Q3 2020 AMETEK Inc Earnings Call
Ladies and gentlemen, please remain on your lines. The Q3 AMETEK earnings conference call will begin momentarily once again, the Q3 earnings conference call will begin momentarily. Please remain on the line. Thank you.
[music].
Better relations Kevin Coleman.
The 19 or 2020 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization and.
And also excluding the gain from the sale of writing alloys in the first quarter of 2020.
And the realignment charge 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.
I will begin today's call with prepared remarks by Dave and Bill and then open it up for questions I'll now turn the meeting over to Dave.
Thank you, Kevin and good morning, everyone.
AMETEK delivered a strong third quarter, despite ongoing challenges presented by the COVID-19 pandemic.
While sales continued to be impacted by the pandemic the demand environment showed solid improvement from the second quarter as customers return to work and travel restrictions began to slow lease.
In addition, our businesses delivered outstanding operating performance, allowing us to expand margins generate excellent cash flow and drive earnings ahead of our expectations.
I would like to thank our employees are managing exceptionally well through this pandemic over.
Overcoming both personal and professional challenges to provide essential products and services to our customers.
I continue to be impressed by the strength of our workforce and the dedication to our mission of solving our customers' most complex challenges.
We remain vigilant and focused on our employee safety.
Our site in country level pandemic coordinators are doing an excellent job adapting to the shifting guidelines provided by the CDC and local health and safety agencies.
The flexibility our teams have shown and implementing new processes and protocols to ensure a safe working environment has been excellent.
Now, let me turn to our results for the quarter.
Compared to the third quarter of 2019.
Furthermore.
Our business has generated a strong level of cash flow.
Operating cash flow in the quarter was $310 million in free cash flow conversion was an impressive 146% of net income.
Next let me provide additional details at the operating group level.
Our electronic instruments group performed very well in the quarter. Despite end market weakness delivering outstanding operating performance, resulting in strong margin expansion.
Sales in the third quarter for UGI were $748.4 million down 8% from the comparable period in 2019.
As expected, we saw solid and widespread sequential sales improvement from the second quarter.
Organic sales were down 15% year over year with the acquisitions of the Tan and Intel power contributing six points and foreign currency contributing one point.
Commercial aerospace remains the largest driver of organic sales weakness in.
Third quarter operating income was $203.7 million and operating margins were an impressive 27.2% up 30 basis points compared to the same quarter last year.
Our electromechanical group also saw sequential sales improvement in mitigated a weak demand environment with solid operating performance.
EMEA sales were $378.6 million down 18% from last year's third quarter, driven in part by the impact of the running alloys divestiture.
Organic sales were down 13%.
With the divestiture and eight point headwind the acquisition of PDT, adding two points and foreign currency, adding one point.
Mgs operating income was $84.3 million and operating margins were solid at 22.3% for the quarter.
Let me comment briefly on end market dynamics for some of our businesses.
Overall, we saw solid sequential sales improvements across all markets in the third quarter.
We expect continued sequential improvements in the fourth quarter for all businesses other than commercial aerospace.
Where we expect largely flat conditions sequentially.
Our strongest market remains defense.
Where we continued to be well positioned with content across a wide range of important defense platforms.
We are also very well positioned with our medical and healthcare businesses although.
Although they experienced a delay in the return of electro procedures during the third quarter.
Which offset solid coven driven demand.
And our most challenged markets remains commercial aerospace.
I remain cautious of a.
The trajectory of the recovery given the uncertainty caused by COVID-19.
Given the uncertain and challenging market dynamics, our businesses remain highly focused on driving operational excellence initiatives, both structural and temporary to manage topline weakness, while ensuring we maintain our investments in key growth initiatives across the company.
Ametek's asset light operating model provides us with the flexibility to do both.
Our ability to expand margins and generate strong levels of cash flow. During this pandemic is evidence of the strength of our operating model.
In the third quarter, we generated $70 million in total cost savings, which was at the high end of our expectations.
With $40 million in structural savings and $30 million in temporary cost reduction savings.
Looking ahead to the fourth quarter, we expect a slightly higher level of structural savings, while temporary savings will be reduced from the third quarter levels as we add back additional temporary costs during the quarter.
As a result, we expect approximately $55 million in total cost savings in the fourth quarter was 45 million in structural and $10 million in temporary cost savings.
And for the full year, we expect approximately $230 million in total cost savings with 140 million in structural savings and $90 million and temporary savings.
Our businesses continued to implement new and innovative ways to reach our customers around the world and in new markets.
Through virtual meeting platforms augmented reality product demonstrations and service.
And enhanced digital marketing initiatives, our businesses have adapted quickly to the new landscape.
Seeing our businesses adopt these new ways of doing business quickly and effectively has been very impressive.
Our businesses are also collaborating across platforms.
As an example, and.
AMETEK land and AMETEK Roland recently partnered together to help support Rollins reopen school safely campaign for their Telo Center you solution.
Brown is a leading provider of critical communication.
Work flow and safety solutions for hospitals and schools there.
Or tell center use solution connex classrooms, and educational facilities the district offices for emergencies event management in everyday communications.
As I mentioned on our last earnings call AMETEK land, a leading manufacturer of Noncontact temperature measurement solutions recently developed their new viral or three system for rapid detection of elevated skin temperatures at points of entry to various facilities, including schools.
Through this collaborative effort wrong was able to incorporate lands viral load three technology into their Telo Center, you solution that their customer safety reopen their schools by allowing for temperature screening of students and faculty.
And return AMETEK land will reach thousands of new potential customers. The Rollins well established network of school districts.
The result was a valuable solution for our customers.
Congratulations to the AMETEK and the AMETEK Roland team.
For the success on this project.
We're also finding ways to support our customers through new product innovation.
Throughout the pandemic, we continued to invest meaningfully in our research and development initiatives and we're seeing great success from these efforts.
Our vitality index, which measures the amount of sales generated from new products introduced during the last three years.
Was very strong at 25% in the quarter.
During the quarter.
Reform a worldwide leader in Threed measurement solutions unveiled as our series three D. scanning solution is designed for automated dimensional quality control applications.
The suite of our series solutions includes the new robot mounted Metro scan Threed scanner with the toolbar a turnkey industrial measuring so that is designed to be integrated into factories for Atlanta inspections.
Together this solution provides customers with much faster cycle times, more accurate and repeatable results higher resolution and operational simplicity to increase productivity by measuring more dimensions on more parts without compromising on accuracy.
Congratulations to the Creaform team for launching this outstanding new solution.
Now shifting to acquisitions.
While deal flow during the second and third quarters has been impacted by the pandemic.
We're starting to see a healthy pickup in activity.
Our pipeline is strong and conversations with acquisition targets are accelerating.
As Bill will highlight in a moment over the last two quarters, we have further strengthened our balance sheet and liquidity position and remain poised to deploy significant capacity capital on strategic acquisitions.
We will remain active yet disciplined in our acquisition process we.
We continue to focus on acquiring this technology leaders with attractive growth FFO profiles of opportunities for us to add value commercially and operationally.
Now turning to our outlook for the remainder of the year.
While the global economy continues to present challenges and uncertainties visibility has improved across most markets.
As a result, we're providing guidance for the fourth quarter.
Overall sales in the fourth quarter are expected to be down high single digits with a similar level of organic sales decline.
Diluted earnings per share are expected to be in the range of one dollar to one dollar for down 4% to 7% versus the prior year.
Fourth quarter decremental margins are expected to remain solid in the low twentys.
To summarize our businesses delivered a solid quarter in a difficult environment.
AMETEK continues to manage this global crisis, while for the proven strength of the AMETEK growth model and with a talented workforce.
Our cost mitigation efforts have allowed the company to weather. This ongoing storm and we are confident that we will overcome these challenges with a bright future.
I'll now turn it over to Bill Burke, who will cover some of the financial details for the quarter.
Then we'll be glad to take your questions Bill.
Thank you, Dave I'd like to Echo Daves comments on the quarter as we saw outstanding operating performance driven by the tremendous efforts of our team in a very challenging economic environment.
Let me provide some additional financial highlights for the quarter.
Third quarter General and administrative expenses were down $4.5 million compared to the same period of 2019, primarily due to lower compensation costs and other discretionary spending cuts.
As a percentage of sales general and administrative expenses were 1.5% of sales in the quarter down from 1.7% last year.
The effective tax rate in the third quarter was 17.5% down from 19.5% in the same period last year, the lower tax rate in the quarter was due to return to provision adjustments and a lower tax rate on foreign earnings.
For 2020, we now expect our effective tax rate to be between 19% and 19.5%.
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.
Operating capital and working capital was an impressive 17% in the third quarter down sequentially from the second quarter's 19.6% on outstanding working capital management.
Capital expenditures in the quarter were $10 million, we now expect full year capital expenditures to be approximately $80 million, which is $5 million $5 million higher than our full year expectations last quarter as we are investing an incremental growth opportunities.
Our full year capital expenditures estimate remains below our initial expectations to start the year of $100 million.
Depreciation and amortization expense in the quarter was $63 million.
For the full year, we expect depreciation and amortization to be approximately $255 million, which includes after tax acquisition related intangible amortization of approximately a $117 million or 51 cents per diluted share.
Our business has continued to continue to generate strong levels of cash flow. Despite the challenges presented by the pandemic operating cash flow in the quarter was $310 million free cash flow was $300 million and free cash flow conversion was excellent at 146% of net income.
Total debt at the end of the quarter was $2.8 billion up slightly from $2.77 billion.
At the end of 2019 and down $68 million from the end of the second quarter.
Offsetting this debt is cash and cash equivalents of $1.3 billion.
Our gross debt to EBITDA ratio at the end of the third quarter was 2.1 times as we are intentionally holding higher than normal cash balances.
This ratio was comfortably below our debt covenants of three and a half times.
And our net debt to EBITDA ratio was 1.1 times at quarter end, which improved by 2.2 turns in the quarter.
We remain well positioned to manage this ongoing economic downturn with approximately $2.3 billion in liquidity to support our operations and growth initiatives. This includes approximately $1 billion and available revolver capacity.
As we've highlighted on previous calls AMETEK has a robust balance sheet with no material debt maturities due until 2023.
In summary, our businesses continue to manage through the pandemic exceptionally well delivering strong operating results and high levels of cash flow.
The dedication of our world class workforce to serving our essential customers has truly been in process, we remain well positioned to manage ongoing economic challenges, while investing in our long term growth initiatives.
Thank you Bill Andrew we're ready to take questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
And our first question comes from the line of Matt Summerville with da Davidson.
Good morning.
Turning Matlock.
Hey, Hey.
Dave.
I was wondering if you can maybe start by doing your more detailed walk through on the businesses. Please.
Sure.
I'll start with the process business.
Overall sales for process were down mid single digits in the quarter.
We add the contributions from the content acquisition and they were offset by inorganic or organic sales decline and was in line with ametek's overall organic sales decline.
We saw sequential improvements in sales during the quarter with this improvement being widespread across our process businesses.
Our communicated zygo businesses had solid quarters, driven impart by their exposures to research and semiconductor markets, They did very well and.
And we expect continued solid sequential improvements in sales for process.
During the fourth quarter.
I'll go into aerospace snacks, both overall and organic sales for our entire Andy.
Business were down mid teens in the quarter.
Showing nice sequential growth from the second quarter.
A similar to the second quarter, there was a meaningful difference in performance between our defense and commercial aerospace businesses.
Our defense businesses.
Continued to see solid demand with sales up low double digits on a percentage basis versus last year, while the commercial aerospace businesses were down about 35% versus last year.
Looking ahead to the fourth quarter, we expect demand to maintain to be relatively flat sequentially.
Sequentially versus the third quarter.
As the broad commercial aerospace market continues to adjust to the uncertain demand environment.
Due to COVID-19.
Next our power and industrial market segment overall sales for power and industrial.
Were down low double digits in the third quarter with.
With contributions from Intel power being offset.
By a mid teens organic sales decline.
Demand levels in the third quarter improved nicely from the second quarter, and we expect sequential improvements again in the fourth quarter.
And finally for automated and engineered solutions market segment.
Organic sales in the third quarter for a npls were down mid teens on a percentage basis.
We saw modest modest sequential improvements across these businesses in the third quarter as we had expected with applications tied to medical markets performing well.
We also saw a return to growth in China for our automation and engineered solutions business in the quarter.
And as with the other sub segments, we expect sequential improvements across both our automation and engineered solutions businesses in the fourth quarter.
That's that's a walk around the company.
Thanks, Dave and then as my follow up can you comment on what your price realization was in Q3 and what what you are looking for in terms of sourcing savings for the full year. Thank you.
Yes, I think the promote the price first.
The we're very pleased to see our.
Pricing held up well Q3 was similar to Q2.
We achieved about a point half of price across our entire business.
Total inflation and the impact of tariffs was about a point so we had a.
50 basis points of positive spread out at the margin.
And.
And your second question was on sourcing savings.
That we consider that part a structural savings and it was about $60 million.
Thank you.
Our next question comes from the line of Deane Dray with RBC capital markets, Yes, the one point, though to finish that was $60 million for the year to map and go ahead sorry.
Thanks, Good morning, everybody. Thanks.
Hey, great to see you guys are back in the quarterly guidance business because it does speak to your earnings visibility. So first question is kind of related to this visibility if you could take us through the cadence of the months in the quarter organically and maybe how.
October.
On to date has loved let's start there please sure.
In terms of orders in Q3, it was pretty typical trend for us with.
September being the strongest month of the quarter.
In fact, it was our strongest month since I believe February back in Q1.
When we started to really feel the impact of the virus Thats orders in terms of sales September again was our highest month of the quarter and the highest month of the year so far.
And in terms of October obviously is not completed yet, but it looks good orders are trending well and is supportive of our guide in Q4, which shows solid sequential improvement.
So did you see in the months that sequential improvement.
Consistent through the quarter.
You saw sequential improvements in orders and sales I believe the August was of.
A bit of an outlier, but but August is always tricky for us. So in general was a trend upward was September the highest in both sales and orders.
Great and then just kind of bridge this.
The degree of confidence in the sequential improvement how this translates into your confidence in restoring guidance.
Yes, I think the.
The confidence is really based on.
Us becoming.
More confident with our ability to live with the virus.
And we got visibility in our markets were seeing consistent.
Improvement in consistent engagement with customers across all of our markets.
And though we just got to the point, where we were comfortable giving guidance that our guidance range a little bit wider than it typically is and that's into it takes into account some of the uncertainty for the fourth quarter, but we just got comfortable because our our businesses are operating in a good rhythm.
And.
Below the level of confidence with us.
Great and then just my last question.
Not to oversimplify your mix and with respect to how you and the last question Matts question, you gave and highlighted those businesses, but if I thought about AMETEK in the strength of.
Your medical and defense is probably those are probably the strongest here how did those collectively do in the quarter and then the weakest which is more secular it's not execution, we get that and actually the commercial business, you're you've outperformed a number of your peers in that space in this market so but the two sides of this medical.
It depends how they do versus the oil and gas and commercial Aero on the other side. That's a great question one way to think about it is if I if I take the two most challenged markets out the the commercial aerospace and the oil and gas sales were down approximately 10%.
And another way to think about that is that our defense showed strong growth in the in the third quarter of mid teens are our of our health care business was just slightly down because of the.
We had cobot related demand that was strong, but we had to people arent going to hospitals and getting surgical procedures. So that was off a little bit but the combination of both the defense and medical was clearly our strongest and that was about flat terrific and just a quick clarification. When you said flat for Q for Aero was that commercial air.
And defense or.
Was it combined so.
So as sequentially, we're saying, it's going to be flat and thats, both for military and commercial aerospace got it that's really helpful. Thank you.
Thank you and our next question comes from the line of Scott Graham with Rosenblatt Securities.
Hi, Scott.
Good morning, well done again, thank you.
I do have a question first on I think an area that you might be most proud of this quarter operating working capital.
What did you do there to push that percentage down as much as you did what happened.
The the first comment is that the one of the hallmarks of AMETEK is are we think about working capital is being very you have to run businesses, where you're efficient with working capital and there are some elements that really overperformed and I'll, let bill comment on that.
I think what you saw was our receivables performance has been fantastic our businesses have really done a great job. So.
Staying close to our customers and understanding that pushing for payment our receivables were down to 46 days on the DSO basis, which is as low as it's been in quite a while so I think the teams did a fantastic job there and then the other thing and so it's a little more difficult, especially when sales are declining as rapidly as they did earlier.
During the year is getting your supply chains us.
Realigned to that level of demand and they did a great job with that as well and I think you saw that.
Play out in the in the in the third quarter. So I think those two things in combination really.
Enabled us to reduce that working capital percentage to 17% in the teams have just done a fantastic job on that around the company.
That's great. Thank you Bill now Houston no. The one the $90 million of expected full year temporary cost reductions.
Lot of companies are saying, hey, not all of that comes back.
What is your view on that for 2021 at this point how much of that comes back how much of it is maybe permanent.
Yes, the first point I'd make is the temporary cost savings will be at a run rate of about $10 million in the fourth quarter.
The second point is related to next year.
Okay.
We weren't a situation we have to sit down with with.
All of our teams are budgeting processes in November.
It's a bottoms up comprehensive planning process for each business unit.
They're going to look at growth.
Growth in each of their markets customer plans competitive dynamics investments opportunities capital projects cost reduction and part of that discussion is going to be how fast the temporary costs are going to come back and what the impact is year over year.
Hi level travels have a part of that is going to come back slowly through the year, but some of the costs have already been restored. So so really don't have a detailed plan on that next year, because we haven't done our budgeting yet we start that process in November.
But that's how I think about it.
Got it last question. Thank you for that.
On the M&A pipeline, obviously, you have a much broader.
Swap of businesses today than you did even two or three years ago, particularly.
Look at Groupon, and how how you've gotten even more scientific markets.
Could you give us maybe something a little bit more granular Dave on what you are looking for and I know competitively you got to be careful there, but I'm assuming that medical scientific slashed research would be really kind of at the top of the list for things you are looking for could you comment on that.
Yes, I think thats an area that we're definitely looking at I mean, it's broad based we as you know we have de central.
Lies business model when we get acquisition plans rolled up through our businesses through an adjacency process and.
We're looking at that to all parts of the business in all areas and and.
The.
We're seeing an uptick in opportunity uptick in discussions.
But you know that they could come from all parts of our business, but the area that you highlighted is a particularly interesting one to us.
Very good. Thank you good job. Thank you Scott.
Thank you and our next question comes from the line of the button on the let's go with Gordon Haskett.
Hello, Ivano good morning.
Morning, guys.
So just wanted to ask what percent of your portfolio, maybe excluding era. Indeed.
In defense and.
In medical is levered to Capex.
And what are you seeing in those Capex levered.
Yes, yes.
Most of the products that we sell our price range that.
Could be considered both opex or capex.
So we really don't segment it that way, but certainly the way to think about the big projects and the Big project businesses and our.
Oil and gas business and our metals business in some of the heavier industries, our art delay right now, but the operating expenditures are continuing so I really don't have a percentage to give you, but thats, how we think about it.
And then in terms of the Capex Levered businesses are those like down significantly more.
No than otherwise would you say.
No in fact are in the research market for CAMECA, there are selling million 3 million dollar tools and that was one of the businesses that I highlighted in process talked about on our on our so that's not the case I mean at the University market or a research market very expensive. The key there is that we have the best.
Products and we're the only one in the world that makes and Adam program, we have a unique sims capabilities. So people save they budget for our products and we build products and they deliver and so you know in CAMECA, which is a capex marker for not for us at one of their best quarters.
So it is it's really dependent on customer dynamics.
Got it thank you very much.
Performance or other companies because I really don't know, but I know our teams did a good job on shipping product on on the.
And.
As a negative 35% please with the performance as.
As a strange as that sounds.
Yes that business is getting better.
And then just on the special color you gave some great detail then I think you said $45 million of cost.
During Fourq you is is that run rate. So as we go into 2021 are we looking at maybe yeah, I don't know 40, or 40 million doses of kind of like carryover benefits into and 21.
Yeah first of all just Nigel was it 55 millions of savings in Q4.
And $45 million of it is structural and 10 minute millions of is temporary.
And.
I'm going to give you a you know there's a $50 million carryover from the restructuring that we did earlier in the year, but in terms of getting into any specifics I'm going to not answer. The question for next year and our budgeting process is going to be in November and really there is a lot of discussion on.
Cost reduction investments.
The temporary costs that are going to come back and that all goes into a mix. It will be a pretty complex budgeting process. This year, what's been dynamics are some extra variable then so.
I'm not going to comment on what the savings will be for next year.
So it sounds like you're still maybe complemented this election will queue kind.
I'd like to set up the 21 would that be fair.
No I don't I don't I don't think so, but we're going to go through our budgeting process isn't something they can't come out of there, but we.
We don't have anything planned in Q4.
Okay. Thanks Bye.
Okay.
Thank you and our next question comes from the line of Christopher Glynn with Oppenheimer.
Hi, Thanks, good morning, guys football's well worn out.
So just wondering if in the current environment, where you have to smaller companies might be concerned about global dynamic supply chain trade et cetera, if you're picking up on any.
New motivations by sellers.
Including some you if you've tracked and courted for some years.
Yeah, I think there is some activity out there were.
People were anticipating possibly a tax rate change so there's some people that are.
I have their business is out there.
Part of the uptake and pipeline opportunities.
And in terms of the overall uncertainty in the global environment if you're.
A smaller owner of a company that has all these dynamics in terms of coal bed and geopolitical issues and and issues with China. You are certainly a little unsettled and we've known those people for a year and years and we're certainly having discussions on them in terms of what the right time for them to sell their businesses.
[noise], Okay, and any changes in the competition for deals that you're interested in seeing.
I would say no no competition changed is noticeable.
And about the same for the last couple of years.
Great. Thank you [noise].
Thank you Chris.
Thank you and our next question comes from the line of Andrew Obin with Bank of America.
Hey, good morning, guys. Good morning, Andrew Good morning.
Just a couple of people actually ask me did I Miss did you guys actually give us actual orders in the third quarter, usually do that I can do that our overall orders were minus 8%.
Our organic orders were minus 12%.
And our book to Bill was 1.01.
Okay that was easy.
And then the second question just I'll ask one elective procedures I I think most of your competitors sort of said that I'd like to surgeries back to 19, 95% level pre kogut.
Are you just has that been your experience on what are you seeing an elective procedures into Q4.
Yeah, I think elective procedures for us we think is kind of stay.
At a reduced level.
And so next year is the we're hearing from customers. So we think we'll have another quarter in Q4 of some.
Some kind of reduced elective procedures and then it will recover next year and I do anticipate they're working off backlog and there is less demand with with Covitz so that.
That that market will correct itself as time goes on.
Your experience is consistent sort of was the data that I cited that your competitors are citing right.
Yeah, I'm not sure what the competitors have cited but.
We're down a bit and the numbers that you put out their nine year, 95% kind of makes sense, okay and.
Just ask you've honest question in a slightly different way.
On the way up as IP recovers, what kind of revenue leverage to IP should we be thinking for your portfolio ex arrow and maybe acts health care.
Right.
That's Thompson, we're going to talk about with our businesses, but historically AMETEK has recovered very well from significant downturns and we're seeing an improvement.
In Q3 versus Q2, we're anticipating seeing it in Q4 was versus Q3 and historically.
We have a really performed well and upticks. So we have a mid and long cycle business.
And we're seeing good improvements and what you're seeing now is a short cycle activity is picking up.
So that.
That should bode well for the future, but we're going to go through our budgets and figure everything else.
Thank you so much thank you Andrew.
Thank you and our next question comes from the line of Brett Linzey with vertical research.
Hey, Good morning, all maybe first question just on defense and medical first on the defense side very strong 2020 continues to look pretty good here what is your visibility in the business next year based on Windsor platforms, you're on clearly a tough comp, but can you see that growing still next year and then on the medical side any I guess.
Then a fileable cove it related opportunities that you could point to or even quantify.
You know that could pop.
Pop up here over the coming months.
Yeah the the.
The first question is I'm really not going to comment on on the.
Military demand environment next year, but the the spending pattern those things are relatively healthy and.
We'll see what the political environment brings but usually those changes occur slowly over time so.
You still think that the overall spending environment will be supportive next year.
And we are quoting activity shows that.
In terms of the the kovar related products I mean, the the first thing I point you to is the.
The land temperature measurement, we're going body temperature scanning when I came into the work today I went through the land system is very quick easy efficient and measured body temperature.
The other things that are happening in our automation business. There's a lot of covance testing devices that require sample automation movement enough samples very precisely through testing the demand in that business is very strong.
We're also seeing some demand for temporary set ups and hospital type situations with our role in health care businesses. So we're really seeing some some some pockets of improved demand and and.
And that's built into the overall story.
Got it that's great and then just in terms of the geographic complex and could you maybe give us a little more color what sales are order rates and then I'm actually curious specific on Europe in October where the lockdown chatter and maybe even enactment was starting to percolate a little bit there or did you see a slowing kind of late in October in Europe. Thanks.
Yeah, Yeah I'll take the second question first I mean, our our orders for October our very good. They are in line with what we were expecting and we're seeing no geographical problems at this point.
In terms of the third quarter, the geographical third quarter, we had positive sequential trends across all geographies.
With Europe and US remaining the most challenge so the U.S. was down I think 13%.
Broad based weakness.
Europe was down 20% on broad based weakness.
Asia was down mid single digits.
We had a good strengthen the MGM, China and China was positive plus three for us so.
But all geographies improved sequentially.
Got it thanks, Dave appreciate it thank you Brian.
Thank you. Your next question comes from the line of Joseph Giordano with Cowen.
Hi, Good morning. This is Robert Hey, good morning, its Robert in for Joe. This morning, Thanks for taking my question.
Hi, grasping covered.
Just a quick one on the structural number well costs for Fourq.
For Q is there any that pretty evenly split between the LNG any angie.
I think when you think about it yes. It is it is a pretty well split between the terminal so yeah use a little bit higher.
Of the relative size.
It's it's a split based on volume.
Okay, Great and then.
You probably could provide another update on enhanced performance, so far and how that's progressing versus expectations and synergies into next year.
Yeah, I mean, we have met our yeah.
Year, one profitability targets, so we're going to be reviewing with that with our board.
Next week, thanks for a very good first year team did an excellent job. We had we were helped by.
Cobot related sales about half of that is life sciences.
And we also announced the confining along.
Continuing with our Edx sorry on similar markets. So we drove.
Excellent synergy so.
Very positive and read the K three camera helps helped to solve some of the cobot related problems being in the first camera to structure. The virus. So all very good and the people get Tanner very proud of that.
Okay.
Thank you.
Next question comes from the line of Andrew Buscaglia with Baird.
Good morning, guys good morning, Andrew.
Yeah.
So David you talked about you reinstated quarterly guidance any you mentioned visibility getting a little bit better.
Which is interesting that some companies are are willing to say that yet or hesitate into year end it bill.
A lot of uncertainty so I guess.
Where where are you seeing across your space, where are you feeling more comfortable obviously some areas with a nature like military spending you can you kind of have better visibility just.
All the time.
I guess, where do you get more comfortable saying that and maybe it is coming from some sort of the conversations you're having with your customers.
Yeah, that's a great question, Andrew and though when you think about it.
We're getting better at living with the virus.
Our customers are again getting better living with the virus, our suppliers are getting better at living with the virus and there is an uptake in cases, especially in Europe, and the western U.S. and.
We're watching that closely but we expect to come.
Continued to run at an essential business and our customers are essential customers and they're expecting to continue to run so business activity levels are continuing to improve.
And even in Europe, when you have some increased.
Lockdowns on certain degrees essential businesses are still operating so that's really the.
The broader context.
That we use to reinstate guidance and talking with our teams are confident they can deliver for fourth quarter.
Yeah, that's fair.
And you talked a lot about this quarter about some benefit.
Benefits from Cove added some color related products I guess.
As far as you have a lot going on on that side I guess, how much of it do you think.
No. It is sustainable demand into 2021, I guess I mean, how would you characterize sort of a temporary bump in demand related to those products versus somebody that might linger into next year and beyond.
Yeah as I said, a couple of times, we're not going to talk about next year and work with our teams, but in general we're seeing a yes.
Pretty substantial improvement quarter to quarter and you.
We'll find out the details with our teams, but I would expect that improvement trend will continue into next year and as I've talked earlier in this call about AMETEK typically as room is responded positive.
Positively to to the downturn. So we'll find out a lot we don't know about the timing.
And there may be some color related demand that falls off but there's also going to be some demand that was impacted by covert that's going to improve so I will figure that all out during our budgeting process.
Okay, all right that's fair thanks, David Thank you.
Thank you and our next question comes from the line of Michael again with Wells Fargo.
Hey, guys, Mike on for Allison. Thanks for the question Am I right.
I wanted to go back to the capital allocation discussion. So as you move into the heavy R&D industries with the bolt on acquisitions versus maybe more material and direct Cogs industry is.
Is there any discussion on the way you approach to report gross margin, which I believe differs from your peers that.
Yeah our.
Our cost of sales includes engineering and that's historically, how we've done that and.
We have not had a discussion recently of changing that.
Okay fair enough.
And then I guess switching to some of your end markets. I believe you have an automation in engineered solutions platform that was approaching 1.5 billion prior to the downturn. So I was curious what a near shoring or re shoring kind of player theme would look like for you guys in the businesses that would be most impactful for yeah.
Automation is one of them automation or did well in the third quarter. It did better than our engineered surfaces business and they're seeing that the man. They also saw good trends in China from that and then when you think about the product that I talked about today from pre reform. That's all product were for outlined metrology. So our.
Automation businesses and our instrumentation businesses.
Our very well positioned to do too.
To improve in a environment that includes reassuring, we have a lot of products that our customers use to make their manufacturing more efficient and more productive. So that's kind of in our sweet spot.
Okay, and so is it fair to say that.
Some of those businesses have a higher vitality index. The maybe the legacy AMETEK platform. I believe you said it was like 25%. This quarter just is that where the R&D focus is now and going forward.
Yeah, I think the R&D focus is E G biased versus 80 Mg and the vitality index is higher and those kind of businesses, so that would be oh.
Oh, Okay correct view from your your your view point.
Okay I appreciate the time I'll pass it along thank you. Thank you.
Thank you.
Now I will turn the call back over to Kevin Coleman for any closing remarks.
Thank you Andrew and thank everyone for joining our call today and as a reminder, a replay of the webcast can be accessed in the investor section AMETEK dotcom, Thanks and have a great that.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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