AMETEK Inc

NYSE:AME

Earnings Call Analysis

AMETEK Reports Strong Earnings and Strategically Expands

AMETEK's third quarter showed solid performance with $1.62 billion in sales, a 5% year-over-year increase, while organic sales remained flat. The company's robust acquisition strategy added growth, with key purchases including United Electronics Industries and Amplifier Research, and the signing of Paragon Medical, estimated at $1.9 billion. Record operating income reached $438 million, up 14%, and EBITDA grew 10% to $511 million. Diluted earnings per share hit $1.64, surpassing guidance and marking a 13% rise. Backlog stood at $3.4 billion despite a 2% decline, maintaining near record levels. Notably, operating margins expanded by 220 basis points to 27%. With strong performance, AMETEK raised its guidance, anticipating overall and organic sales growth in the mid-to-high and mid-single digits, respectively, for the year.

Robust Third Quarter Performance and Raised Full-Year Earnings Guidance

AMETEK delivered strong performance in Q3 with records in key financial metrics and a year-over-year sales growth of 5%, reaching $1.62 billion. The company's operating achievements were marked by a record $438 million in operating income and significant margin increases. Earnings per share also hit a high of $1.64, topping the expected range. This success led to an upturn in full-year guidance, with adjusted EPS forecasted to hit $6.31 to $6.33, signaling an approximate 11% year-over-year growth.

Consistent Growth and Expanding Market Presence

AMETEK is experiencing a phase of growth, underscored by an 8% year-over-year increase in the Electronic Instruments Group (EIG) sales, totaling $1.14 billion, and an ongoing strong demand in aerospace, defense, and other key sectors. EIG's profit soared by 23%, thanks to robust organic sales growth (3.5%) and recent acquisitions. Meanwhile, Electromechanical Group (EMG) faced slight headwinds, observing a 2% dip in sales and a 7% decrease in operating income, attributed mostly to organic sales decline and inventory normalization among OEM customers.

Strategic Acquisitions Expanding the Portfolio

AMETEK's acquisition strategy remains aggressive, with the recent inclusion of United Electronic Industries (UEI), Amplifier Research, and an agreement to acquire Paragon Medical for $1.9 billion. UEI introduces specialized ruggedized data acquisition solutions; Amplifier Research enhances AMETEK's RF and microwave solutions segment; and Paragon Medical, a key player in medical technology with annual sales around $500 million, significantly boosts the company's presence in the growing medical tech space.

Innovative Growth Initiatives

The company's growth initiatives are steaming ahead with a plan to invest $100 million in initiatives, including new product developments boasting a vitality index of 26%. Notably, the acquisition of small tech company innoRIID is set to broaden AMETEK's radiation detection technology capabilities, exemplifying the company's commitment to innovation and value creation.

Forward-Looking Financial Indicators

For Q4, AMETEK anticipates sales to be up by mid-single-digits with earnings per share estimated to be between $1.61 to $1.63, indicating a 6-7% increase from the previous year. The company's solid financial health, high growth market alignment, and effective capital allocation place it in a robust position to navigate economic challenges and leverage opportunities for shareholder value enhancement.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the AMETEK Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

[Kevin Coleman, executive]

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 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 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.

[David Zapico, executive]

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 Electronic 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 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 $3.4 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 EBITDA margin, an impressive 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 4 points and foreign currency added 2 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 the 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 broaden 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 3 years, were 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, 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 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. Bill?

[William Burke, executive]

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 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 1.1x, and our net debt-to-EBITDA ratio was 0.6x, 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 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 in 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. Kevin?

[Kevin Coleman, executive]

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

[Operator]

[Operator Instructions] Our first question comes from Deane Dray with RBC Capital Markets.

[Deane Dray, analyst]

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 like 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?

[David Zapico, executive]

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 with that.

And also in this market, there's a continuing trend toward outsourcing the 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 in this space. It serves specialty applications. I talked about the orthopedics, minimally invasive surgery, robotic surgery and drug delivery.

Orthopedics is the largest, but they're strong positions in each of the applications. Now 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 consumables surgical instruments are about 40% of the revenue. 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. It'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. 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 Paragon. When I look at what it does for AMETEK, it increases our med tech exposure now to over 20%. It's one of the goals we've been trying to achieve. It adds about $500 million of 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 expand margins.

Paragon will benefit from the AMETEK's global infrastructure for sure, and we like the management team. They're a highly talented team, and we're excited about what we can accomplish together. And importantly, the deal economics meant AMETEK's traditional [ dealers ], and this is on a large deployment of capital. So our return on invested capital orders are met by this deal.

And we paid about 15x 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 it's a universal excitement amongst Paragon and AMETEK.

[Deane Dray, analyst]

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 med tech.

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

[David Zapico, executive]

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 guides. The acquisition performed a bit better. 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 & Defense business is stronger and our automation is weaker. And they're offsetting. 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.

In terms of your question, is it a destock or a downturn? It's very difficult dynamic environment right now and lots of uncertainties, with the geopolitical risk, the interest rate increases. They're 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 offing and the projects are not being delayed or canceled.

Our aerospace and defense looks solid. Our medical looks sold. Significant projects and semiconductor, clean energy, power grid. 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.

[Operator]

Our next question comes from Matt Summerville with D.A. Davidson.

[Matt Summerville, analyst]

Dave, your EIG margin 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 the sequential performance, right, Rev flat profitability up $28 million on the OP line as well as kind of the year-over-year dynamics. So maybe if you can just kind of flesh all of that out, that would be helpful. And then I have a follow-up.

[David Zapico, executive]

Yes, sure, Matt. I mean if you'll go back and look at my last quarter or 2, 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 really had excellent price cost. We had strongly performing acquisitions, and it all came together to put up record margins.

[Matt Summerville, analyst]

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?

[David Zapico, executive]

Great questions, Matt. We think the closure -- it's dependent on regulatory approval, but nothing atypical. But we think -- we'll get the approvals and close sometime in the first quarter. In terms of year 1, we'll have a very modest cash EPS accretion. It's going to be impacted by purchase accounting, integration costs, realignment cost to 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. We're very excited.

[Matt Summerville, analyst]

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?

[David Zapico, executive]

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.

[Operator]

Our next question comes from Allison Poliniak with Wells Fargo.

[Allison Poliniak-Cusic, analyst]

Just want to go back to your comments on automation. If I recall, that's typically a canary in the coal mine. But it seems 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 that -- I want to make sure I understand.

[David Zapico, executive]

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

[Allison Poliniak-Cusic, analyst]

Got it. And then on growth investments, keeping to the $100 million. How should we be thinking about into '24? Is it something that you think there could be a raise there? And then just even with Paragon, what's that R&D? I think you talked about the design piece of it being very -- a big part of that. How does design in R&D? Is it higher than the typical AMETEK? How should we be thinking about?

[David Zapico, executive]

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

[Allison Poliniak-Cusic, analyst]

Got it. And then organic investments as we kind of look to '24 is?

[David Zapico, executive]

Yes, I mean we're going to sit down with each of our teams, 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. But -- 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 get to meet with our teams and understand at a detailed level.

[Operator]

Our next question comes from Jeffrey Sprague with Vertical Research Partners.

[Jeffrey Sprague, analyst]

Just to come back to Paragon, maybe one more time. Maybe somebody else will come at it again. I just kind of want to understand the -- maybe 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 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?

[David Zapico, executive]

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.

[Jeffrey Sprague, analyst]

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 an interesting, healthy kind of stand-alone business that drops into the portfolio?

[David Zapico, executive]

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

[Jeffrey Sprague, analyst]

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 the...

[David Zapico, executive]

No, 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 areas. They've deployed their resources well and they're benefiting from the faster -- fastest growth areas.

They're winning new business on new programs, 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. 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 throughout the years, but this is a solid business with really good growth prospects.

[Operator]

Our next question comes from Scott Graham with Seaport Research Partners.

[Scott Graham, analyst]

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

[William Burke, executive]

Give me one second on that.

[Scott Graham, analyst]

Sure. Sure. I'll just -- I'll ask another one.

[William Burke, executive]

I got it. It was 18 4.

[Scott Graham, analyst]

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

[William Burke, executive]

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

[Scott Graham, analyst]

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

[David Zapico, executive]

Other way to make that, as Bill said, post-Paragon, we have 1.5 leverage. We wanted to take at up to 2.5 leverage, which is we've been there before, and that's not a high number for all. 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. And we have the balance sheet to be able to execute on it and the capability to integrate these businesses.

[Scott Graham, analyst]

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?

[David Zapico, executive]

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

[Scott Graham, analyst]

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

[David Zapico, executive]

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 Navitar. And 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. And 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 subsegments. 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 growth 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.

And 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, which we talked about earlier, 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. And now 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 subsegment commentary here, Scott.

[Operator]

Our next question comes from Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

Congrats on the deal, deals even. 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. And also, you gave some perspective on business performance. Maybe you could talk about -- maybe just for a final point on 4Q. Maybe talk about core growth and acquisition and contribution for 4Q.

[David Zapico, executive]

Okay. Q4 and geography. Okay. I'll go across the geographies. We had continued solid growth in the U.S., with the international slowing a bit. So I'll unpack that a bit. The U.S. 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, weakness in Automation. And overall, Asia was down about 10%. So China did better than overall Asia, kind of 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. We'll grow in revenue. There are two factors impacting the earnings in Q4 and one of them is a higher tax rate. And the second one is there's some acquisition, integration costs and they're related to the deals we completed. But we're very confident in our guide for Q4.

[Nigel Coe, analyst]

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

[David Zapico, executive]

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

[Nigel Coe, analyst]

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

[David Zapico, executive]

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 the organic sales in Q4 to be higher than the organic sales in Q3.

[Nigel Coe, analyst]

Got it. That's helpful. Maybe just one more for me. So obviously, Paragon, 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 sort of [indiscernible] multiples here? Any color on the market would be helpful.

[David Zapico, executive]

Yes, I think it's a little choppy in the market and people are reevaluating. And 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 is very strong. 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 to 24 months with our OpEx and our M&A.

[Operator]

Our next question comes from Christopher Glynn with Oppenheimer.

[Christopher Glynn, analyst]

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 and the deal process, competitiveness and such.

[David Zapico, executive]

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 they're -- what they did is really position kind of a pure med tech play, by positioning this with some other parts of their portfolio. So we're pretty excited about what we're buying.

[Operator]

Our next question comes from Peter Costa with Mizuho.

[Peter Costa, analyst]

This is Peter as on for Brett Linzey. So just coming back to orders. Could you provide some context during 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?

[David Zapico, executive]

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. So we had talked -- in our last few earnings calls, we highlighted a couple of dynamics that would impact orders, and our orders have been very strong for an extended period of time. In fact, we averaged 18% organic growth in 2021 and 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, the dynamics are playing out as we anticipated.

[Operator]

Our next question comes from Andrew Obin with Bank of America.

[David Ridley-Lane, analyst]

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? 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?

[David Zapico, executive]

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.

[David Ridley-Lane, analyst]

Got it. And are you supply chain constrained at this point in your aerospace and defense businesses? Is that a sort of a limiter on growth accelerating and even greater over time?

[David Zapico, executive]

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.

[Operator]

Our next question comes from Michael Anastasiou with TD Cowen.

[Michael Anastasiou, analyst]

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 was just expecting -- just curious if you're expecting 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&A dollars for these different end markets as well? Any color would be helpful.

[David Zapico, executive]

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. But it's -- we like the balance in the portfolio.

And what was your other question, Michael? M&A dollars. I mean we have a distributed operating model. In 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 candidates. 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 be 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 per market.

[Michael Anastasiou, analyst]

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

[David Zapico, executive]

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

[Operator]

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

[Kevin Coleman, executive]

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.