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:

For the quarter ended March 31, 2023, the Company posted record backlog, operating income, operating margins, and operating cash flow, as well as strong orders, sales, net income, and diluted earnings per share. We achieved these results from organic sales growth in both EIG and EMG, contributions from the acquisitions of Navitar in September 2022 and RTDS in October 2022, as well as our Operational Excellence initiatives. During 2022 and into 2023, we continue to experience heightened levels of inflation in material costs, supply chain constraints, as well as continued uncertainty in the global economy. We expect material cost inflation to remain elevated throughout 2023, but anticipate pricing actions to mitigate this inflationary pressure. In response to supply chain pressures, we have taken actions to build inventory and seek alternative sources of supply to support sales and backlog growth. We continue to evaluate the extent to which these factors will impact our business, financial condition, and results of operations and will take additional actions as necessary throughout 2023 to mitigate this inflationary pressure. For 2023, our record backlog, the full year impact of the 2022 acquisitions, the 2023 acquisition of Bison Gear & Engineering Corp., and continued focus on and implementation of our Operational Excellence initiatives are expected to have a positive impact on the remainder of our 2023 results.

Results of operations for the first quarter of 2023 compared with the first quarter of 2022

Net sales for the first quarter of 2023 were $1,597.1 million, an increase of $138.6 million or 9.5%, compared with net sales of $1,458.5 million for the first quarter of 2022. The increase in net sales for the first quarter of 2023 was due to a 9% increase in organic sales and a 2% increase from acquisitions, partially offset by an unfavorable 2% effect of foreign currency translation.

Total international sales for the first quarter of 2023 were $788.1 million or 49.3% of net sales, an increase of $43.7 million or 5.9%, compared with international sales of $744.4 million or 51.0% of net sales for the first quarter of 2022. The increase in international sales was primarily driven by strong demand in Europe and Asia during the quarter as well as contributions from the 2022 acquisitions.

Orders for the first quarter of 2023 were $1,812.1 million, a increase of $109.3 million or 6.4%, compared with $1,702.8 million for the first quarter of 2022. The increase in orders for the first quarter of 2023 was due to a 1% increase in organic orders and a 5% increase from acquisitions. As a result, the Company's backlog of unfilled orders at March 31, 2023 was a record $3,433.6 million, an increase of $215.0 million or 6.7% compared with $3,218.6 million at December 31, 2022.

Segment operating income for the first quarter of 2023 was $430.3 million, an increase of $57.3 million or 15.4%, compared with segment operating income of $373.0 million for the first quarter of 2022. Segment operating margins, as a percentage of net sales, increased to 26.9% for the first quarter of 2023, compared with 25.6% for the first quarter of 2022.

Segment operating income and operating margins were positively impacted in 2023 by the increase in sales discussed above. In the first quarter of 2022, segment operating income included a $7.1 million gain on the sale of a facility which increased operating margins 50 basis points.

Cost of sales for the first quarter of 2023 was $1,022.5 million or 64.0% of net sales, an increase of $73.7 million or 7.8%, compared with $948.8 million or 65.1% of net sales for the first quarter of 2022. The cost of sales increase was primarily due to the net sales increase discussed above.

Selling, general and administrative expenses for the first quarter of 2023 were $169.1 million or 10.6% of net sales, an increase of $12.6 million or 8.1%, compared with $156.5 million or 10.7% of net sales for the first quarter of 2022. The selling expenses increase is primarily due to the net sales increase discussed above. General and administrative expenses for the first quarter of 2023 were $24.7 million, compared with $19.7 million for the first quarter of 2022. The general and administrative expenses in the first quarter of 2023 include higher employee compensation expense compared to the first quarter of 2022.

Consolidated operating income was a record $405.5 million or a record 25.4% of net sales for the first quarter of 2023, an increase of $52.3 million or 14.8%, compared with $353.2 million or 24.2% of net sales for the first quarter of 2022.

Other expense, net was $5.4 million for the first quarter of 2023, compared with $2.6 million of other income, net for the first quarter of 2022, an increase of $7.9 million. The first quarter of 2023 includes lower pension income compared to the first quarter of 2022.

The effective tax rate for the first quarter of 2023 was 19.5%, compared with 19.0% for the first quarter of 2022. The higher effective tax rate in 2023 is primarily due to an increase in the foreign rate differential which reflects a greater proportion of earnings in higher tax jurisdictions.

Net income for the first quarter of 2023 was $305.7 million, an increase of $33.3 million or 12.2%, compared with $272.4 million for the first quarter of 2022.

Diluted earnings per share for the first quarter of 2023 were $1.32, an increase of $0.15 or 12.8%, compared with $1.17 per diluted share for the first quarter of 2022.

Segment Results

EIG**’**s net sales totaled $1,117.2 million for the first quarter of 2023, an increase of $129.4 million or 13.1%, compared with $987.8 million for the first quarter of 2022. The net sales increase was due to an 11% increase in organic sales and a 3% increase from acquisitions, partially offset by an unfavorable 1% effect of foreign currency translation.

EIG’s operating income was a record $309.7 million for the first quarter of 2023, an increase of $64.9 million or 26.5%, compared with $244.8 million for the first quarter of 2022. EIG’s operating margins were 27.7% of net sales for the first quarter of 2023, compared with 24.8% for the first quarter of 2022, due to continued benefits from the Company's Operational Excellence initiatives.

EMG’s net sales totaled $479.9 million for the first quarter of 2023, an increase of $9.1 million or 1.9%, compared with $470.8 million for the first quarter of 2022. The net sales increase was due to a 4% organic sales increase, partially offset by an unfavorable 2% effect of foreign currency translation.

EMG’s operating income was $120.5 million for the first quarter of 2023, a decrease of $7.7 million or 6.0%, compared with $128.2 million for the first quarter of 2022. EMG’s operating margins were 25.1% of net sales for the first quarter of 2023, compared with 27.2% for the first quarter of 2022. EMG's operating margins in the first quarter of 2023 were negatively impacted by the dilutive impact of the 2023 acquisition. In the first quarter of 2022, EMG operating income and margins included a $7.1 million gain on the sale of a facility, which increased EMG operating margins by 150 basis points. Excluding the dilutive impact of the 2023 acquisition and the gain on the sale of a facility, EMG margins increased 60 basis points compared with the first quarter of 2022.

Financial Condition

Liquidity and Capital Resources

Cash provided by operating activities totaled a record $386.5 million for the first three months of 2023, an increase of $185.2 million or 92.0%, compared with $201.3 million for the first three months of 2022. The increase in cash provided by operating activities for the first three months of 2023 was primarily due to improved working capital management and higher net income.

Free cash flow (cash flow provided by operating activities less capital expenditures) was a record $366.5 million for the first three months of 2023, compared with $175.0 million for the first three months of 2022. EBITDA (earnings before interest, income taxes, depreciation and amortization) was $481.7 million for the first three months of 2023, compared with $433.6 million for the first three months of 2022. 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 $122.2 million for the first three months of 2023, compared with cash used by investing activities of $14.9 million for the first three months of 2022. For the first three months of 2023, the Company paid $99.3 million, net of cash acquired, to purchase Bison Gear & Engineering Corp. For the first three months of 2022, the Company received $11.8 million from the sale of a facility. Additions to property, plant and equipment totaled $20.0 million for the first three months of 2023, compared with $26.4 million for the first three months of 2022.

Cash used by financing activities totaled $215.0 million for the first three months of 2023, compared with cash used by financing activities of $187.4 million for the first three months of 2022. At March 31, 2023, total debt, net was $2,245.9 million, compared with $2,385.0 million at December 31, 2022. For the first three months of 2023, total borrowings decreased by $155.5 million compared with a $20.0 million increase for the first three months of 2022. At March 31, 2023, the Company had available borrowing capacity of $2,901.0 million under its revolving credit facility, including the $700 million accordion feature.

The debt-to-capital ratio was 22.5% at March 31, 2023, compared with 24.2% at December 31, 2022. 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 19.2% at March 31, 2023, compared with 21.4% at December 31, 2022. 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 three months of 2023 included cash dividends paid of $57.5 million, compared with $50.8 million for the first three months of 2022. Effective February 9, 2023, the Company’s Board of Directors approved a 14% increase in the quarterly cash dividend on the Company’s common stock to $0.25 per common share from $0.22 per common share. The Company repurchased $6.5 million of its common stock for the first three months of 2023, compared with $156.7 million for the first three months of 2022. Proceeds from stock option exercises were $10.4 million for the first three months of 2023, compared with $8.3 million for the first three months of 2022.

As a result of all of the Company’s cash flow activities for the first three months of 2023, cash and cash equivalents at March 31, 2023 totaled $399.9 million, compared with $345.4 million at December 31, 2022. At March 31, 2023, the Company had $377.1 million in cash outside the United States, compared with $334.1 million at December 31, 2022. 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, 2022. 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.