阿美特克 (AME) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to this Ametek Inc.

third 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 and Treasurer.

Please go ahead, sir.

Thank you.

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 are available electronically on your market systems and on our website at www.ametek.com/investors.

A tape of today's conference call may be accessed until November 5, by calling (888)203-1112 and entering the confirmation code number 5111340.

This conference call is also webcasted.

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

This 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'll now turn the meeting over to Frank.

Thank you, Bill.

Ametek had an excellent third quarter, sales were up 22% to $647.4 million on strong internal growth of 6% and the contributions from acquired businesses.

If the effects of foreign currency are included, internal growth and sales was 7%.

Also, internal growth in orders was very strong at 7%.

Operating income was up 25% and operating income margin expanded 30 basis points.

Net income was up 24% and diluted earnings per share were up 25%.

Overall we are delighted with these results.

Our key markets remain 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.

See if I can open this.

The electronics instruments group had an excellent quarter.

Sales were up 20% on strong core growth of 8% and the contributions from the acquisitions of Cameca California Instruments, Vision Research and Xantrex Programmable Power.

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

EIG's operating income was up 28% for the quarter, operating margins improved 140 basis points to 22.4% as compared to 21% in the third quarter of 2007.

Electromechanical group also had a strong quarter with revenues up 26%, solid internal growth of 4% and the contributions from the Reading Alloys, Umeco Repair and Overhaul, Motion Control Group, and Drake Air acquisitions drove the revenue growth.

The effects of foreign currency are included.

Internal growth was 5%.

Operating income for the quarter was up 17% to $50.4 million, operating margins were 17.4% this year as compared to 18.7% last year with a dilutive impact of acquisitions the key driver for the change.

In addition to our excellent financial results, we continue to make significant progress in the implementation of our four growth strategies, operational excellence, global and market expansion, new product development and acquisitions.

Operational excellence is the cornerstone strategy for the Company and our relentless focus on cost and asset management has been a key driver to both our competitive and financial success.

At each business unit Ametek colleagues are implementing initiatives to improve plant productivity, reduce cost and increase capital efficiency.

In addition to these business unit level activities, there are some Companywide initiatives that are driving significant financial benefits.

Our global sourcing office and strategic procurement initiatives have been key drivers to increase profitability in 2008.

We expect to generate $20 million in incremental savings this year from these activities.

For the first nine months we have realized $16 million.

We are continuing our migration to best cost manufacturing locales, Reynosa, Mexico, Shanghai and the Czech Republic.

Revenues from these plants is expected to total approximately 365 million to $375 million in 2008, an increase of 40 million to $50 million from 2007.

In the third quarter, as the headlines warned of an impending recession, we decided to take additional actions to preserve our bottom line.

Even though our key markets remain strong.

These actions included aggressive price increases throughout the business to offset larger inflationary cost increases than we have budgeted.

These price increases totaled approximately 1% on a full-year run rate basis.

We also eliminated a number of planned increases to headcount as well as directly reducing headcount.

The total number of reductions was approximately 225 with annualized savings of about $14 million.

These actions were in addition to the $5 million precautionary belt tightening initiatives implemented earlier in the year.

As we move into the fourth quarter and our planning cycle for 2009, it is becoming clear that there will be a US recession and a slowing international economy.

While we believe our exposure to aerospace, power and oil and gas markets will provide a portfolio hedge, we will not be immune to a global slowdown.

As a result we will budget cautiously on the top line and be very aggressive in taking out costs.

This approach served us very well through the last down turn and we believe it will serve us and our shareholders well in this downturn.

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

In the third quarter international sales grew by 19% and were 48% of our total sales.

This growth was driven by our process, aerospace, power and electromechanical products.

A few examples of future international growth.

Caterpillar Japan has awarded our vehicle instrumentation systems business unit the hydraulic excavator switch pad program.

This program is scheduled to launch in 2010 with annualized sales revenue of approximately $5 million.

This win reflects the strength of our partnership with CAT for their global instrumentation needs.

Ametek's solid state controls was awarded a $2.6 million order for battery backup systems for a new nuclear reactor for Korea Electric.

This is the first time in over 10 years that South Korea has purchased imported battery back up systems for a new nuclear reactor.

The reliability and total cost of our system was recognized as a better value proposition than what was available locally.

Another fee avenue for internal growth is new product development.

We have consistently invested in RD&E.

This year the total is expected to be $121 million, up 18% over last year.

Internal growth reflecting the continued strong level of funding and attraction from our design for Six Sigma efforts was a strong 6% overall in the quarter.

While no single new product is significant to Ametek as a whole, we are very excited about some recent customer wins driven by our development efforts.

In the third quarter Ametek aerospace and defense was awarded the electrical heating system on the new Airbus A350.

Heaters from our air technology business unit in the United Kingdom are matched with Amphion controllers developed in the United States to provide heating to the flight deck, cabin, and cargo areas of this aircraft.

This is a very significant win for Ametek with the volume over the life of this aircraft estimated at $215 million.

We are actively involved in additional opportunities on the A350 and expect this to be a great platform for us.

Ametek Taylor Hobson has received initial orders for its Taylor served PGI blue surface measurement instrument.

This sophisticated instrument is aimed at customers that need to measure complex, steep sided optics, including manufacturers of Blu-Ray DVD players.

Two of the leading manufacturers of advanced solar cells have made our Hamilton Precision Metals business unit their supplier of choice for stainless steel substrates.

The ultra smooth finish of Hamilton's product enables their customers to achieve higher manufacturing efficiencies and lowering the total cost of producing their solar cells.

This product has projected sales of over $3 million in the next year.

Overall, revenues from products introduced over the last three years was 19% of sales in the first nine months of 2008, up from 18% last year, reflecting the excellent work of our businesses and developing the right products to serve their customers.

Turning to acquisitions, we have acquired six companies this year representing approximately $240 million in annualized revenue.

These are all differentiated businesses that expand our market positions and analytical instrumentation, aerospace MRO, power, technical motors and engineered materials.

In July we announced the acquisition of the programmable power business of Xantrex Technology, Inc.

with annual sales of approximately $80 million Xantrex' programmable power division is a leader in alternating current programmable power supplies used to test electrical and electronic products.

Xantrex' programmable power significantly expands our position in the niche market for programmable power sources and provides us with future opportunities for growth in the highly attractive electronic test and measurement equipment market.

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

We have the financial and managerial capacity to continue to do acquisitions and believe this will be a great environment as the price for acquisitions recedes.

There's much concern among investors about the slowing global economy.

To date, we have seen minimal impacts to our business.

Though the events of the last several weeks point clearly to a US recession and a slowing international economy.

Our diversified global customer base, significant exposure to long cycle markets, a lack of presence in certain very weak areas of the US economy and our operational excellence capabilities provide Ametek and you as investors with a buffer against this economic downturn.

Some key points.

Our customer base is global with approximately 50% of our sales outside the US up from 32% in 2001.

Our international markets remain strong.

We have significant revenue, approximately $830 million, concentrated in the long cycle aerospace and power markets.

These businesses should enjoy future 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 US economy.

Also we have and we will continue to 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.

Pulling all this together, only about 25% of our sales and a smaller amount of our profitability are exposed to the short cycle US economy.

Our higher profit, long cycle businesses should continue to perform well in an economic downturn and we will continue to react swiftly to the realities of the economic environment.

Turning to the outlook for 2008.

We are optimistic about our prospects for the balance of 2008 and have increased our full-year guidance.

Our key markets continue to be strong, for the year revenue is estimated to increase approximately 20% on mid-single-digit core growth in each group and the annualized impact of acquisitions.

Internal growth at electronic instruments group will benefit from continued strength in our long cycle aerospace and power 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 as well as the impact of the acquisitions we have completed to date in 2008 will also be a key contributor to the top line growth.

We are raising our earnings estimates from our previous range of $2.50 to $2.54 per diluted share to approximately $2.55 to $2.57 per diluted share, an increase of 20 to 21% over the 2007 level of $2.12 per diluted share.

For the fourth quarter of 2008, sales are expected to be up approximately 15% over last year's fourth quarter.

We estimate our earnings to be approximately $0.66 to $0.68 per diluted share, an increase of 16 to 19% over last year's fourth quarter of $0.57 per diluted share.

So in summary, we are 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 22%.

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

Our key markets continue to be strong.

Our operational excellence capabilities, global customer base, exposure to long cycle markets such as aerospace and power, exposure to the energy markets and the impact of our recent acquisitions should enable us to grow both the top and bottom lines and meet our 2008 earnings estimates even as the economy slows.

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

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

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

John.

Thank you, Frank.

Results we are reporting today demonstrate a high quality of earnings, strong margins and a balance sheet well equipped to support our growth plans.

As Frank has covered our results at a high level, I will focus on certain areas of interest.

Selling expenses were up 21% in the third quarter, excluding the effect of acquisitions, selling expense increased in line with our core growth.

Corporate G&A fell to 1.6% of sales as compared to 1.9% of sales in last year's third quarter.

After excluding the charge related -- excuse me.

After excluding the charge related to the accelerated vesting of restricted stock in the second quarter, we expect our G&A spend for the full year 2008 to be about the same as last year in absolute dollars.

With 2008 decreasing to 1.6% of sales versus 1.9% of sales for 2007.

The effective tax rate for the quarter was 31.1%, in line with last year's third quarter.

We expect the effective tax rate for the full year 2008 to be approximately 32.5%.

As we have 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 defined as receivables plus inventory less payables, was 21.8% of sales for the third quarter, down from last year's third quarter level at 22.7%.

We continue to see an opportunity to reduce our working capital investment and we plan to reduce this year's overall percentage going forward.

Capital spending was $11 million for the quarter and $31 million for the year-to-date.

Depreciation and amortization was $16 million in the quarter and the year-to-date amount is $46 million.

For the full year of 2008, we expect the capital expenditures will total approximately $45 million while depreciation and amortization is expected to be about $65 million.

Operating cash flow for the first nine months was excellent, totaling $205 million, up 13% over the first nine months of 2007.

Total debt was $1.158 billion at September 30, up $68 million from June 30.

Offsetting this debt is cash and cash equivalence of $166 million, resulting in a net debt-to-capital ratio at quarter end of 42%, up slightly from 41% at the end of the second quarter.

These ratios reflect the investment of $120 million for the acquisition of Xantrex programmable power.

Over the past 18 months we have spend a significant amount of effort to improve the Company's capital structure and ensure that adequate liquidity was available to support our growth plans.

The result of this work is that Ametek has significant liquidity available and no significant debt maturities in 2009.

To summarize the key actions we have taken during this time, in June 2007 we amended our resolving credit facility to increase its limit from $300 million to $450 million and to extend its maturity date to June 2012.

In August 2007 we closed on a private placement for $450 million in long-term debt.

These 10 and 12-year notes with a weighted average -- at a weighted average interest rate of 6.2% -- 6.25%.

In the third quarter of this year we had several financing transactions.

We paid off $225 million of 7.2% senior notes that reached maturity in July.

We received the final $80 million draw of the private placement we entered into in August 2007.

On September 17, we closed on a new $350 million private placement with a group of institutional investors.

The private placement was for 7 and 10-year senior notes with a weighted average interest rate of 6.93%.

Of the total raised, $250 million was funded at closing with the remaining $100 million to be funded on December 17.

The offering was very well received by the investor base, in a very difficult financing environment, reflecting the strength of Ametek's business model and credit profile.

At quarter end we had approximately $625 million of cash and credit facilities to fund our growth initiatives.

Clearly liquidity is not an issue for Ametek.

Moreover, our debt maturity profile was very distributed.

With only the renewal of our $100 million accounts receivable securitization program required in 2009.

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.

That concludes our prepared remarks.

We will be happy to take questions now.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Wendy Caplan with Wachovia Securities.

Thank you.

Good morning.

Good morning, Wendy.

Frank, when you receive your Thursday sheets from your business -- from the management team, can you talk about whether there's been any kind of reportable change in those sheets in terms of how they are viewing their businesses?

I would say for the key parts of our business, there has not been a reportable change.

The markets that I talked about in my opening remarks continue to be strong and I would say not a significant change.

However, in some spotted areas, I would say of the Company, we are definitely seeing some impacts of the global slowing and I'll speak to a few of those to put the proper color on what I mean.

For instance, our heavy vehicle business, which is a relatively small part of Ametek, about $20 million in volume, the turnaround in that business is clearly moving out in time.

The estimates for next year have come down some from the viewpoint of the agencies that basically look at the number of heavy vehicles that are going to be produced.

It's still up year over year, but not as strong as predicted just a few weeks ago.

Also, we have seen some slowing in our chemical products division, again, a relatively small part of the Company, but they do have some exposure to the automotive markets and that business is weaker and in a few selected spots internationally as well we have seen some weakening with Brazil, for instance, has had some weakening currency related and also some of our floor care businesses in Western Europe have shown a little bit of slowing.

However, in almost all of these cases it's been offset by very strong business in other parts of the globe, for instance, in this European softening I was mentioning, we've had very strong growth in Asia which offset it so you don't see it in the numbers.

So I would say in these very spotted areas we have seen some weakening, but overall the business remains very healthy and very strong.

Okay.

And just to follow-up with that, you've talked about the heavy vehicle business in the past and how you've encouraged the management to seek other markets for the same product or similar product.

Can you help us understand at this point in time which businesses are you kind of keying into in terms of the ones that would suggest a further slowdown for the Company and can you talk about some of the contingency plans for those businesses?

Yes, absolutely.

The key bellwether for us would be our cost driven businesses where the dynamics in those businesses are essentially cost not as much based on differentiation.

So I look very, very keenly at what is happening to our cost-driven businesses on a global basis and the very encouraging thing is in the third quarter they were essentially at about the same level as they were in the second quarter.

We didn't see any real deterioration on those businesses globally.

As I mentioned, there was a little bit of a slowdown in Europe but offset by strength in Asia, but that has also happened when the economy has been strong, we'll see those kind of tweaks.

But that is the leading indicator I would say that I focus on in the Company.

There are a few shorter cycle business in our instruments group that I'll look at, but they are not as significant in mass, so it's not as critical to Ametek.

In terms of contingencies, we really view ourselves right now as being ahead of the cost curve.

As I mentioned in my opening remarks, we basically put a $5 million precautionary belt tightening in place at the beginning of the year and then during the third quarter we added another $14 million in profit improvement programs which are -- which didn't include the price increase I mentioned which was another 1% or $20 million plus.

So if you sum all that up, there's about $40 million of improvement we've already put in with in essence no significant change in our market -- key markets, I would say.

As we go forward, we are going to be very aggressive on the cost side.

We are rolling our budgets up right now.

We have asked our operating entities to assume lower core growth and they will decide what they mean or what we mean by lower core growth and I'm sure we will discuss that during the budget cycles themselves and to be very aggressive on the cost side of the business.

So I would expect when we release our earnings at the end of the year, you'll hear from us another round of cost cutting to line ourselves up with the realities of the global economy.

Thank you.

And one final thing, and then I'll jump off.

Could you quantify the impact of the Boeing strike this quarter and what you're seeing, what you're thinking about it, please.

Yes, I can.

Basically the Boeing strike in sales will cost us 4 million to $5 million a month starting on November 1.

So that means that the impact of the Boeing strike, if it continued through year-end, could be up to 8 million or $10 million in terms of revenue.

The estimates we gave you cover that downside, so, in other words, if the strike lasts until the end of the year, our earnings estimates, we feel, are still solid.

In addition, you may have heard this morning that Boeing is going to resume talks tomorrow actually with their Union and I would hope that this strike would be handled well before the end of the year, but that's obviously speculation on my part.

Thank you.

You bet, Wendy.

And next I'll move on to Jim Lucas with Janney Montgomery.

Good morning, guys.

Hi, Jim.

John, first housekeeping question, payables end of the quarter.

Sure, Jim, $223 million.

All right.

Thank you.

And two questions today, Frank.

First, the price increase that you put through in your comment with regards to commodity inflation, can you just speak to what you're seeing out there specifically, what commodities were impacting you and given what is evolving in the world today, what do you see in terms of price versus inflation going forward?

That's the first question.

Sure.

Okay.

We started at the beginning of the third quarter to become concerned about various commodities that were increasing with the primary one being steel.

At that time the price of steel was about twice what it was, say, a year before that, and we used about 42 million pounds of steel and when you couple that with the fact that we saw the economy starting to slow, we decided that we would put a pricing increase in place.

So we went out to all of our operating units.

It wasn't just those that were affected by that particular commodity, and we said, this is the time to get aggressive on pricing.

We put that extra 1% in and then, of course, what we have seen across the general level of commodities we use is a price weakening where the price of copper has come down substantially.

I saw in the paper this morning it was $2.11 a pound.

Nickel has come down.

At one point nickel was about $22 a pound and is now about $5 a pound.

So what I would hope is that the result of this price increase as we go forward would actually more than offset the cost of commodities and we'd actually see some bottom line improvement across, and of course that's going to be tempered by a likely scenario of reduced organic growth next year.

Okay.

And in terms of -- because that kind of begged the question that there started to be, some people started talking about potential deflationary pressures starting to come back and asking for price cuts in the face of things like copper and nickel coming down.

That's why it was a little bit of a shock to hear price increase.

Right, well, again, it's the timing of when we did it, Jim.

Okay.

And then secondly, as the portfolio has evolved and we hear, piecemeal through the quarters about aerospace and energy, could we maybe spend just a moment talking about where specifically the sweet spots for Ametek is on both the aerospace and energy sides and, particularly with the price of oil coming down, what your outlook there is?

Okay.

Well, it's very difficult to predict what is going to happen, obviously, next year.

If we look at aerospace first, the backlogs in aerospace are extremely high.

Boeing and Airbus combined have about an $800 billion backlog, 7500 aircraft.

So it's clearly possible that you'll see some backlog shrinkage, but even with a fairly large or significant amount of backlog shrinkage, the production rates for next year are still forecasted to be very healthy.

Airbus came out and talked about basically they were not going to increase their production as much as they had originally indicated and when we first saw those numbers, we got concerned.

We went and looked and they are still talking about producing even with that 9% more aircraft next year than this year.

So I think it's reasonably safe to say that for next year the commercial aircraft production is going to be okay.

You could see a weakening in 2010 or '11 but I think next year at least at this point in time looks fairly secure.

From the viewpoint of the military aircraft business, it is just humming for us and it's a result of the fact that we decided to invest in cooling and electronic systems and our orders and that business has actually strengthened through the third quarter, so very, very good performance and I don't want to really predict what is going to happen next year.

We'll get into that in the budgeting process.

But I've seen no indications of weakening.

So I'm still fairly bullish on aerospace.

There is going to be some weakening as the capacity cuts on the MRO side next year, but, again, our exposure in particular to the US side of that, which is the one that's announced the most significant cuts, is pretty small.

It's about $50 million.

So I'm not overly concerned about it.

So right now aerospace still feels okay to me because of where we invested in and the key strength in the military side of the business.

In the energy markets, that's more difficult to predict because the backlogs are not as far out in those particular businesses and we went around and talked to a bunch of our customers and asked them what level the price of oil are -- are their investments based on and they came back with numbers in the 50 to $55 a barrel basically as the price that they are investing.

So if we see that price of oil get down in that range, it will definitely have an impact on our business.

I looked this morning and oil was at $75 a barrel, roughly, yesterday and at that level I think we are still going to be okay, but, obviously, the margin here is getting narrower and we definitely could have an impact on -- on our energy businesses.

Now, just the last point I would make on this is that the process side of our business, which is a fairly healthy part of Ametek, only about half of that business is really related to what I would call the energy markets.

The other half is related to other types of activities.

So, again, the Ametek portfolio provides some buffer if we do see some shrinkage in energy.

Okay.

And finally, on acquisition multiples, have you seen any sort of reality starting to creep in there?

Yes.

I would say that's a good way to word it.

We have seen some reality come to play in the acquisition environment and the -- I'll call it the prebubble, we were -- we were paying multiples in the 7.5 time frame during the bubble when financial debt was very, very easy to get, we saw those multiples go up to the 9 times region and I actually did a calculation last night and what we have bought this year has averaged about 8, and I think, we are starting to see that move down and hopefully within the next quarter or two we will be back to sort of that prebubble level.

So we view this as an opportunity.

John did a great job and Bill of getting the financing for the Company right before the Wall Street blew up, in essence.

We've got the cash and we are going to be aggressive in the acquisition area and take advantage of the fact that these multiples are going to go down.

Okay.

Great.

Thank you very much.

You bet.

And next we'll move on to Amit Daryanani with RBC Capital Markets.

Thanks.

Just a quick question, guys, on the 225 headcount reduction, I think you guys talked about $14 million in annual savings, how much of a severance charge that you had to take for that and did it flow through the P&L this quarter?

Yes.

Basically, we have taken the philosophy as pay as you go as you're well aware of all of the restructurings that we have done and in essence we have paid for this out of our earnings stream and the amount was not a material amount.

All right.

And then I think you talked about some potential belt tightening measures moving forward as well.

Is there a dollar amount of cost savings that you're potentially looking at?

No, we have not at this point put a specific target on the additional cost reductions that we expect to incur or look at for the fourth quarter and going into next year.

We are basically going to go through the entire Company.

We have a very sophisticated budgeting process and as I mentioned, we are going to ask our businesses to keep the top line at a low level in comparison to what they think from an organic growth viewpoint and we'll put significant pressure on the cost side of the business and as I mentioned, I would expect that in the January conference call we will update you on exactly what we have done, the magnitudes, where, et cetera.

Fair enough.

Just one other follow-up question for you guys.

I think you were talking about price increases a while was 2% in Q2, 1% this quarter as a tailwind.

Given the commodity deflation you're seeing, Ii'm curious, do you see a scenario where those may reverse and actually become a headwind where you may have to give back the price increases to your customers?

Let me just talk to your numbers for a moment.

Actually, in the third quarter the pricing increases were 2.2%, that was the total for the quarter.

And during the quarter we put another 1% in place.

So, going forward into the fourth quarter that would amount to a number like a 3% price increase in total.

Yes, I would definitely expect that our customers over time will put pressure on us to reduce pricing.

There's absolutely no question about that.

As a matter of fact, some of our contracts basically change the pricing as a result of commodities where we cannot in essence put some of these price increases through.

So we'll definitely have pressure back.

However, we believe we are ahead of the curve here.

We believe that we struck just at the right time on price increases that to go out today and try to do them would be much more difficult than it was when we put them in place beginning at the start of the third quarter and we think we're ahead of the curve and that's where we like to be.

Fair enough.

Thanks a lot.

You bet.

We'll move on to John Baliotti with FTN Midwest Securities.

Good morning.

Good morning.

Frank, if we could -- just a quick question on the deals that kind of like the business that you're looking at going forward, are you seeing any change in the over-- sort of in very general terms the health of some of those -- I mean, historically on average the businesses you buy are smaller.

Any dynamic changes in terms of their health?

Well, I think you're going to see that as time goes on.

You're going to see probably a bifurcation where there definitely will be companies out there that I would classify as not good companies that are having major, major earnings problems and we tend to stay away from those companies.

We like to look at companies that are undermanaged, to use our words, where in essence the pretax profitability of those companies is in the 10% region, and I think we are going to see more of those available, but I also think you're going to see a lot more companies that almost have to sell because of the economic environment and in general we will stay away from the -- I'll call them the bankrupt companies.

Yes.

On the other side, on the customer side, obviously given the strength of your margins, overall your products are obviously being viewed as more valuable and I'm wondering, in this environment is there any change in customers as they make some headcount cuts and some cost cuts, are they leaning on you more for more of the work that they might have been doing in the past?

Is that a dynamic change at all that you're seeing now or has that been -- is that the same thing that's been going on for a while?

No, I haven't seen that dynamic to any large degree.

I mean, I'm sure in some of our businesses we are seeing some of that, but it's not a meaningful factor in our performance, at least at this point.

Has it been, I mean, in terms of people -- Ametek being more of -- doing more of some would say some of the development work for them that maybe in the past, let's say 5 or 10 years ago they may have been doing themselves or?

Well, I think we have seen a general trend in that direction over the last 5 or 10 years but I don't think it's -- we haven't seen it accelerate in the last few months.

Right.

I don't think the full impacts of what's happened in the last few months are obviously still embedded in our customers yet, but that very well could happen and we could see more of it.

We have seen that in aerospace in the past where when things weaken, they will basically have more outsourcing of their engineering activities and we will benefit from that.

Right.

Okay.

Great.

Thank you.

Okay.

And our next question we will hear from Chris Glynn with Oppenheimer.

Thanks.

Good morning.

Good morning.

Just would love a little detail on the underlying operating margins of the busy especially with Xantrex in at the instruments group, maybe not much of an impact this quarter, had it for maybe a month, but what's that doing underlying and going forward, what kind of impact from Xantrex would we think about?

I can't specifically answer your question on Xantrex I haven't run those numbers.

But I can give you this detail, that when I spoke to the margins in the Company being up about 30 basis points, there was about 85 basis points of dilution due to all the acquisitions that we have done.

That's the calculation that we have run.

So we are definitely, and we will continue to see dilution on the margins, but, obviously, our overall margins are up, which means the core business, the margins are superlative.

And we think this is the right model because the return on invested capital when we buy these companies at a 10% pretax, even though there is some dilution on the margins themselves, the actual return, because we will take these 10% companies and as you know, in a very short period of time make them 20% companies, the return on invested capital is just off the charts and that's the right utilization of cash from our viewpoint and we will accept some dilution on the top line due to those acquisitions.

Okay.

And then any chance getting the 85 basis points dilution at the segment level or at least directionally assume greater impact at EMG, obviously?

Actually not.

It was about the same in each of those businesses.

So there was not a substantial change.

Remember, we have done a bunch of acquisitions, some last year, some this year.

There's probably 8 to 10 acquisitions rolling through those numbers.

So the total amount was about the same on each part of the Company.

Okay.

And then lastly, the oil and gas, talk about the 50 to $55 a barrel threshold.

If that's the literal level, what's the anticipatory factor, arguably in free fall or at least prospects that it is that the investment anticipates well ahead of that literal level of oil?

That's a question that I can't answer in reality.

I mean, it's very difficult and it's going to vary from customer to customer, but I don't think there's going to be panic in the, major change in the investment levels until you get down near that -- near that level.

Thanks.

Appreciate it.

You bet.

Next we'll move on to Matt Summerville with KeyBanc.

A couple questions.

Frank, can you remind us back in 2001, 2002, how much of your business you would characterize as cost driven and then where that run rate was in the third quarter?

From my recollection it was on the order of a third of our business and now it's on the order of approaching 10% of our business.

Okay.

Great.

Thanks.

And then you typically go into a little bit more detail on the division performance by segment for the quarter.

Can you go into that, please?

You mean take a walk through the Company.

Yes.

Is that what you're asking, Matt?

Sure.

Yes, I have notes here that I'll read from.

If we start with EIG, as I mentioned in my opening remarks, sales were up 20% for all of EIG in Q3 with very good organic growth of 8% and if the currency is included, that organic growth would have been -- or is 9%.

I've already mentioned our long cycle aerospace business, the markets remain strong.

Boeing and Airbus, again have very strong backlogs.

Cessna's backlog is $15.6 billion.

That's up $3 billion since last year-end and they are sold out for three years at the 2009 build rate and Cessna is a very large customer of ours so we are going to enjoy continued strength with them.

As I mentioned, military business was very, very strong in the quarter.

Again, given our focus on electronics and helicopters, organic growth for aerospace was up high single digits in the quarter and for the full year we expect internal growth to be up high single digits so very, very good performance.

Our process businesses remained strong during the quarter, in particular three of our divisions in this area, process and analytical instruments, measurement and calibration technology and our advanced measurement technology divisions were very, very strong.

The new products are doing well.

Q3 internal growth and the process businesses was up high single digits, total growth with acquisitions was up high teens on a percentage basis and for the full year organic growth should be up mid single digits.

And the last part of the instruments group, which is power and industrial, continues to do well.

Q3 was up high single digits organically driven by strength in power with acquisitions it was up about 40%.

So very, very strong performance here.

Full-year organic sales are expected to be up at least mid single digits and we might get even a little higher than that if things go well.

The other half of the Company, the electromechanical group as I mentioned in my opening remarks, sales were up 26% in the quarter.

Organic growth here was 4%, 5% if currency is included.

The differentiated part of EMG continues to be very strong.

It's now about 75% of EMG sales.

Our aerospace and defense-related businesses were very strong in the quarter.

Our engineered materials interconnect and packaging business also had an excellent quarter.

Q3 internal growth was up high single digits, total growth with acquisitions was up approximately 40%, full-year organic sales are expected to be up high single digits.

So again very good story and our cost driven motors business was doing fine and we were somewhat surprised, actually.

Q3 growth was down slightly, which is essentially where we were in Q2.

It was down slightly then.

And as you're aware, we run this business for maximum profitability versus growth.

We are continuing to move production to low cost locales, including our China, Mexico and Czech Republic plants and as I mentioned in my opening remarks, we expect another 40 million to $50 million to be in those plants for 2008.

We also have a very keen focus on lean, efficient manufacturing, low cost region sourcing for this business and for all of Ametek our low cost region sourcing is going to provide in 2008 about $20 million worth of savings.

So we expect here the full-year organic growth is actually expected to be roughly flat and for Q4 we actually expect even a little bit of growth in this part of our business.

So it's hanging in there.

So you sum all this up and the picture is pretty darn good right now.

As you look across going through -- progressing through the quarter, did you see any major change in order rates as the quarter progressed?

No.

Actually, we had a fairly strong September and the orders were essentially flat, steady.

Yes, John's words are better, steady.

Great.

Thank you.

You bet.

(OPERATOR INSTRUCTIONS) Next we'll move onto Richard Eastman with Robert Baird.

Could you give us an order number for the quarter for the third quarter and how the core orders performed year over year?

I'm doing it from memory, John.

I think it's 641, $641 million.

Is that right?

John is looking it up.

And the core growth was 7%.

Okay.

So it matched.

Yes.

641.

I had the right number, Rick.

I'm sorry?

It was 641.

Okay.

Thank you.

And then also, Frank, when you look at the margin profile of the business overall and really by segment as well, as we move forward, it appears as though the EMG margins may be flattened out around this 17.5% mark, and, EIG perhaps as well in the 22 -- low 22 range, and, is the strategy here, we're bumping price to get ahead of the cost curve, we also have some mix influence in the business, but if volumes fall off, I mean, should we be thinking that margins remain flat here at this reasonably high level?

I mean, how are you kind of looking at this over the next 12 months?

We are taking costs out, we're raising prices, we got a mix influence but again, if we start to look at a lower core growth rate, are we putting extreme effort into trying to maintain the margins here?

There's no question there's going to be significant energy put into not only maintaining our margins, but trying to improve them, and necessarily it's going to be more difficult as the organic growth of our businesses recedes, which is going to happen as we go forward.

However, having said that, this really speaks to the strength of Ametek.

We are really good at the cost side of the business and we are going to be very aggressive on the cost side and I'm not going to predict next year exactly what the margins are going to be.

It would be impossible for me to do that right now given the dynamics that are going on, but that will be a key focus in our budgeting process and I feel I've got a lot of levers to pull to not only keep the margins where they are, but hopefully even show some improvement.

The biggest issue we are going to have on margins is the dilution impact of acquired companies.

Okay.

All right.

And then just the last question, geographically you talked a bit about the growth rate.

I think you said 48 or 49% of sales were international, but, obviously, the concern these days is about international business perhaps slowing down, especially in Europe.

Did you see any change in your order pattern, geographically during the quarter or are you more concerned going forward about your international operations?

The order patterns were good.

We looked at it on a worldwide basis and in essence orders were up and relatively healthy in all parts of the world.

There was the spotty business I talked about in answer to one of the previous questions regarding some of the cost driven businesses in Europe showed some weakness in the quarter, but that was in essence offset in Asia and, yes, I'm obviously concerned about the whole worldwide economy, not just in any specific part of the world.

I mean, the cover of the Wall Street Journal this morning was that China's growth was basically moving from the 10% kind of growth area, 10 or 11%, down to 8 to 9, so I don't think there's any question but what we are going to see a slowing global economy and we are just going to have to deal with it as it happens.

Okay.

Okay.

Well, thank you.

Sure.

And there are no further questions at this time.

I would like to turn the call back over to Mr.

Burke for any additional or closing remarks.

Thank you.

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