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