AMETEK, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; compared with the corresponding 2011 periods unless otherwise noted. AMETEK operates through its Electronic Instruments Group (EIG) and Electromechanical Group (EMG). Financial figures below are in U.S. dollars; amounts are rounded to millions where appropriate.
Financial performance
- Third quarter: Revenue was $839.4 million, up 11.8%; operating income was $188.2 million, up 17.9%, with operating margin of 22.4% versus 21.3%; net income was $115.4 million, up 17.8%; diluted EPS was $0.47 versus $0.40.
- First nine months: Revenue was $2,492.4 million, up 11.9%; operating income was $555.9 million, up 18.6%, with operating margin of 22.3% versus 21.0%; net income was $339.2 million, up 20.0%; diluted EPS was $1.39 versus $1.16.
- Segment results, third quarter: EIG revenue rose 11.6% to $457.1 million and operating margin increased to 26.6% from 25.0%. EMG revenue rose 12.1% to $382.3 million and operating margin increased to 20.2% from 20.0%.
- Cash flow, first nine months: Operating cash flow was $419.2 million versus $355.8 million. Capital expenditures were $33.3 million; company-defined free cash flow was $385.9 million versus $323.4 million. Investing activities used $530.4 million, including $497.8 million for acquisitions.
- Liquidity and debt: Cash and equivalents were $162.9 million at September 30, 2012, versus $170.4 million at year-end 2011. Total debt was $1,372.2 million versus $1,263.9 million; debt-to-capital was 36.1% versus 38.1%. The company reported $634.8 million of available revolving credit capacity, including the accordion feature, and no significant debt maturities until 2015. It reported compliance with debt covenants.
- Other: Orders for the first nine months were $2,579.4 million, up 11.0%; backlog was $998.4 million at September 30, up 9.5% from year-end 2011. The quarterly dividend increased 50% to $0.06 per post-split share. The three-for-two stock split was paid in June 2012.
Changes and management commentary
- Quarterly revenue growth reflected acquisitions, approximately 2% internal sales growth, and a 2% unfavorable currency effect. For the first nine months, growth reflected approximately 3% internal sales growth and a 2% unfavorable currency effect, with acquisitions contributing the remainder.
- Management attributed stronger operating income and margins primarily to Operational Excellence initiatives and operating leverage. EIG’s internal growth was led by oil and gas, aerospace, and power; EMG’s quarterly sales increase was primarily acquisition-related.
- Interest expense rose 9.8% in the quarter and 9.5% year to date, mainly because of acquisition-related revolving-credit borrowings and a Swiss-franc senior note issued in 2011. The effective tax rate was 30.4% for the quarter versus 29.5%; it was 31.0% for both nine-month periods. Management cited the absence in 2012 of the 2011 R&D tax credit as a factor in the quarterly comparison.
Acquisitions, outlook, and risks
- AMETEK acquired O’Brien Corporation in January 2012 and Dunkermotoren in May 2012 for a combined $497.8 million net of cash acquired. Their reported-period impact on sales, net income, and diluted EPS was described as immaterial. Goodwill and other intangible assets allocated to the acquisitions were $251.8 million and $238.5 million, respectively.
- In October 2012, after quarter-end, AMETEK acquired Micro-Poise for approximately $170 million; estimated annual sales were approximately $125 million. Management said the 2012 and 2011 acquisitions and Operational Excellence were expected to benefit the remainder of 2012. The filing provides no specific numerical earnings or revenue guidance.
- Forward-looking risks include economic conditions, competition, international operations, acquisition execution and integration, new-product and facility development, raw-material availability and pricing, environmental compliance, and liquidity and financing access.
- Environmental reserves were $23.7 million at September 30, 2012. Management considered reserves adequate and did not expect ultimate costs to materially affect results, financial position, or cash flows. Gross unrecognized tax benefits were $33.5 million, including $30.9 million that would affect the effective tax rate if recognized.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported growth and backlog conversion reflects sustainable internal demand versus acquisitions, and how current order trends are developing.
- Whether acquisition integration, synergies, and expected benefits support margins, given the sizable goodwill and intangible-asset additions and increased debt.
- Cash generation and working-capital trends, including the effect of acquisition spending and foreign-held cash on financial flexibility.
- Debt levels, borrowing availability, covenant compliance, and the timing and cost of future financing.
- Developments in environmental remediation obligations, uncertain tax positions, and the post-quarter Micro-Poise acquisition.