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

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

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

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

Kevin Coleman: Thank you, Abigail. Good morning and thank you for joining us for AMETEK’s third quarter 2023 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today’s call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK’s filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2022 or 2023 results or to 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization.

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

Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We’ll begin today’s call with prepared remarks by Dave and Bill, and then we’ll open it up for questions. I’ll now turn the meeting over to Dave.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Deane Dray with RBC Capital Markets. Your line is open.

Deane Dray: Thank you. Good morning everyone.

Dave Zapico: Good morning, Deane.

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?

Dave Zapico: Yes. Sure. I’ll give you my view of Paragon. As you stated, the leading provider of highly engineered medical components and instruments. When you look at the key market drivers of this acquisition, you have the aging population, the demographic shifts, you also have procedure innovation, where the minimally invasive procedures are becoming more percentages of surgeries, and they do a great job with that. And also in this market, there’s a continuing trend toward outsourcing the OEMs. And they want to — the OEMs want to accelerate their time to market, and Paragon is really well positioned with significant new product wins in this space. It serves specialty applications. I talked about the orthopedics, minimally invasive surgery, robotic surgery and drug delivery.

Orthopedics is the largest, but they’re strong positions in each of the applications. Now, the portfolio is one of your questions, consisted of single-use and consumable surgical instruments and implantable components, and about 40% of the business is recurring in nature. So the single-use and consumables surgical instruments are about 40% of the revenue. So we really like that. As a blue-chip customer base, over 600 programs, with diverse sources of revenue, about 85% of the business is on sole-source programs. It’s a very, very sticky business. When you combine the regulatory environment with lengthy approval processes and the capabilities of Paragon, there’s high switching costs. It’s a business that has unique value to its customer base.

We did a lot of surveys in the market, and they’re the highest quality provider. They have excellent customer service. A differentiator for them is their design and development capability. And I really considered a true partner by their customers. And when I look at this from — that’s about Paragon, when I look at what it does for AMETEK, it increases our med tech exposure now to over 20%. It’s one of the goals we’ve been trying to achieve. It adds about $500 million in revenue to EMG, and that revenue is — comes from Paragon, which is a secular low double-digit grower. It really fits our business model with the highly engineered products that provide unique value to customers. It’s a growing, profitable business that provides multiple avenues of growth.

And there’s really an opportunity for us to improve margins by applying the AMETEK growth model. It’s already a profitable business, but there’s plenty of room for us to apply the AMETEK growth model and expand margins. Paragon will benefit from the AMETEK’s global infrastructure for sure, and we like the management team. They’re highly talented team, and we’re excited about what we can accomplish together. And importantly, the deal economics meant AMETEK’s traditional dealers, and this is on a large deployment of capital. So, our return on invested capital orders are met by this deal. And we paid about 15 times TTM EBITDA for the business. So we’re very excited for the business. It’s a good business for us. We’ve been looking at these businesses for some time and a universal excitement amongst Paragon and AMETEK.

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.

Dave Zapico: Yes. Sure, Deane, great questions. For the quarter, we grew our top line 5% on a mid-single-digit guide. Our revenue was in line with the guide. The acquisition performed a bit better. And we maintained, as I said, our full year sales guide mid-to-high single-digits and organic growth of mid-single-digits. To maintain that organic guide for the full year, our Aerospace and Defense business is stronger and our automation is weaker. And they’re offsetting. That’s one of the benefits of the AMETEK portfolio. And specifically in terms of Q3 revenue, we saw faster destocking in our automation businesses than we anticipated. So that’s what we saw there. And we expect the destocking to continue through the end of the year.

In terms of your question is, is it a, destock or a downturn? It’s very difficult dynamic environment right now and lots of uncertainties, with the geopolitical risk, the interest rate increases. They’re factoring in, for sure. But from what we see, this is largely an inventory correction. And demand looks constructive, with many new projects in the offing and the projects are not being delayed or canceled. Our Aerospace and Defense looks solid. Our Medical looks solid, significant projects and semiconductor, clean energy, power grid. So we remain positive post-destocking. And we think that destocking will continue through the end of the year. And in terms of 2024, we’re going to sit down with our teams and understand what’s going on. But in general, we’re constructive.

Deane Dray: That’s all really helpful. Thank you.

Dave Zapico: Thank you, Deane.

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

Matt Summerville: Thanks. Good morning.

Dave Zapico: Hi, Matt.

Matt Summerville: Dave, your EIG margin this quarter really moved into a new ZIP code for AMETEK. I was wondering if you could maybe talk about the key drivers as you just think about the sequential performance, right, Rev flat, profitability up $28 million on the OP line as well as kind of the year-over-year dynamics, so maybe if you can just kind of flesh all of that out, that would be helpful. And then I have a follow-up.

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.

Matt Summerville: And then, just as a follow-up. With respect to Paragon, I appreciate the stats you shared. Is there any way to kind of parse out what you think year one cash EPS accretion would look like? And then what the expected closure timing might be for that? Thanks.