ame-transcript-2015-08-04t12_30

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTAME - Q2 2015 Ametek Inc Earnings Call

EVENT DATE/TIME: AUGUST 04, 2015 / 12:30PM GMT

OVERVIEW:

Co. reported 2Q15 sales of $1b, net income of $155.5m and diluted EPS of $0.64.Expects 2015 revenue to be up low-single digits on percentage basis from 2014and adjusted diluted EPS to be $2.58-2.63. Expects 3Q15 sales to be approx. flatYoverY and diluted EPS to be approx. $0.64-0.65.

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C O R P O R A T E P A R T I C I P A N T S

Kevin Coleman Ametek Inc - VP of IR

Frank Hermance Ametek Inc - Chairman & CEO

Bob Mandos Ametek Inc - EVP & CFO

David Zapico Ametek Inc - EVP & COO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Scott Graham Jefferies LLC - Analyst

Allison Poliniak Wells Fargo Securities, LLC - Analyst

Mark Douglass Longbow Research - Analyst

Matt McConnell RBC Capital Markets - Analyst

Joe Radigan KeyBanc Capital Markets - Analyst

Robert McCarthy Stifel Nicolaus - Analyst

Christopher Glynn Oppenheimer & Co. - Analyst

Richard Eastman Robert W. Baird & Company, Inc. - Analyst

Matt Summerville Alembic Global Advisors - Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded on Tuesday, August 4, 2015. I would now like to turn the conference over to Kevin Coleman, VicePresident of Investor Relations. Please go ahead.

Kevin Coleman - Ametek Inc - VP of IR

Great. Good morning. Thank you, Tara. Good morning, and welcome to AMETEK's second quarter earnings conference call. Joining me this morningare Frank Hermance, Chairman and CEO; Bob Mandos, Executive Vice President and Chief Financial Officer; and Dave Zapico, Executive Vice Presidentand Chief Operating Officer.

AMETEK's second-quarter results were released earlier this morning. These results are available electronically on market systems and on our websiteat the investor section of AMETEK.com. A tape of today's call may be accessed until August 18, by calling 800-633-8625 and entering the confirmationnumber 21772008. This call is also webcasted. It can be accessed at AMETEK.com and streetevents.com. The conference call will be archived onboth of these sites.

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

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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call

AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the investors section ofAMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.

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

Frank Hermance - Ametek Inc - Chairman & CEO

Thank you, Kevin, and good morning, everyone. AMETEK had a strong second quarter with excellent operating performance. We delivered a recordlevel of earnings, at the high end of our guidance range, despite what remains a slow global growth environment.

We also continue to be very active on the acquisition front. During the second quarter, we acquired Global Tubes, a leading manufacturer ofhigh-precision, small-diameter metal tubing. And, subsequent to the end of the quarter, we closed the acquisition of the Surface Inspection SystemsDivision of Cognex Corporation. I will provide some further details on our continued strong acquisition activity in a moment. Let me first providethe financial highlights for the quarter.

Sales in the quarter were up 1%, to $1 billion. Organic sales were flat, while acquisitions added 5%. And, currency was a 4% headwind. Operatingincome for the quarter was very strong, it increased 4% to a record $240.3 million. Operating income margin in the quarter was excellent at 23.9%,a 50 basis point improvement over the second quarter of 2014. Net income rose 4% to $155.5 million. And, diluted earnings per share were $0.64,up 5% over last year's second quarter. Both net income and diluted earnings per share were records. Operating cash flow in the second quarterwas up 5% to $163 million.

Turning our attention to the individual operating groups. The electronic Instruments Group had a very strong quarter. Sales were up 4%, to $596.5million, on strength in our aerospace business, plus the contributions from the recent acquisitions of Zygo and Amptek in our process business.Organic sales were up 1%. Acquisitions added 7%. And, foreign currency was a 4% headwind.

EIG's operate performance was outstanding. Operating income increased 8% to $164 million. And, operating margins were 27.5%, up 110 basispoints from last year's second quarter. The Electromechanical Group also had a good quarter with strong operating performance. Overall saleswere down 2% to $47.3 million. The lower sales were driven largely by currency headwinds, with the contribution from the acquisition of GlobalTubes, a partial offset.

Organic sales were down 2%, driven by continued weak global macro conditions. Foreign currency was a five point headwind and acquisitionscontributed four points. EMG's operating income declined 3% to $89.3 million, while operating margins were very solid at 21.9%.

Now, turning to our forward global strategies of operational excellence, global and market expansion, new product development and strategicacquisitions. First, I will touch on acquisitions. We continue to remain very active, acquiring two excellent businesses since our last earnings call.Thus far in 2015, we have deployed approximately $360 million in capital and acquired approximately $180 million in revenue on these twoacquisitions. Over the last 24 months, we've acquired 10 businesses, deployed over $1.3 billion in capital, and acquired nearly $650 million inrevenue. Our acquisition pipeline remains very strong.

Now, let me provide some highlights on the two recent acquisitions. First, Global Tubes. Global Tubes manufacturers high-precision, small-diametermetal tubing from stainless steel, nickel alloys, zirconium alloys, and titanium, for very specialized applications. These highly-specialized productsare manufactured to very high tolerances, and customer specifications, for demanding applications within the aerospace, medical, nuclear and oiland gas markets.

Global Tubes is a really good strategic fit with our specialty metals business. It allows us to expand our product offerings into a number of attractivemarket segments, while also expanding our specialty metals presence within Europe. Global Tubes is comprised of two businesses, Superior Tube,based in Collegeville, Pennsylvania. And, Fine Tubes based in the UK. Global Tubes has annual sales of approximately $120 million.

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Subsequent to the end of the second quarter, we completed the acquisition of the Surface Inspection Systems Division of Cognex Corporation.The Surface Inspection Systems Division, or SISD, develops and manufactures software enabled vision systems, used to inspect surfaces ofcontinuously processed materials, for flaws and defects. SISD's proprietary, high-speed defect-recognition technology detects, classifies andaccurately maps specific defects over the entire area of the surface.

This business is also an excellent strategic acquisition for AMETEK, as it expands our presence in a nondestructive process inspection market. Inaddition, SISD will be able to leverage a number of AMETEK's complementary technologies, and products, within it's vision systems. SISD isheadquartered in Hayward, California and has annual sales of about $60 million.

Now, turning to global and market expansion. Global and market expansion continues to be an important driver for our growth, to the expansionof our presence in attractive, higher-growth market segments, and geographic regions. In the second quarter of 2015, international sales represented51% of our total sales. We continue to make investments to develop and expand our global sales channels, service capabilities and manufacturingfootprint, in order to position our businesses to capitalize on the attractive global growth opportunities.

For example, we continue to make sizable investments, in both India and Serbia, to drive our global and market expansion initiatives. In India, ourbusiness continues to add sales and service capabilities, to support increased demand for our products and technology. Additionally, we've beenvery pleased with the tremendous success of our Engineering Center of Excellence in India. As a result, we continue to expand and broaden ourRD&E capabilities and infrastructure in that region.

In Serbia, we have a low-cost manufacturing facility, which was acquired as part of the Dunkermotoren acquisition in 2012. This facility primarilyserves our Precision Motion Control customers in Europe and the Middle East. As other AMETEK businesses identify incremental growth opportunitiesin Europe, and especially the Middle East, we are expanding our presence within Serbia to adequately support their growth.

Now, turning to new product development. We continue to see excellent results from our new product development efforts here. Our businessesare doing a great job developing new products to serve both their existing markets, and to help penetrate adjacent markets or applications. Wewill continue to make sizable investments in RD&E, to ensure we are developing the right products to serve our customers and target markets. In2015, we expect to spend approximately $210 million on RD&E, or approximately 5% of sales.

We've made a number of recent new product introductions. SPECTRO Analytical Instruments, a global leader in instruments for advanced elementalanalysis, introduced their new portable SPECTROSCOUT x-ray fluorescence spectrometer, designed for at-line use. This durable and compact XRFanalyzer delivers reliable, precise and fast laboratory-quality, elemental composition monitoring and quality control testing, for the field ormanufacturing floor. The new SPECTROSCOUT delivers results on site, eliminating the need to transport samples back to a quality-control laboratory.

Zygo, a leader in optical metrology solutions, high-precision optics and optical assemblies, released its Verifire XL high-precision, Large ApertureFizeau Interferometer. It is the latest addition to Zygo's industry-leading line of the phase-shifting laser interferometers. And, is designed to measurelarge plano surfaces such as mirrors, semiconductor wafers and wafer chucks.

The product is a compact, cost effective and complete turnkey solution, for the highly accurate characterization of flat surfaces up to 12 inches indiameter. To further increase precision and reliability, this new Zygo product incorporates a vibration isolation platform from another AMETEKbusiness, our TMC business.

Lastly, Solidstate Controls, a recognized leader in highly-customized, uninterruptible power supplies, has released its DSE UPS system. This newDSC system is an interesting first. It combines the robust design of a ferroresonant transformer with the enhanced digital communications,monitoring and diagnostic capabilities, of a pulse-width modulation UPS system. It is a true online double-conversion UPS system that provideshighly reliable, clean and regulated power, for critical AC loads in demanding process control applications.

From an overall perspective, revenue from products introduced over the last three years was 24% of sales in the second quarter, up from 22% inlast year's second quarter. It's a very high number, which we're very proud of.

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Lastly, I will touch on operational excellence. Operational excellence is the cornerstone strategy for AMETEK. We continue to see tremendous resultsfrom our various operational excellence initiatives. Our teams continue to do an excellent job driving operational improvements in their business,by leveraging the numerous operational excellence tools we have in place throughout the Company.

In low growth environments, the success of our operational excellence initiatives takes on even greater importance. So, we are able to continueto drive meaningful margin expansion, while allowing us to continue to invest in key growth initiatives. Overall, in 2015, we anticipate approximately$145 million of total operational excellence savings. And, we believe that's a conservative number. The largest contributor to this savings is ourglobal sourcing and strategic procurement initiatives, where we expect approximately $70 million in savings in 2015.

Turning to the outlook for the remainder of 2015. We anticipate 2015 revenue to be up low-single digits, on a percentage basis, from 2014. Organicgrowth is expected to be roughly flat for all of AMETEK, and for both operating groups. We continue to expect adjusted earnings for 2015 to be inthe range of $2.58 to $2 63 per diluted share up, 7% to 9% over last year's adjusted earnings per share.

Third quarter 2015 sales are expected to be approximately flat, versus the third quarter of 2014. We estimate our earnings to be approximately$0.64 to $0.65 per diluted share in the third quarter, up 3% to 5% over last year's third quarter.

So, in summary, we delivered strong results in the second quarter, with record earnings. While global growth remains challenging, we are veryconfident in our ability to execute on our growth strategies and to deliver excellent earnings growth. Our balance sheet remains strong. And, wegenerate significant cash flow that provides us with plenty liquidity, to operate the business, and pursue our acquisition strategy. Bob will nowcover some of the financial details. And then, we will be glad to take your questions.

Bob Mandos - Ametek Inc - EVP & CFO

Thank you, Frank. As Frank noted, we had a good second quarter, with strong operating performance. I will provide some further details. In thequarter, selling expenses were down slightly versus last year second quarter. General administrative expenses were 1.3% of sales, slightly abovelast year's second quarter level of 1.2%. The effective tax rate for the quarter was 27.7%, down slightly from last year second quarter rate of 28%.

For 2015, we expect our tax rate to be between 28% and 28.5%. As we have said before, actual quarterly tax rates can differ dramatically, eitherpositively or negatively, from this full-year rate. On the balance sheet, working capital, defined as receivables plus inventory less payables, was19.1% of sales in the second quarter. Strong working capital management will remain a key priority. Capital expenditures were $12 million for thequarter.

Full-year 2015 capital expenditures are expected to be approximately $75 million. Depreciation and amortization was $37 million for the quarter.And, 2015 depreciation and amortization is expected to be approximately $150 million. Operating cash flow was $163 million in the second quarter,up 5% over last year second quarter. The free cash flow was $152 million in the quarter, up 8% over last year second quarter.

For the full year, we expect free cash flow, excluding the $50 million pension contribution made in the first quarter, to be approximately 115% ofnet income. Total debt was $1.67 billion at June 30, down slightly from the 2014 year end. This amount reflects the second funding from the privateplacement agreement we entered into last September. This funding of $50 million was received on June 15, and was used to pay down revolverdebt. Offsetting this debt is cash and cash equivalents of $327 million, resulting in a net debt to capital ratio, at June 30, of 27.9%. At June 30, wehad approximately $1.2 billion of cash and existing credit facilities to fund our growth initiatives.

During the second quarter, we acquired Global Tubes. Subsequent to the end of the second quarter, we acquired the Surface Inspection SystemsDivision of Cognex Corporation, bringing our cumulative expenditures for acquisitions in 2015 to approximately $360 million. Our highest priorityfor capital deployment remains acquisitions.

In summary, we had a very strong second quarter and delivered solid operating results. We are well positioned for further growth, both organicallyand through acquisitions, with a strong balance sheet and cash flows.

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Thank you, Bob. Tara, we'll now open it up for questions.

Q U E S T I O N S A N D A N S W E R S

Operator


Scott Graham, Jefferies

Scott Graham - Jefferies LLC - Analyst

Frank, as usual, I just wanted to ask if you could do your thing with each of the business units, and what have you. Maybe before that, just tell uswhat pricing was in the quarter for the Company.


Yes, pricing was up 1.5%. And, I can add that the total inflation across the Company was such that the net of pricing, minus inflation, was 0.6%.


Okay.


So, sure Scott, I'd be glad to go through my normal discussion of the various subparts of the two groups. I will start with EIG. EIG aerospace had avery solid second quarter. Overall growth was up low-single digits, against a very difficult comparison. We saw strong growth in our regional andbusiness ship business, and continued solid growth in our commercial business. EIG aerospace continues to gain additional content on a numberof attractive platforms. Really, as a result of their strong technology and service capabilities.

Very importantly, thus far in 2015, we have won over $400 in new life or program awards, on over 20 different platforms, including the Rolls-Roycetrent 7000 engine on the Airbus A330neo. Our team in this business has really done an excellent job. For all of 2015, we expect EIG aerospace salesto be up mid-single digits, driven by the continued ramp up of key commercial OEM platforms and solid growth in business and regional jets.

The second part of EIG is our process businesses. Overall, process sales were up mid-single digits, on a percentage basis. Overall growth benefitedfrom the acquisitions that we did in process. They were Zygo and Amptek. And, from solid growth in our material analysis in ultra-precisiontechnologies businesses. Organic sales were flat, as a result of weakness in our upstream oil and gas business. The weakness that we've seen in oiland gas is in line with our original expectations at the start of the year. In 2015, we expect our organic sales growth to be down slightly, versus2014.

And the last part of EIG is power and industrial. Our power and industrial businesses had a very good second quarter. Organic sales were upmid-single digits, with solid growth across both our power and industrial businesses. And in 2015, for the whole year, we expect our organic salesfor power and industrial to be up low-single digits. So, if you take the sum of those three, for all of EIG, we're expecting organic sales to beapproximately flat for 2015.

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Moving to EMG, starting with the differentiated part of EMG, overall sales were down low-single digits, on a percentage basis, in the quarter, asforeign currency headwinds were only partially offset by the contribution from the Global Tubes acquisition. Organically, we saw solid growth inour Precision Motion Control business. But, weakness in our Engineered Materials Interconnects and Packaging business, due to the continuedsoft macro environment. For 2015, we expect our differentiated EMG businesses to be approximately flat, organically.

And the last part of the Company, our Floorcare and Specialty Motors business, organic sales in our Floorcare and Specialty Motors business wereflat in the second quarter. And for 2015, we expect sales for this business to be up low-single digits, organically. So in 2015, for all of EMG thus, weexpect roughly flat organic sales growth, on a percentage basis. So, the bottom line here is, with organic growth, very difficult for just about everyindustrial company. The focus really becomes cost.

And, we've done an excellent job, as typical of AMETEK, in terms of reducing our cost structure. And, obviously, getting record earnings and recordperformance as a result. Scott, that's a recap of what you asked for.


That's perfect, Frank. Thank you very much.

Operator

Allison Poliniak, Wells Fargo

Allison Poliniak - Wells Fargo Securities, LLC - Analyst

Just following on those prior comments. Energy sounds like it's coming in light with what you're looking at. I don't have the notes from last quarter,but what has become progressively weaker, that you're not expecting a lower organic for this year?


There's no question, just the general industrial environment is softer than we had expected. Europe is obviously having difficulties, and in Asia aswell. The growth -- while still overall, we're relatively bullish on Asia, there's no question that the overall growth is slower. So, it's not specific in anygiven business, Allison. It's just a general slow macro.

And, getting back to my point, that I mentioned with Scott, we have been very aggressive on the cost side of the business. And as I stated, the $145million of cost reductions is actually a conservative number. And, therefore, we've got really good confidence in our earnings, given the globalmacro.


That's great. Just touching on the operating side. I imagine there's some acquisition-related accounting and costs in that number. Do you have asense of what the -- I imagine the organic expansion of those businesses were much higher. Can you touch on that a little bit?


Yes. If you're talking about the costs that go through the P&L, as a result of buying these businesses, it's probably on the order of a penny. That'sthe magnitude of it. You couple those costs with the currency impacts. Which, although not off the charts, we lost another couple pennies, in termsof earnings in the quarter, as a result of it. So, that's why these costs reductions become so critical. You are just fighting a number of headwinds.

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Great. Thanks so much.

Operator

Mark Douglass, Longbow Research

Mark Douglass - Longbow Research - Analyst

Payables were?

Bob Mandos - Ametek Inc - EVP & CFO

$384 million.


Great. Frank, you mentioned Europe and Asia were a little disappointing. You grew mid teens in China, in first quarter. So, I think it was a real surpriseto everybody. That was a very good number. I assume you've seen the slowdown in China catch up to you. And, can you size what China is now,and what the slowdown is like there?


Yes, if I give you a geographic look at our business, Europe was down about 4%, organically. And, obviously, that's just a result of the generaleconomic condition in Europe. In Asia, we were actually down 6%, but that was against a very tough comparison. Organically, last year in the secondquarter, Asia actually had 15% organic growth. So, it was a very difficult comparison.

So we don't expect that it's gone to be down that much, as we go forward. But, again, it's not going to be as robust as it was a number of quartersago. And, actually, the best performance was in the US, which was up about 5% organically. And when you sum those, based on our heavyconcentration outside the US, that's how you get to the relatively flat organic growth overall.


US is up 5%, is that related to your power and industrial also being up mid-single digits? That was --


Yes. The power industrial segment was good. The aerospace business, in particular, was very good in the US. So, they were key drivers to ourperformance. And, also, our Precision Motion Control business, on the EMG side of the business, had very strong US performance.

So, I think if you just step back from those parts of the world, it's kind of reflective of what's happening in the global environment, in each of thosebusinesses. The US is getting better. Albeit, slowly, but it is getting better. Europe is tough and Asia is slowing. And that's sort of the global picture.

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Finally, on the power and industrial, can you go into a little bit detail, what businesses within there, or what markets were particularly good foryou?


Well, the good thing there is, both power and industrial were very, very good. In the industrial side, although a small part of overall AMETEK, theheavy vehicle business, continues to do very well. And, it triggered very good growth in the industrial piece. If you look at North American heavytruck sales, it's estimated this year, to be about 325,000 trucks. Which is up about 10% over last year. So, we are enjoying that.

If we look at our power business, and you break it down, there is really three parts to the power business. There is a test and measurement pieceof the power business. There is a battery backup piece of the power business. And then, there's instrumentation for the generation transmissionand distribution part of our power business. And, the latter two of those had good growth in the quarter.

And, that business is performing quite well for us. And, their earnings were excellent in the quarter. So, we're very pleased. We've got really goodmanagement in that business, and they're doing an excellent job. And, it's now becoming a sizable part of AMETEK, with over a half billion in sales,on an annual basis.


Great. Thank you.

Operator

Matt McConnell, RBC Capital Markets

Matt McConnell - RBC Capital Markets - Analyst

Could you give me a sense of how the stronger dollar might be impacting your sales? And, not just on the translation side. But, are you seeing anyinternational projects get delayed, or pushed out? Or, any pressure on your export sales? Just what impact might you be seeing outside of translation.


I'm going to let David take this one.

David Zapico - Ametek Inc - EVP & COO

Matt, it's a great question. Fortunately, AMETEK is relatively balanced on revenues and costs around the world. But, the strong dollar does causesome competitive situations. We're a niche market. We're leaders in niche markets. And, largely, we see is the delay of projects, when people can'tget the US dollars necessary to go forward with projects.

Those are usually delayed 3 months to 6 months, to go back and get the money. This has happened before, and certainly we are seeing some ofthat. Because we're at the top of our niches in technology, we're not seeing a lot of negative impacts. But, certainly, any time the currency changes,there are some businesses that are impacted by the stronger dollar. In cases where we are manufacturing in the US, and we have competitors inEurope or Japan, the environment is tougher.

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Conversely, AMETEK does manufacture in Europe and Asia. And, we have to take advantage of that, to our competitive advantage. So, it's certainlyan issue, but I think we are managing it well. We've done an analysis, business by business, every business unit in the Company. And, we have plansin place to relocate to lower cost regions. We have, as Frank mentioned, we have 24% of sales from new products. We're really emphasizing newproduct development, to enhance our competitive advantage. So, it's an issue for every company. There is a competitive issue with it, but we'remanaging well.


Great. That's very helpful. Maybe on free cash flow. I know you're running below 100% conversion, and that's probably from the pension contribution.But CapEx is down 10%, year to date. The plans for it to be up 5%, for the year. Are there specific projects in the back half of the year? Or, areacquisitions, do you have capital spending plans for those? Anything else that would drive a pretty big ramp in CapEx, in the back half of the


Actually, Bob and I discussed this recently. And, I think it's unlikely that we're going to spend the $75 million in capital debt, that we talked about.And part of the issue here, to be very upfront about it, is that the environment is tough and our people are heavily focused on getting the revenue,and getting the profit that we are looking for. So that, it's just difficult to find the time to do some of the projects.

So I doubt very much that we're going to spend the full $75 million. In terms of free cash flow, usually, in the first part of the year, we always runbelow net income. But, if we look at the full year and actually extract that $50 million in pension contributions that you mentioned, we actuallyexpect free cash flow to net income to be about 115% of sales. And, that's probably a conservative number. We are just throwing off significantcash. And, it's sort of the hallmark of AMETEK. And, the second half will be very strong, in terms of cash generation.


Great. Thanks. That all make sense.

Operator

Joe Radigan, KeyBanc

Joe Radigan - KeyBanc Capital Markets - Analyst

Frank, first on EMG. You've called out Precision Motion Control as an area of strength for a while now. I think that business has pretty diverse endmarkets. So, can you talk about where you're seeing the growth come from, in particular.


Yes, this is really a great business. And, we've got excellent management in this business. The model for the business is a very interesting one,because it's different than most of our other businesses, in that we have a number of platforms in the business. And, what this team does is, whena customer comes in and needs a special motor for a given application, we can take a platform that is closest to that requirement. And basically,design or, with very little engineering, solve that customer's problem.

So, from the viewpoint of the customer, he's getting a highly specialized motor. Whereas, we don't have to do a lot of engineering in order to makethat happen. So this is, as you point out, very diverse. And, what this business has recently done is, expanded globally. They were predominately

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a US business. And, with the acquisition of Dunkermotoren in Germany and a real focus on growing in Asia, this Company has diversified its globalreach.

And, it's basically looking at the stronger parts of the industrial market, and being able to serve them well. To me, this is an example of really strongmanagement, in a difficult global macro environment, that is actually taking advantage of their approach to the market. And, therefore, theirorganic growth has been very good.


Great. Couple of questions on aero. There's been several companies that have indicated that they've seen some weakness in the business-jet markethere, recently. It doesn't sound like you are seeing that. So, can you just comment on your outlook there?


It's a very good question. People have talked about the turnaround in the business- and regional-jet market for about three years now, and they'veall been wrong, in terms of predicting an upturn. And, actually, we're not seeing a major market change in this business. My view of it is that, we'resort of bouncing along bottom. And, I think what you're hearing from other companies is that, there is a little bit of an uptick and then it comesback down. So, you are sort of on that cycle of bouncing along bottom.

Our growth year is purely not market-driven. It's from new products wins. We had major wins on HondaJet, for instance. We have major wins onother platforms like the Global Express, like Gulfstream aircraft. And, you sum those. And actually, in the second quarter, our business- and regional-jetbusiness was up organically. The most in AMETEK. It was up low-double digits. So, it's all driven from platform wins, not market.


Great. That's very helpful. And then, just lastly on aero, on the EMG side. Can you talk about what you are seeing in third-party MRO and military.Again, there's been a lot of mixed commentary this earnings season. So, just what you're seeing there.


Yes, and I'm going to give you some mixed commentary as well. In terms of military, this has been an absolute surprise for us. That actually, whenwe look at military across the Company, that would be both EMG and what we do in EIG, it was up low-single digits. So, we're actually growingorganically in military. I would have bet a fair amount of money that that wasn't going to happen, but we'll take. We need it.

The third-party MRO was weak. It was weak in the quarter. We were actually down. But, we also had a tough comparison. And, if you look at thethird-party MRO business overall, that market is growing 3% to 4%. That's basically the market dynamics right now. And, we think that's the kindof growth that we are going to get, and are getting actually, if you look at it over a longer period of time. But, the second quarter was weak.


Okay, great. Thanks a lot.

Operator

Robert McCarthy, Stifel Nicolaus

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Robert McCarthy - Stifel Nicolaus - Analyst

The first question, Frank, is you've spoken a lot about your cost initiatives, and the fact that you could be fairly conservative. So, this kind of questiongets to that. If we get into even a worse macro environment, clearly there some conservatism there. But, would you take another whole look, giventhe fact that you've already highlighted the strong pay back you announced with your $16 million or so, of initiatives in the first quarter. Howshould we think about, if we go into a cyclical rollover, what kind of cost saves or cost actions could you take?


That's a really good question, and it really depends on how significant a downturn would be. We have sized the Company as we think is appropriatefor the guidance that we provided to you, both in terms of overall sales, organic sales and what we're expecting for the second half. You used theterm rollover. If we are talking about a slight degradation, we'll be able to handle that.

You just look, for instance, at the price of oil in the last few days, where it has gone a little bit lower than, actually, when we put our presentationtogether here. But, what we looked at it, we said, it's not going to be significant to us. It could be a little bit slower to what we expect and we'll dealwith it.

But, if there is a major downturn, this is sort of the hallmark of AMETEK. That there are always substantial things that you can do in the cost structureof a company. And, our approach to our businesses, where we are highly diversified with lots of manufacturing facilities, there are still opportunitiesfor us to do more. We can do additional consolidation of facilities. We could be even more aggressive on our material cost reductions. We couldmove more production to low cost locales.

And, if we got in a major downturn, we would shift some of our focus, which as Dave mentioned and I mentioned, is more right now on RD&E andthe acquisition front. We would move even more of it to the cost side of the business. If I can just look back historically, during the 2008 and 2009downturn, our margins at the operating level, were down just a little over 100 basis points. We were top of class.

You go to the recession before that, our profit margins were actually up in the downturn. So, this is sort of the core competency of our Company.And, the basic answer to your question is, if things get worse, we will do more. And, we'll get the cost structure aligned with the revenue. I hopewe don't have to do that, but we'll be able to do it.


Understood. The second question is around acquisitions, in association with -- you highlighted your track record over the past two years, in termsof the acquired revenues and how much capital you deployed. In terms of doing be postmortem of those acquisitions, have you seen a superiororganic growth rate from those acquisitions, versus the core portfolio?

And, you are a harsh grader of yourself, internally. But, how would you give yourself a grade, in terms of the acquisitions that have come throughthe past two years? And, do you think there's a problem, in terms of your acquisition selection, in terms of organic growth?


No. I don't think so. We specifically have a focus on acquiring companies that are very high up the differentiation curve. And in general, the higherup the differentiation curve, the higher the organic growth of those companies. The issue is, even when you roll through the acquisitions we'vedone, they're not a major part of the Company.

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And, some of the growth is also being muted by just the general macro conditions that we have talked a lot about on this call, and most industrialcompanies are talking about. I actually believe the organic growth of the companies that we acquired is higher than the base organic growth ofthe core business. If we take the last one, the Cognex deal. Dave, do you remember what it was, organic growth, before we acquired it? 5%, 6%?


It was 6%.


6% was the number. So, that's a good number in this environment. That's just an example of the last one that we did.


The third and final question, if you'll indulge me is --


Sure.


And this will be it, I promise. You have been able to execute on some reasonable multiples, particularly in this M&A environment. You look at someof the public multiples been paid right now, for some of these businesses, as companies search for growth and wrestle with the portfoliotransformation, clearly companies of slightly larger decile then yourself. But, there are some very healthy multiples being paid.

Are you nervous, given the fact that you've executed some reasonable deals in terms of EBITDA in the specter of slower growth, that there couldbe a bid-ask issue, in you being able to get deals done in the back half? You'll probably be walking away from -- because, seller expectations aregoing to be have to be moderated, I guess, is my point.


Yes, that's a great question, Robert. If you look at this, we parse the deals that we look at because, you're absolutely right. Some deals are just goingfor ridiculous multiples. And, when you look at paying 15 times or 17 times trailing, to get a return on invested capital that meets a reasonablecriteria, and in particular our criteria, it's virtually impossible. Unless, you've got super growth with the business and/or almost unbelievable typesof cost synergies.

So, we will parse those deals and we won't even spend any time on them. Because, we're not going to get the return on invested capital that wetarget. Having said that, our acquisition program has really been fruitful. We've put a solid team in place. They're doing a super job, and a lot of thedeals that are coming to our attention are coming up on a proprietary basis. And, as a result of that, we're able to pay reasonable multiples.

I can remember the last two deals we bought. They were nine times kind of deals. We can say that's reasonable in an environment where somecompanies are going for 15 times. But, on the other hand, nine times is probably a point more than we've historically paid. So, you have to becautious in terms of not overpaying for a business.

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And, again, this speaks to the quality of our acquisition program. And, our backlog is good right now. The free cash flow of the Company, this year,is going to be on the order of $740 million. And, my objective is to spend that free cash flow on acquisitions, and we're pretty much right on target.You look at what we've done in the first half of the year. As Bob mentioned, we did $360 million. So, we're right on target to spend that.

And, that's the best utilization of that capital. If we can take the free cash flow of the Company, invest in businesses and then make them better.It's sort of a no-brainer, from an economic analysis viewpoint. So, no. I'm not overly worried about it.

One good metric that I like to focus on is, no pack to total average capital. And, you look at this and, although you really probably shouldn't lookat it on a quarter basis, but in the second quarter that number was just under 14%. So, you look at our cost to capital which, depending on howyou value cost of capital, a reasonable number for us would probably be 8%. So, you take 8% and you get no pack to total capital of 14%, we arecreating sizable value. And that's the name of the game, is you've got to create value. So I hope that helps.


Great narrative. Thanks, Frank.

Operator

Christopher Glynn, Oppenheimer

Christopher Glynn - Oppenheimer & Co. - Analyst

Frank, I'm seeing a little bit of a transformation and how the macro cycle is playing out, relative to the last couple of cycles. I'm wondering if you'veseen any changes in competitive landscape, of any of the businesses. In particular, with respect to your categorization of the portfolio as servingthe top of the top of the markets served. I'm wondering if you are seeing any mix down in solution selection, to mid tier solutions, by any of thecustomer bases?


I think that's a fair question. I think the right answer is definitely, in this kind of environment, you see customers pushing down to some degree.Because, either they don't have the capital to spend or they're trying to have the capital that they do have, go across a wider selection of products.So yes I don't think there's any question.

But, that's a part of the dynamic that's occurring here. But in general, our products are differentiated enough that it's not a sizable impact on thebusiness. But, it's definitely a factor. And I think it's just normal, actually, when the global macro is weak.

Christopher Glynn - Oppenheimer & Co. - Analyst

Yes. It definitely appears subtle. We've seen bigger top-line changes. Yours barely changed. Also, would like a reminder on what the organic surgein Asia was, last year, and how that carries through the balance of this year.


We had, last year, very big sales of our CAMECA products. These are very high level systems, and there was a very, very strong performance. And,that business does cycle, as to where they get the business. And actually, in the first half of the year, it wasn't even in China. A good part of thatwas in Japan. And this year, we're not seeing that. So that had, probably, the most significant impact on the organic growth.

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Operator

Richard Eastman, Robert W. Baird

Richard Eastman - Robert W. Baird & Company, Inc. - Analyst

Frank, could you speak a little bit to orders, maybe what the order number was, in the quarter? And then, what the core order change was, yearover year?


Yes, the core orders were $1.035 billion in the quarter. The book to bill was $1.03 billion. If you exclude backlog in both this year's second quarter,as well as last year's, so that you get an equal comparison, overall orders were flat. And, from a organic viewpoint, they were down just a titch, justa very small amount. So, it's pretty consistent with the sales and the picture that we're painting.


I understand. Okay. I was trying to think, when you went through your comments on the two segments. In EIG, am I correct, is the process portionof EIG -- you commented that oil and gas was down, as expected. But, was the balance of that business a bit weaker? Is the expectations baitedthere, a little bit, on the process side for EIG?


No, not really. Dave, you want to take that one?


No, we had solid growth in materials, analysis and our ultra-precision technologies division. It was a solid Q2. The oil and gas was weaker, but theyessential offset and we were flat.


Okay. Understand. One quick question on the midstream and downstream oil and gas business, and the expectation there was for a modest declinethis year. Has there been any acceleration or deceleration, again, in the mid- and downstream spend?


No. That's exactly -- we went out and check this with our businesses. And factually, in Q2, it was down slightly. And, we queried our businessesabout what they expected for the rest of the year, and that's the expectation. Now, as I mentioned, the price of oil has come down a little bit in thelast two days. And, will that have an impact? It could have a modest impact, and it could be a little bit weaker than what we're talking about. Butagain, when we discussed that actually this morning, we said we've got the costs handled here. So, we got really good confidence in our earningsfor the year.

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And, I recall the mid-downstream piece was expected to track down maybe 5%, upstream down 20%. And, that's how you were waiting for this10% number? Those two were --


Your numbers are close. It was 25% on the upstream and a few points on the mid- and downstream piece.


Yes. Okay. And then, one last question. Did you say that the FX impact on the EPS line was $0.02 in the quarter?


Yes.


Great, thank you. And, nice work in the quarter.


Thanks, Richard.

Operator

Matt Summerville, Alembic Global Advisors.

Matt Summerville - Alembic Global Advisors - Analyst

Good morning, guys.


Hello Matt, welcome back.


Thank you. I was hoping you could give a little bit of clarity as to the linearity you saw, in terms of orders, and what you've seen in July. I wouldimagine you have a preliminary order number by now.

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Yes, through the second quarter, orders actually went up. So, we saw a positive trend on orders. For July, we have orders and sales data. We don'thave profitability data yet. Will have that in another day or two. But, on orders and sales, they were basically in line with the forecast that I've givenyou. So, we have pretty good confidence going into the beginning, at least of Q2, that the estimates are going to hold.


With respect to oil and gas, is your sense, again thinking about linearity, is your business bottoming? Is it getting worse? And, what sort of oil pricedo you feel we would need to see for your business, particularly on the upstream side obviously, to start to reaccelerate?


Yes, that's a great question, And, there's a lot of debate in the industry as to what's the price of oil, where you'll see expansion. And, I think ourconsensus is, it's a number like $70 a barrel. If you get up to that $70 plus a barrel, you're going to start to see expansion.

One of the reasons that I, actually, have not that highlighted yet on this call, as to why maybe AMETEK isn't seeing as significant an impact, as someother companies, is that we are not as, in terms of our content, we are not as much focused on fracking in the US. Our business is much moreinternationally focused. And, as a result of that, the estimates that we put together at the beginning of the year are pretty much, are holdingbasically.


Lastly, if you could, you have $145 million that you've committed to, in terms of cost savings. You've mentioned several times there's an upside tothat. I guess what could the upside scenario look like? And then could you remind us, if $70 million comes from sourcing and procurement, whatour major buckets are, to get you to $145 million, please?


On the $145 million, about $70 million is a result of activities that are directly sourcing related. And, that would include our strategic procurementinitiatives. It even includes our value engineering activities, where we will do some minor redesign of products and lower the material content, asa result of that value engineering and value analysis work. So that's about $70 million of the $145 million.

And the remaining, I guess it's $75 million, is all of the actions that we have done, in terms of plant consolidations, reductions in force in thosebusinesses that have had the most significant impact, as a result of the macro environment, et cetera. In terms of the first part of your question,we have not actually rolled that up. But, I think a number on the order of $10 million is very realistic. That gives you a flavor as to why we'recomfortable with the estimates.


Perfect. Thanks again.

Operator


Nigel Coe, Morgan Stanley

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Unidentified Participant - - Analyst

It's [Drew] on, for Nigel. Could you go back to the third-party MRO real quick? You mentioned the markets growing 3% to 4%. Do you have anysense for when that turns back positive for you guys?


I think next quarter. I think the reason the quarter was down was mainly due to the comparison that I talked about. So, I think we're going to seesome growth out of it, next quarter.

Unidentified Participant - - Analyst

Lastly, on the organic growth in 3Q. Can you clarify what you're looking for there? Looks like the 1% to 2% implies, could be down next quarter.


Flat. Where actually talking about a flat number. If oil and gas gets a little bit worse, you might see a minus 1%, that's possible. But, we're callingflat right now.

Operator

Gentlemen, there are no further questions at this time.


Thank you, Tara. Thanks, everyone, for joining the call today. As a reminder, a replay may be accessed at AMETEK.com, and at streetevents.com.And, as always, I am available for further questions today. Thanks again.

Operator

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

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Cover PageOverviewCorporate ParticipantsKevin Coleman (3 Turns)Frank Hermance (32 Turns)Bob Mandos (2 Turns)David Zapico (5 Turns)

Conference Call ParticipantsScott Graham (3 Turns)Allison Poliniak (3 Turns)Mark Douglass (5 Turns)Matt McConnell (3 Turns)Joe Radigan (4 Turns)Robert McCarthy (3 Turns)Christopher Glynn (2 Turns)Richard Eastman (6 Turns)Matt Summerville (5 Turns)

PRESENTATION1. Operator2. Kevin Coleman3. Frank Hermance4. Bob Mandos5. Kevin Coleman

QUESTIONS AND ANSWERS1. Operator2. Scott Graham3. Frank Hermance4. Scott Graham5. Frank Hermance6. Scott Graham7. Operator8. Allison Poliniak9. Frank Hermance10. Allison Poliniak11. Frank Hermance12. Allison Poliniak13. Operator14. Mark Douglass15. Bob Mandos16. Mark Douglass17. Frank Hermance18. Mark Douglass19. Frank Hermance20. Mark Douglass21. Frank Hermance22. Mark Douglass23. Operator24. Matt McConnell25. Frank Hermance26. David Zapico27. Matt McConnell28. Frank Hermance29. Matt McConnell30. Operator31. Joe Radigan32. Frank Hermance33. Joe Radigan34. Frank Hermance35. Joe Radigan36. Frank Hermance37. Joe Radigan38. Operator39. Robert McCarthy40. Frank Hermance41. Robert McCarthy42. Frank Hermance43. David Zapico44. Frank Hermance45. David Zapico46. Frank Hermance47. David Zapico48. Frank Hermance49. Robert McCarthy50. Operator51. Christopher Glynn52. Frank Hermance53. Christopher Glynn54. Frank Hermance55. Operator56. Richard Eastman57. Frank Hermance58. Richard Eastman59. Frank Hermance60. David Zapico61. Richard Eastman62. Frank Hermance63. Richard Eastman64. Frank Hermance65. Richard Eastman66. Frank Hermance67. Richard Eastman68. Frank Hermance69. Operator70. Matt Summerville71. Frank Hermance72. Matt Summerville73. Frank Hermance74. Matt Summerville75. Frank Hermance76. Matt Summerville77. Frank Hermance78. Matt Summerville79. Operator80. Unidentified Participant81. Frank Hermance82. Unidentified Participant83. Frank Hermance84. Operator85. Kevin Coleman86. Operator

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