How did AMETEK perform financially in 2006?

AMETEK set records for sales, operating income, net income, and diluted EPS in 2006. Sales grew 26.8% to $1.82 billion, operating income grew 32.3% to $309.0 million, and diluted EPS rose 32.6% to $1.71. Growth came from both internal growth of about 9% in each segment and acquisitions.

How much debt does AMETEK carry, and is leverage manageable?

Total debt was $681.9 million at year-end 2006, up from $631.4 million. The debt-to-capital ratio fell to 41.4% from 43.8%, and the company was in compliance with its debt covenants. Interest expense rose 28% to $42.2 million, and EBITDA covered interest about 8.3 times. The $400 million revolver was extended to 2011, with $276.1 million available.

What are the main risks to investors?

The main risks are reliance on acquisitions for growth and the integration of those acquisitions, international operations (48% of sales), cyclicality in aerospace, defense, process instrumentation, and motors, and raw material cost increases. Goodwill and intangibles of about $1.08 billion could face impairment charges if performance falls. The company also faces environmental cleanup liabilities at 16 sites and asbestos-related lawsuits, though no judgments have been entered to date.

What drove the 2006 operating margin improvement?

Segment operating margins rose to 18.9% from 18.4%, driven mainly by the higher-margin differentiated businesses in both segments. Operational Excellence (Six Sigma and lean manufacturing) and moving production to low-cost locations such as Mexico, China, and the Czech Republic also contributed. Corporate expenses fell to 1.9% of sales from 2.1%, while SG&A held flat at 12.1% of sales.

What is the outlook and capital return policy?

Management expects continued strength in most businesses in 2007 and plans capital expenditures of about $40 million (about 2% of sales). Backlog reached $536.8 million, up 21.8%, with about 86% expected to ship in 2007. The company repurchased 750,000 shares for $21.1 million in 2006 and has $31.4 million remaining under its authorization. The dividend was raised to $0.06 per quarter, and the company intends to keep pursuing acquisitions.

AME 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

AMETEK, Inc. (NYSE: AME) reported record 2006 results, with net sales up 26.8% to $1.82 billion^a, operating income up 32.3% to $309.0 million, and net income up 33.4% to $181.9 million (diluted EPS $1.71, up 32.6%).

Growth came from roughly 9% internal growth in each of its two segments, Electronic Instruments (EIG) and Electromechanical (EMG), plus five acquisitions totaling about $177.6 million^b in cash (annualized sales of roughly $142 million). Operating margin improved to 17.0% from 16.3%, and segment margins reached 18.9%, which management attributes to its differentiated businesses and Operational Excellence cost programs. Operating cash flow hit a record $226.0 million, and free cash flow reached $196.8 million.

The balance sheet grew with the acquisitions. Total debt rose to $681.9 million^c, and the debt-to-capital ratio fell to 41.4% from 43.8%. Goodwill and other intangibles total about $1.08 billion, roughly 51% of total assets, which creates impairment risk if performance weakens.

The company also declared a three-for-two stock split and a 50% dividend increase to $0.06^d per quarter, and it guided to continued strength across most businesses in 2007, with capital expenditures of about $40 million. Key risks include dependence on an acquisition-led growth strategy, international exposure (48% of 2006 sales), cyclicality in aerospace, defense, process instrumentation, and motors, raw material exposure to nickel, copper, steel, and gold, environmental liabilities (16 PRP sites, with $28.7 million of reserves), and asbestos lawsuits, for which no judgments have been entered to date.

02—Key points

Key Highlights

Record 2006 net sales of $1,819.3 million (+26.8%), with about 9% internal growth in each segment and the balance from acquisitions
Operating income rose 32.3% to $309.0 million; operating margin expanded to 17.0% from 16.3%
Diluted EPS of $1.71, up 32.6%; net income of $181.9 million, up 33.4%
Record operating cash flow of $226.0 million (+45%) and free cash flow of $196.8 million
Five 2006 acquisitions (Pulsar, Pittman, Land Instruments, Precitech, SAI) cost $177.6 million and add about $142 million in annualized sales
Debt-to-capital improved to 41.4% from 43.8%, but goodwill and intangibles are about 51% of total assets
Three-for-two stock split (Nov 2006) and a 50% quarterly dividend increase to $0.06 per share

03—Questions

Frequently Asked Questions

How did AMETEK perform financially in 2006?
AMETEK set records for sales, operating income, net income, and diluted EPS in 2006. Sales grew 26.8% to $1.82 billion, operating income grew 32.3% to $309.0 million, and diluted EPS rose 32.6% to $1.71. Growth came from both internal growth of about 9% in each segment and acquisitions.
How much debt does AMETEK carry, and is leverage manageable?
Total debt was $681.9 million at year-end 2006, up from $631.4 million. The debt-to-capital ratio fell to 41.4% from 43.8%, and the company was in compliance with its debt covenants. Interest expense rose 28% to $42.2 million, and EBITDA covered interest about 8.3 times. The $400 million revolver was extended to 2011, with $276.1 million available.
What are the main risks to investors?
The main risks are reliance on acquisitions for growth and the integration of those acquisitions, international operations (48% of sales), cyclicality in aerospace, defense, process instrumentation, and motors, and raw material cost increases. Goodwill and intangibles of about $1.08 billion could face impairment charges if performance falls. The company also faces environmental cleanup liabilities at 16 sites and asbestos-related lawsuits, though no judgments have been entered to date.
What drove the 2006 operating margin improvement?
Segment operating margins rose to 18.9% from 18.4%, driven mainly by the higher-margin differentiated businesses in both segments. Operational Excellence (Six Sigma and lean manufacturing) and moving production to low-cost locations such as Mexico, China, and the Czech Republic also contributed. Corporate expenses fell to 1.9% of sales from 2.1%, while SG&A held flat at 12.1% of sales.
What is the outlook and capital return policy?
Management expects continued strength in most businesses in 2007 and plans capital expenditures of about $40 million (about 2% of sales). Backlog reached $536.8 million, up 21.8%, with about 86% expected to ship in 2007. The company repurchased 750,000 shares for $21.1 million in 2006 and has $31.4 million remaining under its authorization. The dividend was raised to $0.06 per quarter, and the company intends to keep pursuing acquisitions.

04—Continue

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