阿美特克 (AME) 2002 Q4 法說會逐字稿

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Good day, everyone and welcome to the Ametek Incorporated fourth quarter and conference call this.

Call is being For opening remarks and introduction I would like to turn the call over to Mr. Bill Burke, Vice-President of Investor Relations, please go ahead, sir.

Thank you, Rob.

Good morning and welcome to Ametek Incorporated fourth quarter conference call.

Joining me is Frank Hermance, Chairman and Chief Executive Officer, and John Molinelli, Executive Vice-President and Chief Financial Officer.

Ametek's first fourth quarter and end results were released after the market closed yesterday and have been distributed to everyone on our list.

These results are also available on your market Systems, including first call.

A tape of today's conference call may be accessed until February 11th by calling (888)203-1112 and entering the confirmation code number 388689.

This conference call is also being webcasted.

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

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

Finally, I would 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 filings.

We will begin today with some prepared remarks and then we will take your questions.

I'll now turn the meeting over to Frank.

Thanks, Bill.

Ametek performed extremely well during 2002 in what remains a difficult economic environment.

When we entered 2002, we did not anticipate an economic recovery and sized our business and expectations to match that view.

We achieved the results we expected coming into the year and have now made our estimates for the last 16 quarters.

Ametek 2002 results established records for sales, operating income, net income and diluted EPS.

In addition, we substantially reduced our working capital during 2002 due to excellent effort across the company.

Inventory and receivables were down $29m versus our internal target of $20m.

We use the cash generated to make contributions to our defined benefit pension plans, which on an after-tax basis reduced operating cash flow by approximately $19m.

Sales were up 2% at $1.04b, the 2001 acquisitions of IRAS, ERAS and GS Electric with positive contributors to our top and bottom line.

Our military aerospace and heavy vehicle business performed well, however we encountered weakness in our other businesses due to the economic downturn.

Operating income of $148.7m was up 12%, income increased 18% to $83.7m and diluted EPS was up 17%, $2.49 compared with $2.12 in 2001.

Unless otherwise noted all comparisons to 2001 are before unusual items.

Including these unusual items net income for 2001 was $66.1m or $1.98 per diluted share.

Overall, we are extremely pleased with our performance in 2002.

Our fourth quarter operating results were strong and in line with our expectations at the beginning of the quarter.

Sales were up 6% in the quarter driven by the IRAS inquisition.

Operating income was up 28%, income in the fourth quarter of $21.3m and diluted EPS of 63 cents met our expectations and represent substantial increases over the fourth quarter of 2001.

Including unusual items, net income for the fourth quarter of 2001 was $11.5m or 34 cents per diluted share.

On January 1st, 2002, Ametek adopted FASB 142 which eliminated the good will and goodwill amortization on our 2001 results was eight cents per diluted share in the fourth quarter and 30 cents for diluted the full year.

Turning our attention to the individual operating groups, for EIG sales were up 8% for the year.

The acquisitions of IRAS and EDAX in 2001 contributes significantly to our revenue.

Our military aerospace and heavy businesses had good years while the weak economy impacted the remainder of the group.

EIG operating income was up 26% for the year as the acquisitions and operational excellence initiatives through out the group drove the income growth.

Operating margins increased to 16.2% in 2002 from 13.9% last year, so very strong operating margin performance at EIG.

For the fourth quarter, EIG revenues were up 7% driven by the acquisition of IRAS.

Operating income for the quarter was up 66% to $23m, benefiting from the contributions of acquisitions and operational excellence initiatives as well as easier comparison.

Turning our attention to the electromechanical group, operations remain difficult at EMG.

The 2001 acquisition of GS electronic were more than offset by weak sales in several other markets.

For the year, EMG sales were down 4% and all operating income was down 1%.

Operating margins increased from 15.6% last year to 16% this year.

For the fourth quarter, EMG revenues were up 6%.

Operating income for the quarter was down 3% to $18.2m resulting in operating margins of 15.2% down from 16.5% last year.

The 2001 financial data I just gave for the operating groups is before unusual items which total $10.7m for EMG and $12.4m for EIG.

Turning to the outlook for 2003, we expect that 2003 will be another challenging year, and we do not accept significant improvements in the manufacturing sector.

Given this assumption, revenues are expected to be up modestly in 2003.

Earnings per-share are expected to be in the range of two dollars Q5 cents to $2.75 per-share, an increase of 6% to 10% over 2002.

This estimate includes our resent acquisition of Air Tech installing and increased pension cost of approximately $7m pretax or 14 cents per diluted share.

Without the additional pension costs, our earnings would be up approximately 12% to 16%.

This guidance does not assume any further acquisitions for 2003; however, the acquisition pipeline remains full and we're very active here.

We expect the second half of the year to be better than the first half as additional cost actions underway become effective.

For the first quarter of 2003, we expect revenues to be down slightly as the top line benefits of the Air Tech installing acquisition are more than offset by weaker power, aerospace and heavy vehicle markets.

Diluted earnings per-share are expected to be about equal to the 59 cents earned in last year's first quarter after absorbing the higher pension costs.

Without these additional pension costs, earnings would be up approximately 6%.

We're very excited about the long-term prospects for our company.

We're poised significantly grow earnings once the economy strength strengthens.

The current economic slow down has cost the company between 100, $150m in revenue.

When the economy improves, we can recover this and bring it to the bottom line at a very attractive rate due to our stream line cost structure.

Allegation, the strong acquisition pipeline will allows us to utilize our solid cash flow to enhance our earnings growth.

Our acquisition of Air Tech installing is a great example of this.

I would like to spend a few minutes talking about our acquisition strategy and in particular Air Tech installing, our latest acquisition which we acquired on January 13th, as many of you know, we expect one half to two two-thirds of our revenue growth to come from acquisitions.

We're focused on acquiring differentiating businesses with revenues between 30 and $100m that fit with either our instrument or motor platforms.

We also look for international acquisitions to increase Ametek's exposure to global markets.

Ametek is a disciplined company with thorough process and a strong focus on integrating acquired businesses rapidly.

Air Technology installing meets all of these [inaudible] clear I can't [inaudible] and we're very excited about this latest acquisition.

Air Tech nothing is a supplier of motors, fans and environmental control systems primarily for defense markets.

Air Tech products are used to cool equipment or maintain environmental integrity in a variety applications.

These applications include avionics bay cooling, engine and transmission cooling for military vehicles, nuclear biological and chemical protection systems for fight vehicles and shelters and crew temperature control systems for aircraft and military vehicles.

This acquisition significantly strength evenings our relationships with large European base defense and aerospace customers, including the British Ministry of Defense, the VA Systems and Eads, the parents of Airbus.

Their technologies has positions on a number of European defense and aerospace promises, including the Eurofighter, the [inaudible] 45 destroyer and various Airbus programs.

Nearly 90% of Air Technology’s revenues is generated in Europe, with a remainder split between North America and Asia.

With this acquisition nearly 40% of Ametek sales will now be generated outside the United States.

In terms of markets, nearly 80% of Air Technology’s is generated in the arena with the balance divided between commercial aerospace, rail and industrial customers.

Air Technology is a great compliment to our [Rotron] technical motor business And, in fact, will become a part of the Rotron organizations.

The strong management team at Air Technology has joined Ametek and will work to grow the combined businesses on a global basis.

Air Technology will add approximately $46m in annual revenue.

Ametek, the purchase price was 50 million pounds or approximately $80m, finance with our revolver.

As with many of our acquisitions, we paid approximately Ametek multiples of EBITDA.

As you would expect in a highly differentiated business, Air Technology is a nicely profitable company and will be accretive in the first year.

Air Technology is a great addition to Ametek and an excellent example of Our acquisitions strategy at work.

The acquisition pipeline remains very Full, and we would anticipate more acquisitions this year in line with our stated strategy.

We have the resources, both financial and human, to continue to successfully to implement our acquisition program.

So in conclusion, we're extremely pleased with our performance in 2002.

We met our expectations in 2002 and look forward to a strong 2003.

We remain confident that our forward growth strategies will continue to create value for our shareholders.

John will now cover some of the financial details then we'll be glad take your questions.

John?

Thank you, Frank.

We had a good fourth quarter to finish off a solid 2002.

We generated strong earnings growth in a difficult economic environment.

We improved our balance sheet significantly, further reduced inventories, brought down receivables, paid down debt and addressed the needs of our pension plans.

Focusing first on the P&L.

As expected, GNA expenses for 2002 were up approximately 6% reflecting higher pension, business and health insurance and professional fees.

For the year, interest expense was down $2.7m or 10% versus 2001 on lower interest rates and debt levels throughout 2002.

For the year, other expense totaled about $600,000 and was unfavorable by $1.6m compared to 2001, due primarily to lower interest income and lower gains on sales of securities.

The effective tax rate was 31.9% for the year, in line with our prediction for 2002 of about 32%.

As we have mentioned previously, the adoption of FAS 142 has eliminated the amortization of goodwill effective January 1st, 2001.

The goodwill amortized January 1st, 2002.

The goodwill amortized in 2001, resulted in a 30-cent per-share reduction in earnings per share.

Quarterly breakdown of that 30 cents was seven cents in Q1, seven cents in Q2, eight cents in Q3 and eight cents in Q4.

Looking to the balance Sheet;

Our first fourth quarter cash flow was good.

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

Our cash and marketable securities total approximately $22m, essentially unchanged for the end of 2001.

In the aggregate, our operating managers did an excellent job of managing our receivables and inventory.

As we have mentioned in prior calls, we have placed a focus effort on reducing our investment in these two areas for the targeted reduction of $20m during 2002.

Our operating units did a great job.

Exceeding our target, reducing receivables and inventory by a combined $29m.

Inventories continue to decline, coming down another $6m in the quarter to $129m.

For the year, inventories were down more than $23m.

These reductions have taken place simultaneously with our continued moves to low cost manufacturing areas and despite our conscious steps to protect our customers with higher pockets of certain inventories.

Accounts receivable at December 31st, 2002, were $175m, down $6m for the quarter and the year.

For the year, our accounts receivable days sales outstanding metric improved by about three days.

With most of that improvement driven by better collections of our international receivables.

Accounts payable at December 31st, 2002, were about $81m.

Our 2002 free cash flow, defined as net income plus depreciation and amortization, less capital spending and less dividends, was $91m, 109% of net income for the year.

Cash flow from operations was $104m for the year.

The 2002 cash flow from operations was 3% higher than 2001's level and reflects the full effect of a $30m pretax 2002 pension contribution to our U.S. defined benefit plans.

Total debt was $390m, down approximately $81 million from year-end 2001 driven by the strong cash flow.

Our available about borrowing capacity totaled approximately $200m at December 31st.

Our purchase of Air Technology on January 13 of this year for approximately $80m affectively reduces the available borrowing capacity to about $120 million.

Our debt to capitalization ratio stood at 48% at December 31st, improved from 58% at year-end, 2001.

Our interest coverage and debt to EBITDA ratios remain solidly investment grade.

Our capital allocation policy remains unchanged.

Acquisitions remain our first priority.

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

Our dividend is expected to remain unchanged and stock repurchases will be limited to offsetting the delusion from our benefit plans.

Stockholders’ equity increased to $420m, up from $335m at December 31st, 2001. 2002 capital expenditures totaled about $17m, slightly below our prior estimate.

Depreciation and amortization total approximately $33m for the year.

Turning our attention to 2003.

Frank has given our initial guidance for 2003 at $2.65 to $2.75 per-share, a 6% to 10% growth in earnings in what remains a difficult economic environment.

That earnings guidance reflects an estimate pension expense of approximately $7m along with higher general insurance and medical expenses of about $4m.

We expect to overcome these expense increases and post solid earnings per-share growth through our continued focus on operational excellence.

Further movement to low cost manufacturing areas and the contributions from our disciplined acquisition strategy.

The higher pension costs that Ametek is facing is shared by many of our piers and is driven by several factors.

Poor performance in the equity markets in the last several year has impacted the asset of our plans.

While our pension fund managers as a whole have consistently beaten their bench marks, the absolute magnitude suffered by investors in the broad markets has been significant.

Part of our evaluation of our plan and its December 31st, 2002 measurement date, we have reduced the expected long-term rate of return on plant assets from 9.2% to 8.9%.

While our historical long-term plan performance exceed both of these levels, in a current environment it is prudent to reduce our expected return.

We have also reduced the discount rate used in determining the present value of pension obligations from 7.25% to 6.75%, in recognition of the lower interest rate environment we are currently experiencing.

GNA is expected to be up approximately 8% due to the higher pension, general insurance and medical insurance impacting the business.

Interest expense will be up mid-single digits given the acquisition of the technology and a more stable interest rate environment.

Capital expenditures are anticipated to increase modestly in 2003 to approximately 2.5% of revenue.

Depreciation and amortization expense is expected to be approximately $35m.

We expect our tax rate to be between 32% and 33%.

In summary, Ametek remains financial lie sound.

Our focus on operational excellence continues to pay off.

Our factories are well run, our inventories are down and 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 forward growth strategies and continue to create shareholder value.

The outlook for 2003 is solid.

Bill?

That concludes our prepared remarks.

We'll now be happy to take your questions.

Rob?

The question and answer session will be conducted electronically today.

If you want to ask a question, press the "*" Q3 followed by the digit one on your touch-tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll proceed in the order you signal us and take as many questions as time permits.

Once again, that is star one if you would like to ask a question.

We'll begin with Harriet Baldwin from Deutsche Banc Securities.

Good morning.

Hi, Harriet.

Harriet Baldwin I was wondering in instruments if there were any pockets that were showing increased stability or even signs of sequential improvement, or if all the growth is coming from past acquisitions?

Yeah, we look at the year, the internal growth in the instruments group was down about 7% but -- 5%, excuse me, but it had been -- has been improving as the quarters went on.

It was like 8% in the first quarter, improving to about a negative 3% or 4% in the fourth quarter.

So we are seeing some improvement in internal growth.

But I think the best way to describe the instruments group right now when I -- when I sum all the business as we look forward is that we expect it to be slightly down going into next year.

Maybe I could take a moment and just talk about the various markets and what's happening there, Harriet.

We expect the process part of the instruments group in 2003 to be up modestly.

That is going to be driven largely by the high end of the process instruments area.

This would be PNAI, EDAX and our resent acquisition of IRAS.

The heavy vehicle business is going to be down about 4% is what we're estimating.

So that whole industrial segment of EIG will be down about that amount.

The aerospace business actually was some positive [inaudible], I had expected it to be off a little more.

We expected it is going to be down in the 3% to 5% region with different mixes, with commercial being somewhat better in terms of comparisons.

The business and regional being off somewhat but military continuing very strong and then the weakest business is actually going to be the power instrument area which we expect to be down around ten to 12% in that kind of a region.

So when I sum up the overall instruments for next year, we're looking at slightly down performance.

Harriet Baldwin Great.

That was really helpful.

Could you do the same sort of review for EMG?

Sure.

If we look at EMG, you know, bouncing along the bottom is probably a reasonable way to describe it.

If I look to next year we expect EIG's revenues to be up in the high single digits.

That is driven largely by the Air Technology acquisition.

The rest of it, if you exclude Air Technology, we expect it to be flat with others in EMG performing a little bit better than the cost driven businesses but not substantially so.

One being up a little bit, the -- being down a little bit.

You actually look at the internal growth prospect to ENG and our present forecast, the internal side, we're saying is going to be, you know, roughly flat.

Harriet Baldwin Great.

And then in terms of air Technology, can you give us an idea of what your targets there are in actual pennies?

We typically don't talk about actual acquisitions bah we can tell you based on the multiples we talked about will be less than 10% and more creative than some of the other acquisitions that we have done because of the high profit margins.

Harriet Baldwin Great.

I'll let someone else test you now.

Thanks.

From Janney Montgomery Scott we have Jim Lucas.

Thanks a lot.

Good morning, gentlemen.

Good morning, Jim.

I want to start first, you entered last year right sizing the business with the fourth quarter restructuring.

Could you give us an update of what your original target was, what were the savings realized and then as we're entering the new year, are there further actions that need to be taken?

Yeah, great question, Jim.

Let me see if I can put some color around that question.

When we took the charge at the end of 2001, we had talked about an analyzed savings coming from that particular action of about $25m.

What we think we have actually achieved is about, I would say, two-thirds of that in 2002 and some of that will roll over into 2003.

Obviously you get some of the year to year changes.

We're very confident in getting that $25m of full savings.

Let me take a moment and focus on 2003 and maybe even broaden your question a little bit and talk some about the earnings improvement that we expect to see through the year.

We're forecasting the first quarter to be relatively flat with last year and -- which means that some -- to make the 265 to 275 that I talked about, we're obviously going to have to show improved earnings through the year.

And there is three parts of that: One, are the cost reductions, which I'll elaborate on more in a moment; the second is the heavy vehicle business, which we expect to actually show some ramps during the year; and the third is the acquisition of Air Technology.

Let me talk about each of those.

In the area of cost reductions, in addition to getting some improvement from the actions we took last year which again would be roughly a third of that $25m, we expect we're going to get another $8m to $10m of cost savings from other actions that we are taking and those actions are a result of some additional right-sizing that we're going to do in the first quarter and second quarter of this year, which means we'll start to see some impacts of those in the second quarter, but more in the second half of the year.

And also additional movements of products to [Reynosa] -- excuse me to low cost manufacturing locals which Reynosa says is one of those.

We expect to actually move about $40m of volume -- additional in 2003 over 2002.

So when you sum those up, we're looking at a number like $15m to $17m of additional costs improvements in 2003 or 2002.

In addition to that, if you look at the heavy vehicle business, I actually look at it for the eight quarters of 2002 and 2003.

The first quarter of 2003 is the lowest and that is a result of the overbill at the end of last year.

That happened.

So what is going to happen is that business is just going to naturally ramp up during the year and we're going to see positive factors coming from it really in each sequential quarter as we go through the year.

The last is Air Technology when we go back to hair yes, sir question, if we look back at EPI on that, it is going to look better.

Actually, the fact that the synergies are going to come more in the second half of the year.

So that is a long answer to your question but I thought I would provide color to exactly what is happening on the P&L.

That actually anticipated one of my questions.

Okay.

If you look at the heavy-duty truck market though.

Yes.

I understand the sequential ramp up that will take place.

But given that the third quarter had the pre-bill and the heavy volume, aren't you going to face a tough comparison?

Would that have any margin impact?

Well, if we looked at the market itself, the market is intended to be down about 14% next year.

That is from readily available market data.

We actually think we're going to do much better than that.

We think our business is going to be down 4% or 5% because of some pretty significant market share gains that we have been able to handle with a bunch of the customers.

So with that modest decrease in volume and with the -- all the cost reductions we put in place in that business, we actually expect our profitability is going to be improved quite considerably in that business.

Okay.

And from a low-cost manufacturing standpoint, what is the analyzed run rate you gave us at roughly 40% of your sales analyzed will be international but from an international standpoint, how would you characterize?

Manufacturing outside the U.S. now what is you're talking about?

Yes, yes.

You talking low cost, Jim, or total manufacturing?

Either or.

Either or.

I guess low cost would probably be the best way to look at it.

Okay, low cost in 2002 was roughly $175m.

So what we're saying now is for 2003 that is going to increase by $40m.

Okay.

All right, I'll let someone else ask questions.

Thanks.

You bet, Jim.

Eric Daniels has our next question and he's with J.P. Morgan.

Good morning.

Good morning, Eric.

Looking into the power business a little bit you mentioned expectation down ten to 12% next year.

Could you talk a little bit about the differentiation between power Gen and TND?

Yes.

Substantially different dynamics in those two parts of the business.

You may recall that our business is roughly half and half between T and D and power GEN.

In 2002, that business was roughly $60m.

If you take it down, I'd say 10% to 12%, we're going to be looking at a business in 2003 that is on the order of $52m-$53m.

If you look at the various elements of that, depart , we expect to be relatively stable.

It is going to be in the $30m plus region.

So let's just say it's flat -- roughly flat from year to year.

So all the degradation is in the power Gen side and that is going to be in the order of 30%.

It is a big deal and basically that follows GE land gas turbine business, actually we're going to be a little better than their business because we're more diversified.

If you look at GE land gas turbine business they're projecting going from 264 turbines in 2002 down to 127 or almost I guess even more than a 50% drop.

And you mention on prior conference call or calls the opportunity to perhaps diversify beyond GE on the land gas turbines, sell products to other manufactures.

How that is effort going?

We're definitely making progress but obviously the downturn in the market makes it more difficult.

Those companies aren't quite as interested in expanding their portfolio at this point, but we definitely have products in with most of the major manufactures an at test phase or pre-evaluation phase, pre-production phase and I think as that market comes back we're going to be able to gain share.

We have got very, very, strong technical capability in that whole power/aerospace sector of our business.

It's clearly the most technically confident part of our organization.

So I think the future will be bright once we see some market rebound.

Okay.

And on the $40m of additional volume expected to be moved to Reynosa this year.

I may have missed it; is that EMG only or is that EIG products as well.

It will be both.

The $40m is not just Reynosa.

The Czech Republic but the majority is in essence of it’s going to Reynosa.

Okay.

On the acquisition front, sounds like the pipeline is full.

I know one time there was a -- a larger than average or larger than average disconnect between buyer and seller.

Is this seller becoming I guess a bit more realistic in terms of asking prices?

Is that what is making the landscape improve?

Yeah.

I would say there are several factors.

One is there is definitely been an improvement in the pricing arena.

It appears to us, from what we have been looking at probably over the course of the last several years, there's been a drop now maybe of one multiple point in terms of pricing.

That surely helps.

But some of these acquisitions, we started many -- probably three years ago really starting internally to go out and have our people search for acquisitions rather than having them come to us over the transom and that is starting to bear some fruit now.

Some of these acquisitions we have on the table are through our own internal efforts according to potential companies and et cetera.

So I think there is multiple factors that are driving this right now.

But we're pretty excited about the acquisition pipeline.

We didn't do as many as we would have preferred in 2002 and -- but again, we're going to remain very disciplined in what we dodo.

We're not going to acquire companies that are not good for the long-term health of the company.

But right now that pipeline looks good and I'm pretty excited about it going forward.

As John said, we have the balance sheet to support it.

I would add to what Frank said, I think the quality of the companies we're seeing now were -- are noticeably better than what we saw last year.

There is more reason to get excited about the kind of conversations we're having than six to nine to 12 months ago.

Okay.

The last question is, can you share the timing of the pension expense?

Would it be about even throughout the four quarters?

Yeah, it will be even.

Flat.

Okay, thank you very much.

We'll hear now from Gary Goldstein with Gilford Securities.

Hi, guys.

Hi, Gary.

Congratulations.

It was a really, really great year in some tough times.

You guys said what you were going to do what was to pull the cost out.

I don't want to focus on the near term.

Everybody has been doing that.

Frank, you were talking about a half to two-thirds of the forward-looking growth coming from acquisitions.

And we've talked an awful lot in the past and continue hearing from you guys a lot about the acquisitions.

Is there a theme that's defining itself right now?

Are you guys moving towards military?

Are you guys moving away from any sectors?

With the acquisition -- the latest acquisition looks like you're going to be able to put some EIG through it.

Is that a focus for the company going forward?

There is a theme for the acquisitions?

I would say the theme is very consistent with strategy that we've outlined.

We're basically looking to acquire differentiated companies.

We're not looking to acquire companies that are more in the cost driven arena.

Which means if you look at Ametek's portfolio, it would imply there would be a lot of acquisitions on the instrument side of the business, but also on the differentiated parts of the motor business which would be, you know, Rotrone and specialty metals and the power switch business versus our floor care businesses.

That is really the focus that we have.

And we would look really in any of those markets and EIG, again, a common theme of measuring physical phenomenon, whether it's in aerospace or power or the process industries or the general industrial segment.

On the motor side it would be high-end motors and other electrical mechanical devices.

So that is basically the theme.

That is how we're looking for companies and we're -- looks like we're finding a fair number in that exact sweet spot so we'll just continue to do that.

Great.

You guys have done a great job on the acquisitions.

With the draw-down being at 120, can we expect there is going to be a quarter or two to absorb the current -- I know you guys are not going to tell us on the call, but can we look forward to a quarter or two to consolidate this current acquisition and -- but getting back to track again later in the year?

We're not expecting to see a drop off this year in activity from you guys?

No, not at all.

In terms of Air Tech installing it's going to take us a couple of quarters to get that integrated.

That is one of the reasons we're saying the second half is going to be stronger than the first.

In terms of the acquisition pipeline, we've got the $120m but if we need more firepower, we can surely get that with the balance sheet we have right now.

So we don't feel capital constraint, an if the acquisitions are good, we're going to do them and no -- no sort of breaks at all.

Well, congratulations on a great '02.

Thank you, Gary.

Thanks.

Up next we'll hear from Scott Graham from Bear Stearns.

Yes, good morning.

I have a couple of housekeeping questions first before my more important question.

The $104m in cash from operations, is that -- does that include the pension contributions?

That is after the pension contribution which basically is $19m after taxes.

It fully reflects that.

It fully reflects that, Scott.

So you guys had a very good fourth quarter of free cash flow.

Oh yeah, $23m, I think.

The way we define cash flow is $23m.

It doesn't necessarily take into consideration that situation.

But the cash flow from operation was about $23m after we -- after we accounted for the pension contribution. $10m of that was in the third quarter and the other $20m of that was at the very end of the year, Scott, from a financial stand upon it point.

That is how it breaks down.

It looks like working capital was approximately a source of 20ish million dollars in the first fourth quarter?

You're right.

Okay.

The contribution to revenues from acquisitions, could you give us that number for the quarter?

For the quarter was $14m.

$14m.

Yes.

Okay.

All right.

The larger question I have here is really about internal growth whereas I think last quarter in the conference call we were fairly optimistic that core growth would be -- would be something that you guys would achieve in 2003.

Now it looks like you guys are maybe going to be a little bit below flat, maybe down a couple of percentage points.

Is this largely attributable to what looks like the goings on in the fourth quarter,and that in fact quarters 2 through 4, we should see the reemergence of core growth for the company?

It's going to improve during the year.

But, we're going to be fight in 2003 the weakness in aerospace and power markets and that's the prime driver.

We're forecasting relatively flat, a little bit down as you said, in terms of internal growth.

But the numbers do get better.

By the end of the year they do get positive in our estimates.

And again, we sometimes are conservative on our estimates so time will tell if this really transpires this way.

Right.

It seems to me the big swing here since you did allude to aerospace perhaps being for the 2003 budget, a little bit better than what you were perhaps expecting that the swing factor here is largely in the power Gen business.

Yes, power is worse than we had thought.

No question about that, Scott.

Okay.

Fair enough.

Thanks.

Yep.

As a reminder to our phone audience, if you would like to pose a question, you can do so by pressing the star key on your touch-tone phone.

From SBK brooks we'll now hear from Godfrey Birckhead.

Hi, Godfrey.

As usual, long-term debt placed John, as of 12/31 ’02.

$280m.

$280m.

Okay.

Now, Frank, you've mentioned to us several times this $100m to $150m of lost revenue because of the difficulties in the manufacturing sector across the board.

Right.

Is it possible to go at that another way and discuss what the unabsorbed overhead is in that $100m to $150m of low sales?

I think the best way that we look at it is not so much in terms of unabsorbed cost but, we fundamentally believe we have not lost share in these markets and when we look at the trends in the business, we think that that $100 to $150 million, which is roughly what we acquired in terms of businesses over that period of time is what we lost.

Exactly.

And we think when that comes back, you know when this you look at the average contribution margins margin across our company, it's about 40%.

40%, okay.

Yeah, it's a big deal.

It varies substantially between group and it varies substantially within the groups.

Just to put a little more flavor on that, Godfrey, the instrument contribution margins is on the order of 48%, 49%.

And the motor contribution is more on the order of 32%, 33%.

That is how you get to that, you know, average of 40%.

Okay.

Even within those two groups, there is substantial variance around those two numbers.

So the difficult part here is predicting which part, when this the economy does start to improve, which parts are going to come back and what the effect is on the bottom line and that is why we have just taken the approach, we're not going to assume that the economy approves that it tended to do well for us last year and we're taking the same approach for 2003.

If we're lucky enough that the third or fourth quarter we start to see some market improvement, that is going to be upside to the estimates we're given.

Basically now, there is no sign of any renewed life in any of the markets that you sell into?

Well, that is just probably a -- there is probably a few that are showing a little bit of life.

Clearly, the military part of our business

Sure.

Frank Hermance-- is strong and that is about 11% of.[inaudible]

Okay, thank you.

After this Air Technology transaction and that is a part of the business and we expect that to be good and I hope there is not a war, but if there is, it would surely help that part of the business.

Right, right.

We're seeing some improvement in the chemical products area of our company.

You might recall we have one division, it's a small division.

That is about $40m?

That is exactly right, Godfrey.

That business has shown a definite incremental improvement trend for a number of quarters right now.

So --

Really.

So there is some improvement there.

Can you review for us what you do there please, Frank?

We're basically a to them compounding company.

We basically take plastic and we compound them.

We don't hold the inventory, pass it through our operation and send it back to a customer.

Right.

So there are some -- the high end analytics business is another one that has done quite well.

In our last conference call we talked about the IRAS acquisition in the nuclear instrumentation area.

That business did great last year and we expect it to do good this year.

Same with our EDAX and our process analytic business we think they're going to do fine this year.

There are some pockets that are doing well, but there are also a bunch of pockets that aren't doing well and so I sort of talk in general also when I say it's going to be flat before it comes down.

Can you talk specifically about the floor care market?

Sure.

Floor care market is bouncing along the bottom.

It's the best way to describe it.

Stronger in Asia than in the U.S. or Europe.

We expect as we go through 2003 for that business to be relatively flat.

Okay.

Specialty metals?

The same.

Actually, very similar picture.

Specialty metals business fell off some in 2002 from 2001, and it is sort of stabilized now.

We expect slight improvement next year.

Bill is looking up the number.

Is it about 5%, Bill?

Yeah.

Yeah, our budget is about 5% up for that business.

Top line.

Top line?

Okay.

The new acquisition you made sort of intrigued me, they do business with Airbus?

That's correct.

Your prime commercial aircraft customer has been Boeing in the past.

Is that correct?

Frank HermanceYes, in the commercial segment, Boeing has clearly been our dominant customer.

Okay.

So we have specifically looked for ways to penetrate Airbus.

Well, exactly.

That is my next question.

Is there some real potential there, because as we all know, Airbus is about or already has surpassed Boeing.

Yes.

Is there room for doing some important business with Airbus down the line and, if so, how soon would that begin to manifest itself?

Yes, absolutely.

There is potential here and that was one of the, you know, drivers for this acquisition because you need a European presence to really effectively penetrate Eads and, in particular, Airbus but we definitely see potential and we think we can grow that business over time.

Now, it's not a short cycle type of thing.

We have won business on the 380, which we think is very important.

We picked up some business on the 330 and 340 with Air Technology and we will continue to use our technical capability at sort of bite away at airbus.

Okay.

Thank you very much, Frank.

You bet, Godfrey.

We'll hear now with Gerry Brockman with Credit Suisse First Boston.

Hi, guys.

Not a bad quarter considering particularly the margin side.

Where I like to focus is more on the revenue.

As I quickly crunch some numbers here I come up year-over-year 1.5% growth in the organic.

One and-a-half percent, that is about right.

My question is, where are we at with -- how do we stipulate organic growth beyond, you know, the economy recovering and your end markets recovering?

Have we thought about putting something in instead of comp. plans, where are we at with R&D?

If you can talk about what internally can be do?

That is a great question.

We have really been focusing on that question and, you know, one thing that we have done is put real emphasis on the R&D part of the company and if you look at the R&D spending in 2002, it's actually up from 2001.

We're spending in terms of our total engineering investment about $47m was spent, excuse me, in 2002 up from about $45m.

So as we have gone through all of this cost reduction, which as you know has been very mammoth in terms of its magnitude, we have not really touched our R&D spending.

So we're really focused on bringing the new products to the marketplace and, you know, we think there is definitely upside potential on the product side.

It's just difficult when the markets that we're facing are so weak.

The other part of the internal growth question is really the continuing expansion into international markets.

And, you know, you may have heard me say before that we think about more than half of our market opportunity is outside the U.S. where only, you know, up until just recently only about a third of our revenue was outside the U.S.

So we're putting, you know, additional focus there and doing acquisitions like Air Technology will help us now internally grow in those parts of the world.

We also -- it does link to our acquisition strategy in this sense.

We're looking for companies that when we acquire them their basic inherent growth rate is higher than the businesses that we have now.

So that over time as the portfolio shifts more to these higher end differentiated businesses, there will be an improvement in the internal growth of the company.

Right, right, good.

On the Air Tech, what is your percentage break up between commercial and military?

Military is about 80% of that acquisition, the commercial is about 10% and the remaining 10% is divided between rail and general industrial businesses.

Okay.

Great.

Let's see, on the SG&A, just First fourth quarter numbers came in good.

Are these sustainable at these levels or what should we expect going forward?

The pension expense we saw in the fourth quarter, was that pre-funding?

Or did it run through the income statement as well?

I guess we had a nice drop off on our SG&A and flat revenues in the fourth quarter.

I'm trying to get a feel what we should expect SG&A to be, going forward.

The fourth quarter SG&A should be sustainable but we have the dynamics of bringing in the Air Tech business which will shift the mix going forward.

I can't give you the impact on that.

I'm not sure I understand your question about the pension expense.

The expense we talked about was for 2003 increase over 2002.

That is $7m.

Right.

And what we saw in the fourth quarter was more a pension funding and it didn't show up as an expense item in the fourth quarter of 2002 which is different than the $7m that we're talking about in '03, spread out over the four quarters in '03, correct?

The 2002 events was our cash and contribution to our pension plans.

The only impact on the P&L would have been the higher borrowing that we have would have incurred to fund those contributions.

Right, okay.

So my fourth quarter '02 did not include any pension expense.

Yet it still had a pretty decent level of the so in '03, I would expect somewhat of a jump up of the $7m being spread.

How much of that pension will be in SG&A versus COGS and how much can we expect it going forward?

I don't know that I can give you a breakdown.

It will be heavily weighted to COGS, but I would guess two-thirds to manufacturing and one-third to SG&A, but that is just a guess.

That is fair enough.

So what drove our savings in the SG&A in the fourth quarter?

We had -- you're comparing it from sequentially, Gerry, or from a year ago?

A little bit of both.

It's not that dramatic from a year ago or from a sequential basis.

Our activity level, our travel expenses, our -- we're fairly -- I mean, let me just grab some sheets here.

I think I got 10.2% in the third quarter, 9.5% in the fourth quarter?

Looking at -- you're looking at --

Total.

Total SG&A and I'm talking about corporate GNA so we're on a separate page.

I'm talking about total.

In the corporate, the corporate number is not that dramatic, but the SG&A number includes the mixes of our businesses, there's nothing dramatic in that, Gerry, to --

So it's a little bit more of a mix than anything anything else?

I would say so.

Okay, thanks a lot, guys.

We'll hear now from Richard Eastman with Robert W. Baird.

Yeah, two quick questions.

What do you expect the incremental margin to be on the product sales that are moved to low-cost regions?

That is a tough question.

It really depends on which of the products we're talking about because we're moving stuff from EIG and from EMG.

I am going to give you one data point that we looked at about six months ago and there's about a 20% kind of shift between the free-tax profit when you move a cost driven business from the U.S. to Reynosa.

That is the particular I can affirmatively to.

So 20%, say there is a 20% pickup in the pretax profit, okay.

Yeah.

And then just real quickly.

In terms of the two things, one in terms of the working capital improvements you expect in '03, do those start to level off or is there more to go?

That is a good question.

We don't think we're going to get as much leverage as we did in 2002, but we still think there is more room and, John, why don't you talk about the program you're going to put in place this year.

Yeah, there is a couple of levels to that answer.

One level is at the highest level we're targeting roughly a relationship of 20% between our inventory receivables less payables to revenue and we're right around 21%, a little over 21% right now.

Last year we were around 22.5% to 23%.

So long-term, we want to get to that 20% relationship or below it.

And so that is a long-term picture.

What we're doing on a more day-to-day basis is beginning of 2002 we set this $20m target, we picked the five businesses that we thought had the greatest opportunity or the greatest leverage to reduce inventories and receivables.

We targeted $20m combined for the company but focused hard on those five businesses.

We had quarterly meetings with Frank, myself, a group -- the group President and controller of the corporation as well as the staff and spent one to three hours talking about everything, everything on their working capital area.

Those five businesses roughly were roughly were about 50% of our inventory starting the year and they generated about ¾ to 80% of our savings this year.

So it really worked.

I mean, I'm not sure they had the most fun in the world sitting in on those beginning calls, but those guys performed admirably, just did a terrific job, so what we're going to do is keep that up, keep those five businesses in the fold and expand it into a few more businesses that we think have some upside to it.

So that is the kind of the day-to-day stuff, the way we're looking at it from this office.

But the long-term vision is we're pointed at that 20% relationship.

As we push towards that, should we expect a cash contribution from working capital in '03 or just less use?

A little bit of a cash contribution.

Okay.

Then just lastly, in the floor care segment, was your volume up year-over-year in regard care?

Kind of getting at the volume price dynamic there how did it play out in 2002?

The volume for all of floor care was down slightly.

Okay.

Thank you.

We'll hear from Steven Colbert with JMP Securities.

Good morning.

Good morning.

Most of my questions have been answered already, but in terms of two issues I wanted to address.

In terms of what we're seeing right now in the foreign currency markets, the weakness of one dollar, how does that affect what you're doing in terms of taking more businesses into overseas markets and overseas production?

Obviously that is a positive factor in terms of our pricing being cheaper as we export products out of the U.S. and, you know, we export more than we import so that will be a positive dynamic.

To try to put a number on it is very difficult.

I can tell you that I did look at the international volume in the company and it's pretty good.

We were up about 11% international last year, coming largely out of Europe and Asia and I think the currency was a factor in that.

Is that plus 11% -- what is venture -- in those foreign currencies or are those in dollars?

In dollars.

In dollars.

So presumably if you had the same type of growth in 2003 that plus 11% would actually translate into something a bit less with -- I'm sorry -- a bit more with a weaker dollar?

Assuming it ramped up it would be more.

Was profitability been up 11% or has that been a lot better?

Profitability is very good in those parts of the world, so I haven't actually seen those numbers yet, but my guess is it would be up more.

I was just wondering in terms of currency impact if you had more impact on the operating income line than the revenue line or vice versa.

Not just due to the translation impact.

Yeah, I just trying to separate the translation impact.

No, the translation impact is going to come back the same percentage rate.

Okay.

Well, but, margins could have been affected by the strength in the dollar in 2002 as well as now with the weaker dollar, you know, it affected the margins.

The most likely impact was it makes our ability to export easier so we would get more volume and probably at the same margins, so it makes us more competitive internationally.

Okay.

The other question is on the pension expense issue.

Can you give us some feel for what the pension expense was in 2002, if you had -- if it was net/net expense or pension income?

$7.5m, if I remember right. $7.4m.

Company-wide $7.4m which has all of our DD plans, all our other worldwide plans, our defined contribution plans;we see that number going up about $7m next year.

So is $7.4m in 2002 we're looking at going up to about $14.4m in 2003?

Roughly.

Then as you look forward to that number, that number is affected, I assume, by the stock market performs in the defined benefits plan.

You're assuming it's over 8% return.

If the return actually falls short of that during 2003, does that mean we would see a higher cost number in 2004?

It could be, yeah.

The calculations for pension accounting are obviously pretty complex.

Yeah, I know.

In general, if you wanted to perform your expectations, it will catch up to you.

There is a pro-ration factor.

You get into a quarter and you exercise differences and then it's rather protracted.

Right.

In general, if we don't perform in our expectations we have a shortfall to account for.

On the other hand, if we outperform which we have since inception our yield is about 9.6%, 9.7% since the beginning of these plans, so long-term, which is the way to look at this, we're comfortable with our assumptions.

But you're in effect having to affect amortize the shortfall from the past couple of years right now.

You're right.

That is right, Steve.

That is a serving the P&L and so to the extent that the market doesn't -- the extent that your funding -- your funds don't perform equal to your expected return, which is a% that -- which is a percent then we see the higher cost going forward.

That is how it works.

That is what I thought.

Thank you.

We'll hear now with Greg McCowsko with Lord Abbott.

Hearing no response, we have a follow-up from Jim Lucas with Janney Montgomery Scott.

Frank, one additional question on CAPEX.

CAPEX coming in lower last year and it looks like you're going to continue to curtail on the spending.

Where is your utilization and if the core business remains sluggish, can you speak to what is going to happen with that overcapacity that is in place?

Well, we definitely have overcapacity in terms of facilities and infrastructure.

We have been looking at that and we might consider disposing of some of those assets if, in fact, that makes sense.

Obviously what we're really hoping for is that at some point this economy is going to turnaround and we see tremendous upside leverage because that capacity is in place.

In terms of the human element we have done a significant amount of downsizing of the company.

If you -- we sort of use a stake in the ground of September 30th, 2001, and we have removed about 1100 people from the company from that point until now.

So we have reacted to the human side of the capacity, but not as substantially to the facility side.

Jim Lucas So what --

Does that answer your question, Jim?

Jim Lucas Yeah.

What the -- the low CAPEX, that is primarily maintenance related or are there growth initiatives in there?

Oh, no, the growth initiatives are in there.

It is just that we have made the major capital expenditures that make it necessary, in other words, the low cost manufacturing places, you know, are -- operations in place and the incremental capital now that is needed for those operations for the -- our planning which we look at as five years is not significant.

So we really feel like a rate and we have used this number before of about 3% of sales is the capital appetite of this company for the next five years.

That is -- we're talking about that number, a little bit less.

John was saying two-and-a-half percent for 2003, but that is the capital appetite that we think we will need as we go forward.

We don't see a large amount of cash being needed here.

Jim Lucas Okay, thanks.

Okay, Jim.

Scott Graham is next with Bear Stearns.

Yeah, hi.

I just want to follow up a little more on the core sales which as I'm sure you guys will agree with have been difficult for the company over the last two years, let's say.

Okay.

Scott Graham And if I were to sort of go back in my notes here and just sort of look at some of the things that we have talked about, some of the things that

I have actually been -- I have actually written about with respect to IRAS, the radioactive, you know, sniffer, if you will.

Right.

Scott Graham The aerospace suite leverage, the transmission, new products specialty motors, new markets, the new hover business, the movement into the higher end truck, the cat pill letter truck, I'm just struggling with why first quarter would be down what looks like, you know, in the 5% to 7% core range and why the rest of the quarters wouldn't be up more like in the 3% to 5% range versus the slow single digit range which I think you guys are implying?

Well, the first quarter is more like 3% or 4% down.

The fundamental answer to your question is that everything you said is right and most of that is happening.

We're seeing some good growth in some of those areas.

It's just being offset by other market dynamics.

If you take a look -- let's look at the aerospace business, for instance, we're still looking in the first quarter at a very difficult comparison, the first quarter of 2003, the first quarter of 2002.

If you recall the OEM business and aerospace business had not fallen off in the first quarter of 2002.

So we're looking at a very difficult comparison there.

When you're looking at the heavy vehicle business, as I talked about before, if you look at the eight quarters between -- throughout 2002 and 2003, the first quarter is the weakest of those eight quarters.

And it's largely due to that overbill.

That happens in the second half of 2002.

So there is some very difficult things going on in these markets that are offsetting a whole bunch of the good stuff we're doing and what you're going to see is this improvement during the year and, you know, we would sure love to see it at a little bit higher number than it is but that is the reality of what we're dealing with.

The real driver here that is going to really pick this number up is as the economy turns around, you're going to see -- we're viewing it as an abnormally low internal growth rate now.

It's going to flip to an abnormally high internal growth rate as that economy swings.

Scott Graham Well, hopefully, new normally high.

So it sounds to me like when you guys, particularly you, Frank, when you would say 2003 revenues will be up modestly, are we talking in the mid single digit territory?

The number we're using, you know, again it depends on which of the EPS numbers you use, but if you sort of take the midrange of what I'm talking about, we're talking on the order of 3%, 4%.

I mean, it's not.

Scott Graham Thank you.

We're basically saying internal growth is going to be relatively flat and slightly down in 2002 with the estimates we have on the table.

Scott Graham Okay, thanks.

That is not that bad of a picture.

As a final reminder to our phone audience, if you would like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone phone.

We do have a follow-up from Godfrey Birckhead.

Yeah, John, a housekeeping item again.

Total assets, please, as of 12/31/02.

1.03 -- 1030, Godfrey.

Okay.

Here I go.

Then talking about the expansion part of your capital expenditures, you were asked -- as I recall, you were going to make a choice to expand in eastern Europe and you were either going to build more on the Czech Republic or you were going to go elsewhere.

Has that moved at all?

Has there been anything happening there?

The immediate plans for the next couple of years, we can do enough expansion in the Czech Republic to handle the growth and the expansion numbers that I have already stated to you.

So the short-term plan is to expand in the Czech Republic on the premises that we're on.

It's also the lowest cost way of making this happen.

Okay.

The other question I have, speaking about the -- about the chemical business again, since that has become profitable at one time since you did not think of it as core business, there was some suggestion on your part that that might be for sale.

Is that---could that be a possibility now that that business is turning around some?

No, it's not, Godfrey.

We had tried to sell this business several times and we were not able to get a price that we felt was reasonable and I made a commitment to the people in that business that they were going to stay without a tech and we were going to invest in them, which we have done and we there are no intentions of divesting that business.

So using the boss and company (ph) model, this is a mature cash cow of your bid business that is the way to look at it?

That is a fair way of looking at it.

I don't particularly like that model.

But we have been able to do with this business, which we have not historically done, is that we have kept this business profitable even in the down cycle.

And previous, if you go back to the early 90's when the cycle went down, you know, we were in the red.

And that just isn't happening now.

Right.

So as that business comes back we're really in great shape.

Okay.

So over the cycle we're going to get a great return on that business.

Thanks again.

We'll hear now from Eric Stevenson with Lewis capital.

Yes gentlemen, just a couple of questions.

Regarding last year outlook we benefited nicely from a working capital shift.

Would you given the flat top-line growth project it for next year, would you then assume that cash flow from operations will probably be flat to possibly down for '03?

Oh, no, no, no.

We think it's going to be up.

You look at our estimate on earnings and we're talking up between 6% and 10%.

So you're going to see, you know, you're going to see cash flow go up.

And that takes into consideration the flat working capital benefit for '03?

We see some improvement as John talks about.

Some improvement.

It is not for the same magnitude but we see some improvement.

We're definitely going to see very good dash flow.

Remember, we may not have to make that pension contribution next year so that also will, you know, even this out because without that pension contribution this year, our cash flow would have been, what, $123m--$123m.

Right.

And my second question, when you look at the cash flow from operations, you're expanding internationally I believe you said earlier 40% of our sales or internationally related.

What percentage of cash flow from all operations is internationally based or generated?

Boy, that is hard to tell.

Some of our business that we export, you know, we count that revenue in the U.S. and that cash flow comes from -- comes to our books here.

We have never tried to ever put a source of cash flow together on ultimate question -- destination, Eric.

I guess it would follow in theory the percentages Frank said because our profitabilities are not that much different worldwide.

What we do is a slight variation but not dramatic, so I think in theory it should be distributed the way our revenue is distributed because our profits are not dramatically different around the world.

So about 40% is denominated in foreign currency?

Well, it is not denominated in foreign currency.

I said it had an international source to it.

Sure, right.

Okay.

Fair now enough.

All right, thank you.

You bet.

Mr. Burke, it appears there are no further questions at this time.

I would like to turn the call back to you for any additional or closing remarks.

Thank you for joining us today.

If you have any further questions I can be reached at (610)889-5249.

Thanks again.

That does conclude today's teleconference.

Thank you for your participation.

You may now disconnect.