Business context and reporting period
AMETEK, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. It reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $878.8 | $825.9 | $1,761.7 | $1,653.1 |
| Operating income | $202.6 | $185.0 | $399.8 | $367.8 |
| Operating margin | 23.1% | 22.4% | 22.7% | 22.2% |
| Net income | $128.3 | $113.7 | $253.5 | $223.8 |
| Diluted EPS | $0.52 | $0.47 | $1.03 | $0.92 |
- Q2 segment operating margin was 24.2%, versus 23.8% a year earlier; six-month segment margin was 24.0%, versus 23.6%.
- For the six months, operating cash flow was $285.0 million (up 11.1%); capital expenditures were $21.6 million and company-defined free cash flow was $263.4 million. EBITDA, a non-GAAP measure, was $451.8 million.
- At June 30, cash was $207.6 million; total debt was $1,243.7 million, down from $1,453.8 million at year-end 2012. Debt-to-capital was 31.1% and net debt-to-capital was 27.3%. The company reported no significant debt maturities until 2015 and compliance with debt covenants.
- Dividends declared and paid were $0.06 per share in Q2 and $0.12 for the first six months. The effective tax rate was 29.4% in Q2 and 29.2% for the six months.
Material changes versus prior comparable periods
- Q2 sales rose 6.4%, primarily from the Micro-Poise and Dunkermotoren acquisitions; internal sales growth and foreign-currency translation were flat. Six-month sales rose 6.6%, with acquisitions partly offset by an approximately 1% internal sales decline.
- Q2 net income increased 12.8% and diluted EPS increased 10.6%; six-month net income increased 13.3% and diluted EPS increased 12.0%.
- Management attributed margin improvement mainly to Operational Excellence and a lower cost structure. EIG margins improved, while EMG’s six-month margin edged down to 20.3% from 20.4%, partly reflecting Dunkermotoren’s lower margins.
- Six-month orders declined 0.4% to $1,772.8 million. Backlog reached a record $1,123.4 million at June 30, up 1.0% from year-end.
- Cash used in financing was $214.1 million, largely reflecting lower short-term borrowings; the company had generated $255.3 million from financing in the prior-year period, which included substantial acquisition-related borrowing.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management said the full-year impact of the 2012 acquisitions and continued Operational Excellence initiatives was expected to benefit the remainder of 2013.
- In August 2013, after quarter-end, AMETEK acquired Controls Southeast for approximately $160 million; it had estimated annual sales of approximately $50 million.
- Disclosed risks include economic and competitive conditions, international operations, acquisition integration, product development and facility changes, raw-material availability, regulation, and access to liquidity and financing.
- Environmental reserves were $21.9 million at June 30; management said recorded provisions were adequate and expected the ultimate cost of known matters not to materially affect results, financial position or cash flows. AMETEK was named in asbestos lawsuits but reported no judgments against it to date and said it intended to defend the claims.
- Gross unrecognized tax benefits were $37.2 million, of which $34.7 million would affect the effective tax rate if recognized. A restricted-stock vesting provision triggered accelerated vesting in January 2013, resulting in a $2.7 million pretax charge ($1.9 million after tax) for the six-month period. Certain warranty settlements were described as nonrecurring.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquired businesses versus underlying demand, particularly given flat Q2 internal growth and the six-month internal sales decline.
- Whether orders and backlog trends support continued growth, and how the subsequent Controls Southeast acquisition affects leverage, integration costs and results.
- The sustainability of margin gains from Operational Excellence and the effects of acquisition mix, currency movements and the lower EMG margin.
- Cash availability and debt capacity, including the location of cash: $205.0 million was held outside the United States at June 30.
- Developments in environmental remediation, asbestos claims and uncertain tax positions; management’s estimates and statements about materiality are subject to change.