Ametek Inc (AME) — Q3 2021 Earnings Call Transcript

Thank you, Angie. Good morning and thank you for joining us for AMETEK's Third Quarter 2021 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today's call, we will make forward-looking statements which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the 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 charges taken in the first quarter of 2020. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks by Dave and Bill, and then we'll open it up for questions. I'll now turn the meeting over to Dave.

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 remain challenging, our businesses are doing a tremendous job navigating these issues and delivering results which exceeded our expectations. Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our sales and earnings guidance for the full year. This strong overall performance reflects the exceptional work of all AMETEK colleagues, as well as the strength, flexibility, and sustainability of the AMETEK growth model. AMETEK's proven business model was central to our focus on creating a sustainable future for all stakeholders. We're very proud of the important steps we are taking to further sustainability across AMETEK. Last week, we published our latest corporate sustainability report to highlight our efforts in this area. This report provides information on our sustainability initiatives, the strong progress we have made, and the commitments we are making to create a better future. I welcome you all to read our latest corporate sustainability report, which is located on our website. Now, let me turn to our third quarter results. Third quarter sales were a record $1.44 billion, up 28% from the same period in 2020 and above our expectations. Organic sales growth was 17%. Acquisitions added 11 points, and foreign currency was a modest benefit in the quarter. Overall, orders in the third quarter were $1.55 billion, an increase of 37% over the prior-year period. While organic orders were up an impressive 31% in the quarter. We ended the quarter with a record backlog of $2.62 billion, which is up over $800 million from the start of the year. Third quarter operating income was a record $338 million, a 25% increase over the third quarter of 2020, and operating margins were 23.4%. Excluding the dilutive impact of acquisitions, core operating margins were 24.7%, up 70 basis points versus the third quarter of 2020. EBITDA in the third quarter was a record $415 million, up 25% over the prior year, with EBITDA margins of 28.8%. 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. Next, let me provide some additional details at the operating group level. First, the Electronic Instruments Group. Sales for EIG were a record $982 million, up 31% over last year's third quarter. Organic sales were up 15%, acquisitions added 16%, and foreign currency was a modest benefit. While growth remains broad-based, growth was particularly strong across our ultra-precision technologies and our Power and Industrial businesses. EIG third quarter operating income was a record $245 million, up 20% versus the same quarter last year, and operating margins were 25%. Excluding acquisitions, EIG's core margins were excellent at 27.2% in line with prior year margins. The Electromechanical Group also delivered outstanding sales growth and excellent operating performance. Third quarter sales increased 21% versus the prior year to $459 million. Organic sales were up 20% and currency added 1 point to growth. Growth remains strong across all of the EMG with our automation businesses, 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%. 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 teams continue to work diligently, identifying attractive acquisition opportunities, and we expect to remain busy over the coming quarters. We also remain focused on investing back into our businesses to support the organic growth initiatives, including in support of their new product development efforts. In the third quarter, we invested over $75 million in R&D, and for all of 2021, we now expect to invest approximately $300 million or approximately 5.5% of sales. Through these investments, our businesses develop unique and highly differentiated solutions to help solve our customers' most complex challenges. One such example is a new product introduction from AMETEK Gatan. Gatan is a leading provider of direct detection technology for electron microscopy supporting high-end research and materials and life sciences applications. Gatan recently introduced the Stela hybrid pixel camera, the only fully integrated hybrid pixel electron detector with the Gatan microscopy suite. This new product reinforces Gatan's leadership position, providing the highest quality TEM diffraction camera, allowing the user to perform 4D STEM analysis and high dynamic range. Gatan's new camera builds on a long history of disruptive and award-winning technology. In August, the Stela camera was awarded the 2021 Microscopy Today Innovation Award and called one of the 10 game-changing products and methods. I would like to congratulate the team at Gatan for the recent launch of the Stela camera, and broader 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 were able to more than offset this inflation with higher pricing, leading to a strong price inflation spread. While we expect these challenges will continue into 2022, we remain well-positioned to navigate the issues given the strength and flexibility of the AMETEK growth model. Moving to our updated outlook for the remainder of 2021. Given our strong performance in the third quarter and the continuous strong order 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 guidance of up approximately 20%. Organic sales are now expected to be up low double-digits on a percentage basis over 2020 compared to our previous guidance of approximately 10%. Diluted earnings per share for 2021 are now expected to be in the range of $4.76 to $4.78, an increase of approximately 21% over 2020 on a comparable basis and above our prior guidance 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 $1.30, up 19% to 20% over last year's fourth quarter. In summary, AMETEK's 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-led 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 continues to drive long-term success for all of the 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, order growth, and outstanding operating performance. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were $22.1 million, up $4.8 million from the prior year, largely due to higher compensation expense. As a percentage of total sales, G&A was 1.5% for the quarter unchanged from the prior year. For 2021, general and administrative expenses are expected to be up approximately $18 million driven by higher compensation costs to approximately 1.5% 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 $0.02 per share gain on the sale of a small product line in the quarter. The gain on this sale was more than offset by a higher effective tax rate in the quarter of 19.5%, up from 17.5% in the same quarter last year. For 2021, we now expect our effective tax rate to be between 19.5% and 20%. Actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year estimated rate. Working capital in the quarter was 14.9% of sales down 210 basis points from the 17% reported in the third quarter of 2020, reflecting the excellent work of our businesses in managing working capital. Capital expenditures in the third quarter were $26 million, and we continue to expect capital expenditures to be approximately $120 million for the full year. Depreciation and amortization expense in the third quarter was $75 million. For all of 2021, we expect depreciation and amortization to be approximately $295 million, including after-tax acquisition-related intangible amortization of approximately $138 million or $0.60 per diluted share. We continue to generate strong levels of cash given our asset-light business model and working capital management efforts. 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 was cash and cash equivalents of $359 million. At quarter-end, our gross debt to EBITDA ratio was 1.6 times and our net debt to EBITDA ratio was 1.4 times. We continue to have excellent financial capacity and flexibility with approximately $2.25 billion of cash and existing credit facilities to support our growth initiatives. To summarize, our businesses drove outstanding results in the third quarter and throughout the first nine months of 2021. Our balance sheet and tremendous cash flow generation have positioned the Company for significant growth in the coming quarters and years.

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

Thanks. A couple of questions. First, Dave, can you talk about where you were with realized pricing in the third quarter on a year-over-year basis, what the spread looked like? You mentioned that it seemed pretty favorable. And then what your thoughts are in terms of how much price you might need to take in '22?

Sure, Matt. In the third quarter, our pricing continued to more than offset inflation. As I said in the prepared remarks, pricing was about 3.5% of sales and inflation was about 2.5% of sales. So we got a spread of about 100 basis points. We expect in Q4 that'll be similar to Q3 with slightly higher pricing and inflation. The results speak to the highly differentiated nature of AMETEK's product portfolio and our leadership position in niche markets around the world. In terms of next year, 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'll stay ahead of inflation with price. Did I 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 is a component of that. You did some structural cost outs during COVID. Is there still leverage to drive margins higher in that business? Help me think about how we should think about that going forward.

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

Great. Thank you, Dave.

Thank you, Matt.

This is actually Sufia on for Josh. So looking at backlog, where it stands today, how much of that would you call it excess backlog, kind of, based on supply chain issues? And how much should we expect that to contribute to 2022 growth here?

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

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

That's a good question. During the quarter, we continued to experience challenges with our supply chain, logistics, inflation, and labor availability, and it was one of the more dynamic environments I can recall. These conditions were a bit worse in Q3 than Q2, and we expect those conditions to persist in the fourth quarter. I would characterize our overall effort in response to these challenges as outstanding. We're clearly showing the agility necessary to navigate these 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 allows them to react quickly to changing conditions. At the same time, the dedicated business unit teams are collaborating effectively with our corporate supply chain team, leveraging the combined strength and authority of all of AMETEK. This holistic approach has proven successful for us. You inquired about our significant challenges, and as I noted last quarter, they lie in semiconductor chip availability. This is a particularly difficult area because our operations rely heavily on electronics. We're utilizing our purchasing power and established relationships over the years. Our engineering capabilities are focused on qualifying alternative sources and modifying designs to address issues. We do not anticipate improvements in semiconductor availability until late 2022. It's a challenging environment, but we're managing well, and I am very pleased with our teams. I would highlight our distributed business model, where experienced P&L leaders are committed to meeting customer needs without letting supply chain issues hinder their efforts.

That's helpful. Thank you.

Thank you.

Hi. Good morning.

Hello, Allison, and good morning.

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

That's a good question, Allison, because what we do is we set our plan based on material availability. We executed that plan extremely well. In fact, we beat our expectations, but at the end of the quarter, I look at it as if the stars aligned: what could we have shipped without some of the material availability issues? It was about an additional $50 million that shifted out of Q3 to Q4. I feel like we're going to have the same kind of shift out of Q4 into Q1. We're able to meet demand; we're able to juggle the schedule. Once we lock into the schedule, we're very good at executing it. But there was about $50 million that slipped out. We're not a big labor business; labor is not a big cost driver for us. So labor availability is tough, but we're able to get the products manufactured with the labor available. Your answer is $50 million in an ideal world.

That's helpful, thank you. And then just on the acquisition environment, you obviously deployed a significant amount at the beginning of the year. It sounds like the pipeline, as always, is pretty active. Any color on what you're a little bit more focused on, or what we could see maybe near-term over the next few months, if the stars align there?

Yes. We are very focused on some deals right now, and I don't know if they're going to happen next month or three months from now, but we're very active over the next few months. The thing you have to be careful of right now is there's a lot of businesses that are out there, and you have to sort through them and find the quality, find the gems within those pipelines. And we're good at that. I feel the pipeline remains strong. We're very active exploring opportunities. As Bill mentioned, we have a meaningful level of financing capacity and strong cash flows. I think 2022 is going to be a good year for us, and we will have a tailwind from some of the deals we got done this year. So we're feeling optimistic about what we've got done this year, the quality of businesses that we acquired, and we're feeling good about our pipeline for 2022.

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

Thank you, Allison.

Thank you. Good morning, everyone.

Good morning, Deanne.

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

Thank you.

It was interesting on Allison's question there we actually had to drag it out of you that there was a $50 million push out on revenues. We've seen that, and also we've seen where that is like a rolling push-out from 4Q 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.

I have a couple of questions. There's some concern about supply chain issues for companies like AMETEK that operate higher up the value chain, primarily in final testing and assembly rather than raw material conversions. It seems that the impact from component supply issues might be felt more in the upcoming quarters. We are already aware of the chip-related challenges, but is there any expectation that the situation could worsen from here, considering your position in the value chain?

I don't expect the situation to worsen. As I noted earlier, Q3 was more challenging than Q2, but it appears to have stabilized now. To address your question, inflation does pose a concern regarding our backlog, but we believe it is manageable despite the high levels of components. It is crucial for us to secure firm supplier pricing for items in the backlog whenever possible to understand our costs. We utilize several commodities, and when we can, we make firm orders to buy forward on certain key commodities to lock in costs where suitable. We are also applying surcharges to accommodate increases in shipping, transportation, and energy costs. Additionally, we have reduced the duration of our quotation validity so that we can adjust pricing if necessary, factoring in the higher costs. Our customers have generally been open to price adjustments given the current environment. While we may lag behind some component businesses, we are proactively keeping our pricing ahead of inflation, which will be essential for our budgeting process. We are attentive to market conditions, analyzing inflation trends, and with a price increase of 3.5% alongside 2.5% inflation across our businesses, I believe we are managing this effectively and will continue to do so.

That's really helpful. And you mentioned budgeting process. I'd be interested in hearing how the budgeting process for 2022 might be tempered given these circumstances on the supply chain. Would it be the top line being these rolling push outs? Would it also be margins 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 would be helpful also.

Okay. I will talk about our preliminary thoughts on 2022. Deanne, we operate in niche markets and we have a comprehensive budgeting process that allows us to understand the market dynamics of these niches at a detailed level. 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. We think overall it's a good macro environment for us. We think the mid-cycle recovery continues. We expect to see longer cycle improvement in our Commercial Aero business; 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. The supply chain may constrain growth, mainly in the first half of the year. As I mentioned before, semiconductor availability is a key issue for us. The final thing is we remain active in capital deployment with significant balance sheet capacity focused on M&A. We're bullish about what we'll accomplish in 2022, and there are a couple of challenges out there, headwinds, mainly the supply chain that we're actively managing now, but we're still feeling good about 2022.

And comments on October?

The comments on the sales performance throughout the quarter indicate that September was the strongest month, not only of the quarter but also year-to-date. Sales increased each month during the quarter, with October also showing solid results. This positive trend supports our expectations for Q4, and we're very pleased with how October performed, as there was no indication of a slowdown.

Really helpful. Thank you.

Thank you, Deanne.

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

Sure. I mentioned in the prepared remarks that it was a broad-based growth. I'll take a walk around the Company, David. If you look at our process businesses, they were up high teens on a percentage basis in the third quarter, driven by low teens or organic sales growth, and the contribution from the acquisition of Magnetrol. Our process businesses continue to see broad-based growth, with particularly strong growth within our ultra-precision technologies businesses as new products and differentiated measurement technologies drive 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. We were up 55% in the third quarter, driven by solid organic sales and the contribution from the acquisition of Abaco. Organic sales were up high single-digits on a percentage basis versus the prior year. We saw solid growth in our commercial aftermarket business and our business ship businesses, those were the two areas of strong growth. For all of 2021, we now expect mid-single-digit organic sales growth for aerospace and defense businesses. We expect our defense businesses to be up high single-digits, and our commercial businesses to be up low single. So the defense business is still stronger but moderating a bit, and the commercial businesses had a good quarter. Moving on to the power and industrial market segment, this increased nearly 40% in the quarter, driven by mid-20s organic sales growth, indicating a very successful quarter. Additionally, acquisitions from NSI and Crank Software played a role. For the entirety of 2021, we now anticipate mid-teens organic growth for our power and industrial sectors. Furthermore, our Automation and Engineered Solutions business, both overall and in organic sales, rose approximately 25%, which is an acceleration from the previous quarter. Sales in our automation sectors stayed strong with ongoing demand in their respective markets. For 2021, we now expect organic sales growth in our automation and engineered solutions sectors to be mid-teens percentage-wise, with automation businesses showing stronger growth than engineered solutions. The automation sector is performing exceptionally well, as customers seek to eliminate labor from their processes and aim for contamination-free operations. We're currently operating at full capacity. We have made prior investments in advanced technologies that are gaining market share, and we excel in rapid and precise movements. The automation sector is in an excellent position with a solid backlog, and we are optimistic about the future. Regarding geography, we experienced strong growth across all regions, with each area showing improvement. The U.S. grew by 15%, Europe also increased by 15%, while Asia stood out, climbing by 25%, bolstered by widespread strength, particularly in our process and automation sectors in that region.

Absolutely. Just to follow up, you mentioned mid-cycle earlier. This cycle is quite unusual, so could you elaborate on the areas where you anticipate improved organic growth in 2022 compared to 2021? I assume you'll see some traditional longer-cycle segments like commercial aerospace and oil and gas, but also possibly areas linked to patient volumes and similar factors.

You mentioned three areas where I believe we are seeing improvements: our commercial aerospace business, which is expected to improve; our oil and gas business, which now represents only about 5% of AMETEK but saw mid-teens growth this quarter. With current oil and gas prices, we are starting to observe a return of the project business in 2022, and we feel positive about that. Regarding healthcare, it now makes up 15% of AMETEK, making it our largest market vertical, with mid-teens growth for the quarter. We experienced strong growth in our rolling and record businesses, driven by new products. The electrosurgery segment showed gains in Q3, although it was not at 15%—it grew in the high single digits, benefiting from the increase in elective surgeries related to neurostimulation, cardiac mapping, and catheters as more patients return to hospitals for these procedures. We anticipate this segment will continue to grow more next year. The key areas you mentioned are commercial aerospace, oil and gas, and medical elective surgeries. Additionally, I believe the mid-cycle growth is not over yet, and we are beginning to see acceleration in this business across some of our process segments.

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

Thank you.

Thanks. Good morning, everybody.

Good morning, Chris.

Hey, Dave. So results really answer a lot of questions in principle. 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.

I would say that when you can deliver, your customers give you more orders. That's the key issue driving our business right now. When I look at the automation business, I talked about that earlier; that business is doing extremely well. Because of 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 it's difficult to maintain. You're at capacity now, so there's more automation in both discrete automation and factory automation. We've invested in the right technologies in the last few years, and acquired the right businesses, and we put them together. We have a really compelling value proposition, and we can design customized sub-assemblies that do automation very quickly and efficiently. That business is doing the right things right now, so we're pretty bullish on the outlook for it.

I was curious if there are any other particular areas; even if more illustrative than moving the top line by themselves, because maybe it's in a discrete niche business, but might speak to illustrate the AMETEK growth model.

Right. I think another area that we're starting to see traction in is some of our sustainability solutions. If you look at our sustainability report, we've done some good work highlighting that. In the case of greenhouse gas emissions and trying to understand that, we have some instrumentation that's very unique in helping researchers understand the trajectories. In terms of China, the pollution generated from heavy industrial processes requires very durable emissions equipment. That emissions equipment is selling very well for us now in China. 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 insights.

Hey. Good morning, guys.

Good morning.

Congrats on the awesome quarter. I'm on for Nigel Coe. So really around M&A, do you see any updated thoughts around M&A accretion in fiscal year '22 from your deals this year?

No, I think the M&A accretion being about $0.18 from deals this year. I think that we're still in line to deliver that. Akhil's businesses that we have acquired, we're very pleased with them, and each of these businesses is going to benefit from the custom playbook developed for them as part of our integration process. We'll also benefit from AMETEK's global footprint. It's early in the ownership, but so far they're integrating nicely, and we're very bullish with all the businesses. I think in terms of 2022, I'm going to throw that in the bucket of we're going to go through and analyze everything from all of our business units with our detailed budgeting process, and once we understand everything, we'll come back and communicate that to you.

Gotcha. And then around EIG sales for the quarter. Do you see that normal seasonal uptick in sales for the fourth quarter?

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

All right. Well, that's it from me. Thank you.

Okay, thank you.

Hey, there. This is Andrew Shlosh on for Jeff Sprague. How are you?

Hi, Andrew.

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

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

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 provide specific details about the research; it's part of our process segment. The research business represents around 10% of AMETEK. Recently, this sector has begun to grow again, with industrial research remaining strong, although university research had been affected by COVID. However, things are returning to normal in the university research sector. The product introduction we discussed with Gatan is well-suited for that market, making it an advantageous area for us. While its growth isn't as high as the overall AMETEK average, we are optimistic about its recovery as it moves towards normalcy post-COVID.

That's great. Appreciate the color there.

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

Oh, Ken, how are you doing?

Good. How are you?

Good.

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

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

Okay. And when I 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 new products coming to market at all, or would you still expect any kind of material expansion in that vitality index?

I think 24% is a pretty good level, but I'd like to see it in the mid-twenties, which is probably what we're targeting. In terms of new product introductions, to the extent that a new product introduction relies on electronics or semiconductors, it could be delayed, but it's broader than new products. It's across all semiconductor chip availability; that's the one area I'm particularly focused on because of the constraints in supply.

That leads well into my follow-up question. Regarding the semiconductor shortage, you have a diverse range of businesses that cover various computing needs. Can you provide insight into the extent of your semiconductor exposure, particularly in relation to the more advanced chips compared to the older ones?

Yeah, I think the microprocessors and the higher-end chips are the ones that are particularly challenging in terms of availability right now. But we have such a broad-based portfolio of products.

We're using different chips across various businesses, so there isn't a single chip or product. It's not a passive component; it's an active component, mainly related to microprocessors. This impacts our EIG business more than EMG, which is a key focus for us. We effectively managed this situation in Q3, thanks to long-standing relationships and our purchasing power. Most importantly, our strong engineering capability allows us to address these challenges quickly.

Good color. Thank you very much.

Thank you.

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