10-Q 1 mtd10q93018.htm FORM 10-Q Q3 2018 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, 2018, 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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer.  X  Accelerated filer __ Non-accelerated filer __ 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 25,045,028 shares of Common Stock outstanding at September 30, 2018.
 




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, 2018 and 2017
(In thousands, except share data)
(unaudited)

 
September 30,
2018
 
September 30,
2017
Net sales
 
 
 
Products
$
576,340

 
$
544,408

Service
158,506

 
154,391

Total net sales
734,846

 
698,799

Cost of sales
 
 
 
Products
232,851

 
216,496

Service
82,741

 
81,328

Gross profit
419,254

 
400,975

Research and development
34,838

 
32,203

Selling, general and administrative
202,451

 
207,033

Amortization
11,856

 
10,716

Interest expense
9,003

 
8,248

Restructuring charges
2,222

 
3,385

Other charges (income), net
(1,479
)
 
(237
)
Earnings before taxes
160,363

 
139,627

Provision for taxes
33,710

 
34,677

Net earnings
$
126,653

 
$
104,950

 


 
 
Basic earnings per common share:
 
 
 
Net earnings
$
5.04

 
$
4.10

Weighted average number of common shares
25,126,061

 
25,613,433

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
4.93

 
$
3.99

Weighted average number of common and common equivalent shares
25,683,365

 
26,303,529

 
 
 
 
Comprehensive income, net of tax (Note 9)
$
108,845

 
$
125,699



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, 2018 and 2017
(In thousands, except share data)
(unaudited)

 
September 30,
2018
 
September 30,
2017
Net sales
 
 
 
Products
$
1,649,762

 
$
1,514,516

Service
467,901

 
432,506

Total net sales
2,117,663

 
1,947,022

Cost of sales
 
 
 
Products
657,167

 
591,395

Service
253,684

 
235,651

Gross profit
1,206,812

 
1,119,976

Research and development
104,866

 
95,985

Selling, general and administrative
611,149

 
588,313

Amortization
35,561

 
31,010

Interest expense
25,671

 
24,160

Restructuring charges
13,956

 
8,840

Other charges (income), net
(5,795
)
 
(8,654
)
Earnings before taxes
421,404

 
380,322

Provision for taxes
89,979

 
81,326

Net earnings
$
331,425

 
$
298,996

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
13.10

 
$
11.60

Weighted average number of common shares
25,296,680

 
25,764,472

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
12.81

 
$
11.31

Weighted average number of common and common equivalent shares
25,877,979

 
26,446,677

 
 
 
 
Comprehensive income, net of tax (Note 9)
$
313,302

 
$
376,357



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, 2018 and December 31, 2017
(In thousands, except share data)
(unaudited)

 
September 30,
2018
 
December 31,
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
137,448

 
$
148,687

Trade accounts receivable, less allowances of $16,515 at September 30, 2018
 
 
 
and $15,549 at December 31, 2017
494,887

 
528,615

Inventories
277,266

 
255,390

Other current assets and prepaid expenses
61,898

 
74,031

Total current assets
971,499

 
1,006,723

Property, plant and equipment, net
697,689

 
668,271

Goodwill
537,862

 
539,838

Other intangible assets, net
220,904

 
226,718

Deferred tax assets, net
36,423

 
41,425

Other non-current assets
93,287

 
66,830

Total assets
$
2,557,664

 
$
2,549,805

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
156,447

 
$
167,627

Accrued and other liabilities
128,760

 
152,834

Accrued compensation and related items
142,500

 
170,159

Deferred revenue and customer prepayments
123,526

 
107,166

Taxes payable
90,483

 
72,210

Short-term borrowings and current maturities of long-term debt
55,753

 
19,677

Total current liabilities
697,469

 
689,673

Long-term debt
988,894

 
960,170

Deferred tax liabilities, net
50,216

 
51,230

Other non-current liabilities
289,470

 
301,452

Total liabilities
2,026,049

 
2,002,525

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 25,045,028 and
 
 
 
25,541,393 shares at September 30, 2018 and December 31, 2017, respectively
448

 
448

Additional paid-in capital
759,643

 
747,138

Treasury stock at cost (19,740,983 shares at September 30, 2018, and 19,244,618 shares at December 31, 2017)
(3,708,805
)
 
(3,368,182
)
Retained earnings
3,763,858

 
3,433,282

Accumulated other comprehensive loss
(283,529
)
 
(265,406
)
Total shareholders’ equity
531,615

 
547,280

Total liabilities and shareholders’ equity
$
2,557,664

 
$
2,549,805



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, 2018 and twelve months ended December 31, 2017
(In thousands, except share data)
(unaudited)

Insert Title Here
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
 
Treasury Stock
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
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
270,413

 

 

 
38,586

 
(9,937
)
 

 
28,649

Repurchases of common stock
(749,254
)
 

 

 
(399,997
)
 

 

 
(399,997
)
Effect of accounting change

 

 

 

 
1,539

 

 
1,539

Share-based compensation

 

 
16,582

 

 

 

 
16,582

Net earnings

 

 

 

 
375,972

 

 
375,972

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax

 

 

 

 

 
89,592

 
89,592

Balance at December 31, 2017
25,541,393

 
$
448

 
$
747,138

 
$
(3,368,182
)
 
$
3,433,282

 
$
(265,406
)
 
$
547,280

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
102,174

 

 

 
15,626

 
(849
)
 

 
14,777

Repurchases of common stock
(598,539
)
 

 

 
(356,249
)
 

 

 
(356,249
)
Share-based compensation

 

 
12,505

 

 

 

 
12,505

Net earnings

 

 

 

 
331,425

 

 
331,425

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

 

 

 

 

 
(18,123
)
 
(18,123
)
Balance at September 30, 2018
25,045,028

 
$
448

 
$
759,643

 
$
(3,708,805
)
 
$
3,763,858

 
$
(283,529
)
 
$
531,615

 
 
 
 
 
 
 
 
 
 
 
 
 
 


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, 2018 and 2017
(In thousands)
(unaudited)

 
September 30,
2018
 
September 30,
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
331,425

 
$
298,996

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
27,889

 
24,421

Amortization
35,561

 
31,010

Deferred tax benefit
(11,901
)
 
(7,754
)
Share-based compensation
12,505

 
11,823

Gain on facility sale

 
(3,394
)
Other
(2,706
)
 
227

Increase (decrease) in cash resulting from changes in:
 
 
 
Trade accounts receivable, net
26,017

 
1,891

Inventories
(26,224
)
 
(23,596
)
Other current assets
863

 
(2,526
)
Trade accounts payable
(7,753
)
 
(5,857
)
Taxes payable
13,482

 
11,386

Accruals and other
(32,725
)
 
14,608

Net cash provided by operating activities
366,433

 
351,235

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
7,809

 
10,437

Purchase of property, plant and equipment
(96,665
)
 
(85,826
)
Acquisitions
(4,962
)
 
(108,445
)
Net hedging settlements on intercompany loans
(780
)
 
3,716

Net cash used in investing activities
(94,598
)
 
(180,118
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
772,274

 
985,694

Repayments of borrowings
(703,704
)
 
(834,061
)
Proceeds from stock option exercises
14,777

 
23,315

Repurchases of common stock
(356,249
)
 
(334,998
)
Other financing activities
(1,664
)
 
(7,205
)
Net cash used in financing activities
(274,566
)
 
(167,255
)
Effect of exchange rate changes on cash and cash equivalents
(8,508
)
 
6,550

Net increase (decrease) in cash and cash equivalents
(11,239
)
 
10,412

Cash and cash equivalents:
 
 
 
Beginning of period
148,687

 
158,674

End of period
$
137,448

 
$
169,086



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, 2018 – 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, 2017.
The accompanying interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.
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, 2017.
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, 2018 – 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,
2018
 
December 31,
2017
Raw materials and parts
$
125,197

 
$
118,790

Work-in-progress
50,546

 
43,035

Finished goods
101,523

 
93,565

 
$
277,266

 
$
255,390

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, 2018
 
December 31, 2017
 
Gross
Amount
 
Accumulated
Amortization
 
Intangibles, Net
 
Gross
Amount
 
Accumulated
Amortization
 
Intangibles, Net
Customer relationships
$
198,042

 
$
(48,173
)
 
$
149,869

 
$
198,527

 
$
(41,794
)
 
$
156,733

Proven technology and patents
74,732

 
(42,036
)
 
32,696

 
70,311

 
(38,890
)
 
31,421

Tradenames (finite life)
4,557

 
(2,904
)
 
1,653

 
4,518

 
(2,807
)
 
1,711

Tradenames (indefinite life)
35,536

 

 
35,536

 
35,562

 

 
35,562

Other
3,668

 
(2,518
)
 
1,150

 
3,490

 
(2,199
)
 
1,291

 
$
316,535

 
$
(95,631
)
 
$
220,904

 
$
312,408

 
$
(85,690
)
 
$
226,718


- 9 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company recognized amortization expense associated with the above intangible assets of $3.6 million and $2.9 million for the three months ended September 30, 2018 and 2017, respectively and $10.7 million and $7.9 million for the nine months ended September 30, 2018 and 2017, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $14.2 million for 2018, $13.9 million for 2019, $13.5 million for 2020, $12.9 million for 2021, $12.4 million for 2022 and $12.2 million for 2023. Purchased intangible amortization was $3.4 million, $2.5 million after tax, and $2.6 million, $1.7 million after tax, for the three months ended September 30, 2018 and 2017, respectively and $10.0 million, $7.5 million after tax, and $7.2 million, $4.7 million after tax, for the nine months ended September 30, 2018 and 2017, respectively.
In addition to the above amortization, the Company recorded amortization expense associated with capitalized software of $8.2 million and $7.7 million for the three months ended September 30, 2018 and 2017, respectively and $24.7 million and $22.9 million for the nine months ended September 30, 2018 and 2017, respectively.
Revenue Recognition
Product revenue is recognized from contracts with customers when a customer has obtained control of a product. The Company considers control to have transferred upon shipping terms. To the extent the Company’s contracts have a separate performance obligation, revenue related to any post-shipment performance obligation is deferred until completed. Shipping and handling costs charged to customers are included in total net sales and the associated expense is a component of cost of sales. Certain products are also sold through indirect distribution channels whereby the distributor assumes any further obligations to the end customer. Revenue is recognized on these distributor arrangements upon transfer of control to the distributor. Contracts do not contain variable pricing arrangements that are retrospective, except for rebate programs. Rebates are estimated based on expected sales volumes and offset against revenue at the time such revenue is recognized. 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. The provisions for estimated returns and rebates are immaterial to the consolidated financial statements.
Certain of the Company’s product arrangements include separate performance obligations, primarily related to installation. Such performance obligations are accounted for separately when the deliverables have stand-alone value and the satisfaction of the undelivered performance obligations is probable and within the Company's control. The allocation of revenue between the performance obligations is based on the observable standalone selling prices at the time of the sale in accordance with a number of factors including service technician billing rates, time to install and geographic location.
Software is generally not considered a distinct performance obligation with the exception of a few small software applications. The Company does not usually sell software products without the related hardware instrument as the software is embedded in the product. 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.
Service revenue not under contract is recognized upon the completion of the service performed. Revenue from spare parts sold on a stand-alone basis is recognized when control is transferred to the customer, which is generally at the time of shipment or delivery. Revenue from service contracts is recognized ratably over the contract period using a time-based method. These contracts represent an obligation to perform repair and other services including regulatory compliance qualification, calibration, certification, and preventative maintenance on a customer’s pre-defined equipment over the contract period.

- 10 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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 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 $4.3 million and $12.5 million of share-based compensation expense for the three and nine months ended September 30, 2018, respectively, compared to $4.0 million and $11.8 million for the corresponding periods in 2017.
Research and Development
Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.

Recent Accounting Pronouncements
On January 1, 2018 the Company retrospectively implemented ASU 2017-07 to ASC 715 "Compensation - Retirement Benefits," which requires the Company to report the non-service cost components of net periodic benefit cost (pension cost) in other charges (income), net. These amounts were previously reported in selling, general, and administrative, cost of sales and research and development in the consolidated statement of operations. Nonservice pension benefits were $1.6 million and $1.2 million for the three months ended September 30, 2018 and 2017, respectively, and $4.7 million and $3.1 million and for the nine months ended September 30, 2018 and 2017, respectively.
In February 2016 and July 2018, the FASB issued ASU 2016-02 and ASU 2018-11 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. The Company is currently evaluating the impact of this guidance as well as the election of certain practical expedients available within the ASU. The Company has identified its significant leases by geography and by asset class and made progress in developing accounting policies and future processes to ensure an effective adoption of the new standard. The ASU will be effective beginning the first quarter of 2019 and the Company will adopt using a modified retrospective approach without adjusting comparative periods.
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income". The accounting update provided entities with guidance on how to reclassify certain stranded tax effects from accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act, which was a tax bill enacted by the U.S. government in December 2017. The new guidance is effective for the year beginning January 1, 2019 and the Company is still evaluating the impact on the financial statements.

- 11 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

3.
REVENUE
On January 1, 2018, the Company adopted ASC 606 "Revenue from Contracts with Customers" and all the related amendments using the modified retrospective method, whereby the adoption does not impact any prior periods. The effect of adopting the new standard did not require any cumulative effect adjustment to retained earnings as of January 1, 2018. There was no impact to our consolidated statements of operations, balance sheet, or statement of cash flows as of and for the period ended September 30, 2018.
The Company disaggregates revenue from contracts with customers by product, service, timing of revenue recognition and geography. A summary by the Company’s reportable segments follows for the three and nine months ended September 30, 2018:
Three months ended September 30, 2018
U.S. Operations
 
Swiss Operations
 
Western European Operations
 
Chinese Operations
 
Other Operations
 
Total
Product Revenue
$
195,554

 
$
24,791

 
$
124,412

 
$
127,050

 
$
104,533

 
$
576,340

Service Revenue:
 
 
 
 
 
 
 
 
 
 
 
Point in time
48,910

 
4,663

 
29,365

 
10,200

 
25,645

 
118,783

Over time
10,915

 
2,009

 
19,393

 
2,848

 
4,558

 
39,723

Total
$
255,379

 
$
31,463

 
$
173,170

 
$
140,098

 
$
134,736

 
$
734,846

Nine months ended September 30, 2018
U.S. Operations
 
Swiss Operations
 
Western European Operations
 
Chinese Operations
 
Other Operations
 
Total
Product Revenue
$
559,566

 
$
75,520

 
$
365,680

 
$
351,052

 
$
297,944

 
$
1,649,762

Service Revenue:
 
 
 
 
 
 
 
 
 
 
 
Point in time
146,515

 
14,410

 
92,331

 
28,212

 
74,853

 
356,321

Over time
30,517

 
6,152

 
54,303

 
8,037

 
12,571

 
111,580

Total
$
736,598

 
$
96,082

 
$
512,314

 
$
387,301

 
$
385,368

 
$
2,117,663

A summary of revenue by major geographic destination for the three and nine months ended September 30 follows:
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Americas
$
280,512

 
$
807,119

Europe
216,956

 
643,514

Asia / Rest of World
237,378

 
667,030

Total
$
734,846

 
$
2,117,663


- 12 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company's global revenue mix by product category is laboratory (51% of sales), industrial (41% of sales) and retail (8% of sales). The Company's product revenue by reportable segment is proportionately similar to the Company's global mix except the Company's Swiss Operations is largely comprised of laboratory products while the Company's Chinese Operations has a slightly higher percentage of industrial products. A summary of the Company’s revenue by product category for the three and nine months ended September 30, 2018 is as follows:
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Laboratory
$
368,967

 
$
1,075,853

Industrial
305,248

 
873,181

Retail
60,631

 
168,629

Total
$
734,846

 
$
2,117,663


The payment terms in the Company’s contracts with customers do not exceed one year and therefore contracts do not contain a significant financing component. In most cases, after appropriate credit evaluations, payments are due in arrears and are recognized as receivables. Unbilled revenue is recorded when performance obligations have been satisfied, but the Company does not have a right to receive payment. Unbilled revenue as of September 30, 2018 was $19.4 million and is included within accounts receivable. Deferred revenue and customer prepayments are recorded when cash payments are received or due in advance of the performance obligation being satisfied. Deferred revenue primarily includes prepaid service contracts, as well as deferred installation.
Changes in the components of deferred revenue and customer prepayments during the period are as follows:
 
 
Deferred Revenue
and Customer Pre-payments
Beginning balances as of December 31, 2017
 
$
107,166

Customer pre-payments/deferred revenue
 
469,173

Revenue recognized
 
(450,312
)
Foreign currency translation
 
(2,501
)
Ending balance as of September 30, 2018
 
$
123,526

The Company generally expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general, and administrative expenses. The Company has not disclosed the value of unsatisfied performance obligations other than customer prepayments and deferred revenue above as most contracts have an expected length of one year or less and amounts greater than one year are immaterial.
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 subsidiaries. For additional disclosures on the fair value of financial instruments, see Note 5 to the interim consolidated financial statements.

- 13 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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.
In June 2013, the Company entered into 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, 2018 and December 31, 2017, 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 gain of $2.7 million based upon interest rates and foreign currency rates at September 30, 2018, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through September 30, 2018, 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, 2018 and December 31, 2017, respectively, and disclosed in Note 5. The Company recognized in other charges (income), a net loss of $4.4 million and a net gain of $4.5 million during the three months ended September 30, 2018 and 2017, respectively, and a net loss of $0.2 million and net gain of $6.3 million during the nine months ended September 30, 2018 and 2017, respectively. The gains and losses are primarily offset by the underlying transaction gains and losses on the related intercompany balances. At September 30, 2018 and December 31, 2017, these contracts had a notional value of $452.1 million and $394.8 million, respectively.    
5.    FAIR VALUE MEASUREMENTS
At September 30, 2018 and December 31, 2017, the Company had derivative assets totaling $3.0 million and $1.9 million, respectively, and derivative liabilities totaling $1.3 million and $2.4 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

- 14 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

counterparty credit risk in determining fair value and determined these adjustments were insignificant at September 30, 2018 and December 31, 2017.
At September 30, 2018 and December 31, 2017, the Company had $15.3 million and $5.6 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.
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 carrying value of the Company's debt exceeds the fair value by approximately $5.1 million as of September 30, 2018.
The fair value of the contingent consideration obligation of $30.9 million relating to the Biotix acquisition as of September 30, 2018 is 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.

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, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
15,310

 
$

 
$
15,310

 
$

 
$
5,616

 
$

 
$
5,616

 
$

Interest rate swap agreements
 
2,404

 

 
2,404

 

 

 

 

 

Cross currency swap agreement
 
185

 

 
185

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments
 
442

 

 
442

 

 
1,912

 

 
1,912

 

Total
 
$
18,341

 
$

 
$
18,341

 
$

 
$
7,528

 
$

 
$
7,528

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$

 
$

 
$

 
$
1,292

 
$

 
$
1,292

 
$

Cross currency swap agreement
 

 

 

 

 
106

 

 
106

 

Foreign currency forward contracts not designated as hedging instruments
 
1,287

 

 
1,287

 

 
986

 

 
986

 

Total
 
$
1,287

 
$

 
$
1,287

 
$

 
$
2,384

 
$

 
$
2,384

 
$


- 15 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

6.    INCOME TAXES
The Company's reported tax rate was 21% and 25% during the three months ended September 30, 2018 and 2017, respectively and 21% during both the nine months ended September 30, 2018 and 2017, respectively. The provision for taxes is based upon using the Company's projected annual effective tax rate of 21.5% before non-recurring discrete tax items for the three and nine months periods ended September 30, 2018. The difference between the Company's projected annual effective tax rate of 21.5% and the reported tax rate is related to the timing of excess tax benefits associated with stock option exercises. The three month period ended September 30, 2018 also includes a cumulative year-to-date benefit of $1.3 million from reducing our annual projected effective tax rate from 22.0% to 21.5% related to the first six months of 2018.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") significantly revised U.S. corporate income tax law. The Act includes, among other things, a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective for taxable years beginning after December 31, 2017, and the implementation of a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax") that is payable over a period of up to eight years.
The Company's accounting for the Act is based upon reasonable estimates, however, the estimates may change upon the finalization of the Act's implementation and additional interpretive guidance from regulatory authorities. Among other things, the Company needs to complete its analysis of historical foreign earnings and related taxes paid and its analysis of foreign cash equivalents. In addition, the Company needs to complete its analysis of deemed repatriation of deferred foreign income and related state tax effects. The Company will complete its accounting for the above tax effects of the Act during the fourth quarter of 2018 as provided by SAB 118 and will reflect any adjustments to its provisional amounts at that time. We estimate any such adjustments will not be material to our financial statements.
7.    DEBT
Debt consisted of the following at September 30, 2018:
 
September 30, 2018
 
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

 
146,938

 
146,938

Debt issuance costs, net
(950
)
 
(335
)
 
(1,285
)
Total Senior Notes
349,050

 
146,603

 
495,653

$1.1 billion Credit Agreement, interest at LIBOR plus 87.5 basis points
443,776

 
49,465

 
493,241

Other local arrangements
14

 
55,739

 
55,753

Total debt
792,840

 
251,807

 
1,044,647

Less: current portion
(14
)
 
(55,739
)
 
(55,753
)
Total long-term debt
$
792,826

 
$
196,068

 
$
988,894


- 16 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Credit Agreement
On June 15, 2018 the Company entered into an amended $1.1 billion Credit Agreement (the "Credit Agreement"), which amended its $800 million Amended and Restated Credit Agreement (the "Prior Credit Agreement"). As of September 30, 2018, the Company had $601 million of availability remaining under its Credit Agreement.
The Credit Agreement is provided by a group of financial institutions (similar to the Company's Prior Credit Agreement) and has a maturity date of June 15, 2023. It is a revolving credit facility and is not subject to any scheduled principal payments prior to maturity. The obligations under the Credit Agreement are unsecured.
Borrowings under the Credit Agreement bear interest at current market rates plus a margin based on the Company’s consolidated leverage ratio, which was set at LIBOR plus 87.5 basis points as of June 15, 2018. The Company must also pay facility fees that are tied to its leverage ratio. The Credit Agreement contains covenants that are the same as those contained in the Prior Credit Agreement, with which the Company was in compliance as of September 30, 2018. The Company is required to maintain a ratio of funded debt to Consolidated EBITDA of 3.5 to1.0 or less and an interest coverage ratio of 3.5 to 1.0 or greater. The Credit Agreement also places certain limitations on the Company, including limiting the ability to incur liens or indebtedness at a subsidiary level. In addition, the Credit Agreement has several events of default. The Company incurred approximately $0.1 million of debt extinguishment costs during 2018 related to the Prior Credit Agreement. The Company capitalized $2.0 million in financing fees during 2018 associated with the Credit Agreement which will be amortized to interest expense through 2023.
Other Local Arrangements
In April 2018, two of the Company's non-U.S. pension plans issued loans totaling $39.6 million (Swiss franc 38 million) to a wholly owned subsidiary of the Company. The loans have the same terms and conditions which include an interest rate of Swiss franc LIBOR plus 87.5 basis points, a maturity date of April 2019 and a one year renewal term and, as such, are classified as short-term debt on the Company's consolidated balance sheet. The proceeds were used to repay outstanding amounts on the Company's credit facility.

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 $1.8 million and $5.0 million for the three months ended September 30, 2018 and 2017, respectively, and a gain of $2.8 million and a loss $15.5 million for the nine months periods ended September 30, 2018 and 2017, respectively.

8.    SHARE REPURCHASE PROGRAM AND TREASURY STOCK
As of September 30, 2018, the Company had $227.2 million of remaining availability under the Company's share repurchase program. On November 8, 2018, the Company's Board of Directors authorized an additional $2.0 billion to the share repurchase program. 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.

- 17 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The Company has purchased 27.3 million shares since the inception of the program in 2004 through September 30, 2018. During the nine months ended September 30, 2018 and 2017, the Company spent $356.2 million and $335.0 million on the repurchase of 598,539 shares and 647,756 shares at an average price per share of $595.18 and $517.15, respectively. The Company also reissued 102,174 shares and 206,646 shares held in treasury for the exercise of stock options and restricted stock units during the nine months ended September 30, 2018 and 2017, 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, 2018 and 2017:
 
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, 2017
$
(31,340
)
 
$
(1,081
)
 
$
(232,985
)
 
$
(265,406
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) cash flow hedging arrangements

 
6,523

 

 
6,523

Foreign currency translation adjustment
(32,206
)
 

 
(749
)
 
(32,955
)
Amounts recognized from accumulated other comprehensive income (loss), net of tax

 
(2,528
)
 
10,837

 
8,309

Net change in other comprehensive income (loss), net of tax
(32,206
)
 
3,995

 
10,088

 
(18,123
)
Balance at September 30, 2018
$
(63,546
)
 
$
2,914

 
$
(222,897
)
 
$
(283,529
)
 
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:

 

 

 

Unrealized gains (losses) cash flow hedging arrangements

 
(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
)


- 18 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – 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,
 
 
 
 
2018
 
2017
 
Location of Amounts Recognized in Earnings
Effective portion of (gains) / losses on cash flow hedging arrangements:
 
 
 
 
 
 
Interest rate swap agreements
 
$
97

 
$
424

 
Interest expense
Cross currency swap agreement
 
(3,559
)
 
(1,866
)
 
(a)
Total before taxes
 
(3,462
)
 
(1,442
)
 
 
Provision for taxes
 
(252
)
 
18

 
Provision for taxes
Total, net of taxes
 
$
(3,210
)
 
$
(1,460
)
 
 
 
 
 
 
 
 
 
Recognition of defined benefit pension and post-retirement items:
 
 
 
 
 
 
Recognition of actuarial losses and prior service cost, before taxes
 
$
4,651

 
$
5,053

 
(b)
Provision for taxes
 
1,064

 
1,319

 
Provision for taxes
Total, net of taxes
 
$
3,587

 
$
3,716

 
 
(a) The cross currency swap reflects an unrealized gain of $2.9 million recorded in other charges (income) that was offset by the underlying unrealized loss on the hedged debt. The cross currency swap also reflects a realized gain of $0.8 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 months ended September 30, 2018 and 2017.
 
 
Nine months ended September 30,
 
 
 
 
2018
 
2017
 
Location of Amounts Recognized in Earnings
Effective portion of (gains) / losses on cash flow hedging arrangements:
 
 
 
 
 
 
Interest rate swap agreements
 
$
531

 
$
1,273

 
Interest expense
Cross currency swap agreement
 
(3,171
)
 
(454
)
 
(a)
Total before taxes
 
(2,640
)
 
819

 
 
Provision for taxes
 
(112
)
 
454

 
Provision for taxes
Total, net of taxes
 
$
(2,528
)
 
$
365

 
 
 
 
 
 
 
 
 
Recognition of defined benefit pension and post-retirement items:
 
 
 
 
 
 
Recognition of actuarial losses and prior service cost, before taxes
 
$
14,150

 
$
15,128

 
(b)
Provision for taxes
 
3,313

 
3,947

 
Provision for taxes
Total, net of taxes
 
$
10,837

 
$
11,181

 
 
(a) The cross currency swap reflects an unrealized gain of $1.0 million recorded in other charges (income) that was offset by the underlying unrealized loss on the hedged debt. The cross currency swap also reflects a realized gain of $2.2 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 12 for additional details for the nine months ended September 30, 2018 and 2017.


- 19 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – 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
 
2018
 
2017
 
2018
 
2017
Net earnings
$
126,653

 
$
104,950

 
$
331,425

 
$
298,996

Other comprehensive income (loss), net of tax
(17,808
)
 
20,749

 
(18,123
)
 
77,361

Comprehensive income, net of tax
$
108,845

 
$
125,699

 
$
313,302

 
$
376,357

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:
 
2018
 
2017
Three months ended
557,304

 
690,096

Nine months ended
581,299

 
682,205

Outstanding options and restricted stock units to purchase or receive 54,708 and 17 shares of common stock for the three month period ended September 30, 2018 and 2017, 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. Options and restricted stock units to purchase or receive 55,775 and 35 for the nine month period ended September 30, 2018 and 2017, 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
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost, net
$
273

 
$
141

 
$
3,752

 
$
4,008

 
$

 
$

 
4,025

 
4,149

Interest cost on projected benefit obligations
1,060

 
1,094

 
2,180

 
2,269

 
16

 
18

 
3,256

 
3,381

Expected return on plan assets
(1,733
)
 
(1,684
)
 
(7,733
)
 
(7,910
)
 

 

 
(9,466
)
 
(9,594
)
Recognition of prior service cost

 

 
(1,727
)
 
(1,611
)
 
(93
)
 
(195
)
 
(1,820
)
 
(1,806
)
Recognition of actuarial losses/(gains)
1,451

 
1,639

 
5,331

 
5,676

 
(311
)
 
(474
)
 
6,471

 
6,841

Net periodic pension cost/(credit)
$
1,051

 
$
1,190

 
$
1,803

 
$
2,432

 
$
(388
)
 
$
(651
)
 
$
2,466

 
$
2,971



- 20 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – 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
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost, net
$
817

 
$
423

 
$
11,416

 
$
12,086

 
$

 
$

 
12,233

 
12,509

Interest cost on projected benefit obligations
3,182

 
3,282

 
6,534

 
6,294

 
48

 
54

 
9,764

 
9,630

Expected return on plan assets
(5,197
)
 
(5,052
)
 
(23,408
)
 
(22,795
)
 

 

 
(28,605
)
 
(27,847
)
Recognition of prior service cost

 

 
(5,248
)
 
(4,439
)
 
(279
)
 
(585
)
 
(5,527
)
 
(5,024
)
Recognition of actuarial losses/(gains)
4,353

 
4,917

 
16,261

 
16,657

 
(937
)
 
(1,422
)
 
19,677

 
20,152

Net periodic pension cost/(credit)
$
3,155

 
$
3,570

 
$
5,555

 
$
7,803

 
$
(1,168
)
 
$
(1,953
)
 
$
7,542

 
$
9,420


As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, the Company expects to make employer contributions of approximately $25.9 million to its non-U.S. pension plans during the year ended December 31, 2018. This estimate may change based upon several factors, including fluctuations in currency exchange rates, actual returns on plan assets and changes in legal requirements.

12.    RESTRUCTURING CHARGES
For the three and nine months ended September 30, 2018, the Company has incurred $2.2 million and $14.0 million of restructuring expenses, respectively, which primarily relates to employee and other costs associated with the consolidation of facilities. Liabilities related to restructuring activities are included in accrued and other liabilities in the consolidated balance sheet. A roll forward of the Company’s accrual for restructuring activities for the nine months ended September 30, 2018 is as follows:
 
 
Total
Balance at December 31, 2017
 
$
10,620

Restructuring charges
 
13,956

Cash payments and utilization
 
(16,701
)
Impact of foreign currency
 
(61
)
Balance at September 30, 2018
 
$
7,814


13.    OTHER CHARGES (INCOME), NET
Other charges (income), net includes non-service pension costs (benefits), (gains) losses from foreign currency transactions and related hedging activities, interest income and other items. Nonservice pension benefits were $1.6 million and $1.2 million for the three months ended September 30, 2018 and 2017, respectively, and $4.7 million and $3.1 million and for the nine months ended September 30, 2018 and 2017, respectively. Other charges (income), net for 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.

- 21 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

14.    SEGMENT REPORTING
As disclosed in Note 17 to the Company's consolidated financial statements for the year ended December 31, 2017, 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
 
2018
September 30, 2018
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
255,379

 
$
25,050

 
$
280,429

 
$
41,890

 
$
410,022

Swiss Operations
31,463

 
148,418

 
179,881

 
44,542

 
22,404

Western European Operations
173,170

 
41,923

 
215,093

 
30,046

 
89,915

Chinese Operations
140,098

 
64,079

 
204,177

 
75,762

 
644

Other (a)
134,736

 
1,334

 
136,070

 
19,179

 
14,877

Eliminations and Corporate (b)

 
(280,804
)
 
(280,804
)
 
(29,454
)
 

Total
$
734,846

 
$

 
$
734,846

 
$
181,965

 
$
537,862


 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the nine months ended
External
 
Other
 
Total Net
 
Segment
 
 
September 30, 2018
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
736,598

 
$
72,203

 
$
808,801

 
$
118,141

 
 
Swiss Operations
96,082

 
440,959

 
537,041

 
138,254

 
 
Western European Operations
512,314

 
128,076

 
640,390

 
75,661

 
 
Chinese Operations
387,301

 
183,074

 
570,375

 
201,199

 
 
Other (a)
385,368

 
4,436

 
389,804

 
50,702

 
 
Eliminations and Corporate (b)

 
(828,748
)
 
(828,748
)
 
(93,160
)
 
 
Total
$
2,117,663

 
$

 
$
2,117,663

 
$
490,797

 
 

(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.

- 22 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – 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
 
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

 
39,212

 
22,252

Western European Operations
171,722

 
40,287

 
212,009

 
32,519

 
90,832

Chinese Operations
125,067

 
68,625

 
193,692

 
69,086

 
673

Other (a)
128,866

 
1,754

 
130,620

 
16,754

 
15,489

Eliminations and Corporate (b)

 
(271,813
)
 
(271,813
)
 
(38,836
)
 

Total
$
698,799

 
$

 
$
698,799

 
$
161,739

 
$
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

 
81,946

 
 
Chinese Operations
323,940

 
178,593

 
502,533

 
167,873

 
 
Other (a)
363,514

 
5,481

 
368,995

 
45,043

 
 
Eliminations and Corporate (b)

 
(776,737
)
 
(776,737
)
 
(99,338
)
 
 
Total
$
1,947,022

 
$

 
$
1,947,022

 
$
435,678

 
 

(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
 
2018
 
2017
 
2018
 
2017
Earnings before taxes
$
160,363

 
$
139,627

 
$
421,404

 
$
380,322

Amortization
11,856

 
10,716

 
35,561

 
31,010

Interest expense
9,003

 
8,248

 
25,671

 
24,160

Restructuring charges
2,222

 
3,385

 
13,956

 
8,840

Other charges (income), net
(1,479
)
 
(237
)
 
(5,795
)
 
(8,654
)
Segment profit
$
181,965

 
$
161,739

 
$
490,797

 
$
435,678


During the three months ended September 30, 2018, restructuring charges of $2.2 million were recognized, of which $0.6 million, $0.7 million, $0.7 million, $0.1 million and $0.1 million related to the Company’s U.S., Swiss, Western European, Chinese and Other Operations, respectively. Restructuring charges of $3.4 million were recognized during the three months ended September 30, 2017, 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 $14.0 million were recognized during the nine months ended September 30, 2018, of which $10.6 million, $1.5 million, $1.6 million, $0.1 million and $0.2 million related to the Company’s U.S., Swiss, Western European, Chinese and Other

- 23 -

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2018 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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 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.

- 24 -


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, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.
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, 2018 and 2017 (amounts in thousands).
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018