AMETEK, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2016, compared with the same periods in 2015. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $977.7 | $1,003.7 | $1,922.1 | $1,987.8 |
| Operating income | $219.0 | $240.3 | $427.6 | $461.3 |
| Operating margin | 22.4% | 23.9% | 22.2% | 23.2% |
| Net income | $138.2 | $155.5 | $272.4 | $297.6 |
| Diluted EPS | $0.59 | $0.64 | $1.16 | $1.22 |
- Q2 sales declined 2.6%; management attributed the change to a 7% internal sales decline, partly offset by 4% acquisition growth. Q2 orders fell 8.8% to $944.4 million.
- First-half sales declined 3.3%, reflecting an 8% internal decline partly offset by 5% growth from acquisitions. Orders declined 3.4% to $1,912.4 million; period-end backlog was $1,138.0 million, down 0.9% from December 31, 2015.
- Q2 segment operating income was $232.4 million, down 8.3%, with a 23.8% margin versus 25.2%. EIG sales were essentially flat at $596.0 million; EMG sales fell 6.3% to $381.7 million.
- First-half operating cash flow was $340.6 million versus $285.4 million; free cash flow, as defined by the company, was $315.3 million versus $259.4 million. EBITDA was $501.2 million versus $529.3 million.
- Capital expenditures were $25.3 million. Investing activities used $318.2 million, including $293.5 million for acquisitions. Financing activities provided $56.5 million, including a $221.9 million net increase in short-term borrowings, offset in part by $135.3 million of share repurchases and $42.0 million of dividends.
- Cash and equivalents were $456.2 million at June 30, 2016, up from $381.0 million at year-end. Total debt, net, was $2,142.2 million, versus $1,938.0 million at year-end. Debt-to-capital was 39.0% (37.3% at year-end); net debt-to-capital was 33.4% (32.4%).
Changes, outlook, and notable items
- Management cited a weak global economy and a strong U.S. dollar, with lower demand in oil-and-gas-exposed process businesses, metals-related businesses, Floor Care, and Specialty Motors. It expected challenging conditions across many markets and geographies to continue through the remainder of 2016.
- No specific full-year revenue or earnings guidance is stated in the supplied filing text. Management cited acquisitions and Operational Excellence initiatives, including prior realignment actions, as contributors supporting results.
- Brookfield Engineering Laboratories and ESP/SurgeX were acquired in January for $293.5 million net of cash acquired; their reported-period impact on sales, net income, and diluted EPS was immaterial. In July, AMETEK acquired HS Foils and Nu Instruments for approximately $65 million.
- AMETEK amended its revolving credit agreement in March: the facility increased from $700 million to $850 million and matures in March 2021. Available borrowing capacity at June 30 was $571.2 million, including the accordion feature. A £40 million senior note, reported as $53.0 million at June 30, was due in Q4 2016. The company reported compliance with debt covenants.
- Interest expense rose 4.4% in Q2, primarily due to higher revolver borrowings for acquisitions and repurchases. The first-half effective tax rate was 27.1%, compared with 27.8%; 2016 included benefits from international and state tax-planning initiatives.
- Environmental reserves were $28.1 million at June 30; management said the ultimate costs were not expected to materially affect results, financial position, or cash flows. The filing also describes asbestos litigation; no judgments had been rendered against the company. Product warranty settlements included certain specific, nonrecurring obligations.
- Prior-year restructuring charges totaled $36.6 million and related primarily to workforce reductions; actions were expected to be completed in the second half of 2016 and second half of 2017 for the respective restructuring programs. No new restructuring charges are reported for the first half of 2016.
Important facts for investors to verify
- Whether order trends and backlog stabilize, particularly in the markets management identified as weak, and how foreign exchange affects reported results.
- Whether margin and earnings declines persist, and how acquisition contributions and integration costs develop.
- Debt maturities, borrowing availability, leverage, and the company’s ability to fund acquisitions and repurchases while maintaining liquidity.
- Final purchase-price allocations for the 2016 acquisitions, the July acquisitions’ subsequent contribution, and the realization of expected acquisition benefits.
- Changes in environmental, asbestos, warranty, and uncertain-tax-position exposures, including whether actual costs differ from recorded reserves.