Q3 2021 AMETEK Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the AMETEK third quarter 2021 conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Kevin Coleman, Vice President of Investor Relations. Please go.

Go ahead Sir.

Thank you Angie good morning, and thank you for joining us for Ametek's third quarter 2021 earnings Conference call with me today are Dave <unk>, Chairman and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer.

During the course of today's call, we will make forward looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

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 2020 or 2021 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization.

And also excluding the gain from the sale of reading alloys in the first quarter of 2020.

And the realignment charge charges taken in the first quarter of 2020.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investors section of our website.

We'll begin today's call with prepared remarks by Dave and Bill and then we'll open it up for questions I will now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK had another outstanding quarter with better than expected sales growth strong operating performance and earnings above our expectations.

We established records for sales EBITDA operating income and earnings per share in the quarter.

Demand remains strong across our diverse set of end markets, leading to robust order growth and a record backlog.

While the global supply chain and logistics networks remains challenging our businesses are doing a tremendous job navigating these issues and delivering results, which exceeded our expectations.

Given our results in the third quarter and outlook for the fourth quarter. We are again, increasing our sales and earnings guidance for the full year.

This strong overall performance reflects the exceptional work of all AMETEK colleagues as well as the strength flexibility and sustainability of the grammar Tech roadmap.

Ametek's proven business model with central to our focus on creating a sustainable future for all stakeholders.

We are very proud of the important steps we are taking to further sustainability across AMETEK and last week, we published our latest corporate sustainability report to highlight our efforts in this area.

This report provides information on our sustainability initiatives.

The strong progress we have made and the commitments, we're making to create a better future.

I welcome you all to read our latest corporate sustainability report, which is located on our website.

Now, let me turn to our third quarter results.

Third quarter sales were a record $1 $44 billion up 28% over the same period in 2020 and above our expectations.

Organic sales growth was 17% acquisitions.

Acquisitions added 11 points and foreign currency was a modest benefit in the quarter.

Overall orders in the third quarter were $1 5 billion.

An increase of 37% over the prior year period.

While organic orders were up an impressive 31% in the quarter.

We ended the quarter with a record backlog of $2 $62 billion, which is up over $800 million from the start of the year.

Third quarter operating income was a record $338 million or 25% increase over the third quarter of 2020 and operating margins were 23, 4%.

Excluding the dilutive impact of acquisitions.

Core operating margins were 24, 7% up 70 basis points versus the third quarter of 2020.

EBITDA in the third quarter was a record $415 million up 25% over the prior year with EBITDA margins of 28, 8%.

This outstanding performance led to record earnings of $1 26 per diluted share up 25% over the third quarter of 2020 and above our guidance range of $1 16 to $1 18.

We continued to generate strong levels of cash flow with third quarter operating cash flow of $307 million and free cash flow conversion of 109% of net income.

Overall tremendous results in a challenging operating environment.

Next let me provide some additional details at the operating group level.

First the electronic instruments group.

Sales for <unk> were a record $982 million up 31% over last year's third quarter.

Organic sales were up 15% acquisitions added 16% and foreign currency was a modest headwind.

While growth remains broad based.

Growth was particularly strong across our ultra precision technologies, and our power and industrial businesses.

Aig's third quarter operating income was a record $245 million up 20% versus the same quarter last year and operating margins were 25%.

Excluding acquisitions.

Core margins were excellent at 27, 2% in line with prior year margins.

The electromechanical group also delivered outstanding sales growth and excellent operating performance.

Third quarter sales increased 21% versus the prior year to $459 million.

Organic sales were up 20%.

And currency added one point to growth.

Growth remained strong across all of EMG with our automation business is again, delivering notably strong growth in the quarter.

Emg's operating income.

In the quarter was a record $115 million up a robust 36% compared to the prior year period.

Emg's operating margins expanded an exceptional 270 basis points to a record 25%.

Okay.

Now switching to our acquisition strategy.

AMETEK has had an excellent year with a record level of capital deployment, leading to the acquisition of five highly strategic businesses.

AMETEK has deployed approximately $1 $85 billion on acquisitions, thus far this year, reflecting the strength of ametek's acquisition strategy and our ability to identify and acquire highly strategic companies.

Our proven operating capabilities allow us to drive meaningful improvements across our acquired companies, resulting in outstanding returns on capital.

Generating strong returns on capital deployed is critical to long term sustainable growth an important element of ametek's strategy.

Ametek's strong cash flow generation continues to support our capital deployment strategy.

Our acquisition pipeline remains very active.

Our M&A team has continued to work diligently identifying attractive acquisition opportunities and we expect to remain busy over the coming quarters.

We also remain focused on investing back into our businesses to support the organic growth initiatives, including in support of their new product development efforts.

In the third quarter, we invested over $75 million in <unk> and for all of 2021.

Now expect to invest approximately $300 million or approximately five 5% of sales.

Through these investments our businesses develop unique and highly differentiated solutions to help solve our customers' most complex challenges.

One such example is a new product introduction from AMETEK Tan.

<unk> is a leading provider of direct detection technology for electron microscopy supporting high end research and materials and life Sciences applications.

<unk> recently introduced a stellar hybrid pixel camera.

The only fully integrated hybrid pixel electron detector, what the Tam across coffee suite.

This new product reinforces <unk> leadership position, providing the highest quality tem diffraction camera, allowing the user to perform <unk> stem analysis with rapid speed and high dynamic range.

<unk> new camera builds on our long history of disruptive and award winning technology.

In August the stellar camera was awarded the 2021 microscopy today Innovation Award and call one of the 10 game changing products and methods.

I would like to congratulate the team at could tamper the recent launches of stellar camera and further support of important research applications.

Now, let me touch on the supply chain issues.

The global supply chain remains challenging.

We see extended lead times for a broad range of materials and components with logistics issues and labor availability, adding to the complexity.

While these difficulties exist, we exceeded our sales estimates for the quarter and are navigating the challenging environment well given our agile operating approach.

The supply chain issues are leading to higher inflation.

However, given our differentiation, we're able to more than offset this inflation with higher pricing leading to a strong price inflation spread.

While we expect these challenges will continue into 2022.

Being well positioned to navigate the issues given the strength and flexibility of the AMETEK growth model.

Moving to our updated outlook for the remainder of 2021.

Given our strong performance in the third quarter.

And the continued strong orders momentum and record backlog.

We have again raised our 2021 sales and earnings guidance.

For the full year, we now expect overall sales to be up in the low 20% range versus our previous guide.

Up approximately 20%.

Organic sales are now expected to be up low double digits on a percentage basis over 2020 as compared to our previous guide of approximately 10%.

Diluted earnings per share for 2021 are now expected to be in the range of four.

$4 76 to $4 78 and.

An increase of approximately 21% over 2020 as comparable basis and above our prior guide of $4 62 to $4 68 per diluted share.

For the fourth quarter, we anticipate that overall sales will be up in the low 20% range versus last year's fourth quarter.

Fourth quarter earnings per diluted share are expected to be between $1 28 to.

To $1 30 up 19% to 20% over last year's fourth quarter.

In summary, ametek's third quarter results were excellent.

Our teams continue to execute and our businesses are performing well.

Our performance through a challenging environment shows the resilience and strength of the AMETEK growth model.

The asset light nature of our businesses, our leading positions in attractive niche markets.

World Class workforce will continue to drive long term sustainable success.

The proven nature of the AMETEK growth model continued to drive long term success for all of Ametek's stakeholders.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions.

Thank you, Dave as Dave highlighted AMETEK delivered excellent results in the third quarter with continued strong sales growth and orders growth and outstanding operating performance, let me provide.

Some additional financial highlights for the quarter.

Third quarter General and administrative expenses were $22 1 million up $4 $8 million from the prior year.

Largely due to higher compensation expense as a percentage of total sales G&A was one 5% for the quarter unchanged from the prior year.

For 2021 general and administrative expenses are expected to be up approximately $18 million driven by higher compensation costs or approximately one 5% of sales also unchanged from the prior year.

Third quarter other income and expense was better by approximately $4 million versus last year's third quarter, driven by a $6 million or approximately <unk> <unk> per share gain on the sale of a small product line in the quarter.

This gain on the sale was more than offset by a higher effective tax rate in the quarter of 19, 5% up from 17, 5% in the same quarter last year.

For 2021, we now expect our effective tax rate to be between $19 five and 20%.

Actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Working capital in the quarter was 14, 9% of sales down 210 basis points from the 17% reported in the third quarter of 2020.

Reflecting the excellent work of our businesses and managing working capital.

Capital expenditures in the third quarter were $26 million and we continue to expect capital expenditures to be approximately $120 million for the full year.

Depreciation and amortization expense in the third quarter was $75 million for all of 2021, we expect depreciation and amortization to be approximately $295 million, including after tax acquisition related intangible amortization of approximately $138 million or <unk> 60 per <unk>.

Diluted share.

We continue to generate strong levels of cash given our asset light business model and working capital management efforts.

In the third quarter operating cash flow was $307 million and free cash flow was $281 million with free cash flow conversion of 109% of net income.

Total debt at quarter end was $2 $65 billion.

Up less than $250 million from the end of 2020, despite having deployed approximately $1 85 billion on acquisitions, thus far in 2021.

Offsetting this debt with cash and cash equivalents of $359 million and at quarter end, our gross debt to EBITDA ratio was one six times and our net debt to EBITDA ratio was one four times.

We continue to have excellent financial capacity and flexibility with approximately $2 billion to $5 billion of cash and existing credit facilities to support our growth initiatives.

To summarize our businesses drove outstanding results in the third quarter and throughout the first nine months of 2021, our balance sheet and tremendous cash flow generation have positioned the company for significant growth in the coming quarters and years Kevin.

Thank you Bill.

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

If you would like to ask a question. Please press star one on your telephone keypad again, Thats star one to ask an audio question.

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

Thanks, a couple questions first Dave can you talk about where you were with realized pricing in the third quarter on a year over year basis, what the spread looks like you mentioned it seems pretty favorable and then what your thoughts are in terms of how much price you might need to take in 'twenty two.

Sure Matt in the third quarter.

Our pricing continued to more than offset inflation.

As I said in the prepared remarks pricing was about three 5% of sales.

And inflation was about two 5% of sales so we're going to.

Spread of about 100 basis points.

We expect in Q4 that will be similar to Q3 with slightly higher pricing and inflation.

And the results speak to the highly differentiated nature nature of ametek's product portfolio in our <unk>.

Leadership position in niche markets around the world.

In terms of next year, we haven't done the detailed planning but.

A key for me is that we're going to stay out ahead of inflation and I expect that to be true next year. So we will stay ahead of inflation with price with.

To answer your question Matt.

Yes. Thank you and then just as a follow up.

Look over the last two years EMG margins, who really migrated into a completely different zip code versus where they were at I know divesting reading is a component to that you did some structural cost outs during <unk>.

The COVID-19 outbreak.

Still leverage to drive margins higher in that business, how do we think about.

How we should think about that going forward, yes. The EMG has done a fantastic job in margin.

Development and you mentioned some of the key drivers we divested reading.

But more fundamentally I mean, we have an automation business is firing on all cylinders is very profitable.

Have a thermal management system as part of our.

Defense industry defense businesses.

Doing well and has high margin.

And then we have.

Some part of our EMEA business, that's accelerating so.

It isn't a new ZIP code, but I expect it to stay there and Theres still room for margin expansion.

Great. Thank.

Thank you Matt.

Your next question comes from the line of Josh quick Winski.

With Morgan Stanley. Please proceed with your question.

Yeah.

Hi, this is actually <unk> on for Josh.

So looking at backlog.

Where it stands today, how much of that would you call I'll call. It.

Excess backlog.

Just on supply chain issues and how much should we expect that contribute to 2022 growth here.

Yes, we have a record backlog of $2 62 billion.

And.

I wouldn't categorize as excess I mean, I mentioned in earlier calls that.

Customer behavior is to give you more visibility into future months and quarters, because there's so many issues in our supply chain. So you have more visibility, but I would not consider as excess and I would not.

I would not view us is not keeping up with demand.

So really you have a situation where there is strong underlying demand.

It's resulting in a higher backlog is giving us further insight into 2022, and we feel real good about it.

Got it and then just a quick follow up so.

What are kind of the biggest inflation and supply chain issues that we should kind of watch.

For AMETEK as conditions.

Conditions potentially do start to improve.

Is it again on the materials side ray or labor.

What should we keep our eyes on.

Yeah, that's a good question and.

During the quarter, we continued to experience challenges with.

Our supply chain logistics.

Inflation labor availability.

And it was one of the more dynamic environments I can recall.

And these conditions were a bit worse in Q3 than Q2, and we expect.

Those conditions to persist in the fourth quarter.

And I would characterize our overall effort in response to these challenges is outstanding.

We're clearly showing the agility necessary to navigate these supply chain disruptions.

Key from my view is the distributed nature of our business model.

Where we have committed P&L managers running their businesses.

With their own supply chain teams, which allow them to react quickly to changing conditions.

And at the same time these dedicated business unit teams are working seamlessly with our overall.

Corporate supply chain team that acts with the combined leverage and the authority of all of AMETEK.

And this overall approach has been effective for us.

You asked where we had some the biggest tissues, we add as I mentioned last quarter. It's in semiconductor chip availability. It's an area that is particularly challenging because we use a lot of electronic center on our businesses obviously.

And we're using our purchasing leverage the relationships that we built up over.

Decades.

Our.

Generic capability in terms of qualifying second sources in terms of changing designs to solve problems and.

And we don't expect.

Anticipated improvements in the availability of semiconductors until.

Sometime in late 2022.

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

Got it that's helpful. Thank you.

Thank you.

Your next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question Hi.

Good morning, Hello, Allison good morning.

Keep in line with dissipating as obviously you guys are a bit unique in that you certainly been managing is quite low.

Is there a sense I mean organic growth very strong organic orders are very strong is there any temporary maybe what growth could have been because of some of these supply chain issues are really not impactful to you guys in terms of what that expected growth could be or the volume that you were anticipating this quarter. Yes. That's a good question Allison because what we do is.

We set our plan based on material availability and and we executed that plan extremely well in fact, we beat our expectations, but we did at the end of the quarter.

I look at it as a.

If the stars aligned what could we have shipped without some of the material availability issues and it was about.

The additional $50 million.

That shifted out of Q3 to Q4.

I feel like we're going to have the same kind of shift out of Q4 into Q1. So.

We're able we're able to meet demand.

<unk> able to do.

<unk> schedule once we lock into the schedule, we're very good at executing it but there was about $50 million of debt.

Slipped out now we're not a big labor business.

Labor is not a big cost driver for us so labor availability of staff, but we're able to get the products manufactured with the labor available. So.

Your answer is $50 million in an ideal world.

Got it that's helpful. Thank you.

And then just on the acquisition environment, obviously deployed a significant amount of the beginning of the year it sounds like.

The pipeline is always its pretty active any color on kind of what youre, a little bit more focused on or what we could see maybe near term over the next few months if the stars align.

Sure.

Yes, we are very focused on some deals right now and I don't know if theyre going to happen.

Next month or three months from now but were very active over the next few months I mean, the thing you have to be careful right. Now is there's a lot of businesses that are out there and you have to sort through them and find the quality fine agenda within those pipelines and we're good at that and.

I just feel.

Our pipeline remains strong we're very active on exploring opportunities.

As Bill mentioned, we have a meaningful level of financing capacity and strong cash flows and we also have so I think 2022 is going to be a good year for us.

And when I have a tailwind from some of the deals we got done this year. So we're feeling pretty optimistic about what we've got done this year the quality of businesses that we've acquired and we're feeling good about our pipeline for 2022.

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

Sure Alex.

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

Thank you and good morning, everyone. Good morning Deane.

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

Interesting on analysis question, there, we actually had to drag it out to you that there was a $50 million pushout on revenues we've seen that.

And also I've seen where.

That is like a rolling pushout in from <unk> into the first quarter, but.

I like how the fact that wasn't an excuse you still put up strong numbers. So congrats there. Thank you.

A couple of questions.

There is this thought here on the on the.

Supply chain issues for companies like AMETEK that are higher up the value chain youre not doing raw material conversions.

Youre more final test and assembly. So it's the components supply might be the impact might be felt later so that this might become more of an issue for our component supply in the coming quarters.

We know it's chip related already but is there any sense of where you think it gets worse from here.

Again, where you are on the value chain.

Yes, I don't see it getting worse.

As I mentioned it was.

Worse in Q3 than Q2, but.

Things seems things seem to have stabilized the comment that I'd make is.

It's a good one.

Your question and <unk>.

Inflation is a concern related to our backlog, but we think it's manageable even with the high level components and the first key for me is that you have firmed supplier pricing for items in the backlog as much as possible. So you know what your costs are going to be.

And then we do have some <unk>.

Commodities that we use in various areas and when possible and we have firm orders will buy forward certain key commodities to lock in costs where appropriate.

<unk>.

We're using surcharges to handle increases in shipping cost increases in transportation costs.

Higher energy costs et cetera.

We shortened the length of our quotation valid.

<unk> the valid timer quotations are out there so items can be repriced if necessary.

And then you take into account the higher costs and when you can and if necessary.

Our customers have been fairly receptive to get to get a price increase due to what's happening right now so I put that whole package together.

We're a bit later and some of the components businesses that may be true, but at the same time, we're welling running well ahead of inflation with our pricing and we plan to stay there and that's going to be a big part of our budgeting process that we're going through and to understand what's happening in the market to understand inflations.

With three 5% of price and two 5% inflation across our entire businesses I think.

We're focused on it and I think we're doing a good job of it and I think we'll stay in front of it.

Really helpful and you mentioned budgeting process it would be interested in hearing how the budgeting process for 2022 might be tempered given the circumstances on the supply chain would it be.

The top line kind of being these rolling push outs.

Would it also be margins you know with the labor issues just how does this all change your planning assumptions for 2022, and then maybe if you could just give us a comment on October that'd be helpful. Also okay.

I'll talk about.

I guess, our preliminary thoughts on 2022.

As you know Deane, we operate in niche markets and we have a comprehensive budgeting process.

It allows us to understand the market dynamics of these niches in a detailed level.

And we begin that process later this month and that process is going to inform our guidance for 2022.

In terms of the macro setup, we believe the economic recovery continues.

Hum.

We think overall, it's a good macro environment for us.

We think the mid cycle recovery continues.

We think that will start to see longer cycle improvement and our commercial aero businesses. Our process industries will continue to recover.

We're expecting a stable defense spending environment.

In terms of some of the headwinds that you mentioned the challenges from inflation are going to continue and we're going to have to continue to offset inflation with price and the supply chain may constrain growth.

Mainly in the first half of the year.

And as I mentioned before semiconductor availability as a key issue for us.

And we remain the.

The final thing is we remain active in capital deployment with significant balance sheet capacity with a primary focus on M&A. So so we're really bullish about what we're going to be able to accomplish in 2022 and there is a couple of challenges out there headwinds mainly the supply chain that we're actively managed now but we're still feeling good about 2022.

And comments on October.

<unk> comments on the cadence throughout the quarter and October September was the strongest month of the quarter. It was also the strongest month of the year to date.

And then the sale and in orders and sales grew sequentially through the quarter with September being the strongest month quarter.

In October was very solid it was supported supportive of the trend required to meet our guide for Q4. So we're very pleased with how October <unk>.

Turned out and it showed no slowdown at all.

Really helpful. Thank you. Thank you Deane.

Your next question comes from the line of Andrew <unk> with Bank of America.

Good morning. This is David Ridley Lane on for Andrew.

Can you give some additional color on revenue by end markets and geographies.

Sure.

Mentioned.

In the prepared remarks that.

It was a broad based growth in.

Ill take a walk around the company, David and you look at our process businesses.

They were they were up high teens on a percentage basis in the third quarter and they were driven by low teens organic sales growth and the contribution from the acquisition of <unk>.

Our process businesses continue to see broad based growth.

Particularly strong growth within our ultra precision technologies businesses.

New products and are differentiated measurement technologies are really driving solid demand across a wide range of markets, including semiconductor and optics market.

For the full year for process, we now expect.

To be up low double digits versus the prior year.

Our next major market segment is the aerospace and defense market.

And.

Overall, we were up 55% in the third quarter driven by.

Solid organic sales and the contribution from the acquisition of <unk>.

Organic sales were up high single digits on a percentage basis versus the prior year.

Solid growth in our commercial aftermarket business and our business jet businesses. So those were the two areas of strong growth.

And for all of 2021, we now expect mid single digit organic sales growth for our aerospace.

And defense businesses.

And we expect our defense businesses to be up high single digits in our commercial businesses to be up low single so.

The defense business is still stronger, but it's moderating a bit in the commercial businesses had a good quarter.

When we go to the power and industrial market segment next.

Up nearly 40% in the quarter driven by mid Twenty's organic sales growth. So they had a very good quarter.

Also acquisitions from NSA and crank software contributed.

And for all of 2021, we now expect mid teens organic growth for our power and industrial businesses.

And finally, our automation and engineered solutions business and <unk>.

Both overall and organic sales were up approximately 25%.

Accelerating from the prior quarter.

Sales across our automation businesses remained robust with strong demand continuing in their end markets.

For all of 'twenty one.

We now expect organic sales for our automation and engineered solutions businesses to be up mid teens on a percentage basis with.

With stronger growth across our automation businesses and our engineered solutions business. So the automation business is doing very well as customers want to remove labor from their processes.

They want to move things contamination free.

We're at capacity.

We've invested in the past in our rig technologies that are winning share so.

And we're very good at moving things quickly and precisely so the automation business is in really good position with a strong backlog and an end.

We're bullish about the future.

You mentioned the geography.

I'll go around the geographies, we've got strong broad based growth across geographies, where.

Every geography was up the U S was up 15%.

Europe was up 15% and the star for the quarter was Asia was up 25% with.

Broad based strength and notable strength in our process and automation businesses in Asia.

That answer your question David.

Perfectly Okay, and then just a quick follow up.

You sort of alluded to it earlier in talking about mid cycle. This is Uh huh.

Pretty strange cycle, maybe just can you talk about some of the areas that you are.

Looking for better organic growth in 2022 versus 21.

I imagine that would be.

Some traditional.

No longer cycle areas like commercial Aero and oil and gas, but also maybe in this particular cycle.

Things that are tied to patient volumes and that sort of stuff.

Yeah, I mean, it's.

You mentioned three of the areas that I think are all improving our commercial aerospace business. So we will definitely improve.

Our oil and gas business, it's only about 5% of AMETEK now, but it was up mid teens in the quarter.

And given where oil and gas prices are we are beginning to see the signaling of the project business. Returning in 2022. So we're feeling good about that and in terms of the health care business.

Health care is 15% of AMETEK now so it is our largest end market vertical.

We were up mid teens in the quarter.

Had really solid growth in our <unk> business and a record business really driven by new products and ryker.

And the Electrosurgery business it picked up for us in Q3, So we were up in the quarter.

It wasn't a 15% it was up high single digits, and we're benefiting from elective surgeries for things like neuro stimulation cardiac mapping catheter is all of that stuff is people are going back to hospitals getting those procedures done and we expect that to grow this quarter was.

High single digit kind of number we expect that to grow more next year or so.

So you hit the key issues commercial aerospace oil and gas.

The the medical electric surgeries.

But I don't think the mid cycle is done growing yet either and we're starting to see acceleration in that business across some of our process businesses.

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

If you would like to ask a question. Please press star one on your telephone keypad again, Thats star one to ask an audio question.

Next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

Thanks, Good morning, everybody good morning, Chris.

Hey, Dan.

Well, it's really answer a lot of questions in principle.

Actually curious any particular areas of share gain or areas of market space creation.

You want to comment on you mentioned automation, a little bit just kind of looking to expand on those.

Yes, I mean the.

I would say that when you can deliver your customers, giving you more orders.

And that's the key issue that's driving our business right now.

When I look at the automation business I talked about that earlier that businesses is doing extremely well.

Because the.

Broader macro.

People want to remove labor from the processes. They don't want to be dependent on labor because in some places you can't hire labor in there.

Difficult to maintain.

You are at capacity announced so there's more automation.

And both discrete automation and factory automation.

We've invested in the right technologies in the last few years and acquire the right businesses and we put them together.

Have a really compelling value proposition and we can.

Design customized sub assemblies that do automation very quickly and efficiently.

And.

That business is doing the right things right now so we're pretty bullish on the outlook for it.

That answer your question Chris.

Yes, I was curious if there are any other particular areas even if.

More illustrative than moving the topline by themselves because maybe it's in a.

Discrete niche business, but Mike I'll speak to illustrate the AMETEK growth model.

Right I think another area that we're starting to see traction in.

As some of our sustainability solutions and if you look at our sustainability report.

And some good work highlighting them, but.

But.

In the case of.

Greenhouse gas emissions and trying to understand that we have some instrumentation thats very unique.

Helping researchers to understand the trajectory.

In terms of China.

B.

<unk>.

Pollution generated from heavy industrial processes requires very durable emissions equipment.

That emissions equipment is selling very well for us now in China. So.

Sustainability solutions will be another thing that we're starting to get our hands around but it's growing pretty rapidly.

Great. Thanks, Niccolo. Thank you.

Your next question comes from the line of Sapphire Ross.

With Wolfe Research. Please proceed with your question.

Okay.

Guys good morning.

Congrats on the awesome quarter.

On for Nigel Coe.

So really around M&A.

Just thoughts around M&A accretion in fiscal year 'twenty two.

Sure.

No I think I think the.

We had talked about the M&A accretion being about 18 from deals this year and I think that we're still in line to deliver that.

Apples businesses that we've acquired we're very pleased with them and they're each of these businesses is going to benefit from custom playbook developed for them.

As part of our integration process and will also benefit from ametek's global footprint.

And.

It's early in the ownership, but so far they are integrating nicely nicely and we're very bullish with all the businesses I think.

In terms of.

<unk> 2022, I'm going to throw that in the bucket of we're going to go through and analyze everything from the.

All of our business units with our detailed budgeting process.

Once we understand everything will come back and communicate that to you.

Gotcha, and then around <unk>.

For the for the quarter do you see that normal seasonal uptick in sue for fourth quarter.

There is a bit of seasonality for AIG in the fourth quarter, So youll see a bit of that.

Alright, well that's it from me. Thank you okay. Thank you.

Your next question comes from the line of Andrew Slosh.

Vertical research. Please proceed with your question.

Hey, guys, it's Andrew on for Jeff Sprague, how are you hi, Andrew.

Just a couple quick ones for me you said the elective surgery business was up high single digits do you have a great feel for where electric.

Elective procedure volumes are versus 2019.

I can't comment on that right now I can tell you that the.

The business in the first half of the year was.

Yeah, It was about flattish for us to down a bit.

It picked up in Q3 in that high single digit range and we expect further growth from here and Thats, probably the best I'm going to be able to give you.

Right no that makes sense.

I apologize if I missed it did you kind of give rattle off some of the end market detail the research business.

Yeah.

I didn't specifically give the researches within our process segment.

The research business is about 10% of AMETEK and.

And what you're seeing that business is it starting to.

To.

Grow again as people industrial research has been strong but.

University research has been impacted by Covid.

And people are getting back to the University research environment and is starting to.

Perform a function normally and I think the product introductions that we've talked about with Katanga is perfectly targeted to that market and so it's a good market for us it's not.

As much as the AMETEK average, but we're.

Bullish on that market as it begins to heal and they get back to more normal business.

After after Covid.

That's great I appreciate the color there. Thank you.

Your next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.

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

Ken how are you doing.

Good how are you.

I think you had mentioned an increase in the <unk> guidance for the year.

I'm curious if you could just talk about how much growth was driven by new products in the quarter.

Any color on what the vitality index is big right. It's a good question Ken in the quarter, our vitality index was 24%, so a pretty healthy level for us.

And as I mentioned last quarter, we increased our spending on R&D and also on the sales and marketing.

Initiatives that we have and.

We have a lot of things that we're funding and we're bullish and optimistic on them. So we're spending about five 5% of sales, it's a healthy amount for.

In industrial business, but we think it gives us a couple of things one is.

These new sales from from.

New product sales, but also it gives us the ability to raise price because we're investing for our customers and we're going to have the latest.

<unk> products that have the most value for our customers. So that the investments that we make we also linked to the pricing capability in our business. So.

That's an important factor for us.

Okay, and when you think about the impact of shifting sales from out of the third quarter into the next one because of supply chain issues does that impact the mix of of new products coming to market at all or.

Would you still expect any kind of material expansion in that vitality index.

Yes, I think 24%, so a pretty good level, but I'd like to say.

Mid Twenty's is probably what we're targeting and.

I think the in terms of new product introductions to the extent that our new product introduction relies on electronics for semiconductors, it could be delayed.

But it's more broader than new products its across the semiconductor chip availability as the.

One area in particular that were very focused on because of the challenges with us.

Constrained supply.

Right and.

And that kind of segue is pretty well in semi and my follow up question just on the semiconductor shortage, obviously, you've got a very diverse set of businesses that spreads the gamut of computing needs.

As we think of the kinds of chips needed for the embedded compute business and our backup versus your automation business can you just give us an idea of how much of the semi exposure is toward more of the bleeding edge chips versus the trailing edge.

Yes, I think the.

The microprocessors and the higher end chips are the ones that are particularly.

The chip availability as particularly an issue right now, but we have such a broad based portfolio of products.

And we're using different chips in different businesses. So.

There's really not one ship or one product.

It's just a.

It's not in the passive components, it's an active components and it's in more of the microprocessors, but but in effects our business more than EMG.

But that's something that we're focused on and we did a great job managing it in Q3 and.

As I said, we have a lot of people that.

We have relationships built over a long period of time.

Using our purchasing leverage and probably most importantly.

If a product is not available these are engineering capability too.

Qualify second sources to find alternatives, we setup a group within our company.

Both our Bangalore engineers and some of our engineers in Europe, and some of our engineers in the U S. And there is a team that is quickly gone through these things when product availability comes through so but one of the things that we've been able to differentiate versus maybe some other people in the market as we have strong engineering capability that can work on these problems as they come up and solve them quickly.

Good color. Thank you very much.

Thank you.

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

Thank you Angie. Thank you everyone for joining our call today and as a reminder, a replay of today's webcast may be accessed in the investors section of AMETEK Dot com have a great day.

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

Okay.

[music].

Okay.

[music].

Okay.

Okay.

Yeah.

Okay.

Yes.

Yes.

Yeah.

Yes.

[music].

No.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Understood.

Okay.

Yes.

Yes.

Okay.

Yes.

Okay.

Okay.

Yes.

[music].

Okay.

[music] defense.

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

You bet.

Okay.

Okay.

Thanks.

[music].

Okay.

Yes.

[music].

Yes.

[music].

Sure.

Okay.

[music].

<unk>.

[music].

Okay.

Okay.

[music].

Yes.

[music].

Sure.

Yes.

Okay.

Okay.

[music].

Thank you.

Okay.

Yes.

Yes.

[music].

Okay.

Okay.

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the AMETEK third quarter 2021 conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

Require further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Kevin Coleman, Vice President of Investor Relations. Please go ahead Sir.

Thank you Angie good morning, and thank you for joining us for Ametek's third quarter 2021 earnings Conference call.

With me today are Dave <unk>, Chairman, and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer.

During the course of today's call, we will make forward looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the 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 2020 or 2021 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization.

And also excluding the gain from the sale of reading alloys in the first quarter of 2020.

And the realignment charge charges taken in the first quarter of 2020.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investors section of our website.

We'll begin today's call with prepared remarks by Dave and Bill and then we'll open it up for questions I will now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK had another outstanding quarter with better than expected sales growth strong operating performance and earnings above our expectations.

We established records for sales EBITDA operating income and earnings per share in the quarter.

Demand remains strong across our diverse set of end markets, leading to robust order growth and a record backlog.

While the global supply chain and logistics networks remains challenging our businesses are doing a tremendous job navigating these issues and delivering results, which exceeded our expectations.

Given our results in the third quarter and outlook for the fourth quarter. We are again, increasing our sales and earnings guidance for the full year.

This strong overall performance reflects the exceptional work of all AMETEK colleagues as well as the strength flexibility and sustainability of the grammar Tech growth model.

Ametek's proven business model with central to our focus on creating a sustainable future for all stakeholders.

We are very proud of the important steps, we're taking to further sustainability across AMETEK and last week, we published our latest corporate sustainability report to highlight our efforts in this area.

This report provides information on our sustainability initiatives.

The strong progress we have made and the commitments, we're making to create a better future.

I welcome you all to read our latest corporate sustainability report, which is located on our website.

Now, let me turn to our third quarter results.

Third quarter sales were a record 144 billion.

Up 28% over the same period in 2020 and above our expectations.

Organic sales growth was 17% acquisitions.

Acquisitions added 11 points and foreign currency was a modest benefit in the quarter.

No.

Overall orders in the third quarter were $1 5 billion.

An increase of 37% over the prior year period.

While organic orders were up an impressive 31% in the quarter.

We ended the quarter with a record backlog of $2 $62 billion.

Which is up over $800 million from the start of the year.

Third quarter operating income was a record $338 million or 25% increase over the third quarter of 2020 and operating margins were 23, 4%.

Excluding the dilutive impact of acquisitions.

Core operating margins were 24, 7% up 70 basis points versus the third quarter of 2020.

EBITDA in the third quarter was a record $415 million up 25% over the prior year with EBITDA margins of 28, 8%.

This outstanding performance led to record earnings of $1 26 per diluted share up 25% over the third quarter of 2020 and above our guidance range of $1 16 to $1 18.

We continue to generate strong levels of cash flow with third quarter operating cash flow of $307 million and free cash flow conversion of 109% of net income.

Overall tremendous results in a challenging operating environment.

Yes.

Next let me provide some additional details at the operating group level.

First the electronic instruments group.

Sales for <unk> were a record $982 million up 31% over last year's third quarter.

Organic sales were up 15% acquisitions added 16% and foreign currency was a modest headwind.

While growth remains broad based.

Growth was particularly strong across our ultra precision technologies, and our power and industrial businesses.

Aig's third quarter operating income was a record $245 million up 20% versus the same quarter last year and operating margins were 25%.

Excluding acquisitions Aig's core margins were excellent at 27, 2% in line with prior year margins.

The electromechanical group also delivered outstanding sales growth and excellent operating performance.

Third quarter sales increased 21% versus the prior year to $459 million.

Organic sales were up 20%.

And currency added one point of growth.

Growth remained strong across all of EMG with our automation business is again, delivering notably strong growth in the quarter.

Emg's operating income.

In the quarter was a record $115 million up a robust 36% compared to the prior year period.

Emg's operating margins expanded an exceptional 270 basis points to a record 25%.

Okay.

Now switching to our acquisition strategy.

AMETEK has had an excellent year with a record level of capital deployment, leading to the acquisition of five highly strategic businesses.

AMETEK has deployed approximately $1 $85 billion on acquisitions, thus far this year, reflecting the strength of ametek's acquisition strategy and our ability to identify and acquire highly strategic companies.

Our proven operating capabilities allow us to drive meaningful improvements across our acquired companies, resulting in outstanding returns on capital.

Generating strong returns on capital deployed is critical to long term sustainable growth and an important element of ametek's strategy.

Ametek's strong cash flow generation continues to support our capital deployment strategy.

Our acquisition pipeline remains very active.

Our M&A team is continuing to work diligently identifying attractive acquisition opportunities and we expect to remain busy over the coming quarters.

We also remain focused on investing back into our businesses to support the organic growth initiatives, including in support of their new product development efforts.

In the third quarter, we invested over $75 million in <unk> and for all of 2021.

Now expect to invest approximately $300 million or approximately five 5% of sales.

Through these investments our businesses develop unique and highly differentiated solutions to help solve our customers' most complex challenges.

One such example is a new product introduction from AMETEK Tan.

<unk> is a leading provider of direct detection technology for electron microscopy supporting high end research and materials and life Sciences applications.

<unk> recently introduced a stellar hybrid pixel camera.

The only fully integrated hybrid pixel electron detector, what the Tam across coffee suite.

This new product reinforces get Dan's leadership position, providing the highest quality tem diffraction camera, allowing the user to perform for D stem analysis with rapid speed and high dynamic range.

<unk> new camera builds on our long history of disruptive and award winning technology.

In August the stellar camera was awarded the 2021 microscopy today Innovation Award and call one of the 10 game changing products and methods.

I would like to congratulate the team at <unk> for the recent launch of the seller camera and further support of important research applications.

Now, let me touch on the supply chain issues.

The global supply chain remains challenging.

We see extended lead times for a broad range of materials and components with logistics issues and labor availability, adding to the complexity.

While these difficulties exist, we exceeded our sales estimates for the quarter and are navigating the challenging environment well given our agile operating approach.

These supply chain issues are leading to higher inflation. However, given our differentiation, we're able to more than offset this inflation with higher pricing leading to a strong price inflation spread.

While we expect these challenges will continue into 2022.

We remain well positioned to navigate the issues given the strength and flexibility of the AMETEK growth model.

Moving to our updated outlook for the remainder of 2021.

Given our strong performance in the third quarter.

And the continued strong orders momentum and record backlog, we have again raised our 2021 sales and earnings guidance.

For the full year, we now expect overall sales to be up in the low 20% range versus our previous guide.

Up approximately 20%.

Organic sales are now expected to be up low double digits on a percentage basis over 2020 as compared to our previous guide of approximately 10%.

Diluted earnings per share for 2021 are now expected to be in the range of.

$4 76 to $4 78 and.

An increase of approximately 21% over 2000, twenty's comparable basis and above our prior guide of $4 62 to $4 68 per diluted share.

For the fourth quarter, we anticipate that overall sales will be up in the low 20% range versus last year's fourth quarter.

Fourth quarter earnings per diluted share are expected to be between $1 28 to.

To a $1 30 up 19% to 20% over last year's fourth quarter.

In summary, AMETEK third quarter results were excellent.

Our teams continued to execute and our businesses are performing well.

Our performance through a challenging environment shows the resilience and strength of the AMETEK growth model.

The asset light nature of our businesses, our leading positions in attractive niche markets and our world class workforce will continue to drive long term sustainable success.

The proven nature of the AMETEK growth model continued to drive long term success for all of AMETEK stakeholders.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions.

Thank you, Dave as Dave highlighted AMETEK delivered excellent results in the third quarter with continued strong sales growth and orders growth and outstanding operating performance, Let me provide some additional financial highlights for the quarter.

Third quarter General and administrative expenses were $22 1 million up $4 $8 million from the prior year.

Largely due to higher compensation expense as a percentage of total sales G&A was one 5% for the quarter unchanged from the prior year.

For 2021 general and administrative expenses are expected to be up approximately $18 million driven by higher compensation costs or approximately one 5% of sales also unchanged from the prior year.

Third quarter other income and expense was better by approximately $4 million versus last year's third quarter, driven by a $6 million or approximately <unk> <unk> per share gain on the sale of a small product line in the quarter.

The gain this gain on the sale was more than offset by a higher effective tax rate in the quarter of 19, 5% up from 17, 5% in the same quarter last year.

For 2021, we now expect our effective tax rate to be between 19, five and 20%.

Actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Working capital in the quarter was 14, 9% of sales down 210 basis points from the 17% reported in the third quarter of 2020.

Reflecting the excellent work of our businesses and managing working capital.

Capital expenditures in the third quarter were $26 million and we continue to expect capital expenditures to be approximately $120 million for the full year.

Depreciation and amortization expense in the third quarter was $75 million for all of 2021, we expect depreciation and amortization to be approximately $295 million, including after tax acquisition related intangible amortization of approximately $138 million or <unk> 60 per <unk>.

Diluted share.

We continue to generate strong levels of cash given our asset light business model and working capital management efforts.

In the third quarter operating cash flow was $307 million and free cash flow was $281 million with free cash flow conversion of 109% of net income.

Total debt at quarter end was $2 $65 billion up less than $250 million from the end of 2020, despite having deployed approximately $1 $85 billion on acquisitions, thus far in 2021.

Offsetting this debt with cash and cash equivalents of $359 million and at quarter end, our gross debt to EBITDA ratio was one six times and our net debt to EBITDA ratio was one four times.

We continue to have excellent financial capacity and flexibility with approximately $2 billion to $5 billion of cash and existing credit facilities to support our growth initiatives.

To summarize our businesses drove outstanding results in the third quarter and throughout the first nine months of 2021, our balance sheet and tremendous cash flow generation have positioned the company for significant growth in the coming quarters and years Kevin.

Your Bill and Angie, we're now ready to open it up for questions.

If you would like to ask a question. Please press star one on your telephone keypad.

Jim Thats Star one to ask an audio question.

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

Thanks, a couple questions first Dave can you talk about where you were with realized pricing in the third quarter on a year over year basis, what the spread looks like you mentioned that seems pretty favorable and then what your thoughts are in terms of how much price you might need to take in 'twenty two.

Sure Matt in the third quarter.

Our pricing continued to more than offset inflation.

As I said in the prepared remarks pricing was about three 5% of sales.

And inflation was about two 5% of sales. So we've got a spread of about 100 basis points.

And we expect in Q4 that will be similar to Q3 with slightly higher pricing and inflation.

And the results speak to the highly differentiated nature nature of ametek's product portfolio on our.

Leadership position in niche markets around the world.

In terms of next year, we haven't done the detailed planning but.

A key for me is that we're going to stay out ahead of inflation and I expect that to be true next year. So we will stay ahead of inflation with price.

To answer your question Matt.

Yes. Thank you and then just as a follow up if I just look over the last two years EMG margins have really migrated into a completely different zip code versus where they were at I know divesting reading as a component to that you did some structural cost outs during <unk>.

The COVID-19 outbreak.

Still leverage to drive margins higher in that business help me think about.

How we should think about that going forward yes.

Yes, the EMG has done a fantastic job in.

Margin development and you mentioned some of the key drivers we divested reading.

But more fundamentally I mean, we have an automation business is firing on all cylinders is very profitable.

Have a thermal management system as part of our.

Defense industry defense businesses, it's doing well and has high margin.

And then we have.

Some part of our EMEA business, that's accelerating so.

It isn't a new ZIP code, but I expect it to stay there and Theres still room for margin expansion.

Great. Thanks, Dave Thank you Matt.

Your next question comes from the line of Josh quick Winski with Morgan Stanley. Please proceed with your question.

Yeah.

Hi team this is actually <unk> on for Josh.

So looking at backlog.

As it stands today, how much of that would you call I'll call. It <unk>.

Excess backlog kind of based on supply chain issues and how much should we expect that contribute to 2022 growth here.

Yes, we have a record backlog of $2 62 billion.

And.

I wouldn't categorize as excess I mean, I mentioned in the earlier call that.

Customer behavior is to give you more visibility into future months and quarters, because there's so many issues in the supply chain. So you have more visibility, but I would not consider as excess and I would not.

I would not view us is not keeping up with demand.

So so really you have a situation where there is strong underlying demand.

<unk>.

It's resulting in a higher backlog is giving us further insight into 2022, and we feel real good about it.

Got it and then just just a quick follow up so.

What are kind of the biggest inflation and supply chain issues that we should kind of watch for.

For AMETEK as conditions.

Conditions potentially do start to improve.

Is it again on the materials side gray or labor.

What should we keep our eyes on.

Yeah, that's a good question and.

During the quarter, we expense, we continued to experience challenges with.

Our supply chain logistics.

Inflation labor availability.

And it was one of the more dynamic environments I can recall.

And these conditions were a bit worse in Q3 than Q2, and we expect.

Those conditions to persist in the fourth quarter.

And I would characterize our overall effort in response to these challenges is outstanding.

We're clearly showing the agility necessary to navigate the supply chain disruptions.

A key for my view is the distributed nature of our business model.

Where we have committed P&L managers running their businesses.

With their own supply chain teams, which allow them to react quickly to changing conditions.

And at the same time these dedicated business unit teams are working seamlessly with our overall.

Corporate supply chain team that acts with the combined leverage and the authority of all of AMETEK.

And this overall approach has been effective for us.

You asked where we had some the biggest tissues, we add as I mentioned last quarter. It's in semiconductor chip availability and it's an area that is particularly challenging because we use a lot of electronic center on our businesses obviously.

And we are using our purchasing leverage the relationships that we built up over.

Decades.

Our engineering capability in terms of qualifying second sources in terms of changing designs to solve problems.

And we don't expect to.

Anticipate improvements in the availability of semiconductors until <unk>.

Sometime in late 2022.

No.

It's a tough environment, and but we're reacting well to it and I was very pleased with our teams in a point to one thing is distributed business model, where we have very experienced P&L leaders, making sure that they're going to they're going to.

Satisfies our customers and not letting the supply chain getting away.

Got it that's helpful. Thank you.

Yeah.

Your next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question Hi, Good morning, Hello, Allison and good morning.

Just wanted to keep in line with dissipating as obviously you guys are a bit unique in that Easter and leap in managing this quite well.

Is there a sense I mean organic growth very strong organic orders were very strong is there any tampering of maybe what growth could have been because of some of these supply chain issues are really not impactful to you guys in terms of what that expected growth could be or the volume that you were anticipating this quarter, yes, thats a good question Allison because.

What we do is we set our plan based on material availability and and we executed that plan extremely well in fact, we beat our expectations, but we did at the end of the quarter.

I look at it as a.

If the stars aligned what could we have shift without some of the material availability issues and it was about.

An additional $50 million that shifted out of Q3 to Q4 and.

And I feel like we're going to have the same kind of shift out of Q4 into Q1. So.

We're able we're able to meet demand we're able to juggle.

John will reschedule once we lock into the schedule, we're very good at executing it but there was about $50 million that slipped out now we're not a big labor business.

Labor is not a big cost driver for us so labor availability of staff, but we're able to get the products manufactured with the labor available. So.

Your answer is $50 million in an ideal world.

Got it that's helpful. Thank you.

And then just on the acquisition environment, obviously deployed a significant amount the beginning of the year it sounds like.

The pipeline is always its pretty active any color on kind of what youre, a little bit more focused on what we could see maybe near term over the next few months if the stars align there.

Yes, we are very focused on some deals right now and I don't know if theyre going to happen.

Next month or three months from now but were very active over the next few months I mean, the thing you have to be careful right. Now is there's a lot of businesses that are out there and you have to sort through them and find the quality fine agenda within those pipelines and we're good at that and.

I just feel.

Our pipeline remains strong we're very active on exploring opportunities.

As Bill mentioned, we have a meaningful level of financing capacity and strong cash flows and we also have so I think 2022 is going to be a good year for us.

And when I have a tailwind from some of the deals we got done this year. So we're feeling pretty optimistic about what we got done this year the quality of businesses that we've acquired and we're feeling good about our pipeline for 2022.

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

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

Thank you and good morning, everyone. Good morning, Dan Hey, really solid execution this quarter.

Many of your peers have struggled I think it was interesting on enel.

Analysis question, there, we actually had to drag it out to you that there was a $50 million pushout on revenues we've seen that.

And also I've seen where.

That is like a rolling pushout in from <unk> into the first quarter, but.

Like all the fact that wasn't an excuse you still put up strong numbers. So congrats there. Thank you.

A couple of questions.

There is this thought here on the on the <unk>.

Supply chain issues for companies like AMETEK that are higher up the value chain youre not doing raw material conversions.

Youre more final test and assembly. So it's the components supply might be the impact might be felt later, so that it might become more of an issue for our component supply in the coming quarters.

We know it's chip related already but is there any sense, where you think it gets worse from here.

Where you are on the value chain.

Yes, I don't see it getting worse.

As I mentioned it was.

Worse in Q3 than Q2, but.

Things seems things seem to have stabilized the comment that I'd make is.

It's a good one.

Your question and you know inflation is.

As a concern related to our backlog, but we think it's manageable even with the high level components and the first key for me is that you have firm supplier pricing for items in the backlog as much as possible. So you know what your costs are going to be.

And then we do have some <unk>.

Commodities that we use in various areas and when possible and we have firm orders will buy forward certain key commodities to lock in costs where appropriate.

<unk>.

We are using surcharges to handle increases in shipping cost increases in transportation costs.

Higher energy costs et cetera.

We shortened the length of our quotation valid.

<unk>.

Timer quotations are out there so items can be repriced if necessary.

And then you take into account the higher costs and when you can and if necessary.

Our customers have been fairly receptive to get to get a price increase due to what's happening right now so.

Put that whole package together.

We're a bit later than some of the component businesses that may be true, but at the same time, we're welling running well ahead of inflation with our pricing and we plan to stay there and that's going to be a big part of our budgeting process that we're going through and to understand what's happening in the market to understand Inflations and end with three 5% of price and two five.

5% inflation across our entire businesses I think.

We're focused on it and I think we're doing a good job of it and I think we'll stay in front of us.

That's really helpful and you mentioned budgeting process it would be interested in hearing how the budgeting process for 2022 might be tempered given the circumstances on the supply chain would it be.

The top line kind of being these rolling push outs.

Would it also be margins you know with the labor issues just how does this all changed your planning assumptions for 2022, and then maybe if you could just give us a comment on October that'd be helpful. Also okay.

Yes, I'll talk about.

I guess, our preliminary thoughts on 2022.

As you know we operate in niche markets and we have a comprehensive budgeting process that allows us to understand the market dynamics of these niches in a detailed level and we began that process. Later this month and that process is going to inform our guidance for 2022.

Turning to the macro setup, we believe the economic recovery continues.

We think overall, it's a good macro environment for us.

The mid cycle recovery continues.

We think that will start to see longer cycle improvement and our commercial aero businesses. Our process industries will continue to recover.

We're expecting a stable defense spending environment.

In terms of some of the headwinds that you mentioned the challenges from inflation are going to continue and we're going to have to continue to offset inflation with price and the supply chain may constrain growth.

Mainly in the first half of the year.

And as I mentioned before semiconductor availability as a key issue for us.

And we remain the the final thing is we remain active in capital deployment with significant balance sheet capacity with a primary focus on M&A. So so we're really bullish about what we're going to be able to accomplish in 2022, and there's a couple of challenges out there headwinds mainly the supply chain that we're actively.

Managed now, but we're still feeling good about 2022.

And a comment on October.

Comments on the cadence throughout the quarter and October September was the strongest month of the quarter. It was also the strongest month of the year to date.

And then the sale and then orders and sales grew sequentially through the quarter with September being the strongest month quarter.

In October was very solid it was supported supportive of the trend required to meet our guide for Q4. So we're very pleased with how October <unk>.

Turned out and it showed no slowdown at all.

Really helpful. Thank you. Thank you Deane.

Your next question comes from the line of Andrew <unk> with Bank of America.

Good morning. This is David Ridley Lane on for Andrew.

Can you give some additional color on revenue by end markets and geographies.

Sure.

Mentioned.

In the prepared remarks.

It was a broad based growth in.

Ill take a walk around the company, David and you look at our process businesses.

They were they were up high teens on a percentage basis in the third quarter and they were driven by low teens organic sales growth and the contribution from the acquisition of mangrove trial.

And our process businesses continue to see broad based growth with.

With particularly strong growth within our ultra precision technologies businesses.

As new products and are differentiated measurement technologies are really driving solid demand across a wide range of markets, including semiconductor and optics markets.

For the full year for process, we now expect.

To be up low double digits versus the prior year.

Our next major market segment is the aerospace and defense market.

And.

Overall, we were up 55% in the third quarter, driven by solid organic sales and the contribution from the acquisition of abaca.

Organic sales were up high single digits on a percentage basis versus the prior year.

And solid growth in our commercial aftermarket business and our business jet businesses. So those were the two areas of strong growth.

And for all of 2021, we now expect <unk>.

Mid single digit organic sales growth for our aerospace.

And defense businesses.

And we expect our defense businesses to be up high single digits in our commercial businesses to be up low single so.

The defense business has been stronger, but it is moderating a bit in the commercial businesses had a good quarter.

When I go to the power and industrial market segment next.

Up nearly 40% in the quarter driven by mid Twenty's organic sales growth. So they had a very good quarter.

Also acquisitions from MSI and crank software contributed.

And for all of 2021, we now expect mid teens organic growth for our power and industrial businesses.

And finally, our automation and engineered solutions business and <unk>.

Both overall and organic sales were up approximately 25%.

Accelerating from the prior quarter.

Sales across our automation businesses remained robust with strong demand continuing in their end markets.

For all of 'twenty one.

We now expect organic sales for our automation and engineered solutions businesses to be up mid teens on a percentage basis with stronger growth across our automation businesses and our engineered solutions business. So the automation business is doing very well as customers want to remove labor from the processes they want to move.

<unk> contamination free.

We're at capacity.

We've invested in the past in our rig technologies that are winning share so.

And we're very good at moving things quickly and precisely so the automation business is in really good position with a strong backlog and an end.

We're bullish about the future.

You mentioned the geography.

I'll go around the geographies, we've got strong broad based growth across geographies, where.

Every geography was up the U S was up 15%.

Europe was up 15% and the star for the quarter was Asia was up 25% with.

Broad based strength and notable strength in our process and automation businesses in Asia.

So to answer your question David.

Perfectly Okay, and then just a quick follow up.

Sort.

Sort of alluded to it earlier in talking about mid cycle.

Uh huh.

Pretty pretty strange cycle, maybe just can you talk about some of the areas that you are.

Looking for better organic growth in 2022 versus 21.

I imagine that would be.

Some traditional.

Yeah longer cycle areas like commercial Aero and oil and gas, but also maybe in this particular cycle.

Things that are tied to patient volumes and that sort of stuff.

Yeah, I mean, it's.

You mentioned three of the areas that I think are all improving our commercial aerospace business. So we will definitely improve.

Our oil and gas business, it's only about 5% of AMETEK now, but it was up mid teens in the quarter, and given where oil and gas.

Gas prices are we are beginning to see the signaling of the project business. Returning in 2022. So we're feeling good about that and in terms of the health care business.

Health care is 15% of AMETEK now so it's our largest end market vertical.

We were up mid teens in the quarter.

Had really solid growth in our <unk> business and a record business really driven by new products and record.

And the electro surgery business picked up for us in Q3, So we were up in the quarter.

It wasn't.

15% it was up high single digits, and we're benefiting from elective surgeries for things like neuro stimulation cardiac mapping catheter is all of that stuff is people are going back to hospitals getting those procedures done and we expect that to grow.

ROE this quarter was.

They are high single digit kind of number we expect that to grow more next year or so so you you hit the key issues.

<unk> aerospace oil and gas.

The the medical electric surgeries.

But I don't think the mid cycles done growing yet either and we're starting to see acceleration in that business across some of our process businesses.

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

If you would like to ask a question. Please press star one on your telephone keypad.

Again, Thats star one to ask an audio question.

Next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

Thanks, Good morning, everybody.

Chris.

Hey, Dan.

Well, it's really answer a lot of questions in principle I.

I was actually curious any particular areas of share gain or areas of market space creation.

You want to comment on you mentioned automation, a little bit just kind of looking to expand on those.

Yes.

<unk>.

I would say that when you can deliver your customers, giving you more orders.

And that's the key issue that's driving our business right now.

When I look at the automation business I talked about that earlier that businesses is doing extremely well.

Because the.

Broader macro.

People want to remove labor from the processes. They don't want to be dependent on labor because in some places you can't hire labor and difficult to maintain.

You're at capacity announced so there's more automation.

And both discrete automation and factory automation.

We've invested in the right technologies in the last few years and acquire the right businesses and we put them together, we have a really compelling value proposition and we can.

Design customized sub assemblies that do automation very quickly and efficiently.

And.

That business is doing the right things right now so we're pretty bullish on the outlook for it.

That answer your question Chris.

Yes, I was curious if there are any other particular areas even if.

More illustrative than moving the top line by themselves because maybe it sooner.

Discrete niche business, but Mike I'll speak to illustrate the AMETEK growth model right.

Alright, I think another area that we're starting to see traction in some of our sustainability solutions and if you look at our sustainability report.

And some good work highlighting them, but but.

The case of <unk>.

Greenhouse gas emissions and trying to understand that we have some instrumentation, that's very unique in helping researchers to understand the trajectories.

In terms of China.

The pollution.

Pollution generated from heavy industrial processes requires very durable.

<unk> emissions equipment.

That emissions equipment is selling very well for us now in China. So the sustainability solutions will be another thing that we're starting to get our hands around but it's growing pretty rapidly.

Great. Thanks for the color. Thank you.

Your next question comes from the line of Sapphire Ralph.

With Wolfe Research. Please proceed with your question.

Hey.

Good morning, guys good morning.

Congrats on the awesome quarter.

On for Nigel Coe.

So really around M&A.

Just thoughts around M&A accretion in fiscal year 'twenty two from your deals this year.

No I think I think the.

We had talked about the M&A accretion being about 18 from deals this year and.

And I think that we're still in line to deliver that.

Apple's businesses that we've acquired we're very pleased with them and they're each of these businesses is going to benefit from our custom playbook developed for them.

As part of our integration process and we will also benefit from ametek's global footprint.

And.

It is early in the ownership, but so far the integration nightly nicely and we're very bullish with all the businesses I think.

In terms of <unk>.

2022, I'm going to throw that in the bucket of we're going to go through and analyze everything from the.

All of our business units with our detailed budgeting process and.

Once we understand everything will come back and communicate that to you.

Gotcha, and then around <unk>.

For the for the quarter do you see that normal seasonal uptick in sales for fourth quarter.

There is a bit of seasonality for AIG in the fourth quarter, So youll see a bit of that.

Alright, well that's it from me. Thank you okay. Thank you.

Your next question comes from the line of Andrew Slosh.

Vertical research. Please proceed with your question.

Hey, guys, it's Andrew Liesch on for Jeff, Greg How are you Hi, Andrew.

Just a couple quick ones for me.

Said the elective surgery business was up high single digits do you have a great feel for where electric.

Elective procedure volumes are versus 2019.

I can't comment on that right now I can tell you that the.

The business in the first half of the year was.

Yeah, It was about flattish for us to down a bit.

It picked up in Q3 in that high single digit range and we expect further growth from here and Thats, probably the best I'm going to be able to give you.

Right no that makes sense.

I apologize if I missed it did you give rattle off some of the end market detail on the research business.

I didn't specifically give the researches within our process segment.

The research business is about 10% of AMETEK and and what you see in that business is it starting to.

Grow again.

People industrial research has been strong but the.

University research has been impacted by Covid.

And people are getting back to the University research environment and is starting to perform a function normally and I think the product introductions that we've talked about with <unk> is perfectly targeted to that market. So it's a good market for us it's not.

As much as the AMETEK average.

We're.

Bullish on that market as it begins to heal and they get back to more normal business.

After after Covid.

That's great I appreciate the color there. Thank you.

Your next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.

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

Ken how are you doing.

Good how are you.

I think you had mentioned an increase in the <unk> guidance for the year.

I'm curious if you could just talk about how much growth was driven by new products in the quarter.

Any color on what the vitality index as bad right. It's a good question Ken in the quarter, our vitality index was 24%, so a pretty healthy level for us.

And as I mentioned last quarter, we increased our spending on R&D and also on the sales and marketing.

Initiatives that we have and.

We have a lot of things that we're funding and we're bullish and optimistic on them. So we're spending about five 5% of sales as a healthy amount for.

In industrial business, but we think it gives us a couple of things one is.

These new sales from from.

New product sales, but also it gives us the ability to raise price because we're investing for our customers and we're going to have the latest.

Latest products that have the most value for our customers. So that the investments that we make we also linked to the pricing capability in our business. So.

That's an important factor for us.

Okay, and when you think about the impact of shifting sales from out of the third quarter into the next one because of our supply chain issues does that impact the mix of of new products coming to market at all or.

Would you still expect any kind of material expansion in that vitality index.

Yes, I think 24% is a pretty good level, but I'd like to say it.

Mid Twenty's is probably what we're targeting and.

I think the in terms of new product introductions to the extent that our new product introduction relies on electronics or semiconductors, it could be delayed.

But it's more broader than new products its across the semiconductor chip availability as the.

One area in particular that were very focused on because of the challenges with us.

Constrain supply.

Right.

And that kind of segue is pretty well and somebody that and my follow up question just on the semiconductor shortage, obviously, you've got a very diverse set of businesses that spreads the gamut of computing needs.

As we think of the kinds of chips needed for the embedded compute business and our backup versus your automation business can you just give us an idea of how much of the semi exposure is toward more of the bleeding edge chips versus the trailing edge.

Yes, I think the.

The microprocessors and the higher end.

<unk> are the ones that are particularly.

The chip availability as particularly an issue right now, but we have such a broad based portfolio of products.

And we're using different chips in different businesses. So.

There's really not one share for one product.

It's just a.

It's not in the passive components to an active components and it's in more of the microprocessors, but but and affects our business more than EMG.

But that's something that we're focused on and we did a great job managing it in Q3.

As I said, we have a lot of people that are.

We have relationships built over a long period of time.

We're using our purchasing leverage and probably most importantly.

If a product is not available because our engineering capability to qualify.

Qualify second sources to find alternatives we setup.

Group within our company.

Both our Bangalore engineers and some of our engineers in Europe, and some of our engineers in the U S and there's a team that is quickly gone through these things when product availability comes through so all but one of the things that we've been able to differentiate versus maybe some other people in the market as we have the strong engineering capability that can work on these problems as they come up and solve them quickly.

Good color. Thank you very much.

Thank you.

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

Thank you Angie. Thank you everyone for joining our call today and as a reminder, a replay of today's webcast may be accessed in the investors section of AMETEK Dot com have a great day.

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