UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________________
Commission file number 1-12981
AMETEK, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 14-1682544
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 North Valley Road, Building 4, P.O. Box 1764, Paoli, Pennsylvania 19301-0801
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 610-647-2121
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of shares of the issuer's common stock outstanding as of the
latest practicable date was: Common Stock, $0.01 Par Value, outstanding at July
31, 2003 was 33,097,375 shares.
AMETEK, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for
the Three and Six Months Ended June 30, 2003 and 2002............. 3
Consolidated Balance Sheet as of
June 30, 2003 and December 31, 2002............................... 4
Condensed Consolidated Statement of Cash Flows for
the Six Months Ended June 30, 2003 and 2002....................... 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 12
Item 4. Controls and Procedures.............................................. 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................. 19
Item 6. Exhibits and Reports on Form 8-K..................................... 19
SIGNATURES...................................................................... 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMETEK, Inc.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 276,870 $ 267,426 $ 544,401 $ 530,984
---------- ---------- ---------- ----------
Expenses:
Cost of sales, excluding depreciation 201,285 194,420 396,349 386,206
Selling, general and administrative 28,252 27,009 55,567 54,784
Depreciation 8,593 8,293 17,068 15,856
---------- ---------- ---------- ----------
Total expenses 238,130 229,722 468,984 456,846
---------- ---------- ---------- ----------
Operating income 38,740 37,704 75,417 74,138
Other income (expenses):
Interest expense (6,335) (6,383) (12,967) (13,277)
Other, net (212) 86 (1,099) (110)
---------- ---------- ---------- ----------
Income before income taxes 32,193 31,407 61,351 60,751
Provision for income taxes 10,377 10,082 19,817 19,761
---------- ---------- ---------- ----------
Net income $ 21,816 $ 21,325 $ 41,534 $ 40,990
========== ========== ========== ==========
Basic earnings per share $ 0.66 $ 0.65 $ 1.26 $ 1.25
========== ========== ========== ==========
Diluted earnings per share $ 0.65 $ 0.63 $ 1.24 $ 1.22
========== ========== ========== ==========
Average common shares outstanding:
Basic shares 32,891 32,991 32,936 32,894
========== ========== ========== ==========
Diluted shares 33,577 33,797 33,611 33,700
========== ========== ========== ==========
Dividends per share $ 0.06 $ 0.06 $ 0.12 $ 0.12
========== ========== ========== ==========
See accompanying notes.
3
AMETEK, Inc.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 26,808 $ 13,483
Marketable securities 7,988 8,320
Receivables, less allowance for possible losses 190,829 175,230
Inventories 140,536 129,451
Deferred income taxes 11,301 10,005
Other current assets 15,929 14,080
------------- -------------
Total current assets 393,391 350,569
------------- -------------
Property, plant and equipment, at cost 612,931 587,331
Less accumulated depreciation (404,220) (383,002)
------------- -------------
208,711 204,329
------------- -------------
Goodwill, net of accumulated amortization 488,927 391,947
Investments and other assets 88,845 83,161
------------- -------------
Total assets $ 1,179,874 $ 1,030,006
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 94,159 $ 110,422
Accounts payable 93,900 81,108
Accruals 90,858 69,890
------------- -------------
Total current liabilities 278,917 261,420
Long-term debt 359,326 279,636
Deferred income taxes 47,340 41,233
Other long-term liabilities 29,225 27,536
Stockholders' equity :
Common stock 341 339
Capital in excess of par value 18,138 14,045
Retained earnings 502,303 464,731
Accumulated other comprehensive losses (25,883) (34,719)
Treasury stock (29,833) (24,215)
------------- -------------
465,066 420,181
------------- -------------
Total liabilities and stockholders' equity $ 1,179,874 $ 1,030,006
============= =============
See accompanying notes.
4
AMETEK, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended
June 30,
--------------------------
2003 2002
----------- -----------
Cash provided by (used for):
Operating activities:
Net income $ 41,534 $ 40,990
Adjustments to reconcile net income to total operating activities:
Depreciation and amortization 17,541 16,268
Deferred income taxes 5,130 619
Net change in assets and liabilities 13,670 5,392
Other (1,621) (6,535)
----------- -----------
Total operating activities 76,254 56,734
----------- -----------
Investing activities:
Additions to property, plant and equipment (7,998) (7,937)
Purchase of businesses (114,259) -
Other 2,108 (5,999)
----------- -----------
Total investing activities (120,149) (13,936)
----------- -----------
Financing activities:
Net change in short-term borrowings (16,382) (44,708)
Additional long-term borrowings 78,682 -
Repurchases of common stock (5,848) -
Cash dividends paid (3,963) (3,947)
Proceeds from stock options and other 4,731 7,140
----------- -----------
Total financing activities 57,220 (41,515)
----------- -----------
Increase in cash and cash equivalents 13,325 1,283
Cash and cash equivalents:
As of January 1 13,483 14,139
----------- -----------
As of June 30 $ 26,808 $ 15,422
=========== ===========
See accompanying notes.
5
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 1 - Financial Statement Presentation
The accompanying consolidated financial statements are unaudited. The Company
believes that all adjustments (which consist of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company at June 30, 2003, and the consolidated results of its operations and
cash flows for the three and six-month periods ended June 30, 2003 and 2002 have
been included. Quarterly results of operations are not necessarily indicative of
results for the full year. Certain amounts appearing in the prior year's
financial statements have been reclassified to conform with the current year's
presentation. Quarterly financial statements should be read in conjunction with
the financial statements and related notes presented in the Company's annual
report on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission.
Note 2 - Recent Accounting Pronouncements
In May, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classification of certain freestanding
financial instruments that have characteristics of both liabilities and equity.
It also requires that an issuer classify a financial instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 is not expected to have any material effect
on the Company's consolidated results of operations, financial position, or cash
flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 requires a company to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity even if the company does not have a majority of its
voting interest. A variable interest entity is generally defined as an entity
who does not have the characteristics of a controlling financial interest or do
not have sufficient equity for the entity to finance its activities without
additional subordinated financial support from other parties, or whose owners
lack risk and reward ownership. FIN No. 46 also has a disclosure requirement for
all variable interest entities of a company, even if the company is not the
primary beneficiary. FIN No. 46 is applicable to variable interest entities
created after January 31, 2003. Variable interest entities in which an interest
in a variable interest entity was created before February 1, 2003 shall apply
the provisions of FIN No. 46 effective July 1, 2003. The Company is still
evaluating the effects of adopting FIN No. 46.
Effective January 1, 2003, the Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 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
6
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
retirement costs are capitalized as a part of the carrying amount of
the long-lived asset and subsequently allocated to expense over the asset's
useful life. The adoption of SFAS No. 143 had no effect on the Company's
consolidated results of operations, financial position, or cash flows.
Effective January 1, 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Among other things, SFAS 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. The adoption of SFAS
No. 146 had no effect on the Company's consolidated results of operations,
financial position, or cash flows in the quarter.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN No. 45"). FIN No. 45 requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that guarantee. 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 required by FIN No. 45, is included in Note 10, "Guarantees." The
Company adopted the recognition and measurement provisions of FIN No. 45
effective January 1, 2003 for guarantees issued or modified after December 31,
2002. The Company does not provide significant guarantees on a routine basis. As
a result, the adoption of FIN No. 45 did not have an impact on the Company's
financial statements.
Note 3 - Earnings Per Share
The calculation of basic earnings per share for the three and six-month
periods ended June 30, 2003 and 2002 are based on the average number of common
shares considered outstanding during the periods. Diluted earnings per share for
such periods reflect 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 for the periods:
Weighted average shares (In thousands)
--------------------------------------
Three months ended June 30, Six months ended June 30
--------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic shares 32,891 32,991 32,936 32,894
Stock option and award plans 686 806 675 806
------ ------ ------ ------
Diluted shares 33,577 33,797 33,611 33,700
====== ====== ====== ======
Note 4 - Acquisitions
In January, 2003, the Company acquired Airtechnology Holdings Limited
(Airtechnology) from Candover Partners Limited, for approximately 50.0 million
British pounds sterling, or $79.8 million in
7
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
cash, subject to adjustment. Airtechnology is a supplier of motors, fans and
environmental control systems for the aerospace and defense markets.
Airtechnology generated sales of approximately 29.0 million British pounds
sterling, or $46.0 million in 2002. Airtechnology is a part of the Company's
Electromechanical Group.
Effective February 28, 2003, the Company acquired Solidstate Controls,
Inc. (SCI) from the Marmon Industrial Companies LLC for approximately $34.5
million in cash, subject to adjustment. SCI is a leading supplier of
uninterruptible power supply systems for the process and power generation
industries. SCI generated sales of approximately $45.0 million in 2002. SCI is a
part of the Company's Electronic Instruments Group.
The operating results of the above acquisitions are included in the
Company's consolidated results from their respective dates of acquisition.
The acquisitions have been accounted for using the purchase method in
accordance with SFAS No. 141, "Business Combinations." The following table
presents the tentative allocation of the aggregate purchase price for the 2003
acquisitions based on their estimated fair values:
In millions
-----------
Net working capital $ 8.3
Property, plant and equipment 8.6
Goodwill 92.2
Other assets 5.2
-----------
Total net assets $ 114.3
===========
The amount allocated to goodwill is reflective of the benefit the
Company expects to realize from expanding its presence in high-end technical
motors through Airtechnology and the process and power generation industries
through SCI.
Of the $5.2 million in other assets, $5.0 million was assigned to
intangibles, other than goodwill, with estimated remaining lives of periods up
to 10 years.
The Company is in the process of completing third party valuations of
certain tangible and intangible assets acquired with the new businesses.
Therefore, the allocation of purchase price to these acquisitions is subject to
revision.
The following table provides pro forma results of operations for the
periods noted below, as if the acquisitions had been made as of January 1, 2002.
The pro forma amounts are not necessarily indicative of the results that would
have occurred if the acquisitions had been completed on the date indicated. Pro
forma net sales, net income and diluted earnings per share would not have been
materially different than the amounts reported in the consolidated statement of
income for the three and six-month periods ended June 30, 2003.
Pro Forma Results of Operations
(In millions, except per share)
------------------------------------
Three months Six months
ended ended
June 30, 2002 June 30, 2002
------------- -------------
Net sales $ 289.5 $ 572.8
Net income $ 22.4 $ 42.4
Diluted earnings per share $ 0.66 $ 1.26
8
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 5 - Goodwill
The balance of goodwill as of June 30, 2003 and December 31, 2002 was
$488.9 million and $391.9 million, respectively. Goodwill by segment at the
respective dates were (in millions):
June 30, 2003 December 31, 2002
------------- -----------------
Electronic Instruments Group $ 274.6 $ 244.1
Electromechanical Group 214.3 147.8
------------- -------------
Total $ 488.9 $ 391.9
============= =============
The increase in goodwill since December 31, 2002 relates primarily to
the two acquisitions previously discussed, and the translation effect of changes
in foreign currency exchange rates during the period.
Note 6 - Inventories
The estimated components of inventory stated at lower of LIFO cost or
market are:
(In thousands)
------------------------------------
June 30, December 31,
2003 2002
------------ ------------
Finished goods and parts $ 32,729 $ 26,819
Work in process 34,582 33,054
Raw materials and purchased parts 73,225 69,578
------------ ------------
$ 140,536 $ 129,451
============ ============
Inventory increased $11.1 million from December 31, 2002 to June 30,
2003. Inventory acquired with the two new businesses, previously discussed,
was the reason for the increase.
Note 7 - Comprehensive Income
Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by and distributions to
stockholders. The following table presents comprehensive income for the three
and six-month periods ended June 30, 2003 and 2002:
(In thousands)
--------------
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 21,816 $ 21,325 $ 41,534 $ 40,990
Foreign currency translation adjustment 7,767 6,808 8,030 4,975
Unrealized gain on marketable securities 792 69 806 137
---------- ---------- ---------- ----------
Total comprehensive income $ 30,375 $ 28,202 $ 50,370 $ 46,102
========== ========== ========== ==========
9
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 8 - Segment Disclosure
The Company has two reportable business 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.
At June 30, 2003, there were no significant changes in identifiable
assets of reportable segments from the amounts disclosed at December 31, 2002,
nor were there any changes in the basis of segmentation, or in the measurement
of segment operating results. Operating information relating to the Company's
reportable segments for the three and six-month periods ended June 30, 2003 and
2002 can be found in the table on page 12 in the Management's Discussion &
Analysis section of this Report.
Note 9 - Pro Forma Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock option
plans, which recognizes expense based on the intrinsic value at the date of
grant. Since stock options have been issued with the exercise price per share
equal to the fair market value per share at the date of grant, no compensation
expense has resulted. Had the Company accounted for stock options in accordance
with the fair value method prescribed by SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company would have reported the following pro
forma results for the second quarter and six months ended June 30, 2003 and
2002:
(In thousands, except per share data)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income
Net income, as reported $ 21,816 $ 21,325 $ 41,534 $ 40,990
Deduct total stock-based compensation
expense, determined under the fair
value method of SFAS 123, net of tax (951) (912) (1,687) (1,555)
------------ ------------ ------------ ------------
Pro forma net income $ 20,865 $ 20,413 $ 39,847 $ 39,435
============ ============ ============ ============
Net income per share
Basic:
As reported $ 0.66 $ 0.65 $ 1.26 $ 1.25
Pro forma $ 0.63 $ 0.62 $ 1.21 $ 1.20
Diluted:
As reported $ 0.65 $ 0.63 $ 1.24 $ 1.22
Pro forma $ 0.63 $ 0.61 $ 1.20 $ 1.18
10
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 10 - Guarantees
The Company does not provide significant guarantees on a routine basis.
The Company primarily issues guarantees, stand-by letters of credit and surety
bonds in the ordinary course of its business to provide financial or performance
assurance to third parties on behalf of its consolidated subsidiaries to support
or enhance the subsidiary's stand-alone creditworthiness. The amounts subject to
certain of these agreements vary depending on the covered contracts actually
outstanding at any particular point in time. The maximum amount of future
payment obligations relative to these various guarantees was approximately $39
million, and the outstanding liabilities under those guarantees was
approximately $26 million, which is recorded in the accompanying balance sheet
at June 30, 2003. These guarantees expire in 2003 through 2006.
Indemnifications
In conjunction with certain acquisition and divestiture transactions,
the Company may agree to make payments to compensate or indemnify other parties
for possible future unfavorable financial consequences resulting from specified
events (e.g., breaches of contract obligations, or retention of previously
existing environmental, tax or employee liabilities) whose terms range in
duration and often are not explicitly defined. Where appropriate, the obligation
for such indemnifications is recorded as a liability. Because the amount of
these types of indemnifications generally is not specifically stated, the
overall maximum amount of the obligation under such indemnifications cannot be
reasonably estimated. Further, the Company indemnifies its directors and
officers who are or were serving at the Company's request in such capacities.
Historically, any such costs incurred to settle claims related to these
indemnifications have been minimal for the Company. The Company believes that
future payments, if any, under all existing indemnification agreements would not
have a material impact on its results of operations, financial position, or cash
flows.
Product Warranties
The Company provides limited warranties in connection with the sale of
its products. The warranty periods for products sold varies widely among the
Company's operations, but for the most part do not exceed one year. The Company
calculates its warranty expense provision based on past warranty experience and
adjustments are made periodically to reflect actual warranty expenses.
The change in the carrying amount of the Company's accrued product
warranty obligation from December 31, 2002 to June 30, 2003 was as follows (in
thousands):
Balance as of December 31, 2002 $ 6,432
Accruals for warranties issued during the period 2,347
Settlements made during the period (2,570)
Changes in liability for pre-existing warranties,
including expirations during the period (562)
Warranty accruals related to 2003 acquisitions 1,227
---------
Balance as of June 30, 2003 $ 6,874
=========
11
AMETEK, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth sales and income by reportable segment,
and consolidated operating income and pretax income:
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Dollars in thousands)
Net sales
Electronic Instruments $ 137,363 $ 135,308 $ 270,964 $ 272,109
Electromechanical 139,507 132,118 273,437 258,875
----------- ----------- ----------- -----------
Consolidated net sales $ 276,870 $ 267,426 $ 544,401 $ 530,984
=========== =========== =========== ===========
Operating income and income before income taxes
Electronic Instruments $ 21,885 $ 20,657 $ 41,867 $ 41,616
Electromechanical 21,690 21,864 43,491 42,437
----------- ----------- ----------- -----------
Total segment operating income 43,575 42,521 85,358 84,053
Corporate and other (4,835) (4,817) (9,941) (9,915)
----------- ----------- ----------- -----------
Consolidated operating income 38,740 37,704 75,417 74,138
Interest and other expenses, net (6,547) (6,297) (14,066) (13,387)
----------- ----------- ----------- -----------
Consolidated income
before income taxes $ 32,193 $ 31,407 $ 61,351 $ 60,751
=========== =========== =========== ===========
Operations for the second quarter of 2003 compared with the second quarter
of 2002
In the second quarter of 2003, the economic slowdown impacting the
manufacturing sector continued to adversely affect many of the Company's
businesses. Net sales for the second quarter of 2003 were $276.9 million, an
increase of $9.4 million, or 3.5%, compared with second quarter 2002 net
sales of $267.4 million. Favorable foreign currency translation effects
represented approximately $7.3 million of the sales increase. Net sales for
the Electronic Instruments Group (EIG) increased $2.1 million or 1.5% for
the second quarter of 2003, primarily due to the February 2003 acquisition
of Solidstate Controls (SCI), strength in the Group's high-end analytical
instrumentation businesses and favorable foreign currency translation
impacts, partially offset by weakness in the aerospace and power markets.
Net sales for the Electromechanical Group (EMG) were up $7.4 million or 5.6%
in the second quarter of 2003 primarily driven by the January 2003
acquisition of Airtechnology and favorable foreign currency translation
impacts, partially offset by continued adverse market conditions in the
domestic floor care markets, although the European floor care market
continues to be strong. Sales by the Company's base businesses (businesses
other than the 2003 acquisitions), in the second quarter of 2003 showed a
4.9% reduction when compared with the same period in 2002. International
sales were $115.1 million, or 41.6% of consolidated sales, in the second
quarter of 2003, compared with 34.9% of consolidated sales in the same
period of 2002. International sales by the businesses acquired in the first
quarter of 2003 primarily accounted for the increase.
12
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Segment operating income for the second quarter of 2003 was $43.6 million,
an increase of $1.1 million or 2.5% from $42.5 million in the second quarter
of 2002. Segment operating income, as a percentage of sales, decreased to
15.7% of sales in the second quarter of 2003 from 15.9% of sales in the
second quarter of 2002. The increase in segment operating income was the
result of a profit contribution from the 2003 acquisitions, as well as the
Company's operational excellence initiatives, including continued movement
of manufacturing to low-cost locales and cost reduction programs. Partially
offsetting the segment operating income increase was the impact of lower
sales by the Company's base businesses, and a $2.9 million increase in
pension costs, general business insurance and medical expenses in the second
quarter of 2003 when compared with the second quarter of 2002.
Selling, general and administrative expenses were $28.3 million in the
second quarter of 2003, an increase of $1.2 million or 4.6%, when compared
with the second quarter of 2002. Selling expenses, as a percentage of sales,
remained essentially flat at 8.4% in the second quarter of 2003, compared
with the same period in 2002. Higher selling expenses of the acquired
businesses more than offset lower selling expense of the Company's base
businesses. Second quarter 2003 selling expenses of base businesses declined
4.3% compared with the same period in 2002 as a result of a continued focus
on cost reduction initiatives.
Corporate expenses for the second quarter of 2003 were $4.8 million,
essentially unchanged from the same period in 2002. Corporate expenses
represented 1.7% of sales for second quarter of 2003, a slight improvement
when compared with the second quarter of 2002. The improvement was a result
of the Company's cost reduction initiatives, partially offset by higher
insurance and pension costs. After deducting corporate expenses,
consolidated operating income totaled $38.7 million, or 14.0% of sales for
the second quarter of 2003, compared with $37.7 million, or 14.1% of sales
for the second quarter of 2002, an increase of $1.0 million, or 2.7%.
Interest expense decreased slightly to $6.3 million in the second quarter of
2003, from $6.4 million for the same quarter of 2002. The decrease was a
result of lower interest rates partially offset by higher average debt
levels to fund the first quarter 2003 acquisitions. Other expenses were $0.2
million in the second quarter of 2003, compared with other income of $0.1
million in the same quarter of 2002. The $0.3 million increase in other
expenses is primarily due to expenses related to acquisition candidates
not consummated.
Net income for the second quarter of 2003 totaled $21.8 million, an increase
of 2.3% from $21.3 million in the second quarter of 2002. Diluted earnings
per share rose 3.2% to $0.65 per share, compared with $0.63 per share for
the same quarter of 2002.
13
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Segment Results
Electronic Instruments Group (EIG) net sales totaled $137.4 million in the
second quarter of 2003, an increase of $2.1 million or 1.5% from the same
quarter of 2002. Net sales increased in the second quarter of 2003 due to
the acquisition of SCI, favorable foreign currency translation impacts of
approximately $1.8 million, and strength in the Group's high-end analytical
instrumentation businesses, partially offset by weakness in the aerospace
and power markets. Sales by the Group's base businesses for the second
quarter of 2003 decreased 6.8% when compared with the same period in 2002.
Operating income of EIG was $21.9 million for the second quarter of 2003, an
increase of $1.2 million or 5.9% when compared with the second quarter of
2002. The increase in operating income was primarily driven by the SCI
acquisition and overall strength in the Group's process and industrial
products businesses, partially offset by the impact of lower sales by the
Group's base businesses, and an increase of approximately $2.0 million in
pension costs and insurance expense for EIG, and weakness in the aerospace
and power markets. Operating margins were 15.9% of sales in the second
quarter of 2003 compared with operating margins of 15.3% of sales in the
second quarter of 2002. Group operating margins in the second quarter of
2003 were favorably impacted due to cost reduction initiatives.
Electromechanical Group (EMG) net sales totaled $139.5 million in the second
quarter 2003, an increase of $7.4 million or 5.6% from the same quarter in
2002. The sales increase was primarily the result of the Airtechnology
acquisition and favorable currency translation impacts of approximately $5.5
million, partially offset by the continued soft domestic floor-care market.
Sales by base businesses in this Group showed a declined of 2.9% when
compared with the second quarter of 2002.
Operating income of EMG was $21.7 million for the second quarter of 2003,
down slightly from $21.9 million in the second quarter of 2002. Operating
income was negatively impacted by the impact of lower sales by the Group's
base businesses, severance costs, higher than anticipated benefit costs, and
continued weakness in the domestic floor-care market, partially offset by a
profit contribution from the Airtechnology acquisition. Group operating
income as a percentage of sales for the second quarter of 2003 was 15.5%,
compared with a higher than normal 16.5% margin in the second quarter of
2002.
Operations for the first six months of 2003 compared with the first six
months of 2002.
In the first six months of 2003, the economic slowdown continued to impact
many of the Company's businesses. Net sales for the first six months of
2003 were $544.4 million, an increase of $13.4 million, when compared with
net sales of $531.0 million reported for the first six months of 2002.
Favorable foreign currency translation effects, the acquisition of new
businesses, reduced by lower sales by base businesses accounted for the
sales increase. EIG's net sales decreased by $1.1 million or 0.4% to $271.0
million for the first six months of 2003. EIG's sales decrease was due to
continued weak market conditions in the aerospace and power markets,
partially offset by the recent acquisition of SCI, strength in the Group's
high-end analytical
14
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
instrumentation businesses and favorable foreign currency translation
impacts. EMG's net sales increased $14.6 million or 5.6% to $273.4 million
for the first six months of 2003 primarily from the Airtechnology
acquisition and favorable currency translation impacts, partially offset by
continued weakness in the domestic floor-care market. The Company's European
floor care motor business continues to be strong. Sales by the Company's
base businesses for the first six months of 2003 showed a 4.0% reduction
when compared with the same period in 2002. International sales were $222.2
million, or 40.8% of consolidated sales, for the six months ended June 30,
2003, compared to $181.6 million, or 34.3% of consolidated sales, for the
comparable period in 2002. The 2003 acquisitions primarily accounted for the
increase in international sales.
New orders for the six months ended June 30, 2003 were $595.3 million,
compared with $515.7 million for the same period in 2002, an increase of
$79.6 million, or 15.4%. The Company's backlog of unfilled orders at June
30, 2002 was $291.8 million, compared with $240.9 million at December 31,
2002. The increase in orders and backlog resulted primarily from the two
acquisitions in the first quarter of 2003, as previously mentioned.
Segment operating income for the first six months of 2003 was $85.4 million,
an increase of $1.3 million, or 1.6% compared with the same period in 2002.
The increase was the result of the profit contribution from the 2003
acquisitions, as well as the Company's operational excellence initiatives,
including continued movement of manufacturing to low-cost locales and
ongoing cost reduction programs. Partially offsetting the segment operating
income increase was the impact of lower sales by the Company's base
businesses, and a $4.6 million increase in pension costs, general business
insurance and medical expenses in the first six months of 2003 when compared
with the same period of 2002. Higher levels of these costs and expenses are
expected to continue through the remainder of 2003.
Selling, general and administrative expenses were $55.6 million for the
first six months of 2003, an increase of $0.8 million or 1.4%, when compared
with the same period in 2002. Selling expenses, as a percentage of sales,
improved slightly to 8.4% for the first six months of 2003, compared with
the same period in 2002. Lower selling expenses by the Company's base
businesses were more than offset by higher selling expenses of the acquired
businesses. Base business selling expenses declined 5.4% for the six month
period ended June 30, 2003, compared with the same period in 2002, as a
result of a continued focus on cost reduction initiatives.
Corporate expenses were $9.9 million for the first six months of 2003, which
is unchanged from the same period in 2002. As a percentage of sales such
expenses were reduced slightly to 1.8% compared with the same period in
2002. Higher insurance expenses and pension costs were more than offset by
cost reductions.
Consolidated operating income was $75.4 million, an increase of $1.3 million
or 1.7% when compared with the same period in 2002. This represents an
operating margin of 13.9% for the first six months of 2003 compared with
14.0% for the same period in 2002.
15
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Interest expense was $13.0 million for the first six months of 2003, a
decrease of $0.3 million or 2.3% when compared with the first six months of
2002. Interest expense decreased as a result of lower interest rates,
partially offset by higher average debt levels to fund the first quarter of
2003 acquisitions. Other expenses were $1.1 million for the first six months
of 2003, compared with $0.1 million for the same period of 2002. The $1.0
million increase in other expenses was primarily the result of the writedown
of marketable securities owned by the Company's insurance subsidiary in the
first quarter of 2003, which were deemed to be other-than-temporarily
impaired.
The effective tax rate for the first six months of 2003 was 32.3% compared
with 32.5% for the first six months of 2002. The lower tax rate in 2003 is
primarily attributable to foreign operations and the continued
implementation of favorable tax planning initiatives.
Net income for the first six months of 2003 was $41.5 million, or $1.24 per
share on a diluted basis, compared with net income of $41.0 million, or
$1.22 per diluted share for the first six months of 2002.
Segment Results
Electronic Instruments Group (EIG) net sales were $271.0 million for the
first half of 2003, a decrease of $1.1 million or 0.4% compared with the
same period of 2002. The sales decrease for the first six months of 2003 was
due to weakness in the aerospace and power markets, partially offset by the
acquisition of SCI in the first quarter of 2003, strength in the Group's
high-end analytical instrumentation businesses and favorable foreign
currency translation impacts. EIG's sales by its base businesses for the
first six months of 2003 were 6.0% lower when compared with the same period
in 2002.
EIG's operating income for the first half of 2003 totaled $41.9 million, a
slight increase of $0.3 million or 0.6% compared with the first half of
2002. The improvement was driven by the SCI acquisition and strength in the
Group's high-end analytical instrumentation businesses, partially offset by
the impact of lower sales by the Group's base businesses, and by weakness in
the aerospace and power markets, as well as an increase of approximately
$3.4 million in pension costs and insurance expenses, noted above. Operating
margins were 15.5% of sales in the first six months of 2003 compared with
operating margins of 15.3% of sales in the comparable period in 2002. The
higher margin in 2003 was primarily the result of continuing cost reduction
initiatives.
In the Electromechanical Group (EMG) net sales totaled $273.4 million for
the first six months of 2003, an increase of $14.6 million or 5.6% compared
with the same period in 2002. The sales increase was the result of the
Airtechnology acquisition and favorable foreign currency translation impact
totaling $10.2 million, partially offset by continued weakness in the
domestic floor-care market. EMG sales by its base businesses decreased 2.0%
from the comparable period in 2002.
16
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
EMG's operating income for the first six months of 2003 was $43.5 million,
an increase of $1.1 million or 2.5% when compared with the same period in
2002. The higher profit was the result of the Airtechnology acquisition,
partially offset by continued weakness in the domestic floor-care market and
the impact of lower sales by the Group's base businesses. Severance costs,
higher than anticipated benefit costs and higher insurance expenses also
adversely affected Group operating income. Operating margins for the first
six months of 2003 were 15.9%, compared with operating margins of 16.4% for
the comparable period in 2002.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities totaled $76.3 million in the first
half of 2003, compared with $56.7 for the same period in 2002, an increase
of $19.6 million. The increase in operating cash flow was the result of
continued strong working capital management and lower required tax payments
for the first six months of 2003.
Cash used for investing activities totaled $120.1 million in the first six
months of 2003, compared with $13.9 million used in the same period of 2002.
The Company's acquisition of Airtechnology Holdings Limited and Solidstate
Controls, Inc. in the first quarter of 2003 used $114.3 million of cash. No
acquisitions were made in the comparable period in 2002. Additions to
property, plant and equipment in the first six months of 2003 totaled $8.0
million, essentially the same as the first six months of 2002.
Cash provided by financing activities in the first six months of 2003
totaled $57.2 million, compared with cash used for financing activities of
$41.5 million in the same period of 2002. In the first six months of 2003,
net short-term borrowings decreased by $16.4 million, compared with a
decrease of $44.7 million in 2002. Additional long-term borrowings in the
first half of 2003 were $78.7 million, compared with no additional long-term
borrowings in the comparable period in 2002. The 2003 borrowings were under
the Company's revolving credit agreement and were used to finance the two
acquisitions, mentioned above. Net cash proceeds from the exercise of
employee stock options totaled $3.9 million in the first six months of 2003,
compared with $6.9 million for the same period of 2002. Also, in the first
quarter of 2003, the Company repurchased 190,000 shares of its common stock
at a cost of $5.8 million.
In March, 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 June 30, 2003, $46.7 million was available
for future share repurchases.
17
AMETEK, Inc.
FINANCIAL CONDITION (CONTINUED)
After-tax cash expenditures in the first half of 2003 related to the
Company's prior accruals for cost reduction initiatives were $0.8 million.
The remaining $2.1 million in after-tax cash expenditures related to these
actions, is expected to be expended for the intended programs by the end of
2004.
As a result of the activities discussed above, the Company's cash and cash
equivalents at June 30, 2003 totaled $26.8 million, compared with $13.5
million at December 31, 2002. The Company believes it has sufficient
cash-generating capabilities and available credit facilities to enable it to
meet its needs in the foreseeable future.
FORWARD-LOOKING INFORMATION
Information contained in this discussion, other than historical information,
are considered "forward-looking statements" and may be subject to change
based on various important factors and uncertainties. Some, but not all, of
the factors and uncertainties that may cause actual results to differ
significantly from those expected in any forward-looking statement are
disclosed in the Company's 2002 Form 10-K as filed with the Securities and
Exchange Commission.
Item 4. Controls and Procedures
As of the end of the quarter ended June 30, 2003, management, including the
Company's Chief Executive Officer, and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, the
Company's Chief Executive Officer, and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, as of the end of the period covered by this report.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
18
AMETEK, Inc.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of AMETEK, Inc. (the "Company") was held on
May 20, 2003. The following matters were voted on at the Annual Meeting and
received the number of votes indicated:
1) Election of Directors. The following nominees were elected to
the Board of Directors for the terms expiring in 2006:
Number of Shares
-------------------------------------
Voted against
Nominee Voted for or withheld
- ---------------------- ---------- -------------
Helmut N. Friedlaender 27,994,667 512,231
James R. Malone 28,007,131 499,767
Elizabeth R. Varet 27,944,566 562,332
Of the remaining five Board members, Lewis G. Cole and Charles D. Klein
will stand for election in the year 2004. Sheldon S. Gordon, Frank S.
Hermance, and David P. Steinmann will stand for election in the year
2005.
2) Appointment of Independent Auditors. The Shareholders approved
the appointment of Ernst & Young LLP as independent auditors
for the Company for the year 2003. There were 27,200,026
shares voted for approval, 1,227,714 shares voted against, and
79,158 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
------ -----------
10.1 First Amendment to Credit Agreement dated as of April 23, 2003.
10.2 Amendment No. 1 to the Employees' Retirement Plan of AMETEK, Inc.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
19
b) Reports on Form 8-K: The Company filed Current Reports on Form 8-K
dated April 22, 2003, and July 23, 2003, under Item 5. Other Events, to report
the issuance of the Company's press releases announcing its financial results
for the first quarter of 2003 and the second quarter of 2003, respectively.
20
AMETEK, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMETEK, Inc.
------------------------------------------
(Registrant)
By /s/ Robert R. Mandos, Jr.
---------------------------------------
Robert R. Mandos, Jr.
Vice President & Comptroller
(Principal Accounting Officer)
August 7, 2003
21