AMETEK, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Financial statements are unaudited. Comparisons are with Q1 2009 unless otherwise noted.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $556.7 million | $552.9 million | +0.7% |
| Operating income | $102.4 million | $106.2 million | -3.6% |
| Operating margin | 18.4% | 19.2% | -0.8 percentage points |
| Net income | $57.9 million | $59.1 million | -2.0% |
| Diluted EPS | $0.54 | $0.55 | -1.8% |
| Operating cash flow | $91.9 million | $110.4 million | -16.8% |
| Capital expenditures | $5.8 million | $6.1 million | |
| Free cash flow | $86.1 million | $104.3 million | |
| EBITDA | $118.5 million | $122.5 million |
Segment operating income was $112.4 million, down 2.5%, and segment margin declined to 20.2% from 20.9%. EIG sales fell 1.3% to $298.7 million; operating income was essentially unchanged at $69.1 million, with margin improving to 23.1% from 22.8%. EMG sales rose 3.0% to $258.0 million, while operating income fell 6.1% to $43.4 million and margin declined to 16.8% from 18.4%.
The effective tax rate was 32.0%, versus 33.4%, primarily reflecting international and state tax-planning benefits. Interest expense was $16.8 million, down 4.5%, mainly due to repayment of pound-denominated revolving debt in 2009. Dividend declared and paid was $0.06 per share, unchanged.
Liquidity, debt and balance sheet
At March 31, cash and cash equivalents were $255.6 million, compared with $246.4 million at December 31, 2009. Total debt was $1,026.7 million, versus $1,041.7 million at year-end; debt-to-capital was 40.2% and net debt-to-capital was 33.6%. The filing reports no significant debt maturities until 2012 and states AMETEK was in compliance with all debt covenants. Management said available cash generation, credit facilities and access to capital should cover foreseeable operating needs and contractual obligations.
Current assets were $996.3 million and current liabilities $449.3 million at March 31. Receivables increased to $356.2 million from $331.4 million at year-end, while inventory declined to $306.0 million from $311.5 million.
Material changes and operating trends
- New orders increased 19.5% to $582.3 million, driven by short-cycle businesses. Backlog rose 3.9% from year-end to $674.0 million.
- Management attributed the modest sales increase to higher order rates, foreign-currency translation and acquisitions, including Ameron Global (acquired December 2009) and Sterling Ultra Precision (acquired January 2010). Internal sales declined approximately 2%.
- International sales rose 7.9% to $285.9 million, or 51.4% of sales, with growth reflecting stronger orders, expansion in Asia and currency translation.
- Lower consolidated operating income and margins reflected the stronger mix of short-cycle businesses, which generally have lower margins. EMG also cited a greater mix of lower-margin cost-driven motors businesses.
- Operating cash flow decreased primarily because higher operating working capital was needed to support business growth.
Outlook, risks and notable items
Management reported improving orders and results compared with Q4 2009 and expected operating results through the rest of 2010 to show further strength compared with 2009. The filing provides no quantified earnings or revenue guidance.
Q1 financing cash outflow included $67.3 million to repurchase 1.8 million shares. The Board had authorized an additional $75 million of repurchases; $76.1 million remained available at March 31. In April, AMETEK repurchased another 0.2 million shares for $9.2 million, leaving $66.9 million available at April 30.
Remaining accruals from 2008 restructuring charges were $11.0 million at March 31, including severance and facility-closure obligations. Gross unrecognized tax benefits were $29.0 million, of which $26.1 million would affect the effective tax rate if recognized. Foreign-currency translation and hedge movements reduced Q1 comprehensive income to $24.7 million from $40.2 million despite net income of $57.9 million.
Risks identified include economic conditions and competition, international operations, acquisition integration, product development and facility or product-line transfers, raw-material prices and availability, regulatory compliance, and maintaining liquidity and financing sources. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order growth and the $674.0 million backlog convert into sustained sales and earnings, given internal sales remained lower year over year.
- Whether margin pressure from short-cycle and lower-margin product mix persists, particularly in EMG.
- How working-capital requirements affect cash generation as sales and orders grow.
- The pace and price of further share repurchases and the resulting effect on liquidity and share count.
- Potential outcomes for the $29.0 million of unrecognized tax benefits and the remaining restructuring obligations.
- Acquisition contribution and integration, foreign-exchange exposure, and debt covenant and refinancing conditions.