AMETEK, Inc. (AME) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the AMETEK Second Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, August 7, 2013. I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations. Please go ahead, sir.

Great. Good morning. Thanks, Alana. Good morning, welcome to AMETEK Second Quarter Earnings Conference Call. Joining me are Frank Hermance, Chairman and CEO; and Bob Mandos, Executive Vice President and Chief Financial 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 conference call may be accessed until April 21 by calling (800) 633-8284 and entering the confirmation code number 21661529. 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 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 call. We'll begin today with prepared remarks, and then we'll open it up for questions. I'll now turn the meeting to Frank.

Thank you, Kevin, and good morning, everyone. AMETEK had a very good second quarter. We established quarterly records for operating income, operating margins, net income and diluted earnings per share. In addition, we ended the quarter with a record backlog of over $1.1 billion. Orders in the second quarter were $895 million, up 2% organically from the prior year. The book-to-bill ratio in the quarter was 1.02. Sales in the quarter were up 6% to $878.8 million. Organic sales were flat and in line with our expectations, while acquisitions added 6% and currency was flat. Operating income for the second quarter was very strong. It increased 10% to $202.6 million from $185 million last year, reflecting the impact of the higher sales and our Operational Excellence activities. Operating income margin in the quarter was a record 23.1%, a 70 basis point improvement over the second quarter of 2012. Net income was up 13% to $128.3 million, and diluted earnings per share of $0.52 were up 11% over last year's second quarter. Both net income and diluted earnings per share were records. Operating cash flow in the quarter was strong at $128 million, up 11% over last year's second quarter. Free cash flow was also strong at $117 million. Working capital management was excellent. Operating working capital was 17.9% of sales. Turning our attention to the individual operating groups. The Electronic Instruments Group had an excellent second quarter. Sales were up 7% to $483.3 million, on strength in our longer cycle aerospace and oil and gas businesses, plus the contributions from the Micro-Poise acquisition. We also saw strength in our Measurement and Calibration Technology business and our Advanced Measurement Technology business. Organic sales were up 1 %, acquisitions added 7 %, while currency was down 1%. EIG's operating income performance was excellent, operating income increased 10% to $129.6 million and operating margins were strong at 26.8 %, up 80 basis points over last year's second quarter. The Electromechanical Group also had a solid quarter. Sales were up 6% to $395.5 million, on strength in our Floorcare and Specialty Motors business and the contribution from the acquisition of Dunkermotoren. Organic sales were flat, acquisitions added 6% and foreign currency was also flat. EMG's operating income increased 6% to $83.4 million and operating margins were 21.1%. Focusing now on our 4 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 focus on cost and asset management has been a key driver to both our competitive and financial success. Our results this quarter reflect the tremendous impact of our various Operational Excellence initiatives, as we were able to expand operating margins in the second quarter by 70 basis points to a record 23.1%. Operational Excellence within AMETEK includes lean manufacturing, Six Sigma in our factories and back-office operations, design for Six Sigma in our new product development efforts and the movement of production to low-cost locales. We also continue to see excellent results from our global sourcing and strategic procurement initiatives. From these sourcing activities, we recognized approximately $16 million in savings in the second quarter. As a result of the weak global environment, we have increased our cost savings for 2013. We now expect approximately $100 million in total savings, up from the $95 million we targeted at the end of the first quarter. Global and Market Expansion continues to be a driver for AMETEK's growth. In the second quarter, international sales represented 54% of our total sales, up from 50% of sales in the second quarter of 2012. The increase in international sales percentage was driven by strong growth in our process businesses and last year's acquisitions. Overall sales growth in the BRIC regions in the second quarter was very strong, up 21% over last year's second quarter. We continue to make investments to develop and expand our global sales channels, service capabilities and manufacturing footprint in order to position our businesses to capitalize on the attractive global growth opportunities. In the second quarter, AMETEK's Process Instrument business was awarded a large contract for process analyzers at the Shah Gas Field in the U.A.E. The $4.6 million contract covers 26 AMETEK analyzers for the field software recovery unit, the largest complex of this kind ever built. The Shah Field was not previously developed because the gas has a high hydrogen sulfide concentration, making it especially challenging. We were selected because of our extensive experience worldwide in sulfur recovery, as well as our ability to meet the project's demanding schedule. Also in the second quarter, AMETEK's Power Systems & Instruments business was chosen by STX Heavy Industries, a South Korean-based EPC firm, to provide power supplies to support their ballast water management systems on both new and existing ships. Ballast water management systems are now increasingly being mandated for use on ships to provide a reliable and environmentally safe solution to properly chlorinate ballast water before discharge. We will be providing 40-kilowatt water-cooled high-frequency power supplies to STX for use in their electro-chlorination systems. New product development is a key to our long-term health and growth. We have consistently invested in RD&E. In 2013, we expect to spend $173 million, a 12% increase over 2012. We're excited about some recent new product introductions driven by these R&D efforts. AMETEK Solartron Metrology further extended the capabilities of their Orbit measurement system with the introduction of 2 noncontact laser probes. These high-accuracy measurement devices are specifically designed to support quality control in high-volume precision manufacturing applications. The addition of noncontact capability allows Solartron Metrology to meet the manufacturing requirements of smartphones and tablet computers that might be scratched by traditional touch probes. Within our programmable power business, we added 2 new benchtop products to our source in SG Series of DC power supply units. Our source in SG Series leads the industry in power density and is the most widely used DC power supply in its class, with more than 20,000 units in the field. The higher voltages and quality of power supplied by these benchtop units makes them well suited for a broad range of applications, including testing components for electric and hybrid vehicles, solar energy systems, semiconductor processing equipment, laser etching devices and the scanners used for airport security. From an overall perspective, revenue from products introduced over the last 3 years was 21% of sales in the second quarter, reflecting the excellent work of our businesses in developing the right products to serve their customers. Now turning our attention to our 4 strategy of acquisitions. We announced the acquisition of Controls Southeast this morning, which closed after the end of the second quarter. Controls Southeast or CSI is the leader in custom engineered thermal management solutions used to maintain temperature control of liquids and gases in demanding process applications. Their thermal solutions are used across a wide product range of process industries, including oil and gas, petrochemicals, plastics and pharmaceuticals. CSI is a highly strategic and synergistic acquisition for our process and analytic instruments division. The combination of CSI's thermal management solutions with our process instruments analyzers and our recently acquired O'Brien gas and fluid handling systems, now allows us to provide our global customers with a more complete end-to-end process control solution. In addition, we can leverage our market leading position in the global sulfur analyzer market to better position CSI globally. CSI was privately held and has annual sales of approximately $50 million. The price paid was approximately $160 million. The business is headquartered in Pineville, North Carolina, just outside of Charlotte. Acquisitions will continue to be a focus for us during 2013 as we see this -- as this strategy is a key driver to the creation of shareholder value, especially during periods of soft global growth. We have the financial and managerial capacity and disciplined approach to support this acquisition focus. Our backlog of deals remains excellent, our balance sheet is strong and our cash flow and financing facilities provide us with ample liquidity to pursue this strategy. Turning to the outlook now for the remainder of 2013. Our estimates for the balance of 2013 reflect the impact from the continued soft and uncertain demand environment. We anticipate 2013 revenue to be up mid-single digits on a percentage basis from 2012. Organic growth is expected to be up low single digits for all of AMETEK and for both operating groups. We expect our earnings to come in at the low end of our original guidance range of $2.08 to $2.12 per diluted share. Third quarter 2013 sales are expected to be up mid-single digits from last year's third quarter, with organic growth flat to up low single digits. We estimate our third quarter earnings to be approximately $0.51 to $0.52 per diluted share, up 9% to 11% over last year's third quarter. In summary, our overall business performed well in the second quarter. Our Operational Excellence initiatives and focus on strategic growth initiatives enabled us to deliver earnings in line with our guidance against the backdrop of a continued soft demand environment. We remain well positioned for the remainder of 2013. We have a strong balance sheet and generate significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy. Our record level of backlog, strong portfolio of businesses, proven operational capabilities and a successful focus on strategic acquisitions should enable us to perform well for the remainder of 2013. Bob will now cover some of the financial details, and then we will be glad to answer your questions.

Thank you, Frank. As Frank noted, we had a solid second quarter with very strong operating performance. I will provide some further details. In the quarter, total selling expenses were up less than total sales on a percentage basis due to good cost containment. General and administrative expenses were 1.2% of sales, below last year's second quarter level of 1.4% of sales. The effective tax rate for the quarter was 29.4 %, down from last year's second quarter rate of 30.8%. The lower tax rate in the quarter was the result of our ongoing international tax planning activities. For 2013, we expect our tax rate to be between 29% and 30%. As we've said before, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year rate. On the balance sheet, working capital, defined as receivables plus inventory less payables, was 17.9% of sales in the second quarter, up slightly from last year's second quarter. Strong working capital management will remain a key priority. Capital expenditures were $11 million for the quarter. Full year 2013 capital expenditures are expected to be $65 million. Depreciation and amortization was $29 million for the quarter. 2013 depreciation and amortization is expected to be approximately $118 million. Our cash flow was excellent in the second quarter. Operating cash flow was $128 million, up 11% over last year's second quarter, and free cash flow was $117 million. For the first half of 2013, our operating cash flow was $285 million, up 11% from the first half of 2012. And free cash flow was $263 million, representing 104% of net income. We anticipate the full year free cash flow to be approximately 115% of net income. Total debt was $1.24 billion at June 30, down $210 million from the 2012 year end. Offsetting this debt is cash and cash equivalents of $208 million, resulting in a net debt to capital ratio at June 30 of 27.3%, down from 33.8% at the end of 2012. At June 30, we had approximately $915 million of cash and existing credit facilities to fund our growth initiatives. Subsequent to the end of the second quarter, we acquired Controls Southeast. Total capital deployed was approximately $160 million. Our highest priority for capital deployment remains acquisitions. In summary, we had a strong second quarter, establishing record levels of operating income, operating margins, net income and diluted earnings per share. We are well positioned for further growth, both organically and through acquisitions, with a very strong balance sheet and cash flows.

Great. Thanks, Bob. That concludes our prepared remarks, and we're happy to open it up for questions.

[Operator Instructions] And our first question comes of the line of Allison Poliniak using with Wells Fargo.

Frank, could you just touch on, obviously, a lower expected revenue growth for this year. I mean, is there a specific end market or region that we could be more concerned about, I guess, or what's changed?

I think the biggest change, and it probably isn't a change in the sense that the markets just remained tepid. And there's no specific area in the company, it's just that the second half is not quite as strong as we had originally anticipated. And that's why we lowered our guidance just a bit, because we're really reflecting that weaker environment. So we had hopes the second half would be a bit stronger.

Okay. And then, the BRIC regions, could you touch on it? Obviously, the nice growth there. There's -- certainly, there's concerns with macro challenges in Brazil and China. Can you just talk about what you're seeing there at this point?

Yes. We've put some very sizable investments in those regions, Allison, and they're paying off for us. As you heard in my opening remarks, the BRIC countries were up over 20% in the first quarter. They were up nicely organically. And in particular, the BRIC countries outside of China were strong, with India, Brazil and Russia up sizeably. China was a bit tepid, but we're still pretty optimistic about the Chinese market. And although there are some macro concerns there, we're making investments and we still think it's going to be an excellent part of the world to continue to invest in. So overall, we're continuing to put investments in the BRIC countries and I think it's going to help our growth as we go forward.

Our next question comes of the line of John Baliotti with Janney Capital Markets.

Frank, the -- if my numbers are right, over the last 4 years or so, you've averaged about 150 basis point improvement in EIG. So I think the quarter, as you pointed out, was particularly strong, but it seems like the comps were certainly not in your favor and -- to continue to show improvement there. And it seems like with less growth there, are you finding more synergies than you originally expected, since as you pointed out, the growth was harder to come by this quarter than previously thought?

Absolutely. I mean, we have seen the growth, although it was a bit better in the second quarter versus the first quarter, we had seen -- we have seen the growth not quite at the level we would like, so we have put additional cost reductions into EIG, as well as EMG. And actually, we were quite pleased with the operating income margin performance that we saw with the 70 basis points improvement at the operating income line and in EIG, it was actually 80 basis points. And both margins were 26.8%, so very good margins. We're not going to be able, and we've talked about this previously, to continue raising the margins 100-plus basis points when you're running at those kinds of levels. But we do believe we can continue, and our guidance now is in the range of 50 to 60 basis points for the company this year at the operating income line. And although we haven't given guidance for next year, I think that's the kind of range that you could consider we would be in for next year.

Yes. And so to that point, what do you think that says about, without holding into a particular quarter or year when that -- when you see much more stable core growth? But what do you think -- let's focus on EIG, about future leverage in terms of the types of things you've been able to improve efficiency on in that segment?

We continue to think that there's leverage and there's 2 key points to the leverage. One is organic growth and EIG tends to have higher organic growth than EMG. The contribution margins in our businesses are well north of 35%. And particularly, in EIG, they're north of 40%. So for every dollar you do get in organic growth on the top line, you have a very high contribution margin to the bottom line, which is a positive impact on margins. The second element is we are continually looking to improve the operating efficiencies and the cost in our business. It's just ingrained in the blood of our operating managers, and we won't really accept the budget unless we see cost improvements. And there are additional things that we have been doing and will be doing in terms of plant consolidations, focusing on material. A lot of work in EIG on value engineering, which has really given us substantial cost improvements where we can go back and look at products and -- with minimal engineering, substantially improve the margins on those products. When you sum all of that up, some organic growth and continued cost improvements, we're pretty bullish about the operating performance of the company and we do see that we can continue to expand margins. John, just as a point, I did look at return on invested capital. And in the quarter, it was 12.9% versus 12.4% last year's second quarter. And I know you focus on that metric.

Yes. I was going to -- actually, that was something I was looking at. That's -- it's been -- that's part of the greatest improvement you've put up since the fourth quarter of 2011, and that's despite the fact that your cash was up 27 %, which is certainly a high-quality problem, but certainly didn't help your improvement in that metric.

Right. Yes, we're pleased with that, John.

Our next question comes of the line of Matt McConnell with Citi.

Could you give us a sense of the profitability on CSI and maybe price on the EV to EBITDA basis?

Yes, the price that we paid was about 9x forward EBITDA. So this business has got a very good EBITDA profit margin associated with it, but it's actually still a bit below AMETEK. So we see sizeable synergy here, sizeable leverage to improve it more. So we think the price paid has been in line with our previous acquisitions. But the good thing about this particular deal is that we have more than the average amount of synergies with this product. They do a lot in sulfur recovery and we are very, very strong in our process businesses and sulfur recovery. In the instrument side, our market shares are on the order of 70%, 80%, 90%, depending on how you put the numbers together. So you put you these 2 businesses together, and they are a powerful combination where we can further extend our reach into sulfur recovery. So we're pretty excited about it, we think we paid a reasonable multiple and we think we're going to get a super return on invested capital on this deal.

Okay, great. That's helpful. And then is there also an international expansion opportunity and could you talk about -- is CSI U.S.-centric or...

Yes, there is. The company itself is about 50% international. However, they have virtually no sales in the BRIC countries. And as we just talked in response to Allison's question, we have put substantial investments in the BRIC countries. And it's really an excellent question because that is part of the key synergies we see with this deal that they can -- we can drag them along, if you will, with our sulfur recovery efforts in the international and in the BRIC -- in particular, the BRIC environment. So we do see a sizable synergy there. We just counted it in a bit in our model. And as I mentioned, the return on invested capital on our model was excellent. So I think we have the opportunity to even do better than what is in our model, based on that sales synergy.

Okay, great. And then you mentioned in the prepared remarks that the pipeline is still fairly strong. So where are you seeing opportunities? Could there be more deals in 2013? And just give us a sense of what the M&A environment looks like in our [ph] view...

The M&A environment is okay. Our team has done a good job of filling the backlog of deals. We have a very aggressive and solid team here in the corporate office, which is augmented by our divisions. And they've done a really, really good job of working with companies and bringing some of these companies to the table without even having investment bankers involved, et cetera. So we feel pretty good about it. The first half, we obviously closed this one deal. We did have a couple of deals that we didn't consummate. And that's good for you guys and ladies because we found some problems with those deals. But I'm hoping and I would be disappointed, it may be another way of saying it, if we didn't have a solid second half in terms of acquired businesses. As Bob suggested, we have extremely good cash flow. We're estimating operating cash flow for the year, about $665 million, I think, was the last number I saw. We're going to spend about $65 million on CapEx, so we've got $600 million of free cash flow to basically deploy. And you couple that with our strong balance sheet and we're in great shape. And the key is to find good deals. It's easy to do acquisitions. It's not as easy to do good acquisitions. And we're very selective, we make sure there's synergy and we make sure they fit with our businesses. So as I say, I hope in the second half, you'll be hearing a lot from us.

On question comes of the line of Christopher Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Frank, I think the 40% incremental margin expectation for EIG that you expected is maybe more pointedly above ranges you previously discussed, if I'm not mistaken. Can you just address if anything's inflecting there or what's shifting to drive that upward?

Yes, Chris, you're probably referring to the point that I have talked about margins in the 35% -- contribution margins in the 35% or above region. When I was talking about that, it was for the full company. And the margins in EIG tend to be on the higher side. The margins in EMG tend to be a bit on the low side. So it really is not inconsistent with what we have been saying. It's -- the EIG businesses are very good. They've got high levels of differentiation. They tend to have a higher gross margins and they tend to have higher contribution margins as a result than the businesses that are in EMG. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then on the Controls Southeast, I know you've tied it in with O'Brien, but I think the thermal solutions is somewhat new. I'm just wondering what the breadth of bolt-on potential is related to that space, how fragmented is the industry, and if that's on the electric or steam heat?

It's a great question. This particular business is focused on the steam side. O'Brien is focused more in -- on the electric side. And the opportunity here is really, really good because this business, basically, one of the key core competencies is that they do complete thermal management solutions for either EPCs for the end customer or also in MRO-type of applications. So they will come in, they have proprietary software and technology that enables them to identify exactly what type of products need to be either in the sulfur process or in some other process to basically guarantee the temperature of the gases or liquids because you obviously don't want them to freeze. They're -- you get higher efficiency if they're held at the right temperatures, et cetera, and they are very, very strong in this niche. And the niche itself is relatively large, depending on how define it, it can be $3 million to $500 million. So we see that it's just a characteristic acquisition where basically, it's a niche. They've got great technology, highly differentiated and very little competition in that niche and therefore, you can make very high returns.

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

So if you wouldn't mind, Frank, doing your typical unbundling of 5 [ph] business, what you saw on the quarter?

I'd be glad to do that, Scott. So let me start with the EIG, since there's been a lot of questions regarding EIG. And I'll start with the aerospace and EIG had a really strong quarter, driven by strong performance in our business and regional jet business. Sales were up mid-single digits on a percentage basis in the quarter. In the second half of the year, we expect solid growth for our commercial and business and regional jet businesses, given both our internal growth initiatives combined with positive trends in the OEM build rates. OEM build rates for Boeing and Airbus combined are expected to be up about 7% this year. For all of 2013, EIG aerospace core growth should be up approximately mid-single digits. Moving to our process businesses, they also had a solid quarter with overall sales up low double digits on a percentage basis. Organic sales were up low single digits. Overall, our growth in the quarter was driven by continued strength in our oil and gas business, combined with the contributions from the Micro-Poise acquisition, as I mentioned in my opening remarks. And our Measurement Technology -- Measurement and Calibration business and Advantage Measurement Technology businesses were also quite strong in the quarter. For the full year, we expect our process businesses to grow high single digits overall, with organic growth up low single digits. And the last part of EIG is Power and Industrial. Sales for Power and Industrial were down mid-single digits on a percentage basis, which was driven by continued weakness, as we expected, in the heavy truck and off-road market. For all of 2013, we expect sales for Power and Industrial to be down about mid-single digits, driven by weakness in the industrial businesses. So if you sum these 3 parts of EIG, for all of EIG, we expect overall 2013 sales to be up mid-single digits, with organic growth up low single digits. And we do expect some strengthening in organic growth over the second half of the year. Moving to the other part of the company, in EMG, I'll start with the differentiated businesses in EMG. They were up mid-single digits on a percentage basis in the quarter, driven by strength in our Precision Motion Control division, including the contribution from the Dunkermotoren acquisition. Organic sales were down low single digits in the quarter, driven by weakness in our EMIP business and our North American MRO business. For all of 2013, we expect our differentiated businesses to be up mid-single digits on a percentage basis, with overall organic growth approximately flat. Floorcare and Specialty Motors, our legacy business, had just a stupendous quarter. They performed very, very well. Sales were up 10% organically in the quarter and profit margins were excellent. This was driven by winning some business that I have talked about before, with in particular, one OEM, but also a second OEM has also been made or been acquired by us. So that for all of 2013, we now expect sales for Floorcare and Specialty Motors to be up mid-single digits. So if you sum these 2 parts of EMG, we are now expecting EMG to have overall growth mid-single digits in 2013 with organic growth of low single digits. And also, we do expect some strengthening in organic growth over the second half of the year. My final comment would be, as I mentioned in my opening remarks, if you sum what I said about EIG and EMG and look at AMETEK as a whole for 2013, we're expecting mid-single digit sales growth, with organic growth up low single digits.

That's perfect. That's exactly what we're looking for. But if you don't mind, 2 questions do stem from that. Number one, the EMIP business has now been weak for several successive quarters, I was kind of wondering what your thoughts were on that business and what the cause is. And then secondly, third-party MRO North America sounded like it was down, maybe the why behind that as well.

Sure, Scott. The EMIP business, you're absolutely right. It has been weak the last few quarters. One of the drivers for that weakness is that we make master alloys, or components that are used for master alloys, that basically produce titanium that's used in the aerospace industry. And there was pent-up demand for that and basically buildup of inventory, I should say, rather than pent-up demand. It was really a buildup of inventory in that cycle. As you know, the 787 was delayed. And even irrespective of the 787, there were a lot of take-or-pay contracts from the aerospace OEMs that they had to take titanium when they really didn't need it. And that is just starting to bleed off at this point. So that's a dynamic in the marketplace that should improve. Secondly, a major part of this business is U.S.-focused and the U.S. economy has been weak, so there's just general weakness in that business. And we're forecasting that it will improve as we go through the second half and I think we will see improvement in that business. The second question you had was on the third-party MRO business and yes, you're absolutely right. That was weak in the second quarter. That weakness really stemmed, again, from the U.S. marketplace. The international portion of our MRO business was actually quite strong and did well, but there was weakness in the U.S. piece of the MRO business. And you may recall that many other companies in the first quarter spoke to weakness in their U.S.-based MRO businesses and I think we have just seen a delayed impact of that and we saw it in the second quarter. It was not as big an issue as EMIP was, but it did contribute to basically some of the slower growth in the EMG side of the business. And I can tell you, it's looking better. July was actually very strong in the U.S., which was surprising, given what we saw in the second quarter. So hopefully, we're sort of through the knee and this business will improve throughout the second half, Scott.

Our next question comes the line of Brian Langenberg with Langenberg & Company. Brian K. Langenberg - Langenberg & Company, LLC: Two things, Frank. First of all, in oil and gas, if you could just dive a little bit deeper into what you're seeing as far as you have visibility between upstream, midstream and downstream. And then within oil and gas, a couple of companies are talking particularly about long cycle, which you alluded to. Talk to us about MRO within oil and gas and long cycle to the extent you have visibility. And I have a small follow-up.

Sure, Brian. In terms of oil and gas, it performed very strong in the second quarter and we're forecasting it to continue to be strong through the rest of the year. Obviously, the price of oil is one of the key drivers to the marketplace, in general. If you look at the international rig count, it's a bit off of its recent peak, but it's still at a very, very high level. So this is clearly a driver. In terms of your question between upstream, midstream and downstream, our strength is focused in the upstream area. We're seeing extremely good strength, both in the U.S. as well as internationally, in the upstream segment. The midstream segment is okay. It's actually improving a bit. The downstream area is the weakest of the business, but we're also feeling a little revitalization in the down -- in the downside of that business as well. So overall, a good picture, driven largely by upstream. In terms of your comment about long cycles, there's no question that this is a longer-cycle business. When AMETEK looks at its businesses, we characterize the -- basically, the oil and gas business along with our power business and more importantly, our aerospace businesses as the longer-cycle components. And you add all of them up and they are about 1/3 of our volume, but about 40% of the overall profitability of AMETEK. And the MRO business is okay. It tends to be more focused on the downstream side, and so my comments on the downstream side are probably more reflective of the MRO than the upstream area. But we expect that's going to continue to sort of improve as the year goes on, so I hope that's... Brian K. Langenberg - Langenberg & Company, LLC: Great. Yes, that's very helpful. And then just one other question. With respect to the CSI acquisition, the way you talked about it, it seems to me that, that acquisition actually increases the value of your prior acquisition of O'Brien.

Absolutely. Brian K. Langenberg - Langenberg & Company, LLC: And then my question, it's a nuance question, at the time you bought O'Brien, when you did that deal, were you thinking in terms of it works on the numbers as is, or was there a thought process to other things that you knew you would end up acquiring in due course, probably [ph] just play out [indiscernible].

That's an interesting debate internally when we do acquisitions. But our philosophy is, whenever you buy a business, basically, you've got to make that business stand on its own from a financial viewpoint. So when we did O'Brien, we looked at that on a standalone basis. We understood there were opportunities to add other businesses. And just as a point, the CSI business and O'Brien, both came out of the same private equity company, and there was even considerations within the private equity company of combining these 2 businesses before they sold them. But for whatever set of reasons, they decided to sell them sequentially. And when we looked at this business and we knew it was available, the seller IGP, who we've got a real good relationship with, I think, decided to go with us because they know that we know how to close deals and therefore, we can capitalize on that relationship and capitalize on putting these 2 businesses together. And obviously, we can employ synergies that a private equity firm would not be able to, all of my discussions around the sulfur recovery, et cetera.

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

Just a couple of questions. First, can you sort of talk about the cadence of incoming order rates as the second quarter progressed? So in looking at April to May to June and then what you've seen, I would imagine, you have at least a preliminary order number for July at this point for the company?

Sure, Matt. If we look at April, May and June, which is basically, obviously, the second quarter, the orders were basically flat through the quarter. There wasn't any major uptick at the end of the quarter. They were basically flat. July, surprisingly, came in strong. And it wasn't just on orders, it was on shipments as well. So we were very, very pleased with July, both from a orders and sales viewpoint, but also from a profitability viewpoint. One month does not make a trend in terms of an upward tick. But we were surely delighted with what we saw in July and hope that, that continues throughout the rest of the quarter and throughout quarter 4.

I know you mentioned BRIC earlier. Can you put some geographic color behind what you just said beyond BRIC?

Yes, I can put some geographic color on this. And you're probably going to be a little bit surprised by the numbers that I talk about. So if you look at our -- I'll take organic growth, which is probably the most applicable to your question. And in the second quarter, organically, we were flat on sales. And if you look at the disbursement around the globe, we were down about 4% in the U.S. organically. And there was no specific area for that, it was just general weakness, I would say, in the U.S. marketplace. Surprisingly, Asia was actually down a bit organically as well, but that was mainly due to some very tough comparisons that we had in Asia. We have booked some very large, we had some strong business in our UPT business. And so there was definitely an impact due to that. Another factor in there was Fukushima, because we had really spiked up our shipments last year. So that organic growth, although a low number, is probably not a good indicator of the future organic growth of Asia. And then, the part that I think might surprise you is that Europe was actually up about 5% organically. And that was really driven by our oil and gas businesses, which were very, very strong. We do roll up the Middle East and Russia and the former stan states into our Europe, if you will, and they were strong. And we also had some very strong shipments of our ORTEC products to Abu Dhabi, actually. And they also contributed to the strong performance in Europe. So that's the picture of what happened in the second quarter. I think as we go forward on more normal trend, we'd probably make sense and that's what we forecasted where if you look at the growth, the growth will be the highest in Asia, the U.S. will be in the middle and Europe will be the weakest. And so that's our thought process going forward.

And then just lastly, price realization, second quarter, year-over-year?

Yes. Price realization was 1.5% in the second quarter. Just an extension of your question, we roll up everything in terms of cost inflation on the input side, not just material, but labor, everything. And the net result of profit minus inflation, if you will -- actually, the pricing minus inflation, was about 0.6% in the quarter.

Our next question comes from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Frank, could you just walk through the pieces of the aerospace business? I think you spoke to the MRO business, the third-party MRO business. But could you just walk through those 4 pieces again and just kind of reflect against the total aerospace growth rate in core?

Yes. If you look at all of aerospace, it was actually on sale, slightly negative in the quarter. The sale -- or excuse me, the order growth was actually very, very good. It was up sort of mid-single digits. And the other areas, the EIG portion, which is largely the commercial aerospace portion, was strong. That was up mid-single digits. The third-party MRO, we've already talked about. Business in regional jet was quite strong. The weakness really came out of the military segment, which is about 35% of the business and that was down 2% or 3% organically. So there was some mixed results in the quarter, but we were very optimistic because of the order incoming rate. And as we go forward, we expect this business to be up overall in the mid-single digit region on the sales line. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: For '13 that you're seeing, or for the second half or for '13?

It will be both. It would be both. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just -- it's interesting, the military business, I think, you had cautioned about that very early in the year when sequester is just what's going on with the military budgets. Is that -- a number of 2 things, it is that primarily a U.S. business? And then secondly, again, are we seeing that impact and should we kind of expect the military aerospace business to be down low single digits here into the future for the next maybe 4 quarters?

Yes. Well, first of all, it's 50-50. About half of our military business is U.S.-based and about half of it is outside the United States. In terms of our projections, you're right on. We are forecasting this to be down a few points. But that's much better than we had thought it was going to be. When sequester initially happened, we were really thinking this business could be down mid to high single digits organically. And the fact that it's just down 1 point or 2 is actually good news for us. And in discussions with this operating team, we don't see that changing for the next few quarters, so I think it's going to stay in that region. It's not going to be -- it's obviously a deterrent to the overall goal, but it's not going to be what I would consider a major problem to AMETEK. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just lastly, as I look at the second half of the year and I look at the 2 pieces of the business, EIG and EMG, again, the expectation for all of '13 is that core growth in both pieces or segments of the business is plus low single digit. And given how the first half played out, it would basically appear that maybe the growth in EMG might slightly exceed EIG for the second half? Is that just a comparison issue or is that rounding?

Yes, slightly, you're right. The key to the organic growth in second half of the year, Richard, is actually the fourth quarter. And we have an easier comparison in the fourth quarter, plus the normal cyclicality of our business is to have a stronger fourth quarter in terms of total sales. And actually, we went through some numbers yesterday and about half of our anticipated growth in the fourth quarter is due to an easier comparison and about half is due to a tick up in sales. So when you sum that very strong fourth quarter organically, that's how you can get to this low single digit number. In terms of -- let me just look here between EMG and EIG, and -- let's see, in the third quarter, we still have EIG a bit stronger. But you're right, in the fourth quarter, EMG is stronger. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, okay.

Okay. Does that help? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I know we're rounding your very low numbers but nevertheless, it does help.

[Operator Instructions] And our next question comes from the line of Mark Douglass with Longbow Research.

Just quickly, what were payables?

$332 million.

$332 million. Okay, great. And what's the acquisition -- it seems like a great fit, Frank, for the Process group. What are you expecting as far as annual accretion?

We don't expect any significant accretion this year, mainly because we have some acquisition-related expenses that are associated with this business. But as we go into next year, there's a couple of pennies here of accretion, that's about the magnitude. That's probably conservative, but that's basically what we have in our model.

Okay. It sounds pretty conservative. Okay. Now what's your current capacity for M&A? And then how much more debt could you layer on to be in your comfortable -- your comfort range for net...

Cash and existing facilities is about $950 million.

Right. But I mean, our debt to EBITDA is 1.36. Our covenants are at 3. We could easily lever up to -- 2.4 and 2.5 and keep investment grade. So the bottom line is we are not cash strapped in any way to do deals. It really comes down to finding good deals. We've got plenty of capital to do the acquisitions piece of the strategy.

Yes, I wasn't concerned that you didn't have capital since like you have a lot of capital. I'm just trying to frame how much...

Right, it's available.

How much you would have maybe in the next 12 to 18 months in order to continue to accelerate your [indiscernible] valuation to get a little more reasonable?

Probably we can go between $1 billion and $1.5 billion when you lookay at our free cash flow.

I would say $1 billion, $1.5 billion.

Our next question as a follow-up question from the line of Scott Graham with Jefferies.

Frank, you almost answered the -- one of my 2 questions. The purchase accounting charges in the third quarter, is there an expectation for that?

Yes, absolutely. And as you know, we don't strike those out, as most companies do. But there is at least $0.005, I would say, that may have flipped our estimates up 1 point higher, $0.01 higher if we had spiked it out. But we typically don't spike it out, as you know.

Yes. And then secondly, if you wouldn't mind, to the extent that you're able, the second half, the pipeline for M&A, you sounded pretty optimistic about being able to close possibly multiple deals. Could you maybe size what you're looking at a little bit? And obviously, these things come and go often. But is there anything maybe a little bit outsized versus what we -- versus let's say, the one you announced today? Just maybe just give us a little bit of a framework for what is in the pipe, size wise.

Difficult question, Scott. And I'm sure you knew it when you asked it. But we do have a wide range of deals in the pipeline, all the way from smaller deals like this one of $30 million to $50 million in sales, up to deals we're looking at that are $200 million, $300 million, even $400 million in sales. And as you say, the pipeline, it changes, deals come, deals go. And what I can tell is we're very focused on the deals. Actually, the executive team here be meets every Thursday at 5:00 and that meeting is solely focused on acquisition pipeline and where we are and what deals are we bidding on, et cetera. So it's a wide range, it's in various different segments of the business. It's not in any once segment. There are substantial numbers of deals in process. There are some in the Power business and aerospace and some in the Electromechanical side of the business as well. So there's no way that I can really tell you or give you any guidance as to what we're actually going to close and where it is and how big because I honestly don't know. So that's not very helpful, but those are the facts.

No, I wasn't asking that. It just sounded like you were optimistic on closing 1, 2 or more? That's just essentially the tone that I read from you.

I think the tone is right.

Our next question comes from the line of Andy Noorigian with Vertical Research.

Just a quick question. I was wondering how Dunkermotoren and Micro-Poise did kind of on a standalone basis? I mean, how those are kind of comparing to your acquisition cases? And also as they roll into organic growth there, are they going to be organic growth positive, negative as we look at the back half?

Yes. No, I would say that both of those deals are doing well for us. Micro-Poise is pretty much on the model, Dunker is a bit behind. But we're pretty optimistic that as we go forward, we're going to get good growth out of both of these and organically, they will be up as they sort of roll over on their annual or anniversary dates. So they'll be helpful to the overall organic growth of the company.

Okay. And then just one quick follow-up. On the point you made about the U.S. organic growth being down about 4 points, is there any way you can flush that a little bit more? Was that the military aero, or is there something else going on in there?

Actually, it's interesting because I looked at that this morning in anticipation of this question and it was just broad-based. There's no single thing that I can point to and say this part of the business or that part of the business was the issue. I mean, there was some softness in our industrial business, that I talked about in the -- in my opening remarks. So that was there, but that wasn't the prime driver to the U.S. business being down. It was just general weakness. It's not the greatest environment, as we all know, in the U.S. and hopefully, it's going to get better as we go forward.

And there are presently no further questions at this time.

Great. Thanks, Allana. Thanks, everyone, for joining our conference call. As a reminder, a replay of the call may be accessed on the Internet at ametek.com and at streetevents.com. And as always, if there's any further questions, I can be reached at (610) 889-5247. Thanks so much.

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.