阿美特克 (AME) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ametek Incorporated second 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, Camille.

Good morning, and welcome to Ametek's second 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 second quarter results were released earlier this morning.

These results are available electronically on Market Systems and on our web site at the Investor section of Ametek.com.

A tape of today's conference call may be accessed until August 10, by calling 888-203-1112, and entering the confirmation code number 3704298.

This conversation 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 web sites.

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 risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained in Ametek's filings with the Securities and Exchange Commission.

Ametek disclaims any intention or obligation to update or revise any forward-looking statements.

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 delivered solid financial results for the second quarter in challenging economic conditions.

Sales were down 19%, to $524.9 million, internal growth was a negative 21%, with the impact of foreign currency an additional 4% headwinds.

Acquisitions added 6% to growth.

Operating income declined 18% to $93.2 million, falling less than sales, as we properly aligned our cost structure through operational excellence initiatives.

As a result, operating income margins improved 20 basis points.

Net income was $51.8 million, or $0.48 per diluted share.

Cash flow from operations was superb at $74 million, up 13%, over last year's second quarter.

Overall, we're pleased with these results given the difficult economic environment.

Although the global economy impacted our sales to a higher degree than anticipated, we were able to accelerate our cost reduction activities and meet our earnings expectations.

Turning our attention to the individual operating groups, the Electronic Instruments Group did very well in a difficult market equipment.

Sales decreased 17% to $286.3 million, driven predominantly by weakness in the process and industrial businesses.

Internal growth was down 19%, with the impact of foreign currency and additional 4% headwinds.

EIG's operating income cass down 23% for the quarter to $59.8 million, benefiting from a strong focus on reducing costs to counterbalance the drop in sales.

Operating margin were 20.9%, as compared to 22.8% in the second quarter of 2008.

The Electromechanical Group had a solid second quarter given the state of the economy and its impact on group revenue.

Revenues were down 22% with weakness in both the cost-driven and differentiated businesses.

Internal growth was down 24% with the impact of foreign currency an additional 4% headwinds.

Operating income for the quarter was down 22% to $41.5 million.

Operating margins were flat at 17.4%, as very effective cost reduction and operational excellence initiatives were able to offset the impact of the lower sales volume.

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

The results we announced today reflect that focus and our goal of staying ahead of the cost curve.

We expanded operating income margins by 20 basis points, despite a sharp decline in sales.

We are realizing the benefits of the restructuring plan we announced in January, as well as the follow-on plan announced in April.

These two plans totaled $95 million.

Headcounts have been reduced by approximately 1,500 people since the beginning of the year and more than 2,200 people since June of 2008.

At each business unit, Ametek colleagues are implementing cost savings initiatives well beyond the restructuring plan we put in place to drive costs out of the business.

They've done a fantastic job in what are very difficult circumstances.

And I thank them.

As well, our global sourcing office and strategic procurement initiatives continue to be a key driver to reduced costs in 2009.

We are on track to generate $20 million in incremental savings this year from these activities.

In the second quarter, we realized $5.4 million, and for the first half of the year, we generated $9.8 million of savings from these initiatives.

Overall, the total impact of the operational excellence actions outlined above will be approximately $135 million in reduced costs for 2009.

In the first half, we recognized $55 million of these savings.

We continue to invest in global and market expansion and new product development.

These initiatives will help our performance during the downturn and position us to outperform during the upturn.

Global and market expansion continues to be a driver for Ametek's growth over the business cycle.

In the second quarter, international sales represented 50% of our total sales.

A key element of this strategy is the movement of production to low cost locales.

Ametek has three low cost facilities -- Reynosa, Mexico, Shanghai, and the Czech Republic.

Starting in 1997, Ametek began production in these low-cost locales to support our cost-driven motor business.

We have consistently been moving production to these best-cost facilities in a disciplined, measured fashion.

Our differentiated businesses have taken advantage of this low-cost platform, and we now produce significant amounts of aerospace, power, and heavy vehicle instrumentation in Reynosa, Mexico.

Also, we have begun assembly of process instrumentation, scientific instrumentation, and high-end technical motors at our Shanghai facility.

This production capability allows us to produce our products in close proximity to our customers.

As well, a lower overall cost opens new market opportunities for these products.

New product development is the key to our long-term health and growth.

We've consistently invested in RD&E.

This year the total is expected to be approximately $108 million, down slightly from last year, but higher as a percentage of sales.

And while no single new product is significant to Ametek as a whole, we're excited about some recent product introductions.

Ametek has been selected by RFD Beaufort to supply the pilot cooling unit for the F-35 joint strike fighter.

The PCU supplies chilled liquid to a vest which is worn by the pilot.

Ametek currently provides similar equipment to the Eurofighter program.

The JSF-PCU program is anticipated to be worth in excess of $30 million to Ametek over the life of the aircraft.

Ametek aerospace and defense has been awarded a $9.6 million contract from [Mega Defense] Systems, Inc.

for an upgrade of the M1-A2 Abrams main battle tank used by the US Army and Marines.

Our used [trailer] business will provide five heat exchangers per vehicle for this program.

The heat exchangers are used to cool the turret crew and avionics.

Our calibration instruments business unit has introduced a new family of drive lock temperature calibrators, maintaining Ametek's leadership and position in this field.

Incorporating several pending patents, these instruments marketed under the [Joffer] brand name provide greater speed and accuracy in the calibration process.

Our Vision Research business unit released a new flagship model of its high speed digital camera, the Phantom V7-10.

This camera is capable of recording at speeds up to 1.3 million frames per second.

making it the world's fastest digital camera.

The Phantom V7-10 is ideally suited for use in a variety of industries where high speed, high resolution imagery is critical, including industrial and R&D applications, as well as military and ballistics testing.

From an overall perspective, revenue from products introduced over the last three years was 19% of sales reflecting the excellent work of our business in developing the right products to serve our customers.

The pipeline of acquisition candidates is picking up, and we expect it to further improve as the year goes on.

We continue to look to add additional differentiated businesses to Ametek.

We remain a very disciplined, yet aggressive acquirer.

We have the financial and managerial capacity to continue to do acquisitions.

Our balance sheet is strong.

And our cash flow and financing facilities provide us with ample liquidity to pursue this strategy.

We believe this will be a great environment as the price where acquisitions recedes.

Turning to the outlook for the balance of 2009, we expect 2009 to be a very challenging year.

As a result of the continuing global economic downturn, revenue is now expected to decline in the high teens on a percentage basis, with core growth down approximately 20% for the Company as a whole and in each of the operating groups.

Earnings are expected to be approximately $1.85 to $2.00 per diluted share.

For the third quarter of 2009, sales are expected to be down approximately 20% from last year's third quarter.

We estimate our earnings to be approximately $0.38 to $0.42 per diluted share.

The expectations for the third quarter are driven by further weakness in our process markets, and the normal cyclicality of our floor care motor business.

We expect that the third quarter will be the bottom for our business this year.

And that the fourth quarter will be stronger than the third for several reasons.

First, we have large military orders in the backlog that will shift in Q4.

Second, the process market should improve due to higher research instrumentation sales helped by stimulus and other government spending.

We also expect a general improvement in the market for metals instrumentation.

And lastly, the cost reduction initiatives will produce higher benefits in Q4.

In summary, we are pleased with our performance in the second quarter, given the rapid and significant downturn in the economy.

We met our earnings expectations in the quarter, despite a low sales level, as we aggressively attack the cost structure.

Overall, we are reducing costs by approximately $135 million in 2009.

We have a strong balance sheet, generates significant cash flow, and providing us with plenty of liquidity to operate the business and pursue our acquisition strategies.

The pipeline of acquisition candidates remains good, and we believe this will be a good acquisition environment for us.

In addition to acquisitions, we will continue to make sizable investments in new product development and global and market expansion to position ourselves to outperform in the upturn.

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

Thank you, Frank.

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

Selling expenses were down 23% in the second quarter, which is greater than the 19% drop in sales.

Corporate G&A is running at 1.6% of sales year-to-date and should remain at that rate for the year and be down 30% from the 2008 levels.

The effective tax rate for the quarter was 31%, down from last year's second quarter of 32.7%.

For the full year, the effective tax rate is expected to be about 32%, down about 50 basis points from last year's rate.

And 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.

Pension costs are a significant headwind in 2009.

Total pension costs for Ametek will increase approximately $18 million, or $0.11 per diluted share.

These additional costs are included in the earnings guidance that we have given for 2009.

On the balance sheet, capital spending was $9 million for the quarter and $15 million for the first half of the year.

Expenditures for capital in 2009 are expected to be approximately $38 million.

Depreciation and amortization was $15 million in the quarter.

For 2009, depreciation and amortization is expected to be approximately $66 million.

Operating cash flow for the second quarter was excellent, totaling $74 million, up 13% over last year's second quarter, as working capital investments were reduced.

Included in the operating cash flow was an $18 million contribution to our defined benefit pension plan.

Reduced operating working capital needs defined as accounts receivable, inventory less payables, were a source of cash of $42 million in the quarter, driven by reductions in receivables and inventory.

Receivable days were 58 days, down from 59 days last year.

Further reductions in working capital remain an opportunity for us.

Second quarter free cash flow was $65 million, representing 125% of net income.

For the first half of 2009, operating cash flow was $184 million, up 30% over the first half of 2008, and the free cash flow was 152% of net income.

Total debt was $1.06 billion at June 30th, down $35 million from March 31st.

Offsetting this debt is cash and cash equivalents of $137 million, resulting in a net debt to capital ratio at quarter-end of 39%, compared with 44% at year-end.

For the past two years, we have expended 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 results of this work is that Ametek has plenty of liquidity available and no significant debt maturities until 2012.

At quarter-end, we had approximately $570 million of cash and credit facilities to fund our growth initiatives.

Clearly, liquidity is not an issue for Ametek.

We are in excellent shape from a debt covenant perspective as well.

Our debt to EBITDA ratio of 2.1, versus the covenant threshold of three.

Given the strong cash flow and disciplined acquisition strategy, we should remain comfortably below this covenant.

In summary, we continue to manage our cost structure and balance sheet effectively, maintaining a strong liquidity profile, and positioning ourselves to navigate through the current economic downturn.

Bill?

That concludes our prepared remarks.

Camille, we will be happy to take questions now.

Thank you.

(Operator Instructions) And our first question comes from Chris Glynn with Oppenheimer.

Yes, hello.

Good morning, this is actually Chris Wiggins in for Chris Glynn.

Hi, Chris.

How are you?

Just looking at the 3Q kind of outlook it looks like guidance sort of looks for flat sequential revenues but also implies some accelerating decremental margin.

Can you talk a little bit about what is going on there?

Is this price or mix?

Or is this some increase under absorption?

Or any color there?

Actually, as you go from Q2 to Q3, the revenues are down.

They are not flat.

And that is the driver for our EPS estimate that we gave you.

The margins are still extremely good.

We expect for the full year, our margins at the operating income line to be slightly down.

Probably about 50 basis points.

So there is no real pricing pressure that you're seeing?

No, our pricing is reasonable.

We looked in the second quarter, and pricing was up about one point.

And our forecast calls for similar overall pricing performance.

Now that does vary by element of the business.

We're under more pressure in our cost-driven motor business, for instance, than we are in our higher-end differentiated businesses.

But overall, pricing is still reasonable.

Okay.

That's great.

Thank you.

And then just last question, would you mind giving the normal deep dive into the sub-segments that you would typically go through?

Glad to do that.

So let me start with aerospace because I know there has been a number of questions regarding our aerospace business.

And overall, our aerospace business remains healthy, but somewhat weaker than we had anticipated.

In Q2, our overall aerospace business was up mid-single digits.

And for the full year, we expect high single digit growth in our aerospace operations.

Organically, we were down mid-single digits for the quarter and expect similar performance for the full year.

Very importantly, for 2010, we expect relatively flat performance with respect to 2009 in aerospace.

So if we take a look at the various sub-segments of aerospace, about 40% of our business is military, 20% is commercial, 15% is business and regional jets, and 25% is in the third party MRO business that we accelerated the growth in over the last couple of years.

So if we look at each of those sub-segments, for the 40% of the business which is military, due to our focus on helicopters and electronic cooling, coupled with numerous military retrofit and upgrade programs, we expect mid-single digit organic growth for both 2009 and 2010.

With the 20% of our business which is commercial, we expect organic growth to be down high single digits both this year and next.

There are changing dynamics, however, within that 20%.

Of the total 20%, 10% is OEM, and 10% is after-market.

The OEM piece will be up approximately 10% this year, and down about 10% next year based on projected Boeing and Airbus production forecasts.

The after-market piece will be down more significantly in 2009 and 2010.

Counterbalancing the weaker OEM business.

The third part, which is the business and regional jet market, representing about 15% of our total aerospace revenue, is very weak.

And it is expected to be down 30% this year, and another 20% next year.

So about 50%.

However, our third party MRO business is performing nicely and accounts for about 25% of the overall aerospace revenue.

And it is expected to be up slightly this year, and up high single digits next year, on an organic basis.

So our strategy to enter the third party MRO business is paying dividends as our ability to gain share can more than offset the impacts of the economy.

So to sum this up, the growth in our military and MRO businesses is expected to counterbalance weaker commercial aerospace and business and regional jet markets, providing a relatively healthy picture for aerospace in both 2009 and 2010.

Moving on to the process businesses, our process markets weakened significantly in the second quarter, with sales down approximately 20% organically.

The decline was fairly widespread, but oil and gas was a major factor.

We expect our process businesses to bottom in Q3, driven by further declines in our oil and gas-related businesses.

We expect a better Q4, as our research-related businesses, helped by stimulus and other government spending and our metals related business should improve, while our oil and gas business stabilizes.

For all of 2009, we expect approximately 20% negative organic growth.

Power industrial was down mid-single digits in Q2.

Our industrial business was very weak.

Industrial data showed heavy trucks down 58% in the second quarter.

2009 deliveries are now forecasted at 106,000 trucks.

That's for North America, and that's a 48% decline from 2008.

We expect these overall market conditions to continue.

And we estimate overall volume will be down low double digits for 2009.

Organic growth is expected to be down about 25%.

Moving to the other part of the Company and EMG.

For our differentiated EMG businesses, Q2 sales was down approximately 20%.

Our aerospace business, as I mentioned previously, remains healthy in this segment.

The economic slowdown, however, impacted our Technical Motor and EMIP businesses.

We expect the full year 2009 results will be down approximately 10%.

Organic revenues will be down approximately 20%.

And for the last part of our Company, our cost-driven motors business.

We struggled in the second quarter, given the current economic climate, although it appears that we have hit bottom in this business.

Q2 organic growth was down approximately 20%.

For 2009, we expect this business to be down between 20% and 25%.

So that gives you an overview of all of the various sub-segments of the Company.

That's great.

Thank you very much.

You bet.

I will get back in queue.

Alright.

Our next question is from Jim Lucas with Janney Montgomery Scott.

Great.

Thanks.

Good morning.

Hi, Jim.

John, first question, housekeeping.

What was the payables number in the quarter?

Sure, Jim.

$176.5 million.

Great.

Thank you.

Frank, when you look at what has changed between April, when guidance was provided, and now.

Clearly the economy, you have seen several of your end markets worsen, but -- or weaken is maybe the better word.

Can you talk a little bit more about what has changed most significantly from an end market perspective versus the original plan?

Yes, sure, Jim, I would be glad to do that.

The fundamental change that occurred was in our process businesses.

And in particular, the oil and gas-related parts of the process business.

If you break the process business down, about one third of those sales are oil and gas-related.

About 25% is metals instrumentation related.

And about 20% is linked to the research environment.

And the remaining, whatever it is, 22%, is just in various end segments.

And the part that changed dramatically and faster than normal were the oil and gas-related businesses.

And these are very high margin businesses, as we are have talked about previously, and usually we have more lead time in terms of the degradation in those businesses.

And it actually happened very rapidly during the quarter, and really forced us to take a re-look at the overall estimates for the year.

To a lesser degree, from a profit viewpoint, our differentiated part of EMG also deteriorated.

As I mentioned in my opening remarks, or in answer to one question, aerospace business is fairly healthy in that differentiated segment.

But our TIP and EMIP businesses, which are really various industries, we just saw downturns in industries such as semiconductor weakened for us.

Even though some global data says it is getting a little bit better, we didn't see that, we actually saw weakening in our semiconductor-related businesses.

We do a firm-out in our TIP business, and basically business machines, and that weakened as well.

And then there is an oil and gas component in that business as well that showed the deterioration.

So those were really the key changes that occurred, that forced us to re-evaluate our earnings guidance, and also to accelerate our cost reduction activities.

And as I mentioned in my opening remarks, the cost reduction activities have been absolutely superb.

And we've done more acceleration to counterbalance the impacts of these market changes that I talked about.

And still, just a little bit further, in oil and gas what you saw?

Was that more project cancellations?

Could you just give a little bit more color of where were you seeing the weakness?

Was it inventory?

Project cancellation?

Any color of that nature?

I can give you some color, sure.

There is a geographic content, in essence, that the US kind of stopped.

And although there is still a fair amount of activity in international, it is at a reduced level.

And I think you can link it to the rig counts, which we all know are down substantially.

I think there was a delay of the oil and gas companies in terms of turning off their spigot, and they now have done that.

And the impact essentially mounted on us.

Okay.

And finally, on the metal side, you indicated that you're expecting to see some rebound in the fourth quarter.

When you look at the instrumentation that is provided there, is that driven more by the price of metals?

Is it more on the research side?

Could you just give a little more color there, please?

Well, it is actually both.

Our instrumentations go all the way from the lab to the factory floor.

So there is both substantial amounts of instrumentation that are in the production cycle, as well as in the laboratory environment.

And what we've seen here that gives us a reasonable degree of confidence in Q4 is we saw the order rates stabilize during the beginning of Q2, and we are actually seeing improvements in the order rates for that portion of our process businesses, as we speak.

And talking to all of our key customers in this segment, it appears that there definitely is going to be some improvement as we go forward, and we expect that order input that I'm talking about to realize in terms of sales in Q4.

Clearly, to your question, metals prices do have an impact on this business.

And, metals prices are all over the map now, with some going down, some going up.

But there appears to be a situation where I think investments have been held off long enough.

That those investments need to be made now by our customers.

Okay.

Great.

Thanks a lot.

You bet, Jim.

Our next question comes from Mark Douglass with Longbow Research.

Good morning, gentlemen.

Hello, Mark.

Just real quickly, can you repeat -- you said were you expecting $135 million in reduced costs for the year.

That is correct.

And you've realized $55 million?

$55 million in the first half.

In the first half.

Right.

Okay.

And of the balance that is left over, it is more weighted toward the fourth quarter.

Would you say it is 60%-40% or -- ?

Well, I will give you the exact numbers.

It is about $37 million in Q3 and $43 million in Q4 which is -- that is about $80 million, which is the difference, right.

Okay.

Excellent.

Thank you.

With -- through July, would you say that -- have you seen any improvement or stabilization in the semiconductor space that you mentioned?

Is there anything to give you hope that things might get better this quarter?

The book-to-bill in semiconductor equipment seems to have turned the corner, but of course, there have been head fakes before.

I think at the end of the first quarter, the book-to-bill was about 0.5.

And now, it is about 0.75.

So you can look at that as a positive indicator.

But yet, the book-to-bill is still down.

And obviously -- or less than one, I should say.

And obviously, we're very niche-oriented.

And some of our semiconductor business goes into capital goods kinds of environments.

And we saw some weakness in Q2.

And I would say we have not seen any improvement.

I don't think we've seen any further degradation in Q3, but we haven't seen any improvement in that business.

What kind of lag, or is there a typical lag?

Yes, I think it is a three- to five-month kind of lag.

You started to see that book-to-bill go up in the second quarter.

So you might -- we might see some benefit of that toward the back of the third quarter and into the fourth quarter.

But we're not actually forecasting that in semiconductor.

We're not forecasting that business to improve.

Essentially sequentially flat?

Yes.

Okay.

Good.

And then we talk about the process and analytical business again.

With the stimulus -- there is a lot of research of money in there.

Have you seen -- I know there was a flurry of order activity -- early request for quotes coming out of research institutions.

Are you starting to see people actually come through with some orders yet?

Or is there just anticipation that -- in the government's fiscal year that you will see -- ?

There are two parts to the spending.

There is sort of stimulus-related spending and then just general government spending.

And actually, the more general government spending will have a larger impact on this year than the stimulus spending itself.

And what we saw at the beginning of the year, through the first six months, is that I think due to the change in administration and the economic crisis, is those orders were not essentially being let.

And we have seen a huge flurry of activity here in the recent, say four to six weeks, are quoting on those types of businesses, are very, very high.

And obviously, we have the government fiscal year coming up -- year-end coming up.

So that in essence, we're going to book, we believe, a significant amount of business related to what I will call general government spending in research.

And in addition to that, the stimulus dollars are starting to flow.

And we're starting to feel that.

I don't want to call it major.

It is not of the same magnitude as the other spending I talked to.

But it definitely is showing -- starting to show up in our orders.

Again, there is a lot of quoting going on right now.

So we're pretty optimistic that we're going to see an uptick in our business as a result of both of these things.

Okay.

But so far, through July, you haven't necessarily seen orders.

No, I would say the biggest thing through July has been the quoting activity has been extremely high.

Okay.

Thank you very much.

You bet.

(Operator Instructions) Our next question is from Phil Friedman with PW Partners.

Good morning.

How are you doing?

Good.

Can I get a little more clarity on the aerospace businesses?

Sure.

Two questions really.

One is within the business and regional jets.

Obviously, those are different markets with business jets doing much worse than regional.

Can you just give me a split on what percent is what?

And how business jets did in the quarter -- ?

Go ahead.

And then secondly, I might have missed the granularity on this.

But talk again on the commercial aircraft after market.

What happened in the current quarter, and what you're seeing going forward.

Sure.

I actually don't have a breakdown here of the business jet versus regional jet activity.

But I can tell you, anecdotally, basically -- your comments are correct.

That obviously business jets are down significantly, more so than the regional jet business.

And as I mentioned during my walk-through, we expect this segment to be down about 30% this year, and about an additional 20% next year.

So a very substantial reduction.

It is actually the worst segment of all of of our aerospace.

But luckily, it is only about 15% of our business.

So it is not a major driver to the business.

Although I wish it were obviously not 15%, either.

In commercial aircraft, as I mentioned, the overall commercial aircraft business is expected to be down for us, on an organic basis, high single digits this year, and high single digits next year.

But there is a mix shift.

And the mix shift -- about half of our commercial aerospace business is OEM and about half of it is after market.

The part that is OEM, it is going to be up about 10% this year and down about 10% next year, based on present Boeing and Airbus forecasts.

And our after market business, in specific answer to your question, was down on the order of 20% to 25% this year.

And we expect it to be down probably about 4% or 5% next year, because most of that capacity has, in essence, been taken out of the system already.

So we're not expecting a -- major sequential decline next year in that commercial aerospace after market.

And in the second quarter, what was the commercial after market down?

About 25%.

And then you expect that to -- you are saying it it was down 25% in the second quarter, and you expect that trend to continue for the second half?

Yes.

For this year.

And that's what is in our estimates.

Okay.

Thank you.

You bet.

Thank you.

And our next question comes from Rob Mason with RW Baird.

Yes, Frank, do you have an order number for the second quarter?

Yes, it was $485 million.

And then with respect to the restructuring and the savings.

The $135 million in savings that you expect this year, as opposed to to the $115 million I believe you spoke to in the first quarter.

That reflects the acceleration of the cost reductions, correct?

That's exactly right.

Then in relation to the $43 million that you expect in the fourth quarter, is that fair -- should we assume that that is the annualized savings from all of the actions that you will take this year?

And then perhaps whatever you don't realize off that is, this year in '09, is reasonable assuming you capture the balance in 2010?

Bill and I did a rough calculation of 2010, and we expect the total savings from all of these activities that is equivalent to the $135 million would be about $180 million.

Okay.

And then, just what did you recognize in terms of the costs to implement that restructuring in the quarter?

And what you expect in the second half?

Can you answer that one, Bill?

It is not significant in the quarter, and I don't know that I brought that information with me for the balance of the year.

We can give you the full amount of the year, it is on the order of $0.02 or $0.03.

And the reason is that last year we took all of the costs to do this activity, and this year, we're predominantly accelerating that activity.

So the only cost is the non-accruable cost that goes through the P&L, and it is on the order of several pennies.

Okay.

Understood.

And just lastly, could you just touch on your trends through the quarter by geography to the extent that there was significant deviations?

The expectation is perhaps the US, North America stabilizing, and Europe still weakening.

Is that what you saw?

Yes, I would say if you look at the trends, and I will speak more toward the end of the quarter, which would be an indicator of what we're going to see going forward.

And I would say, yes.

Some stabilization in the US.

Europe still showing weakening, and Asia actually strengthening.

Okay.

Thank you.

Sure.

And our next question comes from Jamie Sullivan with RBC Capital Markets.

Good morning.

Good morning, Jamie.

A question on the oil and gas end market.

I know you're expecting some stabilization there in the fourth quarter.

Just wondering what you see driving that?

Is it a stabilization of rig counts that is driving that?

Or something that you're seeing in your pipeline or order activity?

It is actually both.

There is definitely a stabilization of rig counts that is going on.

If you look at the data, and just look back over the last year to 18 months and what has happened with rig counts.

They obviously have gone down significantly.

But more recently, you definitely see -- actually a little uptick at the bottom of that curve.

And when we talk to our customers, there definitely is a feeling that there is going to be a stabilization element of this.

I also think that there is just the normal, when people hold off these orders, they can only hold them off for so long.

And we went out and did speak with the majority of our customers in this segment.

They feel fairly -- I would say -- I don't want to use the word bullish, maybe that is a little too strong.

But they feel that, in essence, their orders are going to be stronger as we get to the end of the third quarter and into the fourth quarter.

Okay.

Great.

And then just on the R&D spend, it sounds like that is down slightly from where you were at the end of last quarter.

Anything there?

Is that just nominal changes?

Or -- ?

Yes, these were very nominal changes.

We are expecting to spend about $108 million this year in RD&E.

I think it is about 5.1% of sales.

And last year, we were at about 4.5% of sales.

So definitely up as a percentage of sales.

Although down just a bit from last year.

Last year's spending was on the order of $115 million.

So very nominal change.

Okay.

Great.

Last question, just on the M&A pipeline.

Has there been any change from last quarter and the activity and some of the -- the spread between prices for buying and where sellers are at?

Has there been any change in the tone of the discussions in the pipeline?

Yes, I would say definitely, there has been some improvement from the end of the first quarter.

Things somewhat stopped at the end of the first quarter, and there is definitely more discussions and more activity going on right now.

There is still a disparity between the pricing between buyers and selling, but I think that disparity is shrinking.

We are heavily involved right now in a number of potential acquisition possibilities.

So I would expect this to get more reasonable as time goes on.

And we obviously -- with the extremely strong cash flow that we have enjoyed, both for the six months as well as what we expect to occur during the rest of the year.

We're pretty bullish that we're going to be able to execute very solidly on our acquisition strategy.

Great.

Thanks a lot.

You bet.

And our next question is from Matt Summerville with KeyBanc.

A couple of questions.

A lot of mine have been answered.

But Frank, can you talk about how incoming orders looked as you progressed from one month to the next in the second quarter?

Are there any numbers that you can put around that?

Then I guess what your incoming order rate looked like year-over-year in July so far?

Yes, it is basically flat is the answer.

So you take that $485 million that I talked to, and it was essentially flat through the second quarter.

And I would say, as I mentioned previously, it has remained flat through the -- through the first few weeks of July.

I haven't seen an uptick in orders.

Are you seeing any activity in your short cycle businesses that has given you any indication that those might be -- that that group of businesses might be poised to turn to the upside between now and year-end?

Yes, I have some optimism even though we haven't put it directly in our forecast that that particular business will show some upturn during the back part of the year.

It has been stable now for probably four months, which is a good indicator.

We're seeing a lot of interest on the part of customers, and there is a lot of activity, particularly in China.

And it would not surprise me if we're sitting here at the end of the third quarter talking about an uptick in that business.

But we have not forecasted that.

If I look at your third quarter guidance, and I just want to make sure I'm clear.

You did about $525 million in revenue in the second quarter of this year.

Implied by your guidance would be somewhere around $510 million, maybe $515 million.

Down 20% over the third quarter of '08.

But yet we're looking at a pretty substantial drop in earnings, and I just want to make sure I understand what is going on from a mix standpoint.

Or am I missing something on the volume side that I'm not thinking about?

You're missing something on the volume side.

I think you're taking the organic number.

I don't know exactly what number you're using.

But we are going to be probably a bit below $500 million in Q3.

Okay.

The margins -- there is no major issues with margins, or changes between segments, et cetera.

The Company from a margin viewpoint is performing admirably.

Obviously, it is a very tough macro environment.

But Frank, this is the second time this year you have had to take your guidance down in a pretty meaningful way.

I guess I'm trying to gauge your level of confidence based on what you're seeing today in Ametek's ability to make sure -- to see this through.

That there aren't more cuts on the way.

Yes, I would be very surprised if we saw any additional cuts as we went on.

I think you have to calibrate Ametek in that we have longer cycle businesses.

So it is not ultra surprising that you would see us on the latter part of this downturn having this this occur to us.

But we have been fairly conservative in these estimates.

We've got a fair amount of confidence in them.

And again, I would be very surprised if, in essence, we were going to take estimates down again.

But again, it is difficult to predict the future.

I want to couch it a bit, but I do have a significant amount of confidence that we have gotten under this.

Thank you.

Sure.

(Operator Instructions) And our next question comes from Allison Poliniak with Wells Fargo.

Hello, good morning.

Hello, Allison.

Just going back to aerospace and defense for a minute.

I think last quarter you talked about it being up low single digits on a quarter basis and now we're looking at a mid-single digit decline in 2009 in the quarter.

Is that really due to the after market part of commercial, which is worse than expected?

Or is it something else?

I would say it was just a softening across these markets.

It was not in any particular area.

It was a general softening that we saw.

And this caused this slight disparate you're talking about of 5%.

It wasn't larger in after market than it was.

Even our military business was just a slight bit down.

So I would say it was just general softening.

Okay , for 2009.

And then assuming your comfort level with revenue stabilizing, there was no significant restructuring activities announced this quarter.

Are we done with those, excluding your day-to-day operational

Yes, I would say that in terms of what we have announced, we're not intending to announce another major restructuring.

We have not fully executed it yet.

There is going to be more execution that happens in the second half of the year, but we don't anticipate another restructuring.

With these reductions that I've talked about, we have reduced our total headcount very substantially, and we think that is adequate to get under the business environment that we're expected to see.

Great.

Thank you.

Sure, Allison.

And we have no further questions at this time.

I would like to turn the conference back over to our speakers for any closing remarks or comments.

I would like to thank everyone for joining us, and if you have any further questions, I can be reached at my office.

Thank you.

That does conclude today's conference.

We appreciate your participation.