UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Commission File Number 1-13595
Delaware
13-3668641
(State or other jurisdiction of incorporationor organization)
(I.R.S. Employer Identification No.)
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 43,704,602 shares of Common Stock outstanding at September 30, 2004.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes X No ____
METTLER-TOLEDO INTERNATIONAL INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
PART 2. OTHER INFORMATION
Table of Contents
Item 1. Financial Statements
METTLER-TOLEDO INTERNATIONAL INC.INTERIM CONSOLIDATED STATEMENTS OF OPERATIONSThree months ended September 30, 2004 and 2003(In thousands, except share data)
The accompanying notes are an integral part of these interim consolidated financial statements.
-3-
METTLER-TOLEDO INTERNATIONAL INC.INTERIM CONSOLIDATED STATEMENTS OF OPERATIONSNine months ended September 30, 2004 and 2003(In thousands, except share data)
-4-
$
-5-
-6-
METTLER-TOLEDO INTERNATIONAL INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSNine months ended September 30, 2004 and 2003 (In thousands)
-7-
METTLER-TOLEDO INTERNATIONAL INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2004 - Unaudited(In thousands except share data, unless otherwise stated)
1. BASIS OF PRESENTATION
Mettler-Toledo International Inc. ("Mettler-Toledo" or the "Company") is a global supplier of precision instruments and services. The Company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics and food retailing applications. The Company also manufactures several related analytical instruments, and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the Company manufactures metal detection and other end-of-line inspection systems used in production and packaging, and provides solutions for use in certain process analytics applications. The Company's primary manufacturing facilities are located in Switzerland, the United States, Germany, the United Kingdom and China. The Company's principal executive offices are located in Greifensee, Switzerland.
The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include all entities in which the Company has control, which are its majority owned subsidiaries. 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 September 30, 2004 and for the three and nine month periods ended September 30, 2004 and 2003 should be read in conjunction with the December 31, 2003 and 2002 consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
The accompanying interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. A discussion of the Company's critical accounting policies is included in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Inventories, net
Inventories are valued at the lower of cost or net realizable value. Cost, which includes direct materials, labor and overhead, is generally determined using the first in, first out (FIFO) method. The estimated net realizable value is based on assumptions for future demand and related pricing. Reserves for excess and obsolete inventories are established based on forecast usage, orders and technological obsolescence.
Inventories, net consisted of the following at September 30, 2004 and December 31, 2003:
Other Intangible Assets
Other intangible assets include indefinite lived assets and assets subject to amortization. Where applicable, amortization is charged on a straight-line basis over the expected period to be benefited. The Company assesses the recoverability of other intangible assets subject to amortization in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
Other intangible assets consisted of the following at September 30, 2004 and December 31, 2003.
Accumulated amortization
19,905
-
Other intangible assets substantially relate to the acquisition of Rainin Instrument. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $3.8 million for each of the next five years.
The Company had amortization expense associated with the above intangible assets of $2.7 million and $2.5 million for the nine months ended September 30, 2004 and 2003, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation
The Company applies the intrinsic valuation methodology under Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan.
Had compensation cost for the Company's stock option plan been determined based upon the fair value of such awards at the grant date, consistent with the methods of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure," the Company's net earnings and basic and diluted net earnings per common share for the three and nine month periods ended September 30 would have been as follows:
Warranty
The Company generally offers one-year warranties on most of its products. Product warranties are recorded at the time revenue is recognized for certain product shipments. While the Company engages in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure.
Warranty (Continued)
Changes to the Company's accrual for product warranties for the nine months ended September 30 are as follows:
Research and Development
Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.
New Accounting Pronouncements
In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". FSP 106-2 relates to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") signed into law on December 8, 2003. The Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. During the third quarter of 2004, the Company adopted the provisions of FSP 106-2. The Company sponsors postretirement health care plans that provide prescription drug benefits that are deemed actuarially equivalent to the Medicare Part D and elected to recognize the impact of the federal subsidy on its accumulated postretirement benefit obligation and net postretirement benefit costs in the third quarter of 2004. Recognition of the Medicare Drug Act decreased the Company's accumulated postretirement benefit obligation by $3.5 million and reduced its net postretirement benefit cost by approximately $0.2 million in the three months ending September 30, 2004.
3. BUSINESS COMBINATIONS
The terms of certain of the Company's acquisitions in 2003 and earlier years provide for possible additional earn-out payments. During the nine months ended September 30, 2004 and September 30, 2003 the Company made additional cash payments of approximately $1.0 million and $3.5 million respectively, related to acquisitions consummated in prior years. The Company accounted for the additional consideration using the purchase method of accounting and classified the payments as additional goodwill, primarily within the Company's Principal U.S. Operations segment.
4. TREASURY STOCK
On February 5, 2004, the Company announced a share repurchase program, commencing with an initial buyback of up to $100 million over the two-year period ending December 31, 2005. This program was approved by the Company's Board of Directors. The share repurchase program is funded from cash generated from operating activities.
During the nine months ended September 30, 2004 the Company spent $60.1 million on the repurchase of 1,349,400 shares at an average price of $44.50. See Part II Item 2 regarding details of the share repurchase program for the three months ended September 30, 2004. As of September 30, 2004, 282,891 shares held in treasury were reissued for the exercise of stock options.
In November 2004, the Company's Board of Directors approved an additional buyback of up to $200 million to its share repurchase program over the two-year period ending December 31, 2006.
5. EARNINGS PER COMMON SHARE
In accordance with the treasury stock method, the Company has included the following equivalent shares in the calculation of diluted weighted average number of common shares for the three and nine month periods ended September 30, relating to outstanding stock options.
Outstanding options to purchase 1,140,450 and 2,504,950 shares of common stock for the three month periods ended September 30, 2004 and 2003, respectively, and options to purchase 998,417 and 2,109,233 shares of common stock for the nine month periods ended September 30, 2004 and 2003, respectively, have been excluded from the calculation of diluted weighted average number of common shares on the grounds that such options would be anti-dilutive.
6. NET PERIODIC BENEFIT COST
Net periodic cost for the Company's defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the three months ended September 30:
2003
Net periodic pension cost for the Company's defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the nine months ended September 30:
As previously disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2003, the Company expects to make normal employer pension contributions of approximately $11.4 million to its non-U.S. defined benefit pension plans and $2.4 million to its U.S. post-retirement medical plan during the year ended December 31, 2004. The Company may make additional voluntary contributions to its pension plans from time to time.
7. OTHER CHARGES (INCOME), NET
Other charges (income), net consists primarily of charges related to the Company's restructuring programs, interest income, (gains) losses from foreign currency transactions, (gains) losses from sales of assets and other items.
As noted in previous filings, the Company recorded a restructuring charge in the second quarter of 2002 related to the exit of its French manufacturing facility. In accordance with U.S. GAAP, this charge was limited to the minimum contractual payment required by French law. During the three months ended March 31, 2003, the Company recorded an additional restructuring charge of $5.4 million ($3.8 million after tax) comprising the additional employee-related costs resulting from the final settlement of the social plan negotiated with the French workers' council during the first quarter of 2003.
The Company's significant restructuring programs were substantially completed at December 31, 2003.
8. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the three and nine month periods ended September 30 were as follows:
9. SEGMENT REPORTING
The Company has six reportable segments: Principal U.S. Operations, Other Western European Operations, Principal Central European Operations, Swiss R&D and Manufacturing Operations, Asia and Other. In previous reporting periods, results from Asia were included within the Other operating segment. During the three months ended December 31, 2003, the Company's reporting units in Asia exceeded the quantitative threshold for disclosure as a separate operating segment. Segment disclosures for all periods in 2003 have been reclassified accordingly. As the segments below have different mixes of external customer and inter-segment sales, changes in transfer pricing can impact the profitability of individual segments from year to year. However, such changes have no impact on consolidated profitability.
The Company evaluates segment performance based on Segment Profit (gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest expense and other charges).
The following tables show the operations of the Company's operating segments:
For the three months ended September 30, 2004
For the nine months ended September 30, 2004
Footnotes on following page
9. SEGMENT REPORTING (Continued)
For the three months ended September 30, 2003
For the nine months ended September 30, 2003
Non-GAAP Financial Measures
The Company supplements U.S. GAAP results with non-GAAP financial measures. The principal non-GAAP financial measure used is Adjusted Operating Income. Adjusted Operating Income, or Segment Profit, is defined as gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest, other charges and taxes. The most directly comparable U.S. GAAP financial measure is net earnings.
The Company believes that Adjusted Operating Income is important supplemental information for investors. Adjusted Operating Income is used internally as the principal profit measurement by our segments in their reporting to management. The Company uses this measure because it excludes amortization, interest, other charges and taxes, which are not allocated to the segments.
On a consolidated basis, the Company also believes Adjusted Operating Income is an important supplemental method of measuring profitability. It is used internally by senior management for measuring profitability and setting performance targets for managers and has historically been used as one of the means of publicly providing guidance on possible future results. The Company also believes that Adjusted Operating Income is an important performance measure because it provides a measure of comparability to other companies with different capital or legal structures, which accordingly may be subject to disparate interest rates and effective tax rates, and to companies which may incur different amortization expenses or impairment charges related to intangible assets.
Adjusted Operating Income is used in addition to and in conjunction with results presented in accordance with U.S. GAAP. Adjusted Operating Income is not intended to represent operating income under U.S. GAAP and should not be considered as an alternative to net earnings as an indicator of the Company's performance because of the following limitations.
Limitations of the non-GAAP measure, Adjusted Operating Income
The non-GAAP measure, Adjusted Operating Income, has certain material limitations as follows:
Adjusted Operating Income should not be relied upon to the exclusion of U.S. GAAP financial measures, but reflects an additional measure of comparability and means of viewing aspects of the Company's operations that, when viewed together with U.S. GAAP results and the accompanying reconciliation to net earnings, provides a more complete understanding of factors and trends affecting the business.
Because Adjusted Operating Income is not standardized, it may not be possible to compare with other companies' non-GAAP financial measures having the same or a similar name. The Company strongly encourages investors to review these financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
A reconciliation of Adjusted Operating Income, or Segment Profit, to net earnings for the three and nine month periods ended September 30 follows:
-18-
10. RELATED PARTY TRANSACTIONS
As part of the Rainin acquisition, the Company entered into an agreement to lease certain property from the former owner and current General Manager of Rainin. During the three and nine months ended September 30, 2004 and 2003, the Company made lease payments in respect of this agreement of $0.5 million and $0.6 million respectively, and $1.6 million and $1.6 million respectively. In addition, Rainin continued to purchase certain products from its former owner. During the three and nine months ended September 30, 2004 and 2003, the volume of these purchases was $0.2 million and $0.2 million respectively, and $0.8 million and $0.9 million respectively. The agreement to purchase these products was terminated during the third quarter of 2004. This termination did not have a material impact on the Company's consolidated financial statements. All of the Company's transactions with the former owner of Rainin were in the normal course of business.
11. CONTINGENCIES
The company is party to various legal proceedings, including certain environmental matters, incidental to the normal course of business. Management does not expect that any of such proceedings will have a material adverse effect on the Company's financial condition, results of operations or its cash flows.
-19-
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 and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.
Results of Operations - Consolidated
The following table sets forth certain items from our interim consolidated statements of operations for the three and nine month periods ended September 30, 2004 and 2003 (amounts in thousands).
Net sales
Net sales in U.S. dollars increased 7% and 8%, respectively, during the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003, of which 4% and 5%, respectively, was due to currency exchange rate fluctuations.
Market conditions remain generally consistent with the first half of 2004. Europe remains weak and we continue to believe it will take some time before the European economy gains strength, especially for our industrial applications. Market conditions in the Americas are better than Europe, and Asia remains strong.
In total, sales of products increased 5% and 7% respectively, during the three and nine months ended September 30, 2004, of which 4% and 5%, respectively, was due to currency exchange rate fluctuations. Service revenues (including spare parts) increased 12% and 10%, respectively, during the three and nine months ended September 30, 2004, of which 5% and 6%, respectively, was due to currency exchange rate fluctuations.
We experienced increased local currency sales in both our laboratory and drug discovery markets during the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003, principally driven by improved market conditions and growth in Asia. However, our drug discovery sales growth during the three month period was lower than the first half of 2004.
In our industrial and packaging markets, local currency sales in the three and nine months ended September 30, 2004 were generally consistent with the corresponding periods in 2003. We continue to see an overall decrease in sales of transportation and logistics products relative to strong project activity in 2003. While long-term fundamentals of the market for our transportation and logistics products are strong, the timing of projects can impact the year-over-year comparison significantly.
In our retail markets, local currency sales increased during the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003, as customer spending patterns continue to improve relative to weak activity last year. Sales growth in the third quarter was driven by improved sales of our in-store retail item management software solutions and expansion of our core retail products into Asia.
Growth in service revenues in both the three and nine months ended September 30, 2004 was generated by our consultative based value-added services approach, including instrument qualification and asset management services and training.
Gross margin
The increase in gross margin for products for the nine months ended September 30, 2004 reflects continuing benefits from our cost rationalization and product transfer initiatives of the last two years, as well as the impact of improving sales volume leveraging our fixed production costs.
The increase in gross margin for services (including spare parts) in the three month period reflects the expansion of higher margin regulatory compliance service sales and improved productivity. In the nine month period, this effect is partially offset by the impact of voluntary investments in our field service organization, particularly during the first quarter.
Research and development and selling, general and administrative expenses
Research and development expenses increased 5% and 7% respectively, during the three and nine months ended September 30, 2004, of which 6% and 5% respectively, was due to currency exchange rate fluctuations.
Selling, general and administrative expenses increased 13% and 11% respectively, during the three and nine months ended September 30, 2004, of which 5% in each period was due to currency exchange rate fluctuations. We have incurred $2.7 million and $3.9 million in the three and nine month periods ended September 30, 2004, respectively, related to an investigation into allegations made by an employee with respect to the Company and various company processes. Our spending also includes a significant increase in Sarbanes Oxley regulatory compliance costs, including $1.7 million and $2.1 million of external professional fees for the three and nine month periods ending September 30, 2004, respectively.
Interest expense, other charges (income) net, taxes and net earnings
Interest expense decreased 6% and 10% respectively, during the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003, principally due to lower average borrowings during 2004.
During the nine month period ended September 30, 2003, we incurred a restructuring charge of $5.4 million ($3.8 million after tax) related to the final union settlement on the closure of our French manufacturing facility. In the consolidated statements of operations, this restructuring charge is included within Other charges (income), net.
The provision for taxes is based upon our projected 30% annual effective tax rate for the related periods.
Net earnings increased 2% and 14%, respectively in the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003. The increase reflects improving sales volume in 2004 and the benefits from our cost rationalization initiatives, as well as the impact of the related restructuring charge of $3.8 million (after tax) recorded in 2003. As previously mentioned, we have also incurred $2.7 million ($1.9 million after tax) and $3.9 million ($2.7 million after tax) for the three and nine month periods ended September 30, 2004, respectively, related to the investigation.
We supplement our U.S. GAAP results with non-GAAP financial measures. The principal non-GAAP financial measure we use is Adjusted Operating Income. We define Adjusted Operating Income as gross profit less research and development, selling, general and administrative expenses and restructuring charges, before amortization, interest, other charges and taxes. The most directly comparable U.S. GAAP financial measure is net earnings.
We believe that Adjusted Operating Income is important supplemental information for investors. Adjusted Operating Income, or Segment Profit, is used internally as the principal profit measurement by our segments in their reporting to management. We use this measure because it excludes amortization, interest, other charges and taxes, which are not allocated to the segments.
On a consolidated basis, we also believe Adjusted Operating Income is an important supplemental method of measuring profitability. It is used internally by senior management for measuring profitability, setting performance targets for managers and has historically been used as one of the means of publicly providing guidance on possible future results. We also believe that Adjusted Operating Income is an important performance measure because it provides a measure of comparability to other companies with different capital or legal structures, which accordingly may be subject to disparate interest rates and effective tax rates, and to companies which may incur different amortization expenses or impairment charges related to intangible assets.
Adjusted Operating Income is used in addition to and in conjunction with results presented in accordance with U.S. GAAP. Adjusted Operating Income is not intended to represent operating income under U.S. GAAP and should not be considered as an alternative to net earnings as an indicator of our performance because of the following limitations.
Limitations of our non-GAAP measure, Adjusted Operating Income
Our non-GAAP measure, Adjusted Operating Income, has certain material limitations as follows:
Adjusted Operating Income should not be relied upon to the exclusion of U.S. GAAP financial measures, but reflects an additional measure of comparability and means of viewing aspects of our operations that, when viewed together with our U.S. GAAP results and the accompanying reconciliation to net earnings, provides a more complete understanding of factors and trends affecting our business.
Because Adjusted Operating Income is not standardized, it may not be possible to compare with other companies' non-GAAP financial measures having the same or a similar name. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
Our Adjusted Operating Income increased 3% and 12% during the three and nine months ended September 30, 2004 compared to the corresponding periods in 2003. The increases reflect improving sales volume in 2004 and the benefits from our cost rationalization initiatives, as well as the impact of the related restructuring charge of $5.4 million recorded in 2003. As previously mentioned, we have also incurred $2.7 million and $3.9 million for the three and nine month periods ended September 30, 2004, respectively, related to the investigation.
Results of Operations - by Operating Segment
Principal U.S. Operations
The increase in sales to external customers in the three month period reflects improved sales of our in-store retail item management software solutions. Sales in the nine month period reflects growth in our laboratory and retail products, offset by decreases in our transportation and logistics and industrial OEM products.
The decrease in segment profit is principally related to the impact of our product transfer initiatives on this particular segment with an offsetting benefit to our Asia segment. Segment profit in the nine month period also includes additional costs, particularly in the first quarter, related to product launches and a North American sales meeting. These results were partially offset by the benefits of our cost reduction programs.
Other Western European Operations (including France, U.K., Italy and Spain)
The increase in U.S. dollar sales to external customers in the three and nine month periods includes increases of 10% due to currency exchange rate fluctuations. The improvement in the three month period is due to strong performance in our laboratory products partially offset by lower sales of industrial and packaging products, which were down relative to strong 2003 activity, particularly for transportation and logistics.
The increase in segment profit for the three month period is principally due to favorable currency rate fluctuations and improved sales volume. The increase in segment profit for the nine month period includes the impact of favorable currency rate fluctuations and the restructuring charge of $4.5 million recorded in 2003.
Principal Central European Operations (including Germany)
The increase in U.S. dollar sales to external customers in the three and nine month periods includes increases of 9% due to currency exchange rate fluctuations. The local currency sales decline particularly reflects lower sales of industrial and packaging products.
Segment profit benefited from cost saving initiatives, offset partially by the reduced sales growth.
Swiss R&D and Manufacturing Operations
U.S. dollar sales to external customers in the three and nine month periods include increases of 9% and 7% respectively, due to currency exchange rate fluctuations which offset a reduction in sales of electronic components. These trends were partially offset by increased sales of our core laboratory products.
The increase in segment profit in both periods is principally a result of the impact of favorable currency exchange rate fluctuations and increased sales to other segments of core laboratory and process analytics products.
Asia
The increase in U.S. dollar sales to external customers in the three and nine month periods includes increases of 2% and 3% respectively, due to currency exchange rate fluctuations. These results reflect strong sales performance for most of our product lines. China experienced particularly strong results in the three and nine month periods, while sales growth in Japan improved in the third quarter versus the first half of the year.
The increase in segment profit reflects the leverage of our fixed cost structure in China and the corresponding strong sales performance, as well as the benefit of product transfer initiatives.
Other
U.S. dollar sales to external customers in the three and nine month periods include increases of 2% and 3% respectively due to currency exchange rate fluctuations. The local currency sales increase in the three and nine month periods reflects strong growth in our packaging and process analytics products, as well as continued growth in Eastern Europe.
The increase in segment profit reflects the impact of higher sales and benefits of our cost restructuring initiatives as well as the restructuring charge of $1.0 million recorded in the third quarter of 2003.
Liquidity and Capital Resources
Cash flow statistics
The increase in net cash provided by operating activities in the nine months ended September 30, 2004 compared to the corresponding period in 2003, is principally attributable to improved management of operating assets and liabilities, including working capital, and lower restructuring payments of $3.3 million in 2004 compared to $13.1 million in 2003.
We continue to explore potential acquisitions. In connection with any acquisition we may incur additional indebtedness. In addition to the acquisition costs already incurred, the terms of certain of our acquisitions provide for possible additional earn-out payments. Such earn-out payments, if any, will not be material to our financial position.
Capital expenditures are a significant use of funds and are made primarily for machinery, equipment and the purchase and expansion of facilities. We expect capital expenditures to increase as our business grows, and to fluctuate as currency exchange rates change.
Net debt
As of September 30, 2004, we had $255.2 million of availability remaining under our credit facility. Changes in exchange rates between the currencies in which we generate cash flows and the currencies in which our borrowings are denominated affect our liquidity. In addition, because we borrow in a variety of currencies, our debt balances fluctuate due to changes in exchange rates.
We currently believe that cash flow from operating activities, together with liquidity available under our credit facility and local working capital facilities, will be sufficient to fund currently anticipated working capital needs and capital spending requirements for at least several years, but there can be no assurance that this will be the case.
Share repurchase program
On February 5, 2004, we announced a share repurchase program, commencing with an initial buyback of up to $100 million over the two-year period ending December 31, 2005. The share repurchase program is funded from cash generated from operating activities.
During the nine months ended September 30, 2004 we spent $60.1 million on the repurchase of 1,349,400 shares at an average price of $44.50.
In November 2004, the Company's Board of Directors approved an additional buyback of up to $200 million to its share repurchase program over the two-year period ending December 31, 2006. The additional share repurchases are also expected to be funded from cash generated from operating activities.
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. We also have significantly more sales in European currencies (other than the Swiss franc) than we have expenses in those currencies. Accordingly, the Swiss franc exchange rate to the euro is an important cross-rate monitored by the Company. While our revenues and expenses by currency change from period to period, we estimate that a 1% strengthening of the Swiss franc against the euro would result in a decrease in our earnings before tax of between $0.8 million and $1.2 million on an annual basis. In addition to the effects of exchange rate movements on operating profits, our debt levels can fluctuate due to changes in exchange rates, particularly between the U.S. dollar and the Swiss franc. Based on our outstanding debt at September 30, 2004, we estimate that a 10% weakening of the U.S. dollar against the currencies in which our debt is denominated, would result in an increase of approximately $2.1 million in the reported U.S. dollar value of the debt.
See Note 2 to the interim consolidated financial statements.
Forward-Looking Statements and Associated Risks
Some of the statements in this quarterly report constitute "forward-looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. These statements relate to future events or our future financial performance, including, but not limited to, strategic plans, potential growth opportunities in both developed markets and emerging markets, planned research and development efforts, product introductions and innovation, manufacturing capacity, expected customer demand, meeting customer expectations, planned operational changes and productivity improvements, research and development expenditures, competitors' product development, expected capital expenditures, future cash sources and requirements, liquidity, impact of taxes, expected compliance with laws, impact of environmental costs, expected cost savings and benefits of completed or future acquisitions, which involve known and unknown risks, uncertainties and other factors that may cause our or our businesses' actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential" or "continue" or the negative of those terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors. Moreover, we do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. Unless otherwise required by applicable laws, we disclaim any intention or obligation to publicly update or revise any of the forward-looking statements after the date of this quarterly report to conform them to actual results, whether as a result of new information, future events, or otherwise. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption "Factors affecting our future operating results" in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended December 31, 2003, which describes risks and factors that could cause results to differ materially from those projected in those forward-looking statements.
We caution the reader that the above list of risks and factors that may affect results addressed in the forward-looking statements may not be exhaustive. Other sections of this quarterly report and other documents incorporated by reference may describe additional risks or factors that could adversely impact our business and financial performance. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict these new risk factors, nor can it assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2004, there was no material change in the information provided under Item 7A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Item 4. Controls and Procedures
(a) Our management carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report under the supervision and with the participation of our disclosure committee, our CFO and CEO. Based upon that evaluation, our CFO and CEO concluded that our disclosure controls and procedures are effective in permitting us to comply with our disclosure obligations and ensure that the material information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our controls over financial reporting.
(b) As of December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002 ("the Act") will require the Company to include an internal control report of management in its Annual Report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of internal control over financial reporting, (3) management's assessment of the effectiveness of internal control over financial reporting as of the end of its most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal control over financial reporting. Management acknowledges its responsibility for internal controls over financial reporting and seeks to continually improve those controls. In addition, in order to achieve compliance with Section 404 of the Act within the prescribed period, the Company has, since 2003, been engaged in a process to document and evaluate its internal controls over financial reporting. In this regard, management has dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. The Company believes its process for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act. During the second quarter of 2004, the Company commenced testing its internal controls. The Company's documentation and testing to date have identified certain gaps in the design and effectiveness of internal controls over financial reporting that the Company is in the process of remediating. In addition, the Company's recent changes in its finance organization may have short-term consequences to its internal controls as individuals assume new responsibilities. The Section 404 certification process requires the Company to complete a number of processes and procedures before the end of the current year, and there can be no assurance that it will be able to complete all these required processes and procedures in the required timeframe. The Company has also brought in additional resources to aid it in accomplishing these objectives, which will increase its costs. Also, given the complexities of the design and operation of internal controls over financial reporting, the Company can provide no assurance as to its, or its independent auditors, conclusions at December 31, 2004 with respect to the design or effectiveness of its internal controls over financial reporting. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The Company has only one share repurchase program. Under this program, announced on February 5, 2004 and November 4, 2004, the Company is authorized to buy back up to $100 million of equity shares over the two-year period ending December 31, 2005, and an additional $200 million of equity shares over the two-year period ending December 31, 2006.
During the nine months ended September 30, 2004 the Company spent $60.1 million on the repurchase of 1,349,400 shares at an average price of $44.50.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other information. None.
Item 6. Exhibits and Reports on Form 8-K
-32-