Spruce Point Capital
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Disclaimer Spruce Point Capital
This research presentation report expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation report. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses and projections. You should assume these types of statements, expectations, pro forma analyses and projections may turn out to be incorrect for reasons beyond Spruce Point Cap ital Management LLC’s control. This is not investment advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers has a short position in all stocks (and/or are long puts/short call options of the stock) covered herein, including without limitat ion AMETEK Inc. (“AME”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following p ublication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor or broker/dealer. To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and d oes not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of AMETEK Inc. or other insiders of AMETEK Inc. that has not been publicly disclosed by AMETEK Inc. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. 2
Brief Overview of Ametek Spruce Point Capital
Business Description Ametek is a global manufacturer of electronic instruments and electromechanical devices with operations in North America, Europe, Asia and South America. The Company is listed on the New York Stock Exchange (symbol: AME). The common stock of AMETEK is a component of the S&P 500 and the Russell 1000 Indices
$ in mm except per share amounts Stock Price Shares Outstanding Net Exercisable Options Fully Diluted Shares Market Capitalization Total Debt Less: Cash (1) Total Enterprise Value
$52.20 245.9 2.2 248.1 $12,953 $1,636 $370 $14,219
Valuation on Company Reported Metrics Metrics LTM Sept 14 2014E 2015E EV/Sales 3.6x 3.5x 3.3x EV/EBITDA 13.8x 13.7x 12.5x Price/EPS 22.2x 21.7x 19.5x Debt/EBITDA 1.6x 1.6x 1.4x
(1) $307.1m of cash is outside of the U.S.
The Company markets its products worldwide through two operating groups, the Electronic Instruments Group (“EIG”) and the Electromechanical Group (“EMG”). EIG provides monitoring, testing, calibration and display devices for the process, aerospace, power and industrial markets. EMG produces engineered electrical connectors for electronic applications; precision motion control solutions; specialty metals and alloys; and electric motors, blowers and heat exchangers. End markets include aerospace and defense, medical devices, factory automation, mass transit, petrochemical and other industrial markets. The Company grows primarily through strategic acquisitions focused on markets in instrumentation and electromechanical devices.
EIG EMG Total Sales % growth
2008 $1,403 $1,128 $2,531 18.5%
Fiscal Year Ended Dec 31, 2009 2010 2011 2012 $1,147 $1,324 $1,647 $1,873 $952 $1,147 $1,343 $1,462 $2,098 $2,471 $2,990 $3,334 -17.1% 17.8% 21.0% 11.5%
2013 $2,035 $1,560 $3,594 7.8%
LTM Sept '14 $2,344 $1,596 $3,940 12.8%
Gross Profit % margin
$801 31.6%
$662 31.6%
$824 33.3%
$1,034 34.6%
$1,180 35.4%
$1,270 35.3%
$1,397 35.5%
EBITDA % margin
$496 19.6%
$432 20.6%
$555 22.5%
$722 24.2%
$851 25.5%
$934 26.0%
$1,030.6 26.2%
Diluted EPS
$1.03
$0.85
$1.18
$1.58
$1.88
$2.10
$2.35
Cash from Ops Less: Capex Less: Acquisitions Adj Free Cash Flow Source: Ametek
$247 ($44) ($463) ($260)
$365 ($33) ($73) $259
$423 ($39) ($539) ($155)
$509 ($51) ($474) ($17)
$612 ($57) ($748) ($193)
$661 ($63) ($414) $183
$723 ($73) ($824) ($175)
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Spruce Point Capital
Ametek’s Historic Stock Price Rise Defies Numerous Red Flags Ametek Appears to Have Mislead Investors About the Results of Dunkermotoren, its Largest Deal Ever Completed. Its CFO “Retires” and its Cost Savings Estimates Explode Higher
$50.00 Theron Matthews, Director of Operations at Chandler Engineering Files Whistleblower Case Under Sarbanes Oxley; Claims Improper Inventory and Revenue Booking
$40.00
$30.00
$20.00
Acquires Beleaguered Zygo for $280m
Added to the S&P 500 Index
$60.00
“Lower of Cost or Market” Language Dropped From Inventory Disclosure Approx 50/50 LIFO vs. FIFO Accounting
Updates Equity Clawback Language for Fraud and Financial Misstatements
Head of Audit Committee Quietly Resigns
Announces Departure of Electronics Division President
$10.00
Accelerates Change From LIFO to FIFO
$0.00
Management Adjusts Operating Income Bonus Target for ‘Excess Inventory’
30.0
25.0 French Auditor No Longer Audits Cameca
20.0
Ametek India Auditor Issues Qualified Opinion; Notes Continued Failure of Internal Controls Tied to Sales 15.0 and Inventory Acct’g
FBI Charged Chris Stehm, Former Controller and Head Accountant at Chandler Engineering, and Later VP Finance and Accounting at Ametek’s HCC Division w/ Wire Fraud
10.0
5.0
0.0
Volume
Stock Price
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Executive Summary
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
Spruce Point Capital
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Spruce Point Sees 30 - 50% Downside Risk in Ametek For the Following Reasons:
Ametek Is An Aggressive Roll-up, Aiding EBITDA Margin Overstatement: With Limited Organic Growth, Ametek is Under Pressure as its Strategy Appears to be Hitting a Brick Wall. It Underinvests in R&D and Buys What it Cannot Develop. This Strategy Inherently Benefits its Margins and EPS, Which We Have Evidence that Suggests Are Overstated By Up to 600bps. It Has Among the Highest Goodwill/Intangibles to Assets of Industrial Peers at 69% and Appears to Be Using Aggressive Purchase Price Acct’g to Amortize Costs Too Slowly. Its Cumulative Cash Flow After Acquisition is Negative and its Dependence on External Debt is Rising; Foreign Financial Filings Also Point to Funding Issues Ametek Appears to Have Misled Investors: About the Performance of its Largest Acquisition Ever in 2012. Curiously, its CFO “Retired” Quickly After and Equity Clawback Language Was Modified to Cover Acts of Fraud. We’ve Found Other Instances Where Ametek Grossly Overestimated the Performance of its Acquisitions A Whistleblower Case and FBI Indictment Appear Linked: A Whistleblower in 2009 Claimed He Observed Revenue and Inventory Acct’g Irregularities. Curiously, in 2013 the FBI Charged Ametek’s VP of Finance For Embezzlement By Submitting Phony Travel Expenses. The Two Individuals Worked Together at Ametek Chandler During the Same Period Inventory Acct’g Changes Enable EPS Inflation: Ametek Has Surreptitiously Changed From LIFO to FIFO and Dropped the “Lower of Cost or Market” Provision. Mgmt Has Made Quiet Adjustments to its Bonus Target for Obsolete Inventory, (Yet Has Never Disclosed to Investors a Single Inventory Write-down!). It Appears Ametek is Spinning a Story of Superior Procurement and Supply Chain Cost Savings as a Cookie Jar To Cover its Expanding Margins E&Y Has Been Ametek’s Auditor Since the 1930s: Three Non-E&Y Auditors Abroad Appear to Have Concerns. In France, Two Auditors Appear to Have Resigned. In India, its Auditor Issued a Qualified Opinion and Noted Inventory, Sales and Travel Expense Issues! The Chairman of Ametek’s Audit Committee Mysteriously Retired in 2011 and its Current Head of Internal Audit Is Not Even a Currently Licensed CPA Despite the Company’s Claim Concerns With the “Asia Growth” Story: Ametek’s Head of Asia Recently Retired and Our Review of Some Key Businesses Found Substantial Red Flags About its Success in the Region, Including Filing Delinquencies, an Insolvent Operation, and Declining Financial Performance at its Oldest Asian Operating Entity Massive Overvaluation, Insider Alignment w/Shareholders Is Broken: Insiders Own Just 2% and Ownership Declines Every Year. Ametek Trades at a Huge Premium to the Sum of its Acquired Businesses on the Belief it Can Add Superior Lasting Value Through Operational Improvements, Which Result in Abnormally High EBITDA Margins 6 and Continued 15%+ Growth Through Acquisitions. We Believe These Assumptions Need to Be Challenged
Spruce Point Capital
Evidence Suggesting Ametek’s EBITDA Margins May Be Overstated By 400 – 600 bps
1. Ametek’s voracious acquisition strategy has resulted in a balance sheet bloated with goodwill + intangible assets: currently 69% of total assets! I.
Its fastest growing intangible asset category is “customer relationships,” which is unusual given it tends to announce its acquisition rational as acquiring ‘complementary’ products or “expanding penetration” further in existing markets to current customers. Few businesses enjoy nearly two decade relationships, yet Ametek amortizes customer relationships over an avg period of 19 yrs, which appears very high relative to industrial peers
II.
We estimate this accounting maneuver adds ~5% to the overstatement of its EBITDA and 2.5% to EPS
2. Ametek underinvests in self-funded R&D, and acquires what it does not build internally. In various deals we’ve analyzed, it has acquired companies where the seller’s have borne the cost of R&D investment. Therefore, Ametek is essentially capitalizing the acquired R&D on its balance sheet vs. funding and expensing R&D internally. We estimate Ametek’s underinvestment in R&D flatters its EBIT margins by approximately 200bps 3. A peer analysis of industrial competitors on gross margin vs. EBITDA margin suggests Ametek is an extreme outlier. Given its relatively low consolidated gross margin, it has an unusually high EBITDA margin. A peer regression suggests its EBITDA margin should be closer to 20 – 21%, not 26% 4. We’ve obtained over 14 public financial statements across 10 countries of Ametek’s business entities. In total, we find the average EBITDA margin of these targets to be approximately 21%. Our analysis shows evidence of recent margin contraction, not margin expansion across these operating businesses
5. Inventory accounting assumptions greatly affect both Gross and EBITDA margins. We have observed significant red flags warranting caution: I.
Ametek does not discuss factors affecting its Cost of Sales or Gross Margin in its SEC Filings, which is suspicious and opaque for its investors
II.
A whistleblower case in 2009 claimed irregular revenue booking and accounting designed to understate the true cost of inventory. While the case was never proven, we observe that Ametek’s Chandler Instruments, where the irregularities were noted, recently had its former Financial Controller and Chief Accountant charged with embezzlement of submitting phony travel expenses by the FBI in October 2013!
III.
Ametek’s consolidated inventory accounts dropped the “Lower of Cost or Market” provision, and it has quietly changed its mix from LIFO to FIFO. These changes accelerated around the time of the whistleblower complaint. Its inventory turnover had also been steadily declining from 2011 to Q2’14
IV.
Ametek’s management mysteriously added language in its Proxy Statement to adjust its operating income bonus target for ‘excess/obsolete inventory,’ yet it has never disclosed an inventory write-down to investors. Furthermore, management is also awarded annual bonuses tied to working capital management. Inventory valuation is a critical component in the calculation of working capital
V.
In India, where Ametek markets over 30 of its global products, the local auditor noted issues of “continuing failure to correct a major weakness in the internal control system.” Specific problems: highlighted ageing and valuation of inventory, travel expenses, and poor working capital management
VI.
Ametek notes an usually high amount of off-balance sheet inventory purchase obligations, approx. 75% of current inventory. An analysis of peers suggests that 45% is industry best practice. Ametek also uses inventory consignment strategies designed to keep inventory off its balance sheet
VII.
Ametek repeatedly raises its estimated supply chain and procurement cost savings. We think this could be a cookie jar used as a cover to explain the margin increases. We note the savings estimates exploded in size in mid 2012, a period we believe Ametek was strained from a botched acquisition in Germany and facing cash flow issues from its European businesses. Its CFO resigned shortly after the German acquisition was announced and its equity 7 clawback language was changed to explicitly cover fraud and intentional conduct
Spruce Point Capital
Aggressive Acquisition and Financial Strategy is Core to Facilitating Margin Overstatement
Facing challenges in its core vacuum motors market, Ametek embarked on an aggressive acquisition strategy. Since 2000, Ametekhas invested $4.6bn for over 60 acquisitions; cumulative operating cash flows, after capital expenditures and recurring acquisitions has been -$627m. This aggressive roll-up strategy has allowed Ametek to beat Wall Street EPS estimates an astounding 95% of the time in the past decade, a result that trounces its industrial peers’ ability to satisfy Wall Street, and appears too good to be true
Goodwill and Intangibles / Assets = 69% is the highest among industrial peers, signaling possible overpayment Quality and actionable acquisition targets appear to be shrinking in number and valuations rising; latest deals to acquire Zygo (Nasdaq: ZIGO) and Amptek are recent examples of paying richly for no growth businesses Since 2010, Ametek has acquired 11 companies from private equity (“PE”) firms for $1.8bn.Questionable what added value Ametek can bring to the table, especially to PE-owned targets. PE firms are known to streamline costs and accelerate growth opportunities for portfolio companies No demonstrated revenue synergies from acquisitions >> organic growth essentially 1% p.a. in 2012 and 2013
Appears to be hitting a wall in terms of cost cutting and working capital efficiency gains Underinvests in R&D + capex. Acquisitions must be accounted for in evaluating true cash flow
Ametek conducts minimal share buybacks (essentially to offset share dilution) and its dividends paid are effectively debt-funded when viewed in context of its capital allocation preference for deals Dependence on short-term debt was rising with ~75% of its credit revolver having to cover short-term debt obligations utilized at the end of Q2’14. We believe Ametek’s main European funding and holding entities, Ametek Netherlands B.V and Ametek European Holdings, both of which stopped filing financials in 2012, showed limited cash holdings and declining equity. Ametek’s recent need to raise $700m in private placement notes in Oct. ‘14 illustrates our concerns that its ‘strong operating cash flow’ to fund deals is not as it appears. By accessing the private placement market, Ametek was able to avoid SEC registration and scrutiny of its financial filings, which we believe are cryptic and provide an incomplete picture for investors to fully assess its condition. For example, Ametek does not even discuss factors affecting its gross margins Warning Signs of a Stressed Financial Model Have Appeared: Whistleblower Case and FBI Indictment
In a 2009 whistleblower case, Matthews vs. Ametek, claimed Ametek was booking revenue and inventory improperly at Chandler Engineering. In 2013, the FBI indicted Chris Stehm, former Chandler Chief Accounting Officer and VP of Finance at its HCC division for embezzlement. The two men worked together, with Matthews even warning Stehm he observed things that “looks, smells, and tastes like fraud.” Curiously, Ametek set-up a CV/BV tax structure in 2006. We pulled the public filing for Ametek International C.V. in the Netherlands, and found none other than Chandler listed as its only Limited Partner. We do not understand the significance of Chandler, a 8 tiny business based in Oklahoma, but it appears to play a significant financial role within the organization.
Spruce Point Capital
Highly Suspect and Aggressive Accounting Appears to Bolster Margins and EPS
Ametek Appears to Use Aggressive Acquisition Accounting To Bolster EBITDA Margins and EPS: Ametek has allocated >$1.0 billion of deal values to “customer relationships” and amortizes these costs over 19yrs vs. 10yrs (median of peers). Customer relationships account for 80% of its intangible asset allocation vs. 50% for peers. We believe Ametek is really purchasing technology and products it does not develop internally, and according to most of its own deal commentary, is buying complimentary products to sell to existing customers We estimate the impact of amortizing costs too slowly adds 130bps to EBITDA margins and overstates EPS by approximately 2.5%. Furthermore, we estimate that if Ametek were to boost its R&D expenditure to 6% (peer average) instead of capitalizing costs via acquisitions, its EBITDA margins would contract by ~200bps and its EPS would be 4 – 5% lower
Ametek Is Primarily a Manufacturer and its Inventory Accounting is Highly Suspect: Ametek’s margins continue to expand to record levels, despite inventory turns that have declined since 2011. AME has surreptitiously been changing from LIFO to FIFO in a material way. In 2005 the FIFO/LIFO split was 50/50%, and now it’s 80/20%, In an inflationary env’t, this classic accounting switch bolsters reported EPS. AME also doesn’t appear to apply “Lower of Cost or Market - LCM” GAAP accounting; its SEC filing curiously omit this LCM language! Ametek holds a high % of raw materials in inventory relative to peers given its claims of lean/JIT manufacturing. It reports significant fixed-price off-balance sheet purchase commitments (75% of inventory); unusually high relative to its peers that report ~45%. This would make sense if Ametek had a high degree of customer demand visibility; in our opinion, unlikely given its cyclical end markets. Ametek uses inventory consignment strategies w/suppliers, and may be using tactics to understate inventory Management’s operating income bonuses have been adjusted for the past 3yrs for a mysterious “estimated tax benefit realized through the disposal of excess/obsolete inventory,” yet Ametek claims to have never taken an inventory write-down or charge! In our opinion, Ametek may be using its ever-expanding ‘sourcing cost savings’ as a cookie jar to bolster margins Warning: Ametek’s Non-Ernst & Young Auditors Abroad Appear to Have Accounting Reservations Ametek’s relationship with its auditor E&Y goes back to the 1930s. Ametek entered India in 2009, and has most recently received a “qualified” audit opinion from its local auditor. The auditor noted changes to inventory valuation that made the impact on the financials indeterminable, along with continuing failure to strengthen internal controls tied to sales of goods and services. In France, Ametek’s statutory auditors for both its Cameca and Antavia businesses have resigned. Historically, each has been audited by both E&Y and an affiliate of Deloitte and Touche 9
Spruce Point Capital
Opaque Disclosures and Questionable Oversight Amplify Our Concerns
Opaque SEC Financial Disclosures and Non-Transparent, Complex Business Model In light of our concerns about inventory accounting, we observe that Ametek does not discuss any factors affecting its cost of sales or gross margin in any of its recent SEC filings. Unusually high spread between its relatively (low) gross and (high) EBITDA margins are difficult to evaluate in the absence of more information; Ametek is an extreme outlier to peers It has jammed all its acquisitions into just two reporting segments, even though it appears some businesses such its Maintenance Repair and Operations (MRO) and Specialty Metals units have nothing to do with Electronics or Testing Equip. Because Ametek makes frequent and small acquisitions relative to its large size, it does not regularly disclose the EBITDA or EPS impact of acquisitions and can hide under the cover of “immateriality” Ametek’s income statement is “too clean;” and doesn’t separately identify recurring acquisition costs by segment like its peers. The company rarely has any one-time items or inventory charges - a remarkable achievement for a company its size!
Warning Signs With Management, Audit and Governance Concerns Ametek’s senior management has been in place for a long time. However, we note significant leadership role changes in 2012 involving its CFO, Treasurer and COO all occurred after Ametek announced the acquisition of Dunkermotoren, its largest in history. After reviewing its German financial statements, it appears management shamefully misled investors about the performance of the target. In light of our concerns about the integrity of the financial statements, we observe that Ametek changed its “equity clawback” language to include the word “fraud,” and sharply boosted supply cost saving estimates shortly after Ametek’s auditor since the ‘30s is E&Y. At the whistleblower deposition, E&Y admitted that it doesn’t audit all of Ametek. Its Audit Chairman mysteriously departed in 2011 and its newly promoted VP of Internal Audit, is not even a CPA, despite it claiming otherwise. We also note that three of Ametek’s foreign auditors have distanced themselves from the company Ametek has been touting its major growth opportunities in Asia, yet its long time VP of Asia resigned in Jan 2014. Curiously, Ametek’s initial JV formed in Taiwan to enter China appears to have gone dark, while its main Asian operating entity out of Singapore was delinquent in its filings for most of 2014. Recent results from the entity suggest a progressive decay of the business Insiders own under 2% of the company. Key division heads and a corporate development officer have all sold shares this year. The management team as a whole owns less and less of the company each year. Ametek’s classified board may be asleep at the wheel! Ametek’s board is among the smallest, oldest, and most entrenched among industrial peers we reviewed. Board members have been particularly aggressive sellers of shares in 2014. 10
Spruce Point Capital
Irrational and Unsustainable Valuation Premium to its Acquired Assets and Peers
Ametek Trades at an Irrational Premium to Its Acquired Assets Since 2000, Ametek has purchased over 60 businesses at an estimated average EV/Sales and EBITDA multiples of 1.7x and 9.0x, respectively. The notion that they’ve seamlessly acquired and integrated these businesses, while extracting perpetual margin increases and missing just 1 quarter of EPS expectations in a decade seems too good to be true In light of our numerous concerns, Ametek trades at an unjust valuation premium to peers at 3.5x, 13.5x, and 22x 2014E revenue, EBITDA and EPS, respectively. We think a conglomerate discount is more appropriate, not a premium! Investors’ seemingly believe that Ametek’s conglomerate-like structure can add superior lasting value to acquired businesses, above and beyond what private ownership can achieve. Many of Ametek’s acquired companies were flipped from private equity; these prior owners are supposed to add value through cost cutting and supplying growth opportunities. What lasting incremental benefits Ametek can add are a question open for debate In contrast to the optimistic sell-side analyst views that Ametek is a proven acquirer capable of delivering steady EPS growth of 15%+ per year, we believe Ametek’s model is showing signs of strain and that its valuation premium is unwarranted. Ametek has failed to demonstrate revenue synergies, underinvests in R&D, and will become increasingly challenged to meet earnings targets in the absence of fresh acquisitions. It also appears to be covering its issues by repeated boosts to cost procurement savings estimates. With Ametek recently having stretched its short-term debt obligations to 75% of revolver capacity at Q2’14, it raised $700m of external debt. We believe this illustrates that its reportedly “strong operating cash flow” for acquisitions and debt repayment cannot be relied upon as an indicator of the company’s financial health If Ametek Were to Be Valued Correctly, Its Share Price Would Be 30 - 50% Lower Given our concerns about aggressive acquisition and inventory accounting, Ametek’s true EBITDA margin may be 400600 bps lower than reported. Our opinion is also supported by our review of at least 14 of its operating entities, which suggest EBITDA margins closer to 20 - 21%. Furthermore, our plot of large cap industrial peers’ gross vs. EBITDA margins would also suggest Ametek’s EBITDA margins are closer to 20% - 21% to be on trend. If Ametek were valued in line w/ peers at 2x and 10-11x ‘14E revenues and EBITDA, its stock would be worth $27-$36/share, implying 30 - 50% downside from its current share price 11
30% – 50% Downside in Ametek’s Shares Spruce Point Capital
In our opinion, Ametek’s EBITDA margins appear overstated and are likely a few hundred basis points lower than the 26% indicated in its filings, potentially up to 400 – 600 bps lower. This estimate is supported by our peer regression analysis, evaluation of various Ametek foreign filings, and pro forma amortization analysis. If Ametek were to be valued closer to peers at 2x and 10-11x EV / 2014E Sales and EBITDA, respectively, its share price would have downside to $27 - $36 per share. $ in millions True EBITDA Margin: 14E Adj. EBITDA
$ in millions 20% $799.0
21% $839.3
22% $879.6
23% $920.0
24% $960.3
25% $1,001
26% $1,041
$3,797
$3,874
9.00x
$7,191
$7,554
$7,917
$8,280
$8,643
$9,006
$9,369
10.00x
$7,990
$8,393
$8,796
$9,200
$9,603
$10,007
$10,410
11.00x
$8,789
$9,232
$9,676 $10,120 $10,564
$11,007
$11,451
12.00x
$9,588 $10,072 $10,556 $11,040 $11,524
$12,008
$12,492
Less: Debt Plus: Cash FD Shares
($1,636) ($1,636) ($1,636) ($1,636) ($1,636) $370 $370 $370 $370 $370 248.1 248.1 248.1 248.1 248.1
($1,636) $370 248.1
($1,636) $370 248.1
$6,644
$6,780
$6,918
$7,060
$7,201
$7,345
$7,492
2.00x
$7,594
$7,749
$7,907
$8,068
$8,229
$8,394
$8,562
2.25x
$8,543
$8,717
$8,895
$9,077
$9,258
$9,443
$9,632
2.50x
$9,492
$9,686
$9,883
$10,085
$10,287
$10,492
$10,702
Less: Debt Plus: Cash FD Shares
($1,636) $370 248.1
($1,636) ($1,636) ($1,636) ($1,636) ($1,636) ($1,636) $370 $370 $370 $370 $370 $370 248.1 248.1 248.1 248.1 248.1 248.1 Implied Stock Price
9.00x
$23.90
$25.30
$26.80
$28.30
$29.70
$31.20
$32.70
10.00x
$27.10
$28.70
$30.30
$32.00
$33.60
$35.20
$36.90
11.00x
$30.30
$32.10
$33.90
$35.70
$37.50
$39.30
$41.00
12.00x
$33.50
$35.50
$37.40
$39.40
$41.30
$43.30
$45.20
EV/'14E Sales
EV/'14E EBITDA
$4,281
1.75x
Implied Stock Price 1.75x
$21.70
$22.20
$22.80
$23.30
$23.90
$24.50
$25.10
2.00x
$25.50
$26.10
$26.80
$27.40
$28.10
$28.70
$29.40
2.25x
$29.30
$30.00
$30.70
$31.50
$32.20
$33.00
$33.70
2.50x
$33.20
$33.90
$34.70
$35.50
$36.40
$37.20
$38.00
Implied Downside From Current Price
9.00x
-54%
-51%
-48%
-46%
-43%
-40%
-37%
10.00x
-48%
-45%
-42%
-38%
-35%
-32%
-29%
11.00x
-42%
-38%
-35%
-31%
-28%
-24%
-21%
12.00x
-36%
-32%
-28%
-24%
-21%
-17%
-13%
EV/'14E Sales
Implied Downside From Current Price
EV/'14E EBITDA
$4,197
Implied Enterprise Value
EV/'14E Sales
EV/'14E EBITDA
Implied Enterprise Value
2014E Revenues $3,953 $4,034 $4,115
1.75x
-58%
-57%
-56%
-55%
-54%
-53%
-52%
2.00x
-51%
-50%
-48%
-47%
-46%
-45%
-43%
2.25x
-44%
-42%
-41%
-39%
-38%
-37%
-35%
2.50x
-36%
-35%
-33%
-32%
-30%
-28%
-27%
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Signs of An Aggressive, “Too Good To Be True” Financial Strategy
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
Spruce Point Capital
Early Warning: Email From Whistleblower Matthews to Ametek Financial Controller
Financial Controller – Remember This Name!
SOX Whistleblower Case: Matthews v. Ametek (2009)
Matthews claims Ametek’s Chandler Engineering in Oklahoma improperly booked revenue to mislead investors, and improperly accounted for inventory in an attempt to under-report costs and inventory balances Source: Matthews v. Ametek, legal docket Publicly available via Freedom of Information Act (FOIA) request with the DOL/OSHA
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Spruce Point Capital
Ametek’s Ability to Never Disappoint Wall St. = Too Good To Be True?
We analyzed over 10 years of quarterly EPS results for a broad set of diversified and cyclical industrial peers. Ametek’s predictable and stable financial results defy logic – the company has missed Wall St. estimates just once (by a fraction of cent), and even beat estimates during every quarter of the great financial crisis. These remarkable results deserve further scrutiny! Beats EPS Est.
Meets EPS Est.
Misses EPS Est.
% Beats
% Meets
% Misses
Avg. Surprise
AMETEK
42
1
1
95.5%
2.3%
2.3%
3.4%
Danaher
39
0
5
88.6%
0.0%
11.4%
2.4%
Eaton
37
0
7
88.4%
0.0%
11.6%
6.3%
Hubbell
36
3
5
81.8%
6.8%
11.4%
7.1%
Thermo Fisher
35
1
8
79.5%
2.3%
18.2%
4.0%
Parker Hannifan
35
0
9
79.5%
0.0%
20.5%
13.0%
Rockwell Auto.
35
1
9
77.3%
2.3%
20.5%
7.1%
Emerson
32
0
12
72.7%
0.0%
27.3%
3.9%
Agilent
23
2
13
60.5%
5.3%
34.2%
2.9%
Source: Bloomberg Earnings Surprise Analysis: AME SURP
15
Spruce Point Capital
Superior Financial Model, Outlier or Accounting Gimmickry?
EBITDA is a big driver of firm valuation, and subject to numerous business decisions and accounting assumptions by management. In our opinion, Ametek’s EBITDA margin is being artificially enhanced by its overly aggressive acquisition strategy designed to circumvent R&D expense, and amortize costs too slowly to earnings. Furthermore surreptitious inventory accounting changes from LIFO to FIFO appear to also inflate its EPS. Ametek appears to be an extreme outlier relative to peers. Were Ametek to fall closer to trend, its EBITDA margins would be closer to 20 - 21% or 500 - 600bps lower.
30.0% AME
EBITDA Margins
25.0%
DHR RXN
FEIC
HUB
20.0%
ROK
EMR OXIG
15.0%
ETN PH
TDY
MTD KEYS SXS
BRKR
AIMC RBC 10.0%
5.0% 20.0%
30.0%
Note: Bubble size represents relative size of enterprise value Source: Company financial filings
40.0%
50.0%
FEIC: FEI Company DH: Danaher RXN: Rexnord OXIG: Oxford Instruments SXS: Spectris Plc BRKR: Bruker Bioscience TDY: Teledyne Tech RBC: Regal-Beloit PH: Parker-Hannifan ETN: Eaton Plc KEYS: Keysight Tech. EMR: Emerson Electric AIMC: Altra Industrial Motion ROK: Rockwell Automation MTD: Mettler-Toledo HUB: Hubbell Inc.
60.0%
Gross Margins 16
Spruce Point Capital
Presentation of Ametek’s Financials, Extremely Simple for a Complex Company
Ametek’s presentation of its Income Statement is extremely simplified for a complex and diverse company assembled from over 60 acquisitions. Inventory charges and other one-time items are never separately identified. “Other net expense” are primarily explained as acquisition costs and currency effects.
Source: Ametek’s 10K (here)
17
Ametek’s Secret Sauce: Create a Complex Roll-up Spruce Point Capital
Dynamics of an Effective Roll-up(1) Ametek’s target acquisitions do not receive its stock. All deals are cash financed. Furthermore, Ametek does not repurchase its own shares beyond a token amount. Insiders are significant net sellers of stock
Observations of Ametek’s M&A Strategy • Ametek uses cash acquisitions to fuel its growth, and believes it will continue to play an important part of its business strategy. Since 2000 through Q3’14, Ametek has completed over 60 acquisitions totaling $4.6 billion (See Appendix for complete list). Recent operating cash flow may be illusory. To illustrate, Ametek recently raised $700m of long-term debt to pay down revolver debt that it could not pay down with operating cash flow
• Its goodwill and intangibles amount to $4.5 billion (~69% of assets), indicating it places a substantial premium on its ability to extract synergies from deals. Industrial peer average goodwill+intangibles to assets is ~40% • Ametek targets businesses with revenues between $50-$200m, which are often private companies with limited financial disclosures. Ametek typically discloses only the revenue contribution of its targets. We estimate it has paid ~1.7x revenues for its targets vs. its current revenue multiple of 3.5x and 9.0x EBITDA vs. its current valuation of 14.5x. The large spread in value reflects the market’s perception of Ametek’s ability to continue its growth and to extract substantial value from deals
Ametek has extracted limited/no revenue synergies from acquisitions (see slides 28-29). Rather, it has relied on heavy cost cutting and aggressive accounting to achieve earnings growth. We view this as an unsustainable strategy fraught with issues and inherent limitations 1) Paul F Kocourek, Steven Y Chung, and Matthew G McKenna, “Strategic Rollups: Overhauling the Multi-Merger Machine,” Strategy & Business, second quarter 2000
• Ametek’s capex and funded R&D margins are 1.7% and 2.6%, which is dramatically lower than industrial peer averages at 3.0% and 6.0%, respectively. Given the underinvestment in its business, we must analyze its financial performance after acquisitions since it is essentially buying R&D and new products it would otherwise develop internally • Since 2000, Ametek has burned -$627m after capital expenditures and cash acquisitions. Viewed from this perspective, cumulative dividends paid of $411m and share repurchases of $270m have effectively been debt-financed 18
Ametek is a Roll-Up w/Limited Organic Growth; Financial Performance Needs to Adjust For Recurring Acquisitions Spruce Point Capital
• The roll-up strategy flatters income statement figures like EBITDA and EPS, along with operating cash flow metrics for a period of time due to the inherent financial statement mechanics of acquisition accounting (which run through the Investing section of the Statement of Cash Flows), so Ametek is able to inherit a new income and operating cash flow (“OCF”) stream upon deal closing, without any OCF outlay • Moreover, as Ametek liquidates the working capital of the acquired company in the normal course of business – collecting on receivables or selling inventory – it can realize an unsustainable OCF boost that has virtually nothing to do with the performance of its business • We believe this strategy has significantly aided Ametek’s ability to never disappoint Wall Street with an earnings miss. Therefore, it’s extremely important to dig beneath the surface to critically analyze what’s really going on at Ametek
AME’s Earnings to Cash Flow Appears High $ in mm
Cash from Operations begins to dramatically depart from Net Income, aided by cost cutting, aggressive acquisitions and potentially aggressive inventory accounting (note: whistleblower allegations in 2009)
$700 $600 $500 $400
FBI Indicts VP of Finance CFO Retires After Dunkermotoren Snafu
Free Cash Flow Adjusted for Capex/M&A is Negative $ in mm
$800
Deal pace accelerates $600
$400
$200
$300 $0
$200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD
$100
($200)
$0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD Net Income Source: Ametek financials
Cash from Operations
($400) Cash from Operations
Capex
Acquisitions
FCF After Capex and Acquisitions
19
Diminishing Returns to Ametek’s Strategy Are Rapidly Becoming Evident Spruce Point Capital
• We believe Ametek appears to be underinvesting in its business and using acquisitions to create the appearance of superior cash flow generation. As such, cumulative free cash flow after capex and acquisitions is a key metric for analyzing Ametek, and presents a better picture of its financial performance over time. In this case, it demonstrates that Ametek appears to be hitting a wall with its aggressive acquisition strategy and has burned -$627m since FY 2000. We believe that Ametek’s deal pace has accelerated postfinancial crisis, and its true operating cash flow may be struggling. $ in mm
$5,500
Period of Post Financial Crisis. Company Restructures, Inventory Turns Peak at 5.5x in 2011. Deal-Making Activity Accelerates After Whistleblower Complaint (2009). Head of Audit Committee Resigns (2011), CFO Resigns (2012). Ametek’s Short-Term Debt Swells, and it Issues $800m of Long-Term Debt in 2007-2008
$4,500
$3,500 Early Gains From the Strategy Are Evident with Slow and Steady Appreciation of Financial Results
$2,500
Notice How the Slope of the Curve Flattens, Inventory Turnover Declines, Capital Required for Acquisitions and Multiples Paid Rise, Short-term Credit Utilization Swells;. Ametek raises $700m in Debt
$500.0 $450.0 $400.0
$350.0 $300.0 $250.0 $200.0
$1,500
$150.0
$100.0
$500
$50.0 ($500)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Cumulative Cash from Ops.
Cumulative Cash for Acquisitions
Cumulative FCF after Acquisitions
Short Term Debt
Source: Ametek financials Note: Short-term credit usage = Short Term Debt Outstanding / ( Revolver and A/R Facility Capacity )
2012
2013 Q1'14 Q2'14 Q3'14
$0.0
Cumulative Capex
20
Spruce Point Capital
Ametek Never Discusses or Discloses Drivers of its Gross Profit Margins 2013 Management, Discuss and Analysis (MD&A)
Total international sales for 2013 were $1,984.5 million or 55.2% of net sales, an increase of $276.9 million or 16.2%, compared with international sales of $1,707.6 million or 51.2% of net sales in 2012. The $276.9 million increase in international sales resulted from the acquisitions mentioned above, primarily driven by Dunkermotoren and Micro-Poise, and includes the effect of foreign currency translation. Both reportable segments of the Company maintain strong international sales presences in Europe and Asia. Export shipments fr om the United States, which are included in total international sales, were $1,037.0 million in 2013, an increase of $174.4 million or 20.2%, compared with $862.6 million in 2012. Export shipments improved due to increased exports from the 2013 and 2012 acquisitions noted above, excluding Creaform and Dunkermotoren. New orders for 2013 were a record at $3,621.9 million, an increase of $86.8 million or 2.5%, compared with $3,535.1 million in 2012. The increase in orders was primarily attributable to 2013 and 2012 acquisitions. As a result, the Company’s backlog of unfilled orders at December 31, 2013 was $1,140.0 million, an increase of $27.7 million or 2.5%, compared with $1,112.3 million at December 31, 2012.
Segment operating income for 2013 was $861.5 million, an increase of $72.2 million or 9.1%, compared with segment operating income of $789.3 million in 2012. The increase in segment operating income resulted primarily from the acquisitions mentioned above, as well as the benefits of the Company’s lower cost structure through Operational Excellence initiatives. Segment operating income, as a percentage of net sales, increased to 24.0% in 2013, compared with 23.7% in 2012. The increase in segment operating margins resulted primarily from the benefits of the Company’s lower cost structure through Operational Excellence initiatives. Selling, general and administrative (“SG&A”) expenses for 2013 were $398.2 million, an increase of $17.7 million or 4.7%, com pared with $380.5 million in 2012. As a percentage of net sales, SG&A expenses were 11.1% for 2013, compared with 11.4% in 2012. Selling expenses increased $14.8 million or 4.4% for 2013 primarily driven by the increase in net sales noted above. Selling expenses, as a percentage of net sales, decreased to 9.8% for 2013, compared with 10.1% in 2012. Base business selling expenses decreased approximately 2% for 2013 compared to 2012, primarily due to cost containment initiatives.
Ametek Never Discusses and Omits Factors Affecting its Cost of Goods Sold or Gross Margins in its MD&A of its 10K’s/10Q’s
21
Warning Indicator: Margins Always Expand Spruce Point Capital
• Ametek’s margins are continually expanding, and experienced only a brief hiccup during the great financial crisis. Ametek would have you believe this a result of; 1) continuous cost cutting ability and operational improvements and 2) its strategy shift to ac quire higher margin businesses that are differentiated • We believe this story is too good to be true and have evidence that margins are being enhanced by: 1) underinvesting in R&D expense, 2) aggressive acquisition accounting which amortizes costs too slowly, 3) changes in inventory accounting method and potentially the avoidance of recording inventory charges 4) Suspicious boosts to supply chain cost estimates after its CFO ‘retired’
• We’ve collected publicly filed foreign financial statements for 15 of Ametek’s operating entities, and the majority have shown evidence of margin contraction, not margin enhancement!
EBITDA Margins Always Expand
Gross Margins Starting To Show Stress 37.0%
35.0%
Financial crisis
Sign of Issues Mounting; Acquiring Lower Quality Companies
27.0% 26.0%
Financial crisis
25.0% 24.0% 23.0%
33.0%
22.0% 21.0%
31.0%
20.0%
19.0%
29.0%
18.0% 27.0%
17.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1'14 Q2'14 Q3'14
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1'14 Q2'14 Q3'14
Source: Ametek SEC filings 22
Spruce Point Capital
Warning: Inventory Turnover Had Been Persistently Declining
A persistently declining inventory turnover is at odds with a healthy, growing company and supports our belief that Ametek may be experiencing inventory accounting issues. Ametek gives investors limited insights to evaluate the factors affecting Cost of Goods/Services that drive inventory turns. It is unclear to what degree product/service mix shifts are affecting results
5.50x 5.40x 5.30x 5.20x 5.10x
5.00x 4.90x 4.80x 2011
2012
2013
Source: Ametek Company Financials Note: Inventory Turnover = LTM Cost of Sales / Average (Beginning and Ending Period Inventory)
Q1'14
Q2'14 23
Spruce Point Capital
Summary: Foreign Operating Subsidiaries Show Margin Contraction
•
We’ve examined public documents of businesses that contribute ~$731m of revenue (~20% of Ametek’s $3.6 billion total in 2013)
•
We find that on average:
•
•
Its operating businesses have an EBITDA margin of ~21% and;
•
Are experiencing both contracting Gross Margins of ~0.2% and EBITDA margins of ~1.3%
Paradoxically, Ametek’s corporate EBITDA margin continues to expand and is in the 26% range. However, few businesses we examined have EBITDA margins anywhere close to this level. We have excluded Zygo and Amptek from our analysis because the results have not yet been fully consolidated on an annual basis into Ametek’s financials
i n l oca l a nd forei gn currency (mi l l i ons )
Company Dunkermotoren GmbH Zygo Corporation (1)
Last Public Foreign Reporting LTM Country Period Sales Germany 2012 € 136.4 US 2013 $162.8
US$ LTM Sales $168.6 $162.8
LTM Gross Margin 57.8% 46.7%
YoY Change in Sales -3.0% 3.3%
YoY Ch. Gross Margin -0.4% 0.3%
SPECTRO Analytical Taylor Hobson Limited Cameca SAS
Germany UK France
2012 2013 2013
€ 108.3 £54.8 € 59.1
$133.8 $82.4 $75.5
53.8% 49.9% 50.9%
4.8% 1.3% 5.5%
2.3% -2.1% -3.2%
€ 25.0 £13.2 € 9.0
23.1% 24.1% 15.3%
AMETEK Airtechnology Group Atlas Material Testing (2) AEM Limited Amptek
UK Germany UK US
2012 2012 2013 2013
£47.5 € 32.0 £25.3 $29.2
$72.4 $39.6 $38.0 $29.2
22.2% 56.0% 46.2% --
7.8% Decline 9.0% -3.6%
-1.9% --1.0% --
£5.1 € 1.6 £5.7 --
Land Instruments Lloyd Instruments Muirhead Aerospace Ltd
UK UK UK
2013 2012 2013
£18.3 £18.0 £16.4
$27.5 $27.5 $24.6
41.0% 60.3% 41.8%
-9.6% -31.4% 16.6%
2.7% 8.9% -3.4%
-$19.7 $12.3 $7.7 $2.4 $731.9
-46.3% 74.2% -81.4%
-11.0% 7.6% 63.0% 12.3%
--1.3% -0.5% --3.3% -0.2%
Ametek Denmark A/S Denmark 2013 -Antavia SAS France 2013 € 15.4 Grabner Instruments Austria 2013 € 9.6 AMETEK Instruments India India 2012 $7.7 AMETEK Nordic AB Sweden 2013 SEK 15.9 Total Implied EBITDA Margin and Average YoY Change (3)
LTM LTM YoY Operating Operating Change in Income Margin Op. Income € 6.2 4.6% -29.5% $15.4 9.5% -25.7%
Foreign LTM EBITDA € 24.4 $26.8
US$ LTM EBITDA $30.2 $26.8
LTM EBITDA Margin 17.9% 16.5%
YoY Yoy Change Change EBITDA in EBITDA Margin -10.9% -1.7% -13.4% -3.2%
23.5% -9.8% -7.4%
€ 28.3 £14.2 € 9.4
$35.0 $21.4 $12.0
26.1% 25.9% 15.8%
23.6% -8.7% -6.8%
4.0% -1.1% -2.1%
10.8% 4.9% 22.4% --
-3.3% -47.0% 21.7% --
£6.6 € 2.9 £6.4 $13.1
$10.0 $3.5 $9.6 $13.1
13.8% 9.0% 25.4% 44.9%
-5.1% -35.5% 18.1% 7.2%
-1.9% -2.0% 4.5%
£1.9 £8.1 £3.4
10.5% 29.4% 20.9%
-26.3% 0.3% 7.5%
£2.2 £8.7 £3.7
$3.3 $13.3 $5.6
12.2% 48.3% 22.7%
-16.1% 0.0% 6.9%
-2.0% 14.1% -1.8%
DKK 33.3 € 3.0 € 2.4 -SEK 2.3
-19.3% 25.0% -14.8%
-11.3% 24.0% -8.0% -39.5%
DKK 33.6 € 3.2 € 2.5 $1.1 SEK 2.4
$5.8 $4.1 $3.2 $1.1 $0.4 $152.6
-20.6% 26.3% 14.6% 15.2% 20.9%
-11.4% 11.7% -6.9% 19.9% 27.4% -0.9%
-0.1% -4.0% -5.3% 1.7% -1.3%
Sources: Public Foreign Financial Filings (1) ZYGO results through 12/31/13. EBITDA also adds back stock compensation (2) Estimated 2012 results (3) Our average implied EBITDA margin is an estimation which is limited by our financial data and we recognized that it includes data from 2012 and 2013. Excludes ZYGO, Amptek and Lloyd Instruments from 2012, which had an unusual EBITDA margin increase despite a 30% decline in sales. Currencies converted at average annual exchange rates provided by the IRS
24
Spruce Point Capital
Ametek Appears To Underinvest In Its Businesses
There are clear indications that Ametek underinvests in its businesses from a capital expenditure and research and development perspective. As a result, we argue that Ametek’s financial performance (esp. its operating cash flow) needs to be evaluated after the cost of acquisitions. Ametek’s recurring acquisition strategy is geared toward acquiring products and assets it believes complement its existing businesses. If Ametek were to invest in its business directly through greater R&D expense, its margins would be significantly lower.
Capital Expenditures / Sales 8.0%
R&D Expense / Sales 14.0%
7.0%
12.0%
6.0%
10.0%
5.0% 4.0%
8.0%
3.0%
6.0%
2.0%
4.0%
1.0%
2.0%
0.0%
0.0%
2011
2012
2013
Average
Source: Company filings Note: Includes net company funded R&D expense; Agilent is pro forma for Keysight Technologies spin-off
2011
2012
2013
Average
25
Ametek Appears To Underinvest in R&D Spruce Point Capital
Current Ametek Job Openings
Just 1 out of 202 jobs (30% EBITDA Margins?
•
According to our research, Amptek is the only acquired company with an EBITDA margin above 30%. Amptek’s previous owner reported margins of 45%
•
To assess the chance that Ametek’s remaining businesses contribute 32 – 33% EBITDA margins, we try to get a sense of how common it is for a business to produce such high margins
•
To accomplish this, we’ve analyzed all of the industrial businesses in the Russell 3000 index (ex: transportation, leasing, staffing and service companies) and plotted their frequency of occurrence in the chart below
•
In total, we identified 289 companies, with just 3% reporting EBITDA margins greater than 30%. This makes it extremely unlikely that all of its remaining businesses have the necessary EBITDA margin profile to hit its consolidated margin
Percent of Industrial Companies in the Russell 3000 by EBITDA Margin 35.0%
29.5%
30.0%
26.7%
25.0% 19.8%
20.0% 15.0%
8.7%
10.0%
5.0%
6.9% 2.4%
3.1%
2.8%
25-30%
>30%
0.0% < 0%
0-5%
5-10%
10-15%
15-20%
20-25%
Top EBITDA Margins – Russell 3000 Industrials Com pany TransDigm Group Incorporated US Ecology, Inc. Waste Connections Inc. Roper Industries Inc. Allison Transmission Holdings, Inc. Sun Hydraulics Corp. Precision Castparts Corp. Copart, Inc. Stericycle, Inc. Graco Inc. Republic Services, Inc. Covanta Holding Corporation 3M Company Ametek Inc. Thermon Group Holdings, Inc. Douglas Dynamics, Inc. RBC Bearings Inc.
Exchange/Ticker NYSE:TDG Nasdaq:ECOL NYSE:WCN NYSE:ROP NYSE:ALSN Nasdaq:SNHY NYSE:PCP Nasdaq:CPRT Nasdaq:SRCL NYSE:GGG NYSE:RSG NYSE:CVA NYSE:MMM NYSE:AME NYSE:THR NYSE:PLOW NasdaqGS:ROLL
EBITDA Margin 44.2% 35.4% 34.3% 33.1% 32.9% 31.7% 31.4% 30.8% 29.3% 28.7% 28.7% 28.2% 26.4% 26.2% 26.2% 25.2% 25.1%
EBITDA margin
Sources: Capital IQ
116
A Closer Look Into Ametek’s Asia Growth Story....
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
A Closer Look into Ametek Asia Spruce Point Capital
Source: Ametek Subsidiaries as of 12/31/13 (here)
118
Spruce Point Capital
Head of Ametek Asia “Retires” In 2014; Problems Brewing in Asia?
BERWYN, Pa., Jan. 14, 2014 /PRNewswire/ -- AMETEK, Inc. (NYSE: AME) today announced the appointment of Volker Dreisbach as Vice President, Asia. He replaces Lim Meng Kee, who retires after 21 years with the Company. "Volker brings extensive international experience to his new position, and we expect him to play a key role in the continued growth and success of our Asian businesses," notes Frank S. Hermance, AMETEK Chairman and Chief Executive Officer. "Volker previously served as Division Vice President for AMETEK's Materials Analysis Division and was responsible for all of our Electronic Instruments Group businesses in Asia.“ Volker has 31 years of experience with AMETEK and its SPECTRO Analytical Instruments business, where he most recently served as Managing Director, Asia Pacific, and as Director of International Sales and President of SPECTRO USA. AMETEK acquired SPECTRO, a global leader in high-end analytical instruments, in 2005. "Meng Kee, whom Volker replaces, was instrumental in AMETEK's growth and success in China and across Asia. Under his leadership, our Asian sales grew from $16 million in 1992 to now approximately $700 million," adds Mr. Hermance. Meng Kee joined AMETEK in 1992 as General Manager of AMETEK Singapore – AMETEK's first Asian operation. He played a key role in 1995 in the formation of AmeKai, AMETEK's first Asian joint venture. He was elected a Corporate Vice President in 1999 and added responsibility for AMETEK Motors Shanghai.
Let’s Take A Closer Look At Ametek Singapore and its first JV Amekai Source: Ametek press release (here)
119
Spruce Point Capital
Unusual Time For Asia Head To Retire... Just As Business is “Booming?” Recent Conference Call Comments About Asia Are Bullish
“Organic sales in Asia were up mid-teens on a percentage basis in the second quarter, with broadbased strength across our businesses.”
“If you look at the BRIC countries, just another cut, the BRIC countries were up 21% overall and about 13% organically. China, just is superb. China was up organically, almost 25% and in total I think it was a number like 35%“ “So, all the efforts and you’ve heard me talking about the expansion in the BRIC countries, the expansion in Asia, they are really coming to fruition now and it’s just an exciting time and even though, many of our peer companies are talking about issues in China and issues in Asia” “We are simply outgrowing the market from both a product point of view and also we got very strong distribution capability there now. In Asia, we have approximately 300 people who are engaged in selling our products and that doesn’t include people who in some cases were distributors, not direct sales.”
Source: Q2’2014 Earnings Conf Call (here)
120
Spruce Point Capital
So Much Growth For Ametek in Asia.... That Hiring is Non-Existent
Ametek Career Search Just 1 Single Job Opening in Asia out of Shanghai, China. No Job Openings in Brazil, Russia India, Hong Kong, Malaysia!
Ametek Career Website (here)
121
Here’s What it Really Takes to Win in China Spruce Point Capital
Mettler Toledo (MTD) is a global manufacturer and marketer of precision instruments for use in laboratory, industrial and food retailing applications. The Company has strong worldwide leadership positions. A significant majority of its instrument sales are in segments in which it is the global leader. The company described China as “challenging” on its recent conference call and is committing significant resources to hire people to grow further. Mettler is hiring for a significant amount of Sales Consulting jobs, since business in China is very relationship driven.
Mettler Career Website (here) and Q3’14 conf call (here)
122
Spruce Point Capital
Ametek’s Main Singapore Entities Were Not in Compliance for Most of 2014
Source: www.bizfile.gov.sg Note: As of Aug 2014
123
Is Ametek Singapore Hiding Big Problems? Spruce Point Capital
•
• • •
We obtained Ametek Singapore’s 2013 financials, which weren’t filed until late September 2014. We believe Ametek Singapore wa s late in holding its Annual General Meeting, potentially as a result of its Director Lee Meng Kee having resigned Top line revenues decreased by 12.6% while other income, which is primarily investment income from its main operating subsidiaries including China, declined by 15% from $10.7m to $9.1m Overall, profitability fell from $13.4m to $12.2m or 8%. More importantly, operating cash flow plummeted from $28.6m to $7.3m, -75%, while the dividend paid to its holding company, Ametek European Holdings Limited, declined from $19.1m to $10.1m or -47% Responding to an analyst question about emerging market performance on the Q4’13 conference call, the CEO said “Yes, it's actually amazing. We were very delighted in the quarter when we looked at our international businesses, actually, believe it or not, both in Eu rope and in Asia. In Asia, the organic growth was up about 25%, in Asia. So a truly outstanding quarter.” The performance from Ametek’s Singapore entity (which conducts business in Taiwan, China, Malaysia and India), suggests that full year results were disappointing, not spectacular
Note: Figures in Singapore Dollars Source: www.bizfile.gov.sg and Q4’13 earnings conf call (here)
124
Spruce Point Capital
Ametek Singapore’s 2011-2012 Results Further Illustrate Declining Trends Spruce Point Observations • Top line revenues increased, which we believe relates to additions to its MRO business. However, we note that this new revenue reduced gross margins by 186 basis points1 • Other income (dividends) dropped dramatically from $17.1m to $10.7, or by 37%. We believe this drop is directly attributable to its main operating subsidiaries, particularly its China operating entity • The main subsidiaries include: • Ametek Commercial Enterprises (Shanghai) • Ametek Instruments India Pte Ltd • Ametek Engineered Materials Sdn Bhd (Malaysaia) • Amekai Singapore Pte Ltd • Amekai Taiwan Co. Ltd • Overall, profitability fell from $19.0m to $13.4m or 29.4%, while dividend income rose from $17.1m to $19.2m • Responding to a question about China on the Q3’12 earnings conf call, the company responded: “China did well for us. If you look at our total Asia sales, they were about 19% of our company and China in rough numbers is half of that. And they performed, not as strong as it had a year and half ago when we were seeing organic growth rates out of China that were 20% plus but we are now more in that single digit category. But again if you look at it from a worldwide basis it’s surely stronger than the U.S. and we are going to continue to invest in that part of the world.”
Note: Figures in Singapore Dollars Source: www.bizfile.gov.sg
1. 2.
Q2’12 Earnings call (here) Q3’12 Earnings call (here)
125
Amekai Taiwan Co. Ltd...Ametek’s First Asian Joint Venture Appears Insolvent!
Spruce Point Capital
Website Does Not Work
Address: 2-FLoor, No. 214 Alley 1 Lane 138, Chang-An Street Pan-Chiao, Taipei Taiwan
Liabilities > Assets = Insolvency?
Source: www.bizfile.gov.sg
Source: Google Maps. http://www.ametek.com/locations/amekai-taiwan-location.aspx
126
Spruce Point Capital
Amekai Taiwan Co., Ltd. No Longer Even Registered in Taiwan
Source: http://gcis.nat.gov.tw/ 127
And of Course...Ametek India Doesn’t Make Money and Has Acct’g Issues! Spruce Point Capital
While revenues grew 63% YoY, EBITDA grew just 20% with EBITDA margins declining from 19.9% to 14.6% > 530bps!
Losses increased by 31%! Source: http://www.mca.gov.in/
128
Sell-Side Analyst Misperceptions and Variant Valuation View
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
Ametek Has Many Bullish Analysts Spruce Point Capital
Ametek has attracted a roster of smaller sell-side brokers, that generally have bullish opinions on the stock. However, a few analysts appear reluctant to upgrade the stock to a buy given its rich valuation. We do not believe any analysts have incorporated of our accounting concerns and unique research insights. Broker
Rating
Langenberg & Co
Buy
$63
Jefferies
Buy
$61
Janney Montgomery
Buy
$61
Keybanc
Buy
$60
RBC
Outperform
$60
Oppenheimer
Buy
$59
Longbow
Buy
$55
Atlantic Equities
Buy
$58
Baird
Neutral
$53
Morgan Stanley
Hold / Equal weight
$52
Wells Fargo
Outperform Average Price % Implied Upside % Max Upside
Price Target
$59 13% 21%
Ratings Distribution
33% 67%
Buys
Hold
Source: Bloomberg; may not reflect all recent price changes
130
Spruce Point Capital
Analysts’ Views Are Too Rosy and Regurgitate Ametek’s Own Story
Wall St. Analysts’ Views of Ametek
Spruce Point’s Quick Rebuttal
“AME aims to grow EPS 15% annually via a mixture of organic growth and acquisitions. In normal growing economies, AME targets 15% annual EPS growth, with roughly one-third via organic growth and two-thirds from acquired companies”
AME’s EPS growth is heavily financially engineered with aggressive accounting assumption for acquisitions and suspect inventory accounting. It has demonstrated almost no organic growth in recent years
“Mgmt’s track record for closing attractive deals within the company’s sweet spot ($50-$200m) is impressive.”
When you overpay for low margin, low/no growth assets, of course your closure rate will be impressive! AME seems to be running out of quality/actionable targets
“Strong cash flow qualities underlying AME's businesses support continued strategic growth, debt reduction and the dividend. AME has ~$800M of liquidity available from cash and existing credit lines. AME maintains adequate resources to fund its stated acquisition strategy”
AME’s cash flow is obscured by its dozens of deals. Free cash flow after capex and acquisitions is negative. ST debt has been rising (to effectively pay its dividend), and its liquidity is misleading given significant cash trapped abroad which would be taxable upon repatriation
“Management are seasoned operators and have demonstrated an impressive ability to expand segment margins. Proactive cost reductions in 2009 drove margin rebound in 2010/2011, aided by operating leverage from core volume growth. Further cost actions amid sluggish global growth drove margin expansion in CY12.”
Strong evidence that mgmt has not executed flawless M&A and misguided sales estimates on key deals. Its margin expansion is likely to be overstated given our analysis of various operating entities. Cost cuts appear to be hitting a wall, and margins have been aided by aggressive inventory acct’g changes and amortizing expenses too slowly
“Best-in-class Industrial. We view AME’s premium vs. the sector as sustainable given best-in-class combination of EPS growth/volatility and M&A story”
AME’s record of missing only one quarterly earnings estimate in a decade is a major red flag. Its valuation is at a substantial premium to what it has paid for its underlying businesses 131
Spruce Point Capital
Spruce Point’s Variant View: Ametek Deserves a Conglomerate Discount, Not a Premium
Ametek is a Poorly Constructed, Opaque and Complex Company Trading at an Irrational Premium to Peers. Its Financials Are Littered With Red Flags Pointing To Inflation of Earnings, and Are at High Risk of Restatement 1. Ametek has acquired over 60 businesses in the past decade for $4.6bn, consuming -$627m in net cash flow at an average revenue multiple of 1.7x. Yet, its current trading revenue multiple is 3.5x, which is a significant premium to the sum of its parts 2. Ametek has not demonstrated an ability to extract revenue synergies from acquisitions that are often touted as “complementary” products for existing customers. Organic growth in 2012 and 2013 were 1.1% and 1.2%, respectively. Pricing power in its businesses appears low 3. To continue its historical growth rate, Ametek will have to continue acquiring at a rapid pace, and face many challenges a. Competition intensifying for a shrinking pool of actionable targets in the sub $200m enterprise value range it targets b. Multiples for private companies in its markets are rising; Ametek had to pay rich EV/sales and EBITDA multiples for newly acquired targets such as Zygo (1.7x / 9x) and Amptek (3.9x / 10x), respectively c. Agilent’s recently spun-out Electronic Measurement Technology unit (FY ‘13 Revenues: $2.9bn) will be newly capitalized and incentivized to growth through acquisitions 4. SEC financial disclosures are weak: a. Ametek cannot adequately explain its gross margins to investors, or its operating margin improvements; margin improvements are continually attributed to “endless cost cuts and savings” with few tangible examples ever given b. Ametek has jammed all its acquisitions into just two operating segments. Once companies are acquired, very little disclosure is given about their continued performance Evidence supports the view that Ametek’s EBIT/EBITDA margins are overstated and aggressive accounting is at work: a. Ametek appears to use aggressive acquisition accounting; marking significant intangible assets as customer relations, and amortizing them over 19yrs. Over $1 billion has been allocated to this account! b. A whistleblower complaint, a “qualified” audit opinion, and surreptitious conversion from LIFO to FIFO, all point to creative inventory accounting being used to inflate margins and earnings c. We’ve acquired foreign filings for 14 operating entities constituting ~$732m of revenue, few have EBITDA margins close to the consolidated margin of 26%. Many units have been experiencing decreasing margins, not increasing! 5. Insider ownership alignment with shareholders is weak, and getting worse! Insiders have been net sellers every single year 132
Ametek’s Extreme Valuation Premium is Not Justified
Spruce Point Capital
($ i n mi l l i ons , except per s ha re fi gures )
Name
Stock % of Price 52-wk Ticker 11/12/2014 High
Danaher DHR Emerson EMR Eaton ETN Parker Hannifan PH Rockwell Automation ROK Mettler-Toledo MTD Hubbell HUB Keysight Tech. KEYS Rexnord RXN Teledyne TDY Spectris PLC SXS.Lon Regal-Beloit Corp RBC FEI Company FEIC Bruker BRKR Oxford Instruments OXIG.Lon Altra Industrial AIMC
Ametek Inc.
AME
$82.36 $64.05 $67.64 $128.57 $112.44 $284.70 $112.50 $30.83 $27.25 $106.67 $30.26 $71.47 $83.09 $18.42 $17.29 $31.95
$52.20
Source: Company financials, Wall St. estimates.
99% 91% 85% 99% 86% 99% 88% 93% 88% 100% 71% 89% 74% 74% 58% 81%
100%
Ent. Value
'14E-'15E Revenue EPS Growth Growth
LTM Gross EBITDA FCF P/E Margin Margin Margin 2014E 2015E
Enterprise Value EBITDA Sales 2014E 2015E 2014E 2015E
Debt/ Capital
$57,948 $47,684 $40,173 $19,561 $15,119 $8,814 $6,571 $5,610 $4,453 $4,516 $3,798 $3,640 $3,047 $3,125 $1,195 $1,063
5.5% 3.7% 2.8% 2.6% 5.0% 4.5% 4.3% 2.7% 5.1% 4.7% 5.6% 4.4% 9.7% 4.5% 8.5% 2.8%
9.2% 8.6% 16.1% 14.0% 9.2% 11.2% 10.1% 2.0% 18.6% 2.4% 8.3% 18.4% 35.2% 20.0% 11.4% 17.2%
52.4% 41.4% 30.4% 23.3% 41.6% 54.2% 33.3% 55.4% 36.3% 37.6% 57.7% 24.5% 47.1% 44.9% 43.4% 30.0%
22.1% 21.5% 14.5% 14.2% 20.2% 21.4% 18.4% 21.5% 19.9% 15.8% 19.0% 13.6% 21.6% 13.2% 16.4% 14.9%
15.3% 12.1% 5.3% 8.7% 13.5% 12.1% 10.0% 15.1% 9.8% 10.5% 10.3% 6.7% 12.5% 7.6% 6.0% 7.4%
22.4x 16.7x 14.7x 17.7x 17.8x 24.5x 21.0x 12.1x 18.0x 19.4x 15.8x 16.6x 27.6x 24.6x 15.9x 17.8x
20.5x 15.4x 12.7x 15.5x 16.3x 22.0x 19.1x 11.9x 15.1x 18.9x 14.6x 14.0x 20.4x 20.5x 14.3x 15.1x
12.9x 9.1x 11.1x 9.8x 11.0x 16.3x 11.2x 9.1x 10.4x 12.3x 10.8x 8.1x 15.2x 12.6x 11.1x 9.2x
11.9x 9.0x 10.5x 9.1x 10.0x 15.1x 10.4x 8.6x 9.6x 11.2x 10.0x 7.5x 11.7x 10.8x 9.8x 8.4x
2.9x 1.9x 1.8x 1.5x 2.3x 3.5x 2.0x 1.9x 2.1x 1.9x 2.1x 1.1x 3.2x 1.7x 1.8x 1.3x
2.8x 1.9x 1.7x 1.4x 2.1x 3.4x 1.9x 1.9x 2.0x 1.8x 2.0x 1.1x 2.9x 1.6x 1.6x 1.3x
11% 36% 35% 25% 32% 36% 23% 56% 77% 27% 14% 24% 0% 30% 65% 48%
Max Average Min
9.7% 4.8% 2.6%
35.2% 13.2% 2.0%
57.7% 40.8% 23.3%
22.1% 18.0% 13.2%
15.3% 10.2% 5.3%
27.6x 22.0x 18.9x 16.7x 12.1x 11.9x
16.3x 11.3x 8.1x
15.1x 10.2x 7.5x
3.5x 2.1x 1.1x
3.4x 2.0x 1.1x
77% 34% 0%
$14,219
6.1%
11.2%
35.5%
26.1%
15.8%
21.7x 19.5x
13.7x
12.5x
3.5x
3.3x
32%
Ametek’s Margins Vastly Superior
133
Enterprise Value / 2015E Revenues
Enteprise Value / 2015E EBITDA
4.0x
15.0x
3.5x
13.0x
Average
3.0x
11.0x
Average
2.5x
9.0x
2.0x
7.0x
1.5x
5.0x
1.0x 3.0x 0.5x
2015E Revenue Growth
AME
MTD
FEIC
DHR
TDY
ETN
BRKR
ROK
HUB
SXS.Lon
OXIG.Lon
PH
RXN
EMR
KEYS
RBC
-1.0x
AIMC
MTD
FEIC
AME
ROK
DHR
RXN
SXS.L…
HUB
EMR
TDY
KEYS
ETN
PH
BRKR
RBC
AIMC
OXIG.…
1.0x 0.0x
2015E EPS Growth 40.0%
12.0%
35.0%
10.0% 30.0%
8.0%
25.0% 20.0%
Average
6.0%
15.0%
4.0%
Average
10.0% 2.0%
5.0%
FEIC
AME
OXIG.Lon
DHR
SXS.Lon
RXN
ROK
TDY
MTD
RBC
BRKR
HUB
ETN
EMR
KEYS
AIMC
0.0%
PH
Spruce Point Capital
Ametek’s Extreme Valuation Premium is Not Justified
0.0%
134
Spruce Point Capital
Public Investors Paying a Big Premium to Own Quick Flipped Private Equity Deals
Ametek appears to be the buyer of last resort for many private equity firms looking to flip their investments after a 3 – 5 year holding period. With each private equity firm claiming to add operational expertise and strong financial controls to its portfolio companies, we question what additional value Ametek can extract from these acquisitions. $ in millions Enterprise
LTM
EV/
Announced
Location
Target
Private Equity Sponsor (Year Invested)
Target Description
Value
Sales
Sales
8/8/2014
Bedford, MA
Amptek
Edgewater Growth (2012) Bouler Capital; JZ Capital
x-ray detectors used to identify the composition of materials using x-ray fluorescence (XRF) within the metal
$115.0
$29.2
3.94x
2/10/2014
Irvine, CA
VTI Instruments
Merit Capital Partners; Alerion Capital Group (2008)
high precision test and measurement instrumentation, esp in Aerospace
$74.0
$38.0
1.95x
Powervar
Pfingsten Partners (2006)
power protection equipment used by the medical, retail and telecommunication industries
$128.0
$70.0
1.83x
Controls SouthEast
Industrial Growth Partners (2010)
manufacturer of custom-engineered thermal solutions
$160.0
$50.0
3.20x
$320.0
$168.6
1.90x
12/4/2013 8/7/2013
Waukegan, IL Chalotte, NC
5/21/2012
Bonndorf, Germany
Dunkermotoren
Triton Partners (2009)
engineered advanced motion control solutions for niche applications
1/26/2012
St Louis, MO
O'Brien Corp
Industrial Growth Partners (2009)
manufacturer of fluid and gas handling solutions, sample conditioning equipment and process analyzers
$175.0
$80.0
2.19x
Equipment used to perform electrical immunity and electromagnetic compatibility testing
$93.0
$41.0
2.27x
$170.0
$125.0
1.36x
$150.0
$55.0
2.73x
$159.0
$85.0
1.87x
$270.0
$85.0
3.18x
$89.5
$50.0
1.79x
$158.6 $1,903.5
$73.1 $876.8
2.35x --
10/25/2011
Reinach, Switzerland
EM Test
Riverside Company (2008)
10/23/2012
Streetsboro, OH
Micro-Poise Measurement Systems
American Industrial Partners (2007)
10/17/2011
Depew, NY
11/9/2010
Chicago, IL
7/1/2010
Waterbury, CT
6/1/2010
Arlington, MN
Reichert Technologies Atlas Material Testing Technology Haydon Enterprises Technical Services for Electronics
integrated test and measurement solutions for the tire industry instruments used by ophthalmologists, optometrists, and Beecken Petty O'Keefe (2007) opticians for vision correction and the screening Industrial Growth weathering test instruments and related testing and Partners (2007) consulting services linear actuators and lead screw assemblies for diverse Harbor Group (2007) industrial end markets manufacturer of engineered interconnect solutions for the Pfingsten Partners (2006) medical device industry Average: Total:
Source: Company filings; public information
135
30% – 50% Downside in Ametek’s Shares Spruce Point Capital
In our opinion, Ametek’s EBITDA margins appear overstated and are likely a few hundred basis points lower than the 26% indicated in its filings, potentially up to 400 – 600 bps. This estimate is supported by our peer regression analysis, evaluation of various Ametek foreign filings, and pro forma amortization analysis. If Ametek were to be valued closer to peers at 2x and 10-11x EV / 2014E Sales and EBITDA, respectively, its share price would have downside to $27 - $36 per share. $ in millions True EBITDA Margin: 14E Adj. EBITDA
$ in millions 20% $799.0
21% $839.3
22% $879.6
23% $920.0
24% $960.3
25% $1,001
26% $1,041
$3,797
$3,874
9.00x
$7,191
$7,554
$7,917
$8,280
$8,643
$9,006
$9,369
10.00x
$7,990
$8,393
$8,796
$9,200
$9,603
$10,007
$10,410
11.00x
$8,789
$9,232
$9,676 $10,120 $10,564
$11,007
$11,451
12.00x
$9,588 $10,072 $10,556 $11,040 $11,524
$12,008
$12,492
Less: Debt Plus: Cash FD Shares
($1,636) ($1,636) ($1,636) ($1,636) ($1,636) $370 $370 $370 $370 $370 248.1 248.1 248.1 248.1 248.1
($1,636) $370 248.1
($1,636) $370 248.1
$6,644
$6,780
$6,918
$7,060
$7,201
$7,345
$7,492
2.00x
$7,594
$7,749
$7,907
$8,068
$8,229
$8,394
$8,562
2.25x
$8,543
$8,717
$8,895
$9,077
$9,258
$9,443
$9,632
2.50x
$9,492
$9,686
$9,883
$10,085
$10,287
$10,492
$10,702
Less: Debt Plus: Cash FD Shares
($1,636) $370 248.1
($1,636) ($1,636) ($1,636) ($1,636) ($1,636) ($1,636) $370 $370 $370 $370 $370 $370 248.1 248.1 248.1 248.1 248.1 248.1 Implied Stock Price
9.00x
$23.90
$25.30
$26.80
$28.30
$29.70
$31.20
$32.70
10.00x
$27.10
$28.70
$30.30
$32.00
$33.60
$35.20
$36.90
11.00x
$30.30
$32.10
$33.90
$35.70
$37.50
$39.30
$41.00
12.00x
$33.50
$35.50
$37.40
$39.40
$41.30
$43.30
$45.20
EV/'14E Sales
EV/'14E EBITDA
$4,281
1.75x
Implied Stock Price 1.75x
$21.70
$22.20
$22.80
$23.30
$23.90
$24.50
$25.10
2.00x
$25.50
$26.10
$26.80
$27.40
$28.10
$28.70
$29.40
2.25x
$29.30
$30.00
$30.70
$31.50
$32.20
$33.00
$33.70
2.50x
$33.20
$33.90
$34.70
$35.50
$36.40
$37.20
$38.00
Implied Downside From Current Price
9.00x
-54%
-51%
-48%
-46%
-43%
-40%
-37%
10.00x
-48%
-45%
-42%
-38%
-35%
-32%
-29%
11.00x
-42%
-38%
-35%
-31%
-28%
-24%
-21%
12.00x
-36%
-32%
-28%
-24%
-21%
-17%
-13%
EV/'14E Sales
Implied Downside From Current Price
EV/'14E EBITDA
$4,197
Implied Enterprise Value
EV/'14E Sales
EV/'14E EBITDA
Implied Enterprise Value
2014E Revenues $3,953 $4,034 $4,115
1.75x
-58%
-57%
-56%
-55%
-54%
-53%
-52%
2.00x
-51%
-50%
-48%
-47%
-46%
-45%
-43%
2.25x
-44%
-42%
-41%
-39%
-38%
-37%
-35%
2.50x
-36%
-35%
-33%
-32%
-30%
-28%
-27%
136
Valuation Multiples Near All-Time Highs Spruce Point Capital
Despite our concerns about Ametek’s business and its financial earnings quality, its stock is trading near all-time valuation multiples. In our opinion, investors should carefully consider if its valuation premium is warranted.
Historic EV/Sales and EV/EBITDA Valuation (trailing) 16.0x
Historic Price/EPS Valuation (trailing) 4.0x
28.0x 26.0x
15.0x
3.5x
14.0x
3.0x
13.0x
12.0x
2.5x
24.0x 22.0x 20.0x 18.0x
11.0x
2.0x
10.0x 1.5x
9.0x
16.0x 14.0x 12.0x
8.0x
1.0x 2006
2007
2008
2009
2010
EV/EBITDA
Source: Bloomberg Average Multiples
2011
2012
2013 Current
10.0x
2006
2007
2008
2009
2010
2011
2012
2013 Current
EV/Sales
137
Appendix
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
List of Ametek Acquisitions (2011-2014) Spruce Point Capital
$ in millions Announced
Location
Target
8/5/2014
Germany
Luphos
8/5/2014 4/11/2014
Bedford, MA Middlefield, CT
Amptek Zygo Corp
2/10/2014
Irvine, CA
VTI Instruments
1/3/2014
Switzerland
Teseq Group
12/4/2013
Waukegan, IL
Powervar
10/29/2013 8/7/2013
Lévis, Québec Chalotte, NC
Creaform Controls SouthEast
1/3/2013
Athens, OH
Sunpower Inc
1/3/2013
San Luis Obispo, CA
12/17/2012
Miami, FL
10/23/2012
Streetsboro, OH
5/21/2012
Bonndorf, Germany Dunkermotoren GmbH
1/26/2012
St Louis, MO
O'Brien Corp
1/3/2012
Peabody, MA
Techinical Manufacturing Corp
10/17/2011
Depew, NY
Crystal Engineering Aero Components / Avtech Avionics Micro-Poise Measurement Systems
Reichert Technologies
10/25/2011
Switzerland
EM Test
5/9/2011
Montvale, NJ
Coining Holding
4/28/2011
Montevideo, MN
Avicenna Technology
Private Equity Sponsor
Target Description Technology utilizing multi-wavelength laser interferometry
provider of x-ray detectors used to identify the Edgewater Growth (2012) composition of materials using x-ray fluorescence (XRF) Bouler Capital; JZ Capital within the metal metrology solutions and optical systems Merit Capital/ Alerion high precision test and measurement instrumentation, Capital Group esp in Aerospace test and measurement instruments for electromagnetic compatibility testing. power protection equipment used by the medical, retail Pfingsten Partners and telecommunication industries developer and manufacturer of portable 3D measurement technologies and a provider of 3D engineering services Industrial Growth Partners manufacturer of custom-engineered thermal solutions
Enterprise Value
LTM Sales
LTM EBITDA
EBITDA Margin
Electronic Instruments
$12.7
--
--
--
--
--
Electronic Instruments Electronic Instruments
$115.0 $280.0
$29.2 $162.9
$13.1 $28.9
44.9% 17.7%
3.94x 1.72x
8.78x 9.69x
Electronic Instruments
$74.0
$38.0
--
--
1.95x
--
Electronic Instruments
$92.0
$53.0
--
--
1.74x
--
Electronic Instruments
$128.0
$70.0
--
--
1.83x
--
Electronic Instruments Electronic Instruments
$120.0 $160.0
$52.0 $50.0
---
---
2.31x 3.20x
---
N/A
N/A
--
--
--
--
Electronic Instruments
N/A
N/A
--
--
--
--
Electromechanical Group
~$80
N/A
--
--
--
--
Electronic Instruments
$170.0
$125.0
$22.6
18.1%
1.36x
7.52x
Electromechanical Group
$318.5
$168.6
$34.0
20.2%
1.89x
9.37x
Electronic Instruments
$179.3
$80.0
$19.9
24.9%
2.24x
9.01x
Electronic Instruments
$48.9
$30.0
$7.5
25.1%
1.63x
6.50x
Electronic Instruments
$150.0
$55.0
$15.0
27.3%
2.73x
10.00x
$93.0
$41.0
$10.3
25.2%
2.27x
9.00x
$148.0
$65.0
--
--
2.28x
--
$35.0
$25.0
--
--
1.40x
--
Segment
development of Stirling cycle cryocoolers and externally heated Stirling engine technology for various markets Electronic Instruments high-end pressure measurement technology and manufactures high-end portable digital pressure calibrators and digital test gauges repairs and overhauls fuel, hydraulic, pneumatic, power generation and heat exchanger components American Industrial integrated test and measurement solutions for Partners the tire industry engineered advanced motion control solutions for Triton Partners niche applications manufacturer of fluid and gas handling solutions, sample Industrial Growth Partners conditioning equipment and process analyzers custom active piezoelectric vibration cancellation systems for life sciences, photonics and semiconducter equipment Beecken Petty O'Keefe
River Associates Investments
instruments used by ophthalmologists, optometrists, and opticians for vision correction and the screening
Equipment used to perform electrical immunity and electromagnetic compatibility testing Electronic Instruments supplier of custom-shaped metal preforms, microstampings and bonding wire solutions for interconnect applications in microelectronics packaging and assembly Electromechanical Group fine-featured catheter and other medical components for leads, guide wires and custom medical assemblies Electromechanical Group
Source: Press releases, SEC filings, Earnings Calls, Public information
Enterprise Value / LTM Revenues EBITDA
139
List of Ametek Acquisitions (2008-2010) Spruce Point Capital
$ in millions Announced
Location
Target
Private Equity Sponsor
11/9/2010
Chicago, IL
Atlas Material Testing Technology
weathering test instruments and related testing and Industrial Growth Partners consulting services
N/A
American Reliance Power Division
direct current power supplies and electronic loads for the automated linear actuatorstest andequipment lead screw market assemblies for the
Haydon Enterprises
Harbor Group
medical, industrial equipment, aerospace, analytical instrument, computer peripheral and semiconductor
Pfingsten Partners
manufacturer of engineered interconnect solutions for the medical device industry
8/19/2010 7/1/2010
Waterbury, CT
6/1/2010
Arlington, MN
4/1/2010
Madison, WI
Technical Services for Electronics Imago Scientific Instruments (1)
1/26/2010
Tampa, FL
Sterling Ultra Precision
12/1/2009
Baldwin Park, CA
Ameron Global
1/1/2009
Miami, FL
High Standard Aviation
11/3/2008
United Kingdom
Murihead Aerospace
7/28/2008
San Diego, CA
Programmable power business of Xantrex
6/12/2008
Wayne, NJ
Vision Research
4/14/2008
Robesonia, PA
Reading Alloys
2/26/2008
Tulsa, OK
Drake Air
2/26/2008 2/20/2008
Minneapolis, MN N/A
Motion Control Group Newage Testing
Enterprise Value
LTM Sales
LTM EBITDA
EBITDA Margin
Electronic Instruments
$159.0
$85.0
--
--
1.87x
--
Electronic Instruments
N/A
N/A
--
--
--
--
Electromechanical Group
$270.0
$85.0
--
--
3.18x
--
Electromechanical Group
$89.5
$50.0
--
--
1.79x
--
manufacturer of 3D atom probes
Electronic Instruments
$6.0
$7.0
--
--
--
--
reseller of machine tools for the ophthalmic lens market manufacturer of highly engineered pressurized gas components and systems for commercial and military aerospace customers electrical and electromechanical, hydraulic and pneumatic repair services to the aerospace industry manufacturer of motion technology products and a provider of avionics repair and overhaul services for A&D markets
Electronic Instruments
$3.2
N/A
--
--
--
--
Electromechanical Group
$32.7
$20.0
--
--
1.64x
--
Electromechanical Group
$40.2
$31.0
--
--
1.30x
--
Aerospace/Defense
~$64
$54.0
--
--
1.20x
--
Electronic Instruments
$120.0
$80.0
--
--
1.50x
--
Electronic Instruments
N/A
$37.0
--
--
--
--
Electromechanical Group
N/A
$80.0
--
--
--
--
Electronic Instruments
N/A
$15.0
--
--
--
--
Electromechanical Group Electronic Instruments
N/A N/A
$26.0 N/A
---
---
---
---
Target Description
AC/DC programmable power supplies used to test electrical and electronic products manufacturer of high-speed digital imaging systems used for motion capture and analysis in numerous test and measurement applications pecialty titanium master alloys and highly engineered metal powders used in the aerospace, medical implant, military and electronics markets heat-transfer repair services to the commercial aerospace industry customized motors and motion control solutions for the medical, life sciences, industrial automation, semiconductor and aviation markets manufacturer of hardness testing equipment
1) Information based on public article Source: Press releases, SEC filings, Earnings Calls, Public information
Segment
Enterprise Value / LTM Revenues EBITDA
140
List of Ametek Acquisitions (2006-2007) Spruce Point Capital
$ in millions Private Equity Sponsor
Announced
Location
Target
12/14/2007 10/18/2007 8/13/2007
San Diego, CA United Kingdom Paris, France
California Instruments Umeco R&O Cameca SAS
6/14/2007
Lancaster, PA
6/5/2007 4/18/2007
Witchita, KS Westerly, RI
Hamilton Precision Metals Advanced Industries B&S Aircraft Parts & Acces. Seacon Phoenix
4/18/2007
N/A
Siemens' Power Control
and related Power Control Systems technology and products
12/13/2006
Tulsa, OK
Southern Aeroparts
3rd Party MRO services to the commercial aerospace
12/12/2006 11/6/2006
N/A Keene, NH
General Ceramics Precitech
6/15/2006
Dronfield, UK
5/15/2006 2/18/2006
Harleysville, PA Coral Springs, FL
Land Instruments Int'l PennEngineering Motion Tech. Pulsar Technologies
Carlyle
Enterprise Value
LTM Sales
LTM EBITDA
EBITDA Margin
Electronic Instruments joins Ametek A&D division Electronic Instruments
~$38 $73.0 $112.0
$22.0 $57.0 $82.0
----
----
1.73x 1.28x 1.37x
----
Electromechanical Group
$42.0
$25.0
--
--
1.68x
--
~'$20 $38.0
$25.0 $17.0
---
---
0.80x 2.24x
---
Electronic Instruments
--
--
--
--
--
--
Electronic Instruments
~$40
$17.0
--
--
2.35x
--
-$13.0
-$19.0
---
---
-0.68x
---
$45.7
$41.0
--
--
1.11x
--
$64.0 $14.4
$55.0 $10.0
---
---
1.16x 1.44x
---
Target Description
Segment
programmable alternating current (AC) power sources European MRO business high-end elemental analysis systems precision metal strip and foil for medical, electronic and instrumentation markets
aircraft power management and 3rd party MRO Electronic Instruments undersea electrical interconnect Halmar Robicon silicon controlledsubsystems rectifier power controller Joins HCC Industries in EMG
manuf'ter of engineered hermetic microelectronic packages for electronic apps in the A&D, telco, and industrial markets Electromechanical Group manufacturer of ultra-precision machining systems Electronic Instruments on-line optical temperature measurement instrumentation for industrial applications Electronic Instruments highly engineered motors for niche applications communications equipment for the electric utility market
Source: Press releases, SEC filings, Earnings Calls, Public Information
Technical&Industrial Products unit Electronic Instruments
Enterprise Value / LTM Revenues EBITDA
141
List of Ametek Acquisitions (2000-2005) Spruce Point Capital
$ in millions Private Equity Sponsor
Announced
Location
Target
10/10/2005
Los Angeles, CA
HCC Industries
9/7/2005 9/26/2005 6/13/2005
N/A England Kleve, Germany
Quizix Solartron Group SPECTRO
6/30/2004
Leicester, UK
7/20/2004
Enterprise Value
LTM Sales
LTM EBITDA
EBITDA Margin
Enterprise Value / LTM Revenues EBITDA
Electromechanical Group
$162.0
$104.0
--
--
1.56x
--
Electronic Instruments Electronic Instruments Electronic Instruments
-$75.0 $98.0
-$50.0 $104.0
----
----
-1.50x 0.94x
----
--
--
1.67x
--
Target Description manufacturer of engineered hermetic connectors, terminals, headers and microelectronic packages manufacturer of precision pumping systems for the oil and gas market analytical and metrology instruments Atomic Spectroscopy analytical instrumentation
Segment
Taylor Hobson
ultra-precision measurement instrumentation
Electronic Instruments
Garden City, NY
Hughes-Treitler
Electronic Instruments
$48.0
$32.0
9/4/2003
Tulsa, OK
Chandler Instruments
Electronic Instruments
$49.0
$30.0
--
--
1.63x
--
5/9/2003
Columbus, OH
Solidstate Controls
Marmon Industrial
Electronic Instruments
$34.0
$45.0
--
--
0.76x
--
1/13/2003 2/1/2002
London, England Oak Ridge, TN
Airtechnology IRAS
Candover Partners PerkinElmer
Electromechanical Group Electronic Instruments
$80.0 $63.0
$46.4 $50.0
---
---
1.72x 1.26x
---
7/9/2001
Mahwah, NJ
EDAX
Panta Electronics
Electronic Instruments
$37.0
$34.0
--
--
1.09x
--
5/22/2001 9/13/2000
Wisconsin Rochester, NY
GS Electric Rochester Instrument
SPX Corp
Electromechanical Group Electronic Instruments
$32.0 $21.0
$65.0 $33.0
---
---
0.49x 0.64x
---
8/8/2000
Various
Prestolite Electric
Prestolite
heat exchangers and thermal management subsystems measurement instrumentation for the oil and gas industry uninterruptible power supply systems for the process and power generation industries supplier of motors, fans and environmental control systems for the aerospace and defense markets manufacturer of advanced analytical instrumentation analytical instrumentation which complements the Company's process and analytical instruments magnet motors for the global floor care and other markets electric power generation market Switch Division, Industrial Battery Charger business, and Direct-Current (DC) motor business
Electromechanical Group
$60.0
$71.0
--
--
0.85x
--
1.7x
8.7x
German Equity Ptnrs
GBP 55m GBP 38m
1.67x
Deal Averages: Source: Public Information
Compare average valuation paid for acquisitions vs. Ametek’s current valuation of 3.8x and 14.5x LTM Sales and EBITDA! Source: Press releases, SEC filings, Earnings Calls, Public Information
142
Spruce Point Capital
Ametek’s Sourcing and Operational Improvement Expectations $ in millions
Source: Ametek earnings conference calls
Total Annual Cost Savings Expectations
Total Annual Sourcing Expectations
Total Annual Operational Expectations
Total Qtrly Realized Sourcing
Total Annual Realized Sourcing
Q1'09 Q2'09 Q3'09 Q4'09
$115.0 $135.0 $135.0 $135.0
$20.0 $20.0 $20.0 $22.0
$95.0 $115.0 $115.0 $113.0
$4.4 $5.4 $6.0 $6.0
$21.8
Q1'10 Q2'10 Q3'10 Q4'10
$75.0 $75.0 $75.0 $75.0
$22.0 $25.0 $27.0 $27.0
$53.0 $50.0 $48.0 $48.0
$6.0 $7.0 $7.0 $7.0
$27.0
Q1'11 Q2'11 Q3'11 Q4'11
$50.0 $50.0 $50.0 $50.0
$27.0 $28.0 $29.0 $30.0
$23.0 $22.0 $21.0 $20.0
$7.0 $7.0 $8.0 $8.0
$30.0
Q1'12 Q2'12 Q3'12 Q4'12
$60.0 $75.0 $80.0 $85.0
$40.0 $47.0 $48.0 $49.0
$20.0 $28.0 $32.0 $36.0
$10.0 $12.0 $13.0 $14.0
$49.0
Q1'13 Q2'13 Q3'13 Q4'13
$95.0 $100.0 $100.0 $100.0
$54.0 $54.0 $54.0 $62.0
$41.0 $46.0 $46.0 $38.0
$14.0 $16.0 $16.0 $16.0
$62.0
Q1'14 Q2'14 Q3'14
$90.0 $95.0 $100.0
$60.0 $65.0 $70.0
$30.0 $30.0 $30.0
$17.0 $18.0 $19.0
$54.0
Total
$545.0
$260.0
$285.0
$243.8
143
.
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Company Registration No; 00620201 (Englan·d and Wales)
i·~·:
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AEM LIMITED ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013
II 1111 II II 1111 1111 II *L3E39CUG*
LD4
12/08/2014
#66
AEM LIMITED ·
·.
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COMPANY INFORMATION i.';-·:
Directors
DB Coley JG Smith J W Hardin A Harding E Speranza
Secretaries
DB Coley .. KE Sena
Company number
00620201
Registered office
(Appoi.nted 31 March 2014)
PO Box 36 · 2 New Star Road Leicester LE4 9JQ
Auditors
Ernst & Young LLP One Cambridge Business Park Cambridge CB4 OWZ
Business address
Taylor's End, Stansted Airport Stansted Essex CM241RB
·Bankers
NatWest 1 Granby Street Leicester LE1 6EJ
i._y.
AEM LIMITED
·.
·.
·.
CONTENTS '';:.
Page Strategic report
1- 2
Directors' report .
3-4
Independent auditors' report
5-6
Profit and loss account
7
Balance sheet
8
Notes to the financial statements
9 - 21
·.
AEM LIMITED
·.
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·.
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STRATEGIC REPORT
FOR THE YEAR ENDED 31.. DECEMBER 2013 i~-
i~-,·
~'::
:
The directors present their strategic report for the year ended 31 December 2013. Principal activities and review of the business The principal activity of the company continued to be that of repair, overhaul, modification and testing of aircraft components and the supply of first aid and medical kits and equipment to the aviation industry. The company's key financial indicators for the year were.as follows:
Sales Operating profit Operating profit as a % of sales Net current assets (excluding debtors falling due after more than one year) Shareholders' funds
2013 2012 £'QOO £'000 25,262 23, 181 5,671 4,659 22.45% 20.10% 11,230 11,414
8,316 8,088
Change % 8.98 21.72
35.04 41.12
Operating profit for the 12 month period ended 31 December 2013 showed a 22% increase on the prior 12 month period with turnover up by 9%. Despite the general downturn in the UK economy the company, through diversification and a strong presence in overseas markets, recorded strong levels of profitability and met AMETEK expectations for all of its main key performance indicators. We remain confident, given the actions taken in 2013 to enhance capability and production facilities at our Ramsgate location that we will continue to see growth and increased profitability in 2014. Principal risks and uncertainties The company operates in a competitive and global environment and whilst the economic downturn has undoubtedly affected the airline industry as a whole, the company, )IVith its increasing global spread of MRO (Maintenance, Repair and Overhaul) businesses under the AMETEK brand, is now of significant mass and diversification. Consequently, it is much better placed to minimise the effects of this market decline and well placed to take further advantage of any market fall-out. Financial risk management The company's principal financial instruments comprise trade debtor, trade creditor and inter-company loans and balances. The company does not enter into derivative transactions and it is, and has been throughout the period under review, the company's policy that no trading in financial instruments shall be undertaken. The main risks arising from the company's financial instruments are interest rate risk and foreign currency risk. Interest rate risk It is AMETEK group policy not to enter into interest rate swaps.
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AEM LIMITED .··
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·.
STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2013 i'.·::
Foreign currency risk The company has transactional and translated currency exposure arising from sales, purchases and loans in foreign currencies. It is AMETEK group policy not to actively hedge against foreign currency transactions and balances. On behalf of the board
JG Smith
Directo{3
...................~
'::..'v L...o ,
4
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·.
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AEM LIMITED DIRECTORS' REPORT
FOR THE YEAR ENDED 31 DECEMBER 2013
The directors present their report for the year ended 31 December 2013. Results and dividends The results for the year are set out on page 7.
The total distribution of dividends for the year ended 31 December 2013 was £1,810,000 (2012: £3,521,000). Market value of land and buildings In the opinion cif the directors, the market value of freehold land and buildings is not considered to be materially different to the net book value as disclosed in th~ fixed asset note.
Research and development The company continues to invest in a programme of research and development across all business areas, researching and adding new capabilities considered strategic to support the markets it serves. Post balance sheet events The company has declared and paid dividends amounting to £1,000,000 since the year end. Future developments The company will continue fo expand its presence in the Far East market by utilising the AMETEK MRO facility in Singapore and seek to develop strategic partnerships wi~h other AMETEK companies. Going concern The company's business activities, together with the factors likely to affect its future development, its financial position, financial risk management objectives and details of the company's exposure to risk are described in the strategic report on page 1.
After making enquiries, the directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Directors The following dire,ctors have held office since 1 January 2013:
DB Coley A Imrie JG Smith J W Hardin A Harding . E Speranza
(Resigned 31 March 2014)
(Appointed 31 March 2014)
Directors' insurance AMETEK Inc. has indemnified one or more directors of the company against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act 2006 .. Such qualifying third party the year and remains in place to the date of this report. ) indemnity provision was in force during . Environment The group operates under recognised environmental procedures and best practice, fully recognising and complying with its responsibilities to the environment and current legislation. In furtherance to this.. the company operates an environmental policy in accordance with ISO 14001.
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AEM LIMITED
·.
DIRECTORS' REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2013 i'::.
.:....,.
Financial instruments Details of financial instruments are provided in the strategic report on page 1. Auditors The auditors, Ernst & Young LLP, are deemed to be reappointed under section 487(2) of the Companies Act 2006. Statement of directors' responsibilities The ·directors are responsible for preparing the Strategic Report, the Directors' Report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and accounting estimates that are reason.able and prudent; · - state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the · company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Statement of disclosure to auditors So far as the directors are aware, there is no relevant audit information of which the company's auditors are unaware. Additionally, the directors have taken all the necessary steps that they ought to have taken as directors in order to make themselves aware of all relevant audit information and to establish that the company's auditors are aware of that information.
On behalf of the board
JG Smith Director
0
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