阿美特克 (AME) 2006 Q4 法說會逐字稿

Good day, everyone.

Welcome to this AMETEK, Inc. fourth-quarter earnings release conference call.

As a reminder, today's conference is being recorded.

And at this time 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, Jeff.

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 earlier this morning and have been distributed to everyone on our list.

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 6740863.

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

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

I'll now turn the meeting over to Frank.

Thanks, Bill.

AMETEK had a great fourth quarter, bringing to a close an excellent 2006.

We established records for sales, operating income, net income and diluted earnings per share for both the quarter and the full year.

In the quarter, sales were up 19% to $480.7 million on solid internal growth of 8% and the benefits of our disciplined acquisition program.

Internal growth in orders was 10%.

Operating income was up 25%, driven by the top-line growth in operational improvements.

This resulted in an 80 basis point improvement in operating margins.

Net income of $47.8 million was up 30%, and diluted earnings per share of $0.45 were up 29%.

Cash flow from operations was $65 million, up 44% from last year's fourth quarter.

For the full year, sales were up 27% to $1.82 billion.

Operating income was up 32% to $309 million, net income was up 33% to $181.9 million and diluted earnings per share were $1.71, up 33% over 2005.

Excellent internal growth in each of our segments and contributions from acquired businesses enabled us to post a sharp sales increase.

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

Cash flow from operations for the year was $226 million, up 45% from last year's level of $155.7 million.

Overall, we're delighted with these results.

Turning our attention to the individual operating groups, for the Electronic Instruments Group, sales were up 19% for the quarter to $273.8 million.

Strong internal growth of 7% led by our aerospace, process and industrial businesses, together with the contributions from the acquisitions of Pulsar, Land Instruments and Precitech drove the sales increase.

EIG's operating income was up 17% for the quarter to $53.3 million.

Operating margins were 19.5% compared with 19.8% in the fourth quarter of 2005.

For the year, EIG sales were up 26% to $1.02 billion, driven by growth in our process, aerospace and power businesses and the contributions from acquisitions.

Operating income was $203.4 million, an increase of 24% over last year.

For the Electromechanical Group, fourth-quarter revenues were up 20% to $206.9 million on excellent internal growth of 9%, driven by broad-based strength in our differentiated businesses.

The PennEngineering Motion Technologies acquisition also contributed to the revenue growth.

Operating income for the quarter was up 36% to $35 million.

Operating margins expanded 200 basis points to 16.9%, as we saw strength and results in both our cost-driven and differentiated businesses.

For the full year, EMG sales were up 28% to $802.8 million.

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

Operating income of $139.9 million was up 41% from 2005.

In 1999, we set out to transform AMETEK into a set of differentiated, niche-focused businesses, moving away from our roots as a floor care motor manufacturer.

On any financial metric, whether it is growth, profitability or capital efficiency, differentiated businesses are more attractive.

Rather than doing abrupt transformational acquisitions or divestitures with the significant risk that that would entail, we chose to make this portfolio shift in an incremental fashion, taking the very good cash flow from our legacy motor businesses and redeploying it to fuel the transition to the differentiated model.

Our four growth strategies -- operational excellence, acquisitions, global and market expansion and new product development -- served as the strategic vehicles for this transformation to happen.

The results have been dramatic.

Cost-driven businesses today represent only 15% of our Company.

Internal growth increased dramatically to 9% in 2006.

Operating income margins have expanded from 12.8% of sales to 17% of sales today.

International sales have increased from 33% of sales in 1999 to 48%.

Capital expenditures in 1999 were 3.3% of sales, while last year, they were approximately half of that level.

On a split-adjusted basis, diluted earnings per share increased from $0.62 in 1999 to $1.71 in 2006.

In 2006, we continued to implement this vision for the Company with great success.

I've already described some of the financial metrics for what was the most successful year in AMETEK's history.

We also made significant progress in the implementation of our four growth strategies.

In the acquisitions arena, we completed six acquisitions that had a combined annual volume of approximately $150 million.

These were all differentiated businesses that expanded our market positions in the aerospace, power, process, analytic instrument and technical motor markets.

The acquisitions were Pulsar, a leading designer and manufacturer of specialized communications equipment for the electric utility market;

PennEngineering Motion Technologies, a supplier of highly-engineered motors for niche applications in data storage, electronics, automation and aviation;

Land Instruments, a high-end analytic instrument maker, producing a full range of on-line optical temperature measurement products;

Precitech, a technologically advanced supplier of ultra-precision machining system that broadens our product offering for rapidly growing nanotechnology applications;

Southern Aeroparts, a third-party MRO business providing repair and overhaul services to the commercial aerospace industry.

And in addition, we made a small technology acquisition, adding General Ceramics and its high-temperature co-fired ceramic seals and microelectronic packaging to our HCC division.

Operational excellence was also a significant contributor to AMETEK's success in 2006.

Our global sourcing office in Shanghai ramped up tremendously during the year.

In its role supporting many AMETEK divisions, it generated more than $4 million in savings for material procured in China.

We would expect an even greater level of incremental savings in 2007.

We continued our migration to best-cost manufacturing in 2006.

Revenue from our Reynosa, Mexico, Shanghai and Czech Republic facilities totaled $286 million, an increase of $43 million for the year.

We increased our production of cost-driven motor products as well as differentiated aerospace, power and heavy vehicle instruments.

As a result of these actions and many others throughout our divisions, we were able to again expand operating margins this year by 70 basis points.

Global and market expansion continues to be a driver for AMETEK's growth.

For the year, international sales grew 33%.

Asia led the way, growing by 39%, driven by strong interest in our process, aerospace and power products, as well as the success of our Shanghai motor plant.

Acquisitions played a significant role in our international growth.

The acquisitions in 2005 of SPECTRO and Solartron, as well as Land Instruments in 2006, provided a big boost to our international growth.

Another key component of our global expansion strategy has been the strengthening of our worldwide distribution capabilities.

Two-thirds of the $9 million in additional spending we announced last year was directed to bolstering our sales and marketing capabilities in key market segment and geographies.

We opened sales offices in Chengdu, China and Moscow, and expanded our presence in Japan and the Middle East, all key markets for differentiated instrumentation.

Our final growth strategy and a key avenue for growth is new product development.

We have consistently invested in RD&E.

This year the total is $88 million, up 15% over last year.

Revenue from products introduced over the last three years is now 23% of sales versus 16% last year, demonstrating the excellent work of our businesses in developing the right products to serve their customers.

As design for Six Sigma continues to gain traction, I expect the efficiency of our R&D dollar to further increase.

As we look forward, this same business model and four growth strategies will continue to drive AMETEK's success.

Our differentiated business model, coupled with very favorable market conditions, will drive strong internal growth.

Our operational excellence capabilities, including low-cost manufacturing and sourcing, will continue to drive margin expansion.

The acquisition pipeline remains robust.

While we can't predict when acquisitions will close, we fully expect another successful year on this front.

We will continue to add niche-focused, differentiated businesses that complement or extend our current market positions in analytic instrumentation, aerospace, power and electromechanical products.

Turning to our expectations for 2007 in a little more detail.

Revenue is estimated to increase approximately 10% on mid to high single-digit core growth in each group and the annualized impacts of our 2006 acquisitions.

Electronic instrument internal growth will benefit from continued strength in our aerospace, power and process businesses.

In the Electromechanical Group, the core growth will be driven by strong performance in our differentiated businesses.

Earnings are expected to be approximately $1.93 to $1.97 per diluted share, an increase 13% to 15% over the 2006 level of $1.71 per diluted share.

The increase in earnings reflects the benefits of the revenue growth and our continued focus on operational excellence.

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

Earnings are expected to be approximately $0.44 to $0.46 per diluted share, an increase of 16% to 21% over last year's first quarter of $0.38 per diluted share.

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

Solid internal growth and the contributions from acquired businesses enabled us to grow the top line 27% for the year.

We were able to bring that sales increase to the bottom line, driving earnings growth of 33% and expanding operating margins by 70 basis points.

2007 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 for the year ahead.

We look forward to building on our track record of success during 2007 and remain confident that our four growth strategies will continue to create value for our shareholders.

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

Thank you, Frank.

As Frank has covered our financial results at a high level, I will provide some additional details on the Company's performance.

Compared to the same quarter of a year ago, we drove margin improvement at the group level and lowered our G&A spending as a percentage of sales, increasing our operating income margins by 80 basis points.

Below the operating income line, higher other expense was offset by a lower tax rate, yielding a continuing high quality of earnings.

On an overall note, as of January 1, 2006, AMETEK adopted FAS 123R to expense stock options using the modified retrospective method.

That means all 2005 as well as 2006 numbers are presented in accordance with this accounting standard.

Selling expenses were up 19% in the fourth quarter.

Excluding acquisitions, selling expense increased 6% below our core growth.

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

Other expenses were $1.8 million in the quarter as compared to expense of $640,000 in last year's fourth quarter.

Higher costs related to environmental activities and other professional costs drove the difference.

The tax rate for the full year of 2006 was 31%.

We expect our 2007 tax rate to be about 32%, plus or minus half a percent.

The phase-out of the FSC tax credit is driving this anticipated rate increase.

I would like to emphasize that this is a full-year rate, and as we saw in 2006, actual quarterly rates can differ dramatically, either positively or negatively, from this full-year rate.

On the balance sheet, our operating working capital, defined as inventories plus receivables less payables, improved in the quarter and ended the year at approximately 20.7% of fourth-quarter sales annualized, down from 21.6% at the end of the third quarter.

We expect that we should be able to continue to positively move this metric, with a long-term goal of guiding this number below 20%.

Pre-cash flow for the year was $197 million, or 108% of net income.

We continue to generate free cash flow in excess of net income as we grow the business.

Total debt was $682 million at December 31.

Our debt to capital ratio at year-end was approximately 41%, down from 44% at the beginning of the year, despite our spending nearly $200 million on acquisitions and share repurchases.

Capital spending was $11 million for the quarter and $29 million for the year.

Depreciation and amortization was $11.6 million in the quarter and $46 million for the year.

For 2007, we expect that capital expenditures will total approximately $40 million, while depreciation and amortization are expected to be about $50 million.

We expect operating cash flow for the Company to be $275 million to $280 million in 2007, reflecting growth in earnings, better 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 $276 million available under our existing revolver credit line.

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.

Jeff, we will be happy to take questions now.

(OPERATOR INSTRUCTIONS) Amit Daryanani from RBC Capital Markets.

Thanks.

Good morning, guys.

Just a question on operating margins.

It looked like on both the segments they were down somewhere between 70 to 100 basis points, despite sequential revenue growth.

Could you maybe talk about what impact acquisitions had on the sequential margins?

It obviously had an impact on the sequential margins.

I don't have an exact number, but it clearly was a factor in that sequential margins.

But if we look at it on a year-over-year basis, we were delighted with the margins.

And there does tend to be some cyclicality in our business, that in essence we tend not to look at the sequential margins as much as we do year-over-year.

On a year-over-year basis, operating income margins were up about 80 basis points.

And for the groups, they were up about 70 basis points.

So pretty good performance on that basis.

I guess could you maybe talk about incremental operating margins, annually or quarterly, on a core basis then?

Sure.

If we look at the incremental margins for the Company -- and that is excluding acquisitions -- we like to keep that number above a 30% number.

In the fourth quarter, it was a little bit below that, and that was driven by the fact that we had announced early last year that we were going to do about $9 million of incremental spending above and beyond the amount of spending we normally do.

And that was to drive basically growth in our R&D activities and also in the market expansion activities that I talked about in my opening remarks -- opening the sales offices in Chengdu, China and Moscow, etc.

And if you exclude that spending, in essence, operating margins -- contribution margins were well above 30%.

And the really good news here is we are not putting in that incremental amount of spend again in 2007.

So we're going to see expansion in the incremental margins of the Company in 2007.

Fair enough.

And then -- just the same question -- just looking at the pricing, could you maybe talk about the pricing trends, and how do you anticipate lower copper and oil prices seen for the last few months playing out?

Should that help you out on the margin profile going into 2007 as well?

Yes.

I think the fact that there could be some reduction in the price of materials could have a positive impact on our margins.

Our budgets and our guidance that we gave you did not assume that.

We assumed levels that we are at when we put the budgets together would continue through the year.

So that as we go through the year, if we get some reduction in those material costs, some of it we will give back, because some of our contracts are on a surcharge basis.

But others are not; they are permanent price increases and they should help us.

With respect to your first question of overall pricing, in essence, we increased prices and actually got about 2.5% in 2006 over 2005, and we expect a repeat of that.

We are expecting 2.5% overall price increases in 2007 over 2006, again assuming constant commodity prices on the input side.

Thank you.

Jim Lucas from Janney Montgomery Scott.

Thanks, good morning.

John, first housekeeping question, Accounts Payable, could you give us that number, please?

Sure, Jim.

It was $161 million.

Okay, great.

Frank, I'm sure others are going to ask for the end market breakdown later.

And I was hoping that maybe you could give us a little bit of color on the integration side on the acquisitions, of how that progressed and what you see going into '07 from a benefit.

Because not to be -- the margin in the EIG showing a small year-over-year decline, I think, caught maybe some of us a little off guard, but nothing much to read into it.

So maybe if you could talk a little bit about how those integrations are going and where you see that going in '07?

In general, our integrations are going, I would say, better than plans.

SPECTRO, which we bought in 2005, had a really good 2006, as did HCC.

So they are actually aiding our overall margins in the Company.

But other acquisitions that you do in the given year, the ones in 2006, obviously depressed those margins a bit.

And when we look at the value that we create, the economic value from these acquisitions, it is really significant.

Because we tend to buy companies at margins that are maybe in the 10%, 12% kind of region, and then over a fairly short period of time, we improve those margins up to more of our norm.

And when you look at this, we pay a multiple of -- last year, we averaged probably 7.5 times trailing EBITDA for our acquisitions -- and that is based on that sort of 10% EBIT, 12%, 15% -- 10% or 12% EBIT.

And then you look at them a year later, and that multiple is going to down substantially.

So the economic return is just great.

But one of the factors that happens is that there is a little bit of downward pressure on the overall margins of the Company.

But from an economic value viewpoint, they are absolutely first-class returns.

And I think you can see that in our return on equity and our return on invested capital type of performance.

So overall, I'm delighted with the way the acquisitions are going.

I think we're buying at reasonable multiples.

I think the integration is going absolutely fine.

And we're going to just continue to do this because we think the economic model is extremely good.

Okay.

Thank you for that color.

On the CapEx, can you talk a little bit -- I mean, not that it is a significant increase, but on a percentage basis, it obviously is a little bit more.

Can you talk about what is driving that?

And then you also alluded to how the design for Six Sigma has gained traction.

Can you maybe expand on that a little bit more, on what you are seeing on the R&D front?

Yes, sure.

The first question again, Jim, was what?

CapEx.

CapEx.

All right.

Let me just write that down.

On CapEx, last year we spent about $29 million.

And as John indicated, we are projecting that to go up to about $40 million.

Every time we have given you these projections, we tend to underspend those numbers, so I think you might want to think about that as well.

But if you look at the breakdown of the capital, about one-third of this is maintenance-type capital, just to keep the factories essentially running.

About a third is for OpEx types of improvements; these are improvements that basically help the margin growth that we have talked about.

And the last part is for expansion, if you will, basically growing the Company.

We're actually delighted with these levels of capital, because as I think I mentioned in my opening remarks, if you go back in AMETEK's history, we were investing numbers like 3.5% to 4% of sales in capital.

And right now we have the capital appetite of the Company running in the 2% region.

And we think that is a very respectable number for a Company like this.

And my expectation is that by the time we get to the end of the year, it will even be a lower number.

Design for Six Sigma is -- and I think Jim, as you know, we started this a number of years ago.

And the results have really been dramatic.

For those of you that may not be familiar with it, what this is basically is taking Six Sigma, which has heavily been focused in the manufacturing environment, and moving it into the R&D processes.

And as we examined the efficiency of our R&D dollar, we concluded that we had significant leverage in that process.

And when we look at the various parts of it, the key area for improvement was better understanding the customer needs.

We were finding that our engineering departments, when a given set of specifications was set, they did a fairly good job of generating a product with those specifications.

But more often than not, we needed to go back and change those specifications, either during the development process or even after some of the products were introduced.

Which leads to inefficiency, it leads to lateness in the time of the product.

So by applying the rules and the discipline of design for Six Sigma, we have been able to make a dramatic change in the efficiency of our R&D dollar.

The key metric that I look at is the percent of revenue from products introduced in the last three years.

And when we started this thrust, we were down at about a 12%, 13% kind of level.

In 2006, that number was 23%.

So there has been a dramatic, dramatic shift in our R&D processes and the amount of new products that we're introducing for a given R&D dollar.

So we are pretty excited about this, and it obviously is one of the factors in the strong internal growth of the Company.

Great.

Congrats on a very good year and look forward to another one in '07.

Thank you, Jim.

Wachovia Securities' Wendy Caplan.

Thank you.

Good morning.

Can we talk a little bit more about, I guess, a couple things.

First of all, I was looking back, and a year ago at this time you reported a good year for '05, and you gave us information suggesting that the EPS numbers were in fact below what the consensus view was at that time.

We took our numbers down, not wanting to be heroes in the space, and said to our sales force, we really believe that we will be back here telling you that the numbers are in fact going to be higher than what we had originally thought.

And in fact, that was the case, if you account for the split.

The question that I have for this year is, as you look out, you are saying roughly 9% core -- I mean, if we look at the acquisitions you have done and just back out the annualizing of those, it is about 1 point or so, 1 point plus in acquisitions, and the balance of that 10 being core.

First question is, what are you seeing in your -- that would suggest that you can comfortably say high single digit core growth in '07?

And then if you add roughly 40 basis points in margin, you get to kind of the top end of your range that you suggest is correct for '07.

Can you talk about that number?

I know it's a number that you have been comfortable with historically, kind of 40% basis points margin improvement.

Can you talk about specifically where is the leverage, the operating leverage?

Are there particular business pieces or areas that represent significant leverage for you in terms of acquisitions you did this year or last year or anything specific?

And then I had one more question.

But if you could do those first, I would appreciate it.

Okay, Wendy.

Let's start with the earnings numbers.

I think the best way I can characterize our guidance is that I have more confidence in these numbers this year than I did last year when I told you what the guidance is.

So there is definitely upside in these numbers.

And that confidence comes from where, Frank?

It comes from the strength in our markets and what we're going to do in the operational excellence environment this year.

If you look at the overall markets for the Company, they're extremely strong.

Our long-cycle businesses are just humming along; our process businesses are good.

So there is just a market upswing here that started maybe 18 months ago and it's continuing.

And the fact that our businesses have this long-cycle nature to them, that even if we see some softening in the general industrial economy as this year progresses, I think our long-cycle businesses are going to continue to perform in an admirable way.

In addition, I'm particularly excited about the operational excellence initiatives that we have planned for this year.

I think, as you know, we have continually been moving product to low-cost locales, and this year is going to be an exceptional year.

If you look at the total volume that we expect to produce in our low-cost manufacturing plants in 2007, the incremental amount is about the same as last year.

It's going to be in this range of $40 million to $50 million of incremental volume we're going to put into those plants in total.

However, there is a key difference.

And that difference is that in addition to that $40 million to $50 million, we're going to be moving, in rough numbers, $17 million of product from our Reynosa, Mexico plant to China.

And this is a major shift that is going on; we're going to put some of our higher differentiated businesses in Reynosa and move some of our lower-end, cost-driven businesses out of there.

So in essence, we're going to get more leverage this year than we did last year in moving to low-cost manufacturing locales.

The second thing -- and I mentioned this briefly in my opening comments -- is that we put a sizable investment in our global sourcing initiative in 2006, and we think that is going to pan out in 2007.

This is where our operating divisions can interface with this global sourcing operation, which is in Shanghai, and purchase materials from China for both our European operations as well as our U.S.-based operations.

And we were in more of a ramp-up mode last year, and we are going to be able to gain more leverage this year.

So I'm pretty bullish on where the Company is right now, Wendy.

I appreciate your comments.

Well, that's all good news.

I guess the question is, in terms of what is not in those numbers, which clearly is the acquisition question.

And I assume that there is no change in the sense that you did about $140 some million in revenue in '06 --

Right.

As you look forward -- I mean, obviously, we never can predict that -- but is the pipeline similar to what it was a year ago, better, pricing, what --?

The backlog is fine;

I would say it is similar.

Pricing is probably up a little bit over last year.

So as we follow our acquisitions, we are funneling them probably with a little bit more bent to those acquisitions where we have higher synergy.

But I'm very optimistic and I think another year we try to target this $100 million to $150 million region.

In 2005, we did more than that; we did about $250 million.

As you indicated, last year we did in the range of $140 million, $150 million.

And I would expect a similar year this year.

Okay.

Thanks very much.

Scott Graham from Bear Stearns.

Good morning.

First of all, housekeeping wise, I'm calculating a lot more than 1 point of acquisition contribution next year, which does seem to jibe with your mid to upper single digit organic growth number.

Is that correct?

That is correct.

I think in rough numbers, the final impact in 2007 over 2006 is on the order of $70 million of acquisition organic growth.

Yes, that is pretty much what we have.

Frank, very simply, could you go through your typical -- by business, by subdivision analysis for us?

Sure, Scott, I'd be glad to do that.

Start with EIG.

And the way I will do this is talk a little bit about Q4 and then give you some insight into 2007.

Pre-EIG sales were up 19% in Q4.

Organic growth was 7%.

Our long-cycle aerospace businesses are doing great, the markets are very strong.

There is essentially strength in all parts of the business.

Boeing and Airbus in 2006 did very well, and in 2007, they are each going to produce approximately 450 aircraft, which is up for Boeing about 15%, up for Airbus mid single digits.

So a very, very good picture from a production viewpoint.

The same is true in business and regional aircraft.

Our largest customer is Cessna.

They had a great 2006, and that is going to continue in 2007.

Probably the most positive news here is in military, which has just been very, very strong for us.

I know some other military companies are talking about some weakness, and I think the strategic decision that we made a number of years ago to focus on helicopters and electronic cooling have been key factors in this.

So our military business last year was very, very strong and we expect to have another very, very good year.

So if you look at Q4, our internal growth in aerospace was double-digits; that is on the EIG side.

It was also actually in the midteens on the other side of the business, on the EMG side.

So we had very strong performance in aerospace.

And we expect 2007 to be another very, very good year.

In our forecast, we are talking about high single digits for this part of our business.

And we may be being a little conservative there, but time will tell.

Moving to the process businesses, the markets here are very strong.

They are driven by the price of oil.

Analytic instruments are doing great.

As I mentioned, SPECTRO has been just a home run for us.

They had a great quarter.

It's probably the best acquisition AMETEK has ever done.

Also our process and analytic instruments business, AMT and T&CI, had excellent performances in the quarter.

New products, as I mentioned in answer to Jim's question, are doing very well.

Q4 internal growth was up high single digits, and we expect very good performance and these trends to continue in 2007, with internal growth should be in the high single- digit arena.

Power and industrial, power continues to do very well.

We had strong performance in our power quality instrument business in Q4.

Our heavy truck business was very strong in Q4.

Truck manufacturers continued to produce at high levels.

Q4 was up mid-single digits organically, and I believe it was double-digit with acquisitions, and we expect that growth to continue.

So for 2007, we expect power and industrial to have mid single digit type organic growth, and that will be driven by power.

We would expect power to be up like high-single digits, and we'd expect industrial to be relatively flat in 2007.

And we're actually very, very pleased with that because the only market that is weak as we enter 2007 for AMETEK is the heavy vehicle market, heavy truck market in particular.

And industry forecasts are talking about a 45% drop in that particular market.

We made a strategic decision probably four years ago to basically diversify away from that heavy truck market, so we weren't in essence affected substantially by that downturn.

And the team at Dixson has done just a wonderful job of that.

Believe it or not, we are now going to be supplying our dash panels to the military market on Humvees.

So they've done a major diversification into the military business.

They've also increased their exposure to construction.

They penetrated the ag market as well as some coach and recreational vehicle business.

So, in essence, with a very sizable downturn in that particular one market segment, we expect our business for industrial is going to be relatively flat.

And that is why we are very pleased with that.

Flipping to the other side of the Company, in EMG sales were up about 20% in the quarter.

Organic growth was very strong at 9%.

In the differentiated part of EMG that was driven by strength in aerospace and defense, as I've already talked about, but also our technical motors and specialty metals businesses were very strong.

And in particular, again, our U.S. military business is really, really doing well.

Q4 internal growth was up midteens in this business, and we expect good growth in 2007, and what we have working through our numbers is high- single digit organic growth.

Probably the biggest surprise to us in 2006 was the performance of our cost-driven motor business.

It is doing great.

Q4 internal growth was up low-single digits, which was much higher than expected at the beginning of the year.

As I think you're aware, we run this business for maximum profitability versus growth.

So we achieved double-digit profit improvements for 2006, and that was based on continued movement of production to low-cost locales including China, Mexico and the Czech Republic, as well as a focus on lean and efficient manufacturing.

2007, our expectation is very similar, that we will have low-single digit organic growth and double-digit profit growth.

So being a little bit more bullish with the forecast this year than I was a year ago, based on our performance in 2006.

To sum this up for the full company, we're entering the year pretty good.

I mentioned organic order growth rate was 10%, which means we're going to enter with (technical difficulty).

The backlog for the Company in 2006 was up 96 million, so we've got good backlog going into the year and we think we're going to get margin improvements.

And our forecasts are calling for 70, 80 basis points at the operating income line.

So it feels pretty good right now.

Okay, thank you, that was very helpful.

I just have one other question for you.

Scanning your website, it looks like you're putting like a new business win up on the website in the form of some type of news, seemingly every several weeks.

And I was wondering where -- I mean certainly I can see from the website which businesses are being the larger contributors, although it does seem fairly broadbased.

Where would you say you're starting to really see some of your M&A strategy where you are bolting on businesses for the purposes of making sales sort of like 1 plus 1 equals at least 2.5 or 3?

Which businesses, which acquisitions beside SPECTRO are you seeing some real great synergy from your M&A activity sort of making a critical mass statement in the market?

I think this question links back directly to my opening comments where AMETEK has just gone through a major, major change from really a low-cost motor supplier to a set of differentiated businesses that are driven by technology and engineering capability and market expansion.

And what you are seeing is we have made a conscious decision that now that we're competing much more from a technology base that we're going to promote our products and promote our technology, which we're pretty satisfied with.

In terms of the key parts of the Company, it is really all of the differentiated businesses I'm talking about.

And that has largely been the acquisitions we've done really over the last five years.

It's been fueled recently with some of the larger acquisitions like you mentioned SPECTRO, like HCC.

Land Instruments that we did last year, very high-tech products;

AMT, our nuclear business, is just doing extremely well.

So it is really a combination of accumulation of those acquisitions that have shifted our portfolio so dramatically that we now compete on a different basis.

Understand.

If I may, just one last housekeeper.

If we were to X out the impact of acquisition, negative acquisition mix from EIG, would that margin have been up year-over-year?

Oh, yes.

Absolutely.

But very dramatic on top of that is this $9 million incremental spend.

We made a conscious decision last year, which is why we told you right upfront that we're going to make that spend, and we also mentioned that most of that was in EIG.

And we felt very prudent in good times to basically spend the money on R&D and market expansion, and that also either one of those would have put those margins up on a year-over-year basis.

When you sum the two, it would have been dramatic.

But we think that is the right strategy for the Company, and you are seeing it in our internal growth numbers.

That is very helpful, Frank.

Thanks for that color.

Keybanc, Matt Summerville.

Good morning, just one or two questions; most of mine have been answered.

When you look at the migration you're making to low-cost manufacturing, the $40 million or $50 million, Frank, historically how much cost leverage do you see on that and do you expect that dynamic to be any different on the $17 million that you're moving from Mexico to China?

And over time, should we expect I guess that trend to continue or accelerate?

In general, what I can tell you, Matt, is that at the pretax profit line when we make these transitions, we're typically looking at 10-point changes.

That is the magnitude of what we are talking about.

Now there is a significant variance on that number, depending on what kind of business we're moving and where we're moving it from and to.

For instance, our aerospace businesses when we have moved and will continue to move from Wilmington, Massachusetts to Reynosa, we're going from unionized facilities, very cost-intensive, heavy-cost facilities, to a place like Reynosa, Mexico, you're going to get a higher leverage on profitability than you would if you were, for instance, going to move a cost-driven business from maybe the United States to Mexico, etc.

So there is some variance, but we use this sort of a rule of thumb 10 points on the pretax line when you make a move, and we sort of judge the moves based on that.

Your question about the $17 million we're moving from Reynosa to China, it's about that level; it is about that level.

The issue there is sometimes you have to give a little bit more on pricing on those businesses when you move them than you would on your more differentiated businesses, but it will be in that ballpark.

I don't expect a huge difference going forward versus what we've done in the past, sort of answer the second part of your question.

Okay.

How much, I guess, would you say out your cost-driven business is now being produced in Czech Republic, Mexico or China; the volume through that -- volume of cost-driven businesses?

I can't answer that off the top of my head, but I will just give you a rough feel.

I would say probably 70% of that business as a rough feel.

Okay.

And then I know you're talked several times about your sourcing strategy and the incremental benefit you expect in '07 off of that 4 million.

Did you quantify that and if not, would you be willing to do so?

For 2007?

Yes.

Well, I'll tell you exactly what we're doing and you can play the numbers yourself.

The targets we have set out are for about $10 million, and what's in our budgets is about 6.5 million.

Of --?

What we're saying is we probably won't get everything we are targeting.

So that's additional savings '07 versus '06 from low-cost sourcing?

Right.

Okay, great.

Thank you.

Elana Wood from Merrill Lynch.

Good morning.

Can you tell us how much currency contributed to segment top-line growth?

Sure, I could, Elana.

If we look at -- you're talking about Q4 I would assume, right?

Right.

Let's see, for the Company with currency the internal growth was 10% versus the 8% I reported after currency.

For EMG, it was 11% with currency and the 9% without currency.

And we had a more dramatic impact in EIG without -- or excuse me, with currency it was 10% and without 7%.

So there was essentially 3 points in EIG, 2 points in EMG, and it rounded to 2 points for the Company.

Okay, terrific.

And then in your income statement there was the $1 .8 million expense in the other net line item.

I was wondering what was in that?

The driver there was some existing environment issues that we're cleaning up, and we took -- I forgot the exact number -- $750,000?

About $800,000.

About $800,000 to do that, and that is the majority of that delta you're seeing on that line.

Okay, so that's sort of a one-timer?

Yes, that is exactly right.

And then can you update us on China, how big are sales to China today and how fast are they growing, and then also how much you are now manufacturing in China?

I can give you some rough numbers.

I think we're doing about $80 million of volume in China, growing dramatically, probably up on the order of 20% in the year.

And the amount we're producing, that number I don't have in my head, but it was probably -- and you've got to take AMEKAI into account, so it was -- John's got the number here -- about $50 million.

Now that isn't necessarily -- that $50 million doesn't end up necessarily in China.

Right.

Different -- I think you're right, okay.

Then just lastly, you've already sort of talked about this a little bit, but wondering how we should be thinking about (indiscernible) to the full year, how does the imputed 40 basis points or so of margin improvement generally break down between volume growth, mix, pricing, sourcing, relocating to lower cost manufacturing regions; and then separately, just improvement in the companies that you have acquired over the last one or two years?

Let me first say that the guidance I'm giving on margins at the operating income line is 70 to 80 basis points.

That is what we think we're going to do.

It is a combination of all those items.

We actually don't even go back and look at and break it down the way you're asking the question.

We really do it from the viewpoint that each business has a certain dynamic and when we go through the budgeting processes with those divisions, each of them look at margin expansion.

We actually incent our people in terms of margin expansion.

When we roll that up, we just simply don't go back and break it down the way that you are indicating.

So, in essence, I really can't answer your question, but I can tell you it is a combination of all those factors.

Okay, thanks.

At this time, we have one question remaining in the queue. (OPERATOR INSTRUCTIONS) Next Generation's Ned Borland.

Good morning.

I just had one question really on the acquisition pipeline.

Just kind of looking for a little color on the type of acquisition candidates out there that -- what kind of flavor they have.

Are we looking at more international or are we looking at by end market or by geography, I guess is what I'm looking for here?

Yes, okay.

I would say, Ned, that there has been a shift where if we go back four or five years ago, we were not having a lot of luck with international acquisitions in terms of finding companies that we thought were good investments where we could get a return on the longer-term, if you will.

And that's changed and we've now done a fair number of acquisitions in Europe.

Now, we are pretty well-balanced, I would say, across our businesses in terms of the market sizes and how much activity we have in Europe.

So I would say geographically, we will be focused on the U.S. and Europe.

There aren't as many acquisition candidates for our types of businesses in the Far East.

So there our focus is more on internal growth instead of on acquisition type growth.

In terms of the type of companies, it really follows the strategy that I've outlined on a number of occasions, which we're going to look for differentiated businesses, that's what's in the backlog right now, a fair number in both Europe and the U.S.

We try to buy companies as far up the technology curve as we can, because we think those businesses will provide higher returns on the longer-term.

And if you sort of broke it down by our markets, our process businesses are probably the top focus for us.

There's lots of candidates and we've got excellent management team in that part of the business.

Aerospace similarly.

Power, we did a number in the last few years.

We will continue to look and have some backlog in that part of the business.

And also as the EMG businesses go through this dramatic change, where now more than half of that business is differentiated -- it is no longer sort of a floor care motor business -- there is great acquisition opportunities in the Electromechanical Group.

And we also have a number of those in the backlog.

So it is really fairly broadbased, and probably the key factor would be differentiated types of businesses.

Okay, that is very helpful.

One more question.

On the acquisitions you've completed here in 2006, is there anything that prevents those integrations from achieving the same pretax income improvement that you've seen historically?

Not really.

I think the same type of operating performance we've had in the past we should be able to do on a go-forward basis.

Okay, thanks.

Trimark's Bruce Harrop.

Thanks for taking the question.

Just a couple of quick questions.

Just to confirm your guidance for the year on organic growth, is it 6% for the year?

No, my guidance is mid to high-single digits.

Okay, all right.

Because basically, I'm calculating 4% from acquisitions last year, the 70 million plus the organic number to get to your 10% number, which comes out to roughly 6.

But I guess you're just giving a wider range in there to --.

When I said 10%, I said approximately.

I'm just giving you flavor.

This is not a science where it's going to be exactly 10% next year.

Understand.

Also, for a large number of years your depreciation has been significantly higher than CapEx, and my guess is because you're utilizing your assets a lot more intensely, shifting assets to lower-cost regions.

So I'm just trying to get a sense for how many years do you think depreciation will exceed CapEx?

Well, there's another part to that equation, Bruce.

When we make an acquisition, we pick up that company's depreciation rate, so that has to be factored into our ongoing depreciation.

And that acquisition doesn't count towards our capital expenditures.

So you've got to add that into your calculation.

Right, understand.

So provided you continue to do lots of acquisitions, that will continue to be the case?

That will be a major part of the change year-over-year.

Okay.

Thank you very much.

Robert W. Baird's, Rob Mason.

Good morning, Frank.

I want to see if you can provide us a geographic outlook that would correspond to your 2007 sales outlook, and what you might expect across your key geographies?

I will give you a relative sense, not sort of absolute numbers.

The highest growth is obviously going to come out of the Far East and the Middle East.

I think the second element will be U.S., and I think Europe will be the third level in the rung.

So I think if you ranked them, it would be Asia, U.S., Europe.

Okay, that is helpful.

And then just a last question.

Your process instruments business has expanded to be your largest subsegment in a large way, it seems.

Absolutely.

Could you dissect that a little bit, tell us how much of that business now would be directly tied to say oil and gas?

You mentioned the price of oil being a big driver there.

How much of the sales there are directly tied to oil and gas activity, and what are some of the other major influences?

I can give you rough indications.

I would say about half of that segment is tied to oil and gas.

And then some of the other major components would be our nuclear instrumentation business, which is doing extremely well right now.

That is a different market; it is not driven by gas and oil.

And then we've got our ultraprecision measurements businesses, Taylor Hobson, the recent Precitech, that also is just sort of another sliver in the process businesses that wouldn't be driven by oil and gas.

But I think the key point is all of the businesses there are -- the vast majority is maybe a better way of saying it -- of those businesses are high-end differentiated businesses with good end-market dynamics.

Understood, thank you.

At this time, Mr. Burke, there are no further questions.

I'd like to turn the call back to you and our other speakers for any closing or additional remarks.

Thank you, Jeff.

I'd like to thank everyone for joining our call.

As a reminder, a replay can be heard by calling 888-203-1112 and entering the confirmation code number 674-0863.

It will also be archived on the Internet at ametek.com and streetevents.com.

Thank you.

Thank you everyone for your participation.

That does conclude today's conference.

Everyone have a great day.