Ametek Inc (AME) — Q3 2019 Earnings Call Transcript

Thank you, Justin. Good morning and thank you for joining us for AMETEK's third quarter 2019 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. AMETEK's third quarter results were released earlier this morning and are available on market systems, in the Investors section of our website. This call is also being webcasted and can be accessed on our website. The webcast will be archived and made available on our site later today. During the course of today’s call, we will make forward-looking statements, which 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 SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2018 or 2019 results will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding the fourth quarter 2018 gains related to the finalization of the impact of the 2017 Tax Cuts and Jobs Act. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. Also this morning we announced the closing of the Gatan acquisition. Our fourth quarter 2019 guidance and our updated full year 2019 guidance, which Dave will speak to shortly include Gatan. We'll begin today's call with prepared remarks by Dave and Bill and then open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. AMETEK delivered another outstanding quarter with exceptional operating performance, earnings above expectations, solid organic sales growth, and the acquisition of two highly strategic businesses. Our execution of the AMETEK growth model, including an increased focus on operational excellence allowed us to report record levels of EBITDA, operating income and diluted earnings per share in the quarter. Additionally, our business has generated record operating cash flow, providing the capital to support our growth model and drive strong long-term shareholder returns. Given our results in the quarter, we will once again raise our earnings guidance for 2019. Now on to the financial highlights for the quarter. Total sales were $1.28 billion, up 7%, compared to the third quarter of 2018. Organic sales were up 3%, acquisitions added 5%, and foreign currency was a one point headwind. AMETEK's operating performance in the quarter was exceptional, resulting in record operating results and robust margin expansion. EBITDA in the third quarter increased 12% over the prior year to $349 million. EBITDA margins in the quarter were also excellent at 27.4%. Operating income was $301.1 million in the quarter, up 13% over the third quarter of 2018. Reported operating income margins were up an impressive 140 basis points to 23.6%. And excluding the dilutive impact of acquisitions, operating margins increased 150 basis points over the prior-year period. Earnings in the third quarter were $1.06 per diluted share, up 16% over the same quarter in 2018. This comfortably exceeded our guidance range of $1 to $1.02 per share. Additionally, our business has generated $330 million of operating cash flow in the quarter, up an impressive 33% over the same period last year, resulting in outstanding cash conversion in the quarter. Now onto the individual operating groups. First, the Electronic Instruments Group. EIG sales in the quarter were $815.6 million, up 10% over last year's third quarter. Recent acquisitions contributed 7%, organic sales added 3%, and foreign currency was a 1 point headwind. We continue to see solid growth across our Aerospace, Defense and Process businesses, with particularly strong growth again in our Materials Analysis division. EIG delivered fantastic operating performance in the quarter, with operating income up 15% to a record $219.5 million. Reported operating income margins increased 130 basis points to 26.9%. And excluding the dilutive impact of acquisitions, EIG's operating margins expanded an impressive 170 basis points over the third quarter of 2018. The Electromechanical Group also performed exceptionally well in the quarter, with solid organic sales growth and superb operating performance. Sales in the third quarter for EMG were $461.1 million, up 2% over the same quarter in 2018. Organic sales grew 3%, with contributions from the acquisition of Pacific Design Technologies being more than offset by foreign currency headwinds. Strong growth across our Engineered Materials and Aerospace & Defense businesses in the quarter was offset in part by continued slowing in our Automation business. EMG's operating performance in the third quarter was also outstanding. Operating income increased to a record $103.5 million, up 12% over the 2018 third quarter. EMG’s operating income margins increased sharply to a record 22.4%, up 180 basis points over the prior-year period. Excluding the dilutive impact from acquisitions, EMG margin expanded 190 basis points in the quarter. To summarize, AMETEK delivered another quarter of fantastic results, reflecting the strength and flexibility of the AMETEK Growth Model and the excellent work of our colleagues worldwide. Before providing our updated guidance for 2019, I wanted to provide some additional highlights for the quarter. First, I'd like to congratulate the team at CAMECA for their recent launch of the EIKOS-UV Atom Probe microscope. CAMECA is the world leader in Atom Probe Tomography. The new Atom Probe Tomography scope reinforces the leadership position with increased ease-of-use at a lower cost of ownership. The EIKOS-UV delivers nanoscale structural information enabling a new understanding of materials for research and faster development of products for industrial applications. This new product complements CAMECA's LEAP 5000 Atom Probe which provides the fastest, most sensitive 3D imaging and analysis system with nanoscale resolutions across a wide range of applications. Developing leading-edge technologies is the core to AMETEK's success. We are committed to continuing our strong levels of investment in research, development and engineering of new products and the solutions to drive innovation across our businesses. For all of 2019, we expect to invest more than $260 million in R&D, a 13% increase over 2018. This level of investment and success of our R&D effort leads to a healthy vitality index. Our vitality index, which is a measure of sales from products and solutions introduced over the last three years was excellent at 24% in the third quarter. We also remain committed to investing in our sales and service capabilities to support our global and market expansion initiatives. And in September, we unveiled our newest center of excellence in Singapore. This center of excellence includes products and solutions from numerous AMETEK businesses including Rauland, Taylor Hobson, ZYGO, EDAX, and Programmable Power. This state-of-the-art facility serves as a product showcase, application lab and service facility for our customers and partners in the region. Congratulations to our teams on this important effort. Now shifting to acquisitions. It has been another very active and highly successful year on the acquisition front. Since our last earnings call, we've acquired two excellent businesses: Pacific Design Technologies, or PDT for short, and Gatan. I'll touch briefly on these acquisitions, first PDT. PDT is a leading provider of advanced, mission-critical thermal management solutions. Their custom-engineered liquid cooling systems and components are used across a broad set of current and next-generation commercial aerospace, defense and space platforms. PDT is an excellent fit with our Thermal Management Systems business, given their complementary thermal management solutions and deep R&D expertise. PDT is headquartered in Goleta, California and has annual sales of approximately $40 million. We deployed approximately $125 million on the acquisition. Now moving to AMETEK's largest acquisition to date, Gatan, which we acquired this week. Gatan is a tremendous acquisition for AMETEK. Market leading technologies, premier brand, highly complementary fit with our existing instrumentation businesses, attractive mid to high single-digit growth rates, excellent profitability and cash flow and the ability to drive improved profitability with excellent returns on capital. Overall, an excellent acquisition. So a little more on the business. Gatan is a leading brand in direct detection technology for electron microscopy, supporting high-end research and materials and life science applications. Their solutions enable improved microscopy workflows and specimen preparation, imaging and analysis. Gatan's technology and product offering nicely complements our Materials Analysis Business, providing AMETEK with an enhanced position in high-end analytical instrumentation and expanded capabilities in the Life Sciences market. The business is headquartered in Pleasanton, California and has annual sales of approximately $180 million. We deployed approximately $925 million on this acquisition. Thus far in 2019, we deployed nearly $1.1 billion on these two acquisitions. This follows 2018 when we deployed over $1.1 billion on six acquisitions, resulting in approximately $2.2 billion of capital deployed on acquisitions over the last two years. This success speaks to the strength and discipline of our acquisition and integration process. Even with this level of activity, our acquisition pipeline remains full and we have significant balance sheet capacity to continue our acquisition strategy. As we integrate these recent acquisitions into AMETEK, we look for them to embrace each of the elements of the AMETEK growth model, including our operational excellence strategy focused on cost and asset management. As evidenced in our tremendous operating performance, margin expansion and cash flow generation this year, our businesses continue to drive meaningful and efficiency improvements through the implementation of our operational excellence initiatives. We have again increased our full year target for operational excellence savings from $85 million to now $90 million of savings in 2019. Our operational excellence strategy plays an increasingly important role, given the uncertain global economic environment. Now shifting to the outlook for the fourth quarter. Given our strong results in the third quarter, we now expect 2019 earnings to be in the range of $4.12 to $4.14 per diluted share, up 13% over 2018's earnings per diluted share. This new guidance range has increased from our previous guidance range of $4.04 to $4.10 per diluted share. We expect overall sales for the year to be up mid to high single digits with organic sales growth of approximately 3%. Fourth quarter sales are expected to be up mid-single digits, with earnings in the range of $1.01 to $1.03 per diluted share, up 5% to 7% over the prior year. To summarize, our third quarter performance was excellent. We are well-positioned to manage in a challenging economic environment given the flexibility of our growth model and proven operating capability. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions.

Thank you, Dave. As Dave noted AMETEK had an excellent third quarter with strong operating performance. Let me provide some additional financial highlights. Core selling expense in the quarter was down slightly versus the third quarter of last year. Third quarter general and administrative expenses were up $4.1 million year-over-year on higher compensation expense. For the full year, we expect general and administrative expenses to be approximately 1.5% of sales in line with 2018. The effective tax rate for the quarter was 19.5%, down from last year's third quarter tax rate of 21.9%. For 2019, we now expect our effective tax rate to be approximately 20.5%. And as we've stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate. Working capital was 18.2% in the third quarter, down slightly from 18.3% in the second quarter of this year. Capital expenditures were $18 million in the quarter and $62 million for the year-to-date. For the full year, we continue to expect capital expenditures to be approximately $100 million or about 1.9% of sales. Depreciation and amortization expense was $55 million in the quarter. For the full year, we continue to expect depreciation and amortization to be approximately $235 million, including after-tax acquisition related intangible amortization of $100 million or $0.44 per diluted share. Our businesses continue to generate very strong levels of cash flow. Third quarter operating cash flow was a record $330 million, up 33% over last year's third quarter. Free cash flow was $311 million, up 35% over the same period. As a percentage of net income, free cash flow conversion was an impressive 141% in the quarter. For the full year, we expect free cash flow conversion of approximately 110% of net income. Total debt at the end of the third quarter was $2.43 billion, down from $2.63 billion at the end of 2018. Offsetting this debt is cash and cash equivalents of $735 million, resulting in a net debt-to-EBITDA ratio as of September 30 of 1.2 times. As Dave noted, we continue to be very active deploying our capital on strategic acquisitions. In the third quarter, we acquired PDT and subsequent to the end of the quarter we acquired Gatan. Combined, we deployed $1.1 billion on these two acquisitions. Our pipeline remains healthy and we have significant financial flexibility to continue to execute our acquisition strategy with approximately $1.3 billion of cash and existing credit facilities available following the Gatan acquisition. In summary, our businesses delivered excellent results in the third quarter and through the first nine months of the year. We remain well-positioned to support our long-term growth strategy given our strong balance sheet and excellent cash flows.

Thank you, Bill. Justin, could we please open the lines for questions?

Thanks. Good morning. A couple of questions. First, Dave, can you maybe talk a little bit about what incoming organic order rates look like during the quarter in total for AMETEK and across the two segments?

Yeah. Sure, Matt. Overall, orders were up 3% in the quarter. Organic orders were down negative 2.5%. And if I look at that by group, the EIG organic orders remain solid. They were positive. Solid across most of the EIG portfolio, aerospace, process, medical. EMG orders were down, mainly due to our automation business and Asia. As we highlighted last quarter, we're experiencing soft conditions in those two areas, which continued into quarter three.

And then, maybe just talk a little bit more about the Gatan acquisition. Historically speaking, shied away might be too strong of a term, but you haven't really done much in the Life Sciences space, opting instead more for medical and healthcare with Rauland and some of the other businesses. So maybe talk about what attracted you now to Life Sciences? So maybe sort of a why now question. And then, what you see in that business potentially from a synergy standpoint and the level of cyclicality we should expect out of that business?

Right, right. Yeah. Our Materials Analysis business that Gatan will become a business unit of has had an existing Life Science presence, and it's been a small presence and we haven't talked about it much, but certainly with Gatan they're in market they're a 50-50 split between life sciences, so biology, cancer research, and then material sciences. So it fits our existing profile. But it does add life sciences capability and we really like that. And with their technology and what their market exposures, there's really attractive growth opportunities. We think it's a mid to high single-digit grower. I mean, when I think about the Gatan business, it's a very differentiated technology business. It's a sizable transaction with strong profitability for AMETEK shareholders will get a good return on capital. It's a premier brand. We followed this business for a long time. It's a premier brand. They have highly specialized intellectual properties over 150 patents in the business and a strong management team. They’re staying with the business so we're pleased about that. And it's a business that is dependent on new product introductions. So we're going to have to work on the new product introduction cycle because that drives a lot of growth. And I think you can expect it to fit into MAD and MAD is performing very well for AMETEK. So it's a great add to MAD. So we're very excited about the acquisition.

Thanks.

Thanks, Matt.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, Dave, maybe pick up on your last point about the macro-environment. You said it's a challenging operating environment, but you put up great margins and cash flow. But you did point to some weakness in automation in Asia and this is consistent with what we've seen elsewhere in the sector this quarter, short-cycle pressures in Asia in particular. So could you expand a bit on what you're seeing in the automation side in terms of the softness? And then how would you characterize the softness in Asia? Is that trade uncertainty related?

Sure, Deane. In Asia, we experienced a decline in the mid-single digits, largely driven by China, similar to what we saw in the second quarter. The trend remained consistent, and our automation business did not show any sequential weakening. Other geographic results mirrored the second quarter, with mid-single digit growth in the U.S. and Europe, where various sectors, including aerospace and oil and gas, performed well. The situation in Q2 continued into Q3 without further deterioration. However, we did observe some incremental weakness in the industrial sector within our Power and Industrial business in the third quarter. Overall, our Aerospace and Process businesses are performing strongly, and our medical sector is stable. While we are seeing some weakness in automation in Asia and slight incremental industrial weakness, that summarizes our current situation.

That certainly is consistent with what we've been seeing. Any comments about how October has played out? And then I know you're not in the business yet of giving 2020 guidance but just qualitatively for this challenging operating environment, what's the setup for next year for AMETEK in the way your discussions with customers, the visibility on product introductions and so forth? Thanks.

Right. I'll start with the insight in 2020. As is typical for this time of the year, we're not going to give guidance for 2020 as you know Deane, and during November and December, we're going to sit down with our teams and work with the businesses to build a bottom-up budget and this will include a detailed review of our niche markets, which are sometimes different than the overall macro. And the risks and opportunities that our businesses see in their 2020 business plan. I think in terms of operating in this kind of environment with trade tensions and customers hesitant to spend and ordering patterns changing a bit in terms of just giving an order for what you need versus giving you a longer-term outlook at something there are some issues to deal with. But AMETEK is ideally suited to thrive in this environment because we have the OpEx capability, it's in our DNA and we have the M&A driver. And we're going to put those two elements of our strategy to work and succeed in the current environment. That's the way we're looking at it and that will go into our 2020 planning.

And any comments on October?

In October, we observed that our orders were reasonable in July and saw a slight increase in August, which is typical for us. September showed stronger performance than August, but we did not experience a significant surge in orders that month, making it somewhat subdued though still an improvement over August. We had a regular progression throughout the quarter. October has started off on track and feels positive, similar to the early months of previous quarters. We have a trend of monthly increases during the quarter, although the final month tends to be a bit quieter.

Terrific. And then congratulations on Gatan. That's a great asset. Thank you.

Thank you. Thank you, Dean. We feel the same way.

Hi, good morning, guys.

Hi, Josh. Good morning.

One of the common questions we receive is regarding how AMETEK compares this cycle to the last industrial slowdown. It seems there's always concern that the next move of the ISM will be a downturn for AMETEK. However, you have shown remarkable resilience, particularly this year. Can you elaborate, David, on how you are balancing M&A, including aspects like margins or organic growth? Specifically, how has the evolution of your portfolio's exposure to customer R&D versus CapEx spending changed?

Every slowdown is unique, so relying on the past performance may not yield the same results. However, we have several parts of our portfolio that continue to perform strongly. Our Aerospace sector is robust across all its segments, and we have secured significant wins in that area. Additionally, our Process and Analytical instrumentation has expanded into healthcare, which is also doing well. The commodity segments of our business represented about 22% of our sales prior to the 2015-2016 downturn, and now they account for approximately 16%, as we have experienced growth in other areas. Currently, those segments are performing well. This downturn feels different for us, as it seems to be self-induced and more trade-related, which is affecting customer behavior. Regardless of the economic conditions, we are committed to operating effectively and believe we are well-positioned due to our operational excellence. Our mergers and acquisitions strategy is also performing well. As I mentioned earlier, we aim to outperform in the existing market environment.

Terrific. And then just a follow-up. Obviously, margins have been pretty spectacular throughout the year; I think another step-up in the third quarter. How should we think about kind of the progression from here? And any kind of puts and takes, either related to seasonality or any kind of blue birds in the quarter that may have helped out?

Yes, we had outstanding margin performance this quarter, mainly due to excellent execution. We achieved good pricing, significant cost reductions, and our plant efficiencies were impressive. Additionally, we had an increased contribution margin from the additional sales. We intend to continue this level of execution. I am not certain if the margins will remain at this level, but we anticipate an annual core margin expansion of 30 to 40 basis points as part of our operating model, which reflects our long-term focus on operational excellence. We have various cost reduction strategies in place, and we see ample opportunity for margin growth. That's our perspective on the matter.

Great. Thanks for the detail and congratulations.

Yes, thanks, Josh.

Thanks. Good morning.

Good morning, Nigel.

Hey, just I'll echo the comments on operating margins, great execution there. And I did want to put a finer point on kind of going to the next level on Q4 guidance. And really want to dig into Gatan. Roper mentioned that the business would be very heavy skewed towards Q4, much more so than usual this year. So, I'm just curious what you're baking in for sales, EBITDA, and the level of accretion, if any, that you have baked into Q4? And anything else that you're sort of baking into your guidance for Q4 would be helpful.

We have owned Gatan for two months and anticipate around $35 million in sales during that period. We expect this to be neutral for Q4 earnings at the cash EPS level. There are purchase accounts and a significant amount of inventory involved. The inventory step-up charges are considerable, along with deal costs, increased interest expense, and one-time charges. Additionally, Q4 was front-end loaded based on Gatan's forecast. When we consider the $35 million we are forecasting alongside what we believe Gatan achieved in October, the performance is roughly similar to last year on a quarter-over-quarter basis. The management team has faced numerous challenges, including a prolonged sales process and a lot of integration activity. However, we aim to achieve a Q4 performance comparable to last year's strong results.

Sorry about that. That's helpful. Thanks for that. And if you want to prognosticate on Gatan EPS increase for next year, that would be great. But I did want to touch on Josh's question a slightly different way. And if we take the acquisitions you've done for the past, call it, two or three years, and I'm thinking here about Rauland-Borg, Tell, Spectro, et cetera. How are those businesses performing right now relative to the 3% you just put up? I mean are they above that bar? Are they stable? I mean how does that look?

Yeah. I think the acquisitions being primarily North America focused, like WR, like Rauland-Borg and the end markets that they're in, they're performing very well. So they're at/or above our model. And the U.S. centricity of some of those businesses is clearly helping us in the current environment.

Okay, great. Thank you, Bill.

Thank you.

Hey, guys. Good morning. Great quarter.

Yeah. Good morning, Andrew.

Just a question. Can we talk a little bit about aerospace and specifically, A, can you remind us of the composition of your aerospace exposure? And can we talk about what are you seeing about the commercial aftermarket business as traffic slows? And also, what are you guys seeing on bizjets, because I know that's an important business for you as well? Thanks.

So, broad-brush, our aerospace business is about 35% military, about 30% third-party MRO, about 25% commercial, and that's equally split between the OEM and the proprietary spare parts that come from that and about 10% of the business jet market. And the aerospace business for us, in Q3 the whole business was up high single digits. It was strong in all segments. Our commercial business in Q3 was up mid-teens. So we had strong OEM sales to the Airbus 320 platform, the 787, the LEAP and GTF engines are doing well. Our third-party MRO business had an excellent quarter, up high single digits. Our military business was up mid-single digits. So solid demand in both the U.S. and international programs, our strength in missiles, radar systems, general spending tied to improving fleet readiness, and our business jet market was up high teens. And at easier comp, but it was up high teens. So we really had a fantastic performance in our aerospace business in the quarter. And the backlogs are very solid. And to your specific question, our aftermarket was very solid in Q3, and we're not seeing a sign of a slowdown.

I guess Eleanor is doing quite well.

Eleanor has fantastic orders.

Just a follow-up question and this is more for my decision. How should I think about the relationship directionally between your order rates and organic growth? Because, clearly, orders slowed last quarter. We did not see a similar slowdown in revenue this quarter, what has continued to slow. And clearly, you guys think that revenue can continue to outpace the orders. What's the disconnect? Thank you.

I believe the main issue is that we have a strong backlog, currently around $1.63 billion at the end of Q3, which offers some conversion opportunities. Aside from our aerospace and defense sector, we are likely approaching a quarter where we need about 50% of the orders to meet our targets, but we have some clarity in our aerospace and defense segments. We are managing the company effectively, which allows us to convert these opportunities, and we feel assured about our projections. We're cautious due to the global macroeconomic environment, but our factories are performing very well at the moment. I'm confident that as new orders come in or as we look to our backlog, we can execute effectively. This approach allows us to reconcile a flat to slightly declining order situation with organic growth.

Very clear that the team is executing very well. Thank you.

Thank you.

Hi guys, good morning.

Good morning, Allison.

Just following up on that backlog commentary. Are you getting any, sort of, pushback or delays within that backlog that, I guess, delaying some of that conversion?

Yeah, there's a changing order pattern that we saw in the quarter. And typically, a customer will give you a purchase order with three or six month’s visibility. And now when they're giving us a replenishment purchase order, they're really giving it month-to-month, just what they need. So there is an element of the global macro conditions that are impacting our order input. But our cycle times are reduced, and our factory execution is really good. So we're able to deal with that on and turn things very quickly. But certainly, there is a change in the ordering environment that wasn't there six months ago.

Great. And then just on the OpEx savings, is that because of that step up because of Gatan and the acquisitions? Or is that organic that you guys are accelerating some of that?

There are no operational expense savings in the last two months for Gatan. Instead, we achieved organic savings, increasing our material savings to $70 million, which includes a $5 million rise due to tariff activities. Our sourcing organization is performing exceptionally well, procuring products faster than anticipated and securing additional savings by finding lower costs in various regions globally. This is what has led to the savings reaching $90 million, all attributed to material cost reductions.

Okay. Thank you.

Thank you, Allison.

Good morning, everyone. Congratulations on the quarter.

Thank you, Rob.

I guess, first on Gatan kind of stepping back, obviously, a very well-run company under Roper's purview, but obviously, Roper in terms of its governance and overall models, not big on centralization and cost synergies among their various disparate businesses. Clearly, that's a point of differentiation. So, could you expand qualitatively or quantitatively about how you see the opportunity to expand margins? And maybe a little bit of color around fixed cost leverage, SG&A, gross margins? Where do you think are the biggest buckets where you can drive incremental value on that?

Yeah. Sure, sure. It’s obvious question, and we're going to work with the Gatan team to come up with a plan that we both agree with, because we think there are some opportunities, but we get buy-in from the management teams. But what we see is, it's more like a typical deal synergy for us. There's a lot of opportunity in the supply chain to reduce costs. There's eight remote sales and service offices, so a bigger than typical opportunity to benefit from the AMETEK G&A internationally. There's also opportunities to improve working capital. This business is running at a working capital level in the mid-20s, and our equivalent business is running at about 14% in materials analysis. AMETEK's overall working capital is about 18.2% in the quarter. So we add that all up, the cost synergy from the supply chain, the substantial synergy from the international offices, the ability to reduce working capital and we think it's going to be a great return for our shareholders. We think we'll get a return on invested capital of 10% in year 3, and we're excited about it.

And just on that point, as one brief follow-up on Gatan. What do you think about the perspective of the growth rate? Because I think you talk about mid single-digit organic growth. But just in doing our own due diligence, it could be fairly lumpy. And part and parcel of that is, they're definitely seems to be more of a product cycle business, branded their hit rate on product cycles are very high. But aftermarket may be more of a concern. So how would you talk about kind of the sustainability of growth and managing a little bit of a lumpiness there?

The business does experience some lumpy performance. However, their direct detection cameras are exceptional technologies, particularly facilitating a new method known as cryo electron microscopy. This method is being explored for drug and vaccine development, significantly expanding their presence in the life sciences sector. They have a strong long-term demand driver, with only about 10% of their business coming from aftermarket sales. While the lumpy nature of the business is influenced by new product cycles, we plan to enhance the pace of these cycles, even though we will have to manage some inconsistencies. Overall, we have a positive view of the business.

Thank you.

Thank you.

Yes, good morning. Could you just give us a sense of what price did, price capture and net price capture in the quarter?

Yes. Q3 was much like the first half of 2019. We had an excellent quarter. So we achieved a little bit more than 2 points of price across our entire business. Total inflation and the impact of tariffs was a bit less than 1.5%. So we're very pleased with the results and they speak to the highly differentiated nature of our product portfolio. We have leadership positions in the niche markets around the globe, and it's playing itself out in these uncertain times.

Okay. Dave, could you go over EMG's core growth rate by segment or by business within EMG? We had 3%. I'm a bit curious since automation softened. Could you elaborate on that, please?

Yes, I can. The market segments of automation and engineered solutions are roughly equal, with automation making up about half and engineered solutions accounting for the other half. We experienced solid growth in the EMIP business, which was up in the mid-single digits during the quarter, while automation saw a decline. Overall, our performance was up in the low single digits for the quarter. The EMIP business is doing exceptionally well, although we are facing challenges with the slowdown in our automation sector. Additionally, our thermal management systems business also had a solid quarter, aligned with our aerospace division's performance.

Okay. And then just is the EMIP business following the aerospace business up? I mean is that where the strength is kind of generated?

I mean the end markets for EMIP, our aerospace and medical and specialized industrial. So that mid-single-digit growth was across all those markets. So they really done well.

Okay. And then just my last question, David, as you kind of sit here today, and I know we don't want to touch 2020 from an outlook perspective, maybe on the sales line. But is it your sense that we're seeing enough slowing into this – into the fourth quarter here that we maybe have to take a harder look at the cost side of the business, whether it would be savings plans or any sort of tighter restructuring or realignment of cost? Where do you sit on that? Or is it kind of business as usual, and we're going to walk into this with our operational excellence plan and eyes wide open?

That's a great question, Rick. And I'll start with the point that we have people running the businesses that are good operators of the businesses. And we're going to go through a budget process with each of our business units. And you can see in the results, they're already naturally reacting to the changing global conditions. And right now, this feels for – this feels like a – for Bill and I, like a business-to-business discussion. So we're going to sit down with these budgets, and we're going to understand the projects that they want to fund and what makes sense for AMETEK to fund and what makes sense for their businesses to act on. And right now, it seems like a business-to-business decision. But if it turns into a broader alignment, if it certainly weakens further. We're not there yet, but that's an option, and we're going to really explore that in detail during November and the beginning part of December. And the important thing for us is that we're going to continue to invest in attractive opportunities that and make our core stronger, and that's our talent development, our innovation but we're really good at managing costs. And we'll have a good, healthy discussions during our budget process, and I expect that it will be a business-to-business discussion, and the businesses will come with opportunities to us to ...

And given some of – given some of your business, I'm thinking aerospace is kind of in the backlog, and we're talking about backlog conversion here kind of rolling forward. Do you sense that the pricing contribution in 2020 would be as great in 2020, as it has been here in 2019? I mean, is there visibility in your backlog on price for next year?

That's a good question, Rick. And we're going to have that detail when we go through our budget, but my feeling is that the pricing power of our portfolio is something that – through up cycles or down cycles, is there. And I think the level of pricing offsetting cost and inflation in tariffs is going to stay. So I'd be very surprised if pricing did not exceed inflation in tariffs in 2020.

Okay. Very good. Thank you.

Thank you.

Hi, good morning, guys. I just want to come back to thinking about the next year, 2020. Just in the context of margins, obviously, the revenue like a go either way, but thinking of Q2 or Q3 is sort of the run rate, low single-digit organic decline environment. Do you think that based on the deals you've done, some of the actions underway that you can actually grow margins in a down organic sales environment next year?

Yes. I think it's possible. It has to do with – to Rick's question, the prior question, the level of pricing that you get and the level of acquisition synergies that we're executing on. But if you have a modestly declining order input, yes, you can expand margins like that. It won't be like the margins that you see in the second quarter, but certainly an up margin trajectory as possible.

Okay, great. I have another question about metals. There was strong performance in this quarter, with mid-single digit growth. How much visibility do you have regarding the value chain or supply chain in terms of inventory levels? I recall that last cycle showed a backfill as you moved through the value chain. What is the current inventory situation?

Yes. The metals business has less visibility into customer inventory levels compared to our other businesses. Currently, our end markets are influencing this business, and both aerospace and medical sectors remain strong. We will monitor this closely during the budgeting process and at the end of the next quarter to better understand the situation.

Okay. But no indication that things are full or that anything starting to back up there?

Up mid-single-digit quarter.

Yeah. Okay, great. Appreciate, I'll leave it there.

Thank you.

Hey, good morning. This is Robert in for Joe. Congrats in the quarter. Good morning. Just a high-level question as we head into next year, not specific guidance. But are there any particular end markets that you feel are kind of like at risk versus your current view this year? And did you see any changes in any end markets this quarter that you found surprising? Or any changes in trends that are worth noting? Thank you.

Sure. It's really the comment that I made before. Q3 felt very similar to Q2, but we did see some incremental weakening in our industrial businesses. And when we go into next year, we're going to have a clear view of that once we work through our budget process with all of our businesses because we have some niche exposures that are a little bit different than the overall macro, and we have to understand that. But certainly, the aerospace business feels very solid right now.

Can you provide more insight on Gatan? It seems that the price Thermo Fisher paid is a bit lower than your implied EBIT/EBITDA multiple. I believe they should be able to achieve significant synergies. Could you discuss the valuation you provided and whether this was a competitive bid? Please elaborate on the process a bit more.

Yes, Andrew, I think you might have your numbers wrong. If you go back and look at it, we paid about the same. We paid the identical amount that Thermo paid for the business and it has about 20% more than the EBITDA now. So, the multiple is lower.

Okay. Could you provide an update on Telular? It's been about a year since the acquisition. Specifically, I'd like to know about the margins, as that was expected to be a significant part of the story, and how you plan to leverage it throughout your entire business. Can you share some examples of where we might see that?

Yes, that's a great question. Telular is performing well and we're very pleased with the business. They've come into AMETEK with a lot of energy in terms of the integration. And we have a process where we're taking that IoT technology to some specific businesses and we've developed a broader thought process of applying it to other businesses within AMETEK that should be aware of the technology. So it's going very well. We're very pleased with that management team and we're counting on them for 2020. It's going to be one of the drivers for AMETEK.

All right. Thank you.

Sorry for getting greedy, but a couple of cleanups, if you don't mind. I guess, first, I know, episodically, we went through some of the order rates and some of the organic growth rates. But could we do the in honor of Scott Graham, the state of the Union in terms of where organic growth is across the segments and outlook?

Sure thing, Rob. And we've covered a lot of this in the call already, but I'll just go through it all. So be a bit of a rehash. Our process businesses delivered an excellent quarter. We talked about overall mid-teens on a tonnage basis, mid-single-digit organic growth, and we had the acquisitions of Forza, Telular, and Spectro Scientific and our Materials Analysis business, again, delivered particularly strong organic growth in the quarter. And they're seeing positive results from the organic growth initiatives. So for all of 2019, we continue to expect our process businesses that have organic sales up in the mid-single-digit range. And we talked a bit about our aerospace business. They performed exceptionally well again in the third quarter, was strong and balanced growth across all the businesses. Our overall sales were up high single digits, driven by high single-digit organic growth. So we have the contribution from the acquisition of Pacific Design Technologies in there. And similar to the first half, growth in the third quarter was broad-based. And I'd highlight a couple of our businesses, but it was a commercial OEM and third-party MRO, they had very good quarters and we expect to continue to have mid- to high single-digit organic growth for all of 2019, with balanced growth across each of the markets. And our Power and industrial segment, they were down slightly in the third quarter, driven by weakness in our industrial business. And for all of 2019, we now expect roughly flat organic sales, driven by incremental weakness in our industrial businesses. We had a good, good quarter for our power business improving, but their industrial power and industrial weakened a bit, and that's what we talked about in the quarter. And our automation and engineered solutions up low single digits in the quarter. Again, solid growth across engineered solutions, offset by weakness in our automation business. So for all of 2019, we now expect low single-digit organic sales growth for our automation and engineered businesses. And that's around the horn run.

And then just kind of last question, how much was the contribution, and it might have been alluded to, so I'm sorry if it's asked and answered, but how much in third quarter was pricing underlying your organic growth? And what is your embedded expectation for this year?

Yes. I think the – our price – we had about two points of price a little better than two points, and similar expectation to continue for Q4.

Great. Thank you, Justin, and thank you, everyone, for joining our call today. And as a reminder, a replay of the webcast may be accessed in the Investors section of our website at ametek.com. Thank you.