AMETEK, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 25, 2016. AMETEK manufactures electronic instruments and electromechanical products through Electronic Instruments (EIG) and Electromechanical (EMG). FY2015 was a record year for operating income, operating margin, net income and diluted EPS, despite lower sales.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $3,974.3 million | $4,022.0 million | Down 1.2% |
| Operating income | $907.7 million | $898.6 million | Up 1.0% |
| Operating margin | 22.8% | 22.3% | Up 0.5 percentage point |
| Net income | $590.9 million | $584.5 million | Up 1.1% |
| Diluted EPS | $2.45 | $2.37 | Up 3.4% |
| Cash from operations | $672.5 million | $726.0 million | Down 7.4% |
| Free cash flow | $603.4 million | $654.7 million | Down 7.8% |
| Capital expenditures | $69.1 million | $71.3 million | Down $2.2 million |
| Interest expense | $91.8 million | $79.9 million | Up 14.9% |
| Effective tax rate | 26.7% | 27.4% | Down 0.7 percentage point |
Cash from operations declined mainly because defined-benefit pension contributions rose by $49.5 million, including a $50 million U.S. plan contribution. Cash and cash equivalents were $381.0 million at year-end, including $357.2 million held outside the United States. Current assets were $1,619.6 million and current liabilities were $1,025.2 million.
Total debt rose to $1,942.1 million from $1,714.0 million; net debt was $1,561.1 million. Debt-to-capital increased to 37.4% from 34.6%, and net debt-to-capital to 32.4% from 29.2%. The company reported $550.3 million of available revolving-credit capacity, including its accordion feature, and compliance with debt covenants. Cash dividends were $0.36 per share, and share repurchases totaled $435.4 million.
Comparative performance and segment developments
- Sales fell primarily due to a 4% unfavorable foreign-currency translation impact and a 1% internal decline; acquisitions contributed 4% growth. International sales declined 6.4% to $2,054.7 million and represented 51.7% of sales, versus 54.6% in 2014.
- EIG sales were essentially flat at $2,417.2 million; operating income increased 4.3% to $639.4 million and margin improved to 26.5% from 25.3%.
- EMG sales declined 2.7% to $1,557.1 million; operating income fell 5.0% to $318.1 million and margin eased to 20.4% from 20.9%.
- New orders declined 3.8% to $3,924.7 million. Year-end backlog was $1,147.8 million, down 4.1%; approximately 88% was expected to ship in 2016.
- Fourth-quarter sales declined 3.5% to $988.0 million, segment operating income fell 7.5% to $221.8 million, and net income declined 10.0% to $136.8 million. Fourth-quarter diluted EPS was $0.57, down 8.1%.
Unusual items, outlook and risks
- FY2015 realignment costs were $36.6 million pre-tax, reducing net income by $24.7 million and diluted EPS by $0.10. Management cited weak global markets and the strong U.S. dollar. Expected annualized cash savings were approximately $90 million; about $40 million was realized in 2015 and approximately $75 million was expected in 2016. Actions were expected to be completed by the second half of 2017.
- Management expected challenging global economic conditions across many markets and geographies to continue in 2016. It anticipated capital expenditures of approximately 1.8% of net sales, with continued emphasis on productivity. No specific 2016 sales or EPS guidance is provided in the filing text.
- AMETEK spent $356.5 million, net of cash acquired, on Global Tubes and Surface Vision in 2015. In January 2016, it acquired Brookfield Engineering Laboratories for approximately $167 million and ESP/SurgeX for approximately $130 million, using revolving-credit borrowings.
- Key risks include cyclical end markets, acquisition execution and integration, currency translation and international operating exposure, competition, raw-material supply and prices, product liability, environmental obligations, debt covenants, operational/IT disruptions, and potential impairment of substantial goodwill and intangible assets.
- Goodwill and other intangible assets totaled $4,379.6 million, or 66% of total assets. Annual impairment tests found no impairment; management reported reporting-unit fair values remained 20% to 717% above carrying values under a hypothetical 10% fair-value decline.
- Environmental reserves were $30.5 million at year-end. The company was a potentially responsible party at 14 non-owned sites and stated that currently known matters were not expected to materially affect its financial position or results. It also faced asbestos-related lawsuits; no judgments had been rendered against AMETEK, and it reported indemnification arrangements for many claims.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Controls at the two 2015 acquisitions were excluded from management’s assessment; together they represented 6.4% of year-end assets and 2.2% of FY2015 sales.
Important facts for investors to verify
- Whether order trends, backlog conversion and internal demand stabilized after the 2015 declines, particularly in EMG and international markets.
- Whether restructuring savings were realized as expected, and how much of the reported margin improvement was operational versus acquisition-related or currency-driven.
- How the January 2016 acquisitions affected debt, revolving-credit availability, leverage and subsequent earnings.
- Whether pension contributions, foreign-exchange movements and cash held overseas continue to constrain operating cash flow or liquidity.
- Whether environmental, tax and other contingent liabilities, or any deterioration in acquired-business performance, could require additional reserves or asset impairments.