阿美特克 (AME) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMETEK first quarter 2012 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 on Thursday, April 26th, 2012. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations. Please go ahead, sir.

Great. Thank you, Tahira. Good morning everyone and welcome to AMETEK's first quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and CEO, John Molinelli, Executive Vice President and Chief Financial Officer, and Bill Burke, Vice President and Treasurer. AMETEK's first quarter results were released earlier this morning. These results are available electronically on Market Systems and on our website at the investor section of www.ametek.com. A tape of today's conference call may be accessed until May 10th by calling 800-633-8284 and entering the confirmation code number 21585026. This conference call is also webcasted. It can be accessed at www.ametek.com and at www.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 www.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 would now turn the meeting over to Frank.

Thank you, Kevin, and good morning, everyone. AMETEK had an excellent first quarter. We established quarterly records for orders, sales, operating income, operating margins, net income and diluted earnings-per-share. Sales in the first quarter were up 15% to $827.2 million internal growth was strong at 6% while acquisitions added 10% and currency was a 1% headwinds. Operating income for the first quarter was superb. It increased 20% to $182.8 million from $152 million last year reflecting the impact of the higher sales and our operational excellence initiatives. Operating income margin in the quarter was a record at 22.1%, a 90 basis point improvement over the first quarter of 2011. Net income was up 22% to $110.2 million and diluted earnings-per-share of $0.68 were up 21% over last year's first quarter.

Orders in the first quarter were a record $863 million, up 8% overall from the prior year sequentially orders were up 15%, the book-to-bill ratio in the quarter was 1.04. Cash flow was very strong. Operating cash flow was $141 million, up 36% over last year's first quarter. Free cash flow was $132 million or 120% of net income. Working Capital Management was excellent, operating working capital was 17.2% of sales. Turning our attention to the individual operating groups. The electronic instruments group had a great first quarter, sales were up 21% to a record of $468.8 million on strength and our aerospace and process businesses. In addition, we had strong contributions from the four acquisitions that we completed in the fourth quarter of 2011 and in January of 2012. Internal growth was strong at 9% while currency reduced sales by 1%. The IG's operating income increased 23% to a record $123 million and operating margins were very strong at 26.2%, up 50 basis points over last year's first quarter. The electomechanical group also had a very good quarter, sales were up 9% to $358.3 million on strength in our differentiated businesses and the contributions from the acquisitions of Avicenna and Snecma. Internal growth was 3%, acquisitions added 7% and foreign currency reduced sales by 1%. EMG's operating income increased 13% to $70.9 million, a record level, and operating margins increased 70 basis points to 19.8%.

Focusing now on our four growth strategies of operational excellence, global and market expansion, new product development and acquisitions. 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 and back offers operations designed for Six Sigma in our new product development efforts and the movement to low-cost locales. We also continued to drive lower cost to our global sourcing office and strategic procurement initiatives. From these sourcing activities we recognized approximately $10 million in savings in the first quarter and are conservatively estimating $40 million savings for all of 2012. Our continued focus on these operational excellence efforts were key drivers in achieving the record operating margin of 22.1% in the first quarter. Global and market expansion continues to be a driver for AMETEK's growth. In the first quarter of 2012 international sales represented 51% of our total sales. Organic growth in Asia was very strong in the first quarter, up mid-teens on a percentage basis over the first quarter of 2011. Growth in Europe was also strong, up mid-single digits organically in the quarter. Sales growth in the BRIC regions was excellent at 20% reflecting the impact from the investments we've made over the last several years.

As an example of global and market expansion AMETEK is a power instruments business was recently awarded a contract to provide fault recorders and distributed on lower management systems to a high speed rail project in Saudi Arabia. Our product will provide complete transient disturbance trend and alarm management of all substation events providing real-time indications of issues and high resolution post-mortem analysis in the event of a fault. The initial contract is for support of the first two phases of this rail project. We expect more orders to follow in additional phases. The total expected value for this project is approximately $3.5 million. New product development is a key to our long-term health and growth. We've consistently invested in RD and E. In 2012 we expect to spend $155 million at 13% increase over 2011. We are excited about some recent new program wins driven by our R and D efforts and engineering capabilities. AMETEK Aerospace and Defense has been selected by Snecma to provide heat exchangers and sensors for the leap 1A and leap 1C engines being developed for the Airbus a320neo and the Comex C919,that's a Chinese aircraft. AMETEK will supply low -drive surface coolers to cool variable frequency generator oil and also main engine oil. While AMETEK measurement and power systems will supply the sensors for these engines. The combined contract value is estimated to exceed $175 million over the life of the program. These awards are great examples of AMETEK's success in winning additional content on key aerospace growth platforms through our engineering capabilities. From an overall perspective revenue from products introduced over the last three years was 19% of sales in the first quarter reflecting the slept work of our businesses in developing the right products to serve their customers.

Turning our attention too acquisitions. AMETEK had a very strong year of acquisitions in 2011 deploying near $475 million in capital and acquiring approximately $215 million in annual revenue. We're off to a tremendous start in 2012 with the acquisition of O'Brien Corporation in the first quarter and as we announced this morning the signing of a definitive agreement to acquire Dunkermotoren. With the contemplated acquisition of Dunkermotoren, we will have acquired approximately $280 million in revenue thus far in 2012. I will discuss the Dunkermotoren acquisition in a moment, but first I wanted to discuss the acquisition of O'Brien which we completed in January.

O'Brien is a leading manufacturer of fluid and gas handling solutions, sampling conditioning equipment and process analyzers used in critical applications in the process industries worldwide. O'Brien was privately held and had annual sales of approximately $80 million the price paid was approximately $175 million. O'Brien's product offering includes pre-insulated tubing bund else, sampling conditioning equipment, specialty electro polish recalled for use in high -purity applications, instrument enclosers an process analyzers. It's products are used to enable, capture, transport and analysis of liquids, gases, vapors and emissions in challenging process environments such as oil and gas production refining petro chemical processing, power generation, pharmaceutical manufacturing and semiconductor fabrication. O'Brien's product lines are both highly differentiated and highly complementary to AMETEK's process instrument businesses combined with our analytical instrument solutions AMETEK now can offer it's customers a complete solution for all of their process analysis needs. In addition, we expect the strong customer relationships of the combined businesses and AMETEK's global capability to further extend O'Brien's market reach.

Now turning to Dunkermotoren,AMETEK announced this morning that we entered into a definitive a treatment to acquire Dunkermotoren, a global leader in highly engineered brush and brushless motion control solutions for a wide range of industrial automation applications. Dunkermotoren is privately held and has expected 2012 sales of approximately 155 million EURO or about $200 million. The business is headquartered in Bongdorf, Germany with additional manufacturing locations in China, Serbia and the UK. Approximately 60% of their sales are outside of Europe. Completion of the acquisition is subject to German government approval as well as normal closing conditions. We expect to complete the transaction in the second quarter. This company is an excellent strategic and highly complementary fit with our precision motion control business and expands our leadership position in its rotary and linear motion applications. In addition, it broadens our manufacturing capabilities in both Europe and China and greatly expand our presence in key industrial end-markets worldwide. We're very excited about the opportunity to acquire such an outstanding company in Dunkermotoren and we'll provide further information on the business upon completion of the transaction. Acquisitions will continue to be a focus for us during 2012 as we see this strategy as a key driver to the creation of shareholder value. We have the managerial and financial capacity and disciplined approach to support this acquisitions focus. Our backlog of deals remains 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 now for 2012, we expect our businesses to continue to show solid growth in 2012 with our longer cycle aerospace, oil and gas and power businesses showing particular strength. Our solid backlog, strong portfolio of businesses, proven operational excellence capabilities and a successful focus on strategic acquisitions should enable us to perform very well in 2012. We anticipate 2012 revenue to be up low-double digits on a percentage basis from 2011, organic growth is expected to be up mid-single digits for all of AMETEK and for both operating groups. Earnings for 2012 are now expected to be in the range of $2.70 to $2.75 per diluted share, up 14% to 16% over 2011 reflecting the leveraged impact of core growth and our operational excellence initiatives. This is an increase from our previous guidance of $2.65 to $2.70 per diluted share. Second quarter 2012 sales are expected to be up approximately 10% from last year's second quarter. We estimate our earnings to be approximately $0.65 to $0.68 per diluted share, up 12% to 17% over last year's second quarter. The estimates provided for the second quarter and the full year do not include any impact from the pending Dunkermotoren acquisition. John will now cover some of the financial details and then we'll be glad to take your questions.

Thank you, Frank. As Frank noted, we had an outstanding first quarter with excellent financial performance and a high-quality of earnings. And I will provide some further details. Core growth in selling expenses in the quarter was in line with core growth and sales. General and administrative expenses were 1.3% of sales below last year's first quarter of 1.5% of sales. The effective tax rate for the quarter was 31.9%, down from last year's first quarter rate of 32.2%. We anticipate a tax rate of between 30% and 31% for the full year 2012. 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 17.2% of sales in the first quarter, down from 18.3% in last year's first quarter reflecting the continued focus and efforts of our operating teams to reduce our investment here. Strong working Capital Management will remain a key priority.

Capital spending was $8 million for the quarter, full year 2012 capital expenditures are expected to be approximately $60 million. Depreciation and amortization was $25 million for the quarter. 2012 depreciation and amortization is expected to be approximately $100 million. Our cash flow was very strong in the first quarter. Operating cash flow was $141 million, up 36% over last year's first quarter and pre cash flow was $132 million for the quarter representing 120% of net income. Total debt was $1.36 billion at March 31st, up $96 million from year end. Expenditures for acquisitions through the first quarter totalled approximately $175 million. Offsetting this debt is cash and cash equivalents of $219 million resulting in a net debt-to-capital ratio at March 31st of 34.3%, down from 38-point -- 34.8% at the end of 2011. At March 31st we had approximately $875 million of cash and existing credit facilities to fund our growth initiatives. Our highest priority for capital deployment remains acquisitions.

In summary, we had an outstanding first quarter establishing records for essentially all the key financial metrics. We are a well-positioned for further growth both organically and through acquisitions with a strong balance sheet and cash flows. Kevin.

Thank you, John. Great. We're now -- Tahira, we're now ready to take some questions.

Thank you. (Operator Instructions). And our first question comes from the line of Robert Barry from UBS. Please proceed.

Hi, guys. Good morning.

Good morning, Robert.

Congrats on a very solid quarter.

Thank you.

I know you guys tend to be conservative, but I just was trying to square the revenue guidance, especially for the second quarter, with the order growth and the impact from M&A. It looks like a significant slowdown from what you did in the first quarter and I think I can get kind of 6, 7, 8% of growth just from the deals you have kind of done already excluding the one you announced today. So is that just really conservative, is there kind of anything happening in the core growth rate, maybe easing a bit, if you could just talk a little bit about that, that would be great.

Sure. I would be glad to do that. First of all, the acquisition that we announced today as I mentioned in my opening remarks is not included in any of the estimates we provided. Obvious that deal is not closed at this point so we did not feel it appropriate to provide any estimates. We did say that it's going to close in the second quarter, but it could close right at the end of the second quarter. We are dependent on German approval, the government there, as well as the normal closing conditions. So when you actually look at the order and -- and the sales guidance we have given you, it's roughly the same as the first quarter. It's not substantially different than the first quarter. We did have a very good order intake in the first quarter. A lot of it was in our longer cycle businesses which are going to tend to ship in the second half of the year and there also may be a tad of conservatism in our estimates.

Okay. Could you comment perhaps on what you are seeing in Europe and what the change, if any, has been in that region?

Yes. Sure. Europe is an interesting story for us. Overall, our organic growth in Europe was quite good. It was up actually about 7% in the first quarter and we saw very, very strong performance in our aerospace businesses and also one of our companies in France, CAMECA, which makes very high-end analytic type instrumentation, saw excellent, excellent sales. So those very positive impacts were the drivers for the 7% organic growth. There was some weakness that we saw in our other businesses, but nothing that I would consider sizeable at this point in time.

Okay. And then just finally, I was wondering if you could update us on what your expectation I guess so for EBIT market expansion I think at 4Q you had San Diego about 30 basis points and I'm sorry if I missed that in your comments. Just given the very strong thoughts are now for the year. Thanks.

You're absolutely right that I didn't say anything in my comments, but, yes, I indicated up 30 basis points in the talk at the end of the year and we're now estimating -- and I would say conservatively 40 basis points and hopefully, we will be able to continue to increase that guidance as we go through the year.

Yes.

Obviously, the it shall the capability right now and the flow through in the Company is just -- just absolutely incredible. The contribution margin in the company in the first quarter was north of 40% so very, very strong contribution margins and.

Yes.

You couple that with the operational excellence activities where we expect to put about $60 million of cost improvements through the P&L this year bodes well for margins there yes.

Yes. Especially given the 90 you did in the first quarter.

Yes. Exactly.

Okay. Thank you.

You bet.

Thank you the and comes contract line of Allison Poliniak with Wells Fargo. Please proceed.

Good morning.

Good morning, Allison.

How are you?

Good.

Going back to Europe could you give a little more color in terms of what your end market exposure is like how big is aerospace, does oil and gas play any part of that as well?

You're talking about overall for the company now?

Overall for Europe, yes.

Oh, for Europe.

Yes.

The overall amount of business that AMETEK has in Europe is about 26% of our total sales so it's about the right proportion in terms of our market concentration and that breaks down roughly a third is in Aerospace & Defense related activities. We have very strong concentration in the process industries including oil and gas but not just oil and gas, we also have our ultraprecision technology business, which is a part of our European sales, and as I think I have mentioned in previously calls we also roll up the Middle East into our Europe although that wasn't really the driver for the excellent core growth we had in the quarter. So it is a mix, but there is good concentration of Aerospace & Defense in our European content and obviously aerospace -- and even a defense portion of aerospace in Europe did quite well.

Great. And then going back to the EBIT expansion, the 40 basis points, is there any way to say acquisitions are holding it back by 10 or 20 basis points, you know, with the acquisition related costs

Yes. Actually I haven't done that calculation, but the deals that we have done recently and will also include Dunkermotoren, assuming we close it, are very strong margin businesses so I don't expect a huge amount of dilution, but there will be some, especially as our -- you know, our growth from acquisitions is going to accelerate as the year goes on.

Great. Thank you.

Sure, Allison.

Thank you. And our next question comes from the line of Scott Graham with Jefferies. Please proceed.

Hey. Good morning.

Hello, Scott.

So I was just wondering, Frank, if you could do your typical, you know, by division sales sum up. That would be helpful.

Sure. I would be glad to do that. Why don't I start with aerospace which had a really, really good first quarter. We had low double-digit organic sales and order growth with really broad based strength across all parts of that aerospace business. We expect to see continued growth for our aerospace business in 2012 as trends and order rates, OEM build rates and revenue passenger miles really support strong commercial third-party MRO and also business in regional jet sales. I was just reading in the Wall Street before I came in to this conference call that Boeing is expecting to increase their production by about 40% by the end of 2014. So a very substantially change there which obviously is going to be a nice driver for our growth. Right now for all of 2012, we are expecting our commercial an third-party MRO businesses to be up high single-digits. Our business in regional jet business should be up low double digits an that's base the more on wins than it is on the actual market for business in regional jets turning around and then our military business we're still saying flat although we did have a fairly strong first quarter and there may be some conservatism in our forecast for the military side of the business. So if you sum up we're expecting organic growth in the mitt to high single-digit its for all of 2012 for aerospace. And obviously this is one of our higher profit margin businesses so I think it's going to be a driver to our performance for quite an extended period of time.

Process -- our process markets performed extremely well in the first quarter. Overall sales were up about 25% and/or began sales were up about 10%. Strong growth was evident across most of our businesses. Our oil and gas business continued to sizeable strength, while our material analysis, ultra precision technology, and also our advanced measurement technology division were very strong. In addition, we had the benefits from the like other technologies TMC and O'Brien acquisitions. For 2012 we are expecting this business to grow mid-teens overall with mid-single digit organic growth and in particular we expect continued strong performance from later cycle of oil and gas businesses.

And the last part of EIG, Scott is power and industrial. Overall Q1 sales were up low double digits driven by mid-single digit organic growth and the contribution from the EM test acquisition that we did last year. For all of 2012 we're expecting sales for power and industrial to be up low double digits overall with mid-single digit organic growth and that will be actually balance growth between the process and industrial parts of that business. So if you take those discussions and look at EIG overall for 2012 we're expecting overall sales to be up about mid-teens on a percentage basis and organic growth of mid-single digits.

Switching to the other half of the company. In EMG, for our differentiated EMG businesses sales were up low teens in Q1 while organic sales were solid and they had growth in the mid-single digits organically. We saw strong growth from our third-party MRO businesses and also our military businesses as a mentioned in the answer to Allison's question and we also augmented that with the acquisition of Avicenna Technology and Coining. We're expecting for the differentiated part of EMG for all of 2012 we'll be up approximately 10% overall with organic growth of mid-single digits.

And the last parts of our company which is really the legacy businesses, our Cost Driven Motor business, kind of a mixed story here. Orders were up 10% in the first quarter but sales were actually down about mid-single digits. A and for 2012 we're expecting sales to be roughly flat over 2011 and I think as you know we don't manage this business for growth. We really manage it very heavily for-profitability through our operational excellence activities.

So if you sum these two parts of EMG, we're expecting overall sales for EMG to be up mid to high single-digit its and organic growth should be in that mid-single digit region if we get the high single digit overall growth we'll be at the high-end of the mid-single digits organically and vice versa if it's a little bit weaker then it will be on o the other side and I think the wild card there is , although we saw good order growth in cost-driven motors, it will be interesting to see how that translates as we go through the year. So if you sum the company up and as I have said in my opening remarks for AMETEK as a whole we're expecting low double-digit sales growth on a percentage basis and organic growth in this mid-single digit arena.

That's perfect. Thanks a lot. That's all I had.

You bet.

And our next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed.

Thanks. Good morning.

Chris, good morning.

Frank, just wondering how long you've been looking at Dunkmotoren and if there was a typical cycle time or sort of a unique process.

That's a great question, Chris. We have probably been looking at this company for four to five years. It was number one on the acquisition agenda for our precision motion control business. Our precision motion control business has very strong content in the US and very strong content in Asia, but did not have strong content in Europe and Dunkermotoren basically has a very similar type of approach to the market. They get extremely good margins and they complement our business just like a glove.

So we have remained in contact with this company actually even through a change in ownership to the present owner and we actually contacted the owner ourselves and were able to strike a deal and we got a lot of tired people here. I think they signed this deal at about 3 or 4 o'clock thismorning. So we're very pleased with it. It's a great business, great complementing as a matter it of fact both of these acquisition O'Brien and Dunkermotoren are just ideal fits with AMETEK.

We understand the businesses we can improve them we can leverage them and I would say both management teams are also extremely excited about being part of our company. We were their number one choice in determines of -- of who would acquire them but yes, it was sort of a long process, but we always hang in there and it turned out great.

Sounds like maybe you should grab a nap after the call.

Yes.

Wondering also in the acquisition pipeline if you are seeing any in the third party MRO pre PM A type area.

Yes. That's another good question, Chris. Yes, we actually have. We actually over the course of the last couple years we've been somewhat quiet on that front and we actually had a couple deals that got fairly close to fruition and then didn't happen for one reason or another. But yes, there are some deals in our backlog. That business performed remarkably well in the first quarter.

I think you know as we started to roll up these companies typically these companies have 10% kind of pre-tax margins because they can't leverage the PMA and DER capabilities the way we are able to and I can tell you that total third-party MRO business right now is, Scott, operating player that are just under 20%. So very sizeable improvement and as well they were one of our higher growth parts of aerospace. So we would like to do more transactions here, we've got some backlog and hopefully you will be hearing from us in this area from okay. Thank you.

Okay. Thank you.

Sure.

Thank you. And our next question comes from the line of Jim Lucas with Janney Capital Markets. Please proceed.

Thanks. Good morning,

Good morning, Jim.

I wanted to follow up on Dunkermotoren here and, you know, when you look at that sitting in the precision motion how big is precision motion now for you?

It's about that same size so it's -- this is going to be, you know, a sizeable increase in that business so -- Bill, look it up so see how close I am in my. Bill's going to look it up but it's roughly that same size.

Well, knowing your track record you're pretty he a close, Frank.

Okay. Great. And when -- good color on Europe. You know, BRIC growth up 20%. You know, we have heard a lot of conflicting reports about China in particular and you have been make I guess lot of investments in Brazil and India. Can you just give us an update of what you're seeing in emerging, China in particular?

Yes, I can, Jim. There's no question that I can feel some slowing in China, but when you look at slowing from a GDP of 9% to 7% it's still obviously one of the stronger GDP growths in the world. So we saw very good performance in China. I mentioned the BRIC countries were up about 20% in sales and China was right in that region and I think it was around 19%. So we were -- we were fine and, you know, it will be interesting to see how the year plays out, but largely for us it's -- it's a share game so we are getting the growth from share and it's not as much dictated specifically by the GDPs of that country.

India, I did see an article in the Wall Street Journal this morning talking about a potential down grade from S&P for India which actually surprised me a bit, but we saw a very good performance in India in -- in the first quarter. It was also right in that same region of about 20% growth and, again, it is a largely a share game for us in India. In Brazil -- Brazil was actually a bit weaker for us in the first quarter, but the order growth was really, really super there and the sum of that is due to the fact that we have some floor care motor business down there and it has not been a favorable climate season for that particular floor care -- I floor care but it's actually in lawn and garden and those times of applications so that's what drove that.

Actually he was just talking to the group president for our process businesses, and he said looking at his businesses down there he just spent three or four days down there they're growing very, very rapidly. So a little bit of a mixed bag there but overall the order growth was good so I suspect it will be fine for the rest of the year. So I think the best way I can characterize this for us is a little bit of we're not growing at the same rates that maybe we were last year but still this is the organic growth engine for us.

Okay. That's helpful. And two housekeeping questions for John. One, I missed D&A for the quarter and, two, payables.

D&A was $25 million, Jim. And payables is $291 million.

Great. Alright. Thanks a lot.

You bet, Jim.

Thank you. And our next question comes from the line of Jamie Sullivan with RBC Capital markets. Please proceed.

Hi. Good morning.

Hi Jamie.

On the Dunkermotoren just wondered if you have -- is there a purchase price on the deal that you can tell us?

Well, that's a great question and we have agreed with the sellers that until we close we're not going it give a specific number, but I can -- I can tell you that this is a typical AMETEK deal. I think you know we don't pay multiples that are double digits and I think when we do release the final purchase price and the multiples you will see this is right in line with a typical AMETEK acquisition.

Okay. It sounds like it might be operating at margins that are slightly higher than EMG today overall?

Than EMG you said?

Right.

Well, I'm not supposed to be talking about this.

Okay.

But you're assumption is -- is a good one.

Okay. You also mentioned that it's a very nice compliment. Do you see opportunity for synergies with --

Oh, yes. Absolutely. We see opportunities for synergy. There's going to be cross-selling opportunities where they have a capability that -- and not huge share in the US so they can capitalize on that. Also, in the other direction, you know, our US-based businesses can capitalize on their distribution capability in -- in Europe. We see cost synergies. They have a plant in Serbia and we spent a lot of time looking at Serbia because it's a parts of the world that we had very little exposure to and that could end up being another low cost platform for AMETEK. So that -- that's another synergy that -- that we see in this deal.

So I think, again, this will be a normal AMETEK acquisition in that we'll have good synergy, ability to increase profitability and as I said that management team and in the management team within AMETEK are really excited about this. Very -- two very strong management teams and they capital wait to really have this thing close and start to capitalize on each other's capability.

Great. And you mentioned your -- your segment detail it doesn't sound like there's any real major change there. Is there any -- is there any different expectation by geography owe as you look at the year at this point?

I would say maybe the only difference is we probably won't see quite as much growth in China as we originally were hoping for, but offsetting that is our aerospace businesses are stronger than we had anticipated. So it feels like we're being to end up in the same position but maybe with a little bit of shift there but to your opening comment I don't think it's -- it's material. It's not significant.

Okay. And then one last quick one on -- on the guidance for 2Q you are not assuming any Dunkermotoren contribution, but I assume there will be M&A expenses associated with it that you are assuming on the cost side?

No. No.

Okay.

I guess we did roll -- we rolled it through already some of it, didn't we, guys? Yes. We rolled it through already so there might be a little bit more but it's actually in the first quarters results. That's when the majority of our costs were -- were done and there's not going to be any huge restructuring charges, et cetera as we go forward. As you know, we're very, very conscious about continually not hitting P&L with these extraneous charges so don't expect anything substantially from think of any of these deals as we go forward and as I said this is just going to be a typical deal for us.

Thanks very much.

Okay.

Thank you. And our next question comes from the line of Matt Summerville with KeyBanc. Please proceed.

Morning. Couple questions. Frank, you mentioned your networking capital coming in at 18%, maybe a little bit higher than that which is down I believe over the last few years from the 20s, for a company like AMETEK looking out over the next two to three years what is the right number on your networking capital? Can you get it down into the low-teens and I guess along those lines how much incremental cash do you think you can get out of working capital?

I will answer the first part and John can answer the second part. The 17 -- actually what we did in the quarter was 17.2% and we're fairly comfortable with that kind of number. What actually happens and it was et cetera when we put our budget together this year is that as we acquire companies and bring them into our fold very few operate at this 17.2% or 17% type of number so our objective is really to maintain that type of level as we acquire these companies which means we have to be continually improving the working capital of those acquired companies. But I don't see our mix of businesses getting down to the low-teens. We have some businesses that get there but not for all of AMETEK. If you recall we have some businesses, like our metals businesses and even our -- some of our other more capital intensive businesses, that do have a bit higher working capital, but we're very pleased at this 17% level and, John, you might be able to answer the question.

Well, I would take it to just a little bit gradients to what you just said, Frank. I would -- if you look at 2012 we anticipated a number of this 17.2, but it's a mixture of our base businesses beating that with the acquisition that we did last year coming in around 26%. So -- and as we go through the year that number gets better and better an then you roll that number, Matt, into 2013, that 26 its going to become maybe close to 20 and we will pull cash out of those businesses while we run our base businesses in that 16.5%to 17% range in the aggregate. We have got some of them that are much better on that. So that's the picture I would painted. We would be taking cash out of the acquisitions getting them into that sweet spot of around 16.5%, 17%, 17.5% from an overall perspective.

That's very helpful. Thank you. And then just on the -- military portion of your business, Frank, you indicated that was up in Q1. What's driving that and I guess as we go throughout the year are there specific content wins that you have that give you confidence that that business isn't going to slip in terms of revenue or -- or potentially even grow?

That's a great question and we were -- at least I was actually surprised at the strength in the first quarter. It was -- it was quite good and -- and it wasn't just on the sales side. Our order intake was -- was very, very good and it was particularly good in Europe. As I mentioned in my opening remarks we're being a bit conservative as we go forward, but I have no indications that this business is going to become a major drain. I think the question is more how much upside are we going to get out of it and are the -- the first quarter results something that we can repeat through the year.

Actually I was just talking to our group president about this exact thing and our position is really we're going to wait another quarter and we'll see how well it does and the order intake is good in the second quarter it started out okay in April. We may be raising our guidance here, but I don't think we're worried about some dramatic negative impact of -- of military. And it is I mean to your point, Matt, there is -- we're on some really good particularly in Europe and this is a platform type of business and the dollars are still coming in. So it's going to be a wait and see.

And then, Frank, in your opening remarks early on you mentioned that orders organically up a year-over-year sequentially15 or excuse me in total, do you have the organic numbers for orders .

Yes. organic growth was relatively flat across -- or against a -- a very tough comparison

Got it. Thank you.

You bet.

Thank you. And our next question comes from the line of Mark Doulgass with Longbow Research. Please proceed.

Hi. Good morning, gentlemen.

Hello, Mark.

Mark.

What is the backlog right now?

$947 million. About $800,000 short of a record.

Because you were what, 911 last quarter?

I think that's right. I think that's right. And that's book-to-bill of 1.04 that I was talking about.

Yes. Yes. Then, Frank did I miss it? Is it you talk about what the organic growth rates were in the US North America and then what you are seeing there?

Yes. The -- the -- I will just give them all to you so you have them. The Far East was 15% organically as I already mentioned Europe was 7% organically, the US was about 4% organically.

So what's -- can you discuss the relative weakness in the US given actually the PMI has been a lot better in the US versus any place else?

I understand. I think you have got to almost turn it around in that we had really strong growth in the other parts of the world. The US came in pretty much as we had anticipated and Europe for the reasons we've already talked about came in much stronger than we had anticipated and Asia was a tad weaker so I don't think it's like we feel there's some problem in the US. It's more sort of food news in the other parts of the world in particular Europe. And I'm probably one of the few CEO's that's talking about good news in Europe.

Right. I guess I would have guessed US would have been higher, you know, seeing that some other companies that the US was still very strong but I'm just curious if there was certain parts of the US in your products, end markets that were under expectations or --

No. I would say -- you know, we had said mid-single digits so it's pretty much what we expected. Pretty much what we expected and there's nothing of concern or alarm in the US. Most of our markets are -- are okay so there's nothing income nothing that I can comment onto your point.

Okay. When Dunkmotoren, you know, what is their -- I guess their -- they sounds like a pretty diversified, you know, but with a precision motion company in Germany is solar big enough to be a concern for them at this point or are they pretty well diversified across --

Oh, this is just like our business in the US this is a highly of diversified business. No key end market, no key customer. Very, very diverse and you win in this business based on being able to very rapidly customize motors for a particular application and there's just -- there's no single concentration that you can point to that's going to be an issue for them.

Okay. Looks like a nice acquisition. congratulations.

Thank you.

Thank you. And our next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Yes. Good morning.

Hi Richard.

Frank, could you provide just maybe a little bit of color --or John -- on the gross margin. You know when you look at that year-over-year the 110 beeps of improvement how much of that is driven by your current sales mix and growth in the aerospace process versus acquisition accretion or price? Are you getting some price here in the quarter?

We are getting some price. Richard, we are probably pulling a nets of inflation about a little less than 1% through so that's contributed, but there's so many ingredients that go into that to try to back it down into beyond that we've got that -- the $10 million of cost savings Frank talked about. That's running ahead of our expectations. the mix has been d it's been very good.

Yes.

No question about that. So there's probably half a dozen variables that are trending positive but.

Okay. So but we are seeing the -- the -- the upward buys in the margins from these later cycle -- or longer cycle.

Oh, no question about that.

No question about that.

That kind margin expansion at the gross line is pretty sustainable as long as we're in this -- we city in this longer cycle.

no question. Especially -- especially look out with the aerospace strength that we see. That has got a very positive contribution to the higher margins so.

We don't actually -- in contrast to other businesses that I have been involved in we don't focus at the gross margin line because the gross margins of our businesses have very wide diversity amongst them. We really focus on the contribution margin and the absolute margin to the bottom line and just to augment what John said the contribution margin I in our aerospace businesses is essentially the highest in the company. It's very, very good so that's why the contribution margin overall in the quarter was, you know, up above 40%.

And that's -- so overall when I -- when I look at the reported incremental, you know, we're more in the high 20s obviously influenced by the acquisition contribution and pull down there, but your core increments Al for AMETEK was in the low 40s?

Yes. Actually it was even a bit higher than that but it was really good but you're absolutely right that.

Okay.

When we talk about contribution margin, we excluded acquisitions because obviously you're not going to gets the that low through the to same level on the ache significance so yes just extract them and that's where this 40% plus movement comes from.

Okay. And just -- just one last question. Frank, you know, when I like at the organic order number -- order growth rate or flat growth in orders in the core business, is there any -- is there anything in the mix of order flow that gives you a I better feel or a good feel for your markets you know, for instance, long cycle I think you had mentioned long cycle orders -- business orders were up. Is there a anything on the short cycle side that -- that causes you concern or --

Part of our short cycle business that we are concerned about is always our Cost Driven Motor business but obviously as mentioned that part of the business on the order intake was pretty good. This is really -- you know, the fact that we had very, very strong performance last year on orders and as we were coming sort of up from the -- the depths of the recession we were swinging back and sort of in a V-shaped manner and some of our order flows in those first couple quarters last year were just very, very strong so -- I'm not looking at -- at anything in that number that is overly concerning to me.

Okay. Okay. Very good. Well, thank you.

Sure.

Thank you. Gentlemen, there are no further questions at this time.

Okay. Fantastic. Thank you so much, Tahira. Thank you everyone for joining ore conference call. As a reminder a replay of this call may be accessed on the internet at www.ametek.com and at www.streetevents.com. If there are any further questions please call me at 610-889-5247. Thank you so much.

So 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.