AMETEK, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; fourth-quarter figures are also summarized below. AMETEK manufactures electronic instruments and electromechanical products through Electronic Instruments (EIG) and Electromechanical (EMG), serving industrial, process, power, aerospace, medical, automation and other markets. International sales were 52.4% of revenue.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $3,840.1 million | $3,974.3 million | -3.4% |
| Operating income | $801.9 million | $907.7 million | -11.7% |
| Operating margin | 20.9% | 22.8% | -1.9 percentage points |
| Net income | $512.2 million | $590.9 million | -13.3% |
| Diluted EPS | $2.19 | $2.45 | -10.6% |
| Operating cash flow | $756.8 million | $672.5 million | +12.5% |
| Free cash flow | $693.5 million | $603.4 million | Higher year over year |
Cost of sales was 67.1% of revenue, compared with 65.9% in 2015; SG&A was 12.1%, compared with 11.3%. Segment operating income was $855.6 million, or 22.3% of sales, versus $957.5 million, or 24.1%, in 2015. EIG sales fell 2.4% to $2,360.3 million and segment margin was 24.5%, down from 26.5%. EMG sales fell 5.0% to $1,479.8 million and margin was 18.8%, down from 20.4%.
Fourth quarter: Sales were $973.0 million, down 1.5% year over year; net income was $109.1 million, down 20.2%; diluted EPS was $0.47, down 17.5%. Segment operating income was $187.8 million, down 15.3%, and segment margin declined to 19.3% from 22.5%.
Balance sheet and liquidity: Cash and cash equivalents were $717.3 million at year-end, versus $381.0 million. Current assets were $1,928.2 million and current liabilities $924.4 million. Total debt, net, was $2,341.6 million, versus $1,938.0 million; net debt was $1,624.3 million. Total debt as a share of capitalization rose to 41.8% from 37.3%, and net debt as a share of capitalization to 33.3% from 32.4%. AMETEK reported $1,117.3 million of available revolving-credit capacity, including the accordion feature, and compliance with debt covenants. A $270 million 6.20% senior note matures in December 2017.
Capital allocation included $391.4 million, net of acquired cash, for five 2016 acquisitions; $336.1 million of share repurchases; $83.3 million of dividends; and $63.3 million of capital expenditures. Dividends were $0.36 per share for the year.
Material changes versus the prior period
- Organic sales declined 7%, with a further 1% adverse currency effect, partly offset by 4% growth from acquisitions. Orders declined 1.9%; year-end backlog rose 0.8% to $1,156.5 million.
- Management attributed weaker sales chiefly to oil-and-gas-exposed process businesses, engineered materials and metals markets, a weak global economy and a strong U.S. dollar. It noted some stabilization in these markets in the second half of 2016.
- Operating income and margins declined, while operating cash flow reached a record, supported by lower pension contributions and working-capital management. Interest expense increased 2.7% to $94.3 million, partly due to borrowings for acquisitions and repurchases.
- Debt increased during the year, while cash also rose. AMETEK issued euro- and sterling-denominated senior notes totaling approximately $820.9 million equivalent, with a weighted average rate of 1.82%, and amended its revolving facility to $850 million, with an option to request up to $300 million more.
Outlook, commentary, risks and unusual items
- Management expected the challenging global environment to continue affecting markets and geographies into the first half of 2017. It expected the full-year effect of 2016 acquisitions and operational improvements to benefit 2017 results; no specific 2017 revenue or EPS guidance is provided in the supplied filing text.
- 2016 fourth-quarter restructuring charges were $25.6 million pretax, reducing net income by $17.0 million, or $0.07 per diluted share. Expected annualized cash savings were approximately $35 million, with about $15 million expected in 2017. A $13.9 million non-cash trade-name impairment reduced net income by $8.6 million, or $0.04 per diluted share. Goodwill was not impaired in the annual test.
- Research, development and engineering spending was $200.8 million before customer reimbursements; products introduced in the prior three years accounted for 24.2% of sales. Management expected 2017 capital expenditures of approximately 2.0% of sales.
- Management estimated 2017 defined-benefit pension contributions of $52–56 million, including $50.1 million contributed in January 2017. In February 2017, AMETEK acquired Rauland-Borg for approximately $340 million, with a potential $30 million contingent payment; estimated annual sales were approximately $160 million.
- Principal risks include economic and end-market cyclicality, currency and international operating exposure, acquisition integration and financing, competition, raw-material supply and pricing, debt covenant constraints, environmental and other legal contingencies, and impairment risk. Goodwill and other intangible assets totaled $4,553.0 million, 64% of total assets. Environmental reserves were $28.4 million; management did not expect known environmental matters to materially affect results, financial position or cash flows.
- Auditors issued an unqualified opinion on the financial statements and internal controls. Management reported effective controls, but controls for the five 2016 acquisitions were excluded from its assessment; those businesses represented 5.9% of assets and 2.9% of sales.
Important facts for investors to verify
- Whether stabilization in oil and gas, metals-related and other affected markets translated into organic order and sales growth after year-end.
- Whether projected restructuring savings were realized and how results trend after adjusting for the $25.6 million restructuring charge and $13.9 million impairment.
- Integration, returns and purchase-accounting assumptions for the five 2016 acquisitions and the subsequent Rauland-Borg acquisition.
- Debt maturities, refinancing of the $270 million 2017 note, leverage, covenant headroom and the use of cash held outside the United States.
- Cash conversion and working-capital performance, as well as pension funding needs and the sensitivity of goodwill and intangible values to operating assumptions.
- The adoption impact of the new revenue-recognition standard, which AMETEK planned to adopt January 1, 2018; management had not yet determined the full financial-statement impact.