阿美特克 (AME) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to this AMETEK Inc. fourth quarter conference call.

This call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Bill Burke, Vice President of Investor Relations.

Thank you, Rochelle (ph).

Good morning and welcome to AMETEK's fourth quarter 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 fourth-quarter results were released before the market opened today and have been distributed to everyone on our lists.

These results are also available electronically on your market systems and on our website at AMETEK.com/investors.

A tape of today's conference call may be accessed until February 10th by calling 888-203-1112 and entering the confirmation code number 708032.

This conference call is also webcast.

It can be accessed at AMETEK.com and at street event.com.

The call will be archived on both of these websites.

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, the 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.

I will also refer you to the investors' section of AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.

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

I will now turn the meeting over to Frank.

Thank you, Bill.

AMETEK had an excellent fourth quarter, establishing records for sales, operating income, net income and diluted earnings per share.

Sales were up 11 percent to $279.4 million on the contribution of the three acquisitions we made last year, Airtechnology, Solidstate Controls, and Chandler Instruments, as well as good internal growth in our high-end analytic instruments business.

Power, aerospace, and cost-driven motor markets remained weak.

Operating income was up 15 percent, driven by broad-based operating gains, particularly in the Electronic Instruments Group and the contribution from the acquisitions.

Net income to 24.4 million and diluted earnings per share of 71 cents were up 14 and 13 percent respectively over the fourth quarter of 2002.

AMETEK also established records for sales, operating income, net income, and diluted earnings per share for the full year 2003.

Sales were up 5 percent to nearly $1.1 billion, and, like the fourth quarter, acquisitions in high-end analytic instruments were positive contributors to the revenue line, while weaker power, aerospace, and cost-driven motor markets restrained revenue growth.

Operating income was up 5 percent.

Net income was up 5 percent to $87.8 million.

Diluting earnings per share were $2.60, up 4 percent over 2002.

During 2003, we absorbed additional pension costs of $7 million or 14 cents per diluted share, as well as 6 cents per share in costs related to the accelerated vesting of restricted stock.

Without these costs, earnings would have increased by 12 percent.

Cash flow from operations was outstanding, once again demonstrating AMETEK's cash-generating capabilities.

For the fourth quarter, cash flow from operations of $47 million was up nearly 100 percent over last year's fourth quarter.

For the year, cash flow from operations was $155 million, up 49 percent over 2002.

Higher income, a continued focus on working capital management, and lower contributions to our defined benefit plans drove the stronger cash flow.

Overall, we are very pleased with these results.

Our strategy of acquiring differentiated businesses and our focus on operational excellent continues to drive AMETEK's strong performance.

In addition to achieving our financial objectives, we continue to make progress on our strategic initiatives.

During 2003, we acquired three great companies, each in line with the acquisition strategy we have articulated.

Airtechnology, Solidstate Controls, and Chandler Instruments are all highly differentiated businesses representing approximately $120 million in annualized revenue.

Integration of these three acquisitions is proceeding to plan and the businesses are achieving the revenue and profitability levels we anticipated.

International sales were $462 million, up 31 percent over 2002.

As a percentage of total revenue, international sales were 42 percent, up 34 -- up from 34 percent from last year.

The impact of acquisitions with a significant international component together with a focus on expanding distribution around the globe has made this growth possible.

We have maintained our commitment to new product development during economic downturn.

In 2003, we spent $50 million on RD&E, up 7 percent over last year.

Aerospace delivered hardware for the GE-Pratt & Whitney GP7200 engine, which will fly on the Airbus A380.

This is an important milestone in the development of a sensor suite for this engine.

Pacific Gas & Electric, one of the largest utilities in the United States, approved and specified our Gemstar Plus (ph) revenue meter for all interconnect points on their electricity grid.

Also, our Advanced Measurement Technology division received a $1 million order from Lawrence Livermore National Laboratory for a vehicle-mounted radio neuplide (ph) search and identification system.

These systems are integrated on a car top and can locate sources of gamma ray and neutron radiation around the country.

Our Rotron division was recently awarded an $800,000 order for nuclear biological and chemical blower systems that will be used by the U.S. Army.

Our blowers will be part of a shelter designed to house command control in communication systems, as well as personnel who need protection from potential nuclear, biological or chemical attacks on the battlefield.

Turning our attention now to the individual operating groups, for the Electronic Instruments Group, sales were up 15 percent for the quarter to $151.9 million.

The Solidstate Controls and Chandler Instruments acquisitions and strengthen in our high-end analytic instruments businesses drove the revenue increase.

EIG's operating income was up 22 percent for the quarter and operating margins increased to 18.6 percent from 17.4 percent last year.

This impressive 120 basis point improvement in margins came as a result of the contributions from the acquisitions and broad-based operating improvements.

For the year, EIG sales were up 4 percent to $561.9 million, driven by contributions from acquisitions and growth in high-end analytic instruments, which more than offset weaker aerospace and power markets.

Operating profit was $95 million, an increase of 9 percent over last year, and margins expanded 70 basis points to 16.9 percent.

For the Electromechanical Group, fourth quarter revenues were up 6 percent to 127.5 million as the contribution from Airtechnology overcame lower sales of cost-driven motors.

Operating income for the quarter was up 4 percent and operating margins were 14.9 percent, compared with 15.2 percent in last year's fourth quarter.

For the full year, EMG sales were up 6 percent to $529.7 million.

The acquisition of Airtechnology drove the sales increase.

Operating income of 84.2 million was up 5 percent from 2002 and margins were essentially unchanged at a very strong 15.9 percent.

Turning to the outlook for 2004, we expect our 2004 revenue to be up mid single digits based on the full year benefits of the Chandler and Solidstate Controls acquisitions together with modest internal growth.

Earnings are expected to be approximately $2.90 to $3.00 per diluted share, an increase of 12 to 15 percent over 2003.

Strength in our differentiated businesses, continued focus on operational excellent, including movement of additional manufacturing to low-cost locales, and the contribution from our 2003 acquisitions should enable us to deliver another record year of sales and profit.

For the first quarter, sales are expected to be up mid single digits from last year's first quarter.

Earnings are expected to be approximately 60 cents to 66 cents to 68 cents per share.

Let me repeat that -- 66 cents to 68 cents per share, an increase of 12 to 15 percent over last year's first quarter.

I would like to take a few minutes and talk about some other actions we have announced today in conjunction with our earnings release.

First, the Board has approved a two-for-one stock split of our common stock payable on February 27th to shareholders of record on February 13th.

We expect the split will broaden the stock's marketability and improve the trading liquidity.

Secondly, we have increased our dividend 100 percent.

Our disciplined application of our four growth strategies has resulted in significant increases in our sales, profitability, and cash flows over the last several years.

The Board reviewed this performance, our financial position and future expected cash flows, and felt the significant increase in the dividend was warranted.

AMETEK's superb cash flow generation will enable us to fund the increased dividend as well as our four growth strategies, particularly our acquisition strategy.

The dividend has been increased to an annual rate of 24 cents per share on a post-split basis or 48 cents per share on a presplit basis.

The Board has declared the first-quarter dividend of 6 cents per share on a post-split basis or 12 cents per share on a presplit basis.

The dividend is payable on March 26 to shareholders of record on March 12th.

Dividends will now total approximately $16 million on an annual basis.

The Company has also adopted a change in our long-term compensation plan.

Beginning in 2004, long-term incentive compensation for officers and other senior managers will be composed of 50 percent restricted stock and 50 percent stock options.

Previously, long-term incentive compensation was composed primarily of stock options.

This change was made for two important reasons.

The first is that restricted stock is prevalent as it removes some of the perceived abuses with options.

It also is expensed in the P&L in a very straightforward manner.

With this change, approximately half of our future long-term incentive compensation awards will be expensed.

Secondly, we believe this new plan will enhance our ability to attract and retain management talent, which is an essential element to grow the Company.

So in summary, we're very pleased with our performance in the fourth quarter and full year.

Contributions from acquired businesses enabled us to grow the top line during a difficult time through the manufacturing segment.

An improving mix of businesses combined with our successful operational excellence focus enabled us to post another record year of earnings.

On that point, we have talked often about how we have been deploying our cash flow to grow the differentiated component of the Company to take advantage of the inherently better organic growth opportunities in the differentiated businesses.

As we enter 2004, differentiated businesses now account for 75 percent of our sales mix, up from 70 percent.

We would expect that through continued application of our growth strategies, that percentage will continue to increase.

We look forward to building on our track record of success during 2004 and remain confident that our four growth strategies with continue to create value for our shareholders.

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

Thank you, Frank.

I would like to cover some key metrics up front and then elaborate on other important themes.

Cash flow for the Company was excellent.

We generated $47 million in cash from operations in the quarter and $155 million for the full year.

The full year cash flow from operations was a record and was a 49 percent increase over 2002.

Working capital management was an important part of the cash flow improvement.

Our inventory performance metric improved from 4.7 turns a year ago to 5.0 turns this year.

Our collection cycle improved by one day from last year.

The inventory improvements were made while we continue to move production to low-cost manufacturing sites.

Accounts Receivable were $189 million and inventories $143 million, each down slightly from the third quarter.

Accounts Payable were $96 million, up $8 million in the quarter.

This very strong cash flow enabled us to reduce debt by $49 million in the quarter.

Total debt was $424 million at December 31st, with long-term debt of $318 million.

And our stockholders' equity was $529 million at year-end.

Our debt-to-capital ratio at December 31 was 44.5 percent, down from 48.1 percent at the beginning of the year, despite spending $164 million on acquisitions this year.

Capital spending was $8 million for the quarter and $21 million for the year.

Depreciation and amortization were $10 million in the quarter and $36 million for the year.

Selling, general and administrative expenses were up 10 percent for the year.

The increase in selling expense was attributable to the 2003 acquisitions and the higher G&A costs were related to the accelerated vesting of restricted stock in addition to higher pension, business and health insurance expenses.

Core business SG&A was flat for the year.

The effective tax rate was 31.5 percent for the fourth quarter and 32.5 percent for the year.

Excluding the impact of the vesting of the restricted stock, the effective tax rate for 2003 was 32.0 percent.

For 2004 we expect the capital expenditures will total approximately $23 million, while depreciation and amortization should be about $35 million.

Operating cash flow for 2004 is expected to be up low to mid single digit percentage from the exceptional 2003 level, driven by higher income and less positive changes in the balance sheet.

AMETEK continues to manage its cost structure and balance sheet effectively, generating excellent cash flow and positioning itself for future growth.

Frank has outlined the solid operating results for the Company.

These were accomplished in the face of headwinds from pension, medical and other purchase insurance increases.

These additional costs totaled 6 cents per share for the fourth quarter and 22 cents per share for the full year.

These additional costs reduced group operating margins about 110 basis points.

Obviously, we have been very active in managing the cost structure to offset these uncontrollable cost increases.

Our moves to low-cost manufacturing areas, Six Sigma, and other operational excellence activities have enabled us to overcome this cost issue.

In addition to the strong cash flow of the Company, we have substantial financial resources at our disposal to continue to fund our growth.

At the end of December, we had $250 million available under our existing credit lines.

In summary, we continue to manage through these rough economic times.

Our cost structure is lean.

We are generating cash and look to continue to grow the business.

That concludes our prepared remarks.

And, Rochelle, we will be happy to take questions at this time.

Thank you. (OPERATOR INSTRUCTIONS) Jim Lucas with Janney Montgomery Scott.

A couple of housekeeping questions to start.

When we look at the revenue growth by the two segments for both the fourth quarter and the full year, could you give us organic acquisition FX, the three buckets there of where the revenue growth came from?

For the fourth quarter and the year?

Yes.

For the Company, the internal growth was a negative 3 percent in the fourth quarter and it was negative 5 percent in EMG and negative 1 percent in EIG.

For the year, the internal growth for the Company was negative 4 percent.

It was negative 3 percent at EMG and negative 5 percent in EIG.

There is one thing I would like to comment on that, Jim, in addition, is if you look the trend here of the internal growth, in the third quarter of 2003, we were negative 6 percent and it was negative 6 in each of the operations.

That improved in the fourth quarter to the negative 3 that I had mentioned.

And as we look forward, the first quarter of next year we are anticipating to be slightly negative, and then in the second quarter break through, and we expect to be up in the mid single digits as we go into the second half of the year.

So we are definitely seeing an improvement in that internal growth.

Okay, and FX contribution?

For the fourth quarter, it was about $2 million in EIG and about $4 million in EMG.

Okay, and do you have that for the full year by chance?

I've got it.

It is $7 million for EIG and $17 million for EMG.

Okay, thank you on that housekeeping part.

And as you are looking with the three acquisitions you have done and with the integration, as you indicated, is progressing nicely, have you seen any surprises either positive or negative?

Could you give us a little feedback on what you seen so far with these three acquisitions?

I would say in general the surprises have been positive.

We acquired Chandler, and their order intake in the fourth quarter was just excellent and their performance in the fourth quarter, which was really the first full quarter we owned them, actually exceeded our expectations; so we are very, very pleased with what has occurred at Chandler.

There seems to be a fair amount of activity in the oil patch and they have got some instrumentation that is just first class for those types of applications.

Similarly with the Solidstate Controls acquisition we did, this is a company that does universal -- Uninterruptible Power Supply systems.

They have done just a remarkable job in getting business outside of the United States.

They have a very solid platform in the U.S., but they have really been expanding both in the Far East and in South America.

And their internal growth as we go forward looks to be very, very encouraging.

They also exceeded the profit plans that we had anticipated.

And the last one, which we acquired very early in the year, was Airtechnology.

You may recall they are largely a military company located in the United Kingdom, and they basically met their targets and did well.

So these three acquisitions have been just great for us.

Okay, thank you for that update.

And final question on the low-cost manufacturing strategy.

You had set a target to move 40 million of revenue in 2003.

Could you tell us how you did in relation to that target and what your 2004 plans are?

Yes, I can.

We didn't quite make that target.

We ended up with about $180 million in revenue that we actually did that year.

I think that was up about 30 million, not the 40 million -- is that right? (multiple speakers) And single digits up.

And our anticipation for 2004 is exactly that same number, it's 40 million.

And we've got really solid plans to make that happen.

Mix is going to be a little different.

We're going to be doing more in China in terms of that 40 million, and so we are really looking forward, we're seeing some strong market activity in China, so we think we can very fairly easily make that $40 million number this year.

Is that mostly EIG that you're moving to China?

No, it is actually mostly EMG.

Great, thanks a lot.

Matt Summerville with McDonald Investments.

A couple of questions.

Actually, a follow-up to Jim's question.

You mentioned that you had hoped to move about 40 million to low-cost in '03.

What inhibited you from being able to do that, and what have you done to ensure that you are successful in that regard in '04?

And could you also then talk about at the end of the year, assuming you are successful with these incremental shifts in manufacturing, how will your low-cost footprint look between the EMG business and the EIG business?

Okay, Matt.

The main reason we didn't hit the target in 2003 was really related to the very low end of that low-cost motor business.

As I have said before, we are going to not take that business if it does not make sense.

And I think what you can see from some of the numbers that I gave in my opening talk, there is a substantial shift occurring in the Company, which is really right in line with our strategy to move more to the differentiated businesses, which obviously have the higher profit margins etc.

And we were very pleased when we put the budget together for 2004 that we're now seeing that mix of our businesses at 75 percent differentiated and 30 percent cost driven.

So we are going to let some of that low-end business go when the profitability and the amount of energy that goes into it just doesn't make that much sense.

Could you repeat your second question so that I understand it better, please?

I am looking just for an update.

As a percent of EMG's manufacturing footprint at the end of '04 and then the same analysis for EIG, how much will be low-cost versus not low-cost region?

Is that a little more clear?

(multiple speakers) We don't have it broken down by group here, so we can't really answer that on the fly.

What we will do is get back to you on that question.

Okay.

And then just one follow-up.

You did a great job, Frank, of going through the FX versus the core growth and how that's expected to proceed in '04.

The one follow-up I have to that is did your fourth quarter core analysis include or exclude the gains you had from currency?

The internal growth that we gave you includes the benefits of foreign currency, so then Frank gave some dollar figures that you need to subtract out to get to internal growth X foreign currency.

Got you.

As far as guidance, what is your underlying assumption then for '04 in terms of how much of your core growth will come from continued favorable exchange rates?

Probably a couple percent.

Okay, thank you very much.

Scott Graham with Bear Stearns.

I have a couple questions as well.

First, if you could, Frank, in the past, you have given us a little bit more detail on the sales growth by the businesses -- the high-end, specifically, you have given us that number before.

I am wondering if you can give us a couple more buckets here, aerospace, just throw out some deltas, maybe talk about that low end, which obviously remains in the doldrums marketwise.

That would be helpful.

You bet, Scott.

I would be glad to do that.

Why don't we start with the Electronics Instruments Group.

As I mentioned before, for the overall Company we are looking at like a mid single digit revenue growth for the whole Company.

When we look at EIG, it is going to be better than that number by a little bit.

And if you look at the various parts of the business, the process part of the business we expect to be quite strong next year.

It's going to be driven both in terms of internal growth of that business -- to give you a number, in the fourth quarter of this year, the internal growth of the process businesses was plus 7 percent.

So the process business is (ph) well; we anticipate them to continue to do well next year.

And we are also going to have the incremental benefit of the Chandler acquisition on a year-over-year basis.

So that segment is going to overall be a very strong contributor to that revenue growth in EIG.

If we look at the industrial part of EIG, we also expect good growth in that segment.

The heavy vehicle market is definitely rebounding.

The estimates in terms of the market that are basically prevalent in that industry right now are like a 38 to 40 percent increase in the amount of truck production.

We were pretty conservative in our budgets.

We took about half that amount.

But in fact we are starting to see some of that uptick.

Aerospace, we don't expect to see any substantial uptick.

Matter of fact we're projecting pretty much flat in aerospace, and that will be a little bit of a drag on internal growth in the beginning of the year because it's actually negative on a comparison basis and then will get better as the year goes on.

It is possible we are little conservative on this.

We are seeing some uptick as we speak in the aftermarket part of that business, but we are not seeing any uptick in the OEM part, which is consistent with Boeing and Airbus basically saying they are going to be flat as we go into this year, in essence.

And in terms of the last segment here, power.

Power is a good story as well.

The dynamics of our power business have really changed as a result of the SSC acquisition.

If you look at basically that business, we expect it to be around $85 million next year -- this year, excuse me.

And if you provide a breakdown of that business, it is now about $48 million of that acquisition.

And that is really in the power area in terms of generating power, cleaning up power systems, etc.

The way we used to talk about this in terms of power generation, that business is going to go down.

It is going to go down substantially, but it's to the point where it is only about 10 percent of the revenue for that whole segment in 2004.

And the transmission and distribution part of that business is showing life.

So overall, when you include the acquisition, that business is going to be up very nicely.

If you look at it on an internal growth basis, it is about flat.

So that is the Electronic Instruments part of the business.

If we look at the Electromechanical Group, probably can be summed up this way, that we expect in the cost driven side of that business to be roughly flat, maybe slightly down for the full year, and we expect the differentiated part of the motor business, which is basically specialty metals and Prestolite Power and Switch and Airtechnology, Rotron, to be up in the mid single digits.

So definitely the drag there is going to be more on the cost-driven motor side, but good performance from the differentiated businesses, which again is in line with our strategy.

Does that help, Scott?

It helps significantly, Frank.

I hate to say this, except I was asking about the fourth quarter.

I certainly appreciate all of the above, but would you mind doing that same type of analysis for the fourth quarter?

I missed your point.

I am sorry.

I certainly appreciate the forward looking.

You just answered somebody else's question.

Right.

You can tell I was prepared for that question.

Okay, let's talk about the fourth quarter, then.

If we talk about the fourth quarter -- and I will be a little bit briefer -- for EIG, the process part of that business was up, but overall, EIG was up 15 percent.

And for the process part it was up 29 percent including the acquisition; about 7 percent excluding the acquisition.

That was the internal growth I was talking to you about in the process businesses.

The industrial business was up a few percent.

Aerospace was down 8, and power, if you include the acquisition, was up 60 percent.

If you exclude the acquisition it was down 18 percent.

Okay.

For EMG, we're talking -- for the differentiated businesses, they were up in the region of 3 to 4 percent, and for the cost-driven businesses, they were down in the high single digits.

And all of the X acquisition numbers do include a couple of points in FX, yes?

That you just laid out?

In general that is true.

Again, it might vary by which of those subsegments, which we haven't broken out in our own thinking.

That's fair.

I'll stop there.

Thank you very much.

Wendy Caplan with Wachovia Securities.

Good morning.

I have a question about your incremental margin.

Last quarter it was particularly impressive and I thought I remembered hearing you talk about sustainability of that margin, and it didn't look quite as impressive this quarter.

Could you comment on that and what your future expectations are for '04?

Our margins, if you look at it on the operating line at the group level, were about 17.4 percent in the third quarter and moved to about 17 percent in the fourth quarter.

So we considered that to be still very, very strong performance.

And yes, the drag, if you want to say that we didn't go up even a little bit higher, was that low-end motor business that we have been talking about.

There was a little bit of a drag from that, but overall, EMG still did quite well in terms of the margins.

What we are expecting next year and we have not assumed any broad-based recovery in our plan next year, we think we can get another 30, 40, maybe 50 basis points in terms of margin improvement, and that is what is baked into the numbers and the forecast that I gave you.

Thanks.

And as we look to next year, it sounds as if, having been listening to conference calls all week and partially last week, that you are being a little more conservative than most of our diversified industrial managements out there.

Is that a fair assumption and could we see some upside here?

Because it appears -- one of the examples you gave was the heavy-duty truck market that looks like it will be up about 40 percent next year and baked into your assumptions is half of that improvement.

So could these prove to be fairly conservative numbers in your mind?

There's no question that we put this budget together and started with the assumptions back in the September time frame.

And we basically told our operating managers not to assume any major economic uptick as we went into 2004.

And we are feeling better now than how we were feeling three or four months ago.

But I can also say, Wendy, that we are not feeling a broad-based recovery in all of our markets and we also have long cycle businesses here in terms of power and aerospace.

So if we are looking at probabilities, I would say sure, there is some reasonable probability we could outperform these numbers.

But we are very confident that we can achieve these numbers, and that's the way we like to give our guidance.

One last question, a more strategic view, if we could.

Certainly, the cost-driven motor side of the business has been a bit of a drag and as you have talked about the mix moving toward the differentiated businesses, that certainly is the strategic outlook.

But if we were to look forward about three to five years, are these businesses that we expect to exit?

Will they be 10 percent of the business going forward?

Can you comment on that from a strategic standpoint?

I think what is naturally going to happen as part of this strategy is we are going to see the cost-driven parts of AMETEK become smaller.

And right now it is the 75/25 mix, and I think over time moving more towards a 10 percent mix is a reasonable longer-term view.

We're not intending to exit those businesses.

We make extremely good cash flow on the top end and if you look at the margins in that business, even though there has been a slight drag, the margins are still quite impressive.

And we are just going to continue to drive the strategy as we have talked about.

And I think I may have mentioned this before -- there's another important strategic link here.

Those cost-driven businesses really culturally enable us -- and I'll even use the word "force" us -- to be extremely good at cost.

We are looking at pennies in a motor.

They were the driver to go to these offshore manufacturing locations and do it much sooner than many other manufacturing companies have done.

So that culture permeates our differentiated businesses.

So it is a very, very important part of our overall strategy and a key element of why we did so good as the economy weakened over the last several years.

Thanks, Frank.

One last quick thing.

Impact from increased raw material pricing, what did we see this quarter and what are we baked into our assumptions for next year?

That's a great question.

We have been actually working that issue.

For next year, we have assessed the impact on the Company at about a $5 million exposure.

Now that is basically from three basic commodities.

It is copper, steel, and nickel.

And through some very aggressive actions that we put in place in the fourth quarter, we think we can counter about half of that.

And we are going to do that through some price increases on our specialty metals and our motor products.

Many of our motor contracts have inherently escalation clauses in them, so that will help us.

We are also being very aggressive on the purchasing of that material, using auctions, reverse auctions basically, and other mechanisms to keep that cost down.

So we think we can counter about half of that.

And that is all baked in to the $2.90 to $3 guidance we're giving for next year.

For the fourth quarter, I don't have numbers right front of me, but I would say it is probably about one-quarter of that number, just as a rough estimate.

So like 1 million, 1.25 million of impact on the fourth quarter.

And maybe -- we started these strategies very aggressively like in the middle of the quarter, so we might have got a little of that back.

Okay, Wendy?

Thank you very much.

Yvonne Varano with CIBC.

Just one quick housekeeping item, if I missed it.

Did you give the cash on the balance sheet at the end of the quarter -- the end of the year?

23 million.

Great, and when you talk about your revenues expected to be up in mid single digits in '04, you said that that includes some foreign exchange.

What about acquisitions?

The impact of acquisitions is fairly minimal.

It's about $28 million on a year-over-year basis.

So that assumes no further acquisitions in '04?

Our whole model, Yvonne, assumes no further acquisitions, which is unlikely, obviously.

Right.

And just a little more on the motor side.

What really needs to happen in the marketplace for you to see those cost-driven businesses start to turn around?

And then can you talk a little bit about your efforts to gain market share in that area?

Again, our estimates were put together assuming no economic recovery.

So as the economy improves, which is obviously appearing more and more likely today than it did several months ago, that business is going to do better.

It has been in the doldrums in terms of the U.S. part of the business has been very weak for a number of quarters and started getting weak in the beginning of 2003 and got weaker as the year went on.

So I think when the economic upturn occurs, we are going to see some life in that business, and we are going to see some topline growth, which will go to the bottom line at a reasonable contribution margin.

In terms of our strategy for this business, it's really solid.

We're really the only global supplier of these motors.

We supply them from the United States, South America, China, Western Europe, Eastern Europe, and there is essentially no other competitor that has that global footprint, so our costs are extremely good in this overall business.

It is just at that very low end of that low-end business it is just business that you work very hard for and the economic return you get on it is not that much.

So as time goes on, we're just going to let some of that business go, as we have been talking about.

You mentioned the U.S. business.

In the past, Europe had seemed to be doing better than the U.S.

Can you give us a little color on whether that has changed?

Europe was actually weaker in the fourth quarter than it has been in the first, second, and third quarters of the year.

Some of that was due to the phenomenon we were just talking about, but also there was some inventory buildup in Europe, and they had to sort of bleed that supply chain.

And in fact, that business is now coming back as we speak.

I just checked on the order intake yesterday and it has improved substantially.

So we did have a little bit weaker fourth quarter than we have in the past.

Okay, thank you.

Elana Hordon with Merrill Lynch.

I was wondering if you could give us what you're planning assumptions are for pension and healthcare this year or maybe if you could talk about just what the incremental expense might be in '04 versus '03?

Our pension costs will be declining this year.

We are in the pleasant state of being in an overfunded position and had some nice pension management success in 2003.

That looks to give us some upside going into 2004.

Offsetting that substantially will be increases in our business insurance, medical costs, and a number of other issues that probably will about cancel each other out.

My next question separately, are you see any pricing in any of your businesses?

There is definitely the ability now to do more on pricing than there has been and I think that is just a reflection of the changing economy.

So we put some pressure on that in the budgets that we went through with each of the operating units, and these are not substantial increases, but better than what we saw at the beginning of 2003, if people are able to implement some of that and, in fact, that environment is looking a little bit more positive.

Can you talk about which businesses might seem the most significant --?

It almost goes directly in line with the differentiation of the businesses.

The higher the level of differentiation, the more flexibility, the more power you have to increase prices.

Where as you go down that differentiation curve, you simply don't have that luxury.

For instance, the process businesses have had -- the high-end analytics businesses have had more flexibility than some of our lower-end businesses.

Okay, thank you.

James Fong with Gabelli and Company.

Can we talk about the potential outsource business that you might get in '04?

And how much did you get in fourth quarter from European as well as integrated suppliers?

We basically came up with a number in 2003 that we ended up with about $15 million in outsource business.

In the fourth quarter it was probably a little bit more than 25 percent of that.

I don't have an exact number in front of me for that.

And we've assumed probably a little conservatively about another $7 million of additional outsourcing that we would do in 2004.

Okay, and I guess that kind of fits in with just the whole conservative outlook you've been looking at for '04 then.

I guess the other thing is, at one time you talked about recovering a potential 100 to $125 million of revenues as the economy improves.

Are you still looking at those numbers as you see some sort of growth in some of your businesses?

Absolutely.

You look at some of the markets that we are in, with Aerospace down in commercial, a number like 25 percent; the heavy vehicle business down a number like 40 percent.

We just talked about the motor businesses being down.

So we believe, and still believe strongly, that over time, that business is going to come back.

Now, there's different cycles on those businesses.

Like as I mentioned before, we don't expect any substantial growth in the power or the aerospace businesses from a market viewpoint in 2004.

In general, in 2005 we will start to see those businesses come back.

But we believe strongly that we are going to get that back.

And I bracketed it from 100 to 150 million.

So I think those are still reasonable estimates.

Thank you.

Gary Goldstein with Gilford Securities.

I just wanted to congratulate you.

This was really a great quarter and a great year.

We have only been covering the Company for about three years, but every quarter has just been outstanding and this one does not seem to be any different.

A couple of housekeeping questions.

Might have missed the total asset number.

You might have said it;

I just missed it.

We didn't say it.

It's $1.217 billion.

And just in the aerospace, I did not hear you break it out.

Can you talk to us about the difference between the commercial aerospace and the military, what's going on on the military side?

Sure.

Pretty much the patterns that we had talked about previously continue to hold.

The commercial segment, in essence, right after September 11 went down 25 percent and has essentially stayed there.

There has been no substantial recovery.

As I mentioned before, we are starting to see a little bit of an uptick in the aftermarket part of that business, which is encouraging, I would say.

But there is surely no broad-based recovery, and as you look again at Boeing and Airbus, they're talking about flat in terms of their production from 2003 to 2004.

The business in regional jet business went down not as much.

Numbers, if you go back again to after September 11, probably in the 10 percent kind of region.

And it has stayed down and we're projecting that's going to get a little bit better, actually, as we go into next year from that level.

So we are feeling pretty good about that.

And military has just went exactly the other way.

After September 11, it popped up and it stayed up; and we're expecting actually very good performance in military as we go into -- are into this year.

So the dynamics are about the same as what we have been talking about.

I think if you look at it on a longer-term basis, I think the military is going to stay up there.

I have no indications that it is going to fall off, and I think you're going to see a major rebound in commercial and a more moderate rebound in the business and regional jet environment.

Thank you, and you answered my other question -- when Scott answered the quarter, you got my year.

Again, congratulations, guys.

Godfrey Birckhead with SBK Brooks.

Traditionally, you have not had a relationship with Airbus, but with the acquisition of Airtechnology, as I understand, that is a strong possibility for you.

Can you talk about that?

Actually there's two major things that are going on here.

One is through the acquisition of Airtechnology, we have picked up volume with Airbus and they've got a good relationship with Airbus and having the platform in Europe substantially helps us because we are much closer to the customer than trying to sell product out of the U.S.

So that was a very nice part of that acquisition for us.

But in addition, we have one business on the Pratt & Whitney GP7200 engine which is one of the key engines that is going to fly on the A380.

We got the complete sensor suite, which was a major, major win for us.

And so that is of significance in terms of our penetration of Airbus.

We have been really focusing on getting a better share of Airbus and I think we are well on the way.

There is also an increased receptivity on Airbus's part to let some contracts go outside of the European continent, and that has helped us, as it will help other U.S. aerospace manufacturers.

But we're starting to feel much more bullish about our business with Airbus.

And (indiscernible) ship the 380 next year, Frank, is that right?

We just shipped our first set, and I think production is actually going to be the year after that, any major production.

All right.

And what about your chemical business, how is that doing?

That's interesting.

As you know, I have talked about that as one of our leading indicators, and this is not a typical cycle back, because that business has not shown a major uptick yet, where some of the other businesses I talked about are showing some life.

So I would say that business is essentially where it was at the end of the last quarter.

My third and last question is, as you went from September to October to November to December and now we are into January, are you seeing any sequential increase?

Let me answer the question in a couple ways.

First, if you look at the order intake for the Company in the fourth quarter, it was about $280 million.

If you look at the quarterly order intakes of quarter 1, 2 and 3 of last year and extract the backlog that we acquired to sort of get a normalized level, those first three quarters were in the range of 260 to 264 million.

So in essence, the fourth quarter on that sequential basis was definitely an improvement, so that was encouraging to us.

And as we go into January, the order rates seem quite good; so from that viewpoint it's good.

Now, if I look at it on a month-to-month basis, which was part of your question, it is a strange quarter when you look at quarter 4, because you've obviously got the holidays in there.

The exact numbers making up that 280, if my recollection is right -- John, you can look them up -- but I believe it was 104, 85, 92.

Is that right?

I remembered them correctly.

Which if you look at that in terms of our historical performance is pretty good, even though October is always a very strong month and December is typically weaker than that, so December came in good.

So our overall assessment when we look at that is things are getting better.

There is no question things are getting better.

My third and last question is in your sales forecast, what is -- how much is price built into that, negative or positive, Frank?

I would say overall it is slightly positive.

Slightly positive.

And last year overall it was what?

Flat.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Richard Eastman of Robert W. Baird.

A couple things I wanted to just follow up on.

On the operating profit, when I look at the guidance for '04 versus where we left '03, it looks to be in the middle of the EPS range that the op-profit growth next year is forecast at about 15 percent, which is about -- sorry to do this to you, is about $14 million.

I am curious.

We have acquisitions.

We've got a little bit of internal growth.

It sounds like we have some price.

That gets us maybe half of the way there.

I'm curious what you have plugged in for cost reductions -- net cost reductions for next year.

Essentially, you're asking for roll-forward of where we were in terms of operating income in '03 versus '04, what the key drivers are?

Yes.

Again, I'm looking at the sales number and we have currency, we have acquisitions, and we have maybe 1 percent organic growth. so if we are at 5 percent at the sales line, we need 15 percent or so at op-profit line.

And we have it sounds like some cost increases in the business; obviously, some cost decreases planned here as well.

And I'm just wondering if there is a net and a savings number here from cost reductions (multiple speakers).

You don't have net number, but what I can tell you is that the operational excellence improvements that we put in place last year, you start to get obviously the year-over-year benefit as you go into 2004, plus we are putting additional operational excellence initiatives in place this year.

And they will give profit improvement as the year goes on.

So the way we establish these numbers is via a roll-up of every business unit and we look at what they are going to do from operational excellence, what they feel they can achieve, etc.

I simply haven't rolled up that number, Rick, so I can't give you an overall number.

The other dynamic that also may relate your question is that with these differentiated businesses that we've acquired -- and I think as we have talked about the past, there is a difference in the cycle of those businesses, that they tend to be much stronger in the second half of the year than in the first half of the year.

So there is going to be incremental improvement in the margins as we go through the year.

And that is not exactly what your question was, but I just wanted to point that out.

That is one reason we're saying the earnings in the first quarter are this 66 to 68 cent number and they will obviously accelerate as the year goes on.

Just to clarify, to segregate FX a little bit, if we are looking at mid-single-digit growth next year, we get about 2.5 percent out of the acquisitions that have been acquired, 2 percent from currency.

So we are looking at maybe 1 percent internal growth and it sounds like you're laying that out maybe 2 percent in the back half of the year and just flattish in the first half?

Actually it will be negative in the first half and then it will go positive, up in the mid-single digits in the second half.

And then just one last question, Frank.

On the floor care business, the commodity business, have we shifted strategy here just a little bit?

Because a year, maybe 1.5 years ago we were pursuing the low-end business.

We felt that that trend would push more business towards us from an outsource standpoint.

We had a couple pieces of business booked with Hoover and some others that accounted to maybe $30 million, $40 million of incremental revenue.

That has not shown up and I'm curious if we have shifted gears here and we are going to let some of the low end, which seems to be the trend in the marketplace, just bleed off.

I think you have to characterize this business in that within this 25 percent of the company that we call cost-driven there is probably three levels of business in there.

There is very high-end commercial products, which actually are much more like the differentiated products in the company.

There is the core floor care products.

And then there is this very low-end part of the business.

It is that very low end that I'm talking about when I say we're going to bleed some of that off.

In terms of our strategy, no, I don't feel we're changing our strategy at all.

We have talked about the fact that we're going to let some of that business go, and that is just going to happen over time.

We're still focused on outsourcing.

We think when the economy comes back we're going to get a kick in this business.

I will supply just about every one of the major OEMs, with Hoover being the last one.

So I think probably some of this maybe misconception of what we're talking about really refers to just a part of that overall business.

Okay, but that is -- what we have seen over the last maybe eighteen months, that is the direction this market has taken, at least on the residential side, towards the low end, towards lower price point product.

No question.

There's been a mix shift.

No question about that.

The key thing I want emphasize is as the mix shift has occurred, the margins that we have gotten have been pretty impressive.

So we are managing.

Okay, thanks.

Rick, I just wanted to address that question, the first question asked, maybe add some color to it, amplify the move to the low-cost operations that we have got tagged for 2004.

It is going to also contribute to our profitability substantially.

We've got ongoing cost reduction efforts that are going to take our headcount down by a few hundred people, but embedded in that is a continuing flow toward really low-cost, really improving upon our footprint in China.

So there is a lot of things going on underneath the surface there that are really going to contribute to improved profitability for next year.

It doesn't sound like from your commentary that the cost headwinds that we faced this time last year are anywhere near as significant.

Absolutely, that's absolutely right.

All right, thanks again.

A follow-up question from Matt Summerville of McDonald Investments.

Two quick items.

First, Frank, what is your outlook next year for operating cash flow?

Do you think that you can sustain the strength that you had this year in that I believe it was $150 million,$155 million range?

And what is the working capital component that you are looking at for next year?

And then finally if you could just wrap up and talk about what you're seeing in the acquisition pipeline and what your thoughts are there.

We looked at the operating cash flow with a lot of vigor and we do believe we can sustain that level.

We think we did we did $155 million this year and we think we can do the same kind of level next year.

And, John, what is the working capital number?

I think we will see lower working capital improvements year-over-year but still in the $5 million to $10 million range should be the contributing factor on top of the rest of the equation.

And in terms of the pipeline for acquisitions, again, it remains very strong.

We have a good, solid backlog.

The kinds of companies are good companies, again with this differentiation focus, and we are going to be aggressive.

We have the cash flow and we have the balance sheet and we are going to do them as they make sense.

Thanks a lot.

Jim Lucas with Janney Montgomery Scott.

Frank, a big picture question.

At the beginning in your remarks you talked about China as more of an offensive move, with obviously you will be able to take advantage of the cost.

Could you talk a little bit about your evolving strategy of how to enter the Chinese market and which businesses you see as your growth potentials in 2004, '05 and beyond?

Absolutely, Jim.

We have really increased our distribution and capability in China, aside from this low-cost manufacturing thrust.

With the acquisition of AMT, we now have about 20 people in Beijing.

We have a sales office for EIG that is also in Shanghai with probably 8 to 10 people there.

And we now have salespeople that are on our payroll located in other parts of China.

So we have incrementally improved the distribution system in China.

And the businesses that have the most opportunity and have done just great in China are our high-end businesses, particularly in the process area, the analytic instruments businesses.

The P and AI operation in Pittsburgh, they now have more than half of their volume outside the U.S. with a major concentration in China.

And I think the reason that those higher-end products are received so well in China is that there is not a counterpart that can be produced locally in China because of the technology that's involved.

They can't copy the product or get the technology in any other way than to buy it from someone who is outside of their country.

And obviously our whole approach in that market is to have the best products in a niche way for the applications we go after.

So those businesses have done extremely well.

So there is a strong emphasis not only in China, but similarly throughout Asia, to continue to increase our volume.

If you look at some overall numbers, right now of that 42, 43 percent of our international volume, about 10 percent is in the Far East, and in China the number is on the order of 25 to 30 million of export business into that part of the world, and we think there is a great growth opportunity to keep that going.

And to your point on the technology, from an intellectual property standpoint, how, from a protecting the technology standpoint, what is your approach to the market there?

Very difficult, Jim.

Obviously, we've got patents, etc., but very difficult from looking at it in terms of a legal protection on your technology.

The key, though, is not so much the legal part of this as it is the capability to produce this technology.

I'll give you an example.

The AMT products that we are talking about that measure very finite amounts of radiation, we actually grow these crystals.

And the crystals, just to give you a flavor of the size, can be four or five inches in diameter and maybe six or eight inches or even ten inches long.

And it is a very complex process that essentially only AMT are the only people in the world that really know how to do this.

So there is just no way that a Chinese or anyone outside the U.S. is going to be able to replicate that technology, even if they had access to it.

And similarly in the high-end process businesses, we use Zirconium Oxide technology in our oxygen analyzers.

They are just not going to be able to get that technology and use it because it is so far up the technology curve.

So I think is the best blockage here, rather than the legal side.

Okay, thank you very much.

It appears there are no further questions at this time.

Mr. Burke, I would like to turn the conference back over to you for any additional or closing remarks.

I would like to thank everyone for joining our call.

Again, the call is archived on the Web site and also can be replayed.

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

Thank you.

That will conclude today's conference call.

Thank you for your participation.