AMETEK, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results; amounts below are in millions except per-share data. AMETEK reports Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $990.7 | $878.8 | $1,966.0 | $1,761.7 |
| Operating income | $231.7 | $202.6 | $453.4 | $399.8 |
| Operating margin | 23.4% | 23.1% | 23.1% | 22.7% |
| Net income | $150.1 | $128.3 | $290.6 | $253.5 |
| Diluted EPS | $0.61 | $0.52 | $1.18 | $1.03 |
| Segment operating margin | 24.6% | 24.2% | 24.3% | 24.0% |
- Q2 sales increased 12.7%; management attributed the increase to approximately 4% internal growth, 8% acquisitions, and a favorable 1% currency effect. Orders rose 20.5% to $1,078.6 million. Backlog reached a record $1,251.0 million at June 30, up 9.7% from year-end 2013.
- For the first half, sales grew 11.6%, with approximately 4% internal growth, 7% acquisition contribution, and a favorable 1% currency effect. Orders increased 17.2% to $2,077.0 million.
- Q2 effective tax rate was 28.0%, versus 29.4%; first-half rate was 28.6%, versus 29.2%. AMETEK cited a greater proportion of lower-taxed foreign earnings and international tax planning benefits.
- Segment trends differed: Q2 EIG sales rose 18.6%, while its margin declined to 26.4% from 26.8%, partly because recent acquisitions had lower margins. EMG sales rose 5.5% and its margin improved to 22.1% from 21.1%. First-half EIG margin fell to 26.3% from 27.0%; EMG margin increased to 21.5% from 20.3%.
Cash flow, liquidity, and debt
- First-half operating cash flow was $316.0 million, compared with $285.0 million; free cash flow, defined by the company as operating cash flow less capital expenditures, was $286.8 million versus $263.4 million. Capital expenditures were $29.3 million.
- Investing activities used $485.7 million, primarily reflecting $458.7 million spent net of cash acquired on four acquisitions. Financing activities provided $158.1 million, including a $181.1 million net increase in short-term borrowings. Cash declined $12.4 million to $282.8 million.
- At June 30, cash was $282.8 million, current assets $1,530.7 million, and current liabilities $1,121.8 million. Total debt was $1,602.7 million, versus $1,415.1 million at December 31, 2013. Debt-to-capital was 31.9%, up from 31.1%; net debt-to-capital was 27.8%, up from 26.3%. Management reported no significant debt maturities until Q3 2015 and compliance with debt covenants.
- Cash dividends paid in the first half were $36.7 million. The quarterly dividend was raised 50%, to $0.09 per share from $0.06.
Material changes, outlook, and risks
- AMETEK acquired Teseq, VTI Instruments, Luphos, and Zygo during the first half for $458.7 million in aggregate, net of cash acquired. The acquisitions were assigned preliminary goodwill of $194.3 million and intangible assets of $219.3 million; purchase accounting was not final. Their reported impact on first-half sales, net income, and diluted EPS was described as immaterial. An additional acquisition, Amptek, was completed in August 2014 for approximately $115 million, after the reporting period.
- Management said the full-year impact of recent acquisitions and continued Operational Excellence initiatives was expected to benefit the remainder of 2014. The filing provides no specific full-year revenue or EPS guidance.
- Risks identified include economic and competitive conditions, international operations, acquisition completion and integration, product development and facility transfers, raw-material prices and availability, environmental regulation, and maintaining liquidity and financing sources.
- Unrecognized tax benefits totaled $76.1 million, of which $69.9 million would affect the effective tax rate if recognized. Environmental reserves were $21.4 million. AMETEK reported asbestos-related lawsuits but no judgments to date and said it intends to defend the claims. Management did not expect environmental matters to materially affect results, financial position, or cash flows; actual remediation costs could differ from estimates.
- Acquisition-related expenses contributed to higher first-half other expenses. The company also disclosed certain specific, nonrecurring warranty settlements; the amount was not separately stated.
Important facts for investors to verify
- Whether order growth and the record backlog convert into sustained organic sales growth.
- Acquisition integration, final purchase-price allocations, and the acquired businesses’ effect on EIG margins and amortization expense.
- Working-capital requirements, acquisition-funded borrowing, and debt levels relative to cash generation.
- Exposure to uncertain tax positions, environmental remediation, asbestos claims, and warranty obligations.
- Progress against management’s stated expectation of continued benefits from acquisitions and Operational Excellence initiatives; no numerical full-year guidance was provided in this filing.