AMETEK, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the same 2016 periods unless noted. AMETEK reports through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG).
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,064.6M | $977.7M | $2,072.3M | $1,922.1M |
| Operating income | $232.4M | $219.0M | $452.7M | $427.6M |
| Net income | $150.5M | $138.2M | $289.4M | $272.4M |
| Diluted EPS | $0.65 | $0.59 | $1.25 | $1.16 |
| Segment operating margin | 23.6% | 23.8% | 23.5% | 23.6% |
| Consolidated operating margin | 21.8% | 22.4% | 21.8% | 22.2% |
- Q2 sales rose 8.9%; management attributed the increase to 4% organic growth and 6% from acquisitions, partly offset by a 1% unfavorable foreign-currency effect. Orders increased 20.4%, including 12% organic growth, and reached $1,137.4M.
- First-half sales rose 7.8%, reflecting 4% organic growth and a 5% acquisition contribution, partly offset by a 1% unfavorable currency effect. Orders increased 18.1%; backlog reached a record $1,341.9M at June 30, up 16.0% from year-end 2016.
- Q2 EIG sales increased 10.4% and operating margin was 25.1%, down from 25.5%; management cited the lower margins of acquired businesses. EMG sales rose 6.6% and margin was 21.0%, unchanged. First-half EMG margin fell to 20.7% from 21.1%, reflecting weaker profitability in engineered materials, interconnects and packaging.
- Cash provided by operations was $341.4M in the first half, essentially flat year over year. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $313.7M versus $315.3M; EBITDA was $529.3M versus $501.2M.
- Cash and equivalents were $516.5M at June 30, down from $717.3M at December 31, 2016. Total debt was $2,401.4M, up from $2,341.6M. Debt-to-capital was 40.1%; net debt-to-capital was 34.4%. The company reported $1,115.6M of available revolving-credit capacity, including the accordion feature, and compliance with all debt covenants.
Material changes and notable items
- AMETEK acquired Rauland-Borg in February and MOCON in June 2017, spending $518.6M net of cash acquired. The acquisitions contributed to sales growth, while their reported impact on Q2 and first-half net sales, net income and diluted EPS was immaterial. Purchase accounting remained preliminary. A $30M payment tied to Rauland revenue milestones was recorded at an estimated fair value of $25.5M.
- First-half investing cash use rose to $546.7M, mainly reflecting acquisition spending. The company contributed $51.7M to defined-benefit pension plans, compared with $1.8M in the first half of 2016; management said expected 2017 contributions remained within the range previously disclosed.
- Share-based payment tax benefits reduced the effective tax rate under newly adopted accounting guidance: $3.1M in Q2 and $8.9M in the first half. Management cautioned that the change may make the effective tax rate more volatile.
- Q2 SG&A included a $2.5M pre-tax charge for accelerated vesting of restricted stock associated with the Executive Chairman’s retirement. The 2016 restructuring program remained in progress, with $15.1M accrued at June 30; actions were expected to continue through 2017, with most completion expected in 2018.
Outlook, risks and contingencies
- Management said a stronger global economic environment, the full-year effects of 2017 and 2016 acquisitions, and continued Operational Excellence initiatives were expected to benefit the remainder of 2017. The filing provides no specific numerical earnings or revenue guidance.
- Risks identified include economic and competitive conditions, international operations, successful acquisition integration, product development and facility or product-line transfers, raw-material prices and availability, regulatory and environmental compliance, and access to liquidity and financing.
- Environmental reserves were $28.0M at June 30; management did not expect ultimate remediation costs to materially affect results, financial position or cash flows. AMETEK was named a potentially responsible party at 13 non-owned sites. The company also disclosed asbestos-related lawsuits, said it had received no judgments, and stated it intended to defend the claims.
- Gross unrecognized tax benefits were $61.7M, of which $52.1M would affect the effective tax rate if recognized. A $270M tranche of 6.20% senior notes was due in the fourth quarter of 2017.
Important facts for investors to verify
- Whether record orders and backlog convert into sales and earnings, and whether organic growth persists across both segments.
- Acquisition integration, final purchase-price allocations, the Rauland milestone payment, and the effect of acquired businesses on margins and amortization.
- Debt repayment or refinancing for the $270M notes, cash deployment, and the continuing impact of pension contributions on operating cash flow.
- Effective tax-rate variability from share-based payment accounting, resolution of uncertain tax positions, and the status and adequacy of environmental and other contingency reserves.