阿美特克 (AME) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to the AMETEK Incorporated fourth-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, Ashley.

Good morning and welcome to AMETEK's fourth-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 fourth-quarter results were released before the market opened today and have been distributed to everyone on our lists and these results are also available electronically on your market systems and on our website at AMETEK.com/investors.

A tape of today's conference call may be accessed until February 8 by calling 888-203-1112 and entering the confirmation code number 4369217.

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

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

I will now turn the meeting over to Frank.

Thank you, Bill.

AMETEK had a great fourth quarter establishing records for sales, operating income, net income and diluted earnings per share.

Sales were up 24% to $403.8 million on solid internal growth of 6% and the benefits of our disciplined acquisition program.

Operating income was up 18% driven by the top-line growth and operational improvements.

Net income of 38 million was up 21% and diluted earnings per share of $0.53 were up 18%.

AMETEK also established full-year records for sales, operating income, net income and diluted earnings per share.

Sales were up 16% to $1.43 billion, operating income was up 22%, net income was up 25% to $140.6 million and diluted earnings per share were $1.99, up 22% over 2004.

Good internal growth in each of our segments and contributions from acquired businesses enabled us to post a double-digit sales increase.

Our operating leverage and improved mix of businesses and our focused operational excellence initiatives drove our record earnings performance.

Overall, we're very pleased with these results.

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

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

During 2005, we acquired three excellent companies;

Spectro Analytic Instruments, Solartron and HCC Industries.

Each of these acquisitions exemplifies our strategy of acquiring highly differentiated businesses.

SPECTRO designs, manufactures and services a broad array of spectrometers used to analyze the elemental composition of solids and liquids.

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.

United Kingdom based Solartron is a leading supplier of analytic instrumentation for the process and other industrial markets.

HCC manufactures highly engineered hermetic or moisture-proof connectors, terminals, headers and microelectronic packages primarily for the Aerospace and Defense markets.

Together, these businesses represent nearly $260 million in annualized revenue and our integration of these acquisitions is proceeding according to plan and the businesses are exceeding our expectations.

Also we made significant progress on our global and market expansion strategy.

International sales for 2005 were $656 million, up 22% over 2004.

As a percentage of revenue, international sales were 46%, up from 44% in 2004.

The impact of acquisitions with a significant international component, together with a focus on expanding distribution around the globe, has made this growth possible.

We have expanded our investment in new product development.

In 2005, we spent $76 million on research, development and engineering, up 15% over 2004.

We have made the product investments necessary to grow our business, including aircraft sensors, portable and portal radiation detectors for homeland security, analyzers for the process industries and state-of-the-art motor blowers for technical motor applications.

We remain committed to operational excellence.

We moved about $35 million in revenue to low-cost locales during 2005.

This total now stands at $245 million.

We expect to move an additional $40 to $50 million of revenue in 2006.

We're very aggressive in our pricing actions to offset the impact of raw material cost increases.

We continue to deploy Six Sigma and design for Six Sigma throughout the Company.

We also began a major expansion of our global sourcing organization in China originally established to support our motor plants.

We were in the process of expanding this unit to support all AMETEK divisions.

All of these items contributed to our ability to expand operating margins at the group level by 70 basis points in 2005 despite the headwinds from higher raw material costs.

Turning our attention to the individual operating groups.

For the Electronic Instruments Group, sales were up 25% for the quarter to $230.7 million.

Strong internal growth of 6% driven by our aerospace, power and process businesses, together with the contributions from the acquisitions of SPECTRO and Solartron, drove the top-line increase.

EIG's operating income was up 15% for the quarter to $46.2 million.

Operating margins were 20% compared with 21.8% in the fourth quarter of 2004.

Included in EIG's 2004 fourth-quarter results was a pre-tax gain of $3.5 million from the final settlement of insurance claims related to a flood at one of its manufacturing facilities and a gain on the sale of another facility.

These gains increased operating margins 190 basis points in the 2004 quarter.

Excluding the gains in the 2004 results, EIG's operating income would have been up 26% and margins would have increased over 2004.

For the year, EIG's sales were up 21% to $808.5 million driven by growth in our process and aerospace businesses and the contributions from acquisitions.

Operating profit was $166.4 million, an increase of 32% over last year and margins expanded 170 basis points to 20.6%.

For the Electromechanical Group, fourth-quarter revenues were up 22% to $173.1 million on excellent internal growth of 7% driven by strong performances in both our differentiated and cost driven motor businesses.

The HCC Industries acquisition also contributed to the revenue growth.

Operating income for the quarter was up 19% and operating margins were 15% compared with 15.4% in last year's fourth quarter.

For the full year, EMG sales were up 11% to $626 million.

Strong growth in our differentiated businesses and the acquisitions of Hughes Treitler and HCC Industries drove the sales increase.

Operating income of $100.3 million was up 6% from 2004.

Before I touch on our business expectations for 2006, I would like to address stock option accounting and how it will impact AMETEK.

Effective January 1, 2006, we are adopting FASB 123R using the retrospective restatement method, which means we will be restating prior period results.

On this basis, our reported earnings for 2005 are expected to be reduced by $0.05 per diluted share from $1.99 to $1.94.

In 2006, the effect of stock option expense is also expected to be $0.05 per diluted share.

All of the 2006 comparisons for income, diluted earnings per share and operating margins will be compared to the restated 2005.

Turning to our expectations for 2006, we expect 2006 to conform to our long-term business model of mid single digit core growth combined with approximately 10% acquisition growth yielding a mid teen percentage growth in overall revenue.

Electronic Instrument internal growth will be driven by continued strength in our aerospace and process businesses along with a resurgence in our power business.

In the Electromechanical Group, positive core growth will result from strong growth in our differentiated businesses offsetting some weakness in our cost driven motor business.

Our acquisition growth will result from the full year benefits of the SPECTRO, Solartron and HCC acquisitions completed during 2005.

Earnings are expected to be approximately $2.25 to $2.30 per diluted share, an increase of 16% to 19% over 2005's restated level of $1.94 per diluted share.

The increase in earnings reflects the benefits of the revenue growth, our continued focus on operational excellence and substantial investments in product development and sales and marketing to drive future growth.

For the first quarter, sales are expected to be up in the high teens on a percentage basis from last year's first quarter.

Earnings are expected to be approximately $0.52 to $0.53 per diluted share, an increase of 18% to 20% over last year's restated first quarter of $0.44 per diluted share.

I would like to address the higher than normal investments in product development and sales and marketing, which is included in our guidance.

Our four growth strategies have formed the foundation of AMETEK's profitable growth over the last six years.

Two of those strategies, operational excellence and strategic acquisitions, have played a prominent role, particularly during economic downturn and will continue to do so in 2006.

In addition, in this year's plan, we have increased our emphasis on the other two strategies, new product development and global and market expansion.

We have invested meaningfully in these areas in the past but feel a higher level of investment now will translate into accelerated internal growth in the future.

Our 2006 plan contemplates higher than normal investments of approximately $9 million or $0.08 per diluted share on product development and global and market expansion initiatives.

These investments are heavily weighted toward our differentiated businesses that have higher margins and higher intrinsic growth rates.

A large percentage of this increased new private development investment is in our high-end analytics business, an increasingly important market area for AMETEK.

Key areas we are investing in include elemental analysis of liquid and solids, analyzers for the oil and gas market, nanotechnology, high-end calibrators and wireless leak detection.

We also increased our investment in new product development for the homeland security market, a very exciting opportunity for AMETEK.

Additional investment for global and market expansion is largely in our instrument group.

We are expanding our presence in key international markets, including China, Russia, Japan and the Middle East as well as expanding our reach in new and existing vertical markets.

These are important investments for AMETEK's future.

The payoff on this investment will be seen in higher internal growth rates in the coming years.

Without these investments, AMETEK's guidance for 2006 would have been higher.

So in summary, we are very pleased with our performance for the fourth quarter and the full year.

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

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

2006 is shaping up to be another great year.

Strong internal growth, a continued focus on operational excellence and our ability to make additional acquisitions make me very optimistic about the year ahead.

We look forward to building on our track record of success during 2006 and remain confident that our four growth strategies will continue to create value for our shareholders.

I'll now turn it over to John who will cover some of the financial aspects of our performance.

Thank you, Frank.

As Frank has covered our financial results at a high level, I will provide some additional details.

Looking first at the P&L.

Selling expenses were up 37% in the fourth quarter.

Excluding the acquisitions, selling expense increased 4%, in line with our core growth.

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

Other expenses were $600,000 in the quarter as compared to $1.4 million in last year's fourth quarter.

Lower bank fees and lower costs related to environmental cleanup activities drove the decrease.

The tax rate for the full year 2005 was 31.1%, in line with our expectations.

We expect our 2006 tax rate to be about 32%, plus or minus 0.5%.

I want to emphasize that this is a full year rate and as we saw in 2005, actual quarterly rates can differ significantly, either higher or lower, than the 2006 average rate as certain tax events are realized in a given quarter.

On the balance sheet, AMETEK's operating working capital performance in the fourth quarter was very good.

Our operating working capital, defined as inventories plus receivables less payables, improved very nicely and ended the year at approximately 20.4% of fourth-quarter sales annualized.

This working capital level improved by 1.5% from the third quarter.

Both inventory and accounts receivable showed improved performance from a year ago while showing increases in their balances driven by the 2005 acquisitions.

We have a long-term goal of driving this number below 20% on a consistent basis.

Cash flow from operations was $166 million in 2005, up from $161 million in 2004. 2004 operating cash flow included $14 million of proceeds from onetime insurance settlements and tax refunds for the prior year returns.

Total debt was $631 million at December 31.

Our debt-to-capital ratio at year end was approximately 44%, up slightly from 41% at the beginning of the year despite our spending $341 million on acquisitions.

Capital spending was $8 million for the quarter and $23 million for the year.

Depreciation and amortization were $11 million in the quarter and $39 million for the year.

For 2006, we expect that capital expenditures will total approximately $33 million while depreciation and amortization should be about $46 million.

We expect operating cash flow for the Company to be in the range of $200 to $210 million in 2006 reflecting growth in earnings, continued improvement in working capital management and the additional working capital needs of a growing business.

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 December, we had about $300 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.

Ashley, that concludes our prepared remarks.

We would be happy to take folks questions right now.

(OPERATOR INSTRUCTIONS).

Jim Lucas, Janney Montgomery Scott.

John, a housekeeping question first off.

Accounts payable?

$133 million.

Thanks.

And Frank, on the initiatives, could you break down go into a little bit more detail on the global expansion versus new products?

You have already done quite a lot of incremental spending on new products.

It is becoming a trademark of AMETEK similar to the new 12.3 motor I saw yesterday.

A lot of excitement about that at the trade show.

Good.

I wanted to see if you could also expand on the wireless leak detection of what markets you're using that technology for.

Sure.

Let me walk you through.

These additional investments that I talked about basically are going to comprise hiring about 75 additional people.

About 50 of those people are going to be in sales and marketing and about 25 will be in engineering.

In the sales and marketing area, the largest percentage of those people are basically going to be feet on the street and they're going to be focused internationally.

First in China, we have got a pretty strong presence on the East Coast of China.

We are going to continue to expand that but more importantly, we're going to go into the center of China, in the southwestern part of China, we're going to be opening a field office in Chengdu.

We're going to do further expansion in Japan.

We're going to put additional investments in both Russia and the Middle East with such a high concentration of our analytic instrument portfolio associated with oil and gas.

Russia, particularly the former stand states and the Middle East are very important markets.

So we're going to be opening an office probably in Moscow to service both Russia and the former CIS states.

In addition to what I would call feet on the street, we're also going to be hiring a number of strategic marketing people who basically will be focused on existing as well as some new vertical markets.

The key markets there are going to be nanotechnology, the laboratory market and I'll talk a little bit more about that when I talk about the engineering side of the equation.

Crystallography -- we do a lot of work in elemental composition of materials and we are going to be expanding our efforts in terms of understanding the crystalline structure of materials.

And then last but by no means least is homeland security.

I think all of you are aware of the significant opportunities we have there and we're going to continue to expand.

Moving over to the engineering side.

As I said, about 25 people there, Jim.

The nanotechnology area is probably the one that we're very excited with.

You may be aware that nanotechnology is probably the next big thing in terms of changing the way we all live.

It has probably got implications that are broader than even how the Internet has changed the way we have lived.

We are going to focus on the part of this that -- because it is largely in the research stage, we're going to focus on the research environment and making instrumentation to help companies do the research work in nanotechnology.

Just to give you a little flavor of that.

The human hair has got a diameter of about 70,000 nanometers.

Our Taylor Hobson products can measure down to less than one nanometer and actually look at these nanotechnology structures.

So we're going to do additional engineering, broaden our portfolio, strengthen our portfolio in that area.

You asked specifically about wireless leak detection.

Leak detection is an interesting measurement.

If you look at -- we do a lot of work in measuring level in tanks in a process control plant but typical accuracies there are like 1/10 of a percent.

With leak detection, we're talking about a much finer measurement, probably a factor of 100 better than that because you're looking for leaks.

Opportunities and markets to answer your question -- gas stations are an excellent opportunity for this because, as you know, there are significant environment issues with leakage out of gas tanks.

There is applications in the aircraft industry.

One of the things you’ll find is that trucks when they go out to fuel aircraft, there is a major problem between the amount of fuel they leave the dock with and what actually ends up on the aircraft.

So there is interest in seeing if in essence there is fuel being taken out of those trucks.

In process control plants.

Again, looking for leaks into the ground.

So the process industry is another area.

Another big application is in farms where basically you have got remote tanks on large farms and basically you can look at leak detection in those fuel tanks and you can transmit this information back to a headquartered area through wireless transmission.

So those are a couple and obviously we're going to continue with the homeland security thrust and develop more products to go into homeland security.

So that gives you a flavor of what we're doing, Jim.

A just on the engineering side, you talk about adding people there.

Are you looking at any outsourcing alternatives in India or China?

Absolutely.

We already are doing some outsourcing, particularly in the software development area and our aerospace businesses in India.

It works extremely well.

I was a little bit skeptical about how well it would work and provided you have good documentation, use structured engineering techniques.

It has worked well and we're going to expand on that because obviously the cost to do it is substantially less.

Wendy Caplan, Wachovia Securities.

I'm not sure about others but I was a little disappointed in the margin in the quarter.

I heard John talk about the selling expense.

Would that be the main reason the selling expense related to the new acquisitions that drove the margin that put the margin under pressure and if so, what does that say about future margin opportunities?

Actually that was not the driver to the margins in the quarter.

I think the first thing you have to recognize is that last year's fourth quarter was an exceptionally strong quarter if you look at the quarter by quarter last year, the fourth quarter was up about 100 basis points over the other quarters.

If you compare the margins in the fourth quarter of 2005 with respect to 2004, margins were about flat.

So they were off a little bit but they are not off to the same level as it might appear because of what I just said.

We had a lot of onetime events in the fourth quarter of 2004 and if you kind of normalized those events, basically, as I said, the margins were overall about flat after you normalized.

They were actually up substantially in EIG, about 100 basis points and they were down a bit in EMG and probably the core answer to your question is we did have some unfavorable mix in EMG in the fourth quarter and it was actually both in our cost driven businesses and our differentiated businesses in EMG and we expect that to rebound in the first quarter of next year.

Can you say some more about that mix, Frank?

Where was the problem?

It was actually -- we shipped some both cost driven motors that were an abnormally low mix for us and also there were some aerospace products that we shipped out of our differentiated businesses that were lower than what they normally are.

But as I said, that is going to rebound in the first quarter so there is nothing substantial going on here.

I think it's just the normal ebb and flow of the business.

And a clarification.

You said that core growth for the business as a whole was 6%.

That's correct.

That includes some negative currency effect?

That is without currency.

The currency impacts were about minus 2%.

So it would have been four with currency?

That is correct.

And finally, you usually discuss with us the incremental margin excluding acquisitions, can you give us a sense of what that looked like this quarter?

Yes, we went back and we looked at the incremental margins and as we've talked about before, Wendy, to look at this on a quarter, we had one quarter this year where they were like 70% and the fourth quarter was down.

I didn't compute it for the fourth quarter but I went back and looked at it for the full year and the incremental margins for the Company, if you exclude the acquisitions, were on the order of 35%.

So reasonably good contribution margin for the Company.

And finally, one more if I might, your expectation for next year seems awfully low to me, well below what we are expecting.

Can you address how conservative you are being on those numbers, whether you are giving full shrift to the acquisitions or not?

We are being conservative on the numbers, Wendy.

I think you know that we have a history of being conservative with the numbers.

I think the more important thing here is that we have made a conscious decision to make these additional investments that I talked about.

And that is why we put it in the press release and I talked to them because in essence, we're going to be investing about $0.08 a share here that we normally would not have invested.

We think that is the right decision for the future of the Company and actually we're very excited about it and we know that if we decided not to make those investments, our earnings guidance would have been higher.

So I think there are two elements here.

There is some conservatism and there also is this fact of incremental investments that are driving our guidance for next year.

Scott Graham from Bear Stearns.

Just could you do your typical unbundling, Frank, by business percent changes in the organic sales growth by business within the segments?

Sure.

Why don't I do this -- why don't I walk you through the businesses as I normally do.

I'll talk to Q4.

I'll also give you some insight into next year and what is happening in these businesses, because it is actually pretty exciting that most of our businesses are doing very, very well right now.

Let me start with the EIG part of the equation, Scott.

In the process businesses, the markets are extremely strong.

They're driven by the price of oil.

We're seeing substantial growth in China, Russia, the Middle East, which is one of the reasons for the incremental investments I talked about.

Our analytics business, overall all of them are doing very, very well right now.

Our nuclear business is exceeding our expectations.

If we look at Q4 internal growth with high single digits in this particular business and as we look to 2006, we expect mid to high single digit organic growth in this business.

Obviously, we've done two acquisitions in this area, both Solartron and SPECTRO, and basically the top-line growth is going to be much higher than that due to the acquisitions themselves.

Moving to aerospace in EIG, markets are very strong.

Strength in essentially all parts of the business, but being driven by commercial aircraft -- commercial aircraft is doing just great right now.

Boeing is talking about a 36% increase in production this year over last year.

Cessna is -- or Airbus in the commercial side is talking about 11%; it will probably go higher than that in their next update.

In business and regional jets, Cessna is doing fine and they are our largest customers, so we expect strength there.

And military looks extremely good.

If we look at Q4, internal growth was high single digits for that particular part of the business, and we expect next year mid to high single digit organic growth in aerospace.

Moving to power, in the Electronic Instruments Group, we are definitely rebounding there.

This was sort of the last market to show strength for AMETEK, and for the last quarter or two I have been talking about the possibility that this market has indeed rebounded and now I can say emphatically it has.

There is strength in both our transmission and distribution business as well as in our battery backup business.

Q4 had high single digit growth.

It was 9%.

And we expect high single digit growth next year as well.

The last part of the Instruments Group is industrial.

There, basically heavy truck demand is the driver for that part of our business and that demand remains very good.

Forecasts are for a strong 2006 in the sense that this market will essentially be at its peak in 2006.

Market forecasts are that it will probably show a downturn in 2007, but that is not anticipated in 2006.

So what we are expecting here is that we will follow the market -- we will be up in the low single digits in terms of growth for next year.

One thing -- one abnormality here that I think most of you are aware of is in the industrial segment, we had a flood in one of our operations and we decided to shut down that operation and we got out of a lot of product lines.

So in Q4, our growth was actually negative in industrial.

That will carry over to Q1, and after Q1, our comparisons will be back to normal and we will be showing the normal growth of the heavy vehicle market.

So that is pretty much one side of the Company.

Let me switch to the other side now.

EMG -- great story.

The differentiated parts of EMG are doing quite well right now.

They are driven by the strengths in aerospace, in particular the military component in EMG is just doing phenomenal.

We had a great 2005 and will show good 2006.

We have strength in technical motors, strength in specialty metals.

So overall in the fourth quarter, growth was high single digits internally and we expect mid to high single digit growth in 2006.

So it should be a good year for us in terms of the differentiated businesses.

The last part of the Company, our cost driven motors, we were actually pleasantly surprised in the fourth quarter where our internal growth was actually mid single digits.

We had the strongest growth of the year actually in the fourth quarter.

As I think everyone on the phone or most people on the phone are aware, we run this business for maximum profitability versus growth.

What we're looking for in 2006 is basically double-digit earnings growth in this part of the business.

In terms of volume and this is an area we may be overly conservative on, we are basically saying low to mid single digit negative growth in this business while we are basically increasing the earnings.

The earnings increase is going to come from continued migration to low-cost manufacturing locales and continual focus on operational excellence.

So that is a run through, Scott.

That helps a lot, Frank.

Thank you.

Two other questions if I may.

A previous question talked about the trendlines in the margins, which I am forced to agree with that question to the extent that the electronic instrument business admittedly is taking on, you know, a tough comparison.

That margin I still thought was going to be a little bit higher and I'm wondering would you be able, Frank, to tell us what the margin setback was maybe in basis points if you could in each business because of the acquisitions because I know that there were resets there.

Would you be able to tell us what they were?

I don't have that information in that form, Scott.

Because in particular -- the electronic instruments margin I know is going to be something where -- I think that margin still has some upside to it from the mix overall but that is my view.

But I think more importantly, the electromechanical margin -- last quarter, that margin was down pretty decisively.

There were some onetime issues in there.

Yet this quarter it was down just as decisively with only this mix issue.

So I am wondering with this electromechanical margin really running down all year, have we really seen on a core basis the peak of that margin and any margin growth in that business would come from the assimilation of an acquisition or is there still --?

No, actually I feel almost just the reverse.

I think when we look to next year, I think we have got probably more opportunity for margin expansion on EMG than we do on EIG and the main reason for that is just the absolute level of these margins and the fact that we have got such substantial operating leverage in terms of moving additional volume to low-cost locales.

Some of the volume that we moved in 2004 is going to show some profit improvement in 2005.

So actually when you look at our guidance and our thoughts for next year, there is more margin expansion in EMG than in EIG.

Okay.

What would you then characterize the year in terms of electromechanical's margin other than the third quarter, the onetime stuff, why would you say that that margin was down then this year?

You know, in general, there has been some movement down the curve on the EMG side of the business and that has had some impact on the margins but probably more significantly are some of the onetime events that we included in the quarter.

I guess it was really in two quarters but in particularly in the third quarter.

Fair.

Last question, the radiation detector news is -- I think a lot of us are sort of chomping at the bit for that and what is obviously an exciting opportunity for you guys.

Scuttlebutt had it that maybe we would hear something about contract awards by the government in February.

Is there any news on that, Frank?

No.

I don't think there was ever a thought process that we would have contract awards in February.

Let me just tell you where we are.

You may recall in our last conference call, we talked about the fact that this market was much larger than we had anticipated.

The RFP that came out from the government was showing a need for 1800 of these portal monitors over a five-year period.

That was a number that was much larger than what we thought it was going to be and I think you may recall that that was just the U.S. portal monitor market.

It did not include the international parts of that market and it also didn't include the market worldwide for the portable detectors.

So the process that we are going through now is that the testing in the desert of our product along with those of our competitors has been completed.

We are responding to the RFP now to actually do the development work for the final product.

We have to have that RFP or our response in on February 3rd.

The government will then downselect from all of the responses that they get from the various competitors.

That is probably a couple month process.

That is my best guess as to how long it will take.

Once they downselect, they will then ask the people who are left in the process to basically develop the final product, which will probably last through 2006 and production orders will probably start in 2007.

The basic, really positive thing here is that when they look at who they are going to award these development contracts to say two or three months from now, what they are basically telling us is that if you get the development contract, you're going to get the production contract.

You don't have to go through another competition to basically get the development contract.

So this is a very important milestone for us when this downselect happens in the next few months.

I very much appreciate how comprehensive your answers were as usual, Frank.

If there is any way I can get that reset number in the quarter, Bill, perhaps you can provide that at some point.

I'd really appreciate it and thank you.

(OPERATOR INSTRUCTIONS).

Matt Summerville, KeyBanc.

A couple of questions.

First, just back on the nuclear detection business, can you talk about what the volumes look like for the portable detectors '05 versus '04 and then what your expectations are for volume growth there in '06?

And lastly as far as this portal based system that you're looking at, can you compare and contrast the competing technologies and price points?

Sure.

The answer to your first question is we shipped 104 units in 2005 and that was up 60% over 2004 and we are expecting considerable expansion in 2005.

What we actually put in our guidance was an improvement on the same order but I think there is upside to that number.

And the second question again was what exactly?

It was --.

Can you compare and contrast what these portal based detectors -- well first, how many competitors are there and then can you talk about the competing technologies and the relative price points?

Yes.

There were ten companies that were down in the desert having testing done.

Most of those companies used sodium iodide technology and we and one other company used germanium technology.

The advantage of germanium technology is that it can basically tell essentially 100% if a material is fissionable.

Can you produce a nuclear bomb from it?

And it is almost impossible to conceal the material from these types of detectors.

So there is a clear technological advantage to germanium versus sodium iodide.

If you take a sodium iodide detector, you can essentially fool it by using just common things like kitty litter for instance gives off radiation.

Ceramic in toilets gives off radiation that could fool a sodium iodide detector.

So there is a clear technological difference between these two.

Historically, germanium has been more expensive and obviously I don't want to give any details on the quotes that we are going to provide but one thing and one story that I think I told in one of these conference calls is that as we were testing these products out in the desert, we found in one case where they actually put a truck through that didn't have the bad stuff in it, the radioactive material, our instrument picked it up and all of a sudden everybody was saying what happened.

In essence what happened is a previous run, they had had nuclear fissionable material.

They brought that material over to a shed a couple of hundred yards away and believe it or not our instrument was picking it up.

And the reason I am retelling that story is the good news here in terms of price point is that for the production and for this development contract that we are doing, we can substantially reduce the number of germanium crystals that we need to basically do the measurements and meet the specifications.

Therefore we are going to have a lower price point that is possible and that's about as far as I want to go because obviously this is a competitive situation.

One follow-up on the incremental growth investments that you're making.

Is there any allocation going over to EMG?

I don't recall you mentioning anything and then more broadly with respect to these dollars, what kind of return are you looking for and over what timeframe?

There is some.

I'd say about 15 to 20% of what I talked about would end up in EMG and in terms of return, we are thinking of maybe 1.5 points of internal growth could come from this.

So if you go through some numbers, I haven't actually done it this way but if you did and you say next year maybe 1.6 billion as a number, you are talking 24 million of revenue, 30% margin, 35% margin on that to the bottom line is 8 million and you get a one year return, two year return on it.

Now it is not going to start until probably 2007.

But the returns will be excellent.

What we typically use is a 15% hurdle rate on our investments and this will be obviously higher than that with the numbers I just gave.

Richard Eastman, Robert Baird Investments.

Just two questions.

When you break down the growth rate by segment, EIG and EMG, should we apply a 2% negative FX impact to both pieces?

Is that --?

It rounds.

It rounds 2% in EMG and it actually rounds to 3% in EIG.

But it is actually between those numbers.

I don't have the actual decimal points here.

I just wanted to get at the acquisition contribution as close as I can.

I can tell you.

Basically in EIG, it was about $40 million and in EMG, it was about $22 million in the quarter.

Okay.

And was the contribution, the EBIT contribution from HCC, can you at least comment, was it below the segment contribution for EMG?

About the same, about the same.

And then last question is in the cost driven motors business, I think you had a comment earlier that you expect sales to be down there mid single digit in '06.

The dynamics in that business have moved around with I guess the OEMs strategy.

At one point, the thought was that we would pick up some new motors marketshare as OEMs would outsource that business.

Has that shifted or are we just seeing pricing pressure in general there?

I don't think it has shifted.

What's happening here is we are continuing to win business on the high end of this cost driven motors segment.

But at the same time and I think I've talked about this on a number of occasions, we are letting some of that lower margin business go.

It just doesn't make sense to utilize our facilities and possibly even have to make incremental investments in that very low end of that business.

We typically look at $20 million of business out of the $300 million in this cost driven segment that we are not going to really get aggressive on pricing.

So what was actually happening here is that there is sort of a dynamic happening where the low end of the portfolio moves out and we move in one business in either the middle or the top end of the portfolio and it is tough for us to actually give estimates as to exactly what is going to happen in a given year.

I think I gave probably similar estimates a year ago and in fact, this business grew in 2005.

So it is just more difficult for us to call exactly what is going to happen because those decisions are sort of made as the contracts come up in that business.

So the margin balance is a little less volume, which means more leverage or less leverage --.

Less leverage.

I think some to low-cost regions and then trying to pull in more higher end product?

That's exactly right.

That's very well worded and the reason I responded positively in terms of EMG margins next year is we have more operating leverage in this particular business than we do in some of the other businesses that we operate.

Jim Foung, Gabelli and Co.

Could you just kind of comment on what the margin contribution was from your other two acquisitions?

You kind of gave us an idea what HCC was.

But just get a sense of --?

I think the way I would say it is SPECTRO was obviously below the group average but also exceeding our expectations in terms of what we had told you that particular company was going to do.

And Solartron is about on our expectations and it is probably a little bit lower than the group average, just a little bit lower.

And in the past you've been able to raise these margins over a 12 to 15 month period as you assimilate that.

So we shouldn't see these acquisitions any different from what you have done in the past?

No, no, no.

I think we are able to expand margins.

We are pretty excited about it and we are going to continue to do that, specifically in SPECTRO.

And just on the incremental spend of $9 million for '06, from your explanation, it sounds like this is more of a permanent increase in your cost as you hire more salespeople and marketing people.

That's true.

This is not a one year blip that we're looking at.

We made a conscious decision to put essentially this $9 million of investment in that typically we would not have done and our intent is surely not to remove it a year from now.

Now obviously our volume will be going up as we go into 2007.

So as a percentage of revenue, it isn't going to have quite the same impact.

But yes it is a long-term investment.

It is not a one-year investment.

Okay.

So I should adjust by SG&A then reflecting the aggregate level, reflecting this incremental spending.

I guess that is true.

That's true.

And then on the portal monitoring, when do you think you might see -- I guess you talked about the bids and stuff.

What is your kind of timeframe?

Well as I said, the bid date is firm.

It's February 3rd and then it is up to the government to make their decisions and my best guess is it will be a couple of months but that is really a guess.

They are not really telling us how long it is going to take.

They might do it faster.

The one thing there is, there is a lot of momentum on this project.

For a year or two after September 11, there didn't seem to be any momentum in this area and now they are pushing us, which is great.

So they probably will make the decision sooner rather than later but I really can't predict exactly when that is going to happen.

And then in your revenue guidance for '06, did you bake in any assumptions in terms of this business?

Yes.

We did bake in that we would get the development contract for this business.

Do you want to quantify how much?

I don't exactly remember but these are not big dollars.

Ned Borland, Next Generation Equity Research.

Just a couple of questions.

Most of them might have been answered but just if you could give us a little color on how the acquisition integration is proceeding, particularly at SPECTRO.

Very, very well.

These three companies that we bought last year have turned out to be better companies than even we had anticipated at the time we bought the companies.

If you recall with SPECTRO, when we bought that company, the margins were lower in that particular business.

They are an extremely good management team.

They have done a really great job of integrating themselves into AMETEK and there is just simply no doubt in my mind that they are going to move to the same type of margins as the rest of the Company.

So very, very positive on that side.

The Solartron acquisition, you may recall, we broke that into three parts and we actually put it with three different divisions of AMETEK and that has gone tremendously smoothly.

There have been really no integration issues that have come to my attention in those and there are substantial margin opportunity improvement there with some consolidation of facilities.

We just moved out of some of the Roxboro facilities, consolidated these into other facilities.

So it is going extremely well.

HCC, relatively new, brewing a lot of excitement in terms of synergy between our specialty metals operation and HCC.

Different type of synergy for us.

In this case, we can supply materials to HCC that they can then use in their products and use it to basically ship their customers' end products.

So there is both existing materials that they can buy from specialty metals and in addition, we can develop new materials that they can then put into their products to expand their market base.

As a matter of fact, I think it was just last week they had a joint sales force meeting between those two companies and although a different type of synergy than what AMETEK typically gets, I think it is going to be substantial and it is going to be very, very good for us.

So I am nothing short of delighted about where these acquisitions stand and the integration process at this point.

Did you say that SPECTRO can get to the group average in EIG?

I believe it can.

When we first came out, we talked about moving these margins from 10 to 15% as the first step and we'd do it in 18 months.

We are going to beat that.

And then the next step would be to move them up to the next level I believe that is possible with everything that I know right now.

And that movement, will that happen in '06 or is that more longer-term given its --?

No.

That's going to be longer term.

I'm saying we are going to beat the -- that acquisition roles in June of this year and you know I essentially said 18 months.

So it would have been the end of this year that we would have reached the 15% point and we're going to exceed that.

And maybe I missed it but did you give out an organic sales growth for both segments just overall?

I did but I can give it to you again.

It was 7% -- you're talking about the quarter right?

Yes.

7% in the quarter for EMG, 6% in the quarter for EIG and it rounds to 6% for the entire company.

Elena [Witt], Merrill Lynch.

I was wondering what kind of margin expansion you're assuming in your 2006 guidance and how that delineates between EIG and EMG and then also is option expense going to be included in the segment profits or is that going to be in the corporate expense line?

It is going to be in both if I take your second question first.

The part of options that go out to our operating entities will obviously show in the segments and the part that is more corporate related would show below the segment line.

So it will end up being in both.

The margins -- I'll give you some guidance on margins for next year.

We think the margins are going to be up next year and our guidance is going to be in the range of 20 to 40 basis points.

And I actually don't have specific numbers for EMG and EIG although, as I said before, it will be a little higher in EMG and a little lower in EIG is what is in our guidance.

Just to characterize, every time I've given guidance on margins, we have exceeded it.

So we probably have some upward leverage here.

And then separately, of the roughly $0.30 to $0.35 EPS improvement you're forecasting this year, can you give us a sense of how much of that is accretion from the last three acquisitions you did roughly?

I don't have that.

I don't have that in that form.

Sorry.

And then just lastly, what are you assuming for currency this year?

Basically flat.

There is no effect on -- John, do you want to say something on this?

The first quarter may have some impact but it should be flat for the year.

(OPERATOR INSTRUCTIONS).

Wendy Caplan, Wachovia Securities.

Two just quick final questions.

Can you share with us the mix of OEM and aftermarket in aerospace?

Yes.

In aerospace on EIG side, it is about 30% aftermarket and about 70% OEM driven.

When I say that, I am assuming that the military business is OEM.

You can almost make an argument it is aftermarket because there aren't a lot of new planes flying.

But that is how that assumption or my numbers are characterized.

And we would assume in '06 that that mix might shift a bit more positively toward the aftermarket?

Probably will because our aftermarket orders have just been off the charts here recently.

So I think what will happen is in the first part of the year, you will see more of a swing to aftermarket and then as the OEMs crank up, which they are going to substantially do, you'll probably see some counterbalancing as the second half of the year comes through and obviously that will bode well for profitability in the first part of the year because our aftermarket business has a higher level of profitability than our after -- our aftermarket business has a higher level of profitability than our OEM business.

And finally on the portal product, you said that you were including it in your outlook for '06.

Wouldn't that inclusion be more on a cost basis than a profit or revenue or profit basis?

This is going to be a cost plus contract.

That's correct.

Scott Graham, Bear Stearns.

A couple of questions that latch onto previous questions.

Your margin guidance for 2006, does that contemplate options equalized, restated for '05?

Yes.

What we basically said is we're going to restate '05 and we're going have $0.05 basically in each year.

So in essence there is a little noise in there.

But it is essentially zeroed out in my guidance.

Got you.

Could you also talk about the acquisition pipeline?

I know that you have in the last year and a half talked about how happy you are with it and obviously that came through in '05.

But what could we expect for '06?

Could '06 be anything like '05 and maybe give us some color on that, Frank?

Yes, sure.

As I have said, we seem to be a little different than other companies in our space in that I am finding a very rich backlog right now as I did last year.

It is always very difficult to predict exactly what you're going to close but there is a substantial number of acquisitions in the backlog.

I would be highly, highly surprised if you didn't see some really good acquisitions from AMETEK this year.

Now to try to predict whether we're going to have more or less than last year, I'm not going to go out on that limb because again you can sometimes get right down to the end of the pike and you find out that there is some problem with the company and you don't end up acquiring it.

But all I can say is I feel very optimistic about the acquisition environment right now.

Is there any business because of '05 acquisitions and management time being taken to integrate them that you would not attach an acquisition to?

Yes.

I think that's true.

I mean we tend to -- when we look at these acquisitions -- if it comes in at a division level, we will really want the management team in that division to get the first one under their belt before we bring another one in but the advantage of having such a decentralized company as ours is that we have got very large number of legs that we can bring acquisitions into.

So I don't think it is going to be a major obstacle to us doing more.

The other thing that happens is that for a couple of these acquisitions that are more platform type acquisitions, they can now look at doing acquisitions.

For instance, Taylor Hobson, which we brought in not in 2005 but in 2004, we have really asked them to start being very aggressive in terms of building a precision instrumentation line of companies and products under that umbrella and so they are going to really gear up their activities.

So it is sort of a mix here.

The context of your question is correct but I don't think it is a limiter to us doing additional acquisitions.

At this time, I'll turn it back over to the speakers for any closing or additional remarks.

Thank you very much for joining our call and if you have any other questions, please give me a call at 610-889-5249.

Thank you.

That does conclude today's conference.

Thank you for your participation.

You may now disconnect.