Crane Co (CR) 2003 Q4 法說會逐字稿

Good day and welcome, everyone, to the Crane Co. fourth-quarter 2003 earnings conference call. Today's call is being recorded. At this time I would like to call over to the Director of Investor Relations, Miss Pamela Styles. Please go ahead.

Good morning, everyone. Welcome to our Crane Co. fourth-quarter 2003 earnings release conference call. As you know, I'm Pam Styles, Director of Investor Relations and Strategic Planning. This morning on our call we have Eric Fast, our President and CEO, who has some prepared remarks for us, and after which we'll take questions. George Scimone, our Vice President and CFO, cannot be with us today but he does send his best. And we have Joan Nano, our VP and Controller, also sitting in with us on the call.

Before we get into our prepared remarks, let me just remind everyone that the comments we make on this call may include some forward-looking statements. We would refer you to the disclaimer language at the bottom of our earnings press release, also our annual report, our 10k, and subsequent filings pertaining to the forward-looking statements. So with that, let me turn the call over to Eric.

Thank you, Pam. Fourth quarter performance was good across most of our businesses except fluid handling. We earned 56 cents in the quarter which was at the high end of our previous guidance of 51 to 56; $1.75 earnings per share for the full year also achieved the upper end of our full 2003 earnings guidance. We began the year 2003 with earnings guidance of $1.65 to $1.75 per share which we tightened to $1.70 to $1.75 on our third quarter call. We are maintaining our full year 2004 guidance of $1.85 to $2.00 per share.

Total company sales in the fourth-quarter of 428 million increased 61 million or 17 percent from the prior year. Favorable currency translation contributed roughly 15 million and sales from the Signal and Etex acquisitions contributed 46 million. Sales from our base businesses were flat. Operating profit of 53 million was 18 million or 50 percent higher than comparable operating profit in the prior year quarter, excluding asbestos. The incremental profit came from our 2003 acquisitions, reduced inventory write-offs as a result of more effective inventory practices such as improved procurement and product planning, and margin improvement from all our business segments except fluid handling.

Last year we had a 108 million pretax charge for asbestos in the fourth-quarter, which impacted 2002 reported operating profit. Please note that we have chosen to file our asbestos disclosure with this release in our 8-K so you do not have to wait two months for the 10-K. As is our practice, the asbestos disclosure is quite detailed, and I will not expand on the comments in the 8-K.

The press release has the numbers, but I would like to make some general comments on each of our segments. The fourth-quarter was a very strong showing for both the aerospace and electronics groups. Aerospace benefited from improved military orders, a most stable civil market, and the 8 million annualized savings from consolidating businesses under one management team earlier in the year.

During the second-quarter our electronics group accomplished the significant -- significantly strategic acquisition of Signal Technology that gives us a much larger presence in the military and defense electronics businesses. The Signal acquisition has gone very well. We retained a very good management team, we successfully closed the corporate office achieving 5 million annualized savings we anticipated, and in the fourth-quarter we closed the California microwave plant, consolidating it into the Arizona microwave operation. And importantly, operating profit was very strong in the fourth-quarter, exceeding our plans.

Sales during the quarter for the total aerospace and electronics segments were split 41 percent commercial and 59 percent military defense. The aerospace group sales split was 70 percent commercial and 30 percent military defense. And in the electronics group sales were approximately 10 percent commercial and 90 percent military defense.

In spite of the strong fourth-quarter, we had a conservative -- I'll put it in parentheses here -- probably too conservative outlook for 2004 with operating profits expected to be up slightly for the segment. In the aerospace group, potential declines in military and retrofit activity are expected to be offset by a slightly improved commercial aftermarket benefiting from our expectations of 150 planes coming off the desert. The group does continue to have very real demands from airframers for price, delivery and product support concessions.

Performance in our engineered material segment reflected continued strong recreational vehicle and truck markets partially offset by competitive pressures in the industry. The truck/trailer market demand for fiberglass reinforced panels returned in 2003 and RV demand for FRP remained strong, marking the second consecutive year of profitable sales growth for our Kemlite unit off the cyclical low in 2001. Industry association predictions for 2004 production activity suggests a 2 percent increase in RV units produced from 2003 and an approximately 30 percent increase in truck/trailer production.

Our 2004 plans generally incorporate the industry expectations for growth as well as expectations of strong competitive pressures and challenging increases in material prices. We continue to expect operating profits in this segment to be slightly higher in '04 compared to '03. Merchandising systems has struggled with terrible end market conditions for both coin changers and vending machines throughout the year. Workforce reductions occurred in both businesses during the year in an attempt to right size our operations to the market demand.

In the fourth-quarter, segment sales were just slightly below prior year while operating profit improved from the prior year loss. As you know, Brad Ellis has assumed responsibility for the group to work closely with me to build on the strong improvements that we already have -- that have already been made in both of these businesses. New product initiatives and productivity enhancements should improve operating profit moderately in 2004. Markets will remain a challenge.

Crane's fluid handling units continue to experience price pressure and demand weakness across their major end markets which include chemical processing, power and general industrial. We have yet to see improvement in these end markets. Excluding currency and the acquired Etex sales, sales actually declined 6 percent from the prior year's quarter. Operating profit was unsatisfactory at 10.9 million in the quarter, down 2.9 million compared to the fourth-quarter of '02.

The valve group performance was particularly disappointing and well below our own internal forecast as it was only marginally profitable with the results including $2.5 million of severance. The acquisition of the couplings and fittings business from Etex more than doubled sales of our Crane Ltd. business, and we are now disclosing it separately from valve. This acquisition was also on track during the quarter. There is a very good management team here which we have been able to retain. The (indiscernible) rationalizations are being executed as planned, and our sales and operating profit are as we projected, perhaps slightly better. We'd characterize our remaining fluid handling businesses, namely Resistoflex pumps and systems and supplies essentially flat in the quarter.

During 2003 in fluid handling we focused on rightsizing these businesses through facility rationalization, reductions in force, procurement initiatives, and moving standard product to our facilities in low-cost countries. These actions resulted in closure of three plants, three service centers, and a reduction of 10 percent of the US and Western European work force and it approximately cost us $8 million. At the same time, progress was made in strengthening the management teams across these businesses and process improvement in the operations. With the lower cost from rightsizing actions and the full year impact from the Etex business, we do expect our fluid handling segment to show strong operating profit increases in 2004.

Our controlled segment, sales and operating profit improved slightly compared with last year. The combination of increased build rates for Class A trucks, which increased demand for our air suspension valves and favorable foreign currency offset a reduction in demand for our other products due to continued weakness in oil and gas and industrial. We believe full year operating profit from this segment will increase slightly in 2004.

For the fourth-quarter 2003, we generated 57 million in free cash flow after dividends and capital expenditures. We generated 111 million in free cash flow for the full year, about as expected. We ended the quarter with net debt to capital of 24.4 percent compared to 31 percent at September 30. I would note that we ended the year with about 142 million of cash on the balance sheet, which will be used for acquisitions and to pay off the 100 million of 8.5 percent notes maturing March or April of this year.

In anticipation of your questions, a few other facts for the Company as a whole. Cost of sales in the quarter was 28 -- 285.6 million, SG&A was 89.5 million, and included in those categories was depreciation and amortization of $15.3 million. Working capital as a percent of full year sales at the end of '03 improved to 23.1 percent compared to 24.3 percent the prior year. Current projections would indicate our total pension cost for our defined benefit plans will increase approximately $2 million from 7 million in 2003 to 9 million in 2004.

For a quick summary of our actions to reduce headcount, we incurred over 3 million of severance costs during the fourth-quarter, most of which, as I said, was in fluid handling. Over the course of the year we incurred 12 million from severance costs and facility closures reducing head count by approximately 580 employees. Plans for 2004 include 2 million -- approximately 2 cents per share of additional severance in the first quarter, mostly in our European coin changer operations and some in fluid handling.

As I noted, we are maintaining our full year 2004 guidance of $1.85 to $2.00 per share, and we believe the first-quarter 2004 earnings per share to be in the range of 33 cents to 38 cents, which includes approximately 2 cents per share for severance in the quarter. Earnings per share in the first-quarter of 2003 was 28 cents, which include 5 million for severance costs. Having finalized our 2004 plan reviews, we believe full year 2004 free cash flow will be in the range of 110 to 120 million. With that I'll turn the call back to Pam.

Thank you, Eric. We're done with our prepared comments now, you're welcome to open up the call for questions.

(OPERATOR INSTRUCTIONS) Deane Dray with Goldman Sachs.

First would be some housekeeping questions regarding the top line. Could you break out for us the total company, what the contribution was from FX and acquisitions and then do it for the segments if you could please?

I'll do it for the total company, Deane, and then -- let me do currency first. Currency for the full year was -- impacted sales a positive 53 million, and operating profit by 2 million. Fluid handling of the sales was approximately $40 million. And for the quarter, currency was 15 million of sales, 12 of that was in fluid handling, again all positive. And really breakeven in terms of operating profit, because we had some operations in Europe that lost money. In terms of the acquisitions, I think we -- I think I broke that out -- we broke it out in the press release actually, didn't we?

For the total company?

Yes.

Could we get that again, please.

In the quarter, Deane, in the quarter sales of our base businesses were flat again. The 61 million increase in sales, 15 of that was from foreign exchange and 46 of that was from the two acquisitions. I don't have the full year right here with me on sales.

So organic is flat then across the company?

In the quarter.

And then next question would be regarding the '04 guidance. When we met in November for the analyst meeting, one of the -- you were only partly through the planning process. So you included what was essentially a cushion within the corporate expense of 12 million, if I recall. How are you thinking about that cushion now given the kind of performance you're seeing on the aerospace side -- and a suggestion that you're looking for improvement in the operating results on the fluid handling, you would think you would've been more aggressive there. So how does that stand?

That's a good question. We have obviously completed the '04 plan and we basically are keeping our guidance for the individual segments and at corporate, roughly the same as we provided in that institutional investor conference in November. Obviously, the fourth-quarter was stronger than we expected in aerospace and electronics, and that's why I say even though we kept our guidance kind of the same, we may be a little bit conservative there.

And obviously the fourth-quarter was worse in fluid handling than we expected, but we're kind of holding our guidance there in that segment as I think a lot of it was -- there's a fair amount of one time impact there. And as I say -- that's the story on the segment, and as I say, we're maintaining the corporate expense about at roughly the same level, Deane, as we did there, which had some cautionary cushion in it, shall I say.

And when will we get an update on what you would be doing with that cushion? Is it going to be mid year, end of first-quarter?

We're just going to hold it there all year until we use it, Deane.

And then a comment and then a question on acquisitions. A comment regarding asbestos, I do appreciate the fact that you put those details in the 8-K. From our perspective it really didn't look like conditions changed that much. And you had some optimistic comments regarding potential for a national trust legislation, we don't think that's a likely prospect in an election year. But appreciate those details.

And then last question is on the acquisitions, you had commented that some of your free cash flow you would look to be directing towards acquisitions. What are you looking at? How active is the pipeline? And what's pricing look like?

A couple of things. On the asbestos, we don't comment above -- beyond what we've filed, but we felt very strongly here that it was important to get it out, have the disclosure commensurate with the press release so there wasn't that two month lag, and that's why we did it. Let me answer your question on the sales and OP for the year for acquisitions. The acquisitions accounted for about $98 million of the sales in 2003, and about $16 million of the operating profit, and I think that number is in the press release. And as a result of that you can see that our core business, excluding those two acquisitions, was about flat, down a couple million dollars when you take out some of the unusual items.

I'm actually encouraged by that they because this was the first time, because of 9-11 and really what I described as a perfect storm in the market, this is the first time in the last four or five years that the core business hasn't declined pretty significantly. So I view the stabilization of core business as important, and in fact, we are looking for that to be up next year. What was the third question?

It was the acquisition, just the outlook.

The acquisitions -- we continue to see, I wouldn't call it a very full pipeline, but where we see opportunity is -- are in the aerospace and electronics segment.

What about the pricing of those assets?

It's competitive. Nobody' is stealing any businesses.

Thank you.

Matt Summerville with McDonald Investments.

A couple of questions. First, Eric, can you talk about what your expectation is for your valves -- for the core valves business in 2004? And then backup a little bit and talk through how you saw the year-over-year delta in your core business progress through 2003 and what your thoughts are as far as whether or not you've maintained or taken or lost market share?

Is that all in Valves, Matt?

Yes.

Well, we're not happy with the performance of the valve business. And I think a lot of this is market related where we just have not got the volumes and you've got substantial deleveraging in the plants. So we've had to aggressively close facilities, reduce headcount. And I think some of the disappointing results are also some of our own execution of performance.

In terms of moving forward, we took a lot of pain this year in our valve business both in the P&L and in executing the plant closures, it was highly disruptive to the business. And I feel that we should see improvement throughout the year, the improvement will be stronger in the second half than the first half, unfortunately. But that the combination of a focus on materially improving our businesses, we have generally stronger management teams in place. I remain confident about our ability to produce results here.

As far as what you're baking in now for your core growth rate in valves in '04 as far as your guidance?

That's a very good question. We are not assuming that we're going to get recovery in our end markets in valves. And so the way we have to make it is to make sure that the cost savings that we got and the expenses that we took to get those cost savings that we hold onto next year.

And as far as severance expenses in '04, I think you mentioned something in your prepared remarks, Eric. Is that anything anticipated as far as more rationalization, restructuring, severance etc., in fluid handling beyond Q1?

We've got some modest severance in the first quarter. We have no facility rationalization in our globe -- let me deal with, in our global valve business planned. If you looked at the fluid handling business in the aggregate, there's one, a very modestly sized, somewhat small plant that we're undecided on, but I don't consider it significant. It's pretty much -- we think our costs are in line, and it's now a matter of holding sales at these level and driving the margin improvement through the P&L.

And then lastly, with respect to Signal Technology, you talked about $5 million worth of cost savings that it sounds like you captured in 2003. First, is that a fair statement? And then second, I was wondering if you could talk about any incremental cost savings plans that you have with respect to that for '04?

The 5 million that I referred to was the close down of the corporate office, and that's a benefit that -- we didn't get all the $5 million benefit, that's at an annual rate. We're also looking for, in the fourth-quarter, and a lot of this was in December, we closed the California microwave business and we will get some savings going into next year. That's really it for single kind of closures or facility rationalizations. We think the business is right sized and in good shape, and we don't have any other changes planned there other than to try to grow it.

Just one follow up quickly. What was in the line item, miscellaneous income, that made that so high?

Miscellaneous income has miscellaneous income and expense, it also has netted in there gain and loss on sales of assets. In there on an ongoing basis we have the results of our Ferguson JV. There's legal expenses associated with a lawsuit where we're looking to enforce a non compete, we've spent a fair amount of money on. There's some modest gains and some sales from small pieces of property. There's a -- and there's a bit of a larger gain on some preferred stock that we had taken back years ago in an acquisition that was repaid in full and we had had it at a more conservative number on our books. It's a mishmash of a lot of different items, some of which are ongoing such as the Ferguson.

But I mean it wouldn't be fair for us to model $2 million from miscellaneous income on a quarterly basis going forward?

That's correct.

Okay. Thank you.

Scott Graham with Bear Stearns.

Good morning, Eric. Good morning, Pam. I've got a couple questions on two different segments. When you had your analyst meaning in November, I suspect that fluid handling's booked quarter results, the thinking on that was higher than what you came out with, and clearly you were able to -- a lot of this up in the other businesses. What happened at sort of after that meeting that really kind of changed the dynamics of earnings for the fourth-quarter fluid handling and where was really the catch-up to offset that weakness in fluid handling toward the end of the quarter?

I think the catch-up was clearly in aerospace and electronics. Everybody else was pretty on track except for the fluid handling, although everybody else kind of came in with what we needed. I think the -- in the fourth-quarter in fluid handling we saw -- we did not see the revenue levels that we anticipated in the book and ship business, number one. So you've got some of the deleveraging. Number two, we did take $2.5 million of severance which we hadn't planned on taking but realized we needed to do to have our costs in line given what was going on in the revenue trends. Number three, we incurred a fair amount of expenses, whether it's E&O or in inventory, kind of one time freight costs which we hadn't anticipated in Mexico, just poor execution on some of the initiatives.

So I would say first off it was market weakness on the revenue side, and then our having to go back in and take the severance and the costs, and then some unanticipated kind of one time cleanup as we took our physical inventory and our E&O to make sure that everybody was 100 percent in line with policies and that cost us some money in the fourth-quarter, and we didn't hesitate to take it.

You referred a couple of times to some competitive pressures in engineered materials. Could you elaborate on that?

As you know, we have very strong market shares here. We are seeing the European come in on the high-end product and a little bit in transportation and RV competing against us on some high-end product. One of the competitors had something that we couldn't match, we now have a competing product that we're going after. But there was a little -- there was definitely some noise there. And on the low end we've got a Mexican competitor who was coming in in the building materials and mass merchandising segment. This tends to be a lower margin business, but we've lost a little bit of share there to them. And that's clearly a -- these are clearly factors in the market, and they were a little bit -- I would say I little bit stronger in the second half of this year than they were in the first half.

Yet it looks like the core sales in engineered materials was quite --.

Sales are good, but the markets are good. We've tried to take all this into account as we look at 2004. A little bit stronger market. Yes, we've got these competitors but we're coming back after them hard with our competing product. We've also got the -- the European -- our European competitor's got to fight a substantially higher euro cost base, and we've got to watch ourselves in material resin prices here. But could I think we're in good shape there and we have a world-class business, as you know -- the way we run it.

Actually I do have one other question about one other business. In electronics, operating margin really jumped off the page this quarter. And I'm wondering, is there a seasonal implication there, or is that something that because of the corporate office that we might see that type of year-over-year margin improvement in electronics for the --?

No. We had very strong shipments in the last 60 days out of Signal. We had some costs that we weren't as high as we thought that they were going to have. Those margins are not sustainable. We're happy to have it, it was a very good quarter and really excellent results. But our guidance is not that we're going to sustain those margins. I think overall our guidance is talking about margins in the 20 percent, slight plus, for the electronics and aerospace segment.

Very good, thank you.

Wendy Caplan, Wachovia Securities.

Thank you. Good morning. I have a question about your working capital (technical difficulty) for '04. You brought down your working capital usage somewhat in '03 but it's still not at stellar levels. What are your goals for '04 and how do you expect to achieve those?

First, I would agree with you that our working capital at 23.1 percent of sales is not at stellar levels, and I'd like to see it get to 19 or 20. And I think the main culprit there, as you know, is inventory and I'm totally focused on driving inventory out of here. Our goal has been to try to get 1 to 1.5 percent improvement in working capital, and I think we got that this year. So I'm not -- we are clearly making progress every year, and it's a matter of putting the process improvements in place to make sure we do that.

With respect to the core working capital next year, we're looking for another improvement, something like 1 percent, if you just look at receivables inventory and payables. However, there's some accrued liabilities on the balance sheet relating to synergies that we're taking with respect to the acquisitions that are going to take some cash away from us. Okay? So, I forget the exact number, it's 70 to 10 million. This is cash that we're going to spend to close California, to close the Wash. facility, we just announced this past week that we're going to be closing Hellmans (ph) which was part of the Etex acquisition. So we're spending some cash there to execute on those synergies and make sure that we've got those reduced costs going into next year.

But it's primarily then, Eric, the inventory line that we should be focused on to sort of judge the progress here?

Yes, that's what I'm focused on. As you know, we write every receivable off, 100 percent if it's over 90 days. And every time I benchmark our receivables at 50 days, we're pretty good if not among the best in class there. The inventory turns ended the year at about four times, and our goal next year is to get to 4.35 times, and frankly that's -- we'd like to get -- that's part of the progress that we're trying to make.

And which segment should we look at in terms of the greatest opportunity for the inventory declines?

Fluid handling.

That was my guess. And speaking of fluid handling --.

You asked that politely, though.

Yes, thank you, and I'll try to be polite again. I am terribly disappointed at the fluid handling numbers yet again. I think we've all had this discussion over time. It does -- you mentioned execution issues a couple times, and it kind of feels like that, although certainly the end markets have been weak. As we kind of look at this business and we go back to fundamentals, can you help us walk through why -- is this a good business for us to be in; why is that? Has the world changed and makes the valve business less interesting for a U.S. company? Can we ever get the cost down enough to compete with Asian competition here, etc.? Can you address some of those issues, please?

My first observation is we are just as unhappy and disappointed in our fluid handling business as you are. So I don't think there is any disagreement on that. We continue to feel strongly that there is no reason for us not to have a very attractive business here, margin-wise and return-wise. We generally have strong market shares in niche markets, powerful brands. When you have that as a starter, there is no reason not to get returns. We have been -- we are in the wrong part of the market. We are in chemical processing, power, marine, general industrial, which means the pulp and paper, metals and mining, etc., etc., and those markets have been severely hurt in the last three or four years. And that volume deleveraging and the excess capacity has really ravaged operating profit.

If I had known three years ago that those markets were going to continue to decline at the pace that they have, particularly chemical processing, probably would have done a lot of cost reductions sooner than we did. However, didn't have a crystal ball. I feel that we have come a long way in terms of rationalizing facilities. I feel we've come a long way in getting our costs in the developed countries down. I think we are up to 1500 people in India, China, Hungary, and Mexico, so that would have been a very small number three years ago. So we made a massive migration to our own plants in these locations, so we control quality. Again, which is where you need to compete on a global basis.

I feel that we've made some missteps here, but we made a lot of progress in getting higher quality management talent in the businesses and focused on improving. We have a long way to go. Our businesses which historically have been our worst run businesses. So, as I said at the outset -- as I sit here today, Wendy, we don't have big restructuring charges or substantial additional facility rationalization in our current plans, as long as we get a reasonably stable revenue outlook here. We think we are okay to produce the results that we expect to produce for you, which we are determined to do.

At times I look at this, I know you look at this -- you can look at this as a problem, but you can also look at it as a huge opportunity because the underlying profitability of Crane, if the fluid handling results start to move in the direction in which we expect them to, in my view could be hugely -- really a very powerful underlying trend in our earnings. So that's kind of how I think about it.

Thank you. We will keep an eye on it, thanks.

Me too.

David Smith with Smith Barney.

Some quick housekeeping stuff. Just given the pace we were going at, I didn't catch the cost of goods sold and SG&A number. Can you quickly comment on the tax rate going forward in 2004?

The cost of sales was 285.6 million and SG&A was 89.5 million, and depreciation and amortization was 15.3 million. Our tax rate going forward for the foreseeable future is 31 percent.

You talked about pension, the expense going up by about 2 million in 2004. Is there any impact as well on contributions and assumptions?

We haven't changed any assumptions or -- I haven't paid a whole lot of attention to it, because it's not a big deal.

David, what we shared with you at the November analyst conference would still hold.

What about health care, anything there?

Well, I should have paid you to ask that question, David. I think I mentioned this a little bit at our institutional investor conference. In December of this year, as part of our philosophy of moving to an integrated operating company, Crane has had 89 separate nonunion health and benefit plans. In December of this year, we moved to one plan, one core plan with several options on it. As a result of that, our health and benefits costs, rather than going up 60 percent, basically are going to be flat '04 versus '03. And more importantly, as we move people around in our company, we no longer have to negotiate the walls of health and benefit plans. Everybody's got the same plan and makes it a lot easier to move them.

Okay, sounds good. Just coming back to that miscellaneous net number, I know that it's not a big number, but was there anything that drove it up? You mentioned a bunch of offsetting items.

Well, there was a larger than usual -- an old divestiture that happened before I got here, took back some preferred stock. Typical Crane, we didn't put it on the books or anything, and then seven years later the company shows up and pays it off. So there was a modest gain there. But again, there are some underlying things that happen every month that are positive here, too.

Just given the history, that's where I'm coming from. (multiple speakers) in the past. On fluid handling then, can we take away that you really don't expect any top line improvement next year, is that fair to say?

Away from the annualization of the Etex acquisition. Other than that it's -- and there's some currency translation that gets in there that's going to make the numbers look like there's sales increases, and our people have been all over this in a very intense way so that we're not adding costs for what is that translation expense. It's flat to just a touch up.

Okay. Well, if we look at the core this quarter, it was down what -- 5 or 6 percent core?

Yes, including the currency.

So is there some sort of an indication of a bottom here, is that kind of what you're saying? Or should we kind of assume modest declines in the first half offset by a better than increase in the second half?

No, we're assuming it's relatively stable here through the year. I'm just trying to think for a minute, David. I think stable through the year is the best answer I can get -- I can give you at this point.

These are your comps?

Well, we just have a lot going on. There's a lot of new product coming. I'm okay with the flat sales. It's a good question, but --.

Any kind of a market decline might be offset by new products?

We're assuming that the chemical processing industry does not get worse. We're assuming that the power industry gets a little worse, that's the gas turbines. But that general industrial activity, the book and ship business -- the MRO business, if you will, aftermarket MRO business, remains pretty -- it is pretty solid here in 2004.

So kind of maybe up a little bit? Okay. Just on another point of strength, it sounds like heavy trucks have certainly seen a bit of a bend in the corner and are turning up -- 30 percent numbers, is that something typically that you see coming out of a downturn? And then, just is the (indiscernible) exposure we have here on engineered materials and on Barksdale?

The principal exposure is engineered material and in Barksdale, that's exactly right. I think trucks were up this year. I forget the exact numbers, Pam can get them for you later. And the industry is calling for them to be up next year. The industry is probably a little bit more aggressive than what we're assuming.

So it's a point of strength. Okay, thanks.

Ned Armstrong, Friedman Billings Ramsey.

Good morning. With regard to your merchandising systems business, has the new year brought any encouraging signs whatsoever in any of the end markets there?

Unfortunately no, Ned. Neither in the coin changer business or in North American vending.

And what type of big picture items would you look at as being a harbinger of change in that particular business?

I think the keys for the North American vending business are the -- obviously commercial office vacancies; industrial space, and employment are the two keys that we look at. And we really don't see that improving next year, so we're looking for -- we've got good new product flow coming out in Europe for vending, and in the -- and in the (indiscernible) as well as for our coin changing business.

And would these new products be replacing your existing product at a given location or is it entry into new niches?

The European product is a tabletop coffee machine which will be new for us. But the other ones are modernization upgrades of some of our existing lines.

Thank you.

(OPERATOR INSTRUCTIONS) Steve Tusa with J.P. Morgan.

Very nice aerospace margins, and you noted that maybe 26 percent is not sustainable for the near-term. If I heard you correctly, the source of that was strength in electronics -- on the electronics side, am I correct on that?

And the aerospace group, both of them.

So what markets in particular were you surprised by in the fourth quarter, I guess first of all?

Aftermarket in the aerospace group was better than we expected.

Commercial or military.

A little of both. And in electronics, as I indicated earlier, we shipped a lot more than we had expected. So sales and the leverage that you get from that all came in.

That leads into my next question. Historically -- I know maybe things have changed in the industry with the pricing, but this business has done high 20s margins, mid to high 20s margins. What are you assuming for an after market increase next year, and how much leverage would we see in the number if we had a nice pickup in air travel? I know you said that kind of low 20s is the current target, could we see something that's a slight discount to this 26 percent next year if we have a nice ramp in air travel?

We're not assuming that. We're kind of assuming a lower military aftermarket. We're looking for a more -- a stable civil/commercial aftermarket. And obviously we've got strong price pressure that we give back every year to Boeing, Airbus and the major airframers. Now we may be too conservative here, but at the moment we're not planning on that aftermarket picking up in a particularly strong way. Just hoping that it's got a base.

So if you did see a nice pickup there, that would be upside?

If we saw a pickup in aftermarket it would be a good upside, no question about it. But we didn't want to plan on it.

Understood. Lastly, on free cash. That was a very -- maybe I missed it, I missed the first five minutes of the call, I don't know -- the working capital performance in the fourth quarter, do you include deferred taxes in that working capital number? Or is there anything kind of one kind that fits in there?

I don't think so.

So that's maybe a little bit of a --?

Fourth-quarter is always historically by far our strongest cash flow quarter. And we kind of -- we worry about cash flow a little bit all year because the first quarter is nothing, the second quarter is a little, third quarter is a bunch, and then fourth quarter it rains.

So no deferred cash contribution in there or anything?

No.

It's a 3 point working capital.

And then lastly, sorry, one more question on engineered materials. On the building product sides, did you mention that that was a little bit soft? Is that mostly kind of residential on a -- kind of peaking or continued weakness in not res? What is your kind of exposure to res and nonres?

I don't know. It's mostly residential and it's a little -- some of it's a little market and some of it's market share from the Mexican.

Great. All my best to George, by the way, and thank you very much.

Wendy Caplan with Wachovia Securities.

Sorry, Eric, but I have one other question about fluid handling in terms of raw material costs. How much is that hurting you now and what do you expect going forward?

Wendy, that's an excellent question. The fact of the matter is in fluid handling we did not plan on pressure from material costs. And in fact, in the last 45 days we are seeing suppliers come to us with requests for what are pretty substantial increases. Material cost, as you know, generally in that business runs about 40 percent of sales. So, this is particularly onerous in Asia here and in China is where we're seeing a lot of this, and it's just going to have to be one of those factors that we're going to have to address and deal with.

But there is no question, in the last 45 days that material price pressures are coming back into market in a very, very powerful way. Now, we're not agreeing to them, and all those negotiations are going on and it's offset by a lot of our activities to -- that we're already -- currently engaged in to reduce suppliers and lower material cost. But it is a new issue in the marketplace, and a very timely question.

Either any other questions?

We are standing by with no further questions at this time.

Very good. Thank you, everyone. And thank you for your time. If you have any further questions you're welcome to call me directly. Otherwise, have a great day and we'll look forward to talking with you at our next quarterly earnings call. Take care.

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect.