10-K 1 doc1k10.txt ANNUAL REPORT United States Securities and Exchange Commission Washington, D.C. 20549 -------------------------------------------------------------------------------- Form 10-K (Mark One) |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 2000 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _______ to _______ Commission file number 0-22493 -------------------------------------------------------------------------------- Mettler-Toledo International Inc. (Exact name of registrant as specified in its charter) Delaware 13-3668641 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Im Langacher P.O. Box MT-100 CH 8606 Greifensee, Switzerland (Address of principal executive offices) (Zip Code) 011-41-1-944-22-11 (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE -------------------------------------------------------------------------------- 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 such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 16, 2001 there were 39,681,536 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant (based on the closing price for the Common Stock on the New York Stock Exchange on March 16, 2001) was approximately $1.655 billion. For purposes of this computation, shares held by affiliates and by directors of the Registrant have been excluded. Such exclusion of shares held by directors is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the Registrant. Documents Incorporated by Reference Document Part of Form 10-K Proxy Statement for 2001 Into which Incorporated Annual Meeting of Stockholders Part III METTLER-TOLEDO INTERNATIONAL INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 PART I ITEM 1. BUSINESS.........................................................1 ITEM 2. PROPERTIES......................................................23 ITEM 3. LEGAL PROCEEDINGS...............................................24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................25 ITEM 6. SELECTED FINANCIAL DATA.........................................26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............40 ITEM 11. EXECUTIVE COMPENSATION..........................................42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................................42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................................42 SIGNATURES....................................................................43 i Unless otherwise stated or where the context otherwise requires, references herein to we, our, the "Company" or "Mettler-Toledo" refer to Mettler-Toledo International Inc. and its direct and indirect subsidiaries. This Annual Report on Form 10-K includes forward-looking statements based on our current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties which could cause our actual results to differ materially from historical results or those anticipated and certain of which are beyond our control. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Exhibit 99.1 to this Report. We use the following registered and unregistered trademarks, which are found in this Report: APPLIED SYSTEMS, ASI, AVS, AX, BERGER, BERGER INSTRUMENTS, BOHDAN, CARGOSCAN, DELTARANGE, DIGITOL, FORMWEIGH, FREEWEIGH, FTIR, JAGUAR, JAGXTREME, LABMAX, LUTRANA, MENTOR SC, METTLER, METTLER-TOLEDO, MT-SHOP, MULTIMAX, MultiRange, MYRIAD, OHAUS, OPRA, SAFELINE, SPIDER, TESTUT, TESTUT-LUTRANA, THORNTON, TRIMWEIGH , TRUCKMATE, VIPER, WINBRIDGE. Unless otherwise indicated, industry data contained herein is derived from publicly available industry trade journals, government reports and other publicly available sources. We have not independently verified this data but we believe the data is reliable. Where such sources are not available, industry data is derived from our internal estimates, which we believe to be reasonable, but which cannot be independently verified. As used in this Annual Report, "$" refers to U.S. dollars, "CHF" or "SFr" refers to Swiss francs, "(pound)" refers to British pounds sterling and "CDN $" refers to Canadian dollars. PART I ITEM 1. BUSINESS Overview Mettler-Toledo is a leading global supplier of precision instruments. We are the world's largest manufacturer of weighing instruments for use in laboratory, industrial and food retailing applications. We hold top-three market positions in several related analytical instruments, and are a leading provider of automated chemistry systems used in drug and chemical compound discovery and development. In addition, we are the world's largest manufacturer and marketer of metal detection and other end-of-line inspection systems used in production and packaging. 1 We focus on the high value-added segments of our markets by providing innovative instruments that are often integrated into application-specific solutions for customers. We design our instruments not only to capture valuable data but also to facilitate the processing and transfer of this data into customers' management information systems. Competitive Strengths We believe our franchise has a number of competitive strengths, which allow us to compete successfully in high value-added segments: o Worldwide Market Leadership Positions. We believe that we have a leading position in each of our markets, and at least 80% of our product sales are from products that are the global leaders in their segment. In the weighing instruments market, we are the only company to offer products for laboratory, industrial and food retailing applications globally and we believe that we hold a market share more than twice that of our nearest competitor. We believe that in 2000 we had approximately 50% of the global market for laboratory balances, including the largest market share in each of Europe, the United States and Asia (excluding Japan), and the number two position in Japan. In the industrial and food retailing markets, we believe we have the largest market share in Europe and the United States. In Asia, we have a substantial industrial and food retailing business which has gained market share in recent years. This business is supported by our established manufacturing presence in China. In addition to our weighing franchise, most of our other sales come from product lines where we hold a top-three global position. o Global Brand and Reputation. The Mettler-Toledo brand name is identified worldwide with accuracy, reliability and innovation. Customers value these characteristics because most of our instruments significantly impact customers' product quality, productivity, costs and regulatory compliance. Furthermore, precision instruments generally constitute a small percentage of customers' aggregate expenditures. As a result, we believe customers focus on accuracy, product reliability, technical innovation, service quality, reputation and past experience when choosing precision instruments, rather than cost alone. We have one of the strongest brand names in the laboratory. In fact laboratory balances are often generically referred to as "Mettlers". The strength of this brand name has allowed us to successfully extend our laboratory balance line to include other analytical instruments. o Technological Innovation. We have a long and successful track record of innovation and remain at the forefront of technological development by focusing on the high value-added segments of our markets. We believe that we are the global leader in our industry in providing innovative measurement solutions to enhance our customers' processes. Our technological innovation efforts benefit from our knowledge of customer processes and related requirements, our manufacturing expertise in sensor technology, precision machining and electronics, as well as our strength in software development. o Comprehensive, High Quality Solution Offering. We offer a more comprehensive range of instruments and solutions than any of our key competitors. Our broad product line addresses a wide range of applications across and within many industries and regions. We manufacture our products in modern facilities, most of which are ISO 9001 certified. Our broad range of high quality products and the ability to provide integrated solutions 2 allows us to leverage our sales and service organization, product development activities and manufacturing and distribution capabilities. o Global Sales and Service. We have the only global sales and service organization among weighing instruments manufacturers, and one of the largest of any precision instrument company. We believe that this capability is a major competitive advantage. At December 31, 2000, this organization consisted of more than 4,000 employees organized into locally based, customer-focused groups that provide prompt service and support to our customers and distributors in virtually all major markets around the world. The local focus of our sales and service organization enables us to provide timely, responsive support to our customers worldwide and provides feedback for manufacturing and product development. When we survey our current and potential customers on their needs, they often name service as the most important criteria for choosing their instrument suppliers. In addition, we believe there is a trend in may of our customer segments to outsource service activities, which provides us a growth opportunity for the future. o Largest Installed Base. We believe that we have the largest installed base of weighing instruments in the world. From this installed base, we obtain service contracts that provide a strong, stable source of recurring service revenue. Service revenue represented approximately 18% of net sales in 2000, of which approximately half was derived solely from service contracts and repairs with the remainder derived from the sale of spare parts. We believe that our installed base of instruments represents a competitive advantage with respect to repeat purchases and purchases of other instruments we offer, because customers tend to remain with their existing suppliers. In addition, switching to a new instrument supplier entails additional costs to the customer for training, spare parts, service and systems integration requirements. Close relationships and frequent contact with our broad customer base also provide us with sales leads and new product and application ideas. o Geographical, Product and Customer Diversification. Our revenue base is diversified by geographic region, product range and customer. Many different industries, including pharmaceuticals, food processing, food retailing and chemicals, cosmetics and logistics utilize our broad product range. We supply customers all over the world, and no one customer accounted for more than 3% of net sales in 2000. Our diverse revenue base reduces our exposure to regional or industry-specific economic conditions, and our presence in many different geographic markets, product markets and industries enhances our attractiveness as a supplier to multinational customers. In 2000, our sales were $1.1 billion. Of this total 44% came from Europe, 44% from North and South America and 12% from Asia and other countries. For additional information regarding our segment disclosure, see Note 15 to our audited consolidated financial statements. 3 Growth Strategies We believe that our growth opportunities arise from our solutions approach to the principal challenges facing our customer base. These include the need for increased efficiency (for example, in accelerating time to market, achieving better yields, improving work processes and outsourcing non-core activities), the desire to integrate information captured by instruments into management information systems, the drive for ever higher quality products and services, including the need to adhere to stringent regulatory and industry standards, and the move towards globalization in all major customer groups. We continue to execute the business strategies that we outlined at the time of our buy-out in 1996, which are described below. The successful implementation of these strategies has allowed us to achieve a compound annual sales growth rate in local currencies of 11% since 1996, and to improve our Adjusted Operating Income (gross profit less research and development and selling, general and administrative expenses before amortization and non-recurring costs) from $57.8 million (6.8% of net sales) for 1996 to $142.8 million (13.0% of net sales) for 2000. Earnings per share increased from $0.14 in 1996 (pro forma for our buy-out) to $1.70 in 2000 before non-recurring items. In addition, our ratio of net debt to EBITDA decreased from 4.6 in 1996 to 1.6 in 2000 and our interest coverage increased from 2.3 to 8.4 during the same period. Our key growth strategies are as follows: Expanding Our Technology Leadership. We attribute a significant portion of our recent margin improvement to our research and development efforts. We intend to continue to invest in product innovation in order to provide technologically advanced products to our customers for existing and new applications. Over the last three years, we have invested approximately $160 million in research and development. Our research and development efforts fall into two categories: o technology advancements, which increase the value of our products. These may be in the form of enhanced functionality, new applications for our technologies, more accurate or reliable measurement, additional software capability or automation through robotics or other means o cost reductions, which reduce the manufacturing cost of our products through better overall design Our research and development efforts have contributed to a pipeline of innovative and new products, significant reductions in product costs and reduced time to market for our new products. Examples of recent product introductions include: o our new AX line of analytical balances, which gives scientists a wealth of new capabilities through its embedded software, Internet connection for remote monitoring and downloadable applications, and sensors that provide for single-handed operation, o our Internet-enabled industrial terminal, JagXtreme, which gives production managers the ability to perform monitoring and diagnostics off-site, including predicting equipment problems before they disrupt manufacturing processes and 4 o MultiMax, our high-throughput lab reactor, which combines multiple vessels with robotic and FTIR technologies that enable chemists to reduce process development time by running real-time chemical analysis. Increasing our Market Share and Capitalizing on Opportunities in Developed Markets. We recognize that to be a successful company, we must not only develop excellent solutions, but we must market and distribute them effectively--more effectively than our competitors. We view the key elements of our sales and service strategy as follows: o We utilize what we believe are the most sophisticated marketing and sales techniques in our industry. These techniques include the development and utilization of marketing databases. We develop these databases to better understand the full potential of our market by customer, location, industry, instrument and related application. We then utilize this data to more efficiently direct our field resources and complement our direct and distributor sales forces with targeted mailing and telemarketing campaigns to more fully exploit our market's potential. The transparency of the marketplace created through these databases allows us to more effectively identify penetration opportunities among customers and non-customers. o With our developing E-commerce project, we plan to create a configurable Internet portal which will allow customers, channel partners and suppliers to customize the information presented to them and to interact with us in the way they choose. Over time, we will develop a knowledge base which will allow us to gain deeper insight into our customers' patterns of behavior and give us better market transparency. From this, we will be able to refine our marketing efforts, gain quicker market penetration with new products and services, and also ultimately reduce our marketing costs. o Our service capabilities stretch across the globe and include around-the-clock availability of well-trained technicians, which is highly valued by our customers. We believe that no other competitor has our capabilities and that our service capabilities are a critical success factor for us. Customers are continuing to outsource non-core activities, such as service. In almost all cases, we can provide higher-quality service at lower costs than the customer can. Therefore, it is important that our customers have the right partner in these outsourcing efforts. Our value-added services encompass maintenance, calibration, traceability of weights, certification, asset management, software upgrades, data integration and training. o We also utilize a dual brand strategy for certain market segments to improve our overall market penetration. For example, we sell balances under the Ohaus brand name as an alternative to the Mettler-Toledo brand name in certain distribution channels, such as the education market. Capitalizing on Opportunities in Emerging Markets. We believe that emerging markets will continue to provide growth opportunities for us. These growth opportunities are being driven primarily by economic development and multinationals' use of additional and more sophisticated precision instruments as they shift production to emerging markets. In addition, we believe that over the long term, the trend toward international quality standards, the need to upgrade mechanical scales to electronic versions and the establishment of local production facilities by our multinational client base will add to the opportunities in emerging markets. 5 To date our emerging market expansion has primarily focused on Asia. In Asia (excluding Japan), we are the market leader in laboratory weighing instruments and have a substantial industrial and food retailing business that has gained market share in recent years. For instance, we have two profitable operations in China: a facility that manufactures and sells industrial and food retailing products and a facility that manufactures and distributes laboratory products. We also have direct marketing organizations in Taiwan, Korea, Hong Kong, Singapore, India, Thailand, Malaysia and Eastern Europe. Beyond Asia, we are also expanding our sales and service presence in Latin America and other emerging markets. We want to continue leveraging our Chinese manufacturing and R&D as a platform for low-end products, which are necessary to increase our penetration of emerging markets. At the same time, we are supplying these products to complementary channels in North America and Europe. We are also transferring production of many of our low-end products from Europe and North America to China - the most recent example being our Ohaus electronic laboratory balances and our shipping scales. China is itself a great market for us. China is striving to meet global quality standards so it can be a significant exporter. An increasing number of multinationals are investing in China. Also, the local market is continuing to switch over from mechanical to electronic weighing. For these reasons, we are working to win a larger share of the market. We developed and launched a host of new products in China in the past two years and our objective is to continue to gain momentum. Pursuing Selected Acquisition Opportunities. Acquisitions are an integral part of our growth strategy. We believe that we have a powerful acquisition platform in the instrument industry. Our acquisitions leverage our global sales and service network, respected brand, extensive distribution channels and technological leadership. We are interested in pursuing acquisitions which have strong strategic fit - for example, companies with complementary products that will benefit from our brand name and global distribution channels, and companies with solutions we can combine with our own technologies to create overall better solutions for our customers. In addition, our acquisitions should anchor more of our business in faster-growing markets. We are particularly attracted to the following end markets: o Drug Discovery. The impact of scientific developments, including the human genome project, is fundamentally changing the pharmaceutical industry and its need for automation. In recent years, we have acquired a variety of companies in the field of drug discovery, including ASI, Bohdan, Myriad and Berger. We offer these companies the infrastructure to expand globally and take advantage of the Mettler-Toledo brand name. We now offer one of the industry's broadest range of automation solutions for drug discovery and research. o Process Analytics. Our pharmaceutical and biotech customers need to comply with increasing quality standards. At the same time, they are seeking in-line control instruments to improve their yields. In December 2000 we announced the acquisition of Thornton. Thornton is the leader in pure and ultra-pure industrial water monitoring instrumentation used in semi-conductor, micro-electronics, pharmaceutical and biotech applications. We believe the acquisition of Thornton is an excellent strategic move to expand our process analytics business, and gain access to new markets. Their conductivity technology and know-how are 6 complementary to our strength in pH and oxygen measurements. With a broader technology offering, we will be better able to serve our expanded customer base. o Food and Drug Packaging. Increasing safety and consumer protection requirements are driving the need for more and more sophisticated end-of-line inspection systems. We are the world's leading provider of metal detectors and checkweighers, which, when combined with our application-specific software packages, provide food and drug packaging lines an integrated solution to check the quality and quantity of their packages. In 2000, we acquired AVS, which allowed us to add x-ray-based vision technology to our offering. X-ray-based vision inspection is effective in detecting non-metallic contamination in packages and where metal packaging prevents detection by conventional means. o Transportation and Logistics. The effects of globalization, the move to just-in-time processes, and e-commerce are all causing our customers to invest in our weighing and dimensioning solutions. Our customers are the major express carriers, freight forwarders, third-party logistic entities and warehousing and distribution companies. We are currently the leading supplier of automatic identification and data capture solutions which incorporate weighing and dimensioning technology to optimize the shipment and tracking of packages worldwide. In 2000, we announced that we would acquire full ownership of our Cargoscan joint venture, the premier provider of dimensioning technology. This transaction underscores our commitment to the transportation and logistics sector and will allow us the flexibility and faster decision-making necessary to exploit the substantial growth of this market. These are not the only opportunities and end markets we are focusing on. We are also alert for opportunities to expand our solution scope, particularly by adding more application-specific software, and to consolidate fragmented markets or expand geographically. Re-engineering and Cost Savings. We have improved our profitability in recent years partly through a series of initiatives aimed at reducing our cost structure. We plan to undertake similar initiatives in the future with the goal of further improving our operating margins. These initiatives include: o Continuing to leverage our Chinese manufacturing and R&D as a platform for low-end products, which are necessary to increase our penetration of emerging markets. We are also transferring production of many of our low-end products from Europe and North America to China - the most recent example being our Ohaus electronic laboratory balances and our shipping scales. We now have over 600 employees in China, including approximately 75 R&D professionals. o Our procurement initiative, launched in 1999, which is expected to bring us substantial cost savings. Our global procurement initiative aims to reduce our supplier base to a select group of high-quality suppliers from all parts of the world. By doing so, we believe we can ensure maximum cost effectiveness and improve the quality of our product and processes. We expect to improve operating margins through a more effective procurement effort over the coming years. o Opportunities in our service business. We have approximately 2,000 employees worldwide engaged in service, which generates approximately 18% of our annual sales. We believe our customers are looking far beyond repair to value-added 7 services that give them competitive advantages in the marketplace. Customers are also increasingly looking to outsource processes, which provides us additional growth opportunities. By exploiting available technology and best practices, we believe we can increase the efficiency of our service business and expand our margins. o We are taking advantage of the globalization of our customer base and the harmonization of regulatory standards worldwide to standardize our product lines on a global basis and streamline our organizational structure. As much as possible, we will harmonize our product lines worldwide. With global standardized offerings, our sales and service professionals will require less frequent training and reduced parts inventory. R&D resources will be re-deployed for new value-added products, allowing us to gain incremental growth. In addition, consolidated operations will produce significant savings and more efficient use of invested capital. We believe that these initiatives and others will place us in a position to build on our recent improvement in profitability. Furthermore, we believe that we can leverage our existing infrastructure, particularly our recent investments in Asia, to obtain continued sales growth without significant additions to our overall cost base. Instruments and Solutions Laboratory Instruments and Solutions We manufacture and market a broad range of instruments for use in the laboratory. Our largest product line is laboratory balances, where we are a clear global market leader. We estimate that approximately 40% of our sales are to customers using our instruments and services in laboratory environments. Our drug discovery group provides customers with integrated solutions that enable chemists to increase their productivity and accelerate the drug discovery process. Drug discovery products include a variety of synthesizers, robotic workstations, automatic lab reactors, purification systems and reaction calorimeters. We also offer selected analytical instruments, such as titrators, thermal analysis systems and other analytical instruments. Our process analytics business provides instruments for the in-line measurement of liquid parameters in the production process of pharmaceutical and biotech companies. We estimate that we have approximately one half of the global market for laboratory balances. Our drug discovery business is the global leader in synthesis, supercritical fluid chromatography, and reaction engineering. In the analytical instrument field, we are the global number two in titrators and number three in thermal analysis, and we are among the top three suppliers worldwide of other analytical instruments. Our process analytics business is the global leader in measuring liquid parameters for the pharmaceutical and biotech industries. Laboratory Balances The balance is the most common piece of equipment in the laboratory. We believe that we sell the highest performance laboratory balances available on the market, with weighing ranges from one ten-millionth of a gram up to 32 kilograms. Our brand name is so well recognized that laboratory balances are often generically referred to as "Mettlers." The Mettler-Toledo name is identified worldwide with accuracy, reliability and innovation. In our judgment, this reputation constitutes one of our principal competitive strengths. 8 In order to cover a wide range of customer needs and price points, we market laboratory balances in three principal product tiers offering different levels of functionality. High-end balances provide maximum automation of calibration, application support and additional functions. Mid-level balances provide a more limited but still extensive set of automated features and software applications. Basic level balances provide simple operations and a limited feature set. We also manufacture mass comparators, which are used by weights and measures regulators as well as laboratories to ensure the accuracy of reference weights. Due to the wide range of functions and features offered by our products, prices vary significantly. A typical mid-range precision balance is priced at approximately $2,500 and a typical microbalance is priced at approximately $14,000. In addition to Mettler-Toledo branded products, we also manufacture and sell balances under the brand name "Ohaus." Ohaus branded products include mechanical balances and electronic balances for the educational market and other markets in which customers are interested in lower cost, a more limited set of features and less comprehensive support and service. Drug Discovery Our pharmaceutical and biotechnology customers are all too aware of the costs involved in drug research and development. To take a drug from "the bench to the bottle" costs on average $500 million and takes in the region of ten to twelve years. The mission of our drug discovery group is to provide our customers with integrated solutions that enable chemists to increase their productivity and accelerate the drug discovery process. The potential benefits to our customers are enormous: each day that a pharmaceutical company is able to accelerate the introduction of a blockbuster drug can translate into millions of dollars of additional revenue. The number of drug targets and potential lead compounds has increased significantly as a result of combinatorial chemistry techniques, high-throughput screening methods and the initial findings of the human genome project. The increasing number of targets and compounds resulting from these developments have created severe bottlenecks in the drug discovery process. We believe that our portfolio of integrated technologies can bring significant efficiencies to the drug discovery process, enabling our customers to create larger numbers of higher quality candidate compounds. The drug R&D process essentially comprises six distinct phases: o Target identification o Lead identification o Lead optimization o Preclinical development and product development o Clinical development and process development o Production Our current drug discovery solution offering is focused on key aspects of the lead identification, lead optimization, and process development phases of the drug R&D process. Our overall value proposition is to speed up and integrate these phases by offering systems which perform the many tasks which a chemist has to perform, in parallel and fully automated. 9 In the target identification phase, researchers seek to identify the genes responsible for disease states and ultimately the proteins produced by these genes which become the target for a therapeutic drug. Lead identification is the process of producing large, diverse, libraries of tens of thousands of potential drug candidates which are then screened for possible biological activity against the target protein. Lead optimization is the process used by chemists to evaluate the hundreds of drug candidates that may emerge from the lead identification phase. Chemists perform successive rounds of chemical synthesis to create numerous variants of the drug candidates to find compounds likely to have appropriate drug properties. Chemists then optimize the compounds for their biological potency, thus creating lead compounds. In pre-clinical development and product development, process research chemists investigate practical ways to produce individual lead compounds in larger quantities. Also, laboratory tests are performed to check the compound's ability to pass into, and out of, the body without seriously toxic side-effects. Clinical development and process development is the process in which chemists test clinical candidates in animals and humans to demonstrate their safety and as well as efficacy. The successful outcome of clinical trials may result in regulatory approval to commercialize the new drug product. During this time period, process chemists optimize the method of compound synthesis prior to commencement of large scale manufacturing of the drug. Production is the process of manufacturing bulk quantities of the final drug. Both the production methodology and the analytical methods which check the drug's composition are tightly regulated and monitored. Within our drug discovery group, the Chemistry Systems team focuses on lead identification and optimization, and the Reaction Engineering team focuses on process research and development. The Chemistry Systems business offers the following solutions to combinatorial and medicinal chemists working on lead identification and optimization: o the Mini-Block manual parallel synthesizer, which has become a standard tool among medicinal chemists for chemistry development and lead optimization o the Discoverer automated synthesizer, capable of extremely sophisticated chemistry o the Myriad Core System, the top-of the range automated parallel synthesizer, capable of producing hundreds of thousands of new drug candidates per year o automated workstations for reagent preparation, weighing, labeling and dispensing to support the synthesis process o the ALLEX automated liquid/liquid extraction system for cleaning up synthesis products, and 10 o Berger's supercritical fluid chromatographs, which are capable of purifying synthesis products in a fraction of the time of conventional HPLC instruments. Our Reaction Engineering business offers products to help speed up process research and development. Automatic lab reactors and reaction calorimeters simulate an entire chemical manufacturing process in the laboratory. Customers use the simulation test before proceeding to production, in order to test the safety and feasibility of new processes. Our products are fully computer-integrated, with a significant software component that we also provide: o the Process Development Workstation, which has 16 separate reactors and is used for process screening (finding possible pathways to make the drug candidate economically and safely) o the new Multimax and Labmax automated laboratory reactors, with four and one separately-controlled reactors respectively, which are used in process optimization to find the precise reaction parameters to make larger quantities of the drug candidate o the RC-1, which combines a laboratory reactor with calorimetry and is used to ensure the process remains economical as well as safe as the manufactured quantities are scaled up o the React-IR 4000 in-situ infrared analyzer, which can be used with the laboratory reactors to monitor the chemistry in real-time, and o React-IR MP and Process-IR, which are hardened infrared analyzers used in scale-up applications and production. We continue to pursue opportunities that will enable us to extend our drug discovery and development solutions by internal research and development and by acquiring businesses that have technologies and capabilities complementary to ours. In particular, we recognize the importance of software as an integral part of any solution offering. Effective integration of automation instruments with data recording and analysis software represents an attractive solution to our customers. We believe that our drug discovery group is well positioned to support and grow with the pharmaceutical and biotechnology industries in their exciting challenge to discover and develop new drugs. Analytical Instruments The research and quality control labs of our customers, especially those in the pharmaceutical, chemical, food and cosmetics industries, use our analytical instruments to help them understand the properties of the liquid and solid compounds used in their products. We offer a broad range of such analytical instruments, taking advantage of our strong position in the balance market. We also offer a host of value-added services to support our customers, including calibration, validation and maintenance services. Titrators. Titrators measure the chemical composition of samples. Our high-end titrators are multi-tasking models, which can perform two determinations simultaneously. They permit high sample throughputs and have extensive expansion capability and flexibility in calculations, functions and parameters. Most models, including those in the lower-range, permit 11 common determinations to be stored in a database for frequent use. Titrators are used heavily in the food and beverage industry. A typical titrator is priced at approximately $12,000. Thermal Analysis Systems. Thermal analysis systems measure different properties, such as weight, dimension and energy flow, at varying temperatures. Our thermal analysis products include full computer integration and a significant amount of proprietary software. Thermal analysis systems are used primarily in the plastics and polymer industries. A typical thermal analysis system is priced at approximately $50,000. Other Instruments. We have recently introduced single-channel and multi-channel pipettes which are used for liquid handling in the laboratory. These devices are the most widely used instruments in the rapidly growing life science market. The pH meters we offer measure acidity in laboratory samples, and are the second most widely used measurement instruments in the laboratory, after the balance. Data collected from our pH meters can be downloaded to a computer or printer using an interface kit and custom software. We sell density and refractometry instruments, which measure chemical concentrations in solutions. These instruments are sourced through a marketing joint venture with a third-party manufacturer, but are sold under the Mettler-Toledo brand name. In addition, we manufacture and sell moisture analyzers, which precisely determine the moisture content of a sample by utilizing an infrared dryer to evaporate moisture. Process Analytics Our process analytics business provides instruments for the in-line measurement of liquid parameters in the production process of pharmaceutical and biotech companies. In the ongoing quest to improve product quality and production efficiency, manufacturers are adopting sensor technologies for in-line process control. Our process analytics business is the leading supplier of pH and oxygen measurement instruments used in bio-pharmaceutical manufacturing, and is well positioned to accelerate its growth in this market. With our acquisition of Thornton, we have expanded our technology offering in process analytics to include Thornton's conductivity technology and know-how in determining water purity. More than half of our process analytics sales are to the pharmaceutical and biotech markets. Our customers need fast and secure scale-up and production that meets the validation processes required for GMP (Good Manufacturing Processes) and other regulatory standards. Our in-line process analytics solutions help these customers ensure reproducible and consistent product quality, while ensuring compliance within relevant regulatory standards. Industrial Instruments and Solutions We offer industrial measurement solutions to customers in a variety of industries, often in the same end markets where we sell our laboratory instruments. Weighing instruments are among the most broadly used measurement devices in industry. We estimate that approximately 40% of our sales are to customers using our instruments and services in industrial environments. We believe that we have the largest market share in the industrial market in each of Europe and the United States. In Asia, we have a substantial industrial business which has gained market share in recent years. This business is supported by an established manufacturing presence in China. We believe that we are the only company with a true global presence across industrial weighing and related applications. 12 In recent years, we have continued the globalization of our industrial businesses. This anticipates the continued emergence of a global marketplace, as our customers set up operations worldwide and as industry standards are harmonized globally. We want to offer state-of-the-art solutions and consistent quality and service levels around the globe. It is this powerful combination that continues to attract major customers who have standardized on our instruments at their facilities worldwide. The industrial instruments and solutions that we offer are described in more detail below. Industrial Weighing Solutions Industrial Scales and Balances. We offer a complete line of industrial scales and balances, such as bench scales and floor scales, for weighing loads from a few grams to several thousand kilograms in applications ranging from measuring materials in chemical production to weighing mail and packages. Our product lines include the Viper and Spider range of scales, often used in receiving and shipping departments in counting applications; TrimWeigh scales, which determine whether an item falls within a specified weight range, and are used primarily in the food industry; Mentor SC scales, for counting parts; and precision scales for formulating and mixing ingredients. Prices vary significantly with the size and functions of the scale, generally ranging from $1,000 to $20,000. Industrial Terminals. Our latest industrial scale terminal is the JagXtreme, which is our fastest, most powerful scale terminal ever. It harnesses the power and flexibility of the internet to help integrate and control information, equipment management, and automation in manufacturing processes. The JagXtreme terminal is two and a half times faster than our industry-leading Jaguar terminal - but it works like a Jaguar terminal so there is little training time required. It allows users to download programs or access setup data from across the plant - or across the globe. The JagXtreme terminal can also maximize up time by dispatching emails when the unit needs service - and minimize down time through predictive rather than reactive maintenance. The JagXtreme terminal can serve up data across the web through an internet browser. It also provides users with the tools to design their own user interface. Prices for industrial weighing terminals vary significantly based on functionality of the application, generally ranging from $500 to $10,000. Vehicle Scale Systems. Our primary heavy industrial products are scales for weighing trucks or railcars (i.e., weighing bulk goods as they enter a factory or at a toll station). Our vehicle scales, such as the DigiTol TRUCKMATE, generally have digital load cells, which offer significant advantages in serviceability over analog load cells. Heavy industrial scales are capable of measuring weights up to 500 tons and permit accurate weighing under extreme environmental conditions. We also offer advanced computer software, such as WinBridge, that can be used with our heavy industrial scales to permit a broad range of applications. Our WinBridge software provides a complete system for managing vehicle weighing transactions. Vehicle scale prices generally range from $20,000 to $50,000. Application Software for Weighing. Our software for industrial weighing applications are based on an open-system architecture that enables interaction with customers' enterprise software packages. For example, FreeWeigh is a powerful standard software package that covers the entire range of prepackage and filling process control. FreeWeigh is distinguished by its large number of standard functions and by its high flexibility in meeting customers' specific application needs. The modular structure of the software allows for gradual expansion and great flexibility to meet often rapid changes in production conditions. FormWeigh is our formulation/batching solution used in chemistry, pharmaceutical and food 13 production processes. Using FormWeigh, weighing is made simple and reliable, including for a host of customized configurations. We also offer a variety of solutions in the industrial filling process to meet our customers' statistical process and quality control needs. Our "MultiRange" products also include standardized software which uses the weight data obtained to calculate other parameters, such as price or number of pieces. The modular design of these products facilitates the integration of our weighing equipment into a computer system performing other functions, like inventory control or batch management. Packaging Dynamic Checkweighers. We are the world's leading provider of metal detectors, checkweighers and x-ray visioning, which, when combined with our application-specific software packages, provide food and drug packaging lines an integrated solution to check the quality and quantity of their packages. We offer solutions to checkweighing requirements in the food processing, pharmaceutical, chemicals and cosmetic industries, where customers are required to accurately measure portions for packaging. We also offer checkweighing solutions to the transportation and package delivery industries, where tariffs are levied based on weight. Customizable software applications utilize the information generated by checkweighing hardware to find production flaws, packaging and labeling errors and nonuniform products, as well as to sort rejects and record the results. Our checkweighing equipment can accurately determine weight in dynamic applications at speeds of up to several hundred units per minute. Checkweighers generally range in price from $8,000 to $40,000. End-of-line Inspection Solutions. Increasing safety and consumer protection requirements are driving the need for more and more sophisticated end-of-line inspection systems. We are the leading global provider of integrated end-of-line inspection solutions. These high throughput solutions incorporate sensor technologies and software to assist customers in fulfilling validation requirements and in improving their quality and yield. For example, metal detection systems control the removal of products that are identified as contaminated by metal during the manufacturing process in the food processing, pharmaceutical, cosmetics, chemicals and other industries. Metal detectors therefore provide manufacturers with vital protection against metal contamination arising from their own production processes or from using contaminated raw materials. Metal detectors are most commonly used with checkweighers as components of integrated packaging lines in the food processing, pharmaceutical and other industries. Prices for metal detection systems generally range from $5,000 to $20,000. Through our recent acquisition of AVS, we added x-ray-based vision inspection, which is ideal for identifying non-metallic contamination. We feel that AVS is an excellent strategic complement to our existing offering of metal detection, checkweighing and related quality control software systems. Transportation / Shipping and Logistics Companies are increasingly conducting business across geographic boundaries, and transportation/logistics suppliers are instrumental in supporting those efforts. Speed is also critical, as evidenced by the growth in e-commerce and just-in-time methods. Customers are seeking solutions to speed throughput, lower costs, increase revenue and ensure first-rate service to their own customers. We are addressing those needs as the leading global supplier of automatic identification and data capture solutions, which integrate in-motion weighing, dimensioning and identification technologies. With these solutions, companies such as FedEx can measure the weigh and cubic volume of packages for appropriate billing, logistics and quality control. Our solutions also integrate into information systems that allow customers to 14 track the progress of packages via the Internet. Prices for integrated dimensioning/weighing systems range from $5,000 to $20,000. We believe our solutions provide our customers with greater accuracy and higher throughput than competitors' products. Based on a thorough understanding of customer processes, we can match our solutions precisely to customer needs. Our global presence gives us the ability to provide world-class service in most major locations around the world. What's more, our technical knowledge of local weights and measures regulations and our application know-how result in effective installations and provides ongoing support for customers. Food Retailing Instruments and Solutions We offer food retailing measurement solutions to customers in a variety of industries, often in the same end markets where we sell our industrial solutions. Weighing instruments are among the most broadly used measurement devices in industry and food retailing. We estimate that approximately 20% of our sales are to customers in food retailing environments. We believe that we have the largest market share in the food retailing market in each of Europe and the United States. In Asia, we have a substantial food retailing business which has gained market share in recent years. This business is supported by an established manufacturing presence in China. We believe that we are the only company with a true global presence across food retailing weighing applications. Retail Weighing Solutions Retail Scale Systems and Prepackaging Systems. Supermarkets, hypermarkets and other food retail establishments make use of multiple weighing applications for the full handling of perishable goods. For example, perishable goods are weighed on arrival to determine payment to suppliers and some of these goods are repackaged, priced and labeled for sale to customers. Other goods are kept loose and selected by customers and either weighed at the produce or delicatessen counter or at the checkout counter. We offer stand-alone scales for basic counter weighing and pricing, price finding, and printing. In addition, we offer network scales and software, which can integrate backroom, counter, self-service and checkout functions, and can incorporate weighing data into a supermarket's overall perishable goods management system. Our OPRA retail scale, a key element of our perishable goods management solution, is the first Internet-enabled weighing instrument in the industry. OPRA enables customers to remotely manage pricing, run promotions, support frequent-shopper programs, download software, manage inventory and more. Our equipment can also accommodate required dual-currency displays and, thorugh its Internet capabilities, can automatically adjust for conversion to the euro. Backroom products include dynamic weighing products, labeling and wrapping machines, perishable goods management and data processing systems. In some countries in Europe, we also sell slicing and mincing equipment. Prices for food retailing scales generally range from $500 to $5,000, but are often sold as part of comprehensive weighing solutions. 15 Customers and Distribution Our business is geographically diversified, with sales in 2000 derived 44% from Europe, 44% from North and South America and 12% from Asia and other countries. Our customer base is also diversified by industry and by individual customer. Our largest single customer accounted for no more than 3% of 2000 net sales. Principal customers for our solutions include companies in the following key end markets: the life science industry (pharmaceutical and biotech companies, as well as independent research organizations), food processors, packagers and retailers, specialty chemicals and cosmetics companies, the transportation and logistics industry, the metals industry, the electronics industry and the academic market. Our laboratory products are sold through a worldwide distribution network. Our extensive direct distribution network and our dealer support activities enable us to maintain a significant degree of control over the distribution of our products. Mid to high-end products in the United States are handled by our own sales force. We sell laboratory products in Asia through our own sales force and distributors, and in Europe primarily through direct sales. European and Asian distributors are generally fragmented on a country-by-country basis. Ohaus branded laboratory balances are generally positioned in alternative distribution channels to those of Mettler-Toledo branded products. This means that we can fill a greater number of distribution channels and increase penetration of our existing markets. Since acquiring Ohaus in 1990, we have expanded this brand beyond its historical U.S. focus. Ohaus branded products are sold exclusively through distributors. In the industrial and food retailing market, we sell both directly to customers (including OEMs) and through distributors. In the United States, direct sales exceed distribution sales and in Europe, direct sales predominate, with distributors used in certain cases. We sell products in Asia primarily through distributors, except in China where we sell products through our own sales force and distributors. Where we use distributors, we seek to provide them with significant support. We also offer customers the ability to shop online for basic instruments with global appeal, such as balances, pipettes, pH meters, electrodes, titrators and density meters. Launched in mid-1999, www.MT-Shop.com presents customers with unique options, including the ability to customize a product down to a specific color or design motif. Users also can access the site in multiple languages. Our virtual shop is aimed principally at small start-up companies and individual scientists - segments of the market that previously were difficult to reach cost-effectively. The site is expected to increase brand awareness and market penetration with these new target groups. Sales and Service Market Organizations We have a host of geographically focused market organizations ("MOs") around the world that are responsible for all aspects of our sales and service. The MOs are local marketing and service organizations designed to maintain close relationships with our customer base. Each MO has the flexibility to adapt its marketing and service efforts to account for different cultural and economic conditions. MOs also work closely with our producing organizations (described 16 below) by providing feedback on manufacturing and product development initiatives and relaying innovative product and application ideas. We have the only global sales and service organization among weighing instruments manufacturers. At December 31, 2000, our sales and services group consisted of more than 4,000 employees in sales, marketing and customer service (including related administration) and after-sales technical service. This field organization has the capability to provide service and support to our customers and distributors in virtually all major markets across the globe. Sales managers and representatives interact across product lines and markets in order to serve customers that have a wide range of instrument needs, such as pharmaceutical companies that purchase both laboratory and industrial products. We classify customers according to their potential for sales and the appropriate distribution channel is selected to service the customer as efficiently as possible. Larger accounts tend to have dedicated sales representatives. Other representatives specialize by product line. Sales representatives call directly on end-users either alone or, in regions where sales are made through distributors, jointly with distributors. We utilize a variety of advertising media, including trade journals, catalogs, exhibitions and trade shows. In addition, we also sponsor seminars, product demonstrations and customer training programs. We utilize sophisticated marketing techniques in our sales efforts. These techniques include the development and utilization of marketing databases. We develop these databases to better understand the full potential of our market by customer, location, industry, instruments and related application. We then utilize this data to more efficiently direct our field resources and complement our direct and distributor sales forces with targeted mailing and telemarketing campaigns to more fully exploit our market's potential. We also utilize a dual brand strategy for certain market segments to improve our overall market penetration. For example, we sell laboratory balances under the Ohaus brand name as an alternative to the Mettler-Toledo brand name in certain distribution channels. We use the Mettler-Toledo Web site, www.mt.com, to provide current and prospective customers and other audiences with the information they need in a convenient manner. With several thousand pages of information, our Web site has become a principal source of answers for customers' questions on many laboratory, industrial and food retailing processes. In addition, we use the information gained through visits to our site to make our marketing messages even more relevant to customers. This includes employing one-to-one marketing techniques. 17 Service We believe service capabilities are a critical success factor in our business. Through our own dedicated service technicians, we provide contract and repair services in all countries in which our products are sold. We estimate that we have the largest installed base of weighing instruments in the world, and our contract and repair services generate significant revenues. In 2000, service (representing service contracts, repairs and replacement parts) accounted for approximately 18% of our total net sales (service revenue is included in the laboratory and industrial and food retailing sales percentages given above). Approximately half of this amount is derived from spare parts with the remaining portion derived from service contacts. Beyond revenue opportunities, service is a key part of our product offering and helps significantly in generating repeat sales. The close relationships and frequent contact with our large customer base provides us with sales opportunities and innovative product and application ideas. A global service network also is an important factor in our ability to expand in emerging markets. Moreover, the widespread adoption of quality laboratory and manufacturing standards and the privatization of weights and measures certification represent favorable trends for our service business, as they tend to increase demand for on-site calibration services. Our service contracts provide for repair services within various guaranteed response times, depending on the level of service selected. Many contracts also include periodic calibration and testing. Contracts are generally one year in length, but may be longer. If the service contract also includes products of other manufacturers, we will generally perform calibration, testing and basic repairs directly, and contract out more significant repair work. As application software becomes more complex, our service efforts increasingly include installation and customer training programs as well as product service. Research and Development; Manufacturing Producing Organizations Our product development, research and manufacturing efforts are organized into a number of producing organizations ("POs"). POs are product development teams comprised of personnel from our marketing, development, research, manufacturing, engineering and purchasing departments. POs often seek customer input to ensure that the products developed are tailored to market needs. We have organized our POs to reduce product development time, improve customer focus, reduce costs and maintain technological leadership. The POs work together to share ideas and best practices, and some employees are in both MOs and POs. We recently implemented a number of projects that we believe will further increase productivity and lower costs. For example, we restructured the order and product delivery process in Europe to enable us to deliver many of our products to our customers directly from the manufacturing facility within several days, which minimizes the need to store products in decentralized warehouses. In addition, we have centralized our European spare parts inventory management system allowing all spare parts for Europe to be delivered from a single, highly automated location. 18 Research and Development We attribute a significant portion of our recent margin improvement to our research and development efforts. We intend to continue to invest in product innovation in order to provide technologically advanced products to our customers for existing and new applications. Over the last three years, we have invested more than $160 million in research and development. In 2000, we spent approximately 5.1% of net sales on research and development (including costs associated with customer-specific engineering projects, which are included in cost of sales for financial reporting purposes). Our research and development efforts fall into two categories: o technology advancements, which increase the value of our products. These may be in the form of enhanced functionality, new applications for our technologies, more accurate or reliable measurement, additional software capability or automation through robotics or other means o cost reductions, which reduce the manufacturing cost of our products through better overall design We have devoted an increasing proportion of our research and development budget to software development. Software development for weighing applications includes application-specific software, as well as software utilized in sensor mechanisms, displays and other common components, which can be leveraged across our broad product lines. We closely integrate research and development with marketing, manufacturing and product engineering. We have over 700 professionals in research and development and product engineering. As part of our research and development activities, we have frequent contact with university experts, industry professionals and the governmental agencies responsible for weights and measures, analytical instruments and metal detectors. In addition, our in-house development is complemented by technology and product development alliances with customers and original equipment manufacturers. Manufacturing We manufacture some of our own components, usually components that contain proprietary technology. However, when outside manufacturing is more efficient, we contract with others for certain components and in turn use these components in our own manufacturing processes. We use a wide range of suppliers and we believe our supply arrangements to be adequate. From time to time we rely on a single supplier for all of our requirements of a particular component. Even then, adequate alternative sources are generally available if necessary. Supply arrangements for electronics are generally made globally. For mechanical components, we generally use local sources to optimize materials flow. We strive to emphasize product quality in our manufacturing operations, and most of our products require very strict tolerances and exact specifications. We use an extensive quality control system that is integrated into each step of the manufacturing process. This integration permits field service technicians to trace important information about the manufacture of a particular unit, which facilitates repair efforts and permits fine-tuning of the manufacturing process. Many of our measuring instruments are subjected to an extensive calibration process that allows the software in the unit to automatically adjust for the impact of temperature and humidity. 19 We are a worldwide manufacturer, with manufacturing plants in the United States, Switzerland, Germany, the United Kingdom, France and China. Laboratory products are produced mainly in Switzerland and to a lesser extent in the United States and China, while industrial and food retailing products are produced worldwide. Most of our manufacturing facilities have achieved ISO 9001 certification. We believe that our manufacturing capacity is sufficient to meet our present and currently anticipated needs. Backlog Manufacturing turnaround time is generally sufficiently short so as to permit us to manufacture to fill orders for most of our products, which helps to limit inventory costs. Backlog is therefore generally a function of requested customer delivery dates and is typically no longer than one to two months. Employees As of December 31, 2000, we had approximately 8,250 employees throughout the world, including approximately 4,500 in Europe, 2,750 in North and South America, and 1,000 in Asia and other countries. We believe our employee relations are good, and we have not suffered any material employee work stoppage or strike during the last five years. Labor unions do not represent a meaningful number of our employees. In certain of our facilities, we have a flexible workforce environment, in which hours vary depending on the workload. This flexible working environment enhances employees' involvement, thus increasing productivity. It also improves efficient payroll management by permitting us to adjust staffing to match workload to a greater degree without changing the size of the overall workforce. Intellectual Property We hold more than 1,100 patents and trademarks, primarily in the United States, Switzerland, Germany, the United Kingdom, France, Japan and China. Our products generally incorporate a wide variety of technological innovations, some of which are protected by patents and some of which are not. Products are generally not protected as a whole by individual patents, and as a result, no one patent or group of related patents is material to our business. We have numerous trademarks, including the Mettler-Toledo name and logo, which are material to our business. We regularly protect against infringement of our intellectual property. Regulation Our products are subject to various regulatory standards and approvals by weights and measures regulatory authorities. Although there are a large number of regulatory agencies across our markets, there is an increasing trend toward harmonization of standards, and weights and measures regulation is harmonized across the European Union. Our food processing and food retailing products are subject to regulation and approvals by relevant governmental agencies, such as the United States Food and Drug Administration. Products used in hazardous environments may also be subject to special requirements. All of our electrical components are subject to electrical safety standards. We believe that we are in compliance in all material respects with applicable regulations. 20 Environmental Matters We are subject to a variety of environmental laws and regulations in the jurisdictions in which we operate, including provisions relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. We wholly or partly own, lease or hold a direct or indirect equity interest in a number of properties and manufacturing facilities around the world, including North and South America, Europe, Australia and China. Like many of our competitors, we have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations in both the United States and abroad. We are currently involved in, or have potential liability with respect to, the remediation of past contamination in certain of our facilities in both the United States and abroad. In addition, certain of our present and former facilities have or had been in operation for many decades and, over such time, some of these facilities may have used substances or generated and disposed of wastes which are or may be considered hazardous. It is possible that such sites, as well as disposal sites owned by third parties to which we have sent wastes, may in the future be identified and become the subject of remediation. Accordingly, although we believe that we are in substantial compliance with applicable environmental requirements and to date we have not incurred material expenditures in connection with environmental matters, it is possible that we could become subject to additional environmental liabilities in the future that could result in a material adverse effect on our financial condition or results of operations. We, or in some cases the former owner of Toledo Scale, have been named a potentially responsible party under CERCLA or analogous state statutes at the following third-party owned sites with respect to the alleged disposal at the sites by Toledo Scale during the period before we owned it: Granville Solvents Site, Granville, Ohio; Aqua-Tech Environmental, Inc. Site, Greer, South Carolina; and Seaboard Chemical Company Site, Jamestown, North Carolina. Pursuant to the terms of the stock purchase agreement between us and the former owner of Toledo Scale, the former owner is obligated to indemnify us for various environmental liabilities. To date, with respect to each of the foregoing sites, the former owner has undertaken the defense and indemnification of Toledo Scale. Based on currently available information and given our contractual rights of indemnification, we believe that the costs associated with the investigation and remediation of these sites will not have a material adverse effect on our financial condition or results of operations. Competition Our markets are highly competitive. Furthermore, weighing instruments markets are fragmented both geographically and by application, particularly the industrial and food retailing weighing instruments market. As a result, we face numerous regional or specialized competitors, many of which are well established in their markets. In addition, some of our competitors are divisions of larger companies with potentially greater financial and other resources than our own. Taken together, the competitive forces present in our markets can impair our operating margins in certain product lines and geographic markets. We expect our competitors to continue to improve the design and performance of their products and to introduce new products with competitive prices. Although we believe that we have certain technological and other advantages over our competitors, we may not be able to realize and maintain these advantages. In any event, to remain competitive, we must continue to 21 invest in research and development, sales and marketing and customer service and support. We cannot be sure that we will have sufficient resources to continue to make these investments or that we will be successful in identifying, developing and maintaining any competitive advantages. We believe that the principal competitive factors in our U.S. markets for purchasing decisions are accuracy and durability, while in Europe accuracy and service are the most important factors. In emerging markets, where there is greater demand for less sophisticated products, price is a more important factor than in developed markets. Competition in the United States laboratory market is also influenced by the presence of large distributors that sell not only our products but those of our competitors as well. History Mettler-Toledo International Inc. was incorporated as a Delaware Corporation in December 1991 and was recapitalized in connection with the October 15, 1996 acquisition of the Mettler-Toledo group of companies from Ciba-Geigy. In the acquisition, we paid cash consideration of approximately SFr 505.0 million (approximately $402.0 million at October 15, 1996), including dividends of approximately SFr 109.4 million (approximately $87.1 million at October 15, 1996), paid approximately $185.0 million to settle amounts due to Ciba-Geigy and its affiliates and incurred expenses in connection with the acquisition and related financing of approximately $29.0 million. We financed the acquisition primarily with (i) borrowings under a credit agreement in the amount of $307.0 million, (ii) the issuance of $135.0 million of senior subordinated notes and (iii) an equity contribution of $190.0 million primarily from AEA Investors Inc., its shareholder-investors and our executive officers and other employees. Following the completion of our initial public offering in November 1997, management, employees and Company sponsored benefit funds held approximately 18% of the Company's shares on a fully diluted basis. In May 1997, we acquired Safeline Limited for (pound)63.7 million (approximately $104.4 million at May 30, 1997). Safeline is the world's largest manufacturer and marketer of metal detection systems for companies that produce and package goods in the food processing, pharmaceutical, cosmetics, chemicals and other industries. In November 1997, we completed our initial public offering of 7,666,667 shares of common stock at a per share price of $14.00. The offering raised net proceeds of approximately $97.3 million. Concurrently with the offering, we refinanced our prior credit facility and used proceeds from the refinancing and the offering to repay the senior subordinated notes of our wholly owned subsidiary, Mettler-Toledo, Inc. In 1998 and 1999, certain selling shareholders completed secondary offerings of 11,464,400 and 6,099,250 shares of our common stock, respectively. Neither we nor any of our directors, executive officers or other employees sold shares or received any proceeds from these offerings. 22 ITEM 2. PROPERTIES The following table lists our principal manufacturing facilities, indicating the location and whether the facility is owned or leased. Our Greifensee, Switzerland facility also serves as our worldwide headquarters and our Columbus, Ohio, facility serves as our North American headquarters. We believe our facilities are adequate for our current and reasonably anticipated future needs. Location Owned/Leased Europe: Greifensee/Nanikon, Switzerland........ Owned Uznach, Switzerland.................... Owned Urdorf, Switzerland.................... Owned Schwerzenbach, Switzerland............. Leased Albstadt, Germany...................... Owned Giesen, Germany........................ Owned Bethune, France........................ Leased Manchester, England.................... Leased Royston, England....................... Leased Americas: Columbus, Ohio......................... Leased Worthington, Ohio...................... Owned Spartanburg, South Carolina............ Owned Ithaca, New York....................... Owned Woburn, Massachusetts.................. Leased Millersville, Maryland................. Leased Tampa, Florida......................... Leased Vernon Hills, Illinois................. Leased Other: Shanghai, China............................ Building Owned; Land Leased Changzhou, China........................... Building Owned; Land Leased Mumbai, India.............................. Leased 23 ITEM 3. LEGAL PROCEEDINGS Routine litigation is incidental to our business. Nevertheless, we are not currently involved in any legal proceeding which we believe could have a material adverse effect upon our financial condition or results of operations. See "Environmental Matters" under Part I, Item 1 for information concerning legal proceedings relating to certain environmental claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK Our common stock is traded on the New York Stock Exchange under the symbol "MTD". The following table sets forth on a per share basis the high and low sales prices for consolidated trading in our common stock as reported on the New York Stock Exchange Composite Tape for the quarters indicated. Common Stock Price Range ----------- High Low ---- --- 2000 Fourth Quarter $56.00 $39.50 Third Quarter $48.81 $37.75 Second Quarter $45.75 $30.00 First Quarter $44.50 $31.81 1999 Fourth Quarter $39.50 $27.63 Third Quarter $30.44 $23.81 Second Quarter $29.00 $22.63 First Quarter $27.94 $19.63 HOLDERS At March 16, 2001 there were 229 holders of record of common stock and 39,681,536 shares of common stock outstanding. The number of holders of record excludes beneficial owners of common stock held in street name. DIVIDEND POLICY We have never paid any dividends on our common stock and we do not anticipate paying any cash dividends on the common stock in the foreseeable future. The current policy of our Board of Directors is to retain earnings to finance the operations and expansion of our business. Moreover, our credit agreement restricts our ability to pay dividends. Any future determination to pay dividends will depend on our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by our Board of Directors. 25 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial information set forth below at December 31, 2000, 1999, 1998, 1997 and 1996, for the years ended December 31, 2000, 1999, 1998 and 1997, for the period from October 15, 1996 to December 31, 1996 and for the period from January 1, 1996 to October 14, 1996 is derived from our consolidated financial statements. The financial information for the period prior to October 15, 1996, the date of our acquisition from Ciba-Geigy (the "Acquisition"), is combined financial information of the Mettler-Toledo group of companies (the "Predecessor Business"). The combined historical data of the Predecessor Business and the consolidated historical data of the Company are not comparable in many respects due to the Acquisition and the Safeline acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes. The financial information presented below, in thousands except per share data, was prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP").
Predecessor Mettler-Toledo International Inc. Business ------------------------------------------------------------------------ ----------- October 15 January 1 Year ended Year ended Year ended Year ended to to December 31, December 31, December 31, December 31, December 31, October 14, 2000 1999 1998 1997 1996 1996 ------------ ------------ ------------ ------------ ----------- ------------ Statement of Operations Data: Net sales............................... $1,095,547 $1,065,473 $935,658 $878,415 $ 186,912 $662,221 Cost of sales........................... 600,185 585,007 (a) 520,190 493,480 (c) 136,820 (f) 395,239 ------- ------- ------- ------- -------- ------- Gross profit............................ 495,362 480,466 415,468 384,935 50,092 266,982 Research and development................ 56,334 57,393 48,977 47,551 9,805 40,244 Selling, general and administrative..... 296,187 300,389 265,511 260,397 59,353 186,898 Amortization............................ 11,564 10,359 7,634 6,222 1,065 2,151 Purchased research and development...... - - 9,976 (b) 29,959 (d) 114,070 (g) - Interest expense........................ 20,034 21,980 22,638 35,924 8,738 13,868 Other charges (income), net (h)......... 2,638 10,468 1,197 10,834 17,137 (1,332) ------- ------- ------ ------ ------ ------- Earnings (loss) before taxes, minority interest and extraordinary items....... 108,605 79,877 59,535 (5,952) (160,076) 25,153 Provision for taxes..................... 38,510 31,398 20,999 17,489 (938) 10,055 Minority interest....................... (24) 378 911 468 (92) 637 -------- ------- ------ ------ ------- ------- Earnings (loss) before extraordinary items.................... 70,119 48,101 37,625 (23,909) (159,046) 14,461 Extraordinary items - debt extinguishments................... - - - (41,197) (e) - - ---------- ---------- -------- --------- ---------- -------- Net earnings (loss)..................... $ 70,119 $ 48,101 $ 37,625 $(65,106) $(159,046) $ 14,461 ========== ========== ======== ========= ========== ======== Basic earnings (loss) per common share: Net earnings (loss) before extraordinary items.................. $ 1.80 $ 1.25 $ 0.98 $ (0.76) $ (5.18) Extraordinary items................... - - - (1.30) - ------- ------- -------- -------- -------- Net earnings (loss)................... $ 1.80 $ 1.25 $ 0.98 $ (2.06) $ (5.18) ======= ======= ======= ======== ======== Weighted average number of common shares..................... 38,897,879 38,518,084 38,357,079 31,617,071 30,686,065 Diluted earnings (loss) per common share: Net earnings (loss) before extraordinary items.................. $ 1.66 $ 1.16 $ 0.92 $ (0.76) $ (5.18) Extraordinary items................... - - - (1.30) - -------- -------- -------- -------- -------- Net earnings (loss)................... $ 1.66 $ 1.16 $ 0.92 $ (2.06) $ (5.18) ======= ======= ======= ======== ======== Weighted average number of common shares..................... 42,141,548 41,295,757 40,682,211 31,617,071 30,686,065 Balance Sheet Data (at end of period): Cash and cash equivalents............... $ 21,725 $ 17,179 $ 21,191 $ 23,566 $ 60,696 Working capital......................... 103,021 81,470 90,042 79,163 103,697 Total assets............................ 887,582 820,973 820,441 749,313 771,888 Long-term debt.......................... 237,807 249,721 340,246 340,334 373,758 Other non-current liabilities (i)....... 95,843 100,334 103,201 91,011 96,810 Shareholders' equity..................... 178,840 112,015 53,835 25,399 12,426 (Footnotes on next page)
26 (Footnotes from previous page) ------------------------------ (a) In connection with acquisitions in 1999, including the acquisition of the Testut-Lutrana group, we allocated $998 of the purchase price to revalue certain inventories (principally work-in-progress and finished goods) to fair value (net realizable value). Substantially all such inventories were sold during the second quarter of 1999. (b) In connection with the Bohdan acquisition, we allocated, based upon independent valuations, $9,976 of the purchase price to purchased research and development in process. This amount was recorded as an expense immediately following the Bohdan acquisition. (c) In connection with the Safeline acquisition, we allocated $2,054 of the purchase price to revalue certain inventories (principally work-in-progress and finished goods) to fair value (net realizable value). Substantially all such inventories were sold during the second quarter of 1997. (d) In connection with the Safeline acquisition, we allocated, based upon independent valuations, $29,959 of the purchase price to purchased research and development in process. This amount was recorded as an expense immediately following the Safeline acquisition. (e) Represents charges for the write-off of capitalized debt issuance fees and related expenses associated with our previous credit facilities. The amount also includes the prepayment premium on the senior subordinated notes which were repurchased and the write-off of the related capitalized debt issuance fees. (f) In connection with the Acquisition, we allocated $32,194 of the purchase price to revalue certain inventories (principally work-in-progress and finished goods) to fair value (net realizable value). Substantially all such inventories were sold during the period October 15, 1996 to December 31, 1996. (g) In connection with the Acquisition, we allocated, based upon independent valuations, $114,070 of the purchase price to purchased research and development in process. This amount was recorded as an expense immediately following the Acquisition. (h) Other charges (income), net generally includes interest income, foreign currency transactions, (gains) losses from sales of assets and other items. The 2000 amount also includes a charge of $1,425 related to the close-down and consolidation of operations. The 1999 amount includes a gain on an asset sale of approximately $3,100, a charge of $8,007 to transfer production lines from the Americas to China and Europe and the closure of facilities and losses of approximately $4,100 in connection with the exit from our glass batching business based in Belgium. For the years ended December 31, 1999 and 1998, the amount shown also includes $825 and $650, respectively, of expenses incurred on behalf of certain selling shareholders in connection with the secondary offerings. For the year ended December 31, 1997, the amount shown includes a restructuring charge of $6,300 to consolidate three facilities in North America. (i) Consists primarily of obligations under various pension plans and plans that provide postretirement medical benefits. See Note 11 to the audited consolidated financial statements included herein. 27 ITEM 7. 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 our audited consolidated financial statements. Overview We operate a global business, with net sales that are diversified by geographic region, product range and customer. We hold leading positions worldwide in many of our markets and attribute this leadership to several factors, including the strength of our brand name and reputation, our comprehensive solution offering, the quality of our global sales and service network, our continued investment in product development, our pursuit of technology leadership and our focus on capitalizing on opportunities in developed and emerging markets. While all of our businesses have significant strategic links in terms of technology or customer base, we have a geographically diverse business which serves customers in relatively healthy and stable end markets, including the pharmaceutical, biotech and food industries. Our financial information is presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). Net sales in local currency increased 9% in 2000, 16% in 1999 and 8% in 1998. The strengthening of the U.S. dollar versus our major trading currencies reduced U.S. dollar-reported sales growth in each year. Net sales in U.S. dollars increased 3% in 2000, 14% in 1999 and 7% in 1998. In 2000, we had local currency sales growth of 11% in Europe, 6% in the Americas and 13% in Asia and other markets. We believe our sales growth over the next several years will come primarily from our solutions approach to the principal challenges facing our customer base. These include the need for increased efficiency (for example, in accelerating time to market for new products, achieving better yields, improving work processes and outsourcing non-core activities), the desire to integrate information captured by instruments into management information systems, the drive for ever higher quality of our customers' products and services, including the need to adhere to stringent regulatory and industry standards, and the move towards globalization in all major customer groups. Acquisitions are also an integral part of our growth strategy. Our acquisitions leverage our global sales and service network, respected brand, extensive distribution channels and technological leadership. We are particularly attracted to acquisitions which leverage these attributes or increase our solutions capability (for example, software acquisitions). In addition, we are most attracted to the following end markets: drug discovery, process analytics, food and drug packaging and transportation and logistics. We increased our Adjusted Operating Income (gross profit less research and development and selling, general and administrative expenses before amortization and non-recurring costs) as a percentage of net sales from 10.8% in 1998 to 13.0% in 2000. This improved performance was achieved while we continued to invest in product development and in our distribution and manufacturing infrastructure. We believe that a significant portion of the increase in our Adjusted Operating Income resulted from our strategy to reduce costs, re-engineer our operations and focus on the highest value-added segments of the markets in which we compete. 28 Recent Acquisitions In 2000, we acquired Berger Instruments, Thornton Inc. and AVS. We also increased our shareholding in Cargoscan to 100%. Berger Instruments, based in Delaware, USA, is the market leader in Supercritical Fluid Chromatography (SFC), a high-performance technology used to analyze and purify chemical compounds during drug discovery. Berger Instruments is an excellent complement to our portfolio of automated drug discovery solutions. We already have a leading position in sample preparation and synthesis. Purification is the next process step after synthesis. Berger allows us to further our strategy of providing solutions that automate and integrate the drug discovery process and therefore help our customers improve the efficiency, throughput and accuracy of their processes. Thornton Inc., based in Massachusetts, USA, is the leader in pure and ultra-pure industrial water monitoring instrumentation used in semi-conductor, micro-electronics, pharmaceutical, and biotech applications. We believe the acquisition of Thornton is an excellent strategic move to expand our process analytics business and gain access to new markets. Their conductivity technology and know-how are complementary to our strength in pH and oxygen measurements. With a broader technology offering, we will be better able to serve our expanded customer base. AVS, UK-based, is a leader in x-ray visioning solutions used in the inspection of packaged goods. We are the leading global provider of integrated end-of-line inspection solutions. These high throughput solutions incorporate sensor technologies and software to assist customers in fulfilling validation requirements and in improving their quality and yield. Through AVS, we add x-ray-based vision inspection, which is ideal for identifying non-metallic contamination in packages and where metal packaging prevents detection by conventional means. We feel that AVS is an excellent strategic complement to our existing offering of metal detection, checkweighing and related quality control software systems. Cargoscan is the premier provider of dimensioning technology used by major express carriers, freight forwarders, third-party logistic entities and distribution companies. We believe we are uniquely positioned to serve this industry given our global presence and our technical knowledge of local regulatory requirements. This transaction underscores our commitment to the transportation and logistics sector and will allow us the flexibility and faster decision-making necessary to exploit the substantial growth of this market. In 1999, we acquired the Testut-Lutrana group, a leading manufacturer and marketer of industrial and retail weighing instruments in France with annual sales of approximately $50 million. We believe this acquisition is an excellent strategic fit given Testut-Lutrana's extensive sales and service network in France and excellent brand recognition. By virtue of this acquisition, we assumed the leading position in food retail weighing in Europe and are well positioned to meet the rapidly changing demands of our European customer base. In 1999, we also signed an agreement to convert our 60% joint venture in Changzhou, China, into a legal structure that provides us with full control. Through this change in ownership, we are able to fully leverage this low-cost manufacturing base for international markets. This move underscores our strategic commitment to Asia and our belief in the fundamental growth factors for the region. 29 In 1998, we acquired three technologically advanced instrument companies in the drug discovery sector: Applied Systems, Bohdan Automation Inc. and Myriad. Applied Systems designs, assembles and markets instruments for in-process molecular analysis, which is primarily used for researching, developing and monitoring chemical processes. Applied Systems' proprietary sensors, together with its innovative Fourier transform infrared technology, enable chemists to analyze chemical reactions as they occur, which is more efficient than pulling samples. Bohdan is a leading supplier of laboratory automation and automated synthesis products to the automated drug and chemical compound discovery market used in research for life science applications. Myriad designs, assembles and markets instruments that facilitate and automate the synthesis of large numbers of chemical compounds in parallel, which is a key step in the chemical compound discovery process. Its products can be used in all stages of synthesis in drug discovery. Cost Reduction Programs As part of our efforts to reduce costs, we evaluate from time to time the cost effectiveness of our global manufacturing strategy. In 2000, we recorded a charge of $1.4 million related to the close-down and consolidation of operations. Over the next few years, we also intend to continue to develop China as a low-cost manufacturing resource and to seek other manufacturing cost-saving opportunities. In this respect, we recorded a charge of $8.0 million in 1999 associated with the transfer of production lines from the Americas to China and Europe and the closure of facilities. These charges relate primarily to severance and other related benefits and costs of exiting facilities, including lease termination costs and the write-down of impaired assets. We believe that the future cash benefits of these programs will exceed the costs, although the cash outflows will precede the cash flow benefits. Activities related to the charge recorded in 1999 were significantly completed in 2000. In 1999, we launched a worldwide procurement project. The project is intended to eliminate price differences between units, leverage potential opportunities to increase buying power, and establish worldwide sourcing arrangements. We envision it will take at least two years to obtain anticipated benefits from this project. During 1999, we also exited our glass batching business based in Belgium. In this respect, we incurred losses of $4.1 million during 1999 primarily for severance and other costs of exiting this business. We completed our exit of the glass batching business by the end of 1999. 30 Results of Operations The following table sets forth certain items from our consolidated statements of operations for the years ended December 31, 2000, 1999 and 1998 (amounts in thousands).
2000 1999 (a) 1998(b) ---- -------- ------- Net sales.............................. $1,095,547 $1,065,473 $935,658 Cost of sales.......................... 600,185 585,007 520,190 ------- ------- ------- Gross profit........................... 495,362 480,466 415,468 Research and development............... 56,334 57,393 48,977 Selling, general and administrative.... 296,187 300,389 265,511 Amortization........................... 11,564 10,359 7,634 Purchased research and development..... - - 9,976 Interest expense....................... 20,034 21,980 22,638 Other charges, net (c)................. 2,638 10,468 1,197 --------- -------- -------- Earnings before taxes and minority interest $ 108,605 $ 79,877 $ 59,535 ========== ========== ======== Adjusted Operating Income (d).......... $ 142,841 $ 123,682 $100,980 ========== ========== ========
(a) In connection with acquisitions in 1999, including the acquisition of the Testut-Lutrana group, we allocated $998 of the purchase price to revalue certain inventories (principally work-in-progress and finished goods) to fair value (net realizable value). Substantially all such inventories were sold during the second quarter of 1999. (b) In connection with the Bohdan acquisition, we allocated, based upon independent valuations, $9,976 of the purchase price to purchased research and development in process. This amount was recorded as an expense immediately following the Bohdan acquisition. (c) Other charges, net generally includes interest income, foreign currency transactions, (gains) losses from sales of assets and other items. The 2000 amount also includes a charge of $1,425 related to the close-down and consolidation of operations. The 1999 amount includes a gain on an asset sale of approximately $3,100, a charge of $8,007 to transfer production lines from the Americas to China and Europe and the closure of facilities and losses of approximately $4,100 in connection with the exit from our glass batching business based in Belgium. For the years ended December 31, 1999 and 1998, the amount shown also includes $825 and $650, respectively, of expenses incurred on behalf of certain selling shareholders in connection with our secondary offerings in 1999 and 1998, respectively. (d) Adjusted Operating Income is defined as operating income (gross profit less research and development and selling, general and administrative expenses) before amortization and non-recurring costs. Non-recurring costs which have been excluded are the costs set forth in Note (a) above. We believe that Adjusted Operating Income provides important financial information in measuring and comparing our operating performance. 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 operating performance. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net sales were $1,095.5 million for the year ended December 31, 2000, compared to $1,065.5 million in the prior year. This reflected an increase of 9% in local currencies during 2000. Results for 2000 were negatively impacted by the strengthening of the U.S. dollar against other currencies. Net sales in U.S. dollars during 2000 increased 3%. Net sales by geographic customer location were as follows: Net sales in Europe increased 11% in local currencies during 2000, versus the prior year. The increase reflected organic growth in our business and the effect of the Testut-Lutrana acquisition. Net sales in local currencies during 2000 in the Americas increased 6%. Net sales in Asia and other markets increased 13% in local currencies during 2000. The results of our business in Asia and other markets during 2000 reflect strong sales performance in China and Japan. The operating results for Testut-Lutrana (which were included in our results from May 1, 1999) would have had the effect of increasing our net sales by an additional $16.3 million in 1999. 31 Gross profit as a percentage of net sales was 45.2% for 2000 and 1999, before non-recurring acquisition costs in 1999. During 2000, we experienced an increase in certain raw material costs, including electronics. Research and development expenses as a percentage of net sales were 5.1% for 2000, compared to 5.4% for the prior year. This decrease is the result of exchange rate movements. Selling, general and administrative expenses as a percentage of net sales decreased to 27.1% for 2000, compared to 28.2% for the prior year. Adjusted Operating Income increased 15% to $142.8 million, or 13.0% of net sales, for 2000, compared to $123.7 million, or 11.6% of net sales, for the prior year. The 1999 period excludes the previously noted non-recurring acquisition charge of $1.0 million for the revaluation of inventories to fair value. The increased operating profit reflected the benefits of higher sales levels and our continuous efforts to improve productivity. Interest expense decreased to $20.0 million for 2000, compared to $22.0 million for the prior year. The decrease was principally due to reduced debt levels. Other charges, net were $2.6 million for 2000, compared to other charges, net of $10.5 million for the prior year. The 2000 amount includes a charge of $1.4 million related to the close-down and consolidation of operations. The 1999 amount also included a gain on an asset sale of $3.1 million, charges of $8.0 million regarding the transfer of production lines from the Americas to China and Europe and the closure of facilities, losses of $4.1 million to exit our glass batching business based in Belgium and a charge of $0.8 million relating to the secondary offering completed in 1999. Our effective tax rate of 35% before non-recurring items in 2000 was consistent with the previous year. Net earnings were $71.5 million in 2000, compared to $57.9 million in 1999, before the $1.4 million charge to close down and consolidate operations in 2000, and expenses for the secondary offering, acquisition charges and the $8.0 million charge to transfer production lines from the Americas to China and Europe and the closure of facilities in 1999. This represents an increase of 23%. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net sales were $1,065.5 million for the year ended December 31, 1999, compared to $935.7 million in the prior year. This reflected an increase of 16% in local currencies during 1999. Results for 1999 were negatively impacted by the strengthening of the U.S. dollar against other currencies. Net sales in U.S. dollars during 1999 increased 14%. Net sales by geographic customer location were as follows: Net sales in Europe increased 19% in local currencies during 1999, versus the prior year. The increase largely reflected the effect of Testut-Lutrana, as well as organic growth in our business. Net sales in local currencies during 1999 in the Americas increased 15% principally due to organic growth in our business, as well as the effect of businesses acquired. Net sales in Asia and other markets increased 11% in local currencies during 1999. The results of our business in Asia 32 and other markets during 1999 primarily represented improved economic conditions throughout the region, which began in the fourth quarter of 1998. The operating results for Testut-Lutrana (which were included in our results from May 1, 1999) would have had the effect of increasing our net sales by an additional $38.8 million in 1998, if included from May 1, 1998. Gross profit as a percentage of net sales increased to 45.2% for 1999, compared to 44.4% for 1998, before non-recurring acquisition costs. Research and development expenses as a percentage of net sales increased to 5.4% for 1999, compared to 5.2% for the prior year. The increase primarily reflected increased research and development activity related to product introductions, as well as the effect of acquired businesses. Selling, general and administrative expenses as a percentage of net sales decreased to 28.2% for 1999, compared to 28.4% for the prior year. Adjusted Operating Income increased 22.5% to $123.7 million, or 11.6% of net sales, for 1999, compared to $101.0 million, or 10.8% of net sales, for the prior year. The 1999 period excludes the previously noted non-recurring acquisition charge of $1.0 million for the revaluation of inventories to fair value. The increased operating margin reflected the benefits of higher sales levels and our continuous efforts to improve productivity. Interest expense decreased to $22.0 million for 1999, compared to $22.6 million for the prior year. The decrease was principally due to reduced debt levels. Other charges, net were $10.5 million for 1999, compared to other charges, net of $1.2 million for the prior year. The 1999 and 1998 amounts included charges of $0.8 million and $0.7 million relating to the secondary offerings completed in 1999 and 1998, respectively. The 1999 amount also included a gain on an asset sale of $3.1 million, charges of $8.0 million regarding the transfer of production lines from the Americas to China and Europe and the closure of facilities and losses of $4.1 million to exit our glass batching business based in Belgium. The 1998 amount also included gains on asset sales offset by other charges. Our tax rate in 1999 before non-recurring items was consistent with the prior year, excluding a benefit of approximately 5 percentage points or $3.6 million based upon a one-time change in Swiss tax law which benefited only the 1998 period. The 1998 period also included non-deductible purchased research and development charges incurred in connection with the Bohdan acquisition. Net earnings before expenses for the secondary offerings, acquisition charges and the $8.0 million charge to transfer production lines from the Americas to China and Europe and the closure of facilities were $57.9 million in 1999, compared to $48.3 million in 1998. This represents an increase of almost 30%, excluding the one-time tax benefit of $3.6 million received in 1998. Liquidity and Capital Resources At December 31, 2000, our consolidated debt, net of cash, was $266.6 million. We had borrowings of $237.7 million under our credit agreement and $50.7 million under various other arrangements as of December 31, 2000. Of our credit agreement borrowings, approximately 33 $127.8 million was borrowed as term loans scheduled to mature in 2004 and $109.9 million was borrowed under a multi-currency revolving credit facility. At December 31, 2000, we had $293.5 million of availability remaining under the revolving credit facility. At December 31, 2000, approximately $110.2 million of the borrowings under the credit agreement and local working capital facilities were denominated in U.S. dollars. The balance of the borrowings under the credit agreement and local working capital facilities were denominated in certain of our other principal trading currencies amounting to approximately $178.2 million at December 31, 2000. Changes in exchange rates between the currencies in which we generate cash flow 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. Under the credit agreement, amounts outstanding under the term loans are payable in quarterly installments. In addition, the credit agreement obligates us to make mandatory prepayments in certain circumstances with the proceeds of asset sales or issuance of capital stock or indebtedness and with certain excess cash flow. The credit agreement imposes certain restrictions on us and our subsidiaries, including restrictions and limitations on the ability to pay dividends to our shareholders, incur indebtedness, make investments, grant liens, sell financial assets and engage in certain other activities. We must also comply with several financial covenants. The credit agreement is secured by most of our assets. Cash provided by operating activities totaled $84.7 million in 2000, compared to $91.3 million in 1999 and $72.0 million in 1998. The decrease in 2000 resulted principally from a one-time payment of $4.2 million associated with an early retirement plan from previous years, as well as an increase in inventory levels associated with product introductions, production transfers and increased safety stocks of electronics. In 1999, we also increased our accounts payable terms with many suppliers to improve our working capital efficiency. This resulted in an increase in cash provided by operating activities of $16.2 million in 1999. We maintained these payment terms in 2000, and therefore, accounts payables were not a source of cash in 2000. During 2000, we spent approximately $55.5 million on acquisitions, including approximately $10.2 million of additional consideration related to earn-out periods associated with acquisitions consummated in December of 1998, seller financing of $27.6 million and working capital retained by sellers. These purchases were funded from cash generated from operations and additional borrowings. We continue to explore potential acquisitions. In connection with any acquisition, we may incur additional indebtedness. In addition, we expect to make additional earn-out payments relating to certain of these acquisitions in the future. Capital expenditures are a significant use of funds and are made primarily for machinery, equipment and the purchase and expansion of facilities. Our capital expenditures totaled $29.3 million in 2000, $29.2 million in 1999 and $28.6 million in 1998. We expect capital expenditures to increase as our business grows, and fluctuate as currency exchange rates change. We currently believe that cash flow from operating activities, together with borrowings available under the credit agreement and local working capital facilities, will be sufficient to fund currently anticipated working capital needs and capital spending requirements as well as debt service requirements for at least several years, but there can be no assurance that this will be the case. 34 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. In recent years, the Swiss franc and other European currencies have generally moved in a consistent manner versus the U.S. dollar. Therefore, because the two effects previously described have offset each other, our operating profits have not been materially affected by movements in the U.S. dollar exchange rate versus European currencies. However, there can be no assurance that these currencies will continue to move in a consistent manner in the future. 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. European Economic and Monetary Union Within Europe, the European Economic and Monetary Union (the "EMU") introduced a new currency, the euro, on January 1, 1999. Switzerland is not part of the EMU. On January 1, 1999, the participating countries adopted the euro as their local currency, initially available for currency trading on currency exchanges and non-cash (banking) transactions. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and coins will be issued for cash transactions. For a period of six months from this date, both legacy currencies and the euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw all legacy currency and use exclusively the euro. We have recognized the introduction of the euro as a significant event with potential implications for existing operations. Currently, we operate in all of the participating countries in the EMU. We expect nonparticipating European Union countries, where we also have operations, may eventually join the EMU. We have committed resources to conduct risk assessments and to take corrective actions, where required, to ensure we are prepared for the introduction of the euro. We have undertaken a review of the euro implementation and have concentrated on areas such as operations, finance, treasury, legal, information management, procurement and others, both in participating and nonparticipating European Union countries where we operate. Also, existing legacy accounting and business systems and other business assets have been reviewed for euro compliance, including assessing any risks from third parties. Progress regarding euro implementation is reported periodically to management. 35 Because of the staggered introduction of the euro regarding non-cash and cash transactions, we have developed our plans to address our accounting and business systems first and our business assets second. We were euro compliant within our accounting and business systems by the end of 1999 and expect to be compliant within our other business assets prior to the introduction of the euro bills and coins. Compliance in participating and nonparticipating countries will be achieved primarily through upgraded systems, which were previously planned to be upgraded. Remaining systems will be modified to achieve compliance. We do not currently expect to experience any significant operational disruptions or to incur any significant costs, including any currency risk, which could materially affect our liquidity or capital resources. We are preparing plans to address issues within the transitional period when both legacy and euro currencies may be used. We continue to assess our pricing strategy throughout Europe due to the increased price transparency created by the euro and are attempting to adjust prices in some of our markets. We are also encouraging our suppliers, even in Switzerland, to commence transacting in the euro. We do not believe that the effect of these adjustments will be material. We have a disproportionate amount of our costs in Swiss francs relative to sales. Historically, the potential currency impact has been muted because currency fluctuations between the Swiss franc and other major European currencies have been minimal and there is greater balance between total European (including Swiss) sales and costs. However, if the introduction of the euro results in a significant weakening of the euro against the Swiss franc, our financial performance could be harmed. The statements set forth herein concerning the introduction of the euro which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. In particular, the costs associated with our euro programs and the time-frame in which we plan to complete euro modifications are based upon management's best estimates. These estimates were derived from internal assessments and assumptions of future events. There can be no guarantee that any estimates or other forward-looking statements will be achieved, and actual results could differ significantly from those contemplated. Taxes We are subject to taxation in many jurisdictions throughout the world. Our effective tax rate and tax liability will be affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and repatriate income, and changes in law. Generally, the tax liability for each taxpayer within the group is determined either (i) on a non-consolidated/non-combined basis or (ii) on a consolidated/combined basis only with other eligible entities subject to tax in the same jurisdiction, in either case without regard to the taxable losses of non-consolidated/non-combined affiliated legal entities. As a result, we may pay income taxes to certain jurisdictions even though on an overall basis we incur a net loss for the period. Environmental Matters We are subject to various environmental laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes 36 and the remediation of contamination associated with the use and disposal of hazardous substances. We incur capital and operating expenditures in complying with environmental laws and regulations both in the United States and abroad. We are currently involved in, or have potential liability with respect to, the remediation of past contamination in facilities both in the United States and abroad. In addition, some of these facilities have or had been in operation for many decades and may have used substances or generated and disposed of wastes that are hazardous or may be considered hazardous in the future. Such sites and disposal sites owned by others to which we sent waste may in the future be identified as contaminated and require remediation. Accordingly, it is possible that we could become subject to additional environmental liabilities in the future that may harm our results of operations or financial condition. However, we do not anticipate any material adverse effect on our results of operations or financial condition as a result of future costs of environmental compliance. Inflation Inflation can affect the costs of goods and services that we use. The competitive environment in which we operate limits somewhat our ability to recover higher costs through increased selling prices. Moreover, there may be differences in inflation rates between countries in which we incur the major portion of our costs and other countries in which we sell products, which may limit our ability to recover increased costs. We remain committed to operations in China, Latin America and Eastern Europe, which have experienced inflationary conditions. To date, inflationary conditions have not had a material effect on our operating results. However, if our presence in China, Latin America and Eastern Europe increases, these inflationary conditions could have a greater impact on our operating results. Seasonality Our business has historically experienced a slight amount of seasonal variation, with sales in the first quarter slightly lower than, and sales in the fourth quarter slightly higher than, sales in the second and third quarters. This trend has a somewhat greater effect on income from operations than on net sales because fixed costs are spread evenly across all quarters. Quantitative and Qualitative Disclosures About Market Risk We have only limited involvement with derivative financial instruments and do not use them for trading purposes. We have entered into foreign currency forward contracts to hedge short-term intercompany balances with our foreign businesses. Such contracts limit our exposure to both favorable and unfavorable currency fluctuations. A sensitivity analysis to changes in the U.S. dollar and Swiss franc on these foreign currency-denominated contracts indicates that if the U.S. dollar and Swiss franc uniformly worsened by 10% against all of our currency exposures, the fair value of these instruments would decrease by $1.2 million at December 31, 2000, as compared with $2.7 million at December 31, 1999. Any resulting changes in fair value would be offset by changes in the underlying hedged balance sheet position. The sensitivity analysis assumes a parallel shift in foreign currency exchange rates. The assumption that exchange rates change in parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in a foreign currency. We also have other currency risks as described under "Effect of Currency on Results of Operations." 37 We have entered into certain interest rate swap agreements in order to limit our exposure to increases in interest rates. These contracts are more fully described in Note 5 to our audited consolidated financial statements. Based on our agreements outstanding at December 31, 2000, a 100 basis point increase in interest rates would result in an increase in the net aggregate market value of these instruments of $0.8 million, as compared with $9.4 million at December 31, 1999. Conversely, a 100 basis point decrease in interest rates would result in a $0.7 million net reduction in the net aggregate market value of these instruments, as compared with $9.4 million at December 31, 1999. Any change in fair value would not affect our Consolidated Statement of Operations unless such agreements and the variable rate debt they hedge were prematurely settled. We have designated certain of our Swiss franc debt as a hedge of our net investments. A sensitivity analysis to changes in the U.S. dollar on such debt at December 31, 2000 indicates that if the U.S. dollar weakened by 10% against the Swiss franc, the fair value of such debt would increase by $9.7 million, as compared with $5.1 million at December 31, 1999. Any changes in fair value of the debt are recorded in comprehensive income and offset the impact on comprehensive income of foreign exchange changes on the net investments which they hedge. New Accounting Standards In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 did not have a material impact on our financial position and results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement will not have a material effect on our financial condition or results of operations. Forward-Looking Statements and Associated Risks This annual report includes forward-looking statements based on our current expectations and projections about future events, including: strategic plans; potential growth, including penetration of developed markets and opportunities in emerging markets; planned product introductions; planned operational changes and research and development efforts; euro conversion issues; future financial performance, including expected capital expenditures; research and development expenditures; potential acquisitions; impact of completed acquisitions; future cash sources and requirements; liquidity; impact of environmental costs; and potential cost savings. These forward-looking statements are subject to a number of risks and uncertainties, including those identified in Exhibit 99.1 to our Annual Report on Form 10-K, which could cause our actual results to differ materially from historical results or those anticipated and 38 certain of which are beyond our control. The words "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Discussion of this item is on page 37 of Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are set forth on pages F-1 through F-27 and the related financial schedule is set forth on page S-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 10, 1999, the Company dismissed KPMG Fides Peat as its independent auditors. The reports of KPMG Fides Peat on the Company's financial statements for the fiscal years ended December 31, 1998 and December 31, 1997 did not contain an adverse opinion or a disclaimer of opinion, or a qualification or modification as to uncertainty, audit scope, or accounting principles. In connection with its audits for fiscal years ended December 31, 1998 and 1997, and through March 10, 1999, there were no disagreements with KPMG Fides Peat on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of KPMG Fides Peat, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its reports covering such periods. None of the reportable events listed in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Company and KPMG Fides Peat. On March 10, 1999, the Company engaged PricewaterhouseCoopers ("PwC") as its independent auditors for the fiscal year ending December 31, 1999. During the fiscal years ended December 31, 1998 and 1997, and through March 10, 1999, the Company did not consult with PwC as to either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements and the Company did not consult with PwC as to any matter that was either the subject of a disagreement or reportable event. The decision to dismiss KPMG Fides Peat as the Company's independent auditors was approved by the Audit Committee of the Company's Board of Directors. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are set forth below. All directors hold office until the annual meeting of shareholders following their election or until their successors are duly elected and qualified. Officers are appointed by the Board of Directors and serve at the discretion of the Board. Name Age Position Robert F. Spoerry 45 President, Chief Executive Officer and Chairman of the Board of Directors William P. Donnelly 39 Chief Financial Officer Lukas Braunschweiler 44 Head of Industrial and Retail Peter Burker 55 Head of Human Resources Jean-Lucien Gloor 48 Head of Information Systems and Logistics Karl M. Lang 54 Head of Asia/Pacific Daniel G. Schillinger 42 Head of Laboratory Philip Caldwell 81 Director John T. Dickson 55 Director Reginald H. Jones 83 Director John D. Macomber 73 Director George M. Milne 57 Director Laurence Z. Y. Moh 75 Director (to retire) Thomas P. Salice 41 Director Robert F. Spoerry has been President and Chief Executive Officer of the Company since 1993. He served as Head of Industrial and Retail (Europe) of the Company from 1987 to 1993. Mr. Spoerry has been a Director since October 1996. Mr. Spoerry has been Chairman of the Board of Directors since May 1998. William P. Donnelly has been Chief Financial Officer of the Company since 1997. From 1993 until joining the Company, he held various senior financial and management positions, including most recently Group Vice President and Chief Financial Officer with Elsag Bailey Process Automation, a global manufacturer of instrumentation and analytical products and developer of distributed control systems. Lukas Braunschweiler has been Head of Industrial and Retail of the Company since 1999. From 1995 to 1999 he served as Head of Industrial and Retail (Europe). From 1992 until 1995 he held various senior management positions with the Landis & Gyr Group, a manufacturer of electrical meters. Prior to 1992, he was a Vice President in the Technology Group of Saurer Group, a manufacturer of textile machinery and IT solutions. Peter Burker has been Head of Human Resources of the Company since 1994. From 1992 to 1994 he was the Company's General Manager in Spain, and from 1989 to 1991 he headed the Company's operations in Italy. Jean-Lucien Gloor joined the Company as Head of Information Systems and Logistics on March 1, 2001. From 1999 to 2000, he was the leader of Central Server Platforms for Credit 40 Suisse Financial Services in Zurich. Prior to 1999, he served in a variety of IT functions for Dow Chemical Corporation. Karl M. Lang has been Head of Asia / Pacific of the Company since January 2000. From 1994 to January 2000 he served as Head of Laboratory. From 1991 to 1994 he was based in Japan as a representative of senior management with responsibility for expansion of the Asian operations. Daniel G. Schillinger has been Head of Laboratory of the Company since January 2000. From 1995 to 1999 he was with Grundfos, a Danish industrial instrument manufacturer, as head of the mid- and east European sales companies and as General Manager for Germany. Prior to 1995, he held various positions in R&D and technology management with ABB, an engineering concern, and with Landis & Gyr, a manufacturer of electrical meters and building control systems. Philip Caldwell has been a Director since October 1996. Prior to May 1998, Mr. Caldwell served as Chairman of the Board of Directors. Mr. Caldwell spent 32 years at Ford Motor Company, where he served as Chairman of the Board of Directors and Chief Executive Officer from 1980 to 1985 and a Director from 1973 to 1990. He served as a Director and Senior Managing Director of Lehman Bros. Inc. and its predecessor, Shearson Lehman Brothers Holdings, Inc., from 1985 to February 1998. Mr. Caldwell is also a Director of the Mexico Fund, Russell Reynolds Associates, Inc. and Waters Corporation. He is a member of the Zurich Financial Services Group US Advisory Board. He has served as a Director of the Chase Manhattan Bank, N.A., the Chase Manhattan Corp., Digital Equipment Corporation, Federated Department Stores Inc., Kellogg Company, CasTech Aluminum Group Inc., Specialty Coatings International Inc., American Guarantee & Liability Insurance Company, Zurich Holding Company of America, Inc., and Zurich Reinsurance Centre Holdings, Inc. John T. Dickson has been a Director since March 2000. Mr. Dickson is Executive Vice President of Lucent Technologies and CEO designate and President of Agere Systems Inc. (formerly the Microelectronics Group of Lucent Technologies). Mr. Dickson joined Lucent Technologies in 1993. Mr. Dickson is also a Director of the Semiconductor Industry Association and a member of the Board of Trustees of Lehigh Valley Health Network. Reginald H. Jones has been a Director since October 1996. Mr. Jones retired as Chairman of the Board of Directors of General Electric Company ("General Electric") in April 1981. At General Electric, he served as Chairman of the Board of Directors and Chief Executive Officer from December 1972 through April 1981, President from June 1972 to December 1972 and a Director from August 1971 to April 1981. John D. Macomber has been a Director since October 1996. He has been a principal of JDM Investment Group since 1992. He was Chairman and President of the Export-Import Bank of the United States (an agency of the U.S. Government) from 1989 to 1992. From 1973 to 1986 Mr. Macomber was Chairman and Chief Executive Officer of Celanese Corporation. Prior to that, Mr. Macomber was a Senior Partner of McKinsey & Company. Mr. Macomber is also a Director of Lehman Brothers Holdings and Textron Inc. George M. Milne has been a Director since September 1999. Mr. Milne is President of the Central Research Division and Senior Vice President of Pfizer Inc., with responsibility for guiding the company's global pharmaceutical and animal health drug discovery and development efforts, a position he assumed in 1993. Since joining Pfizer in 1970, Mr. Milne has held a variety of senior management and research positions. 41 Laurence Z. Y. Moh has been a Director since October 1996. At present, he is Chairman and Chief Executive Officer of Plantation Timber Products Limited (CHINA), which he founded in 1996. He is Chairman Emeritus of Universal Furniture Limited, which he founded in 1959. Thomas P. Salice has been a Director since October 1996. Mr. Salice is President and Chief Executive Officer of AEA Investors Inc. and has been associated with AEA Investors Inc. since June 1989. Mr. Salice is also a Director of Waters Corporation and Sovereign Specialty Chemicals, Inc. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the sections captioned "Board of Directors Information," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement") is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the section "Share Ownership" in the 2001 Proxy Statement is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the section captioned "Certain Transactions" in the 2001 Proxy Statement is incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report: 1. Financial Statements. See Index to Consolidated Financial Statements included on page F-1. 2. Financial Statement Schedule and related Audit Report See Schedule II, which is included on pages S-1 and S-2. 3. List of Exhibits. See Index of Exhibits included on page E-1. (b) Reports on Form 8-K: None. 42 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Mettler-Toledo International Inc. (Registrant) Date: March 22, 2001 By: /s/ ROBERT F. SPOERRY --------------------- Robert F. Spoerry Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Chairman of the Board, President and /s/ ROBERT F. SPOERRY Chief Executive Officer March 22, 2001 -------------------------- Robert F. Spoerry Vice President and Chief Financial Officer (Principal financial and /s/ WILLIAM P. DONNELLY accounting officer) March 22, 2001 -------------------------- William P. Donnelly /s/ PHILIP CALDWELL Director March 22, 2001 -------------------------- Philip Caldwell /s/ JOHN T. DICKSON Director March 22, 2001 -------------------------- John T. Dickson /s/ REGINALD H. JONES Director March 22, 2001 -------------------------- Reginald H. Jones /s/ JOHN D. MACOMBER Director March 22, 2001 -------------------------- John D. Macomber /s/ GEORGE M. MILNE Director March 22, 2001 -------------------------- George M. Milne /s/ LAURENCE Z.Y. MOH Director March 22, 2001 -------------------------- Laurence Z.Y. Moh /s/ THOMAS P. SALICE Director March 22, 2001 -------------------------- Thomas P. Salice 43
Page Number or Exhibit No. Description Incorporation by Reference ----------- ----------- -------------------------- 3.1 Amended and Restated Certificate of Filed as Exhibit 3.1 to the Annual Report on Form Incorporation of the Company 10-K of the Company dated March 13, 1998 and incorporated herein by reference 3.2 Amended By-laws of the Company, effective Filed as Exhibit 3.2 to the Annual Report on Form February 3, 2000 10-K of the Company dated March 24, 2000 and incorporated herein by reference 4.1 Specimen Form of the Company's Stock Filed as Exhibit 4.3 to the Registration Statement, Certificate as amended, on Form S-1 of the Company (Reg. No. 333-35597) and incorporated herein by reference 10.1 Employment Agreement between Robert F. Spoerry Filed as Exhibit 10.4 to the Annual Report on Form and Mettler-Toledo AG, dated as of October 30, 10-K of Mettler-Toledo Holding Inc. dated March 31, 1996 1997 and incorporated herein by reference 10.2 Employment Agreement between Lukas Filed as Exhibit 10.2 to the Annual Report on Form Braunschweiler and Mettler-Toledo GmbH dated 10-K of the Company dated March 13, 1998 and as of November 10, 1997 incorporated herein by reference 10.3 Employment Agreement between William P. Filed as Exhibit 10.3 to the Annual Report on Form Donnelly and Mettler-Toledo GmbH dated as of 10-K of the Company dated March 13, 1998 and November 10, 1997 incorporated herein by reference 10.4 Employment Agreement between Karl M. Lang and Filed as Exhibit 10.4 to the Annual Report on Form Mettler-Toledo GmbH dated as of November 10, 10-K of the Company dated March 13, 1998 and 1997 incorporated herein by reference 10.5 Loan Agreement between Robert F. Spoerry and Filed as Exhibit 10.5 to the Annual Report on Form Mettler-Toledo AG, dated as of October 7, 1996 10-K of Mettler-Toledo Holding Inc. dated March 31, 1997 and incorporated herein by reference 10.6 Regulations of the Performance Oriented Bonus Filed as Exhibit 10.7 to the Annual Report on Form System (POBS) - Incentive System for the 10-K of the Company dated March 18, 1999 and Management of Mettler Toledo, effective as of incorporated herein by reference November 5, 1998 10.7 Regulations of the POBS Plus - Incentive Filed as Exhibit 10.7 to the Annual Report on Form Scheme for Senior Management of Mettler 10-K of the Company dated March 24, 2000 and Toledo, effective as of March 14, 2000 incorporated herein by reference 10.8 Credit Agreement, dated as of November 19, Filed as Exhibit 10.9 to the Annual Report on Form 1997, between Mettler-Toledo International 10-K of the Company dated March 13, 1998 and Inc., as Guarantor, Mettler-Toledo, Inc., incorporated herein by reference Mettler-Toledo AG, as Borrowers, Safeline Holding Company as UK Borrower, Mettler-Toledo, Inc., as Canadian Borrower and Merrill Lynch & Co. as Arranger and Documentation Agent, and the Lenders thereto 10.9 Amendment No.1, dated as of September 30, Filed as Exhibit 10 to the Quarterly Report on Form 1998, to the Second Amended and Restated 10-Q of the Company, dated November 16, 1998 and Credit Agreement, dated as of November 19, incorporated herein by reference 1997 E-1 Page Number or Exhibit No. Description Incorporation by Reference ----------- ----------- -------------------------- 10.10 1997 Amended and Restated Stock Option Plan Filed as Exhibit 10.10 to the Registration Statement on Form S-1 of the Company (Reg. No. 333-35597) and incorporated herein by reference) 10.11 Amendment to the 1997 Amended and Restated Filed as Exhibit 10 to the Quarterly Report on Form Stock Option Plan 10-Q of the Company dated August 15, 2000 and incorporated herein by reference 10.12 Employment Agreement between Peter Burker and Filed as Exhibit 10.11 to the Annual Report on Form Mettler-Toledo GmbH dated as of November 10, 10-K of the Company dated March 24, 2000 and 1997 incorporated herein by reference 10.13 Employment Agreement between Daniel G. Filed as Exhibit 10.12 to the Annual Report on Form Schillinger and Mettler-Toledo GmbH dated as of 10-K of the Company dated March 24, 2000 and January 1, 2000 incorporated herein by reference 10.14 Regulations of the POBS PLUS - Incentive Filed as Exhibit 10.13 to the Annual Report on Form Scheme for Members of the Group Management of 10-K of the Company dated March 24, 2000 and Mettler Toledo, effective as of March 7, 2000 incorporated herein by reference 10.15* Employment Agreement between Jean-Lucien Gloor Page 76 and Mettler-Toledo GmbH dated as of March 1, 2001 21* Subsidiaries of the Company Page 78 23.1* Consent of PricewaterhouseCoopers AG Page 82 99.1* Factors Affecting Our Future Operating Results Page 83 --------------- * Filed herewith
E-2 METTLER-TOLEDO INTERNATIONAL INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Reports..................................... F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999...... F-4 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......... F-5 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.......... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......... F-7 Notes to Consolidated Financial Statements........................ F-8 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Mettler-Toledo International Inc. In our opinion, the consolidated financial statements listed in the index under Item 14(a)(1) on page 42 present fairly, in all material respects, the financial position of Mettler-Toledo International Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index under Item 14 (a) (2) on page 42 presents fairly, in all material respects, the information set forth therein for 2000 and 1999 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers AG Zurich, Switzerland February 8, 2001 F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Mettler-Toledo International Inc. We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of Mettler-Toledo International Inc. and subsidiaries for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations of Mettler-Toledo International Inc. and subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. KPMG Fides Peat Zurich, Switzerland February 5, 1999 F-3
METTLER-TOLEDO INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As of December 31 (In thousands, except per share data) 2000 1999 ------- ------- ASSETS Current assets: Cash and cash equivalents............................................... $ 21,725 $ 17,179 Trade accounts receivable, less allowances of $9,097 in 2000 and $9,827 in 1999.................................................... 212,570 203,750 Inventories, net........................................................ 141,677 123,901 Other current assets and prepaid expenses............................... 47,367 43,115 ------- ------- Total current assets.................................................. 423,339 387,945 Property, plant and equipment, net......................................... 199,388 199,723 Excess of cost over net assets acquired, net of accumulated amortization of $29,664 in 2000 and $21,313 in 1999.................................. 228,035 204,395 Other non-current assets .................................................. 36,820 28,910 ------- ------- Total assets.......................................................... $887,582 $820,973 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable................................................. $ 80,513 $ 81,234 Accrued and other liabilities........................................... 97,575 105,783 Accrued compensation and related items.................................. 51,968 53,510 Taxes payable........................................................... 68,537 48,769 Short-term borrowings and current maturities of long-term debt......... 50,560 46,879 ------- ------- Total current liabilities............................................. 349,153 336,175 Long-term debt............................................................. 237,807 249,721 Non-current deferred taxes................................................. 25,939 22,728 Other non-current liabilities.............................................. 95,843 100,334 ------- ------- Total liabilities.................................................... 708,742 708,958 Shareholders' equity: Preferred stock, $0.01 par value per share; authorized 10,000,000 shares - - Common stock, $0.01 par value per share; authorized 125,000,000 shares; issued 39,372,873 and 38,674,768 (excluding 64,467 shares held in treasury) at December 31, 2000 and 1999............................... 393 386 Additional paid-in capital.............................................. 294,558 288,092 Accumulated deficit .................................................... (68,307) (138,426) Accumulated other comprehensive loss.................................... (47,804) (38,037) -------- -------- Total shareholders' equity ........................................... 178,840 112,015 Commitments and contingencies.............................................. -------- -------- Total liabilities and shareholders' equity ........................... $887,582 $820,973 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-4
METTLER-TOLEDO INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31 (In thousands, except per share data) 2000 1999 1998 ------ ------ ------- Net sales...................................... $1,095,547 $1,065,473 $935,658 Cost of sales.................................. 600,185 585,007 520,190 ------- ------- ------- Gross profit............................... 495,362 480,466 415,468 Research and development....................... 56,334 57,393 48,977 Selling, general and administrative............ 296,187 300,389 265,511 Amortization................................... 11,564 10,359 7,634 Purchased research and development............. - - 9,976 Interest expense............................... 20,034 21,980 22,638 Other charges, net............................. 2,638 10,468 1,197 ------- ------ ----- Earnings before taxes and minority interest................................ 108,605 79,877 59,535 Provision for taxes............................ 38,510 31,398 20,999 Minority interest.............................. (24) 378 911 ---------- ---------- -------- Net earnings............................... $ 70,119 $ 48,101 $ 37,625 ========== ========== ======== Basic earnings per common share: Net earnings............................... $1.80 $1.25 $0.98 Weighted average number of common shares... 38,897,879 38,518,084 38,357,079 Diluted earnings per common share: Net earnings............................... $1.66 $1.16 $0.92 Weighted average number of common shares... 42,141,548 41,295,757 40,682,211 The accompanying notes are an integral part of these consolidated financial statements.
F-5
METTLER-TOLEDO INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31 (In thousands, except for share data) Common Stock Accumulated All Classes Additional Other ----------------------- Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Loss Total ---------- ------ -------- ---------- --------- ------- Balance at December 31, 1997.... 38,336,014 $383 $284,630 $(224,152) $(35,462) $25,399 Exercise of stock options....... 64,349 1 531 - - 532 Comprehensive income: Net earnings................. - - - 37,625 - 37,625 Change in currency translation adjustment................ - - - - (4,962) (4,962) Minimum pension liability.... - - - - (4,759) (4,759) ------- Comprehensive income............ 27,904 ---------- ---- -------- ---------- --------- ------- Balance at December 31, 1998.... 38,400,363 $384 $285,161 $(186,527) $(45,183) $53,835 Exercise of stock options....... 274,405 2 2,931 - - 2,933 Comprehensive income: Net earnings................. - - - 48,101 - 48,101 Change in currency translation adjustment................ - - - - 2,387 2,387 Minimum pension liability.... - - - - 4,759 4,759 ------ Comprehensive income............ 55,247 ---------- ---- -------- ---------- --------- ------- Balance at December 31, 1999.... 38,674,768 $386 $288,092 $(138,426) $(38,037) $112,015 Exercise of stock options....... 698,105 7 6,466 - - 6,473 Comprehensive income: Net earnings................. - - - 70,119 - 70,119 Change in currency translation adjustment................ - - - - (9,767) (9,767) ------- Comprehensive income............ 60,352 ---------- ---- -------- --------- --------- ------- Balance at December 31, 2000.... 39,372,873 $393 $294,558 $(68,307) $(47,804) $178,840 ========== ==== ======== ========= ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
F-6
METTLER-TOLEDO INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (In thousands) 2000 1999 1998 ------ ------ ------ Cash flows from operating activities: Net earnings.............................................. $70,119 $48,101 $37,625 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation......................................... 21,690 24,940 24,592 Amortization......................................... 11,564 10,359 7,634 Write-off of purchased research and development and cost of sales associated with revaluation of inventories................... - 998 9,976 Net (gain) loss on disposal of long-term assets...... 427 (3,269) (2,868) Deferred taxes and adjustments to goodwill........... 1,487 (1,636) (1,200) Minority interest.................................... (24) 378 911 Increase (decrease) in cash resulting from changes in: Trade accounts receivable, net....................... (12,437) (19,437) (16,391) Inventories.......................................... (17,274) (9,540) (5,953) Other current assets................................. (1,778) 11,363 3,300 Trade accounts payable............................... (2,958) 16,239 17,523 Accruals and other liabilities....................... 13,898 (a) 12,844 (a) (3,107) (a) ------ ------ ------- Net cash provided by operating activities.......... 84,714 91,340 72,042 ------ ------ ------ Cash flows from investing activities: Proceeds from sale of property, plant and equipment..... 1,468 10,151 22,500 Purchase of property, plant and equipment............... (29,304) (29,188) (28,633) Acquisitions, net of seller financings.................. (26,377) (b) (18,468) (b) (28,925) (b) Other investing activities.............................. - - (885) ------ ------ ------ Net cash used in investing activities.............. (54,213) (37,505) (35,943) -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings................................ 29,239 20,640 23,019 Repayments of borrowings................................ (61,617) (80,393) (62,376) Proceeds from issuance of common stock.................. 6,473 2,592 532 -------- -------- -------- Net cash used in financing activities.............. (25,905) (57,161) (38,825) -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (50) (686) 351 ---- ----- --- Net increase (decrease) in cash and cash equivalents....... 4,546 (4,012) (2,375) ----- ------- ------- Cash and cash equivalents: Beginning of period..................................... 17,179 21,191 23,566 ------- ------- ------- End of period........................................... $21,725 $17,179 $21,191 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.............................................. $20,014 $21,642 $21,109 Taxes................................................. 16,523 25,952 20,285 Non-cash investing activities: Seller financings on acquisitions....................... $27,638 - $11,960 (a) Accruals and other liabilities include payments for restructuring, certain acquisition integration activities and a one-time payment in 2000 associated with an early retirement plan from previous years. These amounts totalled $10.3 million, $5.9 million and $9.4 million in 2000, 1999 and 1998, respectively. (b) Amounts paid for acquisitions including seller financing, assumed debt and working capital retained by sellers were $55.5 million, $20.5 million and $44.0 million in 2000, 1999 and 1998, respectively. The accompanying notes are an integral part of these consolidated financial statements.
F-7 METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands unless otherwise stated) 1. Business Description and Basis of Presentation Mettler-Toledo International Inc. ("Mettler-Toledo" or the "Company") is a global manufacturer and marketer of precision instruments, including weighing and certain analytical and measurement technologies, for use in laboratory, industrial and food retailing applications. The Company is also a leading provider of automated chemistry solutions used in drug and chemical compound discovery and development. The Company's primary manufacturing facilities are located in Switzerland, the United States, Germany, the United Kingdom, France and China. The Company's principal executive offices are located in Greifensee, Switzerland. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and include all entities in which the Company has control, including its majority owned subsidiaries. Certain amounts in the prior period financial statements have been reclassified to conform with current year presentation. All intercompany transactions and balances have been eliminated. Investments in which the Company has voting rights between 20% to 50% are accounted for using the equity method of accounting. The preparation of financial statements 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. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturity dates of three months or less. Inventories Inventories are valued at the lower of cost or market. Cost, which includes direct materials, labor and overhead plus indirect overhead, is determined using the first in, first out (FIFO) or weighted average cost methods and to a lesser extent the last in, first out (LIFO) method. F-8 METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands unless otherwise stated) 2. Summary of Significant Accounting Policies - (Continued) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is charged on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements 15 to 50 years Machinery and equipment 3 to 12 years Computer software 3 to 5 years Leasehold improvements Shorter of useful life or lease term The Company reviews its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Excess of Cost over Net Assets Acquired The excess of purchase price over the fair value of net assets acquired is amortized on a straight-line basis over the expected period to be benefited. The Company assesses the recoverability of such amounts by determining whether the amortization of the balance over its remaining life can be recovered from the undiscounted future operating cash flows of the acquired operations. Taxation The Company files tax returns in each jurisdiction in which it operates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the Company operates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Generally, deferred taxes are not provided on the unremitted earnings of subsidiaries outside of the U.S. because it is expected that these earnings are permanently reinvested and such determination is not practicable. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. Deferred taxes are provided in situations where the Company's subsidiaries plan to make future dividend distributions. F-9 2. Summary of Significant Accounting Policies - (Continued) Currency Translation and Transactions The reporting currency for the consolidated financial statements of the Company is the U.S. dollar. The functional currency for the Company's operations is generally the applicable local currency. Accordingly, the assets and liabilities of companies whose functional currency is other than the U.S. dollar are included in the consolidated financial statements by translating the assets and liabilities into the reporting currency at the exchange rates applicable at the end of the reporting period. The statements of operations and cash flows of such non-U.S. dollar functional currency operations are translated at the monthly average exchange rates during the year. Translation gains or losses are accumulated in other comprehensive income (loss) in the Consolidated Statements of Shareholders' Equity. Revenue Recognition Revenue is recognized when title to a product has transferred or services have been rendered and any customer obligations have been fulfilled. Revenues from service contracts are recognized over the contract period. Research and Development Research and development costs are expensed as incurred. Earnings per Common Share As described in Note 10, in accordance with the treasury stock method, the Company has included 3,243,669 and 2,777,673 equivalent shares relating to 5,173,777 outstanding options to purchase shares of common stock in the calculation of diluted weighted average number of common shares for years ending December 31, 2000 and 1999, respectively. Derivative Financial Instruments The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into foreign currency forward contracts to hedge short-term intercompany transactions with its foreign businesses. Such contracts limit the Company's exposure to both favorable and unfavorable currency fluctuations. These contracts are adjusted to reflect market values as of each balance sheet date, with the resulting changes in fair value being recognized in other charges, net. The Company also enters into certain interest rate swap agreements in order to reduce its exposure to changes in interest rates. The differential paid or received on interest rate swap agreements is recognized as interest expense over the life of the agreements as incurred. The Company has entered into certain foreign currency forward contracts in order to convert certain U.S. dollar-based debt into Swiss franc-based debt. The Company has also designated certain of its Swiss franc debt as a hedge of its net investments. Any changes in F-10 2. Summary of Significant Accounting Policies - (Continued) fair value of the forward contracts and the debt are recorded in comprehensive income (loss) and offset the net investments which they hedge. Stock Based Compensation The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Concentration of Credit Risk The Company's revenue base is widely diversified by geographic region and by individual customer. The Company's products are utilized in many different industries, although extensively in the pharmaceutical, food and beverage, transportation and logistics and chemicals industries. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. 3. Business Combinations During 2000, the Company spent approximately $55.5 million on acquisitions, including approximately $10.2 million of additional consideration related to earn-out periods associated with acquisitions consummated in prior years, seller financing of $27.6 million and working capital retained by sellers which has been excluded from the purchase price allocation. The Company accounted for the acquisition payments using the purchase method of accounting. The Company may be required to make additional earn-out payments relating to certain of these acquisitions in the future. In 2000, the Company acquired Berger Instruments, Thornton Inc. and AVS. The Company also increased its shareholding in Cargoscan to 100%. Berger Instruments is the market leader in Supercritical Fluid Chromatography (SFC), a high-performance technology used to analyze and purify chemical compounds during drug discovery. Thornton is the market leader in pure and ultra-pure industrial water monitoring instrumentation used in semi-conductor, micro-electronics, pharmaceutical and biotech applications. AVS is a leader in x-ray visioning solutions used in the inspection of packaged goods. Cargoscan is the leading provider of dimensioning technology used by major express carriers, freight forwarders, third-party logistic entities and distribution companies. During 1999, the Company spent approximately $20.5 million on acquisitions including the net assets of the Testut-Lutrana group, a leading manufacturer and marketer of industrial and retail weighing instruments in France. This amount includes approximately $2.0 million of working capital retained by sellers which has been excluded from the purchase price allocation. The Company accounted for the acquisitions using the purchase method of accounting. Accordingly, the costs of the acquisitions were allocated to the assets acquired and liabilities assumed based upon their respective fair values. In this respect, the Company allocated $1.0 million of the purchase price to revalue certain finished goods inventories to fair value. Substantially all of such inventories were sold in 1999. F-11 3. Business Combinations - (Continued) During 1998, the Company spent approximately $44.9 million on acquisitions and other investing activities including seller financing of $12.0 million and assumed debt of $3.1 million as well as contingent and other payments associated with acquisitions consummated in 1997. In 1998, the Company acquired Applied Systems, Bohdan Automation Inc. and Myriad. The Company accounted for these acquisitions using the purchase method of accounting. Accordingly, the costs of the acquisition were allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company incurred a charge of $10.0 million immediately following the acquisition of Bohdan Automation based upon an independent valuation for purchased research and development costs for products being developed that had not established technological feasibility as of the date of acquisition and, if unsuccessful, had no alternative future use in research and development activities or otherwise. Applied Systems designs, assembles and markets instruments for in-process molecular analysis, which is primarily used for researching, developing and monitoring chemical processes. Applied Systems' proprietary sensors, together with its innovative Fourier transform infrared technology, enable chemists to analyze chemical reactions as they occur, which is more efficient than pulling samples. Bohdan Automation Inc. is a leading supplier of laboratory automation and automated synthesis products to the automated drug and chemical compound discovery market used in research for life science applications. Myriad designs, assembles and markets instruments that facilitate and automate the synthesis of large numbers of chemical compounds in parallel, which is a key step in the chemical compound discovery process. Its products can be used in all stages of synthesis in drug discovery. 4. Inventories, Net Inventories, net consisted of the following at December 31: 2000 1999 ------ ------- Raw materials and parts................ $ 67,379 $ 53,685 Work-in-progress....................... 37,289 33,073 Finished goods......................... 38,148 37,769 -------- -------- 142,816 124,527 LIFO reserve........................... (1,139) (626) --------- --------- $141,677 $123,901 ======== ======== F-12 5. Financial Instruments At December 31, 2000, the Company had certain interest rate swap agreements outstanding that fix the variable interest obligation associated with CHF 110 million of Swiss franc-based debt and $50 million of USD-based debt. Certain of these agreements have forward starting dates commencing in 2001. The agreements have various maturities beginning in 2003 and continuing through 2004. The fixed rates associated with the swap of Swiss franc debt are approximately 3.5%, while the rates associated with the USD debt are approximately 6.0% plus the Company's normal interest margin. The swaps are effective at either one-month or three-month LIBOR rates. At December 31, 2000 and 1999, the fair market value of such financial instruments was approximately $(0.5) million and $2.4 million, respectively. At December 31, 2000, the Company had outstanding foreign currency forward contracts in the amount of $23.5 million. The purpose of these contracts is to hedge short-term intercompany balances with its foreign businesses. The fair value of these contracts was not materially different than the carrying value at December 31, 2000 and 1999, respectively. The Company may be exposed to credit losses in the event of nonperformance by the counterparties to its derivative financial instrument contracts. Counterparties are established banks and financial institutions with high credit ratings. The Company has no reason to believe that such counterparties will not be able to fully satisfy their obligations under these contracts. The fair values of all derivative financial instruments are estimated based on current settlement prices of comparable contracts obtained from dealer quotes. The values represent the estimated amount the Company would pay or receive to terminate the agreements at the reporting date, taking into account current creditworthiness of the counterparties. 6. Property, Plant and Equipment, Net Property, plant and equipment, net, consisted of the following at December 31: 2000 1999 -------- -------- Land............................................ $ 40,580 $ 41,230 Buildings and leasehold improvements............ 105,937 101,088 Machinery and equipment......................... 133,072 120,989 Computer software............................... 5,387 5,399 -------- -------- 284,976 268,706 Less accumulated depreciation and amortization.. (85,588) (68,983) --------- --------- $199,388 $199,723 ======== ======== F-13 7. Short-Term Borrowings and Current Maturities of Long-Term Debt Short-term borrowings and current maturities of long-term debt consisted of the following for the years ended December 31: 2000 1999 ------ ------- Current maturities of long-term debt............. $31,900 $23,204 Other short-term borrowings...................... 18,660 23,675 ------- ------- $50,560 $46,879 ======= ======= 8. Long-Term Debt
Long-term debt consisted of the following at December 31: 2000 1999 ------ ------ Credit Agreement Borrowings: Term A USD Loans, interest at LIBOR plus 0.625% (7.1% at December 31, 2000) payable in quarterly installments due May 19, 2004........ $ 69,420 $ 81,816 Term A CHF Loans, interest at LIBOR plus 0.625% (4.0% at December 31, 2000) payable in quarterly installments due May 19, 2004........ 36,245 43,102 Term A GBP Loans, interest at LIBOR plus 0.625% (6.5% at December 31, 2000) payable in quarterly installments due May 19, 2004........ 22,096 28,221 Revolving credit facilities....................................... 109,907 127,283 Other............................................................... 50,699 16,178 -------- -------- 288,367 296,600 Less current maturities............................................. (50,560) (46,879) --------- --------- $237,807 $249,721 ======== ========
The Company has a multi-currency $400.0 million revolving credit facility and a CDN $26.3 million Canadian revolving credit facility under its credit agreement. Loans under these revolving credit facilities may be repaid and reborrowed and are due in full on May 19, 2004. At December 31, 2000, the Company had $293.5 million of additional borrowing capacity under its credit agreement. The Company has the ability to refinance its short-term borrowings through its revolving facilities for an uninterrupted period extending beyond one year. Accordingly, approximately $145 million of the Company's short-term borrowings at December 31, 2000 have been reclassified to long-term. The aggregate maturities of long-term obligations during each of the years 2002 through 2004 are approximately $31.9 million, $36.5 million and $27.4 million, respectively. The Company is required to pay a facility fee based upon certain financial ratios per annum on the amount of its revolving facilities. The facility fee at December 31, 2000 was equal to 0.2%. At December 31, 2000, borrowings under the Company's revolving facilities carried an interest rate of LIBOR plus 0.425%. The Company's weighted average interest rate for the year ended December 31, 2000 was approximately 7.0%. The Company's credit agreement contains covenants, including limitations on the Company's ability to pay dividends to shareholders, incur indebtedness, make investments, grant liens, sell financial assets and engage in certain other activities. The credit agreement F-14 8. Long-Term Debt - (Continued) also requires the Company to maintain a minimum net worth, a minimum fixed charge coverage ratio, and a ratio of total debt to EBITDA below a specified maximum. The carrying value of the Company's obligations under its credit agreement approximates fair value due to the variable rate nature of the obligations. 9. Shareholders' Equity Common Stock The number of authorized shares of the Company's common stock is 125,000,000 shares with a par value of $0.01 per share. Holders of the Company's common stock are entitled to one vote per share. At December 31, 2000, 7,831,586 shares of the Company's common stock were reserved for grant pursuant to the Company's stock option plan. Preferred Stock The Board of Directors, without further shareholder authorization, is authorized to issue up to 10,000,000 shares of preferred stock, par value $0.01 per share in one or more series and to determine and fix the rights, preferences and privileges of each series, including dividend rights and preferences over dividends on the common stock and one or more series of the preferred stock, conversion rights, voting rights (in addition to those provided by law), redemption rights and the terms of any sinking fund therefore, and rights upon liquidation, dissolution or winding up, including preferences over the common stock and one or more series of the preferred stock. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of the Company or an unsolicited acquisition proposal. F-15 10. Stock Option Plan The Company's stock option plan provides certain key employees and directors of the Company additional incentive to join and/or remain in the service of the Company as well as to maintain and enhance the long-term performance and profitability of the Company. Under the terms of the plan, options granted shall be nonqualified and the exercise price shall not be less than the fair market value of the common stock on the date of grant. Options vest equally over a five-year period from the date of grant. Weighted Average Number of Options Exercise Price Outstanding at December 31, 1997............ 4,408,740 $ 9.75 Granted..................................... 670,000 21.48 Exercised................................... (64,349) (8.26) Forfeited................................... (142,549) (7.95) --------- ------ Outstanding at December 31, 1998............ 4,871,842 $11.30 Granted..................................... 647,500 28.56 Exercised................................... (274,405) (8.87) Forfeited................................... (209,290) (13.74) --------- ------- Outstanding at December 31, 1999............ 5,035,647 $13.45 Granted..................................... 887,000 43.72 Exercised................................... (698,105) (10.68) Forfeited................................... (50,765) (13.12) -------- ------- Outstanding at December 31, 2000............ 5,173,777 $19.02 ========= ====== Options exercisable at December 31, 2000.... 2,700,697 $11.14 ========= ====== At December 31, 2000, 2,657,809 options were available for grant. The following table details the weighted average remaining contractual life of options outstanding at December 31, 2000 by range of exercise prices:
Number of Options Weighted Average Remaining Contractual Options Outstanding Exercise Price Life of Options Exercisable Outstanding ----------- -------------- --------------- ----------- 2,456,751 $ 7.95 5.8 1,965,401 669,726 $15.91 6.8 400,916 1,162,300 $25.38 6.8 334,380 167,000 $32.75 6.7 - 718,000 $46.30 9.2 - ------- --- --------- 5,173,777 6.6 2,700,697 ========= =========
F-16 10. Stock Option Plan - (Continued) As of the date granted, the weighted average grant-date fair value of the options granted during the years ended December 31, 2000, 1999 and 1998 was approximately $18.31, $12.31 and $8.11 per share, respectively. Such weighted average grant-date fair value was determined using an option pricing model which incorporated the following assumptions: 2000 1999 1998 ---- ---- ---- Risk-free interest rate.............. 5.0% 6.3% 5.2% Expected life in years............... 4 4 4 Expected volatility.................. 46% 45% 39% Expected dividend yield.............. - - - The Company applies Accounting Standards Board Opinion No. 25 and related interpretations in accounting for its 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," the Company's net earnings and basic and diluted net earnings per common share for the years ended December 31 would have been as follows: 2000 1999 1998 ----- ---- ---- Net earnings: As reported...................... $70,119 $48,101 $37,625 Pro forma........................ 66,425 45,847 35,475 ====== ====== ====== Basic earnings per common share: As reported...................... $1.80 $1.25 $0.98 Pro forma........................ 1.71 1.19 0.92 ==== ==== ==== Diluted earnings per common share: As reported...................... $1.66 $1.16 $0.92 Pro forma........................ 1.58 1.11 0.87 ==== ==== ==== 11. Benefit Plans Mettler-Toledo maintains a number of retirement plans for the benefit of its employees. Certain companies sponsor defined contribution plans. Benefits are determined and funded annually based upon the terms of the plans. Amounts recognized as cost under these plans amounted to $2.6 million, $2.8 million and $8.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Based on certain changes in 1999, the Company performed a reevaluation of its Swiss pension plans and determined these plans to be defined benefit plans. Accordingly, commencing in 1999, the Company has accounted for these plans as such. The application of defined benefit accounting to the plans had no material impact on the consolidated financial statements. F-17 11. Benefit Plans - (Continued) Certain companies sponsor defined benefit plans. Benefits are provided to employees primarily based upon years of service and employees' compensation for certain periods during the last years of employment. The Company's U.S. operations also provide postretirement medical benefits to their employees. Contributions for medical benefits are related to employee years of service. The following table sets forth the change in benefit obligation, the change in plan assets, the funded status and amounts recognized in the consolidated financial statements for the Company's principal defined benefit plans and postretirement plans at December 31, 2000 and 1999:
Pension Benefits Other Benefits ------------------------- ---------------------- 2000 1999 2000 1999 --------- --------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year...... $394,250 $149,930 $35,464 $37,095 Service cost, gross.......................... 19,250 20,972 461 624 Interest cost................................ 18,572 18,680 2,460 2,489 Actuarial gains.............................. (12,694) (2,918) (2,577) (2,482) Plan amendments and other.................... 151 (239) - (105) Benefits paid................................ (18,013) (17,429) (2,426) (2,161) Impact of foreign currency................... (7,479) (46,316) (2) 4 Impact of businesses acquired................ - 1,867 - - Impact of Swiss pension plans................ - 269,703 - - ------- ------- ------ ------ Benefit obligation at end of year............ 394,037 394,250 33,380 35,464 ------- ------- ------ ------ Change in plan assets: Fair value of plan assets at beginning of year......................................... 368,674 77,375 - - Actual return on plan assets................. 18,244 39,760 - - Employer contributions....................... 14,611 11,360 2,426 2,161 Plan participants' contributions............. 4,236 4,472 - - Benefits paid................................ (18,013) (17,429) (2,426) (2,161) Impact of foreign currency................... (3,667) (42,738) - - Impact of Swiss pension plans................ - 295,874 - - ------- ------- ----- ----- Fair value of plan assets at end of year..... 384,085 368,674 - - ------- ------- ----- ----- Funded status................................ (9,952) (25,576) (33,380) (35,464) Unrecognized actuarial (gain) loss........... (37,826) (28,712) 594 2,438 --------- --------- --------- --------- Net amount recognized........................ $(47,778) $(54,288) $(32,786) $(33,026) ========= ========= ========= ========= Amounts recognized in the Consolidated Balance Sheets consist of: Pension Benefits Other Benefits -------------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- --------- -------- Other non-current assets..................... $ 6,881 $ 6,597 $ - $ - Other non-current liabilities................ (54,659) (60,885) (32,786) (33,026) --------- --------- --------- --------- Net amount recognized........................ $(47,778) $(54,288) $(32,786) $(33,026) ========= ========= ========= =========
F-18 11. Benefit Plans - (Continued) The assumed discount rates and rates of increase in future compensation levels used in calculating the projected benefit obligations vary according to the economic conditions of the country in which the retirement plans are situated. The weighted average rates used for the purposes of the Company's U.S. plans are as follows: 2000 1999 1998 ---- ---- ---- Discount rate...................................... 7.8% 7.8% 7.2% Compensation increase rate......................... 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets... 9.5% 9.5% 9.5% Plan assets relate principally to the Company's U.S. and Swiss companies and consist of equity investments, obligations of the U.S. Treasury or other governmental agencies, and other interest-bearing investments. At December 31, 2000, the fair value of plan assets and the total projected benefit obligation for the Company's non-U.S. defined benefit plans were $314.2 million and $319.4 million, respectively. Actuarial assumptions for these plans ranged from 3.75% to 8.5% for the discount rate, 2.0% to 6.5% for the compensation increase rate and 5.0% to 9.5% for the expected long-term rate of return on plan assets for the years ended December 31, 2000, 1999 and 1998. Net periodic pension cost for the defined benefit plans includes the following components for the year ended December 31: 2000 1999 1998 ------- -------- ------- Service cost, net..................... $15,438 $16,842 $5,929 Interest cost on projected benefit 18,572 18,680 8,624 obligations........................... Expected return on plan assets........ (22,491) (22,420) (6,613) Recognition of actuarial (gains) losses 19 394 (104) ------- ------- ------- Net periodic pension cost............. $11,538 $13,496 $7,836 ======= ======= ====== Net periodic postretirement benefit cost for the U.S. postretirement plans includes the following components for the year ended December 31: 2000 1999 1998 ------- ------ ------ Service cost........................ $ 461 $ 624 $ 507 Interest cost on projected benefit obligations....................... 2,460 2,489 2,360 Recognition of actuarial losses..... - 189 - Net amortization and deferral....... - 21 26 ----- ------ ------ Net periodic postretirement benefit cost.............................. $ 2,921 $ 3,323 $2,893 ======= ======= ====== The accumulated postretirement benefit obligation and net periodic postretirement benefit cost were principally determined using discount rates of 7.8% in 2000, 7.2% in 1999 and 6.7% in 1998 and health care cost trend rates ranging from 7.0% to 8.0% in 2000, 1999 and 1998, decreasing to 5% in 2005. F-19 11. Benefit Plans - (Continued) The health care cost trend rate assumption has a significant effect on the accumulated postretirement benefit obligation and net periodic postretirement benefit cost. A one-percentage-point change in assumed health care cost trend rates would have the following effects: One-Percentage- One-Percentage- Point Increase Point Decrease --------------- --------------- Effect on total of service and interest cost components.............. $ 376 $ (326) Effect on postretirement benefit obligation.................... $3,430 $(3,102) 12. Taxes The sources of the Company's earnings before taxes and minority interest were as follows for the year ended December 31: 2000 1999 1998 -------- -------- -------- United States............... $ 13,670 $(1,906) $(2,172) Non-United States.......... 94,935 81,783 61,707 -------- ------- ------- Earnings before taxes and minority interest...... $108,605 $79,877 $59,535 ======== ======= ======= The provision for taxes consists of:
Adjustments to Current Deferred Goodwill Total ------- -------- -------- ----- Year ended December 31, 2000: United States federal............................ $ 381 $ (601) $ - $ (220) State and local.................................. 519 - - 519 Non-United States................................ 36,123 1,052 1,036 38,211 ------- ------ ------ ------- $37,023 $ 451 $1,036 $38,510 ======= ====== ====== ======= Adjustments to Current Deferred Goodwill Total ------- -------- -------- ----- Year ended December 31, 1999: United States federal............................ $ (17) $ - $ - $ (17) State and local.................................. 494 - - 494 Non-United States................................ 32,557 (10,260) 8,624 30,921 ------ --------- ------ ------- $33,034 $(10,260) $8,624 $31,398 ======= ========= ====== ======= Adjustments to Current Deferred Goodwill Total ------- -------- -------- ----- Year ended December 31, 1998: United States federal............................ $ 517 $ (700) $ 591 $ 408 State and local.................................. 561 (102) 351 810 Non-United States................................ 21,121 (2,642) 1,302 19,781 ------ --------- ------ ------- $22,199 $ (3,444) $2,244 $20,999 ======= ========= ====== =======
F-20 12. Taxes - (Continued) The adjustments to goodwill during the years ending December 31, 2000, 1999 and 1998 relate to tax benefits utilized which were not previously recognized in the purchase price allocation pertaining to previous acquisitions. The provision for tax expense for the years ended December 31, 2000, 1999 and 1998 differed from the amounts computed by applying the United States federal income tax rate of 35% to the earnings before taxes and minority interest as a result of the following:
2000 1999 1998 ------- ------- ------- Expected tax..................................... $38,012 $27,957 $20,837 United States state and local income taxes, net of federal income tax benefit............ 519 494 810 Non-deductible purchased research and development - - 3,492 Non-deductible intangible amortization........... 2,227 2,254 2,459 Change in valuation allowance.................... (3,065) (983) 4,964 Other non-United States income taxes at other than a 35% rate..................... 455 1,165 (6,708) Change in Swiss tax law.......................... - - (3,557) Change in Swiss tax rates........................ - - (1,406) Other, net....................................... 362 511 108 ------- ------- ------- Total provision for taxes........................ $38,510 $31,398 $20,999 ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below at December 31:
2000 1999 ------ ------ Deferred tax assets: Inventory............................................ $ 2,042 $ 1,363 Accrued and other liabilities........................ 20,466 15,099 Deferred losses...................................... 6,524 2,091 Accrued postretirement benefit and pension costs..... 19,451 21,984 Net operating loss carryforwards..................... 16,499 27,798 Other................................................ 1,942 4,075 ------- ------- Total deferred tax assets................................ 66,924 72,410 Less valuation allowance................................. (49,027) (53,128) -------- -------- Total deferred tax assets less valuation allowance....... 17,897 19,282 ------- ------- Deferred tax liabilities: Inventory............................................ 1,640 1,787 Property, plant and equipment........................ 16,259 15,531 Other................................................ 8,221 9,131 ------- ------- Total deferred tax liabilities........................... 26,120 26,449 ------- ------- Net deferred tax liability............................... $ 8,223 $ 7,167 ======= =======
The Company has established valuation allowances primarily for net operating losses, deferred losses as well as postretirement and pension costs as follows as of December 31:
2000 1999 ------ ------- Summary of valuation allowances: Cumulative net operating losses....................... $13,923 $26,923 Deferred loss......................................... 6,524 2,091 Accrued postretirement and pension benefit costs...... 12,765 14,579 Other................................................. 15,815 9,535 ------- ------- Total valuation allowance................................. $49,027 $53,128 ======= =======
F-21 12. Taxes - (Continued) The Company has recorded valuation allowances related to its deferred income tax assets due to the uncertainty of the ultimate realization of future benefits from such assets. The 2000 net change in the valuation allowance is primarily attributable to the changes as enumerated above which are related to improved realization potential and/or utilization of associated deferred tax assets. The potential decrease or increase of the valuation allowance in the near term is dependent on the future realizability of the deferred tax assets which are affected by the future profitability of operations in various worldwide jurisdictions, but primarily in the United States. A valuation allowance has been provided on the Company's net deferred tax assets related to its United States operations because of the uncertainty regarding their realizability due to the expectation that deductions from future employee stock option exercises and related tax deductions will exceed future taxable income. Deferred tax assets of $1.2 million at December 31, 2000 pertain to net operating loss carryforwards resulting from the exercise of certain employee stock options. When recognized, the tax benefit of these losses will be recorded in shareholders' equity. The total valuation allowances relating to acquired businesses amount to $15.5 million and $16.7 million at December 31, 2000 and 1999, respectively. The reduction for the current year is primarily attributable to the utilization of net operating losses and the expiration of the useful life of various deferred tax assets. Future reductions of these valuation allowances will continue to be credited to goodwill when realized. At December 31, 2000, for U.S. federal income tax purposes, the Company had net operating loss carryforwards of $21.3 million which expire in various amounts through 2012 and other tax credits of $0.6 million which have no expiration. The Company has various U.S. state net operating losses and various foreign operating losses that expire in varying amounts through 2012. 13. Other Charges, Net Other charges, net consists primarily of foreign currency transactions, interest income, charges related to the Company's cost-reduction programs and gains on the sale of property, plant and equipment. As part of its efforts to reduce costs, the Company evaluates from time to time the cost effectiveness of its global manufacturing strategy. In this respect, the Company recorded charges of approximately $1.4 million and $8.0 million in 2000 and 1999, respectively, associated with the close-down and consolidation of operations in 2000, and the transfer of production lines from the Americas to China and Europe and the closure of facilities in 1999. The charges comprised primarily severance and other related benefits and costs of exiting facilities, including lease termination costs and the write-down of impaired assets. In connection with these activities, the Company has involuntarily terminated approximately 180 employees, and expects to further terminate 60 employees in 2001. Activities related to the charge recorded in 1999 were significantly completed in 2000. F-22 13. Other Charges, Net (Continued) The Company also incurred losses of $4.1 million during 1999 in connection with the exit from its glass batching business based in Belgium. This amount primarily comprised severance and other costs of exiting this business. The Company completed its exit of this business by the end of 1999. These losses were offset by a gain of $3.1 million recorded in connection with an asset sale. A rollforward of the components of the Company's accrual for restructuring activities is as follows: 2000 1999 ------- ------- Beginning of the year............................... $5,462 $ 1,831 Restructuring expense............................... 1,972 12,881 Reductions in workforce and other cash outflows..... (4,337) (5,902) Non-cash write-downs of impaired assets............. - (3,018) Impact of foreign currency.......................... (117) (330) ------- -------- End of the year..................................... $2,980 $ 5,462 ====== ======= The Company's accrual for restructuring activities at December 31, 2000 primarily consisted of severance, lease termination and other costs of exiting facilities. 14. Commitments and Contingencies Operating Leases The Company leases certain of its facilities and equipment under operating leases. The future minimum lease payments under non-cancelable operating leases are as follows at December 31, 2000: 2001.................. $12,509 2002.................. 11,911 2003.................. 9,994 2004.................. 6,287 2005.................. 5,447 Thereafter............ 12,356 ------- Total............... $58,504 ======= Rent expense for operating leases amounted to $21.2 million, $18.5 million and $17.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Legal 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. F-23 15. Segment Reporting Operating segments are the individual reporting units within the Company. These units are managed separately, and it is at this level where the determination of resource allocation is made. The units have been aggregated based on operating segments in geographical regions that have similar economic characteristics and meet the aggregation criteria of SFAS 131. The Company has determined that there are five reportable segments: Principal U.S. Operations, Principal Central European Operations, Swiss R&D and Manufacturing Operations, Other Western European Operations and Other. Principal U.S. Operations represent certain of the Company's marketing and producing organizations located in the United States. Principal Central European Operations primarily include the Company's German marketing and producing organizations that primarily serve the German market and, to a lesser extent, Europe. Swiss R&D and Manufacturing Operations consist of the organizations located in Switzerland that are responsible for the development, production and marketing of precision instruments, including weighing, analytical and measurement technologies for use in a variety of industrial and laboratory applications. Other Western European Operations include the Company's market organizations in Western Europe that are not included in Principal Central European Operations. The Company's market organizations are geographically focused and are responsible for all aspects of the Company's sales and service. Operating segments that exist outside these reportable segments are included in Other. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on adjusted operating income (gross profit less research and development and selling, general and administrative expenses before amortization and non-recurring costs). Intersegment sales and transfers are priced to reflect consideration of market conditions and the regulations of the countries in which the transferring entities are located. The following tables show the operations of the Company's operating segments:
Principal Other Principal Central Swiss R&D Western Eliminations For the year ended U.S. European and Mfg. European and December 31, 2000 Operations Operations Operations Operations Other (a) Corporate (b) Total ------------------------------- ---------- ---------- ---------- ---------- --------- ------------- -------- Net sales to external customers $367,738 $177,912 $ 26,974 $256,257 $266,666 $ - $1,095,547 Net sales to other segments.... 33,528 53,563 148,158 41,896 120,730 (397,875) - -------- -------- -------- -------- -------- --------- ---------- Total net sales................ $401,266 $231,475 $175,132 $298,153 $387,396 $(397,875) $1,095,547 ======== ======== ======== ======== ======== ========== ========== Adjusted operating income...... $ 38,414 $22,881 $ 38,313 $ 21,979 $ 32,231 $ (10,977) $ 142,841 Depreciation................... 6,692 2,364 1,962 2,803 7,488 381 21,690 Total assets................... 242,878 138,957 199,067 152,816 661,740 (507,876) 887,582 Purchase of property, plant and equipment.................. 6,289 3,123 3,068 4,226 10,798 1,800 29,304
F-24 15. Segment Reporting - (Continued)
Principal Other Principal Central Swiss R&D Western Eliminations For the year ended U.S. European and Mfg. European and December 31, 1999 Operations Operations Operations Operations Other (a) Corporate (b) Total ------------------------------- ---------- ---------- ---------- ---------- --------- ------------- -------- Net sales to external customers $356,400 $184,021 $ 23,832 $267,426 $233,794 $ - $1,065,473 Net sales to other segments.... 46,310 58,094 154,931 20,229 111,284 (390,848) - -------- -------- -------- -------- -------- --------- ---------- Total net sales................ $402,710 $242,115 $178,763 $287,655 $345,078 $(390,848) $1,065,473 ======== ======== ======== ======== ======== ========== ========== Adjusted operating income...... $ 37,255 $23,070 $ 32,992 $ 25,024 $ 30,138 $ (24,797) $ 123,682 Depreciation................... 7,807 2,912 2,748 3,176 7,903 394 24,940 Total assets................... 217,202 139,726 158,160 146,955 624,528 (465,598) 820,973 Purchase of property, plant and equipment.................. 7,588 2,051 2,322 4,140 10,548 2,539 29,188 Principal Other Principal Central Swiss R&D Western Eliminations For the year ended U.S. European and Mfg. European and December 31, 1998 Operations Operations Operations Operations Other (a) Corporate (b) Total ------------------------------- ---------- ---------- ---------- ---------- --------- ------------- -------- Net sales to external customers $324,455 $181,377 $23,554 $220,543 $185,729 $ - $ 935,658 Net sales to other segments.... 39,634 58,035 148,062 22,848 104,585 (373,164) - -------- -------- -------- -------- -------- --------- --------- Total net sales................ $364,089 $239,412 $171,616 $243,391 $290,314 $(373,164) $ 935,658 ======== ======== ======== ======== ======== ========== ========= Adjusted operating income...... $ 26,283 $ 20,314 $ 30,155 $ 17,795 $ 23,576 $ (17,143) $ 100,980 Depreciation................... 8,132 3,081 2,506 2,748 7,770 355 24,592 Total assets................... 166,934 146,754 142,717 125,621 597,175 (358,760) 820,441 Purchase of property, plant and equipment.................. 8,296 2,957 2,922 3,562 8,886 2,010 28,633
(a) Other includes reporting units in Asia, Eastern Europe, Latin America and segments from other countries that do not meet the aggregation criteria of SFAS 131. (b) Eliminations and Corporate includes the elimination of intersegment transactions as well as certain corporate expenses, intercompany investments and certain goodwill, which are not included in the Company's operating segments. A reconciliation of adjusted operating income to earnings before taxes and minority interest for the year ended December 31 follows:
2000 1999 1998 -------- -------- -------- Adjusted operating income............. $142,841 $123,682 $100,980 Amortization.......................... 11,564 10,359 7,634 Interest expense...................... 20,034 21,980 22,638 Other charges, net.................... 2,638 10,468 1,197 Revaluation of acquisition inventories - 998 - Purchased research and development.... - - 9,976 -------- -------- --------- Earnings before taxes and minority interest............................ $108,605 $ 79,877 $ 59,535 ======== ======== ========
F-25 15. Segment Reporting - (Continued) The Company sells precision instruments, including weighing instruments and certain analytical and measurement technologies, and related after-market support to a variety of customers and industries. None of these customers account for more than 3% of net sales. After-market support revenues are primarily derived from parts and services such as calibration, certification and repair, much of which is provided under contracts. A break-down of the Company's sales by product category for the years ended December 31 follows:
2000 1999 1998 ---------- ---------- -------- Weighing-related instruments..... $ 663,598 $ 659,785 $600,450 Non-weighing instruments......... 237,501 226,434 183,259 After-market..................... 194,448 179,254 151,949 ---------- ---------- -------- Total net sales.................. $1,095,547 $1,065,473 $935,658 ========== ========== ========
The breakdown of net sales by geographic customer destination and property, plant and equipment, net for the year ended December 31 are as follows:
Property, plant Net sales equipment, net ------------------------------------- -------------------- 2000 1999 1998 2000 1999 -------- -------- ------- ------- ------- United States....... $ 411,484 $ 386,452 $328,448 $ 41,050 $ 41,604 Other Americas...... 76,522 74,701 74,951 2,222 1,887 ------- ------- ------- ------ ------ Total Americas...... 488,006 461,153 403,399 43,272 43,491 Germany............. 122,570 132,302 129,464 22,504 23,086 France.............. 97,345 94,557 58,081 5,863 5,438 United Kingdom...... 44,927 44,105 41,265 6,037 5,828 Switzerland......... 45,308 42,530 40,158 99,627 99,324 Other Europe........ 168,040 174,497 161,314 5,985 6,515 ------- ------- ------- ------ ------ Total Europe........ 478,190 487,991 430,282 140,016 140,191 Rest of World....... 129,351 116,329 101,977 16,100 16,041 ---------- ---------- -------- -------- -------- Totals.............. $1,095,547 $1,065,473 $935,658 $199,388 $199,723 ========== ========== ======== ======== ========
F-26 16. Quarterly Financial Data (unaudited) Quarterly financial data for the years ended December 31, 2000 and 1999 are as follows:
First Second Third Fourth Quarter Quarter (a) Quarter Quarter (b) --------- -------- -------- ------- 2000 Net sales ........................ $259,116 $268,558 $270,003 $297,870 Gross profit...................... 114,241 119,586 120,684 140,851 Net earnings...................... $ 11,754 $ 17,931 $ 17,134 $ 23,300 Basic earnings per common share.... $0.30 $0.46 $0.44 $0.59 Diluted earnings per common share.. $0.28 $0.43 $0.41 $0.55 Market price per share: High............................ $44.50 $45.75 $48.81 $56.00 Low............................. $31.81 $30.00 $37.75 $39.50 1999 Net sales ........................ $235,715 $257,465 $268,006 $304,287 Gross profit...................... 105,227 113,755 119,728 141,756 Net earnings...................... $ 8,065 $ 13,467 $ 13,658 $ 12,911 Basic earnings per common share.... $0.21 $0.35 $0.35 $0.33 Diluted earnings per common share.. $0.20 $0.33 $0.33 $0.31 Market price per share: High............................ $27.94 $29.00 $30.44 $39.50 Low............................. $19.63 $22.63 $23.81 $27.63
(a) The financial data for the second quarter of 1999 includes acquisition charges of $1.0 million regarding the revaluation of certain inventories to fair value (Note 3). (b) The financial data for the fourth quarter of 2000 includes a charge of $1.4 million related to the close-down and consolidation of operations. The financial data for the fourth quarter of 1999 includes a charge of approximately $8.0 million associated with the transfer of production lines from the Americas to China and Europe and the closure of facilities (Note 13). F-27 Independent Auditors' Report on Financial Statement Schedule The Board of Directors and Shareholders Mettler-Toledo International Inc.: Under date of February 5, 1999, we reported on the consolidated statements of operations, shareholders' equity and cash flows of Mettler-Toledo International Inc. and subsidiaries for the year ended December 31, 1998, included herein. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included under Item 14 of the Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Fides Peat Zurich, Switzerland February 5, 1999 S-1
Schedule II- Valuation and Qualifying Accounts -------------------------------- ---------------- ---------------------------------- ---------------- ----------------- Column A Column B Column C Column D Column E -------------------------------- ---------------- ---------------------------------- ---------------- ----------------- Additions ---------------------------------- (1) (2) Balance at Charged Charged to the beginning to costs and other accounts -Deductions- Balance at Description of period expenses describe describe end of period -------------------------------- ---------------- ----------------- ---------------- ---------------- ----------------- Note (A) Accounts Receivable- allowance for doubtful accounts: Year ended December 31, 2000 9,827 1,008 - 1,738 9,097 Year ended December 31, 1999 9,443 1,867 - 1,483 9,827 Year ended December 31, 1998 7,669 2,008 - 234 9,443 -------------------------------- ---------------- ----------------- ---------------- ---------------- -----------------
Note A Represents excess of uncollectable balances written off over recoveries of accounts previously written off. Additionally, amounts are net of foreign currency translation effect of $(253), $(691) and $239 for the years ended December 31, 2000, 1999 and 1998, respectively. S-2