Barrick Mining Corp (B) 2003 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Barnes Group fourth quarter earnings conference call. At this time I'd like to inform you this conference is being recorded and that all participants are in a 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, Barnes Group Director of Investor Relations.

Thanks everyone for joining us to discuss our fourth quarter and full year 2003 results. With me are Ed Carpenter, President and CEO, and Bill Denninger, Senior VP of Finance and Chief Financial Officer. In keeping with our past practice on these calls, if you have any questions that are purely data related, hold them for me after the conference call. That will give us time to focus on the broader issues that are more of interest to everyone. I'd like to remind everyone that certain statements we make both during the formal session and Q and A session may be forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. These are subject to risks and uncertainties that may cause our actual results to differ materially. We would encourage investors to consider these risks and uncertainties that are described in our periodic filings with the SEC, which are available through the Investor Relations section of our corporate website. With that said let me now turn the call over to Ed Carpenter.

Good morning. Welcome to Friday the 13th's conference call to discuss our fourth quarter earnings, and to remind you all that tomorrow is Valentine's Day. For those of you, like me, who haven't taken care of that situation. What I'd like to do today is to just talk about a couple of take-away points that we want to stress on schedule 1. First of all, overall I thought it was a nice quarter. It was a good quarter.

First key point, bullet 1, sales, net income, diluted earnings were all up from year ago period of better than our plan. This was the 7th straight quarter we've reported higher diluted earnings per share than a year ago. Sales for the full year were just short of $900 million, giving us another record year for sales, while net income was up 22% to $33 million. Or about $1.49 a diluted share, an increase of 5% versus '02. Point 2. In spite of a head wind from a higher diluted share count for Q4 and for the full year, our net income was strong enough to generate positive EPS growth. A good quarter and a good year. Third point. We worked aggressively, as we've talked about before, on the integration of Kar into Barnes Distribution during the fourth quarter and into the month of January. We'll talk more about that. But to give you some idea of the scope of that infrastructure change, we opened, closed, or converted to a new system; 13 warehouse facilities in the past five months. And as of today, the heavy lifting from the initial integration in the U.S. is behind us, we'll focus that initial integration in completing in Canada. We incurred operating expense in the fourth quarter and that will continue for the first half of the year to accelerate the integration, but felt that it was vital to our customers and field sales people to be done with the integration as soon as possible.

Point 4. We entered into an important second revenue sharing program, or rsp, at Barnes Aerospace, like the first rsp the second one has started to contribute to Barnes Aerospace profitability from day 1, and we're seeing -- additionally, I would say we're seeing some important strengths from aerospace other underlying businesses which we'll talk about in a minute. Point 4, as a final take-away, there's been some concern in the market in the last two or three weeks about raw material prices, most notably steel. For those who have been in manufacturing for some time, dealing with these costs is not a unique situation, so I want to share that this is not going to be a significant in '04. So to iterate, we add good fourth quarter, closed out a solid year of improvement with a huge number of important action items completed to make '04 an important and positive year.

Let's switch to schedule 2, and I'll start with Barnes Distribution, now the largest of our three businesses. Sales were up in the fourth quarter, reflecting some modest organic growth in the Kar Products acquisition. After a good start, in October, sales slowed a bit in November and then rebounded in December and January. We had good organic growth in Q4 without Kar. At this point it looks as though sales and distribution are moving consistently with the economic pace. We turned an operating loss in the fourth quarter of '02 into a positive number in '03, delivering on the commitment we made to you on a call, I think a year ago that we no longer expect fourth quarter losses on our distribution business. It was a good result, given the significant costs we incurred in the Kar integration. As I've said we made a number of changes to the distribution infrastructure in the past few months, which we've talked about before.

We consolidated two New Jersey facilities into one existing. We consolidated two facilities in Nevada into a brand-new facility. We consolidated two facilities in Texas into a brand-new facility. We moved an old Chicago facility into a brand-new facility west of Chicago. We moved all of our packaging equipment from three sites now into one site. We moved our redistribution facility from two locations in Kentucky to one. That was all in the U.S., it was a major effort by our folks in operations there. Obviously, with all the moving parts that we had, where essentially all our SKUs moved locations in the last four or five months, we've been able to keep our order turnaround on track, that is in by 11:00 out today, during that time, which I think is a terrific acknowledgement. Our service level has dropped slightly below 95. We historically are in the 97 to 98% range. The team is working to get the inventory in the proper places to get that back up.

When our distribution center in Beamsville, Ontario, opens in a few months, the integration of our Kar in Canada will be complete; and with the exception of one old warehouse we may address later this year, we've built a network of state-of-the-art, large, modern distribution facilities to support our customers, and importantly our field sales force. Our new growth initiatives which we've talked about on all our phone calls continue to run well, including new national account development, E-commerce, and our tier 2 strategy. Had a solid quarter last year for the year generating roughly about $20 million of new sales; just a hair short of that. You may remember six months ago we talked about that in a range of $15 to $20. There was some discussion on the second quarter conference call on that, and we felt good about the $20 million, and we essentially hit close to that number. We continue to believe that each one of these initiatives will contribute to higher growth in distribution as we move forward, especially if we're in a full-blown manufacturing recovery.

We continue to see equally strong growth potential for some of our business at Raymond, particularly one product line. In order to support that growth potential we're going to spend about $3 million this year in engineering, manufacturing, and marketing on a global launch. It's an important product for us, one that we see a great future. Keep in mind that this Raymond investment and the Kar integration costs we are incurring in the first quarter and will, in the first two quarters, offset a large portion of the cost synergies we are receiving from the already completed stages of integration. We still believe that -- and we still project that the $10 to $12 million of savings that we will get from this will come to us in the second half of the year. We've said that consistently, and we continue to -- our results right now would continue to suggest that that will happen.

Let me move on to Associated Spring. Sales set a new record in '03, including the impact of exchange and acquisitions. Let me give you just some commentary by segment. Keeping in mind that we've stripped out foreign exchange and acquisitions in some cases. First we continue to outperform the market in light vehicles. As our light vehicle sales for the full year are off less than 2% versus the 3% drop in light vehicles. Our sales last year to the transplants grew a solid 18%, much better than the growth in their production or the overall light vehicle work. Also on the plus side, our sales overall in nitrogen gas products grew 13% for 2003, this was down from 15% from '02, but we continue to believe this is a very strong business for us. We have grown this business solidly each year since we purchased the business in '99, and believe that it remains a growth engine for Associated Spring. We actively are seeking additional product lines, as well as important new large customers to augment the solid organic growth we are already enjoying.

Industrial product sales were up about 3% in '03 which I think, on an overall basis, was impressive given the weakness in the economy. We continue to see industrial product as an attractive segment for us, particularly outside the U.S. Offsetting some of that top line expansion were sales into heavy truck, telecom, and electronics market. As a comment on their sales, telecom and electronics were down about 25% for the full year, so we're not seeing any recovery in that, and we still saw a down quarter in Q4. Even though, in heavy-duty truck, even though we made a decision to exit some of the products, we saw for the full year, that was a 15% drop in sales, we saw our sales in the fourth quarter up 20%. Anecdotally, I think you'll see I'm getting a lot of indication that heavy truck is going to have a strong year. Profitability, a lot of moving parts at Spring wasn't quite what were normally expected. A large part of this is higher personnel costs, mostly pension and medical. Don't want to talk about this as an excuse. I think the team has addressed that and has got it under control, and we would expect that our lower cost manufacturing initiatives will eventually turn the day on this. I think it will involve both improvements in our domestic facilities as looking for lower cost environments.

Let me spend a moment on Barnes Aerospace. In the fourth quarter we achieved the highest sales volume and operating profits of the year. And we had foreshadowed, both in our July and September calls that we would -- that we felt we were seeing improvement, so unlike what you've heard from some others; we believe we've moved past the inflection point in our Aerospace business in the middle of '03 and are well into a recovery. We entered, as I said at the beginning of the call, we've entered into our second revenue sharing program in the fourth quarter. We discussed the first one with you three months ago, and much like that first rsp, the second one gives us exclusive manufacturing rights for OEM and aftermarket parts for the remaining life of an important engine program. We're bound by the same confidentiality agreement not to reveal the customer or specific programs, but I can say the financial returns of the second program are as compelling as the first, and the team at Aerospace is working hard to identify additional opportunities.

Importantly, the orders in '03 for Aerospace were at $162 million dollars. Even more importantly, the order rate for the second half of the year was almost $95 million, which suggests that their orders bottomed out in the first half of '03; and suggests, as we've said for the last two calls, a sharply improved financial performance in '04 relative to '03. We booked another $6 million of GE-90-115-B orders in the fourth quarter, a shade more than we expected. Now with more than 150 engines on order, including spares, this promises to be a meaningful program for us for well over the next several years. I'm pleased to report we had almost $50 million in military orders this year, a validation of the investment we're making in this segment. Given the size of the pond, we see plenty of opportunity for new growth here. Our overhaul and repair orders recently were the strongest we've seen in quite some time, and this may suggest an uptick in repair volumes that we expected in our last conference call. We believe it's merely delayed and is below what we've anticipated, we'll keep you informed, and I'm optimistic about this segment.

Operating profits for the 2003 at Aerospace essentially equaled a year ago and it was largely achieved by the actions taken '02 to get the business properly positioned for lower volume. We've talked about that with you extensively. To that point, we suggested to you in both July and October that a substantial improvement at Barnes Aerospace would be likely in '04, and everything we've discussed here and everything we're seeing strengthens our belief that will be the case. Let me now turn the call over to Bill Denninger who will give you a little more detail on the financial view of the fourth quarter.

Thank you, Ed, and good morning. I'd like to begin by recapping the financial highlights from the fourth quarter and the full year. Turn to schedule 3, if you would, please, and you'll see that fourth quarter sales increased 20% to about $220 million. The increase is largely due to the Kar acquisition which added $27.3 million to the quarter, and to positive organic growth at all three business groups. Notably this is the first positive organic growth quarter we've seen at distribution in at least three years. As you can see cost of sales increased 18% in the fourth quarter, a rate below that of sales growth. This was due, in part, to the shift of sales mix in favor of Barnes Distribution with it's higher gross margins. Selling & admin expenses were up 31% in the quarter, this again due primarily to additional selling and commission expense at Kar which we acquired in February last year. Operating income was down slightly in the quarter, and we'll discuss this group by group in a moment. Other income was up in the quarter due to significantly lower foreign exchange losses this year compared to last, and to additional profits this year from our Nasco joint venture.

Interest expense was down about 7% for the quarter, while our average borrowings were slightly higher, weighted average interest rates were down about 40 basis points versus the prior year. Net income up some 45% to $7 million, translating to diluted EPS of 29 cents, up from 25 in the year ago quarter. The diluted share count was up 23% from the fourth quarter of '02, due to the use of Barnes Group's stock as partial purchase price consideration for Kar, completion of the follow-on equity offering we did back in May, and the impact of a much higher stock price which causes the higher number in the money options to be more dilutive. As Ed said, overall a good quarter. Moving on to schedule 4 now I'd like to spend a few minutes on each of the businesses. But before I do let me comment that during the fourth quarter we allocated an unusually higher level of costs back to the groups from the corporate center. This included about $800,000 of due diligence costs from an abandoned acquisition, higher incentive compensation expense because we exceeded planned targets, and a continuing higher level of post-retirement medical costs.

On now to Associated Springs. Sales $80.3 million up 4%, due to about a 12% increase in sales at nitrogen gas springs and higher sales of product for industrial applications. We also saw growth in heavy trucks, as Ed mentioned, for the first time in several quarters. Offsetting these increases was a continued decline in sale product for telecom and electronics. Production of U.S. light vehicles was up 1% in the fourth quarter was Associated Spring sales to that sector increased about 2%. In addition we continued to successfully grow within the transplant companies, where our sales were up 27% in the quarter. Operating profit at Spring was $5.1 million down from $6.9 in the previous fourth quarter. As has been the case all year, operating profit was negatively impacted by personnel coughs which were about $1.6 million higher in the fourth quarter. This would include pension, medical, and other post-retirement benefits. In addition, gross margin was negatively impacted by less favorable mix of sales within light vehicle, as well as decline in sales of higher margin racing products.

Moving on now to Barnes Aerospace, the 7% fourth quarter sales increase was driven by our OEM operations. The sales for overhaul and repair declined 17%. Sales of product in the new 115-B were $2.5 million in the quarter, as Ed mentioned orders were about $5.5 million so we're able to grow backlog for this important program as we entered '04. Total Aerospace backlog ended the year $148 million driven by orders of $43 million in the fourth quarter. Military-related orders were about $12 million in the quarter, and over $50 million for the full year, or about 34% of the total orders booked in '03. Operating profit at aerospace $3.4 million was flat compared to the fourth quarter last year. Positively impacting operating profit was higher overall sales and profit from the first rsp, offset by a drop in the historically higher margin repair and overhaul sales. As Ed mentioned the two rsp's entered into in the second half of '03 will have a positive impact in '04. I'll discuss the funding of those programs in a few minutes.

Now turning to Barnes Distribution, Kar Products contributed $27.3 million of sales in the fourth quarter, while organic sales were up 5% including impact of currency. In the fourth quarter our U.S. daily sales average, or dsa, increased by 2.5% compared to the fourth quarter of '02. As I stated in our call back in October it looked like October was off to a good start. It was. However, things softened considerably in November, and then began to strengthen in December with dsa for December increasing 15% versus the prior year December. We think the trend in January suggested that the momentum is continuing. Distribution generated operating profit of $1 million in the fourth quarter, compared to operating loss of about $300,000 in the fourth quarter of '02. This increase came from a contribution from Kar including cost savings from integration and an improvement in selling costs as a percent of sales. Partly offsetting these improvements were Kar integration expenses of about $1.3 million, and a negative impact on sales caused by a reduced order fill rate during the integration of the distribution center that Ed took you through. We are seeing very good results from the key growth initiatives such as corporate accounts, with a total of $20 million for the year. For the quarter these initiatives produced $6 million in sales, double the amount of the previous fourth quarter.

If you would now turn to schedule 5. Income tax in the quarter was affected by two favorable reserve adjustments related to our foreign operations, which reduced taxes by about $2.1 million. Both of these items were non-recurring. Obviously the negative tax rate for the fourth quarter is not sustainable, so to reiterate information we've given you in recent calls, the outlook for the effective tax rate in '04 will be in the low to mid 20s, in the mid 20s longer term, dependent on the mix of income between the U.S. and other jurisdictions. As I said earlier also during the quarter we wrote off $800,000 pretax of due diligence costs for an abandoned acquisition. We do our best to mitigate the impact of up-front due diligence costs, but would much rather take the hit and walk than to do the wrong deal. Cap ex in the fourth quarter, $7 million compared to $4.8 in the fourth quarter of '02, about $3 million of the increase in cap ex relates to integration related investments associated with the Kar acquisition, in particular the construction of a new dc in the Ontario province of Canada. In 2004 cap ex will be in the $25 to $30 million range, less than our depreciation of just over $30 million.

Moving to schedule 6 you'll see we had about $50 million of cash at year end. This was after fourth quarter payments of $18 million for the rsp's, an additional payment of $15 million associated with the second rsp is due in the first quarter of this year. All of these rsp investments are being funded with offshore cash, which we view as a very effective utilization of that cash. Looking at schedule 6 you can see that our gross debt-to-cap ratio was 43% at year end, comfortably within our target range of 40 to 45%. The net debt-to-cap ratio has dropped to 37% from 48% a year ago. We had another year of solid cash flow generation and feel that our year end balance sheet positions us well to support both internal and external growth investments going forward. With that let me now turn the call back over to Ed.

Thanks, Bill. Wrap it up. Since October, our October call, the economic recovery appears to have gained some strength. We see it in all our sectors, which is a positive for our company as a whole. I think as we've described for you today we have a number of solid growth programs underway in each business. We've invested heavily in those growth programs in '03. With these programs in place, based on what I know today, I think you'll see improvements for Barnes each quarter as we move forward through '04. Thanks for your time. Let me turn it back to Phil for any questions.

Thanks, Ed. Operator, we're ready to start the Q and A session.

Thank you, Mr. Penn. The Q and A session will begin at this time. If you are using a speakerphone please pick up the handset before pressing any numbers. Should you have a question please press star 1 on your phone. If you wish to withdraw your question please press star 2. Your question will be taken in the order received. Please stand by for the first question. Our first question comes from Holden Lewis with BB&T.

Thank you. Good morning. I was a little bit surprised, I guess, and would like a little more detail on distribution. It seems like Kar has been running a 5 to 6 type operating margin, and you can sort of apply that to the revenues and assume that you've seen some synergies flow through there; and I think if you add that up it suggests that at least maybe the core base distribution business might have been operating at a loss for the quarter. And, so I mean, given the contribution from Kar and given the fact that I would have expected some synergies to be seen, I guess I was surprised that the % was so low. Can you talk a bit about the base business, where that was at and why that might be?

Sure. One of the things I tried to point out, Holden, and knowing you -- you've got a pretty good handle on distribution itself, particularly warehouses. If you think about what we did starting the end of September and, in fact, we're still doing it as we speak. There's a lot of moving parts in here. We've had a lot of temporary people. We've been operating dual warehouses in some locations during that period, and so if I look at our plan, and what we expected to see for expenses in warehousing in that time period and moving forward I think we're right on -- we're right spot on. You're exactly right on expectations once you hit a steady state, but when you do what we're doing in such a rapid time it's very difficult. You recall we were very careful in talking with everybody about the fact that our estimate of when the accretion would hit was mid-'04.

Okay.

And -- you recall that? And that's really what we meant, because we knew the moving parts would sop up a lot of the cost savings. Yes, we've closed down a significant Chicago headquarters and saved money. Yes, we're seeing very -- in spite of the environment, we're seeing nice reductions in our purchase price. We're seeing all the value drivers that we expected to see, but we're also seeing the costs that we expected to see. If Bill and I were doing this transaction ten years ago, we would have set up all those costs as an initial entry. As you know, the accounting does not allow us to do that anymore.

Uh-huh. Okay.

The other thing I think is worth mentioning. We had a solid third quarter, as you know. The return was 7.1% for distribution. We said at that time we would not maintain that into the fourth quarter. As I mentioned, we did take some hit on sales in the fourth quarter as a result of a lower fill rate, which you would expect as we go through a very heavy integration program, as Ed discussed, and in my view, given the integration expense, I think the quarter was okay.

When you talk about dual warehouses, duplicate people, that's all included in that $1.3 million number, or is the $1.3 pretty well stripped?

That is the best number we can identify at this point.

Now, talk to me a little bit about the impact from sort of the lower fill rates, and I guess I'm also curious, given that I remember last time you had some issues when you were putting -- when you did an acquisition and were trying to do some IT work with the Curtis transaction, if I remember correctly. That was actually pretty detrimental for a longer period of time than a quarter. Is this a replay of that? I mean, what confidence do we have that the sales issues, you know, are going to be able to go away pretty quickly?

Good memory. When we brought Curtis in and put in a new system, we saw service levels in the mid 80s, which is not acceptable; and our turnaround time moved to a couple of days. We're still maintaining, if it's in by 11:00 we're shipping it the same day. But our service level, instead of 97, 98, I don't know all the numbers but I do recall that December was 94 and change. If you think about that, that doesn't sound like a lot, but I always think about service levels as the reciprocal of the number people like to use. When you're at 97 or 98% what that really means is that two to three percent of the orders you're shipping do not contain all the products that you've committed to. Our measurement includes -- we don't give credit for an order if it doesn't have all the line items and all the quantities, so when we say 97, 98%, that means great.

So historically we had been running up until the fourth quarter 2 to 3% of the orders were not shipped complete. We ran 5% -- over 5% in December. And I don't know what November was. Phil can get that for you if you want. But those -- that has a significant impact on the field, and it also obviously had some impact on our absolute sales revenue, and in spite of that we had a better December than we did October and November.

And do you know in January, have you got the numbers back up, and have you seen sort of the sales rebound as a result? I mean, wasn't so far ago that maybe memories have not been cleansed. Does this present a real issue on a go-forward basis?

I'm not hysterical about it. I think it's well within the plan. This January looks like December. It's 94. If you think about all the changes we made, they've kept the turnaround time, they're beginning to get the temporary people out, they're beginning to get the inventory in place, and they're beginning to see anecdotally, or daily, our rates are improving in February. And you pointed this out in your question, and I'm not being defensive about it. I think the team learned a lot from the Curtis integration. We didn't see the service level drop in the 80s, and we don't expect it will be six or seven months, but we do think it is going to take December, January, February to slug ourselves out of this. It isn't that the people aren't trying. It's just a lot of parts and a lot of work.

Another big difference between the integration of Kar and that of Curtis is the basic business system itself where we did spend a lot of time and money to make it more robust, that is really not the same sort of issue with Kar as it was with Curtis. That's what delayed the completion of the Curtis integration. That's not the case with Kar.

Lastly on distribution, you know, are you exiting the year kind of at that $10 to $12 million run rate, or you're somewhere below that at this point? Where are you exiting the year at?

What we've said is that we will see that $10 to $12 million run rate bite in the middle of the year. We've said that for 18 months-- or for a year now and we'll probably say it again. What we're saying is that cost that we incur to do this, you know, creating -- all these new warehouses and everything else, plus all the relocation costs, plus all the termination costs, are going to bite us from now until -- enough so that you will not see that benefit until the end of the second quarter and the beginning of the third quarter. We've said that all along.

Even though -- Canada is the last piece, right? I would think that would be a smaller effort.

Holden, I'm going to -- I really -- that's where I am. You're right, Canada is a smaller effort, but we are building a brand-new warehouse in Canada. I've seen pictures. I haven't been there yet. It's up. The structure is up. We've got to shut down a warehouse in Windsor and consolidate another warehouse from Toronto. As we speak we're putting the new system into Montreal. Last month we put the two warehouses in eastern Canada together and we will be doing the western Canada later on in the quarter. So there's a lot of moving parts there, too.

Thank you.

Thank you. Our next question comes from Matt Summerville with McDonald Investments. Please state your question.

Couple of questions to follow up on distribution. Ed, can you give us some color on what the daily selling average looked like in January and what you've seen thus far in February of '04 relative to '03?

We don't have that data here, Matt.

Is it -- suffice it to say, though, that it's up Ed?

February is up, January was down.

Okay. And as far as -- I think you may have been hitting on this, but the incremental revenue that you expect in '04 versus '03, as it pertains to the new -- the national regional accounts, tier 2 initiative, et cetera; is there any way that you can quantify that? Do you have an expectation for that?

As you know we went -- and I'll -- somebody here will grab '02, but we went to -- just a hair under $20, and we originally--in '03, and we originally estimated a year ago right now was-- we were sitting there that we would be somewhere between $15 to $20. So I think -- and I think has we did about $12 in '02. If anything, I would say that the increase will be ramping up. In other words, if we went up $8 million this year -- last year --.

Right.

I would expect that to accelerate.

Okay. Very good.

Right now, our wins over the last 60 to 90 days have been terrific. In fact, I think it's kind of -- I would like to say that it's not going to be a manpower issue, but it might be to get those new accounts up and running.

Okay. In the past you had actually talked about how your win rate had been progressing. Is there a new number that you can update us with there?

No, I think, as we've talked about that we went from, you know, I don't want to say 0, but we went from 5 or 8% to now we're at -- we were at 50% and I think we're now over 50%. When we start to show people the quality of our new warehouses, what we've done in terms of investment in systems, how we're able to handle the E-commerce solutions; and a lot of these companies, particularly the larger ones, are looking for that solution, it continues to enhance our ability to share. It's very difficult for us to sort out whether it's an E-commerce solution or a national account, which has really caused the increase, but that's why we lump them together.

Okay. And then as far as your expectation for organic growth in distribution outside of the national regional account efforts, I mean, you seem a little bit more upbeat on what you're seeing from a macro perspective. I guess I'm curious as to what you think you can do in distribution, you know, as it -- if I can say we're in the early stages of an industrial recovery here.

I think we continue to see that as GDP moves along we see better growth than that. And so if I X out national and regional accounts that would be a positive. Although in some cases it's hard to tell.

Okay.

Better than GDP.

And then lastly, in distribution, just to make sure I understand, on a net basis you still anticipate to see cost savings from Kar, if I subtract from that the investment you're making in this new product side of things, to be positive in '04. I guess if I look at what you're investing in from a new product perspective and the costs that you'll be incurring through, it sounds like, roughly the first half of the year with respect to on going integration; will you in fact see any net benefit in 2004? Is that more of an '05 kind of thing?

Holden, we would expect to see a net benefit -- or Matt, sorry, net of the investment for the new Raymond product, but primarily in the second half.

Okay. And then can you talk with respect to the Raymond product, is there any more color you can provide there? Ed, maybe talk about the return that you expect on the investment that you're making there. How big of a magnitude is this thing? Is one individual product big enough to move the bar?

We think so. And I just -- what I'd want to be is a little careful here because we're early into this product and we listen to our competitors' conference calls, I assume they listen to ours. It is a product that we've already seen significant interest in. I got an e-mail yesterday that we got three new orders, and we're selling it on an international as well as a national basis, or domestic basis; but we're trying to stay under the radar. I tried to give you some feel for our spend level this year, but we think this is an important business that could be, you know, it can move the dial.

Okay. Then last, Bill, if you can comment on some of the accruals you made or adjustments you made in the fourth quarter to your bonus accruals or incentive compensation. If I'm looking at schedule 4, where would that be reflected in the operating profit? Is that by each individual business unit, or is that -- would I find that somewhere else?

It's allocated back to the three businesses roughly based on their sales as a percent of the total company.

Okay. And then is there any -- you know, can you give a little more detail on how that number -- you know, how big that number was in the fourth quarter and where, if you will, Barnes was successful in achieving, you know, plan, if you will. Was it return on capital EVA? Can you help us understand that as well?

Sure. Overall, fourth quarter compared to the fourth quarter a year ago, the total increase is about $3 million of these corporate office charges. About $1million of that related to incentive comp and restricted stock. I mentioned the $800,000 for the due diligence cost write-off, and there were other miscellaneous items. When we talk about achieving our plan we set a full year plan at the group level, and they are measured based on an EVA measure that we've used at Barnes for a couple of decades. At the corporate office our targets are based on sales and earnings per share.

Okay. Thank you guys.

You're welcome.

Next question comes from David Siino with Gabelli & Company.

Good morning.

Good morning, David.

Could you talk about the acquisition pipeline? Obviously there's one deal that didn't work out. It sounds like a big number, I guess, but, I mean, was it a large deal, or potentially transforming deal you were looking at or more of the same, kind of the onesies and twosies?

One is the pipeline, two is the deal we didn't do. Let me deal with the deal we didn't do. We used to work with a guy who said the deal you won't do won't kill you. We really got into this one. It was a -- it was a very nice transaction. It was not a transformation. As you know we don't tend to do those things. We look at bolt-on's and incremental deals, but it was a complex transaction because it was multi-country, it had a lot of both legal tax as well as operational complexities. Everyone was feeling quite good about it when we got into some of the numbers, and we just didn't like it, so we had spent a lot of the legal accounting and tax money on it, and the $800,000 is not our internal costs, it's really the advisory fees and people that we had hired to do it. We just said -- we frankly walked away from it, and didn't worry about how much lower the price might get because we just said we didn't want to do the deal. As you know, in a couple of our other transaction we've walked away from time to time on transactions and ended up back in the deal. Kar Products we walked away from the table three times. So we are not -- we are not -- if we don't like where we're at we are not going to do a deal, and I think as a shareholder that gives me comfort.

Second point is, is that you asked about, pipeline, I think the pipeline is huge right now. There's a lot of activity going on. All generated by the normal sources that you know as well as I do, that is entrepreneurs starting to get ready for retirement, companies that have a very good portfolio but have a division that may not be core, and we continue to see very attractive opportunities, and, in fact, more than we can probably handle. So we continue to try and be very judicious in how we spend our time, and sometimes, as we were in the fourth quarter, we think we've got a transaction that's important to one of our businesses, and it turns out not to be as represented.

And as usual there's no priority as far as the three businesses are concerned? It's kind of an opportunistic sort of a mentality?

That would be exactly true because we're very comfortable strategically with the individual businesses. We break our businesses down further than just the three, and so we look at it strategically in 11or 12 pieces, so we have a pretty good idea of where we want to put the growth money, but I would also say to you that there are two important allocation issues. One is the money issue, which you raised, and the second one is the people issue, and their capacity and what's going on in their life as their ability to deal with another acquisition.

Then shifting to Aerospace, is it too early to start thinking about the Dream Liner and where Barnes might fit in, in terms of higher content and older models?

It's Phil Penn. Actually, I raised that same question with our Aerospace guys a couple weeks back, and quite frankly the answer is, yes, it's still in too early of a stage to think about where this is going to go. We're just getting to the point now where the engine designers are going to be providing their ideas to Boeing, and until we have a sense of if it's derivatives of the existing engines, or completely new programs; we can't get a sense of where this is going to go. Obviously it will be a major new aircraft program. I think we will be participating to some degree but right now it would just be conjecture if I threw anything out there at you.

Fair enough.

The one part, David, that I think is from my point I think is good is that we have, as you know, we have spent the last four or five years making sure that we've got adequate both sales and marketing and application engineering to interface with these major engine manufacturers. If you look at historically, as the -- as new engines roll out, we continue to get more and more product per engine, and that would be our goal on this next one.

Okay. Then last question for Bill, '04 versus '03. Did you mention incremental expense pension, post-retirement?

Pension '04 over '03 is about $1million, post-retirement benefit Phil is going to have to get back to you on that. I think it's $.5 million, but he'll confirm it.

Your next question comes from Mike Harris with Robert W. Baird.

Good morning everyone. A lot of discussion already on the Barnes Distribution. And talking about, you know, accelerated actions in the integration of Kar as well as Raymond. Just want to get an appreciation. Can you give us any idea of where margins in the segment should trend in the next quarter or two?

Gross margins?

No, operating. What you would report on a segment basis.

We don't forecast.

No color on that at all?

Bill is searching now for a range.

I mean, the other way to ask that, incrementally you had $1.3 million in this quarter from the accelerated actions for Kar. Can you give us an idea what you expect in the first half of '04 from that, and also talk about incremental costs for Raymond?

I'd rather give you a range, and I expect that each quarter in '04 for distribution that that percent of operating profit related to sales will improve. And I would think in the first and second quarter you'll be in the 3 to 5%, moving up from there.

Okay. That's reasonable. And just want to review Q4 earnings here from a high level. Obviously from a GAAP perspective you reported 29 cents. Looks like you had a 9 cent benefit from tax. You had $1.3 million in incremental cost from Kar, that was about 4 cents. All the other stuff seems to me like it's more normal recurring items, cost of doing business type items, so the real number I'm looking at is 24 cents, consensus was 36 cents. Ed, you commented in the press release and in this call that the reported financial results were above your plan. Can you just give us an appreciation of what your plan was for the quarter?

Let me just comment on a couple other items you ought to take into account. I mentioned the higher corporate expenses, the $800,000, some of the incentive comp moves all over the place depending on results. Typically the fourth quarter is our weakest quarter. Our plan for the quarter was in the low 20 cent range.

In the low 20-cent range.

Yeah. It would have been comparable to prior year.

Okay. So your plan for this Q4 was in the low 20-cent range.

Right.

The $800,000 in costs you incurred for due diligence on this acquisition that didn't materialize, certainly you've had negative costs like this in the past and certainly you'll have some again in the future. You are an inquisitive company, as you said.

We haven't spent anywhere near that for any of the previous acquisitions that we've walked from.

On the incentive comp side, how much would you classify--and you talked a little about this. How much is truly a true-up that you saw in Q4?

About $.5 million.

About $.5 million?

Yep.

Okay. Just talking on the Associated Spring side, you continue to see declines in the telecom and electronics area. These markets, from a macro perspective, appear to be bouncing back. A lot of data points here showing that IT capital spending is picking up. Just wanted to talk about what's causing the continued weakness here. Are you experiencing significant pricing pressure? Are you confident you're maintaining share in this area?

One of the things that happens to a supplier in this business, particularly when he's supplying to an OEM who has some in-house capability, is -- and we're seeing that anecdotally right now. They will use up their in-house capacity before they will come to us. We had tools pulled over the last 18 months out of our shop into some of our OEM's, and now what we're seeing is they're beginning to come back and talk to us about capacity. As the vice president of sales at Associated Spring said, I'm going to have a long slow talk about that because I don't really want to date, I want a marriage. And so we don't want to supply them for another two months until they get out of problems. So what you're seeing, what you report as the IT spending is accurate, but OEMs in the telecom and electronics area to the extent that either they or their major assembly houses have in-house capacity, use that up first, and that's what we're seeing.

I think it's also fair to say, based on all the quote activity that we'll probably see at least flattening if not an increase in the first quarter.

So this could possibly be the bottom here.

Right. You've got to remember, if you look at the absolute sales volume for Associated Spring this is not a big sector for us.

Sure, I understand.

It used to be.

Yeah.

But it's been -- you know, when you have the kind of double-digit -- you can't have triple-digit declines, but double-digit declines year after year, it's really had a big impact on us.

Just staying on Associated Spring, you already talked about raw material not being -- will not have a significant impact to '04 for the overall company; but on the Associated Spring side can you just talk about trends you've seen recently regarding raw material prices and the ability to pass along these price increases, or the ability to offset them through better procurement initiatives?

Obviously it really isn't just limited to Associated Spring because all three of our businesses are impacted. I think, and I'll let Bill respond on a more specific basis, but I think one of the things that is happening here is that we-- in most industries, most guys that are running businesses have seen a period of five or six years where pricing pressure from suppliers has really been relatively benign, and the power has been in the buyer; and now it's beginning to move back to what I'd call a more traditional level. Things that, you know, we've seen in the last 30 or 40 years. And so I don't think anybody's surprised at that. We've got the same thing occurring in labor. But we've been aware of the pricing issues in raw material probably for the last six months, and have got a pretty good handle on it.

It's really, may part of running the business, let me run through groups to give you a quick flavor. Start with Spring. Primary raw materials there you might be concerned about are spring wire and strip wire. We spend about $65 million a year on these products. We have a number of programs in place to mitigate those increases as they occur. First off, as I'm sure you know, Spring has been involved with lean, lean manufacturing, lean culture for many years, so the resultant productivity gains are the first to offset them; and that's a way of life. Secondly, and unlike many of our North American competitors, we do source raw materials from a number of suppliers including several from outside the U.S., and that gives us an offset. Third, in certain circumstances within our contractual agreements we are able to pass through raw material price increases to the customer. Put all that together we don't think there's a significant or material impact to Spring.

Move on to distribution. There's four or five product categories where we're seeing price increase requests right now, most important of which is fasteners. These four or five categories we spend something over $20 million a year. Similar to Spring we source these products from around the world and expect to be able to pass through at least a reasonable portion of any increases to our customers.

Okay.

At aerospace, we buy about $40 million worth of raw materials such as castings, forgings, and titanium. Half those purchases are directed by the large OEMs, and we're able to use their pricing power. Roughly 80% of those are covered by long-term agreements that give you some pricing protection. The balance is mostly sub-components purchased from other suppliers. Here, too, we don't see any significant impact. Put it all together we think the total impact of higher prices this year after mitigation is going to be far less than the range that's been suggested by some out there and really don't see it as a significant threat or exposure to this year's profitability. That's something we manage. We manage it every year, up or down.

That's a pretty comprehensive review of what's going on there. Appreciate that. Last question. You've talked about how order trends progressed on the distribution side. Would just like to get your commentary on how orders trends progressed within Associated Spring. General commentary would be appreciated.

Why don't I follow up off line.

The one thing I would share with you is that the order trends in December and January were strong, orders usually have a 30 to 60-day lead time, unlike Aerospace. And, in fact, our January sales were not where we -- where the orders would indicate. We were past due more than we would typically be, and the guys are working hard to correct that problem in February.

Your comment on order trends, in distribution, was interesting, because I had another one of my coverage companies that has pretty broadbased exposure to the economy see those same trends you talked about. October was pretty strong, November was weak, and then things picked up measurably in December and carried through thus far in 2004, so I thought that was interesting. But that's all I had for you. Thank you.

We're out of time for questions at this point.

Okay. Mr. Penn, you may take over the call.

Thank you everybody for joining us on the call. If you do have any additional follow up, I can be reached at 860-973-2126. Otherwise we look forward to talking with you in April. Thank you.

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