阿美特克 (AME) 2014 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the AMETEK second quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, August 5, 2014.

I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations.

Please go ahead, sir.

Great.

Thank you, Susie.

Good morning.

Welcome to AMETEK's second quarter earnings conference call.

Joining me this morning are Frank Hermance, Chairman and CEO, and Bob Mandos, Executive Vice President and Chief Financial Officer.

AMETEK's second quarter results were released earlier this morning.

These results are available electronically on market systems and on our website at the Investor section at AMETEK.com.

A tape of today's call may be accessed until August 19 by calling 800-633-8625, and entering the confirmation code number 21721081.

This 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 sites.

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, the 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 are contained in the 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 call.

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

I'll now turn the meeting over to Frank.

Thank you, Kevin, and good morning, everyone.

AMETEK had an excellent second quarter with very strong execution of our four growth strategies.

In the quarter, we established records for essentially all key financial metrics including orders, sales, operating income, operating margins, net income, and diluted EPS.

Additionally, we ended the second quarter with a record backlog of $1.25 billion.

We remain very active on the acquisition front.

During the second quarter, we closed the acquisition of Zygo Corporation and acquired Luphos, a technology acquisition which is highly synergistic with Zygo and our Taylor Hobson metrology businesses.

Subsequent to the end of the second quarter, we acquired Amptek, a provider of instrumentation used to identify composition of materials using x-ray fluorescence.

I will provide more details on our continued strong acquisition activity in a moment, but let me first provide the financial highlights for the quarter.

Sales in the quarter were up 13% to $990.7 million.

Organic sales increased 4%, while acquisitions added 8%, and currency added 1%.

Operating income for the second quarter was very strong.

It increased 14% to $231.7 million from $202.6 million last year.

Operating income margin in the quarter was a record 23.4%, a 30 basis point improvement over the second quarter of 2013.

Net income and diluted earnings per share were both up 17% over last year's second quarter to $150.1 million and $0.61, respectively.

Our diluted earnings per share in the quarter were $0.02 above the high end of our guidance range.

Orders in the second quarter were very strong at $1.1 billion, up 21% overall from the prior year driven by solid organic growth and the contributions from recent acquisitions.

The book-to-bill ratio in the quarter was 1.09.

Operating cash flow was $155 million for the second quarter, up 21% from last year's second quarter, and operating working capital was excellent at 17.7% of sales.

Turning our attention to the individual operating groups, the Electronic Instruments Group had an excellent quarter.

Sales were up 19% to $573.3 million on strength in our Ultra Precision Technologies and Material Analysis businesses, plus the contributions from the acquisitions of Controls Southeast, Creaform, Powervar, Teseq, and VTI.

Organic sales were up 4%.

Acquisitions added 14%, and foreign currency was a 1% tailwind.

EIG's operating income increased 17% to $151.5 million, and operating margins were 26.4%.

Excluding the dilutive impact on operating margins of recent acquisitions, EIG's operating margins were 27.6%, up 80 basis points from last year's second quarter.

The Electromechanical Group had a great quarter as well with strong operating performance.

Sales were up 6% to $417.4 million.

Organic sales were up 4%, and foreign currency added 2%.

Growth was broad based with particular strength in our precision motion control and engineered materials, interconnect, and packaging businesses.

EMG's operating income increased 10% to $92.1 million, and operating margins were superb at 22.1%, up 100 basis points from last year's second quarter and a record level.

Now turning to our four growth strategies of operational excellence, global and market expansion, new product development, and strategic acquisitions.

First, I will touch on acquisitions.

We continue to remain very active as evidenced by our record M&A activity over the past 12 months.

With the Zygo, Luphos, and Amptek acquisitions, we have now acquired 8 businesses over the last 12 months, deployed nearly $1 billion in capital, and acquired approximately $460 million in revenue.

Thus far in 2014 we have deployed approximately $570 million in capital and acquired over $285 million in sales on five acquisitions.

Importantly, our acquisition pipeline remains very strong.

Now, let me provide some highlights on the three recent acquisitions.

We completed the acquisition of Zygo on June 20.

Total capital deployed on the acquisition was approximately $280 million, net of cash acquired.

Zygo has annual sales of approximately $165 million.

Zygo is truly a great strategic fit with AMETEK.

We're very excited about this acquisition and are pleased to welcome the Zygo team to AMETEK.

Zygo is a leading provider of non-contact metrology solutions, high precision optics, and optical assemblies for use in semiconductor, medical, life sciences, industrial, and aerospace and defense end markets.

They have a high-value, differentiated technology capability along with a strong brand within the optical and metrology markets.

Zygo's leading position in non-contact optical metrology directly complements our strength in contact metrology, expanding our capabilities in this very attractive market.

As previously indicated, we expect sizable synergy through elimination of public company costs, sourcing savings, and through leveraging our global infrastructure.

Also in the second quarter, we acquired Luphos, a small yet highly strategic technology acquisition.

Luphos provides us with exciting technology which is highly complementary to our existing metrology technology.

Luphos' core technology is used in the measure of complex aspheric optical surfaces through non-contact methods.

Our Taylor Hobson metrology business provides similar measurement capabilities through contract metrology technology.

So this way we really have both technology capabilities, either non-contact or contact metrology capabilities.

The addition of Luphos expands our metrology capabilities across a broader range of surface finishes and profiles, thereby providing our customers a broader product portfolio to serve their various applications, and they're headquartered outside of Frankfurt, Germany.

Lastly, subsequent to the end of the second quarter, we completed the acquisition of Amptek.

Amptek is a privately held manufacturer of instrumentation and detectors used to identify the composition of materials using x-ray fluorescence.

Amptek's products are sold to OEMs that manufacture non-disruptive testing devices to measure elemental composition and metal production, pharmaceutical products, electronics, and environmental samples.

Amptek is another excellent strategic acquisition for us as it provides us with attractive sensor and detector technology, as well as strong R&D development capabilities which will help to accelerate future technology developments for our served markets.

In addition, Amptek detector technology opens up new market and application opportunities in benchtop and life sciences applications.

They are headquartered in Bedford, Massachusetts, and have annual sales of approximately $30 million, and they're very profitable company.

Now, turning to global and market expansion.

Global and market expansion continues to be a key driver for our growth as we are increasingly expanding our presence in attractive, higher growth market segments and geographic regions.

In the second quarter of 2014, international sales represented 56% of our total sales.

This was up from 54% of sales in the second quarter of 2013.

The increase in international sales percentage was driven by strong organic growth in Asia and the benefit from recent acquisitions.

Organic sales in Asia was up mid-teens on a percentage basis in the second quarter with broad based strength across our businesses.

This strong growth reflects the benefits of our continued focus on expanding our sales, service, and distribution capabilities in this region.

We'll continue to make investments to develop and expand our global sales channels, service capabilities, and manufacturing footprint in order to position our businesses to capitalize on the attractive global growth opportunities.

Now turning to new product development, new product development is a key internal growth driver and critical to our long-term health and growth.

We have consistently grown our investment in RD&E to ensure we are developing the right products to serve our customers and markets.

In 2014, we expect to spend approximately $210 million, a 17% increase over 2013.

We're excited about some recent new product introductions.

Creaform which we acquired in 2013 is a leader in portable 3D scanning technology.

During the second quarter, Creaform introduced two new portable 3D scanners, the GoSCAN 3D and the HandySCAN 3D, that represents breakthroughs in terms of speed, accuracy, and versatility.

The GoSCAN 3D is a white light scanner that offers accurate, high-speed scanning of practically any object and is suitable for engineering and CAD projects that require full-color 3D models or direct scan-to-print capabilities.

The HandySCAN 3D is a metrology grade laser scanner that achieves groundbreaking accuracy, resolution, and measurement rates operating 25 times faster than previous versions.

This is truly a breakthrough kind of product.

The HandySCAN 3D is suitable for all stages in the product development lifecycle from design, prototyping, testing, assembly, production, and quality control.

Both the GoSCAN 3D and the HandySCAN 3D rely on Creaform's new VX application software to quickly and seamlessly integrate digital scans into 3D printing or CAD process applications.

Creaform is seeing extremely strong growth in 2014 through the success of their new product introductions and their market expansion efforts.

AMETEK'S ORTEC Products Group introduced a number of new products including a new series of high-purity Germanium detectors, the Profile S and C series.

These new radiation detector products provide exceptional resolution across the entire energy range while also improving efficiency at the lower energies, further cementing ORTEC's leading position in nuclear radiation detection and identification systems.

ORTEC also launched their PNS-3 portable chemical identification system.

Leveraging our experience with radiation detection, this new product safely and quickly identifies hazardous chemicals inside munitions or chemical storage containers by conducting non-destructive gamma ray analysis.

The system is completely portable and it requires applications that use this kind of solution without the need for liquid nitrogen or shielded radioactive sources.

From an overall perspective, revenue from products introduced over the last three years was 22% of sales in the second quarter, up from 21% in last year's quarter.

Lastly, I'll touch on OpEx.

We continue to see tremendous results from our various operational excellence initiatives.

Our management teams and employees continue to do an excellent job driving operational improvements through their businesses, leveraging the numerous operational excellence tools we have in place throughout the Company.

Key tenets of our operational excellence activities include lean manufacturing, Six Sigma in our factories and back office operations, design for Six Sigma in our new product development efforts, global sourcing and strategic procurement initiatives, movement of production to low cost locales, and value engineering.

Through our global sourcing and strategic procurement initiatives, we recognized $18 million in savings in the second quarter.

As a result of the continued strong efforts of our team, we now expect approximately $95 million in total cost savings in 2014 through our operational excellence initiatives, including $65 million in savings through our global sourcing and strategic procurement initiatives.

This is up from $90 million in total cost that we targeted at the end of a first quarter.

Turning to the outlook for the remainder of 2014, we continue to expect our businesses to show solid growth during 2014 with balanced organic growth across both operating groups.

We now anticipate 2014 revenue to be up low-double digits on a percentage basis from 2013, reflecting continued solid core growth and the contribution from recent acquisitions.

Organic growth is expected to be up low- to mid-single digits for all of AMETEK and for both operating groups.

Earnings for 2014 are now expected to be in the range of $2.37 to $2.42 per diluted share, up 13% to 15% over 2013, excluding one-time Zygo integration cost expected to be incurred in the third and fourth quarter.

This is an increase from our previous guidance of $2.32 to $2.37 per diluted share and reflects stronger operating performance plus the benefits from the Zygo acquisition.

Third quarter 2014 sales are expected to be up mid-teens on a percentage basis from last year's second quarter with organic growth up low- to mid-single digits.

We estimate our earnings to be approximately $0.59 to $0.61 per diluted share, up 13% to 17% over last year's third quarter excluding one-time Zygo integration costs.

In summary, we delivered exceptional performance in the quarter.

Our results and increased guidance for 2014 reflect the continued strong execution of our growth strategies.

Our balance sheet remains strong, and we generate significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy.

Our excellent backlog, strong portfolio of businesses, proven operational excellence capabilities, and a successful focus on strategic acquisitions should enable us to perform extremely well for the remainder of 2014.

Bob will now cover some of the financial details, and then we'll be glad to take your questions.

Bob?

Thank you, Frank.

As Frank noted, we had an excellent second quarter with strong overall results.

I will provide some further details.

Core growth in selling expenses was in line with core growth in sales in the quarter.

General and administrative expenses were 1.2% of sales, in line with last year's second quarter.

Effective tax rate for the quarter was 28% versus last year's second quarter rate of 29.4% and in line with our guidance.

The lower tax rate in the quarter was a result of our ongoing international tax planning activities.

For 2014, we expect our tax rate to be between 28% and 29%.

As we've 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 17.7% of sales in the second quarter versus 17.9% in last year's second quarter.

Strong working capital management will remain a key priority.

Capital expenditures were $15 million for the quarter.

For the full-year 2014 capital expenditures are expected to be $70 million.

Depreciation and amortization was $33 million for the quarter.

Full-year 2014 depreciation and amortization is expected to be approximately $142 million.

Operating cash flow was $155 million in the second quarter, up 21% over last year's second quarter.

Free cash flow was $140 million in the quarter, up 19% over last year's second quarter.

For the full year, we expect free cash flow to be approximately 110% of net income.

Total debt was $1.6 billion at June 30, up $188 million from the 2013 year end, largely the result of the Zygo acquisition.

Offsetting this debt is cash and cash equivalents of $283 million, resulting in a net debt-to-capital ratio at June 30 of 27.8%.

At June 30, we had approximately $700 million of cash and existing credit facilities to fund our growth initiatives.

During the quarter, we close acquisition of Zygo Corporation and acquired Luphos.

Subsequent to the end of the second quarter, we acquired Amptek, bringing our cumulative of expenditures for acquisitions in 2014 to approximately $570 million.

Also in the second quarter, we announced a 50% increase in the quarterly cash dividend on common stock to $0.09 per share from $0.06 per share.

This dividend increase will raise the annualized dividend payout to $0.36 per share.

In summary, we had a very strong second quarter, establishing records for essentially all key financial metrics.

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

Great.

Thank you, Bob.

Susie, we'll now open it up for questions.

(Operator Instructions)

John Baliotti, Janney Capital Markets.

Frank, I was wondering, looking at the focus on M&A a little bit.

Your cash continues to go up on your balance sheet, and you continue to do deals.

Your working capital as a percentage of sales continues to go down, or certainly stays in line despite the deals.

I was wondering, is there a way to quantify how much of deals that you're doing right now are funded by the improvements in not only the businesses that you've bought but the businesses that have been core to AMETEK over the years?

Yes, I think the best way to look at this, John, is that the majority of the savings that we get and the improvements we get are in the existing businesses, but the existing businesses would include what we acquired in the previous year, not what we acquired this year.

We obviously look at both the acquired companies as well as the existing businesses.

Because the existing businesses are so much larger in totality, the majority of the improvements come from the existing businesses.

You touched on working capital.

It's a very similar situation.

Typically, when we acquire companies, their working capital is well above ours, but we're able to offset that with the existing business improvements in the year that we acquire the company.

Then in succeeding years, we will work very aggressively to improve the working capital of those acquired companies.

I think the focus and the real answer to your question is that it's the existing businesses where the majority of this is coming from including the acquisitions from the previous year.

Just a follow on to that, it seems like, I think in the past you've said, that even though you have a rigorous M&A team and a due diligence process, you tend to scatter your deals, for lack of a better term, in different areas.

It seems like of the last seven deals, if I have it right, about five of them have been more in the metrology whether it's contact or non-contact.

If you include Creaform in there as complementary to that, I was just wondering, is it a greater confidence or interest in that area, or is it just randomness?

It is more randomness in terms of where the deals come from, John.

When you look at where those deals went, although your macro view is absolutely correct, they're in these metrology areas.

Where they end up in AMETEK is different.

For instance, the Amptek acquisition is going to end up in our Materials Analysis division, whereas Zygo is ending up in our Ultra Precision Technology division.

It may seem like they're all going in the same place, but they're not.

We have an internal thought process that we don't like to do two acquisitions in the same business unit.

We might do it in the same division but it would be in different business units just to reduce the risk, and only on a few occasions have we not adhered to that.

Allison Poliniak, Wells Fargo.

Just riding out on that product portfolio question on the Ultra Precision Technology.

You've done a lot of acquisitions there.

Outside of organic ideas, is that product portfolio filled out, or do you certainly need more, maybe with end market, or a differing technology there?

We've now done a really superb job of putting key technology into this particular business.

For the market that we're focusing on, we now have an excellent portfolio of technologies, and we really don't need additional technologies for that market.

However, we can expand the market penetration of UPT and go into other markets.

That's pretty much the strategy that we have used across the Company, that we get into an area, we fill out the technologies and capabilities, for good access to specific niche markets.

Then we work on adjacencies that are around that, that are really new market segments.

We can do that either through acquisition, or we can do it through basically internal development.

I think you may have heard me talk previously about the finger approach, which is the way we think about how we bring the deals into AMETEK.

Every time we do a sizable acquisition, it opens up another set of fingers that we can basically add on either additional acquisitions or additional markets through internal R&D activities.

That's great.

Thank you.

Then, a lot of moving parts obviously on the EBIT line with the acquisition.

How should we be thinking about that, maybe versus EIG versus EMG in the back half of the year?

As we've talked about, if you look at the margins, the margins in EIG are very good.

They were at 26.4% in the quarter, and EMG is where the margin opportunity is, and we continue to do really well on those margins.

EMG was at 22.1%, if my recollection is correct, which was up 100 basis points.

As we go forward, you're going to see more margin improvement coming out of EMG than EIG.

Again through randomness of the acquisitions, a large number of the acquisitions we've done in the last, say, couple of years have ended up in EIG.

Therefore, there tends to be a bit of a dilutive impact on the margins in EIG.

We are actually consider the positive because what we want to do with those acquired companies, is actually buy businesses that have lower margins and make them better; and therefore the return on invested capital turns out to be superb.

We've always been able to outgrow that as a Company.

In other words, our margins are at 30 basis points we're talking about, includes all of the dilution of the acquisitions.

If we extracted that, the 30 basis points, we'd be up in the 70, 80 basis point area, just put some numbers on it.

That's probably the best way I can answer your question, Allison.

Matt Summerville, KeyBanc.

With respect to the core business, Frank, I think you talked about orders being up total 21%.

Can you talk about what that looked like organically, give the actual number, as well as what your core backlog looks like on a year-over-year basis?

Yes, I think I'll try to do that off the top of my head, and Bob, you can correct me if I do not have exactly the right numbers here.

The organic growth in orders was in the 2%, 3% area.

If we look at the backlog, the backlog was $1.25 billion, and the most significant contributor to that was Zygo.

Zygo was $83 million.

Did I get those numbers right?

Got it.

I got them right.

Okay.

Then with respect to, you've obviously done a lot of M&A in the last 12 months, and it sounds like you're doing to exclude the integration costs related to Zygo.

Can you quantify the inventory step-up cost, the other acquisition expenses, transaction costs, that are still flowing through the P&L in aggregate for 2014?

Yes, we have not yet finalized exactly what the integration cost of Zygo are going to be going forward.

We're in the process of working with the Zygo team to refine that.

By the next conference call I'll be able to quantify those for you, but they won't be minor.

The reason is, you may recall, Matt, that we're looking for synergy in this deal that is extremely large.

We think there's tremendous synergy between, in particular, the Zygo operation or Zygo business, and AMETEK.

That's the reason why we did exclude those costs in our forward-looking guidance.

We will get it quantified.

It's not a material number.

It'll probably be on the order of $0.04, something like that, in that kind of region, but it has not been finalized.

I guess a follow up, Frank, with respects to all the other deals you've done, there's inventory step-up costs, there's transaction costs; what is, indeed, flowing through the P&L that you're not calling out as one-time (inaudible - multiple speakers)?

I can give you some numbers for the second quarter for instance.

In the second quarter, we had $1.6 million of costs that were used in terms of acquiring Zygo.

We're separating those cost from going forward integration costs, and that $1.6 million was in the P&L.

We're absorbing that, so our earnings would have been, if we excluded that, would have been $1.6 million higher.

And, it was a very similar number in the first quarter for Zygo.

Just in that six months, for one acquisition, we're talking $3.2 million which is basically a penny a share which we have absorbed.

Then there are other costs associated with the other deals, but they're relatively small in comparison.

Scott Graham, Jefferies.

Somebody has to ask it, so Frank, hopefully you can go through your by-business- unit-analysis for us, and particularly give us maybe a little bit more color than normal, if possible, on [EMIP] which is the first time we've mentioned that positively in some time.

I'd be glad to do that, Scott.

I'll just put a star there.

I have got some notes as I normally do regarding the business subsegments, and I'll start with EIG.

EIG aerospace business really had an excellent quarter, high-single digit organic sales growth, and the growth was driven by our business and regional jet business along with continued strength in commercial aerospace.

We really expect continued strong performance in this EIG aerospace business throughout 2014.

Trends in OEM build rates support excellent commercial sales while the continued ramp-up that we've talked about before, Scott, in key business and regional jet platforms will drive significant demand for us, even though the business and regional jet market, has not yet rebounded in a similar or, in the way, that commercial market has rebounded.

What we're estimating for all of 2014 is that EIG aerospace should be up at least mid-single digits.

Our process business also had a great quarter.

Overall sales were up mid-teens on a percentage basis, and organic sales were up mid-single digits.

Overall growth was driven by very good core growth in Ultra Precision Technologies and Material Analysis divisions, the two we just talked about a few moments ago, combined with obviously the strong acquisitions we did in this segment which were Controls Southeast, Creaform, and VTI.

For the full year we expect our process businesses to grow mid-teens overall with organic growth up low to mid-single digits, and again, I think it's going to be pressing more towards the mid than the low.

The last part of EIG is power and industrial.

Sales for that part of the business was up more than 30% in the second quarter.

That growth was driven by the contributions from the acquisitions of Powervar and Teseq, as well as mid-single digit organic growth.

We expect overall sales for power and industrial to be up approximately 30% in 2014 and organic growth up low- to mid-single digits.

This business is definitely turning upwards now for us which is very good.

Obviously the aerospace and process businesses have been up and moving higher for a sustained basis, but the power business is now starting to show some strength.

If you sum those three parts of EIG, for all of EIG we expect 2014 sales to be up high teens on a percentage basis with organic growth up that low- to mid-single digits.

Moving to the second part of the Company, EMG, our differentiated businesses had a very solid quarter with overall sales up mid-single digits organically on a percentage basis.

That strong growth came from our precision motion control and engineered materials, interconnect, and packaging business.

Scott, you asked me to spend a little bit of time on the engineered materials interconnect and packaging businesses, we have been talking about that business turning around.

It didn't turn around quite as quickly as we thought it was going to, but definitely now it has turned the corner.

You may remember, that part of this business is involved with alloys that are used in titanium production that go into aircraft, and there was a situation where there was a lot of inventory in the supply chain.

We thought this was going to clear a quarter or two ago, but it is now cleared, and we're basically seeing the results of that.

The other really good thing here is that this team has really embraced our international strategy and have done a lot of work in selling their products now outside of the United States.

This was a largely US business and is rapidly now moving more in line with the rest of the Company, where a significant part of their business is outside the United States.

If you sum it up, we've just got that team in here, and you can see a smile on their faces, which is great.

To finish then with the differentiated businesses, if you sum this up, we are expecting low- to mid-single digit organic growth through all of 2014, obviously with stronger growth in the second part of the year.

The last part of the Company is floorcare and specialty motors.

Sales in floorcare and specialty motors were up low-single digits in the quarter, so continued good performance there.

That team expects sales for the business to be up low-single digits organically for all of 2014.

If you look at all of EMG then and take what I just said for the differentiated businesses, as well as the floorcare and specialty motors businesses, we expect overall sales growth of low- to mid-single digits in 2014.

Finally then, if you look at AMETEK as a whole combining the two segments, as I mentioned in my opening remarks, we now expect low-double digit sales growth overall with organic growth up low- to mid-single digits, and obviously, in the second half of the year, we're expecting a good organic growth.

We had a really fine July on order intake which I think just continues this trend that we are seeing the global economy generally improve.

It's not a dramatic change, but it sure feels better now than it did six months ago, let's say.

Scott, that was a lot.

I hope that gets at your question.

It totally does, Frank.

Thank you.

The answer on that one is always much larger than the question.

I think all of us thank you for always doing that for us.

If I could just ask one follow up, on the M&A very quickly, I know something expressed a quarter or so ago was a desire to really build out your power business that we really haven't seen, other than the Powervar acquisitions there in 2014.

How does the pipeline look for that area that I think you're still targeting?

It looks very good.

Just to add on, in addition to Powervar which we did at the end of last year, in the first quarter, we acquired Teseq.

That's a power business.

I'm pretty pleased now.

If you take that whole power business, it has grown to about a half a billion dollars, and it also has some diversification within it.

There's roughly $220 million is in power, test, and measurement equipment.

There's another $200 million that is in battery backup systems.

That's where Powervar went.

There's about $80 million that's in instrumentation that's used in generation, transmission, and distribution applications.

For a while, we were not growing the power business.

We've now done two.

We're at $0.5 billion.

That team has their eye on a billion dollar business.

That's the way we're thinking about it, and in terms of the pipeline, yes, there are deals that we are actively looking at in power.

This is a good time to buy because the market is just turning up, and hopefully we can close some deals in this space and start to get towards that billion dollar level.

Mark Douglass, Longbow Research.

Bob, the payables?

$383 million.

Thank you.

Frank, can you discuss your organic growth by region, maybe expand on the strong growth in Asia?

It sounds like a lot of that is you're outgrowing the markets there with a lot of new initiatives and sales and marketing I would assume, maybe some new products too.

Could you walk through what happened in the different [regions]?

Sure, I'd be glad to do that.

Let's look organically.

Organically in the US, we were up low-single digits, and similarly in Europe we were up low-single digits.

As you stated in your question, a significant part of our growth came out of Asia where that growth was up in the mid-teens organically.

If you look at the BRIC countries just another cut, the BRIC countries were up 21% overall and about 13% organically.

China just is superb.

China was up organically almost 25%, and total, I think it was a number like 35%.

You've got it there.

Am I right, 35%?

Yes.

All the efforts and you've heard me talking about the expansion in the BRIC countries, the expansions in Asia, they are really coming to fruition now.

It's just an exciting time, and even though many of our peer companies are talking about issues in China and issues in Asia, we are simply outgrowing the market from both a product point of view, and also we've got very strong distribution capability there now.

In Asia, we have approximately 300 people who are engaged in selling our products.

That doesn't include people in some cases, we're using distributors.

We're not doing direct sales, though it doesn't include the number of salespeople that will be on the street, in essence, through those distributors.

These are about 300 people that are our AMETEK employees, and it's just paying off in super dividends.

You look at the lower organic growth in Europe and the US, we actually had a pretty difficult comparison, that those numbers would probably be up closer to the mid-single digit area, if you took out some of the large shipments that were done last year.

Just in general, Mark, we're feeling better.

We're feeling better.

I can tell you that it's easier than it was six months ago to put up the results that we're putting up.

That's because these economies are starting to move in a direction that's helping, so it is a tailwind instead of a headwind.

Then you couple that with all the operational things that we are doing, and that's what has given us these really superb results.

Looking at your process business, can you discuss what's happening in process, in particular what you're seeing in oil and gas?

That's a great question, Mark, and as you are aware, over the last few years oil and gas has been the driver to process.

What is happening now, which actually I view quite favorably, is that there's balance now across all of those process businesses.

In essence, we saw very strong growth in the non-oil and gas businesses, but oil and gas was also good.

It just wasn't at the level that it was in terms of growth a year or two ago.

We're feeling pretty good about the process businesses because we've got that broad based strength.

We've talked a little bit about the Ultra Precision Technology business.

That is doing, even exclusive of the acquisitions, extremely well organically.

Our [MAD] division had a really good quarter which is in the process area.

Also, our measurement calibration technology division was fine.

There is a broader base now, and we're not as dependent just on oil and gas.

Although, just to expand a bit, we see true opportunities in the fracking area.

There's a lot going on in fracking.

We think it's going to expand in China and other places outside the US.

There are definite opportunities for us to continue to grow in oil and gas, even as the market dynamics come down a bit from where they were a year or two ago.

Christopher Glynn, Oppenheimer.

A lot has been asked but just going back to the Asia mid-teens organic, obviously it sounds like a lot of internal execution there.

I just wondered if you could add some commentary on -- to the extent that you've really just lifted these to higher run rates versus now you have tough comps for next year with Asia.

We think, Chris, that we're going to continue to grow.

Sure, we have improved our penetration in Asia, but we don't consider it that it's a new plateau that is going to be flat.

We're going to continue to put investments in that region.

In the BRIC countries which is a little bit broader obviously then just Asia, we're putting in about 50 people this year.

We're adding additional manufacturing capability in Asia, and that is key to access to the markets there, that you have products that are locally built.

We're just going to continue to add to those regions, and you take China for instance, even though the GDP in China has come down from the 9% to 10% region to the 7% to 7.5% region, that GDP is still a heck of a lot better than the US and Europe.

We're going to continue to put investments in those regions.

If you look at what has transpired in the Company and just step back, the area that we were under-penetrated in was Asia.

If you look at the mix now, of that 56% that is outside the United States, the mix has gone, it is about 30% in Europe, it's now 20% in Asia.

I can remember that number when it was 10%.

It's now 20%, and then you've got 5% or 6% in the other areas of the world.

We're getting better balance, but we're still not there.

It still the part of the world where I don't feel we have our fair share.

We're just going to continue to go after it, and hopefully, although the comps will be a little bit more difficult next year, we're going to be able to show you increased performance over the levels of this year.

(Operator Instructions)

Nigel Coe, Morgan Stanley.

Good morning, guys.

It's Drew on for Nigel.

Frank, just a question on M&A increasing going forward, I'm not sure how quantitative you can be here, but maybe qualitative given how much synergies you expect from the Zygo acquisition, and then the other acquisitions to date, what you're thinking about as far as accretion into 2015?

I haven't actually quantified what that is going to be in 2015.

It's not significant in 2014.

We'll pick up a few pennies in 2014, but obviously as we start to put our synergies in place, and as I mentioned before, we're working through that on Zygo.

We will be able to quantify that, but I really don't have a number right now for that.

Rob Mason, Robert W. Baird.

Frank, I wanted to know if you could give us a feel for what pricing may have contributed to the 4% core growth in the quarter, and maybe how that compares to what you were getting earlier in the year?

Yes, it's about the same.

It was 1.5% in the second quarter.

Another measure that sometimes we talk about is pricing minus inflation, where inflation is essentially everything in the business, salaries, materials, et cetera.

That number pricing minus inflation was about 0.6%.

We focus on that, so that we do in fact get some of the pricing to the bottom line.

That's the best quantification I can give you.

These are also not what I would call exact numbers.

They're not the easiest thing to establish, but we have a practice in place that we're very consistent.

So the numbers are comparable but they're not what I would call GAAP precise.

Perhaps I missed it when you gave the run down on the aerospace business, but how did the military portion do in the quarter, and the outlook there for the balance of the year?

If you have any insight in 2015 on military, that'd be helpful.

It's a great question.

It was probably and has been, for the first half of the year and for our forecast for the rest of the year, surprisingly good.

It's basically it's been up in the low-single digit arena, and we're just not seeing a really major impact of sequestration in the US.

US is down some but it's being compensated by our international military business which is about half of the overall military business.

We actually thought it was going to be worse than what it is.

I would say the outlook, with everything I know in 2015, is going to be very similar.

It's not going to be a high growth segment, but it's not going to be a major drain on the growth of the Company.

That's helpful.

Lastly, we spent a fair amount today discussing your Ultra Precision portfolio.

Do you have a ballpark number on the size of the market that you're now addressing there, and give us a sense of what your share is?

Yes, I think if you think about all of those businesses in UPT, and you think about probably a 35% market share, and I'm going to use rough numbers here.

This is a $500 million business in very rough numbers.

You're talking about $1.5 billion kind of market opportunity, but as you know, this business like most AMETEK businesses is very niche oriented.

You can define the market in ways that either make it a very small market share or a very high market share.

What I've given you is an average of the way we think about it.

Probably more importantly, it's not only the share in that addressable market, but as I said before, we have this internal process that we actually look at the adjacencies around that, so we feel we can continue to grow into other market segments.

A great example of this, I'll switch to a different part of the Company, but when you look at the genesis of our power business, that actually came out of our aerospace business.

We decided to take aircraft engines and simply convert them to land gas turbines, and that's what got us started in the power business.

Now we have a half a billion dollar business.

You can expand your market by taking technologies and putting them in other market areas or just taking existing products and putting them in new markets.

There are many different ways you can do this, but I think that one-third or 33% market share is the best way I can answer your question.

Scott Graham, Jefferies.

I didn't want to take up too much air time before.

If you don't mind just answering one more question from me, Frank.

The strength in the July orders, can you give us a little bit of color on that?

Was it broad?

Was it a couple of businesses in particular, and any type of number around that?

Do you mean that it was up more than the third quarter?

Whatever you can give us.

I didn't catch the last part of your question, Scott.

What was that?

When you say it was strong, did you mean to say that's because it was up more than in the third quarter?

If you can give us a number, attach a number to it, that would even be better, but whatever you can do.

Okay.

The trend is positive.

It's moving in an upward direction.

The growth in orders was across the businesses.

It was not that we had one or two businesses that blew it out.

I think that reflects the improvement in the overall global environment.

When we look at July, it continued that trend.

I really was focused on July.

I wanted to see how strong the orders came in, and it was very good.

Now, we'll have to look at what occurs obviously in August which does tend to be a little bit slower month, and then hopefully, very good in September.

I can't really quantify it for you except to say it was broad based.

It was strong, and I think it reflects the global environment from an organic viewpoint.

Thank you.

Mr. Coleman, there are no further questions at this time.

I will now turn the call back to you.

Thank you, Susie.

Thanks, everyone, for joining our call today.

As reminder, a replay of the call may be accessed at AMETEK.com and StreetEvents.com.

As always, I'm available today for further questions at 610-889-5247.

Thanks again.

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.