阿美特克 (AME) 2002 Q3 法說會逐字稿

Good-day everyone and welcome to this Ametek Incorporated Q3 Conference Call.

This call is being recorded.

For opening remarks and introduction, I would now like to turn the conference over to Mr Bill Burke, Vice-President of Investor Relations.

Please go ahead sir.

Good morning and welcome to Ametek's Q3 Conference Call.

Joining me this morning are Frank Hermance, Chairman and Chief Executive Officer, and John Molinelli, Executive Vice President and Chief Financial Officer.

Ametek's Q3 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 until November 1st, by calling 888 203 11 12 and entering the confirmation code number, 333785.

This conference call is also webcasted.

It can be accessed at Ametek.com and at Streetevents.com.

The conference call will be archived on both of these websites.

Finally, I will remind you that any statements made by Ametek during the call that are not historical in nature are to be considered 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 files.

I now turn the meeting over to Frank.

Thanks Bill.

We had a solid Q3.

We met our expectations for earning and established records for operating income, net income and diluted EPS.

Cash flow generation was strong with cash flow from operations at $23.6mln.

Sales were flat for the quarter at $257mln.

The December 2001 acquisition of Instruments for Research and Applied Science or IRAS was a positive contributor to our top line.

Our high and analytic instruments and heavy vehicle businesses also performed quite well in the quarter.

However, the economic slow-down continues to impact many of our markets.

Operating income of $38.1mln was up 15% from last year's Q3.

Net income was up 21% to $21.4mln and diluted earnings per share also increased 21% to 64c per share.

Over the past 2 years we have aggressively managed our cost structure.

These actions had a significant positive impact on our performance.

Overall, we are very pleased with our Q3 results.

Turning our attention to the individual operating groups.

For Q3 EIG revenues were up 6%.

IRAS contributed to the top and bottom line performance through the group.

In addition our high and analytical instruments and heavy vehicle businesses did well.

However, conditions remain weak in many of EIG's markets.

Operating income for the quarter was up 26% to $22.8mln and margins improved to a very strong 16.9% from 14.4% last year.

This margin improvement while aided by a somewhat easier comparison, is truly impressive and represents the strength of Ametek's growth strategies.

Contributors to this increase include first the acquisition of IRAS, a highly differentiated business, with margins greater than the group average.

Second, the anticipated improved profitability of our Edax acquisition moving from significantly below the group average to well above the group average.

And third, and perhaps more importantly, many of our instrument businesses in the face of the economic down turn, have worked very hard to maintain and in a number of instances, improve their profitability.

This has been accomplished by reducing their cost structure, through head count reductions, shifting production to low cost locales, and other general expense reductions.

Turning to the Electro-Mechanical Group.

For Q3 EMG revenues were down 6%, reflecting continued difficult market conditions in the floor care business.

Operating income for the quarter was up 2% to $19.5mln.

Operating margins expanded to 130 basis points to 16%.

Significant progress has been made by EMG in strengthening margins despite a difficult economic environment.

As in the Electronic Instruments Group our businesses have worked very hard to hold, and in a number of instances, improve their profitability.

Key drivers in EMG are the low cost manufacturing thrust and a relentless focus on driving cost out of the organisation.

Turning to the outlook for 2002, as we stated in our prior conference calls, our business planning for 2002, was done assuming no economic recovery during the year.

The manufacturing sector remains weak and we have not seen signs of a recovery in most of our markets.

We expect Q4 revenues to be up mid single digits from last year's Q4, resulting in modestly improved revenues for the year.

We are comfortable with the street consensus for earnings per share for 2002.

In summary, Ametek has performed well during this economic down-turn.

Our [forgrow] strategies have worked during these difficult times and have positioned us for substantial growth when the economy recovers.

We will recapture the $100mln to $150mln in revenue we have lost, due to the economic down-turn and bring that revenue to the bottom line at a leveraged rate.

This should create significant value for our shareholders.

On January 1st 2002, Ametek adopted FAS 142 which eliminated the amortisation of goodwill.

The impact of goodwill amortisation on our 2001 results was 8c for diluted share in Q3 and Q4 and 30c for diluted share for the full year.

Acquisitions have been and continue to be a key component of Ametek's success.

In our acquisitions, we look for the following; companies that are between $30mln and $100mln in size, differentiated businesses, better leaders in their niche markets and either extend Ametek's strength in those niche markets, or expand our capabilities into new niche markets.

And finally, any potential acquisition must meet stringent financial criteria.

IRAS acquired at the end of December 2001, is an excellent example of Ametek's acquisition strategy at work.

I would like to take a few minutes and speak about our IRAS acquisition and how changes in the world have created new opportunities for this business.

IRAS, renamed Advanced Measurement Technology, or AMT, is a highly differentiated, technologically advanced instrumentation business, with annual revenues of more than $50mln.

AMT significantly expanded our core competency in the measurement of physically properties, adding new technologies, applications and end markets.

AMT's largest product line is nuclear spectrometry instruments and systems.

These products marketed under the ORTEC brand name include high purity [germanium] detectors and spectrometers that are used to detect, identify and qualify and monitor radioactive materials.

These products are focused on the increasingly important areas of environmental monitoring, research and the detection of nuclear and chemical weapons.

Recent terrorist events have created a large opportunity for suppliers of instrumentation for nuclear safeguards and non-disruptive assay.

AMT is well-positioned to benefit from this growing anti-terrorism market.

AMT's products are used as a part of multiple lines in defense against potential threats to homeland security.

The first line of defense is safeguarding of known nuclear stockpiles.

AMT products are used around the world by groups such as the International Atomic Energy Agency, to monitor the levels of fissile nuclear material at declared nuclear sites.

These are very precise measurements because the object of the measurement is to detect any missing material.

With the events of September 11th, and the specter of an attack using a nuclear device or a so-called dirty bomb, the second line of defense, getting better control of our nation's ports and borders, to keep out any fissile material, has become much more important.

The third line of defense is environmental monitoring around the U.S. to identify undeclared material that may be in place.

The second and third line of defense projects are being greatly expanded under the umbrella of homeland security by such organizations as Defense Threat Reduction Agency and others.

AMT has developed strong relationships with the Departments of Energy and Defense and the appropriate national laboratories charged with developing and deploying these technologies.

AMT's high purity germanium detectors and associated software and electronics are key components to these types of monitoring systems.

Market opportunities for AMT's products for homeland defense could total as much as $50mln annually.

AMT's technology also is used in chemical weapons detection.

While originally designed to support verification under the Chemical Weapons Convention, the [ ] attack on the Tokyo underground several years ago, has resulted in a number of systems being deployed world widely as a counter terrorism device.

AMT's ORTEC Pin System was used at the Olympic Games in Australia and Salt Lake City for chemical weapons detection. [ ] technology has been a great acquisition for Ametek.

It is a highly differentiated business with strong growth characteristics.

It has extended our reach into new measurement technologies and new markets.

It is a platform that we intend to grow in the future.

John will now cover some of the financial details and then we will be very glad to answer your questions.

Thank you Frank.

In general we had a solid Q3, both from a PNL and balance sheet perspective.

First, focusing on PNL.

Our Q3 GNA spending was essentially unchanged from last year's Q3 and down 9% on a sequential basis, as we have focused very closely on cost reduction opportunities.

We do expect the 2002 GNA spending will be up about 5% from last year, driven by a higher pension, medical, and general insurance cost, partially offset by other cost reductions.

Interest expense was down $280,000 or 4% versus Q3 of 2001.

On lower interest rates and debt levels in Q3 of 2002.

Interest expense was down sequentially from Q2 as we paid down debt with the strong cash flow during the quarter, and interest remain low.

Other expense totals $600,000 in the quarter, an increase of $1mln from Q3 of 2001.

In the current market environment, we were unable to duplicate the gains generated last year on investments held in our insurance captive. [Ennisback] had losses on sales of our marketable securities.

The effective tax rate in Q3 was 31.7%, down from 34.2% last year due to the impact of implementing FAS 142 as well as effective tax planning strategies.

Our year to date effective tax rate is 32.2% for the year.

We expect a rate between 32% and 32.5%.

As we have mentioned, the adoption of FAS 142 has eliminated the amortization of goodwill effected January 1st, 2002.

Our goodwill amortized in 2001 resulted in a 30c per share reduction on earnings per share.

The quarterly breakdown of that 30c, was 7c in Q1, 7c in Q2, 8c in Q3, and 8c in Q4.

Looking to the balance sheet.

Our Q3 cash flow was good.

Our balance sheet is stronger and we continue to see results from our working capital focus.

Our cash and marketable securities total $24min, up $2mln from year end.

Inventories declined $6.6mln for the quarter to $135mln.

For the year, inventories are down more than $17mln.

As we have mentioned in our previous calls, we have placed a focused effort on reducing inventories and are very pleased with our progress, especially when it is placed in the context of what is going on in our businesses and the economy in general.

We have continued our moves to low cost manufacturing areas and have increased inventories in certain businesses to protect our customers during the moves.

In addition the weak economic environment and disruptions in several of our markets have made the task of reducing working capital that much more difficult.

The costs receivable at September 30th, 2002, were $181m, down almost $16mln on the quarter, compared to the June 30th level.

While quarterly sales were down $10mln on a sequential basis, day sales outstanding improved by 4 days in the quarter.

Costs payable at September 30th 2002 was $81mln.

Our businesses are working hard to reduce working capital and have achieved much success.

Our ratio of operating working capital to sales is 22%.

A number that ranks Ametek high among our peers and we believe there is still more to come.

Our pre-cash flow net income plus depreciation and amortization, less capital spending and less dividends, was $22.9min, or 107% of net income for Q3.

Cash flow from Operations was $23.6mln in the quarter and $80.3mln for the year to date.

The year to date cash flow from Operations was 66% higher than last year's year to date level.

Total debt is $416mln down $55mln from $471mln at December 31st, driven by the strong cash flow.

Our existing borrowing capacity totaled $177mln at September 30th.

Our debt to capitalization ratio stands at 51% at September 30th, down from 58% at December 31st, despite spending more than $60mln on the IRAS acquisition at the end of 2001.

Regarding our use of capital.

Acquisitions remain our first priority.

In the absence of an acquisition opportunity, our next priority is to pay down our debt.

Also in Q3 we repurchased approximately 237,000 shares at a cost of $7.3mln as part of our program to generally offset the dilution of our benefit program for share repurchases.

Approximately $8mln remains available under this authorization.

Shareholders equity increased to $397mln up from $335mln at year end.

Capital expenditures were nearly $5mln for the quarter and total about $13mln here to date and should total about $20mln for the year.

A reduction from our prior estimate.

Depreciation and amortization total $8.3mln for the quarter and is expected to reach $33mln for the year.

In summary, Ametek remains financially sound.

Our focus on operational excellence continues to pay off.

Our factories are well run, our inventories are down, our margins are good and our cost structure is well managed.

The balance sheet is healthy.

We continue to generate strong cash flow and our working capital metrics are good and improving.

All this in a very difficult economic environment.

We have significant financial resources at our disposal to support our core growth strategies and continue to create shareholder value.

The outlook for 2002 continues to be solid.

That concludes our prepared remarks - Phil we would be more than happy to take questions at this point.

Thank you.

Our question and answer session will be conducted electronically.

If you would like to ask a question simply press the *key followed by the digit 1 on your touchtone telephones.

We will take the questions as you have signaled us and take as many questions as time permits.

Once again that is the *1 to ask a question, then we will pause just a moment to assemble our roster.

And our first questions comes from Susanna Matter with Deutsche Bank.

Good morning.

Good morning.

My first question is, how sustainable do you think the high end instrument demand is?

Actually pretty good.

As we look into Q4 our demand forecast and projection for the high end analytic business is strong as both for Process and Analytics as well as our AMT business, so that part of the business is doing well.

Do you see that continuing into 2003 as well?

I see no reason why it wouldn't.

My second question concerns the sequential [ ] motor trends.

Do you see any acceleration of the contraction that occurred in September and October?

A little bit.

As we look from Q3 to Q4 there is going to be a slight reduction in EMG's volume.

There is a normal cyclicality to Q4 in that business, so I don't think it is actually weakening of the market itself, it is more the normal cyclicality of that business.

But definitely that business is bouncing along bottom right now.

And what about Floor care trends in the US versus Europe.

I would say they are both very similar.

They are lethargic, maybe a little worse in the US than Europe.

The strong point right now is actually Asia.

It is not only for the motor group but actually for the whole company.

If you look at our volume in Q3, on a quarter over quarter basis, the Asia volume for Ametek was actually up more than 50% so that's the one economy right now that is showing some life.

Thank you very much.

We will now hear from Jim Lucas from Janney Montgomery Scott.

Thanks a lot.

First question, housekeeping John.

What was the debt number again?

It was $416mln total debt at the end of September, Jim.

And if we could spend a minute on the CAPEX reduction, could you talk about how much of your CAPEX is maintenance versus growth and of the cut, the reduction in your forecast here, does that signify that just clamping down the belt are you, have you cut back on funding any growth initiatives?

Jim, let me take that one.

Yeah, the CAPEX for the company is pretty much split - probably a third for maintenance, a third for growth and a third for other types of activities and yeah, along with our general expense reductions, we have really looked at the capital in the company and have basically been able to reduce it a little bit from what we had originally anticipated.

But in instance are we feeling like we have hurt any of our future growth initiatives.

And on the acquisition front, first in the quarter, could you break out the EIG how much was core versus acquisitions.

Yeah, I sure can.

There was about $12mln of acquisition oriented volume in the quarter.

If you look at the core growth why don't I give you the whole company figures.

For Q3 the core growth was down 4% for the company.

It was down about 3% in EIG and down about 6% in EMG.

The good news in this is if you look at the quarterly trends here.

In the Q1 Ametek's internal growth was down 13%, in the Q2 down 7% - as I just indicated in Q3 down 4% and we actually expected that in Q4 we are going to see growth from an internal viewpoint.

So the trends are definitely improving.

Of course the comparisons are getting a little bit easier as we go forward.

And on the acquisition front, the balance sheet continues to improve, generating solid cash.

What we have been hearing on conference calls over the last couple of weeks in companies in general in the last few months is that valuations are slowly beginning to become a little more reasonable as people are coming back to reality on the expectations of what their worth are.

But what are you seeing from an acquisition standpoint and give us a fill for the pipeline.

You bet Jim.

A great set of questions there.

Actually there has been a pretty significant change.

You may recall that Q2 when I talked about the acquisition pipeline, I wasn't too optimistic.

We had been looking at one company very seriously just prior to that and we actually pulled out of that acquisition because of some liability issues we couldn't resolved.

And the pipeline was not as strong as I would like.

Over the course of Q3 that has totally changed.

Our pipeline is now, I would say, extremely full.

We are actively engaged in looking at a number of companies and I support what you heard from other companies, that the pricing seems to be getting a little bit more reasonable than it was.

Although I would not say dramatically so.

We will now hear from Eric Daniels of J.P. Morgan.

Good morning.

Hello, Eric.

Frank, could you take a moment and sort of go through the different businesses on the EIG side, EMG side and give some color on what their end markets are looking like?

Sure.

I would be glad to do that.

Why don't I do it in terms of trends from Q3 into Q4 of the year?

We expect EIG's volume as we go from Q3 to Q4 to be about flat.

We expect Aerospace to be roughly flat in volume.

We are pretty pleased overall with the performance of our Aerospace group.

It is really being driven by very, very strong performance in the military side of that business.

Obviously the commercial side is down.

If you look at it on a quarter over quarter basis it is down 25% to 30%, which is what we had anticipated.

The business in regional jet business is doing much better and the military was up about 50% in the quarter, so overall, the aerospace business, in light of what's happening in the commercial market, is doing pretty well.

So we expect the trend from Q3 and Q4 to be about flat.

The power business as we go from Q3 to Q4 is down a little bit, not substantially.

You know, if you look at General Electric, the number of turbines that they are shipping.

They are projecting going from about 250 this year, down somewhat next year, about half of that level.

So that business is going to continue to weaken, but we have taken the appropriate cost actions to keep the profitability of that business in good shape.

And also, as I think you are aware, only about half of that business is in the [Lang] gas turbine side, the other half is in transmission and distribution and that business is doing better than the [Lang] gas turbine business.

As I mentioned in response to a previous question, the high end analytics business, the process business, look pretty good right now and we actually expect improvement as we go from Q3 to Q4.

So that business is strong both in the process analytic side as well as the AMT business that I highlighted in my call.

And the last part of EIG is the industrial business and Q3 was very, very strong for the industrial business.

It was up about 10% over last year and the reason for that was largely this EPA guideline that went into effect in the heavy truck business that essentially is going to start to weaken in Q4.

So we actually expect the trend from Q3 to Q4 to go down.

And when you sum all of that up with aerospace roughly flat from Q3 to Q4, power down a little bit, process up and industrial down, we expect that basically we are going to have flat performance for EIG.

I hope that answers your question.

And on the EMG side?

If you could go through a similar exercise.

Ok.

On EMG, basically we expect the volume to go down slightly from Q3 to Q4.

As I mentioned before that is due predominantly to the cyclicality of that business.

So when you sum that up, if you sum EIG and EMG we expect the total volume for the company to just be down slightly as we go from Q3 to Q4.

If you break EMG down, the household floor care business is a little bit weaker than the other parts of the business - the more differentiated businesses, which is what you would expect in this economic environment.

And any update on the effort to get floor care manufacturers to [deintegrate] their motor manufacturing?

Yeah, actually without speaking to the particular customer, we won another major part of business from a vertically integrated supplier of vacuum cleaners in Q3.

We expect that particular business to click in about mid-next year and we are pretty pleased with that.

So it is actually a positive of this economic environment that we are in, as some of the vertically integrated manufacturers look to put capital in their lines, because of their need to upgrade their motors.

They basically will say, 'You know, why don't we go to Ametek or another supplier, instead of putting the capital in'.

So we are actually leveraging our capital base right now.

Ok, and a couple of housekeeping questions on the model.

What was the short-term debt and long-term debt for Q3.

Long-term debt was $280mln and as John said, the total debt was $416min, so ..

I may have missed the CAPEX number, what was that for Q3?

$4.8min.

Ok, great.

That does it for me.

Thanks.

You bet, Eric.

Gerry Brockman with C.S.First Boston, has the next question.

Morning guys, nice quarter.

Thanks Gerry.

Let me go back to kind of the, I mean I am new to you guys here - on the - we are hanging the bottoms on the EMG side, what kind of rebound potential do we have here?

And then given the kind of cost moves you have taken, what potential could we hit on the upside with the margins in this business?

Let me answer the question in a little bit more global sense, and then get back to just EMG.

As I mentioned in my initial comments, we believe that we have lost between $100mln and $150mln in volume across the entire company as a result of this economic downturn.

And if you look at our volumes over the last year or so, we basically kept the volumes flat which was due to the acquisition strategy that we have in place.

We believe that we can bring that $100mln to $150mln back as the economy improves, and that we can put it to the bottom line at a leveraged rate.

If you look at the contribution margins of these businesses, Ametek overall has a contribution margin of about 40%, with significant differences between the two groups and also significant differences in the two groups of the company.

If you look at the average for EMG, it is in the low thirties, in terms of contribution margin.

If you look at the average for EIG it is in the high forties, and that is how you get this average for the whole company of about 40%.

But within those two groups there is substantial variance.

If you look at some of our very low end floor care businesses, they are going to have lower contribution margins, than for instance the higher end differentiated businesses, and similarly in the EIG area.

So it is difficult to predict as that $100mln and $150mln comes back, which businesses are actually going to come back first and what the contribution margin from those specific business are going to be.

And that is going to be one of our challenges as we look to our profitability for the next couple of years.

Ok.

And the $100mln and $150mln is for the entire company and not just EMG.

That is exactly right.

Roughly I would say it is pretty evenly split between the two groups.

Ok.

And then during this downturn, market share - have we been gaining, losing?

I would say if we averaged it across the whole company we are probably slightly up on market share.

Certain parts of the business, in the very low ends of both the floor care business and EIG businesses, we have purposefully not taken business, where the profitability got to the point where it just didn't make sense.

So, in some of those businesses, we have lost share, but knowingly and purposefully.

And through our higher end businesses we have been able to gain share, and take advantage of this economic downturn and our strong operating performance.

So if I sum it up across the whole company, I would say slight improvements in market share.

Good, good.

Then on the other question, how much corn is left on the cob as we move to the low cost locales?

How much what?

Corn on the cob?

Sure, we are getting close now, aren't we?

I got the question Gerry, it just took a couple of ...

Sorry.

If you look at our progress here.

In year 2000, about 10% of Ametek's total volume was outside the US.

In 2001 we increased that to 15%.

I just got the numbers for Q3 and we are up to about 18% in Q3.

So we have been making substantial progress.

As we look forward, you know, we believe that about 40% of Ametek's volume could in fact be done in these low cost locales, so there is tremendous leverage that we will continue to bear fruit from.

And, you know, it sort of links to some of the questions on the capital, in that we have got the capital structure in place to make this happen.

We don't have to inject substantial amounts of capital to continue this thrust.

So we are going to continue it on a sequential basis and just continue to make it happen.

No we don't expect you to get there in Q4, what is it about 2 or 3 years?

Oh, yeah, absolutely.

This is a multi-year effort to make this happen.

Ok, just one last quick question.

The other expenses jumped about $1mln a year over here.

Yeah, as John indicated in his write up, that is mainly due to gains on securities last year, versus some losses this year.

Ok.

Great, and again thanks - a good quarter.

Thanks Gerry.

Moving on, we will hear from Gerry Goldstein, with Gilford Securities.

Great quarter guys in this kind of environment.

Our questions have been answered, but a really good quarter in this kind of environment.

Thanks.

We will hear from Matt Somerville with McDonald Investments.

Good morning.

Good morning, Matt.

A couple of questions.

In EMG, they are down 6% on a core basis.

Can you kind of break out how much of that relates to mix, or pricing versus units?

That's a good question.

Pricing has been relatively strong.

We are probably looking at a percent or so on the pricing itself.

So the bigger impacts are really on mix and volume.

Ok, other than floor care, can you talk a little bit more specifically about some of the other businesses' technical specialty, motors, and what you have seen there in terms of demand trends?

Yeah, I mean the demand trends are sort of bouncing along bottom.

There is not any substantial up tick that we are seeing in those businesses and also not a substantial down tick.

The good news is that those businesses have done, I would say, just an incredible job on keeping their profitability reasonable in this kind of economic environment.

The Rotron people have done a great job - our specialty metals people have done a great job.

So these businesses are just sitting there waiting for the economic rebound, whenever that occurs, and as it does, their profitability is going to increase nicely.

And if I could just take a moment and inject a comment.

I would like to really thank all the Ametek employees, many of whom are listening to this conference call, for really the excellent job they've done in managing this very difficult economic environment.

Secondly, you know can you, is there any way you can put some numbers around how meaningful some of the new program wins you've had on the motor side could be the revenues in 2003 and 2004.

It is a difficult question.

I mean we can talk specifically to a few of the contracts that we have won and we are probably talking on those contracts.

If I look worldwide a number between $25mln and $35mln.

But you have to be careful in terms of just saying 'that's incremental volume for next year', because we are going to continue to be under mix and pricing pressure in our core businesses.

Right, ok.

That certainly makes good sense.

A couple of questions for John.

John, could you talk a little bit about what your expectation is for the pension impact on the P and L next year?

Matt, we are still looking at the budget for next year for the whole company, and we really haven't even begun that process.

Clearly it is going to be a difficult environment, given the markets that we are all in, but it is really premature to comment on one aspect of next year's income statement before we get into the whole picture for next year.

ok.

And lastly could you talk sequentially what drove the decline in the headquarters and other operating income line - it was down about $500,000 sequentially.

It was down - with a lot of ..

We had a little bit of seasonality in that spend rate it looks like.

Travel was down, some of the consulting work was down, some of our just general activities were down in the headquarters and in Q3 which is not unlike what was happening a year ago.

I don't expect that to continue.

It think we will be up several hundred thousand in Q4.

Thank you.

We will now hear from Richard Easeman with Roger W. Baird.

Good morning guys.

Good morning Rick.

A couple of thoughts on the EIG operating margin.

What impact did IRAS have on that number?

Can you break it out in basis points?

I prefer not to talk about the specifics of the numbers of a given division in the company, but let me just qualify it this way and say that that business has operating margins well above the group average.

And that obviously helped the overall group, but on the other hand the volume from that group - it is basically a $50mln business, so it is about 10% of the overall group.

So its impact is not the major contributor to that margin improvement.

The major contributor is more the operating performance of all the other divisions.

Can I also ask again, in EIG, did the EPA benefits that hit the industrial business, the heavy duty truck instrument business, did they have a measurable impact on that 16.9%?

Sure.

Will that come off seasonally?

Yes.

Yes, that is an excellent point.

We had an abnormally strong performance from that group, due to those EPA guidelines.

So let me talk about the margins for the company and what we expect as we go forward.

As we go from Q3 to Q4, we are going to be very consistent with what I said a quarter ago and that we do expect across the whole company margins to improve a little bit more.

Probably on the order of 20 basis points.

But if you look at the mix of that margin improvement we would actually expect EIG to go down.

They had this very strong third quarter to your point, so we would actually expect those margins to retreat as we go from Q3 to Q4.

But conversely, we expect the margins in EMG to improve, and the primary reason for that is this continual movement of products from higher cost areas to lower cost areas, and we continue to expect to get benefits from that.

So as you sum those two, we expect extremely good margin performance for the overall company.

Ok.

And then also I would just circle back one second to IRAS, was IRAS a [ ] to the net income line?

Oh, yes.

Did it add a penny or two?

I don't know if we can give you an exact number.

But probably that's probably in the order of [a million or two].

Ok.

Just one last question.

I just want to clarify.

In terms of the EMG business itself, I think an important point - do you have any comparable level with you know, sales were down there 6%, price was actually up .5%, was unit volume itself up?

Again trying to separate mix from unit volume?

Do you have any sense for that?

In general, we see a really strong good mix in the quarter on the EMG side.

As Frank alluded to, there has been some low margin business that we have chosen not to be terribly competitive on, and gone after the higher margin, better businesses that we could bring to the bottom line at a better rate, so I think you are seeing the effect of the mix, as well as our operational excellence coming to bear there.

You will now hear from Giles Vinprog with Delafield Asset Management.

Good morning.

Once again congratulations on the margins this quarter - really fantastic in the light of the world out there.

Thanks Giles.

You did answer most of the questions I had.

But just a little bit more on the move to lower cost areas.

Your comment that you don't need to put a lot of capital in there to get from your current level to the ultimate potential [40%] of manufacturing.

Roughly where are you in terms of capacity utilisation in a lower cost area, and how much incremental capital do you think you need to put into this operation, understanding it is not a big chunk?

It really varies between the various locations and I think the best way I can answer your question, is to say that we have under utilization in those factories, but probably the key point is that the incremental things we need to do in order to increase capacity are pretty small, and let me give you some example.

In the [Renosa] operation, we purchased a second site, as you may recall and we did it in a way that we built one building on that site now, which is roughly 100,000 square feet.

And we can now add, on that same site, two increments of 80,000 square feet.

We have already purchased the land.

The incremental cost to put the next couple of buildings in terms of addition is relatively small.

Similarly, if we look at Asia, it is exactly the same scenario.

We have built one plant there, and then as we expanded it, we built another half a plant in terms of size.

We can now take that whole structure, and I will say it is a plant and a half and duplicate that, to make it three plants on the same land, with minimal incremental expense.

And maybe the best way I could put it number 2, is that we have said before, and we will stick to the fact that we think that using a number like 3% of the total volume of the company as our injection of capital, we can easily support the strategy that I am talking about.

Great, great.

And in [Renosa] specifically, since you initially moved down there, you've got a lot of company, just listening to companies talking about what they are doing with low cost, are you having any issues with labor and or labor rates down there?

There are some issues.

You know the labor rates if you look historically back a couple of years, they were growing at fairly substantial rates, but actually now the increase this year was much more like the United States.

So it seems like it is coming back into more reasonable levels.

The cost structure of labor has not been a major concern of ours.

We have had no problems in terms of the workforce themselves.

They are just great people, very dedicated.

We have to deal with a little higher turnover, which is characteristic of factories there.

But we have processes in place in order to handle a little bit higher turnover rate in those factories, but overall we are very pleased.

Actually, not only in [Renosa], but also in Asia and the Czech Republic our three low cost manufacturing sites are performing, doing things probably better than we had anticipated.

Great, and one more if I might.

In terms of the performance of Dixson, this if I understand it correctly, was that people rushing to get in before a new EPA regs hit, driving higher volume of manufacturing, which ended up in terms of higher orders for your product, or was it something else?

No, that is exactly what happened.

This industry can be very frustrating to a manufacturing arm like ours, where basically because of that EPA guideline, everybody rushed to get trucks produced under the old guidelines, so you had an abnormal peak and now we are going to have an abnormal bottom as that corrects itself.

You know we had to put a bunch of temporary workers in to handle the up volume, and now we are going to have to reduce as that volume goes away.

Ok, and I am sorry, maybe one last - how is specialty metals looking?

Specialty metals volume is weak.

As I said before, sort of bouncing along bottom, but that business has done an incredible job in terms of keeping their profitability up and they are really poised well as the economy returns.

Great, thanks.

Congratulations again.

We will now hear from Ulli Gerhardt with TIB Bank UK

I was just wondering if you had recently spoken to the rating agencies.

In particular with having rather itchy feet.

Yes I know you have produced steps [ ] down to 51%.

On the other hand you are saying, we want to make acquisitions, which will drive debt levels up again.

Could you comment on that please?

Ulli, we have not had any recent conversations with the rating agencies.

We talk to them usually about once a quarter.

In fact I am going to be going to a seminar up in New York tomorrow to meet with them.

But the last conversations we had go back prior to our last call.

They were very cordial conversations.

They know what we are doing, what our strategy is, they understand our prioritization of cash flow, to make a good intelligent, disciplined acquisition, and play down dead as a secondary choice with very modest share purchases to offset the benefit plans, so they are well aware of the strategy we have had in place for the last several years, very comfortable with it and we have had no indications of their change in their thinking.

And have you seen .. you know you have renewed your bank line, is there any specific covenant in the bank line, if you should be downgraded to high yield.