AMETEK, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. AMETEK supplies advanced instruments and electromechanical products through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,172.6 million | $1,007.7 million | Up 16.4% |
| Operating income | $258.2 million | $217.4 million | Up 18.8% |
| Operating margin | 22.0% | 21.6% | Up 0.4 percentage points |
| Net income | $181.3 million | $138.9 million | Up 30.5% |
| Diluted EPS | $0.78 | $0.60 | Up 30.0% |
| Operating cash flow | $177.4 million | $142.4 million | Up 24.6% |
- Sales growth comprised 8% organic growth, 5% from acquisitions and a favorable 3% foreign-currency effect. International sales were $612.7 million, or 52.3% of sales.
- Orders increased 20.0% to $1,344.8 million; backlog reached $1,568.3 million, up 12.3% from December 31, 2017. Management reported records for orders, backlog, sales and operating income.
- Segment operating income was $183.4 million for EIG, on sales of $716.4 million and a 25.6% margin; EMG reported $91.0 million on sales of $456.2 million and a 19.9% margin. EIG’s margin improved from 25.1%; EMG’s declined from 20.2%.
- Free cash flow, defined by the company as operating cash flow less capital expenditures, was $165.1 million versus $129.1 million. EBITDA was $306.0 million versus $257.9 million; both are non-GAAP measures.
- The effective tax rate was 23.1%, down from 27.4%, primarily reflecting the U.S. Tax Cuts and Jobs Act, including the lower U.S. corporate rate and current GILTI and FDII effects.
Balance sheet, liquidity and capital allocation
- At March 31, 2018, cash was $556.8 million, down from $646.3 million at year-end; total debt, net, was $2,205.7 million, up from $2,174.3 million. The company reported a 34.4% debt-to-capital ratio and 28.2% net debt-to-capital ratio.
- Available borrowing capacity under the revolving credit facility was $1,104.1 million, including the $300 million accordion. The company said it complied with all debt covenants and believed available cash, credit and capital access would meet foreseeable needs.
- Debt maturities include $240 million in Q3 2018 and $65 million in Q4 2018. Cash outside the United States was $501.9 million.
- Cash used in investing was $253.6 million, including $242.1 million for the January acquisition of FMH Aerospace. Cash used in financing was $27.1 million. The quarterly dividend rose 56%, to $0.14 per share from $0.09.
Changes, outlook and other notable items
- Management expected positive market trends, record backlog, the full-year contributions of recent acquisitions and continued Operational Excellence initiatives to benefit the remainder of 2018; no numerical full-year guidance was provided.
- FMH Aerospace, acquired in January for $242.1 million net of cash acquired, added preliminary goodwill of $106.1 million and other intangible assets of $129.3 million. Its Q1 impact on sales, net income and diluted EPS was immaterial. In April, after quarter-end, AMETEK acquired SoundCom Systems for approximately $40 million.
- ASC 606 revenue recognition was adopted January 1, 2018 using the modified retrospective method. The company reported no significant impact on Q1 results; adoption increased opening retained earnings by $4.2 million. Certain custom equipment and repair revenues are now recognized over time, accelerating revenue and associated costs in affected contracts.
- ASU 2017-07 was adopted retrospectively, moving non-service pension components outside operating income. Q1 2017 comparative figures were restated; this presentation change did not significantly affect consolidated results.
- The 2018 tax rate and tax-law estimates remain subject to refinement. AMETEK had $62.9 million of gross unrecognized tax benefits at quarter-end; $54.2 million would affect the effective tax rate if recognized. The company had not yet selected an accounting policy for GILTI and had not recorded a provisional deferred tax liability for it.
- Environmental reserves were $31.2 million. Management said recorded reserves were adequate and environmental matters were not expected to materially affect results, financial position or cash flows. The company also disclosed asbestos litigation and groundwater-contamination lawsuits; it said it could not estimate reasonably possible losses for the latter and did not expect material impact.
- Other risks cited include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material costs and availability, regulation, and liquidity and financing access.
Important facts for investors to verify
- Whether organic orders and backlog convert into sales and cash flow, and whether the favorable 2018 growth trends persist.
- Acquisition integration and returns, including the final purchase-price allocations for FMH and the impact of the subsequent SoundCom acquisition.
- Cash conversion and working-capital trends: operating cash flow benefited from lower pension contributions but was partly offset by higher operating working capital.
- Upcoming 2018 debt maturities, access to the revolving facility, and the use and availability of cash held outside the United States.
- Final tax-law estimates, including GILTI treatment, and any material changes in uncertain tax positions or environmental and litigation exposures.