阿美特克 (AME) 2004 Q3 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Regina.

Good morning and welcome to AMETEK's third quarter conference call.

Joining me this morning are Frank Hermance, Chairman and CEO, and John Molinelli, EVP and CFO.

AMETEK's third quarter results were released before the market opened this morning and have been distributed to everyone on our lists.

These results have also-- are also available electronically on your market systems and on our website at www.ametek.com/investors.

A tape of today's conference call may be accessed until August 3rd by calling -- excuse me, it's not August 3rd, I'll get you that date -- by calling 888-203-1112 and entering the confirmation code number 847787.

This conference call is also webcasted and can be accessed at ametek.com and at streetevents.com.

The conference 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, these states 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, and good morning.

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

Our strong performance was driven by solid internal growth, the contributions from acquisitions and continued improvement in our operations.

Sales were strong, up 16 percent to $311 million.

Operating income, at $50.5 million was up 28 percent over last year's third quarter.

Net income of $29 million was up 32 percent and diluted earnings per share of 42 cents were up 31 percent over the third quarter of 2003.

Turning our attention to the individual operating groups, for the Electronic Instruments Group, sales were up 24 percent for the quarter to $172.9 million.

EIG's operating income was up 29 percent for the quarter and operating margins increased to 18.6 percent from 17.9 percent last year.

The acquisitions of Chandler Instruments and Taylor Hobson, as well as strength in our process and industrial businesses, drove the revenue increase.

This strength was widespread, with major contributions from our heavy vehicle, high-end analytic instrument and factory automation businesses.

As expected, power instruments was weak due to lower sales to the generation market.

Operating income was up sharply and margins jumped sequentially 100 basis points to 18.6 percent.

These impressive results were driven by the top-line performance and the benefits of our operational excellence initiatives across the group.

For the Electromechanical Group, third quarter revenues were up 7 percent to $137.8 million.

Continued strong growth in our differentiated businesses and the addition of Hughes Treitler in the quarter drove the top-line increase.

Our cost-driven motor business was down slightly.

Operating income for the quarter was up 11 percent and operating margins improved to 17.4 percent as we continued to drive operational improvements across the group.

Turning to our outlook for 2004, we continue to see a broad-based economic rebound in our short-cycle businesses, while our long cycle businesses will not see a major rebound this year.

We are again raising our earnings estimates for the year.

We expect our 2004 revenue to be up low double digits based on the improved internal growth in each of our two segments and the full-year benefit of acquisitions.

Earnings are expected to be approximately $1.59 to $1.61 per diluted share, an increase of 22 to 24 percent over 2003.

For the fourth quarter, sales are expected to be up low double digits from last year's fourth quarter.

Earnings are expected to be between 41 cents and 43 cents per diluted share, an increase of 14 to 19 percent over last year's fourth quarter.

So, in summary, we are very pleased with our third quarter results and are looking forward to a strong finish to 2004.

I thought I'd do something a little different this morning and take a moment to look back at what the people of AMETEK have accomplished over the last five years.

Over this time, we have faithfully executed our four growth strategies, namely, operational excellence, strategic acquisitions, global and market expansion and new product development.

This consistency of purpose, combined with solid execution, has made our success possible.

Our operational excellence strategy is the foundation on which AMETEK's success has been built.

Our attention to cost and asset management has been instrumental to the earnings and cash-flow growth of the company.

The group operating margin we reported today was 18.1 percent.

If this is not an historical record, it is certainly the highest during my 14 years with the company.

For our cost-driven businesses, this operational focus is essential to their survival in the competitive markets that they serve.

A key element of this operational excellence thrust has been to move manufacturing to low-cost areas.

By locating manufacturing in the low-cost areas of Reynoso, Mexico, Shanghai, China, and the Czech Republic, our cost-driven businesses have been able to compete effectively.

We expect that approximately $215 million of our revenue will be produced in these low-cost plants in 2004, up from $47 million in 1999.

The focus on operational excellence also adds value to our differentiated businesses.

For example, the low-cost manufacturing platforms put in place for our cost-driven businesses already have substantially benefited our differentiated businesses, such as aerospace, heavy vehicle and power.

The focus on operational excellence is also key to driving value from our acquisitions.

We very rapidly focused on the cost and asset positions of acquired companies in order to improve profitability and asset utilization.

As a measure of the success of that focus, we have raised the profitability of the 14 acquisitions we made prior to 2004, on average, by 31 percent in our first year of ownership.

Turning to our acquisition strategy, we look for acquisitions to drive one-half to two-thirds of our growth.

We have been an active and disciplined acquirer, completing 10 acquisitions since the end of 1999.

These acquisitions have expanded our positions in market areas such as analytic instrumentation, thermal management products for the aerospace industry and power systems and power instruments.

As we have executed our acquisition strategy, we have made a significant shift in AMETEK's mix of businesses toward more differentiated platforms with better growth and profitability characteristics.

In 1999, differentiated businesses were two-thirds of AMETEK.

As we exit 2004, differentiated businesses are now 78 percent of AMETEK and we expect this shift to continue.

In the area of global and market expansion, it has been our stated goal to generate more than half of our sales outside the United States.

Five years ago, less than a third of our sales were outside the U.S.

Today, that figure is 44 percent and growing.

We have accomplished this through a significant and continuing expansion of our global sales organization.

Since 1999 we have added 16 international sales offices and more than tripled our sales and service personnel in Asia, Europe and the Middle East.

We also have acquired two international businesses -- Airtechnology and Taylor Hobson.

In addition, a number of our U.S. acquisitions have a significant portion of their revenue derived from international markets.

In the area of new products, we have introduced many new products for the markets that we serve, from aircraft engine sensor suites to portable radiation detectors for homeland security to analyzers for the process industries, to state of the motor-- state of the art motor blowers for technical motor applications, we have made the investments necessary to grow our business.

Through the economic downturn we grew our investment in research, development and engineering to continue the flow of new products.

We have recently introduced Design for Six Sigma to further leverage our investment in new product development, reducing our time to market and enhancing the internal growth rate of the company.

The bottom line of all of this is the bottom line.

Our commitment to the investment community has been double-digit earnings growth over the business cycle and we have delivered on that commitment through one of the most difficult manufacturing environments that I have been associated with.

Using the midpoint of the range of earnings for 2004 that I just announced, our five-year compounded annual growth rate on earnings will be 12 percent.

Our growth in cash flow has been even more impressive.

Our compounded growth in free cash flow since 1999 has been approximately 20 percent.

This superb cash flow enables AMETEK to fund these growth initiatives.

Looking forward, we will continue to execute these four strategies.

This strategies have generated significant shareholder value over the past five years and we believe this is the right path to additional value creation.

Our commitment to double-digit earnings growth over the business cycle remains unchanged.

This year we are generating earnings growth of more than 20 percent as we benefit from growth in our short-cycle businesses.

Our long-cycle businesses, representing 30 percent of sales and an even greater percentage of profits, are poised for a rebound in 2005 and 2006.

Thus, we should see several more years of economic uplift and solid earnings growth.

Finally, I'd like to take this opportunity to thank all of our AMETEK colleagues, many of whom listen to this call, for the excellent job they have done in taking AMETEK to the next level of performance.

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

Thank you, Frank.

As Frank has covered our financial results at a high level, I will provide additional details.

Included in the operating results in the third quarter are several items worth noting.

As part of our cost reduction efforts, we incurred costs related to product line relocations and we settled two union contracts, which together resulted in charges of $2.4 million.

Separately, we accounted for insurance proceeds received to date related to a flood at one of our manufacturing facilities, which resulted in a $2.8 million gain.

These items are included in the Electronic Instruments Group results.

Selling expenses were up 28 percent in the quarter.

After removing the effect of acquisitions, selling expense increased in line with core revenue growth.

The acquired businesses tend to have a higher selling-- to have higher selling expenses as a percentage of sales than the base AMETEK businesses due to their differentiated nature.

Third quarter corporate G&A was $1.4 million below last year's third quarter level.

After excluding the $2.1 million in restricted stock expense in last year's third quarter, corporate G&A is up about $700,000, primarily related to higher legal, professional and consulting fees, driven mainly for Sarbanes-Oxley compliance.

We expect this year's total corporate G&A to be up slightly from last year's level.

The effective tax rate was 31.3 percent for the third quarter, in line with expectations.

We expect the effective tax rate to be between 32 and 32.5 percent for the year.

This reflects our view of the 2004 impact to AMETEK of the new tax law.

Turning to cash flow and the balance sheet, cash flow from operations totals $100 million year-to-date, which is about 7 percent less than the level of a year ago.

The cash requirements of growing the company in 2004, as well as very low 2003 tax payments, are the major factors for the difference.

We expect the fourth quarter's cash flow to be extremely good and for the full year of 2004 we expect cash flow from operations to be up low single digits over last year's excellent $155 million.

Our operating working capital, defined as inventory plus receivables less payables, as a percent to sales, ended the quarter at approximately 22 percent while achieving 5 percent internal sales growth, a very good level that ranks favorably to our peers and comparable to where we ended the second quarter.

In the third quarter, receivables dropped about $4 million to $215 million.

If we exclude Hughes Treitler, which was acquired during the third quarter, base business receivables declined $8 million.

For the year, base business receivables are up 3 percent, while our internal growth has averaged nearly 5 percent.

In the third quarter, inventories increased approximately $4 million to $168 million.

Excluding Hughes Treitler, base business inventories declined $4 million.

For the year base business inventories are up in line with our core growth.

We do see a future opportunity to improve working capital to-- to improve working capital by about $15 million.

Debt increased $25 million in the third quarter to $487 million as we spent $45 million for Hughes Treitler.

We continue to strengthen the balance sheet.

Our debt-to-capital ratio at September 30th was 44.3 percent, down slightly from the beginning of the year and 48.5 percent one year ago, even as we spent $142 million for Taylor Hobson and Hughes Treitler.

Capital spending was $5.4 million for the quarter, $14.4 million year-to-date, and is expected to total about $23 million for the year.

Depreciation and amortization was $9.7 million in the quarter and is expected to be approximately $38 million for the year.

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 September 30th, we had about $183 million available under our existing credit lines.

In summary, our businesses are running well and taking advantage of the economic upturn.

We continue to generate significant cash.

Together with our strong balance sheet, we look to deploy that cash to continue to grow the business.

Bill?

That concludes our prepared remarks.

Regina, we'd love to take some questions now.

(OPERATOR INSTRUCTIONS) Jim Lucas, Janney Montgomery Scott.

Thanks.

Good morning and congrats on a good quarter there, Frank.

Thanks, Jim.

A good five years, I should say.

If we start first, could we go through the housekeeping question of the revenue breakdown by segments?

You mean in terms of growth?

Acquisitions, FX and core?

Yes, absolutely.

Let's start with the core growth question.

For the entire company, the core growth was 5 percent.

That includes FX effects and we are up about 1 percent due to FX.

In the instruments group, the growth was 8 percent internally and the effect of FX was about 1 percent.

In the Electromechanical Group, revenue growth was up 2 percent including FX and the impacts of FX were about 2 percent.

OK.

In terms of acquisitions, the impact in the quarter was about $30 million of acquisitions and it was roughly $6 million in EMG and $24 million in EIG.

OK.

That's helpful.

I just want to add one more point to this, Jim.

One of the things I've started to do is look at the internal growth of our order rates and they were extremely good in the quarter.

The actual internal growth on orders was actually 10 percent and it was evenly balanced between the two groups.

So this bodes well for internal growth as we go forward.

OK.

That's helpful.

Taking a look here at the continued evolution of the AMETEK model, the one positive surprise that really has come out has been the strength of the EIG margins and clearly the acquisition strategy of getting into these higher growth, higher return businesses is beginning to show.

Can you give us where you think those margins can potentially go, longer-term?

As I've said in the past, Jim, I think there's still incremental improvement that's possible on these margins.

This quarter the margins in the instrument group were, you know, well above 18 percent, so I think on the longer term, looking at a 20 percent kind of margin at the group level is not unrealistic for that half of the company or that part of the company.

OK.

I think it'll be incremental improvement, though.

It's not going to have the same huge kind of changes that we've seen in the last year or two.

Right.

And a final question.

You alluded to the long cycle businesses looking for some rebound there in 2005-2006.

Could you add a little bit of color of what you're seeing there?

Yes, I could.

Let's talk a little bit about our aerospace business.

On the instrument side of the business, the aerospace business showed internal growth in the third quarter.

So that's several quarters in a row now where we've seen internal growth.

The after-market part of that business, which is usually a precursor to a turnaround, has continued to grow.

We actually hit the trough about mid-last-year and every quarter sequentially has now shown some incremental growth.

And probably the most important thing that happened during the quarter is that both Airbus and Boeing increased their production rates.

In Boeing's case, they didn't change 2004, but they increased 2005 by about 10 percent in terms of their production, up to about 315 to 320 aircraft.

And Airbus changed both their 2004 numbers, as well as their 2005 numbers, and their 2005 number now is showing about the same amount, about 10 percent growth over 2004.

So I think that bodes very well for the aerospace industry and we're starting to feel more optimistic about a turnaround in commercial aerospace in 2005.

The other long-cycle business is our power business.

I can't be quite as optimistic about that.

In the quarter that business still was a laggard.

Actually, it was the only part of the instruments group that was a laggard to internal growth.

It was down about 11 percent and that was driven by the generation market where, I'm sure you're aware, GE's land gas turbine business is off substantially.

Last year they produced about 106 turbines.

This year they're talking about a number more like 60 or 70 turbines and, obviously, that part of the business is tracking-- our part of the business is tracking that number that's in the generation side.

The good news here for us is that the total revenue from that part of the power business is only expected to be about $7 million, so I think it's hit the trough.

It's down as far as it's probably going to go and the question is, when is it going to return and I don't have the same kind of indications on that part of the business that I do in the aerospace about 2005.

So I think if there is a rebound there, it's probably going to be more later 2005 into 2006 for that rebound.

Wendy Caplan, Wachovia Securities.

Good morning.

First, you mentioned, Frank, about the internal order rates that you were seeing, up about 10 percent.

Just clarifying, is that across the board.

You said they were balanced, but does that mean up 10 percent, roughly, in both segments?

Yes.

That is correct.

OK.

And can you give us some indication as to how those orders are being-- what the profitability level of those orders is versus the current profitability level?

And also address the issue, speaking of profits, you know, the incremental margins were down this quarter versus the second quarter, in part, I suspect, because the revenue growth was so strong.

But could you address that, as well?

Yes, absolutely.

Let's start with the orders profitability.

The order growth, as I said, was equal between the two parts of the business and if you look at where we were very strong on orders in the instrument side of the business, it was in our industrial area and in our process instruments area, the two parts that have been driving our growth this year.

And in the motor side of the business it was in our differentiated parts of the Electromechanical Group.

So, yes, I mean, that bodes well for profits.

Those are, obviously, stronger profit generators for us than other parts of the business.

Your second question -- again, remind me what that was?

Contribution margin?

Yes, actually, our contribution margins overall were fine in the quarter.

They were somewhat less than the 40 percent that we've sort of talked about as a peg on the wall, but that's to be expected because if look at our aerospace business, which is one of our highest contribution margin businesses and one of our longer-cycle businesses, that one didn't come back.

But we still had reasonable contribution margin and, you know, we're very pleased with the incremental amount we're getting to the bottom line, which, obviously, is one of the factors in the margin expansion of the company.

OK.

And finally, John, you spoke about some working capital initiatives that you had put into effect that you expected would get about $15 million in cash out of working capital.

Can you address what those are and what you-- refresh our memories about what kind of working capital goals you have for the firm?

The initiatives we've got in place is basically to redouble the efforts that we launched a couple three years ago.

As we've been growing the business this year, people have obviously got a lot of balls in the air and, I think, justifiably, have tried to get a lot of things done and we're going to ask them to make sure that one of the balls that they keep in the air is the working capital side of the equation.

And I think we're doing a fine job, but we can do a better job. $15 million -- I could speak to several business units that we could handle that opportunity yet this year and it's really a series of conversations at our various business units to talk to them about particular opportunities in front of them.

Our overall goals, Wendy, I think we can get towards a 20 percent level.

It may take us a couple of years and that's roughly 2 percent of revenue.

So you can do the math yourself.

We should be able to improve our working capital metrics toward that goal.

That's very achievable.

Matt Summerville, McDonald Investments.

Two quick questions.

First, it looked like your tax rate was a little bit lower in the third quarter.

I don't know if that relates to some of the one-timers that impacted the number a little bit.

If you could talk about that, John?

And then, Frank, if you could talk about what you're seeing out there in the M&A environment overall right now?

Nothing special in the tax line.

We had some puts and takes like we always do that are-- that flowed into our estimate for the year and we've been predicting or hoping to get to that 32, 32.5 percent rate at the end of the year.

As we see things settling down in terms of what this tax law does, we're able to solidify that with booking towards our year-end projections of that range.

So there's nothing strange on the tax line.

And, Matt, your question on the M&A environment, we remain very positive on the M&A environments.

Our backlog remains very strong.

We're seeing good quality companies and we're going to continue on our stated strategy to basically acquire between $100 and $150 million in businesses every year and to focus on differentiated companies in those purchases.

As far as-- if you look at the balance sheet today, how much dry powder do you have available to yourselves right now, before taking into consideration, you know, next year's cash flow, if you will?

Well, we've got the-- the revolver that's-- we've got a capacity of $183 million that we could borrow on a-- literally on an overnight basis from the bank.

So we've got-- and literally banks are standing in line to talk to us about expanding the business if we've got the right opportunities.

There's really little, if any, limit on the capital equation side of the business, the conversation, Matt.

(OPERATOR INSTRUCTIONS) Scott Graham, Bear Stearns.

A couple of questions.

There are a lot of companies out there, rightfully so, complaining about materials and we have heard nary a word from you guys.

No surprise from me, but is there an update here, perhaps, to be provided with respect to the-- what was it, the net $5 million hit?

I forget what the number was.

It was either a $5 million hit or a 2.5 cent per share net cost of materials.

Is there an update on that?

Basically, Scott, what we told you last quarter remains intact.

We believe the net impact to our bottom line for the year is about $2.5 million or 2.5 cents a share.

The gross impact of material on the company is probably on the order of $8 to $10 million, 8 to 10 cents a share, and we have been very, very aggressive in terms of price increases, which the receptivity in the market is much better to now than it was, say, a year ago.

We've also been very aggressive on shifting sources of where we procure material to basically keep our material issues in line.

So, as you can see from our operating margins, they're going up and we were able to absorb this relatively minor impact on the material costs and we don't see any major issue here as we go forward.

Great.

What was pricing up in the quarter?

I don't actually have that in terms of a number that we've computed.

I can give you my instincts.

My instincts are we're probably up a couple points on pricing.

And no pushback?

Actually, the pushback-- there is pushback, but we are getting the pricing changes, which, as I said, is a change from a year ago.

Very good.

A quick question for John and then one last one.

John, what was accounts payable in the quarter?

Oh, give me a second on that.

Why don't you go on to number three while John's looking it up, Scott?

There's been a lot of talk from the vacuum cleaner OEMs -- which I now certainly understand is a less and less important part of your business, but still not immaterial -- the vacuum cleaner OEMs complaining, you know, once again about consumer resistance to price points and things along those lines.

Yet you did not show a decline in core sales in that business, though I assume that your differentiateds being up and the vacuum motors, I assume, was down, but that still left the core-- the base business in EM essentially flat.

Could you tell us what you're seeing in this market from both a volume and a pricing or margin standpoint?

Can you characterize this thing for us?

It looks like it's weakened again versus the first half, when it looked like it was more stable.

Yes, your numbers are correct.

Basically, if you look at the Electromechanical Group, our core growth in the more cost-driven parts of the business was down just a little bit, a percent or two, and the differentiated businesses were up nicely, about 7 percent in internal growth and with the acquisitions, they were actually up about 17 percent.

I would say there's fundamentally not a significant change in the floor care business from the first part of the year.

It's kind of lackluster right now.

The-- there definitely is pricing pressure in the business, but we have been extremely aggressive and, I would say, have done a respectable job of keeping our cost points in line with whatever pressure comes to bear.

So it's a tough-- it's a tough business, no question about it, but we're managing it, I think, as well as anyone could manage it.

And, as you said, it's becoming a smaller and smaller part of the company, so it's not anywhere near the kind of driver that it was in the history of the company.

Scott, the accounts payable is about $104 million at the end of the quarter.

Alana Horton (ph), Merrill Lynch.

I'm wondering if you could tell us how much content you expect to have on the 77 and when this might be announced, any wins might be announced?

Sure, Alana.

Actually, in the quarter we did get our first win on the 77.

It's a contract that's total value will be about $15 million over the life of the aircraft.

We have a large number of quotes outstanding on the 77.

As I mentioned in the last conference call, we're really supplying more to the tier-one suppliers where we're a tier-two supplier, so these contracts are going to be let probably over the next six months or so.

And we believe this is just the beginning of a very large amount of volume that we're going to get on the 77.

So we're pretty excited about it and we think we're off to an excellent start.

OK.

And then separately, the other net line item was a relatively big drag this quarter.

I was wondering if you could break out the components?

Yes, I'd be glad to do that.

Yes, we were off about $800,000 on the other line and there were two factors in that.

One was a failed acquisition that I'll talk about in a moment and the second was-- that was about a half a million dollars and the second was some lower investment income this year versus last year.

And let me talk about the failed acquisition for a minute.

As you know, we do a very, very thorough job in due diligence and we were in the midst of due diligence on a relatively large acquisition in terms of what we have historically done and we found that that business was not as represented to us initially and we decided that it was too much of an issue to basically fix the business, so we decided not to pursue and, in essence, we put about a half a million dollars of effort into that acquisition and we needed to take those costs during the quarter and we did that.

Richard Eastman, Robert W. Baird.

Yes, Frank, could you just talk a little bit about the geographic environment, you know, what you're seeing in Europe and Asia?

Yes, be sure-- be glad to do that, Rich.

Basically, we're seeing extremely strong growth in Asia.

In the quarter our volume was up on the order of 57 percent in Asia.

That does include some acquisitions as part of that, but even if you exclude the acquisitions, it was very, very sizable.

Our analytic instrument businesses are just doing extremely well in that part of the world.

In the U.S. our business is solid.

Obviously, the GDP growth in the country this year versus last is having a positive impact.

So our businesses in the U.S. are extremely good.

And, interestingly enough, when we look at our business in Europe it's very strong, but when you diagnose it, it's not so much Central Europe-- or Western Europe, I should say, it's really driven largely by the Middle East and the *Stans* -- part of Russia, the former CIS states, where there's a tremendous amount of oil exploration going on and gas production and our analytic businesses are just doing very, very strong there so that we sum Europe with that part of the world in the way we look at our geographic dispersion and because of that what we call Europe is up sizably.

If you look at Western Europe, I don't actually have numbers at my disposal, but it's rather lethargic, I would say, up, you know, a few percent, that kind of thing.

And can you remind me, Frank, out of the 44 percent of your sales this year that will be international just roughly how much of that is Asia?

Sure.

I'll give you the whole breakdown.

For the quarter it changed a little bit because Asia was so strong and in the quarter Asia was about 14 percent and Europe was about 23 percent and the rest of the world outside the U.S. was around 7 percent.

More historically, those numbers are 25 percent in Europe, say, oh, maybe 10 percent in Asia and 6 or 7 percent in other parts of the world.

So we are seeing a shift, again, because of the very strong performance in Asia.

OK.

And then a second question.

In terms of the operating profit overall for the company, it was up in the quarter about 28 percent year-over-year.

That's correct.

Could you give us a rough feel for what that number would look like without acquisitions?

Don't have that.

That's not something that we tend to look at and I just don't have the breakdown of that between internal and external.

OK.

And then maybe the last thing is, are there any parts of the EIG business that are losing a little momentum?

I know the business has, you know, overall been very good, but I'm just curious.

We hit this little soft spot in the economy, but outside of seasonality in Europe or somewhere, is there anything that you're seeing that's maybe losing a little momentum?

I don't feel that.

I mean, I don't feel-- actually, when I heard many industrial companies talking about this soft patch, I didn't really feel that that was happening in our business.

I mean, we get normal, you know, just sort of swings.

We've got so many diversified markets and diversified businesses that we get some normal swings, but everything was within what I would call, you know, a tolerance band that I didn't see any softening and I don't feel that right now.

So, obviously, we're not seeing, you know, maybe as much leverage, you know, coming off the third or fourth quarter of last year, but, I mean, it's hanging right in there.

(OPERATOR INSTRUCTIONS) Gregory McCostle (ph), Lord Abbott Capital.

Could you talk a little bit about your expectation for the fourth quarter?

I believe you were looking for low-double-digit core growth and I know there was some acquisitions in the fourth quarter last year.

Could you give us a sense-- that seems, perhaps, a little bit slower, you're being more conservative there?

Well, we're talking about low double digits in terms of total revenue growth in the quarter.

Oh, low double digit.

Excuse me.

Yes, low double digits in terms of overall growth and I think the mix is going to be, you know, similar to, you know, a sort of internal growth rate in, probably, the mid-single-digit kind of arena and the rest coming from the acquisitions that we did.

OK and with regard to the longer-term situation with the differentiated products, you said that those will kick in sort of towards the end of the year, particularly aerospace?

Yes, you're talking about the long-cycle businesses?

Long cycle, yes.

Yes, I'm saying that I'm starting to feel in more definitive terms than I felt a quarter ago about a rebound in the aerospace part of our long-cycle businesses, which is, you know, a very sizable part of that, mainly due to the fact that, as I mentioned, both Boeing and Airbus have raised their forecasts and the after market continues to show incremental quarter-over-quarter growth.

So I believe the signs are there for a rebound in 2005.

Whereas, on the power side of the business, I'm not seeing those sort of early indicators, so I'm not as positive in 2005 on the power business.

So, in other words, basically with regard to GE and some of the orders that they're seeing there, you're still not-- haven't seen a turn up on a sequential basis?

Right.

On the land gas turbine side.

Right.

On the aerospace side of GE, we have.

We're starting to see a little bit of life there.

Jim Lucas, Janney Montgomery Scott.

Thanks.

First, a housekeeping question.

John, could you comment on the increase in the share count and where you see that, going forward?

Increase in the share count.

The share count?

Well, I would say that-- where I see it going, Jim?

I mean, the results we've got for this quarter are-- obviously, speak for themselves and reflect -- get the status.

In terms of share buy-backs, our practice has been, over time, to buy back roughly the number of shares that we issue in terms of from benefit plans.

We have not bought any this year and I don't know that I would speak to any plans with respect to that condition.

I think, in general, you'll see a relatively flat picture in terms of share count.

That number, obviously, gets modulated on a diluted calculation based upon a lot of things that could affect that, but from our outstanding share count, it should be relatively flat over a long period of time.

In terms of the 700,000 share increase second quarter to third quarter, nothing specific that jumps out to you there?

Well, you got the benefit plans that are affecting the share count in this period of time and over time I expect us to be buying back shares that should offset that and keep it relatively stable.

OK.

And, Frank, could you give us an update, now that you've had the DFSS rollout in terms of how the initial embrace has gone and has it met your initial expectations in terms of how you're looking at the new product development stage?

Yes, absolutely, Jim.

It's actually quite exciting.

As I think I've mentioned in one of these calls previously, we had an officers meeting earlier in the year where we had over a hundred people invited, which is unusual for us.

We usually don't invite that many people.

And we invited predominantly the engineering management and the key engineering drivers in the company to that session where we sort of re-launched, reinvigorated the whole engineering activity in the company and specifically rolled out Design for Six Sigma.

And I'd say the response to Design for Six Sigma has been nothing short of fantastic.

One of the key things that came out of that meeting is that when we looked for areas to improve our business one of the issue was in understanding customer requirements better.

Many of our engineers were, I'll use the word, *complaining* about the fact that they would design to specifications and then the products would get to the market and the specifications wouldn't be exactly what the customer wanted, so there was redesign involved, which means you're later in terms of getting the product that the customer wants and there's a lot of rework involved.

So we've put a lot of emphasis on that and through the DFSS process we have launched a program that's called Quality Function Deployment, which is basically a methodology, an analytic methodology, that allows you to take customer inputs and, in an analytic form, convert them into product specifications and that has been rolled out to many parts of the company and, actually, just yesterday I got an e-mail from our internal black belt that's doing those training sessions and he said the response was just super in the last training session that he did in Chicago.

So I'd say we're off and running on this and pretty excited about it.

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

Thank you, Regina.

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