阿美特克 (AME) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to this AMETEK Incorporated first quarter conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Regina.

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

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

AMETEK's first quarter results were released before the market opened today, and have been distributed to everyone on our lists.

These results are also available electronically on your market systems.

A tape of today's conference call may be accessed until May 3rd, by calling 888-203-1112, and entering the confirmation code number 4642186.

This conference call is also webcasted.

It can be accessed at www.AMETEK.com, and at www.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's section at 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.

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

Sales were up 15%, to $334.1 million, on strong internal growth, in both our Electronic Instruments and Electromechanical segments, and the contributions from the Taylor Hobson and Hughes-Treitler acquisitions we made last year.

Operating income was up 27%, and group operating margins expanded by 140 basis points, to 18.4%.

Net income of $32 million was up 30%, and diluted earnings per share of 46 cents, were up 28% over the first quarter of 2004.

Overall, we're very pleased with these results.

Our strategy of acquiring differentiated businesses and our focus on operational excellence continue to drive AMETEK's strong performance.

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

In our last conference call, I mentioned that the Department of Homeland Security had awarded AMETEK's ORTEC business a contract to develop an advanced portal monitor system for the interdiction of illicit nuclear material.

The portals are designed to screen cargo and passengers for potentially harmful shipments of radioactive material that could be used in a nuclear bomb or a dirty bomb.

I am now pleased to report that ORTEC had been awarded a $3.1 million contract to deliver two prototype systems and other related hardware, in the third quarter of 2005.

The prototype systems will incorporate a raise of ORTEC high-purity germanium detectors, coupled with several unique and novel techniques to process and display radiation data.

The systems will be able to quickly determine whether or not a source is innocent, such as naturally-occurring radioactive materials and medical isotopes, or suspicious and poses a potential threat to safety or security.

The system will operate without interfering with the normal flow of commerce, at airports, border crossings, cargo ship docks, transportation terminals, and other points of interest.

With the success of our detective family of handheld radioactive isotope identifiers, and our continued progress on the advanced portal monitoring system, we are building momentum in the Homeland Security market.

We acquired two excellent companies during 2004, Taylor Hobson and Hughes-Treitler.

Our integration of these businesses continues with excellent results.

A key element in the success of our acquisition strategy is improving the profitability of businesses, once acquired.

When we acquired Taylor Hobson, their operating margins were lower than the Electronic Instruments Group average.

Given the level of differentiation in their products, Taylor Hobson was capable of becoming a 20%- plus operating margin business.

The Taylor Hobson management team, together with their AMETEK colleagues worldwide, have done the heavy lifting necessary to rationalize distribution channels, reduce costs, and integrate into AMETEK.

In the first quarter, Taylor Hobson posted operating margins north of 20%, rapidly achieving our vision for the business.

We believe our ability to find and integrate strategic acquisitions is a core competency of the Company, and a key to our future growth.

Our acquisition pipeline remains full, and I expect we will again meet our target of acquiring $100 to $150 million in annualized revenue this year.

Turning our attention to the individual operating groups.

For the Electronic Instruments Group, sales were up 20% for the quarter, to $180. 9 million.

Internal growth of 9% for the quarter, and the addition of Taylor Hobson, drove the revenue increase.

Our Aerospace, Industrial and Process and Analytic Instrument businesses enjoyed strong core growth in the quarter.

EIG's operating income was very strong.

It was up 41%.

For the Electromechanical Group, first quarter revenue was up 9%, to $153.2 million, driven by strong internal growth and the contribution from our acquisition of Hughes-Treitler.

Operating income for the quarter was up 6%.

I'd like to take a moment and talk about the margins for the Company, and each group.

For the Company, group operating margins were 18.4%, up 140 basis points from last year's first quarter.

This was excellent performance.

In the Electronic Instruments Group, operating margin increased 310 basis points, to 20.4%.

These impressive results were driven by great performance across the entire group.

We were able to leverage the strong core growth in the Aerospace, Industrial and Process and Analytic Instrument businesses, to the bottom line.

As well, Taylor Hobson had a great quarter.

In the Electromechanical Group, first quarter margins were 16.1%, versus 16.6% last year.

We experienced shipment delays on several high-margin, military aerospace programs, driving EMG's margin down.

We expect to ship these products over the balance of the year.

Turning to the outlook for 2005, given the continued, favorable market conditions, we expect our full-year revenue to be up approximately 10%.

Good internal growth in each of our two groups and the full-year benefits of the Taylor Hobson and Hughes-Treitler acquisitions will drive the top line.

That top line growth, a continued focus on operational excellence, including movement of additional manufacturing to low-cost locales, and the contribution from our 2004 acquisitions, should enable us to deliver another year of record earnings.

Based on our first quarter results, we have raised our estimated earnings, and now see 2005 earnings of approximately $1.90 to $1.97 per diluted share, an increase of 17 to 21% over 2004.

For the second quarter, sales are expected to be up approximately 10 to 15% from last year's second quarter.

Earnings are expected to be approximately 46 to 48 cents per diluted share, an increase of 15 to 20% over last year's second quarter.

So, in summary, we are very pleased with our performance in the first quarter.

Solid internal growth and the contributions from acquired businesses enabled us to grow the top line at a double-digit rate.

As we had anticipated, we were able to bring that sales increase to the bottom line at a leveraged rate, resulting in significant margin expansion.

With one quarter now completed, 2005 looks to be another great year.

Strong internal growth, led by our long-cycle Aerospace businesses, with a continued focus on operational excellence, and a favorable M&A environment, make me very optimistic for the balance of 2005.

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

As Frank has covered our financial results at a high level, I will provide some additional details, starting first with the P&L.

Selling expense, excluding acquisitions, increased 7%, in line with our core revenue growth of 7%.

Corporate expenses were up $600,000 in the quarter, driven by normal increases associated with growing a business.

Our first quarter's tax rate was 32.6%, versus 32.9% in the first quarter of 2004.

We expect our historical pattern, of having a higher tax rate in the first half of the year, to repeat itself.

We also expect that our tax planning strategies will enable us to achieve our full-year, expected tax rate of between 31 and 31.5%.

On the balance sheet, our operating working capital, defined as inventories plus receivables, less payables, continues to be well managed, and stood at 21.7% of first quarter sales, essentially unchanged from last year.

We continue to expect that we should be able to drive this ratio down by a full percentage point over the course of 2005, and below 20% over the longer term.

Inventories at March 31st were $173 million, an increase of $4 million from year-end.

Our inventory turns improved to 4.9, up from 4.8 for 2004.

Accounts receivable were $233 million, up $38 million over last year's first quarter.

After excluding the receivables of acquired companies, receivables were up $15 million, or 8%, in line with our core growth rate.

Our collection cycle was 61 days, the same as at year-end, and a one-day improvement over the average of 2004.

Operating cash flow in the quarter was $22 million, and was good.

In this year's first quarter, we made a $5 million contribution to fund our pension plans.

The first quarter of the year tends to be a lower-cash-flow quarter for AMETEK, as we move from the cyclically slower fourth quarter.

As well, we are growing the Company, which requires an investment in working capital.

We continue to expect operating cash flow for the Company to be approximately $185 to $190 million in 2005, reflecting growth in earnings, better working capital management, and the additional working capital needs of a growing business.

Total debt was $427 million at March 31st, a reduction of $22 million in the quarter.

Our debt-to-capital ratio, at the end of the first quarter, was approximately 38%, down from 42% a year ago, despite the expenditures of $143 million for last year's acquisitions.

Capital spending was $4.5 million for the quarter.

Depreciation and amortization totaled $9.2 million in the quarter.

For 2005, we expect that capital expenditures will total approximately $30 million, while depreciation and amortization should be about $39 million.

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 March, we had $326 million available under our existing credit lines.

In summary, we continue to manage our cost structure and balance sheet effectively, generating excellent cash flow and positioning ourselves for future growth.

Bill...

That concludes our prepared remarks.

Regina, we'll be happy to take questions at this point.

[OPERATOR INSTRUCTIONS] Wendy Caplan, Wachovia Securities.

A couple things.

First, the ORTEC orders, the $3.1 million contract,.

Do you have any sense of where Homeland Security will be testing the systems?

Actually, we don't.

It'll probably be in a research and development-type laboratory environment first, and then they'll probably bring it out to a site or two and test it.

But, we don't have that information at this point.

And, I assume there was no information about follow-on for this year?

No, no.

Obviously, they're going to go through the testing process, establish that the product works in accordance with its specifications, which we have a high degree of confidence in.

And then they'll decide how this thing is rolled out.

Okay.

And Frank, you gave us some very helpful details about the performance of Taylor Hobson.

Can you walk through Hughes-Treitler and give us some indication of where the margin was when you started, and where it is now?

Yes.

When we acquired Hughes-Treitler, it was a different situation than Taylor Hobson, in that their margins were very good.

And, we expect that those margins are going to be up slightly this year.

It's not the same situation where, in Taylor Hobson, as I mentioned, in that acquisition, the margins were below the group average.

Actually, they're around 13%, and we were able to drive them up to the 20% plus kind of region.

Hughes-Treitler has excellent backlogs, has a great management team.

We're extremely happy with it.

It's more of a growth initiative than it is a cost improvement in the business, with that particular acquisition.

Okay, and if I might, just a few more quick ones.

The incremental margin in EMG was particularly light, and my sense is that it probably had to do with the shipment delays, the military shipment delays, that you referenced.

Can you give us some sense of the margin impact from that?

Yes.

Just those shipment delays that occurred would get us back to about a 16.5%, 16.6% kind of margin in EMG.

So that was the core issue for essentially not seeing some margin improvement in that particular business.

On the other side of the Company, we had phenomenal margin improvement that was driven by very high contribution margins.

And, I think, as I mentioned in the past, these things are going to vary quarter by quarter and group by group, but overall, the contribution margin for the Company, if you extract acquisitions, was right around where we had previously talked, about -- actually, a little bit above.

It was 41% for the quarter.

[OPERATOR INSTRUCTIONS] Jim Lucas, Janney Montgomery Scott.

First question on the housekeeping side.

The revenue contribution by segment, you mentioned 9% core and EIG.

What was FX there?

And on the EMG side, what was core and FX there?

Yes, why don't I give you all the numbers, Jim?

Including the effects of FX, the internal growth was 7% for the entire Company, 4% for EMG, and as you indicated, 9% for EIG.

In terms of FX impacts, it positively contributed 1% to each of those.

Which means that, excluding FX, the internal growth of the Company was 6%, for EMG it was 3%, and for EIG it was 8%.

Okay.

And, if we could spend a minute on the margin side, you alluded to it in your prepared remarks.

But, as we exit last year, you said EIG had the potential to approach 20, and we've gone through that barrier.

Clearly, you're seeing a lot of good things line up with the differentiated acquisition contributing, and getting good organic growth.

Could you talk about what you see from a margin potential, for both segments going forward?

Sure, Jim.

What we're basically - our guidance has been 40 to 50 basis points of margin improvement on a year-over-year basis.

So, for the entire Company, 2005 over 2004, is about 40 to 50 basis points.

I've given this guidance, probably for the last several years, and each year, we're able to do better than my guidance.

And my hopes are the same this year, but until I actually have a little bit more confidence as we go through the year, I'm going to stick with those kind of numbers.

By group, I think you're going to see a little better margin improvement in EIG than EMG, but not appreciably, because I do expect to see some good margin improvement in EMG, even though they started off a little weak in the first quarter.

I think they're going to come back strong as the year goes on.

Mainly, some of those shipment delays that I talked about in Wendy's question, they're going to just ship a little bit later in the year.

So, we're going to get some favorable impacts on the margin.

So, I think, if you say a little bit less in EMG, a little bit more in EIG, using that 40 to 50 basis points overall for the Company, that's a reasonable thought process.

There's nothing wrong with being conservative.

And the final question, on the acquisition side, could you talk a little bit about what you're seeing from a multiple standpoint, both in the US and abroad?

Yes, sure.

First, as I mentioned in my prepared remarks, our acquisition pipeline is very, very strong, and we do anticipate achieving our goals of $150 million in annualized revenue, in terms of acquired businesses this year.

There's no question that the pricing has moved up some from where we were, sort of as the economy was in a much worse position than it is right now.

And, what I'm seeing - as you know, we've been acquiring businesses, historically in the 7, 7.5 times trailing EBITDA kind of level.

And, from my experience right now, we're up about a point from that, for the kinds of companies that we're talking about.

I know I've heard other companies talking in the 9.5, 10, even 11 kind of category, and I'm not feeling like the companies that we're looking for, or have in the backlog, are going to be up approaching that 10% level.

So, I think it's fair to say 8, maybe 8.5 times level is a reasonable level of pricing for us.

And you're comfortable paying those types of multiples?

Yes, comfortable.

I mean, we do a very elaborate financial analysis.

And actually, we don't focus as much on the initial multiple, as we do a year later, because, as we just talked about in the Taylor Hobson, many of our acquisitions, we do a substantial amount of cost improvement.

So, if you, for instance -- I didn't run the numbers on Taylor Hobson, but if you just ran the numbers, and you say we acquired it at a 13% profit margin, it's now at north of 20%.

I think we paid, what was it, Bill, 8 times for -- what did we pay for Taylor Hobson?

It was 8 and -- I think we may have paid 8.5.

8.5 for Taylor Hobson?

Okay.

But if you go back now, and run that number, it's obviously going to be substantially less.

So we really focus on what we can bring to the party in terms of cost, to these acquisitions, and that factors heavily in our pricing decision, and what multiple we're willing to pay up front.

Wendy Caplan, Wachovia Securites.

Just to follow up on this acquisition profile at this point, it's been a while since you've done one.

And, I guess I'm just wondering how we should be thinking of that -- about that.?

Is it that the properties-- I mean, why have there been so few acquisitions over the past year after Hughes Treitler and Taylor Hobson?

I mean, was it -- is it that you get to the final stage and you don't want to pay up for it?

Or, is it very -- are you finding it to be more competitive?

Or, are the properties less attractive; if you could give us some sense of that?

Sure, I'd be glad to.

First, I think we announced a quarter or two ago, that in one case we had actually been well down the acquisition pipeline with a particular company and we basically found in our due diligence process, that that particular company was essentially not properly represented, in terms of its profitability and growth prospect.

And it was significant enough that even a price reduction was not the right answer.

So we basically pulled out of that acquisition.

And that was a fairly large acquisition.

In terms of why it might be taking a little bit longer than you would like or we would like, many of the acquisitions we're looking at now are in Europe.

Which is good for us, because obviously, we're trying to get our fair share of the international market and we're pushing for acquisitions in Europe.

And by definition, it takes longer to do an acquisition in Europe.

And without giving any of the details here, I can tell you that we basically have one acquisition right now that we're simply waiting for Antitrust approval on.

And the deal has basically been solidified, but we're simply waiting for Antitrust approval, and we're going to get it.

It's just a question of having the final sign off.

So we're well along in the process and as I mentioned in my opening comments, we're quite optimistic that we're going to get the $100 to $150 million in acquisitions that is our target for this year.

And is that in this one acquisition?

No.

Actually, I can tell you we're presently working on three.

And Frank, can you tell us whether there's any other cost in the quarter that pressured margins?

I know sometimes you have some cost relative to moving to low-cost regions or any kind of Operation Excellence programs.

Is there anything there that we should talk about?

Well, I wouldn't say anything special, but in every quarter, as you know, we are continuing to move products to these low-cost locales and there has been cost in this quarter as there would be in essentially all our quarters.

As you know, my goal this year is to move from $210 million last year, in these low-cost manufacturing locales, up to about $250 million this year.

And actually we're very much on track.

I actually looked at the data last night and in the first quarter, we actually did $61 million in low-cost regions.

So we're almost at that $250 million run rate.

There are material price increases, as we've talked before, we're very good at not having them substantially affect profitability.

And in fact, that was true in the first quarter.

We had a little bit of impact, but nothing of any significance.

The key factor, in even the higher margins than what we had in the first quarter, was these shipments that I talked about.

If we had gotten those shipments of those two military aerospace programs, we would have made a few more pennies, probably one to two more pennies in the quarter.

So, it would have been a blowout quarter, essentially.

Scott Graham, Bear Stearns.

I have a couple of questions.

The first is on guidance, Frank.

With guidance being inched up at the high end, and by that, a nickel at the low end, what I'm trying to, I guess, reconcile here is I know that your prior guidance contemplated second half option expensing.

And, I'm wondering what -- if the guidance continues to contemplate that, and if so, why, since we have been -- that's been pushed off?

And perhaps then, if we're not contemplating that anymore, perhaps why that high end of guidance maybe wouldn't have gone up a little higher?

Sure.

First, the present guidance that I have given, still assumes that we are going to expense options, starting essentially, July 1st.

As you indicated, the SEC came out last Friday, indicating that companies can, if they desire, move that out until, for us, it would be January of next year.

We have not yet made a determination as to whether or not we're going to move it.

I actually want to talk with the compensation committee next week, at our normal board of directors meeting, about that.

And we'll be making a decision.

So in the worst case, if we decide that we're going to continue to expense the options, the guidance I've given you is correct.

If, in essence, we decide that we're going to wait until January, there's going to be approximately 3 cents of upside in these numbers.

Great.

That's very helpful, thank you.

Typically, you also are nice enough to give us the by-Division sales trends.

I was wondering if you might be able to do that this quarter as well?

Yes, why don't I walk through the Company for you, Scott, because it really is a very, very positive picture.

And let me start in the Electronic Instruments Group.

In Aerospace, they're just doing fantastic right now.

The internal growth in our Aerospace part of EIG was 17% in the quarter.

Commercial aircraft is back, and back in a big way.

The Commercial Aircraft part of that business was up almost 25% in the quarter.

As we know, Boeing's production this year is up about 12% over last year, and since our last conference call, they've announced 2006 levels that are again up, and this time 20% instead of 12.

Obviously, we'll start to see some of that this year, because we're supplying parts to them.

Airbus is up about 10% in terms of production.

And then, these programs that we have talked to you all about in the past, regarding getting on new platforms, et cetera, we're starting to see that come through.

Just this morning, I saw where General Dynamics and UT and Honeywell were all out, and all citing strength in the aerospace market.

So, commercial business is great.

The business and regional aircraft business also is very strong right now.

It was up sizably in the quarter.

And the military business is -- doesn't have the same growth, but it's running at very, very high levels, and very, very strong performance on the instrument side.

So Aerospace is, essentially nothing but a positive story.

In the Process and Analytic businesses, in Process, the internal growth was 10% in the quarter.

And, with the acquisitions, they were up, I think it was 33%.

Very, very strong performance in the Analytic Instrument business.

Process Instruments were strong, EDAX was strong.

We've already talked about Taylor Hobson being very good, and our AMP division, which does the nuclear products, also was very strong, so great performance in that part of the business.

In Industrial, another good story.

Growth rates were -- core growth rates were up about 9% in the quarter, driven by two things.

Driven by the heavy truck market, heavy vehicle market, which is up nicely this year, and also our share gains at Caterpillar.

So those two things really drove great, internal growth there.

And the last part, although a very small part of the Instruments Group, is the Power segment.

We didn't see a strong, in terms of revenue growth there, but the good news in Power was that the cost activities, that we put in place last year, are bearing fruit this year, and the profitability was up double digits in that business.

So, EIG just had a really super quarter.

If I flip to the other side of the Company, our cost-driven businesses have stabilized.

We're very pleased with the performance of those businesses.

As you know, we don't manage those for growth, as much as we do for profitability.

And the prime thrust there, is the continual movement of these products, to low-cost manufacturing locales.

And as I mentioned a moment ago, we're pushing to go from this $210 million for the whole Company, to 250, and a good part of that comes out of the cost-driven businesses.

So, I'm very pleased with the performance.

I think that management team has done a great job in managing those businesses.

And they're tougher businesses, as we all know, than some of our more differentiated businesses.

And, if you look at the differentiated side of EMG, and just walk through that, Specialty Metals had a great quarter.

Rotron had a really good quarter.

And, the only issue we had, which was a slight disappointment in the quarter, was that in our Air Technology business, and one of our other Military Aerospace businesses.

We had to push out of those two programs, but they had nothing to do with order- input.

They were simply shipment delays that are going to happen later.

So, when I sum the whole picture, it's pretty positive right now.

Scott.

Very good.

Thank you very much for that, Frank.

And one final housekeeping question, John.

Could you tell us what accounts payable was in the quarter?

Sure, Scott.

It was $116 million.

Richard Eastman, Robert W. Baird.

Just a couple of follow-up questions.

Frank, could you just give us a flavor for what kind of revenue that slipped out into those two Aerospace, Defense Aerospace businesses?

What kind of revenue -- is that a $5 million chunk of revenue --?

Yes, this is on the order of $2 to $5 million kind of slip.

And, I'll give you a little bit more detail on it, just so you have a flavor of what is going on.

It's actually an administrative issue, with the four European countries.

The most significant part of this, is on a product that we call the Air Bag, which, probably the best way I can describe it -- if you think of our astronauts, when they move out to get in the capsule, you notice they're carrying these little handbags on their side, which basically is providing heating, ventilation and cooling to their spacesuits.

We produce that exact same kind of product, but we do it for the Euro fighter.

And, we basically have a whole bunch of those products produced, in inventory, which is one of the issues, when John was talking about inventory going up a little bit.

And we simply have to get the okay from four countries to basically ship those, because the Euro fighter is a joint activity between four European countries, and it's simply getting the paperwork through the system.

There's no other issues with this, and it's obviously just taking longer than we had hoped, and it's like dealing with four US governments, is probably the best way to describe it.

So, we're confident these things are going to ship.

There's no order issue or anything like that.

So, that just puts a little bit more color on it for you.

That's helpful.

And then the piece of the Aerospace business that falls in the EIG business, we talked about the commercial coming back pretty strongly.

How did the operating profit respond to that sales increase?

Really well, really well.

This is one of our -- we don't, as you know, give out details on the sub- segments, but this is one of our highest- margin businesses in the Company, and it's got one of the highest contribution margins in the Company.

So, when we get that revenue increase on the top line, it's a very strong factor, and it's one of the key reasons why we're raising our guidance.

Okay.

And then, also maybe a last thought just on that front.

In terms of the orders number -- and again, let me just broaden this out.

In terms of the orders for the Company in the first quarter, how did that number look?

It was great.

We were at $343 million, and it was an all-time record for the Company.

Wow, okay.

And that's versus 316?

That's the number I have.

I don't know what it was last year.

At 343.

343 this year.

That's the number I have in my head.

Okay, and then, was FX much of an impact at the EBIT line?

No.

Virtually nothing.

At the group line, it had a minor impact.

John, why don't you talk to that?

Yes, it was -- at the EBIT line, Rich, it was about, maybe $300,000, but as you walk through the rest of the P&L and you look at the interest, the FX effect on interest and taxes, it comes down to literally a couple hundred thousand at most.

And basically, we've got our -- we studied our revenue and cost by currency, and have come to the -- to grips with it, and it's about in balance.

Most of our profits are in the dollar currency, our cost in various currencies are just about offset by the revenues, or however you want to characterize it.

But, if you take it all the way to the bottom line, the current structure right now is, we're fairly insulated from a P&L impact of currency fluctuations.

That was by design.

Okay, very good.

And just a last question, on the M&A side, we talked a little bit about the pipeline and the geography.

Are you seeing more opportunities in any given business segment?

Are we --?

Oh yes, no question.

If you look at the Company, and we talked about this previously, there tends to be much more opportunities in the Process and Analytic Instruments business.

And, in general, there are more opportunities in EIG than there are in EMG.

And also, as you know, we're not focused on doing any acquisitions in the cost-driven part of EMG, so just by definition; you've got sort of a smaller market area to concentrate on.

So, I think you'll almost see the acquisitions coming in more on Process and Analytic Instruments, and probably second with the Aerospace, like we did more recently, Air Technology and Hughes-Treitler, thaen probably the industrial part.

And then probably sort of the differentiated part of EMG.

Okay, so we're not being pushed in this environment to look at what appears to be bigger opportunities on the cost-driven side?

We're still not interested in that?

No, not at all, not at all.

Actually, we're staying away from those types of acquisitions.

In our history here, we've only done one, and that was a number of years ago.

And the only reason we did it, is that the pricing just got so low on the deal, it was a financial home run, so we did it.

But that is clearly an exception.

Alok Chopra, Oppenheimer Capital.

We'll move to our next question, Elana Hordon, Merrill Lynch.

I'm wondering if you could quantify raw material inflation this quarter, and maybe talk about how you've been able to minimize the negative impact through higher selling prices, better sourcing?

Right.

Yes, I actually have not gone back and got an actual number, but it's going to be in the low hundreds of thousands of dollars.

It's just not a significant part of our overall operating profit picture.

And we're, as you know, last year, we did a really respectable job when many other companies were having trouble, and it's really through a combination of several things.

First, aggressive pricing, and there's no question that the pricing environment is a lot easier now than it was, say, a year and a half ago, in terms of either being able to get permanent price increases to offset material costs, or surcharges to offset material costs.

The second thing is that we've been very, very aggressive in terms of alternate sourcing on material.

We have a global sourcing office in China, which is really gaining steam right now.

Actually, all of our Divisions are able to link with it, to help source products from different parts of the world.

And that has been a key factor, especially as our production levels also come up in that part of the world, in terms of getting lower-cost material from that part of the world.

The other thing is that, when you look at the commodities that impact us, some have moderated, and it's not as big an issue.

For instance, if you look at steel, the price of steel over the 6 months actually has a downward trend.

And if you actually look at it on a quarter-over-quarter basis, first quarter this year versus first quarter last year, there is very little movement.

It's very, very close to what it was.

And similarly, if you look at nickel, which is also another key commodity we use, and you look at it on a quarter-over-quarter basis, I think it's up like 4% or 5%.

So, it's not a significant factor.

The only one where there is an impact that we have to deal with, is copper, and that's -- we've done a great job of dealing with it, and that's why the impact to the bottom line has not been significant in any way.

Okay, but it's fair to say that this year, the negative impact is much lower than it was?

Yes, I think that's fair to say.

We haven't quantified it, but I think it's fair to say, yes.

[OPERATOR INSTRUCTIONS] Edmond Griffin, BlackRock.

Quick question, it's just a follow-up question.

When you were talking about the fundamentals by end market, I know you don't give out specifically, the revenue, but could you just give us rough ranges of the revenue by end market?

I mean just to get somewhat of an idea of --?

Yes, I'll give you a rough idea.

I mean, in -- as we started in EIG, it's about $140, $150 million in the Aerospace part.

In Process, it's probably 375.

Industrial is a little bit over 100.

And, the Power is smaller.

It's on the order of $80 million.

And those are just rough numbers, not exact, because I'm doing them off the top of my head.

And on the EMG side, the cost-driven businesses are about 300, and the differentiated businesses are the difference between that and the group number.

What's the group number?

Well, let's see, we've got about 185 in Technical, or differentiated motors, and then about 100 million between our specialty metals and Prestolite Power and Switch businesses.

Okay, perfect, great.

And are you -- what is the use of cash flow right now?

What is the focus, aside from acquisitions?

Right.

Well, the first use is definitely acquisitions.

The second use would be paying down debt.

And, we do a little bit of stock buybacks, just to offset the dilution impacts of our benefit programs, and we do that opportunistically, and it's not really a major use of cash.

Okay, and then when you look at management compensation, what sort of metrics is short-term compensation tied to?

Well, it varies by the level of a person in the Company, but in general, there's an EBIT kind of measure, and an asset kind of measure.

And, those are the two prime measures that would flow through just about anybody's short-term incentive compensation targets, if you will.

And then, it's specialized to the particular person's responsibility.

For instance, if we have -- we feel there's opportunity in working capital in a certain Division, we will incent that Division to make aggressive improvements in their working capital.

For some of our really top-performing divisions, where we want them to look at acquisitions, we will actually incent them to get acquisitions, so that they become -- are out looking for acquisitions and helping us find those kind of acquisitions.

So, we will tailor it to whatever we think is the maximum leverage for the Company and for our shareholders.

Right, and more specifically, to the executive management team, you know, yourself, CFO, and your Chief Operating Officer.

Yes, it's the first two.

So it's a return on capital?

Return on capital kind of measure, EPS kind of measure, and an asset kind of measure.

Right, and your hurdle rate for acquisitions is what?

We use an after-tax discounted cash flow, rate of return-kind of model, and our hurdle rate is 15% after tax.

It appears we have no further questions at the time.

Mr. Burke, I'll turn the conference back to you for closing remarks.

Thank you very much for joining us today.

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

Thank you.

That does conclude today's conference.

We thank you all for your participation, have a great day.