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spk05: Thank you for standing by. My name is Meg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ametek Inc. Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.
spk11: Thank you, Meg. Good morning, and thank you for joining us for Amatek's second quarter 2024 earnings conference call. With me today are Dave Zepico, Chairman and Chief Executive Officer, and Dala Puri, Executive Vice President and Chief Financial Officer. 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 2023 or 2024 results or 2024 guidance will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding a pre-tax $29.2 million or $0.10 diluted share charged in the first quarter for integration cost related to the Paragon medical acquisition. 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, and then we'll open it up for questions. I'll now turn the meeting over to Dave.
spk14: Thank you, Kevin, and good morning, everyone. Amitek delivered solid results with strong operating performance in the second quarter against the backdrop of a more subdued global growth environment. In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base, leading to lower than expected sales volumes. Additionally, we are seeing signs of customers turning more cautious, leading to some temporary delays in project spending. Despite these headwinds, our businesses delivered strong operating performance in the quarter, we saw the growth in cash flow and earnings, and robust core margin expansion, reflecting the strength and flexibility of the Amatek operating model. We expect the inventory destocking and more cautious customer behavior to continue in the back half of the year. As a result, we are adjusting our outlook for the remainder of the year. We remain confident in our ability to successfully navigate these near-term headwinds. As we've done in the past, we will expand our focus on operational efficiencies, continue to invest back on our businesses, utilize our strong balance sheet to deploy capital on strategic acquisitions, and ensure we position Ametek for continued long-term growth.
spk03: Now, let me turn to our second quarter financial results.
spk14: Sales in the second quarter were $1.73 billion, up 5% from the same period in 2023. Organic sales were down 2%. Acquisitions added eight points in the quarter, and foreign currency was a slight headwind. Amitek's operational performance in the quarter was excellent, with robust margin expansion. Operating income in the quarter was a record $448 million, a 7% increase over the second quarter of 2023. Operating margins were 25.8% in the quarter, up 40 basis points from the prior year. Excluding the dilutive impact from acquisitions, Core margins were up a sizable 180 basis points in the quarter. EBITDA in the quarter was a record, $545 million, up 10% over the prior year, with EBITDA margins in oppressive, 31.4%. Cash flow in the quarter was excellent, reflecting our operating capability and asset-light business model. Operating cash flow in the quarter was up 14% to $381 million, with free cash flow up 17% and free cash flow conversion of 107%. This operating performance led to earnings of $1.66 per diluted share, up 6% versus the second quarter of 2023, and above our guidance range of $1.63 to $1.65 per share.
spk03: Now, let me provide some additional details of the operating group level. First, the electronic instruments group.
spk14: EIG delivered strong operating performance with outstanding margin expansion. EIG sales were $1.15 billion, a 2% increase from the second quarter of last year. Organic sales were flat, and acquisitions contributed two points. Growth was strongest within our aerospace and defense and Kameka businesses in the quarter. EIG operating income was $350 million, up 14% versus the prior year, and operating margins were at 30.3%, up 320 basis points from the prior year. Our EIG businesses are operating at a very high level with excellent operating margins. They remain well-positioned to benefit from a number of important long-term secular growth drivers, given their increasing exposures to attractive markets across process, aerospace, power, and energy markets.
spk03: The Electromechanical Group continues to navigate
spk14: the impacts of the inventory normalization across our automation and engineered solutions businesses. In the quarter, EMG sales were a record, $581 million, a 14% increase compared to the prior year, driven by contributions from the acquisition of Paragon Medical. Organic sales declined 6% due to weakness in our automation and engineered solutions businesses. More than offsetting solid growth across our EMG aerospace and defense businesses. Acquisitions contributed 20% in the quarter. Operating income for the second quarter was $123 million, with operating margins at 21.2%, while core operating income margins were 25%. As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory built up during the supply chain crisis. What we had expected to see conditions approved in the second half of the year, we now believe demand within this OEM customer base will remain subdued at current levels through the end of 2024. This inventory normalization is also impacting our medical OEM businesses, including Paragon Medical, leading to near-term delays in orders and shipments. Paragon remains very well positioned for strong growth once the inventory correction is complete given their leadership position across a number of high-growth medtech market segments. Additionally, Paragon has won a number of new programs that we are currently investing in, which will drive incremental growth in 2025 and beyond. As we noted last quarter, we are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success. As the volumes return following these talking, We believe the business will be levered to deliver outstanding sales growth and profitability. In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion in the quarter. We continue to generate strong cash flow with 17% free cash flow growth in the quarter. And for the full year, we expect free cash flow to net income conversion to be between 110% and 120%. The strength of Ametek's operational excellence strategy is evident in our operating results. We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OpEx initiatives. This year, we now expect to generate $140 million in savings. We also remain committed to investing back into our businesses, and this year, we expect to invest an incremental $90 million in growth. largely focused on research, development, and engineering, and sales and marketing. The effectiveness of these investments is reflected in our Vitality Index, which was a strong 24% in the quarter. Additionally, our strong free cash flow and flexible balance sheet provides us with ample financial capacity for strategic acquisitions. Our pipeline of acquisition opportunities remains strong. Ametek is very well positioned to continue to expand our portfolio of highly differentiated businesses that both are organic growth investments and are acquisition strategy.
spk03: Now, turning to our outlook for the remainder of the year.
spk14: With destocking expected to continue through the balance of the year and some customers turning more cautious on project spending, we are adjusting our sales and earnings guidance for the full year. Overall sales are now expected to be up 5% to 7% versus the prior year, with organic sales expected to be flat to down low single digits. Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80, up 5% to 7% compared to last year's results. This is less than a 1% reduction from our prior earnings guidance range of $6.74 to $6.86 as our proactive productivity actions along with a lower expected fourth quarter tax rate help offset the impact of the reduced sales forecast. This guidance reflects second half sales and operating earnings essentially in line with our first half results. For the third quarter, we anticipate overall sales to be up mid-single digits with earnings in the range of $1.60 to $1.62 per share, down 1% to 2% versus the prior year. In summary, we are pleased with our business's strong operating performance in the second quarter. We have a proven operating model and an experienced management team, and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long-term results. I will now turn it over to Dalla Perry, We'll cover some of the financial details of the quarter. Then we will be glad to take your questions.
spk08: Sal? Thank you, Dave, and good morning, everyone. As Dave noted, Amatek had a solid second quarter with excellent operating performance leading to outstanding margin expansion and strong cash flows. Now let me provide some additional financial highlights for the second quarter. Second quarter general and administrative expenses were $25 million, or 1.5% of sales. in line with last year's second quarter. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.5% of sales. Second quarter interest expense was $31 million, up $12 million from the second quarter of 2023 due to higher debt balances following the acquisition of Paragon Medical in December. Second quarter other expense was down approximately $4 million versus the prior period, due largely to higher pension income and higher investment income in the quarter. The effective tax rate was 19%, up from 18.2% in the second quarter of 2023. For 2024, we now expect our effective tax rate to be between 17% and 18%. driven by a lower fourth quarter tax rate due to statute expirations. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from the full year estimated rate. Capital expenditures in the second quarter were $21 million, and we expect capital expenditures to be approximately $150 million for the full year, or about 2% of sales. Depreciation and amortization expense in the quarter was $99 million. In 2024, we expect depreciation and amortization to be approximately $400 million. This includes after-tax, acquisition-related intangible amortization of approximately $190 million, or 82 cents per diluted share. Operating working capital in the second quarter was 18.6% of sales. Operating cash flow was $381 million, up 14% versus the second quarter of 2023, while free cash flow was $360 million, up 17% over the prior year. For the quarter, free cash flow conversion was a strong 107% of net income. For the full year, we continue to expect strong free cash flow conversion in the range of 110 and 120% of net income. Total debt at June 30th was $2.65 billion, down from $3.3 billion at the end of 2023. Offsetting this debt is cash and cash equivalents of $397 million. At the end of the second quarter, our gross debt to EBITDA ratio was 1.2 times, and our net debt to EBITDA ratio was 1 times. We have significant financial capacity and flexibility with $2.2 billion of cash and available credit facilities to support our growth initiatives and to deploy on strategic acquisitions. In summary, Amitek had a solid second quarter of 2024. delivering strong results with robust margin expansion and excellent free cash flows. Our leading positions across attractive market segments, combined with our strong balance sheet and outstanding operating capabilities, leaves us very well positioned to navigate the current environment and to deliver on our growth strategies. Kevin? Great. Thank you, Dalit.
spk11: Meg, can we please open the lines for questions?
spk05: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Matt Somerville with D.A. Davidson. Please go ahead.
spk09: Thanks. Morning. A couple questions. First, Dave, you know, you seemed pretty convinced a quarter ago that the destocking phenomenon would sort of wrap itself up by mid-year. So I guess relative to 90 days ago, can you maybe talk a little bit about what's changed, what gives you confidence that we're only in for another six months of this, and then maybe touch on What end markets and businesses are starting to be impacted by some of the project delays you referenced? And then I have a follow-up. Thank you.
spk14: Yeah, our outlook for the year has changed. And as we noted in my prepared remarks, we now expect the improvements in the second half of the year are not going to happen as originally anticipated. And we talked about that earlier in the year. We now expect our sales and operating performance in the second half to will be similar to the growth that we, the sales and operating performance in the first half. So we're not gonna see the increases that we had anticipated. And this change results in about a four point reduction in our sales outlook. And to your question, where is it coming from? Roughly three points of this reduction is from our automation and engineering solutions subset, which is the businesses that we talked about being exposed to the OEM destocking. And within that area, we have two points of reduction tied to our automation business and one point from the Paragon destock. That makes up about three to four point reduction in our outlook. Across our EIG businesses, we expect about one point of lower sales due to short-term project delays. And there we're seeing customers are being just a bit more cautious given the accumulative impact of a wide range of economic, political, and geopolitical factors. But we feel these are temporary delays. Our new funnel pipelines remain very solid. Projects are not being canceled. They're being delayed. And given the expected lower sales, we reduced our earnings guidance by about a nickel at the midpoint. You know, and another couple points, I mean, we're really doing a good job running the company. It reflects, when you take that sales decrease, it reflects about a 20% checker amount of margin on the expected lower sales. And as Dal mentioned, the tax rate will be lower in Q4. So, you know, I'm pleased with how the team is managing through these temporary demand changes. I'm confident that we're positioned to see accelerated profit growth when the economic conditions change. To your point, we missed the timing of the recovery, and the inventory corrections will take a bit longer. As Ametek does, we're adapting to the current situation, and we're going to manage our businesses appropriately. And as I said, we got really pleased how the team responded with, you know, 20% decrementals to the volume change.
spk09: No, thanks, David. I would definitely agree on the decremental comment. Can you also – I think it's probably good from a timing standpoint, Nicole – Can you kind of go ahead and do the around the horn you typically do across the businesses and how expectations have kind of changed in some of the subvertibles?
spk14: Yeah, sure, Matt. I'll start with our largest subsegment, the process. Sales for our process businesses were up low single digits with solid growth across our energy businesses and our Kameka business in the quarter. As noted in my prepared remarks, we've seen Customers, as we just talked about, turned more cautious. We expect this to continue as the second half, as we discussed, and we expect our process businesses to be flat to up a little single digits versus the prior year. Then I'll move to aerospace and defense, and that business was up mid-single digits in the quarter. Growth was strongest across our commercial aerospace businesses, while defense experienced some shipment delays in the quarter. For the full year, we continue to expect strong, high single-digit organic sales growth for our A&E business, with similar growth across both our commercial and defense businesses. Next, I'll move to our power and industrial businesses. And overall sales for our power and industrial businesses were up mid-single digits in the second quarter, with contributions from recent acquisitions being offset by a low single-digit decrease in organic sales. Similar to our process businesses, our power and industrial are seeing the same kind of customers delaying some projects due to their broader macro uncertainties. And for all the 24, we now expect organic sales for our process and industrial businesses to be flat compared to 2023. And our final segment, automation and engineering solutions, sub-segment sales, they were up high teens on a percentage basis in the quarter. This was driven by the contributions from the acquisition of Paragon Medical. Organic sales in the quarter were down approximately 10% due to the continued normalization of inventory levels across our OEM customer base. We expected to see improvements and return to growth as we talked about in the second half of the year. As we just mentioned, that's not going to happen. Inventory normalization is going to continue through the end of the year. As a result, we expect organic sales for our automation and engineering solution businesses to be down mid-single digits for the full year.
spk03: So that's a picture around the horn, Matt. Great. Thank you, David. Thank you, Matt.
spk05: Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Dean Dre with RBC Capital Markets Please go ahead.
spk16: Thank you. Good morning, everyone. Good morning, Dean. Hey, Dave, I'd like to pick up where you left off with Matt and just some more color on the customer's kind of sentiment here and the delays in project spending. What kind of reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries? way that you could characterize and frame for us about this degree of cautiousness?
spk14: I think what we see from our customer base is they're just taking longer to approve projects. And they're going further up the sign-off chain to get sign-offs. These are typically, they're not even large projects. And you see those resulting in delays. And I think it's a culmination of the Elections in the U.S., I think two-thirds of the world has elections this year. So it's elections around the world. It's some financing related to the higher interest rate, higher inflation. I mean, it's the worst. It's just a lot of things that they're combining to affect people's decisions, and they're just delaying a bit. I mean, the thing that is different than some other downturns is, we still have very strong pipelines of new activity. So I'm thinking about past downturns. We've been through a bunch of these. I don't think there's been any where we have a strong new activity pipeline from our customers. So the projects aren't being canceled. There may be some delays in phasing some new products in, and maybe it's taken longer to get the financing, although that's not the primary feedback we're getting. But I think it's this this broader macro issue that's honestly a bit of a smaller issue for us. The bigger issue is the OEMD stock. So I think we had the pandemic, and then we had the supply chain crisis, and we're selling in our automation and engineer solutions businesses differentiated components and subsystems to people that are typically smaller dollar value amounts to the entire system. When people bought inventory because we're very specialized and they wanted to keep shipping their products and now we're just dealing with a destocking process that's just taking a little longer than we thought.
spk16: David, that's really helpful. I love the way you characterized it because In slowing, that's one of the first things you see customers do is they kind of delay the spending or approvals, and so that's pretty familiar. Do you have any sense that it's snowballing from here? As the quarter progressed, did those type of behaviors increase? Any kind of monthly cadence would be helpful.
spk14: Yeah, I think the monthly cadence in both sales and orders was our typical monthly cadence. So otherwise, we typically stair-step through a quarter with the first month being the lowest and the second month being a little bit higher than the third month being the highest month of the quarter. That same process occurred, but definitely as the quarter went on, we saw some incremental weakness, mainly in the project area.
spk16: Got it. All right, just last question on the destocking. And when we look back on this period, That's been the biggest surprise and how long it has persisted and you're not by far the only one. We've seen this everywhere. Anyone has anything to do with medical or life sciences supply chain. It has just taken more than 2x longer than anyone thought. And just the question is for Paragon. how are, what's their visibility like? You said they, you know, a percent of point was from their D stock. Right. What's their visibility, you know, are versus your comparison of the rest of Amatek businesses. Where do they fit on that scale?
spk14: Yeah, I, because, you know, Paragon's, you know, mainly in one end market, um, and they're talking to their customers daily, um, I think there's better visibility, and you can also talk to customers and get market information. So this D-Stock that we're seeing is really happening everywhere. Just to refresh everybody's memory, Paragon manufactures single-use and consumable surgical instruments and implantable devices, orthopedic implantable devices, drug delivery systems, really attractive markets. At the same time this is going on, we're working on substantial efficiency improvements in the businesses. We talked about that last quarter and this process is proceeding very well. This combination of the market growth that follows the D-Stock along with the new program wins and a leaned out and efficient cost structure is really going to provide substantial sales and profit growth for Paragon in the years ahead. You know, we have a similar business and similar markets in another part of Ametek, and it's seeing the same kind of D-stock. And Paragon won a tremendous amount of new programs, so we're still investing and driving those things in the market. So I think when you take a step back, this is going to be a tremendous opportunity generator for our long-term shareholders, and we're very optimistic about the business. It's unfortunate about the D-Stock process, but we're in this game for the long run, and we're doing all the right things for the business, and we've got a new management team with some really talented people from Amatek that are working with people that are from Paragon, and they have a great plan to take the business forward. So we're really optimistic about how that business is going to perform for us long-term.
spk16: Dave, thanks for all that color. Really helpful.
spk03: Yeah, thank you, Dean.
spk05: Again, if you would like to ask a question, press star on your telephone keypad. Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
spk06: Hi, good morning. Good morning, Jamie. Nice quarter considering the environment. I guess just my first question, can you talk to sort of what price cost was in the quarter by segment and what your expectation is, you know, in an environment where organic growth is going to be flat to down? single-digit. And then my follow-up question, you know, what also struck me about the quarter or, you know, over the past couple of quarters is the margins in EIG, you know, above 30%, you know, with, you know, mediocre growth. So is there anything, like, was there anything unusual to drive the operating margins there? What's structural? What's the risk that, you know, some of this goes away if pricing gets more difficult? I'm just trying to understand that. the performance in EIG margins, the good performance, you know, given a tough macro.
spk14: Thank you. Good questions, Jamie, and I'll try to answer them both. The first thing is, you talked about pricing in the quarter, and our pricing in Q2 was about three and a half points price, and our inflation was about two and a half points. So we had a positive benefit from that. So the you know, the pricing environment's moderating a bit and the inflation's moderating a bit. But we're real pleased with that. And it was across our portfolio and, you know, maybe a little bit more in EMG, just a bit in EMG. But it was pretty much across the portfolio, a pretty consistent performance. And that's, you know, driven by our differentiated portfolio on the heavy level of investments. We're putting in new products. We talked about a vitality index of 24%. We got newer products, fresh products in the market. Our customers are buying them, and that's resulting in some good pricing. And as I said, inflation is moderating. And we think that general environment, the moderation of inflation, but our ability to continue to leverage our investments are going to continue throughout the year. So no change there. Very, very consistent. And it's kind of a – the Amitek portfolio is – very differentiated and kind of performed very well. In terms of the margins in EIG, if you think about it, we've had a similar performance in the first quarter and an excellent operating quarter. We had 320 basis points up driven by high leverage excellent price cost, strongly performing acquisitions, and a really good product mix. And that was consistent from Q2 to Q3. And we see that continuing for the rest of the year. I mean, we do have a comp in Q3 margins is a difficult one because that was a high margin order for us if you look back the past few years. But in general, you think about EIG, The margins are good, and they're going to stay there, and that business is very well positioned. In our process, in our power and industrial, in our aerospace businesses, we've got excellent market positions. Just talking about the EMG part of the business, they had core margins of over 25%, so they got some dilution there because of the acquisition and destocking and automation in our medical businesses. When we look at our businesses, both segments are running very well, generating excellent margins. I think EIG has historically a bit of a higher margin entitlement because they sell mainly to end users, and they get the aftermarket revenue stream. And EMG is selling more to an OEM customer base, so a little bit lower margin. So they're in relation to each other. And I see that continuing. I'm not really concerned that those margins are going to fall off or anything like that. Does that answer your question, Jamie?
spk06: Yes, very helpful. Thank you so much.
spk04: Thank you.
spk05: Our next question comes from the line of Jay Sprague with Vertical Research. Please go ahead.
spk15: Hey, thank you. Good morning, everyone. Good morning, Jay. Good morning. Hope it's going well, Dave. Hey, just on Paragon, I want to make sure I have things dialed right here. I think your comment about a point of headwind, right, is on a total Amatek basis. So I guess that implies 40 or 50 million bucks. So we're sort of talking about the business being down, you know, kind of 8%, 9%, 10% for the year. Is that basically where we're at?
spk14: Yeah, I'd say you're between 10% and 15% is the paradigm. You're right on.
spk15: Okay. And then, you know, just thinking about... I mean, the comps are getting fairly easy on a year-over-year basis, but really the commentary is we should kind of think sequentially revenues are quite similar to Q2, or do you actually see a little bit of step up there?
spk14: That's a good question, Jeff. And when we step back and look at this, first I'll go to orders. Our orders for the past couple of quarters have had small sequential improvements. So if you go back to Q4 of last year, you have Q1 of this year, and now the quarter recently completed, the orders sequentially were up low single digits each quarter. So I feel like the orders have stabilized. We had a minus 10 organic in Q1. The orders in Q2 organically were minus 4. And we think in the second half of the year, we're going to have a modest improvement versus the first half. So it kind of feels like the business has really stabilized. When you go to sales, we wanted to de-risk the year, and it's really flat. So even though you have a little bit of movement from quarter to quarter, and we have a benefit of a tax rate in Q4, if you back that out and you look at Sales in the first half of the year versus sales in the second half of the year. Then you look at operating profit above the tax line in the first half of the year versus operating profit in the second half of the year. It's a 50-50 split. Amatek traditionally is a 48-52 split. And that's why we think we really de-risked the year with that 50-50 split in the second half. Now, we still have some seasonality in our business. Q4 because of the seasonality is always higher than Q3, and we have a typical seasonality there, and we, again, as Dalit mentioned, we have the benefit of the tax rate in Q4, but we really feel we de-risked the year to reflect the current environment, and we think it's going to stay that way through the balance of the year.
spk15: And then maybe we could just touch on that tax rate. So, assuming 19 again in Q3 would imply, I don't know, 14 or 15, and in Q4. But the bigger question is, just jumping off into 2025, do we stay at that 17 to 18 range, or do we move back up into the 19 to 20 range in 2025?
spk08: Yeah, no, you see it right. We move back up in 2025 to our typical tax rate. And we haven't done our planning for 2025, but based on where we're sitting, that's what we would expect.
spk04: Great. Thank you.
spk05: Your next question comes from the line of Scott Graham with Seaport Research. Please go ahead.
spk02: Yeah, hi. Good morning. Thanks for taking the question. Hello, Scott. Good to hear from you. Likewise. So I want to understand, so the reduction in sales guidance for the year indicated that it was essentially three points on it in EMG, one point in EIG, and you talked about project delays there. My question is, in your sort of round the horn, you indicated project delays in power. And I was just wondering if there's any vulnerability to project delays spreading into process because you didn't cite anything there.
spk14: Yeah, if I didn't cite it, I should have cited process and power or seeing similar activities. I mean, in the power segment, we have some power test and measurement businesses and they'll sell to multiple markets, including the government customers. And there's a little delay there in projects, but we're very well positioned, and those are just delayed. And process is a bit larger, but it's kind of the same thing. But that was only 1% of the change in sales from all of EIG, which is both process and power.
spk02: Okay, thank you. I want to maybe shift to defense because that's a pretty high margin business for you guys. Is that sort of push out of shipment? Is that something that you'll see in the third quarter or the fourth quarter? Is there anything more to discuss there?
spk14: No, I think that on the defense side, for our A&D business, we kept the guy for the year the same, plus high single digits. So what we saw in the second quarter was a very good commercial, and you had some defense delays. But for the full year, we're saying the defense and commercial is still going to be the same. They're going to be up high single digits. So we're doing very well there. As you said, there's good margins in our A&D segment, and we feel confident in that segment.
spk02: Thank you. If I could just squeeze this last one in, Dave. Sure. Net leverage of 1X, it's pretty low for you guys. Just kind of wondering, the pump, I assume, is pretty darn primed at this point. How does the pipeline look? How are the sizes of the deals out there? Maybe you can give us a little color.
spk14: Yeah, the pipeline looks really good. The size of the deals are throughout the whole spectrum. I mean, there are smaller deals, midsize, and larger deals. And as we talked about before, We'll probably buy a big business. Big for us is a deployment of greater than a billion dollars in capital every couple of years, and that's just because we're generating so much cash flow. I think we really have the opportunity to differentiate our performance in this period. What you really see is there's a lot of PE-owned sponsor businesses that are long in the tooth. They're late in their ownership cycle, and they're struggling now because they have to go back and refinance their businesses at higher rates, and they're also trying to sell the business in a slowing environment. But we have discussions going on, and there's a very, very large pipeline of opportunities that fit our businesses that we're having discussions with. So I'm optimistic that the pipeline is going to be strong. And the discussions we're having are good ones. And you remember, our capital allocation is very clear. Our first priority is to deploy our free cash flow. Strategic acquisitions, it remains a clear priority. And like we're going to see from Paragon next year, that's how we generate value. And priority two is opportunistic buybacks. And as we've shown in the past, if we see a dislocation in our valuation, or poised to act. And our third priority is consistently, modestly increasing dividends. So our capital allocation doesn't change and with a net leverage of one, we're ideally positioned right now and there's a lot of activity going on.
spk03: Does that answer your question, Scott? It answers everything, Chloe. Thank you. Thank you, sir.
spk05: Your next question comes from the line of Rob Wertheimer with Mellius Research. Please go ahead.
spk12: Thanks. Good morning, everybody. Good morning, Rob. So my question, and I understand that the kind of delays here and there that you're talking about aren't the biggest driver in the quarter, but I'm still a little bit curious. And so is the project delay often one where you're a small piece of the total project cost is one question. And the second one is probably pretty easy to answer, given the nature of your business. But is there any pushback on price? Do customers have any option to change out? I mean, is there any downshifting or anything like that? I know it's unlikely. I just thought I'd sort of check around those dynamics.
spk14: Yeah. Yeah, the project cost, I think, was your first question. And you're right. We are typically a small portion of the project. And with good technology, small part of a bigger project. So it's a nice place to be. In terms of pricing, we have very differentiated technology, and we're conscious of the value that we're adding. What you'll typically see in the most classic downturns is they may mix down. They may buy our project, buy our product, but it'll maybe have less features. Because we're in a pretty good position with the customer base in our positions in our niche portfolio. We're not seeing that now. And we're not seeing the activity pipeline change. So I think on the, you know, we're typically smaller projects, you know, typically, you know, priced for value, and we do a lot of investment in our portfolio. So I think delays are more just related to the general macro that we talked about with Dean about the elections and some of the uncertainty with the geopolitical issues. But we went through the – we're confident we're not losing share. We're confident that our pipelines are very strong. So it's a temporary delay.
spk04: Thank you much. Thank you.
spk05: Your next question comes from the line of Joe Giordano with TD Cohen. Please go ahead.
spk03: Hi, good morning.
spk07: I wanted to see if you could talk about the paragliding charges you took last quarter. Now that you're another quarter in, do you expect any additional charges? I know there were just one time, but just any update on that and when you might start seeing any impact from those charges?
spk14: Yeah, I think, you know, we don't anticipate another charge. I mean, that doesn't mean we won't change our mind, but we don't anticipate any other charges. That'll be clear. That's clear. Yeah, that activity is going on now. So we're in process of improving that business, of fixing that business, of making it run as efficiently as Amatek does. And we have a team of Paragon people and a team of Amatek people and a team of our operational excellence, uh, talent across the business, all working on the project and the response is, is, is, uh, very, very solid to it. So I think that's ongoing and it'll occur or occur through the balance of this year. I think next year you'll start to see the benefits of it, but the project you recall goes out, you know, two or two or three years as we continue to improve it. So I think the, um, you know, next year you have a sizable, uh, improvement because we expect the, uh, the volumes that come back from the D-stock, combined with the OPEX work that's going on, combined with some new product introductions that we're heavily investing in to phase in. So, you know, it's unfortunate that we have this D-stock downturn right now, but couldn't be happier with the business.
spk03: Thank you for that.
spk07: Another question I had was on the 4Q ramp. I understand the normal cyclicality, there's usually a 4Q ramp, but it does look like the implied guide implies the ramp is more than usual for historical, especially considering that you guys are not anticipating any easement in destocking for the latter half. Could you comment on what's driving that?
spk14: Yeah. I kind of disagree with your conclusion. I think there's a tax benefit in Q4, and when you factor that in, I think the ramp is very similar to what it was last year, and we de-risked Q3. As I said, the operating performance in the first half of the year is very similar to the operating performance in the second half of the year, and you add to that a little bit of a tax benefit in Q4. I think it's pretty typical.
spk03: from what we've done in the past.
spk04: Got it. Thanks for that. Very helpful. Yep.
spk05: Your next question comes from the line of Andrew Obin with Bank of America. Please go ahead.
spk10: Yes, good morning.
spk14: Good morning, Andrew.
spk10: Hey, just going back to inventory, just how to think about it. Are your OEM customers, are they bringing inventory levels back to pre-COVID levels or below pre-COVID levels? I guess just trying to better understand, you know, how to think about the destocking impact versus history. And, you know, where do you think inventories will be on a going forward basis relative to pre-COVID levels?
spk14: Yeah, I think it's different because there's a lot of customers in a lot of different market segments. But in general, I think you're getting back to pre-COVID levels. There may be slightly higher because of some of the geopolitical things that happened and the supply chains becoming more regional and less dependent on Asia. So it could be a bit higher. But in general, I believe that the general statement across the customer base, they're trying to get back to something at the pre-COVID level. They may be a bit higher for some of the
spk10: the other geopolitical issues going on. Maybe I missed it, but could you just cover major geographies? What are we seeing? North America versus Europe versus Asia versus China? I apologize if I missed it.
spk14: Sure, Andrew. No, you didn't miss it. We saw modest growth in Europe in the second quarter, and we saw low single-digit declines in both the U.S. and Asia. So I'm going to go a step lower. We had low single digit in the U.S. We actually had strong growth in our materials analysis division, our A&D businesses, but our automation business was down a bit. Europe was up low single digit. Again, weakness in our automation business, offset by strong growth in process. And for Asia, we were down low single digits. pretty difficult comps in China. China was down a bit, but when you look at Asia, excluding China, it was flat.
spk03: It's kind of a flat world, but we are seeing some improvements in Europe.
spk04: Thanks so much. Thank you, Andrew.
spk05: Your next question comes from the line of Steve Marger with KeyBank Capital Markets. Please go ahead.
spk13: Thanks. Good morning. Good morning, Steve. Dave, we're hearing a lot of optimism about the semiconductor cycle having a strong 2025 led by AI-related devices, of course, but also some leading-edge node transitions later next year. What are you seeing in that business, and are you more levered to node transitions or unit volume increases?
spk14: Yeah, I think right now we're levered to both of them. But, you know, in our second quarter, our semiconductor business was up. And it was up because we had strong growth in our Kameka business. And you think about that business. They're doing next-generation defect detection projects. and it's kind of like you're going to want one of these Kameka systems in just about every new fab. And then we also have the strong benefits from our Zygo business, and there we're one of the few businesses that can operate with technology in the EUV, the extreme UV, and that's more the transitioning to smaller nodes. So right now what you see is even though the market was down tremendously, there's a lot of R&D activity to get at the node transitions, to be able to detect defects at these smaller nodes. So we're going very well there, driven by the uniqueness of our product portfolio. But then when the market picks up, we also have a good part of our business is tied to the right production. So it feels pretty good for us in terms of moving into next year, Steve.
spk13: Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers has been stronger than I think people expected. Do you have exposure there, and do you have an outlook for that market in the back half next year?
spk14: I don't have that level of resolution for next year. We do sell into the Chinese market. It's typically lower technology products. It's been healthy this year.
spk03: Yeah, okay, thanks. Thanks, Steve.
spk05: Your next question comes from the line of Nigel Cooley with Wolf Research. Please go ahead.
spk01: Oh, good morning. Hi, David, Dilip, and Kevin. Thanks for the question. Good, thanks. How about yourself? Just a few more details. I know you cut a lot of ground here, but on Paragon, just want to make sure I've got the right base for FY23. I've got about 450, 460 of revenues for FY23. Is that about right?
spk14: A little bit higher for 23.
spk01: A little bit higher for 23? Okay. That's helpful. So down 10%, 15% this year, I mean, what sort of cost measures are you taking? I know the charge you took in 1Q is a much longer tail, but what measures are you taking to sort of preserve the earnings there and Where do we stand right now on the accretion for FY2024?
spk14: Yeah, I think we're doing a lot of work on the cost structure. They have excess capacity in plants. So that work's going on right now. And we took the charge. There's also some expenses related to doing the things that are non-accruable that we're spending. And then more importantly, there's a lot of new product introductions that are going on that we're spending on right now that are very solidly positioned for Paragon. We talk about the accretion for this year. It's a couple of pennies and it's in the fourth quarter.
spk01: A couple of pennies in the fourth quarter. Okay, that's helpful. Thanks, David. And then on orders, I think you said 4% organic decline. I think that's better than the 8% you saw in the first quarter. I'm calculating $1.6 billion of orders this quarter. Is that in the right zone?
spk14: Yeah, if you look at overall orders, they were up 1.5% in the quarter.
spk01: 1.5%, okay.
spk14: The overall orders were up 1.5%. Organic orders were down 4%. That's improved from what we saw in Q1, where we were down organically minus 10%. And we saw a sequential improvement in orders in Q2. So they're up low single digits from Q1. So we're definitely seeing stability in orders. No, no question about it. June was the strongest.
spk01: And then just a quick one on the 4Q tax rates issue. Any qualification there?
spk08: Yes, I mean, if you think about the way we're seeing our expected tax rate play out, Nigel, Q3, as we said, we're projecting our typical expected tax rate. Q4, we're now projecting a lower expected tax rate in the range of 10% to 15%. That lower effective tax rate in Q4 is primarily due to statute expirations. That brings our expected tax rate for the full year to 17% to 18%. which is expected to provide an earnings benefit in the range of 10 to 15 cents per share in Q4.
spk01: Okay. Thank you very much.
spk03: Thank you, Nigel.
spk05: Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.
spk11: Thank you, Meg. And thanks, 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.
spk04: Have a great day. This concludes conference call. You may now disconnect.
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