阿美特克 (AME) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this Ametek Incorporated Second Quarter Conference Call.

This call is being recorded.

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

Please go ahead, sir.

Thank you, Kim.

Good morning, and welcome to Ametek’s second quarter earnings 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 are on our website at amatek.com/investors.

A tape of today’s conference call may be accessed until August 2nd by calling 888-203-1112, and entering the confirmation code number 6242756.

This conference call is also webcasted.

It can be accessed at ametek.com and at streetevents.com.

The conference call will be archived on both of these 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 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’ll now turn the meeting over to Frank.

Thank you, Bill.

Ametek had a tremendous second quarter.

Excellent internal growth, operational improvements, and the contributions from acquisitions drove our strong performance.

Sales were up 16% to $352.1 million.

Operating income was up 28% to $60.8 million, group operating margins expanded 170 basis points to 19.2%, net income of $35.2 million was up 27%, and diluted earnings per share of $0.50 were up 25% over the second quarter of 2004.

Operating cash flow was $47 million, up 30%.

These impressive results established new records for sales, operating income, net income and diluted earnings per share.

Turning our attention to the individual operating groups.

In the Electronic Instruments Group, sales were up 20% for the quarter to $191.4 million, driven by strength in our aerospace and process businesses, and the contribution from acquisitions.

EIG’s operating income was up 44% for the quarter, and operating margins increased to 21% from 17.6% last year.

This sharp increase was driven by the strong top line performance and broad-based operating improvements.

The electromechanical group also had a strong quarter, as good core growth, combined with the contribution of the Hughes-Treitler acquisition, resulted in double-digit sales and profit increases.

Second quarter revenues were up 11% to $160.7 million.

Operating income for the quarter was up 10% to $27.6 million, and operating margins reached 17.2% in the quarter, up 110 basis points sequentially, and essentially unchanged from the second quarter of last year.

Turning to the outlook for 2005, we now expect a low double-digit percentage increase in revenues, based on solid internal growth in each of the two groups, and the full year benefits of our acquisitions, including the recent acquisition of SPECTRO.

We now expect 2005 earnings to be near the top of our previous guidance range of $1.90 to $1.97 per diluted share.

For the third quarter, we expect a low double-digit percentage increase in sales from last year’s third quarter.

Earnings are expected to be between $0.48 and $0.50 per diluted share, an increase of 14 to 19% over last year.

Since our last conference call, we have closed a significant acquisition, SPECTRO Analytical Instruments.

I’d like to spend a few minutes talking about our acquisition strategy, and then talk in more detail about SPECTRO.

As many of 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 keen focus on integrating acquired businesses rapidly.

SPECTRO, which we acquired on June 13th, meets all of these criteria, and we are very excited to have them join Ametek.

SPECTRO is a leading global supplier of spectrometers used to analyze the elemental composition of solids and liquids.

Using optical emission or energy dispersive X-ray fluorescent technology, SPECTRO’s instruments address the analysis requirements of a variety of end markets, including metal production and processing, environmental testing, hydrocarbon processing, aerospace, food processing, and pharmaceutical.

SPECTRO is a highly differentiated, technology-driven business, which significantly expands our measurement capabilities.

With this acquisition, our high-end analytic instrument businesses now total nearly $375 million in annual revenue.

SPECTRO employs three key measurement techniques.

First, they hold a leading market position in Arc/Spark optical emission spectrometry, a technology widely regarded as the most precise and reliable for the metal analysis market.

Second, SPECTRO’s inductively coupled plasma optical emission spectrometers expand Ametek’s analytic measurement capability to liquid analysis, opening new market opportunities, particularly for environmental testing.

And finally, SPECTRO’s ED-XRF-based products complement those manufactured by our EDAX business, enabling Ametek to supply a broader range of products to this very attractive market.

SPECTRO’s revenues are geographically balanced, with Europe accounting for about 50%, Asia with 30%, and the U.S. and the rest of the world accounting for the balance.

With this acquisition, nearly 47% of Ametek’s sales will be generated outside the United States.

SPECTRO will add over $100 million in annual revenue to Ametek.

The purchase price was EUR80 million, or approximately $98 million, and was financed with our existing credit facilities.

SPECTRO’s margins are below our EIG Group average, running about 10%.

We see plenty of opportunity to increase those margins.

These areas include leveraging our global sales infrastructure, global sourcing of material, and our typical operational excellence initiatives.

The strong management team of SPECTRO has joined Ametek, and, together, we are focused on growing this new measurement platform and improving the profitability of the business.

As with all our acquisitions, SPECTRO will be accretive in the first year of ownership, though not significantly in 2005.

SPECTRO is a great addition to Ametek, and is an excellent example of our acquisition strategy at work.

Also, I’d like to mention a small technology acquisition we completed in the second quarter.

We acquired patented technology and other proprietary and intellectual assets from Xtreme Energy, a privately held developer of brushless DC micro-motors for healthcare, aerospace and other specialized industrial applications.

This acquisition complements our existing differentiated technical motor business, adding a unique line of small, high-efficiency motors to our product offering.

We will continue to make technology-focused acquisitions like Xtreme to further expand our technology base, fuel innovation, and enhance our internal growth.

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

We are driving internal growth across the company, led by our long-cycle aerospace business.

We continue to drive margin expansion, bring in the leverage contribution from the sales increase to the bottom line, and as always, we remain focused on driving operational 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 profitability characteristics.

In 2005, differentiated businesses will account for 80% of Ametek’s volume.

The acquisition pipeline is very 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.

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

Thank you, Frank.

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 the effect of acquisitions, increased 4% over the second quarter of last year, below our core growth rate of 6%.

Corporate expenses were up $1.4 million in the quarter, driven primarily by restricted stock expense due to the change in our long-term compensation philosophy.

Additional personnel costs necessary to grow the company accounted for the balance.

Our second quarter tax rate was 33.3% versus 32.6% in the second 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 strategy will enable us to achieve our full year expected tax rate of between 31 and 31-1/2%.

On the balance sheet, excluding the effect of the recent SPECTRO acquisition, operating working capital, defined as inventory plus accounts receivable less accounts payable, was 20.6% of sales, an improvement of over 1% from the first quarter percentage.

We expect that we should be able to drive this ratio down below 20% over the longer term.

Inventories at June 30th were 180 million, an increase of $11 million from year-end.

After excluding the inventory acquired with the SPECTRO acquisition, inventories were down $2 million for the year while we grow the business.

Inventory turns were 4.9 times, up from 4.8 times for the full year of 2004.

Accounts receivable were $247 million, up $28 million from last year’s second quarter.

After excluding the receivables of acquired companies, receivables were up $7 million, or 3%, again below our core growth rate.

Our collection cycle was 59 days, 2 days better than at year-end, and a 3-day improvement over the average of 2004.

Operating cash flow in the quarter was $47 million, a 30% increase over the second quarter of last year.

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

Total debt was $493 million at June 30th, an increase of $66 million in the quarter, reflecting the $98 million paid for SPECTRO, offset by other debt reductions caused mainly by our strong cash flow.

Our debt to capital ratio at the end of the second quarter was approximately 41%, down from 44% a year ago, despite the expenditures of $145 million for the acquisitions of Hughes-Treitler and SPECTRO.

Capital spending was $5.1 million for the quarter, and depreciation and amortization was $9.5 million for 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.

In June, we amended the existing $300 million revolver.

The amendment included extending the term to June 2010, improving the financial terms, and adding an accordion feature that allows the Company to add an additional $100 million in revolver debt.

At the end of June, we had $357 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 the Company for future growth.

Bill...

That concludes our prepared remarks.

Kim, we’ll be happy to take questions now.

Thank you, sir.

[OPERATOR INSTRUCTIONS.]

Jim Lucas with Janney Montgomery Scott.

Couple of questions on the housekeeping side first.

John, could you give us the payables number for the quarter?

122 million, Jim.

Could you walk us through the revenue breakdown by segment for the company of internal versus acquisition and FX?

Sure.

If we look at the internal growth, including the effects of currency, the entire company was up 6%, EMG was up 5%, and EIG was up 6%.

And currency basically added 1% to each of those, 1% for the total company and 1% for each of the operating groups.

SPECTRO looks like a very good acquisition, clearly right in the sweet spot of what you’re looking for.

Could you give us a little flavor of the operating structure there, of why their margins have been somewhat lower, and how quickly do you think you could get those up to the corporate average?

I think there’s essentially untapped potential in the margins in SPECTRO.

They have traditionally run at this kind of level, and it was one of the key attractivenesses to us of the acquisition, because, in discussions with management there and talking about our operating disciplines, we feel we’ve got substantial leverage to improve those markets as I’m -- or those margins, as I’ve talked about, in the opening address.

As I mentioned, we think we’ve got distribution synergy.

They do not have a strong position in the U.S. market.

Only about 20% or less of their sales are in this market, so we see that we can leverage their capability in the U.S. market.

And conversely, this is the first major platform that we have on the continent in Europe, and we believe we can take and increase our volume from U.S.-based operations through having SPECTRO help us with the distribution of those products.

So, there’s basically cross-distribution synergies here that we can capitalize on.

In addition, just our normal operational excellence initiatives, our focus on working capital, focus on cost, et cetera, as we do in any acquisition, will come into play.

As to your question regarding timing, this probably will be a little bit slower than other acquisitions that we have done in terms of reaching our margin targets.

What we’ve done is set a goal of moving this business to 15% initially.

As I ‘m sure you’re aware, it’s more difficult in continental Europe to do some of the changes that have to be made, so we’re saying it’s going to be a little bit slower.

But every time I’ve given a projection on how fast we’re able to do something, we seem to always exceed it.

And I’ve got an energized team on both sides of the ocean here to make those operating improvements happen.

And finally, could you just give us an update on what you’re seeing on the aerospace side of the business?

Yes.

We talked about aerospace on the instrument side of the business.

It’s a great story, Jim.

The internal growth in that business was up 14% in the quarter.

If you break it down by the various sub-market segments, commercial did extremely well.

As I’m sure you’re aware, Boeing is up in their production this year about 12% over last year, and they’re forecasting next year to be up about 20% over this year.

Airbus, similarly, is up about 10% this year over last, and they just recently came out with forecast for next year that called for at least 11% growth.

And the way they worded it, it implied that that number is probably going to go up as they get closer to next year.

So, the commercial side of aerospace is doing great.

Similarly, the business in regional portion of aerospace is very strong.

Cessna is our largest customer, and Cessna is just doing phenomenal right now, to some degree driving Textron’s business growth and profitability.

So, we’re pretty excited about the business with Textron, and with Cessna.

And military, as I think we’ve talked about before, is just doing incredibly well.

We actually -- we’re operating at very high levels, and we actually saw growth in the second quarter.

Military was up about 5% in the quarter, again, from very high levels.

So, all in all, when you look across that whole aerospace business, it’s a positive story.

And just one additional comment as we look out in time, we’ve won business on every major new engine program that has been established, and it really spans each of these three segments.

We’ve got the answer -- engine suites -- on the GP7200 engine, which was going to fly in the Airbus A380.

We’ve got the CF34 center suite, which is in the business and regional jet aircraft environment.

And last, we’ve got a major position on the Joint Strike Fighter, which is the next major military aircraft to -- that’s in development right now.

So, aerospace is a good story right now.

Wendy Caplan with Wachovia.

We should expect, I assume, John, that the EIG margin is going to decline because of SPECTRO?

And Frank, you mentioned 15% near-term goal for -- maybe not near-term goal for SPECTRO’s margin.

Can you give us some sense of when that is reach -- is reachable?

And is there anything characteristic about SPECTRO that it shouldn’t have closer to a 20% margin ultimately?

Let’s start with your last question first.

No, I think, over time, that margin can move to that kind of level.

But we want to take it in steps, so we’ve set this target first at the 15% level, and I think we’re looking at a -- actually, I have a meeting at 10:00 where that’s going to be the topic of discussion.

But I think we’re looking at maybe, instead of a one-year time period, it’s maybe an 18-month kind of time period, something in that general flavor of time.

Now, let’s talk a little bit about the margins, because I think you’ve hit on a very good question.

And there’s some really good news in here.

First, if we go back to the guidance that I gave you before the SPECTRO acquisition, we had said we were going to improve margins 40 to 50 basis points this year.

On that same basis, we now believe that the margins will improve 70 to 80 basis points, so we’ve almost doubled the margin improvement from our original estimates.

When we now put the SPECTRO acquisition in at this lower margin level, we think we can essentially meet our original projections of 40 to 50 basis points for the company for the year.

So, there obviously is some dilutive impact when you buy a larger company that has margins that are lower than your average.

But, when you really think about this, we like to buy companies at this 10% margin in general, companies that aren’t sort of in a bankrupt situation, but that are running below the kind of margins that you would hope they could run at.

And therefore, we add tremendous value to those companies and get tremendous returns on the investments we make in the companies.

And as the margins of Ametek have expanded so substantially, the dilutive impacts on margins are going to be a little bit higher, obviously.

When we used to run at 15% in the company and you do a 10% acquisition, it would have a certain amount of dilution, and obviously, we’re now running up in the 20% region at the group level.

It’s going to be a little bit significant -- more significant, but still, when you look at this on a cash return basis, it’s phenomenally good.

And one more question about SPECTRO.

Have you met – has management met with the works council yet, and how are they -- and if so, how are they seemed to be positions?

Excellent.

The people in SPECTRO, the management council, are -- I would use the work “ecstatic” about being part of Ametek.

And finally, Frank, can you give us an update on Ortec’s homeland security business?

Great performance in the second quarter.

Our nuclear products did well.

We took 32 orders in the quarter for the detective product, and, since we’ve introduced that product, we now have I think it’s 129 orders in total for that product.

Again, most of those orders and shipments that we have made have gone into beta test sites for our customers.

We’re getting very positive responses from our customers, so we’re hopeful, at some point, that’s going to break into some very large order volume for us.

On the portal monitor -- and this is the device that, basically, we can drive trucks through and establish if there’s fissionable material inside the truck, sort of on the concept of easy pass.

We are just completing our first prototype, and that prototype is going to go out in the Nevada test site, and they’re basically going to be driving trucks through the prototype, both with fissionable material and with dummy material to establish how well our product works.

We were able to take sort of the guts of the product out to the Nevada test site a few weeks ago without yet fully completing the prototype, and actually did measurements with both fissionable and non-fissionable material so that we could tune our algorithms, and we’re very, very pleased with the performance of that.

So, once these instruments get out in the Nevada test site, we’ll be able to test them ourselves, but then, in essence, we have to leave, and the Department of Homeland Security will run their tests, and we’ll see where that takes us.

So, it’s a pretty exciting time right now for us.

Matt Summerville with KeyBanc Capital Markets.

I wanted to talk about your incremental margins in the two divisions, Frank.

It looks like, all in in the second quarter, EIG was in the high 30s, EMG was in the mid-teens.

I was wondering if you had those numbers, excluding acquisitions?

And then, also, if you could maybe talk about why the incremental margins and EMG have been running kind of low.

Yeah.

First, the incremental margins in the company were nothing short of incredible in the second quarter.

We were actually up 48% at the company level.

And as I’ve mentioned in the past, on a quarter-by-quarter basis, these margins are going to move around.

You’re not going to, on each quarter, be able to use the sort of guidance I’ve given you on contribution margin.

But let me sort of give you an overall flavor, because we ran some calculations yesterday on this.

And last year, for the year, although it bounced around a lot by quarter again, we have exactly the contribution margins that I had anticipated.

It was 40% for the company, and it was 32% in EMG and 48% in EIG.

If you -- we ran the numbers yesterday for 2005 based on our forecast, and, in essence, they came -- they come out almost identical.

So, you’re going to see some bounce-around, and, in this particular quarter, we saw very high margins in EIG, contribution margins, which are essentially not sustainable, and, conversely, we saw lower margins now in EMG, but we think they’re going to all average out over the year, and will be right back to those norms.

When you said incremental margins in the second quarter were 48, is that the core business?

Yes.

That’s basically excluding acquisitions.

Yes, I just wanted to clarify that.

And then, maybe, can you just do a walk-through in the EMG businesses in terms of what you saw in the quarter and what demand looks like in the major verticals there?

Yeah, absolutely.

Actually, we had a great quarter in EMG.

It’s kind of overshadowed because we did so well in EIG, but EMG did really well.

The cost-driven businesses were actually up 4% in the quarter.

That was higher than our estimates.

I had mentioned last quarter that those businesses had stabilized, and we’re actually getting some growth out of those businesses.

Now that, as I said, was unanticipated, so that’s definitely a positive trend.

We’ll have to see if that continues as we go into the second half of the year.

We’re actually not quite -- we’re not forecasting at that level, so we’ll have to see what happens.

And similarly, on the differentiated part of EMG, it had a great quarter.

Volume was up 19% on the differentiated side of EMG.

In terms of core revenues, it was up high single digits, so it did just fine.

And this really is driven by the fact that we have some substantial content on that side of the business in military aerospace, military ground-based vehicles, and, to a lesser extent, commercial and business aircraft applications, and our business is doing just fine.

Our specialty metals operation, in a differentiated segment, had a fine quarter.

So, overall, we got both double-digit top line and double-digit bottom line improvement in EMG.

What drove the increase in the cost-driven businesses that you weren’t anticipating?

That’s a great question.

I’m not sure I can answer it.

We just got some really good volume out of china.

That’s probably the number one driver.

Our manufacturing operation in China has just come up a level in their capability.

I was over there -- I think it was in February, early March -- and I actually mentioned to the entire team there that the incremental improvement that I saw in that operation, just in terms of efficiency, cleanliness, inventory performance, essentially all the key metrics of how to run a manufacturing plant, had improved more substantially than any -- I go about every year -- more substantially than any time that I had been there.

But I think our customers -- I know our customers have come in and observed that, and that’s been a factor in growing the business.

So, that’s probably the key driver in the quarter, Matt.

You had had some business push-out in the first quarter on the military side.

Did you get any of that in the second quarter?

Yeah, that’s a good question, Matt.

Very late in the quarter, we got the necessary approvals that we talked about in the last conference call, and we will -- we’re able to recognize some of the revenue, but not all of it.

So, there will be more of that coming in the rest of the year.

Richard Eastman with Robert W. Baird.

Just a couple questions.

One is, could you give us the order number the end of the quarter?

Yeah, it was 400 – 360 million. 360 million, up 19%.

OK.

And that’s up 19 year-over-year?

Year-over-year, quarter-over-quarter.

And then also, I just wanted to maybe ask a bigger picture question.

With the acquisition of SPECTRO, and now EDAX, and we talk about your high-end analytical businesses now being -- pushing 400 million in sales.

Is there -- do we have to manage this group of businesses differently?

Do we have to manage them together to get some of these synergies, as opposed to a more typical approach, where we’re managing them as individual businesses?

Yeah, absolutely.

It’s really a very insightful question.

One of the key changes that I made in the company about -- I guess it was about a year and a half ago now -- was to move an individual -- Dave Zapico was his name – who was basically managing our aerospace businesses, and had background in the process businesses, over to run these businesses.

And his expertise is essentially in analytic types of businesses.

And he is taking a very holistic approach to these businesses, and we’re definitely going to run these more as a grouping of businesses than we are as individual divisions under Dave’s leadership.

OK.

And then, when -- has that all been done just kind of beginning of this year, the management structure?

No it actually -- it started prior to that, but I would say it’s gaining steam now as we added more -- Dave was involved in getting the Taylor-Hobson acquisition in, and now the SPECTRO acquisition, so, as we add mass, that was really what he was chartered to do, was go out and find companies, integrate them, and basically manage this as an entity.

OK.

And then, one just -- one last question on the guidance.

We talk about the 190 to 197 range for the year, the high end looks most likely, I guess.

Since we no longer are expensing options, we had an excellent second quarter.

Guidance looks a little bit higher for the third.

Shouldn’t we -- again, I know we’re conservative, but shouldn’t we be at $2.00 plus, perhaps?

I hate to put you on the spot, but it just seems like 197, without the options expensing, is kind of a lay-up.

Well, we didn’t have to expense options, but we did have a restricted grant that was granted in the second quarter, which, when you run through the puts and takes of that, they tend to offset each other.

So, Rick, when you do the math, there’s a -- it was a wash between that, and I believe that’s been fully discussed and disclosed before.

Yes, we disclosed it.

Ned Borland with Next Generation Equity.

Just a quick question on some of the EIG businesses.

You detailed the aerospace organic growth.

Can you go through some of the other businesses?

Sure, I’d be glad to.

Why don’t we talk about the process side of EIG?

That also was a great story in the quarter.

That business was up about 35% in revenue.

In terms of organic growth, it was up high single digits.

Performance was very strong in China.

Performance very strong in the Middle East, and also the former CIS states, driven obviously by the price of oil, which helps that business.

As I mentioned, the nuclear business, which is also in that process segment, did extremely well, and that was a key driver to the performance in the group.

So, overall, our process businesses have performed well all year, and we see no reason why that’s going to change as we go forward.

Moving on to the heavy vehicle business, that also did well in the quarter.

We were up sort of -- like I said, it was high single digits in that business.

Also, in that industrial segment, you may recall that we have our chemical products division, and we did some major restructuring of that business essentially a year ago.

And it was actually part of some recovery efforts that we had with a flood situation that we previously talked about there.

And as a result of all of that, the good performance in heavy vehicles and the restructuring of our chemical products division, the profitability of that part of our business was actually up about 50% in the quarter.

So, very, very strong operating performance.

And then, the last part of the instruments group, which is really the only part of the company now where the markets are not essentially working in our favor, is our process business.

We were essentially flat in the quarter on volume, and, simply, the power businesses, which is sort of the second leg of our long cycle businesses, have not shown any substantial recovery yet.

There are some sort of early warning signals that maybe we’re going to start to see an uptick.

I happened to listen to GE’s conference call earlier in the week, and it felt like they were a little bit more bullish on the power segment than they have been in past conference calls.

So, maybe we’ll start to see some uptick there, but that business and that market is the one that sort of is not working in our favor right now.

But luckily, it’s a small part of our overall business.

It’s about $80 million that EIG has in that particular segment.

And also, if I look at it from an operating viewpoint, they did an incredible job on the operating performance of the business.

They were actually up double-digits in profitability, even though their revenue was relatively flat.

So, overall, when you sum up those four various parts of EIG, it was really a great quarter, with volume being up 20% and pre-tax profit up 44.

Edmond Griffin with Black Rock.

Frank, just a follow-up.

I just want to be clear on the SPECTRO acquisition, the EBID margin that you expect for the full year, and then sort of the returns you expect to get on this acquisition over time.

OK.

On margins, we’re basically looking at 10% margin for this year.

And as I mentioned in Wendy’s call, we’ve set a target of 15% for the operating margins of the business, and I’m looking out in an 18-month time frame to achieve that, and, hopefully, we can do better than that.

In terms of the return on this acquisition, I mean, it’s going to be excellent.

We’re -- we use a 15% internal rate of return as our hurdle rate, and no question, we’re going to exceed that on this acquisition.

And then, just a follow-up on a previous question regarding your operating leverage in the segment.

Can you just -- I mean, what causes, I guess, the lumpiness in that?

Is that just a function of the leverage of each of the businesses each quarter?

Right.

I mean, you’ve got -- mix is probably the biggest factor in this.

We can establish well in advance exactly what products we’re going to be shipping.

And what tends to happen is it just balances out over the year, because, on an annual basis, we’ve got a -- sort of a better handle, looking at historical patterns.

But to try to do it on a quarterly basis is quite difficult to do, and we had the same questions last year, except they were focused on a number, the meanings on the EIG side, where our margins -- incremental margins in a quarter or two were lower.

But as I said, it all averaged out, and I’ve got extreme confidence in these general margin -- incremental margins because of the analysis we ran yesterday, that I think we’re going to be very close to the guidance I’m giving you.

Scott Graham with Bear Stearns.

Just a question about the acquisition outlook.

SPECTRO was certainly one of the larger transactions you’ve taken down in some time, and I know that that debt, because of how strong your cash flow has been, is not a restraint to acquisitions.

But I’m wondering if, maybe, SPECTRO slows down the acquisition process, at least in your high-end, that differentiated business that you’re referring to.

Does that slow it down at all?

No, not at all.

I mean, it’s always difficult to predict when acquisitions are available and when you’re going to close them, but in no way, shape or form has this in any way reduced our thrust to acquire companies.

And again, there’s going to be lumpiness in this.

Some years you’re going to be able to acquire more than in others, and this may be a year where we exceed our normal guidance as to what we do in acquisitions, because SPECTRO was a pretty big lump.

But if you look at our cash flow right now, and the strength of the balance sheet, it simply is no -- there’s no impediment to doing more acquisitions.

And the good news is that the backlog of acquisitions is -- continues, I would say, very good.

So, it would not surprise me if you hear more from us in the acquisition front.

Gregory Macosko with Lord Abbott.

Could you talk about the low-cost countries, what the share of total revenue is in there?

OK.

Last year, we did about $210 million in our three low-cost regions, which are China, Mexico and the Czech Republic.

This year, our forecast calls for $250 million.

We’ve actually done $125 million in the first six months, which means we will probably exceed the $250 million number for this year.

With regard to the acquisitions, could you give us a sense of what the EBITDA multiple was on the SPECTRO, and kind of what we’re looking at going forward?

Yeah, the EBITDA multiple on SPECTRO was 8 times, and I think if you look at, in general, the acquisitions environment that we’re in now, multiples have probably gone up a point.

We used to average about 7-1/2 times EBITDA, and I would say that that average is probably in the 8-1/2 times right now.

We tend not to focus as much on the multiple, looking historically, as we do on what the multiple’s going to look like one year after, because, through our operating acumen, we typically can knock a couple points off that multiple, if you look at it sort of 12 months after the acquisition.

And that’s 8 times projected next 12 months, or trailing?

No, no, no, I’m sorry, trailing, trailing EBITDA.

[OPERATOR INSTRUCTIONS.]

Wendy Caplan.

Quick question of the impact of Whirlpool’s purchase of Maytag.

Anything that we should be thinking about?

Well, I don’t think they purchased it yet, but they obviously have a bid on, as does a private equity group.

And just last night, Haier came out and said they are no longer going to participate in the potential sale.

So, it sounds like -- and I also read this morning that Electrolux has decided not to get involved in the auction, so I guess it isn’t even an auction -- but involved in trying to bid on Maytag.

So, it looks like we’re down to Whirlpool and a private equity group, that one of those two is going to win the business.

In either case, in Whirlpool’s case, they do not make vacuum cleaner motors, and, obviously, from the viewpoint of the private equity buyer, they obviously have no manufacturing capability to make vacuum cleaner motors.

So, in general, I don’t see any major issues, from Ametek’s viewpoint, of them being acquired by either of those two parties.

And in general, I would say that the fact that Maytag is having some difficulty right now is a positive, because they’re -- for Ametek, that is -- in general, their problem has been they have not moved down the food chain fast enough to lower margin, lower mix kinds of vacuum cleaners, and what we can offer them -- and have offered them, which is one of the key reasons we’ve accumulated a fair amount of business with them -- is our low-cost manufacturing arms essentially worldwide.

So, I think this, hopefully, will play out well for us.

It appears there are no further questions at this time.

Mr. Burke, I’d like to turn the call back to you for any additional or closing remarks.

All right.

Thank you, everyone, for joining us today.

If you have any other questions, feel free to give me a call, 610-889-5249.

Thank you.

That concludes today’s conference.

Thank you for joining us.