AMETEK(AME) - 2020 Q4 - Annual Report

PART I Item 1. Business AMETEK, Inc. is a global manufacturer of electronic instruments and electromechanical devices, operating through two segments: Electronic Instruments (EIG) and Electromechanical (EMG) - AMETEK operates globally, manufacturing electronic instruments and electromechanical devices through two segments: Electronic Instruments (EIG) and Electromechanical (EMG)[6][7] - Key competitive advantages include significant market share in niche markets, strong technological and development capabilities, efficient and flexible manufacturing operations, and an experienced management team[7][8][9][10] - The AMETEK Growth Model aims for double-digit annual sales and EPS growth, and superior return on total capital, integrating strategies like Operational Excellence, Strategic Acquisitions, Global and Market Expansion, and New Product Development[13] - From 2016 to 2020, AMETEK completed 17 acquisitions with annualized sales of approximately $1.0 billion, including one in 2020, focusing on strategic, technical, and cultural fit[15] - EIG specializes in advanced analytical, test, and measurement instruments for process, aerospace, medical, research, power, and industrial markets, with 49% of 2020 net sales from outside the U.S[19][20][21] - EMG is a supplier of automation solutions, thermal management systems, specialty metals, and electrical interconnects, with 47% of 2020 net sales from outside the U.S[26][27][28] 2020 Segment Net Sales Breakdown | Segment | % of Net Sales (2020) | | :------ | :-------------------- | | EIG | 49% (International) | | EMG | 47% (International) | - The company employs approximately 16,500 people globally as of December 31, 2020, with a focus on diversity, inclusion, employee development, and safety[40][41][44] Item 1A. Risk Factors AMETEK faces various risks, including operational challenges from the COVID-19 pandemic (supply chain disruptions, reduced demand, cybersecurity vulnerabilities), economic downturns, and the cyclical nature of its markets. International operations are exposed to political, legal, and currency risks. The company also highlights risks related to executing its acquisition strategy, protecting intellectual property, raw material availability, regulatory compliance, intense competition, and potential IT system disruptions. Financial risks include environmental liabilities, litigation, debt covenant compliance, and goodwill impairment - The COVID-19 pandemic significantly impacted operations, leading to a rapid decline in demand across most end markets and geographies in 2020, with ongoing market volatility[47][48][53] - International sales constituted 48.7% of consolidated net sales in 2020, exposing the company to risks such as trade restrictions, tax structure overlaps, regulatory changes, tariffs, currency fluctuations, and political instability[58][59] - Failure to successfully execute Operational Excellence initiatives, develop new products, protect proprietary technology, or manage raw material supply chain disruptions could adversely affect business[57][65][66][68] - Acquisition strategy risks include difficulty identifying candidates, increased costs, integration challenges, loss of key personnel, and unforeseen liabilities[74][75] - Financial risks include potential liabilities from environmental clean-up, various litigation and regulatory proceedings, and the risk of goodwill and other intangible asset impairment (66% of total assets at Dec 31, 2020)[78][80][84] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 2. Properties As of December 31, 2020, AMETEK operates from various owned and leased office and operating facilities across the United States and global markets, including its corporate headquarters in Berwyn, Pennsylvania. The company believes its facilities are well-maintained, in good operating condition, and suitable for current needs - As of December 31, 2020, AMETEK operates from owned and leased facilities globally, including its corporate headquarters in Berwyn, Pennsylvania[86] - The company assesses its facilities as adequately maintained, in good operating condition, and suitable for current needs[86] Item 3. Legal Proceedings AMETEK is involved in various legal and regulatory proceedings, including claims related to product use, intellectual property, employment, tax, commercial disputes, and environmental matters. While the company does not anticipate these proceedings to have a material adverse effect on its financial position, results of operations, or cash flows, specific details on environmental matters are referenced in the financial statements - AMETEK is subject to various litigation and legal proceedings, including claims for damages, intellectual property, employment, tax, commercial disputes, and environmental matters[88] - Based on experience, management does not believe these proceedings will have a material adverse effect on the company's results of operations, financial position, or cash flows[88] Item 4. Mine Safety Disclosures This item is not applicable to AMETEK PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AMETEK's common stock is traded on the New York Stock Exchange under the symbol 'AME'. As of January 29, 2021, there were approximately 1,800 holders of record. The company repurchased 55,000 shares for $4.7 million in 2020 and 133,000 shares for $11.9 million in 2019. A $500 million share repurchase authorization was approved in February 2019, with $484.4 million remaining as of December 31, 2020. Equity compensation plans had 3,950,093 outstanding options/warrants/rights and 11,084,782 shares available for future issuance as of December 31, 2020 - AMETEK's common stock is traded on the New York Stock Exchange (symbol: AME)[90] - As of January 29, 2021, there were approximately 1,800 holders of record of the company's common stock[90] Share Repurchases | Year | Shares Repurchased | Value (millions) | | :--- | :----------------- | :--------------- | | 2020 | 55,000 | $4.7 | | 2019 | 133,000 | $11.9 | - A $500 million share repurchase authorization was approved in February 2019, with $484.4 million remaining as of December 31, 2020[93][132] Equity Compensation Plan Information (as of Dec 31, 2020) | Category | Number of Securities to be Issued | Weighted Average Exercise Price | Number of Securities Remaining Available | | :--------------------------------------------- | :-------------------------------- | :------------------------------ | :--------------------------------------- | | Equity compensation plans approved by security holders | 3,950,093 | $65.16 | 11,084,782 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 3,950,093 | $65.16 | 11,084,782 | Five-Year Cumulative Total Stockholder Return (Indexed to $100 on Dec 31, 2015) | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :---------------- | :------ | :------ | :------ | :------ | :------ | :------ | | AMETEK, Inc. | $100.00 | $91.37 | $137.04 | $128.96 | $191.21 | $233.72 | | S&P 500 Index | $100.00 | $111.96 | $136.40 | $130.42 | $171.49 | $203.04 | | S&P Industrials | $100.00 | $118.86 | $143.86 | $124.74 | $161.38 | $179.23 | Item 6. Selected Financial Data AMETEK's selected financial data for the past five years shows a decline in net sales and operating income in 2020, primarily due to the COVID-19 pandemic, but a record net income and diluted EPS. Cash flow from operating activities and free cash flow also reached record highs in 2020, driven by strong working capital management. The company's debt-to-capital and net debt-to-capital ratios improved significantly in 2020 Consolidated Operating Results (Year Ended December 31) | Metric (in millions, except per share) | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Net sales | $4,540.0 | $5,158.6 | $4,845.9 | $4,300.2 | $3,840.1 | | Operating income | $1,027.9 | $1,177.4 | $1,075.5 | $903.6 | $791.0 | | Net income | $872.4 | $861.3 | $777.9 | $681.5 | $512.2 | | Earnings per share: | | | | | | | Basic | $3.80 | $3.78 | $3.37 | $2.96 | $2.20 | | Diluted | $3.77 | $3.75 | $3.34 | $2.94 | $2.19 | | Dividends declared and paid per share | $0.72 | $0.56 | $0.56 | $0.36 | $0.36 | | EBITDA | $1,421.6 | $1,388.3 | $1,267.7 | $1,076.0 | $966.0 | | Cash provided by operating activities | $1,281.0 | $1,114.4 | $925.5 | $833.3 | $756.8 | | Free cash flow | $1,206.8 | $1,012.1 | $843.4 | $758.2 | $693.5 | Consolidated Financial Position (At December 31) | Metric (in millions) | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Current assets | $2,522.5 | $2,025.8 | $1,836.1 | $1,934.7 | $1,928.2 | | Current liabilities | $1,075.9 | $1,425.9 | $1,258.7 | $1,138.7 | $924.4 | | Total debt, net | $2,413.7 | $2,768.7 | $2,632.7 | $2,174.3 | $2,341.6 | | Stockholders' equity | $5,949.3 | $5,115.5 | $4,241.9 | $4,027.6 | $3,256.5 | | Total debt as a percentage of capitalization | 28.9 % | 35.1 % | 38.3 % | 35.1 % | 41.8 % | | Net debt as a percentage of capitalization | 16.8 % | 31.7 % | 34.9 % | 27.5 % | 33.3 % | - Net sales decreased by 12.0% in 2020 compared to 2019, primarily due to a 13% organic sales decline from the COVID-19 pandemic and a 3% unfavorable impact from the Reading divestiture, partially offset by a 4% increase from acquisitions[117] - Net income increased by 1.3% to a record $872.4 million in 2020, and diluted EPS increased by 0.5% to a record $3.77, including a $141.0 million pre-tax gain from the Reading Alloys sale and $43.9 million in realignment costs[109][110][124][125] - Cash provided by operating activities increased by 14.9% to a record $1,281.0 million in 2020, and free cash flow increased to a record $1,206.8 million, driven by strong working capital management[110][128] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations AMETEK's 2020 performance was significantly impacted by the COVID-19 pandemic, leading to a 12.0% decrease in net sales and a 12.7% decrease in consolidated operating income. Despite this, the company achieved record net income and diluted EPS, largely due to a $141.0 million pre-tax gain from the sale of its Reading Alloys business and strong operational excellence initiatives. Cash flow from operations and free cash flow reached record highs, improving liquidity and reducing debt-to-capital ratios. The company also incurred $43.9 million in realignment costs in response to the weak global economy - In 2020, AMETEK's operations were impacted by a weak global economy due to the COVID-19 pandemic, leading to $43.9 million in realignment costs (severance and asset write-downs)[109][120] - Key highlights for 2020 include the acquisition of IntelliPower ($116.5 million), the sale of Reading Alloys for $245.3 million cash (resulting in a $141.0 million pre-tax gain), record cash flow from operating activities ($1,281.0 million), record free cash flow ($1,206.8 million), and record EBITDA ($1,421.6 million)[110][111] Consolidated Financial Performance (2020 vs. 2019) | Metric | 2020 (millions) | 2019 (millions) | Change (millions) | Change (%) | | :----------------------------------- | :-------------- | :-------------- | :---------------- | :--------- | | Net sales | $4,540.0 | $5,158.6 | $(618.6) | -12.0% | | Cost of sales | $2,996.5 | $3,370.9 | $(374.4) | -11.1% | | Selling, general & administrative | $515.6 | $610.3 | $(94.7) | -15.5% | | Consolidated operating income | $1,027.9 | $1,177.4 | $(149.5) | -12.7% | | Other income (expense), net | $140.5 | $(19.2) | $159.7 | N/A | | Net income | $872.4 | $861.3 | $11.1 | +1.3% | | Diluted earnings per share | $3.77 | $3.75 | $0.02 | +0.5% | Segment Performance (2020 vs. 2019) | Segment | Net Sales 2020 (millions) | Net Sales 2019 (millions) | Change (%) | Operating Income 2020 (millions) | Operating Income 2019 (millions) | Change (%) | Operating Margins 2020 | Operating Margins 2019 | | :------ | :------------------------ | :------------------------ | :--------- | :------------------------------- | :------------------------------- | :------------------------------- | :--------------------- | :--------------------- | | EIG | $2,989.9 | $3,322.9 | -10.0% | $770.6 | $865.3 | -10.9% | 25.8% | 26.0% | | EMG | $1,550.1 | $1,835.7 | -15.6% | $325.0 | $387.9 | -16.2% | 21.0% | 21.1% | - EIG's net sales decreased by 10.0% due to a 15% organic sales decline from COVID-19, partially offset by acquisitions (Gatan and IntelliPower)[126] - EMG's net sales decreased by 15.6% due to a 10% organic sales decline, a 2% favorable impact from PDT acquisition, and an 8% unfavorable impact from Reading divestiture[127] - The company's backlog of unfilled orders at December 31, 2020, was a record $1,802.2 million, an increase of 4.9% from 2019[119] Liquidity and Capital Resources (2020 vs. 2019) | Metric (millions) | 2020 | 2019 | Change (millions) | | :---------------------------------------------- | :---------- | :---------- | :---------------- | | Cash provided by operating activities | $1,281.0 | $1,114.4 | $166.6 | | Cash provided by (used for) investing activities | $61.6 | $(1,150.9) | $1,212.5 | | Cash used by financing activities | $(539.4) | $72.9 | $(612.3) | | Total debt, net (Dec 31) | $2,413.7 | $2,768.7 | $(355.0) | | Net debt-to-capital ratio (Dec 31) | 16.8% | 31.7% | -14.9 pp | | Cash and cash equivalents (Dec 31) | $1,212.8 | $393.0 | $819.8 | - The company's revolving credit facility has an aggregate principal amount of $1.5 billion with an additional $500 million accordion feature, providing $1,897.7 million in available borrowing capacity at December 31, 2020[130] - Capital expenditures were $74.2 million (1.6% of net sales) in 2020, with 73% for improvements and capacity expansion[137] - Research, development, and engineering costs were $246.2 million in 2020[137] - Critical accounting policies include business combinations (fair value estimation), goodwill and other intangible assets impairment testing (annual, discounted cash flow analysis), pensions (discount rate, expected return on assets), and income taxes (uncertainties, deferred tax assets)[140][141][146][149] Item 7A. Quantitative and Qualitative Disclosures About Market Risk AMETEK's primary market risks are fluctuations in interest rates, foreign currency exchange rates, and commodity prices. The company manages these through operating and financing activities, local borrowings, and occasional derivative instruments. While a hypothetical 10% adverse movement in these rates is not expected to materially impact future earnings, fair value of financial instruments, or cash flows, actual effects may differ - Primary market risks include fluctuations in interest rates, foreign currency exchange rates (Euro, British pound, Japanese yen, Chinese renminbi, Canadian dollar, Mexican peso), and commodity prices (nickel, aluminum, copper, steel, titanium, gold)[155][156][157] - The company mitigates these risks through operating and financing activities, local borrowings, derivative financial instruments, and adjustments in selling prices or purchase order pricing arrangements[155][156][157] - A hypothetical 10% adverse movement in these market factors is not expected to have a material impact on future earnings, fair value of risk-sensitive financial instruments, or cash flows[157] Item 8. Financial Statements and Supplementary Data This section presents AMETEK's audited consolidated financial statements for the years ended December 31, 2020, 2019, and 2018, including the statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows. It also includes management's responsibility for financial statements, management's report on internal control over financial reporting, and the independent registered public accounting firm's reports, which confirm the effectiveness of internal controls and an unqualified opinion on the financial statements. Critical audit matters identified include accounting for acquisitions and impairment assessment of indefinite-lived intangible assets - Management is responsible for the integrity and fair presentation of the consolidated financial statements, prepared in conformity with U.S. GAAP, and maintains a system of internal accounting and disclosure controls[163][164] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, excluding IntelliPower (1.1% of total assets, 0.6% of net sales)[167][168] - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[170][178][179] - Critical audit matters included the complexity and judgment involved in finalizing the fair value of acquired intangible assets for the Gatan acquisition and the significant measurement uncertainty in estimating the fair value of indefinite-lived intangible assets (trademarks and trade names) for impairment testing[184][185][187] Consolidated Statement of Income (Years Ended December 31) | (In thousands) | 2020 | 2019 | 2018 | | :---------------------------------- | :---------- | :---------- | :---------- | | Net sales | $4,540,029 | $5,158,557 | $4,845,872 | | Cost of sales | $2,996,515 | $3,370,897 | $3,186,310 | | Selling, general and administrative | $515,630 | $610,280 | $584,022 | | Operating income | $1,027,884 | $1,177,380 | $1,075,540 | | Interest expense | $(86,062) | $(88,481) | $(82,180) | | Other income (expense), net | $140,487 | $(19,151) | $(5,615) | | Income before income taxes | $1,082,309 | $1,069,748 | $987,745 | | Provision for income taxes | $209,870 | $208,451 | $209,812 | | Net income | $872,439 | $861,297 | $777,933 | | Basic earnings per share | $3.80 | $3.78 | $3.37 | | Diluted earnings per share | $3.77 | $3.75 | $3.34 | Consolidated Balance Sheet (At December 31) | (In thousands) | 2020 | 2019 | | :--------------------------------------------------------------------------- | :------------ | :------------ | | ASSETS | | | | Cash and cash equivalents | $1,212,822 | $393,030 | | Receivables | $597,472 | $744,760 | | Inventories, net | $559,171 | $624,567 | | Total current assets | $2,522,470 | $2,025,771 | | Property, plant and equipment, net | $526,530 | $548,908 | | Goodwill | $4,224,906 | $4,047,539 | | Other intangibles, net | $2,623,719 | $2,762,872 | | Total assets | $10,357,483 | $9,844,559 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Short-term borrowings and current portion of long-term debt, net | $132,284 | $497,449 | | Accounts payable | $360,370 | $377,219 | | Total current liabilities | $1,075,915 | $1,425,858 | | Long-term debt, net | $2,281,441 | $2,271,292 | | Total liabilities | $4,408,137 | $4,729,067 | | Total stockholders' equity | $5,949,346 | $5,115,492 | | Total liabilities and stockholders' equity | $10,357,483 | $9,844,559 | Consolidated Statement of Cash Flows (Years Ended December 31) | (In thousands) | 2020 | 2019 | 2018 | | :----------------------------------------------- | :---------- | :------------ | :------------ | | Cash provided by operating activities | $1,280,980 | $1,114,422 | $925,518 | | Cash provided by (used for) investing activities | $61,630 | $(1,150,925) | $(1,210,044) | | Cash used by financing activities | $(539,436) | $72,913 | $13,040 | | Effect of exchange rate changes | $16,618 | $2,645 | $(20,839) |\ | Increase (decrease) in cash and cash equivalents | $819,792 | $39,055 | $(292,325) |\ | Cash and cash equivalents, end of year | $1,212,822 | $393,030 | $353,975 | 1. Significant Accounting Policies AMETEK's significant accounting policies include basis of consolidation, use of estimates, cash equivalents, accounts receivable (with allowances for credit losses), inventories (primarily FIFO, some LIFO), business combinations (purchase price allocation to fair values), property, plant and equipment (straight-line depreciation), goodwill and other intangible assets (annual impairment testing, discounted cash flow analysis for goodwill, relief from royalty method for indefinite-lived intangibles), financial instruments and foreign currency translation (hedging, infrequent use of derivatives), revenue recognition (point-in-time for most product sales, over time for custom equipment/services), research and development costs (expensed as incurred), shipping and handling costs (included in cost of sales), share-based compensation (fair value expensed over service period), income taxes (assessment of uncertainties, deferred tax assets, uncertain tax positions), pensions (defined benefit and contribution plans, discount rates, expected return on assets), and earnings per share (basic and diluted calculations) - The company uses the first-in, first-out (FIFO) method for approximately 88% of its inventories and the last-in, first-out (LIFO) method for the remaining 12%[204] - Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually, primarily using a discounted cash flow analysis for reporting units and the relief from royalty method for trademarks/trade names[207][208][209] - The majority of product sales revenue is recognized at a point in time when the customer obtains control, while revenue for custom-made equipment and service repairs is recognized over time[217][232] - Research and development costs were $158.9 million in 2020, $161.9 million in 2019, and $141.0 million in 2018, expensed as incurred[218] Weighted Average Common Shares Outstanding (in thousands) | Metric | 2020 | 2019 | 2018 | | :------------------ | :------ | :------ | :------ | | Basic shares | 229,435 | 227,759 | 230,823 | | Equity-based compensation plans | 1,715 | 1,636 | 1,889 | | Diluted shares | 231,150 | 229,395 | 232,712 | 2. Recent Accounting Pronouncements AMETEK adopted several accounting pronouncements on January 1, 2020, including ASU 2016-13 (Credit Losses), ASU 2018-13 (Fair Value Measurement), ASU 2018-15 (Internal-Use Software), and ASU 2018-14 (Defined Benefit Plans). None of these adoptions had a material impact on the company's consolidated financial statements, except for a $0.4 million decrease to net Accounts Receivable and Retained Earnings from ASU 2016-13. The company is currently evaluating the impact of ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020 - Adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a $0.4 million decrease to net Accounts Receivable and Retained Earnings[227] - Adopted ASU 2018-13 (Fair Value Measurement), ASU 2018-15 (Internal-Use Software), and ASU 2018-14 (Defined Benefit Plans) on January 1, 2020, with no material impact on financial statements[228][229][230] - Currently evaluating ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020, and has not yet determined its impact[231] 3. Revenues AMETEK primarily recognizes revenue from product sales at a point in time when customer control is obtained, typically evidenced by legal title, right to payment, or physical possession. For custom-made equipment and service repairs, revenue is recognized over time using the cost-to-cost input method. The company manages variable consideration (discounts, rebates) and records contract assets when revenue is recognized before payment is due, and contract liabilities for advance payments. Remaining performance obligations exceeding one year were $300.8 million at December 31, 2020. The company also provides limited product warranties, with an accrued obligation of $27.8 million at December 31, 2020 - The majority of product sales revenue is recognized at a point in time when the customer obtains control, while custom-made equipment and service repairs revenue is recognized over time using the cost-to-cost input method[232][234] Contract Assets and Liabilities (in thousands) | Metric | 2020 | 2019 | | :-------------------------------------- | :---------- | :---------- | | Contract assets – December 31 | $68,971 | $73,039 | | Contract liabilities – December 31 | $215,093 | $167,306 | | Net change (decrease) in 2020 | $(51,855) | $(6,371) | - Remaining performance obligations exceeding one year were $300.8 million at December 31, 2020, expected to be substantially satisfied within two to three years[240] Net Sales by Geographic Area (2020, in thousands) | Geographic Area | EIG | EMG | Total | | :---------------- | :---------- | :---------- | :---------- | | United States | $1,513,967 | $816,159 | $2,330,126 | | International | $1,475,961 | $733,942 | $2,209,903 | | Consolidated | $2,989,928 | $1,550,101 | $4,540,029 | Net Sales by Major Products and Services (2020, in thousands) | Product/Service | EIG | EMG | Total | | :------------------------------- | :---------- | :---------- | :---------- | | Process and analytical instrumentation | $2,199,167 | $— | $2,199,167 | | Aerospace and power | $790,761 | $466,343 | $1,257,104 | | Automation and engineered solutions | $— | $1,083,758 | $1,083,758 | | Consolidated net sales | $2,989,928 | $1,550,101 | $4,540,029 | Product Warranty Obligation (in thousands) | Metric | 2020 | 2019 | 2018 | | :----------------------------------- | :-------- | :-------- | :-------- | | Balance at beginning of year | $27,611 | $23,482 | $22,872 | | Accruals for warranties issued | $12,000 | $21,145 | $13,897 | | Settlements made | $(14,602) | $(19,637) | $(14,509) |\ | Warranty accruals from acquisitions | $2,830 | $2,621 | $1,222 | | Balance at end of year | $27,839 | $27,611 | $23,482 | 4. Fair Value Measurements AMETEK defines fair value as the exit price in an orderly transaction and uses a three-level hierarchy for valuation inputs. Mutual fund investments are classified as Level 1 (quoted market prices). Short-term borrowings are Level 2, while long-term debt, which is privately held, is considered Level 3, valued based on comparable market data. The company had no foreign currency forward contracts outstanding at December 31, 2020, and any realized gains/losses on such contracts were not significant - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs based on company assumptions)[254][256] - Mutual fund investments are valued as Level 1, based on quoted market prices[257] - Short-term borrowings are Level 2, and long-term debt is Level 3, valued based on comparable current market data for similar debt instruments[259] - The company had no foreign currency forward contracts outstanding at December 31, 2020, and realized gains/losses on these contracts were not significant in 2020 and 2019[260] 5. Hedging Activities AMETEK designates certain foreign-currency-denominated long-term borrowings, specifically British-pound and Euro-denominated loans, as hedges of its net investment in foreign operations. These hedges are 100% effective, with gains or losses reported in accumulated other comprehensive income to offset translation adjustments. In 2020, $60.5 million of pre-tax currency remeasurement losses were included in other comprehensive income due to these hedges - AMETEK uses British-pound and Euro-denominated long-term borrowings as net investment hedges for its foreign operations[261][263] - These hedges are 100% effective, with gains or losses reported in accumulated other comprehensive income[262][263] - In 2020, $60.5 million of pre-tax currency remeasurement losses were included in other comprehensive income due to these hedges, compared to $2.4 million in 2019[263] 6. Acquisitions and Divestiture In 2020, AMETEK acquired IntelliPower for $116.5 million, net of cash, expanding its differentiated product offerings in power systems. The acquisition resulted in $57.3 million in goodwill and $59.5 million in other intangible assets. The company also finalized accounting for its 2019 acquisitions of PDT and Gatan. In March 2020, AMETEK divested its Reading Alloys business for $245.3 million in cash, generating a pre-tax gain of $141.0 million - In January 2020, AMETEK acquired IntelliPower for $116.5 million, net of cash, adding high-reliability, ruggedized uninterruptible power systems to its EIG segment[264] IntelliPower Acquisition Purchase Price Allocation (in millions) | Asset/Liability | Amount | | :------------------------------ | :----- | | Property, plant and equipment | $1.8 | | Goodwill | $57.3 | | Other intangible assets | $59.5 | | Deferred income taxes | $(12.4)|\ | Net working capital and other | $10.3 | | Total cash paid | $116.5 | - The IntelliPower acquisition had an immaterial impact on reported net sales, net income, and diluted EPS for 2020[266] - In 2019, AMETEK acquired Pacific Design Technologies (PDT) and Gatan for $1,061.9 million[267][268] - The Gatan acquisition resulted in $472.5 million of goodwill and $418.0 million of other intangible assets[268] - In March 2020, the company sold its Reading Alloys business for $245.3 million in cash, resulting in a $141.0 million pre-tax gain[270] 7. Goodwill and Other Intangible Assets Goodwill and other intangible assets are significant components of AMETEK's balance sheet. Goodwill increased to $4,224.9 million at December 31, 2020, primarily due to the IntelliPower acquisition and purchase price allocation adjustments. Other intangible assets, net, totaled $2,623.7 million, comprising definite-lived assets (patents, purchased technology, customer lists) and indefinite-lived assets (trademarks and trade names). Amortization expense for 2020 was $154.0 million, with similar amounts expected annually for the next five years. The company completed its annual impairment tests in Q4 2020 and found no impairment Changes in Goodwill by Segment (in millions) | Metric | EIG | EMG | Total | | :-------------------------------------- | :-------- | :-------- | :-------- | | Balance at December 31, 2019 | $2,892.2 | $1,155.3 | $4,047.5 | | Goodwill acquired | $57.3 | $— | $57.3 | | Purchase price allocation adjustments | $74.6 | $— | $74.6 | | Foreign currency translation adjustments | $26.2 | $19.3 | $45.5 | | Balance at December 31, 2020 | $3,050.3 | $1,174.6 | $4,224.9 | Other Intangible Assets (at December 31, in thousands) | Asset Category | 2020 | 2019 | | :-------------------------------------------- | :------------ | :------------ | | Definite-lived intangible assets (gross) | $2,863,847 | $2,847,520 | | Accumulated amortization | $(993,111) | $(826,519) |\ | Net intangible assets subject to amortization | $1,870,736 | $2,021,001 | | Indefinite-lived intangible assets | $752,983 | $741,871 | | Total other intangibles, net | $2,623,719 | $2,762,872 | - Amortization expense was $154.0 million in 2020, $132.6 million in 2019, and $114.1 million in 2018[274] - Expected amortization for the next five years is approximately $154 million annually[274] - The company completed its annual impairment tests in the fourth quarter of 2020 and determined that the carrying values of goodwill and indefinite-lived intangibles were not impaired[210][145] 8. Other Consolidated Balance Sheet Information This section provides detailed breakdowns of inventories, property, plant and equipment, and accrued liabilities and other. Inventories, net, decreased to $559.2 million in 2020, with raw materials being the largest component. Property, plant and equipment, net, was $526.5 million, with machinery and equipment representing the largest gross value. Accrued liabilities and other totaled $349.7 million, including employee compensation, product warranty, realignment costs, and short-term lease liabilities Inventories, Net (at December 31, in thousands) | Category | 2020 | 2019 | | :------------------------ | :-------- | :-------- | | Finished goods and parts | $81,619 | $99,773 | | Work in process | $102,945 | $118,240 | | Raw materials and purchased parts | $374,607 | $406,554 | | Total | $559,171 | $624,567 | Property, Plant and Equipment, Net (at December 31, in thousands) | Category | 2020 | 2019 | | :------------------------ | :------------ | :------------ | | Land | $33,382 | $33,516 | | Buildings | $302,158 | $295,891 | | Machinery and equipment | $1,119,419 | $1,074,643 |\ | Less: Accumulated depreciation | $(928,429) | $(855,142) |\ | Total | $526,530 | $548,908 | Accrued Liabilities and Other (at December 31, in thousands) | Category | 2020 | 2019 | | :-------------------------------- | :-------- | :-------- | | Employee compensation and benefits | $124,347 | $137,951 | | Product warranty obligation | $27,839 | $27,611 | | Realignment | $32,904 | $23,825 | | Short term lease liability | $44,948 | $43,025 | | Liabilities held for sale | $— | $23,405 | | Other | $119,694 | $108,263 | | Total | $349,732 | $364,080 | 9. Income Taxes AMETEK's income before income taxes was $1,082.3 million in 2020, with a total provision for income taxes of $209.9 million, resulting in an effective tax rate of 19.4%. The effective tax rate was influenced by state income taxes, foreign operations, and U.S. manufacturing benefits. Deferred tax liabilities primarily relate to differences in basis of intangible assets. The company has net operating loss and tax credit carryforwards, with valuation allowances maintained for certain deferred tax assets. Unrecognized tax benefits totaled $100.7 million at December 31, 2020, with $60.6 million impacting the effective tax rate if recognized. The company recognized a net benefit of $2.6 million for interest and penalties related to uncertain tax positions in 2020 Income Before Income Taxes and Provision for Income Taxes (in thousands) | Metric | 2020 | 2019 | 2018 | | :----------------------------------- | :---------- | :---------- | :---------- | | Income before income taxes: | | | | | Domestic | $810,844 | $766,436 | $555,077 | | Foreign | $271,465 | $303,312 | $432,668 | | Total | $1,082,309 | $1,069,748 | $987,745 | | Provision for income taxes: | | | | | Current | $208,031 | $189,071 | $283,494 | | Deferred | $1,839 | $19,380 | $(73,682) |\ | Total provision | $209,870 | $208,451 | $209,812 | Effective Tax Rate Reconciliation to U.S. Federal Statutory Rate | Factor | 2020 | 2019 | 2018 | | :-------------------------------------------- | :------ | :------ | :------ | | U.S. Federal statutory rate | 21.0 % | 21.0 % | 21.0 % | | State income taxes, net of federal tax benefit | 2.3 | 1.8 | 1.2 | | Foreign operations, net | (1.4) | (0.9) | (0.1) | | U.S. Benefits for Manufacturing, Export and credits | (1.9) | (2.0) | (1.8) | | Uncertain Tax Items | (1.3) | (1.0) | 1.7 | | Stock compensation | (1.0) | (1.5) | (0.5) | | US Tax on Foreign Earnings | 2.1 | 2.3 | (0.1) | | Consolidated effective tax rate | 19.4 % | 19.5 % | 21.2 % | - As of December 31, 2020, the company had $482.0 million in previously taxed income (PTI) that can be repatriated without incremental U.S. Federal tax[286] - No provision for U.S. deferred income taxes has been made for undistributed earnings over PTI of approximately $411.0 million[286] - Gross unrecognized tax benefits were $100.7 million at December 31, 2020, with $60.6 million impacting the effective tax rate if recognized[291] - The company recognized a net benefit of $2.6 million for interest and penalties related to uncertain tax positions in 2020[291] 10. Debt AMETEK's total debt, net, decreased to $2,413.7 million at December 31, 2020, from $2,768.7 million in 2019. This reduction was driven by decreases in short-term and long-term borrowings, including the repayment of an 80 million British pound senior note. The company maintains a $1.5 billion revolving credit facility with an additional $500 million accordion feature, providing significant liquidity. The weighted average interest rate on total debt was 3.0% in 2020, down from 3.5% in 2019. The company was in compliance with all debt covenants at year-end 2020 Long-term Debt, Net (at December 31, in thousands) | Debt Instrument | 2020 | 2019 | | :-------------------------------------------- | :---------- | :---------- | | U.S. dollar senior notes (various maturities) | $975,000 | $975,000 | | British pound senior notes (various maturities) | $307,313 | $305,149 | | Euro senior notes (various maturities) | $703,084 | $645,552 | | Swiss franc senior note (due Dec 2021) | $62,190 | $56,830 | | Revolving credit facility borrowings | $72,145 | $384,816 | | Other, principally foreign | $— | $9,234 | | Less: Debt issuance costs | $(6,007) | $(7,350) |\ | Total debt, net | $2,413,725 | $2,768,741 | | Less: Current portion, net | $(132,284) | $(497,449) |\ | Total long-term debt, net | $2,281,441 | $2,271,292 | - In 2020, an 80 million British pound senior note matured and was paid in full[301] - In 2019, a $100 million senior note matured and was paid[301] - The company's revolving credit facility, amended in October 2018, provides $1.5 billion in aggregate principal amount with a $500 million accordion feature, totaling $1,897.7 million in available borrowing capacity at December 31, 2020[305] - The weighted average interest rate on total debt borrowings outstanding was 3.0% at December 31, 2020, down from 3.5% in 2019[307] - AMETEK was in compliance with all debt covenants, including financial covenants, at December 31, 2020[307] 11. Share-Based Compensation AMETEK grants performance restricted stock units (PRSUs), stock options, and restricted stock to employees and directors. Share-based compensation expense is recognized over the requisite service period based on grant date fair value. Total pre-tax expense was $41.6 million in 2020, up from $40.4 million in 2019. Stock options granted in 2020 had a weighted average fair value of $11.01, with 3,950 thousand shares outstanding at year-end. Restricted stock and PRSUs also contribute to compensation expense, with significant non-vested amounts remaining - AMETEK grants PRSUs, incentive and non-qualified stock options, and restricted stock to officers, management, and directors[308] - Stock options granted prior to 2018 generally vested over four years, while those granted from 2018 onwards generally vest over three years[309] Total Pre-Tax Share-Based Compensation Expense (in thousands) | Expense Category | 2020 | 2019 | 2018 | | :------------------- | :-------- | :-------- | :-------- | | Stock option expense | $13,695 | $12,810 | $11,390 | | Restricted stock expense | $17,997 | $16,169 | $14,400 | | PRSU expense | $9,873 | $11,415 | $1,525 | | Total pre-tax expense | $41,565 | $40,394 | $27,315 | Stock Option Grant Date Fair Value Assumptions (2020) | Assumption | 2020 | | :------------------------ | :------- | | Expected volatility | 22.2 % | | Expected term (years) | 5.0 | | Risk-free interest rate | 0.52 % | | Expected dividend yield | 1.14 % | | Black-Scholes-Merton fair value per stock option granted | $11.01 | - As of December 31, 2020, there was approximately $14 million of expected future pre-tax compensation expense related to 1.9 million non-vested stock options, to be recognized over less than two years[316] - As of December 31, 2020, there was approximately $33 million of expected future pre-tax compensation expense related to 0.7 million non-vested restricted shares, to be recognized over less than two years[319] - As of December 31, 2020, there was approximately $4 million of expected future pre-tax compensation expense related to 0.3 million non-vested performance restricted shares, to be recognized over less than one year[322] 12. Retirement Plans and Other Postretirement Benefits AMETEK sponsors various retirement and pension plans, including contributory and non-contributory defined benefit plans (U.S. and foreign), 401(k) plans, and non-qualified unfunded retirement plans for executives and directors. The company expects to contribute $6 million to $10 million to its worldwide defined benefit pension plans in 2021. The net projected benefit obligation for U.S. plans was $532.4 million and for foreign plans was $351.6 million at December 31, 2020. Plan assets for U.S. plans totaled $662.3 million and for foreign plans $250.7 million. The weighted average discount rate for U.S. plans was 2.69% and for foreign plans 1.27% in 2020. Total net pension expense was $29.9 million in 2020, a decrease from $39.9 million in 2019 - AMETEK sponsors U.S. and foreign defined benefit and defined contribution pension plans, as well as non-qualified unfunded retirement plans[325][327][328] - The company estimates cash contributions of approximately $6 million to $10 million to its worldwide defined benefit pension plans in 2021[326] Defined Benefit Pension Plans - Projected Benefit Obligation (PBO) and Plan Assets (in thousands) | Metric | U.S. Plans 2020 | U.S. Plans 2019 | Foreign Plans 2020 | Foreign Plans 2019 | | :-------------------------------------- | :-------------- | :-------------- | :----------------- | :----------------- | | Net PBO at end of year | $532,357 | $510,514 | $351,584 | $311,783 | | Fair value of plan assets at end of year | $662,298 | $621,632 | $250,735 | $224,347 | Weighted Average Assumptions for Benefit Obligations (at December 31) | Assumption | U.S. Plans 2020 | U.S. Plans 2019 | Foreign Plans 2020 | Foreign Plans 2019 | | :--------------------------------------- | :-------------- | :-------------- | :----------------- | :----------------- | | Discount rate | 2.69 % | 3.45 % | 1.27 % | 1.83 % | | Rate of compensation increase (if applicable) | 3.75 % | 3.75 % | 2.50 % | 2.50 % | - The target asset allocation for U.S. defined benefit plans is approximately 50% equity securities, 20% fixed income securities, and 30% other securities/cash[345] - For foreign plans, it's approximately 22% equity, 21% fixed income, 51% multi-asset funds, and 6% other/insurance/cash[351] Total Net Pension Expense (in thousands) | Metric | 2020 | 2019 | 2018 | | :------------------------- | :-------- | :-------- | :-------- | | Total net periodic benefit income | $(8,791) | $(1,958) | $(14,724) |\ | Total other plans | $38,731 | $41,914 | $35,014 | | Total net pension expense | $29,940 | $39,956 | $20,290 | 13. Contingencies AMETEK faces contingencies related to indemnifications from acquisitions/divestitures, asbestos litigation, and environmental matters. While the maximum obligation for indemnifications cannot be reasonably estimated, historical costs have been minimal. The company is a defendant in asbestos lawsuits, but believes it has strong defenses and is indemnified by sellers. For environmental matters, AMETEK is a Potentially Responsible Party (PRP) at 13 non-owned sites and has ongoing remediation at owned sites. Total environmental reserves were $32.4 million at December 31, 2020. The company recently settled groundwater contamination lawsuits for $6.8 million, covered by existing reserves, and believes ultimate costs for all contingencies will not materially affect its financial position - AMETEK may agree to indemnifications in M&A transactions, but the maximum obligation is not reasonably estimable, and historical costs have been minimal[365] - The company is a defendant in asbestos-related lawsuits, but believes it has good defenses and is indemnified by sellers for certain claims[367] - AMETEK is a Potentially Responsible Party (PRP) at 13 non-AMETEK-owned waste sites and has ongoing remediation activities at owned sites[368] - Total environmental reserves were $32.4 million at December 31, 2020, up from $28.9 million in 2019[369] - The company settled groundwater contamination lawsuits for an aggregate of $6.8 million in 2020, which was covered by previously established reserves[373] - Management believes that the ultimate cost from these actions is not expected to materially affect the consolidated results of operations, financial position, or cash flows[372] 14. Leases and Other Commitments AMETEK accounts for leases as a single component, primarily operating leases for buildings and automobiles. Operating lease ROU assets and liabilities are recognized at commencement based on the present value of lease payments, using the incremental borrowing rate. Total lease cost was $49.0 million in 2020, down from $53.3 million in 2019. Lease liabilities totaled $173.1 million at December 31, 2020. The company also had $494.1 million in purchase obligations outstanding at year-end 2020, primarily for inventory, and $94.3 million in maximum future payment obligations for guarantees - AMETEK primarily leases buildings and automobiles, classified as operating leases, and accounts for lease and non-lease components as a single lease component[375] - Operating lease ROU assets and liabilities are recognized at commencement based on the present value of lease payments, using the incremental borrowing rate[375] Components of Lease Expense (in thousands) | Expense Category | 2020 | 2019 | | :----------------- | :-------- | :-------- | | Operating lease cost | $44,498 | $45,438 | | Variable lease cost | $4,526 | $7,813 | | Total lease cost | $49,024 | $53,251 | Supplemental Balance Sheet Information Related to Leases (at December 31, in thousands) | Metric | 2020 | 2019 | | :-------------------------------------- | :---------- | :---------- | | Right of use assets, net | $167,233 | $179,679 | | Total lease liabilities | $173,121 | $185,645 | - Purchase obligations totaled $494.1 million at December 31, 2020, primarily for inventory[385] - The maximum amount of future payment obligations for guarantees was $94.3 million at December 31, 2020[385] 15. Reportable Segments and Geographic Areas Information AMETEK operates through two reportable segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG). EIG focuses on advanced analytical, test, and measurement instruments for various markets, while EMG supplies automation solutions, thermal management systems, specialty metals, and electrical interconnects. Segment operating income is calculated as net sales less direct costs and expenses, excluding interest. In 2020, EIG's operating income was $770.6 million and EMG's was $325.0 million. Total segment assets were $9,201.4 million, with EIG accounting for $6,554.4 million. Long-lived assets from continuing operations were $526.5 million, with $344.5 million in the United States - AMETEK has two reportable segments: Electronic Instruments Group (EIG) and Electromechanical Group (EMG)[386] - EIG manufactures advanced instruments for process, power, industrial, and aerospace markets, including analytical, test, and measurement instruments[387] - EMG supplies automation solutions, thermal management systems, specialty metals, and electrical interconnects, including precision motion control products and motor-blower systems[388] Reportable Segment Financial Information (2020, in thousands) | Metric | EIG | EMG | Total Segment | | :-------------------------------------- | :---------- | :---------- | :------------ | | Segment operating income | $770,620 | $324,962 | $1,095,582 | | Total segment assets | $6,554,414 | $2,646,985 | $9,201,399 | | Additions to property, plant and equipment | $48,638 | $26,381 | $75,019 | | Depreciation and amortization | $174,494 | $78,297 | $252,791 | Long-lived Assets by Geographic Area (2020, in thousands) | Geographic Area | Amount | | :---------------- | :---------- | | United States | $344,535 | | International | $181,995 | | Total consolidated | $526,530 | 16. Additional Consolidated Income Statement and Cash Flow Information This section provides supplementary details on income statement and cash flow items. In 2020, interest and other investment income was $2.7 million, income taxes paid were $210.4 million, and cash paid for interest was $86.2 million Selected Income Statement and Cash Flow Items (in millions) | Metric | 2020 | 2019 | 2018 | | :----------------------------------- | :----- | :----- | :----- | | Interest and other investment income | $2.7 | $4.6 | $2.0 | | Income taxes paid | $210.4 | $221.6 | $195.2 | | Cash paid for interest | $86.2 | $84.9 | $83.6 | 17. Stockholders' Equity AMETEK's stockholders' equity increased, with 230.5 million shares outstanding at December 31, 2020. The company repurchased 55,000 shares for $4.7 million in 2020, with $484.4 million remaining under authorization. The Board of Directors approved a 29% increase in the quarterly cash dividend to $0.18 per share in February 2020, and an additional 11% increase to $0.20 per share effective February 2021 - The company repurchased 55,000 shares of common stock for $4.7 million in 2020, with $484.4 million remaining under the share repurchase authorization[397] - The Board approved a 29% increase in the quarterly cash dividend to $0.18 per common share in February 2020[397] - As of December 31, 2020, 230.5 million shares were outstanding, and 36,227,061 shares were held in treasury at a cost of $1,565.3 million[398] - Effective February 11, 2021, the Board approved an 11% increase in the quarterly cash dividend to $0.20 per common share[399] 18. Realignment Costs In 2020, AMETEK recorded pre-tax realignment costs of $43.9 million, reducing net income by $33.6 million ($0.15 per diluted share). These costs, primarily for workforce reduction and asset write-downs (mainly inventory), were a response to the weak global economy caused by the COVID-19 pandemic. The costs were allocated across Cost of sales ($43.7 million) and Selling, general and administrative expenses ($0.2 million), impacting EIG ($22.8 million) and EMG ($20.9 million). Most realignment activities are expected to be completed by mid-2021 - In 2020, AMETEK recorded $43.9 million in pre-tax realignment costs, reducing net income by $33.6 million ($0.15 per diluted share)[400] - These costs were primarily for workforce reduction ($35.5 million) and asset write-downs ($8.4 million), in response to the COVID-19 pandemic's impact on the global economy[120][401] - Realignment costs were reported as $43.7 million in Cost of sales and $0.2 million in Selling, general and administrative expenses[400] - Segment-wise, EIG incurred $22.8 million and EMG incurred $20.9 million in realignment costs[121][401] PART III Item 10. Directors, Executive Officers and Corporate Governance This section incorporates by reference information from AMETEK's 2021 Proxy Statement regarding the company's directors, executive officers, compliance with Section 16(a), the Audit Committee (including financial experts), the Corporate Governance/Nominating Committee, and the Code of Ethics for senior officers - Information on Directors, Executive Officers, Section 16(a) Compliance, Audit Committee, Audit Committee Financial Experts, and Corporate Governance/Nominating Committee is incorporated by reference from the 2021 Proxy Statement[408][409][410][411][412][413] - AMETEK has adopted a Code of Ethics for its principal executive officer, principal financial officer, and principal accounting officer, available on its website[414] Item 11. Executive Compensation Information concerning executive compensation, including the Compensation Discussion and Analysis, Compensation Committee Report, Compensation Tables, and Potential Payments Upon Termination or Change of Control, is incorporated by reference from the company's 2021 Proxy Statement - Details on executive compensation, including discussion, committee reports, tables, and termination/change of control payments, are incorporated by reference from the 2021 Proxy Statement[415][416] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 'Stock Ownership of Executive Officers and Directors' and 'Beneficial