Barrick Mining Corp (B) 2002 Q4 法說會逐字稿

Good morning. And welcome, ladies and gentlemen, to the Barnes Group Incorporated, fourth quarter earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Phillip Penn, Director of investor relations. Go ahead, Mr. Penn.

Thanks, Tom. And thanks everyone for joining us on the call and the web cast today. As usual, on the call today are Ed Carpenter, our President and CEO and Bill Denninger, SVP of finance and CFO.

As I have requested on previous calls, if you have number or data specific questions, I prefer that you please hold them for me after the conference call this morning. That's going to give us more time to focus on some of the broader and strategic issues that are more of interest to everyone on the call. As a last point before we begin our formal remarks, I'd like to remind everyone that certain statements we say on the call today, both during the presentation and during the Q&A session, may be forward-looking information as defined in the private securities litigation reform act of 1995. These forward-looking statements are subject to risks and uncertainties and may cause our actual results to differ materially from those contained in the statements. We encourage investors to consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission which can be attained through our corporate website.

With that said, let me turn the call over to Ed Carpenter.

Thanks, Phil.

Before I get into some discussion on our results for the quarter and the year, I thought it might be interesting to have some background on where we see the environment right now. The fourth quarter continued to be tough, as a lot of '02 was. But as we finish it up and as we look ahead, it seems a little bit better. But I think the concern that everybody has is the current environment. If you set aside Iraq, North Korea, terrorist alerts and everything else that's spooking our markets today, which is a lot, I think February 2003 feels a lot better than February 2002. And although I feel that way, we are a little bit skeptical because we saw the beginnings of '02 being relatively strong, and it, frankly, faded away. Because of that we are not changing our operating strategies and our cost attention in a way that assumes a dramatic recovery this year. Even if there isn't a substantial lift to the overall markets, last year the operating folks took a lot of initiatives in our business that enabled us to continue to generate profitable growth. And I'll cover those as we move through the presentation today.

Phil has set out in advance a number of schedules. Let me address, first of all, schedule 1. So let me recap the quarter. As you can see from this schedule, our top line was flat, absolutely, versus a year ago while the bottom line improved nicely. The top line, at $186 million was pretty much in line with our expectations. We had solid growth at Associated Spring while sales contracted at Barnes Aerospace reflecting the state us of the commercial aircraft market. Sales were also down slightly at Barnes Distribution. While the industrial end markets continue to be weak, we had some planned internal disruptions which I'll describe in a minute. Operating income was up sharply over a year ago. The year ago period was obviously depressed by some expenses we took to close our plant in -- Associated Spring plant in Texas. But that aside, the results were solid, and we'll walk you through those details in a minute. Thanks to the higher operating income, a lower effective tax rate, and some other items, net income and EPS improved substantially over a year ago as we reported a profit in this quarter versus a loss a year ago. That left us with EPS growth for the full year of just over 40 percent, which, frankly, we regard as a very good result.

If I could turn to schedule 2 now. With that said for the Barnes Group overall, let me share with you some details on each of our three businesses. While we had some end market strain on our business, the efforts of management and employees in all three of the groups. Each executed extremely well to deliver good financial results for the fourth quarter and the full year. Let me go into a little more detail starting with Associated Spring. The results continue to be impressive as their top line grew solidly and their profitability was excellent. Sales were up more than 20 percent, which reflected the acquisitions we've made earlier in the year and the strong organic growth for our nitrogen gas spring and light vehicle products. As has been the case for the last seven or eight quarters, some of that strong growth was tempered by a decline in the sales of our products for telecommunications and electronics. To put it in a broader perspective, our organic, telecom and electronic sales are only realistically about a third of what they were just two years ago. With that kind of end market dynamics, it's made for a strong head wind against our progress, but I think they have done a great job to overcome that decline.

Associated Spring's bottom line has improved substantially from a year ago with higher sales volume and but more importantly the productivity improvements and cost reductions made since the end of 2000, a good effort over the last two years. Looking at -- ahead a little bit at '03, published information suggests that the early part of the year will be good for light vehicle production versus the first couple quarters of '02. So our short-term visibility on that portion of Spring remains fine. Our nitrogen gas and industrial spring segments continue to grow organically this year as we look at the first five weeks. On the flip side, frankly, we see nothing on the horizon to suggest that electronics and telecom will improve meaningfully. We need to stabilize that first before we can think about a recovery.

In our last call, I gave you a brief update on our recent acquisitions at Associated Spring. I'd like to extend that discussion today. We have now owned Seeger-Orbis, our German based business for just less than a year. Seeger has been fully integrated for a number of months now. And our focus has really been on leveraging the cross-selling opportunities between Seeger's customers in Europe and our other Associated Spring divisions throughout the world. Likewise, we've been introducing our other Associated Spring customers to Seeger's products and to date the results have been excellent. To point where we need -- to point where we really need to increase, some staffing at Seeger to handle all the quoting activity. That's a high class problem from their point of view. Just as importantly, though, Seeger continues to see strong order input in their underlying business. We are confident that this acquisition will be a homerun for us.

The other acquisition at Associated Spring which is Spectrum Plastic plastic we've owned for about ten months. Telecom and electronics were two of their major businesses, we knew were going to be difficult in the short run. Because of that, Spectrum wasn't and we had not planned on it to contribute positively to earnings in a significant way until those markets improved. And that remains our view today. We've been focusing on transferring their technology from Spectrum to our manufacturing facilities in Asia. That technology was one of the strategic reasons for purchasing Spectrum. It greatly enhance, frankly, our ability to grow customer relationships in that part of the geographic market. So for Spectrum we knew we were in for a period of transition, and we are moving through that.

Barnes Distribution, the fourth quarter of '02 we had a lot going on as the culmination of a lot of the activity and the integration efforts with Curtis were taking place. At our two primary locations in Kentucky, we finished converting one into a repackaging operation so that we have a single repackaging operation. And the other we converted into a single master warehouse and replenishment center. Both activities were completed in the fourth quarter and we are very pleased with how that's come across. In addition, and probably more importantly, we put our sales force through an integration of a single order entry system where we converted to a single part numbering system with -- for the whole sales force in addition to the order entering system. So there was new technology and new part numbers for the sales force to get up to speed on. We also at the same time completed a global inventory management system for the Raymond division of Barnes Distribution, so that they had visibility throughout the world on all their part numbers. So we had a lot of what I would call planned disruption on our sales, which had a negative impact on their top line.

Our daily sales rate in the U.S. was down about 5 percent on a sequential and year-over-year basis, with December clearly the worst of the three months as all the activity came to a close. But the sales have bounced back nicely since those items have been completed and for the last five weeks we have seen the anticipated improvement improvement that we need. Despite the drop in sales, our operating results in the fourth quarter improved dramatically from last year and grew $2 million for the full year. As we mentioned in the last few quarters, that cost reduction associated with our infrastructure consolidation has been an important profitability driver and remained the case in the fourth quarter. As you can see, the Barnes Distribution was profitable on an operating basis for the full 12 months. And that's what we would anticipate now that the changes have been made, to see in the future.

Gross margin continues to stay relatively strong. And another key point for the fourth quarter was national and regional account development. For the full year, we opened up 116 new national and regional accounts, versus less than 20 last year. So sales potential for those accounts is between 10 and $20 million going forward. And I'll point out that there were some -- particularly in the fourth quarter -- some upfront costs getting these accounts rolled out. We expect to see the benefits of that have activity begin to develop in early '03.

Another area of growth at Barnes Distribution in '03 will be our eCommerce initiatives. And although these will be small in scale relative to our national and regional account development, we've been very encouraged on the early interest in these solution. And frankly for '03 as you might expect Barnes Distribution will be very focused on the integration of the recently acquired Carr products. In terms of the tasks ahead of us, we believe that the Carr integration will be very similar to that occurrence, although perhaps much quicker. Since the acquisition closed a few days ago, we've held a number of meetings. Actually before the acquisition was closed, once it was announced, we went out and met with the Carr sales force. They seemed genuinely excited about being part of a company that is willing to put capital, products, and programs behind their excellent selling results.

We've also announced, currently, a number of consolidation activities that will be taking place and the integration teams are hard at work. Many of these actions will be completed in '03, creating a combined the sales evident with a much lower cost structure and earnings leverage. We'll see the costs related to the integration for the next few quarters, but I suspect these will be essentially neutral to our '03 results as the benefits kick in later in the year. Real financial impact will probably be felt in early '04, which is a consistent time line with our other acquisitions.

Finally, let me turn to Aerospace. As far as the commercial aerospace market goes things have remained essentially where they were since our October call. The team at Aerospace spent '02 getting their business properly positioned to meet that lower level of demand, and I think they have done a terrific job at achieving that objective. From a financial viewpoint, sales were down in the quarter, as expected from last year. Orders, however, showed a renewed strength almost at about $49 million. Thus, orders were up 25 percent sequentially, which pushed our backlog to $152 million just a little bit off the year end record level we set in '01. Roughly a third of those orders we booked in the fourth quarter were military related. And although it may be easy to brush aside that as an effect the Iraqi buildup, I would argue that it has a lot more to do with the investment the company made in sales, marketing, engineering to capture more military business than we have in the past and the terrific results of the people that were focused on that effort.

Operating profit was essentially flat, a significant achievement given the sales decline. It really reflects the employment downsizing and cost reduction initiatives that were underway during the year, particularly the first part of the year.

Let me now turn the call over to Bill, who will give you a little more of the financial details for the fourth quarter and the full year.

Thank you, Ed, and good morning.

Given the state of America, this was a good quarter in terms of sales, earnings, and cash flow. Let me give you now some more detail on the operations and on our overall financial operation. Operating margin as you saw in the press release came in at 5.2 percent in the fourth quarter. This was in line with our expectations and a substantial improvement from the depressed levels of a year ago. If you turn to schedule 2, you will see that Associated Spring sales were up 22 percent to $77 million in the quarter. Sales from acquisitions provided an incremental $11 million in the quarter. So the organic growth rate was about 5 percent. We saw real strength in a number of Associated Spring's markets. Particularly light vehicle and nitrogen gas springs. Nitrogen gas spring sales grew by about 18 percent year-over-year in the quarter, 16 percent for the full year, reflecting very strong market demand and we think some share gains for those products.

Operating profit at Spring was $6.9 million, up from an operating loss of $1.1 million a year ago. And as we pointed out in the press release, the fourth quarter of 2001 did include a charge related to the closure of the Spring plant in Texas. So the quarterly comparisons are skewed. However the impact of that 2001 charge aside, operating profitability at Spring grew nicely year-over-year, reflecting the growth in organic sales and the productivity and capacity utilization improvements Spring has made in real recent years.

Turning now to Barnes Distribution, sales came in at 68 million, down to 2 percent from last year. That result is consistent with the state of the industrial activity we saw in the fourth quarter. As has been the case for Barnes Distribution all year, despite the drop in sales, operating profit improved in the fourth quarter to a loss of $300,000 from a loss of $800,000 in 2001's fourth quarter. The master warehouse reconfiguration that Ed described described generated incremental costs in the quarter of half a million. There were one-time costs. We also saw incremental costs of 400,000 in the quarter related to the rollout of new national and regional accounts that were opened under that very active sales initiative. These costs are more likely to repeat as we continue to build a national and regional account base. However we view this as growth investment as a sales potential from the new accounts opened in 2002 is significant, as Ed indicated.

Offsetting these negative costs were the benefits from the early actions we had completed to consolidate infrastructure since the current acquisition. This has been a consistent story for us in 2002, and that certainly remains the case in the fourth quarter. For the full year, operating profit was up $2 million on a sales decline of $12 million. This was the full impact of the Curtis integration coming through the P&L. To be clear, most of the savings were recognized in 2002 so you should not expect to see the same type of year-over-year impact on operating profit in 2003.

Moving on to Barnes Aerospace. Sales about $40 million, well off last year's $53 million. Operating profit, though, was down only slightly at $3.4 million as the benefit of the workforce reductions and other actions taken during the year helped offset the sales decline. Those of you joining us for the first time in this call should know Barnes Aerospace reduced its staffing level by about 20 percent during the first three quarters of 2002. This is really the first quarter in which we've seen the benefit of those actions.

I'd like now to make quick points on schedule 3. Interest expense was up slightly in the quarter, but as you can see down about $1.3 million for the year on average borrowings that were slightly higher in 2002. You will see we booked an effective income tax rate of 16 percent in the quarter bringing our full year rate down to 18 percent. The last quarter of the year always includes true ups or tax. Changes in our effective tax rate is determined by the mix between foreign and domestic income and our foreign operations had a strong year in 2002. Foreign operations do generally have a lower tax rate than the U.S. rate. We also took a tax deduction in 2002 for 401(K) dividends. Taking into account Carr products which has the majority of its sales in the U.S., our expectations that the 2003 effective rate should be in the range of 21 to 24 percent, which is up a bit, but not much from the outlook we provided you in October. The increase in shares outstanding that you see relates primarily to shares issued as part of a purchase consideration for Spectrum Plastics.

A few quick points now on our cash flow from operation, schedule four. We generated about 19 million in operating cash in the fourth quarter, driving the full year number to just about $54 million, a good result. The improvement in net income was a big driver but we also continued to reduce working capital, generating cash for both the quarter and the full year. We were able to reduce debt in the fourth quarter and ended up the year with debt $16 million lower than we had at the end of 2001. You will also notice on schedule 4 that we kept a tight control over our capital expenditures during 2002, spending less than $20 million for the full year. In 2003 we expect Cap Ex should be closer to the $25 million we spent in 2001.

Turning now to schedule 5, you will see that our net debt to total cap ratio has stayed fairly consistent at about 48 percent. That ratio has increased for the purchase of Carr Products earlier this month, and we were able to attain an teamed our loan agreements to permit higher level of borrowings. You will also note on schedule 5 that our stockholders' equity dropped in the fourth quarter. This relates to a minimum pension liability adjustment recorded. This was a noncash non P&L adjustment to equity totaling about $17 million after tax.

While we are talking about pensions I'll tell you that we, like everybody else, are taking P&L hits from reduced pension income. That income will drop by about $3.5 million, pretax, year on year in 2003. But to summarize, what you have heard from both Ed and me, there are lots of carryover operating initiatives from prior periods that will benefit 2003. The operations are off to a good start this year and we think it should be a pretty good year.

Let me turn the call back to Ed.

Thanks, Bill.

It's been a recurring theme for us on these calls that we don't really see a lot in any one of our businesses that needs -- that requires us to alter our long term strategy. And we again feel comfort in saying that today. I'm also confident that the three teams at Spring, Aerospace, and Distribution have really taken the right steps to position their business for their end markets today. Equally important, though, they are not sitting back and waiting for an improvement in those markets to drive future growth. They continue to make investments in personnel, in technology, and other resources to find new avenues for growth. And I wish to acknowledge their efforts, particularly in the last year or two.

Just as in your own equity portfolio, not all of the investments will pay off immediately. But in cyclical businesses like our own, the investments that I was talking about that the management is now making nation a difference between the second class companies and the also rans. We also look for acquisition opportunities to grow our company. Without any favoritism for one business or the other, we are very pleased with all three. Frankly, it's become slightly more of a buyer's market as the industrial contraction has progressed. But there are many more reasons, frankly, to be a slow and deliberate buyer than to rush ahead.

So in summary, in spite of a challenging last few years we've been able to maintain our strategic focus and direction. We remain committed to generating profitable growth, building lasting values for our shareholders, and we'll continue to do that for you. Thanks for your time, and I will now turn it over to Phil for Q&A.

Thank you, Ed. If we could please go ahead and start the Q&A session.

Thank you, Mr. Penn. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push button telephone. If you wish to withdraw your question, please press star 2. Your question will be taken in the order it was received. Please stand by for your question. Gentlemen, your first question comes from Holden Lewis of BBT. Please state your question.

Good morning.

I'm sorry, sir. Your next question comes from Matt Somerville of McDonald Investments.

Good morning.

Good morning.

Couple of questions. With respect to Aerospace, pretty decent margins in the fourth quarter. Is that sustainable moving into next year? Can you kind of update based upon the cost reductions that have been implemented now as Bill said beginning to be fully realized, the leverage profile of that business?

We believe that, first of all, it is a difficult market. So the customers there are always very watchful of the selling prices. And we're cognizant that we have to provide both value and cost-effectiveness. We think we have done a lot, Matt, to get our operations down to fairly lean situations. And so we would -- we would feel that going forward, to the extent that we can maintain this order momentum, that we ought to continue to enjoy similar kinds of margins. It doesn't make it easy. The team there is working very hard to generate appropriate cost reductions but, yes, I'd say that that's about the leverage. As you know, prior to 9/11, we thought this business would be dramatically larger in scope. And so after 9/11 we brought it back down to a size that can perform and generate appropriate profits in the 40 to $45 million range in terms of revenue per quarter.

Okay. And just a couple follow-ups on Aerospace. Can you get into a little more detail on the performance of Aerospace in the fourth quarter with respect to the military piece, the commercial OE, and then the commercial aftermarket pieces? And then help me understand really what is driving that pickup in your orders given that I think you said about a third of he it was military related. That would lead me to believe that the remainder would be commercial OE. I guess that sort of surprises me based upon what we are hearing from other companies out there.

You are correct. About a third that have order in that fourth quarter was either direct or indirect military. But we did, as you said, receive some pretty good underlying commercial rather than military orders. These would have been follow-on orders. Not a lot of new orders or new contracts, but we were quite pleased with that kind of result.

This is Ed, Matt. If you look at the team's resolve in terms of retaining engineers and sales and marketing people over the last two years, we have not cut that particular effort. We continue a high level of quoting over the last three or four quarters, and I think that's been helpful.

So then, should that lead me then to conclude that the gains you are seeing on the commercial side really aren't the result of the market, you know, coming back on a growth path, but perhaps market share or content gains that you have had?

We see no growth in the market at all right now. We are in the trough right now on commercial. And it has not begun any measurable uptick in the overall market.

And then the first part of my question: Could you compare either year-over-year sequentially, the performance in the fourth quarter of the military commercial OE and commercial aftermarket pieces of the business?

Matt, I'll follow up with you after the call, okay.

Fair enough. I'll get back in queue. Thank you.

Okay.

Gentlemen, your next question comes from Holden Lewis of BB&T. Please state your question.

Yes. Good morning. Over the past couple of years you have taken a slew of charges to right size the business and things of that nature. Can you give us -- separating Carr aside, and based on prior initiatives for downsizing and things of that nature, have we kind of run through the gamut in terms of these charges? Again, you took some in distribution in Q4, but has the plate been largely cleaned going into '03 so we can see sort of a more reflective type of ongoing business? Or do you anticipate continuing to take charges internally for IT system improvements, head count reductions, things like that, and continue to muddy sort of the EPS growth from that? Can you give us perspective there?

First of all, you should understand that we don't spend a lot of time either on pro forma or on saying, you know, if we had wings we wouldn't bump on the ground so much. We take them as we come, and we do it, and we do what we think is right for the business in the long term. Having said that, I think you could say that we looked hard at our manufacturing locations and have rationalized either during acquisition integration or through looking at our overall capacity, particularly that in North American and the two manufacturing organizations we've taken our action, and that's behind us. And terms of the distribution, ever since we started in the Curtis integration, we've indicated that we would be completed last year, and we're done. So the answer is, to your question is, yes, we are done. Are you always done with right sizing and leaning and so on? Never. Are we done with anything, you know, major initiatives, I think we are done.

Okay. Can you give us a sense sort of of the Carr ramp? Are you suggesting in the first half, including those charges that deal might be dilutive and then accretive in the second half once you get that done with, and so neutral for the year? Is that how we should look at the Carr business?

At this point that is probably fair. Yes, but we haven't had the time to work out the timing on the pluses and minuses. Certainly on the next call we will be prepared to discuss that.

Holden, we've owned that business for seven days now -- eight days. We feel very good about it. What Bill characterizes as, you know, the first year we think is going to be very good for us and will not affect in a negative way our EPS. Particularly, I think the team at Barnes Distribution has been very impressed with the Carr sales force. And I think they are perhaps more optimistic about the results that they might bring in over the next year than they were before we completed the acquisition.

Okay. And talk to us a little bit about the pace of new accounts growth. Obviously, you incurred some charges there. I think you are right to say that's really an investment, but, you know, obviously, you incur some of these up front. At what point do you start seeing a lot of these up front charges drop off? Or is the pipeline of new account business such that, you know, the costs that you saw this quarter kind of represent an ongoing number, where when they drop off there will just me some more to come in so we just need to see the volume start to ramp?

I think, Holden, this is an ongoing program as you know, we restructured sales force management at the end of 2001 with what we think was an excellent result in 2002. The first half of 2002 was trying to open the accounts, and then began the rollout procedure. I would expect the same sort of level of costs an an ongoing basis as we both complete rollouts and bring on new accounts. I think it's going to be an ongoing cost but it's one we are happy to bear.

Okay. And when do you expect to see -- or I guess, what level of revenues do you expect to recognize in 2003 from the new accounts opened up?

Ed mentions a range of 10 to 20. That's what we expect. The timing depends on the nature of the rollouts. Each one is different, different number of locations and bins and complexity. On an annualized basis 10 to $20 million, hopefully a good portion of that in the calendar year.

Okay. And this is the last thing before I jump into queue. Can you make a comment in Aerospace about the learning curve issues you have been facing to tool up for the 300 ER and talk about whether or not you are seeing some orders flowing into your business in Q4 because of that, or some of the status or timing of when orders might start to flow?

I think, Holden, at this point it is pretty safe to say you have not really seen the 300 ER as a pickup in the backlog number. That's because we have a lead time of 6 to 9 months for customer delivery. So we are looking at that for a late '03 type of effect given the fact that this particular plane is going to be delivered for the first time to a customer in March of '04. Really, the pickup in the backlog didn't have anything to do with the strength of the 300 ER program. As far as the rampup goes through, I think we've probably gotten most of that behind us because we have been in the development stage for quite some time with GE for quite some time on that engine. So we've achieved a lot of the engineering know how that we needed to achieve for that program over the past year, year and a half that we have been working on it.

That is something which has been plaguing the margin the last couple of quarters, right?

Sure.

Great. Thank you.

Sure.

Gentlemen, your next question comes from David Siino of Cabelli Partners. Please state your question.

Good morning.

Good morning, David.

Couple questions. Being that you are at a trough in the commercial aerospace business --

We can't quite hear you, David.

Can you hear me now?

Yes.

Seeing that you are in a trough in the commercial aerospace business, and you are still making that level of profits -- I guess you made $16 million pretax in that business at the last peak. Given the restructuring, would you venture a guess at what the peak earnings power of that business is the next time around?

No.

Okay. Next question.

I -- you know us well enough, David, that we are not big on forecasting and predicting. And you know, it's always -- I mean, first of all, I don't know when the next peak is going to be. But if you do, that's terrific. And second is that the environment in that business, while we think we have done a lot better in terms of restructuring it, you've always got a mixture of MRO and OEM and military OEM -- OEM commercial and military business. One of the things we are trying to do is take a little bit of the peak off, but at the same time do the same with the trough.

But the reductions you made are -- should have a permanent margin effect. It's not as if --

Yeah, that's right.

Okay. And distribution. I guess along the same lines. Would you venture a guess as to EBIT being up or down in 2003 with the addition of the new business but at the same time a presumed --.

Without the Carr acquisition, we feel very comfortable in the progress that Barnes Distribution has made in the last two years. And we are very optimistic in terms of their -- both their sales growth and their operating income growth for the next year. We are going to have some -- you know, some integration to go through with Carr. We think when that's completed it will be extremely accretive to the company. It's got a terrific sales and marketing organization that will be extremely accretive to the company. It's got a terrific sales and marketing organization that will compliment ours. We're very confident about that. We think a lot of the Barnes Distribution people have done a lot of heavy lifting over the last year and it's resulted in completion of a very comprehensive integration plan, one that was dramatically more difficult than what we face at Carr. The organization in Barnes Distribution today both in terms of systems, people, and operational level is much better than when we started with Bowman alone 2.5 years ago. And when we look at Carr, we think they are equally good operating results and we expect that to be complimentary.

So better in '03 then. And the nitrogen gas spring business. Can you remind me how big that is as a piece of Spring?

In total, about $60 million in sales.

Bill, the last question, the number you gave on pension, that was pretax or after tax?

Pretax $3.5 million reduction year on year.

And any substantial cash contribution this year?

No.

Okay. And health care?

Up.

On a similar magnitude to pension or not quite?

Not quite as bad but still a material number.

One of the things that the operating groups are challenged with is the increased health care costs they have got to cover in their operating results. When you talk about things like whether it's aerospace, distribution or Spring, we expect people to bet the productivities. And we don't have, you know, price increases that anywhere match the increases in our health care costs, nor are we unique. And nor do we see those kinds of increases in our foreign operations. But it is an issue that I think everybody talk to probably has to deal with. And you can't ignore it and you can't say, well, it's just a cost of doing business. You've got to be aggressive in developing productivity programs to deal with it.

Sure. Okay. Thank you very much.

Sure.

Gentlemen, your next question comes from Alan Weber of Robota and Company. Please state your question.

Good morning.

Good morning.

I have a few questions on the Distribution side and there are parts that I don't really understand. When Curtis was acquired back in May of 2000.

Right.

Right? And you paid a little more than $60 million for it or something like that.

That's right.

So the combined last year, all of Barnes Distribution, which included Bowman, earned $7.5 million. And I'm confused how that was a successful integration.

At the time we were losing money at Bowman.

Right. But -- that I understand. So -- I mean, in order the margins that you now have at distribution prior to Carr of 2.5 percent, is that kind of like what you view as, you know, successful?

No.

I didn't hear that.

I guess the important point to keep in mind here. When we bought that business it was prior to the recession hitting and taking hold.

Right.

You've got to not forget a fair amount of the organic sales we had in that business was definitely impacted in the last two years.

Right.

So the fact that we've increased margin over that time frame and made the business more profitable to us does feel like a win.

And keep in mind the gross profit there is on the order, 50%, and for every dollar up or down the leverage is right there.

Okay. I mean, so Carr -- does Carr have similar margins?

Yes.

To Barnes Distribution.

Yes, they do. Slightly higher.

So they have like a 2.5 percent operating margin also?

Pre-integration, it would be a little bit higher, not much.

So they would earn about $2 or $3 million?

We are not going to comment on that.

That's what I'm puzzled on. If that's their margins are, then why would you pay $70 million for it.

Their EBITDA margins, which you'll see in future documents, I think would demonstrate that that's a very good transaction. We're required to put those documents out shortly. At that time, we will have a further conversation about it. But I think you will agree we made an attractive purchase.

So back to my question. Is Barnes Distribution prior to Carr, is it going to have similar EBITDA margins as to what Carr has?

Will it in the future?

What did it, say, over the last year? You will have to file an 8K again for Carr, right?

Right.

So there will be some EBITDA margins that we could compute?

We tend not to think in EBITDA.

Carr was just slightly higher, Alan, than the existing distribution business.

We still had integration costs in those numbers.

You mean in Barnes Distribution for last year?

Right.

To what magnitude?

I'll follow up with you on that, Alan. I don't have that information with me right now.

Okay. Thank you very much.

Okay.

Gentlemen, your next question comes from John Wallethousen from Paradigm Capital Management. Please state your question.

Good morning. And first of all, congratulations that was an excellent quarter in this environment.

Thank you, John.

Thanks, John.

On the distribution business, you said the daily sales rates were down about 5 percent in the fourth quarter because of these factors and they popped back up. Do you mean they popped back up to flat year-over-year or can you give more color?

That's about right.

They are essentially running about flat with the first few weeks of last year.

Okay. And you said that you expect with regard to the Carr integration that the savings that you realize this year will basically offset the integration cost. That would, of course, be on a reporting basis. On a cash basis feel, what does it look like?

It would be about the same. The things that hit the P&L, John, ten to be cash type expense has the don't go back into the purchase accounting.

Okay. Right. And in this equation are we taking some reserves right off in the acquisition accounting or does it all flow through?

No. We'll go to fair value accounting. We haven't completed all the purchase accounting work yet in terms of the opening markets. There are a lot of intangibles that need to be computed and valued. There is a lot of work to do there. I can't give you an answer.

What I -- what I take from that is there is not the assumption of a significant reserve to start off with in your equation?

We are still trying to finalize some early integration plans in terms of what will the infrastructure look like for the business when we're done. And we are not there yet so it's tough to give you an answer on that soon.

When we get to the April call we will have more information and we can go down that route.

That's helpful. Switching to the Associated Spring business, and I might have missed this because I came in a little bit late. But on the automotive side of the business going into the new year on a per car or per vehicle basis have we picked up anything versus 2002 or lost anything of significance?

There has been -- we had a really nice top '01, '02. It looks relatively flat for us this year. As you may know from other discussions, other calls, we've really focused on maintaining that and trying to broaden our penetration. That's one of the reasons for the German acquisition. Because that gives us additional non North American vehicles. We've done a -- we think, a great job on penetrating the transplants. If you look at our light vehicle overall, I think we have done a better job at broadening our base rather than necessarily focusing on perhaps just the big three. We work hard on tier 1 suppliers like Vistaian and Delphi. Those types of things and we've seen good successes on those. That takes our traditional business and gives us a broader base. In addition to that the general industrial.

Right. Sounds like a good strategy.

I think they have done a great job, and if you look at the detail numbers and perhaps we ought to talk about that in April, you will see they have really dune good job there.

Obviously the numbers speak for themselves but we shouldn't look for a real step up in 2003?

No. No. And that's not where we are looking for our dramatic improvements from Spring in '03 anyway. We are looking at particularly some of the improvements that we can get in our foreign operations.

Okay. Good. Thanks.

I think we have time for one more question.

Yes, sir, your final question comes from Matt Somerville of McDonald Investments.

Please state your question. Yeah. I have a couple of follow-ups. With respect to distribution, Ed, could you talk a little bit about whether you expect the operating losses in Distribution that occurred in the fourth quarter to continue into the first quarter of '03?

I do not.

Okay. And then can you also talk about -- you know, you put brackets around the revenues anticipated in '03 from that national and regional account effort, 10 to $20 million. I mean, can you talk about what differentiates the low end from the high end of that range?

Primarily, when we receive a national account award, the customer is telling us -- let me use this as an example -- that he has 100 plants, and that we will get the MRO business in the 100 plants. And it depends on how rigorously the corporate center of the customer enforces that award because there have been long-standing relationships with local or regional suppliers that have been servicing that plant. To the extent that we give very good service, which is our problem, and to the extent that the corporate center gives rigorous enforcements of that award, you would be at the high end. To the extend that it's less stringent and we don't get good service, it will be at the low end. It does really have that kind of variability.

But it's basically a timing issue. As Ed is saying, how quickly we can roll it out and what sort of mandate do we have from corporate. That's the issue.

With respect to pension, I want to spend a minute on that as well. That $3.5 million pretax. Two questions. If I want to come up with a per share number, should I apply the effective rate that you are talking about for '03, or is there a different rate I should use? And then also, if you can help me understand where that appears in the consolidated P&L. And also some color on the relative magnitude of impact across the three business segments.

Yes. I'm going to give you the effective rate.

Okay.

The primary impact is on the Spring group. Some impact on distribution. Very little in Aerospace. And terms of the consolidated P&L, it's spread. Some are costs of sales. Some in other expenses.

Right. But it flows through the operating income for each of the three businesses, Matt. So it's not like it's written down separately on the P&L.

Okay. Sort of NOP for the businesses.

Yes.

And then just one last question. With respect to the nitrogen gas spring business. I think Bill mentioned it was up 16 percent year-over-year '02 versus '01. You know, what sort of growth outlook do you have for that business in 2003? Can you talk some more about that?

First of all, this is a much higher level of performing Spring than standard mechanicals. There are two growth aspects of it. There are traditional markets which have been used in tool dye stamping operations around the world. And we enjoy penetration in most countries of the world and that continues as customers have more frequent model changes, whether that be light vehicles or appliances, we continue to see that as a growing opportunity but also, you know, a growing penetration against mechanical springs which is a traditional business of Associated Spring. Second of all, we're seeing new applications for it in a lot of industrial applications. 16 percent was a terrific growth. Very few businesses in the industrial market continue that. We would hope to be in the high single digit growth range for that over a three or four year period. So we're very positive about it. We continue to make appropriate investments in people and capital dollars.

Great. Thanks a lot, guys.

Good.

Since there are no further questions, I will now turn the question back to Mr. Penn.

Thanks, Tom. And thanks again for joining us today. If any of you have follow-up questions after the call call me at 860-973-2126. Otherwise we will look forward to talking to you again in April.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now