaking them out between segments, I don't have that right now. But I can get that. I mean, it is between other, you know, aerospace again is not a party. It is between North America, rest of world, and other. And I can see if I can't work that out for you.

Your next question comes from Bart parse knack of Midwest research.

Hey, Tim, good morning.

Hey, Mark. Getting whole bunch of new people on the call today.

Yeah, that's right. Listen. I try and keep track of these acquisitions. And so as I plugged, you know, your outlook numbers into my model. What it implies so me is that North America industrial, for instance, the base business would be up only two percent and international would be up only about three percent. And so, when I look at the margin expansions that you're anticipating, it looks like you're anticipating more improved income than base business is improving. And given that, your acquisitions haven't made any money this year, you know, arguably they have detracted from income, either you're anticipating a big turn around in those acquisitions or, here is my real question, is there something else going on, like mix within the business. I know your semiconductor used to be really profitable. Are you expecting a recovery in that. Are there any mix related issues that could have an income impact so much more stronger than the revenue improvement.

Okay. There was a heck of a lot in that question. Let me try to take it in different components. First of all, I would just say, the good news is, collectively our acquisitions, the new acquisitions made money this year. So, they didn't have - they were higher than our base businesses. It was lower, but they were in the black. So they were in the black and they were increases. So that's the good news. The bad news on the acquisitions, it's just our approach of the and you heard this before. When we buy something we take the first year to focus all of our efforts to get them completely integrated into Parker, assimilated and integrated into Parker. And we spend a lot of a lot of money to take all those actions, including doing any downsizing and whatever, systems work, and go right down, change the catalogs, and right down the list. So typically what occurs, Mark, in the first year of ownership after an acquisition, unless they came in very, very profitable, they don't make a lot of money. We don't like to lose money. But to break even in the first year of ownership is not at all unusual. But then we do expect in the second year that they do make money. And in fact, they make better money than they were making before. So your observation is valid. Acquisitions didn't add a lot. But we would certainly, starting next year, expect them to add a lot more. Okay. Now, additionally you were right. There is some mix issue. Semicon is another issue that's we see coming back, starting to come back next year. Carrying over the course of the fiscal year. You all know that's a high cost high margin, should be a good contributor. So there is some of that going as well.

Your next question comes from Stacey dutien of high growth partners.

I wanted just to have you spend a little bit more time on some of the year-end adjustments you referred to. In particular, I was intrigued by, I think you mentioned some unfavorable manufacturing variances, some loss absorption, some obsolete inventory write downs. I don't mean this in a literally GAAP accounting sense, but were those - I guess I do. I apologize. Those were all taken in the cost of goods sold, were they not.

Yes.

I'm curious why you're breaking them out here. It seems to me as if those are truly ongoing fixed costs and the like of being in your business. It sounds as if you were trying to break them out as if they were nonrecurring. I just with a confused about the context in which you were putting them.

Stacey, nonrecurring, I never labelled them that way, and as I said, they were unfavorable series of normal operating items. Okay?

Okay.

Now, the ones you were referring to, 4.2 million of unfavorable production variances in tooling write-off, those are normal things that happen all the time. Okay?

Uh-huh.

But we don't normally close 50 plants. And we were not closing that many plants and moving product lines. We close plants. We don't just exit the business. Of course we move the equipment and the production to somewhere else. And there's a knock on effect on that. So this again, were not normal. They were kind of unforeseen in all this shuffling around, closing plants and moving product lines around, lo and behold we ended up taking a hit unforeseen, unplanned. Maybe should have done a better job but we didn't. 4.2 million just because we were moving stuff around, if you will. And the hits we took there. So that was the one production related. The other, 3 million on loss and absorption. Well, of course, if you're reducing inventories you're going to lose absorption. You're going to take those hits. Now, that's just normal business. And this is kind of part of normal business. But what happened is that they reduced the inventory ten million more than we thought. Which was a good thing. It's a good thing. It's a wonderful cash result. But because they cut it ten million more than we thought they were going to, that led to sort of an unexpected hit on and absorption in 3 million dollars. The last one was just obsolete inventory, 2.2 million. I don't know all about those that occurred - we have 125 business units. Two out of 125 business units had problems. And they made inventory, and they thought they had a market for it and they kept holding out and holding out. And guess what, the market was never there. So you can only be so patient. Write the damned things off. So those were the ones that I think you could say, well, potentially foreseeable but that kind of snuck up on us nonetheless in the fourth quarter.

Your next question comes from barry bannister of lag Mason.

Hi, how are you doing, Tim.

Okay, barry.

Yes. I understand the 15.2 percent sales decline in FY 02 in the base business in North American industrial. But the margin fell 710 basis points. It was 5.4 versus 12.5. I think what worries me, there's been a lot of questions about acquisitions and special item and such. But I think one thing that worries me is this overreliance maybe on the technology side of NAI. Talking about [culmerics], some EMI sales, [veriflow], semicon gas flow, maybe other businesses I don't know about. So what I'd like to do is either now or maybe tomorrow in Don's call, if you would give us the operating margins in NAI in FY 02 and FY 01, had [culmerics] and [veriflow] simply not existed. Because I'm concerned that it was such a large percentage of the profits because the delta was just unreal. Can you talk about that.

That would be very interesting. We can look at that. You're right. Again, when you get in the tech side, you're going up a different dynamic than cost structures. And higher fixed costs. And hopefully higher margins. But there you are. More volatile. Frankly, on the [culmeric] side into the telecom. Okay, telecom market as we all know stinks. It's not coming back. It's terrible. But those guys have held up very well and our margins are nice. They are way down from where they used to be which are super nice but they are now in the very nice category. But the semicon, the [veriflow], you're absolutely right. That's a situation that they went from total heroes to total goats. And I think they are sort of halfway in between now. But, yeah, we can talk about that. I think that may be part of it, Barry. But honestly, the biggest influence, it's just the overall industrial business and the fact that in this terrible part of it, in this terrible recessionary period, where you're talking through all this, we did experience, you know, we also experienced about a 50 million dollars hit in those three categories of the medical, the insurance, and the pension.

Yeah. If [culmerics] and [veriflow] could be excluded from NAI I think the informational content would be to see what it did for FY 02 but also just how good it was for FY 01. That would be a wonderful figure. I know it's hard.

Well, no, it's easy to get. We'll take a look at it, [veriflow] and [culmerics]. I think it's an interesting question.

Okay. Thanks a lot. Bye.

Your next question comes from John inch of Merrill Lynch.

Thank you. Tim, you may have actually said this so I apologized if I missed it. But of this 21 million, how much of these types of items would have been run through the P and L in the third? I'm trying to look at, your volumes in industrial North American were up seven percent sequentially if you at those two divisions. I'm trying to just apples-to-apples the margins. Is there any way to assign how much of the 21 would have been in last quarter?

I'll tell you, just going through the list, let's look at that real quickly. The 5.3 million all was a fourth quarter event. So, you know, it was properly recorded within the fourth quarter. All those events became known, occurred. The 4.2 million has to do with the unfavorable production variance related to all the moving and stuff around. Pretty much also was a fourth quarter event. Because that's when we were doing those things. Now, the 3.2 million in workers' comp, maybe if we had been a little smarter we would have just said, well, I'll bet our claims are going to go up if we keep laying people off. And, gee, I guess the medical costs we know, that's going up. And so maybe that should have been spread a little more over the course of the year. I give you have that 3.2. The three million on the loss and absorption was a fourth quarter event. That's when we reduce the inventory. You have to take it. The obsolete inventor, that's one of the already inventory, that's one of these things, I sit on these committees, the marketing people think they can sell it, there's a market, yeah, no problem. And after a while you finally don't believe them interest anymore. So it's 20-20 hindsight on that. So forth. I don't know. Litigation reserves I think were all fourth quarter. And the severance payments also were fourth quarter. So I think they mostly were fourth quarter. It's just that they were just kind of wrapping up a lot of unattractive things.

So sequentially your volume is up, your margin mix, most of these themselves are going to be up. There's nothing about mix or pricing or anything else that would have caused margins to degredate these items that were specific fourth quarter versus third quarter.

Exactly right. And again just a little bit, industrialy worldwide we shipped around 450 million in April and around 450 million in May. And we were making about 16 cents in that. We new in June, you know, lose two workdays we're probably only going to ship around 420. So we're going to lose a little bit. But everything else should be fine. Year-end adjustments come in as they normally do a wash or slightly favorable. No problem. And it just, you know, they didn't come in that way. So our volume was fine, our gross margin was fine. And that's why we're all level. We were all level when we just said, geez, you know, man, this one against us, this one against us, that one against us. My goodness. You know, it's one of those years. Yeah. Not much more I can say than that. I think the preponderance real year were fourth quarter ^ really were fourth quarter events you could argue a few were because it's spread out over earlier periods.

As a reminder, pertain allotted for questions, again, please limit your questions to one per person. Your next question comes there Joe Anna slantly of gold man Goldman Sachs.

Good morning, Tim.

Hey, another new person.

Yeah. On orders for the next couple months, obviously we get easier comparisons. But do we anticipate seeing the normalcy of a slow down. It sounds like we should for July and August in North American industrial.

Yes.

So essentially when you give us the order pad we should expect to see it down. It's just normal seasonality.

They are down. It depends on year to year. And you think back a year ago this time, it was pretty slow period too. Maybe not as bad as we are right now. But anyway, it's different when you're comparing a real boom summer versus a real bust. So we'll see. As of right now, I never want to put these out until the end of the month because they change on me. And then you all want to know how it changed and what that was all about. But as of today, frankly, with a couple days ago, it would appear that North America, if we close them today, would be fairly similar. On the average daily rate, North America right now is fairly similar to where they were last month. And Europe, and Europe is definitely down a little bit. So I think we're seeing the European, how they shut down impacts us a little more.

My other question is maybe something you can address tomorrow if you can't answer today. We've laid off 6200 people and shout down 50 plants and we have the incremental cost reduction which you highlighted, that being 32 million of savings. What about the 6200 people the and the 50 plants we have already closed. What type of savings does that give us? It just couldn't be zero. When do we actually start to see it?

Well, you're right. Obviously besides just people, you're going to save the cost of the plants and so on. And we should start to see it over this next fiscal year. Clearly, we're not building a hell of a lot into the plant right now, having lived through this tough period and having a real struggle to try to get the numbers. But we should start to see it come forward in the next year. And that's partly why the improvements in the second half are going to be hopefully as good as they are going to be.

Your next question comes from Michael brag of AG Edwards.

Good morning, Tim.

Hi, mike.

I wonder if we could explore the issue of inventory reduction a bit more. You have cited 5.8 percent reduction in inventories for base operations. Is that for the full year?

Yes.

Can you do two things with that number: Indicate which sectors were most affected, and secondly give us some idea of margin impact.

Well, I don't have it. I do not have it right now by the four segments. I can get that, Mike. I don't have it. But our rule of thumb generally on inventory reductions is that the hit to the operating margins is about 30 cents on the dollar. It depends, of course, on what you're reducing. Is it manufactured items versus purchased parts, all that. But on average that's the hit usually. If you take a million dollars out of inventory, you're going to take a $300,000 hit to the operating margin.

And again, because the text was a little bit unclear, the 5.8 percent reduction is year over year.

Right.

Exclusive of acquisitions.

Correct.

Could you give us the approximate dollar amount.

Yeah, 60 million.

Okay. Thank you.

Your next question comes from Pete was knack of Robert W. Baird.

Hi, Tim.

Hi, Pete.

Just to focus on the neglected child in terms of aerospace, next year we're looking at sales down five and a half to seven and a half percent. I'm wondering if you could get in terms of mix what it looks like in terms of OEM and after market, and also what kind of contribution you're expecting from military next year.

Okay, fine. The military, they are divided into, let's say, four pieces. The commercial OEM, the commercial after market, the military, and then the sort of regional business, regional jet.

Uh-huh.

The commercial OE is running down that 30, 35 percent. And the accounts are going to get easier over time. But the bottom line is they are going to reduce the production again next year over this year. So that's going to stay fairly brief. Let's just say that continues minus 30 percent, although as I said, the accounts will be easier and won't look as dramatic. The MRO which has been running around 20 percent is the one we are expecting to improve over time as the revenue [inaudible] improving, the road factors improve, people come back to flying, hopefully recession is coming to an end, business travel is coming around, people are going to take vacations. So all of that should help that MRO slowly. It is minus 20. We would like to see that get to a minus 15, a minus ten type of trend over time. The military defense is running in at plus ten to plus 15 percent range. We don't see that changing with what's going on in the world. We think that will stay there. And the regional jet business jet, it's kind of a mixed bag. They have been okay so far. And we would expect those to remain a secular story. And for those to improve too over time. To show some positive numbers.

Sounds like general we speaking you've got, I guess, better performance in some of the higher margin businesses. So I guess I'm a tad confused to where you're projecting a 400 decline in the margin at aerospace. I would guess it would be a little bit stronger.

Two things. One is 400, because it did so well this year they embarrassed us in a good way. But earning so well they held up there in the 16 percent range. And frankly we were looking for them to be in the 14 percent range. So probably it's a little dramatic. How did they do so well, how did they hold up so well, they have a lot of stuff in backlog that they could pull forward and ship. And they just, they were living off their backlog and generated some good margins. But that's kind of going away. So I think the drop is more dramatic because this year held up better than we thought. We said all along we thought aerospace - in the last downturn they got it down around the nine, ten percent in the dark days. And we said all along we thought that these guys could hold up in the 12 to 13 percent range. And I think - and looking at this forecast for 03, I think we are looking at their worst year of this aerospace down turn.

Your next question comes from John Mac nitty of CSFV.

Good morning, Tim. Could we talk for a second about cash flow, what would we look at for capex. And if you look at thee sales targets with working capital would you generate cash or would it be neutral or what would you expect to do there.

Good question, John. Capex which came in at 3.4 percent of sales this year, we are not expecting that to go back up to traditional level of five. We're going to, through the lean initiatives, I think, kind of keep that at four percent. Okay?

Okay.

So I would be using four percent for capex.

Four percent of the four percent in sales.

Of the projected sales volume. In terms of working capital, we think that that could be a push. We think that clearly volume is going to come up. We do a good job with receivables. Volume is going to come up. Those will go up. But we still have some opportunity in inventory. I think we have some opportunities in accounts payable. So we're looking for working capital to really be a wash.

And depreciation and amortization staying at 282.

Boy. Should drop. Let me see here. Let me look at a form here. Yeah. I'm not sure. That was that big hit there. I see. Okay. Yeah. Depreciation and amortization should be dropping down from that 282.

Back to 264 of last year.

I really need to give you a number on that. I don't have a good number.

If I could just try one thing it seems everyone, we're trying to come at it different ways, trying to figure out why the margins go up, and we've come at all of the things, acquisitions, inventory and so on. The question I have is to the extent that you closed 50 plants, to the extent that you lay off 6200 people, yeah, you can take the restructuring charges for what they let you. But there have to be, I assume, some operational costs involved with that that you are unable to capitalize or at least even to identify, as this is a restructural cost per satisfy. Can you give us any idea of any way to measure those kind of costs, the disruptions and penalties of what you did that hit operations that theoretically are again next year.

It's almost impossible to measure those items. And that's a problem for us. I mean, we know, you can't do all of that that we did without having severe impacts to your margins, your performance and your margins. There's a whole long list. I won't take the time on the phone. But you've got all sorts of learning curves involved. And you've got disgruntled people and you have this and that. And you have money to spend here to do that and do this. And yeah, there's just a lot of that going on that's not really quantified. It's not really captured. That we've been living through. Now, the proof in the pudding, of course, will be, you get that stuff done, you get it behind you. And by god, margins should improve. Once the dust settles down and everyone is settled in, they should improve. That's been the way we've done things around here and that is the way we have made improvements over time. We do not think that there's anything that has been fundamentally changed in Parker that is going to impact or limit. I mean, only good things have been done. They have been costly. But in North American industrial we were making 15 percent operating margin just a couple of years ago. And what we have done through all of this stuff, yeah, we did buy a couple big businesses that had less margins than we did. But we've integrated them. We downsized them. And we'll get them up to the Parker margins and we'll get our old businesses back to the Parker margins. So nothing fundamentally has been change. But there has been a lot of costs and inefficiencies running through these financial statements.

Your next question comes from Karen ebleheart, government k report.

Hi, Tim. Just I know it's hard to get visibility in the summertime. But can you just give a little more color on the volume trends which have been a little bit slower than expected. Would you characterize it as a slower than expected recovery, or are you seeing deterioration or retrenchment in any of your end markets as far as you can tell.

Well, Karen, six months ago I would have told you that we were very disappointed. After seeing a nice surge in December, and then a little plus in January, we thought we were on our way. And then this thing sort of, you know, plateaued out in April. In April, you know, April, May, June, we sort of really plateaued out here. But anyway, early on I guess we were dispointed. We thought it would come back faster, stronger, broader. I'd say where we sit today we think, no, we're sort of settled back down. Okay. This is going to be slow going. We don't see anything that is going to interfere with the recovery yet. We sat through these plan reviews for FY '03. All seven of our industrial groups came in and said, the last two years we have been very frugal in our capex requirement because we knew that was the thing to do. But we've just got to spend money next year on just some maintenance type items and replacement items. And so every group came in and said their capex budget has to pick up and their spending is going to pick up. And I think we're no give than anyone else. So I think that after a couple years of this lousy period, people are going to want to, going to need to spend money on capex. And that's going to help fuel all this. So I guess it's slow going, but it's cautious. We start our fiscal year July 1. So our guys get new and improved increased capital budgets right now. So that's good. They can get in the market and start doing some of that. Most people with the year starting January 1 won't get their new approved capital budgets until after the first of the year. But it's coming. So yeah, we were disappointed at first. We think it's pretty much on track right now. No surprise whatsoever in what we're seeing.

And then in Europe, can you give sort of the same characterization? I know you said you're seeing it down. But I was just there for five weeks and it sounded more like things were sort of flattish. So I'm just wondering if you're seeing a deterioration there beyond your expectations.

No. Actually, June, I was very encouraged. June was great for them. And now we got into July and August, you know, home day period, and it's looking pretty anemic. So I won't know again until come September. So like I say, if you asked me last month, I was manic. And this month I'm depressed. But I just, as I say, I think it's - we're still not in a real boom economy here. And I think everybody was just taking extra time off.

Your next question comes from Michael spun yachta of staged asset management.

Hi. It's Barry. Hi, Tim. I have a question on the heavy duty truck market. Your first quarter ought to be I would think pretty good and running pretty flat out. But based on what you're hearing from the manufacturers, how does your second quarter look and how much of a sequential decline might you see because of the prebuy.

You're right. We got a nice boost. And they were one of the boosters that were driving our improvements here in here in the spring. I can't honestly tell you, though. I have to get back to you. I can't tell you on heavy duty truck today what they are expecting our first quarter versus our second quarter to be. I honestly don't have that. But I can call you back.

Great. I'll follow up with you. Thanks.

Yeah, thanks.

Your next question comes from Carl merchant hailer of Banc of America.

Hey, Tim. It's Carl merchant thaler question on your pension plan. As of the end of last year you had underfundend pension and the expected rate of return on the unplanned asset was 9.5 percent. Can you just tell me, are any of your assumptions going to change at the end of 02. And what are the expectations for the next fiscal year. Is the pension plan, will the assumptions change going forward, and at what point are you going to have a cash funding requirement?

Right. The pension fund, I think the assumptions are changing. Let's see here if I've got those in front of me here. Yeah. These are just the numbers here. Yeah. The assumptions are changing. And I take them both actually on lowering the rate of return on the assets. And on the discount rate. So both kind of going against you. And they will be built in there. We may or may not be up against funding requirements in that regard. I think that we certainly would be in a position to do some optional funding requirements if we thought that was a prudent thing to do. I'm not sure if we're going to have any mandatory ones yet. But yes. The assumptions are being lowered. That's going to help - that's going to drive up the expense.

Could you specify what the expenses are going to.

I do not - again, I do not have those all in front of me. I'm sorry. But I can get back to you on those.

Okay. Thanks, Tim.

Your next question comes from Seth fargen thal tall of John Lee ban and company. Go ahead, Seth . That question has been withdrawn. Your next question comes from Marcie yeah man of Bank One investment.

Hi. In some of your nonrecurring items or unusual items, you talk about an increased and accrual for litigation. Can you elaborate on what that litigation was in regards to.

It wasn't really in regard to any one thing. It was just sort of a review, you know, we did a general review of all possible claims. They run all sorts of myriad of different things. And people thought it was prudent to increase that again based upon what's kind of happening in some of the courts these days. So it wasn't any one specific thing. It was just a review of all the caseload in general.

Okay. Thank you.

Uh-huh.

Your next question comes from Eli boss garden of HC Wainwright.

Before we go all day, most of it has been asked. Just one question. Tim, you indicated you expected the second quarter to be a little bit better than the first quarter.

Right.

On that, I assume, most of us are very concerned about truck production at what would be your second quarter. Is that based on the - is that all based on semiconductor coming back? With normal seasonality, you usually don't get a higher second quarter. Something has to happen that's going to be very material. And that's also aerospace has some shipments in that quarter we don't know about.

We're assuming the first quarter will be, you know, very anemic, especially with a lot of people doing the shutdowns. And we do see therefore the second quarter to be just better because of that. And also, you're right, the semiconductor will be supposedly kicking in at a much better rate during that second quarter.

Where are you seeing all these shutdowns? Can you give us some idea of what's shutting down.

Just general across the industry. Most, both mobile and industrial customers. People are taking, you know, taking advantage, I guess, of the weaker environment to add another week and add another week there. It's kind of wholesale.

These are unannounced shutdowns.

I don't know if they are announced or unannounced or whatever.

All right. Thank you.

You have a follow-up question from Mark cost marky of Midwest research.

Thanks. The question has been answered.

You also have a follow-up from Stacey dutien of high growth partners.

Hi Tim. Could you just walk us through. I know that you have attributed the increase in inventories and receivables to the acquisitions. After we anniversary those in the first half do you anticipate those two items to be in line more with sales.

Yeah, going forward from there, yeah, any changes would be - we're always working those as a relationship to sales.

Uh-huh.

And of course, you do need to annualize the sales number to reflect this. So yes, I would expect them to be in line. And we do have an on purpose program to work the inventory down from about 18 percent of sales to hopefully get it down to about 12 percent of sales.

So definitely by the December quarter we'll see those in line.

They should be fully integrated, if you will, and incorporated. It will take us a while to work them down to the lower levels. But the relationship to sales should make more sense to you.

Great. Thanks.

There are no further questions.

Okay. Well, again, thank you very much for tuning in. This has not been a fun year. As I said, I think we managed to incorporate the four worst quarters of this recession into our fiscal year. As I say, we tried to do all the right things, farm the farm and run the business for cash. Hopefully hold up the earnings. But most importantly run for cash and do the right things. And we are very proud of the record cash flow that we did achieve, and many other accomplishments we made through this period. We do think the company, therefore, through all these actions, is extremely well placed to do quite well when the turn comes. And we have no doubt that we will attain those levels that we were hitting before, and hopefully go beyond it. So we just need that, we need those orders to come, this recovery to continue. Aerospace we think will do a wonderful job working their way through this downturn. They have before. And we're very confident in their abilities as well. So thank you all for your time. I'll remind you again, you'll get information regarding a little follow on conference with Don [Washowitz] tomorrow morning. And look forward to talking to you at that time. Thank you.

Thank you for participating in today's conference. 01:36:25 You may now disconnect.