AMETEK, Inc. (NYSE:AME) Q4 2022 Earnings Call Transcript

AMETEK, Inc. (NYSE:AME) Q4 2022 Earnings Call Transcript February 2, 2023

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

Kevin Coleman: Thank you, Rocco. Good morning and thank you for joining us for AMETEK’s fourth 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 will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK’s filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2021 or 2022 results or 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization.

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

Dave Zapico: Thank you, Kevin, and good morning, everyone. I’m very pleased with AMETEK’s results in the fourth quarter, and for all of 2022. AMETEK’s continued excellent performance reflects the quality of our niche-differentiated businesses, the strength of the AMETEK growth model, and the expanding impact of our organic growth initiatives, and most importantly, the outstanding efforts of our global employees. Thank you to all AMETEK colleagues for your many contributions to our success. We have navigated many challenges over the last few years only to emerge stronger and even better positioned for sustained growth. Our results in the fourth quarter were outstanding. Stronger-than-expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter.

We ended the year with a record backlog as demand remains solid across our diverse end markets. Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence serving attractive growth markets. Operationally, we’re performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion. Additionally, cash flow in the quarter was outstanding, providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions. Now, on to the results of the fourth quarter and all of 2022, fourth quarter sales were $1.63 billion, up 8% over the same period in 2021. Organic sales growth was 9%, acquisitions added two points.

And foreign currency was a three-point headwind in the quarter. Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3.22 billion. Operating income in the quarter was a record $398 million, a 10% increase over the fourth quarter of 2021. Operating margins were 24.5% in the quarter, up 50 basis points from the prior year. EBITDA in the quarter was a record $489 million, up 12% over the prior year. And EBITDA margins were an impressive 30.1%. This outstanding operating performance led to record earnings of $1.52 per diluted share, up 11% versus the fourth quarter of 2021, and above our guidance range of $1.45 to $1.47 per share. Now, let me provide some additional details at the operating group level; first, the Electronic Instruments Group.

The Electronic Instruments Group delivered continued strong sales growth and excellent operating performance. Sales for EIG were a record $1.16 billion in the quarter, up 10% from the fourth quarter of last year. Organic sales were up 9%, acquisitions added 3%, and foreign currency was a three-point headwind. EIG growth was broad-based with particularly strong growth across our Aerospace & Defense and Ultra Precision Technologies businesses in the quarter. EIG’s operating income in the fourth quarter was a record $307 million, up 10% versus the prior year, while EIG margins were a very strong 26.5% in the quarter. The Electromechanical Group also finished the year with outstanding performance. EMG’s fourth quarter sales were $466 million, up 4% versus the prior year, with organic sales growing 8%, and foreign currency a three-point headwind.

Growth was again broad-based across EMG, with our Aerospace & Defense businesses leading the growth. EMG’s operating income in the fourth quarter was $115 million, up 9% compared to the prior year period. EMG’s fourth quarter operating margins were 24.6%, up an impressive 100 basis points versus the prior year. Now for the full-year results; overall, performance was outstanding in 2022, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.15 billion, up 11% from 2021. Organic sales increased 11%, acquisitions added 2%, and foreign currency was a three-point headwind. Operating income for 2022 was $1.5 billion, up 15%. And operating margins were 24.4%, up 80 basis points versus the prior year.

While core margins up and impressive 130 basis points, reflecting our ability to successfully manage inflation and supply chain challenges. EBITDA for the year was $1.83 billion, up 15% from 2021, with EBITDA margins a very strong 29.7%, up 100 basis points from the prior year. Full-year earnings were $5.68 per diluted share, up an impressive 17% versus the prior year. AMETEK’s performance in a challenging operating environment highlights the proven strength and flexibility of the AMETEK growth model and our ability to successfully navigate through uncertain economic times. Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth, develop innovative new products, and identify and execute on operational efficiency improvements.

Additionally, our businesses worked closely with our corporate development team to manage our acquisition pipeline, resulting in a continued strong deployment of capital on strategic acquisitions. In 2021 and 2022 combined, we deployed over $2.4 billion in capital on eight acquisitions, and acquired over $600 million in annual sales. We expect to remain active in 2023 as our deal pipeline remains very strong, and our balance sheet provides us significant financial capacity to deploy capital. In addition to our acquisition strategy, we remain committed to investing in organic growth initiatives and are very pleased with the impact these investments are having on AMETEK’s growth. As I highlighted during our last earnings call, AMETEK’s portfolio has strategically evolved with increased exposure to higher growth market segments.

This portfolio evolution has been driven by our acquisition strategy and by the organic investments we are making in our businesses. In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research, development, and engineering, and sales and marketing. One way we measure the success of these investments is through our Vitality Index, which was an outstanding 27% of sales in 2022. Our increased investments in RD&E continue to yield innovative advanced technology solutions, including within our Zygo business. Zygo, which is based in Middlefield, Connecticut, designs and manufactures advanced optical metrology systems and ultra-precise optical components and assembles for a diverse set of end markets, including defense, research, and semiconductor.

Zygo partnered with the Lawrence Livermore National Laboratory’s National Ignition Facility to provide high-end precision optics in support of their inertial fusion energy testing program, which provides a significant leap forward in the realization of sustainable fusion energy. Achieving these heights of energy production requires the use of highly precise optics and scalable manufacturing processes which were developed in partnership with Zygo. I want to congratulate the Zygo team for their tremendous contributions supporting important advancements in research and technology. Lastly, let me briefly touch on the supply chain issues and inflation. While tightness remains in certain areas, we’re seeing improvements in the global supply and logistics.

Additionally, although inflation remains elevated, we are also seeing modest improvements versus levels experienced in 2022. As we look ahead to 2023, we will continue to proactively manage our supply chain and remain confident in our ability to offset inflation with price increases. Now, shifting to our outlook for the year ahead, while macroeconomic uncertainties remain, we are confident in the quality of our businesses, the flexibility of the AMETEK growth model, and our ability to navigate through these uncertain times. Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023. For 2023, we expect both overall and organic sales to be up mid-single-digits versus 2022. Diluted earnings per share for the year are expected to be in the range of $5.84 to $6, up 3% to 6% compared to last year’s results.

For the first quarter, we anticipate overall sales up mid-single-digits with adjusted earnings up $1.38, of the $1.38 to $1.42, up 4% to 7% versus the prior-year. In summary, AMETEK’s fourth quarter and full-year results were excellent, our record backlog, the strength and flexibility of the AMETEK growth model and a world class workforce position us nicely for 2023. I will now turn it over to Bill Burke who will cover some of the financial details of the quarter. Then we’ll be glad to take your questions, Bill?

Bill Burke: Thank you, Dave. As Dave highlighted, AMETEK had a very strong fourth quarter to complete an outstanding year. In the quarter, we delivered record level operating performance at a high quality of earnings. Let me provide some additional financial highlights for the fourth quarter and for the full-year along with some additional guidance for 2023. Fourth quarter general and administrative expenses were essentially flat versus the prior-year and for the full-year general and administrative expenses were up $6 million, driven largely by higher compensation costs. And as a percentage of sales were 1.5% versus 1.6% of sales in 2021. For 2023, general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately 1.5% of sales.

The effective tax rate in the fourth quarter was 18.9%, up from 17% in the fourth quarter of 2021. For 2023, we anticipate our effective tax rate to be between 19% and 20% and 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 were $58 million in the fourth quarter, and $139 million for the full-year. Capital expenditures in 2023 are expected to be approximately $114 million, or about 2% of sales. Depreciation and amortization expense in the quarter was $89 million, and for the full-year was $320 million. In 2023, we expect depreciation and amortization to be approximately $325 million, including after-tax, acquisition-related intangible amortization of approximately $154 million or $0.66 per diluted share.

For the quarter, operating working capital was 18.9% of sales. Cash flow in the fourth quarter was excellent with operating cash flow of $385 million, up 37% versus the fourth quarter of 2021. Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income. Total debt at year-end was $2.39 billion down from $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $345 million and during the fourth quarter, we deployed approximately $240 million on the acquisition of RTDS Technologies. Gross debt-to-EBITDA ratio at year-end was 1.2 times and our net debt-to-EBITDA ratio was 1.1 times. As Dave noted, we remain active on the acquisition front with a solid pipeline of acquisition candidates.

Given our strong cash flow and modest levels of leverage, we’re well-positioned to deploy additional capital. We have approximately $2.3 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses performed exceptionally well in the fourth quarter and throughout all of 2022 delivering strong growth and high quality of earnings in a challenging operating environment. AMETEK is well-positioned for 2023, given our strong financial position, our proven growth model, and our world-class workforce. Kevin?

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

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Q&A Session

Operator: Absolutely. Today’s first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak: Hi, good morning.

Dave Zapico: Good morning, Allison.

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

Dave Zapico: Yes, that’s to start off the year, and there a potential to do more, and — but the $90 million was a good number, and it’s incremental; Keep in mind, incremental over what we’ve done in 2022. So, it’s incremental, and we’re making healthy investments in RD&E, it’s up double digits for the year, and healthy investments for sales and marketing. So, we think the $90 million is appropriate. And, obviously, that can be flexed up or down if required.

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

Dave Zapico: Not really. I mean, the — obviously, our growth is slowing, but the record backlogs and we’re executing very well, we’re getting the price, and it still feels good to us. It feels strong and good. And when you get out to the second-half of 2023, I mean this is a — there’s less visibility because you’re further out, but our backlog is at a record level. It’s usually at about 30% of annual sales. And right now, it’s running at about 50% of annual sales. So, we feel really good. And we don’t see a slowdown yet.

Allison Poliniak: Perfect, thank you.

Dave Zapico: Okay, thank you, Allison.

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

Deane Dray: Thank you. Good morning, everyone.

Dave Zapico: Good morning, Deane.

Deane Dray: I was hoping you’d take us through the key end markets. And then also on the regional updates, it’s been interesting, maybe people got too negative on Europe. So, like to know how Europe did. And then China reopening, how does that impact you all?

Dave Zapico: Sure, Deane. I’ll start with your second question, the geographical outlook. Strong, broad-based growth across most geographies. Our Asia region was flat on China headwinds. And to your point, our fastest growing market was Europe. Europe was up 12% with notable strength in both our process and aerospace defense markets. And then we had a really strong performance in the U.S., up 10% organically; broad-based strength, notable strength in our process businesses. And in Asia, as I said, it was flat, with notable strength in aerospace and defense, and process. And China was down for us low double digits in the quarter on a difficult prior-year comp, and the impact of the Zero COVID policy. And Asia, we think that the China situation is going to turn around as the reopening occurs.