Notes to Consolidated Financial Statements
March 31, 2018
(Unaudited)
1. Basis of Presentation
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, 2018, the consolidated results of its operations and its cash flows for the
three months ended March 31, 2018 and 2017 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, 2017 as filed with the U.S. Securities
and Exchange Commission.
As discussed below in Note 2, effective January 1, 2018, the Company adopted the requirements of
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2014-09
(Topic 606),
Revenue from Contracts with Customers
(ASU 2014-09)
using the modified retrospective method. Also, effective January 1, 2018, the Company retrospectively adopted
ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07).
All amounts and disclosures set forth in this
Form 10-Q
reflect these changes.
2. Recent Accounting
Pronouncements
In May 2014, the FASB issued
ASU 2014-09
and modified the standard
thereafter within Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers
(ASC 606). 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 supersedes most of the existing revenue recognition guidance. The Company adopted
ASU 2014-09
effective January 1, 2018 using the modified retrospective method. The adoption of
ASU 2014-09
did not have a significant impact on the
Companys consolidated results of operations, financial position and cash flows. See Note 3.
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 and early adoption is permitted.
ASU 2016-02
includes transitional guidance, as currently issued, that calls
for a modified retrospective approach. The FASB has recently proposed adding a transition option to the current guidance and it includes optional practical expedients for ease of transition. The Company has formed a steering committee to lead the
Companys implementation project. 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, which could be significant to the Companys financial position.
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. The Company prospectively adopted
ASU 2017-01
effective January 1, 2018 and the
adoption did not have a significant impact on the Companys consolidated results of operations, financial position, cash flows and financial statement disclosures.
6
In March 2017, the FASB issued
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. The
Company retrospectively adopted
ASU 2017-07
effective January 1, 2018. For the three months ended March 31, 2017, the consolidated statement of income was restated to increase Cost of sales by
$2.5 million, increase Selling, general and administrative expenses by $0.4 million and decrease Other expense, net by $2.9 million for net periodic benefit income components other than service cost. The $2.9 million of net
periodic benefit income components other than service cost was originally reported in operating income as follows: $1.5 million in Electronic Instruments (EIG), $1.0 million in Electromechanical (EMG) and
$0.4 million in Corporate administrative expense. The adoption of
ASU 2017-07
did not have a significant impact on the Companys consolidated results of operations, financial position, cash
flows and financial statement disclosures.
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. The Company prospectively adopted
ASU 2017-09
effective January 1, 2018 and
the adoption did not have a significant impact on the Companys consolidated results of operations, financial position or cash flows.
3. Revenues
As discussed in Note 2, the Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The
cumulative adjustment made to the January 1, 2018 consolidated balance sheet for the adoption of ASC 606 was to increase Retained earnings by $4.2 million, increase Total assets by $7.9 million and increase Total liabilities by
$3.7 million. For the three months ended March 31, 2018, the effect of the changes in all financial statement line items impacted by ASC 606 was immaterial from the amount that would have been reported under the previous guidance.
Updated disclosure of the Companys significant accounting policy regarding revenue recognition is 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.
Revenue is derived from products and services. The Companys
products are marketed and sold worldwide through two operating groups: EIG and EMG.
EIG manufactures advanced instruments for the
process, power and industrial, and aerospace markets. It provides process and analytical instruments for the oil and gas, petrochemical, pharmaceutical, semiconductor, automation, and food and beverage industries. EIG also provides instruments to
the laboratory equipment, ultraprecision manufacturing, medical, and test and measurement markets. It makes power quality monitoring and metering devices, uninterruptible power supplies, programmable power equipment, electromagnetic compatibility
test equipment and gas turbines sensors. EIG also provides dashboard instruments for heavy trucks and other vehicles, as well as instrumentation and controls for the food and beverage industries. It supplies the aerospace industry with aircraft and
engine sensors, monitoring systems, power supplies, fuel and fluid measurement systems, and data acquisition systems.
EMG is a
differentiated supplier of automation solutions, thermal management systems, specialty metals and electrical interconnects. It manufactures highly engineered electrical connectors and electronic packaging used to protect sensitive electronic
devices. EMG also makes precision motion control products for data storage, medical devices, business equipment, automation and other applications. It supplies high-purity powdered metals, strip and foil, specialty clad metals and metal matrix
composites. EMG also manufactures motors used in commercial appliances, fitness equipment, food and beverage machines, hydraulic pumps and industrial blowers. It produces motor-blower systems and heat exchangers used in thermal management and other
applications on a variety of military and commercial aircraft and military ground vehicles. EMG also operates a global network of aviation maintenance, repair and overhaul facilities.
7
The majority of the Companys revenues on product sales are recognized at a point in time
when the customer obtains control of the product. The transfer in control of the product to the customer is typically evidenced by one or more of the following: the customer having legal title to the product, the Companys present right to
payment, the customers physical possession of the product, the customer accepting the product, or the customer has benefit of ownership or risk of loss. Legal title changes to the customer in accordance with the delivery terms of the order,
usually upon shipment. For a small percentage of sales where title and risk of loss transfers at the point of delivery, the Company recognizes revenue upon delivery to the customer, assuming all other criteria for revenue recognition are met.
Under ASC 606, the Company determined that revenues from certain of its customer contracts met the criteria of satisfying its performance
obligations over time, primarily in the areas of the manufacture of custom-made equipment and for service repairs of customer-owned equipment. Prior to the adoption of the new standard, these revenues were recorded upon shipment or, in the case of
those sales where title and risk of loss passes at the point of delivery, the Company recognized revenue upon delivery to the customer. Recognizing revenue over time for custom-manufactured equipment is based on the Companys judgment that, in
certain contracts, the product does not have an alternative use and the Company has an enforceable right to payment for performance completed to date. This change in revenue recognition accelerated the revenue recognition and costs on the impacted
contracts.
Applying the practical expedient available under ASC 606, the Company recognizes incremental cost of obtaining contracts
as an expense when incurred if the amortization period of the assets that the Company would have otherwise recognized is one year or less. These costs are included in Selling, general and administrative expenses in the consolidated statement of
income.
Revenues associated with repairs of customer-owned assets were previously recorded upon completion and shipment of the repaired
equipment to the customer. Under ASC 606, if the Companys performance enhances an asset that the customer controls as the asset is enhanced, revenue must be recognized over time. The revenue associated with the repair of a customer-owned
asset meets this criterion.
The determination of the revenue to be recognized in a given period for performance obligations over time is
based on the input method. The Company recognizes revenue over time as it performs on these contracts because the transfer of control to the customer occurs over time, revenue is recognized based on the extent of progress towards completion of the
performance obligation. The Company generally uses the total
cost-to-cost
input method of progress because it best depicts the transfer of control to the customer that
occurs as costs are incurred. Under the
cost-to-cost
method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to
the total estimated costs at completion of the performance obligation. On certain contracts, labor hours is used as the measure of progress when it is determined to be a better depiction of the transfer of control to the customer due to the timing
and pattern of labor hours incurred.
Performance obligations also include service contracts, installation and training. Service contracts
are recognized over the contract life. Installation and training revenues are recognized over the period the service is provided. Warranty terms in customer contracts can also be considered separate performance obligations if the warranty provides
services beyond assurance that a product complies with agreed-upon specification or if a warranty can be purchased separately. The Company does not incur significant obligations for customer returns and refunds.
Payment terms generally begin upon shipment of the product. The Company does have contracts with multiple billing terms that are all due
within one year from when the product is delivered. As such, no significant financing component exists. Payment terms are generally
30-60 days
from the time of shipment or customer acceptance, but
negotiated terms can be shorter or longer. For customer contracts that have revenue recognized over time, revenue is generally recognized prior to a payment being due from the customer. In such cases, the Company recognizes a contract asset at the
time the revenue is recognized. When payment becomes due based on the contract terms, the Company reduces the contract asset and records a receivable. In contracts with billing milestones or in other instances with a long production cycle or
concerns about credit, customer advance payments are received. The Company may receive a payment in excess of revenue recognized to that date. In these circumstances, a contract liability is recorded.
8
The outstanding contract asset and (liability) accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Unbilled
Revenues
|
|
|
Customer
Advanced
Payments
|
|
|
|
(In thousands)
|
|
Balance at March 31, 2018
|
|
$
|
41,722
|
|
|
$
|
(142,016
|
)
|
Revenues recognized during the period from:
|
|
|
|
|
|
|
|
|
Amounts in Customer advanced payments
|
|
|
|
|
|
|
70,040
|
|
Performance obligations satisfied
|
|
|
31,282
|
|
|
|
|
|
Transferred to Receivables from contract assets at the beginning of the period
|
|
|
(22,233
|
)
|
|
|
|
|
Increase due to cash received
|
|
|
|
|
|
|
(95,294
|
)
|
Unbilled revenues at March 31, 2018 included approximately $14 million that was previously reported
in current assets at December 31, 2017. Customer advanced payments at March 31, 2018 included amounts that were previously reported in accounts payable of approximately $76 million, accrued liabilities of approximately
$26 million and other of approximately $12 million at December 31, 2017. Customer advanced payments includes $6.6 million, which is included in Other long-term liabilities.
The aggregate amount of the expected future revenues allocated to performance obligations that are unsatisfied (backlog) as of
March 31, 2018 was $1,568.3 million, of which approximately 90% is expected to be recognized as revenue within the next twelve months.
The Company has certain contracts with variable consideration in the form of volume discounts, rebates and early payment options, which may
affect the transaction price used as the basis for revenue recognition. In these contracts, the amount of the variable consideration is not considered constrained and is allocated among the various performance obligations in the customer contract
based on the relative standalone selling price of each performance obligation to the total standalone value of all the performance obligations.
Product Warranties
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
22,872
|
|
|
$
|
22,007
|
|
Accruals for warranties issued during the period
|
|
|
3,191
|
|
|
|
3,505
|
|
Settlements made during the period
|
|
|
(3,710
|
)
|
|
|
(3,210
|
)
|
Warranty accruals related to acquired businesses and other during the period
|
|
|
233
|
|
|
|
1,470
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
22,586
|
|
|
$
|
23,772
|
|
|
|
|
|
|
|
|
|
|
Product warranty obligations are reported as current liabilities in the consolidated balance sheet.
9
Geographic Areas
Information about the Companys operations in different geographic areas is shown below. Net sales were attributed to geographic areas
based on the location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
|
EIG
|
|
|
EMG
|
|
|
Total
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
329,076
|
|
|
$
|
230,864
|
|
|
$
|
559,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
13,740
|
|
|
|
35,383
|
|
|
|
49,123
|
|
European Union countries
|
|
|
92,302
|
|
|
|
107,814
|
|
|
|
200,116
|
|
Asia
|
|
|
191,485
|
|
|
|
51,063
|
|
|
|
242,548
|
|
Other foreign countries
|
|
|
89,823
|
|
|
|
31,097
|
|
|
|
120,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
387,350
|
|
|
|
225,357
|
|
|
|
612,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
716,426
|
|
|
$
|
456,221
|
|
|
$
|
1,172,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Products and Services
The Companys major products and services in the reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
|
EIG
|
|
|
EMG
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Process and analytical instrumentation
|
|
$
|
499,637
|
|
|
$
|
|
|
|
$
|
499,637
|
|
Aerospace and Power
|
|
|
216,789
|
|
|
|
108,657
|
|
|
|
325,446
|
|
Electromechanical devices
|
|
|
|
|
|
|
347,564
|
|
|
|
347,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
716,426
|
|
|
$
|
456,221
|
|
|
$
|
1,172,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
The Companys timing of revenue recognition was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
|
EIG
|
|
|
EMG
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Goods transferred at a point in time
|
|
$
|
625,422
|
|
|
$
|
429,082
|
|
|
$
|
1,054,504
|
|
Products and services transferred over time
|
|
|
91,004
|
|
|
|
27,139
|
|
|
|
118,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
716,426
|
|
|
$
|
456,221
|
|
|
$
|
1,172,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
The Companys EIG and EMG 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, 2018, there were no significant changes in identifiable assets of reportable segments from the amounts disclosed at
December 31, 2017, other than those described in the acquisitions footnote (Note 9), 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, 2018 and 2017 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.
10
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
230,928
|
|
|
|
229,548
|
|
Equity-based compensation plans
|
|
|
2,037
|
|
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
232,965
|
|
|
|
231,004
|
|
|
|
|
|
|
|
|
|
|
5.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of accumulated other
comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
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
|
|
$
|
(251,805
|
)
|
|
$
|
(177,371
|
)
|
|
$
|
(429,176
|
)
|
|
$
|
(338,631
|
)
|
|
$
|
(203,758
|
)
|
|
$
|
(542,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
29,581
|
|
|
|
|
|
|
|
29,581
|
|
|
|
4,679
|
|
|
|
|
|
|
|
4,679
|
|
Change in long-term intercompany notes
|
|
|
5,404
|
|
|
|
|
|
|
|
5,404
|
|
|
|
2,704
|
|
|
|
|
|
|
|
2,704
|
|
Net investment hedge instruments
|
|
|
(30,142
|
)
|
|
|
|
|
|
|
(30,142
|
)
|
|
|
1,044
|
|
|
|
|
|
|
|
1,044
|
|
Gross amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
2,952
|
|
|
|
2,952
|
|
|
|
|
|
|
|
3,512
|
|
|
|
3,512
|
|
Income tax benefit (expense)
|
|
|
7,342
|
|
|
|
(719
|
)
|
|
|
6,623
|
|
|
|
(365
|
)
|
|
|
(1,321
|
)
|
|
|
(1,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
12,185
|
|
|
|
2,233
|
|
|
|
14,418
|
|
|
|
8,062
|
|
|
|
2,191
|
|
|
|
10,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(239,620
|
)
|
|
$
|
(175,138
|
)
|
|
$
|
(414,758
|
)
|
|
$
|
(330,569
|
)
|
|
$
|
(201,567
|
)
|
|
$
|
(532,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications for the amortization of defined benefit pension plans are included in Other expense, net in
the consolidated statement of income. See Note 13 for further details.
11
6.
|
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. See Note 9 for
discussion of acquisition date fair value of contingent payment liability.
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, consistent with the fair value hierarchy, at March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Fixed-income investments
|
|
$
|
8,041
|
|
|
$
|
8,060
|
|
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, 2018 and 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, 2018 and 2017.
Financial Instruments
Cash, cash
equivalents and fixed-income investments are recorded at fair value at March 31, 2018 and December 31, 2017 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, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
Recorded
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Long-term debt, net (including current portion)
|
|
$
|
(2,205,702
|
)
|
|
$
|
(2,205,169
|
)
|
|
$
|
(2,174,289
|
)
|
|
$
|
(2,210,466
|
)
|
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.
Foreign Currency
At March 31, 2018,
the Company had no forward contracts outstanding. At December 31, 2017, the Company had a Canadian dollar forward contract for a total notional value of 83.0 million Canadian dollars ($1.5 million fair value unrealized gain at
December 31, 2017) outstanding. For the three months ended March 31, 2018, realized gains and losses on foreign currency forward contracts were not significant. The Company does not typically designate its foreign currency forward
contracts as hedges.
12
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, 2018, 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 March 31, 2018, the Company had $427.8 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, 2018, the Company had $615.8 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, $30.1 million of
pre-tax
currency
remeasurement losses have been included in the foreign currency translation component of other comprehensive income for the three months ended March 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Finished goods and parts
|
|
$
|
84,699
|
|
|
$
|
84,789
|
|
Work in process
|
|
|
128,258
|
|
|
|
107,362
|
|
Raw materials and purchased parts
|
|
|
383,355
|
|
|
|
348,353
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
596,312
|
|
|
$
|
540,504
|
|
|
|
|
|
|
|
|
|
|
13
The Company spent $242.1 million in cash, net of cash acquired, to
acquire FMH Aerospace (FMH) in January 2018. FMH is a provider of complex, highly-engineered solutions for the aerospace, defense and space industries. FMH is part of EMG.
The following table represents the preliminary allocation of the purchase price for the net assets of the 2018 acquisition based on their
estimated fair values at acquisition (in millions):
|
|
|
|
|
Property, plant and equipment
|
|
$
|
4.0
|
|
Goodwill
|
|
|
106.1
|
|
Other intangible assets
|
|
|
129.3
|
|
Deferred income taxes
|
|
|
(23.3
|
)
|
Net working capital and other
(1)
|
|
|
26.0
|
|
|
|
|
|
|
Total cash paid
|
|
$
|
242.1
|
|
|
|
|
|
|
(1)
|
Includes $5.9 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 2018 acquisition as follows: FMHs
products and solutions further broaden the Companys differentiated product offerings in the aerospace and defense markets. The Company expects approximately $62 million of the goodwill recorded relating to the 2018 acquisition will be tax
deductible in future years.
At March 31, 2018, the purchase price allocated to other intangible assets of $129.3 million
consists of $23.5 million of indefinite-lived intangible trade names, which are not subject to amortization. The remaining $105.8 million of other intangible assets consists of $82.3 million of customer relationships, which are being
amortized over a period of 18 years, and $23.5 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 2018 acquisition is expected to
approximate $6 million per year.
The Company is in the process of finalizing the measurement of certain tangible and intangible
assets and liabilities for its 2018 acquisition including inventory, property, plant and equipment, goodwill, trade names, customer relationships and purchased technology and the accounting for income taxes. The Company is in the process of
finalizing the accounting for income taxes for its June 2017 acquisition of MOCON, Inc.
The 2018 acquisition had an immaterial impact on
reported net sales, net income and diluted earnings per share for the three months ended March 31, 2018. Had the 2018 acquisition been made at the beginning of 2018 or 2017, unaudited pro forma net sales, net income and diluted earnings per
share for the three months ended March 31, 2018 and 2017, respectively, would not have been materially different than the amounts reported.
In February 2017, the Company acquired Rauland-Borg Corporation (Rauland). The Rauland acquisition included a potential
$30 million contingent payment due upon 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
March 31, 2018, there was no change to the estimated fair value of the contingent payment liability.
Acquisitions Subsequent to March 31,
2018
In April 2018, the Company acquired SoundCom Systems (SoundCom) for approximately $40 million in cash.
SoundCom has estimated annual sales of approximately $40 million. SoundCom provides design, integration, installation and support of clinical workflow and communication systems for healthcare facilities, educational institutions and
corporations. SoundCom also serves as a value-added reseller for Rauland in the Midwest portion of the United States. SoundCom will join EIG.
14
The changes in the carrying amounts of goodwill by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIG
|
|
|
EMG
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at December 31, 2017
|
|
$
|
2,077.0
|
|
|
$
|
1,038.6
|
|
|
$
|
3,115.6
|
|
Goodwill acquired
|
|
|
|
|
|
|
106.1
|
|
|
|
106.1
|
|
Purchase price allocation adjustments and other
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
Foreign currency translation adjustments
|
|
|
7.9
|
|
|
|
10.6
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
2,083.3
|
|
|
$
|
1,155.3
|
|
|
$
|
3,238.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018, the Company had gross unrecognized tax benefits of
$62.9 million, of which $54.2 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, 2017
|
|
$
|
60.3
|
|
Additions for tax positions
|
|
|
2.8
|
|
Reductions for tax positions
|
|
|
(0.2
|
)
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
62.9
|
|
|
|
|
|
|
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, 2018 and 2017 were not significant.
The effective tax rate for the first quarter of 2018 was 23.1%, compared with 27.4% for the first quarter of 2017. The first quarter of 2018
effective tax rate primarily reflects the impact of the recently enacted U.S. Tax Cuts and Jobs Act (the Act) including the reduction of the U.S. corporate income tax rate and the current impact of the global intangible
low-taxed
income (GILTI) and the foreign-derived intangible income (FDII) provisions.
In the fourth quarter of 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component
of Provision for income taxes related to the impact of the Act. The $91.6 million net benefit consisted of a $185.8 million benefit resulting from the remeasurement of the Companys net deferred tax liabilities in the U.S. based on
the new lower corporate income tax rate and $94.2 million expense mostly relating to the
one-time
mandatory tax on previously deferred earnings of certain
non-U.S.
subsidiaries that are owned either wholly or partially by a U.S. subsidiary of the Company as discussed further below.
Although the
$91.6 million net benefit represents what the Company believes is a reasonable estimate of the impact of the income tax effects of the Act on the Companys consolidated financial statements as of December 31, 2017, it should be
considered provisional. As of March 31, 2018, the Company has not materially changed its estimate of the December 31, 2017 impact of the income tax effects of the Act. As additional guidance from the U.S. Department of Treasury is
provided, the Company may need to adjust the provisional amounts after it finalizes the 2017 U.S. tax return and is able to conclude whether any further adjustments are required to its U.S. portion of net deferred tax liability of
$390.4 million as of December 31, 2017, as well as to the liability associated with the
one-time
mandatory tax. The currently recorded amounts include a variety of estimates of taxable earnings and
profits, estimated taxable foreign cash balances, differences between U.S. GAAP and U.S. tax principles and interpretations of many aspects of the Act that may, if changed, impact the final amounts. Any adjustments to these provisional
amounts will be reported as a component of Provision for income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018. As of March 31, 2018, the Company is still
evaluating the potential future impact of GILTI and has not provided any provisional deferred tax liability for it. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions
in the U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Companys measurement of its deferred taxes. Due to the ongoing evaluation, the Company has not yet made the accounting
policy decision as of March 31, 2018.
15
12.
|
Share-Based Compensation
|
In March 2018, the Company granted performance restricted
stock units (PRSUs) to officers and certain key management-level employees an aggregate target award of approximately 52,000 shares of its common stock. The PRSUs vest three years from the grant date based on continuous service,
with the number of shares earned (0% to 200% of the target award) depending upon the extent to which the Company achieves certain financial and market performance targets measured over the period from January 1, 2018 through December 31,
2020. Half of the PRSUs were valued in a manner similar to restricted stock as the financial targets are based on the Companys operating results. The grant date fair value of these PRSUs are recognized as compensation expense over the vesting
period based on the number of awards expected to vest at each reporting date. The other half of the PRSUs were valued using a Monte Carlo model as the performance target is related to the Companys total shareholder return compared to a group
of peer companies. The Company recognizes the grant date fair value of these awards as compensation expense ratably over the vesting period.
Total share-based compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Stock option expense
|
|
$
|
2,428
|
|
|
$
|
2,213
|
|
Restricted stock expense
|
|
|
3,076
|
|
|
|
3,115
|
|
PRSU expense
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
pre-tax
expense
|
|
$
|
5,571
|
|
|
$
|
5,328
|
|
|
|
|
|
|
|
|
|
|
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.
13.
|
Retirement and Pension Plans
|
The components of net periodic pension benefit expense
(income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,814
|
|
|
$
|
1,855
|
|
Interest cost
|
|
|
6,482
|
|
|
|
6,805
|
|
Expected return on plan assets
|
|
|
(14,963
|
)
|
|
|
(13,238
|
)
|
Amortization of net actuarial loss and other
|
|
|
2,952
|
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
Pension income
|
|
|
(3,715
|
)
|
|
|
(1,066
|
)
|
|
|
|
|
|
|
|
|
|
Other plans:
|
|
|
|
|
|
|
|
|
Defined contribution plans
|
|
|
8,399
|
|
|
|
7,034
|
|
Foreign plans and other
|
|
|
1,596
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
Total other plans
|
|
|
9,995
|
|
|
|
8,510
|
|
|
|
|
|
|
|
|
|
|
Total net pension expense
|
|
$
|
6,280
|
|
|
$
|
7,444
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2018 and 2017, contributions to the Companys defined benefit
pension plans were $0.7 million and $50.9 million, respectively. The Companys current estimate of 2018 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, 2017.
16
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 March 31, 2018, 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 March 31, 2018 and December 31, 2017 were $31.2 million and $30.1 million, respectively,
for both
non-owned
and owned sites. For the three months ended March 31, 2018, the Company recorded $2.0 million in reserves and the reserve increased $0.2 million due to foreign currency
translation. Additionally, the Company spent $1.1 million on environmental matters for the three months ended March 31, 2018. The Companys reserves for environmental liabilities at March 31, 2018 and December 31, 2017
included reserves of $11.2 million and $11.6 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, 2018, 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.
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.
17
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.
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 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 have been broadly implemented across the Companys various businesses 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 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 quarters of 2016 and 2015
restructuring charges as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
of 2016
Restructuring
|
|
|
Fourth Quarter
of 2015
Restructuring
|
|
Balance at December 31, 2017
|
|
$
|
12.8
|
|
|
$
|
6.7
|
|
Utilization
|
|
|
(1.2
|
)
|
|
|
(0.2
|
)
|
Foreign currency translation adjustments and other
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
11.7
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
|
|
|
18