AMETEK, Inc. (AME) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 AMETEK Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the call over to Vice President of Investor Relations Mr. Kevin Coleman. Please go ahead, sir.

Great, thank you, Andrew. Good morning and thank you everyone for joining us for AMETEK's fourth quarter earnings conference call. With me this morning are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. AMETEK's fourth quarter results were released earlier this morning and are available electronically on market systems and on our website in the Investors section of ametek.com. 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. Before we get started, I want to remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I'll also refer you to the Investors section of ametek.com for a reconciliation of any non-GAAP financial measures used during this call. We will begin with prepared remarks by Dave and Bill and then we’ll open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning everyone. AMETEK had a great year. Capped off by an exceptional fourth quarter in which we exceeded our expectations and established records for essentially all key financial metrics. In the fourth quarter, we generated a record level of sales with a robust and broad-based organic sales growth. We also generated a record level of orders providing us with solid visibility as we enter 2018. We delivered excellent operating performance with a strong core margin expansion, a high quality of earnings and record diluted earnings per share. We generated a record level of cash flow, while continue to deploy those cash flow on a strategic acquisitions having just announced two new acquisitions simply put the AMETEK model is working. As we look ahead, we remain confident on our ability to deliver strong performance in 2018. I’ll provide more details on our 2018 guidance in a moment, but first let me provide the highlights of our fourth quarter and full year results. Our fourth quarter reported results included an after-tax gain of $75.5 million as the gain from the remeasurement of our tax deferred liabilities due to Tax Reform was offset in part by a change related to the repatriation of our unremitted foreign earnings and certain other items in the quarter including realignment costs and a charitable note donation to the AMETEK Foundation. The AMETEK Foundation is the charitable honor of AMETEK. It focuses its support on early childhood education, health and welfare and social programs in the communities where AMETEK has a presence. As a result of Tax Reform, we made a $5 million donation to our charitable foundation in the fourth quarter. I’ll comment further on Tax Reform and the impact on AMETEK in a moment. Please note that any references made on this call to 2016 or 2017 financial results will be on an adjusted basis excluding the fourth quarter of 2017 items noted above and the fourth quarter of 2016 realignment cost. AMETEK’s fourth quarter sales were a record $1.14 billion, up 17%, compared to the fourth quarter of 2016. Organic sales were excellent up 9% in the quarter with acquisitions adding 6% and foreign currency providing a 2% benefit to sales. Organic sales growth remains broad based across each of our businesses in key geographies. It reflects the continuation of the global synchronized growth I spoke to last quarter combined with the strength of our businesses in our niche positions across attractive growth markets. We're also very pleased with the strength and orders as fourth quarter orders continue excellent pace of growth we experienced in the first three quarters of the year. Overall, orders were up 19% in the fourth quarter with organic orders up 9%. This level of orders growth enabled us to end 2017 with a record backlog of $1.4 billion. Operating income in the quarter was a record $251.4 million, up 18% over the same period in 2016. Operating income margins were 22%, up 10 basis points compared with the fourth quarter of last year. Excluding the dilutive impact on margins from recent acquisitions, operating income margins in the quarter were 22.4%, up 50 basis points compared to last year’s fourth quarter. Diluted earnings per share were a record at $0.70 in the quarter, representing an impressive 21% increase compared to the $0.58 reported in the same quarter of last year. AMETEK’s businesses continue to operate at a very high level, generating tremendous cash flow. Operating cash flow was a record $253 million in the fourth quarter and free cash flow conversion was an excellent 137% of adjusted net income. Now for the full year of 2017. AMETEK established records across all key financial measures. Sales were a record $4.3 billion up 12% over 2016 and organic sales were up 6%. Full year orders were also excellent about 18% overall and 10% organically with broad-based strength across our businesses. Operating income was $936.9 million, up 11% over last year while operating margins were 21.8% for the full year. Excluding the dilutive impact of acquisitions on margins, full year operating margins were up 22.2%, up 30 basis points over 2016. Full year 2017 diluted earnings per share for a record $2.61, up 13% compared to $2.30 in 2016. Lastly, our cash flow generation for the full year was exceptional with operating cash flow up 17% to a record $883.3, excluding a $50 million pension contribution in the first quarter of 2017. Now turning to the individual operating groups, first the Electronic Instruments Group. EIG sales in the fourth quarter increased 20% versus the prior year to a record $741.5 million. Organic sales were strong, up 9% in the quarter. The acquisitions of Rauland and MOCON contributed 10% and foreign currency was a two point tailwind. EIG’s operating income in the quarter was a record $195.6 million, up 20% over the prior year, and operating incomes were very strong at 26.4%. Excluding the dilutive impact from acquisitions, EIG margins were a superb 27.5%, up 110 basis points over the last year. The Electromechanical Group also delivered outstanding performance in the fourth quarter. EMG’s sales were up 13% year-over-year to $401.6 million. Organic sales growth was broad based, up 10% over last year. The acquisition of Laserage contributed 1% and foreign currency contributed 2%. EMG’s operating income in the quarter was $74.2 million, up 18% over the same period in 2016. Fourth quarter operating margins were 18.5%, up 80 basis points over last year. In summary, AMETEK results in the fourth quarter and for the full year were outstanding. I want to extend my thanks to all AMETEK colleagues for their excellent work and congratulate them on the great successes in 2017. While we benefited from the strong global macro environment, our team continues to execute each of AMETEK’s growth strategies and deliver excellent performance in the short-term while positioning their businesses well for long-term success. Before I discuss our outlook for 2018, I want to touch on some of these averages, which are powering AMETEK success. First, acquisitions. We remain very active on the acquisition front having just announced the acquisitions of two businesses: FMH Aerospace and Arizona Instrument. FMH Aerospace, which we acquired in January, is a leading provider of highly engineered and differentiated components for use in the aerospace, defense and space markets. Their products are used to facilitate the transfer of fluids and gases, extreme temperatures and pressures with highly demanding mission critical applications. FMH is currently supporting more than 100 strategic platforms with applications that include aircraft fuel systems, auxiliary power units and cabin pressurization. FMH is an excellent addition to our thermal management systems division as it brings strong positions across a range of attractive aerospace and defense platforms while providing us with highly complimentary products and solutions. FMH is based in Irvine, California and has annual sales of approximately $50 million. We deployed approximately $235 million on the acquisition. Arizona Instrument, which we acquired in late December, develops a manufacture of high quality precision instrumentation measurements for high value applications. There are advanced moisture and toxic gas analysis instrumentation, serves several markets with attractive growth dynamics including food, pharmaceuticals and environmental. Arizona has an attractive mix of aftermarket sales at approximately 40%. Arizona Instrument decisively complements our Brookfield viscosity measurement business, which we acquired in 2016 allowing us to further expand AMETEK’s product offering in these attractive secular growth markets. Arizona Instruments is based in Chandler, Arizona and has annual sales of approximately $15 million. We deployed approximately $38 million on the acquisition. Over the last twelve months, we have acquired four businesses, deployed nearly $800 million in capital and acquired approximately $290 million in sales revenue, essentially achieving our stated strategy of deploying our free cash flow on acquisitions. Our business and M&A teams remain very active and are managing a strong pipeline of attractive acquisition candidates. Given our excellent cash flow generation, the strength of our balance sheet and now more flexibility with respect to our foreign cash due to Tax Reform, we have significant financial capacity available to deploy on strategic acquisitions. We're also seeing great results from our new product development strategy. New products are an interval component of our long-term success. Through our investments in new products and technologies, our businesses are helping their customers to solve their most complex challenges. Our teams were very active and successful in 2017 introducing many outstanding new products. Our vitality index, which measures the level of sales generated from new products and solutions, introduced within the last three years continues to reflect the great success from our work. In the fourth quarter, our vitality index was a very strong 24%. AMETEK also continues to invest meaningfully in our research and development and engineering. In 2017, we invested approximately $221 million in RD&E, up 10% from 2016. And in 2018, we expect to increase our investments to approximately $235 million, up 6% over 2017. Lastly, our business has continued to deliver outstanding performance from our operational excellence initiatives. In 2017 along with excellent working capital management, we realized more than $100 million in savings with most of these savings coming from our global sourcing and strategic procurement initiatives. In 2018, we expect to achieve approximately $85 million in savings from our operational excellence initiatives with the majority being driven through our sourcing and procurement activities. In addition to the strong success of our OpEx tools focused on productivity improvements, we're seeing positive results from the expansion of our operational excellent tools focused on the front-end or customer-facing part of our business. We are very pleased with the success we have seen and expect this success will continue to contribute to our organic growth. I want to take a moment to comment on Tax Reform and AMETEK’s capital deployment strategy. Not surprisingly Tax Reform is a positive for AMETEK. We will see a lower effective tax rate. We have better and more efficient access to our foreign cash, which will provide us with additional flexibility. And although not a large direct benefit to us given our asset like business model, it is likely it will benefit our customers that will consider accelerated capital expenditures given the full expensing of certain capital investments. However the benefits of Tax Reform do not change AMETEK’s fundamental approach to investment and capital allocation. We will continue to invest appropriately back into our businesses to support the growth initiatives. Following these internal investments, our top priority for capital deployment remains strategic acquisitions as does our stated objective of deploying our free cash flow on acquisitions. We will continue to make opportunistic share repurchases and we will continue to be able pay a modest dividend as we have done in the past. With respect to the dividend, we announced today that our Board of Directors approved a 56% increase in our quarterly dividend, reflecting the strength and confidence we have in our underlying cash flows. This increase brings our regularly quarter rate to $0.14 per share from our indicated annual rate to $0.56 per share. We have last raised our dividend in 2014 and this raise increases our dividend yield to the desire range of between 0.5% and 1%. Now let me turn to the outlook for 2018. For the full year, we anticipate overall sales will be up 7% to 9% compared to 2017. Organic sales are expected to be up 3% to 5% with similar levels of organic growth expected across each of our reportable segments. 2018 earnings per diluted share expected to be in the range of $2.95 to $3.05 reflecting a 13% to 17% increase compared to 2017’s adjusted earnings of $2.61 per diluted share. The guidance range reflects the expected tax benefit from Tax Reform and assumes an approximate 23% effective rate in 2018 versus our 26% effective rate in 2017. In the first quarter, sales are projected to be up low double-digits compared to the first quarter of 2017 with organic sales up mid single-digits. First quarter diluted earnings per share are anticipated to fall within the range of $0.70 to $0.72, up 17% to 20%, compared to the first quarter of last year. To summarize, AMETEK finished an outstanding year with an exceptionally strong quarter. Our businesses and the world-class teams are well positioned for another year of growth and sustainable long-term success. I will now turn it over to Bill Burke, who will cover some of the financial details for the quarter and the year. And then we will glad to take your questions. Bill?

Thank you, Dave. As Dave has noted, AMETEK had an excellent quarter. We delivered a record level of performance with a very high quality of earnings. I will provide some additional color on our financial highlights. We will also provide more details on the impact of Tax Reform on AMETEK and our reported results. First let me touch on Tax Reform. As a result of the passage of the Tax Cuts and Jobs Act, AMETEK recognized a gain of $185.8 million, or $0.80 per share, in the fourth quarter. This one-time non-cash gain was a result of the remeasurement of our deferred tax liabilities. Also as a result of Tax Reform, we incurred a $94.2 million, or $0.41 per share charge in the fourth quarter related to repatriation and associated withholding taxes. The net impact of these tax adjustments resulted in a gain in the fourth quarter of $91.6 million, or $0.39 per share. This gain should be considered provisional and maybe subject to further adjustment during the measurement period. This gain was offset in part by certain other items in the quarter. First, we took a pre-tax realignment charge of $16.8 million or $0.05 per share. This charge will allow us to better position our long-term cost structure and includes cost associated with the final stages of the consolidation of our floor care and specialty motors business with our precision motion control business. And second, we made a pre-tax $5 million, or $0.01 per share, charitable donation to the AMETEK Foundation in the fourth quarter due to the benefits from Tax Reform. Combined these other items totaled $21.8 million pre-tax, $16.1 million after-tax or $0.06 per share So as a result of Tax Reform and these other items, the reported gain included in our fourth quarter GAAP earnings was $75.5 million or $0.33 per share. Now let me provide some additional financial highlights for the fourth quarter. In the fourth quarter, core selling expenses were up in line with core sales growth. General and administrative expenses in the fourth quarter were up over the prior year due largely to higher compensation expense. The adjusted tax rate for the fourth quarter was 25.7% versus last year’s rate of 27.1% and was in line with our expectation. We are still evaluating the impact of Tax Reform on our go forward effective tax rate, however, based on current information available we have estimated our 2018 tax rate to be approximately 23% given our expected benefits from Tax Reform. As we have stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate. Working capital, defined as receivables plus inventory less payables, was excellent at 16.8% of sales in the fourth quarter, down from 18.4% in the same period of 2016 reflecting the great performance of our businesses. Capital expenditures were $29 million in the quarter and $75 million for the full year. 2018 capital expenditures are expected to be approximately $85 million or 1.9% of sales. Depreciation and amortization was $52 million in the quarter and $183 million for the full year. We expect 2018 depreciation and amortization to be approximately $200 million. Our businesses continue to generate excellent cash flow. Fourth quarter operating cash flow was a record $253 million and fourth quarter cash flow was $223 million, representing a very strong 137% of adjusted net income. Our full year cash flow was also excellent. Excluding the $50 million discretionary pension contribution made in the first quarter, 2017 operating cash flow was $883 million, up 17% from 2016 with full year free cash flow of $808 million or 133% of adjusted net income. For 2018, we expect free cash flow to be approximately 120% of net income. We continue to successfully deploy our strong cash flow on strategic acquisitions. In 2017, we deployed approximately $560 million on the acquisitions of Rauland, MOCON and Arizona Instrument and thus far in 2018 we have deployed approximately $235 million on the acquisition of FMH Aerospace. Total debt at December 31 was $2.17 billion, down from $2.34 billion at the end of 2016. Offsetting this debt is cash and cash equivalents of $646 million, resulting in a net-debt-to-capital ratio at December 31 of 27.5%. After the acquisition of FMH Aerospace, we have approximately $1.5 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses performed exceptionally well in the fourth quarter capping off the year with excellent results and high quality of earnings with our strong balance sheet, cash flows, proven growth strategies we are excited as we look ahead to 2018. Kevin?

Great, thank you, Bill. Andrew, can we please open the lines for questions?

[Operator Instructions] And our first question comes from the line of Allison Poliniak with Wells Fargo. Your line is now open.

Hi, guys. Good morning.

Good morning, Allison.

So margins continue to push higher here. As you look 2018, particularly on the organic side, how should we be thinking about that entering this year? How far can you push them going forward and obviously you’re investing in there as well?

Right, right. Well the way we think about it is we have a lot of runway for margins. And we think we can increase our margins, ex-acquisitions about 30 basis points. So the same thing we did in the 2017. So 30 bps is probably a good way to think about it. And if you look at our 2017 results, we got about – on the incremental sales we are up about 35% incremental margin and that’s what we’re targeting for 2018 also.

Great. And then you touched on it a little bit in your remarks, but it’s sort of you’re expecting sort of a likely benefit from the Tax Reform and increased capital expenditures. Can you maybe talk to sort of the order increase that you’ve received thus far? Does it feel like it’s accelerating to you guys or not really?

Yeah, it’s a – I think our orders were accelerating before Tax Reform and its continuing. So, we can’t point to specific customers telling us that are ordering because of the Tax Reform, but we can’t point to broad-based order strength across our portfolio that’s continuing and it’s continuing into January. We’ve got – January orders were in line with what we expected. So it’s strong. It’s continuing its strength. It's all geographies and it’s all of our businesses. So it’s difficult to pinpoint how much is from Tax Reform and how much of it’s just the general synchronized growth across the globe, but it is the good market. The one point I add to that is a lot of customers are now talking about their next generations and new designs and some new projects that are floating into the pipeline. So it feels good looking forward.

Great, thanks so much.

Great.

And our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Yeah, good morning, guys.

Good morning, Andrew.

Just sort of big picture question for companies that does a lot of acquisitions. How do you guys think about cost of capital and return hurdles as interest rates go up?

Right. Yeah, the one thing about our acquisition strategy is that we haven’t changed our key hurdle rate. So it’s the return on capital of 10% in a third year of owning a business for the return on invested capital. And we use that throughout the – in times when interest rates are lower and times when interest rates were higher. So the current environment is very similar to what we have been experiencing. So that – and we plan on applying the same process. So we think that’s reflected on our balance sheet. Our balance sheet as a return on total capital of a NOPAT average, total capital of about 12%, which is a really good rate for an acquisitive company and we consider our cost of capital of about 8%. So the strength between the 12% and the 8% is what we’re providing to our shareholders in the long-term. And we don’t think that we’re still going to stay focused on our disciplined approach and the 10% ROIC in year three. And we’re seeing a similar environment to what have seen over the two years. The pricing is elevated. There is plenty of cash chasing deals, but despite this we have been successful in deploying our free cash flow and value enhancing acquisitions.

Right, so you were never a spread company?

No, we’re never a spread company. We’ve always been an absolute company.

And just a question on payout ratio, and I apologize I delve in a little bit late; fairly significant increase in the payout has philosophy on dividends change going forward.

No, the philosophy hasn’t changed. The primary use of free cash flow is acquisitions. Secondarily, it’s opportunistic buybacks. And the dividend, we continue to pay a modest dividend. And basically, we last raised our dividend about four years ago. It was in the neighborhood of 50% and this is four years later and we’re raising it to 57%. So it’s the same philosophy we want to reward our shareholders because we’re very confident on our underlying cash flows, but it really doesn’t changed the fundamental capital allocation strategy of the business. M&A is the clear priority.

So we should not expect a series of dividend increases that run well ahead of earnings growth, right.

No, I would say no. I view this increase is catching up and I would not expect it to run ahead of earnings growth.

Thanks a lot guys, great quarter.

Thank you.

Thank you.

And our next question comes from the line of Robert McCarthy with Stifel. Your line is now open.

I would echo the strong quarter, gentlemen, particularly the organic growth.

Thank you.

A couple questions, a couple questions if you don't mind. I will leave – I will leave around the horn to Mr. Graham. But what I would ask is number one have you looked at a lot of serial acquisition stories, high quality, mid-caps like yourself have looked and some of actually changed accounting to going to excluding amortization. And now it looks like on the basis of my fuzzy math amortization for you on a guidance basis, I mean, it's something looks like it's – I don’t know north of $100 million a year, could be $0.50, maybe it’s much higher than that. But have you think that – made that accounting change because if you look at the underlying, how your business is run and operated. It's really about cash and backing that out might be a better way for investors to look at how to value your company over time. Have you looked at that and what are your thoughts?

Yeah, it's a great question. We get the question occasionally. We decided not to do it this year. We're still talking to our investors. I mean you just figure it out pretty easily. And we think our investors can figure it out. So we use the GAAP earnings to talk about our EPS. Some of our peers have changed the cash EPS. We're not saying that we're not going to do it and we're not saying that we’re going to do. We’ll think about it then we give everybody some heads-up if we’re going to do that, but right now we decided to stay a GAAP company.

Okay. And just to amplify your comments about capital allocation. Obviously, you deployed a lot of capital recently, done some solid presumably niche and bolt-on deals. But where we stand today given – Tax Reform given how you’re feeling about your businesses? Could you talk about the state of play for how much capital you think you could deploy over the next two years in this environment to drive value?

I’d point to Bill’s comment. He talked about $1.5 billion of dry power essentially from cash and existing flexibility on our credit lines. And I also add to that the free cash flow of the business will be somewhere around $850 million next year. So if we add those two up, we clearly can deploy greater than $1 billion with relative ease and our stated strategy is to deploy our free cash flow. So that would be our target, but if we wanted to we could flex it and go to much higher levels, north of $2 billion. So that’s the way we think about it and we look for good targets and we want to make sure we’re deploying the capital with good businesses and our business that return on capital. So our strategy really is not capital constrained. It's our deal pipeline, and looking at these different deals that we have, all good businesses. But we have to pick the deals but we have the most value too. And in the selection of those deals is really the limber on the growth and we have a great pipeline, but we’re picking the deals in an environment that has higher prices and still giving our shareholders the same return on capital. If we get a larger deal or we get many smaller deals, we have a financial capacity to do them and we’re certainly increasing efforts on the – in the M&A. We now have an 11 individuals dedicated to the pipeline work and we feel real good about our pipeline.

Just the last one, as a follow-up, I would say specifically in terms of large deals, is there tension in the pipeline to look at larger deals or is there a goal to look at larger deals? And how do you look at the opportunities out there because you get the fixed cost leverage of integrating these deals and getting good returns? I mean could you just comment on that?

Yeah, I mean, we have expanded our pipeline to include larger deals. Now, larger deals for us are not of the size of AMETEK or half the size of AMETEK. We’re talking about of kind of one notch up from what we’re looking to do, deals that are maybe $200 million, $300 million of revenue. And those are in our pipeline and we’re working through it. So we could do deal of that size and maybe deployments of capital of a $1 billion and we’re looking at those kind of business. Our financial flexibility looks compatible. But we don’t need to do those kinds of deals to deliver double-digit earnings growth for our shareholders. We’re staffed to do six to eight deals a year and that can be $50 million, $100 million deals and we’re perfectly comfortable doing of that size deal and growing at 15% a year on average.

Thanks so much.

Thank you.

And our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is now open.

Thank you. Good morning. Happy, February.

Chris, good morning.

See just I am wondering on the upside in the quarter was that more like backlog conversion was faster than expected or the kind of in quarter orders came in and converted? And if there's any insight in and answering the question?

Yeah, I think we executed very well and we were able to convert a lot of incoming orders in the quarter to sales. And there was some business, additional business investment tied to year end spend that resulted especially in our process business, some year-end spend that we were able to convert on. And we ended the year at $1.4 billion backlog. So we kind of have our cake and we got to eat it to because we had a great Q4 and we have real good visibility to 2018.

And nice cake. And then on the Tax Reform as you look at your global corporate entities or the acquisitions you've done over time and the brick strategies over time, is there any key signification opportunities that might be significant from a cost perspective?

I think as we – we obviously, there's still a lot of work that needs to be done as guidance gets issued and the like. I think we -- certainly, this will simplify things and we'll have to look at our structures. I don't think that would say that there's huge cost benefits that are going to come from that. I think it's going to be more about continuing to look at tax planning strategies and see if we can take the rate down from that 23% level that we have baked into the forecast. But that's going to be something that we’re going to really play out over the next year or more as we get the full understanding of it and be able to try and plan and act accordingly.

Got it. Thanks, Bill.

You’re welcome.

And our next question comes from the line Deane Dray with RBC Capital Markets. Your line is now open.

Hi, good morning. This is Jeff on for Deane. My question is about your acquisition of FMH Aerospace. In the price-to-sales ratio, 4.7 times roughly, I mean it just looks notionally large. Can you maybe talk about your organic growth rates of that business and maybe the synergies and what percent of that business is aftermarket?

Sure, yeah, on a price-to-sales ratio, it may look a bit rich but it's 11 times EBITDA and it's a very profitable business. It's more profitable than the AMETEK average. So we bought a business that's really well positioned. They're a manufacturer of highly engineered products that facilitate the transfer of fuels and gas us at very high temperatures and pressures and really demanding applications. An example application would be in-air tanking refueler. So if you think about an in-air tanking refueler connecting to a jet and refueling it. FMH builds the components. They don't build the whole system, but they build key components within the air refueling systems. So these are very differentiated components. It's a unique business that has unique capability. They're a leader in a niche, attractive growth profile. We're at the high-single digit grower. And even though it's a very profitable business, we have a very healthy level of cost synergy built into our model. So in terms of the go-forward growth rate, we have a division of AMETEK, our TMS division that really is in the same market and has already made sales force to sell the FMH products globally and that's something they really haven't done. So we're really excited about what FHM does for AMETEK. It's an excellent strategic fit and we think it's a great business and we're going to get the same kind of returns on capital that we do with all our deals.

Okay, great. Thank you. And just last maybe just talking about Tax Reform and M&A. So with the lower tax rate, we're expecting maybe less tax leakage on transactions. Are you seeing any more targets come on the market? Or do you expect more activity this year?

You know, our pipeline has been pretty full through 2017 and it's continuing in 2018. So it's not like we came in the door on January 1 and the target started coming in the door. These are very few things surprise us when they're sold because of our business development pipeline and our information's so good. And I would characterize it as a strong market, as strong as it was last year for us, but we really haven't seen a spike because of tax reform.

Okay, great. Thanks.

And our next question comes from the line of Matt Summerville with D.A. Davidson. Your line is now open.

Thanks, good morning.

Good morning, Matt.

A couple of questions. First, where were you on price in 2017? What is your expectation for 2018? And then maybe if you could talk about where you were in terms of spread between price [indiscernible] in 2017 and what your expectation is for 2018?

Right, I think the pricing for us improved a bit in the fourth quarter compared to the first half of the year. I will start with the Q4. And in Q4, we achieved price of about 1.5 points across our entire portfolio. And total inflation was up a bit more. It was about a little – a bit more than 1%. So we had a positive spread there. And it was very balanced across our portfolio with similar results and no real outliers. And when we look to 2018, we expect the conditions similar to Q4 to continue playing out. We have in our 2018 model for our budget about 1.5 points of price and we think inflation will pick up to about 1.2%. So we got a positive spread there. As you know we have been able to offset increasing cost with price. We're leaders in niche markets that speak to the differentiated nature of our AMETEK product portfolio. The leadership position we have in our niche markets and we look at it as only fair that we can pass inflation on to our customer base.

And as a follow-up, can you just give us a little more detail around what you're doing with restructuring or repositioning of the floor care and specialty motors business into the PMC, please, and what [indiscernible]?

Good question, Matt. Thanks. Yeah, we basically have – we've consolidated our floor care and specialty motors business into our precision motion control business given the strong operational and technology synergies that exist between those businesses. As we talked about the business over the last couple of years, we talked about our floor care business, migrating their business and customer portfolio away from the legacy floor care motors market into higher end markets and applications. And this transition has been incredibly successful. Now only about $50 million of our sales are in the floor care market. So it's a really, really small part of AMETEK. And those customer bases have changed to specialized industrial, food and beverage, which require higher levels of engineering support, technology development and provide stronger growth and margin characteristics. So we put those businesses together. We combined the management teams earlier in 2017 and then – we just really – there's some final stages, some strategic cost reductions that we're going – through this realignment cost that we're going to address. And we've actually now – if you think about what was the old differentiated EMG, one of the markets in the company, and floor care, we've actually combined floor care and now we're going to call that automation and engineered solutions. So that's the fourth segment, and it's really a result of this consolidation. So it's the old PMC plus EMIP, and that's reflects the automation demand driver for the PMC business and it includes the engineered solutions business.

Thanks, Dave.

Thank you.

And our next question comes from the line of Richard Eastman with Robert W. Baird. Your line is now open.

Yes, Good morning.

Good morning, Richard.

Dave, could you kind of speak maybe to the segments for 2018? As we look out, core growth for 2018 was kind of guided maybe 3% to 5%. Could you just speak to maybe how EIG and EMG falls into that 3% to 5% guide? And also, I just wanted to ask similar question for 2018 around aerospace and what the expectation is for all of aerospace?

Okay. Yeah, it's very similar with both EIG and EMG. We have 3% to 5% organic for both of them and total sales for both of them are high-single digits. So there's not much difference in the sales growth between the different groups. And it reflects the broad-based improvements that I talked to earlier. In terms of aerospace, our overall aerospace sales, we have a solid 2018. We were up mid-single digits in the fourth quarter, very solid year across all of our segments. They all grew in 2017. And we think that looking ahead in 2018, we're going to expect organic sales for overall aerospace business to be up mid-single digits with similar growth expected across each of our market segments. And the one change that we saw – really 2 changes that we saw in 2017, the military market really improved and we expect that continuing mid-single-digit growth for that. And we also saw some improvement in the business in regional jet market and we're expecting that to continue. So we really got a solid commercial environment. We want some share on business jets that’s allowing us to grow there and the military is strong. So we’re pretty optimistic about aerospace in 2018 and we think it will be a mid-single-digit grower for the total business.

Okay. And then I just had a question around the gross margin in the quarter, if I – can I assume in the fourth quarter that much of that $16 million of realignment costs was taken against in COGS? I’m curious if you make that adjustment, gross margin looks a little bit more normalized, but the trend still down year-over-year. And I’m curious with the moving mix here, EIG strength, what’s the outlook for gross margin here? And maybe what’s kind of depressing that a little bit relative to the volume strength?

Yes. I mean because we have so many different businesses on our portfolio, we really don’t focus on gross margin as much as operating income margin and there’s a lot of mixed dynamics and there are different product dynamics and there is the restructuring. So with positive price to inflation, there is not an issue or a problem of gross margin. So…

Okay. And can you remind me some of the RD&E step-up also gets accounted for in the COGS. Is that correct?

It does. If you think about that, almost all of our RD&E is in COGS. So that reflects the increased spending that we have. So that will be part of the gross margin and actually a little bit of divisional G&A shows up there too.

Okay, alright.

So that’s – it’s difficult to compare our G&A with other companies because of what it reflects. It’s just been a historical way we’ve done it.

Yeah, I understand. And then…

The operating income margins instead.

Yeah, and then the last question, when you talk about the operational excellence savings and the commentary around maybe $85 million of savings targeted for 2018 versus slightly over $100 million in 2017 actual, any thought there? So a little less targeted savings. Is some of that just accounted for maybe in the realignment charge?

Yes. If you think about the sourcing savings and material savings, which is the predominant driver of the cost last year, they’re about flat, its $65 million both years. So, still really, really good year in sourcing savings. What’s really happening is last year, we had some realignment expenses that benefited the year 2017 and the realignment that we talked about in the last quarter of 2017 is more long-term in nature. So we’ll get benefit from that, not so much benefit in 2018, but it will benefit in 2019 and 2020. So that’s the difference between those two numbers. The realignment charge is more long-term and the sourcing savings is about the same.

Okay, alright, thank you.

Thank you.

And our next question comes from the line of Joe Giordano with Cowen. Your line is now open.

Hi, good morning guys. This is Tristan in for Joe today. I just wanted to maybe check your level of inventory and how it compares to the last few months and also the level of inventory at your partners and at your distributors. Thank you.

Yes. We don’t deal a lot through distributors. So a lot of our products are sold direct. So there isn’t usually a distribution inventory issue. I mean what I can say is our inventory terms were excellent. They were up, I guess, about 4.9, 4.8 turns in the quarter and last year Q4 2016 they’re about 4.4 turns. So a lot of the benefits that we got from working capital for improved inventory turn. So we're executing very well. The inventory is turning quicker. The working capital was, as Bill mentioned, less than 17% about 16.8%. So we’re operating very well. Inventory is turning. And in the niche custom business that we have, that’s a really good rate.

Thank, Dave. I’ll go back in the queue.

Okay, thank you.

And our next question comes from the line of Brett Kearney with Gabelli and Company. Your line is now open.

Hi, guys. Thanks for taking my question.

Hi, Brett.

You touched on a bit in your prepared remarks, but I wanted to ask whether you’re seeing any indications at all thus far this year. I know it’s early, but just in terms of customers exploring or committing to more of the larger capital projects already this year?

Yes. I hit that a little bit. I mean we saw good capital projects in 2017. We saw them in – a little bit in the Middle East in terms of oil and gas. It helped our mid downstream business. We saw the defense market turn on projects had been shutdown for a while. And as we enter 2018, it seems like new projects are surfacing in our pipelines. It feels like some of our customers that we deal with on an OEM basis are designing new products. So it feels like its definitely solid and it feels like it could be accelerating, but we’re not factoring that into our guidance. We’re expecting the continuing growth, but there's a lot of activity in these sales pipelines.

Yep, thank you.

Thank you.

And our next question comes from the line of Scott Graham with the BMO. Your line is now open.

Hey, good morning David, Bill. Kevin, how are you?

Hey, Scott.

Good morning.

Good.

I want to ask a question on organic and, obviously, the trends there have been good. Although you’ll admit that the comps have been easy. And now in the fourth quarter the comp gets harder and that will be harder again in 2018. Essentially, my question is this is that we see a pretty good order book. We’re coming out of the fourth quarter with momentum. You’re saying mid-single in the first quarter yet you’re saying 3 to 5 for the full year. Is that sort of may be more look before your leap guidance? Or is there something that you’re seeing maybe in the second half of the year where some market or group of market slows?

I don’t think we’re seeing any market slowdown or we’re not assuming any slowdown. And I think you might have answered your own question because we do have tougher comps later in the year. So the organic growth guidance of 4% at the midpoint assumes we have some – a little bit of easier comp in Q1. But as we progress through 2018, the comps are going to get difficult, but the markets are not slowing down.

Fair enough. Is there anything that stops you – from where you sit today, Dave, anything that you think will stop you from getting to that 7% to 8% goal for acquisitions, adding to sales in that amount? It just sounds to me like the pipeline is pretty good. You announced a couple today. Are we – do you see – I don’t want to ask you if you have a line of sight, you never want line of sight on anything when it comes to M&A. But is there anything that you think that interrupts that?

The best way I can explain it is that I'm confident because we have such a refined M&A process. We have a dedicated team of M&A professionals. It allows for a broad set of opportunities from which we can identify the best fits. So I feel really confident that we'll be able to deliver that over the long run. But you know as well as I do on M&A, predicting a particular deal or 2 deals or 3 deals in a quarter or a year is pretty difficult because things can happen and we're very particular and we do a lot of due diligence, but I feel extremely confident because of our capability, our processes around deal sourcing and deal modeling, diligence and integration. So, incredibly confident on long-term to get that kind of number, but it's very difficult in the short term just by the nature of the M&A world.

Understood and my last question is the [indiscernible]. Maybe you can kind of give us a sketch on the – sort of the business units themselves within each segment.

Right, I'll go through each of the markets and I'll start with our process business. Our process business had an excellent fourth quarter. Overall sales were up more than 25% driven by contributions from both acquisitions and organic growth. Rauland and MOCON are both performing exceptionally well and they're delivering solid performance while they’re successfully and positively integrating into AMETEK. And organic growth in the fourth quarter for Process was excellent. It was 10%. It was particularly robust with our high-end research instrumentation including business like CAMECA, Zygo and AMETEK, had very good, very good course especially in Asia. We also benefited in the quarter from some solid year-end spending across the board in process. And in 2018, we expect continued broad-based sales growth with organic sales up mid-single digits. Aerospace side, I answered Rick's question. I'll get with that one. Overall, mid-single digits in the fourth quarter. All of our segments were good. Military and business jets were particularly strong. And looking ahead to 2018, we expect organic sales for our overall aerospace business to be up mid-single digits with similar growth expected across each market segment. Our Power & Industrial segment finished the year strong with mid-single-digit growth, organic growth in the fourth quarter. We saw growth in both our Power & Industrial businesses with notable strength in our power instruments business. And in 2018, we expect low to mid-single-digit organic growth for our Power & Industrial businesses. And finally, as I mentioned previously, our fourth market, our automation and engineered solutions. Our automation and engineered solutions businesses completed an outstanding year, impressive double-digit organic growth sales in the quarter. We continue to see excellent growth across our businesses serving automation markets as well as our EMIP businesses. So looking ahead to 2018, we expect mid-single-digit organic growth from that market.

Thank you.

Thank you. Scott

And that concludes our Q&A session for today. So with that said, I'd like to turn the conference back over to Vice President of Investor Relations, Kevin Coleman, for closing remarks.

Great, thank you, Andrew, for your help today and thank you everyone for joining our conference call. As a reminder, a replay of today's webcast may be accessed on ametek.com, and as always, I'm available for additional questions. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.