Ladies and gentlemen, thank you for standing by and welcome to the AMETEK Q4 2014 earnings conference call. [Operator Instructions] As a reminder this conference is being recorded Wednesday, January 28, 2015. I would now like to turn the conference over to the Vice President of Investor Relations, Mr. Kevin Coleman. Please go ahead, sir.

Think you, Frank. Good morning, everyone. Welcome to AMETEK's fourth-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 fourth-quarter results were released earlier this morning. These results are available electronically on Market Systems and on our website at the investors section of www.Ametek.com. A tape of today's call can be accessed until February 11 by calling 800-633-8284 and entering the confirmation code number 21758655. This call is also webcasted. It can be accessed at www.AMETEK.com and www.streetevents.com. The 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 AMETEKs filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I'll also refer you to the investor section of www.AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call. We will begin with prepared remarks, and then we will open it up for questions. I'll now turn the meeting over to Frank.

Thank you, Kevin, and good morning, everyone. AMETEK had a strong fourth quarter to complete another excellent year. In the quarter on an adjusted basis we established records for operating income, net income, diluted earnings per share and operating cash flow. In the fourth quarter, we incurred additional Zygo integration costs of approximately $0.01 per diluted share. Including the costs from the third quarter, total Zygo integration costs in 2014 are approximately $0.05 per diluted share. The additional fourth-quarter integration costs increases the expected Zygo synergy benefit from $15 million to $20 million. All financial results and commentary on the call today will be on an adjusted basis excluding these integration costs. Now, onto the full year and fourth-quarter results. For the full year 2014, we established records for essentially all key financial metrics including orders, sales, operating income, operating margin, net income, diluted earnings per share, and operating cash flow. Sales were up 12% for the year; orders were up 13%; operating income was up 13%; operating margins were 22.8%; and diluted earnings per share ended at $2.42, a 15% increase over 2013's diluted EPS. In the fourth quarter, sales increased 9% to $1.02 billion. Organic growth was up 2% against a very difficult comparison in the fourth quarter of 2013 while acquisitions added 9% and foreign currency was a 2% headwind. Organic growth in the fourth quarter was excellent with broad-based strength across our businesses. Overall orders were up 10%, and organic sales were very strong, up 7% on orders. Operating income for the fourth quarter was very strong. It increased 10% to a record $232.3 million. Operating income margin in the quarter was also very strong at 22.7%, a 40 basis point improvement over the fourth quarter of 2013. Net income was up 14% to $155.2 million,…

Thank you, Frank. As Frank noted, we had an excellent fourth quarter with strong operating performance and an excellent quality of earnings. I will provide some further details. In the quarter, organic selling expenses were up less than organic sales on a percentage basis. General and administrative expenses were up 8% over last year's fourth quarter driven by a contribution to the AMETEK charitable foundation in the fourth quarter. As a percentage of sales, general and administrative expenses were 1.2% of sales in line with last year's fourth quarter. In the fourth quarter, total other expenses were down approximately $4.5 million versus the fourth quarter of 2013. This $0.01 per diluted share benefit was more than offset by realignment costs of $0.02 per diluted share taken in the fourth quarter, resulting in a high quality of earnings. The effective tax rate for the quarter was 27.1% essentially in line with last year's fourth quarter of 27.2%. We are very pleased with the success of our ongoing international and state tax planning initiatives. For 2015 we estimate our tax rate to be between 28% and 29%. As we have said before, actual quarterly tax rates can differ dramatically either positively or negatively from this full-year rate. Overall, our quality of earnings was excellent in the quarter. On the balance sheet, working capital, defined as receivables plus inventory less payables, was a very strong 17.1% of sales in the fourth quarter and 17.6% for the full year. We remain one of the top performers in our peer group, and our working capital performance is a direct reflection of the tremendous strides our business units have taken in driving towards operating excellence. Strong working capital management will remain a key priority. Capital spending was $24 million for the quarter and $71 million for…

Great. Thank you, Bob. Frank, we will now open it up for questions.

[Operator Instructions] Our first question comes from the line of Allison Poliniak with Wells Fargo Securities. Please proceed.

Hi, guys. Good morning.

Hello, Allison.

Obviously we can't let this call get away without talking about energy. Frank, can you give us a sense of what you're seeing out there today and how we should think about 2015 in the parameters of what you talked about with guidance?

Sure, Allison. In essence, we have included in our estimates what we believe is going to be the impact of oil prices falling to the levels that they're at which is obviously a very depressed level. If you look at our business, we have about $125 million of our business that is focused on upstream oil and gas. And in total if you look at the amount of business when you include the downstream and the midstream piece, it's about $400 million. We've done a roll up. We estimate that the impact on our business is going to be about $40 million in sales. As I mentioned, that's included in our estimates. The majority of that is in that $125 million upstream part of the business. So we believe we have the impacts covered. There will be a counter effect that's positive that is difficult to predict in terms of exactly what the magnitude will be, but there should obviously be a positive impact on the US economy that should result from this reduction in oil prices. But we haven't assumed any of that in our estimates.

That's great. Just touching on your EBIT expectations for 2015. We continue to hit new highs. How should we think about 2015 just given the mix of your business now?

Another great question, Allison. We have rolled up, in a very detailed manner, the budget for 2015, and although our margins are very good and very high, we do expect that we can continue to expand margins, and we are estimating a 30 to 40 basis point improvement in margins for 2015 over 2013 or 2014. And the drivers for that are really 2 things. One, is the fact that we expect organic growth in 2015 to basically have a very high contribution margin going to the bottom line. As you've heard us speak before, our contribution margins are very good. In 2014, the actual contribution margin for the Company was actually greater than 40%. We have told you to estimate 35% for our contribution margins, but we tend to outperform that, so you take that organic growth and that will go to the bottom line through that contribution margin and thus that will be a lift on the margin performance of the Company. The second thing is our very aggressive cost reduction activities. You heard in my opening comments that we're, I would say, conservatively expecting $110 million of cost improvements going through the P&L in 2014. We've been aggressive on the cost side. You heard the $0.02 of realignment costs that we put in the fourth quarter. As we saw the price of oil go down and we saw some of the FX impacts, we decided to take a bit aggressive stance in terms of additional cost reductions. So we're pretty confident in that $110 million of savings, and you sum those 2 and that leads to basically the 30 to 40 basis points of margin improvement.

Perfect. Thanks so much.

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

Good morning.

Hi, John.

Hi, John.

Hey, Frank. Obviously a lot of the strategic M&A activity over the years has been in EIG, but EMG's performance in 2014 was very solid. I'm sure you're aware of that. You've always been – the Company's always been very consistent with the outlook for the year, so I was just wondering how does that – the operational focus and the benefits that you've gotten this year – how does that position in terms of manageability of the operations in this environment? It's obviously a tougher year I think than we expected.

I think that's right. I think everybody looking at 2015 now versus just a few months ago are seeing headwinds if you're in the general industrial space as we are. And we feel this positions us in a very, very positive way. We are very, very good at cost and asset management. You just heard me talk to Allison about the basic improvements we're going to put through the P&L which helps when the economic environment is not as strong as we would all like on a worldwide basis. And we view it as a great time to be aggressive in the acquisition front. We've got plenty of cash flow as Bob mentioned in his opening remarks. We're going to focus on acquisitions, and we believe there are good targets out there that we can buy at reasonable multiples, add value to, and continue the growth of the Company through both organic and acquisition type of activities.

So to that point, I know you've done a number of the deals especially in the aerospace area have been complementary where they fit in nicely. The are nice tuck ins with their current operations. Does the environment – does that strengthen the conversation you have with other companies where they might be more focused might, be more concentrated in an area? Does that open up the conversation a little bit more now given this environment than maybe a year ago?

I think in general I would say if I look back in history, obviously we've been doing deals for many, many years and what tends to happen when the global economic environment is sort of difficult, many companies decide it's a good time to buy – or sell. So it's a great time for us to look at buying those companies. We continually and think you know, John, we've got a team here that nourishes deals, works with companies over an extended period of time and on occasion they will just come to us and say – hey, now we are ready. And I think the global economic environment will foster some of that.

Great. Thanks very much.

All right, John.

Our next question comes from the line of Matt McConnell with RBC Capital Markets. Please proceed.

Thank you. Good morning.

Hi, Matt.

So, the 4.7 million shares that you repurchased in the quarter, is that more than you would need to offset dilution? And I wonder if based on the cash flow and the balance sheet, could you enter a period where you do both buybacks and acquisitions? I know obviously acquisitions are the primary use of capital, but do you have enough flexibility to do both going forward or is this more of a one-time repurchase?

Yes, if you look with the amount of shares that we bought back, the 4.7 million shares, and you look back over the last few years, we have not bought back any shares. As Bob mentioned in his opening remarks, we do that opportunistically. We felt that the stock price actually didn't move as well as one would expect in 2014 given our truly superlative performance. So we took advantage of that. And in essence, that 4.7 million shares does offset the dilution if you look back over a number of years. We're not changing our strategy. We are basically going to focus on acquisitions as you said. Would it be possible in the future that we take some of the capital and buyback more shares? I never want to say no, but that's really not our thrust. We think that we can create the most value for shareholders by basically buying companies and making them better and getting the synergies with our present operating units. So there is no present intent to do some type of major buyback. Also implied in your question is, do we have the flexibility if we wanted to do some buybacks along with doing acquisitions? Absolutely. The cash flow of the Company is superlative as Bob mentioned. There's a significant amount of capital that we have available to us. So we are not capital constrained. And if we got to a point where there weren't as many deals on the table as we would like, we would surely consider it. But it's not our present thought process.

Since we have Dave on the call, maybe I can touch on a business which I think you should know well, just a status update on Zygo. So maybe give us a sense of what kind of margin improvement has been driven there over your 6 or 7 months owning it. And I know that this probably has margin potential above the AMETEK average, so there are probably some big initiatives left on the integration front. So can you walk us through what the priorities are and maybe the timeframe for reaching what you think is the margin potential at Zygo?

Sure. As Frank mentioned earlier, we took an additional $5 million of costs to get – increase our benefits that we're going to get from Zygo at about $20 million in cost synergy. And we are very pleased with the progress and integration we've had so far. When we bought the business, the margins were in the low teens, and we ended the year in the mid-teens and at the end of 2015 we expect to be in the high teens. And as you said, we expect it to be above the AMETEK average when we are done. We are really seeing efficiency in all areas that we can improve the business. The most – the biggest change that you see right now is we have put a new management team in place. There's an AMETEK P&L leader and an AMETEK finance leader at the business. And they've gone through and put a new work structure in place that brings P&L accountability to the business. I think that long-term, we're very bullish with the Zygo technology and the AMETEK financial discipline and OpEx we're going to have a great return for shareholders.

[Operator Instructions] Our next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed.

Thank you. Good morning, everybody.

Hi, Christopher.

Hey. Just wanted to dive into the current state of the pipe line, Frank if you could, talk a little bit about the relative degree of actionability across the size ranges and then in particular if any of the deals over the past couple of years are really supporting their own active pipeline.

Yes, actually hat's a great question, Chris. The pipeline remains good in terms of size of deals. We are looking at deals that spread all the way from technology deals where the revenue is not all that significant to what I would say are the typical sized deals for AMETEK which would be in that sort of $100 million revenue category. And our pipeline also includes larger deals. Deals that are up in the $500 million kind of range in terms of sales. As you know and what I've said many times, we are not looking to do a merger of equals. So we're not looking at companies that are sort of multi-billion dollars in size. But we've got a good range of deals. There are actionable deals and you never can tell when a deal is going to close or if it's going to close, but we are remaining very, very active, and it's a top priority of our management team to focus on deals and bring them home.

Okay and then a bit of a bookkeeping question. Given the magnitude of FX changes that was seen is there a rule of thumb how translation impacts incremental margins in overall dropthrough to the bottom line?

No we really don't have the kind of rule of thumb. But I can tell you to give you a flavor of that, if we looked at 2015, we looked at currency rates that are pretty close to where they are today, and the impact was about 2% on the top line maybe a little bit greater than 2% on the top line. And on the bottom line it was about $0.05 per share. So that sort of gives you a calibration point, and we have included that in our estimates so that we are assuming that kind of currency impact. We're relatively balanced in terms of cost and sales in currencies so that the impact on us is there. Wish it weren't, but it's not all that sizable.

So just to be clear, your guidance isn't tethered to like a 12/31/2014 exchange rates?

No it isn't that close. It's probably the average over the last 4 to 8 weeks. Something like that.

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

Hey. Good morning, everybody.

Hello, Scott.

Hello, Scott.

I'm going to, of course, Frank, ask you to unbundle the business units if you don't mind. But I had a couple of – for the organic growth that is – I had a couple of other housekeepers I wanted to maybe piggyback on Chris's question. What was the impact of FX EPS-wise in the quarter?

Virtually nothing. Virtually nothing on the bottom line in terms of EPS.

Right. What are the Company realize in pricing for the fourth quarter?

Another good question. We're up about 1.6% in pricing. Just to follow on the inflation was about 0.8%. So the net of those 2 was about 0.8% to the bottom line.

And that's exactly where this question was going. Do you expect to be sort of price-cost positive in 2015?

Absolutely, Scott. We focus on that ratio like a hawk is probably the best way to describe it. And our estimates – and it's somewhat difficult to estimate exactly, but our estimates right now are between 1.5% and 2% on pricing, and inflation running a little bit higher this year. Probably closer to 0.8%, 0.9%, 1%, something in that region. So that's essentially what's baked into our budget.

And my last question, again before you unbundle things for us, Frank, again if you would. The productivity number as expected, as I expected at least, $100 million-plus. Typically however you get there without the need for any realignment, because you kind of take your second and third pass through acquisitions and what have you. I guess my question is, is there upside to that $110 million for 2015?

Absolutely. It's a conservative number. You know our history, Scott. We typically come out with a number and then as our operating units perform and we have confidence that they're going to do more, we will raise that as the year goes on. So I personally would be disappointed if we didn't end up well above that $110 million number. But we'll update you in each quarter.

That would be great. Thank you.

I will give you an update on the various businesses as Scott asked. I'll start with EIG. EIG aerospace had really a super fourth quarter with organic sales and orders both up low double digits reflecting excellent growth in our regional and business-to-business and a continued strong growth in our commercial aerospace business. As we look ahead to 2015, we expect EIG aerospace sales to be up in the mid-single-digit region, and that's going to be driven by the continued ramp up of our key commercial OEM platforms and solid growth in business and regional jets. Our process businesses had a solid fourth quarter to complete really an excellent year. In the fourth quarter overall sales were up low double digits on a percentage basis. Organic sales were flat, but it was against a very difficult comparison from the prior year. Overall growth was driven by contributions from the recent acquisitions which were Creaform, VTI instruments, Luphos, Zygo, and AMPTEK. We are already seeing the benefits, as I mentioned in my opening talk, from the AMPTEK acquisition with the introduction of a new product at EDAX using AMPTEK's detector technology. Also, the introduction of a number of new products at Creaform has been very well received by their customers. So in mid-2015, we're optimistic. We expect our process businesses to grow mid- to high-single digits overall with mid-single digit organic growth. And the third part of EIG is power and industrial. Power and industrial businesses had a strong fourth quarter. Overall sales were up approximately 24% with the growth driven by the contributions from Teseq and Powervar. These 2 acquisitions that we did recently, and we're very pleased with the success of those acquisitions both of those businesses are performing quite well and are actually exceeding the models we put…

Our next question comes from the line of Joseph Radigan with KeyBanc. Please proceed.

Hey. Good morning, guys.

Hey.

Frank, on the cost reduction targets, last year you came in expecting 90 cost savings 60 sourcing, obviously you did better than that as you do every year. Can you maybe just explain the process you go through to identify that number going into a year and then how you flex it up as necessary? I'm sure it's not just an arbitrary number out there, but maybe give a little bit more granular detail on how you derive that number?

There's chuckling going on in the room, because it's really not arbitrary. We do a very extensive process as we go through the budgets for 2015. And for every one of our operations, we ask them to identify growth projects in terms of how they're going to grow the top line. We ask them to look at pricing. We look very intently at inflation, and then we look at cost improvements that they need to put in the business so that they get a good return for shareholders. It's a very detailed analysis in each of those parts of the business. So every business has a cost improvement target that they are not only focused on, but there is also an element of their compensation which is related to it. And what Bob does is rolls that up from throughout the entire Company, and that provides a number to us and quite frankly we gave that a bit of a haircut, because not every business unit is going to make their exact target as some are going to over perform some are going to under perform. And therefore when we first come out and talk with you, we give you a conservative number, and then as we go through the year, we will look to see how the overall Company is doing, and we tend to raise it. And there will also be dynamics in businesses where they'll get into the year, and they'll say – some businesses will say, the year looks a little tougher and we're going to do a little bit more in this area. And then there number goes up. So it's a flexible type thing. We look at it very closely and it's not just a swag. It's analytically driven.

On the revenue side, book-to-bill has been below one for the last couple of quarters. I know you guys, a lot of your businesses are long cycle so orders can be lumpy. You can't really look at it necessarily on a quarterly basis, but in this kind of choppy organic growth environment, are there any growth accelerators that are within your control. I mean you're calling for low- to mid-single digit organic growth. How much of that do you think is within your control in this sort of environment?

I think a fair amount of it is in our control. We are putting hefty investments in RD&E that we talked about. And obviously they're going to have an impact on the organic growth. And the products that come out and are produced the better they are the more market penetration we're going to get. We're going to continue the investments in international regions. You heard some of the data that I provided with the strong growth that we are seeing in international. So we're going to continue to put those investments in and focus on the distribution system both outside the US and inside the US. And actually that book-to-bill that you're talking about it was 0.99 in the fourth quarter, but actually it was driven by the FX effect on backlog. So if you take that out the book-to-bill was actually pretty much in line. So it's hard, as you mentioned, with the type of businesses we have to focus on that backlog number. But we feel pretty good about it. It's $1.2 billion. It's up a nice amount from the end of the previous year so – and very importantly, the organic growth in orders in Q4 was very strong as I mentioned in my opening remarks. It was up 7% so a very very good number. Actually the organic growth in orders for all of 2014 was up 4%, a fairly healthy number in this environment.

Last one on the aerospace side. You talked about what you're seeing in EIG. Can you maybe talk about what you saw on the EMG side the third-party MRO and the military and what your expectations are for 2015 there?

Okay I'll take that. If you look at the MRO business, those markets for 2015 are going up 3% to 4%. That's the general market growth. We're calling for mid-single digits in that part of the business so we expect it to be reasonably good. The surprise is military. We all expected that military was going to be a real drag on the business. And in fact, in the fourth quarter our military business was up mid-single digits, and we really scrubbed this number, but for 2015, we're expecting it to be up mid-single digits as well. That's being driven by a couple of things. It's not as much driven by the US military market as it is the international business. We've got a good amount of content in military in Europe, and that business is doing quite well. So there's a fair amount of confidence. And actually when you look across all of aerospace for the Company for next year, we're looking at mid-single digit growth in essentially all the parts of aerospace. It might end up a little bit stronger in commercial than what we're calling for right now, because obviously there's some key drivers going on there with new platforms, but overall aerospace is a good picture for us right now.

[Operator Instructions] Our next question comes from the line of Brian Konigsberg with Vertical Research Partners. Please proceed.

Yes. Hi. Good morning.

Hi.

Hi.

Hey. Just a quick question, and I apologize if you discuss this already. The other income line you had a positive impact in the quarter. Typically that has seen some costs accrue into that line. Can you just spell out what that is and what – is there any assumptions in 2015 that we should be aware of?

This is Bob. The answer to the question there is we had a settlement to the gain on some old insurance policies that relate to environmental policies that actually just benefit from in the fourth quarter and that's really what's lowing through.

If I could just add to what Bob said. If you look below the operating income line, obviously we picked up a benefit there that was offset to some degree by the increase in interest expense that was due to the private placement we did, so we picked up sort of a penny below the line. But as we mentioned several times during the call, we actually took a couple of cents of realignment costs above the line and as a result, our earnings were really a very high quality, so we felt very good about that.

And then your interest expense for 2015. You expect that to be mid-80s?

We expect that it's going to be an incremental increase of about $0.03 per share as we go into 2015.

Nothing in the other line?

No, I think the other line will kind of normalize as we expect 2015 to progress.

Understood. And then just one other question. The guidance on the process of business. You kind of spelled out for kind of I guess gave us a more detail on the exposures to up mid-and down. You are seeing the main exposure on the upstream was $125 million. You're saying – I think you're saying there's about a $40 million sales impact expected in 2015 which would expect a 10% drop. I guess if you just layer that in, and I think that's about 25% of the process business, it suggests the remainder of the business are expected to do really, really well.

Yes, absolutely.

Maybe can you just give a little – is that really – is that how we should be looking at it?

Yes, I'll let Dave take that question.

The ultra precision technology business and the materials analysis division are now much bigger parts of the process, and they are tied to the general industrial market and the research market that's about 80% of the process business now. And those businesses are going very well. We are seeing organic growth related to new product introduction and global expansion. Those 2 businesses while the oil and gas business was growing very nicely through our acquisition strategy have become a much bigger part of process and that's where the growth is coming from.

And then just mid and downstream. So you don't anticipate any impact those markets at all. We have started to see some cracks in a couple of downstream projects a couple refineries were canceled or pushed out last week. We saw a gas to liquids project pushed out. What is your expectation? Is that holding it firm in 2015, or are you baking in some potential weakness in numbers?

We are baking in some potential weakness. It's not nearly like the upstream, but we are baking in some weakness. Basically we are balanced geographically in that part of the business, and we are seeing the larger international projects moving along. There is a big aftermarket component in that part of the business. About a quarter to a third of the business is aftermarket, and there's some demand drivers and environmental regulations that are impacting the business positively. So we see a slight decline but nothing like the upstream, and that's all factored into that $40 million.

Mr. Coleman, there are no further questions at this time. Please continue with your presentation or closing remarks.

Great. Thank you very much. Thanks, everyone, for joining the call. A replay of the call will be available on www.AMETEK.com and www.streetevents.com, and as always I am available for further questions and can be reached at 610-889-5247. Thanks again.