阿美特克 (AME) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 AMETEK, Inc.

Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

It is now my pleasure to introduce Vice President of Investor Relations, Kevin Coleman.

Thank you, Andrew.

Good morning, and thank you for joining us for AMETEK's Fourth Quarter 2020 Earnings Conference Call.

With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer.

AMETEK's fourth quarter and full year results were released earlier this morning and are available on market systems and in the Investors section of our website.

This call is also being webcasted and can be accessed on our website.

The webcast will be archived and made available on our site later today.

During the course of today's call, we will make forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the 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 2019 or 2020 results will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020 and the realignment charge taken in the first quarter of 2020.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website.

We'll begin today with prepared remarks by Dave and Bill and then open it up for questions.

I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone.

AMETEK concluded 2020 with a strong fourth quarter, delivering record operating results despite ongoing challenges presented by the pandemic.

Our businesses saw solid sequential sales and order improvements in the quarter while year-over-year growth turned positive across several of our businesses.

We also drove exceptional operating performance in the quarter, leveraging our broad set of operational excellence initiatives.

These efforts led to record backlog, margins and cash flow as well as the high quality of earnings that exceeded our expectations, positioning us extremely well as we look ahead to 2021.

The safety of our employees remains our #1 priority.

We continue to adjust our practices and enforce our safety protocols across our businesses to help limit the possible spread of the virus.

While we are cautious in the short term given COVID-19 and ongoing travel restrictions, we are highly confident in the strength of our businesses and our ability to deliver exceptional growth and shareholder returns over the long term.

The AMETEK growth model continues to provide the framework for long-term sustainable success and our performance in 2020 was a testament to the strength and flexibility of the model.

Now let me return to our results for the quarter.

Sales in the quarter were $1.2 billion, down 8% compared to the fourth quarter of 2019.

Organic sales were also down 8% with the divestiture of Reading Alloys, a 3 point headwind, the acquisition of IntelliPower contributing 1 point to growth and foreign currency added 2 points.

As we saw in prior quarters, our commercial aerospace business was the most impacted by the pandemic with sales down approximately 35% in the quarter.

Orders continued to improve with our book-to-bill at 1.07 for the fourth quarter.

This led to a record backlog of $1.8 billion, providing us with a positive line of sight into 2021.

Operating income in the fourth quarter was $298.1 million, up slightly from the fourth quarter of 2020, and operating margins were a record 24.9%, up an impressive 210 basis points compared to the prior year period.

EBITDA in the fourth quarter was a record $360.7 million and EBITDA margins were also a record of 30.1%, up a robust 300 basis points over the fourth quarter of 2019.

This operating performance led to earnings per diluted share of $1.08, matching last year's fourth quarter results and comfortably ahead of our guidance for the quarter.

Our business has also delivered outstanding cash flow during the quarter.

With operating cash flow up 13% to a record $386 million and free cash flow conversion, exceptional 158% of net income.

Now let me provide additional details at the operating group level for the fourth quarter.

The Electronic Instruments group delivered superb operating performance despite challenging market conditions.

EIG sales in the fourth quarter were $819.4 million, down 7% from the prior year and in line with our expectations of solid sequential improvement.

Organic sales were down 10%, with the acquisition of IntelliPower contributing 2%, and foreign currency contributing 1%.

Commercial aerospace remained the largest driver of the sales weakness while other EIG businesses saw improvements versus prior quarters.

Our Materials Analysis division returned to growth in the fourth quarter, while other EIG businesses, including Zygo and Telular, also generated year-over-year growth.

Despite the overall sales decline, EIG's operating income in the fourth quarter increased 3% over the prior year to a record $236 million, and operating margins reached a new high of 28.8%, expanding an exceptional 270 basis points over the same period in 2019.

Our Electromechanical Group also delivered strong operating results in the quarter.

EMG sales were $379.5 million, down 11% from the fourth quarter in 2019, driven in large part by the divestiture of Reading Alloys.

Organic sales were down 4%, with the divestiture an 8-point headwind, and foreign currency adding 2 points.

In addition to continued strong growth across our defense businesses, we are pleased to see our automation business generate solid organic growth in the quarter.

Fourth quarter operating income for EMG was $79.8 million, and operating margin expanded an impressive 110 basis points to 21%.

Now for the full year results.

Despite very difficult end market conditions and meaningful top line headwinds in 2020, AMETEK was able to expand full year operating margins while delivering record levels of operating and free cash flow, truly outstanding performance.

Overall sales for the year were $4.5 billion, down 12% from 2019.

Organic sales declined 13%, with acquisitions adding 4%, the divestiture of Reading Alloys a 3% headwind, and foreign currency flat for the year.

Operating income in 2020 was $1.1 billion and operating margins were a record 23.6%, expanding 80 basis points over 2019.

EBITDA for the year was $1.32 billion and EBITDA margins were a record 29.2%, up 230 basis points from last year.

This led to full year earnings of $3.95 per diluted share, down 6% versus the prior year.

As Bill will highlight, our businesses did a fantastic job managing our working capital, which helped drive a record level of cash flow with full year operating cash flow up 15% to $1.28 billion.

In summary, while 2020 was very challenging, I'm extremely proud of the way AMETEK colleagues managed through the pandemic and delivered tremendous results.

Before I cover the outlook for 2021, I wanted to highlight certain key elements of the AMETEK growth model and how each position us for long-term success.

First and foremost, AMETEK's proven operational acumen stood out in 2020, with our businesses doing an incredible job driving our operational excellence initiatives.

In the fourth quarter, we generated $60 million in total cost savings with $50 million of structural savings and $10 million in temporary savings.

And for the full year, total incremental savings versus the prior year were $235 million, with approximately $145 million of structural savings and $90 million in temporary savings, including furloughs, travel reductions and temporary pay actions.

As we look ahead to 2021, we expect a much more modest level of temporary savings versus 2020 as the economy continues to recover from the worst of the pandemic and we continue to add back these temporary costs.

However, we do expect to drive meaningful incremental structural savings across our various operational excellence initiatives including across our global sourcing activities.

For the full year 2021, we expect approximately $140 million of incremental operational excellence savings.

Shifting to new product development.

Even through this downturn, we remain committed to investing in new products and solutions that help our customers solve their most complex challenges.

In 2020, we invested $246 million in research, development and engineering, approximately 5.5% of sales.

These investments led to outstanding innovation and dozens of new product launches.

In the fourth quarter, our vitality index or the percent of sales generated from products introduced over the last 3 years was an impressive 25%.

In 2021, we expect to invest approximately $270 million or 5.5% of sales in research, development and engineering to enhance our position as a global technology leader.

This is a 10% increase over 2020 RD&E spend.

Finally, I want to touch on our acquisition strategy.

Prior to the onset of the pandemic last year, we acquired IntelliPower, a leading provider of high reliability, ruggedized, uninterruptible power systems for mission-critical defense and industrial applications.

IntelliPower has integrated nicely into our Power Systems and Instruments division and is performing well.

While deal flow in 2020 was impacted by the pandemic, we are seeing continued improvements in the M&A markets and are managing a strong pipeline of acquisition targets across a broad set of markets.

As Bill will discuss shortly, AMETEK has significant balance sheet capacity and, when combined with our robust cash flow generation, provides us with meaningful capital to support our acquisition strategy, which remains our #1 priority for capital development -- deployment.

Now shifting to our outlook for the year ahead.

While we remain cautious in the short term, given the uncertainty of the timing and pace of the recovery, we are confident in the strength of our businesses and our ability to manage through these uncertain times.

We continue to manage our businesses safely and prudently while ensuring continued investments in key growth initiatives.

For the year, we expect both overall and organic sales to be up mid-single digits versus 2020.

Diluted earnings per share for the year are expected to be in the range of $4.18 to $4.30, up 6% to 9% compared to 2020.

For the first quarter, we anticipate continued year-over-year impact from the pandemic, with overall sales down low to mid-single digits and first quarter earnings of $0.97 to $1.02 per share, flat to down 5% versus the prior year.

In summary, the strength of the AMETEK growth model, the asset-light nature of our businesses, our leading positions in attractive niche markets and our world-class workforce will continue to drive long-term sustainable success.

I'm confident that we are emerging from this unprecedented economic environment even stronger than we were before.

Again, I would like to thank all of our employees for their continued hard work and tremendous efforts as we manage the ongoing global crisis.

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?

Thank you, Dave.

As Dave highlighted, AMETEK had an outstanding finish to 2020 with record operating performance and a high quality of earnings in the fourth quarter.

I would also like to thank and recognize all of my AMETEK colleagues for their so significant contributions in 2020.

The way our teams persevered through the challenges of the past year was truly impressive.

With that, I will provide additional financial highlights for the fourth quarter and the full year and will also provide some additional guidance for 2021.

Fourth quarter general and administrative expenses were $17.7 million, up modestly from the prior year.

For the full year, G&A was down 11% from 2019 due to lower compensation costs and other discretionary cost reductions and, as a percentage of total sales, was 1.5% in both years.

For 2021, general and administrative expenses are expected to be up approximately 10% due primarily to the return of temporary costs, including compensation.

The effective tax rate in the fourth quarter was 20.1%, up from 17.6% in the fourth quarter of 2019.

The difference in tax rate was due primarily to the finalization of tax returns in each of the years.

For 2021, assuming the current tax regime, 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.

Our businesses continue to manage their working capital exceptionally well.

Operating working capital was an impressive 14% in the fourth quarter, down 330 basis points from the 17.3% reported in the same quarter last year, reflecting the outstanding work by our teams.

Capital expenditures were $37 million in the fourth quarter and $74 million for the full year.

Capital expenditures in 2021 are expected to be approximately $110 million.

Depreciation and amortization in the quarter was $65 million and for the full year was $255 million.

In 2021, we expect depreciation and amortization to be approximately $260 million, including after-tax, acquisition-related intangible amortization of approximately $117 million or $0.50 per diluted share.

As Dave highlighted, our businesses continue to generate tremendous levels of cash flow.

Operating cash flow in the quarter was a record $386 million, up 13% over last year's fourth quarter.

Free cash flow was also a record at $349 million, up 16% over the same period last year, resulting in a free cash flow conversion of 158% of net income.

Cash flow for the full year also set new record levels.

Operating cash flow for 2020 was $1.28 billion, up 15% over the prior year, and free cash flow was $1.21 billion, a year-over-year increase of 19%.

Full year free cash flow conversion was 158% of net income adjusted for the Reading Alloys gain.

Total debt at December 31 was $2.41 billion, down from $2.77 billion at the end of 2019.

Offsetting this debt is cash and cash equivalents of $1.2 billion.

Our gross debt-to-EBITDA ratio was 1.8x and our net debt-to-EBITDA ratio was 0.9x at year-end.

We entered 2021 with approximately $2.6 billion in liquidity to support our growth initiatives.

This liquidity, along with our strong balance sheet and no material debt maturities until 2024, enables us to manage the continued effects of the economic downturn while also deploying meaningful capital on strategic acquisitions.

To conclude, our businesses performed exceptionally well in the fourth quarter and throughout the year, delivering a high quality of earnings in a very challenging environment.

Our outlook for 2021 and beyond remains positive given our strong financial position, our proven growth model and our world-class workforce.

Kevin?

Thank you, Bill.

Andrew, we're now ready to take questions.

(Operator Instructions) Our first question comes from Allison Poliniak of Wells Fargo.

Just obviously ending the piece on the $2.6 billion of liquidity.

As you think of that M&A pipeline today, 2020 and '20 -- and even the beginning of '21 as been some -- there's been a lot of noted challenges.

Has that caused you to alter sort of what's attractive in your mind towards the AMETEK portfolio?

That's a great question, Allison, and not really.

I mean, M&A remains our top priority for capital allocation, and we feel there's going to be substantial opportunity for us.

As you mentioned, with the liquidity and our cash flow, we have a very strong balance sheet, and we're really positioned to use that as a lever to increase our earnings.

And we're seeing an uptick in pipeline opportunities.

You started to see some of the pent-up demand happening in Q4.

The market is very hot.

We're maintaining our discipline, but we're working on deals of all sizes.

We have some larger deals we're working on.

We have some AMETEK typical-sized deals, and we even have a couple of small technology acquisitions we're looking at.

So I would say we've never been busier on M&A and we're looking at it the same way.

We think deploying our capital on M&A is the best way to get our shareholders' return.

Within that, are there any verticals that have, I guess, increased in importance in your view, just given what's happened?

Yes.

I think we're -- we have 42 business units, and they all develop an acquisition plan, and we're looking at all of those.

And we're certainly seeing properties become available in all areas.

We're also looking at some places where we can get a high return on capital.

So I'd say that our bias is toward more technology deals but not necessarily a vertical market.

We're looking at all of them right now.

Great.

And then just last, on that temporary cost savings, I know, Bill, you talked about G&A being up 10%.

Should we layer that in more so in the back half?

How should we think of that cadence of that coming back?

Yes I'd say primarily, the temporary cost, with some small exceptions in the first quarter as we continue to see the effects of the pandemic, they're going to be coming back, basically, I'd say, evenly across the year, a little bit lower in the first quarter.

And our next question comes from the line of Deane Dray with RBC Capital Markets.

Nice strong finish to the year.

And would like to hear what the approach was this time to providing guidance.

I mean, there's still so much COVID uncertainty in the macro.

So what was different this time as you frame guidance?

And maybe give us some insight into how the cadence of the monthly sequential improvement that you saw this year.

Sure.

And thank you for your comments on the quarter.

We sat back and -- near the end of the year and into January, there were situations that occur where you're having to close down your plant for a couple of days, get everyone tested, clean it.

And people were bringing the virus to work, I'll say, and it created a difficult operating environment.

And certainly, it made us think through giving guidance for the quarter and for the year.

But as we thought through it and we were executing well -- so well, that we got confident that we're able to operate and execute with the virus, and we have good processes and protocols in place.

And we're seeing the -- we're mid-cycle and long-cycle businesses, and we're seeing those demand picks up -- pick up later in the year, we're assuming, and that all went into discussion.

We talked about it several times.

But we feel comfortable with the guidance that we're giving, and we feel comfortable we're going to be able to execute, and we feel the processes and procedures we've developed are allowing us to operate safely, and we also feel -- we're feeling an uptick.

And we're looking to the short-cycle businesses and markets and seeing them trend up, and we're assuming that's going to happen for us a couple of quarters later.

That's helpful.

And if we're looking at the first quarter guide and is there any of the usual seasonality in effect?

I mean, just with COVID, it's uncertain how much is a reaction to coming back, the recovery, but is there any of the usual seasonality in effect?

Yes.

What happens to us usually in Q1 is that our Process businesses are stronger in Q4 and not as strong in Q1.

That's the seasonality.

So you have a drop in revenue there.

And then on the bottom line in Q1, along with the contribution margin effect of that, you have a lack of Reading and you also have us resetting some compensation G&A-type costs.

So you add that all together and our top line guide for Q1 is down low to mid-single digits.

And we gave the earnings range of $0.97 to $1.02.

So that's the way that we got that.

And you also asked about the cadence, and I didn't answer that in the first part of your question.

The cadence throughout the quarter, it was a pretty typical trend for us.

Orders grew sequentially every month with December being the strongest month of the year and in fact, the strongest month of the quarter -- I mean, of 2020.

And in terms of sales, we have a similar pattern with growing sequentially.

December was strong and also the strongest month of the year.

So that was good.

And in January, orders and sales, they ended up at a level supportive over Q1 and our full year guide.

I would characterize them as solid.

So continuing the positive trend.

When you think about the low to mid-single-digit guide, back in Q2, we had organic growth of about minus 22%, and that improved in Q3, and we believe it was minus 14%.

And then you see the last quarter, Q4 completed was minus 8%.

So to go from that minus 8% organic to a minus low to mid-single digit organic, you see a continuing improvement.

So we have a calendarization seasonality issue, but underlying it is a continuing sequential improvement of the business.

Yes.

That really sounds and looks like a V-shaped recovery to us.

And I know there's a lot of hard work in getting that done.

And our next question comes from the line of Joshua Pokrzywinski with Morgan Stanley.

Dave, just on the incremental margin expectation.

I know there's a lot of moving pieces, some of which you touched on.

And probably chief amongst those is maybe, to start the year, organic growth.

No need to get out ahead of yourself on expectations.

But as the year progresses or as growth starts to accelerate, what should we think of as kind of the underlying incremental margin for AMETEK right now?

I know that with small numbers on the growth, it kind of gets distorted by other items.

But what's the real number as we move forward?

Yes, I think that's a great question.

And you'll recall that we talked about it last quarter.

We had about $90 million of temporary costs that we're going to have to fit back in and -- to the budget model this year.

And what it turns out is that we got really strong OpEx cost reductions of $140 million.

On top of that, we have continued stronger pricing.

And when you take the organic growth combined with the OpEx structural savings, combined with the pricing, we're able to absorb the temporary costs coming back to the P&L and end up with incremental margin of about 35%.

Now typically, AMETEK would have a bit higher incremental margin, but the 35% is a solid number and it includes absorbing all the temporary costs.

So we feel comfortable with the margin forecast that we have for 2021.

We think core operating margins will be up about 40 basis points, and we believe the incremental margins will be up about 35%.

Got it.

That's helpful.

And then just on the end markets themselves.

Obviously, a pretty heady cocktail of businesses inside the portfolio.

Just given that this has been such an atypical downturn and recovery, anything that you would call out as maybe being ahead of normal kind of recovery trajectory or behind, for that matter, relative to some of these early, mid- and late-cycle markets that you guys participate in?

Not really.

It's -- I think the military market's been very strong for us.

We've talked about that.

We think that'll continue into 2021.

We are seeing a tick-up in the semiconductor market.

That's not atypical.

A lot of people are seeing that, but we have some technology that's more tied to the EUV, which is the next technology in semiconductor.

So we're seeing some research demand in that area.

That business looks solid for us.

And in general, everything is behaving as we would think it would.

And we do have the mid- and long-cycle businesses.

And the aerospace business, we're not assuming it's going to -- the commercial aerospace business, we're not assuming a recovery during -- it's flat to up a bit, flat to up low single for 2021.

Most of the other markets are up mid-single digit.

And our next question comes from the line of Nigel Coe with Wolfe Research.

I wanted to really pick up on the FY '21 sort of puts and takes, and you broadly talked about aerospace looking for a very modest recovery there, semi, et cetera.

But anything by geography that you'd call out next year in your plan process?

I'd be particularly interested in what your views are on the U.S. and China markets.

Yes.

Good question.

Yes, I'll start with Q4.

In Q4, there are really mixed trends across geographies and -- with Asia returning to strong growth and Europe and the U.S. seeing continued sequential improvements but still showing negative organic growth.

And let me talk about Asia first.

We had a great quarter in Asia.

We were up low double digits, and we had strong growth in both our Process and Automation businesses.

And China, in particular, grew 22% with us with -- in the quarter.

So really big pickup there, both Process and Automation.

And as we talked about prior quarters, Automation picking up, the Process business followed, and that had a big impact on EIG margins, as you can see in the accounts.

When you think about the U.S., we were down low double digits on broad-based weakness other than the defense market.

The defense market was strong.

And when you think about Europe, we were down mid-teens on broad-based weakness other than the Automation business.

So in the U.S. and in Europe, it was down except for small parts of our portfolio that were bright spots.

But in China, we really knocked it out of park.

In Asia, we did well.

What we're thinking, the incremental improvements in 2021 are going to continue in Europe and the U.S. So the sequential improvements that we've been seeing are going to continue.

And we think that Asia, for our quotation activity, Asia is going to maintain strength.

So I'm not sure we're going to go up 22% in China, but -- every quarter, but certainly, we're seeing strength in the pipeline in China and broader Asia.

Great.

And with regards to the M&A pipeline, you talked about a variety of different sizes in there.

How are bid multiples and market multiples right now?

Obviously, we're seeing the public market multiples are obviously very high.

How confident are you, you can still do deals, ROIs, that make sense to you?

Yes.

We've been able to do it so far, and we have a very strong pipeline.

And so I'm pretty confident that we're going to be able to keep doing that.

I mean, that's -- there's a lot of deals.

The thing that's happened is we're able to derive more synergy than we were a few years or 5 or 10 years ago.

We have a great synergy capability to improve businesses, and we're disciplined.

Returns matter to us, and I'm confident that we're going to be able to deploy the cash on M&A.

And our next question comes from the line of Brett Linzey with Vertical Research.

I wanted to come back to the structural cost programs.

Obviously, you guys have done quite a bit over the last couple of years to navigate the pandemic but also integrate acquired businesses.

As we think about the programs in 2021, do those continue on a structural basis?

Or do you think you've got the businesses where they need to be from a cost structure standpoint?

Yes.

I think there are still structural programs that we're going to execute in 2021, and it's ongoing because we're combining businesses, and we're implementing acquisition synergies, and we got that $140 million in structural costs, and there's $80 million of structural savings.

There's $80 million of OpEx savings in that.

So remember, we have a spillover from 2020, but there's ongoing programs.

So the way I look at it is we have over 150 operating facilities, and we have strategic plans on OpEx.

And we take the advantages to combine and make things more efficient all the time, and 2021 will be no different.

Got it.

That's great.

And just on -- back to the price cost question.

What are you embedding for price -- gross price realization for 2021?

And how are you thinking about freight, steel, other raw mat inflationary pressures against that?

And then any items in terms of supply chain that are a worry point that we should be thinking about or constraining your ability to serve customers?

Good question.

So for all of 2020, we had about 1.5 points of price and total inflation was about 1 point, so at a 50 basis point spread for all of the year.

But actually, in Q4 of 2020, our pricing ticked up a bit.

So it was a little higher than 1.5%.

So that added the margins.

And for 2021, we see slightly higher pricing than 1.5%, but we're going to have slightly higher inflation.

So think about it as a 50 basis point spread, a little higher price, a little higher inflation.

And we are seeing commodity price inflation.

We are seeing transportation costs but we got them under control.

We have very good supply chain people, and we've got that factored in.

And with our highly differentiated portfolio and our leadership position in these niche markets, when we have those kind of costs, we're typically able to pass them on to the customer.

And I've been very pleased to see our pricing out of wealth of the pandemic.

In terms of material shortages, I mean, there's a little bit of -- there are issues in the semiconductor market that have been in the press, where you see the automotive industry having some issues now and our supply chain people are on top of that and working it.

But it hasn't caused us any missed shipments or anything like that.

So it's just something to manage, and it's an issue we're working on.

And just one more on price.

Is it fair to say, with the exit of Reading, that the -- your volatility on price up and down has dampened somewhat as part of the total portfolio?

Is that fair?

That's exactly right, Brett.

You're right on.

And our next question comes from the line of Christopher Glynn with Oppenheimer.

Nice numbers.

I think the balance sheet might look the most ample I've ever seen.

So my understanding -- haven't covered you a long time, you usually got kind of base case revenue with some hedge in the implied margin outlook, and you went through that with Josh's question.

In this case, you're entering 2021 with record backlog and a minus 13% organic comp for the full year.

I think it sort of suggests mid-single digits is pretty in the bag, barring significant macro disruptions.

Just want to reconcile the organic comp with the backlog number, if you could.

Yes.

The backlog number is customers who are feeling confident in placing orders for the year.

Those aren't just 1 quarter.

The customers are getting their orders in for the first couple of quarters of the year.

And I think that AMETEK, you -- covered it a long time, we're mid and long-cycle businesses.

So we typically see the uptick a couple of quarters later.

Our Automation business is seeing it now, but the long-cycle businesses in oil -- aero and oil and gas are not seeing an uptick.

So the fact that we have a negative organic growth in Q1, and there's 4 numbers to the year, when you have 1 number that's negative and you add them up, you're at mid-single digits.

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

Great job on the cost side, as usual, and supply, too.

I wanted to ask maybe a little bit more on the cost add-backs.

Dave, is the plan to add back the entire $90 million that you took out?

And if so, how does that go into the segments?

Yes.

I don't think we'll add back the entire $90 million, but I'll give you an example.

We left -- the temporary cost savings in Q4 were $10 million.

So we really ramped down by that point.

And in Q1, it's significantly lower than that.

So it's -- and we'll adjust that as we go through the year.

But I think the temporary costs are going to become so small as we go throughout the year, they're not meaningful anymore.

So it's really the structural savings that drive the margin improvement.

Got it.

And then maybe, Bill, one for you.

The working capital numbers were like pretty incredible.

I was just wondering it's going to have to go the other way this year.

What would you think the working capital percentage increases by in 2021?

Well, as you think about it, yes, our businesses did a fantastic job on working capital, taking inventories down.

Receivables performance was the best I've seen in my 30 years with the company, 30 years-plus.

So it was fantastic.

Will that continue?

Well, I don't know.

We're going to work real hard to make sure it does and our businesses are focused on that.

So will there be some giveback next year?

I'd expect it to be a little bit, but we're very much focused on trying to keep that at the levels we've seen in this fourth quarter and the full year.

And the key point for us, Scott, is I think we had 158% free cash flow-to-net income conversion in 2020.

And for 2021, we're targeting 110%.

So above 100%, even in this environment.

Certainly, we're going to have to put some cash back on the balance sheet.

But we're operating very efficiently, and we're going to put it back on the balance sheet regularly.

Got it.

Would you mind if I squeeze in one more?

Yes, sure.

Sure.

So in terms of the liquidity number, I mean, Christopher's comment was like I haven't seen this level of liquidity in your balance sheet in my time.

Is there room there for some share buybacks if the first half of the year is maybe a little bit slower on M&A than you were hoping because I know how disciplined you are there?

Is there room for share buybacks in that?

Clearly, our #1 priority is M&A.

And I really think we're going to be able to deploy the capital on M&A.

But if we can't, we'll find a way to get the cash back to you, either through buybacks or dividends.

We have a consistently increasing dividend, and we've been opportunistic on share buybacks, but I'm not feeling that way right now.

I think there's an incredible acquisition opportunity for us, and we're positioned at a level and, to your point, a liquidity position that we haven't been at before.

So it's very exciting to me, and I'm very excited about the pipeline.

Our next question comes from the line of Richard Eastman with Baird.

Rick, we don't hear you.

So...

Andrew, why don't we go to the next question?

Our next question comes from the line of Andrew Obin with Bank of America.

Congratulations on another great quarter.

Thank you.

Just a question for you on orders.

We've sort of tried to back into the number from your book-to-bill.

And I think we sort of calculated something like down around 8%.

I was wondering if we could talk about the order rates and just maybe give us color by market.

I mean, I think you sort of highlighted China, you highlighted aerospace, but maybe a little bit more color there.

Yes.

I'll give you the numbers.

Our overall orders were down 8%.

But organic were...

Half what?

We're down 2%.

So...

Oh, okay.

And EIG organic, we're down 2%.

And EMG, organic we're down 1%.

So what you backed into where the overall orders was correct, and we had a good organic month at minus 2%.

Got you.

That makes a lot of sense.

Can you just talk about how you guys are thinking about your own CapEx spending into 2021 and how you have changed in any way, shape or form, how you think about where you spend CapEx on, what you spend CapEx on in the aftermath of the pandemic?

Right.

Yes.

CapEx is -- we plan on $110 million this year.

And opportunities -- we have opportunities that are going to provide excellent returns for growth CapEx, efficiency improvements, expanding our footprint in emerging markets.

And if you recall, in 2020, we talked about it midyear.

We had some expansion projects in emerging markets, and we couldn't get people there.

We needed to get some expertise from different regions to the emerging markets.

We couldn't travel, and so we delayed them.

So we spent $74 million in 2020, and our original plan was $102 million.

So we ended up spending a little less than 2% in 2020.

In 2021, we're going to spend a little over 2%.

We're going to make up a bit of those projects because they're still there, and there's great opportunity in other areas.

But we're still -- longer term, 2% of sales is the CapEx number, and we have a little bit of makeup this year with projects that -- these efficiency projects and growth projects have very high internal rates of returns or rates of returns like 30%, 40%, 50%.

So this is the kind of stuff that you want to fund, you want to get done, and we have a whole slew of projects that we're getting after.

And just are you spending anything different on what kind of equipment you're buying?

Are you spending more on software?

Are you changing your suppliers?

Yes.

I think there's a mix of all that in there, and it's bottoms-up from the businesses.

But I think definitely, software -- our digital strategy is driving a lot of that.

I think the emerging market infrastructure that we're putting in place is driving that.

So it's -- you're right on in the areas, and we just have a particularly large group of projects, and we're going to get those done this year, and we've got great returns on them.

And our next question comes from the line of Andrew Buscaglia with Berenberg.

I wanted to talk a little bit more about M&A because I'm curious what your philosophy is out of this -- out of the pandemic.

Do you -- obviously, you have the capacity to do some larger-sized deals.

First off, do you see more medium, large-sized deals as likely?

And then secondly, is there sort of philosophy here to buy stuff that's kind of beaten down, beaten up that you could -- you're buying out a low here?

Or are you going to go after certain assets that -- I don't know, whatever is opportunistic at the time, wherever there's a good deal to be had?

Right.

I think it's both.

It's all of the above.

And when I think about the -- we expanded our revenue targets, the acquisition we're looking at.

So you could see deals in that $200 million, $300 million, $400 million range.

Those are considered big.

So we're not talking about acquisitions that would be the size of AMETEK or even half the size of AMETEK.

We think those bigger deals, it's much harder to create value.

So there's smaller deals but the size growing with the size of the company.

We're a bigger company now.

So like I said, there's technology deals we're looking at that will augment our organic growth.

There's deals on our sweet spot, very close to our existing positions that we'll get a very high-return on capital on.

And there are some bigger deals that fit with us but are in adjacent markets.

And there's multiple deals in each one of those categories.

So we're busy.

We're prudent in approach, but I'm optimistic that we're going to be able to deploy our capital and add very strong businesses to AMETEK.

Okay.

And can you remind us what was medical as a percentage of sales this year in 2020?

And then can you just remind us like what is that -- what's -- that area, I think, is pretty interesting as a budding platform for you guys.

What's -- what are you thinking about that going forward?

Yes.

Medical sales, 2021, 2020 are in the range of 15% of sales.

So that's approximately $700 million.

And we have businesses that are doing very well in that area.

And they're niche positions, like all of AMETEK, and there's expansion opportunities there.

So we're actively looking at the health care medical space, and we'd like to see that be a bigger percentage of the company.

And our next question comes from the line of Joseph Giordano with Cowen.

This is Francisco on for Joe.

Can you guys talk a little bit about your expectations on aerospace?

Do you think this is coming to be bottoming out soon?

And what are the mix implications going forward?

Yes, it's a great question.

The first point is our aerospace business is one of our more profitable businesses, it's definitely greater than the company average.

That was before the pandemic and right now.

And the team has done an excellent job of realigning the cost structure, lower volume but still very profitable and more profitable than the average AMETEK business.

So we think any change in volume is going to result in high contribution margins because we so leaned out the cost structure.

The second point is there's a distinctly different demand pattern that we've been talking about all along.

About half of our business in aerospace and defense is in the military space.

That business was up mid teens in the fourth quarter.

We think we still see growth in 2021, but it will be more mid-single digits.

And in the commercial space, that business was down about 35% in the fourth quarter, down about 30% for the entire full year.

And for 2021, the commercial aerospace business we're seeing is flat to up low single digits.

And the commercial aerospace business is impacted by many variables impacting demand, including government support, airline capacity decisions.

And overriding it all is the confidence of the flying public, and it's very difficult to predict that thing and -- to predict those things when they the pandemic is raging.

So we're pretty conservative how we're looking in that.

The management team we have in aerospace is outstanding.

And eventually, the commercial business is going to come back.

I don't think it's going to be 2021.

I think it's going to be beyond that, and our guidance reflects that.

So we're really -- we've really done a hard work and done the right thing in our aerospace business.

So we're poised even for small incremental sales growth to deliver good margins.

And eventually, that long-cycle business will pick up and drive the earnings of the company.

And our next question comes from the line of Richard Eastman with Baird.

All right.

I'll try this.

Try one more time.

Yes.

I'm not sure what happened there.

Just a quick thought.

Dave, when we talk of...

Rick, I think we lost you again.

Rick, we got you now.

Okay.

Just when we try to reconcile our segment growth to the AMETEK core growth outlook for '21.

Yes.

So we're kind of 3% to 5%.

And my question is, is EIG -- I presume EMG with process coming back stronger, does EMG on the high end of maybe a 3% to 5% core '21 growth rate?

Yes.

We gave a mid-single-digit range.

So for me, that says between 4% and 6%, not 3% to 5%.

But in that 4% to 6% range, both of the businesses are going to be in that range.

And certainly, EMG is going to probably start out a little better in the year.

But we think the -- when we end the year, they're both going to be plus mid-single-digit growth.

And Dave, when I kind of run that math through the numbers here, I look at both segments of the business perhaps being at a revenue rate at the end of '21 that's below '19.

And I guess my thought is there that the longer cycle, I mean, aerospace would be below.

And then would oil and gas still be projected to be below '19's level?

Are there any other?

Yes.

Oil and gas is projected to be lower.

And oil and gas is going to have a -- the way it looks for us, a strong 2022 right now.

But if you think about where we're at right now in the fourth quarter, the businesses that showed positive organic growth were our defense business, in Process, some of our research businesses, like our Materials Analysis division, that division was all positive organic.

Our UPT business.

Zygo was positive organic.

The Telular business was positive organic, and our Automation business was positive organic.

So as we go out through the year, that will change.

But yes.

The fact of the matter is, with our mid- and long-cycle exposure, we'll have a strong second half.

And for some of our markets, we will not get back to 2019 in 2021.

Yes.

Fair enough.

And when you talked defense Dave, is that...

Rick, I think we lost you in your question there.

Yes.

Andrew, why don't we wrap it up?

Rick we hear you now, I think.

I don't understand that.

Okay.

But with defense, Dave, when you speak to defense, that's all aerospace defense?

Is there anything else that you're capturing in that?

No.

It's aerospace defense, but we do have some land-based programs within aerospace, but it's all the A&D business.

That's right.

I will now turn the call back over to Vice President of Investor Relations, Kevin Coleman, for any closing remarks.

Great.

Thank you, Andrew, and thanks, everyone, for joining our call today.

And as a reminder, a replay of today's webcast may be accessed in the Investors section of ametek.com.

Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating, and you may now disconnect.