AMETEK, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. AMETEK reports Electronic Instruments (EIG) and Electromechanical (EMG). The financial statements are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,287.7 million | $1,172.6 million | +9.8% |
| Operating income | $283.3 million | $258.2 million | +9.7% |
| Operating margin | 22.0% | 22.0% | Flat |
| Net income | $204.3 million | $181.3 million | +12.6% |
| Diluted EPS | $0.89 | $0.78 | +14.1% |
| Operating cash flow | $196.3 million | $177.4 million | +10.6% |
| Free cash flow | $174.8 million | $165.1 million | +$9.7 million |
Sales growth reflected 5% organic growth and a 7% contribution from acquisitions, partly offset by a 2% adverse currency effect. Cost of sales was 66.1% of sales versus 66.2%; SG&A was 11.9% versus 11.7%. The effective tax rate fell to 20.5% from 23.1%, which management attributed mainly to higher share-based payment tax benefits and lower net tax costs related to GILTI and foreign-derived U.S. income. Other expense, net increased to $3.7 million from $0.7 million; the filing text does not provide a clear explanation for the increase.
Segments and demand
- EIG: Sales rose 12.6% to $806.9 million; operating income increased 10.8% to $203.1 million. Margin declined to 25.2% from 25.6%, primarily due to lower margins at recent acquisitions, partly offset by Operational Excellence initiatives.
- EMG: Sales increased 5.4% to $480.8 million; operating income rose 8.6% to $98.8 million. Margin improved to 20.6% from 19.9%, with sales growth and Operational Excellence cited as drivers.
- Orders increased 2.5% to $1,378.1 million. Backlog was $1,692.5 million at March 31, up 5.6% from December 31, 2018.
Cash, debt and liquidity
- Cash and cash equivalents were $368.1 million at quarter-end, up from $354.0 million at year-end; $281.7 million was held outside the U.S.
- Total debt, net was $2,472.4 million, compared with $2,632.7 million at December 31, 2018. Debt-to-capital was 35.7% (38.3% at year-end); net debt-to-capital was 32.1% (34.9%).
- AMETEK reported $1,965.0 million of available revolving-credit capacity, including a $500 million accordion feature, and said it complied with all debt covenants.
- Operating cash flow was partly offset by higher working-capital levels. Capital expenditures were $21.4 million, versus $12.3 million a year earlier. Financing cash use was $165.9 million, including a $256.3 million decrease in short-term borrowings, $31.8 million of dividends, and $100 million of long-term borrowing proceeds.
Outlook, changes and notable items
Management said record backlog, the full-year contribution from 2018 acquisitions, and continued Operational Excellence initiatives were expected to benefit results for the remainder of 2019. The filing provides no numerical full-year guidance. Management described Q1 sales, operating income, orders and backlog as records.
Recent acquisitions contributed to growth, including Spectro Scientific, Forza, Telular, Motec and SoundCom. Acquisitions accounted for 7% of consolidated sales growth; the 2018 comparison also included the FMH acquisition. The company issued the remaining $100 million of a 2018 private placement in January; the notes carry a weighted-average rate of 3.93%. The Board authorized an additional $500 million for share repurchases in February. Q1 purchases under the plans totaled 1,830 shares, described as shares surrendered for employee-award tax withholding.
AMETEK adopted the new lease standard on January 1, 2019, recognizing $192.4 million of right-of-use assets and $198.6 million of lease liabilities at adoption; it said adoption did not significantly affect operating results or cash flows. At March 31, lease liabilities were $188.6 million. Environmental reserves were $28.3 million; management said remediation costs were not expected to materially affect consolidated results, financial position or cash flows. The company also disclosed asbestos litigation and groundwater-contamination claims, and stated it intended to defend the claims. Forward-looking risks include economic and competitive conditions, international operations, acquisition integration, product development, raw-material availability, regulation, and liquidity and financing.
Important facts for investors to verify
- Whether organic growth, order trends and backlog convert into revenue and earnings, and whether the stated positive outlook is borne out; no quantified 2019 guidance is provided here.
- Acquisition integration and margins, particularly the disclosed 1.5 percentage-point negative EIG margin impact from recent acquisitions.
- Working-capital trends, debt levels, covenant headroom and access to revolving-credit capacity.
- Potential changes to environmental, asbestos or groundwater-related exposures; management says material effects are not expected, but outcomes remain uncertain.
- The drivers of the increase in other expense, net, which the filing text does not clearly explain.