Business Context and Reporting Period
AMETEK, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial Performance and Position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $591.9 | $524.9 | $1,148.6 | $1,077.8 |
| Operating income | $115.6 | $93.2 | $218.0 | $199.4 |
| Operating margin | 19.5% | 17.8% | 19.0% | 18.5% |
| Net income | $67.4 | $51.8 | $125.3 | $110.9 |
| Diluted EPS | $0.63 | $0.48 | $1.17 | $1.03 |
- For the six months, cash from operations was $180.4, capital expenditures were $12.7, and reported free cash flow was $167.7, versus $184.2, $15.2, and $169.0, respectively, in 2009. Operating cash flow was lower primarily because of working capital needed to support growth.
- Cash and cash equivalents were $230.8 at June 30, 2010, down from $246.4 at year-end 2009. Current assets were $984.9 and current liabilities were $462.4.
- Total debt was $1,014.1, compared with $1,041.7 at December 31, 2009. Debt-to-capital was 39.5% and net debt-to-capital was 33.5%; the company reported no significant debt maturities until 2012 and compliance with all debt covenants.
- Dividends were $0.06 per share in Q2 and $0.12 per share for the first half, unchanged from the comparable 2009 periods.
Material Changes Versus Prior Period
- Q2 sales increased 12.8% year over year, including approximately 12% internal growth; acquisitions contributed the remainder. For the first half, sales rose 6.6%, with approximately 5% internal growth, excluding a 1% favorable currency effect.
- Q2 net income rose 30.1% and diluted EPS rose 31.3%. First-half net income rose 13.0% and diluted EPS rose 13.6%.
- Q2 segment operating margin increased to 21.3% from 19.3%, which management attributed to sales leverage and Operational Excellence cost initiatives. EIG and EMG Q2 sales rose 8.2% and 18.1%, respectively.
- First-half new orders increased 26.1% to $1,226.1; backlog at June 30 was $725.9, up 12.0% from December 31, 2009.
- Share repurchases used $78.6 of cash for 2.0 million shares in the first half; none were reported for the first half of 2009. First-half cash acquisitions totaled $92.7, versus $38.4 in 2009.
Outlook, Risks, Contingencies, and Unusual Items
- Management said order strength continued into 2010 and expected operating results for the remainder of 2010 to be stronger than in 2009. The filing provides no quantified full-year guidance.
- In July 2010, after quarter-end, AMETEK acquired Haydon Enterprises for approximately $270 million in cash, funded with operating cash and revolver borrowings. Haydon had estimated annual sales of approximately $85 million.
- 2010 acquisitions included TSE, Sterling Ultra Precision, and Imago Scientific Instruments. The $92.7 million aggregate purchase-price allocation was preliminary; $58.9 million was assigned to goodwill and $41.0 million to intangibles, subject to valuation adjustments.
- Risks identified include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material prices and availability, regulatory compliance, and liquidity and financing access.
- At June 30, the company reported $26.2 million of gross unrecognized tax benefits, including $21.7 million that would affect the effective tax rate if recognized. Remaining accruals from 2008 restructuring actions were $9.4 million.
- Foreign currency translation reduced first-half comprehensive income; the company also uses pound- and euro-denominated debt as net-investment hedges. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether order growth and the $725.9 million backlog convert into sustained sales and margins, and how much growth is organic versus acquisition-related.
- The financing and balance-sheet effects of the Haydon acquisition, including revolver usage and subsequent debt levels.
- Final acquisition purchase-price allocations and the performance and integration of acquired businesses.
- Working-capital trends, free cash flow, and the company’s capacity to fund acquisitions, repurchases, and dividends while maintaining covenant compliance.
- Potential outcomes of uncertain tax positions, restructuring obligations, and warranty claims; the filing notes some warranty settlements were nonrecurring but does not quantify them separately.