阿美特克 (AME) 2010 Q2 法說會逐字稿

Good day everyone and welcome to this AMETEK, Inc.

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.

Good morning everyone, 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 website at the Investors section ofAMETEK.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 842-3045.

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

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

I will now turn the meeting over to Frank.

Good morning.

AMETEK had an excellent second quarter.

We performed much better than anticipated with broad-based improvement in most of our markets.

Orders were particularly strong, totaling $644 million.

With respect to the second quarter of 2009 this represents a 33% increase.

Sales were up 13% to $591.9 million.

Internal growth was a positive 12%.

Acquisitions added 2% to sales, while foreign currency translation reduced sales by 1%.

Operating income was $115.6 million, up 24% from last year second quarter, reflecting the leveraged impact of our topline performance and the benefits of our lower cost structure.

Operating margins increased 170 basis points to 19.5%.

Net income was up 30% to $67.4 million, and diluted earnings per share were up 31% to $0.63 per diluted share.

Operating cash flow was strong, up 20% in the quarter to $89 million.

Free cash flow was $82 million or 122% of net income.

Turning our attention to the individual operating groups.

The Electronic Instruments Group had an excellent quarter.

Orders were very strong, up 32% over last year's second quarter.

Sales were up 8%.

Our Power and Process businesses where drivers of this strength.

Internal growth was 9%, while foreign currency translation reduced sales by 1%.

EIG's operating income was $73.7 million, up 23% from last year's second quarter.

Operating margins were exceptional at 23.8%, expanding 290 basis points from last year's second quarter, reflecting our topline performance and a streamlined cost structure.

The Electromechanical Group also had an excellent quarter.

Orders were very strong, up 33% over last year's second quarter.

Sales were up 18% with broad-based improvements in both our Cost Driven Motor and differentiated businesses.

Internal growth was 16%.

Acquisitions added 3% to revenue.

Operating income for the quarter was $52.3 million, up 26% from last year's second quarter.

Operating margins were up 110 basis points to 18.5%, driven by higher revenue and our lowered cost structure.

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

We continue to drive lower cost through our global sourcing office and strategic procurement initiatives.

We recognized $7 million in savings in the quarter and expect to generate approximately $25 million in incremental savings this year from these activities.

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

These initiatives helped our performance during the downturn and position us to perform well in the upturn.

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

For the first half of 2010 international sales represented 50% of our total sales.

Asia sales were particularly strong.

During the second quarter our Singapore Aerospace MRO facility received approval from ATR, a leading regional aircraft manufacturer, to begin overhauling starter generators for the expanding fleet of ATR aircraft in the Far East.

This approval represents just one in a string of business wins for the Singapore facility.

This facility opened in August of 2008 and has enabled us to take capabilities from our businesses in the US and Europe to the Far East.

As a result we can better serve global customers with regional support and gain marketshare in this rapidly growing market.

The growing demand for renewable energy sources has led to significant growth in the photovoltaic or solar industry.

AMETEK has devoted considerable resources to developing products that enable photovoltaic research, as well as instrument systems and materials, to support the associated production process.

As part of this growth new materials are being introduced into the industry to improve the capability and efficiency of these products.

As an example, our Reading Alloys business is crushing and [senoring] indium tin oxide to form powder that is used on sputtering targets, which are instrumental in photovoltaic module production.

We believe this market will be a significant growth area for AMETEK in the years ahead.

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

We have consistently invested in RD&E.

This year we are forecasting $109 million, up significantly from last year's level of $101 million.

While no single product is significant to AMETEK as a whole, we are excited about some recent introductions.

Our Programmable Power Division has been awarded a multimillion dollar engineering development contract by Lockheed Martin for the development of the power conditioning unit for the U.S.

Navy ECAS system.

ECAS is the next generation of automated test equipment for naval avionics and electronic equipment used for both shore-based and at sea test applications.

It is expected this development contract will lead to a preproduction order later this year and ultimately a full production order for this product.

We are expecting awards for other applications within the ECAS system, which hopefully will make this a great, long-term program for the business.

Taylor Hobson launched its revolutionary new TalyMaster product line, a significant advancement in measurement technology that delivers roughness, roundness and contour measurements on a single platform at the sub micron level.

Fully automated, it is capable of measuring multiple components without operator intervention, improving measurement reproducibility and lowering operating costs.

From an overall perspective revenue from products introduced over the last three years was 20% of sales, reflecting the excellent work of our businesses in developing the right products to serve their customers.

Since our last conference call we have acquired two companies representing approximately $135 million in annual revenue.

These are highly differentiated businesses that expand our market positions in precision motion control and electrical interconnects.

On July 1 we acquired Haydon Enterprises, a leading manufacturer of high precision motion control products, for approximately $270 million in cash.

Headquartered in Waterbury, Connecticut, Haydon has additional manufacturing operations in Hollis and Milford, New Hampshire and Changzhou, China.

Haydon is a leader in linear actuators and lead screw assemblies for the medical, industrial equipment, aerospace, analytical instrument, computer peripheral and semiconductor industries, with estimated annual sales of approximately $85 million.

Haydon is truly an outstanding addition to AMETEK.

Their product line complements our highly differentiated technical motor business, which shares common markets, customers and distribution channels, and places AMETEK in a unique position as the premier industry provider of high-end, linear and rotary motion control solutions.

In June we acquired Technical Services for Electronics, or TSE, a privately held manufacturer of engineered interconnect solutions for the medical device industry.

TSE has expected annual sales of $50 million.

TSE greatly expands our position in the highly attractive medical device market, and is an excellent fit with our HCC division, which manufactures highly engineered electronic interconnects and microelectronics packages for sophisticated electronic applications.

TSE enjoys an excellent reputation with leading medical device OEMs, many of whom are long-term customers.

TSE's products, which include customized multi-lead and fine wire interconnects, cable assemblies, leads and antennas, serve a number of high-growth, therapeutic sectors, including neuro-simulation, patient monitoring, ultrasound, cardiorhythm management and cardio mapping.

With this acquisition AMETEK's total volume in the medical industry is about $150 million.

We expect to remain active on the acquisition front for the balance of 2010 and are actively working through a very robust backlog.

We have the financial and managerial capacity and disciplined approach to support this acquisition focus.

Our balance sheet is strong, and our cash flow and financing facilities provide us with ample liquidity to pursue this strategy.

Turning to the outlook for 2010, our markets overall continue to show good growth as evidenced by our strong order input this year.

While we are watchful for any effects to our business from a slowing global economy, we are not experiencing any impact at this point.

We continue to believe that AMETEK's strong portfolio of businesses, proven operational capabilities, lower cost structure, and a successful focus on strategic acquisitions will enable us to perform well in 2010.

We now anticipate 2010 revenue to be up low double-digits on a percentage basis from 2009, reflecting a stronger core growth environment and the impact of recent acquisitions.

Earnings for 2010 are expected to be in the range of $2.43 to $2.47 per diluted share, up 27% to 29% over 2009, reflecting the leveraged impact of core growth, our streamlined cost structure, and the benefit from our strategic acquisitions.

This guidance is in line with our announcement last week and up from our April guidance of $2.20 to $2.28 per diluted share.

Throughout 2010 we have been selectively adding resources to support and enhance the growth of the business.

In the second quarter we opened 60 new positions.

Due to our continued strong projected performance going forward, we have decided to add 30 more people to the business, primarily in sales and engineering roles.

Of this 90 additional people, 39 are in BRIC locations.

These 39 are in addition to the 42 people originally budgeted to be added in these locations, bringing the total BRIC country adds to 81 people this year.

Third-quarter 2010 sales are now expected to be up high teens on a percentage basis from last year's third quarter.

We estimate our earnings to be approximately $0.63 to $0.65 per diluted share as compared to last year's third quarter of $0.40, an increase of 58% to 63%.

In summary, AMETEK had a truly excellent quarter.

We performed much better than anticipated, with broad-based improvements in most of our markets.

Our lower cost structure enables us to drive leveraged earnings growth and margin improvement on our improving core growth.

We have a strong balance sheet and generate significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy.

We have acquired more than $135 million in revenue this year and our acquisition pipeline remains robust.

In addition to acquisitions, we continue to make sizable investments in new product development as well as global and market expansion to position ourselves for future growth.

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

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

Our selling, general and administrative costs were up 14% from last year's second quarter, driven by a higher level of sales activities and compensation related expenses.

The effective tax rate for the quarter was 30.7%, down slightly from last year's second quarter.

We anticipate a tax rate of approximately 30% for the full year, reflecting the impact of our tax planning strategies.

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

On the balance sheet our working capital, defined as receivables plus inventory, less payables, was 19.6% of sales for the second quarter, a very substantial improvement from last year's level of 24%.

This excellent performance enabled us to minimize the amount of working capital added to support the 13% growth in business.

Compared to a year ago receivable days improved to 53 days from 58 days, and inventory turns improved by 13%.

Capital spending was $7 million for the quarter and $13 million for the first six months.

Full-year capital expenditures are expected to be about $35 million.

Depreciation and amortization was $17 million for the quarter and $34 million for the year to date.

Full-year depreciation and amortization is expected to be approximately $71 million for the year.

Operating cash flow for the second quarter was very strong at $89 million, up 20% over last year's second quarter.

Free cash flow was $82 million for the second quarter, representing 122% of net income.

For the first half of the year free cash flow was $168 million or 134% of net income.

Total debt was $1.01 billion at June 30, down slightly from year-end.

Offsetting this debt is cash and cash equivalents of $231 million, resulting in a net debt to capital ratio at June 30 of 33.5%, slightly lower than the end of last year.

The cash and debt figures just noted include expenditures for acquisitions through June 30 of $93 million.

On July 1 when we acquired Haydon Enterprises for approximately $270 million net of cash received.

We utilized cash on the balance sheet and borrowings under our revolving credit facility to complete this transaction.

After the completion of the Haydon Enterprises acquisition we had approximately $390 million of cash and credit facilities to fund our growth initiatives.

Clearly liquidity is not an issue for AMETEK.

In summary, we continue to manage our cost structure and balance sheet effectively, maintaining a strong liquidity profile and positioning ourselves to fund our four growth strategies.

Felicia, we will now be happy to take questions.

(Operator Instructions).

Jim Lucas, Janney Montgomery Scott.

First, a housekeeping question, John, payables number.

Sure, Jim, $214 million, up about $10 million in the quarter.

Frank, a couple of questions here.

First, when you look at the 81 people that you're adding in the BRIC countries, geographically where are they being added?

Basically the majority of those people are going into two locations, China and India.

We have a few people that are going into Brazil and Russia, but the majority are going into those two areas.

In terms of -- we had talked last quarter a little bit about Brazil.

Where do you stand in terms of your investment there?

And obviously China and India are the bigger near-term opportunity, but how do you think about Brazil longer-term?

That's a great question.

We think there is an opportunity in Brazil, and we actually have a task team within the Company that is putting together a total strategy for us.

Our investments now are fairly minor, probably on the order of $15 million to $20 million.

But we do see opportunity there, and we are basically taking these countries in order of leverage.

Obviously, we started with China many, many years ago, and have developed substantial capability there.

We have done some in Russian because of the oil related industries in that part of the world.

As you know, we have had a major focus recently in India.

And Brazil is the last one, but we do see opportunity, and when that strategy is completed I would expect that we would make investments of reasonable magnitude in that part of the world as well.

Okay, that's helpful.

When you look across what can only be called a really great quarter, the comment was broad-based, but are there any markets that you can point to that stand out as either exceptional above and beyond what you saw or potentially lagging a little bit that could offer a little bit of a tail here?

In terms of the first part of your question, the answer is absolutely yes.

The market area that showed really significant growth in the quarter was our power and industrial business.

In the quarter it was up above 30%, and that is organically.

We have raised our thought process, which is included in our guidance for that part of the business, to having the year up about 30%.

So that business is really, really doing well.

That was a surprise to us.

It was a surprise coming into the year.

Those businesses tend to be a little bit longer cycle and we didn't expect the rebound to be as significant as it is.

If you look across the whole Company, essentially all of the subsegments that we talk about, which would be process, the power and industrial part in EIG, the differentiated part of EMG, and the cost driven part of EMG, all did extremely well, and actually did better than what we told you a quarter ago.

In terms of aerospace that business is solid, and there are clearly signs that aerospace is going to improve.

As you probably are aware, Boeing and Airbus raised their forecast several times during the first part of the year, which bodes well for 2011 and 2012.

Aerospace for us is holding its own; it is flat, which is what we anticipated.

The second half of aerospace will be stronger than the first half.

So in general there really are no major segments that are -- or subsegments -- that really cause me concern right now.

I think the biggest concern, as I alluded to in my opening remarks, is whether or not we are going to see a global economic slowdown as we go forward, and we are not seeing any signs of it yet, but that could happen, and we will watch it very closely and take the appropriate actions if, in fact, it occurs.

Okay, very, very helpful.

Final question, when you look at the acquisition pipeline, which you characterized as robust, what is the composition there in terms of are they TSE type deals, Haydon type deals?

I am sure there is a mixture of them, but as you're looking at the second half of the year what is the pipeline looking like?

The pipeline looks amazingly strong right now.

And, as you say, there is a mix.

There are a number of potential opportunities TSE like in that $50 million, $75 million kind of arena.

But we also have some larger deals in the pipeline.

We were delighted to be able to get that Haydon Kerk business, we think that is an excellent fit.

We deployed a fair amount of capital, but it is so much of the strategic fit for AMETEK that we are really excited about it.

We are going to get substantial accretion from it and it has really got great, long-term prospects.

So there is a mixture.

It is hard to predict right now what we are going to actually close, but I'm relatively optimistic that we will close more deals as the year goes on.

Great, thank you very much.

Elana Wood, Merrill Lynch.

I just wondering if you could comment on the progression of orders through the quarter and preliminarily what you're seeing in July?

I would say if you look at the orders through the quarter, they were relatively flat.

There was not a big surge in any given month, but obviously very, very strong.

We built a substantial backlog in the quarter, which portends well for the remaining part of the year.

And July continues extremely strong.

Our daily order reports indicate very, very strong performance.

So, as I indicated, we are not seeing, at least at this point, any impacts of a potential slowing in the global economy.

Can you comment also just broadly speaking about demand trends by geography?

Maybe the best way to characterize it, is I indicated that the core growth of the Company in the quarter was 12%.

If you look at this by geography, in Asia our business was organically up about 20%.

In the USA it was organically up about 15%.

In the euro-based economies it was up just a slight amount.

I think it was 2%.

So you are almost seeing an AMETEK volume what is happening globally to these economies with Asia, obviously, leading the trend.

The substantial investments we put there allowed us to even outgrow obviously the GDP in that part of the world.

The US was strong and Europe is lagging.

Then go back to Jim's earlier question about the BRIC Countries, how much do you currently sell into those countries?

And then do you have a formal target, maybe over the next 3 to 5 years?

We don't really have a formal target.

I can tell you that our Asian sales, which are predominantly in China, not totally in China, but predominantly in China, are about 15% of AMETEK's total revenue.

So if we say the Far East is about 20%.

India now, Bill, do you have it there -- about $30 million, I think there?

I think it is in the $30 million region.

That is one of the reasons we are putting investments in that part of the world, as we think we are underserving the market and we see an opportunity.

Russia, again, these are rough numbers, on the order of $20 million.

And Brazil $30 million probably, something in that region.

Then just lastly, do you mind doing a run through of organic growth by the various subsegments in EIG and EMG?

I tell you what, I've got some notes here.

Why don't I just walk through the Company.

A little bit of this will be repetitive to what I said to Jim, but it will give you a flavor of the organic growth and how we are doing the businesses.

Sure, that will be great.

Thank you.

In EIG, I will start with aerospace.

As I mentioned, our aerospace markets remain healthy.

Boeing and Airbus have obviously raised their forecast.

Our third-party MRO and military businesses continue to perform well, while the business jet market remains weak.

As we had anticipated in Q2 our overall aerospace business was flat.

We expect it to be roughly flat for the year.

We see this improvement, the general positive views that we are hearing about aerospace to impact us more in 2011 and 2012, not 2010.

But it is very, very encouraging.

Even within this guidance that second half of aerospace is going to be stronger than the first half.

With the significant cost reductions we have done in 2009 we expect profit for aerospace to be up nicely.

So the basic answer in aerospace is we expect flat in that business.

In process -- our process markets really performed much better than we expected in the quarter.

We had strong growth across most all of the businesses.

Sales were up high single-digits in the quarter.

That is all organic.

We are now expecting this business to grow high single-digits, an improvement from our guidance in April, again, all organic in that part of the business.

I already mentioned power and industrial.

It was up, very, very nicely, greater than 30% in the quarter.

And basically we expect it to be up about 30% for the year, and that is all organic.

So when you sum all of that up for EIG, we are now expecting high single-digit organic growth in 2010, which was up from our April guidance when we talked about mid single-digit kind of improvements in EIG.

Switching to the other half of the Company, looking at EMG, for our differentiated businesses Q2 sales were up high teens on a percentage basis.

That improvement was driven by technical motors, EMIP, and our aerospace third-party MRO businesses.

For 2010 we now expect this business to be up approximately 20%, with half of that being organic.

So about 10% for the differentiated part of EMG.

The last subsegment segment is our Cost Driven Motor business, which continues to show strength.

Second-quarter sales were up approximately 20%; that was all organic.

It is really a broad-based strength across all geographies in this business.

And for 2010 we now expect this business to be up high single-digits organically, which is an improvement from our guidance in April.

So if you sum that up and look at all of EMG, we are now expecting high single-digit organic growth in 2010, also up from our previous guidance.

So for the total Company we are now looking at high single-digit organic growth.

And if things go well, I could easily see us being in the double-digits on organic growth for the year.

Thank you, Frank.

You bet.

Mark Douglass, Longbow Research.

Frank, you mentioned power industrial is really booming for you.

Can you break down -- is it -- pretty much is given by end market demand for your current products or did you introduce a new series of products that opened up new markets?

Is there a mix of what is going on?

I think the first comment is the strength was in both power and industrial.

It was not in one part of this business.

They were very, very strong, and the growth is, I would say, largely driven by end demand, which was very good and particularly in international locations where we are putting those investments in.

So we are seeing the ramp up due to those investments.

We also have introduced a number of new products.

You have heard over the last few conference calls me talking about some of these new products, and they're definitely having an impact.

An example is, I mentioned solar and one of our metals businesses, but the solar area is also a very, very important area for our battery backup systems, where in essence we have systems that can link to remote locations.

We have one in Malaysia, for instance, where we basically link with solar panels, and we have the backup power, which is battery generated, and in essence that is the only power these small villages have.

So it is really broad-based.

There is not a single reason or a single product, it is just broad-based improvement.

You step back from this and you almost look at how our businesses are performing, it is almost following a normal economic cycle, with our short cycle businesses have come back extremely strong.

Our medium cycle businesses are now starting to ramp up.

Power is on what we call the shorter cycle of our long cycle businesses, if that makes sense.

We are seeing it come back.

The last one will be aerospace.

So AMETEK is going to have sort of a second leg to our turnaround when aerospace in fact rebounds, and the signals are good that is going to happen.

Okay, thanks.

How far out does your order book go?

How far does it look out?

Is it more like a quarter; is it a couple of quarters?

What is your backlog?

The backlog is $726 million.

It is up about $77 million from the end of the year.

We put over $50 million in the second quarter in backlog, so it is very, very strong.

I will let John and Bill reflect what we said in our external reports.

Yes, we have a very solid picture of the third quarter, and then, obviously, it tapers off.

But we do have some long cycle businesses that go out 6 to 9 to 12 months.

We are very hesitant to book anything that goes out beyond the 12 months.

So our visibility is very good into the next quarter, and then it tapers off after that.

But we do have some business that gets into the fourth quarter and first quarter next year.

Okay, so your overall visibility in the second half of the year is pretty decent at this point.

Pretty decent; pretty decent.

We have a high level of confidence in the numbers that we gave you.

Then finally the incremental savings of $25 million you talked about, are they still to come?

Did you already book them, and you enjoy the savings -- you already enjoyed the savings this quarter or -- and then --?

No, no.

Basically you're talking about the material cost savings.

And in the first quarter $6 million of that was realized.

In the second quarter $7 million was realized.

The remaining part of the $25 million will be realized over the third and the fourth quarter.

All right, thank you very much.

Christopher Glynn, Oppenheimer.

Just looking at the performance versus your end markets, I know you referring to outperforming GDP because of some of your initiatives, but you have some more cyclical markets in GDP.

I'm just wondering what your thoughts are with regard to comparing your growth to market growth, and really just a little more detail on how the selling strategies are taking effect?

It is a difficult question, because it is very difficult to separate exactly where the growth is coming from.

I don't really have specific numbers that I can give you, but I can tell you in terms of my general feeling is that we are definitely outgrowing the market.

We have put substantial investments in -- during the recession, even prior to the recession.

We did not stop our RD&E expenditures to any substantial degree.

We continued to invest in the international locations.

And when you look at that growth, you can see that growth coming from the geographic areas, where we put those investments, and you can also see it in the subsegments where we put the RD&E expense.

So I am very optimistic that we are, in fact, outgrowing the markets, but it is very difficult in a diversified industrial company to really segment the market growth and how much is coming from A., B., C., or D.

Okay, that is certainly helpful.

Then I am just wondering about the sustainability of the cost structure, again with sales and orders coming back a lot more than we expected that you kind lag on adding back some support costs or anything like that?

Yes, there is no question that we are being very cautious about adding additional cost into the business.

Obviously, there is a lot of discussion about the global economy slowing, and you surely don't want to get ahead of yourself in putting that cost in place.

I mentioned in my opening remarks that we have added additional, or going to add an additional 30 people.

We had that meeting right after the close of our quarter, because we saw these great results.

And I will tell you that the initial requests I got from the operating people were higher than that.

As a matter of fact, I remember the number, it was 49 people that they asked to add.

And what I told them was, let's assume that we do have a downturn; what would we do, and would you add all 49 people?

Basically that is how we ended up at the 30 adds that we talked about.

We are being a little conservative just to feel the economy out, and make sure that basically this thing is not going to sag.

Nobody knows right now whether it is going to sag, in my opinion.

And we will just watch it, and we will take the appropriate action.

But your question is right on that you don't want to get the cost ahead of the economy.

John has another point he would like to make here.

Just to amplify what Frank said, if you look back at what happened in the first six months, extract the acquisitions, our base business headcount is on the up about 235 people, and about 180 of those are on the direct/indirect, the hourly rank.

So we talked about these gross adds, but there have been others cost shifts changes that have happened that have netted down to only about 55 adds in the Company for the salaried ranks.

So we are being very judicious in how we put costs back into the business.

Thanks for that detail.

Just a last one.

Time to call aero aftermarket inflection or still waiting for that event?

That is a great question.

We have had discussions about that internally, and we do believe that there is an inflection point and it is starting to occur.

We actually thought it would probably start sooner than what it is.

But you look at all of the key indicators here, and the prime one is revenue -- passenger miles and what is the general mood in the aerospace industry.

There was a great article in the Wall Street a week or two ago about the airlines, and in essence all of, I think there, I don't know, 8 or 10 airlines in that article, and they were all making money with the exception of American Airlines, which they were predicting a minor loss.

I think American Airlines did come out with a minor loss subsequent to that article.

So they are making money; people are flying.

I think we are going to start to see improvement in that aftermarket business.

And the beginnings of that I am starting to feel -- I am starting to feel from my operating people.

Thanks everybody.

Wendy Caplan, SunTrust.

Could we talk a little bit, Frank, about -- strategically about your M&A program?

I know you have added significantly in terms of numbers to the group.

Is it where you want to be at this point?

And can you talk about some of the -- give some color to that in terms of opportunities relative to geographies, end markets?

And of course, Haydon was bought by -- from the Harbour Group, which is a name we have known for a long time in terms of an industrial private equity group.

Can you address how important those folks -- not specifically them, but others like them are -- how important are coming to you in terms of property opportunities?

Well, if I can remember all those questions, I will answer them.

I'll remind you.

Thanks.

Let's start with the number of people.

As you said, we have added additional people to our M&A trust.

We have approximately 10 people that are spending 100% of their time in the acquisitions environment.

I don't pretend now or believe that we will need to substantially increase that in the next 12 months.

As a matter of fact these people, some of them were rather junior and are now substantially progressing in their capability, so there is more capability in the department just from the viewpoint of tenure.

They are doing a great job.

I mean, the backlog is great.

The deals we are seeing, many of them are proprietary.

And also they know how to close deals.

I don't think I am out of school by talking a little bit about the Harbour Group in the sense that I got a call from their top person after basically we did this acquisition with some very complimentary comments about this group of people in terms of how they handled themselves, how they did the acquisition, when we ran into problems the approach they took, etc.

So I am really feeling really good about this and I think you're going to see it and have seen it in our results.

In terms of the second part of your question, the opportunities from a geographic region -- and this is a little different, I was listening to several of the other industrial conference calls the last day or two, and right now the majority of our opportunities are within the United States, not outside the United States.

And this seems to flow back and forth.

If you go back a number of -- maybe 3 or 4 years ago we did a whole bunch of deals in Europe, and we weren't saying a lot of US acquisitions.

In our space right now we happen to see -- be seeing more in terms of the US than outside the US.

That doesn't mean we are not -- we don't want to do acquisitions outside the US.

It is just if you look at our backlog it does have a US bias.

In terms of end markets if I rank them where the opportunities are, our process businesses are definitely a major area.

There are just lots of companies in the size range in which we are interested in that business.

We've got very strong management capability there, so the backlog is good.

Aerospace, as well, there is number of deals in the pipeline in aerospace.

Our businesses in EMG, both in terms of the metals related businesses as well as the technical motor businesses, a la the Harbour Group acquisition, there is opportunities there.

So it is fairly broad-based.

The key here is to pick the ones that have the best strategic value to the Company, and are reasonably priced.

Some of the businesses are still incredibly overpriced.

The worst mistake we or, in my opinion, any customer could make is overpaying for an acquisition come because you'll never get a return on it.

So we do have to bifurcate with a reasonableness filter, if you will.

In terms of private equity, I think there is two parts to the answer here.

We don't see, and have not traditionally seen, a lot of competition from private equity in our deals.

When I think back, we have lost a few deals over the years, but not many to private equity type companies.

And that is predominantly because we are able to get more synergies than a private equity company can.

On the other side of the coin, in terms of buying from private equity, we love to buy from private equity.

The reason is that in essence they know when they acquire a business they're going to sell it.

So they will clean up any major problems.

If there is environmental issues, they will clean them up.

If the financials of the company, the reporting mechanisms and how solid the financials are themselves are not good, they clean that up.

So they will take companies that are maybe bankrupt and bring them up to a certain level.

We can buy them at a reasonable multiple, which gives them their return, and then in essence we can add strategic synergy on top of that and some of our operating capability that they don't have, and take the second leg of this and get an excellent return.

Sometimes when we go into large companies and buy a division, the financials -- we almost have to start from scratch to generate the financials, because there is all kinds of allocations to the divisions.

Sometimes the environmental problems are not cleaned up to the magnitude you would like, etc., etc.

So sort of a bifurcated answer to that last part of your question.

That was a good run through.

Thank you.

I know you mentioned that India as part of the BRIC countries is important at about $30 million, I think you said in terms of revenue.

Can you give us an update on your presence there and how that is going?

Surely.

It is really exciting what is happening in India.

We started an office there and we really were able to buy two companies, Unispec and Thelsha, back in -- I guess it was 2009, which enabled us to essentially get about 70 people, sort of feet on the street, if you will, in selling.

And also and a very important thing in India is that it is very distributed.

The business is really throughout the country, and you have to have a presence in each of those locations, unlike China to a certain degree.

You can do a lot from Shanghai and Beijing and maybe Chengdu in China, but in India you really need to be in the remote locations.

This jumpstarted our presence there.

We had the field offices from those acquisitions.

Now we are just adding these people into those field offices very much the way we did in China, but in a more distributed way.

Our divisions make those decisions on their own.

We encourage them to look at it, etc.

And that is why the number of people is expanding so rapidly, the costs are lower and the opportunity is high.

The other part of the India strategy, which is really different than the China strategy, is that we are also using it for engineering.

We have started an engineering capability there.

We are going to have, I think, by the end of this year 40 engineers, if my recollection is correct.

And we'll continue to expand it.

I was there -- when were we there, John, a month and a half ago maybe?

Maybe a month and a half ago and when --.

April.

April, okay.

We were there in April.

And when we walked in we had one floor in this facility, and we had really just moved in a few months before that.

The team there who are very, very good said basically we need more space.

So we walked up to the next floor and we basically decided to lease it.

So we doubled our space just in that brief visit.

I think that is going to continue.

So that is a brief rundown.

Thanks, Frank, I appreciate it.

Matt Summerville, KeyBanc.

A couple of questions.

First, just focusing on the process side of the instrumentation business, Frank, historically you have talked about that in a couple of different buckets -- metallurgy, materials science or materials analysis in the oil and gas chemical, petrochemical.

Can you walk through and give a little more granularity on what you're seeing there from a demand or current business trends standpoint?

Absolutely.

I mentioned for this segment we saw high single-digit growth in that part of the business.

If you break it down by those, I will call them sub, subsegments, the oil and gas part of the business, which is roughly one-third business the business has stabilized.

I think we predicted that.

We told you we thought that was going to happen, and in fact it has.

We are seeing some signs of life in that business, but I think stabilization in that piece is the right description of what is occurring.

The metals piece, which is about 25% of that business, is just doing incredibly well, very high growth.

And that is one of the key drivers to that overall subsegment being up high single-digits.

The third part is research.

That is about 20% of the business, and that as well as doing extremely well.

The remaining piece, which is very scattered in terms of the industries that it serves.

I think if you did those numbers that is a little bit over 20% of the business, and in general that is doing extremely well.

So I think the best way to characterize it is oil and gas is stabilized and the rest of the process businesses are doing extremely well.

Thank you, Frank.

Then just a follow-up on aerospace and defense.

I believe the biggest bucket under there is the military side, which is kind of 40% of the business.

How has that business performed year-to-date specifically, and what is your outlook for the balance of the year there?

If you break down our aerospace business, you've got the right number, the military business is basically 40% of the business.

And it has performed quite well.

And we expect mid single-digit organic growth from that part of the business, and we think we are going to get that.

If you look at the other parts of the aerospace, the third-party MRO business is about 30% of the overall aerospace business, and it is up -- we expect to be up high single-digits.

And commercial is about 20% of the business.

We expect for the year it is going to be down about 10%, though again that improvement that I talked about is really out in '11 and '12 great, it is not in 2010.

Then the last part, as I said in my opening remarks, is the business jet market.

It is the remaining 10% of the business.

It is the weakest one.

It was done substantially last year, and our call is down about 15% this year.

There was a little bit of positive news in the business jet area in terms of the feedback from Farmborough.

Farmborough is, I think, more positive in general for aerospace than most people expected.

And business and regional jet were one of those -- that we started to hear a lot of positive comments around business jets.

We have not yet seen that in our order intake.

Allison Poliniak, Wells Fargo.

The acquisitions have given you an increased exposure to the medical area.

Can you talk about through the competitive landscape there, and if there is any sort of specific end market risk we need to be aware of?

Yes, that is a great question.

We have been mentioning that we saw medical as a growth opportunity for many years.

Really it has just materialized to a substantial degree in the last year or two to this $150 million annualized level that I talked about.

The competitive landscape is -- believe it or not, I compare it to aerospace in this way that the key in this business, because we are really supplying subcomponents to the OEMs or to other instrument -- full instrument manufacturers, and the key in getting locked in in that business is the engineering capability.

For instance, with TSE, where we talked about cables and leads and antennas, they go into a product that would be produced by a Medtronic or a GE or a Siemens, a Philips, etc.

The key to the win is they want that product to work and work the first time, and they want to make sure it is engineered, because it is specifically engineered for their end product.

What that means is that once you are selected and do that engineering, basically there is no competition, you're locked in to that business.

And the only way you're going to be kicked out is if you really mess it up somehow.

Because they don't want to go through the expense of requalifying someone else.

The other advantage of medical is that these instruments require FDA approval.

And it is a very similar situation.

Once a GE or a Siemens or whomever our customers gets that approval, it is a big deal to go back and change suppliers, because in essence you've got to have that reapproved by the FDA, unless it is a very minor change.

So you are sort of locked in in the same way that you are in error space.

We looked at the liabilities associated with medical, and basically the products that we supply are not products that remain in the body.

In essence the liability exposure goes up if your products remain in the body.

In some test applications our probes will go in the body, but they are removed as part of the test that is happening, so they don't remain in the body like a pacemaker, for instance.

Therefore, John has done a great job looking at potential liabilities concerns and risks, and we feel very comfortable that the risk of this business is no more than our other businesses in essence.

Great.

Thank you.

Richard Eastman, Robert W.

Baird.

Just a quick question, perhaps.

Frank, could you just dive a little bit further into the differentiated kind of motors, technical motors, and differentiated products.

You touched on one part of that third-party MRO business being up high single-digits.

But earlier you had talked about the entire piece being up high teens.

So given just the definition of everything in there being diversify, but differentiated, which end markets are rebounding that sharply?

Basically the technical motors piece of the business and the metals related piece of the business are the ones that are doing extremely well.

And the third-party MRO is the strongest part of our aerospace business, but it isn't showing the same growth as those two.

So in the technical motor area it is largely our TIP business.

That is Technical and Industrial Products Division, where we have now linked the recent Haydon Kerk acquisition.

And that business is just performing very, very strongly.

Then our EMIP business, which basically is the metals related business, the one I talked about in my opening remarks around the tin oxide type of capability, that business also has rebounded very, very strongly.

So I would say those are the two real strong growers.

Third-party MRO is nice and growing nicely but just not at the levels of the other two.

So really the industrial components within there versus aerospace, or even the medical markets, probably are not up at that kind of rate, so it is really the early cycle industrial pieces component businesses that are tucked in there?

Is that --?

Yes, but medical is also up sizably.

It is both.

But I think in general your comment is right, it is the industrial side.

But no question, medical as part of that rebounding nicely.

(multiple speakers).

At some point do we break out maybe the specialty metals and connectors business, again, from that differentiated piece?

That whole thing is getting awfully sizable, I mean, as we start to break down that piece a little bit so we can track that a little bit better.

Is that a fair request?

It is probably a fair request, but we have already gone to one segment subsegment level beyond what we report.

And I can give you some more color in the future, but we are not going to break it out the way we break out the other subsegments.

Then just lastly, on the cost driven side is there any marketshare gains in there or is that specifically a rebound from last year's very depressed levels?

I am sorry.

I didn't hear the first part of your question.

The Cost Driven Motors business being up 20%, is there any marketshare gain in there or is that strictly a --?

Oh, no, there is definitely marketshare gain in there.

That is an area where we have come out with some really great low cost products, and our capability particularly in Asia to distribute, to gain marketshare there is substantial.

The key fundamental driver in that business, which is actually different than the rest of AMETEK, is that you do when on cost.

One of the key levers that we have is that we can buy material on a global basis, and therefore the material cost is substantially lower than our main competitors.

And the fact that we manufacture in all of the various parts of the world, our competitors don't have a manufacturing advantage over us in terms of labor and efficiencies, etc., etc.

I definitely -- we are gaining share.

And the team in that business has done a remarkable job.

That is the toughest business in our Company to run.

My hat goes off to them, the way they have run it.

At one point there was a dynamic that the vacuum cleaner manufacturers were outsourcing their motor production.

Have we run the table on that dynamic, so now it is a matter of share gains into new manufacturers?

There is still more to go.

There tends to be some ebbs and flows of that business.

It tends to be related to when those OEMs have to make capital investments in their motor lines.

And they will send a request up to their management for a $20 million motor line, and their management will say, no way.

And, therefore, they will come to us than to produce those motors.

So there is more of that to happen.

But your point is right on that a fair amount of that is behind us, but there is still some runway to continue.

Then just one last question.

What is the currency assumption for the second half?

That in essence will have about a negative 1%, I believe, impact on sales.

Is that right, Bill?

Yes.

Yes, negative 1% (multiple speakers).

Total for the second half.

Okay, thank you.

Thanks so much.

Jamie Sullivan, RBC Capital Markets.

Just a quick question on Europe.

I think last quarter you mentioned there was some relative outperformance from your regions in Europe.

It sounds like it reversed a little bit this quarter.

I am just wondering if you could comment on what is going on there?

I think no question there was some slowing in the Europe economy, as many companies are seeing.

And I think it relates directly to what happened over there.

I think it was overblown that the markets to some degree, particularly the equity markets, overreacted to what happened, and that seems to be normalizing now.

There has been a fair number of positive comments in the Wall Street Journal recently about Europe that it probably is better than what was anticipated a month or two ago, but it is definitely had some impact on our business.

Did your orders fluctuate with some of the -- as the concern throughout the quarter got raised and then things normalized a bid, or was it just a general slowdown?

I think general.

That volcano caused some hiccups.

I don't remember exactly when that was, but that caused some hiccups in our business.

But I would say general is the right thought process.

Click on the margins as well.

I think you are expecting somewhere in the 19% -- north of 19% range this year.

I am just wondering with the topline coming in a bit higher and not adding a lot of cost, where you're thinking the shakeout in the guidance (multiple speakers)?

I am pretty optimistic about the margins.

If you look at how we're feeling about the entire year, we think the operating income margin will be up about 160 basis points.

If you compare that to what happened in the first half, in the first quarter, if my recollection is correct we were down about 80 basis points, and in the second quarter we were up this 170 basis points.

If we are saying the whole year is 160, it means the second half has to be stronger by definition.

So we're feeling pretty good.

There could even be some conservatism in our 160 basis point forecast.

Sure.

I guess just some thoughts on longer-term.

When do you think your incremental margins will start to slow a bit when you will have to start adding a bit more cost on, is that into next year?

I am just wondering how we should think about that long term.

Yes, I think in general it is not going to be this year, aside from the types of things we talked about.

If we are sitting here at the end of the third quarter, and we have had another stellar quarter and our outlook is good, we may decide to add more people into the BRIC countries.

That type of investment and growth may be a little bit more in RD&E, but I don't anticipate substantial investment in what I will infrastructure, the manufacturing sort of core of the business, except we may have to -- as John mentioned before, we may have to add some direct people just to get the product out.

But I don't see a major infrastructure investment.

I guess maybe just asked a different way, how much volume increase do you think the business overall can handle from where we are today without having to add a lot of additional cost?

I actually have not analyzed that, but it really is dependent on where it comes.

But if the volume increase is in general on the EIG side of the business, those are all light manufacturing operations, mainly assembly operations, predominantly single shift.

So the infrastructure that you have to add for sizable changes in volume is not that substantial.

You have to add little bit.

If you go to another shift, for inference instance, you have to put another supervisor in and maybe some additional janitorial services or things of that nature, but nothing of significance.

If the volume increase comes more in our businesses like our metals business, and our Cost Driven business, then there could be more infrastructure that has to go in place.

But I don't foresee it in any appreciable magnitude in the next 12 months fundamentally.

Just to build on Frank's point, I think if you look at our bricks and mortars around the world, I don't see anything changing, except perhaps expansion on our plant in Shanghai, which would be modest and well within our capital numbers that we have described to you already.

Thanks a lot.

That's all I had.

Ned Borland, Hudson Securities.

Just one quick one, kind of follow-up on the last question about margins.

If we look at the segment margins they are at the -- they are just below the high water marks of the past.

You've got probably some more positive mix coming from aerospace, and you've got cost savings from global sourcing.

Are we looking at maybe perhaps down the road here maybe 12 months out looking at 25% operating margins in EIG and say maybe 20% in EMG?

It is not crazy, not crazy at all.

We are at a different point because of the restructuring that we did.

So in essence the margin capability of the Company is higher than it was.

So if you get back to similar operating levels in terms of topline, the margins will go higher.

And the kind of numbers you're talking about are, I think, within reason.

I don't think they are out of bounds.

Obviously, we will give you more guidance as we get into next year as to what we think, but I am surely not sitting here thinking we are limited by our margin expansion capability.

Okay, thanks.

Great quarter.

Gentlemen, at this time there are no further questions in the queue.

I will turn the conference back to you for any additional remarks.

I would like to thank everyone for joining our call.

As a reminder, a replay can be heard by calling 888-203-1112 and entering the confirmation code 842-3045 or on the Internet at ametek.com or streetevents.com.

Thank you.

That concludes today's conference.

Thank you for your participation.