Thank you for standing by, and welcome to the Q3 2019 AMETEK, Inc. Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker, Kevin Coleman, Vice President of Investor Relations. Thank you. Please go ahead, sir.
Thank you, Justin. Good morning, and thank you for joining us for AMETEK's Q3 2019 earnings conference call. With me today are Dave Zappico, Chairman and Chief Executive Officer Bill Burke, Executive Vice President and Chief Financial Officer. AMETEK's 3rd 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 Q4 2018 gain 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 Q4 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 2 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 $1,280,000,000 up 7% compared to the Q3 of 2018. Organic sales were up 3%, acquisitions added 5% and foreign currency was a 1 point headwind. AMETEK's operating performance in the quarter was exceptional, resulting in record operating results and robust margin expansion. EBITDA in the 3rd quarter increased 12% over the prior year to $349,000,000 EBITDA margins in the quarter were also excellent at 27.4%.
Operating income was $301,100,000 in the quarter, up 13% over the Q3 of 2018. Reported operating income margins were up an impressive 140 basis points to 23.6 percent. And excluding the dilutive impact of acquisitions, operating margins increased 150 basis points over the prior year period. Earnings in the Q3 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 businesses generated $330,000,000 in 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 on to the individual operating groups. First, the Electronic Instruments Group. EIG sales in the quarter were $815,600,000 up 10% over last year's Q3. 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 $219,500,000 Reported operating income margins increased 130 basis points to 26.9 percent. And excluding the dilutive impact of acquisitions, EIG's operating margins expanded an impressive 170 basis points over the Q3 of 2018. The electromechanical group also performed exceptionally well in the quarter with solid organic sales growth and superb operating performance. Sales in the 3rd quarter for EMG were $461,100,000 up 2% over the same quarter in 2018.
Organic sales grew 3% with contribution from the acquisition of Pacific Design Technologies being more than offset by foreign currency headwinds. Strong growth across our Engineered Materials and Aerospace and Defense businesses in the quarter was offset in part by continued slowing in our automation business. EMG's operating performance in the 3rd quarter was also outstanding. Operating income increased to a record $103,500,000 up 12% over the 20 eighteen's Q3. EMG's operating income margins increased sharply to a record 22.4 percent, up 180 basis points over the prior year period.
Excluding the dilutive impact from acquisitions, EMG's margins 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 Kamika for their recent launch of the IQOS UV AtomPro Microscope. Kamika is the world leader in ADAMPRO tomography.
The new ADAMPRO microscope reinforces the leadership position with increased ease of use at a lower cost of ownership. The IQOS UV delivers nanoscale structural information, enabling a new understanding materials for research and faster development of products for industrial applications. This new product complements Kamika's LEAP-five thousand atom probe, which provides the fastest, most sensitive three d imaging and analysis system with nanoscale resolutions across a wide range of applications. Developing leading edge technologies is the core to Amasek'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 $260,000,000 in RD and E, a 13% increase over 2018. This level of investment and success of our R and D efforts leads to a healthy vitality index. Our vitality index, which is a measure of sales from products and solutions introduced over the last 3 years was excellent at 24% in the 3rd 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, which is similar to other centers we have around the world, includes products and solutions from numerous AMETEK businesses including Rolland, Taylor Hobson, ZYGO, EDEX, Programmable Power and others. 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 2 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 and D expertise. PDT is headquartered in Galita, California and has annual sales of approximately $40,000,000 We deployed approximately $125,000,000 on the acquisition. Now moving to AMETEK's largest acquisition today, 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. Catan is the 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. Catanis 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 $180,000,000 We deployed approximately $925,000,000 on this acquisition.
Thus far in 2019, we deployed nearly $1,100,000,000 on these 2 acquisitions. This follows 2018 when we deployed over $1,100,000,000 on 6 acquisitions, resulting in approximately $2,200,000,000 of capital deployed on acquisitions over the last 2 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 efficiency improvements through the implementation of our operational excellence initiatives. We have again increased our full year target for operational excellence savings from $85,000,000 to now $90,000,000 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 Q4. Given our strong results in the 3rd quarter, we now expect 2019 earnings to be in the range of $4.12 to $4.14 per diluted share, up 13% over 20 eighteen'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%. 4th 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 Q3 performance was excellent. We are well positioned to managing 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. Bill?
Thank you, Dave. As Dave noted, AMETEK had an excellent Q3 with strong operating performance. Let me provide some additional financial highlights. Core selling expense in the quarter was down slightly versus the Q3 of last year. 3rd quarter general and administrative expenses were up 4,100,000 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 Q3 tax rate of 21 0.9%. 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 3rd quarter, down slightly from 18.3% in the Q2 of this year.
Capital expenditures were $18,000,000 in the quarter $62,000,000 for the year to date. For the full year, we continue to expect capital expenditures to be approximately $100,000,000 or about 1.9 percent of sales. Depreciation and amortization expense was $55,000,000 in the quarter. For the full year, we continue to expect depreciation and amortization to be approximately $235,000,000 including after tax acquisition related intangible amortization of $100,000,000 or $0.44 per diluted share. Our businesses continue to generate very strong levels of cash flow.
3rd quarter operating cash flow was a record $330,000,000 up 33% over last year's Q3. Free cash flow was $311,000,000 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 3rd quarter was $2,430,000,000 down from $2,630,000,000 at the end of 2018.
Offsetting this debt is cash and cash equivalents of $735,000,000 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 and strategic acquisitions. In the Q3, we acquired PDT and subsequent to the end of the quarter, we acquired Gatan. Combined, we deployed $1,100,000,000 on these two acquisitions. Our pipeline remains healthy and we have significant financial flexibility to continue to execute our acquisition strategy with approximately $1,300,000,000 of cash and existing credit facilities available following the Gatan acquisition.
In summary, our businesses delivered excellent results in the 3rd quarter and through the 1st 9 months of the year. We remain well positioned to support our long term growth strategy given our strong balance sheet and excellent cash flows. Kevin?
Thank you, Bill. Justin, could we please open the lines for calls for questions?
Our first question is going to come from Matt Summerville from D. A. Davidson.
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?
Yes, 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 and which continued into quarter 3.
And then maybe 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 science space, opting instead more for medical and health care with Rollins and some of the other businesses. So maybe talk about what has attracted you now to Life Sciences, so maybe sort of the 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. Yes, our materials analysis business that Catan 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 Catan, there are in market, there are fifty-fifty 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 with 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 who 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 strong management team that's 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 with the acquisition.
Thanks, David.
Thanks, Matt.
Thank you. And our next question comes from Deane Dray from RBC Capital Markets. Your line is now open.
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 what we've seen elsewhere in the sector this quarter, short cycle pressures and Asia in particular. So can 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?
Yes, sure, Dean.
Asia was down for us by I'll start with the geography question. Asia was down mid single digits and it was driven by China. So very similar to quarter 2 for us. It was really the same trend. Our automation business did not weaken sequentially.
It was the same trend. But at the same time, the other geographic results were similar to the Q2. We were up mid single digits with broad based growth in the U. S. And in Europe, we were up mid single digits and we had aerospace and our oil and gas business and really a lot of businesses did well in Europe.
So it felt like Q2, the weakness played into Q3 continued, it didn't get weaker and we did see a little bit of incremental industrial weakness that showed up in our Power and Industrial business in quarter 3. But overall, when you think about our portfolio, our Aerospace business is very strong. Our Process businesses are rock solid and our Medical business is holding up well. And we have a weakness in automation in Asia. And then we have a bit of incremental industrial weakness and that's the full picture that we have.
That certainly is consistent 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.
Yes, I'll start with the insight into 2020. As is typical for this time of the year, we're not going to give guidance for 2020 as you know, Dean. And during November 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 you 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 and 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'll go into our 2020 planning.
And any comments on October?
October, yes. Yes, I'll get back to that. Yes, throughout the quarter, we looked at our orders and they were okay in July. They stepped up a bit in August as we typically have. And then September, sometime when September was stronger than August, but we didn't get the big spike of orders in September.
So it was a bit muted. It was still better than August. So we had a normal stair step through the quarter. And then October starting out right on plan. So October feels better, a lot like the Q1 of 1st month of Q2 and Q3.
So we got this trend where we're stepping up by month of the quarter, but it's a bit muted usually in the last month of the quarter.
Terrific. And then congratulations on Gatan. That's a great asset. Thank you.
Thank you. Thank you, Dean. We feel the same way.
Thank you. And our next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is now open.
Hi, good morning guys. Hi, Josh. Good morning. Just one of the questions we get a lot is kind of AMETEK compared the cycle to maybe the last industrial slowdown. I know it's something that comes up from time to time on calls that folks are always worried that the next move of the ISM is going to be down for AMETEK, but you guys have been much more resilient, especially this year.
Can you talk, David, all about how you're mixing up through M and A, whether that's margins or organic growth? And maybe specifically on how the kind of portfolio evolution of exposure to customers R and D versus CapEx spend has maybe changed?
Yes, sure. I mean, every slowdown is a bit different, Josh. So basing performance on the prior slowdown is often is not going to work out. But what we see is we really have, as I mentioned to Dean earlier, we have elements of our portfolio that are continuing to perform very well. Our Aerospace business is strong and that's strong across all segments of Aerospace and we have some good wins in Aerospace that we're going to continue to benefit from.
Our process and analytical instrumentation, we added some healthcare to that and that's holding up very well for us. The commodity parts of our businesses that were about 22% of our sales before we head into the 2015, 2016 downturn, but they're down around 16% of our businesses because we grew around them. At the same time, those businesses are performing well right now. So this doesn't feel like the prior downturn for us. And but there is this one is I'll call it self induced it's different and it's really trade related that started it and it's affecting the customer behavior because of that.
And what we're going to do is whatever the economy brings to us, we're going to operate well in it. And we think we're well positioned with our operational excellence capability and we have the M and A driver and it's working very well. So we're like I said before, we're looking to outperform in the current environment.
Terrific. And then just a follow-up, obviously margins have been pretty spectacular throughout the year, I think another step up in the Q3. How should we think about kind of the progression from here? Any kind of puts and takes either related to seasonality or any kind of bluebirds in the quarter that may have helped out?
Right. Yes, you said we had excellent margin performance in the quarter and it was primarily overall excellent execution. I mean we had good price in the quarter, excellent cost reductions, the plant efficiencies were fantastic and we had the incremental contribution margin on the incremental sales. So we plan to keep executing that way. I don't know if the margins are going to continue at that level.
We certainly the way we think about our business is we think we're going to get 30 to 40 basis points of core margin expansion every year. That's kind of built into our operating model and that's built into the way we think about operational excellence long term. So there's cost reduction drivers that we have in our business that and we pull those levers and there's plenty of runway on margins. So that's how we think about it.
Great. Thanks for detailing. Congratulations.
Yes. Thanks, Josh.
Thank you. And our next question comes from Nigel Coe from Wolfe Research. Your line is now open.
Thanks. Good morning.
Good morning, Nigel.
Hey. Just echo the comments on operating margins. Great execution there.
I did want to put a
finer point on kind of going to next level on 4Q guidance. And really want to dig into Gatan. Roper mentioned that the business would be very heavy skewed towards 4Q, much more so than usual this year. So I'm just curious what you've baked in for sales EBITDA and the level of accretion, if any, that you have baked in for 4Q? And anything else that you baking into your guidance for 4Q would be helpful?
Right. To talk about we'll own Gatan for 2 months and with about $35,000,000 of sales in our forecast over those 2 months. And we're planning that to be neutral to Q4 earnings at the cash EPS level. I mean we have there's purchase accounting, there's a lot of inventory in the business. So the inventory step up charges are significant.
We have all the deal costs. We have higher interest expense, one time charges. And as a matter of fact, Q4 was front end loaded for Gatan's forecast. So when you take the $35,000,000 that we're forecasting and what we think Gatan did in October, really quarter over quarter it's about the same as it did last year. And the management team is they've been through a lot.
They've been through an extended sales process. There's a lot of integration activity. But we're going to push forward with a Q4 equal to last year's Q4, which was good.
I was on mute there. Yes, I was on mute. Sorry about that. That. That's helpful.
Thanks for that. And if you want to prognosticate on Gatan EPS accretion for next year, that'd be great. But I did want to touch on Josh's question in a slightly different way. And if we take the acquisitions you've done for the past, call it, 2 or 3 years, and I'm thinking here about Rolandborg, TELUSpectro, etcetera. 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?
Yes. I think the acquisitions being primarily North America focused like Telular, like Rollinbor 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,
ma'am.
Thank you.
Thank you. And our next question comes from Andrew Obin from Bank of America. Your line is now open.
Hey, guys. Good morning. Great quarter.
Thanks. Yes. Good morning, Andrew. Thank you.
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 commercial aftermarket business as traffic slows? And also what are you guys seeing on biz chats because I know that's an important business for you as well?
So Rod 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 3rd party MRO business had an excellent quarter up high single digits. Our military business was up high mid single digits, so solid demand in both the U. S. And international programs. Strength in missiles, radar systems, general spending tied to improving fleet readiness and our business jet market was up high teens.
And that's 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, Eleonore is doing quite well.
Eleonore has a fantastic quarter.
Just a follow-up question and this is more for my identification. 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. Orders continue to slow and clearly you guys think that revenue can continue to outpace the orders.
What's the disconnect? Thank you.
I think the biggest disconnect there is we have a pretty healthy backlog. So it's about a $1,630,000,000 backlog at the end of Q3 and it provides some conversion opportunities. And the balance of our business besides the aerospace and defense business, we're probably going to a quarter needing about 50% of the orders to make the quarter, but we have some visibility in our aerospace and defense businesses. And we're operating the company well and we're able to convert on them. So we feel comfortable with our guide and we have cautious given the global macro conditions and but our factories are executing at extremely positively right now.
So I feel very confident that if there's incoming orders or opportunities in our backlog to execute on it, we can. And that's how you bring together a flat to slightly declining order picture and combine it with growing organically.
Very clear that the team is executing very well. Thank you.
Thank you.
Thank you. And our next question comes from Allison Poliniuk from Wells Fargo. Your line is now open.
Hi, guys. Good morning. Good morning, Allison.
Just following up on that backlog commentary, are you getting any sort of pushbacks or delays within that backlog that sort of, I guess delaying some of that conversion?
Yes. There's a changing ordering pattern that we saw in the quarter. And typically a customer will give you a purchase order with 3 or 6 months 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 6 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?
Yes, there's no OpEx savings in the final two months for Gatan. It's organic savings. We boosted our material savings from up to $70,000,000 That was the $5,000,000 increase. And with all the tariff activity, we have a world class sourcing organization and they're executing on it, resourcing the products at a faster rate than we thought they would and we're getting incremental savings from it because we're finding lower costs in other places in the world. So it's that's what's driving the savings up to the $90,000,000 it's all materials cost savings.
Perfect. Thank you.
Thank you, Allison.
Thank you. And our next question comes from Robert McCarthy from Stephens. Your line is now open.
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 its overall model is not big on centralization of 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 color around fixed cost leverage, SG and A, gross margins. Where do you think are the biggest buckets where you can drive incremental value on the Yes, sure.
It's a 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 8 remote sales and service offices, so a bigger than typical opportunity to benefit from the AMETEK G and 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 had that all up. The cost synergies 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 with 10% year 3 and we're excited about it.
And just on that point as a one brief follow-up on Gatan, what do you think about the perspective of the growth rate? Because I think you talked about mid single digit organic growth. But just in doing our own due diligence, it can be fairly lumpy. And part and parcel of that is it definitely seems to be more of a product cycle business, granted 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?
Right. Yes, naturally the business is a bit lumpy and but their direct detection cameras, they're fantastic technologies. They were and they've really enabled a new technique called cryo EM, cryo electron microscopy. And this technique is being developed for drugs and vaccines and it's opened up the life sciences market to a greater degree for them. So they're really in the they have a good long term demand driver.
Only about 10% of the business is aftermarket, but and it is a bit lumpy and it's driven by new product cycles. So one of the things we're going to try to do is increase the velocity of the new product cycles. But we'll deal with a bit of a lumpiness and we like the business a lot.
I'll leave it there. Thank you.
Thank you. Thank you. And our next question comes from Richard Eastman from Baird. Your line is now open.
Yes. Good morning. Hi, Richard. Could you just give us a sense of what price did price capture net price capture in the quarter?
Yes. Q3 was much like the first half of twenty nineteen. We had an excellent quarter. So we achieved a little bit more than 2 point 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. And then, could you, Dave, perhaps just sift through EMG's core growth rate by segment a little bit or by business within EMG? We had 3%. I'm just a little bit curious, I mean automation softened, but just and could you do that please?
Yes, I could. If you look at the market segments and automation and engineered solutions, so they've already got the automation business is about half of it and Engineered Solutions, which is basically EMIPs about the other half of it. So we had solid growth in the EMIP business. It was up,
I think
it was up mid single digits in the quarter and automation was down. And overall, it was up low single digits for the quarter. So really the EMIP business is performing very well. And as we mentioned, we have a problem with the slowdown in our automation business. And when you think about our Thermal Management Systems business, that's the other business in there.
They had a solid quarter in line with our Aerospace business.
Okay. And then just is the EMIP business following the Aerospace business up? I mean is that where the strength is kind of generated?
The
strength is. I mean the end markets for EMIP are aerospace and medical and specialized industrial. So that mid single digit growth was across all those markets. So they're really doing well.
Okay. And then just my last question. Davis, 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 Q4 here that we maybe have to take a harder look at the cost side of the business, whether it 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 business 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 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 an important thing for us is that we're going to continue to invest in attractive opportunities that make our core stronger and that's our talent development, our innovation, but we're really good at managing costs and we'll have good healthy discussions during our budget process and I expect that it'll be a business to business discussion and the businesses will come with opportunities to us to review.
And 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 budgets. 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 and tariffs is going to stay. So I'd be very surprised if pricing did not exceed inflation and tariffs in 2020.
Okay, very good. Thank you.
Thank you.
Thank you. And our next question comes from Brett Linzey from Vertical Research Partners. Your line is now open.
Hi, good morning guys. Hi, Brett. I just want to come back to thinking about the next year 2020. Just in the context of margins, obviously the revenue line could go either way, but thinking if 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. It won't be like the margins that you see in the Q2, but certainly an up margin trajectory is possible.
Okay, great. And then maybe just another question on metals. Obviously, good performance here in the quarter. I think you said mid single digits. What's your visibility into the value chain or the supply chain on inventory levels?
I know last cycle kind of got back kind of backfilled as you worked up the value chain. What does the inventory look like today?
Yes. The metals business as you know the nature of that business is we have less visibility into that inventory levels at the various customers than we do in our other business. So our end markets right now are driving that business and aerospace and medical still feel solid. So that will be something that we look at closely during the budget and at the end of the next quarter to understand what's happening there.
Okay. But no indication that things are full or that anything starting to back up there?
About mid single digit quarter.
Yes. Okay, great. Appreciate it. I'll leave it there.
Thank you. Thank you. And our next question comes from Joe Giordano from Cowen. Your line is now open.
Hey, good morning. This is Robert in for Joe. Congrats on the quarter. Good morning. Good morning.
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.
And our next question comes from Andrew Buscaglia from Berenberg.
Hey, guys. Can you comment just a little bit more on Gatan? And correct me if I'm wrong, I think the price Thermo Fisher paid seems to be a little bit below what you guys your implied EBITDA multiple was for that. And I would think that they would be able to drive synergies, substantial synergies as well. So can you just talk about the how you how much like in terms of the valuation you've paid?
And was this a competitive bid? Just talk about the process a little bit more there.
Yes. Andrew, I think you might have your numbers wrong. If you go back and look at it, we paid about the same as we paid the identical amount that Thermo paid for the business and has about 20% more than EBITDA now. So the multiple is lower.
Okay. And then if you could turn to Telular. So it's been about a year since you've owned that asset. Can you provide an update on this specifically with regards to margins where that was supposed to be a big part of the story and leveraging it across your entire business. Can you give some examples maybe of where
you see that?
Yes, that's a great question. I mean, Telia is performing well and we're very pleased with the business. They've come into AMETEK, 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 Hemitec.
All right. Thank you.
Thank you. And we have a follow-up question from Robert McCarthy from Stephens. Your line is now open.
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. Thanks, Rob. And we've covered a lot of this in the call already, but I'll just go through it all. So it'd be a bit of a rehash. Our process businesses delivered excellent quarter.
We talked about overall mid teens on a percentage 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 their organic growth initiatives. And so for all of 2019, we continue to expect our process businesses to 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 Q3 with strong and balanced growth across all the businesses. Overall sales were up 10% 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 3rd quarter was broad based and I'm going to highlight a couple of our businesses, but it was commercial OEM and third party MRO that had very good quarters and we expect to continue to have mid to high single digit organic growth for all of 2019, but balanced growth across each of the markets. And our Power and Industrial segment, they were down slightly in the 3rd 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 part power and industrial weakened a bit and that's what we talked about in the quarter.
And our Automation and Engineering Solutions, up low single digits in the quarter. Again, solid growth across Engineering 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 engineering businesses. And that's around the horn, Rob.
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 Q3 was price underlying your organic growth and what is your embedded expectation for this year?
Yes, I think the our price we're about 2 points of price, a little better than 2 points and similar expectation to continue for Q4.
Okay?
Thank you. And I'm showing no further questions. I would now like to turn the call back to Kevin Coleman, Vice President of Investor Relations for closing remarks.
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.
Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.