Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

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Index to Financial Statements (Item 15(a)(1))

Reports of Management		53

Reports of Independent Registered Public Accounting Firm		54

Consolidated Statement of Income for the years ended December 31, 2018, 2017 and 2016		56

Consolidated Statement of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016		57

Consolidated Balance Sheet at December 31, 2018 and 2017		58

Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016		59

Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016		60

Notes to Consolidated Financial Statements		61

Financial Statement Schedules (Item 15(a)(2))

Financial statement schedules have been omitted because either they are not applicable or the required information is included in the financial statements or the notes thereto.

Management’s Responsibility for Financial Statements

Management has prepared and is responsible for the integrity of the consolidated financial statements and related information. The statements are prepared in conformity with U.S. generally accepted accounting principles consistently applied and include certain amounts based on management’s best estimates and judgments. Historical financial information elsewhere in this report is consistent with that in the financial statements.

In meeting its responsibility for the reliability of the financial information, management maintains a system of internal accounting and disclosure controls, including an internal audit program. The system of controls provides for appropriate division of responsibility and the application of written policies and procedures. That system, which undergoes continual reevaluation, is designed to provide reasonable assurance that assets are safeguarded and records are adequate for the preparation of reliable financial data.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. AMETEK, Inc. maintains a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements; however, there are inherent limitations in the effectiveness of any system of internal controls.

Management recognizes its responsibility for conducting the Company’s activities according to the highest standards of personal and corporate conduct. That responsibility is characterized and reflected in a code of business conduct for all employees and in a financial code of ethics for the Chief Executive Officer and Senior Financial Officers, as well as in other key policy statements publicized throughout the Company.

The Audit Committee of the Board of Directors, which is composed solely of independent directors who are not employees of the Company, meets with the independent registered public accounting firm, the internal auditors and management to satisfy itself that each is properly discharging its responsibilities. The report of the Audit Committee is included in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders. Both the independent registered public accounting firm and the internal auditors have direct access to the Audit Committee.

The Company’s independent registered public accounting firm, Ernst & Young LLP, is engaged to render an opinion as to whether management’s financial statements present fairly, in all material respects, the Company’s financial position and operating results. This report is included herein.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, AMETEK, Inc. conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.

The Company acquired FMH Aerospace (“FMH”) in January 2018, SoundCom Systems (“SoundCom”) in April 2018, Motec GmbH in June 2018, Forza Silicon Corporation (“Forza”) and Telular Corporation in October 2018, and Spectro Scientific Corporation in November 2018. As permitted by the U.S. Securities and Exchange Commission staff interpretative guidance for newly acquired businesses, the Company excluded FMH, SoundCom, Motec, Forza, Telular and Spectro Scientific from management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In the aggregate, FMH, SoundCom and Motec, Forza, Telular and Spectro Scientific constituted 13.6% of total assets as of December 31, 2018 and 3.1% of net sales for the year then ended.

The Company’s internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.



/s/ DAVID A. ZAPICO		/s/ WILLIAM J. BURKE

Chairman of the Board and Chief Executive Officer		Executive Vice President – Chief Financial Officer

February 21, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders of AMETEK, Inc.:

Opinion on Internal Control over Financial Reporting

We have audited AMETEK, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the “COSO criteria”). In our opinion, AMETEK, Inc. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of FMH Aerospace, SoundCom Systems, Motec GmbH, Forza Silicon Corporation, Telular Corporation and Spectro Scientific Corporation**,** which are included in the 2018 consolidated financial statements of the Company and constituted 13.6% of total assets as of December 31, 2018 and 3.1% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of FMH, SoundCom and Motec, Forza, Telular and Spectro Scientific.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of AMETEK, Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018 and the related notes and our report dated February 21, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania

February 21, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENTS

To the Board of Directors and Stockholders of AMETEK, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of AMETEK, Inc. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), AMETEK, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ ERNST & YOUNG LLP

We have served as the Company’s auditor since 1930.

Philadelphia, Pennsylvania

February 21, 2019

AMETEK, Inc.

Consolidated Statement of Income

(In thousands, except per share amounts)


	Year Ended December 31,
	2018			2017			2016
Net sales	$	4,845,872		$	4,300,170		$	3,840,087

Cost of sales		3,186,310			2,861,370			2,585,499
Selling, general and administrative		584,022			535,180			463,609

Total operating expenses		3,770,332			3,396,550			3,049,108


Operating income		1,075,540			903,620			790,979
Interest expense		(82,180	)		(98,029	)		(94,304	)
Other expense, net		(5,615	)		(8,862	)		(3,572	)

Income before income taxes		987,745			796,729			693,103
Provision for income taxes		209,812			115,259			180,945

Net income	$	777,933		$	681,470		$	512,158

Basic earnings per share	$	3.37		$	2.96		$	2.20

Diluted earnings per share	$	3.34		$	2.94		$	2.19

Weighted average common shares outstanding:
Basic shares		230,823			230,229			232,593

Diluted shares		232,712			231,845			233,730

See accompanying notes.

AMETEK, Inc.

Consolidated Statement of Comprehensive Income

(In thousands)


	Year Ended December 31,
	2018			2017			2016
Net income	$	777,933		$	681,470		$	512,158

Other comprehensive (loss) income:
Amounts arising during the period – gains (losses), net of tax (expense) benefit:
Foreign currency translation:
Translation adjustments		(72,112	)		159,507			(68,774	)
Change in long-term intercompany notes		(16,569	)		36,320			(7,597	)
Net investment hedge instruments gain (loss), net of tax of ($12,384), $41,178 and $6,558 in 2018, 2017 and 2016, respectively		38,452			(109,412	)		(12,179	)
Defined benefit pension plans:
Net actuarial (loss) gain, net of tax of $(18,825), ($8,384) and $17,450 in 2018, 2017 and 2016, respectively		(75,253	)		16,518			(55,259	)
Amortization of net actuarial loss, net of tax of ($2,716), ($4,680) and ($2,090) in 2018, 2017 and 2016, respectively		9,313			9,910			6,618
Amortization of prior service costs, net of tax of $1,154, $4 and $25 in 2018, 2017 and 2016, respectively		(5,639	)		(41	)		(79	)
Unrealized holding gain (loss) on available-for-sale securities:
Unrealized gain (loss), net of tax of $ -, ($221) and ($275) in 2018, 2017 and 2016, respectively		(104	)		411			512

Other comprehensive (loss) income		(121,912	)		113,213			(136,758	)

Total comprehensive income	$	656,021		$	794,683		$	375,400

See accompanying notes.

AMETEK, Inc.

Consolidated Balance Sheet

(In thousands, except share amounts)


	December 31,
	2018			2017

ASSETS
Current assets:
Cash and cash equivalents	$	353,975		$	646,300
Receivables, net		732,839			668,176
Inventories, net		624,744			540,504
Other current assets		124,586			79,675

Total current assets		1,836,144			1,934,655
Property, plant and equipment, net		554,130			493,296
Goodwill		3,612,033			3,115,619
Other intangibles, net		2,403,771			2,013,365
Investments and other assets		256,210			239,129

Total assets	$	8,662,288		$	7,796,064


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt, net	$	358,876		$	308,123
Accounts payable		399,571			437,329
Customer advanced payments		137,229			—
Income taxes payable		48,597			34,660
Accrued liabilities		314,431			358,551

Total current liabilities		1,258,704			1,138,663
Long-term debt, net		2,273,837			1,866,166
Deferred income taxes		528,336			512,526
Other long-term liabilities		359,489			251,076

Total liabilities		4,420,366			3,768,431

Stockholders’ equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued		—			—
Common stock, $0.01 par value; authorized 800,000,000 shares; issued: 2018 – 263,645,489 shares; 2017 – 262,947,829 shares		2,640			2,631
Capital in excess of par value		706,743			660,894
Retained earnings		5,653,811			5,002,419
Accumulated other comprehensive loss		(551,088	)		(429,176	)
Treasury stock: 2018 – 36,534,802 shares; 2017 – 31,754,106 shares		(1,570,184	)		(1,209,135	)

Total stockholders’ equity		4,241,922			4,027,633

Total liabilities and stockholders’ equity	$	8,662,288		$	7,796,064

See accompanying notes.

AMETEK, Inc.

Consolidated Statement of Stockholders’ Equity

(In thousands)


	Year Ended December 31,
	2018			2017			2016
Capital stock
Preferred stock, $0.01 par value	$	—		$	—		$	—

Common stock, $0.01 par value
Balance at the beginning of the year		2,631			2,615			2,608
Shares issued		9			16			7

Balance at the end of the year		2,640			2,631			2,615


Capital in excess of par value
Balance at the beginning of the year		660,894			604,143			568,286
Issuance of common stock under employee stock plans		18,534			31,660			8,484
Share-based compensation costs		27,315			25,091			22,030
Excess tax benefits from exercise of stock options		—			—			5,343

Balance at the end of the year		706,743			660,894			604,143


Retained earnings
Balance at the beginning of the year		5,002,419			4,403,683			3,974,793
Net income		777,933			681,470			512,158
Cash dividends paid		(128,911	)		(82,735	)		(83,267	)
Other		2,370			1			(1	)

Balance at the end of the year		5,653,811			5,002,419			4,403,683


Accumulated other comprehensive (loss) income
Foreign currency translation:
Balance at the beginning of the year		(251,909	)		(338,324	)		(249,774	)
Translation adjustments		(72,112	)		159,507			(68,774	)
Change in long-term intercompany notes		(16,569	)		36,320			(7,597	)
Net investment hedge instruments (loss) gain, net of tax of ($12,384), $41,178 and $6,558 in 2018, 2017 and 2016, respectively		38,452			(109,412	)		(12,179	)

Balance at the end of the year		(302,138	)		(251,909	)		(338,324	)

Defined benefit pension plans:
Balance at the beginning of the year		(177,371	)		(203,758	)		(155,038	)
Net actuarial (loss) gain, net of tax of ($18,825), ($8,384) and $17,450 in 2018, 2017 and 2016, respectively		(75,253	)		16,518			(55,259	)
Amortization of net actuarial loss, net of tax of ($2,716), ($4,680) and ($2,090) in 2018, 2017 and 2016, respectively		9,313			9,910			6,618
Amortization of prior service costs, net of tax of $1,154, $4 and $25 in 2018, 2017 and 2016, respectively		(5,639	)		(41	)		(79	)

Balance at the end of the year		(248,950	)		(177,371	)		(203,758	)

Unrealized holding gain (loss) on available-for-sale securities:
Balance at the beginning of the year		104			(307	)		(819	)
Increase (decrease) during the year, net of tax		(104	)		411			512

Balance at the end of the year		—			104			(307	)

Accumulated other comprehensive loss at the end of the year		(551,088	)		(429,176	)		(542,389	)

Treasury stock
Balance at the beginning of the year		(1,209,135	)		(1,211,539	)		(885,430	)
Issuance of common stock under employee stock plans		6,629			9,271			10,031
Purchase of treasury stock		(367,678	)		(6,867	)		(336,140	)

Balance at the end of the year		(1,570,184	)		(1,209,135	)		(1,211,539	)

Total stockholders’ equity	$	4,241,922		$	4,027,633		$	3,256,513

See accompanying notes.

AMETEK, Inc.

Consolidated Statement of Cash Flows

(In thousands)


	Year Ended December 31,
	2018			2017			2016
Cash provided by (used for):
Operating activities:
Net income	$	777,933		$	681,470		$	512,158
Adjustments to reconcile net income to total operating activities:
Depreciation and amortization		199,490			183,227			179,716
Deferred income taxes		(73,682	)		(91,205	)		(5,632	)
Share-based compensation expense		27,315			25,091			22,030
Loss (gain) on sale of facilities		127			(1,213	)		(743	)
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in receivables		(13,383	)		(24,581	)		14,773
(Increase) decrease in inventories and other current assets		(59,472	)		(6,087	)		38,666
Increase in payables, accruals and income taxes		36,547			124,399			2,657
Increase (decrease) in other long-term liabilities		42,814			2,787			(4,298	)
Pension contributions		(5,063	)		(54,796	)		(6,775	)
Other, net		(7,108	)		(5,833	)		4,283

Total operating activities		925,518			833,259			756,835


Investing activities:
Additions to property, plant and equipment		(82,076	)		(75,074	)		(63,280	)
Purchases of businesses, net of cash acquired		(1,129,305	)		(556,634	)		(391,419	)
Proceeds from sale of facilities		2,570			6,290			1,832
Other, net		(1,233	)		(399	)		500

Total investing activities		(1,210,044	)		(625,817	)		(452,367	)


Financing activities:
Net change in short-term borrowings		258,349			(9,616	)		(315,674	)
Proceeds from long-term borrowings		560,050			—			820,900
Repayments of long-term borrowings		(305,000	)		(270,000	)		(48,724	)
Repurchases of common stock		(367,678	)		(6,867	)		(336,140	)
Cash dividends paid		(128,911	)		(82,735	)		(83,267	)
Acquisition contingent consideration		(25,500	)
Excess tax benefits from share-based payments		—			—			5,343
Proceeds from stock option exercises		30,021			40,047			17,622
Other, net		(8,291	)		—			(3,006	)

Total financing activities		13,040			(329,171	)		57,054

Effect of exchange rate changes on cash and cash equivalents		(20,839	)		50,770			(25,268	)

(Decrease) increase in cash and cash equivalents		(292,325	)		(70,959	)		336,254
Cash and cash equivalents:
Beginning of year		646,300			717,259			381,005

End of year	$	353,975		$	646,300		$	717,259

See accompanying notes.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

Basis of Consolidation

The accompanying consolidated financial statements reflect the results of operations, financial position and cash flows of AMETEK, Inc. (the “Company”), and include the accounts of the Company and subsidiaries, after elimination of all intercompany transactions in the consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

Prior Period Reclassifications

Certain reclassifications and disclosures of prior period amounts have been made to conform to the current year presentation. See Note 2.

Cash Equivalents, Securities and Other Investments

All highly liquid investments with maturities of three months or less when purchased are considered cash equivalents. At December 31, 2018 and 2017, the Company’s investment in a fixed-income mutual fund (held by its captive insurance subsidiary). The aggregate fair value of the fixed-income mutual fund at December 31, 2018 and 2017 was $7.7 million ($8.5 million cost basis) and $8.1 million ($8.2 million cost basis), respectively. In 2018, the unrealized gain or loss on the fixed-income mutual fund was recorded in the income statement and was not significant. In 2017, the unrealized gain or loss was recorded as a separate component of accumulated other comprehensive income (in stockholders’ equity).

Accounts Receivable

The Company maintains allowances for estimated losses resulting from the inability of specific customers to meet their financial obligations to the Company. A specific allowance for doubtful accounts is recorded against the amount due from these customers. For all other customers, the Company recognizes allowance for doubtful accounts based on the length of time specific receivables are past due based on its historical experience. The allowance for doubtful accounts was $9.3 million and $10.4 million at December 31, 2018 and 2017, respectively. See Note 8.

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. See Note 8.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. The results of operations of the acquired business are included in the Company’s operating results from the date of acquisition. See Note 6.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for additions to plant facilities, or that extend their useful lives, are capitalized. The cost of minor tools, jigs and dies, and maintenance and repairs is charged to expense as incurred. Depreciation of plant and equipment is calculated principally on a straight-line basis over the estimated useful lives of the related assets. The range of lives for depreciable assets is generally three to ten years for machinery and equipment, five to 27 years for leasehold improvements and 25 to 50 years for buildings. Depreciation expense was $85.4 million, $82.0 million and $74.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 8.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets with indefinite lives, primarily trademarks and trade names, are not amortized; rather, they are tested for impairment at least annually.

The Company identifies its reporting units at the component level, which is one level below its operating segments. Generally, goodwill arises from acquisitions of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. The Company’s reporting units are divisions that are one level below its operating segments and for which discrete financial information is prepared and regularly reviewed by segment management.

The Company principally relies on a discounted cash flow analysis to determine the fair value of each reporting unit, which considers forecasted cash flows discounted at an appropriate discount rate. The Company believes that market participants would use a discounted cash flow analysis to determine the fair value of its reporting units in a sale transaction. The annual goodwill impairment test requires the Company to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization and working capital requirements, which are based on the Company’s long-range plan and are considered level 3 inputs. The Company’s long-range plan is updated as part of its annual planning process and is reviewed and approved by management. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both equity and debt, including a risk premium. While the Company uses the best available information to prepare its cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances.

The impairment test for indefinite-lived intangibles other than goodwill (primarily trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method using level 3 inputs. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such trademarks and trade names and not having to pay a royalty for their use.

The Company completed its required annual impairment tests in the fourth quarter of 2018, 2017 and 2016 and determined that the carrying values of the Company’s goodwill were not impaired. The Company completed

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

its required annual impairment tests in the fourth quarter of 2018 and 2017 and determined that the carrying values of the Company’s other intangible assets with indefinite lives were not impaired. The Company completed its required annual impairment tests in the fourth quarter of 2016 and determined that the carrying values of certain of the Company’s trademarks and trade names with indefinite lives were impaired. During 2016, the Company recorded a $13.9 million non-cash impairment charge related to certain of the Company’s trade names.

Other intangible assets with finite lives are evaluated for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of other intangible assets with finite lives is considered impaired when the total projected undiscounted cash flows from the asset group are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of those assets. Fair value is determined primarily using present value techniques based on projected cash flows from the asset group.

Intangible assets, other than goodwill, with definite lives are amortized over their estimated useful lives. Patents and technology are being amortized over useful lives of five to 20 years, with a weighted average life of 16 years. Customer relationships are being amortized over a period of five to 20 years, with a weighted average life of 19 years. Miscellaneous other intangible assets are being amortized over a period of two to 20 years. On a quarterly basis, the Company evaluates the reasonableness of the estimated useful lives of these intangible assets. See Note 7.

Financial Instruments and Foreign Currency Translation

Assets and liabilities of foreign operations are translated using exchange rates in effect at the balance sheet date and their results of operations are translated using average exchange rates for the year. Certain transactions of the Company and its subsidiaries are denominated in currencies other than their functional currency. Exchange gains and losses from those transactions are included in operating results for the year.

The Company makes infrequent use of derivative financial instruments. Forward contracts are entered into from time to time to hedge certain inventory purchases, export sales, debt or foreign currency transactions, thereby minimizing the Company’s exposure to raw material commodity price or foreign currency fluctuation.

In instances where transactions are designated as hedges of an underlying item, the gains and losses on those transactions are included in accumulated other comprehensive income within stockholders’ equity to the extent they are effective as hedges. An evaluation of hedge effectiveness is performed by the Company on an ongoing basis and any changes in the hedge are made as appropriate. See Note 5.

Revenue Recognition

Revenue is derived from sales of products and services. The Company’s products and services are marketed and sold worldwide through two operating groups: EIG and EMG. See Note 15 Descriptive Information about Reportable Segments. See Note 3 for the Company’s revenue recognition policy under ASC 606, adopted January 1, 2018.

Related to revenue recognition in 2017 and 2016, the majority of the Company’s revenues on product sales were recognized at a point in time when the customer obtains control of the product. The transfer in control of the product to the customer was 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 having the benefits of ownership or risk of loss. For a small percentage of sales where title and risk of loss transfers at the point of delivery, the Company recognized revenue upon delivery to the customer, which is the point that control transferred, assuming all other criteria for revenue recognition were met.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Research and Development

Research and development costs are included in Cost of sales as incurred and were $141.0 million in 2018, $130.4 million in 2017 and $112.0 million in 2016.

Shipping and Handling Costs

Shipping and handling costs are included in Cost of sales and were $62.7 million in 2018, $53.1 million in 2017 and $47.9 million in 2016.

Share-Based Compensation

The Company expenses the fair value of share-based awards made under its share-based plans in the consolidated financial statements over their requisite service period of the grants. See Note 11.

Income Taxes

The Company’s process of providing for income taxes and determining the related balance sheet accounts requires management to assess uncertainties, make judgments regarding outcomes and utilize estimates. The Company conducts a broad range of operations around the world and is therefore subject to complex tax regulations in numerous international taxing jurisdictions, resulting at times in tax audits, disputes and potential litigation, the outcome of which is uncertain. Management must make judgments currently about such uncertainties and determine estimates of the Company’s tax assets and liabilities. To the extent the final outcome differs, future adjustments to the Company’s tax assets and liabilities may be necessary. The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax expense.

The Company assesses the realizability of its deferred tax assets, taking into consideration the Company’s forecast of future taxable income, available net operating loss carryforwards and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, valuation allowances against the Company’s deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required. See Note 9.

Pensions

The Company has U.S. and foreign defined benefit and defined contribution pension plans. The most significant elements in determining the Company’s pension income or expense are the assumed pension liability discount rate and the expected return on plan assets. All unrecognized prior service costs, remaining transition obligations or assets and actuarial gains and losses have been recognized, net of tax effects, as a charge to accumulated other comprehensive income in stockholders’ equity and will be amortized as a component of net periodic pension cost. The Company uses a measurement date of December 31 (its fiscal year end) for its U.S. and foreign defined benefit plans. See Note 12.

Earnings Per Share

The calculation of basic earnings per share is based on the weighted average number of common shares considered outstanding during the periods. The calculation of diluted earnings per share reflects the effect of all potentially dilutive securities (principally outstanding stock options and restricted stock grants). The number of

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

weighted average shares used in the calculation of basic earnings per share and diluted earnings per share was as follows for the years ended December 31:


	2018		2017		2016
	(In thousands)

Weighted average shares:
Basic shares		230,823		230,229		232,593
Equity-based compensation plans		1,889		1,616		1,137

Diluted shares		232,712		231,845		233,730

2. 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.

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. The Company adopted ASU 2016-02 on January 1, 2019. 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 to 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.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 are presented outside of operating income. The Company retrospectively adopted ASU 2017-07 effective January 1, 2018. For twelve months 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 twelve months 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 Electronic Instruments (“EIG”), $4.1 million and $3.6 million in Electromechanical (“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 an election to reclassify 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. 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

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

3. Revenues

As discussed in Note 2, the Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The cumulative adjustment made to the January 1, 2018 consolidated balance sheet for the adoption of ASC 606 was to increase Retained earnings by $4.2 million, increase Total assets by $7.9 million and increase Total liabilities by $3.7 million. For the year ended December 31, 2018, the effect of the changes in all financial statement line items impacted by ASC 606 was immaterial from the amount that would have been reported under the previous guidance.

Under ASC 606, the Company determined that revenues from certain of its customer contracts met the criteria of satisfying its performance obligations over time, primarily in the areas of the manufacture of custom-made equipment and for service repairs of customer-owned equipment. Prior to the adoption of the new standard, these revenues were recorded upon shipment or, in the case of those sales where title and risk of loss passes at the point of delivery, the Company recognized revenue upon delivery to the customer. Recognizing revenue over time for custom-manufactured equipment is based on the 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 contract cost 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 each 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 are 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, software as a service, managed services, installation and training. Post-delivery service revenues are recognized over the contract term. Installation and

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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 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.

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, not exceeding one year. 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. Contract liabilities are derecognized when the performance obligations are satisfied and revenue is recognized.

The outstanding contract asset and (liability) accounts were as follows:


	2018
	(In thousands)
Contract assets – January 1, 2018	$	32,658
Contract assets – December 31, 2018		58,266

Change in contract assets – increase (decrease)		25,608

Contract liabilities – January 1, 2018		117,058
Contract liabilities – December 31, 2018		146,162

Change in contract liabilities – (increase) decrease		(29,104	)

Net Change	$	(3,496	)

The net change was primarily driven by higher acquired contract assets compared to acquired contract liabilities related to the 2018 acquisitions. In 2018, the Company recognized revenue of $97 million that was previously included in the beginning balance of contract liabilities.

Contract assets are reported as a component of Other current assets in the consolidated balance sheet. At December 31, 2018, $8.9 million of Customer advanced payments (contract liabilities) were recorded in Other long-term liabilities in the consolidated balance sheet. In conjunction with the January 1, 2018 adoption of ASC 606, in the consolidated balance sheet, approximately $14 million was reclassified to contract assets that was previously reported in Other current assets at December 31, 2017. Also, at January 1, 2018, in the consolidated balance sheet, approximately $114 million was reclassified to Customer advanced payments that was previously reported in Accounts payable of approximately $76 million, Accrued liabilities of approximately $26 million and other of approximately $12 million at December 31, 2017.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company applied the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected term of one year or less. Remaining performance obligations exceeding one year as of December 31, 2018 were $187.2 million. Remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from December 31, 2018, for which the performance obligation is unsatisfied or partially unsatisfied. These performance obligations will be substantially satisfied within two to three years.

Geographic Areas

Information about the Company’s operations in different geographic areas for the year ended December 31, 2018 is shown below. Net sales were attributed to geographic areas based on the location of the customer.


	2018
	EIG		EMG		Total
	(In thousands)
United States	$	1,446,974	$	950,358	$	2,397,332


International(1):
United Kingdom		61,513		135,077		196,590
European Union countries		389,032		399,547		788,579
Asia		780,135		205,047		985,182
Other foreign countries		351,305		126,884		478,189


Total international		1,581,985		866,555		2,448,540

Consolidated net sales	$	3,028,959	$	1,816,913	$	4,845,872

(1)	Includes U.S. export sales of $1,269.4 million.

Information about the Company’s operations in different geographic areas for the year ended December 31, 2017 is shown below. Net sales were attributed to geographic areas based on the location of the customer.


	2017
	EIG		EMG		Total
	(In thousands)

United States	$	1,284,570	$	801,610	$	2,086,180


International(1):

United Kingdom		59,319		127,215		186,534

European Union countries		327,970		364,146		692,116

Asia		685,070		194,356		879,426

Other foreign countries		333,625		122,289		455,914


Total international		1,405,984		808,006		2,213,990


Consolidated net sales	$	2,690,554	$	1,609,616	$	4,300,170

(1)	Includes U.S. export sales of $1,142.3 million.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information about the Company’s operations in different geographic areas for the year ended December 31, 2016 is shown below. Net sales were attributed to geographic areas based on the location of the customer.


	2016
	EIG		EMG		Total
	(In thousands)

United States	$	1,110,795	$	718,546	$	1,829,341


International(1):

United Kingdom		50,880		137,820		188,700

European Union countries		287,391		331,747		619,138

Asia		611,819		174,049		785,868

Other foreign countries		299,396		117,644		417,040


Total international		1,249,486		761,260		2,010,746


Consolidated net sales	$	2,360,281	$	1,479,806	$	3,840,087

(1)	Includes U.S. export sales of $1,036.0 million

Major Products and Services

The Company’s major products and services in the reportable segments were as follows for the year ended December 31:


	2018
	EIG		EMG		Total
	(In thousands)
Process and analytical instrumentation	$	2,120,448	$	—	$	2,120,448
Aerospace and power		908,511		456,517		1,365,028
Automation and engineered solutions		—		1,360,396		1,360,396

Consolidated net sales	$	3,028,959	$	1,816,913	$	4,845,872

Timing of Revenue Recognition

The Company’s timing of revenue recognition was as follows for the year ended December 31:


	2018
	EIG		EMG		Total
	(In thousands)
Products transferred at a point in time	$	2,533,718	$	1,690,124	$	4,223,842
Products and services transferred over time		495,241		126,789		622,030

Consolidated net sales	$	3,028,959	$	1,816,913	$	4,845,872

Product Warranties

The Company provides limited warranties in connection with the sale of its products. The warranty periods for products sold vary among the Company’s operations, but the majority 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. Product warranty obligations are reported as a component of Accrued liabilities in the consolidated balance sheet.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Changes in the accrued product warranty obligation were as follows:


	2018			2017			2016
	(In thousands)

Balance at the beginning of the year	$	22,872		$	22,007		$	22,761
Accruals for warranties issued during the year		13,897			15,951			16,046
Settlements made during the year		(14,509	)		(17,854	)		(17,732	)
Warranty accruals related to acquired businesses and other during the year		1,222			2,768			932

Balance at the end of the year	$	23,482		$	22,872		$	22,007

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. See Note 6 for discussion of acquisition date fair value of contingent payment liability.

The Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the Company’s assets that are measured at fair value on a recurring basis, consistent with the fair value hierarchy, at December 31:


	2018		2017
	Fair Value		Fair Value
	(In thousands)
Fixed-income investments	$	7,655	$	8,060

The fair value of fixed-income investments, which are valued as level 1 investments, was based on quoted market prices. The fixed-income investments are shown as a component of long-term assets in the consolidated balance sheet.

For the years ended December 31, 2018 and 2017, gains and losses on the investments noted above were not significant. No transfers between level 1 and level 2 investments occurred during the years ended December 31, 2018 and 2017.

Financial Instruments

Cash, cash equivalents and fixed-income investments are recorded at fair value at December 31, 2018 and 2017 in the accompanying consolidated balance sheet.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides the estimated fair values of the Company’s financial instrument liabilities, for which fair value is measured for disclosure purposes only, compared to the recorded amounts at December 31:


	2018						2017
	Recorded Amount			Fair Value			Recorded Amount			Fair Value
	(In thousands)
Long-term debt, net (including current portion)	$	(2,378,809	)	$	(2,368,676	)	$	(2,174,289	)	$	(2,210,466	)

The fair value of short-term borrowings, net approximates the carrying value. Short-term borrowings, net are valued as level 2 liabilities as they are corroborated by observable market data. The Company’s long-term debt, net is all privately held with no public market for this debt, therefore, the fair value of long-term debt, net was computed based on comparable current market data for similar debt instruments and is considered to be a level 3 liability. See Note 10 for long-term debt principal amounts, interest rates and maturities.

Foreign Currency

At December 31, 2018, the Company had a Canadian dollar forward contract for a total notional value of 30.0 million Canadian dollars ($1.0 million fair value unrealized loss at December 31, 2018) outstanding. At December 31, 2017, the Company had a Canadian dollar forward contract for a total notional value of 83.0 million Canadian dollars ($1.5 million fair value unrealized gain at December 31, 2017) which settled in first quarter of 2018. For the year ended December 31, 2018 and 2017, realized gains and losses on foreign currency forward contracts were not significant. The Company does not typically designate its foreign currency forward contracts as accounting hedges.

5. Hedging Activities

The Company has designated certain foreign-currency-denominated long-term borrowings as hedges of the net investment in certain foreign operations. As of December 31, 2018 and 2017, these net investment hedges included British-pound- and Euro-denominated long-term debt. These borrowings were designed to create net investment hedges in each of the designated foreign subsidiaries. The Company designated the British-pound- and Euro-denominated loans referred to above as hedging instruments to offset translation gains or losses on the net investment due to changes in the British pound and Euro exchange rates. These net investment hedges are evidenced by management’s contemporaneous documentation supporting the hedge designation. Any gain or loss on the hedging instruments (the debt) following hedge designation is reported in accumulated other comprehensive income in the same manner as the translation adjustment on the hedged investment based on changes in the spot rate, which is used to measure hedge effectiveness.

At December 31, 2018 and 2017, the Company had $389.2 million and $412.4 million, respectively, of British-pound-denominated loans, which were designated as a hedge against the net investment in British pound functional currency foreign subsidiaries. At December 31, 2018 and 2017, the Company had $658.7 million and $601.0 million, respectively, in Euro-denominated loans, which were designated as a hedge against the net investment in Euro functional currency foreign subsidiaries. As a result of the British-pound- and Euro-denominated loans being designated and 100% effective as net investment hedges, $50.8 million of pre-tax currency remeasurement gains and $109.4 million of pre-tax currency remeasurement losses have been included in the foreign currency translation component of other comprehensive income for the years ended December 31, 2018 and 2017, respectively.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Acquisitions

The Company spent $1,129.3 million in cash, net of cash acquired, to acquire FMH Aerospace (“FMH”) in January 2018, SoundCom Systems (“SoundCom”) in April 2018, Motec GmbH in June 2018, Forza Silicon Corporation (“Forza”) and Telular Corporation in October 2018 and Spectro Scientific Corporation in November 2018. FMH is a provider of complex, highly-engineered solutions for the aerospace, defense and space industries. SoundCom provides design, integration, installation and support of clinical workflow and communication systems for healthcare facilities, educational institutions and corporations. SoundCom also serves as a value-added reseller for Rauland-Borg Corporation (“Rauland”) in the Midwest portion of the United States. Motec is 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. Forza is a leader in the design and production of high-performance imaging sensors used in medical, defense and industrial applications. Telular is a provider of communication solutions for logistics management, tank monitoring and security applications. Spectro Scientific is a provider of machine condition monitoring solutions for critical assets in high-value industrial applications. FMH is part of EMG. SoundCom, Motec, Forza, Telular and Spectro Scientific are part of EIG.

The following table represents the allocation of the aggregate purchase price for the net assets of the 2018 acquisitions based on their estimated fair values at acquisition (in millions):


	Telular			Other			Total
Property, plant and equipment	$	54.7		$	19.9		$	74.6
Goodwill		214.7			320.5			535.2
Other intangible assets		265.2			257.6			522.8
Long-term liabilities		—			(7.9	)		(7.9	)
Deferred income taxes		(28.0	)		(42.0	)		(70.0	)
Net working capital and other(1)		16.1			58.5			74.6

Total cash paid	$	522.7		$	606.6		$	1,129.3

(1)	Includes $51.0 million in accounts receivable, whose fair value, contractual cash flows and expected cash flows are approximately equal.

The amount allocated to goodwill is reflective of the benefits the Company expects to realize from the 2018 acquisitions as follows: FMH’s products and solutions further broaden the Company’s differentiated product offerings in the aerospace and defense markets. SoundCom expands Rauland’s presence in the healthcare and education markets in the Midwest while providing customers with expanded value-added solutions and services. Motec’s vision systems complement the Company’s existing instrumentation businesses by expanding its portfolio of solutions to its customers. Forza provides the Vision Research business with custom sensor design and production capability, allowing for accelerated development of next generation sensor technology for use across the Company’s market leading, high-speed cameras. Telular’s end-to-end solutions include purpose-built hardware, proprietary software and wireless connectivity services to enhance the efficiency and safety of critical assets. The combination of Telular’s IoT capabilities and the Company’s highly differentiated measurement technology provides additional growth opportunities for its businesses. Spectro Scientific’s differentiated solutions serve an increasing need for predictive maintenance in a broad and growing set of end markets, including military and defense, process, power generation and transportation. Spectro Scientific expands the Company’s strategy to integrate instrumentation data with cloud-based software and analytics. The Company expects approximately $94 million of the goodwill recorded relating to the 2018 acquisitions will be tax deductible in future years.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2018, the purchase price allocated to other intangible assets of $522.8 million consists of $82.3 million of indefinite-lived intangible trade names, which are not subject to amortization. The remaining $440.5 million of other intangible assets consists of $359.8 million customer relationships, which are being amortized over a period of 10 to 20 years and $80.7 million of purchased technology, which is being amortized over a period of nine to 18 years. Amortization expense for each of the next five years for the 2018 acquisitions is expected to approximate $26.9 million per year.

The Company is in the process of finalizing the measurement of certain tangible and intangible assets and liabilities for its fourth quarter of 2018 acquisitions of Forza, Telular and Spectro Scientific including inventory, property, plant and equipment, goodwill, trade names, customer relationships and purchased technology and the accounting for income taxes. The Company is in the process of finalizing the accounting for income taxes for its April 2018 acquisition of SoundCom and its June 2018 acquisition of Motec.

The 2018 acquisitions had an immaterial impact on reported net sales, net income and diluted earnings per share for the year ended December 31, 2018. Had the 2018 acquisitions been made at the beginning of 2018 or 2017, unaudited pro forma net sales, net income and diluted earnings per share for the years ended December 31, 2018 and 2017, respectively, would not have been materially different than the amounts reported.

In 2017, the Company spent $556.6 million in cash, net of cash acquired, to acquire Rauland in February 2017, MOCON, Inc. in June 2017 and Arizona Instrument LLC in December 2017. The Rauland acquisition included a $30 million contingent payment due upon the achievement of certain milestones as described further below. Rauland is a global provider of enterprise clinical and education communications solutions for hospitals, healthcare systems and educational facilities. MOCON is a provider of laboratory and field gas analysis instrumentation to research laboratories, production facilities and quality control departments in food and beverage, pharmaceutical and industrial applications. Arizona Instrument is a provider of differentiated, high-precision moisture and gas measurement instruments in food, pharmaceutical and environmental markets. Rauland, MOCON and Arizona Instrument are part of EIG.

The Rauland acquisition included a potential $30 million contingent payment due upon Rauland achieving a certain cumulative revenue target over the period October 1, 2016 to September 30, 2018. At the acquisition date, the estimated fair value of the contingent payment liability was $25.5 million, which was based on a probabilistic approach using level 3 inputs. At September 30, 2018, Rauland achieved the target. The $30.0 million contingent payment was made in the fourth quarter of 2018.

In 2016, the Company spent $391.4 million in cash, net of cash acquired, to acquire Brookfield Engineering Laboratories (“Brookfield”) and ESP/SurgeX in January 2016, HS Foils and Nu Instruments in July 2016 and Laserage Technology Corporation (“Laserage”) in October 2016. Brookfield is a manufacturer of viscometers and rheometers, as well as instrumentation to analyze texture and powder flow. ESP/SurgeX is a manufacturer of energy intelligence and power protection, monitoring and diagnostic solutions. HS Foils develops and manufactures key components used in radiation detectors including ultra-thin radiation windows, silicon drift detectors and x-ray filters. Nu Instruments is a provider of magnetic sector mass spectrometers used for elemental and isotope analysis. Laserage is a provider of laser fabrication services for the medical device market. Brookfield, ESP/SurgeX, HS Foils and Nu Instruments are part of EIG and Laserage is part of EMG.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

7. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by segment were as follows:


	EIG			EMG			Total
	(In millions)

Balance at December 31, 2016	$	1,817.0		$	1,002.0		$	2,819.0

Goodwill acquired		225.6			—			225.6

Purchase price allocation adjustments and other		0.5			0.6			1.1

Foreign currency translation adjustments		33.9			36.0			69.9


Balance at December 31, 2017		2,077.0			1,038.6			3,115.6
Goodwill acquired		396.2			139.0			535.2
Purchase price allocation adjustments and other		(1.6	)		—			(1.6	)
Foreign currency translation adjustments		(19.6	)		(17.6	)		(37.2	)

Balance at December 31, 2018	$	2,452.0		$	1,160.0		$	3,612.0

Other intangible assets were as follows at December 31:


	2018			2017
	(In thousands)
Definite-lived intangible assets (subject to amortization):
Patents	$	51,348		$	52,548
Purchased technology		405,204			328,301
Customer lists		1,966,709			1,621,652

		2,423,261			2,002,501

Accumulated amortization:
Patents		(37,768	)		(36,998	)
Purchased technology		(127,363	)		(110,298	)
Customer lists		(538,504	)		(450,814	)

		(703,635	)		(598,110	)

Net intangible assets subject to amortization		1,719,626			1,404,391

Indefinite-lived intangible assets (not subject to amortization):
Trademarks and trade names		684,145			608,974

	$	2,403,771		$	2,013,365

In the fourth quarter of 2016, the Company completed its required annual impairment tests and determined that the carrying values of certain of the Company’s trademarks and trade names with indefinite lives were impaired. During 2016, the Company recorded, in Cost of sales, a $13.9 million non-cash impairment charge related to certain of the Company’s trade names, of which $9.2 million impacted EIG and $4.7 million impacted EMG. See Note 1 for further descriptions of the Company’s impairment testing.

Amortization expense was $114.1 million, $101.2 million and $104.9 million (including impairment of $13.9 million) for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense for each of the next five years is expected to approximate $133 million per year, not considering the impact of potential future acquisitions.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Other Consolidated Balance Sheet Information


	December 31,
	2018			2017
	(In thousands)
INVENTORIES, NET
Finished goods and parts	$	107,289		$	84,789
Work in process		117,899			107,362
Raw materials and purchased parts		399,556			348,353

	$	624,744		$	540,504

PROPERTY, PLANT AND EQUIPMENT, NET
Land	$	41,751		$	42,851
Buildings		315,250			295,023
Machinery and equipment		1,022,362			923,394

		1,379,363			1,261,268
Less: Accumulated depreciation		(825,233	)		(767,972	)

	$	554,130		$	493,296

ACCRUED LIABILITIES
Employee compensation and benefits	$	150,006		$	151,435
Product warranty obligation		23,482			22,872
Restructuring		24,149			30,046
Contingent purchase price		3,000			25,500
Other		113,794			128,698

	$	314,431		$	358,551


	2018			2017			2016
	(In thousands)

ALLOWANCES FOR POSSIBLE LOSSES ON ACCOUNTS RECEIVABLE

Balance at the beginning of the year	$	10,401		$	10,257		$	8,555
Additions charged to expense		1,667			2,800			4,124
Write-offs		(2,335	)		(3,208	)		(2,304	)
Foreign currency translation adjustments and other		(463	)		552			(118	)

Balance at the end of the year	$	9,270		$	10,401		$	10,257

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Income Taxes

The components of income before income taxes and the details of the provision for income taxes were as follows for the years ended December 31:


	2018			2017			2016
	(In thousands)

Income before income taxes:
Domestic	$	555,077		$	447,853		$	397,215
Foreign		432,668			348,876			295,888

Total	$	987,745		$	796,729		$	693,103

Provision for income taxes:
Current:
Federal	$	204,712		$	127,874		$	116,898
Foreign		51,686			71,846			63,170
State		27,096			6,744			6,509

Total current		283,494			206,464			186,577

Deferred:
Federal		(62,095	)		(97,465	)		5,273
Foreign		(3,872	)		6,204			(8,434	)
State		(7,715	)		56			(2,471	)

Total deferred		(73,682	)		(91,205	)		(5,632	)

Total provision	$	209,812		$	115,259		$	180,945

Significant components of the deferred tax (asset) liability were as follows at December 31:


	2018			2017
	(In thousands)
Noncurrent deferred tax (asset) liability:
Differences in basis of property and accelerated depreciation	$	46,103		$	39,816
Reserves not currently deductible		(41,159	)		(42,966	)
Pensions		29,624			11,452
Differences in basis of intangible assets and accelerated amortization		554,597			455,690
Net operating loss carryforwards		(52,142	)		(10,376	)
Share-based compensation		(15,399	)		(13,434	)
Unremitted earnings		12,598			84,356
Other		(24,492	)		(23,176	)

		509,730			501,362
Less: Valuation allowance		8,634			3,100

		518,364			504,462
Portion included in noncurrent assets		9,972			8,064

Gross noncurrent deferred tax liability		528,336			512,526

Net deferred tax liability	$	528,336		$	512,526

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company’s effective tax rate reconciles to the U.S. Federal statutory rate as follows for the years ended December 31:


	2018			2017			2016
U.S. Federal statutory rate		21.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		1.2			0.4			0.6
Foreign operations, net		(0.1	)		(6.8	)		(7.1	)
U.S. Benefits for Manufacturing, Export and credits		(1.8	)		(1.8	)		(2.4	)
Uncertain Tax Items		1.7			0.4			(0.4	)
Stock compensation		(0.5	)		(1.5	)		0.2
Net deferred tax revaluation		(0.1	)		(23.3	)		—
US Tax on Foreign Earnings		(0.1	)		11.9			—
Other		(0.1	)		0.2			0.2

Consolidated effective tax rate		21.2	%		14.5	%		26.1	%

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 changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result, in the fourth quarter of 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component of Provision for income taxes. The $91.6 million net benefit consisted of a $185.8 million benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate and $94.2 million expense mostly relating to the one-time mandatory tax on previously deferred earnings of certain non-U.S. subsidiaries that are owned either wholly or partially by a U.S. subsidiary of the Company as discussed further below.

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. The Company elected to pay the cash tax cost of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries over an eight-year period. As of December 31, 2018, the Company has a remaining cash tax obligation of $66.8 million of which $5.9 million is payable within the next twelve months.

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.

As a result of the one-time mandatory deemed repatriation and the taxable inclusions under the GILTI provisions of the Tax Act, the Company has approximately $555 million in previously taxed income (“PTI”) as of December 31, 2018 which can be repatriated without incremental U.S. Federal tax. The Company intends to reinvest its earnings indefinitely in operations outside the United States except to the extent of the PTI.

As of December, 31 2018 and 2017, the Company recorded deferred income taxes totaling $12.6 million and $13.3 million respectively in state income and foreign withholding taxes expected to be incurred when the cash amounts related to the mandatory tax are ultimately repatriated to the U.S.

The Company is acquisitive and at times acquires entities with tax attributes (net operating losses or tax credits) that carry over to post-acquisition tax periods of the Company. At December 31, 2018, the Company had

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

tax effected benefits of $52.1 million related to net operating loss carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes net operating loss carryforwards of $34.4 million for federal income tax purposes with no valuation allowance, $16.6 million for state income tax purposes with a valuation allowance of $0.9 and $1.1 million for foreign income tax purposes with a valuation allowance of $1.1 million. These net operating loss carryforwards, if not used, will expire between 2019 and 2038.

At December 31, 2018, the Company had tax effected benefits of $7.9 million related to tax credit carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes tax credit carryforwards of $2.1 million for federal income tax purposes with a valuation allowance of $1.6 million, $5.8 million for state income tax purposes with a valuation allowance of $1.5 million, and no remaining credit carryforwards for foreign income tax purposes. These tax credit carryforwards, if not used, will expire between 2019 and 2038.

The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the deferred tax assets established for state and foreign net operating loss carryforwards and tax credits. In 2018, the Company recorded an increase of $5.5 million in the valuation allowance of which $2.0 million relates to acquired state loss and credit carryforwards that are not expected to be utilized and $3.5 million for non-deductible interest expense in states that conform to the Tax Act. There are no material uncertainties related to the realization of any deferred tax assets and their realization does not materially depend on specific tax planning strategies being implemented or changes in future levels of expected profits.

At December 31, 2018, the Company had gross unrecognized tax benefits of $119.3 million, of which $73.1 million, if recognized, would impact the effective tax rate. At December 31, 2017, the Company had gross unrecognized tax benefits of $60.3 million, of which $51.7 million, if recognized, would impact the effective tax rate.

At December 31, 2018 and 2017, the Company reported $14.0 million and $9.7 million, respectively, related to interest and penalty exposure as accrued income tax expense in the consolidated balance sheet. During 2018 and 2017, the Company recognized a net expense of $8.9 million and $0.9 million, and during 2016, the Company recognized a net benefit of $1.8 million, respectively, for interest and penalties related to uncertain tax positions in the consolidated statement of income as a component of income tax expense.

Approximately 60% of the Company’s overall tax liability is incurred in the United States. The Company files income tax returns in various other state and foreign tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, the Company has open tax years subject to tax audit on average of between three and six years in these jurisdictions. At December 31, 2018, there were no tax years currently under examination by the Internal Revenue Service (“IRS”) related to the U.S. consolidated tax group, although a separate examination of a pre-acquisition net operating loss is ongoing related to a recently acquired company for which no material liability is expected. The Company has not materially extended any other statutes of limitation for any significant location and has reviewed and accrued for, where necessary, tax liabilities for open periods including state and foreign jurisdictions that remain subject to examination. There have been no penalties asserted or imposed by the IRS related to substantial understatement of income, gross valuation misstatement or failure to disclose a listed or reportable transaction.

During 2018, the Company added $81.6 million of tax, interest and penalties related to identified uncertain tax positions and reversed $18.4 million of tax and interest related to statute expirations and settlement of prior uncertain positions. During 2017, the Company added $15.4 million of tax, interest and penalties to identified uncertain tax positions and reversed $12.1 million of tax and interest related to statute expirations.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a reconciliation of the liability for uncertain tax positions at December 31:


	2018			2017			2016
	(In millions)
Balance at the beginning of the year	$	60.3		$	57.9		$	63.8
Additions for tax positions related to the current year		21.8			10.0			5.5
Additions for tax positions of prior years		53.5			3.1			1.5
Reductions for tax positions of prior years		(3.9	)		(2.8	)		(3.6	)
Reductions related to settlements with taxing authorities		—			—			(3.4	)
Reductions due to statute expirations		(12.4	)		(7.9	)		(5.9	)

Balance at the end of the year	$	119.3		$	60.3		$	57.9

In 2018, the additions above primarily reflect the increase in tax liabilities for uncertain tax positions related to certain higher transfer pricing risks for hard to value intangible assets that may more likely be asserted following U.S. tax reform as taxpayers react and adapt to new tax planning initiatives; the reductions above primarily relate to statute expirations. At December 31, 2018, tax, interest and penalties of $131.7 million were classified as a noncurrent liability. The net change in uncertain tax positions for the year ended December 31, 2018 resulted in an increase to income tax expense of $23.8 million, which reflects the increase of $59 million in gross uncertain tax positions less offsetting benefits reported as decreases to deferred tax liabilities or increases in long-term taxes receivable.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Debt

Long-term debt, net consisted of the following at December 31:


	2018			2017
	(In thousands)
U.S. dollar 6.35% senior notes due July 2018	$	—		$	80,000
U.S. dollar 7.08% senior notes due September 2018		—			160,000
U.S. dollar 7.18% senior notes due December 2018		—			65,000
U.S. dollar 6.30% senior notes due December 2019		100,000			100,000
U.S. dollar 3.73% senior notes due September 2024		300,000			300,000
U.S. dollar 3.91% senior notes due June 2025		50,000			50,000
U.S. dollar 3.96% senior notes due August 2025		100,000			100,000
U.S. dollar 4.18% senior notes due December 2025		275,000			—
U.S. dollar 3.83% senior notes due September 2026		100,000			100,000
U.S. dollar 4.32% senior notes due December 2027		150,000			—
U.S. dollar 4.37% senior notes due December 2028		50,000			—
U.S. dollar 3.98% senior notes due September 2029		100,000			100,000
U.S. dollar 4.45% senior notes due August 2035		50,000			50,000
British pound 4.68% senior note due September 2020		102,082			108,180
British pound 2.59% senior note due November 2028		191,405			202,840
British pound 2.70% senior note due November 2031		95,700			101,420
Euro 1.34% senior notes due October 2026		343,666			360,620
Euro 1.71% senior notes due December 2027		85,916			—
Euro 1.53% senior notes due October 2028		229,108			240,414
Swiss franc 2.44% senior note due December 2021		55,932			56,452
Revolving credit facility borrowings		260,000			—
Other, principally foreign		2,278			4,589
Less: Debt issuance costs		(8,374	)		(5,226	)

Total debt, net		2,632,713			2,174,289
Less: Current portion, net		(358,876	)		(308,123	)

Total long-term debt, net	$	2,273,837		$	1,866,166

Maturities of long-term debt borrowings outstanding at December 31, 2018 were as follows: $102.1 million in 2020; $55.9 million in 2021; none in 2022; none in 2023; $300.0 million in 2024; and $1,815.8 million in 2025 and thereafter.

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 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 2017, the Company paid in full, at maturity, $270 million in aggregate principal amount of 6.20% private placement senior notes.

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

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 was 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 first funding of the 2018 Private Placement were used to pay down domestic borrowings under the Company’s revolving credit facility. The proceeds from the second funding of the 2018 Private Placement will provide the Company with additional financial flexibility to support its growth plans, including its acquisition strategy.

In December 2007, the Company issued $100 million in aggregate principal amount of 6.30% private placement senior notes due December 2019. In July 2008, the Company issued $80 million in aggregate principal amount of 6.35% private placement senior notes due July 2018 (paid in full, at maturity, as previously noted). In September 2008, the Company issued $160 million in aggregate principal amount of 7.08% private placement senior notes due September 2018 (paid in full, at maturity, as previously noted). In December 2008, the Company issued $65 million in aggregate principal amount of 7.18% private placement senior notes due December 2018 (paid in full, at maturity, as previously noted). In September 2014, the Company issued $300 million in aggregate principal amount of 3.73% senior notes due September 2024, $100 million in aggregate principal amount of 3.83% senior notes due September 2026 and $100 million in aggregate principal amount of 3.98% senior notes due September 2029. In June 2015, the Company issued $50 million in aggregate principal amount of 3.91% senior notes due June 2025. In August 2015, the Company issued $100 million in aggregate principal amount of 3.96% senior notes due August 2025 and $50 million in aggregate principal amount of 4.45% senior notes due August 2035.

In September 2010, the Company issued an 80 million British pound ($102.1 million at December 31, 2018) 4.68% senior note due September 2020. In December 2011, the Company issued a 55 million Swiss franc ($55.9 million at December 31, 2018) 2.44% senior note due December 2021. In October 2016, the Company issued 300 million Euros ($343.7 million at December 31, 2018) in aggregate principal amount of 1.34% senior notes due October 2026 and 200 million Euros ($229.1 million at December 31, 2018) in aggregate principal amount of 1.53% senior notes due October 2028. In November 2016, the Company issued 150 million British pounds ($191.4 million at December 31, 2018) in aggregate principal amount of 2.59% senior notes due November 2028 and 75 million British pounds ($95.7 million at December 31, 2018) in aggregate principal amount of 2.70% senior notes due November 2031.

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 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.

Interest rates on outstanding borrowings under the revolving credit facility are at the applicable benchmark rate plus a negotiated spread or at the U.S. prime rate. At December 31, 2018 the Company had $260.0 million of borrowings outstanding under the revolving credit facility. At December 31, 2017, the Company did not have any

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

borrowings outstanding under the revolving credit facility. The weighted average interest rate on the revolving credit facility for the years ended December 31, 2018 and 2017 was 1.40% and 1.61%, respectively. The Company had outstanding letters of credit primarily under the revolving credit facility totaling $35.1 million and $42.1 million at December 31, 2018 and 2017, respectively.

The private placements, the senior notes and the revolving credit facility are subject to certain customary covenants, including financial covenants that, among other things, require the Company to maintain certain debt-to-EBITDA and interest coverage ratios. The Company was in compliance with all provisions of the debt arrangements at December 31, 2018.

Foreign subsidiaries of the Company had available credit facilities with local foreign lenders of $49.1 million and $45.4 million at December 31, 2018 and 2017, respectively. At December 31, 2018, foreign subsidiaries had debt borrowings outstanding totaling $2.3 million, which was reported in short-term borrowings. At December 31, 2017, foreign subsidiaries had debt borrowings outstanding totaling $4.6 million, which was reported in short-term borrowings.

The weighted average interest rate on total debt borrowings outstanding at December 31, 2018 and 2017 was 3.7% and 4.2%, respectively.

11. Share-Based Compensation

Under the terms of the Company’s stockholder-approved share-based plans, performance restricted stock units (“PRSUs”), incentive and non-qualified stock options and restricted stock have been, and may be, issued to the Company’s officers, management-level employees and members of its Board of Directors. Stock options granted prior to 2018 generally vest at a rate of one-fourth on each of the first four anniversaries of the grant date and have a maximum contractual term of seven years. Beginning in 2018, stock options granted generally vest at a rate of one-third on each of the first three anniversaries of the grant date and have a maximum contractual term of ten years. Restricted stock granted to employees prior to 2018 generally vests four years after the grant date (cliff vesting) and is subject to accelerated vesting due to certain events, including doubling of the grant price of the Company’s common stock as of the close of business during any five consecutive trading days. Beginning in 2018, restricted stock granted to employees generally vests one-third on each of the first three anniversaries of the grant date. Restricted stock granted to non-employee directors generally vests two years after the grant date (cliff vesting) and is subject to accelerated vesting due to certain events, including doubling of the grant price of the Company’s common stock as of the close of business during any five consecutive trading days.

In March 2018, the Company granted PRSUs to officers and certain key management-level employees an aggregate target award of approximately 52,000 shares of its common stock. The PRSUs vest three years from the grant date based on continuous service, with the number of shares earned (0% to 200% of the target award) depending upon the extent to which the Company achieves certain financial and market performance targets measured over the period from January 1, 2018 through December 31, 2020. Half of the PRSUs were valued in a manner similar to restricted stock as the financial targets are based on the Company’s operating results. The grant date fair value of these PRSUs are recognized as compensation expense over the vesting period based on the number of awards expected to vest at each reporting date. The other half of the PRSUs were valued using a Monte Carlo model as the performance target is related to the Company’s total shareholder return compared to a group of peer companies. The Company recognizes the grant date fair value of these awards as compensation expense ratably over the vesting period.

The Company issues previously unissued shares when stock options are exercised and shares are issued from treasury stock upon the award of restricted stock.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company measures and records compensation expense related to all stock awards by recognizing the grant date fair value of the awards over their requisite service periods in the financial statements. For grants under any of the Company’s plans that are subject to graded vesting over a service period, the Company recognizes expense on a straight-line basis over the requisite service period for the entire award.

Total share-based compensation expense was as follows for the years ended December 31:


	2018		2017		2016
	(In thousands)
Stock option expense	$	11,390	$	9,895	$	9,984
Restricted stock expense		14,400		15,196		12,046
PRSU expense		1,525		—		—

Total pre-tax expense	$	27,315	$	25,091	$	22,030

Pre-tax share-based compensation expense is included in the consolidated statement of income in either Cost of sales or Selling, general and administrative expenses, depending on where the recipient’s cash compensation is reported. The year ended December 31, 2017 includes a second quarter of 2017 $2.5 million pre-tax charge in corporate administrative expenses related to the accelerated vesting of restricted stock grants in association with the retirement of the Company’s Executive Chairman of the Board of Directors.

The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes-Merton option pricing model. The following weighted average assumptions were used in the Black-Scholes-Merton model to estimate the fair values of stock options granted during the years indicated:


	2018			2017			2016
Expected volatility		17.3	%		18.0	%		21.8	%
Expected term (years)		5.0			5.0			5.0
Risk-free interest rate		2.81	%		1.94	%		1.23	%
Expected dividend yield		0.76	%		0.60	%		0.77	%
Black-Scholes-Merton fair value per stock option granted	$	14.12		$	11.05		$	9.14

Expected volatility is based on the historical volatility of the Company’s stock over the stock options’ expected term. The Company used historical exercise data to estimate the stock options’ expected term, which represents the period of time that the stock options granted are expected to be outstanding. Management anticipates that the future stock option holding periods will be similar to the historical stock option holding periods. The risk-free interest rate for periods within the expected term of the stock option is based on the U.S. Treasury yield curve at the time of grant. The expected dividend yield is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the Company’s closing common stock price on the grant date. Compensation expense recognized for all share-based awards is net of estimated forfeitures. The Company’s estimated forfeiture rates are based on its historical experience.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a summary of the Company’s stock option activity and related information for the year ended December 31, 2018:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(In thousands)					(Years)		(In millions)

Outstanding at the beginning of the year		5,583		$	48.99
Granted		885			73.45
Exercised		(698	)		42.35
Forfeited		(140	)		56.55
Expired		(1	)		42.98

Outstanding at the end of the year		5,629		$	53.46		4.2	$	85.2

Exercisable at the end of the year		3,135		$	47.19		2.6	$	64.3

The aggregate intrinsic value of stock options exercised during 2018, 2017 and 2016 was $23.9 million, $41.3 million and $16.2 million, respectively. The total fair value of stock options vested during 2018, 2017 and 2016 was $10.1 million, $12.4 million and $10.8 million, respectively.

The following is a summary of the Company’s nonvested stock option activity and related information for the year ended December 31, 2018:


	Shares			Weighted Average Grant Date Fair Value
	(In thousands)

Nonvested stock options outstanding at the beginning of the year		2,699		$	10.47
Granted		885			14.12
Vested		(950	)		10.61
Forfeited		(140	)		10.81

Nonvested stock options outstanding at the end of the year		2,494		$	11.69

As of December 31, 2018, there was approximately $20 million of expected future pre-tax compensation expense related to the 2.5 million nonvested stock options outstanding, which is expected to be recognized over a weighted average period of approximately two years.

The fair value of restricted shares under the Company’s restricted stock arrangement is determined by the product of the number of shares granted and the Company’s closing common stock price on the grant date. Upon the grant of restricted stock, the fair value of the restricted shares (unearned compensation) at the grant date is charged as a reduction of capital in excess of par value in the Company’s consolidated balance sheet and is amortized to expense on a straight-line basis over the vesting period, which is the same as the calculated derived service period as determined on the grant date.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a summary of the Company’s nonvested restricted stock activity and related information for the year ended December 31, 2018:


	Shares			Weighted Average Grant Date Fair Value
	(In thousands)

Nonvested restricted stock outstanding at the beginning of the year		932		$	53.53
Granted		238			73.66
Vested		(221	)		52.74
Forfeited		(58	)		55.84

Nonvested restricted stock outstanding at the end of the year		891		$	58.98

The total fair value of restricted stock vested during 2018, 2017 and 2016 was $11.6 million, $15.8 million and $11.1 million, respectively. The weighted average fair value of restricted stock granted per share during 2018 and 2017 was $73.66 and $60.35, respectively. As of December 31, 2018, there was approximately $28 million of expected future pre-tax compensation expense related to the 0.9 million nonvested restricted shares outstanding, which is expected to be recognized over a weighted average period of less than two years.

12. Retirement Plans and Other Postretirement Benefits

Retirement and Pension Plans

The Company sponsors several retirement and pension plans covering eligible salaried and hourly employees. The plans generally provide benefits based on participants’ years of service and/or compensation. The following is a brief description of the Company’s retirement and pension plans.

The Company maintains contributory and noncontributory defined benefit pension plans. Benefits for eligible salaried and hourly employees under all defined benefit plans are funded through trusts established in conjunction with the plans. The Company’s funding policy with respect to its defined benefit plans is to contribute amounts that provide for benefits based on actuarial calculations and the applicable requirements of U.S. federal and local foreign laws. The Company estimates that it will make both required and discretionary cash contributions of approximately $2 million to $6 million to its worldwide defined benefit pension plans in 2019.

The Company uses a measurement date of December 31 (its fiscal year end) for its U.S. and foreign defined benefit pension plans.

The Company sponsors a 401(k) retirement and savings plan for eligible U.S. employees. Participants in the retirement and savings plan may contribute a specified portion of their compensation on a pre-tax basis, which varies by location. The Company matches employee contributions ranging from 20% to 100%, up to a maximum percentage ranging from 1% to 8% of eligible compensation or up to a maximum of $1,200 per participant in some locations.

The Company’s retirement and savings plan has a defined contribution retirement feature principally to cover U.S. salaried employees joining the Company after December 31, 1996. Under the retirement feature, the Company makes contributions for eligible employees based on a pre-established percentage of the covered employee’s salary subject to pre-established vesting. Employees of certain of the Company’s foreign operations participate in various local defined contribution plans.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company has nonqualified unfunded retirement plans for its Directors and certain retired employees. It also provides supplemental retirement benefits, through contractual arrangements and/or a Supplemental Executive Retirement Plan (“SERP”) covering certain current and former executives of the Company. These supplemental benefits are designed to compensate the executive for retirement benefits that would have been provided under the Company’s primary retirement plan, except for statutory limitations on compensation that must be taken into account under those plans. The projected benefit obligations of the SERP and the contracts will primarily be funded by a grant of shares of the Company’s common stock upon retirement or termination of the executive. The Company is providing for these obligations by charges to earnings over the applicable periods.

The following tables set forth the changes in net projected benefit obligation and the fair value of plan assets for the funded and unfunded defined benefit plans for the years ended December 31:

U.S. Defined Benefit Pension Plans:


	2018			2017
	(In thousands)

Change in projected benefit obligation:
Net projected benefit obligation at the beginning of the year	$	520,376		$	498,850
Service cost		3,777			3,538
Interest cost		19,183			20,693
Actuarial (gains) losses		(43,163	)		26,922
Gross benefits paid		(30,127	)		(29,627	)
Acquisition		1,460			—

Net projected benefit obligation at the end of the year	$	471,506		$	520,376

Change in plan assets:
Fair value of plan assets at the beginning of the year	$	619,993		$	517,073
Actual return on plan assets		(39,022	)		92,058
Employer contributions		541			40,489
Gross benefits paid		(30,127	)		(29,627	)
Acquisition		802			—

Fair value of plan assets at the end of the year	$	552,187		$	619,993

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Foreign Defined Benefit Pension Plans:


	2018			2017
	(In thousands)

Change in projected benefit obligation:
Net projected benefit obligation at the beginning of the year	$	284,178		$	258,297
Service cost		3,102			3,600
Interest cost		6,495			6,732
Foreign currency translation adjustments		(15,568	)		26,457
Employee contributions		108			228
Actuarial gains		(4,674	)		(1,563	)
Expenses paid from assets		(572	)		(608	)
Gross benefits paid		(11,114	)		(8,964	)
Plan amendments		6,808			(1	)

Net projected benefit obligation at the end of the year	$	268,763		$	284,178

Change in plan assets:
Fair value of plan assets at the beginning of the year	$	226,968		$	188,935
Actual return on plan assets		(11,171	)		13,869
Employer contributions		4,521			14,307
Employee contributions		108			228
Foreign currency translation adjustments		(11,939	)		19,201
Expenses paid from assets		(572	)		(608	)
Gross benefits paid		(11,114	)		(8,964	)

Fair value of plan assets at the end of the year	$	196,801		$	226,968

The accumulated benefit obligation consisted of the following at December 31:

U.S. Defined Benefit Pension Plans:


	2018		2017
	(In thousands)
Funded plans	$	456,319	$	503,309
Unfunded plans		5,453		6,046

Total	$	461,772	$	509,355

Foreign Defined Benefit Pension Plans:


	2018		2017
	(In thousands)
Funded plans	$	220,842	$	235,787
Unfunded plans		39,459		39,531

Total	$	260,301	$	275,318

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Weighted average assumptions used to determine benefit obligations at December 31:


	2018			2017
U.S. Defined Benefit Pension Plans:
Discount rate		4.40	%		3.75	%
Rate of compensation increase (where applicable)		3.75	%		3.75	%
Foreign Defined Benefit Pension Plans:
Discount rate		2.59	%		2.39	%
Rate of compensation increase (where applicable)		2.50	%		2.50	%

The following is a summary of the fair value of plan assets for U.S. plans at December 31:


	2018						2017
Asset Class	Total		Level 1		Level 2		Total		Level 1		Level 2
	(In thousands)
Corporate debt instruments	$	2,440	$	—	$	2,440	$	1,757	$	—	$	1,757
Corporate debt instruments – Preferred		10,967		—		10,967		12,574		—		12,574
Corporate stocks – Common		115,013		115,013		—		137,693		137,693		—
Municipal bonds		488		—		488		565		—		565
Registered investment companies		279,006		279,006		—		289,693		289,693		—
U.S. Government securities		362		—		362		246		—		246

Total investments		408,276		394,019		14,257		442,528		427,386		15,142

Investments measured at net asset value		143,911		—		—		177,465		—		—

Total investments	$	552,187	$	394,019	$	14,257	$	619,993	$	427,386	$	15,142

U.S. equity securities and global equity securities categorized as level 1 are traded on national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and global equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as level 2 if the custodian obtains corroborated quotes from a pricing vendor. Additionally, some U.S. equity securities and global equity securities are public investment vehicles valued using the Net Asset Value (“NAV”) provided by the fund manager. The NAV is the total value of the fund divided by the number of shares outstanding.

Fixed income securities categorized as level 1 are traded on national and international exchanges and are valued at their closing prices on the last trading day of the year and categorized as level 2 if valued by the trustee using pricing models that use verifiable observable market data, bids provided by brokers or dealers or quoted prices of securities with similar characteristics.

The expected long-term rate of return on these plan assets was 7.50% in 2018 and 2017. Equity securities included 512,565 shares of AMETEK, Inc. common stock with a market value of $34.7 million (6.3% of total plan investment assets) at December 31, 2018 and 512,565 shares of AMETEK, Inc. common stock with a market value of $37.1 million (6.0% of total plan investment assets) at December 31, 2017.

The objectives of the Company’s U.S. defined benefit plans’ investment strategy are to maximize the plans’ funded status and minimize Company contributions and plan expense. Because the goal is to optimize returns over the long term, an investment policy that favors equity holdings has been established. Since there may be periods of time where both equity and fixed-income markets provide poor returns, an allocation to alternative

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

assets may be made to improve the overall portfolio’s diversification and return potential. The Company periodically reviews its asset allocation, taking into consideration plan liabilities, plan benefit payment streams and the investment strategy of the pension plans. The actual asset allocation is monitored frequently relative to the established targets and ranges and is rebalanced when necessary. The target allocations for the U.S. defined benefits plans are approximately 50% equity securities, 20% fixed-income securities and 30% other securities and/or cash.

The equity portfolio is diversified by market capitalization and style. The equity portfolio also includes international components.

The objective of the fixed-income portion of the pension assets is to provide interest rate sensitivity for a portion of the assets and to provide diversification. The fixed-income portfolio is diversified within certain quality and maturity guidelines in an attempt to minimize the adverse effects of interest rate fluctuations.

Other than for investments in alternative assets, certain investments are prohibited. Prohibited investments include venture capital, private placements, unregistered or restricted stock, margin trading, commodities, short selling and rights and warrants. Foreign currency futures, options and forward contracts may be used to manage foreign currency exposure.

The following is a summary of the fair value of plan assets for foreign defined benefit pension plans at December 31:


	2018				2017
Asset Class	Total		Level 3		Total		Level 3
	(In thousands)
Life insurance	$	18,685	$	18,685	$	21,294	$	21,294

Total investments		18,685		18,685		21,294		21,294

Investments measured at net asset value		178,116		—		205,674		—

Total investments	$	196,801	$	18,685	$	226,968	$	21,294

Life insurance assets are considered level 3 investments as their values are determined by the sponsor using unobservable market data.

Alternative investments categorized as level 3 are valued based on unobservable inputs and cannot be corroborated using verifiable observable market data. Investments in level 3 funds are redeemable, however, cash reimbursement may be delayed or a portion held back until asset finalization.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a summary of the changes in the fair value of the foreign plans’ level 3 investments (fair value determined using significant unobservable inputs):


	Life Insurance
	(In thousands)

Balance, December 31, 2016	$	18,147

Actual return on assets:

Unrealized gains relating to instruments still held at the end of the year		3,147

Realized gains (losses) relating to assets sold during the year		—

Purchases, sales, issuances and settlements, net		—


Balance, December 31, 2017		21,294


Actual return on assets:
Unrealized losses relating to instruments still held at the end of the year		(2,609	)
Realized gains (losses) relating to assets sold during the year		—
Purchases, sales, issuances and settlements, net		—

Balance, December 31, 2018	$	18,685

The objective of the Company’s foreign defined benefit plans’ investment strategy is to maximize the long-term rate of return on plan investments, subject to a reasonable level of risk. Liability studies are also performed on a regular basis to provide guidance in setting investment goals with an objective to balance risks against the current and future needs of the plans. The trustees consider the risk associated with the different asset classes, relative to the plans’ liabilities and how this can be affected by diversification, and the relative returns available on equities, fixed-income investments, real estate and cash. Also, the likely volatility of those returns and the cash flow requirements of the plans are considered. It is expected that equities will outperform fixed-income investments over the long term. However, the trustees recognize the fact that fixed-income investments may better match the liabilities for pensioners. Because of the relatively young active employee group covered by the plans and the immature nature of the plans, the trustees have chosen to adopt an asset allocation strategy more heavily weighted toward equity investments. This asset allocation strategy will be reviewed, from time to time, in view of changes in market conditions and in the plans’ liability profile. The target allocations for the foreign defined benefit plans are approximately 70% equity securities, 15% fixed-income securities and 15% other securities, insurance or cash.

The assumption for the expected return on plan assets was developed based on a review of historical investment returns for the investment categories for the defined benefit pension assets. This review also considered current capital market conditions and projected future investment returns. The estimates of future capital market returns by asset class are lower than the actual long-term historical returns. The current low interest rate environment influences this outlook. Therefore, the assumed rate of return for U.S. plans is 7.50% and 6.52% for foreign plans in 2019.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and pension plans with an accumulated benefit obligation in excess of plan assets were as follows at December 31:

U.S. Defined Benefit Pension Plans:


	Projected Benefit Obligation Exceeds Fair Value of Assets				Accumulated Benefit Obligation Exceeds Fair Value of Assets
	2018		2017		2018		2017
	(In thousands)
Benefit obligation	$	6,928	$	6,046	$	6,928	$	6,046
Fair value of plan assets		809		—		809		—

Foreign Defined Benefit Pension Plans:


	Projected Benefit Obligation Exceeds Fair Value of Assets				Accumulated Benefit Obligation Exceeds Fair Value of Assets
	2018		2017		2018		2017
	(In thousands)
Benefit obligation	$	268,763	$	186,756	$	260,301	$	180,779
Fair value of plan assets		196,801		127,170		196,801		127,170

The following table provides the amounts recognized in the consolidated balance sheet at December 31:


	2018			2017
	(In thousands)

Funded status asset (liability):
Fair value of plan assets	$	748,988		$	846,961
Projected benefit obligation		(740,269	)		(804,553	)

Funded status at the end of the year	$	8,719		$	42,408

Amounts recognized in the consolidated balance sheet consisted of:
Noncurrent asset for pension benefits (other assets)	$	86,799		$	108,039
Current liabilities for pension benefits		(1,905	)		(1,901	)
Noncurrent liability for pension benefits		(76,175	)		(63,730	)

Net amount recognized at the end of the year	$	8,719		$	42,408

The following table provides the amounts recognized in accumulated other comprehensive income, net of taxes, at December 31:


Net amounts recognized:	2018		2017
	(In thousands)
Net actuarial loss	$	244,511	$	178,466
Prior service costs		4,432		(1,102	)
Transition asset		7		7

Total recognized	$	248,950	$	177,371

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides the components of net periodic pension benefit expense (income) for the years ended December 31:


	2018			2017			2016
	(In thousands)

Defined benefit plans:
Service cost	$	6,879		$	7,138		$	6,622
Interest cost		25,678			27,424			30,049
Expected return on plan assets		(59,325	)		(53,442	)		(51,140	)
Amortization of:
Net actuarial loss		12,092			14,591			10,224
Prior service costs		(49	)		(47	)		(52	)
Transition asset		1			1			1

Total net periodic benefit income		(14,724	)		(4,335	)		(4,296	)

Other plans:
Defined contribution plans		28,829			24,280			23,881
Foreign plans and other		6,185			5,866			5,694

Total other plans		35,014			30,146			29,575

Total net pension expense	$	20,290		$	25,811		$	25,279

The total net periodic benefit expense (income) is included in Cost of sales, General and administrative expense and Other income and expense in the consolidated statement of income. The estimated amount that will be amortized from accumulated other comprehensive income into net periodic pension benefit expense in 2019 for the net actuarial losses and prior service costs is expected to be approximately $16 million.

The following weighted average assumptions were used to determine the above net periodic pension benefit expense for the years ended December 31:


	2018			2017			2016

U.S. Defined Benefit Pension Plans:
Discount rate		4.40	%		4.25	%		4.80	%
Expected return on plan assets		7.50	%		7.50	%		7.75	%
Rate of compensation increase (where applicable)		3.75	%		3.75	%		3.75	%
Foreign Defined Benefit Pension Plans:
Discount rate		2.59	%		2.56	%		3.62	%
Expected return on plan assets		6.52	%		6.79	%		6.95	%
Rate of compensation increase (where applicable)		2.50	%		2.50	%		2.88	%

Estimated Future Benefit Payments

The estimated future benefit payments for U.S. and foreign plans are as follows: 2019 – $39.7 million; 2020 –$40.4 million; 2021 – $41.4 million; 2022 – $41.9 million; 2023 – $43.5 million; 2024 to 2028 – $220.3 million. Future benefit payments primarily represent amounts to be paid from pension trust assets. Amounts included that are to be paid from the Company’s assets are not significant in any individual year.

Postretirement Plans and Postemployment Benefits

The Company provides limited postretirement benefits other than pensions for certain retirees and a small number of former employees. Benefits under these arrangements are not funded and are not significant.

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company also provides limited postemployment benefits for certain former or inactive employees after employment but before retirement. Those benefits are not significant in amount.

The Company has a deferred compensation plan, which allows employees whose compensation exceeds the statutory IRS limit for retirement benefits to defer a portion of earned bonus compensation. The plan permits deferred amounts to be deemed invested in either, or a combination of, (a) an interest-bearing account, benefits from which are payable out of the general assets of the Company, or (b) the equivalent of a fund which invests in shares of the Company’s common stock on behalf of the employee. The amount deferred under the plan, including income earned, was $14.4 million and $25.4 million at December 31, 2018 and 2017, respectively. Administrative expense for the deferred compensation plan is borne by the Company and is not significant.

13. Contingencies

Indemnifications

In conjunction with certain acquisition and divestiture transactions, the Company may agree to make payments to compensate or indemnify other parties for possible future unfavorable financial consequences resulting from specified events (e.g., breaches of contract obligations or retention of previously existing environmental, tax or employee liabilities) whose terms range in duration and often are not explicitly defined. Where appropriate, the obligation for such indemnifications is recorded as a liability. Because the amount of these types of indemnifications generally is not specifically stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Further, the Company indemnifies its directors and officers for claims against them in connection with their positions with the Company. Historically, any such costs incurred to settle claims related to these indemnifications have been minimal for the Company. The Company believes that future payments, if any, under all existing indemnification agreements would not have a material impact on its consolidated results of operations, financial position or cash flows.

Asbestos Litigation

The Company (including its subsidiaries) has been named as a defendant in a number of asbestos-related lawsuits. Certain of these lawsuits relate to a business which was acquired by the Company and do not involve products which were manufactured or sold by the Company. In connection with these lawsuits, the seller of such business has agreed to indemnify the Company against these claims (the “Indemnified Claims”). The Indemnified Claims have been tendered to, and are being defended by, such seller. The seller has met its obligations, in all respects, and the Company does not have any reason to believe such party would fail to fulfill its obligations in the future. To date, no judgments have been rendered against the Company as a result of any asbestos-related lawsuit. The Company believes that it has good and valid defenses to each of these claims and intends to defend them vigorously.

Environmental Matters

Certain historic processes in the manufacture of products have resulted in environmentally hazardous waste by-products as defined by federal and state laws and regulations. At December 31, 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

AMETEK, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. The Company believes that it has

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good and valid defenses to each of these claims and intends to defend them vigorously. The Company believes it has established reserves for these lawsuits that are sufficient to satisfy its expected exposure. 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.

14. Leases and Other Commitments

Minimum aggregate rental commitments under noncancellable leases in effect at December 31, 2018 (principally for production and administrative facilities and equipment) amounted to $200.0 million, consisting of payments of $43.1 million in 2019, $35.7 million in 2020, $29.0 million in 2021, $23.3 million in 2022, $18.9 million in 2023 and $50 million thereafter. 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. Rental expense was $52.5 million in 2018, $49.7 million in 2017 and $46.3 million in 2016.

As of December 31, 2018 and 2017, the Company had $470.2 million and $390.6 million, respectively, in purchase obligations outstanding, which primarily consisted of contractual commitments to purchase certain inventories at fixed prices.

The Company does not provide significant guarantees on a routine basis. The Company primarily issues guarantees, stand-by letters of credit and surety bonds in the ordinary course of its business to provide financial or performance assurance to third parties on behalf of its consolidated subsidiaries to support or enhance the subsidiary’s stand-alone creditworthiness. The amounts subject to certain of these agreements vary depending on the covered contracts actually outstanding at any particular point in time. At December 31, 2018, the maximum amount of future payment obligations relative to these various guarantees was $94.5 million and the outstanding liability under certain of those guarantees was $2.3 million.

15. Reportable Segments and Geographic Areas Information

Descriptive Information about Reportable Segments

The Company has two reportable segments, EIG and EMG. The Company’s operating segments are identified based on the existence of segment managers. Certain of the Company’s operating segments have been aggregated for segment reporting purposes primarily on the basis of product type, production processes, distribution methods and similarity of economic characteristics.

EIG manufactures advanced instruments for the process, power and industrial, and aerospace markets. It provides process and analytical instruments for the oil and gas, petrochemical, pharmaceutical, semiconductor, automation, and food and beverage industries. EIG also provides instruments to the laboratory equipment, ultraprecision manufacturing, medical, and test and measurement markets. It makes power quality monitoring and metering devices, uninterruptible power supplies, programmable power equipment, electromagnetic compatibility test equipment and gas turbines sensors. EIG also provides dashboard instruments for heavy trucks and other vehicles, as well as instrumentation and controls for the food and beverage industries. It supplies the aerospace industry with aircraft and engine sensors, monitoring systems, power supplies, fuel and fluid measurement systems, and data acquisition systems.

EMG is a differentiated supplier of automation solutions, thermal management systems, specialty metals and electrical interconnects. It manufactures highly engineered electrical connectors and electronic packaging used to protect sensitive electronic devices. EMG also makes precision motion control products for data storage, medical devices, business equipment, automation and other applications. It supplies high-purity powdered

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metals, strip and foil, specialty clad metals and metal matrix composites. EMG also manufactures motors used in commercial appliances, fitness equipment, food and beverage machines, hydraulic pumps and industrial blowers. It produces motor-blower systems and heat exchangers used in thermal management and other applications on a variety of military and commercial aircraft and military ground vehicles. EMG also operates a global network of aviation maintenance, repair and overhaul facilities.

Measurement of Segment Results

Segment operating income represents net sales less all direct costs and expenses (including certain administrative and other expenses) applicable to each segment, but does not include interest expense. Net sales by segment are reported after elimination of intra- and intersegment sales and profits, which are insignificant in amount. Reported segment assets include allocations directly related to the segment’s operations. Corporate assets consist primarily of investments, prepaid pensions, insurance deposits and deferred taxes.

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Reportable Segment Financial Information

For sales by segment, see Note 3.


	2018			2017			2016
	(In thousands)
Operating income and income before income taxes:
Segment operating income(1)(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		(70,369	)		(74,805	)		(54,332	)

Consolidated operating income		1,075,540			903,620			790,979
Interest and other expenses, net		(87,795	)		(106,891	)		(97,876	)

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

Assets:
Electronic Instruments	$	5,625,303		$	4,803,575
Electromechanical		2,685,674			2,535,503

Total segment assets		8,310,977			7,339,078
Corporate		351,311			456,986

Consolidated assets	$	8,662,288		$	7,796,064

Additions to property, plant and equipment(3):
Electronic Instruments	$	110,858		$	54,321		$	45,091
Electromechanical		42,461			36,829			39,340

Total segment additions to property, plant and equipment		153,319			91,150			84,431
Corporate		3,496			3,002			1,914

Consolidated additions to property, plant and equipment	$	156,815		$	94,152		$	86,345

Depreciation and amortization:
Electronic Instruments	$	121,709		$	108,053		$	104,284
Electromechanical		75,801			73,222			73,767

Total segment depreciation and amortization		197,510			181,275			178,051
Corporate		1,980			1,952			1,665

Consolidated depreciation and amortization	$	199,490		$	183,227		$	179,716

(1)	Segment operating income represents net sales less all direct costs and expenses (including certain administrative and other expenses) applicable to each segment, but does not include interest expense.

(2)	Effective January 1, 2018, the Company retrospectively adopted ASU 2017-07. See Note 2.

(3)	Includes $74.6 million in 2018, $19.1 million in 2017 and $23.1 million in 2016 from acquired businesses.

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Geographic Areas

Information about the Company’s operations in different geographic areas for the years ended December 31, 2018 and 2017 is shown below. For sales by geography, see Note 3.


	2018		2017
	(In thousands)
Long-lived assets from continuing operations (excluding intangible assets):
United States	$	380,855	$	325,908

International(1):
United Kingdom		55,527		62,643
European Union countries		78,524		65,204
Asia		11,846		12,073
Other foreign countries		27,378		27,468

Total international		173,275		167,388

Total consolidated	$	554,130	$	493,296

(1)	Represents long-lived assets of foreign-based operations only.

16. Additional Consolidated Income Statement and Cash Flow Information

Included in other income are interest and other investment income of $2.0 million, $2.1 million and $1.2 million for 2018, 2017 and 2016, respectively. Income taxes paid in 2018, 2017 and 2016 were $195.2 million, $176.6 million and $180.8 million, respectively. Cash paid for interest was $83.6 million, $96.1 million and $91.8 million in 2018, 2017 and 2016, respectively.

17. Stockholders’ Equity

In 2017, the Company repurchased approximately 114,000 shares of its common stock for $6.9 million in cash under its share repurchase authorization. At December 31, 2017, $368.7 million was available under the Company’s Board of Directors authorization for future share repurchases.

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. In 2018, the Company repurchased approximately 5,079,000 shares of its common stock for $367.7 million in cash under its share repurchase authorization. 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.

At December 31, 2018, the Company held 36.5 million shares in its treasury at a cost of $ 1,570.2 million, compared with 31.8 million shares at a cost of $1,209.1 million at December 31, 2017. The number of shares outstanding at December 31, 2018 was 227.1 million shares, compared with 231.2 million shares at December 31, 2017.

18. Restructuring Charges

During the fourth quarter of 2016, the Company recorded pre-tax restructuring charges totaling $25.6 million, which had the effect of reducing net income by $17.0 million. The restructuring charges were

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reported in the consolidated statement of income as follows: $24.0 million in Cost of sales and $1.6 million in Selling, general and administrative expenses. The restructuring charges were reported in operating income as follows: $12.4 million in EIG, $11.6 million in EMG and $1.6 million in corporate administrative expenses. The restructuring actions primarily related to $19.3 million in severance costs for a reduction in workforce and $6.2 million of asset write-downs in response to the impact of a weak global economy on certain of the Company’s businesses and the effects of a continued strong U.S. dollar. The restructuring activities have been broadly implemented across the Company’s various businesses with most actions expected to be completed in 2019.

During the fourth quarter of 2015, the Company recorded pre-tax restructuring charges totaling $20.7 million, which had the effect of reducing net income by $13.9 million. The restructuring charges were reported in the consolidated statement of income as follows: $20.0 million in Cost of sales and $0.7 million in Selling, general and administrative expenses. The restructuring charges were reported in operating income as follows: $9.3 million in EIG, $10.8 million in EMG and $0.7 million in corporate administrative expenses. The restructuring actions primarily related to a reduction in workforce in response to the impact of a weak global economy on certain of the Company’s businesses and the effects of a continued strong U.S. dollar. The restructuring activities have been broadly implemented across the Company’s various businesses with all actions expected to be completed in 2019.

Accrued liabilities in the Company’s consolidated balance sheet included amounts related to the fourth quarters of 2016 and 2015 restructuring charges as follows (in millions):


	Fourth Quarter of 2016 Restructuring			Fourth Quarter of 2015 Restructuring

Balance at December 31, 2016	$	19.2		$	9.2

Utilization		(6.4	)		(2.4	)

Foreign currency translation adjustments and other		—			(0.1	)


Balance at December 31, 2017		12.8			6.7
Utilization		(5.5	)		(1.0	)
Foreign currency translation adjustments and other		(2.1	)		(0.8	)

Balance at December 31, 2018	$	5.2		$	4.9

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19. Quarterly Financial Data (Unaudited)


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total Year
	(In thousands, except per share amounts)
2018
Net sales(1)	$	1,172,647	$	1,208,935	$	1,192,962	$	1,271,328	$	4,845,872
Operating income	$	258,168	$	270,086	$	265,266	$	282,020	$	1,075,540
Net income(2)	$	181,340	$	193,860	$	191,213	$	211,520	$	777,933
Basic earnings per share(2)(3)	$	0.79	$	0.84	$	0.83	$	0.92	$	3.37
Diluted earnings per share(2)(3)	$	0.78	$	0.83	$	0.82	$	0.91	$	3.34
Dividends paid per share	$	0.14	$	0.14	$	0.14	$	0.14	$	0.56

2017

Net sales	$	1,007,682	$	1,064,604	$	1,084,799	$	1,143,085	$	4,300,170

Operating income(4)(5)	$	217,447	$	229,549	$	230,038	$	226,586	$	903,620

Net income(5)(6)	$	138,926	$	150,481	$	153,531	$	238,532	$	681,470

Basic earnings per share(3)(5)(6)	$	0.61	$	0.65	$	0.67	$	1.03	$	2.96

Diluted earnings per share(3)(5)(6)	$	0.60	$	0.65	$	0.66	$	1.03	$	2.94

Dividends paid per share	$	0.09	$	0.09	$	0.09	$	0.09	$	0.36

(1)	Effective January 1, 2018, the Company adopted ASC 606. See Note 3.

(2)	During 2018, the Company recorded a net benefit of $11.8 million in the consolidated statement of income as a component of Provision for income taxes related to the Tax Act. The net benefit related to the Tax Act had the effect of increasing net income for 2018 by $11.8 million. See Note 9.

(3)	The sum of quarterly earnings per share may not equal total year earnings per share due to rounding of earnings per share amounts, and differences in weighted average shares and equivalent shares outstanding for each of the periods presented.

(4)	Quarter and year ending 2017 operating income amounts were restated in accordance with the retrospective adoption of ASU 2017-07. See Note 2.

(5)	During 2017, the Company recorded pre-tax restructuring charges totaling $10.8 million, recorded in the fourth quarter of 2017. The restructuring charges had the effect of reducing net income for 2017 by $9.1 million.

(6)	During 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component of Provision for income taxes related to the Tax Act. The net benefit related to the Tax Act had the effect of increasing net income for 2017 by $91.6 million. See Note 9.

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