AMETEK, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Amatek, Inc. earnings conference call. At this time, our participant lines are in a 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Kevin Coleman, Vice President of Investor Relations, Thank you. Please go ahead, sir.

Thank you, Justin. Good morning, and thank you for joining us for Amatek's third quarter 2019 earnings conference call. With me today are David Zepico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President and Chief Financial Officer. Amatek's third quarter results were released earlier this morning and are available on Market Systems and the Investors section of our website. This call is also being webcasted and can be accessed on our website. The webcast will be archived and made available on our site later today. 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 risk and uncertainties that may affect our future results is contained in the AMETEX filings with the SEC. AMETEC disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2018 or 2019 results will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding the fourth quarter 2018 gain related to the finalization of the impact of the 2017 Tax Cuts and Jobs Act. Reconciliations between GAAP and adjusted measures can be found in our press release and on the investor section of our website. Also, this morning we announced the closing of the Catan acquisition. Our fourth quarter 2019 guidance and our updated full year 2019 guidance, which Dave will speak to shortly, include Catan. We'll begin today's call with prepared remarks by Dave and Bill and then open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. Emotech delivered another outstanding quarter with exceptional operating performance, earnings above expectations, solid organic sales growth, and the acquisition of two highly strategic businesses. Our execution of the Emotech growth model, including an increased focus on operational excellence, allowed us to report record levels of EBITDA, operating income, and diluted earnings per share in the quarter. Additionally, our business has generated record operating cash flow, providing the capitals to support our growth model and drive strong long-term shareholder returns. Given our results in the quarter, we will once again raise our earnings guidance for 2019. Now on to the financial highlights for the quarter. Total sales were $1.28 billion, up 7% compared to the third quarter of 2018. Organic sales were up 3%, acquisitions added 5%, and foreign currency was a one-point headwind. Amatek's operating performance in the quarter was exceptional, resulting in record operating results and robust margin expansion. EBITDA in the third quarter increased 12% over the prior year to $349 million. EBITDA margins in the quarter were also excellent at 27.4%. Operating income with $301.1 million in the quarter, up 13% over the third quarter of 2018. Reported operating income margins were up an impressive 140 basis points to 23.6%. And excluding the dilutive impact of acquisitions, operating margins increased 150 basis points over the prior year period. Earnings in the third quarter were $1.06 per diluted share, up 16% over the same quarter in 2018. This comfortably exceeded our guidance range of $1 to $1.02 per share. Additionally, our business has generated $330 million in operating cash flow in the quarter, up an impressive 33% over the same period last year, resulting in outstanding cash conversion in the quarter. Now on to the individual operating groups. First, the electronic instruments group. EIG sales in the quarter were $815.6 million, up 10% over last year's third quarter. Recent acquisitions contributed 7%, organic sales added 3%, and foreign currency was a one-point headwind. We continue to see solid growth across our aerospace, defense, and process businesses, with particularly strong growth again in our materials analysis divisions. EIG delivered fantastic operating performance in the quarter, with operating income up 15% to a record $219.5 million. Reported operating income margins increased 130 basis points to 26.9%. And excluding the dilutive impact of acquisitions, EIG's operating margins expanded an impressive 170 basis points over the third quarter of 2018. The electromechanical group also performed exceptionally well in the quarter, with solid organic sales growth and superb operating performance. Sales in the third quarter for EMG were $461.1 million, about 2% over the same quarter in 2018. Organic sales grew 3%, with contributions from the acquisition of Pacific Design Technologies being more than offset by foreign currency headwinds. Strong growth across our engineer materials and aerospace and defense businesses in the quarter was offset in part by continued slowing in our automation business. EMG's operating performance in the third quarter was also outstanding. Operating income increased to a record $103.5 million, up 12% over the 2018 third quarter. EMG's operating income margins increased sharply to a record 22.4%, of 180 basis points over the prior year period. Excluding the dilutive impact from acquisitions, EMG's margins expanded 190 basis points in the quarter. To summarize, Ametek delivered another quarter of fantastic results, reflecting the strength and flexibility of the Ametek growth model and the excellent work of our colleagues worldwide. Before providing our updated guidance for 2019, I wanted to provide some additional highlights for the quarter. First, I'd like to congratulate the team at Kameka for their recent launch of the IQOS-UV atom probe microscope. Kameka is the world leader in atom probe tomography. The new atom probe microscope reinforces the leadership position with increased ease of use at a lower cost of ownership. The IQOS-UV delivers nanoscale structural information enabling a new understanding of materials for research and faster development of products for industrial applications. This new product complements Kameka's LEAP 5000 atom probe, which provides the fastest, most sensitive 3D imaging and analysis system with nanoscale resolutions across a wide range of applications. Developing leading-edge technologies is the core to Amasek's success. We are committed to continuing our strong levels of investment in research, development, and engineering of new products and solutions to drive innovation across our businesses. For all of 2019, we expect to invest more than $260 million in RD&E, a 13% increase over 2018. This level of investment and success of our R&D average leads to a healthy vitality index. Our vitality index, which is a measure of sales from products and solutions introduced over the last three years, was excellent. at 24% in the third quarter. We also remain committed to investing in our sales and service capabilities to support our global and market expansion initiatives. And in September, we unveiled our newest center of excellence in Singapore. This center of excellence, which is similar to other centers we have around the world, includes products and solutions from numerous Amatek businesses, including Rolland, Taylor-Hoffsen, Zygo, EDAX, Programmable Power, and others. This state of the art facility serves as a product showcase, application lab, and service facility for our customers and partners in the region. Congratulations to our teams on this important effort. Now shifting to acquisitions. It has been another very active and highly successful year on the acquisition front. Since our last earnings call, we've acquired two excellent businesses. Pacific Design Technologies, or PDT for short, and Gatan. I'll touch briefly on these acquisitions, first PDT. PDT is a leading provider of advanced mission-critical thermal management solutions. Their custom-engineered liquid cooling systems and components are used across a broad set of current and next-generation commercial aerospace, defense, and space platforms. PDT is an excellent fit with our thermal management systems business, given their complementary thermal management solutions and deep R&D expertise. PDT is headquartered in Goleta, California, and has annual sales of approximately $40 million. We deployed approximately $125 million on the acquisition. Now moving to Ametek's largest acquisition today, Catan, which we acquired this week. Catan is a tremendous acquisition for Ametek. market-leading technologies, premier brand, highly complementary fit with our existing instrumentation businesses, attractive mid- to high-single-digit growth rates, excellent profitability and cash flow, and the ability to drive improved profitability with excellent returns on capital. Overall, an excellent acquisition. So a little more on the business. Katana is the leading brand in direct detection technology for electron microscopy. supporting high-end research and materials and life science applications. Their solutions enable improved microscopy workflows and specimen preparation, imaging, and analysis. Catanis technology and product offering nicely complements our materials analysis business, providing Ametek with an enhanced position in high-end analytical instrumentation and expanded capabilities in the life sciences market. The business is headquartered in Pleasanton, California, and has annual sales of approximately $180 million. We deployed approximately $925 million on this acquisition. Thus far in 2019, we deployed nearly $1.1 billion on these two acquisitions. This follows 2018 when we deployed over $1.1 billion on six acquisitions, resulting in approximately $2.2 billion of capital deployed on acquisitions over the last two years. This success speaks to the strength and discipline of our acquisition and integration process. Even with this level of activity, our acquisition pipeline remains full, and we have significant balance sheet capacity to continue our acquisition strategy. As we integrate these recent acquisitions into Amatek, we look for them to embrace each of the elements of the Amatek growth model, including our operational excellence strategy, focused on cost and asset management. As evidenced in our tremendous operating performance, margin expansion, and cash flow generation this year, our businesses continue to drive meaningful efficiency improvements through the implementation of our operational excellence initiatives. We have again increased our full-year target for operational excellence savings from $85 million to now $90 million of savings in 2019. Our operational excellence strategy plays an increasingly important role given the uncertain global economic environment. Now shifting to the outlook for the fourth quarter. Given our strong results in the third quarter, we now expect 2019 earnings to be in the range of $4.12 to $4.14 per diluted year, up 13% over 2018's earnings per diluted year. This new guidance range is increased from our previous guidance range of $4.04 to $4.10 per diluted share. We expect overall sales for the year to be up mid to high single digits with organic sales growth of approximately 3%. Fourth quarter sales are expected to be up mid single digits with earnings in the range of $1.01 to $1.03 per diluted share, up 5% to 7% over the prior year. To summarize, our third quarter performance was excellent. We are well positioned to managing in a challenging economic environment given the flexibility of our growth model and proven operating capability. 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 questions. Bill?