AMETEK Q3 2021 Earnings Report

AMETEK EPS Results

• Actual EPS: $1.26
• Consensus EPS: $1.18
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $1.01

AMETEK Revenue Results

• Actual Revenue: $1.44 billion
• Expected Revenue: $1.41 billion
• Beat/Miss: Beat by +$32.18 million
• YoY Revenue Growth: N/A

AMETEK Announcement Details

• Quarter: Q3 2021
• Date: 11/2/2021
• Time: Before Market Opens
• Conference Call Date: Monday, November 1, 2021
• Conference Call Time: 8:00PM ET

AMETEK (NYSE:AME) is a global manufacturer of electronic instruments and electromechanical devices that serves a broad range of industries. Headquartered in Berwyn, Pennsylvania, the company designs and produces precision instruments, electronic measurement devices, specialty sensors, and electric motors and motion control systems. Its product portfolio includes analytical and monitoring instruments, calibration equipment, power supplies, embedded electronics, and industrial motors and drives used for critical applications.

The company operates through two primary business platforms — an electronic instruments group focused on analytical, test and measurement and sensor products, and an electromechanical group that supplies motors, actuators, and related power and motion solutions. AMETEK’s products are used across aerospace and defense, industrial manufacturing, power generation, process industries, semiconductor and electronics, and medical markets. Beyond initial equipment sales, the company provides aftermarket services, technical support and calibration services that support long-term customer operations.

Founded in the early 20th century, AMETEK has grown through a combination of internal development and targeted acquisitions to broaden its technical capabilities and geographic reach. The company maintains a global footprint with operations, manufacturing and sales in the Americas, Europe and Asia, supporting multinational customers and regional supply chains. AMETEK emphasizes engineering-driven innovation, quality manufacturing and customer service as key elements of its approach, managed by an experienced executive team and board of directors focused on long-term operational performance and product development.

AMETEK Q3 2021 Earnings Call Transcript

Key Takeaways

• AMETEK delivered record third quarter sales of $1.44 billion (up 28% YoY), record orders of $1.55 billion (up 37% YoY) and ended with a backlog of $2.62 billion.
• Third quarter operating income reached a record $338 million (up 25% YoY) with adjusted margins of 24.7%, EBITDA of $415 million (28.8% margin) and earnings per share of $1.26 (up 25%).
• Global supply chain and logistics remain challenging, with extended lead times and rising inflation, though AMETEK’s pricing actions (3.5% price increase vs. 2.5% inflation) have more than offset cost pressures.
• Year-to-date capital deployment reached approximately $1.85 billion across five strategic acquisitions, and management expects continued M&A activity supported by strong cash flow and a robust pipeline.
• AMETEK raised its full-year 2021 guidance to low-20% sales growth with organic sales up low-double digits and earnings per share of $4.76 to $4.78 (about 21% growth).

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the AMETEK third quarter 2021 conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations. Please go ahead, sir.

[Kevin Coleman, VP of Investor Relations at AMETEK]

Thank you, Angie. Good morning, and thank you for joining us for AMETEK's third quarter 2021 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today's call, we will make forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the 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.

[Kevin Coleman, VP of Investor Relations at AMETEK]

Any references made on this call to 2020 or 2021 results will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization, and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020, and the realignment charge, charges taken in the first quarter of 2020. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks by Dave and Bill, and then we'll open it up for questions. I'll now turn the meeting over to Dave.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you, Kevin, and good morning, everyone. AMETEK had another outstanding quarter, with better-than-expected sales growth, strong operating performance, and earnings above our expectations. We established records for sales, EBITDA, operating income, and earnings per share in the quarter. Demand remained strong across our diverse set of end markets, leading to robust order growth and a record backlog. While the global supply chain and logistics networks remains challenging, our businesses are doing a tremendous job navigating these issues and delivering results which exceeded our expectations. Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our sales and earnings guidance for the full year. This strong overall performance reflects the exceptional work of all AMETEK colleagues, as well as the strength, flexibility, and sustainability of the AMETEK growth model.

[Dave Zapico, Chairman and CEO at AMETEK]

AMETEK's proven business model is central to our focus on creating a sustainable future for all stakeholders. We are very proud of the important steps we are taking to further sustainability across AMETEK, and last week, we published our latest corporate sustainability report to highlight our efforts in this area. This report provides information on our sustainability initiatives, the strong progress we have made, and the commitments we are making to create a better future. I welcome you all to read our latest corporate sustainability report, which is located on our website. Now let me turn to our third quarter results. Third quarter sales were a record $1.44 billion, up 28% over the same period in 2020 and above our expectations. Organic sales growth was 17%. Acquisitions added 11 points, and foreign currency was a modest benefit in the quarter.

[Dave Zapico, Chairman and CEO at AMETEK]

Overall orders in the third quarter were $1.55 billion, an increase of 37% over the prior year period, while organic orders were up an impressive 31% in the quarter. We ended the quarter with a record backlog of $2.62 billion, which is up over $800 million from the start of the year. Third quarter operating income was a record $338 million, a 25% increase over the third quarter of 2020, and operating margins were 23.4%. Excluding the dilutive impact of acquisitions, core operating margins were 24.7%, up 70 basis points versus the third quarter of 2020. EBITDA in the third quarter was a record $415 million, up 25% over the prior year, with EBITDA margins of 28.8%.

[Dave Zapico, Chairman and CEO at AMETEK]

This outstanding performance led to record earnings of $1.26 per diluted share, up 25% over the third quarter of 2020 and above our guidance range of $1.16-$1.18. We continue to generate strong levels of cash flow, with third-quarter operating cash flow of $307 million and free cash flow conversion of 109% of net income. Overall, tremendous results in a challenging operating environment. Next, let me provide some additional details at the operating group level. First, the Electronic Instruments Group. Sales for EIG were a record $982 million, up 31% over last year's third quarter. Organic sales were up 15%, acquisitions added 16%, and foreign currency was a modest headwind.

[Dave Zapico, Chairman and CEO at AMETEK]

While growth remains broad-based, growth was particularly strong across our Ultra Precision Technologies and our power and industrial businesses. EIG's third quarter operating income was a record $245 million, up 20% versus the same quarter last year, and operating margins were 25%. Excluding acquisitions, EIG's core margins were excellent at 27.2%, in line with prior year margins. The Electromechanical Group also delivered outstanding sales growth and excellent operating performance. Third quarter sales increased 21% versus the prior year to $459 million. Organic sales were up 20% and currency added 1% to growth. Growth remained strong across all of EMG, with our automation businesses again delivering notably strong growth in the quarter.

[Dave Zapico, Chairman and CEO at AMETEK]

EMG's operating income in the quarter was a record $115 million, up a robust 36% compared to the prior year period. EMG's operating margins expanded an exceptional 270 basis points to a record 25%. Now switching to our acquisition strategy. AMETEK has had an excellent year with a record level of capital deployment, leading to the acquisition of five highly strategic businesses. AMETEK has deployed approximately $1.85 billion on acquisitions thus far this year, reflecting the strength of AMETEK's acquisition strategy and our ability to identify and acquire highly strategic companies. Our proven operating capabilities allow us to drive meaningful improvements across our acquired companies, resulting in outstanding returns on capital. Generating strong returns on capital deployed is critical to long-term sustainable growth, an important element of AMETEK's strategy.

[Dave Zapico, Chairman and CEO at AMETEK]

AMETEK's strong cash flow generation continues to support our capital deployment strategy. Our acquisition pipeline remains very active. Our M&A teams continue to work diligently identifying attractive acquisition opportunities, and we expect to remain busy over the coming quarters. We also remain focused on investing back into our businesses to support their organic growth initiatives, including in support of their new product development efforts. In the third quarter, we invested over $75 million in RD&E, and for all of 2021, we now expect to invest approximately $300 million or approximately 5.5% of sales. Through these investments, our businesses develop unique and highly differentiated solutions to help solve their customers' most complex challenges. One such example is a new product introduction from AMETEK Gatan.

[Dave Zapico, Chairman and CEO at AMETEK]

Gatan is a leading provider of direct detection technology for electron microscopy, supporting high-end research in materials and life sciences applications. Gatan recently introduced the Stela Hybrid-Pixel Camera, the only fully integrated hybrid pixel electron detector with a Gatan Microscopy Suite. This new product reinforces Gatan's leadership position, providing the highest quality TEM diffraction camera, allowing the user to perform 4D STEM analysis with rapid speed and high dynamic range. Gatan's new camera builds on a long history of disruptive and award-winning technology. In August, the Stela Camera was awarded the 2021 Microscopy Today Innovation Award and called one of the 10 game-changing products and methods. I would like to congratulate the team at Gatan for the recent launch of the Stela Camera and for their support of important research applications. Now let me touch on the supply chain issues. The global supply chain remains challenging.

[Dave Zapico, Chairman and CEO at AMETEK]

We see extended lead times for a broad range of materials and components, with logistics issues and labor availability adding to the complexity. While these difficulties exist, we exceeded our sales estimates for the quarter and are navigating the challenging environment well given our agile operating approach. These supply chain issues are leading to higher inflation. However, given our differentiation, we were able to more than offset this inflation with higher pricing, leading to a strong price inflation spread. While we expect these challenges will continue into 2022, we remain well positioned to navigate the issues given the strength and flexibility of the AMETEK growth model. Moving to our updated outlook for the remainder of 2021. Given our strong performance in the third quarter and the continued strong orders momentum and record backlog, we have again raised our 2021 sales and earnings guides.

[Dave Zapico, Chairman and CEO at AMETEK]

For the full year, we now expect overall sales to be up in the low 20% range versus our previous guide of up approximately 20%. Organic sales are now expected to be up low double digits on a percentage basis over 2020 as compared to our previous guide of approximately 10%. Diluted earnings per share for 2021 are now expected to be in the range of $4.76-$4.78, an increase of approximately 21% over 2020's comparable basis, and above our prior guide of $4.62-$4.68 per diluted share. For the fourth quarter, we anticipate that overall sales will be up in the low 20% range versus last year's fourth quarter.

[Dave Zapico, Chairman and CEO at AMETEK]

Fourth quarter earnings per diluted share are expected to be between $1.28-$1.30, up 19%-20% over last year's fourth quarter. In summary, AMETEK's third quarter results were excellent. Our teams continue to execute and our businesses are performing well. Our performance through a challenging environment shows the resilience and strength of the AMETEK growth model. The asset-light nature of our businesses, our leading positions in attractive niche markets, and our world-class workforce will continue to drive long-term sustainable success. The proven nature of the AMETEK growth model continued to drive long-term success for all of AMETEK stakeholders. 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.

[Bill Burke, EVP and CFO at AMETEK]

Thank you, Dave. As Dave highlighted, AMETEK delivered excellent results in the third quarter, with continued strong sales growth and orders growth and outstanding operating performance. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were $22.1 million, up $4.8 million from the prior year, largely due to higher compensation expense. As a percentage of total sales, G&A was 1.5% for the quarter, unchanged from the prior year. For 2021, general and administrative expenses are expected to be up approximately $18 million, driven by higher compensation costs or approximately 1.5% of sales, also unchanged from the prior year.

[Bill Burke, EVP and CFO at AMETEK]

Third quarter other income and expense was better by approximately $4 million versus last year's third quarter, driven by a $6 million or approximately $0.02 per share gain on the sale of a small product line in the quarter. This gain on the sale was more than offset by a higher effective tax rate in the quarter of 19.5%, up from 17.5% in the same quarter last year. For 2021, we now expect our effective tax rate to be between 19.5% and 20%. Actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year estimated rate.

[Bill Burke, EVP and CFO at AMETEK]

Working capital in the quarter was 14.9% of sales, down 210 basis points from the 17% reported in the third quarter of 2020, reflecting the excellent work of our businesses in managing working capital. Capital expenditures in the third quarter were $26 million, and we continue to expect capital expenditures to be approximately $120 million for the full year. Depreciation and amortization expense in the third quarter was $75 million. For all of 2021, we expect depreciation and amortization to be approximately $295 million, including after-tax acquisition-related intangible amortization of approximately $138 million or $0.60 per diluted share. We continue to generate strong levels of cash given our asset-light business model and working capital management efforts.

[Bill Burke, EVP and CFO at AMETEK]

In the third quarter, operating cash flow was $307 million, and free cash flow was $281 million, with free cash flow conversion 109% of net income. Total debt at quarter end was $2.65 billion, up less than $250 million from the end of 2020, despite having deployed approximately $1.85 billion on acquisitions thus far in 2021. Offsetting this debt was cash and cash equivalents of $359 million. At quarter end, our gross debt to EBITDA ratio was 1.6 times, and our net debt to EBITDA ratio was 1.4 times.

[Bill Burke, EVP and CFO at AMETEK]

We continue to have excellent financial capacity and flexibility with approximately $2.25 billion of cash and existing credit facilities to support our growth initiatives. To summarize, our businesses drove outstanding results in the third quarter and throughout the first nine months of 2021. Our balance sheet and tremendous cash flow generation have positioned the company for significant growth in the coming quarters and years. Kevin?

[Kevin Coleman, VP of Investor Relations at AMETEK]

Thank you, Bill. Angie, we're now ready to open it up for questions.

[Operator]

Your first question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Thanks. A couple questions. First, Dave, can you talk about where you were with realized pricing in the third quarter on a year-over-year basis, what the spread looked like? You mentioned it seemed pretty favorable. What your thoughts are in terms of how much price you might need to take in 2022.

[Dave Zapico, Chairman and CEO at AMETEK]

Sure, Matt. In the third quarter, our pricing continued to more than offset inflation. As I said in the prepared remarks, pricing was about 3.5% of sales, and inflation was about 2.5% of sales. We get a spread of about 100 basis points. We expect in Q4 that'll be similar to Q3 with slightly higher pricing and inflation. The results speak to the highly differentiated nature of AMETEK's product portfolio and our leadership position in niche markets around the world. In terms of next year, you know, we haven't done the detailed planning, but you know, a key for me is that we're gonna stay out ahead of inflation, and I expect that to be true next year. We'll stay ahead of inflation with price.

[Dave Zapico, Chairman and CEO at AMETEK]

Does that answer your question, Matt?

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Yes, thank you. Just as a follow-up, you know, if I just look over the last two years, EMG margins have really migrated into a completely different ZIP Code versus where they were at.

[Dave Zapico, Chairman and CEO at AMETEK]

Right.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

I know divesting Reading is a component to that. You did some structural cost outs, you know, during-

[Dave Zapico, Chairman and CEO at AMETEK]

Right.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

When the COVID outbreak, is there still leverage to drive margins higher in that business? Help me think about how we should think about that going forward.

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah, EMG has done a fantastic job in margin development. You mentioned some of the key drivers. We divested Reading. More fundamentally, I mean, we have an automation business that's firing on all cylinders. It's very profitable. We have a thermal management system as part of our defense businesses. It's doing well, and it's high margin. Then we have, you know, some part of our EMG business that's accelerating. It is in a new ZIP code, but I expect it to stay there, and there's still room for margin expansion.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Great. Thank you, Dave.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you, Matt.

[Operator]

Your next question comes from the line of Joshua Pokrzywinski with Morgan Stanley. Please proceed with your question.

[Gustavo Gonzalez, Executive Director and Counsel of Investment Research Division at Morgan Stanley]

Hi, team. This is actually Gustavo Gonzalez on for Josh. Looking at backlog, where it stands today, how much of that, you know, would you call it excess backlog, you know, kind of based on supply chain issues? How much, you know, should we expect that contribute to 2022 growth here?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. We have a record backlog of $2.62 billion. I wouldn't categorize as excess. I mean, I mentioned in an earlier call that customer behavior is to give you more visibility into future, you know, months and quarters because there's so many issues in the supply chain. You have more visibility, but I would not consider it as excess, and I would not view us as not keeping up with demand. Really you have a situation where there's strong underlying demand. It's resulting in a higher backlog. It's giving us further insight into 2022, and we feel real good about it.

[Gustavo Gonzalez, Executive Director and Counsel of Investment Research Division at Morgan Stanley]

Got it. Just a quick follow-up. What are kind of the biggest inflation and supply chain issues that we should kind of watch for AMETEK as conditions potentially do start to improve? Is it on the material side, freight or labor? Just kind of what should we keep our eyes on?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah, that's a good question. You know, during the quarter, we continued to experience challenges with our supply chain, logistics, inflation, labor availability, and it was one of the more dynamic environments I can recall. These conditions were a bit worse in Q3 than Q2, and we expect those conditions to persist in the fourth quarter. I would characterize our overall effort and response to these challenges as outstanding. We're clearly showing the agility necessary to navigate these supply chain disruptions. A key from my view is the distributed nature of our business model, where we have committed P&L managers running their businesses with their own supply chain teams, which allow them to react quickly to changing conditions.

[Dave Zapico, Chairman and CEO at AMETEK]

At the same time, these dedicated business unit teams are working seamlessly with our overall corporate supply chain team that acts with the combined leverage and the authority of all of AMETEK. This overall approach has been effective for us. I mean, you asked where we had some of the biggest issues we had. As I mentioned last quarter, it's in semiconductor chip availability. It's an area that's particularly challenging because we use a lot of electronics in our businesses, obviously. We're using our purchasing leverage, the relationships that we've built up over decades, and our engineering capability in terms of qualifying second sources, in terms of changing designs to solve problems. We don't anticipate improvements in the availability of semiconductors until, you know, sometime in late 2021 to 2022.

[Dave Zapico, Chairman and CEO at AMETEK]

You know, it's a tough environment, but we're reacting well to it, and I was very pleased with our teams. I point to one thing is the distributed business model where we have very experienced P&L leaders making sure that they're gonna satisfy their customers and not letting the supply chain get in the way.

[Gustavo Gonzalez, Executive Director and Counsel of Investment Research Division at Morgan Stanley]

Got it. That's helpful. Thank you.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Hi. Good morning.

[Dave Zapico, Chairman and CEO at AMETEK]

Hello, Allison. Good morning.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Just wanna keep in line with the supply chain, because obviously you guys are a bit unique in that you certainly been managing this quite well. Is there a sense, I mean, organic growth very strong, your organic orders are very strong. Is there any tempering of maybe what growth could have been, because of some of these supply chain issues or really not impactful to you guys in terms of what that expected growth could be or the volume that you were anticipating this quarter?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. That's a good question, Allison, because, you know, what we do is we set our plan based on material availability, and we executed that plan extremely well. In fact, we beat our expectations. We did at the end of the quarter, you know, I look at it as a, if the stars aligned, what could we have shipped without some of the material availability issues? It was about an additional $50 million that shifted out of Q3 to Q4, and I feel like we're gonna have the same kind of shift out of Q4 into Q1. You know, we're able to meet demand. We're able to juggle the schedule. Once we lock into the schedule, we're very good at executing it.

[Dave Zapico, Chairman and CEO at AMETEK]

There was about $50 million that slipped out. Now, we're not a big labor business. You know, labor is not a big cost driver for us, so labor availability is tough, but we're able to get the products manufactured with the labor available. You know, your answer is $50 million in an ideal world.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Got it. That's helpful. Thank you. Just on the acquisition environment, you know, obviously deployed a significant amount at the beginning of the year. It sounds like, the pipeline, as always, is pretty active. You know, any color on kind of what you're a little bit more focused on or what we could see maybe near term, over the next few months if the stars align there?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. We are very focused on some deals right now, and I don't know if they're gonna happen next month or three months from now, but we're very active over the next few months. I mean, the thing you have to be careful of right now is there's a lot of businesses that are out there, and you have to sort through them and find the quality, find the gems within those pipelines, and we're good at that. You know, I just feel the pipeline remains strong. We're very active on exploring opportunities. As Bill mentioned, we have a meaningful level of financing capacity and strong cash flows, and we also have-

[Dave Zapico, Chairman and CEO at AMETEK]

You know, I think 2022 is gonna be a good year for us, and we're gonna have a tailwind from some of the deals we got done this year. We're feeling pretty optimistic about what we've got done this year, the quality of businesses that we acquired, and we're feeling good about our pipeline for 2022.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Great. Thank you. I'll pass it along.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you, Allison.

[Operator]

Your next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone.

[Dave Zapico, Chairman and CEO at AMETEK]

Good morning, Deane.

[Deane Dray, Managing Director at RBC Capital Markets]

Hey. Really solid execution this quarter, when many of your peers have struggled.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Deane Dray, Managing Director at RBC Capital Markets]

It was interesting on Allison's question there. We actually had to drag it out of you that there was a $50 million push-out on revenues, and we've seen that. We also have seen where that is like a rolling push-out from 4Q into the first quarter. I like how the fact that wasn't an excuse. You still put up strong numbers, so congrats there.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Deane Dray, Managing Director at RBC Capital Markets]

A couple questions. There's this thought here on the supply chain issues for companies like AMETEK that are higher up the value chain. You're not doing raw material conversions. You're more final test and assembly, so the component supply might be where the impact might be felt later so that it, this might become more of an issue for component supply in the coming quarters. We know it's chip related already, but is there any sense where you think it gets worse from here, again, where you are on the value chain?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. I don't see it getting worse. As I mentioned, it was worse in Q3 than Q2, but things seem to have stabilized. The comment that I'd make is, it's a good one, your question. You know, inflation is a concern related to our backlog, but we think it's manageable even with the high level components. The first key for me is that you have firm supplier pricing for items in the backlog as much as possible so you know what your costs are gonna be. Then we do have some commodities that we use in various areas and when possible, when we have firm orders, we'll buy forward certain key commodities to lock in costs where appropriate.

[Dave Zapico, Chairman and CEO at AMETEK]

We're using surcharges to handle increases in shipping costs, increases in transportation costs, higher energy costs, et cetera. We shortened the length of our quotation validity, the valid time our quotations are out there so items can be repriced if necessary. You take into account the higher costs, and when you can and it's necessary, our customers have been fairly receptive to get a price increase due to what's happening right now. You know, I put that whole package together, and, you know, if we're a bit later than some of the component businesses, that may be true, but at the same time, we're running well ahead of inflation with our pricing, and we plan to stay there.

[Dave Zapico, Chairman and CEO at AMETEK]

That's gonna be a big part of our budgeting process that we're going through and to understand what's happening in the market, to understand inflation and with 3.5% pricing and 2.5% inflation across our entire businesses. I think we're focused on it, and I think we're doing a good job of it, and I think we'll stay in front of it.

[Deane Dray, Managing Director at RBC Capital Markets]

That's really helpful. You mentioned budgeting process. I'd be interested in hearing how the budgeting process for 2022 might be tempered, given these circumstances on the supply chain. Would it be the top line, kind of being, you know, these rolling push-outs? Would it also be margins, you know, with the labor issues? Just how does this all change your planning assumptions for 2022? Then maybe if you could just give us a comment on October, that'd be helpful also.

[Dave Zapico, Chairman and CEO at AMETEK]

Okay. Yeah, I'll talk about the, I guess, our preliminary thoughts on 2022. As you know, Deane, we operate in niche markets, and we have a comprehensive budgeting process that allows us to understand the market dynamics of these niches in a detailed level. We begin that process later this month, and that process is gonna inform our guidance for 2022. In terms of the macro setup, we believe the economic recovery continues. We think overall it's a good macro environment for us. We think the mid-cycle recovery continues. We think that we'll start to see longer cycle improvement in our commercial aero businesses. Our process industries will continue to recover.

[Dave Zapico, Chairman and CEO at AMETEK]

We're expecting a stable defense spending environment. In terms of some of the headwinds that you mentioned, the challenges from inflation are gonna continue, and we're gonna have to continue to offset inflation with price. The supply chain may constrain growth, mainly in the first half of the year. As I mentioned before, semiconductor availability is a key issue for us. You know, the final thing is we remain active in capital deployment with significant balance sheet capacity with a primary focus on M&A. We're really bullish about what we're gonna be able to accomplish in 2022, and there's a couple of challenges out there, headwinds, mainly the supply chain that we're actively managing now, but we're still feeling good about 2022.

[Deane Dray, Managing Director at RBC Capital Markets]

Comment on October.

[Dave Zapico, Chairman and CEO at AMETEK]

Oh, yeah. The comments on the cadence throughout the quarter in October. Yeah, September was the strongest month of the quarter. It was also the strongest month of the year to date, and in the orders. Sales grew sequentially through the quarter, with September being the strongest month of the quarter. October was very solid. It was supportive of the trend required to meet our guide for Q4. We're very pleased with how October turned out, and it showed no slowdown at all.

[Deane Dray, Managing Director at RBC Capital Markets]

Really helpful. Thank you.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you, Deane.

[Operator]

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

[David Ridley-Lane, Research Analyst at Bank of America]

Good morning. This is David Ridley-Lane on for Andrew. Can you give some additional color on revenue by end markets and geography?

[Dave Zapico, Chairman and CEO at AMETEK]

Sure. I mentioned in the prepared remarks that it was a broad-based growth. I'll take a walk around the company, David. You look at our process businesses, they were up high teens% on a percentage basis in the third quarter, and they were driven by low teens% organic sales growth and the contribution from the acquisition of Magnetrol. Our process businesses continue to see broad-based growth, with particularly strong growth within our Ultra Precision Technologies businesses as new products and their differentiated measurement technologies are really driving solid demand across a wide range of markets, including the semiconductor and optics market. For the full year for process, we now expect to be up low double digits versus the prior year. Our next major market segment is the aerospace and defense market.

[Dave Zapico, Chairman and CEO at AMETEK]

Overall, we were up 55% in the third quarter, driven by solid organic sales and the contribution from the acquisition of Abaco. Organic sales were up high single digits on a percentage basis versus the prior year, and solid growth in our commercial aftermarket business and our business jet businesses. Those were the two areas of strong growth. For all of 2021, we now expect mid-single digit organic sales growth for our aerospace and defense businesses. We expect our defense businesses to be up high single digits and our commercial businesses to be up low single. The defense business is still stronger, but it's moderating a bit, and the commercial business has had a good quarter. I'll go to the power and industrial market segment next.

[Dave Zapico, Chairman and CEO at AMETEK]

Up nearly 40% in the quarter, driven by mid-20s organic sales growth, so they had a very good quarter. Acquisitions from NSI and Crank Software contributed. For all of 2021, we now expect mid-teens organic growth for our power and industrial businesses. Finally, our automation and engineered solutions business. Both overall and organic sales were up approximately 25%, accelerating from the prior quarter. Sales across our automation businesses remained robust, with strong demand continuing in their end markets. For all of 2021, we now expect organic sales for our automation and engineered solution businesses to be up mid-teens%, with stronger growth across our automation businesses than our engineered solutions businesses. The automation business is doing very well as customers wanna remove labor from their processes. They wanna move things contamination-free. We're at capacity.

[Dave Zapico, Chairman and CEO at AMETEK]

We've invested in the past in the right technologies that are winning share, so, and we're very good at moving things quickly and precisely. The automation business is in a really good position with a strong backlog and we're bullish about the future. You mentioned geography. I'll go around the geographies. We've had strong broad-based growth across geographies, where every geography was up. The U.S. was up 15%. Europe was up 15%. The star for the quarter was Asia. It was up 25% with broad-based strength and notable strength in our process and automation businesses in Asia. Does that answer your question, David?

[David Ridley-Lane, Research Analyst at Bank of America]

Perfectly.

[Dave Zapico, Chairman and CEO at AMETEK]

Okay.

[David Ridley-Lane, Research Analyst at Bank of America]

Just a quick follow-up. You know, you sort of alluded to it earlier in talking about mid-cycle. This is a pretty strange cycle. Maybe just can you talk about some of the areas that you are looking for better organic growth in 2022 versus 2021? I imagine that'd be some traditional, you know, longer cycle areas like commercial aero and oil and gas, but also maybe in this particular cycle, things that are tied to patient volumes and that sort of stuff.

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. I mean, it's you mentioned three of the areas that I think are improving. Our commercial aerospace business will definitely improve. Our you know, oil and gas business. It's only about 5% of AMETEK now, but it was up mid-teens% in the quarter. Given where oil and gas prices are, we're beginning to see the signaling of the project business returning in 2022. We're feeling good about that. In terms of the healthcare business, healthcare is 15% of AMETEK now, so it's our largest end market vertical. We were up mid-teens% in the quarter. We had really solid growth in our Rauland business and our Reichert business, really driven by new products in Reichert. The elective surgery business, it picked up for us in Q3. We were up in the quarter.

[Dave Zapico, Chairman and CEO at AMETEK]

It wasn't up 15%, it was up high single digits, and we're benefiting from elective surgeries and things like neurostimulation, cardiac mapping, catheters. All that stuff is people are going back to hospitals, getting those procedures done, and we expect that to grow. This quarter was, you know, a high single-digit kind of number. We expect that to grow more next year. You hit the key issues, commercial aerospace, oil and gas, the medical elective surgeries. But I don't think the mid-cycle is done growing yet either. We're starting to see acceleration in that business across some of our process businesses.

[David Ridley-Lane, Research Analyst at Bank of America]

Perfect. Thank you so much, and congratulations on the quarter.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

If you would like to ask a question, please press star one on your telephone keypad. Again, that's star one to ask an audio question. Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

[Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer]

Thanks. Good morning, everybody.

[Dave Zapico, Chairman and CEO at AMETEK]

Good morning, Chris.

[Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer]

Hey, Dave. Results really answer a lot of questions in principle. I was actually curious, any particular, you know, areas of share gain or areas of market space creation, you know, you wanna comment on? You mentioned automation a little bit, just kind of looking to expand on those.

[Dave Zapico, Chairman and CEO at AMETEK]

I mean, I would say that when you can deliver, your customers give you more orders. That's the key issue driving our business right now. When I look at the automation business, I talked about that earlier. That business is doing extremely well, because you know, the broader macro, people wanna remove labor from their processes. They don't wanna be dependent on labor because in some places you can't hire labor, and it's difficult to maintain. You're at capacity now, so there's more automation in both discrete automation and factory automation. We've invested in the right technologies the last few years and acquired the right businesses, and we put them together. We have a really compelling value proposition, and we can design customized sub-assemblies that do automation very quickly and efficiently.

[Dave Zapico, Chairman and CEO at AMETEK]

That business is doing the right things right now, so we're pretty bullish on the outlook for it. Does that answer your question, Chris?

[Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer]

Yeah. I was curious if there were any other, you know, particular areas, even if, you know, more illustrative than moving the top line by themselves because maybe it's in a, you know, discrete niche business, but might-

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah.

[Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer]

Speak to illustrate the AMETEK growth model.

[Dave Zapico, Chairman and CEO at AMETEK]

Right. I think another area that we're starting to see traction in is some of our sustainability solutions. If you look at our sustainability report, we've done some good work highlighting them. You know, in the case of greenhouse gas emissions and trying to understand that, we have some instrumentation that's very unique in helping researchers understand the trajectory. In terms of China, the pollution generated from heavy industrial processes requires very durable emissions equipment. That emissions equipment is selling very well for us now in China. The sustainability solutions will be another thing that we're starting to get our hands around, but it's growing pretty rapidly.

[Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer]

Great. Thanks for the color.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of [Safa Rashtchy] with Wolfe Research. Please proceed with your question.

[Analyst at Wolfe Research]

Hey. Good morning, guys.

[Dave Zapico, Chairman and CEO at AMETEK]

Good morning.

[Analyst at Wolfe Research]

Congrats on the awesome quarter. I'm on for Nigel Coe. Really around M&A, do you see any updated thoughts around M&A accretion in fiscal year 2022 from your deals this year?

[Dave Zapico, Chairman and CEO at AMETEK]

No. We had talked about the M&A accretion being about $0.18 from deals this year. We're still in line to deliver that. The Abaco businesses that we have acquired, we're very pleased with them. Each of these businesses is gonna benefit from a custom playbook developed for them as part of our integration process, and will also benefit from AMETEK's global footprint. You know, it's early in the ownership, but so far, they're integrating nicely, and we're very bullish with all the businesses. In terms of 2022, I'm gonna throw that in the bucket of we're gonna go through and analyze everything from all of our business units with our detailed budgeting process.

[Dave Zapico, Chairman and CEO at AMETEK]

Once we understand everything, we'll come back and communicate that to you.

[Analyst at Wolfe Research]

Gotcha. Around EIG sales for the quarter, do you see that normal seasonal uptick in sales for fourth quarter?

[Dave Zapico, Chairman and CEO at AMETEK]

There is a bit of seasonality for EIG in the fourth quarter, so you'll see a bit of that.

[Analyst at Wolfe Research]

All right, well, that's it for me. Thank you.

[Dave Zapico, Chairman and CEO at AMETEK]

Okay. Thank you.

[Operator]

Your next question comes from the line of Andrew Shlosh with Vertical Research. Please proceed with your question.

[Andrew Shlosh, Senior Associate of Equity Research at Vertical Research]

Hey, guys. It's Andrew Shlosh on for Jeff Sprague. How are you?

[Dave Zapico, Chairman and CEO at AMETEK]

Hi, Andrew.

[Andrew Shlosh, Senior Associate of Equity Research at Vertical Research]

Just, a couple quick ones from me. You know, you said the elective surgery business was up high single digits. Do you have a great feel for where elective procedure volumes are versus 2019?

[Dave Zapico, Chairman and CEO at AMETEK]

I can't comment on that right now. I can tell you that the business in the first half of the year was, you know, it was about flattish for us to down a bit. It picked up in Q3 in that high single digit range, and we expect further growth from here, and that's probably the best I'm gonna be able to give you.

[Andrew Shlosh, Senior Associate of Equity Research at Vertical Research]

Right. No, that makes sense. You know, I apologize if I missed it. Did you kind of rattle off some of the end market detail on the research business?

[Dave Zapico, Chairman and CEO at AMETEK]

I didn't specifically give the research. It's within our process segment. The research business is about 10% of AMETEK. What you see in that business is it's starting to grow again. You know, industrial research has been strong, but the university research has been impacted by COVID. People are getting back to the university research environment, and it's starting to function normally. I think the product introductions that we talked about with Gatan is perfectly targeted at that market. It's a good market for us. It's not up as much as the AMETEK average, but we're bullish on that market as it begins to heal, and they get back to more normal business after COVID.

[Andrew Shlosh, Senior Associate of Equity Research at Vertical Research]

That's great. Appreciate the color there.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

Hey, good morning, guys. It's Ken Newman on for Steve.

[Dave Zapico, Chairman and CEO at AMETEK]

Hello, Ken. How are you doing?

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

Good. How are you?

[Dave Zapico, Chairman and CEO at AMETEK]

Good.

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

You know, I think you had mentioned an increase in the RD&E guidance for the year. I'm curious if you could just talk about how much growth was driven by new products in the quarter and any color on where the vitality index has been.

[Dave Zapico, Chairman and CEO at AMETEK]

Right. It's a good question, Ken. In the quarter, our vitality index was 24%, so pretty healthy level for us. As I mentioned last quarter, we increased our spending on R&D and also on the sales and marketing initiatives that we have. We have a lot of things that we're funding, and we're bullish and optimistic on them. We're spending about 5.5% of sales. It's a healthy amount for an industrial business, but we think it gives us a couple of things. One is these new sales from new product sales, but also it gives us the ability to raise price because we're investing for our customers, and we're gonna have the latest products that have the most value for our customers.

[Dave Zapico, Chairman and CEO at AMETEK]

The investments that we make, we also link to the pricing capability in our business. That's an important factor for us.

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

Okay. When I think about the impact of shifting sales out of the third quarter into the next one because of supply chain issues, does that impact the mix of new products coming to market at all? Or would you still expect any kind of material expansion in that vitality index?

[Dave Zapico, Chairman and CEO at AMETEK]

Yeah. I think 24% is a pretty good level, but I like to see it, you know, mid-20s is probably what we're targeting. In terms of new product introductions, to the extent that a new product introduction relies on electronics or semiconductors, it could be delayed, but it's more broader than new products. It's across the semiconductor chip availability is the one area in particular that we're very focused on because of the challenges with this constrained supply.

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

Right. That kind of segues pretty well into my follow-up question. You know, just on the semiconductor shortage, obviously you've got a very diverse set of businesses that spreads the gamut of computing needs. As we think of the kinds of chips needed for the embedded compute business in Abaco versus your automation business, can you just give us an idea of how much of the semi exposure is toward more of the bleeding edge chips versus the trailing edge?

[Dave Zapico, Chairman and CEO at AMETEK]

I think the microprocessors and the higher-end chips are the ones that are particularly. The chip availability is particularly an issue right now. We have such a broad-based portfolio of products, and we're using different chips in different businesses, so there's really not one chip or one product. It's not in the passive components, it's in active components, and it's in more of the microprocessors, but it affects our EIG business more than EMG. That's something that we're focused on, and we did a great job managing it in Q3. As I said, we have a lot of people that have relationships built over a long period of time. We're using our purchasing leverage.

[Dave Zapico, Chairman and CEO at AMETEK]

Probably most importantly, if a product's not available, we use our engineering capability to qualify second sources to find alternatives. We set up a group within our company. It's both our Bangalore engineers and some of our engineers in Europe and some of our engineers in the U.S., and there's a team that's quickly going through these things when product availability comes through. One of the things that we've been able to differentiate versus maybe some other people in the market is we have the strong engineering capability that can work on these problems as they come up and solve them quickly.

[Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets]

Good color. Thank you very much.

[Dave Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

At this time, there are no further questions. I will now turn the floor back to Kevin Coleman for any additional or closing remarks.

[Kevin Coleman, VP of Investor Relations at AMETEK]

Thank you, Angie. Thank you everyone for joining our call today. As a reminder, a replay of today's webcast may be accessed in the investor section of ametek.com. Have a great day.

[Operator]

Thank you for participating in today's conference call. You may now disconnect your lines at this time.

Participants

Executives

• Bill Burke, EVP and CFO
• Dave Zapico, Chairman and CEO
• Kevin Coleman, VP of Investor Relations

Analysts

• Allison Poliniak, Director and Senior Analyst at Wells Fargo
• Andrew Shlosh, Senior Associate of Equity Research at Vertical Research
• Christopher Glynn, Managing Director and Senior Analyst at Oppenheimer
• David Ridley-Lane, Research Analyst at Bank of America
• Deane Dray, Managing Director at RBC Capital Markets
• Gustavo Gonzalez, Executive Director and Counsel of Investment Research Division at Morgan Stanley
• Ken Newman, VP and Equity Research Analyst at KeyBanc Capital Markets
• Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson
• Analyst at Wolfe Research