AMETEK, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results. Comparisons are with Q1 2019 unless otherwise noted. AMETEK operates through Electronic Instruments (EIG) and Electromechanical (EMG).
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,202.2 million | $1,287.7 million | Down 6.6% |
| Operating income | $232.0 million | $283.3 million | Down 18.1% |
| Operating margin | 19.3% | 22.0% | Down 2.7 percentage points |
| Net income | $280.6 million | $204.3 million | Up 37.4% |
| Diluted EPS | $1.22 | $0.89 | Up 37.1% |
| Operating cash flow | $270.8 million | $196.3 million | Up 38.0% |
| Free cash flow | $253.8 million | $174.8 million | Up |
Net income and EPS benefited substantially from the $141.0 million pretax gain on the Reading Alloys sale; the reported increase does not reflect underlying operating performance alone. The gain was recorded in other income, with approximately $31.4 million of related income tax expense. The effective tax rate was 20.1%, versus 20.5%.
Cash and cash equivalents were $1,253.4 million at March 31, 2020, versus $393.0 million at year-end 2019. Total debt, net, was $3,252.6 million, versus $2,768.7 million; debt-to-capital was 37.9% and net debt-to-capital 27.3%. The company reported $1,067.3 million of available revolving-credit capacity, including the accordion feature, and compliance with debt covenants. It stated it expects sufficient liquidity to meet foreseeable operating needs and obligations.
Material changes and operating results
- Sales fell 8% organically; foreign exchange reduced sales by 1%, acquisitions added 4%, and the Reading divestiture reduced sales by 2%. Orders declined 12.2% to $1,210.0 million, including a 9% organic decline.
- EIG sales were $774.2 million, down 4.1%; operating income was $171.3 million, down 15.7%, and margin was 22.1% versus 25.2%.
- EMG sales were $428.0 million, down 11.0%; operating income was $76.6 million, down 22.5%, and margin was 17.9% versus 20.6%. The Reading sale contributed to the segment’s sales decline.
- Consolidated segment operating margin was 20.6%, versus 23.4%. Cost of sales was 68.6% of sales, compared with 66.1%.
- Operating cash flow increased primarily because of reduced working-capital investment. Investing cash flow was $115.6 million, including $245.3 million of Reading sale proceeds and $116.6 million paid for IntelliPower. Financing cash flow was $486.6 million.
Outlook, risks, and unusual items
- Management said COVID-19 weakened broader customer demand and disrupted supply and demand, despite strong demand in select end markets. It expected continued challenges from uncertain market conditions throughout 2020; the full-year impact was not quantifiable.
- AMETEK borrowed approximately $519 million under its revolver to increase cash and financial flexibility. It reduced or planned to reduce hiring, discretionary spending, capital investment, and other costs; manufacturing facilities remained open, though external factors constrained operations.
- The company recorded $43.9 million of pretax realignment costs ($35.5 million severance and $8.4 million asset write-downs), reducing net income by $33.6 million, or $0.15 per diluted share. Management estimated approximately $86 million of annualized cash savings, with about $33 million expected in 2020; substantially all actions were expected to be completed by year-end.
- IntelliPower was acquired in January for $116.6 million net of cash acquired; its Q1 impact was immaterial. Reading Alloys was sold in March. Management cited acquisitions and Operational Excellence initiatives as expected contributors to 2020 results, while also warning of pandemic-related headwinds.
- COVID-19 risks include weaker demand, supplier or customer financial stress, collection delays, facility and workforce disruption, cybersecurity exposure from remote work, and potential effects on liquidity and future acquisitions. The company reported no COVID-related impairment trigger at March 31 and said it would continue monitoring assets.
- Environmental reserves were $29.4 million; management did not expect known environmental matters to materially affect results, financial position, or cash flows. A $6.8 million global settlement related to groundwater claims was subject to final court approval, with a hearing scheduled for August 24, 2020. Asbestos claims were disclosed; no judgments had been rendered.
Important facts for investors to verify
- How COVID-19 affected orders, organic sales, margins, cash collection, and supply chains after quarter-end.
- Whether the projected realignment savings are achieved and what additional costs or actions arise.
- Underlying earnings and margins excluding the Reading gain and realignment charges.
- Debt, revolver usage, liquidity, and cash generation as pandemic conditions evolve.
- Completion and final purchase accounting for IntelliPower, integration progress, and approval of the groundwater settlement.