AMETEK, Inc. — Q3 2009 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2009, compared with the corresponding 2008 periods. AMETEK reports Electronic Instruments (EIG) and Electromechanical (EMG). Management attributed weaker results primarily to the global recession and lower customer orders.
Key financial results
| Metric | Q3 2009 | Q3 2008 | First nine months 2009 | First nine months 2008 |
|---|---|---|---|---|
| Net sales | $497.1 million | $647.4 million | $1,574.9 million | $1,907.4 million |
| Operating income | $77.5 million | $120.1 million | $276.9 million | $350.4 million |
| Net income | $43.0 million | $70.9 million | $153.9 million | $203.1 million |
| Diluted EPS | $0.40 | $0.66 | $1.43 | $1.89 |
| Segment operating margin | 17.3% | 20.2% | 19.2% | 20.3% |
Q3 sales declined 23.2%, operating income 35.5%, and net income 39.4% year over year. Nine-month sales declined 17.4%, operating income 21.0%, and net income 24.2%. Consolidated operating margin was 15.6% in Q3 versus 18.5%, and 17.6% for the nine months versus 18.4%. The filing does not provide a standalone gross margin figure.
- Segments: Q3 EIG sales fell 24.0% and operating income fell 40.3%; EMG sales fell 22.3% and operating income fell 24.2%. Nine-month sales decreased 17.3% at EIG and 17.6% at EMG. EMG’s nine-month operating margin improved to 17.6% from 17.4%, while EIG’s fell to 20.5% from 22.8%.
- Cash flow: Nine-month operating cash flow was $255.9 million, up from $204.6 million. Capital expenditures were $21.5 million; company-defined free cash flow was $234.4 million versus $173.6 million. Cash increased to $201.0 million at September 30 from $87.0 million at year-end 2008.
- Debt and liquidity: Total debt was $1,059.7 million, down from $1,111.7 million at December 31, 2008; debt-to-capital was 41.7% versus 46.3%, and net debt-to-capital was 36.7% versus 44.3%. No borrowings were outstanding under the revolving credit facility at quarter-end. Management reported covenant compliance and said liquidity was adequate; it noted no significant debt maturities until 2012. The $100 million receivables securitization facility was not renewed in May 2009.
- Orders and backlog: Nine-month new orders declined 27.7% to $1,451.3 million. Backlog was $595.1 million at September 30, down 17.2% from December 31, 2008.
Material changes, outlook, and risks
- Management expected the recession’s impact to stabilize in most markets in Q4 2009. It cited acquisitions and Operational Excellence/cost-reduction measures as supporting results. No specific full-year earnings or revenue guidance was provided.
- Lower orders and sales, particularly in EIG process and industrial businesses and aerospace aftermarket, weighed on results. Acquisitions partly offset declines. Currency translation also reduced sales.
- Q3 segment income and margins were pressured by lower volumes, higher defined-benefit pension expense, and additional restructuring charges; cost savings partly offset these effects. Q3 diluted EPS included a $0.02 restructuring impact.
- In 2008 AMETEK recorded $40.0 million of restructuring and asset write-down charges. The related restructuring accrual was $17.6 million at September 30, 2009; substantially all severance and lease termination payments were expected in 2009. The filing also reports higher pension expense and $19.9 million of pension contributions for the first nine months of 2009, compared with $2.6 million a year earlier.
- Gross unrecognized tax benefits rose to $25.5 million from $18.6 million at year-end 2008; $24.7 million would affect the effective tax rate if recognized. The company cites economic conditions, competition, international operations, acquisitions and integration, product development, raw-material availability, environmental and other regulatory compliance, and liquidity/financing as risks to forward-looking results.
Important facts for investors to verify
- Whether orders and backlog stabilize as management expected, and how that translates into sales and margins.
- Whether cost reductions can offset lower volumes, pension costs, and restructuring expenses.
- Debt-covenant headroom, cash generation, debt maturities, and the effect of not renewing the receivables facility.
- Final purchase-price allocations for 2009 acquisitions and their subsequent contribution to performance.
- Developments in uncertain tax positions, pension obligations, and environmental provisions; the filing does not state a clear quantified total for future environmental exposure.