Notes to Consolidated Financial Statements
March 31, 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 March 31, 2017, and the
consolidated results of its operations and its cash flows for the three months ended March 31, 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 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 determine its method of adoption by the end of the second quarter of 2017.
The Company is currently evaluating the impact of the potential changes identified by its initial assessment work. The standard is expected to
impact the Companys revenue recognition processes, primarily in the areas of the allocation of contract revenues (such as installations, training and warranty services) and the timing of when certain revenues should be recognized
(over-time or at a point-in-time). The Company is continuing to determine the impact
ASU 2014-09
may have on its consolidated results of operations, financial position, cash flows
and financial statement disclosures.
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.
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.
6
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
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 months ended March 31, 2017, the Company recorded a tax benefit of
$5.8 million 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 reduction 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 months ended March 31, 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.
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.
7
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
229,548
|
|
|
|
234,983
|
|
Equity-based compensation plans
|
|
|
1,456
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
231,004
|
|
|
|
236,216
|
|
|
|
|
|
|
|
|
|
|
4.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of accumulated other
comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
|
Three Months Ended
March 31, 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
|
|
|
4,679
|
|
|
|
|
|
|
|
4,679
|
|
|
|
21,679
|
|
|
|
|
|
|
|
21,679
|
|
Change in long-term intercompany notes
|
|
|
2,704
|
|
|
|
|
|
|
|
2,704
|
|
|
|
13,703
|
|
|
|
|
|
|
|
13,703
|
|
Net investment hedges
|
|
|
1,044
|
|
|
|
|
|
|
|
1,044
|
|
|
|
(2,910
|
)
|
|
|
|
|
|
|
(2,910
|
)
|
Gross amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
3,512
|
|
|
|
3,512
|
|
|
|
|
|
|
|
2,484
|
|
|
|
2,484
|
|
Income tax benefit (expense)
|
|
|
(365
|
)
|
|
|
(1,321
|
)
|
|
|
(1,686
|
)
|
|
|
1,019
|
|
|
|
(869
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax
|
|
|
8,062
|
|
|
|
2,191
|
|
|
|
10,253
|
|
|
|
33,491
|
|
|
|
1,615
|
|
|
|
35,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(330,569
|
)
|
|
$
|
(201,567
|
)
|
|
$
|
(532,136
|
)
|
|
$
|
(217,102
|
)
|
|
$
|
(153,423
|
)
|
|
$
|
(370,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications for the amortization of defined benefit pension plans are included in Cost of sales in the
consolidated statement of income. See Note 11 for further details.
8
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 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
March 31, 2017 and December 31, 2016, consistent with the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Fixed-income investments
|
|
$
|
7,623
|
|
|
$
|
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 three
months ended March 31, 2017, gains and losses on the investments noted above were not significant. No transfers between level 1 and level 2 investments occurred during the three months ended March 31, 2017.
Financial Instruments
Cash, cash
equivalents and fixed-income investments are recorded at fair value at March 31, 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 March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Short-term borrowings, net
|
|
$
|
(58,192
|
)
|
|
$
|
(58,192
|
)
|
|
$
|
|
|
|
$
|
|
|
Long-term debt, net (including current portion)
|
|
|
(2,356,336
|
)
|
|
|
(2,400,520
|
)
|
|
|
(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.
9
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 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 March 31, 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 investment based on changes in the spot rate, which is used to measure hedge effectiveness.
At March 31, 2017, the Company had $382.3 million of British-pound-denominated loans, which were designated as a hedge against the
net investment in British pound functional currency foreign subsidiaries. At March 31, 2017, the Company had $534.9 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, $13.1 million of currency remeasurement losses have been included in the foreign currency
translation component of other comprehensive income for the three months ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Finished goods and parts
|
|
$
|
88,893
|
|
|
$
|
75,827
|
|
Work in process
|
|
|
109,653
|
|
|
|
101,484
|
|
Raw materials and purchased parts
|
|
|
331,381
|
|
|
|
314,793
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
529,927
|
|
|
$
|
492,104
|
|
|
|
|
|
|
|
|
|
|
The Company spent $334.5 million in cash, net of cash acquired, plus
a potential $30 million contingent payment due upon the achievement of certain milestones to acquire
Rauland-Borg
Corporation (Rauland) in February 2017. Rauland is a global provider of
enterprise clinical and education communications solutions for hospitals, healthcare systems and educational facilities. Rauland is part of AMETEKs Electronic Instruments Group.
The following table represents the preliminary allocation of the aggregate purchase price for the net assets of the above acquisition based on
their estimated fair values at acquisition (in millions):
|
|
|
|
|
Property, plant and equipment
|
|
$
|
13.3
|
|
Goodwill
|
|
|
146.0
|
|
Other intangible assets
|
|
|
184.5
|
|
Long-term liabilities
|
|
|
(9.4
|
)
|
Net working capital and other
(1)
|
|
|
25.6
|
|
|
|
|
|
|
Total purchase price
|
|
|
360.0
|
|
Less: Contingent payment liability
|
|
|
(25.5
|
)
|
|
|
|
|
|
Total cash paid
|
|
$
|
334.5
|
|
|
|
|
|
|
(1)
|
Includes $22.3 million in accounts receivable, whose fair value, contractual cash flows and expected cash flows are approximately equal.
|
10
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
The amount allocated to goodwill is reflective of the benefits the Company expects to realize
from the acquisition as follows: Rauland provides the Company with an attractive new growth segment within the medical technology market, strong growth opportunities in its core markets and incremental growth opportunities through acquisitions and
international expansion. The Company expects approximately $146 million of the goodwill recorded in connection with the Rauland acquisition will be tax deductible in future years.
At March 31, 2017, purchase price allocated to other intangible assets of $184.5 million consists of $36.6 million of
indefinite-lived intangible trade names, which are not subject to amortization. The remaining $147.9 million of other intangible assets consists of a $111.0 million customer relationship, which is being amortized over a period of
20 years and $36.9 million of purchased technology, which is being amortized over a period of 15 years. Amortization expense for each of the next five years for the Rauland acquisition is expected to approximate $8 million
per year.
The Company is in the process of finalizing the measurement of certain tangible and intangible assets and liabilities for its
Rauland acquisition, 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.
The
Rauland acquisition had an immaterial impact on reported net sales, net income and diluted earnings per share for the three months ended March 31, 2017. Had the Rauland acquisition been made at the beginning of 2017 or 2016, unaudited pro forma
net sales, net income and diluted earnings per share for the three months ended March 31, 2017 and 2016, respectively, would not have been materially different than the amounts reported.
Subsequent Event
In
April 2017, the Company entered into a definitive merger agreement under which AMETEK will acquire all of the outstanding shares of common stock of MOCON, Inc. The aggregate enterprise value of the transaction is approximately
$182 million, including MOCONs outstanding equity awards and net cash to be acquired in the transaction. For the calendar year ended December 31, 2016, MOCON had sales of approximately $63 million. 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 and will join AMETEKs Electronic Instruments
Group. The closing of the definitive merger agreement is subject to customary closing conditions, including the approval of MOCONs shareholders and applicable regulatory approvals. The transaction is expected to be completed towards the end of
the second quarter or the beginning of the third quarter of 2017.
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
|
|
|
146.0
|
|
|
|
|
|
|
|
146.0
|
|
Purchase price allocation adjustments and other
|
|
|
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Foreign currency translation adjustments
|
|
|
5.0
|
|
|
|
4.4
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
1,968.0
|
|
|
$
|
1,007.0
|
|
|
$
|
2,975.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
At March 31, 2017, the Company had gross unrecognized tax benefits of
$59.2 million, of which $49.9 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
|
|
|
1.3
|
|
Reductions for tax positions
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
59.2
|
|
|
|
|
|
|
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 months ended March 31, 2017 and 2016 were not significant.
11.
|
Retirement and Pension Plans
|
The components of net periodic pension benefit expense
(income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,855
|
|
|
$
|
1,659
|
|
Interest cost
|
|
|
6,805
|
|
|
|
7,613
|
|
Expected return on plan assets
|
|
|
(13,238
|
)
|
|
|
(12,969
|
)
|
Amortization of net actuarial loss and other
|
|
|
3,512
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
Pension income
|
|
|
(1,066
|
)
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
Other plans:
|
|
|
|
|
|
|
|
|
Defined contribution plans
|
|
|
7,034
|
|
|
|
7,042
|
|
Foreign plans and other
|
|
|
1,476
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
Total other plans
|
|
|
8,510
|
|
|
|
8,378
|
|
|
|
|
|
|
|
|
|
|
Total net pension expense
|
|
$
|
7,444
|
|
|
$
|
7,165
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, contributions to the Companys defined benefit
pension plans were $50.9 million and $1.2 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.
12
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
22,007
|
|
|
$
|
22,761
|
|
Accruals for warranties issued during the period
|
|
|
3,505
|
|
|
|
3,104
|
|
Settlements made during the period
|
|
|
(3,210
|
)
|
|
|
(4,010
|
)
|
Warranty accruals related to acquired businesses and other during the period
|
|
|
1,470
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
23,772
|
|
|
$
|
22,584
|
|
|
|
|
|
|
|
|
|
|
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.
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 it has strong defenses to the claims being asserted and intends to
continue to vigorously defend itself in these matters.
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 March 31, 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
13
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
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 March 31, 2017 and December 31, 2016 were $28.2 million and $28.4 million, respectively,
for both non-owned and owned sites. For the three months ended March 31, 2017, the Company recorded $1.2 million in reserves and the reserve increased $0.1 million due to foreign currency translation. Additionally, the Company spent
$1.5 million on environmental matters for the three months ended March 31, 2017. The Companys reserves for environmental liabilities at March 31, 2017 and December 31, 2016 include reserves of $12.5 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 March 31, 2017, the Company had $11.9 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.
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 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 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 March 31, 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 months ended March 31, 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.
14
AMETEK, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(Unaudited)
15.
|
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 the second half of 2017.
Accrued
liabilities in the Companys consolidated balance sheet included amounts related to the 2016 and 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
|
|
|
(1.9
|
)
|
|
|
(1.0
|
)
|
Foreign currency translation adjustments and other
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
17.1
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
15