In March 2020, the Company completed the sale of its Reading Alloys business (“Reading”) to Kymera International for net proceeds of $245.3 million in cash. The sale resulted in a
pre-tax
gain of $141.0 million recorded in other income, net and income tax expense of $31.4 million.
Net sales for the first quarter of 2020 were $1,202.2 million, a decrease of $85.5 million or 6.6%, compared with net sales of $1,287.7 million for the first quarter of 2019. The decrease in net sales for the first quarter of 2020 was due to an 8% organic sales decline, an unfavorable 1% effect of foreign currency translation, a favorable 4% increase from acquisitions as well as an unfavorable 2% from the Reading divestiture.
Total international sales for the first quarter of 2020 were $561.0 million or 46.7% of net sales, a decrease of $62.5 million or 10.0%, compared with international sales of $623.5 million or 48.4% of net sales for the first quarter of 2019. The decrease in international sales was primarily driven from lower sales in Europe and Asia during the quarter.
Orders for the first quarter of 2020 were $1,210.0 million, a decrease of $168.1 million or 12.2%, compared with $1,378.1 million for the first quarter of 2019. The decrease in orders for the first quarter of 2020 was due to a 9% organic order decline, an unfavorable 2% effect of foreign currency translation, a favorable 4% increase from acquisitions as well as an unfavorable 5% impact from the Reading divestiture.
The Company recorded 2020 realignment costs totaling $43.9 million in the first quarter of 2020 (the “2020 realignment costs”). The 2020 realignment costs were composed of $35.5 million in severance costs for a reduction in workforce and $8.4 million of asset write-downs, primarily inventory, in response to the impact of a weak global economy as a result of the
COVID-19
pandemic. See Note 15 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q
for further details.
The 2020 realignment costs (in millions) reported in the consolidated statement of income as well as the impact on segment operating margins (in basis points) are as follows:
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Total reported in segment operating income
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Selling, general and administrative expenses
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Total reported in the consolidated statement of income
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The expected annualized cash savings from the 2020 realignment costs is expected to be approximately $86 million, with approximately $33 million expected to be realized in 2020.
Segment operating income for the first quarter of 2020 was $247.8 million, a decrease of $54.1 million or 17.9%, compared with segment operating income of $301.9 million for the first quarter of 2019. The decrease in segment operating income was primarily due to the lower sales discussed above and the $43.7 million of 2020 realignment costs recorded during the quarter, partially offset by the benefits of the Company’s Operational Excellence initiatives. Segment operating margins, as a percentage of net sales, decreased to 20.6% for the first quarter of 2020, compared with 23.4% for the first quarter of 2019. The first quarter of 2020 segment operating margins were negatively impacted by 370 basis points due to the 2020 realignment costs discussed above, partially offset by the benefits of the Company’s Operational Excellence initiatives.
Cost of sales for the first quarter of 2020 was $824.6 million or 68.6% of net sales, a decrease of $26.7 million or 3.1%, compared with $851.3 million or 66.1% of net sales for the first quarter of 2019. The cost of sales decrease was primarily due to the net sales decrease discussed above partially offset by the increase from the 2020 realignment costs discussed above.
Selling, general and administrative expenses for the first quarter of 2020 were $145.5 million or 12.1% of net sales, a decrease of $7.6 million or 5.0%, compared with $153.1 million or 11.9% of net sales for the first quarter of 2019. Selling, general and administrative expenses decreased primarily due to the decrease in net sales discussed above.
Consolidated operating income was $232.0 million or 19.3% of net sales for the first quarter of 2020, a decrease of $51.3 million or 18.1%, compared with $283.3 million or 22.0% of net sales for the first quarter of 2019. The consolidated operating income margins were negatively impacted by 370 basis points due to the 2020 realignment costs discussed above.
Other income, net was $141.8 million for the first quarter of 2020, compared with $3.7 million of other expense, net for the first quarter of 2019, an increase of $145.5 million. The increase in other income in the first quarter of 2020 was primarily due to the gain on the sale of Reading of $141.0 million as well as lower acquisition-related expenses during the quarter.
The effective tax rate for the first quarter of 2020 was 20.1%, compared with 20.5% for the first quarter of 2019. The lower rate for 2020 reflects the results of tax planning initiatives and lower
mix-related
foreign tax expense partially offset by lower year over year tax benefits related to share-based payment transactions. See Note 11 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
Net income for the first quarter of 2020 was $280.6 million, an increase of $76.3 million or 37.4%, compared with $204.3 million for the first quarter of 2019.
Diluted earnings per share for the first quarter of 2020 were $1.22, an increase of $0.33 or 37.1%, compared with $0.89 per diluted share for the first quarter of 2019.
net
sales totaled $774.2 million for the first quarter of 2020, a decrease of $32.7 million or 4.1%, compared with $806.9 million for the first quarter of 2019. The net sales decrease was due to a 9% organic sales decline, partially offset by the acquisitions of Gatan and IntelliPower.
EIG’s operating income was $171.3 million for the first quarter of 2020, a decrease of $31.8 million or 15.7%, compared with $203.1 million for the first quarter of 2019. EIG’s decrease in operating income was primarily due to the decrease in sales discussed above as well as the $22.8 million of 2020 realignment costs recorded during the quarter. EIG’s operating margins were 22.1% of net sales for the first quarter of 2020, compared with 25.2% for the first quarter of 2019. EIG’s 2020 operating margins were negatively impacted by 300 basis points due to the 2020 realignment costs discussed above.
net sales totaled $428.0 million for the first quarter of 2020, a decrease of $52.8 million or 11.0%, compared with $480.8 million for the first quarter of 2019. The net sales decrease was due to a 7% organic sales decline, an unfavorable 1% effect of foreign currency translation, a favorable 3% impact from the PDT acquisition as well as an unfavorable 6% impact from the Reading divestiture.
EMG’s operating income was $76.6 million for the first quarter of 2020, a decrease of $22.2 million or 22.5%, compared with $98.8 million for the first quarter of 2019. EMG’s decrease in operating income was primarily due to the decrease in sales discussed above as well as the $20.9 million of 2020 realignment costs recorded during the quarter, partially offset by benefits from the Group’s Operating Excellence initiatives. EMG’s operating margins were 17.9% of net sales for the first quarter of 2020, compared with 20.6% for the first quarter of 2019. EMG’s 2020 operating margins were negatively impacted by 490 basis points due to the 2020 realignment costs discussed above.
Liquidity and Capital Resources
Cash provided by operating activities totaled $270.8 million for the first three months of 2020, an increase of $74.5 million or 38.0%, compared with $196.3 million for the first three months of 2019. The increase in cash provided by operating activities for the first three months of 2020 was primarily due to reduced investments in working capital.
Free cash flow (cash flow provided by operating activities less capital expenditures) was $253.8 million for the first three months of 2020, compared with $174.8 million for the first three months of 2019. EBITDA (earnings before interest, income taxes, depreciation and amortization) was $439.2 million for the first three months of 2020, compared with $336.7 million for the first three months of 2019. Free cash flow and EBITDA are presented because the Company is aware that they are measures used by third parties in evaluating the Company.
Cash provided by investing activities totaled $115.6 million for the first three months of 2020, compared with cash used by investing activities of $17.8 million for the first three months of 2019. Additions to property, plant and equipment totaled $16.9 million for the first three months of 2020, compared with $21.4 million for the first three months of 2019. For the first three months of 2020, the Company paid $116.6 million, net of cash acquired, to acquire IntelliPower in January 2020 and received proceeds of $245.3 million from the sale of its Reading business.
Cash provided by financing activities totaled $486.6 million for the first three months of 2020, compared with cash used by financing activities of $165.9 million for the first three months of 2019. At March 31, 2020, total debt, net was $3,252.6 million, compared with $2,768.7 million at December 31, 2019. For the first three months of 2020, total borrowings increased by $522.3 million, compared with a $156.3 million decrease for the first three months of 2019. At March 31, 2020, the Company had available borrowing capacity of $1,067.3 million under its revolving credit facility, including the $500 million accordion feature.
The
debt-to-capital
ratio was 37.9% at March 31, 2020, compared with 35.1% at December 31, 2019. The net
debt-to-capital
ratio (total debt, net less cash and cash equivalents divided by the sum of net debt and stockholders’ equity) was 27.3% at March 31, 2020, compared with 31.7% at December 31, 2019. The net
debt-to-capital
ratio is presented because the Company is aware that this measure is used by third parties in evaluating the Company.
Additional financing activities for the first three months of 2020 included cash dividends paid of $41.2 million, compared with $31.8 million for the first three months of 2019. Effective February 12, 2020, the Company’s Board of Directors approved a 29% increase in the quarterly cash dividend on the Company’s common stock to $0.18 per common share from $0.14 per common share. Proceeds from stock option exercises were $7.0 million for the first three months of 2020, compared with $24.9 million for the first three months of 2019.
As a result of all the Company’s cash flow activities for the first three months of 2020, cash and cash equivalents at March 31, 2020 totaled $1,253.4 million, compared with $393.0 million at December 31, 2019. At March 31, 2020, the Company had $303.6 million in cash outside the United States, compared with $357.9 million at December 31, 2019. The Company utilizes this cash to fund its international operations, as well as to acquire international businesses. The Company is in compliance with all covenants, including financial covenants, for all of its debt agreements. The Company believes it has sufficient cash-generating capabilities from domestic and unrestricted foreign sources, available credit facilities and access to long-term capital funds to enable it to meet its operating needs and contractual obligations in the foreseeable future.
Critical Accounting Policies
The Company’s critical accounting policies are detailed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition of its Annual Report on Form
10-K
for the year ended December 31, 2019. Primary disclosure of the Company’s significant accounting policies is also included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of its Annual Report on Form
10-K.
Forward-Looking Information
Information contained in this discussion, other than historical information, is considered “forward-looking statements” and is subject to various factors and uncertainties that may cause actual results to differ significantly from expectations. These factors and uncertainties include risks related to the
COVID-19
pandemic and its potential impact on AMETEK’s operations, supply chain, and demand across key end markets; general economic conditions affecting the industries the Company serves; changes in the competitive environment or the effects of competition in the Company’s markets; risks associated with international sales and operations; the Company’s ability to consummate and successfully integrate future acquisitions; the Company’s ability to successfully develop new products, open new facilities or transfer product lines; the price and availability of raw materials; compliance with government regulations, including environmental regulations; and the ability to maintain adequate liquidity and financing sources. A detailed discussion of these and other factors that may
affect the Company’s future results is contained in AMETEK’s filings with the U.S. Securities and Exchange Commission, including its most recent reports on Form
10-K,
10-Q
and
8-K.
AMETEK disclaims any intention or obligation to update or revise any forward-looking statements, unless required by the securities laws to do so.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. Under the supervision and with the participation of our management, including the Company’s principal executive officer and principal financial officer, we have evaluated the effectiveness of our system of disclosure controls and procedures as required by Exchange Act Rule
13a-15(b)
as of March 31, 2020. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
Such evaluation did not identify any change in the Company’s internal control over financial reporting during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.