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AMETEK Corporation (NYSE:AME)

Q4 2011 Earnings Call

January 26, 2012, 8:30 a.m. ET

Executives

Kevin Coleman, VP, IR

Frank Hermance – Chairman and CEO

John Molinelli – EVP, CFO

Bill Burke – Treasurer and VP

Analysts

Allison Poliniak – Wells Fargo

Robert Berry – UBS

Jim Lucas – Janney Capital Markets

Scott Graham – Jefferies & Company

Christopher Glynn – Oppenheimer

Mark Douglass – Longbow Research

Jamie Sullivan – RBC Capital Markets

Matt Summerville – KeyBanc Capital Markets

Elana Wood – Bank of America

Richard Eastman – Robert W. Baird

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AMETEK’s Fourth Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, January 26, 2012.

It is now my pleasure to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations, Please go ahead, sir.

Kevin Coleman

Thank you, Savanah. Good morning, and welcome to AMETEK’s fourth quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and CEO, John Molinelli, Executive Vice President and Chief Financial Officer, and Bill Burke, Vice President and Treasurer.

AMETEK’s fourth quarter results were released earlier this morning. These results are available electronically on Market Systems and on our website at the investor section of www.ametek.com. A tape of today’s conference call may be accessed until February 9, by calling 800-633-8284 and entering the confirmation code number 21563559.

This conference call is also webcasted. It can be accessed at www.ametek.com and at www.streetevents.com. The conference call will be archived on both of these websites.

I will remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK’s filings with the Securities and Exchange Commission.

AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the Investor section of 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, Kevin. AMETEK had a strong fourth quarter to complete another outstanding year. We established quarterly and annual records for sales, operating income, operating margins, net income, diluted earnings per share, and operating cash flow.

For the full year of 2011, sales were up 21%, operating income was 32%, margins were up 180 basis points, and diluted earnings per share ended at $2.37, a 35% increase over 2010.

Focusing on the fourth quarter, sales were up 13% to $762.8 million; internal growth was strong at 6%, while acquisitions added 7%.

Operating income for the fourth quarter increased 24% to $167.4 million, from $135.5 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Operating income margin in the quarter was a record at 21.9%, a 190 basis points improvement over the fourth quarter of 2010.

Net income was up 25% to $101.9 million, and diluted earnings per share of $0.63 were up 26% over last year’s fourth quarter.

Orders in the fourth quarter were $748 million, up 4% over a difficult comparison from the prior year.

Operating cash flow was suburb with both the fourth quarter and full-year results representing records. Operating cash flow was $153 million for the quarter and $509 million for the year, up 19% and 20% respectively. Free cash flow was 132% of net income in the fourth quarter and 119% of net income for the full year.

Turning our attention to the individual operating groups; the Electronics Instrument group had a tremendous fourth quarter with strength across each of our major businesses. For the quarter, sales were up 17% to a record $441.5 million, on accelerating growth in our Aerospace business, and continuing strength in our process, tower, and industrial businesses. The Reichert technologies and EM Test acquisitions completed in the fourth quarter, also contributed to the growth.

Internal growth was 9%, acquisitions added 8%, and foreign currency translation had no impact on EIG.

EIG’s operating income increased 29% to $116.3 million, and operating margins were very strong at 26.3%, up 240 basis points over last year’s fourth quarter. Both operating income and operating margins in the quarter were records.

The Electromechanical group also performed well in the fourth quarter and for the full year. Sales were up 7% to $321.3 million in the fourth quarter on strength in our differentiated businesses. In particular, our aerospace third-party MRO business was very strong. The acquisitions of Avicenna Technology and Coining, also contributed to the growth.

Internal growth was 1%, acquisitions added 6%, and foreign currency had no impact.

EMG’s operating income increased 6% to $62.3 million, and operating margins were 19.4%.

Operational excellence is the cornerstone strategy for the company and our focus on cost and asset management has been a key driver to both our competitive and financial success.

Operational excellence has many facets within AMETEK, including lean manufacturing, Six Sigma in our factories and back office operations, designed for Six Sigma in our new product development efforts, and the movement of production to low cost locales.

We are especially pleased with our working capital results, which reached an all-time record level in the fourth quarter. Working capital as a percentage of sales was 17% in the quarter. We also continue to drive lower cost through our global sourcing office and strategic procurement initiatives. From these sourcing activities, we recognized $8 million in savings of the fourth quarter, and $30 million in savings for all of 2011.

For 2012, we expect approximately $40 million in incremental savings through our material cost reduction initiatives. All of these operational excellent efforts were key drivers in achieving record operating margin of 21.9% in the quarter, full-year margins were 21.3%, an all-time record for AMETEK and up 180 basis points from 2010.

Moving on to our second strategy, global and market expansion continues to be a driver for AMETEK’s growth.

In the fourth quarter of 2011, international sales represented 50% of our total sales. Due to the investments we’ve made over the last several years, order growth in the BRIC locations was very strong, at 18% in the quarter and 35% for the full year. We have also seen continued growth in our global, oil, and gas business, as many new supply sources are being explored and developed.

In particular, the growth of the Canadian Oil Sands, as an attractive source for proven oil reserves, has led to a number of opportunities for our solid-state controls business unit. The latest order awarded was the UPS system contract for the Kearl Oil Sands in Alberta, Canada. The initial order was valued at $2.3 million with additional orders expected to follow. AMETEK’s solid-state controls was previously awarded orders for the supply of industrial UPS equipment, totally over $6 million related to other Oil Sands projects in Canada.

AMETEK has devoted considerable resources to this growing market, including establishing a local service center, to further enhance our position and serve customers. We are well positioned to capture additional business and support of the development of the Oil Sands as the leading supplier of industrial UPS equipment in Canada.

In the fourth quarter, AMETEK’s EM Test business booked their first order to supply compliance testing solutions into the hybrid and electric car market. This order is for the supply of a compliance test system, to test surge, harmonics and flicker for E-car charging stations. EM Test is in discussions with many of the leading automobile manufacturers, and expects similar orders to follow.

As the hybrid and electric vehicle market develops, a set of compliance standards is emerging, which will require electric automobile manufacturers and charging stations to comply with electronic discharge and compatibility standards.

REM Test business, which we acquired in October of 2011, is well positioned to capitalize on this niche market opportunity. EM Test is currently the clear leader in providing conductive immunity solutions to the automotive test industry, enabling car manufacturers and their supply chain, to ensure compliance to ISO standards. This opportunity is a great example of AMETEK’s strategy to expand our existing capabilities into new market areas.

Moving on to our third strategy, new product development is a key to our long-term health and growth. We’ve consistently invested in RD&E. In 2011, we spent $137 million, which was up 22% from 2010, and in 2012 we expect to spend $155 million, a 13% increase over 2011.

And we’re excited about some recent new product introductions. Our Vision Research business introduced a third generation of their Phantom Miro high-speed imaging camera line, the Miro M-Series. The Phantom Miro line is targeted at scientist and engineers for use in applied research applications, product development, and quality monitoring of high-speed processes. The new Miro M-Series delivers a price-to-performance ratio, which sets a new benchmark in the industry, in addition, it provides for a new level of performance and ease of use, which will open new segments of the market to high-speed imaging.

Our Medical Interconnects business recently received their first order for the supply of highly-engineered cables and cable harnesses, for use in portable medical imaging products. This order was received from Varian Medical Systems, an existing customer of our medical interconnect business.

Demand for portable products, such as portable ultrasound and X-ray equipment, has increased through the improvements in imaging quality, along with the continued focus on reducing medical cost and improving access.

Our Medical Interconnects business is well positioned to capitalize on further opportunities in this developing niche market, given our strong technical and engineering capabilities, along with our excellent relationships with many of the key medical OEMs.

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

Turning our attention to acquisitions, which is our core strategy, we had another tremendous year for acquisitions in 2011, and with the announcement this morning of the acquisition of O'Brien Corporation, we started 2012 strong. I will discuss O'Brien in a moment, but first wanted to address our 2011 acquisitions.

We deployed nearly $475 million in capital on five acquisitions in 2011, and acquired approximately $215 million in annual revenue. We acquired an excellent set of highly-differentiated businesses that expanded our market opportunities and technology base, in the areas of electrical interconnects, [inaudible], diagnostics, programmable power, and high-end and analytical instrumentation.

In the fourth quarter alone, we closed three acquisitions, Reichert Technologies, EM Test, and Technical Manufacturing Corporation.

Over the last two years, we have deployed over $1 billion in capital on acquisitions, and acquired approximately $430 million in annual revenue.

The last acquisition completed in 2011 was Technical Manufacturing Corporation, which we closed in December. TMC is a global leader in high-performance precision vibration isolation systems, for use in ultra-precision measurement applications, where vibration isolation is critical to accuracy. AMETEK has and will use these products in conjunction with our high-end metrology instrumentation.

TMC was privately held and has annual sales of approximately $30 million. TMC’s products include Piezoelectric vibration cancellation systems, which are based on TMC’s patented active Piezo technology. They also provide passive vibration cancellation systems, optical test benches, and acoustic and magnetic isolation hoods. It’s customers include the leading manufacturers of life sciences, botanics, and semiconductor equipment, along with testing laboratories and universities, where vibration isolation is critical to the quality of their testing work.

TMC is an excellent acquisition for AMETEK and fits well with our ultra-precision technology business, it’s the leader in its market niche, and has unique differentiated technology. It also provides compelling market synergy opportunities across many of our high-end analytical instruments businesses, given the complementary nature of its product offering, and the common customer base.

Now, turning to the acquisition of O'Brien Corporation, which we announced this morning.

O'Brien is a leading manufacturer of fluid and gas handling solutions, sample conditioning equipment, and process analyzers used in critical applications in the process industries worldwide.

O'Brien was privately held and has annual sales of approximately $80 million. The price paid was approximately $175 million. O'Brien’s product offering includes pre insulation tubing bundles, sample conditioning equipment, specialty electro polished tubing for use in high purity applications, instrument enclosures, and process analyzers. Its products are used to enable the capture, transport, and analyses of liquids, gases, vapors and emissions, in challenging process environments, such as oil and gas production, refining, petrochemical processing, power generation, pharmaceutical manufacturer, and semiconduction fabrication.

O'Brien’s product lines are both highly differentiated and highly complementary to AMETEK’s process instrument businesses, combined with our analytic instrument solutions, AMETEK can now offer its customers a complete solution for most of their process analysis needs. In addition, we expect to lever the strong customer relationships of the combined businesses and AMETEK’s global capability, to further extend O'Brien’s market reach.

Acquisitions will continue to be a focus for us during 2012 as we see this strategy as a key driver to the creation of shareholder value. We have the financial and managerial capacity and disciplined approach to support this acquisition focus. Our backlog of deals is excellent, our balance sheet is strong, and our cash flow and financing facilities provide us with ample liquidity to pursue this strategy.

Turning now to the outlook for 2012. We expect our businesses to continue to show solid growth in 2012, with our longer-cycle, oil and gas, power and aerospace businesses showing particular strength. Our solid backlog, strong portfolio of businesses, proven operational excellence, capabilities, and a successful focus on strategic acquisitions should enable us to perform well in 2012.

We anticipate 2012 revenue to be up low double-digits on a percentage basis from 2011, organic growth is expected to be up mid-single digits for all of AMETEK and for both operating groups. Earnings for 2012 are expected to be in the range of $2.65 to $2.70 per diluted share, up 12% to 14% over 2011, reflecting the leveraged impact of core growth and our operational excellence initiatives.

First quarter of 2012 sales, are expected to be up mid-teens on a percentage basis from last year’s first quarter. We estimate our earnings to be approximately $0.63 to $0.65 per diluted share, up 13% to 16% over last year’s first quarter.

In summary, our overall businesses performed extremely well in the fourth quarter and in 2011, producing record results for essentially all key financial metric. We expect top and bottom-line growth to continue in 2012, as our longer cycle, higher profit businesses show particular strength, and the benefits of our 2011 acquisitions are fully realized. We have a strong balance sheet, generates significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy.

In addition to acquisitions, we continue to make sizable investments in new product development as well as global and market expansion to position ourselves for future growth. John, will now cover some of the financial details, and then we’ll be glad to take your questions.

John Molinelli

Thank you Frank. As Frank noted, we had a strong fourth quarter with excellent financial performance and a high quality of earnings. I will provide some further details.

Core growth in selling expenses in the quarter was in line with growth in core sales. General and Administrative expenses were 1.5% of sales below last year’s fourth quarter level of 1.9% of sales, driven primarily by lower consulting spend in this year’s fourth quarter.

The effective tax rate for the quarter was 30.7%, up from last year’s fourth quarter rate of 29.4%. The full-year tax rate was 30.9% versus last year’s rate of 30.1%, and in line with our expectations.

For 2012, we would expect our tax rate to be between 30 and 31%. As we have said before, actual quarterly tax rates can differ dramatically either positively or negatively from this full-year rate.

On the balance sheet, working capital defined as receivables plus inventory less payables was 17% of sales in the fourth quarter, down from 18% in last year’s fourth quarter. This record low level of working capital positions AMETEK as one of the top performers in our peer group, and is a direct reflection of the tremendous drives our business units have taken, in driving towards operational excellence.

Strong working capital management will remain a key priority. Capital spending was $18 million for the quarter, and $51 million for the full-year. Full-year 2011 capital expenditures were 1.7% of sales. 2012 capital expenditures are expected to be about $60 million.

Depreciation and amortization was $24 million for the quarter and $87 million for the full-year. 2012 depreciation and amortization is expected to be approximately $100 million. Operating cash flow for the fourth quarter and full-year were records. In the fourth quarter, operating cash flow was $153 million, up 19% over last year’s fourth quarter, and full-year operating cash flow of $509 million was up 20% over 2010.

Free cash flow was $134 million for the fourth quarter, representing 132% of net income. For the full-year, free cash flow was $458 million approximately 119% of net income, continuing our strong free cash flow generation. Our strong cash flow was deployed to support our acquisition strategy where we expended nearly $475 million on transactions in 2011. In addition, we repurchased $59 million in stock in 2011.

Total debt was $1.26 billion at December 31, up $95 million from 2010 year-end. Offsetting this debt is cash and cash equivalence of $170 million, resulting in a net debt to capital ratio at December 31, of 34.8%, down from 36.2% at the end of 2010.

At December 31, we had approximately $915 million of cash and existing credit facilities to fund our growth initiatives. Subsequent to the end of 2011 we acquired O'Brien Corporation for approximately $175 million. Our highest priority for capital deployment remains to acquisitions.

And in summary, we had an outstanding 2011 establishing records for essentially all the key financial metrics. We’re well positioned for further growth, organically and through acquisitions with a strong balance sheet and cash flow.

That concludes our prepared remarks, we are now happy to take questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Allison Poliniak – Wells Fargo

Hi. Good morning, guys.

Frank Hermance

Hi, Allison.

Allison Poliniak – Wells Fargo

So, obviously, concerns about Europe and emerging market growth is certainly on the forefront of investor’s minds. Could you just give us a little color on what you’re seeing geographically as well as how you’re thinking about it going into 2012?

Frank Hermance

Sure, Allison. We saw a little impact of Europe in the fourth quarter. It was predominately in our floor care motor business. If you look at the organic growth numbers for the company at 6% overall, the organic growth in Europe was about 3% and the organic growth in Asia was about 9%. And in the U.S., it was around 6%. So Europe was a little weaker but you know, not significantly. And probably, very importantly, our order intake so far in January has been nothing short of superb. And Europe looks fairly good so I’m not overly concerned at this point, but obviously, we are going to watch it very, very closely. And as you know, they’re very aggressive if revenue starts to show weakness in terms of removing costs and keeping our profitability up. So, so far, so good, but I would say some slight weakness in Europe.

Allison Poliniak – Wells Fargo

Great. And also, obviously you guys have done a great job on margins in 2011 and historically. How should we think about the margin profile going forward?

Frank Hermance

Yeah, we believe that even though we’ve hit record levels on margins, that there’s definitely more runway. I have consistently said through the course of 2011 to model about 30 basis points as we go forward and as we’ve rolled up the budgets, we feel confident in another 30 basis points of improvement in 2012. And it really comes from two places; first, with the organic growth that we’ve talked about in 2012 of mid-single digits and with the contribution margins that we have, which are superb. In the fourth quarter, our contribution margin was greater than the 40% so you take that organic growth with that kind of contribution margin and obviously that’s going to be a positive impact on the overall margins in the company.

And secondly, as always, we will be aggressive on the cost reduction side. In 2012, we’re going to put approximately $60 million of cost improvements through the P&L. So you take those two dynamics and it does lead to improving margins.

Normally, what we do is give you some estimates at the beginning of the year and then the margins get better as we go through the year and I hope that will be the case this year. So the 30 basis points is probably a conservative amount.

Allison Poliniak – Wells Fargo

Great. Thank you.

Operator

Our next question comes from the line of Robert Berry with UBS. Please proceed with your question.

Robert Berry – UBS

Hi, guys. Good morning.

Frank Hermance

Hi, Robert.

Robert Berry – UBS

First on O'Brien, is there any assumed accretion this year from it?

Frank Hermance

There’s a cents of accretion that’s in our estimates, but nothing substantial. There will be costs that will run through the P&L as we integrate that business. So the real effect on the bottom line will come more in 2013 than 2012.

Robert Berry – UBS

Got you. And then you called out areas of strength; Aerospace and also Oil and Gas. I was wondering if you could just unpack each of those a little bit for us in terms of what your outlook is in the various areas within Aero and also within Oil and Gas, particularly up versus downstream. Thanks.

Frank Hermance

Sure, Robert. I would be glad to do that. Why don’t I start with our overall Aerospace business. That business completed a solid year with high single digit organic growth in the fourth quarter and it was on strengths in the third-party MRO business, the commercial businesses. We expect to really see strong growth for all of Aerospace in 2012 and that’s going to be based on the OEM build rates.

If you look at Boeing, they’re projecting to be up about 18% on build rates. Airbus is expected to be up about 9%. So overall, we’re looking at 13% build rate in the 2012 timeframe. And also, revenue passenger miles support strong growth.

And our business and regional jet business as well, is expected to do very well. But that’s mainly due to program wins on new aircraft, not as much by market as it is by the engineering efforts we’ve put in place.

So to give you some specifics on the various segments, in 2012 we expect our commercial and third-party MRO businesses will be high-single digits. Our business and regional jet business, we actually expect to be up low-double digits, so it’s going to be actually our strongest growth area. And our military business is expected to be up low-single digits.

So when you sum all of that up, we expect our overall Aerospace business should be up in that mid-to-high single digits region in 2012. And as I mentioned, our orders look really good in January and Aerospace is one of the drivers for that.

Talking about the process businesses and oil and gas, I’ll talk first about the process businesses overall and then I’ll come back to address your upstream, midstream, downstream question.

The process markets performed extremely well in Q4, both in the quarter and the full year, with strong growth across most of the business in process. In the quarter, our growth was driven by oil and gas, ultra-precision technology and our advanced measurement technology businesses. So it’s broader than oil and gas, although oil and gas was a key driver.

Sales were up high-single digits organically in the quarter and high-teens overall. And if you look to 2012, we expect this business to grow high teens overall with organic growth of mid-single digits.

And if you look at the later cycle oil and gas businesses, that is going to be a driver for this.

So if you look at the various segments of upstream versus midstream versus downstream. The growth is clearly being driven more by upstream than it is by midstream or downstream. However, the midstream business is still reasonably good and if you look at the downstream business, outside of the U.S. and about 70% of our process businesses are outside the U.S. it’s pretty good. This has been a driver to the company in 2011 and we expect it to do extremely well in 2012.

Robert Berry – UBS

Great. Thank you very much.

Frank Hermance

Sure.

Operator

Our next question comes from the line of Jim Lucas with Janney Capital Markets. Please proceed with your question.

Jim Lucas – Janney Capital Markets

Thanks, good morning, guys.

Frank Hermance

Hello, Jim.

Jim Lucas – Janney Capital Markets

Frist a housekeeping question. John, the payables number?

John Molinelli

Sure, Jim; $283 million.

Jim Lucas – Janney Capital Markets

Great, thanks a lot. And Frank, first question. With regards to the EMG core of 1% in the fourth quarter, could you walk us through the dynamic there given the commentary about the Aerospace and differentiated businesses? Just what was the dynamic behind the slower core in the fourth quarter in EMG?

Frank Hermance

Yeah, sure, Jim. Basically, the driver there was Europe, as I mentioned and it was predominately in the floor care and motor business. That particular business was weaker than we had anticipated. It was down about mid-single digits and we were forecasting more flattish for that particular business. So that had an impact on the organic growth in that portion of our business.

But the good news is that January is starting off quite strong. So it’s actually a bit hard for us to understand exactly what happened. It was really at the end of the fourth quarter, it just looked like things slowed, but then it popped back. So we’re going to watch that closely, but that was the key driver and the answer to your question.

Jim Lucas – Janney Capital Markets

Okay, so the other components of EMG were in line or better than your forecast?

Frank Hermance

Yeah, they were fine. The other components were fine.

Jim Lucas – Janney Capital Markets

Okay. And you know, just a follow up on the emerging market question; you’ve, you know, made a lot of investments there through the years. Could you just give us an update of what you’re seeing in the three key emerging markets of China, India and Brazil going into 2012?

Frank Hermance

Yeah, I mean, the BRIC countries in general look very exciting to us. I know there’s been a lot of talk in the press about slowing growth rates in those countries. But our market shares are low and all those countries are doing well for us. Overall, for the BRIC countries in 2012, we’re looking at approximately 20% growth for the company. So they will be a key driver. Actually, it’s 22% is the actual way that our budget is rolled up. So they’re going to be a driver to our growth.

If you’ll look at our concentration, it’s heavily China. That market continues to do well for us. India, we’ve made some major investments over the course of the last three or four years. We saw excellent growth in 2011 and we expect that to continue in 2012. If you look at Brazil, we don’t have as much volume in Brazil, but we have decided to put significant investments in Brazil. We feel that, you know, we’ve been working in China for many, many years. We’ve done a lot in India, so our intention now is focused more in Brazil.

I may have mentioned in our last conference call, Jim, that we know have a 140,000 square foot facility in Brazil. We’ve won some major business with PetroBrass, which we’re going to produce in that facility. We’ve opened it up now to the other AMETEK divisions, that they can put production down there. We’ve got the infrastructure to support that and our businesses are looking at it as aggressively as they have in China, for instance. It’s very unfortunate to be able to manufacturer in Brazil because of the terror situations that are a factor in that business.

And in that plant, we’re also going to beef up our distribution capabilities. We’re going to have our divisions as we have in China and in India, put people down there in all of these BRIC countries. If my recollection is correct, we’re going to add just under 60 people that are predominately in the distribution network, a few in engineering in India just to continue that growth profile.

So we’re pretty encouraged with all of the BRIC countries and we think it’s going to be a key driver to our gross, so we’re going to continue those investments.

Jim Lucas – Janney Capital Markets

Okay, great. Thank you very much.

Frank Hermance.

You bet.

Operator

Our next question comes from the line of Scott Graham with Jefferies. Please proceed with your question.

Frank Hermance

Scott, are you there?

Operator

Mr. Graham, go ahead, your line is open.

Scott Graham – Jefferies & Company

Can you hear me?

Frank Hermance

Now we can, Scott.

Scott Graham – Jefferies & Company

Fine, I’m sorry, I had my mute on. Good morning, all three of you.

John Molinelli

Hi, Scott.

Scott Graham – Jefferies & Company

So from what I heard you say, Frank, and correct me if I’m wrong, I think you said fourth quarter organic orders were up 4, is that right?

Frank Hermance

That’s correct. ’12 overall orders are up four. And organic…

Scott Graham – Jefferies & Company

Would you be able to split that between the two segments?

Frank Hermance

Actually, I don’t have that information here, so I can’t split it. We don’t look at orders as fundamentally the key drivers, Scott, because Aerospace orders just come in in lumps and actually, I don’t have that data here. So we can get it for you.

John Molinelli

We’ll get it for you.

Frank Hermance

We’ll get it for you, Scott.

Scott Graham – Jefferies & Company

Yeah, no, but [inaudible] cycle is always lumpy, I get that. But was there anything, you mentioned that there were tough comps and you’re kind of talking about the floor care. Was there any other businesses that maybe contributed to that number maybe being a little bit below what we have seen?

Frank Hermance

Not really. There was maybe a little weakness in our TMC business, which is the higher technology and motors that are more in the differentiated segment. But again, those orders came back very good in January. So I would just say it was sort of the even flow, not anything that would be any different than sort of a normal recovery because we’re coming back from sort of a recession. We’ve had huge organic growth over the course of the last year and now we’re coming back to what I would call more normality. So there is some movement up and down. But we’re fairly encouraged right now. We think 2012 is going to be a fine year.

Scott Graham – Jefferies & Company

Yes. I definitely sense that you know, my sense is that you’re sensing that the fourth quarter 4% was just something more of lumpiness more than anything else. I don’t want to paraphrase here, but that’s…

Frank Hermance

That’s true.

Scott Graham – Jefferies & Company

And then if you wouldn’t mind, maybe going through some of the other businesses, you know, power, industrial and is there anyway, would you mind, if you could do this, great, to split kind of floor care versus technical versus EIG on the fourth quarter organic?

Frank Hermance

Yeah, let me talk to your question in a way that I typically talk about the various subsegments in the business. Looking at EIG, I think we’ve handled Aerospace and we’ve handled the process businesses. So the one remaining part of EIG is the power and industrial and that business was very strong in Q4, sales were up low-teens organically and more than 20% overall, with excellent growth across both the power and the industrial parts of the business. So strength really across that whole subsegment.

Looking forward in 2012, we expect sales for power and industrial to be up low-teens overall and mid-single digits organically. So if you sum what we talked about for Aerospace, for process and for power and industrial, for all of EIG, we’re expecting sales to be up about mid-teens overall and organically to be up mid-single digits. And hopefully, that mid-single digit organic is a conservative number. We’ll see how that goes as the year unfolds.

Moving to the other half of the company where we really talk about this in two subsegments, the differentiated EMG businesses and our cost-driven motor business, for the differentiated EMG businesses, overall sales were up about 10% in Q4, a solid growth in the third party MRO business and obviously, we had contributions from acquisitions, which were out of [inaudible] Technology and coining, which helped to drive that business.

And looking into 2012, we’d expect this business to be up again about 10% and organic growth in the mid-single digit arena. So you know the business is doing very good and we expect it’s going to continue.

The cost-driven motor business, which is the other piece of EMG, was weak in the fourth quarter, as I mentioned. Q4 sales were down mid-single digits, which was weaker than we had anticipated, primarily due to Europe. And for 2012, we expect this business to be up low-to-mid-single digits and you know, the January orders support that growth.

So if you sum those parts of EMG, for all of EMG we’re expecting a high-single digit growth in 2012 and organic growth of mid-single digits. And the last thing I commented is, if you then look at both halves of the business and sum them up, as I'm mentioned in my overall talk , we’re expecting low-double digits sales growth. We’re expecting another just fine year from a sales growth picture with organic growth in that mid-single digit arena.

So that gives you some color.

Scott Graham – Jefferies & Company

That gives a lot of color, Frank. Thank you. My last question is this. Do you have a specific FX impact within your budget, you know, is it, are you expecting minus 1, 2, 3? Is there, you know something that you can offer on that?

Frank Hermance

On what, on pricing?

Scott Graham – Jefferies & Company

On FX.

Frank Hermance

On FX. Probably as we go into 2012, about a point of negative headwind.

Scott Graham – Jefferies & Company

Thanks very much.

Frank Hermance

Okay.

Operator

Our next questions come from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

Christopher Glynn - Oppenheimer

Thank you, good morning.

Frank Hermance

Morning, Chris.

Christopher Glynn - Oppenheimer

I have a question on what the price was in the quarter and your 2012 outlook, and just overall update and complexion on how you view your pricing power in the portfolio.

Frank Hermance

Yes, basically in the 4th quarter our price end was up about 2 points and we have rolling in our - word it this way, we asked our divisions to get 2% in terms of pricing. While we rolled through our budgets and what's in the forecast we gave you is 1 point. And obviously, we're hoping that will be conservative, but that's the way we gave the estimates.

Christopher Glynn - Oppenheimer

Okay, and then just interested in a little more detail on the globalizing opportunity for the two recent deals of O'Brien and TMC as now part of AMETEK. And more broadly, how much of a role did those strategies play in 2011? Do you think with realizing synergies with your global channels and recent acquisitions?

Frank Hermance

Yeah, it's a huge factor Chris, and an excellent question. If you look at the two acquisitions that I talked about this morning in detail, TMC and O'Brien, both of those businesses have about 70% of their volume in the US. And that's an advantage of buying companies of the relative size that we buy in that they don't have as a significant amount of international exposure because it's expensive, and for a small company to put the infrastructure in is typical. So we put infrastructure in place for our acquisitions so that in essence that can come right out on day 1 and simply put people in our infrastructure, those people report back to the acquired business. But we have the - we know how to pay those people, we've got the legal structures set up, we got the facilities, etcetera. So it's very, very easy for those acquired companies to immediately gain access to distribution in China, distribution in India, shortly we'll have that capability in Brazil, as I talked about. And we have that capability in Europe as well. So it's definitely a sizable factor when we think about deals, and especially businesses like O'Brien for instance, where the market opportunity outside the US is huge for that business. As I mentioned for our profit businesses, about 70% of our volume is outside the US and that where a sizable amount of growth comes. So we're going to capitalize on that. We've set that company up in a way to capitalize on it, and we're pretty excited about it.

Christopher Glynn - Oppenheimer

Okay, thanks. And then last one, just some clarification. You noted the 60 million cost savings in the plan, is that sort of a gross number that that's against natural inflation and it all kind of rolls up into the leverage targets?

Frank Hermance

That's exactly right Chris. Basically that 60 million is just the cost that we're taking out of the business and pricing is going to be a positive, and then on the other side of the, sort of, the balance sheet there's going to be inflation, and there's going to be investments. And I can give you a rough flavor that on the investment side we plan to put in about $37 million in 2012. And so we sum all of that up with the contribution margins of the company and that's in essence how we get to the bottom line in the estimates that you're talking about. So it is a gross cost number when we speak to it. Another measure, just to go a bit further on your question is we do look internally at just cost minus - excuse me, price minus inflation. Just that's another measure and I have some numbers in the 4th quarter. Price minus inflation was 0.8% of sales. And the budgets are rolling up in that same region - in that same kind of region. So…

Christopher Glynn - Oppenheimer

Great, thanks Frank.

Frank Hermance

Hey, you bet.

Operator

The next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Mark Douglass - Longbow Research

Good morning gentlemen.

Male

Morning Mark.

Mark Douglass - Longbow Research

So Frank, that 60 million in gross savings, that's including the 40 million of your global sourcing initiatives?

Frank Hermance

That's correct.

Mark Douglass - Longbow Research

Okay, and the additional 20 is just kind of operational improvements?

Frank Hermance

Yeah, it's operational improvements. It would include a few plant consolidations that we're going to do. And, you know, netted in that number is any cost associated with any restructuring that is going on. So that's sort of a net number on the cost improvements going through the P&L, but it doesn't include inflation. And it doesn't include other investments that we're making.

Mark Douglass - Longbow Research

Okay, great. And then can you bridge the EPS in 2012 for us? How much volumes, acquisitions, and then I guess you talked about operational improvements. Is there a way to break it out that way?

Male

Boy, that's a very tough question, John do you have any thoughts on that?

John Molinelli

No, I don't. I think - I think when you get the EPS you're getting into tax effect, some of these things. That's really not how we break down the - how we look at the businesses Mark.

Mark Douglass - Longbow Research

Okay. In talking about BRIC countries, what were their percentage of sales in 2011?

Frank Hermance

About 11% of our total sales are in the BRIC countries.

Mark Douglass - Longbow Research

11%, okay. And then, I guess, finally when you talk about process, how big was that in '11? And then, on the oil and gas side, how much are you tied to the fracking, natural gas phenomenon going on, particularly in the US? And then, are you seeing potential pullbacks in investments with the slide in the natural gas prices? Is that some chatter going on? Assuming you're tied to that market.

Male

This segment was on the order of $1 billion. That whole process business, and if you break it down, about 1/3 of that is in oil and gas. About 25% is related to the metals industry, where we do analytic instrumentation in metals. About 20% is in what we would call research and development. And the remaining, whatever it is, 22% I think, is basically in varied industries. So within that 1/3 that is oil and gas, there's roughly an equal component of oil and gas in that 1/3 of the business. And though, to date although that's being under $3, which is incredibly low, and there's a lot of talk about some reductions in drilling, if you actually look at the data the recount in Q4 actually reached a higher level than it was back in 2008. There's about, I think it's 3700 active rigs that are working at the present time. So there could be some impact in the fracking area. I did see an article where Chesapeake is discussing, or has actually decided that they're going to cut back some drilling. But oil is doing just fine. So it's pretty strong. I mean, it's pretty good.

Mark Douglass - Longbow Research

Okay, thank you.

Male

Yeah, just another point. Bill dropped me a note, that is correct, that I should have mentioned. Remember 70% of our business is outside the US as well. So again, you're not going to have that major an impact even if the fracking goes down a bit in the US.

Mark Douglass - Longbow Research

Thank you.

Operator

Our next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please proceed with your question.

Jamie Sullivan - RBC Capital Markets

Hi, good morning.

Male

Good morning.

Jamie Sullivan - RBC Capital Markets

I think you touched both the BRICs and the growth you're expecting out of those regions in '12. You know, 20% plus and I think you said it was in the high teens in the 4th quarter. Just wondering, you do have some difficult comps coming up in the 1st through the 3rd quarter, just wondering how to think about where you see that growth coming from and your confidence level there.

Frank Hermance

Got pretty high confidence in the 1st two quarters of the year. You know, it's not as clear in the 2nd half of the year, but we've got excellent backlog, it's over $900 million. Aerospace is just accelerating, so we're very excited about it. And if you look at the profit margins in aerospace and process and in the power industry of businesses, they have very high contribution margins. So we've got, I would say significant confidence in the 1st half of the year. And we've been a bit conservative on our estimates for the full year, and it's really based on it's not as clear in the 2nd half. And so we want to watch that and although I don't think Europe is going to crash, if it did obviously that's going to have an impact on us in the 2nd half. So we don't want to be too aggressive at this point. But I think the fundamental answer to your question is we've got a high confidence in the 1st half of the year.

Jamie Sullivan - RBC Capital Markets

Okay, that's helpful. Thanks. And on the EMG side, the margin's down a touch from last year, is that really just the drag from the cost driven motor [Inaudible]?

Frank Hermance

Yeah, there's a drag there. I mean, we were, I think, 20 basis points, but still the margins are darn good at just under 20% - 19.4% in a quarter. So we feel pretty good about that.

Jamie Sullivan - RBC Capital Markets

Right, thanks. And then, just lastly, on the M&A side what areas is the deal pipeline weighted today?

Frank Hermance

Well first of all, the deal pipeline is just great. We've obviously been very successful over the course of the last 15 months. And not only buying companies, but in buying good companies that are really close adjacencies to what we do. And we can leverage those companies in terms of increasing their reach, etcetera. And the backlog really has deals in all of the major areas. We'll acquire in aerospace, we'll acquire in the process businesses, we'll acquire in the power part of our business, and also in the differentiated part of the EMG. The only part of the company that we don't intend to do any acquisitions is in the floor care and sort of cost driven part of EMGs. So it's hard to predict where the deals are actually going to come from as we take each deal and sort of wrestle it to the ground, but I think you could assume we're going to do the kind of deals we've done over the last 15 months. And we did for instance, Avicenna and Coining rolled up in EMG. Reichert, TMC, and EM Test rolled up in EIG, so you had three in one part of the company and two in the other. And O'Brien this morning, the first one out of the box is going to be in EIG. And I can also tell you that we're working on another good sized deal in the EMG side of the business. So I'm not specifically answering your question because it's varied, but there's lots of opportunity.

Jamie Sullivan - RBC Capital Markets

Great. No, that's helpful. I appreciate it, thank you.

Operator

Our next question comes from the line of Matt Summerville with Keybanc. Please proceed with your question.

Matt Summerville - KeyBanc Capital Markets

Morning. Just a couple questions. Frank, you had indicated I think, I your remarks that you expected the military side of aerospace to still be up in the low single digits in '12. What was it in '11? And I guess, what sort of gives you the confidence in that viewpoint just given everything that's going on with that?

Frank Hermance

Right, well it's about the same. It was in that low single digit kind of arena in 2011. And we feel that even with some of the reductions - I know there's going to be some more color on that today. There was a little bit in the Wall Street Journal. But if you look at what they're doing, and like this morning they were talking about increasing the number of drones by about 30% due to the success we've had, and obviously we've got content on drones. So I think the two drivers for us are that the electronic content in military either ground based vehicles or aerocraft is going up and we are the prime provider to the military of cooling solutions for those electronics. So even if the overall military budget is going to wane some we believe we can and we’ve shown that we can outgrow that. So we think positively about that. The other side is an EIG more is that we've invested very heavily in helicopters and they have to change this fleet to a more helicopter base fleet. Just this recent situation in Somalia, they - using aircraft to parachute the SEALs in and then using helicopters to get them back out. And so those investments also are going to sort of outgrow the military budget. So, you know, and we've got pretty good visibility is this business so we think that low single digit rate is reasonable. I guess, if we wanted to look at it negatively, I'm saying the overall aerospace is going to grow in that mid to high single digits. If we didn't have the drag of military at low single digits we'd be probably up in double digits. So it's not all good, but we also don't feel that there's a major problem there. So I hope that helps Matt.

Matt Summerville - KeyBanc Capital Markets

Yeah, that does. And then just another question on the aerospace side of business. Could you maybe differentiate a little bit between what your expectations are for 3rd party MRO growth versus sort of the traditional civilian aftermarket related piece? And I guess, how much is share gain playing a role in your outlook there?

Frank Hermance

Actually if we look at the 3rd party MRO business, we're saying that's going to be up, high single digits. And we're also saying that commercial aviation is going to be up high single digits. Now, for that 3rd part MRO piece, the market is estimated to be up about 4%. Just to put a flavor on it, and therefore, a good part of the remainder is share gain. There is some price in there, but a good part of it is in essence share gain. If you look at the commercial side, that is more driven by the OEM production and just taking advantage of the market conditions. As I mentioned Boeing and Airbus combined are going to be up 13% in build rates. And obviously, we have to lead them because they need our parts to build their airplanes. And that's why as we went into the 2nd half of last year we saw this accelerating growth. So that's less share gain than it is market. Does that help?

Matt Summerville - KeyBanc Capital Markets

Thank you, Frank. Yes, absolutely. Thank you.

Operator

Our next question comes from the line of Elana Wood of Bank of America. Please proceed with your question.

Elana Wood - Bank of America

Good morning everybody.

Frank Hermance

Hello, Elana.

Elana Wood - Bank of America

Wondering if you've calculated incremental margins as acquisitions for the 4th quarter?

Frank Hermance

We did. They were superb. They were in excess of 40%.

Elana Wood - Bank of America

Okay, and I was just wondering, what is your kind of baseline assumption for the total company this year in terms of organic growth in Europe?

Frank Hermance

It's about the same number we talked about in the 3rd quarter. It's like a 3% kind of number, a little bit less than the US, for instance. And it's significantly less than Asia.

Elana Wood - Bank of America

Okay, do you see it dipping into negative territory in the 1st quarter or do you expect it to stay positive?

Frank Hermance

Oh no, we expect it to remain positive. I think the growth there, where we're very strong is in the process businesses. And I think we're going to be just fine.

Elana Wood - Bank of America

Okay, and then just circling back on the acquisition - the O'Brien acquisition, what was the purchase price multiple on EBITDA, in terms of EBITDA?

Frank Hermance

The multiple on that deal was about 9 times trailing. On the TMC deal it was about 6 ½ times trailing. So actually that was good news to me that we're starting to see some better deals out there - a little bit more reasonable multiples.

Elana Wood - Bank of America

Okay, and then just lastly, I was just wondering if there was any unusual items in your 2012 guidance? How much tension is embedded in the guidance? I know…

Frank Hermance

Yeah, we’re in good shape. I'll let John answer that question.

John Molinelli

Yeah Elana, we are - well first of all we're overfunded on our prominent part of our pension numbers. We're looking at probably about a $0.03 headwind going into 2012 if you just look at the pension. But we’ve got a couple other accounts, the restricted stock invested in 2011, obviously that expense won't - is not part of our 2012 outlook. That's a couple cent to the good, so if you put a couple of those types of things together it's sort of a push, maybe a little bit, slight headwind, but it's just not significant at all. So we really don't see that as an overall distraction from running the business.

Elana Wood - Bank of America

Okay, terrific. Thank you so much.

Operator

Our next question comes from the line of Richard Eastman with Robert W. Baird and Company. Please proceed with your question.

Richard Eastman - Robert W. Baird

Thanks. Just two questions. Frank, I was doing the math here on the backlog and I think you eluded to this, is the back log up around 912? Something like that?

Frank Hermance

Yeah, you got it. It's 911 million. It's up about $83 million since the beginning of last year.

Richard Eastman - Robert W. Baird

So about 10% year over year. And then is that - would you think of aerospace and maybe process those, you know, maybe a little longer cycle businesses, would their backlog be up greater than that? Is that where there's some confidence coming from?

Frank Hermance

Yeah, yeah. No, I think if you look at the breakdown of that backlog it does have a higher component of the longer cycle businesses and therefore, you couple that with the fact that the orders have been - you know, even the first part of this year, have started very strong, we just feel pretty confident in the short-term outlook, the six month outlook. So even if we have some weakness in other parts of the business we feel our estimates will more than cover that.

Richard Eastman - Robert W. Baird

Yes, okay. And then just - I wanted to just double back for a second on the geographic thoughts for '12. We're expecting some modest Europe growth and then I presume for '12 if we think US and Asia, or rest of the world, we're probably in these same general growth rates that we saw on the 4th quarter?

Frank Hermance

Yeah, that's exactly right. I mean, we're saying mid-single digits for the company a little bit weaker in Europe, stronger, much stronger in other parts of the world, but they are a smaller part of the business. So that's where you sum up to this sort of mid 6% kind of number.

Richard Eastman - Robert W. Baird

And is the BRIC waiting - the sales waiting that goes into the BRIC countries, is that toward - it sounds like it's towards the process, maybe aerospace, but is - which businesses do you BRIC exposure weight towards?

Frank Hermance

They weight towards the process businesses and there's definitely an aerospace component, but process is a key driver. And it's because of the international markets that we've talked about, with oil and gas, and those kinds of businesses being largely outside the US. Our metrology businesses are very strong in China. So those businesses - and Russia as well, our process businesses are the strongest in Russia. So those are the drivers for the growth and we feel pretty good about that.

Richard Eastman - Robert W. Baird

And there's no general degradation in incremental margins on process instrument sales into those emerging markets?

Frank Hermance

No, absolutely not. Matter of fact, we've looked at this very, very, closely during our strategic planning activities. And if you roll up and look at the bottom line profits in the BRIC countries, as a percentage of sales, versus the rest of AMETEK they're almost identical, less than a point difference. And in the BRIC countries they're actually higher.

Richard Eastman - Robert W. Baird

Okay, very good, great. Thank you, very nice quarter.

Frank Hermance

Thank you Richard.

Operator

(Operator Instructions) And our next question is a follow-up question from the line of Scott Graham with Jefferies. Please proceed with your question. Go ahead, your line is open.

Scott Graham - Jefferies

Yeah, I'm having trouble with my mute button here, and I'm sorry for that.

Frank Hermance

We'll get you a new mute button Scott.

Scott Graham - Jefferies

You know, budgets are tight on the self-side so - you know, the 4% - I'm sorry to ask you about this question again, but the 4% orders number for the 4th quarter, Frank was that a total number or was it an organic?

Frank Hermance

That was a total number and our organic was slightly less than that.

Scott Graham - Jefferies

So the organic was slightly less than that. If I factor in that BRICs was a real good number, you know, it would be fair to say then that sort of US/Europe was flat to only slightly up, fair?

Frank Hermance

You're talking about orders now or are you talking about sales?

Scott Graham - Jefferies

Orders, organic orders.

Frank Hermance

Yeah, that's right. I think that's right Scott.

Scott Graham - Jefferies

Okay, then on that, let me just - the next question that stems is, you've got an outlook of let's say plus 3% in organic Europe, I was just wondering kind of what businesses would you expect to contribute to that 3?

Frank Hermance

Oh, it's really a similar answer to Richard's question in that's it's predominantly going to be the process businesses. And, you know, they are, one thing you also have to realize is that we roll up the Middle East and we roll up Russia in that part of the world And the process businesses are doing very, very well. So they will be a key driver. And also, we have sizeable aerospace content. We have a major company, actually several companies in Europe that service that part of the world and aerospace is doing fine in Europe. So you take those two factors and you say okay, maybe floor care is not going to be as good and we feel, we're pretty comfortable with these numbers. Matter of fact, it would not surprise me if we even exceeded this guidance that I'm giving you.

Scott Graham - Jefferies

That's very helpful, thanks a lot.

Frank Hermance

Okay, Scott.

Operator

And there appear to be no further questions at this time. Please continue with your presentation or closing remarks.

Frank Hermance

I think we're all through, thanks (Ivanna). Thanks everyone for joining our conference call. As a reminder a replay of this call can be accessed on the Internet at Ametek.com and at streetevents.com. Thank you so much. Have a great day.

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