filings.toolsItem 8. Financial Statements and Supplementary Data
172K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
| --- | --- |
Financial Statement Schedules (Item 15(a)(2))
Financial statement schedules have been omitted because either they are not applicable or the required information is included in the financial statements or the notes thereto.
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Management’s Responsibility for Financial Statements
Management has prepared and is responsible for the integrity of the consolidated financial statements and related information. The statements are prepared in conformity with U.S. generally accepted accounting principles consistently applied and include certain amounts based on management’s best estimates and judgments. Historical financial information elsewhere in this report is consistent with that in the financial statements.
In meeting its responsibility for the reliability of the financial information, management maintains a system of internal accounting and disclosure controls, including an internal audit program. The system of controls provides for appropriate division of responsibility and the application of written policies and procedures. That system, which undergoes continual reevaluation, is designed to provide reasonable assurance that assets are safeguarded and records are adequate for the preparation of reliable financial data.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. AMETEK, Inc. maintains a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements; however, there are inherent limitations in the effectiveness of any system of internal controls.
Management recognizes its responsibility for conducting the Company’s activities according to the highest standards of personal and corporate conduct. That responsibility is characterized and reflected in a code of business conduct for all employees and in a financial code of ethics for the Chief Executive Officer and Senior Financial Officers, as well as in other key policy statements publicized throughout the Company.
The Audit Committee of the Board of Directors, which is composed solely of independent directors who are not employees of the Company, meets with the independent registered public accounting firm, the internal auditors and management to satisfy itself that each is properly discharging its responsibilities. The report of the Audit Committee is included in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders. Both the independent registered public accounting firm and the internal auditors have direct access to the Audit Committee.
The Company’s independent registered public accounting firm, Ernst & Young LLP, is engaged to render an opinion as to whether management’s financial statements present fairly, in all material respects, the Company’s financial position and operating results. This report is included herein.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, AMETEK, Inc. conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
The Company acquired Rauland-Borg Corporation (“Rauland”) in February 2017, MOCON, Inc. in June 2017 and Arizona Instrument LLC in December 2017. As permitted by the U.S. Securities and Exchange Commission staff interpretative guidance for newly acquired businesses, the Company excluded Rauland, MOCON and Arizona Instrument from management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In the aggregate, Rauland, MOCON and Arizona Instrument constituted 8.4% of total assets as of December 31, 2017 and 4.5% of net sales for the year then ended.
The Company’s internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
| /s/ DAVID A. ZAPICO | /s/ WILLIAM J. BURKE | |
| Chairman of the Board and Chief Executive Officer | Executive Vice President – Chief Financial Officer |
February 22, 2018
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of AMETEK, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited AMETEK, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, AMETEK, Inc. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Rauland-Borg Corporation (“Rauland”), MOCON, Inc. and Arizona Instrument LLC**,** which are included in the 2017 consolidated financial statements of the Company and constituted 8.4% of total assets as of December 31, 2017 and 4.5% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Rauland, MOCON and Arizona Instrument.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of AMETEK, Inc. as of December 31, 2017 and 2016 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and our report dated February 22, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 22, 2018
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of AMETEK, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AMETEK, Inc. (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), AMETEK, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 1930.
Philadelphia, Pennsylvania
February 22, 2018
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AMETEK, Inc.
Consolidated Statement of Income
(In thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net sales | $ | 4,300,170 | $ | 3,840,087 | $ | 3,974,295 | ||||||
| Operating expenses: | ||||||||||||
| Cost of sales | 2,851,431 | 2,575,220 | 2,617,987 | |||||||||
| Selling, general and administrative | 533,645 | 462,970 | 448,592 | |||||||||
| Total operating expenses | 3,385,076 | 3,038,190 | 3,066,579 | |||||||||
| Operating income | 915,094 | 801,897 | 907,716 | |||||||||
| Other expenses: | ||||||||||||
| Interest expense | (98,029 | ) | (94,304 | ) | (91,795 | ) | ||||||
| Other, net | (20,336 | ) | (14,490 | ) | (9,541 | ) | ||||||
| Income before income taxes | 796,729 | 693,103 | 806,380 | |||||||||
| Provision for income taxes | 115,259 | 180,945 | 215,521 | |||||||||
| Net income | $ | 681,470 | $ | 512,158 | $ | 590,859 | ||||||
| Basic earnings per share | $ | 2.96 | $ | 2.20 | $ | 2.46 | ||||||
| Diluted earnings per share | $ | 2.94 | $ | 2.19 | $ | 2.45 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic shares | 230,229 | 232,593 | 239,906 | |||||||||
| Diluted shares | 231,845 | 233,730 | 241,586 | |||||||||
See accompanying notes.
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AMETEK, Inc.
Consolidated Statement of Comprehensive Income
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 681,470 | $ | 512,158 | $ | 590,859 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Amounts arising during the period — gains (losses), net of tax (expense) benefit: | ||||||||||||
| Foreign currency translation: | ||||||||||||
| Translation adjustments | 159,507 | (68,774 | ) | (67,245 | ) | |||||||
| Change in long-term intercompany notes | 36,320 | (7,597 | ) | (51,235 | ) | |||||||
| Net investment hedge instruments, net of tax of $41,178, $6,558 and $3,432 in 2017, 2016 and 2015, respectively | (109,412 | ) | (12,179 | ) | (6,374 | ) | ||||||
| Defined benefit pension plans: | ||||||||||||
| Net actuarial gain (loss), net of tax of ($8,384), $17,450 and $12,870 in 2017, 2016 and 2015, respectively | 16,518 | (55,259 | ) | (21,002 | ) | |||||||
| Amortization of net actuarial loss, net of tax of ($4,680), ($2,090) and ($3,247) in 2017, 2016 and 2015, respectively | 9,910 | 6,618 | 6,137 | |||||||||
| Amortization of prior service costs, net of tax of $4, $25 and ($564) in 2017, 2016 and 2015, respectively | (41 | ) | (79 | ) | 1,809 | |||||||
| Unrealized holding gain (loss) on available-for-sale securities: | ||||||||||||
| Unrealized gain (loss), net of tax of ($221), ($275) and $445 in 2017, 2016 and 2015, respectively | 411 | 512 | (827 | ) | ||||||||
| Other comprehensive income (loss) | 113,213 | (136,758 | ) | (138,737 | ) | |||||||
| Total comprehensive income | $ | 794,683 | $ | 375,400 | $ | 452,122 | ||||||
See accompanying notes.
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AMETEK, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 646,300 | $ | 717,259 | ||||
| Receivables, net | 668,176 | 592,326 | ||||||
| Inventories, net | 540,504 | 492,104 | ||||||
| Deferred income taxes | — | 50,004 | ||||||
| Other current assets | 79,675 | 76,497 | ||||||
| Total current assets | 1,934,655 | 1,928,190 | ||||||
| Property, plant and equipment, net | 493,296 | 473,230 | ||||||
| Goodwill | 3,115,619 | 2,818,950 | ||||||
| Other intangibles, net | 2,013,365 | 1,734,021 | ||||||
| Investments and other assets | 239,129 | 146,283 | ||||||
| Total assets | $ | 7,796,064 | $ | 7,100,674 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term borrowings and current portion of long-term debt, net | $ | 308,123 | $ | 278,921 | ||||
| Accounts payable | 437,329 | 369,537 | ||||||
| Income taxes payable | 34,660 | 29,913 | ||||||
| Accrued liabilities | 358,551 | 246,070 | ||||||
| Total current liabilities | 1,138,663 | 924,441 | ||||||
| Long-term debt, net | 1,866,166 | 2,062,644 | ||||||
| Deferred income taxes | 512,526 | 621,776 | ||||||
| Other long-term liabilities | 251,076 | 235,300 | ||||||
| Total liabilities | 3,768,431 | 3,844,161 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued | — | — | ||||||
| Common stock, $0.01 par value; authorized 800,000,000 shares; issued: 2017 – 262,947,829 shares; 2016 – 261,432,134 shares | 2,631 | 2,615 | ||||||
| Capital in excess of par value | 660,894 | 604,143 | ||||||
| Retained earnings | 5,002,419 | 4,403,683 | ||||||
| Accumulated other comprehensive loss | (429,176 | ) | (542,389 | ) | ||||
| Treasury stock: 2017 – 31,754,106 shares; 2016 – 32,053,227 shares | (1,209,135 | ) | (1,211,539 | ) | ||||
| Total stockholders’ equity | 4,027,633 | 3,256,513 | ||||||
| Total liabilities and stockholders’ equity | $ | 7,796,064 | $ | 7,100,674 | ||||
See accompanying notes.
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AMETEK, Inc.
Consolidated Statement of Stockholders’ Equity
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Capital stock | ||||||||||||
| Preferred stock, $0.01 par value | $ | — | $ | — | $ | — | ||||||
| Common stock, $0.01 par value | ||||||||||||
| Balance at the beginning of the year | 2,615 | 2,608 | 2,589 | |||||||||
| Shares issued | 16 | 7 | 19 | |||||||||
| Balance at the end of the year | 2,631 | 2,615 | 2,608 | |||||||||
| Capital in excess of par value | ||||||||||||
| Balance at the beginning of the year | 604,143 | 568,286 | 491,750 | |||||||||
| Issuance of common stock under employee stock plans | 31,660 | 8,484 | 32,296 | |||||||||
| Share-based compensation costs | 25,091 | 22,030 | 23,762 | |||||||||
| Excess tax benefits from exercise of stock options | — | 5,343 | 20,478 | |||||||||
| Balance at the end of the year | 660,894 | 604,143 | 568,286 | |||||||||
| Retained earnings | ||||||||||||
| Balance at the beginning of the year | 4,403,683 | 3,974,793 | 3,469,923 | |||||||||
| Net income | 681,470 | 512,158 | 590,859 | |||||||||
| Cash dividends paid | (82,735 | ) | (83,267 | ) | (85,988 | ) | ||||||
| Other | 1 | (1 | ) | (1 | ) | |||||||
| Balance at the end of the year | 5,002,419 | 4,403,683 | 3,974,793 | |||||||||
| Accumulated other comprehensive (loss) income | ||||||||||||
| Foreign currency translation: | ||||||||||||
| Balance at the beginning of the year | (338,324 | ) | (249,774 | ) | (124,920 | ) | ||||||
| Translation adjustments | 159,507 | (68,774 | ) | (67,245 | ) | |||||||
| Change in long-term intercompany notes | 36,320 | (7,597 | ) | (51,235 | ) | |||||||
| Net investment hedge instruments, net of tax of $41,178, $6,558 and $3,432 in 2017, 2016 and 2015, respectively | (109,412 | ) | (12,179 | ) | (6,374 | ) | ||||||
| Balance at the end of the year | (251,909 | ) | (338,324 | ) | (249,774 | ) | ||||||
| Defined benefit pension plans: | ||||||||||||
| Balance at the beginning of the year | (203,758 | ) | (155,038 | ) | (141,982 | ) | ||||||
| Net actuarial gain (loss), net of tax of ($8,384), $17,450 and $12,870 in 2017, 2016 and 2015, respectively | 16,518 | (55,259 | ) | (21,002 | ) | |||||||
| Amortization of net actuarial loss, net of tax of ($4,680), ($2,090) and ($3,247) in 2017, 2016 and 2015, respectively | 9,910 | 6,618 | 6,137 | |||||||||
| Amortization of prior service costs, net of tax of $4, $25 and ($564) in 2017, 2016 and 2015, respectively | (41 | ) | (79 | ) | 1,809 | |||||||
| Balance at the end of the year | (177,371 | ) | (203,758 | ) | (155,038 | ) | ||||||
| Unrealized holding gain (loss) on available-for-sale securities: | ||||||||||||
| Balance at the beginning of the year | (307 | ) | (819 | ) | 8 | |||||||
| Increase (decrease) during the year, net of tax | 411 | 512 | (827 | ) | ||||||||
| Balance at the end of the year | 104 | (307 | ) | (819 | ) | |||||||
| Accumulated other comprehensive loss at the end of the year | (429,176 | ) | (542,389 | ) | (405,631 | ) | ||||||
| Treasury stock | ||||||||||||
| Balance at the beginning of the year | (1,211,539 | ) | (885,430 | ) | (457,807 | ) | ||||||
| Issuance of common stock under employee stock plans | 9,271 | 10,031 | 7,777 | |||||||||
| Purchase of treasury stock | (6,867 | ) | (336,140 | ) | (435,400 | ) | ||||||
| Balance at the end of the year | (1,209,135 | ) | (1,211,539 | ) | (885,430 | ) | ||||||
| Total stockholders’ equity | $ | 4,027,633 | $ | 3,256,513 | $ | 3,254,626 | ||||||
See accompanying notes.
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AMETEK, Inc.
Consolidated Statement of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash provided by (used for): | ||||||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 681,470 | $ | 512,158 | $ | 590,859 | ||||||
| Adjustments to reconcile net income to total operating activities: | ||||||||||||
| Depreciation and amortization | 183,227 | 179,716 | 149,460 | |||||||||
| Deferred income taxes | (91,205 | ) | (5,632 | ) | 6,458 | |||||||
| Share-based compensation expense | 25,091 | 22,030 | 23,762 | |||||||||
| Gain on sale of facilities | (1,213 | ) | (743 | ) | — | |||||||
| Changes in assets and liabilities, net of acquisitions: | ||||||||||||
| (Increase) decrease in receivables | (24,581 | ) | 14,773 | (6,995 | ) | |||||||
| (Increase) decrease in inventories and other current assets | (6,087 | ) | 38,666 | (12,007 | ) | |||||||
| Increase (decrease) in payables, accruals and income taxes | 124,399 | 2,657 | (20,049 | ) | ||||||||
| Increase (decrease) in other long-term liabilities | 2,787 | (4,298 | ) | 255 | ||||||||
| Pension contribution | (54,796 | ) | (6,775 | ) | (55,215 | ) | ||||||
| Other, net | (5,833 | ) | 4,283 | (3,988 | ) | |||||||
| Total operating activities | 833,259 | 756,835 | 672,540 | |||||||||
| Investing activities: | ||||||||||||
| Additions to property, plant and equipment | (75,074 | ) | (63,280 | ) | (69,083 | ) | ||||||
| Purchases of businesses, net of cash acquired | (556,634 | ) | (391,419 | ) | (356,466 | ) | ||||||
| Proceeds from sale of facilities | 6,290 | 1,832 | 421 | |||||||||
| Other, net | (399 | ) | 500 | (429 | ) | |||||||
| Total investing activities | (625,817 | ) | (452,367 | ) | (425,557 | ) | ||||||
| Financing activities: | ||||||||||||
| Net change in short-term borrowings | (9,616 | ) | (315,674 | ) | 226,761 | |||||||
| Proceeds from long-term borrowings | — | 820,900 | 200,000 | |||||||||
| Repayments of long-term borrowings | (270,000 | ) | (48,724 | ) | (182,007 | ) | ||||||
| Repurchases of common stock | (6,867 | ) | (336,140 | ) | (435,400 | ) | ||||||
| Cash dividends paid | (82,735 | ) | (83,267 | ) | (85,988 | ) | ||||||
| Excess tax benefits from share-based payments | — | 5,343 | 20,478 | |||||||||
| Proceeds from employee stock plans and other, net | 40,047 | 14,616 | 39,192 | |||||||||
| Total financing activities | (329,171 | ) | 57,054 | (216,964 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 50,770 | (25,268 | ) | (26,629 | ) | |||||||
| (Decrease) increase in cash and cash equivalents | (70,959 | ) | 336,254 | 3,390 | ||||||||
| Cash and cash equivalents: | ||||||||||||
| Beginning of year | 717,259 | 381,005 | 377,615 | |||||||||
| End of year | $ | 646,300 | $ | 717,259 | $ | 381,005 | ||||||
See accompanying notes.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Significant Accounting Policies |
|---|
Basis of Consolidation
The accompanying consolidated financial statements reflect the results of operations, financial position and cash flows of AMETEK, Inc. (the “Company”), and include the accounts of the Company and subsidiaries, after elimination of all intercompany transactions in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Cash Equivalents, Securities and Other Investments
All highly liquid investments with maturities of three months or less when purchased are considered cash equivalents. At December 31, 2017 and 2016, the Company’s investment in a fixed-income mutual fund (held by its captive insurance subsidiary) is classified as “available-for-sale.” The aggregate fair value of the fixed-income mutual fund at December 31, 2017 and 2016 was $8.1 million ($8.2 million cost basis) and $7.3 million ($8.0 million cost basis), respectively. The temporary unrealized gain or loss on the fixed-income mutual fund is recorded as a separate component of accumulated other comprehensive income (in stockholders’ equity), and is not significant. Certain of the Company’s other investments, which are not significant, are also accounted for by the equity method of accounting.
Accounts Receivable
The Company maintains allowances for estimated losses resulting from the inability of specific customers to meet their financial obligations to the Company. A specific allowance for doubtful accounts is recorded against the amount due from these customers. For all other customers, the Company recognizes allowance for doubtful accounts based on the length of time specific receivables are past due based on its historical experience. The allowance for doubtful accounts was $10.4 million and $10.3 million at December 31, 2017 and 2016, respectively. See Note 7.
Inventories
The Company uses the first-in, first-out (“FIFO”) method of accounting, which approximates current replacement cost, for approximately 84% of its inventories at December 31, 2017. The last-in, first-out (“LIFO”) method of accounting is used to determine cost for the remaining 16% of the Company’s inventory at December 31, 2017. For inventories where cost is determined by the LIFO method, the FIFO value would have been $22.9 million and $18.4 million higher than the LIFO value reported in the consolidated balance sheet at December 31, 2017 and 2016, respectively. The Company provides estimated inventory reserves for slow-moving and obsolete inventory based on current assessments about future demand, market conditions, customers who may be experiencing financial difficulties and related management initiatives. See Note 7.
Business Combinations
The Company allocates the purchase price of an acquired company, including when applicable, the acquisition date fair value of contingent consideration between tangible and intangible assets acquired and
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in the Company’s operating results from the date of acquisition. See Note 5.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for additions to plant facilities, or that extend their useful lives, are capitalized. The cost of minor tools, jigs and dies, and maintenance and repairs is charged to expense as incurred. Depreciation of plant and equipment is calculated principally on a straight-line basis over the estimated useful lives of the related assets. The range of lives for depreciable assets is generally three to ten years for machinery and equipment, five to 27 years for leasehold improvements and 25 to 50 years for buildings. Depreciation expense was $82.0 million, $74.8 million and $68.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. See Note 7.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite lives, primarily trademarks and trade names, are not amortized; rather, they are tested for impairment at least annually.
The Company identifies its reporting units at the component level, which is one level below its operating segments. Generally, goodwill arises from acquisitions of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. The Company’s reporting units are divisions that are one level below its operating segments and for which discrete financial information is prepared and regularly reviewed by segment management.
The Company principally relies on a discounted cash flow analysis to determine the fair value of each reporting unit, which considers forecasted cash flows discounted at an appropriate discount rate. The Company believes that market participants would use a discounted cash flow analysis to determine the fair value of its reporting units in a sale transaction. The annual goodwill impairment test requires the Company to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization and working capital requirements, which are based on the Company’s long-range plan and are considered level 3 inputs. The Company’s long-range plan is updated as part of its annual planning process and is reviewed and approved by management. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both equity and debt, including a risk premium. While the Company uses the best available information to prepare its cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances.
The impairment test for indefinite-lived intangibles other than goodwill (primarily trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method using level 3 inputs. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such trademarks and trade names and not having to pay a royalty for their use.
The Company completed its required annual impairment tests in the fourth quarter of 2017, 2016 and 2015 and determined that the carrying values of the Company’s goodwill were not impaired. The Company completed its required annual impairment tests in the fourth quarter of 2017 and 2015 and determined that the carrying values of the Company’s other intangible assets with indefinite lives were not impaired. The Company completed
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its required annual impairment tests in the fourth quarter of 2016 and determined that the carrying values of certain of the Company’s trademarks and trade names with indefinite lives were impaired. During 2016, the Company recorded a $13.9 million non-cash impairment charge related to certain of the Company’s trade names.
Other intangible assets with finite lives are evaluated for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of other intangible assets with finite lives is considered impaired when the total projected undiscounted cash flows from those assets are separately identifiable and are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of those assets. Fair value is determined primarily using present value techniques based on projected cash flows from the asset group.
Intangible assets, other than goodwill, with definite lives are amortized over their estimated useful lives. Patents and technology are being amortized over useful lives of five to 20 years, with a weighted average life of 16 years. Customer relationships are being amortized over a period of five to 20 years, with a weighted average life of 19 years. Miscellaneous other intangible assets are being amortized over a period of two to 20 years. On a quarterly basis, the Company evaluates the reasonableness of the estimated useful lives of these intangible assets. See Note 6.
Financial Instruments and Foreign Currency Translation
Assets and liabilities of foreign operations are translated using exchange rates in effect at the balance sheet date and their results of operations are translated using average exchange rates for the year. Certain transactions of the Company and its subsidiaries are denominated in currencies other than their functional currency. Exchange gains and losses from those transactions are included in operating results for the year.
The Company makes infrequent use of derivative financial instruments. Forward contracts are entered into from time to time to hedge specific firm commitments for certain inventory purchases, export sales, debt or foreign currency transactions, thereby minimizing the Company’s exposure to raw material commodity price or foreign currency fluctuation.
In instances where transactions are designated as hedges of an underlying item, the gains and losses on those transactions are included in accumulated other comprehensive income within stockholders’ equity to the extent they are effective as hedges. An evaluation of hedge effectiveness is performed by the Company on an ongoing basis and any changes in the hedge are made as appropriate. See Note 4.
Revenue Recognition
The Company recognizes revenue on product sales in the period when the sales process is complete. This generally occurs when products are shipped to the customer in accordance with terms of an agreement of sale, under which title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable. For a small percentage of sales where title and risk of loss passes at point of delivery, the Company recognizes revenue upon delivery to the customer, assuming all other criteria for revenue recognition are met. The Company’s policy, with respect to sales returns and allowances, generally provides that the customer may not return products or be given allowances, except at the Company’s option. The Company has agreements with distributors that do not provide expanded rights of return for unsold products. The distributor purchases the product from the Company, at which time title and risk of loss transfers to the distributor. The Company does not offer substantial sales incentives and credits to its distributors other than volume discounts. The Company accounts for these sales incentives as a reduction of revenues when the sale is recognized in the consolidated statement of income. Accruals for sales returns, other allowances and estimated warranty costs are
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provided at the time revenue is recognized based on the Company’s historical experience. The warranty periods for products sold vary among the Company’s 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. See Note 12.
Research and Development
Research and development costs are included in Cost of sales as incurred and were $130.4 million in 2017, $112.0 million in 2016 and $116.3 million in 2015.
Shipping and Handling Costs
Shipping and handling costs are included in Cost of sales and were $53.1 million in 2017, $47.9 million in 2016 and $50.5 million in 2015.
Share-Based Compensation
The Company expenses the fair value of share-based awards made under its share-based plans in the consolidated financial statements over their requisite service period of the grants. See Note 10.
Income Taxes
The Company’s process of providing for income taxes and determining the related balance sheet accounts requires management to assess uncertainties, make judgments regarding outcomes and utilize estimates. The Company conducts a broad range of operations around the world and is therefore subject to complex tax regulations in numerous international taxing jurisdictions, resulting at times in tax audits, disputes and potential litigation, the outcome of which is uncertain. Management must make judgments currently about such uncertainties and determine estimates of the Company’s tax assets and liabilities. To the extent the final outcome differs, future adjustments to the Company’s tax assets and liabilities may be necessary. The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax expense.
The Company assesses the realizability of its deferred tax assets, taking into consideration the Company’s forecast of future taxable income, available net operating loss carryforwards and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, valuation allowances against the Company’s deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required. See Note 8.
Pensions
The Company has U.S. and foreign defined benefit and defined contribution pension plans. The most significant elements in determining the Company’s pension income or expense are the assumed pension liability discount rate and the expected return on plan assets. All unrecognized prior service costs, remaining transition obligations or assets and actuarial gains and losses have been recognized, net of tax effects, as a charge to accumulated other comprehensive income in stockholders’ equity and will be amortized as a component of net periodic pension cost. The Company uses a measurement date of December 31 (its fiscal year end) for its U.S. and foreign defined benefit plans. See Note 11.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings Per Share
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 for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Weighted average shares: | ||||||||||||
| Basic shares | 230,229 | 232,593 | 239,906 | |||||||||
| Equity-based compensation plans | 1,616 | 1,137 | 1,680 | |||||||||
| Diluted shares | 231,845 | 233,730 | 241,586 | |||||||||
| 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 control 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 adopted 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 will use the modified retrospective method of adoption.
ASU 2014-09 will impact the Company’s 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 Company’s consolidated results of operations or financial position. Also, the Company has developed the additional expanded disclosures required. The Company has implemented the appropriate changes to its business processes to support recognition and disclosure under ASU 2014-09. The Company does not 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 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 LIFO. The Company prospectively adopted ASU 2015-11 effective January 1, 2017 and the adoption did
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
not have a significant impact on the Company’s 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. Therefore, prior periods have not been adjusted to reflect this adoption. The adoption of ASU 2015-17 did not have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.
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 Company’s implementation project. The Company has not determined the impact ASU 2016-02 may have on the Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures, which could be significant to the Company’s financial position.
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 year ended December 31, 2017, the Company recorded a tax benefit of $12.3 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 component of Capital in excess of par value. The adoption of this standard could create volatility in the Company’s 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 year ended December 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 Company’s 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 Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 reporting unit 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 unit’s 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 Company’s 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. The changes in presentation will be applied retrospectively when adopted. The Company expects restated 2017 Cost of sales to increase $11.5 million with an offsetting $11.5 million increase to Other operating income. The 2018 service cost included in operating income is expected to approximate 2017 service cost of $7.1 million. The Company does not expect the adoption of ASU 2017-07 to have a significant impact on the Company’s consolidated 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. 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 Company’s consolidated results of operations, financial position or cash flows.
| 3. | 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 5 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 Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides the Company’s assets that are measured at fair value on a recurring basis, consistent with the fair value hierarchy, at December 31:
| 2017 | 2016 | |||||||
| Fair Value | Fair Value | |||||||
| (In thousands) | ||||||||
| Fixed-income investments | $ | 8,060 | $ | 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 years ended December 31, 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 years ended December 31, 2017 and 2016.
Financial Instruments
Cash, cash equivalents and fixed-income investments are recorded at fair value at December 31, 2017 and 2016 in the accompanying consolidated balance sheet.
The following table provides the estimated fair values of the Company’s financial instrument liabilities, for which fair value is measured for disclosure purposes only, compared to the recorded amounts at December 31:
| 2017 | 2016 | |||||||||||||||
| Recorded Amount | Fair Value | Recorded Amount | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Long-term debt, net (including current portion) | $ | (2,174,289 | ) | $ | (2,210,466 | ) | $ | (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 Company’s 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. See Note 9 for long-term debt principal amounts, interest rates and maturities.
Foreign Currency
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. At December 31, 2016, the Company had no forward contracts outstanding. For the year ended December 31, 2017 and 2016, 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.
| 4. | Hedging Activities |
|---|
The Company has designated certain foreign-currency-denominated long-term borrowings as hedges of the net investment in certain foreign operations. As of December 31, 2017 and 2016, 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-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 management’s 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 December 31, 2017 and 2016, the Company had $412.4 million and $376.3 million, respectively, of British-pound-denominated loans, which were designated as a hedge against the net investment in British pound functional currency foreign subsidiaries. At December 31, 2017 and 2016, the Company had $601.0 million and $527.7 million, respectively, 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, $109.4 million of pre-tax currency remeasurement losses and $50.0 million of pre-tax currency remeasurement gains have been included in the foreign currency translation component of other comprehensive income for the years ended December 31, 2017 and 2016, respectively.
| 5. | Acquisitions |
|---|
The Company spent $556.6 million in cash, net of cash acquired, to acquire Rauland-Borg Corporation (“Rauland”) in February 2017, MOCON, Inc. in June 2017 and Arizona Instrument LLC in December 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. Arizona Instrument is a provider of differentiated, high-precision moisture and gas measurement instruments in food, pharmaceutical and environmental markets. Rauland, MOCON and Arizona Instrument are part of AMETEK’s Electronic Instruments Group (“EIG”).
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 | $ | 19.1 | ||
| Goodwill | 225.6 | |||
| Other intangible assets | 340.7 | |||
| Long-term liabilities | (10.9 | ) | ||
| Deferred income taxes | (35.1 | ) | ||
| Net working capital and other(1) | 42.7 | |||
| Total purchase price | 582.1 | |||
| Less: Acquisition date fair value of contingent payment liability | (25.5 | ) | ||
| Total cash paid | $ | 556.6 | ||
| (1) | Includes $31.7 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
medical technology market, strong growth opportunities in its core markets and incremental growth opportunities through acquisitions and international expansion. MOCON’s products and technologies complement the Company’s existing gas analysis instrumentation business and provides it with opportunities to expand into the growing food and pharmaceutical package testing market. Arizona Instrument complements the Company’s existing Brookfield Engineering Laboratories (“Brookfield”) viscosity measurement business and provides it with opportunities to further grow its presence in the food, pharmaceutical and environmental markets. The Company expects approximately $89.2 million of the goodwill recorded relating to the 2017 acquisitions will be tax deductible in future years.
At December 31, 2017, the purchase price allocated to other intangible assets of $340.7 million consists of $72.9 million of indefinite-lived intangible trade names, which are not subject to amortization. The remaining $267.8 million of other intangible assets consists of 229.4 million customer relationships, which are being amortized over a period of 18 to 20 years, $0.8 million of trade names, which are being amortized over a period of 18 years and $37.6 million of purchased technology, which is being amortized over a period of ten to 18 years. Amortization expense for each of the next five years for the 2017 acquisitions is expected to approximate $15 million per year.
The Company is in the process of finalizing the measurement of certain tangible and intangible assets and liabilities for its December 2017 acquisition of Arizona Instrument, including inventory, goodwill 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.
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 December 31, 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 year ended December 31, 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 years ended December 31, 2017 and 2016, respectively, would not have been materially different than the amounts reported.
In 2016, the Company spent $391.4 million in cash, net of cash acquired, to acquire Brookfield and ESP/SurgeX in January 2016, HS Foils and Nu Instruments in July 2016 and Laserage Technology Corporation (“Laserage”) in October 2016. Brookfield is a manufacturer of viscometers and rheometers, as well as instrumentation to analyze texture and powder flow. ESP/SurgeX is a manufacturer of energy intelligence and power protection, monitoring and diagnostic solutions. HS Foils develops and manufactures key components used in radiation detectors including ultra-thin radiation windows, silicon drift detectors and x-ray filters. Nu Instruments is a provider of magnetic sector mass spectrometers used for elemental and isotope analysis. Laserage is a provider of laser fabrication services for the medical device market. Brookfield, ESP/SurgeX, HS Foils and Nu Instruments are part of EIG and Laserage is part of AMETEK’s Electromechanical Group (“EMG”).
In 2015, the Company spent $356.5 million in cash, net of cash acquired, to acquire Global Tubes in May 2015 and Surface Vision in July 2015. Global Tubes is a manufacturer of high-precision, small-diameter metal tubing. Surface Vision develops and manufactures software-enabled vision systems used to inspect surfaces of continuously processed materials for flaws and defects. Global Tubes is part of EMG and Surface Vision is part of EIG.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisitions Subsequent to December 31, 2017
In January 2018, the Company acquired FMH Aerospace (“FMH”) for approximately $235 million in cash. FMH has estimated annual sales of approximately $50 million. FMH is a provider of complex, highly-engineered solutions for the aerospace, defense and space industries. FMH will join EMG.
| 6. | Goodwill and Other Intangible Assets |
|---|
The changes in the carrying amounts of goodwill by segment were as follows:
| EIG | EMG | Total | ||||||||||
| (In millions) | ||||||||||||
| Balance at December 31, 2015 | $ | 1,678.2 | $ | 1,028.4 | $ | 2,706.6 | ||||||
| Goodwill acquired | 165.0 | 6.3 | 171.3 | |||||||||
| Purchase price allocation adjustments and other | 0.3 | (0.1 | ) | 0.2 | ||||||||
| Foreign currency translation adjustments | (26.5 | ) | (32.6 | ) | (59.1 | ) | ||||||
| Balance at December 31, 2016 | 1,817.0 | 1,002.0 | 2,819.0 | |||||||||
| Goodwill acquired | 225.6 | — | 225.6 | |||||||||
| Purchase price allocation adjustments and other | 0.5 | 0.6 | 1.1 | |||||||||
| Foreign currency translation adjustments | 33.9 | 36.0 | 69.9 | |||||||||
| Balance at December 31, 2017 | $ | 2,077.0 | $ | 1,038.6 | $ | 3,115.6 | ||||||
Other intangible assets were as follows at December 31:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Definite-lived intangible assets (subject to amortization): | ||||||||
| Patents | $ | 52,548 | $ | 49,755 | ||||
| Purchased technology | 328,301 | 283,612 | ||||||
| Customer lists | 1,621,652 | 1,363,700 | ||||||
| 2,002,501 | 1,697,067 | |||||||
| Accumulated amortization: | ||||||||
| Patents | (36,998 | ) | (34,927 | ) | ||||
| Purchased technology | (110,298 | ) | (87,869 | ) | ||||
| Customer lists | (450,814 | ) | (362,924 | ) | ||||
| (598,110 | ) | (485,720 | ) | |||||
| Net intangible assets subject to amortization | 1,404,391 | 1,211,347 | ||||||
| Indefinite-lived intangible assets (not subject to amortization): | ||||||||
| Trademarks and trade names | 608,974 | 536,574 | ||||||
| Impairment | — | (13,900 | ) | |||||
| 608,974 | 522,674 | |||||||
| $ | 2,013,365 | $ | 1,734,021 | |||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the fourth quarter of 2016, the Company completed its required annual impairment tests and determined that the carrying values of certain of the Company’s trademarks and trade names with indefinite lives were impaired. During 2016, the Company recorded, in Cost of sales, a $13.9 million non-cash impairment charge related to certain of the Company’s trade names, of which $9.2 million impacted EIG and $4.7 million impacted EMG. See Note 1 for further descriptions of the Company’s impairment testing.
Amortization expense was $101.2 million, $104.9 million (including impairment of $13.9 million) and $80.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization expense for each of the next five years is expected to approximate $105 million per year, not considering the impact of potential future acquisitions.
| 7. | Other Consolidated Balance Sheet Information |
|---|
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| INVENTORIES, NET | ||||||||
| Finished goods and parts | $ | 84,789 | $ | 75,827 | ||||
| Work in process | 107,362 | 101,484 | ||||||
| Raw materials and purchased parts | 348,353 | 314,793 | ||||||
| $ | 540,504 | $ | 492,104 | |||||
| PROPERTY, PLANT AND EQUIPMENT, NET | ||||||||
| Land | $ | 42,851 | $ | 41,875 | ||||
| Buildings | 295,023 | 281,847 | ||||||
| Machinery and equipment | 923,394 | 840,725 | ||||||
| 1,261,268 | 1,164,447 | |||||||
| Less: Accumulated depreciation | (767,972 | ) | (691,217 | ) | ||||
| $ | 493,296 | $ | 473,230 | |||||
| ACCRUED LIABILITIES | ||||||||
| Employee compensation and benefits | $ | 151,435 | $ | 93,226 | ||||
| Product warranty obligation | 22,872 | 22,007 | ||||||
| Restructuring | 30,046 | 29,951 | ||||||
| Contingent purchase price | 25,500 | — | ||||||
| Other | 128,698 | 100,886 | ||||||
| $ | 358,551 | $ | 246,070 | |||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| ALLOWANCES FOR POSSIBLE LOSSES ON ACCOUNTS | ||||||||||||
| Balance at the beginning of the year | $ | 10,257 | $ | 8,555 | $ | 10,446 | ||||||
| Additions charged to expense | 2,800 | 4,124 | 630 | |||||||||
| Write-offs | (3,208 | ) | (2,304 | ) | (1,872 | ) | ||||||
| Foreign currency translation adjustments and other | 552 | (118 | ) | (649 | ) | |||||||
| Balance at the end of the year | $ | 10,401 | $ | 10,257 | $ | 8,555 | ||||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 8. | Income Taxes |
|---|
The components of income before income taxes and the details of the provision for income taxes were as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Income before income taxes: | ||||||||||||
| Domestic | $ | 447,853 | $ | 397,215 | $ | 502,292 | ||||||
| Foreign | 348,876 | 295,888 | 304,088 | |||||||||
| Total | $ | 796,729 | $ | 693,103 | $ | 806,380 | ||||||
| Provision for income taxes: | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 127,874 | $ | 116,898 | $ | 130,996 | ||||||
| Foreign | 71,846 | 63,170 | 66,691 | |||||||||
| State | 6,744 | 6,509 | 11,376 | |||||||||
| Total current | 206,464 | 186,577 | 209,063 | |||||||||
| Deferred: | ||||||||||||
| Federal | (97,465 | ) | 5,273 | 1,711 | ||||||||
| Foreign | 6,204 | (8,434 | ) | (3,611 | ) | |||||||
| State | 56 | (2,471 | ) | 8,358 | ||||||||
| Total deferred | (91,205 | ) | (5,632 | ) | 6,458 | |||||||
| Total provision | $ | 115,259 | $ | 180,945 | $ | 215,521 | ||||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the deferred tax (asset) liability were as follows at December 31:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Current deferred tax (asset) liability: | ||||||||
| Reserves not currently deductible | $ | — | $ | (39,509 | ) | |||
| Share-based compensation | — | (7,022 | ) | |||||
| Net operating loss carryforwards | — | (2,072 | ) | |||||
| Other | — | (1,041 | ) | |||||
| — | (49,644 | ) | ||||||
| Portion included in other current liabilities | — | (360 | ) | |||||
| Gross current deferred tax asset | — | (50,004 | ) | |||||
| Noncurrent deferred tax (asset) liability: | ||||||||
| Differences in basis of property and accelerated depreciation | 39,816 | 54,243 | ||||||
| Reserves not currently deductible | (42,966 | ) | (28,808 | ) | ||||
| Pensions | 11,452 | 8,714 | ||||||
| Differences in basis of intangible assets and accelerated amortization | 455,690 | 603,577 | ||||||
| Net operating loss carryforwards | (10,376 | ) | (8,399 | ) | ||||
| Share-based compensation | (13,434 | ) | (13,707 | ) | ||||
| Foreign tax credit carryforwards | — | (3,441 | ) | |||||
| Unremitted earnings | 84,356 | 4,481 | ||||||
| Other | (23,176 | ) | (1,004 | ) | ||||
| 501,362 | 615,656 | |||||||
| Less: Valuation allowance | 3,100 | 2,046 | ||||||
| 504,462 | 617,702 | |||||||
| Portion included in noncurrent assets | 8,064 | 4,074 | ||||||
| Gross noncurrent deferred tax liability | 512,526 | 621,776 | ||||||
| Net deferred tax liability | $ | 512,526 | $ | 571,772 | ||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s effective tax rate reconciles to the U.S. Federal statutory rate as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| U.S. Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal income tax benefit | 0.4 | 0.4 | 1.2 | |||||||||
| Foreign operations, net | (6.8 | ) | (7.1 | ) | (6.8 | ) | ||||||
| U.S. Manufacturing deduction and credits | (2.2 | ) | (2.6 | ) | (2.4 | ) | ||||||
| Stock compensation | (1.6 | ) | 0.2 | 0.1 | ||||||||
| Net deferred tax revaluation | (23.3 | ) | — | — | ||||||||
| Deemed repatriation of foreign earnings | 11.8 | — | — | |||||||||
| Other | 1.2 | 0.2 | (0.4 | ) | ||||||||
| Consolidated effective tax rate | 14.5 | % | 26.1 | % | 26.7 | % | ||||||
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result, 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. The $91.6 million net benefit consisted of a $185.8 million benefit resulting from the remeasurement of the Company’s 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 Company’s consolidated financial statements as of December 31, 2017, it should be considered provisional. 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. The Company is still evaluating the potential future impact of the global intangible low-taxed income (“GILTI”) section of the Act 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 Company’s measurement of its deferred taxes. Due to the ongoing evaluation, the Company has not yet made the accounting policy decision.
The recently enacted Act mandated a one-time tax on previously deferred foreign earnings of U.S. subsidiaries. At December 31, 2017, included in the $94.2 million expense mentioned above, the Company recorded an expense of $81.9 million relating to the one-time mandatory tax. The Company is electing to pay the tax on an installment basis with $1.2 million recorded in current taxes payable, $13.2 million recorded in
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
noncurrent taxes payable and $67.5 million recorded as a deferred tax liability, which represents the portion relating to certain non-U.S. subsidiaries that have a fiscal year end in 2018 and is not yet payable. The Company intends to reinvest its earnings indefinitely in operations outside the United States except to the extent of $1.5 billion, which is deemed paid earnings under the mandatory tax provision of the Act. In addition, the Company has recorded an incremental $13.3 million in state income and foreign withholding taxes expected to be incurred when the cash amounts related to the mandatory tax are ultimately repatriated to the U.S., offset by $1.0 million for a remeasurement of uncertain tax positions impacted by the mandatory tax inclusion.
Due to the adoption of ASU 2015-17, the Company classified all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet at December 31, 2017. The Company prospectively adopted ASU 2015-17 effective January 1, 2017. Therefore, prior periods have not been adjusted to reflect this adoption.
At December 31, 2016, U.S. and foreign deferred income taxes totaling $4.5 million were provided on undistributed earnings of certain non-U.S. subsidiaries that were not expected to be permanently reinvested in such companies. There was no provision for U.S. deferred income taxes for the undistributed earnings of certain other subsidiaries, which totaled approximately $1.1 billion at December 31, 2016.
At December 31, 2017, the Company had tax effected benefits of $10.4 million related to net operating loss carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes net operating loss carryforwards of $1.7 million for federal income tax purposes with no valuation allowance, $6.6 million for state income tax purposes with no valuation allowance and $2.2 million for foreign income tax purposes with a valuation allowance of $2.2 million. These net operating loss carryforwards, if not used, will expire between 2018 and 2037.
At December 31, 2017, the Company had tax effected benefits of $5.1 million related to tax credit carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes tax credit carryforwards of $0.6 million for federal income tax purposes with a valuation allowance of $0.6 million, $4.4 million for state income tax purposes with a valuation allowance of $0.3 million and $0.1 million for foreign income tax purposes with no valuation allowance. These tax credit carryforwards, if not used, will expire between 2018 and 2037.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the deferred tax assets established for foreign net operating loss carryforwards and tax credits. In 2017, the Company recorded an increase of $1.1 million in the valuation allowance primarily related to foreign net operating loss carryforwards that are not expected to be utilized.
At December 31, 2017, the Company had gross unrecognized tax benefits of $60.3 million, of which $51.7 million, if recognized, would impact the effective tax rate. At December 31, 2016, the Company had gross unrecognized tax benefits of $57.9 million, of which $48.5 million, if recognized, would impact the effective tax rate.
At December 31, 2017 and 2016, the Company reported $9.7 million and $8.9 million, respectively, related to interest and penalty exposure as accrued income tax expense in the consolidated balance sheet. During 2017, the Company recognized a net expense of $0.9 million, and during 2016 and 2015, the Company recognized a net benefit of $1.8 million and $0.4 million, respectively, for interest and penalties related to uncertain tax positions in the consolidated statement of income as a component of income tax expense.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Approximately 70% of the Company’s overall tax liability is incurred in the United States as measured prior to tax reform. The Company files income tax returns in various other state and foreign tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, the Company has open tax years subject to tax audit on average of between three and six years in these jurisdictions. At December 31, 2017, there were no tax years currently under examination by the Internal Revenue Service (“IRS”) related to the U.S. consolidated tax group, although a separate examination of a pre-acquisition net operating loss carryback is ongoing related to a recently acquired company for which no material liability is expected. The Company has not materially extended any other statutes of limitation for any significant location and has reviewed and accrued for, where necessary, tax liabilities for open periods including state and foreign jurisdictions that remain subject to examination. There have been no penalties asserted or imposed by the IRS related to substantial understatement of income, gross valuation misstatement or failure to disclose a listed or reportable transaction.
During 2017, the Company added $15.4 million of tax, interest and penalties to identified uncertain tax positions and reversed $12.1 million of tax and interest related to statute expirations. During 2016, the Company added $8.6 million of tax, interest and penalties related to identified uncertain tax positions and reversed $16.3 million of tax and interest related to statute expirations and settlement of prior uncertain positions.
The following is a reconciliation of the liability for uncertain tax positions at December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In millions) | ||||||||||||
| Balance at the beginning of the year | $ | 57.9 | $ | 63.8 | $ | 71.7 | ||||||
| Additions for tax positions related to the current year | 10.0 | 5.5 | 8.8 | |||||||||
| Additions for tax positions of prior years | 3.1 | 1.5 | 1.3 | |||||||||
| Reductions for tax positions of prior years | (2.8 | ) | (3.6 | ) | (7.1 | ) | ||||||
| Reductions related to settlements with taxing authorities | — | (3.4 | ) | (8.3 | ) | |||||||
| Reductions due to statute expirations | (7.9 | ) | (5.9 | ) | (2.6 | ) | ||||||
| Balance at the end of the year | $ | 60.3 | $ | 57.9 | $ | 63.8 | ||||||
In 2017, the additions above primarily reflect the increase in tax liabilities for uncertain tax positions related to certain domestic and foreign issues, while the reductions above primarily relate to statute expirations. At December 31, 2017, tax, interest and penalties of $68.5 million were classified as a noncurrent liability. The net change in uncertain tax positions for the year ended December 31, 2017 resulted in an increase to income tax expense of $4.3 million.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 9. | Debt |
|---|
Long-term debt, net consisted of the following at December 31:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| U.S. dollar 6.20% senior notes due December 2017 | $ | — | $ | 270,000 | ||||
| U.S. dollar 6.35% senior notes due July 2018 | 80,000 | 80,000 | ||||||
| U.S. dollar 7.08% senior notes due September 2018 | 160,000 | 160,000 | ||||||
| U.S. dollar 7.18% senior notes due December 2018 | 65,000 | 65,000 | ||||||
| U.S. dollar 6.30% senior notes due December 2019 | 100,000 | 100,000 | ||||||
| U.S. dollar 3.73% senior notes due September 2024 | 300,000 | 300,000 | ||||||
| U.S. dollar 3.91% senior notes due June 2025 | 50,000 | 50,000 | ||||||
| U.S. dollar 3.96% senior notes due August 2025 | 100,000 | 100,000 | ||||||
| U.S. dollar 3.83% senior notes due September 2026 | 100,000 | 100,000 | ||||||
| U.S. dollar 3.98% senior notes due September 2029 | 100,000 | 100,000 | ||||||
| U.S. dollar 4.45% senior notes due August 2035 | 50,000 | 50,000 | ||||||
| British pound 4.68% senior note due September 2020 | 108,180 | 98,701 | ||||||
| British pound 2.59% senior note due November 2028 | 202,840 | 185,067 | ||||||
| British pound 2.70% senior note due November 2031 | 101,420 | 92,533 | ||||||
| Euro 1.34% senior notes due October 2026 | 360,620 | 316,643 | ||||||
| Euro 1.53% senior notes due October 2028 | 240,414 | 211,096 | ||||||
| Swiss franc 2.44% senior note due December 2021 | 56,452 | 54,150 | ||||||
| Revolving credit facility borrowings | — | — | ||||||
| Other, principally foreign | 4,589 | 14,604 | ||||||
| Less: Debt issuance costs | (5,226 | ) | (6,229 | ) | ||||
| Total debt, net | 2,174,289 | 2,341,565 | ||||||
| Less: Current portion, net | (308,123 | ) | (278,921 | ) | ||||
| Total long-term debt, net | $ | 1,866,166 | $ | 2,062,644 | ||||
Maturities of long-term debt borrowings outstanding at December 31, 2017 were as follows: $100.0 million in 2019; $108.2 million in 2020; $56.5 million in 2021; none in 2022; none in 2023; and $1,605.3 million in 2024 and thereafter.
In the fourth quarter of 2017, the Company paid in full, at maturity, $270 million in aggregate principal amount of 6.20% private placement senior notes.
In December 2007, the Company issued $270 million in aggregate principal amount of 6.20% private placement senior notes due December 2017 (paid in full, at maturity, as previously noted) and $100 million in aggregate principal amount of 6.30% private placement senior notes due December 2019. In July 2008, the Company issued $80 million in aggregate principal amount of 6.35% private placement senior notes due July 2018. In September 2008, the Company issued $160 million in aggregate principal amount of 7.08% private placement senior notes due September 2018. In December 2008, the Company issued $65 million in aggregate principal amount of 7.18% private placement senior notes due December 2018. In September 2014, the Company issued $300 million in aggregate principal amount of 3.73% senior notes due September 2024, $100 million in aggregate principal amount of 3.83% senior notes due September 2026 and $100 million in aggregate principal amount of 3.98% senior notes due September 2029. In June 2015, the Company issued $50 million in aggregate principal amount of 3.91% senior notes due June 2025. In August 2015, the Company issued $100 million in
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
aggregate principal amount of 3.96% senior notes due August 2025 and $50 million in aggregate principal amount of 4.45% senior notes due August 2035.
In September 2010, the Company issued an 80 million British pound ($108.2 million at December 31, 2017) 4.68% senior note due September 2020. In December 2011, the Company issued a 55 million Swiss franc ($56.5 million at December 31, 2017) 2.44% senior note due December 2021. In October 2016, the Company issued 300 million Euros ($360.6 million at December 31, 2017) in aggregate principal amount of 1.34% senior notes due October 2026 and 200 million Euros ($240.4 million at December 31, 2017) in aggregate principal amount of 1.53% senior notes due October 2028. In November 2016, the Company issued 150 million British pounds ($202.8 million at December 31, 2017) in aggregate principal amount of 2.59% senior notes due November 2028 and 75 million British pounds ($101.4 million at December 31, 2017) in aggregate principal amount of 2.70% senior notes due November 2031.
The Company along with certain of its foreign subsidiaries has an amended and restated credit agreement dated as of March 10, 2016 (the “Credit Agreement”). The Credit Agreement consists of a five-year revolving credit facility in an aggregate principal amount of $850 million with a final maturity date in March 2021. The revolving credit facility total borrowing capacity excludes an accordion feature that permits the Company to request up to an additional $300 million in revolving credit commitments at any time during the life of the Credit Agreement under certain conditions. The Credit Agreement places certain restrictions on allowable additional indebtedness. At December 31, 2017, the Company had available borrowing capacity of $1,108.1 million under its revolving credit facility, including the $300 million accordion feature.
Interest rates on outstanding borrowings under the revolving credit facility are at the applicable benchmark rate plus a negotiated spread or at the U.S. prime rate. At December 31, 2017 and 2016, the Company did not have any borrowings outstanding under the revolving credit facility. The weighted average interest rate on the revolving credit facility for the years ended December 31, 2017 and 2016 was 1.61% and 1.72%, respectively. The Company had outstanding letters of credit primarily under the revolving credit facility totaling $42.1 million and $33.2 million at December 31, 2017 and 2016, respectively.
The private placements, the senior notes and the revolving credit facility are subject to certain customary covenants, including financial covenants that, among other things, require the Company to maintain certain debt-to-EBITDA and interest coverage ratios. The Company was in compliance with all provisions of the debt arrangements at December 31, 2017.
Foreign subsidiaries of the Company had available credit facilities with local foreign lenders of $45.4 million and $43.7 million at December 31, 2017 and 2016, respectively. At December 31, 2017, foreign subsidiaries had debt borrowings outstanding totaling $4.6 million, all of which was reported in short-term borrowings and current portion of long-term debt, net. At December 31, 2016, foreign subsidiaries had debt borrowings outstanding totaling $14.6 million, including $3.8 million reported in long-term debt, net.
The weighted average interest rate on total debt borrowings outstanding at December 31, 2017 and 2016 was 4.2% and 4.4%, respectively.
| 10. | Share-Based Compensation |
|---|
Under the terms of the Company’s stockholder-approved share-based plans, incentive and non-qualified stock options and restricted stock have been, and may be, issued to the Company’s officers, management-level employees and members of its Board of Directors. Employee and non-employee director stock options generally vest at a rate of 25% per year, beginning one year from the date of the grant, and restricted stock generally has a
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
four-year cliff vesting. Stock options generally have a maximum contractual term of seven years. At December 31, 2017, 12.0 million shares of Company common stock were reserved for issuance under the Company’s share-based plans, including 5.6 million shares for stock options outstanding.
The Company issues previously unissued shares when stock options are exercised and shares are issued from treasury stock upon the award of restricted stock.
The Company measures and records compensation expense related to all stock awards by recognizing the grant date fair value of the awards over their requisite service periods in the financial statements. For grants under any of the Company’s plans that are subject to graded vesting over a service period, the Company recognizes expense on a straight-line basis over the requisite service period for the entire award.
Total share-based compensation expense was as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Stock option expense | $ | 9,895 | $ | 9,984 | $ | 10,955 | ||||||
| Restricted stock expense | 15,196 | 12,046 | 12,807 | |||||||||
| Total pre-tax expense | $ | 25,091 | $ | 22,030 | $ | 23,762 | ||||||
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 recipient’s cash compensation is reported. The year ended December 31, 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 Company’s Executive Chairman of the Board of Directors.
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 years indicated:
| 2017 | 2016 | 2015 | ||||||||||
| Expected volatility | 18.0 | % | 21.8 | % | 22.3 | % | ||||||
| Expected term (years) | 5.0 | 5.0 | 5.0 | |||||||||
| Risk-free interest rate | 1.94 | % | 1.23 | % | 1.58 | % | ||||||
| Expected dividend yield | 0.60 | % | 0.77 | % | 0.69 | % | ||||||
| Black-Scholes-Merton fair value per stock option granted | $ | 11.05 | $ | 9.14 | $ | 10.89 |
Expected volatility is based on the historical volatility of the Company’s 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 Company’s estimated forfeiture rates are based on its historical experience.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the Company’s stock option activity and related information for the year ended December 31, 2017:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| (In thousands) | (Years) | (In millions) | ||||||||||||||
| Outstanding at the beginning of the year | 6,011 | $ | 42.25 | |||||||||||||
| Granted | 1,331 | 60.32 | ||||||||||||||
| Exercised | (1,515 | ) | 31.62 | |||||||||||||
| Forfeited | (237 | ) | 52.62 | |||||||||||||
| Expired | (7 | ) | 52.10 | |||||||||||||
| Outstanding at the end of the year | 5,583 | $ | 48.99 | 4.2 | $ | 131.1 | ||||||||||
| Exercisable at the end of the year | 2,884 | $ | 43.96 | 2.9 | $ | 82.2 | ||||||||||
The aggregate intrinsic value of stock options exercised during 2017, 2016 and 2015 was $41.3 million, $16.2 million and $62.3 million, respectively. The total fair value of stock options vested during 2017, 2016 and 2015 was $12.4 million, $10.8 million and $10.3 million, respectively.
The following is a summary of the Company’s nonvested stock option activity and related information for the year ended December 31, 2017:
| Shares | Weighted Average Grant Date Fair Value | |||||||
| (In thousands) | ||||||||
| Nonvested stock options outstanding at the beginning of the year | 2,802 | $ | 10.15 | |||||
| Granted | 1,331 | 11.05 | ||||||
| Vested | (1,197 | ) | 10.40 | |||||
| Forfeited | (237 | ) | 10.35 | |||||
| Nonvested stock options outstanding at the end of the year | 2,699 | $ | 10.47 | |||||
As of December 31, 2017, there was approximately $21 million of expected future pre-tax compensation expense related to the 2.7 million nonvested stock options outstanding, which is expected to be recognized over a weighted average period of approximately two years.
The fair value of restricted shares under the Company’s restricted stock arrangement is determined by the product of the number of shares granted and the grant date market price of the Company’s common stock. Upon the grant of restricted stock, the fair value of the restricted shares (unearned compensation) at the date of grant is charged as a reduction of capital in excess of par value in the Company’s consolidated balance sheet and is amortized to expense on a straight-line basis over the vesting period, which is the same as the calculated derived service period as determined on the grant date. Restricted stock grants are subject to accelerated vesting due to certain events, including doubling of the grant price of the Company’s common stock as of the close of business during any five consecutive trading days.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the Company’s nonvested restricted stock activity and related information for the year ended December 31, 2017:
| Shares | Weighted Average Grant Date Fair Value | |||||||
| (In thousands) | ||||||||
| Nonvested restricted stock outstanding at the beginning of the year | 1,019 | $ | 48.59 | |||||
| Granted | 340 | 60.35 | ||||||
| Vested | (333 | ) | 47.42 | |||||
| Forfeited | (94 | ) | 51.51 | |||||
| Nonvested restricted stock outstanding at the end of the year | 932 | $ | 53.53 | |||||
The total fair value of restricted stock vested during 2017, 2016 and 2015 was $15.8 million, $11.1 million and $10.6 million, respectively. The weighted average fair value of restricted stock granted per share during 2017 and 2016 was $60.35 and $46.91, respectively. As of December 31, 2017, there was approximately $28 million of expected future pre-tax compensation expense related to the 0.9 million nonvested restricted shares outstanding, which is expected to be recognized over a weighted average period of less than two years.
| 11. | Retirement Plans and Other Postretirement Benefits |
|---|
Retirement and Pension Plans
The Company sponsors several retirement and pension plans covering eligible salaried and hourly employees. The plans generally provide benefits based on participants’ years of service and/or compensation. The following is a brief description of the Company’s retirement and pension plans.
The Company maintains contributory and noncontributory defined benefit pension plans. Benefits for eligible salaried and hourly employees under all defined benefit plans are funded through trusts established in conjunction with the plans. The Company’s funding policy with respect to its defined benefit plans is to contribute amounts that provide for benefits based on actuarial calculations and the applicable requirements of U.S. federal and local foreign laws. The Company estimates that it will make both required and discretionary cash contributions of approximately $2 million to $6 million to its worldwide defined benefit pension plans in 2018.
The Company uses a measurement date of December 31 (its fiscal year end) for its U.S. and foreign defined benefit pension plans.
The Company sponsors a 401(k) retirement and savings plan for eligible U.S. employees. Participants in the retirement and savings plan may contribute a specified portion of their compensation on a pre-tax basis, which varies by location. The Company matches employee contributions ranging from 20% to 100%, up to a maximum percentage ranging from 1% to 8% of eligible compensation or up to a maximum of $1,200 per participant in some locations.
The Company’s retirement and savings plan has a defined contribution retirement feature principally to cover U.S. salaried employees joining the Company after December 31, 1996. Under the retirement feature, the Company makes contributions for eligible employees based on a pre-established percentage of the covered employee’s salary subject to pre-established vesting. Employees of certain of the Company’s foreign operations participate in various local defined contribution plans.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has nonqualified unfunded retirement plans for its Directors and certain retired employees. It also provides supplemental retirement benefits, through contractual arrangements and/or a Supplemental Executive Retirement Plan (“SERP”) covering certain current and former executives of the Company. These supplemental benefits are designed to compensate the executive for retirement benefits that would have been provided under the Company’s primary retirement plan, except for statutory limitations on compensation that must be taken into account under those plans. The projected benefit obligations of the SERP and the contracts will primarily be funded by a grant of shares of the Company’s common stock upon retirement or termination of the executive. The Company is providing for these obligations by charges to earnings over the applicable periods.
The following tables set forth the changes in net projected benefit obligation and the fair value of plan assets for the funded and unfunded defined benefit plans for the years ended December 31:
U.S. Defined Benefit Pension Plans:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Change in projected benefit obligation: | ||||||||
| Net projected benefit obligation at the beginning of the year | $ | 498,850 | $ | 472,477 | ||||
| Service cost | 3,538 | 3,488 | ||||||
| Interest cost | 20,693 | 22,153 | ||||||
| Actuarial losses | 26,922 | 29,681 | ||||||
| Gross benefits paid | (29,627 | ) | (29,005 | ) | ||||
| Plan amendments | — | 56 | ||||||
| Net projected benefit obligation at the end of the year | $ | 520,376 | $ | 498,850 | ||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at the beginning of the year | $ | 517,073 | $ | 508,775 | ||||
| Actual return on plan assets | 92,058 | 36,414 | ||||||
| Employer contributions | 40,489 | 889 | ||||||
| Gross benefits paid | (29,627 | ) | (29,005 | ) | ||||
| Fair value of plan assets at the end of the year | $ | 619,993 | $ | 517,073 | ||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Defined Benefit Pension Plans:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Change in projected benefit obligation: | ||||||||
| Net projected benefit obligation at the beginning of the year | $ | 258,297 | $ | 243,924 | ||||
| Service cost | 3,600 | 3,134 | ||||||
| Interest cost | 6,732 | 7,896 | ||||||
| Foreign currency translation adjustments | 26,457 | (39,910 | ) | |||||
| Employee contributions | 228 | 256 | ||||||
| Actuarial (gains) losses | (1,563 | ) | 52,248 | |||||
| Expenses paid from assets | (608 | ) | (770 | ) | ||||
| Gross benefits paid | (8,964 | ) | (8,475 | ) | ||||
| Plan amendments | (1 | ) | (6 | ) | ||||
| Net projected benefit obligation at the end of the year | $ | 284,178 | $ | 258,297 | ||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at the beginning of the year | $ | 188,935 | $ | 213,296 | ||||
| Actual return on plan assets | 13,869 | 14,346 | ||||||
| Employer contributions | 14,307 | 5,886 | ||||||
| Employee contributions | 228 | 256 | ||||||
| Foreign currency translation adjustments | 19,201 | (35,604 | ) | |||||
| Expenses paid from assets | (608 | ) | (770 | ) | ||||
| Gross benefits paid | (8,964 | ) | (8,475 | ) | ||||
| Fair value of plan assets at the end of the year | $ | 226,968 | $ | 188,935 | ||||
The accumulated benefit obligation consisted of the following at December 31:
U.S. Defined Benefit Pension Plans:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Funded plans | $ | 503,309 | $ | 480,249 | ||||
| Unfunded plans | 6,046 | 6,212 | ||||||
| Total | $ | 509,355 | $ | 486,461 | ||||
Foreign Defined Benefit Pension Plans:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Funded plans | $ | 235,787 | $ | 213,877 | ||||
| Unfunded plans | 39,531 | 33,924 | ||||||
| Total | $ | 275,318 | $ | 247,801 | ||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Weighted average assumptions used to determine benefit obligations at December 31:
| 2017 | 2016 | |||||||
| U.S. Defined Benefit Pension Plans: | ||||||||
| Discount rate | 3.75 | % | 4.25 | % | ||||
| Rate of compensation increase (where applicable) | 3.75 | % | 3.75 | % | ||||
| Foreign Defined Benefit Pension Plans: | ||||||||
| Discount rate | 2.39 | % | 2.56 | % | ||||
| Rate of compensation increase (where applicable) | 2.50 | % | 2.50 | % |
The following is a summary of the fair value of plan assets for U.S. plans at December 31:
| 2017 | 2016 | |||||||||||||||||||||||
| Asset Class | Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Corporate debt instruments | $ | 1,757 | $ | — | $ | 1,757 | $ | 2,662 | $ | — | $ | 2,662 | ||||||||||||
| Corporate debt instruments - Preferred | 12,574 | — | 12,574 | 8,880 | — | 8,880 | ||||||||||||||||||
| Corporate stocks - Common | 137,693 | 137,693 | — | 109,881 | 109,881 | — | ||||||||||||||||||
| Municipal bonds | 565 | — | 565 | 777 | — | 777 | ||||||||||||||||||
| Registered investment companies | 289,693 | 289,693 | — | 251,054 | 251,054 | — | ||||||||||||||||||
| U.S. Government securities | 246 | — | 246 | — | — | — | ||||||||||||||||||
| Total investments | 442,528 | 427,386 | 15,142 | 373,254 | 360,935 | 12,319 | ||||||||||||||||||
| Investments measured at net asset value | 177,465 | — | — | 143,819 | — | — | ||||||||||||||||||
| Total investments | $ | 619,993 | $ | 427,386 | $ | 15,142 | $ | 517,073 | $ | 360,935 | $ | 12,319 | ||||||||||||
U.S. equity securities and global equity securities categorized as level 1 are traded on national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and global equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as level 2 if the custodian obtains corroborated quotes from a pricing vendor. Additionally, some U.S. equity securities and global equity securities are public investment vehicles valued using the Net Asset Value (“NAV”) provided by the fund manager. The NAV is the total value of the fund divided by the number of shares outstanding.
Fixed income securities categorized as level 1 are traded on national and international exchanges and are valued at their closing prices on the last trading day of the year and categorized as level 2 if valued by the trustee using pricing models that use verifiable observable market data, bids provided by brokers or dealers or quoted prices of securities with similar characteristics.
The expected long-term rate of return on these plan assets was 7.50% in 2017 and 7.75% in 2016. Equity securities included 512,565 shares of AMETEK, Inc. common stock with a market value of $37.1 million (6.0% of total plan investment assets) at December 31, 2017 and 512,565 shares of AMETEK, Inc. common stock with a market value of $24.9 million (4.8% of total plan investment assets) at December 31, 2016.
The objectives of the Company’s U.S. defined benefit plans’ investment strategy are to maximize the plans’ funded status and minimize Company contributions and plan expense. Because the goal is to optimize returns
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
over the long term, an investment policy that favors equity holdings has been established. Since there may be periods of time where both equity and fixed-income markets provide poor returns, an allocation to alternative assets may be made to improve the overall portfolio’s diversification and return potential. The Company periodically reviews its asset allocation, taking into consideration plan liabilities, plan benefit payment streams and the investment strategy of the pension plans. The actual asset allocation is monitored frequently relative to the established targets and ranges and is rebalanced when necessary. The target allocations for the U.S. defined benefits plans are approximately 50% equity securities, 20% fixed-income securities and 30% other securities and/or cash.
The equity portfolio is diversified by market capitalization and style. The equity portfolio also includes international components.
The objective of the fixed-income portion of the pension assets is to provide interest rate sensitivity for a portion of the assets and to provide diversification. The fixed-income portfolio is diversified within certain quality and maturity guidelines in an attempt to minimize the adverse effects of interest rate fluctuations.
Other than for investments in alternative assets, certain investments are prohibited. Prohibited investments include venture capital, private placements, unregistered or restricted stock, margin trading, commodities, short selling and rights and warrants. Foreign currency futures, options and forward contracts may be used to manage foreign currency exposure.
The following is a summary of the fair value of plan assets for foreign defined benefit pension plans at December 31:
| 2017 | 2016 | |||||||||||||||
| Asset Class | Total | Level 3 | Total | Level 3 | ||||||||||||
| (In thousands) | ||||||||||||||||
| Life insurance | $ | 21,294 | $ | 21,294 | $ | 18,147 | $ | 18,147 | ||||||||
| Total investments | 21,294 | 21,294 | 18,147 | 18,147 | ||||||||||||
| Investments measured at net asset value | 205,674 | — | 170,788 | — | ||||||||||||
| Total investments | $ | 226,968 | $ | 21,294 | $ | 188,935 | $ | 18,147 | ||||||||
Life insurance assets are considered level 3 investments as their values are determined by the sponsor using unobservable market data.
Alternative investments categorized as level 3 are valued based on unobservable inputs and cannot be corroborated using verifiable observable market data. Investments in level 3 funds are redeemable, however, cash reimbursement may be delayed or a portion held back until asset finalization.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the changes in the fair value of the foreign plans’ level 3 investments (fair value determined using significant unobservable inputs):
| Life Insurance | ||||
| (In thousands) | ||||
| Balance, December 31, 2015 | $ | 20,486 | ||
| Actual return on assets: | ||||
| Unrealized (losses) relating to instruments still held at the end of the year | (2,339 | ) | ||
| Realized gains (losses) relating to assets sold during the year | — | |||
| Purchases, sales, issuances and settlements, net | — | |||
| Balance, December 31, 2016 | 18,147 | |||
| Actual return on assets: | ||||
| Unrealized gains relating to instruments still held at the end of the year | 3,147 | |||
| Realized gains (losses) relating to assets sold during the year | — | |||
| Purchases, sales, issuances and settlements, net | — | |||
| Balance, December 31, 2017 | $ | 21,294 | ||
The objective of the Company’s foreign defined benefit plans’ investment strategy is to maximize the long-term rate of return on plan investments, subject to a reasonable level of risk. Liability studies are also performed on a regular basis to provide guidance in setting investment goals with an objective to balance risks against the current and future needs of the plans. The trustees consider the risk associated with the different asset classes, relative to the plans’ liabilities and how this can be affected by diversification, and the relative returns available on equities, fixed-income investments, real estate and cash. Also, the likely volatility of those returns and the cash flow requirements of the plans are considered. It is expected that equities will outperform fixed-income investments over the long term. However, the trustees recognize the fact that fixed-income investments may better match the liabilities for pensioners. Because of the relatively young active employee group covered by the plans and the immature nature of the plans, the trustees have chosen to adopt an asset allocation strategy more heavily weighted toward equity investments. This asset allocation strategy will be reviewed, from time to time, in view of changes in market conditions and in the plans’ liability profile. The target allocations for the foreign defined benefit plans are approximately 70% equity securities, 15% fixed-income securities and 15% other securities, insurance or cash.
The assumption for the expected return on plan assets was developed based on a review of historical investment returns for the investment categories for the defined benefit pension assets. This review also considered current capital market conditions and projected future investment returns. The estimates of future capital market returns by asset class are lower than the actual long-term historical returns. The current low interest rate environment influences this outlook. Therefore, the assumed rate of return for U.S. plans is 7.50% and 6.64% for foreign plans in 2018.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and pension plans with an accumulated benefit obligation in excess of plan assets were as follows at December 31:
U.S. Defined Benefit Pension Plans:
| Projected Benefit | Accumulated Benefit | |||||||||||||||
| Obligation Exceeds | Obligation Exceeds | |||||||||||||||
| Fair Value of Assets | Fair Value of Assets | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Benefit obligation | $ | 6,046 | $ | 26,356 | $ | 6,046 | $ | 26,356 | ||||||||
| Fair value of plan assets | — | 19,059 | — | 19,059 |
Foreign Defined Benefit Pension Plans:
| Projected Benefit | Accumulated Benefit | |||||||||||||||
| Obligation Exceeds | Obligation Exceeds | |||||||||||||||
| Fair Value of Assets | Fair Value of Assets | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Benefit obligation | $ | 186,756 | $ | 215,893 | $ | 180,779 | $ | 209,377 | ||||||||
| Fair value of plan assets | 127,170 | 146,480 | 127,170 | 146,480 |
The following table provides the amounts recognized in the consolidated balance sheet at December 31:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Funded status asset (liability): | ||||||||
| Fair value of plan assets | $ | 846,961 | $ | 706,008 | ||||
| Projected benefit obligation | (804,553 | ) | (757,147 | ) | ||||
| Funded status at the end of the year | $ | 42,408 | $ | (51,139 | ) | |||
| Amounts recognized in the consolidated balance sheet consisted of: | ||||||||
| Noncurrent asset for pension benefits (other assets) | $ | 108,039 | $ | 25,571 | ||||
| Current liabilities for pension benefits | (1,901 | ) | (1,393 | ) | ||||
| Noncurrent liability for pension benefits | (63,730 | ) | (75,317 | ) | ||||
| Net amount recognized at the end of the year | $ | 42,408 | $ | (51,139 | ) | |||
The following table provides the amounts recognized in accumulated other comprehensive income, net of taxes, at December 31:
| Net amounts recognized: | 2017 | 2016 | ||||||
| (In thousands) | ||||||||
| Net actuarial loss | $ | 178,466 | $ | 204,782 | ||||
| Prior service costs | (1,102 | ) | (1,031 | ) | ||||
| Transition asset | 7 | 7 | ||||||
| Total recognized | $ | 177,371 | $ | 203,758 | ||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides the components of net periodic pension benefit expense (income) for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Defined benefit plans: | ||||||||||||
| Service cost | $ | 7,138 | $ | 6,622 | $ | 7,000 | ||||||
| Interest cost | 27,424 | 30,049 | 28,670 | |||||||||
| Expected return on plan assets | (53,442 | ) | (51,140 | ) | (54,819 | ) | ||||||
| Amortization of: | ||||||||||||
| Net actuarial loss | 14,591 | 10,224 | 9,383 | |||||||||
| Prior service costs | (47 | ) | (52 | ) | (55 | ) | ||||||
| Transition asset | 1 | 1 | 1 | |||||||||
| Total net periodic benefit income | (4,335 | ) | (4,296 | ) | (9,820 | ) | ||||||
| Other plans: | ||||||||||||
| Defined contribution plans | 24,280 | 23,881 | 22,750 | |||||||||
| Foreign plans and other | 5,866 | 5,694 | 4,800 | |||||||||
| Total other plans | 30,146 | 29,575 | 27,550 | |||||||||
| Total net pension expense | $ | 25,811 | $ | 25,279 | $ | 17,730 | ||||||
The total net periodic benefit expense (income) is included in Cost of sales in the consolidated statement of income. The estimated amount that will be amortized from accumulated other comprehensive income into net periodic pension benefit expense in 2018 for the net actuarial losses and prior service costs is expected to be approximately $12 million.
The following weighted average assumptions were used to determine the above net periodic pension benefit expense for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| U.S. Defined Benefit Pension Plans: | ||||||||||||
| Discount rate | 4.25 | % | 4.80 | % | 4.20 | % | ||||||
| Expected return on plan assets | 7.50 | % | 7.75 | % | 7.75 | % | ||||||
| Rate of compensation increase (where applicable) | 3.75 | % | 3.75 | % | 3.75 | % | ||||||
| Foreign Defined Benefit Pension Plans: | ||||||||||||
| Discount rate | 2.56 | % | 3.62 | % | 3.44 | % | ||||||
| Expected return on plan assets | 6.79 | % | 6.95 | % | 6.92 | % | ||||||
| Rate of compensation increase (where applicable) | 2.50 | % | 2.88 | % | 2.88 | % |
Estimated Future Benefit Payments
The estimated future benefit payments for U.S. and foreign plans are as follows: 2018 - $39.8 million; 2019 - $40.2 million; 2020 - $41.2 million; 2021 - $41.9 million; 2022 - $42.5 million; 2023 to 2027 - $223.4 million. Future benefit payments primarily represent amounts to be paid from pension trust assets. Amounts included that are to be paid from the Company’s assets are not significant in any individual year.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Postretirement Plans and Postemployment Benefits
The Company provides limited postretirement benefits other than pensions for certain retirees and a small number of former employees. Benefits under these arrangements are not funded and are not significant.
The Company also provides limited postemployment benefits for certain former or inactive employees after employment but before retirement. Those benefits are not significant in amount.
The Company has a deferred compensation plan, which allows employees whose compensation exceeds the statutory IRS limit for retirement benefits to defer a portion of earned bonus compensation. The plan permits deferred amounts to be deemed invested in either, or a combination of, (a) an interest-bearing account, benefits from which are payable out of the general assets of the Company, or (b) the equivalent of a fund which invests in shares of the Company’s common stock on behalf of the employee. The amount deferred under the plan, including income earned, was $25.4 million and $25.2 million at December 31, 2017 and 2016, respectively. Administrative expense for the deferred compensation plan is borne by the Company and is not significant.
Multiemployer Defined Benefit Pension Plan
For the year ended December 31, 2017, the Company recorded $6.0 million in costs as a result of its decision to withdraw from a multiemployer pension plan serving a facility that is currently operating.
| 12. | Guarantees |
|---|
The Company does not provide significant guarantees on a routine basis. The Company primarily issues guarantees, stand-by letters of credit and surety bonds in the ordinary course of its business to provide financial or performance assurance to third parties on behalf of its consolidated subsidiaries to support or enhance the subsidiary’s stand-alone creditworthiness. The amounts subject to certain of these agreements vary depending on the covered contracts actually outstanding at any particular point in time. At December 31, 2017, the maximum amount of future payment obligations relative to these various guarantees was $82.8 million and the outstanding liability under certain of those guarantees was $0.3 million.
Indemnifications
In conjunction with certain acquisition and divestiture transactions, the Company may agree to make payments to compensate or indemnify other parties for possible future unfavorable financial consequences resulting from specified events (e.g., breaches of contract obligations or retention of previously existing environmental, tax or employee liabilities) whose terms range in duration and often are not explicitly defined. Where appropriate, the obligation for such indemnifications is recorded as a liability. Because the amount of these types of indemnifications generally is not specifically stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Further, the Company indemnifies its directors and officers for claims against them in connection with their positions with the Company. Historically, any such costs incurred to settle claims related to these indemnifications have been minimal for the Company. The Company believes that future payments, if any, under all existing indemnification agreements would not have a material impact on its consolidated results of operations, financial position or cash flows.
Product Warranties
The Company provides limited warranties in connection with the sale of its products. The warranty periods for products sold vary among the Company’s 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.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the accrued product warranty obligation were as follows at December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Balance at the beginning of the year | $ | 22,007 | $ | 22,761 | $ | 29,764 | ||||||
| Accruals for warranties issued during the year | 15,951 | 16,046 | 14,817 | |||||||||
| Settlements made during the year | (17,854 | ) | (17,732 | ) | (19,905 | ) | ||||||
| Warranty accruals related to acquired businesses and other during the year | 2,768 | 932 | (1,915 | ) | ||||||||
| Balance at the end of the year | $ | 22,872 | $ | 22,007 | $ | 22,761 | ||||||
Product warranty obligations are reported as current liabilities in the consolidated balance sheet.
| 13. | Contingencies |
|---|
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 December 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 Company’s 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
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s 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 December 31, 2017 and 2016 were $30.1 million and $28.4 million, respectively, for both non-owned and owned sites. In 2017, the Company recorded $7.7 million in reserves and the reserve increased $0.4 million due to foreign currency translation. Additionally, the Company spent $6.4 million on environmental matters in 2017. The Company’s reserves for environmental liabilities at December 31, 2017 and 2016 included reserves of $11.6 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 December 31, 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 HCC’s 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 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 Company’s 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.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 14. | Leases and Other Commitments |
|---|
Minimum aggregate rental commitments under noncancellable leases in effect at December 31, 2017 (principally for production and administrative facilities and equipment) amounted to $187.3 million, consisting of payments of $39.0 million in 2018, $31.6 million in 2019, $25.1 million in 2020, $21.2 million in 2021, $16.8 million in 2022 and $53.6 million thereafter. The leases expire over a range of years from 2018 to 2082, with renewal or purchase options, subject to various terms and conditions, contained in most of the leases. Rental expense was $49.7 million in 2017, $46.3 million in 2016 and $43.6 million in 2015.
As of December 31, 2017 and 2016, the Company had $390.6 million and $289.1 million, respectively, in purchase obligations outstanding, which primarily consisted of contractual commitments to purchase certain inventories at fixed prices.
| 15. | Reportable Segments and Geographic Areas Information |
|---|
Descriptive Information about Reportable Segments
The Company has two reportable segments, EIG and EMG. The Company’s operating segments are identified based on the existence of segment managers. Certain of the Company’s 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.
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. It 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. It 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. It 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. It manufactures motors used in commercial appliances, fitness equipment, food and beverage machines, hydraulic pumps and industrial blowers. It operates a global network of aviation maintenance, repair and overhaul facilities.
Measurement of Segment Results
Segment operating income represents net sales less all direct costs and expenses (including certain administrative and other expenses) applicable to each segment, but does not include interest expense. Net sales by segment are reported after elimination of intra- and intersegment sales and profits, which are insignificant in amount. Reported segment assets include allocations directly related to the segment’s operations. Corporate assets consist primarily of investments, prepaid pensions, insurance deposits and deferred taxes.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reportable Segment Financial Information
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Net sales(1): | ||||||||||||
| Electronic Instruments | $ | 2,690,554 | $ | 2,360,285 | $ | 2,417,192 | ||||||
| Electromechanical | 1,609,616 | 1,479,802 | 1,557,103 | |||||||||
| Consolidated net sales | $ | 4,300,170 | $ | 3,840,087 | $ | 3,974,295 | ||||||
| Operating income and income before income taxes: | ||||||||||||
| Segment operating income(2): | ||||||||||||
| Electronic Instruments | $ | 677,489 | $ | 577,717 | $ | 639,399 | ||||||
| Electromechanical | 310,875 | 277,873 | 318,098 | |||||||||
| Total segment operating income | 988,364 | 855,590 | 957,497 | |||||||||
| Corporate administrative and other expenses | (73,270 | ) | (53,693 | ) | (49,781 | ) | ||||||
| Consolidated operating income | 915,094 | 801,897 | 907,716 | |||||||||
| Interest and other expenses, net | (118,365 | ) | (108,794 | ) | (101,336 | ) | ||||||
| Consolidated income before income taxes | $ | 796,729 | $ | 693,103 | $ | 806,380 | ||||||
| Assets: | ||||||||||||
| Electronic Instruments | $ | 4,803,575 | $ | 4,104,972 | ||||||||
| Electromechanical | 2,535,503 | 2,446,180 | ||||||||||
| Total segment assets | 7,339,078 | 6,551,152 | ||||||||||
| Corporate | 456,986 | 549,522 | ||||||||||
| Consolidated assets | $ | 7,796,064 | $ | 7,100,674 | ||||||||
| Additions to property, plant and equipment(3): | ||||||||||||
| Electronic Instruments | $ | 54,321 | $ | 45,091 | $ | 32,069 | ||||||
| Electromechanical | 36,829 | 39,340 | 88,369 | |||||||||
| Total segment additions to property, plant and equipment | 91,150 | 84,431 | 120,438 | |||||||||
| Corporate | 3,002 | 1,914 | 2,121 | |||||||||
| Consolidated additions to property, plant and equipment | $ | 94,152 | $ | 86,345 | $ | 122,559 | ||||||
| Depreciation and amortization: | ||||||||||||
| Electronic Instruments | $ | 108,053 | $ | 104,284 | $ | 83,832 | ||||||
| Electromechanical | 73,222 | 73,767 | 64,539 | |||||||||
| Total segment depreciation and amortization | 181,275 | 178,051 | 148,371 | |||||||||
| Corporate | 1,952 | 1,665 | 1,089 | |||||||||
| Consolidated depreciation and amortization | $ | 183,227 | $ | 179,716 | $ | 149,460 | ||||||
| (1) | After elimination of intra- and intersegment sales, which are not significant in amount. |
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| (2) | Segment operating income represents net sales less all direct costs and expenses (including certain administrative and other expenses) applicable to each segment, but does not include interest expense. |
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| (3) | Includes $19.1 million in 2017, $23.1 million in 2016 and $53.4 million in 2015 from acquired businesses. |
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Areas
Information about the Company’s operations in different geographic areas for the years ended December 31, 2017, 2016 and 2015 is shown below. Net sales were attributed to geographic areas based on the location of the customer. Accordingly, U.S. export sales are reported in international sales.
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Net sales: | ||||||||||||
| United States | $ | 2,086,180 | $ | 1,829,341 | $ | 1,919,611 | ||||||
| International(1): | ||||||||||||
| United Kingdom | 186,534 | 188,700 | 201,192 | |||||||||
| European Union countries | 692,116 | 619,138 | 615,956 | |||||||||
| Asia | 879,426 | 785,868 | 789,435 | |||||||||
| Other foreign countries | 455,914 | 417,040 | 448,101 | |||||||||
| Total international | 2,213,990 | 2,010,746 | 2,054,684 | |||||||||
| Total consolidated | $ | 4,300,170 | $ | 3,840,087 | $ | 3,974,295 | ||||||
| Long-lived assets from continuing operations (excluding intangible assets): | ||||||||||||
| United States | $ | 325,908 | $ | 322,743 | ||||||||
| International(2): | ||||||||||||
| United Kingdom | 62,643 | 59,208 | ||||||||||
| European Union countries | 65,204 | 58,368 | ||||||||||
| Asia | 12,073 | 12,204 | ||||||||||
| Other foreign countries | 27,468 | 20,707 | ||||||||||
| Total international | 167,388 | 150,487 | ||||||||||
| Total consolidated | $ | 493,296 | $ | 473,230 | ||||||||
| (1) | Includes U.S. export sales of $1,142.3 million in 2017, $1,036.0 million in 2016 and $1,090.7 million in 2015. |
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| (2) | Represents long-lived assets of foreign-based operations only. |
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| 16. | Additional Consolidated Income Statement and Cash Flow Information |
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Included in other income are interest and other investment income of $2.1 million, $1.2 million and $0.7 million for 2017, 2016 and 2015, respectively. Income taxes paid in 2017, 2016 and 2015 were $176.6 million, $180.8 million and $157.8 million, respectively. Cash paid for interest was $96.1 million, $91.8 million and $90.8 million in 2017, 2016 and 2015, respectively.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 17. | Stockholders’ Equity |
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In 2016, the Company repurchased approximately 7,099,000 shares of its common stock for $336.1 million in cash under its share repurchase authorization. On November 2, 2016, the Company’s Board of Directors approved an increase of $400 million in the authorization for the repurchase of the Company’s common stock. At December 31, 2016, $375.6 million was available under the Company’s Board of Directors authorization for future share repurchases. In 2017, the Company repurchased approximately 114,000 shares of its common stock for $6.9 million in cash under its share repurchase authorization. At December 31, 2017, $368.7 million was available under the Company’s Board of Directors authorization for future share repurchases.
At December 31, 2017, the Company held 31.8 million shares in its treasury at a cost of $1,209.1 million, compared with 32.1 million shares at a cost of $1,211.5 million at December 31, 2016. The number of shares outstanding at December 31, 2017 was 231.2 million shares, compared with 229.4 million shares at December 31, 2016.
The Company had a Shareholder Rights Plan, which expired in June 2017. Under the Plan, the Company’s 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 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 Company’s 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.
Subsequent Event
Effective February 1, 2018, the Company’s Board of Directors approved a 56% increase in the quarterly cash dividend on the Company’s common stock to $0.14 per common share from $0.09 per common share.
| 18. | Restructuring Charges |
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During the fourth quarter of 2017, the Company recorded pre-tax restructuring charges totaling $10.8 million, which had the effect of reducing net income by $9.1 million. The restructuring charges were reported in the consolidated statement of income in Cost of sales. The restructuring charges were reported in segment operating income as follows: $4.5 million in EIG and $6.3 million in EMG. The restructuring actions were composed of $3.0 million in severance costs for a reduction in workforce and $7.8 million of asset write-downs to better position the Company’s long-term cost structure and included costs associated with the continued consolidation of the Company’s floor care and specialty motors businesses into its precision motion control businesses. The restructuring activities will be broadly implemented across the Company’s various businesses through the end of 2018, with most actions expected to be completed in 2019.
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 Company’s businesses and the effects of a continued strong U.S. dollar. The restructuring activities have been broadly implemented across the Company’s various businesses with most actions expected to be completed in 2018.
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s businesses and the effects of a continued strong U.S. dollar. The restructuring activities have been broadly implemented across the Company’s various businesses with all actions expected to be completed in 2018.
Accrued liabilities in the Company’s consolidated balance sheet included amounts related to the fourth quarters of 2017, 2016 and 2015 restructuring charges as follows (in millions):
| Fourth Quarter of 2017 Restructuring | Fourth Quarter of 2016 Restructuring | Fourth Quarter of 2015 Restructuring | ||||||||||
| Balance at December 31, 2015 | $ | — | $ | — | $ | 19.3 | ||||||
| Pre-tax charges | — | 25.6 | — | |||||||||
| Utilization | — | (6.4 | ) | (9.2 | ) | |||||||
| Foreign currency translation adjustments and other | — | — | (0.9 | ) | ||||||||
| Balance at December 31, 2016 | — | 19.2 | 9.2 | |||||||||
| Pre-tax charges | 10.8 | — | — | |||||||||
| Utilization | (7.8 | ) | (6.4 | ) | (2.4 | ) | ||||||
| Foreign currency translation adjustments and other | — | — | (0.1 | ) | ||||||||
| Balance at December 31, 2017 | $ | 3.0 | $ | 12.8 | $ | 6.7 | ||||||
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AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 19. | Quarterly Financial Data (Unaudited) |
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| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
| 2017 | ||||||||||||||||||||
| Net sales | $ | 1,007,682 | $ | 1,064,604 | $ | 1,084,799 | $ | 1,143,085 | $ | 4,300,170 | ||||||||||
| Operating income(1) | $ | 220,298 | $ | 232,385 | $ | 232,831 | $ | 229,580 | $ | 915,094 | ||||||||||
| Net income(1)(2) | $ | 138,926 | $ | 150,481 | $ | 153,531 | $ | 238,532 | $ | 681,470 | ||||||||||
| Basic earnings per share(1)(2)(3) | $ | 0.61 | $ | 0.65 | $ | 0.67 | $ | 1.03 | $ | 2.96 | ||||||||||
| Diluted earnings per share(1)(2)(3) | $ | 0.60 | $ | 0.65 | $ | 0.66 | $ | 1.03 | $ | 2.94 | ||||||||||
| Dividends paid per share | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.36 | ||||||||||
| 2016 | ||||||||||||||||||||
| Net sales | $ | 944,398 | $ | 977,706 | $ | 945,030 | $ | 972,953 | $ | 3,840,087 | ||||||||||
| Operating income(4)(5) | $ | 208,523 | $ | 219,036 | $ | 201,116 | $ | 173,222 | $ | 801,897 | ||||||||||
| Net income(4)(5) | $ | 134,170 | $ | 138,193 | $ | 130,687 | $ | 109,108 | $ | 512,158 | ||||||||||
| Basic earnings per share(3)(4)(5) | $ | 0.57 | $ | 0.59 | $ | 0.56 | $ | 0.47 | $ | 2.20 | ||||||||||
| Diluted earnings per share(3)(4)(5) | $ | 0.57 | $ | 0.59 | $ | 0.56 | $ | 0.47 | $ | 2.19 | ||||||||||
| Dividends paid per share | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.36 |
| (1) | During 2017, the Company recorded pre-tax restructuring charges totaling $10.8 million, recorded in the fourth quarter of 2017. The restructuring charges had the effect of reducing net income for 2017 by $9.1 million. See Note 18. |
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| (2) | During 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 Act. The net benefit related to the Act had the effect of increasing net income for 2017 by $91.6 million. See Note 8. |
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| (3) | The sum of quarterly earnings per share may not equal total year earnings per share due to rounding of earnings per share amounts, and differences in weighted average shares and equivalent shares outstanding for each of the periods presented. |
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| (4) | During 2016, the Company recorded pre-tax restructuring charges totaling $25.6 million, recorded in the fourth quarter of 2016. The restructuring charges had the effect of reducing net income for 2016 by $17.0 million. See Note 18. |
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| (5) | During 2016, the Company recorded a $13.9 million non-cash impairment charge related to certain of the Company’s trade names. The impairment charge had the effect of reducing net income for 2016 by $8.6 million. See Note 6. |
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