AMETEK, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared with the same periods in 2013. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,031.8 million (+15.9%) | $890.0 million | $2,997.8 million (+13.1%) | $2,651.7 million |
| Operating income | $218.1 million (+6.5%); 21.1% margin | $204.7 million; 23.0% margin | $671.5 million (+11.1%); 22.4% margin | $604.5 million; 22.8% margin |
| Net income | $141.8 million (+10.9%) | $127.9 million | $432.5 million (+13.4%) | $381.3 million |
| Diluted EPS | $0.57 (+9.6%) | $0.52 | $1.75 (+12.9%) | $1.55 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $512.7 million | $451.1 million |
- For the first nine months, free cash flow (operating cash flow less capital expenditures) was $465.4 million, versus $414.0 million; EBITDA was $757.0 million, versus $679.5 million.
- Q3 sales growth reflected approximately 3% internal growth, 12% from acquisitions, and the remainder from foreign currency translation. Nine-month growth reflected approximately 3% internal growth and 9% from acquisitions, with currency accounting for the remainder.
- EIG Q3 sales rose 26.4% to $631.6 million; EMG sales rose 2.6% to $400.2 million. EIG operating margin fell to 23.5% from 27.8%; EMG margin improved to 20.5% from 19.9%.
Financial condition and material changes
- At September 30, cash and equivalents were $369.6 million, up from $295.2 million at year-end 2013. Current assets were $1.59 billion and current liabilities $831.7 million.
- Total debt was $1.637 billion, versus $1.415 billion at December 31, 2013. Debt-to-capital was 32.1% (31.1% at year-end); net debt-to-capital was 26.8% (26.3%). AMETEK reported compliance with debt covenants and no significant maturities until Q3 2015, when $153.1 million is due.
- Investing cash outflow was $617.6 million, primarily reflecting $573.6 million spent, net of cash acquired, on five 2014 acquisitions: Teseq, VTI, Luphos, Zygo and Amptek. The acquisitions were assigned $267.4 million of goodwill and $275.9 million of intangible assets; their reported-period earnings impact was described as immaterial.
- The company issued $500 million of a planned $700 million private placement of senior notes in September, with additional fundings scheduled for June and August 2015. The notes carry a 3.88% weighted average rate and customary financial covenants. Proceeds from the first funding repaid domestic revolver borrowings.
- Backlog was $1.215 billion at September 30, up 6.6% from December 31, 2013. Q3 orders increased 6.3% year over year; nine-month orders increased 13.4%.
Outlook, commentary, risks and unusual items
- Management said 2014 acquisitions and continued Operational Excellence initiatives were expected to benefit the remainder of 2014. No specific full-year earnings or revenue guidance is provided in the filing text.
- Q3 segment margin was affected by $9.1 million of Zygo severance charges and a $4.5 million fair-value inventory adjustment. The prior-year quarter included an $11.6 million facility-sale gain, also affecting the comparison.
- The Q3 effective tax rate was 25.3%, versus 29.0%; the nine-month rate was 27.6%, versus 29.2%. A $12.9 million release of uncertain tax-position liabilities related to an acquired entity reduced the 2014 rate. Other expense included a $5.5 million reversal of an insurance-policy receivable connected with that tax matter.
- Comprehensive income was $58.4 million in Q3, versus $171.8 million, and $356.2 million for nine months, versus $401.7 million. The filing reports substantial foreign-currency-related other comprehensive losses in 2014.
- Gross unrecognized tax benefits were $67.8 million, of which $61.2 million would affect the effective tax rate if recognized. Environmental reserves totaled $25.2 million; management said known environmental and other contingencies were adequately reserved and not expected to materially affect results. AMETEK also faces asbestos-related lawsuits; it reported no judgments against it to date and intends to defend the claims.
- Risks identified include economic and competitive conditions, international operations, acquisition execution and integration, product development and facility transfers, raw-material availability, regulatory compliance, and liquidity and financing access. Management stated it believed available cash, credit and capital access were sufficient for foreseeable needs.
- The board approved a $200 million increase in its share-repurchase authorization on November 5, 2014. The quarterly dividend had been increased 50% in May 2014, to $0.09 per share.
Important facts for investors to verify
- Whether acquired businesses deliver expected growth and synergies, and how Zygo integration costs affect margins.
- Debt levels, scheduled 2015 note fundings, covenant headroom and the company’s ability to fund acquisitions while maintaining liquidity.
- The sustainability of organic order growth and backlog conversion, particularly across EIG and EMG.
- Potential changes in tax reserves and the effect of the acquired-entity tax matter, including the insurance-receivable reversal.
- Environmental and asbestos exposure, reserve adequacy, and the progress of third-party indemnifications and recoveries.
- Currency effects, which materially affected other comprehensive income and contributed to the change in comprehensive income.