AMETEK, Inc. — Q3 2016 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $945.0m | $998.5m | $2,867.1m | $2,986.3m |
| Operating income | $201.1m | $237.6m | $628.7m | $698.9m |
| Operating margin | 21.3% | 23.8% | 21.9% | 23.4% |
| Net income | $130.7m | $156.4m | $403.1m | $454.0m |
| Diluted EPS | $0.56 | $0.65 | $1.72 | $1.87 |
- Revenue and demand: Q3 sales declined 5.4%; internal sales fell 8%, partly offset by a 3% acquisition contribution. Orders decreased 1.6% in Q3. Nine-month sales declined 4.0%, while orders fell 2.8%; backlog at September 30 was $1,157.2m, up 0.8% from year-end 2015.
- Segments: Q3 EIG sales were $579.3m, down 3.2%, and operating margin was 24.6% versus 27.2%. EMG sales were $365.7m, down 8.6%, and margin was 19.5% versus 21.7%. Weakness included process businesses exposed to oil and gas, engineered materials, interconnects and packaging, floor care, and specialty motors.
- Cash flow: Nine-month cash from operations was $509.5m versus $473.1m; capital spending was $40.5m, producing reported free cash flow of $469.0m versus $427.8m. The operating cash flow increase mainly reflected $49.4m lower pension contributions than in 2015. EBITDA was $740.8m versus $802.1m.
- Liquidity and debt: Cash was $445.5m at September 30, up from $381.0m at December 31, 2015; $420.5m was held outside the U.S. Total debt, net was $2,154.4m versus $1,938.0m; debt-to-capital was 39.0% and net debt-to-capital 33.6%. The company reported $558.7m of available revolving-credit capacity, including the accordion feature, and said it was in compliance with debt covenants.
- Other balance-sheet items: Current assets were $1,696.9m and current liabilities $1,216.7m. Goodwill was $2,846.1m. The filing reports no separate gross-profit figure.
Material changes and notable items
- Sales and earnings weakened year over year, with internal declines outweighing acquisition contributions. Q3 segment operating income fell 14.1%; nine-month consolidated net income fell 11.2%.
- AMETEK spent $360.0m, net of cash acquired, on four 2016 acquisitions. Their reported contribution to sales and earnings was immaterial through September 30. Purchase accounting included $162.0m goodwill and $179.5m intangible assets; allocations remained preliminary for certain items. Laserage was acquired in October for approximately $32m, with estimated annual sales of approximately $22m.
- In March, the company replaced its $700m revolver with an $850m five-year facility maturing in March 2021, with an option to request up to $300m more under specified conditions. After quarter-end, it issued €500m of senior notes; a further £225m issuance was scheduled for November. The notes carry a weighted average rate of 1.82%; proceeds were intended to repay revolver borrowings and a maturing note.
- Nine-month share repurchases were $236.1m for approximately 5.0m shares. The board increased the repurchase authorization by $400m on November 2, 2016.
- Effective tax rates were 25.0% in Q3 and 26.4% for nine months, compared with 26.1% and 27.2%. 2016 rates benefited from releases of uncertain tax liabilities, including $11.6m for nine months; the Q3 release was $7.7m.
Outlook, risks and contingencies
- Management observed stabilization in certain weak markets during Q3, but expected the challenging global economic environment to continue affecting markets and geographies through the remainder of 2016. No quantitative full-year guidance is stated in the provided filing text.
- Management cited operational excellence initiatives and the 2015 realignment actions as supporting results. The 2015 restructuring program had $13.5m of accrued costs remaining at September 30; actions were expected to be completed in the second half of 2017.
- Principal risks identified include economic and competitive conditions, international operations, acquisition execution and integration, product development and facility or product-line transfers, raw-material prices and availability, environmental compliance, and access to liquidity and financing.
- Environmental reserves were $27.8m at September 30; management said probable costs were adequately provided for and expected no material impact from the matters described. The company is named in asbestos-related litigation; no judgments had been rendered against it, and it said it intended to defend the claims.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Investor verification points
- Verify whether the reported stabilization and backlog translate into improved organic orders, sales, and margins, particularly in oil-and-gas-exposed and EMG businesses.
- Track acquisition integration, final purchase-price allocations, and the performance of acquired businesses relative to the limited reported contribution to date.
- Review debt and covenant headroom after the post-quarter euro and sterling note issuances, including refinancing and foreign-currency exposure.
- Assess cash generation excluding the benefit of lower pension contributions, and the balance among acquisitions, repurchases, dividends, and debt.
- Monitor tax benefits and uncertain tax positions, restructuring execution, environmental reserves and recoveries, and asbestos-related claims.