Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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This report includes forward-looking statements based on the Company’s current assumptions, expectations and projections about future events. When used in this report, the words “believes,” “anticipates,” “may,” “expect,” “intend,” “estimate,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. In this report, the Company discloses important factors that could cause actual results to differ materially from management’s expectations. For more information on these and other factors, see “Forward-Looking Information” herein.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Item 1A. Risk Factors,” “Item 6. Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Business Overview

AMETEK’s operations are affected by global, regional and industry economic factors. However, the Company’s strategic geographic and industry diversification, and its mix of products and services, have helped to mitigate the potential adverse impact of any unfavorable developments in any one industry or the economy of any single country on its consolidated operating results. In 2018, the Company posted record backlog, orders, sales, operating income, net income, diluted earnings per share and operating cash flow. Positive market trends, the Company’s record backlog, contributions from recent acquisitions, and continued focus on and implementation of Operational Excellence initiatives, had a positive impact on 2018 results. The Company also benefited from its strategic initiatives under AMETEK’s four key strategies: Operational Excellence, Strategic Acquisitions, Global & Market Expansion and New Products.

Highlights of 2018 were:

	•		Orders for 2018 were $5,051.8 million, an increase of $512.0 million or 11.3%, compared with $4,539.8 million in 2017. As a result, the Company’s backlog of unfilled orders at December 31, 2018 was $1,602.1 million.

	•		Net sales for 2018 were $4,845.9 million, an increase of $545.7 million or 13%, compared with $4,300.2 million in 2017. The increase in net sales for 2018 was due to 7% organic sales growth, a 5% increase from the 2018 and 2017 acquisitions and favorable 1% effect of foreign currency translation.

	•		Net income for 2018 was $777.9 million, an increase of $96.5 million or 14.2%, compared with $681.5 million in 2017.

	•		Diluted earnings per share for 2018 were $3.34, an increase of $0.40 or 13.6%, compared with $2.94 per diluted share in 2017.

	•		Cash flow provided by operating activities for 2018 was $925.5 million, an increase of $92.3 million or 11.1%, compared with $833.3 million in 2017.

	•		During 2018, the Company spent $1,129.3 million in cash, net of cash acquired, to acquire six businesses:

	•		In January 2018, acquired FMH Aerospace (“FMH”), a provider of complex, highly-engineered solutions for the aerospace, defense and space industries;

	•		In April 2018, acquired SoundCom Systems (“SoundCom”), a provider of design, integration, installation and support of clinical workflow and communication systems for healthcare facilities, educational institutions and corporations. SoundCom also serves as a value-added reseller for Rauland-Borg Corporation (“Rauland”) in the Midwest portion of the United States;

	•		In June 2018, acquired Motec GmbH, a provider of integrated vision systems serving the high growth mobile machine vision market. Motec’s ruggedized vision products and integrated software solutions provide customers with improved operational efficiency and enhanced safety across a variety of critical mobile machine applications in transportation, agriculture, logistics and construction;

	•		In October 2018, acquired Forza Silicon Corporation (“Forza”), a leader in the design and production of high-performance imaging sensors used in medical, defense and industrial applications;

	•		In October 2018, acquired Telular Corporation, a provider of communication solutions for logistics management, tank monitoring and security applications; and

	•		In November 2018, acquired Spectro Scientific Corporation, a provider of machine condition monitoring solutions for critical assets in high-value industrial applications.

	•		In the third quarter of 2018, the Company paid in full, at maturity, $80 million in aggregate principal amount of 6.35% private placement senior notes and $160 million in aggregate principal amount of 7.08% private placement senior notes.

	•		In the fourth quarter of 2018, the Company paid in full, at maturity, $65 million in aggregate principal amount of 7.18% private placement senior notes.

	•		In October 2018, the Company along with certain of its foreign subsidiaries amended and restated its credit agreement dated as of September 22, 2011, as amended and restated as of March 10, 2016 (the “Credit Agreement”). The Credit Agreement amends and restates the Company’s existing $850 million revolving credit facility, which was due to expire in March 2021. The amended Credit Agreement consists of a five-year revolving credit facility in an aggregate principal amount of $1.5 billion with a final maturity date in October 2023. The revolving credit facility total borrowing capacity excludes an accordion feature that permits the Company to request up to an additional $500 million in revolving credit commitments at any time during the life of the Credit Agreement under certain conditions. The revolving credit facility provides the Company with additional financial flexibility to support its growth plans, including its acquisition strategy.

	•		In December 2018, the Company completed a private placement agreement to sell $575 million and 75 million Euros in senior notes to a group of institutional investors (the “2018 Private Placement”). There are two funding dates under the 2018 Private Placement. The first funding occurred in December 2018 for $475 million and 75 million Euros ($85.1 million). The second funding will be in January 2019 for $100 million. The proceeds from the fundings of the 2018 Private Placement were used to pay down domestic borrowings under the Company’s revolving credit facility. For further details, see “Liquidity and Capital Resources” herein.

	•		In 2018, the Company repurchased approximately 5,079,000 shares of its common stock for $367.7 million.

	•		The Company continued its emphasis on investment in research, development and engineering, spending $230.2 million in 2018 before customer reimbursement of $5.2 million. Sales from products introduced in the past three years were $1,195.2 million or 24.7% of net sales.

Results of Operations

The following table sets forth net sales and income by reportable segment and on a consolidated basis:


	Year Ended December 31,
	2018			2017			2016
	(In thousands)

Net sales(1):

Electronic Instruments	$	3,028,959		$	2,690,554		$	2,360,285

Electromechanical		1,816,913			1,609,616			1,479,802

Consolidated net sales	$	4,845,872		$	4,300,170		$	3,840,087


Operating income and income before income taxes:

Segment operating income(2):

Electronic Instruments	$	782,144		$	671,646		$	571,077

Electromechanical		363,765			306,779			274,234


Total segment operating income		1,145,909			978,425			845,311

Corporate administrative expenses(2)		(70,369	)		(74,805	)		(54,332	)


Consolidated operating income(2)		1,075,540			903,620			790,979

Interest expense		(82,180	)		(98,029	)		(94,304	)

Other expense, net(2)		(5,615	)		(8,862	)		(3,572	)


Consolidated income before income taxes	$	987,745		$	796,729		$	693,103

(1)

Effective January 1, 2018, the Company adopted the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and modified the standard thereafter within Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method. See Note 3 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and “Critical Accounting Policies” herein for further details.

(2)

In accordance with the retrospective adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), for the years ended December 31, 2017 and 2016, the consolidated statement of income was restated to increase Cost of sales by $9.9 million and $10.3 million, increase Selling, general and administrative expenses by $1.5 million and $0.6 million, and decrease Other expense, net by $11.5 million and $10.9 million, respectively, for net periodic benefit income components other than service cost. For the years ended December 31, 2017 and 2016, the $11.5 million and $10.9 million, respectively, of net periodic benefit income components other than service cost were originally reported in operating income as follows: $5.8 million and $6.6 million in EIG, $4.1 million and $3.6 million in EMG, and $1.5 million and $0.6 million in Corporate administrative expense, respectively. For the year ended December 31, 2018, Other expense, net included $21.0 million for net periodic benefit income components other than service cost. See Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Results of Operations for the year ended December 31, 2018 compared with the year ended December 31, 2017

In 2018, the Company posted record backlog, orders, sales, operating income, net income, diluted earnings per share and operating cash flow. The Company achieved these results from organic sales growth in both EIG and EMG, contributions from the acquisitions completed in 2018 and the acquisitions of Arizona Instrument in December 2017, MOCON in June 2017 and Rauland in February 2017, as well as the Company’s Operational Excellence initiatives.

Continuing positive market trends, the Company’s record backlog, the full year impact of the 2018 acquisitions and continued focus on and implementation of Operational Excellence initiatives are expected to have a positive impact on the Company’s 2019 results.

Net sales for 2018 were $4,845.9 million, an increase of $545.7 million or 13%, compared with net sales of $4,300.2 million in 2017. The increase in net sales for 2018 was due to 7% organic sales growth, a 5% increase from acquisitions and favorable 1% effect of foreign currency translation. EIG net sales were $3,029.0 million in 2018, an increase of 12.6%, compared with $2,690.6 million in 2017. EMG net sales were $1,816.9 million in 2018, an increase of 12.9%, compared with $1,609.6 million in 2017.

Total international sales for 2018 were $2,448.5 million or 50.5% of net sales, an increase of $234.5 million or 10.6%, compared with international sales of $2,214.0 million or 51.5% of net sales in 2017. The $234.5 million increase in international sales was primarily driven by organic sales growth. Both reportable segments of the Company maintain strong international sales presences in Europe and Asia. Export shipments from the United States, which are included in total international sales, were $1,269.4 million in 2018, an increase of $127.1 million or 11.1%, compared with $1,142.3 million in 2017. Export shipments increased primarily due to organic sales growth.

Orders for 2018 were $5,051.8 million, an increase of $512.0 million or 11%, compared with $4,539.8 million in 2017. The increase in orders for 2018 was due to 7% organic order growth, a 5% increase from acquisitions and a 1% unfavorable effect of foreign currency translation. As a result, the Company’s backlog of unfilled orders at December 31, 2018 was $1,602.1 million, an increase of $206.0 million or 14.8%, compared with $1,396.1 million at December 31, 2017.

The Company recorded 2017 realignment costs totaling $16.8 million in the fourth quarter of 2017 (the “2017 realignment costs”). The 2017 realignment costs were composed of $3.0 million in severance costs for a reduction in workforce, $7.8 million of asset write-downs and $6.0 million in costs to withdraw from a multiemployer defined benefit pension plan. The 2017 realignment costs better positioned 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 2017 realignment costs were reported in the consolidated statement of income as follows (in millions):


	2017
	Three Months Ended December 31,		Year Ended December 31,

Cost of sales	$	16.8	$	16.8

Selling, general and administrative expenses		—		—


Total reported in the consolidated statement of income	$	16.8	$	16.8

The 2017 realignment costs were reported in segment operating income as follows (in millions):


	2017
	Three Months Ended December 31,		Year Ended December 31,

EIG	$	4.5	$	4.5

EMG		12.3		12.3


Total reported in segment operating income	$	16.8	$	16.8

The 2017 realignment costs negatively impacted segment operating margins as follows (in basis points):


	2017
	Three Months Ended December 31,			Year Ended December 31,

EIG		(60	)		(10	)

EMG		(310	)		(80	)

Total impacting segment operating margins		(150	)		(40	)

Segment operating income for 2018 was $1,145.9 million, an increase of $167.5 million or 17.1%, compared with segment operating income of $978.4 million in 2017. Segment operating income, as a percentage of net sales, increased to 23.6% in 2018, compared with 22.8% in 2017. The increase in segment operating income and segment operating margins for 2018 resulted primarily from the increase in net sales and the impact of the 2017 realignment noted above, as well as the benefits of the Company’s Operational Excellence initiatives.

Cost of sales for 2018 was $3,186.3 million or 65.8% of net sales, an increase of $324.9 million or 11.4%, compared with $2,861.4 million or 66.5% of net sales for 2017. Cost of sales increased primarily due to the increase in net sales noted above. Cost of sales in 2017 included the impact of the realignment costs detailed in the tables above.

Selling, general and administrative expenses for 2018 were $584.0 million or 12.1% of net sales, an increase of $48.8 million or 9.1%, compared with $535.2 million or 12.4% of net sales in 2017. Selling, general and administrative expenses increased primarily due to the increase in net sales noted above. For 2017, selling, general and administrative expenses included a fourth quarter of 2017 $5.0 million charitable donation and 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.

Consolidated operating income was $1,075.5 million or 22.2% of net sales for 2018, an increase of $171.9 million or 19.0%, compared with $903.6 million or 21.0% of net sales in 2017.

Interest expense was $82.2 million for 2018, a decrease of $15.8 million or 16.2%, compared with $98.0 million in 2017. Interest expense decreased primarily due to the repayment in full, at maturity, of $270 million in aggregate principal amount of 6.20% private placement senior notes in the fourth quarter of 2017, $80 million in aggregate principal amount of 6.35% private placement senior notes and $160 million in aggregate principal amount of 7.08% private placement senior notes in the third quarter of 2018, and $65 million in aggregate principal amount of 7.18% private placement senior notes in the fourth quarter of 2018.

Other expenses, net were $5.6 million for 2018, a decrease of $3.3 million, compared with $8.9 million in 2017. The Other expenses, net decrease for 2018 was primarily due to higher pension income included in Other expenses, partially offset by higher due diligence expense.

The effective tax rate for 2018 was 21.2%, compared with 14.5% in 2017. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, which is also commonly referred to as “U.S. tax reform,” significantly changed 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 a deemed repatriation of previously deferred foreign earnings of U.S. subsidiaries.

During 2018 the Company finalized the calculations of the Tax Act transitional tax items and reported a favorable $11.8 million tax benefit of which $10.4 million relates to the one-time mandatory deemed repatriation tax and $1.4 million relates to the remeasurement of the net deferred tax liabilities in the U.S. for the impact of the lower tax rates. 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. 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 a $94.2 million expense 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.

The Company has evaluated the impact of the global intangible low-taxed income (“GILTI”) section of the Tax Act and has made a tax accounting policy election to record the annual tax cost of GILTI as a current period expense when incurred and, as such, will not be measuring an impact of GILTI in its determination of deferred taxes.

In addition to the Tax Act adjustments previously mentioned, the 2018 effective tax rate primarily reflects the ongoing impact of the Tax Act including the reduction of the U.S. corporate income tax rate and the current impact of GILTI and FDII provisions, as well as a $25.0 million net tax expense for a change in measurement of a prior year uncertain tax position stemming from the planned implementation of prospective tax planning related to hard to value intangible assets. The 2018 and 2017 effective tax rates also reflect the release of uncertain tax position liabilities primarily relating to statute expirations for U.S. Federal and State jurisdictions totaling $11.4 million and $8.1 million, respectively. See Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

Net income for 2018 was $777.9 million, an increase of $96.5 million or 14.2%, compared with $681.5 million in 2017. The 2017 realignment costs reduced 2017 net income by $13.0 million and the net benefit related to the Tax Act increased 2018 and 2017 net income by $11.8 million and $91.6 million, respectively.

Diluted earnings per share for 2018 were $3.34, an increase of $0.40 or 13.6%, compared with $2.94 per diluted share in 2017.

Segment Results

EIG’s net sales totaled $3,029.0 million for 2018, an increase of $338.4 million or 13%, compared with $2,690.6 million in 2017. The net sales increase was due to 6% organic sales growth, a 6% increase from the 2018 acquisitions of Spectro Scientific, Telular, Forza, Motec and SoundCom and 2017 acquisitions of MOCON and Rauland, and favorable 1% effect of foreign currency translation.

EIG’s operating income was $782.1 million for 2018, an increase of $110.5 million or 16.5%, compared with $671.6 million in 2017. EIG’s operating margins were 25.8% of net sales for 2018, compared with 25.0% of net sales in 2017. The increase in EIG’s operating income and operating margins for 2018 resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives.

EMG’s net sales totaled $1,816.9 million for 2018, an increase of $207.3 million or 13%, compared with $1,609.6 million in 2017. The net sales increase was due to 9% organic sales growth, a 3% increase from the 2018 acquisition of FMH and favorable 1% effect of foreign currency translation.

EMG’s operating income was $363.8 million for 2018, an increase of $57.0 million or 18.6%, compared with $306.8 million in 2017. EMG’s operating margins were 20.0% of net sales for 2018, compared with 19.1% of net sales in 2017. The increase in EMG’s operating income in 2018 resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives. The increase in EMG’s operating margins for 2018 resulted primarily from the net impact of the 2017 realignment costs detailed in the tables above.

Results of operations for the fourth quarter of 2018 compared with the fourth quarter of 2017

Net sales for the fourth quarter of 2018 were $1,271.3 million, an increase of $128.2 million or 11%, compared with net sales of $1,143.1 million for the fourth quarter of 2017. The increase in net sales for the fourth quarter of 2018 was due to 6% organic sales growth, a 7% increase from acquisitions and unfavorable (1%) effect of foreign currency translation.

Segment operating income for the fourth quarter of 2018 was $300.5 million, an increase of $50.1 million or 20.0%, compared with segment operating income of $250.4 million for the fourth quarter of 2017. The increase in segment operating income for the fourth quarter of 2018 resulted primarily from the increase in net sales noted above. Segment operating income, as a percentage of net sales, increased to 23.6% for the fourth quarter of 2018, compared with 21.9% for the fourth quarter of 2017. The increase in segment operating margins for the fourth quarter of 2018 resulted primarily from the net impact of the 2017 realignment costs noted above and their effect on the prior year margin.

Cost of sales for the fourth quarter of 2018 was $835.3 million or 65.7% of net sales, an increase of $65.6 million or 8.5%, compared with $769.7 million or 67.3% of net sales for the fourth quarter of 2017. Cost of sales increased primarily due to the increase in net sales noted above.

The effective tax rate for the fourth quarter of 2018 was 18.3%, compared with (20.8%) in the fourth quarter of 2017. The effective tax rate for the fourth quarter of 2018 includes a favorable $11.8 million tax adjustment related to the finalization of the Tax Act transitional tax items and $9.1 million net tax expense related to uncertain tax positions for certain hard to value intangible assets. In the fourth quarter of 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component of Provision for income taxes related to the Tax Act. 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 a $94.2 million expense primarily 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.

Net income for the fourth quarter of 2018 was $211.5 million, a decrease of $27.0 million or 11.3%, compared with $238.5 million for the fourth quarter of 2017. The decrease in net income is primarily driven by the implementation of the 2017 Tax Act. The fourth quarter of 2017 realignment costs reduced the fourth quarter of 2017 net income by $13.0 million and the net benefit related to the Tax Act increased fourth quarter of 2017 net income by $91.6 million.

Diluted earnings per share for the fourth quarter of 2018 were $0.91, an decrease of $0.12 or 11.7%, compared with $1.03 per diluted share for the fourth quarter of 2017. The decrease is primarily related to the changes in the tax provision.

Segment Results

EIG’s net sales totaled $826.0 million for the fourth quarter of 2018, an increase of $84.5 million or 11%, compared with $741.5 million for the fourth quarter of 2017. The net sales increase for the fourth quarter of 2018 was due to a 9% increase from the 2018 acquisitions of Spectro Scientific, Telular, Forza, Motec and SoundCom, 4% organic sales growth and unfavorable (1%) effect of foreign currency translation.

EIG’s operating income was $214.6 million for the fourth quarter of 2018, an increase of $25.0 million or 13.2%, compared with $189.6 million for the fourth quarter of 2017. EIG’s operating margins were 26.0% of net sales for the fourth quarter of 2018, compared with 25.6% of net sales for the fourth quarter of 2017. The increase in EIG’s operating income for the fourth quarter of 2018 resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives. The increase in operating margins for the fourth quarter of 2018 resulted primarily from the net impact of the 2017 realignment costs noted above and their effect on prior year margins.

EMG’s net sales totaled $445.3 million for the fourth quarter of 2018, an increase of $43.7 million or 10.9%, compared with $401.6 million for the fourth quarter of 2017. The net sales increase for the fourth quarter of 2018 was due to 9% organic sales growth, a 3% increase from the 2018 acquisition of FMH and unfavorable (1%) effect of foreign currency translation.

EMG’s operating income was $85.8 million for the fourth quarter of 2018, an increase of $25.1 million or 41.3%, compared with $60.8 million for the fourth quarter of 2017. EMG’s operating margins were 19.3% of net sales for the fourth quarter of 2018, compared with 15.1% of net sales for the fourth quarter of 2017. The increase in EMG’s operating income resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives. The increase in operating margins for the fourth quarter of 2018 resulted primarily from the net impact of the 2017 realignment costs noted above and their effect on prior year margins.

Results of Operations for the year ended December 31, 2017 compared with the year ended December 31, 2016

In 2017, the Company established records for orders, sales, operating income, net income, diluted earnings per share and operating cash flow. The continued strengthening global economic environment, contributions from the acquisitions completed in 2017 and the acquisitions of Laserage Technology Corporation (“Laserage”) in October 2016, HS Foils and Nu Instruments in July 2016, and Brookfield Engineering Laboratories (“Brookfield”) and ESP/SurgeX in January 2016, and continued focus on and implementation of Operational Excellence initiatives, including the 2017 and 2016 realignment actions (described further throughout the results of operations for the fourth quarter and year ended December 31, 2017), are expected to have a positive impact on the Company’s 2018 results.

Net sales for 2017 were $4,300.2 million, an increase of $460.1 million or 12.0%, compared with net sales of $3,840.1 million in 2016. The increase in net sales for 2017 was due to 6% organic sales growth and a 6% increase from acquisitions. Foreign currency translation was essentially flat period over period. EIG net sales were $2,690.6 million in 2017, an increase of 14.0%, compared with $2,360.3 million in 2016. EMG net sales were $1,609.6 million in 2017, an increase of 8.8%, compared with $1,479.8 million in 2016.

Total international sales for 2017 were $2,214.0 million or 51.5% of net sales, an increase of $203.3 million or 10.1%, compared with international sales of $2,010.7 million or 52.4% of net sales in 2016. The $203.3 million increase in international sales was primarily driven by organic sales growth. Both reportable segments of the Company maintain strong international sales presences in Europe and Asia. Export shipments from the United States, which are included in total international sales, were $1,142.3 million in 2017, an increase of $104.3 million or 10.1%, compared with $1,036.0 million in 2016. Export shipments increased primarily due to organic sales growth.

Orders for 2017 were $4,539.8 million, an increase of $691.0 million or 18.0%, compared with $3,848.8 million in 2016. The increase in orders for 2017 was due to 10% organic order growth, a 6% increase from acquisitions and favorable 2% effect of foreign currency translation. As a result, the Company’s backlog of unfilled orders at December 31, 2017 was a record $1,396.1 million, an increase of $239.6 million or 20.7%, compared with $1,156.5 million at December 31, 2016.

The Company recorded $16.8 million of 2017 realignment costs in the fourth quarter of 2017. The 2017 realignment costs were composed of $3.0 million in severance costs for a reduction in workforce, $7.8 million of asset write-downs and $6.0 million in costs to withdraw from a multiemployer defined benefit pension plan. The 2017 realignment costs 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 Company recorded 2016 realignment costs totaling $25.6 million in the fourth quarter of 2016 (the “2016 realignment costs”). The 2016 realignment costs 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, as well as the effects of a continued strong

U.S. dollar. See Note 18 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details. Also, in the fourth quarter of 2016, the Company recorded a $13.9 million non-cash impairment charge related to certain of the Company’s trade names.

The 2017 and 2016 realignment costs and 2016 impairment charge were reported in the consolidated statement of income as follows (in millions):


	2017				2016
	Three Months Ended December 31,		Year Ended December 31,		Three Months Ended December 31,		Year Ended December 31,
Realignment costs	$	16.8	$	16.8	$	24.0	$	24.0

Impairment charge		—		—		13.9		13.9

Cost of sales		16.8		16.8		37.9		37.9

Realignment costs		—		—		1.6		1.6

Impairment charge		—		—		—		—


Selling, general and administrative expenses		—		—		1.6		1.6

Realignment costs		16.8		16.8		25.6		25.6

Impairment charge		—		—		13.9		13.9

Total reported in the consolidated statement of income	$	16.8	$	16.8	$	39.5	$	39.5

The 2017 and 2016 realignment costs and 2016 impairment charge were reported in segment operating income as follows (in millions):


	2017				2016
	Three Months Ended December 31,		Year Ended December 31,		Three Months Ended December 31,		Year Ended December 31,
Realignment costs	$	4.5	$	4.5	$	12.4	$	12.4

Impairment charge		—		—		9.2		9.2

EIG		4.5		4.5		21.6		21.6

Realignment costs		12.3		12.3		11.6		11.6

Impairment charge		—		—		4.7		4.7

EMG		12.3		12.3		16.3		16.3

Realignment costs		16.8		16.8		24.0		24.0

Impairment charge		—		—		13.9		13.9

Total reported in segment operating income	$	16.8	$	16.8	$	37.9	$	37.9

The 2017 and 2016 realignment costs and 2016 impairment charge negatively impacted segment operating margins as follows (in basis points):


	2017						2016
	Three Months Ended December 31,			Year Ended December 31,			Three Months Ended December 31,			Year Ended December 31,
Realignment costs		(60	)		(10	)		(200	)		(50	)
Impairment charge		—			—			(150	)		(40	)

EIG		(60	)		(10	)		(350	)		(90	)
Realignment costs		(310	)		(80	)		(330	)		(80	)
Impairment charge		—			—			(130	)		(30	)

EMG		(310	)		(80	)		(460	)		(110	)
Realignment costs		(150	)		(40	)		(250	)		(60	)
Impairment charge		—			—			(140	)		(40	)

Total impacting segment operating margins		(150	)		(40	)		(390	)		(100	)

Segment operating income for 2017 was $978.4 million, an increase of $133.1 million or 15.7%, compared with segment operating income of $845.3 million in 2016. The increase in segment operating income for 2017 resulted primarily from the increase in net sales noted above. Segment operating income, as a percentage of net sales, increased to 22.8% in 2017, compared with 22.0% in 2016. The increase in segment operating margins for 2017 resulted primarily from the net impact of the 2017 versus the 2016 realignment costs and 2016 impairment charge noted above. Segment operating income and segment operating margins for 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

Cost of sales for 2017 was $2,861.4 million or 66.5% of net sales, an increase of $275.9 million or 10.7%, compared with $2,585.5 million or 67.3% of net sales for 2016. The cost of sales increase for 2017 was affected by the net sales increase noted above. Cost of sales for 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

Selling, general and administrative expenses for 2017 were $535.2 million or 12.4% of net sales, an increase of $71.6 million or 15.4%, compared with $463.6 million or 12.1% of net sales in 2016. The increase in selling, general and administrative expenses for 2017 was primarily due to the increase in net sales noted above, a fourth quarter of 2017 $5.0 million charitable donation and a second quarter of 2017 $2.5 million equity-based compensation charge 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. For 2016, selling, general and administrative expenses included $1.6 million of realignment costs noted above.

Consolidated operating income was $903.6 million or 21.0% of net sales for 2017, an increase of $112.6 million or 14.2%, compared with $791.0 million or 20.6% of net sales in 2016.

Interest expense was $98.0 million for 2017, an increase of $3.7 million or 3.9%, compared with $94.3 million in 2016. The interest expense increase for 2017 was primarily due to the impact of private placement senior notes funded in the fourth quarter of 2016, partially offset by lower average borrowings under the Company’s revolving credit facility period over period.

Other expenses, net were $8.9 million for 2017, an increase of $5.3 million, compared with $3.6 million in 2016. The other expenses, net increase for 2017 was primarily due to higher environmental-related expenses.

The effective tax rate for 2017 was 14.5%, compared with 26.1% in 2016. On December 22, 2017, the U.S. enacted the Tax Act. The Tax 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 a $94.2 million expense 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. Also, included in the $94.2 million, the Company recorded additional deferred tax liabilities of $13.3 million related to 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.

The $91.6 million net benefit represents what the Company believed was a reasonable estimate of the impact of the income tax effects of the Tax Act on the Company’s consolidated financial statements as of December 31, 2017, it was considered provisional. As additional guidance from the U.S. Department of Treasury was provided, the Company will 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 Tax 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, and could result in significant impacts to the effective tax rate for the period. The Company is still evaluating the potential future impact of the GILTI section of the Tax 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. See Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

The 2017 effective tax rate reflects $12.3 million of tax benefits related to share-based payment transactions in accordance with the January 1, 2017 adoption of the FASB ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. See Notes 2 and 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

The effective tax rates for 2017 and 2016 reflect the impact of foreign earnings, which are taxed at lower rates, tax benefits related to international and state tax planning initiatives and the release of uncertain tax position liabilities relating to certain statute expirations.

Net income for 2017 was $681.5 million, an increase of $169.3 million or 33.1%, compared with $512.2 million in 2016. The 2017 realignment costs reduced 2017 net income by $13.0 million and the net benefit related to the Tax Act increased 2017 net income by $91.6 million. The 2016 realignment costs and the 2016 impairment charge reduced 2016 net income by $17.0 million and $8.6 million, respectively.

Diluted earnings per share for 2017 were $2.94, an increase of $0.75 or 34.2%, compared with $2.19 per diluted share in 2016. The 2017 realignment costs had the effect of reducing 2017 diluted earnings per share by $0.05 and the net benefit related to the Tax Act had the effect of increasing 2017 diluted earnings per share by $0.39. The 2016 realignment costs and the 2016 impairment charge had the effect of reducing 2016 diluted earnings per share by $0.07 and $0.04, respectively.

Segment Results

EIG’s net sales totaled $2,690.6 million for 2017, an increase of $330.3 million or 14.0%, compared with $2,360.3 million in 2016. The net sales increase for 2017 was due to a 9% increase from the 2017 acquisitions of MOCON and Rauland and 2016 acquisitions of Nu Instruments, Brookfield and ESP/SurgeX, and 5% organic sales growth. Foreign currency translation was essentially flat period over period.

EIG’s operating income was $671.6 million for 2017, an increase of $100.5 million or 17.6%, compared with $571.1 million in 2016. The increase in EIG’s operating income for 2017 resulted primarily from the increase in net sales noted above. EIG’s operating margins were 25.0% of net sales for 2017, compared with 24.2% of net sales in 2016. The increase in EIG’s operating margins for 2017 resulted primarily from the net impact of the 2017 versus the 2016 realignment costs and 2016 impairment charge noted above. EIG’s operating income and operating margins for 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

EMG’s net sales totaled $1,609.6 million for 2017, an increase of $129.8 million or 8.8%, compared with $1,479.8 million in 2016. The net sales increase for 2017 was due to 8% organic sales growth and a 1% increase from the 2016 acquisition of Laserage. Foreign currency translation was essentially flat period over period.

EMG’s operating income was $306.8 million for 2017, an increase of $32.6 million or 11.9%, compared with $274.2 million in 2016. EMG’s operating margins were 19.1% of net sales for 2017, compared with 18.5% of net sales in 2016. The increase in EMG’s operating income and operating margins for 2017 resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives. EMG’s operating income and operating margins for 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

Results of operations for the fourth quarter of 2017 compared with the fourth quarter of 2016

Net sales for the fourth quarter of 2017 were $1,143.1 million, an increase of $170.1 million or 17.5%, compared with net sales of $973.0 million for the fourth quarter of 2016. The increase in net sales for the fourth quarter of 2017 was due to 9% organic sales growth, a 6% increase from acquisitions and favorable 2% effect of foreign currency translation.

Segment operating income for the fourth quarter of 2017 was $250.4 million, an increase of $65.2 million or 35.2%, compared with segment operating income of $185.2 million for the fourth quarter of 2016. The increase in segment operating income for the fourth quarter of 2017 resulted primarily from the increase in net sales noted above. Segment operating income, as a percentage of net sales, increased to 22.1% for the fourth quarter of 2017, compared with 19.3% for the fourth quarter of 2016. The increase in segment operating margins for the fourth quarter of 2017 resulted primarily from the net impact of the 2017 versus the 2016 realignment costs and 2016 impairment charge noted above. Segment operating income and segment operating margins for the fourth quarter of 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

Cost of sales for the fourth quarter of 2017 was $769.7 million or 67.3% of net sales, an increase of $86.0 million or 12.6%, compared with $683.7 million or 70.2% of net sales for the fourth quarter of 2016. The cost of sales increase for the fourth quarter of 2017 was affected by the net sales increase noted above. Cost of sales for the fourth quarter of 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

The effective tax rate for the fourth quarter of 2017 was (20.8)%, compared with 24.9% in the fourth quarter of 2016. In the fourth quarter of 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component of Provision for income taxes related to the Tax Act. 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 a $94.2 million expense primarily relating mostly 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. The effective tax rates for the fourth quarter of 2017 and 2016 reflect the impact of foreign earnings, which are taxed at lower rates, tax benefits related to international and state tax planning initiatives and the release of uncertain tax position liabilities relating to certain statute expirations.

Net income for the fourth quarter of 2017 was $238.5 million, an increase of $129.4 million or 118.6%, compared with $109.1 million for the fourth quarter of 2016. The fourth quarter of 2017 realignment costs reduced the fourth quarter of 2017 net income by $13.0 million and the net benefit related to the Tax Act increased fourth quarter of 2017 net income by $91.6 million. The fourth quarter of 2016 realignment costs and fourth quarter of 2016 impairment charge reduced the fourth quarter of 2016 net income by $17.0 million and $8.6 million, respectively.

Diluted earnings per share for the fourth quarter of 2017 were $1.03, an increase of $0.56 or 119.1%, compared with $0.47 per diluted share for the fourth quarter of 2016. The fourth quarter of 2017 realignment costs had the effect of reducing the fourth quarter of 2017 diluted earnings per share by $0.05 and the net benefit related to the Tax Act had the effect of increasing the fourth quarter of 2017 diluted earnings per share by $0.39. The fourth quarter of 2016 realignment costs and fourth quarter of 2016 impairment charge had the effect of reducing the fourth quarter of 2016 diluted earnings per share by $0.07 and $0.04, respectively.

Segment Results

EIG’s net sales totaled $741.5 million for the fourth quarter of 2017, an increase of $125.5 million or 20.4%, compared with $616.0 million for the fourth quarter of 2016. The net sales increase for the fourth quarter of 2017 was due to a 10% increase from the 2017 acquisitions of MOCON and Rauland and 2016 acquisitions of Nu Instruments, Brookfield and ESP/SurgeX, 9% organic sales growth and favorable 2% effect of foreign currency translation.

EIG’s operating income was $189.6 million for the fourth quarter of 2017, an increase of $50.2 million or 36.0%, compared with $139.4 million for the fourth quarter of 2016. The increase in EIG’s operating income for the fourth quarter of 2017 resulted primarily from the increase in net sales noted above. EIG’s operating margins were 25.6% of net sales for the fourth quarter of 2017, compared with 22.6% of net sales for the fourth quarter of 2016. The increase in EIG’s operating margins for the fourth quarter of 2017 resulted primarily from the net impact of the 2017 versus the 2016 realignment costs and 2016 impairment charge noted above, as well as the benefits of the Group’s Operational Excellence initiatives. EIG’s operating income and operating margins for the fourth quarter of 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

EMG’s net sales totaled $401.6 million for the fourth quarter of 2017, an increase of $44.7 million or 12.5%, compared with $356.9 million for the fourth quarter of 2016. The net sales increase for the fourth quarter of 2017 was due to 10% organic sales growth, a 1% increase from the 2016 acquisition of Laserage and favorable 2% effect of foreign currency translation.

EMG’s operating income was $60.8 million for the fourth quarter of 2017, an increase of $15.0 million or 32.8%, compared with $45.8 million for the fourth quarter of 2016. EMG’s operating margins were 15.1% of net sales for the fourth quarter of 2017, compared with 12.8% of net sales for the fourth quarter of 2016. The increase in EMG’s operating income and operating margins for the fourth quarter of 2017 resulted primarily from the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives. EMG’s operating income and operating margins for the fourth quarter of 2017 and 2016 included the impact of the realignment costs and 2016 impairment charge detailed in the tables above.

Liquidity and Capital Resources

Cash provided by operating activities totaled $925.5 million in 2018, an increase of $92.2 million or 11.1%, compared with $833.3 million in 2017. The increase in cash provided by operating activities for 2018 was primarily due to higher net income and a $49.7 million reduction in defined benefit pension plan contributions driven by a discretionary $50.1 million contribution to the Company’s defined benefit pension plans in the first quarter of 2017, with $40.0 million contributed to U.S. defined benefit pension plans and $10.1 million contributed to foreign defined benefit pension plans.

Free cash flow (cash flow provided by operating activities less capital expenditures) was $843.4 million in 2018, compared with $758.2 million in 2017. EBITDA (earnings before interest, income taxes, depreciation and amortization) was $1,267.7 million in 2018, compared with $1,076.0 million in 2017. Free cash flow and EBITDA are presented because the Company is aware that they are measures used by third parties in evaluating the Company. (See the “Notes to Selected Financial Data” included in Item 6 in this Annual Report on Form 10-K for a reconciliation of U.S. GAAP measures to comparable non-GAAP measures).

Cash used for investing activities totaled $1,210.0 million in 2018, compared with $625.8 million in 2017. In 2018, the Company paid $1,129.3 million, net of cash acquired, to acquire Spectro Scientific in November 2018, Telular and Forza in October 2018, Motec in June 2018, SoundCom in April 2018 and FMH in January 2018. In 2017, the Company paid $556.6 million, net of cash acquired, to acquire Arizona Instrument in December 2017, MOCON in June 2017 and Rauland in February 2017. Additions to property, plant and equipment totaled $82.1 million in 2018, compared with $75.1 million in 2017.

Cash provided by financing activities totaled $13.0 million in 2018, compared with $329.2 million of cash used for financing activities in 2017. At December 31, 2018, total debt, net was $2,632.7 million, compared with $2,174.3 million at December 31, 2017. In 2018, short-term borrowings increased $258.3 million, compared with a decrease of $9.6 million in 2017. In 2018, long-term borrowings increased $255.1 million, compared with a decrease of $270.0 million in 2017.

In October 2018, the Company along with certain of its foreign subsidiaries amended and restated its Credit Agreement. The Credit Agreement amends and restates the Company’s existing $850 million revolving credit facility, which was due to expire in March 2021. The amended Credit Agreement consists of a five-year revolving credit facility in an aggregate principal amount of $1.5 billion with a final maturity date in October 2023. The revolving credit facility total borrowing capacity excludes an accordion feature that permits the Company to request up to an additional $500 million in revolving credit commitments at any time during the life of the Credit Agreement under certain conditions. The revolving credit facility provides the Company with additional financial flexibility to support its growth plans, including its acquisition strategy. At December 31, 2018, the Company had available borrowing capacity of $1,705.1 million under its revolving credit facility, including the $500 million accordion feature.

In December 2018, the Company completed the 2018 private placement agreement to sell $575 million and 75 million Euros in senior notes to a group of institutional investors utilizing two funding dates. The first funding occurred in December 2018 for $475 million and 75 million Euros ($85.1 million). The second funding will be in January 2019 for $100 million. The 2018 Private Placement senior notes carry a weighted average interest rate of 3.93% and are subject to certain customary covenants, including financial covenants that, among other things, require the Company to maintain certain debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization) and interest coverage ratios. The proceeds from the fundings from the 2018 Private Placement were used to pay down domestic borrowings under the Company’s revolving credit facility.

In the third quarter of 2018, $80 million of 6.35% senior notes and $160 million of 7.08% senior notes matured and were paid. In the fourth quarter of 2018, $65 million of 7.18% senior notes matured and were paid. The debt-to-capital ratio was 38.3% at December 31, 2018, compared with 35.1% at December 31, 2017. The net debt-to-capital ratio (total debt, net less cash and cash equivalents divided by the sum of net debt and

stockholders’ equity) was 34.9% at December 31, 2018, compared with 27.5% at December 31, 2017. The net debt-to-capital ratio is presented because the Company is aware that this measure is used by third parties in evaluating the Company. (See the “Notes to Selected Financial Data” included in Item 6 in this Annual Report on Form 10-K for a reconciliation of U.S. GAAP measures to comparable non-GAAP measures).

In 2018, the Company repurchased approximately 5,079,000 shares of its common stock for $367.7 million, compared with $6.9 million used for repurchases of approximately 114,000 shares in 2017. At December 31, 2018, $1.0 million was available under the Company’s Board of Directors authorization for future share repurchases. On February 12, 2019, the Company’s Board of Directors approved an increase of $500 million in the authorization for the repurchase of the Company’s common stock.

Additional financing activities for 2018 included cash dividends paid of $128.9 million, compared with $82.7 million in 2017. 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. Proceeds from the exercise of employee stock options were $30.0 million in 2018, compared with $40.0 million in 2017. In the fourth quarter of 2018, the Company made a $30.0 million contingent payment related to the Rauland acquisition. Cash provided by financing activities includes $25.5 million related to the acquisition date estimated fair value of the contingent payment liability, which was based on a probabilistic approach using level 3 inputs. See Note 6 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

As a result of all of the Company’s cash flow activities in 2018, cash and cash equivalents at December 31, 2018 totaled $354.0 million, compared with $646.3 million at December 31, 2017. At December 31, 2018, the Company had $311.2 million in cash outside the United States, compared with $569.4 million at December 31, 2017. The Company utilizes this cash to fund its international operations, as well as to acquire international businesses. The Company is in compliance with all covenants, including financial covenants, for all of its debt agreements. The Company believes it has sufficient cash-generating capabilities from domestic and unrestricted foreign sources, available credit facilities and access to long-term capital funds to enable it to meet its operating needs and contractual obligations in the foreseeable future.

The following table summarizes AMETEK’s contractual cash obligations and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future years at December 31, 2018.


	Payments Due
Contractual Obligations(1)	Total		Less Than One Year		One to Three Years		Four to Five Years		After Five Years
	(In millions)

Long-term debt borrowings(2)	$	2,378.8	$	100.0	$	158.0	$	—	$	2,120.8

Revolving credit loans(3)		260.0		260.0		—		—		—

Other indebtedness		2.3		2.3		—		—		—


Total debt(4)		2,641.1		362.3		158.0		—		2,120.8

Interest on long-term fixed-rate debt		556.4		76.4		134.5		128.4		217.1

Noncancellable operating leases(5)		200.0		43.1		64.7		42.2		50.0

Purchase obligations(6)		470.2		454.2		15.7		0.2		0.1

Restructuring and other		24.1		24.1		—		—		—


Total	$	3,891.8	$	960.1	$	372.9	$	170.8	$	2,388.0

(1)	The liability for uncertain tax positions was not included in the table of contractual obligations as of December 31, 2018 because the timing of the settlements of these uncertain tax positions cannot be reasonably estimated at this time. See Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

(2)	See Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

(3)	Although not contractually obligated, the Company expects to have the capability to repay the revolving credit loan within one year as permitted in the Credit Agreement. Accordingly, $260.0 million was classified as short-term debt at December 31, 2018.

(4)	Excludes debt issuance costs of $8.4 million, of which $3.4 million is classified as current and $5.0 million is classified as long-term. See Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details.

(5)	The leases expire over a range of years from 2019 to 2082 with renewal or purchase options, subject to various terms and conditions, contained in most of the leases.

(6)	Purchase obligations primarily consist of contractual commitments to purchase certain inventories at fixed prices.

Other Commitments

The Company has standby letters of credit and surety bonds of $56.7 million related to performance and payment guarantees at December 31, 2018. Based on experience with these arrangements, the Company believes that any obligations that may arise will not be material to its financial position.

Critical Accounting Policies

The Company has identified its critical accounting policies as those accounting policies that can have a significant impact on the presentation of the Company’s financial condition and results of operations and that require the use of complex and subjective estimates based on the Company’s historical experience and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from the estimates used. The consolidated financial statements and related notes contain information that is pertinent to the Company’s accounting policies and to Management’s Discussion and Analysis. The information that follows represents additional specific disclosures about the Company’s accounting policies regarding risks, estimates, subjective decisions or assessments whereby materially different financial condition and results of operations could have been reported had different assumptions been used or different conditions existed. Primary disclosure of the Company’s significant accounting policies is in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

	•		Revenue Recognition. The majority of the Company’s revenues on product sales are recognized at a point in time when the customer obtains control of the product. The transfer in control of the product to the customer is typically evidenced by one or more of the following: the customer having legal title to the product, the Company’s present right to payment, the customer’s physical possession of the product, the customer accepting the product, or the customer has the benefits of ownership or risk of loss. Legal title transfers to the customer in accordance with the delivery terms of the order, usually upon shipment, which is the point that control transfers. For a small percentage of sales where title and risk of loss transfers at the point of delivery, the Company recognizes revenue upon delivery to the customer, which is the point that control transfers, assuming all other criteria for revenue recognition are met.

Under ASC 606, revenues from certain of the Company’s customer contracts meet the criteria of satisfying its performance obligations over time, primarily in the areas of the manufacture of custom-made equipment and for service repairs of customer-owned equipment. Prior to the adoption of the new standard, these revenues were recorded upon shipment or, in the case of those sales where title and risk of loss passes at the point of delivery, the Company recognized revenue upon delivery to the customer. Recognizing revenue over time for custom-manufactured equipment is based on the Company’s judgment that, in certain contracts, the product does not have an alternative use and the Company has an enforceable right to payment for performance completed to date. This change in revenue recognition accelerated the revenue recognition and costs on the impacted contracts.

Applying the practical expedient available under ASC 606, the Company recognizes incremental cost of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company would have otherwise recognized is one year or less. These costs are included in Selling, general and administrative expenses in the consolidated statement of income.

Revenues associated with repairs of customer-owned assets were previously recorded upon completion and shipment of the repaired equipment to the customer. Under ASC 606, if the Company’s performance enhances an asset that the customer controls as the asset is enhanced, revenue must be recognized over time. The revenue associated with the repair of a customer-owned asset meets this criterion.

The determination of the revenue to be recognized in a given period for performance obligations satisfied over time is based on the input method. The Company recognizes revenue over time as it performs on these contracts because the transfer of control to the customer occurs over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally uses the total cost-to-cost input method of progress because it best depicts the transfer of control to the customer that occurs as costs are incurred. Under the cost-to-cost method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. On certain contracts, labor hours is used as the measure of progress when it is determined to be a better depiction of the transfer of control to the customer due to the timing and pattern of labor hours incurred.

Performance obligations also include post-delivery service, installation and training. Post-delivery service revenues are recognized over the contract term. Installation and training revenues are recognized over the period the service is provided. Warranty terms in customer contracts can also be considered separate performance obligations if the warranty provides services beyond assurance that a product complies with agreed-upon specification or if a warranty can be purchased separately. The Company does not incur significant obligations for customer returns and refunds. Accruals for sales returns, other allowances and estimated warranty costs are provided at the time revenue is recognized based on the Company’s historical experience. At December 31, 2018 and 2017, the accrual for future warranty obligations was $23.5 million and $22.9 million, respectively. The Company’s expense for warranty obligations was $13.9 million in 2018 and $16.0 million in both 2017 and 2016, respectively. 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. If actual future sales returns and allowances and warranty amounts are higher than the Company’s historical experience, additional accruals may be required.

Payment terms generally begin upon shipment of the product. The Company does have contracts with multiple billing terms that are all due within one year from when the product is delivered. No significant financing component exists. Payment terms are generally 30-60 days from the time of shipment or customer acceptance, but terms can be shorter or longer. For customer contracts that have revenue recognized over time, revenue is generally recognized prior to a payment being due from the customer. In such cases, the Company recognizes a contract asset at the time the revenue is recognized. When payment becomes due based on the contract terms, the Company reduces the contract asset and records a receivable. In contracts with billing milestones or in other instances with a long production cycle or concerns about credit, customer advance payments are received. The Company may receive a payment in excess of revenue recognized to that date. In these circumstances, a contract liability is recorded.

The Company has certain contracts with variable consideration in the form of volume discounts, rebates and early payment options, which may affect the transaction price used as the basis for revenue recognition. In these contracts, the amount of the variable consideration is not considered constrained and is allocated among the various performance obligations in the customer contract based on the relative standalone selling price of each performance obligation to the total standalone value of all the performance obligations.

	•		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. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. The allowance for doubtful accounts was $9.3 million and $10.4 million at December 31, 2018 and 2017, respectively.

	•		Inventories. The Company uses the first-in, first-out (“FIFO”) method of accounting, which approximates current replacement cost, for approximately 85% of its inventories at December 31, 2018. The last-in, first-out (“LIFO”) method of accounting is used to determine cost for the remaining 15% of the Company’s inventory at December 31, 2018. For inventories where cost is determined by the LIFO method, the FIFO value would have been $28.4 million and $22.9 million higher than the LIFO value reported in the consolidated balance sheet at December 31, 2018 and 2017, 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. If these factors are less favorable than those projected by management, additional inventory reserves may be required.

	•		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 liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Third party appraisal firms and other consultants are engaged to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating fair values requires significant judgments, estimates and assumptions, including but not limited to: discount rates, future cash flows and the economic lives of trade names, technology, customer relationships, property, plant and equipment, as well as income taxes. These estimates are based on historical experience and information obtained from the management of the acquired companies, and are inherently uncertain.

	•		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. For the purpose of the goodwill impairment test, the Company can elect to perform a qualitative analysis to determine if it is more likely than not that the fair values of its reporting units are less than the respective carrying values of those reporting units. The Company elected to bypass performing the qualitative screen and performed the first step quantitative analysis of the goodwill impairment test in the current year. The Company may elect to perform the qualitative analysis in future periods. The first step in the quantitative process is to compare the carrying amount of the reporting unit’s net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required and no impairment loss is recognized. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the reporting unit fair value.

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. While there are always changes in assumptions to reflect changing business and market conditions, the Company’s overall methodology and the population of assumptions used have remained unchanged. In order to evaluate the sensitivity of the goodwill impairment test to changes in the fair value calculations, the Company applied a hypothetical 10% decrease in fair values of each reporting unit. The 2018 results (expressed as a percentage of carrying value for the respective reporting unit) showed that, despite the hypothetical 10% decrease in fair value, the fair values of the Company’s reporting units still exceeded their respective carrying values by 29% to 859% for each of the Company’s reporting units.

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 can elect to perform a qualitative analysis to determine if it is more likely than not that the fair values of its indefinite-lived intangible assets are less than the respective carrying values of those assets. The Company elected to bypass performing the qualitative screen. The Company may elect to perform the qualitative analysis in future periods. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method using level 3 inputs. The Company believes the relief from royalty method is a widely used valuation technique for such assets. 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’s acquisitions have generally included a significant goodwill component and the Company expects to continue to make acquisitions. At December 31, 2018, goodwill and other indefinite-lived intangible assets totaled $4,296.2 million or 49.6% of the Company’s total assets. The Company completed its required annual impairment tests in the fourth quarter of 2018 and determined that the carrying values of the Company’s goodwill were not impaired.

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.

	•		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. The pension discount rate reflects the current interest rate at which the pension liabilities could be settled at the valuation date. At the end of each year, the Company determines the assumed discount rate to be used to discount plan liabilities. In estimating this rate for 2018, the Company considered rates of return on high-quality, fixed-income investments that have maturities consistent with the anticipated funding requirements of the plan. The discount rate used in determining the 2018 pension cost was 3.75% for U.S. defined benefit pension plans and 2.39% for foreign plans. The discount rate used for determining the funded status of the plans at December 31, 2018 and determining the 2019 defined benefit pension cost was 4.40% for U.S. plans and 2.59% for foreign plans. In estimating the U.S. and foreign discount rates, the Company’s actuaries

developed a customized discount rate appropriate to the plans’ projected benefit cash flow based on yields derived from a database of long-term bonds at consistent maturity dates. The Company used an expected long-term rate of return on plan assets for 2018 of 7.50% for U.S. defined benefit pension plans and 6.64% for foreign plans. In 2019, the Company will use 7.50% for the U.S. plans and 6.52% for the foreign plans. The Company determines the expected long-term rate of return based primarily on its expectation of future returns for the pension plans’ investments. Additionally, the Company considers historical returns on comparable fixed-income and equity investments and adjusts its estimate as deemed appropriate. The rate of compensation increase used in determining the 2018 pension income for the U.S. plans was 3.75% and was 2.50% for the foreign plans. The U.S. and foreign plans’ rate of compensation increase will remain unchanged in 2019. In 2018, the Company recognized consolidated pre-tax pension income of $14.7 million from its U.S. and foreign defined benefit pension plans, compared with pre-tax pension income of $4.3 million recognized for these plans in 2017. The Company estimates its 2019 U.S. and foreign defined benefit pension pre-tax income to be approximately $2.5 million.

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.

To fund the plans, the Company made cash contributions to its defined benefit pension plans in 2018, which totaled $5.1 million, compared with $54.8 million in 2017. The Company anticipates making approximately $3 million to $6 million in cash contributions to its defined benefit pension plans in 2019.

	•		Income Taxes. The 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 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 the 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.

The Company assesses the uncertainty in its tax positions, by applying a minimum recognition threshold which a tax position is required to meet before a tax benefit is recognized in the financial statements. Once the minimum threshold is met, using a more likely than not standard, a series of probability estimates is made for each item to properly measure and record a tax benefit. The tax benefit recorded is generally equal to the highest probable outcome that is more than 50% likely to be realized after full disclosure and resolution of a tax examination. The underlying probabilities are determined based on the best available objective evidence such as recent tax audit outcomes, published guidance, external expert opinion, or by analogy to the outcome of similar issues in the past. There can be no assurance that these estimates will ultimately be realized given continuous changes in tax policy, legislation and audit practice. The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax expense.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASU 2014-09”) and modified the standard thereafter within Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09 established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method. The adoption of ASU 2014-09 did not have a significant impact on the Company’s consolidated results of operations, financial position and cash flows. See Note 3 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) and modified the standard in July 2018 with ASU No. 2018-11, Leases (“ASU 2018-11”). 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. 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 and ASU 2018-11 include transitional guidance, that allows for a modified retrospective approach with “optional transition relief”, which the Company expects to elect.

The Company expects the adoption of ASU 2016-02 to have a material effect on our balance sheet. The adoption of ASU 2016-02 is not expected to have a significant impact on the Company’s consolidated results of operations or cash flows. The Company is primarily a lessee. While we continue to design internal controls and assess all the effects of adoption, the Company currently believes the most significant effects be the recognition of new right-of-use assets and lease liabilities on our balance sheet related to real estate, machinery and equipment operating leases and providing significant new disclosures about our leasing activities.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of assets is not a business. ASU 2017-01 requires that, to be a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The Company prospectively adopted ASU 2017-01 effective January 1, 2018 and the adoption did not have a significant impact on the Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures.

In March 2017, the FASB issued ASU 2017-07, which changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. ASU 2017-07 requires employers to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs. All other components of the net periodic benefit cost will be presented outside of operating income. The Company retrospectively adopted ASU 2017-07 effective January 1, 2018. For the years ended December 31, 2017 and 2016, the consolidated statement of income was restated to increase Cost of sales by $9.9 million and $10.3 million, increase Selling, general and administrative expenses by $1.5 million and $0.6 million, and decrease Other expense, net by $11.5 million and $10.9 million, respectively, for net periodic benefit income components other than service cost. For the years ended December 31, 2017 and 2016, the $11.5 million and $10.9 million, respectively, of net periodic benefit income components other than service cost were originally reported in operating income as follows: $5.8 million and $6.6 million in EIG, $4.1 million and $3.6 million in EMG, and $1.5 million and $0.6 million in Corporate administrative expense, respectively. The adoption of ASU 2017-07 did not have a significant impact on the Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company prospectively adopted ASU 2017-09 effective January 1, 2018 and the adoption did not have a significant impact on the Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 addresses a specific consequence of the Tax Act by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Act’s reduction of the U.S federal corporate income tax rate. ASU 2018-02 is effective for all entities for annual reporting periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal income tax rate in the Tax Act is recognized. Upon adoption, the Company does not expect to elect to reclassify the stranded income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurement (“ASC 820”), by eliminating, modifying and adding to those requirements. ASU 2018-13 also modifies the disclosure objective paragraphs of ASC 820 to eliminate (1) “at a minimum” from the phrase “an entity shall disclose at a minimum” and (2) other similar “open ended” disclosure requirements to promote the appropriate exercise of discretion by entities. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted upon issuance of this ASU. The Company has not determined the impact ASU 2018-13 may have on the Company’s consolidated financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation–Retirement Benefits–Defined Benefit Plans–General (“ASU 2018-14”), which changes the disclosure requirements of ASC Topic 715, Compensation – Retirement Benefits, by eliminating, modifying and adding to those requirements. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted and the amendments in this ASU should be applied on a retrospective basis to all periods presented. The Company has not determined the impact ASU 2018-14 may have on the Company’s consolidated financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (“ASU 2018-15”), that requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC Topic 350, Intangibles–Goodwill and Other. ASU 2018-15 requires a customer to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. ASU 2018-15 is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company has not determined the impact ASU 2018-15 may have on the Company’s consolidated results of operations, financial position, cash flows and financial statement disclosures.

Internal Reinvestment

Capital Expenditures

Capital expenditures were $82.1 million or 1.7% of net sales in 2018, compared with $75.1 million or 1.7% of net sales in 2017. In 2018, approximately 62% of capital expenditures were for improvements to existing equipment or additional equipment to increase productivity and expand capacity. Capital expenditures in 2019 are expected to approximate 2% of net sales, with a continued emphasis on spending to improve productivity.

Research, Development and Engineering

The Company is committed to, and has consistently invested in, research, development and engineering activities to design and develop new and improved products and solutions. Research, development and engineering costs before customer reimbursement were $230.2 million in 2018, $221.2 million in 2017 and $200.8 million in 2016. Customer reimbursements in 2018, 2017 and 2016 were $5.2 million, $5.4 million and $7.2 million, respectively. These amounts included research and development expenses of $141.0 million, $130.4 million and $112.0 million in 2018, 2017 and 2016, respectively. All such expenditures were directed toward the development of new products and solutions and the improvement of existing products and solutions.

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. The Company believes these waste products were handled in compliance with regulations existing at that time. At December 31, 2018, the Company is named a Potentially Responsible Party (“PRP”) at 13 non-AMETEK-owned former waste disposal or treatment sites (the “non-owned” sites). The Company is identified as a “de minimis” party in 12 of these sites based on the low volume of waste attributed to the Company relative to the amounts attributed to other named PRPs. In eight of these sites, the Company has reached a tentative agreement on the cost of the de minimis settlement to satisfy its obligation and is awaiting executed agreements. The tentatively agreed-to settlement amounts are fully reserved. In the other four sites, the Company is continuing to investigate the accuracy of the alleged volume attributed to the Company as estimated by the parties primarily responsible for remedial activity at the sites to establish an appropriate settlement amount. At the remaining site where the Company is a non-de minimis PRP, the Company is participating in the investigation and/or related required remediation as part of a PRP Group and reserves have been established sufficient to satisfy the 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 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, 2018 and 2017 were $27.8 million and $30.1 million, respectively, for both non-owned and owned sites. In 2018, the Company recorded $4.5 million in reserves. Additionally, in 2018 the Company spent $6.6 million on environmental matters and the reserve decreased $0.2 million due to foreign currency translation . The Company’s reserves for environmental liabilities at December 31, 2018 and 2017 included reserves of $9.6 million and $11.6 million, respectively, for an owned site acquired in connection with the 2005 acquisition of HCC Industries (“HCC”). The Company is the designated performing party for the performance of remedial activities for one of several operating units making up a Superfund site in the San Gabriel Valley of California. The Company has obtained indemnifications and other financial assurances from the former owners of HCC related to the costs of the required remedial activities. At December 31, 2018, the Company had $12.1 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.

Market Risk

The Company’s primary exposures to market risk are fluctuations in interest rates, foreign currency exchange rates and commodity prices, which could impact its financial condition and results of operations. The Company addresses its exposure to these risks through its normal operating and financing activities. The Company’s differentiated and global business activities help to reduce the impact that any particular market risk may have on its operating income as a whole.

The Company’s short-term debt carries variable interest rates and generally its long-term debt carries fixed rates. These financial instruments are more fully described in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

The foreign currencies to which the Company has the most significant exchange rate exposure are the Euro, the British pound, the Japanese yen, the Chinese renminbi, the Canadian dollar, the Mexican peso and the Swiss franc. Exposure to foreign currency rate fluctuation is modest, monitored, and when possible, mitigated through the use of local borrowings and occasional derivative financial instruments in the foreign currency affected. The effect of translating foreign subsidiaries’ balance sheets into U.S. dollars is included in other comprehensive income within stockholders’ equity. Foreign currency transactions have not had a significant effect on the operating results reported by the Company because revenues and costs associated with the revenues are generally transacted in the same foreign currencies.

The primary commodities to which the Company has market exposure are raw material purchases of nickel, aluminum, copper, steel, titanium, vanadium and gold. Exposure to price changes in these commodities are generally mitigated through adjustments in selling prices of the ultimate product and purchase order pricing arrangements, although forward contracts are sometimes used to manage some of those exposures.

Based on a hypothetical ten percent adverse movement in interest rates, commodity prices or foreign currency exchange rates, the Company’s best estimate is that the potential losses in future earnings, fair value of risk-sensitive financial instruments and cash flows are not material, although the actual effects may differ materially from the hypothetical analysis.

Forward-Looking Information

Certain matters discussed in this Form 10-K are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which involve risk and uncertainties that exist in the Company’s operations and business environment and can be affected by inaccurate assumptions, or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company’s actual future results. The Company wishes to take advantage of the “safe harbor” provisions of the PSLRA by cautioning readers that numerous important factors, in some cases have caused, and in the future could cause, the Company’s actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Some, but not all, of the factors or uncertainties that could cause actual results to differ from present expectations are set forth above and under Item 1A. Risk Factors. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, subsequent events or otherwise, unless required by the securities laws to do so.

Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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