AMTEK, Inc. (AME)

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AMETEK, Inc. (AME)

Q2 2011 Earnings Call

July 26, 2011 8:30 a.m. ET

Executives

Bill Burke - VP of IR & Treasurer

Frank Hermance- Chairman and CEO

John Molinelli - EVP and CFO

Analysts

Jim Lucas - Janney Capital Markets

Matt Summerville – KeyBanc

Jamie Sullivan - RBC Capital Markets

Robert Barry – UBS

Allison Poliniak - Wells Fargo Securities, LLC

Wendy Caplan – SunTrust Robinson

Mark Douglass - Longbow Research

Richard Eastman - Robert W. Baird

Jim Fong - Capelli

Presentation

Operator

Ladies and gentleman, thank you for standing by. Welcome to the AMETEK second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode, afterwards, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded, Tuesday July 26, 2011.

I would like to turn the call over to Mr. Bill Burke, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Bill Burke

Thank you, Savanna. Good morning, everyone, and welcome to AMETEK's second quarter earnings conference call.

Joining me this morning are Frank Hermance, Chairman and Chief Executive Officer, and John Molinelli, Executive Vice President and Chief Financial Officer.

AMETEK's second quarter results were released earlier this morning. These results are available electronically on Market Systems and on our website at the investor section of ametek.com.

A tape of today's conference call may be accessed until August 9 by calling 800-633-8284 and entering the confirmation code number 21532101.

This conference call is also webcasted, it can be accessed at ametek.com and at streetevents.com. The conference call will be archived on both of these websites.

I will remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the investor section of ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call. We will begin today with some prepared remarks, and then we will take your questions.

I will now turn the meeting over to Frank.

Frank Hermance

Thank you, Bill. AMETEK had a tremendous second quarter. We established quarterly records for sales, operating income, net income, and diluted earnings per share. Orders in the second quarter were strong, up 24% to $797 million. Book-to-bill was 1.05 and backlog of 948 million was an all-time high.

Sales in the second quarter were up 28% to $758.8 million, internal growth was very strong at 14%, while acquisitions added 12%, and currency added 2% to sales.

Operating income for the second quarter increased 36% to $157 million from $115.6 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Operating income margin of 20.7% was a 120 basis point improvement over the second quarter of 2010.

Operating margins include $5.2 million in cost associated with the performance-based accelerated vesting of restricted stock, which resulted from the doubling of our stock price from the April of 2009 grant date. Excluding these cost, operating margins in the quarter were a record 21.4%.

Net income was up 40% to $94.1 million, and diluted earnings per share of $0.58 were up 38% over last year’s second quarter.

Operating cash flow in the quarter of $115 million was superb, representing a 30% increase over last year’s second quarter.

Free cash flow was $105 million or 111% of net income. Working capital management was excellent. Operating working capital fell to 17.5% of sales, our lowest level in my tenure as CEO.

Turning our attention to the individual operating groups. Electronic Instruments group had a tremendous second quarter. Sales were up 31% to $407.4 million on continuing strength in our process, power, and industrial businesses, and the contribution from the Atlas Material Testing Tech acquisition that we completed in November.

As expected, our oil and gas businesses were very strong. Internal growth for EIG was 21%, acquisitions added 7% to sales, while currency added 3%. EIGs operating income increased 38% to $101.5 million. Operating margins were very strong at 24.9%, up 110 basis points over last year’s second quarter.

The Electromechanical group also had an excellent second quarter. Sales were up 25% to $351.5 million on strength and our differentiated businesses and the contribution from the acquisitions of Technical Service for Electronics, Haydon Enterprises, Avicenna Technology, and Coining.

Internal growth was 6%, acquisitions added 16% to sales, while currency added 3%.

EMG’s operating income increased 32% to $69.2 million, and operating margins were very strong at 19.7%, up 120 basis points over last year’s second quarter.

Operational excellence is the cornerstone strategy for the company, and our focus on cost and asset management has been a key driver to both our competitive and financial success.

Operational excellence has many facets within AMETEK, including lean manufacturing, Six Sigma, and our factories and back office operations, design for Six Sigma, and our new product development efforts, and the movement of production to low cost locals.

We also continue to drive lower cost through our global sourcing office and strategic procurement initiatives. From these sourcing activities, we recognize $7 million in savings in the second quarter and expect $28 million in savings for all of 2011. These efforts were key drivers in the very strong operating margins in the second quarter.

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