阿美特克 (AME) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AMETEK second quarter earnings conference call.

During the presentation, all participants will be in a listen only mode.

Afterwards, we will conduct a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded, Tuesday, July 26, 2011.

I would now like to turn the conference over to Mr.

Bill Burke, Treasurer and Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Sildawna.

Good morning, everyone.

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 Investor section of AMETEK.com.

A tape of today's conference call may be accessed until August 9 by calling 800-633-8284 and entering the confirmation code number 21532101.

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.

AMETEK had a tremendous second quarter.

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

Orders in the second quarter were strong, up 24% to $797 million.

Book-to-bill was $1.05 million.

The backlog of $948 million was an all-time high.

Sales in the second quarter were up 28% to $758.8 million.

Internal growth was very strong at 14% while acquisitions added 12%, and currency added 2% to sales.

Operating income for the second quarter increased 36% to $157 million from $115.6 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Operating income margin of 20.7% was 120 basis point improvement over the second quarter of 2010.

Operating margins include $5.2 million in costs associated with the performance-based accelerated vesting of restricted stock which resulted from the doubling of our stock price from the April 2009 grant date.

Excluding these costs, operating margins in the quarter were a record 21.4%.

Net income was up 40% to $94.1 million, and diluted earnings per share of $0.58 were up 38% over last year's second quarter.

Operating cash flow in the quarter of $115 million was superb, representing a 30% increase over last year's second quarter.

Free cash flow was $105 million, or 111% of net income.

Working capital management was excellent.

Operating working capital fell to 17.5% of sales, our lowest level in my tenure as CEO.

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

Sales were up 31% to $407.4 million on continuing strength in our process, power, and industrial businesses, and the contribution from the Atlas Material Testing Technology acquisition that we completed in November.

As expected, our oil and gas businesses were very strong.

Internal growth for EIG was 21%.

Acquisitions added 7% to sales while currency added 3%.

EIG's operating income increased 38% to $101.5 million.

Operating margins were very strong at 24.9%, up 110 basis point over last year's second quarter.

The Electromechanical Group also had an excellent second quarter.

Sales were up 25% to $351.5 million on strength in our differentiated businesses and the contribution from the acquisitions of Technical Service for Electronics, Haydon Enterprises, Avicenna Technology, and Coining.

Internal growth was 6%, acquisitions added 16% to sales while currency added 3%.

EMG's operating income increased 32% to $69.2 million, and operating margins were strong at 19.7%, up 120 basis points over last year's second quarter.

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.

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.

From these sourcing activities, we recognized $7 million in savings in the second quarter and expect $28 million in savings for all of 2011.

These efforts were key drivers in the very strong operating margins in the second quarter.

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

In the second quarter of 2011, international sales represented 51% of our total sales.

Organic growth in Asia was very strong at 34% while Europe also showed double-digit organic growth.

Through the investments we've made over the last several years, sales growth in the BRIC locations was excellent at 47% in the quarter.

AMETEK do Brasil was the winning bidder to provide Petrobras with battery backup systems, batteries, and battery chargers over the next 3 years for the Comperj petrochemical complex in Rio de Janeiro, Brazil.

Comperj is a large-scale refinery and petrochemical facility which will have the capacity to refine 165,000 barrels of oil a day.

This equipment will be used in various critical applications across the facility and represents a multi-million dollar opportunity for AMETEK.

AMETEK's programmable power business produces a wide variety of simulators to test both space and ground-based photovoltaic power systems.

In the second quarter, we delivered a 97-kilowatt system to a Chinese research institute, our largest solar array simulator ever.

This system can precisely simulate the behavior of a solar panel under a wide variety of conditions, enabling spacecraft testing to be as accurate as possible.

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

We've consistently invested in RD&E.

We expect to spend $136 million in 2011, up 21% over 2010.

We are excited about some recent introductions.

Hamilton Sundstrand has selected AMETEK's fuel flow transmitter for the Pratt & Whitney PW1000G geared turbofan engine.

This engine is 1 of 2 being offered by Airbus to power its new A320 NEL aircraft.

The same engine has also been selected to power the Bombardier CSeries aircraft and the Mitsubishi MRJ aircraft.

Estimates are that as many as 10,000 of these engines will be built representing up to $60 million in revenue for AMETEK over the life of the program.

In June, Vision Research booked their largest-ever order.

A US military test range purchased over $3 million of high-speed cameras and accessories for use in missile launch applications.

The order includes a combination of Phantom 65s, a digital camera with very high resolution, and Phantom 341s, a recently introduced camera ideal for use with telescopic tracking mounts.

The order consisted of more than 20 cameras plus accessories and service contracts.

From an overall perspective, revenue from products introduced over the last 3 years was 21% of sales in the second quarter, up from 19% in 2010, reflecting the excellent work of our businesses in developing the right products to serve their customers.

During the second quarter, we completed the acquisitions of Avicenna Technology and Coining, acquiring $90 million in annual revenue and deploying nearly $185 million in capital.

The first acquisition was Avicenna Technology, Inc., a privately-held supplier of custom components used in the medical device industry.

Avicenna provides us with expertise in producing fine-featured catheter and other medical components for leads, guide wires, and custom medical assemblies.

Avicenna adds to our growing portfolio of businesses that serve the highly attractive medical device market and is an excellent fit with our Technical Services for Electronics business acquired in 2010.

The combination of these two businesses positions AMETEK as the only medical interconnects provider with integrated capabilities for the catheter, cardiac, and neurostimulation markets.

Avicenna is based in Montevideo, Minnesota, and has annual sales of approximately $25 million, and with this application, medical sales comprise approximately 6% of AMETEK's total revenue.

In May, we announced the acquisition of Coining Holding Company, a global leader in custom-shaped preforms, microstampings, and bonding wire that's used for joining electronic circuitry, packaging microelectronics, and providing thermal protection and electrical conductivity for a wide range of electronic devices.

Coining's products are used in highly engineered applications for the RF microwave, photonics, medical, aerospace and defense, and general electronic industries.

Coining is an outstanding addition to AMETEK's business portfolio and a really good fit with our engineered materials, interconnects, and packaging businesses.

Coining's unique, proprietary manufacturing processes mesh well with our existing specialty metals capabilities.

Coining is based in Montvale, New Jersey, and has annual sales of approximately $65 million.

Acquisitions will continue to be a focus for us during 2011 as we see this strategy as a key driver to the creation of shareholder value.

We have the financial capacity, managerial capability, and disciplined approach to support this acquisitions focus.

Our backlog of deals is excellent.

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

Now, turning to the outlook for 2011, we expect our businesses to continue to show solid growth in 2011 with our longer cycle oil and gas, power, and aerospace businesses showing particular strength.

Our record backlog, strong portfolio of businesses, proven operational excellence capability, and a successful focus on strategic acquisitions should enable us to continue to perform well in 2011.

We anticipate 2011 revenue to be up high teens on a percentage basis from 2010 and organic growth to be up at least high single digits.

Earnings for 2011 are now expected to be in the range of $2.30 to $2.34 per diluted share, up 31% to 33% over 2010, reflecting the leveraged impact of core growth and our streamlined cost structure.

This is an increase from our previous guidance of $2.20 to $2.25 per diluted share.

Third quarter 2011 sales are expected to be up approximately mid-teens on a percentage basis from last year's third quarter.

We estimate our earnings to be approximately $0.57 to $0.59 per diluted share, an increase of 19% to 23% over last year's third quarter of $0.48 per diluted share.

In summary, our overall businesses performed extremely well in the second quarter of 2011.

We expect top and bottom line growth to continue in 2011 as our longer cycle, higher profit businesses show particular strength and the benefits from recent acquisitions are fully realized.

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.

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.

John?

Thanks, Frank.

As Frank noted, we had an outstanding second quarter with excellent financial performance and a high quality of earnings.

I will touch on some further details.

Selling expense was up, in line with the growth in sales.

General and administrative expenses were 1.8% of sales, essentially unchanged from last year's second quarter.

Excluding the costs associated with the accelerated vesting of restricted stock, G&A was 1.5% of sales, down significantly from last year.

The effective tax rate for the quarter was 31.4%, up slightly from last year's second quarter rate.

We anticipate a rate of between 30% and 31% for the full-year 2011.

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 17.5% of sales down from 19.6% in last year's second quarter, reflecting the tremendous work done by our operating units to reduce the Company's investment there.

Compared to last year's second quarter, our collection cycle improved to 50 days from 53 days, and inventory turns improved by 11%.

Capital spending was $10 million for the quarter.

2011 capital expenditures are expected to be about $45 million.

Depreciation and amortization was $21 million for the quarter.

2011 depreciation and amortization is expected to be approximately $87 million for the full year.

Operating cash flow for the second quarter was $115 million, up 30% over last year's second quarter.

Free cash flow was $105 million for the second quarter, representing 111% of net income.

For the full year, we anticipate free cash flow to be approximately 115% of net income.

Total debt was $1.21 billion at June 30, up $42 million from year-end.

Expenditures for acquisitions have totaled nearly $185 million for the first half of this year.

Offsetting this debt is cash and cash equivalents of $197 million, resulting in a net debt to capital ratio at June 30 of 33.8%, down from 36.2% at December 31.

At June 30, we had approximately $500 million of cash in existing credit facilities to fund our growth initiatives.

In summary, we had an outstanding second quarter of 2011, establishing records for many key financial metrics.

We are well positioned for further growth both organically and through acquisitions with a strong balance sheet and cash flows.

Bill?

[Sildawna], that wraps up our prepared remarks.

We will be happy to take folks' questions now.

Thank you.

(Operator Instructions) Our first question comes from the line of Jim Lucas with Janney Capital Markets.

Please proceed.

Thanks.

Good morning, all.

Hi, Jim.

John, first question.

Payables?

Sure, Jim.

$267 million.

All right.

Thanks.

And, Frank, you talked about orders up 24%.

What were the -- what was the organic order rate in the quarter?

Yes, the organic growth rate was approximately 10%.

Okay.

And when you look at the various both geographies and markets, have you seen any sort of changes either positive or negative in any of the major end markets?

Or is it a continuation of the trends from last quarter?

It's really a continuation from the trends from last quarter, Jim.

The best way I can describe what is occurring in the entire portfolio is that we are beginning to see a return to normalcy with some of our short-cycle businesses showing that now.

Our mid-cycle businesses right now are performing extremely well.

With the order rates in particular our Aerospace business, we are really starting to crank up and sales will increase in the second half of the year going into next year.

So, it's a very normal recovery that we are seeing.

But, in general, all of the key end markets are extremely good.

Okay.

And with regards to aerospace, could you just give us a little bit of a deeper dive there of what you are seeing by the various major markets of OE, commercial versus after-market, as well as military, et cetera.

Yes.

Sure, I would be glad to do that, Jim.

In the second quarter, aerospace overall was up mid-single-digits in terms of sales, but the key thing is that orders were up mid-teens on a percentage basis with really commercial, military, and third party MRO all showing good growth.

So, when we look forward now to the second half of this year, we expect -- if you look at the second half of 2011 over the second half of 2010, we are expecting high single-digit growth rates.

That is an improvement over what we saw in the first half of the year.

So the backlog is building just as it normally would in a recovery.

Our sales are going to escalate, and we are going to have a strong second half.

And going into the first half of next year, aerospace looks very good.

If you break it down a little bit in regards to your question, the third party MRO business, which is about 35% of our total business, is doing very, very well.

They were organically in sales up low double-digits.

For the year, we are expecting orders to be up mid-teens.

The Commercial business, which is about 20% of our overall business, extremely good.

Our orders were actually up about 50% in Q2 over this year versus Q2 of last year.

For the full year, we are estimating they are going to be up about 25%.

Even military is -- which is now only about a third of our overall Aerospace business had low single digit sales growth in the quarter.

We are not seeing any tremendous issue around our military business, and we are starting to see a rebound in orders and business in regional jets which is about 10% of our business.

We expect that business for the year to be up low double-digits.

So, overall, it's a very, very positive situation for aerospace.

Great.

Then final question, back to your comment on seeing a normal recovery.

We have talked about how this has not been far from normal, but in terms of the rampant acceleration of the overall businesses, does it still look like we are in the V at this point?

I think what is happening is the V -- as we are getting to the top of the V, and you are starting to see some of the shorter cycle businesses roll over to normalcy.

Where if you look at our mid-cycle businesses, they are well in the center of the V coming up, and our Aerospace businesses are basically bottomed out and are starting to V up.

So, again, it's a normal situation that you would expect.

Great.

Thank you very much.

You bet, Jim.

Our next question comes from the line of Matt Summerville with KeyBanc.

Please proceed.

Good morning.

A couple of questions.

Frank, can you talk about the linearity you saw in orders from month to month throughout the quarter for the overall business?

I think you gave some organic growth rates in Asia and Europe.

Can we also get that for the US?

Yes, sure.

In terms of the linearity in the quarter, Matt, if you extract acquired backlog which basically shows the organic -- what is really happening in the overall business.

In essence, they were extremely linear through the quarter.

Each month was within actually a few million dollars of the other months in the quarter.

Very linear performance.

In terms of the organic growth rates around the world, let me just take a quick trip around the world for you.

In the US, the organic growth rate was 10%, and in Europe it was 11%.

In Asia, it was 34% which means that, if you look at the international growth rate in total, it was on the order of 18%.

And with the US growth rate at 10%, that gets you to the 14% for the overall Company.

Got it.

Then, just one follow-up.

You went through a lot of detail in the Aerospace business.

Can you do the same for the process power and industrial side of EIG, and then talk about the differentiated versus cost-driven businesses?

What you saw in the quarter?

And what your expectations are for the balance of the year?

Yes, sure.

I would be glad to do that.

Process business is just a phenomenal story.

They performed extremely well in the second quarter.

Sales are up more than 35%.

It was strong growth evident across all of our process businesses.

Oil and gas as we mentioned in the press release and my opening comments showed sizable strength.

But also our material analysis, ultra precision technology, advanced measurement technology, and measurement calibration technology which are really all the other divisions in this group -- or in this sub-segment -- were also very strong.

Organic sales in process were up more than 20% in the quarter.

For 2011, we expect the business to grow overall about 25% and organic growth will be low double-digits.

In particular, we are expecting continued strong performance from our later cycle Oil and Gas business.

Power industrial also performed extremely well.

Q2 sales were up more than 25% organically with excellent growth across both the power and industrial parts of the business.

And if we look at the full year, we expect sales for power and industrial to be up at least high teens organically in 2011.

Really driven by strength in our Power business but also our Industrial businesses are doing quite well but not quite as good as the later Cycle Power businesses.

So, if you sum up all of EIG then, including aerospace, we are now expecting 2011 overall sales to be up high teens on a percentage basis and organic growth of low double-digits.

That is an increase over our previous guidance.

So, very, very strong performance in EIG.

And EMG also did quite well in the quarter.

If we look at the two parts of that business per your question, Matt.

For the differentiated EMG businesses, overall sales are up approximately 35% in Q2, and organic sales were very strong with growth of low double-digits.

In you look at the parts of that business, the improvement was driven by technical motors, by our EMIT businesses that I talked about in my opening comments.

And also, Aerospace third party MRO was extremely strong.

If we look forward, 2011, we expect this business to be up approximately 25% overall and organic growth of low double-digits.

So, very strong performance coming out of the differentiated EMG businesses.

The last part of our Company is the Cost-driven Motors business.

That is now less than 10% of our sales.

That has definitely returned to what I would call a more normal trend after the strong growth in 2010.

Sales in Q2 were actually down mid-single-digits.

That was against a very tough comparison.

In fact, Q2 2010 was, by far, the strongest quarter we had last year.

For 2011, we expect this business to be up low single-digits overall.

And most importantly, given the sizable cost improvements we have made in this business, we anticipate a double-digit increase in profit for the year of this -- for the year for this business.

So, the team that's managing this business has done a very, very good job.

So if you sum that up for all of EMG, we are expecting high teen growth on a percentage basis for 2011 with organic growth of high single-digits.

And so if you take what I talked about for EIG and EMG -- for AMETEK as a whole, we expect high teen sales growth on a percentage basis with organic growth of high single-digits, and we may very well get to low double-digits for 2011.

Great.

Thanks a lot, frank.

You bet, Matt.

Our next question is from the line of Jamie Sullivan with RBC Capital Markets.

Please proceed.

Hi, good morning.

Good morning, Jamie.

Wondering if you could talk a little bit more about Europe.

It looks like you saw the organic trends accelerate there from 1Q to 2Q.

Can you talk about the dynamics there?

Yes, actually we were pleasantly surprised with our performance in Europe.

Obviously with some of the issues that are going on there, we had anticipated performance that wouldn't be as strong as it was.

In essence, most of our business is located in northern Europe versus southern Europe.

Northern Europe was quite strong.

I think some of our new products -- as a matter of fact, I know -- I don't think but I know that some of our new products are having tremendous success in Europe.

That has been a key driver to the growth.

So, it was very nice to see the 10% organic growth -- actually 11% organic growth in the quarter.

Orders were good.

We think we will have a reasonable second half even with the problems that are going on there.

Okay.

Thanks.

And I was just wondering if you could talk maybe about a couple of end markets -- chemical and refinery both in mature and emerging markets.

Just some of the customer behavior that you are seeing there?

When we look at our business in the refining area and chemical area in the US, it is largely a replacement business.

There aren't that many new plants up in the United States, and so the growth there is lower than the growth outside the US although we did see growth.

I think that is really based on the fact that during the trials of the recession, these facilities in the US just held back on purchasing anything they didn't need.

Now with the economy a little bit better, their output is a little bit stronger.

They are starting to purchase more of the equipment.

Also our new product development efforts helped there as well because for a modest cost in terms of their total cost to run their factories, they can upgrade their instrumentation to higher level instrumentation that will, in essence, improve their efficiency.

We are definitely seeing some of that.

But the real story here in these markets is outside of the United States.

If you look at some of our key businesses, like the process businesses, more than two thirds of that business is outside the US.

That is where the real growth is coming from.

Even in the refinery and chemical sectors of those businesses.

So, it's a very, very positive situation.

Okay.

Great.

Thanks.

And then one last quick one.

On the charge you mentioned for the restricted stock vesting, was there a breakdown in the segments?

Or is that all in the corporate line?

No, it's not all in the corporate line.

There is also an impact on tax.

Can you handle that question?

I can handle the Group breakdown.

It's about $2.1 million in G&A.

A little less than $1 million in EMG, and then the balance in EIG.

That's the $57 million, Bill?

That's the $5.2 million.

Excuse me, $5.2 million.

Then there was also a tax impact, John.

Do you know what that was?

The tax impact cost us about 0.6% on the effective tax rate on the quarter.

So instead of 31.4%, we'd have been 30.8% without that.

Okay.

Thanks a lot.

All right, Jamie.

Our next question comes from the line of Robert Barry with UBS.

Please proceed.

Good morning.

Good morning, Robert.

Actually I wanted to just quickly follow-up on that chemicals question.

We have been hearing that there is increased potential project activity in the US given how much cheap shale gas there is?

Are you seeing any rumbles of that?

We are seeing some of that.

We are seeing some of that.

No question about it.

I think the chemical business is doing better than it was, but it still pales in comparison to what we are seeing internationally.

Okay.

I was curious about the sales outlook.

Looks like you have been, for the past couple quarters tracking very well ahead of what your expectation was.

I think you were looking for 20% growth this quarter.

You came in at 28%.

But you left the outlook for sales growth unchanged.

So, I was just wondering how you are thinking about the back half on the top line.

That's a great question.

I think the best way that I can answer it is that with the global macro situation that we are all reading about in the news, we have been cautious about the second half of the year.

Clearly if the trends that we have seen in the second quarter continue, and I can say through at least this far in July they have continued, those estimates could very well prove to be conservative.

Okay.

That makes sense.

Then the adjustment that you are making on the earnings guidance is reflecting what happened this quarter.

I guess some better outlook for the margin side in the second half?

There is some margin improvement.

It's really a mixture.

We have got the strong backlog that I talked about.

So, there is plenty of shipment capability off of that backlog and also some of the operational excellence initiatives that we have in place are going to ramp up a bit as we go into the second half of the year.

So it's really a summation of sales growth as well as margin improvement.

Got you.

Then, I think last quarter you had talked about G&A being down mid-single-digits this year?

I assume that is adjusted for that one-time item in the quarter?

Actually what we expect for the year is it's going to be down about 1% including that charge that we just talked about.

Last quarter, we didn't speak to that.

Okay.

Good.

Then how about on the selling side?

Selling expense as John, indicated was up in line with sales, and we expect that to, in essence, continue.

Okay.

Slightly less as a percentage, but in line with sales.

Okay.

Then just finally, can you comment on what the net impact of price versus inflation was in the quarter, please?

Yes.

We got -- we feel about 2% in pricing.

And when we analyzed the price versus inflation on the input side of the business, the net of that was on the order of $6 million positive.

That's interesting.

What are you seeing on the commodities?

Is it bouncing around a lot, but net-net not going up a whole lot?

It's a mixed bag right now.

We looked at the trends from Q1 to Q2 on the commodities.

Nickel was up from Q1 to Q2.

If you look at steel and you look at copper, it was actually down a bit.

So, we are seeing variations.

You may recall that we have mechanisms in the Company that our profitability is pretty much independent of what happens with these commodity prices.

That is through a number of activities, but in a number of our businesses, we will actually -- where there is a high level of the base commodities, we will quote at the spot price of those commodities then we buy forward on that material.

So, we are not looking at speculating.

We know we have the order, et cetera.

Therefore, we have locked in the profitability of those commodities.

Now, there could be an effect on margin percentage.

But it's not going to affect the total profitability.

You've never heard of us over the -- well forever, really, talking about any major impact to our bottom line from commodity shipping.

Right.

Good position to be in.

Thanks very much, and congrats on the good quarter.

Thank you.

Our next question comes from the line of Allison Poliniak with Wells Fargo.

Please proceed.

Hi, good morning.

Good morning, Allison.

Can we just talk about margins in EIG?

I think you mentioned in the question or two before that there was a charge impacting that, but it seems like it was still down sequentially.

Is that acquisition-related?

Let's see.

Sequentially, it was down as reported.

I haven't tried to calculate the impact of the restricted stock on that.

I am going to have to do that off-line.

Why don't we do that off line for you, Allison, and we will get you the question -- the answer.

No worries.

And then, in terms of margin expansion, you are on track for well over 100 basis points this year.

Looking out further, if we do settle into that high single-digit growth rate on the top line, can you remind us again how we should [even hand out] margin expansion?

We are estimating now at least 120 basis points of margin expansion for 2011 over 2010.

As I mentioned before, if the growth rates are better than what we are forecasting, we will see even more margin expansion than that.

I would say the 120 basis points is a floor.

Great, thank you.

You bet, Allison.

Our next question comes from the line of Wendy Caplan with SunTrust.

Please proceed.

Thank you.

Good morning.

Good morning.

Well, I'm glad I didn't have to ask the conservative question since you answered it for me.

(Laughter) But where -- if the growth rates do appear to be higher, where do you expect them to be?

Where will we see that?

What is the likelihood?

It is going to be in the later cycle businesses.

We are estimating how rapidly they are going to grow.

If the process businesses continue on the trend that they have been on, they have a good chance of exceeding the estimates that we have put in place.

And also from the viewpoint of Aerospace, as I mentioned, our aerospace orders have just taken off.

If that continues, it will come down to how much can we ship in this year versus next year.

There is definitely a possibility that those businesses could do better than we are forecasting.

I don't want to leave our Power businesses out of this either.

Because the order trends were very, very good in power, and it's also possible that we could do a bit better there.

So, I don't see a huge amount of downside.

It really comes down to how much growth are we going to get given this macroeconomic situation that is occurring.

Okay.

And headcount, can we talk about where we are versus the beginning of the year?

And where are you hiring?

Where are you having trouble hiring?

And are there any examples of where you are laying off?

Yes.

We are up about 150 people extracting the acquisitions that we did this year.

That is a baseline to baseline employment level.

These are predominantly salaried positions which is a change from as we were ramping up at the second part of last year.

It's largely outside the United States, unfortunately for the US.

If you look outside the United States, I don't know exactly but it's probably two thirds of those hires are outside the US Very heavily in the BRIC countries.

I have one data point in mind that in the BRIC countries, we are putting in, over last year and this year, about 190 people in rough numbers.

Most of those are this year.

There were about 57 added last year and the remainder is going this year.

So we are just trying to capitalize on the growth in the BRIC countries.

And in terms of layoffs, we have had some minor layoffs that are associated with some restructuring activities but not substantial this year.

Obviously during the downturn, we took about 20% of our entire workforce out, and obviously, we are not adding back at that rate at all.

We don't need to, in essence, because we have done infrastructure restructuring.

That's why you are seeing this phenomenal margin performance, et cetera, that we think we can maintain.

You said salaried positions.

Is it marketing, management, how should we think about that?

It's largely sales resource in China.

In India, it's a combination of sales and engineering resource.

We now have about 50 people doing engineering work in India in our operation there.

We plan on substantially increasing that.

As a matter of fact, we just leased another floor in the building that we are in, and we expect probably by the end of next year we will have over 100 people doing engineering work in India.

Those are the drivers.

There are some other support people, but it's predominantly salespeople, feet on the street, sales management people, and engineering people.

Again, focused on growth.

Okay.

And one last question, can -- you usually give us the core incremental margin for the quarter?

Yes.

If you exclude this accelerated vesting of restricted stock, the contribution margin in the business was 37%.

And if you include it, it was 33%.

So the more normalized rate of what you would expect to see going forward is above that 35% level so very good flow-through.

Okay.

Thanks very much.

You bet, Wendy.

Our next question comes from the line of Mark Douglass with Longbow Research.

Please proceed.

Good morning, gentlemen.

Hello, Mark.

Frank, going a little bit more into power and process, can you review the demand in the power products regions, end markets, any particular product strength that you saw?

And what is it about defense that seems like it wouldn't be holding up as well as it is?

Or is it holding up with power?

Yes.

Let's talk about the Power business first.

If you look at our Power business, it's roughly $300 million in volume and a little less than half of that is in tested measurements.

By tested measurement, I mean these are systems that are used to test power systems in essentially another company's manufacturing operation.

So, we can go into any Electronics company or for that matter a Boeing or anybody that is producing product that has electronic gear, and our systems can automatically test it.

That business has been the key driver -- or a key driver to the growth in power.

That reflects the general trends that you are seeing in the test and measurement market in a broader sense than just power.

In addition, our battery backup system which is a large percentage of the remaining business -- it's about $100 million.

They have about half of their business that actually goes in oil and gas.

When we speak about oil and gas, we don't include that.

We include that portion as part of the Power business.

That is following the same trend that we are seeing in our process businesses with very, very strong growth, and the remaining piece of the business is essentially instrumentation that goes into test and distribution and generation of power.

That is rebounding nicely.

Not as strong as the other two parts that I talked about, but there is strength across that entire Power business.

The second part of your question around defense, you may recall that we made some very good investments quite a number of years ago on both sides of our defense Aerospace business.

In the EIG side, we decided to invest in helicopters.

It fit the capabilities of AMETEK.

We saw growth opportunities in helicopters.

And to be very honest about it, I don't think any of us anticipated that helicopters would be doing as well as they are.

We are riding that trend of the military.

And not even in terms of as much wars as it is they have to change the dynamics of their air fleet to simply put more helicopters in it.

That business is doing well.

And then the second issue on the EMG side of the business is that we are the prime supplier to the military for cooling systems on any electronic devices.

We have fans that are just ingrained in the military.

Very high performance fans that can cool electronics.

And what is happening is, there is -- even with the constraints on the budget that we are seeing now and that we are going to see, the electronic content of what is going into in essence the military is simply increasing.

So even with a flat top line on military business in terms of the overall market or even a decreasing trend, with that electronic content increasing within that, we are enjoying that.

As a result, our Military business is doing okay.

It's not growing at the same level as our Commercial businesses that I talked about, but it's still doing quite well.

And we are optimistic even with what is occurring in Congress now that we will be able to do well.

Again, remember, it's only about a third of our Aerospace business.

It's not a major part of our Company.

That was very helpful.

You bet.

Finally on process side, or I guess maybe all of the process and power.

What is your total exposure to Brazil?

It sounds like it's a combination of power and process, depending on what day it happens to be.

Total sales in Brazil around the order of $30 million.

Bill is looking it up exactly.

Am I right?

It's $30 million.

But there is huge opportunity here.

I can expand on this a little bit.

We are in the final stages of putting a lease together to lease 100,000 plus square foot facility in Brazil.

It's a result of initially winning that large contract that I talked about in my opening remarks at Comperj.

We are going to use this facility as we have in China, as we have in Mexico, and as we have in Eastern Europe now as a location where all of our divisions will have access to do manufacturing in Brazil.

Manufacturing in Brazil is very important because there are significant tariffs that they impose on anything that is imported in.

They are obviously trying to encourage local manufacturing.

So, we have decided that, in essence, to further penetrate the market it's essential to manufacture there.

And so we are starting to do that.

In addition to that in the same facility, we're in the beginnings of building the same type of distribution infrastructure locally that we have in China, that we have in Europe, that we have in Eastern Europe.

We just hired a general manager, a very, very strong guy, who is going to oversee both the manufacturing and the distribution side of this business.

So we are going to make significant investments in Brazil.

As I think you are aware, we have made significant investments in China.

More recently in India, and Brazil is the next part of the world that we are going to focus on.

Great.

Thanks.

You bet.

Our next question comes from the line of Richard Eastman with Robert W.

Baird.

Please proceed with your question.

Yes, good morning.

Nice quarter.

Hi, Rick.

Frank, could you just speak for a minute or two to your exposure in Asia?

You talked about the growth rate in Asia.

I'm curious where AMETEK has the most exposure when you are looking at product lines or at least sub-segments in the business?

It's basically our Process businesses and our low-end Floor Care business.

Those are the two businesses that represent the largest part of Asia.

Our Power businesses are more in the beginning of penetrating that part of the world.

I think there is tremendous opportunity for our Power businesses, but they are not at the same level of sales at this point that our process and Floor Care motor businesses are.

Okay.

With the recent acquisitions, a bit of a mix shift toward the interconnect businesses, and then also the Medical App's -- or applications market.

Is that intentional that we continue to shift the business maybe directionally that way?

Or is that more opportunistic based on the M&A market itself?

In terms of if we look at EMG, this is strategic what we are doing.

It lines up directly with what we really have been talking about for a number of years where when you go back in time, that segment was predominantly floor care motors.

The dynamics in that business, as we all know, is that it's a lower growth kind of business.

Strategically, we said we are going to focus on differentiated businesses that in essence can go into EMG.

We decided to essentially grow off of businesses that AMETEK already owned although at that time had very strong levels of sales.

We had a specialty metals business for many, many years.

Actually, it was acquired more than 20 years ago because it was acquired before I came to AMETEK, and I have been here about 20 years.

Very, very good business, high profit margins.

We looked at opportunities around it, and in essence, this metals focus came out of that activity.

For many years, we have been talking about medical.

We think that is a good market for both instruments as well as the electro-mechanical side of the business.

As we looked at that, there is opportunities on both halves of the business, but we have been fortunate to be able to get companies that we know something about.

We know a lot about metals and that type of product and essentially putting it into a very good market which is medical.

This is strategic, it's not opportunistic.

It's opportunistic in the sense that when acquisitions fit that model we go after them.

It wasn't that these businesses were just available, and we said, oh, let's go there.

Okay.

Then in terms of the initiative to build-out the third party MRO Aerospace business, obviously very good growth.

My guess is M&A multiples probably reflect that good growth.

Are there still MRO opportunities in the M&A pipeline?

No question.

Actually, I can tell you that we are working on one right now.

Again, I'm not going to postulate whether we will close it or not.

There are always issues with deals, but hopefully we will.

There are definitely additional opportunities there.

They're great businesses.

And actually in terms of multiples, the multiples on the businesses are actually lower.

The reason they are lower -- it's not because of the growth.

It's because most of those companies don't have the inherent ability to do PMAs and DDRs.

Therefore, their margins are low because they have to essentially buy all the material from the OEMs, and the OEMs mark them up.

And therefore, there is a discount on the multiple of those businesses.

So what we do is most of those businesses we bought -- I don't know exactly, but probably in the 6.5, 7 times trailing EBITDA -- we bring them in, we do the PMAs and the DDRs so we can get the profit margins up from say, 10% to 18% or 19%.

So from a return on invested capital viewpoint, they are home runs in essence.

That is the model that -- and the reason we went after these businesses.

And you add that to the great growth rate, and it's very, very good business.

On the other side of this is we don't want to have our aerospace business become just a third party MRO business.

We see it as an adjunct to our base business.

Very good.

Thank you.

You bet.

(Operator Instructions) Our next question comes from the line of Jim Foung with Gabelli.

Please proceed with your question.

Good morning, Frank, and everyone.

Hi, Jim.

Frank, I was just wondering -- just going back to aerospace.

Boeing and Airbus have announced higher production rates on more of the airplanes as we go out to 2014 as well as new airplanes being launched.

I was wondering, could you comment where your Aerospace OE business is today, and how high can that grow?

And where would that be when you get to 2014, 2015 type of time frame?

I think I can give you an answer to that, Jim.

As I mentioned, if you look at just commercial aerospace, it's about 20% of our total business in aerospace.

Our total Aerospace business is on the order of $550 million -- let's round it to $600 million.

So 20% is $120 million.

That is roughly where we are today.

You look at these production rates, and this year, Boeing is growing in terms of number of aircraft about 10% and Airbus is growing about 5%.

So say then they are roughly splitting the market.

So they have got 7%, 8% growth.

And then you take the after-market piece of this which is going to grow in that same number.

I think if you take that $120 million number and put -- excluding any additional acquisitions -- you put a high single-digit organic growth rate on it and roll that out.

I think that is a reasonable model for that business.

I don't know exactly where that ends up in 2014, but I think if you did it that way, that would give you a reasonable model.

That is terrific.

What about margin growth?

What kind of margin expansion we could see as we go on that during that time frame?

I think definitely we can continue to do margin expansion.

Just the growth -- if you look at the organic growth in our businesses, and in response to Wendy's question, with this greater than 35% contribution margin.

As you get the growth and that kind of contribution margin, there is really only one place that bottom line margins can go, and that is up.

So I think there is definitely expansion there.

I could also say that the aerospace contribution margins are higher than the Company average because obviously they are very, very good businesses.

Excluding any cost activities that we put in place, there is definitely margin potential here.

Great.

Thanks so much.

You bet.

And there are presently no further questions, sir, at this time.

Please continue with your presentation or closing remarks.

Thank you, Sildawna.

Thank you, everyone, for joining our conference call.

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Thank you very much.

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