AMETEK, Inc. — Q3 2015 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2015, compared with the same 2014 periods. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $998.5 million | $1,031.8 million | $2,986.3 million | $2,997.8 million |
| Operating income | $237.6 million | $218.1 million | $698.9 million | $671.5 million |
| Operating margin | 23.8% | 21.1% | 23.4% | 22.4% |
| Net income | $156.4 million | $141.8 million | $454.0 million | $432.5 million |
| Diluted EPS | $0.65 | $0.57 | $1.87 | $1.75 |
- Q3 sales declined 3.2%; management attributed the decrease to a 4% foreign-currency headwind and 2% lower internal sales, partly offset by 2% from acquisitions. Q3 orders fell 1.6% to $979.7 million.
- For the first nine months, sales declined 0.4%, with a 4% currency headwind offset by 4% growth from acquisitions; internal sales were flat. Orders declined 3.7% to $2,958.4 million. Backlog was $1,169.4 million at September 30, down 2.3% from year-end 2014.
- Q3 segment operating income rose 8.2% to $249.2 million; segment margin was 25.0%, versus 22.3%. EIG sales fell 5.2% and operating margin increased to 27.2% from 23.5%. EMG sales were essentially flat and operating margin rose to 21.7% from 20.5%.
- Nine-month segment operating income increased 3.9% to $735.7 million. EIG sales rose 0.6% and operating margin increased to 26.7% from 25.3%; EMG sales fell 1.9% and operating margin increased to 21.5% from 21.1%.
- Q3 cost of sales excluding depreciation was 63.3% of sales versus 65.7%; SG&A was 11.2% versus 11.6%. Management cited cost containment, Operational Excellence initiatives, currency effects, and prior-year Zygo integration costs as contributors to improved margins.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $473.1 million, down from $512.7 million. The filing attributes the decrease primarily to $49.8 million of additional pension contributions, including a $50 million U.S. plan contribution.
- Management-reported free cash flow, defined as operating cash flow less capital expenditures, was $427.8 million versus $465.4 million. Capital expenditures were $45.3 million. EBITDA, another management-presented measure, was $802.1 million versus $757.0 million.
- Cash was $328.0 million at September 30, 2015, down from $377.6 million at December 31, 2014. Total debt was $1,917.1 million, up from $1,714.0 million. Net debt-to-capital was 32.4%, compared with 29.2% at year-end.
- Current assets were $1,590.7 million and current liabilities were $925.5 million. The company reported $257.3 million outstanding under its revolving credit facility and $298.7 million of cash outside the United States. It stated that it was in compliance with debt covenants and had sufficient liquidity for foreseeable needs. $35 million of debt was due in Q4 2015.
- Financing included $200 million of 2015 private-placement note fundings; the company also repaid $90 million of 6.59% notes and a €50 million note at maturity. The new senior notes carry a weighted average interest rate of 3.88% and include financial covenants. Nine-month share repurchases were $306.5 million for approximately 5.6 million shares; $90.6 million remained under the authorization at September 30.
Changes, outlook and notable items
- Net income and diluted EPS reached Q3 records, according to management. Results benefited from acquisitions and Operational Excellence, while a strong U.S. dollar and challenging global markets were headwinds.
- Global Tubes and Surface Vision were acquired in May and July 2015 for a combined $356.5 million net of cash acquired. Their reported impact on 2015 sales, income and diluted EPS was immaterial. Purchase-price allocations were preliminary; acquired goodwill was $155.2 million and included an $8.4 million environmental liability.
- First-quarter restructuring charges were $15.9 million pre-tax, reducing nine-month net income by $10.8 million, or $0.04 per diluted share. Actions were expected to be completed by the first half of 2016. Management estimated approximately $55 million of annualized cash savings, with approximately $40 million expected in 2015.
- Management expected acquisitions and Operational Excellence initiatives to benefit the remainder of 2015, while challenging markets and currency headwinds were expected to continue. The filing provides no specific full-year sales or EPS guidance.
- Effective tax rates were 26.1% for Q3 and 27.2% for the nine months. The 2015 periods included specified tax benefits, including $7.5 million in Q3 related to closure of an international subsidiary. Gross unrecognized tax benefits were $62.3 million at quarter-end.
- Environmental reserves were $32.0 million, versus $26.6 million at year-end; management did not expect known environmental matters to materially affect consolidated results, financial position or cash flows. AMETEK also disclosed asbestos litigation; it reported no judgments against the company and said it intended to defend the claims.
- Other significant factors include increased interest expense from additional borrowing, currency-related comprehensive losses, and dependence on successful acquisition integration. Management identified economic conditions, competition, international operations, raw-material availability, regulation, and access to liquidity and financing as risks.
Important facts for investors to verify
- Whether orders, backlog and internal demand stabilize, particularly given foreign-currency exposure and the weaker global environment.
- Whether stated restructuring savings are achieved and whether acquisitions integrate as expected; confirm final purchase-price allocations and related environmental obligations.
- Debt maturities, revolver usage, interest costs and continued compliance with financial covenants as leverage and net debt-to-capital have risen.
- The sustainability of reported margin gains and earnings growth after excluding prior-year integration costs, current-year restructuring charges and tax benefits.
- Cash-flow conversion, pension funding requirements, share repurchases and the potential range of environmental and tax contingencies.