AMETEK, Inc. (NYSE: AME) has reported a strong second quarter in 2024 with a 5% increase in sales, reaching $1.73 billion, despite facing challenges such as inventory destocking and cautious customer behavior. The company's operating income rose to a record $448 million, marking a 7% increase from the previous year, while operating margins stood at 25.8%.
However, due to the ongoing headwinds, AMETEK has revised its full-year sales outlook to a 5% to 7% increase, with organic sales expected to be flat or down by a low single-digit percentage. The company anticipates diluted earnings per share for the year to be between $6.70 and $6.80, representing a 5% to 7% rise compared to last year's figures.
Key Takeaways
- AMETEK's Q2 sales rose to $1.73 billion, a 5% increase year-over-year.
- Operating income reached a record $448 million, up 7% from Q2 2023.
- Full-year sales forecast adjusted to 5%-7% growth; organic sales may be flat or slightly down.
- Diluted EPS expected to be $6.70 to $6.80 for the year, up 5%-7% from the previous year.
- Operating cash flow increased by 14% to $381 million, with free cash flow up 17% at $360 million.
- Total debt reduced to $2.65 billion from $3.3 billion at the end of 2023.
- Despite short-term challenges, AMETEK is confident in its balance sheet and growth strategies.
Company Outlook
- AMETEK anticipates the inventory destocking and cautious customer behavior to persist in the latter half of the year.
- Sales and operating performance in the second half are expected to mirror the first half, leading to a four-point reduction in the sales outlook.
- The company is focused on strategic acquisitions, opportunistic buybacks, and increasing dividends.
Bearish Highlights
- Organic sales decreased by 2% in Q2.
- The company is adjusting to a lower sales outlook due to OEM destocking and project delays in automation, engineered solutions, and EIG businesses.
Bullish Highlights
- AMETEK saw a positive pricing benefit in Q2, with inflation moderating.
- The defense business is expected to remain robust, contributing to high single-digit growth for the full year.
- The semiconductor business, including the CAMECA and Zygo businesses, is performing well with strong growth.
Misses
- The company reported a 1.5% increase in orders, but organic orders were down 4%.
- Paragon, a manufacturer of surgical instruments and implantable devices, is experiencing destocking.
Q&A Highlights
- CEO Dave Zapico expressed confidence in the defense and commercial segments' growth.
- The company is optimistic about the Chinese market and expects it to pick up in the future.
- AMETEK is implementing cost-saving measures and introducing new products for the Paragon business, expecting earnings accretion in Q4.
- A lower tax rate of 10-15% in Q4 is anticipated to provide an earnings benefit of $0.10 to $0.15 per share.
In conclusion, AMETEK has demonstrated resilience in the face of market challenges, delivering solid financial performance in the second quarter of 2024. While the company has revised its full-year outlook to reflect the ongoing headwinds, its strong balance sheet and strategic focus on growth initiatives position it well for long-term success.
InvestingPro Insights
AMETEK, Inc. (NYSE: AME) has shown a robust financial performance in the second quarter of 2024, with a notable increase in sales and operating income. To provide further context on the company's financial health and stock performance, here are some key insights based on InvestingPro data and tips:
InvestingPro Data indicates that AMETEK has a market capitalization of $35.36 billion and is trading at a price-to-earnings (P/E) ratio of 26.61. This suggests that investors are willing to pay a premium for the company's earnings, which could be reflective of the company's quality or growth prospects. The company's revenue growth over the last twelve months stands at 6.29%, showing a steady increase in its top-line figures.
An InvestingPro Tip highlights that AMETEK has raised its dividend for 4 consecutive years, and remarkably, has maintained dividend payments for 54 consecutive years. This is indicative of the company's commitment to returning value to shareholders and its confidence in sustaining a stable cash flow.
Another tip from InvestingPro suggests that the stock is currently in oversold territory according to the Relative Strength Index (RSI), which could signal a potential buying opportunity for investors who believe in the company's fundamentals.
For readers interested in more in-depth analysis and additional InvestingPro Tips, there are 9 more tips available for AMETEK on InvestingPro's platform, which include insights on analyst revisions, debt levels, and profitability predictions for the year.
These insights can help investors better understand AMETEK's financial position and market sentiment as they consider the company's revised full-year outlook and strategic growth initiatives.
(Note: All financial metrics are as of Q2 2024, and the P/E ratio is adjusted based on the last twelve months' data.)
Full transcript - Ametek Inc (NYSE:AME) Q2 2024:
Operator: 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. [Operator Instructions] 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.
Kevin Coleman: Thank you, Meg. Good morning, and thank you for joining us for AMETEK's second quarter 2024 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip 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 and 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 2023 or 2024 or 2024 results guidance will be on an adjusted basis, excluding after tax, acquisition-related intangible amortization, and excluding a pretax $29.2 million or $0.10 diluted share charge in the first quarter for integration costs related to the Paragon Medical acquisition. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks, and then we'll open it up for questions. I'll now turn the meeting over to Dave.
Dave Zapico: Thank you, Kevin, and good morning, everyone. AMETEK delivered solid results with a 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 AMETEK 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 and continue to invest back in our businesses utilize our strong balance sheet to deploy capital on strategic acquisitions and ensure we position AMETEK for continued long-term growth. Now let me turn to our second quarter financial results. Sales in the quarter - sales in the second quarter were $1.73 billion, up 5% from the same period in 2023. Organic sales were down 2%. Acquisitions added 8 points in the quarter and foreign currency was a slight headwind. AMETEK's operational performance in the quarter was excellent with robust margin expansion. Operating income in the quarter was a record $448 million, 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 prior year with EBITDA margins in impressive 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. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. 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 CAMECA 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. The electric mechanical group continues to navigate the impacts of inventory normalization across our automation and engineered solutions businesses. In the quarter, EMG sales were a record $81 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 prices. While we had expected to see conditions approved in the second half of 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 new programs that we're currently investing in, which will drive incremental growth in 2025 and beyond. As we noted last quarter, are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success. As the volumes return following destocking, 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 full year, we expect free cash flow to net income conversion 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. And 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 remain strong. AMETEK is very well positioned to continue to expand our portfolio of highly differentiated businesses that both our organic growth investments and our acquisition strategy. Now, turning to outlook for the remainder of the year. 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 helped 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 Dalip Puri, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Dal?
Dalip Puri: Thank, Dave, and good morning, everyone. As Dave noted, AMETEK 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 $0.82 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 30 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 second quarter, our gross debt to EBITDA ratio was 1.2 times, and our net debt-to-EBITDA 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 deploy on strategic acquisitions. In summary, AMETEK 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?
Kevin Coleman: Great. Thank you, Dalip. Can we please open the lines for questions?
Operator: [Operator Instructions] Your first question comes from the line of Matt Summerville with D.A. Davidson. Please go ahead.
Matt Summerville: Thanks. Good morning. A couple of questions. First, Dave, you seemed pretty convinced a quarter ago that the destocking phenomenon would 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.
Dave Zapico: Yes. 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 will be similar to the growth that we – sales and operating performance in the first half. So we're not going to 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 our automation and engineered 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. So 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 cumulative impact of 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 $0.05 at the midpoint. Another couple of points. I mean, we've really done a good job running the company. It reflects when you take that sales decrease, it reflects about a 20% decremental margin on the expected lower sales. And as Dalip mentioned, the tax rate will be lower in Q4. So 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. I think to your point, we missed the timing of the recovery and the inventory corrections will take a bit longer. And as AMETEK does, we're adapting to the current situation, and we're going to manage our business appropriately. And as I said, we've got really pleased how the team responded with 20% decremental to the volume change.
Matt Summerville: Thanks, David. I would definitely agree on the decremental comment. Can you also - I think it's probably good from a timing standpoint in the call. 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 suburbs?
Dave Zapico: 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 CAMECA business in the quarter. As noted in my prepared remarks, we've seen customers, as we just talked about, turn more cautious. We expect this to continue in the second half as we discussed, and we expect our process businesses to be flat to up low single digits versus the prior year. Now 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&D business with similar growth across both our commercial and defense businesses. Next, I'll move to our Power & Industrial businesses. And overall sales for our Power & 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 of delaying some projects due to the broader macro uncertainties. And for all of '24, we now expect organic sales for our Process and Industrial businesses to be flat compared to 2023. And our final segment, automation and Engineered Solutions. Self-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 quarter were down approximately 10% due to the continued normalization of inventory levels across our OEM customer base, we expected to see improvements in return to growth, as we talked about in the second half of the year. And as we just mentioned, that's not going to happen. Inventory normalization is going to continue through the end of the year. And as a result, we expect organic sales for our Automation & Engineered Solutions businesses to be down mid-single digits for the full year. So that's a picture around the word at.
Matt Summerville: Great. Thank you.
Operator: [Operator Instructions] Your next question comes from the line of Deane Dray with RBC Capital Markets. Please go ahead.
Deane Dray: Thank you. Good morning everyone.
Dave Zapico: Good morning, Deane.
Deane Dray: Dave, would like to pick up where you left off with Matt. And just some more color on the customers' kind of sentiment here and the delayed project spending. What kind of reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries? Any kind of way that you could characterize and frame for us about this degree of cautiousness?
Dave Zapico: Yes. I think the - 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 signed off. These are typically - they're not even large projects. And you see those resulting in delays. I think it's a combination of the elections in the U.S., I think two-thirds of the worlds have elections this year. So it's elections around the world. It's the - some financing related to the higher interest rate higher inflation. I mean, it's the worst. So 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's different than some other downturns is we still have very strong pipelines of new activity. So 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 primary feedback we're getting. But I think it's this broader macro issue that's honestly a bit of smaller issue for us. The bigger issue is the OEM destock. So I think we had the pandemic. And then we had the supply chain crisis. And we're selling it in our automation and engineered solutions businesses differentiated components and subsystems to people that are typically smaller dollar value amounts to the entire system. And when people bought inventory, because we're very specialized, and they wanted to keep shipping the products. And now we're just dealing with a destocking process that's just taking a little longer than we thought. And I think that.
Deane Dray: Yes, David, that's really helpful. I love the way you characterize it because in slowing, that's one of the first things you see customers do is they kind of delay the spending more approvals. And so that's pretty familiar. Do have any sense that it's snowballing from here? Does it get like as the quarter progressed did those type of behaviors increase? And any kind of monthly cadence would be helpful.
Dave Zapico: Yes. I think the monthly cadence in both sales and orders was our typical monthly cadence. So otherwise, we typically 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.
Deane Dray: Got it. All right. Just last question on the destocking and when we look back on this period, that's been the biggest surprise 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 supplies chain it has just taken more than 2x longer than anyone thought. And just the question is for Paragon. What's their visibility like? You said they - a percent of point was from their, destock…
Dave Zapico: Right.
Deane Dray: What's their visibility versus your comparison of the rest of AMETEK businesses, where do they fit on that scale?
Dave Zapico: Yes, because Paragon is mainly in one end market, and they're talking to their customers daily. I think there's better visibility. And you can also talk to customers and get market information. So this the - talk 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. So this combination of the market growth that follows the destock, along with the new program wins and leaned out and efficient cost structure is really going to provide substantial sales and profit growth for Paragon in the years ahead. We have a similar business and similar markets and another part of AMETEK, and it's seeing the same kind of destock 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 generator for our long-term shareholders, and we're very optimistic about the business. It's unfortunate about the destock process, but we're in this game for the long run, and we're doing all the ready things for the business and we've got a new management team with some really talented people from AMETEK 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.
Deane Dray: David, thanks for all that color. Really helpful.
Dave Zapico: Thank you, Deane.
Operator: [Operator Instructions] Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook: Hi. Good morning.
Dave Zapico: Good morning.
Jamie Cook: 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 in an environment where organic growth is going to be flat to down single digit. And then my follow-up question, it also struck me about the quarter over the past couple of quarters is the margins in EIG above 30% with 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 some of this goes away if pricing gets more difficult? I'm just trying to understand the performance in EIG margins, the good performance, given a tough macro. Thank you.
Dave Zapico: 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 3.5 points price, and our inflation was about 2.5 points. So we had a positive benefit from that. So the pricing environment is moderating a bit and the inflation is moderating a bit, but we're real pleased with that. And it was across our portfolio and maybe a little bit more in EMG just a bit than EMG, but it was pretty much across the portfolio at a pretty consistent performance, and that's 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. So - 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 the AMETEK portfolio is very differentiated and kind of performed very well. In terms of the margins in EIG, if you think about - we've got a similar performance in the first quarter and 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 quarter for us if you look back the past few years. But in general, if you think about EIG, the margins are good and they're going to stay there, and that business is very well positioned. And it's - in our process, our Power and Industrial and our Aerospace businesses, we've got excellent market positions. And then 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. But when we look at our businesses, they're running - 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, 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. So, does that answer your question, Jamie?
Jamie Cook: Yes. Very helpful. Thank you so much.
Dave Zapico: Thank you.
Operator: Your next question comes from the line of Jeff Sprague with Vertical Research. Please go ahead.
Jeff Sprague: Hi. Thank you. Good morning, everyone.
Dave Zapico: Good morning, Jeff.
Jeff Sprague: Good morning. Hope as going well, Dave. Hi, just on Paragon, I want to just make sure I have things dialed right here. I think your comment about a point of headwind, right, is on a total AMETEK basis.
Dave Zapico: Yes.
Jeff Sprague: So that implies $40 million or $50 million. So we're sort of talking about the business being down kind of 8%, 9%, 10% for the year. Is that basically where we're at?
Dave Zapico: Yes. I'd say you're between 10% and 15% is the Paragon. You're right on.
Jeff Sprague: Okay. And then just thinking about EMG, right, 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 a step up there?
Dave Zapico: That's a good question. 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 like 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 derisk the year because 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 in Q4, if you back that out and you look at sales 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 year, it's a 50-50 split. AMETEK traditionally is a 48-52 split. And that's why we think really derisked the year with that 50-50 split in the second half. Now we still have some seasonality in our business. Historically Q4 because the seasonality is always higher than Q3, and we have a typical seasonality there. And again, as Dalip mentioned, we have the benefit of the tax rate in Q4. But we really feel we derisked the year to reflect the current environment, and we think it's going to stay that way through the balance of the year.
Jeff Sprague: And then maybe we could just touch on that tax rate. So assuming 19%, again in Q3, you would imply, I don't know, 14 or 15 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?
Dave Zapico: Yes. No, you see it right. We moved back up in 2025 to our typical tax rate. We haven't done our planning for 2025, but based on where we're sitting, that's what we would expect.
Jeff Sprague: Yes. Thank you.
Operator: Your next question comes from the line of Scott Graham with Seaport Research. Please go ahead.
Scott Graham: Yes. Hi. Good morning. Thanks for taking my question.
Dave Zapico: Hi, Scott. Good to hear from you.
Scott Graham: Likewise. So I want to understand, so the reduction in sales guidance for the year, you indicated that it was essentially three points in EMG One point in EIG and you talked about project delays there. My question is, in your sort of around 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 decide anything there?
Dave Zapico: Yes. If I didn't cite it, I should have said the process and power seeing similar activities. I mean, in the power segment, we have some power test and measurement businesses and they sell to multiple markets, including the government customers and there's a little delay there in projects, but we're very well positioned those are just delayed and process is a bit larger and it's more - it's - but it's kind of the same thing. But that was only the change in sales from all of EIG and - which is both process power.
Scott Graham: 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 shipments? Is that something that you'll see in the third quarter or the fourth quarter? Is there anything more to discuss there?
Dave Zapico: No, I think that on the defense side, for our A&D business, we kept the guide for the year, the same, like plus high single digits. So what we saw in the second quarter was a very good commercial and had some defense delays. But for full year, we're saying that defense and commercial is still going to be the same. They're going to be up high single digits. So there's - doing very well there. As you said, there's good margins in our A&D segment, and we feel confident in that segment.
Scott Graham: If I could just squeeze this last one in, Dave. The 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 or how are the sizes of the deals out there? Maybe you can give us a little color.
Dave Zapico: Yes. The pipeline looks really good. The size of the deals are throughout whole spectrum. I mean there are smaller deals, mid-size and larger deals. And as we talked about before, we'll probably buy a big business, for us as deployment of greater than $1 billion 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 laying 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 those are - 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 that 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, we're poised to act. And our third priority is a consistently modestly increasing dividend. So capital allocation doesn't change. And with a net leverage of one, we're ideally positioned right now, and there's a lot activity going on. Does that answer your question, Scott?
Scott Graham: It answers everything fully. Thank you.
Dave Zapico: Thank you, Scott.
Operator: Your next question comes from the line of Rob Wertheimer with Melius Research. Please go ahead.
Rob Wertheimer: Thanks. Good morning, everybody.
Dave Zapico: Good morning, Rob.
Rob Wertheimer: 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 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 just thought sort of check around those dynamics.
Dave Zapico: Yes. The project cost, I think, was your first question. And you're right …
Rob Wertheimer: Yes.
Dave Zapico: We are typically a small portion of the project and with good technology, a small part of a bigger project. 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 most classic downturns is they may mix down. They may buy our project, buy our product, but it will maybe have less, features, because we're pretty good position with the customer base and 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 - we're typically smaller projects typically 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.
Rob Wertheimer: Thanks so much.
Dave Zapico: Thank you.
Operator: Your next question comes from the line of Joe Giordano with TD Cowen. Please go ahead.
Joe Giordano: Hi. Good morning. This is [technical difficulty] talk about the Paragon 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?
Dave Zapico: Yes. I think - 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 will be clear. That's clear. Yes, that activity is going on now. So we're in process of improving that business, so fixing that business. So making it run as efficiently as AMETEK does. And we have a team of Paragon people and a team of AMETEK people and a team of our operational excellence, talent across the business, all working on the project. And the response is very, very solid to it. So I think that's ongoing and it will occur through the balance of this year. I think next year, you'll start to see the benefits of it. But the project, if you recall, goes up two or three years, as we continue to improve it. So I think the, next year, you have a sizable improvement, because expect the volumes to come back from the - destock, combined with the OpEx work that's going on combined with some new product introductions that we're heavily investing in the phase-in. So it's unfortunate that we have this destock downturn right now, but we couldn't be happier with the business.
Joe Giordano: Thank you for that. And another question I had was on the 4Q ramp. So 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. Is there - especially considering that you guys are not anticipating any easement in destocking for the latter half - could you comment on what's driving that?
Dalip Puri: Yes. I kind of disagree with your conclusion. I think there's a tax benefit in Q4. And when you factor that in, we have a pretty - I think the ramp is very similar to what it was last year. So it's - and we derisked Q3. So as I said, the operating performance in the first half of the year is very similar to the operating performance in the second half year. And you add to that a little bit of a tax benefit in Q4. So I don't - I think it's pretty typical from what we've done in the past.
Joe Giordano: Got it. Thanks for that. Very helpful.
Dalip Puri: Yes.
Operator: Your next question comes from the line of Andrew Obin with Bank of America. Please go ahead.
Andrew Obin: Yes. Good morning.
Dave Zapico: Good morning, Andrew.
Andrew Obin: 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 better understand how to think about the destocking impact versus history? And where do you think inventories will be on a going-forward basis relative to pre-COVID levels?
Dave Zapico: Yes. I think there - it's different because there's a lot of customers and a lot of different market segments. But in general, I think you're getting back to pre-COVID levels, there might 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 might be a bit higher for some of the other geopolitical issues going on.
Andrew Obin: Got you. And just - 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.
Dave Zapico: Sure, Andrew. No, you didn't miss it. We saw a modest growth in Europe in the second quarter, and we saw a low single-digit declines in both the U.S. Asia. Go a step lower. We had low single-digit in the U.S. We actually had strong growth in our Materials Analysis division or 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. So it's kind of a flat world. But we are seeing some improvements in Europe.
Andrew Obin: Thanks so much.
Dave Zapico: Thank you, Andrew.
Operator: Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.
Steve Barger: Thanks. Good morning.
Dave Zapico: Good morning, Steve.
Steve Barger: 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?
Dave Zapico: Yes. I think right now, we're levered to both of them. But in our second quarter, our semiconductor business was up, and it was up because we had strong growth in our CAMECA business, and you think about that business, they're doing next-generation defect detection. And it's kind of like you're going to want one of these CAMECA 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 EUV, and that's more of 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 get us some of the - 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 - just the rate production. So, it feels pretty good for us in terms of moving into next year, Steve.
Steve Barger: Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers have 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 and next year?
Dave Zapico: We don't - I don't have that level of resolution for next year. We do sell into the Chinese market. It's typically lower technology products, has been healthy this year.
Steve Barger: Okay. Thanks.
Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.
Nigel Coe: Good morning. Hi David, hi Dalip and Kevin. Thanks for the question. Just a few more details. I know you got a lot of ground here. But on Paragon, I just want to make sure I've got the right base for FY '23. I've got about $450 million, $460 million of revenues for FY '23. Is that about right?
Dave Zapico: A little bit higher for '23.
Nigel Coe: A bit high of 23%. Okay. That's helpful. So down 10% to 20% this year, I mean, what sort of cost measures are you taking? I know the charge you took in 1Q is 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 FY '24?
Dave Zapico: Yes. I think the - we're doing a lot of work on the cost structure. They have excess capacity in plants - so that work is going on right now. And we took the charges also some expenses related to doing 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 that - spending on right now that are very, very solidly positioned for Paragon. You talk about the accretion for this year, it's a couple of pennies and it's in the fourth quarter.
Nigel Coe: Couple of pennies in the fourth quarter. Yes. 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?
Dave Zapico: Yes. If you look at overall orders, they were up 1.5% in the quarter.
Nigel Coe: 1.5%, okay, that’s…
Dave Zapico: 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. And the cadence…
Nigel Coe: The question about it.
Dave Zapico: June was the strongest.
Nigel Coe: And then just a quick one on the 4Q tax rate issue and any quantification there?
Dalip Puri: 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. So 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 $0.10 to $0.15 per share in Q4.
Nigel Coe: Okay. Thank you very much.
Dave Zapico: Thank you, Nigel.
Operator: Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.
Kevin Coleman: 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 Investors section of ametek.com. Have a great day.
Operator: This concludes conference call. You may now disconnect.
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