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AMETEK Inc
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Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2020 AMETEK, Inc. 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. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. It is now my pleasure to introduce, Vice President of Investor Relations, Kevin Coleman.
Thank you, Andrew. Good morning. And thank you for joining us for AMETEK’s fourth quarter 2020 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. AMETEK’s fourth quarter and full year results were released earlier this morning and are available on market systems and in the Investors section of our website. This call is also being webcasted and can be accessed on our website. The webcast will be archived and made available on our site later today.
During the course of today’s call, we will make 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 2019 or 2020 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 will begin today with prepared remarks by Dave and Bill, and then open it up for questions. I will now turn the meeting over to Dave.
Thank you Kevin and good morning, everyone. AMETEK concluded 2020 with a strong fourth quarter, delivering record operating results despite ongoing challenges presented by the pandemic. Our businesses saw solid sequential sales and order improvements in the quarter, while year-over-year growth turned positive across several of our businesses. We also drove exceptional operating performance in the quarter, leveraging our broad set of operational excellence initiatives. These efforts led to record backlog, margins, and cash flow as well as a high quality of earnings that exceeded our expectations, positioning us extremely well as we look ahead to 2021.
The safety of our employees remains our number one priority. We continue to adjust our practices and enforce our safety protocols across our businesses to help limit the possible spread of the virus. While we are cautious in the short-term, given COVID-19 and ongoing travel restrictions, we are highly confident in the strength of our businesses and our ability to deliver exceptional growth and shareholder returns over the long-term. The AMETEK growth model continues to provide the framework for long-term sustainable success, and our performance in 2020 was a testament to the strength and flexibility of the model.
Now, let me return to our results for the quarter. Sales in the quarter were $1.2 billion, down 8% compared to the fourth quarter of 2019. Organic sales were also down 8% with a divestiture of Reading Alloys of 3 point [ph], the acquisition of IntelliPower contributing one point to growth, and foreign currency added two points. As we saw in prior quarters, our commercial aerospace business was the most impacted by the pandemic with sales down approximately 35% in the quarter. Order is continuing to improve with our book to bill at 1.07 for the fourth quarter. This led to a record backlog of $1.8 billion, providing us with a positive line of sight into 2021.
Operating income in the fourth quarter was $298.1 million, up slightly from the fourth quarter of 2020 and operating margins were a record 24.9%, up an impressive 210 basis points compared to the prior year period. EBITDA in the fourth quarter was a record $360.7 million and EBITDA margins were also a record of 30.1%, up a robust 300 basis points over the fourth quarter of 2019. This operating performance led to earnings per diluted share of $1.08 matching last year’s fourth quarter results and comfortably ahead of our guidance for the quarter. Our business has also delivered outstanding cash flow during the quarter, with operating cash flow up 13% to a record $386 million and free cash flow conversion exceptional 158% of net income.
Now, let me provide additional detail of the operating group level for the fourth quarter. The Electronic Instruments Group delivers superb operating performance despite challenging market conditions. EIG sales in the fourth quarter were $819.4 million, down 7% from the prior year and in line with our expectations of solid sequential improvement. Organic sales were down 10% while the acquisition of IntelliPower contributing 2% and foreign currency contributing 1%. Commercial aerospace remained the largest driver of the sales weakness, our other EIG businesses saw improvements versus prior quarters. Our materials analysis division returned to growth in the fourth quarter while other EIG businesses, including Zygo and Telular are also again getting year-over-year growth. Despite the overall sales decline, EIG’s operating income in the fourth quarter increased 3% over the prior year to a record $236 million and operating margin has reached a new high of 28.8% expanding an exceptional 270 basis points over the same period in 2019.
Our Electromechanical Group also delivered strong operating results in the quarter. EMG sales were $379.5 million down 11% from the fourth quarter in 2019, driven in large part by the divestiture of Reading Alloys. Organic sales were down 4% with a divestiture and eight point headwind and foreign currency adding two points. In addition to continued strong growth across our defense businesses, we were pleased to see our automation business generate solid organic growth in the quarter. Fourth quarter operating income for EMG was $79.8 million and operating margin expanded an impressive 110 basis points to 21%.
Now for the full year results. Despite very difficult end market conditions and meaningful top-line headwinds in 2020 AMETEK was able to expand full year operating margins while delivering record levels of operating and free cash flow, truly outstanding performance. Overall sales for the year were $4.5 billion down 12% from 2019. Organic sales declined 13% with acquisitions adding 4%, the divestiture of Reading Alloys a 3% headwind, and foreign currency flat for the year. Operating income in 2020 was a $1.1 billion and operating margins were a record 23.6% expanding 80 basis points over 2019. EBITDA for the year was $1.32 billion and EBITDA margins were a record 29.2% up 230 basis points from last year. This led to full year earnings of $3.95 per diluted share down 6% versus the prior year. As bill will highlight our businesses did a fantastic job managing our working capital, which helped drive a record level of cash flow while full year operating cash flow up 15% to $1.28 billion.
In summary, while 2020 was very challenging, I'm extremely proud of the way AMETEK colleagues managed through the pandemic and delivered tremendous results. Before I cover the outlook for 2021, I wanted to highlight certain key elements of the AMETEK growth model and how each position us for long-term success. First and foremost, AMETEK’s proven operational acumens stood out in 2020 with our businesses doing an incredible job, driving our operational excellence initiatives. In the fourth quarter, we generated 60 million in total cost savings with 50 million in structural savings and 10 million in temporary savings. And for the full year total incremental savings versus the prior year were $235 million with approximately $145 million of structural savings and $90 million in temporary savings, including furloughs, travel reductions, and temporary pay actions.
As we look ahead to 2021, we expect a much more modest level of temporary savings versus 2020 as the economy continues to recover from the worst of the pandemic and we continue to add back these temporary costs. However, we do expect to drive meaningful, incremental structural savings across our various operational excellence initiatives, including across our global sourcing activities. For the full year 2021, we expect approximately $140 million of incremental operational excellence savings.
Shifting to new product development. Even through this downturn we remain committed to investing in new products and solutions that help our customers solve their most complex challenges. In 2020, we invested $246 million in research, development, and engineering, approximately 5.5% of sales. These investments led to outstanding innovation and dozens of new product launches. In the fourth quarter our Vitality Index or the percent of sales generated from products introduced over the last three years was an impressive 25%. In 2021, we expect to invest approximately $270 million or 5.5% of sales in research development and engineering to enhance our position as a global technology leader. This is a 10% increase over 2020 RD&E [ph] spend.
Finally, I want to touch on our acquisition strategy. Prior to the onset of the pandemic last year, we acquired IntelliPower, a leading provider of high reliability, ruggedized uninterruptible power systems for mission critical defense and industrial applications. IntelliPower has integrated nicely into our power systems and instruments division and is performing well. While deal flow in 2020 was impacted by the pandemic, we were seeing continued improvements in the M&A markets and are managing a strong pipeline of acquisition targets across a broad set of markets. As Bill will discuss shortly, AMETEK has significant balance sheet capacity and when combined with our robust cash flow generation provides us with meaningful capital to support our acquisition strategy, which remains our number one priority for capital deployment.
Now shifting to our outlook for the year ahead. While we remain cautious in the short-term, given the uncertainty and the timing and pace of the recovery, we're confident in the strength of our businesses and our ability to manage through these uncertain times. We continue to manage our businesses safely and prudently while ensuring continued investments in key growth initiatives. For the year we expect both overall and organic sales to be up mid-single-digits versus 2020. Diluted earnings per share for the year are expected to be in the range of $4.18 to $4.30 up 6% to 9% compared to 2020. For the first quarter, we anticipate continued year-over-year impact from the pandemic with overall sales down low to mid-single-digits and first quarter earnings of $0.97 to a $1.02 per share, flat to down 5% versus the prior year.
In summary, the strength of the AMETEK growth model, the asset-light nature of our businesses, our leading positions in attractive niche markets, and our world-class workforce will continue to drive long-term sustainable success. I'm confident that we are emerging from this unprecedented economic environment even stronger than we were before. Again, I would like to thank all of our employees for their continued hard work and tremendous efforts as we manage the ongoing global crisis. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter. Then we'll be glad to take your questions. Bill.
Thank you, Dave. As Dave highlighted, AMETEK had an outstanding finish to 2020 with record operating performance and a high quality of earnings in the fourth quarter. I would also like to thank and recognize all of my AMETEK colleagues for their significant contributions in 2020. The way our teams persevered to the challenges of the past year was truly impressive. With that I will provide additional financial highlights for the fourth quarter and the full year, but we'll also provide some additional guidance for 2021.
Fourth quarter general and administrative expenses were $17.7 million up modestly from the prior year. For the full year G&A was down 11% from 2019 due to lower compensation costs and other discretionary cost reductions. And as a percentage of total sales was 1.5% in both years. For 2021 general and administrative expenses were expected to be up approximately 10% due primarily to the return of temporary costs, including compensation. The effective tax rate in the fourth quarter was 20.1% up from 17.6% in the fourth quarter of 2019. The difference in tax rate was due primarily to the finalization of tax returns in each of the years. For 2021, assuming the current tax regime, we anticipate our effective tax rate to be between 19% and 20%. And as we stated in the past actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.
Our businesses continued to manage their working capital exceptionally well. Operating working capital was an impressive 14% in the fourth quarter, down 330 basis points from the 17.3% reported in the same quarter last year, reflecting the outstanding work by our teams. Capital expenditures were $37 million in the fourth quarter and $74 million for the full year. Capital expenditures in 2021 are expected to be approximately $110 million. Depreciation and amortization in the quarter was $65 million and for the full year was $255 million. In 2021 we expect depreciation and amortization to be approximately $260 million, including after-tax acquisition related intangible amortization of approximately $117 million or $0.50 per diluted share.
As Dave highlighted our businesses continue to generate tremendous levels of cash flow. Operating cash flow in the quarter was a record $386 million up 13% over last year's fourth quarter. Free cash flow was also a record $349 million up 16% over the same period last year, resulting in a free cash flow conversion of 158% of net income. Cash flow for the full year also set new record levels. Operating cash flow for 2020 was $1.28 billion up 15% over the prior year and free cash flow was $1.21 billion, a year-over-year increase of 19%. Full year free cash flow conversion was 158% of net income adjusted for the Redding Alloys gain.
Total debt at December 31st was $2.41 billion down from $2.77 billion at the end of 2019. Offsetting this debt is cash and cash equivalents of $1.2 billion. Our gross debt to EBITDA ratio was 1.8 times and our net debt to EBITDA ratio was 0.9 times at year-end. We enter 2021 with approximately $2.6 billion in liquidity to support our growth initiatives. This liquidity, along with our strong balance sheet and no material debt maturities until 2024 enables us to manage the continued effects of the economic downturn, will also deploy meaningful capital on strategic acquisitions.
To conclude our businesses performed exceptionally well in the fourth quarter and throughout the year, delivering a high quality of earnings in a very challenging environment. Our outlook for 2021 and beyond remains positive, given our strong financial position, our proven growth model, and our world-class workforce. Kevin.
Thank you, Bill. Andrew, we're now ready to take questions.
[Operator Instructions]. The first question comes from the line of Allison Poliniak with Wells Fargo.
Hi guys, good morning.
Good morning, Allison.
Just obviously ending the piece on the 2.6 billion of liquidity, as you think of that M&A pipeline today, 2020 and even the beginning of 2021 there has been a lot of noted challenges. Has that caused you to alter sort of what's attractive in your mind and towards the AMETEK portfolio?
That's a great question, Allison, and not really. I mean, M&A remains our top priority for capital allocation and we feel there's going to be substantial opportunity for us. We -- as you mentioned with the liquidity and our cash flow, we have a very strong balance sheet and we're really positioned to use that as a lever to increase our earnings. And we're seeing an uptick in pipeline opportunities. You started to see some of the pent up demand happen in Q4, the market is very hot, we're maintaining our discipline, but we're working on deals of all sizes. We have some larger deals we're working on and we have some AMETEK typical size of the ozone. We even have a couple of small technology acquisitions we're looking at. So, I would say we've never been busier on M&A and we're looking at it the same way. We think deploying our capital on M&A is the best way to get our shareholders return.
Now within that, are there any verticals that have, I guess, increased in importance in your view just given what's happened?
Yeah, I think, we have a 42 business units and they all develop an acquisition plan and we're looking at all of those. And, we're certainly seeing properties come available in all areas. We're also looking at some places where we can get a high return on capital. So I'd say that, our bias is toward more technology deals, but not necessarily a vertical market. We're looking at all of them right now.
Agree. And then just last, on that temporary cost savings, I know Bill you talked about G&A being up 10%. Should we layer that in more so in the back half, how should we think of that cadence of that coming back?
I'd say primarily that the temporary costs with some small exceptions in the first quarter as we continue to see the effects of the pandemic. They're going to be coming back basically I'd say evenly across the year, a little bit lower in the first quarter.
Great. Thank you.
Thank you.
Thank you. And our next question comes from the line of Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone.
Good morning Deane.
Hey, nice, strong finish to the year. And would like to hear what the approach was this time to providing guidance, I mean, there's still so much COVID uncertainty in the macro so what was different this time as you frame guidance and maybe give us some insight into how the cadence of the monthly sequential improvement that you saw this year?
Sure. And thank you for your comments on the quarter. We sat back and -- near the end of the year and into January, there was situations that occur where you're having to close down your plants for a couple of days, get everyone tested, clean it and people were bringing the virus to work, I'll say. And it created a difficult operating environment. And certainly it made us think through giving guidance for the quarter and for the year. But as we thought through it, and we were executing well, so well that we got confident that we're able to operate and execute with the virus and we have good processes and protocols in place. And we're seeing the -- we're mid cycle and long cycle businesses and we're seeing those demand pick up later in the year we are assuming and that all went into a discussion. We talked about it several times, but we feel comfortable with the guidance that we're giving and we feel comfortable that we're going to be able to execute and we feel the processes and procedures we've developed are allowing us to operate safely. And we also feel we're feeling an uptick and we're looking for the short cycle businesses and markets and seeing them trend up and we're assuming that's going to happen for us a couple of quarters later.
That's helpful. And if we're looking at first quarter guide, and is there any of the usual seasonality in effect. I mean, just with COVID it's uncertain how much is a reaction to coming back the recovery, but is there any of the usual seasonality in effect?
Yeah. What happens to us usually in Q1 is that our processed businesses are stronger in Q4 and not as strong in Q1, that's the seasonality. So you have a drop in revenue there. And then on the bottom line in Q1, along with the contribution margin effect of that, you have a lack of Reading and you also have us resetting some compensation G&A type costs. So, you add that all together and our top line guide for Q1 is down low to mid-single-digits. And we gave the earnings range of $0.97 to $1.02. So, that's the way that we got that. And you also asked about the cadence and I didn't answer that in the first part of your question. The cadence throughout the quarter was a pretty typical trend for us. Orders grew sequentially every month with December being the strongest month of the year and in fact strongest month of the quarter -- of 2020. And in terms of sales, we had a similar pattern with growing sequentially. December was strong and also the strongest month of the year. So that was good. And then January, orders in sales, they ended up at a level of support over Q1 in our full year guide and I would characterize them as solid. So continuing the positive trend, when you think about the low to mid-single-digit guide, back in Q2, we had organic growth of about minus 22% and that improved in Q3 where it was minus 14%. And then you see the last quarter Q4 completed was minus 8%. So to go from that minus 8% organic to minus low to mid-single-digit organic, you see a continuing improvement. So we have calendarization seasonality issue, but underlying it is a continuing sequential improvement of the business.
Yeah, that really sounds and looks like a V-shape recovery to us. I know there is a lot of hard work in getting that done, I appreciate it. And you also answered my question about January, so I'm all set. Thank you very much.
Thank you Deane.
Thank you. And our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.
Hey, good morning guys.
Hey, Josh.
Dave, just on the incremental margin expectation. I know there's a lot of moving pieces, some of what you touched on and probably chief amongst those is maybe to start the year, organic growth no need to get out ahead of yourself on expectations, but as the year progresses or as growth starts to accelerate, what should we think of is kind of the underlying incremental margin for AMETEK right now, I know that with small numbers on the growth, it kind of gets distorted by other items, but what the real number is as we move forward?
Yeah, I think that's a great question. And you will recall that we talked about it last quarter, we had about 90 million of temporary costs that we're going to have to fit back in and to the budget model this year. And what it turns out is that we got really strong OPEX cost reductions of 140 million. On top of that we have continued stronger pricing and when you take the organic growth combined with the OPEX structural savings combined with the pricing, we're able to absorb the temporary costs coming back to the P&L and end up with an incremental margin of about 35%. Now, typically AMETEK would have a bit higher incremental margin, but the 35% is a solid number and it includes absorbing all the temporary costs. So we feel comfortable with the margin forecast that we have for 2021. We think core operating margins will be up about 40 basis points. And we believe the incremental margins will be up about 35%.
Got it, that's helpful. And then just on the end markets themselves, obviously a pretty heady cocktail of businesses inside the portfolio. Just given that this has been such an atypical downturn and recovery, anything that you would call out as maybe being ahead of normal kind of recovery trajectory or behind for that matter relative to some of these early mid and late cycle markets that you guys participate in?
Not really. I think the military market has been very strong for us. We've talked about that. We think that'll continue into 2021. We are seeing a tick up in the semiconductor market, that's not atypical. A lot of people are seeing that, but we have some technology that's a more tied to the EUV, which is the next technology in semiconductor. So we're seeing some research demands in that area. That business looks solid for us. And in general, everything is behaving as we would think it would and we do have the mid and long cycle businesses and the aerospace business we're not assuming it's going to -- the commercial aerospace business we're not assuming a recovery during, it's flat up a bit, flat low single for 2021. Most of the other markets are up mid-single-digit.
Yeah, that's great detail. Thanks Dave.
Sure.
Thank you. And our next question comes from the line of Nigel Coe with Wolfe Research.
Good morning. Wanted to sort of pick up on the FY 2021 sort of [Technical Difficulty] anything by geography that you've called out next year in your plant process, I'd be particularly interested in what your views are on the U.S. and China markets?
Yeah, good question. Yeah, I'll start with Q4. In Q4 there were really mixed trends across geographies and with Asia returning to strong growth and Europe and U.S. seeing continued sequential improvement, but still showing negative organic growth. And we talk about Asia first, we had a great quarter in Asia. We were up low double-digits, and we had strong growth in both our process and automation businesses. And China in particular grew 22% with us in the quarter. So a really big pickup there in the process and automation. And if we talk about prior quarters, automation picking up, the process business followed, and that had a big impact on EIG margins as you can see in the accounts. When you think about the U.S. we were down low double-digits on broad based weakness, other than the defense market. Defense market was strong and we think about Europe, we were down mid-teens on broad based weakness, other than the automation business. So, in the U.S. and in Europe it was down except for small parts of our portfolio that were bright spots, but in China we really knocked it out of the park. In Asia we did well. What we're thinking, the incremental improvements in 2021 are going to continue in Europe and the U.S. so the sequential improvements that we've been seeing are going to continue. And, we think that Asia or quotation activity Asia is going to maintain strength. So I'm not sure if we're going to go up 22% in China, every quarter, but certainly we're seeing strength in the pipeline in China and [indiscernible].
Great, thank you. And, regards to the M&A pipeline, you talked about variety of different sizes in there, how big multiples and multiples right now what was seen in the public multiples is obviously very high, how confident are you, you can still do deals, ROI to make sense to you?
Yeah, we've been able to do it so far, and we have a very strong pipeline and so I'm pretty confident that we're going to be able to keep doing that. I mean, that's a -- there's a lot of yields. The thing that's happened is we're able to drive more synergy than we were a few years or five or 10 years ago. We have a great synergy capability to improve businesses and we're disciplined, returns matter to us, and I'm confident that we're going to be able to deploy the cash on M&A.
Right, thanks again.
Thank you. And our next question comes from the line of Brett Linzey with Vertical Research.
Hey, good morning everybody.
Good morning Brett.
Hey, I wanted to come back to the structural cost programs. Obviously, you guys have done quite a bit over the last couple of years to, navigate the pandemic, but also integrate acquired businesses. As we think about the programs in 2021, do those continue on a structural basis or do you think you've got the businesses where they need to be from a cost structure standpoint?
I think there's still structural programs that we're going to execute in 2021. And it's ongoing because we're combining businesses and we're implementing acquisition synergies. And we've got that 140 million in structural costs and there's 80 million of structural savings, there's 80 million of OPEX savings in that. So remember we have a spillover from 2020, but there's ongoing program. So the way I look at it is we have over 150 operating facilities and we have a strategic plan on OPEX, and we take the advantages to combine and make things more efficient all the time and 2021 will be no different.
Got it, that's great. And just on back to the price cost question, what are you embedding for price via gross price realization for 2021 and how are you thinking about freight, steel, other raw mat inflationary pressures against that? And then any items in terms of supply chain that are a worry point that we should be thinking about or constraining your ability to serve customers?
Good question. So, for all of the 2020 we had about 1.5 points of price and total inflation was about 1 point. So at a 50 basis point spread for all of the year but actually in Q4 of 2020, our pricing ticked up a bit. So it was a little higher than 1.5%. So that added to margins and for 2021, we see slightly higher pricing than 1.5%, but we're going to have slightly higher inflation. So you think about it as a 50 basis point spread, a little higher price, a little higher inflation, and we are seeing commodity price inflation. We are seeing transportation costs, but we got them under control. We have very good supply chain people and we've got that factored in and with our highly differentiated portfolio and our leadership position in these niche markets, we have those kind of costs we're typically able to pass them on to the customer. And I've been very pleased to see our pricing out of -- to the pandemic. Now in terms of material shortages I mean, there's a little bit of a -- there are issues in the semiconductor market that had been in the press where you see the automotive industry having some issues now and our supply chain people are on top of that and working it. But it hasn’t cost us any missed [indiscernible] or anything like that. So, it is just something to manage and an issue we are working on.
And just one more on prices, is it fair say with the exit of Reading that your volatility on price up and down has dampened somewhat as part of the total portfolio, is that fair?
That’s exactly right Brett. You are right on.
Got it, okay. Great, I will pass along. Thanks.
Thank you. And our next question comes from the line of Christopher Glynn with Oppenheimer.
Hey, thank you. Good morning everybody.
Good morning Chris.
Nice numbers, I think the balance sheet might look the most ample I have ever seen. So, in my understanding haven’t covered you a long time, usually guide kind of base case revenue with some hedge in the implied margin outlook and you went through that with Josh’s question. In this case you are entering 2021 with record backlog and minus 13% organic comp for the full year. I think it sort of suggests mid-single-digit pretty in the bag barring significant macro disruptions. Just want to reconcile the organic comp with the backlog numbers if you could.
Yeah, the backlog number is customer is feeling confident and placing orders for the year. It is not just one quarter, the customers are getting their orders in for the first couple of quarters of the year and I think that AMETEK you have covered a long time, we are mid and long cycle businesses so we typically see the uptick couple of quarters later. Our automation business is seeing it now but the long cycle businesses in aero and oil and gas are not seeing an uptick. So the fact that we have a negative organic growth in Q1 and there is four numbers for the year, when you have one number that is negative and you add them up, you are at mid-single-digits.
Got it, thanks for that.
Okay.
Thank you. And our next question comes from the line of Scott Graham with Rosenblatt.
Hey, good morning. Great job on the cost side as usual and supply chain. I wanted to ask maybe a little bit more on the cost add backs. Dave is the plan to add back the entire 90 that you took out and if so how does that go into the segments?
Yeah, I don’t think we will add back the entire 90 but I will give you an example. We left the temporary cost savings in Q4 were $10 million. So we really ramped on by that point. In Q1 it is significantly lower than that. So, it is -- and we will adjust that as we go through the year but I think that temporary costs are going to become so small as we go throughout the year they are not meaningful anymore. So it is really the structural savings that drive the margin improvement.
Got is and then maybe Bill one for you, the working capital numbers were like pretty incredible. I was just wondering it’s going to have to go the other way this year, what would you think the working capital percentage increases by in 2021?
Well, as you think about it yeah, our businesses did a fantastic job on working capital, taken inventories down, receivables performance was the best I have seen in my 30 years with the company, 30 years plus. So it was fantastic. Will that continue, well I don’t know. We are going to work real hard to make sure it does and our businesses are focused on that. So will there be some give back next year, I expect it to be a little bit but we are very much focused on trying to keep that at the levels we have seen in this fourth quarter and the full year.
And the key point for us Scott is, I think we had 158% free cash flow to net income conversion in 2020. And for 2021 we're targeting 110%. So above a 100% even this environment, certainly we're going to have to put some cash back on the balance sheet, but we're operating very efficiently and, we're going to put it back on the balance sheet grudgingly.
Got it. Thank you. Would you mind if I squeeze in one more?
Yeah, sure.
Sure. So, in terms of the liquidity number, I mean, Christopher's comment was like, I haven't seen this level of liquidity in your balance sheet in my time. Is there room in there for some share buybacks if the first half of the year is maybe a little bit slower on M&A than you're hoping because I know how disciplined you are there, is there room for share buybacks in that?
Clearly our number one priority is M&A. And I really think we're going to be able to deploy the capital on M&A but, if we can't, we'll find a way to get the cash back to you, either through buybacks or dividends. We have a consistently increasing dividend and we've been opportunistic on share buybacks. But I'm not feeling that way right now. I think there's an incredible acquisition opportunity for us and for physicians at a level and to your point, a liquidity position that we haven't been at before. So it's very exciting to me, and I'm very excited about the pipeline.
Great, thank you.
Thank you.
Thank you. Your next question comes from the line of Richard Eastman with Baird.
Yes, good morning.
Hey Rick, we don't hear you. So Andrew, why don't we go to the next question.
Certainly. Our next question comes from the line of Andrew Obin with Bank of America.
Hi guys, good morning.
Good morning, Andrew.
Hey, congratulations on another great quarter.
Thank you.
Just a question for you on orders, we sort of tried to back into the number from your book to bill, as it were sort of calculated something like down around 8%. I was wondering if we could talk about the auto rates and just maybe give us color by market, I mean, I think it's sort of highlighted, China [ph] highlighted aerospace, but maybe a little bit more color there?
Yeah, I'll give you the numbers. Our overall orders were down 8%. But organic we're down 2%. And EIG organic we're down 2% and EMG organic we're down 1%. So what you backed into with the overall orders was correct and we had a good organic month at minus two.
Got you, that makes a lot of sense. Thank you. Can you just talk about how you guys are thinking about your own CAPEX spending into 2021 and how you have changed in any way, shape or form, how you think about where you will spend CAPEX on, what you spend CAPEX on into aftermath of the pandemic?
Yeah, CAPEX is -- we plan on 110 million this year. And opportunities -- we have opportunities that are going to provide excellent returns. For growth CAPEX, efficiency improvements, expanding our footprint in emerging markets, and if you recall in 2020 we talked about at mid-year, we had some expansion projects in emerging markets, and we couldn't get people there. We needed to get some expertise from different regions to the emerging markets, we couldn't travel. So we delayed them. So we spent 74 million in 2020 and our original plan was 102 million. So we ended up spending a little less than 2% in 2020 and 2021 we're going to spend a little over 2%. We're going to make up a bit of those projects, because they're still there. And there's great opportunity in other areas. But we're still longer term 2% of sales is the CAPEX number. And we have a little bit of makeup this year with projects that -- these efficiency projects and growth projects have very high internal rates of returns or rates of returns like 30%, 40%, 50%. So this is the kind of stuff that you want to fund. You want to get done. And we have a whole slew of projects that we're getting after.
And just are you spending anything different on what kind of equipment you're buying, are you spending more on software, are you changing your suppliers?
Yeah, I think there's a mix of all that in there and it's bottoms up from the businesses. But yeah, I think definitely software or digital strategy is driving a lot of that. I think the emerging market infrastructure that we're putting in place is driving that. So you are right on in the areas and we just have a particularly large group of projects, and we're going to get those done this year and we got great returns on them.
Fantastic, great to hear. Thank you very much.
Thank you Andrew.
Thank you. And our next question comes from the line of Andrew Buscaglia with Berenberg.
Good morning guys. I wanted to talk a little bit more about M&A because I am curious your philosophy is out of this -- out of the pandemic, do you -- out of the other capacity due to some larger size deals. First off, do you see more medium large sized deals as likely? And then secondly, is there sort of philosophy here that to buy stuff that's kind of beaten down, beaten up that you could -- you're buying at a low here, are you going to go after certain assets that whatever is opportunistic at the time, wherever there's a good deal to be had?
Right, I think it's both. It's all of the above. And when I think about the -- we expanded our revenue targets, the acquisition we're looking at so you can see deals in that $200 million to $300 million to $400 million range. Those are considered big. So we're not talking about the acquisitions that would be the size of AMETEK or even half the size of AMETEK. We think those bigger deals, it's much harder to create value. So there's smaller deals, but the size growing with the size of the company, we're a bigger company now. So, like I said, there's technology deals we're looking at that augment our organic growth, there's deals in our sweet, sweet spot, very close to our existing positions that will get a very high return on capital one. And there's some bigger deals that fit with us, but are in adjacent markets. And there's multiple deals in each one of those categories. So we are busy, we're prudent and approach. But I'm optimistic that we're going to be able to deploy our capital and add very strong businesses effective.
Okay. And can you remind us what was medical as a percentage of sales this year in 2020? And then can you just minus, like what is that, you know, what that area I think it's pretty interesting as a budding platform for you guys, what are you thinking about that going forward?
Yeah, medical sales 2021, 2020 are in the range of 15% of sales. So that's approximately $700 million. And, we have businesses that are doing very well in that area and their niche positions like all of AMETEK and there's expansion opportunities there. So we're actively looking at healthcare medical space and we'd like to see that be a bigger percentage of the company.
Thank you guys.
Thank you.
Thank you. And our next question comes from the line of Joseph Giordano with Cowen.
Hey guys, good morning. This is Francesco on for Joe.
Hello Francesco, good morning.
Hey, can you guys talk a little bit about your expectations on aerospace, do you think this in coming to be bottoming out soon and what are the mix implications going forward?
Yeah, it's a great question. And the first point is our aerospace business is one of our more profitable businesses. It is definitely greater than the company average. That was before the pandemic and right now. And the team has done an excellent job of realigning the cost structure, lower volume, but still very profitable and more profitable than the average AMETEK business. So we think any change in volume is going to result in high contribution margins because we have so bring down the cost structure. The second point is there's a distinctly different demand pattern that we've been talking about all along. About half of our business in aerospace and defense is in the military space. That business was up mid-teens in the fourth quarter. We think we still see growth in 2021, but it'll be more mid-single-digits. And in the commercial space, that business was down about 35% in the fourth quarter, down about 30% for the entire full year. And for 2021 the commercial aerospace business we're saying is flat up low single-digits. And the commercial aerospace business is impacted by many variables impacting demand, including government support, airline capacity decisions, and overriding all the competence of the flying public and it's very difficult to predict that thing and to predict those things when the pandemic is raging. So we're pretty conservative about how we are looking at that. The management team we have in aerospace is outstanding. And eventually the commercial business is going to come back. I don't think it's going to be 2021. I think it's going to be beyond that and our guidance reflects that. So we're really -- we have really done the hard work and done the right thing in our aerospace business. So we're poised even for small incremental sales growth to deliver good margins and eventually, that long cycle business will pick up and drive the earnings of the company.
Great, that's extremely helpful. Thank you very much.
Okay.
Thank you. And our next question comes from the line of Richard Eastman with Baird.
Alright, thank you. Try this…
Try one more time.
Yeah, not sure what happened there. Hey, just a quick thought, Dave, when we talk…
Rick, I think we lost you again. Alright, we got you now.
Okay. Hey, just when we try to reconcile our segment growth to the AMETEK core growth outlook for 2021. So we're kind of 3% to 5%. And my question is, is EIG I presume EMG, with process coming back stronger, does EMG on the high end of maybe a 3% to 5% core 2021 growth rate?
Yeah, we gave a mid-single-digit range. So for me that says between 4% and 6%, not 3% to 5%. But in that 4% to 6% range, both of the businesses are going to be in that range. And certainly EMG is going to probably start out a little better in the year, but we think the -- when we end the year, they're both going to be plus mid-single-digit growth.
Dave, when I kind of run that math through the numbers here, I look at both segments of the business perhaps being at a revenue rate at the end of 2021 that's below 19 and I guess my thought is there that the longer cycle, mean aerospace would be below and then would oil and gas still be projected to be below 2019 level, are there any other?
Yeah, oil and gas is projected to be lower, and oil and gas is going to have -- the way it looks for us a strong 2022 right now. But, if you if you think about where we're at right now in the fourth quarter, the businesses that showed positive organic growth for our defense business in process, some of our research businesses like our materials analysis division, that division was all positive, organic. Our UPG business Zygo was positive organic. The Telular business was positive organic, and our automation business was positive organic. So as we go out through the year, that'll change. But yeah, the fact of the matter is with our mid and long cycle exposure, while the strong second half and for some of our markets, we will not get back to 2019 in 2021.
Yes, fair enough. And when you talk defense, Dave, is that…
Rick, I think we lost you and your question there.
Andrew, why don’t we wrap it up.
Rick, we hear you now I think.
I don't understand it. Okay, but with defense Dave, when you speak to defense, that's all aerospace defense, is there anything else that you're capturing in that?
No, it is aerospace defense but we do have some land based programs within aerospace, but it's all -- business, that's right.
Okay. Thanks again. Thanks for tolerating the problems. Thank you.
No problem.
Thank you. I will now turn the call back over to Vice President of Investor Relations, Kevin Coleman for any closing remarks.
Great, thank you, Andrew. And thanks everyone for joining our call today. And as a reminder, a replay of today's webcast may be accessed in the investor section of ametek.com. Thanks and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.