10-Q 1 mtd10q93017.htm FORM 10-Q Q3 2017 Document

 

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, 2017, 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 __ Emerging growth company __

If an emerging growth company, indicate by check mark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act __

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

The Registrant had 25,579,124 shares of Common Stock outstanding at September 30, 2017.
 




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

 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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, 2017 and 2016
(In thousands, except share data)
(unaudited)

 
September 30,
2017
 
September 30,
2016
Net sales
 
 
 
Products
$
544,408

 
$
508,963

Service
154,391

 
141,635

Total net sales
698,799

 
650,598

Cost of sales
 
 
 
Products
217,194

 
203,150

Service
81,328

 
77,954

Gross profit
400,277

 
369,494

Research and development
32,477

 
30,139

Selling, general and administrative
204,915

 
187,680

Amortization
10,716

 
9,087

Interest expense
8,248

 
7,167

Restructuring charges
3,385

 
1,494

Other charges (income), net
909

 
603

Earnings before taxes
139,627

 
133,324

Provision for taxes
34,677

 
31,992

Net earnings
$
104,950

 
$
101,332

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
4.10

 
$
3.84

Weighted average number of common shares
25,613,433

 
26,375,468

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
3.99

 
$
3.77

Weighted average number of common and common equivalent shares
26,303,529

 
26,888,810

 
 
 
 
Comprehensive income, net of tax (Note 9)
$
125,699

 
$
117,704



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

- 3 -


METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine months ended September 30, 2017 and 2016
(In thousands, except share data)
(unaudited)

 
September 30,
2017
 
September 30,
2016
Net sales
 
 
 
Products
$
1,514,516

 
$
1,392,860

Service
432,506

 
405,698

Total net sales
1,947,022

 
1,798,558

Cost of sales
 
 
 
Products
593,277

 
552,329

Service
235,651

 
229,252

Gross profit
1,118,094

 
1,016,977

Research and development
96,723

 
89,813

Selling, general and administrative
582,604

 
544,399

Amortization
31,010

 
26,166

Interest expense
24,160

 
20,619

Restructuring charges
8,840

 
4,579

Other charges (income), net
(5,565
)
 
8,492

Earnings before taxes
380,322

 
322,909

Provision for taxes
81,326

 
76,315

Net earnings
$
298,996

 
$
246,594

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
11.60

 
$
9.25

Weighted average number of common shares
25,764,472

 
26,644,938

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
11.31

 
$
9.08

Weighted average number of common and common equivalent shares
26,446,677

 
27,153,450

 
 
 
 
Comprehensive income, net of tax (Note 9)
$
376,357

 
$
246,840



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

- 4 -


METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
As of September 30, 2017 and December 31, 2016
(In thousands, except share data)
(unaudited)

 
September 30,
2017
 
December 31,
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
169,086

 
$
158,674

Trade accounts receivable, less allowances of $15,893 at September 30, 2017
 
 
 
and $14,234 at December 31, 2016
483,167

 
454,988

Inventories
263,527

 
222,047

Other current assets and prepaid expenses
70,784

 
61,075

Total current assets
986,564

 
896,784

Property, plant and equipment, net
641,709

 
563,707

Goodwill
538,418

 
476,378

Other intangible assets, net
229,975

 
167,055

Deferred tax assets, net
43,103

 
33,951

Other non-current assets
57,430

 
28,902

Total assets
$
2,497,199

 
$
2,166,777

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
148,521

 
$
146,593

Accrued and other liabilities
137,672

 
133,167

Accrued compensation and related items
151,820

 
140,461

Deferred revenue and customer prepayments
123,730

 
100,330

Taxes payable
72,082

 
47,990

Short-term borrowings and current maturities of long-term debt
18,533

 
18,974

Total current liabilities
652,358

 
587,515

Long-term debt
1,050,681

 
875,056

Deferred tax liabilities
31,090

 
64,306

Other non-current liabilities
250,091

 
204,957

Total liabilities
1,984,220

 
1,731,834

Commitments and contingencies (Note 15)


 


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 25,579,124 and
 
 
 
26,020,234 shares at September 30, 2017 and December 31, 2016, respectively
448

 
448

Additional paid-in capital
742,379

 
730,556

Treasury stock at cost (19,206,887 shares at September 30, 2017, and 18,765,777 shares at December 31, 2016)
(3,312,526
)
 
(3,006,771
)
Retained earnings
3,360,315

 
3,065,708

Accumulated other comprehensive income (loss)
(277,637
)
 
(354,998
)
Total shareholders’ equity
512,979

 
434,943

Total liabilities and shareholders’ equity
$
2,497,199

 
$
2,166,777



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

- 5 -


METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Nine months ended September 30, 2017 and twelve months ended December 31, 2016
(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, 2015
27,090,118

 
$
448

 
$
697,570

 
$
(2,543,229
)
 
$
2,692,317

 
$
(266,649
)
 
$
580,457

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
278,623

 

 

 
36,450

 
(10,979
)
 

 
25,471

Repurchases of common stock
(1,348,507
)
 

 

 
(499,992
)
 

 

 
(499,992
)
Tax benefit resulting from exercise of
 
 
 
 
 
 
 
 
 
 
 
 
 
certain employee stock options

 

 
17,680

 

 

 

 
17,680

Share-based compensation

 

 
15,306

 

 

 

 
15,306

Net earnings

 

 

 

 
384,370

 

 
384,370

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax

 

 

 

 

 
(88,349
)
 
(88,349
)
Balance at December 31, 2016
26,020,234

 
$
448

 
$
730,556

 
$
(3,006,771
)
 
$
3,065,708

 
$
(354,998
)
 
$
434,943

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
206,646

 

 

 
29,243

 
(5,928
)
 

 
23,315

Repurchases of common stock
(647,756
)
 

 

 
(334,998
)
 

 

 
(334,998
)
Share-based compensation

 

 
11,823

 

 

 

 
11,823

Effect of accounting change (Note 2)

 

 

 

 
1,539

 

 
1,539

Net earnings

 

 

 

 
298,996

 

 
298,996

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax (Note 9)

 

 

 

 

 
77,361

 
77,361

Balance at September 30, 2017
25,579,124

 
$
448

 
$
742,379

 
$
(3,312,526
)
 
$
3,360,315

 
$
(277,637
)
 
$
512,979

 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

- 6 -


METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2017 and 2016
(In thousands)
(unaudited)

 
September 30,
2017
 
September 30,
2016
Cash flows from operating activities:
 
 
 
Net earnings
$
298,996

 
$
246,594

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
24,421

 
24,527

Amortization
31,010

 
26,166

Deferred tax benefit
(7,754
)
 
(11,078
)
Share-based compensation
11,823

 
10,861

Gain on facility sale
(3,394
)
 

Other
227

 
6

Non-cash pension settlement charge

 
8,189

Increase (decrease) in cash resulting from changes in:
 
 
 
Trade accounts receivable, net
1,891

 
4,721

Inventories
(23,596
)
 
(19,857
)
Other current assets
(2,526
)
 
(3,558
)
Trade accounts payable
(5,857
)
 
(11,984
)
Taxes payable
11,386

 
6,577

Accruals and other
14,608

 
26,149

Net cash provided by operating activities
351,235

 
307,313

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
10,437

 
361

Purchase of property, plant and equipment
(85,826
)
 
(51,234
)
Acquisitions
(108,445
)
 
(109,681
)
Net hedging settlements on intercompany loans
3,716

 
2,031

Net cash used in investing activities
(180,118
)
 
(158,523
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
985,694

 
709,988

Repayments of borrowings
(834,061
)
 
(455,913
)
Proceeds from stock option exercises
23,315

 
20,187

Repurchases of common stock
(334,998
)
 
(374,994
)
Other financing activities
(7,205
)
 
(680
)
Net cash used in financing activities
(167,255
)
 
(101,412
)
Effect of exchange rate changes on cash and cash equivalents
6,550

 
(132
)
Net increase in cash and cash equivalents
10,412

 
47,246

Cash and cash equivalents:
 
 
 
Beginning of period
158,674

 
98,887

End of period
$
169,086

 
$
146,133



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

- 7 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – 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 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, 2016.
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, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
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, 2016.
All intercompany transactions and balances have been eliminated.
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.

- 8 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – 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,
2017
 
December 31,
2016
Raw materials and parts
$
119,148

 
$
100,408

Work-in-progress
50,212

 
41,454

Finished goods
94,167

 
80,185

 
$
263,527

 
$
222,047

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 and indefinite-lived intangible assets are generally based on an assessment of qualitative and quantitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount.
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 of benefit. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company assesses the initial acquisition of intangible assets in accordance with the provisions of ASC 805 "Business Combinations" and the continued accounting for previously recognized intangible assets and goodwill in accordance with the provisions of ASC 350 "Intangible - Goodwill and Other" and ASC 360 "Property, Plant and Equipment".
Other intangible assets consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
Gross
Amount
 
Accumulated
Amortization
 
Intangibles, Net
 
Gross
Amount
 
Accumulated
Amortization
 
Intangibles, Net
Customer relationships
$
198,355

 
$
(39,757
)
 
$
158,598

 
$
147,466

 
$
(34,672
)
 
$
112,794

Proven technology and patents
70,169

 
(37,711
)
 
32,458

 
58,394

 
(35,128
)
 
23,266

Tradename (finite life)
4,486

 
(2,765
)
 
1,721

 
4,182

 
(2,514
)
 
1,668

Tradename (indefinite life)
35,603

 

 
35,603

 
28,272

 

 
28,272

Other
3,673

 
(2,078
)
 
1,595

 
2,871

 
(1,816
)
 
1,055

 
$
312,286

 
$
(82,311
)
 
$
229,975

 
$
241,185

 
$
(74,130
)
 
$
167,055


- 9 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company recognized amortization expense associated with the above intangible assets of $2.9 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively and $7.9 million and $5.8 million for the nine months ended September 30, 2017 and 2016, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $11.4 million for 2017, $13.7 million for 2018, $13.3 million for 2019, $12.9 million for 2020, $12.3 million for 2021 and $11.7 million for 2022. Purchased intangible amortization was $2.6 million, $1.7 million after tax, and $2.0 million, $1.3 million after tax, for the three months ended September 30, 2017 and 2016, respectively and $7.2 million, $4.7 million after tax, and $5.2 million, $3.5 million after tax, for the nine months ended September 30, 2017 and 2016, respectively.
In addition to the above amortization, the Company recorded amortization expense associated with capitalized software of $7.7 million and $6.8 million for the three months ended September 30, 2017 and 2016, respectively and $22.9 million and $20.2 million for the nine months ended September 30, 2017 and 2016, 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, 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.
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

- 10 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

programs and processes, its warranty obligations are affected by product failure rates, material usage and service costs incurred in correcting a product failure.
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 statements of operations and other comprehensive income with a corresponding offset to additional paid-in capital in the consolidated balance sheet. The Company recorded $4.0 million and $11.8 million of share-based compensation expense for the three and nine months ended September 30, 2017, respectively, compared to $3.6 million and $10.9 million for the corresponding periods in 2016.
Research and Development
Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.

Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company's consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values and any excess consideration of the net assets acquired is recognized as goodwill. Acquisition transaction costs are expensed when incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the expected contingent payments as of the acquisition date. Changes in the fair value of the contingent consideration are recorded to other charges (income), net.
Recent Accounting Pronouncements
In January 2017, the Company adopted ASU 2016-09, to ASC 718 "Compensation - Stock Compensation." The primary impact of adoption was the recognition of excess tax benefits from stock option exercises within the provision for taxes rather than within shareholder's equity, and a change in the determination of diluted earnings per common share. The Company adopted the guidance on a prospective basis, and expects its estimated annual tax rate will be reduced by 2% in 2017. The adoption of this guidance also increased the Company's income tax rate by approximately 1% for the three months ending September 30, 2017 and reduced the Company's income tax rate by approximately 3% for the nine months ending September 30, 2017. In addition, the Company recognized additional deferred tax assets of $1.5 million as a cumulative adjustment within shareholder's equity. The Company also classified on a retrospective basis the excess tax benefits from stock option exercises of $17.2 million as operating activities in the prior period Statements of Cash Flows. For additional disclosure, see Note 6 to the interim consolidated financial statements.

- 11 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The FASB issued ASU 2014-09, ASU 2016-10 and ASU 2016-12 to ASC 606 "Revenue from Contracts with Customers." ASU 2014-09 provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. ASU 2016-10 provides guidance for identifying performance obligations as they pertain to immaterial promised goods or services, shipping and handling activities, and identifying when promises represent performance obligations. ASU 2016-12 provides guidance for assessing collectability, presentation of sales taxes, noncash considerations, and completed contract modifications at transition. The guidance becomes effective for the Company for the year beginning January 1, 2018. The Company is finalizing its evaluation of the impact of the adoption of this guidance and believes it will have an immaterial impact on the Company's consolidated results of operations and financial position. The estimated impact to the Company's results is expected to be immaterial because most of its performance obligations are satisfied at the time of title transfer and risk of loss to the customer which is generally upon shipment. In addition, contracts with end-customers typically do not exceed a year, and generally pertain to service contracts that represent an obligation to perform repair or other services on a customer's pre-defined equipment over the contract period. The Company also sometimes enters into contracts with end-customers that comprise arrangements that require separate delivery of multiple goods and/or services, including post-shipment obligations such as installation. Immaterial impacts from adopting the new standard include the recognition of certain revenue for performance obligations that were deferred until post-shipment obligations were completed. The number of performance obligations under the new standard is also not materially different from the Company's financial accounting and reporting model under the existing standard. The Company is still evaluating the adoption method it will elect upon implementation. The Company is also in the process of implementing appropriate changes to its business processes, systems and controls to support recognition and disclosures under the new standard.
In March 2017, the FASB issued ASU 2017-7, to ASC 715 "Compensation-Retirement Benefits," which will require the Company to report the non-service cost components of net periodic benefit cost in other charges (income), net. The new guidance must be applied retrospectively and becomes effective for the year beginning January 1, 2018. The Company expects the impact of this guidance will be immaterial.
In February 2016, the FASB issued ASU 2016-02 to ASC 842 "Leases." The accounting guidance primarily requires lessees to recognize most leases on their balance sheet as a right to use asset and a lease liability, with the exception of short term leases. A lessee will continue to recognize lease expense on a straight-line basis for leases classified as operating leases. The guidance becomes effective for fiscal years beginning after December 15, 2018 and must be applied on a retrospective basis with early adoption permitted. The Company is currently evaluating the impact of this guidance on the financial statements and the timing of adoption.

In August 2017, the FASB issued ASU 2017-12 to ASC 815 "Derivatives and Hedging" which modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify the application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance and believes it will have an immaterial impact on the Company's consolidated results of operations and financial position.

3.
ACQUISITIONS
In September 2017, the Company acquired the shares of Biotix, Inc., a manufacturer and distributor of plastic consumables associated with pipettes, including tips, tubes and reagent reservoirs

- 12 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

used in the life sciences market based in the United States. The initial cash payment was $105 million and the Company may be required to pay additional cash consideration up to a maximum amount of $65 million based upon earnings thresholds in 2018 and 2019. The fair value of the contingent consideration obligation of $30.7 million relating to the Biotix acquisition was determined using a Monte Carlo simulation based on the Company's forecast of future results. Goodwill recorded in connection with the acquisition totaled $51.3 million, which is included in the Company's U.S. Operations segment. The fair value of the contingent consideration was determined using a Monte Carlo simulation. Identified intangible finite life assets acquired include customer relationships of $49.5 million, technology and patents of $8.0 million, indefinite life tradenames of $7.1 million, and other intangibles of $0.6 million. The identifiable finite life intangible assets will be amortized on a straight-line basis over periods ranging from 5 year to 18 years and the annual aggregate amortization expense is estimated at $3.7 million. Net tangible assets acquired were $19.2 million and recorded at fair value in the consolidated financial statements.
In 2017, the Company also incurred additional acquisition payments totaling $3.8 million. Goodwill recorded in connection with acquisitions totaled $0.3 million. The Company also recorded $3.1 million of identified intangibles primarily pertaining to technology and patents in connection with these acquisitions, which will be amortized on a straight-line basis over 12 years. Net tangible assets acquired were $0.2 million and recorded a fair value in the consolidated financial statements.
4.     FINANCIAL INSTRUMENTS
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into certain interest rate 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. As also mentioned in Note 7, the Company has designated its euro denominated debt as a hedge of a portion of its net investment in euro-denominated foreign operations. For additional disclosures on the fair value of financial instruments, see Note 5 to the interim consolidated financial statements.
Cash Flow Hedges
In June 2017, the Company entered into a cross currency swap arrangement designated as a cash flow hedge. The agreement converts $100 million of borrowings under the Company's credit facility into synthetic Swiss franc debt which allows the Company to effectively change the floating rate LIBOR-based interest payment to a fixed Swiss franc income of 0.01%. The swap began in June 2017 and matures in June 2019.
The Company has an interest rate swap agreement designated as a cash flow hedge. The agreement is a swap which has the effect of changing the floating rate LIBOR-based interest payments associated with $50 million of borrowings under the Company’s credit facility to a fixed obligation of 2.52%. The swap began in October 2015 and matures in October 2020.
In March 2015, the Company entered into a forward-starting interest rate swap agreement. The agreement is a swap which has the effect of changing the floating rate LIBOR-based interest payments associated with $100 million of borrowings under the Company's credit agreement to a fixed obligation of 2.25% beginning in February 2017 and matures in February 2022.
The Company's cash flow hedges are recorded gross at fair value in the consolidated balance sheet at September 30, 2017 and December 31, 2016, respectively, and disclosed in Note 5 to the consolidated financial statements. Amounts reclassified into other comprehensive income and the effective portions of the cash flow hedges are further disclosed in Note 9 to the consolidated financial statements. A derivative

- 13 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

gain of $1.4 million based upon interest rates and foreign currency rates at September 30, 2017, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through September 30, 2017, no hedge ineffectiveness has occurred in relation to the cash flow hedges.
Other Derivatives
The Company enters into foreign currency forward contracts in order to economically hedge short-term trade and non-trade intercompany balances largely denominated in Swiss franc, other major European currencies, and the Chinese Renminbi with its foreign businesses. In accordance with U.S. GAAP, these contracts are considered “derivatives not designated as hedging instruments.” Gains or losses on these instruments are reported in current earnings. The foreign currency forward contracts are recorded at fair value in the consolidated balance sheet at September 30, 2017 and December 31, 2016, respectively, and disclosed in Note 5. The Company recognized in other charges (income), a net gain of $4.5 million during the three months ended September 30, 2017. The amount recognized in other charges (income) during the three months ended September 30, 2016 was insignificant to the consolidated financial statements. The Company recognized in other charges (income), a net gain of $6.3 million and a net loss of $0.7 million during the nine months ended September 30, 2017 and 2016, respectively. The gains and losses are primarily offset by the underlying transaction gains and losses on the related intercompany balances. At September 30, 2017 and December 31, 2016, these contracts had a notional value of $358.9 million and $353.0 million, respectively.    
5.    FAIR VALUE MEASUREMENTS
At September 30, 2017 and December 31, 2016, the Company had derivative assets totaling $0.8 million in both periods, respectively, and derivative liabilities totaling $4.9 million and $5.8 million, respectively. The fair values of the interest rate swap agreements, foreign currency forward contracts designated as cash flow hedges and foreign currency forward contracts that economically hedge short-term intercompany balances are estimated based upon inputs from current valuation information obtained from dealer quotes and priced with observable market assumptions and appropriate valuation adjustments for credit risk. The Company has evaluated the valuation methodologies used to develop the fair values by dealers in order to determine whether such valuations are representative of an exit price in the Company’s principal market. In addition, the Company uses an internally developed model to perform testing on the valuations received from brokers. The Company has also considered both its own credit risk and counterparty credit risk in determining fair value and determined these adjustments were insignificant at September 30, 2017 and December 31, 2016.
At September 30, 2017 and December 31, 2016, the Company had $33.9 million and $21.5 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.
The fair value of the Company's fixed interest rate debt was estimated using Level 2 inputs, primarily discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company's debt exceeds the carrying value by approximately $9.1 million as of September 30, 2017 and $4.2 million as of December 31, 2016.
The fair value of the contingent consideration obligation of $30.7 million relating to the Biotix acquisition was determined using a Monte Carlo simulation based on the Company's forecast of future results. The fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement.
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.

- 14 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)


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
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, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
33,917

 
$

 
$
33,917

 
$

 
$
21,513

 
$

 
$
21,513

 
$

Foreign currency forward contracts not designated as hedging instruments
 
756

 

 
756

 

 
791

 

 
791

 

Total
 
$
34,673

 
$

 
$
34,673

 
$

 
$
22,304

 
$

 
$
22,304

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
2,985

 
$

 
$
2,985

 
$

 
$
3,630

 
$

 
$
3,630

 
$

Cross currency swap agreement
 
826

 

 
826

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments
 
1,109

 

 
1,109

 

 
2,123

 

 
2,123

 

Total
 
$
4,920

 
$

 
$
4,920

 
$

 
$
5,753

 
$

 
$
5,753

 
$

6.    INCOME TAXES
The provision for taxes is based upon using the Company's projected annual effective tax rate of 22% before non-recurring discrete items for both the three and nine month periods ended September 30, 2017. The reduction in the Company's estimated annual effective tax rate from 24% in 2016 to 22% in 2017, as well as the Company's reported tax rate of 25% and 21% during the three and nine months ending September 30, 2017, is primarily related to the Company's adoption of ASU 2016-09 pertaining to excess tax benefits associated with stock option exercises. The Company's 2017 estimated annual tax rate of 22% includes an estimated annual benefit of 2% related to the adoption of ASU 2016-09, the effects of which are being treated discretely each quarter.


- 15 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

7.    DEBT
Debt consisted of the following at September 30, 2017:
 
September 30, 2017
 
U.S. Dollar
 
Other Principal Trading Currencies
 
Total
3.67% $50 million Senior Notes due December 17, 2022
50,000

 

 
50,000

4.10% $50 million Senior Notes due September 19, 2023
50,000

 

 
50,000

3.84% $125 million Senior Notes due September 19, 2024
125,000

 

 
125,000

4.24% $125 million Senior Notes due June 25, 2025
125,000

 

 
125,000

1.47% EUR 125 million Senior Notes due June 17, 2030

 
146,956

 
146,956

Debt issuance costs, net
(1,125
)
 
(364
)
 
(1,489
)
Total Senior Notes
348,875

 
146,592

 
495,467

$800 million Credit Agreement, interest at LIBOR plus 87.5 basis points
537,304

 
17,910

 
555,214

Other local arrangements

 
18,533

 
18,533

Total debt
886,179

 
183,035

 
1,069,214

Less: current portion

 
(18,533
)
 
(18,533
)
Total long-term debt
$
886,179

 
$
164,502

 
$
1,050,681

As of September 30, 2017, the Company had $238.6 million of availability remaining under its Credit Agreement. During the three months ended September 30, 2017, the Company increased its borrowing under the Credit Agreement by $97.9 million, which primarily was used to fund the Biotix acquisition as described in Note 3.

1.47% Euro Senior Notes
The Company has designated the 1.47% Euro Senior Notes as a hedge of a portion of its net investment in euro-denominated foreign subsidiaries to reduce foreign currency risk associated with the net investment in these operations. Changes in the carrying value of this debt resulting from fluctuations in the euro to U.S. dollar exchange rate are recorded as foreign currency translation adjustments within other comprehensive income (loss). The unrealized gain (loss) recorded in other comprehensive income (loss) related to this net investment hedge was a loss of $5.0 million and $2.0 million for the three months ended September 30, 2017 and 2016, respectively, and a loss of $15.5 million and $3.6 million for the nine months periods ended September 30, 2017 and 2016, respectively.

8.    SHARE REPURCHASE PROGRAM AND TREASURY STOCK
The Company has a share repurchase program of which there was $648.4 million common shares remaining to be repurchased under the program as of September 30, 2017. 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.

- 16 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company has purchased 26.6 million shares since the inception of the program in 2004 through September 30, 2017. During the nine months ended September 30, 2017 and 2016, the Company spent $335.0 million and $375.0 million on the repurchase of 647,756 shares and 1,048,075 shares at an average price per share of $517.15 and $357.77, respectively. The Company also reissued 206,646 shares and 193,517 shares held in treasury for the exercise of stock options and restricted stock units during the nine months ended September 30, 2017 and 2016, respectively.
9.    ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in accumulated other comprehensive income by component for the nine months ended September 30, 2017 and 2016:
 
Currency Translation Adjustment, Net of Tax
 
Net Unrealized
Gain (Loss) on
Cash Flow Hedging Arrangements,
Net of Tax
 
Pension and Post-Retirement Benefit Related Items,
Net of Tax
 
Total
Balance at December 31, 2016
$
(115,322
)
 
$
(2,232
)
 
$
(237,444
)
 
$
(354,998
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Amounts recognized in accumulated other comprehensive income (loss), net of tax

 
(578
)
 

 
(578
)
Foreign currency translation adjustment
78,447

 

 
(12,054
)
 
66,393

Amounts recognized from accumulated other comprehensive income (loss), net of tax

 
365

 
11,181

 
11,546

Net change in other comprehensive income (loss), net of tax
78,447

 
(213
)
 
(873
)
 
77,361

Balance at September 30, 2017
$
(36,875
)
 
$
(2,445
)
 
$
(238,317
)
 
$
(277,637
)
 
Currency Translation Adjustment, Net of Tax
 
Net Unrealized
Gain (Loss) on
Cash Flow Hedging Arrangements,
Net of Tax
 
Pension and Post-Retirement Benefit Related Items,
Net of Tax
 
Total
Balance at December 31, 2015
$
(57,394
)
 
$
3,016

 
$
(212,271
)
 
$
(266,649
)
Other comprehensive income (loss), net of tax:

 

 

 

Unrealized gains (losses) on cash flow hedging arrangements

 
(3,760
)
 
(4,545
)
 
(8,305
)
Foreign currency translation adjustment
162

 
(217
)
 
(2,071
)
 
(2,126
)
Amounts recognized from accumulated other comprehensive income (loss), net of tax

 
(3,121
)
 
13,798

 
10,677

Net change in other comprehensive income (loss), net of tax
162

 
(7,098
)
 
7,182

 
246

Balance at September 30, 2016
$
(57,232
)
 
$
(4,082
)
 
$
(205,089
)
 
$
(266,403
)


- 17 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The following table presents amounts recognized from accumulated other comprehensive income (loss) for the three and nine month periods ended September 30:
 
 
Three months ended September 30,
 
 
 
 
2017
 
2016
 
Location of Amounts Recognized in Earnings
Effective portion of (gains) / losses on cash flow hedging arrangements:
 
 
 
 
 
 
Interest rate swap agreements
 
$
424

 
$
258

 
Interest expense
Cross currency swap agreement
 
(1,866
)
 

 
(a)
Foreign currency forward contracts
 

 
(1,601
)
 
Cost of sales - products
Total before taxes
 
(1,442
)
 
(1,343
)
 
 
Provision for taxes
 
18

 
(229
)
 
Provision for taxes
Total, net of taxes
 
$
(1,460
)
 
$
(1,114
)
 
 
 
 
 
 
 
 
 
Recognition of defined benefit pension and post-retirement items:
 
 
 
 
 
 
Recognition of actuarial losses and prior service cost, before taxes
 
$
5,035

 
$
3,996

 
(b)
Provision for taxes
 
1,319

 
1,033

 
Provision for taxes
Total, net of taxes
 
$
3,716

 
$
2,963

 
 
(a) The cross currency swap reflects an unrealized gain of $1.3 million recorded in other charges (income) that was offset by the underlying unrealized gain on the hedged debt. The cross currency swap also reflects a realized gain of $0.6 million recorded in interest expense.
(b) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and post-retirement cost. See Note 11 for additional details for the three and nine months ended September 30, 2017 and 2016.
 
 
Nine months ended September 30,
 
 
 
 
2017
 
2016
 
Location of Amounts Recognized in Earnings
Effective portion of (gains) / losses on cash flow hedging arrangements:
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,273

 
$
784

 
Interest expense
Cross currency swap agreement
 
(454
)
 

 
(a)
Foreign currency forward contracts
 

 
(4,532
)
 
Cost of sales - products
Total before taxes
 
819

 
(3,748
)
 
 
Provision for taxes
 
454

 
(627
)
 
Provision for taxes
Total, net of taxes
 
$
365

 
$
(3,121
)
 
 
 
 
 
 
 
 
 
Recognition of defined benefit pension and post-retirement items:
 
 
 
 
 
 
Recognition of actuarial losses, settlement loss and prior service cost, before taxes
 
$
15,128

 
$
19,964

 
(b)
Provision for taxes
 
3,947

 
6,166

 
Provision for taxes
Total, net of taxes
 
$
11,181

 
$
13,798

 
 
(a) The cross currency swap reflects an unrealized loss of $0.2 million recorded in other charges (income) that was offset by the underlying unrealized gain on the hedged debt. The cross currency swap also reflects a realized gain of $0.6 million recorded in interest expense.
(b) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and post-retirement cost. See Note 11 for additional details for the three and nine months ended September 30, 2017 and 2016.


- 18 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Comprehensive income (loss), net of tax consisted of the following as of September 30:
 
Three Months Ended
 
Nine Months Ended
 
2017
 
2016
 
2017
 
2016
Net earnings
$
104,950

 
$
101,332

 
$
298,996

 
$
246,594

Other comprehensive income (loss), net of tax
20,749

 
16,372

 
77,361

 
246

Comprehensive income, net of tax
$
125,699

 
$
117,704

 
$
376,357

 
$
246,840

10.    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, relating to outstanding stock options and restricted stock units:
 
2017
 
2016
Three months ended
690,096

 
513,342

Nine months ended
682,205

 
508,512

The determination of the common share equivalents for the three and nine months ended September 30, 2017 includes the effect of the adoption of guidance ASU 2016-09 as described in Note 2. For the three months ended September 30, 2017, there were no anti-dilutive outstanding options or restricted stock units. Outstanding options and restricted stock units to purchase or receive 17 and 84,293 shares of common stock for the three month periods ended September 30, 2017 and 2016, and options and restricted stock units to purchase or receive 35 and 84,712 for the nine month periods ended September 30, 2017 and 2016, respectively, have been excluded from the calculation of diluted weighted average of common and common equivalent shares as such options and restricted stock units would be anti-dilutive.

11.    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
 
Total
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost, net
$
141

 
$
103

 
$
4,008

 
$
4,216

 
$

 
$

 
4,149

 
4,319

Interest cost on projected benefit obligations
1,094

 
1,014

 
2,269

 
2,542

 
18

 
19

 
3,381

 
3,575

Expected return on plan assets
(1,684
)
 
(1,868
)
 
(7,910
)
 
(8,177
)
 

 

 
(9,594
)
 
(10,045
)
Recognition of prior service cost

 

 
(1,611
)
 
(1,288
)
 
(195
)
 
(469
)
 
(1,806
)
 
(1,757
)
Recognition of actuarial losses/(gains)
1,639

 
1,907

 
5,676

 
4,519

 
(474
)
 
(673
)
 
6,841

 
5,753

Net periodic pension cost/(credit)
$
1,190

 
$
1,156

 
$
2,432

 
$
1,812

 
$
(651
)
 
$
(1,123
)
 
$
2,971

 
$
1,845



- 19 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – 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
 
Total
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost, net
$
423

 
$
328

 
$
12,086

 
$
12,606

 
$

 
$

 
12,509

 
12,934

Interest cost on projected benefit obligations
3,282

 
3,414

 
6,294

 
7,967

 
54

 
57

 
9,630

 
11,438

Expected return on plan assets
(5,052
)
 
(5,912
)
 
(22,795
)
 
(25,020
)
 

 

 
(27,847
)
 
(30,932
)
Recognition of prior service cost

 

 
(4,439
)
 
(3,856
)
 
(585
)
 
(1,408
)
 
(5,024
)
 
(5,264
)
Recognition of actuarial losses/(gains)
4,917

 
5,699

 
16,657

 
13,585

 
(1,422
)
 
(2,019
)
 
20,152

 
17,265

Settlement charge

 
7,963

 

 

 

 

 

 
7,963

Net periodic pension cost/(credit)
$
3,570

 
$
11,492

 
$
7,803

 
$
5,282

 
$
(1,953
)
 
$
(3,370
)
 
$
9,420

 
$
13,404


As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, the Company expects to make employer contributions of approximately $19.4 million to its non-U.S. pension plans and employer contributions of approximately $0.5 million to its U.S. post-retirement medical plan during the year ended December 31, 2017. These estimates may change based upon several factors, including fluctuations in currency exchange rates, actual returns on plan assets and changes in legal requirements.

In February 2016 the Company offered former employees a one-time option to receive a lump sum distribution of their vested pension plan benefits. Based upon the eligible participant acceptance, $14.6 million was paid from plan assets to these former employees in the second quarter of 2016 with a corresponding decrease in the benefit obligation. The Company incurred a one-time non-cash settlement charge recorded in other charges (income), net during the second quarter of 2016 of approximately $8.2 million, of which $8.0 million, $4.9 million after tax, was reclassified from accumulated other comprehensive income.

12.    RESTRUCTURING CHARGES
For the three and nine months ended September 30, 2017, the Company has incurred $3.4 million and $8.8 million of restructuring expenses which primarily comprised of employee-related costs. Liabilities related to restructuring activities are included in accrued and other liabilities in the consolidated balance sheet.
A rollforward of the Company’s accrual for restructuring activities for the nine months ended September 30, 2017 is as follows:
 
 
Total
Balance at December 31, 2016
 
$
9,531

Restructuring charges
 
8,840

Cash payments and utilization
 
(7,701
)
Impact of foreign currency
 
837

Balance at September 30, 2017
 
$
11,507



- 20 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

13.    OTHER CHARGES (INCOME), NET
Other charges (income), net includes $1.7 million and $1.1 million of acquisition costs for the three and nine months ended September 30, 2017 and 2016, respectively. The nine months ended September 30, 2017 also includes a one-time gain of $3.4 million relating to the sale of a facility in Switzerland in connection with the Company's initiative to consolidate certain Swiss operations into a new facility, while the nine months ended September 30, 2016 includes a one-time non-cash pension settlement charge of $8.2 million related to a lump sum offering to former employees of the Company's U.S. pension plan. Other charges (income), net also includes (gains) losses from foreign currency transactions and hedging activities, interest income, and other items.

14.    SEGMENT REPORTING
As disclosed in Note 16 to the Company's consolidated financial statements for the year ended December 31, 2016, the Company has determined there are five reportable segments:  U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations and Other.
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
 
 
 
 
 
As of September 30,
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
2017
September 30, 2017
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
239,221

 
$
24,187

 
$
263,408

 
$
43,004

 
$
409,172

Swiss Operations
33,923

 
136,960

 
170,883

 
39,213

 
22,252

Western European Operations
171,722

 
40,287

 
212,009

 
30,885

 
90,832

Chinese Operations
125,067

 
68,625

 
193,692

 
69,086

 
673

Other (a)
128,866

 
1,754

 
130,620

 
16,776

 
15,489

Eliminations and Corporate (b)

 
(271,813
)
 
(271,813
)
 
(36,079
)
 

Total
$
698,799

 
$

 
$
698,799

 
$
162,885

 
$
538,418


 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the nine months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2017
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
693,405

 
$
69,692

 
$
763,097

 
$
126,973

 
 
Swiss Operations
95,957

 
395,859

 
491,816

 
113,181

 
 
Western European Operations
470,206

 
127,112

 
597,318

 
77,283

 
 
Chinese Operations
323,940

 
178,593

 
502,533

 
167,873

 
 
Other (a)
363,514

 
5,481

 
368,995

 
45,106

 
 
Eliminations and Corporate (b)

 
(776,737
)
 
(776,737
)
 
(91,649
)
 
 
Total
$
1,947,022

 
$

 
$
1,947,022

 
$
438,767

 
 

(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.

- 21 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

 
Net Sales to
 
Net Sales to
 
 
 
 
 
As of September 30,
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
2016
September 30, 2016
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
235,715

 
$
20,151

 
$
255,866

 
$
43,779

 
$
356,089

Swiss Operations
32,390

 
127,569

 
159,959

 
36,854

 
22,280

Western European Operations
159,025

 
43,816

 
202,841

 
30,218

 
87,403

Chinese Operations
99,349

 
62,368

 
161,717

 
51,669

 
669

Other (a)
124,119

 
1,770

 
125,889

 
16,721

 
15,703

Eliminations and Corporate (b)

 
(255,674
)
 
(255,674
)
 
(27,566
)
 

Total
$
650,598

 
$

 
$
650,598

 
$
151,675

 
$
482,144


 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the nine months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2016
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
640,618

 
$
61,884

 
$
702,502

 
$
114,046

 
 
Swiss Operations
90,075

 
374,863

 
464,938

 
107,673

 
 
Western European Operations
450,940

 
121,308

 
572,248

 
74,711

 
 
Chinese Operations
277,182

 
166,948

 
444,130

 
134,229

 
 
Other (a)
339,743

 
4,824

 
344,567

 
41,064

 
 
Eliminations and Corporate (b)

 
(729,827
)
 
(729,827
)
 
(88,958
)
 
 
Total
$
1,798,558

 
$

 
$
1,798,558

 
$
382,765

 
 

(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
 
2017
 
2016
 
2017
 
2016
Earnings before taxes
$
139,627

 
$
133,324

 
$
380,322

 
$
322,909

Amortization
10,716

 
9,087

 
31,010

 
26,166

Interest expense
8,248

 
7,167

 
24,160

 
20,619

Restructuring charges
3,385

 
1,494

 
8,840

 
4,579

Other charges (income), net
909

 
603

 
(5,565
)
 
8,492

Segment profit
$
162,885

 
$
151,675

 
$
438,767

 
$
382,765


During the three months ended September 30, 2017, restructuring charges of $3.4 million were recognized, of which $1.7 million, $0.2 million, $1.3 million, and $0.2 million related to the Company’s U.S., Swiss, Western European and Chinese Operations, respectively. Restructuring charges of $1.5 million were recognized during the three months ended September 30, 2016, of which $0.6 million, $0.3 million, $0.5 million and $0.1 million related to the Company’s U.S., Swiss, Western European and Other Operations, respectively. Restructuring charges of $8.8 million were recognized during the nine months ended September 30, 2017, of which $4.7 million, $1.1 million, $2.0 million, $0.3 million, and $0.8

- 22 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2017 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

million related to the Company’s U.S., Swiss, Western European, Chinese, and Other Operations, respectively. Restructuring charges of $4.6 million were recognized during the nine months ended September 30, 2016, of which $1.7 million, $0.9 million, $1.7 million, $0.1 million and $0.2 million related to the Company’s U.S., Swiss, Western European, Chinese and Other Operations, respectively.

15.    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.

- 23 -


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, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
Changes in local currency 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.
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, 2017 and 2016 (amounts in thousands).
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
Net sales
$
698,799

 
100.0
 
$
650,598

 
100.0
 
$
1,947,022

 
100.0

 
$
1,798,558

 
100.0
Cost of sales
298,522

 
42.7
 
281,104

 
43.2
 
828,928

 
42.6

 
781,581

 
43.5
Gross profit
400,277

 
57.3
 
369,494

 
56.8
 
1,118,094

 
57.4

 
1,016,977

 
56.5
Research and development
32,477

 
4.6
 
30,139

 
4.6
 
96,723

 
5.0

 
89,813

 
5.0
Selling, general and administrative
204,915

 
29.3
 
187,680

 
28.8
 
582,604

 
29.9

 
544,399

 
30.3
Amortization
10,716

 
1.5
 
9,087

 
1.4
 
31,010

 
1.6

 
26,166

 
1.5
Interest expense
8,248

 
1.2
 
7,167

 
1.1
 
24,160

 
1.2

 
20,619

 
1.1
Restructuring charges
3,385

 
0.5
 
1,494

 
0.3
 
8,840

 
0.5

 
4,579

 
0.2
Other charges (income), net
909

 
0.2
 
603

 
0.1
 
(5,565
)
 
(0.3
)
 
8,492

 
0.5
Earnings before taxes
139,627

 
20.0
 
133,324

 
20.5
 
380,322

 
19.5

 
322,909

 
17.9
Provision for taxes
34,677

 
5.0
 
31,992

 
4.9
 
81,326

 
4.1

 
76,315

 
4.2
Net earnings
$
104,950

 
15.0
 
$
101,332

 
15.6
 
$
298,996

 
15.4

 
$
246,594

 
13.7
Net sales
Net sales were $698.8 million and $650.6 million for the three months ended September 30, 2017 and 2016, respectively, and $1.947 billion and $1.799 billion for the nine months ended September 30, 2017 and 2016. This represents an increase of 7% and 8% in U.S. dollars for the three and nine months ended September 30, 2017. Excluding the effect of currency exchange rate fluctuations, or in local currencies, net sales increased 6% and 9% for the three and nine months ended September 30, 2017. The Biotix and Troemner acquisitions contributed approximately 1% to

- 24 -


our net sales for the three and nine months ended September 30, 2017. Global market conditions have generally been favorable during the first nine months of 2017 and we continue to benefit from the execution of our global sales and marketing programs. However, we remain cautious given the economic uncertainty that exists in certain regions of the world. We will also face difficult prior period comparisons during the fourth quarter of 2017 and especially as we enter 2018.
Net sales by geographic destination for the three and nine months ended September 30, 2017 in U.S. dollars increased in the Americas 2% and 8%, in Europe 7% and 5%, and in Asia/Rest of World 15% and 12%, respectively. Our net sales by geographic destination for the three and nine months ended September 30, 2017 in local currencies increased in the Americas 2% and 8%, in Europe 2% and 6%, and in Asia/Rest of World 15% and 13%, respectively. Our food retailing sales declined significantly in the third quarter due to very strong growth in the prior year and the timing of project activity. The decline in food retailing during the three months ended September 30, 2017 reduced local currency net sales in the Americas by 5% and Europe by 2%. The Biotix and Troemner acquisitions contributed approximately 2% to net sales in the Americas for the three and nine months ended September 30, 2017. A discussion of sales by operating segment is included below.
As described in Note 16 to our consolidated financial statements for the year ended December 31, 2016, 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 7% in U.S. dollars and 6% in local currencies for the three months ended September 30, 2017 and increased 9% in U.S. dollars and 10% in local currencies for the nine