AMETEK, Inc. — FY 2017 Form 10-K
Business and period. AMETEK is a global manufacturer of electronic instruments and electromechanical products, reported in Electronic Instruments (EIG) and Electromechanical (EMG). This annual report covers the fiscal year ended December 31, 2017; fourth-quarter comparisons are included below.
Financial performance and key metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $4,300.2 million | $3,840.1 million |
| Operating income | $915.1 million | $801.9 million |
| Operating margin | 21.3% | 20.9% |
| Net income | $681.5 million | $512.2 million |
| Diluted EPS | $2.94 | $2.19 |
| Cash from operating activities | $833.3 million | $756.8 million |
| Free cash flow | $758.2 million | $693.5 million |
| Total debt, net | $2,174.3 million | $2,341.6 million |
| Cash and cash equivalents | $646.3 million | $717.3 million |
- Sales increased 12.0%, reflecting 6% organic growth and a 6% contribution from acquisitions; currency translation was essentially flat. EIG sales rose 14.0% and EMG sales rose 8.8%.
- Orders increased 18.0% to $4,539.8 million. Year-end backlog reached a record $1,396.1 million, up 20.7%; approximately 88% was expected to ship during 2018.
- Segment operating income rose 15.5% to $988.4 million; segment margin increased to 23.0% from 22.3%. EIG margin was 25.2% versus 24.5%; EMG margin was 19.3% versus 18.8%.
- International sales were $2,214.0 million, up 10.1%, and represented 51.5% of sales, compared with 52.4% in 2016.
- Fourth-quarter sales were $1,143.1 million, up 17.5%; net income was $238.5 million versus $109.1 million, and diluted EPS was $1.03 versus $0.47. Fourth-quarter EPS included a $0.39 tax-reform benefit.
- Cash from operations rose 10.1%; management attributed the increase primarily to higher net income and lower operating working capital, partly offset by higher pension contributions. Capital expenditures were $75.1 million.
- Current assets were $1,934.7 million and current liabilities were $1,138.7 million at year-end. The company reported $1,108.1 million of available revolving-credit capacity, including the accordion feature, and stated it complied with debt covenants.
Material changes and unusual items
- The 2017 U.S. Tax Cuts and Jobs Act produced a provisional net tax benefit of $91.6 million, increasing annual diluted EPS by $0.39. This comprised a $185.8 million deferred-tax remeasurement benefit, partly offset by a $94.2 million expense, primarily for the mandatory tax on previously deferred foreign earnings. The company was still evaluating the law’s effects, including GILTI; adjustments could affect tax expense through 2018.
- 2017 realignment costs totaled $16.8 million, reducing net income by $13.0 million and diluted EPS by $0.05. These included severance, asset write-downs and a $6.0 million cost to withdraw from a multiemployer pension plan. Expected annualized cash savings are approximately $5 million, fully realized in 2019.
- In 2016, realignment costs of $25.6 million and a $13.9 million noncash trade-name impairment charge reduced net income by $17.0 million and $8.6 million, respectively. The 2016 comparison also reflected weak global markets and a strong U.S. dollar.
- AMETEK spent $556.6 million, net of cash acquired, on three 2017 acquisitions: Rauland, MOCON and Arizona Instrument. In January 2018, it acquired FMH Aerospace for approximately $235 million in cash. The board also approved a 56% quarterly dividend increase, to $0.14 per share effective February 1, 2018.
- The company repaid $270 million of 6.20% senior notes at maturity in Q4 2017. Senior notes totaling $305 million were scheduled to mature in 2018.
Outlook, risks and contingencies
- Management described a strengthening global economy, acquisition contributions and Operational Excellence initiatives as supportive of 2017 results and expected these factors, including prior realignment actions, to benefit 2018 results. Its stated long-term corporate goal is double-digit annual sales and EPS growth over the business cycle; this is not a specific 2018 earnings forecast.
- 2018 capital expenditures were expected to approximate 2% of sales. Management estimated 2018 defined-benefit pension contributions of approximately $2 million to $6 million, following $54.8 million contributed in 2017.
- Key risks include cyclical end markets and order visibility; acquisition execution and integration; international, currency, trade and compliance exposures; competition and product development; raw-material availability and prices; cybersecurity and operational disruptions; debt covenants; and potential impairment of goodwill and intangibles. Goodwill and other intangible assets totaled $5,129.0 million, or 66% of total assets.
- Environmental reserves were $30.1 million at year-end. AMETEK reported groundwater-contamination litigation concerning a formerly owned California site, for which it said reasonably possible losses could not be estimated; management did not expect the matter to materially affect results, financial position or cash flows. The company also reported other environmental and legal matters and stated its reserves were adequate for known obligations.
- The 2017 tax-reform amounts were provisional. Adoption of the new lease accounting standard could significantly affect reported financial position; the company had not yet determined the impact.
Important facts for investors to verify
- How much of 2017 earnings growth persists after excluding the $91.6 million tax benefit and accounting for realignment costs.
- Whether backlog converts to sales as expected and whether organic growth and margins continue across both segments.
- Integration, purchase-price allocation and return outcomes for the 2017 acquisitions and FMH Aerospace; Rauland also had a potential $30 million contingent payment tied to revenue milestones.
- Final tax-reform accounting, including the mandatory foreign-earnings tax and GILTI, and the related cash-tax and repatriation consequences.
- Debt repayment and refinancing needs, near-term maturities, available credit capacity and the effect of contractual obligations.
- Environmental and other litigation exposure, pension funding assumptions, and the effect of future lease-accounting adoption.