AMETEK, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results; amounts below are in millions except per-share data. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $975.3 | $882.9 | +10.5% |
| Operating income | $221.6 | $197.2 | +12.4%; margin 22.7% vs. 22.3% |
| Net income | $140.6 | $125.1 | +12.4% |
| Diluted EPS | $0.57 | $0.51 | +11.8% |
| Cash from operations | $161.0 | $156.8 | +2.7% |
| Capital expenditures | $14.5 | $10.9 | Higher |
| Free cash flow* | $146.5 | $145.9 | Nearly flat |
*Company-defined as operating cash flow less capital expenditures. EBITDA was $250.9 million versus $223.4 million.
- Record quarterly orders were $998.4 million, up 13.7%; backlog reached $1,163.1 million, up 2.0% from December 31, 2013.
- EIG sales rose 18.1% to $572.4 million; operating margin declined to 26.3% from 27.2%, mainly reflecting lower-margin acquisitions. EMG sales increased 1.1% to $402.9 million; margin improved to 20.8% from 19.6%.
- Segment operating income increased 11.7% to $234.2 million, with segment margin of 24.0% versus 23.8%. SG&A rose 15.4% and was 11.5% of sales versus 11.1%.
- Effective tax rate was 29.3%, compared with 29.1%. Q1 2013 benefited from the retroactive U.S. R&D tax-credit extension, which had not been extended into 2014.
Liquidity, debt, and balance sheet
- Cash was $265.3 million at March 31, 2014, down from $295.2 million at year-end; $238.9 million was held outside the United States.
- Total debt was $1,407.9 million, versus $1,415.1 million at December 31, 2013. Debt-to-capital was 30.1% and net debt-to-capital 25.9%; management reported no significant maturities until 2015.
- Current assets were $1,434.2 million and current liabilities $931.8 million. The filing states the company complied with all debt covenants and believed available cash, credit facilities, and capital-market access would meet foreseeable needs.
- Investing cash outflow was $173.6 million, principally $161.5 million spent net of acquired cash on Teseq and VTI. Financing cash outflow was $14.9 million.
Changes, outlook, and notable items
- Sales growth reflected approximately 3% internal growth, 7% from acquisitions, and a favorable 1% currency effect. Orders growth reflected approximately 2% internal growth, 9% acquisitions, and a favorable 3% currency effect.
- Management attributed operating improvement to acquisitions, internal growth, and Operational Excellence initiatives, and expected the full-year impact of recent acquisitions and continued initiatives to benefit the remainder of 2014. No numerical full-year guidance was provided.
- January and February acquisitions of Teseq and VTI cost $161.5 million net of acquired cash; their Q1 impact on reported sales, net income, and diluted EPS was described as immaterial. Purchase-price allocations were preliminary.
- In April 2014, AMETEK agreed to acquire Zygo for approximately $280 million enterprise value; closing was subject to customary conditions and expected toward the end of Q2 2014. Zygo reported approximately $162 million of 2013 sales.
- Other expenses increased to $3.9 million, primarily due to acquisition-related expenses. The company also disclosed certain nonrecurring warranty settlements; the amount was not separately specified.
- Environmental reserves were $21.7 million. Management considered reserves adequate and did not expect environmental matters to materially affect results, financial position, or cash flows. AMETEK was named in asbestos litigation; no judgments had been rendered against it, and it said it intended to defend the claims.
- Gross unrecognized tax benefits were $56.4 million, of which $51.9 million would affect the effective tax rate if recognized. The filing also cites risks including economic conditions, competition, international operations, acquisition integration, raw-material availability, regulation, and liquidity.
Important facts for investors to verify
- How much of subsequent growth and margin performance came from acquired businesses versus organic growth, particularly given EIG’s lower acquisition-related margins.
- Whether record orders and backlog convert to revenue, and whether working-capital needs continue to weigh on operating cash flow.
- Final purchase accounting, integration outcomes, and realized benefits from Teseq, VTI, and the other recent acquisitions.
- Completion, financing, and integration of the proposed Zygo acquisition, including any subsequent updates to transaction terms.
- Developments in uncertain tax positions, environmental remediation, asbestos claims, and warranty obligations.