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AMETEK INC/ - Quarter Report: 2019 June (Form 10-Q)

10-Q
Table of Contents
 
 
     
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
 THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
 SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
                    
to
                    
Commission File Number
1-12981
 
AMETEK, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
14-1682544
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
1100 Cassatt Road
Berwyn, Pennsylvania
 
19312-1177
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(610)
 647-2121
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated
 filer
 
 
Smaller reporting company
 
             
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Exchange Act).    Yes  
    No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
 
AME
 
New York Stock Exchange
The number of shares of the registrant’s common stock outstanding as of the latest practicable date was: Common Stock, $0.01 Par Value, outstanding at July 25, 2019 was 228,345,814​​​​​​​ shares.
 
 
  
 
Table of Contents
 
AMETEK, Inc.
Form 10-Q
Table of Contents
 
 
Page
 
   
 
             
Item 1.
     
 
         
   
2
 
   
3
 
   
4
 
   
5
 
   
6
 
   
7
 
             
Item 2.
     
21
 
Item 4.
     
27
 
         
   
 
             
Item 2.
     
28
 
Item 6.
     
29
 
         
   
30
 
 
 
Table of Contents
 
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
 
 
 
AMETEK, Inc.
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 30,
   
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Net sales
 
$
1,289,412
    $
1,208,935
   
$
2,577,103
    $
2,381,582
 
                                 
Cost of sales
   
838,153
     
791,248
     
1,689,460
     
1,568,048
 
Selling, general and administrative
   
155,849
     
147,601
     
308,974
     
285,280
 
                                 
Total operating expenses
   
994,002
     
938,849
     
1,998,434
     
1,853,328
 
                                 
Operating income
   
295,410
     
270,086
     
578,669
     
528,254
 
                                 
Interest expense
   
(21,475
)
   
(20,784
)    
(44,128
)
   
(42,470
)
Other expense, net
   
(3,336
)
   
(1,081
)    
(7,004
)
   
(1,739
)
                                 
Income before income taxes
   
270,599
     
248,221
     
527,537
     
484,045
 
                                 
Provision for income taxes
   
55,096
     
54,361
     
107,766
     
108,845
 
                                 
Net income
 
$
215,503
    $
193,860
   
$
419,771
    $
375,200
 
                                 
Basic earnings per share
 
$
0.95
    $
0.84
   
$
1.85
    $
1.62
 
                                 
Diluted earnings per share
 
$
0.94
    $
0.83
   
$
1.83
    $
1.61
 
                                 
Weighted average common shares outstanding:
   
     
     
     
 
Basic shares
   
227,577
     
231,252
     
227,219
     
231,090
 
                                 
Diluted shares
   
229,328
     
233,297
     
229,007
     
233,131
 
                                 
Dividends declared and paid per share
 
$
0.14
    $
0.14
   
$
0.28
    $
0.28
 
                                 
 
 
 
See accompanying notes.
 
2
 
 
 
Table of Contents
 
AMETEK, Inc.
Consolidated Statement of Comprehensive Income
(In thousands)
(Unaudited)
 
Three Months Ended
   
Six Months Ended
 
 
June 30,
   
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Total comprehensive income
 
$
219,752
    $
154,538
   
$
435,033
    $
350,296
 
                                 
See accompanying notes.
 
3
 
 
Table of Contents
 
AMETEK, Inc.
Consolidated Balance Sheet
(In thousands)
                 
 
June 30,
   
December 31,
 
 
2019
   
2018
 
 
(Unaudited)
   
 
ASSETS
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
 
$
567,912
    $
353,975
 
Receivables, net
   
757,522
     
732,839
 
Inventories, net
   
634,138
     
624,744
 
Other current assets
   
167,581
     
124,586
 
                 
Total current assets
   
2,127,153
     
1,836,144
 
                 
Property, plant and equipment, net
   
538,256
     
554,130
 
Right of use assets, net
   
182,902
     
—  
 
Goodwill
   
3,613,182
     
3,612,033
 
Other intangibles, net
   
2,338,511
     
2,403,771
 
Investments and other assets
   
269,598
     
256,210
 
                 
Total assets
 
$
9,069,602
    $
8,662,288
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
     
 
Current liabilities:
   
     
 
Short-term borrowings and current portion of long-term debt, net
 
$
98,356
    $
358,876
 
Accounts payable
   
390,443
     
399,571
 
Customer advanced payments
   
140,635
     
137,229
 
Income taxes payable
   
33,029
     
48,597
 
Accrued liabilities and other
   
316,095
     
314,431
 
                 
Total current liabilities
   
978,558
     
1,258,704
 
                 
Long-term debt, net
   
2,368,690
     
2,273,837
 
Deferred income taxes
   
544,218
     
528,336
 
Other long-term liabilities
   
511,355
     
359,489
 
                 
Total liabilities
   
4,402,821
     
4,420,366
 
                 
Stockholders’ equity:
   
     
 
Common stock
   
2,654
     
2,640
 
Capital in excess of par value
   
759,775
     
706,743
 
Retained earnings
   
6,009,968
     
5,653,811
 
Accumulated other comprehensive loss
   
(535,826
)
   
(551,088
)
Treasury stock
   
(1,569,790
)
   
(1,570,184
)
                 
Total stockholders’ equity
   
4,666,781
     
4,241,922
 
                 
Total liabilities and stockholders’ equity
 
$
9,069,602
    $
8,662,288
 
                 
 
 
See accompanying notes.
 
4
 
 
 
Table of Contents
 
AMETEK, Inc.
Consolidated Statement of Stockholders’ Equity
(In thousands)
(Unaudited)
                                 
 
Three months ended
June 30,
 
 
Six months ended
June 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Capital stock
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $0.01 par value
 
$
—  
    $
—  
   
$
—  
    $
—  
 
 
 
 
 
           
 
 
         
Common stock, $0.01 par value
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
2,647
     
2,634
   
 
2,640
     
2,631
 
Shares issued
 
 
7
     
3
   
 
14
     
6
 
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
2,654
     
2,637
   
 
2,654
     
2,637
 
 
 
 
 
           
 
 
         
Capital in excess of par value
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
738,173
     
673,516
   
 
706,743
     
660,894
 
Issuance of common stock under employee stock plans
 
 
13,277
     
(37
)  
 
37,586
     
7,014
 
Share-based compensation costs
 
 
8,325
     
7,384
   
 
15,446
     
12,955
 
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
759,775
     
680.863
   
 
759,775
     
680,863
 
 
 
 
 
           
 
 
         
Retained earnings
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
5,826,313
     
5,153,722
   
 
5,653,811
     
5,002,419
 
Net income
 
 
215,503
     
193,860
   
 
419,771
     
375,200
 
Cash dividends paid
 
 
(31,849
)    
(32,351
)  
 
(63,615
)    
(64,653
)
Other
 
 
1
     
1
   
 
1
     
2,266
 
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
6,009,968
     
5,315,232
   
 
6,009,968
     
5,315,232
 
 
 
 
 
           
 
 
         
Accumulated other comprehensive (loss) income
 
 
     
   
 
     
 
Foreign currency translation:
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
(294,082
)    
(239,620
)  
 
(302,138
)    
(251,909
)
Translation adjustments
 
 
(2,789
)    
(70,213
)  
 
6,175
     
(40,532
)
Change in long-term intercompany notes
 
 
3,396
     
(14,706
)  
 
(1,020
)    
(9,302
)
Net investment hedge instruments gain (loss), net of tax of ($220) and ($13,967)
for the quarter ended June 30, 2019 and 2018 and ($1,350) and ($6,625) for the six months ended June 30, 2019 and 2018, respectively
 
 
685
     
43,364
   
 
4,193
     
20,568
 
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
(292,790
)    
(281,175
)  
 
(292,790
)    
(281,175
)
 
 
 
 
           
 
 
         
Defined benefit pension plans:
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
(245,993
)    
(175,138
)  
 
(248,950
)    
(177,371
)
Amortization of net actuarial loss (gain) and other, net of tax of ($873) and ($719) for the
quarter ended June 30, 2019 and 2018, and ($1,746) and ($1,438) for the six months ended June 30, 2019 and 2018, respectively
 
 
2,957
     
2,233
   
 
5,914
     
4,466
 
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
(243,036
)    
(172,905
)  
 
(243,036
)    
(172,905
)
 
 
 
 
           
 
 
         
Unrealized holding gain (loss) on
available-for-sale
securities:
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
—  
     
—  
   
 
—  
     
104
 
Increase (decrease) during the year, net of tax
 
 
—  
     
—  
   
 
—  
     
(104
)
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
—  
     
—  
   
 
—  
     
—  
 
 
 
 
 
           
 
 
         
Accumulated other comprehensive loss at the end of the period
 
 
(535,826
)    
(454,080
)  
 
(535,826
)    
(454,080
)
 
 
 
 
           
 
 
         
Treasury stock
 
 
     
   
 
     
 
Balance at the beginning of the period
 
 
(1,570,437
)    
(1,210,717
)  
 
(1,570,184
)    
(1,209,135
)
Issuance of common stock under employee stock plans
 
 
6,832
     
8,050
   
 
6,716
     
6,586
 
Purchase of treasury stock
 
 
(6,185
)    
(3,889
)  
 
(6,322
)    
(4,007
)
 
 
 
 
           
 
 
         
Balance at the end of the period
 
 
(1,569,790
)    
(1,206,556
)  
 
(1,569,790
)    
(1,206,556
)
 
 
 
 
           
 
 
         
Total stockholders’ equity
 
$
4,666,781
    $
4,338,096
   
$
4,666,781
    $
4,338,096
 
                                 
 
 
 
 
 
 
 
See accompanying notes.
 
5
 
 
 
Table of Contents
 
AMETEK, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
                 
 
Six Months Ended
 
 
June 30,
 
 
2019
   
2018
 
Cash provided by (used for):
   
     
 
Operating activities:
   
     
 
Net income
 
$
419,771
    $
375,200
 
Adjustments to reconcile net income to total operating activities:
   
     
 
Depreciation and amortization
   
114,673
     
97,777
 
Deferred income taxes
   
7,347
     
(5,734
)
Share-based compensation expense
   
15,446
     
12,955
 
Gain on sale of facilities
   
(735
)
   
—  
 
Net change in assets and liabilities, net of acquisitions
   
(110,690
)
   
(99,526
)
Pension contributions
   
(1,534
)
   
(1,404
)
Other, net
   
(1,700
)
   
1,274
 
                 
Total operating activities
   
442,578
     
380,542
 
                 
Investing activities:
   
     
 
Additions to property, plant and equipment
   
(43,278
)
   
(28,565
)
Purchases of businesses, net of cash acquired
   
—  
     
(374,644
)
Other, net
   
3,667
     
1,481
 
                 
Total investing activities
   
(39,611
)
   
(401,728
)
                 
Financing activities:
   
     
 
Net change in short-term borrowings
   
(260,802
)
   
(44
)
Proceeds from long-term borrowings
   
100,000
     
—  
 
Repurchases of common stock
   
(6,322
)
   
(4,007
)
Cash dividends paid
   
(63,615
)
   
(64,653
)
Proceeds from stock option exercises
   
45,830
     
18,264
 
Other, net
   
(6,613
)
   
(5,108
)
                 
Total financing activities
   
(191,522
)
   
(55,548
)
                 
Effect of exchange rate changes on cash and cash equivalents
   
2,492
     
(11,873
)
                 
Increase (decrease) in cash and cash equivalents
   
213,937
     
(88,607
)
                 
Cash and cash equivalents:
   
     
 
Beginning of period
   
353,975
     
646,300
 
                 
End of period
 
$
567,912
    $
557,693
 
                 
 
 
 
See accompanying notes.
 
6
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
1.
Basis of Presentation
 
 
 
 
 
 
 
 
The accompanying consolidated financial statements are unaudited. AMETEK, Inc. (the “Company”) believes that all adjustments (which primarily consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial position of the Company at June 30, 2019, the consolidated results of its operations for the three and six months ended June 30, 2019 and 2018 and its cash flows for the six months ended June 30, 2019 and 2018 have been included. Quarterly results of operations are not necessarily indicative of results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes presented in the Company’s Annual Report on Form
 10-K
for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission.
As discussed below in Note 2, effective January 1, 2019, the Company adopted the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No.
 2016-02
(Topic 842),
Leases
(“ASU
 2016-02”)
using the effective date transition method. Amounts and disclosures set forth in this Form
 10-Q
reflect this change.
2.
Recent Accounting Pronouncements
 
 
 
 
 
 
 
 
In February 2016, the FASB issued ASU No.
 2016-02
Leases (ASC 842). In July 2018, the FASB issued ASU No.
 2018-10,
“Codification Improvements to Topic 842, Leases” (ASU
2018-10),
which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No.
 2018-11,
“Leases (Topic 842) - Targeted Improvements” (ASU
2018-11),
which addressed implementation issues related to the new lease standard. These and certain other lease-related ASUs have generally been codified in ASC 842. ASC 842 supersedes the lease accounting requirements in Accounting Standards Codification Topic 840, Leases (ASC 840). ASC 842 establishes a
right-of-use
model that requires a lessee to record a
right-of-use
(“ROU”) asset and a lease liability on the balance sheet for all leases. Under ASC 842, leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASC 842 on January 1, 2019 using the effective date transition method. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods.
The Company has elected certain practical expedients permitted under the transition guidance within ASC 842 to leases that commenced before January 1, 2019, including the package of practical expedients. The election of the package of practical expedients resulted in the Company not reassessing prior conclusions under ASC 840 related to lease identification, lease classification and initial direct costs for expired and existing leases prior to January 1, 2019. The Company did not elect the practical expedient to not record short-term leases on its consolidated balance sheet. The adoption of ASU
2016-02
did not have a significant impact on the Company’s consolidated results of operations or cash flows. Upon adoption, the Company recognized a ROU asset and lease liability of $192.4 million and $198.6 million, respectively. See Note 8.
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. The Company adopted ASU
2018-02
on January 1, 2019, and upon adoption, the Company did not 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
 
7
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
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 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
 
 
 
 
 
 
 
 
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.
The outstanding contract asset and (liability) accounts were as follows:
                 
 
2019
   
2018
 
 
(In thousands)
 
Contract assets - January 1
  $
58,266
    $
32,658
 
Contract assets – June 30
   
82,063
     
41,722
 
                 
Change in contract assets – increase
   
23,797
     
9,064
 
                 
Contract liabilities – January 1
   
146,162
     
117,058
 
Contract liabilities – June 30
   
151,447
     
142,016
 
                 
Change in contract liabilities – increase
   
(5,285
)
   
(24,958
)
                 
Net change
 
$
18,512
    $
(15,894
)
                 
 
 
 
 
 
 
 
 
The net change was driven by higher contract assets and an increase in contract liabilities during the period. For the six months ended June 30, 2019 and 2018, the Company recognized revenue of $
110.3
million and $89.1 million, respectively, 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 June 30, 2019 and December 31, 2018, $10.8 million and $8.9 million of Customer advanced payments (contract liabilities), respectively, were recorded in Other long-term liabilities in the consolidated balance sheets.
 
8
 
 
 
 
Table of Contents
 
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
Applying the practical expedient available under ASC 606, the remaining performance
obligations exceeding one year as of June 30, 2019 and December 31, 2018 were $164.4 million and $187.2 million, respectively. Remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from the balance sheet date, 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 is shown below. Net sales were attributed to geographic areas based on the location of the customer.
 
Three Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2019
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
United States
 
$
425,543
   
$
250,904
   
$
676,447
   
$
828,935
   
$
511,658
   
$
1,340,593
 
                                                 
International (1):
   
     
     
     
     
     
 
United Kingdom
   
12,920
     
32,450
     
45,370
     
28,347
     
66,338
     
94,685
 
European Union countries
   
100,835
     
103,362
     
204,198
     
203,620
     
209,781
     
413,401
 
Asia
   
185,287
     
48,577
     
233,863
     
379,134
     
95,688
     
474,821
 
Other foreign countries
   
95,662
     
33,872
     
129,534
     
187,122
     
66,480
     
253,603
 
                                                 
Total international
   
394,704
     
218,261
     
612,965
     
798,223
     
438,287
     
1,236,510
 
                                                 
Consolidated net sales
 
$
820,247
   
$
469,165
   
$
1,289,412
   
$
1,627,158
   
$
949,945
   
$
2,577,103
 
                                                 
 
(1) Includes U.S. export sales of $
322.1
 million and $
647.5
​​​​​​​ million for the three months ended and the six months ended, respectively.
Information about the Company’s operations in different geographic areas is shown below. Net sales were attributed to geographic areas based on the location of the customer.
 
Three Months Ended
June 30, 2018
   
Six Months Ended
June 30, 2018
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
United States
 
$
357,560
   
$
241,935
   
$
599,495
   
$
686,636
   
$
472,799
   
$
1,159,435
 
                                                 
International(1):
   
     
     
     
     
     
 
United Kingdom
   
15,588
     
33,166
     
48,754
     
29,328
     
68,549
     
97,877
 
European Union countries
   
95,778
     
98,585
     
194,363
     
188,080
     
206,399
     
394,479
 
Asia
   
191,169
     
55,435
     
246,604
     
382,654
     
106,498
     
489,152
 
Other foreign countries
   
84,363
     
35,356
     
119,719
     
174,186
     
66,453
     
240,639
 
                                                 
Total international
   
386,898
     
222,542
     
609,440
     
774,248
     
447,899
     
1,222,147
 
                                                 
Consolidated net sales
 
$
744,458
   
$
464,477
   
$
1,208,935
   
$
1,460,884
   
$
920,698
   
$
2,381,582
 
                                                 
 
(1) Includes U.S. export sales of $
320.5
 million and $
635.6
​​​​​​​ million for the three months ended and the six months ended, respectively.
 
9
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
Major Products and Services
The Company’s major products and services in the reportable segments were as follows:
 
Three Months Ended 
June 30, 2019
   
Six Months Ended 
June 30, 2019
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
Process and analytical instrumentation
 
$
583,938
   
$
—  
   
$
583,938
   
$
1,161,278
   
$
—  
   
$
1,161,278
 
Aerospace and Power
   
236,309
     
120,392
     
356,701
     
465,880
     
239,270
     
705,150
 
Automation and engineered solutions
   
—  
     
348,773
     
348,773
     
—  
     
710,675
     
710,675
 
                                                 
Consolidated net sales
 
$
820,247
   
$
469,165
   
$
1,289,412
   
$
1,627,158
   
$
949,945
   
$
2,577,103
 
                                                 
             
 
Three Months Ended
June 30, 2018
   
Six Months Ended
June 30, 2018
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
Process and analytical instrumentation
 
$
515,854
   
$
—  
   
$
515,854
   
$
1,015,491
   
$
—  
   
$
1,015,491
 
Aerospace and Power
   
228,604
     
113,403
     
342,007
     
445,393
     
222,060
     
667,453
 
Automation and engineered solutions
   
—  
     
351,074
     
351,074
     
—  
     
698,638
     
698,638
 
                                                 
Consolidated net sales
 
$
744,458
   
$
464,477
   
$
1,208,935
   
$
1,460,884
   
$
920,698
   
$
2,381,582
 
                                                 
Timing of Revenue Recognition
The Company’s timing of revenue recognition was as follows:
 
Three Months Ended 
June 30, 2019
   
Six Months Ended 
June 30, 2019
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
Products transferred at a point in time
 
$
654,155
   
$
434,175
   
$
1,088,330
   
$
1,331,988
   
$
869,780
   
$
2,201,768
 
Products and services transferred over time
   
166,092
     
34,990
     
201,082
     
295,170
     
80,165
     
375,335
 
                                                 
Consolidated net sales
 
$
820,247
   
$
469,165
   
$
1,289,412
   
$
1,627,158
   
$
949,945
   
$
2,577,103
 
                                                 
             
 
Three Months Ended 
June 30, 2018
   
Six Months Ended 
June 30, 2018
 
 
EIG
   
EMG
   
Total
   
EIG
   
EMG
   
Total
 
 
(In thousands)
 
Products transferred at a point in time
 
$
603,185
   
$
437,630
   
$
1,040,815
   
$
1,228,607
   
$
866,712
   
$
2,095,319
 
Products and services transferred over time
   
141,273
     
26,847
     
168,120
     
232,277
     
53,986
     
286,263
 
                                                 
Consolidated net sales
 
$
744,458
   
$
464,477
   
$
1,208,935
   
$
1,460,884
   
$
920,698
   
$
2,381,582
 
                                                 
 
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.
 
10
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
Changes in the accrued product warranty obligation were as follows:
 
                 
 
Six Months Ended 
June 30,
 
 
2019
   
2018
 
 
(In thousands)
 
Balance at the beginning of the period
  $
 
23,482
    $
22,872
 
Accruals for warranties issued during the period
   
8,196
     
5,904
 
Settlements made during the period
   
(9,275
)
   
(7,068
)
Warranty accruals related to acquired businesses and other during the period
   
(89
)
   
796
 
                 
Balance at the end of the period
 
$   
22,314
    $  
22,504
 
                 
 
 
 
 
4.
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). Securities that are anti-dilutive have been excluded and are not significant. The number of weighted average shares used in the calculation of basic earnings per share and diluted earnings per share was as follows:
                                 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
 
(In thousands)
 
Weighted average shares:
   
     
     
     
 
Basic shares
   
227,577
     
231,252
     
227,219
     
231,090
 
Equity-based compensation plans
   
1,751
     
2,045
     
1,788
     
2,041
 
                                 
Diluted shares
   
229,328
     
233,297
     
229,007
     
233,131
 
                                 
 
 
 
 
 
 
 
 
5.
Fair Value Measurements
 
 
 
 
 
 
 
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the 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.
 
11
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
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 June 30, 2019 and December 31, 2018:
                 
 
June 30, 2019
   
December 31, 2018
 
 
Fair Value
   
Fair Value
 
 
(In thousands)
 
Fixed-income investments
 
$
8,137
    $
7,655
 
 
 
 
 
 
 
 
 
The fair value of fixed-income investments, which are valued as level 1 investments, was based on quoted market prices. The fixed-income investments are shown as a component of long-term assets on the consolidated balance sheet.
For the six months ended June 30, 2019 and 2018, gains and losses on the investments noted above were not significant.
No
 transfers between level 1 and level 2 investments occurred during the six months ended June 30, 2019 and 2018.
Financial Instruments
Cash, cash equivalents and fixed-income investments are recorded at fair value at June 30, 2019 and December 31, 2018 in the accompanying consolidated balance sheet.
The following table provides the estimated fair values of the Company’s financial instrument liabilities, for which fair value is measured for disclosure purposes only, compared to the recorded amounts at June 30, 2019 and December 31, 2018:
                                 
 
June 30, 2019
   
December 31, 2018
 
 
Recorded
Amount
   
Fair Value
   
Recorded
Amount
   
Fair Value
 
 
(In thousands)
 
Long-term debt, net (including current portion)
 
$
(2,473,695
)
 
$
(2,611,123
)
  $
(2,378,809
)   $
(2,368,676
)
 
 
 
 
 
 
 
 
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.
Foreign Currency
At June 30, 2019, the Company had
no
forward contracts outstanding. For the six months ended June 30, 2019, realized gains and losses on foreign currency forward contracts were not significant. The Company does not typically designate its foreign currency forward contracts as hedges.
6.
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 June 30, 2019, 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.
 
12
 
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
At June 30, 2019, the Company had $387.8 million of British-pound-denominated loans, which were designated as a hedge against the net investment in British pound functional currency foreign subsidiaries. At June 30, 2019, the Company had $654.5 million in Euro-denominated loans, which were designated as a hedge against the net investment in Euro functional currency foreign subsidiaries. As a result of the British-pound- and Euro-denominated loans being designated and 100% effective as net investment hedges, $5.5 million of
pre-tax
currency remeasurement gains have been included in the foreign currency translation component of other comprehensive income for the six months ended June 30, 2019.
7.
Inventories, net
                 
 
June 30, 
2019
   
December 31,
2018
 
 
(In thousands)
 
Finished goods and parts
 
$
109,626
    $
107,289
 
Work in process
   
118,327
     
117,899
 
Raw materials and purchased parts
   
406,185
     
399,556
 
                 
Total inventories, net
 
$
634,138
    $
624,744
 
                 
 
 
 
 
 
 
8.
Leases
 
 
 
 
 
 
The Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company has lease agreements which include lease and
non-lease
components, which the Company has elected to account for as a single lease component for all classes of underlying assets. Lease expense for variable lease components are recognized when the obligation is probable.
Operating leases are included in ROU assets, accrued liabilities and other, and other long-term liabilities on our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease payments are recognized as lease expense on a straight-line basis over the lease term. The Company has no material finance leases. The Company primarily leases buildings (real estate) and automobiles which are classified as operating leases. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As an implicit interest rate is not readily determinable in our leases, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The lease term for all of the Company’s leases includes the
non-cancellable
period of the lease plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded from the lease term (and lease liability) for the majority of the Company’s leases as the reasonably certain threshold is not met. In a small number of the Company’s leases, the options for renewals have been included in the lease term as the reasonably certain threshold is met due to the Company having significant economic incentive for extending the lease.
Lease payments included in the measurement of the lease liability are comprised of fixed payments, variable payments that depend on an index or rate and amounts probable to be payable under the exercise of the Company option to purchase the underlying asset if reasonably certain.
Variable lease payments not dependent on a rate or index associated with the Company’s leases are recognized when the events, activities, or circumstances in the lease agreement on which those payments are assessed are probable. Variable lease payments are presented as operating expense in the Company’s income statement in the same line item as expense arising from fixed lease payments.
 
13
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
The Company has commitments under operating leases for certain facilities, vehicles and equipment used in its operations. Our leases have initial lease terms ranging from one month to 14 years. Certain lease agreements contain provisions for future rent increases.
The components of lease expense were as follows:
                 
 
Three Months Ended 
June 30, 2019
   
Six Months Ended
June 30, 2019
 
 
(In thousands)
   
(In thousands)
 
Operating lease cost
 
$
10,038
   
$
18,709
 
Variable lease cost
   
899
     
2,530
 
                 
Total lease cost
 
$
10,937
   
$
21,239
 
                 
 
Supplemental balance sheet information related to leases was as follows:
         
 
June 30, 2019
 
 
(In thousands)
 
Right of use assets, net
 
$
182,902
 
         
Lease liabilities included in Accrued liabilities and other
   
41,751
 
Lease liabilities included in Other long-term liabilities
   
147,344
 
         
Total lease liabilities
 
$
189,095
 
         
 
 
 
 
 
 
Supplemental cash flow information and other information related to leases was as follows:
         
 
Six Months Ended 
June 30, 2019
 
 
(In thousands)
 
Cash used in operations for operating leases
 
$
10,937
 
Right-of-use
assets obtained in exchange for new operating liabilities
 
$
8,634
 
Weighted-average remaining lease terms - operating leases (years)
   
6.06
 
Weighted-average discount rate - operating leases
   
3.80
%
 
 
 
 
 
 
Maturities of lease liabilities as of June 30, 2019 were as follows:
         
Lease Liability Maturity Analysis
 
Operating Leases
 
 
(In thousands)
 
Remaining 2019
 
$
24,825
 
2020
   
44,598
 
2021
   
37,063
 
2022
   
29,621
 
2023
   
23,893
 
Thereafter
   
52,579
 
         
Total lease payments
   
212,579
 
Less: imputed interest
   
23,484
 
         
 
$
189,095
 
         
 
 
 
 
 
 
The Company does not have any leases that have not yet commenced which are significant.
 
14
 
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
9.
Goodwill
The changes in the carrying amounts of goodwill by segment were as follows:
                         
 
EIG
   
EMG
   
Total
 
 
(In millions)
 
Balance at December 31, 2018
  $
2,452.0
    $
1,160.0
    $
3,612.0
 
Goodwill acquired
   
—  
     
—  
     
—  
 
Purchase price allocation adjustments and other
   
1.8
     
(0.3
)
   
1.5
 
Foreign currency translation adjustments
   
1.3
     
(1.6
)
   
(0.3
)
                         
Balance at June 30, 2019
 
$
2,455.1
   
$
1,158.1
   
$
3,613.2
 
                         
 
 
 
 
 
 
 
 
 
 
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.
10.
Income Taxes
 
 
 
 
 
 
 
 
 
 
At June 30, 2019, the Company had gross unrecognized tax benefits of $128.6 million, of which $79.2 million, if recognized, would impact the effective tax rate.
The following is a reconciliation of the liability for uncertain tax positions (in millions):
         
Balance at December 31, 2018
  $
119.3
 
Additions for tax positions
   
9.3
 
Reductions for tax positions
   
—  
 
         
Balance at June 30, 2019
 
$  
128.6
 
         
 
 
 
 
 
 
 
 
 
 
The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax expense. The amounts recognized in income tax expense for interest and penalties during the three and six months ended June 30, 2019 and 2018 were not significant.
The effective tax rate for the three months ended June 30, 2019 was 20.4%, compared with 21.9% for the three months ended June 30, 2018. The effective tax rate for the six months ended June 30, 2019 was 20.4%, compared with 22.5% for the six months ended June 30, 2018. Both comparative quarters effective tax rates include the impact of the 2017 U.S. Tax Cuts and Jobs Act (the “Act”) including the reduction of the U.S. corporate income tax rate and the current impact of the global intangible
low-taxed
income (“GILTI”) and the foreign-derived intangible income (“FDII”) provisions. The lower rates for 2019 reflects higher year over year tax benefits related to share-based payment transactions as well as a partial release of a state related valuation allowance for carryforward interest deductions.
11.
Debt
 
 
 
 
 
 
 
 
 
 
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 were 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 occurred 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 2018 Private Placement were used to pay down domestic borrowings under the Company’s revolving credit facility.
 
15
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
 
12.
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 2019, the Company granted PRSUs to officers and certain key management-level employees an aggregate target award of approximately 102,000 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, 2019 through December 31, 2021. 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, which represents a performance condition. The grant date fair value of these PRSUs are recognized as compensation expense over the vesting period based on the number of awards probable 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, which represents a market condition. The Company recognizes the grant date fair value of these awards as compensation expense ratably over the vesting period.
Total share-based compensation expense was as follows:
                                 
 
Three Months Ended
June 30,
   
Six Months Ended 
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
 
(In thousands)
 
Stock option expense
 
$
3,608
    $
3,115
   
$
6,380
    $
5,543
 
Restricted stock expense
   
3,399
     
3,772
     
7,117
     
6,848
 
PRSU expense
   
1,318
     
497
     
1,949
     
564
 
                                 
Total
pre-tax
expense
 
$
8,325
    $
7,384
   
$
15,446
    $
12,955
 
                                 
 
 
 
 
 
 
 
 
 
 
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.
 
16
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
The fair value of each stock option grant is estimated on the grant date 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 periods indicated:
                 
 
Six Months Ended
June 30, 2019
   
Year Ended
December 31, 2018
 
Expected volatility
   
19.1
%
   
17.3
%
Expected term (years)
   
5.0
     
5.0
 
Risk-free interest rate
   
2.25
%
   
2.81
%
Expected dividend yield
   
0.66
%
   
0.76
%
Black-Scholes-Merton fair value per stock option granted
 
$
16.85
    $
14.12
 
 
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.
The following is a summary of the Company’s stock option activity and related information:
                                 
 
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life 
   
Aggregate
Intrinsic
Value
 
 
(In thousands)
   
   
(Years)
   
(In millions)
 
Outstanding at December 31, 2018
   
5,629
    $
53.46
     
     
 
Granted
   
826
     
85.43
     
     
 
Exercised
   
(1,100
)
   
41.90
     
     
 
Forfeited
   
(143
)
   
64.77
     
     
 
                                 
Outstanding at June 30, 2019
   
5,212
   
$
60.65
     
5.2
   
$
157.3
 
                                 
Exercisable at June 30, 2019
   
3,064
   
$
53.08
     
3.5
   
$
115.7
 
                                 
 
 
 
 
 
 
 
 
 
 
The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2019 was $46.1 million. The total fair value of stock options vested during the six months ended June 30, 2019 was $11.7 million. As of June 30, 2019, there was approximately $25.7 million of expected future
pre-tax
compensation expense related to the
2.1
 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.
 
 17
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
The following is a summary of the Company’s nonvested restricted stock activity and related information:
                 
 
Shares
   
Weighted
Average
Grant Date
Fair Value
 
 
(In thousands)
   
 
Nonvested restricted stock outstanding at December 31, 2018
   
891
    $
58.98
 
Granted
   
199
     
85.22
 
Vested
   
(268
)
   
58.04
 
Forfeited
   
(57
)
   
63.26
 
                 
Nonvested restricted stock outstanding at June 30, 2019
   
765
   
$
65.80
 
                 
 
 
 
The total fair value of restricted stock vested during the six months ended June 30, 2019 was $15.5 million. As of June 30, 2019, there was approximately $33.8 million of expected future
pre-tax
compensation expense related to the 0.8 million nonvested restricted shares outstanding, which is expected to be recognized over a weighted average period of approximately
two years
.
 
13.
Retirement and Pension Plans
 
The components of net periodic pension benefit expense (income) were as follows:
                                 
 
Three Months Ended 
June 30,
   
Six Months Ended 
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
 
(In thousands)
 
Defined benefit plans:
 
 
Service cost
 
$
1,702
    $
1,793
   
$
3,415
    $
3,607
 
Interest cost
   
6,740
     
6,421
     
13,502
     
12,903
 
Expected return on plan assets
   
(13,085
)
   
(14,884
)    
(26,211
)
   
(29,847
)
Amortization of net actuarial loss and other
   
4,649
     
2,952
     
7,936
     
5,904
 
                                 
Pension expense (income)
   
6
     
(3,718
)    
(1,358
)
   
(7,433
)
                                 
Other plans:
   
     
     
     
 
Defined contribution plans
   
8,154
     
6,944
     
17,262
     
15,343
 
Foreign plans and other
   
1,543
     
1,587
     
3,105
     
3,183
 
                                 
Total other plans
   
9,697
     
8,531
     
20,367
     
18,526
 
                                 
Total net pension expense
 
$
9,703
    $
4,813
   
$
19,009
    $
11,093
 
                                 
 
 
For the six months ended June 30, 2019 and 2018, contributions to the Company’s defined benefit pension plans were $
1.5
 million and $
1.4
 million, respectively. The Company’s current estimate of 2019 contributions to its worldwide defined benefit pension plans is in line with the range disclosed in the Company’s Annual Report on Form
 10-K
for the year ended December 31, 2018.
  
18
 
 
Table of Contents
  
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
14.
Contingencies
 
 
 
 
 
 
 
 
 
 
Asbestos Litigation
The Company (including its subsidiaries) has been named as a defendant in a number of asbestos-related lawsuits. Certain of these lawsuits relate to a business which was acquired by the Company and do not involve products which were manufactured or sold by the Company. In connection with these lawsuits, the seller of such business has agreed to indemnify the Company against these claims (the “Indemnified Claims”). The Indemnified Claims have been tendered to, and are being defended by, such seller. The seller has met its obligations, in all respects, and the Company does not have any reason to believe such party would fail to fulfill its obligations in the future. To date, no judgments have been rendered against the Company as a result of any asbestos-related lawsuit. The Company believes that it has good and valid defenses to each of these claims and intends to defend them vigorously.
Environmental Matters
Certain historic processes in the manufacture of products have resulted in environmentally hazardous waste
by-products
as defined by federal and state laws and regulations. At June 30, 2019, the Company is named a Potentially Responsible Party (“PRP”) at 13
non-AMETEK-owned
former waste disposal or treatment sites (the
“non-owned”
sites). The Company is identified as a “de minimis” party in 12 of these sites based on the low volume of waste attributed to the Company relative to the amounts attributed to other named PRPs. In eight of these sites, the Company has reached a tentative agreement on the cost of the de minimis settlement to satisfy its obligation and is awaiting executed agreements. The tentatively
agreed-to
settlement amounts are fully reserved. In the other four sites, the Company is continuing to investigate the accuracy of the alleged volume attributed to the Company as estimated by the parties primarily responsible for remedial activity at the sites to establish an appropriate settlement amount. At the remaining site where the Company is a
non-de
minimis PRP, the Company is participating in the investigation and/or related required remediation as part of a PRP Group and reserves have been established sufficient to satisfy the Company’s expected obligations. The Company historically has resolved these issues within established reserve levels and reasonably expects this result will continue. In addition to these
non-owned
sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its current or previously owned manufacturing locations (the “owned” sites). For claims and proceedings against the Company with respect to other environmental matters, reserves are established once the Company has determined that a loss is probable and estimable. This estimate is refined as the Company moves through the various stages of investigation, risk assessment, feasibility study and corrective action processes. In certain instances, the Company has developed a range of estimates for such costs and has recorded a liability based on the best estimate. It is reasonably possible that the actual cost of remediation of the individual sites could vary from the current estimates and the amounts accrued in the consolidated financial statements; however, the amounts of such variances are not expected to result in a material change to the consolidated financial statements. In estimating the Company’s liability for remediation, the Company also considers the likely proportionate share of the anticipated remediation expense and the ability of the other PRPs to fulfill their obligations.
Total environmental reserves at June 30, 2019 and December 31, 2018 were $28.1 million and $27.8 million, respectively, for both
non-owned
and owned sites. For the six months ended June 30, 2019, the Company recorded $3.3 million in reserves. Additionally, the Company spent $3.0 million on environmental matters for the six months ended June 30, 2019. The Company’s reserves for environmental liabilities at June 30, 2019 and December 31, 2018 included reserves of $9.3 million and $9.6 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 June 30, 2019, the Company had $12.4 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.
 
19
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents
 
AMETEK, Inc.
Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
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 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.
 
20
 
 
Table of Contents
  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
Results of Operations
The following table sets forth net sales and income by reportable segment and on a consolidated basis:
                                 
 
Three Months Ended 
June 30,
   
Six Months Ended 
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
 
(In thousands)
 
Net sales:
 
 
Electronic Instruments
 
$
820,247
    $
744,458
   
$
1,627,158
    $
1,460,884
 
Electromechanical
   
469,165
     
464,477
     
949,945
     
920,698
 
                                 
Consolidated net sales
 
$
1,289,412
    $
1,208,935
   
$
2,577,103
    $
2,381,582
 
                                 
Operating income and income before income taxes:
   
     
     
     
 
Segment operating income:
   
     
     
     
 
Electronic Instruments
 
$
212,913
    $
193,831
   
$
415,997
    $
377,190
 
Electromechanical
   
101,065
     
94,250
     
199,878
     
185,252
 
                                 
Total segment operating income
   
313,978
     
288,081
     
615,875
     
562,442
 
Corporate administrative expenses
   
(18,568
)
   
(17,995
)    
(37,206
)
   
(34,188
)
                                 
Consolidated operating income
   
295,410
     
270,086
     
578,669
     
528,254
 
Interest expense
   
(21,475
)
   
(20,784
)    
(44,128
)
   
(42,470
)
Other expense, net
   
(3,337
)
   
(1,081
)    
(7,004
)
   
(1,739
)
                                 
Consolidated income before income taxes
 
$
270,599
    $
248,221
   
$
527,537
    $
484,045
 
                                 
 
 
 
 
 
 
 
 
 
For the quarter ended June 30, 2019, the Company posted record sales and operating income, as well as strong orders, backlog, operating income margins, net income, diluted earnings per share and operating cash flow. The Company achieved these results from organic sales growth in both EIG and EMG, contributions from the 2018 acquisitions of Spectro Scientific Corporation in November 2018, Forza Silicon Corporation (“Forza) and Telular Corporation in October 2018 and Motec in June 2018, as well as our Operational Excellence initiatives.
For 2019, the Company’s strong backlog, the full year impact of the 2018 acquisitions and continued focus on and implementation of Operational Excellence initiatives are expected to have a positive impact on the remainder of the Company’s 2019 results.
Results of operations for the second quarter of 2019 compared with the second quarter of 2018
Net sales for the second quarter of 2019 were $1,289.4 million, an increase of $80.5 million or 6.7%, compared with net sales of $1,208.9 million for the second quarter of 2018. The increase in net sales for the second quarter of 2019 was due to 3% organic sales growth, a 5% increase from acquisitions and an unfavorable 1% effect of foreign currency translation.
Total international sales for the second quarter of 2019 were $613.0 million or 47.5% of net sales, an increase of $3.6 million or .6%, compared with international sales of $609.4 million or 50.4% of net sales for the second quarter of 2018. The $3.6 million increase in international sales was primarily driven from recent acquisitions. Both reportable segments of the Company maintain strong international sales presences in Europe and Asia.
Orders for the second quarter of 2019 were $1,278.1 million, an increase of $47.3 million or 3.8%, compared with $1,230.8 million for the second quarter of 2018. The increase in orders for the second quarter of 2019 was due to 3% increase from acquisitions and a favorable 1% effect of foreign currency translation.
Segment operating income for the second quarter of 2019 was $314.0 million, an increase of $25.9 million or 9.0%, compared with segment operating income of $288.1 million for the second quarter of 2018. Segment operating income, as a percentage of net sales, increased to 24.4% for the second quarter of 2019, compared with 23.8% for the second quarter of 2018. The increase in segment operating income and segment operating margins for the second quarter of 2019 resulted primarily from the increase in net sales noted above, as well as the benefits of the Company’s Operational Excellence initiatives.
 
21
 
 
 
Table of Contents
 
Cost of sales for the second quarter of 2019 was $838.2 million or 65.0% of net sales, an increase of $47.0 million or 5.9%, compared with $791.2 million or 65.4% of net sales for the second quarter of 2018. Cost of sales increased primarily due to the increase in net sales noted above.
Selling, general and administrative expenses for the second quarter of 2019 were $155.8 million or 12.1% of net sales, an increase of $8.2 million or 5.6%, compared with $147.6 million or 12.2% of net sales for the second quarter of 2018. Selling, general and administrative expenses increased primarily due to the increase in net sales noted above.
Consolidated operating income was $295.4 million or 22.9% of net sales for the second quarter of 2019, an increase of $25.3 million or 9.4%, compared with $270.1 million or 22.3% of net sales for the second quarter of 2018.
Interest expense was $21.5 million for the second quarter of 2019, an increase of $0.7 million or 3.4%, compared with $20.8 million for the second quarter of 2018. The change in interest expense is largely driven by the 2018 private placement senior notes issued in December 2018 ($475 million and 75 million Euros) and January 2019 ($100 million), partially offset by a decrease related to the repayment in full, at maturity, of $80 million in aggregate principal amount of 6.35% private placement senior notes and $160 million in aggregate principal amount of 7.08% private placement senior notes in the third quarter of 2018, and $65 million in aggregate principal amount of 7.18% private placement senior notes in the fourth quarter of 2018.
The effective tax rate for the second quarter of 2019 was 20.4%, compared with 21.9% for the second quarter of 2018. The lower rate for 2019 mainly reflects higher year over year tax benefits related to share-based payment transactions as well as a partial release of a state related valuation allowance. See Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
 10-Q.
Net income for the second quarter of 2019 was $215.5 million, an increase of $21.6 million or 11.1%, compared with $193.9 million for the second quarter of 2018.
Diluted earnings per share for the second quarter of 2019 were $0.94, an increase of $0.11 or 13.3%, compared with $0.83 per diluted share for the second quarter of 2018.
Segment Results
EIG’s
net
sales totaled $820.2 million for the second quarter of 2019, an increase of $75.7 million or 10.2%, compared with $744.5 million for the second quarter of 2018. The net sales increase was due to an 8% increase from acquisitions and 3% organic sales growth, partially offset by an unfavorable 1% effect of foreign currency translation.
EIG’s operating income was $212.9 million for the second quarter of 2019, an increase of $19.1 million or 9.9%, compared with $193.8 million for the second quarter of 2018. The increase in EIG’s operating income for the second quarter of 2019 was primarily due to the increase in net sales noted above. EIG’s operating margins were 26.0% of net sales for the second quarter of 2019, flat with the second quarter of 2018. EIG’s operating margins for the second quarter of 2019 were flat primarily from the impact of lower margins on recent acquisitions, which had a 0.9% negative impact, offset by the benefits of the Group’s Operational Excellence initiatives.
EMG’s
net sales totaled $469.2 million for the second quarter of 2019, an increase of $4.7 million or 1.0%, compared with $464.5 million for the second quarter of 2018. The net sales increase was due to 3% organic sales growth, partially offset by an unfavorable 2% effect of foreign currency translation.
EMG’s operating income was a record at $101.1 million for the second quarter of 2019, an increase of $6.8 million or 7.2%, compared with $94.3 million for the second quarter of 2018. EMG’s operating margins were 21.5% of net sales for the second quarter of 2019, compared with 20.3% for the second quarter of 2018. The increase in EMG’s operating income and operating margins for the first quarter of 2019 were primarily due to the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives.
 
22
 
 
 
Table of Contents
 
Results of operations for the first six months of 2019 compared with the first six months of 2018
Net sales for the first six months of 2019 were $2,577.1 million, an increase of $195.5 million or 8.2%, compared with net sales of $2,381.6 million for the first six months of 2018. The increase in net sales for the first six months of 2019 was due to 4% organic sales growth and a 6% increase from acquisitions and an unfavorable 2% effect of foreign currency translation.
Total international sales for the first six months of 2019 were $1,236.5 million or 48.0% of net sales, an increase of $14.4 million or 1.2%, compared with international sales of $1,222.1 million or 51.3% of net sales for the first six months of 2018. The increase in international sales was primarily driven from recent acquisitions. Both reportable segments of the Company maintain strong international sales presences in Europe and Asia.
Orders for the first six months of 2019 were $2,656.3 million, an increase of $80.6 million or 3.1%, compared with $2,575.7 million for the first six months of 2018. The increase in orders for the first six months of 2019 was due to 2% organic order growth and a 2% increase from acquisitions, partially offset by an unfavorable 1% effect of foreign currency translation. As a result, the Company’s backlog of unfilled orders at June 30, 2019 was $1,681.2 million, an increase of $79.1 million or 4.9%, compared with $1,602.1 million at December 31, 2018.
Segment operating income for the first six months of 2019 was $615.9 million, an increase of $53.5 million or 9.5%, compared with segment operating income of $562.4 million for the first six months of 2018. Segment operating income, as a percentage of net sales, increased to 23.9% for the first six months of 2019, compared with 23.6% for the first six months of 2018. The increase in segment operating income and segment operating margins for the first six months of 2019 resulted primarily from the increase in net sales noted above, as well as the benefits of the Company’s Operational Excellence initiatives.
Cost of sales for the first six months of 2019 was $1,689.5 million or 65.6% of net sales, an increase of $121.5 million or 7.7%, compared with $1,568.0 million or 65.8% of net sales for the first six months of 2018. Cost of sales increased primarily due to the increase in net sales noted above.
Selling, general and administrative expenses for the first six months of 2019 were $309.0 million or 12.0% of net sales, an increase of $23.7 million or 8.3%, compared with $285.3 million or 12.0% of net sales for the first six months of 2018. Selling, general and administrative expenses increased primarily due to the increase in net sales noted above.
Consolidated operating income was $578.7 million or 22.5% of net sales for the first six months of 2019, an increase of $50.4 million or 9.5%, compared with $528.3 million or 22.2% of net sales for the first six months of 2018.
Interest expense was $44.1 million for the first six months of 2019, a increase of $1.6 million or 3.8%, compared with $42.5 million for the first six months of 2018. The change in interest expense is largely driven by the 2018 private placement senior notes issued in December 2018 ($475 million and 75 million Euros) and January 2019 ($100 million), partially offset by a decrease related to the repayment in full, at maturity, of $80 million in aggregate principal amount of 6.35% private placement senior notes and $160 million in aggregate principal amount of 7.08% private placement senior notes in the third quarter of 2018, and $65 million in aggregate principal amount of 7.18% private placement senior notes in the fourth quarter of 2018.
The effective tax rate for the first six months of 2019 was 20.4%, compared with 22.5% for the first six months of 2018. The lower rate for 2019 mainly reflects higher year over year tax benefits related to share-based payment transactions as well as a partial release of a state related valuation allowance for carryforward interest deductions. See Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
 10-Q.
Net income for the first six months of 2019 was $419.8 million, an increase of $44.6 million or 11.9%, compared with $375.2 million for the first six months of 2018.
Diluted earnings per share for the first six months of 2019 were $1.83, an increase of $0.22 or 13.7%, compared with $1.61 per diluted share for the first six months of 2018.
 
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Segment Results
EIG’s
net
sales totaled $1,627.2 million for the first six months of 2019, an increase of $166.3 million or 11.4%, compared with $1,460.9 million for the first six months of 2018. The net sales increase was due to 4% organic sales growth, a 9% increase from the 2018 acquisitions of Motec, Spectro Scientific Corporation, Forza and Telular Corporation, partially offset by an unfavorable 1% effect of foreign currency translation.
EIG’s operating income was $416.0 million for the first six months of 2019, an increase of $38.8 million or 10.3%, compared with $377.2 million for the first six months of 2018. The increase in EIG’s operating income for the first six months of 2019 was primarily due to the increase in net sales noted above. EIG’s operating margins were 25.6% of net sales for the first six months of 2019, compared with 25.8% of net sales for the first six months of 2018. EIG’s operating margins for the first six months of 2019 declined primarily from the impact of lower margins on recent acquisitions, which had a 1.0% negative impact, partially offset by the benefits of the Group’s Operational Excellence initiatives.
EMG’s
net sales totaled $949.9 million for the first six months of 2019, an increase of $29.2 million or 3.2%, compared with $920.7 million for the first six months of 2018. The net sales increase was due to 5% organic sales growth and an unfavorable 2% effect of foreign currency translation.
EMG’s operating income was $199.9 million for the first six months of 2019, an increase of $14.6 million or 7.9%, compared with $185.3 million for the first six months of 2018. EMG’s operating margins were 21.0% of net sales for the first six months of 2019, compared with 20.1% of net sales for the first six months of 2018. The increase in EMG’s operating income and operating margins for the first six months of 2019 was primarily due to the increase in net sales noted above, as well as the benefits of the Group’s Operational Excellence initiatives.
Financial Condition
Liquidity and Capital Resources
Cash provided by operating activities totaled $442.6 million for the first six months of 2019, an increase of $62.1 million or 16.3%, compared with $380.5 million for the first six months of 2018. The increase in cash provided by operating activities for the first six months of 2019 was primarily due to higher net income.
Cash used for investing activities totaled $39.6 million for the first six months of 2019, compared with $401.7 million for the first six months of 2018. Additions to property, plant and equipment totaled $43.3 million for the first six months of 2019, compared with $28.6 million for the first six months of 2018. For the first six months of 2018, the Company paid $374.6 million, net of cash acquired, to acquire Motec in June 2018, SoundCom in April 2018 and FMH in January 2018.
Cash used for financing activities totaled $191.5 million for the first six months of 2019, compared with $55.5 million for the first six months of 2018. At June 30, 2019, total debt, net was $2,467.0 million, compared with $2,632.7 million at December 31, 2018. For the first six months of 2019, short term borrowings decreased by $260.8 million, compared with no change in short-term borrowings for the first six months of 2018. At June 30, 2019, the Company had available borrowing capacity of $1,965.3 million under its revolving credit facility, including the $500 million accordion feature.
In December 2018, the Company completed the 2018 private placement agreement to sell $575 million and 75 million Euros in senior notes to a group of institutional investors utilizing two funding dates. The first funding occurred in December 2018 for $475 million and 75 million Euros ($85.1 million). The second funding occurred 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.
 
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The proceeds from the fundings from the 2018 Private Placement were used to pay down domestic borrowings under the Company’s revolving credit facility.
In the third quarter of 2018, $80 million of 6.35% senior notes and $160 million of 7.08% senior notes matured and were paid. In the fourth quarter of 2018, $65 million of 7.18% senior notes matured and were paid. The
debt-to-capital
ratio was 34.6% at June 30, 2019, compared with 38.3% at December 31, 2018. The net
debt-to-capital
ratio (total debt, net less cash and cash equivalents divided by the sum of net debt and stockholders’ equity) was 28.9% at June 30, 2019, compared with 34.9% at December 31, 2018. The net
debt-to-capital
ratio is presented because the Company is aware that this measure is used by third parties in evaluating the Company.
Additional financing activities for the first six months of 2019 included cash dividends paid of $63.6 million, compared with $64.7 million for the first six months of 2018. Effective 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. Proceeds from stock option exercises were $45.8 million for the first six months of 2019, compared with $18.3 million for the first six months of 2018.
As a result of all of the Company’s cash flow activities for the first six months of 2019, cash and cash equivalents at June 30, 2019 totaled $567.9 million, compared with $354.0 million at December 31, 2018. At June 30, 2019, the Company had $320.0 million in cash outside the United States, compared with $311.2 million at December 31, 2018. The Company utilizes this cash to fund its international operations, as well as to acquire international businesses. The Company is in compliance with all covenants, including financial covenants, for all of its debt agreements. The Company believes it has sufficient cash-generating capabilities from domestic and unrestricted foreign sources, available credit facilities and access to long-term capital funds to enable it to meet its operating needs and contractual obligations in the foreseeable future.
Critical Accounting Policies
The Company’s critical accounting policies are detailed in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition of its Annual Report on Form
 10-K
for the year ended December 31, 2018. Primary disclosure of the Company’s significant accounting policies is also included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of its Annual Report on Form
 10-K.
Revenue Recognition.
The majority of the Company’s revenues on product sales are recognized at a point in time when the customer obtains control of the product. The transfer in control of the product to the customer is typically evidenced by one or more of the following: the customer having legal title to the product, the Company’s present right to payment, the customer’s physical possession of the product, the customer accepting the product, or the customer has the benefits of ownership or risk of loss. Legal title transfers to the customer in accordance with the delivery terms of the order, usually upon shipment, which is the point that control transfers. For a small percentage of sales where title and risk of loss transfers at the point of delivery, the Company recognizes revenue upon delivery to the customer, which is the point that control transfers, assuming all other criteria for revenue recognition are met.
Under ASC 606, 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 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.
 
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The determination of the revenue to be recognized in a given period for performance obligations satisfied over time is based on the input method. The Company recognizes revenue over time as it performs on these contracts because the transfer of control to the customer occurs over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally uses the total
cost-to-cost
input method of progress because it best depicts the transfer of control to the customer that occurs as costs are incurred. Under the
cost-to-cost
method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. On certain contracts, labor hours is used as the measure of progress when it is determined to be a better depiction of the transfer of control to the customer due to the timing and pattern of labor hours incurred.
Performance obligations also include post-delivery service, installation and training. Post-delivery service revenues are recognized over the contract term. Installation and training revenues are recognized over the period the service is provided. Warranty terms in customer contracts can also be considered separate performance obligations if the warranty provides services beyond assurance that a product complies with agreed-upon specification or if a warranty can be purchased separately. The Company does not incur significant obligations for customer returns and refunds.
Payment terms generally begin upon shipment of the product. The Company does have contracts with multiple billing terms that are all due within one year from when the product is delivered. No significant financing component exists. Payment terms are generally
30-60
 days from the time of shipment or customer acceptance, but terms can be shorter or longer. For customer contracts that have revenue recognized over time, revenue is generally recognized prior to a payment being due from the customer. In such cases, the Company recognizes a contract asset at the time the revenue is recognized. When payment becomes due based on the contract terms, the Company reduces the contract asset and records a receivable. In contracts with billing milestones or in other instances with a long production cycle or concerns about credit, customer advance payments are received. The Company may receive a payment in excess of revenue recognized to that date. In these circumstances, a contract liability is recorded.
The Company has certain contracts with variable consideration in the form of volume discounts, rebates and early payment options, which may affect the transaction price used as the basis for revenue recognition. In these contracts, the amount of the variable consideration is not considered constrained and is allocated among the various performance obligations in the customer contract based on the relative standalone selling price of each performance obligation to the total standalone value of all the performance obligations.
Forward-Looking Information
Information contained in this discussion, other than historical information, is considered “forward-looking statements” and is subject to various factors and uncertainties that may cause actual results to differ significantly from expectations. These factors and uncertainties include general economic conditions affecting the industries the Company serves; changes in the competitive environment or the effects of competition in the Company’s markets; risks associated with international sales and operations; the Company’s ability to consummate and successfully integrate future acquisitions; the Company’s ability to successfully develop new products, open new facilities or transfer product lines; the price and availability of raw materials; compliance with government regulations, including environmental regulations; and the ability to maintain adequate liquidity and financing sources. A detailed discussion of these and other factors that may affect the Company’s future results is contained in AMETEK’s filings with the U.S. Securities and Exchange Commission, including its most recent reports on Form
 10-K,
10-Q
and
8-K.
AMETEK disclaims any intention or obligation to update or revise any forward-looking statements, unless required by the securities laws to do so.
 
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Item 4.
Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. Under the supervision and with the participation of our management, including the Company’s principal executive officer and principal financial officer, we have evaluated the effectiveness of our system of disclosure controls and procedures as required by Exchange Act Rule
 13a-15(b)
as of June 30, 2019. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
Such evaluation did not identify any change in the Company’s internal control over financial reporting during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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PART II. OTHER INFORMATION
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchase of equity securities by the issuer and affiliated purchasers.
The following table reflects purchases of AMETEK, Inc. common stock by the Company during the three months ended June 30, 2019:
                                 
Period
 
Total Number
of Shares
Purchased (1)(2)
   
Average Price
Paid per Share
   
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plan (2)
   
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased Under
the Plan
 
April 1, 2019 to April 30, 2019
   
—  
    $
—  
     
—  
    $
500,912,305
 
May 1, 2019 to May 31, 2019
   
72,045
     
85.50
     
72,045
     
494,752,129
 
June 1, 2019 to June 30, 2019
   
283
     
86.48
     
283
     
494,727,655
 
                                 
Total
   
72,328
     
85.51
     
72,328
     
 
                                 
 
(1) Represents shares surrendered to the Company to satisfy tax withholding obligations in connection with employees’ share-based compensation awards.
(2) Consists of the number of shares purchased pursuant to the Company’s Board of Directors $500 million authorization for the repurchase of its common stock announced in February 2019. Such purchases may be effected from time to time in the open market or in private transactions, subject to market conditions and at management’s discretion.
 
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Item 6.
Exhibits
         
Exhibit
Number
   
Description
         
 
  31.1*
   
         
 
  31.2*
   
         
 
  32.1*
   
         
 
  32.2*
   
         
 
101.INS*
   
XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
         
 
101.SCH*
   
XBRL Taxonomy Extension Schema Document.
         
 
101.CAL*
   
XBRL Taxonomy Extension Calculation Linkbase Document.
         
 
101.DEF*
   
XBRL Taxonomy Extension Definition Linkbase Document.
         
 
101.LAB*
   
XBRL Taxonomy Extension Label Linkbase Document.
         
 
101.PRE*
   
XBRL Taxonomy Extension Presentation Linkbase Document.
 
* Filed electronically herewith.
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
AMETEK, Inc.
(Registrant)
     
By:
 
/s/
Thomas M. Montgomery
 
Thomas M. Montgomery
 
Senior Vice President – Comptroller
 
(Principal Accounting Officer)
August 2, 2019
 
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