Illinois Tool Works Inc (ITW) 2002 Q4 法說會逐字稿

Good afternoon.

Welcome to the ITW 2002 Fourth Quarter and Full Year Earnings Release Conference.

All participants will be able to listen only until the question and answer session.

This conference is recorded at the request of ITW.

If you have an objection, you may disconnect at this time.

I'd like to introduce our moderator, Mr. John Brooklier, Vice President of Investor Relations.

Good afternoon and welcome to our fourth quarter and full year conference call.

I'm John Brooklier, Vice President and Director of Investor Relations.

And joining me is Jon Kinney, our CFO.

Jon and I are both pleased that you could join us.

By now you should have received our fourth quarter earnings release.

To summarize, we're pleased with our performance in 2002 particularly in light of some difficult end markets we had to deal with last year.

In the fourth quarter of 02 in particular our top line grew 7 percent.

Our income from continuing operations excluding goodwill and amortization increased 10%.

And our operating margins improved 90 basis points to close at 15.2 percent.

For the year, revenues were up 2 percent.

Income from continuing ops increased 7 percent.

And operating margins moved up 100 basis points to 15.9 percent.

Some of our income growth was tied to improving base business performance in our North American and international segments as well as the positive impact from currency translation.

For the fourth quarter, total company based business finished at plus 2 percent.

And that's certainly a long way from the minus 6 base business number we posted in the first quarter of 2002.

But even with our stronger fourth quarter financial performance and the incremental improvement in some of our end markets, we are still uncertain about the state of the North American and international economies in 2003.

To that point, Jon Kinney will talk to you more about this later in the conference call when he walks you through our first quarter and full year 2003 earnings guidance.

Let me run over the agenda for today's call.

It's similar to what we've done in the past.

Jon Kinney will give you a financial overview of our fourth quarter and full year performance.

I will then come back to give you additional color on our performance for our four manufacturing segments.

Jon will then step in to discuss our first quarter and 2003 full year forecast.

Finally we will open the call to questions.

And to repeat the long-standing rules we've put in place.

Our call today is related to fourth quarter earnings results and our first quarter and 2003 forecast.

Any questions not related will result in me asking the operator to move on to the next question.

And as usual I'm asking each person to ask just one question and one follow-up question so we can accommodate everyone who wants to ask a question.

You are certainly free to come back after your first question later in the call to ask another question if you would like.

Another housekeeping item, I would like to remind everyone that statements regarding the company's earnings estimates contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995 including without limitation statements regarding the company's 2003 forecast.

These statements are subject to certain risks uncertainties and other factors which can cause actual results to differ materially from those anticipated, including without limitation the following: One, a downturn in the construction, automotive, general industrial, food retail and service or real estate markets.

Two, deterioration in global and domestic business and economic conditions, particularly in North America, the European community and Australia.

Number 3, the unfavorable impact of foreign currency fluctuations.

Four, an interruption or a reduction in introducing new products into the company's product lines.

And five, an unfavorable environment for making acquisitions or dispositions domestic and international, including the adverse accounting or regulatory remarket values of [Kennedy].

One final piece of business.

The telephone replay for this conference call is good through midnight on February 12.

The number is 402-530- 7996.

Let me turn the call over to Jon.

Good afternoon, everyone.

Let me review some of the highlights for the quarter.

It will be repetitive on some of the things John said, but also add issues that I will be providing more details on.

First, revenue did increase 7 percent over last quarter, that compared to the 4 percent increase last quarter.

Operating margins improved 90 basis points over last year.

Income per share from continuing ops increased 10% over last year.

Free cash flow continued strong at 281 million for the quarter and 1.1 billion for the year.

And return on invested capital for the quarter was 14.8% and 15% for the year.

This represents an approximately 220 basis point improvement for the quarter and the total year.

In short, the fourth quarter represents another step down the path of improved financial performance.

Now to the details.

Our 7 percent fourth quarter revenue growth was 300 basis points higher than the third quarter.

This was a result of four factors.

First, base business revenue grew 2 percent.

This performance was 200 basis points higher than last quarter.

Second, translation increased revenue growth by 3 percent.

This was about the same as last quarter.

Third, acquisitions increased revenue growth by 1 percent.

This performance was 100 basis points lower than last quarter.

And fourth our leasing and investment activity added 2 percent to the total revenue growth compared to no effect last quarter.

In short, our 300 basis point improvement in revenue growth compared to the third quarter was due to the net effect of a 200 basis point improvement in the base business growth, a 200 basis point improvement in our leasing and investment, and a 100 basis point decline in slower acquisition activity.

Our base revenue growth was made up of 1 percent growth in North America and 3 percent growth internationally.

In North America, the 1 percent growth represented 200 basis points improvement over the last quarter.

Internationally, the 3 percent growth represents a 300 basis point improvement over last quarter.

In short, both North American international business based revenues continued quarter to quarter improvement.

To add further substance to these improving conditions you may recall we started 2001 first quarter with revenues down 6 percent in North America and down 7 percent internationally.

John Brooklier will provide more details when he discusses our manufacturing segments.

Turning to operating margins we gained 90 basis points in the fourth quarter compared to last year.

Manufacturing accounted for 70 basis points of improvement and leasing and investment accounted for 20.

Although this was solid improvement it was considerably down from the 140 basis point gain we achieved in the third quarter.

This reduction in margin improvement was mainly due to higher fourth quarter expenses.

Pension expense was $6 million higher.

Goodwill impairment was $8 million higher.

And restructuring was $5 million higher.

These higher expenses accounted for 84 basis points of margin reduction.

Before I leave margins, let me update you on Premark's progress.

If you recall, their margins were 9 percent when we acquired them at the end of 1999.

We set our target improvement and profitability at 18 percent by the end of 2005.

We ended 2002 with margins of 13 percent.

This was 70 basis points lower than our annual plans called for.

And this was mainly due to higher than expected warranty costs on a discontinued product line and softer than expected sales levels.

Our plans for 2003 call for margins for Premark to be 15.7 percent with sales still 7 percent below 1999 levels.

If we are at 1999 levels for 2003, we estimate our margins would be at 17.3 percent.

In short, we believe we are on track to achieving our target for Premark.

In our leasing and investment segment, fourth quarter income was up $10.8 million over last year.

This improvement was mainly due to four reasons.

First, we made a mark to market adjustment of $24 million on a swap agreement associated with our commercial mortgage agreements.

This gain was mainly a result of declining interest rates used to discount future cash flows to calculate the fair market value of the swap agreement.

Second, we realized an $8 million gain on the sale of a former manufacturing property.

Third, $6 million of additional income was generated from new investments in our telecom leverage leases which we made earlier in the year.

Fourth, the net effect of these positive factors was reduced by a $32 million writedown of two airplanes which we currently lease to United Airlines.

In the nonoperating area, interest expense was up $3 million due to a shift from short-term -- from short-term debt to higher cost long term debt.

Other nonoperating expenses was down $3 million, mainly due to higher interest income resulting from our increased cash balances.

Finally, on our income statement at least, our effective tax rate was held at 35 percent.

Turning to the balance sheet, our inventory month on hand continued at the 2.1 month level and our DSO was 57 days consistent with prior quarters.

Our debt to total cap was 19.2 percent and excluding our leasing and investment nonrecourse debt it was at 11.7 percent.

Our cash position grew mainly because our free cash from operations exceeded our acquisition and investment activities.

Free cash for the quarter was $281 million.

During the quarter we spent $82 million on acquisitions $20 million on debt reduction and $70 million on dividends.

Free cash from operations exceeded these expenditures and coupled with a $208 million proceeds from the sale of two of our consumer businesses, our cash position increased quarter over quarter by $337 million.

Capital expenditures for the quarter were $79 million and the depreciation expense was $65 million.

Finally on the acquisition front we acquired five companies in the fourth quarter with total revenues of $73 million.

Year to date we have closed 21 deals with revenues of $195 million.

Our current acquisition backlog is currently significantly higher than the revenues we acquired in 2002.

By segment the number of acquisitions was as follows: We had one in Engineered Products International and four in Specialty Systems North America.

Before I leave acquisitions, let me update you on the divestiture of our consumer segment.

We closed our West Bend and Precor divestitures in the fourth quarter.

Florida Tile is in the final stages of retaining financing and we hope to close this deal in the first quarter.

We are currently estimating no significant gain or loss on these transactions.

Now John Brooklier will finish our review of the quarter with the discussion of our manufacturing segments.

Thank you, Jon.

Before I give you additional color on our manufacturing segments I want to update you on key economic data that I share with you on a quarterly basis.

This data serves as a proxy for the health of our very diversified end markets.

First of all the Institute for Supply Management index, ISM index took a sharp turn upward in December.

Specifically the ISM December number rose above 50 percent for the first time since August.

ISMs's December level of 54.7 percent was better than the 49.2 percent posted in November.

Even so, the ISM number stayed close to the 50 percent level and that's the line of growth/no growth virtually all year.

This number should suggest to us that the end markets we are dealing with remain mixed at best.

Secondly, U.S. industrial production data, excluding technology, continued its slow but study climb upward in December.

The December number was plus 1.3 percent versus plus 1 percent in November.

This was slightly better than the plus .5 percent in October and much much better than the minus 4.9 for full year 2001.

Remember that our industrial systems businesses, which generated a 1 percent decline in the base business revenues in Q4 match up best with this particular index.

On the international side, the various indices and data are generally more positive than negative, but still somewhat mixed.

While the Eurozone purchasing managers' index came in at 48.4 percent in December versus 49.5 in November the industrial production numbers by region and country were more positive.

Eurozone industrial production was at plus 3 percent in November versus plus 1 percent in October.

And the industrial production data for Germany and France both improved in November with Germany at plus 2.4 percent and France at plus 1.5 percent.

The UK remained slightly negative in November coming in at minus 1.2 percent.

With that as backdrop lets take a look at our four manufacturing segments.

Starting with North America Engineered Products, revenues were plus 3 for Q4.

That consisted of plus two from base businesses and plus one from acquisitions.

Again, plus 2 from base, plus 1 from acquisitions.

Construction and auto are the two biggest pieces of the segment.

And their performance was somewhat mixed during the quarter.

In Q4, construction based revenues were essentially flat while our auto and general industrial businesses grew their respective top lines.

Let's take a look at construction as a total group first.

The flat based business revenues were due to the same dynamic that's been in place for more than a year.

That's simply our commercial construction businesses continue to post negative revenue numbers.

The good news is that while base commercial construction revenues were down 5 to 7 percent for the quarter this is less negative than when these businesses were down 10 to 15 percent earlier in 2002.

We are forecasting, perhaps a bit conservatively, but still forecasting commercial construction to soften a bit more in 2003 before we hopefully start to see slow improvement in the second half of the year.

It would, however, be good news for us if our commercial construction numbers had bottomed in Q4.

Moving the new housing portion of our construction activities.

These ITW businesses grew base revenues 5 percent which is consistent with our performance over the past two quarters.

We believe and continue to believe that the underpinnings for a relatively strong new housing market, low interest rates and strong housing starts are essentially still in place.

Since we usually forecast in a conservative manner we expect housing starts to decline 3 to 4 percent in 2003.

Even with that, that would still be a healthy level of builds for us.

And finally in the last major piece of our construction area, our remodeling rehab piece of construction, and again, those are products that we sell through the big box stores such as Home Depot and Lowe's, generated approximately 15 percent growth in the fourth quarter.

We believe the demand for our Pad Load, Buildex, Rampshead, Redhead and Wilson Art products will stay strong in this category in 2003 as home improvement expenditures are expected to grow 3 percent in 2003.

Our success in '03 will be predicated on our ability to maintain a presence at Home Depot and grow our product offerings at a rapidly improving and expanding Lowe's.

Looking at total construction on a full year basis our base revenues from down 2 percent for the full year.

Moving to auto.

In auto, the fourth quarter finished about where we had anticipated.

Base business revenues for the quarter grew 10 percent as we continue to benefit from a respectable Q4 auto build in North America and we added product content on light vehicles.

In Q4, builds per light vehicles, that's cars and light trucks, were up 2 percent from the prior year period.

Digging a little deeper into the numbers, GM led the way in builds in Q4 with a 9 percent increase.

Ford, which was at minus 5 percent, and Chrysler, which was at minus 3 percent, mitigated overall builds for the quarter.

For the year, total OEM builds were plus 6 percent and the breakdown for the OEMs on a yearly basis was GM plus 10, Ford at plus 3, and Chrysler at plus 3.

Looking ahead, we expect builds to be down 8 percent in 2003 and estimates coming out of Detroit seem to agree with our projections at this point in time.

Thus far in the first quarter of 03 builds appear as if they will be flat year-over-year.

To get to minus 8 percent build for the year we will have to experience a relatively sharp decline in production in Q2 or Q3.

Stay tuned for further details there.

One bit of good news, sales in December permitted the big three to take light vehicle inventories down to 62 days in December from a high 93 days on hand in November.

Once again, GM is leading the way with 53 days on hand.

Ford and Chrysler have 70 and 75 days on hand respectively.

On a full year basis for all of our auto activity in North America our automotive base revenues grew 10 percent.

That's full year 10 percent growth.

Finally in this category, we also continued to get good news from our industrial products based businesses the Engineered Products segment.

As a category, business base revenues from up 1 percent for Q4.

Positive revenue contributions from units such as Mini Grip Zip-Pak, industrial plastics and fluid products and our MRO products offset declines in our electronic component packaging business.

One highlight continues to be strong demand for the Mini Grip Zip-Pak product applications.

These are coming from an increasing array of food and other industrial packaging customers.

For the full year, our industrial businesses, the entire category of industrial businesses saw their base revenue decline of 4 percent, which is not bad considering these same businesses were down nearly 15 percent in the first quarter of '02.

Moving to our second segment, international Engineered Products.

Revenues were plus 15 for the quarter.

And that 15 percent growth consists consists of plus 6 from base business, plus 1 from acquisitions and plus 8 from currency. 6 from base, 1 from acquisitions, 8 from currency.

Similar to North America, the principal businesses in this segment are construction, auto, and industrial based.

And similar to the third quarter results from this segment, we experienced across the board positive base revenue contributions from these businesses.

Starting with construction, fourth quarter base revenues were up 11 percent.

With growth emanating from Europe and Australia.

Our European based construction revenues grew 4 percent with sales ranging from strong in countries such as Spain, Portugal, France, and the UK to revenues that were essentially flat in Germany.

In Australia, base revenues grew 11 percent as the Paslode and Buildex units as well as many of the businesses associated with our Siddons-Ramset acquisition of May 2,000 took advantage of stronger new housing and renovation/rehab market opportunities.

On a full year basis, construction based revenues were up 3 percent in Australia.

Looking ahead, we expect the European construction markets to decline modestly for commercial housing and renovation/rehab in 2003.

In Australia for if upcoming year, we are forecasting residential construction activity to be down 7 percent and commercial construction markets to be up approximately 3 to 4 percent.

Looking at automotive, our automotive businesses in Europe posted their strongest based revenue growth of the year in Q4.

Our base revenues grew 8 percent in the quarter thanks to our plastic component metal fastener business taking advantage of a slightly improving auto build which was close to flat for Q4.

Auto OEMs including Mercedes to Fiat experienced build declines of 3 percent for 2002.

On a full year basis our auto based revenues were flat year-over-year.

With auto builds forecasted to be at plus 3 for 2003 we are cautiously optimistic about our growth prospects in 2003.

And finally in this segment the other contributor is the industrial based business units.

And similar to North America, these businesses serve a wide array of end market customers with plastic components, electron products and packaging, as well as polymers and MROs that I mentioned in talking about the North American segment.

Collectively these business units repeated their performances from the third quarter with plus 6 revenue growth for Q4.

For full year 2002 the industrial based businesses were up about 3 percent.

Switching from the Engineered Products segments into North America Specialty Systems, revenues were at minus 1 in Q4.

That consists of minus one from base business, plus one from acquisitions, and minus one from divestiture.

The fourth quarter continued the trend of subsequential based revenue improvement throughout 2002 with base revenues moving from minus 8 in Q1 to minus 5 in Q2 to minus three in Q3 and minus 1 in Q4.

Even so it's safe to say we haven't experienced any type of significant rebound for the businesses in the segment which rely to a great degree on Cap Ex investments by companies who are our customers.

A good example of the lack of Cap Ex spending is our food equipment business.

Base revenues of minus 8 for food equipment in the fourth quarter were directly tied to the continuing sluggishness in their two key end markets, the first being food service which is the restaurant institutional side of the business and food retail which is the supermarket side of what they do.

Food service. which accounts for roughly 50 percent of the sales, continued to experience weakness in the upper tier white tablecloth restaurants..

A weak economy, lack of business travel, and slower hotel bookings continue to hurt this upper end dining category.

Food retail, again the supermarket side of what they do, and roughly 25% of their business is still feeling the pinch of consolidation and waiting for a rebound, or I should say a meaningful rebound, in both capital expansion and capital retrofit investments from the supermarket chains.

The full year equipment based revenue decline of 5% is testimony to the underlying weakness in the markets But even with the weaker top line, there are still very good news for food equipment North America.

Thanks to completed and ongoing 80/20 programs, operating income increased more than 40 percent and operating margins improved nearly 600 basis points for the quarter.

For the year, food equipment North America moved operating margins up nearly 400 basis points.

In industrial packages our signal business posted its best revenue number of the year. 11 percent growth in Q4.

Part of that growth was easier comparisons but the other part relates to the pick up in demand for consumable strap products in both plastic and steel.

It will come as no surprise to anybody that the machinery side of what they do continues to be weak.

For the full year, signals based revenues were down 5 percent.

Other businesses in this segment include our welding business, which essentially had flat base revenues in Q4.

Though they were up some 2 percent on the top line for full year 2002.

The red hot first half of the year end markets such as oil and pipeline and shipbuilding continued to cool off in the second half of the year for our welding businesses.

Finally, our finishing, or also known as our paint spray business registered 5 percent top line growth in Q4, their best number of year.

They have benefited from limited capital projects from auto OEMs for the quarter.

For the year, their base revenues were down about 6 percent.

Finally, our last manufacturing segment is international Specialty Systems.

Revenues were plus 8 for Q4.

That's made up of plus 1 from the base, plus 2 from acquisitions, plus 8 from translation, and offset by a 3 percent decline from divestitures, which is the disposition of a Signode operation in Asia.

Again, that's plus one from base, plus 2 from acquisitions, plus 8 from translation, and minus 3 from a divestiture.

Similar to our Engineered Products International segment, the big top line impact was from translation.

And similar to Systems North America, the Systems International bases continued to be hamstrung by the lack of spending from our customers.

In our industrial packaging category, base revenues for this category were flat in Q4.

That's marginally better than the flat based revenues for Q3 but significantly better than the minus 11 base revenues in the first quarter of '02.

Signode Europe produced essentially flat base revenues in the fourth quarter while Asia was up 10 percent.

Like North America the signode operations experienced limited growth via the consumibles rather than the capital machinery.

For the full year, Signode based revenues were down 8 percent.

In food equipment international, base revenues in Q4 were essentially flat year over year.

This represents sequential improvement from the minus 7 to minus 9 base revenue range in the first nine months of '02 -- for the full year, food equipment was down 6 percent.

As we said many times before, food equipment success should be measured in terms of its operating income and margin performance.

For the year operating income was up 20 percent and margins improved 250 basis points.

Lastly our finishing businesses produce base business revenues of minus 2 in Q4, their growth, like in North America, is tied to customers in the auto, office furniture, and general industrial sectors.

These are all end markets which were flat to slightly down in Europe and Asia in 2002.

And finishing's full year revenue base decline of only 1 percent is tribute to their market and product selling capabilities.

That is the end of my remarks.

Jon Kinney will detail our 2003 full year and first quarter forecast.

Although we experienced a positive trend in our revenue growth in 2002, let me echo Jim Ferrell's comments in our press release.

And I quote, we are uncertain about the future of the economy as well as the strength and sustainability of a potential recovery.

Unquote.

For us, the risk centers around auto production and residential construction.

Declines in these markets would directly reduce demand for our fasteners, tools, and components and indirectly radios demand for many other products such as industrial packaging, welding, paint spray equipment and others.

Incorporating a downside for these concerns our forecast for 2003 is $3.02 to $3.42 per share.

The base revenue growth supporting this forecast is expected to be in a range of minus 2 to plus 2 percent.

Other assumptions included in the forecast are as follows: Our exchange rates would hold at today's levels.

Our acquired revenues would be in the 200 to 600 million range.

Restructuring costs would continue at the 55 to $60 million level.

Issuance of restricted shares, which we are doing in the first quarter, would reduce -- or would increase our costs by $18 million.

Higher pension costs due to lower discount rate assumptions would increase our pension costs $15 million.

Good will impairment costs primarily to occur in the first quarter would be from 0 to $10 million.

And reduced L&I income of approximately $18 million due to the reduced discount rates.

And finally, we would hold our tax rate at 35 percent.

Overall, if we hit the midpoint of this range, full eight year income of continuing operations of $3.22 cents her share wab 7 percent higher than last year.

We believe this would be solid performance with no growth in the base revenues.

If the economy continues its slow improvement income per share could be up 13 percent, the high end of our range.

If the economy declines further related to significant declines in auto production and residential construction, we believe we can hold earnings close to 2002 levels.

For our first quarter we are forecasting income per share from continuing operations to be within a range of 59 to 69 cents her share.

The low end of this range assumes a minus 2 percent decline in base revenue and the high end a plus 2 percent increase.

In addition the quarter includes approximately 10 to $15 million of restructuring costs, $12 million of higher pension costs, and $4.5 million of costs associated with restricted shares, and approximately $10 million of cost for anticipated goodwill impairment.

If we hit the midpoint of this range of 64 cents her share, earnings per share will be 2 percent higher than last year.

John, back to you.

Thank you, Jon.

We'll now open the call to questions.

Thank you, sir.

If you would like to ask a question, please press star 1 on your telephone key pad.

You will be announced prior to asking your question, and you can withdraw a question by pressing star 2.

Once again, please press star 1 if you would like to ask a question.

Our first question is from Blair Bromely at American Express Financial.

Good morning, gentlemen.

Good morning. -- good afternoon, I should say.

Sorry about that.

Okay.

In the international specialty, you guys did take some goodwill impairment charges.

I do not recall hearing you put an amount to that.

Is that something you can give us clarity on, please.

Goodwill impairment was $8 million for quarter.

And what you are looking at doing in the first quarter, an additional $10 million or so is related to what, please?

Well -- and you know, the requirement is that we do an annual review on -- for goodwill impairment.

And in the fourth quarter we do kind of a -- I can't say this is tradition because it is the first year we've been through it but when we finished up our goodwill impairment in the first quarter of this year, there were approximately 50 companies involved, you know, in the writedown of our impairment charge.

We've looked at those same 50 companies quickly here in the fourth quarter and asked our -- really looked to which companies were performing significantly below planned levels, of which there were 7 or 8.

And we went back to the operating people and said, you know, if conditions change here, if expectations change relative to future cash flows and a few of those came back with very different conditions that they were looking at and resulted in an impairment on five different businesses, two of those made up 80 percent of it.

Not big businesses, not big charge, but we wanted to get that taken care of.

We knew about it.

Now in the first quarter we will do a comprehensive look.

We've got goodwill associated with probably close to 200, 250 different businesses.

And we do a very comprehensive look at that in the first quarter.

We do not expect significant problems.

Remind me if you would quickly, the $32 million hit you took in the L&I portfolio for the aircraft represented what percentage of the value of those leases?

On the 757, all of it.

And on the 777, about $3 million.

Thank you very much.

Our next question is from Andrew Casey at Prudential Securities.

Good afternoon.

It's not morning.

It's afternoon, everybody.

Napalm, John, Napalm.

I know.

Kind of with the outlook if you take the midpoint of the head winds that you are talking about, it looks like it's around a quarter a share of increased costs.

Are you expecting to offset that with the acquisitions or is it mainly offset with, you know, the continued margin improvement that you were talking about with respect primarily to the former Premark business?

We -- in our midpoint, we've got a 20 cent increase year-over-year.

Three-quarters of that is -- three-quarters of that is coming from the base business.

Excluding impairment and pension and restricted stock offerings and this L&I issue.

So we're still very much getting the cost savings associated with the restructuring that we've done this year.

And we anticipate getting more benefits from this year's activity.

So, if you say the base business is up roughly 16 cents a share, then those costs that I've talked about, the impairment and the pension and the restrictive and the L&I type areas, that takes off 13 cents of that.

We believe we will also have acquisitions adding roughly 5 cents, translation 4 cents.

And then our nonoperating cost of both interest expense being down a bit and interest up would add 8 cents.

That's how we see it.

Thanks a lot.

Sure.

Mark Jambroni, Bauro Hanley.

Good afternoon.

Hi, Mark.

I just have a question about the cash balances that are building now and what appears to be sort of a modest expectation for acquisitions in 2003 at least historically speaking.

Is it possible at some point you are going to decide that either you have have so much cash you need to do something with it.

I am assuming that the balance sheet sheet is very strong.

Would you increase your dividend, would you buy back stock or are you just going to build it until it gets to several billion dollars?

One year doesn't mean we've got a broken situation here relative to acquisition activity or our process to go through acquisitions.

We definitely expect to parallel our prior behavior in terms of using the majority of our free cash to support a healthy acquisition program.

That's still our target.

As you know, acquisitions have been down, you know around the world.

So the phenomenon we are facing is not all that unexpected.

Mark, as you know, our pipeline as you know, Jon gave us a range of 200 to 600.

We have a pipeline right now that exceeds that mid point.

So we are still working on lots of deals, but the probable is making those deals come to fruition within a price that makes sense to us.

And I applaud you guys for being disciplined in that.

And I think that's a strength of your company.

But at the same time even if you had $500 million worth of acquisitions that you have over 800 plus million of free cash flow next year after dividends, you still have a billion sitting on the balance sheet.

At some point I'd rather have you return that to shareholders than to hold it?

Our intent isn't just to hold it but we don't think a year is enough evidence that the opportunities aren't going to come back strong.

We are not looking to leave this sitting in cash for an extended period of time.

I might have a very different answer after another year and a further build up.

But we're certainly aware of it, and -- but we're not going to let it burn a hole in our pocket at this point.

Okay.

Thank you.

Sure.

Dean Drake, Goldman Sachs.

Hi.

Good afternoon.

The question relates to pricing power and your raw material pricing that you are having to pay.

So it's our expectation that you've got little in the way of pricing power among your key markets, but you are getting hit with some raw material head wind, both in oil and steel and so forth.

So kind of walk of through both sides of that equation and how that fits your assumption let's say for the first quarter and the year.

I think it fits nicely with sort of our reduced expectations that we think that - I think you know us well enough that we don't have much pricing power anywhere.

And particularly these days pricing power is even more muted.

From the raw materials side of the equation we are looking -- if you look at certain businesses, you've already touched on a couple of them in terms of plastic and steel -- I'm thinking of the Signode business.

They are getting hit with price increases for raw materials.

Certain pieces of our fastener business, based on the import tariffs that our president deemed to be appropriate last year, that certainly has had an impact on our businesses.

So we have to be smarter purchasers.

It's going to have a little bit of a -- you know, provide a little bit of head wind for us.

But we think that, you know, net net it won't be -- it won't be a dramatic increase.

But it certainly doesn't help us in a time when we're still sort of uncertain about end markets.

Okay.

Just as a follow-up, any color you can provide as business conditions as you exit December into January?

Well, we don't have any data on January at this point in time.

So anything that we shared with you on a January basis would be qualitative and I hesitate to do that.

Because we've been down this path before a couple time and you think you hear a couple things from a few people, things sound better or worse and the numbers can be counter to what we are hearing.

We are not hearing anything at this point.

I think the one good data point I would point is and I referenced it when I talked about auto is that auto builds for the first quarter appear like they are going to hang in there.

They are going to be flat year-over-year and that's based an a very strong first quarter in '02.

That's good news to our auto businesses.

Beyond that, I think it's still too early to give you any meaningful interpretation as to what's going on in the quarter or the month itself.

Thank you.

Harriet C Baldwin, Deutsche Bank.

Good afternoon.

I've set my clock.

In talking about the main factors from minus 2 to plus 2 base sales for '03 outlook, is that mainly from the economy or are there new products or penetration that you are targeting that could sway you within that range?

Mainly market.

In fact, it's virtually all market.

We really don't factor in any kind of a product introduction.

You know us well enough that we are so diversified and that the product mix is so diverse that we rarely have single products that can be meaningfully moved top line.

It is a combination of lots of products.

So we are looking at end markets and trying to make some judgments as to what's going to happen.

And right now we are maybe being a little bit more negative than some other people.

But certainly we are trying to account for a downside to give you a sense of how it would impact our earnings.

Definitely.

And in terms of Cap Ex, what is the outlook for '03 from a budget perspective.

And how likely do you feel you would be to actually spend the budget in '03.

Our plan calls for around $300 million.

Our depreciation expense would be around 290.

And given that we spent $272 million this year, 300 is, you know -- certainly from a replacement side, is not out of the question.

And if the economy picks up a bit, we're sure to hit it.

Or even if it continues at the base levels.

And is that still relatively conservative, if the economy does pick up, you would expect that to increase as a percent of revenues as we go forward or as a percent of revenues is that pretty much --

I think the economy would have to do a lot better than our 2 percent for that to move very much.

I think I've calculated the Cap Ex at about 320 two years ago.

That would be an historic high for us Harriet.

Uh-huh.

An incremental 20, $25 million over what John talked about in terms of budget.

And given the upgrade you've done to your manufacturing base over the last decade do you think that that high of 320 is you know higher relative to current needs?

We are really pushing capacity back when we were spending at that level.

We were continuing to add a fair amount of capacity.

And that's just not in the cards in any macro way for the company.

Individual businesses might have some issues, but in a macro-sense, we are not -- big capacity expansions are not contemplated into this.

And finally back to Blair's question about the goodwill impairment.

Are the issues in terms of future cash flow expectations more related to end markets served or is it more related to your own penetration or products or is it hard to generalize?

It is a mixture of things, but it is more market conditions I think that are driving this where things have changed, you know, more than they expected.

So that would be the primary driver, I would believe.

Great.

Thanks.

Uh-huh.

Kevin Silverman, ABM Amro.

I have a question about the earnings on the leasing and investments portfolio that you mentioned in your release.

Can you give us a little detail on that and maybe just the per share contribution and how that might affect comparisons in '03?

Yeah.

Let me go back to my notes.

The mark to market adjustment, the $24 million that I mentioned, that's probably in the neighborhood of 5 cents a share. -- gain, right.

And as I mentioned before, that was driven by reduced discount rates.

Since we've been in this -- involved in this, we've done mark to market adjustments generally on an annual basis.

With the interest rates that have really come down pretty dramatically here, I think we probably should have been looking at this quarterly and maybe catching it earlier.

And we do intend to be looking at this quarterly and not -- we get cash flow data from our partner.

And that is an annual event.

But we can certainly sort through the interest rate side of that on a more frequent basis.

Then the sale of this manufacturing property which leasing investment handles all of our -- facilities, and this is a particular property in the Chicago area that's been being negotiated and worked on for -- seems like forever, but it's been a couple of years off and on.

And that finally closed.

So that's close to 2 cents.

And then the $6 million, you know, we did make a leverage lease investment in some telecom associated properties.

And the additional earnings from that in the quarter were $6 million.

And then lastly, which adds another penny or a little more.

And then we wrote off -- or wrote down our airplanes 32 cents --

32 million.

32 million.

And that was roughly 6.5, 7 cents a share.

So that all netted out to around $10 million positive or 2 cents for the quarter.

Going forward, if you step up asset values for reduced discount rates, you also reduce future period earnings.

And that's just the nature of the accounting.

Not much has changed here relative to the cash flows associated with leasing and investment.

We still expect even though our cash flows for dispositions of these properties down four or five years from now have come down a bit, the nature of the sharing agreement that we have, we get our money out of it sooner than our partner does.

So they have not come down enough to reduce values to us.

So the cash flows that we expect to get from these properties still remains the same, but we do have a swap agreement.

It does require accounting an a mark to market basis.

So that was the step up in this period.

But it would also result in lower earnings on this on arrangement in future periods.

Thank you, that's very helpful.

Was there a particular asset that got written up on the balance sheet that you could point out?

Yeah.

It is in the investment account.

And it is, I believe, described as our swap agreement.

It's in the investment footnote.

And I'm paging through -- yeah.

It's the net swap receivable at the end of 2001 it was $268 million.

Thank you.

Sure.

David Bleustein, UBS Warburg.

Good afternoon.

Hi David.

You mentioned a decent sized acquisition backlog.

The question is, what does it take to get into the backlog, and have you already negotiated price with the companies in the backlog?

Well, generally, we have.

You know, we've gotten to a point where we believe we've got -- I'm -- I'm hemming and hawing here because I'm thinking of both situations.

I think the majority of them we have a letter of intent, right, with a price stated.

But, certainly, we haven't done our due diligence yet.

And in some instances they get on the list before we have that,where we are looking at something seriously and we think we've got a very good opportunity of getting it.

It might be a bidding situation and so on and so forth.

But we have both in there.

But generally, there is a pretty solid involvement with the company.

Another way to answer the question would be that prior to last year when activity was slower and pricing became an issue, if you looked historically, we probably completed 80% of the things in backlog.

Terrific.

That's what I was looking for.

Thanks.

Andrew Casey, Prudential Securities.

Hello again.

Hi Andy.

Good afternoon.

Yeah.

Thanks.

In terms of some of your end markets, you know, specifically in the big box in North America, some of the construction channels, some of your indirect colleagues would sell into there described December as lacking orders.

Did you run into the same issue there?

Per big box?

Yeah.

Things were down a little bit.

Not dramatically.

Things -- as I go back and look at the prior three months and the quarter, December was a little weaker in that area than November and October.

Okay.

And then in terms of pension contribution, that was a question on previous calls.

Have you made any headway into deciding whether you are going to do that on a tax effective basis or is that still in the planning process?

Our largest plan here in North America -- we're still in a position where we can't do any funding.

From a tax standpoint.

So our asset and liabilities are close.

We have looked at, and we did make a -- we -- I mentioned I think on the last conference call that we looked at a retiree medical.

And it's you know, a $400 million liability on our balance sheet.

We were going to look at that to see if we could do some tax advantage funding.

I'm reminded sometimes when you first hear these ideas they are generally the best you are going to hear the first time you hear them.

It's proved very much that way.

We started out at maybe a $400 million contribution but as you work your way through the tax laws, et cetera, we got down to a $32 million.

But the good news we believe is that the $32 million -- although we couldn't do the whole thing right now, we can continue to build the fund in this tax advantaged way, possibly up to the $250 million range.

So we're working on that.

And we did make the contribution there.

And I think we also made a pension contribution in our UK plan.

Thanks.

John Inch, Merrill Lynch.

Thank you.

Good afternoon.

Hey, John.

John.

What was the base business for the year?

I think if you added the quarters it appeared to be down a percent.

Down 2, John.

Down 2?

Yes.

So the fourth quarter is up 2?

Correct.

To get to the high end -- so if I think of that dynamic, then to get to the high end of your range at up 2, how do you translate that into volume?

Are you basically saying that what you saw in the fourth quarter has to continue throughout all of '03 to actually see the high end of your guidance?

Yeah.

Yes.

So in effect, what you are saying is the midpoint of your guidance, you are expecting the overall to get worse, not better?

Or not to hold?

That's right.

Okay, so then, John Brooklier, you had given things like you said well our expectation is auto in North America is down 8 percent.

And I think -- I just wanted to ask about auto and housing.

How do you translate -- I always sort of thought that your expectation for those markets were more precise versus the plus 2 minus 2 range in your base business.

Could you give us within auto and construction what you believe or how you translate the plus 2 minus 2 for the overall company into what your scenario is for those two businesses specifically?

Like where do you think North America, international auto and then commercial construction, housing construction could potentially end up?

Not terribly scientific here but let me tell you how we arrived at it as we went through the planning process.

Our EBPs were asked to look at a downside, particularly those related to automotive and residential construction.

And in the automotive side, from the numbers that John talked to, they took anywhere from 8 to 10 percent off of that thinking that's how much further down automotive could be.

And in the construction side, the -- I can't recall the specific housing side, but I know overall construction came down around 5 percent below the type of numbers that John is talking about here.

So we have done - have then two sets of numbers, right, a set of numbers that says business as usual, thing are going to continue to grow and be wonderful.

And then we have a side that says things are not going to be so good, closer to the minus 2 percent range, because of falloffs in automotive, residential and the collateral damage it does to us both in our direct products into those markets as well as the indirect packaging, welding, paint spray side.

So that's kind of the flavor of what we've been looking at here.

And just to add on to that, John, if you looked at auto production in particular, and you -- we said auto down 8 percent.

And that was part of the original plan that Jon talked about.

I believe -- I believe that they -- when they did that -- they took it down another 10 percent in terms of revenues.

Yes.

They took auto production down to about the minus 15 level.

Yes.

Thereabouts.

Okay.

So John Brooklier the down 8 equal zero - that's your scenario for zero base for the company?

That's correct.

My follow-up is on working capital.

As business has been tough for a lot of manufacturers they have been able to derive cash flow benefits from their working capital.

I know we don't have the cash flow statement yet.

I was wondering if you could talk about the quarter and the year, the cash flow benefit you have been able to derive from working capital and how you see that, the prospects of gaining some additional benefits or maybe and building some working capital over the coming year.

Yeah.

I've got -- I thought I had it here.

I'm looking for some cash flow data.

Our working capital has come down this year.

I don't have the number in front of me that I'm looking for.

But it's -- I don't have the exact numbers here, but I -- my memory is wanting to say $150 million or so in reduced working capital.

Even in spite of the growth we experienced in the fourth quarter.

And let me just confirm that.

Yeah, it's probably for the year closer to $200 million in reduced -- primarily inventory receivables, accounts payable up a tad.

And going forward, we still have room.

You know, I mentioned our 2.1 months of inventory on hand.

We still have businesses that are particularly some of the more recently acquired businesses that are still in excess of 3, 3.5 months.

We know we still have work to do on the inventory front.

And receivables maybe not as much work, but we still can make progress on that front also.

So as I look to the plan, another $100 million of working capital improvement on a zero growth basis certainly seems in the cards.

Thank you.

Walter Liptak, McDonald Investments.

Hi John and Jon.

Walter.

If we could talk a little bit about your outlook for restructuring charges and the restructuring charges in the fourth quarter.

It looks like you said there was $5 million of restructuring charges in the fourth quarter?

What segment was that in?

The $5 million was the increase.

And it was primarily in our Specialty Systems International.

Okay.

What was the total amount of the restructuring?

The total amount for the quarter was in the neighbor of $12 million.

Did some restructuring push out into the first quarter?

Yes.

It did.

And at year end, too, we are looking at our -- we are adjusting our accruals and there is always pluses and minuses.

Our restructuring costs are estimates.

So we had a few million dollars of accrual cleanup which is often the current expenditure charged to P&L.

Overall for the year, we had $55 million, and we expect about that same level next year.

And I'd say -- and that was pretty well distributed around.

Premark clearly had a chunk of that in the 15 to $20 million range.

And the rest was some marking and decorating companies, which we have acquired a lot of over the past few years.

We continue to do work on those.

It's right aimed at that newly acquired businesses that the majority of this is coming from.

But presumably, because you haven't been doing a lot of acquisitions, the restructuring should become lower and lower?

Yes.

But the fact that we, you know -- it's been -- I'll go back two years when we were looking at the numbers two years ago half of our business had been acquired within that three-year period.

And that side of the business was on average earning in the 8 to 9 percent range.

I can't tell you exactly where they are today.

But -- and we've made progress.

But as I mentioned with Premark, we are well on the road, but we've got a couple of more years of work.

And I'd like to say the same applies to a lot of other businesses.

We have the largest backlog of unfixed businesses at the ends of 2000 and 2001.

And that backlog is still there.

And the recession of this last couple of years has opened up the windows for restructuring and margin improvements in some of our base businesses, too, so --

Okay.

Fair enough.

With the automotive, you know, expecting things to slow in the second quarter -- maybe it's third quarter -- what steps do the automotive managers take to kind of brace for this?

Their reductions of overhead, fixed costs, something like that.

That's what they have typically done.

That's what they did two years ago.

Remember when production fell 21 percent in the first quarter of '01?

You attack all areas of costs in your business.

You have to -- which ends up meaning you have to end up taking people out, too.

But you have to balance that off.

You get to a point where you don't want to be taking -- the old fat versus muscle type of thing.

So it is a judgment of the business person to decide at what level is most appropriate.

Then you try to ride it out.

Okay.

Thank you.

Bob Atchison, I'm sorry, is it Adage Capital.

Yes, it is.

Hi, guys a couple of quick questions if I could.

Hi, Bob.

If you strip out the leasing and investment portfolio and just give us the manufacturing debt, what does the balance sheet look like?

I want to say the leasing nonrecourse debt is around $600 million.

Okay.

And I think we said that our debt to cap was at 11 percent without leasing and investment.

Nonrecourse debt versus 19 percent with it.

Okay.

Good.

Do you have any further exposure to either the telecom investment or the airplane leasing side?

The telecom investment I -- we've got agreements where we've got two different investments.

But they both -- John, what is the name of the agreement?

We have a PUA.

Payment undertaking of agreement where 95 percent of the proceeds from the sale leaseback situation, the telecom companies gave 95 percent of it to the banks.

The banks have the obligation to make the payments associated with the lease.

And so we're believing we are pretty secure there.

The banks are good banks.

And so we are not relying on disposition proceeds from telecom equipment.

Relative to the airlines, the airlines that we have currently written down represent 80 or 90 percent of that portfolio of planes.

Bob, we have a total of four planes and one jet engine in the entire portfolio.

It's not like it is a big, big portfolio.

Got it.

If I could sneak one last one in.

What were the '02 sales of the Florida Tile operation?

'02 sales of Florida' tile.

There is one I haven't looked at in a while, Bob.

Just trying to get some idea about what the proceeds might be from that sale.

Taking a shot in the dark at getting information on it.

It's not anywhere related to sales.

This is not a real healthy business.

And you know, it is probably a little less than $50 million, in that range.

In terms of '02 sales?

Oh, in terms of proceeds.

Okay.

Thank you.

Robert Mccarthy, Robert Baird.

Good afternoon, gentlemen.

Rob.

I know that this is a difficult question to address because there is seasonality to every business, there is different numbers of days and quarters and things like that.

But with the midpoint of your forecast for the coming year basically no growth, my question is if we could get at what the fourth quarter acted like relative to the third, was it, I mean, generally weaker?

Would you differentiate between North American and international?

On?

In terms of base revenue growth.

I don't think it was weaker.

I know that the fourth quarter of 2001 was by far our weakest quarter of 2001.

So we had easier comps.

Right.

But in the fourth quarter -- and the fourth quarter tends to be a little less than the third quarter, at least it has for the past two or three years.

So we didn't see a serious, you know, falloff in activity.

I don't know that we saw any falloff, really.

Sort of like we got to some level in the first half of the year, and we've just been stagnant at that and there is no reason to expect it to change unless we get some new information?

Right.

Yep.

I think that's a fair characterization, Rob.

With downside risk on top of that.

I'm sorry?

With some downside risk on top of that.

Right.

Of course,.

In terms of this discussion that went on about doing a sensitivity analysis on assumptions for some of the key markets, et cetera, I'd just like to ask the question a different way: If you have a point estimate for light vehicle build to be down 8 percent in North America, what is a point estimate for what your associated revenue would do in the businesses that deal directly with that market?

In other words, forget about the collateral impact on welding.

Are we talking down 2 or 3 percent?

I think we are more down 4 or 5 percent.

Which would suggest only 3 or 4 points of penetration gain by inference?

That's what my memory says, yes.

Okay.

And -- but that would be a somewhat disappointing year for penetration gain by historical standards, wouldn't it?

Or am I trying to read too much into this?

I think it's hard to -- I think it's hard to make the comparison, Rob.

I don't know if we have enough data to make it.

But you are right, it would be that -- if your numbers are correct, that would be lower than our average historical penetration, which has been running more at the 6 to 7 percent range.

Okay.

Separately, can I just ask, what it was in Asia as part of Signode that was sold?

Why?

And is the minus 3 impact that it had on Specialty Systems International in the quarter reflect a full quarter of its impact or is it a bigger number than that?

Can you help us a little with that?

You are right, Rob.

It's small.

I'm drawing a little bit of a blank on which --

My understanding is it was a strapping operation in Asia.

And it was relatively small.

But we would have to go back and look to try to ferret the number out for you.

Okay.

Thanks.

Let's confirm and and get back to you on it.

That's fine.

Okay.

Thank you.

Robert Schenosky, CIBC World Markets.

Thank you, good afternoon.

Back to the raw material costs I'm interested in what types of increases you have absorbed year-over-year in terms of magnitude and what type of agreements you have gotten into, short-term or whether you've taken them for the calendar year.

The reason I ask is take steel for an example, where you saw a big run-up of prices last year but we are already seeing prices weaken into this year.

Bob, that's a difficult question.

I don't know if we -- we don't aggregate those numbers.

We do have a couple data points.

We know certain portions of specialty steel that that's used for the fasteners that I talked about, part of tariff discussion we had before.

But what type of level increase are you talking about, 2 percent increase?

Greater than that?

We are highly decentralized on our activities.

We have some consortions and groups that work on wire a lot of our stainless steel is in food equipment, a lot of our paper is in Wilson Art and a few of the packaging areas.

But it is decentralized.

John is right, we don't aggregate that data.

It's not controlled out of corporate.

Right, but you had mentioned that -- I'm sorry, John, but you mentioned you will be taking an increase.

I'm trying to get a sense of the magnitude.

There is an increase that has to be offset.

There is no question.

And I'd have to go back and I'd have to ask some of the business groups exactly what kind of increase they have been seeing.

I'll touch back with you off line then.

Thank you.

Okay.

And James Samuel from Grandfield and Dodd.

Good afternoon.

Jim.

In your 8 percent forecast for the auto industry, the decline there, are you currently staffed and sized for an 8 percent decline or will you implement whatever plan you have for that 8 percent decline when and if it materializes?

When it materializes.

Okay.

And then what is the time relationship between as you see it materializing that you then reduce the number of workers, inventories, reduce the number of hours, that sort of thing?

And what sort of financial impact will that have at the time that you are doing that and at what time will you then go back to an equilibrium between the actual experience that you are having and when you've downsized the operations?

It happens pretty quickly.

I mean, we're -- I mean, when releases from automotives start deteriorating, we know quickly, you know, and so the responses to -- depending on the magnitude and how quick, we could go to four-day work weeks.

It could be stopping a shift.

It could be a whole host of steps along that line.

And in the overhead area, it could be likewise layoffs or terminations associated with that.

And it takes at least the quarter, probably, to get that all put to bed and get to a point where we are staffed.

So most of the costs, then, would be short-term in nature and can be viewed as variable as opposed to, say, if you were permanently laying off workers where you would have costs for separating the workers and pension costs and things of that nature?

That's right.

Okay.

That's right.

Thank you.

I show no further questions at this time.

Thank you very much.

We appreciate everybody's interest.

And we look forward to talking to you again.

Thanks again.