泰利福醫療 (TFX) 2002 Q4 法說會逐字稿

Good morning. My name is Debra and I will be your conference facilitator today. At this time, I would like to welcome everyone for the Fourth Quarter Earnings for Teleflex Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer period. If you would like to ask a question during this time, simply press "*", then the number "1" on your telephone keypad. If you would like to withdraw your question press the "#" key. Thank you. Ms. Dusossoit you may begin your conference.

Thank you operator, good morning to everybody. I am Janine Dusossoit, Investor Relations Officer for Teleflex. We released our fourth quarter and fiscal year 2002 results yesterday after the close. The news is available as you know on first call, as well as on our corporate website. Today's call is being webcast in a listen only mode.

In addition, a replay will be archived and available for a limited time at our website or by dialing the following phone number; 800-642-1687 and using the code number 7735343.

This morning Hal Zuber, our Chief Financial Officer will begin with a review of the fourth quarter and fiscal year -- full year 2002 operating and financial results, then Jeff Black, President and CEO, Teleflex will share his comments on corporate activities and direction.

After their formal comments as usual, we will take your questions and before we begin, I want to remind you that our comments today may contain some forward-looking statements concerning earnings, conditions in the market that we serve, economic assumptions, expected volumes and the like. Please remember that these statements reflect current conditions and are subject to various factors that could cause actual future results to differ materially from those that may be contemplated in today's statement. And so now I will turn the call over to Hal Zuber. Hal.

Thanks Janine and good morning. 2002 was a torturous year. We are glad we can pull it to bed. We are going from the frying pan of '02 into the fire of '03 the change is welcome, if only for the onset of spring training.

Just to summarize '02, revenues were up 9%, net income up 12%, and earnings per share increased 10%. The fourth quarter sales increased 10%, net income was up 20%, and earnings per share increased 19%.

Aerospace the number looked good but on second glance you can see, it was aided by a number of non-operating items at various points in the year. The first was the cessation of goodwill amortization. The elimination of this expense added 24 cents in the year, when compared to '01 and was equally split among the four quarters.

To facilitate comparison of the segments operating results, both in the press release and today's discussion, the goodwill amortization in '01 has been reclassified from the individual segments to the corporate expense category. The EPS figures for '01 is the same as recently reported. The second item included in the four quarters and year's results was the $10m non-operating pre-tax gain or 16 cents per share. This gain resulted from the collection of insurance proceeds, from the fire and the flood, in 2000 and from the sale of two businesses, one in equity investment, and the other a small packaging line in our medical group.

Lastly, as previously reported, we had a tax settlement of 8 cents a share in the third quarter. As you may know, the income tax expense in any year consisted of a number of estimates that are ultimately true audit in years down the line. In a conservative accounting environment, one would expect but without certainty that the [inaudible] could result in the benefit. Going forward, the normalized effective tax rate for Teleflex will continue to hover around 30%.

Before we go to operations, let me touch on a few issues that were topside and generally on people's minds. First, a breakout of '02 revenues, the growth in revenues was 9% and was comprised at 6% from acquisitions, 1% from currency, and 2% for core growth. The core growth was especially gratifying after the decline in commercial Aerospace, and power generation market had drastically negative impact on that number. International operations accounted for 44% of sales and about the same percentage of operating profit. For the first time in a number of years, the stronger foreign currencies added to sales and had a positive but negligible affect on income. Cash flows continue to strengthen. Cash from operations grew to $201m in '02 compared to $188m in '01. Working capital as a percent of sales prepped up. The major piece of this increase was in the cargo line, which needs more inventory to support their complete integrated wide body systems worldwide, they need it on several occasions, exponentially magnifies the problem. Capital expenditures in 2002 decreased to $87m from $97m a year-ago and were in line with a historical percentage of about 4%. The balance sheet remained strong with total debt at 32% down from 36% a year-ago.

During the fourth quarter we extended the duration our inventories and placed at $50m ten year note of 5.75% to provide additional financial flexibility. In '02 we acquired five companies for a total of 57m in cash. These companies and those acquired in '01 in the first full-year consolidation contribute a $190m in sales to '02 or 6% or two-thirds of the growth.

Now lets turn to operations. It was a typical year, two segments were up and one was down. But it was not the norm for overall operating profits declined 6% from the year-ago. We may as well start with our worst performer Aerospace, which has experienced the pain being inflected by the worst in decade's capital constraints, commercial Aerospace, and power generation market.

Aerospace revenues for the year were down only 4% but the bottom line was virtually cut in hand. Sales declined in three major product lines, cargo, turbo-machinery, and manufacturing while sales in the repairs line improved.

Operating profits declined in all four product lines. There were a few bright spots. In cargo we have able to launch and install new wide body systems on Boeing 747 aircraft. In the repairs line we added more services to sharp revenues although the margins weren't there.

Our component manufacturing line shipped their first military van model, a complex figure trigger system as supposed to individual components. This helped to offset the OEM declines. We continue to invest in our ITTE aftermarket part business but with limited success due to market conditions. The much heralded boundaries just in cargo container, which helps so much pumps year-ago did not get acceptance in the market place. But our ultra light container is getting plenty of interest in the industry.

In general pricing pressures and cost reductions were the order of the day. In response to the volume declines in overall, Aerospace employee account was reduced by 12% and three plants were closed. Further reductions, particularly in IGT or Industrial Gas Turbine was slowed by the factual nature of the IGT service network, which is customer driven. It also had sight specific approvals and diverse technologies and it is expected this trend of cost reduction and chasing the market value will continue into '03 in the Aerospace Group.

Medical had another good year. Sales grew 5%, profits grew 2%. Sales increased in the hospital supply from acquisitions, currency, and new products. The [inaudible] a device for the trachea, a temperature Foley catheter, the polyflexistand, and the homecare line are just a few of the continuing stream of new products, which are [inaudible]. None of these is a homerun but collectively they are making contribution 1-2% of hospital supply sales.

Sales of surgical devices also increased but operating profits and margins were adversely affected by product mix. And in the fourth quarter they had a severance and other charges related to the closing of an offsite instrument services location. This charge was about $600,000.

Additionally, the cost that integrates the third quarter acquisition of Beere diluted margins. On the plus side for surgical, our innovative [hemo] Morse polymer clip continues to pick up momentum. And lastly, our instrument services business; long on the back burner signed new contracts with the chain of hospitals and is seemingly coming to light. Having been there and done the enthusiasm thing for this instrument services, I am withholding ramp of optimism, but I am glad there is a light at the end of the top.

In summary, medical seems well-positioned on the road of modest growth driven by new products and continues to serve as an anchor to the fluctuating markets elsewhere in the corporation.

Lastly and thankfully, we come to the commercial segment. Sales were up 20% and profits increased 15%. Margins were down slightly but as a result of the acquisitions. The gain in sales was two-thirds from acquisitions and about a third from core group. All three product lines; marine, industrial, and automotive showed gain in sales and operating profits.

In automotive, the highlight was the adjustable pedal where sales rose over 40% from '01 and to over $75m. And yes, finally, the adjustable pedal line is in the black in the fourth quarter is running modestly. Teleflex automotive continues to win market share in the declining European market with cables added to shifters. Also, the Q1 acquisition of the cable company in Japan was diluting margins. With correct strategic moves, we gain additional business for the Asian Transplant and launched an adjustable pedal for an Asian customer.

Although, the unit volume in the overall marine market was fairly flat in 2002. We benefited form the swing to small or less expenses boats. Marine had a great year as core sales increased by 10% and profits more so. The continued improvement of the efficiency in the most product line, the previous plan combinations, and the market place synergies from the acquisition contributed mildly to the bottom line.

In addition, a series of newer, small, niche products in non-marine market such as adjustable pedal for bus and RV of zero re-power source for locomotives and the ongoing field service front for the military helped marine to build on new gains of their market.

In summary, while the overall operating profit was dragged down by Aerospace. The stream of new products in medical and commercial supplemented by acquisitions was alive and well through the marine incorporation. The one-time gains are just that gains in cash, from a all-inclusive income statement standpoint, they have there place, although, not sustainable, but they are much better than one-time charges. But there are a much better benefit to the shareholder from the non-operating gains. In a corporation that prides itself on consistently increasing earnings, the 315 sets the hurdle for next year. While '03 be our 29th consecutive year, every operating manager, every corporate officer knows the goal as to make more money now and in the future. Jeff.

Thanks Harold. In 2002 Teleflex delivered its 28th consecutive year of growth despite a tough environment. We increased share in many of our markets, grow our global operations, and continue to invest in new products and markets that positioned us for long-term success. Teleflex serves customers in hard cycle businesses. Over the years, we have adjusted to upswings in downturns in our markets any number of times. But 2002 was specially challenging. What was different? Well, the swings were dramatic and harder to predict.

An unprecedented decline in the commercial aviation and then the US power generation market. At the same time, automotive production was up and the recreational marine revenues rebounded, overall, were up because we invested in new products and value-added systems for our customers. We are selling more products and delivering more value to the customers that we have; increasing our dollar content on cars, boats, and planes. Healthcare supplies and surgical instruments that help hospitals improve outcomes and save money, services that extend product life and improved performance. We are creating greater value by leveraging our current products and technology investments in new or adjacent markets; capitalizing on our global footprint and developing strategic relationships. This strategy, while still in its infancy, is working for us and we plan to stay focused on long-term growth.

Let me just give you a few examples. The Megatech electro acquisition, which was completed this week; this is a $30m company in Quebec that we invested in equity percentage, four years ago. They make electronic and electromechanical systems. Megatech's products and strong customer relationships will help us leverage our own electronic systems and can bus technology. Together we are developing engine moldering systems that improves safety and security for users of both recreational vehicles and even industrial equipment.

At the Miami boat show this weekend, we will be announcing a partnership with Genmar, the world's largest builder of recreational boats and Volvo Penta Engine Systems to develop easily monitoring systems for boaters and boat builders. Our electronic system and engine monitoring are designed to provide boaters with a better boating experience, safer and trouble free, every time they get behind the wheel. This new system will be part of boats in the Genmar rollout for the 2004 model year. We are also capitalizing on our global footprint.

In 2002, with more than 40% of our annual sales were from products and services delivered outside of the US. Our investment in building a global presence is creating new opportunities. During 2002, we expanded our medical product offerings by introducing new products in anesthesia, neurology, and surgery. We also added product depth by becoming the exclusive European distributor for Vital Signs, who is the leading provider of anesthesia products in the United States. Our global footprint also gives us important access to low cost manufacturing and enables us to develop new customer relationships in the fast growing Asian markets. In 2002, we added a new joint venture partner in Japan and extended our joint ventures in China where we now have four joint ventures serving the automotive and industrial markets.

In 2002, we manufactured and sold our first full ship system in China for the Chinese market place; a first for us and a first in the Chinese market. We entered this market focused on expanding our low cost manufacturing capability, but yet, we have also been very successful in developing sales as well. While our sales in Asia are still relatively small, we see great potential for future growth.

International market presence also provides the balance in place, an important role in year term growth. With the commercial aviation market decline, ATI, our repairs joint venture with GE continued to grow worldwide market share as Europe and Asia pacific remained comparatively strong market for ATI. Likewise, the Power Generation outside of the US have been comparably stable during the down cycle. Two thirds of land-based turbines in the world are outside of the United States. We have customers outside of the US and we see that demand for industrial gas turbine services may increase first in those markets.

Currently, we are aligning our resources to take advantage of this and as we always do during a down turn, we are also exploring new markets for our aerospace technologies. All of these activities in 2002 laid the groundwork for growth in 2003. We are paying close attention to details. That means managing costs and closely tracking progress against our goals.

No question, 2003 will be another challenging year. I said the same thing in '01 and in '02. As I mentioned earlier, our end markets in the general economic environment have proven difficult for anyone to predict. We will continue to manage Teleflex conservatively, maintain a healthy balance sheet, focus on cash flow, search for acquisitions, which makes sense.

We have opportunities across many industries and we expect to find some good acquisitions that strengthen our business and support our long-term strategies. We have created a realistic, conservative operating plan for 2003.

At this time, we expect that Teleflex revenues and earnings in 2003 will increase modestly, probably in the single digit percentage terms over 2002. Earnings in the first quarter of 2003 will be likely to be down compared to the quarter a year ago. But they should show improvement in the subsequent quarters. We will continue to strengthen our business, invest in new products and deliver value to our customers worldwide. Our new product pipeline is solid, our presence in new markets is growing, and we should begin to see results from actions taken in 2002 to adjust to current aerospace market conditions. Please remember, our plan does not assume any acquisitions or any pickup in the US economy. Should we get either one so much the better in '03. Janine.

Operator now we will now take questions. We do ask that the -- those who ask questions, try to limit their -- limit to one plus a follow-up, and we will cycle around again. Operator.

At this time, I would like to remind everyone, to ask a question, please press "*" then the number "1" on your telephone keypad. And we'll pause for just a moment to compile the Q&A roster. Your first question comes from Deane Dray, Goldman Sachs.

Good morning. First question relates to guidance and just like to get a sense of -- you're expecting first quarter to be down year-over-year, but talk about your assumptions of what sort of savings are expected to be coming in to play in quarters 2,3, and 4 such that you would still expect to end up the year with up revenues, up earnings?

Let's break it down by segment if I could Dean. The way it looks now, we are planning that three plant closings in aerospace in the first quarter. So that, I mean, another $2-3m charge.

In the other segments, medical and commercial, we expect to be up. So I don't know that we are in the cost reduction mode in those two segment, of course, through all these weeding [drivel] but as a general role, we will be adding to our infrastructure cost in that area. Okay. So I think that's from a cost reduction standpoint the answer is a couple to $3m of aerospace plane closing in the first quarter would then should benefit the other quarters.

Now, as I go forward, we expect to subsequent quarters to be better because in both medical, and particularly in aerospace somewhat also and particularly in commercial, we have a number of product launches.

To just a name a few, we have a brand new fish finder product that has bank fishing in it. It's a remote wireless product, doing very well, great market acceptance. Coming out with a new fish finder lines to replace the [inaudible] lines. We are ramping up in all fuels in with GM as opposed to Ford only. We have -- in the aerospace although there is not much – glimmer of hope, we're adding a modules in the second half.

So, we see kind of continuing newer products coming on stream, many of which are there and just awaiting there time. Aerospace, or automotive is particularly strong in the second half. With shifters in the USA brand new sea one platform come along in the second half, and that includes control -- and we've another kind of new product control called [Cables] and then we go on with a just market share in New York. So, we can kind of paint a picture for this increasing improvement with a combination of the cost reductions in Q1, and the product launches throughout the rest of the year.

And –Hal, what you are using for automotive build estimates? And then how much of that is going to be Teleflex additional products dollar value on additional programs of the increased penetration if you will?

Okay. That is very difficult question across all the product lines, but we're in a macro using $60m, which is down about 5% domestically, and I forgot exactly what we're using in Europe, I think, but it is also down, we're using

I think it's 15.

So.

Okay, and then just.

Single digit down, but because of the new programs, they were all gaining market share and the new products. We're also going to grow those businesses.

Okay, and then last question on guidance for the first quarter, are you anticipating any one-time below the line items either sales of businesses that would be part of your assumptions for '01?

Well, not at this time, but you can never exclude those. I mean, those transactions come in our, you know, date-specific things price. So, we are looking at kind of single digit and..

Part of the difficulty we are having is gaining a sense of where your operating results are and where these numbers are, I see first call is, but your quarter that includes the 16 cents of non-operating gains from the sales of those businesses. So, just try to get a sense of should we be expecting anything along those lines in order to be a part of our first quarter assumptions?

I wouldn't expect that. I would not expect that. I would try and write-off the operations.

Okay.

We got another one -- if we get another one-time non-operating [inaudible] use one-time with you. I am sorry -- non-operating gains, then so be it.

Alright, thank you. Ill get back in, line.

Your next question comes from Mark Keeler CL King & Associates.

Good morning. Hal, I was wondering if you could just give us a little color on the repairs business. In particular, how much was it up in the fourth quarter on a sequential basis and on a year-over-year basis? And then if you could kind of break out where that was -- where you saw strength in? Remind us the break up between military and commercial, and where the strength was?

The repairs business was up considerably, and I am going to have to beg off that question because generally we shift to the Overhaul shops. And I am sure we know by component whether it's the military blade or military engine, I don’t have that specific data here, okay. But, let me give that a lot of the increase was -- we are selling the full sets, in other words, we are buying new and putting in new set, and selling it to the Overhaul shop, instead of them buying a new blade and assembling the full set. So, it was with incremental margin, marginal dollars, but as you can imagine, passing thorough new blades is not a very high margin business.

Right.

Does that answer your question?

Well as a percentage, how much was it up?

It was up about 50%.

Okay, good, great. That pretty much answers it.

And I would tell you that it was generally in Singapore. But, I don't know what engine they are going to.

Okay. Thank you.

Your next question comes from Harriet Baldwin of Deutsche Bank.

Good morning. I was wondering in aggregate there are a lot of cost cutting activities in aerospace in 2002. What would the total cost have been, is there way to specify that?

Yeah, Harriet, we can look at that, and of course, for instance, industrial gate turban has 18 separate facilities out there in their network. So, these numbers -- it is very difficult to get exact numbers. Let me tell you though that the headcount went down from about 3450 to about 3,000. Okay. And if we, just in aerospace, try and come up with what we believe the severance is, we captured about $2m in severance in -- okay? Now, the issue, of course, is very difficult to just lower back because some of this is just chasing the volume down, if you know what I mean.

Yes. The lower volume ends up even though you got fewer headcount costs -- so that volume dropping. What is your volume expectation for aerospace for '03? My mind going around.

We wiped up from last year and we are planning down slightly. Okay? We are down about 5 or 6%. We think we'll be in the $500m range. That's today's guess. Of course and for the last two quarters? Why ask me?

And in a sense ,you know, for service versus turban machinery, versus, IGT and cargo -- within that?

Yeah We are -- I think we are looking at continuing decline in IGT and the others are kind of flattish, you know, single-digits here and there. And that's really, you know, wrong flags at this point in time after the last four months.

Good, thanks.

Your next question comes from Jim Lucas of Janney Montgomery.

Jeff, question for you, big picture if we could if we look at Teleflex going on -- what the 28th consecutive year. You know, there have been some pluses some minuses throughout the year and some non operating gains, etcetera -- certain opportunity to take a tremendous rationalization to the cost structure to take advantage of what is a lingering and ongoing uncertain environment?

Well I think there is -- while we are always at what is our current structure across all of our businesses. Jim, I think, again we are trying to invest or we believe the future will be, so I think what will be in Aerospace we are very strongly in our cargo business; we are very strong in the joint venture with ATI, so I think where we are really trying to address is in either IGT or market specific. We are not trying to look generally in and I think again, our approach has been we don't manage for the streak. We are a growing company, which is obviously become much more difficult to grow versus what we have done in the past. But I think our approach is, frankly, the market is difficult; the economy is difficult. As long as we can maintain a strong balance sheet, we believe that we can find acquisition opportunities and growth opportunities even in a difficult market like this, but I don't think we will all of a sudden say that we could also clean up our portfolio in one sway, because again our portfolio is so diverse that again, as I said earlier, the predictability of a lot of these markets is, you know, 12 months out at best.

Okay. And on the topic of acquisition, could you characterize the pipeline. I mean, obviously valuations have been as uncertain as some of your end markets over the last several years, and you have remained disciplined, but you know, the balance sheet is in the best shape in a while, cash flow remains strong. Can you just bring us up to date on the pipeline?

Yes, I think we are seeing the pipeline getting better. I think I made that comment after the last quarter. But I think, we are seeing greater opportunities, the issue you still have in the pipeline is with interest rates being so low a lot of people are being artificially supported, but how long can they hold on, I mean it has been 2 years of down markets in several of the businesses we have, but I think we are -- I would say Jim, we see more global opportunities for acquisitions right now. Again, we have got a good network in the Asian markets; we have corporate representation; we have lot of operating people over there. So, I will say it is a typical Teleflex where we are in looking for investments that strategically will help us but they are smaller that we can build up and grow incrementally, and I also believe the same is in Europe.

Are there any Morse type deals or are they more of these $20-$30m that you are eluded to?

Well, I think Jim the size is out there. I mean, we have looked up -- we are not afraid in the Morse neighborhood of a $150m, and we have several of those that we are looking at ongoing.

And, Hal just on a house keeping on the numbers? The operating cash flow, could you give us a breakdown of net income, D&A, and what the working capital use was?

I can. The

Or will?

No we can't -- we will.

Well I am assure, about a $125m in net income that you know for it, amortization and depreciation is roughly $95m.

Okay.

Okay. Then working capitals the rest. I have got it by piece, so can you do that math?

Yes, I can do that math.

Thanks.

And you touched on the inventory increase, can you talk on receivables?

Well receivables held their own. We did very well this year. One other things, even though we serviced the airlines, we serviced them since through the over [inaudible] one of which is GE, so there are a pretty good credit last I checked. And, we had about and a 3-4m of charge-offs this year, the reserve is up slightly, but overall receivables has never been a very difficult. From a flexibility standpoint, now, from a timing standpoint, well the European theater in terms of medical is, you know, 180 days and that is just part of that business, so I think, when we look at that it gets a little long in the tooth, but they are collectable. Most of it is quasi or governmental hospitals over there.

And final house keeping CAPEX and DNA outlook for '03?

It looks as though for '03, we are going to spend about $80m for planned assets, and about a $100m on DNA.

Okay thanks a lot.

Sure.

Your next question comes from Steven Colbert of JMP.

Yes, good morning. Just wanted to know, can you had some color to what was in effect going on the medical segment? The segment was running [after a] very nice gains -- the 9-month -- fully [around] the year and then the [inaudible] in the four quarters that's will go on into 2003 as well, especially, the surgical device side?

All right, I think the product mix will continue but we did close a small onsite plant -- offsite plant, I am sorry. So that should help us, and so we have some new products coming on that helped the sales in '03, the [inaudible] ramping up, as I indicated earlier. The next thing is, it's interesting as we close an offsite plant in the surgical instrument services business, we've had a good deal of success on the other side of the surgical instrument services businesses. So Janine, you want to talk about that a little?

Sure. The onsite or in-hospital services that we offer have actually been expanding pretty nicely this year. They have a number of new contracts. They have -- looking to expand the number of hospitals that they serve. For instance, just to give you a flavor, in '01 they had multi-year contracts with approximately 58-59 hospitals. At the end of '02, they had contracts in place with 85, and in '03 it will be over a 100 hospitals, and these are -- integrated health network owner operated hospitals across the country.

As an average of volume per hospital that we could think about was onsite business?

We have a sense, but it does vary according to region and also the size of the hospital. So it's hard to gauge an average.

And that level of service.

Yes, that's right. They are not all buying exactly the same product or service; there are different levels and different features that we offer.

And these mostly in Europe or the U.S.?

U.S.

U.S. And, if I just ask one another follow-up question. You talked about the plant closing of the cost in the first quarter being or may be a couple million bucks in the Aerospace side, what you think in 2002 that cost you had in Aerospace segment?

Maybe a $0.5m. Okay.

For the full year?

For the whole year. Now for the entire company it was about $6m because we early on closed three plants in the Automotive business, which is one of the reasons our automotive and commercial margins are improving, as we see. So it, you know, not to make excuses but the fact of the matter is, these technologies in an Aerospace are diverse. It's difficult to move; there is a network, and it's just a little more difficult because some of the [inaudible] and then the approvals are site specific. So you -- close sort of close the service side down and woosh, your volume goes away. So it's just more, more difficult than we [inaudible].

And that number of $6m includes severance cost, as well as, other asset costs?

Yes.

Okay, thank you.

You are welcome.

Your next question comes from Matt McPhee of O.P. Capital.

Hi, how you guys are doing?

Hey, Matt.

Good.

I am trying to get an apples-to-apples number here, the low single-digit EPS growth you guys are expecting in '03, is versus a 315 number?

Yes.

So I go back to what that number actually was on the operating basis or, you know, 290 or something? You actually having 10% growth on you know core EPS, and that's all that come from commercial and medical, [inaudible] of 17% operating profit growth in those two businesses? Can you roughly tell, how we get there, how much is top line, how much is margin improvement?

Surely, we are looking at a much stronger commercial segment. We have a lot of new programs as I mentioned; it's not just the market because we planned the market down. We have some acquisitions that are rolling forward and we just did an acquisition.

Right. Okay.

Okay. So we are looking at a very strong commercial segment on sales and then, probably maintain that ninish operating margin.

Okay.

So we have [inaudible] acquisitions to know exactly what we are going to get first time through.

Okay, and then medical is just a standard mid-single digit organic growth with, you know, decent margins like you have done this share?

Yes, medicals just keep trending in.

Okay, great thank you.

Your next question comes from Morris Williams of Williams & Co. (ph).

Yes, it would appear that you are going to be having about $120m in free cash flow for '03 as a conservative forecast. A) is that about right and B) could you talk about the priorities, I presume, the first priority would be the [spinning] on acquisitions, but what would be second and third, particularly related to stock repurchase given the weakness in the stock today?

One it's, I get my numbers right, so I have a sheet with the 1000 columns that took down a 110 or so. Free cash. I take out dividends.

Right

Even though the shareholders get that. So, I am reluctant and the second part of your question, I apologize. Well, I think the priorities have been and always will be to grow the business. We will always leave the door of stock buybacks ajar but that's not our ilk. We have done fairly well over the years and the model with the silos and the engineering technologies seems to be one that we can continue to grow. So that's kind of the.

So, just to clarify, yes in fact you can't find attractive ways to spend a $100-120m on acquisitions and, obviously, you can do more given the strength in your balance sheet...

Right.

You would simply pay down the debt?

Well we would probably pay down the debt for the time being, but I think -- as I said the door is always ajar for a stock buyback but it's not our number one priority.

And if there were a change in the dividend policy regarding the taxation, would you change your thoughts with regard to dividend pay out?

That's certainly a viable alternative.

Thank you.

Your next question comes from Harriet Baldwin of Deutsche Bank

Just a quick follow up on the divested businesses with the annual revenue, what contribution is based from those and with that noted out of the 6% acquisition impact for '02?

The annual impact -- one was the equity investments so there was no revenue; it was 30% and the other being -- the small packaging line had an annual revenue of about $2.5m, so this is the minimum.

And with the new VIE accounting rules, are there any major or minor changes for your consolidated versus non?

No, I think VIE that’s STE?

Yeah, so we are finding that [inaudible].

Yeah no, we are going to -- we don't have anything, we would change in our accounting.

Okay.

Other than make more money.

Operator, are there any other questions?

Yes, we have several other questions.

Alright.

Your next question comes from Dan Indall (ph)of [inaudible].

Hi! Good morning. Thanks for taking my question. On the -- the comment on the bomb resistant cargo containers, and talking about not getting acceptance, is that the like of willingness to spend capital or you don't think it's going to take off at all?

Well it has -- it's accepted in a niche in a niche, okay, but very small margin. Secondly, it does weigh a lot and it costs a lot. So you are just running right up against a lot of things in airlines in terms of weight and cost. Particularly, as the airlines, its the state of their business. So what we were attempting to do, was to get it legislated in. The other complication is that we don't have a bomb resistance for every product line. So we don't have a bomb resistance for every airplane. So that's kind of -- if they legislated in, now what happens; you know, you want to fly on a plane with or you want to take this model and be without. So there are some complications there. But I would say, cost and weight were the -- we were hoping to override with legislation’s mandate but then, you know, economics wins.

Thank you

Your next question comes from Eric Foul of Talser Capital.

I am sorry can you repeat your Capex guidance for ’03?

Yeah, about $80m.

Thank you.

Your next question comes from Jim Lucas of Janney Montgomery.

Could you give us an update of the desiloing for lack of a better word, the collaboration efforts among the various businesses?

Sure Jime. We kick this off really in the fourth quarter and I think there is no question that one of the things we found is, with all of our different products and the number of call points that we have, we believe that our growth, though, some of our greatest growth opportunities wit the customers we have.

Now that's not to say that we are not looking for new customers but having some of our senior managers walk-in at a senior level and talk about the variety of products that we offer that both are either safety or reliability oriented, have truly opened some doors for our total offering of products. I think it's been early in the process, Jim, but I think a lot of companies that are dealing with things like with emission regulations, you know, we have three or four different products from our ETC to our hoses to our alternative fuels so again packaging those capabilities into an OEM who is frankly struggling with, how do they deal with emissions; we've seen some good savings in terms of just sharing information and cost, but as you can well imagine after 60 years of been decentralized, trying to bring this together, first you got to get everyone to speak the same language, and we have a variety of different cable organizations out there. So when you start drilling down into the information, what they call their cable, how its identified in their IT systems; is really been a process that has taken a lot of time but we are seeing those groups get together and truly trying to leverage not only their purchasing but really talked about market opportunities in which they can wok together.

And from -- as you mentioned was 60 years of this decentralization, has there been much pushback and how do you overcome that?

I'll tell you. I think, initially there was some pushback, but I think the economy is helping, the fact that people they need to work together, the networks that's growing inside of the organization. I think we are really starting to see -- again you got to have some small successes that build upon the larger successes, but I can tell you I am not a very patient individual but I have seen that there is an excitement and it's not just at the senior level, it's truly down at, what I would refer to as our middle management, where the activity is truly going to create the greatest value.

Okay. Thanks.

You next question comes from Deane Dray of Goldman Sachs.

Yes, you gave us on a macro level for the companies that hold the core growth of being 2% and you gave part of it for the individual segments; could you just step through the core growth for the three segments for '02, please?

Yes Deane. Aerospace was negative 6; medical, plus 3; and then commercial, plus 6.

Okay. And then on just going back to Aerospace for a second. We look at and we're trying to assize the components of the detrimental margin it was in the fourth quarter. So, if we say it was down about 7 percentage points EBIT margin year-over-year adjusting for goodwill, help me understand how much of that is manufacturing overhead absorptions of volume? How much is pricing as you talked about pricing being a factor and then is the residual the restructuring cost? Could you size that?

It's very difficult for us to collect those across all the units in that way. Particularly since of some of the job order in prices vary. But I will illuminate and that is in the fourth quarter coatings in turbo-machinery lost down nearly $4m. Precipitous decline in volume, as I said the network and how difficult it is to reduce cost and infrastructure. We go on, we took a job, an upgrade job, on a couple of turbines and lost a couple of million dollars.

And so I can't even think of anything else. But if anything could go wrong, it did go wrong. So if you look, you know, the difference between last year and this year, it just about falls to the turbo-machinery section.

Okay. And how much was -- I mean you mentioned pricing being a factor, which out of the four Aerospace businesses saw the most pricing pressure?

Probably turbo-machinery. I mean the others were single digits. They're all getting auto pricing pressure. But, you know, not something we can't make up in productivity.

Is that something we will lose share or are you just having to cut price in order to compete?

Are we losing, no I don't think we are walking away from share. I just think share is going down. Okay. Does that answer the question?

It did thank you.

Your next question comes from Tim Abbot of Tristan Capital.

Good morning. Thanks for taking my call. Could you help us out with your deferred income tax accounts and some backbone cash flow in '02 and also what you are expecting in '03?

You mean on the balance sheet the deferred income tax and -- let me see because I gave you a condensed balance sheet, so it's deferred income tax and other.

Right.

Okay. So, I mean the biggest piece of that deferred income taxes, it also a minority interest and it also has a $12m pension liability.

Okay.

So, those were the -- I'd say $12m pension liabilities, which then goes in to equity. You know, the [side] of that goes into reduction of shareholder's equity net of tax. It's probably the reason it jumped. The single biggest reason it jumped this year.

Okay. And are you expecting a benefit to your cash flow from -- in these areas from '03?

Well, I can tell you the pension funding will probably grow up along with everybody else's in the world. So, I would say not dramatically no.

Sure. Thank you.

The next question comes from Steven Colbert of JMP.

Yes. I was just wondering at last year how many platforms did you have the [inaudible] system and, you know, what we should anticipate for 2003?

Well, you know, I am glad you asked that question. I have been looking at this sheet of paper. 9.

I read your mind on that one and that one Harold.

Thank you. 9 makes me look smart. And now we have 11. And I think some of them we're just starting up last year, but we really had a great year.

Are you accounting towards some stable and sustained platform.

I thought at the end of the -- on the first quarter conference call you indicated that you are on 12 platforms, I thought.

I must have meant accounted.

The last time.

Yes I said I must have misquoted. I mean we may have, just you know, if we lost one -- if we did it, it was only -- Steve at itself -- because we're going to achieve with I fall in this I must have miscounted.

Okay.

As embarrassing is that is for the CFO to say.

Okay. Thank you.

There are no further questions at this time.

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