Earnings Call Transcript - AME Q1 2021

Kevin Coleman, Vice President, Investor Relations

Thank you, Jake. Good morning and thank you for joining us for AMETEK’s first quarter 2021 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today’s call, we will be making forward-looking statements which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks 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 2020 or 2021 results will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization, and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020, and the realignment charge taken in the first quarter of 2020. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We’ll begin today’s call with prepared remarks by Dave and Bill, and then we’ll open it up for your questions. I’ll now turn the meeting over to Dave.

David Zapico, Chairman and CEO

Thank you, Kevin, and good morning, everyone. AMETEK delivered excellent results in the first quarter with stronger than expected sales growth and outstanding operational execution leading to earnings above our expectations. We returned to organic sales growth earlier than expected and as the economy continues its recovery, we're experiencing strong orders growth resulting in a record backlog. Operationally, our businesses are performing at a high level, delivering impressive margin expansion and strong cash flows. Additionally, we started the year with a notable level of acquisition activity, deploying a record $1.85 billion on five acquisitions thus far in 2021. These acquisitions, combined with our strong first quarter results and solid orders momentum, led us to substantially increase our full year sales and earnings guidance. Before I get into the results for the quarter, I wanted to again thank all AMETEK colleagues for their continued hard work and efforts over the last year as we manage through the pandemic. AMETEK’s success in navigating this difficult environment is a testament to the dedicated and highly talented employees across the company. While we are encouraged with the acceleration of the vaccine rollout, we remain focused on the health and well-being of our employees, and we'll remain vigilant in ensuring proper safety protocols are being followed. Now, let me turn to the first quarter results. Overall, sales in the quarter were up 1% versus the prior year to $1.22 billion. Organic sales were up 1% with a divestiture of Reading Alloys being offset by a 2 point foreign currency tailwind. Overall, orders in the quarter were a record $1.4 billion, up 16% compared to the same period last year with organic orders up 9%. This led to a book to bill of 1.15 and a record backlog of $2 billion. We are encouraged by the strong orders as many of our businesses are seeing improved demand conditions across their markets, while some of our longer cycle businesses have yet to return to growth. Operating income in the quarter was $293 million, a 6% increase over the first quarter of 2020. Operating margins expanded an impressive 110 basis points to 24.1%. EBITDA in the quarter was $356 million, up 4% over the prior year with EBITDA margins of 29.2%. This outstanding operating performance led to earnings of $1.07 per diluted share, up 5% versus the first quarter of 2020 and above our guidance range of $0.97 to $1.02. Cash flow in the quarter was also very strong, with operating cash flow up 5% to $284 million and free cash flow conversion of 122% of net income. Let me provide some additional details at the operating group level. Our Electronic Instruments Group and Electromechanical Group reported outstanding results in the first quarter, with both groups delivering positive organic sales growth and impressive margin expansion. Sales for our Electronic Instruments Group in the quarter were $791 million, up 2% over last year's first quarter, driven by modest organic sales growth and a 1.5% foreign currency tailwind. EIG’s operating income in the first quarter was $207 million, up 7% versus the same quarter last year, and operating margins expanded an impressive 110 basis points to 26.2%. The Electromechanical Group also delivered strong operating performance in the quarter with positive organic sales growth driven by strong demand in our automation business. EMG’s first quarter sales were $425 million, down 1% versus the prior year. Organic sales were up 2% in the quarter, while the divestiture of Reading Alloys was a 5 point headwind and foreign currency was a 2 point tailwind. EMG’s operating income was a record $105 million in the quarter, up 8% compared to the same quarter last year. And EMG’s operating margins expanded an exceptional 190 basis points to a record 24.7%. Now turning to acquisitions. As we have discussed, acquisition activity slowed considerably in 2020 due to the pandemic. During this time, we acted swiftly to appropriately align our cost structure with the demand environment and to protect and further strengthen our balance sheet to support a meaningful return of M&A in 2021. At the same time, we communicated that our business and acquisition teams remain very active in managing our pipeline of acquisition opportunities. These actions positioned us to capitalize on an improving acquisition environment in a significant manner, deploying $1.85 billion to acquire five excellent businesses thus far this year. Now, let me take a moment to provide additional color on these deals. I'll start with AMETEK’s largest ever acquisition, Abaco Systems. Headquartered in Huntsville, Alabama, Abaco is the leading provider of mission critical embedded computing systems used on key aerospace and defense platforms, along with specialized industrial applications. Abaco’s open architecture of computing and electronic systems are ruggedized to meet military standards and withstand harsh conditions, including extreme temperatures, altitude and high vibration. As a leading provider of differentiated technology solutions serving attractive high growth applications, Abaco nicely complements and expands our existing aerospace and defense platform. Abaco has approximately $325 million in annual sales, and we deployed $1.35 billion on the acquisition. Next, Magnetrol International. Based in Aurora, Illinois, Magnetrol is the leading provider of level and flow control solutions for challenging process applications across a diverse set of end markets, including medical, pharmaceutical, oil and gas, food and beverage and general industrial markets. Magnetrol is an outstanding strategic fit with our sensors, test and calibration business. Combined, these businesses form an industry leading sensor platform with a broad range of level and flow measurement solutions. Magnetrol has annual sales of approximately $100 million, and we deployed $230 million on the acquisition. Today, we announced the acquisition of NSI-MI Technologies, a leading provider of radio frequency and microwave test and measurement solutions based in Suwanee, Georgia. NSI-MI is an exciting addition to our test and measurement platform, given their deep expertise in advanced RF and microwave technologies. Their highly differentiated test and measurement solutions are uniquely positioned to support the continued development of advanced RF and microwave technologies for critical high growth applications, including 5G wireless communications, autonomous vehicles and specialized defense systems. NSI-MI has annual sales of approximately $90 million, and we deployed $230 million on the acquisition. In addition to these acquisitions, AMETEK also acquired two smaller yet highly strategic businesses, Crank Software and EGS Automation. Crank Software, which is headquartered in Ottawa, Canada, is the provider of embedded graphical user interface software and services. Crank’s award-winning storyboard software platform is ideally positioned to capitalize on the accelerating demand for smart digitally enabled devices. And EGS Automation is an attractive bolt-on acquisition for our Dunkermotoren business, expanding our presence in the attractive automation market. Located near Dunkers, German headquarters, EGS designs and manufactures highly engineered and customized robotic solutions for niche medical, food and beverage and general industrial markets. We would like to welcome the Abaco, Magnetrol, NSI-MI, Crank Software and EGS teams to AMETEK and look forward to working closely with them and supporting their continued growth. Combined, these acquisitions add approximately $535 million in annual sales aligned with attractive secular growth markets. Additionally, they provide AMETEK with excellent returns in line with our stated hurdle rates. Each of these integrations is going very well in the early stages of our ownership. AMETEK’s decentralized operating structure and proven operating capability provides us the flexibility to successfully integrate the businesses while continuing to pursue additional acquisitions. We're still working through a strong pipeline of attractive acquisition candidates. And as Bill will discuss in a moment, we have ample balance sheet capacity with approximately $1.8 billion available to support our acquisition strategy. In addition to continued capital deployment on acquisitions, we also remain committed to investing in our businesses. For all of 2021, we expect to invest approximately $95 million in incremental growth investments. These investments are largely centered around our research and development and sales and marketing functions, including targeted investments in support of our digital transformation strategy. Our investments in R&D continue to yield innovative advanced technology solutions, allowing us to expand our leadership position across our niche markets. For all of 2021, we expect to spend approximately $270 million or 5.5% of sales on R&D for our base businesses before adding in our recent acquisitions. This level of spend is up 10% over last year's R&D spend. Now shifting to our outlook for the remainder of the year. With our strong results in the first quarter, including solid orders growth and a record backlog, along with contributions from our recent acquisitions, we've increased our full year sales and earnings guidance. For 2021, we now expect overall sales to be up high teens on a percentage basis while organic sales are expected to be up high single digits on a percentage basis versus 2020. Diluted earnings per share are now expected to be in the range of $4.48 to $4.56, which is an increase of 13% to 15% over last year's comparable basis. This new range is a $0.28 midpoint increase from our previous adjusted earnings guidance of $4.18 to $4.30 per diluted share. For the second quarter, overall sales are anticipated to be up in the low 30% range versus last year's quarter. Second quarter earnings per diluted share are expected to be in the range of $1.08 to $1.10, up 29% to 31% over last year’s second quarter. Our revised guidance includes each of the five completed acquisitions. To summarize, AMETEK delivered an excellent first quarter with solid orders and sales growth, strong margin expansion, a high quality of earnings and meaningful capital deployment. These outstanding results speak to the strength and flexibility of the AMETEK Growth Model along with the resilience of our world-class workforce. With our differentiated technology solutions serving a diverse set of niche end markets aligned with attractive secular growth opportunities, we remain firmly positioned to deliver long-term sustainable growth. I will now turn it over to Bill who will cover some of the financial details of the quarter. Then, we will be glad to take your questions.

Bill Burke, CFO

Thank you, Dave. As Dave highlighted, AMETEK began the year with outstanding results highlighted by strong sales and orders growth and a high quality of earnings. With that, I'll provide additional financial highlights for the quarter. First quarter general and administrative expenses were $18.6 million, up $3 million from the prior year, largely due to higher compensation expense. As a percentage of total sales, G&A was 1.5% in the quarter. For 2021, general and administrative expenses are now expected to be up approximately $12 million on a return of temporary costs, including compensation. The effective tax rate in the first quarter was 19.5%, which was essentially in line with the adjusted 19.4% reported in the same period last year. For 2021, we continue to expect our effective tax rate to be between 19% and 20%. And as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate. Our businesses continue to do an outstanding job managing their working capital. For the quarter, operating working capital was 14.2%, down 470 basis points from the 18.9% reported in the first quarter of 2020, just excellent work by our teams on the working capital front. Capital expenditures in the first quarter were $18 million. For the full year, we now expect capital expenditures to be approximately $120 million. Depreciation and amortization expense in the first quarter was $65 million. For all of 2021, we now expect depreciation and amortization to be approximately $300 million, including after-tax acquisition-related intangible amortization of approximately $140 million or $0.60 per diluted share. As Dave highlighted, our businesses continue to generate tremendous levels of cash given our asset-light business model and strong working capital management. In the first quarter, both operating cash flow and free cash flow were up 5% over last year's first quarter to $284 million and $267 million, respectively. Free cash flow conversion was very strong at 122% of net income in the quarter. Total debt at quarter end was $2.35 billion, down from $2.41 billion at the end of 2020. Offsetting this debt was cash and cash equivalents of $1.1 billion. At the end of the first quarter, our gross debt to EBITDA ratio was 1.7x and our net debt to EBITDA ratio was 0.9x. As Dave noted, we've been very active on the acquisition front. During the first quarter, we deployed approximately $270 million on the acquisitions of Magnetrol, Crank Software and EGS Automation. Subsequent to the end of the quarter, we deployed approximately $1.58 billion on the acquisition of Abaco Systems and NSI-MI, resulting in $1.85 billion in total capital deployed on strategic acquisitions thus far this year. Also subsequent to the end of the first quarter, we announced we entered into a five-year delayed draw bank term loan for up to $800 million with existing lenders under our revolving credit facility. Proceeds from the term loan will be used to repay borrowings under our revolving credit facility following the recent acquisition activities and to provide capital to further support our acquisition growth strategy. Following the acquisitions of Abaco and NSI, our gross debt to EBITDA ratio and our net debt to EBITDA ratio is expected to be 1.9x and 1.7x, respectively, at the end of the second quarter. We continue to have an excellent financial capacity with approximately $1.8 billion of cash in existing credit facilities to support our growth initiatives. To summarize, our businesses drove excellent performance in the first quarter with high quality results that outpaced our expectations. We remain poised for significant growth in 2021, given our strong balance sheet, outstanding cash flows and the efforts of our talented workforce.

Kevin Coleman, Vice President, Investor Relations

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

Matt Summerville, Analyst

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

David Zapico, Chairman and CEO

Yes, Matt. That's an excellent question. And it's really driven by a mix of different items. So we have the stronger than expected organic growth that drove Q1 of our guide. And then we have an improved guide for Q2. And both of those two together are about $0.10, $0.10 of the $0.28. Really, our second half is unchanged on a core basis. It's too early to change that. And then we have an additional $0.18 from the deal. So the way to think about that is $0.10 from the core business, $0.18 from the deals, $0.28 in total.

Matt Summerville, Analyst

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

David Zapico, Chairman and CEO

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

Matt Summerville, Analyst

Great. Thank you, Dave.

Deane Dray, Analyst

Thank you. Good morning, everyone.

David Zapico, Chairman and CEO

Good morning, Deane.

Deane Dray, Analyst

Dave, I’d like to understand more about this situation. I'm hesitant to call it an M&A spree, but it seems like a significant barrier has been lifted. Can you provide some insights? Did the pricing start to make sense? You likely had these assets on your radar before COVID hit, so the easing of COVID-related uncertainties must have played a role. Please give us some context, as it's quite unusual to see such a number of deals that appear to be ideal matches happening in such a brief period.

David Zapico, Chairman and CEO

It's a great question, and I'll explain how we view the situation. We've navigated through many economic cycles and have observed how these cycles impact mergers and acquisitions. It was expected that deal activity would significantly decrease in 2020 due to the downturn, but we anticipated that pent-up demand would lead to a swift recovery, which we discussed last year. In 2020, our priority was ensuring that we were well positioned for a rebound, and a key part of that was strengthening our balance sheet. We increased our cash reserves during the height of the pandemic, finishing the year with $1.2 billion in cash and a net debt to EBITDA ratio of 0.9. As we mentioned last year, we also concentrated on expanding our pipeline of opportunities. We had been particularly active in developing our pipeline, and, as you noted, we had been collaborating with these companies on their deals for over a year. In the first four months, sellers were eager to proceed with their business sales. We acquired five companies, investing $1.85 billion in capital, which are all strategically important to us. Each aligns perfectly with our acquisition strategy, showcasing strong and unique technology positions. These acquisitions enable us to grow in promising areas such as embedded systems for aerospace and defense, testing for autonomous vehicles, 5G satellite communications, enhancing our IoT capabilities, and improving our automation business and software for embedded systems. We're very pleased with these companies and are confident they will thrive as part of AMETEK. We have tailored an integration strategy for each company, and they will leverage our global presence to boost efficiency. Crucially, we successfully completed these deals while meeting our standard financial benchmarks of a 10% return on invested capital and a 15% internal rate of return, which are vital for us to deliver strong returns on capital for our shareholders. The distributed operating model at AMETEK allows us to manage multiple acquisitions simultaneously while continuing to seek new opportunities. These acquisitions will be integrated into different segments of AMETEK, with a senior leader overseeing each integration process. Our opportunity pipeline remains robust, and as Bill mentioned, we have substantial capacity due to our strong cash flow. We hope to share more updates with you by the end of the year, as we feel very positive about our progress, which reflects extensive effort throughout the pandemic and beyond.

Deane Dray, Analyst

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

David Zapico, Chairman and CEO

Yes. If you think about the $0.28 midpoint rise on our guidance, $0.18 is from the deals this year and the other $0.10 is from the organic operations of the company.

Joshua Pokrzywinski, Analyst

Hi. Good morning, guys.

David Zapico, Chairman and CEO

Good morning, Josh.

Joshua Pokrzywinski, Analyst

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

David Zapico, Chairman and CEO

Yes, good questions. A few years ago, we let our investors know that we were expanding our deal pipeline to include slightly bigger businesses. And we included businesses that will be in the 200 million to 400 million range. And we deploy 1 billion plus capital on them, and Abaco is in that range. And we talked about doing a deal like that every so often. That doesn't necessarily mean that it's going to become our core, but those businesses are still working in our pipeline. But there are still many businesses that are, I’ll call them medium size that are the $100 million deals similar to NSI-MI and Magnetrol. Those are probably the most businesses of that size. And then we also had some smaller deals that they're really important strategically to operate and augment our internal growth. So you're going to see a mix of deals of those sizes. AMETEK is not going to buy a company our size or buy a company half our size. We just don't think that you can create value like that, but the size of the company now I think those companies in the $200 million to $400 million revenue makes sense, and you'll see those from us occasionally.

Joshua Pokrzywinski, Analyst

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

David Zapico, Chairman and CEO

Sure. Let me start by discussing our orders. We experienced a 9% growth in organic orders across the company, with EIG organic orders at 10% and EMG organic orders at 8%. This broad-based growth is encouraging. In terms of our portfolio, we’ve raised our expectations from mid single digits to high single digits, which is another positive sign of growth. I anticipate that the company will see sequential sales growth each quarter. Looking at our four market segments, both process and power and industrial sectors improved by high single digits, while automation and engineering also saw similar improvements. However, we expect the aerospace and defense segment to grow at a low to mid single-digit rate, with defense performing better than commercial. Overall, the business is doing well. I want to highlight the two long-cycle segments: oil and gas, which we expect to trend upward in the second half of this year, and commercial aerospace that won’t see improvement until 2022 or 2023. Nevertheless, we've aligned these businesses appropriately for the current activity level, so any small gains along the way will be highly profitable for us. We're optimistic about the recovery with long-cycle businesses beginning to contribute in the future and a noticeable pickup in mid-cycle activities.

Joshua Pokrzywinski, Analyst

Got it, that's helpful. Congrats on the quarter, all the deals and best of luck.

David Zapico, Chairman and CEO

Thank you, Josh.

Allison Poliniak, Analyst

Hi. Good morning, guys.

David Zapico, Chairman and CEO

Good morning, Allison.

Allison Poliniak, Analyst

And just sort of in line with that, sort of the mid and long cycle businesses, could you maybe talk about the core operating leverage that you expect to see this year based on some of the orders that are coming in for you, any color there?

David Zapico, Chairman and CEO

Yes, that's a good question. We had excellent margin performance in the first quarter, with strong margin improvements in both EIG and EMG, effective execution, solid price inflation, and excellent productivity. We anticipate core incrementals of 35% for the year, which includes bringing all the temporary costs back into the business. Core operating margins are expected to increase by about 40 basis points, so we will grow margins. However, it's important to note that the acquisitions are margin dilutive, so our reported margins will decrease slightly. We typically acquire businesses that have lower margins than AMETEK, and within a couple of years, we work to elevate them to the AMETEK margin levels. It’s challenging to acquire businesses that match AMETEK's profitability of around 29% to 30% EBITDA, but we have significant opportunities to enhance profitability across these businesses. I believe the core operating leverage will be positive, even though the reported margins will be impacted by the acquisitions.

Allison Poliniak, Analyst

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

Bill Burke, CFO

Yes, Allison, I would expect that to probably return. It will add some costs back to the balance sheet. As sales increase, you will see more receivables appear on the balance sheet, and we will focus on ensuring we have the appropriate inventory levels to support growth and meet our customers' needs moving forward. I believe we performed well in the first quarter. Although we increased receivables and inventories on the balance sheet, our teams successfully secured advanced payments from customers, which was a positive outcome. I anticipate seeing that trend rise somewhat throughout the rest of the year.

Allison Poliniak, Analyst

Understood. Thank you.

David Zapico, Chairman and CEO

Thank you, Allison.

Nigel Coe, Analyst

Thanks. Good morning, everyone.

David Zapico, Chairman and CEO

Good morning, Nigel.

Nigel Coe, Analyst

Good morning. I want to revisit the topic of deal flow, especially in light of the recent deals you've completed. You have a strong track record in sourcing and acquiring private and family-owned companies. With potential changes to capital gains tax rates and other tax reforms approaching, I'm curious if you've noticed an uptick in the interest from business owners looking to sell. Are you observing more readiness among them to proceed with sales given these upcoming changes?

David Zapico, Chairman and CEO

There is some of that, Nigel. However, what I observe is a significant number of private owners. Some of these private owners from the businesses we acquired have navigated through the pandemic and are now considering a changed world. They are looking for a larger partner to provide stability, capital, and access to resources that they previously lacked. I believe that the uncertainty in the overall economy, particularly the uncertainty brought on by the pandemic, has made private company owners more inclined to consider exits that they may have planned for a few years down the line. That seems to be what's happening, and we are noticing a bit of that interest.

Nigel Coe, Analyst

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

David Zapico, Chairman and CEO

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

Rob Wertheimer, Analyst

Hi. Good morning.

David Zapico, Chairman and CEO

Good morning, Rob.

Rob Wertheimer, Analyst

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

David Zapico, Chairman and CEO

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

Brett Linzey, Analyst

Hi. Good morning, all.

David Zapico, Chairman and CEO

Good morning, Brett.

Brett Linzey, Analyst

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

David Zapico, Chairman and CEO

Thank you for the questions, Brett. Defense accounts for about 12% of AMETEK's sales. When evaluating Abaco, we wanted to ensure that, with a changing administration, we could continue to grow. Over the past three to four years, Abaco has achieved approximately 16% growth, which is impressive and indicates a healthy business. We believe embedded computing presents one of the most compelling growth opportunities in aerospace and defense, particularly due to the significant Department of Defense emphasis on modernizing and upgrading existing defense platforms. This modernization requires capabilities that are heavily focused on processing and data. Additionally, Abaco has secured over $1 billion in design wins that will support its growth in the coming years. We are optimistic that Abaco is well-positioned to counter any potential challenges from overall DoD funding. For our projections, we anticipate a high single-digit growth rate as opposed to the mid-teens growth we have seen recently, allowing for a more conservative estimate. The management team is still working towards achieving those higher growth rates, while we have planned conservatively. Looking at AMETEK’s overall defense involvement beyond Abaco, we are aligned with current trends, particularly in electronics, including cooling and heating solutions for environmental controls, which have been performing well. For the year 2021, excluding Abaco, we expect our core defense business to grow into the high single digits. We initially forecasted mid single digits, but a strong first quarter led to an improved outlook for the defense sector to mid to high single digits.

Brett Linzey, Analyst

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

Bill Burke, CFO

Yes, if we used the $1.8 billion we mentioned, there would certainly be increased capacity available. Our leverage would still remain below 2.5 at that time, giving us additional room to take on more if the right opportunities arise. Therefore, from a balance sheet perspective, that is not a concern. As we always emphasize, it’s crucial to ensure we have the management capability to effectively handle those deals, which Dave previously discussed in his comments.

David Zapico, Chairman and CEO

Yes. Our strategy is really not capacity constrained. Even at 2.5, we're well below our covenants. Our strategy is constrained by finding good deals that are differentiated that meet our requirements, so we can improve. So we're optimistic that we're going to be able to do that. And hopefully, we're talking to you again later this year. And we have a good pipeline, but it's really finding those deals that we get confident we can get a return. That's the key issue, Brett, not finding them.

Joseph Giordano, Analyst

Hi. Good morning, everyone.

David Zapico, Chairman and CEO

Hi, Joe. How are you doing?

Joseph Giordano, Analyst

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

David Zapico, Chairman and CEO

Yes, that's a great question. We have spent significant time on this. Based on our discussions and specifically with Abaco, they have secured orders for their plans in 2021. We pressed for information, and they responded positively, which was a key focus during our due diligence. While we don't have complete access to the business, the Abaco team is very capable and has a good understanding of the situation. I believe we are well equipped to address any supply chain challenges in that area.

Joseph Giordano, Analyst

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

David Zapico, Chairman and CEO

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

Kevin Coleman, Vice President, Investor Relations

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

Operator, Operator

Thank you. Our first question comes from Matt Summerville from D.A. Davidson. Your line is open. Thank you. There are no further questions. I would now like to turn the call back to Kevin for closing remarks. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.