AMETEK, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Figures are unaudited. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and performance
AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Management attributed growth to stronger order rates, internal growth, acquisitions, international expansion, and Operational Excellence initiatives.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $750.5 | $644.4 | $2,227.2 | $1,793.0 |
| Operating income | $159.6 | $128.6 | $468.6 | $346.6 |
| Operating margin | 21.3% | 20.0% | 21.0% | 19.3% |
| Net income | $98.0 | $77.4 | $282.6 | $202.7 |
| Diluted EPS | $0.60 | $0.48 | $1.74 | $1.26 |
- Sales increased 16.5% in Q3 and 24.2% year to date. Management reported internal sales growth of approximately 8% in Q3 and 13% year to date, excluding favorable foreign currency effects; acquisitions contributed the remainder of the increases.
- Q3 segment operating income was $170.8 million, up 23.0%, with a 22.8% segment margin versus 21.5%. Year-to-date segment operating income was $504.3 million, up 33.7%, with a 22.6% margin versus 21.0%.
- Q3 EIG sales rose 21.3%, with a 25.0% operating margin; EMG sales rose 11.2%, with a 20.0% margin. Year-to-date sales increased 27.4% for EIG and 20.6% for EMG.
- Effective tax rate was 29.5% in Q3 versus 28.9%, and 31.0% year to date versus 30.4%.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $355.8 million, up 20.7%; capital expenditures were $32.4 million and free cash flow (company-defined as operating cash flow less capex) was $323.4 million, versus $272.2 million in 2010.
- Cash and cash equivalents were $218.3 million at September 30, 2011, compared with $163.2 million at year-end 2010. Total debt was $1,111.2 million versus $1,168.5 million; debt-to-capital was 35.2% versus 39.7%, and net debt-to-capital was 30.4% versus 36.2%.
- AMETEK reported $644.9 million of available capacity under its new five-year $700 million revolving facility. The company said it was in compliance with debt covenants and expected cash generation, credit facilities, and capital-market access to cover foreseeable operating needs and obligations.
- Nine-month acquisition spending was $183.0 million; share repurchases were $16.4 million and dividends paid were $28.8 million. The quarterly dividend declared and paid was $0.06 per share, versus $0.04 a year earlier.
Material changes, outlook, and notable items
- Acquisitions of Avicenna and Coining were completed in April and May 2011 for $183.0 million net of acquired cash. Their reported contribution to 2011 results was immaterial. Atlas, acquired in November 2010, also contributed to year-over-year growth.
- After quarter-end, AMETEK acquired Reichert Technologies for $150 million and EM Test for 83 million Swiss francs (reported as $93 million). Their estimated annual sales were $55 million and 37 million Swiss francs ($41 million), respectively.
- Management expected operating results for the remainder of 2011 to show continued strength compared with 2010. This was qualitative commentary, not quantified guidance. Backlog was $925.7 million at September 30, up 11.7% from year-end 2010; nine-month orders rose 20.4%.
- A restricted-stock accelerated-vesting provision generated a $5.2 million pretax charge ($3.6 million after tax) in the first nine months. Q3 operating cash flow and several earnings measures were reported as records.
- Environmental reserves were $29.6 million. The filing identifies potential variability in remediation costs but says management does not expect the matters to materially affect results, financial position, or cash flows. Gross unrecognized tax benefits were $26.3 million, of which $23.7 million would affect the effective tax rate if recognized.
- Risks cited include economic and competitive conditions, international operations, acquisition execution and integration, product development and facility transfers, raw-material availability and pricing, regulatory compliance, and liquidity or financing access. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and margin improvement is attributable to sustainable base-business demand and operational savings versus acquisitions and currency effects.
- Whether order growth and backlog convert into sales and cash flow, particularly amid higher working-capital needs.
- Integration performance, purchase accounting, and returns from the 2011 acquisitions and the two post-quarter acquisitions.
- Debt, covenant headroom, and capital-allocation priorities, including the expanded share-repurchase authorization and subsequent repurchases.
- Whether environmental remediation estimates, third-party recoveries and indemnities, or uncertain tax positions change materially.