filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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
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
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
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.
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.
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.
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 (amoun****ts 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
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.
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.
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%
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.
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-
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.
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.
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.
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.
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.
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