10-Q 1 form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004, OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ________________ Commission File Number 1-13595 Mettler-Toledo International Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3668641 ---------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Im Langacher, P.O. Box MT-100 CH 8606 Greifensee, Switzerland -------------------------------------------- (Address of principal executive offices) (Zip Code) +41-1-944-22-11 ------------------------------------------------------ (Registrant's telephone number, including area code) not applicable ------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The Registrant had 44,439,952 shares of Common Stock outstanding at June 30, 2004. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes X No ----- ---- METTLER-TOLEDO INTERNATIONAL INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q PAGE PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS: INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003.......................... 3 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003.......................... 4 INTERIM CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003........................................ 5 INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003................................. 6 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003.......................... 7 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004............................................. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 19 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 28 Item 4. CONTROLS AND PROCEDURES...................................... 28 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS............................................ 29 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 29 Item 3. DEFAULTS UPON SENIOR SECURITIES.............................. 29 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 30 Item 5. OTHER INFORMATION............................................ 30 Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 30 SIGNATURE.............................................................. 32 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, JUNE 30, 2004 2003 ---- ---- (UNAUDITED) (UNAUDITED) Net sales Products....................................... $266,448 $248,103 Service........................................ 78,044 73,260 -------- -------- Total net sales.................................... 344,492 321,363 Cost of sales Products....................................... 126,784 117,530 Service........................................ 49,789 47,422 -------- -------- Gross profit....................................... 167,919 156,411 Research and development........................... 20,164 19,338 Selling, general and administrative................ 101,020 94,008 Amortization....................................... 2,896 2,840 Interest expense................................... 3,272 3,671 Other charges (income), net........................ (32) (276) -------- -------- Earnings before taxes ......................... 40,599 36,830 Provision for taxes................................ 12,181 11,050 -------- -------- Net earnings................................... $ 28,418 $ 25,780 ======== ======== Basic earnings per common share: Net earnings................................... $ 0.64 $ 0.58 Weighted average number of common shares....... 44,469,648 44,434,612 Diluted earnings per common share: Net earnings................................... $ 0.62 $ 0.57 Weighted average number of common shares....... 45,750,652 45,467,106 The accompanying notes are an integral part of these interim consolidated financial statements. METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, JUNE 30, 2004 2003 ---- ---- (UNAUDITED) (UNAUDITED) Net sales Products....................................... $509,684 $472,260 Service........................................ 153,517 140,911 -------- -------- Total net sales.................................... 663,201 613,171 Cost of sales Products....................................... 245,064 231,286 Service........................................ 99,942 91,816 -------- -------- Gross profit....................................... 318,195 290,069 Research and development........................... 40,819 37,808 Selling, general and administrative................ 197,829 178,813 Amortization....................................... 5,704 5,667 Interest expense................................... 6,738 7,576 Other charges (income), net (see Note 7)......... (96) 4,899 -------- -------- Earnings before taxes ......................... 67,201 55,306 Provision for taxes................................ 20,161 16,591 -------- -------- Net earnings................................... $ 47,040 $ 38,715 ======== ======== Basic earnings per common share: Net earnings................................... $ 1.06 $ 0.87 Weighted average number of common shares....... 44,513,546 44,413,962 Diluted earnings per common share: Net earnings................................... $ 1.03 $ 0.85 Weighted average number of common shares....... 45,793,793 45,377,964 The accompanying notes are an integral part of these interim consolidated financial statements. METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 2004 2003 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................... $ 47,613 $ 45,116 Trade accounts receivable, less allowances of $10,250 at June 30, 2004 and $10,489 at December 31, 2003...... 247,423 249,353 Inventories, less allowances of $34,902 at June 30, 2004 and $38,745 at December 31, 2003........................... 153,292 151,764 Current deferred tax assets, net............................. 27,476 27,644 Other current assets and prepaid expenses.................... 34,850 31,660 ---------- ---------- Total current assets................................... 510,654 505,537 Property, plant and equipment, net............................... 223,723 231,512 Goodwill, net ................................................... 424,440 421,940 Other intangible assets, net..................................... 125,067 126,874 Non-current deferred tax assets, net............................. 39,949 40,683 Other non-current assets......................................... 61,604 60,730 ---------- ---------- Total assets........................................... $1,385,437 $1,387,276 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable....................................... $ 66,214 $ 68,243 Accrued and other current liabilities........................ 101,019 97,966 Accrued compensation and related items....................... 53,972 56,575 Deferred service revenue and customer prepayments............ 36,821 20,759 Taxes payable................................................ 54,019 51,347 Current deferred tax liabilities............................. 14,642 14,742 Short-term borrowings and current maturities of long-term debt......................................... 18,800 18,277 ---------- ---------- Total current liabilities.............................. 345,487 327,909 Long-term debt................................................... 172,806 223,239 Non-current deferred taxes....................................... 46,179 46,519 Other non-current liabilities.................................... 133,849 135,613 ---------- ---------- Total liabilities...................................... 698,321 733,280 Shareholders' equity: Preferred stock, $0.01 par value per share; authorized 10,000,000 shares; issued 0 ........................... - - Common stock, $0.01 par value per share; authorized 125,000,000 shares; issued 44,771,111 and 44,582,017 shares, outstanding 44,439,952 and 44,582,017 shares at June 30, 2004 and December 31, 2003, respectively... 448 446 Additional paid-in capital................................... 475,610 471,628 Treasury stock at cost (331,159 and 0 shares at June 30, 2004 and December 31, 2003, respectively)................... (14,139) - Retained earnings............................................ 244,745 200,216 Accumulated other comprehensive loss......................... (19,548) (18,294) ---------- ---------- Total shareholders' equity............................. 687,116 653,996 Commitments and contingencies.................................... - - ---------- ---------- Total liabilities and shareholders' equity............. $1,385,437 $1,387,276 ========== ========== The accompanying notes are an integral part of these interim consolidated financial statements.
METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
COMMON STOCK ACCUMULATED OTHER ------------ ADDITIONAL TREASURY RETAINED COMPREHENSIVE SHARES AMOUNT PAID-IN CAPITAL STOCK EARNINGS INCOME (LOSS) TOTAL ------ ------ --------------- -------- -------- ---------------- ----- Balance at December 31, 2003 ........ 44,582,017 $ 446 $ 471,628 $ - $ 200,216 $ (18,294) $ 653,996 Exercise of stock options ........... 316,335 2 3,982 5,433 (2,511) - 6,906 Repurchases of common stock ......... (458,400) - - (19,572) - - (19,572) Comprehensive income: Net earnings ........................ - - - - 47,040 - 47,040 Change in currency translation adjustment ..................... - - - - - (1,254) (1,254) ---------- Comprehensive income ................ 45,786 ----------- --------- ----------- ----------- ---------- ---------- ---------- Balance at June 30, 2004 ............ 44,439,952 $ 448 $ 475,610 $ (14,139) $ 244,745 $ (19,548) $ 687,116 =========== ========= =========== =========== ========== ========== ========== Balance at December 31, 2002 ........ 44,384,820 $ 444 $ 459,213 $ - 104,378 $ (61,649) $ 502,386 Exercise of stock options ........... 49,792 - 1,176 - - - 1,176 Comprehensive income: Net earnings ........................ - - - - 38,715 - 38,715 Unrealized gain on cash-flow hedging instruments - - - - - 2,185 2,185 Change in currency translation adjustment ..................... - - - - - 9,152 9,152 ---------- Comprehensive income ................ 50,052 ----------- --------- ----------- ----------- ---------- ---------- ---------- Balance at June 30, 2003 ............ 44,434,612 $ 444 $ 460,389 $ - 143,093 $ (50,312) $ 553,614 =========== ========= =========== =========== ========== ========== ========== The accompanying notes are an integral part of these interim consolidated financial statements.
METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS)
JUNE 30, JUNE 30, 2004 2003 ---- ---- (UNAUDITED) (UNAUDITED) Cash flow from operating activities: Net earnings........................................... $ 47,040 $ 38,715 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation....................................... 12,911 12,689 Amortization....................................... 5,704 5,667 Other.............................................. 281 172 Increase (decrease) in cash resulting from changes in: Trade accounts receivable, net................... (2,766) 15,227 Inventories...................................... (2,019) (12,526) Other current assets............................. (2,484) (8,397) Trade accounts payable........................... (1,516) (10,089) Taxes payable.................................... 2,448 (4,102) Accruals and other current and non-current liabilities................................... 15,324 2,035 --------- --------- Net cash provided by operating activities..... 74,923 39,391 --------- --------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment.... 1,376 604 Purchase of property, plant and equipment.............. (10,667) (10,602) Acquisitions........................................... (991) (1,972) --------- --------- Net cash used in investing activities......... (10,282) (11,970) --------- --------- Cash flows from financing activities: Proceeds from borrowings............................... 36,738 37,301 Repayments of borrowings............................... (86,500) (62,690) Proceeds from exercise of stock options................ 6,906 1,176 Repurchases of common stock............................ (19,572) - --------- --------- Net cash used in financing activities......... (62,428) (24,213) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................ 284 515 --------- --------- Net increase in cash and cash equivalents.................. 2,497 3,723 Cash and cash equivalents: Beginning of period.................................... 45,116 31,427 --------- --------- End of period.......................................... $ 47,613 $ 35,150 ========= =========
The accompanying notes are an integral part of these interim consolidated financial statements. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (In thousands unless otherwise stated) 1. BASIS OF PRESENTATION Mettler-Toledo International Inc. ("Mettler-Toledo" or the "Company") is a global supplier of precision instruments and services. The Company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics and food retailing applications. The Company also manufactures several related analytical instruments, and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the Company manufactures metal detection and other end-of-line inspection systems used in production and packaging, and provides solutions for use in certain process analytics applications. The Company's primary manufacturing facilities are located in Switzerland, the United States, Germany, the United Kingdom and China. The Company's principal executive offices are located in Greifensee, Switzerland. The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements as of June 30, 2004 and for the three and six month periods ended June 30, 2004 and 2003 should be read in conjunction with the December 31, 2003 and 2002 consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The accompanying interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. A discussion of the Company's critical accounting policies is included in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inventories, net Inventories are valued at the lower of cost or net realizable value. Cost, which includes direct materials, labor and overhead, is generally determined using the first in, first out (FIFO) method. The estimated market value is based on assumptions for future demand and related pricing. Reserves for excess and obsolete inventories are established based on forecast usage, orders and technological obsolescence. Inventories, net consisted of the following at June 30, 2004 and December 31, 2003: June 30, December 31 2004 2003 ---------- ---------- Raw materials and parts......................... $ 71,134 $ 71,950 Work in progress................................ 32,117 32,432 Finished goods.................................. 50,041 47,382 --------- --------- $ 153,292 $ 151,764 ========= ========= Other Intangible Assets Other intangible assets include indefinite lived assets and assets subject to amortization. Where applicable, amortization is charged on a straight-line basis over the expected period to be benefited. The Company assesses the recoverability of other intangible assets subject to amortization in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). Other intangible assets consisted of the following at June 30, 2004 and December 31, 2003.
June 30, 2004 December 31, 2003 ----------------------- ----------------------- Gross Accumulated Gross Accumulated amount amortization amount amortization ------ ------------ ------ ------------ Customer relationships......... $ 70,955 $ (4,281) $ 70,955 $ (3,424) Proven technology and patents.. 19,999 (4,737) 19,999 (3,809) Tradename (finite life)........ 893 (101) 893 (79) Tradename (indefinite life).... 22,434 - 22,434 - Intellectual property license (indefinite life)............ 19,905 - 19,905 - -------- --------- --------- -------- $134,186 $ (9,119) $ 134,186 $ (7,312) ======== ========= ========= ========
Other intangible assets substantially relate to the acquisition of Rainin. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $3.7 million for each of the next five years. The Company had amortization expense associated with the above intangible assets of $1.8 million and $1.7 million for the six months ended June 30, 2004 and 2003, respectively. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands except share data, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock Based Compensation The Company applies the intrinsic valuation methodology under Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Had compensation cost for the Company's stock option plan been determined based upon the fair value of such awards at the grant date, consistent with the methods of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure," the Company's net earnings and basic and diluted net earnings per common share for the three and six month periods ended June 30 would have been as follows:
Three months ended Six months ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net earnings: As reported.......................... $28,418 $25,780 $47,040 $38,715 Compensation expense................. (1,843) (1,502) (3,704) (2,997) ------- ------- ------- ------- Pro forma............................ $26,575 $24,278 $43,336 $35,718 ======= ======= ======= ======= Basic earnings per common share: As reported.......................... $ 0.64 $ 0.58 $ 1.06 $ 0.87 Compensation expense................. (0.04) (0.03) (0.09) (0.07) ------- ------- ------- ------- Pro forma............................ $ 0.60 $ 0.55 $ 0.97 $ 0.80 ======= ======= ======= ======= Weighted average number of common shares ..............................44,469,648 44,434,612 4,513,546 44,413,962 Diluted earnings per common share: As reported.......................... $ 0.62 $ 0.57 $ 1.03 $ 0.85 Compensation expense................. (0.04) (0.04) (0.08) (0.06) ------- ------- ------- ------- Pro forma............................ $ 0.58 $ 0.53 $ 0.95 $ 0.79 ======= ======= ======= ======= Weighted average number of common shares ..............................45,548,618 45,387,465 45,582,791 45,326,888
Warranty The Company generally offers one-year warranties on most of its products. Product warranties are recorded at the time revenue is recognized for certain product shipments. While the Company engages in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Warranty (continued) Changes to the Company's accrual for product warranties for the six months ended June 30 are as follows: 2004 2003 --------- --------- Balance at beginning of period........... $ 10,121 $ 8,850 Accruals for warranties.................. 5,481 5,829 Payments / utilizations.................. (5,686) (5,291) -------- -------- Balance at end of period................. $ 9,916 $ 9,388 ======== ======== Recent Accounting Pronouncements In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position FAS 106-2 ("FSP FAS 106-2"), "Accounting and Disclosure Requirements Relating to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". The Company is currently evaluating the impact of FSP FAS 106-2, which is effective for interim financial periods beginning after June 15, 2004. 3. BUSINESS COMBINATIONS The terms of certain of the Company's acquisitions in 2003 and earlier years provide for possible additional earn-out payments. During the six months ended June 30, 2004 and June 30, 2003 the Company made additional cash payments of approximately $1.0 million and $2.0 million respectively, related to acquisitions consummated in prior years. The Company accounted for the additional consideration using the purchase method of accounting and classified the payments as additional goodwill, primarily within the Company's Principal U.S. Operations segment. 4. TREASURY STOCK On February 5, 2004, the Company announced a share repurchase program, commencing with an initial buyback of up to $100 million over the two-year period ending December 31, 2005. This program was approved by the Company's Board of Directors. During the six months ended June 30, 2004 the Company spent $19.6 million on the repurchase of 458,400 shares at an average price of $42.67, but had suspended the program upon commencement of the investigation. See Part II Item 2 regarding details of the share repurchase program for the three months ended June 30, 2004. As of June 30, 2004, 127,241 shares held in treasury were reissued for the exercise of stock options. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands, except share data, unless otherwise stated) 5. EARNINGS PER COMMON SHARE In accordance with the treasury stock method, the Company has included the following equivalent shares in the calculation of diluted weighted average number of common shares for the three and six month periods ended June 30, relating to outstanding stock options. 2004 2003 ------------- ------------- Three months ended.......................... 1,281,004 1,032,494 Six months ended............................ 1,280,247 964,002 Outstanding options to purchase 598,850 and 1,544,650 shares of common stock for the three month periods ended June 30, 2004 and 2003 respectively, and options to purchase 927,400 and 1,911,375 shares of common stock for the six month periods ended June 30, 2004 and 2003 respectively, have been excluded from the calculation of diluted weighted average number of common shares on the grounds that such options would be anti-dilutive. 6. NET PERIODIC BENEFIT COST Net periodic cost for the Company's defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the three months ended June 30:
Non-U.S. Pension Other U.S. ---------------- ---------- U.S Pension Benefits Benefits Post-retirement benefits -------------------- -------- ------------------------ 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Service cost, net.................... $ 127 $ 134 $ 3,797 $ 3,783 $ 76 $ 6 Interest cost on projected benefit obligations................ 1,515 1,638 4,124 4,722 404 469 Expected return on plan assets....... (1,597) (1,558) (5,182) (5,824) - - Recognition of actuarial losses (gains)............................ 570 531 (398) 375 (210) (22) ------ -------- ------- -------- ------- ------ Net periodic pension cost............ $ 615 $ 745 $ 2,341 $ 3,056 $ 270 $ 453 ====== ======== ======= ======== ======= ======
Net periodic cost for the Company's defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the six months ended June 30:
Non-U.S. Pension Other U.S. ---------------- ---------- U.S Pension Benefits Benefits Post-retirement benefits -------------------- -------- ------------------------ 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Service cost, net.................... $ 254 $ 268 $ 7,346 $ 7,343 $ 153 $ 11 Interest cost on projected benefit obligations................ 3,031 3,537 8,385 9,311 926 537 Expected return on plan assets....... (3,195) (3,116) (10,464) (11,289) - - Recognition of actuarial losses (gains)............................ 1,139 1,062 (807) 515 (424) (43) Curtailment gain on plan freeze...... - - - - - (1,330) ------ ------- ------- -------- ------- ------ Net periodic pension cost............ $1,229 $ 1,751 $ 4,460 $ 5,880 $ 655 $ (825) ====== ======== ======= ======== ======= ======
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands, unless otherwise stated) 6. NET PERIODIC BENEFIT COST (CONTINUED) As previously disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2003, the Company expects to make normal employer pension contributions of approximately $11.4 million to its non-U.S. defined benefit pension plans and $2.4 million to its U.S. post-retirement medical plan during the year ended December 31, 2004. The Company may make additional voluntary contributions to its pension plans from time to time. 7. OTHER CHARGES (INCOME), NET Other charges (income), net consists primarily of charges related to the Company's restructuring programs, interest income, (gains) losses from foreign currency transactions, (gains) losses from sales of assets and other items. As noted in previous filings, in accordance with U.S. GAAP, the restructuring charge taken in the second quarter of 2002 related to the exit of our French manufacturing facility was limited to the minimum contractual payment required by French law. During the three months ended March 31, 2003, the Company recorded a restructuring charge of $5.4 million ($3.8 million after tax). This charge comprised the additional employee-related costs resulting from final settlement of the social plan negotiated with the French workers' council during the first quarter of 2003. The Company's significant restructuring programs were substantially completed at December 31, 2003. 8. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, for the three and six month periods ended June 30 were as follows:
Three months ended June 30, Six months ended June 30, 2004 2003 2004 2003 -------------------------- ------------------------- Net earnings.......................... $ 28,418 $ 25,780 $ 47,040 $ 38,715 Other comprehensive income: Change in currency translation adjustment......................... 4,026 9,578 (1,254) 9,152 Unrealized gain on cash flow hedging arrangements............... - 1,306 - 2,185 -------- --------- --------- -------- $ 32,444 $ 36,664 $ 45,786 $ 50,052 ======== ========= ========= ========
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 9. SEGMENT REPORTING The Company has six reportable segments: Principal U.S. Operations, Other Western European Operations, Principal Central European Operations, Swiss R&D and Manufacturing Operations, Asia and Other. In previous reporting periods, results from Asia were included within the Other operating segment. During the three months ended December 31, 2003, the Company's reporting units in Asia exceeded the quantitative threshold for disclosure as a separate operating segment. Segment disclosures for all periods in 2003 have been reclassified accordingly. As the segments below have different mixes of external customer and inter-segment sales, changes in transfer pricing can impact the profitability of individual segments from year to year. However, such changes have no impact on consolidated profitability. The Company evaluates segment performance based on Segment Profit (gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest expense and other charges). The following tables show the operations of the Company's operating segments:
Net sales Net sales For the three months to external to other Total Segment Goodwill, ended June 30, 2004 customers segments net sales profit net ------------------- ------------- ---------- --------- ------- --------- Principal U.S. Operations .......... $111,640 $ 7,854 $ 119,494 $ 18,047 $ 202,284 Other Western European Operations .......... 80,119 6,205 86,324 5,782 85,273 Principal Central European Operations. 47,623 15,654 63,277 5,701 26,322 Swiss R&D and Mfg Operations .......... 11,933 51,126 63,059 10,893 23,010 Asia .................. 42,515 12,971 55,486 9,784 10,175 Other (a) ............. 50,662 11,672 62,334 5,602 77,376 Eliminations and Corporate (b) ....... - (105,482) (105,482) (9,074) - --------- --------- --------- --------- --------- Total ................. $ 344,492 $ - $ 344,492 $ 46,735 $ 424,440 ========= ========= ========= ========= =========
Net sales Net sales For the six months to external to other Total Segment ended June 30, 2004 customers segments net sales profit ------------------- ------------- ---------- --------- ------- Principal U.S. Operations........... $ 212,645 $ 16,239 $ 228,884 $ 31,622 Other Western European Operations........... 159,269 11,422 170,691 8,181 Principal Central European Operations.. 95,245 30,531 125,776 10,918 Swiss R&D and Mfg. Operations........... 24,252 96,898 121,150 20,553 Asia................... 81,244 25,410 106,654 18,771 Other (a).............. 90,546 21,994 112,540 6,460 Eliminations and Corporate (b)........ - (202,494) (202,494) (16,958) --------- --------- --------- --------- Total................. $ 663,201 $ - $ 663,201 $ 79,547 ========= ========= ========= =========
Footnotes on following page. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 9. SEGMENT REPORTING (CONTINUED)
Net sales Net sales For the three months to external to other Total Segment Goodwill, ended June 30, 2003 customers segments net sales profit net ------------------- ------------- ---------- --------- ------- --------- Principal U.S. Operations.......... $ 107,827 $ 9,909 $ 117,736 $ 19,126 $ 202,781 Other Western European Operations.......... 77,972 5,713 83,685 7,331 77,161 Principal Central European Operations. 44,757 15,699 60,456 5,553 25,153 Swiss R&D and Mfg. Operations.......... 12,553 43,027 55,580 8,857 21,869 Asia.................. 32,990 9,979 42,969 7,013 8,832 Other (a)............. 45,264 8,659 53,923 1,881 78,182 Eliminations and Corporate (b)....... - (92,986) (92,986) (6,696) - --------- --------- --------- -------- --------- Total................. $ 321,363 $ - $ 321,363 $ 43,065 $ 413,978 ========= ========= ========= ========= =========
Net sales Net sales For the six months to external to other Total Segment ended June 30, 2003 customers segments net sales profit(c) ------------------- ------------- ---------- --------- --------- Principal U.S. Operations........... $ 208,312 $ 18,756 $ 227,068 $ 33,572 Other Western European Operations.......... 147,179 10,811 157,990 4,041 Principal Central European Operations. 85,901 28,872 114,773 10,235 Swiss R&D and Mfg. Operations.......... 24,770 82,925 107,695 16,634 Asia.................. 63,485 17,176 80,661 12,208 Other (a)............. 83,524 17,343 100,867 1,755 Eliminations and Corporate (b)....... - (175,883) (175,883) (10,441) --------- --------- --------- --------- Total................. $ 613,171 $ - $ 613,171 $ 68,004 ========= ========= ========= ========= (a) Other includes reporting units in Eastern Europe, Latin America and units from other countries that do not meet the quantitative thresholds, but meet the majority of the aggregation criteria of SFAS 131. (b) Eliminations and Corporate includes the elimination of intersegment transactions and certain corporate expenses, which are not included in the Company's operating segments. (c) The results for the six months ended June 30, 2003 include a restructuring charge of $5.4 million recorded in the Other Western European Operations segment. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 9. SEGMENT REPORTING (CONTINUED) Non-GAAP Financial Measures The Company supplements U.S. GAAP results with non-GAAP financial measures. The principal non-GAAP financial measure used is Adjusted Operating Income. Adjusted Operating Income is defined as gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest, other charges and taxes. The most directly comparable U.S. GAAP financial measure is net earnings. The Company believes that Adjusted Operating Income is important supplemental information for investors. Adjusted Operating Income, or Segment Profit, is used internally as the principal profit measurement by our segments in their reporting to management. The Company uses this measure because it excludes amortization, interest, other charges and taxes, which are not allocated to the segments. On a consolidated basis, the Company also believes Adjusted Operating Income is an important supplemental method of measuring profitability. It is used internally by senior management for measuring profitability and setting performance targets for managers and has historically been used as one of the means of publicly providing guidance on possible future results. The Company also believes that Adjusted Operating Income is an important performance measure because it provides a measure of comparability to other companies with different capital or legal structures, which accordingly may be subject to disparate interest rates and effective tax rates, and to companies which may incur different amortization expenses or impairment charges related to intangible assets. Adjusted Operating Income is used in addition to and in conjunction with results presented in accordance with U.S. GAAP. Adjusted Operating Income is not intended to represent operating income under U.S. GAAP and should not be considered as an alternative to net earnings as an indicator of the Company's performance because of the following limitations. METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 9. SEGMENT REPORTING (CONTINUED) Limitations of the non-GAAP measure, Adjusted Operating Income The non-GAAP measure, Adjusted Operating Income, has certain material limitations as follows: o It does not include interest expense. Because the Company has borrowed money to finance some of its operations, interest is a necessary and ongoing part of the Company's costs and has assisted the Company in generating revenue. Therefore any measure that excludes interest expense has material limitations; o It does not include taxes. Because payment of taxes is a necessary and ongoing part of the Company's operations, any measure that excludes taxes has material limitations; o It excludes amortization expense and other charges. Because these items are recurring, any measure that excludes them has material limitations. Adjusted Operating Income should not be relied upon to the exclusion of U.S. GAAP financial measures, but reflects an additional measure of comparability and means of viewing aspects of the Company's operations that, when viewed together with U.S. GAAP results and the accompanying reconciliation to net earnings, provides a more complete understanding of factors and trends affecting the business. Because Adjusted Operating Income is not standardized, it may not be possible to compare with other companies' non-GAAP financial measures having the same or a similar name. The Company strongly encourages investors to review these financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. A reconciliation of Adjusted Operating Income, or Segment Profit, to net earnings for the three and six month periods ended June 30 follows:
Three months ended Six months ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Adjusted operating income after restructuring charge (a)................ $ 46,735 $ 43,065 $ 79,547 $ 68,004 Amortization.............................. 2,896 2,840 5,704 5,667 Interest expense.......................... 3,272 3,671 6,738 7,576 Other charges, net (excluding restructuring charge).................... (32) (276) (96) (545) Provision for taxes....................... 12,181 11,050 20,161 16,591 --------- --------- --------- --------- Net earnings.............................. $ 28,418 $ 25,780 $ 47,040 $ 38,715 ========= ========= ========= ========== ------------------ (a) Adjusted Operating Income for the six months ended June 30, 2003 includes a restructuring charge of $5,444 primarily related to headcount reductions and manufacturing transfers. See Note 7 to the interim consolidated financial statements.
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 - UNAUDITED (CONTINUED) (In thousands unless otherwise stated) 10. RELATED PARTY TRANSACTIONS As part of the Rainin acquisition, the Company entered into an agreement to lease certain property from the former owner and current General Manager of Rainin. During the three and six months ended June 30, 2004 and 2003, the Company made lease payments in respect of this agreement of $0.5 million and $0.5 million respectively, and $1.1 million and $1.0 million respectively. In addition, Rainin continued to purchase certain products from its former owner. During the three and six months ended June 30, 2004 and 2003, the volume of these purchases was $0.3 million and $0.4 million respectively, and $0.6 million and $0.7 million respectively. The agreement to purchase these products will be terminated during the third quarter of 2004. This termination is not expected to have a material impact on the Company's consolidated financial statements. All of the Company's transactions with the former owner of Rainin are in the normal course of business. 11. CONTINGENCIES The Company is party to various legal proceedings, including certain environmental matters, incidental to the normal course of business. Management does not expect that any of such proceedings will have a material adverse effect on the Company's financial condition or results of operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Interim Consolidated Financial Statements included herein. GENERAL Our interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a basis which reflects the interim consolidated financial statements of Mettler-Toledo International Inc. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004. RESULTS OF OPERATIONS - CONSOLIDATED The following tables set forth certain items from our interim consolidated statements of operations for the three and six month periods ended June 30, 2004 and 2003 (amounts in thousands).
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (UNAUDITED) % (UNAUDITED) % (UNAUDITED) % (UNAUDITED) % Net sales Products................ $ 266,448 100.0 $ 248,103 100.0 $ 509,684 100.0 $ 472,260 100.0 Service................. 78,044 100.0 73,260 100.0 153,517 100.0 140,911 100.0 --------- ----- --------- ----- ---------- ----- --------- ----- Total net sales............ 344,492 100.0 321,363 100.0 663,201 100.0 613,171 100.0 Gross profit Products................ 139,664 52.4 130,573 52.6 264,620 51.9 240,974 51.0 Service................. 28,255 36.2 25,838 35.3 53,575 34.9 49,095 34.8 --------- ----- --------- ----- ---------- ----- --------- ----- Total gross profit......... 167,919 48.7 156,411 48.7 318,195 48.0 290,069 47.3 Research and development... 20,164 5.8 19,338 6.0 40,819 6.2 37,808 6.2 Selling, general and administrative........... 101,020 29.3 94,008 29.3 197,829 29.8 178,813 29.1 Restructuring charge....... - - - - - - 5,444 0.9 Adjusted operating --------- ----- --------- ----- ---------- ----- --------- ----- income ............... 46,735 13.6 43,065 13.4 79,547 12.0 68,004 11.1 Amortization............... 2,896 0.8 2,840 0.9 5,704 0.9 5,667 0.9 Interest expense........... 3,272 1.0 3,671 1.1 6,738 1.0 7,576 1.3 Other charges (income), net (32) (0.0) (276) (0.1) (96) (0.0) (545) (0.1) --------- ----- --------- ----- ---------- ----- --------- ----- Earnings before taxes... 40,599 11.8 36,830 11.5 67,201 10.1 55,306 9.0 Provision for taxes........ 12,181 3.6 11,050 3.5 20,161 3.0 16,591 2.7 --------- ----- --------- ----- ---------- ----- --------- ----- Net earnings............ $ 28,418 8.2 $ 25,780 8.0 $ 47,040 7.1 $ 38,715 6.3 ========= ===== ========= ===== ========== ===== ========= =====
Net sales Net sales in U.S. dollars increased 7% and 8% respectively, during the three and six months ended June 30, 2004, compared to the corresponding periods in 2003, of which 3% and 5% respectively, was due to currency exchange rate fluctuations. Market conditions remain generally consistent with our assessment at the end of 2003. Although conditions in Europe appear to have stabilized, they remain generally quite weak and we continue to believe it will take some time before the European economy gains strength, especially for our industrial applications. However, we are starting to see improved momentum in the Americas, and Asia remains strong. In total, sales of products increased 7% and 8% respectively, during the three and six months ended June 30, 2004, of which 3% and 5% respectively, was due to currency exchange rate fluctuations. Service revenues (including spare parts) increased 7% and 9% respectively, during the three and six months ended June 30, 2004, of which 4% and 6% respectively, was due to currency exchange rate fluctuations. We experienced increased local currency sales in our core laboratory markets during the three and six months ended June 30, 2004, compared to the corresponding periods in 2003, principally driven by continued market acceptance of our new analytical and precision balances, and improved market conditions. In addition, following the softness we encountered throughout 2003 and the early part of 2004, sales of drug discovery products were very strong in the three months ended June 30, 2004, compared to the corresponding period in 2003. In our industrial and packaging markets, local currency sales in the three and six months ended June 30, 2004, were generally consistent with the corresponding periods in 2003. We continue to see an improvement in our core industrial business, although sales of transportation and logistics products were down relative to strong project activity in 2003. While long-term fundamentals of the market for our transportation and logistics products are strong, the timing of projects can impact the year-over-year comparison significantly. In our retail markets, local currency sales increased during the three and six months ended June 30, 2004, compared to the corresponding periods in 2003, as customer spending patterns continue to improve relative to weak activity last year. This is driven by the roll out of new products, based on our global platform for retail scales and price/labeling equipment. Growth in service revenues in both the three and six months ended June 30, 2004 was generated by our consultative based value-added services approach, including provision of instrument qualification and asset management services and training, rather than by increased sales of spare parts. Gross margin The increase in gross margin for products for the six months ended June 30, 2004 reflects continuing benefits from our cost rationalization and product transfer initiatives of the last two years, as well as the impact of improving sales volume leveraging our fixed production costs. For the three month period, these trends were offset by an unfavorable sales mix, higher raw material costs and a negative currency impact relative to the second quarter in 2003. The increase in gross margin for services (including spare parts) in the three month period reflects the expansion of higher margin regulatory compliance service sales and improved productivity. In the six month period, this effect is offset by the impact of voluntary investments in our field service organization, particularly during the first quarter. Research and development and selling, general and administrative expenses Research and development expenses increased 4% and 8% respectively, during the three and six months ended June 30, 2004, of which 3% and 5% respectively, was due to currency exchange rate fluctuations. The increased spending reflects investment across most of our major product lines. Selling, general and administrative expenses increased 7% and 11% respectively, during the three and six months ended June 30, 2004, of which 3% and 6% respectively, was due to currency exchange rate fluctuations. The remaining cost increases include costs of $1.2 million incurred in the second quarter, related to an internal investigation into allegations made by an employee with respect to the Company and various company processes, together with other operational increases. Interest expense, other charges (income) net, taxes and net earnings Interest expense decreased 11% in both the three and six months ended June 30, 2004, compared to the corresponding periods in 2003, principally due to lower average borrowings during 2004. During the three months ended March 31, 2003, we incurred a restructuring charge of $5.4 million ($3.8 million after tax) related to the final union settlement on the closure of our French manufacturing facility. In the consolidated statements of operations, this restructuring charge is included within Other charges (income), net. The provision for taxes is based upon our projected 30% annual effective tax rate for the related periods. Net earnings increased 10% and 22%, respectively in the three and six months ended June 30, 2004, compared to the corresponding periods in 2003. The increase reflects improving sales volume in 2004 and the benefits from our cost rationalization initiatives, as well as the impact of the related restructuring charge of $3.8 million (after tax) recorded in 2003. NON-GAAP FINANCIAL MEASURES We supplement our U.S. GAAP results with non-GAAP financial measures. The principal non-GAAP financial measure we use is Adjusted Operating Income. We define Adjusted Operating Income as gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest, other charges and taxes. The most directly comparable U.S. GAAP financial measure is net earnings. We believe that Adjusted Operating Income is important supplemental information for investors. Adjusted Operating Income, or segment profit, is used internally as the principal profit measurement by our segments in their reporting to management. We use this measure because it excludes amortization, interest, other charges and taxes, which are not allocated to the segments. On a consolidated basis, we also believe Adjusted Operating Income is an important supplemental method of measuring profitability. It is used internally by senior management for measuring profitability, setting performance targets for managers and has historically been used as one of the means of publicly providing guidance on possible future results. We also believe that Adjusted Operating Income is an important performance measure because it provides a measure of comparability to other companies with different capital or legal structures, which accordingly may be subject to disparate interest rates and effective tax rates, and to companies which may incur different amortization expenses or impairment charges related to intangible assets. Adjusted Operating Income is used in addition to and in conjunction with results presented in accordance with U.S. GAAP. Adjusted Operating Income is not intended to represent operating income under U.S. GAAP and should not be considered as an alternative to net earnings as an indicator of our performance because of the following limitations. Limitations of our non-GAAP measure, Adjusted Operating Income Our non-GAAP measure, Adjusted Operating Income, has certain material limitations as follows: o It does not include interest expense. Because we have borrowed money to finance some of our operations, interest is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore any measure that excludes interest expense has material limitations; o It does not include taxes. Because payment of taxes is a necessary and ongoing part of our operations, any measure that excludes taxes has material limitations; o It excludes amortization expense and other charges. Because these items are recurring, any measure that excludes them has material limitations. Adjusted Operating Income should not be relied upon to the exclusion of U.S. GAAP financial measures, but reflects an additional measure of comparability and means of viewing aspects of our operations that, when viewed together with our U.S. GAAP results and the accompanying reconciliation to net earnings, provides a more complete understanding of factors and trends affecting our business. Because Adjusted Operating Income is not standardized, it may not be possible to compare with other companies' non-GAAP financial measures having the same or a similar name. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. Our Adjusted Operating Income increased 9% and 17% during the three and six months ended June 30, 2004 compared to the corresponding periods in 2003. The increases reflect improving sales volume in 2004 and the benefits from our cost rationalization initiatives, as well as the impact of the related restructuring charge of $5.4 million recorded in 2003. This performance was achieved while we continued to invest in product development and in our distribution and field service processes. RESULTS OF OPERATIONS - BY OPERATING SEGMENT Principal U.S. Operations
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $111,640 $107,827 4% $212,645 $208,312 2% Segment profit.. $ 18,047 $19,126 -6% $ 31,622 $ 33,572 -6% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The increase in sales to external customers in both the three and six month periods reflects solid results for our core laboratory, packaging and retail products. These trends were partially offset by reduced sales in our U.S. industrial business, which was down relative to strong 2003 project activity, particularly for transportation and logistics products. The decrease in segment profit in both the three and six month periods reflects additional costs, particularly in the first quarter, related to product launches and a North American sales meeting, which we hold every five years, as well as the impact of our product transfer initiatives on this particular segment. These trends are partially offset by the impact of increased sales volume. Other Western European Operations (including France, U.K., Italy and Spain)
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $ 80,119 $ 77,972 3% $ 159,269 $ 147,179 8% Segment profit.. $ 5,782 $ 7,331 -21% $ 8 ,181 $ 4,041 102% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The increase in U.S. dollar sales to external customers in the three and six month periods includes increases of 7% and 11% respectively, due to currency exchange rate fluctuations. These results reflect lower sales of industrial and packaging products, which were down relative to strong 2003 project activity, particularly for transportation and logistics. These trends were partially offset by solid results for core laboratory and retail products, where customer spending patterns continue to improve relative to weak activity last year. The decrease in segment profit for the three month period is principally due to the reduced sales volume. For the six month period, the impact of lower sales is offset by the restructuring charge of $5.4 million, recorded in the first quarter of 2003. Principal Central European Operations (including Germany)
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $ 47,623 $ 44,757 6% $ 95,245 $ 85,901 11% Segment profit.. $ 5,701 $ 5,553 3% $ 10,918 $ 10,235 7% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The increase in U.S. dollar sales to external customers in the three and six month periods includes increases of 5% and 10% respectively, due to currency exchange rate fluctuations. These results reflect solid results for core laboratory and retail products, where customer spending patterns continue to improve relative to weak activity last year. These trends were partially offset by lower sales of industrial and packaging products. The increase in segment profit is principally a result of the sales trends identified above. Swiss R&D and Manufacturing Operations
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $ 11,933 $ 12,553 -5% $ 24,252 $ 24,770 -2% Segment profit.. $ 10,893 $ 8,857 23% $ 20,553 $ 16,634 24% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The decrease in U.S. dollar sales to external customers in the three and six month periods includes increases of 4% and 6% respectively, due to currency exchange rate fluctuations. These results reflect a reduction in sales of electronic components. These trends were partially offset by increased sales of our core laboratory products. The increase in segment profit in both periods is principally a result of the impact of increased sales to other segments of core laboratory products, in particular laboratory balances. Asia
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $42,515 $32,990 29% $81,244 $63,485 28% Segment profit.. $ 9,784 $ 7,013 40% $18,771 $12,208 54% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The increase in U.S. dollar sales to external customers in the three and six month periods includes increases of 3% and 4% respectively, due to currency exchange rate fluctuations. These results reflect strong sales performance throughout the region for most of our product lines, but in particular for industrial and laboratory products. China was particularly strong, while Japan remains relatively weak. The increase in segment profit reflects the leverage of our fixed cost structure in conjunction with strong sales performance. Other
Three months ended June 30 Six months ended June 30 2004 2003 % 1) 2004 2003 % 1) ---- ---- ---- ---- ---- ---- Net sales....... $50,662 $45,264 12% $90,546 $83,524 8% Segment profit.. $ 5,602 $ 1,881 198% $ 6,460 $ 1,755 268% 1) Represents U.S. dollar growth (decline) for net sales and segment profit.
The increase in U.S. dollar sales to external customers in the three and six month periods includes increases of 2% and 3% respectively due to currency exchange rate fluctuations. These results reflect strong sales of our drug discovery products, following a weak first quarter. In addition, the three and six month periods both reflect modest sales growth in our Russian and Eastern European markets. The increase in segment profit reflects the sales growth trends in regions highlighted above, as well as the benefits of our cost restructuring initiatives, including those related to drug discovery. LIQUIDITY AND CAPITAL RESOURCES Cash flow statistics
Six Months ended Six Months ended Increase June 30, 2004 June 30, 2003 (decrease)% ---------------- ----------------- ----------- Net cash provided by operating activities......................... $ 74,923 $ 39,391 90% Cash flows from investing activities Acquisitions....................... (991) (1,972) (50)% Capital expenditures............... $(10,667) $ (10,602) 1%
The increase in net cash provided by operating activities in the six months ended June 30, 2004 compared to the corresponding period in 2003, is principally attributable to improved management of operating assets and liabilities, including working capital, and lower restructuring payments of $2.7 million in 2004 compared to $8.5 million in 2003. We continue to explore potential acquisitions. In connection with any acquisition we may incur additional indebtedness. In addition to the acquisition costs already incurred, the terms of certain of our acquisitions in 2003 and earlier years provide for possible additional earn-out payments. Such earn-out payments, if any, will not be material to our financial position. Capital expenditures are a significant use of funds and are made primarily for machinery, equipment and the purchase and expansion of facilities. The increase in capital expenditures during the three months ended June 30, 2004, as compared to the corresponding period in 2003, is primarily attributable to investment in our manufacturing facilities in the U.K. and China. We expect capital expenditures to increase as our business grows, and to fluctuate as currency exchange rates change. Net debt
June 30, 2004 Other principal trading U.S. dollar currencies Total ----------- ---------- ----- $150m Senior notes (net of unamortized discount)................................ $ 149,259 $ - $ 149,259 Credit facility............................ - 23,547 23,547 ---------- --------- --------- Total long-term debt................. 149,259 23,547 172,806 Other local arrangements................... 8,148 10,652 18,800 ---------- --------- --------- Total debt........................... $ 157,407 $ 34,199 191,606 Less: Cash and cash equivalents............ (47,613) --------- Total net debt....................... $ 143,993 =========
As of June 30, 2004, we had $268.4 million of availability remaining under our credit facility. Changes in exchange rates between the currencies in which we generate cash flows and the currencies in which our borrowings are denominated affect our liquidity. In addition, because we borrow in a variety of currencies, our debt balances fluctuate due to changes in exchange rates. We currently believe that cash flow from operating activities, together with liquidity available under our credit facility and local working capital facilities, will be sufficient to fund currently anticipated working capital needs and capital spending requirements for at least several years, but there can be no assurance that this will be the case. Share repurchase program On February 5, 2004, we announced a share repurchase program, commencing with an initial buyback of up to $100 million over the two-year period ending December 31, 2005. During the six months ended June 30, 2004 we spent $19.6 million on the repurchase of 458,400 shares at an average price of $42.67, but had suspended the program upon commencement of the investigation. Now that the financial aspects of the investigation are complete, we will re-launch the program. INVESTIGATION UPDATE On August 9, 2004, we announced the completion of the financial aspects of our previously disclosed investigation. Our Audit Committee and Board of Directors have concluded that there will be no change to our financial statements. The Audit Committee's investigation covered a number of issues, including the adequacy of our information systems in North America for tracking operating performance and reporting financial results; the manner in which certain inventory write-downs were identified and recorded in 2002 and 2003; the manner in which certain reserves were evaluated and recorded; and the operation of internal controls. Issues that are continuing to be reviewed do not involve financial statements or financial reporting and will not have a material impact on the Company's financial statements. The Audit Committee retained independent outside counsel and forensic accountants to conduct the investigation. Based on the investigation, the Audit Committee and the Board have determined that it would be in the best interests of the Company to make changes in the leadership for the oversight and control of its financial operations to correct the "tone at the top" and ensure it is consistent with the Board's commitment to maintaining strong corporate governance. The Company will enhance the accounting organization, both by adding personnel to that function and by increasing training for all members of the organization. Finally, William P. Donnelly, who was Chief Financial Officer (CFO) from 1997 to mid-2002, has agreed to return as CFO effective immediately. EFFECT OF CURRENCY ON RESULTS OF OPERATIONS Because we conduct operations in many countries, our operating income can be significantly affected by fluctuations in currency exchange rates. Swiss franc-denominated expenses represent a much greater percentage of our operating expenses than Swiss franc-denominated sales represent of our net sales. In part, this is because most of our manufacturing costs in Switzerland relate to products that are sold outside of Switzerland. Moreover, a substantial percentage of our research and development expenses and general and administrative expenses are incurred in Switzerland. Therefore, if the Swiss franc strengthens against all or most of our major trading currencies (e.g., the U.S. dollar, the euro, other major European currencies and the Japanese yen), our operating profit is reduced. We also have significantly more sales in European currencies (other than the Swiss franc) than we have expenses in those currencies. Therefore, when European currencies weaken against the U.S. dollar and the Swiss franc, it also decreases our operating profits. Accordingly, the Swiss franc exchange rate to the euro is an important cross-rate monitored by the Company. We estimate that a 1% strengthening of the Swiss franc against the euro would result in a decrease in our earnings before tax of $0.8 million to $1.2 million on an annual basis. In addition to the effects of exchange rate movements on operating profits, our debt levels can fluctuate due to changes in exchange rates, particularly between the U.S. dollar and the Swiss franc. Based on our outstanding debt at June 30, 2004, we estimate that a 10% weakening of the U.S. dollar against the currencies in which our debt is denominated, would result in an increase of approximately $3.8 million in the reported U.S. dollar value of the debt. NEW ACCOUNTING PRONOUNCEMENTS See Note 2 to the interim consolidated financial statements. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS Some of the statements in this quarterly report constitute "forward-looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. These statements relate to future events or our future financial performance, including, but not limited to, strategic plans, potential growth opportunities in both developed markets and emerging markets, planned research and development efforts, product introductions and innovation, manufacturing capacity, expected customer demand, meeting customer expectations, planned operational changes and productivity improvements, research and development expenditures, competitors' product development, expected capital expenditures, future cash sources and requirements, liquidity, impact of taxes, expected compliance with laws, impact of environmental costs, expected cost savings and benefits of completed or future acquisitions, which involve known and unknown risks, uncertainties and other factors that may cause our or our businesses' actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential" or "continue" or the negative of those terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors. Moreover, we do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. Unless otherwise required by applicable laws, we disclaim any intention or obligation to publicly update or revise any of the forward-looking statements after the date of this quarterly report to conform them to actual results, whether as a result of new information, future events, or otherwise. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption "Factors affecting our future operating results" in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended December 31, 2003, which describes risks and factors that could cause results to differ materially from those projected in those forward-looking statements. We caution the reader that the above list of risks and factors that may affect results addressed in the forward-looking statements may not be exhaustive. Other sections of this quarterly report and other documents incorporated by reference may describe additional risks or factors that could adversely impact our business and financial performance. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict these new risk factors, nor can it assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2004, there was no material change in the information provided under Item 7A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Item 4. CONTROLS AND PROCEDURES (a) Our management carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report under the supervision and with the participation of our disclosure committee, our CFO and CEO. Based upon that evaluation, our CFO and CEO concluded that our disclosure controls and procedures are effective in permitting us to comply with our disclosure obligations and ensure that the material information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our controls over financial reporting. (b) As of December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002 ("the Act") will require the Company to include an internal control report of management in its Annual Report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of internal control over financial reporting, (3) management's assessment of the effectiveness of internal control over financial reporting as of the end of its most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal control over financial reporting. Management acknowledges its responsibility for internal controls over financial reporting and seeks to continually improve those controls. In addition, in order to achieve compliance with Section 404 of the Act within the prescribed period, the Company has, since 2003, been engaged in a process to document and evaluate its internal controls over financial reporting. In this regard, management has dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. The Company believes its process for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act. During the second quarter of 2004, the Company commenced testing its internal controls. The Company's documentation and testing to date have identified certain gaps in the design and effectiveness of internal controls over financial reporting that the Company is in the process of remediating. In addition, the company's recent changes in its finance organization may have short-term consequences to its internal controls as individuals assume new responsibilities. The Section 404 certification process requires the Company to complete a number of processes and procedures before the end of the current year, and there can be no assurance that it will be able to complete all these required processes and procedures in the required timeframe. The Company has also brought in additional resources to aid it in accomplishing these objectives, which will increase its costs. Given the risks inherent in the design and operation of internal controls over financial reporting, the Company can provide no assurance as to its, or its independent auditors, conclusions at December 31, 2004 with respect to the design and effectiveness of its internal controls over financial reporting. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. None Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Issuer Purchases of Equity Securities
---------------------------------------------------------------------------------- (a) (b) (c) (d) Total Number Maximum Number of Shares (or Purchased as Approximate Dollar Part of Value) of Total Average Publicly Shares that Number of Price Paid Announced May Yet Be Purchased Shares per Plans Under the Plans Period Purchased Share or Programs or Programs ----------------------------------------------------------------------------------- April 1, to April 30, 2004 - - - $ 83,409 May 1 to May 31, 2004 67,100 $ 44.40 67,100 $ 80,428 June 1 to June 30, 2004 - - - $ 80,428 Total 67,100 $ 44.40 67,100 $ 80,428
The Company has only one share repurchase program. Under this program, announced on February 5, 2004, the Company is authorized to buy back up to $100 million of equity shares over the two-year period ending December 31, 2005. During the six months ended June 30, 2004 the Company spent $19.6 million on the repurchase of 458,400 shares at an average price of $42.67, but had suspended the program upon commencement of the investigation. Now that the financial aspects of the investigation are complete, the Company will re-launch the program. Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Mettler-Toledo International Inc. annual meeting of stockholders was held on May 6, 2004. At the meeting, the following matters were submitted to a vote of stockholders: the election of directors, the ratification of the appointment of the company's independent auditors, and the approval of the 2004 Equity Incentive Plan. As of March 8, 2004, the record date for the annual meeting, there were 44,497,811 shares of common stock entitled to vote at the meeting. The holders of 40,857,737 shares were represented in person or in proxy at the meeting, constituting a quorum. The vote with respect to the matters submitted to stockholders was as follows: Withheld Matter For or Against Abstained ------ --- ---------- --------- Election of Directors Robert F. Spoerry 39,887,647 970,090 Philip Caldwell 40,194,296 663,441 John T. Dickson 39,705,425 1,152,312 Philip H. Geier 39,710,617 1,147,120 John D. Macomber 40,122,759 734,978 Hans Ulrich Maerki 40,614,944 242,793 George M. Milne 40,622,609 235,128 Thomas P. Salice 38,437,282 2,420,455 Appointment of Independent Auditors 39,168,325 1,554,128 135,284 Approval of 2004 Equity Incentive Plan 30,087,734 6,484,933 165,295 Item 5. OTHER INFORMATION. None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED). (b) Reports on Form 8-K Date Furnished or Filed Item Reported ----------------------- ------------- July 22, 2004 Press release announcing second quarter 2004 sales and net debt SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Mettler-Toledo International Inc. Date: August 9, 2004 By: /s/ William P. Donnelly -------------------- William P. Donnelly Chief Financial Officer