AMETEK Q3 2021 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the AMETEK Third Quarter 2021 Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session.

[Operator Instructions]

Please be advised that today's conference is being recorded.

[Operator Instructions]

I would now like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations. Please go ahead, sir.

[Kevin Coleman, Vice President of Investor Relations at AMETEK]

Thank you, Angie. Good morning, and thank you for joining us for AMETEK's third quarter 2021 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 make 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. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2020 or 2021 results will be on an adjusted basis excluding after-tax acquisition-related, intangible amortization, and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020, and the realignment charges taken in the first quarter of 2020. 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 at AMETEK]

Thank you, Kevin. And good morning everyone. AMETEK had another outstanding quarter, with better than expected sales growth, strong operating performance, and earnings above our expectations. We established records for sales, EBITDA, operating income, and earnings per share in the quarter. Demand remained strong across our diverse set of end markets, leading to robust order growth, and a record backlog. While the global supply chain and logistics networks remain challenging, our businesses are doing a tremendous job navigating these issues and delivering results which exceeded our expectations. Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our sales and earnings guidance for the full year. This strong overall performance reflects the exceptional work of all AMETEK colleagues, as well as the strength, flexibility, and sustainability of the AMETEK growth model. AMETEK's proven business model is central to our focus on creating a sustainable future for all stakeholders.

We are very proud of the important steps we're taking to further sustainability across AMETEK. And last week, we published our latest Corporate Sustainability Report to highlight our efforts in this area. This report provides information on our sustainability initiatives, the strong progress we have made, and the commitments we are making to create a better future. I welcome you all to read our latest Corporate Sustainability Report, which is located on our website. Now let me turn to our third-quarter results. Third-quarter sales were a record $1.44 billion, up 28% over the same period in 2020, and above our expectations. Organic sales growth was 17%, acquisitions added 11 points, and foreign currency was a modest benefit in the quarter. Overall orders in the third quarter were $1.55 billion, an increase of 37% over the prior-year period. While organic orders were up an impressive 30% in the quarter. We ended the quarter with a record backlog of $2.62 billion, which is up over $800 million from the start of the year.

Third quarter operating income was a record $338 million, a 25% increase over the third quarter of 2020, and operating margins were 23.4%. Excluding the dilutive impact of acquisitions, core operating margins were 24.7%, up 70 basis points versus the third quarter of 2020. EBITDA in the third quarter was a record $415 million, up 25% over the prior year, with EBITDA margins of 28.8%. This outstanding performance led to record earnings of $1.26 per diluted share. Up 25% over the third quarter of 2020, and above our guidance range of $1.16 to $1.18. We continue to generate strong levels of cash flow, with third-quarter operating cash flow of $307 million, and free cash flow conversion of 109% of net income. Overall tremendous results in a challenging operating environment. Next, let me provide some additional details at the operating group level.

First, the Electronic Instruments Group. Sales for AIG were a record $982 million, up 31% over last year's third quarter. Organic sales were up 15%, acquisitions added 16%, and foreign currency was a modest headwind. While growth remains broad-based, growth was particularly strong across our Ultra Precision Technologies, and our Power and Industrial businesses. AIG's third-quarter operating income was a record $245 million, up 20% versus the same quarter last year, and operating margins were 25%. Excluding acquisitions, AIG's core margins were excellent at 27.2% in line with prior year margins. The Electromechanical Group also delivered outstanding sales growth and excellent operating performance. Third-quarter sales increased 21% versus the prior year to $459 million. Organic sales were up 20%, and currency added one point to growth. Growth remained strong across all of the MG, with our automation businesses again delivering notably strong growth in the quarter.

EMG's operating income in the quarter was a record $115 million, up a robust 36% compared to the prior-year period. EMG's operating margins expanded an exceptional 270 basis points to a record 25%. Now, switching to our acquisition strategy. AMETEK has had an excellent year with a record level of capital deployment, leading to the acquisition of 5 highly strategic businesses. AMETEK is supported, approximately $1.85 billion on acquisitions, thus far this year, reflecting the strength of AMETEK's acquisition strategy and our ability to identify and acquire highly strategic companies. Our proven operating capability allows us to drive meaningful improvements across our acquired companies, resulting in outstanding returns on capital. Generating strong returns on capital deployed is critical to long-term sustainable growth, an important element of AMETEK strategy. AMETEK's strong cash flow generation continues to support our capital deployment strategy, our acquisition pipeline remains very active, our M&A team continue to work diligently, identifying attractive acquisition opportunities, and we expect to remain busy over the coming quarters.

We also remain focused on investing back into our businesses to support their organic growth initiatives, including in support of their new product development efforts. In the third quarter, we invested over $75 million in RD&E. And for all of 2021, we now expect to invest approximately $300 million or approximately 5.5% of sales. Through these investments, our businesses develop unique and highly differentiated solutions that help solve our customers' most complex challenges. One such example is a new product introduction from AMETEK Gatan. Gatan is a leading provider of direct detection technology, for Elektron microscopy [phonetic], supporting high-end research and materials and life sciences applications. Gatan recently introduced The Stela hybrid pixel camera, the only fully integrated hybrid pixel electron detector with the Gatan microscopy [phonetic] suite. This new product reinforces Gatan's leadership position, providing the highest quality TEM diffraction camera, allowing the user to perform 4D stem analysis for the rapid speed and high dynamic range. Gatan's new camera builds on a long history of disruptive and award-winning technology.

In August, The Stela Cameron was awarded the 2021 [indecipherable] today Innovation Award, and called one of the ten game changing products and methods. I would like to congratulate the team at Gatan for the recent launch of The Stela camera, and further support of important research applications. Now, let me touch on the supply chain issues. The global supply chain remains challenging, we see extended lead times for a broad range of materials and components with logistics issues, and labor availability adding to the complexity. While these difficulties exist, we exceeded our sales estimates for the quarter, and are navigating the challenging environment well, given our agile operating approach. The supply chain issues are leading to higher inflation. However, given our differentiation, we're able to more than offset this inflation with higher pricing, leading to a strong price inflation spread. While we expect these challenges will continue into 2022, we remain well positioned to navigate the issues, given the strength and flexibility of the AMETEK growth model.

Moving to our updated outlook for the remainder of 2021. Given our strong performance in the third quarter, and the continued strong orders momentum and record backlog, we have again raised our 2021 sales and earnings guidance. For the full year, we now expect overall sales to be up in the low 20% range, versus our previous guide up approximately 20%. Organic sales are now expected to be up low-double digits on a percentage basis over 2020, as compared to our previous guides of approximately 10%. Diluted earnings per share for 2021 are now expected to be in the range of $4.76 to $4.78, an increase of approximately 21% over 2020 is comparable basis, and above our prior guide of $4.62 to $4.86 per diluted share.

For the fourth quarter, we anticipate that overall sales will be up in the low 20% range versus last year's fourth quarter. Fourth-quarter earnings per diluted share are expected to be between $1.28 to $1.30 of 19% to 20% over last year's fourth quarter. In summary, AMETEK's third-quarter results were excellent. Our teams continue to execute, and our businesses are performing well. Our performance through a challenging environment shows the resilience and strength of the AMETEK growth model. The asset-light nature of our businesses, our leading positions in attractive niche markets, and our world-class workforce will continue to drive long-term sustainable success. The proven nature of the AMETEK growth model continues to drive long-term success for all of AMETEK's stakeholders. 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. Bill.

[Bill Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you, Dave. As Dave highlighted, AMETEK delivered excellent results in the third quarter, with continued strong sales growth, and orders growth, and outstanding operating performance. Let me provide some additional financial highlights for the quarter. Third-quarter general and administrative expenses were $22.1 million dollars, up $4.8 million from the prior year, largely due to higher compensation expenses. As a percentage of total sales, G&A was 1.5% for the quarter, unchanged from the prior year. For 2021, general and administrative expenses are expected to be up approximately $18 million, driven by higher compensation costs were approximately 1.5% of sales, also unchanged from the prior year. Third-quarter other income and expense was better by approximately $4 million versus last year's third quarter, driven by a $6 million or approximately $0.02 per share gain on the sale of a small product line in the quarter.

This gain on the sale was more than offset by a higher effective tax rate in the quarter of 19.5%, up from 17.5% in the same quarter last year. For 2021, we now expect our effective tax rate to be between 19.5% and 20%, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year estimated rate. Working capital in the quarter was 14.9% of sales, down 210 basis points from the 17%, reported in the third quarter of 2020, reflecting the excellent work of our businesses, and managing working capital. Capital expenditures in the third quarter were $26 million, and we continue to expect capital expenditures to be approximately $120 million for the full year. Depreciation and amortization expense in the third quarter was $75 million, for all of 2021 we expect depreciation and amortization to be approximately $295 million including after-tax, acquisition-related intangible amortization of approximately $138 million or $0.60 per diluted share.

We continue to generate strong levels of cash given our asset-light business model and working capital management efforts. In the third quarter, operating cash flow was $307 million, and free cash flow was $281 million. With free cash flow conversion, 109% of net income. Total debt at quarter-end was $2.65 billion, up less than $250 million from the end of 2020, despite having deployed approximately $1.85 billion on acquisitions, thus far in 2021. Offsetting this debt with cash and cash equivalents of $359 million? In the quarter-end, our gross debt to EBITDA ratio was 1.6 times, and our net debt to EBITDA ratio was 1.4 times. We continue to have excellent financial capacity and flexibility with approximately $2.25 billion of cash and existing credit facilities to support our growth initiatives. To summarize our businesses drove outstanding results in the third quarter, and throughout the first 9 months of 2021. Our balance sheet and tremendous cash flow generation, have positioned the company for significant growth in the coming quarters, and years. Kevin.

[Kevin Coleman, Vice President of Investor Relations at AMETEK]

Thank you, Bill. Angie, we're now ready to open up for questions.

Questions and Answers

[Operator]

[Operator Instructions]

Your first question comes from the line of Matt Summerville, with DA Davidson. Please proceed with your question.

[Matt Summerville, Managing Director, Senior Research Analyst at AMETEK]

Thanks. A couple of questions, first, Dave, can you talk about where you were with realized pricing in the third quarter on a year-over-year basis, what the spread looks like? You mentioned that seems pretty favorable. And then, what your thoughts are in terms of how much price you might need to take in 22'?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Sure, Matt. In the third quarter, our pricing continued to more than offset inflation. As I said in the prepared remarks, pricing was about 3.5% of sales, and inflation was about 2.5% of sales. So we're going to spread about 100 basis points, and we expect in Q4 that will be similar to Q3, with slightly higher pricing and inflation. And the results speak to the highly differentiated nature of AMETEK's product portfolio on our leadership position in niche markets around the world. In terms of next year, we haven't done the detailed planning, but a key for me is that we're going to stay ahead of inflation and I expect that to be true next year. So will stay ahead of inflation with price. Did I answer your question, Matt?

[Matt Summerville, Managing Director, Senior Research Analyst at AMETEK]

Yes, thank you. And then just-- it's a follow-up, if I just look over the last 2 years, EMG margins have really migrated into a completely different zip code versus where they were at. I know divesting of Reading is a component to that, you did some structural cost outs during the COVID outbreak. Is there still leverage to drive margins higher in that business, how do you think about how we should think about that going forward?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah. EMG has done a fantastic job in margin development. And you mentioned some of the key drivers, we divested Reading, but more fundamentally I mean, we have an Automation business that's firing on all cylinders that's very profitable. We have a thermal management system as part of our defense industry-- defense businesses. It's doing well, and it is high margin, and we have some part of our business that's accelerating. So it is in a new zip code, but I expect it to say there and there's still room for margin expansion.

[Matt Summerville, Managing Director, Senior Research Analyst at AMETEK]

Great. Thank you, Dave.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you, Matt.

[Operator]

Your next question comes from the line of Josh Bukwenski [phonetic] with Morgan Stanley. Please proceed with your question.

[Gustavo Gonzalez, Morgan Stanley at AMETEK]

Hi everyone. This is actually Gustavo Gonzalez on for Josh. So looking at backlog, where it stands today, how much of that would you call it, excess backlog? Kind of based on supply chain issues, and how much should we expect that contributed to 2022 growth here?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah. We have a record backlog of $2.62 billion, and I wouldn't categorize it as excess. I mean I mentioned, in an earlier call, that customer behavior is to give you more visibility into future months and quarters, because there are so many issues in the supply chain. So you have more visibility, but I would not consider it as excess and I would not view us as not keeping up with demand. So really, you have a situation where there is strong underlying demand, it's resulting in a higher backlog, it is giving us further insight into 2022, and we feel real good about it.

[Gustavo Gonzalez, Morgan Stanley at AMETEK]

Got it. And then just a quick follow-up. So what are kind of the biggest inflation and supply chain issues that we should kind of watch for AMETEK? As conditions potentially do start to improve, is there on the material side, freight, or labor, just kind of what should we keep our eyes on?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

That's a good question. And during the quarter, we continue to experience challenges with our supply chain, logistics, inflation, labor availability, and it was one of the more dynamic environments I can recall. And these conditions were a bit worse in Q3 and Q2, and we expect those conditions to persist in the fourth quarter. And I would characterize our overall effort in response to these challenges as outstanding. We're clearly showing the agility necessary to navigate the supply chain disruptions. A key from my view is the distributed nature of our business model, where we have committed P&L managers running their businesses with our own supply chain teams which allow them to react quickly to changing conditions. And at the same time, these dedicated business unit teams are working seamlessly with our overall corporate supply chain team, that acts with the combined leverage and the authority of all of AMETEK, and this overall approach has been effective for us. I mean you asked, where we had some of the biggest issues we had?

As I mentioned last quarter, it's in semiconductor chip available. It's an area that's particularly challenging because we use a lot of electronics in our businesses obviously. And we're using our purchasing leverage, the relationships that we've built up over decades. Our engineering capability, in terms of qualifying second sources. In terms of changing designs to solve problems, and we don't expect to anticipate improvements in the availability of semiconductors until sometime in late 2022. So it's a tough environment, and-- but we're reacting well to it. And I was very pleased with our teams, and I point to one thing, it is a distributed business model where we have very experienced P&L leaders, making sure that they're going to satisfy their customers and not letting the supply chain get in the way.

[Gustavo Gonzalez, Morgan Stanley at AMETEK]

Got it. That's helpful. Thank you.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

[Allison Poliniak, Director - Senior Analyst at AMETEK]

Hi, good morning. Hello, Allison, good morning. I just want to keep it in line with pricing, it's obviously, you guys are bit unique in that and you certainly been managing this quite well. Is there a sense, I mean organic look very strong, organic orders are very strong, is there any tempering of maybe what growth could have been because of some of these supply chain issues or really not impactful to you guys in terms of what that expected growth could be or the volume that you're anticipating this quarter?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, that's a good question, Allison because what we do is we set our plan based on material availability, and we executed that plan extremely well. In fact, we beat our expectations, what we did at the end of the quarter, look at it as a-- if the stars aligned, what could we have shipped without some of the material availability issues? And it was about an additional $50 million that shifted out of Q3 to Q4, and I feel like we're going to have the same kind of shift out of Q4 into Q1. So we're able to meet demand, we're able to juggle the schedule. Once we lock into the schedule, we're very good at executing it, but there was about $50 million that slipped out. Now, we're not a big labor business, we have a-- labor is not a big cost driver for us. So labor availability of staff, but we're able to get the products manufactured with the labor available. So your answer is $50 million in an ideal world.

[Allison Poliniak, Director - Senior Analyst at AMETEK]

Got it. That's helpful. Thank you. And then just on the acquisition environment, obviously deployed a significant amount. At the beginning of the year, it sounds like the pipeline, as I always is pretty active. Any color on kind of what you're a little bit more focused on or what we could see maybe near term over the next few months if the stars align there?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, we are very focused on some deals right now. And I don't know if they're going to happen next month or three months from now. But we're very active over the next few months. I mean the thing you have to be careful of right now, is there's a lot of businesses that are out there and you have to sort through them and find the quality. Find gems within those pipelines, and we're good at that, and I just feel the pipeline remains strong, we're very active on exploring opportunities. As Bill mentioned, we have a meaningful level of financing capacity and strong cash flows, and we also have-- so I think 2022 is going to be a good year for us, and we're going to have a tailwind from some of the deals we got done this year. So we're feeling pretty optimistic about what we've got done this year. The quality of businesses that we acquired, and we're feeling good about the pipeline for 2022.

[Allison Poliniak, Director - Senior Analyst at AMETEK]

Great, thank you. I'll pass along.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you, Allison.

[Operator]

Your next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

[Deane Dray, CFA- Managing Director at AMETEK]

Thank you. Good morning, everyone.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Good morning Deane.

[Deane Dray, CFA- Managing Director at AMETEK]

Hey, really solid execution this quarter when many of your peers have struggled.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Deane Dray, CFA- Managing Director at AMETEK]

It was interesting on Allison's question there, we actually had a drag it out to you that there was a 50 million push out on revenues. we've seen that, and also we've seen where that is like a rolling pushout in from 4Q into the first quarter, but I like how the fact that wasn't an excuse, you still put up strong numbers. So congrats there.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Deane Dray, CFA- Managing Director at AMETEK]

A couple of questions. There is this thought here on the supply chain issues for companies like AMETEK that are higher up the value chain. You're not doing raw material conversions, you're more final test and assembly. So it's the component supply might be-- the impact might be felt later, so this might become more of an issue for component supply in the coming quarters. We know it's chip-related already, but is there any sense where you think it gets worse from here? Again, where you are on the value chain.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, I don't see it getting worse. As I mentioned, it was worse in Q3 than Q2, but things seem to have stabilized, the comment that I made is a good one. to your question, and inflation is a concern related to our backlog, but we think it's manageable, even with the high-level components, and the first key for me is that you have firm supplier pricing for items in the backlog, as much as possible. So, you know what your costs are going to be. And then we do have some commodities that we use in various areas, and when possible, we have firm orders will buy forward certain key commodities to locking costs where appropriate. We're using surcharges to handle increases in shipping costs, increases in transportation costs, higher energy costs, et cetera. We shorten the length of our quotation validity, the valid time our quotations are out there. So items can be repriced if necessary. And then you take into account the higher cost and when you can and if necessary, our customers have been fairly receptive to get a price increase due to what's happening right now.

So I put that whole package together, and if we're a bit later than some of the component businesses, that may be true. But at the same time, we're willing running well ahead of inflation with our pricing, and we plan to stay there and that's going to be a big part of our budgeting process that we're going through. And to understand what's happening in the market, to understand inflation, and with 3.5% of price, and 2.5% inflation across our entire businesses. I think we're focused on it, and I think we're doing a good job of it, and I think we'll stay in front of it.

[Deane Dray, CFA- Managing Director at AMETEK]

That's really helpful. And you mentioned the budgeting process, I'd be interested in hearing how the budgeting process for 2022 might be tampered given these circumstances on the supply chain? Would it be the topline, kind of being these rolling pushouts, would it also be margins with the labor issues? Just how does this all change your planning assumptions for 2022, and then maybe if you could just give us a comment on October, that would be helpful also?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Okay. Yeah, I'll talk about, I guess our preliminary thoughts on 2022. And as you know, we operate in niche markets, and we have a comprehensive budgeting process to allows us to understand the market dynamics of these niches in a detailed level. And we begin that process later this month, and that process is going to inform our guidance for 2022. In terms of the macro setup, we believe the economic recovery continues. We think overall, it's a good macro environment for us. We think the mid-cycle recovery continues, we think that we'll start to see longer cycle improvement, and our commercial aero businesses, our process industries will continue to recover. We're expecting a stable defense spending environment. In terms of some of the headwinds that you mentioned, the challenges from inflation are going to continue. And we're going to have to continue to offset inflation with price, and the supply chain makes a strain growth, mainly in the first half of the year.

And as I mentioned before, semiconductor availability is a key issue for us. And we remain-- the final thing is we remain active in capital deployment with significant balance sheet capacity, with a primary focus on M&A. So we're really bullish about what we're going to be able to accomplish in 2022. And there's a couple of challenges out there, headwinds, mainly the supply chain, that we're actively managing now. But we're still feeling good about 2022.

[Deane Dray, CFA- Managing Director at AMETEK]

Then comment on October.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, the comments on the cadence throughout the quarter, and October. September was the strongest month of the quarter, it was also the strongest month of the year to date in orders. And sales grew sequentially through the quarter, with September being the strongest month in the quarter. And October was very solid, it was supportive of the trend required to meet our guide for Q4. So we're very pleased with how October turned out and it showed no slowdown at all.

[Deane Dray, CFA- Managing Director at AMETEK]

Really helpful. Thank you. '

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you, Deane.

[Operator]

Your next question comes from the line of Andrew Obin, with Bank of America.

[David Ridley Lane, Equity Research Analyst at AMETEK]

Good morning. This is David Ridley Lane on for Andrew, can you give us some additional color on revenue by end-markets and geographies?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Sure. I mentioned in the prepared remarks that it was broad-based growth, and I'll take a walk around the company David, and you look at our process businesses, they were up, heighten [phonetic] on a percentage basis in the third quarter and they were driven by low teens [phonetic] organic sales growth, and the contribution from the acquisition of Magnetrol. And our process businesses continue to see broad-based growth with particularly strong growth within our Ultra Precision Technologies businesses. As new products, and thier differentiated measurement technologies are really driving solid demand across a wide range of markets, including the semiconductor and optics market. For the full year for process, we now expect to be up low double digits versus the prior year. Our next major market segment is the aerospace and defense market, and overall, we were up 55% in the third quarter, driven by solid organic sales and the contribution from the acquisition of Abaco.

Organic sales were up high single digits on a percentage basis versus the prior year. Solid growth in our commercial aftermarket business and our businesses. Those are the 2 areas of strong growth, and for all of 2021, we now expect mid-single-digit organic sales growth for our aerospace and defense businesses. And we expect our defense businesses to be a pie-single digit, and our commercial businesses to be up low-single. So the defense business is still stronger but it's moderating a bit, and the commercial business has had a good quarter. Go to the power and industrial market segment next, up nearly 40% in the quarter driven by mid-'20s organic sales growth. So they had a very good quarter, also acquisitions from NSI and Crank Software contributed. And for all of 2021, we now expect mid-teens organic growth for our Power and Industrial businesses. And finally, our automation and engineered solutions business, and both overall and organic sales were up approximately percents, accelerating from the prior quarter.

Sales across our automation businesses remain robust with strong demand continuing in their end markets. And for all the '21, we now expect organic sales for our automation and engineered solution businesses to be up mid-teens on a percentage basis with stronger growth across our Automation businesses than our Engineered Solutions business. So the automation business is doing very well, as customers want to remove labor from their processes, they want to move things contamination-free, we're at capacity, we've invested in the past, and the right technologies that are winning share. So-- and we're very good at moving things quickly and precisely. So the automation business is in a really good position with a strong backlog, and we're bullish about the future. You mentioned geography. I'll go around the geographies, a strong broad based growth across geographies-- every geography was up, the US was up 15%, Europe was up 15%, and the star for the quarter was Asia, it was up 25% with broad-based strength-- and notable strength in our Process and Automation businesses in Asia.

Did answer your question, David.

[David Ridley Lane, Equity Research Analyst at AMETEK]

Perfectly. And then just a quick follow-up, you sort of alluded to it earlier in talking about mid-cycle. This is a pretty strange cycle. So maybe just can you talk about some of the areas that you are looking for better organic growth in 2022 versus 21? Imagine that the-- some traditional longer cycle areas, like commercial, aero, and oil and gas, but also maybe in this particular cycle, things that are tied to patient volumes, and that sort of stuff.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, I mean it's-- you mentioned three of the areas that I think are all improving, our commercial aerospace business will definitely improve. Our oil and gas business is only about 5% of AMETEK now, but it was up mid-teens in the quarter. And given where oil and gas prices are, we're beginning to see the signaling of the project business returning in 2022. So we're feeling good about that. And in terms of the health care business, healthcare is 15% of AMETEK now. So, it's our largest end market vertical, we were up mid-teens in the quarter. We had really solid growth in our rolling business and our record business, really driven by new products and records. And the electrosurgery business, it picked up for us in Q3. So we were up in the quarter. It wasn't up 15%, it was up high-single digits, and we're benefiting from elective surgeries, and things like neuro-stimulation, cardiac mapping, catheters, all that stuff. People are going back to hospitals, getting those procedures done, and we expect that to grow.

This quarter was our high-single-digit kind of number. We expect that to grow more next year. So you hit the key issues, commercial aerospace, oil and gas, the medical elective surgeries. But I don't think the mid-cycle is not growing yet either, and we're starting to see acceleration in that business across some of our process businesses.

[David Ridley Lane, Equity Research Analyst at AMETEK]

Perfect, thank you so much, and congratulations on the quarter. Thank you.

[Operator]

[Operator Instructions]

Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

[Christopher Glynn, Equity Analyst at AMETEK]

Thanks, good morning everybody.

[Unidentified Participant, at AMETEK]

Good morning Chris.

[Christopher Glynn, Equity Analyst at AMETEK]

Hey Dave. So results really answer a lot of questions in principle, I was actually curious, any particular areas of share gain or areas of market space creation you want to comment on? You mentioned automation a little bit, just kind of looking to expand on those.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, I mean the-- I would say that when you can deliver, your customers give you more orders. And that's the key issue that's driving our business right now. And when I look at the Automation business, I talked about that earlier, that businesses is doing extremely well. Because the broader macro, people want to remove labor from the processes, they don't want to be dependent on labor, because in some places you can't hire labor, and it's difficult to maintain. You're capacity now, so there is more automation and both discrete automation, and factory automation. We've invested in the right technologies in the last few years, and acquired the right businesses, and we put them together, we have a really compelling value proposition, and we can design customized sub-assemblies that do automation very quickly and efficiently. And that business is doing the right things right now. So, we're pretty bullish on the outlook for it. Did I answer your question, Chris?

[Christopher Glynn, Equity Analyst at AMETEK]

Yeah, I was curious if there are any other particular areas. Even if more illustrative than moving the topline by themselves, because maybe it's in a discrete niche business. But [Speech overlap] speak to illustrate the AMETEK growth model.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Right. I think another area that we're starting to see traction in is some of our sustainability solutions, and if you look at our sustainability report, we've done some good work highlighting them. But in the case of greenhouse gas emissions, and trying to understand that we have some instrumentation that's very unique in helping researchers understand the trajectory. So in terms of China, the pollution generated from heavy industrial processes requires very durable emissions equipment, that emissions equipment is selling very well for us now in China. So the sustainability solutions will be another thing that we're starting to get our hands around, but it's growing pretty rapidly.

[Christopher Glynn, Equity Analyst at AMETEK]

Great, thanks for the color.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of Sapphire Ralph with Wolfe Research. Please proceed with your question.

[Sapphire Ralph, Analyst at Wolfe Research]

Hey, good morning, guys.

[Unidentified Speaker, at AMETEK]

Good morning.

[Sapphire Ralph, Analyst at Wolfe Research]

Congrats on the awesome quarter. I'm on for Nigel Coe, so really around M&A, do you see any updated thoughts around M&A accretion in fiscal years 2022 from your deals this year?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

No, I think we had talked about the M&A accretion being about $0.18 from deals this year, and I think that we're still in line to deliver that. The businesses that we have acquired, we're very pleased with them, and each of these businesses is going to benefit from a custom playbook developed for them as part of the integration process. And will also benefit from AMETEK's global footprint, and it's is early in the ownership, but so far they're integrating nicely, and we're very bullish with all the businesses. I think in terms of 2022, I'm going to throw that in the bucket of we're going to go through and analyze everything from the-- all of our business units with our detailed budgeting process, and once we understand everything, we will come back and communicate that to you.

[Sapphire Ralph, Analyst at Wolfe Research]

Got you. And then around AIG sales for the quarter. Do you see that normal seasonal uptick in sales for the fourth quarter?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

There is a bit of seasonality for AIG in the 4th quarter. So you'll see a bit of that.

[Sapphire Ralph, Analyst at Wolfe Research]

Alight. Well, that's it from me. Thank you.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Okay, thank you.

[Operator]

Your next question comes from the line of Andrew Shlosh with Vertical Research. Please proceed with your question.

[Andrew Shlosh, Equity Research Associate at AMETEK]

Hey, guys. It's Andrew Shlosh on for Jeff Sprague. How are you.?

[Unidentified Speaker, at AMETEK]

Hi, Andrew.

[Andrew Shlosh, Equity Research Associate at AMETEK]

Just a couple of quick ones from me. You said the elective surgery business was up high-single digits. Do you have a great feel for where elective procedure volumes are versus 2019>

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

I can't comment on that right now, I can tell you that the business in the first half of the year was about flattish for us to down a bit, it picked up in Q3 in that high-single-digit range, and we expect further growth from here. And that's probably the best, I'm going to be able to give you.

[Andrew Shlosh, Equity Research Associate at AMETEK]

Right. No, that makes sense. I apologize if I missed it, did you kind of give some of the end market detail in the research business?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

I didn't specifically give the researches, it is within our Process segment. The research business is about 10% of AMETEK, and what you see in that business is it's starting to grow again, as people-- industrial research has been strong, but the university research has been impacted by COVID, and people are getting back to the university research environment, and is starting to perform a function normally. And I think the product introduction that we talked about was contained is perfectly targeted at that market. So it's a good market for us, it's not up as much as the AMETEK average, but we're bullish on that market as it begins to heal and they get back to more normal business after COVID.

[Andrew Shlosh, Equity Research Associate at AMETEK]

That's great, I appreciate the color there.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

[Ken Newman, Industrial Research Analyst at AMETEK]

Hey, good morning guys. It's Ken Newman on for Steve.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Okay. And how are you doing?

[Ken Newman, Industrial Research Analyst at AMETEK]

Good, how are you? I think you had mentioned an increase in the RD&E guidance for the year. I'm curious if you just talk about how much growth was driven by new products in the quarter and any color on what the vitality index has been?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Right. It's a good question, Ken. In the quarter our vitality index was 24%. So pretty healthy level for us. And as I mentioned last quarter, we increased our spending on R&D, and also on the sales and marketing initiatives that we have, and we have a lot of things that we're funding, and we're bullish and optimistic on them. So we're spending about 5.5% of sales, it's a healthy amount for an industrial business, but we think it gives us a couple of things, one is new product sales, but also it gives us the ability to raise price because we were investing for our customers and we're going to have the latest products that have the most value for our customers. So the investments that we make, we also linked to the pricing capability in our business. So that's an important factor for us.

[Andrew Shlosh, Equity Research Associate at AMETEK]

Okay. And when I think about the impact of shifting sales from out of the third quarter into the next one, because of supply chain issues? Does that impact the mix of new products coming to market at all or would you still expect any kind of material expansion in our vitality index?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, I think 24% is a pretty good level. But I would like to say mid-'20s is probably what we're targeting and I think in terms of new product introductions, to the extent that a new product introduction relies on electronics or semiconductors. It could be delayed, but it's more broader than new products, it's across the semiconductor chip availability is the one area in particular that we're very focused on because of the challenges with the constrained supply.

[Ken Newman, Industrial Research Analyst at AMETEK]

Right. And that kind of segues way pretty well into my follow-up question, just on the semiconductors shortage, obviously you've got a very diverse set of businesses that spreads the gamut of computing needs, as we think of the kinds of chips needed for the embedded compute business in abaco versus your Automation business, can you just give us an idea of how much of the semi exposure is toward more of the bleeding edge chips versus the trailing edge?

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Yeah, I think the microprocessors and the higher-end chips are the ones that are particularly-- the chip availability is particularly an issue right now, but we have such a broad-based portfolio of products and we're using different chips and different businesses. So there is really not one ship or one product, it's just-- it's not in the passive components, it's an active component and it's in more than microprocessors, but it effects our AIG business more than EMG, but that's something that we're focused on. And we did a great job managing in Q3 and as I said, we have a lot of people that we're relationship built over a long period of time. We're using our purchasing leverage, and probably most importantly, if our product is not available. He is our engineering capability to qualify second sources, to find alternatives we set up a group within our company.

It's both our Bangalore engineers and some of our engineers in Europe, and some of our engineers in the US, and there's a team that's quickly gone through these things when product availability comes through. So, but one of the things that we've been able to differentiate versus maybe some other people in the market, is we have a strong engineering capability that can work on these problems as they come up and solve them quickly.

[Ken Newman, Industrial Research Analyst at AMETEK]

Good color, thank you very much.

[Dave Zapico, Chairman, and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

At this time there are no further questions. I will now turn the floor back to Kevin Coleman, for any additional or closing remarks.

[Kevin Coleman, Vice President of Investor Relations at AMETEK]

Thank you, Angie. Thank you everyone for joining our call today. And as a reminder, a replay of today's webcast may be accessed in the Investors section of ametek.com. Have a great day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kevin Coleman, Vice President of Investor Relations
• Dave Zapico, Chairman, and Chief Executive Officer
• Bill Burke, Executive Vice President and Chief Financial Officer
• Unidentified Speaker

Analysts

• Matt Summerville, DA Davidson
• Gustavo Gonzalez
• Allison Poliniak, Wells Fargo & Company
• Deane Dray, RBC Capital Markets
• David Ridley Lane, Bank of America Co.
• Christopher Glynn, Oppenheimer Holdings Inc.
• Unidentified Participant
• Sapphire Ralph, Wolfe Research
• Andrew Shlosh, Vertical Research
• Ken Newman, KeyBanc Capital Markets