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AMETEK Inc (New)  (NYSE:AME)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2018 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) As a reminder, this call is being recorded.

It is now my pleasure to introduce, Vice President of Investor Relations, Mr. Kevin Coleman. Please go ahead, sir.

Kevin Coleman -- Vice President, Investor Relations

Great. Good morning. Thank you, Andrew. Good morning, and thank you all for joining us for AMETEK's third 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 third 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.

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 risk and uncertainties that may affect our future results is contained in the AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Please note that during today's call, references will be made to some financial results on an adjusted basis. Please refer to the Investors section of ametek.com for a reconciliation of any non-GAAP financial measures used during this call. We'll begin today's call with prepared remarks by Dave and Bill, and then I'll open it up for questions.

I'll now turn it over to Dave.

David Zapico -- Chairman and Chief Executive Officer

Thank you, Kevin, and good morning everyone. AMETEK had another spectacular quarter, as our businesses delivered exceptional results across all key operating and financial metrics. In the quarter, double-digit sales growth was driven by another excellent quarter of organic growth. We delivered significant operating margin expansion and robust earnings growth, while again increasing our full year earnings guidance. We generated a record level of free cash flow and announced that we deployed $565 million on two highly strategic acquisitions. And lastly, given the strength of our acquisition pipeline, we announced an increase in our revolving credit facility to $1.5 billion, providing us added flexibility as we execute on our acquisition strategy. So overall, another outstanding quarter reflecting the strength of the AMETEK business model, the differentiated nature of our businesses and the excellent work of the entire AMETEK team.

Now onto the financial and business highlights. Total sales in the third quarter were $1.19 billion, up 10% compared to the third quarter of 2017. Organic sales growth was again very strong at 7%, with acquisitions adding 3%, and foreign currency neutral to sales in the quarter. Growth remains broad-based across our businesses with both our reportable segments growing 7% organically. This organic growth also remains very strong and balanced geographically, with Asia growing 12%, Europe 7%, and the US 6% in the quarter.

EBITDA in the third quarter was $312 million, up 14% over the third quarter of 2017, with EBITDA margin is a very strong 26.1%. Third quarter operating income was $265.3 million, up 15% over the prior year. Reported operating income margins were up 100 basis points to 22.2%, excluding the dilutive impact from acquisitions. Operating margins increased by 130 basis points over the third quarter of last year. Third quarter earnings were $0.82 per diluted share, an increase of 24% over the same period last year, exceeding our guidance of $0.76 to $0.78 per share.

Now turning to the individual operating groups. First, the Electronic Instruments Group. EIG had a great quarter, with strong growth and exceptional operating performance. Overall sales for EIG in the third quarter were $742 million, up 10% over the same quarter of 2017. Organic sales were up 7%, with recent acquisitions contributing 4%. Foreign currency was a slight headwind to sales in the quarter. Organic growth remains broad-based across our EIG businesses. We saw a very strong growth across our process businesses, including Rauland, which has experienced tremendous growth, since being acquired in early 2017. Additionally, our Ultra Precision Technologies division had another outstanding quarter with mid-teens organic sales growth. Operating income for EIG in the quarter was $190.3 million, up 17% over the prior year period. Reported operating income margins were excellent at 25.6%, up a very strong 130 basis points over last year's third quarter. Excluding the dilutive impact of acquisitions, EIG margins were up an outstanding 190 basis points over the same quarter of 2017.

The Electromechanical Group also had an excellent quarter, with impressive sales growth and margin expansion. EMG sales in the third quarter were $450.9 million, a 9% increase over the same quarter last year. Organic sales growth was very strong, up 7% versus the prior year. The acquisition of FMH Aerospace contributed an additional 2% and foreign currency had no impact on sales. Sales growth remains strong and balanced across each of our key EMG businesses, including Automation, Aerospace and Defense and Engineered Materials. EMG's operating income in the third quarter was $92.7 million, up 11% compared to the same quarter in 2017, and operating margins expanded 50 basis points versus the prior year to 20.6%. So overall, a tremendous performance for AMETEK in the third quarter.

Now, let me provide some brief comments on tariffs. On last quarter's conference call, I highlighted the various work streams we were driving to help manage the tariff situation. Our teams are doing a tremendous job managing each of these initiatives and each is progressing as expected. We remain very confident in our ability to mitigate headwinds from announced tariffs given number one, our ability to capture incremental pricing, due to the highly differentiated nature of our business. Number two, the strength and flexibility of our global supply chain. And number three, our ability to ship production given our asset light business model.

AMETEK's proven operational excellence capabilities, which captures each of these elements, positions us extremely well to offset the impact from tariffs. More broadly, our operational excellence initiatives continue to deliver meaningful productivity and efficiency savings. For all of 2018, we now expect total savings are approximately $90 million from our OpEx initiatives. Our business model also remains focused on generating sustainable long-term success by investing in our people, investing in our businesses and investing our strong cash flows in strategic acquisitions.

With that said, I would like to take a minute to welcome two new businesses to AMETEK, Telular and Forza. Telular is a high growth market leading provider of communication solutions for logistics management, tank monitoring and security applications. Telular's end-to-end IoT solutions, include purpose-built hardware, proprietary software and wireless connectivity source services. Their IoT solutions are used to enhance efficiency, lower cost and monitor critical assets in real-time, providing a significant return on investment for their customers. Telular's annual sales of approximately $165 million, with 65% of sales from recurring subscription-based sales. Their sales are expected to continue to grow at a roughly 10% annual rate, as adoption of Telular's IoT based communications solutions are still in the early stages.

In addition to the strength of the Telular business, we see tremendous value and leveraging their IoT capabilities across other AMETEK businesses. Our highly differentiated measurement instrumentation and domain expertise in our niche markets combined with Telular's IoT platform forms the core of an expanded digital strategy for AMETEK and opens up attractive growth opportunities for our businesses. We expect to leverage this platform across other AMETEK businesses, where we currently collect, measure and analyze important process variables across mission critical applications. Telular is headquartered in Chicago, with multiple sales and support locations across the US. We deployed approximately $525 million on this acquisition.

Now shifting to Forza. Forza designs and produces specialized solutions for complex image sensors used in medical, defense, commercial and industrial applications. Forza's deep expertise in CMOS imaging technology combined with their proven design processes, in-house testing capability and supply chain expertise provide the end-to-end ability to design and produce customized next generation sensor solutions for their customers. One of these customers is our Vision Research business, a market leader in the authorized speed cameras for using a scientific research, medical, industrial and military applications. Forza provided Vision Research with custom sensor design and production capability, which will accelerate the pace of new sensor development for uses on high-speed cameras.

The company has annual sales of approximately $20 million, and we deployed approximately $40 million on this acquisition. Including Telular and Forza, we have now acquired five businesses thus far in 2018, and have deployed more than $935 million in capital and acquired approximately $300 million in sales. This is a record level of capital deployment for AMETEK in a year. Even with the strong acquisition activity this year, we are managing our robust pipeline of additional opportunities and have the balance sheet capacity and management bandwidth to remain very active. Our businesses are also doing a tremendous job, delivering exciting new products, while expanding their presence globally and enter new market segments. We are seeing tangible results from this organic growth initiative. Our Ultra Precision Technology division is the good example of this success, as they delivered another quarter of mid-teens organic sales growth. The Ultra Precision Technologies divisions includes the Zygo, Reichert, Creaform, TMC Precitech, Soliton and Taylor Hobson. A highly differentiated group of businesses, which provide leading-edge, ultra-precise metrology solutions and precision optical products for a diverse set of attractive end markets and applications. With these businesses, developing new technology is key to maintaining their market-leading product and application differentiation, while providing the ability to expand into new market segments.

Our Taylor Hobson business, a leader in ultra-precision measurement instruments for a wide range of end-markets, including optics, aerospace and precision manufacturing, recently launched its PGI NOVUS system. The new system is powered by Metrology 4.0 software is the most advanced system available for surface, contour, 3D and diameter measurement. Through this development, Taylor Hobson has addressed many measurement challenges commonly faced by higher precision component manufacturers. The new Metrology 4.0 software package delivers a simple intuitive interface with a virtual display and real-time control, enabling a level of monitoring and control, that is unprecedented in the industry. Developing new products and solutions like the PGI NOVUS are key in driving sustained organic growth. And our businesses are doing a great job on this front. In the third quarter, our vitality index, which measures the level of sales generated from new products and solutions introduced within the last three years was 23%. This reflects a tremendous effort of more than 1,900 engineers around the globe that are designing and implementing new products and solutions for our customers.

Now onto the outlook for the remainder of the year. Given our outstanding results in the first three quarters of the year and our positive outlook for the fourth quarter, we now expect earnings to be in the range of $3.25 to $3.27 per diluted share, an increase of 25% over 2017's adjusted earnings per diluted share. This is an increase from our previous guidance range of $3.16 to $3.20. We expect overall sales to be up low-double digits with organic sales low, now up mid to high-single digits for all of 2018. For the fourth quarter, overall sales are to be up approximately 10%, with organic sales up mid-single digits compared to the fourth quarter of 2017. Earnings per diluted share in the fourth quarter are expected to be in the range of $0.82 to $0.84, up 17% to 20% over the same quarter last year.

I'm very pleased with the outstanding results that our world-class teams have produced thus far in 2018. AMETEK is firmly positioned to close the year with record results. We are focused on continuing this year's success into the future by executing our four growth strategies.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter. Then we'll be glad to take your questions. Bill?

William Burke -- Executive Vice President and Chief Financial Officer

Thank you, Dave. As Dave highlighted, AMETEK had an outstanding third quarter with a high quality of earnings. Let me provide some additional financial details. In the third quarter, selling expenses were 10.6% of sales versus 10.7% in last year's third quarter, with core selling expenses up in line with core sales growth. General and administrative expenses in the third quarter were up $1.7 million over the prior year, due to higher compensation costs. And as a percentage of sales, G&A expenses were 1.5% in line with last year's level. The effective tax rate for the quarter was 21.9% versus last year's rate of 24.9% and was in line with our expectations. The year-over-year reduction in our effective tax rate was due to the benefits of tax reform. We expect our 2018 tax rate to be approximately 22.5%, and as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively, or negatively from this full-year estimated rate. Working capital was very solid at 18.2% of sales in the third quarter, up slightly from 17.9% a year ago.

Capital expenditures were $19 million for the quarter. We continue to expect full-year capital expenditures to be approximately $85 million, or 1.8% of sales, reflecting our asset-light business model. Depreciation and amortization for the quarter was $48 million. For the full-year, we expect depreciation and amortization to be approximately $205 million. Third quarter operating cash flow was $249 million and free cash flow was a record $230 million, a very solid conversion of 120% of net income. We continue to expect full-year free cash flow conversion of approximately 110% of net income. The primary use of our strong free cash flow is to support our acquisition strategy and as Dave mentioned, we've been very active on that front. Subsequent to the end of the third quarter, we deployed approximately $565 million on the acquisitions of Telular and Forza. These acquisitions bring our cumulative expenditures for acquisitions in 2018 to approximately $935 million.

Total debt at September 30th was $1.9 billion, down from $2.17 billion at the end of 2017, as we paid off two maturing senior notes in the quarter, totaling $240 million. Offsetting this debt is cash and cash equivalents of $519 million. Even with our record level of capital deployment, including the acquisitions of Telular and Forza, we still have significant capacity with approximately $1.5 billion of cash and existing credit facilities to support our growth initiatives. This includes the incremental financing capacity provided through the amended and upsized revolving credit facility we announced today. This amended facility increases the size of our revolving credit facility from $850 million to $1.5 billion and extends the maturity date to October of 2023. This provides us with additional capacity and flexibility to support our acquisition strategy.

In summary, our businesses performed exceptionally well in the third quarter, which allowed us to deliver high-quality earnings growth and again raise our full-year guidance. We remain well positioned to support our growth initiatives with our strong balance sheet and excellent cash flows. Kevin?

Kevin Coleman -- Vice President, Investor Relations

Thank you, Bill. Andrew, could we please open the lines for questions.

Questions and Answers:

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Matt Summerville with D.A. Davidson. Your line is now open.

Matt Summerville -- D.A. Davidson -- Analyst

Thank you. Couple of questions. First, even into the month of October, Dave, have you seen any signs of slowing in your business and semiconductor in China, and then would you be willing to provide at this point any high-level thoughts in terms of how you're thinking about 2019?

David Zapico -- Chairman and Chief Executive Officer

Yes, the first question -- October, finished right on plan. It was a very strong orders month. So we're -- it exceeded our expectations, in fact a bit. And so, we're very, very happy with that. It just -- we just got the numbers this morning. In terms of the semiconductor market, it's about 5% of AMETEK, and is performing very well. And we have some very specialized capability and we are selling to the Chinese semiconductor market, but we have seen no slowdown in that regard and we're expecting that to continue. And regarding 2019, really not in a position to speak to the specifics about the 2019, at this point in time. We'll be meeting with our businesses during November and December to hear from each of them. As you know, we operate in a variety of niche markets, and we need to understand what is going on in each of these businesses to have a bottoms up view from our budgeting process before giving any guidance.

Matt Summerville -- D.A. Davidson -- Analyst

And then it is my follow-up, Dave. Can you talk about what realized price was in Q3, and what the spread between price versus cost was for you guys? Thank you.

David Zapico -- Chairman and Chief Executive Officer

Sure, Matt. Sure. We had an excellent quarter in terms of price. In Q3, we achieved price of about 2.2% across our entire portfolio. And total inflation -- it picked up a bit, it was about 1.4%, and we saw a positive spread of about 80 basis points. So we're very pleased with these results. The results speak to their highly differentiated nature of the AMETEK product portfolio. Our leadership position in niche markets and our focus and determination to make sure we stay in front of a changing global economic environment with the pricing outpacing inflation.

Matt Summerville -- D.A. Davidson -- Analyst

Thank you, David.

David Zapico -- Chairman and Chief Executive Officer

Okay.

Operator

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

Christopher Glynn -- Oppenheimer -- Analyst

Thanks, good morning, and congrats on the continued excellent year.

David Zapico -- Chairman and Chief Executive Officer

Thank you, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Get curious about Telular versus the other two communication solutions deals, almost seems like it maybe a discretely different space. So wondering if it does gel with those other deals. And then also update the Dave Zapico vision of adjacencies, maybe communication solutions strikes me, wouldn't have fallen in the range of the AME concept of adjacencies in the not too distant past?

David Zapico -- Chairman and Chief Executive Officer

Yeah. It's a great question, Chris. I mean, when we look at Telular, we see a business that checks a lot of boxes for us, it's a market leader in niche markets, it's a differentiated technology solutions business, it has very good secular growth growing about 10% a year, the last three years it has a sizable recurring revenue stream, that's a bit new. It has -- is very profitable, mid-20s EBITDA with room for margin expansion. So we see very good cost synergy opportunities. We also see opportunities to expand the business internationally. They've had so much growth that they've just concentrated on the US, and we have the capability to help them expand internationally, but aside from the Telular, Telular is a good business in its own right. It also provides something else to AMETEK. It enables a broad set of AMETEK businesses to deliver IoT solutions when combine -- when you combine AMETEK's sensor technology with Telular's IoT capability, it's really -- creates a new growth avenue for all of our businesses. So we're very excited about that.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you.

David Zapico -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

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

Scott Graham -- BMO Capital -- Analyst

Hi, good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Scott.

Scott Graham -- BMO Capital -- Analyst

Wanted to ask you about the orders in the quarter organically by segments?

David Zapico -- Chairman and Chief Executive Officer

Okay. The total reported orders were up 6%. The organic orders were up 5%, and both groups were up mid single digits.

Scott Graham -- BMO Capital -- Analyst

Got you. Also I see that the operating excellence number went up to --

David Zapico -- Chairman and Chief Executive Officer

Yeah.

Scott Graham -- BMO Capital -- Analyst

-- 90 plus million. Could you talk a little bit about operating excellence in more broadly, particularly, not just how you got there, which I'm assuming, includes some hurrying up things on the tariff side, but also how operating excellence being not stretched over the sales functions. How that is adding to sales?

David Zapico -- Chairman and Chief Executive Officer

Okay. The first point is, as that you know, we had a $85 million target for total cost savings working through the P&L, and we increased that to $90 million in my prepared remarks, and that's really about $70 million is going to come from our supply chain and about $20 million from other operational excellence initiatives. And really our teams are doing a great job, and they're handling that work along with the tariffs, and it really speaks to the capability of our teams. Regarding the expansion of the commercial excellence initiatives that we've been working on for some time, now we're seeing really good traction. I mean, Bill and I are going around and visiting the businesses and seeing the active uses of growth presents the focus on the aftermarket, improved digital marketing, it's a big part of our leadership development now, we just finished our leadership development processes and making sure that we're doing the proper things to develop our sales and marketing talent. So that's really a comprehensive approach to improving the organic growth of the businesses, it's going extremely well, and we're still in the early innings of that. So we're very positive what's going on.

Scott Graham -- BMO Capital -- Analyst

So one of the things that, I just talk the same very quickly on that, because I know how important this is, internally. One of the things that a couple of your competitors do is to really kind of train the salespeople to more efficiently generate leads, as well as strengthen the time to create an order out of that, giving them a critical path and then you know, delivering on that order obviously on time to spec the whole thing. Could you just sort of tuck in how AMETEK beyond the four things you've just mentioned is addressing sort of, let's say, the front-end, the sales lead process?

David Zapico -- Chairman and Chief Executive Officer

Yeah, I think, that the lead process would be -- all of our businesses are out there, what our sales force is generating leads, and what we've done is we've really enhanced our digital marketing lead capability. We will take all of our leads and we'll make sure that, we'll generate more leads, we will make sure that they're properly dispositioned. We will follow-up on them to make sure that we're getting good return on our advertising dollars, or the way that we're marketing our products. So regeneration and lead follow-up is a big part of the program. We have to accelerate internal growth. So, it's a core component of it, I'd say Scott.

Scott Graham -- BMO Capital -- Analyst

That's great. Thank you.

David Zapico -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Allison Poliniak with Wells Fargo. Your line is now open.

Allison Poliniak -- Wells Fargo -- Analyst

Hi, guys. Good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Allison.

Allison Poliniak -- Wells Fargo -- Analyst

Just want to go back to tell you -- I know you gave a mix of new versus recurring revenue. Not sure if you touched on this, but the hardware versus software component, how should we think about that?

David Zapico -- Chairman and Chief Executive Officer

Yeah. The Telular solution provide, it requires both hardware and software. So you have a situation where you're providing hardware and also software and connectivity are provided with the service in an annual subscription. So I would say, it's not a classic SaaS business, but it has elements of the SaaS business and the software and the algorithms and the analytics with the software are linked with the hardware. So it's a good fit for AMETEK, because as you know, the hardware part of the world is what we're really good at, and with all of our sensors and instrumentation businesses, that's what we're doing out there all the time and adding the IoT capability to those businesses is something we're very excited about. Also Telular, they have a best of breed IoT solution, but with sensor technologies, they were struggling to a certain degree, and that's really our expertise. So, the combination of both businesses is a wonderful strategic thing (ph).

Allison Poliniak -- Wells Fargo -- Analyst

Okay. And then you would also touched on Asia growing nicely, any noted changes in China over the past few, I guess weeks even, where your successes over there, any issues on the other side (Multiple Speakers)?

David Zapico -- Chairman and Chief Executive Officer

Right. That's a great question, Allison. I mean, the -- China was -- it grew nicely for us in the quarter. It drove the overall sales growth of Asia, was a bit higher than the overall Asia sales growth. And the tariff situation related to the demand side where China adds complexity, that we're watching closely. So far there is no impact, but we'll continue to monitor it closely and our teams over there are bullish. And really if you think about it, and you take a step back and operate maybe 30,000 feet, we have the capability that let China improve their manufacturing capability to move up the value chain. That's what our process, businesses do. And those businesses are doing very well in China. So we're not seeing a slowdown right now, but we're watching it closely.

Allison Poliniak -- Wells Fargo -- Analyst

Thanks. It's helpful.

David Zapico -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, just a follow-up on Allison's last question. Dave, could you calibrate and update us on what you think the tariff impact is, last quarter you said less than $0.01 for the third and fourth quarter, where does that stand today?

David Zapico -- Chairman and Chief Executive Officer

Yeah. In Q3, the situation played out a little better than we expected. We had a little less than $0.01 from direct impact from tariffs and we offset that with price. So we get ahead of it. We expect a similar situation to play out in Q4. We'll have a little bit higher direct impact, it will be about a $0.01 from the tariffs, but we feel, we largely have recovered with our initiatives and we are effectively managing through it.

Deane Dray -- RBC Capital Markets -- Analyst

Great. That's nice work on price cost as well. And Dave, you gave an interesting data point last quarter and this has been the raging debate and the sector as to where we are in the cycle. And there's a lot of market sentiment thinking we're at Pete's Cycle, but you were pretty adamant last quarter, citing fourth inning. And I know the Red Sox have wrapped up, in other words series, and so maybe we'll stay with the baseball analogy. And they talk about another where we are in terms of innings, as we see it today.

David Zapico -- Chairman and Chief Executive Officer

I think it's the bottom of the fourth and own teams up. I mean, we came out (Multiple Speakers) we came out of the recession strong. And we see, no slowdown in our business, and it looks really optimistic. So it still feel good to us.

Deane Dray -- RBC Capital Markets -- Analyst

Okay. That's certainly coming through and your orders in October, so leave it there. And then just the last question is, an idea that's come up a number of times. Investors have asked us is, when would you all consider moving to cash EPS. It strikes us as a number of just most of your growth by acquisition peers have all similarly switch, whether it's Danaher, Fortive, Dover Roper. And again, we know it doesn't change any of the fundamentals, but certainly optically, it puts you on a level playing field in this peer group. And this is something that you all would consider.

David Zapico -- Chairman and Chief Executive Officer

Yes, we will consider it. We consider that last year, and we decided not to do it. And we also talk to you additional investors at a course of this year. So, we'll evaluate it, and we'll decide we're going to do at year-end, that will probably be a good time and we'll let you know we're going to do. Last year, we decided not to do it, because there are varying opinions on investors and our long-term investors matter a lot to us. And we're a gap company and then we're proud of that with very little adjustments to our financial statements, but we also hear what investors are saying on the cash EPS. So we're evaluating it, and we'll make a decision at year-end to do it, or not do it like we did last year.

Deane Dray -- RBC Capital Markets -- Analyst

Great. And just to make it clear from our perspective, we think it would be a good idea, but we appreciate all the color. Thank you.

David Zapico -- Chairman and Chief Executive Officer

Thank you. Your input is noted.

Operator

Thank you. And our next question comes from the line of Brett Linzey with Vertical Research. Your line is now open.

Brett Linzey -- Vertical Research -- Analyst

Hi, good morning all.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Brett.

Brett Linzey -- Vertical Research -- Analyst

Just want to come back to the M&A pipeline. I guess, as you think about the types of deals you're looking at, is this software-based type deal that you're announcing today more opportunistic, or are you seeing a tilt of the pipeline toward deals with more software or recurring elements and maybe just a fighter point on the size of deals you're evaluating?

David Zapico -- Chairman and Chief Executive Officer

Yeah. Software, AMETEK's always been excellent at software within our niche businesses and we have a tremendous capability and a lot of proprietary software as to the value proposition we deliver for our customers. And we've talked in prior calls about our center in India was about now close to 150 software engineers developing, software for all of our businesses. And with some of the trends going on in the market, we've been looking for quite some time for an IoT side business. And we saw either, we saw companies that we either very good at sensors to develop an IoT capability, or companies that we're very good at IoT capabilities that weren't good at sensors. And since we were good at sensors, and we, one of the capability, we think we found a great fit in Telular. And I think that is a secular business and the software is going to become more important as we move forward in AMETEK portfolio, that's a fact. But we're still looking and all the bonds that we've been fishing for in the past and then it's -- we're not wholesale changing the direction. We found just a great business that we can get a good return on the business itself and the unique situation and it adds capability to many of the AMETEK businesses. So we're looking forward to getting that to -- getting to work on that.

Brett Linzey -- Vertical Research -- Analyst

Okay. Great.

David Zapico -- Chairman and Chief Executive Officer

Do you have another question?

Brett Linzey -- Vertical Research -- Analyst

Yeah. Just one more follow up. And then just in terms of the value chain. I mean, obviously, AMETEK plays a few links up, and -- lot of the served markets. But any sense of pre-buying by the value chain, or parts of the channel ahead of price increases. And maybe just, it's a little more color on the sale of inventories relative to production schedules there?

David Zapico -- Chairman and Chief Executive Officer

Yeah. We may now be the best company to get that import from because we're building largely customized products. So there is no lot of buy ahead in terms of our products, because purpose-built to the customer requirement. So, we don't see a lot of that typically in our businesses. And in the places that we could see that, we're not seeing it right now. So, it's a healthy environment. Customers have money, customers are putting in to work and they're keeping up with their demand, is the way that we're looking at it.

Brett Linzey -- Vertical Research -- Analyst

Okay, great. I'll pass it on. Thanks.

David Zapico -- Chairman and Chief Executive Officer

Thanks, Brett. Thank you.

Operator

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

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Just first question, in terms of all the deals that you've done this year, could you help us with the math, how accretive it is to 19 numbers?

David Zapico -- Chairman and Chief Executive Officer

Yeah. You know, the first year we do a deal, there's a lot of restructuring, there's a lot of purchase accounting, and they usually don't add that much to the capability of that earnings in the next year. I would point you, at this point, we haven't completed our work for 2019. But I could see a similar level of accretion that we had last year. And I think we pointed everyone to a $0.06 type number, and I wouldn't be surprised if it doesn't end up like, something like that. But a company like Telular, is going to add something more later in the year, because of all the acquisition step-ups, and the purchase accounting required and the plans we have for the business.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Got you. Another question. We get a lot of questions about your Aerospace and Defense and energy exposure. Could you remind us, could you just talk a little bit more about each one. And what are you seeing in both markets in terms of growth this year, backlog and the outlook? Because it seems there is a lot of sort of operating and cyclical leverage there. Thank you.

David Zapico -- Chairman and Chief Executive Officer

Yeah. Our aerospace -- our overall aerospace business was up mid-teens in the third quarter, and that was driven by contributions from recently acquired FMH Aerospace and high single-digit organic sales growth in the Aerospace Group. We saw solid and balanced growth across our various aerospace markets with notable strength in our commercial and military businesses. You may recall that AMETEK's about 35% military, about 25% commercial, about 30% third-party MRO, and about 10% business units. So, with commercial and military markets doing well, that's good for us. And for all of 2018, we continue to expect organic sales for our aerospace business to be up mid-single digits with growth across these segments. So we're feeling really good about our aerospace business. In recent years, we won a lot of contract on Airbus Airframes in the commercial world. And now with the military market coming back to life and a solid spending environment both US and international for military, it's general spendings improve fleet readiness. But we have also had major design wins on the F-35, and a lot of important programs. And we're not dependent on any one program, but the military markets really changed from what it was a couple years ago and we're doing very well.

In terms of oil and gas, you mentioned that also, oil and gas now is about 6% of AMETEK. In Q3, it was up, mid-single digits and for the full year, we expect sales to be up mid to high single digits with the upstream up low double digits and the mid and downstream up, low to mid-single digits. And that $65 oil, we see solid business activity. The international components of it are picking up. We're about one-third US, two-thirds international, about 25% upstream, 75% mid and downstream. So the business is still solid and we see it just slowly, incrementally getting stronger and we feel positive about the exposure.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

And just on the energy, just a follow up, how far off the peak are we now?

David Zapico -- Chairman and Chief Executive Officer

Yeah, we were at peak. We were about $400 million. And now we're at about $280 million. So we're still roughly under $20 million from the peak.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Terrific. Thank you so much.

David Zapico -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Nigel Cole with Wolfe Research. Your line is now open.

Nigel Cole -- Wolf Research -- Analyst

Thank you. Good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning.

Nigel Cole -- Wolf Research -- Analyst

So just want to kind of weigh in on this cash EPS debates means GAAP -- of the GAAP earnings is that those tenants, but yeah, I think you mentioned 205 amortization this year. I think that looks more like 223 next year. It's going to be a really big number, and I think that number is about (inaudible). So, I think to these larger deals and most of the deals that's becoming a much more disconnected number from economic reality. So, if it's worth, we fully support the move to cash EPS, but just wanted to make that very clear.

David Zapico -- Chairman and Chief Executive Officer

Okay.

Nigel Cole -- Wolf Research -- Analyst

Good. Anyway, so first question on China. You've got a pretty broad footprint in China, quite a large portion of yourself. What are you seeing in China, it doesn't sound like there's any slowdown you've seen in 3Q, but any areas of concern, you maybe quoted semi (ph) has remaining very strong for you, but any areas that's concern in China?

David Zapico -- Chairman and Chief Executive Officer

The concern is really what's going to happen with the overall trade situation. Obviously, people in China are nervous about the situation, but the business activity at least for our businesses are still continuing very strongly. We're selling into that market with products that the Chinese economy needs and the semiconductor market, and the nuclear instrumentation market and the advanced process market, where we're helping improve their production efficiencies. So we're definitely seeing a positive market and they were doing well over there, but it's just the overall global overhang that's, as a complexity and we're watching it closely, but we haven't seen an impact so far in demand.

Nigel Cole -- Wolf Research -- Analyst

Okay. That's helpful. And then come back to tell, there's been a lot of questions on it so far. If I missed it, I'm sorry, but what are the margins, EBITDA margins for that business?

David Zapico -- Chairman and Chief Executive Officer

Yeah. (Multiple Speakers) Yeah, mid-20 EBITDA margins.

Nigel Cole -- Wolf Research -- Analyst

Mid-20, OK. And the growth profile and just one final question on that would be, I think the background of this business was within the residential and commercial for upstream markets that was launched in few industrial. So how does that mix look today?

David Zapico -- Chairman and Chief Executive Officer

Yeah. The residential part of -- tell you, is about 20% of the business. So what they did is, the foundation of the business many years ago was mainly in the commercial and residential market, and that business has been a strong cash flow generator, and they found a nice niche to operate in, but they grown the industrial market around that. So the non-residential piece is about 80%, the residential piece is about 20%. And there are also as a growth driver in that, the non-industrial basis to grow for the -- there's a URL standard, that's an approved standard for a wireless (inaudible) fire alarm monitoring and that businesses is going well, in that business, sales to 5,000 dealers, and it's a very good business. They are agnostic to any other brands and they have curb out a nice little niche that results in a solid recurring revenue stream. So really we'll have the same strategy in the Telular is using that business to generate very strong cash flow was strong sticky customer relationships and growing the industrial piece of Telular aggressively, and that's the same model that Telular brings to AMTEK, it's just a well fair (ph) model.

Nigel Cole -- Wolf Research -- Analyst

Great. Thank you. And then just one final one. Does your guidance anticipate any 4Q structuring?

David Zapico -- Chairman and Chief Executive Officer

Yeah, not that we know, at this time, I mean, certainly there is some, the tax reform and job acts gives you to the year-end to finalize the accounting related to tax reform. So we're looking at that and there are no current plans for realignment, but certainly we're going to -- we'll be going for our budgeting process, the next two months. And then if there are good projects that our businesses want to do and then we could be in a situation, but we don't have anything planned at this time.

Nigel Cole -- Wolf Research -- Analyst

Great. Thanks, David.

David Zapico -- Chairman and Chief Executive Officer

Welcome.

Operator

Thank you. And our next question comes from the line of Sawyer Rice with Morgan Stanley. Your line is now open.

Sawyer Rice -- Morgan Stanley -- Analyst

Hi, thanks. Good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning.

Sawyer Rice -- Morgan Stanley -- Analyst

I'll took over the sentiments on cash EPS there, but maybe to dig a little deeper on some of the tariffs. So you guys have done a good job so far in managing that. Maybe any early thoughts here on 2019, maybe how much of your supply chain, do you see as tariff at this point. And then can you maybe update us, if you'd see with three jumping to 25% what the impact here could be for 2019? Thanks.

David Zapico -- Chairman and Chief Executive Officer

Yeah, it's a dynamic situation, Sawyer. I mean, we're working on a number of initiatives. We've been very successful in Q3. We expect a similar situation in Q4. We're assuming in our budget model, it's going to go from 10% to 25% and with three. And we're also putting plans in place, so that we understand the list for impact. But it's very dynamic, and we're effectively managing through it. And I'm confident that's going to continue because of the things I talked about in my prepared remarks. We really have pricing leverage to deal with tariffs because of the unique differentiated nature of our portfolio. We have an excellent supply chain capability, around the world that are executing very well right now. And finally, if we get in a situation where we want to move our product line and we have a couple of product lines that weren't process of moving, we have an asset light business model, where we don't have a lot of standard fixed investments. We can move products to other low-cost regions around the world. So, I feel very comfortable that we're going to be able to manage through this. Our 2019 is a very dynamic situation, and I don't want to give any information related to that yet. We'll find that out during our process during November and December.

Sawyer Rice -- Morgan Stanley -- Analyst

Great. Thanks for the additional color there. And congrats on the quarter.

David Zapico -- Chairman and Chief Executive Officer

Thank you.

William Burke -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

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

Richard Eastman -- Robert W. Baird -- Analyst

Yes, good morning. Dave, could you provide maybe an update on the emech (ph) business. Just curious how that's acting from a demand standpoint. And then also, is there anything from a metals perspective, prices have been up, there seem to be stabilizing, that's move in the margins around in there. Is there any concern around the margin line. And maybe just what the demand is for that emech business?

David Zapico -- Chairman and Chief Executive Officer

Right. Yeah, there is an element of the emech business, where we pass on the cost for the metals business and that's working in the P&L. But as you saw, we're at the 50 basis points of improvement in core margin. So even with that we're able to grow margins. The emech demand is very strong. I mean, we're up a bit more than EMG in the third quarter. So we're up at 7% EMG, we're up a bit more at emech. And our customers are optimistic. We're seeing strong demand in aerospace, medical and specialized industrial. As you mentioned there is some inflationary impacts on metals and -- but we're dealing with that. And I think in the case of oil and gas, there was, we still have not recovered to our peak. I believe, in the case of the metals business, we're not at our peak, we're much closer. So we had -- I think that's a trial that was down maybe $125 million. I think now we're within $20 million of our peak. So total metals are about 480, and the peak was 500. So, we're getting back to that, but still have some room to go. (Multiple Speakers)

Richard Eastman -- Robert W. Baird -- Analyst

Okay. And then just -- I just want to double back for a second to the aerospace business in general. Given the long cycle nature of that business, can you just kind of characterize. I know, we don't want to touch 2019 here, in terms of growth rate, but one would assume that maybe that business in 2019 tracks at least at 2018s growth rate with backlog and kind of demand on the military side and commercial backlogs. Is that a fair way to look at that business that you got pretty good visibility there from the backlog and the demand into 2019. Is it best guess to be mid-single digits?

David Zapico -- Chairman and Chief Executive Officer

Yeah. I think, when you take a step back and the commercial market is about 25% of our aerospace exposure and we're on the right aircraft and the business is performing very well and we're about half of that businesses proprietary aftermarket. So that's commercial business looks good for the foreseeable future. I mean, the big change is the military business. We were -- are on most military aircraft. We both have a domestic and an international component. The military business is, as I said, before it's picking up, and it's strong, the business step market was kind of down for a long period of time, the order seem to be picking up there. So I think it's a green light for the aerospace business for AMETEK to compensate for the foreseeable future.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. And then just two last questions. Around Europe, could you remind us what, when you look at AMETEK's business and you look at EMEA, is the business slanted toward or weighted toward EIG or EMG in EMEA?

David Zapico -- Chairman and Chief Executive Officer

Yeah. It is really balanced. I mean, the big thing you have for EMG, you have our Dunkermotoren business, and that's a big component of EMG. We saw -- in the quarter, we saw our strongest growth in the automation, in the Dunkermotoren PMC business. And we also saw strong growth in EIG with our Materials Analysis business doing very well. So in Europe, it is kind of like as a Microcosm of AMETEK in the whole world. We have some major instrument businesses in the UK, in Germany, and in France. And we have substantial manufacturing presences in those regions. And we also have a substantial business and operating capability with our Dunkermotoren businesses for EMG in Germany. So it's really about the same proportions of the whole company.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. And just last quick question. Regarding Telular, do they have any OE sales? What is -- how do we get to market?

David Zapico -- Chairman and Chief Executive Officer

Yeah. They have a direct-to-market with customers and then they sold to a variety of end markets in that.

Richard Eastman -- Robert W. Baird -- Analyst

Did they sell to any other OE like automation vendors?

David Zapico -- Chairman and Chief Executive Officer

No.

Richard Eastman -- Robert W. Baird -- Analyst

Okay.

David Zapico -- Chairman and Chief Executive Officer

In the -- no, they're selling our solutions directly to end customers for getting long-term contracts from end customers.

Richard Eastman -- Robert W. Baird -- Analyst

Okay.

David Zapico -- Chairman and Chief Executive Officer

They're managing both the hardware, the communication services and the software. Now on the -- the business that goes after commercial and residential security that I talked about the 20% residential, that's a different channel, and that goes to about a network of 5,000 dealers, and then those are smaller regional independent company. So there's kind of two different channels depending on the two different businesses.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. And presumably given the channels and that mix that 20-80 mix, in that 10%, kind of CAGR sales expectation. Those pricing there as well, you're pretty good pricing, flexibility there as well?

David Zapico -- Chairman and Chief Executive Officer

Yeah, yeah.

Richard Eastman -- Robert W. Baird -- Analyst

Yeah, OK.

David Zapico -- Chairman and Chief Executive Officer

It's the same as any AMETEK business, I'd say.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. Very good. Thank you.

David Zapico -- Chairman and Chief Executive Officer

Thanks, Rich.

Operator

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

Joe Giordano -- Cowen -- Analyst

Hey, guys. Good morning.

David Zapico -- Chairman and Chief Executive Officer

Good morning, Joe.

Joe Giordano -- Cowen -- Analyst

I guess, as a former CPA, I give condolences to the death of gap here, but there are good proof point. Yeah, I think you guys have been pushed pretty hard on, is there any negative inflection anywhere in your business and you've been pretty consistent with your answers. But they talk about what are the things that you kind of look at to gauge those inflections, like where are the most sensitive businesses that you would kind of look forward as others are seeing something and you guys are still seeing kind of accelerating and have a stable growth. So like where are you and what would you start doing, if those businesses started to shift a little bit, maybe your first couple actions to take?

David Zapico -- Chairman and Chief Executive Officer

So, yeah, I mean, that AMETEK is known for our operational excellence capability. So we saw a downturn, we would not shy away from getting in front of it, and manage the cost aggressively. So that would be what we do. In terms of -- we're mainly Aircraft Group of mid and long cycle businesses, and we don't see that right now, but certainly, if there was he canary in the coalmine in our business that was used to be our cost driven motors business, but now that's a small, very small fraction of what it was, and the business from that, the demand in that business is still holding up very well. So we don't see demand turning negative right now, but if it does, that's what AMETEK's good at. We manage costs, we get in front of it, and we have a team of seasoned operators that realize that.

Joe Giordano -- Cowen -- Analyst

Okay. And that was part of the M&A. It seems interesting with acquiring a company with an IoT solution, that was a little bit weak with sensors where you guys can come in, but with your core being on metrology like what's a bridge -- where do you consider like a bridge too far, like when do you start straying from what you guys are really good at and getting into other things that are more recurring in, because there might be good financial decision.

David Zapico -- Chairman and Chief Executive Officer

Right. Yeah, I think about it in terms of the adjacency roadmaps that we build for each of our businesses and those are adjacency roadmaps that will look and near adjacencies, and I consider this business to be there. So close adjacencies are always the ones that you know best, and the ones have the least risk with and we're cognizant of that. So, I don't think we'll be buying businesses that we have no knowledge of our affiliation with. But certainly there is an expanded group of opportunities and the opportunity sets expanded. And we have a broad set of niche businesses that we have adjacency maps or so. I think you'll see more of the same for joining businesses and some of the deals that we've done recently have been more secular, some of the deals that we've done more recently have been more technology orient. There were also done a lot of tuck-ins, that enhance our market positions and we have a really good pipeline right now. And as Bill mentioned earlier, we have the strong balance sheet and we are actively looking at some properties right now.

Joe Giordano -- Cowen -- Analyst

And then just last from me quickly, can you maybe touch on the few businesses that we haven't discussed yet, I think --

David Zapico -- Chairman and Chief Executive Officer

Yeah.

Joe Giordano -- Cowen -- Analyst

Maybe power, industrial overall, and processes and overall?

David Zapico -- Chairman and Chief Executive Officer

Yeah. I'll go through. Yeah, we covered aerospace already on process.

Joe Giordano -- Cowen -- Analyst

Yes.

David Zapico -- Chairman and Chief Executive Officer

Process business had a very strong quarter. Overall, sales were up low-double digits, driven by high single digit organic sales growth and contribution from the SoundCom acquisition. Rauland, which was acquired in February 2017, continues to see robust demand for the communication solutions across our key healthcare and educational markets driving strong organic growth. Our team has really, really came at AMETEK and done a fantastic job. And we mentioned also on my prepared remarks, our UPT, our Ultra-Precision Technologies business in particular Zygo, TMC, Precitech and Taylor Hobson all saw strong double-digit growth in the quarter. So for all of 2018, we now expect organic sales for our process businesses to be up mid to high single digits. So we increased the outlook for our process business to mid to high-single digits from mid-single digits.

And if I go to power industry, overall sales were up low-double digits in the quarter, driven by contributions from recent acquisitions of Arizona Instrument, Motec, along with low-single digit organic sales growth. We saw very solid growth across our Power Test and Measurement businesses in the quarter, that includes our Programmable Power and VTI businesses. And for all of 2018, we continue to expect organic sales for Power and Industrial to be up mid single digits. And finally, we saw good growth across our Automation and Engineered Solutions business remains solid with high single digit organic growth. So that business is doing really well benefiting from the global secular trends and automation. Net Promoter and (inaudible) continued to do an excellent job, expanding our growth funnels by targeting new precision automation applications. And in 2018, we continue to expect high single digit organic sales growth for our Automation and Engineered Solutions business. That's around the warrant, Joe.

Joe Giordano -- Cowen -- Analyst

Thanks.

David Zapico -- Chairman and Chief Executive Officer

Okay.

Operator

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

Scott Graham -- BMO Capital -- Analyst

Hi. This is just a quick one for, Bill. So could you just repeat your capacity number that I think you said earlier in the call.

William Burke -- Executive Vice President and Chief Financial Officer

Yeah.

Scott Graham -- BMO Capital -- Analyst

And tell us, if that includes the sort of the new upgraded revolver?

William Burke -- Executive Vice President and Chief Financial Officer

It does. It's a $1.5 billion, and that includes the upgraded revolver, and it is post the Telular and Forza acquisitions.

Scott Graham -- BMO Capital -- Analyst

Okay. Great. Thanks, Bill.

William Burke -- Executive Vice President and Chief Financial Officer

Okay.

Operator

Thank you. And that concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Kevin Coleman for closing remarks.

Kevin Coleman -- Vice President, Investor Relations

Thank you, Andrew. Thanks everyone for joining our call today. And as a reminder, a replay of the webcast may be accessed in the Investors section of ametek.com. Have a great day.

Operator

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

Duration: 62 minutes

Call participants:

Kevin Coleman -- Vice President, Investor Relations

David Zapico -- Chairman and Chief Executive Officer

William Burke -- Executive Vice President and Chief Financial Officer

Matt Summerville -- D.A. Davidson -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Scott Graham -- BMO Capital -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Brett Linzey -- Vertical Research -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Nigel Cole -- Wolf Research -- Analyst

Sawyer Rice -- Morgan Stanley -- Analyst

Richard Eastman -- Robert W. Baird -- Analyst

Joe Giordano -- Cowen -- Analyst

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