阿美特克 (AME) 2004 Q2 法說會逐字稿

Good day everyone and welcome to this AMETEK Inc. second-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.

Good morning and welcome to AMETEK's second-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 second-quarter results were released before the market opened today and have been distributed to everyone on our lists.

These results are also available electronically on your market systems and on our website at www.AMETEK.com/investors.

A tape of today's conference call may be accessed until August 3 by calling 888-203-1112 and entering the confirmation code number, 477852.

This conference call is also webcasted.

It can accessed at AMETEK.com and at streetevents.com.

The conference call will be archived on both of these websites.

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 investor section of AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.

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

I will now turn the meeting over to Frank.

Thank you, Bill and good morning.

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

Sales were up 10 percent to $303.9 million driven by good internal growth in both the Electronic Instruments and Electromechanical Groups and the contributions from the Chandler Instruments and Taylor Hobson acquisitions.

Operating income was strong and up 23 percent.

We enjoyed broad-based profitability improvements resulting from the leverage contribution on the higher core revenues and the benefits of our acquisition program.

Net income of 27.7 million was up 27 percent, and diluted earnings per share of 40 cents were up 25 percent over the second quarter of 2003.

Turning our attention to the individual operating groups, the Electronic Instruments Group, sales were up 16 percent for the quarter to $159.5 million, equally split between internal growth and acquisitions.

EIG's operating income was up 28 percent for the quarter and operating margins increased to 17.6 percent from 15.9 percent last year, a substantial improvement.

The acquisition of Chandler Instruments and Taylor Hobson, as well as strength in our process, industrial and aerospace businesses drove the revenue increase.

Improvement in the process and industrial businesses was widespread, with particular strength in heavy vehicle, and high-end analytical instruments.

As expected, power instruments was weak due to lower sales to the generation market.

Operating income was up sharply, driven by the topline performance and the benefits of our Operational Excellence initiatives across the group.

The Electromechanical Group second quarter revenues were up 4 percent to $144.4 million.

For the second straight quarter, the differentiated businesses in EMG grew revenues at double-digit rates.

Our cost driven motor business was down slightly on a tough comparison to last year's second quarter.

Operating income for the quarter was up 15 percent, and operating margins jumped 180 basis points to 17.3 percent as we captured the leverage in our differentiated businesses and continued to drive operational improvements across the group.

Turning to the outlook for 2004, we continue to see a broad-based economic rebound in many of the markets we serve, although certain market such as aerospace and power will not see a major rebound this year.

We are raising our revenue and earnings estimates for the year.

We now expect our 2004 revenue to be up low double digits based on the improved internal growth in each of our two segments and the full year benefits of the Taylor Hobson, Hughes-Treitler, Chandler Instruments and Solid-State Controls acquisitions.

Earnings are expected to be approximately $1.54 to $1.58 per diluted share, an increase of 18 to 22 percent over 2003.

For the third quarter, sales were expected to be up low double digits from last year's third quarter.

Earnings are expected to be between 38 and 40 cents per diluted share, an increase of 19 to 25 percent over last year's third-quarter.

Since our last conference call, we have close to acquisitions that I believe significantly strengthen AMETEK.

I would like to spend a few minutes talking about our acquisition strategy, and these 2 acquisitions.

Namely Hughes-Treitler, which we closed on July 16, and Taylor Hobson which we are acquired on June 18.

As many as you know, we expect one-half to two-thirds of our revenue growth to come from acquisitions.

We are focused on acquiring differentiated businesses with revenues between 30 and $100 million that fit with either our instrument or motor platforms.

We also look for international acquisitions to increase AMETEK's exposure to global markets.

AMETEK is a disciplined acquirer, with strict financial metrics, a thorough due diligence process and a strong focus on integrating acquired businesses rapidly.

Hughes-Treitler and Taylor Hobson meet all of these criteria and we're very excited to have each of them join AMETEK.

Let me start with Hughes-Treitler which we closed last Friday.

They are a leading supplier of heat exchangers and thermal management subsystems for the aerospace and defense markets.

Hughes-Treitler produces a wide variety of heat exchangers and other subsystems designed for equipment cooling, or maintaining environmental integrity.

They are used in applications on airframes, engine and avionics systems on aircraft, as well as in military vehicle, Marine space and industrial applications.

Hughes-Treitler products are complementary to the thermal management products offered by our Rotron and Airtechnology businesses and share a common customer base.

The combination of Hughes-Treitler, Rotron and Airtechnology enables AMETEK to provide a broader range of thermal management subsystems to our customers on a global basis.

Hughes-Treitler has expected annual sales of approximately $32 million, and military customers constitute about 65 percent of those sales.

The purchase price was $48 million and was financed with our revolver.

Operating margins at Hughes-Treitler are very good, but there are significant synergy opportunities available to drive even higher margins.

Hughes-Treitler will be slightly accretive in 2004.

On June 18, we closed the Taylor Hobson acquisition.

Taylor Hobson is a leading manufacturer of ultra precision measurement instrumentation for a variety of markets including optic, semiconductor, hard disk drives and nano technology research.

Taylor Hobson is a highly differentiated business which significantly expands our measurement capabilities.

With the acquisition of this Company, our high-end analytic instrument businesses now total more than $250 million in annual revenue.

Taylor Hobson produces a broad array of contact and noncontact instrumentation that measure surface texture, shape and roundness to the subnanometer level.

These dimensions are critical to Taylor Hobson's customers today and become even more critical as product geometries continue to shrink.

Taylor Hobson's revenues are geographically balanced, with Asia accounting for more than 40 percent;

Europe with a third; and the U.S. and rest of the world accounting for the balance.

With these acquisitions, nearly 45 percent of AMETEK's sales will be generated outside the United States.

The strong management team of Taylor Hobson has joined AMETEK and will work to grow this new measurement platform.

They will add approximately $70 million in annual revenue to AMETEK.

The purchase price was 51 million pounds or approximately $94 million, and was financed with our revolver.

While margins are below our EIG group beverage today, Taylor Hobson has the potential to generate above average margins.

As with all our acquisitions, Taylor Hobson will be accretive in the first year of ownership.

Both Hughes-Treitler and Taylor Hobson are great additions to AMETEK and are excellent examples of our acquisition strategy at work.

So, in summary, we're very pleased with our second quarter performance and very optimistic about the future of our Company.

Our short cycle businesses are doing well, and are the main driver for the better-than-expected internal growth of the Company.

Our long cycle businesses representing 30 percent of sales, and an even greater percentage of profits are poised for a rebound in 2005 and 2006; thus we should see several more years of economic uplift.

We captured the leverage on our business model and brought the sales increase to the bottom line.

We remain focused on driving operation improvements in the business and continue to take the necessary steps to improve our cost structure.

As we execute our acquisition strategy, we continue to shift AMETEK's mix of businesses towards more differentiated platforms, with better growth, and better profitability characteristics.

In 2004, differentiated businesses will account for more than 75 percent of AMETEK's volume.

The acquisition pipeline remains good and we anticipate making more acquisitions in the future.

Our cash flow and balance sheet are strong, providing us with the resources to grow the Company.

So, with that, I will turn it over to John, who will cover some of the financial details and then we would be glad to answer your questions.

Thank you Frank.

As we have included a balance sheet as part of the earnings release, I won't be covering the key balance sheet amounts but will instead focus on other important items.

Once again, the cash flow for the Company was very good.

We generated approximately $36 million in cash from operations in the quarter.

For the 6 months, operating cash flow was $77 million, up slightly over a very strong first half of 2003.

We expect that 2004 cash flow from operations will be up high single digits over last year's excellent $155 million.

After extracting the Taylor Hobson acquisition, our operating working capital defined as inventory plus receivables less payables, percent to sales, ended the quarter at approximately 21 percent, while achieving 6 percent internal sales growth.

A very good level that ranks favorably to our peers and comparable to where we ended the first quarter.

Our end of quarter collection cycle improved by 1 day from a year ago to 60 days as our operating units continue to do a good job on collections.

While our inventory grew in proportion to the sales growth, our inventory turnover metric remained essentially unchanged at 4.9 times.

Debt increased $67 million in the second quarter to $462 million as we spent $94 million for Taylor Hobson.

Subsequent to the quarter, we acquired Hughes-Treitler using $43 million at closing with deferred payments of $5 million.

We used our existing revolver to pay for both acquisitions.

We continue to strengthen the balance sheet.

Our debt-to-capital ratio at June 30 was 44.2 percent, down slightly from 44.5 percent at the beginning of the year, and 49.4 percent 1 year-ago, even as we spent a total of $143 million for Taylor Hobson in June and Chandler Instruments in August of last year.

After including the Hughes-Treitler acquisition, we expect debt-to-cap to be roughly unchanged at the end of the third quarter, and would expect it to be at about 40 percent by year-end, assuming no further acquisitions.

Capital spending was $4.5 million for the quarter and is expected to total $23 million for the year.

Depreciation and amortization was $9.3 million in the quarter, and is expected to be approximately $38 million for the year.

Selling, general and administrative expenses were up 13 percent in the quarter.

After removing the effective acquisitions, SG&A increased proportionally with the core revenue growth.

The acquired businesses tend to have higher selling expenses as a percentage of sales than the base AMETEK businesses due to their differentiated nature.

Second quarter corporate G&A was $400,000 below the first quarter level, but $600,000 above last year's level.

This year's cost increases continued to include higher legal and professional fees, mainly for Sarbanes-Oxley compliance.

We expect -- we continue to expect this year's total corporate G&A to approximate last year's level.

The effective tax rate was 32.6 percent for the second quarter.

We expect the effective tax rate to be between 32 and 32.5 percent for the year.

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

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

After the acquisition of Hughes-Treitler, we have about $160 million available under our existing credit lines.

In summary, our businesses are running well and taking advantage of the economic upturn.

We continue to generate sufficient cash -- significant cash together with our strong balance sheet, we look to deploy that cash to continue to grow the grow the businesses.

Bill?

That concludes our prepared remarks.

We would be happy to take questions at this point.

Thank you.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Jim Lucas with Janney Montgomery.

First question, just housekeeping, can you give us a breakdown on the FX component to revenue by both segments?

Yes.

You bet, Jim.

Let's start with the Company.

The internal growth for the entire company was plus 6 percent, and the FX amount included in that 6 percent was about 1.3 percent.

For EIG, the internal growth was 8 percent, and included in that number is a foreign exchange rate that is a little bit less than 1 percent.

For the Electromechanical Group, the internal growth was 4 percent and included in that number was an FX of about 2 percent.

Okay.

Just as a follow-up on that, this has been our best quarter in terms of internal growth in a long time and we're very pleased with it.

It is a welcome change and it's been a long time since we've heard you use the word optimistic in a conference call.

So, that obviously bodes well for the future.

When taking a look at the businesses, the margins -- the leverage is definitely showing through here.

Can you talk about what you're seeing from 1, a pricing standpoint; 2, from an internal investment as the topline continues to accelerate the differentiated mixes there.

Are we seeing -- is there additional upsides of margins or can you talk about the dynamics there?

Sure Jim.

Let's talk about pricing.

Actually, the pricing environment has improved.

We are actually getting some larger price increases.

It tends to flow more with the differentiation of the business so that the more highly differentiated businesses were getting more price increases than we are on the very low end of the differentiation curve.

But, we probably in our results so that we didn't really analyze it from the data that I had before, the end of the quarter -- we probably have a 1 point to 1.5 point of price increase in the numbers, and again that is substantially different than it was a year ago.

And in terms of the contribution margin, let me first speak to the first 6 months of the year.

You may recall that last year we were talking about a 40 percent contribution margin in the Company so that for every dollar on the topline, we would get 40 cents pretax on the bottom line.

And in fact, when we analyzed the first half of the year, that is exactly what we got.

If you extract the acquisitions, which obviously are not going to have that contribution margin, the level was about 40 percent, and it was actually balanced quite evenly between the two groups.

So, we are getting the incremental effect on the topline moved to the bottom line.

Now in terms of the future of the business, is there more margin expansion possibilities?

The answer is definitely yes.

When we look at this year, my previous guidance on margin improvements on a year-over-year basis were about 30 to 40 basis points, I believe is what I said.

And we're now looking at about 80 basis points for the full year.

And as we look forward, we are thinking of a 30 to 40 basis point a year type of improvement is reasonable for the foreseeable future.

That is based on the fact that we are continuing very aggressive actions on the Operational Excellence front, just because the economy is better.

We have not reduced our thrust in terms of taking additional cost reduction measures in the Company.

Also, as we acquire these high-end differentiated companies, by their very nature, their margins tend to be higher.

There will be a little diluted effect maybe in the first quarter or 2 as we acquire these companies -- to margins -- not in terms of EPS, but in terms of margins.

But over a very short period of time, most of those companies will be actually adding some to the overall margins of the Company.

Okay.

Great.

Thank you.

Wendy Caplan with Wachovia Securities.

Good morning.

I had a question just to follow on the margin thought for a minute.

The higher -- since we have been looking at the Company or certainly over the past 4 or 5 years, the incremental margin in EIG was always higher than the incremental margin in EMG.

But, this quarter it flip-flopped and 68 percent of incremental margin in EMG versus a 28 percent incremental margin in EIG.

I know you talked about it Frank in terms of the year-to-date, but can you address the quarterly issue and whether there is anything in there that is important for us.

I don't think there's anything that's important.

These margins are going to bounce around a little bit on a quarter-by-quarter basis.

We did have some extra costs that were one-time in EIG.

That did have a little bit of an impact on this, but there is no trend here.

We actually think on average, the contribution margins in EIG are going to be higher than the contribution margins in EMG.

In fact, if you average the 2 quarters, they were very high in the first quarter, a little but lower in the second quarter and EMG went just the opposite way.

So I think you're going to see some quarter-to-quarter swing, depending on mix.

But there's no major trends here.

We believe that the total Company and in particular, EIG, will have contribution margins that average over a number of quarters at the 48 percent kind of level.

Thank you.

The next question I have is the one that I usually ask about conservativeness in terms of the outlook.

We'll just take for the basis of discussion the third-quarter.

You said that you expected the third quarter to be up low double digits.

That at best is 13 percent.

So, if we assume that and we get 2 months of Chandler which we estimate at 5 million roughly; 3 months of Taylor Hobson at 17.5 million; and 2 months of the new Hughes-Treitler acquisition at 5.5 gets us to roughly 28 percent.

That implies about 2 percent core growth that would include perhaps some currency, some FX but maybe not because the comparisons are tough.

That would be 2 percent organic growth which seems particularly low.

Is there something changing in third quarter, or should we chalk this up to your typical conservative view of the future?

That's a great question, Wendy.

First, let me just make a comment on the acquisitions.

Typically when we say that there are accretive in the first year, it doesn't necessarily mean they're going to be accretive in the first quarter or the first few months.

I think a few of your comments regarding some of the acquisitions we recently did are not going to be probably as strong as you were suggesting.

I think the way I would answer your general question in terms of the conservatism of these numbers is that there is definitely more upside in these numbers than there is downside.

Frank, that upside, can you talk about that a little in terms of what could happen that would make you a little more aggressive on the numbers?

Yes.

One of the items that I'm sure there will be a later question regarding each of the various businesses, but one of the really positive things that we saw in the second quarter was that we actually had internal growth in our aerospace business.

It was up about 4 percent which was extremely good news and one of the first quarters in a long time that we have actually seen growth in our aerospace business.

Yesterday you may have read in the Wall Street that Airbus and Boeing are now being a little bit more optimistic about the future.

So it's very possible that we are in the early stages of a recovery in our aerospace business.

I am not ready yet to take that into the forecast, and predict that in fact that is going to happen.

But that could be a very large upside to us.

We have seen, in fact, that the aftermarket business in the commercial aerospace business has been incrementally growing on a quarter-over-quarter basis for the last few months, which is typically an early indicator of a rebound.

So, if we in fact start to see some uptick in aerospace, that will have some pretty sizable impact to the bottom line because the contribution margin on that business is one of the highest that we have.

Another thing that happened in the second quarter that was extremely good news was that the internal growth in our process businesses was actually up plus 12 percent.

The full growth including acquisitions was 31 percent but the fact that we had 12 percent internal growth was up very sizably over what it has been in previous quarters.

So, again, if that is the beginning of a trend, we're going definitely see some upside and that really gets to your first question -- the point that the internal growth may exceed overall what we're presently predicting, which is sort of in the mid single digit range.

So I think that is the key upside in the Company.

Just to remind us, this is the first quarter that you have seen core growth increases in process and aerospace?

Not process.

Not process, but process has been okay, it's been like in the mid single digits, but to go to 12 percent is a sizable, sizable change.

And aerospace I believe last quarter we were like flat in aerospace and it's been a while since we have seen growth and we actually saw 4 percent growth in this quarter and it was driven not only by the commercial part of the business, but also by the business in regional aircraft part of the business.

Okay.

Thanks very much.

Matt Summerville with KeyBanc Capital Markets.

A couple questions.

First, to get back to margin expansion, Frank.

I was wondering if you've ever looked at the expansion you've seen in terms of how much is being driven by the core business versus the things you've done on the cost side and if you can talk about that in a little bit more detail?

And then maybe provide the acquisition contributions on revenue by segment in the second quarter?

In terms of your first question, we really have not broken down the FX due to the 2 parts of the business that you talked about.

So I really don't have an answer to that question.

Your second point was acquisition growth in the second quarter?

In the second quarter by group?

Well we only had acquisition growth in 1 quarter, which was in EIG.

I was looking for the revenue contributions in each business.

$11 million and it's only in EIG.

Got it.

EIG.

It's only in EIG.

Right.

Could you also talk about some of the trends you saw in some of the other end markets?

I know you mentioned aerospace and heavy truck through the course of this call.

Could you talk in a little bit more detail?

I would be glad to.

Why don't I just go through the whole Company and give you a flavor of what is happening by these markets and it was truly a great quarter from this perspective.

I will start with the instrument side of the business.

The industrial part of the instruments group was up 19 percent on a quarter-over-quarter basis.

That is all internal growth and it is driven by 2 key factors.

The first factor is obviously a rebound in the heavy vehicle business.

That market is up about 45 percent year-over-year, and we're following that trend in that portion of the business.

The second impact is, as we have talked before, AMETEK is getting a very strong position with Caterpillar in the construction vehicle business, and in fact, Caterpillar is doing extremely well so their revenues are up which means their volume to us is up.

And in addition, we're gaining substantial share with them as they have selected us as really their top supplier of instrument panels for all of their vehicles.

So, with those key drivers, we basically saw this 19 percent internal growth in that part of the business, which we are very happy with.

Going to the process side of the business, I already mentioned the internal growth in the process side of the business was 12 percent; the growth with the acquisition impact was about 30 percent, 31 percent.

And what we are seeing there is that the high-end analytic businesses are just doing incredibly well.

They are very, very strong.

The strength is in China and Asia.

We also had very strong performance in the second quarter in the Middle East where we're penetrating some of the oil refineries and oil operations in that part of the world.

Also, our Chandler acquisition, which we did last year in the August time frame, is basically their business is in the oil patch and they are very, very strong at the present time.

So, the process business is just doing quite well at this point in time.

As I already mentioned, aerospace is up about this 4 percent on an internal basis.

The military business remains very strong, but it's not showing the kind of growth that it showed last year, and at this quarter, both the commercial and the business and regional aircraft business was up nicely.

So, we are very pleased with that.

The only weak part of the instruments group is the power instruments area.

It was down about 9 percent.

That's pretty much what we had predicted, and it's based predominantly on the LAN gas turbine (ph) turbo market.

You may be aware that GE last year shipped about 100 LAN gas turbines and this year they are anticipated to ship between 50 and 75 LAN gas turbines, although I did see in their last earnings release that their shipping a few more than they said they were.

It is possible we might see a little bit better performance there as the year goes on.

Switching to the other half of the Company, the Electromechanical Group, the differentiated businesses did really good.

Their internal growth was in the double-digit region.

Each of the businesses, the Rotron Mill Aero (ph) business, our Airtechnology business were up in the double-digit regions, driven by very strong spending in the defense area.

Our specialty metals business had a very good quarter, again with double-digit kinds of topline growth.

So, the differentiated businesses in the motor side of the business are performing very similarly to the high-end differentiated businesses on the instrument side of the business.

If you look at the cost driven businesses, they were down a very slight amount in the quarter.

As we analyze that, the main reason was the comparison to a very tough second quarter of last year which was actually our strongest quarter last year.

And we saw some roll off of that market in the third and fourth quarter of last year.

So, we're still predicting growth that is in the positive direction on a year-over-year basis for the cost driven businesses.

Just one follow-up comment.

When we sort of analyzed the whole Company, and to take into account this strategy that we've been talking about for a number of years of moving our portfolio more to differentiated types of businesses, we're really starting to see it in the numbers now.

We're seeing it in the margins go up in the Company; we're seeing it in the internal growth go up in the Company; and in fact, the cost driven businesses are becoming a much less important part in terms of the profitability and future growth of the Company.

Thanks a lot.

Scott Graham with Bear Stearns.

Good morning Frank.

Good morning Bill and John.

I guess 3 questions for you.

Number 1, I think near and dear to your heart, Frank, these acquisitions -- it looks to me like Hughes is more of a customer, common customer synergy whereas Taylor looks more like a group of businesses that may be taking in some new areas.

Could you talk about the synergies of each of those businesses; how they are going to work with your core businesses going forward to make 1 plus 1 equal 3 at the topline.

Sure.

Let's talk about the Taylor Hobson acquisition first.

This acquisition I think I made this comment publicly before is probably the best company that we've acquired in the last 3 or 4 years.

They are measuring to the subnanometer level and just to put that in perspective, the width of the human hair is about 70,000 nanometers, and this product can basically measure down to sub 1 nanometer levels.

So you are almost measuring at the atomic level.

This becomes a very, very important thing as nanotechnology starts to evolve in the world and nanotechnology is something -- it is really the next big thing.

It's a question mark as to how soon it's going to have an impact on all our lives, but it's the kind of thing that can have the impact like the Internet has had on our lives.

So, we see the Taylor Hobson acquisition as another platform within our analytic instruments portfolio that we can start to add other businesses and other market areas that we have not been exposed to in the past.

So we are very, very excited about that.

When we look at the synergy in that acquisition, the margins in this acquisition as I said in my opening remarks are actually lower than the group averages.

And this company can be and will be substantially above that.

So what we're going to do is focus on the margin improvement in that business, which comes down a how you run the business, pricing, how you go to market, those kinds of things rather than consolidations, which we do in many of our other acquisitions.

Although there could be some consolidations in the sales channel and there could be some savings that comes from that activity.

So, we see this as a 20 percent plus pretax kind of company over a period of time.

On the Hughes-Treitler acquisition, you're absolutely right, Scott, in that this is more of a customer sort of synergy, and that we sell to all of these customers; we sell parts of thermal management in ECS systems and what this acquisition does is basically give us another part of the ECS -- and when I say ECS -- that's environmental control systems that go on military as well as commercial aircraft.

This gives us a much broader range of products that are very integrated with Airtechnology on a Rotron Mill aero business so that we can have a broader suite of products, very much like we did with the sensor suites in the commercial aerospace business.

And we think the synergy there is going to been largely in that sort of both customer and sort of market basket of products approach.

This is a very profitable company.

It's profitability is higher than the group margins, but we think there is even more leverage on those margins as in fact we add more revenue to the topline.

Thank you.

Very comprehensive answer, Frank, thank you.

The raw materials number last quarter you indicated was going to be a bit higher than the $5 million that you announced last -- at the end of last year.

Where do you see that number playing out?

I think that is right.

If you look at what I will call the gross amount, the gross impact, it's probably trending more towards the number in the 8 to $10 million region.

But, we have been very, very aggressive on both price increases, on those parts of the business that are affected by these commodity price changes, and also looking at alternative sourcing areas for these and sourcing the commodities from different places either in the globe or from vendors within the certain parts of the globe.

As a result, we believe the net impact of those is still going to remain around $2.5 million or 2.5 cents a share and that is baked into our numbers.

Okay.

Last question relates to -- I know that you guys have been sending up within the Company a couple of different trial balloons with respect to consolidating purchases of raw materials and the likes -- something that I don't know if it would be the next great thing at AMETEK on the cost side, but something that you guys know that there's a lot of opportunity there.

Where are we in that process?

Is it something that the business units -- you are starting to talk to the business units about getting more aggressive on and what should we expect from that program?

I don't know if it's a program as yet, but what should we expect from that going forward?

There's no question that we're putting a major thrust in this side of the business and we have what we call a global sourcing office now that is located in Shanghai, China.

We just staffed that within the last 6 to 9 months.

I believe we have about 4 people in that organization now, and they are set up to basically interface with every one of the operating divisions in the Company on a global basis, either our European operations or our operations in the U.S. or for that matter, our operations in Asia.

And that group of people speak the language, understand the culture, and are the prime interface with basically sourcing from that part of the globe, and we see substantial improvements coming from that activity.

And the second thing that we have done is we improved our computer systems to the point where we now know our global spend in specific areas, in certain commodities for instance.

What we have been very successful at doing is through catalog houses, and through negotiations with our large vendors is to use that volume leverage across the whole Company to basically negotiate contracts that are more favorable because of the higher volume.

And then have each of our divisions basically have the ability to purchase against those contracts.

So each operation is still buying the raw material, handling their own production builds and things of that nature, but they can basically use a corporate-wide contract which has favorable pricing to get the pricing.

I don't have any specific numbers at my fingertips as to what the benefits have been, but we are into the process now I would say, and I think we are going to see some sizable benefits as time goes on.

Suffice to say a year from now, we will probably be talking about that?

I think that's fair.

Thank you.

Richard Eastman with Robert W. Baird.

Good morning.

A couple of thoughts.

One is, Frank, you were kind enough in the first quarter to share an order number with us and I'm curious -- I think that number was like 316 million?

I'm a little curious how that looked in the second quarter?

It was 302 million.

Orders remained very good.

Was there any particular momentum in that order number?

There was actually.

Each month was sequentially up.

If you look at April, May and June, each one was sequentially up with the last month up quite sizably and that similar trend we saw in the first quarter where March was very strong.

Would there be seasonality in that number?

If we look and what's happened in the IP number and the ISM number, it's probably done the opposite?

It is because -- you know our business has changed so much with all of these acquisitions that it's hard to go back and get what is the seasonality of AMETEK now.

And I don't really have an answer to was there seasonality in the number.

That's fine.

On the aerospace side of the business, could you remind us how much of that would you consider to be after markets or parts?

It's about 30 percent on the instrument side of the business of our full aerospace businesses in the aftermarket part of the business, but a much higher percentage of our profits come from that part of the business.

That is the piece that we saw rebound?

Rebound -- a better word is sort of slow incremental quarter-over-quarter growth with a little bit more momentum in the second quarter.

Two other questions on the aerospace side.

Have you been awarded any content into the Boeing 77?

I know we're on the 8380.

Yes.

We've got great content on the 8380.

What's happened -- the answer is right now, no, but we're going to get -- I'm very confident sizable volume on the 77.

The way Boeing has decided to do the procurements on the 77 is that they basically let all of their first-tier supplier contracts go first.

So right now, we are in negotiations with a number of those first-tier suppliers, us being a second-tier supplier, to put product on the 77.

And I would expect by probably the next quarter conference call, I will have some results for that.

But we truly expect to be on 77.

And that plane, as you probably have read, it looks like it's off to a great start.

There is huge interest in it.

It's going to be high-volume and it's going to be a great aircraft.

When you have content on say the 8380, what would be an AMETEK content number?

Just roughly?

Is it $1 million; is it half a million?

You mean on 1 airplane?

No, no, no.

Typically you're looking at a ship set value on aircraft that goes from 50 to $150,000, $200,000 in aircraft.

Those are the kind of numbers.

That's fine.

Lastly, you had talked about the construction kind of off-road market having picked up significantly through Cat.

Does that business run through Dixson?

Yes.

Basically it's the same technology, Richard, pretty much the same kind of products -- they just go -- 1 goes in a construction vehicle and 1 goes in a class A heavy truck.

No problem.

Thank you.

(OPERATOR INSTRUCTIONS) Greg Macosko with Lord Abbett.

Thank you.

Nice quarter.

Could you talk about the low-cost country run rate?

You've mentioned that in the past?

Sure.

Last year we did about $175 million of production in the 3 low-cost plants that we have which again are Shanghai, China, Reynosa, Mexico and the Czech Republic.

We had estimated an additional $40 million of revenue this year, and we are right on track to do that in the first 6 months of the year.

We did about $106 million of revenue and it's obviously increasing.

So we will do that 40 million and it's obviously a factor in the margins that you see in the Company.

So order of magnitude -- 315 or something like that is what you are expecting?

No, 2.

215, excuse me.

And then with regard to pension and health, I know you had a penny or so last quarter for medical.

I wondered about the pension health area?

It has not changed from last quarter, Greg.

It is not an issue this year.

It is actually down a little bit in expenses from last year, but in terms of pension -- but the health costs are basically offsetting that, so it's not a factor in this year, either quarter-to-quarter or year-over-year perspective.

Good.

Finally I see the shares ticked up 2.6 percent.

Is that just options exercised or options vesting and coming into the numbers?

And the fact that the stock price is up enters into that dilution calculation.

Of course.

Right.

Thank you very much.

Scott Graham of Bear Stearns.

Greg asked one of my questions.

The other one was regarding the IRAS (ph) product, the portable product, Frank.

How are orders trending in that product?

Just great.

Just great.

I don't know the exact number, but I think it's over 30 orders now that we have for that product.

It is ahead of what we thought we were going to do this year.

The interest has even expanded beyond the ports in the Company -- in the country, excuse me.

We are now getting interest from the airlines to use these products to basically look at checked baggage.

So, as I said many times, this 1 could be a home run, but time will tell.

Great.

Thanks very much.

There are no further questions in the queue.

Mr. Burke, please go ahead.

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That concludes today's conference.

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