Operator:

Thank you for standing by. My name is Meg and I will be your conference operator today. At this time, I would like to welcome everyone to the AMETEK, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Dave Zapico:

Thank you, Kevin, and good morning, everyone. AMETEK delivered solid results with a strong operating performance in the second quarter against the backdrop of a more subdued global growth environment. In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base, leading to lower-than-expected sales volumes. Additionally, we are seeing signs of customers turning more cautious leading to some temporary delays in project spending. Despite these headwinds, our businesses delivered strong operating performance in the quarter, we saw the growth in cash flow and earnings and robust core margin expansion reflecting the strength and flexibility of the AMETEK operating model. We expect the inventory destocking and more cautious customer behavior to continue in the back half of the year. As a result, we are adjusting our outlook for the remainder of the year. We remain confident in our ability to successfully navigate these near-term headwinds. As we've done in the past, we will expand our focus on operational efficiencies and continue to invest back in our businesses utilize our strong balance sheet to deploy capital on strategic acquisitions and ensure we position AMETEK for continued long-term growth. Now let me turn to our second quarter financial results. Sales in the quarter - sales in the second quarter were $1.73 billion, up 5% from the same period in 2023. Organic sales were down 2%. Acquisitions added 8 points in the quarter and foreign currency was a slight headwind. AMETEK's operational performance in the quarter was excellent with robust margin expansion. Operating income in the quarter was a record $448 million, 7% increase over the second quarter of 2023. Operating margins were 25.8% in the quarter, up 40 basis points from the prior year. Excluding the dilutive impact from acquisitions, core margins were up a sizable 180 basis points in the quarter. EBITDA in the quarter was a record $545 million, up 10% over prior year with EBITDA margins in impressive 31.4%. Cash flow in the quarter was excellent, reflecting our operating capability and asset-light business model. Operating cash flow in the quarter was up 14% to $381 million with free cash flow up 17% and free cash flow conversion of 107%. This operating performance led to earnings of $1.66 per diluted share, up 6% versus the second quarter of 2023 and above our guidance range of $1.63 to $1.65 per share. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. EIG delivered strong operating performance with outstanding margin expansion. EIG sales were $1.15 billion, a 2% increase from the second quarter of last year. Organic sales were flat and acquisitions contributed two points. Growth was strongest within our aerospace and defense and CAMECA businesses in the quarter. EIG operating income was $350 million, up 14% versus the prior year and operating margins were at 30.3%, up 320 basis points from the prior year. Our EIG businesses are operating at a very high level with excellent operating margins. They remain well-positioned to benefit from a number of important long-term secular growth drivers, given their increasing exposures to attractive markets across process, aerospace, power and energy markets. The electric mechanical group continues to navigate the impacts of inventory normalization across our automation and engineered solutions businesses. In the quarter, EMG sales were a record $81 million, a 14% increase compared to the prior year, driven by contributions from the acquisition of Paragon Medical. Organic sales declined 6% due to weakness in our automation and engineered solutions businesses, more than offsetting solid growth across our EMG, aerospace and defense businesses. Acquisitions contributed 20% in the quarter. Operating income for the second quarter was $123 million with operating margins at 21.2%, while core operating income margins were 25%. As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory built up during the supply chain prices. While we had expected to see conditions approved in the second half of year, we now believe demand within this OEM customer base will remain subdued at current levels through the end of 2024. This inventory normalization is also impacting our medical OEM businesses, including Paragon Medical, leading to near-term delays in orders and shipments. Paragon remains very well-positioned for strong growth once the inventory correction is complete, given their leadership position across a number of high-growth MedTech market segments. Additionally, Paragon has won a new programs that we're currently investing in, which will drive incremental growth in 2025 and beyond. As we noted last quarter, are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success. As the volumes return following destocking, we believe the business will be levered to deliver outstanding sales growth and profitability. In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion in the quarter. We continue to generate strong cash flow with 17% free cash flow growth in the quarter. And for full year, we expect free cash flow to net income conversion be between 110% and 120%. The strength of AMETEK's operational excellence strategy is evident in our operating results. We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OpEx initiatives. And this year, we now expect to generate $140 million in savings. We also remain committed to investing back into our businesses. And this year, we expect to invest an incremental $90 million in growth, largely focused on research, development and engineering and sales and marketing. The effectiveness of these investments is reflected in our vitality index, which was a strong 24% in the quarter. Additionally, our strong free cash flow and flexible balance sheet provides us with ample financial capacity for strategic acquisitions. Our pipeline of acquisition opportunities remain strong. AMETEK is very well positioned to continue to expand our portfolio of highly differentiated businesses that both our organic growth investments and our acquisition strategy. Now, turning to outlook for the remainder of the year. With destocking expected to continue through the balance of the year and some customers turning more cautious on project spending, we are adjusting our sales and earnings guidance for the full year. Overall, sales are now expected to be up 5% to 7% versus the prior year, with organic sales expected to be flat to down low single digits. Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80, up 5% to 7% compared to last year's results. This is less than a 1% reduction from our prior earnings guidance range of $6.74 to $6.86 as our proactive productivity actions, along with a lower expected fourth quarter tax rate helped offset the impact of the reduced sales forecast. This guidance reflects second half sales and operating earnings, essentially in line with our first half results. For the third quarter, we anticipate overall sales to be up mid-single digits, with earnings in the range of $1.60 to $1.62 per share, down 1% to 2% versus the prior year. In summary, we are pleased with our business's strong operating performance in the second quarter. We have a proven operating model and an experienced management team, and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long-term results. I will now turn it over to Dalip Puri, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Dal?

Kevin Coleman:

Great. Thank you, Dalip. Can we please open the lines for questions?

Matt Summerville:

Thanks. Good morning. A couple of questions. First, Dave, you seemed pretty convinced a quarter ago that the destocking phenomenon would wrap itself up by mid-year. So I guess relative to 90 days ago, can you maybe talk a little bit about what's changed? What gives you confidence that we're only in for another six months of this? And then maybe touch on what end markets and businesses are starting to be impacted by some of the project delays you referenced? And then I have a follow-up. Thank you.

Matt Summerville:

Thanks, David. I would definitely agree on the decremental comment. Can you also - I think it's probably good from a timing standpoint in the call. Can you kind of go ahead and do the - around the horn you typically do across the businesses and how expectations have kind of changed in some of the suburbs?

Matt Summerville:

Great. Thank you.

Deane Dray:

Thank you. Good morning everyone.

Deane Dray:

Dave, would like to pick up where you left off with Matt. And just some more color on the customers' kind of sentiment here and the delayed project spending. What kind of reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries? Any kind of way that you could characterize and frame for us about this degree of cautiousness?

Deane Dray:

Yes, David, that's really helpful. I love the way you characterize it because in slowing, that's one of the first things you see customers do is they kind of delay the spending more approvals. And so that's pretty familiar. Do have any sense that it's snowballing from here? Does it get like as the quarter progressed did those type of behaviors increase? And any kind of monthly cadence would be helpful.

Deane Dray:

Got it. All right. Just last question on the destocking and when we look back on this period, that's been the biggest surprise how long it has persisted. And you're not, by far, the only one. We've seen this everywhere. Anyone has anything to do with medical or life sciences supplies chain it has just taken more than 2x longer than anyone thought. And just the question is for Paragon. What's their visibility like? You said they - a percent of point was from their, destock…

Deane Dray:

What's their visibility versus your comparison of the rest of AMETEK businesses, where do they fit on that scale?

Deane Dray:

David, thanks for all that color. Really helpful.

Operator:

[Operator Instructions] Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Dave Zapico:

Good morning.

Dave Zapico:

Good questions, Jamie, and I'll try to answer them both. The first thing is you talked about pricing in the quarter. And our pricing in Q2 was about 3.5 points price, and our inflation was about 2.5 points. So we had a positive benefit from that. So the pricing environment is moderating a bit and the inflation is moderating a bit, but we're real pleased with that. And it was across our portfolio and maybe a little bit more in EMG just a bit than EMG, but it was pretty much across the portfolio at a pretty consistent performance, and that's driven by our differentiated portfolio on the heavy level of investments. We're putting in new products. We talked about a vitality index of 24%. We got newer products, fresh products in the market. Our customers are buying them. So - and that's resulting in some good pricing. And as I said, inflation is moderating. And we think that general environment, the moderation of inflation, but our ability to continue to leverage our investments are going to continue throughout the year. So, no change there, very, very consistent and it's kind of the AMETEK portfolio is very differentiated and kind of performed very well. In terms of the margins in EIG, if you think about - we've got a similar performance in the first quarter and excellent operating quarter. We had 320 basis points up driven by high leverage, excellent price cost, strongly performing acquisitions and a really good product mix. And that was consistent from Q2 to Q3. And we see that continuing for the rest of the year. I mean we do have a comp in Q3 margins is a difficult one, because that was a high-margin quarter for us if you look back the past few years. But in general, if you think about EIG, the margins are good and they're going to stay there, and that business is very well positioned. And it's - in our process, our Power and Industrial and our Aerospace businesses, we've got excellent market positions. And then just talking about the EMG part of the business, they had core margins of over 25%. So they got some dilution there because of the acquisition and destocking and automation in our medical businesses. But when we look at our businesses, they're running - both segments are running very well generating excellent margins. I think EIG has historically a bit of a higher margin entitlement, because they sell mainly to end users, and they get the aftermarket revenue stream and EMG is selling more to an OEM customer base, a little bit lower margin. So they're in relation to each other. And I see that continuing. I'm not really concerned that those margins are going to fall off or anything like that. So, does that answer your question, Jamie?

Dave Zapico:

Thank you.

Jeff Sprague:

Hi. Thank you. Good morning, everyone.

Jeff Sprague:

Good morning. Hope as going well, Dave. Hi, just on Paragon, I want to just make sure I have things dialed right here. I think your comment about a point of headwind, right, is on a total AMETEK basis.

Jeff Sprague:

So that implies $40 million or $50 million. So we're sort of talking about the business being down kind of 8%, 9%, 10% for the year. Is that basically where we're at?

Jeff Sprague:

Okay. And then just thinking about EMG, right, I mean the comps are getting fairly easy on a year-over-year basis, but really, the commentary is we should kind of think sequentially, revenues are quite similar to Q2? Or do you actually see a little bit of a step up there?

Jeff Sprague:

And then maybe we could just touch on that tax rate. So assuming 19%, again in Q3, you would imply, I don't know, 14 or 15 in Q4. But the bigger question is just jumping off into 2025. Do we stay at that 17% to 18% range? Or do we move back up into the 19% to 20% range in 2025?

Jeff Sprague:

Yes. Thank you.

Scott Graham:

Yes. Hi. Good morning. Thanks for taking my question.

Scott Graham:

Likewise. So I want to understand, so the reduction in sales guidance for the year, you indicated that it was essentially three points in EMG One point in EIG and you talked about project delays there. My question is, in your sort of around the horn, you indicated project delays in power. And I was just wondering if there's any vulnerability to project delays spreading into process because you didn't decide anything there?

Scott Graham:

Okay. Thank you. I want to maybe shift to defense because that's a pretty high-margin business for you guys. Is that sort of push out of shipments? Is that something that you'll see in the third quarter or the fourth quarter? Is there anything more to discuss there?

Scott Graham:

If I could just squeeze this last one in, Dave. The net leverage of 1x, it's pretty low for you guys. Just kind of wondering the pump, I assume, is pretty darn primed at this point. How does the pipeline look or how are the sizes of the deals out there? Maybe you can give us a little color.

Scott Graham:

It answers everything fully. Thank you.

Operator:

Your next question comes from the line of Rob Wertheimer with Melius Research. Please go ahead.

Dave Zapico:

Good morning, Rob.

Dave Zapico:

Yes. The project cost, I think, was your first question. And you're right …

Dave Zapico:

We are typically a small portion of the project and with good technology, a small part of a bigger project. It's a nice place to be. In terms of pricing, we have very differentiated technology. And we're conscious of the value that we're adding. What you'll typically see in most classic downturns is they may mix down. They may buy our project, buy our product, but it will maybe have less, features, because we're pretty good position with the customer base and our positions in our niche portfolio. We're not seeing that now. And we're not seeing the activity pipeline change. So I think on the - we're typically smaller projects typically priced for value and we do a lot of investment in our portfolio. So I think delays are more just related to the general macro that we talked about with Dean, about the elections and some of the uncertainty with the geopolitical issues but we went through the - we're confident we're not losing share. We're confident that our pipelines are very strong. So it's a temporary delay.

Dave Zapico:

Thank you.

Joe Giordano:

Hi. Good morning. This is [technical difficulty] talk about the Paragon charges you took last quarter. Now that you're another quarter in, do you expect any additional charges? I know there were just one-time, but just any update on that? And when you might start seeing any impact from those charges?

Joe Giordano:

Thank you for that. And another question I had was on the 4Q ramp. So I understand the normal cyclicality, there's usually a 4Q ramp. But it does look like the implied guide implies the ramp is more than usual for historical. Is there - especially considering that you guys are not anticipating any easement in destocking for the latter half - could you comment on what's driving that?

Joe Giordano:

Got it. Thanks for that. Very helpful.

Operator:

Your next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Dave Zapico:

Good morning, Andrew.

Dave Zapico:

Yes. I think there - it's different because there's a lot of customers and a lot of different market segments. But in general, I think you're getting back to pre-COVID levels, there might be slightly higher because of some of the geopolitical things that happened and the supply chains becoming more regional and less dependent on Asia. So it could be a bit higher. But in general, I believe that the general statement across the customer base, they're trying to get back to something at the pre-COVID level. They might be a bit higher for some of the other geopolitical issues going on.

Dave Zapico:

Sure, Andrew. No, you didn't miss it. We saw a modest growth in Europe in the second quarter, and we saw a low single-digit declines in both the U.S. Asia. Go a step lower. We had low single-digit in the U.S. We actually had strong growth in our Materials Analysis division or A&D businesses but our automation business was down a bit. Europe was up low single-digit. Again, weakness in our automation business, offset by strong growth in process. And for Asia, we were down low single digits, pretty difficult comps in China. China was down a bit. But when you look at Asia, excluding China, it was flat. So it's kind of a flat world. But we are seeing some improvements in Europe.

Dave Zapico:

Thank you, Andrew.

Steve Barger:

Thanks. Good morning.

Steve Barger:

Dave, we're hearing a lot of optimism about the semiconductor cycle having a strong 2025 led by AI-related devices, of course, but also some leading-edge node transitions later next year. What are you seeing in that business? And are you more levered to node transitions or unit volume increases?

Steve Barger:

Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers have been stronger than I think people expected. Do you have exposure there? And do you have an outlook for that market in the back half and next year?

Steve Barger:

Okay. Thanks.

Nigel Coe:

Good morning. Hi David, hi Dalip and Kevin. Thanks for the question. Just a few more details. I know you got a lot of ground here. But on Paragon, I just want to make sure I've got the right base for FY '23. I've got about $450 million, $460 million of revenues for FY '23. Is that about right?

Nigel Coe:

A bit high of 23%. Okay. That's helpful. So down 10% to 20% this year, I mean, what sort of cost measures are you taking? I know the charge you took in 1Q is much longer tail. But what measures are you taking to sort of preserve the earnings there? And - where do we stand right now on the accretion for FY '24?

Nigel Coe:

Couple of pennies in the fourth quarter. Yes. Okay. That's helpful. Thanks, David. And then on orders, I think you said 4% organic decline. I think that's better than the 8% you saw in the first quarter I'm calculating $1.6 billion of orders this quarter. Is that in the right zone?

Nigel Coe:

1.5%, okay, that’s…

Nigel Coe:

The question about it.

Nigel Coe:

And then just a quick one on the 4Q tax rate issue and any quantification there?

Nigel Coe:

Okay. Thank you very much.

Operator:

Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.

Operator:

This concludes conference call. You may now disconnect.

Operator:

Good day, and thank you for standing by. Welcome to AMETEK's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

Kevin Coleman:

Thank you, Julia. Good morning, and thank you for joining us for AMETEK's First Quarter 2024 Earnings Conference Call. We today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, 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.

David Zapico:

Thank you, Kevin, and good morning, everyone. AMETEK delivered strong results in the first quarter of 2024 with outstanding operating performance leading to double-digit growth in earnings per share. During the quarter, we established records for sales, operating income and EBITDA, and deliver robust core margin expansion and excellent cash flows. Considering our first quarter results and the positive outlook for the back half of the year, we are increasing our earnings guidance for the full year. AMETEK's continued success is a testament to the strength and resiliency of our growth model, the quality of our businesses and the outstanding contributions from all AMETEK colleagues.

Dalip Puri:

Thank you, Dave, and good morning, everyone. As Dave highlighted, AMETEK had a very strong first quarter with record level sales and exceptional operating performance, highlighted by strong core margin expansion and free cash flow conversion.

Operator:

[Operator Instructions] Our first question comes from the line of Deane Dray of RBC.

David Zapico:

Sure, sure. Glad to do that all, Deane. I'll start with the walk around the company, and I'll start with our Process business. Overall sales for our Process businesses were roughly flat versus last year and in line with our expectations. Growth remains solid across our energy and semiconductor businesses, and we're really well positioned there to benefit from the sizable project and investment activity within these markets. For the full year, we continue to expect sales for our Process businesses to be up low single digits.

Deane Dray:

It's all really help. Go ahead.

Deane Dray:

Great. And just a quick follow-up on the growth investments. We know this is your playbook. Is there anything unique in terms of how you're deploying that capital? I mean, typically, it's salespeople, is a component, but any other kind of wrinkles here you could share?

Operator:

Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners.

David Zapico:

Yes, that's a great question, Jeff. And it's kind of what you said. I mean we typically absorb the smaller acquisitions as we proceed through the years and quarters. And the last time we did something like this, when we bought, I believe, Zygo, is a bigger acquisition. And because of the size of the acquisition and because of the opportunities that we see, we wanted to take that integration charge because there are tremendous, tremendous opportunities to improve the business. So it's a onetime nature. It's for larger deals as you know, Paragon was largest acquisition that we have done.

David Zapico:

Yes, if you look at -- our overall sales were up 9%. That's because both groups. And go the organic growth was just down modestly, about 0.5 point. EIG overall sales were plus 4. The organic growth in EIG was plus 1%. EMG overall sales were plus 21% and the organic sales at EMG were minus 4. So you had that defines the group dynamics for revenue.

David Zapico:

Yes, yes. The first point is when you look at AMETEK's first half, second half, we typically have 48% of our revenue and profits in the first half of the year, and 52% of our revenue and profits in the second half of the year, and that's exactly what we have this year. So our second half of the year is not back-end loaded. So we feel good about that.

Jeffrey Sprague:

And I'm sorry, did you have a comment on price? I missed it, and I'll see the floor.

Operator:

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

David Zapico:

Yes, it's a great question. I mean we look at tariffs, and that became a bigger issue back in the 2017 time frame. And in the quarter, we had a minimal impact from tariffs and they were completely offset for price. And to give you an idea across the whole company, tariffs are only going to cost us about $0.01, a $3 million or $4 million. And what happened there is we've aggressively rebalanced our supply chain. It's largely done. So we're not overexposed to any region of the globe. And we have a strategy where from the U.S., we're largely sourcing from Mexico and other regions of the Americas and in Europe. We do a lot of sourcing from to Czech Republic and Serbia. And in Asia, we do a lot of sourcing from Malaysia.

Unknown Analyst:

Perfect. And then if you can just provide some color on the tempo or monthly cadence of trends in the quarter and then looking into April?

Operator:

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

David Zapico:

Yes, it's very, very difficult to predict the very near term. But Scott, the pipeline remains very strong, and we're actively looking at a number of high-quality deals across a broad set of markets. So we have $1.8 billion of existing cash and credit facilities post Paragon. We have a balance sheet that would support -- if the deals meet our criteria, we could do over $4 billion of deals this year, and that would only take our leverage up to about 2.5x. So we're really in an excellent position. And it's not a balance sheet issue. It's not a cash flow issue.

Scott Graham:

You answered one of Jeff's questions earlier, saying you're expecting sales to be up modestly each quarter. Were you referring to organic for the next 3 quarters?

Scott Graham:

Okay. So sequentially, you're expecting sales dollar to be up.

Scott Graham:

Okay. And the last one is just sort of back on the orders. I know you do have a pretty significant comp that you're up against when you stack them. What were orders in the quarter in dollars and in organic?

Scott Graham:

Yes. No, I get it, '22 and '21 were also exceptional organic periods for you.

Operator:

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

David Zapico:

Yes. Well, in '24, we had told you in prior meetings that Paragon is going to contribute $0.08 to $0.10 to AMETEK's EPS, and that still holds. When I look at that $22 million charge, we said the payback is going to be less than 2 years, and at run rate, so it will take us a couple of years to get there. But the run rate, we have $70 million of benefit. So we spent approximately $29 million. We're going to get approximately $70 million of benefits. The payback is less than 2 years. So that really tells you what a great return it has, and it's just -- there wasn't a lot of focus, and we can run things really efficiently. And I'm just excited that the management team sees it that way, too, and we're really going to make Paragon an exceptional business from an operating perspective.

Andrew Obin:

Sorry, I'd probably -- and I'd probably take it offline, but just to make sure, so I thought the Paragon restructuring was extra because you saw incremental opportunities. So you were saying that I should have -- that, that was embedded all along but was not in the guide. I'm sorry...

Andrew Obin:

Okay. I'll take it offline because I'm not sure if I -- so I should have had it in my numbers or this $0.10 is extra on top of view we're thinking, just confirming that, I apologize. And I'm happy to take it offline with Kevin, I apologize.

Andrew Obin:

Got you. That makes sense. And then just on revenue and you did give very good color was basically the destock what drove -- I guess you were expecting I think you guided for low double-digit revenue in the first quarter, a little bit below. So it's just you said it's destock pulled forward, correct?

Operator:

Our next question comes from the line of Christopher Glynn of Oppenheimer & Co. Inc.

David Zapico:

Yes. I think the -- when I think about the long-term secular growth drivers, and we talked about a little -- a few of them in my talk, but a lot of project activity around the semiconductor market, and that's finally we're moving closer and closer to the point where that's going to start turning into business for us in the West. There's a lot of project work on semiconductors.

Unknown Analyst:

This is Dan on for Joe. Sorry, I know destocking and bottoming of orders within automation has been discussed a few times. So just a quick follow-up. This is obviously something a lot of companies have been struggling with in the past few quarters. But some have also been talking about changing their internal processes to gain more visibility of end market and end users. Is there anything that you guys have done potentially more frequent conversations or reaching out to like end market users to understand a bit better their demand going forward? Anything you've changed recently?

Nigel Coe:

David, I just want to come back to the order math. I think you said down 8% and then down 10% organic.

Nigel Coe:

We've got about 9 points of contribution from Paragon in our numbers. So just wondering what am I missing, I've expected that there would be significant contribution from Paragon in the order numbers. So just help me out with that math, please.

Nigel Coe:

Okay. But then the orders, 8% organic to, that makes sense, reported downtimes in organic. Was there no material impact from Paragon there?

David Zapico:

Go ahead.

David Zapico:

Yes. I think for the year, when we bought Paragon, it was a little less than $500 million. And the first year, we talked about the mid-single-digit growth. So that's still exactly what we have in our model. So we think that we get out of this year, and we think it will be a double-digit grower over the next couple of years, but the Paragon model from the viewpoint of what we had going into the year and what it is now is pretty much identical.

David Zapico:

Yes. I'd say the vast majority of it was restructuring, and there was a small part of it that were other integration costs. But the vast majority...

David Zapico:

Yes. We started the effort in Q1 and as I said, we pulled forward all the benefits that we had. And I think the restructuring is -- was done in Q1. So I don't think we're going to have another restructuring charge in Q2, if that's what you're asking.

Operator:

I am showing no further questions at this time. I would now like to turn it back to Kevin Coleman, Vice President of Investor Relations and Treasurer, for closing remarks.

Operator:

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 AMETEK 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, Kevin Coleman, Vice President of Investor Relations and Treasurer. You may begin.

Dave Zapico :

Thank you, Kevin, and good morning, everyone. Before I get into the financial results for the quarter, it is with mixed emotions that I share the news of changes in our financial leadership, which we announced on January 16. After an outstanding 36-year career at AMETEK, our Chief Financial Officer, Bill Burke, has decided to embark on a well-deserved retirement effective April 2, 2024. Bill's tremendous leadership of our finance organization and his strategic guidance has been instrumental in AMETEK's long-term growth and success. His legacy is deeply woven into the fabric of our organization, and we express our heartfelt gratitude for his exceptional contributions. In light of this transition, I'm delighted to announce the appointment of Dalip Puri as our new Executive Vice President and Chief Financial Officer. Dalip, currently serving as Senior Vice President, Operational Finance, brings a wealth of experience and expertise to this role. Dalip joined AMETEK in 2017 as Treasurer and subsequently took on the role of Group Controller, providing financial oversight for over half of AMETEK's businesses before transitioning into his current role of Operational Finance. Dalip's leadership of key financial initiatives at AMETEK, along with a proven track record make him the natural choice to lead our financial organization into the future. I'm confident that under Dalip's leadership, our financial organization will continue to thrive contributing significantly to the success of AMETEK. To ensure a seamless transition, Bill will stay on as a senior adviser until April 2025. Thank you, Bill, for your exceptional service, and congratulations Dalip. I'm truly excited about the future. Now let me turn to this quarter's results. AMETEK delivered exceptional performance in the fourth quarter, delivering record results and outstanding operational execution, leading to results ahead of our expectations. In the quarter, we set records for sales, operating income, earnings per share, EBITDA and cash flow. We also ended the quarter with record backlog. Furthermore, in the quarter, we successfully deployed over $2 billion on strategic acquisitions, enhancing our portfolio with the acquisitions of Amplifier Research and Paragon Medical. These results cap a record year for acquisitions and underscore the strength of the AMETEK growth model, the quality of our businesses and the success of our organic growth initiatives. AMETEK's continued success is also the result of the dedicated efforts of our global employees. I want to thank all AMETEK colleagues for your efforts and significant contributions in 2023. Now let me turn to our fourth quarter financial results. Fourth quarter sales were a record $1.73 billion, up 6.5% over the same period in 2022. Organic sales growth was approximately 1.5%. Acquisitions added 4 points and foreign currency added 1 point. We ended the quarter with a record backlog of $3.53 billion which is up 10% from the start of 2023. AMETEK's operational performance in the quarter was outstanding, with robust margin expansion and strong incremental margins. Operating income in the quarter was a record $445 million, a 12% increase over the fourth quarter of 2022. Operating margins were 25.7% in the quarter, up an impressive 120 basis points from the prior year while core margins were up 200 basis points in the quarter. This strong margin expansion reflects the strength and flexibility of our operating model and the quality and differentiation of our businesses. EBITDA in the quarter was a record $526 million, up 8% over the prior year, with EBITDA margins an impressive 30.4%. Our strong growth and operating performance led to robust cash generation with free cash flow up 47% in the quarter to a record $481 million. This tremendous operating performance led to record diluted earnings per share of $1.68, up 11% versus the fourth quarter of 2022 and above our guidance range of $1.61 to $1.63 per share. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments grew by an excellent quarter with strong sales growth and tremendous operating performance. Sales for EIG were a record $1.24 billion in the quarter, up 7% from the fourth quarter of last year. Organic sales were up 3.5%, acquisitions added three points with currency accounting for the balance. EIG sales growth in the fourth quarter was strongest across our Aerospace & Defense businesses and our Materials Analysis division. EIG's operating performance was impressive with strong profit growth and exceptional margin expansion. Operating income was a record $359 million, up 17% versus the prior year, while EIG operating margins were 29%, up and outstanding 250 basis points from the prior year. The Electromechanical Group also finished the year with strong performance despite the continued impact from the normalization of inventory levels across our OEM customer base. Fourth quarter sales for EMG were $495 million, up 6% versus the prior year, driven by the contributions from recent acquisitions. EMG's fourth quarter operating income was $112 million, while operating margin -- operating income margins were 22.7% in the quarter. Excluding the dilutive impact from acquisitions, EMG core margins were up 100 basis points versus the prior year. Now for the full year results. Overall performance was outstanding in 2023, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.6 billion, up 7% from 2022. Organic sales increased 4%, with acquisitions accounting for the balance of the growth. Operating income for 2023 was $1.7 billion, up 14% and operating margins were 25.9% for the full year, with margins up 150 basis points versus the prior year. EBITDA for the year was $2 billion with EBITDA margins are very strong 30.5%. In full year 2023, earnings were $6.38 per diluted share up 12% versus the prior year. Our performance in the fourth quarter and full year highlights the strength of the AMETEK growth model. Our differentiated businesses are strategically aligned with diverse and attractive markets while our organic growth initiatives position us for sustained long-term growth. Our distributed operating structure empowers our businesses to execute on our growth strategies and quickly adapt to evolving market dynamics. This structure is a cornerstone of the success and navigating throughout different economic cycles. Furthermore, our asset-light business model and strong operational execution result in exceptional cash flow generation. This robust cash flow, coupled with our strong balance sheet, provides AMETEK with plenty of firepower to support our growth initiatives and to deploy on acquisitions. Speaking of acquisitions, we were very active in 2023, successfully deploying approximately $2.25 billion on five acquisitions, including the acquisitions of Amplify Research and Paragon Medical in the fourth quarter. I'm very excited to welcome all acquired companies to AMETEK. Each acquisition is an excellent strategic fit with AMETEK as they help expand our product and technology offerings and highly attractive growth markets and applications including renewable energy development and the modernization of the Power group. In addition, our latest acquisition, Paragon Medical, which we closed in the middle of December, nicely expands our presence in the medical technology market. Paragon is a leading manufacturer specializing in highly engineered medical components and single-use and consumable surgical instruments. Their product portfolio spans crucial medical applications and the reputation for quality and precision has earned on the trust of a diverse customer base, including top-tier medical device OEMs. Looking ahead to 2024. Our acquisition pipeline remains robust. As noted, we have a strong and flexible balance sheet and anticipate remaining active deploying capital and acquisitions. In addition to our acquisition strategy, AMETEK remains committed to making strategic investments in organic growth initiatives. In 2023, we invested an incremental $100 million in growth initiatives. And in 2024, we expect to invest another incremental $100 million. The majority of this investment will be within our research, development and engineering and sales and marketing functions. In the quarter, our vitality index, which reflects sales from new products introduced in the last 3 years was a very healthy 29%. Through these strategic investments and acquisitions, we have seen a steady transition of AMETEK's portfolio, with an expanded presence in secular growth markets and reduced exposures in more cyclical markets. This strategic evolution of the portfolio, combined with our proven operational acumen, positions AMETEK well for continued strong and sustained growth. Now shifting to our outlook for the year ahead. For 2024, we expect overall sales to be up low double digits on a percentage basis with low to mid-single-digit organic sales growth. Diluted earnings per share for the year are expected to be in the range of $6 to $6.85, up 5% to 7% compared to last year's results. For the first quarter, we anticipate overall sales to be up low double digits with adjusted earnings of $1.56 to $1.60 per share, up 5% to 7% versus the prior year. In summary, AMETEK's performance in the fourth quarter and throughout the full year of 2023 was outstanding. Our businesses delivered exceptional results with all elements of the AMETEK growth model, playing a key role in our success. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, and then we'll be glad to take your questions. Bill?

Dalip Puri:

Thank you, Bill, and good morning, everyone. I look forward to meeting and working with all of you in the new future. I too want to express my thanks to Dave, to Bill, to the Board of Directors and the leadership team for their trust and confidence in me. It is an honor to serve as AMETEK's EVP and CFO and I'm very excited to lead AMETEK's incredible finance organization and to partner with Dave as we continue to deliver sustained and strong growth across our portfolio of businesses. I also want to express my thanks to Bill for his guidance and mentorship over the years and his commitment to a smooth transition. With that, I'll turn it back to you, Bill.

Kevin Coleman:

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

Matt Summerville:

Thanks, good morning, and congrats, Bill. I wanted to first ask about the EMG business and the inventory normalization you're seeing there. Using a baseball analogy, what inning are we in with respect to that normalization? And when do you start to see inflection in organic orders within EMG. So if you can first maybe start by elaborating there? And then I have a follow-up.

Matt Summerville:

Got it. And then can you review what you experienced in terms of price capture in '23 over '22 and what we should be thinking about in '24 and ultimately, what that price cost relationship looks like this year?

Operator:

Our next question will be coming from Deane Dray of RBC Capital Markets.

Bill Burke:

I appreciate that, Deane. Thank you very much.

David Zapico:

Yes, I'll start with that. With the Paragon acquisition, our portfolio has about 21% of sales into the med tech space. And we like to see that even larger. So we're still looking for acquisition in that space, and we plan to grow nicely within that space. And in fact, in the fourth quarter Q4, we were up mid-single digits with strong growth on our EMC and Roland businesses before we got Paragon integrated. So we're happy with the space. We want to continue to grow it, and we're still looking for deals in the space. Now I'll go around the horn, per se, I look at our various subsegments and end markets, and I'll start with our Process businesses, which are the largest component of our subsegments. And organic sales for Process were up low single digits in the quarter, completing a strong year that saw a broad-based growth across the segment. Growth was strongest within our CAMECA and Zygo businesses given their strong technology position with attractive research optics and medical applications. We look to 2024, we expect organic sales for the Process businesses to be up low single digits for the full year. So it's a low single digit in 2023, low single digits in 2024. Aerospace & Defense, strong fourth quarter to complete an excellent year. Growth was broad-based across all segments. Organic growth was up high single digits in the quarter. The growth was balanced across our commercial and aerospace businesses. And for 2024, we expect the organic sales of the Aerospace & Defense businesses to again be up high single digits with similar growth across commercial aerospace and defense. I'll move to our power businesses. They were up low double digits in the fourth quarter with contributions from the acquisitions of RTDS, UEI and Amplifier Research being offset by low single-digit organic sales growth. Our power businesses have been very active on the acquisition front with 3 highly strategic acquisitions over the past 15 months. These acquisitions broaden our exposure to attractive applications tied to renewable energy and modernization of the power grid. For 2024, we expect organic sales for the Power & Industrial businesses to be up low to mid-single digits. So there's some project -- that business is more impacted by certain projects, and we feel pretty good that we're going to be able to grow low to mid-single digits in 2024, some positive project evolutions. And then finally, our Automation & Engineered Solutions, the segment was up mid-single digits in the quarter, with contributions from the acquisitions of Paragon Medical and Bison Engineering, being offset by a mid-single-digit decrease in organic sales. Results were in line with expectations with the impact of the normalization of inventory levels that Matt asked about across our OEM customer base, and they really continued in the quarter as expected, and we expect them to continue into 2024. In 2024, we expect the Automation & Engineered Solutions business to be up low single digits with stronger growth in the back half of the year as our customer base normalizes inventory levels than in the first half. So the second half for that sun single will be stronger growth in the first half. That's around the horn, Deane.

David Zapico:

Yes. I think anywhere between 20% and 30% is a good number. So that's what we've always said. And we started tracking this, it was back in the 15% range. So we certainly have made tremendous progress with our new product development efforts. In terms of where the $100 million comes from, it's really bottom up. So our business units put plans together. And if they want to go beyond what they invested in the prior year, we will pitch those plans and their budgeting and it's spread across the business. It goes at our best growth opportunities, and it's going to be about $100 million this year.

Allison Poliniak:

Hi, good morning. Congrats, Bill and look forward to working with you, Dalip. Just following on Deane's R&D question. The $100 million is incremental from the '23 that did $1 million that you did $100 million, as you push into this med tech space, does that number need to go up higher? I mean I'm just trying to think through the investment needed to continue those trajectories for those business?

Allison Poliniak:

Great. And just any color on M&A. You obviously had a record year last year, still in a good position from a leverage standpoint. What are you seeing or what are we expecting? I know you mentioned med tech is sort of a vertical you want to go into? Where are you seeing the greatest opportunities? Any difference in terms of size that we should be thinking through? Just any thoughts there.

Operator:

Our next question will be coming from Jeffrey Sprague. of Vertical Research.

David Zapico:

Well, sure. Related to Paragon specifically, during the first half of the year, we're going to be doing some -- expect some muted growth for a couple of reasons. One, there is an inventory correction going on in the medtech market and we're going to look at the portfolio and potentially prove some less product -- less profitable product areas. So there's a whole process that we're going to go through during this first half. And -- but all that said, we're expecting the second half to be very strong because they got some new product introductions that are very exciting. But we continue to expect within the -- in our guidance is 8% to 10% accretion in 2024. And this is back-end loaded as we layer in the integration costs.

Jeffrey Sprague:

Yes, $0.08 to $0.10. Yes. And then just drilling a little bit further into some of the end markets, thanks for kind of going and doing it around the world. But kind of the semi-related markets in particular, which have kind of been the vein of a lot of people that exist in here recently kind of looking for the bottom and the turn. Like what are you seeing in those markets? What do you see in the quarter specifically? And how does 2024 look?

Operator:

Our next question will come from Nigel Coe of Wolfe Research.

David Zapico:

You're in the ballpark, Nigel.

David Zapico:

Are you talking about for 2024 or 2023?

David Zapico:

2024?

David Zapico:

Yes. I mean we had a fantastic margin year in 2023 and margins were up. Core margins were up 200 basis points in the fourth quarter, reported margins are up 120 basis points. EIG had a great quarter. EMG, it was dilutive because of acquisitions. And when you peel away what was going on, they're actually up 100 basis points. So really good margins, really good incremental. And we think for 2024, they're going to moderate a bit. They're going to continue to grow them, but they're going to moderate a bit. And for 2024, we believe that core margins are going to be up 30 basis points. We think that the core incremental are going to be up about 30 basis points. And we have built on our model cost reductions and pricing and things like that, but the whole thing that's to the core margins being up 30 and the core incremental is up 30 basis points. When you look at as reported margins for the year, those will be down probably about 50 basis points due to acquisition dilution. So that's the whole story.

David Zapico:

Yes, I'll do a summary of Q4 geographically, so you know where we stand. And we had growth in the quarter led by the U.S. and Asia. So the U.S. has been strong all along. Asia is picking up a bit. The U.S. was up mid-single digits with notable strength in our Materials Analysis division and Aerospace & Defense, Europe was down high single digits, driven in part by our automation business. And Asia was up about a little under 10%, about 9% with strength in our Materials Analysis division and our Ultra Precision Technology division. We have a dynamic that was a little different than what's going on in the general marketplace. Our China sales were up 22% in Q4. So that -- they were up about 14%, 15% in the year, 22% in Q4. Strong growth in our Materials Analysis division and UPT. When we look into 2024, we think we'll grow in Asia, but we think China is going to moderate to more of a flattish market because there was some -- one of project businesses that we benefited from. So it's still going to be good for us, but we are seeing the broader impacts on the economy, and we think it will be flattish on an orders basis in 2024 in China, and we'll grow in Asia.

Scott Graham:

Hi, good morning. Bill, congratulations on a great run. It's been a complete pleasure working with you. I hope you remain happy invest to your family. Thank you.

Scott Graham:

I was hoping, Dave, you could go through the orders a bit for the quarter, both in total and organically?

Scott Graham:

And would you expect, Bill, that sometime in the first half, perhaps the second quarter that the orders may be really kind of flatten out for you organically and then start to progress into the second half?

Scott Graham:

Got it. Thank you. And then might just one other question. Within the guidance, I guess, I was a little bit surprised at the level of organic you're expecting in a good way. And it looks to me off of your summary that, that's stemming from the aerospace and defense businesses. Would you mind parsing out for the total company kind of what you're expecting in sort of Aerospace versus Defense this year and maybe tack on what the drivers are, particularly in commercial?

Operator:

Our next question will come from Rob Wertheimer of Melius Research.

David Zapico:

Yes. That very well could happen, Rob. I think the -- I think we're in a 3% pricing world. And I think our volume has the potential to be a little stronger in the second half than the first half. So that -- what you're saying is kind of how we're thinking about it. We've been pretty conservative in our second half outlook. But if there was something that could exceed it, it will be the second half volume. Sales volume organically.

David Zapico:

Yes, we've been acquired some good medical businesses. I mean as we go back and look the Rauland business has been a fabulous winner for us and that business is growing in the market. And we made an EMC acquisition, and that business has been very successful. And that business is in the similar market that Paragon that gave us confidence. And it's -- they're classic AMETEK businesses. We win in the market based on technology, based on engineering. They're a little more OEM than end market. But basically, our whole EMG business is more OEM than end market. You have longer looked at your customers in terms of what you're going to be building in the future. So it's a pretty stable market. And we just think the growth in the case of Paragon over the next 3 years will be a little bit slower to get down on that gate because of some of the things that are going on. But we're pretty confident it's going to be a low double-digit grower over the next few years. So we think with those portfolio additions, they're going to grow just a bit greater than the rate of our base portfolio.

Andrew Obin:

Hi, guys. Good morning. Can you hear me? Hey, Bill, congratulations. Yes. So just a little bit more color. You -- I think other automation like short cycle companies expect second half rebound. Your comments sort of indicate something very similar. What kind of visibility do you have on that? And what gives you confidence that things are actually are going to turn in the second half? And I acknowledge that your view is very much consistent with what we hear from everybody else.

Andrew Obin:

Excellent. And just maybe a follow-on building on that. You talked about sort of increasing investment, but are there business units that need to start expanding capacity, where are you broadly in capacity utilization? And finally, as you are expanding capacity, what are you going to do differently about your supply chain and where you are putting this capacity versus maybe pre-COVID?

Operator:

Our next question is coming from Brett Linzey of Mizuho.

David Zapico:

This printing process is something that we do with just about every new acquisition. So this is not new. And Paragon is a little bigger business and we're going to be careful with it. And but it's something that we do all the time. So all M&A deals will go through this process. Paragon is going to be going through in the first half. And we look at our own portfolio and we do that kind of thing all the time. So yes, it can continue, and we're pretty good at that portfolio rationalization things. Do you have another question, Brett?

David Zapico:

In the U.S., there's a record number of projects from clean energy, power grid, semiconductor, they're just at a different level than they've been before. And a lot of that is from the government spending and backing. So that's largely continued. And at some point, it's going to provide an optimistic playing field for a lot of people in the industry. And I don't think we have that kind of upside built into our model right now, but it's -- there's planning going on with those projects right now. And that particular dynamic about the U.S. spending is driving the typical projects. So we're tracking to a very high number.

Joe Giordano:

Hey guys. How are you doing? So a lot of companies are seeing -- have seen orders kind of decline organically for multiple quarters now. And predominantly, it's all attributed to inventory adjustment and supply chain. And Harvey, anyone has said anything about underlying conditions not being fine. So just curious if one, if you would agree with that. And two, if it worries you that everyone is seeing order declines and no one is saying anything is happening other than supply chain adjustments.

Operator:

Next question is going to come from Steve Bar with KeyBanc Capital Markets.

David Zapico:

Yes. We have a little bit of exposure to advanced packaging, but it's spread across the business in different places, we're selling some components. So that's one of the items that our M&A teams are looking at, and we have exposure, but we'd like to have more.

David Zapico:

Yes. I think that market on the memory side, that market is pretty much bottomed. So I don't think there's -- when that ticks up, there's going to be a -- I think that's immediately going to flow to the bottom line. I think the inventory there is mainly cleared out.

Rob Mason:

Yes. Good morning, and I’ll offer my congratulations as well, Bill. Dave, a lot of questions have been asked. I just circle back to the process business. You talked about that going to be up low single digits for the year. There's a lot in there from a business mix and market standpoint. Could you maybe speak to anything that could outperform that low single digits or anything that would stand out? And just for clarity, say what is the actual process industry exposure there now?

Operator:

And I'm showing no further questions. I would now like to turn the conference back to Kevin Coleman for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

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.

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?

Kevin Coleman:

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

Deane Dray:

Thank you. Good morning everyone.

Deane Dray:

Hey, congrats on all the M&A successes here. Maybe we can start with Paragon. It looks right in your wheelhouse, precision medical robotics. If you could provide some color on the company in terms of like what percent are consumables? We're really like seeing all those one use applications. So consumables, comment on margins and growth, if you could, please?

Deane Dray:

All right. That was a great overview, and you hit all the key questions on the consumables, margins and growth. So it sounds like a great story. And if I could just -- on a follow-up question on EMG. So we're seeing destocking all over the sector in biopharma and med tech. Be interested in hearing from you, besides the destocking, is there any kind of read-through on the end markets in those businesses? Are you seeing any slowing there? And look, no one's getting -- no one has a crystal ball here in terms of how long you think this lasts, but I'd love to hear your expectation on the duration of this inventory normalization. Thanks.

Deane Dray:

That's all really helpful. Thank you.

Operator:

Our next question comes from Matt Summerville with D.A. Davidson. Your line is open.

Dave Zapico:

Hi, Matt.

Dave Zapico:

Yes. Sure, Matt. I mean if you'll go back and look at my last quarter or two, I told you EIG, was gaining momentum, and the momentum certainly showed up in Q3. We had an excellent operating quarter. I mean EIG margins were up 360 basis points, driven by high contribution leverage on the growth. We really had excellent price cost. We had strongly performing acquisitions and it all came together to put up record margins.

Dave Zapico:

Great questions, Matt. We think the closure -- it's dependent on regulatory approval, but nothing atypical. But we think -- we'll get the approvals and close sometime in the first quarter. In terms of year one, yes, we'll have a very modest cash EPS accretion. It's going to be impacted by purchase accounting, integration costs, realignment cost to financing costs, we'll pay with this with a mix of cash and debt. And -- but we'll have very strong accretion in year two. And we're excited about getting the business under our wing, improving the business and delivering and we're very excited.

Dave Zapico:

We'll make that decision at the time. Historically, we have not broken them out, but with the amount of acquisition activity that we have. It may make sense to do that. We haven't made a decision yet.

Operator:

Our next question comes from Allison Poliniak with Wells Fargo. Your line is open.

Dave Zapico:

Good morning, Allison.

Dave Zapico:

Yes. We think it's destocking. We think it's destocking. And the destocking last through the year-end. And -- but post destocking, we remain constructive. We are -- that business automation sells to a lot of markets and the health care part of that market is not doing well right now and some of the other exposures, but we think it's clearly destocking.

Dave Zapico:

I think you should think about Paragon is matching the AMETEK profile.

Dave Zapico:

Yes. I mean we're going to sit down with each of our teams, discuss 2024 over the next six weeks. We're going to review each of the individual businesses. We do deep dives, as you know, into what they are seeing in their niches, their market dynamics, growth opportunities, cost reduction opportunities, and we want to go through that -- these meetings before there's any commentary in 2024. We'll tell you in early February. But -- so in terms of talking about next year, we'll have the typical things like we expect price to offset inflation and CapEx will be about 2% of sales and things like that. But we're going to defer from talking about the overall plan until we get to meet with our teams and understand at a detailed level.

Dave Zapico:

Thank you, Allison.

Jeffrey Sprague:

Hey. Thank you. Good morning, everyone.

Jeffrey Sprague:

Good morning, Dave. Just to come back to Paragon, maybe one more time. Maybe somebody else will come at it again. I just kind of want to understand the -- maybe the profit improvement plan going forward. Because it looks like rough math right, margins, EBITDA margin is 25% or so. You're doing 800 to 1,000 bps better now than that in EIG. When you talk about kind of the aspirations for the business and the cost cutting and other opportunities, is that the sort of Zip code and margin improvement we should be thinking about here? And if so, over kind of how long a period of time?

Jeffrey Sprague:

And just to elaborate a little bit more on how this fits. Is there a kind of a commercial or operational synergy with other parts of the business? Or should we just think of this as an interesting, healthy kind of stand-alone business that drops into the portfolio?

Jeffrey Sprague:

And then maybe just one last one from me. The med tech world has been a little rocky here the last couple of years, procedures post-COVID everything. You characterized it as a double-digit secular grower. But are they kind of sitting in a little bit of a trough here impacted by those sorts of forces? Or maybe just kind of the...

Jeffrey Sprague:

Great. Congrats and good luck with it.

Scott Graham:

Hi, good morning. Thanks for taking minute here. Nice quarter.

Scott Graham:

You just -- a couple ideas filled what was the working capital percent last year?

Scott Graham:

Sure. Sure. I'll just -- I'll ask another one.

Scott Graham:

18.4. Okay. Thanks. And then the $1.5 billion of availability, just maybe walk us through there. That is net of Paragon, I assume? And is that like an assumption at about 2.5 times leverage?

Scott Graham:

Okay.

Scott Graham:

Right. Right. Yes, that's how you do that as well.

Scott Graham:

I guess--

Scott Graham:

Sure.

Scott Graham:

Thank you for that. I appreciate it. When you are looking at deals these days in this interest rate environment, you're obviously funding them off of a lot of balance sheet liquidity and admittedly, maybe now higher rates off of the revolver. But are you impute an interest rate that is kind of more market-oriented when you make these decisions?

Scott Graham:

Got it. Thank you. Last question is the typical one, Dave, would you mind kind of maybe unbundling on the four divisions?

Scott Graham:

Thanks very much.

Operator:

Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

Dave Zapico:

Yes. We can hear you Nigel.

Dave Zapico:

Okay. Q4 and geography. Okay. I'll go across the geographies. We had continued solid growth in the US, with the international slowing a bit. So I'll unpack that a bit. The US was up mid-single-digits, with notable strength in our process business. Europe was down low single-digits, notable strength in process and our aerospace business, but weakness in automation. You mentioned China. Our China exposure was down 3%. Strong growth in process weakness in automation. And overall, Asia was down about 10%. So China did better than overall Asia, kind of about 9% of sales. So again, up in the US, slowing in international markets. And the second question you asked was on Q4 and the guide for Q4. And our sales will be up mid-single-digits. We'll grow in revenue. There are two factors impacting the earnings in Q4. One of them is a higher tax rate. And the second one is there's some acquisition, integration costs and they're related to the deals we completed. But we're very confident in our guide for Q4.

Dave Zapico:

Core growth for Q4 was low to mid-single-digits.

Dave Zapico:

I think we're seeing some good demand on the EIG side from the typical year-end selling -- year-end sales that we typically get of capital spending, plus the EIG business is performing well. So our aerospace and our process businesses are performing well, and that's what driving the organic sales in Q4 to be higher than the organic sales in Q3.

Dave Zapico:

Yes, I think it's a little choppy in the market and people are reevaluating. And the interest rates are higher. So financing that debt on a continuing organization may be a challenge. And as I said, in the beginning of the year, our pipeline is strong. I would categorize our pipeline right now is very strong. We have a lot of attractive candidates we're looking at. And I'm just bullish on being able to differentiate AMETEK's performance over the next 12 to 24 months with our OpEx and our M&A.

Operator:

Our next question comes from Christopher Glynn with Oppenheimer. Your line is open

Dave Zapico:

Good morning, Chris.

Dave Zapico:

Yes. When you think about Paragon, they're largely selling to an OEM customer base, but they do sell some of their surgical instruments directly to the end customer, but it's largely an OEM customer base. We purchased the business from American Securities. And from our view, they did an excellent job running the business and got a fantastic management team in place, a good growth strategy. And they're -- what they did is really position kind of a pure med tech play, by positioning this with some other parts of their portfolio. So we're pretty excited about what we're buying.

Dave Zapico:

Yes. Thank you, Chris.

Peter Costa:

Good morning, everyone. This is Peter as on for Brett Linzey. So just coming back to orders. Could you provide some context during the monthly order cadence through the quarter and then moving into October? Have you been seeing anything concerning or anything tracking better than your internal expectations? Thank you.

Peter Costa:

Perfect. Thank you.

Operator:

Our next question comes from Andrew Obin with Bank of America. Your line is open.

Dave Zapico:

Good morning, David.

Dave Zapico:

Yes. As I mentioned, we were down about 3% organically in China, so there was some delays, but it wasn't substantial. In terms of increasing interest rates, that's one of the uncertainties that we're clearly looking at. And it's a very dynamic environment right now. And there are factors for sure, but we're not seeing an impact on projects, proceeding or anything like that from the interest rates at this point.

Dave Zapico:

We are not supply chain limited in Aerospace at this time. Now the industry is dealing with some supply chain difficulties, but we're not limited.

Dave Zapico:

Next?

Michael Anastasiou:

Thank you. Good morning everyone.

WilliamBurke:

Good morning, Michael.

Dave Zapico:

Yes. There's a balance in AMETEK's end markets. And we really like that balance. That's why we're able to navigate some of the challenges that we're going through right now. So it's -- we plan on keeping that balance. But if there are other attractive areas in the medical space, we'll certainly look at them. But it's -- we like the balance in the portfolio. And what was your other question, Michael? M&A dollars. I mean we have a distributed operating model. In all of our businesses, we have management teams there that are doing strategy work around their businesses and trying to make their businesses better, and they're bringing forward acquisition candidates. So we don't have a predefined number of -- predefined amount of capital that we're going to apply to certain markets. We're going to be looking for the deal, the deal quality, the quality of the businesses and if we have the management teams to integrate them. So we have a different viewpoint. We don't look at it from the top down in terms of dollars allocated per market.

Dave Zapico:

Yes. It's 20% now. It could go 25%, 30%. That wouldn't bother us, but we plan on having a diversified revenue base.

Dave Zapico:

Thank you.

Kevin Coleman:

Thank you, Abigail, and thanks, everyone, for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day.

Operator:

Good day and thank you for standing by. Welcome to the AMETEK Second Quarter 2023 Earnings Conference Call. [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.

Dave Zapico:

Thank you, Kevin and good morning, everyone. AMETEK achieved exceptional performance in the second quarter, marked by strong sales growth, outstanding operational execution and record results ahead of our expectations. In the quarter, we established records for sales, operating income, operating margins, earnings per share and EBITDA. We also ended the quarter with a record backlog. AMETEK's continued outstanding results reflect the strength of the AMETEK growth model, the quality of our niche differentiated businesses. The benefits from our organic growth initiatives and, most importantly, the outstanding efforts from our dedicated colleagues. Considering our strong second quarter results and the positive outlook for the remainder of the year, we are again increasing our earnings guidance for the full year. Now let me turn to our second quarter results. Second quarter sales were $1.65 billion, up 9% over the same period in 2022. Organic sales growth was 5%. Acquisitions added 4 points in the quarter and foreign currency was flat. Our book-to-bill ratio in the second quarter was 1.01, our 12th consecutive quarter of positive book-to-bill. As a result, we ended the quarter with a record backlog of $3.44 billion up $220 million from the end of 2022 and up $1.6 billion or 91% from the end of 2020. Operating income in the quarter was a record $419 million. A 15% increase over the second quarter of 2022. Operating margins were 25.4% in the quarter, up an impressive 130 basis points from the prior year. EBITDA in the quarter was a record $496 million, up 12% over the prior year, while EBITDA margins were also impressive at 30.1%. This operating performance led to record earnings of $1.57 per diluted share, up 14% versus the second quarter of 2022 and above our guidance range of $1.49 to $1.51 per share. Now let me provide some additional details of the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group had a great quarter with excellent sales growth and tremendous operating performance. Sales for EIG were $1.13 billion in the quarter, up 10% from the second quarter of last year. Organic sales were up a very strong 8% with acquisitions accounting for the balance of the growth. EIG sales growth in the second quarter was widespread across each of our divisions, with growth particularly strong in our Aerospace and Defense and Ultra Precision Technologies businesses. EIG's operating performance was impressive with strong profit growth and margin expansion. Operating income was $307 million up 16% versus the prior year, while operating margins were 27.1%, up a robust 130 basis points from the prior year. The Electromechanical Group also delivered strong sales growth and excellent operating performance in the quarter. EMG's second quarter sales were a record $511 million up 5% versus the prior year, driven by the acquisition of Bison Engineering, with organic sales roughly flat in the quarter. EMG's operating income in the quarter was $136 million up 10% compared to the prior year period. EMG's second quarter operating margins were excellent at 26.6%, up 100 basis points versus the prior year. While EMG's core operating margins was exclude acquisition dilution, we're up a sizable 180 basis points. Overall, AMETEK achieved outstanding performance in the second quarter of 2023. In addition, AMETEK's continued strong operating execution -- our strong results speak to the attractiveness and diversity of the end markets we serve. Our businesses hold leading positions in attractive niche market segments. Through our continued organic growth investments and strategic acquisitions, we are expanding our presence in market segments and niches aligned with strong secular growth drivers. As a result, our businesses are well positioned with differentiated solutions, to benefit from the meaningful and long-term investments in areas such as electrification, clean energy, health care efficiency and manufacturing reinsuring. In addition to our alignment with strong growth markets, AMETEK has seen great success from our organic growth initiatives and investments. For all of 2023, we expect to spend over $100 million on incremental growth investments. These investments are largely focused on expanding our sales, marketing and commercial excellence initiatives as well as broadening our research, development and engineering efforts. AMETEK's research development and engineering teams across our businesses consistently deliver innovative and next-generation products tailored to meet the unique needs of our customers. While there are numerous examples across the company, I wanted to highlight our Abaco business unit for their outstanding accomplishments. Abaco is a leading provider of commercial off-the-shelf embedded computing systems for aerospace, defense and specialized industrial applications. Demand for Abaco solutions remains strong, given the position as a leading provider of ruggedized technology solutions with advanced thermal management capabilities. Abaco was awarded the best overall design for high-performance PCBAs at the recent Accelerator Technology Innovation Awards. Abaco also recently introduced a next-generation integrated computing and graphics car with the latest GPU technology. This provides our customers with advanced computing graphics processing and security capabilities required in AI-focused applications such as intelligence, surveillance and reconnaissance, radar signal processing and deep machine learning for autonomous systems. In addition to Abaco, many other businesses are well positioned to benefit from the growing demand for high computing power and analytics. We recognize the pivotal role of organic growth initiatives and driving our overall growth strategy. These investments in organic growth, coupled with our market leadership and attractive market exposures position the company for continued success in driving sustainable long-term growth. Now switching to our capital deployment and acquisition strategy. Over the last three quarters, we deployed approximately $530 million on the acquisition of three businesses

Kevin Coleman:

Thank you, Bill. Benny, can we please open the lines for questions?

Allison Poliniak:

Could you maybe talk to about, obviously, book-to-bill being positive is very strong outcome here just given some of the uncertainties -- but could you maybe talk to order trends that you're seeing since then? Anything concerning I know you talked about sort of you've been to looks more in the longer term but any short-term kind of headwinds that you're starting to see there?

Allison Poliniak:

And leverage, clearly low here. You talked about a pipeline pretty active. Can you maybe give us some color on sort of what's been holding it back? Is it still in terms of executing, is it still, I would say, valuations at this point? You're just not seeing anything of great interest. Just any color there would be helpful.

Operator:

Our next question comes from the line of Matt Summerville from D.A. Davidson & Company.

Dave Zapico:

I'd be glad to, Matt. I'll start with our largest market segment, our process segment and overall sales for our Process businesses, were up high single digits in the quarter and that included mid-single-digit organic growth and contributions from the recent acquisition of Navitar. Growth remains solid across each of our process divisions with -- as mentioned in the prepared remarks, our Ultra Precision Technologies business delivered notably strong growth and driven by high-end optics and metrology businesses. We also grew solid growth across our med tech businesses and the Rauland business that we mentioned a couple of quarters ago continues to perform extremely well. So for the full year, we continue to expect mid-single-digit organic growth for the Process businesses, very solid. Aerospace and Defense. The growth remains very strong across our aerospace and defense businesses. In the quarter, both overall and organic sales were up low double digits on a percentage basis. And it really was reflective of strong performance in all of the subsegments in A&D. Growth was particularly strong across our aftermarket businesses as air travel returns to pre-pandemic levels, driving very strong demand for MRO products and services. And given the strong growth in the quarter, we now expect sales for the full year to increase low double digits on a percentage basis versus 2022. So we increased our outlook for our Aerospace and Defense businesses. Moving to Power & Industrial, overall sales were up mid-teens on a percentage basis in the second quarter. And that was really fueled by mid-single-digit organic sales growth and the contributions from the RTDS acquisition which has performed extremely well. Organic growth in the quarter was strongest in our power test and measurement business, programmable power. And for the full year, we continue to expect mid-single-digit organic sales growth for our Power and Industrial businesses. And finally, our Automation & Engineered Solutions. Overall sales were up mid-single digits, with mid-single-digit decline in organic sales being offset by the contributions from the Bison acquisition. And as we noted previously and in my question to Allison, I talked about normalization of inventory levels is continuing across our OEM businesses and the impact is most significant in our automation business. For the full year, we now expect organic sales for our Automation & Engineered Solutions business to be up low single digits with stronger growth expected across our EMIP businesses. That's across the -- around the horn on that.

Dave Zapico:

Yes, I'd be glad to. In terms of the automation business, I think it's going to last a couple of quarters. It's probably going to bottom near the end of this year. And what we have there is the end markets for automation are very interesting. The places where the inventory correction is steepest, as with our medical technology customers, with our life science customers. We have been positioned on a lot of COVID test equipment. Also our semiconductors, especially in the memory area is weak right now. So the -- that is correcting and it's going to correct in the second half. But I really think what the end markets that business serves is coiled the response. So in an upward fashion. So we kind of saw this coming. It's impacting OEM businesses but very significantly in our automation business but we're positioned well to manage through that, increase our guidance and because we're really operating well. Our productivity programs are progressing nicely. As I mentioned, the recent acquisitions are performing very well. Price inflation, we have good visibility and the A&D business is accelerating. It's our highest margin segment. Now moving on to your next question. I really feel good about the geographical story around AMETEK too. We saw a strong broad-based growth across all segments. The U.S. was up mid-single digits. We had broad-based strength -- notable strength in our process and aerospace and defense businesses. Europe was up high single digits, really, really positive performance there with notable strength in our process and power businesses. And Asia was up with 3 points with notable strength in process.

Deane Dray:

First, I got to start with the shout-out complement for that one pager in your website that gives you the quarter recap and backlog and free cash flow. I don't know, I didn't see the timing in the first quarter but we really appreciate having that up on the website; so, thank you. Listen, a lot of good questions. We've gone through already. Just on this normalization and we're seeing that everywhere and it seems to be not very disruptive for you all. Is there an opportunity? Maybe this is for Bill, would you be releasing any buffer inventory as things start to normalize, you go from just in case a bit closer to just in time. Is that an opportunity?

Deane Dray:

Good. That was the timing we were looking for. And maybe some commentary on price cost, any kind of pricing carryover benefit and contribution from new products in the quarter?

Deane Dray:

Great new products?

Deane Dray:

You can get to the Hall of Fame with lots of singles and doubles.

Operator:

Our next question comes from the line of Christopher Glynn of Oppenheimer & Company Inc.

Dave Zapico:

Yes. When I'm talking about other businesses, I'm talking about what's happening, for example, in some of our process instrumentation businesses, we're doing a lot of work there to improve bringing some technologies that were in the lab to the field. And especially in our Spectro Scientific business where there's a lot of technology that we're putting in smart technology, where there's AI algorithms in it and we're doing measurements that were previously done in the lab, now we're doing them in the field. So that's really good and that's all around our predictive maintenance programs that we have with Spectro Analytics. So we're really positive on that. If you think about our -- some of our materials analysis businesses, there is a tremendous amount of data that we're taking from materials analysis. And we're showing our users that in unique and ways highlighting the technologies, our measurement technology. So you have situation where the graphics power, the graphics intensity of what we're doing is kind of a state of the art. So really, across our businesses, a couple of the trends around predictive maintenance, trends around moving the measurements to the field and trends around in the research environment, the analytical computational power to take the data that we have and provide our users with actionable intelligence is would be the areas I'd highlight.

Dave Zapico:

Yes. On both our Aerospace and Defense market, we have not peak. Demand is strong in the commercial market but I talked about it but outlook for the year, both commercial and the defense market have low double-digit outlook. So we're really well positioned in the defense market and some of the things I talked about with Abaco played to that. But both sides of A&D, commercial and defense are strong and we clearly have not peaked.

Brett Linzey:

Just wanted to come back to orders. I was hoping you might be able to provide some context for how things track throughout the quarter, any preliminary view on July. And is there anything notable to glean from the changes in the mix of orders between project or CapEx related versus more OpEx purchases?

Brett Linzey:

And then just shifting over to pricing. As we do work through this normalization of some of the destock dynamic, are there any areas you think there's maybe price concessions? Or do you think you can hold the line on price, if not grow it, in your businesses there?

Operator:

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

Dave Zapico:

Yes. As I mentioned in the last couple of calls, I do expect our sales to outpace orders in the second half of the year. But it will be a moderate impact and we'll end the year with historically high backlog in comparison to what we've done in the past. So it will be a modest impact as we progress through the second half of the year.

Dave Zapico:

Yes. Margin performance has been great. And in fact, in -- the second quarter, we had really healthy core incrementals of 52%. So you're correct on your outlook for the year and it probably is a bit higher because of our performance has been outstanding. And if you look at reported Anchor, we're both up 130 basis points at the company level, healthy incrementals and -- we think for the full year, the incrementals will be similar in both groups and 40% is a good number.

Unidentified Analyst:

This is [indiscernible] on for Joe Giordano. I just wanted to check if there's any color you guys can provide on like some specific end markets in terms of any customer in specifically looking forward, if you have any color on any slowdowns on the medical side, like pressure on biotech because we're hearing from other people who are in the industry that there's been some pressure and some slowdown in that area.

Operator:

So, I do not see any other questions at this point. I would now like to turn the conference back to Kevin Coleman for closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the AMETEK’s First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Dave Zapico:

Thank you, Kevin, and good morning, everyone. AMETEK had an excellent start to 2023 with outstanding results in the first quarter. Continued solid demand across our diverse set of end markets led to strong sales in order of growth and another record backlog. Our businesses delivered tremendous operating performance with record operating profit and robust margin expansion in the quarter. Additionally, we generated record cash flows and reported a portion of that cash flow on our first acquisition of the year Bison Gear & Engineering. Given these results and the outlook for the remainder of 2023, we are increasing our sales earnings guidance for the full year. Now let me turn to our first quarter results. First quarter sales were $1.6 million up 10% over the same period in 2022. Organic sales growth was excellent at 9%. Acquisitions added 2 points while foreign currency was a slight headwind. AMETEK’s continued strong organic sales growth reflects its success of our organic growth initiatives and our leadership positions across diverse and attractive niche markets. Demand also remains solid with overall orders growing 6% in the quarter. Organic orders were up low single digit on a percentage basis against the difficult prior year comparison. Book-to-bill was 1.13 in the quarter for our 11th consecutive quarter of positive book-to-bill. We ended the quarter with a record backlog of $3.4 billion an increase of over $200 million from the end of 2022. As noted, AMETEK’s operating performance in the first quarter was exceptional. Operating income in the quarter was a record $405.5 million a 15% increase over the first quarter of 2022. Operating margins were a record 25.4% in the quarter up 120 basis points from the prior year. Core operating margins were to exclude acquisition dilution and the gain from our facility sale in the first quarter of 2022 or up an impressive 180 basis points with strong core margin expansion in each group. EBITDA in the quarter was $482 million up 11% over the prior year and EBITDA margins were 30.2%. This outstanding margin expansion is a testament to the strength of our operating model a differentiation of our businesses and the great work of our teams. This tremendous operating performance led to a high quality of earnings with diluted earnings per share of $1.49 up 12% versus the prior first quarter of 2022 and above our guidance range of $1.38, $1.42 per share. Now let me provide some additional details of the operating group level. First, the electronic instruments group. EIG delivered excellent sales growth and operating performance with sales up 13% versus the prior year to $1.12 billion. Organic sales were up 11%, acquisitions added three percentage points with foreign currency of slight headwind in the quarter. This strong organic sales growth is broad based of our businesses and geographies with growth particularly strong across our aerospace and defense businesses in the quarter. EIG’s operating profit was impressive resulting in a record operating profit in the quarter. Operating income was $309.7 million up 27% versus the prior year, while EIG margins were 27.7% up a robust 290 basis points from the prior year. The Electromechanical Group also delivered excellent results in the quarter with solid organic sales growth and strong operating performance. EMG's first quarter sales were $479.9 million, up 2% versus the prior year, with organic sales growing 4% in the quarter and foreign currency a 2-point headwind. Growth was notably strong across our Aerospace & Defense businesses in the quarter. EMG's operating income in the first quarter was $120.5 million, and operating margins were 25.1%. On a core basis, excluding acquisition dilution and the gain from a facility sale in the first quarter of 2022, EMG margins were up 50 basis points versus last year's first quarter. So overall tremendous performance by our businesses and all AMETEK colleagues. All elements of the AMETEK growth model, operational excellence, global and market expansion, new product development and strategic acquisitions are working well. These strategies allow us to quickly react to changing market conditions, invest in our businesses for long-term growth and deploy our capital on value-enhancing acquisitions. Now switching to our capital deployment and acquisition strategy. The primary focus for our strong cash flow remains strategic acquisitions. We are managing an active pipeline of attractive acquisition candidates, and we have a strong balance sheet and significant financial capacity to support this strategy. I'm excited to announce our most recent acquisition, Bison Gear & Engineering. Bison is an excellent strategic fit with AMETEK's automation businesses, helping expand our presence within this attractive secular growth market. Bison is a leading provider of customized motion control solutions for use across a wide range of high-precision applications within the automation, food and beverage, power and transportation markets. Bison's portfolio of linear and motion control technology is highly complementary with existing technologies, providing an expanded product offering that enables wider and deeper market participation in attractive markets and applications, including growing electrification requirements. Bison is based in St. Charles, Illinois, and has annual sales of approximately $80 million. In addition to our acquisition strategy, we remain focused on ensuring sustainable growth by investing in organic growth initiatives. This includes making strategic growth investments and driving broader adoption of growth has ends, digitalization and new product development. For all of 2023, we now expect to invest approximately $100 million in support of these growth initiatives, including investments in research, development and engineering and sales and marketing. One way we celebrate and recognize the great work of our businesses, new product development efforts is through the AMETEK Innovation Award. This award is provided annually to the AMETEK business who best demonstrates breakthrough innovation of new technology driving expanded organic growth opportunity. The most recent innovation award winner was our Creaform business for developing its innovative new handheld 3D metrology solution, PL3. Creaform, based in Levy, Canada, is a leading provider of 3D portable and automated measurement technologies for applications such as reverse engineering, quality control, product development and non-destructive testing. The introduction of PL3 further expands the breadth of Creaform's metrology offering and makes high-end 3D scanning accessible to professionals and small enterprises, opening up a new attractive market segment. In addition to the PL3, Creaform also recently added a new scanner to their HandySCAN 3D platform, the HandySCAN BLACK Alete Limited. The latest addition to Creaform's flagship metrology-grade 3D scanners set a new industry standard for handheld devices. I would like to extend my congratulations to the entire Creaform team for their innovative new products and on-going efforts to push into boundaries and metrology. Now turning to our outlook for the remainder of the year. We remain cautious in the short term due to uncertainties in the macroeconomic environment. However, given the strength of the AMETEK growth model and our proven operational capabilities, we are confident in our ability to manage through these challenges. The company's record backlog and leadership positions across attractive mid and long-cycle markets position us well for continued strong growth. Given our strong first quarter results and outlook for the balance of the year, we are increasing our sales and earnings guidance. For the full year, we now expect overall sales to be up mid-to-high single digits versus our prior guidance of up mid-single digits, with organic sales expected to be up mid-single digits. Diluted earnings per share for the year are now expected to be in the range of $5.96 to $6.10, up 5% to 7% compared to last year's results. This is an increase from our previous guidance range of $5.84 to $6 per diluted share. For the second quarter, we anticipate overall sales to be up mid to high-single digits with earnings of $1.49 to $1.51 per share, up 8% to 9% versus the prior year. In summary, AMETEK had an excellent first quarter. We delivered strong orders and sales growth, robust margin expansion, a record backlog, record cash flows and increased our earnings guidance for the year. The company's differentiated technology solutions, market-leading positions in attractive markets and proven operating capabilities have allowed us to navigate through challenging economic cycles. Additionally, AMETEK's strong cash flows and robust balance sheet provide us meaningful flexibility to deploy capital to drive shareholder value. We remain well positioned for continued long-term growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Bill?

Kevin Coleman:

Thank you, Bill. Chris, could we please open the lines for questions?

Matt Summerville:

Thanks, Morning. A couple questions. Dave, can you remind us what you consider to be your canary-like businesses and how they may be informing your go-forward kind of view on the environment? Obviously, you sound pretty positive this morning. And then I have a follow-up.

Matt Summerville:

And just a follow-up, Dave, can you talk about where you were in Q1 with respect to price-cost, what that's going to look like, and the magnitude of absolute realization you expect in 2023 versus 2022? Thank you.

Matt Summerville:

Perfect. Thank you, David.

Operator:

Thank you. One moment for our next question. This question comes from Allison Poliniak of Wells Fargo. Your line is open.

Dave Zapico:

Good morning, Allison.

Dave Zapico:

Yes, we're confident in our guide and for the balance of the year, but we are cautious given how early we are in the year and given the risks in a global macro environment. And as I mentioned in the prepared remarks, our book-to-bill was 1.13. That's pretty strong. And if you take out the bison acquisition, it was still 1.1. It was positive in both groups. Our backlog is over 50% of annual sales is well above normal historical levels. So I think we're pretty well positioned to perform this year. We have mentioned that there is an expectation that we're returning to more normalized ordering patterns. And now that the supply chain is improving and we're seeing some of that play out. And we also have some difficult comps. But when you look across our portfolio, we're feeling really good. We're mid and long cycle. And it feels like the biggest part of our business, EIG, is starting to accelerate. So we're feeling pretty good.

Dave Zapico:

Right. That's a great question. And, we really like the bison deal. We deployed about $100 million on it. And it's an excellent fit with our automation business. We talked about expanding our capabilities there. But more broadly, we have a very, very wide and deep pipeline. And that pipeline is filled with attractive candidates. And it feels like the pricing has come in a bit. And it feels like we're in good position to continue our acquisition strategy and provide a differentiator in coming quarters and years with our strong balance sheet and with our capability there and with our strong pipeline. I'm fairly optimistic that with the pricing coming in and our strong -- we've done work for many years on developing the pipeline of deals, that we're going to have some success this year.

Dave Zapico:

Okay, Allison.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

Maybe we can take the tour of the key end markets and maybe you can start with arrow and defense because that got called out in both segments. Thanks.

Deane Dray:

That’s all really helpful. Thank you. And a follow-up question is actually a follow-up to Allison's question around normalizing and normalization of the supply chain. So maybe if you could just expand on that, product scarcity. How has that played out? And anything on -- when you said normalized order patterns, so what the customers spacing out the orders at smaller size? And anything -- and maybe for Bill, are you releasing buffer inventory because before it was -- recently it's just in case, now coming back a bit more to just in time, but will you be releasing any of this buffer inventory? Thanks.

William Burke:

And Deane, from the inventory perspective, we did add a little bit in the quarter, but we'd expect as we progress through the balance of the year, you're going to see that release of inventories that we've built up over the last year or so, as you say, just in case in protecting our customers and making sure we had enough right inventory on hand.

Dave Zapico:

I think it will be -- it's -- we're going to be continuing to grow the business, which requires working capital, but I think you will see a release in the inventories as being a benefit to the overall free cash flow, which we'd expect would be in that 120% area for all of 2023.

William Burke:

Then, we had record operating cash flow, record free cash flow and 120% conversion in the first quarter. So we think as our business is getting back to normal, you're going to see benefits in the cash flow.

Operator:

Thank you. One moment for the next question. This next question comes from Josh Pokrzywinski of Morgan Stanley. Your line is open.

Dave Zapico:

Yes. I think EIG is more of a long-cycle business. And as these supply issues resolve, we're able to convert on more. And I would expect our backlog to stay strong for the balance of the year. I'd expect it to be a little bit lower at the end of the year, but it's still in excess of typical. And in my view, EIG is just starting to fire on all cylinders. I mean it's just really across the board. And one of the things that's happening in EIG is along with strong growth, along with solid pricing, the profit performance from the recent acquisition has been excellent. And for RTDS and Navacar, the acquisitions we did last year, they're doing well. And you're seeing Abaco also have a very strong year-over-year quarter in margins. So it feels really good for EIG. And I don't think we've taken our foot off the gas.

Dave Zapico:

No, it's similar. I mean we're in precision motion control. So we're moving things to automate them. And we're diverse end markets. We're in medical and factory automation and a bunch of end markets. But just the business that we acquired, Bison Gear & Engineering is a perfect example of what you're talking about. I mean they have about a year of backlog. And they're really capacity limited, and that's something that we can fix in relatively quick order. And it's a business with to provide us a lot of cost synergy, but at the same time, growth drivers of automation and freeing up capacity to go after reshoring and electrification requirements are really on our sweet spot. So -- while we largely have the capacity in our existing businesses, we can really improve Bison. So that's in line with what you're saying in these automation markets where there's secular growth drivers and good strong backlogs.

Dave Zapico:

Thank you.

Robert Wertheimer:

So I wanted to circle back to M&A, where some peers have called out a very strong M&A market, including, I think, one person call it kind of one of the best ever. And your comments were very positive that could very well be AMETEK execution developing the time. So I'm curious about your general feel on the M&A markets. And if they are quite strong, I think you indicated prices coming down, what's changing in the dynamics there?

Robert Wertheimer:

Great. That makes total sense. Thank you. And then just to go in a different direction, to follow up on your comment on, you mentioned like 5, 4 maybe pricing phase a little bit barely really towards the end of the year. Is it more to give us a sense of what's happening in the cost base inflation? Have you seen dramatic down in some areas or logistics or whomever? I'm just curious give us a little bit of sense of breakdown there.

Robert Wertheimer:

Thank you.

Nigel Coe:

Thanks good morning everyone. [Indiscernible] so if we go back to sort of late January, February, when you put together the 1Q plan, obviously, it came in a lot stronger, which is not untypical, but I think the upside is a bit more than normal. So maybe just talk about what surprised you to the upside? Clearly, A&D was was a lot stronger. I'm wondering if you saw an inflection in defense. Curious if you saw maybe China coming in a lot better than perhaps expected. Just kind of walk off better. And maybe talk about was it mainly backlog conversion supply chain driven or customer demand driven?

Nigel Coe:

No, there's no question about it. You talked about the expectation that you'd expect to burn some backlog between now and year-end. You talked about order patents changing, which is very natural with the supply chain improvements. Have you seen that change, David, happened already? Did that sort of happen in March, April? Are we starting to burn backlog through the second quarter? Curious on what you see in real time.

Nigel Coe:

Okay. Great. And then it seems like I'm close to the end of the queue here. So maybe I'll throw 1 more question if I can. The Bison deal, motion control, I don't think we've seen the motion control acquisition for some time or one of the size. Is there a desire to maybe do more of these kinds of deals, maybe become a bit more of a scale player in motion control?

Nigel Coe:

Great. Thanks Dave.

Operator:

One moment for the next question. This question comes from Christopher Glynn of Oppenheimer & Co. Inc. Please go ahead.

Dave Zapico:

No, it's definitely not episodic. I mean, we had -- if you go back after we first bought it, we get the supply chain crisis in electronics, and we had to work through all of that. And we've also augmented the management team. And I think we're really in the right gear now with that business. The defense market is strong. We're in the right areas. So that business is going to accelerate and be a big contributor for us going forward.

Dave Zapico:

Yes. I think both groups have a very good chance to grow mid-single digits for the full year organically. EIG, a little bit stronger than EMG, but both groups have the potential to grow mid-single digits.

Dave Zapico:

Thank you Chris.

David Ridley-Lane:

Good morning. This is David Ridley-Lane on for Andrew. Lot of commentary about improvements to supply chain. Just to go down a little, what about in your Aerospace business? We've heard more mixed messages about component availability and it could be constraints revenue. Obviously, you had very strong revenue growth this quarter, just an update on Aero's specific supply chain.

David Ridley-Lane:

Thanks for that. And then on the Electronic Instruments Group, that commentary is very interesting that you're actually seeing some re-acceleration in demand. Are there any secular themes that you would point to? Can you identify certain maybe reshoring-related projects, etcetera, that are helpful there?

David Ridley-Lane:

Thank you for the details.

Operator:

One moment for the next question. This question comes from Michael Anastasiou of TD Cowen. Please go ahead.

Dave Zapico:

Sure. The medical market is about 15% of our sales now. And in the quarter, it was up high teens with strong growth in our Rauland business and also our Engineered mechanical components business. And for the full year, we expect it to be up high single digits. So we expect to be growing in that medical space. And it's much like the discussion I just had with David about we're in the right niches because in Rauland, their primary product are really to improve the efficiency of nurses. And as long as I've been alive, you have nursing shortages in the United States and Rauland's nurse call systems make nurses more efficient. So coming out of the pandemic, we see a lot of spending on dealing with the shortages, and Rauland has great products and very successful in that area. And in our EMC business, we're dealing with a lot of single procedure, single-use-type devices that we're building components for and that business is accelerating. So both of those core businesses that make up the large part of our medical businesses are doing well, and we were up high teens in the quarter.

Operator:

Thank you. One moment for our final question. Our last question comes from Joseph Donahue of Baird. Your line is open.

Dave Zapico:

Good.

Dave Zapico:

In relation to the semiconductor, I think there's a lot happening now for -- we're transitioning from one technology to -- new technology and smaller and smaller nodes. So I think that we're seeing the strength in semiconductor research spending, and it's one of the strongest areas of our business right now. Again, it's another area where we're in the right niche.

Dave Zapico:

I think when you look at EMG the organic growth was up 4%. So they had a good, good quarter. You had some headwinds from currency. And so EIG grew faster for sure, but EMG was still really solid.

Dave Zapico:

Thank you.

Kevin Coleman:

Thank you, Chris, and thank you, everyone, for joining our conference call today. As a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day.

Operator:

Good day, and welcome to the AMETEK’s Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Dave Zapico:

Thank you, Kevin, and good morning, everyone. I'm very pleased with AMETEK's results in the fourth quarter, and for all of 2022. AMETEK's continued excellent performance reflects the quality of our niche-differentiated businesses, the strength of the AMETEK growth model, and the expanding impact of our organic growth initiatives, and most importantly, the outstanding efforts of our global employees. Thank you to all AMETEK colleagues for your many contributions to our success. We have navigated many challenges over the last few years only to emerge stronger and even better positioned for sustained growth. Our results in the fourth quarter were outstanding. Stronger-than-expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter. We ended the year with a record backlog as demand remains solid across our diverse end markets. Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence serving attractive growth markets. Operationally, we're performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion. Additionally, cash flow in the quarter was outstanding, providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions. Now, on to the results of the fourth quarter and all of 2022, fourth quarter sales were $1.63 billion, up 8% over the same period in 2021. Organic sales growth was 9%, acquisitions added two points. And foreign currency was a three-point headwind in the quarter. Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3.22 billion. Operating income in the quarter was a record $398 million, a 10% increase over the fourth quarter of 2021. Operating margins were 24.5% in the quarter, up 50 basis points [technical difficulty] from the prior year. EBITDA in the quarter was a record $489 million, up 12% over the prior year. And EBITDA margins were an impressive 30.1%. This outstanding operating performance led to record earnings of $1.52 per diluted share, up 11% versus the fourth quarter of 2021, and above our guidance range of $1.45 to $1.47 per share. Now, let me provide some additional details at the operating group level; first, the Electronic Instruments Group. The Electronic Instruments Group delivered continued strong sales growth and excellent operating performance. Sales for EIG were a record $1.16 billion in the quarter, up 10% from the fourth quarter of last year. Organic sales were up 9%, acquisitions added 3%, and foreign currency was a three-point headwind. EIG growth was broad-based with particularly strong growth across our Aerospace & Defense and Ultra Precision Technologies businesses in the quarter. EIG's operating income in the fourth quarter was a record $307 million, up 10% versus the prior year, while EIG margins were a very strong 26.5% in the quarter. The Electromechanical Group also finished the year with outstanding performance. EMG's fourth quarter sales were $466 million, up 4% versus the prior year, with organic sales growing 8%, and foreign currency a three-point headwind. Growth was again broad-based across EMG, with our Aerospace & Defense businesses leading the growth. EMG's operating income in the fourth quarter was $115 million, up 9% compared to the prior year period. EMG's fourth quarter operating margins were 24.6%, up an impressive 100 basis points versus the prior year. Now for the full-year results; overall, performance was outstanding in 2022, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.15 billion, up 11% from 2021. Organic sales increased 11%, acquisitions added 2%, and foreign currency was a three-point headwind. Operating income for 2022 was $1.5 billion, up 15%. And operating margins were 24.4%, up 80 basis points versus the prior year. While core margins up and impressive 130 basis points, reflecting our ability to successfully manage inflation and supply chain challenges. EBITDA for the year was $1.83 billion, up 15% from 2021, with EBITDA margins a very strong 29.7%, up 100 basis points from the prior year. Full-year earnings were $5.68 per diluted share, up an impressive 17% versus the prior year. AMETEK's performance in a challenging operating environment highlights the proven strength and flexibility of the AMETEK growth model and our ability to successfully navigate through uncertain economic times. Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth, develop innovative new products, and identify and execute on operational efficiency improvements. Additionally, our businesses worked closely with our corporate development team to manage our acquisition pipeline, resulting in a continued strong deployment of capital on strategic acquisitions. In 2021 and 2022 combined, we deployed over $2.4 billion in capital on eight acquisitions, and acquired over $600 million in annual sales. We expect to remain active in 2023 as our deal pipeline remains very strong, and our balance sheet provides us significant financial capacity to deploy capital. In addition to our acquisition strategy, we remain committed to investing in organic growth initiatives and are very pleased with the impact these investments are having on AMETEK's growth. As I highlighted during our last earnings call, AMETEK's portfolio has strategically evolved with increased exposure to higher growth market segments. This portfolio evolution has been driven by our acquisition strategy and by the organic investments we are making in our businesses. In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research, development, and engineering, and sales and marketing. One way we measure the success of these investments is through our Vitality Index, which was an outstanding 27% of sales in 2022. Our increased investments in RD&E continue to yield innovative advanced technology solutions, including within our Zygo business. Zygo, which is based in Middlefield, Connecticut, designs and manufactures advanced optical metrology systems and ultra-precise optical components and assembles for a diverse set of end markets, including defense, research, and semiconductor. Zygo partnered with the Lawrence Livermore National Laboratory's National Ignition Facility to provide high-end precision optics in support of their inertial fusion energy testing program, which provides a significant leap forward in the realization of sustainable fusion energy. Achieving these heights of energy production requires the use of highly precise optics and scalable manufacturing processes which were developed in partnership with Zygo. I want to congratulate the Zygo team for their tremendous contributions supporting important advancements in research and technology. Lastly, let me briefly touch on the supply chain issues and inflation. While tightness remains in certain areas, we're seeing improvements in the global supply and logistics. Additionally, although inflation remains elevated, we are also seeing modest improvements versus levels experienced in 2022. As we look ahead to 2023, we will continue to proactively manage our supply chain and remain confident in our ability to offset inflation with price increases. Now, shifting to our outlook for the year ahead, while macroeconomic uncertainties remain, we are confident in the quality of our businesses, the flexibility of the AMETEK growth model, and our ability to navigate through these uncertain times. Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023. For 2023, we expect both overall and organic sales to be up mid-single-digits versus 2022. Diluted earnings per share for the year are expected to be in the range of $5.84 to $6, up 3% to 6% compared to last year's results. For the first quarter, we anticipate overall sales up mid-single-digits with adjusted earnings up $1.38, of the $1.38 to $1.42, up 4% to 7% versus the prior-year. In summary, AMETEK's fourth quarter and full-year results were excellent, our record backlog, the strength and flexibility of the AMETEK growth model and a world class workforce position us nicely for 2023. 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?

Kevin Coleman:

Thank you, Bill. Rocco, can we please open the lines for questions?

Allison Poliniak:

Hi, good morning.

Allison Poliniak:

Can we turn organic investments, the $90 million, if I recall, I think that's a step-down from what you did in '22, just any color there, is there just some conservative nature just given the uncertainty out there, are there unusual projects in '22, just any thoughts on that side?

Allison Poliniak:

Great. And then a lot of concerns, I mean, out there about potentially some weakness showing up in H2. Just any thoughts on your end, what you're seeing in terms of that? Is there anything concerning or sort of popping out that has you a bit worried as we enter the back-half of '23 and into '24?

Allison Poliniak:

Perfect, thank you.

Operator:

And the next question today comes from Deane Dray with RBC Capital Markets. Please go ahead.

Dave Zapico:

Good morning, Deane.

Dave Zapico:

Sure, Deane. I'll start with your second question, the geographical outlook. Strong, broad-based growth across most geographies. Our Asia region was flat on China headwinds. And to your point, our fastest growing market was Europe. Europe was up 12% with notable strength in both our process and aerospace defense markets. And then we had a really strong performance in the U.S., up 10% organically; broad-based strength, notable strength in our process businesses. And in Asia, as I said, it was flat, with notable strength in aerospace and defense, and process. And China was down for us low double digits in the quarter on a difficult prior-year comp, and the impact of the Zero COVID policy. And Asia, we think that the China situation is going to turn around as the reopening occurs. And we're pretty optimistic for it in the second-half. But that's the picture in Q4, really strong broad-based growth, strongest Europe, and second U.S. Most of Asia was really good, and in China there was some weakness. Okay, and the second question was in market segment's summery. I'll take a walk around the company. In our process area, our overall process businesses, they were up high-single digits in the quarter. Organic sales were up 10%, and you also had the contributions from the acquisition of Navitar and it was offset by foreign currency headwinds. And as we saw throughout last year, growth across our process businesses was particularly -- was broad-based, but it was particularly strong in our Ultra Precision Technologies businesses in the quarter. And as we look ahead to 2023, we expect organic sales for process businesses to be up mid-single digits for the year. Next I'll talk about Aerospace & Defense. Our Aerospace & Defense businesses had a very strong finish to the year, and with overall and organic sales up mid teens. So, that was the strongest growth rate of the year for Aerospace & Defense. Our commercial businesses led the growth in the quarter. We had sales of high teens on a percentage business in the commercial business. And Defense was also strong in the quarter, growing low double digits. And for all of 2023, we expect organic sales for our Aerospace & Defense businesses to be up mid-to-high single digits, with commercial aerospace growth expected to be modestly stronger than defense growth. I'll next go to our Power & Industrial, overall sales for our Power & Industrial businesses were up high single digits in the fourth quarter, driven by mid single-digit organic growth and the contributions from the acquisition of RTDS. Growth in the quarter was particularly strong across our programmable power business. For all of 2023, we expect organic sales for our Power & Industrial business to be up mid single digits, with similar growth across both the Power & Industrials segments. And finally, I'll talk about our Automation & Engineered Solutions market segment. And overall sales were up low single digits in the fourth quarter, with very solid mid single-digit organic sales growth, had some currency headwind in that segment. I was very pleased with the overall growth and the performance of Automation & Engineered Solutions in 2022. They're continuing to expand exposures in attractive niche markets. And in particular, our Engineered Medical Components business saw strong growth in the quarter. And in 2023, we expect organic sales for our Automation & Engineered Solutions businesses to be up mid single digits, with similar growth expected across both our Automation and Engineered Solutions business. That's a walk around the company. Deane, do you have any more questions?

Dave Zapico:

That's a great question, Deane. Our overall orders were up 1.5% in the quarter. And the overall demand environment, as I answered Allison's questions, feels really solid. We had our 10th straight positive book-to-bill quarter. And we ended with an all-time record backlog as I mentioned in the prepared remarks. And this level of backlog, as I said, was 50% of our annual sales, well above the normal level of 30%. And it's up 78% from the end of 2020. So, we're in a really strong position as we enter 2023. So, your question on some of the nuances, if you recall, over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth. But the first was the difficult comparisons we're facing because as orders have been strong for an extended period of time. To give some context, over the prior nine quarters, our orders grew over 20% a quarter. So, it's been sizable and sustained that that helped build the backlog. The second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns. Now that the supply chain is improving and -- we started to see that dynamic play out in the fourth quarter. So, overall, we're comfortable with our order levels in Q4. After starting off in January and we just finished January, we had another sold orders a month, ahead of our expectations, and solidly up from January 2022 order levels. So, again, we're feeling pretty good with a strong backlog and our orders are hanging in there. So, we think that we're in -- looking at a pretty good year.

Dave Zapico:

Okay, thank you, Deane.

Brett Linzey:

Hey, good morning, all.

Brett Linzey:

Hey. And just wanted to come back to the inventories, some of your peers have been talking about some elevated inventory in some of the OEM channels. Just curious what you're seeing there in some of your serve businesses, serve markets, and if there's any area of concern there?

Brett Linzey:

Yes, okay, that's great. And just shifting to the 2023 outlook, I was hoping maybe you could put a finer point on just the underlying assumptions. How much price do you expect verses volume? And then anything specific on the quarterly phasing, I mean do you think you'll get growth in both the first-half, second-half, or as you work down the backlog, does it begin to decline there in the second-half?

Brett Linzey:

No, that’s it. Great quarter, and I appreciate all the insight.

Operator:

Thank you. And our next questioner today is Scott Graham from Loop. Please go ahead.

Dave Zapico:

Hey, that’s a really interesting, that's really helping, but that team did a great job. And it’s working on fusion energy is a great thing. And, it just shows our capability.

Dave Zapico:

Yes. That was overall worse. Organic was down minus 2. And so, overall orders were up 1.5. Organic was minus 2. And both segments were about at that same 1:1 book-to-bill. So, wasn’t a distinct difference between the segments, and as I said, overall demand environment showed a solid 10 straight quarter of book-to-bill. So, we have a strong backlog. And as we have this dynamic of customers returning to more normalized ordering patterns, we have a strong backlog. So, we feel pretty good about it.

Bill Burke:

I don’t think in the second half of the year. I mean we are going to have some healthy price. But I think it’s going to actually increase a bit in the second-half. And, if you think about our order rates we have that mid single digit sales growth forecasted. We think we are going to grow orders also. So, orders are going to grow a little bit less than sales as our forecast. But, they are going to grow. And really by the end of the year, our backlog is still going to be at elevated levels. It will be down a bit, but at elevated levels historically. So, we are clearly done with our strong backlog which will provide a buffer is there is some kind of downturn. We don’t see it right now. And our orders will be up, but it will be up a little less than sales. And again, at the end of 2023, we have historically elevated levels of backlog similar to now.

Bill Burke:

Yes, Scott.

Will Jellison:

Hi, good morning. This is Will Jellison on for Matt Summerville today.

Will Jellison:

I was curious about your recent acquisitions with Navitar and RTDS. And just about your first observations with those companies as part of the AMETEK portfolio. How did things unfold related to expectations? And how are things going with bringing them into the fold?

Will Jellison:

Great, thank you. And then, as a follow-up, staying on the theme of M&A, you mentioned your pipeline is very strong at this juncture. And I'm curious about what your observations are in the market overall, with respect to the level of competition for assets and where multiples seem to be moving in your observation?

Will Jellison:

That's great. Thank you for taking my questions.

Operator:

And our next question today comes from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

Dave Zapico:

Hi, David.

Dave Zapico:

Yes, I think that what you're going to see, there's still an elevated level of inflation. But at the same time, some of the one-time distributor purchases of inventory are going to go away. So, there's going to be some natural tailwinds for us in terms of margins, we expect that working in the P&L in our budget model, our productivity/cost savings of about $110 million. So, we think it'll be substantial. And that's where we're starting out the year but we think there's maybe even some upside to that. And it's largely related to a, and there is a couple of opposing forces, you're dealing with inflation and some costs of things are still going up. But at the same time, some of the supply chain issues are working the other way and especially the higher prices that we paid on a one-time basis to some of the electronics distributors to continue shipping products.

Dave Zapico:

We added a lot of capacity in 2022, we brought some low cost region facilities online, we've talked about that. For 2023, we expect our capital expenditures to be flat, a little bit more than 2% of sales, as we've done historically. So, and it's a good balance between growth CapEx, maintenance CapEx and CapEx funding cost reductions.

Dave Zapico:

Yes, I'm not going to break out the deal, but there'll be slightly accretive.

Dave Zapico:

Okay, thank you, David.

Joe Giordano:

Yes, you mentioned -- you mentioned customers kind of getting normalized on their behavior and their ordering patterns, like, can you maybe get a little bit finer point on that? And like, what you're seeing, are actual things getting pushed out, or are they just ordering more real times?

Joe Giordano:

And then when you mentioned the M&A pipeline looks good. How do you think about timing of execution, just given the macro year, given it looks like industrial is getting lighter, is getting weaker and are you relying on trailing 12 results that might be different than forward 12 for acquired for companies that you're looking at. So, how does it impact your desire to do be actionable right now, given where we are in the business cycle?

Joe Giordano:

Thanks, guys.

Operator:

And our next question today comes from Rob Mason of Baird. Please go ahead.

Dave Zapico:

Hello, Rob.

Dave Zapico:

Yes, that's a good way to think about it. And I'll try to put some more color into that. I mean, if you look at 2022, what stood out was our healthcare component. And our healthcare component is a big part of process across all of AMETEK, it's about 50% of sales, but it's a big part of the process. And I'll give you an idea. And Q4, our rolling business was up 20% organically, so they're really doing a good job. And that market has -- hospital spending has been fantastic for us, and people were putting in new systems post-pandemic. Also the semiconductor markets about 6% of sales, and the vast majority of that is in process and the semiconductor market was up high single-digits in the Q4. And we think in 2023, there'll be a slight downtick there, that'll be up low-to-mid but still growing because we have a lot of applications and research and also in the areas that are continuing to grow. So, we're in the right places in semiconductor. So, you got healthcare, you got semiconductor. You got the research market where we've had with our CAMECA business just every lab in the world has to have one of our atom probes, every lab in the world has to have some of our SIMS products. So, their backlog is really good. And they're doing well. And then, you got the old traditional oil and gas part of process. And that's doing very well in Q4, it was up high-single-digits. And for all '22, it was up low double-digits. And for '23, we expect plus high-single-digits. So, process is doing very well. And we think it's going to continue in the future.

Dave Zapico:

Good question. In terms of incrementals, in both groups, I think the core incrementals will be up 30% to 35%. And I think the core and reported margins will be up 30 to 40 Bps. So, we really think we have a clear line of sight to grow margins. Again, there'll be healthy incrementals. And we'll be able to increase our core margins as we go forward.

Dave Zapico:

Thank you, Rob.

Steve Barger:

Hey, good morning, guys.

Steve Barger:

Some automation and robotics OEMs have recently talked about distribution channel bottlenecks being a hindrance to growth, can you just talk about what you're seeing in that market, both near-term and expectations for how that market grows in the future?

Steve Barger:

Got it. Thanks. And obviously semiconductor demand has been under pressure, especially on the memory side. But you just said you're in the right places to grow. That mean, you're supplying the makers of tools that go to foundry and logic or just how will you grow this year in the context of what's a pretty tough memory side?

Steve Barger:

That's great detail. Thank you.

Operator:

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Coleman for any closing remarks.

Operator:

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Operator:

Welcome to the AMETEK’s Third Quarter 2022 Earnings Conference Call. All participants will be listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Dave Zapico:

Thank you, Kevin, and good morning, everyone. AMETEK delivered record results in the third quarter, with stronger-than-expected sales growth and outstanding operational execution, leading to earnings above our expectations. Operationally, our businesses are performing exceptionally well and successfully offsetting inflation with price increases, resulting in impressive margin expansion. We are also seeing continued strong and broad-based demand across our diversified niche markets, leading to impressive organic order growth and a record backlog of $3.2 billion. And this morning, we announced the acquisition of two excellent businesses, Navitar and RTDS Technologies, expanding our presence in high-end precision optics and in testing solutions for the electric power grid and renewable energy applications. I will provide more details on these acquisitions shortly. Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our earnings guidance for the full year. Now, let me turn to our third quarter results. Third quarter sales were a record $1.55 billion, up 8% over the same period in 2021. Organic sales were up 11%. Acquisitions added one point and foreign currency was an approximate four-point headwind in the quarter. Demand also remains solid across our niche markets with organic orders growing 9% in the quarter, while book-to-bill was 1.07, our ninth consecutive quarter of positive book-to-bill. Backlog at quarter end was a record $3.2 billion, up approximately $1.4 billion from the end of 2020. Operating income in the quarter was a record $385 million, a 14% increase over the third quarter of 2021, while operating margins were 24.8% in the quarter, up a robust 140 basis points from the prior year, with strong margin expansion in each operating group. Our ability to drive meaningful margin expansion despite the inflationary environment reflects the differentiation of our technology solutions and our flexible operating model. EBITDA in the quarter was also a record of $463 million, up 12% over the prior year, with EBITDA margins a record 29.8%. This outstanding performance led to a record of earnings of $1.45 per diluted share, up 15% versus the third quarter of 2021 and above our guidance range of $1.36 to $1.38. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group delivered excellent operating performance with continued strong and broad-based growth. Sales for our Electronic Instruments Group were $1.05 billion in the quarter, up 7% from the third quarter of last year. Organic sales were up 10% with a 1-point contribution from acquisitions being more than offset by an approximate 3-point foreign currency headwind. Growth was again broad-based across our EIG businesses with particularly strong growth within our Rauland, TMC Precitech and Thermal Process Management businesses. Third quarter operating income was $272.7 million, up 11% versus the prior year. And operating margins were 25.9% in the quarter, up 90 basis points from the prior year. The performance of our Electromechanical Group in the quarter was exceptional, with excellent sales growth and record operating results. EMG's third quarter sales were a record $497.7 million, up 8% versus the prior year, with organic sales growing 13% in the quarter and foreign currency at four-point headwind. Growth was very broad-based across all of our EMG businesses. EMG's operating income in the third quarter was a record $136.5 million, up 19% compared to the prior year period. EMG's third quarter operating margins were a record 27.4%, up an impressive 240 basis points versus the prior year. Overall, our businesses delivered outstanding performance in the third quarter, allowing us to manage an uncertain macro environment, meaningfully expand margins and drive earnings ahead of our expectations. Now switching to our acquisition strategy. We are very pleased to announce the acquisition of two highly strategic businesses. Navitar and RTDS Technologies are both excellent businesses and highly strategic acquisitions for AMETEK, expanding our presence with -- in attractive secular growth markets. Now let me take a moment to provide additional color on both these acquisitions, starting with Navitar. Navitar is a leading provider of optical solutions for critical applications across several markets, including medical and life sciences research, machine vision and robotics, semiconductor and industrial automation. Their comprehensive suite of high-precision, custom optical solutions includes fully integrated imaging systems, sensors, cameras, optics and software. Navitar is an excellent strategic and complementary fit with our Zygo business unit as their technical capabilities around cameras and optical systems further expand Zygo's product offering. Additionally, Navitar is a high-growth business, well positioned to benefit from the growth in demand for precision optical solutions across attractive growth markets. Navitar was privately held and is based in Rochester, New York. Now switching to RTDS Technologies. RTDS provides real-time digital simulation systems used by utilities and research and educational institutions in the development and testing of the electric power grid and renewable energy applications. Their simulation solutions allow engineers to rapidly prototype, verify and test the performance of the electric grid, power instruments and networks and close-looped systems to help accelerate product development life cycles and decreased testing costs. RTDS' simulation solutions are playing a key role in the modernization of the electric grid infrastructure, as well as supporting secular growth drivers, including renewable energy, distributed power generation and energy storage. The acquisition of RTDS broadens our Power Instruments businesses testing and simulation capabilities, while expanding our exposure to the renewable energy space. RTDS is privately held and based in Winnipeg, Canada. We are very excited to welcome the Navitar and RTDS teams to the AMETEK family. We deployed approximately $430 million on these acquisitions, acquiring approximately $100 million in annual sales. Over the past two years, we deployed more than $2.4 billion in capital and acquisitions and acquired eight businesses. Our acquisition pipeline remains solid. We have a strong balance sheet and significant financial capacity and look to remain active in deploying capital on strategic acquisitions. In addition to the recent acquisitions, we continue to focus on ensuring AMETEK is strategically positioned for long-term sustainable growth. Our businesses are driving broader adoption of our organic growth initiatives, including growth presence, digitalization and new product development. This includes making strategic growth investments across our businesses to help support and accelerate growth. For all of 2022, we now expect to invest approximately $110 million in support of these growth initiatives. We are seeing great results from these efforts over both the short-term and long-term. In the third quarter, sales from new products introduced over the last three years was 27%, a record level for our Vitality Index, reflecting the great work of our teams. These efforts have helped lead to double-digit organic sales growth in each of the past six quarters. Now, turning to the outlook for the remainder of the year. While we remain cautious in the short-term, given the dynamic macro environment, we are highly confident in the quality of our businesses and our ability to manage through these challenging times. Given our strong third quarter results and outlook for the balance of the year, we are again increasing our sales and earnings guidance. For the full year, we now expect overall and organic sales to be up approximately 10% versus our prior guidance of up high single-digits. Diluted earnings per share for the year are now expected to be in the range of $5.61 to $5.63, up 16% compared to 2021. This is an increase from our previous guidance range of $5.46 to $5.54 per diluted share. For the fourth quarter, overall sales are expected to be up mid-single-digits compared to the same period last year, and fourth quarter earnings are expected to be in the range of $1.45 to $1.47 per diluted share, up 6% to 7% versus the prior year. To summarize, AMETEK had another excellent quarter. We delivered record performance, strong orders and sales growth, robust margin expansion, increased our earnings guidance for the year and acquired two strategic businesses. The strength of the AMETEK growth model and our talented global workforce is evident in our results, thus far this year and will continue to allow us to operate at a high level through challenging market conditions. We remain well positioned for continued long-term growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Bill?

Kevin Coleman:

Thank you, Bill. Kate, could we please open the lines for questions?

Matt Summerville:

Thanks. Good morning. Dave, maybe could you talk a little bit about the organic performance you saw by geographic region and what, if anything, for lack of a better word, your canary type of businesses might be telling you about the macro environment? And then I have a follow-up.

Matt Summerville:

Got it. And then, Dave, could you maybe comment a little bit on what your price realization was in the third quarter? What your price/cost sort of ratio look like and how we should be thinking about incremental price actions for 2023? Thank you.

Matt Summerville:

Very good. Thanks, David.

Matt Summerville:

Yes, it did. Thank you, very much.

Allison Poliniak:

Hi. Good morning.

Allison Poliniak:

So Dave, you talked a little bit -- certainly some caution out there. Your orders are really strong. Just maybe give your perspective of this cycle and maybe more importantly, how you think AMETEK's relative position is entering maybe a next downturn prior to relative past cycles? Just any thoughts there?

Allison Poliniak:

Great. That's helpful. And then just on the acquisitions. I know you said at least Navitar, high growth. Could you maybe give a little bit more color on is it -- are the growth of these acquisitions sort of in line with AMETEK a little better? And just any color on the margin performance relative to AMETEK core? Thanks.