AMETEK, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar amounts are in millions unless noted. Comparisons are with the corresponding 2011 periods.
Business context and results
AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Results reflected acquisitions and Operational Excellence initiatives. Management said Q2 set records for orders, operating income, operating margin, net income and diluted EPS.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $825.9 | $758.8 | $1,653.1 | $1,476.6 |
| Operating income | $185.0 | $157.0 | $367.8 | $309.0 |
| Operating margin | 22.4% | 20.7% | 22.2% | 20.9% |
| Net income | $113.7 | $94.1 | $223.8 | $184.6 |
| Diluted EPS | $0.47 | $0.39 | $0.92 | $0.76 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $256.6 | $218.8 |
Q2 sales rose 8.8%, while net income rose 20.8% and diluted EPS rose 20.5%. For the first six months, sales rose 12.0%, net income 21.2%, and diluted EPS 21.1%. Q2 segment operating margin was 23.8%, up from 22.5%; six-month segment margin was 23.6%, up from 22.6%. The six-month effective tax rate was 31.3%, versus 31.8%.
Cash flow, debt and liquidity
- Six-month free cash flow, defined by the company as operating cash flow less capital expenditures, was $236.1 million, versus $198.2 million. EBITDA was $414.1 million, versus $346.0 million.
- Investing cash outflow was $517.7 million, including $497.8 million net cash paid for acquisitions; capital expenditures were $20.5 million. Financing cash inflow was $255.3 million, principally reflecting increased borrowing.
- Cash and equivalents were $163.6 million at June 30, down from $170.4 million at year-end 2011. Total debt was $1,511.6 million, up from $1,263.9 million; debt-to-capital was 39.8%, versus 38.1%. The company reported no significant debt maturities until 2015.
- Available borrowing capacity under the $700 million revolving facility was $490.8 million. AMETEK said it was in compliance with debt covenants and believed available cash, credit and capital sources were sufficient for foreseeable operating needs and obligations. Cash held outside the U.S. was $161.5 million.
Material changes and management outlook
O’Brien Corporation and Dunkermotoren were acquired in January and May 2012, respectively, for aggregate net cash consideration of $497.8 million. The acquisitions added $250.1 million of goodwill and $240.1 million of intangible assets under preliminary purchase-price allocations; valuations and deferred taxes were still being finalized. Their reported-period impact on sales, net income and diluted EPS was described as immaterial. Management expected the acquisitions and Operational Excellence initiatives to benefit the remainder of 2012; no numerical full-year guidance was provided.
Q2 reported sales increased 8.8%, but internal growth was flat, with a weak international environment cited; acquisitions drove the increase, partly offset by a 1% unfavorable currency effect. Six-month internal sales growth was approximately 3%, excluding a 1% unfavorable currency effect. Six-month orders rose 11.5% and backlog reached a record $1,037.6 million, up 13.8% from December 31, 2011; increases were primarily attributable to acquisitions, excluding a 2% unfavorable currency effect.
Interest expense rose 8.7% in Q2 and 9.3% for the six-month period, primarily due to acquisition-related revolving borrowings and a Swiss-franc senior note issued in Q4 2011. The company completed a three-for-two stock split in June 2012 and increased the quarterly dividend 50% to $0.06 per post-split share; share and per-share data were retroactively adjusted.
Risks, contingencies and unusual items
- Management identified risks including economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material availability, regulatory and environmental compliance, and liquidity and financing access.
- Environmental reserves were $24.9 million at June 30, 2012, versus $28.0 million at year-end. AMETEK was named a potentially responsible party at 15 non-owned sites and also reserved for owned-site remediation. Management considered reserves adequate and did not expect environmental matters to materially affect results, financial position or cash flows.
- Gross unrecognized tax benefits were $31.1 million; $28.6 million would affect the effective tax rate if recognized. Specific nonrecurring warranty settlements occurred; the warranty obligation was $25.7 million at period-end.
- Comprehensive income was $88.6 million in Q2 2012 versus $101.3 million in Q2 2011, despite higher net income. The filing attributes differences between net and comprehensive income primarily to currency translation and related items; it does not clearly quantify the specific Q2 drivers.
- Disclosure controls were judged effective at the reasonable-assurance level, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the record backlog converts to revenue and earnings, given flat Q2 internal growth and a weak international environment.
- Integration, final purchase-price allocations, and expected contribution of O’Brien and Dunkermotoren, including amortization of acquired intangibles.
- Debt and interest-cost trajectory after acquisition financing, liquidity availability, and covenant compliance.
- Exposure to currency movements, environmental remediation costs and recoveries, and uncertain tax positions.
- How much reported growth and margin improvement came from acquisitions versus internal performance and Operational Excellence.