MTD_10Q_9.30.2012
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012, OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ________________
Commission File Number: 1-13595
Mettler-Toledo International Inc.
_______________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)

Delaware
 
13-3668641
(State or other jurisdiction of
 
(I.R.S Employer Identification No.)
incorporation or organization)
 
 
1900 Polaris Parkway
Columbus, Ohio 43240
and
Im Langacher, P.O. Box MT-100
CH 8606 Greifensee, Switzerland
_________________________________________________________
 (Address of principal executive offices)
(Zip Code)

1-614-438-4511 and +41-44-944-22-11
________________________________________________________________________________
(Registrant's telephone number, including area code)

not applicable
______________________________________________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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 ___

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web-site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No ___             

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer.  X  Accelerated filer __ Non-accelerated filer __ (Do not check if a smaller reporting company)Smaller reporting company __     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No  X 

The Registrant had 30,643,832 shares of Common Stock outstanding at September 30, 2012.
 




METTLER-TOLEDO INTERNATIONAL INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended September 30, 2012 and 2011
(In thousands, except share data)
(unaudited)

 
September 30,
2012
 
September 30,
2011
Net sales
 
 
 
Products
$
455,707

 
$
477,837

Service
122,846

 
123,277

Total net sales
578,553

 
601,114

Cost of sales
 
 
 
Products
198,889

 
213,500

Service
71,507

 
73,197

Gross profit
308,157

 
314,417

Research and development
27,896

 
30,068

Selling, general and administrative
171,021

 
185,832

Amortization
5,215

 
4,795

Interest expense
5,568

 
5,893

Restructuring charges
3,118

 
362

Other charges (income), net
(266
)
 
409

Earnings before taxes
95,605

 
87,058

Provision for taxes
23,422

 
18,862

Net earnings
$
72,183

 
$
68,196

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
2.34

 
$
2.15

Weighted average number of common shares
30,846,062

 
31,760,270

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
2.28

 
$
2.09

Weighted average number of common and common equivalent shares
31,599,081

 
32,664,482

 
 
 
 
Comprehensive income, net of tax (Note 2)
$
88,958

 
$
28,538



The accompanying notes are an integral part of these interim consolidated financial statements.

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine months ended September 30, 2012 and 2011
(In thousands, except share data)
(unaudited)

 
September 30,
2012
 
September 30,
2011
Net sales
 
 
 
Products
$
1,325,777

 
$
1,305,636

Service
358,459

 
355,332

Total net sales
1,684,236

 
1,660,968

Cost of sales
 
 
 
Products
585,346

 
571,449

Service
214,623

 
217,404

Gross profit
884,267

 
872,115

Research and development
84,529

 
86,024

Selling, general and administrative
508,647

 
519,264

Amortization
15,771

 
12,742

Interest expense
17,097

 
17,296

Restructuring charges
11,261

 
2,831

Other charges (income), net
323

 
2,285

Earnings before taxes
246,639

 
231,673

Provision for taxes
60,425

 
56,462

Net earnings
$
186,214

 
$
175,211

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
5.97

 
$
5.47

Weighted average number of common shares
31,215,212

 
32,016,238

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
5.82

 
$
5.31

Weighted average number of common and common equivalent shares
32,008,311

 
32,990,000

 
 
 
 
Comprehensive income, net of tax (Note 2)
$
199,045

 
$
191,607



The accompanying notes are an integral part of these interim consolidated financial statements.

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and December 31, 2011
(In thousands, except share data)
(unaudited)

 
September 30,
2012
 
December 31,
2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
105,374

 
$
235,601

Trade accounts receivable, less allowances of $12,738 at September 30, 2012
406,570

 
425,147

and $12,317 at December 31, 2011
 
Inventories
214,893

 
241,421

Current deferred tax assets, net
52,646

 
51,125

Other current assets and prepaid expenses
58,880

 
65,569

Total current assets
838,363

 
1,018,863

Property, plant and equipment, net
445,024

 
410,007

Goodwill
451,016

 
447,743

Other intangible assets, net
118,431

 
121,410

Non-current deferred tax assets, net
114,964

 
118,899

Other non-current assets
93,607

 
86,552

Total assets
$
2,061,405

 
$
2,203,474

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
129,982

 
$
168,109

Accrued and other liabilities
103,712

 
100,320

Accrued compensation and related items
112,568

 
139,940

Deferred revenue and customer prepayments
84,769

 
99,584

Taxes payable
69,456

 
55,139

Current deferred tax liabilities
18,181

 
18,452

Short-term borrowings and current maturities of long-term debt
36,570

 
28,300

Total current liabilities
555,238

 
609,844

Long-term debt
379,060

 
476,715

Non-current deferred tax liabilities
121,863

 
125,833

Other non-current liabilities
207,000

 
209,945

Total liabilities
1,263,161

 
1,422,337

Commitments and contingencies (Note 14)


 


Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value per share; authorized 10,000,000 shares

 

Common stock, $0.01 par value per share; authorized 125,000,000 shares;
 
 
 
issued 44,786,011 and 44,786,011 shares; outstanding 30,643,832 and 31,590,101 shares
 
 
 
at September 30, 2012 and December 31, 2011, respectively
448

 
448

Additional paid-in capital
625,928

 
616,202

Treasury stock at cost (14,142,179 shares at September 30, 2012 and 13,195,910 shares
(1,407,740
)
 
(1,225,125
)
at December 31, 2011)
 
Retained earnings
1,653,715

 
1,476,550

Accumulated other comprehensive income (loss)
(74,107
)
 
(86,938
)
Total shareholders’ equity
798,244

 
781,137

Total liabilities and shareholders’ equity
$
2,061,405

 
$
2,203,474



The accompanying notes are an integral part of these interim consolidated financial statements.

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Nine months ended September 30, 2012 and twelve months ended December 31, 2011
(In thousands, except share data)
(unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
 
Treasury Stock
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Balance at December 31, 2010
32,425,315

 
$
448

 
$
597,195

 
$
(1,057,390
)
 
$
1,223,130

 
$
8,201

 
$
771,584

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
450,613

 

 

 
36,843

 
(16,073
)
 

 
20,770

Repurchases of common stock
(1,285,827
)
 

 

 
(204,578
)
 

 

 
(204,578
)
Tax benefit resulting from exercise of
 
 
 
 
 
 
 
 
 
 
 
 
 
certain employee stock options

 

 
6,737

 

 

 

 
6,737

Share-based compensation

 

 
12,270

 

 

 

 
12,270

Net earnings

 

 

 

 
269,493

 

 
269,493

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax (Note 2)

 

 

 

 

 
(95,139
)
 
(95,139
)
Balance at December 31, 2011
31,590,101

 
$
448

 
$
616,202

 
$
(1,225,125
)
 
$
1,476,550

 
$
(86,938
)
 
$
781,137

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
295,090

 

 

 
25,235

 
(9,049
)
 

 
16,186

Repurchases of common stock
(1,241,359
)
 

 

 
(207,850
)
 

 

 
(207,850
)
Tax benefit resulting from exercise of
 
 
 
 
 
 
 
 
 
 
 
 
 
certain employee stock options

 

 
502

 

 

 

 
502

Share-based compensation

 

 
9,224

 

 

 

 
9,224

Net earnings

 

 

 

 
186,214

 

 
186,214

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax (Note 2)

 

 

 

 

 
12,831

 
12,831

Balance at September 30, 2012
30,643,832

 
$
448

 
$
625,928

 
$
(1,407,740
)
 
$
1,653,715

 
$
(74,107
)
 
$
798,244

 
 
 
 
 
 
 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these interim consolidated financial statements.

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2012 and 2011
(In thousands)
(unaudited)

 
September 30,
2012
 
September 30,
2011
Cash flows from operating activities:
 
 
 
Net earnings
$
186,214

 
$
175,211

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
24,278

 
23,370

Amortization
15,771

 
12,742

Deferred tax benefit
(6,889
)
 
(9,753
)
Excess tax benefits from share-based payment arrangements
(502
)
 
(6,259
)
Share-based compensation
9,224

 
8,835

Other
1,382

 
(574
)
Increase (decrease) in cash resulting from changes in:
 
 
 
Trade accounts receivable, net
20,186

 
(18,387
)
Inventories
28,204

 
(38,318
)
Other current assets
7,168

 
(8,173
)
Trade accounts payable
(38,857
)
 
24,211

Taxes payable
12,989

 
6,777

Accruals and other
(43,190
)
 
7,982

Net cash provided by operating activities
215,978

 
177,664

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
344

 
2,402

Purchase of property, plant and equipment
(64,292
)
 
(64,506
)
Acquisitions
(2,098
)
 
(34,662
)
Other investing activities

 
(903
)
Net cash used in investing activities
(66,046
)
 
(97,669
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
436,329

 
65,993

Repayments of borrowings
(526,480
)
 
(170,726
)
Proceeds from stock option exercises
16,186

 
11,189

Repurchases of common stock
(207,850
)
 
(171,179
)
Excess tax benefits from share-based payment arrangements
502

 
6,259

Acquisition contingent consideration paid

 
(7,750
)
Other financing activities
(784
)
 
(111
)
Net cash used in financing activities
(282,097
)
 
(266,325
)
Effect of exchange rate changes on cash and cash equivalents
1,938

 
1,226

Net decrease in cash and cash equivalents
(130,227
)
 
(185,104
)
Cash and cash equivalents:
 
 
 
Beginning of period
235,601

 
447,577

End of period
$
105,374

 
$
262,473



The accompanying notes are an integral part of these interim consolidated financial statements.

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited
(In thousands, except share data, unless otherwise stated)


1.
BASIS OF PRESENTATION
Mettler-Toledo International Inc. ("Mettler-Toledo" or the "Company") is a leading global supplier of precision instruments and services. The Company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics and food retailing applications. The Company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the Company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications. The Company's primary manufacturing facilities are located in China, Germany, Switzerland, the United Kingdom and the United States. The Company's principal executive offices are located in Columbus, Ohio and 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 wholly-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 U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011 should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
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, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. A discussion of the Company’s critical accounting policies is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
All intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses in its existing trade accounts receivable. The Company determines the allowance based upon a review of both specific accounts for collection and the age of the accounts receivable portfolio.

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Inventories
Inventories are valued at the lower of cost or net realizable value. Cost, which includes direct materials, labor and overhead, is generally determined using the first in, first out (FIFO) method. The estimated net realizable value is based on assumptions for future demand and related pricing. Adjustments to the cost basis of the Company’s inventory are made for excess and obsolete items based on usage, 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.
Inventories consisted of the following:
 
September 30,
2012
 
December 31,
2011
Raw materials and parts
$
99,103

 
$
101,716

Work-in-progress
36,367

 
40,822

Finished goods
79,423

 
98,883

 
$
214,893

 
$
241,421

Goodwill and Other Intangible Assets
Goodwill, representing the excess of purchase price over the net asset value of companies acquired, and indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The annual evaluation for goodwill is generally based on an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company is unable to conclude that a reporting unit is not impaired after considering the totality of events and circumstances during its qualitative assessment, the Company performs the first step of the two-step impairment test by estimating the fair value of the reporting unit and comparing the fair value to the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the Company performs the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. The annual evaluation for indefinite-lived intangible assets is based on valuation models that estimate fair value based on expected future cash flows and profitability projections.
Other intangible assets include indefinite-lived assets and assets subject to amortization. Where applicable, amortization is charged on a straight-line basis over the expected period to be benefited. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company assesses the initial acquisition of intangible assets in accordance with the provisions of ASC 805 “Business Combinations” and the continued accounting for previously recognized intangible assets and goodwill in accordance with the provisions of ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant and Equipment.”

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Other intangible assets consisted of the following:
 
September 30, 2012
 
December 31, 2011
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Customer relationships
$
96,488

 
$
(21,088
)
 
$
95,203

 
$
(18,735
)
Proven technology and patents
42,242

 
(27,395
)
 
41,643

 
(25,174
)
Tradename (finite life)
3,987

 
(1,192
)
 
3,995

 
(1,072
)
Tradename (indefinite life)
25,024

 

 
25,033

 

Other
742

 
(377
)
 
743

 
(226
)
 
$
168,483

 
$
(50,052
)
 
$
166,617

 
$
(45,207
)
The Company recognized amortization expense associated with the above intangible assets of $1.9 million for both the three months ended September 30, 2012 and 2011, respectively and $5.6 million and $5.1 million for the nine months ended September 30, 2012 and 2011, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $7.4 million for 2012, $6.1 million for 2013, $6.0 million for 2014, $5.3 million for 2015, $5.1 million for 2016 and $4.9 million for 2017. Purchased intangible amortization, net of tax was $1.2 million and $1.1 million for the three months ended September 30, 2012 and 2011, respectively and $3.4 million and $2.9 million for the nine months ended September 30, 2012 and 2011, respectively.
In addition to the above amortization, the Company recorded amortization expense associated with capitalized software of $3.3 million and $2.9 million for the three months ended September 30, 2012 and 2011, respectively and $10.0 million and $7.6 million for the nine months ended September 30, 2012 and 2011, respectively.
Revenue Recognition
Revenue is recognized when title to a product has transferred and any significant customer obligations have been fulfilled. Standard shipping terms are generally FOB shipping point in most countries and, accordingly, title and risk of loss transfers upon shipment. In countries where title cannot legally transfer before delivery, the Company defers revenue recognition until delivery has occurred. The Company generally maintains the right to accept or reject a product return in its terms and conditions and also maintains appropriate accruals for outstanding credits. Shipping and handling costs charged to customers are included in total net sales and the associated expense is recorded in cost of sales for all periods presented. Other than a few small software applications, the Company does not sell software products without the related hardware instrument as the software is embedded in the instrument. The Company’s products typically require no significant production, modification or customization of the hardware or software that is essential to the functionality of the products. To the extent the Company’s solutions have a post-shipment obligation, such as customer acceptance, revenue is deferred until the obligation has been completed. The Company defers product revenue where installation is required, unless such installation is deemed perfunctory. The Company also sometimes enters into certain arrangements that require the separate delivery of multiple goods and/or services. These deliverables are accounted for separately if the deliverables have standalone value and the performance of undelivered items is probable and within the Company's control. The allocation of revenue between the separate deliverables is typically based on the relative selling price at the time of the sale in accordance with a number of factors including service technician billing rates, time to install and geographic location.
Further, certain products are also sold through indirect distribution channels whereby the distributor assumes any further obligations to the customer upon title transfer. Revenue is recognized on these products upon transfer of title and risk of loss to its distributors. Distributor discounts are offset against revenue at the time such revenue is recognized.

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METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Service revenue not under contract is recognized upon the completion of the service performed. Spare parts sold on a stand-alone basis are recognized upon title and risk of loss transfer which is generally at the time of shipment. Revenues from service contracts are recognized ratably over the contract period. 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. Service contracts are separately priced and payment is typically received from the customer at the beginning of the contract period.
Warranty
The Company generally offers one-year warranties on most of its products. Product warranties are recorded at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure.
The Company’s accrual for product warranties is included in accrued and other liabilities in the consolidated balance sheets. Changes to the Company’s accrual for product warranties for the nine months ended September 30 are as follows:
 
September 30,
2012
 
September 30,
2011
Balance at beginning of period
$
16,748

 
$
15,680

Accruals for warranties
12,324

 
12,164

Foreign currency translation
48

 
291

Payments / utilizations
(12,991
)
 
(11,399
)
Balance at end of period
$
16,129

 
$
16,736


Employee Termination Benefits
In situations where contractual termination benefits exist, the Company records accruals for employee termination benefits when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. All other employee termination arrangements are recognized and measured at their fair value at the communication date unless the employee is required to render additional service beyond the legal notification period, in which case the liability is recognized ratably over the future service period.
Share-Based Compensation
The Company recognizes share-based compensation expense within selling, general and administrative in the consolidated statement of operations with a corresponding offset to additional paid-in capital in the consolidated balance sheet. The Company recorded $3.3 million and $9.2 million of share-based compensation expense for the three and nine months ended September 30, 2012, respectively, compared to $3.1 million and $8.8 million for the corresponding periods in 2011.
Research and Development
Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.


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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02, to ASC 350 "Intangibles - Goodwill and Other." ASU 2012-02 provides authoritative guidance on the measurement of indefinite-lived intangible impairment and allows an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of an indefinite-lived intangible asset is above its carrying amount, then performing the impairment test is unnecessary. The guidance becomes effective for the Company for the year ended December 31, 2013, although early adoption is permitted. The adoption of this guidance is not expected to impact the Company's consolidated results of operations or financial position.
In January 2012, the Company adopted ASU 2011-05, to ASC 220 “Comprehensive Income,” as amended by ASU 2011-12. For interim consolidated financial reporting, the Company presents other comprehensive income in the consolidated statements of operations and comprehensive income. Additionally, as required by ASU 2011-05, the Company ceased presenting components of other comprehensive income as part of the consolidated statements of shareholders' equity and comprehensive income. The adoption of the recently issued guidance did not impact the Company's consolidated results of operations or financial position.
Comprehensive income (loss), net of tax consisted of the following for the nine months ended September 30:
 
September 30,
2012
 
September 30,
2011
Currency translation adjustment, net of tax
$
7,001

 
$
15,659

Net unrealized gain (loss) on cash flow hedging arrangements, net of tax
(278
)
 
(2,295
)
Pension and post-retirement benefit related items, net of tax
6,108

 
3,032

Other comprehensive income (loss), net of tax
12,831

 
16,396

Net earnings
186,214

 
175,211

Comprehensive income (loss), net of tax
$
199,045

 
$
191,607

In January 2012, the Company adopted ASU 2011-04, to ASC 820, "Fair Value Measurement." ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The adoption of the recently issued guidance did not impact the Company's consolidated results of operations or financial position.
3.
ACQUISITIONS
In August 2011, the Company acquired a vision inspection solutions business located in Germany for an aggregate purchase price of $19.4 million that has been integrated into the Company's product inspection product offering. The Company may be required to pay additional cash consideration up to a maximum amount of $2.4 million related to an earn-out period. Goodwill recorded in connection with this acquisition totaled $10.9 million, which is included in the Company’s Western European Operations segment. The Company also recorded $13.3 million of identified intangibles primarily pertaining to tradename, customer relationships and technology.


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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

In March 2011, the Company completed acquisitions totaling $15.4 million, of which $12.0 million related to an X-ray inspection solutions business that has been integrated into the Company's product inspection product offering. Goodwill recorded in connection with these acquisitions totaled $4.4 million, of which $1.9 million is included in the Company's U.S. Operations segment and $2.5 million is included in the Company's Swiss Operations segment. The Company also recorded $9.9 million of identified intangibles pertaining to tradename, customer relationships and technology.

4.
FINANCIAL INSTRUMENTS
As more fully described below, the Company enters into certain interest rate swap agreements in order to manage its exposure to changes in interest rates. The amount of the Company’s fixed obligation interest payments may change based upon the expiration dates of its interest rate swap agreements and the level and composition of its debt. The Company also enters into certain foreign currency forward contracts to limit the Company’s exposure to currency fluctuations on the respective hedged items. The Company does not use derivative financial instruments for trading purposes. For additional disclosures on the fair value of financial instruments, also see Note 5 to the interim consolidated financial statements.
Cash Flow Hedges
The Company has an interest rate swap agreement, designated as a cash flow hedge. The agreement is a forward-starting swap which changed the floating rate LIBOR-based interest payments associated with $100 million in forecasted borrowings under the Company’s credit facility to a fixed obligation of 3.24% beginning in October 2010. The swap is recorded in other non-current liabilities in the consolidated balance sheet at its fair value at September 30, 2012 and December 31, 2011 of $9.0 million and $9.2 million, respectively. The effective portion of the loss reclassified from accumulated other comprehensive income (loss) to interest expense was $0.8 million for both the three month periods ended September 30, 2012 and 2011, respectively, and $2.3 million for both the nine month periods ended September 30, 2012 and 2011, respectively. The amount recognized in other comprehensive income (loss) during the three month periods ended September 30, 2012 and 2011 was a gain of $0.2 million and a loss of $2.7 million, respectively, and during the nine month periods ended September 30, 2012 and 2011 was a gain of $0.2 million and loss of $3.6 million, respectively. A derivative loss of $3.1 million ($1.9 million after tax) based upon interest rates at September 30, 2012, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through September 30, 2012 no hedge ineffectiveness has occurred in relation to this hedge.
In July 2012, the Company began entering into foreign currency forward contracts, designated as cash flow hedges, to hedge certain forecasted intercompany sales denominated in euro with its Swiss-based businesses. The notional amount of foreign currency forward contracts outstanding at September 30, 2012 was $76.6 million. The foreign currency forward contracts are recorded in accrued and other liabilities in the consolidated balance sheet at their fair value at September 30, 2012 of $0.6 million. The Company records the effective portion of the cash flow derivative hedging gains and losses in accumulated other comprehensive income (loss), net of tax and reclassifies these amounts into earnings in the period in which the transactions affect earnings. The effective portion of the loss reclassified from accumulated other comprehensive income (loss) to cost of sales was insignificant during the three months ending September 30, 2012. The amount recognized in other comprehensive income (loss) during the three month period ended September 30, 2012 was a loss of $0.6 million. A derivative loss of $0.6 million ($0.5 million after tax) based upon foreign currency rates at September 30, 2012, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through September 30, 2012 no hedge ineffectiveness has occurred in relation to this hedge.

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Other Derivatives
The Company enters into foreign currency forward contracts in order to economically hedge short-term intercompany balances largely denominated in Swiss franc and other major European currencies with its foreign businesses. In accordance with U.S. GAAP, these contracts are considered “derivatives not designated as hedging instruments.” Gains or losses on these instruments are reported in current earnings. The foreign currency forward contracts were reported at their fair value in the consolidated balance sheet at September 30, 2012 and December 31, 2011 in other current assets of $0.4 million and $0.5 million, respectively, and other liabilities of $0.5 million and $0.5 million, respectively. The Company recognized in other charges (income), net, a gain of $1.4 million and $1.7 million during both the three month period and nine month period ended September 30, 2012, respectively. The Company recognized a net loss of $3.2 million during the three month period and a gain of $1.2 million during the nine month period ended September 30, 2011. At September 30, 2012 and December 31, 2011, these contracts had a notional value of $154.5 million and $143.6 million, respectively.

5.
FAIR VALUE MEASUREMENTS
At September 30, 2012 and December 31, 2011, the Company had derivative assets totaling $0.4 million and $0.5 million, respectively, and derivative liabilities totaling $10.1 million and $9.7 million, respectively. The fair values of the interest rate swap agreement and foreign currency forward contracts are estimated based upon inputs from current valuation information obtained from dealer quotes and priced with observable market assumptions and appropriate valuation adjustments for credit risk. The Company has evaluated the valuation methodologies used to develop the fair values by dealers in order to determine whether such valuations are representative of an exit price in the Company’s principal market. In addition, the Company uses an internally developed model to perform testing on the valuations received from brokers. The fair value of the foreign currency forward contract hedging forecasted intercompany sales is priced with observable market assumptions with appropriate valuations for credit risk. The Company has also considered both its own credit risk and counterparty credit risk in determining fair value and determined these adjustments were insignificant at September 30, 2012 and December 31, 2011.
At September 30, 2012 and December 31, 2011, the Company had $18.7 million and $13.6 million of cash equivalents, respectively, the fair value of which is determined through quoted and corroborated prices in active markets. The fair value of cash equivalents approximates cost.
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement consists of observable and unobservable inputs that reflect the assumptions that a market participant would use in pricing an asset or liability.
A fair value hierarchy has been established that categorizes these inputs into three levels:
Level 1:
Quoted prices in active markets for identical assets and liabilities
Level 2:
Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3:
Unobservable inputs

- 14 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The following table presents for each of these hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:
 
September 30, 2012
 
December 31, 2011
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
18,678

 
$

 
$
18,678

 
$

 
$
13,619

 
$

 
$
13,619

 
$

Foreign currency forward
357

 

 
357

 

 
545

 

 
545

 

contracts not designated
 
 
 
 
 
 
 
as hedging instruments
 
 
 
 
 
 
 
Total
$
19,035

 
$

 
$
19,035

 
$

 
$
14,164

 
$

 
$
14,164

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreement
$
8,950

 
$

 
$
8,950

 
$

 
$
9,175

 
$

 
$
9,175

 
$

Foreign currency forward
600

 

 
600

 

 

 

 

 

contracts designated
 
 
 
 
 
 
 
as cash flow hedges
 
 
 
 
 
 
 
Foreign currency forward
501

 

 
501

 

 
480

 

 
480

 

contracts not designated
 
 
 
 
 
 
 
as hedging instruments
 
 
 
 
 
 
 
Total
$
10,051

 
$

 
$
10,051

 
$

 
$
9,655

 
$

 
$
9,655

 
$


The difference between the fair value and carrying value of the Company's long-term debt is not material and is classified in Level 2 and Level 3 of the fair value hierarchy. The fair value of the Company's debt is estimated based on either similar issues or other inputs derived from available market information, including interest rates, term of debt and creditworthiness.

6.
INCOME TAXES
The provision for taxes for both the three and nine month periods ended September 30, 2012 is based upon the Company’s projected annual effective rate of 24.5%.

During the third quarter of 2011, the Company recorded discrete tax items resulting in a net tax benefit of $3.8 million primarily related to the favorable resolution of certain prior year tax matters. The impact of these items decreased the effective tax rate to 22% and 24% for the three and nine month periods ended September 30, 2011, respectively.


- 15 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

7.
DEBT
Debt consisted of the following at September 30, 2012:
 
September 30, 2012
 
U.S. Dollar
 
Other Principal Trading Currencies
 
Total
6.30% $100 million Senior Notes
$
100,000

 
$

 
$
100,000

Credit facility
278,356

 
704

 
279,060

Other local arrangements

 
36,570

 
36,570

Total debt
378,356

 
37,274

 
415,630

Less: current portion

 
(36,570
)
 
(36,570
)
Total long-term debt
$
378,356

 
$
704

 
$
379,060

As of September 30, 2012, the Company had $596.2 million of availability remaining under the credit facility.

In October 2012, the Company entered into an agreement to issue and sell in a private placement, ten-year Senior Notes with an aggregate principal amount of $50 million and a fixed interest obligation of 3.67% ("3.67% Senior Notes") under a Note Purchase Agreement among the Company and accredited institutional investors (the "Agreement"). The 3.67% Senior Notes are senior unsecured obligations of the Company.

The 3.67% Senior Notes mature in December 2022. Interest is payable semi-annually in June and December of each year, beginning in June 2013. The Company may at any time prepay the 3.67% Senior Notes, in whole or in part (but in an amount not less than 10% of the original aggregate principal amount), at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, plus a "make-whole" prepayment premium. In the event of a change in control of the Company (as defined in the Agreement), the Company may be required to offer to prepay the 3.67% Senior Notes in whole at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.

The Agreement contains customary affirmative and negative covenants for agreements of this type including, among others, limitations on the Company and its subsidiaries with respect to incurrence of liens and priority indebtedness, disposition of assets, mergers, and transactions with affiliates. The Agreement also requires the Company to maintain a consolidated interest coverage ratio of not less than 3.5 to 1.0 and a consolidated leverage ratio of not more than 3.5 to 1.0. The Agreement contains customary events of default with customary grace periods, as applicable.

Issuance costs approximating $0.3 million will be amortized to interest expense over the 10-year term of the 3.67% Senior Notes.


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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

8.
SHARE REPURCHASE PROGRAM AND TREASURY STOCK
The Company has a $2.25 billion share repurchase program, of which there is $508.2 million remaining to repurchase common shares as of September 30, 2012. The share repurchases are expected to be funded from cash balances, borrowings and cash generated from operating activities. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity and other factors. The Company has purchased 19.7 million shares since the inception of the program through September 30, 2012.
During the nine months ended September 30, 2012 and 2011, the Company spent $207.9 million and $171.2 million on the repurchase of 1,241,359 shares and 1,061,666 shares at an average price per share of $167.42 and $161.22, respectively. The Company reissued 295,090 shares and 220,463 shares held in treasury for the exercise of stock options and restricted stock units during the nine months ended September 30, 2012 and 2011, respectively.

9.
EARNINGS PER COMMON SHARE
In accordance with the treasury stock method, the Company has included the following common equivalent shares in the calculation of diluted weighted average number of common shares outstanding for the three and nine month periods ended September 30, solely relating to outstanding stock options and restricted stock units:
 
2012
 
2011
Three months ended
753,019

 
904,212

Nine months ended
793,099

 
973,762

Outstanding options and restricted stock units to purchase or receive 267,208 and 161,326 shares of common stock for the three month periods ended September 30, 2012 and 2011, respectively, and options and restricted stock units to purchase or receive 229,474 and 168,390 shares of common stock for the nine month periods ended September 30, 2012 and 2011, respectively, have been excluded from the calculation of diluted weighted average number of common and common equivalent shares as such options and restricted stock units would be anti-dilutive.

10.
NET PERIODIC BENEFIT COST
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 three months ended September 30:
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other U.S. Post-retirement Benefits
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost, net
$
114

 
$
83

 
$
3,481

 
$
3,746

 
$
83

 
$
76

Interest cost on projected benefit obligations
1,523

 
1,606

 
5,441

 
6,472

 
135

 
183

Expected return on plan assets
(1,741
)
 
(1,875
)
 
(7,962
)
 
(9,118
)
 

 

Recognition of prior service cost

 

 
(335
)
 
(404
)
 

 

Recognition of actuarial losses/(gains)
1,916

 
1,276

 
622

 
288

 
(188
)
 
(173
)
Net periodic pension cost/(credit)
$
1,812

 
$
1,090

 
$
1,247

 
$
984

 
$
30

 
$
86



- 17 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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:

 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other U.S. Post-retirement Benefits
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost, net
$
342

 
$
248

 
$
10,707

 
$
10,693

 
$
249

 
$
228

Interest cost on projected benefit obligations
4,569

 
4,817

 
16,580

 
18,667

 
405

 
548

Expected return on plan assets
(5,223
)
 
(5,624
)
 
(24,337
)
 
(25,970
)
 

 

Recognition of prior service cost

 

 
(1,045
)
 
(1,130
)
 

 

Recognition of actuarial losses/(gains)
5,748

 
3,827

 
1,844

 
864

 
(564
)
 
(519
)
Net periodic pension cost/(credit)
$
5,436

 
$
3,268

 
$
3,749

 
$
3,124

 
$
90

 
$
257


The Company expects to make employer contributions of approximately $3.7 million and $20.6 million to its U.S. pension plan and non-U.S. pension plans and employer contributions of approximately $1.1 million to its U.S. post-retirement medical plan during the year ended December 31, 2012. These estimates may change based upon several factors, including fluctuations in currency exchange rates, actual returns on plan assets and changes in legal requirements.

11.
RESTRUCTURING CHARGES
The Company has initiated additional cost reduction measures in 2012. Estimated charges under the current program are primarily comprised of severance costs and are expected to be approximately $20 million to $25 million, of which $3.1 million and $11.3 million were recorded during the three and nine months ended September 30, 2012. The program is expected to be substantially completed by the end of 2013.
A rollforward of the Company’s accrual for restructuring activities for the nine months ended September 30, 2012 is as follows:

 
Employee
Related
 
Other
 
Total
Balance at December 31, 2011
$
7,469

 
$
100

 
$
7,569

Restructuring charges
9,732

 
1,529

 
11,261

Cash payments and utilization
(6,613
)
 
(1,617
)
 
(8,230
)
Impact of foreign currency
231

 

 
231

Balance at September 30, 2012
$
10,819

 
$
12

 
$
10,831


12.
OTHER CHARGES (INCOME), NET
Other charges (income), net consists primarily of interest income, (gains) losses from foreign currency transactions and other items.

13.
SEGMENT REPORTING
As disclosed in Note 18 to the Company's consolidated financial statements for the year ended December 31, 2011, the Company has determined there are five reportable segments:  U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations and Other.

- 18 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company evaluates segment performance based on Segment Profit (gross profit less research and development and selling, general and administrative expenses, before amortization, interest expense, restructuring charges, other charges (income), net and taxes).
The following tables show the operations of the Company’s operating segments:
 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2012
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
176,874

 
$
19,465

 
$
196,339

 
$
36,627

 
$
307,857

Swiss Operations
28,199

 
99,316

 
127,515

 
34,355

 
23,107

Western European Operations
149,785

 
25,828

 
175,613

 
22,045

 
104,337

Chinese Operations
113,323

 
35,552

 
148,875

 
33,067

 
713

Other (a)
110,372

 
1,500

 
111,872

 
12,211

 
15,002

Eliminations and Corporate (b)

 
(181,661
)
 
(181,661
)
 
(29,065
)
 

Total
$
578,553

 
$

 
$
578,553

 
$
109,240

 
$
451,016


 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the nine months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2012
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
511,354

 
$
54,203

 
$
565,557

 
$
95,987

 
 
Swiss Operations
88,224

 
290,585

 
378,809

 
89,809

 
 
Western European Operations
459,074

 
74,513

 
533,587

 
62,288

 
 
Chinese Operations
313,096

 
91,487

 
404,583

 
89,316

 
 
Other (a)
312,488

 
4,494

 
316,982

 
31,041

 
 
Eliminations and Corporate (b)

 
(515,282
)
 
(515,282
)
 
(77,350
)
 
 
Total
$
1,684,236

 
$

 
$
1,684,236

 
$
291,091

 
 

 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2011
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
173,449

 
$
20,160

 
$
193,609

 
$
33,139

 
$
307,631

Swiss Operations
38,945

 
109,015

 
147,960

 
29,687

 
23,988

Western European Operations
173,367

 
27,693

 
201,060

 
26,273

 
104,823

Chinese Operations
105,053

 
26,866

 
131,919

 
27,065

 
707

Other (a)
110,300

 
1,981

 
112,281

 
15,058

 
15,009

Eliminations and Corporate (b)

 
(185,715
)
 
(185,715
)
 
(32,705
)
 

Total
$
601,114

 
$

 
$
601,114

 
$
98,517

 
$
452,158



- 19 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2012 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the nine months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2011
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
488,678

 
$
58,260

 
$
546,938

 
$
86,303

 
 
Swiss Operations
102,769

 
301,766

 
404,535

 
80,745

 
 
Western European Operations
493,646

 
79,370

 
573,016

 
65,349

 
 
Chinese Operations
275,611

 
91,636

 
367,247

 
82,197

 
 
Other (a)
300,264

 
4,316

 
304,580

 
35,165

 
 
Eliminations and Corporate (b)

 
(535,348
)
 
(535,348
)
 
(82,932
)
 
 
Total
$
1,660,968

 
$

 
$
1,660,968

 
$
266,827

 
 

(a)
Other includes reporting units in Eastern Europe, Latin America, Southeast Asia and other countries.
(b)
Eliminations and Corporate includes the elimination of inter-segment transactions and certain corporate expenses and intercompany investments, which are not included in the Company’s operating segments.
A reconciliation of earnings before taxes to segment profit for the three and nine month periods ended September 30 follows:

 
Three Months Ended
 
Nine Months Ended
 
2012
 
2011
 
2012
 
2011
Earnings before taxes
$
95,605

 
$
87,058

 
$
246,639

 
$
231,673

Amortization
5,215

 
4,795

 
15,771

 
12,742

Interest expense
5,568

 
5,893

 
17,097

 
17,296

Restructuring charges
3,118

 
362

 
11,261

 
2,831

Other charges (income), net
(266
)
 
409

 
323

 
2,285

Segment profit
$
109,240

 
$
98,517

 
$
291,091

 
$
266,827


During the three months ended September 30, 2012, restructuring charges of $3.1 million were recognized, of which $0.2 million, $0.3 million, $1.8 million, $0.7 million, and $0.1 million related to the Company’s U.S., Swiss, Western European, Chinese,and Other operations, respectively. Restructuring charges of $0.4 million were recognized during the three months ended September 30, 2011, of which $0.2 million, $0.1 million, and $0.1 million related to the Company’s U.S., Western European, and Chinese operations, respectively. Restructuring charges of $11.3 million were recognized during the nine months ended September 30, 2012, of which $1.0 million, $4.2 million, $5.2 million, $0.8 million, and $0.1 million related to the Company’s U.S., Swiss, Western European, Chinese, and Other operations, respectively. Restructuring charges of $2.8 million were recognized during the nine months ended September 30, 2011, of which $0.7 million, $0.2 million, $1.4 million, $0.2 million and $0.3 million related to the Company’s U.S., Swiss, Western European, Chinese and Other operations, respectively.

14.
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, either individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

- 20 -


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Interim Consolidated Financial Statements included herein.
General
Our interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
Local currency changes 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.
Results of Operations – Consolidated
The following tables set forth certain items from our interim consolidated statements of operations for the three and nine month periods ended September 30, 2012 and 2011 (amounts in thousands).
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
Net sales
$
578,553

 
100.0

 
$
601,114

 
100.0

 
$
1,684,236

 
100.0
 
$
1,660,968

 
100.0
Cost of sales
270,396

 
46.7

 
286,697

 
47.7

 
799,969

 
47.5
 
788,853

 
47.5
Gross profit
308,157

 
53.3

 
314,417

 
52.3

 
884,267

 
52.5
 
872,115

 
52.5
Research and development
27,896

 
4.8

 
30,068

 
5.0

 
84,529

 
5.0
 
86,024

 
5.2
Selling, general and administrative
171,021

 
29.6

 
185,832

 
30.9

 
508,647

 
30.2
 
519,264

 
31.3
Amortization
5,215

 
0.9

 
4,795

 
0.8

 
15,771

 
1.0
 
12,742

 
0.8
Interest expense
5,568

 
1.0

 
5,893

 
1.0

 
17,097

 
1.0
 
17,296

 
1.0
Restructuring charges
3,118

 
0.5

 
362

 

 
11,261

 
0.7
 
2,831

 
0.2
Other charges (income), net
(266
)
 

 
409

 
0.1

 
323

 
 
2,285

 
0.1
Earnings before taxes
95,605

 
16.5

 
87,058

 
14.5

 
246,639

 
14.6
 
231,673

 
13.9
Provision for taxes (a)
23,422

 
4.0

 
18,862

 
3.1

 
60,425

 
3.5
 
56,462

 
3.4
Net earnings
$
72,183

 
12.5

 
$
68,196

 
11.4

 
$
186,214

 
11.1
 
$
175,211

 
10.5

(a)
Provision for taxes for both the three and nine months ended September 30, 2011 includes a net tax benefit of $3.8 million primarily related to the favorable resolution of certain prior year tax matters.
Net sales
Net sales were $578.6 million and $1.684 billion for the three and nine months ended September 30, 2012, compared to $601.1 million and $1.661 billion for the corresponding periods in 2011. This represents a decrease of 4% and an increase of 1% in U.S. dollars for the three and nine months ended September 30, 2012. Excluding the effect of currency exchange rate fluctuations, or in local currencies, net sales increased 1% and 4% for the three and nine months ended September 30, 2012. Net sales growth was strong during the prior year comparable periods, representing 15% and 14% growth in local currencies during the three and nine months ended

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September 30, 2011, respectively. The global economic environment has deteriorated, especially in Europe. We expect our local currency organic sales growth in 2012 will continue to be less than growth rates experienced in 2011 and 2010, and net sales may decline in future quarters depending on economic conditions. Given economic uncertainty, it is difficult to predict the extent to which our results may be adversely affected.
Net sales by geographic destination for the three and nine months ended September 30, 2012, in U.S. dollars were flat and increased 4% in the Americas, increased 5% and 12% in Asia/Rest of World and decreased 15% and 9% in Europe. In local currencies, our net sales by geographic destination for the three and nine months ended September 30, 2012, increased 1% and 4% in the Americas and 7% and 12% in Asia/Rest of World and decreased 5% and 2% in Europe. Acquisitions contributed approximately 1% to net sales growth in Europe for the nine months ended September 30, 2012. Net sales in local currencies during the previous three and nine months ended September 30, 2011, increased 10% in both periods in the Americas, 16% and 14% in Europe and 21% in both periods in Asia/Rest of World. A discussion of sales by operating segment is included below.
As described in Note 18 to our consolidated financial statements for the year ended December 31, 2011, 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 decreased by 5% and increased by 2% in U.S. dollars for the three and nine months ended September 30, 2012, respectively, and in local currencies decreased by 1% and increased by 4%, respectively, compared to the corresponding prior periods. Service revenue (including spare parts) in U.S. dollars were flat during both the three and nine months ended September 30, 2012, respectively, and increased in local currencies by 5% for both the three and nine months ended September 30, 2012, compared to the corresponding prior periods.
Net sales of our laboratory-related products, which represented approximately 45% of our total net sales for both the three and nine months ended September 30, 2012, decreased 4% and increased 2% in U.S. dollars during the three and nine months ended September 30, 2012, and increased 1% and 6% in local currencies during the three and nine months ended September 30, 2012, respectively. Net sales growth was strong during the prior year comparable periods, representing 12% and 10% growth in local currencies during the three and nine month periods ended September 30, 2011, respectively. We experienced modest sales growth in most laboratory-related products during the three months ended September 30, 2012, except for a decline in laboratory balances which is partly related to difficult prior period comparisons and unfavorable economic conditions, particularly in Europe. Sales growth for the three and nine month periods ended September 30, 2012 benefited from favorable price realization, as well as strong volume increases in Asia/Rest of World. We expect net sales growth of our laboratory-related products (particularly in Europe) to continue to be less than growth rates experienced in 2011 and 2010, and net sales may decline in future quarters depending on economic conditions. It is currently difficult to predict the extent to which our results may be adversely affected.
Net sales of our industrial-related products, which represented approximately 47% and 46% of our total net sales for the three and nine months ended September 30, 2012, decreased 1% and increased 3% in U.S. dollars and increased 3% and 6% in local currencies during the three and nine months ended September 30, 2012, respectively. Net sales growth was strong during the prior year comparable periods, representing 22% and 21% growth in local currencies during the three and nine month periods ended September 30, 2011, respectively. Acquisitions contributed approximately 2% to net sales growth for the nine months ended September 30, 2012. Our industrial-related products experienced strong organic sales growth in product inspection products related to increased volume and favorable price realization, offset in part by a decline in our European core-industrial business related to decreased sales volume which is related to difficult prior period comparisons and unfavorable economic conditions in Europe. We also experienced reduced industrial-related sales growth in Asia/Rest of World during the three months ended September 30, 2012 which is primarily

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related to reduced growth in China. We expect net sales growth of our industrial-related products (particularly in Europe) to continue to be less than growth rates experienced in 2011 and 2010, and net sales may decline in future quarters depending on economic conditions. It is currently difficult to predict the extent to which our results may be adversely affected.
Net sales in our food retailing markets, which represented approximately 8% and 9% of our total net sales for the three and nine months ended September 30, 2012, decreased 14% and 9% in U.S. dollars and decreased 9% and 6% in local currencies during the three and nine months ended September 30, 2012, respectively. We experienced local currency net sales declines in each geographic region during the three months ended September 30, 2012. The net sales declines were primarily related to reduced project activity as well as unfavorable economic conditions. We expect net sales in our food retailing markets may continue to decline in future quarters. It is currently difficult to predict the extent to which our results may be adversely affected.
Gross profit
Gross profit as a percentage of net sales was 53.3% and 52.3% for the three months ended September 30, 2012 and 2011, respectively, and 52.5% for both the nine months ended September 30, 2012 and 2011, respectively.
Gross profit as a percentage of net sales for products was 56.4% and 55.8% for the three and nine months ended September 30, 2012, respectively, compared to 55.3% and 56.2% for the corresponding periods in 2011.
Gross profit as a percentage of net sales for services (including spare parts) was 41.8% and 40.1% for the three and nine months ended September 30, 2012, respectively, compared to 40.6% and 38.8% for the corresponding periods in 2011.
The increase in gross profit as a percentage of net sales for the three months ended September 30, 2012 was primarily due to improved price realization, favorable currency translation fluctuations and favorable business mix. These results were partly offset by unfavorable geographic mix and increased investments in our field service organization.
Research and development and selling, general and administrative expenses
Research and development expenses as a percentage of net sales were 4.8% and 5.0% for the three and nine months ended September 30, 2012, respectively, compared to 5.0% and 5.2% for the the corresponding periods during 2011. Research and development expenses decreased 7.0% and 2.0% in U.S. dollars and increased 1% and 2% in local currencies, during the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in 2011 relating to the timing of research and development project and product launch activity.
Selling, general and administrative expenses as a percentage of net sales were 29.6% and 30.2% for the three and nine months ended September 30, 2012, respectively, compared to 30.9% and 31.3% in the corresponding periods during 2011. Selling, general and administrative expenses decreased 8% and 2% in U.S. dollars during the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in 2011. Selling, general and administrative expenses decreased 2% and increased 1% in local currencies, during both the three and nine months ended September 30, 2012, compared to the corresponding periods in 2011. The local currency decrease for the three months ended September 30, 2012 is primarily due to savings from our cost reduction programs and lower cash incentives.

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Interest expense, restructuring charges and taxes
Interest expense was $5.6 million and $17.1 million for the three and nine months ended September 30, 2012, respectively, and $5.9 million and $17.3 million for the corresponding periods in 2011. Interest expense decreased for the three and nine months ended September 30, 2012 primarily resulting from a decrease in average borrowings offset by an increase in rates for the period.
We also initiated additional cost reduction measures in 2012. Estimated charges under the current program are primarily comprised of severance costs and are expected to be approximately $20 million to $25 million, of which $3.1 million and $11.3 million were recorded during the three and nine months ended September 30, 2012. The program is expected to be substantially completed by the end of 2013.

The provision for taxes for both the three and nine month periods ended September 30, 2012 is based upon the Company’s projected annual effective rate of 24.5%. During the third quarter of 2011, the Company recorded discrete tax items resulting in a net tax benefit of $3.8 million primarily related to the favorable resolution of certain prior year tax matters. The impact of these items decreased the effective tax rate to 22% and 24% for the three and nine month periods ended September 30, 2011, respectively. Our consolidated income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed non-U.S. operations. The most significant of these lower-taxed operations are in Switzerland and China.

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 18 to our consolidated financial statements for the year ended December 31, 2011.
U.S. Operations (amounts in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
%
 
2012
 
2011
 
%
Total net sales
$
196,339

 
$
193,609

 
1
%
 
$
565,557

 
$
546,938

 
3
%
Net sales to external customers
$
176,874

 
$
173,449

 
2
%
 
$
511,354

 
$
488,678

 
5
%
Segment profit
$
36,627

 
$
33,139

 
11
%
 
$
95,987

 
$
86,303

 
11
%

Total net sales increased 1% and 3% for the three and nine months ended September 30, 2012, respectively, and net sales to external customers increased 2% and 5% for the three and nine months ended September 30, 2012, respectively, compared with the corresponding periods in 2011. Growth in total net sales and net sales to external customers was strong during the prior year comparable periods, representing 12% growth in total net sales and 10% growth in net sales to external customers during both the three and nine month periods ended September 30, 2011, respectively. The increase in total net sales and net sales to external customers for the three and nine months ended September 30, 2012 includes strong growth in product inspection and analytical instruments due to increased sales volume and favorable price realization. Net sales in food retailing products declined during the three months ended September 30, 2012 due to reduced project activity. Acquisitions, net contributed approximately 1% to our net sales growth for the nine months ended September 30, 2012.
Segment profit increased $3.5 million and $9.7 million for the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in 2011. The increase in segment profit was primarily due to increased sales volume, favorable price realization, higher inter-segment income, and improved productivity.

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Swiss Operations (amounts in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
%1)
 
2012
 
2011
 
%1)
Total net sales
$
127,515

 
$
147,960

 
(14
)%
 
$
378,809

 
$
404,535

 
(6
)%
Net sales to external customers
$
28,199

 
$
38,945

 
(28
)%
 
$
88,224

 
$
102,769

 
(14
)%
Segment profit
$
34,355

 
$
29,687

 
16
 %
 
$
89,809

 
$
80,745

 
11
 %

1)
Represents U.S. dollar (decline) growth for net sales and segment profit.

    
Total net sales decreased 14% and 6% in U.S. dollars for the three and nine months ended September 30, 2012, respectively. Total net sales in local currency increased 1% for the three month period ended September 30, 2012 and were flat for the nine month period ended September 30, 2012, compared to the corresponding periods in 2011. Net sales to external customers decreased 28% and 14% in U.S. dollars and 15% and 8% in local currency during the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in 2011. Local currency growth during the prior year comparable periods in net sales was 5% and 6%, and for net sales to external customers was 14% and 10%, for the three and nine month periods ended September 30, 2011. The decrease in local currency net sales to external customers for the three and nine month periods ended September 30, 2012 primarily related to volume decreases across most product categories, especially food retailing, and third-party export business. Our Swiss Operations continue to face unfavorable economic conditions and we expect our local currency sales to external customers will be adversely impacted for the remainder of 2012.
 
Segment profit increased $4.7 million and $9.1 million for the three and nine month periods ended September 30, 2012, respectively, compared to the corresponding periods in 2011. The increase in segment profit for the three and nine months ended September 30, 2012 resulted primarily due to increased inter-segment sales and benefits from our cost reduction activities. Segment profit also benefited from favorable currency translation fluctuations during the three months ended September 30, 2012.

Western European Operations (amounts in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
%1)
 
2012
 
2011
 
%1)
Total net sales
$
175,613

 
$
201,060

 
(13
)%
 
$
533,587

 
$
573,016

 
(7
)%
Net sales to external customers
$
149,785

 
$
173,367

 
(14
)%
 
$
459,074

 
$
493,646

 
(7
)%
Segment profit
$
22,045

 
$
26,273

 
(16
)%
 
$
62,288

 
$
65,349

 
(5
)%

1)
Represents U.S. dollar (decline) growth for net sales and segment profit.

Total net sales decreased 13% and 7% in U.S. dollars and in local currency decreased 3% and increased 1% for the three and nine month periods ended September 30, 2012, respectively, compared to the corresponding periods in 2011. Net sales to external customers decreased 14% and 7% in U.S. dollars and in local currency decreased 4% and increased 1%<