METTLER TOLEDO INTERNATIONAL INC/ - Annual Report: 2020 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| (Mark One) | |||||||||||
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the fiscal year ended December 31, 2020 | |||||||||||
| OR | |||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the transition period from to | |||||||||||
Commission file number 001-13595
Mettler-Toledo International Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3668641 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
1900 Polaris Parkway
Columbus, OH 43240
and
Im Langacher 44
CH 8606 Greifensee, Switzerland
(Address of principal executive offices) (Zip Code)
1-614-438-4511 and +41-44-944-22-11
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | MTD | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer. ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
As of January 25, 2021 there were 23,408,050 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 on June 30, 2020 (based on the closing price for the Common Stock on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2020) was approximately $19.3 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 Into Which Incorporated | |||||||
| Certain Sections of the Proxy Statement for 2021 | Part III | |||||||
| Annual Meeting of Shareholders | ||||||||
METTLER-TOLEDO INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
| Page | ||||||||
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FORWARD-LOOKING STATEMENTS DISCLAIMER
You should not rely on forward-looking statements to predict our actual results. Our actual results or performance may be materially different than reflected in forward-looking statements because of various risks and uncertainties, including statements about expected revenue growth and long-term impacts of COVID-19. You can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” or “continue.”
We make forward-looking statements about future events or our future financial performance, including earnings and sales growth, earnings per share, strategic plans and contingency plans, growth opportunities or economic downturns, our ability to respond to changes in market conditions, planned research and development efforts and product introductions, adequacy of facilities, access to and the costs of raw materials, shipping and supplier costs, gross margins, customer demand, our competitive position, pricing, capital expenditures, cash flow, tax-related matters, the impact of foreign currencies, compliance with laws, and effects of acquisitions, and the impact of the COVID-19 pandemic on our business.
Our forward-looking statements may not be accurate or complete, and we do not intend to update or revise them in light of actual results. New risks also periodically arise. Please consider the risks and factors that could cause our results to differ materially from what is described in our forward-looking statements, including the uncertain duration and severity of the COVID-19 pandemic. See in particular “Factors Affecting Our Future Operating Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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PART I
Item 1.Business
We are a leading global supplier of precision instruments and services. We have strong leadership positions in all of our businesses and believe we hold global number-one market positions in most of them. We are recognized as an innovation leader and our solutions are critical in key research and development, quality control, and manufacturing processes for customers in a wide range of industries including life sciences, food, and chemicals. Our sales and service network is one of the most extensive in the industry. Our products are sold in more than 140 countries and we have a direct presence in approximately 40 countries. With proven growth strategies and a focus on execution, we have achieved a long-term track record of strong financial performance.
Our business is geographically diversified, with net sales in 2020 derived 30% from Europe, 38% from North and South America, and 32% from Asia and other countries. Our customer base is also diversified by industry and by individual end-customer.
Mettler-Toledo International Inc. was incorporated as a Delaware corporation in 1991 and became a publicly traded company with its initial public offering in 1997.
Business Segments
We have five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other. See Note 19 to the consolidated financial statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Results of Operations by Reportable Segment” for detailed results by segment and geographic region.
We manufacture a wide variety of precision instruments and provide value-added services to our customers. Our principal products and services are described below. We also describe our customers and distribution, sales and service, research and development, manufacturing, and certain other matters. These descriptions apply to substantially all of our products and related reportable segments.
Laboratory Instruments
We make a wide variety of precision laboratory instruments for sample preparation, synthesis, analytical bench top, material characterization, and in-line measurement. Our portfolio includes laboratory balances, liquid pipetting solutions, automated laboratory reactors including real-time analytics, titrators, pH meters, process analytics sensors and analyzer technology, physical value analyzers including density and refractometry instruments, thermal analysis systems, and other analytical instruments such as UV/VIS spectrophotometers and moisture analyzers. Our laboratory instruments have leading-edge embedded software and we also offer LabX, our laboratory software platform to manage and analyze data generated from our instruments. The laboratory instruments and related service business accounted for approximately 54% of our net sales in 2020, 52% in 2019, and 51% in 2018.
Laboratory Balances
Our laboratory balances have weighing ranges from one ten-millionth of a gram up to 64 kilograms. To respond to a wide range of customer needs and value/price points, we market our balances in a range of product tiers offering different levels of functionality. We also provide filter weighing and powder and liquid dosing automated systems. Based on the same weighing technology platform, we manufacture mass comparators, which are used by weights and measures officials as well as National Measurement Institute laboratories to ensure the accuracy of reference weights. Laboratory balances are primarily used in the pharmaceutical, biotechnology, testing labs, food, chemical, cosmetics, academia, and other industries.
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Pipettes
Pipettes are used in life science research laboratories for dispensing small volumes of liquids. We develop, manufacture, and distribute advanced pipettes, including single- and multi-channel manual and electronic pipettes. We also develop and produce high-value consumables such as pipette tips and tubes. We maintain service centers in the key markets where customers periodically send their pipettes for certified recalibrations. These service centers, combined with our advanced asset management solutions, provide our customers with innovative solutions to maintain their instruments and meet regulatory compliance. Our principal end-markets are pharmaceutical, biotech, and academia.
Analytical Instruments
Titrators measure the chemical composition of samples and are used in environmental and research laboratories as well as in quality control labs in the pharmaceutical, testing labs, food and beverage, and other industries. Our high-end titrators are multi-tasking models, which can perform two determinations simultaneously on multiple vessels. Our offering includes robotics to automate routine work in quality control applications.
Thermal analysis systems measure material properties as a function of temperature, such as weight, dimension, energy flow, and viscoelastic properties. Thermal analysis systems are used in nearly every industry, but primarily in the plastics and polymer industries, academia, and increasingly in the pharmaceutical industry.
pH meters measure acidity in laboratory samples. We also manufacture and sell density and refractometry instruments, which measure chemical concentrations in solutions. In addition, we manufacture and sell moisture analyzers, which precisely determine the moisture content of a sample by utilizing the loss on drying method, and UV/VIS spectrophotometers that optimize spectroscopic workflows.
Laboratory Software
LabX, our laboratory software platform, manages and analyzes data generated by our balances, titrators, pH meters, physical value analyzers, and other analytical instruments like UV/VIS spectrophotometers. LabX provides full network capability; assists with workflow automation; has efficient, intuitive protocols; and enables customers to collect and archive data in compliance with the U.S. Food and Drug Administration’s traceability and data integrity requirements for electronically stored data (also known as 21 CFR Part 11).
Automated Chemistry Solutions
Our automated chemistry solutions focus on selected applications in the chemical and drug discovery process. Our automated lab reactors and in situ analysis systems are considered integral to the process development and scale-up activities of our customers. Our on-line measurement technologies, based on infrared and laser light scattering, enable customers to monitor chemical reactions and crystallization processes in real time in the lab and plant. In situ samples allow overnight sampling and testing. Additionally, we provide industry-leading embedded software solutions that enable our customers to manage, optimize, and improve experiments as well as production scale-up. We believe that our portfolio of integrated technologies can bring significant efficiencies to the development process, enabling our customers to bring new chemicals and drugs to market faster.
Process Analytics
Our process analytics business provides instruments for the in-line measurement of liquid and gas parameters used primarily in the production process of pharmaceutical, biotech, beverage, microelectronics, chemical, and refining companies, as well as power plants. More than half of our
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process analytics sales are to the pharmaceutical and biotech markets, where our customers need fast and secure scale-up and production that meet the validation processes required for GMP (Good Manufacturing Processes) and other regulatory standards like the USP (US Pharmacopoeia) regulations for ultrapure water quality. We are a leading solution provider for liquid analytical measurement to control and optimize production processes. Our solutions include sensor and analyzer technology for measuring pH, dissolved oxygen, carbon dioxide, conductivity, turbidity, ozone, total organic carbons, bioburden, sodium, and silica, as well as laser analyzers for gas measurement. Intelligent sensor diagnostics capabilities enable improved asset management solutions for our customers to reduce process downtime and maintenance costs. Our instruments offer leading multi-parameter capabilities and plant-wide control system integration, which are key for integrated measurement of multiple parameters to secure production quality and efficiency. With a worldwide network of specialists, we support customers in critical process applications, compliance, and systems integration questions.
Industrial Instruments
We manufacture numerous industrial weighing instruments and related terminals and offer dedicated software solutions for the pharmaceutical, chemical, food, discrete manufacturing, and other industries. In addition, we manufacture metal detection, x-ray, checkweighing, and other end-of-line product inspection systems used in production and packaging. We supply automatic identification and data capture solutions, which integrate in-motion weighing, dimensioning, and identification technologies for transport, shipping, and logistics customers. We also offer heavy industrial scales and related software. The industrial instruments and related service business accounted for approximately 40% of our net sales in 2020 and 41% in 2019 and 2018.
Industrial Weighing Instruments
We offer a comprehensive line of industrial scales and weighing devices, such as bench scales, floor scales, and weigh modules for weighing loads from a few grams to several thousand kilograms in applications ranging from measuring materials in chemical production to quality completeness control in discrete manufacturing to weighing packages at the end of the line. Our products are used in a wide range of industrial applications, such as counting, formulating and mixing ingredients, and quality control.
Industrial Terminals
Our industrial scale terminals collect data and integrate it into manufacturing processes, helping to automate them. Our terminals allow users to remotely download formulation recipes or access setup data and can minimize downtime through predictive rather than reactive maintenance.
Transportation and Logistics
We supply automatic dimensional measurement and data capture solutions, which integrate in-motion weighing, dimensioning, and identification technologies. With these solutions, customers can measure the weight and cubic volume of packages for appropriate billing, load management, and quality control. Our solutions also integrate into customers’ information systems.
Vehicle Scale Systems
Our primary heavy industrial products are scales for weighing trucks or railcars (i.e., weighing bulk goods as they enter or leave a factory or at a toll station). 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 that can be used with our heavy industrial scales to facilitate a broad range of customer solutions and provides a complete system for managing vehicle transaction processing.
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Industrial Software
We offer software that can be used with our industrial instruments. Examples include FreeWeigh.Net, statistical quality control software; FormWeigh.Net, formulation/batching software; and DataBridge, which supports the operation of vehicle scales. FreeWeigh.Net and FormWeigh.Net provide full network capability and enable customers to collect and archive data in compliance with U.S. Food and Drug Administration requirements, 21 CFR Part 11.
Product Inspection
Increasing safety and consumer protection requirements are driving the need for more sophisticated end-of-line product inspection systems (e.g., for use in food processing and packaging, pharmaceutical, packaged consumer goods, and other industries). We are a leading global provider of metal detectors, x-ray systems, checkweighers, camera-based imaging equipment, and track-and-trace solutions that are used in these industries. Metal detectors are most commonly used to detect fine particles of metal that may be contained in raw materials or may be generated by the manufacturing process itself. X-ray inspection is used to detect metallic contamination in applications unsuited to metal detectors and many types of non-metallic contamination, such as glass, calcified bone, stones, and pits. Our x-ray systems are also used for mass control and for determining and controlling the fat content in meat. Checkweighers are used to control the filled weight of packaged goods such as food, pharmaceuticals, and cosmetics. Our camera-based vision inspection solutions provide in-line inspection of package quality, labels, and content, which are needs for food and beverage, consumer goods, and pharmaceutical companies. Vision inspection systems with associated specialist software enable our pharmaceutical customers to implement traceability and serialization tracking, as required by regulation. All of our technologies are integrated with material handling systems to ensure the correct presentation of the customer’s product to the device and the secure rejection of non-conforming product, and are frequently designed to comply with stringent hygiene standards. Our technologies may also be used together as components of integrated packaging lines. ProdX Inspect is our quality and productivity control software for helping customers comply with regulations and optimize process efficiency, either as a stand-alone solution or through integration with the customer’s manufacturing and enterprise systems.
Retail Weighing Solutions
Supermarkets, hypermarkets, and other food retail businesses make use of multiple weighing and food labeling solutions for handling fresh goods (such as meats, vegetables, fruits, or cheeses). We offer networked scales and software, which can integrate backroom, counter, self-service, and checkout functions and can incorporate fresh goods item data into a supermarket’s overall food item and inventory management system. The scale screen display allows for in-store marketing and can help encourage consumers in the store to make more purchase decisions at the point of sale. In addition, we offer stand-alone scales for basic counter weighing and pricing, price finding, and printing. The customer benefits of our retail solutions are in the areas of enterprise-wide article and price management, merchandising, and regulatory compliance. In North America and select other markets, our offering also includes automated packaging and labeling solutions for the meat backroom, which are fully integrated with the scales in the store. The retail business accounted for approximately 6% of our net sales in 2020, 7% in 2019, and 8% in 2018.
Customers and Distribution
Our principal customers include companies in the following key end-markets: the life science industry (pharmaceutical and biotech companies, as well as independent research organizations and testing labs); food and beverage manufacturers; chemical, specialty chemicals, and cosmetics companies; food
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retailers; the transportation and logistics industry; the metals industry; the electronics industry; and the academic community.
Our products are sold through a variety of distribution channels. Generally, more technically sophisticated products are sold through our direct sales force, while less complicated products are sold through indirect channels. Our sales through direct channels exceed our sales through indirect channels. A significant portion of our sales in the Americas is generated through indirect channels, including sales of our Ohaus-branded products. Ohaus-branded products target markets, such as the educational market, in which customers are interested in lower cost, a more limited set of features, and less comprehensive support and service.
We have a diversified customer base, with no single end-customer accounting for more than 1% of 2020 net sales.
Sales and Service
Market Organizations
We maintain geographically focused market organizations around the world that are responsible for all aspects of our sales and service. The market organizations are customer-focused, with an emphasis on building and maintaining value-added relationships with customers in our target market segments. Each market organization has the ability to leverage best practices from other units while maintaining the flexibility to adapt its marketing and service efforts to account for different cultural and economic conditions. Market organizations also work closely with our producing organizations (described below) by providing feedback on manufacturing and product development initiatives, new product and application ideas, and information about key market segments.
We have one of the largest and broadest global sales and service organizations among precision instrument manufacturers we compete against. At December 31, 2020, our sales and service group consisted of approximately 8,150 employees in sales, marketing and customer service (including related administration), and post-sales technical service, located in approximately 40 countries. This field organization has the capability to provide service and support to our customers and distributors in major markets across the globe. This is important because our customers increasingly seek to do business with a consistent global approach.
Service
Our service business continues to be successful with a focus on providing uptime and calibration services, as well as further expanding our offerings to provide value-added services for a range of market needs, including regulatory compliance, performance enhancements, application expertise and training, and remote services. We have a unique offering to our pharmaceutical customers in promoting the use of our instruments in compliance with FDA and other international regulations, and we can provide these services to most customers’ locations around the world. Our global service network is also an important factor in our ability to expand in emerging markets. We estimate that we have the largest installed base of weighing instruments in the world. Service (representing service contracts, on demand services, and replacement parts) accounted for approximately 22% of our net sales in 2020, 2019, and 2018.
Beyond revenue opportunities, we believe service is a key part of our solution offering and helps significantly in customer retention. The close relationships and frequent contact with our large customer base allow us to be the trusted advisor of our customers, which provides us with high-quality sales opportunities as well as innovative product and application ideas.
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Research and Development and Manufacturing
Producing Organizations
Our research, product development, and manufacturing efforts are organized into a number of producing organizations. Our focused producing organizations help reduce product development time and costs, improve customer focus, and maintain technological leadership. The producing organizations work together to share ideas and best practices, and there is a close interface and coordinated customer interaction among marketing organizations and producing organizations. We also have regional logistics hubs to satisfy customer delivery requirements while optimizing our logistic processes.
Research and Development
We continue to invest in product innovation to provide technologically advanced products to our customers for existing and new applications. Over the last three years, we have invested $425 million in research and development ($140 million in 2020, $144 million in 2019, and $141 million in 2018), which is approximately 5% of net sales for each year. Our research and development efforts fall into two categories:
•technology advancements, which generate new products or features and increase the value of our products. These advancements may be in the form of enhanced or new functionality, new applications for our technologies, more accurate or reliable measurement, additional software capability, or automation through robotics or other means.
•cost reductions, which reduce the manufacturing cost of our products through better overall design and/or improve the ease of serviceability.
We devote a substantial proportion of our research and development budget to software development. This includes software to process the signals captured by the sensors of our instruments, application-specific software, and software that connects our solutions into customers’ existing IT systems. We closely integrate research and development with marketing, manufacturing, and product engineering. We have approximately 1,400 employees in research and development and product engineering in countries around the globe.
Manufacturing
We are a worldwide manufacturer, with facilities principally located in China, Switzerland, the United States, Germany, the United Kingdom, and Mexico. We 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. All major manufacturing facilities have achieved ISO 9001 certification. We believe that our manufacturing capacity is sufficient to meet our present and currently anticipated demand. We expect to make net investments in new or expanded manufacturing facilities of approximately $10 million to $15 million in 2021.
We generally manufacture critical components, which are components that contain proprietary technology. When outside manufacturing is more efficient, we contract with other manufacturers for certain nonproprietary components. We use a wide range of suppliers. We believe our supply arrangements are adequate and that there are no material constraints on the sources and availability of materials. From time to time, we may rely on a single supplier for all of our requirements of a particular component. Supply arrangements for electronic components are generally made globally.
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Backlog; Seasonality
Our manufacturing turnaround time is generally short, which permits us to manufacture orders to fill for most of our products. Backlog is generally a function of requested customer delivery dates and is typically no longer than one to two months.
Our business has historically experienced a slight amount of seasonal variation, particularly the high-end laboratory instruments business. Traditionally, sales in the first quarter are slightly lower than, and sales in the fourth quarter are slightly higher than, sales in the second and third quarters. Fourth quarter sales have historically generated approximately 28% to 30% of our net sales. This trend has a somewhat greater effect on income from operations than on net sales because fixed costs are generally incurred evenly across all quarters.
Employees
Our total global workforce was 16,500, including 14,900 employees and 1,600 temporary personnel, as of December 31, 2020, and includes approximately 6,000 in Europe, 4,900 in North and South America, and 5,600 in Asia and other countries.
We are proud of our corporate culture and our talented employees. We endeavor to continue to provide an attractive work environment and keep our employees fully engaged. We know that our future success depends on attracting, developing, and retaining the best employees. We promote equal opportunity worldwide and value diversity in our global workforce, which reflects the diversity in the many communities in which we operate internationally. We employ people of more than 85 nationalities.
We wish to further promote all forms of diversity, and we encourage all employees, inclusive of all our demographics, to take on more responsibilities and management positions. As of December 31, 2020, approximately 35% of our global employee headcount was female, with approximately 27% holding management positions. We place great emphasis on performance management, training, and developing our employees across all levels and regions. During 2020, approximately 14,500 employees completed one or more training courses. Lastly, we have local safety programs in place in all relevant units, and select locations have implemented a certified work safety management system. Severe workplace accidents are rare and we have had no fatalities from occupational incidents in the past five years.
We believe our employee relations are good, and we have not suffered any material employee work stoppage or strike during the last five years. Approximately 7,400 employees are represented by collective bargaining or another arrangement organized to represent employee interests.
Sustainability
Sustainability touches all aspects of our business, from designing, sourcing, and producing our products, to selling and delivering them to our customers, to handling them at the end of their lifecycle. A sustainable mindset helps guide us to make the right decisions for our customers, employees, suppliers, shareholders, and the communities in which we operate our business. We want to manage our business sustainably to position the Company for long-term growth. More than 10 years ago, we launched our GreenMT program to pursue environmental, social, and governance priorities where we can have a significant impact. We do this in five key areas: (1) keeping our operations sustainable over the long term by ensuring we use resources efficiently, (2) helping our customers to be sustainable in their businesses by offering green products and services, (3) promoting responsible practices within our supply chain, (4) ensuring an engaged workforce through fair, attractive, safe, and development-minded workplaces, and (5) following corporate governance best practices.
We have set a number of goals relating to our GreenMT sustainability program, including reducing our carbon footprint and other environmental, social, and governance goals. As of 2020, we achieved carbon neutrality with respect to Scope 1 and Scope 2 CO2 emissions. We also broadened our goals
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relating to waste, including reducing our waste intensity by 20% and achieving zero waste to landfill, in each case by 2025. We report annually on our progress in our Corporate Responsibility Report, available on www.mt.com/sustainability.
Blue Ocean Program
“Blue Ocean” refers to our program to establish a global operating model with standardized, automated, and integrated processes and high levels of global data transparency. It encompasses an enterprise architecture, with a global, single-instance ERP system. Within our IT systems, we continue to move toward integrated, homogeneous applications and common data structures. We are also largely standardizing our key business processes. The implementation of the systems and processes has been proceeding on a staggered basis over a multi-year period. We have implemented the Blue Ocean program in our Swiss, Chinese, U.K., Benelux, German, U.S., and Southeast Asia operations. We estimate that we have more than 80% of our users on the program, and we will continue to implement additional locations and functionality over the coming years.
Intellectual Property
We hold over 5,000 patents and trademarks (including pending applications), primarily in the United States, Switzerland, China, the European Union, Germany, the United Kingdom, Italy, France, Japan, South Korea, Brazil, and India. Our products generally incorporate a wide variety of technological innovations, some of which are protected by patents of various durations. 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. 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.
Approvals are required to ensure our instruments do not impermissibly influence other instruments and are themselves not affected by other instruments. In addition, some of our products are used in “legal for trade” applications, in which prices based on weight are calculated and for which specific weights and measures approvals are required. 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 products may also be subject to special requirements depending on the end-user and market. For example, laboratory customers are typically subject to Good Laboratory Practices (GLP), industrial customers to Good Manufacturing Practices (GMP), pharmaceutical customers to U.S. Food and Drug Administration (FDA) regulations, and customers in food processing industries may be subject to Hazard Analysis and Critical Control Point (HACCP) regulations. Products used in hazardous environments may also be subject to special requirements.
Environmental Matters
We are subject to environmental laws and regulations in the jurisdictions in which we operate. We own or lease a number of properties and manufacturing facilities around the world. 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.
We are currently involved in, or have potential liability with respect to, the remediation of past contamination in certain of our facilities. A former subsidiary of Mettler-Toledo, LLC known as Hi-Speed
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Checkweigher Co., Inc. was one of two private parties ordered by the New Jersey Department of Environmental Protection, in an administrative consent order signed on June 13, 1988, to investigate and remediate certain ground water contamination at a property in Landing, New Jersey. After the other party under this order failed to fulfill its obligations, Hi-Speed became solely responsible for compliance with the order. Residual ground water contamination at this site is now within a Classification Exception Area which the Department of Environmental Protection has approved and within which the Company oversees monitoring of the decay of contaminants of concern. A concurrent Well Restriction Area also exists for the site. The Department of Environmental Protection does not view these vehicles as remedial measures, but rather as “institutional controls” that must be adequately maintained and periodically evaluated. We estimate that the costs of compliance associated with the site over the next several years will be approximately a total of $0.4 million.
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 that are or may be considered hazardous. It is possible that these 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. 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 have a material adverse effect on our financial condition, results of operations, or cash flows.
Competition
Our markets are highly competitive. Many of the markets in which we compete are fragmented both geographically and by application, particularly the industrial and food retailing markets. As a result, we face numerous regional or specialized competitors, many of which are well established in their markets. For example, some of our competitors are divisions of larger companies with potentially greater financial and other resources than our own. In addition, some of our competitors are domiciled in emerging markets and may have a lower cost structure than ours. We are confronted with new competitors in emerging markets which, although relatively small in size today, could become larger companies in their home markets. Given the sometimes significant growth rates of these emerging markets, and in light of their cost advantage over developed markets, emerging market competitors could become more significant global competitors. 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 technological and other competitive advantages over many of our competitors, we may not be able to realize and maintain these advantages. These advantages include our worldwide market leadership positions; our global brand and reputation; our track record of technological innovation; our comprehensive, high-quality solution offering; our global sales and service offering; our large installed base of instruments; and the diversification of our revenue base by geographic region, product range, application, and customer. To remain competitive, we must continue to 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 the principal competitive factors in developed markets for purchasing decisions are the product itself, application support, service support, and price. In emerging markets, where there is greater demand for less sophisticated products, price is a more important factor than in developed markets.
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Competition in the U.S. laboratory market is also influenced by the presence of large distributors that sell not only our products but those of our competitors as well.
Company Website and Information
You can find our website on the internet at www.mt.com. The website contains information about us and our operations. The information contained on our website is not included in, or incorporated by reference into, this annual report on Form 10-K. You can view and download free of charge copies of each of our filings with the SEC on Form 10-K, Form 10-Q, Form 8-K, and Schedule 14A and all amendments to those reports by accessing www.mt.com, clicking on About Us, Investor Relations, and then clicking on SEC Filings. The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our website also contains copies of the following documents that you can download free of charge:
•Corporate Governance Guidelines
•Audit Committee Charter
•Compensation Committee Charter
•Nominating and Corporate Governance Committee Charter
•Code of Conduct
•Equal Employment Opportunity Policy
•Business Partner Code of Conduct
•Ethical, Social, and Quality Standards
•Corporate Responsibility Report
•Environmental Policy
•Political Participation Policy
•Conflict Mineral Report
•Statement on Slavery, Human Trafficking, and Transparency in the Supply Chain
You can also obtain in print, free of charge, any of the above documents and any of our reports on Form 10-K, Form 10-Q, Form 8-K, and Schedule 14A and all amendments to those reports by sending a written request to our Investor Relations Department:
Investor Relations
Mettler-Toledo International Inc.
1900 Polaris Parkway
Columbus, OH 43240 U.S.A.
Phone: +1 614 438 4748
E-mail: mary.finnegan@mt.com
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Item 1A.Risk Factors
Factors Affecting Our Future Operating Results
Operational Risks
The COVID-19 pandemic has negatively affected, and will likely continue to negatively affect, various aspects of our business, including our workforce and supply chain, and make it more difficult and expensive to meet our obligations to our customers, and has resulted in, and will likely continue to result in, reduced demand from our customers as their businesses may also be negatively affected.
Our global operations are susceptible to global events that could have an adverse effect on our business results and financial condition.
For instance, we are susceptible to a widespread outbreak of an illness or other health issue, such as the ongoing coronavirus pandemic ("COVID-19"), which has spread globally, resulting in millions of confirmed cases throughout the world and in all countries where we conduct business. The pandemic has caused many governments to implement stay-at-home orders, quarantines, and significant restrictions on travel. Several governments have also implemented work restrictions that prohibit many employees from going to their customary work locations and that require these employees to work remotely if possible. Quarantines, travel bans, work and other restrictions were initially put in place on a national level in China in January 2020, and with the global spread of the virus, subsequently adopted in many other countries and regions with many restrictions in Asia Pacific, Europe, North America, and South America. These restrictions continue to change as COVID-19 evolves in each country and region.
As a result of pandemic outbreaks, including COVID-19, businesses can be shut down; supply chains can be interrupted, slowed, or rendered inoperable; and individuals can become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. COVID-19 interferes with general commercial activity related to our supply chain and customer base. In addition, COVID-19 may negatively affect the global economy and our customers’ businesses, which may result in delayed or reduced purchases from us. Some customers may also have difficulty meeting their payment obligations to us, resulting in late payments or an inability of some customers to make payments at all.
During the year ended December 31, 2020, COVID-19 had a negative impact on our business, primarily related to reduced global customer demand. We remain cautious as uncertainties related to COVID-19 and the resulting impact to the economy continue in all regions of the world and market conditions may also change quickly. With the global spread of the virus and related negative impact to the global economy, we may experience reduced global sales volume from lower customer demand. Our operations could be negatively affected further if our employees who are currently not subject to stay-at-home or work restriction orders are quarantined or become ill as a result of exposure to COVID-19, or if they become subject to governmental COVID-19 curfews or stay-at-home orders. The longer-term effects on our business will be impacted by the global economy and any recession implications in different regions of the world. While it is extremely difficult to estimate the extent and duration of any COVID-19 implications, the effects on our business, results of operations, and financial condition could be material.
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We sell primarily to companies in developed countries. An economic downturn in these countries could hurt our operating results.
Most of our business is derived from companies in developed countries. Economic uncertainty in many parts of the world, including international trade disputes and sovereign debt levels in the European Union and the United States, are situations that we monitor closely. If developed countries were to experience slow growth or recession, we could see the following effects:
•a drop in demand for our products;
•companies being unable to finance their businesses;
•difficulty in obtaining materials and supplies;
•potential devaluation and/or impairment of assets;
•difficulty in collecting accounts receivables;
•an increase in accounts receivable write-offs; and
•greater foreign exchange rate volatility affecting our profitability and cash flow.
Economic downturns or recessions adversely affect our operating results because our customers often decrease or delay capital expenditures. Customers may also purchase lower-cost products made by competitors and not resume purchasing our products even after economic conditions improve. These conditions would reduce our revenues and profitability.
In addition, a potential financial crisis on financial institutions globally would likely have an adverse effect on the global capital markets and our business.
We are subject to certain risks associated with our international operations and have a significant concentration of business in China.
We conduct business in many countries, including emerging markets in Asia, Latin America, and Eastern Europe, and these operations represent a significant portion of our sales and earnings. For example, our Chinese operations accounted for 19% of sales to external customers, approximately 32% of our global production, and 32% of total segment profit during 2020. In addition to the currency risks discussed below, international operations pose other substantial risks and problems for us, including the following:
•local tariffs and trade barriers;
•additions or revisions to a country's legal and regulatory requirements;
•difficulties in staffing and managing local operations and/or mandatory salary increases;
•credit risks arising from financial difficulties facing local customers and distributors;
•difficulties in protecting intellectual property;
•nationalization of private enterprises which may result in the confiscation of assets, as we hold significant assets around the world in the form of property, plant, and equipment, inventory, and accounts receivable, as well as $43.2 million of cash at December 31, 2020 in our Chinese subsidiaries;
•restrictions on investments and/or limitations regarding foreign ownership;
•adverse tax consequences, including tax disputes and imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries;
•the adoption of new or expansion of current travel restrictions or the intensification of trade wars;
•other uncertain local economic, political, and social conditions, including hyper-inflationary conditions or periods of low or no productivity growth; and
•credit tightening or reduction in credit availability for local customers.
We must also comply with regulations regarding the conversion and repatriation of funds earned in local currencies. For example, we need government approval to convert earnings from our operations in
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China into other currencies and to repatriate these funds. If we cannot comply with these or other applicable regulations, we may face increased difficulties in using cash generated in China.
We are required to comply with various import, export control, and economic sanctions laws, which may affect our transactions with certain customers, business partners, and other persons, including in certain cases dealings with or between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services, and technologies, and in other circumstances, we may be required to obtain an export license before exporting a controlled item. We follow all relevant laws and continue to do business in Russia. Sanctions imposed on business in Russia may affect the economy and our business in Russia. In addition, failure to comply with any of these regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to import and export products and services, and damage to our reputation.
Growth in emerging markets, especially China, can be volatile and change quickly.
Our business and financial performance may be adversely affected by a cybersecurity attack.
We rely on our technology infrastructure to interact with suppliers, sell our products and services, fulfill orders, support our customers, and bill, collect, and make payments. Our system and processes may be susceptible to damage or interruption from cybersecurity incidents, such as terrorist or hacker attacks, the introduction of malicious computer viruses, ransomware, falsification of banking and other information, insider risk, or other security breaches. If there is a cybersecurity incident, we may suffer interruptions in service, loss of assets or data, or reduced functionality. Many of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality a cybersecurity incident could cause. Security breaches of our systems which allow inappropriate access to or inadvertent transfer of information and misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, customers, or suppliers could result in our suffering significant financial and reputational damage.
Customers may use our products and/or software to generate or manage critical information. Though we take steps to ensure our products and/or software are secure, it is possible that a cyber attack could result in the loss or compromise of critical information. If a customer alleges that a cyber attack causes or contributes to a loss or compromise of critical information, we could face harm to our reputation and financial condition.
While we attempt to mitigate cybersecurity risks by employing a number of proactive measures, including employee training and awareness, technical security controls, enhanced data protection, and maintenance of backup and protective systems, our systems remain potentially vulnerable to cybersecurity threats, any of which could have a material adverse effect on our business. We believe our mitigation measures reduce, but cannot eliminate, the risk of a cybersecurity incident. Despite any precautions we may take, a cybersecurity incident could harm our reputation and financial condition and cause us to incur legal liability and increased costs to respond to such events. Our cyber liability insurance may not be sufficient to compensate us for losses that may result from interruptions in our services or asset or data loss as a result of cybersecurity incidents.
In addition, regulatory or legislative action related to cybersecurity, privacy, and data protection worldwide, such as the European General Data Protection Regulation which went into effect in May 2018, may increase the costs to develop, implement, or secure our products or services. We expect cybersecurity regulations to continue to evolve and be costly to implement. If we violate or fail to comply with such regulatory or legislative requirements, we could be fined or otherwise sanctioned, and such fines or penalties could have a material adverse effect on our business and operations.
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We are vulnerable to system failures and data loss risks, which could harm our business.
We rely on our technology infrastructure to interact with suppliers, sell our products and services, support our customers, fulfill orders, and bill, collect, and make payments. Our systems are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, malicious employees or employee negligence, computer viruses, and other events. When we upgrade or change systems, we may suffer interruptions in service, loss of data, or reduced functionality. A significant number of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Despite any precautions we may take, such problems could result in interruptions in our services, fraudulent or negligent loss of assets, or unauthorized disclosure of confidential information, which could harm our reputation and financial condition. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our services or data loss as a result of system failures.
Customers may use our products and/or software to generate or manage confidential information. Though we take steps to ensure our products and/or software are secure, it is possible customers could lose confidential information stored on our products. If a customer alleges system failures in our products and/or software cause or contribute to a loss, we could face harm to our reputation and financial condition and legal liability.
We have also been implementing a program to globalize our business processes and information technology systems that includes the implementation of a Company-wide enterprise resource planning system. This has been proceeding on a staggered basis over a multi-year period. We have implemented the program in our Swiss, Chinese, U.K., Benelux, German, U.S., and Southeast Asia operations. We estimate that we have more than 80% of our users on the program and will continue to implement additional locations and functionality over the coming years. If our implementation is flawed, we could suffer interruptions in operations and customer-facing activities that could harm our reputation and financial condition or cause us to lose data, experience reduced functionality, or have delays in reporting financial information. It may take us longer to implement the program than we have planned, and the project may cost us more than we have estimated, either of which would negatively impact our ability to generate cost savings or other efficiencies. In addition, the program has increased our reliance on a single information technology system, which would have greater consequences should we experience a system disruption.
Our ability to manufacture and deliver products and services may be disrupted.
We have key manufacturing facilities located in China, Europe, and the United States. Many of our products are developed and manufactured at single locations, with limited alternate facilities. In addition, a large portion of our products and spare parts are distributed through regional logistics centers, in which certain logistics activities are outsourced to third parties. If we experience any significant disruption in these facilities for any reason, such as the COVID-19 pandemic described on page 14, strikes or other labor unrest, power interruptions, cybersecurity attacks, fire, earthquakes, hurricanes, floods, rising water levels, or other events beyond our control, we may be unable to satisfy customer demand for our products or services resulting in lost sales. It may be expensive to resolve these issues, even though some of these risks are covered by insurance policies. More importantly, customers may switch to competitors and may not return to us even if we resolve the interruption.
Our business would suffer if we were unable to obtain supplies of material.
We purchase most of our raw materials, components, and supplies from multiple suppliers. Some items are purchased from a limited or single source of supply, and disruption of these sources could affect our ability to manufacture products. Even where multiple sources of materials and components are available, the quality of the alternative materials, regulatory and contractual requirements to qualify
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materials for use in manufacturing, and the time required to establish new relationships with reliable suppliers could result in manufacturing delays and possible loss of sales. If we are unable to obtain materials or components for an extended time, this could damage our customer relationships and harm our financial condition or results of operations.
Our product development efforts may not produce commercially viable products in a timely manner.
If we do not introduce new products and enhancements, our products could become technologically obsolete over time, which would harm our operating results. To remain competitive, we must continue to make significant investments 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. In developing new products, we may be required to make substantial investments before we can determine their commercial viability. As a result, we may not be successful in developing new products and we may never realize the benefits of our research and development activities.
We face risks related to sales through distributors and other third parties that we do not control, which could harm our business.
We sell some products through third parties, including distributors and value-added resellers. This exposes us to various risks, including competitive pressure, concentration of sales volumes, credit risks, and compliance risks. We may rely on one or a few key distributors for a product or market, and the loss of these distributors could reduce our revenue and net earnings. Distributors may also face financial difficulties, including bankruptcy, which could harm our collection of accounts receivables. Violations of the FCPA or similar anti-bribery laws by distributors or other third-party intermediaries could materially impact our business. In addition to financial risk, actions of some of our distributors could cause reputational harm, especially if our products are involved. Risks related to our use of distributors may reduce sales, increase expenses, and weaken our competitive position.
Departures of key employees could impair our operations.
Key employees could leave the Company. If any key employees stopped working for us, our operations could be harmed. Important R&D personnel may leave and join competitors, which could substantially delay or hinder ongoing development projects. We have no key man life insurance policies with respect to any of our senior executives.
Our business involves certain operating risks, and our insurance may not be adequate to cover all insured losses of liabilities we might incur in our operations.
We have procured various insurance policies for certain types of insurance coverage and in varying coverage amounts. Our insurance may not be adequate to cover all losses or liabilities that we might incur in our operations. Furthermore, our insurance may not adequately protect us against liability from all of the hazards of our business. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. We also are subject to the risk that we may be unable to maintain or obtain insurance of the type and amount we desire at a reasonable cost. If we were to incur a significant liability for which we were uninsured or for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations, and cash flows.
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Strategic Risks
A prolonged downturn or additional consolidation in the pharmaceutical, food and beverage, and chemical industries could adversely affect our operating results. A reduction in the capital resources or government funding of our customers could reduce our sales.
Our products are used extensively in the pharmaceutical, food and beverage, and chemical industries. Consolidation in these industries hurt our sales in prior years. In recent years, there has been an increase in consolidation within these industries. A prolonged global economic downturn, a downturn affecting one or more of these industries, or additional consolidation in any of these industries could adversely affect our operating results. In addition, the capital spending policies of our customers in these and other industries are based on a variety of factors we cannot control, including the resources available for purchasing equipment, the spending priorities among various types of equipment, and policies regarding capital expenditures. Any decrease or delay in capital spending by our customers would cause our revenues to decline and could harm our profitability. A decline in government funding of research or education could reduce some customers’ ability to purchase our products.
We operate in highly competitive markets, and it may be difficult for us to preserve operating margins, gain market share, and maintain a technological advantage.
Our markets are highly competitive. Many are fragmented both geographically and by application, particularly the industrial and food retailing markets. 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. There has also been an increase in the consolidation of precision instrument companies in recent years. Any consolidation within our market could result in competitors becoming larger and having greater financial and other resources than our own. Some of our competitors are domiciled or operate in emerging markets and may have a lower cost structure than ours. We are confronted with new competitors in emerging markets which, although relatively small in size today, could become larger companies in their home markets. Given the sometimes significant growth rates of these emerging markets, and in light of their cost advantage over developed markets, emerging market competitors could become more significant global competitors. Taken together, the competitive forces present in our markets could harm our operating margins. 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 our products and services have advantages over our competitors, we may not be able to realize and maintain these advantages.
We may face risks associated with future acquisitions.
We may pursue acquisitions of complementary product lines, technologies, or businesses. Acquisitions involve numerous risks, including difficulties in integrating the acquired operations, technologies, and products; diversion of management’s attention from other business concerns; and potential departures of key employees of the acquired company. If we successfully identify acquisitions in the future, completing such acquisitions may result in new issuances of our stock that may be dilutive to current owners, increases in our debt and contingent liabilities, and additional amortization expense related to intangible assets. Any of these acquisition-related risks could have a material adverse effect on our profitability.
Larger companies have identified life sciences and instruments as businesses they will consider entering or expanding their presence, which could change the competitive dynamics of these markets. In addition, we may not be able to identify, successfully complete, or integrate potential acquisitions in the future. Even if we can do so, we cannot be sure that these acquisitions will have a positive impact on our business or operating results. We are also required to estimate the fair value of certain assets acquired or
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liabilities assumed. Such fair values may be based on valuation models which are subject to inherent uncertainties and our judgments regarding certain assumptions.
Financial Risks
Currency fluctuations affect our operating profits.
Our earnings are affected by changing exchange rates. We are particularly sensitive to changes in the exchange rates between the Swiss franc, euro, Chinese renminbi, and U.S. dollar. We have more Swiss franc expenses than we do Swiss franc sales because we develop and manufacture products in Switzerland that we sell globally and have a number of corporate functions located in Switzerland. When the Swiss franc strengthens against our other trading currencies, particularly the U.S. dollar and euro, our earnings go down. We also have significantly more sales in the euro than we do expenses. When the euro weakens against the U.S. dollar and Swiss franc, our earnings also go down. We estimate a 1% strengthening of the Swiss franc against the euro would reduce our earnings before tax by approximately $1.6 million to $1.8 million annually.
We also conduct business throughout the world, including Asia Pacific, the United Kingdom, Eastern Europe, Latin America, and Canada. Fluctuations in these currency exchange rates against the U.S. dollar can also affect our operating results. The most significant of these currency exposures is the Chinese renminbi. The impact on our earnings before tax of the Chinese renminbi weakening 1% against the U.S. dollar is a reduction of approximately $2.0 million to $2.2 million annually.
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, the Swiss franc, and euro. Based on our outstanding debt at December 31, 2020, we estimate that a 5% weakening of the U.S. dollar against the currencies in which our debt is denominated would result in an increase of $25.2 million in the reported U.S. dollar value of our debt.
We may experience impairments of goodwill or other intangible assets.
As of December 31, 2020, our consolidated balance sheet included goodwill of $550.3 million and other intangible assets of $196.8 million.
Our business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense. We make estimates and assumptions in valuing such intangible assets that affect our consolidated financial statements.
In accordance with U.S. GAAP, our goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The evaluation may be based on valuation models that estimate fair value. In preparing the valuation models, we consider a number of factors, including operating results, business plans, economic conditions, future cash flows, and transactions and market data. There are inherent uncertainties related to these factors and our judgment in applying them to the impairment analyses. The significant estimates and assumptions within our fair value models include sales growth, controllable cost growth, perpetual growth, effective tax rates, and discount rates. Our assessments to date have indicated that there has been no impairment of these assets.
Should any of these estimates or assumptions change, or should we incur lower-than-expected operating performance or cash flows, including from a prolonged economic slowdown, we may experience a triggering event that requires a new fair value assessment for our reporting units, possibly prior to the required annual assessment. These types of events and resulting analysis could result in
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impairment charges for goodwill and other indefinite-lived intangible assets if the fair value estimate declines below the carrying value.
Our amortization expense related to intangible assets with finite lives may materially change should our estimates of their useful lives change.
Concerns regarding the Eurozone debt levels and market perception related to the instability of the euro could affect our operating profits.
We conduct business in many countries that use the euro as their currency (the Eurozone). Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations. In addition, concerns in recent years have existed regarding the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries.
These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of our euro-denominated assets and obligations. In addition, concerns over the effect of this type of financial crisis on financial institutions in Europe and globally could have an adverse effect on the global capital markets and, more specifically, on the ability of our Company, our customers, suppliers, and lenders to finance their respective businesses and to access liquidity at acceptable financing costs, if at all, on the availability of supplies and materials, and on the demand for our products.
Legal, Tax, Regulatory, and Other Risks
Unanticipated changes in our tax rates or additional income tax liabilities could impact our profitability.
We are subject to income taxes in the United States and various other jurisdictions, and our domestic and international tax liabilities are subject to allocation of expenses among different jurisdictions. Our effective tax rates and tax obligations could be adversely affected by changes in tax laws or rates, changes in the mix of earnings by jurisdiction, changes in the valuation of deferred tax assets and liabilities, and material adjustments from tax audits.
In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent upon our ability to generate future taxable income in the U.S. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability.
Our tax expense and tax obligations could increase as a result of changing application of tax law.
Governments are facing greater pressure on public finances, which could lead to their more aggressively applying existing tax laws and regulations. Governments also periodically change tax laws and regulations. The Organization for Economic Co-Operation and Development ("OECD") is also performing an economic impact study that is expected to develop a solution to the digital economy, and also propose a supplement to the current transfer pricing arm’s length standard for allocating profit. While the OECD’s current focus appears to be related to the digital economy and consumer businesses, there is a possibility that the OECD also proposes changes to business-to-business transfer pricing regulations. Any changes in corporate income tax rates or regulations, on repatriation of dividends, earnings, or capital, or on transfer pricing, as well as changes in the interpretation of existing tax laws and regulations in the
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jurisdictions in which we operate, could adversely affect our cash flow and increase our overall tax burden, which would negatively affect our profitability. Potential OECD changes impacting consumer businesses could also have an unfavorable effect on some of our key customer segments such as pharmaceutical and food and beverage, which could result in a decline or delay in capital spending by our customers and a resulting decline in our revenues and lower profitability.
We may be adversely affected by failure to comply with regulations of governmental agencies or by the adoption of new regulations. United States trade policy, including the imposition of tariffs and the resulting consequences, as well as other political policies in the United States, China, the U.K., and certain European countries, may also impact global trade or create uncertainty impacting our business.
Our products are subject to regulation by governmental agencies. These regulations govern a wide variety of activities relating to our products, including design and development, product safety, labeling, manufacturing, promotion, sales, and distribution. We also operate a global business and are subject to various laws and regulations in the many markets where we do business, including those relating to competition, employment and labor practices, international trade, and corruption. If we fail to comply with these regulations, or if new regulations are adopted that substantially change existing practice or impose new burdens, we may have to recall products and cease their manufacture and distribution. In addition, we could be subject to investigation costs, reputational harm, fines, criminal prosecution, and other damages that could impact our profitability.
Political policy in the United States, China, the U.K., and certain European countries may impact global trade or create uncertainty. The United States government has recently adopted a new approach to trade policy and in certain cases to renegotiate, or possibly terminate, certain existing trade agreements. The United States government has also initiated tariffs on certain foreign goods, particularly those produced in China. As a result, certain foreign governments, including the Chinese government, have imposed retaliatory tariffs on goods that their countries import from the United States.
These various trade policy and regulatory actions described above may restrict our access to lower-cost countries in certain circumstances or otherwise create uncertainty, negatively impact global markets, and make it more difficult or costly for us to import our products into certain countries. The adoption and expansion of trade restrictions or other governmental action related to tariffs or trade agreements or policies could also lead to an economic downturn and/or could create unfavorable fluctuations in currency exchange rates (see above description "currency fluctuations affect our operating profits"). In times of uncertainty, some customers delay investments or defer normal replacement cycles, which could have an adverse impact on our sales. The adoption and expansion of trade restrictions or other governmental action related to tariffs or trade agreements or policies have the potential to adversely impact our business and financial performance.
The United Kingdom’s withdrawal from the European Union could adversely impact our results of operations.
In June 2016, voters in the United Kingdom ("U.K.") approved an advisory referendum to withdraw from the European Union ("E.U."), commonly referred to as "Brexit." On October 17, 2019, the U.K. Prime Minister and the E.U. agreed to new terms for the country’s exit from the E.U., which received all necessary parliamentary approvals. On January 31, 2020, the U.K. formally left the E.U. and immediately entered into an 11-month transition period during which all E.U. rules and trading agreements remained as they were. On December 24, 2020, the U.K. and E.U. agreed to a trade deal (the “Trade and Cooperation Agreement”) which was ratified by the U.K. on December 30, 2020. The Trade and Cooperation Agreement is subject to formal approval by the European Parliament and the Council of the European Union before it comes into effect and has been applied provisionally since January 1, 2021. The Trade and
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Cooperation Agreement allows the U.K. and E.U. to continue trading without tariffs or quotas; however, the movement of goods between the U.K. and the remaining member states of the E.U. may be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. In addition, there are still a number of areas of uncertainty in connection with the future of the U.K. and its relationship with the E.U. and the application and interpretation of the Trade and Cooperation Agreement, and Brexit-related matters may take several years to be clarified and resolved. In particular, the Trade and Cooperation Agreement only covers the trade of goods and, therefore, uncertainty remains over the U.K.'s long-term trading of services relationship with the E.U. At this time, we cannot predict the potential impact of Brexit on our business. However, Brexit could adversely affect our operating results and financial condition.
If we cannot protect our intellectual property rights, or if we infringe or misappropriate the proprietary rights of others, our operating results could be harmed.
Our success depends on our ability to obtain, maintain, and enforce patents on our technology, maintain our trademarks, and protect our trade secrets. Our patents may not provide complete protection or may expire, and competitors may develop similar products that are not covered by our patents. Our patents may also be challenged by third parties and invalidated or narrowed. We may experience a decline in sales and/or profitability if any of these things occur. Competitors sometimes seek to take advantage of our trademarks or brands in ways that may create customer confusion or weaken our brand. Improper use or disclosure of our trade secrets may still occur.
We may be sued for infringing on the intellectual property rights of others. The cost of any litigation could affect our profitability regardless of the outcome, and management attention could be diverted. If we are unsuccessful in such litigation, we may have to pay damages, stop the infringing activity, and/or obtain a license. If we fail to obtain a required license, we may be unable to sell some of our products, which could result in a decline in our revenues.
We may be adversely affected by environmental laws and regulations.
We are subject to various environmental laws and regulations and incur expenditures in complying with environmental laws and regulations. We are currently involved in, or have potential liability with respect to, the remediation of past contamination in various facilities. In addition, some of our facilities are or have 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. These 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.
We may be adversely affected by regulations and market expectations related to sourcing and our supply chain, including conflict minerals.
The SEC has adopted disclosures and reporting requirements for companies whose products contain certain minerals and their derivatives, namely tin, tantalum, tungsten, or gold, known as conflict minerals. Companies must report annually whether or not such minerals originate from the Democratic Republic of Congo (DRC) and adjoining countries. These requirements could adversely affect the sourcing, availability, and pricing of materials used in the manufacturing of our products. In addition, we have incurred additional costs to comply with the disclosure requirements, including cost related to determining the source of any of the relevant minerals used in our products. Since our supply chain is complex, due diligence procedures we have implemented to understand the origins of the minerals we use in our operations may not enable us to ascertain with sufficient certainty the origins for these minerals or determine that these minerals are DRC conflict free, which may harm our reputation. We may also face
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difficulties in satisfying customers who may require that our products be certified as DRC conflict free, which could harm our relationships with these customers and/or lead to a loss of revenue. These requirements also could have the effect of limiting the pool of suppliers from which we source these minerals, and we may be unable to obtain conflict-free minerals at prices similar to the past, which could increase our costs and adversely affect our manufacturing operations and our profitability.
Future laws, regulations, or customers may make additional demands on supply chain transparency. These demands can include more transparency into the activities of our suppliers with regard to human rights and sustainable sourcing. We have significant protections in place to ensure we partner with responsible suppliers, but increased demands may cause us to incur increased supply chain costs. If we cannot satisfy customers’ demands, we may lose business, and if we cannot meet new regulatory requirements, we may have to alter our sourcing at increased expense.
Our ability to generate and repatriate cash depends in part on factors beyond our control.
Our ability to make payments on our debt and to fund our share repurchase program, planned capital expenditures, and research and development efforts depends on our ability to generate and repatriate cash in the future. This is subject to factors beyond our control, including general economic, financial, competitive, legislative, regulatory, governmental, and other factors described in this section.
We cannot ensure that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot ensure that we will be able to refinance any of our debt, including our credit facility and the senior notes, on commercially reasonable terms or at all.
Our ability to fund our share repurchase program is also dependent on our ability to repatriate our international cash flows. Changes in governmental cash repatriation policies, restrictions, or tax laws could impair our ability to continue our share repurchase program.
Risks Related to Our Debt
We have debt and we may incur substantially more debt, which could affect our ability to meet our debt obligations and may otherwise restrict our activities.
We have debt and we may incur substantial additional debt in the future. As of December 31, 2020, we had total indebtedness of approximately $1.2 billion, net of cash of $94.3 million. Our debt instruments allow us to incur substantial additional indebtedness.
The existence and magnitude of our debt could have important consequences. For example, it could make it more difficult for us to satisfy our obligations under our debt instruments; require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development, and other corporate requirements; increase our vulnerability to general adverse economic and industry conditions, including changes in raw material costs; limit our ability to respond to business opportunities; limit our ability to borrow additional funds, which may be necessary; and subject us to financial and other restrictive covenants, which, if we fail to comply with these covenants and our failure is not waived or cured, could result in an event of default under our debt instruments.
The agreements governing our debt impose restrictions on our business.
The note purchase agreements governing our notes and the agreements governing our credit facility contain covenants imposing various restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. The
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restrictions these covenants place on us include limitations on our ability to incur liens and consolidate, merge, sell, or lease all or substantially all of our assets. Our credit facility and the note purchase agreements governing our senior notes also require us to meet certain financial ratios.
Our ability to comply with these agreements may be affected by events beyond our control, including economic, financial, and industry conditions. The breach of any covenants or restrictions could result in a default under the note purchase agreements governing the senior notes and/or under our credit facility. An event of default under the agreements governing our debt would permit holders of our debt to declare all amounts owed to them under such agreements to be immediately due and payable. Acceleration of our other indebtedness may cause us to be unable to make interest payments on the senior notes and repay the principal amount of the senior notes.
The lenders under our credit agreement may be unable to meet their funding commitments, reducing the amount of our borrowing capacity.
We have a revolving credit facility outstanding under which the Company and certain of its subsidiaries may borrow up to $1.1 billion. Our credit facility is provided by a group of 15 financial institutions, which individually have between 1% and 11% of the total funding commitment. At December 31, 2020, we had borrowings of $497.5 million outstanding under our credit facility. Our ability to borrow further funds under our credit facility is subject to the various lenders’ financial condition and ability to make funds available. Even though the financial institutions are contractually obligated to lend funds, if one or more of the lenders encounters financial difficulties or goes bankrupt, such lenders may be unable to meet their obligations. This could result in us being unable to borrow the full $1.1 billion amount available.
We are subject to risks associated with the discontinuation of LIBOR.
The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out the London Interbank Offered Rate ("LIBOR") by the end of 2021. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and could result in higher borrowing costs. In addition, if changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, including our credit facility and swap arrangements, and we cannot predict what alternative rate or benchmark would be negotiated. This may also result in an increase in our interest expense.
General Risk Factors
We make forward-looking statements, and actual events or results may differ materially from these statements because assumptions we have made prove incorrect due to market conditions in our industries or other factors.
We provide forward-looking statements both in our filings with the SEC and orally in connection with our quarterly earnings calls, including guidance on anticipated sales growth and earnings per share. You should not rely on forward-looking statements to predict our actual results. Our actual results or performance may be materially different than reflected in forward-looking statements because of various risks and uncertainties.
Our forward-looking statements may not be accurate or complete, and we do not intend to update or revise them in light of actual results. New risks also periodically arise. Please consider the risks and factors that could cause our results to differ materially from what is described in our forward-looking statements. See in particular “Factors Affecting Our Future Operating Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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In providing guidance on our future earnings, we evaluate our budgets, strategic plans, and other factors relating to our business. We make assumptions about external factors, including the following:
•the outlook for our end-markets and the global economy;
•the impact of external factors on our competition;
•the financial position of our customers and their willingness to pay for our products and services;
•the estimated costs of purchasing materials;
•developments in personnel costs;
•our estimated income tax expense; and
•rates for currency exchange, particularly between the Swiss franc and the euro and between the Chinese renminbi and the U.S. dollar.
Some of these assumptions may prove to be incorrect over time. For example, although no single end-customer accounts for more than 1% of our revenues, if a number of our customers experienced significant deteriorations in their financial positions concurrently, it could have an impact on our results of operations.
Some of our key internal assumptions include the following:
•our ability to implement our business strategy;
•our ability to implement price increases as forecasted;
•the effectiveness of our sales and marketing programs such as our Spinnaker, market penetration, and Field Turbo initiatives;
•the effectiveness of our programs to improve our service business, including growth, globalization, and productivity initiatives;
•our ability to develop and deliver innovative products and services;
•the continued growth of our sales in emerging markets; and
•the effectiveness of productivity and cost saving initiatives.
These internal assumptions may also prove to be incorrect over time. For example, with respect to our ability to realize our planned price increases without disturbing our customer base in core markets, in certain markets, such as emerging markets, price tends to be a more significant factor in customers’ decisions to purchase our products and services. Furthermore, we can have no assurance that our cost reduction programs will generate adequate cost savings. Additionally, it may become necessary to take additional restructuring actions resulting in additional restructuring costs.
We believe our current assumptions are reasonable and prudent for planning purposes. However, should any of these assumptions prove to be incorrect, or should we incur lower-than-expected operating performance or cash flows, we may experience results different than our projections.
Item 1B.Unresolved Staff Comments
None.
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Item 2.Properties
Our principal executive offices are located in Columbus, Ohio and Greifensee, Switzerland. The following table lists our principal facilities, indicating the location and whether the facility is owned or leased. The properties listed below serve primarily as manufacturing facilities or shared service centers and also typically have a certain amount of space for service, sales and marketing, and administrative activities. The facilities in Giessen, Germany, Viroflay, France, and Salford, United Kingdom are used primarily for sales and marketing. We believe our facilities are adequate for our current and reasonably anticipated future needs.
| Location | Owned/Leased | Business Segment | ||||||||||||
| Europe: | ||||||||||||||
| Greifensee/Nänikon, Switzerland | Owned | Swiss Operations | ||||||||||||
| Urdorf, Switzerland | Owned | Swiss Operations | ||||||||||||
| Manchester, England | Leased | Western European Operations | ||||||||||||
| Royston, United Kingdom | Owned | Western European Operations | ||||||||||||
| Salford, United Kingdom | Leased | Western European Operations | ||||||||||||
| Viroflay, France (two facilities) | Owned | Western European Operations | ||||||||||||
| Albstadt, Germany | Owned | Western European Operations | ||||||||||||
| Giessen, (Hesse) Germany | Owned | Western European Operations | ||||||||||||
| Giesen, (Lower Saxony) Germany | Owned | Western European Operations | ||||||||||||
| Warsaw, Poland | Leased | Other Operations | ||||||||||||
| Americas: | ||||||||||||||
| Columbus, Ohio | Leased | U.S. Operations | ||||||||||||
| Worthington, Ohio (two facilities) | Owned | U.S. Operations | ||||||||||||
| Oakland, California | Owned | U.S. Operations | ||||||||||||
| Billerica, Massachusetts | Owned | U.S. Operations | ||||||||||||
| Tampa, Florida | Owned | U.S. Operations | ||||||||||||
| Tijuana, Mexico | Leased | U.S. Operations | ||||||||||||
| Thorofare, New Jersey | Owned | U.S. Operations | ||||||||||||
| Other: | ||||||||||||||
| Shanghai, China (two facilities) | Buildings Owned; | Chinese Operations | ||||||||||||
| Land Leased | ||||||||||||||
| Changzhou, China (two facilities) | Buildings Owned; | Chinese Operations | ||||||||||||
| Land Leased | ||||||||||||||
| ChengDu, China | Building Owned; | Chinese Operations | ||||||||||||
| Land Leased | ||||||||||||||
| Mumbai, India (four facilities) | Building, Land Owned (1); Leased (3) | Other Operations | ||||||||||||
Item 3.Legal Proceedings
We are not currently involved in any legal proceeding that we believe could have a material adverse effect upon our financial condition, results of operations, or cash flows. See the disclosure in Item 1 above under “Environmental Matters.”
Executive Officers of the Registrant
See Part III, Item 10 of this annual report for information about our executive officers.
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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “MTD.”
Holders
At January 25, 2021, there were 39 holders of record of common stock and 23,408,050 shares of common stock outstanding. We estimate we have approximately 116,897 beneficial owners of common stock.
Dividend Policy
Historically, we have not paid dividends on our common stock. However, we will evaluate this policy on a periodic basis taking into account our results of operations, financial condition, capital requirements including potential acquisitions, our share repurchase program, the taxation of dividends to our shareholders, and other factors deemed relevant by our Board of Directors.
Share Performance Graph
The following graph compares the cumulative total returns (assuming reinvestment of dividends) on $100 invested on December 31, 2015 through December 31, 2020 in our common stock, the Standard & Poor’s 500 Composite Stock Index (S&P 500 Index), and the SIC Code 3826 Index — Laboratory Analytical Instruments.
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Comparison of Cumulative Total Return Among Mettler-Toledo International Inc., the S&P 500 Index, and SIC Code 3826 Index — Laboratory Analytical Instruments(a)
| 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | |||||||||||||||
| Mettler-Toledo | $100 | $123 | $183 | $167 | $234 | $336 | ||||||||||||||
| S&P 500 Index | $100 | $112 | $136 | $130 | $171 | $203 | ||||||||||||||
| SIC Code 3826 Index | $100 | $101 | $139 | $155 | $212 | $294 | ||||||||||||||
(a) The Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. In addition, the Performance Graph will not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value (in thousands) of Shares that may yet be Purchased under the Program | |||||||||||||||||||||||
| Period | ||||||||||||||||||||||||||
| October 1 to October 31, 2020 | 97,777 | $ | 1,022.61 | 97,777 | $ | 833,435 | ||||||||||||||||||||
| November 1 to November 30, 2020 | 114,527 | 1,131.02 | 114,527 | 3,203,901 | ||||||||||||||||||||||
| December 1 to December 31, 2020 | 127,818 | 1,138.12 | 127,818 | 3,058,426 | ||||||||||||||||||||||
| Total | 340,122 | $ | 1,102.52 | 340,122 | $ | 3,058,426 | ||||||||||||||||||||
In November 2020, the Company’s Board of Directors authorized an additional $2.5 billion to the share repurchase program which has $3.1 billion of remaining availability as of December 31, 2020. The share repurchases are expected to be funded from cash generated from operating activities, borrowings, and cash balances. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity, and other factors.
We have purchased 29.4 million common shares since the inception of the program in 2004 through December 31, 2020, at a total cost of $5.9 billion. During the years ended December 31, 2020 and 2019, we spent $775 million in both years on the repurchase of 815,652 shares and 1,094,648 shares at an average price per share of $950.14 and $707.97, respectively. We reissued 162,176 shares and 298,002 shares held in treasury for the exercise of stock options and restricted stock units during 2020 and 2019, respectively.
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Item 6.Selected Financial Data
The selected historical financial information set forth below as of and for the years then ended December 31 is derived from our consolidated financial statements. The financial information presented below, in thousands except share data, was prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||||||||||||
| Net sales | $ | 3,085,177 | $ | 3,008,652 | $ | 2,935,586 | $ | 2,725,053 | $ | 2,508,257 | |||||||||||||||||||
| Cost of sales | 1,284,146 | 1,267,441 | 1,251,208 | 1,149,302 | 1,070,525 | ||||||||||||||||||||||||
| Gross profit | 1,801,031 | 1,741,211 | 1,684,378 | 1,575,751 | 1,437,732 | ||||||||||||||||||||||||
| Research and development | 140,102 | 143,950 | 141,071 | 128,308 | 119,196 | ||||||||||||||||||||||||
| Selling, general, and administrative | 820,221 | 819,183 | 812,802 | 794,861 | 745,358 | ||||||||||||||||||||||||
| Amortization | 56,665 | 49,690 | 47,524 | 42,671 | 36,052 | ||||||||||||||||||||||||
| Interest expense | 38,616 | 37,411 | 34,511 | 32,785 | 28,026 | ||||||||||||||||||||||||
Restructuring charges(a) | 10,516 | 15,760 | 18,420 | 12,772 | 6,235 | ||||||||||||||||||||||||
Other income, net(b) | (13,832) | (6,177) | (21,808) | (9,868) | (1,328) | ||||||||||||||||||||||||
| Earnings before taxes | 748,743 | 681,394 | 651,858 | 574,222 | 504,193 | ||||||||||||||||||||||||
Provision for taxes(c) | 146,004 | 120,285 | 139,247 | 198,250 | 119,823 | ||||||||||||||||||||||||
| Net earnings | $ | 602,739 | $ | 561,109 | $ | 512,611 | $ | 375,972 | $ | 384,370 | |||||||||||||||||||
| Basic earnings per common share: | |||||||||||||||||||||||||||||
| Net earnings | $ | 25.24 | $ | 22.84 | $ | 20.33 | $ | 14.62 | $ | 14.49 | |||||||||||||||||||
| Weighted average number of common shares | 23,882,648 | 24,567,609 | 25,215,674 | 25,713,575 | 26,517,768 | ||||||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||||||||
| Net earnings | $ | 24.91 | $ | 22.47 | $ | 19.88 | $ | 14.24 | $ | 14.22 | |||||||||||||||||||
| Weighted average number of common and common equivalent shares | 24,199,230 | 24,974,457 | 25,781,324 | 26,393,783 | 27,023,905 | ||||||||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 94,254 | $ | 207,785 | $ | 178,110 | $ | 148,687 | $ | 158,674 | |||||||||||||||||||
Working capital(d) | 201,857 | 230,271 | 182,987 | 188,040 | 169,569 | ||||||||||||||||||||||||
Total assets(e) | 2,814,549 | 2,789,321 | 2,618,847 | 2,549,805 | 2,166,777 | ||||||||||||||||||||||||
Long-term debt(d) | 1,284,174 | 1,235,350 | 985,021 | 960,170 | 875,056 | ||||||||||||||||||||||||
Other non-current liabilities(e)(f) | 372,925 | 333,412 | 260,511 | 301,452 | 204,957 | ||||||||||||||||||||||||
Shareholders’ equity(g) | 282,675 | 420,780 | 590,063 | 547,280 | 434,943 | ||||||||||||||||||||||||
_________________________
(a)Restructuring charges primarily relate to our global cost reduction programs. See Note 15 and Note 19 to the consolidated financial statements.
(b)Other charges (income), net includes non-service pension costs (benefits), losses (gains) from foreign currency transactions and related hedging activities, interest income, and other items. Other charges (income), net for 2018 includes a one-time gain of $18.7 million associated with the settlement of the Biotix acquisition contingent consideration, as well as a one-time legal charge of $3 million. Other charges (income), net includes $1.7 million and $1.1 million of acquisition costs for 2017 and 2016, respectively. Other charges (income), net for 2017 also includes a one-time gain of $3.4 million relating to the sale of a facility in Switzerland in connection with our initiative to consolidate certain Swiss operations into a new facility, while 2016 includes a one-time non-cash pension settlement charge of $8.2 million related to a lump sum offering to former employees of our U.S. pension plan.
(c)Provision for taxes for 2019 includes a non-cash net benefit of $15.8 million related to the enactment of Swiss tax reform. Provision for taxes for 2018 and 2017 includes charges of $3.6 million and $72 million, respectively, for the enactment of the Tax Cuts and Jobs Act. Of this aggregate amount, $62 million is expected to be paid over a period of up to eight years beginning in 2018. See Note 14 to the consolidated financial statements.
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(d)Working capital represents total current assets net of cash, less total current liabilities net of short-term borrowings and current maturities of long-term debt and short-term lease liabilities.
(e)Includes a lease right-of-use asset of $98.6 million and $87.3 million, a short-term lease liability of $29.2 million and $27.6 million, and a long-term lease liability of $69.8 million and $60.9 million as of December 31, 2020 and 2019, respectively, in accordance with ASC 842 - Leases that went into effect on January 1, 2019.
(f)Other non-current liabilities consist of pension and other post-retirement liabilities, long-term taxes payable of $37 million, $41 million, $45 million, and $48 million as of December 31, 2020, 2019, 2018, and 2017 related to the Tax Cuts and Jobs Act, plus certain other non-current liabilities. See Note 13 to the consolidated financial statements for pension and other post-retirement disclosures.
(g)No dividends were paid during the five-year period ended December 31, 2020.
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 together with our consolidated financial statements.
Changes in local currencies exclude the effect of currency exchange rate fluctuations. Local currency amounts are determined by translating current and previous year consolidated financial information at an index utilizing historical currency exchange rates. We believe local currency information provides a helpful assessment of business performance and a useful measure of results between periods. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We present non-GAAP financial measures in reporting our financial results to provide investors with an additional analytical tool to evaluate our operating results.
We also include in the discussion below disclosures of immaterial qualitative factors that are not quantified. Although the impact of such factors is not considered material, we believe these disclosures can be useful in evaluating our operating results.
Overview
We operate a global business with 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 offering of innovative instruments and solutions, our Spinnaker sales and marketing program, and the breadth and quality of our global sales and service network.
Net sales in U.S. dollars increased 3% in 2020 and 2% in 2019. Excluding the effect of currency exchange rate fluctuations, or in local currencies, net sales increased 2% in 2020 and 5% in 2019. Net sales in 2020 were negatively impacted by the COVID-19 pandemic, which reduced global customer demand as further described below. However, we continue to benefit from our strong global leadership positions, diversified customer base, innovative product offering, investment in emerging markets, significant installed base, and the impact of our sophisticated global sales and marketing programs. Examples of these programs include identifying and investing in growth and market penetration opportunities, more effectively pricing our products and services, increasing our sales force effectiveness through improved guidance and redirecting resources to our most promising growth opportunities, increasing digitalization tools, and continuing to optimize our lead generation and lead nurturing processes. During 2020, we accelerated our ability to use advanced analytics to identify and pursue growth opportunities, while increasing the effectiveness of our digital tools to support our global sales organization. We also successfully adapted to a remote work environment and increased overall engagement with our customers with our Go-to-Market and digital approaches. We remain cautious as
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uncertainties relating to COVID-19 and the global economy continue and market conditions may change quickly. Net sales in local currencies may be adversely affected in future quarters by the COVID-19 pandemic related to unfavorable economic conditions and reduced customer demand.
Our laboratory sales experienced solid growth in 2020, particularly from life sciences and biotech customers. We also benefited from COVID-19 testing and vaccine development and production preparation activities in biopharma. We expect to continue to benefit from favorable biopharma market trends including the continued need for COVID-19 testing, treatment, and vaccine production activities. We should also benefit from increased customer demand for automation, digitalization, and safety; new facility investments; and continued focus on regulatory compliance including data integrity requirements. However, other segments such as academia and certain segments of chemical were negatively impacted in 2020 and may continue to be challenging.
Our industrial sales experienced a slight decline in 2020 as our product inspection business was particularly impacted in 2020 by reduced customer demand during COVID-19. Core industrial experienced growth, which included strong growth in China. We continue to benefit from our focus on the more attractive, faster-growing segments of the market and strong execution of our growth initiatives in each region. Emerging market economies, especially China, have historically been an important source of growth based upon the expansion of their domestic economies, and we expect this to be a continued source of future growth. Our core industrial-related products are also especially sensitive to changes in economic growth. We expect our industrial markets to also benefit from our customers’ focus on brand protection, food safety, and productivity within our product inspection end-market.
Our food retailing sales decreased during 2020 primarily due to a lack of key account activity, weak market conditions, and minimal customer investments during COVID-19. Traditionally, the spending levels in this sector have experienced more volatility than our other end-markets due to the timing of customer project activity and new regulations.
In 2021, we expect to continue to pursue the overall business growth strategies which we have followed in recent years:
Gaining Market Share. Our global sales and marketing initiative, “Spinnaker,” continues to be an important growth strategy. We aim to gain market share by implementing sophisticated sales and marketing programs, leveraging our extensive customer databases, and leveraging our product offering to larger customers through key account management. While this initiative is broad-based, efforts to improve these processes include utilizing advanced data analytics to identify, prioritize, and pursue growth opportunities, the implementation of more effective pricing and value-based selling strategies and processes, improved sales force guidance, training and effectiveness, cross-selling, increased segment marketing, and leads generation and nurturing activities. Over the past few years, we have also added field sales and service resources to pursue under-penetrated market opportunities and will consider additional investments to front-end resources as market conditions improve. We also continue to adapt our Go-to-Market approaches with additional inside and telesales resources, while also increasing digital customer interaction. In 2020, we also benefited from digitalization tools to gain efficiencies and increase the effectiveness of our field sales force. In addition, our comprehensive service offerings, and our initiatives to globalize and harmonize these offerings, help us further penetrate developed markets. We estimate that we have the largest installed base of weighing instruments in the world, and we continue to leverage advanced data analytics and invest in sales and marketing activities to increase the proportion of our installed base that is under service contract, or sell new products that replace old products in our installed base. In addition to traditional repair and maintenance, our service offerings continue to expand into value-added services for a range of market needs, including regulatory compliance. In 2020, we also made
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adjustments to our service model to incorporate remote service, depot drop-off/pickup, and other approaches to ensure the safety of our technicians and customers.
Expanding Emerging Markets. Emerging markets, comprising Asia (excluding Japan), Eastern Europe, Latin America, the Middle East, and Africa, account for approximately 35% of our total net sales. We have a two-pronged strategy in emerging markets: first, to capitalize on long-term growth opportunities in these markets, and second, to leverage our low-cost manufacturing operations in China. We have more than a 30-year track record in China, and our sales in Asia have grown more than 12% on a compound annual growth basis in local currencies since 1999. Over the years, we have also broadened our product offering to the Asian markets. India has also been a source of emerging market sales growth in past years due to increased life science research activities. Overall, we experienced a 3% increase in emerging market local currency sales by destination during 2020 versus the prior year, which included 7% local currency sales growth in China. Within China, we continue to redeploy resources and sales and marketing efforts to the faster-growing segments of pharma, food manufacturing, chemical, and environment. We believe the long-term growth of these segments will be favorably impacted by the Chinese government’s emphasis on science, high-value industries, product quality, and food safety. We expect our laboratory and product inspection businesses will particularly benefit from our focus on these segments. We also continue to invest and add sales and marketing resources to pursue growth in under-penetrated emerging markets. However, emerging market sales can be volatile. In particular, China has historically been volatile and market conditions may change unfavorably due to various factors.
Extending Our Technology Lead. We continue to focus on product innovation. In the last three years, we spent approximately 5% of net sales on research and development. We seek to accelerate product replacement cycles, as well as improve our product offerings and their capabilities with additional integrated technologies and software which also support our pricing differentiation. In addition, we aim to create value for our customers by having an intimate knowledge of their processes via our significant installed product base.
Expanding Our Margins. We continue to strive to improve our margins by more effectively pricing our products and services and optimizing our cost structure. For example, sophisticated data analytic tools provide us new insights to further refine our price strategies and processes. We also focus on reallocating resources and better aligning our cost structure to support our investments in market penetration initiatives, higher-growth areas, and opportunities for margin improvement. We have also initiated various cost reduction programs over the past few years, including temporary cost containment measures during 2020 in response to COVID-19. We have also implemented global procurement and supply chain management programs over the last several years aimed at lowering supply costs, and have increased our focus on these programs with our SternDrive initiative. SternDrive is our global operational excellence program for continuous improvement efforts within our supply chain, manufacturing, and back-office operations. Blue Ocean is also an important enabler of our various margin expansion initiatives. Our move to standardized business processes, systems, and data structures throughout our global organization provides greater data transparency and faster access to real-time data. Our cost leadership and productivity initiatives are also focused on continuously improving our invested capital efficiency, such as reducing our working capital levels, increasing our order to cash cycle, and ensuring appropriate returns on our expenditures.
Pursuing Strategic Acquisitions. We seek to pursue "bolt-on" acquisitions that may leverage our global sales and service network, respected brand, extensive distribution channels, and technological leadership. We have identified life sciences, process analytics, and product inspection as three key areas for acquisitions. For example, during 2017, we acquired Biotix, Inc., a U.S.-based manufacturer and distributor of plastic consumables associated with pipettes, including tips, tubes, and reagent reservoirs
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used in the life sciences market, for an initial cash payment of $105 million plus additional cash consideration of $10 million that was paid in the first quarter of 2019.
COVID-19
The COVID-19 pandemic has resulted in millions of confirmed cases throughout the world and in all countries where we conduct business. The outbreak has caused many governments to implement stay-at-home orders, quarantines, and significant restrictions on travel. Several governments have also implemented work restrictions that prohibit many employees from going to their customary work locations and that require these employees to work remotely if possible. Quarantines, travel bans, work and other restrictions were initially put in place on a national level in China in January 2020, and with the global spread of the virus, subsequently adopted in other countries and regions with many restrictions in Asia Pacific, Europe, North America, and South America. These restrictions continue to change as COVID-19 evolves in each country and region.
The health and safety of our employees and business partners have been our highest priority throughout the COVID-19 pandemic, and we have implemented several preventative and protective measures relating to social distancing, hygiene, health monitoring, personal protective equipment, split shifts, and remote work. We have also implemented business continuity plans and have been able to continue to support our customers with their essential businesses such as life sciences, food manufacturing, chemicals (e.g., sanitizers, disinfectants, soaps, etc.), food retail, and transportation and logistics. Our production and logistics facilities are currently operational, and our office-based employees have been able to work remotely in adherence to applicable jurisdictional stay-at-home orders. Our supply chain is currently continuing with minimal interruption, and we generally maintain adequate product inventory levels and safety stock for certain components. We quickly adapted to leverage our digital and remote sales and service capabilities, while also meeting delivery requirements with our global supply chain. Our service organization also continues to provide on-site and remote customer support to facilitate uptime, productivity, and regulatory compliance.
We have also implemented various temporary cost containment measures related to workforce management and discretionary spending. Our workforce management measures primarily included reduced work hours, salary freezes, and voluntary senior leadership salary reductions.
We maintain adequate liquidity consisting of approximately $602.5 million of additional borrowings available under our Credit Agreement and $94.3 million of cash and cash equivalents as of December 31, 2020.
COVID-19 presents several risks to our business as further described on page 14 in the Risk Factors section of this Form 10-K.
During the year ended December 31, 2020, COVID-19 had a negative impact on our business, primarily related to reduced customer demand. We remain cautious as uncertainties related to COVID-19 and the resulting impact to the global economy continue in most regions of the world and market conditions can change quickly. With the global spread of the virus and related negative impact to the global economy, we may experience reduced global sales volume due to lower customer demand. The longer-term effects on our business will be impacted by the global economy and any recession implications in different regions of the world. While it is extremely difficult to estimate the extent and duration of any COVID-19 implications, the effects on our business, results of operations, and financial condition could be material.
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Results of Operations — Consolidated
Net sales
Net sales were $3.1 billion for the year ended December 31, 2020, compared to $3.0 billion in 2019 and $2.9 billion in 2018. This represents an increase of 3% in 2020 and 2% in 2019 in U.S. dollars and an increase of 2% in 2020 and 5% in 2019 in local currencies. Net sales were negatively impacted by the COVID-19 pandemic and related reduction in global customer demand on our operations. However, our competitive position increased due to our sophisticated sales and marketing program that was highly effective in the enhanced digital environment, and we strengthened our brand with our ability to serve customers throughout the crisis. Our heightened focus on the most attractive market segments and differentiated resource allocation helped capture growth by pinpointing which customers would be most COVID-19 resilient and which would recover faster. Net sales during the second half of 2020 reflected improved customer demand in most businesses and regions with particularly strong growth in China and our laboratory-related products. We continue to benefit from the execution of our global sales and marketing programs, our innovative product portfolio, and investments in our field organization, particularly surrounding digital tools and techniques. However, we remain cautious as uncertainties relating to COVID-19 and the global economy continue and market conditions may change quickly. Net sales in local currencies may be adversely affected in future quarters by the COVID-19 pandemic related to unfavorable economic conditions and reduced customer demand.
In 2020, our net sales by geographic destination increased in U.S. dollars compared to 2019 by 1% in the Americas and 3% both in Europe and in Asia/Rest of World. In local currencies, our net sales by geographic destination increased in 2020 by 2% in the Americas, 1% in Europe, and 3% in Asia/Rest of World, with 7% growth in China. A discussion of sales by operating segment is included below.
As described in Note 3 to our consolidated financial statements, our net sales comprise product sales of precision instruments and related services. Service revenues are primarily derived from repair and other services, including regulatory compliance qualification, calibration, certification, preventative maintenance, and spare parts.
Net sales of products increased 2% both in U.S. dollars and in local currencies during 2020 and increased 2% in U.S. dollars and 4% in local currencies in 2019. Service revenue (including spare parts) increased 3% in U.S. dollars and 2% in local currencies in 2020 and increased 4% in U.S. dollars and 7% in local currencies in 2019.
Net sales of our laboratory products and services, which represented approximately 54% of our total net sales in 2020, increased 6% in U.S. dollars and 5% in local currencies during 2020. The local currency increase in net sales of our laboratory-related products during 2020 includes very strong growth in pipettes, as well as good results in automated chemistry and process analytics. As previously mentioned, our laboratory-related products in 2020 benefited from COVID-19 testing and vaccine development and production preparation activities.
Net sales of our industrial products and services, which represented approximately 40% of our total net sales in 2020, decreased 1% both in U.S. dollars and in local currencies during 2020. The local currency decrease in net sales of our industrial-related products during 2020 includes a decline in product inspection due to challenging market conditions, offset in part by growth in core industrial products.
Net sales of our food retailing products and services, which represented approximately 6% of our total net sales in 2020, decreased 3% in U.S. dollars and 4% in local currencies during 2020. The decline in food retailing is primarily due to challenging market conditions.
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Gross profit
Gross profit as a percentage of net sales was 58.4% for 2020, compared to 57.9% for 2019 and 57.4% for 2018.
Gross profit as a percentage of net sales for products was 60.3% for 2020, compared to 60.4% for 2019 and 60.3% for 2018. Gross profit as a percentage of net sales for services (including spare parts) was 51.6% for 2020, compared to 49.0% for 2019 and 47.0% for 2018.
The increase in gross profit as a percentage of net sales for 2020 primarily reflects favorable price realization, benefits from temporary cost savings measures, and material cost reductions, offset in part by higher transportation costs and unfavorable business mix.
Research and development and selling, general, and administrative expenses
Research and development expenses as a percentage of net sales were 4.5% for 2020 and 4.8% for both 2019 and 2018. Research and development expenses in U.S. dollars decreased 3% in 2020 and increased 2% in 2019, and in local currencies decreased 5% in 2020 and increased 5% in 2019. The decrease during 2020 relates to the timing of project activity and was impacted by our temporary cost savings measures.
Selling, general, and administrative expenses as a percentage of net sales were 26.6% for 2020, compared to 27.2% for 2019 and 27.7% for 2018. Selling, general, and administrative expenses were flat in U.S. dollars and decreased 1% in local currencies in 2020 and increased 1% and 3% in U.S. dollars and local currencies in 2019, respectively. The decrease during 2020 includes benefits from our temporary and ongoing cost savings initiatives.
Amortization expense
Amortization expense was $56.7 million in 2020, compared to $49.7 million and $47.5 million in 2019 and 2018, respectively. The increase in amortization expense is primarily related to our investments in information technology, including our Blue Ocean program.
Restructuring charges
During the past few years, we initiated various cost reduction measures. For the year ended December 31, 2020, we have incurred $10.5 million of restructuring expenses which primarily comprise employee-related costs. See Note 15 and Note 19 to our consolidated financial statements for a summary of restructuring activity during 2020.
Other charges (income), net
Other charges (income), net consisted of net income of $13.8 million, $6.2 million, and $21.8 million in 2020, 2019, and 2018, respectively. Other charges (income), net includes non-service pension costs (benefits), net (gains) losses from foreign currency transactions and hedging activities, interest income, and other items. Non-service pension benefits were $12.2 million, $4.8 million, and $6.2 million in 2020, 2019, and 2018, respectively. Other charges (income), net in 2018 also includes a one-time gain of $18.7 million associated with the settlement of the Biotix acquisition contingent consideration, as well as a one-time legal charge of $3.0 million.
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Interest expense and taxes
Interest expense was $38.6 million for 2020, compared to $37.4 million for 2019 and $34.5 million for 2018.
Our reported tax rate was 19.5% during 2020, compared to 17.7% and 21.4% during 2019 and 2018, respectively. The 2019 reported tax rate includes a net benefit of $15.8 million associated with Swiss tax reform described below. The 2018 reported tax rate includes a charge of $3.6 million associated with the Tax Cuts and Jobs Act.
In May 2019, a public referendum was held in Switzerland that approved Swiss federal tax reform proposals previously approved by the Swiss Parliament. Additional changes in Swiss cantonal law were enacted in October 2019. The changes in Swiss federal tax had an immaterial effect on our financial statements. We recognized a discrete non-cash net deferred tax benefit of $15.8 million as a result of the enactment of the cantonal law in the fourth quarter of 2019. A further description of Swiss tax reform is in Note 14 to our consolidated financial statements.
Results of Operations — by Operating Segment
The following is a discussion of the financial results of our operating segments. We currently have five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other. A more detailed description of these segments is outlined in Note 19 to our consolidated financial statements.
U.S. Operations (amounts in thousands)
| 2020 | 2019 | 2018 | Increase (Decrease) in % 2020 vs. 2019 | Increase (Decrease) in % 2019 vs. 2018 | |||||||||||||||||||||||||
| Net sales | $ | 1,194,169 | $ | 1,171,909 | $ | 1,112,256 | 2% | 5% | |||||||||||||||||||||
| Net sales to external customers | $ | 1,072,319 | $ | 1,057,115 | $ | 1,007,798 | 1% | 5% | |||||||||||||||||||||
| Segment profit | $ | 244,940 | $ | 210,133 | $ | 161,615 | 17% | 30% | |||||||||||||||||||||
Total net sales increased 2% in 2020 and 5% in 2019 and net sales to external customers increased 1% in 2020 and 5% in 2019. The increase during 2020 is driven by very strong growth in pipettes, as well as transportation and logistics and good growth in process analytics. These results were offset in part by declines in product inspection and food retailing.
Segment profit increased $34.8 million in our U.S. Operations segment during 2020, compared to an increase of $48.5 million during 2019. The segment profit increase in 2020 includes benefits from our temporary cost savings measures, margin expansion initiatives, and favorable business mix.
Swiss Operations (amounts in thousands)
| 2020 | 2019 | 2018 | Increase (Decrease) in % (1) 2020 vs. 2019 | Increase (Decrease) in % (1) 2019 vs. 2018 | |||||||||||||||||||||||||
| Net sales | $ | 823,760 | $ | 797,177 | $ | 762,593 | 3% | 5% | |||||||||||||||||||||
| Net sales to external customers | $ | 143,923 | $ | 139,499 | $ | 134,064 | 3% | 4% | |||||||||||||||||||||
| Segment profit | $ | 245,465 | $ | 233,292 | $ | 202,027 | 5% | 15% | |||||||||||||||||||||
(1)Represents U.S. dollar growth.
Total net sales in U.S. dollars increased 3% in 2020 and 5% in 2019, and in local currencies decreased 2% in 2020 and increased 6% in 2019. Net sales to external customers increased 3% in U.S. dollars and decreased 1% in local currencies in 2020, while net sales to external customers increased 4% in U.S. dollars and 5% in local currencies in 2019. Local currency net sales to external customers
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during 2020 include declines in most products related to lower customer demand as a result of COVID-19, offset in part by strong growth in automated chemistry, pipettes, and product inspection.
Segment profit increased $12.2 million in our Swiss Operations segment during 2020, compared to an increase of $31.3 million during 2019. The segment profit increase in 2020 includes benefits from our temporary cost savings measures and the timing of research and development activity, offset in part by unfavorable currency translation.
Western European Operations (amounts in thousands)
| 2020 | 2019 | 2018 | Increase (Decrease) in % (1) 2020 vs. 2019 | Increase (Decrease) in % (1) 2019 vs. 2018 | |||||||||||||||||||||||||
| Net sales | $ | 889,891 | $ | 876,500 | $ | 895,783 | 2% | (2)% | |||||||||||||||||||||
| Net sales to external customers | $ | 716,715 | $ | 700,741 | $ | 718,788 | 2% | (3)% | |||||||||||||||||||||
| Segment profit | $ | 147,562 | $ | 123,845 | $ | 122,574 | 19% | 1% | |||||||||||||||||||||
(1)Represents U.S. dollar growth.
Total net sales in U.S. dollars increased 2% in 2020 and decreased 2% in 2019, and in local currencies decreased 1% in 2020 and increased 3% in 2019. Net sales to external customers in U.S. dollars increased 2% in 2020 and decreased 3% in 2019, and in local currencies were flat in 2020 and increased 3% in 2019. Local currency net sales to external customers during 2020 include strong growth in pipettes, offset by declines in industrial-related products related to lower customer demand as a result of COVID-19.
Segment profit increased $23.7 million in our Western European Operations segment during 2020, compared to an increase of $1.3 million in 2019. The segment profit increase in 2020 includes benefits from our temporary cost savings measures and margin expansion initiatives, timing of research and development activity, and favorable foreign currency translation.
Chinese Operations (amounts in thousands)
| 2020 | 2019 | 2018 | Increase (Decrease) in % (1) 2020 vs. 2019 | Increase (Decrease) in % (1) 2019 vs. 2018 | |||||||||||||||||||||||||
| Net sales | $ | 792,345 | $ | 769,233 | $ | 767,561 | 3% | 0% | |||||||||||||||||||||
| Net sales to external customers | $ | 578,610 | $ | 544,716 | $ | 525,109 | 6% | 4% | |||||||||||||||||||||
| Segment profit | $ | 270,497 | $ | 266,522 | $ | 270,668 | 1% | (2)% | |||||||||||||||||||||
(1)Represents U.S. dollar growth.
Total net sales in U.S. dollars increased 3% in 2020 and were flat in 2019, and in local currencies increased 3% in 2020 and 4% in 2019. Net sales by origin to external customers in U.S. dollars increased 6% in 2020 and 4% in 2019, and in local currencies increased 6% in 2020 and 8% in 2019. The increase in net sales to external customers during 2020 reflects strong growth in laboratory and industrial-related products during the second half of 2020 after experiencing a significant decline in customer demand during the first quarter of 2020 related to COVID-19. However, uncertainty remains and market conditions may change quickly.
Segment profit increased $4.0 million in our Chinese Operations segment during 2020, compared to a decrease of $4.1 million in 2019. The increase in segment profit during 2020 primarily includes increased sales volume and benefits from our temporary cost savings measures.
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Other (amounts in thousands)
| 2020 | 2019 | 2018 | Increase (Decrease) in % (1) 2020 vs. 2019 | Increase (Decrease) in % (1) 2019 vs. 2018 | |||||||||||||||||||||||||
| Net sales | $ | 578,210 | $ | 572,471 | $ | 556,370 | 1% | 3% | |||||||||||||||||||||
| Net sales to external customers | $ | 573,610 | $ | 566,581 | $ | 549,827 | 1% | 3% | |||||||||||||||||||||
| Segment profit | $ | 77,910 | $ | 71,483 | $ | 78,317 | 9% | (9)% | |||||||||||||||||||||
(1)Represents U.S. dollar growth.
Other includes reporting units in Southeast Asia, Latin America, Eastern Europe, and other countries. Both net sales and net sales to external customers in U.S. dollars increased 1% in 2020 and 3% in 2019, and in local currencies increased 2% in 2020 and 5% in 2019. The increase in local currency growth in net sales to external customers during 2020 includes growth in laboratory-related products, especially pipettes and automated chemistry, offset in part by a decline in industrial-related products due to reduced customer demand related to COVID-19.
Segment profit increased $6.4 million in our Other segment during 2020, compared to a decrease of $6.8 million during 2019. The increase in segment profit during 2020 primarily includes increased sales volume and benefits from our temporary cost savings measures.
Liquidity and Capital Resources
Liquidity is our ability to generate sufficient cash to meet our obligations and commitments. Sources of liquidity include cash flows from operating activities, available borrowings under our Credit Agreement, the ability to obtain appropriate financing, and our cash and cash equivalent balances. Currently, our financing requirements are primarily driven by working capital requirements, capital expenditures, share repurchases, and acquisitions. Global market conditions can be uncertain, and our ability to generate cash flows could be reduced by a deterioration in global markets.
Cash provided by operating activities totaled $724.7 million in 2020, compared to $603.5 million in 2019 and $565.0 million in 2018. The increase in 2020 includes benefits from favorable working capital including strong cash collections and higher net earnings compared to the prior year.
Capital expenditures are made primarily for investments in information systems and technology, machinery, equipment, and the purchase and expansion of facilities. Our capital expenditures totaled $92.5 million in 2020, $97.3 million in 2019, and $142.7 million in 2018. We expect to make net investments in new or expanded manufacturing facilities of approximately $10 million to $15 million in 2021.
Cash flows used in financing activities during 2020 primarily comprised share repurchases. As further described below, in accordance with our share repurchase plan, we repurchased 815,652 shares and 1,094,648 shares in the amount of $775 million during both 2020 and 2019, respectively.
We continue to explore potential acquisitions. In connection with any acquisition, we may incur additional indebtedness. As further described in Note 4 of our consolidated financial statements, in the third quarter of 2017, we acquired all of the shares of Biotix, Inc., a U.S.-based manufacturer and distributor of plastic consumables associated with pipettes, including tips, tubes, and reagent reservoirs used in the life sciences market, for an initial cash payment of $105 million plus additional cash consideration of $10 million that was paid in the first quarter of 2019. We also recorded a one-time gain of $18.7 million during 2018 related to the settlement of the Biotix acquisition contingent consideration.
In 2020, 2019, and 2018, we also incurred additional acquisition payments totaling $6.2 million, $2.0 million, and $5.5 million, respectively.
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We plan to continue to repatriate earnings from China, Switzerland, Germany, the United Kingdom, and certain other countries in future years and expect the only additional cost associated with the repatriation of such foreign earnings will be withholding taxes. All other undistributed earnings are considered to be permanently reinvested. We believe the ongoing tax impact associated with repatriating our undistributed foreign earnings will not have a material effect on our liquidity.
Senior Notes and Credit Facility Agreement
Our short-term borrowings and long-term debt consisted of the following at December 31, 2020:
| U.S. Dollar | Other Principal Trading Currencies | Total | |||||||||||||||
| 3.67% $50 million 10-year Senior Notes due December 17, 2022 | $ | 50,000 | $ | — | $ | 50,000 | |||||||||||
| 4.10% $50 million 10-year Senior Notes due September 19, 2023 | 50,000 | — | 50,000 | ||||||||||||||
| 3.84% $125 million 10-year Senior Notes due September 19, 2024 | 125,000 | — | 125,000 | ||||||||||||||
| 4.24% $125 million 10-year Senior Notes due June 25, 2025 | 125,000 | — | 125,000 | ||||||||||||||
| 3.91% $75 million 10-year Senior Notes due June 25, 2029 | 75,000 | — | 75,000 | ||||||||||||||
| 3.19% $50 million 15-year Senior Notes due January 24, 2035 | 50,000 | — | 50,000 | ||||||||||||||
| 1.47% EUR 125 million 15-year Senior Notes due June 17, 2030 | — | 153,299 | 153,299 | ||||||||||||||
| 1.30% EUR 135 million 15-year Senior Notes due November 6, 2034 | — | 165,563 | 165,563 | ||||||||||||||
| Senior Notes debt issuance costs, net | (1,132) | (1,628) | (2,760) | ||||||||||||||
Total Senior Notes | 473,868 | 317,234 | 791,102 | ||||||||||||||
$1.1 billion Credit Agreement, interest at LIBOR plus 87.5 basis points(1) | 382,162 | 109,257 | 491,419 | ||||||||||||||
| Other local arrangements | 1,665 | 50,305 | 51,970 | ||||||||||||||
Total debt | 857,695 | 476,796 | 1,334,491 | ||||||||||||||
| Less: current portion | (169) | (50,148) | (50,317) | ||||||||||||||
Total long-term debt | $ | 857,526 | $ | 426,648 | $ | 1,284,174 | |||||||||||
(1) See Note 6 and Note 7 for additional disclosures on the financial instruments associated with the Credit Agreement.
As of December 31, 2020, approximately $602.5 million of additional borrowings were available under our Credit Agreement, and we maintained $94.3 million of cash and cash equivalents. 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. Further, we do not have any downgrade triggers from rating agencies that would accelerate the maturity dates of our debt. We were in compliance with our debt covenants at December 31, 2020.
We currently believe that cash flows from operating activities, together with liquidity available under our Credit Agreement, local working capital facilities, and cash balances, will be sufficient to fund currently anticipated working capital needs and capital spending requirements for at least the foreseeable future.
Senior Notes
The Senior Notes listed above are senior unsecured obligations and interest is payable semi-annually. The Senior Notes each contain customary affirmative and negative covenants as further described in Note 10 of our consolidated financial statements.
In December 2020, we entered into an agreement to issue and sell EUR 125 million of 15-year 1.06% Euro Senior Notes ("1.06% Euro Senior Notes"). The terms of the Euro Senior Notes are consistent with the previous Euro Senior Notes as described in Note 10 to the consolidated financial statements. The Company also entered into a forward contract to receive $152.1 million at the time of issuing the 1.06%
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Euro Senior Notes in March 2021. The proceeds will be used to repay outstanding amounts on the Company’s credit facility and fund operational expenses.
Credit Agreement
We have a $1.1 billion Credit Agreement (the “Credit Agreement”), which has $602.5 million of availability remaining as of December 31, 2020. The Credit Agreement is provided by a group of financial institutions and has a maturity date of June 15, 2023. It is a revolving credit facility and is not subject to any scheduled principal payments prior to maturity. The obligations under the Credit Agreement are unsecured.
Borrowings under the Credit Agreement bear interest at current market rates plus a margin based on our consolidated leverage ratio, which was set at LIBOR plus 87.5 basis points as of June 15, 2018. We must also pay facility fees that are tied to our leverage ratio. The Credit Agreement contains covenants as further described in Note 10 of our consolidated financial statements, with which we were in compliance as of December 31, 2020.
Other Local Arrangements
In April 2018, two of our non-U.S. pension plans issued loans totaling $39.6 million (Swiss franc 38 million) to a wholly owned subsidiary of the Company. The loans have the same terms and conditions which include an interest rate of Swiss franc LIBOR plus 87.5 basis points. The loans were renewed for one year in April 2020.
Contractual Obligations
The following summarizes certain of our contractual obligations at December 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. We do not have significant outstanding letters of credit or other financial commitments.
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||||||||||||
| Short- and long-term debt | $ | 1,488,735 | $ | 50,127 | $ | 591,419 | $ | 250,000 | $ | 597,189 | |||||||||||||||||||
| Interest on debt | 191,635 | 31,666 | 56,169 | 32,653 | 71,147 | ||||||||||||||||||||||||
| Non-cancelable operating leases | 88,756 | 31,155 | 35,780 | 11,469 | 10,352 | ||||||||||||||||||||||||
Pension and post-retirement funding(1) | 28,215 | 28,215 | — | — | — | ||||||||||||||||||||||||
| Purchase obligations | 117,139 | 87,272 | 23,907 | 5,960 | — | ||||||||||||||||||||||||
Total(1) | $ | 1,914,480 | $ | 228,435 | $ | 707,275 | $ | 300,082 | $ | 678,688 | |||||||||||||||||||
(1)In addition to the above table, we also have liabilities for pension and post-retirement funding and income taxes (and transition tax liabilities of $43 million related to the Tax Cuts and Jobs Act). However, we cannot determine the timing or the amounts for income taxes or the timing and amounts beyond 2021 for pension and post-retirement funding.
We have purchase commitments for materials, supplies, services, and fixed assets in the normal course of business. Due to the proprietary nature of many of our materials and processes, certain supply contracts contain penalty provisions. We do not expect potential payments under these provisions to materially affect our results of operations or financial condition. This conclusion is based upon reasonably likely outcomes derived by reference to historical experience and current business plans.
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Share Repurchase Program
In November 2020, the Company’s Board of Directors authorized an additional $2.5 billion to the share repurchase program which has $3.1 billion of remaining availability as of December 31, 2020. The share repurchases are expected to be funded from cash generated from operating activities, borrowings, and cash balances. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity, and other factors.
We have purchased 29.4 million common shares since the inception of the program in 2004 through December 31, 2020, at a total cost of $5.9 billion. During the years ended December 31, 2020 and 2019, we spent $775 million in both years on the repurchase of 815,652 shares and 1,094,648 shares at an average price per share of $950.14 and $707.97, respectively. We reissued 162,176 shares and 298,002 shares held in treasury for the exercise of stock options and restricted stock units during 2020 and 2019, respectively.
Off-Balance Sheet Arrangements
Currently, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Effect of Currency on Results of Operations
Our earnings are affected by changing exchange rates. We are particularly sensitive to changes in the exchange rates between the Swiss franc, euro, Chinese renminbi, and U.S. dollar. We have more Swiss franc expenses than we do Swiss franc sales because we develop and manufacture products in Switzerland that we sell globally and have a number of corporate functions located in Switzerland. When the Swiss franc strengthens against our other trading currencies, particularly the U.S. dollar and euro, our earnings go down. We also have significantly more sales in the euro than we do expenses. When the euro weakens against the U.S. dollar and Swiss franc, our earnings also go down. We estimate a 1% strengthening of the Swiss franc against the euro would reduce our earnings before tax by approximately $1.6 million to $1.8 million annually.
We also conduct business throughout the world, including Asia Pacific, the United Kingdom, Eastern Europe, Latin America, and Canada. Fluctuations in these currency exchange rates against the U.S. dollar can also affect our operating results. The most significant of these currency exposures is the Chinese renminbi. The impact on our earnings before tax of the Chinese renminbi weakening 1% against the U.S. dollar is a reduction of approximately $2.0 million to $2.2 million annually.
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, the Swiss franc, and euro. Based on our outstanding debt at December 31, 2020, we estimate that a 5% weakening of the U.S. dollar against the currencies in which our debt is denominated would result in an increase of $25.2 million in the reported U.S. dollar value of our debt.
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 changes in law, 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 earnings repatriations between jurisdictions. Generally, the tax liability for each taxpayer within the group is determined either (i) on a non-consolidated/non-
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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.
Environmental Matters
We are subject to environmental laws and regulations in the jurisdictions in which we operate. We own or lease a number of properties and manufacturing facilities around the world. 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.
We are currently involved in, or have potential liability with respect to, the remediation of past contamination in certain of our facilities. A former subsidiary of Mettler-Toledo, LLC known as Hi-Speed Checkweigher Co., Inc. was one of two private parties ordered by the New Jersey Department of Environmental Protection, in an administrative consent order signed on June 13, 1988, to investigate and remediate certain ground water contamination at a property in Landing, New Jersey. After the other party under this order failed to fulfill its obligations, Hi-Speed became solely responsible for compliance with the order. Residual ground water contamination at this site is now within a Classification Exception Area which the Department of Environmental Protection has approved and within which the Company oversees monitoring of the decay of contaminants of concern. A concurrent Well Restriction Area also exists for the site. The Department of Environmental Protection does not view these vehicles as remedial measures, but rather as “institutional controls” that must be adequately maintained and periodically evaluated. We estimate that the costs of compliance associated with the site over the next several years will approximate a total of $0.4 million.
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 these 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. 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 have a material adverse effect on our financial condition, results of operations, or cash flows.
Inflation
Inflation can affect the costs of goods and services that we use, including raw materials to manufacture our products. 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, Eastern Europe, India, and Brazil, which have experienced inflationary conditions. To date, inflationary conditions have not had a material effect on our operating results. However, as our presence in China, Eastern Europe, India, and Brazil increases, these inflationary conditions could have a greater impact on our operating results.
Quantitative and Qualitative Disclosures about Market Risk
We have only limited involvement with derivative financial instruments and do not use them for trading purposes.
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We have entered into certain interest rate swap agreements. These contracts are more fully described in Note 6 to our consolidated financial statements. The fair value of these contracts was a net liability of $2.5 million at December 31, 2020. Based on our agreements outstanding at December 31, 2020, a 100-basis-point change in interest rates would result in a change in the net aggregate market value of these instruments of approximately $1.2 million. Any change in fair value would not affect our consolidated statement of operations unless such agreements and the debt they hedge were prematurely settled.
We have entered into certain cross currency swap agreements. The fair value of these contracts was a net liability of $19.4 million at December 31, 2020. Based on our agreements outstanding at December 31, 2020, a 100-basis-point change in interest rates and foreign currency exchange rates would result in a change in the net aggregate market value of these instruments by approximately $3.4 million. Any change in fair value would not affect our consolidated statement of operations unless such agreements and the debt they hedge were prematurely settled.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, income taxes, inventories, goodwill and intangibles, leases, and pensions and other post-retirement benefits. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2 to our consolidated financial statements.
Revenue recognition
Product revenue is recognized from contracts with customers when a customer has obtained control of a product. We consider control to have transferred based upon shipping terms. To the extent that our contracts have a separate performance obligation, revenue related to any post-shipment performance obligation is deferred until completed. Shipping and handling costs charged to customers are included in total net sales and the associated expense is a component of cost of sales. Certain products are also sold through indirect distribution channels whereby the distributor assumes any further obligations to the end-customer. Revenue is recognized on these distributor arrangements upon transfer of control to the distributor. Contracts do not contain variable pricing arrangements that are retrospective, except for rebate programs. Rebates are estimated based on expected sales volumes and offset against revenue at the time such revenue is recognized. We generally maintain the right to accept or reject a product return in our terms and conditions and also maintain appropriate accruals for outstanding credits. The provisions for estimated returns and rebates are immaterial to the consolidated financial statements.
Certain of our product arrangements include separate performance obligations, primarily related to installation. Such performance obligations are accounted for separately when the deliverables have stand-alone value and the satisfaction of the undelivered performance obligations is probable and within our control. The allocation of revenue between the performance obligations is based on the observable stand-alone selling prices at the time of the sale in accordance with a number of factors including service technician billing rates, time to install, and geographic location.
44
Software is generally not considered a distinct performance obligation with the exception of a limited number of software applications. We generally sell software products with the related hardware instrument as the software is usually embedded in the product. Our products typically require no significant production, modification, or customization of the hardware or software that is essential to the functionality of the products.
Service revenue not under contract is recognized upon the completion of the service performed. Revenue from spare parts sold on a stand-alone basis is recognized when control is transferred to the customer, which is generally at the time of shipment or delivery. Revenue from service contracts is recognized ratably over the contract period using a time-based method. These contracts represent an obligation to perform repair and other services including regulatory compliance qualification, calibration, certification, and preventative maintenance on a customer’s pre-defined equipment over the contract period.
Income taxes
Income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimated future taxes to be paid on items in the consolidated financial statements. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. The valuation allowance is based on management’s estimates of future taxable income and application of relevant income tax law. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income or equity in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the valuation allowance in the future, an adjustment to the net deferred tax asset would be charged to income in the period such determination was made.
We plan to repatriate earnings from China, Switzerland, Germany, the United Kingdom, and certain other countries in future years and expect the additional tax costs associated with the repatriation of such earnings will be non-U.S. withholding taxes, certain state taxes, and U.S. taxes on currency gains, if any. All other undistributed earnings are considered permanently reinvested.
The significant assumptions and estimates described in the preceding paragraphs are important contributors to our ultimate effective tax rate for each year in addition to our income mix from geographical regions. If any of our assumptions or estimates were to change, or should our income mix from our geographical regions change, our effective tax rate could be materially affected. Based on earnings before taxes of $748.7 million for the year ended December 31, 2020, each increase of $7.5 million in tax expense would increase our effective tax rate by 1%.
Inventories
As of December 31, 2020, inventories were $297.6 million.
We record our inventory at the lower of cost or net realizable value. Cost, which includes direct materials, labor, and overhead, is generally determined using the first in, first out (FIFO) method. The estimated net realizable value is based on assumptions for future demand and related pricing. Adjustments to the cost basis of our inventory are made for excess and obsolete items based on usage, orders, and technological obsolescence. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.
Goodwill and other intangible assets
As of December 31, 2020, our consolidated balance sheet included goodwill of $550.3 million and other intangible assets of $196.8 million.
45
Our business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements.
In accordance with U.S. GAAP, our goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The annual evaluations of goodwill and indefinite-lived intangible assets are generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount.
If we are unable to conclude whether the goodwill or indefinite-lived intangible asset is not impaired after considering the totality of events and circumstances during our qualitative assessment, we perform a quantitative impairment test by estimating the fair value of the respective reporting unit or indefinite-lived intangible asset and comparing the fair value to the carrying amount of the goodwill asset. If the carrying amount of the reporting unit or indefinite-lived intangible asset exceeds its fair value, an impairment charge equal to the difference is recognized.
Both the qualitative and quantitative evaluations consider operating results, business plans, economic conditions, and market data, among other factors. There are inherent uncertainties related to these factors and our judgment in applying them to the impairment analyses. Our assessments to date have indicated that there has been no impairment of these assets.
Should any of these estimates or assumptions change, or should we incur lower than expected operating performance or cash flows, including from a prolonged economic slowdown, we may experience a triggering event that requires a new fair value assessment for our reporting units, possibly prior to the required annual assessment. These types of events and resulting analysis could result in impairment charges for goodwill and other indefinite-lived intangible assets if the fair value estimate declines below the carrying value.
Our amortization expense related to intangible assets with finite lives may materially change should our estimates of their useful lives change.
Leases
We consider an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration. We have operating leases, but do not have material financing leases. As of December 31, 2020, our balance sheet included a right-of-use asset of $98.6 million, a short-term lease liability of $29.2 million, and a long-term lease liability of $69.8 million.
Operating lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement. These assets and liabilities are recognized at the commencement of the lease based upon the present value of the lease payments over the lease term.
The lease term reflects the non-cancellable period of the lease together with periods covered by an option to extend or terminate the lease when management is reasonably certain that it will exercise such option. Changes in the lease term assumption could impact the right-of-use assets and lease liabilities recognized on the balance sheet. We apply our incremental borrowing rate assumption at the lease commencement date in determining the present value of lease payments as the information necessary to determine the rate implicit in the lease is not readily available. The incremental borrowing rate reflects similar terms by geographic location to the underlying leases. A change in the incremental borrowing rate assumption of 1% would impact the lease liability by approximately $3.1 million.
46
Employee benefit plans
The net periodic pension cost for 2020 and projected benefit obligation as of December 31, 2020 were $1.3 million and $149.9 million, respectively, for our U.S. pension plan. The net periodic cost for 2020 and projected benefit obligation as of December 31, 2020 were $6.2 million and $1.1 billion, respectively, for our international pension plans. The net periodic post-retirement benefit for 2020 and expected post-retirement benefit obligation as of December 31, 2020 for our U.S. post-retirement medical benefit plan were $0.1 million and $1.0 million, respectively.
Pension and post-retirement benefit plan expense and obligations are developed from assumptions utilized in actuarial valuations. The most significant of these assumptions include the discount rate and expected return on plan assets. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and deferred over future periods. While management believes the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our plan obligations and future expense.
The expected rates of return on the various defined benefit pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets, which represent a diversified mix of U.S. and international corporate equities and government and corporate debt securities. In 2002, we froze our U.S. defined benefit pension plan and discontinued our retiree medical program for certain current and all future employees. Consequently, no significant future service costs will be incurred on these plans. For 2020, the weighted average return on assets assumption was 6.25% for the U.S. plan and 3.73% for the international plans. A change in the rate of return of 1% would impact annual benefit plan expense by approximately $8.7 million after tax.
The discount rates for defined benefit and post-retirement plans are set by benchmarking against high-quality corporate bonds. For 2020, the weighted average discount rate assumption was 2.2% for the U.S. plan and 0.3% for the international plans, representing a weighted average of local rates in countries where such plans exist. A change in the discount rate of 1% would impact annual benefit plan expense by approximately $10.7 million after tax.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Discussion of this item is included in 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 starting on page F-1 and the related financial schedule is set forth on page S-1.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
47
Item 9A.Controls and Procedures
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm that audited the financial statements included in this Report on Form 10-K, has issued their integrated audit report, which covers our internal control over financial reporting, which appears on page F-2.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.Other Information
None.
48
PART III
Item 10.Directors, Executive Officers, and Corporate Governance
The executive officers of the Company are set forth below. Officers are appointed by the Board of Directors and serve at the discretion of the Board.
| Name | Age | Position | ||||||||||||
| Olivier A. Filliol | 54 | President and Chief Executive Officer | ||||||||||||
| Patrick Kaltenbach | 57 | Chief Executive Officer Designate | ||||||||||||
| Peter Aggersbjerg | 52 | Head of Divisions and Operations | ||||||||||||
| Marc de La Guéronnière | 57 | Head of European and North American Market Organizations | ||||||||||||
| Gerhard Keller | 53 | Head of Process Analytics | ||||||||||||
| Christian Magloth | 55 | Head of Human Resources | ||||||||||||
| Shawn P. Vadala | 52 | Chief Financial Officer | ||||||||||||
Olivier A. Filliol has been a director since January 2009. He has been President and Chief Executive Officer of the Company since January 1, 2008. He will step down as Chief Executive Officer as of April 1, 2021 and will remain a director and support the Company in marketing and other organizational matters. Mr. Filliol served as Head of Global Sales, Service, and Marketing of the Company from April 2004 to December 2007 and Head of Process Analytics of the Company from June 1999 to December 2007. From June 1998 to June 1999, he served as General Manager of the Company’s North American checkweighing operations. Prior to joining the Company, he was a Strategy Consultant with the international consulting firm Bain & Company, working in the Geneva, Paris, and Sydney offices.
Patrick Kaltenbach joined the Company in January 2021 as the Chief Executive Officer Designate and will assume the role of Chief Executive Officer beginning April 1, 2021. Prior to joining the Company, he served as the President of the Life Sciences Segment at Becton Dickinson since 2018. He was President of Life Sciences and Applied Markets Group at Agilent from 2014 to 2018. Previously, he held wide-ranging and increasing leadership roles at Agilent and its predecessor company, Hewlett Packard, since joining in 1991.
Peter Aggersbjerg has been Head of Divisions and Operations since January 2020, and Head of Laboratory since January 2018. From February 2016 to December 2017, he served as the Head of our Laboratory Weighing strategic business unit. Prior to joining the Company, he served as the Global BU Head for Medela’s Neonatal Care business and a member of its Group management. Prior to Medela, Mr. Aggersbjerg worked in various CEO roles in the healthcare, medical devices, and industrial sector in Switzerland, Denmark, and the U.S.
Marc de La Guéronnière has been Head of European Market Organizations of the Company since January 2008 and Head of North American Market Organizations since April 2014. He was Head of Region South and General Manager of the Company’s market organization in Spain from January 2006 to January 2008. He joined the Company in 2001 as the Industrial Business Area Manager for our market organization in France. Prior to joining the Company, Mr. de La Guéronnière held various management positions in Europe and the United States with ABB-Elsag Bailey and Danaher-Zellweger.
Gerhard Keller joined the Company in 1991 and has been Head of Process Analytics since July 2018 and Head of Pipettes since July 2013. He previously was Head of Region East Asia/Pacific and also served in various Sales and Marketing leadership functions in Europe and Asia Pacific. Prior to joining the Company, he worked in Quality Control at Sandoz, now Novartis, in Switzerland.
49
Christian Magloth joined the Company in October 2010 and has been Head of Human Resources since December 2010. Prior to joining the Company, he served as Head of Human Resources of Straumann, a leading global medical devices company listed on the Swiss stock exchange, from April 2006 to September 2010. He previously served as Head of Human Resources at Hero Group, an international consumer foods company, and in various management positions at Hilti, a leading global construction supply company.
Shawn P. Vadala joined the Company in 1997 and has been Chief Financial Officer since January 2014, and also responsible for the Company’s Pricing program since 2008. Mr. Vadala previously held various senior financial positions at the Company’s Columbus, Ohio and Greifensee, Switzerland offices and was also responsible for Business Intelligence from 2010 to 2018. Prior to joining the Company, he worked in the Boston and Zurich, Switzerland offices of PricewaterhouseCoopers.
Certifications
Our Chief Executive Officer and Chief Financial Officer provide certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 in connection with our quarterly and annual financial statement filings with the Securities and Exchange Commission. The certifications relating to this annual report are attached as Exhibits 31.1 and 31.2.
The remaining information called for by this item is incorporated by reference from the discussion in the sections “Proposal One: Election of Directors,” “Board of Directors — General Information,” “Board of Directors — Operation,” and “Additional Information — Section 16(a) Beneficial Ownership Reporting Compliance” in the 2021 Proxy Statement.
Item 11.Executive Compensation
The information appearing in the sections captioned “Board of Directors — General Information —Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” and “Additional Information — Compensation Committee Interlocks and Insider Participation” in the 2021 Proxy Statement is incorporated by reference herein.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information appearing in the sections “Share Ownership” and “Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2020” in the 2021 Proxy Statement is incorporated by reference herein.
Item 13.Certain Relationships and Related Transactions and Director Independence
Certain Relationships and Related Transactions — None.
Director Independence — The information in the section “Board of Directors — General Information — Independence of the Board” in the 2021 Proxy Statement is incorporated by reference herein.
50
Item 14.Principal Accounting Fees and Services
Information appearing in the section “Audit Committee Report” in the 2021 Proxy Statement is hereby incorporated by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedules
(a) Exhibits, Financial Statements, and Schedules:
1. Financial Statements. See Index to consolidated financial statements included on page F-1.
2. Financial Statement Schedule. See Schedule II, which is included on page S-1.
3. List of Exhibits. See Exhibit Index included on page E-1.
Item 16.Form 10-K Summary
None.
51
EXHIBIT INDEX
E-1
| Exhibit | |||||
| No. | Description | ||||
21* | |||||
23.1* | |||||
31.1* | |||||
31.2* | |||||
32* | |||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL Document) | ||||
_______________________________________
(1)Incorporated by reference to the Company’s Report on Form 10-K dated March 13, 1998
(2)Incorporated by reference to the Company’s Report on Form 8-K dated November 8, 2016
(3)Incorporated by reference to the Company’s Report on Form 8-K dated June 21, 2018
(4)Incorporated by reference to the Company’s Report on Form 8-K dated October 16, 2012
(5)Incorporated by reference to the Company’s Report on Form 8-K dated July 29, 2013
(6)Incorporated by reference to the Company’s Report on Form 8-K dated July 2, 2014
(7)Incorporated by reference to the Company’s Report on Form 8-K dated March 31, 2015
(8)Incorporated by reference to the Company’s Report on Form 8-K dated April 18, 2019
(9)Incorporated by reference to the Company’s Report on Form 8-K dated November 6, 2019
(10)Incorporated by reference to the Company’s Report on Form 8-K dated December 16, 2020
(11)Incorporated by reference to the Company’s Report on Form 10-K dated February 15, 2008
(12)Incorporated by reference to the Company’s Registration Statement on Form S-8 dated July 26, 2013 (Reg. No. 333-190181)
(13)Incorporated by reference to the Company’s Report on Form 10-K dated February 2, 2017
(14)Incorporated by reference to the Company’s Report on Form 10-K dated February 13, 2009
(15)Incorporated by reference to the Company’s Report on Form 10-K dated February 7, 2020
(16)Incorporated by reference to the Company’s Report on Form 10-K dated February 16, 2011
(17)Incorporated by reference to the Company’s Report on Form 8-K dated November 1, 2007
(18)Incorporated by reference to the Company’s Report on Form 8-K dated December 15, 2020
(19)Incorporated by reference to the Company’s Report on Form 10-Q dated July 27, 2018
* Filed herewith
† Management contract or compensatory arrangement
E-2
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: February 8, 2021
| By: | /s/ Olivier A. Filliol | ||||
Olivier A. Filliol | |||||
| 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 as of the date set out above and in the capacities indicated.
| Signature | Title | |||||||
| /s/ Olivier A. Filliol | President and Chief Executive Officer | |||||||
| Olivier A. Filliol | ||||||||
| /s/ Shawn P. Vadala | Chief Financial Officer | |||||||
| Shawn P. Vadala | ||||||||
| /s/ Olivier A. Filliol | Director | |||||||
| Olivier A. Filliol | ||||||||
| /s/ Wah-Hui Chu | Director | |||||||
| Wah-Hui Chu | ||||||||
| /s/ Domitille Doat-Le Bigot | Director | |||||||
| Domitille Doat-Le Bigot | ||||||||
| /s/ Elisha Finney | Director | |||||||
| Elisha Finney | ||||||||
| /s/ Richard Francis | Director | |||||||
| Richard Francis | ||||||||
| /s/ Michael A. Kelly | Director | |||||||
| Michael A. Kelly | ||||||||
| /s/ Thomas P. Salice | Director | |||||||
| Thomas P. Salice | ||||||||
| /s/ Robert F. Spoerry | Director | |||||||
| Robert F. Spoerry | ||||||||
E-3
METTLER-TOLEDO INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Mettler-Toledo International Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Mettler-Toledo International Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes, and the schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 appearing on page S-1 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 17 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Deferred Tax Assets
As described in Notes 2 and 14 to the consolidated financial statements, the Company recorded deferred tax assets of $210.4 million, net of a valuation allowance of $52.4 million, as of December 31, 2020. 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, 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. In assessing the ability to realize 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. The valuation allowance is based on management’s estimates of future taxable income and application of relevant income tax law.
The principal considerations for our determination that performing procedures relating to the valuation of deferred tax assets is a critical audit matter are (i) the significant judgment by management when assessing the ability to realize deferred tax assets, particularly as it relates to estimates of future taxable income and application of income tax law in relevant foreign jurisdictions; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s assessment of the realizability of deferred tax assets as it relates to estimates of future taxable income and application of relevant income tax law; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of deferred tax assets, including controls over estimates of future taxable income and application of relevant income tax law. These procedures also included, among others (i) evaluating management’s assessment of the realizability of deferred tax assets on a jurisdictional basis; (ii) evaluating management's estimates of future taxable income; (iii) evaluating management's application of relevant income tax law; and (iv) testing the completeness and accuracy of the underlying data used in management’s assessment.
F-3
Evaluating management’s estimates of future taxable income involved evaluating whether the estimates were reasonable considering (i) the current and past performance of the respective entity and (ii) whether the estimates were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the application of relevant income tax law.
/s/ PricewaterhouseCoopers LLP | ||
PricewaterhouseCoopers LLP | ||
Columbus, Ohio
February 8, 2021
We have served as the Company’s auditor since 2005.
F-4
METTLER-TOLEDO INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(In thousands, except share data)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | |||||||||||||||||
| Products | $ | 2,405,172 | $ | 2,346,845 | $ | 2,300,075 | |||||||||||
| Service | 680,005 | 661,807 | 635,511 | ||||||||||||||
| Total net sales | 3,085,177 | 3,008,652 | 2,935,586 | ||||||||||||||
| Cost of sales | |||||||||||||||||
| Products | 954,697 | 929,669 | 914,086 | ||||||||||||||
| Service | 329,449 | 337,772 | 337,122 | ||||||||||||||
| Gross profit | 1,801,031 | 1,741,211 | 1,684,378 | ||||||||||||||
| Research and development | 140,102 | 143,950 | 141,071 | ||||||||||||||
| Selling, general, and administrative | 820,221 | 819,183 | 812,802 | ||||||||||||||
| Amortization | 56,665 | 49,690 | 47,524 | ||||||||||||||
| Interest expense | 38,616 | 37,411 | 34,511 | ||||||||||||||
| Restructuring charges | 10,516 | 15,760 | 18,420 | ||||||||||||||
| Other income, net | (13,832) | (6,177) | (21,808) | ||||||||||||||
| Earnings before taxes | 748,743 | 681,394 | 651,858 | ||||||||||||||
| Provision for taxes | 146,004 | 120,285 | 139,247 | ||||||||||||||
| Net earnings | $ | 602,739 | $ | 561,109 | $ | 512,611 | |||||||||||
| Basic earnings per common share: | |||||||||||||||||
| Net earnings | $ | 25.24 | $ | 22.84 | $ | 20.33 | |||||||||||
| Weighted average number of common shares | 23,882,648 | 24,567,609 | 25,215,674 | ||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||
| Net earnings | $ | 24.91 | $ | 22.47 | $ | 19.88 | |||||||||||
| Weighted average number of common and common equivalent shares | 24,199,230 | 24,974,457 | 25,781,324 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
METTLER-TOLEDO INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31
(In thousands, except share data)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net earnings | $ | 602,739 | $ | 561,109 | $ | 512,611 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation adjustment | 29,914 | 2,898 | (32,573) | ||||||||||||||
| Unrealized gains (losses) on cash flow hedging arrangements: | |||||||||||||||||
| Unrealized gains (losses) | (11,323) | (1,063) | (658) | ||||||||||||||
| Effective portion of (gains) losses included in net earnings | 11,066 | (861) | 2,441 | ||||||||||||||
| Defined benefit pension and post-retirement plans: | |||||||||||||||||
| Net actuarial gains (losses) | (35,662) | (32,699) | (23,326) | ||||||||||||||
| Plan amendments and prior service cost | (93) | 430 | (780) | ||||||||||||||
Amortization of actuarial (gains) losses and plan amendments and prior service cost | 14,547 | 12,144 | 14,366 | ||||||||||||||
| Impact of foreign currency | (19,701) | (2,108) | 3,522 | ||||||||||||||
| Total other comprehensive income (loss), net of tax | (11,252) | (21,259) | (37,008) | ||||||||||||||
| Comprehensive income | $ | 591,487 | $ | 539,850 | $ | 475,603 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
METTLER-TOLEDO INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As of December 31
(In thousands, except share data)
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 94,254 | $ | 207,785 | |||||||
| Trade accounts receivable, less allowances of $18,625 in 2020 and $17,009 in 2019 | 593,809 | 566,256 | |||||||||
| Inventories | 297,611 | 274,285 | |||||||||
| Other current assets and prepaid expenses | 71,230 | 61,321 | |||||||||
| Total current assets | 1,056,904 | 1,109,647 | |||||||||
| Property, plant, and equipment, net | 798,868 | 748,657 | |||||||||
| Goodwill | 550,270 | 535,979 | |||||||||
| Other intangible assets, net | 196,785 | 206,242 | |||||||||
| Deferred tax assets, net | 41,836 | 36,978 | |||||||||
| Other non-current assets | 169,886 | 151,818 | |||||||||
| Total assets | $ | 2,814,549 | $ | 2,789,321 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 175,801 | $ | 185,592 | |||||||
| Accrued and other liabilities | 196,834 | 166,118 | |||||||||
| Accrued compensation and related items | 179,252 | 155,402 | |||||||||
| Deferred revenue and customer prepayments | 149,106 | 122,489 | |||||||||
| Taxes payable | 89,017 | 69,043 | |||||||||
| Short-term borrowings and current maturities of long-term debt | 50,317 | 55,868 | |||||||||
| Total current liabilities | 840,327 | 754,512 | |||||||||
| Long-term debt | 1,284,174 | 1,235,350 | |||||||||
| Deferred tax liabilities, net | 34,448 | 45,267 | |||||||||
| Other non-current liabilities | 372,925 | 333,412 | |||||||||
| Total liabilities | 2,531,874 | 2,368,541 | |||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| 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 44,786,011 and 44,786,011 shares, outstanding 23,471,841 and 24,125,317 shares at December 31, 2020 and 2019, respectively | 448 | 448 | |||||||||
| Additional paid-in capital | 805,140 | 783,871 | |||||||||
| Treasury stock at cost (21,314,170 and 20,660,694 shares at December 31, 2020 and 2019, respectively) | (5,283,584) | (4,539,154) | |||||||||
| Retained earnings | 5,095,596 | 4,499,288 | |||||||||
| Accumulated other comprehensive income (loss) | (334,925) | (323,673) | |||||||||
| Total shareholders’ equity | 282,675 | 420,780 | |||||||||
| Total liabilities and shareholders’ equity | $ | 2,814,549 | $ | 2,789,321 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
METTLER-TOLEDO INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31
(In thousands, except share data)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 25,541,393 | $ | 448 | $ | 747,138 | $ | (3,368,182) | $ | 3,433,282 | $ | (265,406) | $ | 547,280 | ||||||||||||||||||||||||||||
| Exercise of stock options and restricted stock units | 183,379 | — | — | 28,577 | (3,977) | — | 24,600 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (802,809) | — | — | (474,999) | — | — | (474,999) | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 17,579 | — | — | — | 17,579 | ||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | 512,611 | — | 512,611 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | (37,008) | (37,008) | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 24,921,963 | $ | 448 | $ | 764,717 | $ | (3,814,604) | $ | 3,941,916 | $ | (302,414) | $ | 590,063 | ||||||||||||||||||||||||||||
| Exercise of stock options and restricted stock units | 298,002 | — | 869 | 50,449 | (3,737) | — | 47,581 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (1,094,648) | — | — | (774,999) | — | — | (774,999) | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 18,285 | — | — | — | 18,285 | ||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | 561,109 | — | 561,109 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | (21,259) | (21,259) | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 24,125,317 | $ | 448 | $ | 783,871 | $ | (4,539,154) | $ | 4,499,288 | $ | (323,673) | $ | 420,780 | ||||||||||||||||||||||||||||
| Exercise of stock options and restricted stock units | 162,176 | — | 2,582 | 30,568 | (6,431) | — | 26,719 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (815,652) | — | — | (774,998) | — | — | (774,998) | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 18,687 | — | — | — | 18,687 | ||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | 602,739 | — | 602,739 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | (11,252) | (11,252) | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 23,471,841 | $ | 448 | $ | 805,140 | $ | (5,283,584) | $ | 5,095,596 | $ | (334,925) | $ | 282,675 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
METTLER-TOLEDO INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(In thousands)
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net earnings | $ | 602,739 | $ | 561,109 | $ | 512,611 | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 42,044 | 38,991 | 37,167 | ||||||||||||||
| Amortization | 56,665 | 49,690 | 47,524 | ||||||||||||||
| Deferred tax (benefit) provision | (12,784) | 11,203 | 2,302 | ||||||||||||||
| Share-based compensation | 18,687 | 18,285 | 17,579 | ||||||||||||||
| Swiss tax reform (Note 14) | — | (15,833) | — | ||||||||||||||
| U.S. tax reform (Note 14) | — | — | 3,597 | ||||||||||||||
| Acquisition gain (Note 16) | — | — | (18,674) | ||||||||||||||
| Other | (2,399) | 133 | (2,559) | ||||||||||||||
| Increase (decrease) in cash resulting from changes in: | |||||||||||||||||
| Trade accounts receivable | (4,495) | (31,408) | (19,540) | ||||||||||||||
| Inventories | (3,836) | (4,603) | (21,195) | ||||||||||||||
| Other current assets | (4,763) | (335) | 622 | ||||||||||||||
| Trade accounts payable | (17,803) | (12,221) | 33,671 | ||||||||||||||
| Taxes payable | 14,049 | (6,176) | (1,528) | ||||||||||||||
| Accruals and other | 36,595 | (5,385) | (26,572) | ||||||||||||||
| Net cash provided by operating activities | 724,699 | 603,450 | 565,005 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Proceeds from sale of property, plant, and equipment | 3,106 | 1,422 | 8,190 | ||||||||||||||
| Purchase of property, plant, and equipment | (92,494) | (97,341) | (142,726) | ||||||||||||||
| Acquisitions | (6,242) | (2,004) | (5,527) | ||||||||||||||
| Net hedging settlements on intercompany loans | (4,730) | (1,160) | 1,119 | ||||||||||||||
| Net cash used in investing activities | (100,360) | (99,083) | (138,944) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from borrowings | 1,489,040 | 1,435,081 | 940,615 | ||||||||||||||
| Repayments of borrowings | (1,483,869) | (1,176,784) | (876,324) | ||||||||||||||
| Proceeds from exercise of stock options | 26,719 | 47,581 | 24,600 | ||||||||||||||
| Repurchases of common stock | (774,998) | (774,999) | (474,999) | ||||||||||||||
| Acquisition contingent consideration paid | — | (10,000) | — | ||||||||||||||
| Other financing activities | (800) | 1,753 | (1,914) | ||||||||||||||
| Net cash used in financing activities | (743,908) | (477,368) | (388,022) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 6,038 | 2,676 | (8,616) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (113,531) | 29,675 | 29,423 | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Beginning of period | 207,785 | 178,110 | 148,687 | ||||||||||||||
| End of period | $ | 94,254 | $ | 207,785 | $ | 178,110 | |||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Interest | $ | 37,772 | $ | 37,499 | $ | 34,451 | |||||||||||
| Taxes | $ | 134,674 | $ | 129,347 | $ | 132,410 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
1.BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Mettler-Toledo International Inc. (“Mettler-Toledo” or the “Company”) is a leading global supplier of precision instruments and services. The Company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics, and food retailing applications. The Company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the Company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications. The Company’s primary manufacturing facilities are located in China, Switzerland, the United States, Germany, the United Kingdom, and Mexico. The Company’s principal executive offices are located in Columbus, Ohio and Greifensee, Switzerland.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include all entities in which the Company has control, which are its wholly owned subsidiaries.
The preparation of financial statements in conformity with U.S. GAAP 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 due to uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors. A discussion of the Company’s critical accounting policies is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements included within this filing.
All intercompany transactions and balances have been eliminated.
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. The carrying value of these cash equivalents approximates fair value.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for expected credit losses represents the Company’s best estimate based on current and historical information, and reasonable and supportable forecasts of future events and circumstances.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost, which includes direct materials, labor, and overhead, is generally determined using the first in, first out (FIFO) method. The estimated net realizable value is based on assumptions for future demand and related pricing. Adjustments to the cost basis of the Company’s inventory are made for excess and obsolete items based on usage, expected future orders, and technological obsolescence. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.
F-10
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Long-Lived Assets
a)Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation. Repair and maintenance costs are charged to expense as incurred. The Company capitalizes certain direct costs related to the acquisition and development of internal-use computer software. Externally purchased software is capitalized when we obtain legal ownership and is amortized over its useful life ranging from three to five years. Internally developed software costs for internal use are capitalized once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs associated with internal-use software are amortized on a straight-line basis over 10 years. Fully depreciated assets other than capitalized internally developed software are retained in property, plant, and equipment and accumulated depreciation accounts until disposal.
Depreciation and amortization are 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 10 years | ||||
| Leasehold improvements | Shorter of useful life or lease term | ||||
b)Goodwill and Other Intangible Assets
Goodwill, representing the excess of purchase price over the fair value of the net assets of companies acquired, and indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The annual evaluations of goodwill and indefinite-lived intangible assets are generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount.
If the Company is unable to conclude whether the goodwill or indefinite-lived intangible asset is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs a quantitative assessment by estimating the fair value of the respective reporting unit or indefinite-lived intangible asset and comparing the fair value to the carrying amount. If the carrying amount of the reporting unit or indefinite-lived intangible asset exceeds its fair value, an impairment charge equal to the difference is recognized.
Other intangible assets include indefinite-lived assets and assets subject to amortization. Where applicable, amortization is charged on a straight-line basis over the expected period to be benefited. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company assesses the initial acquisition of intangible assets in accordance with the provisions of ASC 805 - Business Combinations and the continued accounting for previously recognized intangible assets and goodwill in accordance with the provisions of ASC 350 - Intangible - Goodwill and Other and ASC 360 - Property, Plant, and Equipment.
F-11
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived assets (asset group) with finite lives when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. An impairment loss would be recognized when future estimated undiscounted cash flows expected to result from use and eventually disposition of that asset (asset group) are less than the asset’s carrying value, with the loss measured as the difference between carrying value and estimated fair value.
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, 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. In assessing the ability to realize 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. The valuation allowance is based on management’s estimates of future taxable income and application of relevant income tax law.
Deferred taxes are not provided on the unremitted earnings of subsidiaries outside of the United States when it is expected that these earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. Deferred taxes are provided when the Company no longer considers subsidiary earnings to be permanently invested, such as in situations where the Company’s subsidiaries plan to make future dividend distributions.
In accordance with the Tax Cuts and Jobs Act, the Company treats taxes due on future Global Intangible Low-Taxed Income ("GILTI") inclusions in U.S. taxable income as a current period expense when incurred.
The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of income tax expense within its consolidated statement of operations.
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 weighted average exchange rates during the year. Translation gains or losses are accumulated in other comprehensive income (loss) in the consolidated statements of shareholders’ equity. Transaction gains and losses are included as a component of net earnings or in certain circumstances as a component of other comprehensive income (loss) where the underlying item is considered a hedge of a net investment or relates to intercompany notes that are long term in nature.
Revenue Recognition
Product revenue is recognized from contracts with customers when a customer has obtained control of a product. The Company considers control to have transferred based upon shipping terms. To the extent the Company’s contracts have a separate performance obligation, revenue related to any post-shipment
F-12
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
performance obligation is deferred until completed. Shipping and handling costs charged to customers are included in total net sales and the associated expense is a component of cost of sales. Certain products are also sold through indirect distribution channels whereby the distributor assumes any further obligations to the end-customer. Revenue is recognized on these distributor arrangements upon transfer of control to the distributor. Contracts do not contain variable pricing arrangements that are retrospective, except for rebate programs. Rebates are estimated based on expected sales volumes and offset against revenue at the time such revenue is recognized. The Company generally maintains the right to accept or reject a product return in its terms and conditions and also maintains appropriate accruals for outstanding credits. The related provisions for estimated returns and rebates are immaterial to the consolidated financial statements.
Certain of the Company’s product arrangements include separate performance obligations, primarily related to installation. Such performance obligations are accounted for separately when the deliverables have stand-alone value and the satisfaction of the undelivered performance obligations is probable and within the Company’s control. The allocation of revenue between the performance obligations is based on the observable stand-alone selling prices at the time of the sale in accordance with a number of factors including service technician billing rates, time to install, and geographic location.
Software is generally not considered a distinct performance obligation with the exception of a limited number of small software applications. The Company generally sells software products with the related hardware instrument as the software is embedded in the product. The Company’s products typically require no significant production, modification, or customization of the hardware or software that is essential to the functionality of the products.
Service revenue not under contract is recognized upon the completion of the service performed. Revenue from spare parts sold on a stand-alone basis is recognized when control is transferred to the customer, which is generally at the time of shipment or delivery. Revenue from service contracts is recognized ratably over the contract period using a time-based method. These contracts represent an obligation to perform repair and other services including regulatory compliance qualification, calibration, certification, and preventative maintenance on a customer’s pre-defined equipment over the contract period.
Leases
The Company considers an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration. The Company has operating leases, but does not have material financing leases.
Operating lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement. These assets and liabilities are recognized at the commencement of the lease based upon the present value of the lease payments over the lease term. Lease payments include both lease and non-lease components for items or activities that transfer a good and service. Vehicle lease and non-lease components are separately accounted for based on stand-alone value. Real estate lease and non-lease components are accounted for as a single component. Operating lease right-of-use assets include initial direct costs, advanced lease payments, and lease incentives.
F-13
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The lease term reflects the noncancellable period of the lease together with periods covered by an option to extend or terminate the lease when management is reasonably certain that it will exercise such option. The Company applies its incremental borrowing rate at the lease commencement date in determining the present value of lease payments as the information necessary to determine the rate implicit in the lease is not readily available. The incremental borrowing rate reflects similar terms by geographic location to the underlying leases. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the right-of-use asset and lease liabilities and are expensed as incurred. Short-term leases are less than one year without purchase or renewal options that are reasonably certain to be exercised and are recognized on a straight-line basis over the lease term. The right-of-use asset is tested for impairment in accordance with ASC 360.
Research and Development
Research and development costs primarily consist of salaries, consulting, and other costs. The Company expenses these costs as incurred.
Employee Termination Benefits
In situations where contractual termination benefits exist, the Company records accruals for employee termination benefits when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. All other employee termination arrangements are recognized and measured at their fair value at the communication date unless the employee is required to render additional service beyond the legal notification period, in which case the liability is recognized ratably over the future service period.
Earnings per Common Share
In accordance with the treasury stock method, the Company has included 316,582, 406,848, and 565,650 common equivalent shares in the calculation of diluted weighted average number of common shares for the years ended December 31, 2020, 2019, and 2018, respectively, relating to outstanding stock options and restricted stock units.
Outstanding options and restricted stock units to purchase or receive 36,263, 71,660, and 63,019 shares of common stock for the years ended December 31, 2020, 2019, and 2018, respectively, have been excluded from the calculation of diluted weighted average number of common and common equivalent shares as such options and restricted stock units would be anti-dilutive.
Equity-Based Compensation
The Company applies the fair value methodology in accounting for its equity-based compensation plan.
F-14
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. As described more fully in Note 6, the Company primarily enters into foreign currency forward exchange contracts to economically hedge certain short-term intercompany balances involving its international businesses. Such contracts limit the Company’s exposure to currency fluctuations on the underlying hedged item. These contracts are adjusted to fair market value as of each balance sheet date, with the resulting changes in fair value being recognized in other charges (income), consistent with the underlying hedged item.
The Company also enters into interest rate swap agreements and cross currency swaps in order to manage its exposure to changes in interest rates. The differential paid or received on interest rate swap agreements is recognized as incurred in interest expense over the life of the hedge agreements. Floating to fixed interest rate swap agreements are accounted for as cash flow hedges. Changes in fair value of outstanding interest rate swap agreements that are effective as cash flow hedges are initially recognized in other comprehensive income as incurred.
Fair Value Measurements
The Company measures or monitors certain assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities in which fair value is the primary basis of accounting, mainly derivative instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the fair value hierarchy established under U.S. GAAP and when possible looks to active and observable markets to price identical assets and liabilities. If identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities.
Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date. The purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values and any consideration in excess of the net assets acquired is recognized as goodwill. Acquisition transaction costs are expensed when incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the expected contingent payments as of the acquisition date. Subsequent changes in the fair value of the contingent consideration are recorded to other charges (income), net.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13: Financial Instruments - Credit Losses. The ASU requires the allowance for doubtful accounts to be estimated based on an incurred loss model, which considers historical and forecasted conditions. The guidance became effective for the Company January 1, 2020 on a prospective basis and did not have an impact on the consolidated financial statements.
F-15
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
In August 2018, the FASB issued ASU 2018-14: Compensation - Retirement Benefit which amends the current disclosure requirements for defined benefit pension plans and other post-retirement plans. The change in the disclosures has been applied retrospectively and became effective for fiscal years ending after December 15, 2020. The adoption of this guidance did not have a material impact and is disclosed in Note 13 to the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15: Internal-Use Software which clarifies the accounting for implementation costs associated with cloud-computing internal-use software arrangements. The implementation costs should be capitalized and expensed over the service term, including options to extend, and recognized in selling, general, and administrative in the statement of operations. The guidance became effective January 1, 2020 and is applied on a prospective basis. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12: Income Taxes which removes certain exceptions to the general principles of ASC 740 related to intraperiod tax allocation exceptions, deferred tax liabilities related to outside basis differences, and year-to-date losses in interim periods. In addition, the ASU amends the interim guidance to clarify that all tax effects, both deferred and current, related to enactments of tax laws or rate changes should be accounted for in the interim period that includes the enactment date. The change is applied prospectively and became effective December 15, 2020 with early adoption permitted. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuance of LIBOR or another referenced rate. The guidance may be applied to any applicable contract entered into before December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
3.REVENUE
The Company disaggregates revenue from contracts with customers by product, service, timing of revenue recognition, and geography. A summary by the Company’s reportable segments follows for the years ended December 31:
| Twelve months ended December 31, 2020 | U.S. Operations | Swiss Operations | Western European Operations | Chinese Operations | Other Operations | Total | |||||||||||||||||||||||||||||
| Product Revenue | $ | 815,046 | $ | 112,542 | $ | 509,385 | $ | 526,231 | $ | 441,968 | $ | 2,405,172 | |||||||||||||||||||||||
| Service Revenue: | |||||||||||||||||||||||||||||||||||
Point in time | 199,247 | 22,733 | 135,793 | 39,705 | 110,542 | 508,020 | |||||||||||||||||||||||||||||
Over time | 58,026 | 8,648 | 71,537 | 12,674 | 21,100 | 171,985 | |||||||||||||||||||||||||||||
| Total | $ | 1,072,319 | $ | 143,923 | $ | 716,715 | $ | 578,610 | $ | 573,610 | $ | 3,085,177 | |||||||||||||||||||||||
F-16
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
| Twelve months ended December 31, 2019 | U.S. Operations | Swiss Operations | Western European Operations | Chinese Operations | Other Operations | Total | |||||||||||||||||||||||||||||
| Product Revenue | $ | 801,181 | $ | 110,390 | $ | 500,978 | $ | 495,579 | $ | 438,717 | $ | 2,346,845 | |||||||||||||||||||||||
| Service Revenue: | |||||||||||||||||||||||||||||||||||
Point in time | 207,707 | 20,968 | 135,612 | 37,370 | 109,802 | 511,459 | |||||||||||||||||||||||||||||
Over time | 48,227 | 8,141 | 64,151 | 11,767 | 18,062 | 150,348 | |||||||||||||||||||||||||||||
| Total | $ | 1,057,115 | $ | 139,499 | $ | 700,741 | $ | 544,716 | $ | 566,581 | $ | 3,008,652 | |||||||||||||||||||||||
| Twelve months ended December 31, 2018 | U.S. Operations | Swiss Operations | Western European Operations | Chinese Operations | Other Operations | Total | |||||||||||||||||||||||||||||
| Product Revenue | $ | 769,971 | $ | 106,400 | $ | 517,855 | $ | 475,025 | $ | 430,824 | $ | 2,300,075 | |||||||||||||||||||||||
| Service Revenue: | |||||||||||||||||||||||||||||||||||
Point in time | 196,314 | 19,430 | 134,052 | 38,528 | 100,638 | 488,962 | |||||||||||||||||||||||||||||
Over time | 41,512 | 8,234 | 66,881 | 11,556 | 18,366 | 146,549 | |||||||||||||||||||||||||||||
| Total | $ | 1,007,797 | $ | 134,064 | $ | 718,788 | $ | 525,109 | $ | 549,828 | $ | 2,935,586 | |||||||||||||||||||||||
The Company's global revenue mix by product category for the year ending December 31, 2020 is laboratory (54% of sales), industrial (40% of sales), and retail (6% of sales). The Company’s product revenue by reportable segment is proportionately similar to the Company’s global mix with the exception of the Company’s Swiss Operations, which is largely comprised of laboratory products, and the Company’s Chinese Operations, which has a slightly higher percentage of industrial products. A breakdown of the Company’s sales by product category for the year ended December 31 follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Laboratory | $ | 1,669,791 | $ | 1,578,625 | $ | 1,504,600 | |||||||||||
| Industrial | 1,224,497 | 1,233,970 | 1,211,362 | ||||||||||||||
| Retail | 190,889 | 196,057 | 219,624 | ||||||||||||||
| Total net sales | $ | 3,085,177 | $ | 3,008,652 | $ | 2,935,586 | |||||||||||
A breakdown of net sales to external customers by geographic customer destination, net for the year ended December 31 follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Americas | $ | 1,180,626 | $ | 1,165,847 | $ | 1,105,956 | |||||||||||
| Europe | 921,266 | 892,092 | 908,773 | ||||||||||||||
| Asia/Rest of World | 983,285 | 950,713 | 920,857 | ||||||||||||||
| Total | $ | 3,085,177 | $ | 3,008,652 | $ | 2,935,586 | |||||||||||
The payment terms in the Company’s contracts with customers do not exceed one year and therefore contracts do not contain a significant financing component. In most cases, after appropriate credit evaluations, payments are due in arrears and are recognized as receivables. Unbilled revenue is recorded when performance obligations have been satisfied, but not yet billed to the customer. Unbilled revenue as of December 31, 2020, 2019, and 2018 was $22.6 million, $17.4 million, and $12.4 million, respectively, and is included within accounts receivable. Deferred revenue and customer prepayments are recorded when cash payments are received or due in advance of the performance obligation being satisfied. Deferred revenue primarily includes prepaid service contracts, as well as deferred installation.
F-17
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Changes in the components of deferred revenue and customer prepayments during the period are as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Beginning balances as of January 1 | $ | 122,489 | $ | 105,381 | $ | 107,166 | ||||||||||||||
| Customer pre-payments/deferred revenue | 617,643 | 633,190 | 619,257 | |||||||||||||||||
| Revenue recognized | (595,802) | (615,957) | (618,002) | |||||||||||||||||
| Foreign currency translation | 4,776 | (125) | (3,040) | |||||||||||||||||
| Ending balance as of December 31 | $ | 149,106 | $ | 122,489 | $ | 105,381 | ||||||||||||||
The Company generally expenses sales commissions when incurred because the contract period is one year or less. These costs are recorded within selling, general, and administrative expenses. The Company has not disclosed the value of unsatisfied performance obligations other than customer prepayments and deferred revenue as most contracts have an expected length of one year or less and amounts greater than one year are immaterial.
4. ACQUISITIONS
In 2020, 2019, and 2018, we incurred acquisition payments totaling $6.2 million, $2.0 million, and $5.5 million, respectively.
In 2017, the Company acquired all of the shares of Biotix, Inc., a U.S.-based manufacturer and distributor of plastic consumables associated with pipettes, including tips, tubes, and reagent reservoirs used in the life sciences market, for an initial cash payment of $105 million plus additional cash consideration of $10 million that was paid in the first quarter of 2019.
5. INVENTORIES
Inventories consisted of the following at December 31:
| 2020 | 2019 | ||||||||||
| Raw materials and parts | $ | 132,041 | $ | 129,294 | |||||||
| Work-in-progress | 55,688 | 43,202 | |||||||||
| Finished goods | 109,882 | 101,789 | |||||||||
| Total inventory | $ | 297,611 | $ | 274,285 | |||||||
6. FINANCIAL INSTRUMENTS
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into certain interest rate and cross currency swap agreements in order to manage its exposure to changes in interest rates. At December 31, 2020, the interest payments associated with 78% of the Company’s debt are fixed obligations. The amount of the Company’s fixed obligation interest payments may change based upon the expiration dates of its interest rate and cross currency swap agreement and the level and composition of its debt. The Company also enters into certain foreign currency forward contracts to limit the Company’s exposure to currency fluctuations on the respective hedged items. For additional disclosures on derivative instruments regarding balance sheet location, fair value, and the amounts reclassified into other comprehensive income and the effective portion of the cash flow hedges, also see Note 7 and Note 11 to the consolidated financial statements. As
F-18
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
also mentioned in Note 10, the Company has designated its euro-denominated debt as a hedge of a portion of its net investment in a euro-denominated foreign subsidiary.
Cash Flow Hedges
In June 2019, the Company entered into a cross currency swap arrangement designated as a cash flow hedge. The agreement converts $50 million of borrowings under the Company's credit facility into synthetic Swiss franc debt, which allows the Company to effectively change the floating rate LIBOR-based interest payment, excluding the credit spread, to a fixed Swiss franc income of 0.82%. The swap began in June 2019 and matures in June 2023.
In June 2019, the Company entered into a cross currency swap arrangement designated as a cash flow hedge. The agreement converts $50 million of borrowings under the Company’s credit facility into synthetic Swiss franc debt, which allows the Company to effectively change the floating rate LIBOR-based interest payment, excluding the credit spread, to a fixed Swiss franc income of 0.95%. The swap began in June 2019 and matures in June 2021.
In February 2019, the Company entered into a cross currency swap arrangement designated as a cash flow hedge. The agreement converts $50 million of borrowings under the Company’s credit facility into synthetic Swiss franc debt, which allows the Company to effectively change the floating rate LIBOR-based interest payment, excluding the credit spread, to a fixed Swiss franc income of 0.78%. The swap began in February 2019 and matures in June 2021.
In 2015, the Company entered into a forward-starting interest rate swap agreement. The agreement changes the floating rate LIBOR-based interest payments associated with $100 million in borrowings under the Company’s credit agreement to a fixed obligation of 2.25% which began in February 2017 and matures in February 2022.
In 2013, the Company entered into an interest rate swap agreement designated as a cash flow hedge. The agreement was a swap which had the effect of changing the floating rate LIBOR-based interest payments associated with $50 million in borrowings under the Company’s credit agreement to a fixed obligation of 2.52% which began in October 2015 and matured in October 2020.
The Company’s cash flow hedges are recorded gross at fair value in the consolidated balance sheet at December 31, 2020 and 2019 and are disclosed in Note 7 to the consolidated financial statements. A derivative loss of $0.7 million based upon interest rates at December 31, 2020 is expected to be reclassified from other comprehensive income (loss) to earnings in the next 12 months. Through December 31, 2020, no hedge ineffectiveness has occurred in relation to these cash flow hedges.
Other Derivatives
The Company primarily enters into foreign currency forward contracts in order to economically hedge short-term intercompany balances largely denominated in Swiss franc, other major European currencies, and the Chinese renminbi with its foreign businesses. In accordance with U.S. GAAP, these contracts are considered “derivatives not designated as hedging instruments.” Gains or losses on these instruments are reported in current earnings. The foreign currency forward contracts are recorded at fair value in the consolidated balance sheet at December 31, 2020 and 2019, as disclosed in Note 7 to the consolidated financial statements. The Company recognized in other charges (income) a net gain of $4.8 million and net loss of $3.7 million and $1.2 million during the years ended December 31, 2020, 2019, and 2018, respectively, which offset the related net transaction gains (losses) associated with these
F-19
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
contracts. At December 31, 2020 and 2019, these contracts had a notional value of $536.5 million and $494.6 million, 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 believes that such counterparties will be able to fully satisfy their obligations under these contracts.
7. FAIR VALUE MEASUREMENTS
At December 31, 2020 and 2019, the Company had derivative assets totaling $2.2 million and $1.6 million, respectively, and derivative liabilities totaling $23.3 million and $9.0 million, respectively. The Company has limited involvement with derivative financial instruments and therefore does not present all the required disclosures in tabular format. The fair value of the interest rate swap agreements, the cross-currency swap agreements, and the foreign currency forward contracts that economically hedge short-term intercompany balances are estimated based upon inputs from current valuation information obtained from dealer quotes and priced with observable market assumptions and appropriate valuation adjustments for credit risk. The Company has evaluated the valuation methodologies used to develop the fair values by dealers in order to determine whether such valuations are representative of an exit price in the Company’s principal market. In addition, the Company uses an internally developed model to perform testing on the valuations received from brokers. The Company has also considered both its own credit risk and counterparty credit risk in determining fair value and determined these adjustments were insignificant for the years ended December 31, 2020 and 2019.
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement consists of observable and unobservable inputs that reflect the assumptions that a market participant would use in pricing an asset or liability.
A fair value hierarchy has been established that categorizes these inputs into three levels:
Level 1: Quoted prices in active markets for identical assets and liabilities
Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3: Unobservable inputs
F-20
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The following table presents the Company’s assets and liabilities, which are all categorized as Level 2 and are measured at fair value on a recurring basis at December 31, 2020 and 2019.
| 2020 | 2019 | Balance Sheet Location | ||||||||||||||||||
Foreign currency forward contracts not designated as hedging instruments | $ | 2,227 | $ | 1,568 | Other current assets and prepaid expenses | |||||||||||||||
Total derivative assets | $ | 2,227 | $ | 1,568 | ||||||||||||||||
Foreign currency forward contracts not designated as hedging instruments | $ | 1,399 | $ | 2,392 | Accrued and other liabilities | |||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
Interest rate swap agreements | — | 371 | Accrued and other liabilities | |||||||||||||||||
Cross currency swap agreements | 13,093 | — | Accrued and other liabilities | |||||||||||||||||
Interest rate swap agreements | 2,502 | 1,548 | Other non-current liabilities | |||||||||||||||||
Cross currency swap agreements | 6,297 | 4,706 | Other non-current liabilities | |||||||||||||||||
Total derivative liabilities | $ | 23,291 | $ | 9,017 | ||||||||||||||||
The Company had $14.3 million and $8.2 million of cash equivalents at December 31, 2020 and 2019, respectively, the fair value of which is determined using Level 2 inputs, through quoted and corroborated prices in active markets. The fair value of cash equivalents approximates cost.
The fair value of the Company’s debt exceeds the carrying value by approximately $57.4 million as of December 31, 2020. The fair value of the Company’s fixed interest rate debt was estimated using Level 2 inputs and primarily discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company.
8. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net consisted of the following at December 31:
| 2020 | 2019 | ||||||||||
| Land | $ | 61,838 | $ | 58,047 | |||||||
| Building and leasehold improvements | 356,699 | 326,743 | |||||||||
| Machinery and equipment | 458,174 | 413,411 | |||||||||
| Computer software | 544,490 | 514,400 | |||||||||
| Property, plant, and equipment, gross | 1,421,201 | 1,312,601 | |||||||||
| Less accumulated depreciation and amortization | (622,333) | (563,944) | |||||||||
| Property, plant, and equipment, net | $ | 798,868 | $ | 748,657 | |||||||
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the carrying amount of goodwill for the years ended December 31:
| 2020 | 2019 | ||||||||||
| Balance at beginning of year | $ | 535,979 | $ | 534,780 | |||||||
| Goodwill acquired | 6,169 | — | |||||||||
| Foreign currency translation | 8,122 | 1,199 | |||||||||
| Balance at year end | $ | 550,270 | $ | 535,979 | |||||||
F-21
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Goodwill and indefinite-lived assets are reviewed for impairment on an annual basis in the fourth quarter. The Company completed its impairment review and determined that there had been no impairment of these assets through December 31, 2020. The Company identified no triggering events or other circumstances which indicated the carrying amount of goodwill or intangible assets may not be recoverable.
The components of other intangible assets as of December 31 are as follows:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Intangibles, Net | Gross Amount | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||||||||||||||
| Customer relationships | $ | 201,445 | $ | (68,319) | $ | 133,126 | $ | 197,764 | $ | (58,851) | $ | 138,913 | |||||||||||||||||||||||
| Proven technology and patents | 78,312 | (52,138) | 26,174 | 75,170 | (46,532) | 28,638 | |||||||||||||||||||||||||||||
| Tradenames (finite life) | 4,896 | (3,444) | 1,452 | 4,594 | (3,124) | 1,470 | |||||||||||||||||||||||||||||
| Tradenames (indefinite life) | 35,595 | — | 35,595 | 35,474 | — | 35,474 | |||||||||||||||||||||||||||||
| Other | 5,215 | (4,777) | 438 | 5,462 | (3,715) | 1,747 | |||||||||||||||||||||||||||||
| $ | 325,463 | $ | (128,678) | $ | 196,785 | $ | 318,464 | $ | (112,222) | $ | 206,242 | ||||||||||||||||||||||||
The Company recognized amortization expense associated with the above intangible assets of $15.7 million, $15.1 million, and $14.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $14.7 million for 2021, $13.2 million for 2022, $13.5 million for 2023, $12.9 million for 2024, and $11.8 million for 2025. The finite-lived intangible assets are amortized on a straight-line basis over periods ranging from 3 to 45 years. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. Purchased intangibles amortization was $14.9 million, $11.2 million after tax, $14.3 million, $10.8 million after tax, and $13.3 million, $10.0 million after tax, for the years ended December 31, 2020, 2019, and 2018, respectively.
In addition to the above amortization, the Company recorded amortization expense associated with capitalized software, which is included in Property, Plant, and Equipment in Note 8, of $40.7 million, $34.4 million, and $33.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.
F-22
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
10. DEBT
Debt consisted of the following at December 31:
| 2020 | 2019 | ||||||||||
| 3.67% $50 million 10-year Senior Notes due December 17, 2022 | $ | 50,000 | $ | 50,000 | |||||||
| 4.10% $50 million 10-year Senior Notes due September 19, 2023 | 50,000 | 50,000 | |||||||||
| 3.84% $125 million 10-year Senior Notes due September 19, 2024 | 125,000 | 125,000 | |||||||||
| 4.24% $125 million 10-year Senior Notes due June 25, 2025 | 125,000 | 125,000 | |||||||||
| 3.91% $75 million 10-year Senior Notes due June 25, 2029 | 75,000 | 75,000 | |||||||||
| 3.19% $50 million 15-year Senior Notes due January 24, 2035 | 50,000 | — | |||||||||
| 1.47% EUR 125 million 15-year Senior Notes due June 17, 2030 | 153,299 | 140,197 | |||||||||
| 1.30% EUR 135 million 15-year Senior Notes due November 6, 2034 | 165,563 | 151,413 | |||||||||
| Senior Notes debt issuance costs, net | (2,760) | (2,259) | |||||||||
Total Senior Notes | 791,102 | 714,351 | |||||||||
$1.1 billion Credit Agreement, interest at LIBOR plus 87.5 basis points(1) | 491,419 | 520,999 | |||||||||
| Other local arrangements | 51,970 | 55,868 | |||||||||
Total debt | 1,334,491 | 1,291,218 | |||||||||
| Less: current portion | (50,317) | (55,868) | |||||||||
Total long-term debt | $ | 1,284,174 | $ | 1,235,350 | |||||||
(1) See Note 6 and Note 7 for additional disclosures on the financial instruments associated with the Credit Agreement.
The Company’s weighted average interest rate was 2.9% and 3.3% for the years ended December 31, 2020 and 2019, respectively.
Senior Notes
The Senior Notes listed above are senior unsecured obligations of the Company and interest is payable semi-annually. The Company may at any time prepay the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interests, and in some instances a “make whole” prepayment premium. The Euro Senior Notes, if prepaid, may also include a swap related currency loss. The Senior Notes each contain customary affirmative and negative covenants including, among others, limitations on the Company and its subsidiaries with respect to incurrence of liens and priority indebtedness, disposition of assets, mergers, and transactions with affiliates. The agreements also require the Company to maintain a consolidated interest coverage ratio of not less than 3.5 to 1.0 and a consolidated leverage ratio of not more than 3.5 to 1.0. The Senior Notes also contain customary events of default with customary grace periods, as applicable. The Company was in compliance with its covenants at December 31, 2020.
Total issuance costs of approximately $3.4 million have been incurred by the Company related to the Senior Notes mentioned above and are being amortized to interest expense over the various term.
The Company has designated the EUR 125 million 1.47% Euro Senior Notes and the EUR 135 million 1.30% Euro Senior Notes as a hedge of a portion of its net investment in a euro-denominated foreign subsidiary to reduce foreign currency risk associated with this net investment. Changes in the carrying value of this debt resulting from fluctuations in the euro to U.S. dollar exchange rate are recorded as foreign currency translation adjustments within other comprehensive income (loss). The Company recorded in other comprehensive income (loss) related to this net investment hedge an unrealized loss of $27.3 million for the year ended December 31, 2020 and an unrealized gain of $1.3 million and of $6.7
F-23
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
million for the years ended December 31, 2019 and 2018, respectively. The Company has a loss of $28.8 million recorded in accumulated other comprehensive income (loss) as of December 31, 2020.
In December 2020, the Company entered into an agreement to issue and sell EUR 125.0 million of 15-year 1.06% Euro Senior Notes ("1.06% Euro Senior Notes"). The terms of the Euro Senior Notes are consistent with the previous Euro Senior Notes as described above. The Company also entered into a forward contract to receive $152.1 million at the time of issuing the 1.06% Euro Senior Notes in March 2021. The proceeds will be used to repay outstanding amounts on the Company’s credit facility and fund operational expenses. The 1.06% Euro Senior Notes will be designated as a hedge of a portion of the Company’s net investment in a euro-denominated foreign subsidiary to reduce foreign currency risk associated with this net investment.
Credit Agreement
The Company has a $1.1 billion Credit Agreement (the “Credit Agreement”), which has $602.5 million of availability remaining as of December 31, 2020. The Credit Agreement is provided by a group of financial institutions and has a maturity date of June 15, 2023. It is a revolving credit facility and is not subject to any scheduled principal payments prior to maturity. The obligations under the Credit Agreement are unsecured.
Borrowings under the Credit Agreement bear interest at current market rates plus a margin based on the Company’s consolidated leverage ratio, which was set at LIBOR plus 87.5 basis points as of June 15, 2018. The Company must also pay facility fees that are tied to its leverage ratio. The Company is required to maintain a ratio of funded debt to consolidated EBITDA of 3.5 to 1.0 or less and an interest coverage ratio of 3.5 to 1.0 or greater. The Credit Agreement also places certain limitations on the Company, including limiting the ability to incur liens or indebtedness at a subsidiary level. In addition, the Credit Agreement has several events of default. The Company was in compliance with its covenants as of December 31, 2020. The Company capitalized $2.0 million in financing fees in other long-term assets during 2018 associated with the Credit Agreement which will be amortized to interest expense on a straight-line basis through 2023.
Other Local Arrangements
In April 2018, two of the Company’s non-U.S. pension plans issued loans totaling $39.6 million (Swiss franc 38 million) to a wholly owned subsidiary of the Company. The loans have the same terms and conditions which include an interest rate of Swiss franc LIBOR plus 87.5 basis points. The loans were renewed for one year in April 2020.
11. 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, 2020, 2,797,351 shares of the Company’s common stock were reserved for issuance pursuant to the Company’s stock option plans.
F-24
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
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.
Share Repurchase Program
In November 2020, the Company’s Board of Directors authorized an additional $2.5 billion to the share repurchase program which had $3.1 billion of remaining availability as of December 31, 2020. The share repurchases are expected to be funded from cash generated from operating activities, borrowings, and cash balances. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity, and other factors.
The Company has purchased 29.4 million common shares since the inception of the program in 2004 through December 31, 2020, at a total cost of $5.9 billion. During the years ended December 31, 2020 and 2019, the Company spent $775 million, and in 2018, $475 million on the repurchase of 815,652 shares, 1,094,648 shares, and 802,809 shares at an average price per share of $950.14, $707.97, and $591.65, respectively. The Company reissued 162,176 shares, 298,002 shares, and 183,379 shares held in treasury for the exercise of stock options and restricted stock units during 2020, 2019, and 2018, respectively.
F-25
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
Accumulated Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income by component for the period ended December 31, 2020, 2019, and 2018:
| Currency Translation Adjustment, Net of Tax | Net Unrealized Gain (Loss) on Cash Flow Hedging Arrangements, Net of Tax | Pension and Post-Retirement Benefit Related Items, Net of Tax | Total | ||||||||||||||||||||
| Balance at December 31, 2017 | $ | (31,340) | $ | (1,081) | $ | (232,985) | $ | (265,406) | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net unrealized actuarial gains (loss), prior service costs, and plan amendments | — | — | (24,106) | (24,106) | |||||||||||||||||||
Net unrealized gains (loss) on cash flow hedging arrangements | — | (658) | — | (658) | |||||||||||||||||||
Foreign currency translation adjustment | (32,573) | — | 3,522 | (29,051) | |||||||||||||||||||
Amounts recognized from accumulated other comprehensive income (loss), net of tax | — | 2,441 | 14,366 | 16,807 | |||||||||||||||||||
Net change in other comprehensive income (loss), net of tax | (32,573) | 1,783 | (6,218) | (37,008) | |||||||||||||||||||
| Balance at December 31, 2018 | $ | (63,913) | $ | 702 | $ | (239,203) | $ | (302,414) | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net unrealized actuarial gains (loss), prior service costs, and plan amendments | — | — | (32,269) | (32,269) | |||||||||||||||||||
| Net unrealized gains (loss) on cash flow hedging arrangements | — | (1,063) | — | (1,063) | |||||||||||||||||||
| Foreign currency translation adjustment | 2,898 | — | (2,108) | 790 | |||||||||||||||||||
| Amounts recognized from accumulated other comprehensive income (loss), net of tax | — | (861) | 12,144 | 11,283 | |||||||||||||||||||
| Net change in other comprehensive income (loss), net of tax | 2,898 | (1,924) | (22,233) | (21,259) | |||||||||||||||||||
| Balance at December 31, 2019 | $ | (61,015) | $ | (1,222) | $ | (261,436) | $ | (323,673) | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net unrealized actuarial gains (loss), prior service costs, and plan amendments | — | — | (35,755) | (35,755) | |||||||||||||||||||
Net unrealized gains (loss) on cash flow hedging arrangements | — | (11,323) | — | (11,323) | |||||||||||||||||||
Foreign currency translation adjustment | 29,914 | — | (19,701) | 10,213 | |||||||||||||||||||
Amounts recognized from accumulated other comprehensive income (loss), net of tax | — | 11,066 | 14,547 | 25,613 | |||||||||||||||||||
Net change in other comprehensive income (loss), net of tax | 29,914 | (257) | (40,909) | (11,252) | |||||||||||||||||||
| Balance at December 31, 2020 | $ | (31,101) | $ | (1,479) | $ | (302,345) | $ | (334,925) | |||||||||||||||
F-26
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The following table presents amounts recognized from accumulated other comprehensive income (loss) during the years ended December 31, 2020, 2019, and 2018:
| 2020 | 2019 | 2018 | Location of Amounts Recognized in Earnings | |||||||||||||||||||||||
Effective portion of losses (gains) on cash flow hedging arrangements: | ||||||||||||||||||||||||||
Interest rate swap agreements | $ | 2,413 | $ | 109 | $ | 539 | Interest expense | |||||||||||||||||||
Cross currency swap | 11,531 | (1,022) | 2,212 | (a) | ||||||||||||||||||||||
| Total before taxes | 13,944 | (913) | 2,751 | |||||||||||||||||||||||
| Provision for taxes | 2,878 | (52) | 310 | Provision for taxes | ||||||||||||||||||||||
| Total, net of taxes | $ | 11,066 | $ | (861) | $ | 2,441 | ||||||||||||||||||||
Recognition of defined benefit pension and post-retirement items: | ||||||||||||||||||||||||||
Recognition of actuarial losses, plan amendments, prior service cost, and settlement charge before taxes | $ | 18,609 | $ | 15,467 | $ | 18,756 | (b) | |||||||||||||||||||
| Provision for taxes | 4,062 | 3,323 | 4,390 | Provision for taxes | ||||||||||||||||||||||
| Total, net of taxes | $ | 14,547 | $ | 12,144 | $ | 14,366 | ||||||||||||||||||||
(a)The cross currency swap reflects an unrealized loss of $13.8 million, $3.6 million, and $0.8 million recorded in other charges (income) during the years ended December 31, 2020, 2019, and 2018, respectively, that was offset by the underlying unrealized gain on the hedged debt. The cross currency swap also reflects a realized gain of $2.3 million, $4.6 million, and $3.0 million recorded in interest expense during the years ended December 31, 2020, 2019, and 2018, respectively.
(b)These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and post-retirement cost. See Note 13 for additional details.
12. EQUITY INCENTIVE PLAN
The Company’s equity incentive plan provides employees and directors of the Company additional incentives 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. The Company’s 2013 equity incentive plan was approved by shareholders on May 2, 2013 and provides that 2 million shares of common stock, plus any shares that remained available for grant under the Company’s prior equity incentive plan as well as options outstanding that terminate without being exercised, may be the subject of awards. The plan provides for the grant of options, restricted stock units, and other equity-based awards. The exercise price of options granted shall not be less than the fair market value of the common stock on the date of the award. Options primarily vest equally over a five-year period from the date of grant and have a maximum term of up to 10 years. Restricted units primarily vest equally over a five-year period from the date of grant. Performance share units generally vest after a three-year period from the date of the grant based upon satisfaction of the performance condition. The compensation committee of the Board of Directors has generally granted restricted share units to participating managers and non-qualified stock options and performance share units to executive officers.
All share-based compensation arrangements granted to employees, including stock option grants, are recognized in the consolidated statement of operations based on the grant-date fair value of the award over the period during which an employee is required to provide service in exchange for the award. Share-based compensation expense is recorded within selling, general, and administrative in the consolidated statement of operations with a corresponding offset to additional paid-in capital in the consolidated balance sheet.
F-27
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The fair values of stock options granted were calculated using the Black-Scholes pricing model. The aggregate intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The following table summarizes all stock option activity from December 31, 2019 through December 31, 2020:
| Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value (in millions) | |||||||||||||||
| Outstanding at December 31, 2019 | 608,715 | $ | 334.20 | $ | 279.5 | ||||||||||||
| Granted | 16,273 | 1,103.74 | |||||||||||||||
| Exercised | (141,139) | 319.84 | |||||||||||||||
| Forfeited | (9,746) | 505.95 | |||||||||||||||
| Outstanding at December 31, 2020 | 474,103 | 400.21 | 350.6 | ||||||||||||||
| Options exercisable at December 31, 2020 | 367,451 | $ | 319.84 | $ | 301.3 | ||||||||||||
The following table details the weighted average remaining contractual life of options outstanding at December 31, 2020 by range of exercise prices:
| Number of Options Outstanding | Weighted Average Exercise Price | Remaining Contractual Life of Options Outstanding | Options Exercisable | |||||||||||||||||
| 78,288 | $168.98 | 1.8 | 78,288 | |||||||||||||||||
| 131,501 | $253.87 | 3.3 | 131,501 | |||||||||||||||||
| 128,642 | $357.51 | 5.4 | 105,179 | |||||||||||||||||
| 135,672 | $715.98 | 8.1 | 52,483 | |||||||||||||||||
| 474,103 | 5.0 | 367,451 | ||||||||||||||||||
As of the date granted, the weighted average grant-date fair value of the options granted during the years ended December 31, 2020, 2019, and 2018 was $284.25, $196.40, and $189.78, respectively.
Such weighted average grant-date fair value was determined using the following assumptions:
| 2020 | 2019 | 2018 | |||||||||||||||
| Risk-free interest rate | 0.34 | % | 1.74 | % | 3.09 | % | |||||||||||
| Expected life in years | 6.0 | 6.0 | 5.9 | ||||||||||||||
| Expected volatility | 26 | % | 24 | % | 26 | % | |||||||||||
| Expected dividend yield | — | — | — | ||||||||||||||
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 was approximately $84.5 million, $146.6 million, and $74.3 million, respectively.
The compensation expense for options recognized during the years ended December 31, 2020, 2019, and 2018 was $7.7 million, $8.0 million, and $8.4 million, respectively.
During the fourth quarter of 2016, the Company granted 12,678 performance-based options, with a grant-date fair value of $1.5 million. Compensation expense is recognized over the five-year vesting provisions based upon the probability of the performance condition being met.
F-28
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The following table summarizes all restricted stock unit and performance share unit activity from December 31, 2019 through December 31, 2020:
| Number of Restricted Stock Units | Aggregate Intrinsic Value (in millions) | Number of Performance Share Units | Aggregate Intrinsic Value (in millions) | ||||||||||||||||||||
| Outstanding at December 31, 2019 | 40,985 | $32.5 | 17,183 | $13.6 | |||||||||||||||||||
| Granted | 8,285 | 2,690 | |||||||||||||||||||||
Adjustment for performance results achieved(1) | — | 1,838 | |||||||||||||||||||||
| Vested | (14,667) | (6,370) | |||||||||||||||||||||
| Forfeited | (1,507) | — | |||||||||||||||||||||
| Outstanding at December 31, 2020 | 33,096 | $37.7 | 15,341 | $17.5 | |||||||||||||||||||
(1) 2016 performance share units vested in the first quarter 2020.
The weighted average grant-date fair value of the restricted stock units granted during years ended 2020, 2019, and 2018 was $1,104.02, $720.81, and $595.31 per unit, respectively, which primarily vest ratably over a five-year period. The total fair value of the restricted stock units on the date of grant was $9.1 million for 2020, $8.9 million for 2019, and $9.6 million for 2018 and will be recorded as compensation expense on a straight-line basis over the vesting period. The total fair value of restricted stock units vested during the years ended December 31, 2020, 2019, and 2018 was approximately $7.7 million, $7.0 million, and $7.2 million, respectively. Approximately $7.9 million, $7.1 million, and $6.8 million of compensation expense was recognized during the years ended December 31, 2020, 2019, and 2018, respectively.
The Company granted performance share units with a market condition during 2020, 2019, and 2018, respectively. Grantees of performance share units will be eligible to receive shares of the Company’s common stock depending upon the Company’s total shareholder return relative to the performance of companies in the S&P 500 Healthcare and S&P 500 Industrials over a three-year period. The awards actually earned will range from zero to 200% of the targeted number of performance share units for the three-year performance period and will be paid, to the extent earned, in the fiscal quarter following the end of the applicable three-year performance period. During 2020, the market conditions for the 2017 performance share units were met and will vest in the first quarter 2021 with a payout of 132%. Performance share unit awards were valued using a Monte Carlo simulation based on the following assumptions:
| 2020 | 2019 | 2018 | |||||||||||||||
| Risk-free interest rate | 0.18 | % | 1.69 | % | 3.03 | % | |||||||||||
| Expected life in years | 3 | 3 | 3 | ||||||||||||||
| Expected volatility | 26 | % | 24 | % | 26 | % | |||||||||||
| Expected dividend yield | — | — | — | ||||||||||||||
As of the date granted, the fair value of the performance share units granted was $1,345.03 for 2020, $803.26 for 2019, and $733.35 for 2018. The total fair value of the performance share units on the date of the grant was $3.6 million for 2020, 2019, and 2018, and will be recorded as compensation expense on a straight-line basis over the three-year performance period.
At December 31, 2020, a total of 2,080,274 shares of common stock were available for grant in the form of stock options, restricted stock units, or performance share units.
F-29
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
As of December 31, 2020, the unrecorded deferred share-based compensation balance related to stock options, restricted stock units, and performance share units was $48.2 million and will be recognized using a straight-line method over an estimated weighted average amortization period of 2.2 years.
13. BENEFIT PLANS
The Company maintains a number of retirement and other post-retirement employee benefit plans.
Certain subsidiaries 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 $19.3 million, $18.8 million, and $18.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Certain subsidiaries 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. Prior to 2002, the Company’s U.S. operations also provided post-retirement medical benefits to their employees. Contributions for medical benefits are related to employee years of service.
The following tables set 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 defined benefit plans and post-retirement plan at December 31, 2020 and 2019:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Benefits | Total | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 142,450 | $ | 130,202 | $ | 961,263 | $ | 864,095 | $ | 1,295 | $ | 2,186 | $ | 1,105,008 | $ | 996,483 | |||||||||||||||||||||||||||||||
| Service cost, gross | 1,304 | 1,063 | 33,995 | 30,665 | — | — | 35,299 | 31,728 | |||||||||||||||||||||||||||||||||||||||
| Interest cost | 3,556 | 4,585 | 4,778 | 10,192 | 25 | 64 | 8,359 | 14,841 | |||||||||||||||||||||||||||||||||||||||
| Actuarial losses (gains) | 10,733 | 14,449 | 43,508 | 84,262 | (70) | (129) | 54,171 | 98,582 | |||||||||||||||||||||||||||||||||||||||
| Plan amendments and other | — | — | 112 | — | — | (576) | 112 | (576) | |||||||||||||||||||||||||||||||||||||||
| Benefits paid | (8,096) | (7,849) | (39,412) | (38,181) | (220) | (250) | (47,728) | (46,280) | |||||||||||||||||||||||||||||||||||||||
| Impact of foreign currency | — | — | 87,567 | 10,230 | — | — | 87,567 | 10,230 | |||||||||||||||||||||||||||||||||||||||
Benefit obligation at end of year | $ | 149,947 | $ | 142,450 | $ | 1,091,811 | $ | 961,263 | $ | 1,030 | $ | 1,295 | $ | 1,242,788 | $ | 1,105,008 | |||||||||||||||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 102,812 | $ | 95,541 | $ | 861,962 | $ | 767,410 | $ | — | $ | — | $ | 964,774 | $ | 862,951 | |||||||||||||||||||||||||||||||
| Actual return on plan assets | 9,223 | 15,037 | 39,535 | 76,732 | — | — | 48,758 | 91,769 | |||||||||||||||||||||||||||||||||||||||
| Employer contributions | 5,523 | 83 | 26,249 | 25,323 | 220 | 250 | 31,992 | 25,656 | |||||||||||||||||||||||||||||||||||||||
Plan participants’ contributions | — | — | 15,681 | 15,130 | — | — | 15,681 | 15,130 | |||||||||||||||||||||||||||||||||||||||
| Benefits paid | (8,096) | (7,849) | (39,412) | (38,181) | (220) | (250) | (47,728) | (46,280) | |||||||||||||||||||||||||||||||||||||||
Impact of foreign currency and other | — | — | 80,307 | 15,548 | — | — | 80,307 | 15,548 | |||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at end of year | $ | 109,462 | $ | 102,812 | $ | 984,322 | $ | 861,962 | $ | — | $ | — | $ | 1,093,784 | $ | 964,774 | |||||||||||||||||||||||||||||||
| Funded status | $ | (40,485) | $ | (39,638) | $ | (107,489) | $ | (99,301) | $ | (1,030) | $ | (1,295) | $ | (149,004) | $ | (140,234) | |||||||||||||||||||||||||||||||
F-30
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The change in the benefit obligation for 2020 and 2019 includes an actuarial loss primarily related to a decline in discount rates, offset in part by plan asset returns.
The accumulated benefit obligations at December 31, 2020 and 2019 were $149.9 million and $142.5 million, respectively, for the U.S. defined benefit pension plan and $920.3 million and $812.0 million, respectively, for all non-U.S. plans. Certain of the plans included within non-U.S. pension benefits have accumulated benefit obligations which exceed the fair value of plan assets. The projected benefit obligation, the accumulated benefit obligation, and fair value of assets of these plans as of December 31, 2020 were $216.7 million, $205.3 million, and $57.4 million, respectively. The projected benefit obligation, the accumulated benefit obligation, and fair value of assets of these plans as of December 31, 2019 were $195.3 million, $184.4 million, and $51.5 million, respectively.
Amounts recognized in the consolidated balance sheets consist of:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Benefits | Total | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Other non-current assets | $ | — | $ | — | $ | 51,619 | $ | 44,536 | $ | — | $ | — | $ | 51,619 | $ | 44,536 | |||||||||||||||||||||||||||||||
| Accrued and other liabilities | (133) | (126) | (5,549) | (5,023) | (153) | (239) | (5,835) | (5,388) | |||||||||||||||||||||||||||||||||||||||
Pension and other post-retirement liabilities | (40,353) | (39,512) | (153,559) | (138,813) | (877) | (1,057) | (194,789) | (179,382) | |||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive loss (income) | 69,296 | 64,269 | 332,280 | 286,370 | (891) | (924) | 400,685 | 349,715 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 28,810 | $ | 24,631 | $ | 224,791 | $ | 187,070 | $ | (1,921) | $ | (2,220) | $ | 251,680 | $ | 209,481 | |||||||||||||||||||||||||||||||
The following amounts have been recognized in accumulated other comprehensive income (loss), before taxes, at December 31, 2020 and have not yet been recognized as a component of net periodic pension cost:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Benefits | Total | Total, After Tax | |||||||||||||||||||||||||
Plan amendments and prior service cost | $ | — | $ | (9,857) | $ | (501) | $ | (10,358) | $ | (8,262) | |||||||||||||||||||
| Actuarial losses (gains) | 69,296 | 342,137 | (390) | 411,043 | 322,947 | ||||||||||||||||||||||||
| Total | $ | 69,296 | $ | 332,280 | $ | (891) | $ | 400,685 | $ | 314,685 | |||||||||||||||||||
The following changes in plan assets and benefit obligations were recognized in other comprehensive income (loss), before taxes, for the year ended December 31, 2020:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Benefits | Total | Total, After Tax | |||||||||||||||||||||||||
| Net actuarial losses (gains) | $ | 7,605 | $ | 37,041 | $ | (70) | $ | 44,576 | $ | 35,662 | |||||||||||||||||||
| Plan amendment | — | 112 | — | 112 | 93 | ||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||
| Actuarial (losses) gains | (2,578) | (23,251) | 28 | (25,801) | (20,370) | ||||||||||||||||||||||||
| Plan amendments and prior service cost | — | 7,117 | 75 | 7,192 | 5,823 | ||||||||||||||||||||||||
| Impact of foreign currency | — | 24,891 | — | 24,891 | 19,701 | ||||||||||||||||||||||||
| Total | $ | 5,027 | $ | 45,910 | $ | 33 | $ | 50,970 | $ | 40,909 | |||||||||||||||||||
F-31
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
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 plans are as follows:
| U.S. | Non-U.S. | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Discount rate | 2.22 | % | 3.03 | % | 0.32 | % | 0.51 | % | |||||||||||||||
| Compensation increase rate | n/a | n/a | 0.86 | % | 0.86 | % | |||||||||||||||||
| Expected long-term rate of return on plan assets | 5.75 | % | 6.25 | % | 3.73 | % | 3.76 | % | |||||||||||||||
| Interest crediting risk | n/a | n/a | 0.50 | % | 0.80 | % | |||||||||||||||||
The assumed discount rates, rates of increase in future compensation levels, and the long-term rate of return used in calculating the net periodic pension cost 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 plans are as follows:
| U.S. | Non-U.S. | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Discount rate | 3.03 | % | 4.11 | % | 3.49 | % | 0.51 | % | 1.22 | % | 0.97 | % | |||||||||||||||||||||||
| Compensation increase rate | n/a | n/a | n/a | 0.86 | % | 0.87 | % | 0.87 | % | ||||||||||||||||||||||||||
| Expected long-term rate of return on plan assets | 6.25 | % | 6.50 | % | 6.50 | % | 3.76 | % | 3.84 | % | 3.86 | % | |||||||||||||||||||||||
Net periodic pension cost and net periodic post-retirement benefit for the defined benefit plans and U.S. post-retirement plan include the following components for the years ended December 31:
| U.S. | Non-U.S. | Other Benefits | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service cost, net | $ | 1,304 | $ | 1,063 | $ | 1,090 | $ | 18,314 | $ | 15,534 | $ | 15,545 | $ | — | $ | — | $ | — | $ | 19,618 | $ | 16,597 | $ | 16,635 | |||||||||||||||||||||||||||||||||||||||||||||||
Interest cost on projected benefit obligations | 3,556 | 4,585 | 4,242 | 4,778 | 10,192 | 8,630 | 25 | 64 | 66 | 8,359 | 14,841 | 12,938 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (6,094) | (5,887) | (6,929) | (33,067) | (29,162) | (31,005) | — | — | — | (39,161) | (35,049) | (37,934) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of actuarial losses/(gains) and prior service costs | 2,578 | 2,374 | 5,804 | 16,134 | 13,784 | 14,575 | (103) | (691) | (1,623) | 18,609 | 15,467 | 18,756 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net periodic pension cost / (benefit) | $ | 1,344 | $ | 2,135 | $ | 4,207 | $ | 6,159 | $ | 10,348 | $ | 7,745 | $ | (78) | $ | (627) | $ | (1,557) | $ | 7,425 | $ | 11,856 | $ | 10,395 | |||||||||||||||||||||||||||||||||||||||||||||||
The projected post-retirement benefit obligation was principally determined using discount rates of 1.47% in 2020 and 2.54% in 2019. Net periodic post-retirement benefit cost was principally determined using discount rates of 2.54% in 2020, 3.75% in 2019, and 3.15% in 2018. The health care cost trend rate was 6.0% in 2020, 6.2% in 2019, and 6.4% in 2018, decreasing to 4.50% in 2029.
The Company’s overall asset investment strategy is to achieve long-term growth while minimizing volatility by widely diversifying among asset types and strategies. Target asset allocations and investment return criteria are established by the pension committee or designated officers of each plan. Target asset allocation ranges for the U.S. pension plan include 40-60% in equity securities, 23-33% in fixed income securities, and 15-25% in other types of investments. International plan assets relate primarily to the Company’s Swiss plan with target allocations of 24-45% in equities, 35-55% in fixed income securities, and 15-25% in other types of investments. Actual results are monitored against targets and the trustees are required to report to the members of each plan, including an analysis of investment performance on an
F-32
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
annual basis at a minimum. Day-to-day asset management is typically performed by third-party asset managers, reporting to the pension committees or designated officers.
The long-term rate of return on plan asset assumptions used to determine pension expense under U.S. GAAP is generally based on estimated future returns for the target investment mix determined by the trustees as well as historical investment performance.
The following table presents the fair value measurement of the Company’s plan assets by hierarchy level:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Observable Inputs for Identical Assets (Level 2) | Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Observable Inputs for Identical Assets (Level 2) | Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||||||||||||||||||||||
| Asset Category: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and Cash Equivalents | $ | 166,614 | $ | — | $ | — | $ | 166,614 | $ | 104,144 | $ | — | $ | — | $ | 104,144 | |||||||||||||||||||||||||||||||
| Equity Securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mettler-Toledo Stock | 3,767 | — | — | 3,767 | 2,620 | — | — | 2,620 | |||||||||||||||||||||||||||||||||||||||
| Equity Mutual Funds: | |||||||||||||||||||||||||||||||||||||||||||||||
U.S.(1) | 7,467 | 30,460 | — | 37,927 | 7,245 | 29,885 | — | 37,130 | |||||||||||||||||||||||||||||||||||||||
International(2) | 83,309 | 41,027 | — | 124,336 | 62,569 | 53,188 | — | 115,757 | |||||||||||||||||||||||||||||||||||||||
Emerging Markets(3) | 131,103 | 966 | — | 132,069 | 110,972 | 822 | — | 111,794 | |||||||||||||||||||||||||||||||||||||||
| Fixed Income Securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate/Government Bonds(4) | 92,085 | — | — | 92,085 | 84,020 | — | — | 84,020 | |||||||||||||||||||||||||||||||||||||||
| Fixed Income Mutual Funds: | |||||||||||||||||||||||||||||||||||||||||||||||
Insurance Contracts(5) | — | 43,055 | 1,793 | 44,848 | — | 37,459 | 1,486 | 38,945 | |||||||||||||||||||||||||||||||||||||||
Core Bond(6) | 72,061 | 64,111 | — | 136,172 | 116,629 | 61,960 | — | 178,589 | |||||||||||||||||||||||||||||||||||||||
| Real Asset Mutual Funds: | |||||||||||||||||||||||||||||||||||||||||||||||
Real Estate(7) | 117,089 | 15,864 | — | 132,953 | 95,580 | 14,185 | — | 109,765 | |||||||||||||||||||||||||||||||||||||||
Commodities(8) | 53,088 | — | — | 53,088 | 47,697 | — | — | 47,697 | |||||||||||||||||||||||||||||||||||||||
| Other Types of Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
Debt Securities (9) | 43,060 | — | — | 43,060 | 39,275 | — | — | 39,275 | |||||||||||||||||||||||||||||||||||||||
Global Allocation Funds(10) | 12,359 | — | — | 12,359 | 12,269 | — | — | 12,269 | |||||||||||||||||||||||||||||||||||||||
Insurance Linked Securities(11) | 19,038 | — | — | 19,038 | 18,434 | — | — | 18,434 | |||||||||||||||||||||||||||||||||||||||
Total assets in fair value hierarchy | $ | 801,040 | $ | 195,483 | $ | 1,793 | $ | 998,316 | $ | 701,454 | $ | 197,499 | $ | 1,486 | $ | 900,439 | |||||||||||||||||||||||||||||||
Investments measured at net asset value: | |||||||||||||||||||||||||||||||||||||||||||||||
International(12) | 2,930 | 3,288 | |||||||||||||||||||||||||||||||||||||||||||||
Emerging Markets (12) | 7,262 | 6,650 | |||||||||||||||||||||||||||||||||||||||||||||
Multi-Strategy Fund of Hedge Funds (12) | 85,276 | 54,397 | |||||||||||||||||||||||||||||||||||||||||||||
Total pension assets at fair value | $ | 1,093,784 | $ | 964,774 | |||||||||||||||||||||||||||||||||||||||||||
_______________________________________
(1)Represents primarily large capitalization equity mutual funds tracking the S&P 500 Index.
(2)Represents all capitalization core and value equity mutual funds located primarily in Switzerland, the United Kingdom, and Canada.
(3)Represents core and growth mutual funds and funds of mutual funds invested in emerging markets primarily in Eastern Europe, Latin America, and Asia.
(4)Represents investments in high-grade corporate and government bonds located in Switzerland and the European Union.
(5)Represents fixed and variable rate annuity contracts provided by insurance companies.
(6)Represents fixed income mutual funds invested in the U.S., the United Kingdom, Switzerland, and European government bonds, high-grade corporate bonds, mortgage-backed securities, and collateralized mortgage obligations.
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METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
(7)Represents mutual funds invested in real estate located primarily in Switzerland.
(8)Represents commodity funds invested across a broad range of sectors.
(9)Represents a loan to a wholly owned subsidiary of the Company. See Note 10 for additional disclosure.
(10)Represents mutual funds invested globally in both equities and fixed income securities.
(11)Represents a broadly diversified portfolio of assets that carry exposure to insurance risks, particularly insurance linked securities.
(12)Investments that are measured using the net asset value (NAV) per share practical expedient have not been categorized in the fair value hierarchy. The amounts presented above are intended to permit reconciliation of the fair value hierarchy to the fair value of total plan assets in order to determine the amounts included in the consolidated balance sheet.
The fair value of the Company’s stock and corporate and government bonds are valued at the year-end closing price as reported on the securities exchange on which they are traded. Mutual funds are valued at the exchange-listed year-end closing price or at the net asset value of shares held by the fund at the end of the year. Insurance contracts are valued by discounting the related cash flows using a current year-end market rate or at cash surrender value, which is presumed to equal fair value. Funds of hedge funds are valued at the net asset value of shares held by the fund at the end of the year.
The following table presents a roll-forward of activity for the years ended December 31, 2020 and 2019 for Level 3 asset categories:
| Insurance Contracts | |||||
| Balance at December 31, 2018 | $ | 1,461 | |||
| Actual return on plan assets related to assets held at end of year | 14 | ||||
| Sales | (54) | ||||
| Purchases | 83 | ||||
| Impact of foreign currency | (18) | ||||
| Balance at December 31, 2019 | $ | 1,486 | |||
| Actual return on plan assets related to assets held at end of year | 22 | ||||
| Purchases | 99 | ||||
| Impact of foreign currency | 186 | ||||
| Balance at December 31, 2020 | $ | 1,793 | |||
There were no transfers between any asset levels during the years ended December 31, 2020 and 2019.
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Benefits Net of Subsidy | Total | ||||||||||||||||||||
| 2021 | $ | 8,382 | $ | 49,784 | $ | 153 | $ | 58,319 | |||||||||||||||
| 2022 | 8,507 | 48,687 | 128 | 57,322 | |||||||||||||||||||
| 2023 | 8,666 | 49,242 | 110 | 58,018 | |||||||||||||||||||
| 2024 | 8,750 | 50,370 | 98 | 59,218 | |||||||||||||||||||
| 2025 | 8,778 | 50,415 | 87 | 59,280 | |||||||||||||||||||
| 2026-2030 | 42,808 | 246,920 | 303 | 290,031 | |||||||||||||||||||
F-34
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
In 2020, the Company expects to make employer pension contributions of approximately $27.9 million to its non-U.S. pension plan and employer contributions of approximately $0.2 million to its U.S. post-retirement medical plan.
14. TAXES
The sources of the Company’s earnings before taxes were as follows for the years ended December 31:
| 2020 | 2019 | 2018 | |||||||||||||||
| United States | $ | 94,651 | $ | 102,262 | $ | 60,043 | |||||||||||
| Non-United States | 654,092 | 579,132 | 591,815 | ||||||||||||||
| Earnings before taxes | $ | 748,743 | $ | 681,394 | $ | 651,858 | |||||||||||
The provision for taxes consist of:
| Current | Deferred | Total | |||||||||||||||
| Year ended December 31, 2020: | |||||||||||||||||
| United States federal | $ | 6,242 | $ | (6,311) | $ | (69) | |||||||||||
| United States state and local | 5,563 | (1,736) | 3,827 | ||||||||||||||
| Non-United States | 146,983 | (4,737) | 142,246 | ||||||||||||||
| Total | $ | 158,788 | $ | (12,784) | $ | 146,004 | |||||||||||
| Year ended December 31, 2019: | |||||||||||||||||
| United States federal | $ | 3,033 | $ | (2,622) | $ | 411 | |||||||||||
| United States state and local | (996) | (1,950) | (2,946) | ||||||||||||||
| Non-United States | 122,878 | (58) | 122,820 | ||||||||||||||
| Total | $ | 124,915 | $ | (4,630) | $ | 120,285 | |||||||||||
| Year ended December 31, 2018: | |||||||||||||||||
| United States federal | $ | 3,422 | $ | (4,699) | $ | (1,277) | |||||||||||
| United States state and local | 5,073 | (161) | 4,912 | ||||||||||||||
| Non-United States | 128,450 | 7,162 | 135,612 | ||||||||||||||
| Total | $ | 136,945 | $ | 2,302 | $ | 139,247 | |||||||||||
The provision for tax expense differed from the amounts computed by applying the United States federal income tax rate of 21% for the years ended December 31, 2020, 2019, and 2018 to earnings before taxes as a result of the following:
| 2020 | 2019 | 2018 | |||||||||||||||
| Expected tax | $ | 157,236 | $ | 143,092 | $ | 136,890 | |||||||||||
| United States state and local income taxes, net of federal income tax benefit | 3,320 | 499 | 2,787 | ||||||||||||||
| Net effect of Swiss tax reform (see below) | — | (15,833) | — | ||||||||||||||
| Net effect of U.S. tax reform (see below) | — | — | 3,597 | ||||||||||||||
| Non-United States income taxes at other than U.S. federal rate | 179 | 18,546 | 12,710 | ||||||||||||||
| Excess tax benefits from stock option exercises | (17,261) | (28,279) | (13,836) | ||||||||||||||
| Effect of Biotix contingent consideration settlement | — | — | (4,394) | ||||||||||||||
| Other, net | 2,530 | 2,260 | 1,493 | ||||||||||||||
| Total provision for taxes | $ | 146,004 | $ | 120,285 | $ | 139,247 | |||||||||||
F-35
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The Company’s reported effective tax rate was 19.5% in 2020, 17.7% in 2019, and 21.4% in 2018.
As discussed below, the provision for income taxes included a net benefit of $15.8 million in 2019 related to Swiss tax reform and a charge of $3.6 million in 2018 related to the Tax Cuts and Jobs Act, which had the effect of reducing the Company’s effective tax rate by 2.3% in 2019 and increasing the Company’s effective tax rate by 0.6% in 2018. The 2018 effective tax rate also included a benefit of 0.7% associated with the one-time gain related to the settlement of the Biotix contingent consideration.
In May 2019, a public referendum was held in Switzerland that approved Swiss federal tax reform proposals previously approved by the Swiss Parliament. Additional changes in Swiss cantonal law were enacted in October 2019 (collectively "Swiss Tax Reform"). The changes in Swiss federal tax had an immaterial effect on our financial statements. As a result of the enactment of the cantonal law, the Company recognized a deferred tax asset of $48.1 million less a valuation allowance of $31.9 million in the fourth quarter of 2019. The amount primarily related to deferred benefits associated with an allowed step-up of intangible assets for tax purposes. The rate impact of Swiss Tax Reform was effective January 1, 2020 and did not have a material impact on the Company’s consolidated effective tax rate.
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:
| 2020 | 2019 | ||||||||||
| Deferred tax assets: | |||||||||||
| Inventory | $ | 18,849 | $ | 15,756 | |||||||
| Lease liability, accrued and other liabilities | 94,113 | 85,590 | |||||||||
| Accrued post-retirement benefit and pension costs | 56,618 | 53,078 | |||||||||
| Net operating loss and tax credit carryforwards | 27,717 | 30,647 | |||||||||
| Swiss tax reform intangible assets | 53,080 | 48,062 | |||||||||
| Other | 12,408 | 11,918 | |||||||||
| Total deferred tax assets | 262,785 | 245,051 | |||||||||
| Less valuation allowance | (52,388) | (50,853) | |||||||||
| Total deferred tax assets less valuation allowance | 210,397 | 194,198 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Inventory | 6,029 | 5,952 | |||||||||
| Lease right-of-use assets and other assets | 29,553 | 27,268 | |||||||||
| Property, plant, and equipment | 60,047 | 51,298 | |||||||||
| Acquired intangibles amortization | 62,584 | 63,451 | |||||||||
| Prepaid post-retirement benefit and pension costs | 28,270 | 28,542 | |||||||||
| International earnings | 16,526 | 24,137 | |||||||||
| Unrealized currency gains | — | 1,839 | |||||||||
| Total deferred tax liabilities | 203,009 | 202,487 | |||||||||
| Net deferred tax (liability) asset | $ | 7,388 | $ | (8,289) | |||||||
The Company continues to record valuation allowances related to certain of its deferred income tax assets due to the uncertainty of the ultimate realization of future benefits from such assets. The potential decrease or increase of the valuation allowance in the near term is dependent on the future ability of the Company to realize the deferred tax assets that are affected by the future profitability of operations in the respective/relevant jurisdictions.
F-36
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| 2020 | 2019 | ||||||||||
| Unrecognized tax benefits at beginning of year | $ | 29,934 | $ | 25,676 | |||||||
| Increases related to current tax positions | 9,503 | 6,215 | |||||||||
| Decreases related to prior year tax positions | (2,900) | (116) | |||||||||
| Decreases resulting from a lapse of the applicable statute of limitations | — | (1,748) | |||||||||
| Impact of foreign currency | 1,757 | (93) | |||||||||
| Unrecognized tax benefits at end of year | $ | 38,294 | $ | 29,934 | |||||||
Included in the balance of unrecognized tax benefits at December 31, 2020 and 2019 were $38.3 million and $29.9 million, respectively, of tax benefits that if recognized would reduce the Company’s effective tax rate. The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of its income tax expense within its consolidated statement of operations. The amount of accrued interest and penalties included within other non-current liabilities within the Company’s consolidated balance sheet as of December 31, 2020 and 2019 was $6.2 million and $4.5 million, respectively.
The Company believes that it is reasonably possible that the unrecognized tax benefit balance could change over the next 12 months, primarily related to potential disputes raised by the taxing authorities over income and expense recognition. The Company does not expect a change would have a material impact on its financial position, results of operations, or cash flows.
The Company plans to repatriate earnings from China, Switzerland, Germany, the United Kingdom, and certain other countries in future years and believes that there will be no additional tax costs associated with the repatriation of such foreign earnings other than non-U.S. withholding taxes, certain state taxes, and U.S. taxes on currency gains, if any, for which a deferred tax liability has been recognized. All other undistributed earnings and any additional outside basis difference inherent in these entities and the contributed capital of our foreign subsidiaries are considered to be permanently reinvested on which no U.S. deferred income taxes or foreign withholding taxes have been provided. It is not practicable to estimate the amount of deferred tax liability related to these undistributed earnings and additional outside basis differences in these entities due to the complexity of the calculation and the uncertainty regarding assumptions necessary to compute the tax.
As of December 31, 2020, the major jurisdictions for which the Company is subject to examinations are: Germany for years after 2015; the United States after 2016; France after 2017; Switzerland after 2016; the United Kingdom after 2017; and China after 2017. Additionally, the Company is currently under examination in various taxing jurisdictions in which it conducts business operations. While the Company has not yet received any material assessments from these taxing authorities, the Company believes that adequate amounts of taxes and related interest and penalties have been provided for any adverse adjustments as a result of these examinations and that the ultimate outcome of these examinations will not result in a material impact on the Company’s consolidated results of operations or financial position.
15. RESTRUCTURING CHARGES
During the past several years, we have initiated various cost reduction measures. For the years ended December 31, 2020, 2019, and 2018, we have incurred $10.5 million, $15.8 million, and $18.4 million, respectively, of restructuring expenses which primarily comprise employee related costs. Liabilities
F-37
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
related to restructuring activities are included in accrued and other liabilities in the consolidated balance sheet.
A roll-forward of the Company’s accrual for restructuring activities for the years ended December 31, 2020 and 2019 is as follows:
| Total | ||||||||
| Balance at December 31, 2018 | $ | 7,972 | ||||||
| Restructuring charges | 15,760 | |||||||
| Cash payments / utilization | (16,483) | |||||||
| Impact of foreign currency | (548) | |||||||
| Balance at December 31, 2019 | $ | 6,701 | ||||||
| Restructuring charges | 10,516 | |||||||
| Cash payments / utilization | (8,541) | |||||||
| Impact of foreign currency | 508 | |||||||
| Balance at December 31, 2020 | $ | 9,184 | ||||||
16. OTHER CHARGES (INCOME), NET
Other charges (income), net consisted of net other income of $13.8 million, $6.2 million, and $21.8 million in 2020, 2019, and 2018, respectively. Other charges (income), net includes non-service pension costs (benefits), net (gains) losses from foreign currency transactions and hedging activities, interest income, and other items. Non-service pension benefits were $12.2 million, $4.8 million, and $6.2 million in 2020, 2019, and 2018, respectively. Other charges (income), net in 2018 also includes a one-time gain of $18.7 million associated with the settlement of the Biotix acquisition contingent consideration, as well as a one-time legal charge of $3 million.
17. LEASES
The Company adopted ASC 842 - Leases with an effective date of January 1, 2019. The operating lease right-of-use asset recognized upon adoption was $92.7 million, and the lease liability was $93.5 million. The Company elected the practical expedients package under ASC 842, and accordingly did not reassess any previously expired or existing arrangements, and related classification under ASC 840 - Leases.
The Company’s operating leases primarily comprise real estate and vehicles. Real estate leases are largely related to sales and marketing, service, and administrative offices, while vehicle leases are primarily related to the Company’s field sales and service organization. The consolidated balance sheet included the following balances as of December 31:
| 2020 | 2019 | Balance Sheet Location | |||||||||||||||
| Right-of-use assets, net | $ | 98,624 | $ | 87,317 | Other non-current assets | ||||||||||||
| Current lease liability | $ | 29,216 | $ | 27,584 | Accrued and other liabilities | ||||||||||||
| Non-current lease liability | 69,830 | 60,937 | Other non-current liabilities | ||||||||||||||
| Total operating lease liability | $ | 99,046 | $ | 88,521 | |||||||||||||
F-38
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
As of December 31, 2020, the Company has entered into additional real estate operating leases of $15.3 million that are expected to commence in 2021.
For the years ended December 31, 2020 and 2019, the Company had the following recorded in selling, general, and administrative associated with leasing arrangements:
| 2020 | 2019 | |||||||||||||
| Operating lease expense | $ | 34,559 | $ | 33,666 | ||||||||||
| Variable lease expense | 4,182 | 4,337 | ||||||||||||
| Short-term lease expense | 991 | 1,187 | ||||||||||||
| Total lease expense | $ | 39,732 | $ | 39,190 | ||||||||||
| Weighted average remaining lease term | 6.8 years | 6.4 years | ||||||||||||
| Weighted average discount rate | 2.5% | 2.9% | ||||||||||||
Rent expense for operating leases under ASC 840 - Leases was $38.9 million for the year ended December 31, 2018.
Accruals and other on the consolidated statement of cash flows includes the amortization of the lease right-of-use asset of $32.1 million and $31.1 million, offset by a change in the lease liability of $31.7 million and $30.1 million for the years ended December 31, 2020 and 2019, respectively. Lease payments within operating activities were $36.0 million and $33.5 million for the years ended December 31, 2020 and 2019, respectively. The Company also obtained non-cash lease right-of-use assets in exchange for lease liabilities of $35.0 million and $25.7 million for the years ended December 31, 2020 and 2019, respectively.
The following is a maturity analysis of the annual undiscounted cash flows for the annual periods ended December 31:
| 2021 | $ | 31,305 | ||||||
| 2022 | 21,363 | |||||||
| 2023 | 14,716 | |||||||
| 2024 | 8,513 | |||||||
| 2025 | 4,536 | |||||||
| Thereafter | 28,160 | |||||||
| Total lease payments | 108,593 | |||||||
| Less imputed interest | (9,547) | |||||||
| Total operating lease liability | $ | 99,046 | ||||||
F-39
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
18. COMMITMENTS AND CONTINGENCIES
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, results of operations, or cash flows.
19. SEGMENT REPORTING
The Company has five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other. U.S. Operations represent certain of the Company’s marketing and producing organizations located in the United States. Western European Operations include the Company’s marketing and producing organizations in Western Europe, excluding operations located in Switzerland. Swiss Operations include marketing and producing organizations located in Switzerland as well as extensive R&D operations that are responsible for the development, production, and marketing of precision instruments, including weighing, analytical, and measurement technologies for use in a variety of laboratory and industrial applications. Chinese Operations represent the Company’s marketing and producing organizations located in China. The Company’s market organizations are geographically focused and are responsible for all aspects of the Company’s sales and service. Operations 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 segment profit for segment reporting (gross profit less research and development and selling, general, and administrative expenses, before amortization, interest expense, restructuring charges, other charges (income), net, and taxes). Inter-segment sales and transfers are priced to reflect consideration of market conditions and the regulations of the countries in which the transferring entities are located.
F-40
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
The following tables show the operations of the Company’s reportable segments:
| For the Year Ended December 31, 2020 | Net Sales to External Customers | Net Sales to Other Segments | Total Net Sales | Segment Profit | Depreciation | Total Assets(c) | Purchase of Property, Plant, and Equipment | Goodwill | ||||||||||||||||||||||||||||||||||||||||||
| U.S. Operations | $ | 1,072,319 | $ | 121,850 | $ | 1,194,169 | $ | 244,940 | $ | 11,347 | $ | 2,560,652 | $ | (18,258) | $ | 415,869 | ||||||||||||||||||||||||||||||||||
| Swiss Operations | 143,923 | 679,837 | 823,760 | 245,465 | 6,257 | 2,028,879 | (5,495) | 24,525 | ||||||||||||||||||||||||||||||||||||||||||
| Western European Operations | 716,715 | 173,176 | 889,891 | 147,562 | 4,769 | 1,294,579 | (13,678) | 93,514 | ||||||||||||||||||||||||||||||||||||||||||
| Chinese Operations | 578,610 | 213,735 | 792,345 | 270,497 | 8,506 | 985,977 | (9,755) | 686 | ||||||||||||||||||||||||||||||||||||||||||
Other(a) | 573,610 | 4,600 | 578,210 | 77,910 | 3,737 | 340,786 | (5,974) | 15,676 | ||||||||||||||||||||||||||||||||||||||||||
Eliminations and Corporate(b) | — | (1,193,198) | (1,193,198) | (145,666) | 7,428 | (4,396,324) | (39,334) | — | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,085,177 | $ | — | $ | 3,085,177 | $ | 840,708 | $ | 42,044 | $ | 2,814,549 | $ | (92,494) | $ | 550,270 | ||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2019 | Net Sales to External Customers | Net Sales to Other Segments | Total Net Sales | Segment Profit | Depreciation | Total Assets(c) | Purchase of Property, Plant, and Equipment | Goodwill | ||||||||||||||||||||||||||||||||||||||||||
| U.S. Operations | $ | 1,057,115 | $ | 114,794 | $ | 1,171,909 | $ | 210,133 | $ | 10,684 | $ | 2,363,725 | $ | (15,607) | $ | 410,022 | ||||||||||||||||||||||||||||||||||
| Swiss Operations | 139,499 | 657,678 | 797,177 | 233,292 | 6,069 | 1,648,065 | (5,820) | 22,369 | ||||||||||||||||||||||||||||||||||||||||||
| Western European Operations | 700,741 | 175,759 | 876,500 | 123,845 | 4,450 | 1,150,214 | (11,267) | 87,980 | ||||||||||||||||||||||||||||||||||||||||||
| Chinese Operations | 544,716 | 224,517 | 769,233 | 266,522 | 8,045 | 694,903 | (10,252) | 633 | ||||||||||||||||||||||||||||||||||||||||||
Other(a) | 566,581 | 5,890 | 572,471 | 71,483 | 3,395 | 358,281 | (4,936) | 14,975 | ||||||||||||||||||||||||||||||||||||||||||
Eliminations and Corporate(b) | — | (1,178,638) | (1,178,638) | (127,197) | 6,348 | (3,425,867) | (49,459) | — | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,008,652 | $ | — | $ | 3,008,652 | $ | 778,078 | $ | 38,991 | $ | 2,789,321 | $ | (97,341) | $ | 535,979 | ||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2018 | Net Sales to External Customers | Net Sales to Other Segments | Total Net Sales | Segment Profit | Depreciation | Total Assets | Purchase of Property, Plant, and Equipment | Goodwill | ||||||||||||||||||||||||||||||||||||||||||
| U.S. Operations | $ | 1,007,798 | $ | 104,458 | $ | 1,112,256 | $ | 161,615 | $ | 10,425 | $ | 2,113,268 | $ | (27,896) | $ | 410,021 | ||||||||||||||||||||||||||||||||||
| Swiss Operations | 134,064 | 628,529 | 762,593 | 202,027 | 5,835 | 1,471,625 | (1,123) | 21,994 | ||||||||||||||||||||||||||||||||||||||||||
| Western European Operations | 718,788 | 176,995 | 895,783 | 122,574 | 4,173 | 983,809 | (16,879) | 87,242 | ||||||||||||||||||||||||||||||||||||||||||
| Chinese Operations | 525,109 | 242,452 | 767,561 | 270,668 | 7,869 | 1,237,248 | (13,248) | 644 | ||||||||||||||||||||||||||||||||||||||||||
Other(a) | 549,827 | 6,543 | 556,370 | 78,317 | 3,774 | 319,070 | (8,342) | 14,879 | ||||||||||||||||||||||||||||||||||||||||||
Eliminations and Corporate(b) | — | (1,158,977) | (1,158,977) | (104,696) | 5,091 | (3,506,173) | (75,238) | — | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,935,586 | $ | — | $ | 2,935,586 | $ | 730,505 | $ | 37,167 | $ | 2,618,847 | $ | (142,726) | $ | 534,780 | ||||||||||||||||||||||||||||||||||
(a)Other includes reporting units in Southeast Asia, Latin America, Eastern Europe, and other countries.
(b)Eliminations and Corporate includes the elimination of intersegment transactions as well as certain corporate expenses and intercompany investments, which are not included in the Company’s operating segments.
(c)The lease right-of-use asset, net increased total assets as of December 31, 2020 and 2019 for U.S. Operations by $35.5 million and $38.3 million, Swiss Operations by $2.3 million and $1.3 million, Western European Operations by $28.9 million and $20.1 million, Chinese Operations by $2.9 million and $3.0 million, Other by $25.9 million and $22.7 million, and Corporate by $3.1 million and $1.9 million million, respectively.
F-41
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
A reconciliation of earnings before taxes to segment profit follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Earnings before taxes | $ | 748,743 | $ | 681,394 | $ | 651,858 | |||||||||||
| Amortization | 56,665 | 49,690 | 47,524 | ||||||||||||||
| Interest expense | 38,616 | 37,411 | 34,511 | ||||||||||||||
| Restructuring charges | 10,516 | 15,760 | 18,420 | ||||||||||||||
| Other income, net | (13,832) | (6,177) | (21,808) | ||||||||||||||
| Segment profit | $ | 840,708 | $ | 778,078 | $ | 730,505 | |||||||||||
During 2020, restructuring charges of $10.5 million were recognized, of which $3.2 million, $1.0 million, $5.2 million, $0.2 million, and $0.9 million relate to the Company’s U.S., Swiss, Western European, Chinese, and Other Operations, respectively. Restructuring charges of $15.8 million were recognized in 2019, of which $4.2 million, $3.4 million, $6.9 million, $0.5 million, and $0.8 million relate to the Company’s U.S., Swiss, Western European, Chinese, and Other Operations, respectively. Restructuring charges of $18.4 million were recognized in 2018, of which $11.0 million, $4 million, $2.8 million, $0.3 million and $0.3 million relate to the Company’s U.S., Swiss, Western European, Chinese, and Other Operations, respectively.
The Company sells precision instruments, including weighing instruments and certain analytical and measurement technologies, and related services to a variety of customers and industries. None of these end-customers account for more than 1% of net sales. Service revenues are primarily derived from repair and other services including regulatory compliance qualification, calibration, certification, and preventative maintenance, and spare parts. A breakdown of the Company’s sales by product category are disclosed in Note 3 to the consolidated financial statements.
In certain circumstances, our reporting units sell directly into other geographies. A breakdown of net sales to external customers by geographic customer destination and property, plant, and equipment by geographic destination for the years ended December 31 follows:
| Net Sales | Property, Plant, and Equipment, Net | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
| United States | $ | 1,014,180 | $ | 984,524 | $ | 933,419 | $ | 208,038 | $ | 200,497 | |||||||||||||||||||
| Other Americas | 166,446 | 181,323 | 172,537 | 3,713 | 3,828 | ||||||||||||||||||||||||
| Total Americas | 1,180,626 | 1,165,847 | 1,105,956 | 211,751 | 204,325 | ||||||||||||||||||||||||
| Germany | 199,499 | 195,790 | 205,296 | 48,468 | 48,401 | ||||||||||||||||||||||||
| France | 134,542 | 130,387 | 141,513 | 9,123 | 8,849 | ||||||||||||||||||||||||
| United Kingdom | 70,163 | 66,855 | 70,378 | 34,631 | 26,502 | ||||||||||||||||||||||||
| Switzerland | 69,965 | 65,202 | 65,377 | 314,059 | 295,029 | ||||||||||||||||||||||||
| Other Europe | 447,097 | 433,858 | 426,209 | 64,048 | 59,179 | ||||||||||||||||||||||||
| Total Europe | 921,266 | 892,092 | 908,773 | 470,329 | 437,960 | ||||||||||||||||||||||||
| China | 565,100 | 527,076 | 506,360 | 89,277 | 85,817 | ||||||||||||||||||||||||
| Rest of World | 418,185 | 423,637 | 414,497 | 27,511 | 20,555 | ||||||||||||||||||||||||
| Total Asia/Rest of World | 983,285 | 950,713 | 920,857 | 116,788 | 106,372 | ||||||||||||||||||||||||
| Total | $ | 3,085,177 | $ | 3,008,652 | $ | 2,935,586 | $ | 798,868 | $ | 748,657 | |||||||||||||||||||
F-42
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data, unless otherwise stated)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2020 and 2019 are as follows:
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Net sales | $ | 649,162 | $ | 690,673 | $ | 807,357 | $ | 937,985 | |||||||||||||||
| Gross profit | $ | 374,409 | $ | 397,970 | $ | 469,608 | $ | 559,044 | |||||||||||||||
| Net earnings | $ | 98,115 | $ | 126,562 | $ | 161,767 | $ | 216,295 | |||||||||||||||
| Basic earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | 4.08 | $ | 5.29 | $ | 6.76 | $ | 9.15 | |||||||||||||||
| Weighted average number of common shares | 24,027,833 | 23,940,278 | 23,922,272 | 23,642,415 | |||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | 4.03 | $ | 5.22 | $ | 6.68 | $ | 9.03 | |||||||||||||||
| Weighted average number of common and common equivalent shares | 24,353,477 | 24,228,989 | 24,225,204 | 23,965,853 | |||||||||||||||||||
| Market price per share: | |||||||||||||||||||||||
| High | $ | 835.13 | $ | 859.54 | $ | 1,005.15 | $ | 1,193.36 | |||||||||||||||
| Low | $ | 589.41 | $ | 630.58 | $ | 804.79 | $ | 966.92 | |||||||||||||||
| 2019 | |||||||||||||||||||||||
| Net sales | $ | 679,452 | $ | 731,366 | $ | 753,866 | $ | 843,968 | |||||||||||||||
| Gross profit | $ | 388,319 | $ | 419,538 | $ | 435,056 | $ | 498,298 | |||||||||||||||
Net earnings(a) | $ | 111,805 | $ | 127,160 | $ | 129,395 | $ | 192,749 | |||||||||||||||
| Basic earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | 4.50 | $ | 5.15 | $ | 5.28 | $ | 7.95 | |||||||||||||||
| Weighted average number of common shares | 24,851,340 | 24,698,032 | 24,487,268 | 24,241,383 | |||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Net earnings | $ | 4.42 | $ | 5.06 | $ | 5.20 | $ | 7.84 | |||||||||||||||
| Weighted average number of common and common equivalent shares | 25,310,525 | 25,118,352 | 24,880,179 | 24,599,702 | |||||||||||||||||||
| Market price per share: | |||||||||||||||||||||||
| High | $ | 729.72 | $ | 840.00 | $ | 872.45 | $ | 793.31 | |||||||||||||||
| Low | $ | 513.56 | $ | 701.80 | $ | 642.84 | $ | 658.61 | |||||||||||||||
(a) Net earnings includes a non-cash deferred net benefit of $15.8 million for the three months ended December 31, 2019 related to the enactment of Swiss tax reform.
F-43
Schedule II — Valuation and Qualifying Accounts (in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||
| (1) | (2) | |||||||||||||||||||||||||||||||
| Balance at the Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Balance at End of Period | |||||||||||||||||||||||||||||
| Description | -Deductions- | |||||||||||||||||||||||||||||||
| Note (A) | Note (B) | |||||||||||||||||||||||||||||||
| Deferred tax valuation allowance: | ||||||||||||||||||||||||||||||||
| Year ended December 31, 2020 | $ | 50,853 | $ | 2,824 | $ | 3,009 | $ | 4,298 | $ | 52,388 | ||||||||||||||||||||||
| Year ended December 31, 2019 | $ | 15,084 | $ | 36,658 | $ | — | $ | 889 | $ | 50,853 | ||||||||||||||||||||||
| Year ended December 31, 2018 | $ | 12,857 | $ | — | $ | 3,023 | $ | 796 | $ | 15,084 | ||||||||||||||||||||||
_______________________________________
Note (A)
Amounts in 2020 and 2018 relate primarily to changes in currency translation adjustments and foreign tax credit carryforwards, respectively.
Note (B)
Amounts in 2020, 2019, and 2018 include decreases in state net operating losses and credits, foreign tax credit and R&D credit carryforwards.
S-1