AMETEK, Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. AMETEK operates through Electronic Instruments (EIG) and Electromechanical (EMG). Financial statements are unaudited.
Financial results and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,440.7 million | $1,126.9 million | $4,042.8 million | $3,341.1 million |
| Operating income | $337.6 million | $270.7 million | $947.5 million | $729.8 million |
| Operating margin | 23.4% | 24.0% | 23.4% | 21.8% |
| Net income | $257.5 million | $204.6 million | $708.4 million | $651.4 million |
| Diluted EPS | $1.10 | $0.88 | $3.04 | $2.82 |
- Q3 sales increased 27.8% (17% organic; 11% acquisitions). Nine-month sales rose 21.0% (14% organic; 6% acquisitions; 1% favorable foreign exchange).
- Q3 segment operating income increased 24.9%; segment margin was 25.0%, down from 25.6%. Nine-month segment margin rose to 25.0% from 23.3%.
- Cost of sales was 65.9% of sales in Q3 versus 65.0%; SG&A was 10.7% versus 11.0%. For the nine months, cost of sales was 65.6% versus 66.6%, and SG&A was 11.0% versus 11.5%.
- Cash from operations was $878.6 million for the nine months, versus $895.1 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $811.3 million versus $857.9 million.
- At September 30, cash was $358.7 million, down from $1,212.8 million at year-end 2020. Total debt, net, was $2,654.6 million versus $2,413.7 million. Net debt-to-capital increased to 25.9% from 16.8%; debt-to-capital was 28.8% versus 28.9%.
- The company reported $2,407.3 million of available borrowing capacity under its revolving credit facility and term loan, including the $500 million accordion feature; $150 million was outstanding on the new term loan. AMETEK said it was in compliance with debt covenants and believed it had sufficient liquidity for foreseeable needs.
- Capital expenditures were $67.2 million, compared with $37.2 million. Dividends paid were $138.3 million; the quarterly dividend increased 11% to $0.20 per share in February 2021.
Material changes and notable items
- Five 2021 acquisitions—Abaco, Magnetrol, NSI-MI, Crank Software and EGS—required $1,839.7 million in cash, net of cash acquired. They contributed approximately 11% of Q3 sales and 6% of nine-month sales. Acquisition-related margin dilution affected EIG; management reported Q3 EIG margin dilution of 220 basis points and nine-month dilution of 150 basis points.
- Orders increased 36.7% in Q3 and 45.5% for the nine months. Backlog reached a record $2,623.5 million at September 30, up 45.6% from December 31, 2020.
- Q3 EIG sales rose 31.2%, but its margin declined to 25.0% from 27.2%; EMG sales increased 21.2% and its margin improved to a record 25.0% from 22.3%.
- Nine-month 2020 results included a $141.0 million pretax gain on the sale of Reading Alloys and $43.7 million of realignment costs. The Reading sale contributed $0.47 to 2020 diluted EPS, while realignment costs reduced it by $0.15. These items affect comparison of reported earnings growth.
- Q3 effective tax rate increased to 19.5% from 17.5%; the nine-month rate was 19.9% versus 19.1%. Management cited earnings mix in higher-tax jurisdictions and, for the nine-month comparison, a UK tax-rate-related deferred-tax remeasurement.
- Operating cash generation was affected by higher working-capital requirements. Investing cash outflow was $1,895.2 million, primarily reflecting acquisitions.
Outlook, risks and contingencies
- Management expected the full-year impact of 2021 acquisitions, continued economic recovery and Operational Excellence initiatives to benefit the remainder of 2021. No specific full-year numerical guidance was provided in the filing text.
- Management cited material-cost inflation, logistics challenges, labor availability and component shortages, and expected these conditions to continue through Q4 2021. AMETEK said it was taking mitigation steps. COVID-19 duration and business impact remained uncertain.
- Federal contractor vaccination requirements were expected to apply to many U.S. sites. The company was implementing the requirements and noted potential workforce attrition, but did not expect a material adverse effect on financial condition, results or liquidity.
- Amended credit arrangements added a five-year delayed-draw term loan of up to $800 million, subject to restrictions on additional indebtedness. Acquisitions also increased goodwill and intangible assets; purchase-price allocations for certain acquisitions remained under review.
- Environmental reserves were $33.8 million at September 30, 2021. The company said reasonably possible variations in remediation costs were not expected to materially affect results, financial position or cash flows. A $6.8 million settlement of El Cajon groundwater-related lawsuits was paid in April 2021 and had been reserved. The company reported no asbestos judgments and said relevant indemnifying parties had met their obligations.
- Management identified risks including supply interruptions and price increases, COVID-19 effects, economic and competitive conditions, international operations, acquisition integration, raw-material availability, regulation and access to liquidity. Disclosure controls were deemed effective; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether strong orders and record backlog convert to sales and cash flow, including the timing and delivery of longer-term performance obligations.
- Whether supply, labor, logistics and inflation pressures persist or affect margins and working capital.
- Acquisition integration, purchase-price allocation and goodwill/intangible amortization, including the reported expected annual amortization of approximately $41 million for the 2021 acquisitions over the next five years.
- Debt, cash levels and borrowing capacity following substantial acquisition spending, and the effect of higher net leverage.
- The impact of the higher effective tax rate, uncertain tax positions and any changes in environmental or other contingencies.