To the Q1 2019 AMETEK, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance during today's conference, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Kevin Coleman, Vice President of Investor Relations. Sir, you may begin.
Thank you, Sydney. Good morning, and thank you for joining us for AMETEK's first 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 first quarter results were released earlier this morning and are available on market systems and in the investor section of our website. This call is also being webcast 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 that 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 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 investor section of our website. We'll begin today's call with prepared remarks by Dave and Bill. Then open it up for your questions. I'll now turn the meeting over to Dave.
Thank you, Kevin. Good morning, everyone. AMETEK began 2019 with an outstanding first quarter, establishing records for sales, orders, backlog, EBITDA, and operating income. Our businesses delivered strong overall sales growth with solid organic growth and meaningful contributions from the six acquisitions we completed in 2018. Our businesses also delivered fantastic operating performance with impressive operating income growth and core margin expansion, leading to 15% adjusted earnings growth, which nicely exceeded our expectations. We also generated strong cash flow, with operating cash flow increasing 11% year-over-year. Given these strong results, we have increased our earnings guidance for 2019. On to the financial highlights for the quarter. Total sales in the first quarter were $1.29 billion, up 10% compared to the first quarter of 2018.
Organic sales growth was again strong at 5%, with acquisitions adding 7% and foreign currency a two-point headwind. We also generated a record level of orders in the first quarter with another quarter of positive book-to-bill. Our record backlog of $1.7 billion provides us solid visibility as we move through 2019. EBITDA in the first quarter was a record, $337 million, up 10% over the same period in 2018, and EBITDA margins were excellent at 26.2%. Operating income in the quarter was a record at $283.3 million, up 10% over the prior -year period, with reported operating margins of 22%. Excluding the dilutive impact of acquisitions, operating margins increased an impressive 70 basis points over 2018's first quarter.
Adjusted earnings were $1.00 per share, up 15% over the comparable basis for 2018, exceeding our guidance range of $0.95-$0.97 per diluted share. Turning to the first quarter results of the individual operating groups. The Electronic Instruments Group. EIG sales in the quarter increased 13% to $806.9 million. Recent acquisitions contributed 10%; organic sales growth was up 4%. Foreign currency was a two-point headwind. Our Materials Analysis businesses continued to deliver strong growth as their high-end analytical instrumentation solutions are very well positioned in attractive growth markets. EIG's operating performance in the quarter was outstanding, with operating income of $203.1 million, up 11% over 2018's first quarter. Reported operating income margins were 25.2%.
Excluding the dilutive impact of acquisitions, EIG margins expanded an impressive 110 basis points over the prior year's first quarter. The Electromechanical Group also had a great quarter with strong organic sales growth and excellent operating performance. EMG's first quarter sales increased 5% to a record $480.8 million, with organic sales growth a very strong 7%. The acquisition of FMH added 1%, and foreign currency was a two-point headwind. We continue to see broad-based growth across our automation, engineered materials, and aerospace and defense businesses, each continuing to deliver solid growth. EMG also delivered excellent operating performance in the quarter, with operating income increasing 9% to $98.8 million. Operating margins expanded nicely, up 70 basis points to 20.6%.
I am very pleased with AMETEK's first quarter performance, which has positioned us very well for another year of record results. The AMETEK growth model, which combines our four growth strategies with a disciplined focus on cash generation, capital deployment, and talent development, continues to provide the framework for driving long-term and sustainable value for our shareholders. Before I discuss our updated outlook for 2019, I wanted to highlight some of the recent achievements our colleagues have had in driving success for AMETEK. I'll start with a collaborative R&D effort between two of our businesses, which resulted in the release of two innovative new products. In March, EDAX, a leading provider of materials characterization systems, unveiled its Velocity Plus and Velocity Super models. The Velocity Super, at 4,500 frames per second, is the fastest electron backscatter diffraction camera system in the world.
Both new Velocity systems are powered by high-speed, low -noise CMOS sensors developed by our Vision Research business, a leading provider of ultra-high-speed cameras. These new additions to the EDAX portfolio offer our customers a superior solution to help solve materials characterization and elemental composition challenges in both R&D and broader industrial settings. Congratulations to the EDAX and Vision Research teams for coming together and developing these world-class new products. This is just one example of the many market-leading new products and solutions our businesses are developing to help solve our customers' most complex challenges. Our businesses are also capturing additional market share by expanding into attractively positioned adjacent markets. Rauland, a leading provider of communication systems for use in hospitals and healthcare facilities, has a renewed focus on expanding its technology offering to serve schools and educational institutions.
Through its Telecenter U, Rauland provides school districts and campuses with flexible, streamlined communication capabilities for its students and staff. Utilizing a suite of proprietary hardware and software applications, Telecenter U synchronizes mass communications across multiple locations for everyday messages, event scheduling, and critical emergency situations. The solution can play a key role in helping to improve the safety and security of students and teachers during crisis situations, and it is designed to help automate and manage a school's crisis plan during the crucial first few minutes before first responders arrive. Rauland has done an excellent job expanding its technology focus on safety within our schools. We will continue to invest in our new product development and market expansion initiatives, as we are seeing outstanding results from these investments. Our teams are also doing an incredible job integrating our recent acquisitions into AMETEK.
In 2018, we deployed over $1.1 billion of capital on six acquisitions and acquired approximately $350 million in annual sales. These acquisitions are already showing strong performance; we expect them to generate excellent results in 2019. We remain focused on deploying our strong free cash flow on strategic acquisitions. While we are aggressively pursuing these opportunities, we will remain disciplined on our acquisition efforts. Our teams are actively pursuing a broad pipeline of opportunities; we are confident that we'll be able to continue to complete value-enhancing acquisitions. Finally, we continue to focus on driving Operational Excellence, the cornerstone of the AMETEK growth model. In the first quarter, we generated strong savings from our Operational Excellence initiatives, largely resulting from our global sourcing and strategic procurement activities.
For all of 2019, we expect to generate over $80 million in operational excellence savings. We remain focused on developing and enhancing continuous improvement processes to drive positive operating results in 2019 and beyond. Now moving to our updated outlook. Given our performance in the first quarter and our outlook for the remainder of the year, we now expect 2019 adjusted earnings to be in the range of $3.98-$4.08 per diluted share, an increase of 9%-11% over the comparable basis in 2018. This is an increase from our previous guidance range of $3.95-$4.05 per diluted share. We continue to expect overall sales in 2019 to be up high single digits with organic sales up 3%-5%.
In the second quarter, we anticipate overall sales to be up high single digits and adjusted earnings to be in the range of $1.00 to $1.02 per diluted share, a 9%-11% increase over the prior year period. To summarize, our businesses' outperformance in the first quarter firmly positions AMETEK for another year of strong growth. Our experienced management teams, our market-leading niche businesses, and our proven growth model allows AMETEK to deliver strong and consistent performance. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, and then we'd be glad to take your questions. Bill?
Thank you, Dave. As Dave just mentioned, AMETEK began the year with excellent performance, delivering record results that exceeded our expectations. I'll now provide some additional financial highlights for the quarter. Core selling expenses in the quarter were up in line with the core sales growth. First quarter general and administrative expenses were up $2.4 million over the same period in 2018 due largely to higher compensation costs. As a percentage of sales, general and administrative expenses were 1.4%, in line with last year's level. The effective tax rate in the quarter was 20.5%, down from last year's first quarter rate of 23.1%. In 2019, we expect our effective tax rate to be approximately 21.5%.
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 in the quarter was 18.2%, up versus the prior year due in large part to the impact from the acquisitions in 2018. Capital expenditures were $21 million for the first quarter. For 2019, we continue to expect capital expenditures to be approximately $100 million or 1.9% of sales. Depreciation and amortization expense in the quarter was $58 million. For the full year, we continue to expect depreciation and amortization to be approximately $235 million, including acquisition-related intangible amortization of approximately $130 million or $0.43 per diluted share.
Operating cash flow in the quarter was $196 million, up 11% over last year's first quarter, and free cash flow was $175 million. Total debt at the end of the quarter was $2.47 billion, down $160 million from $2.63 billion at the end of 2018. Offsetting this debt are cash and cash equivalents of $368 million, resulting in a net debt -to-EBITDA ratio as of March 31st of 1.6 x. We remain well-positioned to support our growth initiatives with more than $1.8 billion of cash and existing credit facilities. To conclude, our businesses started the year with outstanding performance, delivering high-quality results.
Our outlook for 2019 remains positive given our strong balance sheet and excellent cash flows. Kevin?
Great. Thank you, Bill. Sydney, we're now ready to open the lines for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you please place your line on mute once your question has been stated. Our first question comes from Matt Summerville with D.A. Davidson. Your line is open.
Good morning, Matt. Matt, are you there? Okay, Sydney, why don't we move on to the next call?
Hello?
[crosstalk]
Yes. Can you hear me?
Yeah. We can now. Yes.
Sorry, I don't know what happened there. Could you maybe comment as to the linearity you saw in your business throughout the quarter, anything unusual across the three regions?
Right.
-5% organic growth, sort of what was better, what was worse.
Right. I'll start with the geographic update, and there was a dynamic in one of our regions that was a little bit different, so I'll talk about that also. In the U.S., it was strong, high single-digit growth. It was broad-based growth, particularly in our aerospace business, our process businesses, and our EMG business. It really fired on all cylinders. Europe was a pleasant surprise, up mid-single digits. A solid growth in automation and process businesses drove that growth. Asia was roughly flat, and that's where there was a dynamic where we had the activity seemed to slow in February, but it picked up very strongly in March.
Some of our folks were speculating that some of the uncertainty or the Chinese New Year may have slowed business activity. In March, we ended up with a record order input for Asia. It was flat; you know, going forward, we haven't changed any of our outlook for the region. Across the board, it was a pretty good quarter.
Just lastly, David, can you maybe comment on where you were in Q1 with price realization and how that compared to inflation? Thank you.
Yeah. Matt, I didn't answer your linearity question. I mean, we strengthened through the quarter. Our strongest month was March, which is not atypical for us. Related to the price inflation, Q1 2019 was much like the second half of 2018. We had an excellent quarter. We achieved about two percentage points of price increase across our entire business. Total inflation was a bit less than 1.5%. We're very pleased with these results, and we think we're well-positioned to continue this for the balance of 2019. That speaks to the, as I said before, highly differentiated nature of our product portfolio and our leadership positions in these niche markets and also our focus and determination to stay ahead of the inflation in a changing global economic environment.
Thanks, David.
Thank you, Matt.
Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.
Hi. Yes, good morning. Can you hear me?
Yeah. Good morning, Andrew.
Hey, just maybe a basic question, but just looking at the seasonality, given what the first quarter was, usually first quarter for you is quite a bit a couple of percentage points less than 25%. I guess the second quarter guide and the annual guide imply that on a seasonal basis, the second half is going to be weaker than usual, just looking back 10 years. I was just wondering, are you seeing any yellow flags that are driving this kind of caution , or are you just being conservative?
Yeah. It's a great question, Andrew. I mean, the first point is in quarter two, our guide is higher than in quarter one. We typically, from Q1 to Q2, it's a bit higher, and, you know, we grew, you know, sales organically at the high end of our organic range in the first quarter. We had excellent core margin performance, and we raised our guidance, letting the entire Q1 earnings flow through to the new guide. To your final point, it's still early in the year, and we feel good about how the quarter played out. We're being a bit prudent in the uncertainty of the economic environment, and we feel that we're very comfortable with our guidance.
That makes sense. Just a follow-up question. I guess since 2014, we've been sort of waiting for a big comeback for your energy business. If you can just comment on what, you know, WTI being north of 60, are you seeing any change in tone from your customers that points to, you know, maybe we're finally going to really take off, or it's just going to be a steady climb as it used to be? Thank you.
Sure. You know, the energy business is probably a bit smaller as a percentage of the total AMETEK because of some of the organic growth we've had in other areas and our M&A. It's about 6% of the company. In the first quarter, it was up low single digits. For the full year, we're expecting it to be up mid-single-digits. For the full year, we're looking at our upstream business to be up high single digits and the mid-downstream to be up mid-single digits. We have about 75% of our business in the mid- and downstream. What we're starting to see is a typical recovery. That part of the business, our largest part of the business, is starting to gain momentum.
We feel very good about our energy business. We feel really good about the market position we have, and the business is continuing to grow. It had a great year last year, and it looks like it's on target for another good year this year.
Any near-term change in behavior as the oil price rallied in the past three months?
You know, we have solid backlogs, but I can't say that there was a notable change in behavior when the price of oil rose the last few months, and there wasn't a change in behavior when it dropped precipitously in Q4. We just had a steadily increasing level of business, and it's a global business, about two-thirds of it outside the U.S., and it just feels really solid. Then, as I said, the mid- downstream business is picking up nicely.
Great quarter, guys. Thanks.
Thank you, Andrew.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Hey, good morning, guys.
Morning, Nigel.
Hey, this is Bhupender here sitting in for Nigel Coe.
Hey, Bhupender.
Good morning, Dave.
Good morning.
Dave , you mentioned , you know, the core orders in the quarter. Can you give us some color on the core orders number, you know, for the whole company as well as EIG and EMG? Just kind of talk about, you know, some of the end markets that kind of strengthened or weakened during the quarter or what you actually see, you know, from a color, especially in April, and what we are seeing here. Thanks.
Sure. Sure, Bhupender. The first thing would be the organic orders were up 3.5% for the quarter. That's, remember, against a very difficult comp at, we were up +12% in Q1 of 2018, really solid orders performance. We had excellent book-to-bill. Our book-to-bill was 1.07. I think this marks 10 straight quarters with a positive book-to-bill. We ended the quarter with a record backlog of $1.7 billion. You know, we're feeling really good about the environment we're operating in. From what we're hearing from our businesses, we continue to see solid underlying demand. We're really well positioned to perform well in this environment.
Regarding April, I haven't seen the data as of today, but I've seen it as of yesterday, and we're right on track. No, no change in pace in April, and we're feeling but good about Q2.
Okay, got it. Just a question on your guidance for the second quarter. The sales are going to grow to a high single. Do you have the organic growth number? Like, what kind of organic is built into those numbers?
Yeah. The organic growth would be the same level at the, you know, 3%, 4%, 5% number that we've guided for the year for AMETEK.
Okay. It's within the range, then. Okay, got it. Got it. Lastly, you know, on the, you talked a little bit about the M&A pipeline. You guys did a, you know, great job, like, you know, deploying more than $1 billion here over the last year in 2018. Any color on the size, you know, at least the pipeline, EIG, and EMG; you know, how it's kind of mixed as well . Maybe just give us a, you know, around the horn kind of color here on M&A.
Yeah, sure. On M&A?
Sure.
Yeah, our M&A pipeline's very active. As always, we're evaluating a number of opportunities. We have a very broad pipeline. It needs to be broad because we're in the environment with deal pricing up and with the competitiveness of the environment, we have to select the deals from our broad pipeline, which will give us a solid return on capital. The M&A environment is similar to what we've been experiencing in the past few years. We're looking at deals across both of our groups, and, you know, I'm very encouraged with the progress in the pipeline. You can't predict in the next quarter if a deal's gonna close, but I feel very confident on the long term with our process capability in M&A and with our tremendous pipeline.
I'm very bullish about M&A.
Okay, got it. Lastly, in aerospace, I just want to leave with this. You know, if you can explain the exposure on the 737 MAX here, anything on that front?
Yeah.
You know, any pressure from the, you know, downtick on the production, especially from the Boeings? Thanks.
Right. As you know, AMETEK is not dependent on any one platform. We're on just about every platform, but we're not overly dependent on any one. When we look at the 737 issue, first of all, you know, Boeing hasn't reduced the orders forecast and the production plan that we're seeing yet. We're still, you know, going along meeting that demand. The second point would be for the full year of 2019, the 737 MAX accounts for about $15 million in revenue. That puts it in an order of magnitude. It's a small part of the company, I think probably about 0.25% of revenue. We're not overly dependent on it.
You know, we certainly want to see the problem fixed and want to keep producing at the rate we're producing on. We had in the quarter strong OEM business. We, the commercial business , were very solid. Our aerospace business was up high single digits in the first quarter; we're forecasting it to be up mid-single digits for the year. Strong growth in all segments, and maybe there's a bit of conservatism there. We feel really good about our aerospace business and all of our market segments.
Got it. Thanks a lot.
Thank you, Bhupender.
Thank you. Our next question comes from Brett Linzey with Vertical Research. Your line is open.
Hey, good morning, all.
[crosstalk]
Just wanted to come back to margins. Obviously a lot of noise with FX and deal impacts moving through the reported margins. What were the core incremental margins that you saw in the quarter, you know, at the total company level and at the segment level?
Okay. At the AMETEK level, it was 35%. At the EIG level, it was 50%. At the EMG level, it was 25%. Pretty typical performance, very strong performance, and we're very pleased with it.
Okay, good. Then, to follow up on the order question, appreciate the color on the 3.5%. What did that look like at the segment level? Were both positive, or was the complexion one negative and one up? Then, within that order number, should we assume that that includes, you know, roughly two points of price, similar to what you realized at the sales line in the quarter? Thanks.
Yeah. You probably should assume that because our pricing has been pretty consistent. At the group line, EIG was up 5% organically in orders, and EMG was up 1% organically in orders. EMG had the toughest hurdle because last year we had the very difficult comp at 12%, and EMG was a bit stronger than EIG. Really, you know, all of our businesses had solid order performance, and we have , as I said before, an excellent book-to-bill and record backlog. We're feeling really good about the orders, and it's really across the board.
Okay, good. Maybe just one last one on pricing. Very good pricing power, you know, all year really. As you guys, you know, look out into the balance of the year and you've seen some of these, the commodities and raw materials start to moderate here, is there a period of giveback? Maybe you could just update us or remind us how, you know, pricing mechanisms work, you know, specifically within the metals business.
Yeah. I'd say in AMETEK, except for the metals business, there isn't a period of giving back. I think within the metals business, we don't really count that as price. That's just the commodity fluctuations that get passed on to the customer. What you really have there is a lot of the metals have stabilized, but the price of vanadium , one metal that's important to us , has dropped recently. That'll have a, you know, modest impact as we go forward on EMG's specialty metals business, but I don't expect much of an impact at the AMETEK level.
Okay, great. I appreciate it.
Thank you.
Thank you. Our following question comes from Robert McCarthy with Stephens. Your line is open.
Good morning, everyone.
Morning, Robert.
Congratulations on another solid quarter. It's nice to have a boring AMETEK, right?
Thank you.
Yeah. I guess from that perspective, in some of the excellent questioning that was ahead of me, you know, I think it is a question about kind of the guide and the cadence for the year. Could you talk about that in the context of, you know, you have entered a kind of a slightly different range for the kind of deals you're looking at in terms of growth and potentially valuation and even underlying margins? Do you think, given that the properties you're looking at now are just dictated by the market environment and the pricing environment, that some of the accretion is being blunted so that we might see it a little bit more next year?
Another way to saying it is, of the deals you've announced so far, you know, what would you expect for kind of accretion in 2020 given the fact that it sounds like, you know, we do have a lot of puts and takes for 2019?
Right. Yeah, I think in 2018 we said that there's about $0.12 of benefit in 2019. There's about 12% of $0.12 of benefit from M&A. You know, we got a lot of deals, a slug of deals at the end of 2018, so those deals are working their way through the system, and there's certainly a lot of integration activities going on. Yes, from those deals, timing-wise , they'll have a potentially bigger benefit in 2020. We're, you know, we're still seeing good margins now with our core business, and, you know, that's very positive on those deals, and the integrations are progressing very well. They're spread out amongst our operating units, and we feel good about them.
You know, forgive me for another kind of impolitic question; it's easier to ask these questions when your stock has rallied as significantly as it has and the investor perception has changed as radically as it has over the last three years. If you were self-critical about yourself and the organization over the past three to four years in terms of M&A, how could you miss on a transaction, or how would you grade yourself on where your pitfalls are with AMETEK's strategic style in terms of going after assets?
You know, I think our style is one that equates to returns. We look for a cash-on-cash after-tax return on invested capital of 10% in year three on all these deals, and we haven't changed that. We're getting that kind of return on the deals we're getting done, and we're not chasing deals that we can't get a return on. A critique may be that, you know, we're not paying the inflated prices, but we feel very comfortable in the long run that there's a lot of discipline in our system. We want to maintain that discipline, and we look at the return on total capital on our balance sheet. That return on capital is about 13% in the first quarter.
Our cost of capital is more like 8.5%, and we think the difference between the two is what we're creating as value for our long-term shareholders, and we look at that very closely. That's the key driver behind our acquisition strategy. We have a lot of discipline, and we don't plan to change that.
Thanks for your time.
Thank you, Rob.
Thank you. Our following question comes from Deane Dray with RBC Capital Markets. Your line is open.
Thanks. Good morning, everyone.
Good morning, Deane.
Hey, I'd just like to go into some of the variables and put-and-takes in the quarter, if I could. Some of the dynamics that the industrial companies have been contending with, you know, any ups and downs that you've seen regarding tariffs. Second one is pull-in. Some of the companies saw cases where they actually had bigger demand pulled out of the first quarter and into the fourth quarter. Did you see any of that? Then anything about it? you're not typically someone to complain about the weather, was there any factor there too? Just start there too, please.
Okay. I guess I'll start with the weather; it didn't have a measurable impact on our business. With the tariffs, you know, Q1 2019, it was a situation played out as we predicted. We had about $0.01 from the direct impact from tariffs; we offset that totally with price. Our sourcing activities have been successful in reducing the gross tariffs; we're active in continuing those sourcing plans. Price actions completely offset the tariffs; we feel good about that. To your last question there regarding the pull-ins, we look very hard at the pull-ins; there are always some things pulled into Q4 before the end of the year, maybe to avoid a price increase, it wasn't any different than any other prior year.
We're not saying we pull a lot into Q4 2018. We really looked at it hard, and it looked about the same to us. Those are the answers.
Yeah, those are all good to hear. Just going back to the record backlog, and just could you remind us how much of your backlog would convert in 2019? What percent of that? Just, you know, talk about that visibility that that gives you.
Yeah. Right.
I think it's about 85% comes out in the next year. You know, it gives you some very good visibility. Quite frankly, there were a number of our businesses that are book and ship in the month or the quarter. You don't wanna take it too far, but you know, 85% of that $1.7 billion is gonna go out this year.
Great. Last question for me. Were there any growth investments in the quarter that you would call out? Just remind us about the growth investment. Budget is for 2019.
Right. I highlighted the product development, EDAX, and also the product development and the adjacent expansion of Rauland. Those were the highlights. Regarding investment for the year, we're investing about $80 million of incremental investments in sales, marketing, and engineering activities. That's $80 million more than we invested in 2018. That spend is relatively linear through the year, and we're getting a good return on it. Certainly we're investing heavily, but our businesses are really focused on getting a return, and we were very pleased with our new product development activities and also the work we're doing in commercial excellence and improving our capability to go to market.
Great to hear. Thank you.
Thank you, Deane.
Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the star and the one keys on your telephone keypad. Our next question comes from Richard Eastman with Baird. Your line is open.
Yes, good morning.
Good morning, Richard.
David, just looking at the core growth rates in the quarter, the 3% for EIG and the 7% for EMG against really a tough comp. I'm curious, you know, as the revenue shook out in the quarter, was there any, you know, movement between segments? Was EMG, you know, maybe a bit of a positive surprise, and maybe anything in EIG that, you know, maybe became an order that didn't ship or was there any movement between the segments here relative to the, you know, first quarter macro?
You know, the first point is I'll make a small correction to what you said.
The EIG organic growth was 4% in Q1, not 3%.
Okay, fair enough. Same question then applies.
Yeah, applies.
Yeah
it really played out as we thought. I mean, we had a forecast. Both sides of the business met their forecast.
Okay
Very, from the sales execution side, it was a very predictable quarter for us.
Uh-huh. Okay. The one thing that steps out from a margin perspective, your core margin in EIG, I think you said it was up 110 basis points on the core side. Was that primarily—I mean, what are the dynamics there? Is it mix? Was there more price in the EIG product lines or mix , or does it just seem like a very positive variance?
Yeah, you're right, Rick, it is a positive variance. You know, you have the cost reductions factored in also. You know, our pricing that we got 2% in the quarter was broad-based across our portfolio, but it was a little bit higher in EIG than EMG, and we definitely had a positive mix. I mean, at this stage of the cycle, people were buying our, you know, fully optioned products. They have money to spend, and our mix is positive. Really three factors. We managed costs well, we got a good price in EIG, and the mix was positive.
Okay. Then just one last question. Around the M&A and , you know, the deals that they're kind of in your pipeline or potential deals in the pipeline, a couple things. One, are they skewed, you know, the prospects, are they skewed towards either EIG or EMG? Is there a theme in your pipeline around, you know, the type of businesses or the products? Maybe you could just address that, perhaps?
EIG is about two-thirds of our business and EMG's about a third. I think the pipeline reflects that skewing. We're looking on, in a lot of our businesses, broad-based, looking at differentiated products, you know, the secular versus cyclical markets.
Yeah
Priority. It's a lot of what you've seen recently. There's, you know, healthcare; there's more process instrumentation; there's our automation business; there are some very good properties we're looking at, the power and industrial segments of the aerospace business. I mean, across the board, we're looking.
Okay. Yeah. Is there a healthy element of this, you know, kind of connectivity theme, or, you know, any type of software extensions to the hardware? Is that represented in there as well?
A little bit.
Yeah. Mm-hmm.
with Rauland, a little bit with Telular, and things like that.
Yeah
A theme we're looking at doesn't define our entire pipeline for sure.
Yeah. Okay. Very good. Thank you.
Thank you, Richard.
Thank you. Our following question comes from Joe Giordano. Your line is open.
Hey. Morning, guys.
Morning, Joe.
Hey, if you had to guess, if you spent the same amount in 2019 on M&A as you did in 2018, is it more likely that's six deals, more than six deals, or less than six deals? Like, how are you skewing the size that's in your pipeline right now?
I don't want to guess, Joe, because the pipeline has some more sizable deals, and it also has some smaller deals. With our disciplined approach, you don't know what you're going to find. We could spend the same as we spent last year; we could spend a lot more; we could spend less, and the deals could be a lot of different sizes. That's pretty hard to predict at this point of the year.
Fair enough. Dave , one of the things you focused on when you came into the CEO role was spending to reinvigorate organic growth on the front end of the business. That's shown through results; part of that is also your underlying market's getting better. How would you break that down between success internally at AMETEK relative to just your markets getting better over the last couple of years ?
Yeah, that's it. You know, we just finished our 9th quarter in a row with an average organic growth of 6%; we're really pleased with that. You know, clearly the economic environment has helped us, but certainly the focus and work that we're doing have improved also. Our, you know, customer-facing capability is really improved. Our teams are excited, and we're seeing positive results from growth , Kaizen, and digital marketing; our sales force is much more effective. We're driving aftermarket growth; it's becoming part of our culture and an important part of our business system. It's very difficult to bifurcate between the market growth and the company's specific growth; I can just tell you that we're making great progress, we'll let the numbers speak for themselves.
Great. Maybe last, could you do your kind of wrap-up of everything?
Sure. Yeah.
Yeah.
Yeah. If I go around the horn with market segment commentary, our process businesses had, you know, an outstanding start to the year. Overall sales were up mid-teens. The growth was mid-single digit organically, with contributions from the acquisitions of SoundCom, Forza, Telular, and Spectro Scientific. Our materials analysis business saw particularly strong and broad-based growth, and they are continuing to see solid demand for their high-end analytical instrumentation. That team has done an excellent job. For all of 2019, we continue to expect organic sales to be up mid-single digits. Our aerospace and defense business delivered excellent results, as I talked about before. High single-digit organic growth for the quarter. Growth remained solid across our various aerospace markets, with notable strength across our military and commercial OEM businesses.
For all of 2019, we continue to expect mid-single-digit organic sales growth with balanced growth across each market. For our power and industrial subsegment, we saw mid-single-digit growth in the first quarter, and that was driven by the recent acquisition of Motec. Organic sales were flat in the quarter for power and industrial. In line with our expectations, we had a difficult prior year comparison in our power test and measurement business. For all of 2019, we continue to expect low-to-mid single-digit organic growth driven by the strength of our backlog and the solid order patterns that we're seeing across these businesses. Finally, for our automation and engineered solutions, we saw growth across those businesses. They remain solid with mid-single-digit organic sales growth in the quarter.
We continue to see excellent growth from our Dunkermotoren business, tied to the automation macro trend in service. In addition, we saw notable strength across our engineered medical components businesses in the quarter. That team is really doing a fantastic job with the EMC business. For all of 2019, we continue to expect solid mid-single -digit organic sales growth for our automation and engineered solutions business. That's a walk around the horn, Joe.
Thanks, guys.
Thank you.
Thank you. Our following question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.
Hey, good morning, guys. This is Ken Newman on for Steve.
Morning, Ken.
Morning.
Morning. Hey, I just wanted to clarify. The hurdle rates within your M&A pipeline haven't changed in terms of deal size and return metrics and multiples versus what you've said on prior calls. Is that correct?
No change.
No change. On the larger end, the $300 million-$500 million in revenue type size or deal size is probably at the upper echelon.
Correct.
Okay. It does seem, as my follow-on, that you're pretty positive on end markets, outside of maybe some uncertainty from trade policies. Just given some of the conservatism in your guidance, I'm curious to hear what your view is on the cycle. Where do you think we are? what inning do you think we're in right now, and how many more legs does this cycle have, you think?
Very, very difficult to predict. As we communicated earlier in the year, we expect solid growth this year, but the growth is going to moderate a bit. It's driven by the trade tensions and the global macro uncertainty, and additionally, we have some very difficult comps. We're staying close to Asia because of the trade difficulties, but overall, it feels pretty good. You know, our guide is typically a bit conservative, and we're waiting to see things play out, but we feel good about the year.
Got it. Last one for me, and I'm sorry if I missed it. How much of the $80 million in OpEx savings has been realized in the first quarter?
$18 million [inaudible]. Right on our plan. That'll accelerate a bit as we progress through the year.
Thanks a lot.
Thank you, Ken.
Thank you. Our next question is from Robert McCarthy with Stephens. Your line is open.
You can't get rid of me. I turn up like a bad penny.
Just a couple more since we'll round it out for the hour. You know, touching on your Asia comments, I mean, obviously you're not exactly a bellwether like 3M in terms of a broad octopus touching every different end market, but you did highlight kind of some incremental softness there coming into February, some uncertainty, and then March rebounding. I think you made a comment about Asia as a whole, right, versus China specifically. Maybe you could just amplify your comments there in terms of what you're seeing and in terms of what's going on.
As I said, Asia was roughly flat. China sales were down mid-single digits against a difficult comp. We had done very well over there for the better part of two years. The China orders were up in the low single digits for Q1. Similar to Asia, we had tremendous order input in China in March. I mentioned the dynamic of very slow February, tied to Chinese New Year. The other thing, our MAD business, our Materials Analysis Division, had a great quarter in China. Some of our project businesses with difficult comps were off a little bit. When you look at China as a whole, you had, you know, good orders in line with, you know, low single digits for Q1.
For the full year for China, we expect the growth to be in line with the 3% to 5% of all of AMETEK's. It's moderating from the double -digit growth of the past couple years but is still solid, and we're still staying close to it, but there was a bit of uncertainty. It's the one uncertainty that we're watching closely because of the global trade situation.
Two more, if you'll forgive me. One viewer, mail, wanted to ask about Brexit. Any kind of impact there that we should be thinking about?
Yeah. The U.K. accounts for about 4% of AMETEK sales. We're preparing for a hard Brexit; we're not assuming there's a political solution. The can has been kicked down the road; it's been delayed until the fall. Certainly, there may be some administrative issues that may cause delays in getting products in and out of Europe into the mainland; our businesses are very in tune with the issue. We probably are carrying about 1 million GBP of inventory too that's been pre-positioned to make sure that we're going to be able to sustain a short-term problem. You know, we, our businesses from the U.K. do a lot of exporting already, not to the mainland. We know how to export from the U.K.
There may be some administrative issues in the short term. We're hoping for a solution. Again, preparing for a hard Brexit.
Finally, just on the M&A environment, obviously, you know, it's what you guys ultimately do. You go out and buy these private companies, closely held companies, and some public companies but ultimately make them a heck of a lot better and create a lot of value, which is wonderful and, as you know, God's work as a compounder. I guess the question I have is, given the prevailing environment, where valuations are, where funding is, and optionality, how do you think about the potential for select divestitures in the portfolio, and how do you think about the repurchase option, which you obviously hit the, you know, hit the ignition on, you know, in the last six months?
Yeah. Our, our number one priority for capital allocation is to deploy our capital on acquisitions and buy good businesses and make them better. That's generated the long-term return for our shareholders, and it's a clear priority. You know, at the end of last year, we had an opportunistic approach to buybacks. Our stock had a significant market dislocation, and we deployed a significant amount of capital and bought back some shares, you know, in the low $70s. It looks like a good move at this time. Then the priority three for the capital allocation would be a modest, consistent dividend. In terms of your other question about our portfolio, we're in the process of completing our annual strategic review. This is where we closely look at all the elements of our portfolio.
In the review last year, we concluded that we're very comfortable with our portfolio, and we had clear, profitable growth opportunities for each of our businesses. Our, our strategy is to focus on a broad, diverse set of niche markets; you know, we don't want to become exposed to any one single market, customer, or technology. We haven't completed our review this year. We do it every year; if we go through that review and we come to a different decision, we'll let you know, but we're comfortable with our portfolio.
Thanks again for your time.
Thank you. Thanks, Rob.
Thank you. Our next question comes from Scott Graham with BMO Capital Markets. Your line is open.
Hey, good morning, David, Kevin, and Bill Burke. How's it going?
[inaudible]
Well, yeah, no, I mean, I was napping there. I don't know what happened on the queue here, but I saw I just took a nap. Robert was right; the quarter was boringly comfortable.
Yeah, I'm wondering how Rob got two questions in before you got one.
I think Robert got about nine in. That's good. He, you know, this is a good question as usual. I do have three more, believe it or not.
Oh, geez.
I just want to understand the cadence of organic that you're thinking of this year. Obviously, you kind of came in at the high end this quarter on the organic. Also, obviously, if you look at the stack comp, you know, your second -half comps kind of jump up 200 basis points versus the first half. Are you guys kind of thinking that, you know, three, five? Kind of comes in a little heavier in the first half than in the second half?
Not really. I mean, I wouldn't read too much into it. I mean, we grew sales organically at the high end of our guidance range. It's still early in the year, and we want to be prudent. That would be the biggest driver. As we mentioned before, we do have some tough comps, and that's driving some moderating growth. We're feeling good about how the year is playing out nicely for us, with one quarter behind us.
Great. Thank you. I guess this next one is a question for both you and Bill. You know, as I know from history, you typically can really get some good working capital out of your acquisitions, you know, after that first six-12 months kind of thing. Could we expect an acceleration in free cash flow as the year progresses from that?
I would say that the free cash flow will probably be a little more heavily weighted into the back half of the year than it is in the front half. I think it's, as you mentioned, that we're able to derive the benefits from businesses that are now inside the AMETEK portfolio for a longer period of time, as well as getting after, you know, improving working capital performance across all of our base businesses.
Got it. Thank you, Bill. My last question is kind of going back to an earlier question on M&A, but more specifically, you know, on the segments. There has been a profound difference in M&A in EIG versus EMG. I'm just trying to wonder why that is. I mean, I'm looking at your organics from Electromechanical; over the last couple of years, they've been outstanding. I'm also thinking that I know you are into the connectivity thing, and Dunkermotoren is on that side of the house. You know, kind of like what's going on there that is not where we're not seeing more M&A on that side of the house?
Yeah, I Yeah, we're seeing some M&A on that side of the house. We did FMH Aerospace last year, and we're actively looking. I, you know, and all of our businesses put together a strategic plan, and we look at those opportunities. You know, when you look at the characteristics and the differentiation, we have very differentiated businesses with Dunkermotoren and with our aerospace presence. So, you know, our aerospace business had an outstanding quarter this month. We're looking at both sides of the house. I think over the past 10 years, there's been, you know, at one point, EIG and EMG were about the same size, and EIG has just grown a little bit bigger.
There is clearly a strong desire to do acquisitions on either side of the business.
Would you Maybe as a corollary to that, say that, and this is my speculation, of course, aerospace, particularly aftermarket -oriented, as well as connectivity assets, which are on the electromechanical side of the house, have prices for those deals a little higher than what you would want for your ROIC, or is that just a bad guess?
I wouldn't say that. I wouldn't say that. The pricing is really dependent on the niche market that we're looking in and the expectations of the sellers. I wouldn't say that. I mean, there's a big difference between EIG and EMG from the product portfolio. EIG has a lot of direct aftermarket with the end users, and EMG in large part, is an OEM supplier except for the aerospace business. Really, we're looking on both sides, and I wouldn't draw anything from your prior point.
Understood. Thank you.
Thank you, Scott.
Thanks, Scott.
Thank you. I have no further questions at this time. I would now like to turn the call back to Kevin Coleman for closing remarks.
Great. Thank you, Sydney. Thank you , everyone, for joining today. As a reminder, a replay of today's webcast can be accessed on our website later today. Have a great one.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.