AMETEK, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. AMETEK reported results amid COVID-19-related economic disruption. The company operates through Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,126.9 million | $1,276.6 million | $3,341.1 million | $3,853.7 million |
| Operating income | $270.7 million | $301.1 million | $729.8 million | $879.7 million |
| Operating margin | 24.0% | 23.6% | 21.8% | 22.8% |
| Net income | $204.6 million | $220.7 million | $651.4 million | $640.5 million |
| Diluted EPS | $0.88 | $0.96 | $2.82 | $2.79 |
- Orders: Q3 orders were $1,135.5 million, down 7.5%; nine-month orders were $3,343.6 million, down 13.9%.
- Segment results, Q3: EIG sales declined 8.2% and operating margin was 27.2% (up from 26.9%). EMG sales declined 17.9% and margin was 22.3% (down from 22.4%).
- Cash flow: Nine-month operating cash flow was $895.1 million, versus $772.2 million; free cash flow, defined as operating cash flow less capital expenditures, was $857.9 million, versus $710.7 million. Capital expenditures were $37.2 million.
- Liquidity and debt: Cash was $1,304.8 million at September 30, versus $393.0 million at year-end 2019. Total debt, net, was $2,800.8 million. Available revolving-credit capacity was $1,468.5 million, including the accordion feature. Net debt-to-capital was 20.8%, down from 31.7% at year-end. The company reported compliance with debt covenants.
- Dividends: The quarterly dividend was increased 29% to $0.18 per share in February; nine-month cash dividends were $123.7 million.
Material changes and unusual items
- Q3 sales fell 11.7%, including a 14% organic decline; acquisitions and foreign currency partly offset the decline, while the Reading divestiture reduced sales. Nine-month sales fell 13.3%, including a 15% organic decline.
- Nine-month net income increased 1.7% despite lower operating income, primarily because results included a $141.0 million pretax gain on the March sale of Reading Alloys. The sale generated $245.3 million in net cash proceeds and approximately $31.4 million of related income tax expense.
- Nine-month realignment costs were $43.9 million pretax ($0.15 per diluted share), mainly severance and inventory-related asset write-downs. Management estimated approximately $86 million in annualized cash savings, with about $33 million expected in 2020; substantially all actions were expected to be completed by year-end.
- In Q3, AMETEK repaid at maturity an £80 million ($102.9 million) senior note. It also acquired IntelliPower for $116.5 million net of cash acquired; the acquisition had an immaterial effect on reported results.
Outlook, commentary, and risks
- Management expected uncertain COVID-19 market conditions to continue challenging the business through Q4 2020. It cited volatile demand, ongoing monitoring of costs, capital spending, inventory, and capital resources, and said the pandemic’s duration and ultimate financial impact could not be reasonably estimated.
- All manufacturing locations remained operational with enhanced safety measures. Management said supply chains were not materially affected at the time of filing, but their exposure to a prolonged pandemic remained uncertain.
- Management cited Operational Excellence initiatives, acquisitions, and realignment actions as support for results and longer-term growth. It reported no goodwill or other long-lived-asset impairment trigger at September 30.
- Disclosed risks include COVID-19 effects on demand, operations, supply chains, customers, collections, workforce, cybersecurity, liquidity, and acquisitions; other identified risks include economic and competitive conditions, international operations, raw-material availability, regulation, and financing access.
- Environmental reserves were $30.3 million. The company reported asbestos litigation, generally with seller indemnification for specified claims, and a $6.8 million global settlement of El Cajon groundwater lawsuits subject to court approval in two class actions. Management said reserves for environmental matters were adequate and did not expect the matters described to materially affect results, financial position, or cash flows.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether order trends and organic sales recover, particularly in Europe and Asia, and whether COVID-19 disruptions deepen.
- How much reported nine-month earnings depended on the Reading gain, and how underlying operating performance develops.
- Whether the announced realignment savings are achieved and whether restructuring costs or execution effects persist.
- Cash generation, debt and liquidity after the unusually high cash balance, divestiture proceeds, debt repayment, and ongoing capital returns.
- Developments in environmental and other contingencies, including court approval of the El Cajon settlement.