AMETEK Inc.’s (AME) second quarter earnings of $61 cents per share beat the Zacks Consensus Estimate by two cents and were better than management’s guidance. Earnings also increased 6.7% sequentially and 16.3% on a year-over-year basis. Higher revenue base primarily led to the increase in earnings.
Total Revenue
AMETEK reported revenues of $990.7 million for the quarter, up 1.6% sequentially and 12.7% on a year-over-year basis. Moreover, it was ahead of the Zacks Consensus Estimate of $973.0 million. The increase in revenues was driven partly by acquisitions and partly by solid execution of its four growth strategies. Organic sales added 4%, acquisitions contributed 8% and currency added 1% to total revenue.
International revenues contributed 56% of the total revenue, which was up from 54% in the year-ago quarter. The increase in international sales was primarily due to strong organic growth in Asia, which was up mid-teens on a percentage basis aided by broad-based strength across its businesses and synergies from recent acquisitions.
Orders were at $1.1 billion, up 21% from the year-ago quarter aided by solid organic growth and contributions from recent acquisitions. Backlog was $1.25 billion. The book-to-bill ratio in the quarter was 1.09.
AMETEK has two operating segments— Electronic Instruments Group ("EIG") and Electromechanical Group ("EMG"), which generated 58% and 42% of revenues, respectively in the quarter.
Revenues by Segment
EIG revenues were up 0.2% sequentially and 18.6% on a year-over-year basis to $573.3 million. About 14 percentage points of the year-over-year increase was attributed to acquisitions. Organic volume was also strong, contributing 4 percentage points. The company’s ultra-precision technologies and materials analysis businesses did particularly well. Foreign currency contributed 1 percentage point of the growth. AMETEK saw strong core growth across the Aerospace, Process, and Power & Industrial businesses.
EMG sales were up 3.6% from the previous quarter and 5.6% on a year-over-year basis to $417.4 million. About 4 percentage points of the year-over-year increase was attributed to organic growth. Favorable currency impact added another 2 percentage points. Organic strength was broad-based but the precision motion control and engineered materials interconnect and packaging businesses were particularly strong.
Operating Performance
AMETEK’s gross margin for the quarter was 36.3%, up 45 basis points (bps) from 35.9% in the preceding quarter and 93 (bps) from the year-ago quarter’s 35.4%.
AMETEK’s operating income of $231.7 million was higher than the previous quarter’s $221.6 million as well as the year-ago quarter’s 202.6 million. Its operating margin of 23.4% was up 67 bps from the prior quarter and 33 bps from the year-ago quarter.
Operating Profit by Segment
Operating income in the EIG segment of $151.5 million was up 17% from the year-ago quarter. Its operating margin was 27.6%, up 80 basis points from the year-ago quarter.
EMG operating income increased 10% on a year-over-year basis to $92.1 million. Operating margin was 22.1%, up 100 bps from the year-ago quarter.
Net Income
AMETEK’s net income was $150.1 million or a 15.1% net income margin, compared with $128.3 million or 14.6% net income margin in the year-ago quarter. Reported earnings per share were 61 cents per share compared with 52 cents per share in the same quarter last year. There were no one-time items.
Balance Sheet
The cash and cash equivalents balance at quarter end was $282.8 million, up from $265.3 million in the previous quarter. Accounts receivables were $594.2 million versus $592.4 million in the prior quarter. Total debt was $1.6 billion versus $1.41 billion at the end of the prior quarter.
Capital expenditures were $15 million and operating cash flow was $155 million, up 21% from the year-ago quarter. Free cash flow was $140 million.
Outlook
Management provided limited guidance for the third quarter and for the year.
For the third quarter, management expects revenues to be up mid-teens on a percentage basis from the year-ago quarter. Organic growth is expected to be up low to mid single-digits. Earnings per share are expected to be approximately 59 cents to 61 cents (mid-point 60 cents). The Zacks Consensus Estimate is pegged at 60 cents, within the guided range.
For 2014, management expects the tax rate to be between 28% and 29%. Capital expenditures are expected to be $70 million. Depreciation and amortization is expected to be around $142 million and free cash flow is likely to be 110% of net income.
Recommendation
AMETEK reported better-than-expected second quarter results with both the top and bottom lines beating the Zacks Consensus Estimate. Moreover, both revenues and earnings increased year over year. Management provided moderate earnings guidance for the third quarter.
The company believes that strong execution of its four core growth strategies of operational excellence, global market expansion, new product development, and strategic acquisitions will continue to play an important role in driving its growth. This in combination with its excellent backlog and strong portfolio of businesses will help the company post better results quarter after quarter.
Currently, AMETEK has a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include National Instruments Corporation (NATI), Agilent Technologies Inc. (A) and Cognex Corporation (CGNX), all holding a Zacks Rank #2 (Buy).
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