阿美特克 (AME) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ametek, Incorporated, first quarter conference call.

This call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. [Bill Burke], Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Menanya.

Good morning, and welcome to Ametek's first quarter conference call.

Joining me this morning are Frank Hermance, Chairman and Chief Executive Officer, and John Molinelli, Executive Vice President and Chief Financial Officer.

Ametek's first quarter results were released after the market closed yesterday, and have been distributed to everyone on our lists.

These results are also available electronically on your market systems, including First Call.

A tape of today's conference call may be accessed until May 5th by calling 888-203-1112 and entering the confirmation code number 419304.

This conference call is also Webcasted.

It can be accessed at Ametek.com and at StreetEvents.com.

The conference call will be archived on both of these Web sites.

I will remind you that any statements made by Ametek during the call that are not historical in nature are to be considered forward-looking statements.

As such, these statements are subject to change based on various factors and uncertainties that may cause actual results to differ significantly from expectations.

Those factors are contained in our SEC filings.

I will also refer you to the investors' section of Ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call.

We will begin today with some prepared remarks, and then we will take your questions.

I will now turn the meeting over to Frank.

Thanks, Bill.

Ametek had a very good first quarter.

Sales were up 2 percent to $267.5m; operating income was up 1 percent; net income and earnings per share were essentially unchanged from the first quarter of 2002.

These results were in line with our expectations.

Cash flow from operations was excellent, increasing to nearly $26m in the first quarter, up from $9m in the same quarter of last year.

The cash flow improvement was primarily driven by our working capital performance.

We're very pleased with our overall results, given the continued weak economic environment for the manufacturing sector and headwinds from pension, medical and other insurance costs which totaled 4 cents per diluted share in the first quarter.

In addition to achieving our financial objectives, we also made great progress on our strategic initiatives.

We completed two acquisitions in the quarter, Air Technology and Solid State Controls, both differentiated businesses that will contribute nicely to our future growth.

Our Advanced Measurement Technology Division received an urgent order for five MiniPINS systems from the U.S. Army.

The MiniPINS is a field portable, easy-to-use assay system that can identify chemical weapons and shield munitions, including sarin, VX and mustard gas. "Control" magazine announced its 2003 reader's choice awards and Ametek Drexelbrook once again was a huge winner.

We're rated number one in both level switches and electrical property-based level gauges.

We took second-place awards in ultrasonic levels gauges and open channel flow meters.

We continue to develop products that meet the process market needs.

We continued our move to low-cost manufacturing sites, a very important strategic initiative for us.

Revenue from products produced in our low-cost locales, Reynosa, Mexico, the Czech Republic and Shanghai, China, totaled approximately $44m in the first quarter, up 9 percent from the fourth quarter of 2002.

In 2003, we expect to produce over $200m in low-cost locales, up $40m from 2002.

As part of these moves, we've also announced the closing of our Chambersburg, Pennsylvania, motor manufacturing facility.

The product produced there are being moved to Reynosa and Shanghai.

International sales were 40 percent of company sales in the quarter, a record for Ametek.

Global expansion is a key strategic thrust for the company with the goal of generating half of our sales outside the United States.

Acquisitions of international companies coupled with internal expansion activities drove this increase.

We also announced two major new program wins.

The first, the Censor Suite for the GP7200 engine for the Airbus A380, the newest jumbo jet under development.

And second, our next generation instrumentation cluster which has been selected by Freightliner for its Century Class truck.

Turning our attention to the individual operating groups 3/4 for the electromechanical group, revenues were up 6 percent, driven by Air Technology which was acquired in January.

For EMG's core businesses, overall market conditions remain relatively unchanged when compared to a year ago.

Our European floor care motor business performed extremely well, while business conditions were weak in the U.S. floor care market.

Operating income for the quarter was up 6 percent and operating margin expanded to 16.3 percent from 16.2 percent last year.

For the Electronic Instruments Group, sales were down 2 percent for the quarter.

We saw strong performance from our high-end analytics instruments businesses, and the acquisition of Solid State Controls added to revenue in the quarter.

However, market conditions in aerospace and power are much weaker than last year.

EIG's operating income was down 5 percent for the quarter, and operating margins decreased to 15 percent from 15.3 percent last year.

Turning to the outlook for 2003, for the balance of the year, market conditions are expected to remain weak for many of our businesses, particularly aerospace and power.

As in the past, we are managing the cost structure of the company very closely and making the appropriate adjustments where required.

We are reaffirming our full year forecast of modest revenue growth with diluted earnings per share in the range of $2.65 to $2.75 per share, an increase of 6 to 10 percent over 2002.

For the second quarter of 2003, we expect revenues to be up modestly as the top line benefits of the Air Technology and Solid State Controls acquisitions are partially offset by weaker aerospace and power markets.

We are comfortable with the current Street estimate of 65 cents per diluted share in the second quarter.

I'd like to spend a few minutes talking about Solid State Controls, our latest acquisition which we acquired effective February 28th.

Solid State Controls with annual sales of approximately $45m is the leading supplier of uninterruptible power supply systems for the process and power generation industries, markets that Ametek knows very well.

Solid State is the market leader for this very differentiated niche product.

These highly customized systems are used by its customers to ensure a steady supply of clean power to keep their critical processes functioning properly.

These critical processes typically involve harsh environments and have a correspondingly high cost of failure.

More than 55 percent of Solid State's sales are to the process industries, including the oil production and refining, chemical, petrochemical and steel industries.

The balance of its sales are to the power generation market, primarily fossil fuel and nuclear power utilities.

Solid State Controls is a great addition to Ametek and an excellent example of our acquisition strategy at work.

The acquisition pipeline remains strong and we'll look to make more acquisitions in the future, in line with our stated strategy.

In conclusion, we're very pleased with our performance in the first quarter of 2003.

We met our expectations and look forward to building on our track record of success over the balance of the year.

We are managing the company to perform well in these difficult economic times while positioning ourselves for continued growth in the future.

We remain confident that our four growth strategies will continue to create value for our shareholders.

John will now cover some of the financial details, and then we'll be glad to take your questions.

John?

Thank you, Frank.

We had a solid first quarter of 2003.

We met our earnings expectations and generated excellent cash flow.

We're well positioned to deliver on our commitments for 2003.

First, focusing on the P&L, SG&A expenses were $460,000 lower than a year ago, as cost reduction efforts overcame the additional selling expense from acquired businesses.

G&A expenses specifically in the first quarter were unchanged.

Higher pension and purchased insurance costs were offset by other cost reduction activities.

Interest expense was down $262,000 or 4 percent versus the first quarter of 2002, primarily due to the lower interest rates in the first quarter of 2003.

Interest expense was up sequentially from the fourth quarter of 2002 as debt levels increased in the first quarter with our acquisitions of Air Technology and Solid State Controls.

Other expense totaled approximately $900,000 in the quarter, an increase of $700,000 from the first quarter of 2002.

The key driver was unrealized losses on the writedown of marketable securities held in our self insurance subsidiary.

The effective tax rate in the first quarter was 32.4 percent, essentially in line with our expected rate for the year.

Our first quarter cash flow was excellent.

Our balance sheet remains strong, and we continue to see results from our working capital focus.

Cash flow from operations was $26m in the quarter.

The 2003 cash flow from operations is considerably higher than last year's level of $9m.

Working capital management was a key driver to this increase.

Looking to the balance sheet, cash and marketing securities totaled $28m versus $22m a year ago.

Inventories increased $13m in the quarter to $142m.

The acquisitions of Air Technology and Solid State Controls in the first quarter accounted for $11m of that increase.

Accounts receivable at March 31st, 2003, were $198m, up $22m from year end,$15m of that increase is driven by the acquisitions of Air Technology and Solid State Controls.

Our collections cycle improved by two days from a year ago.

Accounts payable was $90m, of which $6m was associated with the two acquisitions made during the quarter.

Total debt was $496m, up approximately $106m from year end, 2002, as we paid approximately $114m for the acquisitions in the quarter.

The long-term portion of total debt was $358m.

Our available borrowing capacity totaled approximately $113m at March 31st.

Stockholders equity at March 31st was $433m, up $13m from December of 2002, and up nearly $80m from the first quarter of last year.

Our debt to capitalization ratio stood at 53 percent at March 31st, up from 48 percent at year end, 2002, but down from 57 percent a year ago, despite making the two acquisitions noted above.

Without further acquisitions in 2003, our debt to capitalization ratio would approximate 45 percent at year end, further testament to our ability to generate cash.

Our capital allocation policies remain unchanged.

Acquisitions remain our first priority.

In the absence of acquisition opportunities, our next priority is to pay down our debt.

Our dividend is expected to remain unchanged, and stock repurchases will be limited to offsetting the dilution from our benefit plans.

During the quarter, we repurchased 190,000 shares of our common stock for a total consideration of approximately $5.8m.

In March, the board of directors authorized an additional $50m for stock repurchases.

This was added to the $2.5m remaining under a $50m authorization approved by the board in 1998, bringing the total amount available for repurchase to $52.5m.

Good will totaled $484m, up $92m in the quarter, reflecting the preliminary accounting for the acquisitions of Air Technology and Solid State Controls.

Capital expenditures were approximately $4m for the quarter, and depreciation and amortization totaled $8.6m for the quarter.

Turning our attention to the remainder of 2003, Frank has reaffirmed our guidance for 2003 at $2.65 to $2.75 per share, a 6 percent to 10 percent growth in earnings in what remains a difficult economic environment.

That earnings guidance includes the additional pension cost of approximately $7m along with higher general business insurance and medical expenses of $4m, the equivalent of about 22 cents per share for the year.

For the year, G&A is expected to be up approximately 6 percent due to these higher pension and medical costs.

Interest expense will be up mid single digits, given the acquisitions of Air Technology and Solid State Controls, assuming a stable interest rate environment.

Capital expenditures are anticipated to increase modestly in 2003, and should be less than 2.5 percent of revenue.

Depreciation expense is expected to be approximately $35m.

Our tax rate is anticipated to be between 32.5 and 33 percent.

In summary, Ametek remains financially sound.

Our focus on operational excellence continues to pay off.

Our factories are well run, our inventory are in line with expectations, our margins are good and our cost structure is well managed.

The balance sheet is healthy.

We continue to generate strong cash flow and our working capital metrics are good and improving.

All this in a very difficult economic environment.

We have significant financial resources at our disposal to support our four growth strategies and continue to create shareholder value.

The outlook for 2003 is solid.

Bill?

That concludes our prepared remarks.

We'll be happy to take your questions now.

Thank you, Mr. Burke.

Today's question-and-answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press star one on your touchtone telephone to ask a question.

We'll take our first question from Jim Lucas with Janney Montgomery Scott.

Thanks a lot.

Good morning, guys.

Good morning Jim.

Two questions.

The first is if we look at the end markets, in particular the floor care market where there's been it's gotten some attention lately with Maytag on a couple of press releases can you talk a little bit more about what you're seeing in the floor care market from a competitive landscape, as well as opportunities for further de-integration of some of the vertical manufacturers?

Sure, I'll be glad to do that, Jim.

The end markets, or the, let's talk about Ametek's business.

Ametek's business overall in the first quarter was up slightly in the floor care business.

We had substantially different dynamics between Europe and the United States.

In Europe, we had just super performance.

We put some new management in place last year in that operation and they've done a really great job.

They've been moving production to our Czech operation and we expect to be producing, oh, probably $40m of volume in that plant this year.

And they've been able to, with that cost structure, actually lower price a little bit and get some market share that previously we wouldn't have taken because we couldn't have made good money in doing it.

And as a result, they've gained that share and they've substantially improved their profitability.

So Europe performed very well for us in the first quarter.

In terms of the U.S. floor care business, that was weaker, as you indicate.

There have been recent announcements from Maytag and Whirlpool.

Talking to the general appliance market, it has weakened and we have seen that.

And we had expected some of that, not quite to the degree that it's actually occurred.

And so it was a little weaker, but Europe was stronger.

And on balance, we pretty much met our expectations.

Specifically in terms of Hoover, we actually have some great opportunities with Hoover, and we could actually see some positivesas a result of their announcement.

Because in essence, what has happened to Hoover is that they are producing products at the top end of the portfolio, and the issues they're having are that companies are coming in under them.

And it so happens that our motors are, and the reason we have the business with Hoover is that we support their low end business.

So if, in fact, Hoover decides to come down the curve, which they may have to, it could mean incremental business for us.

We have not received that now.

It's just a possibility.

In terms so I see some opportunity there.

You know, we're looking to take that business from a run rate of $10m up to on the order of $25m by the third quarter of this year.

This was previous business that we had won from them, not the result of what I was just mentioning a few seconds a go.

In terms of opportunities, the second part of your question, they're substantially above and beyond Hoover.

As a matter of fact, I looked last night and we are actively working now with nine customers, and the total volume from all of those nine customers is about $50m of annualized revenue.

Now, that doesn't mean we're going to secure all of that.

But over time, what tends to happen because of our very low cost structure, is the business tends to migrate to us.

So we're working with those customers, and hopefully over time we will achieve some of that business.

And some of it's in Europe, and some of it's in the U.S., and some of it's in Asia.

OK.

And then if we could switch gears to the differentiated side of the business, in particular the two recent acquisitions.

One of the hallmarks on the acquisition front with Ametek has been the integration process, and I know it's fairly early in the game, but could you speak a little bit to the integration opportunities you see?

Yeah.

Both these companies that we have acquired are really first-class companies.

And to date the integration process is going very well.

I sit in on monthly meetings with each of these acquired companies to specifically look at the integration process.

And they have come into the company well.

They both have very strong management teams, and, you know, we're going to continue to look for synergies to meet the expectations that we set out initially in our proposal, you know, our own sort of capital allocation that we set up when we first did the acquisitions.

OK.

And from a timing perspective, as we look as the year progresses, in terms of earnings contribution, do you see them being relatively partially additive, non-dilutive, can you speak a little bit to the earnings potential here?

Yeah.

There definitely will be some accretion from each of these acquisitions as the year goes on.

It's not going to be a substantial part of our earnings this year.

The real impact will come in 2004 as we get them integrated and as the earnings go up.

There's also a specific dynamic with one of these acquisitions, the Air Technology acquisition, where their normal business tends to be much stronger in the second half of the year than the first half of the year.

And we will enjoy that benefit when, in fact, that volume goes up.

So they will have definitely more accretion in the second part of the year than what we'll see in the first part.

OK, thank you.

You bet, Jim.

We'll now take our next question from Scott Graham with Bear Stearns.

Hi, guys.

Hello, Scott.

Could you provide a little bit more detail on the sales for each business, each segment, broken down between FX contribution and revenue dollar contribution from acquisitions?

From foreign exchange and from acquisitions?

Yes, please.

OK.

Let's look at foreign exchange first.

For the electromechanical group, the impact on the top line was about $4.8m, and for EIG, the impact was about $1.9m.

In terms of acquisitions in the first quarter, we had about $12m in acquisition volume with about $8m of that in the electromechanical group and $4m in the electronic instruments group.

That's great.

Thank you.

Second question.

Could you maybe walk through a little bit more detail behind what's going on in the differentiated business?

And by that I mean in particular instrumentation where the idea here behind the acquisitions made over the last several years was building critical mass, and, you know, in that when projects came to bid, you had to be invited pretty much to every party, at least to bid.

What are you seeing there in terms of, I guess the easiest way to say this, do you think that that is coming together, and, you know, your sales, your organic growth declines are more a function of end markets whereas maybe you are at the margin gaining some critical mass share, so to speak?

Yeah, I would say that we feel pretty good about that.

The acquisitions that we have done have definitely accumulated some substantial mass.

And if we look at the dynamics that are happening in these businesses, I'm actually pretty pleased.

In the process part of the instruments group in the first quarter our organic growth was up several percent.

We're expecting that to continue.

We had excellent growth in the high end analytic instruments area which is essentially where we've done a large number of these acquisitions.

You may recall we acquired the EDAX Company and we acquired IRAS, both very high-end differentiated businesses that are performing extremely well and driving that growth.

And I believe as the markets return, that growth is going to accelerate substantially.

Also, in the first quarter the industrial part of the instruments group performed extremely well.

It had an organic growth of about 3 percent, and that was with a depressed heavy vehicle market environment.

If you remember last year, in that particular environment there was an overbuild because of the EPA regulations so we had a weak quarter there.

But even given the dips in business, the other businesses in the industrial segment did very well.

So we had organic growth, and part of that is definitely related to the fact that we're gaining some critical mass and being able to address our customers with a larger portfolio of products.

And in our aerospace business, you know, the GP7200 sale that I mentioned in my opening remarks basically was the result of our ability to bring together a whole sensor suite for engines where we basically are supplying all of the key sensors on the engine.

And therefore a customer like GE can come to us and only has to deal with us for the entire sensor suite.

And the aerospace people have done a phenomenal job, both through acquisition and in terms of internal development, of putting that whole sensor suite together so that we can basically support, you know, an entire engine.

And that also rolls into the Lane gas turbine where we did exactly the same thing.

Frank, does that critical mass momentum, is that dependent upon new airline/aerospace platforms?

Yeah, and derivatives.

And derivatives.

Yeah.

We're finding a business derivative area as well as the new platforms.

I mean the you know, obviously on the A380, that's a new platform and that's going to be a very, very nice piece of business for us.

But we're also on some of the GE engines that are derivatives engines where they'll come to us.

And they'd rather, you know, talk with one supplier than talking to three or four as they upgrade the engine.

So our aerospace business is just positioned phenomenally right now as, of course the market is very weak, but as that market comes back, I think we're going to do extremely well.

Last question is in regard to the heavy truck market.

I know that you had some concerns about it for the first quarter, pretty much why you were expecting flat year over year EPS.

What is your view of, you know, let's say Class A build domestically?

I've seen numbers ranging from plus 5 to minus 20.

Yeah, right.

Where do you fall?

It's interesting that you ask that question, Scott.

The data that we use, which is called an AX database, shows this year that the heavy truck builds will be down about 9 percent and that is what we're basing our forecast on.

And given that, we're estimating our business to be about flat for the year.

We expect to gain some share in that business as a result of the NGI platform that I mentioned previously.

I just saw a release from PACCAR that basically they are saying the market in the U.S. or North America is going to be flat.

So those are the two data points I have.

We're using the minus 9 percent.

I can tell you that the order intake in the first quarter was very good and supports a stronger second quarter than first quarter.

So I think the trend we were expecting with a very sort of weak first quarter and growing through the year is substantiated via that order trend.

Thanks very much.

You bet, Scott.

Moving on, we'll hear from Matt Summerville with McDonald Investments.

Hey, good morning.

Good morning, Matt.

A couple of questions.

Frank,¾ right towards the beginning of your opening remarks you had mentioned the closure of a facility in Pennsylvania.

I was wondering if you guys incurred any, you know, meaningful costs associated with that.

And also provide an update on where you are in achieving your cost reduction target for the year of somewhere between, I believe you previously indicated $15m to $17m?

Yeah.

Good questions, Matt.

In terms of the Chambersburg plant closure, that plant came to us through an acquisition that we did several years ago.

And basically that's been handled in the purchase accounting for that particular acquisition.

So there really are not any substantial charges to the P&L directly to make that happen.

In terms of your second question, I did mention a number last conference call on the order of $15m, and let me elaborate a little bit more on that and talk about some additional cost reductions that we put in place since then.

The $15m or $16m that you mentioned was the summation of two things.

You might recall at the end of 2001 we announced a $25m annualized saving activity.

We actually in 2002 achieved about two thirds of that.

On an incremental basis in 2003 we're going to achieve one third of that, which would be about $8m.

So that's half of that $15m or $16m that you talked about in rough numbers.

The second part of that was basically what we had budgeted in terms of further plant consolidations, further movements to low-cost locales, et cetera, for the year 2003.

Both of those activities are moving in a direction and a basically we're achieving those targets.

Our first quarter performance, although flat, as John mentioned, we absorbed substantial pension, medical and other insurance costs.

I think, John, you said it was about, or I said it was about 4 cents in the first quarter and it's going to be over 20 cents for the year.

When you factor those additional costs into the equation and what we've been able to do in terms of profitability and margins, it’s, you know, it's a pretty reasonable performance.

The third part of this, which I did not announce last time because we just initiated it in the first quarter, is that as a result of some of the costs or some of the concerns we saw in the aerospace and power markets, we decided to undertake another cost reduction program in the first quarter.

It was predominantly focused on the instruments group.

We basically put an additional $7m of annualized savings in place.

We expect to realize about $5m of that in 2003 and the costs for that are going to be incurred on a pay-as-you-go basis and it's going to cost about $2m to make that happen.

So when you net that 2 against that 5, you already would have had that baked into your guidance that you provided back in January?

No, it was not in that guidance.

But what has happened is there has been some softening in our aerospace business above and beyond what I talked about at the beginning of, or in January.

And therefore, we've rebalanced to keep our estimates still in line.

OK, great.

Now, can you talk a little bit more about the aerospace side?

You know, what you are seeing and what you expect, you know, for the year on the commercial, the business regional and the military side of things?

Sure, I'll be glad to.

Basically, for the year in aerospace, we're forecasting that business to be down about 8 percent from 2002.

What we had anticipated at the beginning of the year was down about 5 percent.

So we've had some degradation in that business.

It's predominantly 3/4 actually, it's all in the commercial and business jet area.

On the commercial side, GE's engine builds have been reduced further than we had anticipated, and also in the business jet environment, that business had worsened a little bit more than we had anticipated with one of our big customers, Cessna, being a component of that.

So that volume degradation from our estimates in January is what caused us to do these additional cost reductions.

Great.

And what you're seeing on the military side of things, is that, you know, relatively flat compared to a really, really strong '02 or has that scaled off a little bit?

Yeah.

No, it hasn't come down.

It's stayed essentially flat, at a super high level.

I mean we were up 50-60 percent last year and we would expect to get some dividends from the war in Iraq as they start, you know, purchasing additional equipment to put on the airplanes from all the flying they did.

So we've got a very positive outlook on the entire military business for Ametek which now is over 11 percent of our sales.

Great.

One last question and then I'll get back in queue.

As far as you know, you brought up the whole Iraq thing.

Did you see any real change as we progress through the first quarter January, February, March, around the war in terms of order rates?

Did you see a spike down in margin and then it kicked back up?

Yeah, we saw some deterioration through the January-February-March timeframe, and which was another factor in us putting this cost reduction program in place.

But April has popped back up.

So it's sort of bouncing along the bottom is the best way I can describe where we are.

I wouldn't say it was as huge impact as a result of the war, but we definitely saw some.

Great.

Thanks a lot, guys.

You bet.

Moving on, we'll hear from Steven Colbert with JMP Securities.

Thank you, [Lynn].

Good morning.

Can we get, first of all, some idea of the core revenues in both of the two segments of the company in the quarter?

And can you also expand about that, you know, on that somewhat in terms of what you expect, given your second quarter guidance?

Yes.

For the first quarter, the core growth of the company was down about 3 percent.

For EMG, it was down about 1 percent and for EIG it was down 5 percent.

And as I mentioned a few moments ago, within EIG we actually had good organic growth in both the process and the industrial sides but the weaker growth in the aerospace and power sides that led to that minus 5 percent.

As we go forward, what we would see in the second quarter is very similar in terms of internal growth, possibly a little bit worse, but roughly the same kind of numbers.

And then some improvement trend as we get out into the third and the fourth quarters.

Has your outlook for the second half, which you talked a little bit about on the last conference call, changed very much from back then, now that you have three or four months under your belt?

I mean it sounds like the aerospace is somewhat weaker than you thought.

But outside that market is everything else tracking pretty well here with expectations earlier, or the market has changed very dramatically since then?

Yeah.

No, there hasn't been any dramatic shift.

I would say that aerospace and power is the biggest shift in our major market areas.

The second one would be what I mentioned before in the floor care business where we have Europe very strong and the U.S. weak.

But when you sum those two together, it's pretty much what we had anticipated.

The other thing I should point out is that the acquisition of SCI was not in our original projections because obviously we hadn't acquired it until February of this year.

So that also is going to help and we will get some slight accretion from that in the second half of the year.

So I would say those are the changes that have occurred since our last update.

OK.

And with the your comments about the high end of the analytical instrumentation which in effect repeats some comments that you had made earlier, how much volume do you think roughly we're talking about within the EIG group?

I'm not sure I understood question.

Do you mean how big are the PNAI and high-end businesses?

Yes, I mean in terms of your comments about that 3/4 that part of the product lines.

How important is it basically to the company overall?

Yeah, I mean those businesses are on the order of $150m and they've got very high profitability.

So it's a very substantial part of our company, and more importantly it's one, when we look to add these acquisitions, that's the area that we're looking to add.

OK.

And just a last question here and I'll get back into queue, in terms of the new business opportunities which you mentioned on the Airbus 380 and with Freightliner, what is the timing of those businesses coming onstream as you see it right now?

Freightliner is essentially an '04 activity.

We've won the business and that truck is due to come on in '04.

The A380 is 3/4 the volume from that product is going to really ramp up in '06 but the first plane is actually due to fly,I think it's the end of this year and we're obviously doing R&D work on that activity.

Probably what's most important for us in that particular area is that this is the first major win for us in the Airbus and it's really a platform now that they can gain some confidence in our ability, and hopefully we can grow that over time.

So it's a very important strategic win for us.

Is the margin curve on that business typical of many aerospace type products where early on in the program the business tends to lose money and then as volumes build and profitability gets better...

Well, from the viewpoint that we're investing R&D dollars at this point with no volume, I would say yes.

But from the viewpoint of when we start to ship, the margins are going to be great on this product.

So there's not a build up in margin, if you will, in terms of the actual product sales themselves.

But the margins, I assume, will not turn positive on this until 2006 or 2007.

Yeah.

If you look at it on a program basis, that is a fair statement.

Absolutely.

Thank you, Frank.

You bet.

Once again, if you'd like to ask a question, please press star one to signal.

We'll now take a follow-up question from Jim Lucas with Janney, Montgomery, Scott.

Thanks.

If we take a look at the Cap X which you're indicating up slightly, obviously that's been kind of a general concern across all industrial companies these days.

Can you speak to where you're seeing the spending and also what you're seeing from your customers in terms of their capital spending outlook?

Talking to the customers first, Jim, I would say it's pretty lethargic.

We're not seeing any major impetus on their parts to inject, you know, further capital into the system.

So I would say it's pretty subdued, and bouncing along bottom is probably the best words that I can use to describe it.

In terms of our capital and where we're spending it, you know, it's really a combination of maintenance which is probably about a third of this; expansion, which is probably about a third of it; and then productivity improvements, or basically, you know, getting our product costs down, getting our manufacturing costs down, et cetera, would be the other third.

So that's just a rough breakdown of what that capital is being allocated to.

And what about new products and internal growth?

Would that, are you just expensing that as you go along?

Oh, yeah.

That's an expense.

There's not any appreciable capital associated with the R&D activities.

There's surely some when you bring it into manufacturing but it's not substantial.

I mean most of the basic high-end R&D work is done in our instrument businesses and they're not capital intensive businesses.

We don't capitalize any of that, Jim.

We expense all of that as incurred.

And that spend rate is up about,a few million dollars this year over last year.

So we're spending it at a reasonably good pace.

We haven't cut back there at all in the last several years.

Yeah, that's a good point.

Actually, I just looked at a graph and over the last five years we've increased that level of expenditures, even given the economic environment.

So it was not an area that we cut in.

OK.

And following up on the airbus one, is that as a result of the existing Ametek businesses?

Have any acquired companies helped you get the foot in the door?

Can you talk about what it was that has allowed you to finally get your foot in the door at Airbus?

Yeah, I'd say a combination of things.

Probably the most important was our ability to bring all these products together, and that was as a result of both acquisitions and internal development activity.

Secondly, it was just a great strategic job by our people that they you know, we've been bouncing our head against the wall at Airbus for a long time, and they basically said the way to do this is to first be persistent, and secondly, you know, come up with some products that in essence would really get their attention.

And that's what this team did, and the result has been good.

OK.

And finally from a vitality index, new products as a percent of sales, do you have a ballpark of 3/4 whether you measure it on a two-year or a three-year basis...

Yes, we measure it on a three-year basis and in the first quarter it was in the 10-11 percent region.

And any long-term goal there, or...

Yeah.

I mean this is something I’d like to get up into the 15 percent plus kind of region.

OK.

And incrementally, you know, this is incremental... as a matter of fact it's an interesting point because we're having an officers' meeting on Monday and Tuesday of next week which is the one time a year we bring all the officers together.

And one of the things we're going to be talking about is specifically this area and to see what we can do to get even more growth from the dollars we're spending in the R&D side and get this percentage up faster.

OK, great.

Thanks a lot.

You betcha.

And Matt Summerville with McDonald Investments has a follow-up question.

Hey, Frank, I think you mentioned a couple times that the industrial business was perhaps surprisingly stronger than what you thought it would be in the first quarter.

And not coming from the heavy truck side.

Right.

That is correct.

Can you talk about where you saw the strength and what the expectation is for those pieces of the business outside of truck, which was already covered?

Sure.

Our test and calibration instruments business did well.

They were up I think $600,000 or $700,000 in the quarter, so they did well and that's a combination of some new products that they introduced as well as spreading their wings into some new market areas.

So they did a really nice job.

Also, our chemical products division which is in that particular area also had some nice revenue growth and, you know, the sum of those two which, you know, offset the Dixon business which, as we have previously indicated was going to be down some.

OK.

And then, John, a couple of items.

That incremental other expense that you realized in the first quarter, will that continue or is that more of a one-time event?

We think it's a one-time event.

We hope it is.

It just happened to be some pieces of our stock portfolio in our Bermuda sub that were under water and we recognized that loss and we cleaned house, so to speak.

And unless the market does something dramatic, we think we're squared up there.

And with the numbers you provide in your commentary, you've sort of alluded to a free cash number.

But, you know, aside from the calculation can you just talk about what your expectation is for free cash flow in 2003?

I haven't had the chance to run throughout all the numbers.

Including whether you're counting improvement in working capital in that number?

Well, you know, that's a non-GAAP number and we'll put that up on our Web site.

But we should be up in free cash flow mid to high single digits this year, using our definition from a free cash flow.

OK, great.

And then one last question for Frank.

You mentioned, I'm trying to look back in my notes here, an order, I believe, out of the U.S.

Army at AMT.

Can you talk a little bit more about that in terms of whether or not you're seeing a big ramp up in that business related to homeland defense and whether this product is going to be used domestically or abroad?

We don't actually know where that product is going to be used, but our expectations are that it was abroad.

It was a great win.

As I mentioned, it was five [Minipin] systems.

I think it was on the order of a half ,million dollars and, you know, I think it was a direct result of the war and what, you know, is going on in the world.

In terms of the general Homeland Security question, we just have a great opportunity here.

The products that we have really could take off.

And we're working very closely with Lawrence Livermore Labs in terms of some products that would basically enable people to look at fissile material that's coming in through the shores in our country and there's could be some super opportunity for us to grow.

And the issue is that the government really has to sort out exactly where their spending is going to go.

We've recently initiated some very strong contacts in Washington, actually met with several, at least one senator, and it's going to be probably a quarter before we know exactly what is going to happen.

But this could be very, very big and very positive.

Do you have anything on the order of you're talking about being potentially very positive, already built into your '03 forecast?

No.

No, there's none of these what I would call big program wins built into the forecast.

Also, I would say if we did get them, I think the impact would be more in 2004 and '05 than it would be in 2003.

And have you I think at one point you talked maybe about a $50m kind of opportunity here, round numbers.

Is that still kind of how you're sizing up, you know, this opportunity for Ametek?

Yes.

I would say that's a reasonable number on the longer term, yes.

Great.

Thanks a lot, guys.

You bet.

Our next question comes from Godfrey Birckhead with SBK-Brooks.

Good morning, guys.

Hi, Godfrey.

Hi, Frank.

Powdered metals, what's going on there?

Bouncing along bottom.

Basically the business has not shown any substantial growth or deterioration.

They're managing the business extremely well from the viewpoint of profitability and really waiting for a market rebound.

OK.

And so it continues to be a positive cash generator for you...

Oh, absolutely.

You know, this is a very highly profitable business.

OK.

Now, can you give us some insights into what's going on in the power business and what kind of declines you're seeing there, the way you did with the aerospace area for us?

Yeah.

Power is the weakest business that we have.

Our expectations for the year are that the power business is going to be down about 20 percent.

About 20 percent?

About 20 percent and 3/4 actually 23 percent is the exact number that's in our forecast.

OK.

And with some different dynamics between the two businesses, the transmission and distribution side we're saying is going to be down on the order of 13 percent, and generation down on the order of 36 percent.

So the only good news in here is that the starting point for this was relatively small.

It was about a $60m business in 2002.

So although the percentages are large, the volumes are, you know, more manageable because of the size of the business.

And I might point out, too, that these numbers do not include the recent acquisition of SCI which would add revenue to this.

This is the numbers I just gave you were the impacts on our core business.

Right, right.

What's the longer term outlook here, Frank, in terms of markets and new products you have?

Well, I'm excited about this market in the sense that I believe it will come back.

It will come back strong.

As I've mentioned previously in some of our other conference calls, we've been putting a lot of R&D in the transmission and distribution side of this business.

We believe the generation side is somewhat saturated, but getting the power to the end user is a real issue in that there isn't adequate infrastructure in place to do that.

So we've been putting R&D dollars into the transmission and distribution side, basically designing products that can measure the quality of the power.

And, you know, I believe, as these markets come back, that our ability, first, to just leverage our cost structure as the market comes back and then secondly add the new products that we're developing, the upside potential is significant.

I mean I’m excited about all of the markets that are the weakest ones right now.

Aerospace is sort of in the same position.

I mean they're doing a phenomenal job of managing the profitability of that business so when it comes back the incremental affect on the bottom line is going to be substantial, and the same in the heavy vehicle business which are really the three businesses that are sort of down the furthest, if you will.

What's your best guess as to when that might happen in the power business?

We're running the business, Godfrey, in the sense that we're not assuming when the businesses are coming back.

We're just assuming that we're bouncing along bottom and when we start to see things change, then we'll react to it.

To try to predict exactly what's going to happen is just not something that where we feel we can do well.

OK.

My final question has to do with something that was sort of referred to before in terms of capital expenditures.

If you were to take out the movement of facilities to Mexico, China and the Czech Republic and just look at your capacity as a constant, what percentage capacity utilization would you guess you're at, at the current time?

My guess would be, and I want to use the word "guess..."

We don't typically, you know, roll that up across the company, but my guess would be on the order of 65 percent.

Sixty-five percent?

Yeah, 65 percent.

So we've got...

OK.

And if you maxed out, what would it be, Frank?

You mean maxed out in terms of?

If you were operating at full utilization, what would that percentage be?

Do you mean like typically people run at 90 percent or something like that?

Yeah, exactly.

Exactly.

Oh, I see what you're saying.

That's probably the number.

I mean you probably would be at the 90 percent level.

OK.

Thank you very much.

OK.

And Steven Colbert with JMP Securities has a follow-up question.

You've actually my question, actually.

So I'm fine.

Thank you.

OK.

Thank you.

We'll move on to Steven Louis with [Louis Capital Management].

Would you go through the cash operating cash flow again?

I understand the net income on the D&A of 8.6.

With the acquisitions and everything I'm wondering how you reduced working capital to get 26.

How we reduced working capital?

Well, you've got $19.7m of net income and $8.6m of depreciation and amortization and that's almost $28m.

Deferred taxes I thought might be a positive.

It's a positive.

A little less than $6m.

OK.

And then how about the rest of it?

Receivables net has got a $6m negative.

Inventories is about $1.6m.

Other current assets is about $2m.

Payables and accruals is about $8m and there's a positive on income taxes of about $11m.

OK.

So the deferred income taxes made a big difference, the $6m.

It contributed nicely, Steve.

Yeah, especially compared to last year.

Compared to last year, there were dramatic improvements along the way, and especially at the working capital level.

OK.

And the $113m of debt capacity, that is where you would max out on all the covenants?

No, that's what we borrow under existing negotiated lines of credit or deals.

Our max on our covenants is probably 2X times that, at least.

OK.

I think that's it.

Thank you.

And as a final reminder, please press star one to ask a question.

We'll pause for a moment.

Mr. Burke, it appears there are no further questions at this time.

I'd like to turn the conference back over to you.

OK.

Thank you all for joining us today.

We appreciate your participation.

If you have any other questions, I can be reached at 610-889-5249.

Thank you.

That concludes today's conference call.

Thank you for your participation.