AMETEK, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited; comparisons are with the corresponding 2018 periods unless otherwise noted. AMETEK operates through Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,276.6m | $1,193.0m | $3,853.7m | $3,574.5m |
| Operating income | $301.1m | $265.3m | $879.7m | $793.5m |
| Operating margin | 23.6% | 22.2% | 22.8% | 22.2% |
| Net income | $220.7m | $191.2m | $640.5m | $566.4m |
| Diluted EPS | $0.96 | $0.82 | $2.79 | $2.43 |
- Q3 sales increased 7.0%; management attributed the change to 3% organic growth and a 5% acquisition contribution, partly offset by a 1% unfavorable currency effect. Nine-month sales increased 7.8%, reflecting 4% organic growth and a 5% acquisition contribution, partly offset by a 1% currency effect.
- Q3 segment operating margin was 25.3%, up from 23.7%. EIG margin rose to 26.9% from 25.6%; EMG margin rose to 22.4% from 20.6%. Management cited higher sales and Operational Excellence initiatives.
- Cost of sales was 64.5% of Q3 sales versus 65.6% a year earlier; for the nine months it was 65.2% versus 65.8%. SG&A was 11.9% of Q3 sales versus 12.1%, and 12.0% for both nine-month periods.
- Q3 orders increased 3.0% to $1,227.7m, although organic orders declined 3%; acquisition growth was 8%, with a 2% unfavorable currency effect. Nine-month orders rose 3.1% to $3,884.0m. Backlog at September 30 was $1,632.3m, up 1.9% from year-end 2018.
- Nine-month operating cash flow was $772.2m, up 22.7%; capital expenditures were $61.5m and reported free cash flow was $710.7m, versus $581.9m. Cash and equivalents were $735.4m at September 30, compared with $354.0m at December 31, 2018.
- Total debt, net was approximately $2,428.8m, down from $2,632.7m at year-end; net debt-to-capital declined to 25.8% from 34.9%. Available revolver capacity was $1,970.2m, including the $500m accordion. The company reported compliance with debt covenants.
- Interest expense increased to $21.3m for Q3 and $65.4m for nine months, primarily reflecting recently issued private-placement notes. Other expense increased, mainly due to lower defined-benefit pension income.
Changes, transactions, and accounting
- AMETEK paid $122.1m, net of cash acquired, for Pacific Design Technologies (PDT) in September 2019. The acquisition had an immaterial reported-period impact; preliminary allocations included $47.0m of goodwill and $63.7m of intangible assets.
- In October 2019, after quarter-end, AMETEK acquired Gatan for approximately $925m in cash. Gatan had annual sales of approximately $180m and joined EIG.
- The company adopted lease accounting standard ASC 842 on January 1, 2019. It recognized a $174.4m right-of-use asset and $180.4m in lease liabilities at September 30; adoption was not reported to have a significant effect on results or cash flows.
- The effective tax rate was 19.5% in Q3 and 20.1% for nine months, compared with 21.9% and 22.3%, respectively. The lower 2019 rates reflected share-based payment tax benefits and, for the nine-month comparison, lower tax costs on foreign-source income. Q3 rates included releases of uncertain tax-position liabilities of $21.9m in 2019 and $11.4m in 2018.
Outlook, risks, and contingencies
- Management said strong backlog, the full-year impact of 2018 and 2019 acquisitions, and continued Operational Excellence initiatives were expected to positively affect the remainder of 2019. The filing provides no specific numerical full-year guidance.
- Management identified risks including economic conditions, competition, international operations, acquisition execution and integration, product development and facility transfers, raw-material availability and pricing, regulatory compliance, and liquidity and financing access.
- Environmental reserves were $28.5m at September 30, 2019. Management considered the provisions adequate and did not expect environmental matters, including groundwater-related litigation, to materially affect results, financial position, or cash flows. The company also reported asbestos-related lawsuits, no judgments to date, and indemnification for certain claims.
- Gross unrecognized tax benefits were $104.8m, of which $63.1m would affect the effective tax rate if recognized. The filing notes that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether order trends, including Q3’s organic order decline, and backlog convert into sales and earnings.
- Whether operating-margin improvement and reported cash-flow gains persist after acquisition effects and working-capital movements.
- Funding, integration, and returns from the $925m Gatan acquisition, alongside existing debt and covenant requirements.
- The sustainability of the lower effective tax rate and the impact of uncertain tax positions.
- Potential changes to environmental and other legal exposures, and the final purchase-price allocation for PDT.