Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth net sales and income by reportable segment and on a consolidated basis:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(In thousands)
Net sales:
Electronic Instruments			$	981,815					$	748,372					$	2,706,673					$	2,170,479
Electromechanical			458,866						378,570						1,336,096						1,170,603
Consolidated net sales			$	1,440,681					$	1,126,942					$	4,042,769					$	3,341,082
Operating income and income before income taxes:
Segment operating income:
Electronic Instruments			$	245,118					$	203,749					$	678,652					$	534,613
Electromechanical			114,571						84,303						332,038						245,154
Total segment operating income			359,689						288,052						1,010,690						779,767
Corporate administrative expenses			(22,126)						(17,311)						(63,171)						(49,996)
Consolidated operating income			337,563						270,741						947,519						729,771
Interest expense			(20,476)						(21,187)						(59,865)						(66,597)
Other (expense) income, net			2,581						(1,479)						(3,775)						142,428
Consolidated income before income taxes			$	319,668					$	248,075					$	883,879					$	805,602

For the quarter ended September 30, 2021, the Company posted record sales, operating income, and backlog as well as strong operating cash flow. The Company achieved these results from organic sales growth in both EIG and EMG, contributions from the 2021 acquisitions of Abaco Systems, Inc., Magnetrol International, NSI-MI Technologies, Crank Software, and EGS Automation, as well as the Company's Operational Excellence initiatives.

The full year impact of the 2021 acquisitions, continued economic recovery, and benefits from its Operational Excellence initiatives are expected to have a positive impact on the remainder of the Company's 2021 results. While the ultimate duration and impact of the COVID-19 pandemic is unknown, the Company will continue to monitor and address the challenges of the pandemic throughout the remainder of the year.

Impact of COVID-19 Pandemic on our Business

The COVID-19 pandemic resulted in significant global economic disruption and had an adverse impact on the Company's financial results throughout 2020. As the global economy has begun to recover, the Company eliminated certain of the temporary cost saving actions put in place in 2020, but continues to closely monitor its fixed costs, capital expenditure plans, inventory, and capital resources to respond to changing conditions and to ensure it has the resources to meet its future needs. The Company has seen sequential improvement in its financial results since the third quarter of 2020, and this trend has continued in the first nine months of 2021. The current economic environment in which the Company operates is characterized by increased material cost inflation, logistics challenges, labor availability issues, and component part shortages. The Company continues to monitor and closely manage through these conditions. The Company expects the impact of these conditions to continue through the fourth quarter of 2021 and has taken steps to mitigate such impacts.

On September 24, 2021, the U.S. Safer Federal Workforce Task Force issued guidance requiring federal contractors and subcontractors to comply with COVID-19 safety protocols, including requiring certain employees to be fully vaccinated against COVID-19 by December 8, 2021, except in limited circumstances. The vaccination requirements will be incorporated in new government contracts, renewals, extensions and other modifications signed on and after October 15, 2021, and will apply to employees working on or in connection with such contracts, as well as to employees working at a location at which an employee working on such contract is likely to be present. The Company has determined the December 8, 2021 deadline for vaccination will apply to many of the Company's U.S. sites and is in the process of implementing this executive order across its U.S. workforce. It is uncertain to what extent compliance with the vaccine mandate may result in workforce attrition. While this mandate may have an impact on the Company's operations, we do not expect it to have a material adverse effect on the Company's financial condition, results of operations, or liquidity.

The Company's top priority during this pandemic is the health and safety of its employees. All global manufacturing facilities remained fully operational during the third quarter and continue to operate with safety protocols in place to ensure the health and safety of its employees and communities. The Company will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on its business. See Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K, for further discussion of the possible impact of the COVID-19 pandemic on our business.

Results of operations for the third quarter of 2021 compared with the third quarter of 2020

Net sales for the third quarter of 2021 were a record $1,440.7 million, an increase of $313.8 million or 27.8%, compared with net sales of $1,126.9 million for the third quarter of 2020. The increase in net sales for the third quarter of 2021 was due to a 17% increase in organic sales, and an 11% increase from acquisitions.

Total international sales for the third quarter of 2021 were $701.1 million or 48.7% of net sales, an increase of $152.3 million or 27.8%, compared with international sales of $548.8 million or 48.7% of net sales for the third quarter of 2020. The increase in international sales was primarily driven by strong demand in Europe and Asia during the quarter as well as contributions from recent acquisitions.

Orders for the third quarter of 2021 were $1,552.6 million, an increase of $417.1 million or 36.7%, compared with $1,135.5 million for the third quarter of 2020. The increase in orders for the third quarter of 2021 was due to a 31% increase in organic orders, a 9% increase from acquisitions, partially offset by an unfavorable 3% effect of foreign currency translation. As a result, the Company's backlog of unfilled orders at September 30, 2021 was a record $2,623.5 million, an increase of $821.3 million or 45.6% compared with $1,802.2 million at December 31, 2020.

Segment operating income for the third quarter of 2021 was $359.7 million, an increase of $71.6 million or 24.9%, compared with segment operating income of $288.1 million for the third quarter of 2020. Segment operating margins, as a percentage of net sales, decreased to 25.0% for the third quarter of 2021, compared with 25.6% for the third quarter of 2020.

Cost of sales for the third quarter of 2021 was $949.4 million or 65.9% of net sales, an increase of $216.7 million or 29.6%, compared with $732.7 million or 65.0% of net sales for the third quarter of 2020. The cost of sales increase was primarily due to the net sales increase discussed above.

Selling, general and administrative expenses for the third quarter of 2021 were $153.7 million or 10.7% of net sales, an increase of $30.2 million or 24.5%, compared with $123.5 million or 11.0% of net sales for the third quarter of 2020. Selling, general and administrative expenses increased primarily due to the net sales increase discussed above.

Consolidated operating income was a record $337.6 million or 23.4% of net sales for the third quarter of 2021, an increase of $66.9 million or 24.7%, compared with $270.7 million or 24.0% of net sales for the third quarter of 2020.

Other income, net was $2.6 million for the third quarter of 2021, compared with $1.5 million of other expense, net for the third quarter of 2020, a change of $4.1 million.

The effective tax rate for the third quarter of 2021 was 19.5%, compared with 17.5% for the third quarter of 2020. The higher effective tax rate in 2021 is primarily due to an increase in the foreign rate differential related to the mix of earnings generated in higher taxed jurisdictions.

Net income for the third quarter of 2021 was $257.5 million, an increase of $52.9 million or 25.8%, compared with $204.6 million for the third quarter of 2020.

Diluted earnings per share for the third quarter of 2021 were $1.10, an increase of $0.22 or 25.0%, compared with $0.88 per diluted share for the third quarter of 2020.

Segment Results

EIG**’**s net sales totaled a record $981.8 million for the third quarter of 2021, an increase of $233.4 million or 31.2%, compared with $748.4 million for the third quarter of 2020. The net sales increase was due to a 15% increase in organic sales, and a 16% increase from acquisitions.

EIG’s operating income was a record $245.1 million for the third quarter of 2021, an increase of $41.4 million or 20.3%, compared with $203.7 million for the third quarter of 2020. EIG's operating income increased primarily due to the sales

increase discussed above. EIG’s operating margins were 25.0% of net sales for the third quarter of 2021, compared with 27.2% for the third quarter of 2020. The 2021 acquisitions of Abaco, Magnetrol, NSI-MI, and Crank Software diluted operating margins by 220 basis points. Excluding the acquisitions, EIG operating margins were flat when compared to the third quarter of 2020.

EMG’s net sales totaled $458.9 million for the third quarter of 2021, an increase of $80.3 million or 21.2%, compared with $378.6 million for the third quarter of 2020. The net sales increase was due to a 20% organic sales increase, as well as a favorable 1% effect of foreign currency translation.

EMG’s operating income was a record $114.6 million for the third quarter of 2021, an increase of $30.3 million or 35.9%, compared with $84.3 million for the third quarter of 2020. EMG’s operating margins were a record 25.0% of net sales for the third quarter of 2021, compared with 22.3% for the third quarter of 2020. EMG's operating income and operating margins increased primarily due to the increase in sales discussed above as well as benefits from the Company's Operational Excellence initiatives.

Results of operations for the first nine months of 2021 compared with the first nine months of 2020

Net sales for the first nine months of 2021 were $4,042.8 million, an increase of $701.7 million or 21.0%, compared with net sales of $3,341.1 million for the first nine months of 2020. The increase in net sales for the first nine months of 2021 was due to a 14% organic sales increase, a 6% increase from acquisitions as well as a favorable 1% effect of foreign currency translation.

Total international sales for the first nine months of 2021 were $1,983.1 million or 49.1% of net sales, an increase of $389.6 million or 24.4%, compared with international sales of $1,593.5 million or 47.7% of net sales for the first nine months of 2020. The increase in international sales was primarily driven by strong demand in Europe and Asia as well as contributions from recent acquisitions.

Orders for the first nine months of 2021 were $4,864.0 million, an increase of $1,520.4 million or 45.5%, compared with $3,343.6 million for the first nine months of 2020. The increase in orders for the first nine months of 2021 was due to a 27% organic order increase, as well as an 18% increase from acquisitions.

Segment operating income for the first nine months of 2021 was $1,010.7 million, an increase of $230.9 million or 29.6%, compared with segment operating income of $779.8 million for the first nine months of 2020. Segment operating margins, as a percentage of net sales, increased to 25.0% for the first nine months of 2021, compared with 23.3% for the first nine months of 2020. The Company recorded realignment costs of $43.7 million in the first quarter of 2020 in response to the impact of a weak global economy as a result of the COVID-19 pandemic. The 2020 realignment costs were composed of $35.3 million in severance costs for a reduction in workforce and $8.4 million of asset write-downs, primarily inventory, which decreased margins by130 basis points for the first nine months of 2020. Segment operating income and segment operating margins for the first nine months of 2021 were positively impacted by the increase in net sales discussed above as well as the Company's Operational Excellence initiatives, including the 2020 realignment actions.

Cost of sales for the first nine months of 2021 was $2,651.5 million or 65.6% of net sales, an increase of $425.0 million or 19.1%, compared with $2,226.5 million or 66.6% of net sales for the first nine months of 2020. The cost of sales increase was primarily due to the net sales increase discussed above. The first nine months of 2020 included the realignment costs discussed above.

Selling, general and administrative expenses for the first nine months of 2021 were $443.7 million or 11.0% of net sales, an increase of $58.9 million or 15.3%, compared with $384.8 million or 11.5% of net sales for the first nine months of 2020. Selling, general and administrative expenses increased primarily due to the increase in net sales discussed above.

Consolidated operating income was $947.5 million or 23.4% of net sales for the first nine months of 2021, an increase of $217.7 million or 29.8%, compared with $729.8 million or 21.8% of net sales for the first nine months of 2020. The consolidated operating income and operating income margins for the first nine months of 2021 were positively impacted by the increase in net sales discussed above as well as the benefits of the Company's Operational Excellence initiatives. The first nine months of 2020 included the realignment costs discussed above, which negatively impacted consolidated operating margins by 140 basis points.

Other expense, net was $3.8 million for the first nine months of 2021, compared with $142.4 million of other income, net for the first nine months of 2020, a change of $146.2 million. In March 2020, the Company completed the sale of its

Reading Alloys business ("Reading") to Kymera International for net proceeds of $245.3 million in cash. The sale resulted in a pre-tax gain of $141.0 million recorded in other income, net in the first quarter of 2020. The first nine months of 2021 also includes higher acquisition-related due diligence expense compared to the first nine months of 2020.

The effective tax rate for the first nine months of 2021 was 19.9%, compared with 19.1% for the first nine months of 2020. The higher effective tax rate in 2021 is primarily due to an increase in the foreign rate differential and from the remeasurement of the deferred tax liabilities due to an increase in the UK tax rate in 2021.

Net income for the first nine months of 2021 was $708.4 million, an increase of $57.0 million or 8.7%, compared with $651.4 million for the first nine months of 2020.

Diluted earnings per share for the first nine months of 2021 were $3.04, an increase of $0.22 or 7.8%, compared with $2.82 per diluted share for the first nine months of 2020. In the first nine months of 2020, diluted earnings per share included $0.47 for the net gain on the sale of Reading and $0.15 for the net realignment costs.

Segment Results

**EIG’**s net sales totaled $2,706.7 million for the first nine months of 2021, an increase of $536.2 million or 24.7%, compared with $2,170.5 million for the first nine months of 2020. The net sales increase was due to a 13% organic sales increase, a 10% increase from acquisitions, and a favorable 1% effect of foreign currency translation.

EIG’s operating income was $678.7 million for the first nine months of 2021, an increase of $144.1 million or 26.9%, compared with $534.6 million for the first nine months of 2020. EIG’s operating margins were 25.1% of net sales for the first nine months of 2021, compared with 24.6% for the first nine months of 2020. EIG's operating income and operating margins in the first nine months of 2021 were positively impacted by the sales increase discussed above as well as the Company's Operational Excellence initiatives. The 2021 acquisitions of Abaco, Magnetrol, NSI-MI, and Crank Software diluted operating margins by 150 basis points. Excluding the acquisitions, EIG operating margins would have been 26.6% for the first nine months of 2021. EIG’s operating margins were negatively impacted in the first nine months of 2020 by 110 basis points due to the 2020 realignment costs discussed above.

EMG’s net sales totaled $1,336.1 million for the first nine months of 2021, an increase of $165.5 million or 14.1%, compared with $1,170.6 million for the first nine months of 2020. The net sales increase was due to a 14% organic sales increase, a favorable 2% effect of foreign currency translation, partially offset by an unfavorable 2% impact from the Reading divestiture.

EMG’s operating income was $332.0 million for the first nine months of 2021, an increase of $86.8 million or 35.4%, compared with $245.2 million for the first nine months of 2020. EMG’s operating margins were 24.9% of net sales for the first nine months of 2021, compared with 20.9% for the first nine months of 2020. EMG's operating income and operating margins in the first nine months of 2021 were positively impacted by the sales increase discussed above as well as the Company's Operational Excellence initiatives. EMG’s operating margins were negatively impacted in the first nine months of 2020 by 180 basis points due to the 2020 realignment costs discussed above.

Financial Condition

Liquidity and Capital Resources

Cash provided by operating activities totaled $878.6 million for the first nine months of 2021, a decrease of $16.5 million or 1.8%, compared with $895.1 million for the first nine months of 2020. The decrease in cash provided by operating activities for the first nine months of 2021 was primarily due to higher working capital requirements, partially offset by higher net income, net of the gain on the sale of the Reading business in 2020.

Free cash flow (cash flow provided by operating activities less capital expenditures) was $811.3 million for the first nine months of 2021, compared with $857.9 million for the first nine months of 2020. EBITDA (earnings before interest, income taxes, depreciation and amortization) was $1,157.2 million for the first nine months of 2021, compared with $1,060.9 million for the first nine months of 2020, which included the gain on the sale of the Reading business. Free cash flow and EBITDA are presented because the Company is aware that they are measures used by third parties in evaluating the Company.

Cash used by investing activities totaled $1,895.2 million for the first nine months of 2021, compared with cash provided by investing activities of $98.7 million for the first nine months of 2020. For the first nine months of 2021, the Company paid $1,839.7 million, net of cash acquired, to purchase Abaco Systems, Magnetrol International, NSI-MI

Technologies, Crank Software, and EGS Automation compared to $116.5 million, net of cash acquired, to purchase IntelliPower in the first nine months of 2020. For the first nine months of 2020, the Company received proceeds of $245.3 million from the sale of its Reading business. Additions to property, plant and equipment totaled $67.2 million for the first nine months of 2021, compared with $37.2 million for the first nine months of 2020.

Cash provided by financing activities totaled $171.2 million for the first nine months of 2021, compared with cash used by financing activities of $84.7 million for the first nine months of 2020. At September 30, 2021, total debt, net was $2,654.6 million, compared with $2,413.7 million at December 31, 2020. For the first nine months of 2021, total borrowings increased by $286.1 million, driven by the 2021 acquisitions, compared with a $7.1 million increase for the first nine months of 2020. At September 30, 2021, the Company had available borrowing capacity of $2,407.3 million under its revolving credit facility and $800 million term loan, including the $500 million accordion feature.

On April 26, 2021, the Company along with certain of its foreign subsidiaries amended and restated its credit agreement dated as of September 22, 2011, as amended and restated as of March 10, 2016 and as further amended and restated as of October 30, 2018, with the lenders, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A., PNC Bank, National Association, Trust Bank and Wells Fargo Bank, National Association, as Co-Syndication Agents. The credit agreement amends and restates the Company’s existing revolving credit facility to add a new five-year, delayed draw, term loan for up to $800 million. The credit agreement places certain restrictions on allowable additional indebtedness. At September 30, 2021, the Company had $150.0 million outstanding on the term loan.

The debt-to-capital ratio was 28.8% at September 30, 2021, compared with 28.9% at December 31, 2020. The net debt-to-capital ratio (total debt, net less cash and cash equivalents divided by the sum of net debt and stockholders’ equity) was 25.9% at September 30, 2021, compared with 16.8% at December 31, 2020. The net debt-to-capital ratio is presented because the Company is aware that this measure is used by third parties in evaluating the Company.

Additional financing activities for the first nine months of 2021 included cash dividends paid of $138.3 million, compared with $123.7 million for the first nine months of 2020. Effective February 11, 2021, the Company’s Board of Directors approved an 11% increase in the quarterly cash dividend on the Company’s common stock to $0.20 per common share from $0.18 per common share. Proceeds from stock option exercises were $42.3 million for the first nine months of 2021, compared with $39.9 million for the first nine months of 2020.

As a result of all of the Company’s cash flow activities for the first nine months of 2021, cash and cash equivalents at September 30, 2021 totaled $358.7 million, compared with $1,212.8 million at December 31, 2020. At September 30, 2021, the Company had $319.9 million in cash outside the United States, compared with $344.0 million at December 31, 2020. The Company utilizes this cash to fund its international operations, as well as to acquire international businesses. The Company is in compliance with all covenants, including financial covenants, for all of its debt agreements. The Company believes it has sufficient cash-generating capabilities from domestic and unrestricted foreign sources, available credit facilities and access to long-term capital funds to enable it to meet its operating needs and contractual obligations in the foreseeable future.

Critical Accounting Policies

The Company’s critical accounting policies are detailed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition of its Annual Report on Form 10-K for the year ended December 31, 2020. Primary disclosure of the Company’s significant accounting policies is also included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of its Annual Report on Form 10-K.

Forward-Looking Information

Information contained in this discussion, other than historical information, is considered “forward-looking statements” and is subject to various factors and uncertainties that may cause actual results to differ significantly from expectations. These factors and uncertainties include risks related to the COVID-19 pandemic and its potential impact on AMETEK’s operations, supply chain, and demand across key end markets; general economic conditions affecting the industries the Company serves; changes in the competitive environment or the effects of competition in the Company’s markets; risks associated with international sales and operations; the Company’s ability to consummate and successfully integrate future acquisitions; the Company’s ability to successfully develop new products, open new facilities or transfer product lines; the price and availability of raw materials; compliance with government regulations, including environmental regulations; and the ability to maintain adequate liquidity and financing sources. A detailed discussion of these and other factors that may affect the Company’s future results is contained in AMETEK’s filings with the U.S. Securities and Exchange Commission, including its most recent reports on Form 10-K,10-Q and 8-K. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements, unless required by the securities laws to do so.