AMETEK, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. AMETEK reported results across Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Comparisons below are with the corresponding 2019 periods.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,011.9 million | $1,289.4 million | $2,214.1 million | $2,577.1 million |
| Operating income | $227.0 million | $295.4 million | $459.0 million | $578.7 million |
| Operating margin | 22.4% | 22.9% | 20.7% | 22.5% |
| Net income | $166.2 million | $215.5 million | $446.8 million | $419.8 million |
| Diluted EPS | $0.72 | $0.94 | $1.94 | $1.83 |
| Orders | $998.0 million | $1,278.1 million | $2,208.0 million | $2,656.3 million |
- Q2 sales declined 21.5%; management attributed the change to a 22% organic sales decline, a 1% unfavorable foreign-exchange effect, a 5% acquisition benefit, and a 3% impact from the Reading Alloys divestiture. Organic orders fell 23% in Q2.
- Q2 segment operating income fell 22.3% to $243.9 million; segment margin was 24.1% versus 24.4%. EIG sales fell 21.0% and margin was 24.6% versus 26.0%. EMG sales fell 22.4%, while margin improved to 23.2% from 21.5%.
- For the first six months, sales declined 14.1% and organic sales declined 15%. Segment margin declined to 22.2% from 23.9%. Net income and diluted EPS increased year over year largely because of the Reading sale gain; excluding that unusual item, the headline improvement would not reflect underlying operating performance.
- Cost of sales was 66.1% of sales in Q2 versus 65.0%; for the first six months it was 67.5% versus 65.6%. SG&A was 11.4% of sales in Q2 versus 12.1%, and 11.8% for the first six months versus 12.0%.
Cash flow, debt and liquidity
- Six-month cash from operating activities was $585.4 million, up 32.3% from $442.6 million, primarily due to reduced working-capital investment. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $558.4 million versus $399.3 million.
- Capital expenditures were $27.0 million versus $43.3 million. Investing cash flow was positive $104.8 million, reflecting $245.3 million of Reading sale proceeds and $116.5 million paid for IntelliPower.
- Cash and cash equivalents were $1,131.0 million at June 30, 2020, compared with $393.0 million at year-end 2019. Total debt, net, was $2,869.1 million versus $2,768.7 million. The company reported $1,464.1 million of available revolving-credit capacity, including its accordion feature.
- Debt-to-capital was 34.3% and net debt-to-capital was 24.1%, compared with 35.1% and 31.7%, respectively, at December 31, 2019. AMETEK said it was in compliance with debt covenants and believed liquidity was adequate for foreseeable operating needs and contractual obligations.
- The quarterly dividend was increased 29% to $0.18 per share from $0.14, effective February 12, 2020. Six-month dividends paid were $82.4 million versus $63.6 million.
Material changes, outlook and risks
- COVID-19: Management reported significant economic disruption, volatile demand and lower sales, with particular weakness in Europe and Asia. It expected pandemic-related market challenges to continue through the remainder of 2020, but could not estimate their duration, severity or ultimate financial impact. Manufacturing facilities generally remained open with safety measures; supply chains were not materially affected at the filing date, but future effects were uncertain.
- Realignment: Six-month pre-tax realignment costs were $43.9 million, including workforce reductions and asset write-downs, reducing net income by $33.6 million, or $0.15 per diluted share. Approximately $86 million of annualized cash savings were expected, with about $33 million expected in 2020. Substantially all actions were expected to be completed by year-end.
- Reading sale: The March 2020 divestiture generated $245.3 million in net cash proceeds and a $141.0 million pre-tax gain; related income tax expense was approximately $31.4 million.
- Acquisitions: IntelliPower was acquired in January for $116.5 million net of cash acquired. Its reported-period impact on sales, net income and diluted EPS was immaterial. The company also cited contributions from 2019 acquisitions Gatan and Pacific Design Technologies.
- Management expected acquisitions and operational-excellence initiatives, including realignment actions, to benefit 2020 results, while warning of continued uncertainty. The filing provides no specific full-year revenue or earnings guidance.
- Key risks include pandemic effects on demand, operations, supply chains, customers, liquidity and acquisitions; cybersecurity exposure from remote work; general economic and international-market risks; competition; raw-material availability; regulation; and successful integration of acquisitions.
- Environmental reserves were $28.7 million. A $6.8 million global settlement related to groundwater-contamination lawsuits was subject to final court approval; the company said it had previously reserved for the amount. Gross uncertain tax benefits were $117.6 million, of which $71.2 million would affect the effective tax rate if recognized.
Most important facts for investors to verify
- Whether orders and organic demand stabilize or recover as pandemic conditions and end markets evolve.
- Whether the projected $86 million annualized realignment savings are achieved, and how much is offset by continuing sales weakness or implementation costs.
- Underlying earnings and cash generation excluding the Reading gain and sale proceeds, including the sustainability of working-capital benefits.
- Debt, liquidity and covenant capacity if operating cash flow or customer collections deteriorate.
- Final approval and resolution of the groundwater settlement, environmental obligations, and the potential impact of uncertain tax positions.