Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The accompanying consolidated financial statements are unaudited.
AMETEK, Inc. (the Company) believes that all adjustments (which primarily consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial position of the Company at September 30, 2017, the
consolidated results of its operations for the three and nine months ended September 30, 2017 and 2016 and its cash flows for the nine months ended September 30, 2017 and 2016 have been included. Quarterly results of operations are not
necessarily indicative of results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes presented in the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2016 as filed with the Securities and Exchange Commission.
2.
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09)
and modified the standard thereafter. The objective of
ASU 2014-09
is to establish a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance. The core principle of
ASU 2014-09
is that an entity recognizes revenue
at the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2014-09
applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification.
ASU 2014-09
is effective for interim and annual reporting periods beginning after
December 15, 2017 and may be early adopted for interim and annual reporting periods beginning after December 15, 2016. The Company will adopt
ASU 2014-09
as of January 1, 2018. The guidance
permits adoption by retrospectively applying the guidance to each prior reporting period presented (full retrospective method) or prospectively applying the guidance and providing additional disclosures comparing results to previous guidance, with
the cumulative effect of initially applying the guidance recognized in beginning retained earnings at the date of initial application (modified retrospective method). The Company expects to use the modified retrospective method of adoption.
ASU 2014-09
is primarily expected to impact the Companys revenue recognition procedures by
requiring recognition of certain revenues to move from upon shipment or delivery to over-time. The recording of certain revenues over-time is not expected to have a material impact on the Companys consolidated results of operations or
financial position. Also, the Company is developing the additional expanded disclosures required. The Company is in the process of implementing the appropriate changes to business processes and controls to support recognition and disclosure under
ASU 2014-09.
The Company does not currently expect the adoption of
ASU 2014-09
to have a material impact on its consolidated results of operations, financial
position and cash flows.
In July 2015, the FASB issued
ASU No. 2015-11,
Simplifying the Measurement of Inventory
(ASU 2015-11),
which applies to inventory that is measured using
first-in,
first-out
(FIFO) or average cost. As prescribed in this update, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using
last-in,
first-out
(LIFO). The Company prospectively adopted
ASU 2015-11
effective January 1, 2017 and the adoption did not have a significant impact on the
Companys consolidated results of operations, financial position or cash flows.
6
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
In November 2015, the FASB issued
ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU 2015-17).
ASU 2015-17
simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. The Company prospectively adopted
ASU 2015-17
effective January 1, 2017 and the adoption did not have a significant impact on the Companys consolidated results of operations, financial position or cash flows. The December 31, 2016 consolidated balance sheet was not adjusted for
the adoption of
ASU 2015-17.
In February 2016, the FASB issued
ASU No. 2016-02,
Leases
(ASU 2016-02).
The new standard establishes a
right-of-use
model that requires a lessee to record a
right-of-use
asset and a lease
liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
ASU 2016-02
is effective for interim and annual reporting periods beginning after December 15, 2018.
ASU 2016-02
is to be adopted using a modified retrospective
approach and early adoption is permitted. The Company has not determined the impact
ASU 2016-02
may have on the Companys consolidated results of operations, financial position, cash flows and
financial statement disclosures.
In March 2016, the FASB issued
ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09).
ASU 2016-09
includes changes to the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company prospectively adopted
ASU 2016-09
effective January 1, 2017. For the three and nine months ended September 30, 2017, the Company recorded a tax benefit of $2.5 million and $11.4 million, respectively,
within Provision for income taxes related to the tax effects of share-based payment transactions. Prior to adoption, this amount would have been recorded as a component of Capital in excess of par value. The adoption of this standard could create
volatility in the Companys effective tax rate going forward. The Company elected not to change its accounting policy with respect to the estimation of forfeitures. The Company no longer reclassifies the excess tax benefits from share-based
payments from operating activities to financing activities in the consolidated statement of cash flows. For the three and nine months ended September 30, 2017, the Company excluded the excess tax benefits from the assumed proceeds available to
repurchase shares in the computation of its diluted earnings per share and the related increase in the Companys diluted weighted average common shares outstanding was not significant.
In January 2017, the FASB issued ASU
No. 2017-01,
Clarifying the Definition of a
Business
(ASU 2017-01).
ASU 2017-01
provides a more robust framework to use in determining when a set of assets and activities is a business.
ASU 2017-01
requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so,
the set of assets is not a business.
ASU 2017-01
requires that, to be a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the
ability to create outputs.
ASU 2017-01
is effective for interim and annual reporting periods beginning after December 15, 2017.
ASU 2017-01
will be
applied prospectively to any transactions occurring within the period of adoption. Early adoption is permitted, including for interim or annual periods in which the financial statements have not been issued or made available for issuance. The
Company does not expect the adoption of
ASU 2017-01
to have a significant impact on the Companys consolidated results of operations, financial position, cash flows and financial statement
disclosures.
In January 2017, the FASB issued
ASU No. 2017-04,
Simplifying the
Test for Goodwill Impairment
(ASU 2017-04).
ASU 2017-04
eliminates the requirement to calculate the implied fair value of goodwill (second
step) to measure a goodwill impairment charge. Under the guidance, an impairment charge will be measured based on the excess of the reporting units carrying amount over its fair value (first step).
ASU 2017-04
is effective for interim and annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company early adopted
ASU 2017-04
effective January 1, 2017 and the adoption did not have a significant impact on the Companys consolidated results of operations, financial position, cash flows and financial
statement disclosures.
7
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
In March 2017, the FASB issued
ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07),
which changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement.
ASU 2017-07
requires employers to
present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs. All other components of the net periodic benefit cost will be presented outside of operating income.
ASU 2017-07
is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company has not determined the impact
ASU 2017-07
may have on the Companys consolidated results of operations, financial position or cash flows.
In May 2017, the FASB issued
ASU No. 2017-09,
Scope of Modification Accounting
(ASU 2017-09).
ASU 2017-09
clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting.
ASU 2017-09
is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company does not expect the adoption of
ASU 2017-09
to have a significant impact on the Companys consolidated results of operations, financial position or cash flows.
The calculation of basic earnings per share is based on the weighted
average number of common shares considered outstanding during the periods. The calculation of diluted earnings per share reflects the effect of all potentially dilutive securities (principally outstanding stock options and restricted stock grants).
The number of weighted average shares used in the calculation of basic earnings per share and diluted earnings per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
230,439
|
|
|
|
231,894
|
|
|
|
230,049
|
|
|
|
233,387
|
|
Equity-based compensation plans
|
|
|
1,814
|
|
|
|
827
|
|
|
|
1,566
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
232,253
|
|
|
|
232,721
|
|
|
|
231,615
|
|
|
|
234,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
4.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of accumulated other
comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Foreign
Currency
Items
and Other
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Total
|
|
|
Foreign
Currency
Items
and Other
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
(294,922
|
)
|
|
$
|
(199,376
|
)
|
|
$
|
(494,298
|
)
|
|
$
|
(271,501
|
)
|
|
$
|
(151,808
|
)
|
|
$
|
(423,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
37,642
|
|
|
|
|
|
|
|
37,642
|
|
|
|
(10,441
|
)
|
|
|
|
|
|
|
(10,441
|
)
|
Change in long-term intercompany notes
|
|
|
12,035
|
|
|
|
|
|
|
|
12,035
|
|
|
|
3,063
|
|
|
|
|
|
|
|
3,063
|
|
Net investment hedge instruments
|
|
|
(32,422
|
)
|
|
|
|
|
|
|
(32,422
|
)
|
|
|
(1,212
|
)
|
|
|
|
|
|
|
(1,212
|
)
|
Gross amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
3,512
|
|
|
|
3,512
|
|
|
|
|
|
|
|
2,484
|
|
|
|
2,484
|
|
Income tax benefit (expense)
|
|
|
12,190
|
|
|
|
(1,321
|
)
|
|
|
10,869
|
|
|
|
423
|
|
|
|
(869
|
)
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
29,445
|
|
|
|
2,191
|
|
|
|
31,636
|
|
|
|
(8,167
|
)
|
|
|
1,615
|
|
|
|
(6,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(265,477
|
)
|
|
$
|
(197,185
|
)
|
|
$
|
(462,662
|
)
|
|
$
|
(279,668
|
)
|
|
$
|
(150,193
|
)
|
|
$
|
(429,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Foreign
Currency
Items
and Other
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Total
|
|
|
Foreign
Currency
Items
and Other
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
(338,631
|
)
|
|
$
|
(203,758
|
)
|
|
$
|
(542,389
|
)
|
|
$
|
(250,593
|
)
|
|
$
|
(155,038
|
)
|
|
$
|
(405,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
101,846
|
|
|
|
|
|
|
|
101,846
|
|
|
|
(26,581
|
)
|
|
|
|
|
|
|
(26,581
|
)
|
Change in long-term intercompany notes
|
|
|
30,727
|
|
|
|
|
|
|
|
30,727
|
|
|
|
6,862
|
|
|
|
|
|
|
|
6,862
|
|
Net investment hedge instruments
|
|
|
(95,311
|
)
|
|
|
|
|
|
|
(95,311
|
)
|
|
|
(14,393
|
)
|
|
|
|
|
|
|
(14,393
|
)
|
Gross amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
10,536
|
|
|
|
10,536
|
|
|
|
|
|
|
|
7,452
|
|
|
|
7,452
|
|
Income tax benefit (expense)
|
|
|
35,892
|
|
|
|
(3,963
|
)
|
|
|
31,929
|
|
|
|
5,037
|
|
|
|
(2,607
|
)
|
|
|
2,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
73,154
|
|
|
|
6,573
|
|
|
|
79,727
|
|
|
|
(29,075
|
)
|
|
|
4,845
|
|
|
|
(24,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(265,477
|
)
|
|
$
|
(197,185
|
)
|
|
$
|
(462,662
|
)
|
|
$
|
(279,668
|
)
|
|
$
|
(150,193
|
)
|
|
$
|
(429,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications for the amortization of defined benefit pension plans are included in Cost of sales in the
consolidated statement of income. See Note 12 for further details.
9
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
5.
|
Fair Value Measurements
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy
prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the
Companys own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.
The following table provides the Companys assets that are measured at fair value on a recurring basis as of
September 30, 2017 and December 31, 2016, consistent with the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Fixed-income investments
|
|
$
|
7,896
|
|
|
$
|
7,317
|
|
The fair value of fixed-income investments, which are valued as level 1 investments, was based on quoted
market prices. The fixed-income investments are shown as a component of long-term assets on the consolidated balance sheet.
For the nine
months ended September 30, 2017 and 2016, gains and losses on the investments noted above were not significant. No transfers between level 1 and level 2 investments occurred during the nine months ended September 30, 2017
and 2016.
Financial Instruments
Cash, cash equivalents and fixed-income investments are recorded at fair value at September 30, 2017 and December 31, 2016 in the
accompanying consolidated balance sheet.
The following table provides the estimated fair values of the Companys financial
instrument liabilities, for which fair value is measured for disclosure purposes only, compared to the recorded amounts at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Short-term borrowings, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt, net (including current portion)
|
|
|
(2,430,446
|
)
|
|
|
(2,456,920
|
)
|
|
|
(2,341,565
|
)
|
|
|
(2,386,901
|
)
|
The fair value of
short-term
borrowings, net approximates the carrying
value. Short-term borrowings, net are valued as level 2 liabilities as they are corroborated by observable market data. The Companys long-term debt, net is all privately held with no public market for this debt, therefore, the fair value
of long-term debt, net was computed based on comparable current market data for similar debt instruments and is considered to be a level 3 liability.
10
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The Company has designated certain foreign-currency-denominated
long-term borrowings as hedges of the net investment in certain foreign operations. As of September 30, 2017, these net investment hedges included
British-pound-and
Euro-denominated long-term debt. These
borrowings were designed to create net investment hedges in each of the designated foreign subsidiaries. The Company designated the British-pound- and Euro-denominated loans referred to above as hedging instruments to offset translation gains or
losses on the net investment due to changes in the British pound and Euro exchange rates. These net investment hedges are evidenced by managements contemporaneous documentation supporting the hedge designation. Any gain or loss on the hedging
instruments (the debt) following hedge designation is reported in accumulated other comprehensive income in the same manner as the translation adjustment on the hedged investment based on changes in the spot rate, which is used to measure hedge
effectiveness.
At September 30, 2017, the Company had $408.7 million of British-pound-denominated loans, which were designated
as a hedge against the net investment in British pound functional currency foreign subsidiaries. At September 30, 2017, the Company had $590.7 million in Euro-denominated loans, which were designated as a hedge against the net investment
in Euro functional currency foreign subsidiaries. As a result of the
British-pound-and
Euro-denominated loans being designated and 100% effective as net investment hedges, $95.3 million of currency
remeasurement losses have been included in the foreign currency translation component of other comprehensive income for the nine months ended September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Finished goods and parts
|
|
$
|
79,897
|
|
|
$
|
75,827
|
|
Work in process
|
|
|
118,979
|
|
|
|
101,484
|
|
Raw materials and purchased parts
|
|
|
348,000
|
|
|
|
314,793
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
546,876
|
|
|
$
|
492,104
|
|
|
|
|
|
|
|
|
|
|
11
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The Company spent $518.6 million in cash, net of cash acquired, to
acquire
Rauland-Borg
Corporation (Rauland) in February 2017 and MOCON, Inc. in June 2017. The Rauland acquisition includes a potential $30 million contingent payment due upon
the achievement of certain milestones as described further below. Rauland is a global provider of enterprise clinical and education communications solutions for hospitals, healthcare systems and educational facilities. MOCON is a provider of
laboratory and field gas analysis instrumentation to research laboratories, production facilities and quality control departments in food and beverage, pharmaceutical and industrial applications. Rauland and MOCON are part of AMETEKs
Electronic Instruments Group.
The following table represents the preliminary allocation of the aggregate purchase price for the net
assets of the 2017 acquisitions based on their estimated fair values at acquisition (in millions):
|
|
|
|
|
Property, plant and equipment
|
|
$
|
21.5
|
|
Goodwill
|
|
|
256.4
|
|
Other intangible assets
|
|
|
269.5
|
|
Long-term liabilities
|
|
|
(10.6
|
)
|
Deferred income taxes
|
|
|
(27.2
|
)
|
Net working capital and other
(1)
|
|
|
34.5
|
|
|
|
|
|
|
Total purchase price
|
|
|
544.1
|
|
Less: Contingent payment liability
|
|
|
(25.5
|
)
|
|
|
|
|
|
Total cash paid
|
|
$
|
518.6
|
|
|
|
|
|
|
(1)
|
Includes $30.7 million in accounts receivable, whose fair value, contractual cash flows and expected cash flows are approximately equal.
|
The amount allocated to goodwill is reflective of the benefits the Company expects to realize from the 2017 acquisitions as follows: Rauland
provides the Company with attractive new growth opportunities within the medical technology market, strong growth opportunities in its core markets and incremental growth opportunities through acquisitions and international expansion. MOCONs
products and technologies complement the Companys existing gas analysis instrumentation business and provides it with opportunities to expand into the growing food and pharmaceutical package testing market. The Company expects approximately
$146 million of the goodwill recorded in connection with the 2017 acquisitions will be tax deductible in future years.
At
September 30, 2017, purchase price allocated to other intangible assets of $269.5 million consists of $53.6 million of indefinite-lived intangible trade names, which are not subject to amortization. The remaining $215.9 million
of other intangible assets consists of $162.0 million of customer relationships, which are being amortized over a period of 18 years and $53.9 million of purchased technology, which is being amortized over a period of 18 years.
Amortization expense for each of the next five years for the 2017 acquisitions is expected to approximate $12 million per year.
The Company is in the process of finalizing the measurement of certain tangible and intangible assets and liabilities for its 2017
acquisitions, including inventory, property, plant and equipment, goodwill, customer relationships, trade names, purchased technology, and the accounting for income taxes and certain
long-term
liabilities.
The above mentioned contingent payment is based on Rauland achieving a certain cumulative revenue target over the period October 1,
2016 to September 30, 2018. If Rauland achieves the target, the $30 million contingent payment will be made; however, if the target is not achieved, no payment will be made. At the acquisition date, the estimated fair value of the
contingent payment liability was $25.5 million, which was based on a probabilistic approach using level 3 inputs. At September 30, 2017, there was no change to the estimated fair value of the contingent payment liability.
The 2017 acquisitions had an immaterial impact on reported net sales, net income and diluted earnings per share for the three and nine months
ended September 30, 2017. Had the 2017 acquisitions been made at the beginning of 2017 or 2016, unaudited pro forma net sales, net income and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016,
respectively, would not have been materially different than the amounts reported.
12
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The changes in the carrying amounts of goodwill by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
Instruments
Group
|
|
|
Electro-
mechanical
Group
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at December 31, 2016
|
|
$
|
1,817.0
|
|
|
$
|
1,002.0
|
|
|
$
|
2,819.0
|
|
Goodwill acquired
|
|
|
256.4
|
|
|
|
|
|
|
|
256.4
|
|
Purchase price allocation adjustments and other
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.7
|
|
Foreign currency translation adjustments
|
|
|
31.2
|
|
|
|
31.4
|
|
|
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
2,104.7
|
|
|
$
|
1,034.0
|
|
|
$
|
3,138.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017, the Company had gross unrecognized tax
benefits of $58.5 million, of which $49.0 million, if recognized, would impact the effective tax rate.
The following is a
reconciliation of the liability for uncertain tax positions (in millions):
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
57.9
|
|
Additions for tax positions
|
|
|
8.7
|
|
Reductions for tax positions
|
|
|
(8.1
|
)
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
58.5
|
|
|
|
|
|
|
The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax
expense. The amounts recognized in income tax expense for interest and penalties during the three and nine months ended September 30, 2017 and 2016 were not significant.
11.
|
Share-Based Compensation
|
Total share-based compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Stock option expense
|
|
$
|
2,482
|
|
|
$
|
2,311
|
|
|
$
|
7,449
|
|
|
$
|
7,634
|
|
Restricted stock expense
|
|
|
3,094
|
|
|
|
3,047
|
|
|
|
12,240
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
pre-tax
expense
|
|
$
|
5,576
|
|
|
$
|
5,358
|
|
|
$
|
19,689
|
|
|
$
|
16,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
share-based compensation expense is included in the
consolidated statement of income in either Cost of sales or Selling, general and administrative expenses, depending on where the recipients cash compensation is reported. The nine months ended September 30, 2017 includes a second quarter
of 2017 $2.5 million
pre-tax
charge in corporate administrative expenses related to the accelerated vesting of restricted stock grants in association with the retirement of the Companys Executive
Chairman of the Board of Directors.
13
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The fair value of each stock option grant is estimated on the date of grant using a
Black-Scholes-Merton
option pricing model. The following weighted average assumptions were used in the
Black-Scholes-Merton
model to estimate the fair values of stock options granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Expected volatility
|
|
|
18.0
|
%
|
|
|
21.8
|
%
|
Expected term (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.94
|
%
|
|
|
1.23
|
%
|
Expected dividend yield
|
|
|
0.60
|
%
|
|
|
0.77
|
%
|
Black-Scholes-Merton fair value per stock option granted
|
|
$
|
11.05
|
|
|
$
|
9.14
|
|
Expected volatility is based on the historical volatility of the Companys stock over the stock
options expected term. The Company used historical exercise data to estimate the stock options expected term, which represents the period of time that the stock options granted are expected to be outstanding. Management anticipates that
the future stock option holding periods will be similar to the historical stock option holding periods. The risk-free interest rate for periods within the expected term of the stock option is based on the U.S. Treasury yield curve at the time of
grant. Compensation expense recognized for all share-based awards is net of estimated forfeitures. The Companys estimated forfeiture rates are based on its historical experience.
The following is a summary of the Companys stock option activity and related information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(Years)
|
|
|
(In millions)
|
|
Outstanding at December 31, 2016
|
|
|
6,011
|
|
|
$
|
42.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,331
|
|
|
|
60.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,388
|
)
|
|
|
30.96
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(180
|
)
|
|
|
52.17
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8
|
)
|
|
|
52.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
5,766
|
|
|
$
|
48.81
|
|
|
|
4.4
|
|
|
$
|
99.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
3,010
|
|
|
$
|
43.74
|
|
|
|
3.1
|
|
|
$
|
67.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017
was $37.4 million. The total fair value of stock options vested during the nine months ended September 30, 2017 was $12.4 million. As of September 30, 2017, there was approximately $24 million of expected future
pre-tax
compensation expense related to the 2.8 million nonvested stock options outstanding, which is expected to be recognized over a weighted average period of approximately two years.
The following is a summary of the Companys nonvested restricted stock activity and related information:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
Nonvested restricted stock outstanding at December 31, 2016
|
|
|
1,019
|
|
|
$
|
48.59
|
|
Granted
|
|
|
335
|
|
|
|
60.24
|
|
Vested
|
|
|
(317
|
)
|
|
|
47.41
|
|
Forfeited
|
|
|
(66
|
)
|
|
|
51.33
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock outstanding at September 30, 2017
|
|
|
971
|
|
|
$
|
53.32
|
|
|
|
|
|
|
|
|
|
|
14
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The total fair value of restricted stock vested during the nine months ended
September 30, 2017 was $15.0 million. As of September 30, 2017, there was approximately $32 million of expected future
pre-tax
compensation expense related to the 1.0 million nonvested
restricted shares outstanding, which is expected to be recognized over a weighted average period of approximately two years.
12.
|
Retirement and Pension Plans
|
The components of net periodic pension benefit expense
(income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,919
|
|
|
$
|
1,628
|
|
|
$
|
5,657
|
|
|
$
|
4,956
|
|
Interest cost
|
|
|
6,904
|
|
|
|
7,448
|
|
|
|
20,566
|
|
|
|
22,688
|
|
Expected return on plan assets
|
|
|
(13,343
|
)
|
|
|
(12,693
|
)
|
|
|
(39,884
|
)
|
|
|
(38,639
|
)
|
Amortization of net actuarial loss and other
|
|
|
3,512
|
|
|
|
2,484
|
|
|
|
10,536
|
|
|
|
7,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension income
|
|
|
(1,008
|
)
|
|
|
(1,133
|
)
|
|
|
(3,125
|
)
|
|
|
(3,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined contribution plans
|
|
|
5,830
|
|
|
|
5,660
|
|
|
|
18,788
|
|
|
|
18,537
|
|
Foreign plans and other
|
|
|
1,435
|
|
|
|
1,525
|
|
|
|
4,323
|
|
|
|
4,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other plans
|
|
|
7,265
|
|
|
|
7,185
|
|
|
|
23,111
|
|
|
|
22,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net pension expense
|
|
$
|
6,257
|
|
|
$
|
6,052
|
|
|
$
|
19,986
|
|
|
$
|
19,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017 and 2016, contributions to the Companys defined
benefit pension plans were $52.5 million and $3.0 million, respectively. The Companys current estimate of 2017 contributions to its worldwide defined benefit pension plans is in line with the range disclosed in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2016.
The Company provides limited warranties in connection with the sale
of its products. The warranty periods for products sold vary among the Companys operations, but generally do not exceed one year. The Company calculates its warranty expense provision based on its historical warranty experience and adjustments
are made periodically to reflect actual warranty expenses.
Changes in the accrued product warranty obligation were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
22,007
|
|
|
$
|
22,761
|
|
Accruals for warranties issued during the period
|
|
|
12,235
|
|
|
|
9,630
|
|
Settlements made during the period
|
|
|
(13,690
|
)
|
|
|
(11,697
|
)
|
Warranty accruals related to acquired businesses and other during
the period
|
|
|
2,372
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
22,924
|
|
|
$
|
21,927
|
|
|
|
|
|
|
|
|
|
|
Certain settlements of warranties made during the period were for specific nonrecurring warranty obligations.
Product warranty obligations are reported as current liabilities in the consolidated balance sheet.
15
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
Asbestos Litigation
The Company (including its subsidiaries) has been named as a defendant in a number of asbestos-related lawsuits. Certain of these lawsuits
relate to a business which was acquired by the Company and do not involve products which were manufactured or sold by the Company. In connection with these lawsuits, the seller of such business has agreed to indemnify the Company against these
claims (the Indemnified Claims). The Indemnified Claims have been tendered to, and are being defended by, such seller. The seller has met its obligations, in all respects, and the Company does not have any reason to believe such party
would fail to fulfill its obligations in the future. To date, no judgments have been rendered against the Company as a result of any asbestos-related lawsuit. The Company believes that it has good and valid defenses to each of these claims and
intends to defend them vigorously.
Environmental Matters
Certain historic processes in the manufacture of products have resulted in environmentally hazardous waste
by-products
as defined by federal and state laws and regulations. At September 30, 2017, the Company is named a Potentially Responsible Party (PRP) at 13
non-AMETEK-owned
former waste disposal or treatment sites (the
non-owned
sites). The Company is identified as a de minimis party in 12 of these
sites based on the low volume of waste attributed to the Company relative to the amounts attributed to other named PRPs. In eight of these sites, the Company has reached a tentative agreement on the cost of the de minimis settlement to satisfy
its obligation and is awaiting executed agreements. The tentatively
agreed-to
settlement amounts are fully reserved. In the other four sites, the Company is continuing to investigate the accuracy of the
alleged volume attributed to the Company as estimated by the parties primarily responsible for remedial activity at the sites to establish an appropriate settlement amount. At the remaining site where the Company is a
non-de
minimis PRP, the Company is participating in the investigation and/or related required remediation as part of a PRP Group and reserves have been established sufficient to satisfy the Companys
expected obligations. The Company historically has resolved these issues within established reserve levels and reasonably expects this result will continue. In addition to these
non-owned
sites, the Company
has an ongoing practice of providing reserves for probable remediation activities at certain of its current or previously owned manufacturing locations (the owned sites). For claims and proceedings against the Company with respect to
other environmental matters, reserves are established once the Company has determined that a loss is probable and estimable. This estimate is refined as the Company moves through the various stages of investigation, risk assessment, feasibility
study and corrective action processes. In certain instances, the Company has developed a range of estimates for such costs and has recorded a liability based on the best estimate. It is reasonably possible that the actual cost of remediation of the
individual sites could vary from the current estimates and the amounts accrued in the consolidated financial statements; however, the amounts of such variances are not expected to result in a material change to the consolidated financial statements.
In estimating the Companys liability for remediation, the Company also considers the likely proportionate share of the anticipated remediation expense and the ability of the other PRPs to fulfill their obligations.
Total environmental reserves at September 30, 2017 and December 31, 2016 were $27.8 million and $28.4 million,
respectively, for both
non-owned
and owned sites. For the nine months ended September 30, 2017, the Company recorded $3.5 million in reserves and the reserve increased $0.3 million due to
foreign currency translation. Additionally, the Company spent $4.4 million on environmental matters for the nine months ended September 30, 2017. The Companys reserves for environmental liabilities at September 30, 2017 and
December 31, 2016 include reserves of $11.9 million and $12.4 million, respectively, for an owned site acquired in connection with the 2005 acquisition of HCC Industries (HCC). The Company is the designated performing
party for the performance of remedial activities for one of several operating units making up a Superfund site in the San Gabriel Valley of California. The Company has obtained indemnifications and other financial assurances from the former
owners of HCC related to the costs of the required remedial activities. At September 30, 2017, the Company had $12.0 million in receivables related to HCC for probable recoveries from third-party escrow funds and other committed
third-party funds to support the required remediation. Also, the Company is indemnified by HCCs former owners for approximately $19 million of additional costs.
16
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
The Company has agreements with other former owners of certain of its acquired businesses, as
well as new owners of previously owned businesses. Under certain of the agreements, the former or new owners retained, or assumed and agreed to indemnify the Company against, certain environmental and other liabilities under certain circumstances.
The Company and some of these other parties also carry insurance coverage for some environmental matters. To date, these parties have met their obligations in all material respects.
The Company believes it has established reserves for the environmental matters described above, which are sufficient to perform all known
responsibilities under existing claims and consent orders. The Company has no reason to believe that other third parties would fail to perform their obligations in the future. In the opinion of management, based on presently available information
and the Companys historical experience related to such matters, an adequate provision for probable costs has been made and the ultimate cost resulting from these actions is not expected to materially affect the consolidated results of
operations, financial position or cash flows of the Company.
The Company has been remediating groundwater contamination for several
contaminants, including trichloroethylene (TCE), at a formerly owned site in El Cajon, California. Several lawsuits have been filed against the Company alleging damages resulting from the groundwater contamination, including
property damages and personal injury, and seeking compensatory and punitive damages. Given the state of uncertainty inherent in these litigations, the Company does not believe it is possible to develop estimates of reasonably possible loss in regard
to these matters. The Company believes that it has good and valid defenses to each of these claims and intends to defend them vigorously. The Company does not expect the outcome of these matters, either individually or in the aggregate, to
materially affect the consolidated results of operations, financial position or cash flows of the Company.
The Company has two reportable segments, Electronic Instruments
Group (EIG) and Electromechanical Group (EMG). The Companys operating segments are identified based on the existence of segment managers. Certain of the Companys operating segments have been aggregated for segment
reporting purposes primarily on the basis of product type, production processes, distribution methods and similarity of economic characteristics.
At September 30, 2017, there were no significant changes in identifiable assets of reportable segments from the amounts disclosed at
December 31, 2016, other than those described in the acquisitions footnote (Note 8), nor were there any significant changes in the basis of segmentation or in the measurement of segment operating results. Operating information relating to
the Companys reportable segments for the three and nine months ended September 30, 2017 and 2016 can be found in the table included in Part I, Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations of this Quarterly Report on
Form 10-Q.
The Company had a Shareholder Rights Plan, which expired in
June 2017. Under the Plan, the Companys Board of Directors declared a dividend of one Right for each share of Company common stock owned at the close of business on June 2, 2007, and had authorized the issuance of one Right for each
share of common stock of the Company issued between the Record Date and the Distribution Date. The Plan provided, under certain conditions involving acquisition of the Companys common stock, that holders of Rights, except for the acquiring
entity, would be entitled (i) to purchase shares of preferred stock at a specified exercise price, or (ii) to purchase shares of common stock of the Company, or the acquiring company, having a value of twice the Rights exercise price.
17
AMETEK, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
17.
|
Restructuring Charges
|
During the fourth quarter of 2016, the Company recorded
pre-tax
restructuring charges totaling $25.6 million, which had the effect of reducing net income by $17.0 million. The restructuring charges were reported in the consolidated statement of income as
follows: $24.0 million in Cost of sales and $1.6 million in Selling, general and administrative expenses. The restructuring charges were reported in segment operating income as follows: $12.4 million in EIG, $11.6 million in EMG
and $1.6 million in corporate administrative expenses. The restructuring actions primarily related to $19.3 million in severance costs for a reduction in workforce and $6.2 million of asset write-downs in response to the impact of a
weak global economy on certain of the Companys businesses and the effects of a continued strong U.S. dollar. The restructuring activities will be broadly implemented across the Companys various businesses through the end of 2017,
with most actions expected to be completed in 2018.
During the fourth quarter of 2015, the Company recorded
pre-tax
restructuring charges totaling $20.7 million, which had the effect of reducing net income by $13.9 million. The restructuring charges were reported in the consolidated statement of income as
follows: $20.0 million in Cost of sales and $0.7 million in Selling, general and administrative expenses. The restructuring charges were reported in segment operating income as follows: $9.3 million in EIG, $10.8 million in EMG
and $0.7 million in corporate administrative expenses. The restructuring actions primarily related to a reduction in workforce in response to the impact of a weak global economy on certain of the Companys businesses and the effects of a
continued strong U.S. dollar. The restructuring activities have been broadly implemented across the Companys various businesses with all actions expected to be completed in 2018.
Accrued liabilities in the Companys consolidated balance sheet included amounts related to the fourth quarter of 2016 and fourth quarter
of 2015 restructuring charges as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
of 2016
Restructuring
|
|
|
Fourth Quarter
of 2015
Restructuring
|
|
Balance at December 31, 2016
|
|
$
|
19.2
|
|
|
$
|
9.2
|
|
Utilization
|
|
|
(5.4
|
)
|
|
|
(1.7
|
)
|
Foreign currency translation adjustments and other
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
13.9
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
18