阿美特克 (AME) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to this AMETEK Incorporated 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.

Please go ahead, sir.

Thank you, Angela.

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 and full-year results were released before the market opened today, and have been distributed everyone on our lists.

These results 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 February 10th by calling 888-203-1112, and entering the confirmation code number 147127.

This conference call is also webcasted.

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

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

I will remind you that any statements made by AMETEK during the call that are not historical in nature, are to be considered forward-looking statements.

As such, these statements are subject to change based on various factors and uncertainties that may cause actual results to differ significantly from expectations.

Those factors are contained in our SEC filings.

I will also refer you to the investors section of AMETEK.com for a reconciliation of 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 a great fourth quarter, establishing record for sales, operating income, net income, and diluted earnings per share.

Sales were up 17 percent to $326.3 million, on solid internal growth across the Company and the benefits of the Taylor Hobson and Hughes-Treitler acquisitions.

Operating income was up 31 percent, driven by broad-based operating gains, as well as the contributions from the acquisitions.

Net income of 31.4 million and diluted earnings per share of 45 cents were up 29 percent and 25 percent, respectively, over the fourth quarter of 2003.

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

Sales were up 13 percent to $1.23 billion, operating income was up 25 percent, net income was up 28 percent to $112.7 million, and diluted earnings per share were $1.63, up 25 percent over 2003.

Solid internal growth in each of our segments, and contributions from acquired businesses, enabled us to post a double-digit sales increase.

Our operating leverage, benefiting from an improved mix of businesses and our focused operational excellence initiatives drove our record earnings performance.

Free cash flow was outstanding, once again demonstrating AMETEK's cash generating capabilities.

For the fourth quarter, free cash flow was $53 million, up 35 percent over last year's fourth quarter.

For the year, free cash flow was $139 million, or 123 percent of net income.

Overall, we're very pleased with these results.

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

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

During 2004 we acquired 2 excellent companies, Taylor Hobson and Hughes-Treitler.

Both of these businesses exemplified our strategy of acquiring highly differentiated businesses.

Taylor Hobson is a U.K. based Company that's involved in ultra-precision measurement instrumentation for the optics, semiconductor, hard disk drive, and nanotechnology research markets.

Hughes-Treitler is a U.S. based supplier of heat exchangers and thermal management subsystems for the aerospace and defense markets.

Together, these businesses represent approximately $100 million in annualized revenue.

And our integration of these 2 acquisitions is proceeding according to plan, and the businesses are exceeding our expectations.

International sales were $537 million, up 23 percent over 2003.

As a percentage of total revenue, international sales were 44 percent, up from 40 percent 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've expanded our investment in new product development.

In 2004, we spent $66 million on research, development, and engineering, up 18 percent over last year.

We have made the product investments necessary to grow our business, including aircraft engine sensors, portable radiation detectors for Homeland Security, analyzers for the process industries, and state-of-the-art motor blowers for technical motor applications.

Recently, the Department of Homeland Security awarded AMETEK's ORTEC business a contract to develop an advanced portal monitor system for the interdiction of illicit nuclear material.

ORTEC's physicists and engineers are scaling up technology that's used in our highly successful detective line of portable nuclear detectors for this new application.

These highly sophisticated monitoring systems, based on ORTEC's Germanium Detectors, can distinguish between innocent and suspicious radioactive material without interfering with the normal flow of commerce at airports, border crossings, cargo ship docks, transportation terminals, and other points of interest.

The addition of portal monitors doubles the potential market size for AMETEK's Homeland Security business.

So, this is a big deal.

During the year we introduced design for Six Sigma to the company.

This is becoming our key tool in leveraging the money spent on engineering, and reducing our time to market.

Our divisions have rapidly adopted design for Six Sigma, and we are already seeing the benefits from its implementation.

Also, we remain committed to operational excellence.

We expanded operating margins at the Group level by 150 basis points in 2004, despite the headwinds from higher raw material costs.

Aggressive sourcing and pricing actions, Six Sigma, and the movement of production to low cost locales, all contributed to this impressive margin performance.

Let's now turn our attention to the individual operating groups.

For the Electronic Instruments Group, sales were up 21 percent for the quarter, to $184.3 million.

Internal growth at 9 percent for the quarter, and the addition of Taylor Hobson drove this revenue increase.

The internal growth was broad-based, including strong growth in our long-cycle aerospace and power businesses.

EIG's operating income was up 42 percent for the quarter, and operating margins increased to 21.8 percent from 18.6 percent last year.

Included in EIG's fourth quarter results was a pre-tax gain of $3.5 million from the settlement of insurance claims related to a flood at 1 of its manufacturing facilities, and a gain on a sale of another facility.

Without these gains, operating income was up 30 percent, and operating margins were 19.9 percent.

This impressive improvement in margins came as a result of the leverage contribution of the strong internal growth.

For the year, EIG sales were up 19 percent, $667.4 million, driven by growth in our industrial process, and now more recently, our aerospace business.

Operating profit was $126.4 million, an increase of 33 percent over last year, and margins expanded 200 basis points to 18.9 percent.

For the Electromechanical Group, fourth quarter revenue was up 11 percent, to 141.9 million, on good internal growth in both our differentiated businesses, as well as our cost-driven business.

The Hughes-Treitler acquisition also contributed to the revenue growth.

Operating income for the quarter was up 15 percent, and operating margins were 15.4 percent, compared with 14.9 percent in last year's fourth quarter.

Included in the quarter's results were higher than normal expenses of $2.5 million, primarily associated with the movement of production to low-cost manufacturing locales.

Without these expenses, operating income was up 28 percent, and operating margins were 17.2 percent.

For the full year, EMG sales were up 7 percent to $564.9 million.

Strong growth in our differentiated businesses and the acquisition of Hughes-Treitler drove the sales increase.

Operating income of 94.3 million was up 12 percent from 2003, and margins increased 80 basis points to 7 -- to 16.7 percent.

Turning now to the outlook for 2005.

We're very excited as we move into this year, unlike a year ago when we were cautious about the strength and sustainability of the economic recovery.

As we enter 2005, we can say that AMETEK is firing on all cylinders.

We expect our 2005 revenue to be up approximately 10 percent on good internal growth in each of our 2 groups, and the full-year benefits of the Taylor Hobson and Hughes-Treitler acquisitions.

In the fourth quarter of 2004, our long-cycle aerospace and power businesses have come back in a meaningful fashion, and we expect this trend to continue in 2005.

In particular, we expect 2005 to be a very good year for our aerospace business.

Boeing and Airbus are forecasting double digit increases in production for commercial aircraft.

We expect solid market growth in our business and regional aircraft business, and continuing strong performance in our military aerospace and military land-based vehicle business.

Our power business should also grow in 2005, driven by strength in our Solid-State Controls Power Supply business.

Earnings are expected to be approximately $1.85 to $1.95 per diluted share, an increase of 13 to 20 percent over 2004.

The top line growth, continued focus on operational excellence, including movement of additional manufacturing to low-cost locales, and the contributions from our 2004 acquisitions, should enable us to deliver another year of double-digit profit growth.

For the first quarter, sales are expected to be up approximately 15 percent from last year's first quarter.

Earnings are expected to be approximately $0.43 to $0.45 per share, an increase of 19 to 25 percent over last year's first quarter.

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

Solid internal growth and the contributions from acquired businesses enabled us to grow the top line at a double-digit rate.

As we had anticipated, we were able to bring that sales increase to the bottom line at a leveraged rate, resulting in significant margin expansion. 2005 is shaping up to be another great year.

Strong internal growth, led by our long-cycle aerospace businesses, a continued focus on operational excellence, and a favorable M&A environment, make me very optimistic for the year ahead.

We look forward to building on our track record of success during 2005, and remain confident that our 4 growth strategies will continue to create value for our shareholders.

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 some additional details, looking first at the P&L.

Selling expenses were up 27 percent in the fourth quarter.

Excluding the acquisitions, selling expense increased 5 percent, less than our core revenue growth of 7 percent.

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

Corporate expenses were up $1.8 million in the quarter, mainly on higher costs for Sarbanes-Oxley compliance, and higher audit and professional fees.

Other expenses were up $1.4 million in the quarter, as compared to other income of $300,000 in last year's fourth quarter.

Costs related to existing environmental cleanup activities, lower gains on the sale of marketable securities, and higher bank fees, drove the difference.

The tax rate for the full year 2004 was 32 percent, in line with our expectations.

We expect our 2005 tax rate to be down slightly, reflecting our tax planning strategies.

At this time, we expect the recent tax legislation to have a minimal effect on AMETEK.

On the balance sheet.

Our operating working capital, defined as inventories plus receivables, less payables, improved nicely and ended the year at approximately 21 percent of annualized fourth quarter sales, while we achieved a 7 percent internal sales growth rate.

This working capital level was down nearly 1 percent from the third quarter, with inventory performance driving the reduction.

We expect that we should be able to bring this ratio down by half a percentage point over the course of 2005, and below 20 percent over the longer term.

Inventories at December 31st were $169 million, an increase of $25 million for the year.

After excluding inventories of acquired companies, inventories were up $10 million, in line with the core growth rate.

Accounts receivable were $217 million, up $28 million for the year.

Again, after excluding the receivables of acquired companies, receivables were up $7 million or 4 percent, well below the fourth quarter core growth rate.

As Frank mentioned, our free cash flow in the quarter was excellent, totaling $53 million in the quarter, or 168 percent of net income.

This very strong cash flow enabled us to decrease debt by $39 million in the quarter.

Total debt was $449 million at December 31st.

Our debt-to-capital ratio at year end was approximately 40 percent, down from 44.5 percent at the beginning of the year, while we acquired 2 businesses for $143 million this year.

Capital spending was $7 million for the quarter, and $21 million for the year.

Appreciation and amortization were $11.5 million in the quarter, and $40 million for the year.

For 2005, we expect that capital expenditures will total approximately $30 million, while depreciation on amortization should be about $39 million.

We expect operating cash flow for the Company to be approximately 185 to $190 million in 2005, reflecting growth in earnings, better working capital management, and the additional working capital needs of a growing business.

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 $308 million available under our existing credit lines.

In summary, we continue to manage our cost structure and balance sheet effectively, generating excellent cash flow, and positioning ourselves for future growth.

Bill?

That concludes our prepared remarks.

Angela,, we'd be happy to take questions now.

(OPERATOR INSTRUCTIONS) Wendy Caplan, Wachovia Securities.

Could you help us keep score, in terms of the low-cost, locale number?

What percentage of the business this year we ended up in low-cost locations?

And if you have an expectation for '05?

Sure, Wendy.

This year we did about $210 million in the 3 low-cost locales that we're primarily focused on.

And our expectation is an additional $40 million in revenue in 2005.

So we expect to hit about $250 million.

Okay.

And my next question is -- you mentioned that the acquisitions were better than you had -- were going better than you had expected.

Can you give us some indication as to how that is?

Sure.

Actually both of these companies are exceeding both their sales and their profit forecast from what we had anticipated at the time of acquisition.

Some of that is due to an improving economy.

And some of it is probably due to some conservative estimates on our part, as to exactly what they were going to do.

But we're really delighted with the performance of both of these businesses.

And probably more important than that, is the management teams in both of these businesses are absolutely first-class.

So, it is a very positive situation.

Okay.

And speaking of conservative, I couldn't get off without asking, you said in your release, that you're expecting 10 percent upside on the revenue line.

According to our estimates, in terms of backing out the acquisitions, we get to roughly 7 percent core business on the top line.

This is -- in the best M&A period that we've had in years, and given your history of half to two-thirds of the top line coming from acquisitions, shouldn't that 10 percent number be a little higher, as we get farther into the year?

I think that's definitely possible.

Our estimates don't include any additional acquisitions.

And with the backlog that we have now, in terms of looking at companies, and as you said, the strong M&A environment, I think it is not unlikely that we would acquire more businesses this year.

So, as we always have done in the past, we put our estimates together not assuming any future acquisitions.

Jim Lucas, Janney Montgomery.

2 questions.

The first on the housekeeping side.

Could you give us the breakdown in the fourth quarter?

You alluded in the instruments was a 9 percent growth, but core FX and acquisitions section in the Company.

Sure, Jim.

I'd be glad to do that.

The entire Company - and these numbers, first will include the impacts of FX -the entire Company was up 7 percent, EMG was up 4 percent, and EIG was up 9 percent.

The impacts of FX for the Company were a positive 1.5 percent; for EMG, a positive 2 percent; and for EIG, a positive 1 percent.

So the real positive thing here, if you look at the EIG portion of the business, extracting FX, we saw an 8 percent internal growth rate, which is the highest number we've seen in years.

So we're pretty excited about that.

And following on that, 2 strategic questions.

The first, in your prepared remarks you were focusing on the long awaited rebound in the long-cycle aerospace.

But could you talk a little bit about what you're seeing in the short-cycle businesses entering '05?

Yes, why don't I sort of walk you through the Company, because it is probably the best market conditions that we have been in in the last 4 or 5 years.

And I'll start with the instrument side of the group.

If we look at -- and I'll use the fourth quarter as the base, and then move you into next year.

If we look at aerospace, aerospace in the fourth quarter, internally grew at 11 percent.

And as I mentioned in my talk, commercial aircraft is doing extremely well, because Boeing and Airbus are both talking about double-digit increases in their OEM business, which is great.

The business and regional aircraft market is really, really booming right now.

The forecasts for the market are up about 13 percent for 2005 over 2004.

And the military, both aircraft and ground-based vehicle business is remaining extremely strong.

So we believe that that trend will continue there.

Let me talk about power, and then I'll come back to your short cycle question.

Power is the other long-cycle business.

And it also had great internal growth in the fourth quarter.

It was up 9 percent internally.

Which again, is one of the best quarter-over-quarter growths we have seen.

Basically, our transmission and distribution part of that business, and our battery backup portion of that business is just doing great.

And although the generation side of power is relatively weak, it is such a small part of our business now, that as we go into next year, we're feeling pretty good about growth in our power segment.

Which is actually a change from what I talked to you about a quarter ago.

Moving now to the short cycle businesses and your question.

The process businesses did very well in the quarter.

They had an internal growth of 6 percent, but that was with a very tough comparison.

We had very strong, almost abnormal performance in the fourth quarter of last year in process.

And if you actually look at process for all of 2004, it was up about 8 percent.

So very, very strong performance in that sector.

And it is really broad-based.

It is in both our businesses that are related to oil and gas production, our EAX (ph) business did very, very well for both the quarter and the year, and our AMT business, which is associated with nuclear radiation detection, also did very, very well.

And as we go into 2005, we expect that business to continue to outperform, and do great for us.

And the last part of the shorter cycle businesses is our industrial business.

And it had 20 percent internal growth in the fourth quarter, driven by both the heavy vehicle business, in terms of trucks, and also the strong performance that we had with Caterpillar.

And the market estimates for next year are talking about an 18 percent improvement in the heavy vehicle business.

That's up to just over 300,000 trucks in North American production.

So we expect that business to do well into next year also.

And just quickly, on the other side of the Company, our differentiated part of the motor group was up about 5 percent in internal growth.

And that also was on a tough comparison.

For the year, they were up more like 9 percent internally, and being driven there largely by the military business.

We've got a large military aerospace business in those differentiated parts of the Company, and also a military ground-based vehicle business.

And that business is actually growing for us.

It grew through the year, and it is going to grow as we go into next year.

And then 1 of the more positive things that happened in the quarter, is even our cost-driven businesses showed growth.

They were up about 3 percent.

And 1 of the negative things we saw during the economic downturn, was that our mix sort of went down the food chain.

So even though pricing was a problem, a bigger problem for us was mix.

And what we're starting to see now is that mix come back up the food chain.

And we had very strong performance in the fourth quarter in our commercial business.

So we're expecting growth in that business next year, which is also a change from some of the guidance that I talked about previously, where we weren't really expecting any growth in that segment.

So when I sum this all up, it is, as I said, 1 of the best market conditions we've been in in quite a while.

So the planets and moons are aligning.

They are aligning, for once.

All right.

Thank you for the comprehensive overview.

Scott Graham, Bear Stearns.

Given that overview, you've given some nice guidance for 2005.

But given that overview, and I'm looking at down the P&L, and when you kick out the gain and then you look at the flip side, the expenses to transfer production, the excess corporate overhead, the big swing in other net to a negative, it looks like the low end of the range for '05 is kind of like a lay-up territory.

Could you give us an idea of -- if you have a normal year of acquisitions, would you be thinking more toward the high end of that range?

Scott, we really can't forecast what is going to happen in the acquisitions world.

Because you don't know the size of the companies, you don't how much accretion, you don't know what you're going to pay for them.

And, obviously, you don't even know if you're going to get them.

So, I really don't want to speculate on additional acquisitions.

And really, the guidance that I've given you is assuming no acquisitions.

And as you know, we only do accretive acquisitions.

So, if we do some, there is probably going to be some accretion that will come from them.

That's fair.

The corporate overhead number, is that more like a $6 million run rate number for next year, each quarter?

Yes.

It is going to be up in the sort of mid single-digits over this year.

And that's going to be driven by normal inflation.

Plus, with the new accounting rules, we've assumed some expensing of options in the second half of the year.

And as you may recall, we did switch to a 50 percent restricted stock, 50 percent stock option, long-term incentive program.

So, there is also some restricted stock expense that will be in that line.

So, again, if you put in your models roughly mid single-digit kind of growth, that's a reasonable forecast.

Great.

Last question has to do with the new purchasing office in the Far East.

I was wondering, where are you along the curve of number of people, the expansion, the number of business units that are using this, and where do you see that going a year from now?

We're pretty excited about -- we call it the GSO, Global Sourcing Office, that is located in Shanghai.

I think we have 6 people on board in that operation now, and open requisitions for another 3.

I might be off roughly 1 on that, but that's roughly the order of magnitude.

We have introduced this to all of our divisions.

The purpose of the people over there, is sort of the feet on the ground to basically look at suppliers, make sure the suppliers can produce the kind of products that we want, et cetera.

Very difficult to do that from the United States.

I would say right now that there are probably 5 of our divisions that are really involved with it.

And I really would say we are just getting started.

But the opportunity here is immense.

I mean, you're looking at, even after the costs of transporting material from that part of the world to this part of the world, it is not uncommon to see 15 percent, 20 percent, kind of reductions in the costs of the material.

So this will gain strength as time goes on, and we're pretty excited about it.

Very good.

Thank you.

Elana Hordon, Merrill Lynch.

Going back to the options question, would it be fair to say that the headwind from options and restricted stock this year is about $0.02 versus 2004?

No.

That's a little low.

Versus -- are you talking '05 versus '04?

Yes.

Basically it is about $0.03 for options, and it is about $0.01 for restricted shares.

So the headwind is about $0.04.

What about going into '06?

Is that $0.03 number an annualized number or -- ?

No, that's for half a year.

Okay.

So it would be $0.06 in 2006?

Yes.

Okay, and then -- ?

It might actually be a little less than that.

It might round a smidgen less than that.

And then pension expense.

What was your expense in '04, and what's the incremental -- I'm assuming there's probably a little bit of a headwind in '05.

Can you give us a sense of how big it might be?

We're actually in pretty good shape.

Our total pension expense in 2004 was $11 million.

We're estimating exactly that number for 2005.

John, why don't you talk to the assumption changes that you've made in that.

We've just completed our analysis, pending any comments from the board.

But we've reduced our annualized rate of return expectation from 8.9 percent to 8.5 percent.

We reduced our discount assumption from 6.25 to to 5.75 percent.

Those are the 2 major drivers to the calculation.

That, given the really good year in the market for our pension funds this year, net out to an overall -- and those numbers, those assumptions I gave you were just for the U.S. defined benefit plan.

But they drive a good bit of the assets that were under management.

The picture for the year for the Company, with all of our plans around the world, is flat.

And we're really in good shape when our plans were overfunded by these very conservative metrics and assumptions.

And it has become almost a nonevent.

I don't want to get too confident there.

But it is really not something that we worry about these days.

I just had 1 last question on orders.

Do you have any sense of fourth quarter order trends?

Are there any number that you could provide us?

Yes, I'll tell you.

The orders were $321 million.

And they were up 18 percent over the quarter before.

And probably as important as that overall number, is that the internal growth of those orders was about 8 percent.

So it was actually a little higher than the internal growth of sales.

You may recall, I think it was in the third quarter conference call, when I was talking about the internal growth of orders looking good, which bode well for the fourth quarter.

I think that's probably going to be true as we go into the first quarter now.

As a reminder, that is star, 1, for questions or comments.

Richard Eastman, Robert Baird.

Could I just ask for 1 clarification?

Sure.

The FX contribution to EMG, was that 1 percent?

EMG was 2 percent.

EIG was 1 percent.

The Company was 1.5 percent.

Okay.

Great.

And then, can I ask a simple questions on the math, too?

I think this question was asked a little bit earlier.

But a little clarity.

With the 10 percent sales growth rate for '05, if I look at the Hughes-Treitler and Taylor Hobson acquisitions, and assume they'll contribute about 57 million for '05, just a carryover, it would like to me like the organic growth rate that you're looking for might be in the 5 to 6 percent range.

Is there a currency assumption embedded in there, as well?

Yes, but it is not substantial.

It is on the order of 1 percent.

Okay.

So we should think all in against obviously, a good year, that in '05 right now, you're looking at -- call it 4 to 5 percent core organic local currency growth rate.

Yes.

That's about right?

Okay.

That's about right.

Okay.

And then also, could you just maybe provide a little bit of color on the acquisition pipeline?

You had suggested it remained strong.

Are valuations still in a range that you like?

I think that's a great question.

And as I mentioned, the backlog is good.

We've got a large number of companies in the target range that we look for.

And as I think you're aware, we try to focus on companies between 30 and $100 million.

And if you look at the niche markets that we're in, there is just a very, very large number.

And many of those companies were holding off when the economy was down, because obviously their EBITDA was down, and they couldn't get the evaluations they want.

So, as the economy comes back, we're seeing a pretty good backlog of companies.

There's no question that pricing is up from what it was when the market was down.

But multiples are not unreasonable.

And we've typically paid 7.5 type of EBITDA multiple and maybe that's up to the 8.5 kind of level now.

But that still gives us excellent returns, and as you may be aware, we tend to look at the multiple a year after we own it, because we typically bring substantial synergies to the deal.

And those multiples will come down a point or 2 after we apply our synergies to the deal.

Okay.

And then just the last question.

Everything -- most of the businesses look like they are gaining some momentum here into '05.

Is there any portion of your business that you feel is getting a little late in the cycle, and you're a little bit concerned about as you head into '05?

Any particular business or end market?

No.

The only one that comes to mind is, if you do look at the heavy vehicle business, that market was up 45 percent in 2004 over 2003.

And we're now talking about 16 percent.

So it is not up as much.

But it is still 1 of the larger numbers we have in terms of growth.

And I don't think it is unreasonable to assume there will be a correction in that business.

I think the market estimates now are not in 2007, but in 2008.

But that could happen in 2007.

It is a possibility.

So that's probably the 1 that a little further out, has got some issue.

But the rest of them have pretty much got steam behind them right now.

Excellent.

Okay.

Well, very good.

Thank you, again.

Godfrey Birckhead, SBK Brooks.

So, what do you think about the Patriots versus the Eagles, guys?

Well, we're delighted the Eagles won.

But unfortunately, I'm not too optimistic.

I think the 6 or 7 point spread is probably right.

Belichick is a genius.

He is.

He's good.

In fact, the Times had an article saying that the organization is better than the team.

I think that's exactly right.

I mean, speaking of management.

Here we are as analysts, and it is probably the football team to look at in terms of the model for the future, on how to run a football team.

Anyway, what's the Chemical business doing?

We haven't talked about that for a long time, Frank.

Chemical business, it is in the industrial part of EIG.

And with the chemical industry coming back, that business is actually showing some strength. 1 negative in that business, is part of the gain that we recorded in this quarter, was related to a flood at 1 of their facilities.

And the bad news is -- or maybe it's the good news, depends I guess on how you look at it, is that we're -- we decided to get out of some of those low-margin businesses, which will have a little impact on our internal growth rate next year.

But the really good side of that, is that the profitability is going to be up substantially.

It's on the order of 50 percent profit improvement.

And that's still about a $40 million business?

35?

I don't know.

We'll look it up.

A little higher than that.

No, a little lower.

Just a second.

We'll look it up.

I missed a beat I think on the -- in an answer.

I think someone did ask about the vacuum cleaner business.

And I think you said, would that be up about 3 percent or something?

Is that -- ?

Yes, that's right.

That's right.

What is happening in the vacuum cleaner business right now, is more positive than we had anticipated.

Basically, we looked at our pricing that we're putting in the budget.

And the pricing is flat in that business, which is actually an improvement, because it was down several percent.

And as I mentioned, the mix is coming up the food chain, instead of going down the food chain, which is a substantial positive factor.

So we are looking for some growth next year.

We're looking for profit improvement in that business.

In both Europe and the United States?

Yes, I would say in both.

But it is going to be driven actually more out of Asia, from the 3 parts of the business.

I would say Asia would have the highest growth and profit improvement.

The U.S. would be second.

And probably Europe would be third.

Okay.

Now you talked about the Homeland Security of monitors and detectors.

Can you give us a feel as to the size that that is getting to, and how fast it could grow, and what it could mean to you?

Yes.

It's a very difficult question to answer, Godfrey.

Because we're sort of creating -- .

I understand that.

Let me just put some color around it.

A data point is that for the portable devices that we brought to market in the, I guess it was the first or second quarter of last year, we have orders for that product that are about 87 units.

The price range on that product is in the 65 to $70,000 per unit.

Many of those units are being used by a whole host of different agencies, more as a, what I would call beta test sites, to basically establish the viability of the technology.

At some point, and I can't predict when or where, I think we're going to see some rapid improvement -- not improvement, but rapid increase in our order rates for that product.

We're getting orders from places we didn't even expect.

We got an order from the FBI.

And our people hadn't even talked to the FBI.

And what we finally discerned, is that we had developed that product in conjunction with Lawrence Livermore Labs.

And Lawrence Livermore Labs went to the FBI and said you ought to try this product.

So they bought 1.

And you may have noticed that there were portable radiation detectors used by the FBI on this potential terrorist threat in Boston.

And I tried to find out if it was ours.

And we can't find out.

Nobody will tell us.

But it could be our unit that was used up there.

But this thing that I talked about, in terms of the portal monitors, Godfrey, is really a big deal, because instead of a portable device, these portal monitors are really systems.

And they are large enough that a truck could go through them.

Large crates coming off a cargo ship could go through them.

And instead of 1 small crystal, that is used in our portable radiation detector, the portal monitors will use 6 to 8 large crystals.

We haven't priced these products.

But the system -- on what a system could be up in the 800,000, over a $1 million region, depending on exactly what the application is.

So we think that's really doubled, in rough numbers, the market opportunity for us.

And we're putting a prototype together, by virtue of this contract with the Department of Homeland Security.

And that prototype is supposed to be ready in the summertime.

And we'll see where that takes us.

But, it is pretty exciting.

Let me ask you something -- this tragedy that we had out in the Indian Ocean, the tsunami.

I heard mention that there is something called a tsunami detector.

That a business that you're in?

I'm not familiar with what you're talking about.

There are -- .

Well, they were talking about having a piece of equipment which would monitor the ocean --

No, we're not in that.

-- in various places, and could hopefully detect something that was going to happen.

No, we're not in that business.

Okay.

Okay, Godfrey.

Oh, the CPD question.

What was it?

It will be about $30 million (inaudible) '05.

Okay.

Depreciation, please, for the quarter, this year and last year?

Depreciation and amortization was about $11.5 million for the quarter.

About $40 million for the year.

And then, last year's quarter, John?

That was for '04.

In '05 we're predicting about $39 million for depreciation and amortization.

And for the fourth quarter last year?

9.5 was the depreciation.

That's very helpful, guys.

Thank you very much.

Gentlemen, there are no further questions at this time.

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

All right.

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