阿美特克 (AME) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to this Ametek Incorporated second quarter conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Bill Burke, VP of investor relations.

Please go ahead, sir.

Thank you, Felicia.

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

Joining me this morning are Frank Hermance, chairman and CEO and John Molinelli, EVP and CFO.

Ametek's second 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 and on our website at Ametek.com/investors.

A tape of today's conference call may be accessed until August 4th by calling 888-203-1112 and entering the confirmation code number 140512.

This conference call is also being 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.

Thank you, Bill.

Ametek had an excellent second quarter, establishing records for sales, operating income, net income and diluted earnings per share.

Sales were up 4 percent to $277m.

Operating income was up 3 percent.

Net income was up 2 percent and diluted EPS were up 3 percent to 65 cents per share.

Highlighting one of Ametek's strengths, cash flow from operations was excellent, totalling $35m in the second quarter.

For the first six months our operating cash flow is up 34 percent over a very strong cash flow performance in the first half of 2002.

We are very pleased with these results, especially in the face of a continued weak manufacturing sector, and the added costs from pension, medical and other insurance costs which totalled 6 cents per diluted share in the second quarter.

In addition to achieving our financial objectives, we continue to make progress on our strategic initiatives.

We are successfully integrating the two acquisitions made earlier this year, AirTechnology and SolidState Controls.

Both are highly differentiated businesses focused on niche markets.

The integration of these companies is proceeding to plan and the businesses are achieving the revenue and profitability levels we anticipated.

The acquisition pipeline remains very good.

We would anticipate making additional acquisitions and are actively working towards that goal.

Our Advanced Measurement Technology business announced a licensing agreement with Lawrence Livermore National Laboratory to commercialize the development of a handheld nuclear detection system.

These high performance, high resolution portable systems will be used at border crossings, cargo ship docks and transportation terminals to detect and differentiate between potentially dangerous radioactive materials and otherwise harmless radiation sources.

The detectors are part of a suite of technologies offered for homeland security by AMT's Ortec business unit.

We continue our move to low cost manufacturing sites.

We have started to move parts of our commercial floor care motor production from the United States to Reynosa, the Czech Republic and Shanghai.

Revenue from products produced in these low-cost locales totalled approximately $47m in the second quarter and in 2003 we expect to produce about $200m in low-cost locales.

International sales were a record 41 percent of company sales in the quarter, up from 35 percent a year ago, considerable progress towards our goal of 50 percent.

Placing greater emphasis on developing products for the international market, expanding our international distribution and acquisitions of international companies underpin this strategic initiative.

Our Aerospace business has scored another win with its sensor suite strategy.

Honeywell has selected Ametek to provide engine sensors and cables for its LPS 101 engine.

This engine will be sold by Honeywell as part of a military helicopter retrofit to the United States Coast Guard.

This multi-million dollar program will generate revenue over the next three years.

Aerospace also won a $1m order for the Delta 2 launch vehicle.

These space grade pressure transducers utilize the newly developed Silicone on insulator pressure sensor.

Turning our attention to the individual operating groups, for the Electronic Instruments Group sales were up 2 percent for the quarter.

SolidState controls, an acquisition we made in the first quarter of this year drove the revenue increase.

Our aerospace and power businesses are much weaker than last year, but the results were in line with our expectations.

Our high-end analytic instrument business continued to show positive growth.

EIG's operating income was up 6 percent for the quarter and operating margins increased to 15.9 percent from 15.3 percent last year.

For the Electromechanical Group, revenues were up 6 percent, driven by AirTechnology, which was acquired in January.

The trends that affected our core businesses in the first quarter continued in the second quarter.

Our European floor care motor business was strong, while our domestic floor care business remained weak.

Operating income for the quarter was down slightly, and operating margins were 15.5 percent, down from a difficult comparison of 16.5 percent in last year's second quarter.

EMG's margins were negatively impacted by severance costs, higher than anticipated benefit costs and weakness in the U.S. floor care market.

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 expecting our full year revenue to be up mid-single digits, with diluted earnings per share in the range of $2.65 to $2.70 per share, an increase of 6 percent to 8 percent over 2002.

For the third quarter of 2003, we expect revenues to be up modestly, as the top line benefits of the AirTechnology and SolidState Controls acquisitions are partially offset by weaker aerospace and power markets.

We are comfortable with the current street estimate of 70 cents per diluted share for the third quarter.

I would like to speak for a couple of minutes about the analytic instrumentation platform we are building at Ametek.

Several years ago, we split the management of the Electronic Instruments Group, as we saw significant opportunity to grow this part of the business, particularly through acquisition, and needed to ensure we had sufficient management depth to manage this growth.

Highly differentiated analytic instruments were an area that we believed would offer more robust organic growth rates, above average margin potential and fit well with our core focus on measuring physical phenomena.

Analytic instrumentation was and is a fragmented market in which acquisition candidates in niche focus businesses are plentiful.

Since 1998, we have made four acquisitions;

Western Research.

Drexelbrook, EDAX and IRAS in this area.

These acquisitions have strengthened our traditional position in gas analysis and expanded our analysis capabilities into solid measurement and nuclear spectroscopy.

These businesses now total about $150m in revenue.

During this economic downturn, the organic growth of these business has been much better than the rest of the company and profitability for these businesses is well above the group average.

We expect this area to be a focus for future growth.

We will continue to look for acquisitions in these market areas, as bolt-ons to our current business or to move into new market areas or new technologies.

Areas for future expansion may include analytic instruments for liquid analysis, pharmaceutical, medical, biotech or other life science applications, oil and gas production, refining and semi-conductor manufacturing.

In conclusion, we are very pleased with our performance in the second 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 feel we've lost between $100m and $150m of revenue as a result of the manufacturing sector downturn.

We believe this volume will return as the economy improves.

The average contribution margin of Ametek is 49 percent, which will result in significant bottom line leverage as this volume returns.

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 will be glad to take your questions.

Thank you, Frank.

I would like to cover some key metrics upfront, and then elaborate on other important themes.

Total debt was $454m, down $42m in the quarter.

Stockholders equity was $465m at June 30th.

The debt to capitalization ratio was 49 percent, down from 53 percent last quarter.

Accounts receivable are $191m, down $7m in the quarter.

Inventories are $141m, down $2m in the quarter.

Accounts payable are $94m, up $4m in the quarter.

Capital spending was $5m for the quarter and $8m year-to-date.

Depreciation and amortization were $9 m in the quarter and $18m year-to-date.

The effective tax rate was 32.2 percent, slightly below the first quarter.

We expect the tax rate for the year to be about 32.5 percent.

The 2003 cash flow for the company has been excellent.

We generated $50m in cash from operations in the quarter, and $76m year-to-date, a 34 percent increase over the first half of 2002.

Our focus on operating working capital management continues to yield positive results.

We reduced operating working capital in the quarter by $13m.

Our inventory turnover metric improved by 11 percent from a year ago, and our collection cycle improved by five days from last year.

The inventory improvements were made while we continued to move production to low-cost manufacturing sites.

This very strong cash flow enabled us to reduce debt by $42m in the quarter, and bring the debt to capital ratio to 49 percent, just 1 percent above the ratio we started the year with, while acquiring two businesses for $114m this year.

Ametek continues to manage its cost structure and balance sheet effectively, generating excellent cash flow and positioning itself for future growth.

Frank has outlined the solid operating results for the company.

These were accomplished in the face of headwinds from pension, medical and other purchased insurance increases.

These additional costs totalled 6 cents per share in the second quarter and are estimated to be 22 cents per share for the full year.

These additional costs reduce group operating margins by about 90 basis points.

Obviously we have been very active in managing the cost structure to offset these uncontrollable cost increases.

Our moves to low-cost manufacturing areas, Six Sigma and other operational excellence activities have enabled us to overcome this cost issue.

In addition to the strong cash flow of the company, we have substantial financial resources at our disposal to continue to fund our growth.

At the end of June, we had $135m available under our existing credit lines.

In summary, we continue to manage through these rough economic times.

Our cost structure is lean.

We are generating cash and look to continue to grow the business.

That concludes our prepared remarks.

Felicia will be more than happy to take questions now.

Thank you. (Operator instructions) We will begin with Jim Lucas with Janney Montgomery Scott.

Thanks.

Good morning, guys.

A couple of questions.

First off, on EMG, could you walk us through the tough comparison a year ago?

You gave a little bit of flavour in terms of some of the severance costs associated in there, but what exactly entailed that tough comparison and what you see for the business going forward.

Sure, Jim.

Basically when you look at the comparison of the margin performance, second quarter over second quarter in EMG, there were three factors that basically triggered that reduction.

One was increased severance, which was about a third of the total.

As you may recall in the first quarter, we looked at our business and felt that we needed to make some additional adjustments, and we did that.

That resulted in some additional severance costs.

Obviously our philosophy here is pay as you go, so that in essence did have an impact.

Secondly, above and beyond the 22 cents that John referred to for the full year in terms of increased pension, insurance and other medical costs, we had I would say a one-time effect in the second quarter that was a little bit higher than that.

It had to do with just some one-time medical cases that occurred in the company, as well as some worker's compensation increases.

Third, there was some margin impact and that does relate to the fact that there was a very strong second quarter last year in EMG.

The average margins last year at EMG were about 16 percent, and the second quarter last year was about 16.5 percent, and that was just an abnormally good quarter for us.

So the comparison was in fact tough.

The second part of your question as to what we think is going to happen as we go forward, we believe the margins are going to improve.

Both in EMG and in EIG.

We have taken, as I think you are aware, some very significant cost reduction activities in the company.

We indicated previously that the effect was going to be stronger in the second half of the year than the first, and in fact that is happening.

Some examples, we announced the closure of our Chambersburg plant and that is going to kick in in the middle to latter part of the third quarter and be fully down in terms of closing that plant in the fourth quarter of this year.

So that is going to help substantially.

In addition, we are continuing to move more products to low-cost locales and that is going to have an incremental margin impact.

So we do expect the margins to improve, and for the company our present estimate is, on a year-over-year basis, a 20 to 40 basis point improvements in margins.

Okay.

And if we can switch to the top line impact.

Can you give a little bit of colour on the FX impact on each segment in the second quarter?

Jim, it was about $5m in EMG and about $2m in EIG.

Okay.

And final question, you mentioned that the integration of the two acquisitions is tracking nicely.

Can you give us a little bit more colour of some of the progress that has been made there and how you are feeling about the addition of these two new companies to the portfolio?

We are feeling great about both of these companies.

The Solid State Controls acquisition is actually performing a little bit better than the financial plan that we had put in place.

They have tremendous opportunity to increase their volume and their order rate is extremely strong right now.

One of the things they have been able to do is penetrate the Asian and South American market with their products.

They have done just a great job on the distribution side, so we are looking for some really good growth out of that company, both in the second half and more importantly as we move into 2004.

Management team has integrated well, actually it is interesting.

Just this morning I was reading the news bulletin that they provide to their employees and the general manager there just did a great job of talking about Ametek and how pleased he is to be part of the family, et cetera.

So we are very happy with that.

Similarly, AirTechnology, which is largely a military base business, it is located in the U.K., got a very strong management team.

They've integrated well into our Rotron division and actually they are going to perform much better in the second half of the year than the first half, that is the normal cyclicality of that business.

They are gaining share in the U.K.

Ministry of Defense which is one of their prime customers.

They are well respected there.

In terms of integration with Ametek they are looking at mutual distribution links here where they can take products and distribute them through our Rotron operation in the U.S., and similarly our Rotron business is looking at distributing some of their products through AirTechnology into Europe.

Just excellent results.

We consider this sort of a core competency that we have in terms of finding good companies and integrating them well and getting good profitability out of them.

Thanks a lot.

You bet, Jim.

We will go next to Godfrey Birckhead of SBK Brooks.

Good morning, guys.

First of all, John, can I do some housekeeping with you?

Could you give me the total assets, please?

Sure, Godfrey, it's $1,180,000,000.

Okay.

And long-term debt?

$359m.

Thank you, Bill.

Frank, could you help us with what the sales would have been without the two acquisitions in EIG and EMG, please?

Yes, if we look at the internal growth of the company, Godfrey, it was about a negative 5 percent in the second quarter.

For the company as a whole?

For the company as a whole.

If you look at it by the groups, it was about negative 3 percent for EMG and about negative 7 percent for EIG.

Obviously EIG is the drag because of the weak aerospace and power markets.

Now on these pension costs, I am not totally clear on - is this a one-time event, these pension costs?

They are not expected to continue in 2004?

Is that correct?

Well the baseline will continue, and it depends really on how the stock market performs.

Last year, as we all know, the stock market did not perform well and that resulted in the increased pension costs.

So far, year to date the market has done very well, so there is even a possibility that those costs could be mitigated to some degree.

But they are really in the cost structure as we stand right now.

Okay, now let's assume that all other things being equal that you have a flat stock market.

How much would those costs be this year and not be in 2004?

Godfrey, that formula is very, very complicated.

There are a number of variables that get into interest rates, turnover, head count that it is pretty hard to isolate one particular event.

In fact, last year we were bouncing all over the map trying to guesstimate and we quit and waited until year end before we put together our synopsis for 2003.

I think it is premature to guess at what the world would look like.

I think Frank's point that it is in our cost structure and we expect it to be there and we are going to operate to offset those costs going forward is the way we are looking at this.

And Godfrey, we revalue this at 12-31.

That is our point of revaluation, so, okay?

So you will share that with us at that time?

Absolutely.

Okay.

Now when you are talking, Frank, about being up 20 to 40 basis points and your operating margins, that is in the second half of the year?

No, I am talking about the full year.

Year over year performance for the full year.

All right.

So the operating margins are expected to be up 20 to 40 basis points for the year as a whole?

That is correct.

Okay, then the $100m to $150m in lost sales, is that on a quarterly basis or an annual basis?

No, that is an annual number.

We are saying that this manufacturing downturn started sort of in the middle of 2000 and over that period of time that is our best estimate of what we lost.

We don't feel we've lost any substantial share in our market, so as the economy improves we'll expect to get that volume back and it will come back in line with the various businesses we are in.

We've got some short cycle businesses and some long cycle and it will come back over a period of time, but we believe it will come back.

Now my understanding is that Europe is not, as a whole, the industrial markets and so forth in Europe are not doing terribly well.

Is the reason that your motor business there, your vacuum cleaner motor business is doing well is because you've picked up some new business there, some new customers?

Absolutely.

The management team we recently put in place in our Italian motor operations has just done a superb job and have gained share.

They have been moving production from Milan, Italy to our low-cost plant in the Czech Republic which has given them substantial pricing leverage and has enabled them not only gain share but also increase their margins.

So they have just done a first class job.

How is your little chemical business doing? $40m, or whatever it is?

Well, it's interesting.

That business has started to show some life again.

You may recall that several quarters ago I started to see some improvement in that business and I sort of used that as a precursor to potentially what is happening in the economy, because it is typically the first business that comes back.

Then it went down again.

Now we are starting to see some life in it again, it's starting to come back.

As a matter of fact, if I could just expand on your question a little bit, just in June and in the last few weeks I've started to see - I will call it sort of some slight rays through the clouds that a number of our businesses are starting to feel a little bit better.

It's hard to say whether that is just bouncing along bottom and we are starting to come up a little bit or whether it is the very early signs of a recovery, but those businesses are feeling a little bit better.

You know, I don't want to extrapolate that too far, but it is good to hear some of our operating managers be a little bit more optimistic.

What is your plan for the rest of the year, is it based on the assumption that that will not happen?

That's exactly right.

We're assuming market conditions as they are, pretty much flat.

And your materials business?

How is that doing?

Specialty metals, you mean?

Yes.

They are doing a fine job.

A very strong management team there.

They've got excellent profit margins.

They are being impacted as many of our other businesses are by the economy, but they are managing it very well and they will really have a nice rebound when the economy comes back as well.

Capex for the year, John?

Well, our budget, as we talked about in the past Godfrey, is $25m.

I don't think we'll spend that.

I think we will right now be between $20m and $25m, and probably closer to $20m.

Okay, and D&A for the year, please?

That was $35m to $36m.

Thanks guys, very much.

Okay, Godfrey.

We will go next to Richard Eastman of Robert W. Baird.

Hi, just a couple of questions.

Within the EIG business, could you give us the aerospace and power year-over-year declines, excluding power in [Solid State]?

So kind of an organic number?

For the second quarter?

Yes please.

Let me just get that.

For Aerospace we are down about 10 percent and for power we are down about 25 percent.

That is inline with what we thought we would be down.

Could you just remind me when we cycled through the most difficult comparisons?

Is it out into the fourth quarter or is it first quarter?

For what business now are you talking about?

For both those two businesses, aerospace and power.

There's not a huge cycle on those businesses.

They are relatively flat in terms of the comparisons.

I'm not sure we understood your question.

I think his point is during 2002 there was a decline.

That was in the second half of the year.

That's what you mean.

I was talking about the trend.

If you look at it on a comparison basis, these businesses were going down in the second half of the year, that's correct.

So in the second half of 2003 the comparisons year over year become somewhat easier?

That's right, and our internal growth improves as we go forward and that is one of the factors in that.

Also, within the floor care business, how does the mix shake out currently in this quarter for international versus domestic?

Do we have that?

You mean the amount of volume?

Yes, given the revenue number if it is still running at 35 percent to 40 percent of that segment of sales.

It's about two-thirds in the U.S. and one-third internationally.

Okay.

Is there a significant operating profit difference?

Yes.

There is?

The profit margins, on an absolute basis, are higher in the U.S. and that is because of the commercial floor care part of that business which has strong operating margins.

That is largely - we basically own that business in the U.S.

Thank you.

You bet.

We will go next to Steve Colbert of JMP Securities.

Good morning.

Can I get some additional colour perhaps on the margins in the EMG side, for first quarter to second quarter?

It looks like the sales in the segment were up first quarter/second quarter, but the income level was generally flat of an effect.

What was up in affecting sales for the first quarter and in effect why didn't that translate into higher income?

Well the income part of your question really relates to exactly the three areas that I was talking about before.

There was the severance impact, there were some benefits impacts, and we did have a little bit of margins impact in terms of some of the pricing in that segment.

So it is really those three factors that I referred to before.

In terms of the volume -

In terms of the volume half of that increase came from AirTechnology being, first of all, it was almost the entire quarter in the first quarter, it became the entire quarter and also their results improve as the year goes on.

That is part of the revenue increase answer.

But wouldn't the income have been up as well with the revenues?

On the AirTechnology.

Oh yes, yes.

So in effect, that income would have been higher so it was offset by lower income elsewhere.

Can you quantify for us a little bit some of the severance charges in the quarter, what they were maybe in the first quarter?

It is roughly half a million dollars.

In this quarter?

Second quarter.

And it compares to zero in the first quarter?

Roughly.

And the benefits, you say, were about 2 cents per share higher in this quarter than in the first quarter?

I think you said 6 cents this quarter and I think they were 4 cents first quarter, but that is for both segments.

Does it fall proportionally higher in the EMG segment?

It's actually the other way.

It's a little bit more in EIG than in EMG.

So benefits would have been maybe a slight pressure issue, but it doesn't sound like it should have been that bad first quarter to second quarter.

Well it is that 2 cents.

I mean -

But it sounds like it is more in the EIG than the EMG side.

Well a little bit, yes.

Say you have a penny or a little bit less than a penny effect, that's another half a million dollars in rough numbers.

Okay.

The company obviously had very strong cash flow in the first half of the year.

Can that be duplicated in the second half as well?

We expect strong cash flow in the second half, we previously talked about $125m as the operating cash flow of the company.

We are probably going to exceed that by a little bit.

Okay.

And just one last question.

Is it your sense in here that the aerospace and the power markets, which have been so weak, have bottomed at this point?

It feels like we are bouncing along bottom, definitely, in both of those businesses.

Thank you very much.

You bet.

We will go next to Gary Goldstein of Gilford Securities.

First of all congratulations, guys.

It was a great quarter.

Thanks, Gary.

If we could just - a couple of things I missed, I didn't hear clearly.

The foreign currency impact?

It was about $7m for the company, $5m at EMG and $2m at EIG.

And that was for the half or for the quarter?

For the quarter.

And if you guys could just walk us through real quickly.

Growing sales in Europe to 50 percent?

We are assuming obviously the lower dollar helped in sales over there.

Where and in what sectors and how are we going to see Europe go to 50 percent and kind of a timeline, if you could walk us through?

A general timeline, we are not looking for anything specific.

Well, as you can see from our results, we have been substantially increasing this.

If you look at last year we were doing about 35 percent of our business in international and we are now up to about 41 percent, it was actually 41.6 percent in the second quarter.

We are doing that through a combination of designing products specifically for the international marketplace.

There are different safety requirements and safety approvals required to specifically penetrate Europe.

In particular, our EIG operating divisions are putting significant emphasis on getting those approvals and improving our distribution links into Europe.

We've set up an organization in Germany that basically is the distribution side of EIG's businesses.

They have been adding people.

As a result, they have been growing that business in Europe.

If you look at Asia, it is even a better story where our business in Asia has increased substantially to where it is now just about 10 percent of our revenues, and that is up from the low single digits several years ago.

It is through the same thing.

Basically increasing and improving our distribution and designing products specifically for those market arenas.

You add to that acquisitions and we are focusing on trying to find companies that have either their base in these foreign areas or businesses that are based in the U.S. that have a substantial amount of their business exported outside the U.S.

In fact, these last two acquisitions we did, AirTechnology and Solid State Controls are good examples of that.

AirTechnology is predominantly a European-based business.

About I think it is 90 percent of their revenues are in Europe and SCI, Solid State Controls had greater than 50 percent of its revenue outside of the U.S.

So really, it is a combination of those factors.

If you ask me what market areas, it really falls into these differentiated segments that we're in.

We're looking to grow Ametek in these differentiated businesses which tend to be the high-end analytics area.

In EIG and the more differentiated parts of EMG, which are the specialty motors, or excuse me, the technology driven parts of that which are the Rotron businesses, that's why we did the AirTechnology acquisition.

So we are going to focus on those high-end business.

We just meant - no, we understood that.

We just meant that it was well ahead of what we thought it was going to be.

There must be something - That's not aero technology, and you guys still grew faster than we had anticipated over the years.

As I mentioned before, we are gaining share in the floor care motor business, so we did a great job from it.

That was actually a positive surprise for us as to how well that management team has done, and yes.

The penetration -

It was a positive surprise for us as well.

One point of clarification, Gary.

We are growing Ametek's total international sales to 50 percent, not Europe to 50 percent.

Understood.

Thank you very much.

We will go next to Richard Glass of Morgan Stanley.

My question has been answered, thanks a lot.

Nice quarter, guys.

Thank you.

We will go to Wendy Caplan of Wachovia Securities.

Thank you.

Good morning.

Good morning, Wendy.

A couple questions.

Can you give us some sense of, you mentioned going into, focusing on international acquisitions.

Can you give us some sense of what the pipeline looks like at this point in terms of the amount of good properties that are out there and whether the pricing looks a little more favourable at this point, and how much cash do you have on the balance sheet at the end of the quarter?

Okay, your first question.

In general, the acquisition pipeline is very good right now.

It has been strong through this year and continues to be strong.

We are finding more international companies.

If you go back a year or so ago we weren't seeing quite as many international companies for sale as we are seeing now.

So we are pretty bullish in general on the acquisitions market, both in the U.S. and internationally.

In terms of pricing, yes, there has been a little bit of improvement in pricing.

I think that if you look at this over the course of the last year to two years, we're probably looking at a point multiple of EBITDA that pricing has gotten better.

So we are seeing good properties and we are seeing pricing a little bit more favourable.

In terms of cash, marketable securities -

We had $27m in cash and another $8m in marketable securities at the end of the quarter.

Thanks.

Just to get back to the acquisition issue for a second.

Some of your somewhat competitors, we will call it loosely, or peers in the space, have been finding that particularly in the analytical instrumentation business that private equity groups have been more aggressive in this marketplace, being willing to pay up if you will from what they historically have paid, and also to put in more in terms of dollars for these properties.

Have you found that a problem in terms of the opportunity to make some of these?

Have the private equity groups been an issue for you?

No, I would say in general not.

It probably relates to the fact that most of the companies we buy we find significant synergies that more often than not a private equity firm would not have.

As a matter of fact, we have found that a number of the private equity companies will sell to us, because what basically happens in many cases is they will find companies that are somewhat distressed and fix them up to a point where they are running better operationally but they don't have the strategic synergies that we will.

So we have, if you look over the last number of years, we have in fact bought a number of companies from private equity firms.

So I won't say that we have in any way found a problem that the private equity firms are outbidding us.

I just haven't seen that.

Maybe we are a little bit different than some of the other peer companies.

Okay, thanks.

A couple of others.

The opportunities to increase European profitability in the floor care business, clearly the mix isn't as favourable, but are there initiatives that could bring those margins up higher that you are working on?

Absolutely.

The main thrust to increase the margins in our European floor care business is to move production from our Milan, Italy which are facilities which are very high cost, to our low-cost plant in the Czech Republic.

That movement is not as far along as the U.S. production to Mexico and some others going to Asia.

So there is significant opportunity for us to move that production.

Secondly, this operating management team has done a great job of just running this business more effectively in both plants.

In essence, they have done a nice job on working capital and they are running more efficiently.

I think there is more room for that to basically improve as time goes on.

So I think definitely we will be working on the margins to get better margins in that part of the business.

Okay.

Also, you mentioned obviously the business is a mix of shorter cycle versus longer cycle business.

Can you kind of split those up for us?

Is that - just to get a sense of when we should feel the recovery first, and where?

Well, why don't I try to answer that question by talking about what some of our long cycle businesses are.

Aerospace is obviously a long cycle business.

The power business I would put into the long cycle category.

So those are probably the ones that are going to be the furthest out in terms of this recovery.

If you look at market data, most of the market data suggests that upturn will happen in 2005, not in 2004 for those businesses.

On the other side of the cycle are some of our very short cycle businesses which would be the chemical business that we talked about before, that is probably the shortest cycle business that we have.

Also some of our motor business would be somewhat of the household part of that would be more on the lower end of that spectrum.

You know, our other businesses fall sort of in the middle.

So if you look at this maybe just in rough terms, in terms of revenue, the aerospace business in total is about $130m.

The power business is another $50m, so you are talking about 20 percent of our revenue in those longer cycle businesses.

In the very short cycle businesses you are probably 25 percent of the company, and the rest in the business.

I am just giving you rough numbers here from my gut.

That's fine, that's what I was looking for.

Finally, just from a larger perspective given your exposure internationally as well as several different end markets, can you talk about kind of month-to-month comparisons within the quarter, sequentially, have they looked any different for say aerospace, power, some of the floor care businesses, et cetera?

Also whether geographically you saw any changes throughout the quarter?

Let me first answer from the viewpoint of the total company.

What we saw in terms of the total company was a little bit weaker May.

Basically April was okay, May got a little bit weaker and then June was very strong and probably, more importantly, as we go into July I am feeling good order intake from our operating entities.

I will have to look at some sheets here to see if I can break this down any further for you.

In EMG we basically saw improvement through the quarter from April, May to June.

For EIG, we saw a little bit weaker May and then stronger June.

If we further subdivide that I can answer your question on aerospace.

Let's see.

Aerospace was a little weaker in May and then came back in June.

I mean, that just gives you a flavour of what is going on.

Thanks, that is just what I was looking for.

How about internationally?

Oh yes, you said internationally.

I don't have that data in front of me, so I don't think we can answer that question here, Wendy.

We'll have to get back to you in terms of the order trends month to month in international.

Thank you very much.

Frank.

All right, Wendy.

We'll go next to Matt Summerville of McDonald Investments.

Good morning.

Hi Matt.

A couple of questions, more on the aerospace business.

Can you talk about demand trends in the military, commercial and business regional markets and how the outlook for those businesses is looking in the back half of the year, and also kind of throw in there whether or not you have seen on the military side any of the reward come in yet.

The military business remains very strong.

As you may recall last year, we saw a huge increase in that business, in the order of 50 percent.

It has remained strong through the first half of the year.

We have seen some impact in particularly our Wilmington, Massachusetts operation of some of the effects of the war, where we are getting more of that retrofit business, so we are probably getting a little bit of spike from that in the third quarter.

I don't think it is going to be huge, but we will get a little bit of a spike from that.

So the military business is very good for us.

In terms of the commercial floor care business, that business has kind of bottomed out.

Excuse me, commercial aerospace business, has kind of bottomed out.

It is a very interesting effect in that business, because right after September 11 that business went down, and it's essentially been flat since.

We saw a little bit of weakness around the time of the Iraq War because people weren't flying obviously as much, and particularly in the aftermarket business, but that has now come back to the pre-war levels.

So we view that market as pretty flat now, and flat as we go into the rest of this year and actually as we go into 2004.

The trend in the business jet environment has been somewhat different.

It stayed stronger right after the September 11 event, and it was stronger in 2002.

This year, beginning in the first quarter it weakened.

It weakened down somewhat, not overall to the same level as the commercial aerospace business, but it did weaken.

That is sort of running at those levels now and we believe it is going to stay at those levels into next year.

Have you seen any uptick in your aftermarket business on the commercial side?

Aerospace.

Only as a result of this blip with the Iraq War, but not in terms of the longer term trend.

Okay.

Can you talk about the demand fundamentals in your industrial instrumentation business, how that performed here in the second quarter and what you are looking for on the heavy truck side of things and how that business is faring?

That business is doing okay.

Industrial business performed well in the second quarter and as we have indicated before, we expect that the heavy vehicle business is going to sequentially improve during the year and in fact that is happening.

The second quarter was above the first quarter for that business and we expect that to incrementally go up for the rest of the year and that is going to be a good factor in EIG's performance as we go further.

The market data for the heavy truck business has been improving.

It is now, the most recent data shows about a negative 3 percent year-over-year comparison in terms of heavy truck business.

Actually just yesterday I got a note from our group president on that business.

Our customers are incrementally improving their truck production.

It is now somewhat broad based.

Many of them are, they not showing huge month-over-month increases, but they are starting to show increases.

So that should be a good part of - that business should be relatively good.

Also in that segment we do have this chemicals products division, which I mentioned is also starting to show some strength.

So the outlook for the industrial part is pretty good.

You mentioned commercial floor care.

Can you actually talk a little bit about where you stand right now in commercial floor care as a whole in terms of low-cost manufacturing and where you are taking that currently?

It sounds like perhaps the move or the shift there may have been accelerated a bit compared to what you've talked about before?

No, I would not say it's been substantially accelerated.

It has not been a major part of our moves to date.

Only a small part of that business is now in Mexico and in Asia and also a little bit has been moved to Europe, but it is not a substantial - this is a much more differentiated product and pricing is not anywhere near as competitive.

Also, it is more difficult to manufacture in low-cost locales because they are much lower volumes, much higher technical content.

So our thrust in commercial floor care is different than our thrust in household floor care.

There we have accelerated those moves.

We are moving very rapidly in that part of the business.

How much of your household business today is manufactured low-cost producing?

Well, in the U.S. it is about all of it.

It is 90 percent, 90 percent to 95 percent.

In Europe I don't know the exact number, but it is probably a third, better than a third.

And do you have - I think you have talked about this before in previous calls, just an update.

Do you have some sizeable new household floor care motor programs ramping up in the back half of the year?

Can you update us on that?

We definitely have won some business from some customers that we either didn't have a major share with or we had a major share and we got more share.

That has been very good.

On the downside, with respect to some of the things we have talked about in the past, Hoover's business is weaker.

So it basically has averaged out for us that the forecast that we have provided we still feel comfortable with as we go forward.

Okay.

Do you see any signs of pick up?

You mentioned Hoover, so maybe we can talk about them for a second, in their order rates at this point, or is that still definitely in the declining mode?

Hoover is - that's an interesting question.

Because we are gaining share as this happens.

So actually our rates are going up to some degree as Hoover's volume, overall for their company, is going down, but it is not going to rise to the levels that we previously talked about.

Lastly, Frank, can you all in talk about within EIG and EMG what your outlook is in aggregate for the back half of the year in terms of the core performance or the organic performance in each of the business segments, in EIG and EMG?

Let me talk first of all about the company and each of the operating groups, and then we will try to give you some flavour down below that level.

We expect the organic growth for the company in the third quarter to pretty much follow the second quarter, but then to improve markedly as we go into the fourth quarter.

Where we'll be in the fourth quarter, probably flat to maybe slightly up.

In terms of EMG, you know, we expect - actually it's pretty much the same for EMG and EIG that their organic growth rates are going to, in the third quarter, sort of follow the second quarter and then both will improve as we go into the fourth quarter.

That is all predicated on obviously an economy that is flat and where it is.

If we did happen to see some uptick as we go further into the year, that would obviously improve.

Let's see.

To break it down any further, I don't actually have that data that I can do that here for you.

Okay, no.

That was great, what you gave me was more what I was looking for.

Thanks a lot guys, appreciate it.

You bet.

We will go next to Scott Graham with Bear Stearns.

Good morning.

I wanted to ask a little bit about the high end analytical instruments businesses.

What is the size of that business right now the way you define it?

The way we defined it is about $150m.

Okay.

Where is the overlap between that and I think the $150m number - that's the number you talked about earlier in the conference call, yes? $150m when you are talking about your platform?

That's correct.

Okay.

What was the growth rate of this business in the quarter, if you would?

In the quarter it was roughly flat, slightly up.

Okay.

For the first six months of the year it was up about 3 percent.

See the thing is here that I am struggling a little bit with is, when you strip out the FX from the numbers it looks to me like those businesses were down in sort of upper single digit core basis.

I got about minus 9, volumes and mix for EIG and about minus 7 for the other.

The comparisons, particularly in the latter business, electromechanical, were pretty easy.

I was expecting maybe a point or two less of decline.

So I guess what I am wondering here is, what are the things that really start to come together?

We've talked about some of them but maybe you could, in a couple of brushstrokes here Frank, talk about some of the things that come together that make the fourth quarter in 2004 really rev the top line here.

I suspect that your stock, which has really not responded to what has been really good earnings growth for a couple quarters now, I think people are looking at your core growth and maybe scratching their heads a little bit.

I think you meant the fourth quarter of 2003?

I did.

Let me just answer your question from sort of a global view.

Our businesses are being impacted by the general economic environment.

The thing that is going to fundamentally change the growth rate of these businesses, to make a significant bounce in the internal growth rate is going to be as the economy returns.

We are bouncing along bottom in most of these businesses, and I think we are not going down but we are also not coming back.

The reason that the growth rate gets a little bit better as we go into the fourth quarter is that the comparison.

Fundamentally, you've got a better comparison because the business was rolling down some last year.

So the key driver to the internal growth question, where you are going to see a sizeable impact is fundamentally the economy.

Now having said that, the high end analytic businesses are doing well.

We expect those to outperform our other businesses from an organic growth rate.

That is in fact what happened.

As I said, we were up 3 percent to 4 percent in those businesses for the first half of the year and that is going to continue as we go into the second half of the year.

So the more differentiated the product area, in general, the better the internal growth.

So we've got a mix of businesses and those that are higher up the spectrum do better than those that are low, and so I don't know if that answers your question, Scott.

One other point I would add to that picture that Frank just painted, Scott, is that we fight hard to go after high margin business and are somewhat reluctant to chase volume for the sake of volume and keeping our products and reduce our margins.

So there is a trade off that we make every day that perhaps results in giving up a little top line growth to maintain our overall margins in the company and preserve our niche status and preserve our profitability and all those metrics that we are pretty happy with as a company.

So we do gravitate towards the higher margin side of the equation, and that at times will cause us to not get the volume increases that somebody else might see.

Let me maybe change the question a little bit here, because the internal growth thing is something I think is very important for your stock.

It's certainly something that I know you are driving toward, but if we were to look at the business wins you guys have announced both in this conference call, the last couple, but then you sort of juxtapose that versus things like aerospace and power being down in the 10 percent to 20 percent range without really I think any visibility in their improving from that type of run rate.

And industrial customers, which are a fair portion of your EIG business, their reluctance to spend money until profits improve for a while.

I guess what I am saying here is that if we see aerospace and power stay at this trend line, and even your industrials customers stay at this trend line as well, and Hoover stay at this trend line, which I think is entirely possible, is it possible we might not be looking at internal growth until like the first or second quarter of 2004, or do the business wins start to read through?

I think it is possible you will not see internal growth until the first quarter or second quarter of next year.

Given those assumptions.

Given those assumptions, yes.

Remember the aerospace wins are generally going to be longer term in nature.

We are building a business there for the long term, and some of those wins are a little bit further out, but you'll have a combination of the cycle returning and those new program wins rolling on.

Could you quantify what business wins will add to 2003 revenues?

I could not do that here, Scott.

I don't have that kind of information at my fingertips.

Okay.

Thank you.

You bet, Scott.

We will go next to Greig Macosko of Lord Abbot.

Most of my questions have been answered, lots of good questions.

I wondered if you could talk about just my understanding of the power business versus IGT?

How is the industrial gas turbine business?

If you look at the overall performance of the power sector, the IGT area has been much weaker than the other side of that business, which is in power quality.

To give you just some rough numbers, when I said that overall business was down 20 percent to 25 percent, it is down more like 10 percent on the transmission and distribution side and more like 35 percent on the IGT side.

So our IGT business is following the trends of essentially the turbine market and in particular GE.

I think I have some numbers on the top of my head here Greg, I think the last year GE produced 264 turbines and this year it is like 120 turbines.

So we are doing a little bit better than that because we are picking up some share with other businesses, but that is basically the trend.

Are we seeing it, has that bottomed in the same sense that the aerospace business has bottomed, because -

That has bottomed for this year.

We believe that we are pretty much there in terms of this year.

Okay.

With regard to, you mentioned Hoover and the gaining share there, I am assuming that has increased outsourcing at this point?

Absolutely.

Hoover has a mix issue with their products that they sell to their end markets are at the high end of the spectrum.

You know, they are losing some share and trying to move their mix down and that is where we come in, because we've got very strong capability in sort of that mid-sector of the floor care business, so they are outsourcing their motors to us as they come down that mix.

So it is very good for us.

Are there any other manufacturers around the world where we are seeing a similar trend, or is it really Hoover is sort of the -

No, no.

There is an ebb and flow in this business, but we are looking at about $50m to $70m of potential business.

I don't want to infer that we're going to get all of that, but we are constantly working with all of the major vacuum cleaner suppliers, looking at this outsourcing question.

As we mentioned previously, typically when those people have to make investments in their motor lines, there is much higher receptivity to outsourcing and that is why we stay close to those customers.

Hoover has been a great example of that where they have outsourced to us, and we are working with other customers as well.

So that 50 to 70 on a rolling basis continues to increase, is what I sense.

Well there is an ebb and flow.

I mean, there is an ebb and flow but if you look at this on a long-term basis there were people who said our motor business would not get above $50m many years ago, and obviously over a long period of time the economics win.

We produce more motors in this segment than anybody else in the world, we do it at a lower cost.

Over time, the economics win and we have been able to grow the business.

I think that trend is going to continue.

Thank you very much.

We will go next to Godfrey Birckhead of SBK Brooks.

Maybe I got this wrong and I apologize if I did.

Did you say during the quarter that you had allocated another $50m for share buybacks?

No, Godfrey.

In the first quarter that happened.

Okay.

Where do you stand on that, and refresh me on why you did that.

We did this simply in our buying back enough stock to offset the diluted impacts of our benefits programs.

We are not planning on any major stock buyback in the company.

In terms of numbers in the first quarter, we bought back about 190,000 shares and I think it cost us about $5.8m.

I am taking those numbers from memory, but I think that is roughly right.

We didn't do any in the second quarter.

Thank you very much.

Okay, Godfrey.

Gentlemen, at this time there are no further questions in the queue.

Mr. Burke, I will turn the conference back to you for any additional remarks.

I would like to thank everyone for joining us today.

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

Thank you.

That does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.