阿美特克 (AME) 2007 Q4 法說會逐字稿

Good day everyone and welcome to this AMETEK Inc.

fourth-quarter earnings conference call.

This call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr.

Bill Burke, Vice President of Investor Relations.

Please go ahead, sir.

Thank you Rayanne.

Good morning and welcome to AMETEK's fourth-quarter earnings conference call.

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

AMETEK's fourth-quarter results were released before the market open today 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 6 by calling 888-203-1112 and entering the confirmation code number 6426500.

This conference call is also webcasted.

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

The conference call will be archived on both of these websites.

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

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

Those factors are contained in our SEC filings.

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

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

I will now turn the meeting over to Frank.

Thank you, Bill.

AMETEK had an excellent fourth quarter.

We set records for sales, operating income, net income and diluted earnings per share.

Sales were up 21% to $583.3 million on strong internal growth of 7% and the contributions from acquired businesses.

If the effects of foreign currency are included, internal growth was 10%.

Order growth was very strong as well with total orders up 26% in the quarter; internal growth in orders was excellent at 12%.

Operating income was up 31% driven by the top-line growth in Operational Excellence improvements resulting in 130 basis point improvement in operating income margin.

Net income was up 29% and diluted earnings per share of $0.57 were up 27%.

Cash flow from operations was $97 million, up 48% over last year's fourth quarter.

For the full year, our performance was also excellent.

Sales were up 17% to $2.14 billion, operating income was up 25% and operating margins expanded 110 basis points.

Net income was up 25% and diluted earnings per share were $2.12, up 24% over 2006.

Excellent internal growth in each of our segments and contributions from acquired businesses enabled us to post this 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 $279 million, up 23% from last year's level of $226 million.

Overall we're 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 individual operating groups, Electronic Instruments Group had an excellent quarter.

Sales were up 23% on strong core growth of 8% and the contributions from the acquisitions of Precitech, Advanced Industries, B&S Aircraft Parts and CAMECA.

If the effects of foreign currency are included, internal growth was 11%.

EIG's operating income was up 37% for the quarter, so a super quarter.

Operating margins improved 230 basis points to 21.8% as compared to 19.5% in the fourth quarter of 2006.

For the year, EIG sales were up 18% driven by growth in our process, aerospace and power businesses and the contributions from acquisitions.

For 2007, EIG operating income was up -- was $260.3 million, an increase of 28% over last year.

Operating margins were up 170 basis points to 21.7%.

The Electromechanical Group also had a great quarter with revenues up 19%, solid internal growth of 6% and the contributions from the Southern Aeroparts, Seacon Phoenix, Hamilton Precision Metals and Umeco acquisitions drove that revenue growth.

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

Operating income for the quarter was up 21% and operating margins improved 30 basis points to 17.2% compared with 16.9% in last year's fourth quarter.

For the full-year, EMG sales were up 17%.

Strong growth in our differentiated businesses, and the contributions from acquisitions drove the sales increase.

Operating income was up 19% from 2006 and operating margins increased 40 basis points to 17.8%.

We're obviously very pleased with our financial results in 2007.

We're equally pleased with the progress we made in furthering our strategic initiatives and how that success has positioned AMETEK for continued strong profitable growth in 2008 and beyond.

We've made substantial progress in the implementation of our four growth strategies, acquisitions, Operational Excellence, Global & Market Expansion, and new product development.

And I would like to review each of those.

In the acquisition arena, we acquired seven companies in 2007 including two in the fourth quarter.

Together these seven businesses represent approximately $230 million in annualized revenue.

These were all differentiated businesses that expanded our market positions in the analytic instrumentation, aerospace, power and engineered materials and interconnect markets.

The fourth-quarter acquisitions were Umeco Repair & Overhaul and California Instruments.

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 us as it continues our expansion in third-party MRO services, gives us a strong presence in the European MRO market, and greatly expands the rang of products on 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.

Second acquisition in the fourth quarter was California Instruments which we acquired in December.

California Instruments with annual sales of $22 million is a global leader in programmable AC power sources used to test electrical and electronic products.

These products are used in design verification testing, manufacturing, quality assurance and regulatory compliance by its customers in the computer consumer electronics industrial controls aerospace and defense industries.

This acquisition broadens the scope of our power instruments which produces power quality monitoring and metering instrumentation and further expands our presence in the attractive electronic tested measurement equipment markets.

Additionally in August we acquired CAMECA, a highly differentiated manufacturer of high-end elemental analysis systems used in advance laboratory research, semiconductor and nanotechnology applications with annual sales of $80 million.

In June, we acquired Hamilton Precision Metals, a niche specialty metals producer of precision metal strip and foil for medical, electronic and instrumentation markets with annual sales of $25 million.

And also in June, we are two aerospace businesses, Advanced Industries and B&S Aircraft Parts.

Advanced Industries manufactures starter generators, brush and brushless motors, vane-axial and centrifugal blowers and linear actuators for the business jet, light jet, and helicopter markets.

B&S Aircraft Parts & Accessories provides third-party MRO services primarily for starter generators and hydraulic and fuel system components for a variety of business aircraft and helicopter applications.

Together these businesses have combined annual revenue of approximately $25 million.

And lastly in April, we acquired Seacon Phoenix, a privately held provider of undersea electrical interconnect subsystems for the global submarine market with sales of $17 million.

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

We have the financial and managerial capability to continue to do acquisitions and we will become more aggressive in a slowing economy.

As you know, we do not include potential future acquisitions in our guidance.

Operational Excellence was also a significant contributor to AMETEK's success in 2007.

Our global sourcing office and strategic procurement initiatives were key drivers to increase profitability in 2007.

We generated $11 million in savings in 2007 and expect an additional $16 million in incremental savings in 2008.

We strengthened and continued our migration to best cost manufacturing locales in 2007.

Revenue from Reynosa Mexico, Shanghai and Czech Republic plants totaled $326 million, an increase of $40 million from 2006 on increased production of cost driven motor products as well as aerospace products.

In addition, we moved $5 million in revenue from Reynosa to Shanghai.

We will continue to move products to these best cost facilities and expect revenues from these facilities to be up another $40 million to $50 million in 2008.

As a result of these actions and many others throughout our divisions, we are able to again expand operating margins this year by 110 basis points.

Global & Market Expansion continues to be a key driver for AMETEK's growth.

In 2007, international sales grew by 22%.

This growth was balanced across geographies driven by demand for our process, aerospace, power and electromechanical products.

Acquisitions also played a key role on this international growth with Land Instruments, CAMECA Southern Aeroparts and Umeco providing a boost to international growth.

Our investments in Russia, Japan and the Middle East made in 2006 also contributed nicely to our international expansion.

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

We've consistently invested in RD&E.

This year the total is $103 million, up 17% over last year.

Internal growth reflecting a continued strong level of funding and the traction from our design from Six Sigma efforts was a strong 7% in 2007 and nearly 9% for the differentiated businesses.

Revenue from products introduced over the last three years was 18% of sales demonstrating the excellent work of our businesses and developing the right product to serve their customers.

There is much discussion in the press and with investors about the slowing U.S.

economy.

Although we have not seen any meaningful impact in our business, we feel we are well-positioned when and if our business is affected.

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 $675 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.

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 base with economic realities.

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

In addition, as a precautionary measure we have included general belt tightening improvements in our 2008 budget.

Pulling all 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 the outlook for 2008, we're very optimistic about our prospects for 2008.

All of our key markets are strong.

For the year, revenue is estimated to increase in the low double digits on a percentage basis on mid single core growth in each group and an annualized impact of 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.

The full-year impact of our 2007 acquisitions will also be a key contributor to the top-line growth.

Earnings are expected to be approximately $2.40 to $2.45 per diluted share, an increase of 13% to 16% over the 2007 level of $2.12 per diluted share.

For the first quarter of 2008, sales are expected to be up in the high teens on a percentage basis from last year's first quarter.

We estimate our earnings to be approximately $0.56 to $0.58 per diluted share, an increase up 17% to 21% over last year's first quarter of $0.48 per diluted share.

So in summary, we're extremely 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 by 17% for the year.

We've 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.

And 2008 is shaping up to be another great year.

All of our key markets are strong.

Our Operational Excellence capabilities, global customer base, exposure to long cycle aerospace and power markets, and the full-year impact of acquisitions completed in 2007 should enable us to grow both the top and bottom lines and meet our earnings estimates even as the U.S.

economy slows.

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

We're very confident that 2008 will be another great year.

We look forward to building on our track record of success during 2008 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 take 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 130 basis points.

Selling expenses were up 23% in the fourth quarter.

Excluding acquisitions, selling expense increased at a rate 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.

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

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

We expect G&A spend for 2008 to be flat, flat versus 2007.

The effective tax rate for the quarter was 31.7% and for the full year 2007, the rate was 32.2%.

We expect a very similar effective tax rate for the full year of 2008.

As we said before, this is a full-year rate and actual quarterly rates can differ dramatically either positively or negatively from this full-year rate.

On the balance sheet, working capital to sales, defined as receivables plus inventory less payables, was 20.6% for the fourth quarter, essentially unchanged from last year's fourth quarter.

We continue to see an opportunity to reduce our working capital investment.

Our plans are to reduce this overall percentage further in 2008 by approximately 1%.

Capital spending was $13 million for the quarter and $38 million for the year of 2007.

Depreciation and amortization was $15 million for the quarter and $53 million for the year.

For 2008, we expect that capital expenditures will total approximately $50 million while depreciation and amortization is expected to be about $60 million.

Operating cash flow for the fourth quarter was superb and totaled $97 million, up 48% over the fourth quarter of 2006.

Full-year operating cash flow was $279 million, a 23% increase over last year.

We expect operating cash flow for the Company to be roughly $330 million in 2008 reflecting growth in earnings, better working capital management, and the additional working capital needs of a growing business.

During 2007, we expended a significant amount 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 plus an additional $100 million accordion feature.

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

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

There are two funding date under this private placement.

The first occurred in December for a total of $370 million and the second, the remaining $80 million will fund in July of 2008.

Proceeds from the December funding were used to reduce short-term debt which eliminated borrowings under our revolving credit facility and accounts receivable securitization agreements.

Remaining funds are carried in cash on our balance sheet.

We intend to use the second funding under the private placement along with cash balances and if necessary borrowings under our short-term facilities to redeem our 7.2% senior public notes due in July of 2008.

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 to adequately finance our acquisition strategy over the next several years, thereby removing access to the capital markets as a risk for the Company.

Total debt was $903 million at December 31, an increase of $123 million in the quarter.

Offsetting that debt is a cash and marketable securities balance of $181 million.

These amounts reflect the funding under the private placement, repayment of short-term debt, higher cash balances and the investments of $114 million in acquisitions during the quarter.

Our net debt to capital ratio at quarter end was 37%, down from 40% at the end of 2006.

We were able to delever the balance sheet in 2007 while completing more than $300 million in acquisitions.

At the end of December, we had approximately $633 million available under our short-term credit lines.

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

Bill?

That concludes our prepared remarks.

Rayanne, we'd be happy to take questions at this time.

Thank you.

(OPERATOR INSTRUCTIONS).

Jim Lucas, Janney Investment.

Thanks, good morning, guys.

First question, John, just housekeeping here.

The '07 CapEx number again -- I missed that and also the payables?

The '07 payables is $206.2 million and the '07 CapEx I said was --

$38 million.

$38 million, right, $38 million.

Okay, thank you, I had missed that.

Frank, very positive remarks in your opening commentary.

I mean clearly the work that has been done over the last several years is showing up in the reported results.

Two questions, when you look at the end markets, we understand in terms of a lot of the positives that are going on and the commentary regarding the belt tightening.

Are you seeing any markets showing any signs -- and deterioration wouldn't be the right word -- but any signs of any potential slowing where that belt tightening is beginning to occur?

No, not really, Jim.

We are really not seeing any of the end markets showing a slowing that would cause us to react significantly.

The reason we decided to do some belt tightening is just as we looked at what was happening in the world, it obviously feels like things are slowing down.

We could be moving into a recession and we just wanted to take some precautionary steps.

But there is nothing in the end markets that is concerning us or that we are seeing at this point in time.

You may recall that last year the only market that was weak for us was heavy vehicles.

It was a pretty small part of the Company with only $20 million exposure.

And actually that market this year is forecasted to turn around.

It went down substantially last year and is forecasted to turn around.

So in essences, all the markets are in good shape.

Okay, and switching gears on the acquisition side, you know, you went in a couple of new directions in '07 with your acquisitions.

And as you are in the early stages on the integration side, are you seeing anything one way or the other with regards to the acquisitions that either more positive or as expected?

I would say that in general everything is moving ahead just as we had outlined.

The one that stands out in terms of extremely positive performance was Precitech.

That business did extremely well and far exceeded our targets.

But in general, they are doing just fine.

We are getting the synergies.

We are getting obviously the bottom-line results as you can see in our performance and we are pretty optimistic about 2008 to see further savings and integration synergies occurring and levering our profitability.

Okay.

And finally on the aerospace side, looking at the various buckets that you are competing in there from the OEM, military, helicopter, could you give us a little commentary on what you are seeing on the aerospace side?

Sure.

I mean again, all of those markets are very strong.

Boeing and Airbus are producing at very high levels as is Cessna on the commercial side.

The combined backlog for Boeing and Airbus is about $750 billion.

For 2008, Boeing is expected to be up in terms of production about 10% and Airbus up about 5%.

So very strong performance in the large commercial aircraft market.

In terms of the business and regional jet market, as you know, Cessna is our largest customer.

Their backlog is about $12 billion and they are essentially sold out for the next three years.

So very strong market conditions in that part of our business.

And then last is military, and that is also very strong.

As you know, we decided to invest in helicopters and electronic cooling a number of years ago and those two market areas in terms of DoD budget are performing at a higher level and a higher growth rate than the base DoD budget and we are enjoying that growth.

So we had excellent performance in 2008 -- or excuse me -- 2007 and 2008 looks very strong.

Our backlog from the beginning of last year to the end of last year for the Company was up about $150 million.

It was actually $151 million is the exact number; about half of that is in aerospace and defense.

So it is a significant backlog that we are going to be enjoying for the next several years.

And where did the aero mix end up at the end of the year of that $675 million between OEM, military, and business jet?

Yes, it's an interesting mix now.

Because if you look at it in the way that you are talking about it, it is 40% for large commercial aircraft, 40% for military, and 20% for business and regional aircraft.

If you look at it in terms of our aftermarket component versus OEM, it's -- for our base business, it's about 30% of our sort of OEM driven business is about -- is in the aftermarket.

However, now with this third-party MRO, another 18% is in the third-party MRO business.

So it totals in rough numbers almost half of the total aerospace business is in the aftermarket arena.

Great.

Well thanks and congratulations again.

Thanks.

Robert LaGaipa, Oppenheimer.

Good morning.

A few questions.

I guess one just to circle back on the end markets, hopefully you can provide us what you usually do just looking across the end markets; and in doing so, I mean you already gave us commentary relative to aerospace.

We had another aerospace company, related company, materials company report this morning.

Now granted they provide materials and they have about a year, year and a half type lead time, but they had mentioned some cautiousness in the channel especially related to the 787.

And I was also curious as to your thoughts there?

Okay.

Let's take your second question first and then I'll come back and walk through the Company as I normally do.

Sure.

We are not seeing any slowdown in the MRO market either for our MRO market or in essence, the third-party repair business that we are seeing.

It is very strong both in the U.S.

and internationally.

The 787 is not a major factor for us.

We've got nice potential revenue on that aircraft but it is out in time.

It's not on the short term here.

A matter of fact, we looked at what this recent delay would be on the 787 and how it would impact AMETEK and it is roughly $1 million to $1.5 million worth of revenue in 2008.

So it just is not a major factor.

I could see where a company that had substantial content in terms of their business mix on that aircraft might have a more significant issue.

But for us, it simply is not a major factor.

And actually that $1 million to $1.5 million doesn't include the fact that probably more other Boeing and/or Airbus aircraft are going to be shipped because of that delay.

So it will probably be even less than that.

Very good.

Okay, so let me walk you through the end markets as I normally do and I'll try to give you a picture looking into 2008 as to what we see coming off of 2007.

And I will start with EIG.

As I mentioned in my opening remarks for that group, sales were up 23% in Q4; organic growth was 8%; 11% of currency is included.

And if we look at the various parts of the business, we've already talked about aerospace in terms of the end markets being strong so I will not repeat that.

Organic growth for aerospace was up double digits in the quarter; total growth with acquisitions was more than 45%.

For 2008, we expect continued strong growth; internal growth should be high single digits for the year 2008.

In the process business, the markets are very strong driven obviously by the price of oil.

Our process and analytic instruments division had a great quarter.

Our materials analysis and ultra precision metrology businesses were also particularly strong in the quarter.

New products are doing well.

Q4 internal growth was up high single digits.

Total growth with acquisitions was up double digits for this part of the business.

And we expect that good growth to continue for 2008.

Internal growth should be up conservatively mid single digits -- I think there's a great chance we will do better than that -- but that is what is included in our financial forecast.

Power and industrial, power and industrial continues to do well.

Q4 was up mid single digits organically.

And for 2008, we expect power and industrial to have high single digit organic growth, so actually improvement in this part of the business.

And that is driven by the continued strength in power and the improved market conditions in heavy vehicles.

Flipping to the other part of the Company, EMG, as I mentioned in my opening comments, sales were up 19% in the quarter, organic growth was 6% and 9% if currency is included.

The differentiated part of EMG continues to be strong.

It is now 70% of EMG's sales so this change in the AMETEK portfolio that Jim referred to in his questions is now a significant part of the EMG part of the business where now the floor care and cost-driven motor part of that business is becoming a smaller and smaller part.

And that is driving very strong performance in EMG overall.

In that differentiated part of EMG, our aerospace and defense related businesses were extremely strong in the quarter.

Q4 internal growth was up high single digits; total growth with acquisitions was up double digits.

And we expect that good growth to continue in 2008 and again, we are probably a little conservatively but we are saying the organic revenues will be up mid single digits.

On the cost driven motor side of the business, that's doing just fine.

Q4 growth was flat.

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

There's continued movement of production to low-cost locales including China, Mexico and the Czech Republic, as I mentioned in my opening remarks.

We moved about $40 million for the entire Company, not just cost driven motors but that was the largest share of it.

We moved about $40 million to these low-cost facilities in 2007 and we expect to move another $40 million to $50 million in 2008.

Also in this business, we focus on lean efficient manufacturing and low-cost region sourcing.

And I mentioned in my opening remarks that we did about $11 million of cost savings in low-cost region sourcing in 2007 and we expect to do about $16 million in 2008.

So we are being very aggressive on the cost side of the business.

The profit in the quarter for cost driven motors and for the full year was up double digits and for 2008, sales are expected to be in that low single digit to flat arena.

But again profits are expected to be up double digits.

So overall, we are feeling quite positive right now.

As I mentioned, organic growth in orders in Q4 was 12%; backlog is up $150 million; total backlog is $688 million as we go into the year.

So we are pretty bullish.

Terrific.

And last question if I could, this one is just related to the cash levels.

Obviously a result of the private placement, you are going to have the second one in July, and I recognize that you are going to be paying down those notes, but it still seems like the cash flow level is fairly high.

Is this just by design in light of the slowing economy looking for acquisitions that potentially lower multiples?

And what kind of pace should we expect if that is the case over the course of 2008, especially if we are heading toward recession or are already in recession, what kind of pace we can expect from you guys?

That is a -- you asked several questions there at once.

Sure.

Cash flow is clearly a result of the funding in December and our positioning is we're being a little conservative.

It's better to have cash on hand in these times than not.

But from an economic standpoint, it didn't make sense for us to pay anything off earlier.

It is better suited for us to keep the cash on hand and look for opportunistic uses of that cash in the next few months, several months even if we have to and then pay the debt down later as in July when we get to that point.

Funding acquisitions is the top of our priority.

That is what we're going to -- that is our number one use of cash and so we are obviously -- we've got a lot of powder in our -- a lot of ammunition there to use and we could spend much more than we spent this year and still not affect the leverage factors of the Company.

If I could just add to John's comments, we view this as an opportunity in the acquisitions arena.

What typically happens as the economy slows is several things, multiples come down, as you mentioned.

Also the EBITDA of the acquired companies tend to go down.

So when you look at what you are paying for those companies, it is a great time to buy.

Also many of the strategics -- it's not all obviously -- but many will pull in their horns in a down environment and we view it just the opposite as a time to get more aggressive.

And I think as you know, we substantially increased the amount of management capability.

We have for acquisitions by increasing the number of people that are 100% focused on acquisitions from four to 10 last year.

And we've got a great backlog right now and the cash is there.

Obviously we're going to be judicious in the use of the cash but we do see it as an opportunity.

And is there an official target just to clarify, like 200, 300 million, whatever?

We haven't changed our targets.

It's consistent with the strategy that we've outlined for you.

We basically said it is $100 million, it's $150 million in acquisitions but I can tell you that my goal is to do better than that, my personal goal.

Terrific, very good.

Good quarter, thank you.

I just want to make one other point there that I touched on earlier.

Our capital structure is just absolutely rock solid.

At the urging of our Board last summer, they encouraged us to get ahead of the curve from taking steps to protect us from funding to take care of that $225 million notes that are due next summer.

That inspired us to go into the private placement market.

We pushed the envelope in getting delayed fundings and upsized it to match the growth of the Company.

And when we look downstream, our capital structure coupled with the cash flows of the Company is just a rock solid story.

So I just wanted to take that that opportunity to reiterate that.

Terrific.

Thanks again.

Amit Daryanani, RBC Capital Markets.

This is [Dave Gutterman] with [Herrick Research].

A couple of things.

You guys talked during the call regarding Lean in Six Sigma through all your businesses.

Frank, can you talk in a little more detail what you guys are doing with your initiatives for Lean Six Sigma and the benefits you are seeing across your businesses?

Absolutely.

We're actually very excited about what we've accomplished to date and what we see going forward from both Lean and Six Sigma.

Six Sigma is being deployed and has been deployed in two different ways.

One focused predominately on the business today, if you will, basically the flow of product from the material side through the production process and out to our customers.

And secondly, we are focused on design for Six Sigma which is really in the research development and engineering process so that we bring products to market that meet our customer needs and we do that efficiently, get them in production efficiently and obviously satisfy their needs and that levers our growth.

And when he looked at the margin improvement that AMETEK has done over the last really six, seven years, it has been a fairly remarkable story.

I don't exactly remember the numbers.

Bill, you probably do.

But I think when we started this, our margins were down in the 12%, 13% kind of region.

Yes.

And we are running now starting to teeter around 20%.

So it is a phenomenal story and although we have not quantified this as to how much is Lean, how much is Six Sigma, how much is offshore manufacturing, how much is low cost material sourcing, etc., etc., obviously Lean and Six Sigma are a major part of it.

So as we go into this year and as John has mentioned, we are going to focus some of our activities on the inventory side of the Company.

And we're actually -- we decided to higher 11 people into the Company that are going to be put in our key operations and these will be people who have significant Lean capability focused on material movement.

And we are going to really attack that material side of the business.

Take a while to see the results because we have to hire the people, get them in place, etc., but we see an opportunity there and we are focused on that working capital metric and see if we can't make some improvements in it and obviously satisfy our customers at the same time to a higher degree.

In terms of like OE and [RONA], how are you guys using those metrics to look at your manufacturing throughput to make sure you are doing the right job at the right plant?

Oh, we're always looking at our returns, no matter what we do and I think our financial performance shows that.

So any investment that we are making, we are looking at it from a RONA viewpoint and I think you can see that our performance has been excellent.

Over the next year, what percentage do you expect to improve on RONA?

Do you have a target mark, a target you would like to achieve?

No, we don't have a specific target.

Okay.

And final question, I like everything I've been hearing.

Congratulations on a great quarter.

Thank you.

How long has your continuous improvement program been in place?

And going forward over the next couple of years, what systems are you going to be putting in place to accelerate those initiatives to make sure you guys stay number one in the market?

Yes, that is a great, great point.

In essence, we had these continuous efforts in place for an extended period of time, probably even before I was CEO and I have been CEO now I think it is eight years.

So I mean, it has been a continual process but we are continuing to augment the process and it's very important to as the Company grows and we acquire other companies to inject that into those acquired companies.

So the kinds of things we are doing is part of these 11 people that we hired.

We are going to actually put a training function into the Company so that we have better capability as we acquire these companies to in essence go out and teach them, using the basic techniques of Lean Six Sigma other cost improvement types of initiatives.

But it has an AMETEK ting to it in terms of what we like to do and how we like to focus on it.

So that is differently one initiative that is going in place.

Another major initiative is that we are putting a business analytic system in place which sits on top of all of the IT systems we have throughout the Company and it basically puts a dashboard on our desks that allows us to look at things that are not the typical financial metrics that we typically and very consistently look at.

We could look at things like first pass yields, quality on the production lines and things of that nature, amalgamate them and that will give our people additional focus into where the areas of opportunity are, etc.

So those are a few of the initiatives that we have in place.

Great, nice work guys.

Congratulations on a great quarter.

Okay.

Wendy Caplan, Wachovia.

Thanks, good morning.

A couple of quick acquisition questions.

In terms of the environment, I don't think I heard you talking about or mentioning the credit crunch and whether -- you talked about strategic buyers, but have you seen any impact yet from the credit crunch and the financial buyers backing up?

Yes, in essence when we look back, Wendy, over the acquisitions we did, we very seldom competed head to head with financial buyers.

Usually we have got huge synergies in the deals we acquiring.

There's good strategic fit so we really didn't go head to head with them.

And I think the impact on us was more indirect in that because they were being very aggressive and it was huge amounts of capital available as we go back in time, multiples went up on deals.

So we were paying higher multiples in the last year or two than we were in the time before that.

So I think the impact as obviously that cash is not available to the same -- anywhere near the same degree -- is that we are going to see multiples come down as I mentioned before.

And I'm starting to feel a little of that but I can't say right now that we are back to where we were before the bubble.

Okay, thank you.

There were a lot of acquisitions in this quarter.

Have you calculated what the operating margin in the segments or on a consolidated basis would have been excluding those acquisitions?

No.

That is not a calculation that we do, Wendy.

Okay.

Obviously the acquisitions are going to be dilutive to margins --

Right.

-- and in essence our margins were up substantially.

So, the base business margins are extremely good and they've offset that dilution.

But I don't have a number as to what that is.

Okay.

A number I know you do calculate is the incremental margin excluding acquisitions.

Can you --?

That we do.

(multiple speakers) -- that for the quarter?

It was off the charts.

It was well above 40% for the quarter.

Okay.

And finally, can you speak about the new 2008 Mexican tax laws and whether you expect that will -- how you expect that will affect AMETEK?

We are studying that, Wendy, but we don't have a real clear picture of how that is going to affect us and what strategies we may use to handle that.

So I can't give you a finite answer to that.

Okay.

Well, we will look forward to getting it.

Thank you very much.

All right, Wendy.

Scott Graham with Bear Stearns.

Good morning, Frank, John, Bill.

Just a couple of questions for you all.

The acquisitions that you made in 2007 -- and Frank, I'm not asking for all seven, but maybe just the bigger ones.

Could you tell us how those businesses are performing organically, maybe just the bigger ones?

Yes.

Let's see, if I think about them, the first one we did was Seacon Phoenix and that was the submarine related business.

It's not one of the bigger ones, but it is the first one that came to mind, and that one is doing great.

As a matter-of-fact, part of the strong order growth and internal growth that I mentioned for the Company in orders came from that particular business.

We've won some major contracts actually with the Spanish government on their submarine fleet to equip those submarines with -- basically, these are interconnect systems that do cabling interconnect between the outside water and the inside of the submarine.

So they are very high-pressure type devices.

So that business is doing just fine its organic growth.

I don't have numbers in my head, but it is very, very strong.

Some of the larger ones, CAMECA is another one in there, and CAMECA was about an $80 million acquisition.

And that business has exceeded our expectations.

Organic growth has been good.

They've had great order intake since we bought them.

There's really no issues that I can think of with that particular acquisition.

What else is in there, fellows?

Umeco would be the only other large one and that was really we acquired that one in November so it's a little early to tell.

Right, it's kind of early.

I don't know if you heard Bill but Umeco, it's kind of early because it November but we have no indications of any issues with Umeco.

Well, it was that business rising 5 to 10, 10 plus before you bought it?

This is a 6% growth kind of business.

Okay.

Where some of the order rates concerned, I mean, I think I heard you right when you said 12% organic growth --

That is right.

-- in orders.

Could you give us an idea of what you're seeing intake-wise in the first part of January?

It looks fine.

Actually I just checked yesterday with all the group residents because I knew we were going to be talking about it this morning and all three of the group guys were very confident and they are -- what they -- not only what they saw in terms of input so far this year but also how they are feeling about the first quarter.

Okay.

I guess lastly would be some of the belt tightening stuff you guys -- last time things weakened, you guys were way ahead of the curve on that --

Right.

And it doesn't sound like you are doing belt tightening now.

It sounds like you are very much at the ready.

Although my question would be, John did indicate that I think you guys are expecting G&A to be flat in 2008.

Is the maybe first glimpse of a belt tightening or is that something else?

I would say it is maybe a little bit of belt tightening but we had some spend in '07 that just won't repeat itself because we got some initiatives out of the way.

So it is a mixture of just our normal cost conscious approach to running the business and some things behind us.

So, yes, we are looking at always looking at ways to watch our spend there.

Scott, if I could add to that.

When I mentioned the belt tightening in my opening remarks, we were very judicious both when we went through the budget process and as we rolled it up and putting some pressure on our operations recognizing the slowing economy.

And we really asked them to be more judicious in their spends to look for more cost savings opportunities.

It was not to the magnitude of what you were referring to the last time.

We did this because, and back, and when was that -- I guess it was year 2000 or so -- because our markets are strong, everything is really doing quite well right now.

But if I quantified that for you, I would say roughly probably $5 million of incremental additional cost savings.

We didn't go back and roll it up but I think that is probably the rough magnitude of what we did.

And again, it purely precautionary.

It's not because we are seeing something that we have to react to.

Okay, very good.

I do actually have one other question.

And that would be regarding 2008 acquisitions.

I know that you guys have done just I think a tremendous job in improving the portfolio.

But if you had to name -- I mean the now seem to be kind of full or approaching critical mass in your MRO area although I'm sure that there is more opportunity there.

But what are the other areas that you are seeing or maybe the potential for acquisitions to be focused upon in 2008?

Sure.

If I looked at where the concentration of our efforts are going, I would put the process businesses first.

There is lots of potential acquisitions in that arena that fit the size range where we like to do deals.

And they are great businesses, and they tend not to cycle as much as other businesses.

So that is the number one focus I would say for deals.

In addition, aerospace and defense outside of MRO is also an area that we see great opportunity to expand our product portfolio.

So we are going to be continuing to look for and do acquisitions in that part of the business.

And as you already mentioned, we built about $100 million third-party MRO business now with the three acquisitions we've done over the last year and a half plus -- or I guess it was about a year and a half.

And we see that platform can become $200 million, $300 million platform over time.

So -- and that really fits our acquisition strategy well because they tend to be rollups.

You can tend to bring them in, consolidate facilities, get substantial cost reductions and also be in an end market that obviously is doing extremely well.

The power businesses are another key area.

They are very good businesses, very good markets.

That is a smaller platform as you know for AMETEK.

We've got about $150 million of concentration and we've got good management in that part of the Company and we see it as an opportunity to continue to grow that platform.

And the last -- I mean I'm really speaking to all the differentiated businesses because that is where we are focusing.

The last is really the differentiated side of EMG.

We've built a really nice platform of businesses with our [EMPs] division.

We started with the core specialty metals company.

We added HCC.

We made other additions, Hamilton Precision in 2007, and I could tell you we are looking at a bunch of deals that go into that particular arena right now.

So I mean, it's one of the advantages of our portfolio I would say in that we've got a number of these diverse markets and you never know when deals are going to pop and what is going to work from a financial viewpoint.

So we are going to look across that whole spectrum of differentiated businesses and just continue to deploy the capital in a very efficient manner and get the kind of returns that we all like.

Well since you essentially named all of your businesses, Frank, I will just tell you that --

I didn't name --

-- that is very encouraging.

I didn't name cost driven motors.

Thanks.

Amit Daryanani, RBC Capital Markets.

Thanks.

Most of my questions have been answered but just had a few quick clarifications.

In terms of the $5 million in savings we expect from belt tightening, let's call it, is that because you are going to consolidate, try to do some restructuring or where is that going to come from?

Yes, it's a combination of things.

Every year we do consolidation of facilities and we're going to do some additional ones in 2008.

You heard me talk about higher low-cost region sourcing.

We probably wouldn't have been quite as aggressive if we didn't see the slowing U.S.

economy.

I mentioned we're going to do $40 million to $50 million of additional manufacturing in low-cost regions.

We will push for the $50 million instead of the $40 million.

So it is those general types of things.

It's not a major restructuring of the Company in any way, shape or form.

It's just looking at opportunities and being a little bit more cautious as the U.S.

and to some degree the world environment is changing.

Got it.

And in terms of the low-cost procurement or sourcing, we had $11 million in savings this year -- in '07 and $16 million in '08.

Is that right?

That is correct.

And what is the dollar amount that we are sourcing from low-cost regions today?

It's about $60 million.

Well that is for China.

If you expand it to other parts, other low-cost areas, you may add another $15 million, $20 million to that.

Okay, so $60 million to $80 million.

Yes.

And then where does that number go in 2008?

Probably another $20 million.

I mean we are still going to work on the $60 million as well.

I mean we didn't do it all.

Got it.

And then in terms of low-cost manufacturing, that number was around 326 this year?

That is correct.

And it is going to go up by $40 million to $50 million and we typically save about 20% of those savings, right, in our pocket?

We say 10% but probably our more recent performance has been closer to 20%.

But the targets we have given you have been 10%.

All right.

And I'm just trying to look at my model and the way things look like they would end up at the mid or high end at the EPS number is about 50 to 60 basis points of operating margin improvement?

Yes, actually you hit the number.

We are saying 40 to 50 basis points of margin improvement.

All right.

I guess my question really is we get all the savings you get the 60 million here and low-cost sourcing and the final from general belt tightening, plus the incremental margins you can draw on your organic business, you should be -- that seems like a pretty conservative place to start.

I mean is the math right there or --?

Remember we are in a slowing economy.

We don't want to be ultra aggressive at this point in time because none of us know exactly what is going to happen with the economy.

So our numbers we think our very realistic.

We think we can handle a slowing economic environment.

If the environment did not further slow, we probably would beat these numbers but we are assuming in our numbers a slowing economic situation.

And you've got to remember too, there's cost increases that are offsetting this.

I mean you have taken the one side of the equation.

There's other things that you have cost increases and investment as well.

All right.

Well maybe on the cost increases part, could you guys just run down material if that has been an issue?

It doesn't look like commodities have spiked up too much as late other than our --

Commodities even when they were spiking up, it is just it really speaks to the strength of our Company with our Operational Excellence initiatives, they simply have not been a problem.

We are very aggressive in alternate sourcing, very aggressive in pricing as the commodities have gone up.

And now we are actually, as you mentioned, enjoying an environment where they are probably going to moderate and there's opportunity it moderates.

All right, thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS) Matt Summerville, KeyBank.

Good morning.

Just two questions.

First, you mentioned pricing, how much were average selling prices up '07 versus '06?

And then what is your thought on 2008?

That is a good question, Matt.

We took a look at this actually just the other day to see exactly what we had done.

We were up about 2 percentage points in 2007 over 2006.

The pricing that we have put into the budget for 2008 is the same, it's 2%.

It's going to be more difficult to get that but we are going to be aggressive and shoot for that number.

Okay, and then any color on organic sales growth by geography in the fourth quarter?

Do you have that data?

It was a good picture.

It was actually balanced where the organic growth internationally was about the same as the U.S., was about the same as the Company.

So it was a good picture.

We are very pleased with U.S.

performance.

Okay, great.

Thank you.

Sure.

And there are no further questions at this time.

Mr.

Burke, I will turn the call back over to you.

Okay.

I would like to thank everyone for joining us today and look forward to speaking with you next quarter.

That will complete today's conference call.

We appreciate your participation.

Have a good day.