AMETEK, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in millions of dollars except per-share data. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG); products include process and analytical instrumentation, aerospace and power, and automation and engineered solutions.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,289.4 | $1,208.9 | $2,577.1 | $2,381.6 |
| Operating income | $295.4 | $270.1 | $578.7 | $528.3 |
| Net income | $215.5 | $193.9 | $419.8 | $375.2 |
| Diluted EPS | $0.94 | $0.83 | $1.83 | $1.61 |
| Operating cash flow | Not separately stated | Not separately stated | $442.6 | $380.5 |
- Q2 sales rose 6.7% year over year, comprising 3% organic growth, 5% from acquisitions, and a 1% unfavorable foreign-currency effect. Net income increased 11.1%; diluted EPS rose 13.3%.
- Six-month sales increased 8.2% (4% organic growth, 6% acquisition contribution, and a 2% unfavorable currency effect); net income increased 11.9% and diluted EPS 13.7%.
- Q2 consolidated operating margin was 22.9%, versus 22.3%; segment operating margin was 24.4%, versus 23.8%. For the six months, consolidated margin was 22.5%, versus 22.2%, and segment margin was 23.9%, versus 23.6%.
- Q2 segment results: EIG sales were $820.2 million, up 10.2%, and operating margin was 26.0%, flat year over year. EMG sales were $469.2 million, up 1.0%, and operating margin rose to 21.5% from 20.3%.
- Cash provided by operations for the first six months rose 16.3%, primarily due to higher net income. Investing activities used $39.6 million, including $43.3 million of capital expenditures; the prior-year period included $374.6 million of net acquisition spending. Financing activities used $191.5 million.
- At June 30, cash was $567.9 million, compared with $354.0 million at year-end 2018. Total debt, net, was $2,467.0 million, versus $2,632.7 million. Net debt-to-capital was 28.9%, down from 34.9%. Available revolving-credit capacity, including the accordion, was $1,965.3 million.
- Current assets were $2,127.2 million and current liabilities $978.6 million. AMETEK reported compliance with debt covenants and said it expects cash generation, credit facilities, and capital-market access to meet foreseeable operating needs and contractual obligations.
Material changes, outlook, and risks
- Management reported record Q2 sales and operating income, strong orders, backlog, margins, net income, diluted EPS, and operating cash flow. Orders increased 3.8% in Q2 and 3.1% for the six months; backlog at June 30 was $1,681.2 million, up 4.9% from December 31, 2018.
- Management expects strong backlog, the full-year contribution from 2018 acquisitions, and continued Operational Excellence initiatives to positively affect the remainder of 2019. The filing provides no numerical full-year guidance.
- Recent acquisitions contributed to growth, while management noted lower margins at recent acquisitions weighed on EIG margins. Operational Excellence initiatives supported consolidated and segment margin improvement.
- Interest expense increased year over year, partly due to senior notes issued in late 2018 and January 2019. Those notes carry a weighted-average rate of 3.93%; proceeds were used to reduce revolver borrowings. The company also reported a $500 million increase in its share-repurchase authorization in February 2019.
- The effective tax rate declined to 20.4% for both Q2 and the six-month period, from 21.9% and 22.5%, respectively. AMETEK attributed the reductions mainly to higher share-based payment tax benefits and a partial release of a state valuation allowance.
- Environmental reserves totaled $28.1 million at June 30. The company is a potentially responsible party at 13 non-owned sites and has groundwater-contamination litigation related to a formerly owned site; management said reserves are adequate and these matters are not expected to materially affect results, financial position, or cash flows. The filing also describes asbestos lawsuits, with certain claims indemnified by a former owner; no judgments had been rendered.
- Forward-looking risks include economic conditions in served industries, competition, international operations, acquisition integration, product development and facility transfers, raw-material prices and availability, regulatory compliance, and access to liquidity and financing. Management stated disclosure controls were effective and reported no materially affecting change in internal control during the quarter.
- AMETEK adopted lease accounting standard ASC 842 on January 1, 2019. It recognized right-of-use assets and lease liabilities; the company said adoption did not significantly affect operations or cash flows.
Important facts for investors to verify
- Whether organic growth and order trends sustain themselves, particularly as acquisition contributions and foreign-currency effects change.
- Whether backlog converts to sales and cash on expected timing, and whether acquisition-related margin pressure in EIG abates.
- Debt and interest costs, revolving-credit availability, and compliance with financial covenants.
- The assumptions, reserves, and potential recoveries associated with environmental obligations and litigation, as well as the status of uncertain tax positions ($128.6 million gross unrecognized tax benefits).
- Actual 2019 performance against management’s qualitative outlook; the filing gives no numerical full-year earnings or sales guidance.