AMETEK, Inc. (NYSE:AME) Q3 2023 Earnings Call Transcript

AMETEK, Inc. (NYSE:AME) Q3 2023 Earnings Call Transcript October 31, 2023

AMETEK, Inc. misses on earnings expectations. Reported EPS is $1.47 EPS, expectations were $1.58.

Operator: Good day and welcome to the AMETEK's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Kevin Coleman: Thank you, Abigail. Good morning and thank you for joining us for AMETEK's third quarter 2023 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 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 2022 or 2023 results or to 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization.

An aerial view of an industrial complex, representing the company's property ownership.

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 questions. I'll now turn the meeting over to Dave.

Dave Zapico: Thank you, Kevin, and good morning, everyone. AMETEK delivered excellent results in the third quarter, highlighted by outstanding operational execution, superb margin expansion, strong cash flows and earnings ahead of our expectations. In the quarter, we established records for operating income, operating margins, earnings per share, EBITDA and cash flows. Given these strong results and our outlook for the balance of the year, we have again, increased our earnings guidance for the full year. We have also been very active on the acquisition front. During the third quarter, we completed the acquisition of United Electronics Industries and subsequent to the end of the third quarter, we acquired Amplifier Research. Today, we also announced the signing of a definitive purchase agreement to acquire Paragon Medical, a highly attractive acquisition, which broadens our exposure in the Medical Technology space.

I will provide more details on these acquisitions shortly. Now let me turn to our third quarter results. Third quarter sales were $1.62 billion, up 5% over the same period in 2022. Organic sales growth was flat. Acquisitions added four points in the quarter and foreign currency added one point. Book-to-bill in the quarter was 0.96. We ended the quarter with a very strong backlog of $3.4 billion, near record levels and down a modest 2% sequentially. Our backlog is up 5% from last year's third quarter and up 23% or $640 million from the end of 2021. AMETEK's operating performance in the third quarter was exceptional. Operating income in the quarter was a record $438 million, a 14% increase over the third quarter of 2022. Operating margins were a record 27% in the quarter, up a sizable 220 basis points from the prior year.

EBITDA in the quarter was also a record at $511 million, up 10% over the prior year, with EBITDA margin, an impressive 31.5%. Operating cash flow was up 45% in the quarter to a record $473 million. This outstanding performance led to record earnings of $1.64 per diluted share, up 13% versus the third quarter of 2022 and above our guidance range of $1.56 to $1.58. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group delivered impressive operating performance, with continued strong and broad-based sales growth. Sales for EIG were $1.14 billion in the quarter, up 8% from the third quarter of last year. Organic sales were up 3.5%, acquisitions added 3.5% and foreign currency added a point.

EIG's organic sales growth remains broad-based and reflects our leading position across attractive market segments and the impact of our organic growth initiatives. Growth in the quarter was particularly strong across our Aerospace & Defense businesses as well as in our Zygo, Spectro and CAMECA businesses. Third quarter operating income was a record $335 million, up 23% versus the prior year. And operating margins were a record 29.5% in the quarter, up an impressive 360 basis points from the prior year. Tremendous work by our EIG businesses in the third quarter. The Electromechanical Group also delivered solid operating performance in the quarter, despite the impact of normalization of inventory levels across our OEM customer base. EMG's third quarter sales were $487 million, down 2% versus the prior year, with organic sales down 8% in the quarter.

Acquisitions added four points and foreign currency added two points. EMG's operating income in the quarter was $128 million, down 7% compared to the prior year period, while EMG's third quarter operating margins were a very solid 26.2%. Our performance in the third quarter and thus far in 2023, reflects the unique value inherent in the AMETEK growth model. Our differentiated businesses are aligned with diverse and attractive growth markets, while our organic growth initiatives continue to position us for long-term sustainable growth. Our distributed operating structure provides our businesses with the ability to execute their growth strategy and the flexibility to react quickly to changing market conditions. And our asset-light business model and strong operational execution drive outstanding cash flow generation, which we redeploy on value-enhancing acquisitions.

This strong cash flow and our robust balance sheet are key differentiators for AMETEK in this higher interest rate environment. Now switching to our acquisition strategy. As noted, we have been very active in managing a strong pipeline of acquisition opportunities. We are pleased to welcome our most recent acquisitions, United Electronic Industries and Amplifier Research. I'm pleased that we have signed a definitive agreement to acquire Paragon Medical. I will provide some more color on each of these businesses, starting with Paragon Medical. Paragon Medical is a leading manufacturer of highly engineered medical components and instruments serving applications, including orthopedics, minimally invasive surgery, robotic surgery and drug delivery solutions.

Paragon's broad product portfolio of single-use and implantable components are sold to a diverse blue-chip customer base of leading medical device OEMs. Paragon is an excellent acquisition for AMETEK. It expands our presence in the med tech space and provides us with access to attractive new market segments with strong growth rates. We are acquiring Paragon in an all-cash transaction valued at approximately $1.9 billion. Paragon has annual sales of approximately $500 million and is headquartered in Pierceton, Indiana. The closing of the acquisition is subject to customary closing conditions, including applicable regulatory approvals. Now switching to United Electronic Industries, or UEI, which we acquired in August. UEI is a leading provider of ruggedized test, measurement, simulation and control solutions.

UEI's custom products cater to diverse data acquisition needs from hardware in the loop testing, to aircraft simulators and automated testing systems and mission-critical applications. With a strong presence in the defense, aerospace nuclear power generation and semiconductor, UEI nicely complements AMETEK's Power Systems and Instruments division, significantly expanding our data acquisition capabilities. UEI has annual sales of approximately $35 million and is based in Norwood, Massachusetts. Next, Amplifier Research is a leading provider of innovative RF and microwave solutions. Its equipment is used for electromagnetic compatibility testing within the defense, industrial, automotive, medical and communication sectors. Amplifier Research is an outstanding strategic acquisition and complementary fit with our existing compliance test solutions business.

Their technical capability has broaden our RF instrumentation and testing portfolio. Amplifier Research is a growing business, well positioned to benefit from the growth in demand for electric vehicle research, development and testing. Amplifier Research is based in Souderton, PA and has annual sales of approximately $60 million. Our acquisition pipeline remains very solid. We have a strong balance sheet and significant financial capacity and look to remain active in deploying capital in the coming quarters. AMETEK also remains committed to investing in our businesses to help position them for long-term sustainable organic growth. In 2023, we plan to invest approximately $100 million in these growth initiatives, including our new product development efforts where our businesses continue to develop highly differentiated technologies to help solve our customers' most complex challenges.

In the quarter, our vitality index, which measures sales from products introduced over the prior three years, was a healthy 26%. As a complement to our internal new product development efforts, our ORTEC business recently acquired a Small Technology company, innoRIID, to help broaden their technology capabilities in the Radiation Detection market. InnoRIID, both cutting-edge technology expertise and an exceptional product development team, known for their innovative solutions having developed specialized Artificial Intelligence algorithms, for radiation detection in a range of Nuclear Security, Research, Health and Medical Applications. Now turning to our outlook for the remainder of the year, with strong performance in the third quarter and a positive outlook for the remainder of the year, we are, once again, raising our earnings guidance.

For the full year, we continue to expect overall sales to be up mid-to-high single-digits, and we continue to expect organic sales to be up mid-single-digits. Diluted earnings per share for the year are now expected to be in the range of $6.31 to $6.33, up approximately 11% compared to last year's results. This is an increase from our previous guidance range of $6.18 to $6.26 per diluted share. For the fourth quarter, we anticipate overall sales to be up mid-single-digits, with adjusted earnings of $1.61 to $1.63 per share, up 6% to 7% versus the prior year. In summary, AMETEK's third quarter results for 2023 were outstanding, with strong growth across our long-cycle businesses, record operating performance and strong acquisition activity. Our businesses continue to excel, driven by our differentiated technology solutions serving diverse and growing markets.

Our asset-light business model and strong cash flows provide us with the flexibility to navigate challenging economic environments, while actively deploying capital to enhance shareholder value. AMETEK remains firmly positioned for long-term sustainable growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter. Then we'll be glad to take your questions. Bill?

William Burke: Thank you, Dave. As Dave noted, AMETEK delivered outstanding results in the third quarter, with exceptional operating performance, robust margin expansion and strong cash flows. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were $24.6 million essentially unchanged from the prior year, and as a percentage of sales, were 1.5% versus 1.6% in last year's third quarter. For 2023, general and administrative expenses are expected to be approximately 1.5% of sales, in line with last year's G&A to sales level. Other income and expense was a headwind of $9 million in the quarter, due largely to lower pension income and higher due diligence costs. The effective tax rate in the quarter was 17.7%, down from 19% in the third quarter of 2022, due to improved utilization of tax credits.

For 2023, we now anticipate our effective tax rate to be between 18.5% and 19%. And as we stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate. Capital expenditures in the third quarter were $29 million, and we continue to expect capital expenditures to be approximately $145 million for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $82 million. For the full year, we expect depreciation and amortization to be approximately $330 million, including after-tax, acquisition-related intangible amortization of approximately $157 million or $0.68 per share. Operating working capital in the third quarter was 19.1% of sales.

Cash flow was excellent in the quarter with outstanding growth versus the prior year. Operating cash flow was a record $473 million, up 45% versus the third quarter of 2022, while free cash flow was also a record at $444 million, up 49% over the prior year. Free cash flow conversion was 131% in the quarter. And for the full year, we continue to expect approximately 120% free cash flow to net income conversion. Total debt at September 30 was $2.2 billion, down from $2.4 billion at the end of 2022. Offsetting this debt is cash and cash equivalents of $842 million. At the end of the third quarter, our gross debt-to-EBITDA ratio was 1.1 times, and our net debt-to-EBITDA ratio was 0.6 times, leaving us with significant available cash and financial capacity to deploy on strategic acquisitions.

As Dave has noted, we've been very active. During the third quarter, we deployed approximately $150 million on the acquisitions of UEI and innoRIID. And subsequent to the end of the quarter, we deployed approximately $105 million on the acquisition of Amplifier Research. Also subsequent to the end of the third quarter, we announced the signing of a definitive agreement to acquire Paragon Medical for $1.9 billion, which would be our largest acquisition to-date. Following the acquisition of Paragon, we would still have significant financial capacity with approximately $1.5 billion of cash in existing credit facilities available to support our growth initiatives. In summary, AMETEK had exceptional results in the third quarter. We achieved significant margin expansion and delivered high-quality earnings.

Our strong position in key market segments, coupled with a very strong backlog and exceptional operating capabilities, positions us well for continued success. Kevin?

Kevin Coleman: Thank you, Bill. Abigail, could we please open the lines for questions?

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