AMETEK INC quarterly report, Q3 FY2013

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AMETEK, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013. Figures are unaudited; amounts below are in millions except per-share data.

Business context and financial performance

  • AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
  • Q3 revenue rose 6.0% to $890.0 million; internal sales growth was approximately 1%. Nine-month revenue rose 6.4% to $2,651.7 million, primarily reflecting acquisitions; internal sales growth and currency translation were flat.
  • Q3 net income increased 10.8% to $127.9 million; diluted EPS increased to $0.52 from $0.47. For nine months, net income rose 12.4% to $381.3 million and diluted EPS rose to $1.55 from $1.39.
  • Operating performance: Q3 operating income was $204.7 million (23.0% of sales), versus $188.2 million (22.4%). Nine-month operating income was $604.5 million (22.8%), versus $555.9 million (22.3%). Segment operating margin was 24.3% in Q3 and 24.1% for nine months.
  • Segments: Q3 EIG sales increased 9.3% to $499.8 million and operating margin improved to 27.8% from 26.6%. EMG sales increased 2.1% to $390.2 million, while operating income was nearly flat and margin declined to 19.9% from 20.2%. For nine months, EIG sales rose 6.5% and EMG sales rose 6.2%; EMG margin declined to 20.2% from 20.4%.
  • Orders and backlog: Q3 orders grew 17.1% to $937.1 million, with approximately 7% internal order growth excluding a favorable 2% currency effect. Nine-month orders rose 5.1% to $2,710.0 million. Backlog reached a record $1,170.5 million at September 30, up 5.2% from year-end 2012.

Cash flow, debt, and liquidity

  • Nine-month operating cash flow was $451.1 million, up 7.6%; capital expenditures were $37.1 million and reported free cash flow was $414.0 million, versus $385.9 million in 2012.
  • Cash and cash equivalents increased to $254.9 million from $158.0 million at December 31, 2012; $241.7 million was held outside the United States.
  • Total debt was $1,300.1 million, down from $1,453.8 million at year-end. Debt-to-capital declined to 30.7% from 36.4%, and net debt-to-capital to 26.3% from 33.8%. The filing reports no significant debt maturities until 2015 and compliance with debt covenants.
  • Cash used in investing was $183.5 million, including $164.0 million for CSI; cash used in financing was $174.7 million, mainly reflecting reduced borrowings. The company repurchased $8.5 million of shares and paid $43.8 million in dividends during the first nine months.

Material changes, outlook, and unusual items

  • Q3 and nine-month results benefited from acquisitions, Operational Excellence initiatives, and lower effective tax rates. Management said acquisitions and continued Operational Excellence were expected to positively affect the remainder of 2013; no specific full-year financial guidance was provided.
  • An $11.6 million Q3 gain on the sale of a facility supported segment margins and was largely offset by growth investments and higher acquisition-related expenses. Other expenses also increased, primarily due to acquisition-related costs.
  • CSI was acquired in August for $164.0 million net of cash acquired; its reported-period impact was immaterial. The preliminary purchase allocation included $90.4 million of goodwill and $69.5 million of intangible assets. In October, after quarter-end, AMETEK acquired Creaform for approximately $120 million; estimated annual sales were approximately $52 million.
  • The effective tax rate was 29.0% in Q3 and 29.2% for nine months, compared with 30.4% and 31.0%, respectively, in 2012. The filing cites foreign earnings, international tax planning, and the retroactive extension of the U.S. R&D tax credit among the factors.
  • Gross unrecognized tax benefits were $43.5 million, of which $41.0 million would affect the effective tax rate if recognized. Environmental reserves totaled $21.5 million. AMETEK also disclosed asbestos litigation; it reported no judgments against it and said it intended to defend the claims.
  • Key risks identified include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material availability, regulatory compliance, and liquidity and financing access. Management concluded disclosure controls were effective at the reasonable-assurance level.

Important facts for investors to verify

  • How much future growth and margin performance depends on acquisitions versus organic demand, given modest internal sales growth for the period.
  • Whether the Q3 facility-sale gain and acquisition-related costs affect comparisons of recurring operating performance.
  • Integration progress, final purchase accounting, and returns from CSI and the post-quarter Creaform acquisition.
  • Order and backlog conversion, especially whether recent order growth is sustained.
  • Availability and use of cash held outside the United States, debt reduction, and the company’s capacity to fund acquisitions and obligations.
  • Developments in uncertain tax positions and environmental or asbestos matters; the filing says estimated environmental remediation costs are not expected to materially affect results, but actual costs could vary.