AMETEK, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,003.7 million | $990.7 million | $1,987.8 million | $1,966.0 million |
| Operating income | $240.3 million | $231.7 million | $461.3 million | $453.4 million |
| Net income | $155.5 million | $150.1 million | $297.6 million | $290.6 million |
| Diluted EPS | $0.64 | $0.61 | $1.22 | $1.18 |
| Operating margin | 23.9% | 23.4% | 23.2% | 23.1% |
Q2 sales rose 1.3%, while internal sales were flat; acquisitions added 5% and foreign-currency translation reduced sales by 4%. Q2 segment operating margin increased to 25.2% from 24.6%. For the first half, segment operating margin was 24.5% versus 24.3%, including an 80-basis-point negative impact from restructuring charges. Interest expense rose 19.5% in Q2 and 20.1% in the first half, primarily reflecting senior-note funding. The effective tax rate was 27.7% for Q2 and 27.8% for the first half, down from 28.0% and 28.6%, respectively.
Segments and operating trends
- Electronic Instruments Group (EIG): Q2 sales increased 4.0% to $596.5 million and operating income increased 8.3% to $164.0 million; margin rose to 27.5% from 26.4%. First-half sales rose 3.9% to $1,190.3 million.
- Electromechanical Group (EMG): Q2 sales decreased 2.4% to $407.3 million and operating income decreased 3.0% to $89.3 million; margin was 21.9% versus 22.1%. First-half sales fell 2.8% to $797.5 million.
- New orders declined 4.0% in Q2 and 4.7% for the first half. Backlog was $1,188.2 million at June 30, down 0.8% from year-end.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $285.4 million, down 9.7%; free cash flow, defined by the company as operating cash flow less capital expenditures, was $259.4 million versus $286.8 million. The operating cash-flow decline primarily reflected pension contributions of $51.6 million versus $1.9 million, including a $50 million U.S. plan contribution.
- Capital expenditures were $26.0 million. Investing cash outflow was $224.8 million, including $198.8 million net cash paid for Global Tubes. Financing cash outflow was $98.2 million; the company repurchased $57.2 million of stock and paid $43.3 million of dividends.
- Cash was $326.6 million at June 30, 2015, versus $377.6 million at year-end; $248.3 million was held outside the United States. Current assets were $1,599.3 million and current liabilities $830.1 million.
- Total debt was $1,665.8 million, versus $1,714.0 million at year-end. Debt-to-capital was 32.5% and net debt-to-capital 27.9%. The company reported compliance with debt covenants and said it expected available cash generation, credit facilities, and capital-market access to meet foreseeable needs. $145.8 million of debt was due in Q3 2015.
- In June, AMETEK issued $50 million of 3.91% senior notes due 2025; a further $150 million funding was planned for August under the private placement. Notes carry customary financial covenants.
Material changes, outlook, and risks
- Management cited acquisitions and Operational Excellence initiatives as contributors to results and expected them to support the remainder of 2015. A stronger U.S. dollar was expected to remain a headwind; management also cited a weak global economy. The filing provides no numerical earnings or sales guidance.
- Global Tubes was acquired in May for $198.8 million net of cash acquired; its reported-period impact was immaterial. The preliminary purchase allocation included $85.7 million of goodwill and $79.9 million of intangibles, and $8.4 million of environmental liabilities. In July, after quarter-end, AMETEK acquired Cognex’s Surface Inspection Systems Division for approximately $160 million; estimated annual sales were approximately $60 million.
- First-quarter 2015 restructuring charges were $15.9 million pre-tax ($10.8 million reduction in net income, or $0.04 per diluted share), mainly for workforce reductions in response to currency and economic conditions. $11.0 million remained accrued at June 30.
- Other risks identified include economic and competitive conditions, international operations, acquisition integration, product development and facilities, raw-material availability, environmental and other regulatory compliance, and liquidity and financing access.
- Environmental reserves were $33.2 million at June 30, including the Global Tubes accrual. Management stated that known obligations were adequately reserved and did not expect environmental matters to materially affect consolidated results, financial position, or cash flows. AMETEK also disclosed asbestos litigation; no judgments had been rendered against it, and it intended to defend the claims.
Important facts for investors to verify
- Whether order declines, backlog trends, and flat internal sales continue, particularly given currency pressure and international-market exposure.
- Whether operational improvements offset restructuring costs, acquisition integration effects, and the lower margins of Global Tubes.
- Cash conversion and liquidity after the unusually large pension contribution, the Q3 debt maturity, and the planned August note funding.
- Final purchase accounting and environmental exposure for Global Tubes, and the subsequent SISD acquisition’s actual contribution and integration costs.
- Potential effects of uncertain tax positions, environmental and asbestos matters, and debt-covenant requirements.