X-Rite, Incorporated Q3 2008 Earnings Call Transcript

Executives

Dave Rawden -- Interim CFO

Tom Vacchiano -- President and CEO

Analysts

Andrew Wiener – Burnham

Joy Mukherjee – State of Wisconsin Investment Board

X-Rite, Incorporated (XRIT) Q3 2008 Earnings Call Transcript November 4, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the X-Rite, Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. At which time, instructions will be given. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Thomas Vacchiano, Jr., Chief Executive Officer; Mr. Dave Rawden, Interim Chief Financial Officer of X-Rite, Incorporated; and Mr. Brad Freiburger, Vice President and Controller.

Thank you, Mr. Rawden. You may now begin.

Dave Rawden

Well, good morning, ladies and gentlemen, and welcome to the third quarter 2008 X-Rite, Inc. earnings conference call. As Chris mentioned, my name is Dave Rawden, X-Rite’s Interim CFO, and along with me are Tom Vacchiano, X-Rite’s CEO; and Brad Freiburger, X-Rite’s Vice President and Controller and we will conduct this call today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference.

Before I begin though, I must address our normal Safe Harbor Statement. I have to caution you that the information we have released and will be discussing today may contain forward-looking statements within the meaning of the private securities litigation reformat. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors, some of which may be beyond our control. Factors that could cause such differences include the impact of our recent defaults under the company’s credit agreement, our ability to improve operations and realize cost savings, competitive and general economic conditions, our ability to access new markets and other risks associated and described in the company’s filings with the SEC. The company undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events or for any other reason.

In addition to the results reported in accordance with Generally Accepted Accounting Principles or GAAP, X-Rite may provide certain information including EBITDA, which are considered non-GAAP financial measures. Management believes that these non-GAAP financial measures are useful to both management and its investors in their analysis of the company’s underlying business and operating performance. Management also uses this information for operational planning and decision-making purposes.

EBITDA is a non-GAAP financial measure used for covenant compliance testing under our credit agreement. Non-GAAP financial measures should not be considered as substitute for any GAAP measure. Additionally, non-GAAP financial measures, as presented by X-Rite, may not be comparable to similarly titled measures reported by other companies. A reconciliation of these items can be found in our website at www.xrite.com in the Investor Relations section.

We will now move on to the topics for the call today. Tom will cover: One, a discussion of our third quarter and year-to-date 2008 results for the company and by major market categories and geographies, along with key business performance highlights; Two, a general update on the progress we have made versus our restructuring plan announced on April 3, as well as the new actions recently initiated; and three, a summary of the outcome of our recapitalization efforts.

I will then cover: One, an update on our Q3 balance sheet and key changes since the second quarter including working capital management and our liquidity position; Two, a more detailed review of the P&L including comments related to gross margin, operating expenses and a reconciliation of GAAP and non-GAAP performance metrics; and finally, Three, some specifics related to the recapitalization and the sale of life insurance policies.

Tom and I will then conclude with our performance guidance for 2008, which include the range of sales, our expectations related to our restructuring program announced in April, and a range of expected EBITDA per the definition of our credit agreements; and finally, we will then take your questions.

Before we begin our detailed discussions, I would like to cover a few housekeeping matters. We now report our businesses in two segments, with Pantone operating as a separate business unit. Specifically, the core X-Rite business will be recorded as Color Measurement and Pantone as the Color Standards business. It is possible that we will be back to one business segment in 2009 since the core X-Rite business and Pantone are being selectively integrated in term of staff functions, sales management, marketing and other functions.

In our call today, we will communicate pro forma sales by quarter for 2007 with X-Rite, Amazys and Pantone all included. In these numbers, we have eliminated inter-company sales from X-Rite to Pantone from the beginning of 2007 up to October 24, 2007 acquisition date for Pantone. We will not communicate pro forma EBITDA, other income related metrics or expenses by quarter in 2007, as Pantone was a privately owned business prior to the acquisition, and we believe that inclusion of this information for our pro forma purposes would not be meaningful. Pantone’s results are included in those of the company’s since the acquisition date.

And now to Tom for his portion of the review.

Tom Vacchiano

Thanks, Dave. Good morning, everyone, and thank you for joining the X-Rite’s Q3 earnings conference call. Before specifically addressing our key business performance metrics for Q3 and year-to-date, I’d like to highlight three important areas of focus for us in recent months. First, in light of the generally tough market condition and business uncertainty associated with our now-past lending situations, we are working hard to achieve the best possible 2008 business results we can. While we won’t achieve the level of performance we originally set out for 2008, I do believe you will agree that we’re making good progress in many performance areas in the business. Working capital management, for example, has really made great advances and we’ll speak to that in more detail later.

We’ve been successfully executing the restructuring plan that we announced on April 3 without substantially diluting the strategic promise that come with the combination of X-Rite, Amazys and Pantone. Our worldwide employee team has been implementing the necessary changes since April 3, and an increasing proportion of our effort is being directed to our key strategic initiatives for growth for the future. Our restructuring actions are contributing even more significantly than originally anticipated. We are ahead of our target through September and expect to continue on or ahead of our target through end of the year. Overall, we expect the entire $80 million in cost energies versus our original 2008 objective will be fully realized by end of December.

Finally, we just recently on October 28, 2008, completed a thoughtful balance recapitalization initiative with new lender agreement. We now have the necessary resources to pursue our growth goal while giving us the added financial flexibility needed to improve shareholder value and fund ongoing operation.

I also think it makes sense to take a moment to reiterate X-Rite’s rationale for the Amazys and Pantone acquisitions. We believe that the business for color is expanding well beyond the traditional mission critical [ph] application to anywhere where color is important or a differentiator. To take advantage of these new opportunities, we believe the scale, knowledge, technology and brand power of this combination of companies is significantly advantageous. We are even more convinced in the strategic value of this combination today. These acquisitions extend our global reach across the largest customer base in the industry, increase our market segment leadership in nearly every segment, add additional cost synergies and extend our ability to provide new product innovation via the combination of exceptional market knowledge and the biggest engineering budget in the industry. To date, our integration effort to achieve cost synergies associated with these three companies have been our primary focus and are well ahead of schedule.

Our new near-term focus is to further develop our product innovation and sales growth strategies and synergies. We are now clearly the leader in the complete value chain for color-based business solutions from color inspiration to color measurement to color communication to color formulation, representing the full range of Color Management Solutions in the value chain. New product innovations like ColorMunki, MA98, xDNA, and MatchRite iVue, have recently been announced or launched with more new exciting products in our pipeline. Early customer reactions to these products have been very, very positive. New OEM customer design wins or projects are in process as well, such as customers like Lenovo that will take color management well beyond our traditional sales models. Overall, our growth opportunities are bolstered by a proven business model, supporting attractive operating profitability and cash flow. The potential for X-Rite is real and we are well-positioned to capture it.

I would now like to speak specifically to our Q3 and year-to-date business performance, and in this process, also outline some new initiatives for growth. In this discussion, I’ll refer to the sales results in Exhibit 1, the P&L results in Exhibit 2, and the EBITDA reconciliation in Exhibit 3, sent out as a part of our press release.

Company sales for the 2008 third quarter and nine months year-to-date were reported at $61.3 million and $200.7 million, respectively. Compared to the same periods in 2007 on a pro forma combined basis, Q3 net sales were down 8.9% with September year-to-date sales down just above 3%. Third quarter, X-Rite’s core Color Measurement sales were down 7.6% in Q3 while Q3 Pantone sales were down approximately 15%, again, on a comparable pro forma basis. The good news is we have a very diverse product set, as well as a geographic and vertical market footprint. However, our business was not immune from the dramatic shift in economic conditions the world witnessed over the last few months.

Now, let’s look at our sales performance in the quarter by major market and product category, as well as geography. After reporting sales growth of 10% in 2007 and an up-and-down performance in the first two quarters of 2008, the Imaging and Media market category experienced a small sales decline of about 2.2% in the third quarter versus the same period in 2007. The decline was primarily driven by a slowdown in demand from a small number of large OEM account, as well as sluggish demand in the after-market imaging and pressroom space. Although we are continuing to see increases in the attachment rates were embedded and bundled color management systems in the pressroom environment, the magnitude of the slowdown in that sector is hurting the near-term sales potential through that channel.

The OEM sales rate was influenced by partners and their own general sales slowdown, some poor-performing program, as well as our own lack of success in earning new design wins at the rate and timeframe that we expected. I am pleased to report, however, that our OEM sales team has really significantly stepped up their efforts with some recent design or project wins. Companies like Lenovo, W&H, Canon, are just a few examples of recently announced projects or design wins, which will feed the pipeline for growth in 2009.

Our channel sales into the pressroom segment appear to be suffering from a combination of a weak economy, cannibalization from bundled solutions with new presses, and our own lack of new product innovation. The imaging or creative category of our business segment, including selling to photography market, also continues to experience sluggish growth. We believe that along with economic climate, a shortfall in new products’ successes is affecting this performance as well. In April, we began to ship a new product family, ColorMunki, which delivers an exciting new price performance range along with an easy-to-use experience never seen before in the industry for both consumer photographers and graphic arts designers. Early reactions to this product family in both the United States and, more recently, Europe are very encouraging and are expected to improve our sales performance in this segment over the next few quarters.

The industrial products category fell off its recent trends towards modest year-over-year growth as Q3 2008 sales declined just under 10% versus the same period last year. Sales declines were negatively influenced by economic conditions, particularly in North America and, to a large extent, in Asia and were impacting all vertical markets within the industrial segment but particularly, automotive and textile supply chains.

In September of this year, we announced a new product family, the MA98 with xDNA software technology for the automotive segment and paint-refinish segment that should have a positive contribution to our sales result, starting with shipments in December of 2008 and continuing through more significantly in 2009. Design wins or major project contracts with BASF and PPG, two of the largest players in the paint-refinish market, are additional proof points that herald this new innovative technology platform.

After reporting a 6% sales growth rate in 2007 and a small first half sales decline in 2008 of about 3%, the retail medical segment experienced a sales decline just over 15% in the third quarter of this year, compared to Q3 2007. Delays in large retail project rollouts in Europe were the main driver for this decline year-over-year in the quarter. Although we continue to roll out an important project in Home Depot stores, sluggish demand for behind-the-counter paint matching systems in North America also impacted these results.

While we continue to be cautious about our retail business in the near-term, the new MatchRite iVue product family was actually pre-launched in September, the number of retail shows and will be available starting in December of this year, and were told by our prospective major accounts in this market should be very helpful for our growth engine in this segment in coming quarters. In addition, in October of this year, we’ve just rejuvenated an important partnership program with DeguDent, a large European distributor in the medical and dental markets for the distribution of our Shade-X product; and we expect with that new distribution arrangement, this will also bring some added sales growth to this sector in 2009.

The Color Standards Segment or Pantone had sales that grew by 1% in the first quarter of this year, then decline 7% in the second quarter of this year versus prior year on a comparable pro forma basis, and had yet another difficult quarter in Q3. Pantone’s revenues declined about 15% in the third quarter to $10.1 million versus a strong third quarter in 2007. This decline was influenced by color management instruments, continuing to be off prior year sales rate, as well as a slowdown in the Color Standards business both in graphic arts and fashion apparel sub-segment.

Supply chain’s shortfalls of UE continued until late in the third quarter and certain fashion apparel standards books also continued to have troubles in the supply chain, and both of these shortfalls did affect Pantone’s overall sales performance in the third quarter. In addition, the economic environment and related financial uncertainties in the marketplace appear to be influencing repurchasing behaviors of Pantone customers as they seem to be extending the life of standards’ products beyond typical life cycle.

On a more positive note, please check out the November 10, 2008 Special Edition of TIME Magazine, featuring a two-page article titled Purple Reign. That’s reign, as in R-E-I-G-N, not R-A-I-N; and here, Pantone experts and other consultants are explaining the psychological push and pull for the color purple in the fashion world this year and a sneak peek into the 2009 color pick for the year. This is a great example of Pantone X-Rite adding color inspiration to our value chain in serving our market as the 2008 Pantone color was blue iris, which is very much connected to this purple fashion trend.

A number of new marketing and product initiatives are being advanced to turn the Pantone sales trend around. New products such as the Pantone Goe Color Matching System, Next Generation Monitor Calibrators, and the ColorMunki Design are all expected to contribute to improving sales performance overcoming counters in Pantone. We are also addressing supply chain and conversion improvements in the fashion and apparel standards business, which will also give us an uptake in the fourth quarter shipments for Pantone.

From a total enterprise standpoint, our geographic mix and sales performance continue to reflect the ever-changing mix of economic forces, currency swings and business segment pattern. America sales were down another quarter by just under 17% driven primarily by our imaging, media and industrial channel segments. Europe sales were flat this period versus prior year, with the retail segment being the biggest challenge in Europe. Asia sales were down 10%, with sluggish performance really in all business segments in Asia. And our geographic contributions in the quarter than in sales were approximately 37% in America, 43% in EMEA (Europe, Middle East and Africa), and 20% in the Asian rim.

While revenue growth proved challenging in these market conditions, we were happy to see some positive success derived from our April 3 restructuring efforts. Our operating expenses, excluding restructuring and other related charges in Q3, were down 13.2% and down 5.9% as compared to Q1 and Q2 2008, respectively. Dave, will talk more about that in absolute terms.

Prudent and timely expense management actions have supported a healthy adjusted EBITDA range from 22.8% in our most recent quarter, Q3, to 23.4% in the second quarter and 20% in the first quarter. Interestingly, our average EBITDA range as a percent of revenue was higher in the third quarter with $61 million of revenue than it was in the first quarter with over $65 million of revenue, demonstrating the leverage and effectiveness of our cost and expense actions.

In addition, the X-Rite team has made tremendous strides in working capital management, driving receivable turns or DSOs, inventory turns and payable turns all in a direction towards record performances for our company. This has contributed favorably and substantially to our cash position which at the end of our September reporting quarter ended up at $50 million of cash; clearly, a position that allows us to feel as if our financial health and future is substantially more secure.

Our efforts to manage costs and expenses and to continuously pursue the most efficient business model we can will not and is not slowing down. To this end, we have announced today that we will close a manufacturing engineering site in Brixen, Italy, and transfer ongoing product programs to Kentwood, Michigan. This initiative will take approximately 12 months to complete, have restructuring charges of approximately $1.9 million and provide annualized operating savings of approximately $2 million a year, starting in the fourth quarter of 2009. We will remain diligent in our efforts to find and realize further cost savings and leverage our global footprint; and obviously, through the course of the next few quarters, we’ll talk more about those additional actions.

Before passing back to Dave, I’d like to conclude my performance summary by recognizing the various X-Rite stakeholders, who are so important to the overall business performance we have attained in recent quarters and the successful completion of our capital raise and new lender agreements.

First, I’d like to thank our employee team who stuck together to serve our customers’ interests while managing with fewer colleagues, heavier and new responsibilities, and the fear associated with the lender agreement default. Our customers who understood our value as a supplier and maintained their confidence in the present and the future of X-Rite; and of course, our suppliers and business partners who never once stopped working with us in a consistent, professional and fair manner. We also know this hasn’t been an easy ride for our shareholders, but we are truly excited to have a stronger balance sheet, a proper capital structure, the support of new shareholders and board members, and a terrific opportunity to drive future success through growth.

With that, I will now turn it back over to Dave Rawden. Dave?

Dave Rawden

Thanks, Tom. I will discuss a range of topics related to the company’s financial condition, liquidity, working capital management, the status of the company’s recapitalization efforts, and our amended credit agreements with the first and second lien lenders. However, before doing this, I want to complete the discussion of the third quarter income statement with the review of the gross margin and our operating expenses.

Our adjusted gross margin, excluding certain Pantone acquisition-related purchase price adjustments and integration costs was 57.7% in Q3, comprised of 55.2% for the Color Measurement segment, which is X-Rite without Pantone, and 70.5% for the Pantone segment. The overall adjusted gross margin of 57.7% is consistent with Q2 despite a reduction in sales volume that typically negatively affects gross margin. The gross margin for the X-Rite segment continued to be influenced by a reduction in production levels, driven in part by our aggressive inventory reduction program.

Negative first half impact on gross margin were offset in Q3 by cost reductions from our April 3 restructuring, lower excess in obsolescence expense and better sales mix. While we are not pleased with our X-Rite gross margin performance, we are optimistic that the cost reductions we have implemented along with the return to normal production volumes once we have reached our desired inventory levels will result in approved margins.

Operating expenses in Q3, excluding restructuring and other related charges, were $2.0 million lower than Q2 2008. These operating cost savings were achieved despite an additional $600,000 in retention expenses and $400,000 of legal and professional expenses associated with the amended debt agreement recorded during the third quarter. These savings are on top of the $2.8 million reduction in Q2 versus Q1 2008. During the Q1 earnings call, we announced that we expected to reduce operating expenses by approximately $18 million in the Q2 to Q4 2008 timeframe from our original budget. Based on our Q3 results, we are still on plan to achieve these cost reductions.

Now back to the topics I referred to a moment ago. First, I will start the discussion with key items on our balance sheet and key changes since the 2007 year-end. As Tom mentioned, cash increased from $28.3 million at Q2 2008 to $50.1 million at the end of the third quarter.

And there are three main items impacting this significant increase. First, we continue to make progress in reducing working capital. Improved working capital management is one of our key priorities in the company. The company has been consistent with 57 to 60 days of accounts receivables globally, and we are working hard to avoid any slippage of our receivables in a more challenging economic environment. As of the end of the third quarter, global DSO held steady at 56 days, which is below our traditional average. In addition, we continue to work with our vendors globally to get our accounts payable terms in line with our receivable terms and continue to make improvements in this area.

Another of our top priorities is to improve our supply chain efficiencies and coordination. And while there are still opportunities we are working on, we have made significant stride in the third quarter by reducing our physical inventory quantities by $3.4 million during the quarter, and this is on top of the $7.3 million reduction we made in the second quarter. Partially offsetting this significant working capital savings was the fact that the company paid $5.0 million of cash related to professional services and forbearance fees and lender fees in the third quarter.

Second, the company surrendered seven life insurance policies with a total face value of $75.0 million and received a total surrender value of $10.7 million, of which $7.5 million was required to be held in escrow under the company’s forbearance agreement in which release for use by the company for general core for purposes upon the closing of the company’s recapitalization effort on October 28. The remaining $3.2 million was used to reduce first lien debt. We have also entered into agreement to sell or surrender the remaining four policies for $10 million, bringing the total proceeds for eleven policies to $20.7 million.

Third, in light of the difficult and volatile global financial crisis and as a safety measure, we borrowed an additional $10 million on our revolving line of credit in September. During the fourth quarter, we will reevaluate the need for this excess cash and whether we want to repay it to the bank. For the third quarter, EBITDA as calculated in Exhibit 3 was $14.0 million or 22.8% of sales for the combined businesses even though Q3 sales were the lowest of any quarter in 2008; and this is true, historically, that the third quarter is the lowest quarter. Compared to Q1 2008, EBITDA was $700,000 higher despite a $4.7 million less in sale. We include in the reconciliation of net income to EBITDA for Q4 2007 and Q1, Q2 and Q3 2008 with Exhibit 3 attached to today’s press release.

Consistent with the first and second quarters in pursue of the US GAAP, all of the $417.3 million of debt outstanding as of the end of the third quarter is being shown on our Form 10-Q as a current liability due to existing covenant defaults remain in effect relative to this debt at the end of the quarter. However, as part of the recapitalization efforts that closed on October 28, the debt covenants were amended, which will allow us to once again classify these months, do greater than one year out as a long-term liability.

And we are pleased to announce that on Tuesday, October 28, we completed our recapitalization efforts. Under the terms of the recapitalization, X-Rite will issue 28,571,429 shares of common stock to One Equity Partners for $100 million. $9,076,667 shares of common stock to Sagard for $27.2 million and $9,256,667 shares of common stock to Tinicum for $27.8 million. After the issuance, we will now have 76.5 million shares outstanding. Proceeds from the capital raised were used to pay indebtedness of $119.2 million under its first and second lien credit agreements, settle amounts payable by the company pursuant to certain interest rates slop agreements of $12.5 million, prepaid a mortgage on the old headquarters by $3.5 million, as well as fund ongoing operation. Total debt after the recapitalization and the collection of the remaining life insurance proceeds will be $272.3 million, that amount also includes the $10 million that we borrowed during the third quarter.

Having completed this financing initiative, the amendments to the first and second lien credit agreements, including our revised covenants have become effective. With a lower debt and new covenants, we have a healthy safety margin relative to our commitments to our lenders. We also have the necessary resources to more securely operate the business and pursue our strategic long-term goals. This capital raise also provides the company with greater financial flexibility during these times of increased economic uncertainty to improve shareholder value and to fund ongoing operations.

And, Tom, I’ll give it back to you for our 2008 performance guidance.

Tom Vacchiano

Thanks, Dave. Now on to that guidance, specifically, there are three areas where we will provide guidance: 2008 sales, 2008 restructuring savings and restructuring costs, and 2008 adjusted EBITDA per the definition in our credit agreement.

In terms of 2008 revenue outlook or sales outlook, we remain cautious about our growth given the various integration dynamics we’re dealing with and a worsening economic climate. Some of our businesses do have exposure to various consumer-end markets and all businesses are directly or indirectly impacted by the difficult global credit environment by which we can – which is definitely influencing spending habits.

Our 2007 pro forma combined sales for X-Rite and Pantone on a pro forma basis were $283 million. For 2008, we currently expect to see sales results ranging from $263 million or down 7% versus prior year on a pro forma basis to $270 million, down 5% versus the prior year on a pro forma basis. While we are excited about the new products that we are launching this year, we’re continuing our commitment to a robust new product pipeline and we have confidence in the new design wins that we’ve also announced recently. We believe that current market conditions that’s seen in September and October call for caution, so we’re trying to be very, very thoughtful about what we’re going to see in the October, November and December timeframe.

Dave communicated a few minutes ago that we are expecting the $18 million of restructuring savings in the last three quarters of 2008, and $23 million in the four quarters, including first quarter next year, to be materialized. We also have communicated that we expect our restructuring costs, integration costs, excluding the Det-tronics announcement today to run in the $5 million to $6 million range as discussed last quarter, and we confirm those expectations in both savings and costs with the exception of Det-tronics announcement today, adding some additional restructuring costs as mentioned earlier in my remark.

As a reminder, a restructuring cost or an add-back item per our adjusted EBITDA definition with our credit agreement. Guidance for things like restructuring costs and savings and per EBITDA exclude cost related to our refinancing transaction and new lender agreement which we just completed in October 28 of this year. At the present time, we expect X-Rite 2008 EBITDA, per the definition in our credit agreements, to continue in the range provided earlier of $60 million to $68 million but given the reduced net sales outlook just noted, we do expect to land towards the lower end of the range at this point.

In closing, X-Rite’s position as the leading global color company is an important asset that will allow us to penetrate deeper within our existing custom base, as well as move into new market. Our passion and commitment for developing color solution and our ability to integrate high value acquisitions, such as Amazys and Pantone, afford us a unique opportunity. We continue to believe that we have a wonderful opportunity to build a great market leader and a great company, while delivering exceptional stakeholder value. Our job, of course, continues to be executed very well. The successful completion of a market of a major capital raise and new lender agreements is an important milestone in our pursuit, and I believe a proof point that third-party investors believe the same.

So with that, I think we are ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Andrew Wiener with Burnham. Please proceed with your question.

Andrew Wiener – Burnham

Hi. Good morning, gentlemen.

Tom Vacchiano

Hey, Andrew.

Dave Rawden

Hi, Andrew.

Andrew Wiener – Burnham

Hi. I just wanted to try to get a sense of – if I’m doing my math correctly, you achieved the net debt pro forma would be – I mean, sorry, the gross debt would be $272.3 million and if I think about the cash balance, I’m coming to a number of about $50 million on a pro forma basis. Is that correct?

Dave Rawden

At the end of the quarter, we have $50 million of cash on hand. That’s correct.

Andrew Wiener – Burnham

Well, no, but I’m saying then if I assume that $7 million was built into debt you received from insurance proceeds was built to offset the $7 million you intended to put on the balance sheet when you gave the pro forma use of proceeds a few months back, I assume that means that there should still be about $50 million of cash pro forma after the repayment of debt or the restructuring of the debt.

Dave Rawden

The $7.5 million is included in the $50 million at the end of the third quarter.

Andrew Wiener – Burnham

Correct.

Dave Rawden

I’m not sure –

Andrew Wiener – Burnham

I go back to the presentation when you did the restructuring and the debt. You said one of the uses of the sources of proceeds was the $20 million expected for the life insurance policies, so I assume that ultimately goes out the door even though the $7 million is actually on the balance sheet right now as of the end of the quarter. That then though gets offset by the fact that on that same sources and uses of funds, there was an intention of adding back $7.5 million of cash to the balance sheet out of the $175 million of total sources of funds, so I’m just trying to get a sense of what the net debt ultimately would look like on a pro forma basis.

Dave Rawden

I think if you go back to the pro forma that we provided back on August 20th, the one thing that has changed is we estimated that we’d get $20 million of life insurance proceeds and we’re on track of that. We’re actually going to get $20.7 million. We’re going to get another $700,000. We only get to keep $7.5 million of that. All the excess goes to pay down first lien debts, so of the $20.7 million, we get to keep $7.5 million and the rest goes to pay down first lien debts.

Andrew Wiener – Burnham

Sure. Okay. So I mean, so I’m probably thinking about it correctly that if we had – that the cash flow from the quarter plus the modest, I guess, excess above what you expected, so it sounds like there will be about $50 million of cash after you pay down the debts at the $272 million level.

Dave Rawden

Our cash goes up and down but that’s not a bad assumption.

Andrew Wiener – Burnham

Okay. Has there been any change in the expectations to sell the company headquarters next year or –?

Dave Rawden

Well, as we announced in the – or what we will be announcing in the queue and the fact that we did on the October 28 also entered into agreement to sell the old headquarters for $7.25 million. That amount will be used to pay down the mortgage, which is now approximately $5.2 million, and the rest will then be used to pay down first lien debt, the additional $2 million. We expect that to close sometime, somewhere between mid-December and mid-January of next year.

Andrew Wiener – Burnham

Somewhere –

Tom Vacchiano

By mid-December of this year or mid-January of next year. Right.

Dave Rawden

This year, mid-January of next year. Correct.

Andrew Wiener – Burnham

Okay. And that $5 million plus is actually included in that $272 million number, correct?

Dave Rawden

That is correct.

Andrew Wiener – Burnham

Okay.

Dave Rawden

Toward the sale we’ll reduce that by $7.25 million.

Andrew Wiener – Burnham

Okay. I guess my last question, just been thinking about – starting to think about what the company looks like heading into next year. You talked about that next year, the restructuring charges, you’d get the full-year impact which would be $23 million or roughly, an apples to apples basis of sales was flat. There’d be a $5 million benefit year-over-year, correct?

Tom Vacchiano

Yes, if you assume that we get $18 million this year and $23 million in four quarters, there would be about a $5 million at the end of each one.

Andrew Wiener – Burnham

Okay. And I realize it’s a little bit early in the planning process, but how should we think about – I know, DRUPA is an unusual – I shouldn’t say unusual but a once every three or four, I forget what the actual number of years are, but events [ph]. So is that money that will probably get reallocated into other sales and marketing initiatives or will that be a potential cost savings as well?

Tom Vacchiano

We’re in the process of building our 2009 operating plan and budget today and that is a discussion point that is under review. My expectations would be that depending on the sales outlook for the year and how things going, we’d probably have a shared experience in which some of those money wouldn’t be spent and would be an expense saving, and some would be invested in other marketing initiatives for growth. But the exact proportion we’re debating based on where we think the year’s going to be in terms of sale.

Andrew Wiener – Burnham

Okay, great. Those were all my questions for right now. Thank you.

Dave Rawden

Thank you.

Tom Vacchiano

Thank you, Andrew.

Operator

Our next question comes from the line of Joy Mukherjee with the State of Wisconsin Investment Board. Please proceed with your question.