阿美特克 (AME) 2002 Q1 法說會逐字稿

This is premier conferencing. We are currently holding for today's AMETEK Incorporated conference call. At this time, we are admitting additional participants who should be getting underway shortly. Thank you for your patience and please continue to hold.

Please standby. Good day everyone and welcome to the AMETEK Incoporated first quarter conference call. This call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Will Burke, Vice-President of Investor Relations. Please go ahead, Sir.

Thank you [Laura]. Good morning and welcome to AMETEK's first quarter conference call. Joining me today are Mr. Frank S. Hermance, Chairman and Chief Executive Officer and Mr. John J. Molinelli, Executive Vice-President and Chief Financial Officer. AMETEK's first quarter results were released after the market closed yesterday and have been distributed to everyone on our list. These results are also available electronically on your market systems including first call. A tape of today's conference call may be accessed by calling 888-203-1112 and entering the confirmation code number 753563. This conference call is also being broadcasted over the Internet; it can be accessed at www.ametek.com and www.streetevents.com. The conference call will be archived on both of these web sites. Finally, I will remind you that any statements made by AMETEK during the call, that are not historical in nature, are to be considered to be forward-looking statements. As such, these statements are subject to change based on various factors and uncertainties that may cause actual results to differ significantly from expectations. Those factors are contained in our SEC filings. Frank.

Thank you, Bill. We had a very good first quarter. We met our expectation for earnings and established records for operating income, net income, and diluted EPS. Sales were essentially unchanged in the quarter at nearly $264 million. The acquisitions of IRAS, EDAX instruments, and GS Electric were positive contributors to our top line. We encountered weakness in many of our businesses due to the economic slowdown. Operating income of $36.4 million was up 2%, net income increased 8% to $19.7 million while diluted earnings per share was up 7% at $0.59 compared with $0.55 in 2001.

Overall, we are very pleased with our first quarter performance. Turning our attention to the individual operating groups for the first quarter, EIG revenues were up 9%. The 2001 acquisitions of EDAX and IRAS with the prime driver of the sales growth. Our aerospace and power business did well in the quarter showing revenue growth as a result of strength in defense aerospace and our power instrumentation business. Conditions remained weak in most of the other EIG markets, although [Autotrans] and other indicators in some markets are beginning to point to a recovery. Operating income for the quarter was up 11% to $21 million and margins improved 30 basis points to 15.3%. For the first quarter, EMG revenues were down 8%, with GS Electric contributing positively to revenues. Weakness across EMG's business, particularly in our floor care motor business in the U.S. and Europe led to our revenue decline. However, recent [Autotrans] in the floor care and specialty motor businesses have improved, indicating a possible recovery in these markets. Operating income for the quarter was down 6% to $20.6 million and operating margins expanded 30 basis points to 16.2%. Turning to the outlook for [2002], as we discussed in our yearend conference call, our business planning has been done assuming no economic recovery during the year. We remained cautious on the prospects for an economic rebound this year though evidence is mounting that such a recovery may indeed occur. We are reaffirming our guidance for 2002. Revenues are expected to be up slightly for the year, excluding any future acquisitions. Earnings per share is expected to be approximately $2.50, up 18%. For the second quarter of 2002, we expect revenues to be roughly equal to the same period of last year. Second quarter diluted earnings per share should be up approximately 12%. On January 1st of 2002, AMETEK adopted FASB 142, which eliminated the amortization of goodwill. The impact of goodwill amortization on our 2001 results was $0.07 per diluted share in the first quarter and $0.30 per diluted share for the full year. I am very positive about the long-term prospects for our company. We are poised to significantly grow earnings when the economy strengthens. I would like to spend a few moments talking about how our operational excellence actions have enabled AMETEK to weather difficult economic conditions in many of our markets. These actions have established a lean platform, which can be leveraged when the economy improves. Several key elements that I would like to focus, on today, are low-cost manufacturing and acquisition integration. Low-cost manufacturing has been and remains the key thrust of our operational excellence strategy. It's essential to our cost-driven businesses and adds value to our differentiated businesses. Our Reynosa, Mexican operation was started in 1997 to provide our North American floor care business with a low-cost manufacturing base. It has been extremely successful and today more than 70% of North American households motors are produced there. However, it has become much more than a household motor production operation. Today, we have six businesses operating in Reynosa, some of which are cost-driven and others differentiated. Aerospace and Power Instruments, Dixson Heavy Vehicle, Prestolite Power and Switch, Prestolite Light Motors, and GS Electric are all producing products in Reynosa. I just returned from a visit to Reynosa and was very pleased with their progress and the contributions they are making to AMETEK's success.

Similar progress is being made in our other low-cost operations. Our plants in the Czech Republic and China have plan expansions completed or underway to accommodate additional product moves. We are using revenues produced in low-cost areas as the metric to measure our progress. In 2001, approximately 15% of our production was done in low-cost areas, up from less than 10% in 2000. It is expected that this figure will be nearly 20% for the full year 2002, based on the moves that are already underway. Operational excellence also adds significant revenue in the acquisition integration process. It enables us to increase the profitability of the acquired businesses as well as their asset utilization. On an average, we have increased the profitability of acquired companies nearly 40% in the first year of [our] ownership versus the prior year. We accomplished this on a variety of ways depending on what makes sense for a particular acquisition. This can include facility consolidation, movement to low-cost manufacturing locales as I outlined above for Prestolite and GS Electric, rationalization of overlapping distribution networks, general cost, and efficiency improvements. The acquisition of Rochester Instruments is an example of how this has been accomplished. Rochester Instruments, which was acquired in September of 2000, designs and produces color quality instrumentation and for the electric power transmission and distribution market. It is a great strategic [step] with our existing power instruments business and provides us with the opportunity to participate in the expected growth in the electric power transmission and distribution market. When we acquired Rochester Instruments, they were a business with pre-tax margins in the mid-single digits. Through facility consolidation, global sales channel rationalization, and other headcount expense reductions, we more than doubled the pre-tax margin of that business. It is currently operating, with a margin much better than the Instruments Group's average. As well, we have rejuvenated the new product development process including several new products focused on power, quality, and revenue metering. These products will benefit from deregulation in the power transmission and distribution market. I have touched on two aspects of operational excellence. Our divisions are actively pursuing other operational excellence initiatives with really great results. Activities around lean manufacturing, Six Sigma, demand-flow technology are driving operation improvements, inventory reduction, and greater profitability throughout the company. In summary, the current economic slowdown has caused AMETEK between $100 million and $150 million in annualized revenue. When the economy improves, we will be able to recover this revenue and bring it to the bottom-line at a very attractive rate due to our streamlined cost structure. This should create significant additional shareholder value. John will now cover some of the financial details and then we will be glad to answer your questions. John.

Thank you, Frank. In general, we had solid first quarter, both on the remainder of the P & L items and with respect to the balance sheet. First, focussing on the P & L. Our first quarter G&A spending was down slightly from last year's first quarter. The impact of cost-reduction activities was offset by higher pension, medical, and general insurance costs. We continued to expect that 2002 G&A spending would be roughly inline with last year's level. Interest expense was down approximately $770,000 or 10% from the first quarter of 2001, as lower interest rates more than offset the higher average debt levels between the periods. The company's overall effective interest rate in this quarter was about 1.5% lower than last year's first quarter. The effective tax rate in the first quarter was 33%, down from 35.4% last year due to impact of implementing SFAS 142 as well as effective tax-planning strategies. For the year, we still believe, a rate of between 32-32.5% is appropriate. As we have mentioned, the adoption of SFAS 142 has eliminated the amortization of goodwill effective January 1st. The goodwill amortized in 2001 resulted in a $0.30 per share reduction in earnings. The quarterly breakdown of that $0.30 is $0.07 in the first quarter, $0.07 in the second quarter, $0.08 in the third quarter, and $0.08 in the fourth quarter of 2001. Looking to the balance sheet. Our first quarter cash flow was improved over last year. Our balance sheet is stronger and we continued to see results on our working capital focus. Our cash and marketable securities totalled $22 million, the same as yearend. Inventories declined $6.1 million for the quarter to a $146 million, while our sales grew by 11% from the fourth quarter 2001 level. We have placed a focused effort on reducing inventories and are pleased with our progress as our first quarter inventory turnover improved by 10% from the fourth quarter of 2001. There is further opportunity to reduce our inventory. As is typically the case in the first quarter, our receivables were up from yearend. This year's increase of about 9% or $16 million from yearend was due to 11% higher shipments in the first quarter versus the fourth quarter of 2001. Our collection cycle improved by three days in the quarter. Receivables totalled approximately $197 million at the end of the quarter compared with $193 million in last year's first quarter. Our free cash flow defined as net income plus depreciation and amortization less capital spending and less dividends was $21.5 million or a 109% of net income for the first quarter. Cash flow from operations was a positive $9 million in the quarter, improving on last year's first quarter negative $3 million cash flow. While we have always been very efficient in our management of working capital, we have ample opportunity to reduce our working capital. We are committed to move $20 million from the 2001-yearend working capital levels. To that end, we have initiated high-level quarterly reviews with five of our large businesses with intensified focus on improving their working capital performance. We are very encouraged by the early results of these sessions, not only by the working capital that is being freed up, but also by the resulting improvement in operational excellence on the shop floor.

We are now expanding this intensified focus to other units. The result is, we expect 2002 to be another solid year of strong operating cash flow. Included in our operating cash flow for the quarter was $1.4 million aftertax paid as a result of our 2001 fourth quarter cost reduction initiatives. We expect to spend about $7 million aftertax in 2002 related to these fourth quarter initiatives. We are making excellent progress on those projects identified as part of the unusual expenses reported in the fourth quarter of 2001. Headcount levels across the company are down and we are slightly ahead of our plans in moving jobs to lower-cost sites. Total debt is $463 million, down approximately $8 million from $471 million at December 31st. Our available borrowing capacity totalled $139 million at March 31st including $108 million under the revolver and $31 million under our receivables securitization. Our debt-to-capitalization ratio stands at 57% on March 31st, down slightly, from 58% at both December 31st and a year ago, while we spent $132 million on free acquisitions in the prior 12 months. Shareholder's equity increased to $355 million up from $335 million at yearend. Capital expenditures were $4 million for the quarter and should total approximately $25 million for the year or about 2.5% of sales. Depreciation amortization totalled $7.9 million for the quarter and is expected to reach $34 million for the year. In summary, AMETEK remains financially sound. Operationally, we are continually focused on managing our cost-structure and the results we have posted are evident of that.

The balance sheet is healthy. We continued to generate strong cash flow even in a difficult economic environment. We have significant financial resources at our disposal to support our forward growth strategies and continue to create shareholder value. The outlook for 2002 continues to be solid. Bill.

That will conclude our prepared remarks and now we will be happy to take your questions.

Thank you sir. Our question & answer session will be conducted electronically. If you would like to ask a question, please signal us by pressing *1 on your telephone keypad. Again if you do have a question, please signal us by pressing *1. We will go first to Harriet C. Baldwin with Deutsche Banc.

Good morning.

Good morning, Harriet.

Thanks. I was wondering if you could give us a little bit more color on the signs you noticed both at EIG and EMG that markets could start improving, is that based on conversations with customers, actual changes in order rates, or even in shipment rates or what?

Sure. May be I can start, Harriet, by saying at the end of the fourth quarter, in the conference call, I had indicated that I had felt the company had stabilized in terms of our order intakes and our overall performance and I can, definitely, say now that I am starting to see the signs of a recovery and it is really based on three or four of our businesses that are actually showing improvements and let me talk to each of those to put some color to your question. First, if we look at our floor care business, the order intake in the first quarter was up about 25% over the order intake in the fourth quarter. When I look at the backlog in that business at the end of the first quarter, with respect to the end of last year, we are up about $6 million and also if I look at the trends in that business from January, February to March, there was substantial improvement in each month incrementally. So, there are definite trends that are showing an improvement in that business. Similarly, in our specialty motors business, the order intake in the first quarter was up about 9% over the fourth quarter and the backlog is up about $2 million, so although recovery isn't quite as strong there as in the floor care business, but these definitely are signs of improvement and again the trends through the quarter were positive.

In EIG, the heavy vehicle business is finally starting to show some life. It has been down for a number of quarters and now we are starting to see just about every major OEM increasing their production rates with us and that's going to start to take impact in the second quarter. Some of that is due to the general improvement, I would say, in the economy; some is also due to the fact that there are some new EPI regulations going into effect on October 1, that may cause some of the manufacturers to be shipping and selling products before that regulation goes into effect. And that another area in the EIG, which I really was not anticipating, is that we are actually starting to see some improvements in the semiconductor segments and just in the last week or two, I've read some articles that are talking about a piece-meal recovery in semiconductor-ware, the PC market probably is still not going to recover for a while, but when it comes to some analog types of chips and mixed-mode types of chips, there is some recovery and we are seeing some of that in our high-end [analytics] business right now. So, when I sum all that up, there are some definite indications that things are improving and it feels a little bit better clearly than it did a quarter ago.

Great and then also EIG made nice improvement in the margin. How sustainable is that? Is that possible to improve this because through the year and is the biggest factor for improvement the economic outlook the cost-control that you are pursuing or is it more on the consolidation of acquisitions you made?

Yes, the margins are sustainable and we think they will actually improve for both operating groups. Our present model for the year calls for about a little bit over 1.5% improvement in the margins and of that, about a percent or a little bit more than a percent is due to the change in the accounting. So, we are really looking at about a half of a percent real margin improvement in the company with both groups contributing to that and it is a result of the cost-consolidations and the activities that we had put in place really over the course of last 18 months with the most major one being at the end of the fourth quarter. Our model, right now, does not assume a major economic upturn, so if, in fact, that occurs and obviously I am starting to feel more optimistic about there, there could be upside to our present estimates.

Great. Thanks.

Okay Harriet, thank you.

We will move next to James C. Lucas with Janney Montgomery Scott.

Thanks a lot. Good morning everyone.

Hi, Jim.

A couple of questions. First, when you talk about this new working capital initiative, have you changed the compensation structure at all this year and either the corporate or divisional level to help meet this new goal?

Yes, Jim, we have and it's an interesting question, great insight on your part. We decided to put some more focus in this area, as John indicated in his opening remarks, we feel that there's opportunity here even though we rank pretty high with respect to our peer companies in terms of our working capital performance and what we have done is, if you look at the compensation for a General Manager in our company about 20% of his additional compensation, which is the bonus, would be related to overall company performance, about 40% is related directly to the operating profit improvement in the various business units that person might be responsible for, but in the remaining 40% we have the option of selecting specific criteria that we can measure each General Manager against and one of the prime ones, this year, that we are putting focus on is working capital management. Most of our general managers have a good part of that other 40% related to asset management and, in particular, working capital management.

Okay. And on the working capital front, John, you didn't give the payable number. Could you give us that, please?

Just a minute, Jim. Well, our accounts payable is about $82 million at the end of the quarter, our trade accounts payable.

Okay. When you look at the $25 million of capital expenditure this year, how much of that is maintenance versus funding growth initiatives?

It's probably about a third of maintenance, about a third or may be a little bit more to fund growth initiatives, and other third in other various types of activities.

Okay. And final question on the aerospace side of your business, could you give us a little more color of what you are seeing there and part of that is, could you give us the breakdown of the end market served just roughly?

Sure. Let me start with breaking the business down. Right now, about 40% of our aerospace business is related to a commercial aerospace, about 30% is related to miliary aerospace, and about 30% is related to business-type business aircraft, if you will, regional jet type aircraft and the trends here are substantially different. The military side is just doing phenomenal. The shipments in the first quarter were up 80% over the first quarter of the previous year. So, substantial growth in the military side, our forecast for the second quarter maintains that level, so we feel that that part of the aerospace has been strong and will continue to be strong and, obviously, the direct results of the war efforts that are been going on. The commercial side is the weakest, it was down on the order of 15-20% in the first quarter, and it will probably weaken some more as the year goes on. Basically, what's happened in that segment is that the after-market declined right after September 11th and has remained down. The OEM side is forecasted to go down, but we haven't seen that much of a retraction yet that will happen more in the second half of the year and, obviously, we have put that into our planning process and it may be appropriate that cost-reductions to keep the profitability of that part of the business very healthy. And the third part is business in regional jet and that business is doing okay. It's down slightly and I would says it's the best way to describe it. There was an great article this morning in the Wall Street Journal about the [fractional] ownership in the United States and how it's increasing at a tremendous rate and that's helping to hold that part of the business up. So, when we sum that all up, in the first quarter of the total aerospace business was up 4% or 5% and when we look at it through the year, we think, it's going to be down a little bit, basically.

Okay. Great. Thanks a lot.

Goodbye, Jim.

We will move to [Eric Samuel] with JP Morgan.

ERIC SAMUEL]: Good morning.

Hello, [Eric].

ERIC SAMUEL]: I wonder if you could give me, sort of the sale breakout base or organic sales versus acquisitions?

For the whole company?

ERIC SAMUEL]: Yeah, for the whole company.

Sure.

ERIC SAMUEL]: Okay. You mentioned in the press release of power showing a good [spread]. Could you give a little more color than that, sort of, [Jim] versus the [TMD] and what you are seeing there?

There's two basic trends that are occurring in this business, one, down and one up. And, as you may recall, our business is roughly balanced in terms of its volumes between these two areas, one being the generation market and the other being the transmission and distribution market. The trend in the generation market is down. GE was originally planning to sell about 350 turbines this year and their forecast now calls for a number between 280 and 300, which is roughly equivalent to what they shipped last year, but down from their original projection. So, I would say with that business has been improving at a rapid rate, there's definitely a trend change that's occurring in the negative direction. The other part of the business, which is the transmission and distribution side, we expect the trend to go in the other direction and as the electric generation infrastructure gets in place, the issue is really going to be getting that power to the enduser and the transmission and distribution infrastructure is not as good. So, we have been putting a lot of R&D in that second segment, we think that's going to be a major growth opportunity as time goes on and what it's tending to do is to balance out so that we are looking at, when I sum the whole power segment of AMETEK right now, we are looking at for the year slightly down in terms of the overall trends and in the first quarter, it was pretty solid.

ERIC SAMUEL]: Okay. And on prospect instrumentation, you indicated that you had seen some strengthening in semiconductor. How about some of the other end markets there, what are you seeing?

I would say that there are some early indications of possible upside, but they are not as strong as what I have seen in semiconductor or I mentioned in the household or specialty metals business. So these are more some things I am hearing from our customers and what some of our General Managers are talking to, but the trends are not as solid at this point in time as the others. So, it's more difficult for me to give a clear indication there.

ERIC SAMUEL]: Okay and last question. You spoke on operational excellence, did you touch on the other three initiatives basically [give some commentary] of the progress there?

Yeah, absolutely. Let's start with the acquisitions. First, they are going to dramatically help 2002 in terms of our forecast, that's about $88 million to $90 million of incremental revenue that we are going to see in 2002 over 2001 based on the acquisitions that we did last year, which are EDAX, IRAS, and GS Electric. Our backlog of acquisitions is good and we would expect to make our target this year, which is in the area of $100 plus million of acquisitions and we are spending a lot of energy on that. S,o I am pretty excited about the acquisition strategy and we are going to continue to focus on it. In terms of global and market expansion, significant effort is going in to that activity. Actually, within the last week or so, I have been in personal contact with our people in the international areas and preparation for an officers' meeting is coming up in a few weeks and I am starting to see improving trends in those markets. Asia, is definitely starting to show some improvement over where it was last year. We are continuing to expand the distribution capability there. The acquisitions of IRAS, EDAX have added substantially to both our far Eastern as well as our European infrastructure, if you will, to the point now where 35% of EIG's volume is outside the United States, which is a big improvement over where it has been. In Europe, the infrastructure continues to increase with our activities at AEM and the floor care business, as I mentioned in my opening remarks, is starting to show some life. So, feeling pretty good right now about the global market expansion activities and we are going to continue to focus on this, both from the distribution side and from the low-cost manufacturing side to essentially get our fair share of the international market and our goals to get about 50% of our total volume outside the U.S. The third strategy is new product development and we continued to invest in new product development and our level of spending in 2001, in a very difficult economic environment, was only down slightly from the year before so, although we have done dramatic cuts across the company, that's one area where we did not do substantial cost cutting because we felt that it was important to our future and we have introduced a host of new products across the company, a new generation of motors that are lower in costs have been introduced which is very positive. We have introduced some products for the semiconductor industry expecting a rebound and these are [moisture] analytic type of products. So the new product flow is continuing and we feel pretty good about it.

ERIC SAMUEL]: Okay. Great. That's it from me. Thanks.

Okay [Eric].

We will now move to Laurie Goldstein with Gilford Securities.

Good quarter guys. Most of our questions were answered except for total assets.

Total assets were $1.038 billion.

Okay. We have seen AMETEK's, part of the story has been growth by acquisition and the company had chatted last quarter, Frank you had chatted about the aerospace component moving towards military and there was the lack of capacity in aero commands, North American aero commands. Can we expect that AMETEK is looking to put more with the phenomenal numbers, up to 80%, are you guys going to be looking in that area to expand or whether are you currently expanding your capacity organically?

We are actually looking forward to do more on the military side. It's an interesting question because if you go back to the early 90s, we had decided not to do substantial investment in the military side of the business and before September 11th, actually about a year before, we had re-looked at it and start making investments in the military and that timing was good, obviously, because with the advent of September 11th that market which was not considered a good one is now, obviously, a very positive one so we are going to continue that investment and we are going to do it internally and if we can find acquisitions that make sense to add on to that part of that business, we would surely do that. So, we are going to look at it as a potential growth segment. It's sort of an operating philosophy of AMETEK to try to keep balance in your businesses and just the fact that we have a military segment and as well as a commercial aerospace segment, one segment goes down they kind of balance out, so that we can keep the overall earnings of the company rolling forward in a positive way.

Great. Thanks Bill. I do not know if I missed this, R&D for the year?

You want 2002, Gary, or 2001?

2002...

We spent $75 million in our last year and we are budgeting about $50 million this year, Gary.

Okay. Thank you.

Okay Gary.

We will next move to Godfrey Brickhead with SBK Brooks. Please go ahead.

Good morning.

Good morning Godfrey.

A housekeeping question to begin with long-term debt as of 03/31/02 please?

303 million.

How much?

303 million.

Thank you. What is the size of the aerospace business overall?

It is about $140 million on the instrument side of the business and then there is another $30 or $35 million on the motor side of the business that also [focus] into that general aerospace and defense market.

So, talking about 40% commercial, 30% military, and 30% original debt, does that apply to the whole [saying] or?

That is a good question Godfrey. I was really referring to the instrument side of the business when I said that.

Okay.

That is exactly right.

Okay. The next question is in talking about new products, we are all familiar with 3 M that talks about the percentage of new products that were sold last year as a percentage of total, do you keep a track of that?

Yes, we do. What we look at is the percentage of sales in the current year that was due to products introduced in the last three years and for our company last year, it ran around 12% and our goal is to get that up to above 15%.

Thank you. And then, finally, this is the question John that I always have is about the SG&A expenses that were up about 15.3% and I think you eluded to higher pension costs, medical insurance, and general insurance [_____]?

The rest of that Godfrey is the mix of the business that we acquired last year and the selling expense percentages for those businesses will drove that increase.

Okay. So the acquisition, the SG&A costs for them have not been brought the inline with the overall company, is that what you are telling?

Its they have just had a different distributions came and they have a got a different way of ... especially the EDAX and the IRAS business. So, it's just a different way of getting to the market and that's because you are seeing that flow in to our results.

Okay. John, in making our model what should we assume that the SG&A expenses would be up safer the full year [than]?

Our run rate right now was probably reasonable....

Okay. They should run about 15% above a year ago, is that right?

Well, as the year passes that number will change. So, I would take the first quarter and extrapolate of it ...look at last year.

Okay. And so, basically the operating excellence is coming at the gross margin level. Is that the right way to look at it?

More often not.... yes Godfrey. We are focussing on cost...

Okay. Thank you very much guys.

Okay Godfrey.

Just a reminder. If you do have a question today, please signal us by pressing *1.

JIM _____]: Hi. Good morning everyone. Good quarter.

Hi. Jim thanks.

JIM _____]: Just one quick question. Your move to Reynosa, Mexico like you mentioned that you [trying to do the] 20% of your production in Mexico by yearend. How much was that from last year and I missed that number?

Yeah, if you look at our trends here in 2000, we did a little bit less than 10% of the total company volume, which was produced in Mexico. In 2001, it was 15% and for the fully year 2002, its 20%.

That's all in the low-cost areas, not just Reynosa that includes the Czech republic and it includes China.

JIM _____]: Okay. Now is this more than you had planned earlier or is it pretty much on track with what you have planned?

Well, it really depends on the point in time that we are talking about. Where we are now is where we expected to be as a result of the cost productions that we put in place over the last 18 months. But if you go back in time, Jim a couple of years ago, we did not expect to be as far as long as we are now and what we did as the economy got worse, we accelerated these moves and that's been a key factor in keeping the margin performance of the company as strong it is.

JIM _____]: Okay. I guess I am trying to [link] back to your guidance for this year. Does that include 20% [elude] to Reynosa or[is that [more than] upside?

Yes, the guidance that we have given you includes the 20% for the year.

JIM _____]: Okay. And then, you said you exceed that number, do you accelerate the move [_____] upside benefit?

There could be some upside benefits there, but I don't think that we think in 2002 there is a lot more leverage. We are probably at the maximum capacity in terms also being able to make these moves. So, the leverage on earnings is more going to be from an economic recovery in volumes than it is going to be from accelerating those moves in 2002.

JIM _____]: Okay. Great. Thanks a lot guys.

Okay Jim.

We will move next to [Mark Giller] with C.L. King & Associates.

MARK GILLER]: Good morning gentlemen.

Good morning.

MARK GILLER]: A followup to [Eric Samuels] question on the power segment. Given the fact that half of the business is large turbine, is it a safe assumption that's clearly driven by OEM market?

Its largely driven by the OEM market. There is an after-market component, but it's not a huge part of it.

MARK GILLER]: Great. And then what about the transmission and distribution part? Is that strictly OEM or can we kind of gain from retrofits or upgrade to existing?

Yeah. There are retrofits existing in utility plants. There are many power custody kinds of applications and even in manufacturing plants for instance. If you take a semiconductor plant, where the quality of the power is very important to the ability to get good yields in the semiconductor process. So, its has got a much broader customer base that is not just OEM-related, there is an after-market and a service component to it.

MARK GILLER]: That's great. Now, on the last call, I think you said this power business combined was growing about 6-7%?

Yes.

MARK GILLER]: Now, do you think that's going to grow at a lower rate?

Yeah, we do. Our projections for this year are basically flat-to-slightly down right now.

MARK GILLER]: Okay. For the overall total power business?

For the overall total power business.

MARK GILLER]: Now, also on the last call, you said that large turbine business most of the majority of that was with General Electric?

Yes.

MARK GILLER]: And then, you also said that you had been planning on expanding that into some of the other OEMs. Have you been successful at penetrating?

Yeah, we are definitely starting to have more discussions and more business with the other OEMs, although at this point in time, GE is still the major part of that business, but we see over time that we can infact diversify it.

MARK GILLER]: Okay, but its just going to be longer?

MARK GILLER]: Great. Of course. Okay. Switching to the mechanical segment, on several of these calls, you have always stated that one of the biggest market opportunities was disintegration with the major OEMs and in fact, I believe you have reported some success with Hoover. Could you give us an update on how that was going and does weaker market conditions make that easier or more difficult?

Yeah. Let me start with the Hoover. I did mention previous conference calls that we had started to penetrate Hoover and supply them motors and that's going extremely well to the point where we are actually even increasing our penetration of that account and doing more motor production than we had originally anticipated with them. They were one of the few large OEMs who we have not been doing business, we had not historically not a lot of business with them. I am talking Hoover U.S. not Hoover U.K. which we have already had a very strong position with. To your second question, absolutely as the economy gets weaker and as [_____] manufacturer who vertically integrates their own motor production looks to produce new motors, they typically have to capital investments and as the economy weakens obviously, there is an incentive not to make those capital investments and so we find as the economy weakens that those companies come to us probably more easily or more readily than they would in a good economy and in fact, we are talking with other OEMs and without naming one, there is a one that right now, we are looking at an opportunity that could be as large as $40 million in annualized revenue and its exactly the result of what you were talking about. They have to make capital investments if they are going to remain competitive in the motor environment and they prefer not to do it. So that's why they are talking with us.

MARK GILLER]: And if this agreement did materialize would that start this year?

It could start this year.

MARK GILLER]: Okay. Great. Thanks.

Goodbye.

And if you have a question today, please signal us now by pressing *1. Gentlemen, it appears there are no further questions at this point. I will go ahead and turn the call back you for any additional or closing remarks.

Okay. Thank you very much for joining our call today. If you have any further questions, I can be reached at 601-889-5249. Thank you.

With that, we will our conclude today's conference. Thank you everyone for your participation.