AMETEK, Inc.

Good day, ladies and gentlemen. Welcome to the Q2 2019 Ambitech Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If you require operator assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's conference is being recorded. I would now like to introduce our host for this conference call, Mr. Kevin Kaldman, Vice President, Investor Relations. You may begin.

Great. Thank you, Kevin. Good morning, everyone, and thank you for joining us for Amitek's second quarter 2019 earnings conference call. With me today are Dave Zepico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. Amitek's second 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 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 risk and uncertainties that may affect our future results is contained in AMETEC's filing with the SEC. AMETEC disclaims any intention or obligation to update or revise any forward-looking statements. Also, 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 with prepared remarks by Dave and Bill, and then open up for the questions. I'll now turn the meeting to Dave.

Thank you, Kevin, and good morning, everyone. Ametek had an excellent second quarter. We exceeded earnings guidance on solid organic sales growth, contributions from acquisitions, and exceptional operating performance. In the process, we delivered a record level of sales, EBITDA, operating income, and adjusted diluted earnings per share. We also delivered impressive growth in operating cash flow in the quarter. Given these strong results on our outlook for the back half of the year, we have again increased our full-year earnings guidance range. These results continue to highlight the strength of the Amatek growth model and our ability to deliver strong and consistent performance for our shareholders. Now on to the financial highlights for the quarter. Total sales were a record $1.29 billion, up 7% compared to the second quarter of 2018. Organic sales growth was solid at 3%, acquisitions added 5%, and foreign currency was a one-point headwind. EBITDA in the second quarter was a record $349 million, up 10% over the same period in 2018, and EBITDA margins were excellent at 27%. Operating income was a record at $295.4 million, a 9% increase over the second quarter of 2018. Reported operating income margins were up 60 basis points to 22.9%. And excluding the dilutive impact of acquisitions, operating margins increased an impressive 110 basis points over the prior year period. This exceptional operating performance reflects the strength of our operational excellence initiatives. Earnings were a record $1.05 per diluted share, up 14% over the prior year, and exceeding our guidance range of $1 to $1.02 per diluted share. Lastly, operating cash flow was superb in the quarter, up 21% to $246 million. Now on to the individual operating groups. First, the electronic instruments group. AIG's second quarter sales were $820.2 million, up 10 percent over last year's second quarter. Recent acquisitions contributed 8 percent, organic sales were up 3 percent, and foreign currency was a one-point headwind. Our materials analysis business delivered another very solid quarter. Their high-end analytical instrumentation solutions, including several new product introductions, are helping our customers solve increasingly complex challenges in attractive growth markets. Our aerospace business has also performed nicely, and its demand remains very solid across the aerospace and defense markets. In addition to the strong top-line growth, EIG delivered outstanding operating performance in the second quarter. Operating income increased 10% to $212.9 million, with reported operating income margins of 26%. Excluding the dilutive impact of acquisitions, EIG's margins expanded 90 basis points over the prior year. The electromechanical group also had a strong quarter, with solid organic sales and impressive operating performance. Second quarter sales for EMG were $469.2 million, up 1% over the same period in 2018. EMG's organic sales growth was 3%, and foreign currency a two-point headwind. EMG's operating performance was excellent, with operating income a record $101.1 million, up 7% over the prior year's second quarter. Operating margins for EMG increased sharply to 21.5%, up 120 basis points over the same period last year. Ametek's results in the second quarter and through the first half of the year were excellent. We are firmly positioned for another year with strong growth and record results. Our highly differentiated businesses continue to execute the Ametek growth model, driving long-term sustainable value for our shareholders. I'd like to highlight some of our businesses' recent accomplishments, and then I'll touch on our updated outlook and guidance for the remainder of the year. First, I would like to congratulate the team at Creaform for recently winning two Red Dot Awards for innovative product design of their HandyScan Black and GoScan Spark metrology products. Launched in April, both new 3D scanners were designed with enhanced features and a sleek new ergonomic design. Now in its third generation, the HandyScan Black has been optimized to meet the needs of design, manufacturing, and metrology professionals looking for the most effective and reliable way to acquire accurate 3D measurements of physical objects. The anti-scan black provides highly accurate and repeatable results even in difficult environments and with complex surfaces. The GoScan Spark offers the fastest and most friendly 3D scanning experience in the market. Designed to scan any object without need for setup, it offers flawless texture and geometry acquisition as well as impressive details in a rich color palette. The Red Dot Award is a world-renowned competition that is used to identify the most innovative new products across several product categories. I'd also like to congratulate our Dunker Motoren business for winning the Machine and Marks Best in Industry Award for their BG95D Pro servo motor solution. Dunker Motoren is a global leader in advanced motion control solutions serving a broad set of end markets including medical, laboratory, factory automation, and motor applications. Their BG95D Pro sets the standard in integrated servo motors with improved flexibility, functionality, precision, and operational reliability. The Red Dot and Best of Industry awards and the success of these new products are testaments to the strength of our new product development teams. So congratulations to everyone at Creaform and Dunker Motor for these outstanding recognitions. We remain committed to investing in our research and development efforts to provide leading edge innovative products and technologies to our customers. In 2019, we expect to spend approximately $260 million on RD&E, up 13% over last year's level. And we are seeing excellent results as our new product vitality index was a very strong 25% in the quarter. Now shifting to operational excellence. Our operational excellence tools are adding significant value for our businesses. We continue to drive efficiency improvements across our operation to enhance our profitability and improve cash flow, as was evident in our operating performance during the second quarter. For all of 2019, we now expect approximately $85 million in savings from our operational excellence initiatives, with the majority of these savings generated from material sourcing. This is an increase from our previous estimate of $80 million in annual savings. Finally, we remain very active yet disciplined in our acquisition efforts. Our business development teams continue to manage a strong pipeline of acquisition opportunities. Amatek remains focused on deploying our strong free cash flow on value-enhancing acquisitions. I'll now move to the updated earnings guidance for 2019. Given our performance in the second quarter and our near-record backlog, we now expect 2019 earnings per diluted share to be in the range of $4.04 to $4.10, up 10% to 12% over 2018 earnings. This new guidance range has increased from our previous guidance range of $3.98 to $4.80 per diluted share. We continue to expect overall sales for the year to be up high single digits with organic sales up 3 to 5 percent. Overall sales in the third quarter are expected to be up high single digits. Earnings for the third quarter are anticipated to be in the range of $1 to $1.02 per dollar each year, up 10 to 12 percent over the prior year period. To summarize, we are pleased with our second quarter results. We remain focused on driving continued growth at the end of the year and well into the future. Our business's market-leading differentiated technologies and their execution of the Amatek growth model are driving strong results for our stakeholders. 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?

Bill Burke Thank you, Dave. As Dave noted, Amatek had an excellent second quarter, capping off the first half of the year with record results. Let me provide some additional financial highlights for the quarter. Core selling expense in the second quarter was roughly in line with last year's second quarter. Second quarter general and administrative expenses were up slightly over the same period in 2018, and as a percentage of sales were 1.4% versus last year's level of 1.5%. The effective tax rate in the quarter was 20.4%, down from last year's second quarter tax rate of 21.9%. For 2019, we now expect our effective tax rate to be approximately 21%, 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 18.3% in the second quarter, essentially unchanged from the first quarter. Capital expenditures were $22 million in the quarter. And for the full year of 2019, we continue to expect capital expenditures to be approximately $100 million, or 1.9% of sales. Appreciation and amortization expense in the quarter was $57 million. For the full year, we continue to expect appreciation and amortization to be approximately $235 million, including acquisition-related intangible amortization of approximately $130 million, or 43 cents per diluted share. Our businesses continue to generate very strong levels of cash flow. Second quarter operating cash flow was $246 million, up 21% over last year's second quarter, and free cash flow was $224 million, up 20% over last year. As a percentage of net income, free cash flow conversion was 104%, and we continue to expect full-year free cash flow conversion of approximately 110% of net income. The primary use of our strong free cash flow is to support our acquisition efforts, and as Dave has noted, our pipeline remains healthy and we have significant financial flexibility to continue our acquisition strategy. Total debt at the end of the second quarter was $2.47 billion, down from $2.63 billion at the end of 2018. Offsetting this debt is cash and cash equivalents of $568 million, resulting in a net debt-to-EBITDA ratio as of June 30th of 1.4 times. We remain well-positioned to support our growth initiatives with approximately $2 billion of cash in existing credit facilities. To conclude, our businesses delivered outstanding performance with high-quality results in the second quarter. Our outlook remains positive through the back half of 2019, given our strong balance sheet and excellent cash flows.

Kevin? Great. Thank you, Bill. Kevin, can we please open the lines for questions?

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key. Our first question comes from Matt Somerville with DA Davidson.

Thanks. A couple questions. First, can you give us a little color on where incoming order rates organically were for the total company and by business, and also just given the macro choppiness out there, Can you talk about what sort of linearity you saw during the quarter and what you're seeing thus far in your business in July?

Sure, Matt. In terms of orders, Q2 orders were up 4%, and organic orders were flat. They were very slightly positive. In our EIG business, the order rates were in line with the organic sales growth in the quarter, and the EMG orders were down a bit. we had some delays in our automation and engineer solution businesses. And we ended the quarter with a near-record backlog of $1.7 billion. And in terms of the order patterns and sales patterns during the quarter, they followed a similar trend. May was a bit better than April, and June was a bit better than May, which is very typical for our business. But the growth each month as it stepped up was more subdued than past quarters. So pretty typical, but a little less of a ramp.

And then as a follow-up, where were you in the quarter on price versus inflation? Thank you. Sure, Matt. Sure.

Q2 was much like the second half of 18 and the first quarter of 19. We had an excellent quarter. We achieved two points of price across our entire portfolio. Total inflation, the impact of tariffs was a bit less than 1.5%, so we had a positive spread, and we're very pleased with the results. As you know, the results speak to the highly differentiated nature of Ametek's product portfolio. We have leadership positions in niche markets around the globe, and we really have some focus and determination to make sure we stay in front of a changing global environment. So we're very pleased with the results. Thank you, David. Thank you, Matt.

Our next question comes from Nigel Coe with Wolf Research.

Thanks. Good morning. I thought it may be a good time to perhaps run through the end markets and the geographies in a bit more detail.

Right. Sure thing, Nigel. On our market segment commentary, I'll start with our process businesses. They had another excellent quarter with overall sales up low teens on a percentage basis, driven by mid-single-digit organic sales growth. and contributions from the acquisitions of Forza, Telia, or Inspector Scientific. As I mentioned in the prepared remarks, our materials analysis business had a particularly strong organic growth quarter, driven by solid new product introductions and solid demand for their high-end instrumentation. And for all of 29, we continue to expect process organic sales to be up mid-single digits. Switch to aerospace, our aerospace and defense businesses delivered Another excellent quarter with high single-digit organic sales growth. This growth reflects the attractive positions we have across a diverse set of aerospace and defense platforms. Similar to the first quarter, growth in the second quarter was broad-based across our various aerospace markets. We had notable strength in our commercial OEM and third-party MRO businesses. And given the solid start to the year, we're increasing our expectations for aerospace and now expect mid to high single-digit organic sales growth for all of 2019, with balanced growth across each market. Our power and industrial segment in the second quarter sales were up low single digits, driven by the contribution from the recent acquisition of MoTeC. Organic sales were down slightly in the quarter and in line with our expectations. For all of 2019, we continue to expect low to mid single-digit organic sales growth, given the strength of our backlog and solid order patterns in these businesses. And finally, sales of our automation and engineering solutions businesses were up low single digits for the second quarter against the difficult prior year comp. For all of 2019, we now expect low to mid single-digit organic sales growth for automation and engineering solutions, and we are seeing some order delays in certain businesses. So, we lowered that automation and engineered solution segment from mid to low to mid. And we increased our aerospace guide to a bit also. So, you know, just to summarize the whole thing, for the continue to expect overall four-year organic sales growth of three to five percent. As I said, we've modestly increased growth forecasts for aerospace. modestly decreasing our growth forecast for automation and engineering solutions, and really no change to process and industrial process performed very well in the quarter, and they look strong.

Great. Thanks, David. And maybe if you just touch on what you're seeing in China, perhaps just address, you know, the 3% to 5% organic, you know, implies some acceleration of that car for the year to get to the high end of that range. What gives you confidence that that can accelerate on tougher comps in the back end? Yeah, sure.

Right. Yeah, we had overall sales ended up within our guidance range, and organic sales ended up within our guidance range. And at the half year, we were at 4%. So right smack dab middle in our guide. So, you know, in terms of geography, we saw some solid growth across Europe and the U.S., And Asia was down mid-single digits. So you really have about 80% of our business up mid-single digits, and Asia, which is about 18% of our business, was down mid-single digits. We see in the U.S., where we were up mid-single digits, the strongest growth was at process and our aerospace businesses. In Europe, we were up mid-single digits. We had broad-based growth, and oil and gas and aerospace had particularly strong quarters. And Asia was down mid-single digits, and China was down a bit more than mid-single digits. So, you know, we had some down a bit more after two plus years of very strong growth, but it's about 7% of our sales, and, you know, clearly they're being impacted by the the number one and number two economies in a trade war. So we're watching that closely, but given its relative size, it hasn't been too much of a headwind yet.

Thanks, David.

Thank you.

Our next question comes from Josh Bostwinski with Morgan Stanley.

Hi, good morning, guys. Good morning. I guess just to follow up on the last question, thinking about some of the end markets that are doing better or ones that have gotten a little softer, And, Dave, I think, you know, is it a fair characterization to say, you know, some of the longer cycle stuff, aerospace process, you know, is really what gives you the visibility and the guide and that confidence in the second half and the shorter cycle end markets and automation are, I guess, what's holding you back but could also turn quickly? Is that a fair characterization as a starting point?

Yeah, I'd say that's a fair characterization. And our automation business is, We're dealing with OEM customers, and they delay placing orders in the quarter. We didn't lose these orders. They're delayed, and they're cautious, but there's a healthy order pipeline. So I would say that's a good characterization. We have strength in aerospace and solid with process and some weakness in automation. So that's a good summary.

So I think in the automation space, you know, a lot of folks in that orbit have called out auto and electronics as being kind of the you know, the two biggest headwinds. Is that, you know, safe to say it's the same in markets for you guys, or is there something else that's cropped up within that?

Yeah, I would say it's – we have some motive customers there, and that was weaker. There was also some factor automation customers. That was weaker. And to balance that, there was some, you know, medical and food industry automation that were okay. So – But those are OEM customers, and the motive and the factor automation were the areas that it was a bit like.

Got it. And then just one last one for me. Obviously, with the string of acquisitions over the last couple years, a bit more diversity in the portfolio and some deeper niches, how have those performed, or have you even noticed a change in the growth rates or performance as some of the macro has gotten a bit choppier?

Yeah. You know, one of the characteristics of the acquisitions we did over the past two years was they were largely U.S.-based, and they've held up very well. So the acquisitions are performing extremely well, and they're meeting their acquisition models, and it's driving the performance of the company, as you can see in the results.

Great. Thanks. I'll leave it there.

Thanks, Josh.

Our next question comes from Andrew Obin with Bank of America.

Yes. Good morning. Just a question. Did I hear correctly that China was down in the quarter? I apologize if I missed it.

Yes, yes. What we went through the geographies were up in the U.S., mid-single digits, down in Europe, mid-single digits. Oh, excuse me. Up in U.S., up in Europe, mid-single digits, down in Asia, mid-single digits. And China was down a bit more than Asia.

So the question in China, I'm just wondering, could you just walk us what happened in the quarter in China? Because my sense was that the Chinese business is very niche. You have a lot of growth initiatives there. And just trying to get a sense, when did it turn in the quarter, or if you have this granularity on the call?

Yeah, China has been very choppy and inconsistent through the balance of this year, particularly We had very difficult comps that we were running into there. It was mainly in our automation business where we saw weakness, but in China it was more broad-based. A lot of the businesses were down a bit. Again, it was a difficult comp, and I think they're just dealing with the uncertainty and a trade war. We've been watching it closely, and It's 7% of our business, and fortunately we have about 80% of our business growing in single digits. So it's been inconsistent. That's the best way to describe it, Andrew.

No, of course. And just a broader question, I think others have tried to sort of get to the question. If I look at your peers, most of them actually did cut organic growth outlook. If I look at the historical relationship between your revenue growth and industrial production, Your guidance does imply that things are different. You did highlight more North American acquisitions over the past couple of years, but could you also talk about the impact of the growth initiatives? Because I know, Dave, when we meet with Amitek folks, they're really highlighting how you're pivoting more to growth. Any way you can quantify what the growth initiatives do into cyclicality or the growth profile of Amitek, that would be terrific. Thank you. Yeah, sure.

When I think about our portfolio, we had the U.S.-based acquisitions over the past year, but we also have about 13% of our business now is healthcare, and our aerospace business is performing well. So those are all things that are driving us right now. And when I look at the – we definitely have improved our organic growth capability We're making great progress, as you saw when you visited some of our operations. The teams are excited, and we're seeing positive results. But, you know, I don't think that that's – it's very difficult to quantify that. And, you know, we're using the tools, and the way we've talked about it is through the cycle we'll get a point better of organic growth. So I'm not sure in the – current environment, you can draw a distinction between what we've done in organic growth and the current results.

Terrific. Thank you very much.

Thank you, Andrew.

Our next question comes from Dean Dre with RBC Capital Markets.

Hello, Dean.

Thank you. Thank you. Good morning, everyone.

Hey, maybe we can start with price costs in the quarter. How did that play out and expectations for the second half and, you know, what role tariffs had?

Great. Yeah, I think I'll start with the tariffs. And, you know, as you know, we're comprised of niche differentiated businesses and we have low CapEx by design. So our model gives us a lot of flexibility in dealing with those situations and In Q2, the situation played out as we predicted. We had about one cent from the direct impact of tariffs, and we offset that completely with price. And we're expecting a similar level of activity in the second half of the year. And going back to the price question, Q2, 19 was much like the second half of 18 and the first quarter of 19. We had an excellent quarter. We achieved 2% of price across our entire business. That's both in EIG and EMG. Total inflation and the impact of tariffs added together was a bit less than 1.5%. So we had a good contribution to margin from our price-less total inflation and tariffs, and we're very pleased with the results.

That's all great to hear. And then in the verticals and the end markets, I hear you comment on oil and gas prices.

Yeah, we didn't climb it. Oil and gas had a particularly strong quarter in Europe, and we include the Middle East in Europe. And when you look at the whole segment, it was up 10% in Q2. So good, strong organic growth in both our upstream and mid- and downstream businesses, and we were pleased with the performances.

Good. And then on the opening question, I might have, with Matt, I might have missed the answer. He asked about how July had looked.

Yeah, I don't think, yeah, we covered the quarter. We talked about the quarter being, it increased each month, but it was more subdued for us. And in July, we're right on our plan. So July isn't over, but, you know, we're on target. So July feels pretty good.

All good to hear. Thank you.

Thank you, Dean.

Our next question comes from Robert McCarthy with Stevens.

Hello, Rob.

Can you hear me? Yes. Thanks for the time, and congratulations on a good quarter. I guess the first question I would have is around your incremental margins on a core basis. Could you talk through that, just excluding acquisition and some of the distortions we might see there?

Right. We're very pleased with our margin performance in the quarter. Our core margins were excellent. The EIG, if you take out the acquisitions, it was up 90 basis points. And EMG, where there wasn't acquisitions, was up 120 basis points. So just outstanding margins, outstanding operating performance. And it showed up in the incrementals also. We had core incrementals of about 60%. EIG was about 50%, and EMG was about 70%. So excellent operating performance around the horn.

Now, definitely, could you speak, just stepping back on the performance on the cash cycle and cash generation, in more of your aerospace and, well, you probably have very little explicit defense exposure, but your aerospace and longer cycle businesses, in terms of how you do there, in terms of free cash flow, genetic conversion, or operating cash flow typically? Is that below or above the company average?

Yeah, the aerospace business is a great cash generator for us. So I would say in terms of the various components of working capital, aerospace ends up being a little higher as a percentage of sales because they're dealing with the aftermarket. but they're higher margin businesses. So you have higher working capital, but higher margins, and that's characteristic of the aerospace business, and it's been that way for a long time.

Yeah, it's nice to have good cash generation there. The final question is, just looking at the environment you're seeing right now, obviously you went through kind of a rocky road and kind of a 14 to 16 timeframe with deflation, oil and gas kind of contraction, and it led to some challenging organic growth and also some restructuring, right? Do you think we're going to anticipate, given what we're seeing right now over the next 12, 18 months, incremental restructuring from you guys?

You know, Ametek, in our various businesses, we're always doing some level of restructuring, and those are reported in the operating results. In terms of a big restructuring, a realignment activity that affected the entire company, Right now, we're not seeing that. We're pretty confident around that second half of the year. But if things change, you know, we're good at doing it, and we have plenty of opportunities to drive cost reduction. So, you know, as I sit here with, you know, a solid group of businesses generating cash flow, margin expansion, with a robust backlog of deals with businesses, a strong balance sheet, I feel very optimistic about Ametek's performance and being able to outperform in the current environment. Thanks for your time. Thank you.

Our next question comes from Brett Lindsey with Vertical Research.

Hey, good morning, guys.

Morning, Brett.

Hey, just a question pertaining to some of the recent portfolio moves, and in recent I mean, you know, 2017, 2018 acquisitions. If we were to drill down and look at the recurring element or the aftermarket element as a percent of sales of those businesses, how does that mix look of those acquired assets versus the legacy portfolio? Are you actually mixing up with the stickier revenue base?

Yes, we are mixing up, and when we announce those deals, we address the recurring revenue. Tally there stands out. It's about two-thirds of the business is recurring, but many of the businesses like to – Spectro Scientific was 30%, 40%. And, you know, so we're mixing up and recurring, you know, baseline of Ametek was about 20%, but our recent acquisitions have been a bit more than that.

Okay, great. And then if, you know, we continue to see this industrial slowdown historically, you've talked about incrementals, you know, on the way up of 30% to, you know, 35%. If we flip that script and think about potential downside, what type of decremental preservation do you do you see if we get into an environment where sales are declining modestly? And then I guess to follow on there, are there any, you know, countermeasure plans in place that can help you, you know, get at costs relatively quickly if things do turn a little bit south here?

Right. Yeah. As you know, we have high contribution margins in our business, very profitable businesses, but we also have excellent operating capability and we have seasoned general managers that know how to operate both in up cycles and down cycles. And, and, Clearly, going into a down cycle, we have plenty of opportunities and plenty of projects, and we have the ability to pull those forward, and we're also very good at managing our working capital and we generate a lot of cash. So if we get into that environment, it's an environment where we're experienced and we'll perform well on a relative basis. But right at this point, we're not seeing that.

But based on some of those actions or what's been in motion, I mean, do you think you can preserve a decremental margin, you know, much less than 30%?

Yeah, I think definitely. But, again, when something like that happens, it depends where it comes from and the depth of it. And the depth of deep is a good comment, Bill. So we have to look at it if that happens when it comes. And I'm sure there will be another recession, and I'm sure we'll manage our way through it very well.

Okay, great, guys. Thanks.

Thanks, Brian.

Our next question comes from Allison Poliniak with Wells Fargo.

Hi, guys. Good morning. Good morning, Allison. I just want to follow along on that Operation Excellence kind of theme. You know, you did increase your Operation Excellence savings for 2019. Was it just sort of a natural fallout of where some of these programs are ending, or is it some acceleration in certain areas?

We're seeing acceleration. I mean, at the beginning of the year, We had about $80 million of operational excellence savings, and $60 million of it was from sourcing, and $20 million of it is from other projects that we had. And what we're really seeing is an acceleration on the sourcing side. So our sourcing teams are doing an outstanding job, absolutely outstanding job, of dealing with the mitigation of tariffs and moving us to different regions of the world and delivering incremental savings. So, really, the incremental savings from sourcing was increased from 60 to 65, and that drove the operational excellence savings increase from 80 to 85. And that's savings that are in the P&L for 2019, and we saw, you know, that's a rateable kind of thing, and we saw it ramp up from Q1 to Q2, so we're very confident in the second half of that.

Great. And then I might have missed it. The aerospace increase in growth for that sector is Was there a specific sub-segment there or a region that's driving that increased growth relative to your expectations?

Yeah, we had a – if you look at the business jet market, the business jet market was up low double digits and coming off a pretty easy comp, but it's continuing to perform. So, you know, the military market, the third-party MRO had a fantastic quarter in the second quarter. The commercial business continues strong. So it was really the entire market that did well. But if you look into the details, the business jet market ticked up, and we improved the guidance for that for the year. But the entire aerospace business, we increased to mid to high single digits.

Great. Thanks so much.

Thanks, Allison.

Our next question comes from Christopher Glenn with Oppenheimer.

Thank you. Good morning. Good morning, Chris. Hey, Dave. So I think you mentioned $2 billion in cash and available credit. I think it's the first quarter in a little while. You didn't talk about a couple new bolt-ons, I know. I know they don't come every quarter, but just to update, is the pipeline still very vibrant?

It is. It is. You know, Chris, we had our record Q4-18 where we closed three deals and spent about $750 million, and And our pipeline is very good, and we're evaluating a number of opportunities. And as you know, it's difficult to predict when they're going to happen in the short term, but I feel very confident in the long term in our capability in this area and, you know, we have strong balance sheets. So, you know, we're very optimistic that we're going to be able to deploy our free cash flow and acquisitions in the long term. Right now, we're being disciplined. I mean, we're looking at a lot of properties, and when we do a deal, we're going to get you a return on capital.

Thanks for that. And on the outlook, you know, generally calling for continuity versus, you know, the macros clearly weakening. I understand, you know, you don't have much distribution. You're much more direct. So that's clearly an advantage you have in the current environment. But are we moving into a phase where backlog conversion picks up to kind of preserve that organic continuity? Just want a little more kind of complexion around that.

We have a near record backlog of 1.7 billion, which gives us some confidence in the second half. If you look into that backlog, there are some opportunities to convert some of it. That's one of the reasons that we're confident in the guide in the second half. We're performing well. We've got our aerospace growth. Our process business is doing well. The U.S. markets don't extremely well, and we've got a solid backlog that provides conversion opportunities. So that's the way we're looking at it, and we feel good about it.

Okay, thanks for that.

Thank you.

Our next question comes from Joe Giordano with Callen.

Hey, guys, good morning. Hey, Joe. Hey, Bill, just one quick clarification. The tax rate was a little light in the quarter. Anything specific going on there? And I know you gave the full year, but I missed it. What's your view for that?

Full year is now at 21%. What we saw in the quarter was about 150 basis points down year over year, benefits from excess tax benefits, benefits from stock compensation, and as well there was some changes in some state tax laws that helped us drive that rate down to 20.4% in the second quarter.

And 21 good forward number to use like out into the Model 2?

We're looking at a number that's probably to get to the average of 21 for the year. It's more of 22% in the back half of the year.

So I mean more for like a full year going forward, like into 2020 is like a 21 fair number to use?

We'll be working to get to that level next year.

Okay. So we've kind of gotten to this a couple of times at different ways. As top line starts to slow down, you know, a bid, maybe we're, you know, we're still in the same organic range, but maybe we're talking more midpoint or lower. And early in the year, maybe we're talking midpoint or higher. Particularly in markets like maybe heavy truck where there's, you know, some obvious declines probably coming up. Are you, like, teeing up anything here to take some actions? And along the same lines, you know, your cost out this year really strong, sourcing accelerating. What's the opportunity set look like into next year for cost out broadly?

Right. The opportunity set is very good at all times. As part of our strategic planning process, we go through with all of our business. They have a three-year plan for cost reductions that involve sourcing, some plan consolidations, and everything. So we have a viable set of projects to pull from. So we really have some opportunities to do that. But when you mentioned the trucking market, You know, that business is now less than 2% of sales in the mix.

Definitely, yeah.

Yeah, we bought Motec earlier in the year, and they're in the really good business, and that business is actually growing. So it mutes any decline that we had in the other part of the business. So, you know, you have a situation where we've been, you know, modifying our portfolio over time, and there we have a good growth, and the camera and the algorithms, the software of the the vehicles, and we're really, you know, it's changed the outlook for that part of the business. So, you know, you have a little bit of portfolio work that's gone on, and we still feel good for the second half. I mean, your point is valid. Maybe we're more toward the midpoint or the low end than the high end, but we're at 4% through the half year, right in the middle of our guide, and we feel confident for the second half of the year.

So I guess what I'm getting at, I know that you're looking forward and you're not sitting on your hands as things start to weaken from a macro perspective. Early in the year, orders growing 12% organically, or like last year, orders growing 12% organically in the first quarter, and now we're at flat. I'm guessing the decisions are somewhat different now, so how are you acting differently than maybe you were a year ago or something like that?

Yeah, I just point you to margins, and you know, we really have some seasoned operators in our businesses and they're reacting to their plans. So when their business is softened, they're adjusting their cost structures. And with our, you know, you saw, you know, excellent core incrementals in the quarter. You saw excellent operating income on a reported basis. We were up 60 basis points after we did a bunch of dilutive deals. And without the acquisitions, we were at 110 basis points. So I think the Amatek operational excellence is really working for you, and there's plenty of room to go in the long run when you're at that.

Good. Thanks, guys.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

Great. Thank you, Kevin, for all your help, and thank you, everyone, for joining our call today. And as a reminder, a replay of today's webcast will be available on our website shortly. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.