Steelcase Inc (SCS) 2003 Q4 法說會逐字稿

Good morning, everyone, and welcome to today's Steelcase fourth-quarter earnings conference call.

As a reminder, today's conference call is being recorded.

For opening remarks and introductions I would like to turn the conference call over to Terry Linhardt, Director of Investor Relations.

Please go ahead, sir.

Thank you, Jennifer.

Good morning, everyone.

Thank you for joining us.

I am pleased to join the recap of our fourth-quarter and fiscal year 2003 results.

Here with me today are Jim Hackett, our President and Chief Executive Officer, Mark Mosing Vice President and Corporate Controller and Jim Keane our Chief Financial Officer.

You should have received and hopefully have read our fourth-quarter earnings release dated Monday, March 31, 2003 which crossed the wires yesterday evening and this same release was posted to and is now accessible on our web site.

Any non GAAP financial measures have been reconciled to the most comparable GAAP measures in the release in accordance with regulation G. Reconciliation of any nonofficial GAAP measures discussed on this call will be posted to the webcast and presentations page of the investor relations section of our Steelcase web site along with the earnings release.

This conference call is being live webcast.

A replay will be available at our investor relations site at www.steelcase.com shortly after this event concludes.

In addition to our prepared remarks today, we will respond to questions from investors and analysts.

At this time, we are incorporating by reference into this conference call and any subsequent transcripts, the text of our Safe Harbor statement ...

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The conference call will begin momentarily.

Again, we thank you for your patience scanned you that you please continue to hold.

You may begin.

Thank you and I apologize about getting disconnected.

I am not sure where we got cut off so we will start the beginning formalities all over again.

I apologize.

I am pleased to join the recap of the fourth-quarter and fiscal year 2003 results.

And here with me today are Jim Hackett, our President and Chief Executive Officer, Mark Mosing, Vice President and Corporate Controller and Jim Keane, our Chief Financial Officer.

You should have received and hopefully have read our fourth-quarter earnings release March 31, 2003, Monday, which crossed the wires yesterday evening.

The same release was posted to and now accessible on our web site.

Any non GAAP financial measures in the earnings release have been reconciled to the most directly comparable GAAP measures within the release in accordance with regulation G. Any non GAAP measures in this call will be posted to the webcast and presentation page of the investor relation section of our web site.

This is being live webcast.

A replay at our Investor Relations web site at www.steelcase.com.

In addition to our prepared remarks today, we will respond to questions from investors and analysts.

At this time, we are incorporating by reference into this conference call and any subsequent transcripts the text of our Safe Harbor statement as incorporated in last night's release.

Certain statements made in the release and during this conference call constitute forward forward.

For more details on these risks, please refer to last night's release and form 10-K, the company's form 10-K for the year ended February 22, 2002, and our other filings at the Securities and Exchange Commission.

Finally, the webcast of this call a copyrighted production of Steelcase, Inc..

Any reproduction, publication or rebroadcast without the expressed written permission of Steelcase is prohibited, copyright 2002, Steelcase, Inc..

With those formalities out of the way I will turn the call over to our Chief Financial Officer, Jim Keane.

Jim.

Thank you, Terry.

Yesterday we a announced the quarterly profit of $3 million before nonrecurring items and that represents a $17 million improvement over the prior year quarter and compares favorably to the guidance we previously provided.

Revenue for our fourth quarter was $638 million.

Remember, that this was 14-week quarter, if you back out one week, revenue would have been about $595 million.

I am doing this so I can make some apples-to-apples comparisons with last year.

For this quarter we earned $3 million on adjusted revenues of about $595 million versus the same quarter of last year improved profitable $17 million, even though sales were $65 million less.

Said another way, we reduced our break-even point from about $700 million per quarter a year ago to about $590 million today.

In the past year, we estimate that we reduced our annualized fixed costs by more than $200 million.

We consistently updated you on our progress and reducing our break-even point and, of course, we have seen the economic impact each quarter.

But because industry demand continues to weaken during the year, we weren't profitable and that's not acceptable.

This quarter, we were profitable, and that means a lot to the people of Steelcase who have worked so hard over the past two years.

It's been a tough road.

Over the last nine quarters without considering acquisitions, we have reduced our global head count by nearly 10,000 positions, or 40% of the workforce.

We have consolidated plants, closed unprofitable businesses and re engineered our processes around a much smaller workforce.

We haven't just cut costs, we stayed focused on our strategies and made strong progress with lean manufacturing and have a new plant in California that is the model of our new manufacturing strategy.

We are completing implementation of SAP in our order detached cycle and we will start to see the benefits of that in the second half of this year.

We are launching new products that we anticipate will be more profitable than the products they replace.

So, we are quite pleased with these results, and we are proud of the people who have worked to make it happen.

We have exceeded our guidance because of higher-than-expected sales volume and faster realization of cost savings, particularly in the last few weeks of the quarter.

I'll talk about revenue first.

Last quarter we told you we were building our guidance using pretty conservative assumptions for sales volumes, and in fact through early February, we were on track with those assumptions.

During the last few weeks of February, our North American shipments outpaced our incoming orders and we finished the quarter with higher-than-expected revenue.

Our international segment also reported strong revenue because shipments increased and because the euro strengthened we saw a translation benefit in euro denominated shipments.

Overall increase in shipments has a significant positive impact on gross margins because of fixed overhead absorption, however, we have seen improvements in the variable costs of goods sold.

Specifically, we saw modest improvement in material costs, labor productivity and operating expense control.

Our net income as recorded was $18 million or 12 cents per share, that includes $15 million in nonrecurring after tax gains.

That converts to $24 million on a pretax basis and the only net effect on the total Steelcase income statement is on the nonoperating line.

I will explain those pretax nonrecurring items in some detail.

The $24 million is comprised of $39 million in gains offset by $15 million in charges.

There were three major nonrecurring gains.

The first was the $17 million nonoperating gain relating to the sale of our Tustin facility that closed in the fourth quarter, as we had expected.

We expected to sell the last portion of that property in Q1 for a small gain.

The second gain was $15 million and related to some changes we made to our North America retiree medical plan earlier this year.

When we made these changes, the actuarial calculation resulted in a $45 million deferred gain that was to be recognized over the remaining service life of the affected employees.

Because of the level of workforce reduction this year, we have experienced a curtailment of the plan, that means for accounting purposes, we recognize $15 million of the deferred gain in the current year.

We consider that to be nonrecurring, but remember, that the reversal of costs we charged against regular earnings in prior years.

The third gain was $6 million, and was realized from the sale of $110 million of Steelcase financial leases.

That gain was recorded as a nonoperating item.

I'll talk more about that gain in Steelcase Financial in a few minutes.

I mention we had incurred $15 million in pretax nonrecurring charges.

About $10 million were restructuring and impairment charges related to our international operations, as we continue to take steps to improve the long-term profitability of this segment.

The remaining $5 million was related to severance charges in North America and SDT.

I mentioned at the total Steelcase level, the net $24 million gain primarily shows up as nonoperating income.

The operating income effect was immaterial at the total Steelcase level; however, at the segment level, operating income is affected.

North America operating income was reported as $11 million higher because of net nonrecurring gains.

International was reported at $10 million lower because of net nonrecurring charges.

SDT was $1 million lower because of net nonrecurring charges.

More details can be found in charts we have posted on our web site.

We are pleased with the continued strengthening of our balance sheet.

At the end of the fourth quarter, total debt, net of cash, was $195 million, that is comprised of $324 million in debt and $129 million in cash.

This represents a $37 million reduction in debt and $77 million increase in cash versus the prior quarter.

We have reduced our debt by $270 million compared to last year, and it is now at its lowest year-end level since fiscal 1999.

We have no borrowings against the backdrop facility at the end of the year.

Our remaining debt is primarily the $250 million five-year term notes and other structured financing.

We plan to keep these instruments in place. $150 million of our debt relates to our financial services segment, which continues to operate with a debt-to-equity ratio of 6 to1.

We are continuing to sell leased receivables and use the proceeds for retired debt.

We are well in compliance with two of our debt covenance related to interest coverage and allowable debt.

Because of the change in FAS 142 charge which I will talk about in a few minutes, we are not in compliance with the net covenant.

Although the covenant relates to multiple credit facilities it only affects $94.1 million in actual obligations at year end.

When the covenant was established back in October of 2001, the covenant was written to exclude $150 million of charges related to FAS-142 because that was an early rough estimate.

The actual charge was $230 million, so the exclusion of FAS-142 was there in principle, but the exclusion amount was set too low.

We are now in the process of securing a waiver.

We have spoken with all the banks affected by this and they expressed confidence that the waiver would be approved.

The capital spending totaled just $13 million during the quarter, and we spent $77 million for the full year, compared to depreciation expense of $145 million.

We believe our capital expenditures will remain well below depreciation expense for fiscal year 2004.

For the quarter, we had proceeds of $117 million from the sale of leases and $28 million from the sale of our Tustin facility.

Now I will discuss the operating results for each of our segments.

North America revenue was $357 million in the 14-week quarter, a decrease of 4% from Q3 despite the extra week.

North America gross margins were 26.2% without nonrecurring items, which represents our best performance this year.

Margins were up 3.6 points from the prior quarter.

Most of this is because of favorable material costs and improved labor efficiency.

The prior quarter margin was negatively affected by 1%, reflecting a workers compensation catch-up adjustments as we discussed last quarter.

North American operating expenses continues to fall in absolute terms in Q4.

Operating expenses were 24.2% of sales, excluding nonrecurring items, about the same as in Q3.

North American operating income increased to 2% of sales without nonrecurring items.

This is the best quarterly performance of the year, a 1.5-point improvement over the prior year and 3.5-point improvement over Q3 despite a continued decline in revenues.

Next I'll talk about Steelcase Design Partnership.

SDP revenue was $68 million, a 14% decrease compared to the prior quarter, but a small increase over the prior-year quarter.

SDP gross margins were 35.8% and no nonrecurring items related to gross margins.

SDP booked $2 million of year-end inventory reserve charges in the quarter which we did not call out as nonrecurring.

Although margins are down from prior quarters, SDP has the highest gross margins of all of our business segments.

Operating expenses were higher in total because of the 14th week, and higher is a percent of sales because of lower volumes.

SDP incurred an operating loss before nonrecurring items of 1% of sales in the quarter, slightly favorable to the prior year.

The fourth quarter is typically the weakest of the year for SDP.

For the full year, SDP was profitable with an as reported operating income percentage of 5% of sales.

International revenue was $137 million, a 3% increase compared with the prior year and a 11% increase compared to the third quarter.

About half of the sequential quarter increase is due to the strengthening in the Euro and the other half relates to stronger local currency shipments.

Last quarter, we commented that international was nearly back to break-even performance.

And in fact international was profitable this quarter with an operating income of 2.9% before nonrecurring items.

International gross margins rose to 31.7% before nonrecurring items.

That's an increase of 1.7 points from last quarter and 4.5 points higher than last year's fourth quarter.

With higher volume, international operating expenses fell to 28.8% of sales, the lowest level in more than two years.

Next I will talk about financial services.

Steelcase Financial reporting a slight operating loss in quarterly revenue of about $9 million.

We accrued $2 million in lease credit reserves in the quarter.

We now have total reserves of $12 million against the lease portfolio, and we continue to monitor changes in credit quality.

We sold about $110 million of lease receivables during the quarter and recorded a gain on sale of $6 million.

For the total year, we sold leases with a book value of $289 million for proceeds of $302 million.

After settling hedges and transactions costs, we recorded a net gain in the year of about $1 million.

We have an opportunity to earn additional gains on the residuals of leases sold, but we do not retain any downside risk on these sales.

The leases that remain in our portfolio fall into a few different categories.

There are some leases that we may sell in the coming year.

Some leases are less marketable because they are structured to include service contracts.

Those balances will fall as the leases continue through their term.

There are some leases whose credit qualities have fallen since they were first originated and we do not believe we can sell these leases economically.

These lease customers are current on payments, and we expect to work these balances down over time.

Finally, some leases are not current because these customers are experiencing financial difficulty.

We continue to monitor all of these situations, and we believe our reserves are adequate.

As we implement our strategies, we expect Steelcase Financial to be profitable and expect to grow our leasing business but because of our new strategy we also expect Steelcase Financial to be a smaller part of our balance sheet.

I am not going to cover our annual results for fiscal 2003 because it is a summary of all our other quarters.

However, I do want to explain the correction of the first-quarter noncash charge relating to the adoption of FAS-142.

You will recall along with many other companies, Steelcase adopted this new standard relating to accounting for good will and intangibles at the beginning of the fiscal year.

The original noncash charge was $178 million related to good will impairment in our international recording unit and the corrected amount is $230 million.

Since this was the first time we were required to do this calculation, we hired an independent valuation consultant.

The valuation consultants ran their impairment model based on data we provided.

In the FAS-142 calculation, you first establish a market value for the recording unit and compare that value to the book value to determine if an impairment had occurred.

The calculation of market value for the international recording unit was based on average of two methods.

The first used discounted future cash flow, and second was based on comparable public companies multiples, there is no change in that part of the calculation.

The market value is then adjusted for any difference between actual working capital of the unit and an estimate of the amount of working capital required to run the business.

The original calculation used in estimates for acquired working capital that was too low because of an error in the underlying data.

We reviewed the calculation, and so did our auditors at the end of the first quarter, but neither we nor the auditors identified the error at that time.

Under FAS 142, you have to repeat this calculation at the end of each year.

Our auditors were reviewing the end-of-year calculation and raised the question about the amount of required working capital.

Together with our valuation consultants, we went back to the original calculations, identified the problem and corrected the original error.

Our auditors have concurred with this adjustment.

This change has no affect on revenue, operating income, or cash flow, and it does not affect the net income in any other quarter.

We will reflect the corrected charge in our form 10-K we will be filing in May.

I mentioned that FAS-142 requires that the calculation be repeated each year to determine if further impairment has occurred.

We have no additional charge related to the end-of-the-year calculation.

In fact, at the end of the year, the calculation yields a cushion, meaning the estimate of market value is higher than book value, however, FAS-142 does not advise for a reversal of charges taken.

That's it for fiscal 2003.

Next I will talk about our outlook for 2004.

Back in December, we mentioned that we were seeing North American order rates softening more than normal seasonality would explain.

In fact, that trend continued well into January.

Order rates and bid activity gradually strengthened to a new plateau in recent weeks.

Today, orders are tracking at about December order rates with a stable-to-slightly positive outlook.

We have yet to see any specific negative affect of the conflict in Iraq on customer order patterns but we recognize there is a lot of uncertainty right now.

So, the recent increase in order rates is good news, but since January orders were soft and February shipments outpaced orders, our North America backlog was down as we entered the first quarter.

We were already running a reduced workweek in many plants and we believe we lose efficiency when we do that.

Rather than just continue cutting hours, we decided to take a week out of our schedule by idling our North America plants for one week in April.

We believe this will help rebuild the backlog and keep our plants running efficiently.

Since we are forecasting first-quarter sales to be lower than break-even, we decided to take two other steps.

We extended the one-week event to include virtually all salaried and hourly functions in North America not working directly on winning orders.

Since this week is without pay, we expect to save a minimum of $5 million pretax.

We also implemented an additional reduction of 250 salaried workers during the first quarter.

Together, these steps will help us temporarily reduce costs while we rebuild our backlog and more permanently reduce our break-even point.

We won't see the full effect of the workforce reductions in the first quarter, but on a run rate basis, we believe that these reductions will be sufficient to get us back to about break even.

Our SDP businesses are seeing similar order trends, and we are taking steps at each company specific to its own situation.

Our international business did not experience the same softening in January orders and we expect to continue to see profitable growth from that segment.

Okay.

So here is the summary.

We expect first-quarter orders will be at or above the level of fourth-quarter orders.

However, for the reasons I have discussed, we expect first-quarter shipments will be between 570 and 590 million dollars.

We expect net income before nonrecurring charges in the range of negative 5 cents to break even.

We expect net nonrecurring charges in the range of 7 to 10 million dollars after tax, related to severance and restructuring charges.

We are not providing specific sales or EPS guidance for the full year at this time because so much depends on volume.

We are assuming a modest volume increase in the latest quarters versus Q1.

Based on that assumption, as we have said last time, we do expect to be profitable before nonrecurring items in the following quarters and for the full year.

If volume doesn't improve or at least we will be at break even with the actions we have taken.

To help you with your own projections, we expect our break even will be approaching $580 million later in the year.

We expect our contribution margin will remain around 50% on a pretax basis without bonus expense.

Finally, we will have nonrecurring charges next year associated with the work we know is ahead of us to further rationalize our operations in North America and international to implement liens and improve our supply change.

Less related to head count reduction and more related to the cost of reconfiguring our industrial model to best serve us in the future.

We believe that our fourth-quarter profit is a sign we are turning the corner, not because of volume, but because of our own efforts to reduce our break-even point.

Although we may have a small loss in the first quarter, we are on track to be profitable in the following quarters, our balance sheet is very strong as we enter this next year.

We want to thank all the investors and employees who have stayed loyal to Steelcase during one of the most difficult periods the furniture industry has experienced.

Now I would like to ask Jim Hackett to add some comments on the overall business and our progress toward implementing our strategy.

Jim?

Thank you, Jim Keane.

Today's headline is that we have returned the enterprise to profitability.

This is important as it validates that the actions we have taken have had an important and positive impact on the economics of the company.

Had we not taken these actions, we would be reporting much different results.

I continue to reinforce on these calls that an industry decline of the magnitude we have experienced is unlike any activity in business today.

The cumulative effect on quarter-on-quarter decline on capital spending by corporations hit its low watermark last quarter, the lowest in 50 years since World War II.

My generation of leadership has not faced such an event.

Likely, there was some question of what it would do to me, the other leaders, and our company.

Well, today I can report to you the following: First, the company continues to improve its fitness, changes to our employment levels in March further lower our break even.

We firmly believe that the company,albeit much smaller than it was two years ago is much healthier.

Second, the notions that Steelcase has advanced regarding its insights into making workplaces more effective continues to gain acceptance.

For example, our leadership in how teams are becoming a more common application in the office what I often refer to as "we spaces" instead of "I spaces."

This insight ironically has been highly transferable to other segments that are growing right now like education.

We just completed the installation for the classroom of future in one of the world's most preeminent Universities located in Northern California.

I think what made me the most proud was to see how the concepts devised in the corporate settings for teams and using PolyVision products, along with Vecta E-tables and Metro Bics products applied in this classroom created a much better environment.

We found that the students actually use the products much in the way that corporate employees did.

This reinforces a notion that I have that a strategy, improving its worth, comes under even harsher judgment in a recession.

And today, the judgment has to be that the Steelcase brand in its strategy in large multinational accounts carries a tremendous amount of equity and acceptance.

Right now, we estimate that 10% of our sales in North America come from new customers and, yes, you can make the assumption that some of these sales represent the customers adopting these strategies.

The third point I would like to make about this time is that the management team in place, frankly, has demonstrated a capability to lead in a historical depression.

And the good news in this is that the lessons learn ready always cumulative, which means as the economy returns, we expect to leverage our insights into being leaner, more resolute to move quickly, and to have confidence in our ideas.

And finally, I want to thank our employees.

As you know many of the things we have have had to manage through put tremendous stress on the network.

These networks of employees have to be rewired just like a physical network does in its reconstruction.

I can report to you today, that this is in good shape.

And now let us turn our attention to questions, Terry?

Jennifer, we would like to take questions at this time.

Thank you, ladies and gentlemen.

The the floor is now open for questions.

If you have any questions or comments, please press the numbers 1 followed by 4 on your touch-tone phone at this time.

Pressing 1-4 a second time will remove you from the queue should your question be answered.

Lastly, we do ask while posing your question, please pick up your handset if listening on speaker phone for optimum sound quality.

Please hold while we poll for questions.

Our first question is coming from Bud Bugatch.

Please state your affiliation and then state your question.

I am with Raymond James.

Good morning, Jim and Jim.

Good morning, Bud.

A pretty simple explanation, Jim, that you had to go over.

By the way, I tried to get through on the web site to the charts, and I could not get them to come up for whatever reason.

So, maybe if you would check them.

Okay.

But my question -- let's just first go to receivables and the lease receivables.

Jim you are said there are no tails on that in terms of potential downside, is that right?

Yeah, there is no credit risk exposure and we don't have any liability relating to the amount of the residual value in those sales.

On the ones you have sold in?

On the ones we have sold, right.

But you have, like, 130-some million or $140 million of leases on the book, I think?

Yeah, Bud, 152 and reserves against that at 12 at the end of the year.

And you said that some of those are not current.

Can you kind of quantify for us what that is?

I am probably not going to quantify it.

The amount that is not current -- there's relatively few that are not current.

There are -- but the amount has increased slightly over the last couple of years, really resulting from a couple that we have talked about before.

We had a couple of customers who were in financial difficulty, one of which declared bankruptcy and we have taken appropriate reserves against those.

Okay.

So what is your estimate of what -- what the -- you have got $12 million reserve.

Do you think that's an adequate reserve?

Obviously you do, but I am trying to figure out what the potential hit might be.

We think that 12 is adequate.

We have increased the 12 from 7 million year ago so you can get a sense of what we saw in terms of the changes in that credit quality.

Okay.

When you look at the people, can you tell us -- you have taken out 10,000 positions, full-time positions.

I know how painful that's been.

Can you kind of give us a feel of that U.S. versus international?

Oh, okay.

We are going to look that number up and we will give it to new a minute here.

Okay, and can you -- and the break-even of $580 million, can you kind of quantify that U.S. versus -- domestic versus international.

I am not going to try quantify that, but you can get a sense of it by looking at the operating income for the segments.

All right, I will let some other people ask some questions.

I have a whole bunch more but --.

We have the head count, Bud.

In terms of head counted, North America is down a little over 7,000, about 7,300.

International is down about 1,500 and the balance would be in SDP and in our other businesses.

Okay.

Thank you.

Thank you.

Our next question is coming from Chris Hussey from Goldman Sachs.

Please state your question.

Good morning, gentlemen.

Good morning.

You know, it looks like you guys took some market share in this quarter.

Can you discuss that, especially coming off of last quarter where you guys sort of publicly came out and said you lost some market share and maybe comment a little bit, Jim, on what you guys are seeing in the pricing environment.

Are you having to lower prices to get that market share, are you finding any particular customer segments doing better than others, maybe give us a little round-up on how you guys see the market operating?

You bet, Chris.

Last conference call, I touched on this market share thing because the -- my concern was that nature of the reporting in this recession is that it seems like BITMA seems to lag results in a way when market share calculations as they are being made and I hedged a little bit and said maybe we are losing market share.

It is not clear to me in the data that is happening, but I suspected what was happening that our dealers had substituted what I would call much lower cost products in some settings, and maybe we had lost some of that.

I can confirm to you today that we believe we have gained share.

And the reason this yo-yoing goes on is I believe this industry takes a little more time for this to even out because the nature of products, the nature of large account buying that kind of swings in odd ways.

I want to have the affirmative today because it looks to us like it does to you, but I suspect that a lot of this is still yet to shake out.

I have confidence, though, that as large companies can begin to buy, you will actually see a share of Steelcase -- Steelcase's share, excuse me, of the market increase.

That has been our sweet spot, and historically, when there were recessions, some of the lower -- what I call "lower margin -- excuse me lower cost, lower value suppliers tended to increase share.

Regarding the segments, we continue to see growth in and spending in health care and education markets.

The government is still strong and pricing is a difficult topic.

I would say to you that we aren't in a position to discuss specifics around pricing but we can suggest to you that the problem in the business haven't been pricing related.

It is competitive, it is aggressive.

It is pure demand centric, companies not spending the money.

When you think about some of your newer products and so forth, are you getting any particular traction off of any one product that might be helping you to attract more customers or anything like that?

Yeah, I think that is part of what I wanted to imply in the note, in my comments, that we see new customers coming to Steelcase, and we think these notions, these ideas we have about insight into work are pulling them.

We think our seating business is in great shape with LEAP and there are new products being introduced this Spring, they have started shipping which is too premature to report to you but to build a little drama around it, we have been travel around to clients pre-selling it and I have been to dealer training sessions and I am getting anecdotal comments that the new Pathway tech wall is one of the best products they have seen from the company, so I am very excited about that.

Let me shift gears quickly.

You made the decision to close the plant versus -- well, you also made the decision to cut people but could you have cut more people, I suppose.

What goes into that decision to not try to get to a lower break-even, even.

Let me talk to you on a EQ basis about it, kind of the emotional side.

I will let Jim give you more of the science in the study.

You know, this recession is -- is new territory.

I mean, again, I -- I talk about this cumulative capital spending number -- by the way that's the rates of decline, and we saw in this most recent quarter to start to improve, but there was a back-to-back period where cumulatively it had been lower than it had been since World War II.

So the notions we face as a business have are new.

And we tried a number of different approaches to balance the factory loads.

That's where we have learned that our hours per unit actually improve when we can give much balanced -- more balanced loads in our factories.

So this volatility and demand can -- can wreak havoc if it is not managed properly.

The seasonality, which we are reporting in January, as others have reported, was harsh, and as an aid into backlog, we said this was a way in a quick sense to balance these loads.

Culturally, and this is the EQ part, the company is comprised of one kind of workforce, and these are hourly and salaried people and we felt that the hourly people should not take more of the extent of this shutdown than the salaried, so we decided to do it together and configured the week shutdown such that the sales force is still active.

They are out calling on customers and the hourly people see us kind of as one group now managing through this, and I have got to tell you the comments I have gotten from inside the company about it have been extraordinarily reward being how we are sticking together through this tough time.

Jim, you might want to comment on the economics side of what we calculated here.

I think you did a good job.

As Jim said, the economics of the plan.

One of the issues we wanted to address was getting the backlog back up.

If you cut more salaried workers that doesn't solve that problem.

So, we really wanted to take a step to directly impacted the issue we were facing, which is we needed to increase our backlog.

That increase in backlog helps us in many ways to improve our efficiency because we can move jobs around that are in the queue and as the backlog falls you are don't have that much ability to do that.

Frankly, we are in a period where the first quarter are and fourth quarter are seasonally lower than the second and third quarter and we wanted to do something that would address what we saw as a temporary situation.

And we wanted to make sure we are completely ready as volume comes back, when volume comes back, to respond to our customers' needs.

This is a way of making sure that we still have this capacity when we need it, and as Jim said it is frankly the fairest thing to do in terms of our employees.

That's terrific, guys, thanks very much.

Thank you.

Thank you.

Our next question is coming from Margaret Whelan from UBS Warburg.

Please state your question.

Good morning, actually it is Susan McCleary in for Margaret.

Can you talk a little bit about whether you implemented any additional controls to avoid issues that you had with the FAS charge earlier in the year?

No.

We are continuing to review that to make sure we learned from whatever mistakes we made, but we don't believe there are any systemic issues within our accounting or reporting processes.

In fact, it is my opinion that the process actually found it the way it was supposed to.

In the audit for year-end, the issue was found and discussed and handled properly, and -- I've got to suggest it speaks very highly of the integrity inside the company of how it holds its financial reporting, because the people working on this were -- felt quite comfortable in bringing it forth.

We involved our audit committee, and I think we have got a fair resolution of the error.

Okay.

And then just shifting a little bit.

Can you go through the other line of your P&L and how should we be modeling that going forward?

You are talking about nonoperating, Susan?

Yeah.

Typically, there is just -- it is primarily interest expense, and when you strip out most of the charges that have run through this period and others, we typically see a number in the $6 million to $7 million range net.

It varies because there are some smaller items that runs through there but that's typically what we have seen after you strip things out going backwards.

Okay.

Thank you.

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Thank you, Jennifer.

We would like thank everyone for listening in today and look forward to working with you in the future.

Good afternoon.

Thank you, ladies and gentlemen.

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