AMETEK, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 1, 2015. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $984.1 million | $975.3 million | +0.9% |
| Operating income | $221.0 million | $221.6 million | -0.3% |
| Operating margin | 22.5% | 22.7% | -0.2 percentage points |
| Net income | $142.1 million | $140.6 million | +1.1% |
| Diluted EPS | $0.59 | $0.57 | +3.5% |
| Operating cash flow | $121.9 million | $161.0 million | -24.3% |
| Capital expenditures | $14.4 million | $14.5 million | — |
| Free cash flow | $107.6 million | $146.5 million | Lower year over year |
Cost of sales was $636.0 million; SG&A was $110.9 million, or 11.3% of sales versus 11.5% a year earlier. Interest expense rose 20.7% to $22.7 million, largely due to 2014 senior-note financing. The effective tax rate declined to 27.8% from 29.3%, including a release of uncertain-tax-position liabilities related to an EU advance thin capitalization agreement. Q1 comprehensive income was $47.3 million; the substantial difference from net income mainly reflects other comprehensive losses, including foreign-currency translation.
Cash and cash equivalents were $406.6 million at March 31, 2015, versus $377.6 million at year-end. Current assets were $1.609 billion and current liabilities $898.5 million. Total debt was $1.673 billion, down from $1.714 billion at year-end; debt-to-capital was 33.9% and net debt-to-capital 27.9%. The company reported compliance with debt covenants and no significant debt maturities until $143.7 million in Q3 2015. Cash held outside the U.S. was $373.7 million.
Changes and operating trends
- Sales growth comprised approximately 1% internal growth and 4% acquisition contribution, offset by a 4% unfavorable currency effect. International sales fell 7.4% to $507.7 million, or 51.6% of sales, primarily due to currency translation.
- Orders declined 5.5% to $943.7 million, with an 8% unfavorable currency effect partly offset by approximately 1% internal order growth and 1% from acquisitions. Backlog was $1.157 billion, down 3.4% from December 31, 2014.
- EIG sales rose 3.7% to $593.8 million; acquisitions contributed 7%, currency reduced sales 3%, and internal sales were flat. EIG operating margin was 25.5%, versus 26.3%.
- EMG sales fell 3.1% to $390.3 million, reflecting a 5% currency headwind partly offset by approximately 2% internal growth. EMG operating margin was 21.0%, versus 20.8%.
- Q1 operating results included $15.9 million of restructuring/realignment charges, reducing net income by $10.8 million, or $0.04 per diluted share. Segment operating margin was reduced by 160 basis points by these charges.
- Operating cash flow fell mainly because defined-benefit pension contributions increased by $49.9 million, including a $50.0 million U.S. plan contribution. Q1 2014 investing cash flow included $161.5 million of net acquisition spending; there were no business purchases in Q1 2015.
Outlook, risks and other notable items
No quantified earnings or sales guidance is provided in the filing. Management expected the 2014 acquisitions and continued Operational Excellence initiatives, including operational realignment, to benefit the remainder of 2015; it expected a stronger U.S. dollar to remain a headwind. Restructuring actions were expected to continue across the business through the rest of 2015.
- The company cited economic conditions, competition, international operations, acquisition integration, product development and facility transfers, raw-material availability, regulatory compliance, and access to liquidity and financing as risks to forward-looking results.
- Environmental reserves were $25.4 million at March 31, 2015. Management stated that known obligations were adequately reserved and expected no material effect on consolidated results, financial position, or cash flows. The company was named a potentially responsible party at 14 non-owned sites. Asbestos lawsuits were also disclosed; no judgments had been rendered against AMETEK, and the company said it intended to defend the claims.
- Gross unrecognized tax benefits were $69.2 million, of which $57.0 million would affect the effective tax rate if recognized.
- The company repurchased approximately 481,000 shares for $25.7 million in Q1. On April 1, the board authorized an additional $350 million for repurchases.
- The company adopted ASU 2014-08 with no reported impact. The effect and adoption method for the new revenue-recognition standard, ASU 2014-09, had not been determined.
Important facts for investors to verify
- Whether currency pressure, weaker orders, and declining backlog persist, and how these affect organic growth and margins.
- Progress, costs, and realized benefits from restructuring and Operational Excellence initiatives during 2015.
- The sustainability of cash generation after the unusually large pension contribution, and the availability and location of cash for corporate uses.
- Debt maturities, covenant headroom, and interest costs, particularly as remaining senior-note funding dates approach.
- Developments in environmental, asbestos, and tax matters, including whether recorded reserves and indemnifications remain sufficient.