AMETEK, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,551.8 million | $1,440.7 million | $4,524.9 million | $4,042.8 million |
| Operating income | $384.5 million | $337.6 million | $1,102.6 million | $947.5 million |
| Operating margin | 24.8% | 23.4% | 24.4% | 23.4% |
| Net income | $297.6 million | $257.5 million | $852.5 million | $708.4 million |
| Diluted EPS | $1.29 | $1.10 | $3.68 | $3.04 |
| Segment operating margin | 26.4% | 25.0% | 25.9% | 25.0% |
- Q3 sales rose 7.7%, including 11% organic growth and a 1% acquisition contribution, partly offset by a 4% unfavorable foreign-currency effect. Nine-month sales increased 11.9%, reflecting 12% organic growth and 2% from acquisitions, partly offset by a 2% currency headwind.
- Q3 diluted EPS increased 17.3%; nine-month diluted EPS increased 21.1%. The effective tax rate was 19.0% in Q3 and 18.8% for the nine months, versus 19.5% and 19.9%, respectively, in 2021.
- Q3 EIG sales were $1,054.1 million and operating margin was 25.9%; EMG sales were $497.7 million and operating margin was 27.4%. Nine-month segment operating margins were 25.5% for EIG and 26.7% for EMG.
- Cost of sales was 64.7% of sales in Q3 and 65.0% for the nine months, versus 65.9% and 65.6% in 2021. SG&A was 10.5% and 10.6% of sales, respectively, versus 10.7% and 11.0%.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $764.4 million, down 13.0% from $878.6 million. Management attributed the decline primarily to inventory investment to support sales and backlog and address supply constraints, partly offset by higher net income.
- Capital expenditures were $80.8 million; company-reported free cash flow, defined as operating cash flow less capital expenditures, was $683.5 million, versus $811.3 million in 2021. Reported EBITDA was $1,340.3 million, versus $1,157.2 million.
- Cash and cash equivalents were $309.9 million at September 30, 2022, versus $346.8 million at year-end 2021. Total debt, net, was $2,357.4 million, down from $2,544.2 million. Debt-to-capital was 24.8% (27.0% at year-end); net debt-to-capital was 22.3% (24.2%).
- The amended revolving credit facility increased from $1.5 billion to $2.3 billion, terminated the prior $800 million term loan, and matures in May 2027. The company reported $274.0 million outstanding on the revolver and $2,685.9 million of available borrowing capacity, including the $700 million accordion feature. It stated it was in compliance with debt covenants and believed liquidity was sufficient for foreseeable operating needs and obligations.
- Current assets were $2,432.6 million and current liabilities were $1,591.4 million. Inventories increased to $1,025.1 million from $769.2 million at year-end 2021.
Material changes, outlook and risks
- Q3 orders increased 6.8% year over year to $1,657.9 million. Backlog reached a record $3,210.5 million, up 17.6% from December 31, 2021. Nine-month orders increased 2.9% to $5,005.3 million.
- Management cited pricing actions and Operational Excellence initiatives as supporting margins amid higher material and transportation costs. Core segment margins also benefited from these actions; recent acquisitions were dilutive to nine-month segment margins.
- Management anticipated a challenging global economic environment for the remainder of 2022 and into 2023, citing inflation, rising interest rates, supply-chain constraints, COVID-19 uncertainty and the Ukraine conflict. It expected inflation to continue into 2023 and said it would continue mitigation actions. The filing provides no specific quantitative earnings or revenue guidance.
- Navitar was acquired in September for $190.3 million net of cash acquired; its reported impact on Q3 and nine-month sales, net income and diluted EPS was immaterial. In October 2022, after quarter-end, AMETEK acquired RTDS Technologies for C$325.0 million, approximately $240.0 million, in cash.
- Other notable items include a $7.1 million gain on sale of a facility in the first nine months, which benefited EMG results, and $331.4 million of share repurchases in the period. Environmental reserves were $39.6 million at quarter-end; management did not expect environmental matters to materially affect consolidated results, financial position or cash flows. The company also disclosed asbestos litigation and uncertain tax benefits of $170.0 million, of which $125.3 million would affect the effective tax rate if recognized.
- Principal disclosed risks include economic and end-market conditions, COVID-19 impacts, supply and raw-material availability and pricing, international operations, competition, acquisition integration, product development, regulation and access to liquidity and financing.
Important facts for investors to verify
- Whether organic demand and orders sustain growth, and whether record backlog converts to revenue on expected timing.
- Whether pricing and productivity continue to offset inflation, transportation costs and supply-chain constraints.
- Cash conversion and inventory levels, given lower year-to-date operating cash flow and the substantial inventory increase.
- Debt, borrowing capacity and cash deployment, including share repurchases, dividends and the RTDS acquisition.
- Integration and final purchase accounting for Navitar, and the financial contribution and integration risks of the post-quarter RTDS acquisition.
- Exposure to currency movements, the uncertain tax positions, and environmental and other contingencies.