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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 September 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
- --------------------------------------------------------------------------------
(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: Common Stock, $0.01 Par Value, outstanding at October
31, 2003, 33,380,734 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 Nine Months Ended September 30, 2003 and 2002.................. 3
Consolidated Balance Sheet as of
September 30, 2003 and December 31, 2002..................................... 4
Condensed Consolidated Statement of Cash Flows for
the Nine Months Ended September 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................................................... 13
Item 4. Controls and Procedures.......................................................... 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 20
SIGNATURES.................................................................................... 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMETEK, INC.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 267,781 $ 256,995 $ 812,182 $ 787,979
------------ ------------ ------------ ------------
Expenses:
Cost of sales, excluding depreciation 190,049 184,550 586,398 570,756
Selling, general and administrative 30,130 26,123 85,697 80,907
Depreciation 8,123 8,262 25,191 24,118
------------ ------------ ------------ ------------
Total expenses 228,302 218,935 697,286 675,781
------------ ------------ ------------ ------------
Operating income 39,479 38,060 114,896 112,198
Other income (expenses):
Interest expense (6,459) (6,175) (19,426) (19,452)
Other, net 160 (591) (939) (701)
------------ ------------ ------------ ------------
Income before income taxes 33,180 31,294 94,531 92,045
Provision for income taxes 11,262 9,913 31,079 29,674
------------ ------------ ------------ ------------
Net income $ 21,918 $ 21,381 $ 63,452 $ 62,371
============ ============ ============ ============
Basic earnings per share $ 0.66 $ 0.65 $ 1.92 $ 1.90
============ ============ ============ ============
Diluted earnings per share $ 0.65 $ 0.64 $ 1.88 $ 1.86
============ ============ ============ ============
Average common shares outstanding:
Basic shares 33,237 32,926 33,036 32,906
============ ============ ============ ============
Diluted shares 33,861 33,566 33,694 33,623
============ ============ ============ ============
Dividends per share $ 0.06 $ 0.06 $ 0.18 $ 0.18
============ ============ ============ ============
See accompanying notes.
3
AMETEK, Inc.
CONSOLIDATED BALANCE SHEET
(In thousands)
September 30, December 31,
2003 2002
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,809 $ 13,483
Marketable securities 7,744 8,320
Receivables, less allowance for possible losses 190,601 175,230
Inventories 145,285 129,451
Deferred income taxes 11,304 10,005
Other current assets 16,854 14,080
----------- -----------
Total current assets 388,597 350,569
----------- -----------
Property, plant and equipment, at cost 622,118 587,331
Less accumulated depreciation (411,111) (383,002)
----------- -----------
211,007 204,329
----------- -----------
Goodwill, net of accumulated amortization 508,743 391,947
Other intangibles, investments and other assets 109,749 83,161
----------- -----------
Total assets $ 1,218,096 $ 1,030,006
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 152,906 $ 110,422
Accounts payable 88,687 81,108
Accruals 97,369 69,890
----------- -----------
Total current liabilities 338,962 261,420
Long-term debt 310,105 279,636
Deferred income taxes 47,489 41,233
Other long-term liabilities 30,654 27,536
Stockholders' equity:
Common stock 344 339
Capital in excess of par value 25,463 14,045
Retained earnings 522,069 464,731
Accumulated other comprehensive losses (27,427) (34,719)
Treasury stock (29,563) (24,215)
----------- -----------
490,886 420,181
----------- -----------
Total liabilities and stockholders' equity $ 1,218,096 $ 1,030,006
=========== ===========
See accompanying notes.
4
AMETEK, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended
September 30,
-----------------------------
2003 2002
--------- ---------
Cash provided by (used for):
Operating activities:
Net income $ 63,452 $ 62,371
Adjustments to reconcile net income to total operating activities:
Depreciation and amortization 25,961 24,542
Deferred income taxes 5,120 738
Net change in assets and liabilities 13,746 (1,911)
Other (199) (5,444)
--------- ---------
Total operating activities 108,080 80,296
--------- ---------
Investing activities:
Additions to property, plant and equipment (13,505) (12,700)
Purchase of businesses (163,183) -
Other 1,969 (3,355)
--------- ---------
Total investing activities (174,719) (16,055)
--------- ---------
Financing activities:
Net change in short-term borrowings 44,215 (31,976)
Additional long-term borrowings 76,223 -
Reduction of long-term debt (47,769) (23,723)
Repurchases of common stock (5,848) (7,346)
Cash dividends paid (6,115) (5,922)
Proceeds from stock options 9,259 8,856
--------- ---------
Total financing activities 69,965 (60,111)
--------- ---------
Increase in cash and cash equivalents 3,326 4,130
Cash and cash equivalents:
As of January 1 13,483 14,139
--------- ---------
As of September 30 $ 16,809 $ 18,269
========= =========
See accompanying notes.
5
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2003, and the consolidated results of
its operations and cash flows for the three and nine-month periods ended
September 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 to the current year's presentation. The accompanying 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 January 2003, the Financial Accounting Standards Board ("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 which does not have the characteristics
of a controlling financial interest, or does not have sufficient equity for the
entity to finance its own activities without additional 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. In October 2003, the FASB
deferred the effective date for applying the provisions of FIN No. 46. For the
Company, the effective date for applying FIN No. 46 was changed from July 1,
2003 to December 31, 2003. The Company is continuing to evaluate 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 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.
6
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Effective January 1, 2003, the Company adopted the recognition and
measurement provisions of FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN No. 45") for guarantees issued or modified after
December 31, 2002. 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. 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. The disclosures required
by FIN No. 45, is included in Note 10, of this Report, "Guarantees."
Effective July 1, 2003, the Company adopted 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 was effective for financial instruments entered
into or modified after May 31, 2003. The adoption of SFAS No. 150 had no effect
on the Company's consolidated results of operations, financial position, or cash
flows.
Note 3 - Earnings Per Share
The calculation of basic earnings per share for the three and
nine-month periods ended September 30, 2003 and 2002 is 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 September 30, Nine months ended September 30,
-------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic shares 33,237 32,926 33,036 32,906
Stock option and award plans 624 640 658 717
------ ------ ------ ------
Diluted shares 33,861 33,566 33,694 33,623
====== ====== ====== ======
Note 4 - Acquisitions
In January 2003, the Company acquired Airtechnology Holdings Limited
(Airtechnology) from Candover Partners Limited, for approximately 50 million
British pounds sterling, or about $80 million in cash. Airtechnology is a
supplier of motors, fans and environmental control systems for the aerospace and
defense markets. Airtechnology generated sales of approximately 29 million
British pounds sterling, or $46 million in 2002. Airtechnology is a part of the
Company's Electromechanical Group.
7
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Effective February 28, 2003, the Company acquired Solidstate Controls,
Inc. (SCI) from the Marmon Industrial Companies LLC for approximately $34
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 million in 2002. SCI is a
part of the Company's Electronic Instruments Group.
Effective August 28, 2003, the Company acquired Chandler Instruments
Company, LLC. (Chandler Instruments), for approximately $49 million in cash,
subject to adjustment. Chandler Instruments is a leading manufacturer of
high-quality measurement instrumentation for the oil and gas industry. Chandler
Instruments generated sales of approximately $26 million in 2002. Chandler
Instruments 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 $ 9.4
Property, plant and equipment 13.9
Goodwill 113.3
Other intangible assets 26.6
--------
Total net assets $ 163.2
========
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, the process and power generation industries
through SCI and the oil and gas production and refining markets through Chandler
Instruments.
Of the $26.6 million in other intangible assets, $10.7 million was
assigned to intangibles with estimated remaining amortizable lives of up to 15
years. The remaining $15.9 million was assigned to infinite-lived intangibles
other than goodwill.
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.
8
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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 nine-month periods ended September 30, 2003.
Pro Forma Results of Operations
(In millions, except per share)
--------------------------------------------------
Three months Nine months
ended ended
September 30, 2002 September 30, 2002
------------------- ------------------
Net sales $281.5 $865.7
Net income $ 22.0 $ 64.9
Diluted earnings per share $ 0.66 $ 1.93
Note 5 - Goodwill
The balance of goodwill as of September 30, 2003 and December 31, 2002
was $508.7 million and $391.9 million, respectively. Goodwill by segment at the
respective dates was (in millions):
September 30, 2003 December 31, 2002
------------------ -----------------
Electronic Instruments Group $316.1 $244.1
Electromechanical Group 192.6 147.8
------ ------
Total $508.7 $391.9
====== ======
The increase in goodwill since December 31, 2002 relates primarily to
the three 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)
------------------------------
September 30, December 31,
2003 2002
-------- --------
Finished goods and parts $ 33,554 $ 26,819
Work in process 37,418 33,054
Raw materials and purchased parts 74,313 69,578
-------- --------
$145,285 $129,451
======== ========
Inventory increased $15.8 million from December 31, 2002 to September
30, 2003. Inventory acquired with the three 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.
9
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The following table presents comprehensive income for the three and
nine-month periods ended September 30, 2003 and 2002 (In thousands):
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 21,918 $ 21,381 $ 63,452 $ 62,371
Foreign currency translation adjustment (1,505) (105) 6,525 4,870
Unrealized (loss) gain on marketable securities (38) (1,550) 768 (1,413)
-------- -------- -------- --------
Total comprehensive income $ 20,375 $ 19,726 $ 70,745 $ 65,828
======== ======== ======== ========
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.
Since December 31, 2002, there were no changes in the basis of
segmentation, or in the measurement of segment operating results. Identifiable
assets of reportable segments at September 30, 2003, compared with December 31,
2002 are shown in the following table:
(In thousands)
September 30, December 31,
2003 2002
------------ ------------
Electronic Instruments Group $ 598,515 $ 507,358
Electromechanical Group 518,290 427,630
---------- ----------
Total segments 1,116,805 934,988
Corporate 101,291 95,018
---------- ----------
Total consolidated $1,218,096 $1,030,006
========== ==========
The primary reason for the increase in segment identifiable assets was
due to the three acquisitions made in 2003.
Operating information relating to the Company's reportable segments for
the three and nine-month periods ended September 30, 2003 and 2002 can be found
in the table on page 13 in the Management's Discussion and Analysis section of
this Report.
10
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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 three and nine months ended September 30, 2003 and 2002:
(In thousands, except per share data)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income
Net income, as reported $ 21,918 $ 21,381 $ 63,452 $ 62,371
Add: Stock-based employee compensation
expense included in reported net income,
net of tax 2,119 153 2,425 459
Deduct: Total stock-based compensation
expense determined under the fair value
based method for all awards, net of tax (3,107) (1,032) (5,100) (2,893)
---------- ---------- ---------- ----------
Pro forma net income $ 20,930 $ 20,502 $ 60,777 $ 59,937
========== ========== ========== ==========
Net income per share
Basic:
As reported $ 0.66 $ 0.65 $ 1.92 $ 1.90
Pro forma $ 0.63 $ 0.62 $ 1.84 $ 1.82
Diluted:
As reported $ 0.65 $ 0.64 $ 1.88 $ 1.86
Pro forma $ 0.62 $ 0.62 $ 1.83 $ 1.80
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 $40.0
million, and the outstanding liabilities under those guarantees was
approximately $26.0 million, which is recorded in the accompanying balance sheet
at September 30, 2003. These guarantees expire in 2003 through 2006.
11
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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 September 30, 2003 was as follows
(in thousands):
Balance as of December 31, 2002 $ 6,432
Accruals for warranties issued during the period 3,769
Settlements made during the period (4,253)
Changes in liability for pre-existing warranties,
including expirations during the period (330)
Warranty accruals related to 2003 acquisitions 1,299
-------
Balance as of September 30, 2003 $ 6,917
=======
Certain settlements of warranties made during the period were for
specific non-recurring warranty obligations.
12
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(Dollars in thousands)
Net sales
Electronic Instruments $ 138,978 $ 134,726 $ 409,942 $ 406,835
Electromechanical 128,803 122,269 402,240 381,144
--------- --------- --------- ---------
Consolidated net sales $ 267,781 $ 256,995 $ 812,182 $ 787,979
========= ========= ========= =========
Operating income and income before income taxes
Electronic Instruments $ 24,886 $ 22,826 $ 66,753 $ 64,442
Electromechanical 21,640 19,549 65,131 61,986
--------- --------- --------- ---------
Total segment operating income 46,526 42,375 131,884 126,428
Corporate and other (7,047) (4,315) (16,988) (14,230)
--------- --------- --------- ---------
Consolidated operating income 39,479 38,060 114,896 112,198
Interest and other expenses, net (6,299) (6,766) (20,365) (20,153)
--------- --------- --------- ---------
Consolidated income
before income taxes $ 33,180 $ 31,294 $ 94,531 $ 92,045
========= ========= ========= =========
Operations for the third quarter of 2003 compared with the third
quarter of 2002
Net sales for the third quarter of 2003 were $267.8 million, an
increase of $10.8 million, or 4.2%, compared with the third quarter of
2002 net sales of $257.0 million. Favorable foreign currency
translation effects represented approximately $4.3 million of the sales
increase. Net sales for the Electronic Instruments Group (EIG)
increased $4.3 million or 3.2% for the third quarter of 2003, primarily
due to the first quarter 2003 acquisition of Solidstate Controls (SCI)
and the third quarter 2003 acquisition of the Chandler Instruments
business, partially offset by weakness in the aerospace, power and
heavy-vehicle markets. Net sales for the Electromechanical Group (EMG)
were up $6.5 million or 5.3% in the third quarter of 2003 primarily
driven by the first quarter 2003 acquisition of the Airtechnology
business, partially offset by a decline in sales of specialty motors
and continued weak market conditions in the domestic floor care
markets. The European motor market continues to be strong. Sales by the
Company's base businesses (businesses other than the 2003
acquisitions), in the third quarter of 2003 showed a 5.4% reduction
when compared with the same period in 2002, primarily due to the
economic slowdown impacting the manufacturing sector. International
sales were $114.0 million, or 42.6% of consolidated sales, in the third
quarter of 2003, compared with $81.2 million or 31.6% of consolidated
sales in the same period of 2002, an increase of $32.8 million, or
40.4%. International sales by the businesses acquired in 2003 primarily
accounted for the increase.
13
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Segment operating income for the third quarter of 2003 was $46.5 million, an
increase of $4.2 million or 9.8% from $42.4 million in the third quarter of
2002. Segment operating income, as a percentage of sales, increased to 17.4% of
sales in the third quarter of 2003 from 16.5% of sales in the third quarter of
2002. The increase in segment operating income resulted from the profit
contributions generated by the 2003 acquisitions, as well as the Company's
operational excellence initiatives, including continued movement of
manufacturing to low-cost locales and other cost reduction programs. Partially
offsetting the increase in segment operating income was the impact of lower
sales by the Company's base businesses, and a $3.0 million increase in pension
costs, general business insurance and medical insurance expenses in the third
quarter of 2003 when compared with the third quarter of 2002.
Selling, general and administrative expenses were $30.1 million in the third
quarter of 2003, an increase of $4.0 million or 15.3%, when compared with the
third quarter of 2002. Selling expenses, as a percentage of sales, were 8.6% in
the third quarter of 2003, relatively unchanged from the same period in 2002.
Lower selling expenses from the Company's base businesses was more than offset
by selling expenses from the acquired businesses. Recent acquisitions of
differentiated businesses have had a higher content of selling expenses.
Thereby, mitigating the cost reduction benefit in the base businesses.
Corporate administrative expenses for the third quarter of 2003 were $7.0
million, an increase of $2.7 million or 62.3% when compared with the same period
in 2002. The increase was primarily the result of a $2.1 million one-time,
non-cash expense reflecting the accelerated recognition of deferred compensation
expense related to the vesting of restricted stock granted to the Company's
Chairman and Chief Executive Officer. Corporate expenses represented 2.6% of
sales for the third quarter of 2003 versus 1.7% for the same period in 2002. The
remainder of the third quarter 2003 corporate expense increase was due to the
impact of higher insurance and pension costs.
After deducting corporate expenses, consolidated operating income totaled $39.5
million, or 14.7% of sales for the third quarter of 2003, compared with $38.1
million, or 14.8% of sales for the third quarter of 2002, an increase of $1.4
million, or 3.7%.
Interest expense increased to $6.5 million in the third quarter of 2003, from
$6.2 million for the same quarter of 2002. The increase was a result of higher
average debt levels to fund the 2003 acquisitions, partially offset by lower
interest rates. Other income was $0.2 million in the third quarter of 2003,
compared with other expenses of $0.6 million in the same quarter of 2002. This
$0.8 million change resulted primarily from higher investment income in the
current third quarter.
The effective tax rate for the third quarter of 2003 was 33.9% compared with
31.7% for the same period in 2002. The higher tax rate in 2003 is primarily due
to the non-deductibility of the $2.1 million non-cash expense for the
acceleration of deferred compensation expense, discussed above.
Net income for the third quarter of 2003 totaled $21.9 million, an increase of
2.5% from $21.4 million in the third quarter of 2002. Diluted earnings per share
were $0.65, an increase of $.01 when compared with the same quarter of 2002. Net
income for the third quarter of 2003 was reduced by $2.1 million, or $0.06 per
diluted share, resulting from the one-time charge for accelerated recognition of
the deferred compensation expense, discussed previously.
14
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Segment Results
Electronic Instruments Group (EIG) net sales totaled $139.0 million in the third
quarter of 2003, an increase of $4.3 million or 3.2% from the same quarter of
2002. The sales increase was due to the acquisition of the SCI and Chandler
Instruments businesses. Favorable foreign currency translation impacts of
approximately $1.4 million also benefited this Group, partially offset by
weakness in the aerospace, power and heavy-vehicle markets. Heavy-vehicle sales
for the third quarter of 2002 were unusually high due to truck purchases made in
advance of more stringent federal emission standards, which were expected to and
became effective in the fourth quarter of 2002. Sales by the Group's base
businesses for the third quarter of 2003 decreased 5.8% when compared with the
same period in 2002.
Operating income of EIG was $24.9 million for the third quarter of 2003, an
increase of $2.1 million or 9.0% when compared with the third quarter of 2002.
The increase in operating income was primarily driven by the SCI and Chandler
Instruments acquisitions, and an increase of approximately $2.0 million in
pension costs and insurance expense. Operating margins were 17.9% of sales in
the third quarter of 2003 compared with operating margins of 16.9% of sales in
the third quarter of 2002. Group operating margins in the third quarter of 2003
increased due to the favorable effects of cost reduction initiatives and higher
margins of the acquired businesses.
Electromechanical Group (EMG) net sales totaled $128.8 million in the third
quarter 2003, an increase of $6.5 million or 5.3% from the same quarter in 2002.
The sales increase was primarily the result of the Airtechnology acquisition.
Favorable currency translation impacts of approximately $2.9 million also
improved sales, partially offset by lower sales of specialty motors and
continued weak market conditions in the domestic floor-care market. Sales by
base businesses in this Group showed a decline of 4.9% when compared with the
third quarter of 2002.
Operating income of EMG was $21.6 million for the third quarter of 2003, an
increase of $2.1 million or 10.7%, from the $19.5 million in the third quarter
of 2002. The increase in operating income was primarily the result of the
Airtechnology acquisition, partially offset by the effect of the lower sales by
the Group's base businesses and higher benefit costs. Group operating income as
a percentage of sales for the third quarter of 2003 was 16.8%, compared with a
16.0% margin in the third quarter of 2002.
Operations for the first nine months of 2003 compared with the first nine months
of 2002.
In the first nine months of 2003, the economic slowdown continued to impact many
of the Company's businesses. Net sales for the first nine months of 2003 were
$812.2 million, an increase of $24.2 million, when compared with net sales of
$788.0 million reported for the first nine months of 2002. The acquisition of
new businesses and favorable foreign currency translation effects, reduced by
lower sales by base businesses accounted for the sales increase. Sales by the
Company's base businesses for the first nine months of 2003 declined by 4.5%
when compared with the same period in 2002. EIG's net sales increased to $409.9
million, an increase of $3.1 million or 0.8%, when compared to the first nine
months of 2002. EIG's sales increase was driven by the first quarter acquisition
of SCI and the third quarter acquisition of Chandler Instruments, strength in
the Group's high-end analytical instrumentation businesses and favorable foreign
currency translation impacts, partially offset by weak market conditions in the
aerospace and power markets.
15
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
EMG's net sales increased $21.1 million or 5.5% to $402.2 million for the first
nine months of 2003 primarily from the Airtechnology acquisition and favorable
currency translation impacts, partially offset by a decline in the specialty
motors market as well as continued weakness in the domestic floor-care market.
The Company's European motor business continues to be strong. International
sales were $344.1 million, or 42.4% of consolidated sales, for the nine months
ended September 30, 2003, compared to $264.9 million, or 33.6% of consolidated
sales, for the comparable period in 2002, an increase of $79.2 million, or
30.0%. The 2003 acquisitions primarily accounted for the increase in
international sales.
New orders for the nine months ended September 30, 2003 were $856.6 million,
compared with $757.7 million for the same period in 2002, an increase of $98.9
million, or 13.1%. The Company's backlog of unfilled orders at September 30,
2003 was $285.3 million, compared with $240.9 million at December 31, 2002. The
increase in orders and backlog resulted primarily from the three acquisitions
made in 2003.
Segment operating income for the first nine months of 2003 was $131.9 million,
an increase of $5.5 million, or 4.3% 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 other 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 $7.3 million
increase in pension costs, general business insurance and medical expenses in
the first nine 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 $85.7 million for the first
nine months of 2003, an increase of $4.8 million or 5.9%, when compared with the
same period in 2002. Selling expenses, as a percentage of sales, were 8.5%,
essentially unchanged, when compared with the same period in 2002. Lower selling
expense by the Company's base businesses was more than offset by selling
expense from the acquired businesses. Recent acquisitions of differentiated
businesses have had a higher content of selling expenses. Thereby, mitigating
the cost reduction benefit in the base businesses.
Corporate expenses were $16.9 million for the first nine months of 2003, which
is an increase of $2.9 million when compared with the same period in 2002. As a
percentage of sales, such expenses increased to 2.1% compared with 1.8% in same
period in 2002. The increase was the result of a $2.1 million one-time, non-cash
expense reflecting the accelerated recognition of deferred compensation expense
related to the third quarter 2003 vesting of restricted stock granted to the
Company's Chairman and Chief Executive Officer, along with higher insurance and
pension costs, which were partially offset by the continuing cost reductions,
noted above.
Consolidated operating income was $114.9 million, an increase of $2.7 million or
2.4% when compared with the same period in 2002. This represents an operating
margin of 14.1% for the first nine months of 2003 compared with 14.2% for the
same period in 2002.
16
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
Interest expense was $19.4 million for the first nine months of 2003,
essentially unchanged when compared with the first nine months of 2002. Higher
average debt levels to fund the 2003 acquisitions were essentially offset by
strong operating cash inflow and lower average interest rates. Other expenses
were $0.9 million for the first nine months of 2003, slightly higher than $0.7
million for the same period of 2002.
The effective tax rate for the first nine months of 2003 was 32.9%, compared
with 32.2% for the first nine months of 2002. The higher tax rate in 2003 is
primarily due to the non-deductibility of the $2.1 million non-cash expense for
the acceleration of deferred compensation expense, discussed previously.
Net income for the first nine months of 2003 was $63.5 million, or $1.88 per
share on a diluted basis, compared with net income of $62.4 million, or $1.86
per diluted share for the first nine months of 2002. Net income for the first
nine months of 2003 was reduced by $2.1 million, or $0.06 per diluted share,
resulting from the one-time charge for accelerated recognition of the deferred
compensation expense discussed previously.
Segment Results
Electronic Instruments Group (EIG) net sales were $409.9 million for the first
nine months of 2003, an increase of $3.1 million or 0.8% compared with the same
period of 2002. The sales increase for the first nine months was driven by the
2003 acquisitions of SCI and Chandler Instruments, strength in the Group's
high-end analytical instrumentation businesses and $5.1 million in favorable
foreign currency translation impact, partially offset by weakness in the
aerospace and power markets. EIG's sales by its base businesses for the first
nine months of 2003 were 5.9% lower when compared with the same period in 2002.
EIG's operating income for the first nine months of 2003 totaled $66.8 million,
an increase of $2.3 million or 3.6% compared with the first nine months of 2002.
The improvement was driven by the SCI and Chandler Instruments acquisitions,
noted above, and strength in the Group's high-end analytical instrumentation
businesses, and an increase of approximately $5.4 million in pension costs and
insurance expenses, noted above.
Operating margins were 16.3% of sales in the first nine months of 2003 compared
with operating margins of 15.8% of sales in the comparable period in 2002.
Higher margins in 2003 were primarily the result of continuing cost reduction
initiatives and the higher margins of the acquired businesses.
In the Electromechanical Group (EMG) net sales totaled $402.2 million for the
first nine months of 2003, an increase of $21.1 million or 5.5% compared with
the same period in 2002. The sales increase was the result of the Airtechnology
acquisition and $13.2 million in favorable foreign currency translation impact,
partially offset by a decline in the specialty motors market as well as
continued weakness in the domestic floor-care market. EMG sales by its base
businesses decreased 2.9% from the comparable period in 2002.
17
AMETEK, Inc.
RESULTS OF OPERATIONS (CONTINUED)
EMG's operating income for the first nine months of 2003 was $65.1 million, an
increase of $3.1 million or 5.1% when compared with the same period in 2002. The
higher profit was the result of the Airtechnology acquisition, partially offset
by the impact of lower sales by the Group's base businesses. Severance costs,
higher benefit costs and insurance expenses also adversely affected Group
operating income. Operating margins for the first nine months of 2003 were
16.2%, a slight decrease when compared with 16.3% for the comparable period in
2002.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities totaled $108.1 million in the first nine
months of 2003, compared with $80.3 million for the same period in 2002, an
increase of $27.8 million. The increase in operating cash flow was primarily the
result of continued strong working capital management and lower required tax
payments for the first nine months of 2003.
Cash used for investing activities totaled $174.7 million in the first nine
months of 2003, compared with $16.1 million used in the same period of 2002. The
Company's acquisitions of the Airtechnology, Solidstate Controls and Chandler
Instruments businesses in the first nine months of 2003 used $163.2 million of
cash. No acquisitions were made in the comparable period in 2002. Additions to
property, plant and equipment in the first nine months of 2003 totaled $13.5
million, compared with $12.7 million in the same period in 2002.
Cash provided by financing activities in the first nine months of 2003 totaled
$70.0 million, compared with cash used for financing activities of $60.1 million
in the same period of 2002. In the first nine months of 2003, net short-term
borrowings increased by $44.2 million, compared with a decrease of $32.0 million
in 2002. The 2003 increase includes a reclassification of $80.0 million from
long-term debt in the third quarter of 2003. Long-term borrowings in the first
nine months of 2003 increased $76.2 million and includes additional borrowings
of British Pound Sterling to provide a natural hedge of the Company's
investment in Airtechnology. The proceeds from the additional long-term
borrowings were used to repay borrowings under the Company's revolving credit
agreement. The net increase in total borrowings in 2003 was used to finance the
three acquisitions, mentioned above. At September 30, 2003, the Company had
$210.6 million in unused borrowing commitments. Cash proceeds from the exercise
of employee stock options totaled $9.3 million in the first nine months of
2003, compared with $8.9 million for the same period of 2002. Repurchases of
Company common stock for the first nine months of 2003 totaled $5.8 million for
190,000 shares, compared with $7.3 million for 236,900 shares purchased in the
same period in 2002.
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 September 30, 2003, $46.7 million was available for future
share repurchases.
As a result of the activities discussed above, the Company's cash and cash
equivalents at September 30, 2003 totaled $16.8 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.
18
AMETEK, Inc.
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 September 30, 2003, management, including the
Company's Chief Executive Officer and Chief Financial Officer, have 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 controls over financial
reporting during the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
AMETEK, Inc.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
------ -----------
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.
b) Reports on Form 8-K: In the quarter ended September 30, 2003, the
Company filed Current Reports on Form 8-K dated August 20, 2003, and September
3, 2003. The reports were filed under Item 5. Other Events. The August 20, 2003
report announced that restricted stock granted to the Company's Chairman and
Chief Executive Officer had vested. The September 3, 2003 report announced the
acquisition of Chandler Instruments Company, LLC.
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)
November 6, 2003
21