阿美特克 (AME) 2010 Q3 法說會逐字稿

Good day, everyone.

Welcome to this AMETEK, Inc.

third-quarter earnings conference call.

This call is being recorded.

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

Bill Burke, Vice President of Investor Relations and Treasurer.

Please go ahead.

Thank you, Mark.

Good morning, everyone, and welcome to AMETEK's third-quarter earnings conference call.

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

AMETEK's third-quarter results were released earlier this morning.

These results were available electronically on market systems and on our website at the investor section of AMETEK.com.

A tape of today's conference call may be accessed until November 9 by calling 888-203-1112 and entering the confirmation code number 448-1776.

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 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, and good morning.

AMETEK had a record third quarter.

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

Orders were particularly strong, totaling $704 million.

With respect to the third quarter of 2009, this represents a 47% increase.

Sales were up 30% to $644.4 million.

Internal growth was a positive 24%.

Acquisitions added 8% to sales while foreign currency translation reduced sales by 2%.

Operating income was $128.6 million, up 66% from last year's third quarter, reflecting the leveraged impact of our top-line performance and the benefits of our lower cost structure.

Operating margins increased 440 basis points to 20%.

Net income was up 80% to $77.4 million and diluted earnings per share were also up 80% to $0.72 per diluted share.

Operating cash flow was very strong, up 59% in the quarter to $114 million.

Free cash flow was $105 million or 135% of net income.

The third-quarter results established records for operating income, operating income margin, net income, diluted earnings per share, and operating cash flow.

Turning our attention to the individual operating groups, the Electronic Instruments Group had a tremendous quarter.

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

Sales were up 24%.

Our process, power and industrial businesses were drivers of this strength.

Internal growth was 26% while foreign currency translation reduced sales by 2%.

EIG's operating income was $83 million, up 73% from last year's third quarter.

Operating margins were exceptional at 24.6%, expanding 700 basis points from last year's third quarter, reflecting our top-line performance and a streamlined cost structure.

The Electromechanical Group also had an excellent quarter.

Orders were very strong, up 68% over last year's third quarter, of which 32% was organic.

Sales were up 36% with broad-based improvement in both our Cost Driven Motor and differentiated businesses.

Internal growth was 21%, while acquisitions added 16% to revenue.

Foreign currency translation reduced sales 1%.

Operating income for the quarter was $55.8 million, up 46% from last year's third quarter.

Operating margins were up 120 basis points to 18.2%, driven by higher revenue and our lowered cost structure.

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

Operational excellence has many facets within AMETEK, including lean manufacturing; Six Sigma in our factories and back office operations; design for Six Sigma in our new product development efforts; and the movement of production to low-cost locales.

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

We recognized $7 million in savings in the third quarter and expect to generate approximately $27 million in incremental savings this year from these sourcing activities.

Operational excellence was the key driver in our 20% operating income margin in the quarter, an all-time record for AMETEK.

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

For the first nine months of 2010, international sales represented 49% of our total sales.

All geographies, including Europe, showed solid, double-digit organic growth.

Growth in Asia was particularly strong.

AMETEK's vehicle instrumentation systems business unit was recently awarded the instrumentation cluster for the Chinese medium wheel loader and the D9 tractor.

Both of these products will be manufactured in our Shanghai facility.

We are continuing our expansion in the BRIC countries, adding incremental resources and infrastructure.

We are in the process of recruiting over 80 additional people in these countries and see substantial growth opportunities as we move forward.

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

We have consistently invested in RD&E.

This year, we're forecasting $112 million, up significantly from last year's level of $101 million.

We are excited about some recent introductions.

Our HCC business unit received its first orders for a new highly engineered thermal plastic connector system for the downhole oil and gas industry.

This new connector, made from a material called PEEK, will be used by oil field service companies to provide electrical interconnects on measurement devices used during the drilling process.

PEEK, which stands for Poly Ether Ether Keytone, is a competitive leap, replacing less capable materials in this very demanding application where the electro connection is subject to a very harsh environment, including high temperature and high pressure.

Our oil and gas business unit has recently introduced a CO2 core flow analyzer which features precision delivery of carbon dioxide using their proprietary Quizix pumping systems.

This instrument is used by oil field operators and service companies to simulate the injection of CO2 into a producing formation.

This enables the operators to optimize recovery of oil where easy-to-produce oil has already been extracted.

This technique offers the prospect to produce up to 50% more oil from existing reserves.

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

This year, we have made two acquisitions representing approximately $135 million in annual revenue, as well as three small technology acquisitions.

The latest of these acquisitions was Haydon Enterprises, which was acquired on July 1 for approximately $270 million in cash.

Haydon is a leading manufacturer of high-precision motion control products, headquartered in Waterbury, Connecticut.

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.

The integration of Haydon has gone very well, and we expect great things from this business going forward.

We remain very active on the acquisition front and are actively working through a very robust backlog.

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

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 mid teens 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 $2.57 to $2.59 per diluted share, up 35% to 36% over 2009, reflecting the leveraged impact of core growth, our streamlined cost structure, and the benefits from our strategic acquisitions.

This guidance is up from our previous guidance of $2.43 to $2.47 per diluted share.

Fourth-quarter 2010 sales are now expected to be up approximately 20% on a percentage basis from last year's fourth quarter.

We estimate our earnings to be approximately $0.68 to $0.70 per diluted share as compared to last year's fourth quarter of $0.48, an increase of 42% to 46%.

In summary, AMETEK really had an excellent third quarter.

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

Our lower cost structure enables us to drive leveraged earnings growth and sizable margin improvement.

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've 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 & Market Expansion to position ourselves for future growth.

John Molinelli 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 and general and administrative expenses were each up 19% over last year's third-quarter levels.

These rates of increase were significantly below our sales growth rate of 30%.

The effective tax rate for the quarter was 28.9%, up slightly from last year's third-quarter rate of 27.6%.

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, working capital, defined as receivables plus inventory, less payables, was 19.2% of sales for the third quarter, a substantial improvement from last year's level of 24.6%.

This excellent performance enabled us to minimize the amount of working capital added to support the 24% organic growth in the business.

Compared to a year ago, our collection cycle improved to 52 days from 60 days, a 13% improvement.

Inventory turns improved by 15%.

Capital spending was $10 million for the quarter and $22 million for the first nine months.

Full-year capital expenditures are expected to be about $33 million.

Depreciation and amortization was $18 million for the quarter, and $52 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 third quarter was very strong, at $114 million, up 59% over last year's third quarter.

Free cash flow was $105 million for the third quarter, representing 135% of net income.

For the first nine months of the year, free cash flow was $272 million or 134% of net income.

Total debt was $1.1 billion at September 30, up $65 million from year end.

Offsetting this debt is cash and cash equivalents of $135 million, resulting in a net debt-to-capital ratio at September 30 of 36.8%, unchanged from a year ago.

The cash and debt figures just noted include expenditures for acquisitions through September 30 of $374 million.

During the third quarter, we refinanced a maturing GBP15 million borrowing that carried a 5.96% interest rate with a new 10-year GBP80 million borrowing at a rate of 4.68%.

At September 30, we had approximately $536 million of cash and existing credit facilities to fund our growth initiatives.

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

Bill?

That will conclude our prepared remarks.

Mark, we'll be happy to take questions now.

(Operator Instructions).

Jim Lucas, Janney Montgomery Scott.

Thanks.

Good morning, all.

First question, John, housekeeping, payable number?

Sure, Jim.

$228 million.

All right, thanks a lot.

And, Frank, clearly a lot of good things coming together here, and was wondering if you could just give us a little bit of update on two particular end markets, aerospace and the process side?

Okay.

Let me start with the process side.

Our process markets performed better than expected in the third quarter, really with strong growth across all the businesses.

The major change was in our oil and gas portion of process, which showed sizable improvement in the quarter.

Also, our materials analysis and ultra precision technology divisions were particularly strong.

Sales were up organically about 25% in process.

And, if we look for 2010 now, we expect this business to grow low double digits organically, an improvement from our guidance in July.

So we have seen substantial improvement in our process businesses, and obviously, they are very high-margin businesses, which has been a positive factor in the quarter.

Moving to aerospace, aerospace markets remain very healthy and are performing quite well.

As I'm sure you are aware, Boeing has raised their shipment forecast for 2011, 2012, and 2013, a clear sign that market conditions are improving for commercial aerospace.

As anticipated in Q3, our overall aerospace sales business was flat.

And actually of all the subsegments, that's the only one that didn't show sizable growth, but obviously, again, that was as anticipated.

However, a really good sign is that orders were up 28% in the quarter, and we expect high single-digit growth in Q4 sales.

So a real good indicator that things are improving in aerospace and very importantly, we expect for 2010 to see growth in our overall aerospace business.

So as I mentioned in the last conference call, you could almost see the turnaround in the economy come through AMETEK's businesses with our short-cycle businesses up first and then our midcycle businesses first sort of the lower end of the midcycle, and now the oil and gas, which is the longer end of the midcycle.

And now the signs are that aerospace is improving, which is a positive for AMETEK because many of our peer companies don't have this second leg of turnaround with long-cycle businesses.

And within -- just a follow-up on that -- within oil and gas, what particular areas have you been seeing the strength?

And within aerospace, you touched on the commercial side, but you could give us an update on what you're seeing on the military side, which had been a particular area of strength for you?

Yes; in the process side of the business, in the oil and gas portion of that business, strength was broad-based.

It was really both in the US and internationally.

We saw good growth in both natural gas, even given the fact that the price of natural gas is down, as well as in oil rigs.

And obviously if you look at the rig count on the natural gas side, rig counts are up about 34% on a year-to-date basis.

So we are enjoying that turnaround.

And the Gulf situation, we didn't have a lot of volume in the Gulf, and the land-based part of the US market is doing just fine.

So, oil and gas is clearly turning around, but it isn't just a story of oil and gas and process.

All of our metals businesses in terms of analytic instrumentation are used to measure elemental composition of metals -- did extremely well.

And our research side of that business also did well.

So it was really across the board.

If you -- why don't I walk you through the various parts of aerospace, Jim, just to give you a flavor of what's happening.

Our military business, which is about 40% of our total aerospace business, was essentially flat for the year.

The third-party MRO business, the recent acquisitions we've done over the course of the last number of years, which is about 30% of the business, showed great growth.

It was up on the order of 20%.

If you look at the commercial side for the year, we expect that it's about 20% of our business and we expect it to be down about 15%.

But again, the signs are good, and we're starting to see improvement in that part of the business.

And lastly, the business in regional jet, we're also starting to see signs of improvement, and that market has been the worst of all of the aerospace markets.

It represents about 10% of our sales.

And we are now forecasting it's going to be about down 10% this year, which is up from our previous guidance.

So there's dynamics that are happening in the aerospace business, but the signs are relatively good.

Great.

That's very helpful.

Thank you very much.

Mark Douglass, Longbow Research.

Hi, good morning, everyone.

Thanks for taking my call.

Frank, can you go ahead and drill down into some of the other business units, EMG; talk about power and what's going on there and just all the others?

Sure.

I'll be glad to do that.

Why don't I finish up EIG first.

We've talked about aerospace.

We've talked about process for power; and industrial, just incredibly good performance here.

Q3 sales were up more than 50% organically with excellent growth across both the power and industrial parts of the business.

Actually this subsegment is our strongest growth area for the year.

We now expect sales for power and industrial to be up about 35% organically in 2010, and that's an improvement from our guidance in July.

So if I sum up all of EIG, we are now expecting low double-digit organic growth in 2010, also up from our July guidance.

Switching over to EMG, for our differentiated EMG businesses, Q3 organic sales were up more than 20% with total revenue growth of approximately 40% because we've done some acquisitions in this part of the business.

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

And for all of 2010, we now expect this business to be up organically low double digits, an improvement, again, from our July guidance.

Last, but by no means least, our Cost Driven Motor business experienced strength in the third quarter.

Sales were up mid teens on a percentage basis, and it was broad-based strength across all geographies.

For 2010, we now expect this business to be up low double digits, which is another improvement from our guidance in July.

So if you sum up all of EMG, we are now expecting low double-digit organic growth in 2010, which is also up from our July guidance.

So a pretty positive situation when you look across all of the subsegments in the Company.

Right.

Power industrial, up 50% organically; is that market share gains, a lot of new product introductions?

What really is behind such strong performance?

Yes, it's a combination of those factors.

The part of power that is just doing extremely well is the test and measurement portion.

And these are products that basically go into companies that are producing electronic devices, and these systems will test the power systems in those electronic devices.

So they are sort of semi automated test and measurement systems.

And that market is doing extremely well.

If you look at some of the TNM companies, you can see it in their performance.

But we've also introduced a host of new products that are doing very, very well.

And as a result, there's no question, but what we are gaining share and the team out in California has done just a really magnificent job in managing the turnaround and in gaining share as it turns, so a very, very positive situation.

And similarly, on the industrial side, there is substantial improvement this year in the heavy truck business.

I think the last estimates I saw, heavy trucks were going to be up in North America about 146,000 were going to be shipped, and that's up 22%.

And we're growing at a more rapid clip, again, due to new product introductions and a very good team working on this business.

So it's a really great picture in power and industrial.

And then just a final question on Haydon, any changes in your expectations for earnings accretion at this point?

Did you accelerate some of the integration or just how is that going right now?

Well, it's going just fine.

We're on target.

There's a chance that we could exceed them, but I wouldn't model it any higher than what we told you.

What we basically said is for this year, it would add about $0.05 of accretion, and for the first year of our ownership, about $0.13 of accretion.

Okay, great.

Thank you.

Matt Summerville, KeyBanc.

Morning, a couple questions.

Frank, I just was wondering if you could comment -- as we move through the quarter, how did overall order linearity look like across the businesses?

Yes, I mean September was our stronger -- strongest month if you extract the acquired backlog, which we had in July.

So if you look at it, July was pretty strong.

It went down a little bit in August, which is a typical given the vacation season, and then it shot back up in September.

So, very good pattern.

And probably more important than what happened there is October looks extremely good.

So the order flow just continues to come in.

We are now operating at sales and backlog levels that are very near records for the Company.

The other question, with regards to the oil and gas business, you've sort of talked a little bit about kind of what you are seeing in upstream.

I actually thought maybe downstream was a little bit more of an important component to that business.

Could you maybe speak to that subset of oil and gas?

Yes.

I mean downstream is an important segment, but the major turnaround that we saw was in the oil and gas because it had been lagging.

And, if you look at the -- sort of the midstream and downstream part of the business, we're doing great internationally.

In the US, it's not quite as strong.

The refinery business in the US is somewhat weak, but I would say there hasn't been a change.

It just hasn't shown the dramatic improvement that we are seeing on the upstream side.

And then, Frank, one more follow-up.

Following the acquisitions of Haydon and TSE, layering in there your other core business that serves what I will call the medical or medical instrument or device market, how much of AMETEK's business now would you say is into that medical or life science, if you want to call it that, related field?

And I guess going forward, how big of a piece of the pie do you want that to be for AMETEK?

Yes, right now, if you look at it on an annualized, go-forward basis, it's about $150 million of volume, which is what is that, on the order of 5% in rough numbers of the Company.

We like this particular area.

It's got very high organic growth numbers, typically in the high single digits.

When we went back in time, we were concerned about liability concerns in this particular segment, but through insurance, we've been able to mitigate any deep holes if you will.

So we're pretty excited about this segment, and there's no reason that, over time, this couldn't grow to a $300 million to $500 million segment.

We will niche it as we do with all of our businesses.

We're not going to go out and compete with some of the big boys in this space, but what we will do is niche areas as we did with TSE, as we did with Haydon Kerk, where we can clearly be number one, get high margins, and enjoy the very good organic growth of these markets.

Thanks for the color, Frank.

You bet.

Wendy Caplan, SunTrust Robinson Humphrey.

Hi.

I feel a little silly saying that the EMG margin was only up 120 basis points, but, can you kind of -- I assume that acquisitions were a drag there.

Can you kind of give us a sense of what that margin would have been?

And also, looking at the incremental margin, which we calculated was about 36% in the quarter, obviously, there's some acquisition impact there too.

Could you address those two please?

Yes, sure.

If I -- let me address your second question first.

If you extract the acquisitions for the entire Company, in essence, the contribution margin was actually above 40%.

It was -- it calculates out at 41%.

And just to answer a question that you haven't asked, but I'm often asked is, is there more leverage in AMETEK's margins because obviously we had a record quarter.

And the answer is yes, because if you take this contribution margin of 41% as the organic growth of the Company goes up, there's only really one place the margins can go, and that is in the up direction.

So we're pretty excited about the margins.

We think we've got them at a point -- at a different level than what they were before this economic downturn, and we think there's leverage on the upside.

In terms of EMG, first of all, we're pretty proud of those margins at 18.2%, and there was a slight impact of acquisitions on that side, but it actually helped the margins a bit.

And I don't have an actual number on it, but it was because Haydon Kerk in particular has very high margins.

But overall, the core business is doing great.

And as you know, the margins in our Cost Driven Motor business are less.

And what will happen with this part of the segment, since we are not doing acquisitions in that core business, as we add more content into differentiated businesses, the margins will go up.

And there's absolutely no reason on the long-term that the EMG margins cannot approach the EIG margins.

And that's sort of our strategy, is to move them up.

Thank you.

That's real helpful.

And before I pass it on, just some clarification on acquisitions for the balance of the year.

Should we expect them, consider that they are possible?

How should we think about it?

I can tell you right now, we are very active in acquisitions, and we're working through a number of them.

It's definitely possible that you will see some before the end of the year.

But it's hard to predict.

You never know exactly what's going to happen, but the acquisition market is much better now than it was 12 months ago.

And we've obviously got the balance sheet and the management talent to do more, and I'd very much like to do that.

We've deployed already this year about $370 million in capital, as John mentioned in his opening talks.

And I would very much like to deploy more than $500 million this year.

And when you say better, Frank, do you mean in terms of the quality of the targets out there, the pricing?

What's better?

What's better is availability.

In essence, that there are simply more properties available, and very active.

A matter of fact, we've had some come back to us that decided awhile back not to basically sell their companies and now have reapproached us to open up discussions.

So, it's just a more active environment.

In terms of multiples, they're always higher than I would like, but they're reasonable.

And we can basically do these acquisitions as we did with Haydon Kerk and TSE, get sizable accretion.

More important than the accretion is that we can get a good return on invested capital.

So, we're feeling pretty bullish right now about the acquisition environment.

It's just difficult to predict when things are going to close and if they're going to close.

Sure, sure.

Thank you very much.

Elena Wood, Bank of America Merrill Lynch.

Good morning.

Some questions around headcount, just wondering if you have been adding employees outside of the BRIC countries?

And if so, what geographic region and perhaps which businesses?

Yes.

We have definitely been adding people to the Company.

And I can probably classify them in two areas.

One is direct people, just to be able to ship this higher volume.

And obviously that's included in our contribution margin discussions that we just had.

But more importantly, and from a strategic viewpoint, we are selectively adding back people to foster the growth of the Company.

And to put it in rough numbers, at the time we put our budgets together, there were roughly 40 adds that we were putting back in the business.

And since the time of our budget, we basically have added another 90 positions to that.

So it's roughly 90 plus 40, which is about 130 positions.

In rough numbers, about 80 of those positions are in the BRIC countries.

If you look at focus, it's a large focus, continuing our expansion in China, but more importantly, really levering up, I will say, our penetration of India.

Sizable investments from our process businesses, where there's great opportunity in those regions of the world.

We are also adding people in our UPT business, ultra precision technology business.

That's a strong focus in China, maybe not quite as much in India.

So we are just continuing, as AMETEK typically does, in an incremental fashion to roll things out.

The other adds are in basically -- a lot in the R&D environment.

As you noticed, I said that our RD&E expense is going to be about $112 million.

I think when we talked last time, it was about $109 million, if my recollection is right.

So we are continuing to increment this as our Company performs better.

Most of the engineering investment is going into our more differentiated businesses.

This would be our power businesses, as we were talking about, our process businesses; not as much in aerospace right now because those markets have not recovered yet.

A fair amount in the differentiated side of EMG.

So it's pretty broad-based.

You can's just say we're putting it in this area or that area.

It's basically, we have our -- we have a process for our divisions; make recommendations based on their performance to the group presidents in the Company.

The group presidents will then come to me and we will decide what we add.

And we have managed this in a way that we didn't want to get the costs ahead of the revenue, but on the other hand, we wanted to make really good, solid investments to grow the Company.

That's very helpful.

Then just as a follow-up, what kind of revenue growth are you seeing out of the emerging markets of the BRIC countries?

And how would your margins compare here at this point versus rest of world?

Yes, that's a great question.

First of all, I can say the BRIC countries are about 11% of AMETEK's sales, and the margins are right in line with the corporate average.

There's a little bit of variance between the countries with China being on the higher side and Russia being on the lower side.

But when you time or average of those, it's almost exactly -- I just did the calculation a couple days ago -- it's almost exactly the Company average.

So obviously in those parts of the world where we are doing some more infrastructure, you won't get quite the same margins until those infrastructure investments are sort of up and running.

So, very, very solid performance from a margin viewpoint.

And in terms of growth, for instance, the Asia growth of the Company, which includes -- it doesn't include India; it includes China and the other regions of Asia.

The organic growth in the quarter was up 35%, so very sizable growth.

I don't actually have a number on India.

I remember it was about 70% last quarter.

Do you guys know?

I don't.

We'll get that for you, Elena.

I don't have that number at my fingertips.

Okay.

Okay, that's fine.

I just had one last question for John Molinelli.

Have you given any thought to pension for next year?

I know pension is a tailwind this year.

Just wondering if perhaps it becomes a headwind next year with the discovery so low?

I've given it a lot of thought, Elena.

Good.

So to answer your question, yes, but we're still a ways away from finalizing what we think next year will look like.

We have had good performance out of our -- the performance of the assets under management.

That's gone well.

But the major part of this equation is going to be the discount rate that gets cranked into next year.

And we're not ready to speak to that yet.

Okay.

Thank you very much.

Allison Poliniak, Wells Fargo.

Just going back to the aerospace, I know the aerospace aftermarket on the commercial side had been sort of lagging the recovery.

Can you talk about what you saw in Q3 and how we should think about that going forward?

Yes, it was relatively flat in Q3, but we are anticipating growth in Q4.

So, we are starting to see a recovery, I would say, in the aftermarket business.

And that's -- you just know it's going to happen.

It's really a question of when it's going to happen.

You look at airline passenger revenue miles, they're up.

When you get on aircraft, they are quite full, and it's going to turn around.

I just think that it's a quarter or two delayed from what everyone had hoped.

But the fact that we're forecasting we're going to be up in Q4 is a definite positive signal.

Would you think there could be any sort of restocking demand related to that as well?

Yes, I think there could be.

I think there's the definite possibility here that there's going to be a bubble in the positive direction when this comes back because the airlines have really shrunk their inventories.

And they are just holding back so that when they sort of release the valve, I suspect you are going to see a bump up, and then it will come back to a more normalized level.

Great.

Thank you.

Richard Eastman, Robert W.

Baird.

A couple things, was there any price capture in the quarter, just overall Company?

Yes, there was.

It was about 1.5 points.

Wow, okay.

Was it skewed towards either EMG or EIG?

No, it was pretty constant in both of those businesses.

Okay.

(multiple speakers).

And then what was the backlog at the end of the quarter?

$786 million, I believe.

Is my memory right, John?

Look it up.

I believe it was $786 million.

John is going to look it up, but I believe that's what it was.

Okay.

And that's -- I had $726 million for the second quarter, so pretty significant growth there.

I guess part of that would be acquisitions, but nonetheless good growth?

No question, good growth.

I mean, as I mentioned, orders were $704 million.

Acquired backlog was about $26 million in that number and sales were $644 million, so very good improvement.

And John, you've confirmed it?

Yes.

Yes; what I said was correct.

Okay.

And then just a question, Frank, kind of maybe big picture, as I look out to the fourth quarter here, and given where we are today, we had some very strong order growth.

We had a book-to-bill over 1.

We've got a good backlog here.

You know, the EPS guidance for the fourth quarter is down sequentially.

And quite frankly, it appears as though, if I do your math to a mid teens revenue growth for the full year, that maybe you're thinking that the fourth-quarter sales would also be down sequentially?

Is there a reason for that?

Or are you just leaving yourself a bit of room?

We're leaving ourselves a bit of room.

Okay.

So there's no question about that.

Okay.

And also, on the aerospace side of the business, just two real quick questions.

If I go back maybe 18 months ago, there was a fair amount of discussion about growing the third-party MRO business outside the US, in parts of Asia, and that was a bit of a process.

How -- has that progressed?

Is that part of the growth we are seeing here or --?

Yes, absolutely, Richard.

Two major factors in this.

As we rolled up the third-party MRO companies, we were fortunate enough to be able to acquire companies in Europe that, in essence, were third-party MROs.

One was pretty much totally third-party MRO and another one had a major part of its business as an MRO business, where the other part was an OEM business.

So we have substantially increased our penetration in Europe.

When we look to Asia, we didn't feel we could do that via acquisition.

So we have a startup there that we have put in place in Singapore, and it's doing extremely well.

We partnered with [Nordam] when we went there because they do a lot of work in that part of the world.

That's worked great.

We recently got approval from the equivalent of the FAA in China for being able to basically do aftermarket work in that part of the world.

So yes, this part internationally is doing extremely well, and it's definitely a major factor in the 20% growth that I talked about a few minutes ago.

Understood.

And then overall, when we just look at the aerospace segment all rolled in, military, third-party commercial, and even the business jet piece, my understanding is that that business will, when it does come back here, hopefully in calendar 2011, carries a pretty high incremental margin.

Is it -- should we think 40%-ish?

You can think higher than that.

Okay.

All right.

It's a great margin.

So we should have that as a tailwind next year as well?

Should get a tailwind from that.

No question.

Okay.

And then just lastly -- sorry, one last thing, on the EMG business, in the Cost Driven Motor side, is there like a renaissance going on?

Are people vacuuming more, or is that growth rate just against easy comparisons?

Yes, it is.

There's no question it's against easy comparisons.

And what we were doing -- that business fell off, it was one of the first ones to fall off when the economy went down.

And we are enjoying I would say a return to normalcy, is the best way to describe it.

Okay, all right.

Thank you.

Jamie Sullivan, RBC Capital Markets.

Hi, good morning.

A question on the -- you mentioned some of the savings from low-cost sourcing.

I think it's $27 million, up from kind of $25 million, where you were thinking before.

Just wondering, is that just coming from the higher volume overall in the business, and the portion that you do in low-cost regions?

There's a little bit that's volume, but more importantly, it's that the team that we put in place in China -- and we have a person here in Philadelphia that basically manages that overall GSO and the strategic procurement initiatives across the Company -- they've just done a miraculous job here.

And when we started the year, I think we were estimating $20 million.

And they've just been aggressive and they have done a great job, and we're incrementing this up about every quarter.

And it would not surprise me if the $27 million is a little conservative.

And remind us what's the total volume you are doing from those regions?

$70 million is being placed in purchases in China.

That's just the China piece.

(multiple speakers)

(multiple speakers).

Yes, and then low cost overall?

Low-cost regions overall is $330 million.

We are producing, if that's your question.

That's a different question.

Is that what you're asking?

Yes.

Okay; yes, that's $330 million, and that's up from $271 million last year.

Okay.

Great, thanks.

And then just, in Europe, it sounds like Europe accelerated from low single to north of double digits.

Just wondering what you are seeing there, any particular countries or segments, products that are picking up?

Yes.

I mean the organic growth rate in Europe was 17%, so really an excellent, excellent number.

And I think if you look at it by sort of country, it's what you would expect.

Germany is on the uptick.

And we saw good growth in Germany, and we have a sizable part of our business in Germany.

And also, the export piece of the equation that we export from this country into there, did extremely well.

So, I can number six months ago or nine months ago, there was a huge concern across the industry, is Europe going to collapse for industrial businesses, etc.

And we've just seen a sort of sequential improvement from the lows that we saw at that time.

So it's not as good as the other parts of the world, but it's pretty darn good.

Right.

Any particular products where you are seeing strength, or is it broad-based?

It's fairly broad-based.

I would say strength in the process side of the business, is probably the one where it's the highest.

Okay.

Great.

Thanks a lot.

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