AMETEK Q4 2022 Earnings Call Transcript

Presentation

[Operator]

Good day and welcome to the AMETEK Fourth-Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Kevin Coleman, Vice-President of Investor Relations and Treasurer. Please go-ahead, sir.

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Thank you, Rocco. Good morning, and thank you for joining us for AMETEK's Fourth-quarter 2022 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice-President and Chief Financial Officer.

During the course of today's call, we will 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 risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2021 or '22 results or 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors' section of our website.

We'll begin today's call with prepared remarks by Dave and Bill. And then, we'll open it up for questions. I'll now turn the meeting over to Dave.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Thank you, Kevin. And good morning, everyone. I'm very pleased with AMETEK's results in the fourth-quarter and for all of 2022. AMETEK's continued excellent performance reflects the quality of our niche differentiated businesses.

The strength of the AMETEK growth model and the expanding impact of our organic growth initiatives, and most importantly, the outstanding efforts of our global employees. Thank you to all AMETEK colleagues for your many contributions to our success. We have navigated many challenges over the last few years, only to emerge stronger and even better-positioned for sustained growth.

Our results in the fourth-quarter were outstanding. Stronger-than-expected sales growth and excellent operating performance, led to a high-quality of earnings, which exceeded our expectations in the quarter. We ended the year with a record backlog as demand remains solid across our diverse end-markets. Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across our businesses and expanding their presence serving attractive growth markets.

Operationally, we are performing exceptionally well and offsetting inflation with price increases resulting in strong margin expansion. Additionally, cash-flow in the quarter was outstanding, providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions.

Now, onto the results of the fourth-quarter and all of 2022. Fourth-quarter sales were $1.63 billion, up 8% over the same-period in 2021. Organic sales growth was 9%. Acquisitions added two points and foreign currency was a three point headwind in the quarter. Orders were solid in the fourth-quarter against a challenging comparison, resulting in a record backlog of $3.22 billion.

Operating income in the quarter was a record $398 million, a 10% increase over the fourth-quarter of 2021. Operating margins were 24.5% in the quarter, up 50 basis-points from the prior year. EBITDA in the quarter was a record $489 million, up 12% over the prior year, and EBITDA margins were an impressive 30.1%.

This outstanding operating performance-led to record earnings of $1.52 per diluted share, up 11% versus the fourth-quarter of 2021 and above our guidance range of $1.45 to $1.47 per share.

Now, let me provide some additional details of the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group delivered continued strong sales growth and excellent operating performance. Sales for EIG were a record $1.16 billion in the quarter, up 10% from the fourth-quarter of last year. Organic sales were up 9%, acquisitions added 3% and foreign currency was a three point headwind.

EIG growth was broad-based, with particularly strong growth across our aerospace and defense and Ultra Precision Technologies businesses in the quarter. EIG's operating income in the fourth-quarter was a record $307 million, up 10% versus the prior year, while EIG margins were very strong 26.5% in the quarter.

The Electromechanical Group also finished the year with outstanding performance. EMG's fourth-quarter sales were $466 million, up 4% versus the prior year, with organic sales growing 8%, and foreign currency, a three point headwind. Growth was again broad-based across EMG, with our aerospace and defense businesses leading the growth.

EMG's operating income in the fourth-quarter was $115 million, up 9% compared to the prior year period. EMG's fourth-quarter operating margins were 24.6%, up an impressive 100 basis-points versus the prior year.

Now, for the full-year results. Overall, performance was outstanding in 2022, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.15 billion, up 11% from 2021. Organic sales increased 11%, acquisitions added 2%, and foreign currency was a three point headwind.

Operating income for 2022 was $1.5 billion, up 15%, and operating margins were 24.4%, up 80 basis-points versus the prior year. While core margins were up an impressive 130 basis-points, reflecting our ability to successfully manage inflation and supply-chain challenges.

EBITDA for the year was $1.83 billion, up 15% from 2021, with EBITDA margins are very strong 29.7%, up 100 basis-points from the prior year. Full-year earnings were $5.68 per diluted share, up an impressive 70% versus the prior year.

AMETEK's performance in a challenging operating environment, highlights the proven strength and flexibility of the AMETEK growth model and our ability to successfully navigate through uncertain economic times. Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth, develop innovative new products and identify and execute on operational efficiency improvements.

Additionally, our businesses work closely with our corporate development team to manage our acquisition pipeline, resulting in a continued strong deployment of capital on strategic acquisitions. In 2021 and 2022 combined, we deployed over $2.4 billion in capital on eight acquisitions and acquired over $600 million in annual sales. We expect to remain active in 2023 as our deal pipeline remains very strong and our balance sheet provides us significant financial capacity to deploy capital.

In addition to our acquisition strategy, we remain committed to investing in organic growth initiatives and are very pleased with the impact these investments are having on AMETEK's growth. As I highlighted during our last earnings call, AMETEK's portfolio has strategically evolved with increased exposure to higher-growth market segments. This portfolio evolution has been driven by our acquisition strategy and by the organic investments we're making in our businesses.

In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research, development and engineering and sales and marketing. One way we measure the success of these investments is through our vitality index, which was an outstanding 27% of sales in 2022. Our increased investments in RD&E continue to yield innovative advanced technology solutions, including within our Zygo business.

Zygo which is based in Middlefield, Connecticut designs and manufactures advanced optical metrology systems and ultra precise optical components and assemblies for a diverse set of end-markets, including defense, research and semiconductor. Zygo partnered with Lawrence Livermore National Laboratories National Ignition Facility to provide high-end precision optics in support of their Inertial Fusion Energy testing program, which provides a significant leap forward in the realization of sustainable fusion energy. Achieving these types of energy production required the use of highly precise optics and scalable manufacturing processes which were developed in partnership with Zygo. I want to congratulate the Zygo team for their tremendous contributions, supporting important advancements in research and technology.

Lastly, let me briefly touch on the supply-chain issues and inflation. While tightness remains in certain areas, we are seeing improvements in the global supply-chain and logistics. Additionally, although inflation remains elevated, we are also seeing modest improvements versus levels experienced in 2022. As we look-ahead to 2023, we will continue to proactively manage our supply-chain and remain confident in our ability to offset inflation with price increases.

Now, shifting to our outlook for the year ahead. While macroeconomic uncertainties remain, we are confident in the quality of our businesses, the flexibility of the AMETEK growth model and our ability to navigate through these uncertain times. Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023.

For 2023, we expect both overall and organic sales to be up mid single-digits versus 2022. Diluted earnings per share for the year are expected to be in the range of $5.84 to $6, up 3% to 6% compared to last year's results. For the first-quarter, we anticipate overall sales up mid single-digits with adjusted earnings of $1.38 to $1.42, up 4% to 7% versus the prior year.

In summary, AMETEK's fourth-quarter and full-year results were excellent. Our record backlog, the strength and flexibility of the AMETEK growth model and a world-class workforce position us nicely for 2023.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions. Bill?

[William J. Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you, Dave. As Dave highlighted, AMETEK had a very strong fourth-quarter to complete an outstanding year. In the quarter, we delivered record level operating performance and a high-quality of earnings. Let me provide some additional financial highlights for the fourth-quarter and for the full-year, along with some additional guidance for 2023.

Fourth-quarter general and administrative expenses were essentially flat versus the prior year. And for the full-year, general and administrative expenses were up $6 million, driven largely by higher compensation costs. And as a percentage of sales were 1.5% versus 1.6% of sales in 2021. For 2023, general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately 1.5% of sales.

The effective tax-rate in the fourth-quarter was 18.9%, up from 17% in the fourth-quarter of 2021. For 2023, we anticipate our effective tax-rate to be between 19% and 20%, and as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year estimated rate.

Capital expenditures were $58 million in the fourth-quarter and $139 million for the full-year. Capital expenditures in 2023 are expected to be approximately $140 million or about 2% of sales.

Depreciation and amortization expense in the quarter was $89 million and for the full-year was $320 million. In 2023, we expect depreciation and amortization to be approximately $325 million, including after-tax acquisition-related intangible amortization of approximately $154 million or $0.66 per diluted share.

For the quarter, operating working capital was 18.9% of sales. Cash-flow in the fourth-quarter was excellent, with operating cash flow of $385 million, up 37% versus the fourth-quarter of 2021. Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income.

Total debt at year end was $2.39 billion, down from $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $345 million. And during the fourth-quarter, we deployed approximately $240 million on the acquisition of RTDS technologies. Gross debt-to-EBITDA ratio at year end was 1.2 times and our net-debt to EBITDA ratio was 1.1 times.

As Dave noted, we remain active on the acquisition front, with a solid pipeline of acquisition candidates. Given our strong cash-flow and modest levels of leverage, we are well-positioned to deploy additional capital. We have approximately $2.3 billion of cash and existing credit facilities to support our growth initiatives.

In summary, our businesses performed exceptionally well in the fourth-quarter and throughout all of 2022, delivering strong growth and a high-quality of earnings in a challenging operating environment. AMETEK is well-positioned for 2023 given our strong financial position, our proven growth model and our world-class workforce. Kevin?

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Thank you, Bill. Rocco, can we please open the lines for questions?

Questions and Answers

[Operator]

Absolutely. [Operator Instructions] Today's first question comes from Allison Poliniak with Wells Fargo. Please go-ahead.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Hi, good morning.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Good morning, Alison.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Can we turn organic investments, the $90 million, if I recall, I think that's a step-down from what you did in '22, just any color there. Is it just some conservative nature, just given the uncertainty out there? Are there unusual projects in '22? Just any thoughts on that side.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, that's -- it's to start out the year, and there's a potential to do more, and -- but the $90 million was a good number, incremental, keep in mind, incremental over what we've done in 2022.

So it's incremental and we're making healthy investments in RD&E, it's up double-digits for the year and healthy investments for sales and marketing. So we think the $90 million is appropriate. And obviously, that can be flexed up or down if required.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Great. And then, a lot of concern certainly out there about potentially some weakness showing up in H2. Just any thoughts on year end, what you're seeing in terms of that, is there anything concerning or sort of popping out that kind of has you a bit worried as we enter sort of the back-half of '23 and into '24?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Not really. I mean, obviously, our growth is slowing, slowing but record backlogs and we're executing very well, we're getting the price, and it still feels good to us. It feels strong and good. And when you get-out to the second-half of 2023, I mean, there is less visibility because you're further out, but our backlog is at a record level. It's usually at about 30% of annual sales and right now it's running at about 50% of annual sales. So we feel really good and we don't see a slowdown yet.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Perfect. Thank you.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Okay, thank you, Allison.

[Operator]

And our next question today comes from Deane Dray with RBC Capital Markets. Please go-ahead.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you. Good morning, everyone.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Good morning, Deane.

[Deane Dray, Analyst at RBC Capital Markets]

I was hoping you'd take us through the key end-markets. And then, also, on the regional updates, it's been interesting, maybe people got too negative on Europe. So, I'd like to know how Europe did? And then, China reopening, how does that impact you all?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Right. Sure, Deane, I'll start with your second question, the geographical outlook. Strong broad-based growth across most geographies. Our Asia region was flat on China headwinds. And to your point, our fastest-growing market was Europe. Europe was up 12%, with notable strength in both our process and aerospace defense markets. And then, we had a really strong performance in the US, up 10% organically. Broad-based strength, notable strength in our process businesses. And in Asia, as I said, it was flat, with notable strength in aerospace and defense and process. And China was down for us, low-double-digits in the quarter on a difficult prior year comp and the impact of the Zero-COVID policy.

In Asia, we think that the China situation is going to turnaround as the reopening occurs and we're pretty optimistic for it in the second-half, but that's the picture in Q4; really strong broad-based growth, strongest Europe, second US, most of Asia was a really good, and in China, there was some weakness.

Okay, and the second question was in the market segments summary. I'll take a walk around the company. In our process area, our overall process businesses, they were up high-single-digits in the quarter. Organic sales were up 10%, and we also had the contributions from the acquisition of Navitar and it was offset by foreign currency headwinds. And as we saw throughout last year, growth across our process businesses was particularly, it was broad-based, but it was particularly strong in our Ultra Precision Technologies businesses in the quarter. And as we look-ahead to 2023, we expect organic sales for process businesses to be up mid single-digits for the year.

Next, I will talk about aerospace and defense. Our aerospace and defense businesses had a very strong finish to the year, with overall and organic sales up mid-teens. So that was the strongest growth rate of the year for aerospace and defense.

Our commercial businesses led the growth in the quarter. We had sales of high-teens on a percentage basis in the commercial business and defense was also strong in the quarter, growing low double-digits. And for all of 2023, we expect organic sales for our aerospace and defense businesses to be up mid to high single-digits, with commercial aerospace growth expected to be modestly stronger than defense growth.

I'll next go to of Power and Industrial. Overall sales for our Power and Industrial businesses were up high single-digits in the fourth-quarter, driven by mid single-digit organic growth and the contributions from the acquisition of RTDS. Growth in the quarter was particularly strong across our programmable power business. For all of 2023, we expect organic sales for our Power and Industrial business to be up mid single-digits, with similar growth across both the power and industrial segments.

And finally, I'll talk about our automation and engineered solutions market segment. In overall sales, we're up low-single digits in the fourth-quarter with very solid mid single-digit organic sales growth. They had some currency headwinds in that segment. I was very pleased with the overall growth and the performance of automation and engineered solutions in 2022. They're continuing to expand exposures in attractive niche markets. In particular, our engineered medical components business saw strong growth in the quarter.

And in 2023, we expect organic sales for our automation and engineered solutions businesses to be up mid single-digits, with similar growth expected about -- across both our automation and engineered solutions business. That's a walk around the company.

Deane, do you have any more questions?

[Deane Dray, Analyst at RBC Capital Markets]

Yes, just as a follow-up, just how would you characterize the pace of orders. Industrial demand, the size of orders, is there -- just with respect to how normalization might be happening for AMETEK's businesses?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

That's a great question, Deane. Our overall orders were up 1.5% in the quarter. And the overall demand environment, as I answered Allison's questions, feels really solid. We had our 10th straight positive book-to-bill quarter, and we ended with an all-time record backlog, as I mentioned in the prepared remarks. This level of backlog, as I said, was 50% of our annual sales, well-above the normal level of 30%, and it's up 78% from the end of 2020. So we're in a really strong position as we enter 2023.

To your question on some of the nuances, if you recall, over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth. The first was the difficult comparisons we're facing, because those orders have been strong for an extended period of time. To give some context, over the prior nine quarters, our orders grew over 20% a quarter. So it's been sizable and sustained. That helped build the backlog.

The second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns, now that the supply-chain is improving and we started to see that dynamic play-out in the fourth-quarter.

So overall, we're comfortable with our order levels in Q4. After starting off in January, we just finished January, we had another solid orders a month, ahead of our expectations, and solidly up from January 2022 order levels. So, again, we're feeling pretty good with a strong backlog and orders are hanging in there. So, we think that we're in -- looking at a pretty good year.

[Deane Dray, Analyst at RBC Capital Markets]

That's all really helpful. Thank you.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Okay, thank you, Deane.

[Operator]

And your next question today comes from Brett Linzey with Mizuho. Please go-ahead.

[Brett Linzey, Analyst at Mizuho]

Hey, good morning all.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Good morning, Brett.

[Brett Linzey, Analyst at Mizuho]

Hey. I just wanted to come back to inventories. Some of your peers have been talking about some elevated inventory in some of the OEM channels. Just curious what you're seeing there in some of your serve businesses, serve markets, and if there's any area of concern there?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes. The first point I'd like to make is that when you're looking at customer inventories, a lot of our products are customized and they are high-value products. So we don't really have a lot of distributor stocking issues to worry about. That's particularly true in EIG. In EMG, there is more of an OEM fill with the customer-base, and that's where you're seeing a bit of the customer ordering patterns normalize. But. Overall, we think we've got a good handle on it and we feel pretty good about where we're at.

[Brett Linzey, Analyst at Mizuho]

Yes, okay. That's great. Just shifting to the 2023 outlook. I was hoping maybe you could put a finer point on just the underlying assumptions. How much price do you expect versus volume?

And then, anything specific on the quarterly phasing? I mean, do you think you'll get growth in both the first-half, second-half? Or as you work down the backlog, does it begin to decline there in the second-half?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, great question. I mean, with our budget model, we pretty much have a traditional first-quarter. So it's not really second-half biased. And we think we'll grow in each of the quarters of the year. In terms of pricing in our budget model, we have about four points of price, and we assume that we have about 3.5 points of inflation. So we're going to offset price and inflation by about 50 basis-points. Now, that's down a bit from 2022, where we had about six points of price and we offset about five points of inflation, but it's the guide for the entire year and we're being a bit conservative now, and we'll probably start out a little better than that. But that's right, that's our plan for 2023. Also, in 2023, I mean, in addition to staying in front of inflation with price, we think supply-chain shortages are going to abate and we believe our working capital levels will decrease to more normalized levels to a very healthy 110% to 115% conversion to net income on the free cash flow.

We also think that in terms of vertical markets, we do expect our longer-cycle aerospace and defense businesses to be a bit stronger than the balance of the portfolio. So when I went through the mortgage segment commentary -- and Deane, it was a little bit higher, it was a -- had a mid-to-high outlook. So we think that's going to be true and that was accelerating as -- with each quarter of 2022, really. We expect both of our groups to grow in mid single-digits, we've talked about the historically strong backlog, and that's some assumptions that went into our budget. Do you have any other questions, Brett?

[Brett Linzey, Analyst at Mizuho]

No, that's it. Great quarter and I appreciate all the insight.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Thank you, Brett.

[Operator]

Thank you. And our next question for today is Scott Graham from Loop. Please go-ahead.

[Scott Graham, Analyst at Loop Capital Markets]

Hey, good morning all. And really, congrats on that Zygo. That's a pretty big deal.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, that's really, really interesting. We're really helping -- but that team there did a great job and it's working on Fusion Energy is a great thing and it just shows our capability.

[Scott Graham, Analyst at Loop Capital Markets]

Yes, for sure. Thank you. The orders, Dave, you said up 1.5 in the quarter, was that organic? And can you also tell us the split by segment?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, that was overall orders. Organic was down minus two. And so, overall orders were up 1.5, organic was minus two. And both segments were about at that same one book-to-bill. So it wasn't a distinct difference between the segments. And, as I've said, our overall demand environment feels solid. Tenth straight quarter of book-to-bill. So we have a strong backlog. And as we have this dynamic of customers returning to more normalized ordering patterns, we have a strong backlog. So, we feel pretty good about it.

[Scott Graham, Analyst at Loop Capital Markets]

Okay, great. Thank you. Based on your answer to the prior question, is it possible then that sales volumes could sort of flattened out in the second-half of the year and your growth, organic is essentially all price? Is that what you're thinking cadence wise?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, I don't think in the second-half of the year. I mean, we're going to have some healthy price, but I think it's going to actually increase a bit in the second-half. And if you think about our order rates, we have that mid single-digit sales growth forecasted. We think we're going to grow orders also. So orders, we're going to grow a little bit less than sales, is our forecast, but they're going to grow. And really, by the end-of-the year, our backlog is still going to be at elevated levels. It will be down a bit, but at elevated levels historically. So, we clearly, don't -- with our strong backlog, which will provide a buffer, if there is some kind of downturn, we don't see it right now in our orders, orders will be up, it'll just be up a little less than sales. And again, at the end of 2023, we'll have historically elevated levels of backlog similar to now.

[Scott Graham, Analyst at Loop Capital Markets]

Yes, great. Hey, thank you.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Thank you, Scott.

[Operator]

[Operator Instructions] Our next question comes from Matt Summerville with DA Davidson. Please go-ahead.

[Will Jellison, Analyst at DA Davidson]

Hi, good morning. This is Will Jellison on for Matt Summerville today.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Hello, good morning.

[Will Jellison, Analyst at DA Davidson]

I was curious about your recent acquisitions of Navitar and RTDS and just about your first observations with those companies as part of the AMETEK portfolio. How did things unfold relative to expectations? And how are things going with bringing them into the fold?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, they're going very well. I mean, Bill and I have met with both of the acquisition integration teams and really positive. Just to recap a little bit, RTDS provides real-time power simulations used by utilities and very strategic acquisition that broadens our power instruments businesses with differentiated testing and measurement and simulation capabilities. So I'd say, it's a attractive position, and for high-growth market -- really good team. I mean, just experts in the field and it's kind of fun interacting with them, and they're really adopting AMETEK, and feel good about that one.

Same with Navitar. Navitar's in some good growth markets. The optics market is doing quite well with us. And even in the semiconductor space, where they play their main customer is one that's very differentiated and has unique capabilities. So that along with Life Sciences along with machine vision, there is a very good outlook there. And that business is a little bit different. It's being integrated into our Zygo business. So it has new capability for Zygo, much-needed capacity for Zygo, and integration is going very well.

[Will Jellison, Analyst at DA Davidson]

Great. Thank you. And then, as a follow-up, staying on the theme of M&A, you mentioned your pipeline is very strong at this juncture. And I'm curious about what your observations are in the market overall, with respect to the level of competition for assets and where multiple seem to be moving in your observation?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Right. Yes, I think with the interest rates increasing, and with money not as free as it was, it's actually an advantage to us. So, we have a good pipeline and a good balance sheet and we remain very active with a solid pipeline of deals. The valuations have come in a bit. Of course, we're looking at some quality assets though. So they're still a bit elevated from historical levels, but no doubt they've come in. And important for us and our pipeline, we have a very disciplined acquisition process. And these deals, we're going to meet our traditional financial hurdles, which is primarily a return on invested capital of 10% by the third year of ownership. These are important thresholds for us as we want to ensure we're providing a strong level of returns on the capital we deploy for our shareholders.

And that's been a hallmark of AMETEK's acquisition program for a long period of time. We do this all with cash and debt, don't use equity, and there is a bigger pipeline right now than there has been historically, because when there's less money around the system to bid up deals. So we feel pretty good with where we're at. And if we do something, and I believe we will be talking to you about deals in the near-future, they're going to be -- they're going to meet all of our traditional hurdles and we're committed to have investment-grade credit rating and we've got plenty of -- about $2.3 billion of capital and financing capacity available. So, in this environment, discipline is going to be a key word, as it's always been for AMETEK, but I mean, very key in terms of executing our forward-looking M&A strategy.

[Will Jellison, Analyst at DA Davidson]

That's great. Thank you for taking my questions.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, okay.

[Operator]

And our next question today comes from Andrew Obin with Bank of America Merrill Lynch. Please go-ahead.

[David Ridley-Lane, Analyst at Bank of America Merrill Lynch]

Hi, this is David Ridley-Lane on for Andrew Obin.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Hi, David.

[David Ridley-Lane, Analyst at Bank of America Merrill Lynch]

Good morning. How much of the one-time costs around supply-chain disruptions last year, the higher freight costs, the spot buys and electronics, all those things fall-off in 2023? I guess I'm wondering is this a meaningful tailwind in kind of your forecasts?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, I think that what you're going to see, there's still an elevated level of inflation, but at the same time, some of the one-time distributor purchases of inventory are going to go away. So, there's going to be some natural tailwinds for us in terms of margins. We expect that working in the P&L, in our budget model, our productivity/cost savings of about $110 million. So, we think it'll be substantial. And that's where we're starting out the year but we think there's maybe even some upside to that. And it's largely related to -- and there is a couple of opposing forces, you're dealing with inflation and some costs of things are still going up. But at the same time, some of the supply-chain issues are working the other way, especially the higher prices that we paid on a one-time basis to some of the electronics distributors to continue shipping product.

[David Ridley-Lane, Analyst at Bank of America Merrill Lynch]

Got it. And then, you have been adding capacity through 2022, I guess in the capex, what's kind of growth versus maintenance or whatever framework you want to use to discuss kind of how you're thinking about capacity additions here in 2023?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

We added a lot of capacity in 2022. We brought some low-cost region facilities online, we've talked about that. For 2023, we expect our capital expenditures to be flat, a little bit more than 2% of sales, as we've done historically. So, and it's a good balance between growth capex, maintenance capex and capex funding cost reduction.

[David Ridley-Lane, Analyst at Bank of America Merrill Lynch]

Then, if I could get one more in, what is your expected EPS contribution from Navitar and RTDS?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, I'm not going to break out the deals, but they'll be slightly accretive.

[David Ridley-Lane, Analyst at Bank of America Merrill Lynch]

Thank you very much.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Okay. Thank you, David.

[Operator]

And our next question today comes from Joe Giordano with Cowen. Please go-ahead.

[Joe Giordano, Analyst at Cowen]

Yes, you mentioned customers kind of getting normalized on their behavior and their ordering patterns, like, can you maybe give a little bit finer point on that? And like, what you're seeing, are actual things getting pushed out, or are they just ordering more real-time?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, if you think about it from the customer's view, they've kind of got trained by the pandemic to order things early. And now, most companies are getting, including AMETEK, is getting back to being able to deliver in lead-time. And in fact, that's part of the reason that we grow our businesses at a faster rate during the pandemic period, we were able to ship and deliver and we had the inventory buffer. So, what's happening is, as customers normalize their buying patterns, they don't have to order early anymore. And that's what's really happening, I think across the broader supply-chain, and we're seeing that. So, that's the main normalization that we're talking about.

[Joe Giordano, Analyst at Cowen]

And then, when you mentioned the M&A pipeline looks good, how do you think about timing of execution, just given the macro year, given it looks like industrial is getting light -- is getting weaker, and are you relying on trailing 12 results that might be different than forward 12 for acquired -- for companies that you're looking at. So, how does it impact your desire to do be actionable right now, given where we are in the business cycle?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

AMETEK has historically bought through both upcycles and downcycles. And sometimes you can get your best deals during a downcycle. And you have to be cognizant of what the forward-looking EBITDA is, not really the trailing, but the forward. So, it's something that we've been keenly aware of for years, and we're focused on it.

[Joe Giordano, Analyst at Cowen]

Thanks, guys.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Thank you, Joe.

[Operator]

And our next question today comes from Rob Mason of Baird. Please go-ahead.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Hello, Rob.

[Rob Mason, Analyst at Robert W. Baird]

Yes, good morning.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Good morning.

[Rob Mason, Analyst at Robert W. Baird]

Hi, Dave. Good morning. Dave, I was going to see if you could drill into the process segment a little more, you called out Ultra Precision with relative stronger growth, does that carry forward into '23 just in terms of what leads that part of the business? And then, just maybe higher-level, anyway to cut the mix of what that process segment, that sales into more of an R&D function versus more of a production environment?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, that's a good way to think about it, and I'll try to put some more color into that. I mean, if you look at 2022, what stood out was our healthcare component. And our healthcare component is a big part of process, across all of AMETEK, it's about 15% of sales, but it's a big part of the process. And I'll give you an idea, in Q4, our Rauland business was up 20% organically. So they're really doing a good job and that market has -- hospital spending has been fantastic for us, and people are putting in new systems post-pandemic.

Also, the semiconductor market is about 6% of sales, and the vast majority of that is in process, and the semiconductor market was up high single-digits in the Q4. And we think in 2023, there'll be a slight downtick there, that'll be up low-to-mid but still growing because we have a lot of applications and research and also in the areas that are continuing to grow. So, we're in the right places in semiconductor.

So, you got healthcare, you got semiconductor, you got the research market where we've had with our CAMECA business, just every lab in the world has to have one of our atom probes, every lab in the world has to have some of our SIMS products. So, their backlog is really good and they're doing well.

And then, you got the old traditional oil and gas part of process and that's doing very well. In Q4, it was up high-single-digits. And for all of '22, it was up low double-digits. And for '23, we expect plus high-single-digits. So, process is doing very well, and we think it's going to continue in the future.

[Rob Mason, Analyst at Robert W. Baird]

Excellent. That's very helpful. Just as a follow-up, could you speak to how you think the incrementals will look for EIG versus EMG? In '23, they were, EMG was certainly very strong in '22, but just how did those look going forward comparatively?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Good question. In terms of incrementals, in both groups, I think the core incrementals will be up 30% to 35%. And I think the core and reported margins we'll be up 30 bps to 40 bps. So, we really think we have a clear line of sight to grow margins again, and it'll be healthy incrementals, and we'll be able to increase our core margins as we go forward.

[Rob Mason, Analyst at Robert W. Baird]

Very good. Thank you.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Thank you, Rob.

[Operator]

And our next question today comes from Steve Barger at KeyBanc Capital Markets. Please go-ahead.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Hey, good morning, guys.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Hello, Steve.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Some automation and robotics OEMs have recently talked about distribution channel bottlenecks being a hindrance to growth, can you just talk about what you're seeing in that market, both near-term and expectations for how that market grows in the future?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Yes, I think for 2023, we think that business will be up mid-single-digits. And both our automation and our engineering solutions will be up mid-single-digits. I think that we're selling to mainly OEM customers there. So, you're going to have a bit of the effect of the ordering patterns, a change in ordering patterns there, but we have a really healthy backlog.

So, it's really what we talked about; customers are changing ordering patterns. We're really good at delivery. So, we're meeting our customer commitments. So they're now ordering at normal lead times. So, you'll see a little bit of the order corrections that we talked about in Q4 continuing. But we still have a record backlog and all the comments that I made hold for that part of the business also.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Got it. Thanks. And obviously, semiconductor demand has been under pressure, especially on the memory side, but you just said you're in the right places to grow. Does that mean you're supplying the makers of tools that go to foundry and logic or just how will you grow this year in the context of what's a pretty tough memory cycle?

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Right, it's pretty tough. And again, we grew mid-teens in 2022. So, that growth for 2023 is up low-to-mid. So, it's a substantial decline, but we're still growing. And the reason we're growing the key application areas, at our CAMECA business, they're really involved in semiconductor research and development and staying ahead and getting the next generation. And we have some tools that are must haves for the semiconductor market, and really strong backlogs and orders are continuing well.

And then, the second area is we're in the EUV optics area for use in semiconductor fabrication. So, the EUV market is kind of separate from the memory market and really strong. So, those two areas are the -- a good part of our semiconductor business and they're really strong, and that's why we think we'll still be able to grow low to mid-single-digits in an environment where you have some of the headwinds.

[Steve Barger, Analyst at KeyBanc Capital Markets]

That's great detail. Thank you.

[David A. Zapico, Chairman and Chief Executive Officer at AMETEK]

Okay. Thank you, Steve.

[Operator]

And ladies and gentlemen, this concludes our question and answer session, I will return the conference back over to Kevin Coleman for any closing remarks.

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Great. Thank you again, Rocco. And thank you, everyone, for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kevin Coleman, Vice President of Investor Relations and Treasurer
• David A. Zapico, Chairman and Chief Executive Officer
• William J. Burke, Executive Vice President and Chief Financial Officer

Analysts

• Allison Poliniak, Wells Fargo & Company
• Deane Dray, RBC Capital Markets
• Brett Linzey, Mizuho
• Scott Graham, Loop Capital Markets
• Will Jellison, DA Davidson
• David Ridley-Lane, Bank of America Merrill Lynch
• Joe Giordano, Cowen Inc
• Rob Mason, Robert W. Baird
• Steve Barger, KeyBanc Capital Markets