AMTEK, Inc. (AME)

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AMETEK, Inc. (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

Presentation

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.

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