SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002, OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ________________ Commission File Number 1-13595 Mettler-Toledo International Inc. -------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3668641 ----------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) Im Langacher, P.O. Box MT-100 CH 8606 Greifensee, Switzerland - ------------------------------------------ ---------------------- (Address of principal executive offices) (Zip Code) 41-1-944-22-11 ----------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The Registrant had 44,173,850 shares of Common Stock outstanding at March 31, 2002.
METTLER-TOLEDO INTERNATIONAL INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q Page No. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Unaudited Interim Consolidated Financial Statements: Interim Consolidated Balance Sheets as of March 31, 2002 3 and December 31, 2001 Interim Consolidated Statements of Operations for the three 4 months ended March 31, 2002 and 2001 Interim Consolidated Statements of Shareholders' Equity 5 for the three months ended March 31, 2002 and 2001 Interim Consolidated Statements of Cash Flows for the three 6 months ended March 31, 2002 and 2001 Notes to the Interim Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 14 AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGES IN SECURITY 18 ITEM 3. DEFAULT UPON SENIOR SECURITIES 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 ITEM 5. OTHER INFORMATION 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 Signature 19
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND DECEMBER 31, 2001 (IN THOUSANDS, EXCEPT SHARE DATA) <CAPTION> MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------- (UNAUDITED) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 23,461 $ 27,721 Trade accounts receivable, net 221,090 227,295 Inventories, net 141,246 145,621 Other current assets and prepaid expenses 38,016 31,121 ------------ ------------- Total current assets 423,813 431,758 Property, plant and equipment, net 190,352 192,272 Excess of cost over net assets acquired, net 401,895 384,947 Other intangible assets 131,980 126,524 Other assets 55,607 53,911 ------------ ------------- Total assets $1,203,647 $1,189,412 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 54,384 $ 66,327 Accrued and other liabilities 122,442 111,284 Accrued compensation and related items 33,487 47,702 Taxes payable 75,581 72,035 Short-term borrowings and current maturities of long-term debt 50,256 50,239 ------------ ------------- Total current liabilities 336,150 347,587 Long-term debt 318,353 309,479 Non-current deferred taxes 23,937 25,053 Other non-current liabilities 117,984 119,109 ------------ ------------- Total liabilities 796,424 801,228 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 44,173,850 and 44,145,742 shares at March 31, 2002 and December 31, 2001 441 441 Additional paid-in capital 456,557 455,684 Retained earnings 22,631 3,957 Accumulated other comprehensive loss (72,406) (71,898) ------------ ------------- Total shareholders' equity 407,223 388,184 Commitments and contingencies - - ------------ ------------- Total liabilities and shareholders' equity $1,203,647 $1,189,412 ============ ============= The accompanying notes are an integral part of these interim consolidated financial statements. </TABLE> -3-
<TABLE> METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE DATA) <CAPTION> MARCH 31 MARCH 31 2002 2001 ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> Net sales $ 272,957 $ 265,644 Cost of sales 147,820 147,334 ----------- ----------- Gross profit 125,137 118,310 Research and development 16,757 14,807 Selling, general and administrative 75,824 73,196 Amortization 1,774 3,212 Interest expense 4,391 4,783 Other (income) charges, net (286) 7 ----------- ----------- Earnings before taxes 26,677 22,305 Provision for taxes 8,003 7,807 ----------- ----------- Net earnings $ 18,674 $ 14,498 =========== =========== Basic earnings per common share: Net earnings $0.42 $0.37 Weighted average number of common shares 44,173,850 39,716,936 Diluted earnings per common share: Net earnings $0.41 $0.34 Weighted average number of common shares 45,517,058 42,539,345 The accompanying notes are an integral part of these interim consolidated financial statements. </TABLE> -4-
<TABLE> METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) <CAPTION> RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS/ OTHER ------------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL ------ ------ ------- ------- ---- ----- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2001 44,145,742 $441 $455,684 $ 3,957 $(71,898) $388,184 Exercise of stock options 28,108 - 873 - - 873 Comprehensive income: Net earnings - - - 18,674 - 18,674 Unrealized gain on cash-flow hedging instruments - - - - 353 353 Change in currency translation adjustment - - - - (861) (861) --------- Comprehensive income 18,166 ------------ --------- ----------- ------------- ----------- --------- Balance at March 31, 2002 44,173,850 $441 $456,557 $ 22,631 $(72,406) $407,223 ============ ========= =========== ============= =========== ========= Balance at December 31, 2000 39,372,873 $393 $294,558 $(68,307) $(47,804) $178,840 Exercise of stock options 344,063 3 4,904 - - 4,907 Comprehensive income: Net earnings - - - 14,498 - 14,498 Unrealized loss on cash-flow hedging instruments - - - - (2,268) (2,268) Change in currency translation adjustment - - - - (3,105) (3,105) --------- Comprehensive income 9,125 ------------ --------- ----------- ------------- ----------- --------- Balance at March 31, 2001 39,716,936 $396 $299,462 $(53,809) $(53,177) $192,872 ============ ========= =========== ============= =========== ========= The accompanying notes are an integral part of these interim consolidated financial statements. </TABLE> -5-
<TABLE> METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (IN THOUSANDS) <CAPTION> MARCH 31, MARCH 31, 2002 2001 ---------- ---------- (UNAUDITED) (UNAUDITED) <S> <C> <C> Cash flow from operating activities: Net earnings $ 18,674 $ 14,498 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 5,967 5,646 Amortization 1,774 3,212 Other (59) (826) Increase (decrease) in cash resulting from changes in: Trade accounts receivable, net 3,960 343 Inventories 4,134 (6,557) Other current assets (2,631) (3,978) Trade accounts payable (13,117) (12,351) Accruals and other liabilities, net(a) (7,088) 2,197 ---------- ---------- Net cash provided by operating activities 11,614 2,184 ---------- ---------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 38 1,711 Purchase of property, plant and equipment (9,333) (6,086) Acquisitions (16,483) (934) ---------- ---------- Net cash used in investing activities (25,778) (5,309) ---------- ---------- Cash flows from financing activities: Proceeds from borrowings 31,274 29,618 Repayments of borrowings (21,595) (29,500) Proceeds from issuance of common stock 873 4,907 ---------- ---------- Net cash provided by financing activities 10,552 5,025 ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (648) (640) ---------- ---------- Net increase (decrease) in cash and cash equivalents (4,260) 1,260 Cash and cash equivalents: Beginning of period $ 27,721 $ 21,725 ---------- ---------- End of period $ 23,461 $ 22,985 ========== ========== (a) Accruals and other liabilities include payments for restructuring and certain acquisition integration activities of $2.0 million in 2002 and $2.9 million in 2001. The accompanying notes are an integral part of these interim consolidated financial statements. </TABLE> -6-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS UNLESS OTHERWISE STATED) 1. BASIS OF PRESENTATION Mettler-Toledo International Inc. ("Mettler Toledo" or the "Company") is a global manufacturer and marketer of precision instruments, including weighing and certain analytical and measurement technologies, for use in laboratory, industrial and food retailing applications. The Company is also a leading provider of automated chemistry solutions used in drug and chemical compound discovery and development. The Company's primary manufacturing facilities are located in Switzerland, the United States, Germany, the United Kingdom, France and China. The Company's principal executive offices are located in Greifensee, Switzerland. The accompanying interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements as of March 31, 2002 and for the three month periods ended March 31, 2002 and 2001 should be read in conjunction with the December 31, 2001 and 2000 consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The accompanying interim consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. -7-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORIES Inventories are valued at the lower of cost or market. Cost, which includes direct materials, labor and overhead plus indirect overhead, is determined using the first in, first out (FIFO) method. Inventories consisted of the following at March 31, 2002 and December 31, 2001: March 31, December 31, 2002 2001 --------------- --------------- Raw materials and parts $ 72,416 $ 70,392 Work in progress 30,220 28,433 Finished goods 38,610 46,796 --------------- --------------- $ 141,246 $ 145,621 =============== =============== OTHER INTANGIBLE ASSETS The components of other intangible assets are as follows: March 31, December 31, 2002 2001 --------------- --------------- Customer relationships $ 70,955 $ 67,383 Tradename 23,327 22,434 Intellectual property license 19,905 19,905 Proven technology and patents 19,138 17,352 --------------- --------------- $ 133,325 $ 127,074 Less accumulated amortization (1,345) (550) --------------- --------------- Total other intangible assets, net $ 131,980 $ 126,524 =============== =============== Other intangible assets substantially relate to the acquisition of Rainin Instrument, LLC. The annual aggregate amortization expense based on the current balance of other intangible assets for the next five years is estimated at $3.4 million. -8-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON SHARE As described in Note 10 in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, in accordance with the treasury stock method, the Company has included the following equivalent shares relating to 4,442,425 outstanding options to purchase shares of common stock in the calculation of diluted weighted average number of common shares for the three month periods ended March 31, 2002 and 2001, respectively. March 31, March 31, 2002 2001 ---------------- ---------------- Three months ended 1,343,208 2,822,409 NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" which eliminates the pooling of interests method of accounting for all business combinations initiated after June 30, 2001, and also provides new criteria for recognizing acquired intangible assets separately from goodwill. The Company has adopted this Standard for business combinations initiated after June 30, 2001. As of January 1, 2002 the Company has adopted Statements of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. This Statement requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment upon initial adoption of the Statement and on an annual basis going forward. In addition, any goodwill arising from acquisitions completed after June 30, 2001 is not amortized. Other intangible assets will continue to be amortized over their useful lives. Application of the non-amortization provisions of the Statement will increase our net earnings by $6.5 million and our diluted earnings per share by $0.15 on an annual basis, or $0.14 adjusting for additional shares issued in connection with our acquisition of Rainin Instrument LLC. A reconciliation of reported net earnings to adjusted net earnings before amortization of goodwill is as follows: -9-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Three months ended March 31: 2002 2001 ---- ---- Net earnings: Reported......................... $ 18,674 $ 14,498 Goodwill amortization............ - 1,607 -------- -------- Adjusted......................... $ 18,674 $ 16,105 ======== ======== Diluted earnings per share: Reported......................... $0.41 $0.34 Goodwill amortization............ - 0.03 ----- ----- Adjusted......................... $0.41 $0.37 ===== ===== SFAS 142 requires that goodwill be subject to annual impairment tests using a two-step process. The first step is to identify a potential impairment, and the second step measures the amount of impairment if any. The Company has completed its impairment review under SFAS 142 and has determined that there is no impact on the Company's financial position and results of operations. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 as of January 1, 2002. Such adoption had no impact on the Company's financial position or results of operations. -10-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 3. BUSINESS COMBINATIONS During the three months ended March 31, 2002, the Company spent approximately $16.5 million on acquisitions, including the acquisition of SofTechnics Inc. and additional consideration related to earn-out periods associated with acquisitions consummated in prior years. SofTechnics is a leading provider of in-store retail item management software solutions. Goodwill recognized in connection with these acquisition payments totaled $15.1 million, which is primarily included in the Company's Principle U.S. Operations segment as depicted in Note 5 to these interim consolidated financial statements and is expected to be fully deductible for tax purposes. The Company may be required to make additional earn-out payments based upon the achievement of certain financial performance levels relating to certain of these acquisitions in the future. The fair value of any earn-out payments will be recorded as additional consideration of the acquired enterprise and recorded as goodwill and evaluated for impairment, when such payments are deemed issuable to the sellers. As discussed more fully in Note 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001, the Company acquired Rainin Instrument, LLC in November 2001 for approximately $294.2 million. The following summarized unaudited pro forma information assumes the acquisition of Rainin occurred on January 1, 2001. The pro forma data reflects adjustments directly related to the acquisition, and does not include adjustments that may arise as a consequence of the acquisition. Accordingly, the unaudited pro forma information does not purport to be indicative of what the Company's combined results of operations would actually have been had the acquisition occurred on January 1, 2001 or to project the Company's combined results of operations for any future periods. Three months ended March 31: 2002 2001 ---- ---- Net sales: As reported.......................... $272,957 $265,644 Pro forma............................ 272,957 283,647 ======== ======== Net earnings: As reported.......................... $ 18,674 $14,498 Pro forma............................ 18,674 15,196 ======== ======== Basic earnings per common share: As reported.......................... $0.42 $0.37 Pro forma............................ 0.42 0.35 ===== ===== Diluted earnings per common share: As reported.......................... $0.41 $0.34 Pro forma............................ 0.41 0.33 ===== ===== -11-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 4. OTHER CHARGES (INCOME), NET Other charges (income), net consists primarily of foreign currency transactions, interest income, and charges related to the Company's cost-reduction programs. A roll-forward of the Company's accrual for restructuring activities follows: <TABLE> <CAPTION> For the three months ended Employee Lease March 31, 2002 related termination Other Total - -------------- ------- ----------- ----- ----- (a) (b) (c) <S> <C> <C> <C> <C> Balance at December 31, 2001............... $ 2,001 $279 $324 $2,604 Cash payments.............................. (1,340) - (188) (1,528) ------- ---- ----- ------- Balance at March 31, 2002.................. $ 661 $279 $136 $1,076 ======= ==== ==== ====== <FN> (a) Employee related costs comprise mainly severance costs in connection with headcount reductions announced during 2001. These employee terminations and related cash outflows were substantially complete by March 31, 2002. (b) Lease termination costs primarily relate to the early termination of leases on vacated property. (c) Other costs include expenses associated with equipment dismantling and disposal and other exit costs. </FN> </TABLE> 5. SEGMENT REPORTING The Company has five reportable segments: Principal U.S. Operations, Principal Central European Operations, Swiss R&D and Manufacturing Operations, Other Western European Operations and Other. The following tables show the operations of the Company's operating segments: <TABLE> <CAPTION> Principal Other For the period Principal Central Swiss R&D Western Eliminations January 1, 2002 to U.S. European and Mfg. European and March 31, 2002 Operations Operations Operations Operations Other(a) Corporate(b) Total -------------------------- -------------- ------------- ------------ ----------- ---------- -------------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Net sales to external customers................... $ 97,037 $36,505 $ 5,358 $60,769 $ 73,288 $ - $272,957 Net sales to other segments. 8,326 12,538 28,914 10,166 30,041 (89,985) - -------- ------- ------- ------- -------- --------- -------- Total net sales............. $105,363 $49,043 $34,272 $70,935 $103,329 $(89,985) $272,957 ======== ======= ======= ======= ======== ========= ======== Adjusted operating income... $ 12,134 $ 3,437 $ 6,237 $ 3,260 $ 10,092 $ (2,604) $ 32,556 Goodwill, net $237,322 $13,660 $13,401 $53,557 $ 83,955 $ - $401,895 <CAPTION> Principal Other For the period Principal Central Swiss R&D Western Eliminations January 1, 2001 to U.S. European and Mfg. European and March 31, 2001 Operations Operations Operations Operations Other(a) Corporate(b) Total -------------------------- -------------- ------------- ------------ ----------- ---------- -------------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Net sales to external customers................... $83,730 $46,138 $ 6,890 $65,408 $63,478 $ - $265,644 Net sales to other segments. 6,609 13,738 35,062 10,061 35,797 (101,267) - ------- ------- ------- ------- ------- --------- ------- Total net sales............. $90,339 $59,876 $41,952 $75,469 $99,275 $(101,267) 265,644 ======= ======= ======= ======= ======= ========= ======== Adjusted operating income... $ 2,663 $ 6,617 $ 9,156 $ 4,651 $ 7,614 $ (394) $ 30,307 </TABLE> -12-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands unless otherwise stated) 5. SEGMENT REPORTING (CONTINUED) (a) Other includes reporting units in Asia, Eastern Europe, Latin America and segments from other countries that do not meet the aggregation criteria of SFAS 131. (b) Eliminations and Corporate includes the elimination of intersegment transactions as well as certain corporate expenses, intercompany investments and certain goodwill, which are not included in the Company's operating segments. A reconciliation of adjusted operating income to earnings before taxes follows: For the period For the period January 1, 2002 to January 1, 2001 to March 31, 2002 March 31, 2001 ------------------ ------------------ Adjusted operating income......... $32,556 $30,307 Amortization...................... 1,774 3,212 Interest expense.................. 4,391 4,783 Other (income) charges, net....... (286) 7 ------- ------- Earnings before taxes............. $26,677 $22,305 ======= ======= -------------------------------------- -13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Interim Consolidated Financial Statements included herein. GENERAL Our interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America on a basis which reflects the interim consolidated financial statements of Mettler-Toledo International Inc. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002. RESULTS OF OPERATIONS Net sales were $273.0 million for the three months ended March 31, 2002 compared to $265.6 million for the corresponding period in the prior year. This represents an increase of 5% in local currencies. Results were negatively impacted by the strengthening of the U.S. dollar against other currencies. Net sales in U.S. dollars increased 3%. Net sales by geographic customer location were as follows: Net sales in Europe decreased 7% in local currencies during the three months ended March 31, 2002 versus the corresponding period in the prior year reflecting weak sales performance across most product lines, particularly in Germany. In particular, we are experiencing a decrease in sales of our European retail products after the introduction of the euro currency. The Company expects that sales of European retail products will decrease significantly for the remainder of 2002 versus 2001. Net sales in local currencies during the three month period in the Americas increased 16% as compared to the corresponding period in 2001, principally due to the acquisition of Rainin Instrument in 2001. Net sales in local currencies during the three month period in Asia and other markets increased 11% compared to the same period in the prior year. The results of our business in Asia and other markets during the three months ending March 31, 2002 primarily reflect strong sales performance throughout the region, particularly China. We acquired Rainin Instrument in November 2001. Assuming we had acquired Rainin at the beginning of 2001, the acquisition would have added approximately $18.0 million or 7% of sales to 2001 and $4.7 million of Adjusted Operating Income (gross profit less research and development and selling, general and administrative expenses before amortization and other charges, net) on a pro forma basis. Our sales decline in Europe was primarily due to a deterioration in economic conditions, as well as a decrease in sales of our European retail products after the introduction of the euro currency. In the Americas, there has been no sign to date of an economic recovery benefiting the markets for our products, in particular those markets sensitive to manufacturing output. To the extent that economic conditions significantly deteriorate in these or other parts of the world, our sales growth and profitability may be adversely affected. -14-
Gross profit as a percentage of net sales increased to 45.8% for the three months ended March 31, 2002, compared to 44.5% for the corresponding period in the prior year. This increase is primarily related to changes in our sales mix, as well as benefits from various cost savings initiatives. Research and development expenses as a percentage of net sales increased to 6.1% for the three months ended March 31, 2002, compared to 5.6% for the corresponding period in the prior year. We continue to make significant investments in research and development, which increased 15% in local currencies for the three months ended March 31, 2002. Selling, general and administrative expenses as a percentage of net sales increased to 27.8% for the three months ended March 31, 2002, compared to 27.6% for the corresponding period in the prior year primarily due to changes in our sales mix and our reduced sales volume in Europe. Adjusted Operating Income increased 7% to $32.6 million, or 11.9% of net sales, for the three months ended March 31, 2002, compared to $30.3 million, or 11.4% of net sales, for the corresponding period in the prior year. The increased operating margin reflects the previously described benefits of the Rainin acquisition as well as our continuous efforts to improve productivity. We believe that Adjusted Operating Income provides important financial information in measuring and comparing our operating performance. Adjusted Operating Income is not intended to represent operating income under U.S. GAAP and should not be considered as an alternative to net earnings as an indicator of our performance. We expect to record a pre-tax restructuring charge of between $22 million and $24 million during the quarter ended June 30, 2002, of which approximately two-thirds will reflect cash payments. The charge will primarily comprise severance payments related to work force reductions and other costs associated with consolidating manufacturing. Interest expense decreased to $4.4 million for the three months ended March 31, 2002, compared to $4.8 million for the corresponding period in the prior year. The decrease was principally due to reduced borrowing rates. The provision for taxes is based upon our projected annual effective tax rate for the related period. Our effective tax rate for the three months ended March 31, 2002 was approximately 30% compared with 35% in 2001. This reduction reflects the effect of several recently implemented tax initiatives. In addition, we expect to record a one-time gain estimated at approximately $20 million during the three months ended June 30, 2002. Net earnings increased 29% to $18.7 million for the three months ended March 31, 2002, compared to net earnings of $14.5 million, for the corresponding period in the prior years. Adjusting for the adoption of SFAS 142, net earnings increased 16% over 2001. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities totaled $11.6 million for the three months ended March 31, 2002, compared to $2.2 million for the same period in 2001. The increase in 2002 resulted principally from increased Adjusted Operating Income and improved working capital -15-
management. Cash provided by operating activities includes payments for restructuring, and certain acquisition integration activities. These amounts totaled $2.0 million, and $2.9 million for the three months ended March 31, 2002 and 2001 respectively. During the three months ended March 31, 2002, we spent approximately $16.5 million on acquisitions, including additional consideration related to earn-out periods associated with acquisitions consummated in prior years. These purchases were funded from cash generated from operations and additional borrowings. We continue to explore potential acquisitions to expand our product portfolio and improve our distribution capabilities. In connection with any acquisition, we may incur additional indebtedness. In addition, we may make additional earn-out payments relating to certain of these and previous year acquisitions in the future. Capital expenditures are a significant use of funds and are made primarily for machinery, equipment and the purchase and expansion of facilities. Our capital expenditures totaled $9.3 million and $6.1 million during the first three months of 2002 and 2001 respectively. The increase in 2002 is principally due to spending associated with Rainin's new facility in California, USA. We expect capital expenditures to increase as our business grows, and to fluctuate as currency exchange rates change. At March 31, 2002, our consolidated debt, net of cash, was $345.1 million. We had borrowings of $349.0 million under our credit agreement and $19.6 million under various other arrangements as of March 31, 2002. Of our credit agreement borrowings, approximately $86.3 million was borrowed as term loans scheduled to mature in 2004 and $262.7 million was borrowed under a multi-currency revolving credit facility. At March 31, 2002, we had $137.9 million of availability remaining under the revolving credit facility. At March 31, 2002, approximately $293.3 million of the borrowings under the credit agreement and local working capital facilities were denominated in U.S. dollars. The balance of the borrowings under the credit agreement and local working capital facilities were denominated in certain of our other principal trading currencies amounting to approximately $75.3 million at March 31, 2002. Changes in exchange rates between the currencies in which we generate cash flow and the currencies in which our borrowings are denominated affect our liquidity. In addition, because we borrow in a variety of currencies, our debt balances fluctuate due to changes in exchange rates. Under the credit agreement, amounts outstanding under the term loans are payable in quarterly installments. In addition, the credit agreement obligates us to make mandatory prepayments in certain circumstances with the proceeds of asset sales or issuance of capital stock or indebtedness and with certain excess cash flow. The credit agreement imposes certain restrictions on us and our subsidiaries, including restrictions and limitations on the ability to pay dividends to our shareholders, incur indebtedness, make investments, grant liens, sell financial assets and engage in certain other activities. We must also comply with several financial and other covenants. We currently believe that cash flow from operating activities, together with borrowings available under the credit agreement and local working capital facilities, will be sufficient to fund currently anticipated working capital needs and capital spending requirements as well as debt service requirements for at least several years, but there can be no assurance that this will be the case. -16-
EFFECT OF CURRENCY ON RESULTS OF OPERATIONS Because we conduct operations in many countries, our operating income can be significantly affected by fluctuations in currency exchange rates. Swiss franc-denominated expenses represent a much greater percentage of our operating expenses than Swiss franc-denominated sales represent of our net sales. In part, this is because most of our manufacturing costs in Switzerland relate to products that are sold outside of Switzerland. Moreover, a substantial percentage of our research and development expenses and general and administrative expenses are incurred in Switzerland. Therefore, if the Swiss franc strengthens against all or most of our major trading currencies (e.g., the U.S. dollar, the euro, other major European currencies and the Japanese yen), our operating profit is reduced. We also have significantly more sales in European currencies (other than the Swiss franc) than we have expenses in those currencies. Therefore, when European currencies weaken against the U.S. dollar and the Swiss franc, it also decreases our operating profits. In recent years, the Swiss franc and other European currencies have generally moved in a consistent manner versus the U.S. dollar. Therefore, because the two effects previously described have offset each other, our operating profits have not been materially affected by movements in the U.S. dollar exchange rate versus European currencies. However, there can be no assurance that these currencies will continue to move in a consistent manner in the future. We estimate that a one percent strengthening of the Swiss franc against the euro would result in a decrease in our earnings before tax of $0.8 million to $1.2 million on an annual basis. In addition to the effects of exchange rate movements on operating profits, our debt levels can fluctuate due to changes in exchange rates, particularly between the U.S. dollar and the Swiss franc. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Quarterly Report on Form 10-Q includes forward-looking statements based on our current expectations and projections about future events, including: strategic plans; potential growth, including penetration of developed markets and opportunities in emerging markets; planned product introductions; planned operational changes and research and development efforts; future financial performance, including expected capital expenditures; research and development expenditures; estimated proceeds from and the timing of asset sales; potential acquisitions; future cash sources and requirements; and potential cost savings from restructuring programs. These forward-looking statements are subject to a number of risks and uncertainties, certain of which are beyond our control, which could cause our actual results to differ materially from historical results or those anticipated. Certain of these risks and uncertainties have been identified in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended December 31, 2001. The words "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. -17-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2002, there was no material change in the information provided under Item 7A in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. NOT APPLICABLE ITEM 2. CHANGES IN SECURITY. NOT APPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NOT APPLICABLE ITEM 5. OTHER INFORMATION. NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K - None -18-
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Mettler-Toledo International Inc. Date: May 14, 2002 By: /s/ William P. Donnelly ------------------------ William P. Donnelly Vice President and Chief Financial Officer