AMETEK, Inc. — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial results and position
- Revenue: $717.8 million, up 28.9% from $556.7 million. Management attributed approximately 18% internal sales growth, with no foreign-currency translation impact; acquisitions accounted for the remainder of the increase. International sales were $361.4 million, or 50.3% of sales.
- Profit and margins: Operating income was $152.0 million, up 48.4%; consolidated operating margin was 21.2%, versus 18.4%. Net income was $90.4 million, up 56.1%. Diluted EPS was $0.56, versus $0.36. Segment operating income was $162.9 million, with a 22.7% segment margin versus 20.2%.
- Segments: EIG sales were $388.8 million (+30.2%) and operating income $100.0 million (+44.7%); its margin increased to 25.7% from 23.1%. EMG sales were $328.9 million (+27.5%) and operating income $62.9 million (+44.9%); its margin increased to 19.1% from 16.8%.
- Cash flow: Operating cash flow was $103.6 million, versus $91.9 million. Capital expenditures were $10.4 million, resulting in company-reported free cash flow of $93.3 million versus $86.1 million. Reported EBITDA was $170.2 million versus $118.5 million. Cash declined to $155.0 million from $163.2 million.
- Debt and liquidity: Total debt was $1,083.3 million at March 31, down from $1,168.5 million at December 31, 2010. Debt-to-capital was 36.5%, versus 39.7%; net debt-to-capital was 33.0%, versus 36.2%. The filing reports no significant debt maturities until 2012 and compliance with all debt covenants. Management says cash generation, credit facilities, and capital-market access are sufficient for foreseeable operating needs and obligations.
- Other balance-sheet items: Total assets were $3,893.3 million and stockholders’ equity was $1,882.2 million. Inventories were $351.4 million, versus $335.3 million at year-end. Dividends declared and paid were $0.06 per share, up from $0.04.
Material changes and management commentary
- Orders rose 37.2% to $798.7 million; internal order growth was approximately 22%, excluding a 3% favorable currency effect. Backlog reached a record $909.7 million, up 9.8% from December 31, 2010.
- Management said Q1 set records for orders, sales, operating income, operating margin, net income, and diluted EPS, and expected strength in operating results to continue through the remainder of 2011. This is qualitative commentary, not quantified full-year guidance.
- Management attributed margin improvement to sales leverage and Operational Excellence cost initiatives. Acquisitions contributing to Q1 growth included Technical Services for Electronics, Haydon Enterprises, Atlas Material Testing Technology, Imago Scientific Instruments, and American Reliance’s Power Division.
- In April 2011, AMETEK acquired Avicenna Technology, a medical-device component supplier with estimated annual sales of approximately $25 million; it will join EMG.
Risks, contingencies, and unusual items
- Environmental matters: Environmental reserves were $31.2 million at March 31, 2011. The company reported $14.8 million in receivables for probable third-party recoveries related to an acquired site and approximately $19.0 million of additional indemnification from former owners. Management does not expect remediation costs to materially affect consolidated results, financial position, or cash flows, while noting actual costs could differ from estimates.
- Asbestos litigation: AMETEK is a defendant in asbestos-related lawsuits; no judgments had been rendered against it. The company says it has strong defenses and intends to defend the claims. Some claims are subject to indemnification, including by a party that entered bankruptcy liquidation.
- Tax positions: Gross unrecognized tax benefits were $25.8 million, of which $21.2 million would affect the effective tax rate if recognized.
- Share-based compensation event: On April 6, 2011, 509,709 restricted shares vested under an accelerated-vesting provision. The company expects a $5.2 million pretax ($3.6 million after-tax) charge in Q2 2011.
- Other risks: The filing identifies economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material availability and prices, regulatory compliance, and liquidity and financing access as factors that could affect future results.
Most important facts to verify
- Whether strong orders and the record backlog convert into sustained sales and margins, and whether the qualitative outlook is reflected in subsequent results.
- Acquisition performance and integration, including Avicenna’s final purchase details and contribution.
- The timing and amount of the accelerated-vesting charge and any other share-based compensation effects.
- Developments in environmental remediation, indemnification recoveries, asbestos claims, and uncertain tax positions.
- Debt maturities, covenant compliance, and cash-flow capacity as working-capital needs change.