AMETEK, Inc. — Q2 2009 Form 10-Q Summary
Business context and period. This unaudited filing covers the three and six months ended June 30, 2009. AMETEK reports two segments: Electronic Instruments (EIG) and Electromechanical (EMG). Management attributed weaker results chiefly to the global recession and lower order rates; recent acquisitions partly offset declines in established businesses.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $524.9 million | $648.8 million | $1,077.8 million | $1,260.0 million |
| Operating income | $93.2 million | $114.1 million | $199.4 million | $230.3 million |
| Operating margin | 17.8% | 17.6% | 18.5% | 18.3% |
| Net income | $51.8 million | $65.8 million | $110.9 million | $132.2 million |
| Diluted EPS | $0.48 | $0.61 | $1.03 | $1.23 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $184.2 million | $141.8 million |
| Free cash flow | Not stated for quarter | Not stated for quarter | $169.0 million | $121.9 million |
Q2 sales declined 19.1%; management reported internal sales down about 21%, including a 4% unfavorable currency effect, with acquisitions offsetting approximately 6% of the internal decline. First-half sales fell 14.5%; internal sales declined about 19%, including a 4% unfavorable currency effect, with acquisitions offsetting approximately 8% of the decline. Q2 segment operating income was $101.3 million, down 22.8%, and segment margin decreased to 19.3% from 20.2%.
Q2 interest expense rose 11.8% to $17.1 million; the six-month amount rose 13.8% to $34.7 million, reflecting funding of long-term private-placement notes in 2008. Effective tax rates were 31.0% for Q2 and 32.3% for the first half, lower than the comparable periods primarily due to settlements of income tax examinations.
Financial condition and cash flow
At June 30, 2009, cash and cash equivalents were $137.4 million, versus $87.0 million at year-end 2008. Total debt was $1,059.0 million, down from $1,111.7 million; long-term debt was $1,053.9 million. Debt-to-capital was 42.6%, compared with 46.3%, and net debt-to-capital was 39.3%, compared with 44.3%. AMETEK repaid $62.0 million of a British-pound revolving-credit borrowing in Q2 and had no revolver borrowings at quarter-end. It did not renew its $100 million receivables securitization facility in May. Management reported no significant debt maturities until 2012.
First-half operating cash flow increased 29.9%, with lower operating working capital and a tax refund contributing; this was partly offset by lower net income and $19.0 million of pension contributions, versus $1.8 million in the prior-year period. Capital expenditures were $15.2 million, down from $19.9 million. Investing cash use was $54.9 million, including approximately $40.2 million for the High Standard Aviation acquisition. Financing activities used $81.3 million, including a $76.0 million net reduction in borrowings. Management said the company was in compliance with debt covenants and believed available cash generation, credit facilities, and capital access would meet foreseeable operating needs.
Material changes, outlook, and risks
- New orders in the first half were $972.4 million, down 28.9%; backlog at June 30 was $613.2 million, down 14.7% from December 31, 2008.
- Both segments experienced lower sales. EIG was particularly affected by weakness in process and industrial products; EMG by engineered materials, interconnects and packaging, and cost-driven motors. Acquisitions and cost reductions partly cushioned declines. EMG first-half margin rose to 17.9% from 17.4%; EIG margin fell to 21.9% from 23.0%.
- Management expected the recession to continue negatively affecting 2009 results, while the full-year contribution from 2008 acquisitions and Operational Excellence initiatives was expected to be positive. The filing provides no specific numerical earnings or sales guidance.
- Fourth-quarter 2008 restructuring charges totaled $40.0 million pre-tax, including employee reductions, facility closures, and asset write-downs. The remaining restructuring accrual was $21.4 million at June 30, 2009; substantially all severance and lease-termination payments were expected in 2009. Management cited cost savings from accelerated restructuring activity.
- Q2 2008 included a $7.1 million corporate charge related to accelerated vesting of restricted stock, making year-over-year SG&A and corporate expense comparisons more favorable in 2009. First-half defined-benefit pension expense increased to $5.2 million from a $3.5 million credit in the prior-year period.
- Disclosed risks include economic and industry conditions, competition, international operations, acquisition integration, product development and facility transfers, raw-material prices and availability, regulation, and access to liquidity and financing. Management said liquidity had not been affected by the financial crisis and was not expected to be affected in the near future.
Important facts for investors to verify
- Whether order rates and backlog stabilize after the sharp first-half declines, and how these trends affect sales and margins.
- Whether cost reductions and acquisition contributions can offset recession-driven weakness, particularly in EIG’s exposed businesses.
- Debt repayment capacity, covenant compliance, and liquidity after nonrenewal of the receivables securitization facility.
- Remaining restructuring payments, pension funding needs, and the effect of higher pension expense on earnings.
- Final purchase-price allocation for High Standard Aviation and developments in the $22.5 million of gross unrecognized tax benefits.