AMETEK, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Anatex First Quarter 2021 Earnings Call. Please note that today's call is being recorded. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask your question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, Kevin Coleman, Vice President, Investors Relation. Kevin, the floor is yours.

Thank you, Jay. Good morning, and thank you for joining us for Amatek's first quarter 2021 earnings conference call. With me today are Dave Zepico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today's call, we'll be making 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 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 2020 or 2021 results will be on an adjusted basis, excluding after-tax, acquisition-related and tangible amortization, and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020 and the realignment charge taken in the first quarter of 2020. 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, and then we'll open it up for your questions. And I'll turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. Amitek delivered excellent results in the first quarter with stronger-than-expected sales growth and outstanding operational execution leading to earnings above our expectations. We returned to organic sales growth earlier than expected, and as the economy continues its recovery, we're experiencing strong orders growth resulting in a record backlog. Operationally, our businesses are performing at a high level, delivering impressive margin expansion and strong cash flows. Additionally, we started the year with a notable level of acquisition activity, deploying a record $1.85 billion on five acquisitions thus far in 2021. These acquisitions, combined with our strong first quarter results and solid orders momentum, led us to substantially increase our full-year sales and earnings guidance. Before I get into the results for the quarter, I wanted to again thank all Ametek colleagues for their continued hard work and efforts over the last year as we managed through the pandemic. Ametek's success in navigating this difficult environment is a testament to the dedicated and highly talented employees across the company. While we are encouraged with the acceleration of the vaccine rollout, We remain focused on the health and well-being of our employees, and we'll remain vigilant in ensuring proper safety protocols are being followed. Now let me turn to the first quarter results. Overall sales in the quarter were up 1% versus the prior year to $1.22 billion. Organic sales were up 1%, with a divestiture of renting alleys being offset by a two-point foreign currency tailwind. Overall orders in the quarter were a record $1.4 billion, up 16% compared to the same period last year with organic orders up 9%. This led to a book to bill of 1.15 and a record backlog of $2 billion. We are encouraged by the strong orders as many of our businesses are seeing improved demand conditions across their markets, while some of our longer cycle businesses have yet to return to growth. Operating income in the quarter was $293 million, a 6% increase over the first quarter of 2020. Operating margins expanded an impressive 110 basis points to 24.1%. EBDA in the quarter was $356 million, up 4% over the prior year, with EBDA margins of 29.2%. This outstanding operating performance led to earnings of $1.07 per diluted share up 5% versus the first quarter of 2020 and above our guidance range of $0.97 to $1.02. Cash flow in the quarter was also very strong with operating cash flow up 5% to $284 million and free cash flow conversion of 122% of net income. Let me provide some additional details at the operating group level. Our electronic instruments group and electromechanical group reported outstanding results in the first quarter, with both groups delivering positive organic sales growth and impressive margin expansion. Sales for our electronic instruments group in the quarter were $791 million, up 2% over last year's first quarter, driven by modest organic sales growth and a 1.5% foreign currency tailwind. EIG's operating income in the first quarter was $207 million, up 7% versus the same quarter last year, and operating margins expanded an impressive 110 basis points to 26.2%. The electromechanical group also delivered strong operating performance in the quarter, with positive organic sales growth driven by strong demand in our automation business. EMG's first quarter sales were $425 million, down 1% versus the prior year. Organic sales were up 2% in the quarter, while the divestiture of Reading Alloys was a five-point headwind and foreign currency was a two-point tailwind. EMG's operating income was a record $105 million in the quarter, up 8 percent compared to the same quarter last year, and EMG's operating margins expanded an exceptional 190 basis points to a record 24.7 percent. Now turning to acquisitions. As we have discussed, Acquisition activity slowed considerably in 2020 due to the pandemic. During this time, we acted swiftly to appropriately align our cost structure with the demand environment and to protect and further strengthen our balance sheet to support a meaningful return of M&A in 2021. At the same time, we communicated that our business and acquisition teams remain very active in managing our pipeline of acquisition opportunities. These actions positioned us to capitalize on an improving acquisition environment in a significant manner, deploying $1.85 billion to acquire five excellent businesses thus far this year. Now let me take a moment to provide additional color on these deals. I'll start with Amitek's largest ever acquisition, Abaco Systems. Headquartered in Huntsville, Alabama, Abaco is the leading provider of mission-critical embedded computing systems used on key aerospace and defense platforms, along with specialized industrial applications. ABACO's open architecture computing and electronic systems are ruggedized to meet military standards and withstand harsh conditions, including extreme temperatures, altitude, and high vibration. As a leading provider of differentiated technology solutions serving attractive high-growth applications, ABACO nicely complements and expands our existing aerospace and defense platform. Abaco has approximately $325 million in annual sales, and we deployed $1.35 billion on the acquisition. Next, Magnetro International. Based in Aurora, Illinois, Magnetro is a leading provider of level and flow control solutions for challenging process applications across a diverse set of end markets, including medical, pharmaceutical, oil and gas, food and beverage, and general industrial markets. Magnetrol's outstanding strategic fit with our sensors, test, and calibration business. Combined, these businesses form an industry-leading sensor platform with a broad range of level and flow measurement solutions. Magnetrol has annual sales of approximately $100 million, and we deployed $230 million on the acquisition. Today, we announce the acquisition of NSIMI Technologies, a leading provider of radio frequency and microwave test and measurement solutions based in Suwannee, Georgia. NSIMI is an exciting addition to our test and measurement platform, given their deep expertise in advanced RF and microwave technologies. Their highly differentiated test and measurement solutions are uniquely positioned to support the continued development of advanced RF and microwave technologies for critical high-growth applications, including 5G wireless communications, autonomous vehicles, and specialized defense systems. NSMI has annual sales of approximately $90 million, and we deployed $230 million on the acquisition. In addition to these acquisitions, Ametek also acquired two smaller yet highly strategic businesses in Crank Software and EGS Automation. Crank Software, which is headquartered in Ottawa, Canada, is a provider of embedded graphical user interface software and services. Crank's award-winning storyboard software platform is ideally positioned to capitalize on the accelerating demand for smart, digitally-enabled devices. And EGS Automation is an attractive bolt-on acquisition for our Dunker Motoren business, expanding our presence in the attractive automation market. Located near Dunker's German headquarters, EGS designs and manufactures highly engineered and customized robotic solutions for niche medical, food and beverage, and general industrial markets. We would like to welcome the Abaco, Magnetrol, NSIMI, Frank Software, and EGS teams to Ametek, and we look forward to working closely with them and supporting their continued growth. Combined, these acquisitions add approximately $535 million in annual sales align with attractive secular growth markets. Additionally, they provide Ametek with excellent returns in line with our stated hurdle rates. Each of these integrations is going very well in the early stages of our ownership. Ametek's decentralized operating structure and proven operating capability provides us the flexibility to successfully integrate the businesses while continuing to pursue additional acquisitions. We are still working through a strong pipeline of attractive acquisition candidates. And as Bill will discuss in a moment, we have ample balance sheet capacity with approximately $1.8 billion available to support our acquisition strategy. In addition to continued capital deployment on acquisitions, we also remain committed to investing in our businesses. For all of 2021, we expect to invest approximately $95 million in incremental growth investments. These investments are largely centered around our research and development in sales and marketing functions, including targeted investments in support of our digital transformation strategy. Our investments in RD&E continue to yield innovative advanced technology solutions, allowing us to expand our leadership position across our niche markets. For all of 2021, we expect to spend approximately $270 million or 5.5% of sales on RD&E for our base businesses before adding in our recent acquisitions. This level of spend is up 10% over last year's RD&E spend. Now shifting to our outlook for the remainder of the year. With our strong results in the first quarter, including solid orders growth and a record backlog, along with contributions from our recent acquisitions, we've increased our full year sales and earnings guidance. For 2021, We now expect overall sales to be up high teens on a percentage basis, while organic sales are expected to be up high single digits on a percentage basis versus 2020. Diluted earnings per share are now expected to be in the range of $4.48 to $4.56, which is an increase of 13 to 15 percent over last year's comparable basis. This new range is a 28-cent midpoint increase from our previous adjusted earnings guidance of $4.18 to $4.30 for diluted share. For the second quarter, overall sales are anticipated to be up in the low 30% range versus last year's quarter. Second quarter earnings for diluted share are expected to be in the range of $1.08 to $1.10, up 29% to 31% over last year's second quarter. Our revised guidance includes each of the five completed acquisitions. To summarize, Amitek delivered an excellent first quarter with solid orders and sales growth, strong margin expansion, a high quality of earnings, and meaningful capital deployment. These outstanding results speak to the strength and flexibility of the Amitek growth model along with the resilience of our world-class workforce. With our differentiated technology solutions serving a diverse set of niche end markets aligned with attractive sector growth opportunities, we remain firmly positioned to deliver long-term sustainable growth. I will now turn it over to Bill, who will cover some of the financial details of the quarter. Then, we will be glad to take your questions. Bill?

Thank you, Dave. As Dave highlighted, Ametek began the year with outstanding results, highlighted by strong sales and orders growth and a high quality of earnings. With that, I'll provide additional financial highlights for the quarter. First quarter, general and administrative expenses were $18.6 million, up $3 million from the prior year, largely due to higher compensation expense. As a percentage of total sales, G&A was 1.5% in the quarter. For 2021, general and administrative expenses are now expected to be up approximately $12 million on a return of temporary costs, including compensation. The effective tax rate in the first quarter was 19.5%, which was essentially in line with the adjusted 19.4% recorded in the same period last year. For 2021, we continue to expect our effective tax rate to be between 19% and 20%. As we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full-year estimated rate. Our businesses continue to do an outstanding job managing their working capital. For the quarter, operating working capital was 14.2%. down 470 basis points from the 18.9% reported in the first quarter of 2020. Just excellent work by our teams on the working capital front. Capital expenditures in the first quarter were $18 million. For the full year, we now expect capital expenditures to be approximately $120 million. Depreciation and amortization expense in the first quarter was $65 million. For all of 2021, we now expect depreciation and amortization to be approximately $300 million, including after-tax acquisition-related intangible amortization of approximately $140 million, or 60 cents per diluted share. As Dave highlighted, our businesses continue to generate tremendous levels of cash given our asset-light business model and strong working capital management. In the first quarter, both operating cash flow and free cash flow were up 5% over last year's first quarter to $284 million and $267 million, respectively. Free cash flow conversion was very strong at 122% of net income in the quarter. Total debt at quarter end was $2.35 billion, down from $2.41 billion at the end of 2020. Offsetting this debt was cash and cash equivalents of $1.1 billion. At the end of the first quarter, our gross debt to EBITDA ratio was 1.7 times, and our net debt to EBITDA ratio was 0.9 times. As Dave noted, we've been very active on the acquisition front. During the first quarter, we deployed approximately $270 million on the acquisitions of MagControl, Crank Software, and EGS Automation. Subsequent to the end of the quarter, we deployed approximately $1.58 billion on the acquisitions of Abaco Systems and NSIMI, resulting in $1.85 billion in total capital deployed on strategic acquisitions thus far this year. Also subsequent to the end of the first quarter, we announced we entered into a five-year delayed draw bank term loan for up to $800 million with existing lenders under our revolving credit facility. Proceeds from the term loan will be used to repay borrowings under our revolving credit facility following the recent acquisition activities. and to provide capital to further support our acquisition growth strategy. Following the acquisitions of Abaco and NSI, our gross debt to EBITDA ratio and our net debt to EBITDA ratio is expected to be 1.9 times and 1.7 times respectively at the end of the second quarter. We continue to have excellent financial capacity with approximately $1.8 billion of cash and existing credit facilities to support our growth initiatives. To summarize, our businesses drove excellent performance in the first quarter with high-quality results that outpaced our expectations. We remain poised for significant growth in 2021, given our strong balance sheet, outstanding cash flows, and the efforts of our talented workforce. Kevin?

Thank you, Bill. Jay, can we please open the line for questions?

Thank you. And as a reminder, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Our first question comes from the line of Matt Somerville from DA Davidson. Your line is open.

Thanks. Good morning. Dave, could you maybe parse out the $0.28 change in guidance for the year? How much of that is being driven by a better-than-expected performance in the core business versus the M&A-driven accretion given all the deal flow as of late?

Yes, Matt, that's an excellent question. And it's really driven by a mix of different items. We have the stronger than expected organic growth that drove Q1 above our guide. And then we have an improved guide for Q2. And both of those two together are about 10 cents, 10 cents of the 28 cents. Really, our second half is unchanged on a core basis. It's too early to change that. And then we have an additional 18 cents from the deal. A way to think about that is 10% from the core business, 18 cents from the deals, 28 cents in total.

Perfect. And then just in terms of price realization, maybe where you were at in Q1 and then where you were at in terms of price cost spread and what you expect for the balance of the year. Thank you.

Thanks, Matt. Very pleased with our pricing. It continues to offset inflation. We achieved a bit more than 1.5% of price across our entire business. Total inflation was a bit less than 1%, so we're maintaining a positive spread between the two, which is our intention. And when you look out for all of 21, we expect to achieve slightly higher pricing than the 1.5% with slightly higher inflation. So we see both our pricing and inflation building a bit and we'll strive to maintain a positive spread between price and inflation for the full year. And it's really driven by the highly differentiated nature of the Amatek product portfolio. We have leadership positions in these markets around the globe and provide excellent value to our customers, so when we get cost increases, more than likely we can pass them on.

Great. Thank you, Dave.

Thank you, Matt.

Thank you. Next question comes from the line of Dean Drake. from RBC Capital Markets. Your line is open.

Thank you. Good morning, everyone. Good morning, Dean. Hey, Dave, I'd love to get some context of this, and I'm not sure I'm supposed to use the word an M&A spree, but it's just a logjam has been broken here, and maybe you can give us some context. Did the pricing get reasonable? You probably had all these assets on your radar screen before we went into COVID, so the lifting of COVID uncertainty certainly was a factor here. But just give us the context, because you don't often see a volume of deals that look to be great fits, but just happening in such a short amount of time.

Right, right. It's a great question. And I'll try to give you an overlay the way that we think about it. And, you know, we've managed through many economic cycles and seen the impact on M&A from the economic cycles. And it was no surprise and This particular downturn, the deal activity dramatically slowed in 2020, and pent-up demand would drive a quick recovery. We talked about that last year. So our focus in 2020 was to make sure that we were well-positioned for the rebound. And one of the ways we would be well-positioned is we strengthen our balance sheet, and we build up our cash balances during the worst of the pandemic, and we acted the year with you know, $1.2 billion in cash and a net debt to EBITDA of 0.9. But as we talked about last year, we also focused on expanding our pipeline of opportunities. And we told you that our – last year, we were busier than ever with pipeline development. And as you stated, we've been working with these companies for, you know, over a year on these deals. And, you know, just through the first four months, the sellers wanted to sell the businesses like we thought and We have a dedicated team of people that are working for them, so we acquired five companies, deployed $1.85 billion in capital, and they're highly strategic, and we're really excited for each of the companies we acquire. They fit perfectly with our acquisition strategy. Each has strong, differentiated technology positions. They allow us to expand and attract growth areas, like embedded systems for aerospace and defense, testing for autonomous vehicles, 5G, satellite communications, expanding our IoT capability, more capability in an automation business, software for embedded systems. So we're really happy with the set of companies that we acquired. And importantly, each of these businesses is going to benefit from being part of Ametek. We developed a custom playbook for each of the businesses, and they're going to benefit from our global footprint to help them accelerate the efficiencies. Importantly for us, we were able to get the deals done. We're meeting our traditional financial hurdles, which are a return on invested capital of 10% and an IRR of 15%. So these are important thresholds for us, and we want to ensure that we're providing strong level returns on our capital deployed for shareholders. And one of the benefits of Ametek's distributed operating model is that we can handle a bunch of acquisitions like this to acquire and integrate multiple businesses while remaining active in acquiring other businesses. These are coming into different parts of Ametek, and there's a senior Ametek leader responsible for the integration. And our pipeline of opportunities remains strong. We have a meaningful level of capacity, as Bill talked about, with strong cash flows. So I hope we're talking to you before the end of the year about some other things. But we feel real good about it, and it wasn't just it all happened at once. It's a lot of hard work over the course of the pandemic and the course or greater than a year.

That's really helpful, and you answered my question about the additional management capacity, because I can see you've got the capital to do more deals, and you did answer the question about the management capacity. That was really helpful. And I may have missed this, but within the increased guidance, what is the contribution, earnings contribution from the deals?

Yeah, if you think about the $0.28 midpoint rise in our guidance, $0.18 is from the deals this year, and the other $0.10 is from the organic operations of the company. Got it.

Appreciate it. Congrats on all that work. Thank you, Dean.

Thank you. Next question comes from the line of Josh Pokrowinski of Morgan Stanley. Your line is open.

Hey, good morning, guys.

Good morning, Josh.

Dave, just to stick with the deals, I guess, here first, you know, Abaco, you know, I guess we're getting to the point now where bolt-ons are starting to look a little bit less bolt-on and pretty large. Can you talk about maybe the complexion of the pipeline or maybe your own appetite to kind of be in that range maybe more consistently going forward? I think you've said yourself that, you know, needle-moving deals for Amatek sort of have to get bigger over time. Is that something that, as you look out over kind of the range of properties that you think is possible, achievable, kind of consistent with the strategy here?

Yeah, good question. A few years ago, we let our investors know that we were expanding our deal pipeline to include slightly bigger businesses and We included businesses that would be in the $200 million to $400 million range, and we deploy a billion-plus capital on them, and Abaco is in that range. We talked about doing a deal like that every so often. That doesn't necessarily mean that's going to become our core, but those businesses are still working in our pipeline, but there are still many businesses that are, I'll call them medium-sized, that are the $100 million deals, similar to NSIMI and Magnetrol. There's a probably the most businesses of that size. And then we also have some smaller deals that are really important strategically to augment our internal growth. So you're going to see a mix of deals of those sizes. I mean, Ametek is not going to buy a company our size or buy a company half our size. We just don't think that you can create value like that. But the size of the company now, I think those companies in the $200 to $400 million revenue make sense, and you'll see those from us occasionally.

Got it. That's helpful. And then just pivoting over to the core business, it seems like order intake picked up pretty nicely here. You talked about record backlog. I guess the perception out there or maybe the history of Amitek has been slightly longer cycle than maybe some of these book-in-turn only businesses and orders that tend to develop along with the recovery but not necessarily day one. It seems like you've built up a little bit of momentum here. Can you maybe talk about, you know, where is that backlog growth stemming from or what out there fundamentally in the marketplace has maybe picked up a little quicker than you otherwise would have expected?

Right. First, to unpack the orders a bit, we had a 9% organic orders growth, and it was broad-based in the company. And EIG organic orders was 10%. EMG organic orders was 8%, so it was good to see broad-based orders. When you think about our portfolio, both EIG and EMG we raised from mid-single digits to high-single digits. That's another indication of the broad-based growth. I think that the overall company will grow sales sequentially each quarter, and when you look at our four market segments, process improved to high-single digits, Power and industrial improved to high single digits. Automation and engineering improved to high single digits. But the aerospace and defense segment, we continue to expect low to mid single digits. So with defense doing better than commercial. So when you think about the entire business, it really is doing well. And I'd carve out the two long cycle businesses, oil and gas, that we think will trend up in the second half of this year. and the commercial aerospace business, which will not trend up until, you know, 2023 maybe, 2022, 2023. But the key point is, you know, we have properly sized that business for the current level of activity, and any small improvements along the way are going to be very profitable for us. So we look at it as really attractive. We're going to have the long cycle businesses kick in down the road, and we're already seeing the mid-cycle pick up, so we're feeling pretty optimistic about the recovery.

Got it. That's helpful. Congrats on the quarter, all the deals, and best of luck. Thank you, Joe Hanks.

Thank you. Next question comes from the line of Allison Polignac of Wells Fargo. Your line is open.

Hey, good morning, guys. Good morning, Allison. Just sort of in line with that, you know, sort of the mid- and long-cycle businesses, could you maybe talk about the core operating leverage that you would expect to see this year based on some of the orders that are coming in for you? Any closer there?

Yeah, that's a good question. I mean, we had excellent margin performance in the first quarter, strong margin improvements in both EIG and EMG, a strong execution, solid price inflation, excellent productivity. We're going to see for the year core incrementals of 35%, and that includes bringing all the temporary costs back into the business. And core operating margins will increase about 40 basis points. So we'll grow margins. A key point, though, is the acquisitions are margin dilutive. So our reported margins will be down a bit, and that's kind of what we do. We acquire businesses that are lower margin than Amatek, and over the course of a couple of years, three years, we bring them up to the Amatek level. And it's pretty hard to acquire businesses that are at the profitability level of Amatek. We're at the 29%, 30% EBITDA. and we have some room with all these businesses to improve profitability. So that's the way I think about the core operating leverage on the business will be positive, and then the reported margins with the acquisitions will be margin dilutive.

Got it. Thanks. And then, you know, working capital, you know, obviously an impressive number at 14.2% of sales. Would we expect that to maybe flip a little bit with the increase, or is that sort of a sustainable level as you think about it?

Yeah, Allison, I would expect that – We'd expect that to probably come back. We'd be adding some costs back to the balance sheet, particularly as the sales grow. You're going to see some more receivables come on the balance sheet, and we're going to be focused on making sure that we've got all the right inventory levels in the business to support the growth and make sure we're good to go and can support our customers as we move forward. I think we did really well in the first quarter. I think while we did put receivables and inventories back up on the balance sheet, our teams did a great job getting advance payments from customers and the like. So that was a good result, but I'd expect to see that trend up a bit over the course of the balance of the year.

Understood. Thank you.

Thank you, Allison.

Thank you. Next question comes from the line of Nigel Coe from Wolf Research. Your line is open.

Thanks. Good morning, everyone. Morning. So I want to go back to deal flow because it's obviously, by the way, congratulations on all the deals. You know, you source and buy a lot of private companies, family health companies, and I've got to think there's got to be, you know, an increased interest in selling businesses, you know, ahead of any cap gains tax rate changes and inheritance tax changes. Are you seeing that yet? I mean, are you seeing more interest in maybe pulling the trigger on some disposals with these changes on the horizon?

There's a little bit of that, Nigel, but what I see is a lot of private owners and there were some private owners in this suite of businesses that we bought. They got through the pandemic and they're looking at a world that's changed and they're looking at someone larger to provide some stability and some capital and some access to things that they didn't have access to. So I think it's more the uncertainty in the macro environment, the uncertainty driven by the pandemic has certainly made private company owners more likely to consider the exits that they were maybe going to do a couple years from now. That's what I think is happening, and we're seeing a little bit of that.

Okay, that makes sense. And then EMG margins, you know, moving notably higher. You know, pre-pandemic, we're sort of in the high teens, maybe 20% range, and now we're moving into the mid-20s. Do you think that that level is sustainable? I understand red and yellows came out, but do you think mid-20s is sort of the range for EMG from here?

They were a record margin this quarter at 24.7%, and up 190 basis points, and The margins have been growing nicely for a period of time, and when you look at that part of the business and you dissect what happened, the two very profitable parts of that business, our automation business and our defense businesses, both are firing on all cylinders, and that throws the margins up. So it's really a mix among businesses within the EMG group that is driving the margins, and as long as those businesses stay strong, I would expect the margins to be good. Okay. Thanks, David. Thank you.

Thank you. Next question comes from the line of Scott Graham from Rosenblatt Securities. Your line is open.

Hey, good morning, Dave. Good morning, Scott. How are you doing? Thank you. All good. Always nice to wake up to this type of report. So what I think we're about $50 million of.

temporary cost outs last year you know bill you touched on this a little bit within sgna how do you see those layering in uh yeah i i i there was i think there was 90 actually that was the uh the temporary cost from last year and we got the benefit of 50 million into 2021 for the uh the structural restructuring scott but uh okay sorry yeah yeah but what i say is in the second half of the year you're going to see those temporary costs come back in. And a little bit came in in the first quarter, a little more in the second quarter. But in the second half of the year, they're all back in. So that's how we've modeled the year and we look at it.

Thank you for that. And, you know, I read your press release. I listened to your prepared remarks and really nary a peep on supply chain. and you know it's kind of like all the rage this quarter on conference calls and nothing from you guys so could you maybe give us sort of your you know view of what you're seeing both internally and externally things that could maybe not happening in the first quarter but maybe could back up into you not again not internally but something externally that could back up into you and in fact Does that, as a concern, plus the add-backs of the costs, is that what's keeping the second half guidance in check?

You're right on, Scott. I mean, the supply chain, there are certainly challenges in materials and logistics right now. Specifically, the semiconductor shortages have our attention, and our supply chain team are working this issue aggressively. Our guidance reflects all known risks. This is a serious issue and one that will likely be with us for some period of time. And we're managing this with our dedicated business unit supply chain personnel with an overlay of our company-wide global sourcings. And they're an effective team, and we've done an effective job on it so far. But it is a serious issue. Our guidance reflects the known risks, and we're confident we can deliver it. But we just felt it was too early in the year to improve the second half earnings and the sales guidance because of that. We think it's a nice balance.

Makes sense. My last question is a question you've heard me ask before. I know you kind of went through the four big segments on there, organic. Could you also throw in your outlooks for those segments?

Yeah, sure. In process, we talked about it. It was up. mid-single digits in the quarter, and it returned a positive organic growth earlier than we expected. Our little extra color there, our ultra-precision technologies and our materials analysis divisions really had good quarters, and they're seeing improving demand across a broad set of end markets. They're in the research semiconductor and industrial markets. We're also seeing Very strong growth in orders across our process businesses. Organic orders were up low double digits, so a little bit higher than Ametek's overall. And for the full year, we now expect those organic sales for our process businesses to be up high single digits versus the prior year. It was mid-single digits in the original guide for the years, and we raised it to high single digits. So process orders look good. Process is doing very well in Asia. And certain divisions are starting to fire on all cylinders. And our aerospace and defense business, our overall sales for A&D were down approximately 10% in the first quarter, modestly ahead of our expectation. And really there's a bifurcation going on there. The defense businesses remained robust with sales up low double digits on a percentage basis. Commercial aerospace are still feeling the effects of the pandemics. The year-on-year rates of decline are continuing to improve, but in the first quarter, commercial aerospace sales were down approximately 25%. So for all of 21, like I said before, we continue to expect low- to mid-single-digit organic sales growth from our aerospace and defense business. We did not change the outlook on that segment as we did the other three. Power and industrial overall sales, you know, We're up slightly from the prior year's first quarter. Very strong orders up mid-teens on orders. We now expect organic sales for our power and industrial businesses to be up high single digits, and we changed that from up mid-single digits in the first outlook for the year. And finally, our automation and engineering solutions, up modestly versus the prior year, where organic sales were up mid-single digits. Overall, sales were impacted by the divestiture of Reading Alloys in the first quarter of last year. Sales across our automation businesses, as we mentioned in the prepared remarks, remained strong, and we're seeing solid demand conditions across their international markets in Asia and China in particular. And for all of 2021, we now expect automation and engineered solution businesses, organic sales growth that we have high single digits, with stronger growth in our automation businesses than our engineer solution business. And you end up with both EIG and EMG being up high single digits, raised from mid-single digits.

Okay, Scott? Awesome. Thank you for that summary, Dave. Thank you.

Thank you. Next question comes from the line of Andrew Obin of Bank of America. Your line is Obin.

This morning, this is David Ridley Lane on for Andrew Obin. Qualitatively, do you think there was any pull forward or precautionary orders there in the first quarter? And were those a bit of a tailwind for the 9% organic orders growth you had in the quarter?

Yeah, good question. We have highly engineered products, so I don't think people are stocking them. But certainly in the current macro environment, people want to get their orders placed. Customers want to get their orders placed to make sure that they can get the products that they need. So we're seeing confident customers concerned about the global supply chain and placing their orders earlier than expected.

And then the other question I have is on the trends by geography. I mean, we've heard Europe has been relatively slower. Interested in where you saw the largest inflection in your organic trends?

All of the geographies showed improvements. The U.S. was down mid-single digits. Improvements in most areas, but the decline was driven by commercial aerospace and oil and gas. Really, it was the same picture in Europe where we were down mid-single digits with good improvement, but weaknesses in commercial aero and oil and gas. And Asia was the star for us, a broad-based strength up mid-20s, led by our automation business and our process business.

Thank you very much.

Thank you. Thank you. Next question comes from the line of Rob Vortimer. of Mellius Research, your line is open. Hi, good morning.

My question, it's kind of a follow-up on the supply chain question that was asked earlier. I mean, your margin performance is quite good in the quarter on revenues that haven't come back yet. I'm wondering how big, if any, you can quantify the supply chain drag, and maybe more importantly, do you have a sense as to whether you've reached the kind of maximum disruption point in 1Q and 2Q? Are things getting better, or did folks pull out all the stops in 1Q to get stuff done throughout the supply chain, and that leaves more risk out there? Just when can we stop worrying about the issue?

Thanks. In Q1, we did an excellent job, and we didn't have any inability to ship because of supply chain. Our teams are going to work on the full year, and there are certainly challenges, but the We have a good team working on them and going to solve them. I don't think we've seen the worst of it yet, just based on what's happening on semiconductors. I think some of the logistics issues we think will moderate during mid-year, but the semiconductor shortages could continue into 2022. And, you know, there are higher prices you're dealing with or, you know, issues with the global supply chain recovering from a V-shaped recovery, and we have a really good supply chain capability. We're dealing with it effectively, but we're not immune to it, so we're doing our best to stay on top of it. In Q1, we didn't have any issues, and our guidance reflects the known issues, and we're confident in our guidance. Thank you. Thank you, Rob.

Thank you. Next question comes from the line of Brett Levine from the Vertical Research Partners. Your line is open. Good morning, all.

Good morning, Brett.

Hey, my first question is just on the defense business. It continues to grow with these acquisitions, and it's been an area that you've seen very strong growth. I'm just curious what that growth rate looks like over the next two to three years. I know you're on a variety of platforms. And then also just if you could maybe parse out, you know, U.S. versus international for defense specifically.

Yeah, great question, Brett. I mean, the first thing, you know, defense is about 12% of the sales of Ametek. And, you know, when we looked at Abaco, you know, we wanted to make sure that, you know, you have a changing administration. We wanted to make sure we were going to grow through this and, If you look back at Abaco over the last three or four years, they grew about 16%. And that's very, very excellent. It's healthy. We feel that embedded computing is among the most compelling growth opportunities in A&D to the substantial DoD focus on modernization and upgrades of existing defense platforms because there's a focus on processing-intensive and data-intensive mission capabilities in the future. We also got comfortable with they've amassed over a billion dollars in design wins that underpin the growth over the next several years. That's all good, but at the same time, we think they're well positioned to offset any overall DOD funding headwinds because of those factors. We modeled a top line as a high single-digit grower versus the mid-teens of the recent past. We think we've got a conservative model there. The management team of the business is still driving to those higher growth rates, but we modeled it conservatively. When you look at Ametek's broader defense exposure beyond Abaco, right now we're kind of in the right areas. There's a lot of electronics going in and we're cooling and heating electronics in terms of the environmental controls and it's been doing well for us and And we think this year for 2021, outside of Abaco, our core business will be up into high single digits in the defense market. And we went into the year saying mid-single digits, but we had a very strong first quarter, so we improved the defense business to mid-to-high single digits.

Great. Thanks for that. And just back to M&A, great to see the velocity deals pick back up. But given the potential tax changes and the fact that interactions are improving here. Is the $1.8 billion of available capital the optimal range, but maybe you'd be comfortable flexing up even above that opportunistically as volumes pick back up and the fact we're early in the recovery? Just curious on your flex-up capacity.

Yeah, sure. If you look at, you know, if we spent that $1.8 billion that we talked about, certainly there would be more capacity available. Our leverage would still only be below two and a half at that point in time. So we'd have additional room to flex up from there if the right deals came along. So from a balance sheet capacity, that's not an issue. And it's always, as we say, it's all about making sure that we have the management capability to be able to bring in those deals effectively. And Dave touched on that earlier in his comments.

Yeah, our strategy is really not capacity constrained. You know, even at two and a half, we're... well below our governance. Our strategy is constrained by finding good deals that are differentiated that meet our requirements that we can improve. So we're optimistic that we're going to be able to do that, and hopefully we're talking to you again later this year, and we have a good pipeline. But it's really finding those deals that we get confident we can get a return. That's the key issue, Brett, not finding.

Yep. Congrats on the quarter and the deal flow. Thank you.

Thank you. Next question comes from the line of Joe Giordano of Cohen. Your line is open. Hey, good morning, everyone.

Hey, Joe. How you doing? Good. So we've touched on supply chain a couple times, and you guys are doing a good job there. Just curious, when you went through your diligence on all these deals, how did you get comfortable that you weren't bringing in potential problems? Like when I think about embedded computing and and things like that. How did you get comfortable that the supply chains and the requirements there of the new businesses are things that you could pop into your existing framework and not stress it too much?

Yeah, that's a great question. And we obviously spent a lot of time on that. And based on our questions and, you know, Abaco in particular has, they have all their, they have committed order for their plan on 2021. So we pushed it and They responded, and it was an area of heavy focus and our diligence. You know, you don't have full access to the business, but it's understood by the Abaco team. They're very good, and I think that we're well-positioned to deal with the supply chain issues in that business.

And when I think about overall Emitech now, Proforma, I mean, not to give you guys more work, but How do we think about the segmentation structure? I mean, we've got two segments. They're getting pretty large. Are they providing, in your opinion, like adequate transparency into the total company, or maybe do we have to think about a new structure?

Yeah, we're not thinking about a new structure. We've got the four subsegments under the two reporting segments externally. So we have EIG and EMG. EIG is about two-thirds of the size of the company. EMG is about one-third. And we provide insight and revenue disaggregation into process, which is about 46% of the company pro forma. Aerospace and defense, which is about 19% of the company pro forma. Power industrial, which is about 14%. The company in automation and engineering solutions is about 22%. And power industrial is 14%. So we're comfortable with it, and we think this structure is going to let us go and grow for the next few years.

Thanks, guys.

Thanks, Joe.

Thank you. There are no further questions. I would now like to turn the call back to Kevin for closing remarks.

Thank you, everyone, for joining our call today. And as a reminder, a replay of today's webcast can be accessed in the investor section of amatech.com. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.