阿美特克 (AME) 2007 Q3 法說會逐字稿

Good day everyone and welcome to this AMETEK Inc.

third-quarter earnings release 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 and Treasurer.

Please go ahead, sir.

Thank you, Justin.

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

These results are also available electronically on your market systems and on our web site at www.ametek.com\investors.

A tape of today's conference call may be accessed until November 2 by calling 888-203-1112 and entering the confirmation code number 4600134.

This conference call is also web-casted.

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

The conference call will be archived on both of these web sites.

I will remind you that any statements made by AMETEK during the call that are not clearly historical in nature are to be considered forward-looking statements.

As such, these statements are subject to change based on various factors and uncertainties that may cause actual results to differ significantly from expectations.

Those factors are contained in our SEC filings.

I will also refer you to the investor's section of ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call.

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

I will now turn the meeting over to Frank.

Thank you, Bill.

AMETEK had a record third quarter.

Sales were up 14% to $528.8 million on strong internal growth of 6% and the contributions from acquired businesses.

If the effects of foreign currency are included, internal growth was 8%.

Operating income was up 20%, driven by the top-line growth and operational excellence improvements resulting in a 100 basis point improvement in operating income margin.

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

Overall, we are very pleased with these results.

Our markets are strong, our strategy of acquiring differentiated businesses is working well and our focus on operational excellence continues to drive profitability.

Turning our attention to the operating individual operating groups.

The Electronic Instruments Group had a great quarter.

Sales were up 14% on excellent core growth of 7% and the contributions from the acquisitions of the acquisitions of Precitech, Advanced Industries, B&S Aircraft Parts and Cameca.

If the effects of foreign currency are included, internal growth was 9%.

EIG's operating income was up 21% for the quarter, operating margins improved 120 basis points to 21% as compared to 19.8% in the third quarter of 2006.

The Electromechanical Group also had a great quarter with revenues up 14%, solid internal growth of 5% and the contribution from the Southern Aeroparts, Seacon Phoenix and Hamilton Precisions Metals acquisitions drove the revenue growth.

If the effects of foreign currency are included, internal growth was 6%.

Operating income for the quarter was up 19% and operating margins improved 80 basis points to 18.7% compared with 17.9% in last year's third quarter.

Acquisitions have been a key part of AMETEK's past success and continues to be a strategic focus.

Thus far, 2007 has been a great year for us.

In the third quarter, we acquired Cameca, bringing our total number of acquired businesses to five with combined annual revenue of approximately $150 million.

Cameca, based in Paris, was purchased in August for approximately $112 million.

Cameca is a highly differentiated manufacturer of high-end elemental analysis systems used in advanced laboratory research, semiconductor and nanotechnology applications with annual sales of approximately $80 million.

This is the highest technology acquisition that AMETEK has ever made.

Cameca's instruments measure the elemental and isotopic composition at or below the surface of a material at the atomic level.

We are literally measuring atoms.

These instruments can detect a single atom out of a billion surrounding atoms, a truly amazing technology.

Cameca's global customer base includes many of the world's leading semiconductor manufacturers.

In addition, they serve academics, government and industrial research facilities engaged in nanoscience and other materials science research.

Cameca has become part of our Materials Analysis Division, joining SPECTRO and EDAX to form a truly world-class elemental analysis business.

Earlier this morning, we announced the signing of a memorandum of understanding related to the acquisition of Umeco Repair & Overhaul, a division of Umeco plc.

And just to be clear the here, Umeco is spelled U-M-E-C-O and is different than Cameca, which we just previously talked about, which is Cameca.

These are two different acquisitions.

Umeco Repair & Overhaul with sales of approximately $57 million is the largest independent UK provider of third-party maintenance, repair and overall services to the commercial aerospace industry.

This is a great acquisition for AMETEK as it continues our expansion in third-party MRO services, giving us a strong presence in the European MRO market and greatly expands the range of products and airframe platforms that we are now able to support.

This acquisition, coupled with our recent acquisitions of Southern Aeroparts and B&S Aircraft Parts, establishes a global MRO platform for AMETEK.

Umeco services the Airbus and Boeing fleets, various helicopter platforms, as well as many business and regional aircraft.

They operate from multiple locations in the UK as well as Toulouse, France, which is the home of Airbus.

Umeco provides an extensive array of MRO services for electrical and electronic equipment, fluid power devices, hydraulic components, actuation systems, landing gear, wheels and brakes and safety equipment.

The price to be paid is approximately $73 million and this proposed acquisition is subject to customary closing conditions and is expected to close in the fourth quarter.

At the beginning of the year, we set a target of acquiring 100 to $150 million in annualized revenue during 2007.

With the acquisition of Cameca, we have already met the high end of the target of $150 million.

When completed, the acquisition of Umeco will bring the total of annualized acquired revenue to nearly $210 million, a very good year for us.

The pipeline of acquisition candidates remain strong and we continue to look to add additional differentiated businesses to AMETEK.

There is much discussion in the press and with investors us to whether the U.S.

is at the beginning of a major economic downturn.

I believe AMETEK is well positioned when and if this occurs.

This is based on our diversified global customer base, our significant exposure to long cycle markets, a lack of presence in certain very weak areas of the U.S.

economy and our operational excellence capabilities.

Some key points -- our customer base is global with 50% of our sales outside the U.S., up from 32% in 2001.

The international markets are doing extremely well.

We have significant revenue, approximately $600 million, concentrated in the long cycle aerospace and power markets.

From all market indications, these businesses should enjoy a number of years of solid growth.

In addition, it should be noted that these long cycle businesses have higher than average profitability.

Also, we have minimal exposure to the residential housing and automotive markets, two particularly weak areas of the U.S.

economy.

Also, when necessary, we will react swiftly to align our cost structure with economic realities.

This capability enables us to improve margins throughout the last downturn, one of the few industrial companies to do so.

Putting all of this together, only about 25% of our sales and a smaller amount of our profitability are exposed to the short cycle U.S.

economy.

Our higher profit long cycle businesses will continue to do well in an economic downturn, and when needed, we will react swiftly to properly size our operations and continue our strong profitability.

Turning to our outlook for 2007, for the year, revenue is estimated to increase in the mid teens on a percentage basis on mid to high single-digit core growth in each group and annualized impact of acquisitions.

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

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

The full-year impact of our 2006 acquisitions as well as businesses acquired this year will also be a key contributor to the top-line growth.

Given current market conditions and our strong third quarter results, we're raising our earnings estimates for the year from a range of $2.01 to $2.05 previously to approximately $2.06 to $2.08 per diluted share, an increase of 20% to 22% over the 2006 level of $1.71 per diluted share.

Our fourth quarter 2007 sales are expected to be up approximately mid teens on a percentage basis from last year's fourth quarter.

We expect fourth quarter earnings to be approximately $0.51 to $0.53 per diluted share, an increase of 13% to 18% over last year's fourth quarter level of $0.45 per diluted share.

The above estimates do not reflect the anticipated acquisition of Umeco, though any earnings impact is expected to be minimal in 2007.

In summary, we're very pleased with our performance in the third quarter.

Solid internal growth and the contributions from acquired businesses enabled us to grow the top line by 14%.

We have been able to translate the top-line growth into bottom-line performance, driving significant margin expansion and strong net income and earnings-per-share growth.

We expect a strong finish to 2007.

Good internal growth, continued focus on operational excellence and our ability to make additional acquisitions make me very optimistic for the balance of the year.

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

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

Thanks Frank.

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

Compared with the same quarter of a year ago, we drove margin improvement at the group level and increased our operating income margins by 100 basis points.

Selling expenses were up 17% in the third quarter.

Excluding acquisitions, selling expense increased in line with 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.

Corporate G&A expense was up on higher costs associated with growing the Company.

Year-to-date, corporate G&A expense is 1.9% of sales, the same percentage as a year ago.

The tax rate for the quarter was 31.4%.

We expect our full-year 2007 tax rate to be about 32.5%.

As we have said before, 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, working capital, defined as receivables plus inventory less payables, was 22.7% of sales, up about 1% of sales from last year's third quarter.

Our recent acquisitions have brought higher inventory levels than the norm at AMETEK's base businesses.

We view this is an opportunity to reduce the investment in inventories at these acquired businesses which is consistent with our acquisition process.

Total debt was $780 million at September 30, an increase of $70 million in the quarter.

During the quarter, we spent approximately $112 million on acquisitions.

Our debt to capital ratio at quarter end was approximately 40%, down slightly from the beginning of the year of 41.4%.

Capital spending was $7 million for the quarter, depreciation and amortization was $13 million in the quarter.

For 2007, we expect that capital expenditures will total approximately $40 million while depreciation and amortization is expected to be about $52 million.

Operating cash flow for the third quarter was $62 million.

Year-to-date operating cash flow was $182 million, a 13% increase over last year.

We expect operating cash flow for the Company to be roughly $285 million in 2007, reflecting growth in earnings, better working capital management and the additional working capital needs of a growing business.

During 2007, we have expended significant amounts of effort to improve the Company's capital structure and ensure that adequate liquidity was in place to support our growth plans.

In June, we upsized our revolving credit facility from $300 million to $450 million.

Earlier in May, we increased the size of our accounts receivable securitization facility by $35 million to $110 million.

And lastly, on August 30, we closed on a private placement for $450 million in long-term debt.

These will be 10- and 12-year notes with a weighted average interest of 6.25%.

There will be two funding dates under this private placement.

The first will be in December 2007 for $370 million and the remaining $80 million will fund in July of 2008.

The offering was very well-received in a turbulent credit market as these investors had valued AMETEK's credit profile and strong performance.

Proceeds from the offering will be used to repay debt, including the redemption of the $225 million 7.2% senior notes due in July of 2008 and to fund the Company's growth initiatives, including future acquisitions.

This private placement augments an already strong long-term capital structure and along with our strong cash flow and availability under our short-term credit facilities will allow us adequately finance our acquisition strategy over the next several years, thereby removing access to the capital markets as a risk for the Company.

At the end of September, we had approximately $390 million available under these short-term credit lines.

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

Bill?

Thanks, John.

Justin, that concludes our prepared remarks.

We would be happy to take questions now.

(OPERATOR INSTRUCTIONS).

Robert LaGaipa, CIBC World Markets.

Two questions.

One, maybe if you could just start out and talk about the core growth rates across the different subsegments within Electronic Instruments and Electromechanical.

And I guess second, the question is, with the established MRO platform now, how large do you think that can get over time?

What does that market look like for you?

Okay, why don't I start with your second question first.

In terms of the MRO platform and the three acquisitions we have already done, we have approximately $100 million in revenue in this particular area.

And we see that this can grow to a $300 million to $500 million business over time.

One of the reasons that we embarked on this was that there are a lot of companies that we feel we can roll up into this key strategy for us.

These are highly profitable businesses, have good growth rates and obviously complement our other investments in aerospace and defense.

So we see it as a nice platform that just fits well with our strategy of acquiring businesses.

In terms of your first question on core growth rates, why don't I take a few minutes and just walk through the entire company.

Usually Scott asks this question and I will give you a little bit more color than just the core growth rates, but I will include that.

That would be great.

So let's start with the Instrument side of the business.

Here overall as I indicated in my opening remarks, sales were up 14% in Q3.

Organic growth was 7%, 9% of currency is included.

Starting with our aerospace business, which is obviously long-cycle business, it's really doing great.

The markets are very, very strong there.

There's strength in all parts of the business.

Boeing and Airbus are having very strong production years with each anticipating shipping about 450 aircraft, which for Boeing is up about 13% and for Airbus is up about 5%.

Cessna, who is our largest customer in business and regional aircraft, is having a phenomenal year.

They're up about 25% this year and are anticipating being up another 25% next year.

So the backlog is about $11 billion for Cessna.

And also, our military business is strong, given our focus on helicopters and electronic cooling.

Organic growth to your question was up high single digits in the quarter.

Total growth with acquisitions was double digits.

And for 2007, we expect this to continue, actually even strengthen some in the fourth quarter with continued strong internal growth, and we expect internal growth should be up high single digits for the year.

Our process businesses, which are the second part of EIG, are also doing very, very well.

The markets are strong, driven by the price of oil.

Analytic instruments are doing great.

Our material analysis and ultraprecision metrology businesses were strong in the quarter.

New products continue to do well in this group.

Q3 internal growth was up high single digits.

Total growth with acquisitions was up double digits.

So we expect that good growth to continue and for 2007, internal growth should be in the high single digit arena.

The last part of instruments is powered industrial.

They continue to do well.

Q3 was up mid single digits organically.

We have had very strong performance in our power business.

And for 2007, we expect power and industrial to have mid single digit organic growth driven by power, which will have high single digit growth.

Industrial will be flat due to the downturn in the heavy vehicle market.

And as I previously indicated, our Dixon team has done a great job diversifying their business away from heavy trucks, so will not be affected significantly by the market downturn.

Switching to the other part of the Company, as I mentioned again in my opening remarks, for all of EMG, sales were up 14% in the quarter, organic growth was 5%, 6% if we include currency.

The differentiated part of EMG continues to be strong.

Our material interconnect and packaging business was very strong in the quarter.

Q3 internal growth was up mid single digits, total growth with acquisitions was up double digits and we expect good growth in 2007 with organic revenues up high single digits.

Q4 should be particularly strong in our aerospace and defense businesses.

And cost-driven motors, we had an excellent quarter, they're doing fine.

Q3 internal growth was mid single digits and we expect low single digit growth for the year.

As you are aware, we run this business for maximum profitability versus growth.

We are continuing the movement of production to low cost locales, including China, Mexico and the Czech Republic.

Last year, we did about $285 million in volume in those low cost locales, and this year we expect to increase that between 40 and $50 million.

We also have a strong focus in these businesses on lean efficient manufacturing and low cost sourcing.

For the entire Company, we've got a $10 million expense reduction due to low cost sourcing, and so far we are right on target.

Through the first three quarters of the year, we have realized about $7 million and we expect that we will hit the bogey in the fourth quarter.

Profit for cost-driven motors is just doing great.

It was up double digits in the quarter and we expect it to be up double digits for the year.

So, that answers your question with a little bit more color.

That was great.

Thank you very much, good quarter.

(OPERATOR INSTRUCTIONS).

Jim Lucas, Janney Montgomery Scott.

Good morning, this is Ryan McLean on behalf of Jim.

Just first question.

Accounts payable -- what was that for the quarter?

It was $189 million, Ryan.

Alright, thank you.

And on your inventories, you mentioned that most of the increase was due to your acquisition during the quarter (inaudible).

I was just wondering if there was anything else that we should be -- anything else that was in there, or if it was just acquisitions?

I think acquisitions drove it, and we're clearly growing the Company, and that takes a little bit higher inventory level in absolute dollars.

But I think those are the two drivers to look at.

We're growing the Company and we're making acquisitions, and as we do, we expect to have to work down their inventories to our norm.

And finally, Frank, are you seeing any softening in any markets or geographies?

You mentioned you have 25% of sales to North America short cycle businesses.

But is there anything that you're seeing that we should be aware of?

In general, our business is extremely strong.

As I think you are aware, we have some very minor exposure to the U.S.

automotive markets and the U.S.

residential construction area, and we are seeing a little softness there, but it is just very minor in terms of the overall AMETEK portfolio.

So I am not feeling any major issue in this particular area.

Thank you very much, that is all that I have.

Amit Daryanani, RBC Capital Markets.

I just had a quick question on the commercial aerospace side.

I realize you guys are talking that you've seen quite a bit of strength there.

I'm wondering is you're seeing any softness of pushouts because of the delay in Boeing orders that we hear?

No.

Our commercial aircraft business is doing extremely well.

Boeing just recently announced a slippage in their 787 aircraft, which I think was anticipated by the industry even though they had indicated they did not believe they were going to have to slip it.

But that has virtually no impact on AMETEK in the short term.

There will be no impact in 2007.

And in 2008, I called our aerospace people yesterday, they're saying it's maybe $1 million of impact.

So it just is not a major factor.

Aside from that, Boeing's normal shipments, their normal aircraft they have in existence today as I mentioned in my opening, or I guess it was in response to the first question or the second question, was that they are up like 13% production.

They're going to ship 450 aircraft.

So we're struggling to keep up with them, to be honest.

So it's really a great situation.

Alright.

And then just looking at the MOU that you guys announced today with Umeco, can you just talk about the revenue growth and the margin trends that are at that company, and if the acquisition is accretive?

Yes.

This acquisition, as all acquisitions we have done, will be accretive.

The revenue growth of these types of businesses follow the aircraft cycle, which tends to be in that 6% organic growth kind of region.

We think we can possibly improve that organic growth of these types of businesses because we can basically help them get PMA approvals on their parts and that will help their ability to be more cost-effective and thus secure more business.

So, in terms of the margins, another very good acquisition for AMETEK.

We like to look at companies that have margins that are below ours, not bankrupt companies, but margins that are below ours.

And in this case, it is a bit below and we see the opportunity to raise that margins with our synergies.

I think you know, we have a very solid track record of improving the operating performance of companies, and this is no exception to that.

Finally, if I look at your operating margins in the Instrument segment, sequentially they're down about 110 basis points.

If you strip out the acquisitions, could you maybe tell me how the organic margins did?

We don't break out the difference between organic margins and acquisition margins, but Q3 is a little weaker in that our European businesses are not as strong and we include that in all of our forecasts.

So it's not atypical that you'll see a little degradation.

Overall, the margins were incredible in the Company and we're just delighted with the performance that we're able to achieve.

On a quarter-over-quarter basis, the Instrument Group margins were up 120 basis points, and at a very high level.

So we're actually very pleased with that.

Elana Wood, Merrill Lynch.

Going back to the last question about margins, sounds like you're seeing some incremental softness in Europe.

Is that fair to say?

No, I don't think it's incremental, it's just the normal softness that occurs in the third quarter in Europe.

Basically, Europe is on vacation in August and we typically -- simply don't ship as much from that part of the world and the margins are good in that part of our business.

So I wouldn't say it's softness at all, I would say it's just the normal cyclicality of that European market for us.

So no softening in Europe?

No, as I said, we are delighted with the margins and European growth for the entire company was about 20% in the quarter.

So it was -- that is, again, quarter over quarter, not sequential.

Quarter over quarter, not to confuse the issue, but it was very good.

Okay, and that's including acquisitions?

That is including acquisitions, yes.

Okay.

And looking at your margin improvement year-over-year, how much of that do you think you could attribute to volume leverage versus operational improvements or better mix?

It's clearly a combination of everything all rolled up together, Elana.

Our contribution margin continues to be strong, so volume helps us but we have not tried to dissect it any farther than that.

Lastly, do you have a purchase price multiple on EBITDA for the Umeco acquisition?

Yes, it was 8.6.

8.6 times trailing?

Yes, times trailing.

Okay, thank you.

88.5 -- (MULTIPLE SPEAKERS) it was 8.5, I'm sorry, it was 8.5.

Cameca was 8.6.

Got it backwards.

Thank you.

Wendy Caplan, Wachovia.

Could I ask you just my typical incremental margin question in terms of what it looked like excluding acquisitions?

Sure, Wendy.

The incremental margins were quite good in the Company.

They were actually above 40% for the entire company.

And actually, Bill computed it yesterday, and year to date, we're running at about 40%.

So we definitely are seeing the impact of our portfolio enhancements as we acquire these differentiated businesses, which by their nature have higher incremental margins.

So it was great to see.

And I guess that leads me into my next question, which is, as you talk about or referred to the last economic slowdown, it would seem to me that one of the -- you've talked about 50% of the business being outside the U.S., a lot of late cycle businesses, and as well a little exposure to some of the auto housing scary markets in the U.S.

Would we add to that list the margin of the mix of the businesses today versus back in the early 2000s?

And can you kind of give us some view of that, in terms of how you would expect margins to react in the next downturn?

It's an interesting question.

I think from the viewpoint of the portfolio today versus the portfolio in the last downturn, we have a much stronger portfolio that in general as you point out is going to be less sensitive to an economic downturn.

So I think we have definitely a portfolio advantage to what we had.

However, the incremental margins are going to be a little bit higher, and that's going to move in the opposite direction on you as the volume goes down.

But, overall, I think when you sum that all up, I would say we are in at least as good shape and probably better shape from an overall viewpoint in terms of keeping our profitability up.

Finally, you mentioned several times about acting swiftly to any kind of downturn.

Aside from the heavy vehicle market, which turned itself into a defense business, can you give us any -- are there any other places in the business where you have started to see this downturn or the softening that you have reacted to in a swift manner?

No.

At this point, as I mentioned in response to one of the other questions, there just has not been any significant downturn that we have seen.

So we are not taking any actions, but we are looking at it like a hawk, because obviously there's a lot of concern out there.

And I think our experience and what we did in the last downturn where we reacted before most companies as the downturn occurred.

As we see it, we will react.

The few very small pieces of the business that I mentioned that we have some exposure are amalgamated in other businesses and the volume in those businesses more than offsetting these.

So there's just no need to react at this point.

But if in fact it gets worse, we will react.

Richard Eastman, Robert Baird.

Good morning.

Just two questions.

Frank, could you address pricing?

Are we still -- I think we may have lapped the bigger price impact, but are we still capturing net pricing of a point or two?

And then secondly, can you also talk to the raw material environment?

Are we seeing less or increased pressure on our cost of sales for material costs?

Great question.

In terms of the pricing, we are still getting the pricing that we had talked about before, which is that point or two that you are talking about.

However, as we are going into the budgeting process right now, I'm hearing some of my divisions start to scream a little bit.

And it's probably going to be a little bit tougher pricing environment as we go into the next year.

So I would say, no major change this year.

It could be an impact next year, might not be able to get quite as much as we got this year.

In terms of raw materials, it's a more stabilized environment right now, I would say.

If you look at the raw materials that impact AMETEK, it's basically copper, steel and nickel.

And looking at those, if we start with nickel, there has been some basically monitoring of some of the illegal trade activity that has happened in nickel.

And as a result, the price of nickel has come down from its peak, which I think got up to $23, $24 a pound, down to sort of a stabilized level of $13 to $15.

So I think it has improved from where it was.

It is still not back to the norms.

I can remember sitting in budget meetings when my people running this business said it's never going to get above $6 a pound.

So, obviously, that was not functional information.

But I would say, that one is better than it has been but not back to historical norms.

In terms of steel, that one is a little better, in that if I remember the numbers, the kind of steel we used, we use about 42 million pounds of it, and it was running a year ago about $900 a ton, and I think it's now about $750 a ton.

So a little bit of improvement there.

Copper is the one that's going sort of the other way.

Copper is -- I think it's now about $3.50, $3.68 a pound, and it has been up higher, it has been lower, but more recently it has gone the other way.

So, copper is worse, the other two are a little better.

But overall, I think as you know, we have just never had an issue.

I am almost impervious to whether it goes up or it goes down, because we've got the pricing mechanisms in place, we've got the operational excellence activities in place to where you have never heard me talk about bottom line problems due to the commodity pricing.

And I think we're going to be fine, irrespective of what happens.

So when we think year-over-year, at least through the third quarter and perhaps into the fourth quarter, we still should net positively between price and raw material cost increases?

Is that fair?

At the gross margin line.

At the gross margin line, maybe a little bit.

(MULTIPLE SPEAKERS) just a big picture question on the MRO business that we have now carved out.

We have this $100 million-ish of annual revenue in that marketplace.

Is that -- when you look at that $100 million, how much of that is more or less under contract?

Is the revenue recognition in that business model, does it tend to be 12 or 24-month contracts on the outsource service side from the major airlines?

In general, not.

There are some contracts, there's no question about that.

But in general, this is not like the OEM aerospace business which is highly contract oriented.

And actually, it's very similar to our MRO business, which is not heavily contract oriented.

So it is much more an over the transom kind of business.

In many cases, there might be some long-term contracts in place, but basically they will pull against those contracts based on when an aircraft is down or those types of things.

So it's definitely a different business model than the OEM type of business.

Matt Summerville, KeyBanc.

First, just on oil and gas.

When you look at all prices, Frank, they're continuing to rise.

Does that create an opportunity for your process group of businesses within Instruments to further accelerate growth there, or does it just increase the sustainability of the growth you're seeing?

I would say, it's more the second.

The key thing, and it's not widely understood, is that the actual oil companies themselves are investing today at about a $30 a barrel level.

They are very sensitive to the swings in oil and therefore don't invest assuming the price of oil is going to stay up at the $85 or $88 level, wherever it is today.

So as long as the actual price of oil stays well above $30, you are not going to see a significant increase in our business as a result of that.

On the other hand, it provides more downside in the sense that -- or positive from the downside viewpoint that the price of oil would have to substantially drop before it would impact the investment levels.

Can you maybe just give a little more detail just sticking with oil and gas what you are seeing domestically versus internationally there from a demand standpoint?

This is an interesting business, because -- and I'm going to generalize here now.

It's not true across every one of our oil and gas businesses.

But in general, in the U.S., this is largely a replacement type of business.

There are some new platforms going up, etc., etc., but not anywhere near to the extent that is occurring internationally.

And also, if you look at the mix of this business, about 65% of our oil and gas business volume is outside the United States.

So what's happening is that, in terms of the overall growth of the business, we're seeing much more growth in the international environment because it's more of a replacement market in the U.S.

And that is independent of the U.S.

economy that we were talking about previously.

The good news in that is that, when the oil and gas cycle weakens, and we all know at some point it will, there is a little bit of balance here because what tends to happen is the overall in the repair part of the business and the sustaining part will tend to actually go up during those downturns.

So there's a little bit of counterbalance in the business.

But that's sort of the dynamic that's occurring.

And then maybe, I think this is something you first talked about roughly two years ago, correct me if I'm wrong.

But just providing more resources to the Middle East, the [stands] in China around oil and gas or energy.

Can you talk about what sort of progress you're making there?

Yes, it has been great.

As you may recall, we had made an incremental investment to put more marketing resource into China, into the Middle East, into Moscow.

And the purpose of going to Moscow was to really not only be involved in the oil business in Russia, but also the former stand states, and it's just doing great.

We just had a review in Europe and our manager who is running the Moscow office, we're adding people and he's very excited about the business opportunities.

Similarly in the Middle East, we're putting more people in that part of the world or have put more people in that part of the world, and also in China.

So it's a great story.

And overall, I don't have international growth numbers for that part of our business.

But again, it's just part of the overall international situation, which is very, very positive for us.

And just two more questions.

First, when you think about looking out into 2008 and low-cost sourcing, what sort of opportunity do you see on top of the $10 million worth of savings you expect to generate this year?

Again, we haven't put our budgets together for next year, and this will be a key part of it.

But as we've talked about in terms of the low-cost sourcing activity, we are really at the infancy for the entire Company.

Our divisions are just getting involved in it.

We started this with our cost-driven motor business and are obviously further up the curve there.

But for the rest of the portfolio, we're beginning.

So I expect we're going to see sizable improvement going into next year.

But again, we haven't quantified that and won't until we get into the budgeting process.

Last question -- you mentioned I think in your closing remarks just your big picture thoughts on how the Company's positioned in the event there's a more meaningful economic slowdown.

I think you have been running at a pace in terms of low-cost region manufacturing or migrating to LCR at about 40 to $50 million a year.

How fast could you accelerate that, or to what pave could you o execute that in the event we were in a more severe downturn?

Or, would that be a card you would play?

It would definitely be a card we would play.

I think we can look back to the last downturn, and you look at our four growth strategies and what we did at that time is put more emphasis on the operational excellence part of the equation and the acquisition part of the equation.

We view during the downturn that we would get more aggressive both in producing in these international locations, and also in the sourcing that we talked about.

We also view in the acquisition front as an opportunity, because typically what happens is both multiples go down and the EBITDA of the acquired companies goes down.

And many companies on the acquiring side will pull away in that environment and we view it as an opportunity.

So I think you would see the same thing from AMETEK if and when that significant downturn occurs.

Do you have to add brick and mortar?

No.

The brick and mortar in the Company is adequate.

Most of our differentiated businesses, for instance, operates single shift.

So you could immediately double or even triple capacity by going to multiple shifts.

There may be some -- the only place I can think of is in China, we may have to add -- the way we have done this, we bought a plot of land and we have the capacity to add three mirror images of plants on that property.

And we could add a third one and we'll probably need to independent of a downturn.

But, again, we're talking about investments that are million-dollar kinds of investments.

They're just well within the capital that we have been forecasting, that 2% of sales.

So it's just a non-issue from that viewpoint.

(OPERATOR INSTRUCTIONS).

John Baliotti, FTN Midwest Securities.

John, this might be a quarter for you.

I was actually -- Frank had given us some underlying metrics excluding acquisitions.

With respect to return invested capital, is that something that you could kind of at least give us some body language or just a feel on what that would have been?

Yes, about 12.5.

Are you talking about acquisitions, or about -- for the Company as a whole?

Well, the Company as a whole, if you took out the acquisitions, because obviously you talk about the working capital head wind that you're going to work through and that obviously impacted that metric.

So I was just wondering if you had a sense of what it was.

Yes, it's in that 12, 12.5% return on total capital, John.

So it's similar to the first half?

Yes.

And is that something that you have a framework as to how quickly you think you work that stuff out and where that metric could go?

Obviously, it could go up, and I think we will see it bleed off over the next six months.

Of course, we could acquire some additional companies in the meantime.

You get the mix of bringing in people at a slightly lower return on invested capital, and we bring them up to the Company average within a couple of years.

So, there is that mix element that is always working there, John.

And we recognize that you're always going to be acquiring, so you're always going to have that layering that's going to go on.

Right, John.

Great, thanks.

Ned Armstrong, FBR.

My question also involved acquisitions, and what I wanted to try to get at was new verticals or businesses that you're looking at via acquisition, and also how you're thinking about maybe some out of favor areas and if they attract -- if they offer attractive acquisition opportunities, just your thinking within that entire realm?

Yes.

If we start at the sort of 100,000-foot level, we think that we can grow the Company to the kind of models that we have espoused in the past by staying within the two groups that we have.

We don't feel we have to go to another group in the Company to realize the growth objectives that we have laid out.

Now, within that, definitely we see opportunities for new verticals and we have recently put a new process in the Company which actually comes out of some work by [Bain], which is grow from the core.

The concept is that, if you can grow your businesses from your core strengths and find markets and product areas that have good growth rates, the closer to the core they are, the lower the risk in doing that.

So we have actually developed a mapping process that we call spider diagrams and our businesses are mapping basically from the core.

And they look at things like moving internationally, moving to new markets, moving with the new products, forward integration, backward integration, those kinds of things, and identify opportunities both from an acquisition viewpoint and from an internal growth perspective.

And what it has done is it has put a lot more acquisition candidates on the table in vertical areas close to our businesses that we have not been looking at previously to a significant amount.

And we also have substantially recently increased the amount of resource in our M&A department where throughout the Company now we have I guess it's 10.5 people because we have half a person in Asia actually, looking at acquisitions, half of her time.

So we have 10.5 people that are essentially 100% devoted to acquisitions using this methodology and moving out from the core.

Would we look at out of favor areas?

It depends on what you mean by out of favor.

If it's out of favor because it's an untapped potential with good growth characteristics, absolutely yes.

We obviously are not going to look at companies that we don't think have good growth and capability for us.

Anyhow, some of the verticals that are coming out of this, in our metrology business, we are looking more seriously at non-contact metrology.

We have very strong positions, for instance, in contact metrology, which means you have a stylist that touches the sample you're trying to measure where non-contact work you're using essentially optics to do the measurements.

We are looking to have more involvement in the pharmaceutical industry and working on the factory floor if you will in pharmaceutical environments.

We see that as a great growth opportunity.

So we just feel we can grow from these core businesses and just keep this acquisition model going and realize our 15% kind of growth on an annual basis.

I guess what I meant by the out of favor, I will cite you an example.

Suppose that you found an opportunity in the construction market that utilized one of your skills in the measurement area.

Is that something that you would look at, or because of the market and its nature, would you look elsewhere?

Yes, I would -- we have a strong preference to stay away from highly cyclical markets.

So if there's something that has a high degree of cyclicality when we looked at the opportunity, it would get a much lower weighting than one that does not have a degree of cyclicality to it.

So construction is obviously one that has a cycle to it, so we would be more careful.

Now having said that, does that mean we would not buy a company in that space if it was close to AMETEK?

I would never say no to that.

You have to look at each opportunity and judge it on its merits.

Gentlemen, at this time there are no further questions from the phone audience.

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