AMETEK, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2010. Unaudited results; comparisons are with the corresponding 2009 periods. Amounts below are in millions of dollars unless noted.
Business context and performance
AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Management attributed the period’s growth to stronger demand and order rates, operational cost improvements, and acquisitions. International sales were 46.7% of third-quarter sales and 48.6% of nine-month sales.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $644.4 | $497.1 | $1,793.0 | $1,574.9 |
| Operating income | $128.6 | $77.5 | $346.6 | $276.9 |
| Operating margin | 20.0% | 15.6% | 19.3% | 17.6% |
| Net income | $77.4 | $43.0 | $202.7 | $153.9 |
| Diluted EPS | $0.72 | $0.40 | $1.89 | $1.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $294.7 | $255.9 |
Q3 segment operating margin was 24.6% for EIG (17.6% in 2009) and 18.2% for EMG (17.0%). For the first nine months, EIG margin was 23.9% (20.5%) and EMG margin was 17.9% (17.6%).
Nine-month free cash flow, defined by the company as operating cash flow less capital expenditures, was $272.2, versus $234.5; EBITDA was $393.3, versus $322.7. Capital expenditures were $22.4. Cash and equivalents were $135.0 at September 30, down from $246.4 at year-end 2009.
Total debt was $1,107.0, compared with $1,041.7 at December 31, 2009. Debt-to-capital was 39.9%; net debt-to-capital was 36.8%, up from 33.7%. The company reported compliance with debt covenants and no significant maturities until 2012. Current assets were $930.9 and current liabilities $463.3.
Material changes and drivers
- Q3 sales rose 29.6%; management reported approximately 24% internal sales growth, excluding a 2% unfavorable currency effect, with acquisitions contributing the remainder. Nine-month sales rose 13.8%, including approximately 11% internal growth.
- Nine-month new orders increased 33.0% to $1,930.5; backlog at September 30 was $786.0, up 21.2% from December 31, 2009.
- Operating income and margins benefited from higher volumes and Operational Excellence cost initiatives. Nine-month interest expense declined 3.1%; other expense increased, primarily due to acquisition-related costs.
- Five 2010 acquisitions included TSE and Haydon Enterprises. Cash paid, net of cash acquired, was $373.7; purchase price allocation included $224.4 of goodwill and $195.7 of intangible assets. Goodwill increased to $1,489.6.
- Operating cash flow increased 15.2%, partly due to higher net income and lower pension contributions, partly offset by higher working capital needs. Investing cash outflow increased significantly because of acquisitions. The company repurchased 2.0 million shares for $78.6.
Outlook, risks, and unusual items
Management expected Q4 2010 operating results to show further strength compared with Q4 2009; the filing provides no quantified earnings or revenue guidance. It cited risks including economic and competitive conditions, international operations, acquisition integration, product development and facilities or production transfers, raw-material costs and availability, environmental regulation, and liquidity and financing.
Environmental reserves were $31.0 at September 30, versus $27.0 at year-end; management said reserves were adequate and did not expect these matters to materially affect results, financial position, or cash flows. The company also disclosed asbestos litigation, with no judgments to date, and $23.6 of gross unrecognized tax benefits. A 2008 restructuring accrual of $8.3 remained at September 30.
After quarter-end, on November 2, the board declared a three-for-two stock split and raised the quarterly dividend from $0.06 to $0.09 per share on a pre-split basis. The split was payable December 21 to holders of record December 10. The company stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification points
- Assess how much growth and backlog conversion are organic versus acquisition-related, and whether elevated order rates persist.
- Review acquisition integration, purchase-price assumptions, and the substantial goodwill and intangible-asset balances.
- Monitor cash generation, working-capital requirements, debt levels, foreign-currency exposure, and covenant headroom.
- Check developments in environmental and asbestos matters, tax uncertainties, and related indemnification or recovery claims.
- Confirm the stock-split-adjusted per-share figures and dividend implementation in subsequent filings.