Good day and welcome to the AMETEK's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. 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.

Thank you, Abigail. Good morning and thank you for joining us for AMETEK's third 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 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 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.

Thank you, Kevin, and good morning, everyone. AMETEK delivered excellent results in the third 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. During the third quarter, we completed the acquisition of United Electronics Industries and subsequent to the end of the third quarter, 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 third quarter results. Third-quarter sales were $1.62 billion, up 5% over the same period in 2022. Organic sales growth was flat. Acquisitions added four points in the quarter and foreign currency added one point. Book-to-bill in the quarter was 0.96. We ended the quarter with a very strong backlog of $3.4 billion, near record levels and down a modest 2% sequentially. Our backlog is up 5% from last year's third quarter and up 23% or $640 million from the end of 2021. AMETEK's operating performance in the third quarter was exceptional. Operating income in the quarter was a record $438 million, a 14% increase over the third quarter of 2022. Operating margins were a record 27% in the quarter, up a sizable 220 basis points from the prior year. EBITDA in the quarter was also a record at $511 million, up 10% over the prior year, with an impressive EBITDA margin of 31.5%. Operating cash flow was up 45% in the quarter to a record $473 million. This outstanding performance led to record earnings of $1.64 per diluted share, up 13% versus the third quarter 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. 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 $1.14 billion in the quarter, up 8% from the third quarter 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. Growth in the quarter was particularly strong across our Aerospace & Defense businesses as well as in our Zygo, Spectro, and CAMECA businesses. Third-quarter operating income was a record $335 million, 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 third 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 third-quarter sales were $487 million, down 2% versus the prior year, with organic sales down 8% in the quarter. Acquisitions added four points and foreign currency added two points. EMG's operating income in the quarter was $128 million, down 7% compared to the prior year period, while EMG's third-quarter operating margins were a very solid 26.2%. Our performance in the third quarter 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 asset-light business model and strong operational execution drive outstanding cash flow generation, which we redeploy on value-enhancing acquisitions. This strong cash flow and our robust balance sheet are key differentiators for AMETEK in this higher interest rate environment. Now switching to our acquisition strategy. As noted, we have been very active in 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. I will provide some more color on each of these businesses, starting with 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 med tech space and provides us with access to attractive new market segments with strong growth rates. We are acquiring Paragon in an all-cash transaction valued at approximately $1.9 billion. Paragon has annual sales of approximately $500 million 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 and mission-critical applications. With a strong presence in defense, aerospace, nuclear power generation, and semiconductor, UEI nicely complements AMETEK's Power Systems and Instruments division, significantly expanding our data acquisition capabilities. UEI has annual sales of approximately $35 million and is based in Norwood, Massachusetts. Next, Amplifier Research is a leading provider of innovative RF and microwave solutions. Its 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 capability has broadened our RF instrumentation and testing portfolio. Amplifier Research is a growing business, well-positioned to benefit from the growth in demand for electric vehicle research, development, and testing. Amplifier Research is based in Souderton, PA, and has annual sales of approximately $60 million. 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 million 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. In the quarter, our vitality index, which measures sales from products introduced over the prior three years, was a healthy 26%. As a complement to our internal new product development efforts, our ORTEC business recently acquired a small technology company, innoRIID, to help broaden their technology capabilities in the Radiation Detection market. InnoRIID has both cutting-edge technology expertise and an exceptional product development team, known for their innovative solutions that have 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 third quarter and a positive outlook for the remainder of the year, we are, once again, raising our earnings guidance. 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 fourth quarter, 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 third quarter results for 2023 were outstanding, with strong growth across our long-cycle businesses, record operating performance, and strong acquisition activity. 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 deploying 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.

Thank you, Dave. As Dave noted, AMETEK delivered outstanding results in the third quarter, with exceptional operating performance, robust margin expansion, and strong cash flows. Let me provide some additional financial highlights for the quarter. Third quarter general and administrative expenses were $24.6 million, essentially unchanged from the prior year, and as a percentage of sales, were 1.5% versus 1.6% in last year's third quarter. For 2023, general and administrative expenses are expected to be approximately 1.5% of sales, in line with last year's G&A to sales level. Other income and expense was a headwind of $9 million 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 third quarter of 2022, due to improved utilization of tax credits. For 2023, we now anticipate our effective tax rate to be between 18.5% and 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. Capital expenditures in the third quarter were $29 million, and we continue to expect capital expenditures to be approximately $145 million for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $82 million. For the full year, we expect depreciation and amortization to be approximately $330 million, including after-tax, acquisition-related intangible amortization of approximately $157 million or $0.68 per share. Operating working capital in the third quarter was 19.1% of sales. Cash flow was excellent in the quarter with outstanding growth versus the prior year. Operating cash flow was a record $473 million, up 45% versus the third quarter of 2022, while free cash flow was also a record at $444 million, 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% free cash flow to net income conversion. Total debt at September 30 was $2.2 billion, down from $2.4 billion at the end of 2022. Offsetting this debt is cash and cash equivalents of $842 million. At the end of the third quarter, 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. As Dave has noted, we've been very active. During the third quarter, we deployed approximately $150 million on the acquisitions of UEI and innoRIID. And subsequent to the end of the third quarter, we deployed approximately $105 million on the acquisition of Amplifier Research. Also subsequent to the end of the third quarter, we announced the signing of a definitive agreement to acquire Paragon Medical for $1.9 billion, which would be our largest acquisition to date. Following the acquisition of Paragon, we would still have significant financial capacity with approximately $1.5 billion of cash and existing credit facilities available to support our growth initiatives. In summary, AMETEK had exceptional results in the third quarter. We achieved significant margin expansion and delivered high-quality earnings. Our strong position in key market segments, coupled with a very strong backlog and exceptional operating capabilities, positions us well for continued success.

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

Thank you. Our first question comes from Deane Dray with RBC Capital Markets. Your line is open.

Thank you. Good morning everyone.

Good morning, Deane.

Hey, congrats on all the M&A successes here. Maybe we can start with Paragon. It looks right in your wheelhouse, precision medical robotics. If you could provide some color on the company in terms of what percent are consumables? We're really like seeing all those one-use applications. So consumables, comment on margins and growth, if you could, please?

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 a larger percentage of surgeries, and they do a great job with that. And also in this market, there's a continuing trend toward outsourcing by the OEMs. They want to accelerate their time to market, and Paragon is really well positioned with significant new product wins in this space. It serves specialty applications. I talked about orthopedics, minimally invasive surgery, robotic surgery, and drug delivery. Orthopedics is the largest, but they're strong in each of the applications. Now, the portfolio is one of your questions, consists 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 consumables surgical instruments make up about 40% of the revenue. 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. It's a very, very sticky business. When you combine the regulatory environment with lengthy approval processes and the capabilities of Paragon, there are high switching costs. It's a business that has unique value to its customer base. We did a lot of surveys in the market, and they are known as the highest quality provider. They have excellent customer service. A differentiator for them is their design and development capability. They are truly regarded as a partner by their customers. When I look at this from AMETEK's perspective, it increases our med tech exposure now to over 20%. That's one of the goals we've been trying to achieve. It adds about $500 million in revenue to EMG, and that revenue comes from Paragon, which is a secular low double-digit grower. It fits our business model with highly engineered products that provide unique value to customers. It's a growing, profitable business that provides multiple avenues of growth. There is 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 expand margins. Paragon will benefit from AMETEK's global infrastructure for sure, and we like the management team. They're a highly talented group and we're excited about what we can accomplish together. Importantly, the deal economics meet AMETEK's traditional standards, and this is a significant deployment of capital. Our return on invested capital thresholds are satisfied by this deal. We paid about 15 times TTM EBITDA for the business, so we're very excited about the acquisition. It's a good business for us. We've been looking at these types of businesses for some time and there's universal excitement among both Paragon and AMETEK.

That was a great overview, and you addressed all the key questions regarding consumables, margins, and growth, making it sound like a promising narrative. I have a follow-up question about EMG. We are witnessing destocking throughout the biopharma and med tech sectors. I'm interested in your insights on whether there are any indications regarding the end markets in those industries beyond the destocking. Are you observing any slowdown? While no one can predict the duration of this situation, I would appreciate your thoughts on how long you believe this inventory normalization will last. Thank you.

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. The acquisition performed a bit better. As I said, we maintained our full year sales guide of mid-to-high single-digits and organic growth of mid-single-digits. To sustain that organic guide for the full year, our Aerospace and Defense business is stronger, and our automation is weaker, and they're offsetting. That's one of the benefits of the AMETEK portfolio. Specifically, in terms of Q3 revenue, we saw faster destocking in our automation businesses than we anticipated. So that's what we observed there, and we expect the destocking to continue through the end of the year. In terms of your question is, is it a destock or a downturn? It's a very difficult dynamic environment right now and there are lots of uncertainties with the geopolitical risks and interest rate increases factoring in for sure. But from what we see, this is largely an inventory correction, and demand looks constructive, with many new projects in the pipeline and they are not being delayed or canceled. Our Aerospace and Defense looks solid, our Medical looks solid with significant projects in the semiconductor, clean energy, and power grid sectors. So we remain positive post-destocking, and we think that destocking will continue through the end of the year. 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.

That's all really helpful. Thank you.

Thank you, Deane.

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

Thanks. Good morning.

Hi, Matt.

Dave, your EIG margin this quarter really moved into a new territory for AMETEK. I was wondering if you could talk about the key drivers as you think about the sequential performance, right, revenue flat, profitability up $28 million on the operating profits line as well as the year-over-year dynamics, so maybe if you can flesh all of that out, that would be helpful. And then I have a follow-up.

Yes. Sure, Matt. If you go back and look at my last quarter or two, 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 360 basis points, driven by high contribution leverage on the growth. We had excellent price cost, strongly performing acquisitions, and it all came together to put up record margins.

And then, just as a follow-up. With respect to Paragon, I appreciate the stats you shared. Is there any way to parse out what you think year one cash EPS accretion would look like? And then what the expected closure timing might be for that? Thanks.

Great questions, Matt. We believe the closure is contingent on regulatory approval, but it's nothing out of the ordinary. We expect to receive the approvals and finalize things sometime in the first quarter. Regarding year one, we anticipate a modest cash EPS accretion. This will be influenced by purchase accounting, integration costs, realignment costs, and financing costs, which will be covered by a combination of cash and debt. However, we foresee strong accretion in year two, and we're eager to take the business on, enhance its performance, and achieve results. We're very enthusiastic about this.

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&L then?

We'll make that decision at the time. Historically, we have not broken 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.

Got it. Thank you, guys.

Our next question comes from Allison Poliniak with Wells Fargo. Your line is open.

Hi. Good morning.

Good morning, Allison.

I want to revisit your comments on automation. If I remember correctly, that's often an early warning sign. However, based on what you're saying, I would like to confirm whether it seems to be more about industry destocking in that market for you, or if there is another factor at play that I should understand.

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. That business automation sells to a lot of markets, and the healthcare part of that market is not performing well right now, and some of the other exposures, but we think it's clearly destocking.

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

I think you should think of Paragon as matching the AMETEK profile.

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

Yes. I mean we're going to sit down with each of our teams and discuss 2024 over the next six weeks. We're going to review each of the individual businesses, do deep dives, as you know, into what they are seeing in their niches, their market dynamics, growth opportunities, and cost reduction opportunities, and we want to go through those meetings before there's any commentary in 2024. We'll tell you in early February. So in terms of talking about next year, we'll have the typical things like we 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 meet with our teams and understand at a detailed level.

Perfect. Thank you.

Thank you, Allison.

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

Hey. Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning, Dave. Just to come back to Paragon, maybe one more time. I just kind of want to understand the profit improvement plan going forward. Because it looks like rough math right, margins, EBITDA margin is 25% or so. You're doing 800 to 1,000 basis points better now than that in EIG. When you talk about the aspirations for the business and the cost-cutting and other opportunities, is that the sort of range of margin improvement we should be thinking about here? And if so, over kind of how long a period of time?

Yes, that is the range we are aspiring for, and it's over time. 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 range of what we have planned.

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

We have an existing business in our EMG business. It's about a $200 million business, referred to as our engineered medical components. So we're familiar with these segments. There are completely different end markets, but think about that as additive to that existing position, but at a larger scale.

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

Not really. They're growing nicely. I mean you have the market growth that they're benefiting from, and they are positioned in the fastest areas. They've deployed their resources well and they're benefiting from the faster growth areas. They are winning new business on new programs, and it's pretty substantial. 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 gaining market share. 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 our perspective. There are going to be ups and downs as we go throughout the years, but this is a solid business with very good growth prospects.

Great. Congrats and good luck with it.

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

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

Good morning, Scott. Thank you.

What was the working capital percentage last year?

Give me one second on that.

Sure. I'll ask another question.

I got it. It was 18.4.

18.4. Okay. Thanks. And then the $1.5 billion of availability, just maybe walk us through there. That is net of Paragon, I assume? And is that an assumption at about 2.5 times leverage?

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 are available to us as we look to continue the acquisition strategy. So again, it's always finding the right businesses for the AMETEK portfolio. It is not capital constrained.

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

Another way to approach that.

Sure.

Other way to make that, as Bill said, post-Paragon, we have 1.5 leverage. We want to take it up to 2.5 leverage, which is a level we've been at before, and that's not a high number for us. We can spend $2.6 billion on acquisitions above and beyond Paragon. So we're in the M&A game, and our pipeline looks really good. We have the balance sheet to execute on it and the capability to integrate these businesses.

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 imputing an interest rate that is kind of more market-oriented when you make these decisions?

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

Got it. Thank you. Last question is the typical one, Dave, would you mind unbundling on the four divisions?

Sure, Scott, I'll walk around the business. I'll start with our Process business. Overall, sales for Process were up mid-single-digits, at low single-digit organic sales and the contribution from the acquisition of Navitar. Demand across our Process markets remains solid. Our products and technologies are well aligned with important secular growth trends like the energy transition and health care. 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. For the full year, we continue to expect mid-single-digit organic sales growth for our Process businesses. Going to Aerospace & Defense Next. Aerospace & Defense continues to perform well. Organic sales were up low-double digits in the quarter. Growth remains strong and broad-based across our A&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 & Defense to increase mid-teens, on a percentage basis for the full year. In Power & Industrial, those businesses delivered solid results in the third quarter, with overall sales up mid-teens. This growth was driven by a low single-digit organic sales increase and the contribution from the acquisition of RTDS technologies. 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. Finally, our Automation & Engineered Solutions business. Overall sales for AE&S 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 across our OEM customer base, combined with the challenging prior year comparisons, created a short-term headwind for our OEM exposed businesses. We believe underlying demand is solid. As we talked about earlier, and across our diverse Automation & Engineered Solutions markets, we remain constructive. But we do expect, as we said before, the inventory normalization is going to recur throughout the OEM customer base will continue through the end of the year. For the full year, we expect organic sales for our Automation & Engineered Solutions businesses to be down mid-single digits versus the prior year. So that's all for the sub-segment commentary here, Scott.

Thanks very much.

Thank you, Scott.

Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

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

Yes. We can hear you, Nigel.

I couldn't hear you. Could you perhaps discuss what you're observing by geography? I’m particularly interested in Europe and China. You also provided some insights on business performance. As a final point for the fourth quarter, could you elaborate on core growth and the contribution from acquisitions?

Okay. Q4 and geography. Okay, I'll go across the geographies. We had continued solid growth in the US, with the international slowing a bit. So I'll unpack that a bit. The US was up mid-single-digits, with notable strength in our process business. Europe was down low single-digits, notable strength in process and our aerospace business, but weakness in automation. You mentioned China. Our China exposure was down 3%. Strong growth in process, with weakness in automation. Overall, Asia was down about 10%, so China did better than overall Asia, kind of about 9% of sales. So again, up in the US, slowing in international markets. The second question you asked was on Q4 and the guide for Q4. Our sales will be up mid-single-digits. We'll grow in revenue. There are two factors impacting the earnings in Q4. One of them is a higher tax rate. The second one is acquisition integration costs related to the deals we completed. But we're very confident in our guide for Q4.

I'm sorry, David, what is the core growth for Q4?

Core growth for Q4 is low to mid-single digits.

Okay. So that's obviously acceleration from Q3. What's driving that acceleration?

I think we're seeing good demand on the EIG side from the typical 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's driving the organic sales in Q4 to be higher than the organic sales in Q3.

Got it. That's helpful. Maybe just one more for me. So obviously, Paragon is a big deal. You've posed another smaller deal. You sound really bullish on the outlook as well. So it seems like the cut line is still pretty fertile. I mean are we seeing here a change in behavior from sellers that we see more willing sellers? Are we seeing any change in multiples here? Any color on the market would be helpful.

Yes, I think it's a little choppy in the market and people are reevaluating. The interest rates are higher. So financing that debt on a continuing organization may be a challenge. As I said, our pipeline is strong. I would categorize our pipeline right now as very strong. We have a lot of attractive candidates we're looking at. I'm just bullish on being able to differentiate AMETEK's performance over the next 12 to 24 months with our operational excellence and our M&A.

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

Thank you. Good morning.

Good morning, Chris.

I want to continue discussing Paragon for a moment. I noticed you mentioned it relates to medical components and instruments. I'm curious if it pertains to the OEM and some of the instrument areas. Additionally, I'd like to know more about the ownership history and the competitiveness of the deal process.

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. It is largely an OEM customer base. We purchased the business from American Securities. From our view, they did an excellent job running the business and got a fantastic management team in place with a good growth strategy. They positioned this as a pure med tech play by aligning it with some other parts of their portfolio, so we're pretty excited about what we're acquiring.

Our next question comes from Peter Costa with Mizuho. Your line is open.

Good morning, everyone. This is Peter as on for Brett Linzey. So just coming back to orders. Could you provide some context on the monthly order cadence through the quarter and then moving into October? Have you been seeing anything concerning or anything tracking better than your internal expectations? Thank you.

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've highlighted a couple of dynamics that would impact orders. Our orders have been very strong for an extended period of time. In fact, we averaged 18% organic growth in 2021 and 2022. We had 12 consecutive quarters up to this quarter with positive book-to-bill. As a result, we have a near record backlog. These dynamics are playing out as we anticipated.

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

Hi. This is David Ridley-Lane on for Andrew Obin. Wondering if you've seen any impact from the higher interest rates on end market demand? 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?

Yes. As I mentioned, we were down about 3% organically in China, so there were some delays, but it wasn't substantial. Regarding increasing interest rates, that's one of the uncertainties that we're clearly looking at. It's a very dynamic environment right now. 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.

Got it. 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?

We are not supply chain limited in Aerospace at this time. Now the industry is dealing with some supply chain difficulties, but we are not limited.

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

Thank you. Good morning, everyone.

Good morning, Michael.

Currently, medical-related revenues account for approximately 10% of sales. Following the acquisition, this will increase to around 20%. I was wondering if you plan to make a stronger commitment to the medical sector in the future. Additionally, how do you suggest balancing M&A investments across different markets? Any insights would be appreciated.

Yes. There's a balance in AMETEK's end markets. 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 we plan on keeping that balance. If there are other attractive areas in the medical space, we'll certainly look at them. But we like the balance in the portfolio.

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

Yes. It's 20% now. It could go to 25%, 30%. That wouldn't bother us, but we plan on having a diversified revenue base.

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.

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