AMETEK, Inc.
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. 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, Vice President of Investor Relations. Please go ahead.

[Kevin C. Coleman:]

Great. Good morning. Thank you, Tara. Good morning and welcome to AMETEK's second quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and CEO; Bob Mandos, Executive Vice President and Chief Financial Officer; and Dave Zapico, Executive Vice President and Chief Operating Officer. AMETEK's second quarter results were released earlier this morning. These results are available electronically on market systems and on our website at the Investors section of ametek.com. A tape of today's call may be accessed until August 18 by calling 800-633-8625 and entering the confirmation number 21772008. This call is also webcasted. It can be accessed at ametek.com and streetevents.com. The conference call will be archived on both of these sites. I will remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, 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 risk 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 reconciliation of any non-GAAP financial measures used during this conference call. We will begin today with prepared remarks and then we'll open it up for questions. I will now turn the meeting over to Frank.

[Frank S. Hermance:]

Thank you, Kevin, and good morning, everyone. AMETEK had a strong second quarter with excellent operating performance. We delivered a record level of earnings at the high end of our guidance range despite what remains a slow global growth environment. We also continued to be very active on the acquisition front. During the second quarter, we acquired Global Tubes, a leading manufacturer of high precision, small diameter metal tubing, and subsequent to the end of the quarter, we closed the acquisition of the Surface Inspection Systems Division of Cognex Corporation. I will provide some further details on our continued strong acquisition activity in a moment, but let me first provide the financial highlights for the quarter. Sales in the quarter were up 1% to $1 billion. Organic sales were flat while acquisitions added 5% and currency was a 4% headwind. Operating income 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 quarter was 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 $596.5 million 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 operating performance was outstanding. Operating income increased 8% to $164 million and operating margins were 27.5%, up 110 basis points from last year's second quarter. The Electromechanical Group also had a good quarter with strong operating performance. Overall sales were down 2% to $407.3 million. The lower sales were driven largely by currency headwinds with the contribution from the acquisition of Global Tubes, a partial offset. Organic sales were down 2% driven by continued weak global macro conditions, foreign currency was a five-point headwind and acquisitions contributed 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 four global strategies of

[Robert R. Mandos:]

Thank you, Frank. As Frank noted, we had a good second quarter with strong operating performance. I will provide some further details. In the quarter, selling expenses were down slightly versus last year's second quarter. General and administrative expenses were 1.3% of sales, slightly above last year's second quarter level of 1.2%. The effective tax rate for the quarter was 27.7%, down slightly from last year's 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, either positively or negatively, from this full year rate. On the balance sheet, working capital, defined as receivables plus inventory less payables, was 19.1% of sales in the second quarter. Strong working capital management will remain a key priority. Capital expenditures were $12 million for the quarter. 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's second quarter. Free cash flow was $152 million in the quarter, up 8% over last year's 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% of net income. Total debt was $1.67 billion at June 30, down slightly from the 2014 yearend. This amount reflects the second funding from the private placement agreement we entered into last September. This funding of $50 million was received on June 15 and was used to pay down revolver debt. 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, we had 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 Systems Division of Cognex Corporation, bringing our cumulative expenditures for acquisitions in 2015 to approximately $360 million. Our highest priority for 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 organically and through acquisitions, with a strong balance sheet and cash flows.

[Kevin C. Coleman:]

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

[Operator:]

Thank you. And our first question comes from the line of Scott Graham with Jefferies. Please proceed.

[R. Scott Graham:]

Hey. Good morning.

[Frank S. Hermance:]

Hello, Scott.

[R. Scott Graham:]

Thank you. I just wanted to just ask if you could do your thing with each of the business units and what have you? And maybe before that just tell us what pricing was in the quarter for the company?

[Frank S. Hermance:]

Yeah. 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%.

[R. Scott Graham:]

Okay.

[Frank S. Hermance:]

Okay. So, sure, Scott, I'd be glad to go through my normal discussion of the various subparts of the two groups. And I'll start with EIG. EIG Aerospace had a very solid second quarter. Overall growth was up low single digits against a very difficult comparison. We saw strong growth in our regional and business jet business and continued solid growth in our commercial business. EIG Aerospace continues to gain additional content on a number of attractive platforms, really as a result of their strong technology and service capabilities. Very importantly, thus far in 2015, we have won over $400 million in new lifer program awards (21

[R. Scott Graham:]

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

[Frank S. Hermance:]

You bet.

[Operator:]

Thank you. And our next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed.

[Allison A. Poliniak-Cusic:]

Hi, guys. Good morning.

[Frank S. Hermance:]

Hello, Allison.

[Allison A. Poliniak-Cusic:]

How are you? Just following on the prior comments, Energy sounds like it's coming in line with what you're looking at. I guess I don't know have the notes from last quarter, but what's become progressively weaker that you're now expecting a sort of lower organic for this year?

[Frank S. Hermance:]

Yeah. There's no question just the general industrial environment is softer than we had expected. Europe is obviously having difficulties and in Asia as well, 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 any given business, Allison, it's just a general sort of 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 $145 million of cost reductions is actually a conservative number, and therefore we've got really good confidence in our earnings, given the global macro.

[Allison A. Poliniak-Cusic:]

That's great. And then just touching on the operating side, I imagine there's some acquisition-related accounting and cost in that number. Do you have a sense of what the – I mean I imagine the organic expansion of those businesses were much higher. Can you touch on that a little bit?

[Frank S. Hermance:]

Yeah. 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 $0.01.

[Allison A. Poliniak-Cusic:]

Oh, okay.

[Frank S. Hermance:]

That's the magnitude of it. So, you couple those costs with the currency impacts, which although not off the charts, we lost another couple of pennies in terms of earnings in the quarter as a result of this. So, that's why these cost reductions become so critical; you're just fighting a number of headwinds.

[Allison A. Poliniak-Cusic:]

Great. Thanks so much.

[Frank S. Hermance:]

You bet, Allison.

[Operator:]

Thank you. And our next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

[Mark Douglass:]

Hi. Good morning, gentlemen.

[Frank S. Hermance:]

Hello, Mark.

[Mark Douglass:]

Payables were?

[Robert R. Mandos:]

$384 million.

[Mark Douglass:]

$384 million. Great, thank you.

[Robert R. Mandos:]

You're welcome.

[Mark Douglass:]

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

[Frank S. Hermance:]

Yeah. I mean 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 general economic condition in Europe. In Asia, we were actually down 6%, but that was against a very tough comparison. Organically last year, in the second quarter, Asia actually had 15% organic growth, so it was a very difficult comparison, so we don't expect that it's going 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 quarters ago. And actually, the best performance was in the U.S., which was up about 5% organically. And when you sum those, based on our heavy concentration outside the U.S., that's how you get to the relatively flat organic growth overall.

[Mark Douglass:]

U.S. is up 5%, is that related to your Power and Industrial also being up mid-single digits? That was...

[Frank S. Hermance:]

Yeah, the Power and Industrial segment was good; the Aerospace business in particular was very good in the U.S. So, they were key drivers to our performance and also, our Precision Motion Control business on the EMG side of the business had very strong U.S. 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 those businesses. The U.S. 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.

[Mark Douglass:]

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

[Frank S. Hermance:]

Yes, 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, the heavy vehicle business continues to do very well, and it triggered very good growth in the industrial piece. If you look at North American heavy truck 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's really three parts to the power business. There's a test and measurement piece of the power business; there's a battery backup piece of the power business; and then there's instrumentation for the generation, transmission and 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. And so we're very pleased. We got really good management in that business, and they're doing an excellent job. And it's now becoming a sizeable part of AMETEK, with over $0.5 billion in sales on an annual basis.

[Mark Douglass:]

Great. Thank you.

[Frank S. Hermance:]

Sure.

[Operator:]

Thank you. And our next question comes from the line of Matt McConnell with RBC Capital Markets. Please proceed.

[Matthew McConnell:]

Thank you. Good morning.

[Frank S. Hermance:]

Hello, Matt.

[Matthew McConnell:]

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 any international projects get delayed or pushed out? Or any pressure on your export sales? Just what impact might you be seeing outside of translation?

[Frank S. Hermance:]

I'm going to let David take this one.

[David A. Zapico:]

Yes. Yes, Matt, it's a great question. Fortunately, AMETEK is relatively balanced on revenues and costs around the world. But the strong dollar does cause some competitive situations in – we're in niche markets. We're leaders in niche markets and largely what we see is the delay of projects when people can't get the U.S. dollars necessary to go forward with projects. So they're usually delayed three months, six months to go back and get the money. This has happened before, and certainly we're seeing some of that. Because we're at the top of our niches and technology, we're not seeing a lot of negative impacts. But certainly, anytime the currency changes, there are some businesses that are impacted by the stronger dollar. The cases where we're manufacturing in the U.S. and we have competitors in Europe or Japan, the environment is tougher. Conversely, AMETEK does manufacture in Europe and Asia, and we have to take advantage of that to our competitive advantage. So it's certainly an issue, but I think we're managing it well. We've done an analysis business by business, every business unit in the company, and we have plans in place to relocate to lower-cost regions. As Frank mentioned, we have 24% of sales from new products. We're really emphasizing new product development to enhance our competitive advantage. So it's an issue for every company. There is a competitive issue with it, but we're managing it well.

[Matthew McConnell:]

Great. Thanks. That's very helpful. And then 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 plan's for it to be up 5% for the year. Are there specific projects in the back half of the year, or acquisitions? Do you have capital spending plans for those, or anything else that would drive a pretty big ramp in CapEx in the back half of the year?

[Frank S. Hermance:]

Yes, actually, Bob and I discussed this recently, and I think it's unlikely that we're going to spend the $75 million in capital 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're 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 run below net income. But, if we look at the full year and actually extract that $50 million in pension contributions that you've mentioned, we actually expect free cash flow to net income to be about 115% of sales. And that's probably a conservative number. I mean we're just throwing off significant cash and it's sort of a hallmark of AMETEK and the second half will be very strong in terms of cash generation.

[Matthew McConnell:]

Okay. Great. Thanks. That all makes sense.

[Operator:]

Thank you. And our next question comes from the line of Joe Radigan with KeyBanc. Please proceed.

[Joe K. Radigan:]

Thank you. Good morning, guys.

[Frank S. Hermance:]

Hi, Joe.

[Joe K. Radigan:]

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 end markets. So can you talk about where you're seeing the growth come from in particular?

[Frank S. Hermance:]

Yes. I mean this is really a great business and we've got excellent management in this business. And 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 when a 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 make that happen. So this is, as you point out, very diverse. And what this business has recently done is expanded globally. They were predominantly a U.S. business, and with the acquisition of Dunkermotoren in Germany and real focus on growing in Asia, this company has diversified its global reach and it's basically looking at the stronger parts of the industrial market and being able to serve them well. So, to me, this is an example of really strong management in a difficult global macro environment that is actually taking advantage of their approach to the market, and therefore their organic growth has been very good.

[Joe K. Radigan:]

Okay, great. And then a couple questions on aero. There's been several companies that have indicated that they've seen some weakness in the business jet market here recently. It doesn't sound like you're seeing that? So can you just comment on your outlook there?

[Frank S. Hermance:]

Yes...

[Joe K. Radigan:]

And on the EMG side of aero. I'm sorry, go ahead.

[Frank S. Hermance:]

Very good question. People have talked about the turnaround in the business and regional jet market for about three years now, and they've all 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're sort of bouncing along bottom and I think what you're hearing from other companies is that there's a little bit of an uptick and then it comes back down, so you're sort of on that cycle of bouncing along bottom. Our growth here is purely not market-driven. It's from new product wins. We have major wins on HondaJet, for instance. We have major wins on other platforms like the Global Express, like Gulfstream aircraft. And you sum those and actually in the second quarter our business and regional jet business was up organically the most in AMETEK. It was up low-double digits. So it's all driven from platform wins, not market.

[Joe K. Radigan:]

Great. That's very helpful. And then just lastly on aero on the EMG side, can you talk about what you're seeing in third-party MRO and military? Again, there's been a lot of mix commentary this earning season, so...

[Frank S. Hermance:]

Yes...

[Joe K. Radigan:]

...that's what you're seeing.

[Frank S. Hermance:]

And I'm going to give you some mix commentary as well. In terms of military, this has been an absolute surprise for us that actually when we 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 growing organically in military. I would have bet a fair amount of money that that wasn't going to happen. But we'll take it. 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 the third-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 kind of growth that we're going to get and are getting, actually, if you look at it over a longer period of time. But the second quarter was weak.

[Joe K. Radigan:]

Okay, great. Thanks a lot, Frank.

[Frank S. Hermance:]

You bet.

[Operator:]

Thank you. And our next question comes from the line of Robert McCarthy with Stifel, Nicolaus. Please proceed.

[Robert Paul McCarthy:]

Hi. Good morning, everyone.

[Frank S. Hermance:]

Hi, Robert.

[Robert Paul McCarthy:]

So the first question, Frank, is, you've spoken a lot about your cost initiatives and the fact that they could be fairly conservative, and so this question gets to that. If we get into even a worse macro environment, clearly there's some conservatism there, but would you take another whole look given the fact that you've already highlighted the strong payback you announced with your $16 million or so of initiatives in the first quarter? How should we think about it if we go into a cyclical rollover? What kind of cost saves or cost actions could you take?

[Frank S. Hermance:]

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 appropriate for the guidance that we've provided to you, both in terms of overall sales, organic sales and what we're expecting for the second half. You used the term rollover. If we're 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 presentation together here, but when we looked at it we said, it's not going to be significant to us. It could be a little bit slower than what we expect and we'll deal with it. But if there's a major downturn – this is sort of the hallmark of AMETEK that there are always substantial things that you can do in the cost structure of a company. And our approach to our businesses where we're highly diversified with lots of manufacturing facilities, there are still opportunities for us to do more. We can do additional consolidation of facilities, we could be even more aggressive on our material cost reductions, we could move 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 and the acquisition front, we would move even more of it to the cost side of the business. And if I can just look back historically during the 2008 and 2009 downturn, 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 hope we don't have to do that, but we'll be able to do it.

[Robert Paul McCarthy:]

Understood. The second question is around acquisitions in association with – you highlighted your kind of track record over the past two years in terms of the acquired revenues and how much capital you deployed. In terms of doing the post mortem of those acquisitions, have you seen a superior organic growth rate from those acquisitions versus the core portfolio? And you are a harsh grader of yourself internally, but I mean how would you kind of give yourself a grade in terms of the acquisitions that have kind of come through the past two years? And do you think there's a problem in terms of your acquisition selection in terms of organic growth?

[Frank S. Hermance:]

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 higher up the differentiation curve, the higher the organic growth of those companies. The issue is even when you roll through the acquisitions we've done, they're not a major part of the company. And some of that growth is also being muted by just the general macro conditions that we have talked a lot about on this call and most industrial companies are talking about. So I actually believe the organic growth of the companies that we acquired is higher than the base organic growth of the core business. And if we take the last one, the Cognex deal, Dave, you remember what it was, organic growth, before we acquired it, 5%, 6%, 7%? 6%?

[David A. Zapico:]

Yeah.

[Frank S. Hermance:]

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

[Robert Paul McCarthy:]

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

[Frank S. Hermance:]

Sure.

[Robert Paul McCarthy:]

...basically – and then this will be it, I promise, is you have been able to execute on some reasonable multiples, particularly in this M&A environment, I mean, you look at some of the public multiples being paid right now for some of these businesses as companies kind of search for growth and wrestle with the kind of portfolio transformation. Clearly companies of slightly larger deciles than 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 and the specter of slower growth that there could be a bid-ask issue in you being able to get deals done in the back half? And because you'll probably be walking away from – because seller expectation is going have to moderated, I guess is my point.

[Frank S. Hermance:]

Yeah, 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 going for ridiculous multiples, and when you look at paying 15 times or 17 times trailing to get a return on invested capital that meets a reasonable criteria, and in particular our criteria is, it's virtually impossible unless you've got super growth with the business and/or almost unbelievable types of 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 we target. Now having said that, our acquisition program has really been fruitful; we put a solid team in place; they're doing a super job, and a lot of the deals 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. And I can remember like the last two deals we bought, they were 9 times kind of deals. And we can say that's reasonable in an environment where some companies are going for 15 times, but on the other hand, 9 times is probably a point more than we've historically paid. So, there's just – you have to be cautious in terms of not overpaying for a business; 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 sort of 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 nopac (48

[Robert Paul McCarthy:]

Great narrative. Thanks, Frank.

[Operator:]

Thank you. And our next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed.

[Christopher D. Glynn:]

Thank you. Good morning.

[Frank S. Hermance:]

Good morning, Chris.

[Christopher D. Glynn:]

Frank, so seeing a little bit of a transformation in how the macro cycle is playing out relative to the last couple of cycles. I'm wondering if you've seen any changes in competitive landscape of any of the businesses, and in particular, with respect to your categorization of the portfolio, is serving the top of the top of the markets served. And I'm wondering if you're seeing any mix down in solution selection to kind of mid-tier solutions by any of the customer bases?

[Frank S. Hermance:]

Yeah, I think that's a fair question. And 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 yeah, 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 sizeable impact on the business, but it's definitely a factor. And I think it's just normal, actually, when the global macro is weak.

[Christopher D. Glynn:]

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

[Frank S. Hermance:]

Yeah, we had, last year, very big sales of our CAMECA products. These are very high-level systems. And there was 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 that was in Japan. And this year we're not seeing that, so that had probably the most significant impact on the organic growth.

[Christopher D. Glynn:]

Okay. Thank you.

[Frank S. Hermance:]

Sure.

[Operator:]

Thank you. And our next question comes from the line of Richard Eastman from Robert W. Baird. Please proceed.

[Richard C. Eastman:]

Yes. Good morning.

[Frank S. Hermance:]

Hi Richard.

[Richard C. Eastman:]

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 year-over-year?

[Frank S. Hermance:]

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

[Richard C. Eastman:]

I understand. Okay. And then also, I was trying to think, when you went through your comments on the two segments, in EIG, am I correct, is the Process portion of EIG, you commented that Oil & Gas was down as expected, but was the balance of that business a bit weaker? Is the expectations faded there a little bit on the Process side for EIG? Or no?

[Frank S. Hermance:]

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

[David A. Zapico:]

No, we had solid growth in Materials Analysis and our Ultra Precision Technology Division.

[Richard C. Eastman:]

Okay.

[David A. Zapico:]

It's probably Q2 and the Oil & Gas was weaker, but they essentially offset and we were flat.

[Richard C. Eastman:]

Okay. I understand. And then also, just one quick question on the midstream and downstream Oil & Gas business, I know the expectation there was for a modest decline this year. Has there been any acceleration or deceleration again in the mid and downstream spend?

[Frank S. Hermance:]

No, that's exactly – we went out and checked this with our businesses, and factually in Q2, it was down slightly, and we queried our businesses about 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 the last 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, but again, when we discussed that actually this morning, we said, we've got the cost handled here, so we've got really good confidence on our earnings for the year.

[Richard C. Eastman:]

And I recall the mid-downstream piece was expected to track down maybe 5%, upstream down 20%, and that's how you were weighting (54

[Frank S. Hermance:]

Your numbers are close.

[Richard C. Eastman:]

Okay.

[Frank S. Hermance:]

It was 25% on the upstream and a few points on the mid and downstream piece.

[Richard C. Eastman:]

Yes. Okay. And then just one real last question; did you say that the FX impact on the EPS line was $0.02 in the quarter?

[Frank S. Hermance:]

Yes.

[Richard C. Eastman:]

Okay. Great. Thank you. And nice work in the quarter.

[Frank S. Hermance:]

Thanks, Richard.

[Operator:]

Thank you. And our next question comes from Matt Summerville with Alembic Global Advisors. Please proceed.

[Matt Summerville:]

Good morning, guys.

[Frank S. Hermance:]

Hello, Matt. Welcome back.

[Matt Summerville:]

Thank you. Hey, 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 would imagine you have a preliminary order number by now.

[Frank S. Hermance:]

Yeah. 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't have profitability data yet. We'll have that in another day or two. But on orders and sales, they were basically in line with the forecast that I've given you. So we have pretty good confidence going into the beginning at least of Q2 that the estimates are going to hold.

[Matt Summerville:]

And then just with respect to Oil & Gas, is your sense, again thinking about linearity, is your business bottoming? Is it getting worse? And what sort of oil price do you feel we would need to see for your business, particularly on the upstream side obviously, to start to reaccelerate?

[Frank S. Hermance:]

Yeah. That's a great question, and there's a lot of the data in the industry as to what's the price of oil where you'll see expansion. And I think our consensus 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 highlighted yet on this call as to why maybe AMETEK isn't seeing as significant an impact as some other companies is that we're not as, in terms of our content, we're not as much focused on fracking in the U.S. Our business is much more internationally focused. And as a result of that, the estimates that we put together at the beginning of the year are pretty much – are holding, basically.

[Matt Summerville:]

And then just 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 upside to that. I guess, what could the upside scenario look like? And then could you remind us if $70 million comes from sourcing and procurement, what our major buckets are to get you to $145 million, please?

[Frank S. Hermance:]

Yeah. On the $145 million, about $70 million is a result of activities that are directly sourcing-related. And that would include our strategic procurement initiatives. It even includes our value engineering activities where we will do some minor redesign of products and lower the material content as a result of that value engineering and value analysis work. So that's about $70 million of the $145 million. And the remaining, I guess, $75 million is all of the actions that we have done in terms of plant consolidations, reductions in force in those businesses 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.

[Matt Summerville:]

Great. Thanks a lot, Frank.

[Frank S. Hermance:]

And that gives you a flavor as to why we're comfortable with the estimate.

[Matt Summerville:]

Perfect. Thanks again.

[Operator:]

Thank you. And our next question comes from the line of Nigel Coe with Morgan Stanley. Please proceed.

[Drew J. Ronkowitz:]

Hey. Good morning, guys. It's Drew on for Nigel.

[Frank S. Hermance:]

Hi, Nigel.

[Drew J. Ronkowitz:]

This is Drew. But the...

[Frank S. Hermance:]

Hi, Drew.

[Drew J. Ronkowitz:]

Could you just go back to the third-party MRO real quick, you mentioned the market's growing 3% to 4%. Do you have any sense for when that turns back positive for you guys?

[Frank S. Hermance:]

I think next quarter. Yeah, 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 see some growth out of MRO next quarter.

[Drew J. Ronkowitz:]

Okay. And then just lastly on the organic growth in 3Q, could you just kind of clarify what you're looking for there? Kind of looks like the 1% to 2% implies could be down next quarter?

[Frank S. Hermance:]

Flat. We're actually talking about a flat number. But yeah, I mean, if Oil & Gas gets a little bit worse, you might see a minus 1%, that's possible; but we're calling flat right now.

[Drew J. Ronkowitz:]

Okay. Thanks, guys.

[Frank S. Hermance:]

Sure.

[Operator:]

Thank you. And gentlemen, there are no further questions at this time.

[Kevin C. Coleman:]

Okay. Thank you, Tara. Thanks everyone for joining the call today. As a reminder, a replay may be accessed at ametek.com and 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 please disconnect your lines.