AMETEK, Inc. — 2018 Form 10-K Summary
Business context and reporting period
AMETEK is a global manufacturer of electronic instruments and electromechanical products, operating through Electronic Instruments (EIG) and Electromechanical (EMG). This annual report covers the fiscal year ended December 31, 2018; fourth-quarter results are also summarized below. The company reported record orders, backlog, sales, operating income, net income, diluted EPS and operating cash flow.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $4,845.9 million | $4,300.2 million |
| Operating income | $1,075.5 million; 22.2% margin | $903.6 million; 21.0% margin |
| Net income | $777.9 million | $681.5 million |
| Diluted EPS | $3.34 | $2.94 |
| Operating cash flow | $925.5 million | $833.3 million |
| Free cash flow | $843.4 million | $758.2 million |
| Capital expenditures | $82.1 million | $75.1 million |
| Total debt, net | $2,632.7 million | $2,174.3 million |
| Cash and cash equivalents | $354.0 million | $646.3 million |
| Backlog at year-end | $1,602.1 million | $1,396.1 million |
Sales grew 12.7% (reported as 13% in management’s discussion), comprising 7% organic growth, 5% acquisition contribution and a favorable 1% currency effect. International sales were $2,448.5 million, or 50.5% of sales, versus 51.5% in 2017. Segment sales increased 12.6% at EIG and 12.9% at EMG; segment operating margins rose to 25.8% and 20.0%, respectively. Consolidated operating margin improved by 1.2 percentage points. The effective tax rate was 21.2%, compared with 14.5% in 2017.
In Q4 2018, sales were $1,271.3 million, up 11%; net income was $211.5 million, down 11.3%; and diluted EPS was $0.91, versus $1.03. Segment operating margin was 23.6%, compared with 21.9%.
Material changes and capital allocation
- Acquisitions contributed to growth: AMETEK spent $1,129.3 million, net of cash acquired, on six 2018 acquisitions. These acquired businesses represented 13.6% of year-end assets and 3.1% of annual sales. Purchase-price allocations remained subject to finalization for certain acquisitions.
- Operating cash flow rose 11.1%; investing cash outflow increased to $1,210.0 million, principally reflecting acquisitions. Cash used in financing activities shifted to $13.0 million provided, after $329.2 million used in 2017.
- Net debt increased $458.4 million; net debt as a percentage of capitalization rose to 34.9% from 27.5%. The company repurchased approximately 5.08 million shares for $367.7 million and paid $128.9 million in dividends. Quarterly dividend was raised 56% to $0.14 per share in February 2018.
- The revolving credit facility was increased from $850 million to $1.5 billion, with an additional $500 million accordion subject to conditions, and maturity extended to October 2023. Year-end available capacity was reported as $1,705.1 million, including the accordion. A private placement of $575 million and €75 million in notes was completed, with the final $100 million U.S. funding in January 2019.
Outlook, risks and unusual items
Management said positive market trends, record backlog, the full-year contribution from 2018 acquisitions and continued Operational Excellence efforts were expected to benefit 2019 results. It forecast 2019 capital expenditures of approximately 2% of sales. The company’s stated growth-plan objective is double-digit annual percentage growth in sales and EPS over the business cycle; this is a long-term objective, not a specific 2019 earnings forecast.
- 2017 comparisons include a $91.6 million Tax Act net benefit and $16.8 million of realignment costs. 2018 included an $11.8 million favorable Tax Act adjustment and a $25.0 million net tax expense related to a prior-year uncertain tax position. These items materially affect comparisons, particularly Q4 net income and EPS.
- Key risks include economic and market cyclicality, order timing and limited market visibility, acquisition execution and integration, international operations, foreign exchange and tariffs, competition, skilled-labor availability, cybersecurity, supply constraints and commodity prices, debt covenants, and potential goodwill or intangible-asset impairment. Goodwill and other intangible assets totaled $6,015.8 million, or 69% of assets; annual impairment testing found no impairment in 2018.
- Environmental reserves were $27.8 million at year-end. AMETEK was a potentially responsible party at 13 non-owned sites and faces groundwater-contamination litigation concerning a former California site; management said these matters were not expected to materially affect results, financial position or cash flows. The filing does not provide a reasonably estimable loss range for that litigation.
- Gross unrecognized tax benefits were $119.3 million, up from $60.3 million. The company also reported $66.8 million remaining cash tax obligation for the one-time deemed-repatriation tax, with $5.9 million payable within twelve months.
- ASC 606 adoption had no significant overall financial-statement impact. The company expected the lease-accounting standard, adopted January 1, 2019, to materially increase balance-sheet assets and liabilities, without significant expected impact on earnings or cash flows.
Important facts for investors to verify
- Separate organic growth and acquired growth, and assess whether backlog converts to sales as expected; approximately 88% of year-end backlog was expected to ship in 2019.
- Review acquisition integration, final purchase-price allocations, and the returns on the $1.13 billion invested in 2018 acquisitions.
- Assess debt and liquidity after acquisitions, share repurchases and dividends, including covenant headroom, borrowing availability and the timing of debt maturities.
- Normalize earnings comparisons for the differing Tax Act impacts and prior-period realignment costs; evaluate the sizable increase in uncertain tax benefits.
- Monitor goodwill and intangible-asset concentration, environmental and legal exposures, and the balance-sheet impact of lease adoption.