Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 170K
2: EX-10.1 First Amendment to Revolving Credit Agreement HTML 71K
Dated June 29,2007
3: EX-10.2 Amended and Restated Receivables Sale Agreement HTML 210K
Dated May 31, 2007
4: EX-31.1 Certification of Chief Executive Officer Section HTML 13K
302
5: EX-31.2 Certification of Chief Financial Officer Section HTML 13K
302
6: EX-32.1 Certification of Chief Executive Officer Section HTML 9K
906
7: EX-32.2 Certification of Chief Financial Officer Section HTML 9K
906
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the issuer’s common stock outstanding as of the latest practicable
date was: Common Stock, $0.01 Par Value, outstanding at July 31, 2007 was 107,040,801 shares.
The accompanying consolidated financial statements are unaudited. The Company believes that
all adjustments (which primarily consist of normal recurring accruals) necessary for a fair
presentation of the consolidated financial position of the Company at June 30, 2007, and the
consolidated results of its operations for the three- and six-month periods ended June 30, 2007 and
2006 and its cash flows for the six month periods ended June 30, 2007 and 2006 have been included.
Quarterly results of operations are not necessarily indicative of results for the full year. 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 31,2006 as filed with the Securities and Exchange Commission.
Note 2 – Recent Accounting Pronouncements
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 creates a
single model to address accounting for uncertainty in tax positions, by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of
adopting FIN 48 resulted in a non-cash reduction of $5.9 million to the January 1, 2007 opening
balance of retained earnings (See Note 9).
Effective January 1, 2007, the Company adopted Emerging Issues Task Force (EITF) Issue No.
06-5, Accounting for Purchases of Life Insurance- Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4 (“EITF 06-5”). EITF 06-5 provides guidance in
determining the amount to be realized under certain insurance contracts and the related
disclosures. Adoption of EITF 06-5 did not have any effect on the Company’s consolidated results
of operations, financial position and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“FAS 159”) which is
effective for fiscal years beginning after November 15, 2007. This statement permits an entity to
elect to measure certain assets and liabilities at fair value at specified election dates. The
Company is currently evaluating the impact of adopting FAS 159 on our financial statements.
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
Note 3 — Earnings Per Share
The calculation of basic earnings per share for the three- and six-month periods ended June30, 2007 and 2006 is based on the average number of common shares considered outstanding during the
periods. The calculation of diluted earnings per share for such periods reflects the effect of all
potentially dilutive securities (outstanding common stock options and restricted stock grants). The
following table presents the number of shares used in the calculation of basic earnings per share
and diluted earnings per share:
The Company spent $100.3 million for four new businesses acquired in the second quarter of
2007, which includes the acquisition of Seacon Phoenix (“Seacon”) in April 2007 and Advanced
Industries, Inc. (“Advanced”) , B&S Aircraft Parts and Accessories (“B&S”) and Hamilton Precision
Metals (“Hamilton”) in June 2007. Seacon provides undersea electrical interconnect subsystems to
the global submarine market. Seacon is a part of the Company’s Electromechanical Group. Advanced
manufactures starter generators, brush and brushless motors, vane-axial centrifugal blowers for
cabin ventilation, and linear actuators for the business jet, light jet, and helicopter markets.
Advanced is a part of the Company’s Electronic Instruments Group. B&S provides third party
maintenance, repair and operation (MRO) services, primarily for starter generators and hydraulic
and fuel system components, for a variety of business aircraft and helicopter applications. B&S is
a part of the Company’s Electronic Instruments Group. Hamilton produces highly differentiated
niche specialty metals used in medical implant devices and surgical instruments, electronic
components and measurement devices for aerospace and other industrial markets. Hamilton is a part
of the Company’s Electromechanical Group. The four businesses acquired have annualized sales of
approximately $70 million.
The acquisitions have been accounted for using the purchase method in accordance with SFAS No.
141, “Business Combinations.” Accordingly, the operating results of the above acquisitions have
been included in the Company’s consolidated results from the respective dates of acquisition.
The following table represents the tentative allocation of the aggregate purchase price for
the net assets of the above acquisitions based on their estimated fair value:
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
The amount allocated to goodwill is reflective of the benefits the Company expects to
realize from the acquisitions as follows: The Seacon acquisition is an excellent strategic fit
with the Company’s engineered materials, interconnects and packaging business and extends the
Company’s reach into new defense markets. The Advanced acquisition complements the Company’s
AMPHION product line of power management products for the aerospace industry and broadens our
product offering in the power management subsystem market. The B&S acquisition further expands the
Company’s position in the third party aerospace MRO market. The Hamilton acquisition is a strategic
fit with our engineered materials, interconnects and packaging business and has strong positions in
growing specialty metals niche markets within the aerospace and other industrial markets. The
Company expects approximately $5.5 million of goodwill recorded on the 2007 acquisitions will be
deductible in future years for tax purposes.
The Company is in the process of conducting third party valuations of certain tangible and
intangible assets acquired, as well as preparing restructuring plans for certain acquisitions.
Adjustments to the allocation of purchase price will be recorded within the purchase price
allocation period of up to twelve months subsequent to the dates of acquisition. Therefore, the
allocation of the purchase price is subject to revision.
Had the above acquisitions been made at the beginning of 2007, net sales, net income and
diluted earnings per share for the three- and six-month periods ended June 30, 2007 would not have
been materially different than the amounts reported.
Had the above acquisitions and the acquisition of Pulsar, Pittman, Land Instruments, Precitech
and Southern Aeroparts, which were acquired in February, May, June, November and December 2006,
respectively, been made at the beginning of 2006, pro forma net sales, net income, and diluted
earnings per share for the three- and six-month periods ended June 30, 2006, would have been as
follows:
Pro forma results are not necessarily indicative of the results that would have occurred
if the acquisitions had been completed at the beginning of 2006.
Purchase price allocation adjustments reflect final purchase price allocations and revisions to
certain preliminary allocations for recent acquisitions, which include reclassifications between
goodwill and other intangible assets.
Note 6 — Inventories
The components of inventory stated primarily at lower of last in, first out (LIFO), cost or
market are:
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
Note 7 — Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity during a period except those
resulting from investments by and distributions to stockholders.
The following table presents comprehensive income for the three- and six-month periods ended
June 30, 2007 and 2006:
Represents the net gains from non-derivative foreign-currency-denominated long-term debt.
These debt instruments were designated as hedging instruments to offset foreign exchange gains or
losses on the net investment in certain foreign operations.
Note 8 – Share-Based Compensation
Under the terms of the Company’s stockholder approved share-based plans, incentive and
non-qualified stock options and restricted stock awards have been, and may be, issued to the
Company’s officers, other management-level employees and its Board of Directors. Employees and
non-employee director stock options generally vest over a four-year service period. Restricted
stock awards generally cliff-vest at the end of a four year service period. Options primarily have
a maximum contractual term of 7 years. At June 30, 2007, 9.1 million shares of common stock were
reserved for issuance under the Company’s share-based plans, including 4.2 million stock options
outstanding. The Company issues previously unissued shares when options are exercised, and shares
are issued from treasury stock upon the award of restricted stock.
For grants under any of the Company’s plans that are subject to graded vesting over a service
period, we recognize expense on a straight-line basis over the requisite service period for the
entire award.
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
The fair value of each option grant is estimated on the date of grant using a Black-Scholes option
pricing model. The following weighted average assumptions were used in the Black-Scholes model to
estimate the fair values of options granted during the periods indicated:
Expected volatilities are based on historical volatility of the Company’s stock. The
Company used historical exercise data to estimate the options’ expected term, which represents the
period of time that the options granted are expected to be outstanding. Management anticipates the
future option holding periods to be similar to the historical option holding periods. The
risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant. Compensation expense recognized for all share-based
awards is net of estimated forfeitures. The Company’s estimated forfeiture rates are based on its
historical experience.
Total share-based compensation expense recognized under SFAS 123R for the three- and six-
months ended June 30, 2007 and 2006 was as follows:
The six months ended June 30, 2007 results reflect the accelerated vesting of a
restricted stock grant in the first quarter of 2007. See discussion on page 12.
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
Pretax share-based compensation expense is included in either cost of sales, or selling,
general and administrative expenses depending on where the recipient’s cash compensation is
reported and is included in segment operating income and as a corporate item for business segment
reporting.
A summary of the Company’s stock option activity and related information for its option plans
for the six months ended June 30, 2007 was as follows:
Weighted Average
Shares
Weighted Average
Remaining Contractual
(In thousands)
Exercise Price
Life (Years)
Outstanding at beginning of period
4,511
$
18.28
Granted
665
36.41
Exercised
(907
)
12.78
Forfeited
(38
)
26.80
Outstanding at end of period
4,231
$
22.23
4.3
Exercisable at end of period
2,355
$
16.26
3.2
The aggregate intrinsic value of options exercised during the six months ended June 30,2007 was $21.4 million. The total fair value of the stock options vested during the six months
ended June 30, 2007 was $4.8 million. The aggregate intrinsic value of the stock options
outstanding at June 30, 2007 was $94.0 million. The aggregate intrinsic value of the stock options
exercisable at June 30, 2007 was $38.3 million. The weighted average Black-Scholes fair value of
stock options granted per share was $9.53 for the six months ended June 30, 2007 and $9.55 for the
year ended December 31, 2006.
The fair value of restricted shares under the Company’s restricted stock arrangement is
determined by the product of the number of shares granted and the grant date market price of the
Company’s common stock. Upon the grant of restricted stock, the fair value of the restricted shares
(unearned compensation) at the date of grant, is charged as a reduction of capital in excess of par
value in the Company’s consolidated balance sheet and is amortized to expense on a straight-line
basis over the vesting period, which is defined at the grant date. Restricted stock awards are
also subject to accelerated vesting due to certain events. On February 20, 2007, the May 18, 2004
grant of 264,195 shares of restricted stock vested under an accelerated vesting provision. The
charge to income due to the accelerated vesting of these shares did not have a material impact on
our earnings for the first six months of 2007. Early in the third quarter of 2007 (on July 9,2007), the September 22, 2004 grant of 199,042 shares of restricted stock vested under an
accelerated vesting provision. The charge to income due to the accelerated vesting of these shares
will not have a material impact on our earnings in the third quarter of 2007. At June 30, 2007 the
Company had 1.3 million shares of restricted stock outstanding.
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
Note 9 – Income Taxes
The Company adopted the provisions of FIN 48, Accounting for the Uncertainty in Income Taxes,
as of January 1, 2007. As a result of the adoption of FIN 48, the Company recognized a $4.7
million increase in liabilities associated with unrecognized tax benefits, including interest and
penalties of $2.4 million and a decrease of $1.2 million in goodwill related to a previous business
combination, and a $5.9 million charge to the January 1, 2007, opening balance of retained
earnings.
After recognizing the impacts of adopting FIN 48, as of the adoption date, the Company had
gross unrecognized tax benefits of $22.5 million of which $21.3 million, if recognized, would
affect the effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in
income tax expense. The amounts recognized in income tax expense for interest and penalties during
the second quarter and six months ended June 30, 2007 were not significant.
The Company files U.S. Federal income tax returns, as well as, income tax returns in various
state and foreign jurisdictions. The Internal Revenue Service (IRS) is currently examining the
Company’s U.S. income tax returns for 1999 – 2005. Tax years in certain state and foreign
jurisdictions remain subject to examination; however the uncertain tax positions related to these
jurisdictions are not considered material. At present, the Company does not expect any changes that
would significantly impact the unrecognized tax benefits within the next twelve months.
Note 10 – Retirement and Pension Plans
The following table reports total net pension expense for the three- and six-month periods
ended June 30, 2007 and 2006.
AMETEK, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
(Unaudited)
During the six months ended June 30, 2007, we made $1.3 million in contributions to our
defined benefit pension plans, compared with contributions of $10.0 million during the six months
ended June 30, 2006. For the full year 2007, we currently estimate that we will make contributions
to our worldwide defined benefit pension plans of approximately $5 million, compared with
contributions of $13.7 million for the full year 2006.
Note 11 – Product Warranties
The Company provides limited warranties in connection with the sale of its products. The
warranty periods for products sold vary 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.
Changes in the Company’s accrued product warranty obligation for the six-months ended June 30,2007 and 2006 were as follows:
Product warranty obligations are reported as current liabilities in the consolidated balance
sheet.
Note 12 — Segment Disclosure
The Company has two reportable business segments, the Electronic Instruments Group and the
Electromechanical Group. The Company aggregates its operating segments for segment reporting
purposes primarily on the basis of product type, production process, distribution methods, and
management organizations.
At June 30, 2007, there were no significant changes in identifiable assets of reportable
segments from the amounts disclosed at December 31, 2006, nor were there any changes in the basis
of segmentation, or in the measurement of segment operating results. Operating information
relating to the Company’s reportable segments for the three- and six-month periods ended June 30,2007 and 2006 can be found in the table on page 15 in the Management Discussion & Analysis section
of this Report.
Operations for the second quarter of 2007 compared with the second quarter of 2006
In the second quarter of 2007, the Company posted record sales, operating income, net income
and diluted earnings per share. The Company achieved these results from strong internal growth
both in the Electronic Instruments (EIG) and Electromechanical (EMG) Groups, as well as, from
contributions by the acquisitions of Pittman in May 2006, Land Instruments in June 2006, Precitech
in November 2006, Southern Aeroparts in December 2006, Seacon Phoenix in April 2007, and Advanced
Industries, B&S Aircraft and Hamilton Precision Metals in June 2007.
Net sales for the second quarter of 2007 were $519.5 million, an increase of $68.9 million, or
15.3% when compared with net sales of $450.6 million in the second quarter of 2006. The net sales
increase in the second quarter of 2007 was driven by strong internal sales growth of approximately
7%, which excludes a 2% favorable effect of foreign currency, led by the Company’s differentiated
businesses. The acquisitions mentioned above contributed the remainder of the net sales increase.
International sales for the second quarter of 2007 were $254.1 million, or 48.9% of
consolidated sales, an increase of $35.6 million, or 16.3% when compared with $218.5 million, or
48.5% of consolidated sales in the same quarter of 2006. The increase in international sales
primarily results from
increased sales from base businesses, which includes the effect of foreign currency as well as the
acquisitions of Land Instruments, Pittman and Seacon Phoenix. Increased international sales came
mainly from sales to Europe by both Groups.
Segment operating income for the second quarter of 2007 was $105.9 million, an increase of
$18.7 million or 21.4% from $87.2 million in the second quarter of 2006. Segment operating
income, as a percentage of sales, increased to 20.4% of sales in the second quarter of 2007 from
19.3% of sales in the second quarter of 2006. The increase in segment operating income resulted
from strength in the Company’s differentiated businesses, which includes the profit contributions
made by the acquisitions. The margin improvement came from the Company’s differentiated
businesses.
Selling, general and administrative expenses (SG&A) were $62.9 million in the second quarter
of 2007, an increase of $9.5 million or 17.8%, when compared with the second quarter of 2006. As a
percentage of sales, SG&A expenses were 12.1% in the second quarter of 2007, compared with 11.8% in
the same period of 2006 primarily driven by higher selling expenses of the acquired businesses.
Base business selling expenses as a percentage of sales were 7.5%, in line with internal sales
growth.
Corporate administrative expenses for the second quarter of 2007 were $9.2 million, an
increase of $1.2 million when compared with the same period in 2006. The increase in corporate
administrative expenses was primarily the result of higher compensation and consulting costs
necessary to grow the Company. As a percentage of sales, corporate administrative expenses in the
second quarter of 2007 was 1.8%, unchanged compared to the same period of 2006.
Consolidated operating income totaled $96.6 million or 18.6% of sales for the second quarter
of 2007, compared with $79.1 million, or 17.6% of sales for the same quarter of 2006, an increase
of $17.5 million or 22.1%.
Interest expense was $11.0 million in the second quarter of 2007, an increase of $0.7 million
or 6.8%, compared with $10.3 million in the second quarter of 2006. The increase was primarily
driven by higher average debt levels incurred to fund the recent acquisitions and higher average
interest rates.
Other expenses, net were $1.5 million in the second quarter of 2007, compared with other
expenses, net of $0.6 million for the same period of 2006. The $0.9 million increase was primarily
the result of costs associated with an acquisition the Company did not complete.
The effective tax rate for the second quarter of 2007 was 31.0% compared with 31.9% in the
second quarter of 2006. The decrease in the effective tax rate in the second quarter of 2007
primarily reflects recognition of tax benefits from our international tax planning initiatives. In
the second quarter of 2006, the Company realized a Foreign Sales Corporation/Extraterritorial
Income (FSC/ETI) tax benefit.
Net income for the second quarter of 2007 totaled $58.0 million, an increase of 24.7% from
$46.5 million in the second quarter of 2006. Diluted earnings per share rose 25.6% to $0.54 per
share, compared with $0.43 per share for the second quarter of 2006.
Segment Results
Electronic Instruments Group (EIG) sales totaled $281.7 million in the second quarter
of 2007, an increase of $37.7 million or 15.5% from $244.0 million in the same quarter of 2006.
The sales increase was due to internal growth in the Group’s process and analytical, aerospace and
power businesses along with the acquisitions of Land Instruments, Precitech, Advanced Industries
and B&S Aircraft. Internal growth accounted for approximately 8% of the sales increase, excluding
a favorable 2% effect of foreign currency. The acquisitions accounted for the remainder of the
increase.
Operating income of EIG was $62.2 million for the second quarter of 2007, an increase of $11.8
million or 23.4% when compared with the $50.4 million in the second quarter of 2006. Operating
margins for the Group were 22.1% of sales in the second quarter of 2007 compared with operating
margins of 20.7% of sales in the second quarter of 2006. The increase in segment operating income
and margins as a percentage of sales was due to the contribution from the higher sales by the
Group’s differentiated businesses.
Electromechanical Group (EMG) sales totaled $237.8 million in the second quarter of
2007, an increase of $31.2 million or 15.1% from $206.6 million in the same quarter in 2006. The
sales increase was due to solid internal growth from the Group’s differentiated businesses, which
accounted for approximately 6% of the sales increase, excluding a favorable 1% effect of foreign
currency. The acquisitions of Pittman, Southern Aeroparts, Seacon Phoenix and Hamilton Precision
Metals primarily accounted for the remainder of the sales increase.
Operating income of EMG was $43.7 million for the second quarter of 2007, an increase of $6.9
million or 18.8% when compared with the $36.8 million in the second quarter of 2006. EMG’s
increase in operating income was primarily due to higher sales from the Group’s differentiated
businesses, which includes the acquisitions mentioned above. Operating margins for the Group were
at 18.4% of sales in the second quarter of 2007 compared with 17.8% of sales in the second quarter
of 2006. The increase in operating margins, as a percentage of sales, was primarily due to the
increased contribution from the Group’s differentiated businesses. Additionally, the Group
realized a gain on the settlement of a warranty issue with a customer, which was substantially
offset by higher material costs.
Operations for the first six months of 2007 compared with the first six months of 2006.
Net sales for the first six months of 2007 were $1,024.8 million, an increase of $150.3
million or
17.2%, compared with net sales of $874.5 million reported for the same period of 2006. The net
sales increase
in the first six months of 2007 was driven by strong internal sales growth of approximately 8%,
excluding the favorable 2% effect of foreign currency, led primarily by the Company’s
differentiated businesses. Acquisitions contributed the remainder of the net sales increase.
For the first six months of 2007 international sales were $506.1 million, or 49.4% of
consolidated sales, compared with $417.7 million, or 47.8% of consolidated sales, for the
comparable period of 2006, an increase of $88.4 million, or 21.2%. The increase in international
sales primarily results from increased sales from base businesses, which include the effect of
foreign currency as well as the acquisitions of Land Instruments, Pittman, Precitech and Seacon
Phoenix. The increased international sales came mainly from sales to Europe and Asia by both
Groups.
Order input for the first six months ended June 30, 2007 was $1,103.4 million, compared with
$961.2 million for the same period of 2006, an increase of $142.2 million, or 14.8%. The increase
in orders was driven by base businesses, as well as, the acquisitions mentioned previously. As a
result, the Company’s backlog of unfilled orders at June 30, 2007 was $615.4 million, compared with
$536.8 million at December 31, 2006, an increase of $78.6 million or 14.6%. The increase in the
backlog was due to higher order levels in our base differentiated businesses and the 2007
acquisitions of Seacon Phoenix, Advanced Industries and Hamilton Precision Metals.
Segment operating income for the first six months of 2007 was $206.1 million, an increase of
$39.3 million, or 23.6% compared with $166.8 million for the same period of 2006. Segment operating
income as a percentage of sales increased to 20.1% of sales in the first six months of 2007
compared with 19.1% of sales for the same period of 2006. The increase in segment operating income
resulted from strength in the differentiated businesses of each Group, which includes the profit
contributions made by the acquisitions.
Selling, general and administrative expenses were $124.9 million for the first six months of
2007, an increase of $20.8 million or 20.0%, when compared with $104.1 million in the same period
of 2006. Selling expenses, as a percentage of sales, increased to 10.3% for the first six months
of 2007, compared with 10.0% for the same period of 2006. The selling expense increase and the
corresponding increase in selling expenses as a percentage of sales were due primarily to the
business acquisitions. The
Company’s acquisition strategy generally is to acquire differentiated businesses, which because of
their distribution channels and higher marketing costs tend to have a higher content of selling
expenses. Base business selling expenses as a percentage of sales were 9.3%, approximating the
internal sales growth rate for base businesses.
Corporate administrative expenses were $19.5 million for the first six months of 2007, an
increase of $2.7 million, or 16.1%, when compared with $16.8 million for the same period of 2006.
The increase in corporate
administrative expenses was primarily a result of higher compensation costs, including
equity-based compensation and other expenses necessary to grow the business. As a percentage of
sales, corporate administrative expenses were flat at 1.9% for the first six months of 2007 and
2006.
Consolidated operating income was $186.5 million, an increase of $36.6 million or 24.4% when
compared with $149.9 million for the same period of 2006. This represents an operating margin of
18.2% for the first six months of 2007, compared with 17.1% for the same period of 2006.
Interest expense was $21.9 million for the first six months of 2007, an increase of $1.5
million or 7.4% when compared with $20.4 million in the same period of 2006. The increase was
primarily driven by higher average debt levels incurred to fund the recent acquisitions and higher
average interest rates.
Other expenses, net were $2.1 million in the first half of 2007, compared with other expenses,
net of $1.3 million for the same period in 2006. The increase in expenses was primarily the result
of costs associated with acquisitions the Company did not complete.
The effective tax rate for the first six months of 2007 was 33.0% compared with 32.3% for the
same period of 2006. The increase in the effective tax rate primarily reflects the elimination of
the repealed Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) tax benefit, an increase
in state income taxes and the adoption of FIN 48 for the recognition of interest and penalties on
unrecognized tax benefits, partially offset by recognition of tax benefits which resulted from the
Company’s international tax planning initiatives.
Net income for the first six months of 2007 was $108.9 million, or $1.02 per share on a
diluted basis, compared with net income of $86.7 million, or $0.81 per diluted share for the same
period of 2006.
Segment Results
Electronic Instruments Group (EIG) net sales were 564.6 million for the first half of
2007, an increase of $84.2 million or 17.5% compared with the same period of 2006. The sales
increase was due to strong internal growth of approximately 10%, excluding the favorable 1% effect
of foreign currency, driven by EIG’s aerospace, power and process businesses and by the
acquisitions of Land Instruments and Precitech.
EIG’s operating income for the first half of 2007 totaled $124.4 million, an increase of $26.3
million or 26.8% when compared with $98.1 million in the first half of 2006. The increase in
operating income was primarily the result of the higher base business sales previously mentioned.
Operating margins also increased to 22.0% of sales in the first six months of 2007 compared with
20.4% for the same period of 2006. The increase in margins was due to the contribution from the higher sales by the Group’s
base differentiated businesses.
Electromechanical Group (EMG) net sales totaled $460.1 million for the first six
months of 2007, an increase of $66.1 million or 16.8% compared with $394.0 million in the same
period of 2006. The sales increase was due to solid internal growth of approximately 6%, excluding
the favorable 2% effect of foreign currency. The acquisitions primarily accounted for the
remainder of the sales increase.
EMG’s operating income for the first six months of 2007 was $81.7 million, an increase of
$13.0 million or 18.9% when compared with the same period of 2006. The operating income increase
was due to strength in the Group’s differentiated businesses including the previously mentioned
acquisitions. Operating margins increased to 17.8% of sales for the first six months of 2007,
compared with 17.4% for the same period of 2006 due to the increased contribution from the Group’s
differentiated businesses.
Financial Condition
Liquidity and Capital Resources
Cash provided by operating activities totaled $119.9 million in the first half of 2007,
compared with $101.7 million for the same period of 2006, an increase of $18.2 million, or 17.9%.
The increase in operating cash flow was primarily the result of higher earnings, partially offset
by higher working capital requirements necessary to grow the business. In the first half of 2007,
the Company made contributions to its defined benefit pension plans totaling $1.3 million compared
with $10.0 million for the same period of 2006.
Cash used for investing activities totaled $117.5 million in the first six months of 2007,
compared with $127.0 million in the same period of 2006. In the first six months of 2007, the
Company paid $100.3 million for four business acquisitions and one small technology line, net of
cash received. The Company paid $114.1 million for three acquisitions and one small technology
line, net of cash received in the first six months of 2006. Additions to property, plant and
equipment in the first six months of 2007 totaled $17.2 million, compared with $12.8 million in the
same period of 2006.
Cash provided by financing activities totaled $23.6 million in the first six months of 2007,
compared with $32.0 million used in the same period of 2006. In the first six months of 2007, the
net total borrowings increased by $21.4 million, compared with a net total increase of $36.8
million in the first
six months of 2006.
In June 2007, the Company amended its Revolving Credit facility, increasing
the total borrowing capacity from $400 million to $550 million, which includes an accordion feature
that permits the Company to request up to an additional $100 million in revolving credit
commitments at any time during the life of the revolving credit agreement under certain conditions.
The amendment also extended the term of the revolver from October 2011 to June 2012. At June 30,2007, the Company had $432.0 million available under its revolving credit facility, including the
$100 million accordion feature. The accounts receivable securitization facility was amended and
restated in May 2007, to increase the Company’s available borrowing capacity from $75 million to
$110 million as well as extend the expiration date from May 2007 to May 2008. As of June 30, 2007,
the Company had utilized $105 million under the accounts receivable securitization facility.
Additional financing activities for the first six months of 2007 included dividend payments of
$12.8 million, compared with $8.4 million in the same period of 2006. The increase in dividends
paid was the result of a Board of Directors approved 50% increase in the quarterly dividend rate on
the Company’s common stock in the fourth quarter of 2006. Repurchases of the Company’s common
stock in first six months of 2007 totaled $2.9 million for 81,000 shares, compared with a total of $5.5 million for 128,000 shares in
the first six months of 2006. As of June 30, 2007, $28.5 million was available under the current
Board authorization for future share repurchases.
As a result of the activities discussed above, the Company’s cash and cash equivalents at June30, 2007 totaled $76.3 million, compared with $49.1 million at December 31, 2006. The Company
believes it has sufficient cash-generating capabilities and available credit facilities to enable
it to meet its needs in the foreseeable future.
Information contained in this discussion, other than historical information, is considered
“forward-looking statements” and is subject to various factors and uncertainties that may cause
actual results to differ significantly from expectations. These factors and uncertainties include
our ability to consummate and successfully integrate future acquisitions; risks associated with
international sales and operations; our ability to successfully develop new products, open new
facilities or transfer product lines; the price and availability of raw materials; compliance with
government regulations, including environmental regulations; changes in the competitive environment
or the effects of competition in our markets; the ability to maintain adequate liquidity and
financing sources; and general economic conditions affecting the industries we serve. A detailed
discussion of these and other factors that may affect our future results is contained in AMETEK’s
filings with the Securities and Exchange Commission, including its most recent reports on Form
10-K, 10-Q and 8-K. AMETEK disclaims any intention or obligation to update or revise any
forward-looking statements, unless required by the securities laws to do so.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information, which is required to be disclosed, is accumulated
and communicated to management in a timely manner. The Company’s principal executive officer and
principal financial officer evaluated the effectiveness of the system of disclosure controls and
procedures as of June 30, 2007. Based on that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure controls and
procedures are effective in all material respects as of June 30, 2007.
Such evaluation did not identify any change in the Company’s internal control over financial
reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
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.