泰利福醫療 (TFX) 2003 Q1 法說會逐字稿

Welcome to the Teleflex First Quarter earnings call. During this conference, your lines will be on listen only. If you require assistance of an operator at any time, please key Star-Zero on your touchtone phone, and we'll be happy to help you. At this time, I'd like to turn the call over to Julie McDowell, Vice President of Corporate Communications. Ms. McDowell, please go ahead.

Thank you, Rob, and good morning, everybody. This is Julie McDowell, Vice President of Corporate Communications for Teleflex. We released our first quarter results yesterday after the close. The news release is available on the Investor Relations page of our corporate website. Today's call is being webcast in a listen-only mode, and in addition, a replay webcast will be archived and available this afternoon on our website, or by dialing the following phone number: 1-888-286-8010, or for international calls, 617-801-6888. The passcode number is 56918225.

This morning, Harold Zuber, our Chief Financial Officer, will start off with a review of the first quarter operating and financial results. Then Jeff Black, President and Chief Executive Officer of Teleflex, will share his comments on corporate initiatives. After their formal comments, as usual, we will take your questions.

Before we begin, I want to remind you that our comments today may contain some forward-looking statements concerning earnings, conditions in the markets that we serve, economic assumptions, expected volumes and the like. Please remember, these statements reflect current conditions and are subject to various factors that could cause actual future results to differ materially from those that may be contemplated in today's statement.

And with that, I will now turn it over to Harold Zuber.

Thanks, Julie. Good morning, and thanks for joining us. In a seemingly out-of-body experience, my perennially losing, now revamped fillies (phonetic), are temporarily reporting -- or performing better than Teleflex, and let me stress "temporarily."

Sales increased in the quarter to 546 million, up a respectable 7 percent. Net income was 29.2 million and earnings per share was 74 cents compared to 77 cents the prior year. Included in the 74 cents was a 5-cent gain from the sale of a non-core equity investment.

The quarter was typically Teleflex, two segments up, medical and commercial, while aerospace was down. However, it was not typical of Teleflex in that it was a down quarter, 4 percent on the EPS line to be exact, as the aerospace decline outpaced the positive performances in the other segments.

Before we go onto operations, let me touch on a couple of the top side issues generally on people's minds. The revenue growth of 7 percent was comprised of 4 percent from acquisitions, a healthy 5 percent from currency translation, and a decline in the core business of 2 percent. The core decline was driven by the industrial gas turbine product line in the aerospace segment, and I'll probably say that again before the call's over.

International operations accounted for 46 percent of sales in the quarter and 48 percent of operating profit. Stronger local currencies, primarily the euro, added 5 percent to our top line and 3 percent to the operating profit, making translation slightly dilutive to operating margins. The exactitude of this number and where is spread across 26 countries, so it's a little difficult, but that's the way the math works out.

But (inaudible) computer models, gross profit as a percent of sales was 26 percent, and SG&A as a percent of sales was 16.9 percent. Our financial position remains strong, with debt to total capital of 32 percent. Cash flow from operations of 27 million was relatively flat with last year's first quarter.

While not exceptionally robust, the first quarter has historically suffered as a result of the seasonal nature in several of our businesses. This year, the buildup in inventory was accented with the plants closed and to be closed, and the product lines to be moved.

Receivables are a little slower because of the increased European mix, particularly in medical. These sales are generally to quasi-governmental agencies and are really beyond slow, but fully collectible, and of course, we've dealt with this over the history of our European medical business.

While we're on receivables, let me touch on the current state of collections in the airline industry. By way of background, we do about 30 to 35 million directly with airlines around the world. Through this recent spate of bankruptcies, we have suffered approximately $250,000 in losses, and for instance, in terms of size, have about $75,000 outstanding with AMR currently. We'll continue to limit our exposure, but also supply our customer the necessary product to keep their planes flying.

Now onto the segments. In aerospace, the 5 percent decline in sales is attributable ironically not to our aerospace lines, but to the industrial gas turbine business. Despite difficult conditions in aerospace, Tel-Air (sp) with a deliver of three main deck systems, and repairs with the addition of new services, experienced gains in the quarter.

The manufacturing group was flat. Given the severity of the market declines in aerospace, roughly 15 to 20 percent and power gen over 60 percent, the relatively better performance was encouraging for the next upturn. Backlog remained at about 250 million constant with year end.

Operating profit in aerospace was primarily impacted by the steep volume decline in IGT, and to a lesser extent, to a squeeze of currency on Tel-Air and the closure of three plants in the segment: a Tel-Air container facility and two IGT service facilities were closed in the quarter. The cost associated with the wind-down, and the cost to close the plants, approximated $3 million.

Within aerospace, this brings to six the facilities closed over the last year, and we are planning one more in the second quarter. As indicated on a number of occasions, these closings are complicated by the regional and customer-centric nature of the facilities, the customer approval process and the diverse technologies. Operating profit in repairs and manufacturing were relatively flat with a year ago, much to operating management's credit.

The medical segment had a good performance and reached double-digit increases in sales and operating profit. Sales increased in healthcare supply and surgical devices, although growth in healthcare supply far outpaced its counterpart. In healthcare supply, the stronger euro made a significant contribution, but new products, such as the Parker (sp) Twist and the temperature catheter added to the increase.

Sales in surgical devices were up as a result of the spinal instruments acquisition in the third quarter of '02. Operating profit and margins improved in healthcare supply, primarily as a result of the continuing shift of production to lower cost countries. This effect was enhanced by the stronger euro.

Operating profit in surgical devices was relatively flat, and margins slightly lower, generally as a result of product mix, and this has been continuing. On the plus side, the Hem-o-lock clip continued to pick up momentum. On-site services grew double-digit and the closure in Q4 of an offsite services facility contributed to profitability.

And last, but certainly not least, we come to the commercial segment, where sales increased 13 percent by a combination of acquisitions, translation and core growth. All three product lines, automotive, marine and industrial, experienced growth in sales and operating profits. Within automotive, continued success in the adjustable power (phonetic) line, now embedded with the electronic draw control, and new control sales in Europe, added to the increase. Additionally, automotive operating profit and margin increased, not only as a result of the volume, but also from the three plant closings in '02.

In marine, sales were up slightly, driven by non-marine products such as the military burner and the adjustable pedal for truck and bus markets. The marine OEM products continue to experience strength, but the late spring, caused by the miserable weather, affected volume in our most profitable after-market business.

In summary, the core laid the foundation for improved performance over the remainder of the year, and actually, we got off to a better start than anticipated. The second quarter looks flattish, and therefore, I will continue to offer guidance of a single-digit increase for the full year. That will occur, along with continued right-sizing, and an increase in volume. And Jeff's going to help fill in the volume size equations. Jeff?

Thanks, Hal, and good morning. Hal provided you with details on results in operations in the quarter. I really want to spend some time and share with you my perspective, and give you an update on some of our new programs and products going forward.

We all knew the first quarter would be impacted by the actions that we had to take in aerospace, but we were looking for a strong performance in our other markets to help offset. Our commercial and medical businesses both performed very well, with solid increases in revenues and profits.

The aerospace team continued to manage to the downturn, executing their plans for plants closings, and cost reductions, and trying to position the business for future opportunities. On the whole, our business as executed on operating plans, continue to invest in new products and positioned us for the future.

There's no question it's a tough economy out there for the industrial companies right now. I recently spoke at an industrial conference and listened to presenters from other companies discuss their initiatives. Most of the presentations focused on cost-cutting, moves to low-cost manufacturing, and adjusting to market conditions, all themes we at Teleflex know well and practice every day.

At the conference, we talked about new products, migrating from components to subsystems, and expanding our global customer base and operations. Again, our model has been consistent to invest for the long term through down cycles and tough markets, much like what we're seeing in aerospace today.

Core growth in the quarter was down 2 percent, very unusual for us, and the result of the dramatic swing in the industrial gas turbine market, which Hal already discussed. But as the year progresses we expect to see improved performance on capitalizing by the investments we've made in new products and other growth opportunities over the last several months.

Let me just talk about a few of the growth initiatives and some of the programs. No doubt we always depend on new products to play an important role in our financial performance. We're looking for broad-based new products sales growth across our businesses this year. We've talked about electronic throttle controls and adjustable pedals in automotive, and fairly consistently on these calls. I'd like to focus on some of our other market opportunities.

In the marine business, we've recently launched a product called Smart Cast, our fish finder for anglers who fish from shore, dock or canoe. Smart Cast uses a remote sensor attached to a fishing line. For all those of you who do not fish out there, we have taken sonar technology, and implanted it into a bobber or a float -- I'm using technical terms now -- to give anglers a view of fish underneath their line, or in the underwater structures.

We have a wristwatch version launching in Q2, just in time for Father's Day, so get out and buy today. This greatly expands our fish-finder market. Until Smart Cast, our market was the fishermen who have boats. With Smart Cast, we've now expanded the market by ten times to all those people who fish from shore as well. This product is innovative, patented and also, getting lots of media attention. Our marine business is known for boat steering, instrumentation and controls. After market products like Smart Cast, it can only add new customers and new market niches for us to expand into.

In medical, we offer thousands of products, and every year, we refine modes and introduce new technologies. Let me just give you a few examples of product innovation in surgical devices that are launching this year. One of these products is called Surgi-Clear. It's a handheld device with suction and irrigation controls that improves the visual field of surgeons performing sinus surgery and other procedures. Weck Closure System, our new Hem-o-lock automatic applier, used for ligation and open surgical procedures, launched at the end of March.

And we're expanding our distribution of our spinal surgery instruments, which we acquired last year. Our surgical instrument kit and patented grip is designed to provide greater comfort and efficiency for surgeons performing long and often complex procedures. Again, no single product with a big financial impact, but collectively, these should help us through the remainder of the year.

Secondly, we're working to capitalize on our investments in new markets. Again, going back to the Morris acquisitions, we have penetrated many new markets, the RVs, the bus, the industrial vehicles, and now we started to put some of the other Teleflex products into these markets. These products would include alternative fuel systems, fluid handling, and obviously, pedals. Our acquisition (inaudible) also opened markets for other Teleflex products, again expanding some of our markets.

We now have heavy-duty cables sold to utilities, telecommunications, oil drilling and construction companies. Again, heavy truck and bus markets have been sluggish overall, and we're not seeing much growth there, but yet our sales and our new products going into these markets do represent growth for the future for Teleflex.

Third, we're continuing to expand globally, expanding our market presence, and our operational effectivity, by taking Teleflex products around the world. Last quarter, sales from products generated outside of the U.S. rose to a high of 46 percent.

This quarter we continue to grow our market share for products in Europe and Asia, with increased volume in both automotive and medical. We're still just getting started in Asia, and we see a potential here for a number of product lines in the future. As always, acquisitions have been and will be an important part of our growth strategy for the remainder of the year and going forward.

At the industrial conference I mentioned earlier, several of the investment bankers I spoke to mentioned the lack of deal flow. They're probably always looking at much larger deals, more than 100 million. So they're typically not in our neighborhood; yet most of our acquisitions tend to be in the 75 million range and under. But I'd be very surprised that there's a lack of deal flow, obviously, at the big size, where we're seeing a huge amount of acquisition opportunities in the last few months. We continue to look for the right product fit, culture fit and market potential, but our research is paying off and again, patience is key in this marketplace.

So I'm quite confident that we will conclude three acquisitions within the second quarter, which will enhance the top and bottom line throughout the remainder of the year.

Looking ahead. I've discussed on our year-end call that we've created a realistic operating plan for '03. We've already discussed the challenges in aerospace. There's been very little good news in these markets, commercial airlines struggling, demand for power decreased, and now, SARS. And to be honest, we are not noted economists, so I'm not going to try to predict what the economy does when it comes out of its current slump, or when the war ends. Our plan does not assume any acquisitions, nor a pick up in the U.S. economy until the third and fourth quarters.

That said, again I'll concur with Hal that we continue to expect our revenues and earnings in '03 to increase in the single-digit percentages over 2002. Today we're focused on continuing to strengthen our businesses, invest in new products, deliver value for our customers, and no doubt about it, let's close some of these acquisitions. Julie?

Operator, we're ready for questions now.

Okay. Thank you, Ma'am. Ladies and gentlemen, the Q and A session will now begin. (CALL INSTRUCTIONS). Our first question is from Mr. Jim Lucas.

Jeff, big picture question here. The last few quarters we've had -- pardon the analogy here, but some rabbit in the hat was a one-time gain, and in fairness, that is used to offset some of the restructuring cost savings activity that you have going on. And (inaudible) spirit of both disclosure to break out when those gains occur, but when we've looked back over the last several years, you know, the top line has never really been the issue with Teleflex, but looking at operating margins, more importantly, net margins and what's coming down to the bottom line, that number's been relatively stagnant. Now, we're getting three plant closures here and another three there, but can you kind of talk about the bigger picture; what Teleflex can do in the face of the ongoing softness that's out there, that (inaudible) allow the company to grow the margins?

Well, Jim, the rabbit in the hat, I'll take issue with. I think again, we have a portfolio, a diversified portfolio, of both products and investments much like many of you do. I think it's really to our credit that we managed through this portfolio in difficult times, and when we find an opportunity either to divest and get a gain, obviously, we're going to do that.

So I think -- you know, Teleflex, we have had a lot of investments in the past, and we'll continue to invest in some of these going forward, but I think the reality is, that's our portfolio management. And I think we probably don't receive the credit because we get -- the one-timers are always identified as gains, and yet, some of our losses are not truly -- we take them as we go, as opposed to isolating them out.

In regard to your -- probably your bigger question is, where do we go, and how do we improve the bottom line going forward? Well, I think we're doing a lot of that now with the plant closures. You know, we've been doing a lot of acquisitions for the last -- probably five to six years, we've been more acquisitive than in the past, and I think we've now gotten to a point where capacity has been reduced, and we're having to deal with that.

We're also known for being value buyers, and that means that you have to be an investor for the long term. I think many of the deals that we've done in the last few years that I've been involved in, have been value deals that again, are not necessarily a quick turnaround, but do help us strategically, and typically bring us either product or access to regions. So I'm fairly confident that a lot of the deals that have been done, along with some of the closings, will get us to an improvement, or at least stop the slide in terms of the margin that I think you're trying to identify. Hal?

Yes. Thanks, Jim. Jim, if I just look at margins over the last five years, they have diminished. I think part of it is it's a tougher OEM environment, both in aerospace and automotive, and particularly now in aerospace. So I think that that is part of kind of an overall, but I also want to say that Teleflex has never really built its track record on dramatically improving margins, and in fact, has more or less over a decade, has kept margins reasonably constant. So I think that we've slowed a little this quarter versus history. I think some of that is specials, and I can see that we're going to start to move that forward, because we are at the very depths of an aerospace downturn. So I lay those out as kind of issues, but it's never been our hallmark to improve the margins, but to improve the profit and the earnings per shares, I think more -- we are more driven.

Your next question is from Mr. Lucas Price.

Regarding the aerospace business and the year-over-year decremental hit that you took, it was a 5 percent decline in revenues. And so clearly, not all of that 83 percent decline in operating profit is actually operating. You said that there were three plant closures, and you said that was 3 million. So is the balance of that -- so it's 9.5 million on the operating profit side decline; 3 million (inaudible) is from plant closures. Is the balance of that all from IGT, or is there a pricing issue? Is there a market share? Is there volume? Can you calibrate that with any more precision for us?

Sure. Let me take shot at that one, Jeff. It is primarily in IGT. Repairs, manufacturing, they're reasonably flat, as I said, so that's not the issue. In Tel-Air, we did have a slight decrement because of currency. Although we hedged, we were hedged at 90 last year, and about $1 this year. So the margins split a little there with the strength of the euro, our costs versus U.S. dollars, which accounts for a little more than half of the sales.

I think consecutively, though, adding back the plant closing, it improved at least slightly over the fourth quarter (inaudible). Hopefully, we've reached the bottom, and it will firm up and improve from here.

Are there more restructurings in that segment?

Yes. There's one more plant, but I'm not ready to quantify it at this point in time, and I don't' think it would be significant to the overall segment or the company, unless it's not executed in an efficient fashion. I mean, it'll be there, but I guess more or less, in the half a million dollar range at this point in time.

Okay. And what should we be using, or what are you using, in your assumptions for the second quarter, and maybe for the back end of the year, in terms of your after-market aerospace business? And then the same kind of question: what are you looking at for auto builds for the balance of the year?

I believe - let me take the auto first. We started out, if we just talk about the year, if we started out, we said we were assuming roughly a 5 percent decline in the automotive market. And I think production was virtually flat, both here and in Europe in the first quarter. And of course, in the second quarter, we're seeing some softness here, maybe in the 8-11 range, depending on what you read where, overall. So, I think those are now cranked into our assumptions, but we were a little ahead in the first quarter. We might fall a little behind in the second quarter. After that, it becomes kind of a tug of war between inventories and incentives, and you know, the mind of the consumer. So, I don't know that anybody's really said we're going to be any more catastrophic than 5 percent down. You can kind of look at it, week-by-week. So, we are, at this point, kind of on our annual forecast, if we say that the second quarter is going to be down. That's automotive.

In aerospace, we're looking at a decline in the services side, that that serves the airlines, over the rest of the year. So, even though they were up slightly, we believe we'll see declines, really, as the strongest market now in Asia starts to weaken with some of the SARS issues, you can see their flights being curtailed, as we speak. But, we're still comfortable with the guidance given 60 days ago or so, and given today.

Okay, and then just - last question here before I get back in line. It's just to come back to the asset sales question. And I think I asked this last quarter, Jeff. Is to help us understand how we should be thinking about and modeling for expected asset sales. And when we asked the question last quarter, were you contemplating any - for the first quarter, the answer was no. And then we see that there were gains taken. So, what is the outlook over the next couple of quarters? Is this opportunistic? And how might that change?

I don't think we have any planned, one-time gains. And so, I guess, again, if it's an opportunistic gain for us, I think we'll take it. But I think at this point, we don't see any gain, so that should help you with your modeling going forward.

Okay, I'll get back in line. Thank you.

Okay, thank you, sir. Your next question is from David [Gerwitz] [ph].

Hi, guys. Just a couple of quick questions. First, could you give us the organic growth by segment, pre-[FX] [ph]?

Surely. Aerospace was negative 7 and then we experienced 1 percent core growth in medical and commercial. So, we'd kind of like to jettison aerospace for this quarter, but I guess that's really not possible, because they've carried certain quarters in certain years in the past.

Okay. Jeff, could you talk a little bit - I mean, you sounded pretty confident about the three acquisitions that are going to close in Q2. Since you know it's three, you probably - can you give us a little sense of the size of these acquisitions, if they're in one segment or the other, just sort of ballpark it?

I think David, these are typical Teleflex acquisitions. I would say that they're not huge in magnitude, but again, while I think they're value buys, as I said, I think they're going to be accretive both on the top and the bottom line. And they are across the whole range. So, you know again, for us, this is still a good time for us to go out and look at aerospace properties and others. So, it's really across the whole board. But, I do have confidence only because we've been working at this for some time, that I know our acquisition guys listen quite closely to this call, so I'm sure they'll get the message.

Okay. Just another housekeeping item. The tax rate, Harold, is that the rate in Q1, that should probably be the rate going forward?

Yes. I believe it's pretty much on par with last year's rate, David, which is kind of how we come out of the box. And it might have been just slightly better, because of the foreign mix, where we have holidays and in many instances, lower tax rates than the USA. But, I think for planning purposes, somewhere between - and this is really splitting hairs. How about if we say just somewhere just shy of 30 percent is as good as it gets from me, at this point in time.

Okay. And just one other question. The $3 million are sort of cost of resourcing activities within the ITT business in the quarter. Is that a lot of people ticking out or is that just sort of lease payments or prepayments? I mean, what is the sort of annualized cost savings that you would hope to achieve [inaudible].

Well, it's all of the above, you know, asset reductions, lease payments, severance. We have, of those, I'd say there's about 70-80 and some of these plants were slowed down before - 70-80 are employees. And what we're looking at is the annual savings of about $2.5 million. And some of that, of course, will be volume dependant.

Okay. Thank you very much.

Okay, thank you, sir. Your next question is from [inaudible].

Good morning. First of all on medical side, can you give some understanding for the marketplace for the surgical instruments side that business has been flat, now it sounds like for several quarters. And I was thinking that maybe we'd be seeing some upturn, perhaps this year in that business.

Yes, I think, Steve, obviously we do have some new products coming out, both out of - in the surgical device area, with the Open Automatics and then we have an Endo Automatic as well. As well as the spinal surgical kit that we got with the acquisition last year of Beere. So, I think we're optimistic. We also have some additional surgical instruments coming out for cardiovascular. So, I think we see that at least there's some new product flow into that marketplace. Now, how much will be cannibalized at our own business - there will be some cannibalization. So, I think it's still early to say, at least on the Open Automatics and on the Endo Automatics. That's a totally new market for us, as well as the spinal kit. But, cardiovascular, we've been there, so it might be some cannibalization there.

Do you sense that the company has been holding market share? Has the market overall been flat; churn as well?

I think so. And I think it's - you know, we recently announced the appointment of our new chief operating officer for our medical group, Forrest Whittaker. Forest is one of those guys who not only has a great history in the anesthesia area, but he's also very familiar with surgical instruments. So, for us, that was a key hire to find someone who has that balance that truly represents what our portfolio stands for, between instruments as well as surgical or hospital supply devices. So, I think we're pretty confident and we're glad to have Forrest on board. So, we're very optimistic that we can see some improvement in the device side.

Okay. On the automotive area, can you give us some feel at this point for number of platforms that the [indecipherable] systems are on? And how many of those platforms are also accepting the Generation 2 model at this point?

Okay. I believe we're on 11 platforms still. And I think at this point in time, one of them is Gen 2. Okay? And we'll roll that out as we go through model changes. I think the more important aspect of it is, currently, we have our electronic throttle control, which is patented, imbedded, in our adjustable peddle on three or four of these programs. And that's going to continue to roll-out as the year goes, so that by the end, we'll probably have our combination electronic throttle control and adjustable pedal on about half the programs. So, I think that's very important to us, because the combination of those two aspects is patented. Of course, we think it's becoming a more popular option, particularly on the SUVs. It's a take rate and it is an option.

And retail, what's the extra on the price on the car when that system's installed?

I think, Steve, it depends again. A lot of these have variable options, different setting of memory. What I would say, you can go all the way from probably 120 up to 200.

In many instances, it's part of a comfort package. So, it's not specifically out.

Okay. I'm sorry, back to the medical side again, were there any severance costs in the first quarter as well.

If they were, they were modest. And because medical's growing, we haven't got - I mean, probably no more than in a normal year, Steve. I mean, we're always trading out and improving.

Okay, thank you.

Okay, thank you, sir. You have a follow-up question from [inaudible].

Hi. Just to come up with some housekeeping questions, if we could. What are your CapEx plans for the year?

They remain about 80 million.

Okay, and pension expense for '03?

My recollection, and I'm taking a flyer, is it's going to go from about 5 plus to about 7 plus.

Okay, and then what about pension funding? Is there a [multiple speakers] -

It'll be about 5 million. That's today. I mean, that goes down the actuarial assumptions on a tax basis, not necessarily a FASB basis. So, you're asking a question where I don't have all the calculations at this point in time.

And when would that funding take place?

Throughout the year. We don't necessarily [inaudible].

Okay. And did this question already get asked, cost of sales and SG and A?

It was given in the talk at the request of many people.

Okay, good.

Do you want it again?

No. We can get it. And then, Jeff, you had talked about in the summer, about expectations at your analyst meeting, of getting the medical margins up to 19 percent. Is that still a goal?

Absolutely.

Okay, what kind of time frame are you looking at now?

Again, I'd love to give you an aggressive time frame, but I'd rather let Forrest get in. And he has been travelling around to our medical operations for the last several weeks. So, I guess as opposed to hanging him out there, I would say that I think we'll get there in the next few years. I think we believe we can accelerate that, but you know, we put forth the new medical structure back in August, in terms of what we're trying to do. That is still moving forward and going well. So, I think we're still optimistic that we can get to the 19 percent.

Okay, and then last question, you talked about new products. Do you track or can you size what the contribution to your top-line that comes from new products? You can cut it any way you want, introduced in the last 12 months, 24 months, whatever.

Well, we track it and of course, it's rough order of magnitude. But, I think - I guess it's probably those introduced within the last 12 months or so, because it's not with any degree of exactitude. And the total - why don't we exclude just the adjustable pedal, the total's about 20 million of new products in Q1.

That's without the pedal?

Yes. We'll keep the pedal out of it. I mean, that's been around - I consider it a new product, because you know, we're still ramping up and it's - But, we'll keep that out of it, because that's discussed along different places.

And what was the new pedal revenue in approximate profit contribution?

The new pedal revenue was nearly 23 million, and as I've indicated, it's very modest profit contribution.

Okay. Thank you.

Okay, thank you, sir. Your following question from Mr. James Clark.

Hi, how are you? We're trying to break down the cash flow statement here. You gave us the total of 27 million cash from operations, correct?

Yes.

If you start with net income of 29, depreciation what, about 25?

Well, it's in the -

I mean, you didn't give us the top half of the -

Depreciation is about 25, that's right.

And it seems there's been a change in working capital, in receivables and inventories, you know, in the $70 million range, you got maybe mid teens back in payables and accruals, so that would seem to be a $50 million swing negative.

Right. We had an approximate $50 million swing in receivables and inventory. That's correct.

What else is there that gets you to 27?

Well, there's an increase in taxes and -

Deferred tax is a big number?

Yes. Taxes and the accruals go up about 25 million. So, that match should approximate the number you're looking for.

Okay. Thanks very much. [Indecipherable.]

Thank you, sir. You have a question from Mr. [Steven Lewis] [ph].

Yes, I had a question about working capital as a percent of sales. You've given that out before. How did that compare?

Yes. Working capital as a percent of sales was 26 percent, compared to 23 at March a year ago. And because we're a seasonal company, that's probably as good a comparison as you can get.

Are you at all concerned about the increase from 23 to 26 in the same seasonal situation?

Well, let me answer it this way. I don't like it. Do I think there are valuation issues? No. Do I think there are a lot of supporting reasons which we could say are rationalizations in some instances? Yes. A lot of it relates to plants moved or to be moved, so I think that that starts to drive it. Receivables, as I said before, it was the European medical mix that grew quite handsomely. But those quasi-governmental hospitals pay very slowly.

Since the aerospace business is down organically, can't you reduce working capital there somehow?

I know, but we're talking about overall working capital, so overall we're up 7 percent. So, that kind of relates to the overall activity.

Well, okay, for a company with such low unit growth, even with acquisitions, to have your working capital increase so much, it kind of stands out.

Well, I understand. As I said before, I'm not pleased with this.

What was the investment that you made in the first quarter?

It was a small equity investment. We've made a number of these over the years and it was in the hospice pain management area.

Where is that located in the balance sheet? Is that under tangibles and other assets or what? Where was it, I should say?

In investments.

What's the size of the other equity investments?

I don't have that on the tip of my fingers. Less than 50 million.

Are they above or below water?

They're on water.

They're even?

Well, they're counted [inaudible] equity method in the main, so I don't know that we go in and some are on a cost basis, but they're accounted for on the equity method in the main. So, at least in accounting theory, they're on water, if I could use your term.

Thank you.

Okay, thank you. Your last question is from David Gillecks.

Hi, my questions have all been answered. Thank you.

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