阿美特克 (AME) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMETEK's third-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, October 25, 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, Frank.

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

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

AMETEK's third-quarter results were released 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 November 8 by calling 800-633-8284 and entering the confirmation code number 21539558.

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 strong third quarter.

We established quarterly records for operating income, operating margin, net income, diluted EPS and operating cash flow.

Sales in the third quarter were up 16% to $750.5 million.

Internal growth was strong at 8%, while acquisitions added 7% and currency added 1% to sales.

Operating income for the third quarter increased 24% to $159.6 million, from $128.6 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Operating margins were a record at 21.3%, 130 basis point improvement over the third quarter of 2010.

Net income was up 27% to $98 million and diluted earnings per share of $0.60 were up 25% over last year's third quarter.

Orders in the third quarter were up 5% organically, and 3% overall.

If acquired backlog is excluded from last year's third quarter, orders were up 8% overall.

Operating cash flow in the quarter of $137 million was a record, representing a 20% increase over last year's third quarter.

Free cash flow was $125 million or 128% of net income.

Working capital management was excellent.

Operating working capital was 17.5% of sales, matching our best ever levels.

Turning our attention to the individual operating groups.

The Electronic Instruments Group had an excellent third quarter.

Sales were up 21% to $409.5 million on continuing strength in our Process, Power and Industrial businesses, and the contribution from the Atlas Material Testing Technology acquisition that we completed last November.

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

Internal growth for EIG was 12%.

Acquisitions added 7% to sales, while currency added 2%.

EIG's operating income increased 23% to $102.4 million.

Operating margins were very strong at 25%, up 40 basis points over last year's third quarter.

The Electromechanical Group also had an excellent third quarter.

Sales were up 11% to $341 million on strength in our differentiated businesses and the contribution from the acquisitions of Avicenna Technology and Coining.

Internal growth was 3%.

Acquisitions added 7% to sales, while currency added 1%.

EMGs operating income increased 22% to $68.4 million.

Operating margins were strong at 20%, up 180 basis points over last year's third quarter.

These were record operating margins for EMG.

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 our Company, including lean manufacturing, Six Sigma in our factories or 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 securing office and strategic procurement initiatives.

From these sourcing activities we recognized $8 million in savings in the third quarter and expect $29 million in savings for all of 2011.

These efforts were key drivers in the record operating margins in the third quarter.

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

In the third quarter of 2011, international sales represented 50% of our total sales, and international growth was very strong.

Through the investments we've made over the last several years, sales growth in the BRIC locations was excellent at 44% in the quarter.

This quarter our third-party MRO business signed a 3-year agreement with Lufthansa Technik in Germany to provide MRO services on its heat transfer product lines including heat exchangers, oil coolers and fuel heaters.

Annual revenues for the products covered by this agreement are projected to exceed $1 million.

This win represents another example of our third party MRO business's expanding market share.

Our Programmable Power Business booked a $1.6 million order for solar array and battery simulator systems for a Russian spacecraft manufacturer.

These systems will be used to support Russia's space program.

This was the first major space order for Programmable Power in Russia and the culmination of 10 months of strategic focus.

There are 2 additional significant proposals currently being worked on with other Russian manufacturers and are expected to close in early 2012.

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

We have consistently invested in RD&E.

We expect to spend $139 million in 2011, up 24% over 2010, so a very significant investment.

We are excited about some recent introductions.

AMETEK Prestolite Power released a new high frequency battery charger for the motive power market.

Prestolite Power is the largest independent manufacturer of a motive power chargers and the new Eclipse II high-frequency charger adds to its extensive family of chargers.

The new battery charger provides the power efficiency of greater than 92%, providing energy savings for the end user.

Sales in the first year for the new Eclipse II charger is expected to total $9 million.

In September, our SPECTRO business introduced the SPECTRO Blue, an inductively coupled plasma optical emission spectrometer.

The SPECTRO Blue, an ideal system for environmental laboratories, establishes new levels of performance for common laboratory analysis where stability, high throughput, uninterrupted operation and, especially, low cost of ownership are important.

Customer interest in this new release is high and we expect this product will gain rapid market acceptance.

From an overall perspective, revenue from products introduced over the last 3 years was 20% of sales in the third quarter, up from 19% in 2010, reflecting the excellent work of our businesses in developing the right products to serve their customers.

Turning our attention to acquisitions.

Over the last quarter we have been working through a very full pipeline of potential acquisitions and I am pleased to note that we announced 2 recently -- Reichert Technologies, which was announced last week and EM Test which we announced this morning.

Together these businesses represent $95 million in annual revenue and capital deployed of approximately $240 million.

Together with the acquisitions of Avicenna Technologies and Coining earlier this year we have now deployed approximately $425 million on these acquisitions this year acquiring approximately $185 million in annual revenue.

Looking at each of these deals, Reichert Technology is a privately held manufacturer of analytical instruments and diagnostic devices for the eye-care market headquartered in Depew, New York, that is near Buffalo.

Reichert had estimated annual sales of $55 million.

We paid approximately $150 million for the business.

Reichert is a leader and innovator in high end instruments used by ophthalmologists, optometrists and opticians worldwide to diagnose vision correction and eye diseases such as glaucoma and macular degeneration.

Reichert is an excellent acquisition which expands AMETEK's business in the medical market and enables us to enter the highly attractive ophthalmic device market with an industry leader and innovator.

Reichert invented the industry standard Phoroptor refraction device used in vision correction diagnosis.

They are also the leader in tonometry instruments used to measure intra-ocular pressure, a key indicator of glaucoma.

The acquisition of Reichert adds significantly to our position in the medical market and provides us with another adjacency to grow in this attractive market segment.

Reichert complements our acquisition of Avicenna Technology earlier this year and Technical Services for Electronics in 2010.

Both of these businesses provide highly engineered components and connectors to the medical industry.

Reichert Technologies also broadens the range of products we offer, which includes Precitech Optoform machine tools used in niched opthalmic lens manufacturing.

With this acquisition, AMETEK has approximately $250 million in sales to the medical market, representing approximately 8% of AMETEK's overall sales.

The second acquisition is EM Test, a privately held manufacturer of electronic test and measurement equipment headquartered in Reinach, Switzerland.

EM Test is a global leader in equipment used to perform electrical immunity and electromagnetic compatibility testing.

EM Test manufactures a full line of conducted electromagnetic compatibility test equipment including electrical fast transient generators, electrostatic discharge simulators, surge generators, waveform simulators and multi-functional generators.

Its products are used in test applications by a wide range of industries to ensure that electronic and electrical products are not susceptible to external electromagnetic disturbances and do not generate electromagnetic disturbances that might affect other products or instruments.

EM Test is an excellent addition to our programmable power test and measurement equipment business.

It serves as a valuable platform for growth in the highly attractive market for electrical immunity testing and emissions measurement.

EM Test was privately held and has annual sales of approximately $41 million.

The price paid was $93 million.

Acquisitions will continue to be a focus for us for the balance of 2011 and in 2012 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, 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 2011, overall our businesses continue to perform well with our longer cycle, oil and gas, power and aerospace businesses showing particular strength.

We anticipate 2011 revenue to be up approximately 20% from 2010 and organic growth to be up low double digits.

This is an increase from our previous guidance.

Earnings for 2011 are now expected to be in the range of $2.34 to $2.36 per diluted share, up 33% to 34% over 2010 reflecting the leveraged impact of core growth and our streamlined cost structure.

This is an increase from our previous guidance of $2.30 to $2.34 per diluted share.

Fourth quarter 2011 sales are expected to be up low double digits on a percentage basis over last year's fourth quarter.

We estimate our earnings to be approximately $0.60 to $0.62 per diluted share, an increase of 20% to 24% over last year's fourth quarter of $0.50 per diluted share.

So in summary, our overall business performed very well in the third quarter of 2011.

Our strong portfolio of businesses, proven operational excellent capabilities and a successful focus on strategic acquisitions have enabled us to perform well in 2011 and provide AMETEK with a solid foundation going forward.

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?

Thank you, Frank.

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

I will provide some further details.

Selling expenses were 10.0% of sales in the third quarter, down from 10.2% in the prior year's third quarter.

General and administrative expenses were 1.5% of sales, below last year's third quarter level of 1.6%.

The effective tax rate for the quarter was 29.5%, up slightly from last year's third quarter rate of 28.9%.

We anticipate a tax 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 19.2% in last year's third quarter, reflecting the great work done by our operating units to reduce the Company's investment here.

Compared to last year's third quarter, our collection cycle improved to 49 days from 52 days, and our inventory turns improved by 9%.

Capital spending was $12 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 year.

Operating cash flow for the third quarter was a $137 million, up 20% over the cash flow for last year's third quarter.

And cash flow was up 21% on a year-to-date basis.

Free cash flow was $125 million for the third quarter, representing 128% of net income.

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

Total debt was $1.11 billion at September 30, down $57 million from year end.

Expenditures for acquisitions through September 30 totaled approximately $185 million.

Offsetting this debt is cash and cash equivalents of $218 million, resulting in a net debt-to-capital ratio at September 30 of 30.4%, down from 36.2% at December 31.

At September 30, we had approximately $1.06 billion of cash and existing credit facilities to fund our growth initiatives.

This amount includes the new 5-year, $700 million revolving credit facility we announced on September 22.

This new facility was well received by our bank group and replaced our previous $450 million credit facility.

It provides AMETEK with a larger financing capacity and increased flexibility to support our growth initiatives.

Subsequent to the end of the third quarter, we acquired Reichert Technologies and EM Test.

Capital deployed in these acquisitions totaled approximately $240 million, which brings our cumulative expenditures on acquisitions in 2011 to approximately $425 million.

Also, subsequent to quarter end, we repurchased a 1.28 million shares of stock for approximately $43 million.

This is in addition to $5 million spent in the third quarter.

These repurchases were in line with our stated strategy to offset the dilutive impact of our benefit plans with opportunistic share repurchases.

Our highest priority for capital deployment remains acquisitions.

In summary, we had an outstanding third 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 solid cash flows.

Bill?

That concludes our prepared remarks and, Frank, we would be happy to take questions now.

Thank you.

(Operator Instructions) Jim Lucas, Janney Capital Markets.

Thanks, good morning.

First, 2 housekeeping questions.

The payable number, and I'm sorry if I missed it, but the backlog at the end of the quarter?

The payable number is $263 million, Jim, and the backlog is $926 million.

Okay, thanks.

And then, with regards to EM Test, looks like a very nice addition to Power and Test, you gave us the size of what medical is, but I was wondering if you could talk a little bit more about the Power and Test platform now in terms of the total size and how you view this platform going forward?

That's a great question, Jim.

Basically the Power segment, after we include this acquisition, is going to be about $350 million.

We see a great opportunity because the Power segment has been a smaller sub-segment, if you will, within the AMETEK portfolio and we are looking at a number of different acquisitions to expand it.

This particular one really links with part of the existing Power business.

We have a programmable power division that basically makes instrumentation that tests power systems, so it's really in more of the test and T&M market than our other Power businesses which are much more directly related to supplying or measuring power versus automated type test systems.

So, EM Test is a logical fit because it also is in that general test and measurement type of market.

And what you might envision over time is that we can build out both this test and measurement part of Power as well as the more intrinsic part of Power.

So, we see 2 growth opportunities here and we are really looking at deals in both of those areas.

All right that's very helpful.

And then, just if you could give us an update on what you are seeing in the various pieces on the Aero side given that's been a later cycle, more positive story.

Just any update there would be greatly appreciated.

Sure Jim.

Basically Aerospace is gaining steam is probably the best way to describe it.

When we look at the third quarter sales organically, we are up about mid single digits, and when we look at the fourth quarter, we are expecting high single digits.

So, some of the strong order intake that we got in the first half the year, which was Aerospace related, is now starting to build in terms of shipments.

If you look at the various parts of Aerospace, it really moves around quarter to quarter, but let me give you some data to help you understand what exactly is occurring there.

If you look at the strong parts in the third quarter, they were basically commercial, which was up low double digits.

Obviously, driven by the strength in both Boeing and Airbus and also the fact that more people are flying.

And also, somewhat surprising is that business and regional jet was also up low double digits, and the reason for that is not so much the market core of business jets but more the fact that we have won some major programs with a very large customer in business and regional aircraft which is driving our growth.

Military was up low single, which is not surprising, and third party MRO in the third quarter was up mid single digits, and if we look to the fourth quarter we are going to see some shifts in this.

With third party MRO we expect to actually be up mid teens.

We expect business in regional jets to remain strong, and commercial to remain strong, and military to stay probably in that low single digit arena.

So, we are pretty excited, in general, about Aerospace and that it is building steam and we think it is going to be a key driver to our performance next year.

And as I know you are aware the profit margins in this part of the business are extremely good.

Great, and then just one final clarification, on the commercial side, can you give us an update of where you stand OE versus after-market roughly on a mixed basis.

Yes, it is roughly 50-50.

In terms of the amount overall and the organic growth was about the same, low double digits in each part of the business.

Great.

Thanks a lot.

Robert Barry, UBS.

Hi guys, good morning.

Looks like a pretty broad-based strength in the portfolio but I was wondering if you could flag any incremental signs of softness that you've seen since the last quarter and in particular, what you are seeing in Europe.

Great 2 questions.

With respect to the last quarter, there really is not any --

Ladies and gentlemen, please remain on the line.

Your conference will resume momentarily.

We thank you for your patience.

Please go ahead.

Everyone, this is Bill Burke.

We are back.

We had a little bit of a power issue on this end here.

Robert, I think you were asking your question.

I don't know if we got to the end of it so why don't I give the floor back to Robert Barry from UBS.

Thank you.

I guess I had just asked about whether since second quarter you had seen any incremental signs of weakness in the business and in particular if you could comment on what you're seeing in Europe.

Right, Robert.

What I was in the process of saying about weakness is that there really has not been any major change between Q2 and Q3.

Our floor care motor business is the one that basically has, I will say, returned to normalcy.

We are seeing growth that is hovering around zero.

But that's expect it as we are returning from an economic recession.

In general, the portfolio is quite strong.

And in terms of the backlog, which is an indicator at the end of the second quarter, our backlog was $948 million.

At the end of the third quarter it was $926 million.

And most of that change was due to FX.

It was not due to any real weakening in the overall business.

So, we are pretty bullish overall on the markets which is surely not consistent with what we read in the newspapers and listen to in the news.

In terms of Europe, Europe was fine.

Basically, if you look at the overall growth of 16% in the Company, the growth in Europe was 18%.

The growth in Asia was 32%, so the total international growth was about 24%.

And that links with the US growth which was about 10%, and that sums to that 16% overall.

So, in essence, Europe is doing okay.

So, we are not seeing signs of demise in Europe that actually was on the front page of the Wall Street Journal this morning.

So far, so good.

Now, we are obviously looking at it very, very closely.

We have got plans in place if things weaken, but right now it's a pretty good situation.

That's very encouraging.

I was wondering if I could ask about one particular end market and that's related to the medical/research end market.

I know we have seen some NIH related funding concerns impacting demand at customers either to direct NIH funding or collateral damage from uncertainty around parts of their budget.

I was wondering if you were seeing any of that.

Now, our businesses really are not linked directly to NIH funding, and it has not been an issue for us.

These businesses have been growing extremely well.

Organic growth in the double digit arena.

We are very pleased with the businesses we have, and it's just not a factor, at least of any appreciable magnitude that we can detect.

And just finally, can you share any color on what the margin profile is for you EM Test?

EM Test is about the same level as the EBITDA margins of the Company.

Reichert, the first deal, is actually slightly above the EBITDA margins of the Company.

So, both of these are very, very good margin businesses, and we also expect we can improve margins from where they are.

Okay, any color on accretion?

Both of these deals will be slightly accretive next year.

I wouldn't assume any accretion in 2011, as a result of those deals.

Okay, thank you.

You bet.

Wendy Caplan, SunTrust.

Please proceed.

Thanks, good morning.

The new acquisitions, Reichert and EM Test, can you talk a little bit about what we are seeing currently in terms of the growth metrics of those 2 Companies?

Also, can you speak a little about the cost and revenue synergies that you expect?

Sure.

In terms of growth, these businesses, on the longer-term, are high single digit type of growth businesses.

Right now, there's actually a growth profile that's a little bit higher than that but I think if you model them over a business cycle that high single digit growth is the right way to model the businesses.

The synergies are going to be somewhat different for each of these businesses.

If you look at the Reichert deal, they are very strong in the United States and very strong in Europe, but there is a huge opportunity in Asia.

Only about 7% of their sales goes into Asia.

So, we see a great opportunity to leverage our distribution system in China and the other Asian countries to facilitate their growth.

We also see opportunities to improve the manufacturing efficiency in that organization.

As you know, we run a very lean, very high margins and even though this is a high margin business we see opportunities to improve the manufacturing capability of that business.

In the other business, in EM Test, the geographic profile is a bit different.

It's a Swiss-based Company, so it's got very strong sales in Europe and also very strong sales in Asia, but not strong sales in the US.

As a matter of fact it's about the same percentages, it's about 7% of their sales is in the United States.

So, we see an opportunity really in a cross distribution sense here to be able to take their products and leverage them in the United States.

Then conversely, the part of our Power business which is in test and measurement which is largely a US business, to leverage it through EM Test's distribution system in Asia and in Europe.

So, we think there's really good cross distribution synergies there.

Similarly, we think there are ways, in essence, to improve the manufacturing efficiency of that Company.

It's margins, as I mentioned, are about in-line with AMETEK's margins overall and we see potential to be able to increase those, not only through the growth profile but also through the cost side of the business.

So, we are obviously very early, we just acquired the Companies and our people are over there now and I know, I got an email this morning, that they're starting to have discussions about the opportunities on the synergies.

Okay, thank you.

And that record operating margin for EM -- EIG -- or for the Company as a whole rather, for the quarter.

Can you -- under the category of what are you going to do for me tomorrow -- do we think that there's upside to that going forward?

(laughter)

I do, Wendy.

These levels, I can remember when I first became CEO more than 10 years ago, we were talking about margins down in the 10% and 12% region, and we are very pleased, obviously, being up at this 21.3% level.

But if you just look at 2 key facts, and I will focus on 2011, which the same type of profile can carry forward.

There is 2 drivers to these margins.

The first is, in essence, the organic growth and contribution margin in our businesses.

And for 2011, as I mentioned in my opening remarks, the organic growth is going to be up low double digits.

The contribution margins and our business, we have basically told you to model it at 35%.

I can tell you in the third quarter, it was actually 42%.

So, we had excellent flow through.

As that organic growth continues and we get that flow through, in essence, margins on the bottom line can only go in one direction.

So, we think there is leverage.

The second part is our cost reductions.

And we put about $50 million in cost reductions through the P&L this year, a combination of our sourcing activities, which I talked about in my opening remarks, as well as consolidation of facilities, value engineering, low cost locale manufacturing, all of the things that AMETEK has historically done And we're going to continue that.

As a matter of fact, with the weakening of the global macro outlook, we are going to be very aggressive next year and we are going to put through more than $50 million in cost reductions through the P&L in 2012.

We are in the process right now of deciding exactly what that number will be and where it will come from.

But we want to be prepared in case things, in fact, do soften.

So, the guidance that I have been giving and I am still very comfortable with is, as we go forward, modeling a number like 50 basis points is not an unreasonable thing to model.

Hopefully we can do better than that.

Matter of fact, this year now, I think last quarter we told you for 2011 we were to model 150 basis points, and with our strong performance in Q3 we have raised that now to 160 basis points for the year and that's probably conservative.

Great, thank you very much, Frank.

You bet, Wendy.

Allison Poliniak-Cusic Wells Fargo.

Please proceed.

Good morning.

Just going back to the acquisitions, I know you talked about programmable power and that being an area to build out but can you just give us any thoughts on the pipeline.

Where you're looking at generally, and thoughts on the pricing environment as well?

Yes, the pipeline is great.

Really starting about midsummer we saw our pipeline increase significantly.

That has continued.

We are pretty excited about our ability to add additional deals.

You can never really judge when exactly they are going to close and even in some cases if specific deals are going to close, but I am pretty bullish on where we are and what we can do.

In terms of areas, we are really looking across the portfolio and essentially all areas except our cost driven motor business.

We are looking within Process, and that's probably our number 1 area for adding acquisitions if we essentially had to choose.

Aerospace is a very good place at the present time because we see strength in Aerospace for the foreseeable future.

If you look in our Power businesses, as we have already talked about, obviously we will do deals there.

And if you go on the electromechanical side of the business, we have been adding deals in our EMF Division and in our technical motor operation and we will continue to do that.

I am fairly optimistic and, obviously, as John talked about in his opening remarks, we have got plenty of firepower and we are going to use it and use it judiciously to continue to grow the Company.

Great.

And then just back to the pricing side.

I mean, are multiples becoming more realistic?

How are you looking at that right now?

Well, they should be given the macro environment, but I've heard some other CEOs talk about multiples regressing, but I have not seen that yet on the deals that we have been looking at.

So, multiples are, from my viewpoint, still about a point of EBITDA too high, higher than I would like.

So, what we are doing is looking for deals that are particularly attractive both from an organic viewpoint and also from where we can add synergies.

So, that in essence, our return on invested capital is the same even paying that extra multiple point for the businesses.

So, just to give you a flavor, if you look at the multiples on these 2 deals, we paid about 10 times forward EBITDA for Reichert and about 9 times for EM Test.

I would have preferred those both to be about a point lower, but we know we are going to get the return on invested capital in those deals because of the types of businesses they are and the synergies that I outlined.

Great, thank you.

You bet, Allison.

Jamie Sullivan, RBC Capital Markets.

Please proceed.

Hi, good morning.

Frank, you walked through the Aerospace in detail.

Maybe you could just go through the other areas of the business as well for third quarter and your outlook near-term?

Sure, I would be glad to do that.

I will start with the other businesses in EIG.

In the Process businesses our markets performed extremely well in the third quarter.

Sales were up more than 30%.

We saw very strong growth across essentially all parts of the business.

Our Oil and Gas business continued to show sizable strength, but also our Ultra Precision technology, our Materials Analysis and our Measurement and Calibration technology divisions were also very, very strong.

On an organic basis, sales were up mid teens on a percentage basis in the quarter.

And if we look at all of 2011, we expect this business to grow approximately 25% with mid teen percentage organic growth, and in particular, we expect very strong performance from our later cycle Oil and Gas businesses.

So, process is just really humming at this point in time.

And also, our Power and Industrial business is doing very, very well.

Q3 sales were up high single digits organically.

With good growth across both the power and the industrial parts of the business.

So, good strength.

We are very pleased with that.

And we started out very strong in this business, and we expect that sales for Power and Industrial will be up high teens organically in 2011, really driven by strength in the later cycle Power business, but also good strength in our Industrial business.

So, if you sum up all of EIG, including what I talked about for Aerospace, for EIG we now expect 2011 overall sales to be up more than 20% with mid teens organic growth.

And that is actually an increase over our previous guidance, both on overall sales and also on organic growth.

Moving to the other half of the Company, the Electromechanical Group for our differentiated EMG businesses, overall sales were up mid teens on a percentage basis in Q3 with mid single digit organic growth.

And for 2011 we expect this business to be up approximately 25% driven by strength in -- actually all of the major parts of the differentiated business, technical motors, EMIP and also our third party MRO businesses.

For the full year we expect organic growth to be up about low double digits.

And the last part I have already talked a bit about which is our cost driven motor business.

That business is now less than 10% of AMETEK.

It's our legacy business for those of you that are new with us.

It's returned to what I would call a more normal trend in 2011, after strong growth in 2010.

For 2011, we expect the business to be about flat, and Q3 sales were down just slightly, just down low single digits.

So, as you know, we don't manage that business for growth.

We manage it much more for profitability.

So, for all of EMG then, we are now expecting 20% growth in 2011 with organic growth up in that high single digit arena.

And if you sum EMG and EIG for AMETEK as a whole in 2011, we are expecting approximately a 20% sales increase with organic growth of low double digits.

And again, both of those are increases from our previous guidance.

So, we are feeling quite good as we have gone through the third quarter about our prospects for the year.

I hope that helps.

That does.

Thank you very much.

Okay.

Matt Summerville, KeyBanc Capital Markets.

Please proceed.

Good morning.

Frank, you had commented in your discussion on the Aerospace piece of the business.

I wasn't clear if that was relegated to EIG or the whole Company when you were talking about the military side of the business still being up.

And I guess what I'm trying to get at, could you just review where your exposures are at from an Instrumentation and Electromechanical Group standpoint to the military and defense markets?

How much of your business that is today and I guess, how we should think about that heading into next year?

Yes, the military business is largely on the EMG side of the business, and it is roughly a third of our overall Aerospace business in terms of the full Company.

So, we are looking, as I mentioned, we saw low single digit growth in Q3.

We are expecting low single digits in Q4.

We have not rolled up our budgets yet for that part of the business, but I am expecting this business to be up low to mid single digits next year.

That is my thought process without yet having the benefit of going through the budget with the people that are running that business.

So, it's not going to be the prime driver to growth in Aerospace.

What is going to be the prime driver is our Commercial, and related to that, the third party MRO businesses.

Commercial Aerospace is just doing extremely well.

If you look at this year, Boeing's volume is going to be up about 11% and Airbus is going to be up about 3%.

Both of them are projecting growth next year of essentially 10% to 11%.

And between them they're going to produce about 1,150 aircraft.

So, we have now -- we saw a bunch of the orders come through in the first half of the year.

We are starting to see our shipments rise as they are getting, obviously, prepared to ramp up their production rates.

And they seem to be repetitively announcing further aircraft build rates out in 2012 and 2013.

So, this is going to be a key part of the business that is going to grow.

And also, the third party MRO business.

We expect that to be up this year in the mid teens to the low double digits.

Actually, it's low double digits as I look at my sheet here.

We think that's going to be a great performer next year, not only because of the market rebound that also because of our ability to win share.

So, those 2 parts of the business, which are in excess of 50% of the business, are really going to be the key drivers as we go forward versus the military piece of the business.

Got it.

And Frank, I think your total orders in the first couple of quarters of this year were running just under $800 million a quarter and it looks like that has tapered off a bit here in Q3.

Can you reconcile what that change in incoming order rates has been driven by, and I guess, can you talk about overall order linearity as you move through Q3?

Yes, order linearity was extremely good.

It was linear basically.

August, a slight bit weaker just due to the vacation but basically it is flat.

If you look at the order trends, you are absolutely right.

It went from $800 million, around, I think it was around, a little bit less than $800 million -- no, actually it was lower in the first quarter.

Then it was about $798 million or something like that, $797 million.

And it went to about $728 million in Q3.

However, if you look at it organically from Q2 to Q3, it is actually only down about 4% organically.

And that is primarily due to Europe, and in essence, that part of the world that goes on vacation for a substantial part of the third quarter.

So, that's a normal trend for us with Q3 orders being a little bit weaker.

So, in essence, we are really not feeling any major change in the business, even though the numbers look large, the $800 million to the $728 million, organically it's not that big.

We had some acquisitions in the second quarter that we had acquired backlog that was in that $800 million number, so in a way, it was artificially high, I would say.

So, we are feeling very, very good about the order rates in the Company.

And as I mentioned, the $728 million is still organically up about 5%.

And again, if you extract backlog from acquired businesses last year it was up 8% overall.

So, we are feeling okay about the orders, we don't see any major problem.

I mentioned the backlog, the backlog is hanging in there.

So, we are feeling pretty good.

Great, thanks for the color, Frank.

You bet.

Richard Eastman, Robert W.

Baird.

Please proceed.

Yes, 2 quick things, and good morning.

On the incremental margin, Frank, you talked about that a little bit earlier.

I think you mentioned core was around 42% in this quarter.

As you look out to '12, if we assume maybe some shift in the mix of business, perhaps Process settles down a little bit, Aerospace picks up a little bit, is the bias towards higher incremental margins, or at least sustainable incremental margins, up in this of 40%-plus range, if mix shifts a bit?

Your question is a very good one.

These incremental margins do tend to move around quarter by quarter depending on the exact mix, so what we have basically told you guys, or suggested to you, to model is about a 35% number.

I think there will be a bias from that 35% number as we go into next year in the positive direction.

I think you are exactly right that, we probably are not going to see as much organic growth next year in Process as what we have seen this year, because obviously the numbers in Process have been off the charts.

And we will be having tougher comps but I think they will pick up in Aerospace and there will be -- both of those are very high contribution margin businesses.

I would be uncomfortable in telling you to take the 42% and add something to it, but I am very comfortable in saying that the 35% should have an upward bias.

Okay.

And then just lastly, again, I wanted to circle back for a minute to the investment that you made in RD&E.

Yes.

And it's a substantial.

Do you target a point or 2 points above market growth across your segments from that RD&E spend, or is it more of maintaining leadership which maybe gives you a little better price?

How should we think about that investment maybe driving better than market growth in terms of sales across your segments?

Right, fundamentally, we are driving that investment by where we can grow.

You've hit on a very key point.

As you know, we are very niche focused.

Not only do we want to keep our leadership in the niches we are in, but we also want to expand and go in other areas.

So, we actually model our development expense.

If you can think of a graph where you have 2 points which is existing markets and new markets on 1 axis.

If you look on the other axis, and you look at where that investment goes, we try to position that investment so that we get the maximum growth.

And we actually have an internal strategic planning process that augments that, both in terms of the development expense but also where we look for acquisitions to get that resident growth.

If you look at our businesses and just split them, the amount of investment we make in engineering on the Instrument side of the business is much higher than on the Electromechanical side.

That's because the Instrument businesses tend to be more our RD&E driven and less capital-intensive where on the EMG side, they are more capital intensive and less R&D focused.

So, when you look at it, I didn't look at this particular quarter, but in general we tend to invest at about a 6.5% to 7% level in the Instrument side of the business and more like a 3.5% level in the EMG businesses.

That is probably what we will see going forward.

So, we just view this as the key lever for organic growth in the Company.

This and obviously the international focus, so we are going to continue to put investment in.

As you can see, we are up 24% this year, which is a huge increase in the investment, and hopefully that will pay off in spades as we go forward with the organic growth of the Company.

Excellent.

And then, just the last thought.

From the perspective of the acquisitions that you have made, and when you look back over the last maybe 12 months here, in terms of ones that have been integrated and now count towards organic growth.

Are you still comfortable that you are driving that margin?

I think you used a number that margins that would increase, I think it was by one-third post acquisition.

Yes.

Are you still comfortable you're getting that type of leverage off of those acquisitions?

Yes, John just ran the analysis.

Why don't you talk to it John?

Yes, we track every acquisition that we do on the anniversary and we just tabulated the ones for the last, that hit that point.

It is right on the money, right on the money.

Roughly 24%, 25% up in EBIT and that is after you dial-in the acquisition activities, the purchase accounting, the profits and inventory.

We are driving those margins up and it's spot on our prior track record and we are exceeding our models, Richard, so we are doing well in that.

Okay, very good.

No degradation at all.

Great, thank you much.

Christopher Glynn, Oppenheimer.

Please proceed.

Thanks.

Good morning.

I know you're still doing the 2012 plan, but you've commented on some of the businesses and just from a pragmatic point of view you've really established some tough comps in some areas.

Any businesses outside the cost driven motors you think are really more positioned to plateau?

Maybe comment on the Power and Industrial in particular?

I actually think, to a large degree, except the Aerospace businesses, you are going to see what I call a return to normalcy.

So, I would not use the word plateau.

We are talking, this year organic growth rates that are in the low double digits.

We are not going to be looking at double digit organic growth next year and I don't think you're going to be seeing that from virtually any of the industrial companies.

So, I think there is going to be a return to normalcy and I expect it's going to happen, essentially, along the cycle of the businesses.

Where I have already talked about our cost driven motors businesses which are the very short cycle businesses returning to normalcy.

I think you're going to see the mid cycle businesses start to return to normalcy.

We are not seeing that yet but I would expect that would happen as we go through next year.

And I would expect the comps in the Oil and Gas business, as I mentioned before, to be more difficult.

So, we are not going to be seeing that mid teens organic growth next year but I think it will be very good growth.

And then I would expect the Aerospace businesses to pick up over this year.

To me, it's a normal recovery, that the way you would expect these businesses to perform.

Okay, thank you Frank.

You bet Chris.

Mark Douglass, Longbow Research.

Please proceed.

Good morning gentlemen.

I will keep this quick.

I assume you had some battery backup of your own there.

(laughter)

I am embarrassed to tell you that we forgot to plug in the computer and the battery ran out on the computer.

We are going to have to get our Power business here.

We actually do have battery backup in the building believe it or not, but it doesn't help if you have got the power switch off.

I'm going to blame Mr.

Burke for that.

(laughter)

Just real quickly, most of my questions have been answered.

Then you break down some of the margin improvement here, I mean you mentioned your operational excellence was $8 million in savings.

Can you quantify how much was due to a more favorable mix with Oil and Gas being really strong as well as Aerospace?

Can you quantify that?

I really don't have numbers that I can quantify where it exactly came from.

But obviously, if you look at the general areas where it came from, the sourcing was very strong, as you mentioned, with that $8 million in the quarter.

We are really ramping up the value engineering activity in the Company.

We trained most of our people in value engineering in those divisions where we saw substantial leverage.

So, that has got a positive factor in terms of what is happening.

We are also continuing to move production to low cost locales, and we will probably add another $40 million-plus to our low cost locales during the year, not specifically in the quarter.

That's a key area of focus.

And then our divisions are, also, some of them are doing some plant consolidation.

So, that is running through the P&L.

Another way that I can maybe answer your question is, we do look at price versus cost.

And in essence, in the third quarter, our pricing exceeded our cost increases in the business by about 0.5 point of sales.

Pricing was up about 2%, and our costs on the input side were up about 1.5.

So, we in essence exceeded that by 0.5 point.

And that's one of our goals, is to always have the pricing exceed the cost inflation.

And that inflation includes the cost reductions that I am talking about.

In other words, we've put those benefits through and that's what enables us to get this.

Great.

And then with the commodity costs now being a tailwind.

Do you anticipate you should be able to hold price and continue to -- that could even help margins in 2012 assuming there is some organic growth and you have commodity costs stay where they're at right now?

Yes, we are not going to gain much from the fact that commodity prices have gone down because as we mentioned in the past, we are fairly immune to the basic commodities.

And I'm talking about things like nickel and steel and iron and things of that nature.

Because we have either put escalation clauses in our contracts which are going to move in both directions, or we quote based on the spot price of those particular commodities.

As we go -- after we quote it, we basically lock it in using some forward contracts, but it's only on what is essentially in the backlog that we do that on.

So, we are impervious to whether commodities go up or down, so we are not going to gain from that.

But, we plan on being quite aggressive on pricing next year.

In the pre-budget memo that I put out, I have asked for more aggressive pricing next year than this year, and we think there's an opportunity to get that.

So, hopefully when we talk to you in January and talk about our budget for the year, you will see a number that is higher than that 0.5% that I talked about in terms of price exceeding cost.

Okay, thank you.

Our last question comes from the line of Elena Wood, Bank of America.

Please proceed.

Good morning everyone.

I just wanted to circle back to that 42% incremental margin, the core incremental margin.

Would you have a split between EMG and EIG?

It was stronger in EMG than it is in EIG.

I don't have the numbers right in my head but it was definitely stronger.

You can see that with the bottom line incremental margins we saw in EMG where they hit a record.

They were up 180%, and in EIG, which has much higher absolute margins, they were up about 40 basis points.

It was definitely higher in EMG than in EIG.

Okay, and then I just wanted to go back to your comments about raw material spreads.

How would that price cost, the 50 basis points of benefit compare to the second quarter?

I think it was 1% in the second quarter, I think it was 1%.

Yes, that's right.

Okay, and lastly, this is probably a question for John.

Pension.

What should we preliminary be modeling in terms of pension headwinds for next year assuming discount rates stay relatively flat versus where we are today.

We don't see major problem on pensions.

As you know, there's a lot of other assumptions that go into that.

It's premature to give guidance, but we are over-funded in the pension plans and think that next year we will be able to manage our way through that just fine, Elena

Okay, so you're suggesting that it will not be a headwind or --?

It might be, but we have got other winds blowing in different directions so we are not that concerned about pensions.

We have got strong funding there so we are okay.

Okay, terrific, thank you.

You bet, Elena.

(Operator Instructions)

Mr.

Burke, there are no further questions at this time.

Okay, great.

Thank you, Frank.

Thank you everyone on the call.

We appreciate you joining us.

And as a reminder the replay of this call can be accessed on both AMETEK.com and at streetevents.com.

Thank you.

Ladies and gentlemen that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

Have a great day everybody.