AMETEK, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. AMETEK operates through Electronic Instruments (EIG) and Electromechanical (EMG), serving industrial, process, aerospace, power, medical, and other markets. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,193.0 | $1,084.8 | $3,574.5 | $3,157.1 |
| Operating income | $265.3 | $230.0 | $793.5 | $677.0 |
| Net income | $191.2 | $153.5 | $566.4 | $442.9 |
| Diluted EPS | $0.82 | $0.66 | $2.43 | $1.91 |
| Operating cash flow | Not provided separately | Not provided separately | $629.4 | $580.4 |
- Q3 sales increased 10.0%; management attributed the gain to 7% organic growth and 3% from acquisitions, with currency essentially flat. Nine-month sales rose 13.2%, reflecting 8% organic growth, 4% acquisition contribution, and a favorable 1% currency effect.
- Consolidated operating margin was 22.2% in Q3 2018 versus 21.2% in Q3 2017, and 22.2% for the first nine months versus 21.4%. Segment operating margin was 23.7% in both 2018 periods, compared with 22.7% for Q3 2017 and 23.1% for the first nine months of 2017.
- Cost of sales was 65.6% of sales in Q3 versus 66.6%; for nine months, 65.8% versus 66.3%. SG&A was 12.1% of Q3 sales versus 12.2%, and 12.0% for nine months versus 12.3%.
- Q3 effective tax rate was 21.9% versus 24.9%; the nine-month rate was 22.3% versus 26.1%. Interest expense declined to $19.4 from $24.7 in Q3 and to $61.9 from $73.8 for nine months, primarily following repayments of senior notes.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $629.4, up 8.4%. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $581.9 versus $534.8. Capital expenditures were $47.5. EBITDA was $935.5 versus $802.6.
- Investing activities used $424.3, including $376.2 net cash spent on acquisitions. Financing activities used $317.2, including $240.0 of long-term debt repayments and $97.0 of dividends.
- At September 30, cash and cash equivalents were $518.7, down from $646.3 at year-end 2017. Total debt, net was $1,901.3, versus $2,174.3. Debt-to-capital was 29.6% versus 35.1% at year-end; net debt-to-capital was 23.5% versus 27.5%.
- Management reported $1.1 billion of available revolving-credit capacity at September 30, including an accordion feature. In October, the facility was refinanced as a $1.5 billion five-year revolver, with an additional $500 million accordion; reported available capacity at October 31 was $1.7 billion, including the accordion. AMETEK said it was in compliance with debt covenants and expected available cash, credit, and capital-market access to meet foreseeable needs.
- The quarterly dividend increased 56%, from $0.09 to $0.14 per share effective February 1, 2018. Cash dividends paid during the first nine months were $97.0 versus $62.0.
Segments and material changes
- EIG: Q3 sales were $742.0, up 10.5%, and operating income was $190.3, up 16.7%; operating margin increased to 25.6% from 24.3%. Nine-month sales were $2,202.9, up 13.0%, and operating income was $567.5, up 17.7%.
- EMG: Q3 sales were $450.9, up 9.1%, and operating income was $92.7, up 11.6%; operating margin increased to 20.6% from 20.1%. Nine-month sales were $1,371.6, up 13.5%, and operating income was $277.9, up 13.0%; margin was 20.3% versus 20.4%.
- Orders increased 6.2% in Q3 and 11.5% for the first nine months. Backlog at September 30 was $1,589.3, up 13.8% from December 31, 2017. International sales accounted for 50.0% of Q3 sales and 50.9% of nine-month sales.
- Acquisitions completed in 2018 were FMH Aerospace, SoundCom Systems, and Motec, for $376.2 net cash consideration; their reported impact on 2018 sales, net income, and diluted EPS was immaterial. In October, AMETEK acquired Telular and Forza for approximately $565 million in cash. The company also expects to pay a $30 million contingent amount related to the Rauland acquisition in Q4 2018.
Outlook, risks, and unusual items
- Management cited positive market trends, strong backlog, the full-year contribution from acquisitions, and continued Operational Excellence initiatives as expected to support the remainder of 2018. The filing does not provide specific numerical earnings or revenue guidance.
- The $16.0 million net tax expense from remeasuring a prior-year uncertain tax position affected the 2018 tax rate. Gross unrecognized tax benefits were $70.9 million, of which $57.0 million would affect the effective tax rate if recognized. The 2017 comparison periods were retrospectively adjusted for pension-cost presentation; adoption of the new revenue standard had no significant reported impact.
- AMETEK had $27.8 million in environmental reserves at September 30 and described asbestos litigation and groundwater-contamination lawsuits. Management said reserves were adequate and did not expect these matters to materially affect results, financial position, or cash flows. Legacy restructuring liabilities were $8.2 million for 2016 actions and $5.5 million for 2015 actions; most remaining actions were expected to be completed in the first half of 2019.
- Risks identified include economic and competitive conditions, international operations, acquisition execution and integration, new-product and facility development, raw-material costs and availability, regulatory compliance, and access to liquidity and financing.
- The company had not determined the balance-sheet and other effects of the new lease standard, effective for it in 2019; it noted the effect on financial position could be significant. Tax Act estimates remained provisional, and the company was still evaluating GILTI accounting.
Important facts for investors to verify
- Whether strong orders and the $1,589.3 million backlog convert into sustained organic sales growth and margins.
- Post-quarter financing and leverage effects of the $565 million Telular and Forza acquisitions, and the integration performance of recent acquisitions.
- The final outcome of provisional Tax Act estimates, GILTI accounting, and uncertain tax positions.
- Updates to environmental and litigation reserves, including the El Cajon groundwater matters and recoveries from third parties.
- The eventual balance-sheet impact of lease-standard adoption and any changes in the company’s liquidity or covenant position.