AMETEK, Inc.
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the AMETEK Q3 2015 Earnings Call. During the presentation, all participant lines will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today, Tuesday, October 27, 2015. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations. Please go ahead Mr. Coleman.

[Kevin C. Coleman:]

Great. Thank you, Miladen. Good morning and welcome to AMETEK's third quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and CEO; Bob Mandos, Executive Vice President and Chief Financial Officer; and Dave Zapico, Executive Vice President and Chief Operating Officer. AMETEK's third quarter results were released earlier this morning. These results are available electronically on market systems and on our website at the Investors section of ametek.com. A tape of today's call may be accessed until November 10 by calling 800-633-8284 and entering the confirmation code 21777510. This call is also webcasted. It can be accessed at ametek.com and streetevents.com. The conference call will be archived on both of these sites. I will 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 risk 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 will also refer you to the Investor section of ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call. We'll begin today with prepared remarks and then we'll open it up for questions. I'll now turn the meeting over to Frank

[Frank S. Hermance:]

Thank you, Kevin, and good morning, everyone. AMETEK had a solid third quarter with strong operating performance and earnings growth. We delivered a record level of earnings at the high end of our guidance range despite what remains a challenging and slow growth global environment. Before covering the financial highlights, please note that any references to 2014 financial results will be on an adjusted basis excluding the Zygo integration costs from the third and fourth quarter of 2014. Now on to the results. Sales in the quarter were $998.5 million, down 3% from last year's third quarter. Organic sales declined 2%, foreign currency was a 4-point headwind and acquisitions added 2%. Operating income for the third quarter increased 3% to $237.6 million. Operating income margin in the quarter was excellent at 23.8%, up 130 basis points compared to the third quarter of 2014. Net income increased 3% to a record $156.4 million and diluted earnings per share were up 5% over last year's third quarter to a record $0.65 per diluted share. Turning to our individual operating groups. The Electronic Instruments Group had a good quarter with solid operating performance. Sales were $598.5 million in the quarter, down 5% from last year's third quarter. The lower sales were driven by a 3% foreign currency headwind. Organic sales declined 2% as a result of the as expected weakness in our upstream Oil & Gas business. EIG's operating income was $162.5 million, up slightly from last year's third quarter. Operating margins were very strong, up 160 basis points to 27.2%. The Electromechanical Group also had a good quarter with excellent operating performance. Sales were flat for the quarter at $400 million as strong core growth in our Aerospace businesses and the contributions from the acquisition of Global Tubes were offset by foreign currency headwinds and weakness within our Engineered Materials, Interconnects and Packaging business. Organic sales were down 2%. Foreign currency was a 4% headwind and acquisitions added 6%. EMG's operating income increased 6% to $86.7 million and operating margins were very strong at 21.7%, up 120 basis points from last year's third quarter. Now, turning to our Four Growth Strategies of

[Robert R. Mandos:]

Thank you, Frank. As Frank noted, we had a solid third quarter with good operating results. I will provide some further details. In the quarter, total selling expenses were down more than total sales on a percentage basis, due to good cost containment. General and administrative expenses were 1.1% of sales in the quarter, down from last year's third quarter level of 1.2% of sales. Other expense in the quarter was lower in comparison to last year's third quarter as a result of higher expense due to a one-time insurance write-off in last year's third quarter. The effective tax rate for the quarter was 26.1%, up from 25.1% in last year's quarter. For 2015, we expect our tax rate to be approximately 27.5% as a result of our ongoing international and state tax planning. As we have said before, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year rate. On the balance sheet, working capital, defined as receivables plus inventory less payables, was 19.2% of sales in the third quarter. Strong working capital management remains a key priority. Capital expenditures were $19 million for the quarter. Full year 2015 capital expenditures are expected to be approximately $70 million. Depreciation and amortization was $38 million for the quarter and 2015 depreciation and amortization is expected to be approximately $150 million. Operating cash flow was $188 million in the third quarter. And free cash flow was $168 million, or 108% of net income in the quarter. For the full year, we expect free cash flow, excluding the $50 million pension contribution made in the first quarter, to be approximately 110% of net income. The primary use of our strong cash flow is to support our acquisition strategy. In the third quarter, we deployed approximately $160 million for the acquisition of Surface Vision. Year-to-date, we've deployed approximately $360 million on acquisitions. And over the last 24 months, we have deployed $1.2 billion in capital. In addition, in the third quarter, we repurchased approximately 4.5 million shares of stock for approximately $250 million. Total debt was $1.92 billion at September 30, up $200 million from the 2014 year-end. This amount reflects the third funding from the Private Placement Agreement we entered into last September. This funding was $150 million, was received on August 14 and was used to pay down term debt which matured in the quarter. Offsetting this debt is cash and cash equivalents of $328 million, resulting in a net debt to capital ratio at September 30 of 32.4%. At September 30, we had approximately $950 million of cash in existing credit facilities to fund our growth initiatives. In summary, we had a strong third quarter. We are well positioned for future growth with a strong balance sheet and cash flow.

[Kevin C. Coleman:]

Great. Thank you, Bob. Operator, we'll now open it up for questions.

[Operator:]

Thank you very much. And our first question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

[Allison A. Poliniak-Cusic:]

Hi, guys. Good morning.

[Frank S. Hermance:]

Hello, Allison.

[Allison A. Poliniak-Cusic:]

Could you talk, Frank, a little bit about the deceleration, what was different from even last quarter that drove this Q4 a little bit weaker than you maybe anticipated?

[Frank S. Hermance:]

Yeah. Sure, Allison. In essence, when you look across the company, EIG performed in line with our expectations. We saw in EMG that the combination of Aerospace which was very strong was offset to a larger degree than we had anticipated in our Engineered Materials Interconnects & Packaging business. And the net of that ended up with in the third quarter a minus 2% organic growth for EMG. And we believe that that is going to continue in the fourth quarter. So we are seeing the result of the, I'll call it, industrial recession that's being talked about substantially now. And we decided as a result that the fourth quarter, which also was very strong from the viewpoint of expectation, needed to be lowered a bit.

[Allison A. Poliniak-Cusic:]

Okay. Great. And then just obviously acquisitions, you've been very active over the last 24 months. Can you give us somewhat of an update, how they're progressing? Obviously, the macro environment is certainly a large headwind here, but in terms of your expectations going into them, both on a revenue and maybe a profit side as well?

[Frank S. Hermance:]

Yeah. I mean, we're pretty bullish on the acquisition environment. We're working on a number of deals. Without giving specifics, I can tell you that in the third quarter, we worked on a very large deal actually. It would have been the largest deal that AMETEK has ever done. But unfortunately or I guess fortunately, depending on how you look at it, we did find a contingent liability in that deal that caused us to basically not continue with that deal. Putting that aside, we are in due diligence right now on other deals. We feel good about it. As we mentioned, it's the primary use of our cash flow. It's difficult to predict when deals will close. But you're going to be hearing from us either this quarter or surely in the first quarter of next year with additional deals.

[Allison A. Poliniak-Cusic:]

Great. Thank you.

[Operator:]

And our next question comes from the line of Matt McConnell with RBC Capital Markets. Please go ahead.

[Matthew McConnell:]

Thank you. Good morning.

[Frank S. Hermance:]

Hi, Matt.

[Matthew McConnell:]

Just a quick clarification. There was no M&A contribution in EIG. And I thought the Surface Vision deal closed within the first few weeks of the quarter. So, could you clarify when that will be hitting your results?

[Frank S. Hermance:]

Yeah. No. Actually, what occurred there is that Surface Vision was in the quarter. If you go back a year to when we did the Zygo acquisition in the third quarter of 2014, we actually had a stub period for that business because we acquired it right at the end of Q2 of last year. So that when you do the comparison between acquisitions this year in Q3 versus last year, you get an abnormality. In reality, in the quarter, we saw approximately $15 million of sales from Surface Vision, which was countered by basically that stub period. So, that's a good pickup, Matt.

[Matthew McConnell:]

Okay. Thank you. Okay, great. That helps. So, just to kind of follow up on the end market question. Did you say Oil & Gas was kind of expected through the quarter? And it seems like just based on the magnitude of the deceleration, maybe it was more than just EMIP. So, anything besides that in the Process side that's coming in weaker than expected or just this industrial malaise is touching most of your businesses, it seems? Any change in Oil & Gas specifically?

[Frank S. Hermance:]

No. We had given an estimate in Oil & Gas back in the first quarter. We said that our total exposure was around $400 million. And we expected about a 10% reduction in that due to the upstream portion which was around $40 million and, in fact, that's what we're seeing. We called it right. Our people did a really good job of estimating what the impact would be. And therefore, on the EIG side, we have not changed our outlook based on Oil & Gas, and it really performed, as I said in my opening remarks, in line with expectation. The difference was there's obviously a global macro condition here that is having impact on a number of businesses, but when you really isolate the change in EMG, it did come down to our Aerospace businesses, which did very well, being offset by weakness in our Engineered Materials, Interconnects and Packaging business. And when we look at that Engineered Materials, Interconnects and Packaging business, it is really a global macro that is driving that. It's not a specific item, et cetera. It's just the global macro condition. So, that is the area of the company that we've seen an impact due to the industrial recession, for lack of a better set of words. Does that help?

[Matthew McConnell:]

Yes, it does. Thanks very much.

[Frank S. Hermance:]

All right, Matt.

[Operator:]

And our next question comes from line of Joe Radigan with KeyBanc. Please go ahead.

[Joe K. Radigan:]

Thanks. Good morning, guys.

[Frank S. Hermance:]

Good morning, Joe.

[Joe K. Radigan:]

Frank, coming into the year, I think you were expecting or at least you guided to about 30 basis points to 40 basis points of margin improvement, which was consistent with what you've seen in the last few years. You're trending, I think, basically 100 basis points up year-over-year through three quarters. It sounds like that's going to continue into the fourth quarter. So, I guess my question is, obviously, you guys know what you're doing in terms of cost management, but as we look at this sort of slow growth going forward, can you continue to get margin expansion, or does the shift focus to more just sustaining where you're at in this industrial recession type environment?

[Frank S. Hermance:]

Great question, Joe. No, we're pretty bullish on margins. And you're absolutely right that we started the year with a lower number. But you may recall in the first quarter, we took some specific actions when we realized that the year was going to be weak, as most industrial companies were seeing. So, as a result, our guidance has been in the 100-basis-point arena, and that's what we're expecting for the entire year, that we're going to be up about 100 basis points. As we go into next year, which, really, was the key part of your question, we're going to be very aggressive on the cost side of the business. And one advantage of our MIP (26

[Joe K. Radigan:]

Okay. Great. And then, can you give us a rundown by region, kind of what you saw by region?

[Frank S. Hermance:]

Yeah. Sure. If you look at our performance in the main geographic areas, the U.S. was flat. This is all organic. Asia was down 7% and Europe was down about 1%. So Asia, if you look at the change when you go back in time, we were growing our Asia business in the double-digit positive arena. And now, we're seeing obviously the effects of what's going on, principally in China. And the organic growth in China in Q3 was actually a negative 12%, and that compared with last year's third quarter when we were up 17%. So, very significant change in China. And then, just sort of a slower growth in the other parts of the world, Europe is hanging in there. Probably a little bit better than we had expected.

[Joe K. Radigan:]

Great. Thanks, Frank.

[Frank S. Hermance:]

All right, Joe.

[Operator:]

And our next question comes from the line of Andrew Obin with Merrill Lynch. Please go ahead.

[Andrew Burris Obin:]

Yes. Good morning.

[Frank S. Hermance:]

Hello, Andrew.

[Andrew Burris Obin:]

Just a question on growth. With the latest guidance, EPS growth is now likely to come in at sort of mid-single digits, and this is – even if we exclude 2009, this is the lowest level in a decade. And from your perspective, what can get EPS growth to reaccelerate in the near-term?

[Frank S. Hermance:]

Yeah. First of all, I mean, if you go back – you said a decade. If you go back to 2008 and 2009, when we were in the recession, we surely had – our earnings growth was negative. The key part of how we're going to get the numbers up is it's basically going to come down doing more deals, using that strong cash flow to acquire companies. And, obviously, we look at that on a return-on-invested-capital viewpoint, but that will also drive EPS growth. And then, we've been very careful as we've made the cost reductions in the company to focus on the operations side of the business, not on our engineering and sales and distribution side of the business. And that's – you heard me in my opening remarks talk substantially to that. So, we're going to continue. And with those engineering efforts, we're hoping that we'll be able to offset some of the effects of the global macro. So, the basic answer to your question is to get better organic growth and do deals. That's the key. And we'll continue, as we always have. It's sort of the hallmark of AMETEK to continue to do cost improvements across the business. So, those are the drivers, and that's why, as I mentioned to Joe's question, that I think we're going to see margin improvement. And you're not seeing many industrial companies right now showing double-digit EPS growth.

[Andrew Burris Obin:]

No. And are you guys seeing – just a follow-up question. So, A, if I understood you correctly, so high R&D and investment, just ability to take share in the stuff environment. Is that what I've heard?

[Frank S. Hermance:]

Right. That's what you heard.

[Andrew Burris Obin:]

And just a follow-up question, are you guys seeing any headwinds or changes in demand in aerospace, and particularly in bizjets?

[Frank S. Hermance:]

No. We have a very good story in bizjets. And it is not because of the market. The market is kind of bouncing along bottom. Maybe you're hearing a little bit of uptick in the market, but we've been very successful in putting new content on a number of the new airplanes. We're on the HondaJet for example. We do a lot in helicopters which we put in this business jet arena. And actually, orders for our business jets in the third quarter were up 30%.

[Andrew Burris Obin:]

Wow.

[Frank S. Hermance:]

Yeah. So, But again, it's not because of the market. The commercial side of the business, it's a different story where there we are seeing a market, I guess, tailwind to use a pun, where those market conditions are definitely better than business and regional jet. And at some point, we think the business in regional jet market will turn; it always does. People have been predicting that upturn for a number of years and it hasn't happened. So, we decided just to get very aggressive in terms of new products on the newer aircraft. And our team has done a great job and that's why we're growing so well.

[Andrew Burris Obin:]

Terrific. Thank you very much.

[Frank S. Hermance:]

Okay, Andrew.

[Operator:]

And our next question comes from the line of Matt Summerville with Alembic Global Advisors. Please go ahead.

[Matt Summerville:]

Hey, Frank. A couple questions. First, just to put this into context, can you talk about, first, what your organic order number looked like in the quarter and what the organic book-to-bill would have been? And then talk about the linearity you experienced. I guess, I'm trying to all put this into context. I've obviously been familiar with AMETEK for a while now. Typically, the fourth quarter is your best EPS quarter of the year. Are you really just trying to derisk that going to $0.63? It's been quite a while since you've had a Q4 less than what you've earned really throughout the prior part of the year. I'm just trying to put all of this together.

[Frank S. Hermance:]

Okay, Matt. Well, you asked a number of questions there. Let me see if I can answer each of those. Yes, I'll say we definitely derisked the fourth quarter. We just felt with the global macro that we're seeing and the changes that I've already talked about that we just decided to essentially derisk it. And we're going to obviously concentrate in Q4 on getting good results for the following year. So, as you say, you've known us for many, many years and we definitely did derisk it. The order numbers, overall orders were down about 2% in the quarter. Organically, they were actually down 5%, but that number is not a fair representation of the business. And the reason is that last year in that quarter, we had some very large one-off orders. So, I think if you normalize that out, the organic growth was in line with, or lack thereof, was in line with the sales growth. So, I think you put that whole picture together, you see a slowing macro. We just decided that we were going to derisk Q4.

[Matt Summerville:]

And then just to revisit the China question. I think you said you were up 17% last year, down 12% this year. While I get the comp could give you those (35

[Frank S. Hermance:]

Yes. You were breaking up there. I think I got your question. So actually, this is not a change. Last quarter, I don't remember the exact number, but it was in that – it was negative 5%, one of the guys is telling me. So, there really hasn't been a major change in our outlook there. I mean, basically, you're looking at a situation in China that is a basic change. You look at the PMI in China. I was just reading a report actually last night. The latest PMI came out at 47% for China when it was running at close to 60%. So, there just has been a change in the industrial environment in China. So, I don't think it's a major change sort of sequentially in Asia, but clearly it is a major driver in our organic growth. The other thing, I said minus 7% and minus 5%, those numbers were for all of Asia, okay? The minus 12% in China was offset by strong performance in Japan actually last quarter and this quarter. And also, some of the other parts of Asia are doing much better. But the drag is definitely China.

[Matt Summerville:]

Thank you.

[Frank S. Hermance:]

You bet, Matt.

[Operator:]

And our next question comes from the line of Richard Eastman with Robert W. Baird. Please go ahead.

[Rick C. Eastman:]

Yeah. Frank, you had mentioned the EIG business with core growth was down about 2%. You had suggested that that was at plan. Is that...

[Frank S. Hermance:]

No, that – not our original plan but at our forecast. If you look – let's just take EIG and segment this, so you have a flavor as to what is actually going on here. Our Aerospace businesses in EIG were very good. They were up mid-single digits in the quarter on sales and orders, actually. So that part of EIG performed as we had anticipated. You look at the Power & Industrial piece of EIG, that was up low-single digits which was our expectation. The drag was in Process where that was down low-single digits and because Process is a larger part of EIG, that drove that negative 2% overall organic growth. And yes, that's basically what we said last quarter when we provided the outlook. We said that the organic growth for EIG for the entire year was going to be basically flat, and that's what we're predicting now. So there hasn't been what I would call a major change in EIG. It's been pretty much as we anticipated. And the issue is very simple there, it's Oil & Gas. That's what's driving it and it's the upstream piece.

[Rick C. Eastman:]

Okay. And then so...

[Frank S. Hermance:]

Does that help?

[Rick C. Eastman:]

Yeah. And so fourth quarter then, core growth could be flattish or so?

[Frank S. Hermance:]

We're saying low single digits negative.

[Rick C. Eastman:]

For EIG as well. Okay.

[Frank S. Hermance:]

Yeah.

[Rick C. Eastman:]

Okay.

[Frank S. Hermance:]

Yeah.

[Rick C. Eastman:]

And then can I also – I guess – maybe I just – I don't understand the comment that you made about Zygo stub period impacting the revenue contribution from SISD. I mean, if you closed SISD in early July, the acquisition contribution in revenue should be reflected there. I don't understand the Zygo offset comment. I mean, was there – was it just – was there a deferred revenue issue with SISD?

[Frank S. Hermance:]

No, no, no.

[Robert R. Mandos:]

No, no.

[Frank S. Hermance:]

Oh, no. Bob, why don't you explain?

[Robert R. Mandos:]

No, the issue was that we closed Zygo at the very end of the second quarter of last year. And therefore, some of the sales were reflected in the third quarter of 2014. So, the first period of reporting for Zygo really was the third quarter of last year. And it had the last, say, 10 days or so of the second quarter sales after acquisition that showed up in the third quarter.

[Frank S. Hermance:]

So, when you do the comparison, Rick, what basically happens is we got, as you indicated, $12 million to $15 million of revenue from Surface Vision. But what we're talking about is when you compare it to Q3 of last year, we had the same amount from that stub period, so you end up with, quarter over quarter, no acquisition growth. But if you just look at it on an absolute basis, you're absolutely right that we saw the roughly $15 million of volume from Surface Vision in Q3 of this year. Does that all make sense now?

[Rick C. Eastman:]

No, it doesn't.

[Frank S. Hermance:]

No?

[Rick C. Eastman:]

I'll follow up with Kevin, but I -

[Frank S. Hermance:]

Yeah, why don't you follow up with Kevin.

[Rick C. Eastman:]

If there's revenue coming in, there's revenue coming in. And then the other question that I had was just, Frank, in the past week, we've looked at the EMIP business as somewhat of a leading indicator for global macro and for your overall businesses. And I think, if I'm not mistaken, EMIP has some exposure to the Aerospace markets as well. So, how do you reconcile the drastic slowdown in EMIP with your forecast going forward?

[Frank S. Hermance:]

Yeah. I think – first, let me comment on what's the early indicator. The early indicator is actually our Floorcare and Specialty Motors business. We have always used that as an indicator of the global macro. And in fact, that did slow as well. But EMIP, because it's a larger part of the organization, it had a more significant impact. And, yes, there is some Aerospace in there, which actually did quite well, but it's a small part of that overall operation. So that when you see the reduction and put that across the entire EMG, basically all of Aerospace, not just in EMIP, but all of Aerospace in that differentiated part of EMG was basically more than compensated for by the shortfall in EMIP. And, therefore, the total organic growth was down this 1% or 2%. So yeah, okay?

[Rick C. Eastman:]

Okay. Thank you.

[Frank S. Hermance:]

All right.

[Operator:]

And our next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

[Christopher D. Glynn:]

Yeah. Thanks. Good morning. Frank, got a question about how things trended from earlier in the quarter through September and into October. And, I guess, there's a quantitative aspect to the question. But on a qualitative side, do you feel like the reset on the macro is in or is that a question for another day?

[Frank S. Hermance:]

Say that again? Is the...

[Christopher D. Glynn:]

Yeah. Just wondering how things tailed up during the quarter if you compare the early part of the quarter to September and into October. And do you feel like the reset in the macro is in place or is that a question for another day?

[Frank S. Hermance:]

Yes. Yeah. No. No. I feel it's in place and, actually, if you'll look at the order trend in the quarter, it was actually up from the beginning of Q3 to the end of Q3. But the absolute levels were lower than we had anticipated. And, yes, I think we have taken the global macro now into account and we dealt with through the costs and we're looking at now what next year is going to look like. I'm not looking at further deterioration. I don't feel that. But I do feel like, as I said before, the target for the fourth quarter was a very high one. And you look at numbers that were up in the $0.68, $0.69 region. And with this global macro, you couldn't make that ramp. It's just too big a ramp.

[Christopher D. Glynn:]

Okay. So, you don't see any further unraveling in the macro?

[Frank S. Hermance:]

No.

[Christopher D. Glynn:]

You feel like there's a good read on the macro from where you sit right now?

[Frank S. Hermance:]

I feel there's a good read on the macro now. Yes. Absolutely.

[Christopher D. Glynn:]

Thanks.

[Frank S. Hermance:]

You bet.

[Operator:]

And our next question comes from the line of Nigel Coe with Morgan Stanley. Please go ahead.

[Nigel Coe:]

Yeah. Thanks. Good morning.

[Frank S. Hermance:]

Hi, Nigel.

[Nigel Coe:]

So, Frank, no more questions on Zygo. I think I get it.

[Frank S. Hermance:]

Okay. We're good.

[Nigel Coe:]

Just I thought your 4Q comments were interesting in terms of you derisked the 4Q guidance. So, just want to clarify that. So, based on prior years, there should be, what, $0.02 or $0.03 of contingency based on your plan?

[Frank S. Hermance:]

There's contingency. There's definitely contingency. So, I'm not going to speak to the amount. But if things go well, we'll beat that number.

[Nigel Coe:]

Okay. And clearly, Oil & Gas took a toll on the Process performance. You've said in the past, upstream very weak but midstream, downstream – I wouldn't say good but holding the line. What is your current commentary on midstream and downstream and how do you think that looks in 2016 (46

[Frank S. Hermance:]

Yeah. Great question, Nigel. There has been no change. What we said at the beginning of the year is the upstream piece was going to be down about 25%, and the mid and downstream piece would be down slightly, low-single digits. And that's in fact what we're seeing. The mid and downstream is holding in there and we have not seen a deceleration in that piece of the business. I know there was some concern a quarter or two ago, of whether we were going to see that. And in fact, we have not seen it. So the impact on us is largely the upstream part of the business and it's down about what we had expected.

[Nigel Coe:]

Okay. And then just finally, Frank, pricing has been pretty strong year-to-date. Have you seen any deterioration in pricing given the weakening macro?

[Frank S. Hermance:]

Just a little bit. We have been talking numbers on pricing, I think the first few quarters of the year at about 1.5%. And when we rolled up Q3, it came in about 1.3%. But that's sort of a normal variation. So, I don't think there's been a deceleration. But it's not the 2% that we were seeing a number of years ago. And very few industrial companies are seeing a 2% number. So, we're actually fairly happy with staying around that 1.5% level.

[Nigel Coe:]

Great. Thank you very much, Frank.

[Frank S. Hermance:]

Okay, Nigel.

[Operator:]

And the next question comes from the line of Brian Konigsberg with Vertical Research Partners. Please go ahead.

[Brian Konigsberg:]

Yeah. Hi. Good morning.

[Frank S. Hermance:]

Hi.

[Brian Konigsberg:]

I know Nigel might get it, I'm actually still pretty confused about the M&A, but I'll take it offline. It almost seems to me like maybe organic is being overstated the way it's being discussed, but...

[Frank S. Hermance:]

Oh, no, not at all. Not at all, yeah. I think this stuff here is what confuses you. If you're just looking at absolute numbers, there was $15 million of acquisition growth. If you look at it that way. It's only when you compare it to the third quarter of last year does it cause the confusion, and that's the way we typically talk about acquisition growth is on a comparison basis. So, it really just depends how you look at it. There's nothing strange going on here. It's just the way you look at it.

[Brian Konigsberg:]

Okay.

[Frank S. Hermance:]

All right.

[Brian Konigsberg:]

Okay. I'll follow up with Kevin after. Just separately, most of my questions have been answered. But maybe just talk to free cash flow conversation. So, you took it down a little bit and I think you were previously 115%, now you're 110%, CapEx has taken down a little bit. Maybe just talk about the puts and takes there. Is it maybe a little bit on working capital that you're not getting out is what you thought, or are there items?

[Frank S. Hermance:]

Right. You hit it, Brian. When you see a slowing macro, we did have some working capital buildup. It was not substantial, but it did go up and that was a driver. And we're giving you rough estimates here. I think the 110% is actually conservative. It's going to be better than that. But we did want to be fair in saying that it probably is not going to reach the 115% level.

[Brian Konigsberg:]

Okay. And do you think the $70 million is – oh, I'm sorry. Go ahead. Apologize.

[Frank S. Hermance:]

No. I didn't say anything.

[Brian Konigsberg:]

I thought...

[Frank S. Hermance:]

I think there's some background.

[Brian Konigsberg:]

There's some feedback. Yeah. Just the CapEx at $70 million, so you're confident that it will still be spent, it still assumes do some pickup in the fourth quarter? Flat with last year but obviously you've been trending below?

[Frank S. Hermance:]

Yeah. No. It's definitely possible we'll spend less than that. We dropped it from $75 million to $70 million, and it would not surprise me if we ended up at a $65 million number there.

[Brian Konigsberg:]

Yeah. All right. Great. Thank you.

[Frank S. Hermance:]

Hey. You bet.

[Operator:]

Our next question comes from the line of Joe Giordano with Cowen & Company. Please go ahead.

[Frank S. Hermance:]

Hi, Joe.

[Joseph Giordano:]

Hi, guys. Thanks for taking my questions. So, you mentioned, Frank, that the Engineering Materials and Packaging are the biggest variants from when you last gave guidance. And I was just wondering if there was anything specific on the cost side incremental to what you had already planned or what you typically do as part of your continuous improvement that you've identified over that period that you're going to put through?

[Frank S. Hermance:]

Yeah. No. That's a great question, Joe. What we decided and I think I mentioned this on my last call was that the total cost improvements through the whole company that we talked about last quarter was $145 million. And what we have done is increase that to, I would call it, a conservative number which is $150 million. So definitely, we are active on the cost side of the business and we put additional measures in place, not all in EMIP but obviously that would be a place where some of this would occur. And so yes, the answer to your question is we have taken additional cost actions in the business.

[Joseph Giordano:]

That's (51

[Frank S. Hermance:]

And that's why – if I could just add a comment. That's why when we were asked question about Q3 and derisking it, we really did derisk it given that fact as well.

[Joseph Giordano:]

So that's a realized $150 million for 2015?

[Frank S. Hermance:]

For all – yes. For all of 2015. A realized number.

[Joseph Giordano:]

Okay. Got it. And then you seem to tee up a question that didn't get asked. You said that the best read was Floorcare & Specialty Motor but, so what's going on there, what are you seeing?

[Frank S. Hermance:]

Basically, organic growth down low single digits.

[Joseph Giordano:]

Down low. Okay. And then just last for me, you mentioned the Joint Strike Fighter ramp. Just curious as to any commentary overall on military across the segments.

[Frank S. Hermance:]

Yeah. Military has been a phenomenally good story for us. When you look across the whole company and look at the military part of the business, basically it was up mid single digits. And, yeah, exactly. Some of that is obviously driven by the Joint Strike Fighter but there's also great international military business that we are capitalizing on. So that when you look at the Aerospace segment has been a very positive story for us and a surprise, I would say, in the other direction. For the full year, we're saying we expect military to be up low single digits because some of the first quarters weren't as strong as this third quarter in military. But it's doing well. It's just doing well. And I guess Congress has come to a budget agreement which could further help this. So we'll see what happens.

[Joseph Giordano:]

Great. Thanks for the color.

[Frank S. Hermance:]

Oh, sure.

[Operator:]

And, gentlemen, there are no further questions at this time.

[Kevin C. Coleman:]

Great. Thank you, Miladen. Thanks, everyone, for joining our call today. As a reminder, a replay may be accessed at ametek.com and streetevents.com. As always, I'm available for further questions at 610-889-5247. Thanks, again.

[Operator:]

And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. Have a good rest of the day, everyone. You may disconnect your lines.