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AMETEK Inc. (NYSE:AME)

Q3 2009 Earnings Call

October 27, 2009 8:30 a.m. ET

Executives

Bill Burke - VP of IR & Treasurer

Frank Hermance- Chairman and CEO

John Molinelli - EVP and CFO

Analysts

Allison Poliniak - Wells Fargo

Christopher Glynn - Oppenheimer Funds

Jim Lucas - Janney Montgomery Scott

John Baliotti - FTN Equity Capital Markets

Jamie Sullivan - RBC Capital Markets

Mark Douglass - Longbow Research

Elana Wood - Merrill Lynch

Matt Summerville - KeyBanc

Richard Eastman - Robert W. Baird

Christopher Glynn – Oppenheimer

Presentation

Operator

Good day, everyone and welcome to the AMETEK Incorporated third quarter earnings conference call. This call is being recorded. For opening remarks and introductions I would like to turn the call over to Mr. Bill Burke, Vice President of Investor Relations & Treasurer. Please go ahead, sir.

Bill Burke

Thank you, Laura. 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 10th by calling 888-203-1112 and entering the confirmation code number 224-0076. This conference call is also webcasted, and 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 conference 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 uncertainty 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.

Frank Hermance

Thank you, Bill. AMETEK delivered good financial results for the third quarter, given the difficult conditions in our markets. Sales were down 23% to $497.1 million. Internal growth was a negative 26%, with the impact of foreign currency and additional 1% headwind. Acquisitions added 4% to growth.

Operating income, declined to $77.5 million, from $120.1 million last year, reflecting the impact of the reduced sales, partially counterbalanced by our cost reduction activities. Operating income margin, was 15.6% in the quarter, net income was $43 million or $0.40 per diluted share. These results include $0.02 per diluted share of restructuring costs, predominantly in the Electronic Instruments Group.

Excluding these restructuring costs third quarter earnings were $0.42 per diluted share. Cash flow from operations was excellent at $72 million, up 15% over last year's third quarter.

In the face of difficult market conditions, we delivered good financial results. We believe our overall business has stabilized, our restructuring initiatives are on track, and we continue to focus on our key strategic priorities to drive value for our shareholders. In the third quarter, we saw the opportunity to do some additional restructuring, predominantly in the Electronic Instruments Group. These actions will have little impact in 2009, but should provide a benefit of approximately $4 million in 2010.

Turning our attention to the individual operating groups, Electronic Instruments Group experienced difficult market conditions in the quarter, but our team performed very well. Sales decreased 24% to $271.8 million, as we saw weakness in the aerospace aftermarket process and industrial businesses.

Internal growth was down 25%, with the impact of foreign currency an additional 1% headwind. Acquisitions added 2% to revenue. EIG’s operating income was $47.9 million versus $80.2 million in last year's third quarter. Operating margins were 17.6%, reflecting the impact of lower revenues and costs associated with our restructuring actions.

Electromechanical Group had a solid third quarter given the continued impact of the economic downturn on their markets. Revenues were down 22%, with weakness in both the cost driven and differentiated businesses. Internal growth was down 26% with the impact of foreign currency an additional 2% headwind acquisitions added 6% to revenue.

Operating income for the quarter was down 24% to $38.2 million, operating margins were 17%, as very effective cost reductions and operational excellence initiatives were able to mitigate the impact of the lower sales volume.

Operational excellence is the corner stone strategy for the company, and our focus on cost and asset management has been a key driver to both our competitive and financial success. We are realizing the benefits of the restructuring plan we announced in January, as well as the follow-on plan announced in April.

As part of these plans headcounts have been reduced by approximately 2,000 people, since the beginning of the year, and more than 2700 people since June of 2008. In addition to the restructuring activities we continue to drive lower cost through our global sourcing office and strategic procurement initiatives. We are on track to generate more than $20 million in incremental savings this year from these activities.

In the third quarter, we realized $6 million of savings and year-to-date we generated $16 million of savings from these initiatives. Overall, the total impact of the operational excellence actions outlined above will be approximately $135 million in reduced costs for 2009. In the first nine months, we recognized approximately $90 million of these savings as anticipated.

We continue to invest in global and market expansion and new product development. These initiatives will help our performance during the downturn and position us to out perform during the upturn.

Global and market expansion continues to be a driver for AMETEK's growth over the business cycle. In this third quarter international sales represented 49% of our total sales. AMETEK Commercial Enterprise Shanghai or ACES was opened in 2008 to enable AMETEK to provide service and repair in China as well as to promote the sales of our instrument businesses in that region. Prior to the opening of ACES service was provided by third parties. This new capability is expanding our sales in the region and establishing a stronger linkage with our customers. This strategy has been a tremendous success with bookings exceeding plan by 30% to 50% for a number of divisions. High brightness LEDs are rapidly gaining acceptance in such applications as mobile appliances, LCD displays and general lighting, given the greater efficiency and economic pay back as compared to traditional lighting sources. The manufacturing process for these LEDs is complex and requires precision power systems such as the SG series or DC power supplies from our programmable power division.

In the third quarter, programmable power booked over $2 million dollars in orders for these power supplies from a leading manufacturer of LED sonic conductor manufacturing tools. New product development is key to our long-term health and growth. We have consistently invested in RD&E. This year the total is expected to be approximately $103 million down slightly from last year but higher as a percentage of sales. While no single product is significant to AMETEK as a whole we are excited about some recent introductions. NanoSIMS instrumentation from our CAMECA business unit is playing an increasingly important role in life sciences research. SIMS or Secondary Ion Mass Spectroscopy enables researchers to evaluate cellular material at the nano-metric level. Leading centers of research and processing these instruments which can cost up to $4 million each, including one by the Technical University of Munich in the third quarter.

Our process instrument business booked orders for (Inaudible) Process Mass spectrometers from solar power, a manufacturer of thin film photovoltaic cells and modules for power generation. Our process makes spectrometers measure the physical parameters of the manufacturing process to detect contaminants. From a overall perspective, revenue from products introduced over the last three years was 20% of sales up from 18% last year reflecting the excellent work of our businesses in developing the right products to serve their customers. The pipeline of acquisition candidates has definitely picked up. At the end of the third quarter, we announced that we have acquired Unispec Marketing and Thelsha Technical Services, two privately owned and affiliated businesses, headquartered in Mumbai India. These acquisitions provide us with an established sales distribution in service network with a total of 11 offices across India serving the quality control, and the analytical instruments market. Unispec Marketing currently represents our spectral analytical instruments business in India, while its Thelsa Technical Services affiliate provides an installation and wholesale service for those instruments. This acquisition provides AMETEK an immediate sales distribution and service infrastructure in India, that otherwise would have taken years to build. We plan to leverage this distribution structure across other AMETEK business units to increase sales to this very important market. We have the financial and managerial capacity to continue to do acquisitions. Our balance sheet is strong and our cash flow and financing facilities provide us with ample liquidity to pursue this strategy. We continue to look to add differentiated businesses to AMETEK and remain a very disciplined yet aggressive acquirer.

Turning to the outlook for the balance of 2009, 2009 continued to be a very challenging year, but we believe that our overall business has stabilized. For the full year, we expect revenue to decline in the high teens on a percentage basis, with core growth down approximately 20% for the company as a whole and in each of the operating groups. We have narrowed our earnings estimates to be approximately $1.87 to $1.92 per diluted share for 2009 excluding the restructuring cost of $0.02 per diluted share in the third quarter; our guidance is $1.89 to $1.94 per diluted share.

For the fourth quarter of 2009, sales are expected to be down in the high teens on a percentage basis from last year's fourth quarter. We estimate our earnings to be approximately $0.44 to $0.49 per diluted share, a sizable improvement over the third quarter of this year. As anticipated, our fourth quarter should have sequential improvement on better sales and our process and cost driven motor businesses, together with higher benefits from our cost reduction activities.

In summary, our overall business has stabilized. We delivered good results for the third quarter in the face of difficult market conditions, our restructuring initiatives are on track and we continue to focus on our key strategic priorities to drive value for our share holders. 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. The pipeline of acquisition candidates is very good and we are actively working to bring deals to closure. In addition to acquisitions, we will continue to make sizable investments in new product development as well as global and market expansion to position ourselves for growth. John will now cover some of the financial details and then we will be glad to answer your questions.

John Molinelli

Thank you, Frank. As Frank has covered our results at a high level I will focus on some particular areas of interest. Selling expenses on a core basis were down 22% in the third quarter, in line with the drop in sales. Corporate G&A is running at 1.6% of sales year-to-date, and should be down 30% in dollars from the 2008 levels. The effective tax rate for the quarter was 27.6%, down from last year's third quarter rate of 31.1%, driven primarily by state tax planning initiatives that benefited the quarter.

For the first nine months of 2009, the effective tax rate was 31%. As we have said before, actual quarterly rates can differ dramatically either positively or negatively from this full year rate. On the balance sheet, capital spending was $6 million for the quarter and $21 million for the first nine months of the year. Expenditures for capital in 2009 are expected to be approximately $30 million. Depreciation and amortization was $17 million in the quarter and $48 million for the first nine months. For 2009, depreciation and amortization is expected to be approximately $66 million. Operating cash flow for the third quarter was excellent, totaling $72 million, up 15% over last year's third quarter as working capital investments were reduced. Reduced operating working capital defined as accounts receivable inventory and less payables, these were a source of cash of $16 million in the quarter driven by reductions in inventory and receivables. Further reductions in working capital remained an opportunity for us.

Third quarter free cash flow was $66 million, representing 153% of net income. For the first nine months of 2009, operating cash flow was $256 million, up 25% over the first nine months of 2008. And the free cash flow was 153% of net income. Total debt was $1.06 billion at September 30, unchanged from June 30. Offsetting this debt is cash and cash equivalents of $201 million, resulting in a net debt to capital ratio at quarter end of 37%, as compared with 44% at year end. Over the past two years we have expended a significant amount of effort to improve company's capital structure and ensure that adequate liquidity was available to support our growth plans. A result of this work is that AMETEK has plenty of liquidity available and no significant debt maturities until 2012. At quarter end, we have approximately $635 million of cash and credit facilities to support our growth initiatives. Clearly, liquidity is not an issue at AMETEK. As we see our business stabilize we continue to manage our cost structure and balance sheet effectively maintaining a strong liquidity profile and position ourselves to navigate through the current economic downturn. Bill?

Bill Burke

That concludes our prepared remarks, Laura we will be happy to take questions now.

Question-and-Answer Session

Operator

The question-and-answer session will be conducted electronically. (Operator Instructions). Our first question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak - Wells Fargo

Just a question on the EIG operating margins you talked about a lot of it being impacted by the restructuring, can you quantify that, what the margin would have been maybe without the restructuring cost.

Frank Hermance

The impact of the restructuring on EIG margins was about 100 basis points.

Allison Poliniak - Wells Fargo

Okay. And then looking at you know you talked about the $135 million in savings this year, can you talk about how much of that is permanent versus how much would eventually come back with volume as well.

Frank Hermance

I would say about two thirds is permanent, and a third might come back.

Operator

Our next question is from Christopher Glynn with Oppenheimer Funds.

Christopher Glynn - Oppenheimer Funds

Looking at the fourth quarter, you didn't mention the military, just wondering is that still on track with sort of a concentration of contract work and also in the fourth quarter, any comments on mix trends versus third quarter, and prospects for extended customer shut downs?

Frank Hermance

In terms of the military shipments, as I mentioned in the third quarter conference call, we anticipated more military shipments or will anticipate more military shipments in the fourth quarter and in fact, that is true. We expect that to in fact happen. In terms of mix trends, the only negative impact to mix is that our aerospace aftermarket business, not the third party MRO business but the aerospace aftermarket business our OEM aftermarket business is expected to be a little bit weaker than we had anticipated. And that does have a higher contribution in terms of margin. So there will be a little impact of that but we have covered that in our estimates. And yes, we are concerned that in the fourth quarter, there may be more shut downs right at the end of the year, and is one reason that we have been somewhat conservative in our guidance, but we think we have covered that.

Christopher Glynn - Oppenheimer Funds

And then just broadly looking at guidance, you'll characterize it as a substantial improvement over the third quarter, certainly see that at the high end but if you look at the low end, up $0.02 versus the adjusted number, this quarter could you just maybe address that and the sensitivity between the high and low ends?

Frank Hermance

Yeah. The way we were looking at that is again on a GAAP basis we did about $0.40 in the third quarter and our guidance is $0.44 to $0.49. So if you look at the midpoint of that range and we feel it is a sizable improvement, and that's why I characterized it that way. In terms of what could cause us to go to say the lower end of that range it would be what I talked about before, if the aerospace aftermarket business is weaker, due to the high contribution margin that would be on the lower end of the range but again, I think we have been relatively conservative on that particular item. So, hopefully that will not occur. In terms of the high end, it would clearly be volume driven as well as maybe getting a little more out of cost reduction activities.

Operator

Our next question comes from Jim Lucas with Janney Montgomery Scott.

Jim Lucas - Janney Montgomery Scott

John first housekeeping question, payables?

John Molinelli

Sure Jim $171 million at the quarter.

Jim Lucas - Janney Montgomery Scott

Great. Thanks. And frank, on the stabilization comments you made, I was wondering if you could expand a little bit what you are seeing geographically, North America versus Europe and Asia, and you gave a little bit of color on aerospace but in the process and analytical, particularly the process side, any update there of what you are seeing sequentially would be appreciated.

Frank Hermance

Sure, Jim. In terms of the geographical mix of our businesses, I think we are seeing trends that are very similar to what other companies are seeing. In essence, the most positive part of the geographic content is in the far east and particular in China, that particular area of the world has recovered almost unbelievably faster than would have been expected, and we are definitely part of that recovery. So that market is doing well for us. The US market probably the best way I can characterize it is that it has stabilized and that will link to my comments in a moment about process and answer to your second question.

And Europe, and that part of the world is the weakest area, but we are seeing a little bit of life over there. So, if I had to rank these Asia first, US second, Europe third. In terms of the process businesses, we are seeing an improving trend in the third quarter conference call. I had talked about the fact that we expected the third quarter to be our weakest quarter of the year. And a key factor in that was the process businesses, because we were seeing a decline in the oil and gas businesses as we entered the third quarter. And in fact that happened. As we go into the fourth quarter, the trend is definitely improving. The oil and gas business has stabilized and the other parts of the business, which are a sizable portion of our process segment which relate to research related businesses which are about 20% of the overall process segment. And our metals related analytic instruments business which is about 25% of the total process segment, are both improving. This is what we anticipated, the order patterns support that and we believe we are going to see increased sales in the fourth quarter over the third quarter from those businesses.

Jim Lucas - Janney Montgomery Scott

Okay. And finally just on the acquisition pipeline, which you know we are hearing from a lot of the companies as the environment is improving, as you look at the pipeline to the extent you can could you give us color of the type of deal that you are seeing, are there particular geographies, smaller versus larger, valuations and what the competitive environment on some of these deals look like?

Frank Hermance

Yeah, sure Jim. Basically, the deals we are looking at are sort of right now on the center of the type of acquisitions that AMETEK does. These are, basically acquisitions that are in the $50 million to $75 million kind of sales range, not real large. These are the type of deals we like to do.

Multiples are still a little bit higher than I would like, they have definitely regressed, but not as much as we would have expected given the severity of this economic downturn, hopefully we’ll see those multiples come down a little bit more over the next quarter or two, but the multiples are not crazy. They're definitely within the range of what we have been paying historically, but not as low as I would have, I would have hoped for.

In terms of international content versus US content, the majority of the deals we have on the table are US centric. As you know, we have done a lot of international deals over the last several years, but right now the deals that are, we're actively engaged with are US based.

In terms of the business, it’s the deals we are looking at are again aerospace, [they're] in our process businesses. So, right in the center of our strategy.

Jim Lucas - Janney Montgomery Scott

Okay. Great. Thank you for the color.

Frank Hermance

Sure.

Operator

Our next question comes from John Baliotti with FTN Equity Capital Markets.

John Baliotti - FTN Equity Capital Markets

Good morning, Frank. I was curious if just on one housekeeping how is the order, if you look at the sub segments, is there a way to characterize or just rank the order patterns that you are seeing?

Frank Hermance

Let me think about that. We don’t view it that way, but the total orders for the quarter were $479 million. And if I look at the trends process is up, cost driven motors would be up. Aerospace would be relatively flat, maybe slight decline due to the aftermarket. So if I rank them, I would put the process and cost driven at the top, I put aerospace second, and I would probably rank the other business which is the industrial businesses and EIG at about sort of flattish to same as aerospace.

John Baliotti - FTN Equity Capital Markets

Okay. And if you sort of in a longer term view, if you think about what you guys have done since the last cycle, in terms of the M&A and both on acquisitions and also adjustments you have made to the efficiency of the company, is there a way, do you guys think about where you have moved the company in term of the long term growth rate of the company the core growth and also the profitability like as you do deals and think about how the portfolio shifted, is there a way for you to think about in the big picture how do you think the growth has changed?

Frank Hermance

Yeah I think I can give you an outline on without maybe specifics. But just to give you a view of the trends, first of all, we have done a sizable amount of restructuring. If you look at it on the basis of the kind of numbers that we are talking about in terms of cost reductions, say as a percentage of sales versus other companies we are clearly at the high end, in term of restructuring. And that means that as volume returns, the contribution margin of the company is going to be superlative.

Our contribution margins had run when volume was going up on the order of say low 30s, and we are in the process now putting our budgets together for next year. But obviously, the contribution margin is going be substantially higher than that. So, for every dollar to the top line, what goes to the bottom line is going to be significant. And I can't wait for that to happen in terms of seeing that volume increase, but the fact that we have stabilized now hopefully we are not too far away from seeing some major up ticks in our markets.

In term of the structure of the company, it really depends on the timeframe in which I look at it. But in general as I think you know, when I became CEO of the company the majority of our business was in cost driven businesses and we have made a fundamental shift to much more differentiated businesses, and that continued, through the last round of acquisitions so that we have moved the entire portfolio of AMETEK to much more differentiated businesses, the last number I saw had our businesses, over 90% are differentiated type of businesses. So, a very very significant change in the portfolio and as that change happens the internal growth of the company goes up. Just by definition having less of the cost driven businesses in terms of the percentage of your total revenue meaning [that] that’s a lower growth business means the overall growth of the company is going to going to go up.

So, I think as the economy improves we are going to see an improved organic growth rate, there will be some negative impact of potentially in term of margins as you bring in new acquisitions, because you obviously don't bring them at the contribution level, but we have always been able to overcome that and show good margin improvement. And I think that will happen as well as we go into the future.

John I think you have a point too.

John Molinelli

Yeah, I would chip in Frank, the picture you are painting we anticipated our capital expenditures to be reduced, and we are seeing that clearly this year with conservative estimates of only $30 million in capital spend this year. And I think that bodes well for the future needs of the company, because we are not trying to manage that number at all. I think that's just a natural flow from the way we have constructed the business pattern.

John Baliotti - FTN Equity Capital Markets

And John would you think that as you guys expect your own spending behavior coming out of this and your customers, are you expecting more, what sort of pace are you expecting for your I would imagine that you are going to react similar to your customers in terms of your own, you know your CapEx and other types of spending. Do you think its more of a gradual.

John Molinelli

It’ll be very gradual, John. We have got plenty of prick bricks and [mortars] around the world. I don't see those needs hitting us at all. We’ll have incremental capital needs basically a project-by-project basis. And so I think the trend of this year of 30 million, that might be people are so busy saving money that they're not spending there. But slightly but I just don't see capital needs being a major part of our dynamic going forward.

Frank Hermance

And just to add to that, I mean that also reflects this change in portfolio that we have gone through and that I can remember a number of years ago when we were looking at 5% and 6% of sales in terms of capital (Inaudible) of the business. And as we changed the portfolio, the capital appetite for these businesses are substantially less.

John Baliotti - FTN Equity Capital Markets

So its not just the current environment but structurally going forward…

Frank Hermance

Structurally

John Baliotti - FTN Equity Capital Markets

That will stay, and okay. All right thanks very much, guys.

Operator

Our next question comes from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

Hi, good morning. Wondering if you can just clarify on the end market views and your different businesses if the aerospace aftermarket is that the only real change that you have seen since 3Q?

Frank Hermance

Well, it’s not the only change we have seen from the view point. As I mentioned in answering Jim's question our process businesses are also going to improve. Now we did talk about that in the third quarter. So I guess it’s how you characterize that. But yeah I would say that the only change from what we talked about in Q3 is a little bit weaker business in the aerospace aftermarket.

Jamie Sullivan - RBC Capital Markets

Okay. And you still see aerospace overall as flattish as we go into next year.

Frank Hermance

Yes. That's a great question. If you look at our overall aerospace business that encompasses both half’s of the company the outlook for next year obviously we are putting our budgets together right now. And we’ll get a much better call on that, as we go through the process. But our outlook right now is that basically our military business which is about 40% of our sales. And our third party MRO business which is about 25% of our sales will have positive growth, and we'll have negative growth in the commercial business, which is about 20% of our sales and our business and regional aircraft business which is about 15% of our sales and they will roughly counterbalance one another say within plus or minus 5%.

Jamie Sullivan - RBC Capital Markets

And on the oil and gas side, you mentioned orders improving into 4Q. Last quarter you also talked about the tone of customers getting somewhat incrementally positive, can you just give us an update there, kind of as we start to think about 2010 with the tone of customers and their budgets look like?

Frank Hermance

Yeah, it’s definitely little bit better. I don't want to say it’s off the charts positive. That would be definitely an overstatement. But we are hearing a little bit better trends, there is a lot of controversy as to why the price of oil is at 80. But that sure can hurt, having the price of oil little bit higher. So we do expect some improvement as we go into the fourth quarter as I shouldn't say improvement, but sort of in that business more of a flattish kind of environment, but people are more positive about that segment is probably the best way to say it.

Jamie Sullivan - RBC Capital Markets

Okay. Then just lastly, I guess as was thinking about M&A and the portfolio of businesses that you have, if you think about short, mid and long cycle do you think about that when you think about putting together the portfolio although waiting at a little bit more towards short, mid or long or is that not really something you consider?

Frank Hermance

Well it’s absolutely something we consider. Just in general and this is obviously just a high level comment the very short cycle businesses that meet with our portfolio tend to have a more of a commoditization tone to the businesses. So that in general because we want to acquire differentiated businesses with a higher technological content, they tend to be more medium and longer cycle business, they tend to be more in the process side of the business, more in the aerospace side where the process businesses are, I characterize them as mid cycle and the aerospace more long cycle. So there is a tendency for the portfolio to move in that direction. And you know I think you can see that as the economy here dip so the impact to us was delayed because of that and the recovery is probably a little bit delayed from what you have heard from other companies. So its part of the make up of AMETEK right now.

Jamie Sullivan - RBC Capital Markets

Thank you.

Operator

Our next question comes from Mark Douglass with Longbow Research.

Mark Douglass - Longbow Research

Hi. Good morning. If we can talk about EIG again and the restructuring is there anything in particular that precipitated the additional restructuring here part of process and analytical or can you just give a little more indication as to what precipitated that?

Frank Hermance

Sure. It was purely opportunity based, as we looked at EIG, we saw an opportunity that came out of some of our thoughts about next year as we are going into the budgeting process. And we felt it was in the best interest of everyone to basically make that change, it was not huge obviously, it was quite small in comparison with the major restructuring that we did. And as I mentioned in my opening remarks the charge was only a couple of pennies and we expect about $4 million of savings next year from that activity. So we just, the real answer to your question is it was an opportunity.

Mark Douglass - Longbow Research

And that $4 million is on top of can you go through what you expect in 2010?

Frank Hermance

We are in a process now of obviously rolling all of those cost reductions up. But yes, this is clearly incremental to anything else that we have talked to you about.

Mark Douglass - Longbow Research

Okay. So, right now I forget what you said in the past. But we can go back and see what you are expecting 2010?

Frank Hermance

Sorry I don't have that number in front of me right now.

Mark Douglass - Longbow Research

Think it was maybe 190 in total. Okay.

Frank Hermance

Okay.

Mark Douglass - Longbow Research

And then if we again look at the analytical side of EIG what do you see as the opportunity going forward there? Is it a lot of new products, new developments and say mass spectrometers or is there, are you expecting some stimulus impact, people just increasing CapEx budgets because they want more quality control. Can you go a little more into of what you are seeing in analytical?

Frank Hermance

Yeah, absolutely. There are certain [problems] to what we are going to be seeing in analytical. Definitely, this is an area where we have put sizable dollars into development of new products. So, that this is a key driver and I talked about a couple of those in my opening remarks. So, we are looking to bring out new instruments at the higher end of those portfolios that have excellent margins and good growth characteristics.

Another very important part of the analytic instruments strategy is the continual globalization of that platform. And the fellow that runs this business, Dave Zapico has done a great job of in essence getting his fair share of the international market. The India acquisition that I talked about in my opening remarks and also the fact that earlier this year, we talked about the fact that we are opening our own office in Bangalore, basically we are going to use that as a center of our operations in India. We are going to do both distribution from that office manage the distribution links as well as we are going to put R&D capability in there and use it as a low cost research and development facility. And in essence, we have just hired actually an R&D manager for that facility. And now we are going to hire engineers into that operation. And with the acquisition that I talked about, we now have offices throughout India.

So we are going to really go after this and our analytic businesses are the ones that are driving that they see substantial opportunity in India its one of the last areas in the world that we have not put as much energy in, we put a lot of energy in China and the far East a lot of energy in Europe and both Western Europe and Eastern Europe and the Middle East. And now, India is a great opportunity for us.

In terms of stimulus, absolutely part of the research improvement that I talked to and answered to a previous question, is stimulus driven. It’s not totally stimulus driven, but partially stimulus driven because funds are going to the various universities and research organizations around the world and we can capitalize on that.

Mark Douglass - Longbow Research

Okay. And then finally again going back to the acquisitions. If when you close some deals, what are we looking at as far as accretion possibilities, is there going to be when the types of deals you are looking at do you think there is going to be significant amount of amortization that's going to hit in the first year and two up accretion possibilities or can you just describe a little bit about what you might expect there?

Frank Hermance

I mean as you know we do essentially all of our deals with debt, the cost of debt right now is very minimal. So in essence any deal that we do will have accretion associated with it. So again we are not looking at the mega deal here. We are looking at [Bolton’s] and those types of deals but, yes we would clearly expect accretion from the deals that we close, we don't expect sizable amortization there’ll be some but they won't be sizable. And one negative to what I am saying is that with some of the accounting rule changes you do have to expense more of the restructuring costs of these deals. So that will detract, but I can tell you the deals we are looking at will still be nicely accretive.

Mark Douglass - Longbow Research

In the first year?

Frank Hermance

In the first year.

Mark Douglass - Longbow Research

Okay. Thank you.

Operator

Our next question comes from Elana Wood with Merrill Lynch.

Elana Wood - Merrill Lynch

Good morning. Would you mind just running through the organic growth by platform or by end market like you usually do?

Frank Hermance

Okay.

Elana Wood - Merrill Lynch

Or maybe just comment where there are changes perhaps versus the second quarter if that's easier?

Frank Hermance

Yeah. Probably the easiest way I can do it is just quickly run through the businesses. For process, in the third quarter, the organic growth was down about 25% and for the full year we expect it to be down about 20%. For aerospace, its basically approximately 10% down for both the quarter and the year. For power industrial, let me see. I have got to get that out of my data here. Its around 25% down for both. For the differentiated part of EMG its down about 20. And for our cost driven for the year, it will be down about 25.

So those are the numbers and as I mentioned in my opening talk, we expect the groups for the year and the company to be down about 20. So 20 for the company, 20 for EIG, 20 for EMG.

Elana Wood - Merrill Lynch

Okay terrific. Question on the tax rate, so you talked about some state tax planning helping the third quarter. Is there any benefit in the fourth quarter? Or how should we [briefing] about the tax rate for the fourth quarter?

John Molinelli

The tax rate that you see year-to-date would be about the level we will end up for the final for the year. Approximately, don't see much changing in the fourth quarter at all. This was more of a one-time event from a benefit standpoint.

Elana Wood - Merrill Lynch

Okay. And then did you buy back any stock this quarter? It looks like your share count is a little bit lower?

John Molinelli

No, no.

Elana Wood - Merrill Lynch

No? Okay. Currency, just wondering what you're baking in terms of currency benefit for EPS next quarter it looks to me like translation may boost EPS may be around the order of $0.02 to $0.03 sequentially, assuming the dollar remains roughly where it is today?

John Molinelli

We don't see that in our forecast.

Elana Wood - Merrill Lynch

Okay. So you are not baking in any sort of sequential currency benefit?

John Molinelli

No, we don't see anything at all of that magnitude in our forecast.

Elana Wood - Merrill Lynch

Okay. And then just lastly if you wouldn't mind commenting on order trends in terms since the quarter has closed, so that you have seen in October how that might compare to September's order trends?

Frank Hermance

Yeah. First of all if I talk about Q3 that was definitely a sequential improvement in orders, with September being sizably more than the first two months now. You have to take somewhat into account that the first two months are you know vacation month’s etcetera. But even taking in to that account, we started taking that in to account we definitely saw some improvement in September, and so far in October the trend has continued. John and I were actually just commenting yesterday that orders are started off in October very, very good. The thing that we are concerned about, though is in the fourth quarter, whether we are going to see some plant shut downs of our customers. And so we have been a little bit conservative in our forecast based on that possibility.

Elana Wood - Merrill Lynch

Okay. And then just lastly on the restructuring, I don't know if its been announced yet to your employees, if it has can you just comment on what which businesses are going to be impacted sort of broadly with aerospace or would you prefer not to comment?

Frank Hermance

Yeah I would prefer not to comment. It was in EIG.

Elana Wood - Merrill Lynch

Okay.

Frank Hermance

Okay. Thank you very much.

Operator

Our next question comes from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc

Most of my questions have actually been answered Frank, I was wondering if you can maybe just provide a little more color on some of the businesses you don't specifically talk about in EMGs, such as the differentiated motor businesses outside of military and aerospace, and what you are seeing in the specialty metals business?

Frank Hermance

Yeah, what we are seeing in the specialty metals business is an improvement trend, Q3 was weak, no question about it. But orders and specialty metals SMP are showing some life and we are feeling better about that business. Our Reading Alloys business still is somewhat weak, and haven't seen the improvement trends there. And our technical motor business which is part of the differentiated segment is flattish, is the best way to describe that it is not yet seen an up tick.

Matt Summerville - KeyBanc

And then just a question on pension, John can you remind us what your pension expense is for 2009 and what you think it might be in 2010?

John Molinelli

Yeah. The 2009 is $18 million increased costs this year for the year. And that’s relatively evenly throughout the year. Next year we are hopeful that we’ll get some relief there but it is too soon to make a prediction about what that will turn out to be.

Matt Summerville - KeyBanc

Okay. Thank you.

Operator

Our next question comes from Richard Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird

Yes. Good morning. John or Frank, could you just talk through the gross margin on a consolidated basis a little bit? I mean we lost about 200 basis points there. And I am curious the decremental didn't look too bad. But is that primarily mix, or did any of the restructuring hit that?

Frank Hermance

All of the restructuring that we talked about obviously hit that and the degradation is largely due to the large volume. That's really what drove it. The internal growth and the growth of the business and the third quarter as we said is going to be the weakest. And that was the primary driver. Although we are pretty damn pleased with the absolute level of that given the volume drop to as you said the incremental detrimental margins were good. So we are pretty pleased with it, but that's what drove it, Richard.

Richard Eastman - Robert W. Baird

For instance the aerospace aftermarket, presumably that would be a higher gross margin for mix also…

Frank Hermance

Yeah. I mean that's in that equation when I say the volume went down and obviously that's going to have a disproportionately higher impact on the gross margin. The gross margins in that business run on the order of 70%, 75%. So they're very high.

Richard Eastman - Robert W. Baird

I see. And then also just a question on pricing Frank are we flattish year-over-year on price? Have we had any give backs here, how did pricing look overall?

Frank Hermance

Yeah, it varies by business, Richard. But I would say, overall, we are slightly up about a point. And the pricing environment is not easy. It’s tougher, but if you step back and think about the, what's happened in the economy to be able to get a point of pricing is still relatively good. But the environment is not easy to get pricing. NEW SPEAKER

Richard Eastman - Robert W. Baird

Okay. And then just a last question with sales maybe for the fourth quarter, I think given your guidance, maybe around 515ish million and your orders, Q3 orders were 479 is the difference there this improving trend that we have seen or are you comfortable that the military business can spike up off of the backlog? How do we make up the differences?

Frank Hermance

It is a little of both, obviously we are seeing improving trends in the process businesses as I talked about. We are seeing an improving trend in the cost driven businesses. And yes we have backlog to ship not just in the military side of the business, but aerospace overall has good backlog and we also expect those order rates in aerospace to come up, but that stuff will not necessarily be shippable in the fourth quarter.

Richard Eastman - Robert W. Baird

Okay. So you feel pretty good about the visibility on sales for Q4 with the exception of some possible plant shut downs at the very year end.

Frank Hermance

That's exactly right. Very well characterized.

Richard Eastman - Robert W. Baird

Okay. Thank you.

Operator

Our next question comes as a follow up from Christopher Glynn with Oppenheimer.

Christopher Glynn – Oppenheimer

Thanks. Just going back to aerospace aftermarket, could you talk about your different exposure to the supply chain channel versus the airlines, what you are seeing the relative state of de-stocking in those two sides, and what your thoughts are around when you might come up against the flat comparison in the aftermarket?

Frank Hermance

What we are seeing from the airlines is obviously, they are having financial difficulties right now. So they are trying not to order anything that they don't need. So there's definitely a significant push back from the airlines. And at some point that string will run out, where in essence they have to order. So, if we look at the, I’ll give you just some market data. Overall, the aerospace aftermarket business is expected to be down this year on the order of 20% - 25%, those kind of numbers. But next year there's actually all of the industry forecast that I have looked at show growth going into next year.

And we expect that our aftermarket will be better than you are going to see some better performance there, and another very important thing, if I just switch the conversation for a moment to our third party MRO business. There we have a tremendous opportunity to gain share, and in my overall view of aerospace that I mentioned before, we are expecting mid single digit to high single digit organic growth in the third party MRO business because of our ability to gain share.

Christopher Glynn – Oppenheimer

Sounds good. Thank you again.

Operator

It appears there are no further questions at this time. Mr. Burke, I’d like to turn the conference back over to you for any additional or closing remarks.

Bill Burke

Okay. Thank you, Laura. I’d like to thank everyone for joining our call. As a reminder a replay can be heard by calling 888-203-1112 and entering the conformation code 224-0076 and its also on the internet at ametek.com, and streetevents.com. Thank you.

Operator

That concludes today's conference. Thank you for your participation.

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Source: AMETEK Inc. Q3 2009 Earnings Conference Call
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