AMETEK - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 EPS beat on stronger margins: Adjusted EPS $1.75 vs S&P Global consensus $1.69 (+~$0.06); revenue was $1.73B vs $1.74B consensus (slight miss). Operating margin expanded +60 bps YoY to 26.3% on cost controls and pricing power; free cash flow conversion was 112%. Consensus values marked with asterisks are from S&P Global.*
• Orders and backlog strengthened: overall orders +8% (organic +3%), book-to-bill 1.04, backlog $3.47B—supporting visibility despite macro/trade uncertainty.
• Guidance maintained despite tariff headwinds: FY25 sales still “up low single digits” with Adjusted EPS $7.02–$7.18; management outlined mitigation actions and quantified ~$100M direct annual tariff impact they expect to offset. China’s retaliatory tariffs pose ~$70M Q2 shipment timing risk (high-margin instrumentation) but management reiterated confidence in full-year outlook.
• Capital deployment remains a catalyst: dividend raised 11% to $0.31; new $1.25B repurchase authorization; announced agreement to acquire FARO Technologies for ~$920M enterprise value to expand 3D metrology—bolstering secular growth in Ultra Precision Technologies.

What Went Well and What Went Wrong

• What Went Well

  • Margin execution: operating margin rose to 26.3% (+60 bps YoY); EIG margin 31.0% (+50 bps) and EMG margin 21.9% (+120 bps), underscoring pricing power and productivity. “Outstanding operating performance… strong margin expansion”.
  • Cash generation: free cash flow $394M; conversion 112%—supporting flexible capital allocation.
  • Orders momentum and backlog: orders +8% (organic +3%), book-to-bill 1.04, backlog $3.47B. “Earnings above our expectations” and strength across niche businesses.

• What Went Wrong

  • Revenue slight miss vs consensus despite resilient demand: $1.732B vs $1.744B consensus as organic sales dipped 1% YoY; FX neutral. Consensus values are from S&P Global.*
  • Tariff-driven uncertainty: management sized ~$100M direct annual tariff impact (to be mitigated) and flagged ~$70M of high-margin China shipments at risk of Q2 timing slippage, prompting the decision not to issue Q2 guidance.
  • Mixed regional performance: U.S. up modestly, Europe/Asia modest declines in Q1; China down ~10% (ex-China Asia roughly flat), adding near-term choppiness to international demand.

Transcript

Operator (participant)

Welcome to the first quarter 2025 AMETEK earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations and Treasurer Kevin Coleman.

Kevin Coleman (VP of Investor Relations and Treasurer)

Thank you, Andrew. Good morning and welcome to AMETEK's first quarter 2025 earnings conference call. Joining me today are Dave Zapico, Chairman and Chief Executive Officer; Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today's call, we'll be making forward-looking statements which represent the company's current expectations and are based on information currently available to the company. Various risk factors and uncertainties, including government trade policies and tariffs, could cause actual results to differ materially from our current expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2024 or 2025 results or 2025 guidance will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding a pre-tax $29.2 million or $0.10 per diluted share charge in the first quarter of 2024 for integration costs related to the Paragon Medical acquisition. Reconciliations between GAAP and adjusted measures can be found in our press release and on the investor section of our website. We'll begin today's call with prepared remarks, and then we'll open it up for questions. I'll turn the meeting over to Dave.

David Zapico (Chairman and CEO)

Thank you, Kevin, and good morning, everyone. AMETEK had a strong start to 2025 with excellent first quarter results. We delivered robust margin expansion, generated strong free cash flow, and delivered earnings above our expectations. Additionally, orders were again strong in the quarter. Our results reflect the strength of the AMETEK growth model, the quality of our niche differentiated businesses, and most importantly, the outstanding efforts from our colleagues. Now, let me turn to our first quarter financial results. Sales were $1.73 billion, essentially in line with the first quarter of 2024. Organic sales were down 1%, acquisitions added 1 point, and foreign currency was flat. Orders were strong in the quarter, with overall orders up 8% and organic orders up 3% versus the prior year. Book-to-bill in the quarter was 1.04, and we ended the first quarter with a backlog of $3.47 billion, near record levels.

AMETEK's operating performance to start the year was excellent. Operating income in the quarter was $455 million, a 2% increase over the first quarter of 2024. Operating margins were 26.3% in the quarter, up 60 basis points from the prior year. Excluding the dilutive impact from acquisitions, core margins were up 90 basis points in the quarter. EBITDA in the quarter was $559 million, up 3% versus the prior year, with EBITDA margins in the press of 32.2%. This operating performance led to strong cash generation with free cash flow of $394 million in the quarter and free cash flow to net income conversion of 112%. Diluted earnings per share were $1.75, up 7% versus the first quarter of 2024, and above our guidance range of $1.67-$1.69 per share. Now, let me provide some additional details at the operating group level. First, the Electronic Instruments Group.

Our Electronic Instruments Group continues to deliver excellent operating performance, resulting in robust operating margins. EIG sales were $1.14 billion, down 1% from the first quarter of last year. Organic sales were down 2%. Acquisitions added 2 points, and foreign currency was a 1-point headwind. EIG operating income was up slightly to $354.1 million, and operating margins were very strong at 31%, up 50 basis points from the prior year, while core margins were an impressive 110 basis points. EMG delivered strong growth and excellent operating performance in the quarter. EMG's first quarter sales were a record, $588.3 million, up 2% versus the prior year, with organic sales also up 2%. In the quarter, we experienced improving order patterns, especially within our Paragon Medical business. EMG's operating income in the quarter was $128.7 million, up 7% compared to the prior year period.

EMG's operating margins were 21.9%, up a sizable 120 basis points from the first quarter of 2024. I'm pleased with our performance in the first quarter, with robust margin expansion, strong order growth, excellent cash flow generation, and 7% earnings growth despite a continued uncertain economic environment. We remain committed to making strategic investments in our businesses to best position them for long-term growth. These investments are supporting our global and market expansion and technology innovation strategies. For all of 2025, we continue to expect to invest an incremental $85 million in support of these initiatives, with key investments in research, development, and engineering to help advance our product differentiation. Our vitality index, which measures the sales of new products introduced in the past three years, was a strong 26% in the first quarter.

We are confident that these investments will further solidify our competitive positions in our core markets and help broaden our exposure within new attractive growth markets. I want to take a moment to highlight just two of the many recent new product introductions across the company. First, from Gatan, a leader in electron microscope technology, they recently launched the EDAX Elite Ultra Energy Dispersive X-ray Spectroscopy System. The Elite Ultra solves a common challenge in advanced materials research by improving the ability to map and quantify elements in very thin samples. This system provides faster, more accurate results, allowing for deeper insights into material composition. One of the key features of the Elite Ultra is a larger sensor, which captures more X-rays and improves the system's sensitivity to a wider range of elements, leading to better data and faster analysis.

Gatan worked closely with another AMETEK business, AMETEK, in the development of this advanced sensor technology. This is just one example of the ways our businesses partner together to help support and accelerate our technology innovation. With this new product introduction, Gatan continues to lead the way in developing advanced solutions that help scientists and engineers push the boundaries of their scientific research. Vision Research also launched a new line of small, powerful, high-speed cameras, the Phantom KT-Series. These cameras leverage a custom-designed high-speed sensor from Forza Silicon, another AMETEK business. These sensors provide superior image quality and performance, making them ideal for advanced applications. Their compact design makes them easy to use in a variety of settings, whether for industrial testing, motion analysis, or medical research.

Through this latest innovation, Vision Research continues to lead the market in high-speed imaging technology, offering researchers powerful tools to capture and analyze fast-moving phenomena. These advancements, along with many others introduced in the quarter, highlight our continued commitment to our customers and position us well to drive long-term success and meet evolving needs across emerging applications. Now, switching to capital deployment. Strategic acquisitions remain our number one priority for capital deployment. We are managing a robust pipeline of attractive acquisition candidates. While our top priority for capital deployment remains acquisitions, we are also well-positioned to deploy capital on share buybacks. We have a $1.25 billion share repurchase authorization, and as we have shown in prior periods of market dislocation, we are willing to opportunistically purchase shares.

Given our robust free cash flow generation and strong, flexible balance sheet, we are well-positioned to deploy capital on both strategic acquisitions and opportunistic share purchases. Now, let me share our views on the rapidly evolving trade conflict and how AMETEK is approaching this period of heightened uncertainty. Taking a step back, during the first quarter, we saw improving order patterns and generally solid conditions across most markets and geographies. While there was still some cautiousness from customers, conditions were improving, and we were encouraged with our start to the year. With the introduction of the tariffs in early April and subsequent back-and-forth trade negotiations over the past month, the level of uncertainty around trade policy and its implications have increased. Although it is impossible to know how these trade conflicts will evolve, we are confident in our ability to successfully navigate an uncertain and changing economic environment.

Our distributed operating structure empowers local teams to respond quickly and appropriately to the unique dynamics of their businesses, markets, supply chains, and customers. This level of flexibility is a meaningful advantage in a dynamic environment such as the current one. Our portfolio of highly differentiated products and mission-critical applications will allow us to effectively pass through higher input costs, including tariffs, while continuing to deliver strong margins and cash flows. Our broad exposure and diversification across end markets and geographies limit our dependence on any single customer, product, technology, supplier, or region. This diversification is a strategic strength and helps shield the entire company from a concentrated risk. Our large global manufacturing footprint and supplier base, along with our asset-light business model, will allow us to localize production and adjust supply chains.

Lastly, our strong balance sheet and outstanding cash flow generation provides us with the ability to continue playing offense. Through acquisitions and opportunistic share repurchases, we're also continuing to invest in our businesses. During the first wave of the China tariffs in 2018, during COVID, and then again during the resulting supply chain crisis, there were high levels of economic uncertainty, and each time our businesses quickly reacted and strengthened their positions. Our business is robust by design and resilient by nature. We use periods of disruption to make our businesses stronger and more efficient. We use our strong cash flows and balance sheets to better position AMETEK for accelerated growth following the period of uncertainty. We are confident we can do the same in this environment.

More specifically, our businesses have responded quickly and have developed tariff response plans, which include specific mitigation actions to offset the impact from tariffs. These mitigation actions include select pricing initiatives, localization of production operations, adjustments to our supply chain, and targeted productivity actions. We are also finding opportunities created by the tariffs to take advantage of our substantial U.S. manufacturing footprint to broaden our customer base and support their growth in the U.S. While uncertainty has increased as a result of the global trade dynamics, we believe we can offset tariff headwinds through the implementation of these mitigation actions. As a result, we continue to expect full-year sales to be up low-single-digits on a percentage basis compared to 2024. We also continue to expect diluted earnings per share to be in the range of $7.02-$7.18, up 3%-5% compared to last year's results.

We expect the benefits from these various mitigating actions to build throughout the year. We remain confident in our full-year outlook and our ability to deliver strong results in 2025. In summary, AMETEK delivered strong results to start the year. Our businesses executed exceptionally well, delivering strong margins, solid orders growth, and earnings ahead of our expectations. The durability of the AMETEK growth model, combined with our diversified market exposures, outstanding cash flows, and improvement management capabilities, position us well to navigate through these uncertain economic times. We remain focused on delivering long-term growth and creating long-term value for our shareholders. I will now turn it over to Dalip, who will cover some of the financial details of the quarter. We will be glad to take your questions. Dalip.

Dalip Puri (EVP and CFO)

Thank you, Dave, and good morning, everyone.

As Dave noted, AMETEK delivered a strong start to the year, highlighted by excellent operating performance, robust core margin expansion, and strong free cash flow conversion. Now, let me provide some additional financial highlights for the first quarter. First quarter general and administrative expenses were $28 million, up $1.5 million from the prior year. For the full year, we continue to expect general and administrative expenses to be up modestly versus 2024 levels and to remain at approximately 1.5% of sales. First quarter other operating expenses were up $1 million compared to the first quarter of 2024 due to lower interest and investment income. First quarter interest expense was $19 million. The effective tax rate in the quarter was 19%, in line with the first quarter of 2024. For 2025, we continue to anticipate our effective tax rate to be between 19% and 20%.

As we have stated in the past, actual and quarterly tax rates can differ dramatically, either positively or negatively, from this full-year estimated rate. Capital expenditures in the first quarter were $23 million, and for the full year, we expect capital expenditures to be approximately $155 million, or about 2% of sales. Depreciation and amortization expense in the quarter was $106 million. For the full year, we expect depreciation and amortization to be approximately $410 million, including after-tax, acquisition-related, intangible amortization of approximately $203 million, or $0.88 per diluted share. Operating working capital in the first quarter was 18.1% of sales. That compares to 18.7% in last year's first quarter. Operating cash flow was $418 million, up 2% versus the first quarter of 2024, while free cash flow was $394 million, up 3% over the prior year. Free cash flow conversion was strong at 112% in the quarter.

For 2025, we continue to expect free cash flow conversion to be approximately 115% of net income. Total debt at March 31 was $1.9 billion, down from $2.1 billion at the end of 2024. Offsetting this debt is cash and cash equivalents of $399 million. At the end of the first quarter, our gross debt-to-EBITDA ratio was 0.9 times, and our net debt-to-EBITDA ratio was 0.7 times. We continue to have excellent financial capacity and flexibility with approximately $2.5 billion in cash and available credit facilities to support our growth initiatives and our active acquisition pipeline. While acquisitions remain our number one capital allocation priority for use of our free cash flow, we also seek to provide value to our shareholders through opportunistic share repurchases and a consistently increasing dividend.

In February, we announced an 11% increase in our quarterly cash dividend to $0.31 per share, our sixth consecutive year of 10% plus annual increases in our dividend payouts. Additionally, AMETEK's board of directors approved a $1.25 billion share repurchase authorization in February that provides us with added flexibility to enhance shareholder value. In summary, our businesses delivered strong results to start the year. Our proven operating capabilities drove strong earnings, robust margin expansion, and outstanding free cash flow conversion. With a proven strategy, significant capital deployment capacity, and a strong track record of execution, we are confident in our positioning to navigate current trade uncertainties and drive growth and value creation in 2025. I'll now pass it to you, Kevin.

Kevin Coleman (VP of Investor Relations and Treasurer)

Thanks, Dalip. Andrew, could we please open the lines for questions?

Operator (participant)

Certainly.

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Matt Summerville with D.A. Davidson.

Matt Summerville (Managing Director and Senior Research Analyst)

Thanks. Morning. Dave, could you maybe provide a little bit more detail on what you are seeing specifically in Paragon and the broader group of medical-related businesses, especially given that you explicitly called out Paragon as seemingly seeing a notable inflection in orders after a period of softness in that business shortly after you acquired it a year and a half or so ago? A little bit more color on Paragon and medical, and then I have a follow-up.

David Zapico (Chairman and CEO)

Sure, Matt. As you know, Paragon is a business that we acquired a little over a year ago.

They specialize in single-use and consumable surgical instruments and implantable components in attractive MedTech markets. As you said, when we bought it, right after that, they went through a destocking. We took that period of time over the past year to really execute a multi-year improvement plan, for dramatically improving the cost position of the business. Now, the business is in growing markets. It has excellent engineering capability. They have a leading additive manufacturing capability, a substantial number of new program wins, and we just viewed the softness as customers were realigning with the current market environment. There was some overbuying during the prior period. What we saw in the quarter was very encouraging. The customers are beginning to destock.

If you look broader at the OEM automation and the MedTech OEM businesses, those businesses that were really the places where we saw the destocking, in some, those orders were up 25% in the quarter. Across all of those businesses, 25%. Paragon led all those businesses. Paragon was greater than 25%, substantially greater than 25%. The customers are destocking. The business also performed very well on a profit margin basis. It was 25% in the quarter. We have a new management team there. The business is executing. We're working through some of our business improvement plans. Those orders that we have in the first half of the year are going to lead to us having some substantial growth in the second half of the year. We're feeling really good about it, and the team's performing very well.

It is good that the market is performing exactly as we thought it would, and we told you about the past few quarters.

Matt Summerville (Managing Director and Senior Research Analyst)

Thanks, Dave. Just as a follow-up, can you speak more broadly across AMETEK as to the order cadence you have experienced through the first four months of the year? Have you seen—I would not think so given most of what you do is fairly customized to a degree—are you seeing any sort of buy ahead, any sort of discernible demand destruction? If you can maybe comment on what price realization looked like in Q1. Thank you.

David Zapico (Chairman and CEO)

Yeah. I will take the second part first. I mean, during the quarter, we saw a couple of points of inflation, and we were able to offset that with price. It was a positive spread.

In terms of orders, as I said in the prepared remarks, overall orders were up 8% in the quarter. Organic orders were up 3%. That shows continued improvement that we've seen for a third quarter in a row. Sequentially, they were up about 2%, and we have a near-record backlog. That's very good. The cadence in March was the strongest month for orders in the year. It improved throughout the quarter. We started Q2, and we were concerned because of all the tariff things going on, but our orders are still solid. We were really good, and we feel good about it. Pretty typical quarter with March being the strongest, and we also had a strong April. Thank you.

Matt Summerville (Managing Director and Senior Research Analyst)

Thank you, Dave.

Operator (participant)

Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets.

Deane Dray (Managing Director)

Thank you.

Good morning, everyone.

David Zapico (Chairman and CEO)

Good morning, Deane.

Deane Dray (Managing Director)

Hey, maybe we'll start right where you left off with Matt's question, maybe just the next layer of detail because you're really adept at taking us through key end markets, geographies, and really if there's ever been a time where we're interested in the nuances. It sounds like no demand destruction, but just how are you positioned? It looks like the orders have been strong, but any kind of callouts, positives or negatives within geographies and your particular verticals?

David Zapico (Chairman and CEO)

Yeah. In the geography area, positive growth in the U.S., offset by modest declines internationally. So we're up a bit in the U.S. and just down a bit in Europe and Asia. Our China market was down about 10%. Asia, excluding China, was roughly flat.

It kind of played out how we thought it would, but it was, again, strength in the U.S. offset by just modest declines in other areas. If I go around the horn on our process business, organic sales for that business declined low-single-digits in the first quarter. Sales were pretty much in line with our expectations, but in long-term, project activity remained solid. The customers are still remaining cautious about when they place the POs given the broader macro uncertainties, and there were some delays in project timing and process. We now expect organic sales for our process businesses to be roughly flat for the year. Our Aerospace and Defense business had a strong start to 2025. Organic sales were up mid-single-digits in the first quarter. Growth was strongest in our commercial OEM business.

Our after-market business also had a very good quarter as we have content across a broad range of commercial aerospace platforms and after-market capabilities really position us well. For the full year in A&D, we continue to expect organic sales to be up mid-single-digits. In our third market segment, commentary, organic sales for our power businesses were up low-single-digits in the quarter. We saw the growth early across our power platform. We continue to manage a strong growth funnel, good new business pipeline, good opportunities in power grid modernization and electrification. We are expecting some cautious customer behavior in the international markets in the near term given some of the tariff uncertainty. For the full year, we continue to expect organic sales to be roughly flat versus the prior year. Lastly, I'll talk about our Automation and Engineered Solutions business.

The organic sales were down low-single in the quarter, continued solid sequential sales growth. Orders were strong in the quarter. I talked about our OEM customers already as a response to Matt's questions, but clearly the orders are normalizing with both year-over-year and solid sequential orders growth and highlighted the performance of our Paragon Medical business. For the full year, we continue to expect mid-single-digit organic sales growth. We got through the quarter. I mean, it was a good quarter, pretty much as expected. Margins were good. Cash flow strength was good. Base earnings were good. Orders continue on a positive strength. Our balance sheet strength is really good. There is a lot of positives in the first quarter, Deane.

Deane Dray (Managing Director)

Yeah. It really does sound that. I appreciate that color.

Just one data point on the tariffs, and that's exactly what we would have expected you to go through, all the mitigation plan. Can you just size for us China as a percent, China sourcing as a percent of COGS? Just that data point helps us frame what kind of headwind that you're up against.

David Zapico (Chairman and CEO)

Right. I'll go through the entire tariff mitigation, what we're working on. I'll cover China specifically a couple of different ways, what we're sourcing there and what we're selling there. It will, I think, be a good summary. We estimate our annual tariff impact, direct impact to tariffs to be about $100 million. We expect to be able to offset this direct impact through our mitigating actions.

That is why we feel comfortable to reaffirm our full year sales and EPS guidance, given our strong start to the year and some of the things I talked about. Now, if I break down that $100 million, it comes from really three sources. There is a 10% across-the-board tariffs for all countries. The second component it includes is the 145% tariffs on China imports to the U.S. Now, we have fairly limited exposure here. Given the proactive actions, we started back in 2018 to shift sourcing away from China. We have talked about that multiple times over the years. In fact, the remaining sourcing costs in this category are from recently acquired businesses. The bulk of AMETEK is not sourcing from China. When we source from China, we sell in China.

We have some new acquisitions that we have to work on, like the Paragon deal, like some of the more recent deals. We're doing some work in China, but it's relatively modest to get that 145% tax on trade. The other element of it is in terms of Mexico. We're glad to find out that our people have done good work, and we're over 98% compliant with the USMCA guidelines. Very little exposure here. We feel really good about our ability to offset the $100 million of direct tariff exposure through our various mitigating actions. The other element I want to make you aware of is separate from those direct impacts, we have the 125% retaliatory tariffs imposed by China on the U.S. As you know, we do about 9% of our sales in China.

A lot of it's local for local, but we do have approximately 4% of our sales. In the case of the second quarter, that would be about $70 million. They're direct U.S. to China. We expect we're seeing short-term delays here given the magnitude of the tariffs. Our customers are taking a wait-and-see attitude. They're confirming to us that they still want the products, but they're waiting for lower tariff levels. Much of this product is our higher-end instrumentation and optics business where there's really limited alternatives to AMETEK with similar capability products. As you may know, we've been very careful to protect our IP for this product for many years. We're building the product in the U.S. We're shipping it around the globe. Our Chinese customers desire our products. That $70 million in Q2 is very difficult to predict the outcome near term.

We do not have control over that situation. We may be able to ship it all in Q2. We may not be able to ship it in Q2 because there are risks beyond our control, and they are related to country-to-country dynamics. When we looked at that risk, we have ways to fix it. We understand that some of our products are so specialized that there is a, I'll call it an opaque process in China where customers can go and get exemptions. We understand that some of our products are qualifying for those exemptions, but we are monitoring the situation, but we do not have more detail than that. We are also initiating an element of a manufacturing localization plan that will change the value-added nature of some of our production processes so that we do not run into this problem.

We're going to use our footprint to change some sourcing, some assemblies, some test and calibration processes. We get substantial transformation in markets that aren't subject to tariffs. Finally, I mean, we can sell these products to outside of China. This isn't an issue where we can't sell them there. They're just in the queue. They've been started. There are $70 million planned for it for Q2. We're really dealing with a shorter-term issue here. How that's going to turn out in Q2, I'm not certain. It could turn out well. It could be delayed. We're comfortable that we can offset the problem in the year. Over the balance of the year, we feel very good with a very good plan that I can talk a little bit more about.

That is the issue that we're dealing with very near term in terms of Q2. It could swing either way. It could go in Q2. It could shift to Q3. We just got uncomfortable dealing with the uncertainty in the near term with something we didn't really control. That's why we're confident in the year, but the swing between Q2 and Q3, we're not certain of.

Deane Dray (Managing Director)

Dave, that all sounds like you've got it dialed in, right? We understand these are extenuating circumstances, but you guys have been through this before, at least in terms of supply chain challenges. We appreciate all the call here. Thank you and best of luck.

David Zapico (Chairman and CEO)

Thank you, Deane.

Operator (participant)

Thank you. Our next question comes from the line of Jamie Cook with Truist.

Jamie Cook (Managing Director of Equity Research)

Hi. Good morning and nice quarter.

I guess, Dave, my question, if you look at the spread, obviously the EMG margins have been under pressure relative to history for reasons we all know. I am just wondering with some of the positive momentum you are seeing in the orders for that segment and in particular Paragon with some of the cost actions you have taken, as orders and sales start to improve, how do we think about the margin trajectory for that business? I guess that is my first question. My second question, obviously, acquisitions is your specialty. Just wondering if, just given the complexity around trade war and tariffs and all that type of stuff, if some of the larger acquisitions that you guys had been contemplating, if that is sort of on hold at this point.

Just last administrative, I think you guys usually guide one quarter out, and I do not think you guided for the second quarter, so I just want to know if I missed anything. Thanks.

David Zapico (Chairman and CEO)

Yeah. No, Jamie, you did not. Really the response to Deane in my prior question, the uncertainty around the Q2 sales and whether that is going to shift to later in the year is why we did not guide for Q2. We affirmed the year, but we did not guide to Q2 because of the uncertainty. Related to the Paragon margins, we are going to see upside in the second half of the year for sure because we are continuing to work through our improvement plans, and now we have some volume. We have some upside in margins for sure in Paragon in the second half of the year.

Jamie Cook (Managing Director of Equity Research)

I guess I'm thinking EMG in total, just the spread between EMG, IMG, obviously Paragon and EMG.

David Zapico (Chairman and CEO)

Yeah. I think that the way EIG margins are extremely good and they're performing extremely well. I think if you want to think about it from your perspective, we have a hedge on EMG margins. There's some upside there given the acceleration in that business. The third thing you talked about,

Jamie Cook (Managing Director of Equity Research)

it was just M&A on hold. Yeah.

David Zapico (Chairman and CEO)

We have a very, very robust pipeline, and we're very active in the pipeline. Some of the deals, the uncertain nature of it, there's been some delays. Some of them are going forward. Over the history of time, we've been buyers in up markets and down markets, and we've been able to buy some of the best businesses, the best returns for our shareholders in down markets.

We're very active. If you think about this thing, I mean, we're ideally positioned to deal in this changing environment. We're very good operators. We've been through challenges before as we talked about with Deane. We've got an experienced management team. We've got a distributed operating structure that really empowers local management. We have our portfolio of essential mission-critical businesses that allow us to pass through higher input costs. I mean, we expect to differentiate our performance, and M&A is going to be part of that. It's very difficult to predict if we sign a deal in a couple of weeks or sign a deal at the end of the year. We're not backing off at all. We're in the fortunate position that we can do two things at once. We're going after M&A, and we also have a balance sheet in periods of dislocation.

We've used our balance sheet to initiate buybacks also.

Jamie Cook (Managing Director of Equity Research)

Thank you very much and great job.

David Zapico (Chairman and CEO)

Yeah. Thanks, Jamie.

Operator (participant)

Thank you. Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Jeffrey Sprague (Founder and Managing Partner)

Hey, thank you. Good morning, everyone.

David Zapico (Chairman and CEO)

Good morning, Jeff.

Jeffrey Sprague (Founder and Managing Partner)

Good morning. Dave, thanks for that super detailed kind of tariff rundown. I wonder if you could just give us the punchline, though, the China specifically. What is it that you're looking to overcome there on that 145%?

David Zapico (Chairman and CEO)

The 145% is built into the $100 million. It's 125%. You got China and the U.S., and on the supply chain, it's 145%. That's within the $100 million, and that's fairly small. We just have a couple of recent acquisitions. That goes into the $100 million. The $100 million is the total amount of things going to the U.S.

Jeffrey Sprague (Founder and Managing Partner)

Got it. Just thinking about this possible shipping delay in Q2, and I appreciate the guidance uncertainty it creates, we should just assume that's very high incremental margin business, right? I would guess that grows $0.10 or more of sort of variance in an all else equal construct as it relates to Q2.

David Zapico (Chairman and CEO)

Yeah. I think that that's a, I think you're thinking about it the right way. It's our high-end products. That capability is not available for many places in the world. It's higher margin business, and I think you're thinking about it right.

Jeffrey Sprague (Founder and Managing Partner)

We've gotten some inbound questions just about your research exposure and DOGE risk and anything along those lines. Could you just address what, if anything, you're seeing there and what your exposure is?

David Zapico (Chairman and CEO)

Yeah. The total research exposure is about 10% of sales. It's international.

A lot of the DOGE stuff has been in a lot of life science research, and we have some exposure there, but not much. There are some delays with our government customers. At this point, for us, it is relatively modest.

Jeffrey Sprague (Founder and Managing Partner)

Maybe last from me, just on price, can you share—sorry if I missed it—what price was in the quarter? I do not think you changed the organic growth outlook, but I would assume your outlook implicitly would now include some more price, maybe with some volume detraction on the economic uncertainties.

David Zapico (Chairman and CEO)

You are exactly right. When we rolled up the whole year, the volume was down a little bit, but the pricing was up a little bit. It is part of our tariff mitigation plan, and we felt comfortable keeping the full-year guide, the plus low-single-digits accurately.

In terms of the specific price, we're not going to give out that specific number, but I can tell you that we covered all inflationary costs in Q1. We had a good positive spread, and we expect that to continue throughout the year.

Jeffrey Sprague (Founder and Managing Partner)

Thank you.

David Zapico (Chairman and CEO)

Thank you, Jeff.

Operator (participant)

Thank you. Our next question comes from the line of Andrew Obin with Bank of America.

Andrew Obin (Managing Director of Equity Research)

Hi, yes. Good morning.

David Zapico (Chairman and CEO)

Good morning, Andrew.

Andrew Obin (Managing Director of Equity Research)

Can we just talk about just the particular test and measurement side? We've heard a lot of concerns, and these are broad macro concerns that a lot of the components that go into the high-end instrumentation are sourced by many in the industry in China. I think you guys have done a fairly good job, as you've pointed out, of adjusting your supply chain away from China over the past five, six, seven years.

What kind of opportunities does it create, right? Because there are these big concerns that shipments are going to come to a grinding halt in May. You guys seem to have better supply chains. I would imagine on the margin, some of your competition in the U.S. does come internationally. Could you just describe the opportunity set that that creates for you?

David Zapico (Chairman and CEO)

Yeah. Really, it's a great question, Andrew. We have good structure, good bones to deal with this situation. We have 100 plants approximately in the U.S., and we have 50 internationally. We are already working with some customers that we haven't worked with in the past on some opportunities in the U.S. to use our infrastructure in the U.S. to be able to win market share. We are clearly focused on the tariff mitigation, but there are opportunities to using our structure in the U.S.

I think that structure of 50 plants outside the U.S. really gives us some flexibility to look at localization at a different level and the transformation of the value add so that as we move through the course of the year, we're going to be able to mitigate the impact of tariffs. I think it's a comprehensive plan. Dalip and I reviewed the—one of the things we've done a good job with this year is being a great operating system, great business system, but providing a structure and then getting all of our teams to execute it within it. We learned from that. Dalip and I went through plans with every one of our businesses, and we're going to continue that for a period of time. There were plans in the business, and it talked about the tariff mitigation. It talked about sourcing changes.

It talked about select pricing opportunities. It talked about going on offense. We spent a lot of time understanding where our competitors are located and where we are located and areas of advantage that we are going to have in the new structure. We are working on those now, and we are getting positive playback from our customers.

Andrew Obin (Managing Director of Equity Research)

Just a follow-up question. Given this new round of tariffs, how are you and the board thinking about manufacturing footprint, your supply chain? Because clearly, you have made major adjustments in the aftermath of the first wave. What, if any, adjustments, just directionally, you and the board are thinking longer term? The follow-up question on that is, what are you guys doing to your CapEx spending this year? Is it going up or is it going down? Thank you.

David Zapico (Chairman and CEO)

Yeah.

I think the board is very pleased that we started to reduce our risk from China supply chain five years ago. We were constantly acquiring businesses, so we're working on exiting those businesses, and that's in process. I think in terms of our manufacturing footprint, I just think having expanded localization in various countries so that longer term, we're less dependent on some of the tariffs is the right thing to do. We're not changing maybe where we build the core technology, but we're shifting the value add to more and more locales around the world. We have been doing that over time. That's why we have 50 plants outside the U.S. That's why we've been so successful in these international markets, almost, I think, in the quarter, high 40% sales over for international markets. We're going to continue doing that.

We think that's the right strategy, the right plan. In terms of CapEx, we're not reducing our CapEx. We have some very aggressive digital programs going on right now. We're looking to improve our sourcing with AI. We're looking to improve our e-commerce capabilities. We have some very, very long-term strategic plans that are around improving our capability through software investments, and we're going to continue those. We also have a good footprint already, so it's largely effectively utilizing that footprint. I feel good about that, and I see no reason at this time to change our capital expending plan.

Andrew Obin (Managing Director of Equity Research)

Thanks so much.

David Zapico (Chairman and CEO)

Thank you, Andrew.

Operator (participant)

Thank you. Our next question comes from the line of Brett Linzey with Mizuho.

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Hey, good morning, all.

David Zapico (Chairman and CEO)

Hey, Brett.

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Yeah.

I wanted to come back to the destocking comment around automation engineered solutions, perhaps just an update on the level of OEM inventory in some of those channels. Anything in terms of the pulse on capital projects? Are you seeing any shift in timelines as it relates to some of those businesses?

David Zapico (Chairman and CEO)

Yeah. In terms of the timelines, I talked about a little bit in our process business. We're not seeing projects canceled, but we're seeing uncertainty and some projects are delayed. We made an adjustment in our annual outlook related to that business because of that. That's definitely happening. Yeah. Another question. Yeah. The OEM inventory. What we're seeing is that the destock is not completed for all customers. Once it ends, then you see a pop. Those customers are recalibrating to the demand levels.

You're going to see that as we work through the course of 2024. By the time 2025 is completely over, I think all the destocking will be done. I was thinking, but it's starting to happen now, and it's driving growth, strong orders in the first quarter.

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Okay. Got it. I guess just a quick follow-up there. I guess the assumption for the year from a planning perspective is that persists through the balance of the year, or does it improve in the second half? Any thoughts there?

David Zapico (Chairman and CEO)

Yeah. You're talking about our sales, or you're talking about orders, or you're talking about what part of our business?

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Just talking about the level of inventory, when you think that gets worked down and we're kind of normalized.

David Zapico (Chairman and CEO)

Okay. I see. Yeah. I think in the automation area, that's working itself through.

We're seeing the U.S. is kind of, I'll call it, finished. Some of the destocking is still occurring in Europe, places like Germany. That's automation. In terms of the MedTech OEMs, I think it's OEM dependent, and they all have different supply chains. They're good at running their business, but they seem to not really have very tight control on their inventory. We're seeing it's difficult to predict. It's difficult for them to predict, and it's difficult for us to predict because of that. You're seeing as they work through their process that destock is ending, and there's more normalization of inventory. We saw a big chunk of that in Q1. That's like what we saw with the Paragon orders, right? Paragon orders were up much, much more than 25% in Q1.

That was customers getting to the point where they're recalibrating, they're normalized, and they're setting their plan for the year. As we go through the year, we're going to see other MedTech customers do that. It's happening as we thought it would.

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Appreciate the insight. Maybe just one more on A&D. Not much ground was covered here. How are those businesses performing versus expectations? Is your thinking and outlook changed between commercial or defense based on any developments we've seen?

David Zapico (Chairman and CEO)

Yeah. We're still feeling really good about the aerospace business. It grew mid-single-digits in the quarter. We're expecting it to grow mid-single-digits for the year with balanced growth across both our commercial segment and our defense segment. When I think about the commercial segment, you have the OEM multi-year backlogs.

That drove a significant part of our growth in Q1. They have 8-10 year backlogs depending on what you look at. We feel good about that. In the defense area, the funding is solid, and we feel good about that. In terms of the aftermarket, a lot of older planes are flying now because there have been some delays on this OEM side, and that plays to our strength with slower fleet retirements. That business is a good domestic business, but also a good international business. Older planes are flying. In the U.S., there is some dislocation now at the airlines, but they are still flying the planes. They are flying older planes. Fuel costs are coming down. The dynamic there is if we do not get the OEM sale, it is okay because we have such a strong aftermarket presence.

That team running that business is just doing a great job for us. For us, and we're in some niches in this aerospace business, it's about 17%-18% of our company. I would say it's a very stable, strong, growing business for us right now.

Brett Linzey (Managing Director and Senior Equity Research Analyst)

Appreciate all the details always. Thanks a lot.

David Zapico (Chairman and CEO)

Thank you, Brett.

Operator (participant)

Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners.

Scott Graham (Senior Equity Research Analyst)

Yeah. Hey, good morning, all, and thanks for taking my questions. I wanted to maybe unbundle Aerospace and Defense a little bit. I know you just did a little bit more just now, Dave, but when you went through your prepared or the question-and-answer period with A&D, you didn't specifically talk about defense. I know that that business has been a little bit flat down the last couple of quarters.

Are you suggesting that defense kind of gets better in the second half of the year? My follow-up on that would also be on the aerospace side. I know you just indicated that you're comfortable with your aftermarket business, but obviously, there's some passenger wariness to travel, and I'm wondering how that might roll into the second half.

David Zapico (Chairman and CEO)

Yeah. Great question. Specifically on defense, we're expecting balanced growth across all subsegments. We're expecting defense to grow in the second half of the year, and we'll see what gets passed in Congress and things. It is pretty optimistic right now. I think we're well-positioned there, and there's long-term threats, obviously. In terms of the aftermarket, you're exactly right. I mean, you're seeing some airlines with some stress. Again, that's why I was the planes are still flying.

Older planes, in particular, are flying longer because fleet retirements have slowed. I just think that our aerospace business and aftermarket is a U.S. and international business. Our international business, we have operations all over. I have a feeling that if the U.S. slows, the international market will strengthen or will stay strong because they're in a little bit different cycles. Right now, what we're looking at is all sides of the business are strong.

Scott Graham (Senior Equity Research Analyst)

Thank you. I just wanted to also ask if I could about capital allocation. You seem to have a little bit more jump in your speech when you're talking about capital. Seemed like you're a little bit more excited about M&A and then talked about share repurchases a bit more than you've talked about in the past. You have a lot of capital to deploy.

Your net leverage number is very low, obviously. I was just wondering, on the M&A side, are you seeing bid-ask spreads kind of get a little bit more favorable? On the share repurchase side, do you see being more active this year?

David Zapico (Chairman and CEO)

Yeah. I think that we're well-positioned, Scott. I mean, we have, as you said, our net debt does $0.7. When you go through just locations like this a couple of times in your career, you realize that opportunities are going to be there. We're working with people. I think good assets are still demanding good prices. It's not like you're seeing tremendous bargains. They've come in a bit. We have a really good pipeline. We have a good reputation. We're working with some people. There's a lot of processes going on.

I think that we're just in an ideal position to acquire some businesses and also act on the dislocation in stock price that could be occurring. When I put the two together, in a time where you may be on your back foot, we're not on our back foot. You're springing our steps forward lean. I think you got that right. This is a time where we can differentiate our performance.

Scott Graham (Senior Equity Research Analyst)

Thank you, Dave.

Operator (participant)

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research.

Rob Wertheimer (Founding Partner and Machinery Analyst)

Hi, thanks. I just wanted to kind of follow on that acquisition topic that's come up a couple of times. Obviously, there's a lot of uncertainty, maybe more on our side of the phone than what you guys appear to be seeing today, at least, with the comments around April and 1Q being okay.

How have the conversations around acquisitions changed? I mean, there's uncertainty on cost, a little bit of uncertainty in the demand environment. Do you have to wait until you get clarity? How do you kind of approach that uncertainty from an evaluation and/or closing standpoint? Thank you.

David Zapico (Chairman and CEO)

Yeah. That's a great question, Rob. It's still specific. For example, if you're going to acquire a business that has a huge supply chain from China, that may be a wait right now and delay because you see how that thing's going to play out. You deal specifically, you have other dynamics. We've been doing this for a long time. It is an uncertain time, especially when you look at it month to month, but we're looking at it in the long term. We've been through this before, and there are opportunities arising.

We got some issues we're managing through. We talked about them. We gave a tremendous amount of detail on them. Overall, I think that we're well-positioned to do well. I think that you're correct. Some deals are moving ahead. Some deals have been sidelined for a period of time because of the trade dynamics. There's enough in our pipeline that we're still working aggressively on them. Does that answer your question, Rob?

Rob Wertheimer (Founding Partner and Machinery Analyst)

It does. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joe Giordano with TD Cowen.

David Zapico (Chairman and CEO)

Hello, Joe.

Hi. This is Dan Ong for Joe. I had a question on commercial aerospace. You spoke about, obviously, U.S. travel volumes potentially declining, but you mentioned that international might remain strong.

In terms of actions that the airlines are taking, one of the major airline companies spoke about reducing maintenance spend. Is that something that you see broadly in the industry, or is that something that would impact you guys later? Basically, any color on what you're hearing from customers or how something like that would impact your business?

Yeah. I think that the impact on our business is relatively muted. The aftermarket piece of the business is a smaller part compared to the OE piece of the business and compared to the defense business. We could see a downturn in that part of the business. We're not seeing it now, but we're very diversified in specific areas. If there is a future downturn, we'll deal with it. Right now, it's not happening. That's a fact in our business.

I appreciate that. Thank you.

I apologize if I'm doing the call a bit late, but are you seeing any pre-buys broadly in the market? Specifically for you guys, was any part of your mitigation actions for tariffs that include you yourself pre-buying?

Yeah. I think that we build customized products. So we didn't see there could be some pre-buying, but we didn't see a lot of it. I think that we'd see that less than most, but there could have been some there. In terms of inventory purchases, we're certainly doing the smart things. We have operators in our distributed model that run their businesses like they own them. If they think they want to bring some inventory in because it makes sense, they're making those decisions.

Appreciate that. Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia (Senior Analyst for U.S. Industrial Technology)

Hi. Good morning, everyone.

David Zapico (Chairman and CEO)

Good morning, Andrew.

Andrew Buscaglia (Senior Analyst for U.S. Industrial Technology)

David, I wanted to ask you, your backlog has been at record levels almost every quarter now, going back as far as I can remember. I am curious, what gets this backlog to convert? Presumably, tariffs are now kind of delaying that conversion. Maybe you are not seeing that, but that is a thought I had. I guess this is very unique to AMETEK, and it sets you up pretty interestingly once it does start to convert. What gets it going in your opinion?

David Zapico (Chairman and CEO)

Yeah. I think that the backlog is at high levels. There are some delays related to tariffs. We talked about some of the delays for the products that we are shipping directly to China. We are talking about other situations where the tariffs are causing customers to go back and have to get more money to buy products.

I think the tariffs are going to cause some delays. I think we have a good tariff mitigation plan. We have good localization plans. There's some comfort in having that backlog as we navigate through this thing over the next, in terms of the coming quarters. You're right, there are some delays caused by the tariffs.

Andrew Buscaglia (Senior Analyst for U.S. Industrial Technology)

Are you noticing, I don't know, any patterns in the last few quarters where the backlog specifically is building? It sounds like A&D, even some of your medical stuff. Is there a concentration in one area that you're seeing? Can you talk a little bit more about the color within that backlog?

David Zapico (Chairman and CEO)

No, I don't think it's concentrated. I think you hit the areas. I mean, A&D backlog is a longer-cycle business. It's strong.

I think the big change is the MedTech with Paragon backlogs increasing.

Andrew Buscaglia (Senior Analyst for U.S. Industrial Technology)

Yeah. Okay. All right. Thanks, David.

David Zapico (Chairman and CEO)

Okay. Thank you.

Operator (participant)

Thank you. I'll now hand the call back over to Vice President of Investor Relations and Treasurer, Kevin Coleman, for any closing remarks.

Kevin Coleman (VP of Investor Relations and Treasurer)

Thanks again, Andrew. Thanks, everyone, for joining our call today. As a reminder, a replay of the webcast can be accessed in the investor section of ametek.com. Have a great day.

Operator (participant)

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.