AMETEK, Inc. (NYSE:AME) Q4 2023 Earnings Call Transcript February 6, 2024
AMETEK, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 AMETEK Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Kevin Coleman, Vice President of Investor Relations and Treasurer. You may begin.
Kevin Coleman: Thank you, Tanya. Good morning and thank you for joining us for AMETEK's fourth quarter 2023 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer; Bill Burke, Executive Vice President and Chief Financial Officer and Dalip Puri, Senior Vice President, Operational Finance. During the course of today's call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.
Any references made on this call to 2022 or 2023 results or to 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks and then we'll open it up for questions. I'll now turn the meeting over to Dave.
Dave Zapico : Thank you, Kevin, and good morning, everyone. Before I get into the financial results for the quarter, it is with mixed emotions that I share the news of changes in our financial leadership, which we announced on January 16. After an outstanding 36-year career at AMETEK, our Chief Financial Officer, Bill Burke, has decided to embark on a well-deserved retirement effective April 2, 2024. Bill's tremendous leadership of our finance organization and his strategic guidance has been instrumental in AMETEK's long-term growth and success. His legacy is deeply woven into the fabric of our organization, and we express our heartfelt gratitude for his exceptional contributions. In light of this transition, I'm delighted to announce the appointment of Dalip Puri as our new Executive Vice President and Chief Financial Officer.
Dalip, currently serving as Senior Vice President, Operational Finance, brings a wealth of experience and expertise to this role. Dalip joined AMETEK in 2017 as Treasurer and subsequently took on the role of Group Controller, providing financial oversight for over half of AMETEK's businesses before transitioning into his current role of Operational Finance. Dalip's leadership of key financial initiatives at AMETEK, along with a proven track record make him the natural choice to lead our financial organization into the future. I'm confident that under Dalip's leadership, our financial organization will continue to thrive contributing significantly to the success of AMETEK. To ensure a seamless transition, Bill will stay on as a senior adviser until April 2025.
Thank you, Bill, for your exceptional service, and congratulations Dalip. I'm truly excited about the future. Now let me turn to this quarter's results. AMETEK delivered exceptional performance in the fourth quarter, delivering record results and outstanding operational execution, leading to results ahead of our expectations. In the quarter, we set records for sales, operating income, earnings per share, EBITDA and cash flow. We also ended the quarter with record backlog. Furthermore, in the quarter, we successfully deployed over $2 billion on strategic acquisitions, enhancing our portfolio with the acquisitions of Amplifier Research and Paragon Medical. These results cap a record year for acquisitions and underscore the strength of the AMETEK growth model, the quality of our businesses and the success of our organic growth initiatives.
AMETEK's continued success is also the result of the dedicated efforts of our global employees. I want to thank all AMETEK colleagues for your efforts and significant contributions in 2023. Now let me turn to our fourth quarter financial results. Fourth quarter sales were a record $1.73 billion, up 6.5% over the same period in 2022. Organic sales growth was approximately 1.5%. Acquisitions added 4 points and foreign currency added 1 point. We ended the quarter with a record backlog of $3.53 billion which is up 10% from the start of 2023. AMETEK's operational performance in the quarter was outstanding, with robust margin expansion and strong incremental margins. Operating income in the quarter was a record $445 million, a 12% increase over the fourth quarter of 2022.
Operating margins were 25.7% in the quarter, up an impressive 120 basis points from the prior year while core margins were up 200 basis points in the quarter. This strong margin expansion reflects the strength and flexibility of our operating model and the quality and differentiation of our businesses. EBITDA in the quarter was a record $526 million, up 8% over the prior year, with EBITDA margins an impressive 30.4%. Our strong growth and operating performance led to robust cash generation with free cash flow up 47% in the quarter to a record $481 million. This tremendous operating performance led to record diluted earnings per share of $1.68, up 11% versus the fourth quarter of 2022 and above our guidance range of $1.61 to $1.63 per share.
Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments grew by an excellent quarter with strong sales growth and tremendous operating performance. Sales for EIG were a record $1.24 billion in the quarter, up 7% from the fourth quarter of last year. Organic sales were up 3.5%, acquisitions added three points with currency accounting for the balance. EIG sales growth in the fourth quarter was strongest across our Aerospace & Defense businesses and our Materials Analysis division. EIG's operating performance was impressive with strong profit growth and exceptional margin expansion. Operating income was a record $359 million, up 17% versus the prior year, while EIG operating margins were 29%, up and outstanding 250 basis points from the prior year.
The Electromechanical Group also finished the year with strong performance despite the continued impact from the normalization of inventory levels across our OEM customer base. Fourth quarter sales for EMG were $495 million, up 6% versus the prior year, driven by the contributions from recent acquisitions. EMG's fourth quarter operating income was $112 million, while operating margin -- operating income margins were 22.7% in the quarter. Excluding the dilutive impact from acquisitions, EMG core margins were up 100 basis points versus the prior year. Now for the full year results. Overall performance was outstanding in 2023, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.6 billion, up 7% from 2022.
Organic sales increased 4%, with acquisitions accounting for the balance of the growth. Operating income for 2023 was $1.7 billion, up 14% and operating margins were 25.9% for the full year, with margins up 150 basis points versus the prior year. EBITDA for the year was $2 billion with EBITDA margins are very strong 30.5%. In full year 2023, earnings were $6.38 per diluted share up 12% versus the prior year. Our performance in the fourth quarter and full year highlights the strength of the AMETEK growth model. Our differentiated businesses are strategically aligned with diverse and attractive markets while our organic growth initiatives position us for sustained long-term growth. Our distributed operating structure empowers our businesses to execute on our growth strategies and quickly adapt to evolving market dynamics.
This structure is a cornerstone of the success and navigating throughout different economic cycles. Furthermore, our asset-light business model and strong operational execution result in exceptional cash flow generation. This robust cash flow, coupled with our strong balance sheet, provides AMETEK with plenty of firepower to support our growth initiatives and to deploy on acquisitions. Speaking of acquisitions, we were very active in 2023, successfully deploying approximately $2.25 billion on five acquisitions, including the acquisitions of Amplify Research and Paragon Medical in the fourth quarter. I'm very excited to welcome all acquired companies to AMETEK. Each acquisition is an excellent strategic fit with AMETEK as they help expand our product and technology offerings and highly attractive growth markets and applications including renewable energy development and the modernization of the Power group.
A close-up of a technician's hands making precision adjustments to a specialty industrial machine.
In addition, our latest acquisition, Paragon Medical, which we closed in the middle of December, nicely expands our presence in the medical technology market. Paragon is a leading manufacturer specializing in highly engineered medical components and single-use and consumable surgical instruments. Their product portfolio spans crucial medical applications and the reputation for quality and precision has earned on the trust of a diverse customer base, including top-tier medical device OEMs. Looking ahead to 2024. Our acquisition pipeline remains robust. As noted, we have a strong and flexible balance sheet and anticipate remaining active deploying capital and acquisitions. In addition to our acquisition strategy, AMETEK remains committed to making strategic investments in organic growth initiatives.
In 2023, we invested an incremental $100 million in growth initiatives. And in 2024, we expect to invest another incremental $100 million. The majority of this investment will be within our research, development and engineering and sales and marketing functions. In the quarter, our vitality index, which reflects sales from new products introduced in the last 3 years was a very healthy 29%. Through these strategic investments and acquisitions, we have seen a steady transition of AMETEK's portfolio, with an expanded presence in secular growth markets and reduced exposures in more cyclical markets. This strategic evolution of the portfolio, combined with our proven operational acumen, positions AMETEK well for continued strong and sustained growth.
Now shifting to our outlook for the year ahead. For 2024, we expect overall sales to be up low double digits on a percentage basis with low to mid-single-digit organic sales growth. Diluted earnings per share for the year are expected to be in the range of $6 to $6.85, up 5% to 7% compared to last year's results. For the first quarter, we anticipate overall sales to be up low double digits with adjusted earnings of $1.56 to $1.60 per share, up 5% to 7% versus the prior year. In summary, AMETEK's performance in the fourth quarter and throughout the full year of 2023 was outstanding. Our businesses delivered exceptional results with all elements of the AMETEK growth model, playing a key role in our success. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, and then we'll be glad to take your questions.
Bill?
Bill Burke: Thank you, Dave. I appreciate your kind words at the top of the call. As Dave noted, I have made the decision to retire after 36 years with AMETEK, nearly eight of which I had the privilege of serving as Chief Financial Officer. I want to express my deepest gratitude and thanks to the entire AMETEK family for the incredible journey we've shared. It has been an honor to contribute to the tremendous growth and success of AMETEK. To Dave and the Board of Directors, thank you for your confidence in me. Your support and leadership have been invaluable. And to my colleagues, your dedication has been the driving force behind our share of success and I am truly thankful for the privilege of working closely with you. I look forward to remaining with the company as a senior adviser until April 2025 to ensure a seamless transition.
I'm confident in Dalip's leadership and in the very strong and talented financial organization at AMETEK. Before I get into the results for the fourth quarter, Dalip would like to say a few words. Dalip?
Dalip Puri: Thank you, Bill, and good morning, everyone. I look forward to meeting and working with all of you in the new future. I too want to express my thanks to Dave, to Bill, to the Board of Directors and the leadership team for their trust and confidence in me. It is an honor to serve as AMETEK's EVP and CFO and I'm very excited to lead AMETEK's incredible finance organization and to partner with Dave as we continue to deliver sustained and strong growth across our portfolio of businesses. I also want to express my thanks to Bill for his guidance and mentorship over the years and his commitment to a smooth transition. With that, I'll turn it back to you, Bill.
Bill Burke: Thank you, Dalip. Now on to the fourth quarter results. As Dave highlighted, AMETEK had an impressive finish to 2023 with outstanding operating performance leading to better-than-expected results in the fourth quarter. Let me provide some additional financial highlights for the fourth quarter and the full year as well as some additional guidance for 2024. Fourth quarter general and administrative expenses were $26.3 million, up $3 million from the prior year but unchanged at 1.5% of sales. For the full year, general and administrative expenses were up $7 million and as a percentage of sales were 1.5%, in line with 2022 levels. In 2024, general and administrative expenses are expected to be approximately 1.4% of sales.
Fourth quarter other income and expense was additional expense, $7 million compared to the fourth quarter 2022, driven by higher due diligence costs and lower pension income. For 2024, we expect other income and expense to be largely in line with 2023 levels. The effective tax rate in the quarter was 17.8%, down from 18.9% in the fourth quarter of 2023 due to statute expirations. For 2024, we anticipate our effective tax rate to be between 19% and 20%. And as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate. Capital expenditures were $60 million in the fourth quarter and $136 million for the full year. Capital expenditures in 2024 are expected to be approximately $160 million or about 2% of sales.
Depreciation and amortization expense in the quarter was $92 million, and for the full year was $338 million. 2024, we expect depreciation and amortization to be approximately $400 million, including after-tax, acquisition-related intangible amortization of approximately $190 million or $0.82 per diluted share. For the quarter, operating working capital was 17.2% of sales. Cash flow in the fourth quarter was superb with operating cash flow of record of $541 million, up 40% versus the fourth quarter of 2022. Free cash flow was also a record in the quarter, up 47% to $481 million with free cash flow conversion of 140% for the quarter. Free cash flow for 2023 was $1.6 billion, up 58% versus the prior year and 122% of net income. For 2024, we expect free cash flow conversion to be between 110% and 120% of net income.
Total debt at year-end was $3.31 billion, up from $2.39 billion at the end of 2022 due largely to the Paragon acquisition in December. Offsetting this debt is cash and cash equivalents of $410 million. As Dave noted, during the fourth quarter, we deployed approximately $2 billion on the acquisitions of Amplifier Research and Paragon Medical. Our gross leverage was 1.5x at the end of 2023, up from 1.2x at the end of 2022, despite deploying approximately $2.25 billion on acquisitions during the year. We remain very well positioned to deploy additional capital and have approximately $1.5 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses performed exceptionally well in the fourth quarter and throughout all of 2023, delivering strong growth and a high quality of earnings.
We are well positioned for continued growth and success in 2024. Thank you once again, and now I'll turn it back to Kevin.
Kevin Coleman: Great. Thank you, Bill. Tanya, can we please open the line for questions?
