AMETEK, Inc. — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Management said quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $882.9 million | $827.2 million | +6.7% |
| Operating income | $197.2 million | $182.8 million | +7.9% |
| Operating margin | 22.3% | 22.1% | +0.2 percentage points |
| Net income | $125.1 million | $110.2 million | +13.5% |
| Diluted EPS | $0.51 | $0.45 | +13.3% |
| Operating cash flow | $156.8 million | $140.9 million | +11.3% |
| Free cash flow | $145.9 million | $132.5 million | +10.1% |
Segment operating income rose 8.1% to $209.7 million, and segment operating margin increased to 23.8% from 23.4%. EIG sales grew 3.3% and margin rose to 27.2% from 26.2%. EMG sales grew 11.2%, while its margin edged down to 19.6% from 19.8%, partly reflecting Dunkermotoren’s lower margin.
The effective tax rate was 29.1%, versus 31.9%, reflecting the retroactive extension of the U.S. research and development tax credit and other international tax benefits. Interest expense was $18.3 million, down from $18.8 million. Total comprehensive income was $93.3 million, compared with $131.6 million, with the filing reporting a $31.9 million other comprehensive loss in Q1 2013, primarily reflecting currency-related items.
Liquidity, debt, and balance sheet
- Cash and equivalents were $177.3 million at March 31, up from $158.0 million at year-end; $173.4 million was held outside the United States.
- Current assets were $1.214 billion and current liabilities $799.1 million, an approximate current ratio of 1.52. At December 31, the comparable ratio was approximately 1.32.
- Total debt was $1.324 billion, down from $1.454 billion at December 31. Debt-to-capital declined to 33.5% from 36.4%; net debt-to-capital declined to 30.4% from 33.8%. Management reported no significant maturities until 2015 and compliance with debt covenants.
- Operating cash flow less capital expenditures was $145.9 million; capital expenditures were $10.9 million. Investing used $7.0 million, compared with $183.5 million in Q1 2012, when the company paid $179.4 million for an acquisition. Financing used $126.2 million, including a net $113.0 million reduction in borrowings, $14.6 million of dividends, and $7.7 million of share repurchases.
Material changes and management commentary
- Management reported quarterly records for sales, operating income, net income, and diluted EPS. Sales growth mainly reflected the 2012 acquisitions of Micro-Poise and Dunkermotoren; internal sales declined 2% overall. Foreign currency translation was flat year over year.
- Management attributed improved segment margins primarily to Operational Excellence initiatives and a lower cost structure. It expected the full-year contribution from the 2012 acquisitions and continued Operational Excellence efforts to benefit the remainder of 2013; the filing provides no numerical earnings or revenue guidance.
- Orders increased 1.7% to $877.9 million, primarily due to acquisitions and partly offset by a 3% unfavorable currency effect. Backlog was $1.107 billion, down 0.4% from December 31.
- International sales were $484.8 million, or 54.9% of sales, versus $417.8 million, or 50.5%, a year earlier. Management cited acquisitions and strength in European maintenance, repair, and overhaul businesses.
- Accelerated vesting of restricted stock resulted in a $2.7 million pretax charge ($1.9 million after tax). The company repurchased 186,268 shares for $7.7 million and reported $93.2 million remaining under repurchase authorizations.
Risks, contingencies, and other notable items
- Forward-looking risks include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material availability, regulatory compliance, and liquidity and financing access.
- Environmental reserves were $22.9 million. Management considered reserves adequate and did not expect ultimate costs to materially affect results, financial position, or cash flows. The company also disclosed asbestos litigation; it reported no judgments against it and intends to defend the claims.
- Gross unrecognized tax benefits were $39.4 million, of which $36.8 million would affect the effective tax rate if recognized.
- Disclosure controls were judged effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- How much of reported sales and orders growth reflects acquisitions versus underlying demand, given the 2% internal sales decline and 3% currency headwind to orders.
- Whether acquisition integration and Operational Excellence sustain margins, particularly in EMG, where the acquired business diluted margin.
- Whether backlog converts to sales and how international exposure, currency movements, and the large share of overseas cash affect results and liquidity.
- Whether environmental reserves, third-party indemnities and recoveries, and uncertain tax positions remain adequate as claims and assessments develop.