AMETEK CEO Discusses Q3 2012 Results Earnings Call Transcript

Oct.23.12 | About: Ametek Inc. (AME)

AMETEK, Inc. (NYSE:AME)

Q3 2012 Earnings Call

October 23, 2012 8:30 AM ET

Executives

Kevin Coleman - VP, Investor Relations

Frank Hermance - CEO

Bob Mandos - EVP and CFO

Analysts

Allison Poliniak - Wells Fargo

Robert Berry - UBS

Scott Graham - Jefferies Capital

Nicole DeBlase - Morgan Stanley

Matt Summerville - KeyBanc Capital Markets

Jamie Sullivan - RBC Capital Markets

John Baliotti - Janney Montgomery Scott

Richard Eastman - Robert W. Baird

Mark Douglass - Longbow Research

Matt McConnell - Citigroup

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AMETEK Third Quarter 2012 Conference Call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded, Tuesday, October 23, 2012.

I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations. Please go ahead, sir.

Kevin Coleman

Great, good morning and thank you Savannah (ph). Good morning and welcome to AMETEK's third quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and CEO, and Bob Mandos, Executive Vice President and Chief Financial Officer.

AMETEK's third quarter results were released earlier this morning. These results are available electronically on market systems and on our website at the Investors section of ametek.com. A tape of today's conference call may be accessed until November 6 by calling (800) 633-8284 and entering the confirmation code number 21605952. This conference call is also webcasted. It can be accessed at ametek.com and at streetevents.com. The conference call will be archived on both of these websites.

I will remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the Investors section of ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call.

We will begin with some prepared remarks and then we will open it up for questions. I will now turn the meeting over to Frank.

Frank Hermance

Thanks Kevin, and good morning everyone. AMETEK had a strong third quarter. We established records for sales, operating income, operating margins, net income, diluted earnings per share and operating cash flow.

Sales in the quarter were up 12% to $839.4 million. Internal growth was up 2% and met our expectations, while acquisitions added 12% and currency was a 2% headwind.

Operating income for the third quarter was superb. It increased 18% to a record $188.2 million, from a $159.6 million last year, reflecting the impact from our operational excellence activities and our longer cycle, higher-margin businesses.

Operating income margin in the quarter was a record 22.4%, a 110 basis point improvement over the third quarter of 2011. Net income was up 18% to $115.4 million, and diluted earnings per share of $0.47 were up 18% over last year’s third quarter and above the top end of our prior guidance of $0.46. Both net income and diluted earnings per share were records.

Operating cash flow in the quarter was superb at $163 million, a 19% increase over the last year’s third quarter. Free cash flow was also very strong at $150 million, or a 130% of net income. Backlog at the end of the third quarter was $1 billion. Orders in the third quarter were $800 million, up 10% from the prior year.

Turning our attention to the individual operating groups, the electronic instruments group had a solid third quarter. Sales were up 12% to $457.1 million on strength in our oil and gas, aerospace and power businesses in addition to the contributions from the acquisitions of O’Brien, TMC, EM Test, and Reichert Technologies.

Internal growth was 4%, while acquisitions added 10% to sales and currency reduced sales by 2%. EIG’s operating performance was excellent. Operating income increased 19% to $121.6 million and operating margins were a record 26.6%, up 160 basis points over last year’s third quarter.

The electromechanical group also performed very well in the quarter. Sales were up 12%, to a record $382.3 million on strength in our differentiated businesses and the contributions from the acquisitions of Dunkermotoren. Our cost-driven motors business remained weak in the quarter. For all of EMG internal growth was flat, acquisitions added 14% to sales and foreign currency reduced sales by 2%. EMG’s operating income increased 13% to $77.3 million and operating margins increased 20 basis points to 20.2%.

Focusing now on our four growth strategies of operational excellence, global and market expansion, new product development, and acquisitions. Operational excellence is the cornerstone strategy for the company, and our continued focus on cost and asset management has been a key driver to both our competitive and financial success. The results we announced today reflect a tremendous impact of our various operational excellence initiatives as we were able to expand operating margins in the third quarter by 110 basis points to a record 22.4%.

Operational excellence has many facets within AMETEK, including lean manufacturing, Six Sigma in our factory and back office operations, designed for Six Sigma and our new product development efforts and the movement of product to low-cost locales. We also continued to drive lower costs through our global sourcing office and strategic procurement initiatives. From these sourcing activities, we recognized approximately $13 (ph) million in savings in the third quarter and expect $48 million in sourcing savings for all of 2012. Overall, we expect $80 million in total cost savings for all of 2012, an increase in the guidance we provided at the end of the second quarter. We are prepared to take further cost actions if necessary.

Moving to our second strategy, global and market expansion continues to be a driver for AMETEK’s growth. In the third quarter of 212, international sales represented 52% of our total sales. Growth in Asia and Europe was strong in the quarter. We continue to make investments in global and market expansion initiatives.

The following are some examples of recent successes. AMETEK’s SPECTRO Analytical Instruments business was awarded a number of orders in the BRIC regions in the third quarter. These wins highlight the strength of SPECTRO’s product offering across a variety of market applications as well as SPECTRO’s continuous success in the BRIC regions.

In India, SPECTRO booked an order with the India government for a highly configured SPECTRO lab for the chemical analysis of nine different base metals. The complex analytical requirements could only be fulfilled with our product. In China, a leading oil fuel research institute ordered a SPECTRO XEPOS for trace elemental analysis in crude oil. XEPOS’s excellent sensitivity for the elements of interest was the deciding factor.

AMETEK’s Aerospace and Defense business secured a multimillion dollar order for a thermal management system upgrade for the M1A2 Abrams Tank supplied to the Saudi Arabian armed forces. The environmental control system components we are providing include 5 Hughes-Treitler heat exchangers that will provide crew, vehicle and electronics cooling.

In addition to the initial order, there is a planned option for an additional $1.7 million in products sales in the fourth quarter as well as potential near term sales to other foreign military operations. AMETEK’s Aerospace & Defense business is very well positioned to capture additional foreign military sales.

Moving to our third strategy, new product development is a key to our long term health and growth. We have consistently invested in RD&E. In 2012, we expect to spend $155 million, a 12% increase over 2011. We are excited about some recent new product introductions. AMETEK’s Process & Analytical Instruments business introduced several new products in the third quarter which complement our existing products serving in upstream oil and gas market.

Chandler Engineering introduced two advanced well completion tools. The model 5600 Shear History Simulator, which measures the property of oil and gas well fracturing fluids, and the model 8500 Pressurized Foam Rheometer which measures the properties of oil and gas well drilling foams.

In addition, AMETEK’s Solartron ISA business introduced the Seastream FloCalculator, a subsea flow meter that provides unrivalled accuracy in measuring the output of deep sea oil and gas wells. Also in the third quarter, AMETEK’s Programmable Power Business extended its line of solar array simulators introducing the ETS80, a Photovoltaic Simulator providing industry leading performance to support the fast growing micro PV inverter market.

The simulators are used to validate and test micro and string inverter designs used in commercial, industrial and residential solar energy systems. AMETEK'S proprietary combination of hardware, software and firmware allow the stimulators to emulate a wide range of test protocols in real world operating conditions. The ETS80 complements our existing ETS600 and ETS1000 standalone stimulators for string inverter applications, allowing us to offer a comprehensive family to support Photovoltaic inverter test needs.

From an overall perspective, revenue from products introduced over the last three years was 21% of sales in the quarter, versus 20% in last year's third quarter, reflecting the excellent work of our businesses in developing the right products to serve their customers.

And finally the fourth strategy of AMETEK is acquisitions. We’ve had a very strong year thus far in 2012. We’ve acquired three highly strategic businesses: O'Brien in the first quarter, Dunkermotoren in the second quarter and Micro-Poise Measurement Systems which we announced this morning.

Micro-Poise is the world's largest and most technologically advanced provider of integrated test and measurement solutions for the tire industry, Micro-Poise products are used by tire manufacturers to test and measure tire quality and to assess potential quality defects. Micro-Poise is the global leader in this niche market with long term relationships with most of the top tire manufacturers. It has a 50% market share, in this niche.

Micro-Poise was privately held and has annual sales of over approximately 125 million. The price paid was approximately a $170 million. The business is headquartered in Streetsboro, Ohio with additional manufacturing locations in Michigan, Germany and China. Approximately 75% of sales are outside the U.S. and given their sizable installed base of measurement equipment, approximately 35% of total sales are in the aftermarket.

Micro-Poise is an excellent acquisition for us as it further broadens our position in a highly attractive materials test and measurement equipment market. With the acquisition of Micro-Poise, we have acquired $400 million in revenue and deployed approximately $670 million in capital thus far in 2012. Both the acquired revenue and deployed capital are record levels.

Acquisitions will continue to be a focus for us, as we see this strategy as a key driver to the creation of shareholder value, especially given the weakness in the global economy. Our pipeline of deals remain strong with an attractive mix of acquisition candidates with a variety of sizes and markets and geographic concentrations. Our balance sheet is strong, our cash flow and financing facilities provide us with ample liquidity and we have the financial and managerial capacity and disciplined approach to support the acquisitions focus.

Turning to the outlook for the remainder of the 2012, we anticipate 2012 revenue to be up low double digits on a percentage basis from 2011. Organic growth is expected to be up low to mid-single digits on a percentage basis for of AMETEK.

Earnings for 2012 are now expected to be in the range of the $1.85 to $1.87 per diluted share, up 17% to 18% over 2011. This is an increase from our previous guidance of $1.83 to $1.85 per diluted share. Fourth quarter 2012 sales are expected to be up mid-teens on a percentage basis from last year’s fourth quarter. We estimate our earnings to be approximately $0.46 to $0.48 per diluted share, up 10% to 14% over last year’s fourth quarter.

So in summary our overall business performed well in the third quarter, despite a continued sluggish global environment. As we have demonstrated in the past, we will respond with additional cost containment actions if needed to ensure our cost structure is aligned with the slowing global economic environment.

We have a strong balance sheet that 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. Our strong backlog, strong portfolio of businesses, proven operational excellence capabilities and a successful focus on strategic acquisitions should enable us to perform well for the remainder of 2012.

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

Bob Mandos

Thank you Frank. As Frank noted, we had a strong third quarter with excellent financial performance and a very high quality of earnings. I will provide some further details. Growth in selling expenses was in line with growth in sales. General and administrative expenses were 1.3% of sales, below last year’s third quarter level of 1.5% of sales.

The effective tax rate for the quarter was 30.4%, up from last year’s third quarter rate of 29.5%. We anticipate a tax rate of between 30% and 31% for the full year of 2012. As we have said before, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year rate. On the balance sheet, working capital, defined as receivables plus inventory less payables, was 18.2% of sales in the third quarter, up slightly from last year’s third quarter level.

Capital spending was $13 million for the quarter. Full year 2012 capital expenditures are expected to be approximately $60 million. Depreciation and amortization was $27 million for the quarter. For all of 2012 we expect depreciation and amortization to be approximately $107 million.

Our cash flow was excellent in the third quarter. Operating cash flow was $163 million, up 19% over the cash flow from last year’s third quarter and at a record level. Free cash flow was $150 million in the quarter, representing 130% of net income. Operating cash flow for the nine months ended September 30, 2012 was $419 million, up 18% from the same period in 2011, and free cash flow was $386 million for the nine months ended September 2012, representing 140% of net income. For the full year, we anticipate free cash flow to be approximately 115% of net income.

Our strong cash flow was deployed to support our acquisition strategy, where we extended approximately $500 million through September 30. Total debt was $1.37 billion at September 30, up $180 million from the end of 2011. Offsetting this debt is cash and cash equivalents of $163 million, resulting in a net debt to capital ratio at September 30 of 33%, down from 35% at the end of 2011.

At September 30, we had approximately $800 million of cash in existing credit facilities to fund our growth initiatives. Subsequent to the end of the third quarter, we acquired Micro-Poise Measurement Systems. Capital deployed was $170 million, which brings our cumulative expenditures for acquisitions in 2012 to approximately $670 million. Our highest priority for capital deployment remains acquisitions.

In summary we had a very solid third quarter, establishing records for all key operating metrics. We are well positioned for further growth, both organically and through acquisitions, with a strong balance sheet and cash flow.

Kevin Coleman

Great, thanks Bob. That concludes our prepared remarks. We will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). One moment please for the first question. And our first question comes from the line of Allison Poliniak with Wells Fargo. Please proceed.

Allison Poliniak - Wells Fargo

Frank, I think you mentioned, and maybe I'm hearing incorrectly that you said Asia and Europe were strong for you and I guess it's contrary to what we've been sort of hearing. Could you discuss that a little bit.

Frank Hermance

Yes, actually if we look geographically for us, in terms for full sales for Asia we were up about 13%, for Europe about 25% and the U.S. was up 6%. If you look organically it was 5% in Europe, 5% in Asia and actually negative 1% in the U.S. So there definitely was strength in our international businesses, at least as compared to the U.S business and that was driven by a number of factors. In particular our Aerospace and Power businesses were strong outside the United States. We are gaining share in parts of our MRO business outside the United States, in particular in Europe. So that had a positive impact on the results and although Asia at 5% is down from what we were growing substantially, a year up to two ago, it still was relatively good with a number of our instrument businesses. In particular our Oil and Gas and our Med division were very strong in the quarter. So overall international was okay for us.

Allison Poliniak - Wells Fargo

Great, and that order, I think you said they were up 10%. What was the core of that and also any noticeable trends in the quarter into October?

Frank Hermance

The trends were good. Basically the trend was up with each month in the quarter sequentially better than the previous month; so that was encouraging. Core was down slightly but that was on a very tough comparison.

Operator

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

Robert Berry - UBS

I was wondering if you could update us on how price rise and cost impacting, and in particular, if you are starting to see any movement in your favor on commodities.

Frank Hermance

Yes, in terms of price for the quarter, we were up about 2% which was what we had anticipated and we have a measure of price minus inflation with inflation is everything like material, wages et cetera, and when we sum that up, the pricing minus net inflation was up about a percent and that’s about what it has been. So I would say, I have seen no real change in that trend. Even though the global economy is obviously a bit weaker, we have been able to get the pricing and that’s predominantly because of the niche focus that we have where price is low on the buy or purchase criteria. So we are able to get the pricing.

In terms of your question on commodities, we have structured the company in a way that commodity prices do not have a major impact on the bottom line and that is done through agreements that we have with our customers, where there are escalators in our contracts, on the customer side and as you know we are very, very good on the input side; so that in essence are bottom line is not dramatically changed in either direction via commodity changes. It does have an impact on overall organic growth and actually in the third quarter, we probably lost about a point of internal growth, maybe a little bit less than that due to the reduction in commodity pricing but again the bottom line was secure as you can see from our results.

Robert Berry - UBS

Yes. Absolutely very solid results, congrats on that. Just maybe finally, I was curious to dig in more on some of these later cycle end markets, oil and gas, aero, power but, maybe it makes sense for you just to walk us through EIG as you often do.

Frank Hermance

Sure. I’ll go through EIG and I will start with aerospace. Our overall aerospace business really performed extremely well in the quarter. We had high single digit organic growth, on broad based strength in essentially all parts of our aerospace business. In particular, our commercial OEM business was particularly strong.

For all 2012, our anticipation is that the commercial business and our business and regional jet business will be up low double digits organically, and our third party MRO and military businesses, each will be up mid-single digits and our military business also was pleasantly surprising in a sense of being very strong in the third quarter.

So, we are predicting, and as we have predicted that overall aerospace for the full year 2012 should be up mid to high single digits and probably those are leaning now to the higher single digits versus mid, just based on the third quarter results.

Our process businesses performed well in the third quarter. Sales were up about 10%. Upstream oil and gas continued to show sizeable strength while, as I mentioned also our Material Analysis Division was also very strong. Obviously, the growth benefited from the O’Brien, TMC, and Reichert acquisitions in the process part of the business. Organic growth was up low single digits in the quarter and again business was solid internationally.

For all of 2012, we expect this business to grow mid-teens on a percentage basis with low to mid-single digit organic growth and in particular we expect continued strong performance from our later cycle upstream oil and gas businesses, just doing extremely well.

And the last part the EIG is power and industrial and overall for the third quarter sales were up mid-teens on a percentage basis, driven by strong growth in our power business, also the contribution from the EM Test acquisition and our heavy vehicle business also showed particular strength in the quarter. Sales grew mid-single digits organically for all of power and industrial and for 2012 we expect sales for power and industrial to be up high-single digits overall and low-single digits organically.

So if you sum these various parts of EIG, we are expecting 2012 sales to be up mid-teens on a percentage basis with organic growth of low to mid-single digits. And why you didn’t ask about EMG, I’m sure some others will ask, so I’ll just continue on and tell you what happened in EMG.

In the differentiated part of EMG, overall sales were mid-teens on a percentage basis in the quarter while organic sales were up low single digits. We had great growth from our precision motion control and also our military businesses and obviously we also had the contribution from the Dunkermotoren acquisition and for 2012, overall we’re expecting this business to be up approximately mid-teens with organic growth of low single digits. And the last part of the company is our cost driven motors business. Here sales were down organically mid-single digits in the third quarter, due to continued weakness in our international business. So this was an area of weakness outside the United States.

For 2012, we expect sales to be down mid-single digits over 2011. So if you sum these two parts of EMG, we expect all of EMG in 2012 for sales to be up approximately 10%, and organic growth of low single digits and then as I mentioned in my opening remarks, if you know sum what I just said in EIG and EMG, for AMETEK as a whole we’re expecting this low double digit sales growth on a percentage basis with organic growth of low to mid-single digits for the year. I hope that helped you Robert?

Operator

Our next question comes from the line of Scott Graham with Jefferies Capital please proceed.

Scott Graham - Jefferies Capital

So, if I’m trying to tease out the fourth quarter sales guidance little bit, it looks like you’re saying organic are about up 2 to 3? Does that sound about right.

Frank Hermance

Maybe that’s a bit high but we basically, with what’s going on in the global economy, when we put our estimates together, we assumed essentially similar performance to the third quarter, which is up in that low single digit arena; and as you know, we’re very good on the cost side of the business. So we added another $5 million in cost savings. So we have extreme confidence I would say in our earnings for the remainder of the year and with this slowing economic environment we are putting a real focus on both cost and acquisitions, because the organic growth for most companies as you’re well aware is in the low single digit kind of arena and that’s not what’s going to drive overall profitability as we go forward here in the short term. So this focus on cost and focus on acquisitions are the two strategies that we’re emphasizing.

Scott Graham - Jefferies Capital

Understood, could you give us an idea of what the EBITDA margin was for Micro-Poise or alternatively the vicinity of the multiple that you paid for that business?

Frank Hermance

Yes, we paid about 7.5 times for the deals and the EBITDA margins are below those of AMETEK and as you are aware, the EBITDA margin of our company is quite high. Actually in the quarter it was about 25%. So most deals that we do now are going to have lower EBITDA margins but that basically speaks to our strength. We see substantial cost and improvement opportunities and synergies with Micro-Poise. We’ve got a management team there that’s excited to be part of our company and when you look this deal from a return-on-invested-capital viewpoint, it’s going to be a home run for us.

Scott Graham - Jefferies Capital

Understood. Last question is on the pipeline. You were pretty confident when I saw you last about being able to do something potentially sizable in the fourth quarter. Was this it or is it possible we could get more, still to come in the fourth quarter.

Frank Hermance

Definitely it’s possible for more. The backlog is very good in terms of deals. We are working on other deals as we speak. When we did talk, I was specifically referencing Micro-Poise, which I knew was going to close, but we have some other deals. We’re looking at one now which is of equal size to Micro-Poise. We have some other smaller deals, more technology oriented deals. So if you look at the next six months, I would be very surprised if you did not hear from us again. We’ve got tremendous cash flow in the company and we feel the best way to utilize that cash flow is to acquire and improve companies.

Operator

Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed.

Nicole DeBlase - Morgan Stanley

So, a couple of questions for you. Maybe we could talk a little bit about Micro-Poise. I know you mentioned that it has a strong base of international sales, about 75%. Can you just flush that out between Europe and Asia?

Frank Hermance

Yes. If you look at Asia, it’s about 44% of sales and Europe is about 25% and the U.S. was about 25% and there is a little in other parts of the world. So this business is heavily focused on the automotive increases in Asia. That’s where we see the growth trend of this business. We did a lot of work on looking at the organics side of this business. The organic growth worldwide is going to be a number in the 7%, 8% kind of region and another very positive attribute to this business is that, it’s got sort of a counter-cyclical effect in that there was very strong portion of the business that’s in the aftermarket. It’s about 35% of the business, so that as the automotive cycle goes down and obviously we’re in an up-cycle right now, but as it goes down there is a balance in this business because people still have to put tires on their cars in essence and that counter-effect of people buying tires for existing automobiles is a counter to the cycle. So we’re pretty excited about this business. It’s a niche business. As you know, everything we do is very niche oriented. It’s got this 50% share, it’s got the international focus. So we think this business is going to be a home run for us.

Nicole DeBlase - Morgan Stanley

And then on the U.S., you guys mentioned that you had a 1% decline. Can you just talk about, have your customers, are they concerned about the fiscal cliff (ph), the election? Is that driving a positive investment that you think picks up again in 2013.

Frank Hermance

Well, that’s a very, very tough question and I think that’s the key question as we look at next year. We are just starting to roll up our budgets and I’m going to be interested to hear what are our businesses say. I can only speculate Nicole. I really don’t know but the weakness was general. It was not in any specific business or specific area. It was in EIG, it was in EMG. I’ve got to believe this fiscal cliff (ph) is part of the issue and just general nervousness with the election et cetera is a factor. Some of our customers are talking about push-outs. They are not saying they are losing share. We have not felt that we are losing share in our businesses. So it’s a very difficult question to answer, but obviously we are being cautious as we go forward and our guidance for the fourth quarter and the fact that we took some additional cost actions is a reflection of that cautiousness.

Nicole DeBlase - Morgan Stanley

Okay, I’ll just squeeze in one more before I pass it along. Talking about pricing trends during the quarter, did you see any areas of weakness, and actually the EIG margins were extremely strong. Is there anything special going on there or do you see those as sustainable in the future.

Frank Hermance

Well, I think the EIG margins are sustainable. Our team has done just an incredible job of first selecting businesses that we acquire and also putting new product development and global expansion in these niche markets that have high margin capability and it really comes down to the differentiation of the product. So, it’s just a very, very positive trend.

I think as we go forward, the margins in EMG are going to be the ones that have the higher potential and there is several factors to that. One is continued trust in terms of cost reductions, buying businesses like Dunkermotoren that have good inherent margin capability and also just as this business shifts from the cost driven side to the more differentiated businesses, as a result of our strategy, those margins will expand. So, I do think that the margin capability is going to be higher in EMG than EIG as we go forward. And there was another part to your question?

Nicole DeBlase - Morgan Stanley

Oh I was just curious on pricing, if you saws any areas of concern?

Frank Hermance

The only, I mean I don’t think there is anything that is different. The pricing weakness in the company follows the level of differentiation. So, it’s harder in our cost driven businesses to get pricing and as you go further up the differentiation curve, we are able to get much higher pricing and that basically sums to this 2% that I was talking about. But I don’t think that should change. That’s pretty similar to what is has been historically. So, I don’t see a trend change. I think it’s just the normal dynamics of our business.

Operator

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

Matt Summerville - KeyBanc Capital Markets

Just a follow up to the last line of questioning; Frank, what were your core incremental margins, excluding acquisitions in EIG and EMG during the quarter?

Frank Hermance

They were just off charts, no other way to say it Matt and to a certain degree when you have this low organic growth number, the incremental margins are less important but I can tell you that the contribution margins were well, well above 40%.

Matt Summerville - KeyBanc Capital Markets

Okay, and then similar to a prior question; some of what you sell, particularly in the high-end process business, definitely runs through customers capital budgets. Some of these instruments can sell for tens, hundreds and even, $2 million apiece. Are the discussions you are having with customers indicative of you C level executives going back and re-examining that capital budget? Do they need to buy it this year? Can they push it out? And have you in fact seen any sort of slippage yet, in some of those higher end process businesses?

Frank Hermance

Interesting question, Matt. I would say that we definitely had the impact that you’re talking about in some of our lower priced instruments, or maybe I should say medium priced instruments, where there definitely is this sort of concern and indecision and we definitely heard people saying we’re going wait a quarter, this is going to be pushed out and I’m sure internally in those companies that’s being impacted by upper management having a concern over their capital budgets.

Interestingly though, at the very high end of our business, it’s absolutely the opposite, where I think you’re familiar with our CAMECA business and that business tends to go counter-cyclical to the semiconductor cycle and when things are weaker in semiconductor, basically the semiconductor companies put more investment in RD&E. So that business is just doing incredibly well for us. So it’s an interesting dynamic, the thesis of your question. Just stepping back you would think would be accurate but in fact it’s not for the reasons that I indicated.

Matt Summerville - KeyBanc Capital Markets

That’s interesting. Thanks for the perspective.

Operator

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

Jamie Sullivan - RBC Capital Markets

First question, just a follow on the U.S. commentary. Was it pretty consistent throughout the quarter? We’ve heard from some companies talking about how the quarter kind of weakened as it went on or September didn’t ramp as expected. Just kind of wondering how you felt throughout 3Q?

Frank Hermance

I didn’t feel that. As I mentioned we had a very strong end of the quarter and it was pretty consistent within the framework of the higher growth internationally and subdued growth in the U.S., but I didn’t feel a trend change and I have heard other companies make the comment that you’re marking but I can say we’re an abnormality there.

Jamie Sullivan - RBC Capital Markets

Okay, and then, just on the cost savings front, you ratcheted that up a bit. Was that due to out-performance of those initiatives versus your expectations or more of a step up due to the sluggish demand environment you’re sort of seeing right now?

Frank Hermance

Yes, it was the latter. We’re just feeling that things are a bit sluggish and we decided early in the third quarter, after our last earning’s release that we were going to take additional actions. We did that and in essence, we added that extra $5 million cost savings, which obviously is going to largely come in to the end of the third quarter and the fourth quarter and that’s why we have this very high confidence level in our earnings. We’re not going to rely on organic growth to be the driver. We’re going to rely on cost reductions and our acquired businesses, as I said before.

Jamie Sullivan - RBC Capital Markets

Okay, and the motor segment or the other, I guess you know how much of them, do you feel you have to continue those initiatives, if the environment stays consistent where it is?

Frank Hermance

Yes, we feel there is a significant additional leverage. It’s an advantage of a niche-oriented acquisition strategy that we have. As we buy these businesses, there are significant improvements and consolidations that are possible. You can see we’re relatively balanced between EIG and EMG in terms of those acquisitions. So we see substantial opportunity there and there is another thrust that we have not talked about a lot externally, but we’re putting a lot of energy now into value engineering.

We have trained our entire engineering teams on value engineering and we’re basically doing things with our existing products, where we can lower the cost and raise their margins and Bob, maybe you can help. I think what I saw was this year about $11 million. Is that the right number?

Bob Mandos

That’s correct.

Frank Hermance

Yes, it was about an $11 million this year that we’re getting to the bottom line as result of value engineering. So it’s just another thrust and it’s in both parts of the business. So we’re just aggressive. We’re relentless in terms of getting cost out of the businesses and it’s the key driver as to why AMETEK performs extremely well in these weak environments and we tend to outperform our peers.

Operator

Our next question comes from the line of John Baliotti with Janney Montgomery Scott, please proceed.

John Baliotti - Janney Montgomery Scott

Bob, maybe in honor of my predecessor Jim Lucas, could you give us that payables number?

Bob Mandos

Sure, $288 million.

John Baliotti - Janney Montgomery Scott

Great. Frank, it’s encouraging to see the benefits you are taking, the cost actions are coming through so quickly and I know all the companies that we follow are pretty different, more different than they are alike, but do you have any sort of expectation as far as the lasting benefits, or sort of the follow on benefits you will get in addition to shoring up some of the lack of visibility this year, but they may feel the build on in 2013 or years beyond.

Frank Hermance

I would say, the majority of the savings we’re talking about will continue on. A good part of this $80 million is material cost savings on the input side. It’s about $48 million. So that will continue. You will see a year-over-year positive impact, because obviously we put these cost reductions in incrementally throughout 2012 so that you will see a year-on-year benefit, just due to that timing impact, and then we will have another program for next year, which Bob actually drives that will give us additional material savings, give us additional value engineering. We will have additional movement of products to low cost manufacturing, which for us will be China, Mexico and Eastern Europe.

So we continually will put cost reductions through the P&L. It’s sort of a hallmark of our company. A little bit of the $80 million in fairness was what I would call belt tightening and our businesses and I’ve seen it in some of their spreadsheets, when they send them in to come to this $80 million, their hope is business will be better so that they could spend some of that belt tightening reductions they’re putting in place this year; and I think what that will really depend on is what we see next year. If things feel a little better, as we get into the first quarter then we will basically probably spend that and it will not be incremental sort of year-to-year but if its weak, we will just keep our belts tighter. But I would say the majority is definitely stuff that will continue.

John Baliotti - Janney Montgomery Scott

The majority of structural improvement in the operations.

Frank Hermance

That’s exactly right.

Operator

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

Richard Eastman - Robert W. Baird

Yes, good morning. Frank, just on that last comment, the $48 million of the $80 million is cost savings due to your sourcing initiatives. How was that kind of a variable cost savings? How was it possible to bump up your sourcing cost savings in a weaker market? Is this just basically going back to vendors and asking for concessions on pricing?

Bob Mandos

I would say; this is Bob Mandos. It’s a combination of utilizing our global procurement organization and continuing to drive into low cost regions, our sourcing strategy and we have really a top level strategy there to continually drive year-in and year-out that incremental savings in low cost regions. So we clearly continue to expand in China, but we’re looking at other parts of the world, whether it’d be other parts of Asia, Eastern Europe et cetera. Additionally we focus on the value-add, value engineering aspect of it throughout the whole company and particularly on the differentiated size of businesses and continually to drive our organization is a key metric for cost improvement.

Frank Hermance

Then I’ll add, the other piece is just the MRO material that we procure, lights and just the various things to keep our operations. There is tremendous leverage in terms of accumulating our total spend across the whole company of those MRO type items and just continuing to drive cost. We’ve had substantial improvements in things like FedEx cost by amalgamating our part volumes and for some of our plants, we buy chemicals and again if you can amalgamate that volume, you have leverage with your customers. So this is just relentless, continuous and Bob and his organization who drive this have done a really, really great job.

Bob Mandos

And the other point I’d just make on acquisitions. We continue to drive our strategy, our sourcing strategy to our new acquisitions. You’ve heard us talk about operational excellence and how that’s core competency for us, while we drive that into the newly acquired companies and generate synergy through that mechanism.

Richard Eastman - Robert W. Baird

So the larger the acquisitions, as they flow in, driving your value engineering, but probably more important the sourcing piece can get you an inflating number of cost savings?

Frank Hermance

Exactly.

Richard Eastman - Robert W. Baird

Yes, can I also ask on the EIG business in the quarter, did the acquisitions contribute as expected from a revenue perspective? I would have heard the…

Frank Hermance

(inaudible).

Richard Eastman - Robert W. Baird

Okay, that’s not a little bit light or anything?

Frank Hermance

No, maybe a hair but not significantly. It was pretty close to what we said. We gave guidance and we were very close to our guidance. We said low double digits and we were at 12%.

Richard Eastman - Robert W. Baird

Yes, just the mix of between the acquisition. It looked like - okay. And then just one quick question on the margin line. If I look at the EMG margins, did Dunker contribute approximately their penny for the quarter?

Frank Hermance

Yes they did, but they did what we they were going to do but the impact on margins was actually dilutive and it was dilutive about 100 basis points. So that 20 basis point improvement that you saw was really, if you exclude Dunker, it was 120 basis points. So we were able to outperform based on our cost activities et cetera.

Richard Eastman - Robert W. Baird

Yes, because again, using our estimates if I look at EMG and I pull out the Dunker contribution, and again you made maybe $5 million of core profit on a sales decline. Is that primarily the cost reductions coming through?

Frank Hermance

Absolutely Rick, and that’s why my comment before that almost can’t look at contribution margins because it really comes down to getting the cost out of these businesses and I think we have done a superb job of that.

Operator

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

Mark Douglass - Longbow Research

Frank, going back to the margin question, looking at it a different way, gross margins seems to have had just an internal step up the past year then even from the year before. Can you relate how much is due your core operating improvements versus, are you buying business that at the heart of them, once you really get them integrated have higher gross margins and a lot of your legacy business and should they continue to improve over the time as you make more acquisitions?

Frank Hermance

Yes, you hit it right on the head, absolutely. As we look to buy businesses, we look for businesses that inherently have this high level of differentiation that I have talked about for many years and if you look at the dynamics of those businesses, by definition they have higher gross margins. So as we have moved the company from a sort of our cost-driven legacy businesses, which have low gross margins, the overall gross margin of the company has improved. So what you’re seeing is definitely a function of the inherent capability of the businesses but then of course we make improvements in these businesses and you’re seeing that flow through this as well. So you really focused on a point that’s at the heart of our strategy.

Mark Douglass - Longbow Research

Is it possible to get another point on gross margin improvement in 2013?

Frank Hermance

Yes. Well, 2013, I’m not going to give any guidance for 2013. We will do that in January, but if you asked me is there any possibility to get another point, definitely.

Mark Douglass - Longbow Research

(inaudible) volumes right?

Frank Hermance

Yes, right, exactly. Well, I think that’s definitely possible, but I don’t want to put a timeframe on it until we roll up our budgets and I’ll some guidance on that in January or February whenever we release earnings.

Mark Douglass - Longbow Research

Okay. And then finally how big is China these days for you and how did China perform since (ph) December?

Frank Hermance

China did well for us. If you look at our total Asia sales, they were about 19% of our company and China in rough numbers is half of that. And they performed, not as strong as it had a year and half ago when we were seeing organic growth rates out of China that were 20% plus but we are now more in that single digit category. But again if you look at it from a worldwide basis it’s surely stronger than the U.S. and we are going to continue to invest in that part of the world.

Just another statistic, if you look at our BRIC countries and sort of take that slice, they were up about, I remember right about 12% in the quarter and very importantly, the margins in our BRIC countries is about equivalent to our overall company margin. So, we are not going into these areas by essentially competing on lower price and getting lower margins. We’re able to get our margins in those parts of the world and enjoy the growth. So even though China, I guess they just came out with this 7.4% GDP growth in the second quarter, it’s not what it was, but it’s still pretty good and we’re going to continue to invest there.

Operator

Our next question comes from the line of Matt McConnell with Citigroup. Please proceed.

Matt McConnell - Citigroup

I’d like to just come back to Aero real quick, which has been really strong especially, relative to what some of your peers have been reporting, and especially on the military side. So is there anything that you can point to in either new products or platforms or share gains and maybe talk about sustainability of that growth into 2013 for Aero?

Frank Hermance

Yes, the second part of your question is a difficult one but let me take the first part and we have decided and have made investments in areas where the basic growth of the DOD budget is larger in those niche areas than the base budget itself and those areas are basically helicopters. We started literally 10 or 12 years ago to invest in helicopters and that’s a very strong area. Again, that niche is outpacing the base DOD budget, that’s predominately on the EIG side.

On the EMG side, we’ve made substantial investments in cooling where we are basically the company to do cooling of electronics on military aircraft or military ground-based vehicles or even military operations where we go into certain bases and we’ll basically upgrade the electronics that they use for radar and things of that nature. And as a result again, that area is outgrowing the base DOD budget. So we’re enjoying some of that growth.

The second part of your question is much more difficult and that comes to the question of sequestration and what is going to happen. Your prediction is probably better than mine but I’ll tell you what my best guess is on sequestration, which actually the President last night had some comments that would support what I’m going to say. The way sequestration is put in to effect makes absolutely no sense, because basically you have to go down every line item of the budget and reduce that line item. It essentially gives no degree of flexibility to the people who are making those decisions. So if we are going to in and make substantial changes, whether it’s on the military side or the nonmilitary side, you want to give the people that are in power the ability to make the decisions, versus this sort of line item approach.

So if you step back and say that’s just unrealistic, I think the more logical thing is it’s going to be very difficult. I think they get in agreement between the election and January. So my best call would be that what will happen is Congress will pass something that will delay this six months or nine months and they will try to battle out an agreement that make sense and give our people basically some discretion and I think wherever it ends up, we will outperform it.

So if you look at these numbers, even take the worst case on sequestration, you’re talking about 6% - 7% kind of decline a year. Obviously this isn’t going to be a high growth part of our business, but we also don’t think it’s going to be some major problem. If you look at our total military spending it’s on the order of 10% or 11% of AMETEK and a good part of that is outside the U.S. and it wouldn’t be even impacted by sequestration. So that’s a long answer to your question but it’s obviously a difficult question with what’s going on.

Operator

Our next question is a follow up question from the line of Scott Graham with Jefferies Capital. Please proceed.

Scott Graham - Jefferies Capital

My question has been answered. Thank you.

Operator

And our next question is a follow-up question from the line of Richard Eastman with Robert W. Baird, please proceed.

Richard Eastman - Robert W. Baird

Yes, Frank, can I just ask you, on Aerospace; the commercial and regional pieces of your Aerospace business typically, I believe are in EIG and the question I had, can you just repeat how those did in the quarter? I know you said they were particularly strong but is that plus mid-single digits or mid-double digits, excuse me.

Frank Hermance

Yes, it was more in the 10% kind of area for those two parts and so they were very, very strong.

Richard Eastman - Robert W. Baird

I know when we travelled a while back and I think your comment, you did a nice job of kind of laying out some meaningful content gains on both; primarily on the regional side but I think on the commercial side and would you attribute a portion, say half of that growth to content gains on various aircraft or how would you characterize the content benefit?

Frank Hermance

Yes, it’s a great question and in reality on the commercial side, it is right now more driven my market dynamics, where if you look at the number of planes that are being produced by Boeing and Airbus, this year they are going to be up about 17%. Each are producing around 600 aircraft in the year and that trend is going to continue and actually increase.

As you mentioned, on the business and regional jet, the market dynamics there are not the greatest right now. Actually they are kind of bouncing a long bottom but there we have definitely won some major content on, in particular Gulfstream aircraft which is driving our growth. So that in the short term is content wins.

Now let me come back to the commercial side because the way we view it is the long term future of our commercial business is dependent on the new aircraft and so we have made substantial investments in those new aircraft and I’ll just give you a few numbers Rick to put some flavor on it. If we look at 350, actually I just read this morning that they opened a new plant in Toulouse, France for the 350. That is going to be our largest content airplane. It’s going to have a ship set value of about $150,000 and over a 10 year period we are going to get about $380 million of revenue from that. So that’s going to be a very strong aircraft for us.

The 380, obviously not as many aircraft, but that’s going to have about $66 million of content over that same period. The 787 is going to be about $220 million. The content value there will be lower per aircraft, about 85 and just to jump for a moment, another very large content aircraft for us, which speaks of the future of the military business is the Joint Strike Fighter, where we have about 140,000 of content and that will be about $600 million, but that’s over the life of that program, not 10 years. So the point I’m trying to make and just put the military aside for a minute is that for commercial the short term is more market driven, but the long term is content driven and for business and regional jet the short term is more content driven, but in the longer term will be more market driven.

Richard Eastman - Robert W. Baird

Got it, okay. That one was a tongue twister.

Operator

And there appear to be no further questions. At this time I’ll turn the call back to you. Please continue with your presentation or closing remarks.

Frank Hermance

Great; thank you Savannah (ph). Thank you everyone for joining our conference call today. As a reminder, a replay of the call may be accessed at www.ametek.com and at streetevents.com and as always, if there is any further questions, I will be available all day at (610) 889-5247. Thanks again.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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