Earnings Call Transcript
AMETEK INC/ (AME)
Earnings Call Transcript - AME Q3 2022
Operator, Operator
Welcome to AMETEK's Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.
Kevin Coleman, Vice President of Investor Relations and Treasurer
Thank you, Kate. Good morning, and thank you for joining us for AMETEK’s third quarter 2022 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today’s call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk 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 2021 or 2022 results will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We’ll begin today’s call with prepared remarks by Dave and Bill, and then we’ll open it up for questions. I’ll now turn the meeting over to Dave.
Dave Zapico, Chairman and Chief Executive Officer
Thank you, Kevin, and good morning, everyone. AMETEK delivered record results in the third quarter, with stronger-than-expected sales growth and outstanding operational execution, leading to earnings above our expectations. Operationally, our businesses are performing exceptionally well and successfully offsetting inflation with price increases, resulting in impressive margin expansion. We are also seeing continued strong and broad-based demand across our diversified niche markets, leading to impressive organic order growth and a record backlog of $3.2 billion. And this morning, we announced the acquisition of two excellent businesses, Navitar and RTDS Technologies, expanding our presence in high-end precision optics and in testing solutions for the electric power grid and renewable energy applications. I will provide more details on these acquisitions shortly. Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our earnings guidance for the full year. Now, let me turn to our third quarter results. Third quarter sales were a record $1.55 billion, up 8% over the same period in 2021. Organic sales were up 11%. Acquisitions added one point and foreign currency was an approximate four-point headwind in the quarter. Demand also remains solid across our niche markets with organic orders growing 9% in the quarter, while book-to-bill was 1.07, our ninth consecutive quarter of positive book-to-bill. Backlog at quarter end was a record $3.2 billion, up approximately $1.4 billion from the end of 2020. Operating income in the quarter was a record $385 million, a 14% increase over the third quarter of 2021, while operating margins were 24.8% in the quarter, up a robust 140 basis points from the prior year, with strong margin expansion in each operating group. Our ability to drive meaningful margin expansion despite the inflationary environment reflects the differentiation of our technology solutions and our flexible operating model. EBITDA in the quarter was also a record of $463 million, up 12% over the prior year, with EBITDA margins a record 29.8%. This outstanding performance led to a record of earnings of $1.45 per diluted share, up 15% versus the third quarter of 2021 and above our guidance range of $1.36 to $1.38. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group delivered excellent operating performance with continued strong and broad-based growth. Sales for our Electronic Instruments Group were $1.05 billion in the quarter, up 7% from the third quarter of last year. Organic sales were up 10% with a 1-point contribution from acquisitions being more than offset by an approximate 3-point foreign currency headwind. Growth was again broad-based across our EIG businesses with particularly strong growth within our Rauland, TMC Precitech and Thermal Process Management businesses. Third quarter operating income was $272.7 million, up 11% versus the prior year. And operating margins were 25.9% in the quarter, up 90 basis points from the prior year. The performance of our Electromechanical Group in the quarter was exceptional, with excellent sales growth and record operating results. EMG's third quarter sales were a record $497.7 million, up 8% versus the prior year, with organic sales growing 13% in the quarter and foreign currency at a four-point headwind. Growth was very broad-based across all of our EMG businesses. EMG's operating income in the third quarter was a record $136.5 million, up 19% compared to the prior year period. EMG's third quarter operating margins were a record 27.4%, up an impressive 240 basis points versus the prior year. Overall, our businesses delivered outstanding performance in the third quarter, allowing us to manage an uncertain macro environment, meaningfully expand margins and drive earnings ahead of our expectations. Now switching to our acquisition strategy. We are very pleased to announce the acquisition of two highly strategic businesses. Navitar and RTDS Technologies are both excellent businesses and highly strategic acquisitions for AMETEK, expanding our presence in attractive secular growth markets. Now let me take a moment to provide additional color on both these acquisitions, starting with Navitar. Navitar is a leading provider of optical solutions for critical applications across several markets, including medical and life sciences research, machine vision and robotics, semiconductor and industrial automation. Their comprehensive suite of high-precision, custom optical solutions includes fully integrated imaging systems, sensors, cameras, optics and software. Navitar is an excellent strategic and complementary fit with our Zygo business unit as their technical capabilities around cameras and optical systems further expand Zygo's product offering. Additionally, Navitar is a high-growth business, well-positioned to benefit from the growth in demand for precision optical solutions across attractive growth markets. Navitar was privately held and is based in Rochester, New York. Now switching to RTDS Technologies. RTDS provides real-time digital simulation systems used by utilities and research and educational institutions in the development and testing of the electric power grid and renewable energy applications. Their simulation solutions allow engineers to rapidly prototype, verify and test the performance of the electric grid, power instruments and networks and closed-loop systems to help accelerate product development life cycles and decrease testing costs. RTDS' simulation solutions are playing a key role in the modernization of the electric grid infrastructure, as well as supporting secular growth drivers, including renewable energy, distributed power generation and energy storage. The acquisition of RTDS broadens our Power Instruments businesses testing and simulation capabilities, while expanding our exposure to the renewable energy space. RTDS is privately held and based in Winnipeg, Canada. We are very excited to welcome the Navitar and RTDS teams to the AMETEK family. We deployed approximately $430 million on these acquisitions, acquiring approximately $100 million in annual sales. Over the past two years, we deployed more than $2.4 billion in capital and acquisitions and acquired eight businesses. Our acquisition pipeline remains solid. We have a strong balance sheet and significant financial capacity and look to remain active in deploying capital on strategic acquisitions. In addition to the recent acquisitions, we continue to focus on ensuring AMETEK is strategically positioned for long-term sustainable growth. Our businesses are driving broader adoption of our organic growth initiatives, including growth presence, digitalization and new product development. This includes making strategic growth investments across our businesses to help support and accelerate growth. For all of 2022, we now expect to invest approximately $110 million in support of these growth initiatives. We are seeing great results from these efforts over both the short-term and long-term. In the third quarter, sales from new products introduced over the last three years was 27%, a record level for our Vitality Index, reflecting the great work of our teams. These efforts have helped lead to double-digit organic sales growth in each of the past six quarters. Now, turning to the outlook for the remainder of the year. While we remain cautious in the short-term, given the dynamic macro environment, we are highly confident in the quality of our businesses and our ability to manage through these challenging times. Given our strong third quarter results and outlook for the balance of the year, we are again increasing our sales and earnings guidance. For the full year, we now expect overall and organic sales to be up approximately 10% versus our prior guidance of high single-digits. Diluted earnings per share for the year are now expected to be in the range of $5.61 to $5.63, up 16% compared to 2021. This is an increase from our previous guidance range of $5.46 to $5.54 per diluted share. For the fourth quarter, overall sales are expected to be up mid-single-digits compared to the same period last year, and fourth quarter earnings are expected to be in the range of $1.45 to $1.47 per diluted share, up 6% to 7% versus the prior year. To summarize, AMETEK had another excellent quarter. We delivered record performance, strong orders and sales growth, robust margin expansion, increased our earnings guidance for the year and acquired two strategic businesses. The strength of the AMETEK growth model and our talented global workforce is evident in our results thus far this year and will continue to allow us to operate at a high level through challenging market conditions. We remain well positioned for continued long-term growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we will be glad to take your questions.
Bill Burke, Executive Vice President and Chief Financial Officer
Thank you, Dave. As Dave highlighted, AMETEK delivered outstanding results in the third quarter with strong sales and orders growth, excellent operating performance and a high quality of earnings. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were $24.7 million, up $3 million from the prior year due to higher compensation expense in the quarter. For the full year, general and administrative expenses are expected to be up modestly from 2021 levels and approximately 1.5% of sales versus 1.6% of sales in 2021. The effective tax rate in the third quarter was 19%, down from 19.5% in the third quarter of 2021. For 2022, we anticipate our effective tax rate to be approximately 19%. 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. Capital expenditures in the third quarter were $28 million, and we expect capital expenditures to be approximately $130 million for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $76 million. For the full year, we expect depreciation and amortization to be approximately $310 million, including after-tax acquisition-related intangible amortization of approximately $148 million or $0.64 per diluted share. For the quarter, operating working capital was 18.4% of sales. We generated strong levels of cash flow in the quarter. Operating cash flow was $327 million, up 7% versus the third quarter of 2021. Free cash flow was $299 million in the third quarter, up 6% from the prior year and free cash flow to net income conversion was 100%. Total debt ended the third quarter at $2.36 billion, down from $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $310 million. At the end of the third quarter, gross debt-to-EBITDA ratio was 1.3 times, and our net debt-to-EBITDA ratio was 1.1 times. As Dave noted, we've been active on the acquisition front. During the third quarter, we acquired Navitar and subsequent to the end of the third quarter, we acquired RTDS Technologies. Combined, we deployed approximately $430 million on these two acquisitions. We remain very well positioned to deploy additional capital given the strength of our balance sheet and strong cash flows. We have no material debt maturities due until 2024 and modest levels of leverage. We continue to have excellent financial capacity and a strong balance sheet. Following our two recent acquisitions, we still have over $2 billion of cash and existing credit facilities to support our growth initiatives. In summary, our business has performed exceptionally well in the third quarter and through the first nine months of 2022. Our outlook for the remainder of the year remains positive, given our strong financial position, our proven growth model and world-class workforce.
Kevin Coleman, Vice President of Investor Relations and Treasurer
Thank you, Bill. Kate, could we please open the lines for questions?
Operator, Operator
We will now begin the question-and-answer session. Our first question is from Matt Summerville of D.A. Davidson. Please go ahead.
Matt Summerville, Analyst
Thanks. Good morning. Dave, maybe could you talk a little bit about the organic performance you saw by geographic region and what, if anything, for lack of a better word, your canary type of businesses might be telling you about the macro environment? And then I have a follow-up.
Dave Zapico, Chairman and Chief Executive Officer
Okay. Yes. Regarding the geographic storyline, it was really strong broad-based growth across all geographies and very balanced growth. I mean the US was up about 11%. We had broad-based growth there, notable performance in our process and automation businesses. The US was the strongest, up 11%. Europe was up 9%, notable strength in process in our aerospace business. And Asia was up 9%, notable strength in our Process businesses. So, no canaries in the coal mine for us. Orders are strong. Sales were strong geographically and all regions showed a solid broad-based growth, very balanced.
Matt Summerville, Analyst
Got it. And then, Dave, could you maybe comment a little bit on what your price realization was in the third quarter? What your price/cost sort of ratio look like and how we should be thinking about incremental price actions for 2023? Thank you.
Dave Zapico, Chairman and Chief Executive Officer
In the third quarter, our pricing effectively exceeded inflation, remaining consistent across our portfolio. The pricing increase was around 6%, while inflation was about 5%, giving us a positive spread of roughly 100 basis points. We anticipate a similar spread of 100 basis points in Q4. These results highlight the distinct nature of our product offerings and our leadership in specific niches. As for next year, we are not yet prepared to discuss pricing and inflation. However, we do believe we can offset inflation with price increases in 2023 based on our philosophy and operational capabilities. We'll wait to discuss 2023 specifics until we complete our thorough reviews with each business unit. Therefore, we do not have any forecasts yet, but we do expect positive outcomes next year. Overall, we saw strong pricing performance in Q3, and we expect this trend to continue into Q4. Did that address your question, Matt?
Matt Summerville, Analyst
Very good. Thanks, David.
Dave Zapico, Chairman and Chief Executive Officer
Sure.
Matt Summerville, Analyst
Yes, it did. Thank you very much.
Operator, Operator
The next question is from Allison Poliniak of Wells Fargo. Please go ahead.
Allison Poliniak, Analyst
Hi. Good morning.
Dave Zapico, Chairman and Chief Executive Officer
Good morning, Allison.
Allison Poliniak, Analyst
So Dave, you mentioned some caution in the market. Your orders are very strong. Could you share your insights on this cycle and, more importantly, how you believe AMETEK is positioned as we potentially face another downturn compared to previous cycles? Any thoughts on that?
Dave Zapico, Chairman and Chief Executive Officer
Those are great questions. In terms of AMETEK, our underlying demand remains strong. As I mentioned in response to Matt's question, we aren't experiencing any weakness yet. The strength is broad-based, with organic orders up 9%. Both groups reported positive organic growth, and we are experiencing healthy growth rates across all major regions of the world. We feel confident, and we ended the quarter with a record backlog, which is very encouraging. Looking ahead to 2023, our portfolio is in much better shape as we continue to shift towards growth markets such as automation, healthcare, and power. The recent acquisition adds to our position in renewables, which is appealing for us. Our technology and differentiation have improved compared to six or seven years ago, and we see this reflected in our organic growth in relative and absolute performance. We have enhanced our portfolio without sacrificing growth over the past few years, achieving exceptional results along the way. For example, our healthcare portfolio has grown from about 10% six years ago to 15% now. The aerospace and defense segment has increased from low double digits to high teens, while our automation business rose from 7% to 12%. We have made significant improvements across these areas in relation to our total portfolio. Conversely, more cyclical sectors like oil and gas and metals, which were over 20% of sales six years ago, now account for about 8%. We are pleased with our portfolio's current performance and believe it will continue to thrive in any economic climate we encounter.
Allison Poliniak, Analyst
That's helpful. Regarding the acquisitions, I understand you mentioned Navitar is experiencing high growth. Could you provide more details on whether the growth of these acquisitions aligns with AMETEK or is it even better? Additionally, any insights on the margin performance compared to AMETEK's core would be appreciated. Thank you.
Dave Zapico, Chairman and Chief Executive Officer
I believe both acquisitions are expected to grow in the high single-digit to low double-digit range. They are both strong growth opportunities and very profitable. The blended multiple was around 11 times, indicating they are fairly priced for their profitability and growth potential. We are excited to welcome these companies as they align perfectly with our acquisition strategy. They are leaders in niche markets, each with significant technological advantages supported by exceptional engineering capabilities. Furthermore, they enhance our presence in attractive growth sectors. Navitar operates in high-growth areas like optical solutions, life sciences, machine vision, and robotics. On the other hand, RTDS is well-positioned to capitalize on the modernization of the electrical power grid and the investments in renewable energy. We have been focused on these businesses for a substantial amount of time, and I’m truly pleased to have them as part of our portfolio.
Allison Poliniak, Analyst
Great. Thanks, so much.
Dave Zapico, Chairman and Chief Executive Officer
Okay. Thank you.
Operator, Operator
The next question is from Deane Dray of RBC Capital Markets. Please go ahead.
Deane Dray, Analyst
Thank you. Good morning, everyone.
Dave Zapico, Chairman and Chief Executive Officer
Good morning, Dean.
Deane Dray, Analyst
We touched on it a bit so far in the earlier questions, but maybe just more methodically take us through the key end markets. Sounded like Process, aero were strong. But can you just kind of go from the strongest or the weakest and we'll take it from there. Thanks.
Dave Zapico, Chairman and Chief Executive Officer
Sure, Dean. I'd be happy to do that. The strongest growth was in our Process segment, which experienced substantial growth in the third quarter with organic sales increasing in the low teens percentage-wise. This growth was widespread, particularly strong in our Roland Healthcare business, TMC Pressitech, and our thermal process management businesses. For the entirety of 2022, we now anticipate that organic sales for our Process segment will rise by approximately 10%. The fastest-growing segment was Automation & Engineered Solutions, which had a robust third quarter with organic sales increasing in the low double digits, showing balanced growth across both Automation and Engineered Solutions. For this sub-segment, we now expect organic sales to rise by around 10%, a revision from high single digits for the full year, with similar growth anticipated across each segment. Next, the Power & Industrial business saw mid-single-digit growth in the quarter, with notable strength in our power instruments and programmable power business. We also expect that sub-segment to grow by 10%, increased from high single digits. In the Aerospace & Defense segment, organic sales were up in the mid-single digits during the third quarter. Commercial sales were particularly strong, rising in the mid-teens, driven by substantial underlying demand across the industry. Commercial OE, aftermarket, and business jet sales all demonstrated solid growth, with the strongest results in aftermarket and business jet. Defense sales increased by low single digits during the quarter. For the full year, we project organic sales for Aerospace & Defense to increase by high single digits, with our commercial aerospace growth outpacing that of defense. That covers the overview of the company, Dean.
Deane Dray, Analyst
That's great. Can you discuss any changes in customer buying behavior? We've noticed that as supply chains are stabilizing, lead times are decreasing. Customers no longer need to place larger orders just to secure their spot. Is there any shift in this trend, and could you provide insight into the order cadence during the quarter?
Dave Zapico, Chairman and Chief Executive Officer
I will begin with the flow of orders. We experienced strong orders throughout each month, with September being the strongest. September was particularly strong, and our results for October align with our expectations, showing solid performance. Regarding the underlying orders, I believe we will face tougher comparisons for order input in the upcoming quarters. While we anticipate a moderation in orders—primarily because customers placed their orders earlier due to supply chain dynamics—we expect a return to more normalized ordering patterns. Despite these factors, I foresee our backlog being in an excellent position as we approach 2023.
Deane Dray, Analyst
That’s really helpful. Thank you.
Dave Zapico, Chairman and Chief Executive Officer
Yes. No problem.
Operator, Operator
The next question is from Josh Pokrzywinski at Morgan Stanley. Please go ahead.
Josh Pokrzywinski, Analyst
Hi, good morning, guys.
Dave Zapico, Chairman and Chief Executive Officer
Good morning, Josh.
Bill Burke, Executive Vice President and Chief Financial Officer
Good morning.
Josh Pokrzywinski, Analyst
Dave, I want to follow-up on Dean's last question and your last comment about backlog. With supply chain starting to improve and really some of this kind of extra backlog really being more supply side driven than anything else, what would you say is sort of the amount of backlog you think you could convert next year? I guess how should we think about the time frame for getting from where we are today, maybe down to more typical levels because the entire business isn't long cycle, just kind of pockets of it?
Dave Zapico, Chairman and Chief Executive Officer
That's a good question. Historically, our annual sales consisted of about 30% in backlog, which was typical for us. Currently, we have a little over 50% of our annual sales in backlog, marking a 20% increase. This increase gives us solid visibility, as our customers' ordering patterns have shifted, and we've had strong order input. Additionally, we've aimed to protect our customers with inventory due to the supply chain pressures. So, the growth in backlog from around 30% to 50% of annual sales is how I see the situation.
Josh Pokrzywinski, Analyst
That is helpful. I guess how fungible should we think of backlog? So let's say, book-to-bill starts to trend well below one for a couple of quarters between comps and maybe a little bit of a demand slowdown. Are you guys able to pull that in sort of in real time? Or does that have specific dates associated with it where you can't really pull it in as much?
Bill Burke, Executive Vice President and Chief Financial Officer
Yes, Josh, as you review our backlog, almost all of it is ready to be shipped, with only a small portion expected to carry over into 2024. Looking ahead to the next 12 to 15 months, considering the remainder of 2023, a significant majority of this backlog will be shipped within the next year.
Josh Pokrzywinski, Analyst
Got it. That’s helpful. I'll leave it there. Thanks guys.
Dave Zapico, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
The next question is from Nigel Coe of Wolfe Research. Please go ahead.
Nigel Coe, Analyst
Thanks. Good morning, everyone. Thanks for the question. Just going back to the acquisitions. I'm guessing these are more North American-centric acquisition. So, just wondering if there's a globalization sort of angle to this? And just want to confirm some numbers. It sounds like these are high 30% EBITDA margins combined. Is there any difference between the two acquisitions? Or would you say they are you quite consistent across both of them? And can they go even higher than that? I mean, are there any sort of easy synergies from supply chain, et cetera, that can actually move the needle on those margins?
Dave Zapico, Chairman and Chief Executive Officer
Yes, you are correct about the profitability. Both companies operate with high profitability. Navitar has a slightly higher growth rate and a bit lower profitability compared to RTDS, which has higher profitability and a healthy growth rate, though it may be slower than Navitar's. We typically expect a normal level of synergy from these acquisitions. Since they are both private businesses, we see excellent opportunities to enhance their cost and revenue generation capabilities. There is a globalization aspect; RTDS is already more globalized than Navitar, but both will benefit from AMETEK's global scale. Your insight is appreciated.
Nigel Coe, Analyst
That's great. And then my follow-on is as we dig into the EMG margins, which were pretty exceptional. Did a disproportionate amount of price cost land in EMG? Or are we seeing some mix impact from commercial aero aftermarket? Any details there would be great.
Dave Zapico, Chairman and Chief Executive Officer
Yes. EMG performed excellently this quarter, achieving record margins of 27.4%. The key factor is that our higher-margin businesses are growing faster, especially this quarter. EMG continues to align with AMETEK's approach, moving up the differentiation curve with their product portfolio. We have gradually exited some lower-margin consumer businesses, which positions us well for growth as we enhance differentiation and improve pricing. In terms of pricing, it was broad-based across all of AMETEK. EIG and EMG experienced similar pricing dynamics, with certain mix effects due to the faster growth of higher-margin businesses this quarter.
Nigel Coe, Analyst
Very clear. Thanks, David.
Dave Zapico, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
The next question is from Scott Graham of Loop Capital Markets. Please go ahead.
Scott Graham, Analyst
Hey good morning, David, Bill, Kevin.
Dave Zapico, Chairman and Chief Executive Officer
Good morning, Scott.
Scott Graham, Analyst
I wanted to talk a little bit more about the backlog, piggyback on to Josh's question. Bill, you indicated, I think it was Bill, that 15 months is kind of like the shippable. So are you also saying that customers can't push that back, that these are sort of contracted shipment dates? What's the dynamic look like there?
Bill Burke, Executive Vice President and Chief Financial Officer
The reason I chose the 15 months was to align with the end of next year. That's really the main point I wanted to express. It's important to work with your customers regarding delays or advancements in shipments. However, much of our backlog is ready to be shipped next year, and we will manage through that. As Dave noted, this represents only half of next year's shipments, and we will continue to receive orders and fulfill them.
Scott Graham, Analyst
Okay. So when you say you talked with customers about this, is there a possibility that some of these things could be delayed by a quarter or two?
Bill Burke, Executive Vice President and Chief Financial Officer
Yes.
Dave Zapico, Chairman and Chief Executive Officer
Yes.
Scott Graham, Analyst
Thank you. I have another question about acquisitions. There have only been two deals this year, which has been relatively quiet. Is there a possibility that this situation might create opportunities? Are you beginning to see the gap between buyers and sellers narrow to a point where there could be an increase in activity? Or could this simply be a matter of just a couple of transactions? I'm asking because there were two deals instead of one. What do you think this means for the next six months?
Dave Zapico, Chairman and Chief Executive Officer
When I examine our backlog and potential deals, I feel very optimistic that in the next 12 months, we will be able to utilize our free cash flow for acquisitions. The pipeline is very strong, and we are currently collaborating with several businesses while actively seeking out exciting opportunities. Can we secure the financing to proceed? The pricing on deals is starting to align, and our competitive position compared to private equity has improved. Therefore, I am quite hopeful about the prospects for deals in 2023. Our backlog, coupled with our robust balance sheet and strong cash flow, will support this growth, making it a significant aspect of AMETEK's future.
Scott Graham, Analyst
So you're saying, Dave, you're confident that over the next 12 months, you can deploy 100% of your free cash flow on deals?
Dave Zapico, Chairman and Chief Executive Officer
Yes, I believe that to be true.
Scott Graham, Analyst
Great. Thank you.
Dave Zapico, Chairman and Chief Executive Officer
Okay.
Operator, Operator
The next question is from Rob Wertheimer of Melius Research. Please go ahead.
Rob Wertheimer, Analyst
Hi, thanks.
Dave Zapico, Chairman and Chief Executive Officer
Hey, Rob.
Rob Wertheimer, Analyst
My question is about Navitar. Can you provide more details on the niches they operate in? The reason I'm asking is that there are significant changes occurring globally, particularly with reshoring and investment in battery and semiconductor factories in North America. I'm curious about their historical growth rate, future growth prospects, and their strategic focus, as well as whether ongoing investments are contributing to this.
Dave Zapico, Chairman and Chief Executive Officer
I believe some of the reshoring efforts will benefit them. The largest market segment is in medical and life sciences, where they have achieved significant success with optics used in different types of microscopes. Their optics are also highly effective and are utilized in numerous machine vision and robotics applications. They supply major semiconductor companies at the high end of the market. We believe that combining this business with our Zygo business, which focuses on optics, enhances our offerings and provides us with additional tools for our customers. I am very optimistic about the future and consider this a low-risk opportunity for us.
Rob Wertheimer, Analyst
Okay. Great. And if I may, can I ask the same sort of question on RTDS with some of the upcoming changes to Power Grids, maybe that's a longer-term… situation, but I don't know if you're seeing opportunity and inflection there.
Dave Zapico, Chairman and Chief Executive Officer
Yes, we are. I believe we entered this business at the right moment as more renewable energy sources are being integrated into the grid. Whether it's a wind farm, a solar panel field, or charging stations for electric vehicles, each addition to the grid is complex and requires thorough analysis to assess the impact of these integrations. At the same time, there is significant investment in the grid, including funding from infrastructure initiatives. RTDS plays a crucial role in simulating and modernizing the grid, which gives it a strong market presence, with all utilities relying on it to navigate the modernization of their electric systems. This positions them well for the future, supported by a talented team of technical experts. We are optimistic about what this business can achieve under AMETEK.
Rob Wertheimer, Analyst
Great. Thank you for the answers.
Dave Zapico, Chairman and Chief Executive Officer
Okay.
Operator, Operator
The next question is from Andrew Obin of Bank of America. Please go ahead.
Andrew Obin, Analyst
Hey guys, good morning. Can you hear me?
Dave Zapico, Chairman and Chief Executive Officer
Yes. Good morning, Andrew.
Andrew Obin, Analyst
Just a question on RTDS. As you guys move into more software, I know some of your peers as they were making a transition, you try to apply the business system, but how do you fit something like churn into your framework and to optimizing the business. Clearly, you have an amazing playbook for integrating assets and taking the margins up. How do you apply your playbook to a more digital asset like RTDS? And what adjustments have you had to make because that seems very interesting? Thank you.
Dave Zapico, Chairman and Chief Executive Officer
Yes, with RTDS, it's similar to many AMETEK businesses. It combines hardware and software for operation, so it's not just a software-only model. We have generally avoided software-only businesses due to high pricing and the challenges in achieving a satisfactory return. Additionally, we don't identify the synergy that would enhance these operations. However, software remains crucial to AMETEK, particularly in complex hardware systems that require it, which aligns with our expertise, and RTDS fits perfectly into that framework.
Andrew Obin, Analyst
No, that's a great way to get smart on software. And then another question for you. Are there any businesses where AMETEK has added capacity or has plans to add capacity, given what's happening out there? Just to follow-up on some of the questions that were asked before.
Dave Zapico, Chairman and Chief Executive Officer
Yes, we are expanding our capacity in low-cost regions. This year, we have enhanced our facilities in Mexico, Serbia, and Malaysia, with more developments planned to increase our capacity. This strategy allows us to manage our volume in these regions effectively while gaining local market access. We have made significant investments in low-cost manufacturing, and Malaysia has proven to be a valuable facility for us, alongside our operations in Eastern Europe, Serbia, and Mexico for the US market. We are successfully establishing regional hubs and have implemented substantial capacity this year.
Andrew Obin, Analyst
Thanks so much.
Operator, Operator
The next question is from Christopher Glynn of Oppenheimer. Please go ahead.
Christopher Glynn, Analyst
Thank you. Good morning, Dave, Bill, Kevin.
Dave Zapico, Chairman and Chief Executive Officer
Good morning, Chris.
Christopher Glynn, Analyst
Was curious about the Vitality Index, 27%, a record level. I think that ties into some of the discussion on the EMG margins. But is there a level you think of it as a mature level of vitality for the business? And I don't mean that as a negative, but you've got an entrenched market for a lot of your products and I'm just kind of curious how you're thinking about that.
Dave Zapico, Chairman and Chief Executive Officer
Yes. The Vitality Index not only assists with our pricing but also reflects our continuous addition of new features and benefits to our products for our customers. This ongoing engineering investment, consistently over 5% for many years, allows us to command a higher price. When we began tracking the Vitality Index, it was in the mid-teens, and over the last 10 to 15 years, it has risen to the 20s and now stands at an impressive 27%. Our new product development process is clearly effective, as we are creating products that our customers want to purchase. We believe that 27% of sales for our end markets is a strong figure. Generally, I consider a range of 20% to 30% as very good for AMETEK. The vitality not only supports the introduction of fresh products that help us gain market share but also positively impacts realized pricing.
Christopher Glynn, Analyst
Thank you. I wanted to discuss the process markets. You've mentioned some of your brands, and I'm interested to know if you're noticing any specific trends in particular end markets or applications, especially regarding capacity investments or modernizations.
Dave Zapico, Chairman and Chief Executive Officer
Yes, I would say things are strong across the board, but the healthcare and energy sectors stood out this quarter. With TMC Precitech, we are utilizing precision technology to accomplish tasks that others cannot, and our orders have been high for several quarters. Now, sales are finally catching up.
Christopher Glynn, Analyst
Great. Thanks for the color.
Dave Zapico, Chairman and Chief Executive Officer
Thank you, Chris.
Operator, Operator
The next question is from Joe Giordano of Cowen. Please go ahead.
Joe Giordano, Analyst
Hi, Joe.
Tristan Margot, Analyst
Hey, guys, good morning. This is Tristan in for Joe. Thanks for taking the question. I guess I'd like to go back to Allison's question a little bit and maybe ask it a little bit differently. But if we were to have an industrial recession, the likes of 2016, for example, how do you think your current portfolio would fare versus your portfolio six years ago? Just trying to get a sense of the magnitude there. Thank you.
Dave Zapico, Chairman and Chief Executive Officer
Yes. I mean it's difficult to understand the specifics until you're in a recession because they're all different. But as I said, I think our portfolio has been improved dramatically. And I think that when you think about all the other things that I mentioned, we would stay in front of inflation with pricing. I think in 2023 as the supply chain shortages abate, we believe our working capital will decrease to a more normalized level. In the vertical markets, I'm going to wait and see what we learn from our businesses but we do expect our longer cycle businesses to be strong in both A&D and energy, and we do expect to have a historically strong backlog when we enter 2023. And in terms of a recession playbook, let's say we do see slowing and we start to see a recession, we'll react and manage our business appropriately as we have done in the past. And we think we have a proven model that works well in both up markets and down markets. And the most recent example of this was during the COVID-driven recession in 2020. And if you look at how we performed through that, despite the weakness in sales during the time, our margins actually grew 80 basis points and decremental margins were only 17%. So we've got the capability to manage in both up cycles and down cycles. And I believe that the next recession will be no different whenever it comes.
Tristan Margot, Analyst
Awesome. That’s all I had. Thank you.
Dave Zapico, Chairman and Chief Executive Officer
Okay.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Coleman for closing remarks.
Kevin Coleman, Vice President of Investor Relations and Treasurer
Great. Thank you again, Kate, and thank you, everyone, for joining us for our conference call. And as a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.