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 June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In thousands)
Net sales:
Electronic Instruments			$	1,028,248					$	933,934					$	2,016,007					$	1,724,858
Electromechanical			486,304						452,412						957,070						877,230
Consolidated net sales			$	1,514,552					$	1,386,346					$	2,973,077					$	2,602,088
Operating income and income before income taxes:
Segment operating income:
Electronic Instruments			$	265,115					$	226,637					$	509,889					$	433,534
Electromechanical			124,371						112,434						252,580						217,467
Total segment operating income			389,486						339,071						762,469						651,001
Corporate administrative expenses			(24,644)						(22,460)						(44,387)						(41,045)
Consolidated operating income			364,842						316,611						718,082						609,956
Interest expense			(20,350)						(20,442)						(39,920)						(39,389)
Other income (expense), net			1,973						(4,414)						4,525						(6,356)
Consolidated income before income taxes			$	346,465					$	291,755					$	682,687					$	564,211

Recent Events and Market Conditions

Recent events and market conditions impacting our business include the COVID-19 pandemic, increased material and transportation cost inflation, supply chain constraints, and the ongoing conflict in Ukraine. As a result of these events and conditions, we anticipate a challenging global economic environment for the remainder of 2022. There still remains uncertainty around the COVID-19 pandemic, its effect on labor, government mandated lockdowns and other restrictive measures, and the pandemic's ultimate duration. The recent lockdowns in China limited our ability to access customer sites, operate certain facilities, and placed additional constraints on our supply chain during the second quarter. Depending on the course of the pandemic, additional lockdowns in China or elsewhere could impact our operations and results of operations. Beginning in 2021, we experienced heightened levels of inflation in material and transportation costs and we expect elevated levels of cost inflation to persist throughout 2022. We have taken steps to mitigate the impacts of inflation by implementing pricing actions. We experienced additional pressure in our supply chain due to component shortages and strained transportation capacity, as well as the impact of continued elevated customer demand. In response to these supply chain pressures, we have taken actions to build inventory and seek alternative sources of supply to support sales and backlog growth. The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. Russia and Ukraine represent an insignificant portion of our business, but a significant expansion of the conflict's current scope could further complicate the economic environment. While the ultimate impact of these events remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, and results of operations.

Results of operations for the second quarter of 2022 compared with the second quarter of 2021

For the quarter ended June 30, 2022, the Company posted record sales, operating income, and backlog as well as strong orders. The Company achieved these results from organic sales growth in both EIG and EMG, as well as the Company's Operational Excellence initiatives.

Net sales for the second quarter of 2022 were a record $1,514.6 million, an increase of $128.3 million or 9.2%, compared with net sales of $1,386.3 million for the second quarter of 2021. The increase in net sales for the second quarter of 2022 was due to a 12% increase in organic sales, a 1% increase from acquisitions, partially offset by an unfavorable 3% effect of foreign currency translation.

Total international sales for the second quarter of 2022 were $721.4 million or 47.6% of net sales, an increase of $55.7 million or 8.4%, compared with international sales of $665.7 million or 48.0% of net sales for the second quarter of 2021. The increase in international sales was primarily driven by strong demand in Asia during the quarter as well as contributions from recent acquisitions.

Orders for the second quarter of 2022 were $1,644.5 million, a decrease of $269.2 million or 14.1%, compared with $1,913.7 million for the second quarter of 2021. The decrease in orders for the second quarter of 2022 was due to a 20% decrease from $371 million of acquired backlog from the 2021 acquisitions, an unfavorable 5% effect of foreign currency translation, partially offset by an 11% increase in organic orders. As a result, the Company's backlog of unfilled orders at June 30, 2022 was a record $3,104.4 million, an increase of $374.3 million or 13.7% compared with $2,730.1 million at December 31, 2021.

Segment operating income for the second quarter of 2022 was $389.5 million, an increase of $50.4 million or 14.9%, compared with segment operating income of $339.1 million for the second quarter of 2021. Segment operating income was positively impacted in 2022 by the increase in sales discussed above. Segment operating margins, as a percentage of net sales, increased to 25.7% for the second quarter of 2022, compared with 24.5% for the second quarter of 2021. Excluding the dilutive impact of the 2021 acquisitions, segment operating margins for the core businesses increased 130 basis points compared to the second quarter of 2021, due to benefits from the Company's Operational Excellence initiatives.

Cost of sales for the second quarter of 2022 was $988.2 million or 65.2% of net sales, an increase of $75.5 million or 8.3%, compared with $912.7 million or 65.8% of net sales for the second quarter of 2021. The cost of sales increase was primarily due to the net sales increase discussed above.

Selling, general and administrative expenses for the second quarter of 2022 were $161.5 million or 10.7% of net sales, an increase of $4.5 million or 2.9%, compared with $157.0 million or 11.3% of net sales for the second quarter of 2021.

Consolidated operating income was a record $364.8 million or 24.1% of net sales for the second quarter of 2022, an increase of $48.2 million or 15.2%, compared with $316.6 million or 22.8% of net sales for the second quarter of 2021.

Other income, net was $2.0 million for the second quarter of 2022, compared with $4.4 million of other expense, net for the second quarter of 2021, a change of $6.4 million. The second quarter of 2022 includes higher pension income of $2.5 million and lower due diligence expense compared to the second quarter of 2021.

The effective tax rate for the second quarter of 2022 was 18.5%, compared with 20.6% for the second quarter of 2021. The lower effective tax rate in the second quarter of 2022 is primarily due to improved foreign-derived intangible income ("FDII") benefits on exported products and favorable foreign deferred taxes.

Net income for the second quarter of 2022 was a record $282.4 million, an increase of $50.7 million or 21.9%, compared with $231.7 million for the second quarter of 2021.

Diluted earnings per share for the second quarter of 2022 were $1.22, an increase of $0.22 or 22.0%, compared with $1.00 per diluted share for the second quarter of 2021.

Segment Results

EIG**’**s net sales totaled $1,028.2 million for the second quarter of 2022, an increase of $94.3 million or 10.1%, compared with $933.9 million for the second quarter of 2021. The net sales increase was due to a 12% increase in organic sales, a 1% increase from acquisitions, partially offset by an unfavorable 3% effect of foreign currency translation.

EIG’s operating income was $265.1 million for the second quarter of 2022, an increase of $38.5 million or 17.0%, compared with $226.6 million for the second quarter of 2021. EIG’s operating margins were 25.8% of net sales for the second quarter of 2022, compared with 24.3% for the second quarter of 2021. Excluding the dilutive impact of recent acquisitions, EIG operating margins for the core business increased 170 basis points compared to the second quarter of 2021, due to benefits from the Company's Operational Excellence initiatives.

EMG’s net sales totaled $486.3 million for the second quarter of 2022, an increase of $33.9 million or 7.5%, compared with $452.4 million for the second quarter of 2021. The net sales increase was due to an 11% organic sales increase, partially offset by an unfavorable 3% effect of foreign currency translation.

EMG’s operating income was $124.4 million for the second quarter of 2022, an increase of $12.0 million or 10.6%, compared with $112.4 million for the second quarter of 2021. EMG’s operating margins were 25.6% of net sales for the second quarter of 2022, compared with 24.9% for the second quarter of 2021. EMG operating margins increased compared to the second quarter of 2021 due to benefits from the Company's Operational Excellence initiatives.

Results of operations for the first six months of 2022 compared with the first six months of 2021

Net sales for the first six months of 2022 were $2,973.1 million, an increase of $371.0 million or 14.3%, compared with net sales of $2,602.1 million for the first six months of 2021. The increase in net sales for the first six months of 2022 was due to a 13% organic sales increase, a 3% increase from acquisitions, partially offset by an unfavorable 2% effect of foreign currency translation.

Total international sales for the first six months of 2022 were $1,465.7 million or 49.3% of net sales, an increase of $183.6 million or 14.3%, compared with international sales of $1,282.1 million or 49.3% of net sales for the first six months of 2021. 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 six months of 2022 were $3,347.4 million, an increase of $36.0 million or 1.1%, compared with $3,311.4 million for the first six months of 2021. The increase in orders for the first six months of 2022 was due to a 14% organic order increase, partially offset by a 10% decrease from acquisitions, as well as a 3% unfavorable effect of foreign currency translation.

Segment operating income for the first six months of 2022 was $762.5 million, an increase of $111.5 million or 17.1%, compared with segment operating income of $651.0 million for the first six months of 2021. Segment operating income was positively impacted in 2022 by the increase in sales discussed above, as well as a $7.1 million gain on the sale of a facility. Segment operating margins, as a percentage of net sales, increased to 25.6% for the first six months of 2022, compared with 25.0% for the first six months of 2021. Segment operating margins for the first six months of 2022 were negatively impacted by the dilutive impact of recent acquisitions. Excluding the dilutive impact of recent acquisitions and the gain on the sale of a facility, segment operating margins for the core businesses increased 140 basis points compared to the first six months of 2021, due to the Company's Operational Excellence initiatives.

Cost of sales for the first six months of 2022 was $1,937.0 million or 65.2% of net sales, an increase of $234.9 million or 13.8%, compared with $1,702.1 million or 65.4% of net sales for the first six months of 2021. The cost of sales increase was primarily due to the net sales increase discussed above.

Selling, general and administrative expenses for the first six months of 2022 were $318.0 million or 10.7% of net sales, an increase of $28.0 million or 9.6%, compared with $290.0 million or 11.1% of net sales for the first six months of 2021. Selling, general and administrative expenses increased primarily due to the net sales increase discussed above.

Consolidated operating income was $718.1 million or 24.2% of net sales for the first six months of 2022, an increase of $108.1 million or 17.7%, compared with $610.0 million or 23.4% of net sales for the first six months of 2021. The consolidated operating income and operating income margins for the first six months of 2022 were positively impacted by the increase in net sales discussed above as well as the benefits of the Company's Operational Excellence initiatives.

Other income, net was $4.5 million for the first six months of 2022, compared with $6.4 million of other expense, net for the first six months of 2021, a change of $10.9 million. The first six months of 2022 includes higher pension income of $5.0 million and lower acquisition-related due diligence expense compared to the first six months of 2021.

The effective tax rate for the first six months of 2022 was 18.7%, compared with 20.1% for the first six months of 2021. The lower effective tax rate in 2022 is primarily due to improved FDII benefits and a favorable foreign tax rate differential.

Net income for the first six months of 2022 was $554.8 million, an increase of $103.9 million or 23.0%, compared with $450.9 million for the first six months of 2021.

Diluted earnings per share for the first six months of 2022 were $2.39, an increase of $0.45 or 23.2%, compared with $1.94 per diluted share for the first six months of 2021.

Segment Results

**EIG’**s net sales totaled $2,016.0 million for the first six months of 2022, an increase of $291.1 million or 16.9%, compared with $1,724.9 million for the first six months of 2021. The net sales increase was due to a 14% organic sales increase, a 5% increase from acquisitions, partially offset by an unfavorable 2% effect of foreign currency translation.

EIG’s operating income was $509.9 million for the first six months of 2022, an increase of $76.4 million or 17.6%, compared with $433.5 million for the first six months of 2021. EIG’s operating margins were 25.3% of net sales for the first six months of 2022, compared with 25.1% for the first six months of 2021. EIG's operating margins in the first six months of 2022 were negatively impacted by the dilutive impact of the 2021 acquisitions. Excluding the dilutive impact of recent acquisitions, EIG operating margins increased 160 basis points compared to the first six months of 2021, due to benefits from the Company's Operational Excellence initiatives.

EMG’s net sales totaled $957.1 million for the first six months of 2022, an increase of $79.9 million or 9.1%, compared with $877.2 million for the first six months of 2021. The net sales increase was due to an 11% organic sales increase, partially offset by an unfavorable 2% effect of foreign currency translation.

EMG’s operating income was $252.6 million for the first six months of 2022, an increase of $35.1 million or 16.1%, compared with $217.5 million for the first six months of 2021. EMG's operating income included a $7.1 million gain on the sale of a facility during the first six months of 2022. EMG’s operating margins were 26.4% of net sales for the first six months of 2022, compared with 24.8% for the first six months of 2021. Excluding the gain on the sale of a facility, EMG operating margins increased 90 basis points compared to the first six months of 2021, due to the Company's Operational Excellence initiatives.

Financial Condition

Liquidity and Capital Resources

Cash provided by operating activities totaled $437.2 million for the first six months of 2022, a decrease of $134.2 million or 23.5%, compared with $571.4 million for the first six months of 2021. The decrease in cash provided by operating activities for the first six months of 2022 was primarily due to higher investments in inventory to support sales and backlog growth, and to mitigate inventory supply chain constraints, partially offset by higher net income.

Free cash flow (cash flow provided by operating activities less capital expenditures) was $384.7 million for the first six months of 2022, compared with $530.4 million for the first six months of 2021. EBITDA (earnings before interest, income taxes, depreciation and amortization) was $877.2 million for the first six months of 2022, compared with $742.5 million for the first six months of 2021. 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 $41.0 million for the first six months of 2022, compared with cash used by investing activities of $1,882.1 million for the first six months of 2021. For the first six months of 2022, the Company received proceeds of $11.8 million from the sale of a facility. For the first six months of 2021, the Company paid $1,840.8 million, net of cash acquired, to purchase Abaco Systems, Magnetrol International, NSI-MI Technologies, Crank Software, and EGS Automation. Additions to property, plant and equipment totaled $52.5 million for the first six months of 2022, compared with $41.0 million for the first six months of 2021.

Cash used by financing activities totaled $370.4 million for the first six months of 2022, compared with cash provided by financing activities of $491.6 million for the first six months of 2021. At June 30, 2022, total debt, net was $2,502.2 million, compared with $2,544.2 million at December 31, 2021. For the first six months of 2022, total borrowings increased by $56.5 million compared with a $569.9 million increase for the first six months of 2021. At June 30, 2022, the Company had available borrowing capacity of $2,600.1 million under its revolving credit facility, including the $700 million accordion feature.

On May 12, 2022, 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 increase the size from $1.5 billion to $2.3 billion and terminates the $800 million term loan. The credit agreement places certain restrictions on allowable additional

indebtedness. At June 30, 2022, the Company had $360.0 million outstanding on the revolver with a maturity date of May 2027.

The debt-to-capital ratio was 26.5% at June 30, 2022, compared with 27.0% at December 31, 2021. 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 23.7% at June 30, 2022, compared with 24.2% at December 31, 2021. 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 six months of 2022 included cash dividends paid of $101.2 million, compared with $92.2 million for the first six months of 2021. Effective February 9, 2022, the Company’s Board of Directors approved a 10% increase in the quarterly cash dividend on the Company’s common stock to $0.22 per common share from $0.20 per common share. The Company repurchased $331.4 million of its common stock for the first six months of 2022, compared with $12.9 million for the first six months of 2021. Effective May 5, 2022, the Company's Board of Directors approved a $1 billion share repurchase authorization. This authorization replaces an earlier $500 million share repurchase authorization approved by the Board in February 2019. Proceeds from stock option exercises were $17.8 million for the first six months of 2022, compared with $31.1 million for the first six months of 2021.

As a result of all of the Company’s cash flow activities for the first six months of 2022, cash and cash equivalents at June 30, 2022 totaled $348.7 million, compared with $346.8 million at December 31, 2021. At June 30, 2022, the Company had $326.8 million in cash outside the United States, compared with $334.0 million at December 31, 2021. 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, 2021. 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.