AMETEK, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
AMETEK operates through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Management reported record orders and strong sales, operating income, operating margins, net income and diluted EPS. Results reflected organic growth, acquisitions and Operational Excellence initiatives.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $1,007.7 million | $944.4 million; up 6.7% |
| Operating income | $220.3 million; 21.9% margin | $208.5 million; 22.1% margin |
| Net income | $138.9 million | $134.2 million; up 3.5% |
| Diluted EPS | $0.60 | $0.57; up 5.3% |
| Segment operating income | $236.1 million; 23.4% of sales | $221.3 million; 23.4% of sales |
| Cash from operations | $142.4 million | $151.6 million |
| Capital expenditures / free cash flow | $13.4 million / $129.1 million | $11.1 million / $140.5 million |
| EBITDA | $257.9 million | $246.3 million |
Cost of sales was 66.0% of sales in both periods. SG&A was 12.1% of sales versus 11.9%. The effective tax rate was 27.4%, compared with 26.7%; 2017 included a $5.8 million tax benefit from share-based payment accounting changes.
EIG sales rose 8.9% to $619.8 million; operating income increased 10.5% to $156.7 million and margin improved to 25.3% from 24.9%. EMG sales rose 3.3% to $387.9 million, while operating income was approximately flat at $79.4 million and margin declined to 20.5% from 21.2%, primarily due to weaker profitability in engineered materials, interconnects and packaging.
Financial position and liquidity
At March 31, 2017, cash and equivalents were $570.2 million, down from $717.3 million at year-end 2016. Total debt, net, was $2,414.5 million versus $2,341.6 million. Debt-to-capital was 41.5% (41.8% at year-end); net debt-to-capital was 35.1% (33.3%). Available revolving-credit capacity was $1,058.2 million, including the $300 million accordion feature. AMETEK said it was in compliance with debt covenants and had resources it believed sufficient for foreseeable operating needs and obligations.
Operating cash flow declined year over year mainly because defined-benefit pension contributions increased to $50.9 million from $1.2 million; working-capital management partly offset the increase. Investing cash use was $348.3 million, including $334.5 million for Rauland-Borg. Financing cash provided was $51.9 million, including a $58.9 million increase in short-term borrowings. The company had $536.1 million of cash outside the U.S. A $270 million 6.20% senior-note maturity is due in Q4 2017.
Material changes, outlook and notable items
- Sales growth comprised 4% organic growth and a 4% acquisition contribution, partly offset by a 1% unfavorable currency effect. Orders increased 15.7% to $1,120.3 million, including 9% organic growth and an 8% acquisition contribution, partly offset by 1% unfavorable currency. Backlog reached a record $1,269.1 million, up 9.7% from December 31, 2016.
- Management expected a stronger global economic environment, the full-year contribution of recent acquisitions and ongoing Operational Excellence initiatives to benefit 2017 results. The filing provides no numerical full-year earnings or revenue guidance.
- In February 2017, AMETEK acquired Rauland-Borg for $334.5 million cash, with a potential $30 million milestone payment. The acquisition’s Q1 impact on reported sales, net income and diluted EPS was immaterial. Purchase-price allocation was preliminary; expected Rauland amortization is approximately $8 million annually for the next five years.
- In April 2017, AMETEK agreed to acquire MOCON for an enterprise value of approximately $182 million. MOCON had approximately $63 million of 2016 sales; closing was expected toward the end of Q2 or beginning of Q3 2017, subject to customary conditions.
- Q1 comprehensive income was $149.2 million versus $169.3 million. The filing reports other comprehensive income items, including foreign-currency translation and pension-related amounts.
- 2016 restructuring charges totaled $25.6 million and were recorded in Q4 2016, not Q1 2017. The actions were expected to continue through 2017, with most completed in 2018; related accruals at March 31, 2017 were $17.1 million for the 2016 actions and $8.2 million for 2015 actions.
- Environmental reserves were $28.2 million. Management said accrued environmental provisions were adequate and expected the ultimate costs not to materially affect results, financial position or cash flows. AMETEK reported asbestos litigation but no judgments to date and said it intended to defend the claims.
- Gross unrecognized tax benefits were $59.2 million, of which $49.9 million would affect the effective tax rate if recognized. The company cautioned that share-based payment tax accounting may cause effective-tax-rate volatility.
Investor verification points
- Track whether strong orders and record backlog convert into sales and margins, particularly in EMG.
- Verify acquisition integration, final Rauland purchase-price allocation and whether its revenue milestone triggers the contingent payment; monitor MOCON closing and financing.
- Assess cash generation after the unusually large pension contribution, and liquidity around the $270 million Q4 2017 debt maturity.
- Monitor debt levels, foreign-held cash availability, and the effect of acquisition spending on leverage and capital allocation.
- Follow environmental and tax exposures, restructuring execution, and the adoption impact of the revenue-recognition standard planned for January 1, 2018.
Management identified risks including economic and competitive conditions, international operations, acquisition execution and integration, product development, raw-material costs, regulatory compliance, and liquidity and financing access. Disclosure controls were reported effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.