AMETEK Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 13 speakers on the call.

Operator

Good day, and welcome to the AMETEK Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Thank you, Abigail. Good morning and thank you for joining us for AMETEK's 3rd quarter 2023 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 risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC.

Speaker 1

AMETEK disclaims any intention or obligation to update or revise any forward looking statements. Any references made on this call to 2022 or 2023 results or to 2023 guidance 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.

Speaker 2

Thank you, Kevin, and good morning, everyone. AMETEK delivered excellent results in the 3rd quarter, highlighted by outstanding operational execution, superb margin expansion, strong cash flows and earnings ahead of our expectations. In the quarter, we established records for operating income, operating margins, Earnings per share, EBITDA and cash flows. Given these strong results and our outlook for the balance of the year, We have again increased our earnings guidance for the full year. We have also been very active on the acquisition front.

Speaker 2

During the Q3, we completed the acquisition of United Electronic Industries And subsequent to the end of Q3, we acquired Amplifier Research. Today, we also announced the signing of a definitive purchase agreement to acquire Paragon Medical, a highly attractive acquisition, which broadens our exposure in the medical technology space. I will provide more details on these acquisitions shortly. Now, let me turn to our 3rd quarter results. 3rd quarter sales were $1,620,000,000 up 5% over the same period in 2022.

Speaker 2

Organic sales growth was flat. Acquisitions added 4 points in the quarter and foreign currency added 1 point. Book to bill in the quarter was 0.96. We ended the quarter with a very strong backlog of $3,400,000,000 near record levels and down a modest 2% sequentially. Our backlog is up 5% from last year's Q3 and up 23% or $640,000,000 from the end of 2021.

Speaker 2

AMETEK's operating performance in the 3rd quarter was exceptional. Operating income in the quarter was a record $438,000,000 a 14% increase over the Q3 of 2022. Operating margins were a record 27% in the quarter, up a sizable 2 20 basis points from the prior year. EBITDA in the quarter was also a record at $511,000,000 up 10% over the prior year, With EBITDA margins an impressive 31.5 percent. Operating cash flow was up 45 percent in the quarter to a record $473,000,000 This outstanding performance led to record earnings of 1.64 Our diluted share, up 13% versus the Q3 of 2022 and above our guidance range of $1.56 to 1.58 Now, let me provide some additional details at the operating group level.

Speaker 2

First, the Electronic Instruments Group. The Electronic Instruments Group delivered impressive operating performance with continued Strong and broad based sales growth. Sales for EIG were $1,140,000,000 in the quarter, up 8% from the Q3 of last year. Organic sales were up 3.5%, acquisitions added 3.5% and foreign currency added a point. EIG's organic sales growth remains broad based and reflects our leading position across attractive market segments and the impact of our organic growth initiatives.

Speaker 2

Growth in the quarter was particularly strong across our Aerospace and Defense businesses as well as in our Zygo, Spectro and Kamika businesses. 3rd quarter operating income was a record $335,000,000 up 23% versus the prior year and operating margins were a record 29.5% in the quarter, up an impressive 360 basis points from the prior year. Tremendous work by our EIG businesses in the 3rd quarter. The ElectroMechanical Group also delivered solid operating performance in the quarter Despite the impact of normalization of inventory levels across our OEM customer base, EMG's 3rd quarter sales were $487,000,000 down 2% versus the prior year with organic sales down 8% in the quarter. Acquisitions added 4 points and foreign currency added 2 points.

Speaker 2

EMG's operating income in the quarter was $128,000,000 Down 7% compared to the prior year period, while EMG's 3rd quarter operating margins were a very solid 26.2%. Our performance in the Q3 and thus far in 2023 Reflects the unique value inherent in the AMETEK Growth Model. Our differentiated businesses are aligned with diverse and attractive growth markets, while our organic growth initiatives continue to position us for long term sustainable growth. Our distributed operating structure provides our businesses with the ability to execute their growth strategy and the flexibility to react quickly to changing market conditions. And our SLA business model and strong operational execution drive outstanding cash flow generation, which we redeploy on value enhancing acquisitions.

Speaker 2

This strong cash flow and our robust balance sheet Our key differentiators for AMETEK in this higher interest rate environment. Now switching to our acquisition strategy. As noted, we have been very active managing a strong pipeline of acquisition opportunities. We are pleased to welcome our most recent acquisitions, United Electronic Industries and Amplifier Research. I'm pleased that we have signed a definitive agreement to acquire Paragon Medical.

Speaker 2

I will provide some more color on each of these businesses starting Paragon Medical. Paragon Medical is a leading manufacturer of highly engineered medical components and instruments serving applications including orthopedics, minimally invasive surgery, robotic surgery and drug delivery solutions. Paragon's broad product portfolio of single use and implantable components are sold to a diverse blue chip customer base of leading medical device OEMs. Paragon is an excellent acquisition for AMETEK. It expands our presence in the medtech space and provides us With access to attractive new market segments with strong growth rates.

Speaker 2

We are acquiring Paragon in an all cash transaction valued $1,900,000,000 Paragon has annual sales of approximately $500,000,000 and is headquartered in Pierceton, Indiana. The closing of the acquisition is subject to customary closing conditions, including applicable regulatory approvals. Now switching to United Electronic Industries or UEI, which we acquired in August. UEI is a leading provider of ruggedized test, measurement, simulation and control solutions. UEI's custom products cater to diverse data acquisition needs from hardware in the loop testing to aircraft simulators and automated testing systems in mission critical With a strong presence in the defense, aerospace, nuclear power generation and semiconductor, UEI nicely complements AMETEK's Power Systems and Instruments division, significantly expanding our data acquisition capabilities.

Speaker 2

UEI has annual sales of approximately $35,000,000 and is based in Norwood, Massachusetts. Next, Amplify Research is a leading provider of innovative RF and microwave solutions. This equipment is used for electromagnetic compatibility testing within the defense, industrial, automotive, medical and communication sectors. Amplifier Research is an outstanding strategic acquisition and complementary fit with our existing compliance test solutions business. Their technical capabilities broaden our RF instrumentation and testing portfolio.

Speaker 2

Amplifier Research is a growing business well positioned to benefit from Growth and demand for electric vehicle research, development and testing. Amavire Research is based in Souderton, PA And as annual sales of approximately $60,000,000 Our acquisition pipeline remains very solid. We have a strong balance sheet and significant financial capacity and look to remain active in deploying capital in the coming quarters. AMETEK also remains Committed to investing in our businesses to help position them for long term sustainable organic growth. In 2023, we plan to invest Approximately $100,000,000 in these growth initiatives, including our new product development efforts, where our businesses continue to develop highly differentiated technologies to help solve our customers' most complex challenges.

Speaker 2

In the quarter, our vitality index, which measures sales from products introduced over the prior 3 years with a healthy 26%. As a complement to our internal new product development efforts, our Oertek business recently acquired a small technology company, InnoRid, to help broaden their technology capabilities and the radiation detection market. EnnoRid, both cutting edge technology expertise and an exceptional product development team known for their innovative solutions, having developed specialized artificial intelligence algorithms for radiation detection in a range of nuclear security, research, Health and medical applications. Now turning to our outlook for the remainder of the year. With strong performance in the Q3 and a positive outlook for the remainder of the year, we are once again raising our earnings guidance.

Speaker 2

For the full year, we continue to expect overall sales to be up mid to high single digits, and we continue to expect organic sales to be up mid single digits. Diluted earnings per Share for the year are now expected to be in the range of $6.31 to $6.33 up approximately 11% compared to last year's results. This is an increase from our previous guidance range of $6.18 to $6.26 per diluted share. For the Q4, we anticipate overall sales to be up mid single digits with Adjusted earnings of $1.61 to $1.63 per share, up 6% to 7% versus the prior year. In summary, AMETEK's 3rd quarter results for 2023 were outstanding, with strong growth across our long cycle businesses, Record operating performance and strong acquisition activity.

Speaker 2

Our businesses continue to excel, driven by our differentiated technology solutions serving diverse and growing markets. Our asset light business model and strong cash flows provide us with the flexibility to navigate challenging economic environments while actively Capital to enhance shareholder value. AMETEK remains firmly positioned for long term sustainable growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions.

Speaker 3

Bill? Thank you, Dave. As Dave noted, AMETEK delivered outstanding results in the Q3 with exceptional operating performance, Robust margin expansion and strong cash flows. Let me provide some additional financial highlights for the quarter. 3rd quarter general and administrative expenses were $24,600,000 essentially unchanged from the prior year and as a percentage of sales were 1.5% versus 1.6% in last year's Q3.

Speaker 3

For 2023, general and administrative expenses are expected to be approximately 1.5% of sales, in line with last year's G and A to sales level. Other income and expense was a headwind of $9,000,000 in the quarter, due largely to lower pension income and higher due diligence costs. The effective tax rate in the quarter was 17.7%, down from 19% in the Q3 of 2022 due to improved utilization of tax credits. For 2023, we now anticipate our effective tax rate to be between 18.5% 19%. And as we stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Speaker 3

Capital expenditures in the 3rd quarter were $29,000,000 and we continue to expect capital expenditures to be approximately $145,000,000 for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $82,000,000 For the full year, we expect Depreciation and amortization to be approximately $330,000,000 including after tax acquisition related intangible amortization of approximately $157,000,000 or $0.68 per diluted share. Operating working capital in the 3rd quarter was 19.1 Cash flow was excellent in the quarter with outstanding growth versus the prior year. Operating cash flow was a record $473,000,000 Up 45% versus the Q3 of 2022, while free cash flow was also a record at $444,000,000 up 49% over the Prior year. Free cash flow conversion was 131% in the quarter and for the full year we continue to expect approximately 120 percent free cash flow to net income conversion.

Speaker 3

Total debt at September 30 was $2,200,000,000 Down from $2,400,000,000 at the end of 2022. Offsetting this debt is cash and cash equivalents of $842,000,000 At the end of the Q3, our gross debt to EBITDA ratio was 1.1 times and our net debt to EBITDA ratio was 0.6 times, leaving us with significant available cash and financial capacity to deploy on strategic acquisitions. And as Dave has noted, we've been very active. During the Q3, we deployed approximately $150,000,000 on the acquisitions of UEI and Itterid. And Subsequent to the end of the quarter, we deployed approximately $105,000,000 on the acquisition of Amplifier Research.

Speaker 3

Also subsequent to the end of Q3, we announced the signing of a definitive agreement to acquire Paragon Medical for $1,900,000,000 which would be our largest acquisition to date. Following the acquisition of Paragon, we would still have significant financial capacity With approximately $1,500,000,000 of cash and existing credit facilities available to support our growth initiatives. In summary, Amphotec had exceptional results in the 3rd quarter. We achieved significant market margin expansion and delivered high quality earnings. Our strong position in key market segments, coupled with a very strong backlog and exceptional operating capabilities, It positions us well for continued success.

Speaker 1

Kevin? Thank you, Bill. Abigail, could we please open the lines for questions?

Operator

Thank you. At this time, we'll conduct the question and answer session. One moment for our first question. Our first question comes from Deane Dray with RBC Capital Markets. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 2

Good morning, Dean.

Speaker 4

Hey, congrats on all the M and A successes here. Maybe we can start with Paragon, Looks right in your wheelhouse Precision Medical Robotics. If you could provide some color on the company in terms of Like what percent are consumables? We really like seeing all those one use applications. So consumables, Comment on margins and growth, if you could, please.

Speaker 2

Yes, sure. I'll give you my view of Paragon. As you stated, the Leading provider of highly engineered medical components and instruments. When you look at the key market drivers of this acquisition, You have the aging population, the demographic shifts. You also have procedure innovation Where the minimally invasive procedures are becoming more percentages of surgeries and they do a great job at that.

Speaker 2

And also in this market, there's a continuing trend toward outsourcing to OEMs and they want to The OEMs want to accelerate their time to market and Paragon is really well positioned with significant new product wins It serves specialty applications. I talked about the orthopedics, Minimally invasive surgery, robotic surgery and drug delivery. Orthopedics is the largest, but there are strong positions in each of the applications. The portfolio is one of your questions consisted of single use and consumable surgical instruments and implantable components And about 40% of the business is recurring in nature. So the single use and consumable surgical instruments are about 40% of the revenue.

Speaker 2

So we really like that. As a Blue Chip customer base, over 600 programs with diverse sources of revenue, About 85% of the business is on sole source programs. That's a very, very sticky business. When you combine the Regulatory environment with lengthy approval processes and the capabilities of Paragon, there's high switching costs. It's a business that has unique value to its customer base.

Speaker 2

We did a lot of surveys in the market and they're the highest quality provider. They have excellent customer service. A differentiator for them is their design and development capability And I really considered a true partner by their customers. And when I look at this from that's about Perrigo, when I look at what it does for AMETEK, It increases our medtech exposure now to over 20%. It's one of the goals we've been trying to achieve.

Speaker 2

It adds about $500,000,000 in revenue to EMG and that revenue is comes from Paragon, which is a Secular, low double digit grower. It really fits our business model with the highly engineered products that provide unique value to customers. It's a growing profitable business that provides multiple avenues of growth and there's really an opportunity for us to Improve margins by applying the AMETEK growth model. It's already a profitable business, but there's plenty of room for us to apply the AMETEK growth model and And margins, Paragon will benefit from the AMETEK's global infrastructure for sure and we like the management team. They're highly talented team and we're excited About what we can accomplish together and importantly, the deal economics met AMETEK's traditional deal hurdles and this is on a large Deployment of capital.

Speaker 2

So our return on invested capital orders are met by this deal. And we paid about 15 times TTM EBITDA for the business. So we're very excited for the business. It's a good business for us. We've been looking at these businesses for some time and has universal excitement amongst Paragon and AMETEK.

Speaker 4

All right. That was a great overview and you hit all the key questions on the consumables, margins and growth. So it sounds like a great story. And if I could just on a follow-up question on EMG. So we're seeing destocking All over the sector in biopharma and medtech.

Speaker 4

Be interested in hearing from you, Besides the destocking, is there any kind of read through on the end markets in those business? Are you seeing any slowing there? And look, no one's getting no one has a crystal ball here in terms of how long do you think this lasts, but I'd love to hear your Expectation on the duration of this inventory normalization? Thanks.

Speaker 2

Yes. Sure, Deane. Great questions. For the quarter, we grew our top line 5% on a mid single digit guide. Our revenue was in line with the guide.

Speaker 2

The acquisition performed

Speaker 3

a bit better.

Speaker 2

And we maintained, as I said, our full year sales guide mid to high single digits and Organic growth of mid single digits. To maintain that organic guide for the full year, our Aerospace and Defense business is stronger And our automation is weaker and they're offsetting and that's one of the benefits of the AMETEK portfolio. And specifically in terms of Q3 revenue, we saw Faster destocking in our automation businesses than we anticipated. So that's what we saw there. And we expect the destocking to continue through the end of the year.

Speaker 2

In terms of Your question is, is it a destock or a downturn? It's very difficult dynamic environment right now and lots of uncertainties With the geopolitical risks, the interest rate increases, they're factoring in for sure. But from what we see, this is largely an inventory correction. End demand looks constructive with many new projects in the offing and the projects are not being delayed or canceled. Our aerospace and defense looks solid, our medical Look solid, significant projects in semiconductor, clean energy, power grid.

Speaker 2

So we remain positive post destocking. And we think that destocking will continue through the end of the year. And in terms of 2024, we're going to sit down with our teams and understand what's going on. But in general, we're constructive.

Speaker 4

That's all real helpful. Thank you.

Speaker 2

Thank you, Dean.

Operator

One moment for our next question. Our next question comes from Matt Summerville with D. A. Davidson. Your line is open.

Speaker 5

Thanks. Good morning. Dave, your EIG margins this quarter Really moved into a new zip code for AMETEK. I was wondering if you could maybe talk about the key drivers as you just think about Sequential performance, right? Rev's flat profitability up $28,000,000 on the OP line as well as kind of the year over year dynamic.

Speaker 5

Maybe if you can just kind of flush all of that out, that would be helpful. And then I have a follow-up.

Speaker 2

Sure, Matt. I mean, if you'll go back and look at my last quarter or 2, I I told you EIG was gaining momentum and the momentum certainly showed up in Q3. We had an excellent operating quarter. I mean, EIG margins were up 3 60 basis points, Driven by high contribution leverage on the growth, we really had excellent price cost. We had strongly performing acquisitions and it all came together Put up record margins.

Speaker 5

Got it. And then just as a follow-up with respect to Paragon, I Appreciate the stats you shared. Is there any way to kind of parse out what you think year 1 cash EPS accretion would look like and then what the expected Closure timing might be for that?

Speaker 2

Thank you. Great questions, Matt. We think the closure is dependent on regulatory approval, But nothing atypical, but we think the we'll get the approvals and close sometime in the Q1. In terms of year 1,

Speaker 6

we'll have

Speaker 2

a very modest cash EPS accretion. It's going to be impacted by Purchase accounting, integration costs, realignment costs, financing costs, We'll pay with this with a mix of cash and debt and but we'll have very strong accretion in year 2. And we're excited about getting the business under our wing, improving the business and delivering and we're very excited.

Speaker 5

Just real quick, Dave. So you're not planning to non GAAP those items out, you're just going to run them through the P and L then?

Speaker 2

We'll make that decision at the time. Historically, we have not broke them out, but with The amount of acquisition activity that we have, it may make sense to do that. We haven't made a decision yet.

Speaker 5

Got it. Thank you, guys.

Operator

One moment for our next question. Our next question comes from Allison Poliniak with Wells Fargo. Your line is open.

Speaker 7

Hi, good morning.

Speaker 2

Good morning, Allison.

Speaker 7

I just want to go back to your comments on automation. If I recall, that's typically a canary in the coal mine, but it From your comments what I'm reading through, I just want to clarify that it just seems to be more industry destocking for you in that market or was it something bigger? I just want to make sure I understand.

Speaker 2

Yes. We think it's destocking. We think it's destocking and the destocking will last through the year end. But post destocking, we remain constructive. We are that business automation sells to a lot of markets and The healthcare part of that market is not doing well right now and some of the other exposure, but we think it's clearly destocking.

Speaker 7

Got it. And then on growth investments, keeping to the $100,000,000 how should we be thinking that into 2024? Is Something that you think there could be a raise there? And then just even with Paragon, what that R and D, I think you talked about the design piece of it being very A big part of that, how does design and R and D, is it higher than the typical AMETEK? How should we be thinking about that?

Speaker 2

I think you should think about Paragon is matching the AMETEK profile.

Speaker 7

Got it. And then organic investments as we kind of look to 2024s?

Speaker 2

Yes. I mean, we're going to sit down with each of our teams, to discuss 2024 over the next 6 weeks. We're going to review each of the individual businesses. We do deep dives, as you know, into what they are seeing in their niches, their market dynamics, Growth opportunities, cost reduction opportunities and we want to go through that these meetings before there's any commentary in 2024. We'll tell you in early February.

Speaker 2

But so in terms of talking about next year, We have the typical things like we will expect price to offset inflation and CapEx will be about 2% of sales and Things like that, but we're going to defer from talking about the overall plan until we get to meet with our teams and Understand at a detailed level.

Speaker 7

Perfect. Thank you.

Speaker 2

Thank you, Allison.

Operator

Our next question Our next question comes from Jeffrey Sprague with Vertical Research Partners, your line is open.

Speaker 8

Hey, thank you. Good morning, everyone.

Speaker 2

Good morning, Jeff.

Speaker 8

Good morning, Dave. Hey, just to come back to Paragon maybe one more time, maybe somebody else to come at it again.

Speaker 3

I just kind

Speaker 8

of wanted to understand the maybe the profit Improvement plan going forward. So it looks like rough math, right margins, EBITDA margins 25% or You're doing 800 to 1000 bps better now than that in EIG. When you talk about Kind of the aspirations for the business and the cost cutting and other opportunities, is that the sort of zip code and margin improvement we should be thinking about here? And If so, over kind of how long a period of time?

Speaker 2

Yes, that is the zip code and it's over time And we're going to build a plan with the management team and show them all the resources that AMETEK has and some of our business processes. But What you're talking about is in the zip code of what we have planned.

Speaker 8

And just to elaborate a little bit more on how this fits, Is there a kind of a commercial or operational synergy with other parts of the business? Or should we just think of this as a Interesting healthy kind of standalone business that drops into the portfolio.

Speaker 2

We have an existing business in our EMG business is about a $200,000,000 business. It's or called our engineered medical components. So We're familiar with the segments. They're completely different end markets, but think about that as additive to that existing position, but in At greater scale.

Speaker 8

And then maybe just one last one from me. The med tech world has been a little rocky here the last couple of years, Procedures, post COVID, everything. You characterized it as a double digit secular grower. But Are they kind of sitting in a little bit of a trough here impacted by those sorts of forces or maybe just kind of

Speaker 2

Not really. They're growing nicely. I mean, you have the market growth that they're benefiting from and they happen to be in the fastest They've deployed their resources well and they're benefiting from the faster fastest growth areas. There's a they're winning new business on new programs and it's pretty substantial. And We did surveys on these businesses and this is a really good business in terms of Their capability and how they take care of their customers and they're definitely winning share.

Speaker 2

So it's going to be a low double digit grower for the next few years and a lot of that's programmed in. Now that's the way we're looking at. There's going to be ups and downs as we go But this is a solid business with really good growth prospects.

Speaker 8

Great. Congrats and good luck with it. Take care.

Speaker 2

Thanks. One

Operator

moment for our next question. Our next question comes from Scott Graham with Seaport Research Partners. Your line is open.

Speaker 9

Hey, good morning. Thanks for taking a minute here. Nice quarter.

Speaker 2

Thank you.

Speaker 9

So just a couple of items, Bill. What was the working capital percent last year?

Speaker 3

Give me one second on that.

Speaker 9

Sure, sure. I'll just ask another one.

Speaker 2

Got it. It was 18.4.

Speaker 9

18.4. Okay. Thanks. And then the 1,500,000,000 Of availability, just maybe walk us through that. That is net of Paragon, I Assuming is that like an assumption at about 2.5 times leverage?

Speaker 3

No, that's the amount of Cash and availability under our revolver post Paragon. The leverage post Paragon would only be about 1.5 times EBITDA at the gross level. So substantial financial flexibility as well as we're still Well under levered, I would say. And as Dave has talked about, lots of other opportunities available to us as we look to continue the acquisition So again, it's always finding the right businesses for the AMETEK portfolio where it is not capital constraint.

Speaker 9

Right, right. Yes, that's how you do that as well. Another

Speaker 2

way to make that clear is, Bill said post Paragon, we 1.5 leverage. If we wanted to take it up to 2.5 leverage, which is we've been there before and that's not a higher number for all, We could spend $2,600,000,000 on acquisitions above and beyond Paragon. So we're in the M and A game and Our pipeline looks really good and we have the balance sheet to be able to execute on it and the capability to integrate these businesses.

Speaker 9

Thank you for that. I appreciate it. When you are looking at deals these days in this interest rate environment, you're Obviously, funding them off of a lot of balance sheet liquidity and admittedly maybe now higher rates off of the revolver. But Are you impute an interest rate that is kind of more market oriented when you make these decisions?

Speaker 3

Yes. Our models use current borrowing rates as part of that decision making process.

Speaker 9

Got it. Thank you. Last question is, the typical one, Dave, would you mind kind of maybe unbundling The four divisions.

Speaker 2

Sure, Scott. I'll walk around the business. I'll start with our process business. And overall sales for Process were up mid single digits at low single digit organic sales And the contribution from the acquisition of Navatar. And demand across our process markets remain solid.

Speaker 2

Our products and technologies are well aligned with important secular growth trends like the energy transition and healthcare. Growth in the quarter was strongest across these end markets, while our high end optics business in ZYGO Continues to perform very well with strong demand for our custom optical solutions. And for the full year, we continue to expect Mid single digit organic sales growth for our process businesses. Going to Aerospace and Defense next. Aerospace and Defense continues to perform well.

Speaker 2

Organic sales were up low double digits in the quarter. Growth remains strong and broad based across our A and D sub segments. Our growth in the quarter was strongest in our defense businesses, While commercial OEM and aftermarket businesses also grew at healthy levels, given this strong performance, We now expect sales for Aerospace and Defense to increase mid teens on a percentage basis for the full year. In Power and Industrial, those businesses delivered solid results in the Q3 with overall sales up mid teens. This growth was driven by low single digit organic sales growth and the contribution from the acquisition of RTDS Technologies.

Speaker 2

We saw the strongest growth in the quarter across our Renewable Energy and Power Simulation businesses, including RTDS. Our power businesses are well positioned to benefit from long term investments required to modernize the electric power grid And build out of the renewable energy infrastructure globally. And for all of 2023, we continue to expect Mid single digit organic sales growth for our Power business. And finally, our Automation and Engineered Solutions business. Overall sales for A and ES were down mid single digits in the quarter With contributions from the acquisition of Bison Engineering being more than offset by a low double digit decrease in organic sales, As we expected, the impact from normalization of inventory levels, which we talked about earlier across our OEM customer base, Combined with challenging prior year comparisons created a short term headwind for our OEM exposed businesses.

Speaker 2

We believe underlying demand is solid as we talked about earlier And across our diverse Automation and Engineering Solutions markets and we remain constructive. But we do expect, as we said before, that The inventory normalization is going to recur throughout the OEM customer base will continue through the end of the year. And now for the full year, we expect organic sales for our Automation and Engineered Solutions businesses to be down mid single digits versus the prior year. So that's all for the sub segment commentary, Scott.

Speaker 9

Thanks very much.

Speaker 2

Thank you,

Speaker 3

Scott.

Operator

One moment for our next question. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

Speaker 6

Thanks. Good morning and congrats on the deal, deal, Stephen. So good morning. Can you hear me?

Speaker 2

Yes, we can hear you, Nigel.

Speaker 6

Okay, good. I couldn't hear you. Okay. So maybe you could do the same process Geographically, talk about what you're seeing by geography. I'd be curious about Europe and China.

Speaker 6

And also, you gave some perspective on business performance. Maybe you could talk about maybe just for the final points on 4Q, maybe talk about core growth and acquisition contributions for 4Q.

Speaker 2

Okay. Q4 and geographic. Okay. I'll go across the Geographies, we had continued solid growth in the U. S.

Speaker 2

With the international slowing a bit. So Unpack that a bit. The U. S. Was up mid single digits with notable strength in our process business.

Speaker 2

Europe was down low single digits, notable strength in process in our aerospace business, but weakness in automation. You mentioned China. Our China exposure was down 3%, strong growth in process, weakness in automation. And overall Asia was down about 10%. So China did better than overall Asia.

Speaker 2

China is about 9% of sales. So again, up in the U. S, slowing in international markets. And the second question you asked was on Q4 and the guide for Q4. And Our sales will be up mid single digits.

Speaker 2

We'll grow in revenue. There are 2 factors impacting the earnings in Q4 and One of them is a higher tax rate and the second one is there are some acquisition integration costs in there related to the deals we completed. We're very confident in our guide for Q4.

Speaker 6

I'm sorry, David, what was the core growth for the 4Q?

Speaker 2

Core growth for Q4 was low to mid single digits.

Speaker 6

Okay. So that's obviously acceleration from 3Q. What's driving that acceleration?

Speaker 2

I think we're seeing some Good demand on the EIG side from the typical year end selling year end sales that we typically get of Capital spending plus the EIG business is performing well. So our Aerospace and our Process businesses are performing well And that's what driving your organic sales in Q4 to be higher than the organic sales in Q3.

Speaker 6

Got it. That's helpful. Maybe just one more for me. So, obviously, Paragon, big deal. You've booked another smaller deal.

Speaker 6

You sound really bullish on the outlook as well. So it seems like the pipeline is still pretty fertile. I mean, are we seeing here Change in behavior from sellers that we see in more willing sellers, are we seeing any change in sort of ask multiples here, any color on the market would be helpful.

Speaker 2

Yes. I think it's a little choppy in the market and people are reevaluating and No, the interest rates are higher. So financing that debt on a continuing organization may be a challenge. And as I said in the beginning of the year, our pipeline is strong. I would categorize our pipeline right now as very strong.

Speaker 2

We have a lot of attractive candidates we're looking at and I'm just bullish on being able to differentiate AMETEK's performance Over the next 12 months to 24 months with our OpEx and our M and A.

Speaker 6

Great. Thanks, David.

Operator

Our next question comes from Christopher Glynn with Oppenheimer. Your line is open.

Speaker 10

Thank you. Good morning.

Speaker 2

Good morning, Chris.

Speaker 10

I want to keep it going on Paragon a little bit. I think you listed as For medical components and instruments, I'm wondering if it is the OEM and some of the instrument spaces. And also a little bit on ownership history in the field process competitiveness and such.

Speaker 2

Yes. When you think about Paragon, they're largely selling to an OEM customer base, but They do sell some of their surgical instruments directly to the end customer, but it's largely an OEM customer base. We purchased the business from American Securities. And from our view, they Did an excellent job running the business and got a fantastic management team in place, have a good growth strategy. And What they did is really positioned kind of a pure medtech play by positioning this with some other parts of the portfolio.

Speaker 2

So We're pretty excited about what we're buying.

Speaker 10

Okay. Thanks for the added color.

Speaker 2

Yes. Thank you, Chris.

Operator

One moment for our next question. Our next question comes from Peter Costa with Mizuho. Your line is open.

Speaker 10

Good morning, everyone. This is Peter Costa on for Brett Lindsay. So Just coming back to orders, could you provide some context around the monthly order cadence to the quarter and then moving into October? Have you been seeing anything concerning or anything tracking better than your internal

Speaker 2

No, I think the quarterly evolution of orders is about what We see we mentioned our book to bill and things like that. And we started out in Q4 in line with what we need to deliver those results. We had talked our last few earnings calls, we highlighted a couple of dynamics that would impact Our orders have been very strong for an extended period of time. In fact, we averaged 18% organic growth in 2021 2022 And we had 12 consecutive quarters up to this quarter with positive book to bill. So as a result, we have a Near record backlog as we said.

Speaker 2

These dynamics are playing out as we anticipated.

Speaker 10

Perfect. Thank you.

Speaker 2

Yes.

Operator

One moment for our next question. Our next question comes from Andrew Obin with Bank of America. Your line is open.

Speaker 11

Hi. This is David Ridley Lane on for Andrew Obin. Good morning, David.

Speaker 3

Good morning.

Speaker 11

Wondering if you've seen any impact from the higher interest rates on end market demand and in particular, Some of the other publicly traded test and measurement companies have mentioned project delays, particularly in China. Have you seen anything along those lines?

Speaker 2

Yes. As I mentioned, we were down about 3% organically in China. So there was Some delays, but it wasn't substantial. In terms of Increasing interest rates, that's one of the uncertainties that we're clearly looking at and it's a very dynamic environment right now. And there are factors for sure, but we're not seeing an impact on projects proceeding or anything like that from the interest rates at this point.

Speaker 11

Got it. And Are you supply chain constrained at this point in your Aerospace and Defense Businesses? Is that a sort of limiter on growth accelerating and even greater over time?

Speaker 2

We are not supply chain limited in aerospace at this time. Now the industry is Dealing with some supply chain difficulties, but we're not limited.

Speaker 11

All right. Thank you very much.

Operator

One moment. Our next question Our next question comes from Michael Anasacio with TD Cowen. Your line is open.

Speaker 12

Thank you. Good morning, everyone.

Speaker 2

Good morning, Michael.

Speaker 12

Back to Paragon, currently medical related revenues are About give or take 10% of sales and after this acquisition, it takes you to about 20%. So I was just expecting just curious if you're Expect to make like a deeper push into medical moving forward. And then what is sort of like the best way to think about balancing M and A dollars for these different end markets as well? Any color would be helpful.

Speaker 2

Yes. There's a balance in AMETEK's end markets And we really like that balance. That's why we're able to navigate some of the challenges that we're going through right now. So it's we plan on keeping that balance. But if there are other attractive Areas in the medical space, we'll certainly look at them.

Speaker 2

But, it's we like the balance in the portfolio. And what was your other question, Michael? Oh, M and A Dollar. Yes. I mean, we have a distributed operating model.

Speaker 2

And all of our businesses, we have management teams there that are doing strategy work around their businesses and trying to make their businesses better and they're bringing forward acquisition So we don't have a predefined number of predefined amount of capital that we're going to apply to certain markets. We're going to looking for The deal, the deal quality, the quality of the businesses and if we have the management teams to integrate them. So we have a different viewpoint. We don't look at it from the top down in terms of dollars Allocated for market.

Speaker 12

Got you. That's helpful. And just kind of diving back into it. So potentially depending on availability Do you expect total revenues to the medical end market increasing over time and how do you expect that?

Speaker 2

Yes, it's 20% now. It could go 25%, 30%, that wouldn't bother us. But we plan on having a

Speaker 6

Diversified revenue base.

Speaker 12

Great. Thank you.

Speaker 2

Thank you.

Operator

Thank you. That concludes the question and answer session. At this time, I would like to turn it back to Kevin Coleman for closing remarks.

Speaker 1

Thank you, Abigail, and thanks everyone for joining us for our conference call. As a reminder, a replay of today's webcast Can be accessed in the Investors section of ametek.com. Have a great day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
AMETEK Q3 2023
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