AMETEK, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $1,084.8 million | $945.0 million | $3,157.1 million | $2,867.1 million |
| Operating income | $232.8 million | $201.1 million | $685.5 million | $628.7 million |
| Operating margin | 21.5% | 21.3% | 21.7% | 21.9% |
| Net income | $153.5 million | $130.7 million | $442.9 million | $403.1 million |
| Diluted EPS | $0.66 | $0.56 | $1.91 | $1.72 |
- Q3 sales increased 14.8% year over year, reflecting 7% organic growth, 7% from acquisitions and a favorable 1% currency effect. Diluted EPS rose 17.9%.
- For the first nine months, sales rose 10.1% (5% organic growth, 6% from acquisitions, partly offset by a 1% adverse currency effect); diluted EPS increased 11.0%.
- Q3 orders rose 16.4% to $1,122.0 million. Nine-month orders increased 17.5% to $3,379.7 million, and backlog reached a record $1,379.2 million at September 30, up 19.3% from year-end 2016.
- Q3 EIG sales grew 15.9%, with a 24.5% segment margin versus 24.6%; EMG sales grew 13.0%, with a 20.3% margin versus 19.5%. Nine-month segment margins were 25.0% for EIG and 20.6% for EMG, unchanged year over year.
- Effective tax rates were 24.9% for Q3 and 26.1% for the first nine months, versus 25.0% and 26.4%, respectively. The 2017 rates include share-based payment tax benefits of $2.5 million for Q3 and $11.4 million year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $580.4 million, up from $509.5 million; capital expenditures were $45.6 million. Reported free cash flow was $534.8 million, versus $469.0 million.
- Cash and cash equivalents were $736.4 million at September 30, 2017, compared with $717.3 million at year-end 2016. Cash held outside the U.S. was $648.8 million.
- Total debt, net, was $2,430.4 million, versus $2,341.6 million at year-end. Debt-to-capital was 39.2% (41.8% at year-end); net debt-to-capital was 31.0% (33.3%). AMETEK reported $1,110.5 million of available revolving-credit capacity, including the accordion feature, and compliance with debt covenants.
- The company spent $518.6 million, net of cash acquired, on 2017 acquisitions and $45.6 million on capital expenditures. It paid $62.0 million in dividends and repurchased $6.7 million of stock during the first nine months.
Material changes, outlook and notable items
- Rauland-Borg was acquired in February 2017 and MOCON in June 2017; together, 2017 acquisitions had an immaterial reported impact on nine-month sales, net income and diluted EPS. Purchase-price allocations were preliminary. Rauland includes a potential $30 million payment tied to a cumulative revenue target; the recorded fair-value liability was $25.5 million.
- Management cited stronger global economic conditions, the full-year impact of acquisitions, and Operational Excellence initiatives as expected to benefit the remainder of 2017. No quantified full-year guidance is provided in the supplied filing text.
- Nine-month investing outflows increased primarily because of acquisitions. The company made $52.5 million of pension contributions, compared with $3.0 million in the prior-year period; management said estimated 2017 contributions remained within the range disclosed in its 2016 Form 10-K.
- A $2.5 million second-quarter charge for accelerated vesting of restricted stock related to the Executive Chairman’s retirement increased year-to-date SG&A. Prior-year 2016 restructuring charges totaled $25.6 million; related actions were expected to continue through 2017, with most completion anticipated in 2018.
- Environmental reserves were $27.8 million. Management considered reserves adequate and did not expect environmental matters to materially affect results, financial position or cash flows. The company also disclosed asbestos litigation and groundwater-contamination lawsuits; it said loss estimates for the latter were not possible to develop and did not expect a material effect.
- Key risks identified include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material availability, regulatory compliance, and access to liquidity and financing.
Investor verification points
- Assess how much reported growth came from organic demand versus acquisitions and currency, and whether order growth and record backlog convert into sales and earnings.
- Review acquisition integration, preliminary purchase-price allocations, acquired-business margins, and the likelihood and timing of the Rauland contingent payment.
- Verify debt refinancing and repayment plans for $270 million of notes maturing in Q4 2017 and $240 million maturing in Q3 2018.
- Monitor pension funding, environmental remediation and litigation exposures, and the effects of share-based-payment tax benefits on the effective tax rate.