AMETEK, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise noted. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $944.4 million | $984.1 million | Down 4.0% |
| Operating income | $208.5 million | $221.0 million | Down 5.7% |
| Operating margin | 22.1% | 22.5% | Down 0.4 percentage points |
| Net income | $134.2 million | $142.1 million | Down 5.6% |
| Diluted EPS | $0.57 | $0.59 | Down 3.4% |
| Operating cash flow | $151.6 million | $121.9 million | Up 24.4% |
| Free cash flow | $140.5 million | $107.6 million | Up |
Sales fell due to a 9% internal decline and 1% unfavorable currency effect, partly offset by a 5% acquisition contribution. Orders rose 2.6% to $967.9 million; backlog was $1.171 billion at quarter-end, up 2.0% from December 31, 2015. International sales were $496.3 million, or 52.6% of revenue, down 2.2% year over year.
Segment operating income was $221.3 million, down 5.1%, with a 23.4% segment margin versus 23.7%. EIG sales were $569.0 million, down 4.2%, and operating margin was 24.9% versus 25.5%. EMG sales were $375.4 million, down 3.8%, and operating margin was 21.2% versus 21.0%.
Cost of sales, excluding depreciation, was 64.1% of sales versus 64.6%. SG&A was 11.9% of sales versus 11.3%; depreciation rose 12.3% to $18.3 million, mainly reflecting acquisitions. Interest expense increased 3.1% to $23.4 million. The effective tax rate was 26.7%, compared with 27.8%.
Cash, debt and liquidity
Cash and cash equivalents were $386.9 million at March 31, 2016, versus $381.0 million at year-end. Current assets were $1.663 billion and current liabilities $1.291 billion. Total debt, net, was $2.218 billion, up from $1.938 billion at December 31, 2015; debt-to-capital was 40.2% versus 37.3%, and net debt-to-capital was 35.7% versus 32.4%.
Operating cash flow increased largely because pension contributions were $1.2 million versus $50.8 million a year earlier; higher working capital and lower earnings partly offset the benefit. Investing cash outflow was $305.7 million, including $294.6 million for acquisitions. Financing cash inflow was $149.6 million, including a $283.3 million net increase in short-term borrowings; AMETEK repurchased $116.7 million of shares and paid $21.0 million in dividends.
In March, AMETEK replaced its $700 million revolving facility with an $850 million five-year facility maturing in March 2021, with an option to request up to $300 million more. Available capacity, including the accordion feature, was $513.6 million. A £40 million senior note, valued at $57.5 million at quarter-end, matures in Q4 2016. The company reported compliance with debt covenants and said it expects cash generation, credit facilities and capital-market access to meet foreseeable needs.
Material changes and notable items
- Q1 acquisitions of Brookfield Engineering Laboratories and ESP/SurgeX cost $294.6 million net of cash acquired. Their reported Q1 impact on sales, net income and diluted EPS was immaterial. Purchase-price allocation was preliminary and included $139.6 million of goodwill and $145.1 million of intangible assets.
- Acquisitions contributed to higher goodwill and intangibles and increased borrowing. AMETEK also acquired Surface Vision in 2015 and Global Tubes in 2015.
- Q1 2015 included $15.9 million of restructuring charges, reducing net income by $10.8 million, or $0.04 per diluted share. Including Q4 2015, the company recorded $36.6 million of 2015 realignment costs; remaining actions were expected to be completed in the second half of 2017.
- Q1 2016 total comprehensive income was $169.3 million versus $47.3 million in Q1 2015, reflecting substantial period-to-period changes in other comprehensive income, including currency translation.
- AMETEK repurchased approximately 2.406 million shares for $116.7 million; $195.1 million remained under its repurchase authorization at quarter-end.
Outlook, risks and contingencies
Management expected acquisitions and ongoing Operational Excellence initiatives, including realignment actions, to benefit 2016 results, while anticipating continued challenging economic conditions across many markets and geographies. The filing provides no specific numerical revenue or earnings guidance.
Management cited risks including general economic conditions, competition, international operations, acquisition execution and integration, new-product and facility execution, raw-material prices, regulation, and liquidity and financing access. Internal sales weakness was associated with oil-and-gas exposure in parts of EIG and commodity-price deflation in parts of EMG; currency translation was also a headwind to sales.
Environmental reserves were $30.1 million at March 31, 2016. AMETEK reported asbestos-related lawsuits but no judgments against it to date, and said it intended to defend itself. Management stated that recorded environmental provisions were adequate and expected the ultimate cost of disclosed matters not to materially affect results, financial position or cash flows, while acknowledging actual remediation costs could differ from estimates. Gross unrecognized tax benefits were $65.6 million, of which $54.6 million would affect the effective tax rate if recognized.
Important facts for investors to verify
- Whether internal sales and order trends improve, particularly in oil-and-gas-exposed and commodity-sensitive businesses.
- Integration and contribution of Brookfield and ESP/SurgeX, and final acquisition purchase-price allocations and amortization.
- Debt levels, revolving-facility availability, the 2016 note maturity and the effect of acquisition funding and share repurchases on leverage.
- Progress and costs of restructuring actions, environmental remediation and uncertain tax positions.
- How future cash conversion and working-capital needs compare with reported Q1 cash flow, which benefited from unusually lower pension contributions versus Q1 2015.