UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
AMETEK, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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[_] Fee paid previously with preliminary materials:
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Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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4) Date Filed:
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Notice of 2003
Annual Meeting
Proxy Statement
Annual Financial Information
and Review of Operations
[AMETEK LOGO]
TABLE OF CONTENTS
Page
----
Notice of Annual Meeting of Shareholders
Proxy Statement...................................................................... 1
Solicitation of Proxies......................................................... 1
Voting Rights................................................................... 1
Multiple Shareholders Sharing the Same Address.................................. 2
Proposals to be Voted Upon...................................................... 2
Election of Directors........................................................... 3
Board Committees................................................................ 4
Audit Committee Report.......................................................... 5
Compensation of Directors....................................................... 6
Stock Ownership................................................................. 7
Other Beneficial Ownership...................................................... 9
Executive Officers............................................................. 10
Executive Compensation......................................................... 11
Compensation Committee Report on Executive Compensation........................ 12
Stock Options and Stock Appreciation Rights.................................... 16
Defined Benefit and Actuarial Plans............................................ 17
Stock Performance Graph........................................................ 19
Compensation Committee Interlocks and Insider Participation.................... 20
Certain Relationships and Related Transactions................................. 20
Compliance with Section 16(a) of the Securities Exchange Act of 1934........... 20
Employment Contracts and Termination, Severance and Change-of-Control
Arrangements................. 20
Shareholder Proposals for the 2004 Proxy Statement............................. 22
Appendix
Index to Annual Financial Information and Review of Operations................ A-1
[AMETEK LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Tuesday, May 20, 2003
2:00 p.m. Eastern Daylight Time
J. P. Morgan Chase & Co.
11th Floor Conference Center
270 Park Avenue
New York, NY 10017
Dear Fellow Shareholder:
It is my pleasure to invite you to attend the 2003 Annual Meeting of
Shareholders of AMETEK, Inc. The following items of business will be discussed
during the Annual Meeting:
1. Re-election of three directors: Helmut N. Friedlaender, James R.
Malone and Elizabeth R. Varet, each for a term of three years;
2. Ratification of the appointment of Ernst & Young LLP as independent
auditors for 2003;
3. Transaction of any other business properly brought before the Annual
Meeting.
Your vote is important. You can vote in one of four ways: (1) by computer using
the Internet, (2) by Touch-Tone telephone using a toll-free number, (3) by
marking, signing and dating your proxy card, and returning it promptly in the
enclosed envelope, or (4) by casting your vote in person at the Annual Meeting.
Directions to J. P. Morgan Chase & Co. are located on the back cover of the
Proxy Statement.
Please refer to your proxy card for specific proxy voting instructions or visit
our Web site at WWW.AMETEK.COM for general questions and answers about proxy
voting.
We have included the detailed annual financial information relating to our
business and operations in Appendix A to the Proxy Statement. We also have
enclosed a Summary Annual Report.
We hope the convenience and cost savings of voting by computer or by telephone
will attract you. A sizable electronic "turnout" would save your Company
significant return-postage fees.
On behalf of the management and directors of AMETEK, Inc., I thank you for your
continued support and confidence. I look forward to seeing you at the Annual
Meeting.
Sincerely,
/S/ Frank S. Hermance
----------------------------
Frank S. Hermance
Chairman of the Board
and Chief Executive Officer
Dated: Paoli, Pennsylvania
March 27, 2003
[AMETEK LOGO]
Principal executive offices
37 North Valley Road
Building 4
P.O. Box 1764
Paoli, Pennsylvania 19301-0801
P R O X Y S T A T E M E N T
SOLICITATION OF PROXIES
The Board of Directors of AMETEK, Inc. (AMETEK) solicits the accompanying proxy
for use at the Annual Meeting of Shareholders to be held on May 20, 2003, and at
any and all adjournments thereof.
AMETEK has retained Georgeson Shareholder Communications Inc. to assist in the
solicitation of votes for a fee of $7,500, plus reasonable expenses. AMETEK will
reimburse brokerage houses and other custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses for forwarding proxy and solicitation
material to the owners of Common Stock. The above Notice of Annual Meeting, this
Proxy Statement, and the proxy card with voting instructions were distributed on
or about March 27, 2003.
VOTING RIGHTS
Shareholders as of the close of business on March 25, 2003 (the Record Date) are
entitled to vote at the Annual Meeting. Each share of Common Stock is entitled
to one vote. As of the Record Date, 32,910,289 shares of AMETEK's Common Stock
were issued and outstanding. In addition, AMETEK held 1,007,049 issued shares in
its treasury, which cannot be voted. A majority of the outstanding shares of
Common Stock, present or represented by proxy, constitutes a quorum for the
purpose of adopting proposals at the Annual Meeting. A shareholder who is
present or represented by proxy at the Annual Meeting and who abstains from
voting, and broker non-votes (shares held by a broker or nominee who is present
or represented at the meeting, but with respect to which the broker or nominee
is not empowered to vote on proposals) will be counted for purposes of
determining the quorum but will not be counted as votes for or against the
proposals. A shareholder may revoke a proxy any time before the Annual Meeting.
If a proxy is properly submitted and is not revoked by the shareholder, the
shares it represents will be voted at the Annual Meeting in accordance with the
instructions of the shareholder. If the shareholder submits the proxy without
making selections, the proxy will be voted in favor of the election as directors
of those nominees listed on the following page and in favor of the appointment
of independent auditors.
You will receive separate proxy mailings if you own shares independently and
have shares credited to your account under the AMETEK Retirement and Savings
Plan or the AMETEK 401(k) Plan for Acquired Businesses, held in custody by the
trustee. Shares for which no instructions are received by the trustee will be
voted in the same proportion as the shares for which the trustee receives
instructions. In addition, you will receive more than one proxy card if your
shares are in more than one account or are not all under the same registration
in AMETEK stock records. To ensure that all your shares are counted, please vote
all proxies online, by telephone, by mail, or in person at the Annual Meeting.
Representatives of American Stock Transfer & Trust Company will tabulate the
votes and act as inspectors of election.
1
MULTIPLE SHAREHOLDERS SHARING THE SAME ADDRESS
Registered and street-name shareholders who reside at a single address receive
only one annual report and proxy statement at that address unless we have
received contrary instructions. This practice is known as "householding" and is
designed to reduce duplicate printing and postage costs. However, if a
shareholder residing at such an address wishes to receive in the future a
separate annual report or proxy statement, he or she may contact our transfer
agent, American Stock Transfer & Trust Company, toll-free at 1-877-777-0800, or
in writing at American Stock Transfer & Trust Company, Shareholder Services, 59
Maiden Lane, New York, NY 10038. You can request householding if you receive
multiple copies of our annual report and proxy statement by contacting American
Stock Transfer & Trust Company at the address above.
PROPOSALS TO BE VOTED UPON
1. ELECTION OF DIRECTORS
Nominees for re-election this year are Helmut N. Friedlaender, James R. Malone
and Elizabeth R. Varet. Each has consented to serve a three-year term.
All proxies received will be voted for the re-election of the nominees unless
directed otherwise in the proxy. Each nominee needs the affirmative vote of a
plurality of shares represented either in person or by proxy at the Annual
Meeting and entitled to vote. While there is no reason to believe that it will
occur, if any director is unable to stand for re-election, shares represented by
proxies may be voted for a substitute director.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.
2. APPOINTMENT OF INDEPENDENT AUDITORS
Acting on the recommendation of the Audit Committee, the Board of Directors has
approved the reappointment of the firm of Ernst & Young LLP as independent
auditors for the fiscal year 2003.
Representatives of Ernst & Young LLP will attend the Annual Meeting. They will
have an opportunity to make a statement, if they desire, and be available to
answer appropriate questions.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
3. OTHER MATTERS
At the time of this mailing, the Board of Directors is unaware of any matters
that may come before the Annual Meeting other than those set forth above.
However, your proxy confers discretionary authority to the Board of Directors to
vote on any other business that may properly come before the Annual Meeting and
any adjournments of the Annual Meeting.
2
ELECTION OF DIRECTORS
The AMETEK Board of Directors consists of eight members, seven of whom are
non-employee directors. The Board is divided into three classes with staggered
terms so that the term of one class expires at each Annual Meeting of
Shareholders.
CLASS III: NOMINEES FOR ELECTION AT THIS ANNUAL MEETING FOR TERMS EXPIRING IN
2006:
HELMUT N. FRIEDLAENDER Private investor. Age 89.
Director since 1955
JAMES R. MALONE Founder and Managing Director of Bridge Associates LLC
Director since 1994 since June 2000. Chairman of the Board since December
1996 and Chief Executive Officer since May 1997 of
Health-Mor Industries. Chairman of the Board of Anchor
Resolution Corp. (formerly Anchor Glass Container Corp.)
since January 1996. Partner and Managing Director of
Rhone Group LLC from July 1998 to August 1999. Chairman
of the Board of Intek Capital Corp. since September
1990. Director of AmSouth Bank N.A. Age 60.
ELIZABETH R. VARET A Managing Director of American Securities, L.P. and
Director since 1987 chairman of the corporate general partner of several
affiliated entities. Age 59.
CLASS I: DIRECTORS WHOSE TERMS CONTINUE UNTIL 2004:
LEWIS G. COLE Partner, Stroock & Stroock & Lavan LLP, Attorneys.
Director since 1987 Age 72.
CHARLES D. KLEIN A Managing Director of American Securities Capital
Director since 1980 Partners, L.P. and an executive officer of several
affiliated entities. Age 64.
CLASS II: DIRECTORS WHOSE TERMS CONTINUE UNTIL 2005:
SHELDON S. GORDON Chairman of Union Bancaire Privee Holdings, Inc. and
Director since 1989 affiliated entities since May 1996. Director of the
Holland Balanced Fund, Union Bancaire Privee and
Gulfmark Offshore, Inc. Age 67.
FRANK S. HERMANCE Chairman of the Board and Chief Executive Officer of
Director since 1999 AMETEK since January 1, 2001. President and Chief
Executive Officer from September 1999 to January 2001.
President and Chief Operating Officer from November 1996
to September 1999. Age 54.
DAVID P. STEINMANN A Managing Director of American Securities, L.P. and an
Director since 1993 executive officer of several affiliated entities. Age 61.
3
BOARD COMMITTEES
The AMETEK Board Committees include Audit, Compensation, Stock Option,
Nominating, and Pension Investment. All are comprised of non-employee directors.
AMETEK also has an Executive Committee that consists of four directors and has
limited powers to act on behalf of the Board whenever the Board is not in
session.
The Audit Committee, along with independent auditors, reviews the plan for and
results of the audit engagement, reviews the scope and results of AMETEK's
procedures for internal auditing, and reviews the independence of the auditors.
It also considers the range of audit and non-audit services, and reviews the
adequacy of AMETEK's system of internal accounting controls. Its report is
included on page 5.
The Compensation Committee analyzes and makes recommendations regarding
management compensation, and periodically reviews management compensation
policies and practices. It also recommends incentive compensation programs and
awards and officer salary adjustments to the Board of Directors.
The Stock Option Committee administers AMETEK's stock option plans.
The Nominating Committee determines the appropriate size and composition of the
Board of Directors, considers qualifications of prospective Board member
candidates, and conducts research to identify and recommend nomination of
suitable candidates. In addition, it reviews the experience, background,
interests, ability and availability of prospective nominees to meet time
requirements of Board of Director and committee membership.
The Pension Investment Committee reviews administration of AMETEK's retirement
plans, including compliance, investment manager and trustee performance, and
results of independent audits of the plans.
Committee membership as of the Record Date was as follows:
AUDIT COMPENSATION STOCK OPTION
- ----- ------------ ------------
Sheldon S. Gordon, Chairman Charles D. Klein, Chairman Sheldon S. Gordon, Chairman
Lewis G. Cole Sheldon S. Gordon James R. Malone
Helmut N. Friedlaender James R. Malone
James R. Malone Elizabeth R. Varet
NOMINATING PENSION INVESTMENT EXECUTIVE
- ---------- ------------------ ---------
James R. Malone, Chairman Lewis G. Cole, Chairman Frank S. Hermance, Chairman
Helmut N. Friedlaender Sheldon S. Gordon Sheldon S. Gordon
Charles D. Klein James R. Malone Charles D. Klein
David P. Steinmann Elizabeth R. Varet
During 2002 there were six meetings of the Board of Directors, eight meetings of
the Audit Committee, five meetings of the Compensation Committee, two meetings
of the Stock Option Committee, one meeting of the Nominating Committee, four
meetings of the Pension Investment Committee, and four meetings of the Executive
Committee.
4
AUDIT COMMITTEE REPORT
The Audit Committee monitors and oversees AMETEK's financial reporting process
on behalf of the Board of Directors. Management has the primary responsibility
for the financial statements and the reporting process, including the systems of
internal control. The independent auditors are responsible for expressing an
opinion on the conformity of the audited financial statements with accounting
principles generally accepted in the United States. In fulfilling its oversight
responsibilities, the Audit Committee has reviewed with management and the
independent auditors the audited financial statements contained in AMETEK's 2002
Annual Report on Form 10-K and included in Appendix A to this Proxy Statement.
The Committee discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, Communication with Audit
Committees.
In addition, the Committee has discussed with the independent auditors their
independence from management and AMETEK, including the matters in the written
disclosures required by the Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has considered the
compatibility of non-audit services with their independence.
The Committee discussed with AMETEK's internal and independent auditors the
overall scope and plans for their respective audits. The Committee meets with
the internal and independent auditors, with and without management present, to
discuss the results of their examinations, their evaluations of AMETEK's
internal controls, and the overall quality of AMETEK's financial reporting. The
Committee held eight meetings during the fiscal year ended December 31, 2002,
which included telephone meetings prior to quarterly earnings announcements.
Fees billed to AMETEK by Ernst & Young LLP for services rendered in 2002 totaled
$1,148,000, and consisted of the following:
Audit Fees $ 747,000
Financial System Design and Implementation Fees $ --
Audit-Related Fees $ 266,000
All Other Fees $ 135,000
Audit-related fees presented above include fees for employee benefit plan and
statutory audits, due diligence reviews pertaining to business acquisitions,
consultation on accounting standards, and consents and other matters related to
the Securities and Exchange Commission registration statements. All other fees
primarily include amounts related to tax services.
The Committee has reviewed the above fees for non-audit services and believes
such fees are compatible with maintaining Ernst & Young LLP's independence.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Annual Report on Form 10-K, for
the fiscal year ended December 31, 2002, for filing with the Securities and
Exchange Commission. The Committee and the Board have also recommended, subject
to shareholder approval, the selection of Ernst & Young LLP as AMETEK's
independent auditors for the 2003 fiscal year.
The Audit Committee:
Sheldon S. Gordon, Chairman
Lewis G. Cole
Helmut N. Friedlaender
James R. Malone
March 27, 2003
5
COMPENSATION OF DIRECTORS
Mr. Hermance, the only employee director of AMETEK, receives no additional
compensation for serving on the Board or its Committees. Non-employee directors
receive $35,000 annually and $2,500 for each of the six regular meetings of the
Board of Directors attended. There is no additional compensation for attending
Committee meetings.
AMETEK sponsors a retirement plan for directors, under which each non-employee
director who has at least three years of service as a director or officer of
AMETEK and does not have a benefit under AMETEK's retirement plan, receives an
annual retirement benefit equal to 100% of the highest annual rate of Board fees
during the director's service with the Board. The benefit is reduced
proportionately if the director has less than five years of service. Retirement
benefits are paid from AMETEK's general assets. All non-employee directors have
accrued an annual retirement benefit of $50,000. This benefit is not available
to persons who first become members of the Board of Directors on or after
January 1, 1997.
AMETEK sponsors a Death Benefit Program for directors, under which each
non-employee director has an individual agreement that pays the director (or the
director's beneficiary in the event of the director's death) an annual amount
equal to 100% of the highest annual rate of compensation during the director's
service with the Board. The payments are made for ten years beginning at the
director's death or the later of retirement or age 70. Directors appointed after
January 1, 1989 must complete five years of service as a director before
becoming eligible for the benefit payable at the later of retirement or age 70.
The Death Benefit Program is funded by individual life insurance policies
purchased by AMETEK on the lives of the directors. In addition, non-employee
directors have a group term life insurance benefit of $50,000. AMETEK retains
the right to terminate any of the individual agreements under certain
circumstances.
6
STOCK OWNERSHIP
The following table shows the number of shares of AMETEK Common Stock the
officers and directors beneficially owned as of February 10, 2003.
Amount of Shares and
Nature of Ownership(1)
- --------------------------------------------------------------------------------------------------------------
Sole Shared
Voting Voting Percent
and/or and/or Right to of
Investment Investment Acquire SERP Total Class
Name Power Power (4) (5)
(2) (3)
- --------------------------------------------------------------------------------------------------------------
R. W. Chlebek, Officer ...... 15,268 -- 6,250 5,749 27,267 *
L. G. Cole, Director ........ 15,000 -- -- -- 15,000 *
H. N. Friedlaender, Director 43,500 10,000 -- -- 53,500 *
S. S. Gordon, Director ...... 40,000 -- -- -- 40,000 *
F. S. Hermance,
Director and Officer ........ 184,085 40,000 358,721 29,307 612,113 1.8%
C. D. Klein, Director (6) ... 63,000 54,433 -- -- 117,433 *
J. R. Malone, Director ...... 20,000 -- -- -- 20,000 *
T. F. Mangold, Jr., Officer . 28,762 -- 57,109 4,880 90,751 *
J. J. Molinelli, Officer .... 60,064 -- 142,969 11,722 214,755 *
A. J. Neupaver, Officer ..... 32,213 -- 141,961 11,480 185,654 *
D. P. Steinmann, Director (7) 39,700 245,844 -- -- 285,544 *
E. R. Varet, Director (8) ... 64,600 631,837 -- -- 696,437 2.1%
Directors and Executive ..... 643,553 795,899 795,883 65,913 2,301,248 7.0%
Officers as a Group
(15 persons) including
individuals named above
*Represents less than 1% of the outstanding shares of Common Stock of AMETEK.
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared
voting power (including the power to vote or direct the vote) and/or sole or
shared investment power (including the power to dispose or direct the
disposition) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise.
7
(2) Shares held in the individual's name, individually or with others, or in the
name of a bank, broker or nominee for the individual's account, where the
officer or director has sole voting and/or investment power.
(3) Other shares where the officer or director has shared voting and/or
investment power.
(4) Shares the officers have a right to acquire through stock option exercises
within 60 days of February 10, 2003.
(5) Shares deemed held for the account of the individual under the Supplemental
Executive Retirement Plan (described in more detail on page 18).
(6) Includes 2,000 shares owned by Mr. Klein's children either through a trust
or a custodial relationship for which Mr. Klein's wife is the trustee and/or
custodian and as to which Mr. Klein disclaims any beneficial ownership. Mr.
Klein has shared voting and investment power with respect to 54,433 shares,
as to 52,433 shares of which such power is shared with Mr. Steinmann and
others.
(7) Includes 7,424 shares of which 5,200 shares are owned by Mr. Steinmann's
wife and 2,224 shares are owned by Mr. Steinmann's adult children and as to
which Mr. Steinmann disclaims any beneficial ownership. Mr. Steinmann has
shared voting and investment power with respect to 245,844 shares, as to
134,153 shares of which such power is shared with Ms. Varet and others, and
as to 52,433 shares of which such power is shared with Mr. Klein and others.
(8) Includes 11,200 shares of which 10,000 shares are owned by a trust of which
Ms. Varet's husband is a beneficiary and 1,200 shares are owned by Ms.
Varet's adult children and as to which Ms. Varet disclaims any beneficial
ownership. Ms. Varet has shared voting and investment power with respect to
631,837 shares, as to 134,153 shares of which such power is shared with Mr.
Steinmann and others.
8
OTHER BENEFICIAL OWNERSHIP
The following table shows the only entities known to AMETEK to be beneficial
owners of more than five percent of the outstanding shares of AMETEK as of March
20, 2003.
Name and Address of Nature of Beneficial Percent
Beneficial Owner Ownership Amount of Shares of Class
Gabelli Funds LLC
One Corporate Center Sole voting and dispositive
Rye, NY 10580-1434 power......................(1) 582,500
GAMCO Investors, Inc. Sole voting power for
One Corporate Center 2,843,897 shares, and sole
Rye, NY 10580-1434 dispositive power........(1) 2,957,197
Gabelli & Company, Inc.
One Corporate Center Sole voting and dispositive
Rye, NY 10580-1434 power.....................(2) 400
---------
TOTAL.................. 3,540,097 10.7%
=========================
(1) Based on Schedule 13(F-HR) filed on February 14, 2003.
(2) Based on Schedule 13(D) filed on December 2, 2002.
9
EXECUTIVE OFFICERS
Officers are appointed by the Board of Directors to serve for the ensuing year
and until their successors have been elected and qualified. Information on
executive officers of AMETEK is shown below:
NAME AGE PRESENT POSITION WITH AMETEK
---- --- ----------------------------
Frank S. Hermance 54 Chairman of the Board and Chief Executive Officer
John J. Molinelli 56 Executive Vice President - Chief Financial Officer
Albert J. Neupaver 52 President - Electromechanical Group
Robert W. Chlebek 59 President - Electronic Instruments
Thomas F. Mangold, Jr. 57 President - Electronic Instruments
Robert R. Mandos, Jr. 44 Vice President and Comptroller
Deirdre D. Saunders 55 Vice President and Treasurer
Donna F. Winquist 53 Vice President and General Counsel
FRANK S. HERMANCE'S employment history with AMETEK and other directorships
currently held are included under the section "Election of Directors" on page 3.
JOHN J. MOLINELLI was elected Executive Vice President - Chief Financial Officer
on April 22, 1998. Previously he had served as Senior Vice President - Chief
Financial Officer since April 1994.
ALBERT J. NEUPAVER was elected President - Electromechanical Group on January
10, 1997.
ROBERT W. CHLEBEK was elected President - Electronic Instruments on March 1,
1997.
THOMAS F. MANGOLD, JR. was elected President - Electronic Instruments on October
5, 1999. He served as General Manager of the Process and Analytical Instruments
Division from June 1986 to October 1999. Mr. Mangold was elected a Corporate
Vice President in 1988.
ROBERT R. MANDOS, JR. was elected Vice President and Comptroller of AMETEK on
April 22, 1998. He has served as Comptroller of AMETEK since April 1996.
DEIRDRE D. SAUNDERS was elected Vice President on July 30, 1997. She has served
as Treasurer since April 1993.
DONNA F. WINQUIST was elected Vice President and General Counsel on July 19,
2000. She has served as a Vice President since July 30, 1997 and was Corporate
Secretary from May 1, 1997 to July 19, 2000. Since December 1994, and prior to
her appointment as General Counsel, she served as Corporate Counsel.
10
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Other Restricted Shares All Other
Name and Salary Bonus Annual Stock Underlying Compensation
Principal Position Year ($) ($) Compensation Award(s) Options/SARs ($)
($) ($) (#) (1)
- ---------------------------------------------------------------------------------------------------------------------
F.S. Hermance .......... 2002 600,000 650,000 -- -- 70,000 138,516
Chairman of the Board 2001 540,000 345,500 -- -- -- 105,342
and Chief Executive . 2000 450,000 600,000 -- 3,675,000(2) 80,000 116,392
Officer .............
- ---------------------------------------------------------------------------------------------------------------------
J.J. Molinelli ......... 2002 276,750 200,000 -- -- 27,500 38,642
Executive Vice ...... 2001 264,000 130,000 -- -- 32,500 37,006
President - ......... 2000 252,500 200,000 -- -- 32,500 40,697
Chief Financial
Officer
- ---------------------------------------------------------------------------------------------------------------------
A.J. Neupaver .......... 2002 283,000 150,000 -- -- 27,500 32,306
President - ......... 2001 270,000 117,000 -- -- 32,500 35,306
Electromechanical ... 2000 258,000 200,000 -- -- 32,500 39,949
Group
- ---------------------------------------------------------------------------------------------------------------------
R.W. Chlebek ........... 2002 261,375 161,000 -- -- 22,500 26,180
President - ......... 2001 255,000 49,500 -- -- 25,000 45,582
Electronic .......... 2000 246,500 165,000 -- -- 30,000 44,377
Instruments
- ---------------------------------------------------------------------------------------------------------------------
T. F. Mangold, Jr ...... 2002 237,385 178,000 -- -- 22,500 30,664
President - ......... 2001 222,000 70,000 -- -- 22,500 19,594
Electronic .......... 2000 210,000 130,000 -- -- -- 24,132
Instruments
- ---------------------------------------------------------------------------------------------------------------------
(1) The amounts reported represent AMETEK's contribution ($1,200 each) to the
AMETEK Retirement and Savings Plan for each of the named executive officers
listed above, the value of premiums paid by AMETEK with respect to term life
insurance for the benefit of each of the named executive officers, the
amount contributed for Mr. Chlebek under the Retirement Feature of the
AMETEK Retirement and Savings Plan ($10,302), and the value of contributions
under the Supplemental Executive Retirement Plan ("SERP") (described in more
detail on page 18).
(2) On December 15, 2000, Mr. Hermance was granted 150,000 shares of restricted
Common Stock. These shares become vested on the earliest to occur of (a) the
closing price of AMETEK's Common Stock on any five consecutive trading days
equaling or exceeding $40 per share, (b) the death or disability of Mr.
Hermance, or (c) December 15, 2006 provided Mr. Hermance has been in the
continuous employ of AMETEK through that date. The value of this restricted
stock reported in the table was $24.50 per share, the closing price of
AMETEK's Common Stock on the date of grant. The aggregate value on December
31, 2002 was $5,773,500, based on AMETEK's year-end closing stock price of
$38.49. Cash dividends will be earned but will not be paid until the
restricted stock vests. (See additional discussion of Termination and
Change-of-Control Agreement beginning on page 20).
11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The following report, submitted by the Compensation Committee of the Board of
Directors, provides information regarding policies and practices concerning
compensation for the Chairman of the Board and Chief Executive Officer and the
other executive officers of AMETEK.
COMPENSATION OVERVIEW
The Compensation Committee recommends to the Board of Directors (a)
executive compensation arrangements for senior management and directors, and
(b) compensation plans in which officers and employees are eligible to
participate. The Stock Option Committee approves, and then submits for
ratification to the Board of Directors, grants of stock options and
restricted stock awards under AMETEK's stock plans.
The members of the Compensation Committee, Messrs. Gordon, Klein and Malone
and Ms.Varet, are non-employee directors of AMETEK. The members of the Stock
Option Committee, Messrs. Gordon and Malone, are directors and have no other
affiliation with AMETEK.
Executive compensation consists of three principal elements: (a) salary, (b)
annual incentive bonus and (c) grants of stock options and/or restricted
stock. AMETEK provides additional retirement and other benefits for
executives similar to those provided by other major corporations.
Information regarding similarly situated executive officers at comparable
companies was drawn from publicly available information for certain of the
companies included in the index of peer companies used in the Stock
Performance Graph set forth on page 19 and for certain other companies
identified by an independent employee benefits consulting firm engaged by
AMETEK.
REQUIRED STOCK OWNERSHIP FOR EXECUTIVES
The Compensation Committee and the Stock Option Committee believe that
AMETEK should attract, retain, motivate and benefit from the guidance and
experience of talented and qualified executives who will advance AMETEK's
profitability and worldwide growth. AMETEK also believes that encouraging
its executives to acquire a larger equity interest in AMETEK links their
efforts as executives to the interests of the shareholders, providing
additional incentives for the maximum success of AMETEK. Accordingly, AMETEK
has directed that executive officers and management of AMETEK acquire stock,
within a reasonable period of time, varying in value from one to five times
their base salary. Mr. Hermance has exceeded his required AMETEK stock
ownership level of five times base salary, and Messrs. Molinelli, Neupaver
and Mangold have each exceeded their required AMETEK stock ownership level
of three times base salary. The other executive officers have either
achieved their required stock ownership level or continue to make progress
towards this goal.
SALARY
The salary level for each AMETEK executive officer is based principally on
the executive's responsibilities. Consideration also is given to factors
such as the individual's experience and performance, salaries paid to
executive officers by comparable companies, and the cost of living in the
geographic area where the executive is located. When determining adjustments
to each executive officer's salary, consideration also is given to
prevailing economic conditions, the adjustments being given to other
employees within AMETEK, and achievement of performance objectives. In
determining executive salaries, the Compensation Committee has generally
targeted the median level of the compensation range for each position at
comparable companies.
12
ANNUAL INCENTIVE BONUS
Bonuses are viewed as incentive rewards for individual contributions to
AMETEK's performance, based not only on short-term results but also as
investments made in the future growth of AMETEK's profits. AMETEK's diluted
earnings per share, the operating profit of the business unit an executive
is responsible for, and other goals, including asset management improvement,
as established by the Chief Executive Officer and the Compensation
Committee, are used in determining performance. Bonuses are leveraged, which
means that amounts paid for over- or underperformance to targets could be
significantly higher or lower than the targeted bonus level. The Chairman
and Chief Executive Officer reviews AMETEK's performance and the individual
contribution of each executive officer against established targets and makes
recommendations to the Compensation Committee with respect to the
appropriate bonus amount to be awarded to each individual for that year. The
Compensation Committee then meets with the Chairman and Chief Executive
Officer to consider such recommendations, makes any appropriate changes, and
presents its recommendations to the Board of Directors, which then discusses
and votes upon the bonuses.
In 2002, AMETEK substantially achieved the goal established by the
Compensation Committee for diluted earnings per share and, in certain
instances, operating profit goals for individual business units. AMETEK did
not achieve its established target in 2001. Consequently, bonuses are up
significantly in 2002 versus 2001.
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
Awards of stock options and/or shares of restricted stock are considered an
important complement to the cash elements of AMETEK's executive officers'
compensation because they align the executives' interests with the
shareholders' interests. A principal factor influencing the market price of
AMETEK's stock is AMETEK's performance as reflected in its sales, earnings,
cash flow and other results; thus, by granting stock options to AMETEK's
executive officers, such individuals are encouraged to achieve consistent
improvements in AMETEK's performance. AMETEK's shareholders have approved
the plans under which such awards are made. The exercise price of options
equals the mean market price of AMETEK's stock on the grant date.
Accordingly, options will only yield income to the executive if the market
price of AMETEK's stock is greater at the time of exercise than it was when
the option was granted. Awards of shares of restricted stock are subject to
forfeiture restrictions, which prohibit the recipient from selling such
shares for a specified period following the date of the award. Awards
provide inducements to the executive officers to remain with AMETEK over the
long term and enhance corporate performance and, correspondingly,
shareholder value. When considering whether to make grants of stock options
or awards of restricted stock, and the size of such awards, the Stock Option
Committee reviews practices of other comparable companies as well as
individual performance-related criteria, and takes into consideration the
effect such awards might have on AMETEK's long-term performance and creation
of shareholder value.
MR. HERMANCE'S COMPENSATION
In determining the appropriate levels for Mr. Hermance's 2002 base salary
and bonus, the Compensation Committee considered the same factors it
considered when setting compensation levels for AMETEK's other executive
officers. The Compensation Committee also considered the major initiatives
and programs commenced or furthered under Mr. Hermance's leadership during
2002. Among the achievements in 2002 under Mr. Hermance's leadership:
(a) AMETEK performed well in a very difficult economic environment for
manufacturing companies. AMETEK's income rose 18% to $83.7 million and
diluted earnings per share rose 18% to $2.49, from $2.12 in 2001.
(b) AMETEK generated strong cash flow from operations, which enabled it to
pay down nearly $80 million in debt, significantly strengthening its
balance sheet.
13
(c) AMETEK's Four Growth Strategies - Operational Excellence, Strategic
Acquisitions and Alliances, Global & Market Expansion and New Products -
continue to build long-term shareholder value.
- AMETEK's Operational Excellence efforts yielded significant
profitability and working capital improvements in 2002. Net margins
increased from 7.0% in 2001 to 8.0% in 2002. AMETEK reduced its
investment in inventories and receivables by $29 million, benefiting
cash flow and increasing the efficiency of its operations.
- AMETEK continued to expand internationally:
- AMETEK grew international sales by 10% in 2002 over 2001,
increasing its international revenue to 34% of total revenues.
- AMETEK continued its migration to low-cost manufacturing
locales. Revenue generated in low-cost locales increased to
approximately 17% of sales from 15% of sales in 2001.
- AMETEK continued its focus on acquisitions as a key component of its
growth plans. During 2002, AMETEK completed substantial due
diligence that resulted in the January 2003 acquisition of
Airtechnology Holdings, a U.K.-based supplier of motors, fans and
environmental control systems used primarily in defense markets.
Airtechnology is expected to generate approximately $46 million in
revenue annually.
- A number of new products were introduced over the past year that
contributed to AMETEK's revenue and profitability.
Certain personal criteria also were reviewed in determining Mr. Hermance's
compensation, such as his 12 years of service with AMETEK, including two
years as Chairman of the Board, and his previous service as an officer of
AMETEK. The Compensation Committee also evaluated data regarding CEO
compensation practices of comparable companies (which were referred to
previously) so that Mr. Hermance's total compensation would be in line with
that of CEOs of such other companies. In addition, in determining Mr.
Hermance's bonus for 2002, the Compensation Committee considered progress
towards goals established for Mr. Hermance, including AMETEK's substantial
achievement of the 2002 diluted earnings per share goal.
14
SECTION 162(M)
Under Section 162(m) of the Internal Revenue Code, a publicly-held
corporation may not deduct more than $1 million in a taxable year for
certain forms of compensation paid to the Chief Executive Officer or any
other executive officer whose compensation is required to be reported in the
Summary Compensation Table. AMETEK's policy is generally to preserve the
federal income tax deductibility of compensation paid to its executives.
Accordingly, to the extent feasible, AMETEK has taken action to preserve the
deductibility of certain stock-based incentive awards to its executive
officers. However, the Compensation Committee retains the flexibility to
authorize compensation that may not be deductible if it believes that it is
in the interest of AMETEK to do so. Payment of some of the compensation
referred to in the Summary Compensation Table (see page 11) was deferred.
The Compensation Committee believes that all compensation paid to its
executives in 2002 was deductible.
Compensation Committee of the Board:
Charles D. Klein, Chairman
Sheldon S. Gordon
James R. Malone
Elizabeth R. Varet
15
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table provides details regarding stock options granted to the
named executive officers in 2002. In addition, the table provides the
hypothetical gains or "option spreads" that would result for the respective
options based on assumed rates of annual compounded stock price appreciation of
5% and 10% from the date the options were granted through their expiration
dates.
STOCK OPTION/SAR GRANTS IN 2002
Potential
Realizable Value at
Assumed Annual
Rate of Stock
Price Appreciation
Individual Grants for Option Term(1)
Percent of
Number of Total
Shares Options/SARs
Underlying Granted to
Name Options/SARs Employees in Expiration
Granted(#)(2) Fiscal Year Exercise Date 5%($) 10%($)
Price($/Sh)
F.S. Hermance ... 70,000 13.03 $ 37.64 5/21/2009 1,072,628 2,499,680
J.J. Molinelli .. 27,500 5.12 $ 37.64 5/21/2009 421,390 982,017
A.J. Neupaver ... 27,500 5.12 $ 37.64 5/21/2009 421,390 982,017
R.W. Chlebek .... 22,500 4.19 $ 37.64 5/21/2009 344,773 803,469
T.F. Mangold, Jr. 22,500 4.19 $ 37.64 5/21/2009 344,773 803,469
(1) The amounts represent certain assumed rates of appreciation. Actual
gains, if any, on stock option exercises are dependent on future
performance of AMETEK 's Common Stock. There can be no assurance that
the rates of appreciation reflected in this table will be achieved.
(2) The options granted in 2002 are exercisable after the first anniversary
of the date of grant (May 22, 2002) during each of the four succeeding
12-month periods only to the extent of 25% of the total number of shares
optioned. Optioned shares, which may have been but were not purchased
during any one 12-month period, may be purchased during any one or more
succeeding 12-month periods up to the expiration date of the option.
Options generally become fully exercisable in the event of the holder's
death, normal retirement, or termination of employment in connection
with a change in control. No SARs were granted in 2002.
16
The following table shows stock options and stock appreciation rights exercised
by the named executive officers during 2002 and the aggregate amounts realized
by each such officer. In addition, the table shows the aggregate number of
unexercised options and stock appreciation rights that were exercisable and
unexercisable as of December 31, 2002, and the value of "in-the-money" stock
options on December 31, 2002, which represents the positive difference between
the market price of AMETEK's Common Stock and the exercise price of such
options.
AGGREGATE OPTION/SAR EXERCISES IN 2002
AND OPTION/SAR VALUES AT DECEMBER 31, 2002
Number of Shares Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired On Value Options Options
Exercise(#) Realized($) at December 31, 2002 at December 31, 2002($)
- --------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------
F.S. Hermance ... -- -- 358,721 147,500 6,551,446 1,218,380
J.J. Molinelli .. -- -- 142,969 75,625 2,576,200 723,969
A.J. Neupaver ... -- -- 141,961 75,625 2,505,858 723,969
R.W. Chlebek .... 56,875 746,499 6,250 61,875 73,219 599,944
T.F. Mangold, Jr. 5,300 122,893 57,109 48,625 952,791 368,189
DEFINED BENEFIT AND ACTUARIAL PLANS
The Employees' Retirement Plan of AMETEK, Inc. (the "Retirement Plan") is a
non-contributory defined benefit pension plan under which contributions are
actuarially determined. The following table sets forth the estimated annual
benefits, expressed as a single life annuity, payable upon retirement (assuming
normal retirement at age 65) under the Retirement Plan for individuals with the
indicated years of service and at the indicated compensation levels (without
taking into account statutory restrictions incorporated in the Retirement Plan
and described below):
PENSION PLAN TABLE
Annual Benefits Based On
Years of Service at Normal Retirement Age (1)
Average
Compensation 15 20 25 30 35
$150,000 57,600 61,500 65,300 65,300 65,300
200,000 78,000 83,100 88,200 88,200 88,200
250,000 98,400 104,800 111,200 111,200 111,200
300,000 118,800 126,500 134,100 134,100 134,100
350,000 139,200 148,200 157,100 157,100 157,100
400,000 159,600 169,800 180,000 180,000 180,000
450,000 180,000 191,500 203,000 203,000 203,000
500,000 200,400 213,200 225,900 225,900 225,900
550,000 220,800 234,900 248,900 248,900 248,900
600,000 241,200 256,500 271,800 271,800 271,800
650,000 261,600 278,200 294,800 294,800 294,800
700,000 282,000 299,900 317,700 317,700 317,700
(1) Benefit amounts assume a participant reaches age 65 in 2003; for younger
participants, the benefit amounts are less than the amounts indicated above.
At December 31, 2002, the executives named in the Summary Compensation Table had
the following years of credited service under the Retirement Plan: Mr.
Hermance-12, Mr. Molinelli-33, Mr. Neupaver-25, and Mr.
17
Mangold-29. Persons joining AMETEK after January 1, 1997, including Mr. Chlebek,
are not eligible to participate in the Retirement Plan, but instead are eligible
to participate in the Retirement Feature of the AMETEK Retirement and Savings
Plan. Participants receive an annual contribution of between 3% and 8% of their
compensation depending on their age and service with AMETEK.
The annual compensation taken into account for any plan year is generally equal
to the participant's salary and any bonus accrued during the plan year as
reported in the Summary Compensation Table. Compensation in excess of certain
amounts prescribed by the Secretary of the Treasury ($200,000 for 2002) is not
taken into account under the Retirement Plan or the Retirement Feature of the
AMETEK Retirement and Savings Plan. The individuals named in the Summary
Compensation Table are subject to this limitation.
Pursuant to the AMETEK, Inc. Supplemental Executive Retirement Plan (the
"SERP"), AMETEK agreed, beginning in 1997, to credit to the account of certain
executives, including executives named in the Summary Compensation Table, an
amount equal to 13% of the executive's compensation in excess of the statutory
restrictions for each plan year, in order to compensate them for the loss of
retirement income under the Retirement Plan or the Retirement Feature of the
AMETEK Retirement and Savings Plan resulting from those restrictions. The
credited amounts are deemed to be invested in AMETEK Common Stock and, upon
termination of employment or retirement, shall be distributed in kind. An
executive's right to a benefit under the SERP becomes non-forfeitable at the
same time as the executive's right to an accrued benefit under the Retirement
Plan or the Retirement Feature of the AMETEK Retirement and Savings Plan becomes
non-forfeitable.
For retirements occurring in 2003, the maximum annual pension benefit payable at
normal retirement age is restricted by law to the greater of $160,000 or the
amount of such benefit determined under the Retirement Plan and prior existing
law as of December 31, 1982. The $160,000 limit is adjusted annually by the
Secretary of the Treasury to reflect increases in the cost of living.
18
STOCK PERFORMANCE GRAPH
The following graph and accompanying table compare the cumulative total
shareholder return for AMETEK for the five years ended December 31, 2002 to that
of the Russell 2000 Index and the Dow Jones US Electrical Components and
Equipment Industry Group. The performance graph and table assume the investment
of $100 on December 31, 1997 and the reinvestment of all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[INSERT STOCK PERFORMANCE GRAPH HERE]
<Table>
<Caption>
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
AMETEK, Inc. $100.00 $ 83.48 $ 72.16 $ 99.38 $123.19 $149.67
RUSSELL 2000* 100.00 97.45 118.17 114.60 117.45 93.39
DOW JONES US ELECTRICAL COMPONENTS & EQUIPMENT* 100.00 111.92 164.94 111.31 78.56 46.85
*Includes AMETEK
</Table>
19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Gordon, Klein, and Malone and Ms. Varet comprise the Compensation
Committee. Mr. Klein and Ms. Varet are managing directors of American
Securities, L.P., an investment banking firm. American Securities, L.P. and its
affiliates rendered during 2002 financial advisory, investment management and
other services to AMETEK. Beginning in 2003, AMETEK will no longer be utilizing
the services of American Securities, L.P. and its affiliates. American
Securities, L.P. is owned indirectly by Ms. Varet and members of her family
through family trusts of which Ms. Varet is a co-trustee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Stroock & Stroock & Lavan LLP, of which Mr. Cole is a member,
rendered legal services during 2002 and continues to render legal services for
AMETEK and its subsidiaries.
COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires AMETEK's directors
and officers to file with the Securities and Exchange Commission and the New
York Stock Exchange initial reports of ownership and reports of changes in
ownership of AMETEK's Common Stock. Copies of all such Section 16(a) reports are
required to be furnished to AMETEK. These filing requirements also apply to
holders of more than 10% of AMETEK's Common Stock; to AMETEK's knowledge, there
currently are no holders under Section 16(a) of more than 10% of AMETEK's Common
Stock. To AMETEK's knowledge, based solely on a review of the copies of Section
16(a) reports furnished to AMETEK and written representations that no other
reports were required, during the fiscal year ended December 31, 2002, AMETEK's
officers and directors were in compliance with all Section 16(a) filing
requirements.
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND
CHANGE-OF-CONTROL ARRANGEMENTS
AMETEK has in place change-of-control agreements with all of its executive
officers other than Mr. Hermance, who is covered by a separate arrangement
described in the following paragraphs. The purpose of the agreements is to
assure the continued attention and dedication of key executives when AMETEK is
faced with a potential change of control by providing for some continuation of
the executive's compensation and benefits. In the event that an executive's
employment is terminated by AMETEK without cause or by the executive for good
reason within two years after a Change of Control, AMETEK will pay to each
executive the sum of the executive's prior year's salary, plus the greater of
(a) the current year's bonus, or (b) the average of the two prior years' bonuses
(all as limited under Section 280G of the Internal Revenue Code (the "Code"))
for a period of one, two or three years (as defined in each executive's
agreement). Health benefits will be continued until Medicare eligibility,
coverage under another group health plan, the expiration of ten years or the
executive's death, whichever is earlier. For purposes of the agreements, a
Change of Control means the acquisition of 20% or more of the voting stock of
AMETEK by a party other than AMETEK (or its affiliates), a merger or
consolidation after which the shareholders of AMETEK do not own or control at
least 50% of the voting stock of AMETEK, any sale or other disposition of all or
substantially all of AMETEK's assets, or an approved plan of liquidation. Each
of the executive officers named in the Summary Compensation Table on page 11
(other than Mr. Hermance) will be entitled to three times their compensation in
the event of a Change of Control.
As of December 15, 2000, AMETEK entered into a Termination and Change-of-Control
Agreement with Mr. Hermance to assure his continued dedication in the event of a
Change of Control and to provide security to Mr. Hermance in the event his
employment is terminated by AMETEK or a successor without cause or by Mr.
Hermance for good reason.
20
For the purposes of this Agreement, a Change of Control means substantially the
same as when applied to other executive officers, as described above, but also
includes certain changes in the composition of the Board of Directors and
certain additional acquisitions of AMETEK or its shares.
In the event Mr. Hermance is terminated without cause or resigns for good reason
prior to and not in anticipation of a Change of Control, he will receive a
severance payment in an amount equal to two times his annual base salary for the
preceding year, and two times (a) his current year's targeted bonus (if
established) or (b) the average of his bonuses for the two preceding years. In
addition, his health, disability insurance and death benefits will be continued
under the same terms as are provided for other executives as described above,
but only for a period of up to two years, and certain other executive
perquisites will be continued for up to two years.
If Mr. Hermance is employed by AMETEK at the date of a Change of Control, or has
been terminated without cause or resigned for good reason in anticipation of the
Change of Control, AMETEK will pay Mr. Hermance an amount equal to the fair
market value of any non-vested restricted stock (see page 11, footnote (2)).
That amount may be reduced to an amount which maximizes the aggregate net amount
available to Mr. Hermance from all "parachute payments," as defined in Section
280G of the Code, after reduction for all taxes. The shares of restricted stock
for which payment is made will then be forfeited. Mr. Hermance will retain any
remaining shares of restricted stock which will continue to vest in accordance
with their original terms.
If Mr. Hermance's employment is terminated by the Company without cause or by
Mr. Hermance for good reason, in anticipation of, upon or at any time following
a Change of Control, Mr. Hermance has agreed for a period of up to three years
not to compete, directly or indirectly, with any business then conducted by
AMETEK and not to solicit any AMETEK employee to become an employee of any other
entity, in exchange for which Mr. Hermance will be paid, with respect to the
period covered by the non-competition/non-solicitation agreement, an amount
equal to his estimated total compensation (salary, bonus and long-term incentive
compensation) for the period. In such event, AMETEK will continue Mr. Hermance's
health, disability insurance and death benefits, as well as certain executive
perquisites, in the same manner as provided above, except that health benefits
will continue for a period of up to ten years. In the circumstances described in
this paragraph, any restricted stock remaining unvested at the time Mr.
Hermance's employment terminates will be forfeited.
Pursuant to a Supplemental Senior Executive Death Benefit Program (the
"Program"), AMETEK has entered into individual agreements with certain
executives. The agreements require AMETEK to pay death benefits to their
designated beneficiaries and to pay lifetime benefits to the executives under
certain circumstances. If a covered executive dies before retirement or before
age 65 while on disability retirement, the executive's beneficiary will receive
monthly payments from the date of the executive's death until the date he or she
would have attained age 80. If a covered executive retires, or reaches age 65
while on disability retirement, the Program provides for an annual benefit of
one-tenth of the lesser of (a) twice the executive's average annual base salary
for the last five full years of service, rounded off to the next highest
multiple of $50,000 or (b) a maximum amount specified in the agreement. The
highest maximum amount specified in the existing agreements is $1,000,000. The
benefit is payable monthly over a period of ten years to the executive or the
executive's beneficiary. The payments will commence for retirees at age 70 or
death, whichever is earlier. However, if the executive retires after age 70, the
payments commence on retirement.
To fund benefits under the Program, AMETEK has purchased individual life
insurance policies on the lives of certain of the covered executives. AMETEK
retains the right to terminate all of the Program agreements under certain
circumstances. Messrs. Hermance, Molinelli, Neupaver, and Mangold are
participants.
Pre- and post-retirement life insurance coverage and supplemental retirement
income are provided to Mr. Chlebek under a Supplemental Senior Executive Split
Dollar Death Benefit Plan. To fund these benefits, AMETEK has purchased a
split-dollar life insurance policy. AMETEK pays the majority of the premium
costs with Mr. Chlebek paying approximately $500 per year. Pre-retirement death
benefits include a $490,000 lump sum payment to his beneficiary and an annual
payment of $70,000 commencing ten years after his death and
21
ending on the date Mr. Chlebek would have attained age 80. Upon Mr. Chlebek's
attainment of age 65, AMETEK will withdraw from the policy an amount equal to
the amount of premiums paid, and he will become the owner of the policy, which
is targeted to have a value of approximately $300,000 to $350,000 at age 65. In
the event Mr. Chlebek terminates employment prior to age 65, he can either
purchase the policy from AMETEK or terminate the agreement.
SHAREHOLDER PROPOSALS FOR THE 2004 PROXY STATEMENT
Proposals of shareholders intended to be presented at AMETEK's 2004 Annual
Meeting of Shareholders must be received by AMETEK at its executive offices on
or prior to December 20, 2003 to be eligible for inclusion in the proxy material
to be used in connection with the 2004 Annual Meeting.
By order of the Board of Directors
/s/ Kathryn E. Londra
KATHRYN E. LONDRA
Corporate Secretary
Dated: Paoli, Pennsylvania
March 27, 2003
22
AMETEK, INC.
ANNUAL FINANCIAL INFORMATION AND REVIEW OF OPERATIONS
(APPENDIX TO PROXY STATEMENT)
INDEX
PAGE
----
Selected Financial Data............................................ A-2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. A-5
Report of Management .............................................. A-19
Report of Independent Auditors .................................... A-20
Consolidated Statement of Income .................................. A-21
Consolidated Balance Sheet ........................................ A-22
Consolidated Statement of Stockholders' Equity .................... A-23
Consolidated Statement of Cash Flows .............................. A-24
Notes to Consolidated Financial Statements ........................ A-25
A-1
AMETEK, INC.
SELECTED FINANCIAL DATA
<Table>
<Caption>
2002 2001 2000 1999 1998
---------- ---------- ---------- -------- --------
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------
CONSOLIDATED OPERATING RESULTS (YEARS ENDED
DECEMBER 31)
Net sales..................................... $1,040.5 $1,019.3 $1,024.7 $924.8 $927.5
Operating income(1)(2)........................ $ 148.7 $ 109.6 $ 135.9 $118.8 $ 96.4
Interest expense(3)........................... $ (25.2) $ (27.9) $ (29.2) $(24.8) $(37.5)
Net income(1)(2)(3)........................... $ 83.7 $ 66.1 $ 68.5 $ 60.8 $ 41.7
Earnings per share:(1)(2)(3)
Basic....................................... $ 2.54 $ 2.01 $ 2.13 $ 1.88 $ 1.28
Diluted..................................... $ 2.49 $ 1.98 $ 2.11 $ 1.85 $ 1.24
Dividends declared and paid per share......... $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24
Average common shares outstanding:
Basic....................................... 32.9 32.8 32.1 32.3 32.7
Diluted..................................... 33.6 33.4 32.5 32.9 33.7
PERFORMANCE MEASURES AND OTHER DATA
Operating data excluding unusual and
nonrecurring charges(4):
Operating income(4)......................... $ 148.7 $ 132.8 $ 135.9 $118.8 $104.5
Operating income -- Return on sales......... 14.3% 13.0% 13.3% 12.8% 11.3%
Operating income -- Return on average total
assets................................... 14.4% 14.1% 16.7% 16.2% 16.6%
EBITDA(5)................................... $ 180.4 $ 178.0 $ 177.6 $158.1 $146.4
Ratio of EBITDA to interest expense(5)...... 7.2X 6.4x 6.1x 6.4x 3.9x
Income from operations...................... $ 83.7 $ 70.8 $ 68.5 $ 60.8 $ 55.3
Diluted earnings per share.................. $ 2.49 $ 2.12 $ 2.11 $ 1.85 $ 1.64
Depreciation and amortization................. $ 33.0 $ 46.5 $ 43.3 $ 39.6 $ 38.4
Capital expenditures.......................... $ 17.4 $ 29.4 $ 29.6 $ 30.3 $ 49.8
Cash provided by operations(6)................ $ 103.7 $ 101.1 $ 78.7 $ 86.6 $ 78.4
Free cash flow(7)............................. $ 91.4 $ 75.3 $ 74.5 $ 62.3 $ 31.1
Ratio of earnings to fixed charges............ 5.3X 3.7x 4.3x 4.4x 2.6x
Net income -- Return on average total
capital..................................... 10.4% 8.9% 11.5% 11.8% 10.4%
-- Return on average
stockholders' equity........................ 22.2% 21.5% 27.6% 31.2% 25.1%
YEAR-END CONSOLIDATED FINANCIAL POSITION
Current assets................................ $ 350.6 $ 379.3 $ 303.1 $256.1 $267.8
Current liabilities........................... $ 261.4 $ 336.2 $ 297.7 $262.7 $233.9
Property, plant, and equipment................ $ 204.3 $ 214.5 $ 214.0 $219.6 $214.4
Total assets.................................. $1,030.0 $1,039.5 $ 859.0 $768.2 $699.8
Long-term debt................................ $ 279.6 $ 303.4 $ 233.6 $231.8 $227.0
Total debt(8)................................. $ 390.1 $ 470.8 $ 361.2 $331.4 $305.3
Stockholders' equity.......................... $ 420.2 $ 335.1 $ 280.8 $216.2 $174.0
Stockholders' equity per share................ $ 12.71 $ 10.21 $ 8.66 $ 6.76 $ 5.42
Total debt as a percentage of
capitalization(8)........................... 48.1% 58.4% 56.3% 60.5% 63.7%
</Table>
SEE NOTES TO SELECTED FINANCIAL DATA ON PAGES A-3 AND A-4.
A-2
NOTES TO SELECTED FINANCIAL DATA
- ---------------
(1) 2001 includes unusual pretax charges totaling $23.3 million, $15.3 million
after tax ($0.46 per diluted share). The charges were for employee
reductions, facility closures and asset writedowns. The year 2001 also
included a tax benefit and related interest income of $10.5 million after
tax ($0.32 per diluted share) resulting from the closure of a number of tax
years. The amounts in 1998 include a nonrecurring pretax charge for cost
reduction initiatives totaling $8.0 million, ($4.8 million after-tax or
$0.14 per diluted share).
(2) The amounts in 2001 and the preceding years include the amortization of
goodwill. Effective January 1, 2002, the Company adopted Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible
Assets", which no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Had the Company not amortized goodwill,
net income and diluted earnings per share would have been higher by $10.2
million ($0.30 per diluted share), $9.2 million ($0.28 per diluted share),
$6.7 million ($0.20 per diluted share) and $4.9 million ($0.15 per diluted
share) in 2001, 2000, 1999 and 1998, respectively.
(3) Amounts in 1998 include a pretax loss on the early repayment of debt of
$13.8 million, $8.7 million, aftertax ($0.26 per diluted share). Prior to
the issuance of FASB Statement No. 145 ("Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections,") in April 2002, such a transaction was reported as an
extraordinary item in accordance with FASB Statement No. 4. The issuance of
Statement No. 145 rescinds Statement No. 4 and requires retroactive
reclassification of prior period items that do not meet specified criteria
for classification as an extraordinary item.
(4) See description of unusual and nonrecurring charge in Note 1 above. The
table below presents the reconciliation of operating income reported in
accordance with GAAP to operating income before unusual and nonrecurring
items.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN MILLIONS)
Operating income, GAAP...................... $148.7 $109.6 $135.9 $118.8 $ 96.4
Add back:
Unusual and nonrecurring items, net....... -- 23.2 -- -- 8.1
------ ------ ------ ------ ------
Operating income, Non-GAAP.................. $148.7 $132.8 $135.9 $118.8 $104.5
====== ====== ====== ====== ======
</Table>
A-3
NOTES TO SELECTED FINANCIAL DATA (CONTINUED)
- ---------------
(5) EBITDA represents income before income taxes, interest, depreciation and
amortization, amortization of deferred financing costs, and nonrecurring
items. EBITDA is presented because the Company is aware that it is used by
rating agencies, securities analysts, investors and other parties in
evaluating the Company. It should not be considered, however, as an
alternative to operating income as an indicator of the Company's operating
performance, or as an alternative to cash flows as a measure of the
Company's overall liquidity as presented in the Company's financial
statements. Furthermore, EBITDA measures shown for the Company may not be
comparable to similarly titled measures used by other companies. The table
below presents the reconciliation of net income reported in accordance with
U.S. GAAP to EBITDA.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN MILLIONS)
Net income.................................. $ 83.7 $ 66.1 $ 68.5 $ 60.8 $ 41.7
Add (deduct):
Interest expense.......................... 25.2 27.9 29.2 24.8 37.5
Interest income........................... (0.7) (1.0) (1.0) (0.8) (1.0)
Income taxes.............................. 39.2 18.3 37.6 33.7 21.8
Depreciation.............................. 32.5 33.2 32.1 30.6 29.9
Amortization.............................. 0.5 13.3 11.2 9.0 8.5
Unusual and nonrecurring items, net....... -- 20.2 -- -- 8.0
------ ------ ------ ------ ------
Total adjustments........................... 96.7 111.9 109.1 97.3 104.7
------ ------ ------ ------ ------
EBITDA...................................... $180.4 $178.0 $177.6 $158.1 $146.4
====== ====== ====== ====== ======
</Table>
(6) Before the effects of an accounts receivable securitization program.
(7) Free cash flow represents net income, plus depreciation and amortization,
less capital expenditures and dividends. Free cash flow is presented because
the Company is aware that it is used by rating agencies, securities
analysts, investors and other parties in evaluating the Company. (Also see
note 5 above). The table below presents the reconciliation of net income
reported in accordance with U.S. GAAP to Free Cash Flow.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN MILLIONS)
Net income.................................. $ 83.7 $ 66.1 $ 68.5 $ 60.8 $ 41.7
Add: Cost associated with early repayment of
debt...................................... -- -- -- -- 8.7
Depreciation & amortization............... 33.0 46.5 43.3 39.6 38.4
Less: Dividends paid........................ (7.9) (7.9) (7.7) (7.8) (7.8)
Capital expenditures...................... (17.4) (29.4) (29.6) (30.3) (49.9)
------ ------ ------ ------ ------
Free cash flow.............................. $ 91.4 $ 75.3 $ 74.5 $ 62.3 $ 31.1
====== ====== ====== ====== ======
</Table>
(8) At December 31, 2002 and 2001, debt includes borrowings under the accounts
receivable securitization program, referred to in note 6 above. At December
31, 2000 and 1999, such amounts were excluded from the balance sheet. Had
these amounts been included in the balance sheet, total debt and total debt
as a percentage of capitalization would have been $406.2 million and $375.4
million and 59.1% and 63.6%, respectively, at December 31, 2000 and 1999.
A-4
AMETEK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes forward-looking statements based on the Company's
current assumptions, expectations and projections about future events. When used
in this report, the words "believes," "anticipates," "may," "expect," "intend,"
"estimate," "project," and similar expressions are intended to identify forward-
looking statements, although not all forward-looking statements contain such
words. In this report, we disclose important factors that could cause actual
results to differ materially from management's expectations. For more
information on these and other factors see "Forward-Looking Information" on
pages A-17 and A-18.
The following discussion and analysis of the Company's results of
operations and financial condition should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements of the
Company and the related notes included elsewhere in this Appendix.
BUSINESS OVERVIEW
AMETEK performed well in 2002 in what remains a difficult economic
environment. In 2002, the Company posted record sales, operating income, net
income, and diluted earnings per share. The Company benefited from its 2001
acquisitions, the aggressive management of its cost structure and a substantial
reduction in its operating working capital. AMETEK is continuing to take the
appropriate steps to size its business to the current economic environment. The
Company also continues to achieve several major objectives under its four growth
strategies: Strategic Acquisitions and Alliances, Global and Market Expansion,
New Products, and Operational Excellence. Significant 2002 and recent events
were:
- Sales were $1.04 billion in 2002, an increase of 2.1% from 2001 despite
weak economic conditions both domestically and internationally.
- Continuing with the Company's global plan to lower its cost structure,
Operational Excellence initiatives in 2002 included the ongoing
transition of a portion of the Company's motor and instrument production
to low-cost manufacturing facilities in Mexico as well as in China and
the Czech Republic. The Company produced 17% of its products in low-cost
locales in 2002.
- A successful program to reduce operating working capital in 2002 resulted
in strong cash flow from operations that totaled $104 million, a 3%
increase from 2001. Inventories were lowered by $23.1 million, or 15%,
since December 31, 2001. The major use of the Company's increased
operating cash flow in 2002 was an $82.8 million reduction of debt. The
reduction in debt continues to provide the Company with additional
financing capability to, among other things, purchase new businesses.
- The Company's shelf registration statement became effective in the fourth
quarter of 2002, allowing for up to $300 million in additional financing
through the potential issuance of a variety of debt and/or equity
securities.
- In a difficult economic environment, the Company continued its emphasis
on investment in research, development and engineering, spending $46.8
million in 2002, an increase of 3.7% over 2001. Benefiting from its
previous investment in research and development, new product sales
increased 6.8% over 2001 to $111.9 million.
- In mid January 2003, the Company completed the acquisition of
Airtechnology Holdings Limited, significantly expanding its presence in
high-end technical motors.
- As of the end of February 2003, the Company acquired Solidstate Controls,
Inc., adding complementary products for the process and power generation
industries.
- In mid March 2003, a new $50 million share repurchase program was
authorized.
A-5
RESULTS OF OPERATIONS
The following table sets forth net sales and income of the Company by
business segment and on a consolidated basis for the years ended December 31,
2002, 2001, and 2000:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
NET SALES(1):
Electronic Instruments................................... $ 539,448 $ 499,528 $ 509,504
Electromechanical........................................ 501,094 519,761 515,156
---------- ---------- ----------
Total net sales................................ $1,040,542 $1,019,289 $1,024,660
========== ========== ==========
INCOME(2):
Segment operating income(3)(4):
Electronic Instruments................................. $ 87,485 $ 57,035 $ 78,771
Electromechanical...................................... 80,225 70,638 77,560
---------- ---------- ----------
Total segment operating income................. 167,710 127,673 156,331
Corporate administrative and other expenses.............. (19,023) (18,123) (20,441)
---------- ---------- ----------
Consolidated operating income............................ 148,687 109,550 135,890
Interest and other expenses, net......................... (25,789) (25,188) (29,752)
---------- ---------- ----------
Consolidated income before income taxes.................. $ 122,898 $ 84,362 $ 106,138
========== ========== ==========
</Table>
- ---------------
(1) After elimination of intra- and intersegment sales, which are not
significant in amount.
(2) The amounts in 2001 include unusual charges of $23.3 million for cost
realignment initiatives and asset writedowns.
(3) Segment operating income represents sales less all direct costs and expenses
(including certain administrative and other expenses) applicable to each
segment, but does not include interest expense.
(4) 2002 excludes goodwill amortization (see "Operating Segment Results").
YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001.
Results of Operations
The Company reported sales for 2002 of $1,040.5 million, an increase of
2.1% from sales of $1,019.3 million in 2001, despite the difficult global
economic environment, which continued to impact many of the Company's
businesses. Net sales for the Electronic Instruments Group (EIG) were $539.4
million in 2002, an increase of 8.0% from sales of $499.5 million in 2001. The
sales increase for EIG was due mainly to the 2001 acquisitions of Instruments
for Research and Applied Science (IRAS) and EDAX, Inc., as well as strength in
the Company's heavy-vehicle instruments business. These increases were partially
offset by a continued decline in demand from most of the Group's other
businesses, primarily aerospace and power instruments. Net sales for the
Electromechanical Group (EMG) were $501.1 million in 2002, a decrease of 3.6%
from sales of $519.8 million in 2001, due to continued weakness in the United
States and European floor care markets, partially offset by the 2001 acquisition
of GS Electric and currency translation gains from international businesses.
Without the impact of the 2001 acquisitions, consolidated sales for 2002 would
have been lower by 6.3% when compared with 2001. Total consolidated
international sales were $353.4 million in 2002, an increase of 10.0% from sales
of $321.2 million in 2001. Export shipments from the United States in 2002 were
$192.0 million, an increase of 12.9% compared with $170.0 million in 2001.
New orders for 2002 were $1,004.8 million, compared with $1,039.5 million
for 2001, a decrease of $34.7 million or 3.3%, due to declines primarily in the
aerospace and power instrument businesses resulting from softness in these
markets, as well as the overall economic slowdown. The decline in orders was
partially
A-6
offset by orders from the 2001 acquisitions. The order backlog at December 31,
2002 was $240.9 million, compared with $276.6 million at December 31, 2001, a
decrease of $35.7 million or 12.9% primarily in the aerospace, power instrument,
and technical motor businesses.
Total segment operating income increased to $167.7 million for 2002, an
increase of 31.4%, compared with segment operating income of $127.7 million for
2001. Segment operating margins in 2002 were 16.1% of sales, an increase from
12.5% of sales in 2001. The higher operating income was primarily driven by the
2001 acquisitions and the non-amortization of goodwill, effective at the
beginning of 2002. This increase was reduced somewhat by higher net pension
costs resulting primarily from lower pension income from the Company's U.S.
defined benefit pension plans. In 2003, the Company expects an increase in total
pension expense of approximately $7.0 million pretax, due primarily to the
recent decline in the market value of pension plan investments caused by the
poor performance of the equity markets, as well as changes in actuarial
assumptions at year-end 2002. In 2002, the Company continued to benefit from its
aggressive cost reduction initiatives, which began in the second half of 2000.
These initiatives include the continued migration of production to low-cost
locales in Mexico, China and the Czech Republic and the lowering of its overall
cost structure. Segment operating income in 2001 included a fourth-quarter
unusual pretax charge to operations of $23 million ($15 million after tax, or
$0.46 per diluted share). Before the 2001 fourth-quarter unusual charge, segment
operating income was $150.7 million, and margins were 14.8% of sales.
Selling, general, and administrative (SG&A) expenses were $104.8 million in
2002, compared with $98.7 million in 2001, an increase of $6.1 million or 6.2%.
As a percentage of net sales, SG&A expenses were 10.1% in 2002, compared to 9.7%
in 2001. The selling expense component, as a percentage of sales, increased to
8.3% in 2002, compared with 7.9% in 2001. The higher selling expense in 2002 was
due to the 2001 acquisitions in EIG, which have a different overall cost
structure than AMETEK's base businesses. Selling expense of base businesses
decreased as a percentage of sales during 2002, reflecting the Company's
continual focus on cost reduction initiatives.
Corporate and other expenses were $19.0 million, or 1.8% of sales in 2002,
an increase of $0.9 million or 5.0%, when compared with $18.1 million in 2001,
but were unchanged as a percentage of sales. Higher insurance expense, pension
costs, and professional fees in 2002 accounted for the increase in corporate
expenses in 2002.
After deducting corporate expenses, consolidated operating income was
$148.7 million or 14.3% of sales, an increase of $39.1 million when compared
with 2001 operating income of $109.6 million or 10.7% of sales. Before unusual
charges in 2001, operating income was $132.8 million, or 13.0% of sales.
Interest expense was $25.2 million in 2002, a decrease of 9.8% compared
with $27.9 million in 2001. A lower average interest rate was the primary reason
for the decrease in interest expense. Other expenses were $0.6 million for 2002,
compared with other income of $2.7 million for 2001. The $3.3 million change
resulted primarily from lower investment income from the Company's captive
insurance subsidiary in 2002. The prior year also included interest income
related to the tax benefits recognized in the fourth quarter of 2001.
The effective tax rate for 2002 was 31.9% compared with 21.6% in 2001. The
effective tax rate in 2002 was favorably impacted by the effect of not
amortizing goodwill due to the adoption of SFAS No. 142, and the Company's tax
planning initiatives. The lower tax rate in 2001 was primarily due to the
recognition of $10.5 million in tax benefits resulting from the closure of a
number of tax years by U.S. federal and state tax authorities. Before unusual
charges and tax benefits, the 2001 effective tax rate was 33.2%.
Net income for 2002 was $83.7 million, or $2.49 per diluted share, compared
with net income for 2001 of $66.1 million, or $1.98 per diluted share, a 26.6%
increase in net income. Net income in 2001 included goodwill amortization of
$10.2 million after tax, or $0.30 per diluted share, and the net effect of the
unusual items, previously mentioned.
Operating Segment Results
The ELECTRONIC INSTRUMENTS GROUP (EIG) sales were $539.4 million in 2002,
an increase of 8.0% from 2001 sales of $499.5 million. The sales increase was
primarily from the IRAS and EDAX acquisitions, as well
A-7
as strength in the heavy-vehicle business. The Company believes the increase in
heavy-vehicle instrument sales was due mainly to truck purchases in advance of
more stringent federal emission standards that became effective October 1, 2002
and is considered to be an isolated event. Conditions remain weak in many of
EIG's markets, especially in the aerospace, power instruments and heavy-vehicle
markets. Without the recent acquisitions, EIG's 2002 sales would have decreased
by 5.5% when compared with 2001.
EIG's operating income for 2002 increased to $87.5 million from $57.0
million in 2001, an increase of $30.5 million, or 53.4%. The increase is the
result of unusual charges recorded in the fourth quarter of 2001 resulting from
headcount reductions, shifting production to low-cost locales and other expense
reduction initiatives. EIG also benefited from the non-amortization of goodwill
in 2002. EIG's pretax goodwill amortization in 2001 was $6.7 million. The
Group's operating margins for 2002 improved to 16.2% from 11.4% in 2001. Without
the 2001 unusual expenses, and goodwill amortization, the Group's operating
income for 2002 would have shown an increase of $11.2 million, or 14.7% when
compared with 2001.
ELECTROMECHANICAL GROUP (EMG) sales were $501.1 million in 2002, a decrease
of 3.6% from 2001 sales of $519.8 million. The sales decrease reflects the
continued overall weakness in the Group's markets, led by continued softness in
the floor care market. The 2001 acquisition of GS Electric and currency
translation gains from international businesses partially offset the sales
decline. Without the recent acquisition, EMG's sales would have decreased by
7.1%.
EMG's operating income for 2002 increased to $80.2 million from $70.6
million in 2001, an increase of 13.6%. The increase is the result of unusual
charges recorded in the fourth quarter of 2001, and improved operating margins
resulting from headcount reductions, shifting production to low-cost locales and
other expense reduction initiatives. EMG also benefited from the
non-amortization of goodwill in 2002. EMG's pretax goodwill amortization in 2001
was $5.2 million. Group operating margins were 16.0% of sales in 2002, up from
13.6% of sales in 2001. Without the 2001 unusual expenses, and goodwill
amortization, the Group's operating income would have decreased by $6.3 million,
or 7.8%.
Fourth Quarter Results
Sales for the fourth quarter of 2002 were $252.6 million, compared with
$237.3 million in the fourth quarter of 2001, an increase of $15.3 million, or
6.4%. The increase in sales was primarily driven by the IRAS acquisition,
although the difficult global economic environment continued to impact many of
the Company's businesses. Without the acquisition, 2002 sales increased
slightly.
Operating income for the fourth quarter of 2002 was $36.5 million, compared
with $5.3 million for the fourth quarter of 2001, an increase of $31.2 million.
Operating income was lower in the fourth quarter of 2001 primarily due to the
recording of unusual expenses that totaled $23.3 million, of which $12.4 million
was related to the costs of employee reductions, facility closures, and the
continued migration of production to low-cost locales, and $10.9 million was
related to asset writedowns. In the fourth quarter of 2002, the Company
continued to benefit from the aggressive management of its cost structure, which
began in the fourth quarter of 2000. The contribution from the acquisition of
IRAS and the non-amortization of goodwill, which started at the beginning of
2002 also benefited the 2002 fourth quarter. Without the effect of unusual
expenses in the fourth quarter of 2001, segment operating income for 2001 would
have been $28.6 million.
Selling, general and administrative expenses were $23.9 million in the
fourth quarter of 2002, a decrease of $3.7 million or 13.4%, when compared with
the fourth quarter of 2001. Selling expenses, as a percentage of sales,
decreased to 7.6% in the fourth quarter of 2002, compared with 9.8% for the same
period in 2001, which reflects the Company's continual focus on cost reduction
initiatives, and the unusual charges in 2001. This decrease was partially offset
by selling expenses related to the IRAS acquisition, acquired in December 2001.
The 2001 fourth quarter included selling, general and administrative expenses of
$2.7 million related to unusual charges.
Corporate and other expenses for the fourth quarter of 2002 were $4.8
million, or 1.9% of sales, compared to $4.3 million, or 1.8% of sales in the
fourth quarter of 2001. After deducting corporate expenses, consolidated
operating income totaled $36.5 million or 14.4% of sales for the fourth quarter
of 2002, compared with
A-8
$5.3 million, or 2.2% of sales for the fourth quarter of 2001. Before unusual
charges, operating income in the fourth quarter of 2001 was $28.6 million, or
12.1% of sales.
Interest expense was $5.7 million in the fourth quarter of 2002, compared
with $6.6 million for the same quarter of 2001. The decrease of $0.9 million, or
13.6%, resulted from lower interest rates and debt levels.
The fourth quarter 2002 provision for income taxes was $9.5 million
compared to a tax benefit of $10.8 million in the fourth quarter of 2001. The
2001 fourth quarter results include a tax benefit of $10.5 million, from the
closure of a number of tax years by U.S. federal and state tax authorities.
Net income for the fourth quarter of 2002 totaled $21.3 million, or $0.63
per diluted share, an increase of $9.8 million, or 86.1% from the fourth quarter
of 2001, when net income was $11.5 million, or $0.34 per diluted share. Before
the unusual items, fourth quarter 2001 earnings were $16.2 million, or $0.48 per
diluted share. Net income for the fourth quarter of 2001 included goodwill
amortization of $2.7 million after tax, or $0.08 per diluted share.
YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Results of Operations
The Company reported sales for 2001 of $1,019.3 million, a decrease of 0.5%
from sales of $1,024.7 million in 2000, caused by weak economic conditions which
impacted most of the Company's businesses. Significantly offsetting the weak
economic conditions were the contributions from the Company's 2001 and 2000
business acquisitions and strength in its aerospace and power instruments
businesses. Without the acquisitions, sales for 2001 would have been 10% lower.
EIG segment sales were $499.5 million in 2001, a decrease of 2.0% from sales of
$509.5 million in 2000. Sales for EIG were lower largely due to a decline in
demand from most of its businesses. Acquisitions and continued strength in the
aerospace and power instruments businesses offset most of the Group's sales
decline. EMG segment sales were $519.8 million in 2001, an increase of 0.9% from
sales of $515.2 million in 2000 due to the sales contribution from acquisitions.
The Group's sales increase was offset by adverse economic conditions and other
competitive factors in the United States and European floor care markets. Total
consolidated international sales were $321.2 million in 2001, a decrease of 1.1%
from sales of $324.9 million in 2000. Export shipments from the United States in
2001 were $170.0 million, a decrease of 5.1% compared with $179.1 million in
2000.
New orders for 2001 were $1,039.5 million, essentially unchanged from
$1,037.6 million for 2000. The order backlog at December 31, 2001 was $276.6
million, compared with $256.4 million at December 31, 2000. New orders from
acquisitions made by the Company during 2001 and increased orders from the
aerospace and power instrument businesses were the primary reasons for the
increase.
Total segment operating income declined to $127.7 million for 2001, a
decrease of 18.3%, compared with segment operating income of $156.3 million for
2000. Segment operating margins in 2001 were 12.5% of sales, a decrease from
15.3% of sales in 2000. The overall reduction in segment operating margins in
2001 was primarily due to fourth quarter unusual pretax charges to operations of
$23 million ($15 million after tax, or $0.46 per diluted share). Partially
offsetting the lower segment operating margins in 2001, was lower pension
expense due primarily to use of the assumed return on pension investment assets.
Before the unusual charge, segment operating margins for 2001 were 14.8%. These
unusual charges are more fully discussed below under the "Fourth Quarter
Results".
Selling, general, and administrative (SG&A) expenses were $98.7 million in
2001, compared with $95.1 million in 2000, a $3.6 million increase due mainly to
increased selling expenses from acquisitions completed in 2001. As a percentage
of net sales, SG&A expenses were 9.7% in 2001, compared to 9.3% in 2000.
Corporate administrative expenses decreased to $18.1 million in 2001, compared
with $20.4 million in 2000, a decrease of $2.3 million, or 11.3%. The decrease
in corporate expenses reflected the impact of corporate cost reduction
activities primarily resulting from reduced information technology, consulting,
and travel expenses. Corporate expenses for 2001 were 1.8% percent of sales,
compared with 2.0% of sales for 2000.
A-9
After deducting corporate administrative expenses, consolidated operating
income was $109.6 million or 10.7% of sales, a decrease of $26.3 million when
compared with 2000 operating income of $135.9 million or 13.3% of sales. Before
unusual charges, operating income was $132.8 million, or 13.1% of sales.
Interest expense was $27.9 million in 2001, a decrease of 4.4% compared
with $29.2 million in 2000. Lower average interest rates, partially offset by
higher average debt levels to finance acquisitions, were the primary reasons for
the decrease in interest expense. Other income was $2.7 million for 2001,
compared with other expense of $0.5 million for 2000. The improvement resulted
primarily from interest income related to tax benefits recognized in the fourth
quarter of 2001 and from increased gains on sales of marketable securities held
by the Company's captive insurance subsidiary.
The effective tax rate for 2001 was 21.6% compared with 35.4% in 2000. The
lower tax rate in 2001 reflected the fourth quarter recognition of $10.5 million
in tax benefits ($0.32 per diluted share) resulting from the closure of a number
of open tax years by U.S. federal and state tax authorities, as well as higher
tax credits associated with export sales. Before unusual charges and the tax
benefits, the 2001 effective tax rate was 33.2%.
Net income for 2001 was $66.1 million, or $1.98 per diluted share, compared
with net income for 2000 of $68.5 million, or $2.11 per diluted share. The 3.5%
decrease in net income was due primarily to the fourth quarter net effect of the
unusual items, previously mentioned. Before the unusual items, earnings for 2001
were up 3.3% to $70.8 million, or $2.12 per diluted share.
Fourth Quarter Results
Sales for the fourth quarter of 2001 were $237.3 million, compared with
$258.2 million in the fourth quarter of 2000, a decrease of $20.9 million, or
8.1%. The decrease in fourth quarter sales was the result of significantly
weaker economic conditions, which impacted most of the Company's businesses.
Without the acquisitions, sales for the fourth quarter of 2001 would have been
17% lower.
Operating income for the fourth quarter of 2001 was $5.3 million, compared
with $34.1 million for the fourth quarter of 2000, a decrease of $28.8 million
or 84.4%. In response to weak economic conditions, in the fourth quarter of
2001, the Company recorded unusual expenses totaling $23.3 million of which
$12.4 million is related to the costs of employee reductions, facility closures,
the continued migration of production to low-cost locales, and $10.9 million
related to asset writedowns. The asset writedowns related to receivables ($3.3
million), inventory ($6.1 million) and equipment ($1.5 million). The asset
writedowns are primarily the result of the difficulties the economic environment
has had on a number of the Company's customers. The annualized cost savings
resulting from the severance and related actions are expected to be
approximately $25 million. These cost reduction initiatives were a continuation
of cost reduction programs that began in the fourth quarter of 2000, for which
the Company recorded a $3.4 million pretax charge in that quarter, and continued
during 2001.
Also, the fourth quarter 2001 results included a tax benefit of $10.5
million ($0.32 per diluted share), resulting from the closure of a number of tax
years by U.S. federal and state tax authorities. The tax benefits consisted of
cash of $4.4 million and a non-cash benefit of $6.1 million. As a result of the
tax benefit relating to the unusual charges, and the tax benefits discussed
here, the Company reported a total income tax benefit of $10.8 million in the
fourth quarter of 2001 compared with a tax provision of $9.2 million in the same
period of 2000.
Net income for the fourth quarter of 2001 totaled $11.5 million, or $0.34
per diluted share, a decrease of $5.8 million, or 33.5% from the fourth quarter
of 2000 net income of $17.2 million, or $0.53 per diluted share. Before the
unusual items, fourth quarter 2001 earnings were $16.2 million, or $0.48 per
diluted share.
Operating Segment Results
EIG sales were $499.5 million in 2001, a decrease of 2.0% from 2000 sales
of $509.5 million. The continued economic slowdown impacted most of the EIG
Group's businesses and was partially offset by the
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sales contribution of the Company's 2001 and 2000 acquisitions and the strength
of the aerospace and power instruments businesses.
EIG's operating income for 2001 decreased to $57.0 million from $78.7
million in 2000, a decrease of $21.7 million, or 27.6%. Lower base business
sales caused by weak economic conditions, and significant unusual charges for
inventory writedowns, receivable losses related to a bankrupt customer, cost
realignment and employee severance related activities in the fourth quarter of
2001 drove the lower operating income. The Group's operating margins for 2001
declined to 11.4% from 15.5% in 2000. Without the unusual expenses, the Group's
operating income for 2001 would have been $69.5 million, a decrease of $9.3
million, or 13.9% of sales, compared with 2000.
EMG's sales for 2001 were $519.8 million, an increase of 0.9%, from sales
of $515.2 million in 2000. The 2001 and 2000 acquisitions drove the year-to-year
increase in sales. Weakness in the North American and European floor care
markets, along with lower sales of specialty metal products offset most of the
sales increase from acquisitions.
EMG's operating income for 2001 decreased to $70.6 million from $77.6
million in 2000, an 8.9% decrease. Lower profits were the result of significant
unusual expenses associated with cost reduction activities in the fourth quarter
of 2001 related primarily to employee severance activities, inventory
writedowns, losses on receivables due to customer bankruptcies, and the
writedown of certain machinery and equipment. Group operating margins were 13.6%
of sales in 2001 down from 15.1% of sales in 2000. Without the unusual expenses,
the Group's operating income would have increased to $81.3 million, an increase
of $3.7 million, or 15.6% of sales.
LIQUIDITY AND CAPITAL RESOURCES
In 2002, cash provided by operating activities totaled $103.7 million,
compared with $101.1 million (before accounts receivable securitization
transactions) for 2001, an increase of $2.6 million. The $2.6 million increase
in operating cash flow was the result of higher earnings and a strong focus on
reducing operating working capital. At December 31, 2002, inventories were lower
by $23.1 million, or 15.1% and receivables were lower by $5.8 million or 3.2%
compared with December 31, 2001. The 2001 inventory balance included a build-up
of inventories to protect customers during the Company's movement of certain
production to low-cost manufacturing facilities. Those movements are continuing,
and some inventory build-up at certain locations remain in place. Strong
operating cash flow during 2002 allowed the Company to repay $82.8 million in
debt and to contribute $30.3 million to its U.S. defined benefit pension plans,
including a $19.6 million contribution late in the fourth quarter of 2002. The
Company's after-tax cash expenditures for 2002, relating to its fourth quarter
2001 accrual for cost reduction initiatives, were $4.1 million. The remaining
$2.9 million in after-tax cash expenditures is expected to be expended for the
intended programs by the first half of 2004. Free cash flow (net income, plus
depreciation and amortization, less capital spending and dividends) was $91.4
million in 2002, compared with $75.3 million in 2001. Free cash flow and EBITDA
(presented elsewhere in this report) are presented because the Company is aware
that they are important measures that are used by third parties in evaluating
the Company.
In connection with its accounts receivable securitization program in 2001,
the Company recorded $45.0 million of securitized accounts receivable and
short-term borrowings of a special-purpose subsidiary. After deducting this
item, cash generated by operating activities in 2001 totaled $56.1 million.
Cash used for investing activities was $19.7 million for 2002, compared
with $152.5 million of cash used in 2001. In 2001, the Company purchased three
businesses for $131.8 million. The Company acquired GS Electric in May 2001,
EDAX in July 2001 and IRAS in December 2001. Additions to property, plant and
equipment totaled $17.4 million in 2002, compared with $29.4 million in 2001.
Cash used for financing activities totaled $84.6 million in 2002, compared
with cash provided of $103.3 million in 2001. In 2002 net short-term borrowings
decreased by $59.0 million, and long-term borrowings decreased $23.8 million.
These decreases reflect the partial use of the strong operating cash inflows for
2002 to pay down debt outstanding under the revolving credit facility. In 2001,
short-term borrowings
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increased $37.7 million and long-term debt had a net increase of $72.6 million.
The 2001 increases were for borrowings to fund the 2001 acquisitions and the
accounts receivable securitization transaction discussed above.
Repurchases of the Company's common stock in 2002 totaled $7.3 million for
236,900 shares, compared with $11.6 million for 440,000 shares acquired in 2001.
Subsequent to December 31, 2002, the Company repurchased an additional 190,000
shares of its common stock for approximately $5.8 million. The share repurchases
were made under a 1998 $50 million share repurchase program. On March 12, 2003,
the Company's Board of Directors authorized a new $50 million share repurchase
program, adding to the $2.5 million remaining balance from the 1998 program.
Under the 1998 program, $47.5 million was used for share repurchases. As of
March 12, 2003, $52.5 million was approved for future share repurchases. Net
cash proceeds from the exercise of employee stock options and other items, net,
totaled $13.4 million in 2002, compared with $12.5 million in 2001.
At December 31, 2002, total debt outstanding was $390.1 million compared
with $470.8 million at December 31, 2001. The Company's debt agreements contain
various covenants including limitations on indebtedness, dividend payments and
maintenance of certain financial ratios. At December 31, 2002 and 2001, the
Company was within the allowable limits of the financial ratios. Debt as a
percentage of capitalization decreased to 48.1% at December 31, 2002 from 58.4%
at December 31, 2001. EBITDA (income before income taxes, interest expense,
interest income, depreciation and amortization) in 2002 was $180.4 million,
compared with $178.0 million for 2001 before unusual items. The Company's
debt-to-EBITDA ratio (computed in accordance with the credit agreement), was 2.2
to 1 at December 31, 2002, compared with 2.4 to 1 at the prior year-end, and
EBITDA covered interest expense 7.2 times in 2002 compared with 6.4 times in
2001.
Contractual Cash Obligations
The following table summarizes AMETEK's contractual cash obligations at
December 31, 2002 and the effect such obligations are expected to have on its
liquidity and cash flows in future periods.
<Table>
<Caption>
PAYMENTS DUE
---------------------------------------------
LESS ONE TO FOUR TO AFTER
THAN THREE FIVE FIVE
TOTAL ONE YEAR YEARS YEARS YEARS
------ -------- ------ ------- ------
(IN MILLIONS)
Debt:
7.2% Senior Notes............................... $225.0 $ -- $ -- $ -- $225.0
Revolving credit loans (a)...................... 88.0 -- -- 88.0 --
Other indebtedness (b).......................... 77.1 7.4 68.0 0.5 1.2
------ ----- ----- ----- ------
Total debt...................................... 390.1 7.4 68.0 88.5 226.2
Non-cancellable operating leases.................. 21.4 4.6 7.2 4.8 4.8
Employee severance................................ 4.6 2.8 1.8 -- --
------ ----- ----- ----- ------
Total................................... $416.1 $14.8 $77.0 $93.3 $231.0
====== ===== ===== ===== ======
</Table>
- ---------------
(a) Although not contractually obligated, the Company expects to have the
capability to repay this obligation in less than four years as permitted in
the credit agreement. Accordingly, $38 million is classified as short-term
borrowings and the remaining $50 million is considered long-term debt at
December 31, 2002.
(b) Amount includes $65 million under the accounts receivable securitization
program, which is classified as short-term borrowings at December 31, 2002.
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Other Commitments
The Company has standby letters of credit of approximately $21.4 million
related to performance and payment guarantees. Based on experience with these
arrangements, the Company believes that any obligations that may arise will not
be material.
The Company may, from time to time, redeem, tender for, or repurchase its
long-term debt in the open market or in privately negotiated transactions
depending upon availability, market conditions and other factors.
As a result of all of the Company's cash flow activities, cash and cash
equivalents decreased $0.6 million in 2002 to $13.5 million at year-end,
compared with $14.1 million at December 31, 2001. The Company also had available
borrowing capacity of $190.6 million under its $300 million revolving bank
credit facility at December 31, 2002, and $10.0 million under its accounts
receivable securitization agreement. The Company believes it has sufficient
cash-generating capability and available financing alternatives to enable it to
meet its needs for the foreseeable future. The Company's shelf registration
statement, filed with the Securities and Exchange Commission, became effective
in October 2002 and allows for up to $300 million in additional equity or debt
financing.
TRANSACTIONS WITH RELATED PARTIES
The Company has a business relationship with the law firm of Stroock &
Stroock & Lavan LLP. A partner of this firm is a member of the Company's Board
of Directors. The investment banking firm of American Securities, L.P. rendered
financial advisory, investment management, and other services to the Company.
Three managing directors of American Securities, L.P. are members of the
Company's Board of Directors.
In 2002, Stroock & Stroock & Lavan LLP, and American Securities, L.P., and
its affiliates billed fees to the Company in the aggregate for services rendered
of $200,000 and $270,000, respectively. Beginning in 2003, the Company will no
longer utilize the services of American Securities, L.P. and its affiliates.
CRITICAL ACCOUNTING POLICIES
The Company has identified its most critical accounting policies as those
accounting policies that can have a significant impact on the presentation of
the Company's financial condition and results of operations, and require the use
of complex and subjective estimates based upon past experience and management's
judgment. Because of the uncertainty inherent in such estimates, actual results
may differ materially from these estimates. The consolidated financial
statements and related notes contain information that is pertinent to the
Company's accounting policies and to management's discussion and analysis. The
information that follows represents additional specific disclosures about the
Company's accounting policies regarding risks, estimates, subjective decisions,
or assessments where materially different results of operations and financial
condition could have been reported had different assumptions been used or
different conditions existed. Disclosure of the Company's significant accounting
policies can be found in Note 1 of "Notes to Consolidated Financial Statements,"
included elsewhere in this report.
- Revenue Recognition. The Company recognizes revenues in accordance with
invoice terms, generally when products are shipped and services are
rendered. The policy with respect to sales returns and allowances
generally provides that the customer may not return products or be given
allowances, except at the Company's option. Accruals for sales returns,
other allowances, and estimated warranty costs are provided at the time
of shipment based upon past experience. At December 31, 2002 and 2001,
the accrual for future warranty obligations was $6.4 million and $7.7
million, respectively. If actual future sales returns, allowances and
warranty amounts are higher than past experience, additional amounts may
be required.
- Inventories. The Company uses the last-in, first-out (LIFO) method of
accounting for most inventories. Inventories reported on the Company's
balance sheet are conservatively valued. The Company provides estimated
inventory reserves for slow-moving and obsolete inventory based on
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current assessments about future demand, market conditions, customers who
may be experiencing financial difficulties, and related management
initiatives. If these factors are less favorable than those projected by
management, additional inventory reserves may be required. If the Company
had used the first-in, first-out (FIFO) method of inventory valuation,
which approximates current replacement cost, inventories would have been
approximately $27.0 million and $29.1 million higher than the amount
reported in the balance sheet at December 31, 2002 and 2001,
respectively.
- Goodwill and Intangible Assets. The Company adopted SFAS No. 142
"Goodwill and Other Intangible Assets" as of January 1, 2002. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are not
amortized; rather, they are tested for impairment on at least an annual
basis. Accordingly, the Company ceased amortization of all goodwill and
intangible assets with indefinite lives as of January 1, 2002. Intangible
assets with finite lives will continue to be amortized over their useful
lives.
SFAS No. 142 requires a two-step impairment test for goodwill. The
first step is to compare the carrying amount of the reporting unit's net
assets to the fair value of the reporting unit. If the fair value exceeds
the carrying value, no further evaluation is required and no impairment
loss is recognized. If the carrying amount exceeds the fair value then the
second step is required to be completed, which involves allocating the
fair value of the reporting unit to each asset and liability, with the
excess being implied goodwill. An impairment loss occurs if the amount of
the recorded goodwill exceeds the implied goodwill. The determination of
the fair value of the Company's reporting units is based, among other
things, on estimates of future operating performance of the reporting unit
being valued. The Company is required to complete the impairment test for
goodwill and record any resulting impairment losses annually. Changes in
market interest rates and other conditions may have an impact on these
estimates. The Company's acquisitions have generally included a large
goodwill component and the Company expects to continue to make
acquisitions. At December 31, 2002, goodwill totaled $391.9 million or 38%
of the Company's total assets. The Company's transitional impairment test
that resulted from adoption of SFAS 142 early in 2002, and the required
annual impairment test in the fourth quarter of 2002, determined that the
Company's goodwill was not impaired.
- Pensions. The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions", which
requires that amounts recognized in financial statements be determined on
an actuarial basis. The most significant elements in determining the
Company's pension income or expense are pension liability discount rates
and the expected return on plan assets. The pension discount rate
reflects the current interest rate at which the pension liabilities could
be settled at the year-end valuation date. At the end of each year, the
Company determines the discount rate to be used to discount plan
liabilities. In estimating this rate, the Company looks to rates of
return on high-quality, fixed-income investments. The discount rate used
in determining the 2002 pension cost was 7.25% for U.S. defined benefit
pension plans. The discount rate used for determining the funded status
of the plans at December 31, 2002, and determining the 2003 U.S. defined
benefit pension plan cost is 6.75%. The Company has assumed that the
expected long-term rate of return on plan assets for the 2003 pension
expense will be 8.90%, down from 9.25% used for 2002. The rate of
compensation increase used in determining the 2002 pension cost was 4.0%
for U.S. defined benefit pension plans and 3.5% for the 2003 pension cost
for U.S. defined benefit plans. The net effect of changes in the discount
rate, as well as the effect of differences between the expected return
and the actual return on plan assets which have been deferred and are
subject to amortization totaled $74.9 million at December 31, 2002, and
will ultimately affect future pension costs. For the year ended December
31, 2002, the Company recognized consolidated pretax pension income of
$1.2 million from its defined benefit pension plans, compared with
pension income of $4.7 million from these plans in 2001. Due primarily to
the continued depressed equity security markets in 2002 and changes in
the assumed discount rate and long-term rate of return, the Company
anticipates significantly higher pension expense by approximately $7
million in 2003. The Company contributed a total of $30.3 million to its
U.S. defined benefit pension plans during 2002, including a $19.6 million
cash contribution
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late in the fourth quarter of 2002. Based on information available to the
Company at December 31, 2002, the Company does not expect a significant
pension contribution in 2003.
- Accounts Receivable. The Company maintains allowances for estimated
losses resulting from the inability of specific customers to meet their
financial obligations to the Company. A specific reserve for bad debts is
recorded against the amount due from these customers. For all other
customers, the Company recognizes reserves for bad debts based on the
length of time specific receivables are past due based on its past
experience. If the financial condition of the Company's customers were to
deteriorate, resulting in their inability to make payments, additional
allowances may be required. The allowance for possible losses on
receivables at December 31, 2002 was $7.2 million, compared with $7.6
million at December 31, 2001.
NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Goodwill and intangible assets with indefinite lives
are not amortized; rather, they are tested for impairment on at least an annual
basis. Had the Company not amortized goodwill during the years 2001 and 2000,
net income for 2001 and 2000 would have been approximately $10.2 million and
$9.2 million higher respectively, than the reported amounts. Diluted earnings
per share would have been $0.30 and $0.28 higher in 2001 and 2000, respectively.
Pursuant to SFAS No. 142, the Company was required to complete a transitional
impairment test of goodwill in the initial year of adopting the standard, with
any impairment charges recorded as a cumulative effect of a change in accounting
principle. Additionally, the Company completed its annual impairment test in the
fourth quarter of 2002. Both tests determined that no impairment existed.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and normal operation of a long-lived asset. SFAS No.
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life. Statement No.
143 is effective January 1, 2003 for the Company. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 143 will have on its
consolidated results of operations, financial position, or cash flows.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires an impairment loss to be recognized only if the
carrying amounts of long-lived assets to be held and used are not recoverable
from their expected undiscounted future cash flows. Adoption of SFAS No. 144 had
no effect on the Company's consolidated results of operations, financial
position, or cash flows.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS
No. 4, which required that all gains and losses from extinguishment of debt be
reported as an extraordinary item. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15,
2002 (January 1, 2003 for the Company). The Company has early adopted this
statement for the year ended December 31, 2002. In 1998, the Company recorded a
loss on the early extinguishment of debt that was previously classified as an
extraordinary item in its 5-year Selected Financial Data table on page 13. As of
December 31, 2002, such loss has been reclassified to interest expense in the
5-year table previously mentioned. The adoption of this Statement will have no
effect on the Company's consolidated results of operations, financial position,
or cash flows.
In July 2002, the Financial Accounting Standards Board issued Statement No.
146, "Accounting for Costs Associated with Exit or Disposal Activities".
Statement No. 146 replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
A-15
(including Certain Costs Incurred in a Restructuring)." Among other things,
Statement No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred instead of at
the date of an entity's commitment to an exit plan, as under EITF Issue No.
94-3. Statement No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption of this statement to have a significant
effect on the Company's consolidated results of operations, financial position,
or cash flows.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosures",
which amended FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement No. 148 provides alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. Statement No. 148 amends the disclosure requirements of Statement
No. 123 to require more prominent and more frequent disclosure in the financial
statements about the effects of stock-based compensation. Statement No. 148 is
effective for fiscal years ended after December 15, 2002. Accordingly, the
Company has adopted the annual disclosure provisions of Statement No. 148 in its
financial statements for the year ended December 31, 2002. The Company will
implement Statement No. 148 effective January 1, 2003 regarding disclosure
requirements for condensed financial statements for interim periods. As provided
by Statements No. 123 and 148, the Company has chosen to continue use of the
accounting method under APB 25 and the related interpretations to account for
the Company's stock compensation plans. As adoption of Statement No. 148 only
involves disclosures by the Company, there is no impact from its adoption on the
Company's results of operations, financial position, or liquidity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" (FIN No. 45). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting, by requiring identical accounting for guarantees issued
with separately identified consideration and guarantees issued without
separately identified consideration. The disclosure provisions of FIN No. 45 are
effective for the Company as of December 31, 2002. The Company has guarantees
and claims arising during the course of its business operations. The Company
accrues for losses under these arrangements when they become probable and
estimable. The initial recognition and measurement provisions of FIN No. 45 are
applicable to guarantees issued or modified after December 31, 2002. The Company
is currently evaluating what impact, if any, adoption of FIN No. 45 will have on
its consolidated results of operations, financial position, or cash flows.
INTERNAL REINVESTMENT
Capital Expenditures
Capital expenditures were $17.4 million for 2002, compared with $29.4
million for 2001. Approximately 61% of the expenditures in 2002 were for
equipment to increase productivity and expand capacity. The Company's 2003
capital expenditures are expected to increase when compared with 2002 levels,
with a continuing emphasis on spending to improve productivity and expand
low-cost manufacturing facilities.
Product Development and Engineering
Product development and engineering expenses are directed toward the
development and improvement of new and existing products and processes. Such
expenses were $46.8 million in 2002, an increase from $45.2 million in 2001, and
$45.9 million in 2000. Included in the amounts above are net expenses for
research and development of $23.7 million for 2002, $22.6 million for 2001, and
$23.8 million for 2000.
Environmental Matters
Certain historic processes in the manufacture of previous AMETEK products
have resulted in environmentally hazardous waste by-products as defined by
federal and state laws and regulations. While these waste
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products were handled in compliance with regulations existing at that time, the
Company has been named a Potentially Responsible Party (PRP) regarding waste
remediation at several non-AMETEK sites that are the subject of
government-mandated cleanups. In addition to these non-AMETEK sites, the Company
has an ongoing practice of providing reserves for probable remediation
activities at certain of its manufacturing locations and for claims and
proceedings against the Company with respect to other environmental matters once
the Company has determined that a loss is probable and estimable. Total
environmental reserves at December 31, 2002 and 2001 were approximately $7
million and $9 million, respectively. In 2002, the Company spent approximately
$2 million on such environmental matters, compared with approximately $1 million
in 2001. The Company also has agreements with former owners of certain of its
acquired businesses as well as new owners of previously owned businesses under
which the Company and former owners have retained or assumed and agreed to
indemnify the other party against certain environmental and other liabilities
under certain circumstances. The Company and some of the other parties carry
insurance coverage for some environmental matters. To date, those parties have
met their obligation in all material respects. The Company has no reason to
believe that such third parties would fail to perform their obligation in the
future. However, if the Company were required to record a liability with respect
to all, or a portion of, such matters on its balance sheet, the amount of the
liability would not be significant. In the opinion of management, based upon
presently available information and past experience related to such matters,
either adequate provision for probable costs has been made, or the ultimate cost
resulting from these actions are not expected to materially affect the
consolidated financial position, results of operations, or cash flow of the
Company.
IMPACT OF INFLATION
The Company attempts to minimize the impact of inflation through cost
reduction programs and by improving productivity. In addition, the Company uses
the last-in, first-out (LIFO) method of accounting for most inventories (whereby
the cost of products sold approximates current costs), and therefore, the impact
of inflation is substantially reflected in operating costs. In general, the
Company believes programs are in place that are designed to monitor the impact
of inflation and to take necessary steps to minimize inflation's effect on
operations.
MARKET RISK
The Company's primary exposures to market risk are fluctuations in interest
rates on its short-term debt, and in foreign currency exchange rates.
The Company's long-term debt is fixed-rate debt and its short-term debt is
variable-rate debt. These financial instruments are more fully described in the
notes to the financial statements.
The foreign currencies to which the Company has the most significant
exchange rate exposure include the euro, the Japanese yen, and the British pound
sterling. Exposure to foreign currency rate fluctuation is monitored, and when
possible, mitigated through the use of local borrowings in the foreign country
affected. The effect of translating foreign subsidiaries' balance sheets into
U.S. dollars is included in other comprehensive income, within stockholders'
equity. Foreign currency transactions have not had a significant effect on the
operating results reported by the Company.
Based on a hypothetical ten percent adverse movement in either interest
rates or foreign currency exchange rates, the potential losses in future
earnings, fair value of risk-sensitive financial instruments, and cash flows are
not material, although the actual effects may differ materially from the
hypothetical analysis.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Form 10-K are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act (PSLRA)
of 1995, which involve risk and uncertainties that exist in the Company's
operations and business environment, and are subject to change based on various
important factors. The Company wishes to take advantage of the "safe harbor"
provisions of the PSLRA by cautioning readers that numerous important factors
discussed below, among others, in some cases have caused, and in the future
could cause, the Company's actual results to differ materially from those
expressed in any forward-
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looking statements made by, or on behalf of, the Company. The following include
some, but not all, of the factors or uncertainties that could cause actual
results to differ from projections:
- The current economic slowdown, or unforeseen price reductions in the
Company's global market segments, with adverse effects on profit margins.
- Acts of war, terrorism or natural disasters.
- The Company's inability to continue achieving its cost reduction
objectives, due in part to varying prices and availability of certain raw
materials and semifinished materials and components.
- Underutilization of the Company's existing factories and plants, or plant
expansions or new plants, possibly resulting in production
inefficiencies.
- Higher than anticipated, or unanticipated start-up expenses and
production delays at new plants.
- The unanticipated expenses of divesting businesses, or of assimilating
newly acquired businesses into the Company's business structure, as well
as the impact of unusual expenses from business strategies, asset
valuations, acquisitions, divestitures and organizational structures.
Acquisition and divestiture strategies may face legal and regulatory
delays and other unforeseeable obstacles beyond the Company's control.
- The increased cost or inability to obtain property and liability
insurance due to uncertainty in worldwide insurance and reinsurance
markets.
- The potential writeoff of substantial goodwill and other intangible
assets.
- Unpredictable delays or difficulties in the development of key new
product programs, and the risk of not recovering major research and
development expenses, and/or the risks of major technological shifts away
from the Company's technologies and core competencies.
- A prolonged slowing of the growth rate in the U.S. and Europe for
electric motor products, aerospace, heavy-vehicle and process
instrumentation, as well as a restriction in the ability of heavy-vehicle
manufacturers to secure components manufactured by outside suppliers.
- Rapid or unforeseen escalation of the cost of regulatory compliance
and/or litigation, including but not limited to, environmental
compliance, product-related liability, assertions related to intellectual
property rights and licenses, adoption of new, or changes in, accounting
policies and practices and the application of such policies and
practices.
- The effects, in the United States and abroad, of changes in trade
practices; monetary and fiscal policies; laws and regulations; other
activities of governments, agencies and similar organizations, such as
trade restrictions or prohibitions; and social and economic conditions;
unforeseen inflationary pressures and monetary fluctuation; import and
other charges or taxes and the ability or inability of the Company to
obtain, or hedge, foreign currencies, foreign currency exchange rates and
fluctuation in those rates. This would include extreme currency
fluctuations; protectionism and confiscation of assets; nationalizations;
unstable governments and legal systems; and intergovernmental disputes.
- Variation in the level of orders booked, which can be affected by general
economic conditions, intensity of competition and continued marketplace
acceptance of products.
- Increased environmental compliance costs, and the potential costs
associated with asbestos-related litigation.
The Company believes that it has the product offerings, facilities, personnel
and competitive and financial resources for continued business success. However,
future revenues, costs, margins, product mix and profits are all influenced by a
number of factors, as discussed above.
A-18
REPORT OF MANAGEMENT
Management has prepared and is responsible for the integrity of the
consolidated financial statements and related information included herein. The
statements are prepared in conformity with accounting principles generally
accepted in the United States consistently applied and include certain amounts
based on management's best estimates and judgments. Historical financial
information elsewhere in this report is consistent with that in the financial
statements.
In meeting its responsibility for the reliability of the financial
information, management maintains a system of internal accounting and disclosure
controls, including an internal audit program. The system of controls provides
for appropriate division of responsibility and the application of written
policies and procedures. That system, which undergoes continual reevaluation, is
designed to provide reasonable assurance that assets are safeguarded and records
are adequate for the preparation of reliable financial data. Management uses its
best judgment in balancing the benefits of the system with its cost. Management
believes that the Company's system of internal control is effective and adequate
to accomplish the above-described objectives.
The Company's independent auditors, Ernst & Young LLP, are engaged to
render an opinion as to whether management's financial statements present
fairly, in all material respects, the Company's financial position and operating
results. Their report is included on the next page.
The Audit Committee of the Board of Directors, which is composed solely of
Directors who are not employees of the Company, meets with the independent
auditors, the internal auditors and management to satisfy itself that each is
properly discharging its responsibilities. The Report of the Audit Committee is
included in this proxy statement. Both the independent auditors and internal
auditors have direct access to the Audit Committee.
Management recognizes its responsibility for conducting the Company's
activities according to the highest standards of personal and corporate conduct.
That responsibility is characterized and reflected in key policy statements
publicized throughout the Company.
-s- John J. Molinelli Signature
John J. Molinelli
Executive Vice President --
Chief Financial Officer
January 28, 2003
A-19
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of AMETEK, Inc.
We have audited the accompanying consolidated balance sheets of AMETEK,
Inc. as of December 31, 2002 and 2001, and the related consolidated statements
of income, cash flows, and stockholders' equity for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AMETEK, Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the consolidated financial statements, AMETEK,
Inc. changed its method of accounting for goodwill in accordance with Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," in 2002.
-s- ERNST & YOUNG LLP
--------------------------------
Philadelphia, PA
January 28, 2002
A-20
AMETEK, INC.
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET SALES................................................ $1,040,542 $1,019,289 $1,024,660
---------- ---------- ----------
Expenses:
Cost of sales (excluding depreciation)................. 754,571 777,919 761,548
Selling, general and administrative.................... 104,816 98,655 95,147
Depreciation........................................... 32,468 33,165 32,075
---------- ---------- ----------
Total expenses................................. 891,855 909,739 888,770
---------- ---------- ----------
OPERATING INCOME......................................... 148,687 109,550 135,890
Other income (expenses):
Interest expense....................................... (25,181) (27,913) (29,203)
Other, net............................................. (608) 2,725 (549)
---------- ---------- ----------
Income before income taxes............................... 122,898 84,362 106,138
Provision for income taxes............................... 39,200 18,251 37,606
---------- ---------- ----------
Net income............................................... $ 83,698 $ 66,111 $ 68,532
========== ========== ==========
Basic earnings per share................................. $ 2.54 $ 2.01 $ 2.13
========== ========== ==========
Diluted earnings per share............................... $ 2.49 $ 1.98 $ 2.11
========== ========== ==========
Average common shares outstanding:
Basic shares........................................... 32,918 32,838 32,131
========== ========== ==========
Diluted shares......................................... 33,627 33,445 32,534
========== ========== ==========
</Table>
See accompanying notes.
A-21
AMETEK, INC.
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,483 $ 14,139
Marketable securities..................................... 8,320 8,215
Receivables, less allowance for possible losses........... 175,230 181,031
Inventories............................................... 129,451 152,525
Deferred income taxes..................................... 10,005 10,096
Other current assets...................................... 14,080 13,341
---------- ----------
Total current assets.............................. 350,569 379,347
Property, plant and equipment, net.......................... 204,329 214,494
Goodwill, net of accumulated amortization................... 391,947 387,420
Other assets................................................ 83,161 58,231
---------- ----------
Total assets...................................... $1,030,006 $1,039,492
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 110,422 $ 167,399
Accounts payable.......................................... 81,108 86,707
Income taxes payable...................................... 3,287 1,541
Accrued liabilities....................................... 66,603 80,503
---------- ----------
Total current liabilities......................... 261,420 336,150
Long-term debt.............................................. 279,636 303,434
Deferred income taxes....................................... 41,233 33,496
Other long-term liabilities................................. 27,536 31,354
Stockholders' equity :
Preferred stock, $0.01 par value; authorized: 5,000,000
shares; none issued.................................... -- --
Common stock, $0.01 par value; authorized: 100,000,000
shares; issued: 2002 -- 33,883,179 shares;
2001 -- 33,412,873 shares.............................. 339 334
Capital in excess of par value............................ 14,045 683
Retained earnings......................................... 464,731 388,929
Accumulated other comprehensive losses.................... (34,719) (37,023)
Less: Cost of shares held in treasury: 2002 -- 816,057
shares;
2001 -- 596,643 shares................................. (24,215) (17,865)
---------- ----------
Total stockholders' equity........................ 420,181 335,058
---------- ----------
Total liabilities and stockholders' equity........ $1,030,006 $1,039,492
========== ==========
</Table>
See accompanying notes.
A-22
AMETEK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY INCOME EQUITY INCOME EQUITY
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
CAPITAL STOCK
Preferred Stock, $.01 par value... $ -- $ -- $ --
-------- -------- --------
Common Stock, $.01 par value......
Balance at the beginning of the
year............................. 334 334 334
Shares issued..................... 5 -- --
-------- -------- --------
Balance at the end of the year... 339 334 334
-------- -------- --------
CAPITAL IN EXCESS OF PAR VALUE
Balance at the beginning of the
year............................. 683 2,248 2,041
Employee stock option, savings and
award plans...................... 13,362 (1,565) 207
-------- -------- --------
Balance at the end of the year... 14,045 683 2,248
-------- -------- --------
RETAINED EARNINGS
Balance at the beginning of the
year............................. 388,929 330,696 269,861
Net income........................ $83,698 83,698 $66,111 66,111 $68,532 68,532
------- ------- -------
Cash dividends paid............... (7,896) (7,878) (7,697)
-------- -------- --------
Balance at the end of the year... 464,731 388,929 330,696
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE
LOSSES(1)
Foreign currency translation:
Balance at the beginning of the
year............................. (32,891) (30,467) (26,292)
Translation adjustments........... 10,462 10,462 (2,424) (2,424) (4,175) (4,175)
-------- -------- --------
Balance at the end of the year... (22,429) (32,891) (30,467)
-------- -------- --------
Minimum pension liability
adjustment:
Balance at the beginning of the
year............................. (4,680) (169) (280)
Adjustments during the year....... (7,600) (7,600) (4,511) (4,511) 111 111
-------- -------- --------
Balance at the end of the year... (12,280) (4,680) (169)
-------- -------- --------
Valuation adjustments for
marketable securities and other:
Balance at the beginning of the
year............................. 548 471 (823)
(Increase) decrease in marketable
securities(2).................. (558) (558) 77 77 1,294 1,294
------- -------- ------- -------- ------- --------
Balance at the end of the year... (10) 548 471
-------- -------- --------
Total other comprehensive income
(loss) for the year.............. 2,304 (6,858) (2,770)
------- ------- -------
Total comprehensive income for the
year............................. $86,002 $59,253 $65,762
======= ======= =======
Accumulated other comprehensive
loss at the end of the year...... (34,719) (37,023) (30,165)
-------- -------- --------
TREASURY STOCK
Balance at the beginning of the
year............................. (17,865) (22,275) (28,625)
Employee stock option, savings and
award plans...................... 996 16,038 7,961
Purchase of treasury stock........ (7,346) (11,628) (1,611)
-------- -------- --------
Balance at the end of the year... (24,215) (17,865) (22,275)
-------- -------- --------
Total Stockholders' Equity....... $420,181 $335,058 $280,838
======== ======== ========
</Table>
- ---------------
(1) Amounts presented are net of tax based on an average tax rate of 35%, except
for foreign currency translation adjustments, which are presented on a
pretax basis.
(2) Includes reclassification adjustment for (losses) gains included in net
income for 2002, 2001, and 2000 of $(0.1) million, $0.6 million, and $0.3
million, respectively.
See accompanying notes.
A-23
AMETEK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- --------- ---------
(IN THOUSANDS)
CASH PROVIDED BY (USED FOR):
Operating activities:
Net income............................................... $ 83,698 $ 66,111 $ 68,532
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 32,950 46,450 43,257
Deferred income taxes................................. 10,954 3,681 6,430
Changes in assets and liabilities (net of
acquisitions):
Decrease (increase) in receivables.................. 9,966 25,082 (16,782)
Decrease (increase) in inventories and other current
assets........................................... 23,546 (6,139) (6,622)
Decrease in payables, accruals, and income taxes.... (20,754) (24,422) (4,390)
Decrease in other long-term liabilities............. (71) (6,537) (14,866)
Pension contribution................................ (30,250) (1,866) (1,056)
Other................................................. (6,376) (1,226) 4,221
-------- --------- ---------
Total operating activities (before receivable
securitization transactions).......................... 103,663 101,134 78,724
(Decrease) increase in accounts receivable sold.......... -- (45,000) 1,000
-------- --------- ---------
Total operating activities................................. 103,663 56,134 79,724
-------- --------- ---------
Investing activities:
Additions to property, plant and equipment............... (17,374) (29,415) (29,554)
Purchase of businesses................................... -- (131,793) (81,017)
Other.................................................... (2,355) 8,684 3,171
-------- --------- ---------
Total investing activities................................. (19,729) (152,524) (107,400)
-------- --------- ---------
Financing activities:
Net change in short-term borrowings...................... (59,012) 37,747 25,154
Additional long-term borrowings.......................... -- 73,321 3,003
Reduction in long-term borrowings........................ (23,751) (721) (271)
Repurchases of common stock.............................. (7,346) (11,628) (1,611)
Cash dividends paid...................................... (7,896) (7,878) (7,697)
Proceeds from stock options and other.................... 13,415 12,501 7,649
-------- --------- ---------
Total financing activities................................. (84,590) 103,342 26,227
-------- --------- ---------
(Decrease) increase in cash and cash equivalents........... (656) 6,952 (1,449)
Cash and cash equivalents:
Beginning of year........................................ 14,139 7,187 8,636
-------- --------- ---------
End of year.............................................. $ 13,483 $ 14,139 $ 7,187
======== ========= =========
</Table>
See accompanying notes.
A-24
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements reflect the operations,
financial position and cash flows of AMETEK, Inc. (the "Company"), and include
the accounts of the Company and subsidiaries, after elimination of all
significant intercompany transactions in consolidation. The Company's investment
in 50% or less owned joint ventures are accounted for by the equity method of
accounting. Such investments are not significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents, Securities, and Other Investments
All highly liquid investments with maturities of three months or less when
purchased are considered cash equivalents. At December 31, 2002 and 2001, all of
the Company's equity securities and fixed-income securities (primarily those of
a captive insurance subsidiary) are classified as "available-for-sale", although
the Company may hold fixed-income securities until their maturity dates. The
aggregate market value of such securities at December 31, 2002 and 2001 was:
2002 - $13.9 million ($14.0 million amortized cost) and 2001 - $16.6 million
($16.3 million amortized cost). The temporary unrealized gain or loss on such
securities is recorded as a separate component of other comprehensive income (in
stockholders' equity), and is not material. The Company's other investments are
accounted for by the equity method.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined principally by the last-in, first-out (LIFO) method of inventory
valuation, and market on the basis of the lower of replacement cost or estimated
net proceeds from sales. The excess of the first-in, first-out (FIFO) value over
the LIFO value at December 31, 2002 and 2001 was $27.0 million and $29.1
million, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
additions to plant facilities, or that extend their useful lives, are
capitalized. The cost of minor tools, jigs, and dies, and maintenance and
repairs is charged to operations as incurred. Depreciation of plant and
equipment is calculated principally on a straight-line basis over the estimated
useful lives of the related assets.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and
services are rendered. The policy with respect to sales returns and allowances
generally provides that a customer may not return products, or be given
allowances, except at the Company's option. Accruals for sales returns, other
allowances, and estimated warranty costs are provided at the time of shipment
based upon past experience, and are adjusted periodically to reflect actual
expenses. At December 31, 2002 and 2001, the accrual for future warranty
obligations was $6.4 million and $7.7 million, respectively.
A-25
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development
Company-funded research and development costs are charged to operations as
incurred and during the past three years were: 2002 - $23.7 million,
2001 - $22.6 million, and 2000 - $23.8 million.
Earnings Per Share
The calculation of basic earnings per share is based on the average number
of common shares outstanding during the period. The calculation of diluted
earnings per share includes the effect of all potentially dilutive securities
(primarily outstanding common stock options). The following table presents the
number of shares used in the calculation of basic earnings per share and diluted
earnings per share:
<Table>
<Caption>
2002 2001 2000
WEIGHTED AVERAGE SHARES (IN THOUSANDS): ------ ------ ------
Basic shares................................................ 32,918 32,838 32,131
Stock option and award plans................................ 709 607 403
------ ------ ------
Diluted shares.............................................. 33,627 33,445 32,534
====== ====== ======
</Table>
Foreign Currency Translation
Assets and liabilities of foreign operations are translated using exchange
rates in effect at the balance sheet date, and their results of operations are
translated using average exchange rates for the year.
Certain transactions of the Company and its subsidiaries are made in
currencies other than their functional currency. Exchange gains and losses from
those transactions are included in operating results for the year.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123) and SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosures, which amends SFAS 123, encourage
entities to recognize compensation expense for stock-based employee compensation
plans at fair value, but provide the option of measuring compensation expense
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company
accounts for stock-based compensation in accordance with APB 25. The exercise
price of stock options, set at the time of the grant, is not less than the fair
market value per share at the date of the grant. Had the Company applied the
fair value recognition provisions of SFAS 123, pretax stock-based compensation
expense would have increased $4.5 million, $3.2 million, and $2.9 million for
2002, 2001, and 2000, respectively. Diluted earnings per share would have been
lower by $0.07, $0.05, and $0.05 for the respective years. Options generally
have a four-to-ten year vesting period from date of grant. Note 7 presents pro
forma results of operations as if SFAS 123 had been used to account for
stock-based compensation plans.
Derivative Financial Instruments
The Company makes limited use of derivative financial instruments to manage
interest rate, foreign exchange, and forward contract exposure. The Company does
not hold or trade in derivatives for speculative purposes. Interest rate swap
and cap agreements are sometimes used to manage the interest rate
characteristics of certain outstanding revolving credit loans to a more
desirable fixed or variable rate basis, or to limit the Company's exposure to
rising interest rates. There were no interest rate swap or cap agreements in
place at or during December 31, 2002 and 2001. Foreign currency option
contracts, foreign currency exchange contracts, and foreign currency swap
agreements may be entered into to mitigate the translation exposure from
A-26
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investments in certain foreign subsidiaries. Foreign currency forward contracts
are entered into from time-to-time to hedge specific firm commitments for
certain export sales, thereby minimizing the Company's exposure to foreign
currency fluctuation. These contracts may be entered into for periods generally
not to exceed one year. When present, all derivative financial instruments are
accounted for in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was adopted by the Company on January
1, 2001. There are no carrying amounts related to derivative financial
instruments in the consolidated balance sheet and the Company had no derivatives
outstanding at December 31, 2002 and 2001. The Company had one interest rate
swap agreement, which was settled in 2001.
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired businesses and prior to the adoption of SFAS
No. 142, was amortized on a straight-line basis primarily over a 30-year period
for all purchase business combinations made prior to July 1, 2001. Business
combinations can also result in other intangible assets being recognized.
Amortization of such intangible assets, if applicable, occurs over their
estimated useful lives. SFAS No. 142 required companies to cease amortizing
goodwill that existed at June 30, 2001, and established criteria for testing
goodwill for impairment on at least an annual basis, or when events occur that
might reduce the fair value of a reporting unit below its carrying value.
The Company conducts this review for impairment for all of its reporting
units during the fourth quarter of the fiscal year. The results of this review
in the fourth quarter of 2002 and the transitional review performed earlier in
2002 determined that the Company's goodwill was not impaired.
Reclassifications
Certain amounts appearing in the prior year's financial statements and
supporting footnote disclosures have been reclassified to conform to the current
year's presentation.
2. ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Goodwill and intangible assets with indefinite lives
are not amortized; rather, they are tested for impairment on at least an annual
basis. Pursuant to SFAS No. 142, the Company was required to complete a
transitional impairment test of goodwill in the initial year of adopting the
standard, with any impairment charges recorded as a cumulative effect of a
change in accounting principle. The Company determined that its goodwill was not
impaired as a result of its transitional impairment test. Additionally, the
Company completed its annual impairment test in the fourth quarter of 2002 and
determined that no goodwill impairment existed.
A-27
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income and earnings per share for the years ended
December 31, 2002, 2001 and 2000 adjusted to exclude goodwill amortization were
as follows (in thousands, except per share amounts):
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Reported net income......................................... $83,698 $66,111 $68,532
Add back goodwill amortization, net of tax................ -- 10,182 9,174
------- ------- -------
Adjusted net income....................................... $83,698 $76,293 $77,706
======= ======= =======
Basic earnings per share as reported...................... $ 2.54 $ 2.01 $ 2.13
Goodwill amortization, net of tax......................... -- 0.31 0.29
------- ------- -------
Adjusted basic earnings per share......................... $ 2.54 $ 2.32 $ 2.42
======= ======= =======
Diluted earnings per share as reported.................... $ 2.49 $ 1.98 $ 2.11
Goodwill amortization, net of tax........................... -- 0.30 0.28
------- ------- -------
Adjusted diluted earnings per share......................... $ 2.49 $ 2.28 $ 2.39
======= ======= =======
</Table>
As of December 31, 2002 and 2001, goodwill by segment was: Electronic
Instruments Group (EIG) - $244.1 million and $242.8 million; Electromechanical
Group (EMG) - $147.8 million and $144.6 million. Changes in the carrying value
of goodwill during 2002 were the result of adjustments related to the
finalization of purchase accounting for acquisitions in 2001, foreign currency
translation adjustments, and certain reclassifications upon adoption of SFAS No.
142.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and normal operation of a long-lived asset. SFAS No.
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life. Statement No.
143 is effective January 1, 2003 for the Company. The Company is currently
evaluating what impact, if any, the adoption of SFAS No. 143 will have on its
consolidated results of operations, financial position, or cash flows.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires an impairment loss to be recognized only if the
carrying amounts of long-lived assets to be held and used are not recoverable
from their expected undiscounted future cash flows. Adoption of SFAS No. 144 had
no effect on the Company's consolidated results of operations, financial
position, or cash flows.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS
No. 4, which required that all gains and losses from extinguishment of debt be
reported as an extraordinary item. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15,
2002. The Company has early adopted this statement for the year ended December
31, 2002 for a previously recognized extraordinary item. However, its adoption
will have no effect on the Company's future results of operations, financial
position, or cash flows.
In July 2002, the Financial Accounting Standards Board issued Statement No.
146, "Accounting for Costs Associated with Exit or Disposal Activities".
Statement No. 146 replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
A-28
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(including Certain Costs Incurred in a Restructuring)." Among other things,
Statement No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred instead of at
the date of an entity's commitment to an exit plan, as under EITF Issue No.
94-3. Statement No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption of this statement to have a significant
effect on the Company's consolidated results of operations, financial position,
or cash flows.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosures",
which amends FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Statement No. 148 amends the disclosure requirements of Statement
No. 123 to require more prominent and more frequent disclosure in the financial
statements about the effects of stock-based compensation. Statement No. 148 is
effective for fiscal years ended after December 15, 2002. Accordingly, the
Company has adopted the annual disclosure provisions of Statement No. 148 in its
financial statements for the year ended December 31, 2002. The Company will
implement Statement No. 148 effective January 1, 2003 regarding disclosure
requirements for condensed financial statements for interim periods. As provided
by Statement No. 123 and 148, the Company has chosen to continue use of the
accounting method under Accounting Principles Board Opinion No. 25 and the
related interpretations to account for the Company's stock compensation plans.
As adoption of Statement No. 148 only involves disclosures by the Company, the
Company does not expect any impact on its results of operations, financial
position, or liquidity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" (FIN No. 45). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The disclosure provisions of FIN No. 45 are effective
for the Company as of December 31, 2002. The Company has guarantees and claims
arising during the course of its business operations. The Company accrues for
losses under these arrangements when they become probable and estimable. The
initial recognition and measurement provisions of FIN No. 45 are applicable to
guarantees issued or modified after December 31, 2002. The Company is currently
evaluating what impact, if any, adoption of FIN No. 45 will have on its
consolidated results of operations, financial position, or cash flows.
3. ACQUISITIONS
In 2001, the Company made three acquisitions. In May 2001, the Company
acquired from SPX Corporation the assets of GS Electric, a U.S. manufacturer of
universal and permanent magnet motors for the global floor care and other
markets for approximately $32.0 million in cash. GS Electric is now part of the
Company's Electromechanical Group. In July 2001, the Company acquired EDAX,
Inc., a manufacturer of analytical instrumentation which complements the
Company's process and analytical instruments product lines, from Panta
Electronics for approximately $37.0 million in cash. In December, 2001, the
Company acquired from PerkinElmer, Inc., Instruments for Research and Applied
Science (IRAS), a developer and manufacturer of advanced analytical
instrumentation, that is used in a number of applications including nuclear
spectroscopy, research electrochemistry and electronic signal processing, for
approximately $63.0 million. EDAX and IRAS are now part of the Company's
Electronic Instruments Group. Together with the EDAX acquisition, IRAS greatly
expands our presence in the laboratory and research markets.
A-29
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, the Company made two acquisitions. In August 2000, the Company
acquired the assets of certain businesses of Prestolite Electric Incorporated.
The acquired businesses consist of Prestolite's Switch Division, its Industrial
Battery Charger business, and its Direct-Current (DC) motor business, which is
now a part of the Electromechanical Group. Additionally, in September 2000, the
Company acquired the assets of Rochester Instrument Systems, a supplier for the
electric power generation market, which is now a part of the Electronic
Instruments Group. The aggregate purchase price paid for the 2000 acquisitions
was $81 million.
As of the closing dates, the Company also recorded liabilities as a
component of the purchase price for estimated future pension obligations, and
for specific personnel-related costs associated with the relocation and
consolidation of certain of the acquired businesses.
All of the above acquisitions were accounted for by the purchase method,
and accordingly, the results of their operations are included in the Company's
consolidated results from their respective dates of acquisition.
Had the 2001 acquisitions been made at the beginning of 2001, proforma net
sales for 2001 would have been $1,106.3 million. Proforma net income, after
giving effect to the amortization of goodwill, and diluted earnings per share
would not have been materially different, as a result of the acquisitions, for
the year.
Acquisitions Subsequent to Year-end (Unaudited)
In mid January 2003, the Company acquired Airtechnology Holdings Limited
("Airtechnology") from Candover Partners Limited, for approximately 50.0 million
British pounds sterling or $80.0 million in cash. Airtechnology is a supplier of
motors, fans and environmental control systems for the aerospace and defense
markets with estimated annual sales of 29.0 million British pounds sterling, or
$46.0 million. The Airtechnology acquisition will expand the Company's presence
in high-end technical motors and strengthen the Company's relationships with
large European-based aerospace and defense companies. Airtechnology is a part of
the Company's Electromechanical Group.
Effective as of February 28, 2003, AMETEK purchased Solidstate Controls,
Inc. ("Solidstate Controls") from the Marmon Industrial Companies LLC for
approximately $36 million in cash. Solidstate Controls is a leading supplier of
Uninterruptible Power Supply systems for the process and power generation
industries. Solidstate Controls is headquartered in Columbus, Ohio, and has
estimated 2003 sales of $45 million. The acquired business joins AMETEK as part
of the EIG operating group.
A-30
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER BALANCE SHEET INFORMATION
<Table>
<Caption>
2002 2001
--------- ---------
(IN THOUSANDS)
INVENTORIES
Finished goods and parts.................................. $ 26,819 $ 31,313
Work in process........................................... 33,054 36,925
Raw materials and purchased parts......................... 69,578 84,287
--------- ---------
$ 129,451 $ 152,525
========= =========
PROPERTY, PLANT AND EQUIPMENT, at cost
Land...................................................... $ 9,224 $ 8,902
Buildings................................................. 116,977 112,837
Machinery and equipment................................... 461,130 440,014
--------- ---------
587,331 561,753
Less accumulated depreciation............................. (383,002) (347,259)
--------- ---------
$ 204,329 $ 214,494
========= =========
OTHER ASSETS
Other intangibles, at cost:
Patents................................................ $ 23,176 $ 21,474
Other acquired intangibles............................. 39,320 47,708
Less accumulated amortization.......................... (59,582) (65,484)
--------- ---------
2,914 3,698
Investments............................................... 13,658 15,722
Other..................................................... 66,589 38,811
--------- ---------
$ 83,161 $ 58,231
========= =========
ACCRUED LIABILITIES
Accrued employee compensation and benefits................ $ 25,328 $ 24,910
Other..................................................... 41,275 55,593
--------- ---------
$ 66,603 $ 80,503
========= =========
</Table>
A-31
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
ALLOWANCES FOR POSSIBLE LOSSES ON ACCOUNTS AND
NOTES RECEIVABLE
Balance at beginning of year................................ $7,642 $4,318 $3,994
Additions charged to expense................................ 2,377 4,135 264
Recoveries credited to allowance............................ 69 143 43
Write-offs.................................................. (3,031) (1,264) (157)
Allowance acquired with new businesses...................... -- 322 214
Currency translation adjustment and other................... 191 (12) (40)
------ ------ ------
Balance at end of year...................................... $7,248 $7,642 $4,318
====== ====== ======
</Table>
5. DEBT
At December 31, 2002 and 2001, long-term debt consisted of the following:
<Table>
<Caption>
DECEMBER 31,
---------------------
2002 2001
--------- ---------
(IN THOUSANDS)
7.20% Senior Notes due 2008................................. $ 225,000 $ 225,000
Revolving credit loans due 2006............................. 88,000 178,900
Accounts receivable securitization due 2004................. 65,000 47,000
Other, principally foreign.................................. 12,058 19,933
--------- ---------
390,058 470,833
Less: current portion....................................... (110,422) (167,399)
--------- ---------
Total long-term debt........................................ $ 279,636 $ 303,434
========= =========
</Table>
Maturities of long-term debt outstanding at December 31, 2002 are as
follows: $2.7 million in 2004; $0.2 million in 2005; $50.2 million in 2006; and
$0.2 million in 2007; and $225.2 million in 2008; and $1.1 million in 2009 and
thereafter.
On September 17, 2001, the Company completed its $300 million Revolving
Credit Facility that matures in 2006. The five-year Revolving Credit Facility is
unsecured. Interest rates on outstanding loans under the Revolving Credit
Facility are either based on the London Interbank Offered Rate (LIBOR), plus a
negotiated spread over LIBOR, or at the U.S. prime rate. At December 31, 2002,
the Company had $88.0 million in revolving credit loans outstanding at a blended
rate of 2.8%, of which $38.0 million is included in short-term borrowings and
$50.0 million is included in long-term debt. At December 31, 2002, $190.6
million was unused and available under the revolving credit facility.
The Revolving Credit Facility places certain restrictions on allowable
foreign debt, and the measurement of the pro forma effect of potential
acquisitions in certain debt covenant compliance calculations. The Revolving
Credit Facility also places certain restrictions on certain cash payments,
including the payment of dividends. At December 31, 2002, retained earnings of
approximately $23.4 million were not subject to the dividend limitation.
Foreign subsidiaries of the Company had available credit facilities with
local foreign lenders of approximately $26.8 million, of which $6.2 million was
outstanding at December 31, 2002, including $0.7 million reported in long-term
debt. The weighted average interest rate on total debt outstanding at
A-32
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2002 and 2001 was 5.4% and 5.2%, respectively. The Company also had
outstanding letters of credit totaling $21.4 million at December 31, 2002.
Accounts Receivable Financing
The Company's accounts receivable financing agreement with a bank provides
for borrowings up to $75 million against its trade accounts receivable. At
December 31, 2002 and 2001, $65.0 million and $47.0 million, respectively, was
used under this secured credit facility. The weighted average interest rate on
the amounts outstanding at December 31, 2002 and 2001 was 2.5% and 4.8%,
respectively.
6. STOCKHOLDERS' EQUITY
In 2002, the Company repurchased 236,900 shares of its common stock under
its current share repurchase authorization at a total cost of $7.3 million. This
compares with repurchases of 440,000 shares at a total cost of $11.6 million in
2001. At December 31, 2002, approximately $8.3 million of the current $50
million authorization was unexpended. At December 31, 2002, the Company held
approximately 0.8 million shares in its treasury at a cost of $24.2 million
compared with approximately 0.6 million shares at a cost of $17.9 million at the
end of 2001. The number of shares outstanding at December 31, 2002 was 33.1
million shares, compared with 32.8 million shares at December 31, 2001.
The Company has a Shareholder Rights Plan, under which the Company's Board
of Directors declared a dividend of one Right for each share of Company common
stock owned. The Plan provides, under certain conditions involving acquisition
of the Company's common stock, that holders of Rights, except for the acquiring
entity, would be entitled (i) to purchase shares of preferred stock at a
specified exercise price, or (ii) to purchase shares of common stock of the
Company, or the acquiring company, having a value of twice the Rights exercise
price. The Rights under the Plan expire in 2007.
7. STOCK OPTION AND AWARD PLANS
In 2002, the Company adopted the 2002 Stock Incentive Plan ("the 2002
Plan"). The 2002 Plan provides for the grant of up to 2.0 million shares of
common stock to eligible employees and nonemployee directors of the Company in
the form of options, phantom stock awards, restricted stock awards and stock
rights. The Company's 1999 Stock Incentive Plan permits the grant of up to 2.0
million shares of common stock. The Company's 1997 Stock Incentive Plan permits
the grant of up to 3.8 million shares of common stock. Stock options may be
granted as non-qualified stock options or as incentive stock options.
Restricted awards of the Company's common stock are made to eligible
employees and non-employee directors at such cost to the grantee as the stock
option committee of the Board of Directors may determine. Such shares are issued
subject to certain conditions with respect to transfer and other restrictions as
prescribed by the plan. Upon issuance of restricted stock, unearned
compensation, equivalent to the excess of the market price of the shares awarded
over the price paid by the grantee at the date of grant, is charged to
stockholders' equity and is amortized to expense over the periods until the
restrictions lapse. The unamortized balance of unearned compensation related to
restricted stock awards included in stockholders' equity at December 31, 2002
totaled $2.4 million. No restricted stock awards were granted in 2002 and 2001.
In December 2000, the Company awarded 150,000 shares of restricted stock to its
Chairman and Chief Executive Officer. The expense related to restricted stock is
not significant. Under the terms of the existing Stock Incentive Plans, at
December 31, 2002, 388,553 additional restricted stock awards may be granted.
In 2002, the Company reserved 9,419 shares of common stock, and there were
reductions for retirements and terminations which totaled 32,824 shares, under a
Supplemental Executive Retirement Plan (SERP), bringing the total number of
shares reserved to 80,400 shares of common stock as of December 31, 2002.
A-33
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Charges to expense under the SERP, not significant in amount, are considered
pension expense (see Note 10), with the offsetting credit reflected in
stockholders' equity.
At December 31, 2002, 4,969,066 (3,439,372 in 2001) shares of common stock
were reserved for issuance, (including stock options outstanding), under the
2002, 1999 and 1997 plans. The options are exercisable at prices not less than
market prices on dates of grant, and in installments over four-to-ten-year-
periods from dates of grant. The Company had no stock appreciation rights
outstanding at December 31, 2002 or 2001. Stock appreciation rights, if and when
issued, are exercisable for cash and/or shares of the Company's common stock
when the related option is exercised. A charge to income would be made for these
rights and the related options.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<Table>
<Caption>
2002 2001 2000
------------------------- ------------------------- -------------------------
SHARES PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE
--------- ------------- --------- ------------- --------- -------------
Outstanding at
beginning of
year............... 2,553,608 $14.15-$30.64 2,956,595 $11.60-$30.34 2,907,991 $10.92-$30.34
Granted.............. 537,100 $37.64-$38.68 505,650 $26.29-$30.64 566,150 $19.94-$24.44
Exercised............ (470,306) $14.15-$30.34 (820,212) $11.60-$30.34 (433,174) $10.92-$20.00
Canceled............. (55,928) $20.00-$37.64 (88,425) $19.94-$29.09 (84,372) $14.15-$30.34
--------- ------------- --------- ------------- --------- -------------
Outstanding at end of
year............... 2,564,474 $14.15-$38.68 2,553,608 $14.15-$30.64 2,956,595 $11.60-$30.34
========= ============= ========= ============= ========= =============
Exercisable at end of
year............... 1,317,867 $14.15-$30.64 1,237,876 $14.15-$30.34 1,634,903 $11.60-$30.34
========= ============= ========= ============= ========= =============
</Table>
The following table summarizes information pertaining to the Company's
stock options outstanding at December 31, 2002:
<Table>
<Caption>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ------------------------ ----------- -------- ----------- ----------- --------
$14.15-$23.21........................... 1,087,800 $18.15 3.6 790,475 $17.38
$23.22-$30.94........................... 941,474 $27.22 4.1 527,392 $28.17
$30.95-$38.68........................... 535,200 $37.65 6.4 -- $ --
--------- ------ --- --------- ------
2,564,474 $25.55 4.4 1,317,867 $21.70
========= ====== === ========= ======
</Table>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its stock option plans and the
disclosure only option under SFAS 123, "Accounting for Stock-Based
Compensation." Had the Company applied the fair value recognition provisions of
SFAS 123, pretax stock-based compensation expense would have increased $4.5
million, $3.2 million, and $2.9 million for 2002, 2001, and 2000, respectively.
Diluted earnings per share would have been lower by
A-34
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.07, $0.05, and $0.05 for the respective years. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123:
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported..................................... $83,698 $66,111 $68,532
Deduct total stock-based compensation expense, determined
under the fair value method, net of tax................ 3,321 2,277 2,080
------- ------- -------
Pro forma net income...................................... $80,377 $63,834 $66,452
======= ======= =======
Net income per share:
Basic:
As reported............................................ $ 2.54 $ 2.01 $ 2.13
Pro forma.............................................. 2.44 1.94 2.07
Diluted:
As reported............................................ 2.49 1.98 2.11
Pro forma.............................................. 2.42 1.93 2.06
</Table>
The weighted average fair value of each option grant on the grant date was
$13.07 for 2002, $8.88 for 2001, and $7.18 for 2000. The fair value of each
option was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions for options granted in each of the last
three years.
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Expected life (years)....................................... 5.0 5.0 5.0
Expected volatility......................................... 36.4% 35.3% 30.8%
Dividend yield.............................................. 0.69% 0.85% 1.2%
Risk-free interest rate..................................... 3.25% 3.50% 6.61%
</Table>
8. LEASES
Minimum aggregate rental commitments under non-cancelable leases in effect
at December 31, 2002 (principally for production and administrative facilities
and equipment) amounted to $21.4 million consisting of annual payments of $4.6
million in 2003, $4.0 million in 2004, $3.2 million in 2005, $2.9 million in
2006, $1.9 million in 2007 and $4.8 million in 2008 and thereafter. Rental
expense was $8.5 million in 2002, $8.9 million in 2001 and $8.1 million in 2000.
A-35
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The components of income before income taxes and the details of the
provision for income taxes are as follows:
<Table>
<Caption>
2002 2001 2000
-------- ------- --------
(IN THOUSANDS)
Income before income taxes:
Domestic.................................................. $113,351 $85,597 $ 97,302
Foreign................................................... 9,547 (1,235) 8,836
-------- ------- --------
Total....................................................... $122,898 $84,362 $106,138
======== ======= ========
Provision for income taxes:
Current:
Federal................................................ $ 19,354 $14,721 $ 26,995
Foreign................................................ 4,942 2,519 2,390
State.................................................. 3,950 (1,469) 1,541
-------- ------- --------
Total current............................................... 28,246 15,771 30,926
-------- ------- --------
Deferred:
Federal(a)............................................. 11,423 3,373 4,733
Foreign................................................ (363) (1,590) 1,230
State.................................................. (106) 697 717
-------- ------- --------
Total deferred.............................................. 10,954 2,480 6,680
-------- ------- --------
Total provision............................................. $ 39,200 $18,251 $ 37,606
======== ======= ========
</Table>
- ---------------
(a) The amount in 2002 reflects a deferred tax benefit of $6.1 million related
to the Company's 2002 pension plan contributions.
Significant components of the Company's deferred tax (asset) liability as
of December 31 are as follows:
<Table>
<Caption>
2002 2001
-------- --------
(IN THOUSANDS)
Current deferred tax asset:
Reserves not currently deductible......................... $ (6,354) $ (6,754)
Other..................................................... (3,651) (3,342)
-------- --------
Net current deferred tax asset.............................. (10,005) (10,096)
-------- --------
Noncurrent deferred tax (asset) liability:
Differences in basis of property and accelerated
depreciation........................................... 26,102 21,020
Purchased tax benefits.................................... 3,383 3,232
Reserves not currently deductible......................... (7,486) (5,483)
Other..................................................... 19,234 14,727
-------- --------
Noncurrent deferred tax liability........................... 41,233 33,496
-------- --------
Net deferred tax liability.................................. $ 31,228 $ 23,400
======== ========
</Table>
A-36
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective rate of the provision for income taxes reconciles to the
statutory rate as follows:
<Table>
<Caption>
2002(A) 2001(A)(B) 2000(A)
------- ---------- -------
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 2.0 (0.9) 1.4
Tax benefits from qualified export sales.................... (3.9) (5.0) (3.3)
Differences between U.S. and foreign tax rates.............. 1.0 2.1 1.0
Goodwill amortization....................................... -- 2.8 2.2
Settlement of prior years' tax audits....................... -- (11.6) --
Other....................................................... (2.2) (0.8) (0.9)
---- ----- ----
31.9% 21.6% 35.4%
==== ===== ====
</Table>
- ---------------
(a) Includes the reversal of certain prior years' excess federal and state
income tax accruals.
(b) At year-end 2001, U.S. tax authorities closed several open years for which
the Company's income tax returns were under examination. As a result, the
Company recognized a tax benefit of $10.5 million after tax. The benefit
consisted of tax refunds received of $4.4 million (including interest) and
the reversal of certain federal and state tax accruals totaling $6.1 million
associated with the closed years.
At December 31, 2002, the Company had federal and foreign available net
operating loss carryforwards of approximately $0.9 million and $0.5 million,
respectively, to offset future taxable income. The federal carryforwards will
expire in 2019. The foreign carryforward is based on the latest available data,
and will expire in 2004.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $48.0 million at December 31, 2002. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. deferred
taxes has been made. Upon distribution of those earnings to the United States,
the Company would be subject to U.S. income taxes (subject to a reduction for
foreign tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred income tax
liability is not practicable.
10. RETIREMENT AND PENSION PLANS
The Company maintains noncontributory defined benefit pension plans.
Benefits for eligible U.S. salaried and hourly employees are funded through
trusts established in conjunction with the plans. The Company's funding policy
with respect to its defined benefit plans is to contribute amounts that provide
for benefits in accordance with the funding requirements of federal law and
regulations. Assets of these plans are invested in a variety of equity and debt
instruments and in pooled temporary funds, as well as in the Company's common
stock. At December 31, 2002, the plans' investment in the Company's common stock
represented approximately 8% of total plan asset value.
The Company also sponsors a 401(k) retirement and savings plan for eligible
employees. Participants in the savings plan may contribute a portion of their
compensation on a before-tax basis. The Company matches employee contributions
on a dollar-for-dollar basis up to 6% of eligible compensation or a maximum of
$1,200 per participant.
The Company's retirement and savings plan has a defined contribution
retirement feature principally to cover U.S. salaried employees joining the
Company after December 31, 1996. Under this retirement feature, the Company
makes contributions for eligible employees based on a pre-established percentage
of the covered employee's salary. Employees of certain of the Company's foreign
operations participate in various local plans that in the aggregate are not
significant.
A-37
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a defined contribution retirement plan for its
acquired businesses for the benefit of eligible employees. Company contributions
are made for each participant up to a specified percentage, not to exceed 6% of
the participant's base compensation.
The Company has nonqualified unfunded retirement plans for its Directors
and certain retired employees. It also provides supplemental retirement
benefits, through contractual arrangements and/or a SERP covering certain
current and former employees of the Company. These supplemental benefits are
designed to compensate the employee for retirement benefits the executive would
have been provided under the Company's primary retirement plan, except for
statutory limitations on compensation that may be taken into account under those
plans. The projected benefit obligations of the SERP and the contracts will
primarily be funded by a grant of shares of the Company's common stock upon
retirement or termination of the employee. The Company is providing for these
obligations by charges to earnings over the applicable periods.
Effective December 31, 2001, the Company changed the measurement date for
the determination of the fair value of its pension assets, as well as the
discount rate used to compute the present value of plan liabilities to December
31 for its defined benefit plans. Previously, the measurement date was October
1. This change had no effect on pension income for 2001.
The following table provides a reconciliation of the changes in benefit
obligations and fair value of plan assets for the funded and unfunded defined
benefit plans for 2002 and 2001:
<Table>
<Caption>
2002 2001
-------- --------
(IN THOUSANDS)
Change in benefit obligation
Net benefit obligation at beginning of period............... $285,570 $258,168
Service cost................................................ 4,349 4,422
Interest cost............................................... 20,213 20,523
Plan amendments............................................. 1,212 704
Actuarial loss.............................................. 10,457 23,499
Benefits paid............................................... (19,206) (21,746)
-------- --------
Net benefit obligation at end of period..................... $302,595 $285,570
======== ========
Change in plan assets
Fair value of plan assets at beginning of period............ $291,188 $313,972
Actual return on plan assets................................ (23,185) (2,904)
Employer contributions...................................... 30,250 1,866
Benefits paid............................................... (19,206) (21,746)
-------- --------
Fair value of plan assets at end of period.................. $279,047 $291,188
======== ========
</Table>
The following table provides aggregate information for defined benefit
pension plans with accumulated benefits in excess of plan assets:
<Table>
<Caption>
2002 2001
------- -------
(IN THOUSANDS)
Projected benefit obligation................................ $84,889 $76,160
Accumulated benefit obligation.............................. 84,074 73,781
Fair value of plan assets................................... 66,513 65,869
</Table>
A-38
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recognized in the consolidated
balance sheets at December 31, 2002 and 2001:
<Table>
<Caption>
2002 2001
-------- -------
(IN THOUSANDS)
Funded status asset (liability)
Funded status at December 31................................ $(23,548) $ 5,618
Unrecognized net actuarial loss............................. 74,912 15,253
Unrecognized prior service cost............................. 4,027 3,447
Unrecognized net transition obligation (asset).............. 32 (309)
-------- -------
Net amount recognized at December 31...................... $ 55,423 $24,009
======== =======
Balance sheet asset (liability)
Prepaid benefit cost........................................ $ 59,509 $29,040
Accrued benefit liability................................... (4,086) (5,144)
Additional minimum liability................................ (21,010) (9,460)
Intangible asset............................................ 2,117 2,270
Accumulated other comprehensive income (before deferred tax
benefit).................................................. 18,893 7,303
-------- -------
Net amount recognized at December 31...................... $ 55,423 $24,009
======== =======
</Table>
The following table provides the components of net periodic pension
(income) expense for the three years ended December 31:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Defined benefit plans:
Service cost for benefits earned during the period........ $ 4,349 $ 4,422 $ 4,918
Interest cost on projected benefit obligation............. 20,213 20,331 19,410
Expected return on plan assets............................ (26,365) (28,257) (26,192)
Net amortization.......................................... 612 (1,172) (45)
-------- -------- --------
Net pension (income) expense................................ (1,191) (4,676) (1,909)
Other plans:
Defined contribution plans................................ 6,674 5,390 5,227
Supplemental retirement plans............................. 416 416 492
Foreign plans and other................................... 1,454 2,009 1,709
-------- -------- --------
Total other plans........................................... 8,544 7,815 7,428
-------- -------- --------
Total net pension expense................................... $ 7,353 $ 3,139 $ 5,519
======== ======== ========
</Table>
Assumptions used in accounting for the defined benefit plans as of December
31 of each year were (based on a measurement date of December 31st for 2002 and
2001 and October 1st for 2000):
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Discount rate used in determining present values............ 6.75% 7.25% 8.00%
Annual rate of increase in future compensation levels....... 3.50% 4.00% 4.75%
Expected long-term rate of return on plan assets............ 8.90% 9.25% 9.25%
</Table>
A-39
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a deferred compensation plan which allows employees whose
compensation exceeds the statutory IRS limit for retirement benefits to defer a
portion of earned bonus compensation. The plan permits deferred amounts to be
deemed invested in either, or a combination of, (a) an interest bearing fund,
benefits from which are payable out of the general assets of the Company, or (b)
a fund which invests in shares of the Company's common stock on behalf of the
employee. The amount deferred under the plan, including income earned, was $2.8
million and $2.1 million at December 31, 2002 and 2001, respectively. Initial
employee deferrals began January 1, 2000. Administrative expense for the plan is
borne by the Company and is not significant.
The Company provides limited postretirement benefits other than pensions
for certain retirees and a small number of employees. Benefits under these
arrangements are not significant. The Company also provides limited
postemployment benefits for certain former or inactive employees after
employment but before retirement. Those benefits, which are not significant in
amount, are accounted for on the accrual basis of accounting.
11. FINANCIAL INSTRUMENTS
The Company makes limited use of derivative financial instruments, and does
not use them for trading purposes. Such instruments are generally used to manage
well-defined interest rate risks and to hedge firm commitments related to
certain export sales denominated in a foreign currency.
Interest rate swap and cap agreements are used to reduce the potential
impact of increases in interest rates on the Company's borrowings. Accordingly,
the Company may enter into these agreements to effectively convert floating-rate
loans to fixed-rate loans and to cap certain interest rates that are indexed to
LIBOR rates to reduce the risk from rising interest rates. In 2002 and 2001, the
Company did not enter into any such agreements and none are outstanding at
December 31, 2002.
Cross-currency and interest rate agreements may be used to hedge a portion
of the Company's net investment in certain foreign subsidiaries. At December 31,
2002 and 2001, no such agreements were outstanding. During 2001, the Company
settled its outstanding interest rate swap agreement, which totaled $3.8
million. The gain on settlement of this agreement was $0.4 million.
Forward currency contracts may be entered into from time to time to hedge
certain firm export sales commitments denominated in foreign currencies. The
purpose of such hedging activities is to protect the Company from the risk that
the eventual net cash dollar inflows and outflows resulting from the sale of
products to foreign customers will be adversely affected by changes in exchange
rates. At December 31, 2002 and 2001, the Company was not party to any forward
currency contracts. The terms of the currency contracts are dependent on a firm
commitment and generally do not exceed one year. Deferred gains and losses on
such contracts, which are not significant, are recognized in operations as the
related sales and purchases occurred.
The estimated fair values of the Company's other financial instruments are
compared below to the recorded amounts at December 31, 2002 and 2001. Cash, cash
equivalents, and marketable securities are recorded at fair value at December
31, 2002 and 2001 in the accompanying balance sheet.
<Table>
<Caption>
ASSET (LIABILITY)
-----------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
RECORDED RECORDED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
Fixed-income and equity investments............ $ 13,657 $ 13,657 $ 15,214 $ 15,214
Short-term borrowings.......................... $(108,557) $(108,557) $(166,145) $(166,145)
Long-term debt (including current portion)..... $(281,501) $(289,812) $(304,688) $(298,320)
</Table>
A-40
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values of fixed-income investments are based on quoted market
prices. The fair value of equity investments are based on amounts reported by
the investee. The fair value of short-term borrowings is based on the carrying
value at year-end. The fair value of the Company's long-term debt, which
consists primarily of publicly traded notes, is based on the quoted market price
for such notes and borrowing rates currently available to the Company for loans
with similar terms and maturities.
12. ADDITIONAL INCOME STATEMENT AND CASH FLOW INFORMATION
Included in other income are interest and other investment income of $0.9
million, $2.0 million, and $1.5 million for 2002, 2001, and 2000, respectively.
Income taxes paid in 2002, 2001, and 2000 were $26.9 million, $27.6 million, and
$33.6 million, respectively. Cash paid for interest was $24.0 million, $27.5
million, and $30.2 million in 2002, 2001, and 2000, respectively.
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Descriptive Information About Reportable Segments
The Company has two reportable segments, the Electronic Instruments Group
and the Electromechanical Group. The Company organizes its businesses primarily
on the basis of product type, production processes, distribution methods, and
management organizations.
The Electronic Instruments Group produces instrumentation for various
electronic applications that service certain types of transportation industries,
including aircraft cockpit instruments and displays, airborne electronics
systems that monitor and record flight and engine data, and
pressure-temperature-flow and liquid-level sensors for commercial airlines and
aircraft and jet engine manufacturers. The Group also produces analytic
instrumentation for the laboratory and research markets, as well as instruments
for foodservice equipment, measurement and monitoring instrumentation for
various process industries and instruments and complete instrument panels for
heavy truck manufacturers and heavy construction and agricultural vehicles. The
Group also manufactures high-temperature-resistant and corrosion-resistant
materials, as well as thermoplastic compounds for automotive, appliance, and
telecommunications applications.
The Electromechanical Group produces air-moving electric motors and
motor-blower systems for manufacturers of floor care appliances and outdoor
power equipment, fractional horsepower and brushless air-moving motors for
aerospace, mass transit, medical equipment, computer and business machine
applications. The Group also produces high-purity metal powders and alloys in
powder, strip, and wire form for electronic components, aircraft and automotive
products. Sales of electric motors, blowers, and fans represented 41.7% in 2002,
44.1% in 2001, and 42.2% in 2000 of the Company's consolidated net sales.
Measurement of Segment Results
Segment operating income represents sales, less all direct costs and
expenses (including certain administrative and other expenses) applicable to
each segment, but does not include an allocation of interest expense. Net sales
by segment are reported after elimination of intra- and inter-segment sales,
which are insignificant in amount. Such sales are generally based on prevailing
market prices. Reported segment assets include allocations directly related to
the segment's operations. Corporate assets consist primarily of investments,
insurance deposits, and deferred taxes.
A-41
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REPORTABLE SEGMENT FINANCIAL INFORMATION
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Net sales:
Electronic Instruments................................. $ 539,448 $ 499,528 $ 509,504
Electromechanical...................................... 501,094 519,761 515,156
---------- ---------- ----------
Total Consolidated............................. $1,040,542 $1,019,289 $1,024,660
========== ========== ==========
Operating income and income before income taxes:
Operating income:
Electronic Instruments.............................. $ 87,485 $ 57,035 $ 78,771
Electromechanical................................... 80,225 70,638 77,560
---------- ---------- ----------
Total segment operating income................. 167,710 127,673 156,331
Corporate administrative and other expenses......... (19,023) (18,123) (20,441)
---------- ---------- ----------
Consolidated operating income.......................... 148,687 109,550 135,890
Interest and other expenses, net....................... (25,789) (25,188) (29,752)
---------- ---------- ----------
Consolidated income before income taxes................ $ 122,898 $ 84,362 $ 106,138
========== ========== ==========
Assets:
Electronic Instruments................................. $ 507,358 $ 525,410
Electromechanical...................................... 427,630 437,802
---------- ----------
Total segments................................. 934,988 963,212
Corporate.............................................. 95,018 76,280
---------- ----------
Total Consolidated............................. $1,030,006 $1,039,492
========== ==========
Additions to property, plant and equipment:(1)
Electronic Instruments................................. $ 11,364 $ 17,287 $ 10,883
Electromechanical...................................... 7,239 16,229 19,292
---------- ---------- ----------
Total segments................................. 18,603 33,516 30,175
Corporate.............................................. 873 1,888 3,557
---------- ---------- ----------
Total Consolidated............................. $ 19,476 $ 35,404 $ 33,732
========== ========== ==========
Depreciation and amortization:(2)
Electronic Instruments................................. $ 13,403 $ 19,824 $ 18,939
Electromechanical...................................... 19,238 26,435 24,028
---------- ---------- ----------
Total segments................................. 32,641 46,259 42,967
Corporate.............................................. 309 191 290
---------- ---------- ----------
Total Consolidated............................. $ 32,950 $ 46,450 $ 43,257
========== ========== ==========
</Table>
- ---------------
(1) Includes $2.1 million in 2002, $6.0 million in 2001, and $4.2 million in
2000 from acquired businesses.
(2) 2001 and 2000 includes goodwill amortization of $11.9 million and $10.4
million, respectively. Goodwill amortization is not included in 2002 in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets".
A-42
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC AREAS
Information about the Company's operations in different geographic areas
for the years ended December 31, 2002, 2001, and 2000 is shown below. Net sales
were attributed to geographic areas based on the location of the customer.
Accordingly, U.S. export sales are reported in international sales.
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Net sales:
United States.......................................... $ 687,166 $ 698,044 $ 699,713
---------- ---------- ----------
International(a):
European Union countries............................ 122,305 118,964 118,934
Asia................................................ 99,710 74,197 68,409
Other foreign countries............................. 131,361 128,084 137,604
---------- ---------- ----------
Total international............................ 353,376 321,245 324,947
---------- ---------- ----------
Total Consolidated............................. $1,040,542 $1,019,289 $1,024,660
========== ========== ==========
Long-lived assets:
United States.......................................... $ 521,464 $ 532,740
---------- ----------
International(b):
European Union countries............................ 54,775 46,975
Asia................................................ 4,682 4,914
Other foreign countries............................. 27,106 28,097
---------- ----------
Total international............................ 86,563 79,986
---------- ----------
Total Consolidated............................. $ 608,027 $ 612,726
========== ==========
</Table>
- ---------------
(a) Includes U.S. export sales of $192.0 million in 2002, $170.0 million in
2001, and $179.1 million in 2000.
(b) Represents long-lived assets of foreign-based operations only.
A-43
AMETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
NET SALES.............................. $263,558 $267,426 $256,995 $252,563 $1,040,542
OPERATING INCOME....................... $ 36,434 $ 37,704 $ 38,060 $ 36,489 $ 148,687
NET INCOME............................. $ 19,665 $ 21,325 $ 21,381 $ 21,327 $ 83,698
BASIC EARNINGS PER SHARE(A)............ $ 0.60 $ 0.65 $ 0.65 $ 0.65 $ 2.54
DILUTED EARNINGS PER SHARE(A).......... $ 0.59 $ 0.63 $ 0.64 $ 0.63 $ 2.49
DIVIDENDS PAID PER SHARE............... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
COMMON STOCK TRADING RANGE:(B)
HIGH................................... $ 40.20 $ 40.71 $ 37.40 $ 38.90 $ 40.71
LOW.................................... $ 28.50 $ 35.14 $ 27.80 $ 26.15 $ 26.15
2001
Net sales.............................. $264,071 $261,422 $256,533 $237,263 $1,019,289
Operating income(c)(d)................. $ 35,703 $ 35,574 $ 32,966 $ 5,307 $ 109,550
Net income(c)(d)....................... $ 18,272 $ 18,653 $ 17,727 $ 11,459 $ 66,111
Basic earnings per share(a)(c)(d)...... $ 0.56 $ 0.57 $ 0.54 $ 0.35 $ 2.01
Diluted earnings per share(a)(c)(d).... $ 0.55 $ 0.56 $ 0.53 $ 0.34 $ 1.98
Dividends paid per share............... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
Common stock trading range:(b)
High................................... $ 28.74 $ 31.12 $ 34.00 $ 32.35 $ 34.00
Low.................................... $ 23.65 $ 25.35 $ 21.37 $ 25.55 $ 21.37
</Table>
- ---------------
(a) The sum of quarterly earnings per share may not equal total year earnings
per share due to the effect of the Company's purchasing shares of its
outstanding common stock.
(b) Trading ranges are based on the New York Stock Exchange composite tape.
(c) Goodwill amortization was $2.7 million ($2.3 million after tax), $2.9
million ($2.5 million after tax), $3.1 million ($2.6 million after tax) and
$3.1 million ($2.7 million after tax) for the first, second, third and
fourth quarters of 2001, respectively. Such goodwill amortization is
excluded from the Company's 2002 results effective January 1, 2002, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets".
(d) In the fourth quarter of 2001, the Company recorded unusual expenses
totaling $23.3 million (pretax) of which $12.4 million was related to the
cost of employee reductions, facility closures, and the continued migration
of production to low-cost locales, and $10.9 million was related to asset
writedowns. The asset writedowns resulted primarily from certain customer
difficulties associated with the adverse economic environment. The fourth
quarter also included a tax benefit and related interest income of $10.5
million after tax ($0.32 per diluted share) resulting from the closure of a
number of open tax years by U.S. federal and state tax authorities.
A-44
DIRECTIONS TO
ANNUAL MEETING OF SHAREHOLDERS OF AMETEK, INC.
HELD AT
J. P. MORGAN CHASE & CO.
11TH FLOOR CONFERENCE CENTER
270 PARK AVENUE
NEW YORK, NY 10017
(212) 270-6000
J. P. Morgan Chase & Co.'s 270 Park Avenue location is in midtown Manhattan and
accessible by mass transportation from New York, New Jersey, Connecticut, Long
Island and elsewhere. Below are automobile directions:
DIRECTIONS FROM NEW JERSEY
Take Route 3 East to the Lincoln Tunnel. Upon exiting the Tunnel, turn right
onto 40th Street and proceed eastbound to Park Avenue. Turn left onto Park
Avenue and travel north to East 49th Street. Turn left at 49th Street and
proceed southbound on Park Avenue. J. P. Morgan Chase & Co. is located on Park
Avenue between 47th and 48th Streets.
Alternate route: From the George Washington Bridge, follow signs to Henry Hudson
Parkway South. Take the Parkway South to the 56th Street exit (a left lane
exit). At the end of the exit ramp, proceed straight onto 56th Street. Proceed
eastbound to Park Avenue. Turn right onto Park Avenue and proceed southbound. J.
P. Morgan Chase & Co. is located on Park Avenue between 47th and 48th Streets.
DIRECTIONS FROM CONNECTICUT
Take I-95 South to the Cross Bronx Expressway. Take the Cross Bronx Expressway
to the last exit in New York (stay to the right when approaching the George
Washington Bridge so as not to miss the exit). Follow signs for Henry Hudson
Parkway/181st Street. Take the Henry Hudson Parkway South to the 56th Street
exit (a left lane exit). At the end of the exit ramp, proceed straight onto 56th
Street. Proceed eastbound to Park Avenue. Turn right onto Park Avenue and
proceed southbound. J. P. Morgan Chase & Co. is located on Park Avenue between
47th and 48th Streets.
Alternate route: Take I-684 South or the Merritt Parkway onto the Hutchinson
River Parkway South to the Cross County Parkway. Proceed west on the Cross
County Parkway to the Saw Mill River Parkway South. The Saw Mill becomes the
Henry Hudson Parkway in New York City. Proceed south on the Parkway until the
56th Street exit (a left lane exit). At the end of the exit ramp, proceed
straight onto 56th Street. Proceed eastbound to Park Avenue. Turn right onto
Park Avenue and proceed southbound. J. P. Morgan Chase & Co. is located on Park
Avenue between 47th and 48th Streets.
DIRECTIONS FROM LONG ISLAND
Take the Long Island Expressway West (Route 495) to the Midtown Tunnel. Upon
exiting the Tunnel, turn left onto East 39th Street and proceed westbound to
Park Avenue. Turn right onto Park Avenue and travel north to East 49th Street.
Turn left at 49th Street and proceed southbound on Park Avenue. J. P. Morgan
Chase & Co. is located on Park Avenue between 47th and 48th Streets.
Alternate route: Take the Grand Central Parkway to the Triborough Bridge. Take
the exit to Manhattan and follow signs for the FDR Drive South. Exit at 63rd
Street and proceed to Park Avenue. Turn left and proceed southbound. J. P.
Morgan Chase & Co. is located on Park Avenue between 47th and 48th Streets.
[Recycle Logo]
This document is printed on recycled paper, which contains at least 10% post
consumer waste.
ANNUAL MEETING OF SHAREHOLDERS OF
AMETEK, INC.
MAY 20, 2003
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
Please detach and mail in the envelope provided.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [x]
1.ELECTION OF DIRECTORS
NOMINEES
[ ] FOR ALL NOMINEES [ ] Helmut N. Friedlaender
[ ] James R. Malone
[ ] WITHHOLD AUTHORITY [ ] Elizabeth R. Varet
FOR ALL NOMINEES
[ ] FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here: [x]
FOR AGAINST ABSTAIN
2. PROPOSAL TO APPROVE THE APPOINTMENT OF ERNST [ ] [ ] [ ]
& YOUNG LLP AS INDEPENDENT AUDITORS FOR THE
YEAR 2003.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the meeting.
Receipt of the notice of said meeting and of the Proxy Statement of AMETEK, Inc.
accompanying the same is hereby acknowledged.
UNLESS OTHERWISE SPECIFIED IN THE SPACES PROVIDED, THE UNDERSIGNED'S VOTE IS TO
BE CAST FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR LISTED IN PROPOSAL (1),
AND FOR APPROVAL OF PROPOSAL (2), AS MORE FULLY DESCRIBED IN THE ENCLOSED PROXY
STATEMENT.
Signature of Shareholder Date:
------------------------------ -------------------
Signature of Shareholder Date:
------------------------------ -------------------
NOTE: This proxy must be signed exactly as the name appears hereon. When shares
are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
AMETEK, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Frank S. Hermance, Donna F. Winquist and
Kathryn E. Londra or a majority of those present and acting, or, if only one is
present, then that one, proxies, with full power of substitution, to vote all
stock of AMETEK, Inc. which the undersigned is entitled to vote at AMETEK's
Annual Meeting of Shareholders to be held at J. P. Morgan Chase & Co., 270 Park
Avenue, 11th Floor Conference Center, New York, New York 10017, on Tuesday, May
20, 2003, at 2:00 p.m. local time, and at any adjournment or postponements
thereof, hereby ratifying all that said proxies or their substitutes may do by
virtue hereof, and the undersigned authorizes and instructs said proxies to vote
as follows:
(TO BE SIGNED ON REVERSE SIDE) SEE
REVERSE
SIDE
ANNUAL MEETING OF SHAREHOLDERS OF
AMETEK, INC.
MAY 20, 2003
PROXY VOTING INSTRUCTIONS
INTERNET - Access "WWW.VOTEPROXY.COM" and
follow the on-screen instructions. Have your
control number available when you access the
web page.
- OR -
COMPANY NUMBER
TELEPHONE - Call toll-free 1-800-PROXIES
from any touch-tone telephone and follow the ACCOUNT NUMBER
instructions. Have your control number and
proxy card available when you call. CONTROL NUMBER
- OR -
MAIL - Date, sign and mail your proxy card
in the envelope provided as soon as
possible.
PLEASE VOTE - IF YOU VOTE BY
INTERNET OR BY TELEPHONE, THERE IS NO NEED
TO RETURN YOUR PROXY CARD.
Please detach and mail in the envelope provided IF you are not voting via
telephone or the Internet.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE x
1.ELECTION OF DIRECTORS
NOMINEES
[ ] FOR ALL NOMINEES [ ] Helmut N. Friedlaender
[ ] James R. Malone
[ ] WITHHOLD AUTHORITY [ ] Elizabeth R. Varet
FOR ALL NOMINEES
[ ] FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you
wish to withhold, as shown here:[X]
To change the address on your account, please check the box at right
and indicate your new address in the address space above. Please note
that changes to the registered name(s) on the account may not be [ ]
submitted via this method.
FOR AGAINST ABSTAIN
2. PROPOSAL TO APPROVE THE APPOINTMENT [ ] [ ] [ ]
OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS FOR THE YEAR 2003.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the meeting.
Receipt of the notice of said meeting and of the Proxy Statement of AMETEK, Inc.
accompanying the same is hereby acknowledged.
UNLESS OTHERWISE SPECIFIED IN THE SPACES PROVIDED, THE UNDERSIGNED'S VOTE IS TO
BE CAST FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR LISTED IN PROPOSAL (1),
AND FOR APPROVAL OF PROPOSAL (2), AS MORE FULLY DESCRIBED IN THE ENCLOSED PROXY
STATEMENT.
Signature of Shareholder Date:
------------------------------ -------------------
Signature of Shareholder Date:
------------------------------ -------------------
NOTE: This proxy must be signed exactly as the name appears hereon. When shares
are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
NOTIFICATION OF ELECTRONIC AVAILABILITY
IF YOU WOULD LIKE TO RECEIVE FUTURE NOTIFICATION OF THE AVAILABILITY OF THE
PROXY STATEMENT AND ANNUAL REPORT ELECTRONICALLY, PLEASE VISIT
WWW.INVESTPOWER.COM. CLICK ON "ENROLL TO RECEIVE MAILINGS VIA E-MAIL" AND REFER
TO THE COMPANY NUMBER AND ACCOUNT NUMBER ON TOP OF THE REVERSE SIDE OF THIS
CARD.
ANNUAL MEETING OF SHAREHOLDERS
AMETEK, INC.'S ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD AT 2:00 P.M. ON
TUESDAY, MAY 20, 2003, AT J. P. MORGAN CHASE & CO., 270 PARK AVENUE, 11TH FLOOR
CONFERENCE CENTER, NEW YORK, NEW YORK 10017. PLEASE SEE YOUR PROXY STATEMENT FOR
DIRECTIONS SHOULD YOU WISH TO ATTEND THE MEETING.
AMETEK, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Frank S. Hermance, Donna F. Winquist and
Kathryn E. Londra or a majority of those present and acting, or, if only one is
present, then that one, proxies, with full power of substitution, to vote all
stock of AMETEK, Inc. which the undersigned is entitled to vote at AMETEK's
Annual Meeting of Shareholders to be held at J. P. Morgan Chase & Co., 270 Park
Avenue, 11th Floor Conference Center, New York, New York 10017, on Tuesday, May
20, 2003, at 2:00 p.m. local time, and at any adjournment or postponements
thereof, hereby ratifying all that said proxies or their substitutes may do by
virtue hereof, and the undersigned authorizes and instructs said proxies to vote
as follows:
(TO BE SIGNED ON REVERSE SIDE) SEE
REVERSE
SIDE