AMETEK, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Amatek, Inc. earnings conference call. At this time, our participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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 Amatek's third quarter 2019 earnings conference call. With me today are David Zepico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. Amatek's third quarter results were released earlier this morning and are available on Market Systems and 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 risk and uncertainties that may affect our future results is contained in the AMETEX filings with the SEC. AMETEC 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. Also, this morning we announced the closing of the Catan acquisition. Our fourth quarter 2019 guidance and our updated full year 2019 guidance, which Dave will speak to shortly, include Catan. 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. Emotech delivered another outstanding quarter with exceptional operating performance, earnings above expectations, solid organic sales growth, and the acquisition of two highly strategic businesses. Our execution of the Emotech 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 capitals to support our growth model and drive strong long-term shareholder returns. Given our results in the quarter, we will once again raise our earnings guidance for 2019. Now on to the financial highlights for the quarter. Total sales were $1.28 billion, up 7% compared to the third quarter of 2018. Organic sales were up 3%, acquisitions added 5%, and foreign currency was a one-point headwind. Amatek's operating performance in the quarter was exceptional, resulting in record operating results and robust margin expansion. EBITDA in the third quarter increased 12% over the prior year to $349 million. EBITDA margins in the quarter were also excellent at 27.4%. Operating income with $301.1 million in the quarter, up 13% over the third quarter of 2018. Reported operating income margins were up an impressive 140 basis points to 23.6%. And excluding the dilutive impact of acquisitions, operating margins increased 150 basis points over the prior year period. Earnings in the third quarter were $1.06 per diluted share, up 16% over the same quarter in 2018. This comfortably exceeded our guidance range of $1 to $1.02 per share. Additionally, our business has generated $330 million 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 $815.6 million, up 10% over last year's third quarter. Recent acquisitions contributed 7%, organic sales added 3%, and foreign currency was a one-point headwind. We continue to see solid growth across our aerospace, defense, and process businesses, with particularly strong growth again in our materials analysis divisions. EIG delivered fantastic operating performance in the quarter, with operating income up 15% to a record $219.5 million. Reported operating income margins increased 130 basis points to 26.9%. And excluding the dilutive impact of acquisitions, EIG's operating margins expanded an impressive 170 basis points over the third quarter of 2018. The electromechanical group also performed exceptionally well in the quarter, with solid organic sales growth and superb operating performance. Sales in the third quarter for EMG were $461.1 million, about 2% over the same quarter in 2018. Organic sales grew 3%, with contributions from the acquisition of Pacific Design Technologies being more than offset by foreign currency headwinds. Strong growth across our engineer 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 third quarter was also outstanding. Operating income increased to a record $103.5 million, up 12% over the 2018 third quarter. EMG's operating income margins increased sharply to a record 22.4%, of 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 Kameka for their recent launch of the IQOS-UV atom probe microscope. Kameka is the world leader in atom probe tomography. The new atom probe 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 of materials for research and faster development of products for industrial applications. This new product complements Kameka's LEAP 5000 atom probe, which provides the fastest, most sensitive 3D imaging and analysis system with nanoscale resolutions across a wide range of applications. Developing leading-edge technologies is the core to Amasek's success. We are committed to continuing our strong levels of investment in research, development, and engineering of new products and solutions to drive innovation across our businesses. For all of 2019, we expect to invest more than $260 million in RD&E, a 13% increase over 2018. This level of investment and success of our R&D average leads to a healthy vitality index. Our vitality index, which is a measure of sales from products and solutions introduced over the last three years, was excellent. at 24% in the third quarter. We also remain committed to investing in our sales and service capabilities to support our global and market expansion initiatives. And in September, we unveiled our newest center of excellence in Singapore. This center of excellence, which is similar to other centers we have around the world, includes products and solutions from numerous Amatek businesses, including Rolland, Taylor-Hoffsen, Zygo, EDAX, 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 two excellent businesses. Pacific Design Technologies, or PDT for short, and Gatan. I'll touch briefly on these acquisitions, first PDT. PDT is a leading provider of advanced mission-critical thermal management solutions. Their custom-engineered liquid cooling systems and components are used across a broad set of current and next-generation commercial aerospace, defense, and space platforms. PDT is an excellent fit with our thermal management systems business, given their complementary thermal management solutions and deep R&D expertise. PDT is headquartered in Goleta, California, and has annual sales of approximately $40 million. We deployed approximately $125 million on the acquisition. Now moving to Ametek's largest acquisition today, Catan, which we acquired this week. Catan 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. Katana 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 million. We deployed approximately $925 million on this acquisition. Thus far in 2019, we deployed nearly $1.1 billion on these two acquisitions. This follows 2018 when we deployed over $1.1 billion on six acquisitions, resulting in approximately $2.2 billion of capital deployed on acquisitions over the last two years. This success speaks to the strength and discipline of our acquisition and integration process. Even with this level of activity, our acquisition pipeline remains full, and we have significant balance sheet capacity to continue our acquisition strategy. As we integrate these recent acquisitions into Amatek, we look for them to embrace each of the elements of the Amatek 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 million to now $90 million of savings in 2019. Our operational excellence strategy plays an increasingly important role given the uncertain global economic environment. Now shifting to the outlook for the fourth quarter. Given our strong results in the third quarter, we now expect 2019 earnings to be in the range of $4.12 to $4.14 per diluted year, up 13% over 2018's earnings per diluted year. This new guidance range is increased from our previous guidance range of $4.04 to $4.10 per diluted share. We expect overall sales for the year to be up mid to high single digits with organic sales growth of approximately 3%. Fourth quarter sales are expected to be up mid single digits with earnings in the range of $1.01 to $1.03 per diluted share, up 5% to 7% over the prior year. To summarize, our third quarter performance was excellent. We are well positioned to 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 questions. Bill?

Thank you, Dave. As Dave noted, Amatek had an excellent third quarter with strong operating performance. Let me provide some additional financial highlights. Core selling expense in the quarter was down slightly versus the third quarter of last year. Third quarter general and administrative expenses were up $4.1 million year over year on higher compensation expense. For the full year, we expect general and administrative expenses to be approximately 1.5% of sales in line with 2018. The effective tax rate for the quarter was 19.5%, down from last year's third quarter tax rate of 21.9%. For 2019, we now expect our effective tax rate to be approximately 20.5%, and as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full-year estimated rate. Working capital was 18.2% in the third quarter, down slightly from 18.3% in the second quarter of this year. Capital expenditures were $18 million in the quarter and $62 million for the year to date. For the full year, we continue to expect capital expenditures to be approximately $100 million or about 1.9% of sales. Depreciation and amortization expense was $55 million in the quarter. For the full year, we continue to expect depreciation and amortization to be approximately $235 million, including after-tax acquisition-related intangible amortization of $100 million or 44 cents per diluted share. Our businesses continue to generate very strong levels of cash flow. Third quarter operating cash flow was a record $330 million, up 33% over last year's third quarter. Free cash flow was $311 million, up 35% over the same period. As a percentage of net income, free cash flow conversion was an impressive 141% in the quarter. For the full year, we expect free cash flow conversion of approximately 110% of net income. Total debt at the end of the third quarter was $2.43 billion, down from $2.63 billion at the end of 2018. Offsetting this debt is cash and cash equivalents of $735 million, resulting in a net debt-to-EBITDA ratio as of September 30th of 1.2 times. As Dave noted, we continue to be very active deploying our capital and strategic acquisitions. In the third quarter, we acquired PDT, and subsequent to the end of the quarter, we acquired Catan. Combined, we deployed $1.1 billion on these two acquisitions. Our pipeline remains healthy, and we have significant financial flexibility to continue to execute our acquisition strategy with approximately $1.3 billion of cash and existing credit facilities available following the Catan acquisitions. In summary, our businesses delivered excellent results in the third quarter and through the first nine months of the year. We remain well positioned to support our long-term growth strategy given our strong balance sheet and excellent cash flows. Kevin?

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

Yes, sir. As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. And again, that is star one on your touchtone telephone. Our first question is going to come from Matt Somerville from VA Davidson. Your line is now open.

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

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

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

Our materials analysis business that Catan will become a business unit of has had an existing life science presence. It's been a small presence and we haven't talked about it much, but certainly with Catan, in market there are 50-50 split between life sciences, so biology, cancer research, and 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 the mid to high single-digit grower. I mean, when I think about the Catan business, it's a very differentiated technology business. It's a sizable transaction with strong profitability for Ametek shareholders. We'll get a good return on capital. It's a premier brand. We've followed this business for a long time. It's a premier brand. They have highly specialized intellectual property. There's over 150 patents in the business and a strong management team that's staying with the business, so we're pleased about that. And, you know, 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, you know, I think you can expect it to fit into MAD, and MAD is performing very well for Amatek, 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 Dean Dre from RBC Capital Markets. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Dean.

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 consists of what we've seen elsewhere in the sector this quarter, short cycle pressures and Asia in particular. So can you expand a bit on 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?

Yeah, sure, Gene. You know, 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 two 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 second quarter. 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 of incremental industrial weakness that showed up in our power industrial business in quarter three. 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.

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

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

And any comments on October?

Oh, October, yes. Yeah, I'll get back to that. Yeah, throughout the quarter, you know, 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 came, 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 is starting out right on plan. So October feels better, a lot like the first quarter of the first month of Q2 and Q3. So we got this trend where we're stepping up by a month of the quarter, but it's a bit muted usually in the last month of the quarter.

Terrific. And then congratulations on Catan. 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 Porkiewinski from Morgan Stanley. Your line is now open. Hi. Good morning, guys.

Hi, Josh. Good morning.

Just, you know, one of the questions we get a lot is, you know, kind of Amatek compared, you know, the cycle to maybe the last industrial slowdown. I know it's, you know, something that comes up from time to time on calls that, you know, Folks are always worried that, you know, the next move of the ISM is going to be down for Amatek, but you guys have been much more resilient, especially this year. Can you talk, you know, David, all about, you know, how you're mixing up through M&A, whether that's, you know, margins or organic growth, you know, and maybe specifically on how, you know, the kind of portfolio evolution of, you know, exposure to customers, R&D, you know, versus CapEx spend has maybe changed.

Yeah, sure. I mean... you know, every slowdown is a bit different, Josh. So basing performance on the prior slowdown is often, you know, 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 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, they're down around 16% of our businesses because we grew around them. At the same time, those businesses are performing well right now. This doesn't feel like the prior downturn for us and but there is, you know, this one is, you know, I'll call it self-induced, and it's different, and it's really trade-related that started it, and it's affecting the customer behavior because of that, and, you know, 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&A driver, and it's working very well, so. Like I said before, we're looking to outperform in the current environment.

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

Right, right. Yeah, as 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 plan efficiencies were fantastic, and we had the incremental contribution margin on the incremental sales. So, you know, we plan to keep executing that way. I don't know if the margins are going to, you know, 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, and we pull those levers, and, you know, there's plenty of runway on margins. So that's how we think about it.

Great. Thanks for detailing. Congratulations.

Yeah, thanks, Josh.

Thank you. And our next question comes from Nigel Coe from Wolf Research. Your line is now open.

Thanks. Good morning.

Good morning, Nigel.

Hey. I'll echo the comments on operating margins. Great execution there. I did want to put a finer point on kind of going to the next level on 4Q guidance. I 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're baking in for, you know, sales, EBITDA, and the level of accretion, if any, that you have baked in for 4Q, and anything else that you're sort of baking into your guidance for 4Q would be helpful.

Right. To talk about, we'll own Gantan for two months, and we have about 35 million of sales in our forecast over those two months, and we're planning that to be neutral to Q4 earnings at the end. 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, you know, higher interest expense, one-time charges. And, you know, as a matter of fact, you know, Q4 was front-end loaded per Catan's forecast. So when you take the $35 million that we're forecasting and what we think Catan did in October, Really, quarter over quarter, it's about the same as it did last year. And, you know, 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.

Thanks. I don't need that. Yeah, I don't need – sorry about that. That's helpful. Thanks for that. And if you want to prognosticate on Gatan EPS cruise for next year, that would be great. But I did want to touch on Josh's question in a slightly different way, in that if you take the acquisitions you've done for the past, you know, call it two or three years, and I'm thinking here about, you know, Rollenborg, Telespectro, et cetera,

Yeah.

How are those businesses performing right now relative to the 3% you just put up? I mean, are they above that bar? Are they stable? I mean, how does that look?

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

Okay, great. Thank you, Ben.

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.

Yeah, 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 BizChats? Because I know that's an important business for you as well.

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

I guess Eleanor is doing quite well.

Eleanor has a fantastic order.

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, you know, 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 uppace 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 $1.63 billion 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 go into a quarter needing about 50% of the orders to make the quarter, but we have some visibility in our aerospace and defense businesses. And, you know, we're operating the company well, and we're able to convert on them. So, you know, we feel comfortable with our guide, and we have, you know – you know, cautious given the global macro conditions, but our factories are executing extremely positively right now. So I feel very confident that if there's incoming orders or opportunities in our backlog to execute on, we can, and that's how you bring together, you know, a flat, a slightly declining order picture and combine it with growing organically.

No, very clear that the team is executing very well. Thank you.

Thank you. Thank you. And our next question comes from Allison Palenik 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?

Yeah, there's a changing ordering pattern that we saw in the quarter. And, you know, typically a customer will give you a purchase order with three or six 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, you know, global macro conditions that are impacting our order input. But, you know, our cycle times are reduced and our factory execution is really good, so we're able to deal with that on time. and turn things very quickly. But certainly there is a change in the ordering environment that wasn't there six months ago.

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

Yeah, there's no OPEX savings in the final two months for Catan. It's organic savings. We boosted our material savings from up to $70 million. That was the the $5 million increase, and with all the tariff activity, you know, 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 that's what's driving the savings up to the $90 million. It's all materials cost savings.

Perfect. Thank you.

Thank you, Allison.

Thank you. And our next question comes from Robert McCarthy from Stevens. Your line is now open.

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

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

And just on that point, as one brief follow-up on Gatan, what do you think about the perspective of the growth rate? Because I think you talk about mid-single-digit organic growth, but just in doing our own 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. Yeah, naturally the business is a bit lumpy, 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's 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, you know, they have a good long-term demand driver. Only about 10% of the business is aftermarket, but 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 the you know, 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 Bayard. Your line is now open.

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

Yeah. Q3 was much like the first half of 19. We had an excellent quarter. So we achieved a a little bit more than two-pointer 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 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 is so often, but just – and could you do that, please?

Yeah, I could. You know, if you look at the market segments and automation and engineering solutions, So there you 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 EMIPS business. It was up, I think it was up a mid-single digit in the quarter, and automation was down, and overall was up low single digits for the quarter. So really, the EMIPS business is performing very well, and as we mentioned, we have a problem in 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 have a solid quarter in line with our aerospace business.

Okay. And then just is the EMF 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 EMF 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 the fourth quarter here, that we maybe have to take a harder look at the cost side of the business, you know, whether it be savings plans or any sort of, you know, tighter restructuring or realignment of costs. Where do you sit on that, or is it kind of business as usual and, you know, we're going to walk into this with our operational excellence plan and eyes wide open?

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

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's – through up cycles or down cycles, it's there. And I think the level of pricing offsetting cost and inflation in tariffs is going to stay. So I'd be very surprised if pricing did not exceed inflation in tariffs in 2020.

Okay. Very good. Thank you.

Thank you. Thank you. And our next question comes from Brett Lindsey from Vertical Research Partners. Your line is now open.

Good morning, guys. I just want to come back to thinking about the next year, 2020, just in the context of margins. Obviously, the revenue 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 environment? sales environment next year?

I think it's possible. It has to do with the rich 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, yeah, you can expand margins. It won't be like the margins that you see in the second quarter, 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 backfilled as you worked up the value chain. What does the inventory look like today?

Yeah, the metals business, as you know, that The nature of that business is we have less visibility into the 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 is still full solid. So, you know, 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 started to back up there.

I've missed single-digit quarter.

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

Thank you. Thank you. And our next question comes from Joe Giordano from Cohen. Your line is now open.

Hey, good morning. This is Robert in for Joe. Congrats on the quarter. 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 know, you found surprising or any changes in trends that are worth noting? Thank you.

Sure. It's really the comment that I made before, two, three trends. 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, you know, certainly the aerospace business feels very solid right now.

Thank you. And our next question comes from Andrew Buscaglia from Barenburg. Your line is now open.

Hey, guys. Can you comment, you know, just a little bit more on Gatan? And correct me if I'm wrong. I think the price thermal Fisher paid seems to be a little bit below what you guys, your implied EBD bid on multiple was for that. And I would think that they would be able to drive substantial synergies as well. Can you just talk about how much, in terms of the valuation you've paid, and was this a competitive bid? Just talk about the process a little bit more there.

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

Okay. And then if you could turn... to Tellur. 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, you know, 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?

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

All right. Thank you.

Thank you. And we have a follow-up question from Robert McCarthy from Stevens. Your line is now open.

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

Sure thing, Rob. And, you know, we covered a lot of this in the call already, but I'll just go through it all, so it'll be a bit of a rehash. Are 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, Tellur, 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. So for all of 2019, we continue to expect our process businesses that have organic sales up in the mid-single-digit range. And we talked a bit about our aerospace business. They performed exceptionally well, again, in the third quarter 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 third quarter was 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 with balanced growth across each of the markets. And our power industrial segment, they were down slightly in the third quarter, driven by weakness in our industrial business. And for all of 2019, we now expect roughly flat organic sales driven by incremental weakness in our industrial businesses. We had a good, good quarter for our power business improving, but their industrial power and industrial weakened a bit, and that's what we talked about in the quarter. And our automation and engineering solutions, up below 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 the last question, how much was the contribution, and it might have been alluded to, so I'm sorry if it's asked and answered, but how much in third quarter was price underlying your organic growth, and what is your embedded expectation for this year?

Yeah, I think our price... We're about two points of price, a little better than two 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 the Dept of 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 investor section of our website at amatech.com. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.