Business context and reporting period
AMETEK, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. It manufactures electronic instruments and electromechanical products through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG), serving industrial, process, power, aerospace, defense, medical and other markets. Nearly half of sales were international.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $2,471.0 million | $2,098.4 million |
| Operating income | $482.2 million | $366.1 million |
| Operating margin | 19.5% | 17.4% |
| Net income | $283.9 million | $205.8 million |
| Diluted EPS | $1.76 | $1.27 |
| Cash from operations | $423.0 million | $364.7 million |
| Free cash flow* | $383.8 million | $331.6 million |
Sales increased 17.8%, net income 37.9%, and diluted EPS 38.6%. Internal sales growth was approximately 13%; acquisitions contributed the balance of the sales increase. Segment operating margin rose to 21.3% from 19.0%, with management citing higher sales and Operational Excellence cost initiatives.
2010 segment results: EIG sales were $1,324.1 million and operating income $316.2 million (23.9% margin); EMG sales were $1,146.8 million and operating income $210.4 million (18.3% margin). New orders rose 30.7% to $2,651.3 million, and year-end backlog reached a record $828.8 million, up 27.8% year over year.
For the fourth quarter, sales were $678.0 million, operating income $135.5 million, net income $81.2 million and diluted EPS $0.50. Compared with fourth-quarter 2009, sales increased from $523.5 million, operating income from $89.2 million, net income from $51.9 million and diluted EPS from $0.32.
At year-end, cash and cash equivalents were $163.2 million, total debt $1,168.5 million and long-term debt $1,071.4 million. Net debt was $1,005.3 million; net debt to capitalization was 36.2%, versus 33.7% in 2009. Current assets were $974.5 million and current liabilities $550.9 million. The company had $92.0 million drawn and approximately $437 million of availability under its revolving facility, which expires in June 2012. Management reported compliance with debt covenants and no significant debt maturities until 2012.
*Free cash flow is a non-GAAP measure defined as operating cash flow less capital expenditures. It is not a substitute for GAAP cash-flow measures.
Material changes and notable items
- Investing cash outflow was $566.8 million, including $538.6 million, net of cash acquired, for six 2010 acquisitions. Acquisitions contributed $313.5 million of goodwill and $276.3 million of other intangible assets; purchase-price allocations remained subject to revision.
- Total debt increased from $1,041.7 million to $1,168.5 million, while cash declined from $246.4 million to $163.2 million. The company issued an £80 million, 4.68% senior note due in 2020 and repaid an expiring £50 million, 5.96% note.
- AMETEK repurchased 3.1 million shares for $78.6 million; $64.9 million remained authorized. It completed a three-for-two stock split and raised the post-split quarterly dividend 50%, from $0.04 to $0.06 per share.
- Goodwill and other intangible assets totaled $2,335.2 million, about 61% of total assets. The annual impairment review found no impairment; management reported reporting-unit fair values remained above carrying values even under a hypothetical 10% fair-value decline.
- Environmental reserves were $31.3 million, versus $27.0 million in 2009. AMETEK was a potentially responsible party at 16 non-owned sites and reported related indemnifications and expected recoveries.
Outlook, risks and contingencies
The filing gives no numerical 2011 revenue or earnings forecast. Management said the full-year contribution from 2010 acquisitions and Operational Excellence initiatives should benefit 2011 results. It expected 2011 capital expenditures to approximate 1.6% of sales and defined-benefit pension contributions of approximately $3 million to $5 million. The company’s stated long-term objective is double-digit annual EPS growth over the business cycle; this is a strategic objective, not a specific-period forecast.
Key risks include cyclical downturns in aerospace and defense, process instrumentation and motor markets; acquisition execution and integration; international, currency and export-control exposure; raw-material availability and prices; competition, product development and skilled-labor needs; environmental remediation and product-liability claims; debt covenant constraints; and potential impairment of substantial goodwill and intangible assets. Management considered environmental reserves adequate and did not expect known environmental matters to materially affect consolidated results, financial position or cash flows. The filing also describes asbestos litigation; no judgments had been rendered against AMETEK, and the company said it intended to defend the claims.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal control was effective as of December 31, 2010.
Investor verification priorities
- Reconcile reported growth between internal demand and acquired revenue, and assess the sustainability of the 30.7% order growth and record backlog.
- Review acquisition valuations, final purchase-price allocations, integration progress and returns on the $538.6 million acquisition outlay.
- Assess liquidity and refinancing exposure, including the 2012 revolving-credit-facility expiration, debt covenants, and higher net debt and lower cash.
- Examine the assumptions supporting goodwill and intangible-asset valuations, pension estimates and environmental reserves, including the recoverability of indemnifications.
- Confirm the effects of share repurchases, the stock split and dividend increase on per-share comparisons; reported per-share amounts are split-adjusted.