AMETEK Inc

NYSE:AME

Earnings Call Analysis

AMETEK Reports Strong Q3 Performance with Elevated Guidance

AMETEK delivered a strong third quarter with sales reaching $1.71 billion, a 5% year-over-year increase. Despite a 2% decline in organic sales, robust acquisitions contributed significantly. Earnings per share rose 1% to $1.66, exceeding guidance. The company noted a solid order growth of 12% and a backlog of $3.44 billion. Cash flow was notably impressive, with free cash flow conversion at 135%. Looking ahead, AMETEK expects full-year sales growth of 5-7% and has raised EPS guidance to $6.77-$6.82. The outlook reflects ongoing investment in growth initiatives, including a recent acquisition enhancing their automation portfolio.

A Robust Performance in Q3

AMETEK reported a solid third quarter in 2024, achieving sales of $1.71 billion, marking a 5% increase compared to the same period last year. Although the organic sales decreased by 2%, the company's strategic acquisitions contributed 7.5 points to growth. Importantly, overall orders surged by 12%, underscoring strong demand. The company ended the quarter with a backlog of $3.44 billion, which is near record levels. This reflects a continued operational resilience and suggests potential for future sales growth.

Operational Excellence and Margin Performance

The operational performance was commendable, with operating income of $446 million, a 2% rise from Q3 2023. Operating margins remained strong at 26.1%, and core margins improved to 27.4%, an increase of 40 basis points year-over-year. EBITDA reached $553 million, translating to impressive EBITDA margins of 31.2%. A disciplined approach to cost management has facilitated these robust margins, suggesting effective operational efficiency.

Impressive Free Cash Flow Generation

AMETEK's cash flow generation was notable, with free cash flow at $461 million, up 4% year-over-year. The company's free cash flow conversion stood at an exceptional 135%, indicating that AMETEK is generating significant cash relative to its net income. This positive cash flow provides the company with ample flexibility to pursue further investments and acquisitions.

Segment Performance Highlights

Breaking down the performance by segment, the Electronic Instruments Group (EIG) saw stable revenues at $1.13 billion, with strong growth in Aerospace & Defense sectors despite a 2% decline in organic sales overall. EIG maintained strong operating margins at 29.9%. Meanwhile, the Electromechanical Group (EMG) delivered a robust 18% growth to $574 million in revenue, driven primarily by acquisitions. However, organic sales faced challenges and decreased by 3%. EMG managed to achieve a book-to-bill ratio of 1.02, reflecting solid order activity.

Strategic Acquisitions and Future Potential

AMETEK’s strategic acquisition strategy remains a key growth driver. Recently, the company acquired Virtek Vision for approximately $40 million, expanding its technology offerings in laser-based projection and inspection systems. This acquisition aligns well with AMETEK's existing capabilities in automation and inspection technologies. Looking ahead, AMETEK's acquisition pipeline continues to be robust, promising further expansion into high-value markets.

Guidance and Growth Outlook

Looking forward, AMETEK raised its earnings guidance for the full year to a range of $6.77 to $6.82 per diluted share, reflecting a 6% to 7% increase year-over-year. For Q4, sales are expected to increase in the mid-single digits, with earnings projected to be between $1.81 and $1.86 per diluted share, indicating an anticipated growth of 8% to 11% compared to the previous year. This optimistic outlook is underpinned by a strong operational foundation and the ability to navigate macroeconomic challenges.

Market Challenges and Inventory Dynamics

While AMETEK has demonstrated resilience, it has not been without challenges. The company is experiencing destocking pressure from its OEM customers, which has affected certain segments and may continue to impact results through the end of the year. However, with a solid order trend in EMG showing a 12% organic growth, there are signs of a recovery as inventory levels normalize. Overall, AMETEK's management is confident of navigating these short-term headwinds effectively.

Conclusion: Positioned for Long-term Success

In summary, AMETEK's solid performance in Q3 2024 reflects its ability to adapt and thrive in a competitive environment. With strong operational performance, significant cash flow generation, and a clear focus on strategic acquisitions, AMETEK is well-positioned for continued growth. While challenges remain, particularly relating to inventory adjustments, the company’s diverse market presence and proactive management strategies suggest a bright future ahead.

Earnings Call Transcript 2024-Q3

[Operator]

Hello and welcome to the AMETEK Third Quarter 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations and Treasurer, Kevin Coleman.

[Kevin Coleman, executive]

Thank you, Andrew. Good morning, and thank you for joining us for AMETEK's Third Quarter 2024 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, 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 2023 or 2024 results, or to 2024 guidance, will be on an adjusted basis, excluding after tax, acquisition-related intangible amortization, and excluding a pretax of $29.2 million or $0.10 per diluted share charge in the first quarter of 2024 for integration costs related to the Paragon Medical acquisition. 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 and then open it up for questions. I'll now turn the meeting to Dave.

[David Zapico, executive]

Thank you, Kevin, and good morning, everyone. AMETEK delivered strong results in the third quarter. Our business has executed extremely well, resulted in earnings per share above our expectations, solid margin performance, outstanding cash flow conversion and double-digit growth in overall orders with positive growth in organic orders. Additionally, during the quarter, we deployed approximately $60 million on share repurchases. Subsequent to the end of the quarter, we acquired Virtek Vision, an excellent strategic fit with our Creaform business.

I am very pleased with our team's performance. Our businesses remain focused on managing through short-term macro headwinds while ensuring we are positioned for long-term growth. We have a proven successful growth model and efficient operating structure, robust cash flows, a strong balance sheet and leading positions across a diverse set of niche markets.

Now let me turn to our third quarter financial results. Third quarter sales were $1.71 billion, up 5% from the same period in 2023. Organic sales were down 2%, acquisitions added 7.5 points and foreign currency was flat. Overall orders in the quarter were up 12%. Book-to-bill was 1.02, and organic orders were up 2%. Additionally, we saw a solid sequential growth in orders. We ended the quarter with a strong backlog of $3.44 billion, near record levels.

AMETEK's operational performance in the third quarter was excellent. Our disciplined approach to cost management and operational efficiency resulted in strong margins. Operating income in the quarter was $446 million, a 2% increase over the third quarter of 2023, and operating margins were 26.1% in the quarter. Core margins, excluding the dilutive impact from acquisitions and the impact of foreign currency, were very strong at 27.4%, up 40 basis points versus the prior year. EBITDA in the quarter was $553 million, up 4% versus the prior year, with EBITDA margins an impressive 31.2%. Cash flow in the third quarter was excellent, with free cash flow up 4% versus the prior year and free cash flow conversion, a very strong 135%, reflecting our asset-led business model and operating capability. This operating performance led to earnings of $1.66 per diluted share, up 1% versus the third quarter of 2023 and above our guidance range of $1.60 to $1.62 per share.

Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group, EIG, continues to perform well with strong margin expansion and overall outstanding levels of operating margins, reflecting the quality of our businesses. EIG sales were $1.13 billion, in line with the third quarter of last year. Organic sales were down 2%, and acquisitions contributed 2 points. Growth remains solid across our Aerospace & Defense businesses, while our high-end research instrumentation business, CAMECA, also saw strong growth in the quarter. While we did see some temporary delays in project spending across parts of our EIG business as we had expected, our new funnel pipeline remains solid, and our businesses are very well positioned across a number of secular growth markets. EIG operating income was $339 million, up 1%, and operating margins were a very strong 29.9%, up 40 basis points from the prior year. EIG core margins were 30.2%, up 70 basis points versus last year's third quarter.

Now switching to the Electromechanical Group. EMG's third quarter sales were $574 million, up 18% versus the prior year, with organic sales down 3% and acquisitions contributing over 20 points to growth. Strong growth across our Aerospace & Defense businesses in the quarter was offset by expected weakness with our OEM-exposed businesses due to the impact of inventory destocking. EMG orders were very strong in the quarter, growing 12% organically. EMG's operating income in the quarter was $132 million, up 3% compared to the prior year period, while EMG's third quarter operating margins were 22.9% with excellent core margins of 26.1%.

AMETEK delivered a strong performance in the third quarter. effectively navigating demand headwinds to deliver strong results. We remain focused on executing our growth model and positioning AMETEK for continued long-term growth, while ensuring we deliver strong results in the face of a choppy macro environment.

Now turning to our acquisition strategy. Strategic acquisitions are a core component of our growth model. We are committed to deploying our strong cash flow and acquisitions to expand our portfolio in highly attractive market segments. With that, I'm excited to announce our newest acquisition, Virtek Vision. Virtek Vision is a leading provider of laser-based projection and inspection systems, offering a suite of 2D and 3D laser projectors, smart cameras and advanced measurement solutions powered by their proprietary AI software. Virtek's automated systems enhance productivity, improve quality and reduce cost across a range of aerospace, defense and industrial applications. Virtek is an excellent strategic fit with our Creaform business broadening its technology offerings and enabling a wider range of automation and inspection capabilities for our customers. Virtek is headquartered in Waterloo, Canada and has annual sales of approximately $40 million. I would like to welcome the Virtek team to the AMETEK family.

Looking ahead, our acquisition pipeline remains robust. As noted, we have a strong and flexible balance sheet and anticipate remaining active in this area. AMETEK also remains committed to investing in our businesses to ensure they are positioned for long-term sustainable growth. In 2024, we are investing an incremental $90 million in growth initiatives including our new product development efforts where our teams are focused on developing highly differentiated technologies to help solve our customers' most complex challenges. Throughout our business, we see countless examples of innovative products and technologies being developed to support our customers and provide them with the advanced differentiated capabilities to need.

One way we measure the success of our new product development activities is through our Vitality index, which measures the sales from products introduced over the past 3 years. In the third quarter, our vitality index was an outstanding 28%.

In addition to our internal development activities, I'm also pleased to announce that our CAMECA business, a leader in micro-analytical and metrology instrumentation, recently completed a small technology acquisition of Polygon Physics. Polygon Physics specializes in ultracompact, ultra-low power electron cyclotron resonance technology. This technology enhances CAMECA's capabilities and advanced metrology instrumentation and advanced chip manufacturing. Polygon provides us access to cutting-edge ion source technology and expertise that will help accelerate CAMECA's new product development efforts and enhance their technology portfolio. We're excited to welcome the Polygon team to AMETEK.

Now turning to our outlook for the remainder of the year. Given our third quarter results, we are raising our earnings guidance for the full year. We continue to expect overall sales to be up 5% to 7% versus the prior year. Diluted earnings per share for the year are now expected to be in the range of $6.77 to $6.82, up 6% to 7% versus the prior year. This is an increase from our previous guidance range of $6.70 to $6.80 per diluted share. For the fourth quarter, we anticipate overall sales to be up mid-single digits, with earnings in the range of $1.81 to $1.86, up 8% to 11% versus the prior year.

In summary, I'm pleased with the team's performance in the quarter and thus far in 2024. We're managing through an uncertain macro environment and confident in our ability to navigate these challenges. AMETEK has been very successful over a long period of time, managing a diverse set of highly differentiated niche businesses. The AMETEK growth model has allowed us to deliver double-digit earnings growth throughout different phases of the economic cycle. The strength of our portfolio, combined with our operational excellence capabilities and acquisition strategy, has allowed us to deliver outstanding results. This has also allowed us to successfully manage through periods of economic weakness or uncertainty and emerge even stronger with exceptional growth.

We are excited for the future. I will now turn it over to Dalip Puri, who will take us through some of the financial details of the quarter. And then we'll be glad to take your questions. Dalip?

[Dalip Puri, executive]

Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK delivered strong results in the third quarter with excellent operating performance and high free cash flow conversion. Now let me provide some additional financial highlights for the quarter.

Third quarter general and administrative expenses were $25 million, essentially unchanged from the prior year. As a percentage of sales, G&A expense came in at 1.4% of sales, down from 1.5% in last year's third quarter. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.5% of sales.

Third quarter interest expense was $25 million, up $7 million from the third quarter of 2023 due to higher debt balances following recent acquisitions. Third quarter other operating expenses were down $4 million versus the prior period, due largely to higher pension income and lower acquisition-related due diligence expense in the quarter. The effective tax rate in the quarter was 18.8%, up from 17.7% in the third quarter of 2023. For 2024, we anticipate our effective tax rate to be between 17% and 17.5%, driven by a lower fourth quarter tax rate due to statute expirations. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from the full year estimated rate.

Capital expenditures in the third quarter were $26 million, and we expect capital expenditures to be approximately $135 million for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $90 million. For the full year, we expect depreciation and amortization to be approximately $395 million, including after tax acquisition-related intangible amortization of approximately $188 million or $0.81 per diluted share.

Operating working capital in the third quarter was 19% of sales. Cash flow generation in the third quarter was excellent. Operating cash flow was $487 million, up 3% versus the third quarter of 2023, while free cash flow was $461 million, up 4% over the prior year. This was a record third quarter level for both operating and free cash flow generation. Free cash flow conversion was also outstanding at 135% in the quarter. For the full year, we now expect free cash flow conversion of approximately 115% to 120% of net income.

During the quarter, we spent $60 million on share repurchases, repurchasing approximately 371,000 shares of our common stock in the open market. Additionally, at the end of the quarter, we paid down a maturing $300 million private placement note. Total debt at September 30 was $2.34 billion, down $360 million in the quarter and down approximately $1 billion from the end of 2023. Offsetting this debt is cash and cash equivalents of $396 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 0.9x. We have significant financial capacity and flexibility with over $2 billion of cash and available credit facilities to support our acquisition strategy and growth initiatives.

In summary, AMETEK delivered strong results in the third quarter. Our operational excellence initiatives and our strategic focus contributed to strong earnings, robust margins and excellent free cash flow. With a strong balance sheet, near-record backlog and leadership across our key markets, we are well positioned for continued long-term growth. Kevin?

[Kevin Coleman, executive]

Thank you, Dalip. Andrew, could we please open the lines for questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson.

[Matt Summerville, analyst]

David, could you maybe do a little bit more of a detailed update, specifically on what you're seeing in your medical- and life sciences-facing end markets across both EIG and EMG and work in some commentary on what you're seeing in those businesses, specifically around destocking? And then I have a follow-up.

[David Zapico, executive]

Yes, sure. In terms of the destock, we saw demand largely in line with our expectations in the quarter actually, as both our OEM customers and our automation and Paragon businesses continue to work down excess levels of inventory. And these stocking headwinds are going to continue. We remain well positioned on a range of attractive programs within both the automation business and the Paragon business. And we're really encouraged by the trend in recent order rates. We had the -- in EMG, where the main destocking areas was up plus 12 organically. Again, we had a positive book-to-bill of 1.02. And if you just look at the trends, the trends are heading in the right direction. So we stabilized, we saw solid sequential growth in orders, and we're feeling pretty good about that.

[Matt Summerville, analyst]

And then as a follow-up, you mentioned in your prepared remarks when talking about EIG that you're still seeing a little bit of customer [indiscernible] with respect to some delays in that portion of the business. Can you just talk through maybe which divisions are being most impacted by that, which end markets, et cetera? And if you're able at all to kind of ring fence and quantify the impact?

[David Zapico, executive]

Sure. Yes, I'll do that, Matt. In terms of the project lease that we spoke about last quarter, this quarter played out largely as expected. Customers remain cautious given the impact of various economic, geopolitical and election uncertainties. And these project delays are specifically in our EIG Test and Measurement businesses. That's what we talked about last quarter. And the key point here is our new opportunity funnel remains strong. So things are definitely not getting worse. In fact, the EIG orders trend went from minus 11 organic in Q1 to minus 4 organic in Q2 to minus 2 organic in Q3. So we're feeling pretty good about the -- encouraged by the positive trend there.

[Operator]

And our next question comes from the line of Deane Dray with RBC Capital Markets.

[Deane Dray, analyst]

Dave, maybe you can take us through the end markets, geographies? And to the extent that you can, some comments on China, I don't think there's ever been more mixed messages, most of the negative, but each company has got different views based upon their exposures, but maybe we can start there.

[David Zapico, executive]

Great questions. I'll try to get them all and if I forget anything, pull me back to it. I'll go around the one first and talk about our Process business. Both overall and organic sales for our Process businesses declined low single digits in the quarter. Growth remains solid across our energy businesses. We had a good quarter in energy and also our high-end research business, we talked about CAMECA, also had a very strong growth in the quarter. And looking ahead, we continue to expect organic sales for our Process businesses to be flat to up low single digits for the full year.

Next, switching the Aerospace & Defense. Aerospace & Defense is about 18% of AMETEK, delivered strong performance in the quarter, both overall and organic sales were up mid-single digits. Growth was strongest across our commercial OEM and commercial aftermarket businesses. A reminder, we have a good balance between sales and defense, and we have a good balance between OEM products and aftermarket. And additionally, we won a wide range of applications and not dependent on any one platform. So we're positioned well to benefit from the long-term growth across these markets. And for the full year, we continue to expect high single-digit organic growth for our Aerospace & Defense businesses.

Next, I'll go to Power & Industrial. Power & Industrial businesses were up mid-single digits in the quarter, driven by the contributions of Amplifier Research and [indiscernible], recent acquisitions, both of them. Organic sales were down low single digits in the quarter. We expect organic sales for our Power & Industrial businesses to be down low single digits for the full year.

Then finally, our Automation & Engineered Solutions market segment. Overall sales there increased in the low 20% range, driven primarily by the contributions of Paragon Medical. Organic sales were down high single digits due to continued normalization of inventory across our OEM customer base. And for the full year, we continue to expect organic sales to decline mid-single digits as the headwinds from destocking continue.

Talking about the geographies, yes, a little different in the mix there. We had strong growth in Europe and Asia, offset by some declines in the U.S. You talked specifically about China. Our Asia business did well and China was actually up 10%. We had strong growth in our UPT or Ultra Precision Technology division, AMETEK products are used by our customers in China to improve their manufacturing processes, automate processes, make the environment cleaner, produce synergies. So we're very well positioned. But that market will remain choppy and there's been some stimulus announced, but the results that we're seeing now aren't from stimulus or just from market share wins and making good headway in the markets. But it's very difficult to predict what's happening in China. So it's just wait and see what happens each quarter.

[Deane Dray, analyst]

That's really helpful. And it is remarkable how -- it really depends on what your exposures are in China. You just can't paint it all with the negative brush there.

And just as a quick follow-up, the context of destocking, the longer it lasts, I always get this impression that it's really a lower demand as opposed to just an inventory correction. So what's your sense? Is there a reset, let's say, of Paragon? Or is it still you can see sell-in versus sell-through and that there is really like an inventory work down coming through? Just kind of how do you separate those 2 dynamics?

[David Zapico, executive]

It's a great question, and it's obviously difficult to parse, but we're pretty confident that we're working through a supply chain crisis level of inventory that -- and we have some math and see when we work through that and then there's the same kind of growth on the other end of it. And same thing is happening in the medical space and the automation space. So we're seeing -- the other factor that influences our decision is the new business activity, the pipeline activity. Our customers are very active. We'll work on new programs, and they're getting delayed, but there's no program cancellations and there's some uncertainty when they're going to go forward, but we're full out working on tremendous number of opportunities. So we think it's a destocking issue and it's not an overall demand issue, and we think we'll work through it. And you can see some of that starting to happen with the order trends in our business.

[Deane Dray, analyst]

Excellent. I'll leave it there. Just a quick shout out. That was a nice free cash flow this quarter.

[David Zapico, executive]

Thank you, Dave. The team did a great job.

[Operator]

Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

[Jeffrey Sprague, analyst]

David, I was on a little late, so I don't know if you -- just listening to your answer to Deane, I don't know if you already specifically commented on Paragon, but just in terms of the sales trajectory there, if you wouldn't mind repeating it.

And then just on EMG overall, right? It's certainly kind of an interesting set of cross currents, right, with destock going on, but orders up 12% organically? Maybe you could just unpack a little bit more kind of the moving pieces inside that if you haven't already.

[David Zapico, executive]

Yes. I haven't gone deeper, but I can say that every division at EMG was up substantially in orders. So it wasn't one area. So it was across the board all parts of EMG are up in order. So we're really encouraged by that.

Speaking of Paragon, again, it's a single use and consumable surgical instruments business, implantable components, in attractive med tech markets with solid growth rates. And we continue to be excited about the future growth opportunities, excellent engineering capability leading additive manufacturing capability, many, many new program wins, which will provide upside as these things get phased in. And the business is really well positioned when the destocking headwinds abate.

At the same time, we're working on substantial efficiency improvements in the business. And the team is really doing an excellent job of doing that because there's some difficult things that are going on. and -- but that process is proceeding well. So I'm very pleased. I mean, Paragon met its expectations for Q3. They had a similar sequential order improvement that we talked about in our other businesses and overall, very pleased with it.

[Jeffrey Sprague, analyst]

David, then on sort of the margin recovery plan itself, obviously, the restructuring in Q1 and I guess, if there's a silver lining in the drawdown, right, maybe it allows you to accelerate some things on restructuring and the like. Can you give us a sense of sort of the likely tailwind into 2025 as we work through some of these things and arguably sales start to kind of stabilize, pick back up into the new year?

[David Zapico, executive]

Yes. I think the scenario you're talking about is something that has a high likelihood of happening. But when you talk about 2025, we don't give guidance at this time of the year. So we're going to stay away from that and talking about next year. But the things that you're pointing to are correct. I mean it's a tough time. We're improving the business significantly. There are some plant closures in there and continuing to fund all the new product phases in. So it's going to be a very, very positive scenario as we move forward with that business.

[Operator]

Our next question comes from the line of Rob Wertheimer with Melius Research.

[Robert Wertheimer, analyst]

I had a couple of cleanups. Just to kind of put a bow on the destocking. I mean you guys were clear that destocking should continue through the end of the year. I think you mentioned that it continues again now, Dave. The orders seem to indicate that we're getting there. I don't know whether your comment was implied -- was intended to imply any continuation in the next year.

[David Zapico, executive]

Yes. I think we've definitely stabilized in the last couple of quarters we're seeing. We're seeing incremental orders growth. We're encouraged by that. We're seeing it in EMG, where the destocking was occurring. We're seeing it in all of our businesses. So that's all positive. But this destock isn't like a switch. There's going to be -- we're going to slowly improve. As we get into next year, we'll give you the guidance for next year. But whether the destock occurs or not, we're going to make money. And that's what we're working on, on the operations side.

So my point is there's positive trends now. We haven't given guidance for next year. We go through our standard process with sitting down with each business and go through a comprehensive budgeting process. We look at market conditions and sales opportunities and cost reduction opportunities and decide what investments to fund. And it's very important to follow this process right now, given all the macro geopolitical and election uncertainty because that's why we're firm on doing -- working through our process and giving you a good look at the best information we have at the beginning of next year.

[Robert Wertheimer, analyst]

Perfect. And then if I may, on the acquisition pipeline, your balance sheet looks great. Obviously, the pipeline is robust. Are you seeing any similar hesitation to commit amongst your potential inquiries is slowing things down? Or should we just assume things come on stock as normal process?

[David Zapico, executive]

Yes, that's a good question. It's excellent question, Rob. And this is just my subjective read on the market, but I feel like things are coming on stock. We were in a period where things were everybody was dealing with higher interest rates and trying to get their businesses in order. But our pipeline is robust, and we're talking to a lot of people about a lot of things. So I feel like sometime next year, sometime early next year. It feels like things are moving, and it feels like they're moving an accelerated pace.

[Operator]

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

[Scott Graham, analyst]

Really just a couple of them. You're doing a lot of investing internally. The Vitality is up to 28%. Dave, you mentioned that you're really heavily focused on some differentiated products. Could you maybe unbundle that a little bit more? And I know Vitality, the percentage is always a tricky thing because it's a 3-year trail. But nevertheless, is that a number that you think can go even higher? And maybe which businesses -- I know that you're single titers. I get all that, but is there anything that's standing out to you in certain business units? And where can that index go?

[David Zapico, executive]

Yes. I think we think the right level for our business is between 20% and 30%. And we're at 20% -- 28%, and it could go down to 20% or go up to 30%, and that's probably the right range. As you mentioned, it's very distributed across our company. We're spending incrementally $90 million on projects. They're good projects. They're going to result in good sales in the future.

In some cases, they're coming in at lower price points, too. There's been a good job of cost reductions through the new development processes. So it's -- and when you have the fresh up-to-date product line and you're a leader in the niche markets that we're in, it enables you to justify premium pricing for the new products. So that all feels good. It all feels -- it's working well and it's part of our core. So we've -- as you know, you've followed us for a long time, whether the market is good or the market is bad, we fund the R&D spending consistently, and it's paid off for us in the long run, and we plan to continue it.

[Scott Graham, analyst]

I just wanted to ask something that's a little bit more forward-looking to the extent that you can answer it. One of your 2 very large Aerospace customers is struggling in various parts of their portfolio in production. I'm just wondering, does that dampen your potential outlook for 2025 in your Aerospace business?

[David Zapico, executive]

Yes. We haven't done the detailed work on 2025. And related to the situation, we did see some minor delays in the quarter, but we were able to work around them. And we factored in the impact that we know of for Q4 and it's a fluid situation, obviously, but we feel confident in our guide for Q4.

Our Aerospace businesses have diverse exposures across a wide range of platforms, a very healthy mix of OEM and aftermarket sales. There's no overexposure to any single platform or any single customer. So we're feeling good about that, and there's a strong demand, and we're well positioned to benefit from it. And we're not selling as much up on the value chain. We focus on what we do well, the technologies in the niche markets that we focus on. And we really feel that we're in a good position going forward. And hopefully, some of the larger customers can work through some of the situations that we're in, but we think we have a call properly for the rest of this year.

[Operator]

Our next question comes from the line of Brett Linzey with Mizuho.

[Brett Linzey, analyst]

Just wanted to come back to the OEM dynamic and the destock once more. So you noted some of the internal exercises or the math the teams were doing to gauge that pressure. I guess is there any way to quantify in revenue dollars or order percent, how much of the pressure on results this year has been related to OEM destock?

[David Zapico, executive]

I'd say that -- yes, if you go back to Q2, we talked about it, it's pretty significant. It's significant. So if that reverses, that's clearly not -- it's a headwind that's not there for next year. So yes, it was -- in our automation business and with Paragon, that destock was substantial.

[Brett Linzey, analyst]

Okay. Got it. And then just on the project delays. So I think you noted it was various verticals. I guess what are you hearing from customers in terms of project readiness and when these might return? Are you contemplating any catch-up in the fourth quarter as part of the guide? Or have you slid that expectation to 2025?

[David Zapico, executive]

I think our Q4 guide for our project businesses and EIG assumes a normal calendar Q4 that's pretty strong. So we'll see a sequential increase from Q3 to Q4 related to seasonality, related to projects in that business. So it feels like there's definitely some year-end spending going on. So that's positive.

[Operator]

Our next question comes from the line of Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

Just wanted to come back to orders. Plus 2% organic, I think, is what you said. So that's great news. I don't think you were signaling the return to growth until the fourth quarter, if I'm not mistaken. So just anything happened during September that changed that? Any call out? Was there some aerospace -- just any color there?

And then maybe on sort of the back end of that, if we kind of like look at the implied organic orders, it seems like there's about $140 million or thereabout, $140 million, $150 million of kind of backlog growth that's not organic. That's a big number. So I'm just wondering what the book-to-bill was for Paragon and whether this Virtek acquisition has influence as well.

[David Zapico, executive]

Yes. The first point is we don't give guidance on orders. So I don't know how you got your information on the Q3 being a quarter late. But in any event, it's what it was. The second point was...

[Kevin Coleman, executive]

Backlog build?

[David Zapico, executive]

The backlog build, yes, we don't have that number in front of us. It's something we look at. It was $3.44 billion for the company and pretty healthy, and it's -- and the orders turn positive. So I think it's -- I wouldn't read too much into it. It's just positive. We're just encouraged by the positive trends and maybe it did occur earlier than you thought it would be. And we think we're going to have a good quarter in.

[Nigel Coe, analyst]

Okay. Okay. Maybe I'm just mistaken there. And then looking at Paragon, obviously, I think you asked about the [indiscernible] we've seen in sales this year is really inventory draw. Should we consider that to be sort of onetime in nature and therefore, we spring back to plan in 2025? Or do you think it might take a little bit longer to achieve that?

[David Zapico, executive]

So Nigel, your question broke up on our end, and we couldn't hear you. But we...

[Nigel Coe, analyst]

Okay. Paragon, the inventory [indiscernible] reverse basically in [ 2025 ].

[David Zapico, executive]

Yes. I mean as that inventory situation abates, it's definitely going to improve in 2025. And hopefully, it improves in 2025, and we have a low cost -- lower cost structure, and we also have a lot of new products that we're phasing in. It's going to take some time, like I said, you don't throw a switch. But yes, I really think it is going to improve in '25.

[Operator]

Our next question comes from the line of Christopher Glynn with Oppenheimer.

[Christopher Glynn, analyst]

A lot of time spent on the EMG orders. And Dave, you gave the kind of sequential improvement in the year-over-year for EIG. But wondering if we could go a little further into the sequential 3Q over 2Q orders pattern for EIG, maybe anything on book-to-bill there?

[David Zapico, executive]

Yes. The book-to-bill for the whole company was 1.02, and it was above 1 for both of the groups. That's what I can give you there.

[Christopher Glynn, analyst]

That covers all that. And then last quarter, you talked about defense delays, and you had a couple of mid-single-digit quarters for A&D versus the high single-digit guide. Is -- what's the status update on the defense? And is that something that you have factored in pretty strong in the fourth quarter?

[David Zapico, executive]

Yes. Yes, we had -- Q2 and Q3, there's a little bit of project timing on that, and we think that's going to reverse, and there's some good things scheduled for us in Q4. That business is excellent because it's growing. The defense business is growing, but it is project based. So it can be lumpy, but it's lumpy and headed in the right direction. So you're looking at it the right way.

[Christopher Glynn, analyst]

Great. Lastly, I'm not sure if it was asked, multiple companies coming through here. But the deal pipeline, just curious, mix of small, larger actionability?

[David Zapico, executive]

Yes. The deal pipeline remains strong. We're actively looking at a high number of quality deals. We obviously have got the cash and the credit facilities to execute. That's recognized by sellers. The pipeline is a variety of deal sizes, and we're very active. And what I mentioned before, it feels like things are starting to move a little bit more in that area than they were maybe in the last 6 or 9 months.

[Operator]

[Operator Instructions] Our next question comes from the line of Andrew Obin with Bank of America.

[Andrew Obin, analyst]

Look, I appreciate, Dave, that you don't give guide on orders. But just checking if my math is correct. If I do look on a 2-year stack, just third quarter of last year organically was the easiest comp in the year. And I think sort of, right, it was minus 10, and it just goes to minus 2 by Q4. And if I look at Q2 and Q3 on a 2-year stack, for orders, I'm just wondering, is it reasonable to assume that we've bottomed and by fourth quarter, we could return to growth is just arithmetically, it would suggest that we'll probably continue to be -- we'll go back to order decline. And I know you don't guide it, but we're just getting a lot of questions from investors, when do orders impact for these short-cycle names? And look, I get it, it's macro. You don't have a specialty crystal ball. I appreciate all these things.

[David Zapico, executive]

Yes, that's right. Our crystal ball is no better than anyone else's. But we don't look at the 2-year stack numbers, so I can't comment on your numbers.

What I can comment is that there's been healthy sequential increases from Q2 to Q3. So -- and we also saw a sequential increase from Q1 to Q2. So along with the 2-year stack on the year-over-year and we gave the organic numbers already, the sequential numbers are -- they were up mid-single digits in the quarter. So that's an encouraging fact from our viewpoint.

[Andrew Obin, analyst]

No. Really appreciate it more than I expected. And just a follow-up question on Paragon and -- it's a different business. I mean, it's med tech, right? So a lot more regulation. Could you just give us an update on the time line of your restructuring? And obviously, AMETEK playbook is as good as anyone's in the industrial world. But how do you apply this playbook on timing of the restructuring and getting things out fast in terms of costs in a regulated environment where you can't just move production from one facility to another. You can't. It's all subject to regulatory approval. Can you just -- what lessons are being learned? And what has the speed of restructuring been relative to -- I'm sure, very high expectations.

[David Zapico, executive]

Yes, because the environment is regulated, and we know that because we have another business in the space that we move factories. So our EMG business is a sister business to Paragon. So we're very experienced with the regulatory environment and our timing is adjusted for it, and you have to move slow, and you have to be careful when it takes a bit longer, just like moving an aerospace business or just like moving a defense business or just like moving a utility business. So -- we operate in a lot of regulated markets. That's really our focus. We like regulated markets. This isn't new for us. It's kind of core. If you look at our whole portfolio. And -- but you're right, it does take time. and we're going to do it right.

[Operator]

Our next question comes from the line of Joe Giordano with TD Cowen.

[Joseph Giordano, analyst]

Just curious on the aero, you mentioned like you're taking everything into consideration. I know you're a very balanced there, but is your Boeing OE exposure like are you essentially assuming 0 in the fourth quarter? Or are you still selling to like maybe Tier 1s or something where you can still ship?

[David Zapico, executive]

Yes. Yes, I think you've got it right. I mean, the -- where we have confirmed orders to lower levels of the supply chain is 0 and if there was anything direct that's removed.

[Joseph Giordano, analyst]

Got it. And then apologies if I missed this, I had joined a little bit late, but on Paragon, did you give an updated 2024 like revenue number that you expect from them or a contribution number?

[David Zapico, executive]

No, we didn't give the number. And the number that we gave last quarter still holds, and Paragon executed in line with what they thought they did for this quarter. It was a good quarter for them and also talk about the sequential orders growing in Paragon, too.

[Operator]

Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

[Jeffrey Sprague, analyst]

And just a really quick follow-up. Dave, can you just give us an update on price and then what you're seeing on kind of price cost spread in the quarter? And do you think that changing any -- as we move into Q4, the early part of '25?

[David Zapico, executive]

Yes. That's a good question, Jeff. I mean price -- it seems we're getting back to more normal patterns. In the quarter, we got 3 points of price, pretty consistent across the portfolio, and we got about 100 basis points of positive spread to the P&L from it. So I think the days of the high inflation, the higher price are abating. And I think we're in the normal -- if you look into the next year, normal price/cost spread where we are always positive by 50 basis points, and the number is like 2% to 3%.

[Operator]

And our next question comes from the line of Steve Barger with KBCM.

[Steve Barger, analyst]

I'll just ask a question on the semi cap cycle. It feels like expectations are moderating a bit due to slower recovery in some consumer products, but I know there's still a lot of optimism around leading-edge investments coming through. I think you're in deep defect detection and more leading edge. But based on how your portfolio is positioned, can you match or outgrow whatever the equipment market does as the cycle improves?

[David Zapico, executive]

Yes, I think we can. I mean in the -- for example, in the quarter, our semiconductor businesses were up mid-single digits, and that was -- we had growth and it was driven by the uniqueness of the product portfolio. And the one thing about our portfolio is that we have a lot of laboratory semiconductor stuff that gets worked on during the -- between the cycles and then the production stuff that happens. So there's a natural balance in there. And we usually don't have large swings either way that kind of compensate, and they're not correlated with each other.

So it's a positive market. I mean you have some dynamics with China. You have some dynamics with new technology. We have a product in our CAMECA business that's been developed is very unique and best-in-class as we're selling quite well now. So yes, we were up mid-single digits. We think we'll be up mid-single digits for the year in semiconductor. That's about 6% of our portfolio, and we haven't done the planning for 2025. But if anything, or -- that's a market that buys technology, and our technology is getting better. In fact, a small acquisition that we did, Polygon Physics, was related to an ion source technology that is specifically used in EUV manufacturing and gives us some capability in the advanced semiconductor space.

[Steve Barger, analyst]

Understood. And so does it feel like the cycle itself -- and I know you do have some lab exposure, but for the more high-volume production cycle. Does it feel like we're inflecting?

[David Zapico, executive]

Yes. I mean you read all the industry things out there, and it feels like there's some inflection points, but then you got some geopolitical dynamics and kind of sit back and see what happens on that one.

[Operator]

I'll now hand the call back over to Vice President of Investor Relations and Treasurer, Kevin Coleman for any closing remarks.

[Kevin Coleman, executive]

Thank you, Andrew, and thanks, everyone, for joining our call today. And as a reminder, a replay of the webcast can be accessed in the Investors section of ametek.com. Have a great day.

[Operator]

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.