AMETEK, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 Amatek Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during this 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. It is now my pleasure to introduce Vice President of Investor Relations, Kevin Coleman.

Thank you, Andrew. Good morning, and thank you, everyone, for joining us for Amitek's third quarter 2020 earnings conference call. With me today are Dave DiPico, Chairman and Chief Executive Officer, and Bill Burke, Executive Vice President, Chief Financial Officer. Amitek's third quarter results were released earlier this morning and are available on market systems and in the investor 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 AMETEC's filings with the SEC, including in our TEN-Q, which will be filed later today. Ametek disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2019 or 2020 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 taken in the first quarter of 2020. Reconciliations between GAAP and adjusted measures can be found in our press release and on the investor section of our website. 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. Amitek delivered a strong third quarter despite ongoing challenges presented by the COVID-19 pandemic. While sales continue to be impacted by the pandemic, The demand environment showed solid improvements from the second quarter as customers returned to work and travel restrictions began to slowly ease. In addition, our businesses delivered outstanding operating performance, allowing us to expand margins, generate excellent cash flow, and drive earnings ahead of our expectations. I would like to thank our employees who are managing exceptionally well through this pandemic, overcoming both personal and professional challenges, to provide essential products and services to our customers. I continue to be impressed by the strength of our workforce and the dedication to our mission of solving our customers' most complex challenges. We remain vigilant and focused on our employees' safety. Our site and country-level pandemic coordinators are doing an excellent job adapting to the shifting guidelines provided by the CDC and local health and safety agencies. The flexibility our teams have shown in implementing New processes and protocols to ensure a safe working environment has been excellent. Now let me turn to our results for the quarter. Third quarter sales were $1.13 billion, down 12 percent compared to the third quarter of 2019. Organic sales were down 14 percent, with the recent acquisitions contributing five points to growth, the divestiture of Reading Alloys a three-point headwind, and foreign currency adding one point. As expected, Our commercial aerospace business, which is less than 10% of the overall company, experienced the largest impact from COVID, with sales down approximately 35% versus the prior year. Our businesses continue to drive operational excellence initiatives to help mitigate demand weakness. These efforts led to excellent operating results in the quarter. Third quarter operating income was $270.7 million, and operating margins were a record 24%, up 40 basis points compared to last year's third quarter, while decremental margins were an impressive 20 percent in the quarter. EBITDA in the third quarter was $332 million, and EBITDA margins were a record 29.5 percent, up 210 basis points over last year's comparable period. This led to earnings per diluted share of $1.01, down just 5 percent compared to the third quarter of 2019. Furthermore, our businesses generated a strong level of cash flow. Operating cash flow in the quarter was $310 million, and free cash flow conversion was an impressive 146% of net income. Next, let me provide additional details at the operating group level. Our electronic instruments group performed very well in the quarter, despite end market weakness, delivering outstanding operating performance, resulting in strong margin expansion. Sales in the third quarter for EIG were $748.4 million, down 8% from the comparable period in 2019. As expected, we saw solid and widespread sequential sales improvements from the second quarter. Organic sales were down 15% year over year, with the acquisitions of Gatan and Intellipower contributing six points and foreign currency contributing one point. Commercial aerospace remains the largest driver of organic sales weaknesses in EIG. EIG's third quarter operating income was $203.7 million, and operating margins were an impressive 27.2 percent, up 30 basis points compared to the same quarter last year. Our electromechanical group also saw sequential sales improvement and mitigated a weak demand environment with solid operating performance. EMG sales were $378.6 million, down 18 percent from last year's third quarter, driven in part by the impact of the Redding Alloys divestiture. Organic sales were down 13 percent, with the divestiture an eight-point headwind, the acquisition of PDT adding two points, and foreign currency adding one point. EMG's operating income was $84.3 million, and operating margins were solid at 22.3 percent for the quarter. Let me comment briefly on end market dynamics for some of our businesses. Overall, we saw solid sequential sales improvements across all markets in the third quarter. We expect continued sequential improvements in the fourth quarter for all businesses other than commercial aerospace, where we expect largely flat conditions sequentially. Our strongest market remains defense, where we continue to be well positioned with content across a wide range of important defense platforms. We are also very well positioned within our medical and healthcare businesses, although they experienced a delay in the return of elective procedures during the third quarter, which offset solid COVID-driven demand. And our most challenged markets remains commercial aerospace, remain cautious of a trajectory of recovery given the uncertainty caused by COVID-19. Given the uncertain and challenging end market dynamics, our businesses remain highly focused on driving operational excellence initiatives, both structural and temporary, to manage top-line weakness while assuring we maintain our investments in key growth initiatives across the company. Ametek's asset-light operating model provides us with the flexibility to do both. Our ability to expand margins and generate strong levels of cash flow during this pandemic is evidence of the strength of our operating model. In the third quarter, we generated $70 million in total cost savings, which was at the high end of our expectations, with $40 million in structural savings and $30 million in temporary cost reduction savings. Looking ahead to the fourth quarter, we expect a slightly higher level of structural savings, while temporary savings will be reduced from the third quarter levels as we add back additional temporary costs during the quarter. As a result, we expect approximately $55 million in total cost savings in the fourth quarter, with $45 million in structural and $10 million in temporary cost savings. And for the full year, we expect approximately $230 million in total cost savings, with $140 million in structural savings and $90 million in temporary savings. Our businesses continue to implement new and innovative ways to reach our customers around the world and in new markets. Through virtual meeting platforms, augmented reality product demonstrations and service, and enhanced digital marketing initiatives, our businesses have adapted quickly to the new landscape. Seeing our businesses adopt these new ways of doing business quickly and effectively has been very impressive. Our businesses are also collaborating across platforms. As an example, Amitek Land and Amitek Rolland recently partnered together to help support Rolland's Reopen School Safely campaign for their Telecenter U solution. Rolland is a leading provider of critical communications, workflow, and safety solutions for hospitals and schools. Their Telecenter U solution connects classrooms and educational facilities to district offices for emergencies, event management, and everyday communications. As I mentioned on our last earnings call, Ametek Land, a leading manufacturer of non-contact temperature measurement solutions, recently developed their new ViroAlert 3 system for rapid detection of elevated skin temperatures at points of entry to various facilities, including schools. Through this collaborative effort, Rolland was able to incorporate LAND's ViroAlert 3 technology into their telecenter use solution to help their customers safely reopen their schools by allowing for temperature screening of students and faculty. In return, Ametek LAND will reach thousands of new potential customers through Rolland's well-established network of school districts. The result was a valuable solution for our customers. Congratulations to the Ametek and the Ametek Roland team for the success on this project. We're also finding ways to support our customers through new product innovation. Throughout the pandemic, we continued to invest meaningfully in our research and development initiatives, and we're seeing great success from these efforts. Our Vitality Index, which measures the amount of sales generated from new products introduced during the last three years, was very strong at 25 percent in the quarter. During the quarter, Creaform, a worldwide leader in 3D measurement solutions, unveiled its R-Series 3D scanning solution that is designed for automated dimensional quality control applications. The suite of R-Series solutions includes the new robot-mounted MetraSCAN 3D scanner with the Q-Bar, a turnkey industrial measuring cell that is designed to be integrated into factories for at-line inspections. Together, the solution provides customers with much faster cycle times, more accurate and repeatable results, higher resolution and operational simplicity to increase productivity by measuring more dimensions on more parts without compromising on accuracy. Congratulations to the Creaform team for launching this outstanding new solution. Now shifting to acquisitions. While deal flow during the second and third quarters has been impacted by the pandemic, We are starting to see a healthy pickup in activity. Our pipeline is strong and conversations with acquisition targets are accelerating. As Bill will highlight in a moment, over the last two quarters, we have further strengthened our balance sheet and liquidity position and remain poised to deploy significant capital on strategic acquisitions. We will remain active yet disciplined in our acquisition process. We continue to focus on acquiring niche technology leaders with attractive growth profiles with opportunities for us to add value commercially and operationally. Now turning to our outlook for the remainder of the year. While the global economy continues to present challenges and uncertainties, visibility has improved across most markets. As a result, we're providing guidance for the fourth quarter. Overall sales in the fourth quarter are expected to to be down high single digits with a similar level of organic sales decline. Diluted earnings per share are expected to be in the range of $1 to $1.04, down 4% to 7% versus the prior year. Fourth quarter decremental margins are expected to remain solid in the low 20s. To summarize, our businesses delivered a solid quarter in a difficult environment. Amatek continues to manage this global crisis well with the proven strength of the Amatek growth model and with a talented workforce. Our cost mitigation efforts have allowed the company to weather this ongoing storm, and we are confident that we will overcome these challenges with a bright future. I'll now turn it over to Bill Burke, who will cover some of the financial details for the quarter. Then we'll be glad to take your questions. Bill?

Thank you, Dave. I'd like to echo Dave's comments on the quarter as we saw outstanding operating performance driven by the tremendous efforts of our team in a very challenging economic environment. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were down $4.5 million compared to the same period of 2019, primarily due to lower compensation costs and other discretionary spending cuts. As a percentage of sales, general and administrative expenses were 1.5% of sales in the quarter, down from 1.7% last year. The effective tax rate in the third quarter was 17.5%, down from 19.5% in the same period last year. The lower tax rate in the quarter was due to return to provision adjustments and a lower tax rate on foreign earnings. For 2020, we now expect our effective tax rate to be between 19% and 19.5%. And as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year estimated rate. Operating capital and working capital was an impressive 17% in the third quarter, down sequentially from the second quarter's 19.6% on outstanding working capital management. Capital expenditures in the quarter were $10 million. We now expect full-year capital expenditures to be approximately $80 million, which is $5 million higher than our full-year expectations last quarter as we are investing in incremental growth opportunities. Our full-year capital expenditures estimate remains below our initial expectations to start the year of $100 million. Depreciation and amortization expense in the quarter was $63 million. For the full year, we expect depreciation and amortization to be approximately $255 million, which includes after-tax acquisition-related intangible amortization of approximately $117 million, or 51 cents per diluted share. Our businesses continue to generate strong levels of cash flow, despite the challenges presented by the pandemic. Operating cash flow in the quarter was $310 million, Free cash flow was $300 million, and free cash flow conversion was excellent at 146% of net income. Total debt at the end of the quarter was $2.8 billion, up slightly from $2.77 billion at the end of 2019, and down $68 million from the end of the second quarter. Offsetting this debt is cash and cash equivalents of $1.3 billion. Our gross debt to EBITDA ratio at the end of the third quarter was 2.1 times, as we are intentionally holding higher than normal cash balances. This ratio was comfortably below our debt covenants of 3.5 times, and our net debt to EBITDA ratio was 1.1 times at quarter end, which improved by 2.2 turns in the quarter. We remain well positioned to manage this ongoing economic downturn with approximately $2.3 billion in liquidity to support our operations and growth initiatives. This includes approximately $1 billion in available revolver capacity. As we've highlighted on previous calls, Amatek has a robust balance sheet with no material debt maturities due until 2023. In summary, our businesses continue to manage through the pandemic exceptionally well, delivering strong operating results and high levels of cash flow. The dedication of our world-class workforce to serving our essential customers has truly been impressive. We remain well positioned to manage ongoing economic challenges while investing in our long-term growth initiatives.

Kevin? Thank you, Bill. Andrew, are you ready to take questions?

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. And our first question comes from the line of Matt Somerville with D.A. Davidson.

Good morning, Matt.

Hey, Dave. I was wondering if you could maybe start by doing your more detailed walkthrough on the businesses, please.

Sure. I'll start with the process business. Overall sales for process were down mid-single digits in the quarter. We had the contributions from the Catan acquisition, and they were offset by an organic sales decline, and it was in line with Ametek's overall organic sales decline. We saw sequential improvements in sales during the quarter, with this improvement being widespread across our process businesses. Our Kameka and Zygo businesses had solid quarters, driven in part by their exposures to research and semiconductor markets. They did very well. And we expect continued solid sequential improvements in sales for process during the fourth quarter. I'll go into aerospace next. Both overall and organic sales for our entire A&D were down mid-teens in the quarter, showing nice sequential growth from the second quarter. Similar to the second quarter, there was a meaningful difference in performance between our defense and commercial aerospace businesses. Our defense businesses continued to see solid demand with sales up low double digits on a percentage basis versus last year, while the commercial aerospace businesses were down about 35% versus last year. Looking ahead to the fourth quarter, we expect demand to be relatively flat sequentially versus the third quarter as the broad commercial aerospace market continues to adjust to the uncertain demand environment due to COVID-19. And next, our power and industrial market segment. Overall sales for power and industrial were down low double digits in the third quarter, with contributions from IntelliPower being offset by a mid-teens organic sales decline. Demand levels in the third quarter improved nicely from the second quarter, and we expect sequential improvements again in the fourth quarter. And finally, for our automated and engineered solutions market segment, organic sales in the third quarter for A and ES were down mid-teens on a percentage basis. We saw modest sequential improvements across these businesses in the third quarter, as we had expected. with applications tied to medical markets performing well. We also saw a return to growth in China for our automation and engineer solutions business in the quarter. And as with the other sub-segments, we expect sequential improvements across both our automation and engineer solutions businesses in the fourth quarter. That's a walk around the company, Matt.

Thanks, Dave. And then as my follow-up, can you comment on what your price realization was in Q3 and what you are looking for in terms of sourcing savings for the full year? Thank you.

Yeah, I think the – I'll go with the price first. We're very pleased to see our pricing held up well. Q3 was similar to Q2. We achieved about a point and a half of price across our entire business. Total inflation and the impact of tariffs was about a point, so we had 50 basis points of positive spread added to margins. And your second question was on sourcing savings. We consider that part of structural savings, and it was about $60 million.

Thank you. And our next question comes from the line of Dean Dre with RBC Capital Markets.

Yeah, the one point, though, to finish, it was $60 million for the year to Matt. And go ahead, Dean.

Sure. Thanks. Good morning, everybody. Hey, Bob. Great to see you guys are back in the quarterly guidance business because that does speak to your earnings visibility. So first question is kind of related to this visibility. If you could take us through the cadence of the months in the quarter organically, and maybe how October month of date has looked. Let's start there, please. Sure.

In terms of orders in Q3, it was a pretty typical trend for us, with September being the strongest month of the quarter. In fact, it was our strongest month since, I believe, February, back in Q1. when we started to really feel the impact of the virus. That's orders. In terms of sales, September again was our highest month of the quarter and the highest month of the year so far. And in terms of October, obviously it's not completed yet, but it looks good. Orders are trending well and it's supportive of our guide in Q4 which shows solid sequential improvement.

So did you see in the months that sequential improvement consistent through the quarter?

We saw sequential improvements in orders. In sales, I believe August was a bit of an outlier, but August is always tricky for us. So in general, it was a trend upward with September the highest in both sales and in orders.

Great. And then just kind of bridge this, you know, degree of confidence in the sequential improvement, how this translates into your confidence in restoring guidance.

Yeah, I think the confidence is really based on us becoming more confident with our ability to live with the virus. And we got visibility in our markets. We're seeing consistent improvement and consistent engagement with customers across all of our markets. And we just got to the point where we were comfortable with giving guidance. Our guidance range is a little bit wider than it typically is, and That takes into account some of the uncertainty for the fourth quarter, but we just got comfortable because our businesses are operating in a good rhythm, and it builds a level of confidence with us.

Great. And then just my last question, not to oversimplify your mix with respect to how you, in the last question, Matt's question, you gave and highlighted those businesses, but if I thought about Ametek, in the strength of your medical and defense, those are probably the strongest here. How did those collectively do in the quarter? And then the weakest, which is more secular, it's not execution, we get that, and actually the commercial business, you've outperformed a number of your peers in that space in this market. But the two sides of this, medical defense, how'd they do versus the oil and gas and commercial aero on the other side?

That's a great question. One way to think about it is if I take the two most challenged markets out, the commercial aerospace and the oil and gas, sales were down approximately 10%. And another way to think about that is our defense showed strong growth in the third quarter, up mid-teens. Our health care business was just slightly down because of the We had COVID-related demand that was strong, but people weren't going to hospitals and getting surgical procedures, so that was off a little bit. But the combinations of both the defense and medical was clearly our strongest, and that was about flat.

Terrific. And just a quick clarification, when you said flat 4Q for aero, was that commercial aero and defense, or was it combined?

So it's sequentially different. We're saying it's going to be flat, and that's both for military and commercial aerospace.

Got it. That's really helpful.

Thank you. Thank you. And our next question comes from the line of Scott Graham with Rosenblatt Securities.

Hi, Scott. Hey, good morning. Well done again. Thank you. I do have a question first on, I think, an area that you might be most proud of, this quarter, operating working capital. What did you do there to push that percentage down as much as you did? What happened?

Yeah, the first comment is that's one of the hallmarks of Amatek is our, we think about working capital as being very, you have to run businesses where you're efficient with working capital. And there's some elements that really overperformed and I'll let Bill comment on that.

Yeah, I think what you saw was our receivables performance has been Fantastic. Our businesses have really done a great job staying close to our customers and understanding that pushing for payment. Our receivables were down to 46 days on a DSO basis, which is as low as it's been in quite a while. So I think the teams did a fantastic job there. And then the other thing, it's a little more difficult, especially when sales are declining as rapidly as they did earlier in the year, is getting your supply chains straightened. realigned to that level of demand, and they did a great job with that as well, and I think you saw that play out in the third quarter. So I think those two things in combination really enabled us to reduce that working capital percentage to 17%, and the teams have just done a fantastic job on that around the company.

That's great. Thank you, Bill. Now, here's another one. The $90 million of expected full-year temporary cost reductions. You know, a lot of companies are saying, hey, not all of that comes back. What is your view on that for 2021 at this point? How much of that comes back? How much of it is maybe permanent?

Yeah, the first point I'd make is the temporary cost savings will be at a run rate of about $10 million in the fourth quarter. The second point is related to next year. You know, we're in a situation we have to sit down with all of our teams, our budgeting processes in November. It's a bottoms-up comprehensive planning process for each business unit. They're going to look at, you know, growth in each of their markets, customer plans, competitive dynamics, investments, opportunities, capital projects, cost reduction. And part of that discussion is going to be how fast the temporary costs are going to come back and what the impact is year over year. You know, the high-level, you know, travel is a part of that, and it's going to come back slowly through the year, but some of the costs have already been restored. So we really don't have a detailed plan on that next year because we haven't done our budgeting yet. We start that process in November. But that's how I think about it.

Got it. Last question. Thank you for that. On the M&A pipeline, obviously you have a much broader – a swath of businesses today than you did, you know, even two or three years ago, particularly, you know, look at Catan and, you know, how you've gotten even more into the scientific markets. Could you give us maybe something a little bit more granular, Dave, on what you're looking for? And I know competitively you've got to be careful there, but I'm assuming that medical scientific slash research would be really kind of at the top of the list for things you're looking for. Could you comment on that?

Yeah, I think that's an area that we're definitely looking at. I mean, it's broad-based. As you know, we have a decentralized business model, and we get acquisition plans rolled up through our businesses through an adjacency process, and we're looking at all parts of the business in all areas, and we're seeing an uptick in discussions, But, you know, they could come from all parts of our business, but the area that you highlighted is a particularly interesting one to us.

Very good. Thank you. Good job.

Thank you, Scott.

Thank you. And our next question comes from the line of Ivana Dylewska with Gordon Haskett. Hello, Ivana.

Good morning, guys. So just wanted to ask, what percent of your portfolio may be excluding companies aero and defense and medical is leveraged to CapEx, and what are you seeing in those CapEx leveraged businesses?

Yeah, you know, most of the products that we sell are at a price range that could be considered both OpEx or CapEx, so we really don't segment it that way, but certainly you think about the big projects and the big project businesses in our you know, oil and gas business and our metals business and some of the heavier industries are delayed right now, but the operating expenditures are continuing. So I really don't have a percentage to give you, but that's how we think about it.

And then in terms of the CapEx leveraged businesses, are those, like, down significantly more than the rest, would you say?

No, in fact, you know, in the research market for Kameka, They're selling, you know, million, $3 million tools, and that was one of the businesses that I highlighted in process that I talked about on our, so that's not the case. I mean, that's a university market or a research market, very expensive. The key there is that we have the best products, and we're the only one in the world that makes an atom probe, and we have a unique SIMS capability, so people, you know, save, they budget for our products, and we build products, and they deliver them, so, you know, in Kameka, which is a capex market for us at one of their best quarters. So it's really dependent on customer dynamics.

Got it. Thank you very much.

Okay.

Thank you. Our next question comes from the line of Nigel Coe with Wolf Research.

Thanks. Good morning, and thanks for the question. So, Dave, I want to go back to the aerospace, you know, down 35%. You know, it's a steep decline for sure, but compared to sort of down 50% to 60% we've seen from some of the other suppliers into that market. So I'm just curious, would there be a reason why your decline would be significantly, you know, decoupled from what we're seeing in the industry? I'm thinking about maybe programs or other factors because that doesn't sound like it, but that is actually a pretty good performance.

Yeah, I mean, it was a good performance. You remember, we thought we were going to be down in the mid to high 40s, and we ended up down 35% in the commercial aerospace. Our team did an excellent job. When you look at the different subsegments, the third-party aftermarket and the commercial OEM ended up being down similar with business jet, and we thought the business jet would be higher and the third-party aftermarket and the commercial OEM will be lower, and those two sub-segments perform better. But that's as much a backlog and things like that. Commercial is finding a bottom. There are many variables, including government support, airline capacity decisions, obviously the confidence of the flying public. And when we thought about our business sequentially, that's the only part of our business we think will not improve. Definitely a better quarter. I can't comment on how the performance of other companies, because I really don't know it. But I know our teams did a good job on shipping product. And, you know, as a negative 35%, pleased with the performance, as strange as that sounds.

Yeah, right. That business is definitely getting better. And then just on the structural costs, you gave some great detail there, and I think you said $45 million of costs. during 4Q. Is that a full run rate? So as we go into 2021, are we looking at maybe, I don't know, $40 million or so of kind of like carrier benefits into 2021?

Yeah, first of all, Nigel, it's $55 million of savings in Q4 and $45 million of it is structural and $10 million of it is temporary. And I'm going to give you a, you know, there's a $50 million carryover from the restructuring that we did earlier in the year. But in terms of getting into any specifics, I'm going to not answer the question for next year. Our budgeting process is going to be in November. And really, there's a lot of discussion on cost reduction, investments, and the temporary costs that are going to come back. And that all goes into a mix. It will be a pretty complex budgeting process this year. With the pandemics, there's some extra variables in it, so I'm not going to comment on what the savings will be for next year.

So it sounds like you're still maybe contemplating a different action for Q to kind of like maybe set up a 21. Would that be fair?

No, I don't think so, but we're going to go through our budgeting processes, and something may come out of there, but we don't have anything planned in Q4.

Okay. Thanks, Dave. Thank you. And our next question comes from the line of Christopher Glenn with Oppenheimer.

Thanks. Good morning, guys. Hope all's well. So just wondering if in the current environment where some smaller companies might be concerned about global dynamics, supply chain, trade, et cetera, if you're picking up on any new motivations by sellers, you know, including some you've tracked and courted for some years?

Yeah, I think there is some activity out there where people are anticipating possibly a tax rate change. So there's some people that have their businesses out there as part of the uptick in pipeline opportunities. In terms of the overall uncertainty in the global environment, if you're a a smaller owner of a company that has all these dynamics in terms of COVID and geopolitical issues and issues with China, you're certainly a little unsettled, and we've known those people for years, and we're certainly having discussions on them in terms of what the right time for them to sell their businesses.

Okay, and any changes in the competition for deals that you're interested in seeing?

I would say no competition change that's noticeable. It's been about the same for the last couple years.

Great. Thank you.

Thank you, Chris.

Thank you. And our next question comes from the line of Andrew Oden with Bank of America.

Hey, good morning, guys. Good morning, Andrew.

Good morning. Good morning.

Just a couple of people actually asked me, did I miss, did you guys actually give us actual orders in the third quarter? You usually do that.

I can do that. Our overall orders were minus 8%. Our organic orders were minus 12%. And our book to bill was 1.01. Okay.

That was easy. And then the second question just I'll ask on elective procedures. I think most of your competitors sort of said that elective surgery is back to 90%, 95% level pre-COVID. Has that been your experience, and what are you seeing on elective procedures into Q4?

Yeah, I think elective procedures for us, we think, is going to stay at a reduced level. until next year is the word hearing from customers. So we think we'll have another quarter in Q4 of, you know, some kind of reduced elective procedures, and then it will recover next year. And I, you know, anticipate they're working off backlog and there's less demand with COVID. So that market will correct itself as time goes on.

But your experience is consistent sort of with the data that I cited that your competitors are citing, right?

Yeah, I'm not sure what the competitors have cited, but we're down a bit, and the numbers that you put out there, 90% or 95%, kind of make sense.

Okay. And just to ask Ivana's question in a slightly different way, on the way up as IP recovers, what kind of revenue leverage to IP should we be thinking for your portfolio X arrow and maybe X healthcare?

Right. You know, that's something we're going to talk about with our businesses, but historically, Amatek has recovered very well from significant downturns. And we're seeing the improvements in Q3 versus Q2. We're anticipating seeing it in Q4 versus Q3. And historically, we've really performed well in upticks. So we have a mid- and long-cycle business, and we're seeing good improvements. And what you're seeing now is the short-cycle activities picking up So that should bode well for the future, but we're going to go through our budgets and figure everything out.

Thank you so much.

Thank you, Andrew.

Thank you. And our next question comes from the line of Brett Lindsey with Vertical Research.

Hey, good morning, all. First question just on defense and medical. First on the defense side, very strong 2020. It continues to look pretty good here. What is your visibility in that business next year based on wins or platforms you're on? Clearly a tough comp, but can you see that growing still next year? And then on the medical side, any identifiable COVID-related opportunities that you could, you know, point to or even quantify, you know, that could, you know, pop up here over the coming months?

Yeah, the first question is I'm really not going to comment on the – military demand environment next year, but the spending pattern, those things are relatively healthy, and we'll see what the political environment brings, but usually those changes occur slowly over time, so you think that the overall spending environment will be supportive next year, and we are, quoting activity shows that. In terms of the COVID-related products, I mean, the first thing I point you to is the The land temperature measurement, we're going body temperature scanning. When I came into the work today, I went through the land system. It's very quick, easy, efficient, and measures body temperature. The other things that are happening in our automation business, there's a lot of COVID testing devices that require sample automation, movement of samples very precisely through testing. The demand in that business is very strong. We're also seeing some demand for temporary setups in hospital-type situations with our Rolland Healthcare businesses. So we're really seeing some pockets of improved demand, and that's built into the overall story.

Got it. That's great. And then just in terms of the geographic complexion, could you maybe give us a little more color, you know, what sales or order rates? And then I'm actually curious specific on Europe in October where the lockdown chatter and maybe even enactment was – you know, starting to percolate a little bit. Did you see a slowing kind of late in October in Europe? Thanks.

Yeah, yeah. I'll take the second question first. I mean, our orders for October are very good. They're in line with what we're expecting, and we're seeing no geographical problems at this point. In terms of the third quarter, the geographical third quarter, we had positive sequential trends across all geographies with Europe and U.S. remaining the most challenged. So the U.S. was down, I think, 13%, broad-based weakness. Europe was down 20% on broad-based weakness. Asia was down mid-single digits. We had a good strength in EMG in China, and China was positive at plus three for us. But all geographies improved sequentially.

Got it. Thanks, Dave. Appreciate it.

Thank you, Brad.

Thank you. Our next question comes from the line of Joseph Giordano with Cowen.

Hey, good morning. This is Robert. Hey, good morning. It's Robert in for Joe this morning. Thanks for taking my question. A lot of ground has been covered. I guess just a quick one on the structural and variable costs for Q. Is there any – is that pretty evenly split between EIG and EMG? Is that a good way to think about it?

Yeah, yes, it is. It is – pretty well split between the two groups. EIG is a little bit higher because of the relative size of it, but it's split based on volume.

Okay, great. And then can you provide another update on Gatan's performance so far and how that's been progressing versus expectations and synergies into next year?

Yeah, I mean, we met our year one profitability targets. We're going to be reviewing that with our board next week. Very good first year. Team did an excellent job. We were helped by COVID-related sales. About half of that business was light sciences. And we also announced the combining of Catan with our EDX business in a similar market, so we drove excellent synergy. So very positive. And the K3 camera helped us solve some of the COVID-related problems, being the first camera to structure the virus. So all very good, and the people of Catan are very proud of that. Okay.

Thank you. And our next question comes from the line of Andrew Buscalio with Barenberg.

Good morning, guys. Good morning, Andrew. You know, so, David, you talked about, you know, you reinstated quarterly guidance, and you mentioned visibility getting a little bit better. which is interesting. You know, some companies aren't willing to say that yet or hesitate, you know, into year-end. You know, there's still a lot of uncertainty. So I guess, you know, where are you seeing across your space? Where are you feeling more comfortable? Obviously, some areas with by nature, like, you know, military spending, you can have better visibility just all the time. But I guess where do you get more comfortable saying that? And maybe is this coming from some sort of like conversations you're having with your customers?

Yeah, that's a great question, Andrew. And when you think about it, we're getting better at living with the virus. Our customers are getting better at living with the virus. Our suppliers are getting better at living with the virus. And there is an uptick in cases, especially in Europe and the Western U.S., and we're watching that closely. But we expect to continue to run as an essential business, and our customers are essential customers, and they're expecting to continue to run. So, Business activity levels are continuing to improve. And even in Europe, when you have some increased lockdowns on certain degrees, essential businesses are still operating. So that's really the broader context that we use to reinstate guidance and talking with our teams that are confident they can deliver their fourth quarter.

Yeah, that's fair. You know, and you talked a lot about this quarter about some benefits from COVID and, you know, some COVID-related products. I guess, you know, it's hard. You have a lot going on on that side. I guess, how much of it do you think, you know, is sustainable demand into 2021? I guess, I mean, how would you characterize sort of a temporary bump in demand related to those products versus something that might linger into next year and beyond?

Yeah. As I said a couple of times, we're not going to talk about next year. We're going to work with our teams. But in general, we're seeing a pretty substantial improvement quarter to quarter. And, you know, we'll find out the details with our teams. But I would expect that improvement trend will continue into next year. And as I've talked earlier in this call about, Amitek typically has responded positively to deep downturns. So we'll find that out. We don't know about the timing. And there may be some COVID-related demand that falls off, but – There's also going to be some demand that was impacted by COVID that's going to improve. So we'll figure that all out during our budgeting process.

Okay. All right. That's fair. Thanks, David.

Thank you.

Thank you. And our next question comes from the line of Michael McGinn with Wells Fargo.

Hey, guys. Mike on for Allison. Thanks for the question.

Hi, Mike. Great to see you.

I want to go back to the capital allocation discussion. As you move into these heavy R&D industries with the bolt-on acquisitions versus maybe more material and direct COGS industries, is there any discussion on the way you approach and report gross margin, which I believe differs from your peer set?

Yeah. Our cost of sales includes engineering and That's historically how we've done that, and we have not had a discussion recently of changing that.

Okay, fair enough. And then I guess switching to some of your end markets, I believe you have an automation and engineer solutions platform that was approaching $1.5 billion prior to downturn. So I was curious what a nearshoring or reshoring kind of player theme would look like for you guys and the businesses that would be most impactful for them?

Yeah, automation is one of them. Automation did well in the third quarter. It did better than our engineered services business, and they're seeing that demand. They also saw good strength in China from that. And when you think about the product that I talked about today from Preaform, that's all a product for at-line metrology. So our automation businesses and our instrumentation businesses are very well positioned to do that. to improve in an environment that includes reshoring. We have a lot of products that our customers use to make their manufacturing more efficient and more productive. So that's kind of in our sweet spot.

Okay. And so is it fair to say that some of those businesses have a higher vitality index than maybe the legacy Amitek platform? I believe you said it was like 25% this quarter. Just is that where the R&D focus is now and going forward?

Yeah, I think the R&D focus is EIG biased versus EMG, and the vitality index is higher in those kind of businesses. So that would be a correct view from your viewpoint.

Okay. Appreciate the time. I'll pass it along.

Thank you.

Thank you. Thank you. I will now turn the call back over to Kevin Coleman for any closing remarks.

Thank you, Andrew, and thank you, everyone, for joining our call today. And as a reminder, a replay of the webcast can be accessed in the investor section of amatech.com. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.