AMETEK, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. AMETEK makes advanced instruments and electromechanical products through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $1,208.9 | $1,064.6 | $2,381.6 | $2,072.3 |
| Operating income | $270.1 | $229.5 | $528.3 | $447.0 |
| Operating margin | 22.3% | 21.6% | 22.2% | 21.6% |
| Net income | $193.9 | $150.5 | $375.2 | $289.4 |
| Diluted EPS | $0.83 | $0.65 | $1.61 | $1.25 |
| Interest expense | $20.8 | $24.6 | $42.5 | $49.1 |
| Effective tax rate | 21.9% | 26.0% | 22.5% | 26.7% |
- Q2 sales rose 13.6%: 7% organic growth, 5% from acquisitions and a favorable 2% foreign-exchange effect. H1 sales rose 14.9%: 8% organic growth, 5% from acquisitions and a favorable 2% currency effect.
- Q2 orders increased 8.2% to $1,230.8 million. H1 orders increased 14.1% to $2,575.7 million; backlog at June 30 was $1,590.2 million, up 13.9% from December 31, 2017.
- Q2 segment operating margin was 23.8%, versus 23.3%. EIG margin improved to 26.0% from 24.9%; EMG margin declined to 20.3% from 20.8%. For H1, segment margin was 23.6%, versus 23.3%; EIG improved to 25.8% from 25.0%, while EMG declined to 20.1% from 20.5%.
Cash flow, debt and liquidity
- H1 cash from operations was $380.5 million, up 11.5%; capital expenditures were $28.6 million and reported free cash flow was $352.0 million, versus $313.7 million a year earlier. EBITDA was $623.6 million, versus $529.3 million.
- Cash and equivalents were $557.7 million at June 30, down from $646.3 million at year-end. Total debt, net, was $2,145.9 million, versus $2,174.3 million. Debt-to-capital was 33.1% and net debt-to-capital 26.8%.
- Available revolving-credit capacity was $1,102.4 million, including the $300 million accordion feature. AMETEK reported compliance with its debt covenants and said it expects cash generation, credit facilities and capital-market access to meet foreseeable operating needs and obligations.
- Debt maturities include $240 million in Q3 2018 and $65 million in Q4 2018. The company paid $64.7 million in dividends in H1; the quarterly dividend increased 56%, to $0.14 per share, effective February 1.
Changes, outlook and notable items
- Management reported record Q2 backlog, sales and operating income, alongside strong orders, margins, net income, diluted EPS and operating cash flow. It cited organic growth in both segments, acquisitions and Operational Excellence initiatives.
- Management expected positive market trends, record backlog, full-year contributions from 2018 and 2017 acquisitions, and continued Operational Excellence efforts to support results through the rest of 2018. No quantified earnings or sales guidance was provided in the supplied filing text.
- H1 acquisitions—FMH Aerospace, SoundCom and Motec—cost $374.6 million net of acquired cash. Their reported impact on H1 sales, net income and diluted EPS was immaterial. Purchase-price allocations remained preliminary.
- Interest expense fell, primarily reflecting repayment at maturity of $270 million of 6.20% senior notes in Q4 2017. The lower effective tax rate primarily reflected the U.S. tax-rate reduction and current effects of GILTI and FDII provisions. The company’s estimate of the 2017 Tax Act’s effects remained provisional; further adjustments could be recorded by Q4 2018.
- ASC 606 was adopted using the modified retrospective method, with no significant reported-period impact. For certain custom equipment and customer-owned-equipment repairs, revenue and related costs are recognized over time, accelerating recognition compared with the prior approach. ASU 2017-07 was adopted retrospectively and reclassified components of pension costs in prior-period presentation.
- Environmental reserves were $28.9 million. Management said recorded environmental reserves and provisions for the described asbestos and groundwater matters were not expected to materially affect results, financial position or cash flows; actual remediation costs could differ from estimates. Gross unrecognized tax benefits were $65.3 million, of which $56.7 million would affect the effective tax rate if recognized.
- A contingent payment of up to $30 million tied to Rauland revenue targets was valued at $30.0 million at June 30, 2018. Foreign-currency translation contributed to a $24.9 million H1 other comprehensive loss, while the income statement showed total comprehensive income of $154.5 million for Q2 versus $188.3 million a year earlier.
Key facts for investors to verify
- Whether organic growth, order trends and the $1,590.2 million backlog convert into sustained sales and margins, particularly given the softer EMG margin.
- Acquisition integration and final purchase-price accounting for FMH, SoundCom and Motec, including the expected benefits and amortization effects.
- Cash conversion and working-capital demands; H1 operating cash flow included a $99.5 million net use from changes in assets and liabilities.
- Upcoming 2018 debt maturities, refinancing or repayment plans, and continued covenant compliance.
- Final tax-accounting adjustments, uncertain tax positions, and potential outcomes of environmental and other contingencies.