AMETEK, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. AMETEK reports two segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Financial statements are unaudited; amounts below are in millions except per-share data.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $758.8 | $591.9 | $1,476.6 | $1,148.6 |
| Operating income | $157.0 | $115.6 | $309.0 | $218.0 |
| Operating margin | 20.7% | 19.5% | 20.9% | 19.0% |
| Net income | $94.1 | $67.4 | $184.6 | $125.3 |
| Diluted EPS | $0.58 | $0.42 | $1.14 | $0.78 |
- Q2 sales rose 28.2%; management attributed growth to approximately 14% internal growth, favorable currency translation of 3%, and acquisitions. Six-month sales grew 28.6%, including approximately 16% internal growth and a 2% favorable currency effect.
- Q2 segment operating margin increased to 22.5% from 21.3%; six-month margin rose to 22.6% from 20.8%. Management cited sales leverage and Operational Excellence cost initiatives.
- Q2 diluted EPS increased 38.1% year over year; six-month diluted EPS increased 46.2%.
- Q2 international sales were $385.8 million, 50.8% of sales; six-month international sales were $747.2 million, 50.6% of sales.
Cash flow, liquidity and debt
- Six-month operating cash flow was $218.8 million versus $180.4 million. Capital expenditures were $20.6 million, resulting in company-reported free cash flow of $198.2 million versus $167.7 million. Company-reported EBITDA was $346.0 million versus $249.2 million.
- Investing cash use was $206.0 million, including $183.0 million net cash for acquisitions. Financing provided $15.7 million; net borrowings increased $29.9 million. Cash increased to $196.6 million from $163.2 million at year-end.
- At June 30, current assets were $1,083.1 million and current liabilities $601.9 million. Total debt was $1,211.0 million versus $1,168.5 million at December 31, 2010. Debt-to-capital was 37.9% (39.7% at year-end); net debt-to-capital was 33.8% (36.2%). No significant debt maturities were expected until 2012.
- The company reported compliance with all debt covenants and said cash generation, credit facilities and capital-market access should meet foreseeable operating needs and obligations.
Material changes, outlook and risks
- AMETEK acquired Avicenna Technology and Coining in April and May 2011 for $183.0 million net of cash acquired. Acquisitions had an immaterial reported-period effect on sales, net income and diluted EPS; purchase-price allocations remained subject to revision. Goodwill recorded was $117.7 million.
- Management said it expected operating results through the remainder of 2011 to show continued strength versus 2010. The filing gives no quantified earnings or sales guidance. Orders rose 30.2% in the first half, and backlog reached a record $947.9 million at June 30, up 14.4% from year-end.
- Q2 included a $5.2 million pretax charge ($3.6 million after tax) related to accelerated vesting of restricted stock; the income-statement effect included a $2.1 million corporate charge. The accelerated vesting also contributed to a higher effective tax rate. Six-month share-based compensation expense was $14.3 million versus $8.0 million.
- Environmental reserves were $31.0 million. Management considered reserves adequate and did not expect environmental matters to materially affect results, financial position or cash flows; $14.9 million of receivables related to probable recoveries at an acquired site. Gross unrecognized tax benefits were $26.4 million, of which $21.7 million would affect the effective tax rate if recognized.
- Risks identified include economic and competitive conditions, international operations, acquisition integration, product development and facility transfers, raw-material prices and availability, regulation including environmental requirements, and liquidity and financing access.
Most important facts for investors to verify
- Whether strong orders and the $947.9 million backlog convert into sales and margins, and whether management’s positive remainder-of-2011 outlook is sustained.
- How much reported growth reflects internal demand, currency and acquisitions, particularly given the differing internal growth rates in EIG and EMG.
- Acquisition integration, final purchase-price allocations, and the realized contribution of Avicenna, Coining and prior acquisitions.
- Debt, working-capital needs and acquisition spending, including whether cash generation continues to cover investment and obligations.
- Potential changes in environmental remediation costs, third-party recoveries and uncertain tax positions.