AMETEK Q2 2022 Earnings Report

AMETEK EPS Results

• Actual EPS: $1.38
• Consensus EPS: $1.29
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $1.15

AMETEK Revenue Results

• Actual Revenue: $1.51 billion
• Expected Revenue: $1.46 billion
• Beat/Miss: Beat by +$50.87 million
• YoY Revenue Growth: +9.20%

AMETEK Announcement Details

• Quarter: Q2 2022
• Date: 8/2/2022
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 2, 2022
• Conference Call Time: 3:47AM 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 Q2 2022 Earnings Call Transcript

Key Takeaways

• AMETEK posted record Q2 sales of $1.51 billion (up 9% year-over-year) with organic sales up 12%, drove a record $3.1 billion backlog, and raised full-year guidance.
• Each segment delivered strong performance: EIG sales of $1.03 billion and EMG sales of $486 million both achieved record profits and margin expansion on broad-based global demand.
• The company maintained a 100 basis point spread as 6% price increases more than offset 5% inflation, fueling 130 bps operating margin expansion.
• Proactive supply chain and sourcing measures—holding additional inventory and diversifying suppliers—helped manage longer lead times and hedge against cost pressures.
• AMETEK’s robust capital allocation strategy includes a strong M&A pipeline, low-cost fixed debt, 26% vitality index R&D investment, and ~100% free cash flow conversion.

Presentation

[Operator]

Welcome to the second quarter 2022 AMETEK earnings conference call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press zero one on your touchtone phone. I will now turn the call over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Mr. Coleman, you may begin.

[Kevin Coleman, VP of Investor Relations and Treasurer at AMETEK]

Thank you, Richard. Good morning and thank you for joining us for AMETEK's second quarter 2022 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'll 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 risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2021 or 2022 results will be on an adjusted basis, excluding after-tax, acquisition-related, and tangible amortization.

[Kevin Coleman, VP of Investor Relations and Treasurer at AMETEK]

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investor 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 turn the meeting over to Dave.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you, Kevin, and good morning, everyone. AMETEK had another excellent quarter, with stronger-than-expected organic sales growth, outstanding operating performance, robust margin expansion, and record earnings. Importantly, demand remained strong and broad-based across our diversified niche markets, leading to impressive organic order growth and a record $3.1 billion backlog. Given our second quarter results and our outlook for the back half of 2022, we have increased our earnings guidance for the year. Now let me turn to our second quarter results. Second quarter sales were a record $1.51 billion, up 9% over the same period in 2021. Organic sales were up 12%. Acquisitions added a point, and foreign currency was a three-point headwind in the quarter. Organic orders were up a very strong 11%, despite a highly challenging prior year comparison.

[David A. Zapico, Chairman and CEO at AMETEK]

Book-to-bill was 1.09 in the second quarter, our eighth consecutive quarter of positive book-to-bill. Operating income in the quarter was a record $365 million, a 15% increase over the second quarter of 2021. Operating margins were 24.1% in the quarter, up 130 basis points from the prior year, with strong incremental margins. EBITDA in the quarter was a record $444 million, up 15% over the prior year, with EBITDA margins of 29.3%. This outstanding performance led to record earnings of $1.38 per diluted share, up 20% versus the second quarter of 2021, and above our guidance range of $1.27-$1.30, driven by stronger-than-expected sales and excellent operating performance.

[David A. Zapico, Chairman and CEO at AMETEK]

Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. Sales for our Electronic Instruments Group were $1.03 billion, up 10% from last year's second quarter. Organic sales were up 12% in the quarter, with foreign currency headwinds more than offsetting acquisition contributions. Organic growth remains very strong across our EIG businesses, with particularly impressive growth across our Ultra Precision Technologies and P&AI division. EIG's operating performance was impressive, resulting in record operating profit and robust margin expansion in the quarter. Second quarter operating income was $265.1 million, up 70% versus the prior year, and operating margins were 25.8% in the quarter. The Electromechanical Group also delivered strong sales growth and excellent operating performance in the quarter.

[David A. Zapico, Chairman and CEO at AMETEK]

EMG's second quarter sales were a record $486.3 million, up 7% versus the prior year, with organic sales growing 11% in the quarter. EMG's growth was also broad-based, with strong growth across both our eMIP and automation businesses. EMG's operating income in the second quarter was $124.4 million, up 11% compared to the prior year period. EMG's second quarter operating margins were excellent at 25.6%, up 70 basis points versus the prior year. Overall, outstanding result in the quarter, reflecting the quality of our differentiated businesses, the strength of our operating model, and the tremendous efforts of our employees. I would like to thank all AMETEK colleagues for your commitment to AMETEK and for the many important contributions you make to our sustained success. Now let me touch on the supply chain.

[David A. Zapico, Chairman and CEO at AMETEK]

Overall, the global supply chain remains constrained, with the largest challenges continuing to be the availability of electronic components. As we noted previously, we have strategically decided to hold additional inventory of select components to support the strong customer demand and as a hedge against the tight supply chain. Additionally, AMETEK's global sourcing teams are doing an outstanding job working to identify additional sources of supply. While these supply chain issues are leading to higher inflation, we have been able to more than offset this inflation with higher pricing, leading to a strong price inflation spread again this quarter and outstanding margin expansion. The combination of our global supply chain capabilities and pricing power provides us the confidence in our ability to manage through these uncertain times.

[David A. Zapico, Chairman and CEO at AMETEK]

During our first quarter earnings call, we noted that the COVID-driven lockdowns across parts of China were expected to delay some China sales from the second quarter into the second half of the year. These lockdowns caused less impact on the business in the quarter than we anticipated. Due to the excellent efforts of our China team, we were able to operate in a closed loop system and adjust our logistics and supply chain networks to support production and shipments. Additionally, during the last two weeks of the quarter, as restrictions were lifted, we were able to resume multi-shift production and recover much of the delayed shipments. The impact of China's zero COVID policy is something we are closely watching as we may need to react and adjust in the future. Thank you to our entire team in China for your tremendous commitment and resilience during this time.

[David A. Zapico, Chairman and CEO at AMETEK]

Now switching to our acquisition strategy. Our top priority for capital allocation remains the value-enhancing strategic acquisitions. Our M&A pipeline is very strong. Our business unit and corporate development teams are busy managing an active pipeline of attractive acquisition candidates. As Bill will highlight in a moment, we have a strong balance sheet and excellent cash flows providing us with meaningful capacity to support our acquisition strategy, and we expect to be active in the second half of the year. We also remain focused on driving higher levels of organic growth by consistently investing in our businesses to support their strategic growth initiatives. We're seeing the benefits of these investments in stronger organic growth. Our investments in research, development, and engineering continues to yield advanced technology solutions, allowing us to expand our leadership position across our niche markets.

[David A. Zapico, Chairman and CEO at AMETEK]

One measure of the success of these efforts is our Vitality Index, which was a very strong 26% of sales in the second quarter. This level of vitality reflects our business's ability to develop new products aligned with compelling growth opportunities. One example of this is AMETEK's expansion into the high-growth areas of precision optics. AMETEK's Zygo business, based in Middlefield, Connecticut, provides leading-edge extreme precision optics for the design and production of very large, complicated aspheric lenses. These capabilities supported the manufacture of the 18 hexagonal-shaped mirrors, which make up the James Webb Space Telescope's primary mirror. The James Webb Space Telescope very recently produced the deepest and sharpest infrared images of the deep universe. Truly amazing images due in part to Zygo's capability. Zygo also provides advanced optical systems for use in the next generation of semiconductor production equipment.

[David A. Zapico, Chairman and CEO at AMETEK]

Their incredibly precise mirrors are playing an important role in supporting the development of EUV or extreme ultraviolet optics for the next generation of semiconductor technologies. Just two of the many examples across AMETEK of the unique and highly differentiated capabilities and technologies we provide our customers. Now turning to our outlook for the remainder of the year. With our strong results in the second quarter, continued solid order momentum, and record backlog, we've increased our full-year earnings guidance. For the full year, we expect overall sales to be up high single digits, with organic sales now also expected to be up high single digits versus our prior guidance of up mid to high single digits.

[David A. Zapico, Chairman and CEO at AMETEK]

Diluted earnings per share for the year are now expected to be in the range of $5.46-$5.54, up 13%-14% compared to 2021. This is an increase from our previous guidance range of $5.34-$5.44 per diluted share. For the third quarter, we expect overall sales to be up in the high single digits compared to the same period last year, and third quarter earnings are expected to be in the range of $1.36-$1.38 per diluted share, up 8%-10% versus the prior year. While we are closely monitoring the various macroeconomic headwinds, we are not seeing slowing in our businesses as demand remains solid and our businesses are operating at a high level.

[David A. Zapico, Chairman and CEO at AMETEK]

We are confident in our ability and improved outlook for the year, given our strong backlog, ability to offset inflation with price increases, and outstanding operating capability. In summary, AMETEK's second quarter results were excellent. Our businesses are well positioned with differentiated technology solutions, serving a diverse set of growing niche markets. Our organic growth initiatives are driving higher levels of growth, and our portfolio is aligned with attractive mid and long cycle markets. Additionally, our SLA business model and strong cash flows provides us the flexibility to navigate challenging environments while continuing to deploy capital and drive increased shareholder value. AMETEK remains firmly positioned to deliver long-term sustainable growth. 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?

[Bill Burke, EVP and CFO at AMETEK]

Thank you, Dave. As Dave noted, AMETEK delivered excellent results in the second quarter, led by strong sales and orders growth and tremendous operating performance. Let me provide some additional financial highlights for the quarter. Second quarter general and administrative expenses were $24.6 million, up $2 million from the prior year, and as a percentage of total sales was 1.6%, in line with the second quarter of 2021. For the full year, general and administrative expenses are expected to be up modestly from 2021 levels and approximately 1.5% of sales versus 1.6% of sales in 2021. The effective tax rate in the second quarter was 18.5%, down from 20.6% in the second quarter of 2021.

[Bill Burke, EVP and CFO at AMETEK]

The lower rate this quarter was driven by lower tax on foreign income. For 2022, we anticipate our effective tax rate to be between 19% and 19.5%. As we've 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 second quarter were $26 million, and we continue to expect capital expenditures to be approximately $125 million for the full year or about 2% of sales, reflecting our asset-light business model. Depreciation and amortization expense in the quarter was $77 million, and for the full year, we expect depreciation and amortization to be approximately $315 million, including after-tax acquisition-related intangible amortization of approximately $148 million or $0.64 per diluted share.

[Bill Burke, EVP and CFO at AMETEK]

For the quarter, operating working capital was 18% of sales. Operating cash flow was $236 million, and free cash flow was $210 million in the second quarter. We expect approximately 100% free cash flow to net income conversion for the full year. Our working capital and cash flow results reflect our strategic decision to add select inventory in certain areas to support continued strong customer demand and to hedge against the longer lead times we are experiencing across the supply chain. During the second quarter, we repurchased 1.44 million shares of stock in the open market for approximately $173 million. Year to date, we've repurchased approximately 2.6 million shares for a total of $330 million.

[Bill Burke, EVP and CFO at AMETEK]

As a reminder, our top priority for capital deployment remains strategic acquisitions, as we believe it provides AMETEK and our shareholders with the best returns on our capital. Total debt ended the second quarter at $2.5 billion, down slightly from the $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $349 million. At the end of the second quarter, our gross debt to EBITDA ratio was 1.4x, and our net debt to EBITDA ratio was 1.2x. As Dave noted, AMETEK has a robust balance sheet with no material debt maturities due until 2024, modest levels of leverage, and strong cash flows.

[Bill Burke, EVP and CFO at AMETEK]

As a result, we are well positioned to deploy meaningful capital investment in our acquisition strategy with approximately $2.3 billion of cash and existing credit facilities to support our growth initiatives. To conclude, our businesses performed exceptionally well in the second quarter, delivering strong sales growth, outstanding operating performance, and a high quality of earnings in a very challenging environment. We remain well positioned going into the back half of the year, and we'll continue to invest strategically in our long-term growth initiatives. Kevin?

[David A. Zapico, Chairman and CEO at AMETEK]

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

[Operator]

Thank you. We will now begin the question-and-answer session. If you have a question, please press zero one on your touch tone phone. If you wish to be removed from the queue, please press zero two. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press zero one on your touch tone phone. Our first question on the line comes from Allison Poliniak from Wells Fargo.

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

Good morning.

[David A. Zapico, Chairman and CEO at AMETEK]

Good morning, Allison.

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

Just going back to, you know, obviously very strong orders, and you mentioned you're really not seeing any slowing. But has there been any change in the cadence interquarter, in terms of what you're seeing coming in, whether region or end market? Just any more color there?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. I mean, we had strong orders each month of the quarter, with the strongest month being June, so pretty typical. We just ended July, and our results were strong in July and very consistent with our outlook. There's really continuing order strength. It was, you know, we had strength in both groups. EIG was up 11% and EMG was up 9%. Overall, organic growth was up 11%. We're growing at healthy rates in all major regions of the world. All subsegments that we operate in are growing nicely. It feels pretty good from where we sit.

[David A. Zapico, Chairman and CEO at AMETEK]

In addition to that, we have, you know, as we mentioned in the prepared remarks, a record backlog of $3.1 billion, and that's up about 80% from prior to the start of the COVID pandemic. You know, we're feeling good, and we're not seeing any weakness anywhere right now.

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

Great. There was obviously a step up in inventory again this quarter sequentially. I suspect that's due to some of the orders that you're seeing coming in. You know, how should we think of that inventory level as we look to the back half of the year? Is it stabilized, or is it really just dependent on the orders coming in and some of that supply chain issues that are still out there?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. I think you've hit on it there, Allison. We've got you know, as with the strong order rate coming in, we've got to make sure we have the inventory to support those orders. We are still concerned about supply chain, and we're gonna continue to react to that. I would say you've hit the nail on the head, and I think we've increased them now, and we'll continue to manage it closely. Obviously, you know, we're very focused on running lean, but we've got to make sure we're supporting the orders that are in place.

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

Great. Thank you.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you, Allison.

[Operator]

Thank you. Our next question online comes from Mr. Josh Pokrzywinski from Morgan Stanley.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

Hi, good morning, guys.

[David A. Zapico, Chairman and CEO at AMETEK]

Good morning, Josh.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

Dave, just I guess first question on Europe. You know, I guess the totality of AMETEK is doing well. You mentioned the orders growth. Anything, I guess, underneath the surface or a KPI that you're watching there? 'Cause obviously, you know, more than macro challenges, you know, things like energy costs just up a lot. Just wondering any way that that's manifesting itself in your business.

[David A. Zapico, Chairman and CEO at AMETEK]

In the last quarter, orders were up 9% in Europe, and we had notable strength in our automation and aerospace businesses, and the aerospace businesses really started to accelerate. It feels pretty good from a demand perspective right now. With the geopolitical things going on in Russia and Ukraine and the fuel costs in Germany, we're certainly looking, watching that very closely as you know, that may be a sign of the first place for it to turn down for us. Right now it's not, and Europe is strong, and we had a good quarter there. Again, Europe was up 9%.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

Got it. That's helpful. Just on the aerospace and defense side, I think a lot of supply chain bottlenecks starting to get worse in there, not necessarily for the stuff that you guys are producing. Are you seeing that at all, either in your supply chain or being told by your customers to kind of throttle back delivery 'cause they're waiting for, you know, some other component to come in and don't wanna just, you know, kind of be building gliders or, you know, accumulating.

[David A. Zapico, Chairman and CEO at AMETEK]

Right.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

inventory in the meantime?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. I mean, right now I'd say it's quite the opposite. Our orders in our aerospace and defense business were up low double digits in the quarter. Our commercial business was up stronger, and it grew mid-teens. The strongest growth was in the commercial aftermarket. Defense market was up low single digits for us, better than in the first quarter. We're looking at a very strong second half. You know, most of the interactions we have with our customers, they're asking us for more. We're not seeing any slowdown in demand or anything in that. I even think that market's, because of pent-up demand, has got a long cycle of growth ahead of it.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

Got it. That's helpful. Just one more clean up, if you don't mind.

[David A. Zapico, Chairman and CEO at AMETEK]

Sure.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

What was pricing in the quarter?

[David A. Zapico, Chairman and CEO at AMETEK]

Right. In the second quarter, our price continued to more than offset inflation. Pricing was about 6%, and inflation was about 5% of sales. We maintained about 100 basis point spread. The results speak to the highly differentiated nature of the AMETEK product portfolio and our leadership position in niche markets. We think about it, we had 6% volume growth and 6% price growth and 12% organic growth. We think it was a really good quarter from that viewpoint.

[Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley]

Dave, I'll leave it with that. Thanks, Dave.

[David A. Zapico, Chairman and CEO at AMETEK]

Okay. Thank you, Josh.

[Operator]

Thank you. Our next question online comes from, Nigel Coe from Wolfe Research.

[Nigel Coe, Managing Director at Wolfe Research]

Thanks. Good morning. I certainly echo those comments. So just on the third quarter outlook for mid-single-digit sales growth, you know, in context of 12% this quarter, just wondering, you know, especially with the order rates pretty strong as well, what's covering that mid-single-digit outlook? I'm just wondering if we should be looking at the upper end of mid-single-digits, if you can be a bit more-

[David A. Zapico, Chairman and CEO at AMETEK]

Well, yeah.

[Nigel Coe, Managing Director at Wolfe Research]

Specific there.

[David A. Zapico, Chairman and CEO at AMETEK]

If you dig into it, the guide actually reflects mid- to high-single-digit % because we have some currency headwinds. Really quarter three is a kind of a carbon copy of quarter two. We have a little bit of seasonality in quarter three because of our European exposure. The difference between quarter two and quarter three, we're expecting a little higher tax rate. You know, we would consider it appropriately conservative, but there are some dynamics with tax sequentially, and the organic rate is mid- to high-, so it's not mid. Currency's holding us back a bit.

[Nigel Coe, Managing Director at Wolfe Research]

The comp is tougher. I think if you just comp adjust it, you know, 12% goes to maybe 9%. Just

[David A. Zapico, Chairman and CEO at AMETEK]

Right.

[Nigel Coe, Managing Director at Wolfe Research]

Just wondering if that was how you thought about it. On the margins, obviously very strong. It seems like price cost is at least neutral to margin rates, not dollar, but margin rates. If you just maybe confirm that. Just wondering if there's any geographic impact from, you know, obviously Europe is pretty strong, but were there any geo impacts to the margin this quarter?

[David A. Zapico, Chairman and CEO at AMETEK]

No, I mean, when I look at the margins for the whole business, it was up 130 basis points as reported and 140 basis points core. You really see strong flow through price. When you look at total cost of sales, I think the margins improve there. EMG strong in both groups. The EMG margins were up 70 basis points, and EIG margins were up 150 basis points as reported. We had very healthy core incrementals of 40%, reported 38, core incrementals of 38%-40%. You know, it feels like we're more than offsetting inflation with price, and we're getting margin expansion. I think it's a great margin story, and our teams are really executing in their business as well.

[Nigel Coe, Managing Director at Wolfe Research]

No question. Thanks, guys.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you, Nigel.

[Nigel Coe, Managing Director at Wolfe Research]

Thank you.

[Operator]

Thank you. Our next question online comes from Brett Linzey from Mizuho Americas.

[Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas]

Hi. Good morning, all.

[David A. Zapico, Chairman and CEO at AMETEK]

Good morning, Brett.

[Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas]

First question is just on inventories and more channel inventories. I know a lot of your businesses tend to be two to three linkages, you know, upstream from end use or final assembly. Just curious what level of visibility you might have into some of those value chains and, you know, your assessment versus those levels in relation to end demand.

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. If you think about our Electronic Instruments Group, we're largely selling to end users there. We have a good view of the end user, and our products are customized, so we don't have the problem of, you know, people double ordering. You know, they could be over ordering, but they're not ordering to put stuff on the shelf just in case because these are expensive, customized, highly engineered products. When you think about our EMG business, that has more of a, we're back on the food chain a couple of levels like you talked about. You know, you could have a backup there, but we're not seeing it right now, and it's indicated by our strong orders growth.

[David A. Zapico, Chairman and CEO at AMETEK]

It feels like we're in the right areas and demand is still growing, and we're pretty optimistic about the second half of the year.

[Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas]

Okay, great. Just back to price cost. Price 6%, how are you thinking about some of the wraparound price into early 2023, you know, based on some of the midyear actions? Just curious on price cost, what that might look like in terms of a tailwind, you know, as we get into 2023 and what kind of volume or incrementals or decrementals could look like, you know, for the algorithm for 2023.

[David A. Zapico, Chairman and CEO at AMETEK]

Right. It's a little early to start talking about 2023. The same pricing strategy that we've employed will continue. When we think about the second half of the year, we wanna maintain that 100 basis point spread that we had in the second quarter. The difference between 6% and 5% of sales is 100 basis points. We wanna continue that and, you know, second half of the year. The future pricing is gonna be a big part of our budget discussions and we think inflation's gonna be here for a while. That's gonna influence our thought process. I would expect to maintain a positive spread into next year also.

[Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas]

Just a quick follow-up. Would you say the complexion of a lot of your pricing actions is more, you know, list normal course versus surcharges? Or anything you can share there?

[David A. Zapico, Chairman and CEO at AMETEK]

It's a combination of both. I mean, its list, but in a lot of situations there are, we're tied to certain indexes and for shipping and things like that where commodity prices there could be a retracement a bit, but most of it is in the base price. We try to get it in base price, but in some situations it's obvious, it's transparent with your customer, and you have to give it back when things go down. At the same time, we're saying we'll maintain that 100 basis points spread for the second half of the year.

[Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas]

Okay, great. Good quarter. Thanks.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you, Brett.

[Operator]

Thank you. Our next question online comes from Jeff Sprague from Vertical Research.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Thank you. Good morning, everyone.

[David A. Zapico, Chairman and CEO at AMETEK]

Good morning, Jeff.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Hey, hey, good morning. Just wanna talk about the kind of the deals that were done last year that have sort of, kind of anniversaried here, you know, in the last month or two or three. How they're performing now as they kind of, you know, last year and are anniversaried into the portfolio, and any change in your view of, kind of the accretion outlook for those businesses?

[David A. Zapico, Chairman and CEO at AMETEK]

No, I think the outlook for all the businesses is positive, and we're really pleased to have bought them all, and the management teams are now getting embedded into AMETEK. You know, the businesses had the same problems with supply chain that we experienced across our businesses, and those problems were more pronounced in the Electronic Instruments Group. They impacted us a lot. But the second half of the year, you know, we took the opportunity to realign those businesses, get them integrated into AMETEK. For the second half of the year, I really think we're gonna have some significant momentum in H2 related to those deals.

[David A. Zapico, Chairman and CEO at AMETEK]

We made a lot of progress during the first year, and I think into the second half of this year and also 2023, I really see significant momentum.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

I missed the first couple minutes of the call, David. Did you say anything about kind of the current deal pipeline or kind of potential actionability on things as you look here into the balance of the year?

[David A. Zapico, Chairman and CEO at AMETEK]

No, that's a good question, Jeff. I mean, we remain very active. We mentioned that in our prepared remarks. We're looking at multiple deals. As always, we're focused on long-term returns. You know, one of the things I'm excited about is our debt profile. About 86% of our debt is long-term and fixed at a 3.2% interest rate. So if there's, you know, if interest rates rise, it's really gonna have limited effect on us. As Bill mentioned in his prepared remarks, we have no debt maturities in the next couple years. We recently upsized our revolver, so we're in a very good position to be in terms of executing our M&A strategy.

[David A. Zapico, Chairman and CEO at AMETEK]

As I said, our pipeline is strong, and I expect you'll be hearing from us in the second half of the year regarding M&A.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Great. Thanks. I'll leave it there. Take care.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Thank you. Again, for any questions or follow-ups, hit zero then one on your touchtone phone. Our next question on the line comes from Andrew Obin from Bank of America.

[Andrew Obin, Managing Director at Bank of America]

Hey, good morning.

[David A. Zapico, Chairman and CEO at AMETEK]

Hi, Andrew.

[Andrew Obin, Managing Director at Bank of America]

Just another question on price and volume. In terms of your guide rates, how much of it was price and how much was better volumes in the second half? I appreciate that there is FX headwind there as well.

[David A. Zapico, Chairman and CEO at AMETEK]

Right. Yeah. We're not giving that information out. It's really tough to understand that. What we're saying is we'll maintain a spread of 100 basis points positive. It's a very complicated when you take into account FX and our different mix of businesses and what's happening in the market with some commodity starting to come down. But what we're saying is we'll maintain a 100 basis point spread between price and inflation in the second half of the year.

[Andrew Obin, Managing Director at Bank of America]

Gotcha. Just to follow up on Jeff's question on M&A. You know, you have a sort of bottoms up. A lot of your M&A activity is sort of bottoms up in the organization. You know, are you hearing anything new from your business units as they chase, you know, these market leaders? You know, do you take a look at stacks? Are you seeing private equity back away? Any change in behavior, anything different about this market versus where we were maybe 6-12 months ago? Thanks.

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. You know, I mentioned in a prior call that the multiples were very high. For quality assets, they're still attracting a bit of a premium, but the multiples between public and private markets are coming in. They're coming closer together. If you have to go out and finance a deal, and AMETEK can pay for it from its balance sheet, it gives us an advantage right now because there is some difficulty in getting financing, impacting some private equity potential buyers and sellers for that matter.

[Andrew Obin, Managing Director at Bank of America]

Appreciate it. Thanks a lot.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Thank you. Our next question on line comes from Mr. Matt Summerville from D.A. Davidson. Please go ahead.

[William Jellison, Senior Research Associate at D.A. Davidson]

Hi, this is Will Jellison on for Matt Summerville this morning. Good morning.

[David A. Zapico, Chairman and CEO at AMETEK]

Hello, Will.

[William Jellison, Senior Research Associate at D.A. Davidson]

On the call, you mentioned the supply chain actions that you're taking, including some supply diversification. I was wondering, bigger picture across the last year plus of supply chain challenges you faced, are there any best practices that you've learned about throughout the organization that you would wanna sustain even when supply chains reach more normalized levels in the future?

[David A. Zapico, Chairman and CEO at AMETEK]

It's a great question, and I think we learned several things. We learned that our business model is fundamentally sound because our distributed business model, having those committed P&L managers running their business units, they really drive their businesses, and there's a good interaction between them and the centralized corporate supply chain team. We also learned that our engineering capability is first rate, and they solve shortages through redesign and qualified component substitution through this whole time. Probably one thing that will change is how we purchase electronics going forward. We're looking for to leverage or spend more and develop closer relationships with both the semiconductor chip manufacturers and the distributors for that matter. There'll be a little bit of a change in that area. That's one thing I can point to.

[David A. Zapico, Chairman and CEO at AMETEK]

We're being more direct as opposed to relying on distribution. Fundamentally, it's navigating through this as we did, you know, dealing with these challenges. We've had excellent results, and as I said, key from my view is our distributed business model. We have people owning these businesses and making good decisions, and our strong engineering capability is also a key factor to help us solve these shortages and redesign and find qualified component substitutions. Did that answer your question?

[William Jellison, Senior Research Associate at D.A. Davidson]

Yes. That was great. Thank you.

[David A. Zapico, Chairman and CEO at AMETEK]

Okay.

[William Jellison, Senior Research Associate at D.A. Davidson]

Absolutely. As a follow-up, I was wondering, to the point that you made about having content on the James Webb Telescope, I was wondering if events like that are highly visible of historic nature, do those serve to meaningfully increase the visibility of what a business like Zygo offers, to the extent that it catalyzes more orders than you might otherwise have?

[David A. Zapico, Chairman and CEO at AMETEK]

I think in the research community, it really stands out, and it does drive customers to us. The other thing I mentioned in the EUV market, designing and developing optics there's really only a couple people that can do it, so Zygo's really already well known. Those type of events do help us, and they drive customers to us because they see our expertise, and it also is positive for our employees to see that kind of thing and how we're improving the world. It does help, and we have a lot of businesses like that around AMETEK.

[William Jellison, Senior Research Associate at D.A. Davidson]

Understood. Thanks for taking my questions.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Thank you. Our next question online comes from Mr. Joe Giordano from TD Cowen.

[Joe Giordano, Managing Director at TD Cowen]

Hey, guys. Morning.

[David A. Zapico, Chairman and CEO at AMETEK]

Morning, Joe.

[Joe Giordano, Managing Director at TD Cowen]

Hey, just curious, just the way you guys are set up, like when we think about the CHIPS Act, how do you think about the impact? Are you kind of agnostic as to where a plant is built globally, or is this helpful that it, you know, that the U.S. is incentivizing it specifically?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. I'd say in general, we're agnostic wherever it's built in the world. We're gonna have our fair shot at it. What's happening now is there's probably gonna be some incremental capacity put in to, you know, satisfy things like security and national defense. With more opportunities, we'll certainly get a fair share of our business there as well.

[Joe Giordano, Managing Director at TD Cowen]

Perfect. Dave, can you go through kind of like any changes in the outlook by market?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. I think on our process businesses, organic sales for process were up low double digits in the quarter. They had a very broad-based growth across essentially all process businesses. Growth in the quarter was particularly strong across Taylor Hobson, Zygo, and our fluid analysis businesses. You take that all in, and now we're expecting organic sales for process businesses to be up high single digits. We raised that. Aerospace and defense, organic sales for our aerospace and defense businesses were up low double digits, growth across each segment. Total commercial sales were up mid-teens in the quarter, with strong growth across commercial OEM and aftermarket. Defense sales were up low single digits, so stronger in commercial, but defense was growing also.

[David A. Zapico, Chairman and CEO at AMETEK]

For the full year, we now expect organic sales to be up high single digits for our A&D businesses with growth in both commercial and also defense. If you look at our power and industrial businesses, excellent in the quarter, up mid-teens on a percentage basis with notable strength in our Programmable Power business. We now expect organic sales in our power and industrial businesses to be up high single digits, so that was raised also. Finally, our automation and engineered solutions, a really good quarter in both automation and engineered solutions, both seeing strong growth. We raised the year for that segment also to be high single digits. We're reflecting the strength of our businesses and an improved organic guide for the rest of the year.

[David A. Zapico, Chairman and CEO at AMETEK]

Really, all those sub-segments are now forecasted to grow at high single digits%.

[Joe Giordano, Managing Director at TD Cowen]

Thanks.

[David A. Zapico, Chairman and CEO at AMETEK]

Okay, Joe. Thank you.

[Operator]

Thank you. Our next question comes from Mr. Scott Graham from Loop Capital Markets.

[Scott Graham, Managing Director at Loop Capital Markets]

Yes. Hi. Good morning, Dave.

[David A. Zapico, Chairman and CEO at AMETEK]

Morning, Scott.

[Scott Graham, Managing Director at Loop Capital Markets]

Bill and Kevin. Hey. Yes. Thanks for doing that just now. You saved me a question. Can you just give us the productivity number in the quarter and the expectation for the year?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. Cost savings in the quarter was $35 million, so a really good quarter. You know, we're getting a lot of that through value engineering. We're redesigning some of these things and getting them designed at a lower cost level. So that's helping us a lot. For the year, the cost savings number is $125 million. About.

[Scott Graham, Managing Director at Loop Capital Markets]

No change there.

[David A. Zapico, Chairman and CEO at AMETEK]

No change. You know, about half of it's OpEx and half of it's materials.

[Scott Graham, Managing Director at Loop Capital Markets]

Okay.

[David A. Zapico, Chairman and CEO at AMETEK]

Okay?

[Scott Graham, Managing Director at Loop Capital Markets]

Thank you. You went through a longer sort of acquisition response than I've heard you before. It sounds to me like, you know, you're even signaling that the more than signaling, you said expect second half deals. Could you kind of? Is this a situation where things have just sort of been lined up at the gate, and there's gonna be a, you know, a couple of different, you know, closings of deals, do you think? Perhaps your comment was directed more at one in particular. Just, I mean, how close are we on some? Did we lose any? Just maybe a little bit more color on what you're thinking on the second half.

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah. You never can tell with deals, Scott. Things can happen, and things can change. I feel really confident right now because the volume of deals that we're looking at and processing and having some positive interactions are high. They're both the typical deals that AMETEK has, and there's some that are on the, you know, bigger size within the constraint of the types of deals we look at. You know, we're busy with deals. We're busy, and we got our people are real busy. The situation that I talked about with our strong balance sheet, the fixed debt, the strong cash flow, we think that's gonna be a differentiator for us as we look into the second half of the year in 2023.

[Scott Graham, Managing Director at Loop Capital Markets]

Thank you for that, Dave. Just one more, if I may.

[David A. Zapico, Chairman and CEO at AMETEK]

Sure, sure.

[Scott Graham, Managing Director at Loop Capital Markets]

Unbundling of the organic, and for the full year, they're up high single digits really for all four. Could you tell us, of those four, which ones are maybe a little bit more that you're optimistic on in the second half? Because obviously, in the second quarter, you did better than we all expected on organic.

[David A. Zapico, Chairman and CEO at AMETEK]

Right.

[Scott Graham, Managing Director at Loop Capital Markets]

Sort of how much of those raises were because the second quarter was better versus what you're seeing in the second half?

[David A. Zapico, Chairman and CEO at AMETEK]

Good question. In general, we had a good second quarter across the board. The one area that I point out is the order growth rates in the commercial aerospace market were one of the things that caught my attention. I'm looking for some positives there in the second half of the year and into 2023.

[Scott Graham, Managing Director at Loop Capital Markets]

Very good. Thanks.

[David A. Zapico, Chairman and CEO at AMETEK]

Thank you.

[Operator]

Thank you. Our next question on the line comes from Mr. Brett Hardman from Melius Research.

[Brett Hardman, Research Associate at Melius Research]

Hey, good morning, everyone.

[David A. Zapico, Chairman and CEO at AMETEK]

Good morning, Brett.

[Brett Hardman, Research Associate at Melius Research]

Thanks for taking my question. You've already given good color on price cost, but I just wanted to get more of a sense on what you're seeing in terms of cost inflation in particular and your outlook going forward. Sorry if I missed this, but inflation impact was 4% last quarter, 5% this quarter. You've said supply chain is still bad for electronic components in particular, and that inflation will be here for a while. I'm just wondering, do you expect the inflation impact in general across your business to continue to increase, or is it sort of plateauing or decreasing as we move through the rest of the year?

[David A. Zapico, Chairman and CEO at AMETEK]

Yeah, that's a good question. What you really see is some things are coming back in, decreasing in price, like the commodities. At the same time, you have wages and other areas that are increasing. The net effect is inflation is still increasing. It went from 4% to 5% sequentially in the quarters. Right now, I think that's gonna stabilize at that. It's difficult to predict. That's why we have things in place. We're gonna maintain that 100 basis points positive spread. Clearly, there are different dynamics that are happening right now, where some things are coming back in and some things are still inflating, but the net's still increasing costs.

[David A. Zapico, Chairman and CEO at AMETEK]

We got a good system to manage that, but that may change over the next quarter, and we'll tell you about it. Right now, that's where it is.

[Brett Hardman, Research Associate at Melius Research]

All right. Great. That's helpful. That's it for me. Thanks.

[Operator]

We have no further questions at this time. I will now turn the call over to Kevin Coleman for closing remarks.

[Kevin Coleman, VP of Investor Relations and Treasurer at AMETEK]

Thank you again, Richard. Thanks, everyone, for joining our conference call today. As a reminder, a replay of today's webcast may be accessed in the investor section of ametek.com. Thanks, and have a great day.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Participants

Executives

• Bill Burke, EVP and CFO
• David A. Zapico, Chairman and CEO
• Kevin Coleman, VP of Investor Relations and Treasurer

Analysts

• Allison Poliniak, Director and Senior Equity Analyst at Wells Fargo
• Andrew Obin, Managing Director at Bank of America
• Brett Hardman, Research Associate at Melius Research
• Brett Linzey, Executive Director and Senior Equity Research Analyst at Mizuho Americas
• Jeff Sprague, Founder and Managing Partner at Vertical Research Partners
• Joe Giordano, Managing Director at TD Cowen
• Josh Pokrzywinski, Executive Director and Diversified Industrials Senior Research Analyst at Morgan Stanley
• Nigel Coe, Managing Director at Wolfe Research
• Scott Graham, Managing Director at Loop Capital Markets
• William Jellison, Senior Research Associate at D.A. Davidson