MTD_10Q_6.30.2013
Table of Contents

 

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

Form 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013, OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ________________
Commission File Number: 1-13595
Mettler-Toledo International Inc.
_______________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No ___

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

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

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

The Registrant had 29,945,248 shares of Common Stock outstanding at June 30, 2013.
 



Table of Contents

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

 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended June 30, 2013 and 2012
(In thousands, except share data)
(unaudited)

 
June 30,
2013
 
June 30,
2012
Net sales
 
 
 
Products
$
450,414

 
$
450,079

Service
128,266

 
120,204

Total net sales
578,680

 
570,283

Cost of sales
 
 
 
Products
193,339

 
198,612

Service
76,498

 
72,663

Gross profit
308,843

 
299,008

Research and development
29,003

 
27,966

Selling, general and administrative
173,434

 
169,985

Amortization
5,807

 
5,357

Interest expense
5,543

 
5,706

Restructuring charges
3,196

 
7,835

Other charges (income), net
987

 
433

Earnings before taxes
90,873

 
81,726

Provision for taxes
21,811

 
20,022

Net earnings
$
69,062

 
$
61,704

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
2.29

 
$
1.97

Weighted average number of common shares
30,119,889

 
31,267,660

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
2.24

 
$
1.93

Weighted average number of common and common equivalent shares
30,849,934

 
32,038,928

 
 
 
 
Comprehensive income, net of tax (Note 8)
$
74,897

 
$
36,969



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

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Six months ended June 30, 2013 and 2012
(In thousands, except share data)
(unaudited)

 
June 30,
2013
 
June 30,
2012
Net sales
 
 
 
Products
$
852,767

 
$
870,070

Service
250,266

 
235,613

Total net sales
1,103,033

 
1,105,683

Cost of sales
 
 
 
Products
365,498

 
386,457

Service
149,439

 
143,116

Gross profit
588,096

 
576,110

Research and development
56,703

 
56,633

Selling, general and administrative
339,554

 
337,626

Amortization
10,929

 
10,556

Interest expense
10,943

 
11,529

Restructuring charges
8,198

 
8,143

Other charges (income), net
1,760

 
589

Earnings before taxes
160,009

 
151,034

Provision for taxes
38,403

 
37,003

Net earnings
$
121,606

 
$
114,031

 
 
 
 
Basic earnings per common share:
 
 
 
Net earnings
$
4.03

 
$
3.63

Weighted average number of common shares
30,209,729

 
31,399,788

 
 
 
 
Diluted earnings per common share:
 
 
 
Net earnings
$
3.93

 
$
3.54

Weighted average number of common and common equivalent shares
30,975,957

 
32,212,927

 
 
 
 
Comprehensive income, net of tax (Note 8)
$
110,326

 
$
110,087



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

- 4 -

Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
As of June 30, 2013 and December 31, 2012
(In thousands, except share data)
(unaudited)

 
June 30,
2013
 
December 31,
2012
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
120,217

 
$
101,702

Trade accounts receivable, less allowances of $12,774 at June 30, 2013
418,031

 
437,390

and $14,120 at December 31, 2012
 
Inventories
203,288

 
198,939

Current deferred tax assets, net
59,144

 
57,690

Other current assets and prepaid expenses
74,696

 
69,199

Total current assets
875,376

 
864,920

Property, plant and equipment, net
474,050

 
469,421

Goodwill
447,166

 
452,351

Other intangible assets, net
114,496

 
117,564

Non-current deferred tax assets, net
125,090

 
127,110

Other non-current assets
97,259

 
86,034

Total assets
$
2,133,437

 
$
2,117,400

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
122,755

 
$
142,362

Accrued and other liabilities
107,806

 
109,844

Accrued compensation and related items
99,709

 
117,405

Deferred revenue and customer prepayments
85,142

 
71,435

Taxes payable
59,629

 
64,000

Current deferred tax liabilities
16,054

 
16,031

Short-term borrowings and current maturities of long-term debt
17,931

 
41,600

Total current liabilities
509,026

 
562,677

Long-term debt
443,727

 
347,131

Non-current deferred tax liabilities
138,233

 
139,487

Other non-current liabilities
231,349

 
240,886

Total liabilities
1,322,335

 
1,290,181

Commitments and contingencies (Note 14)


 


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

 

Common stock, $0.01 par value per share; authorized 125,000,000 shares;
 
 
 
issued 44,786,011 and 44,786,011 shares; outstanding 29,945,248 and 30,410,006 shares
 
 
 
at June 30, 2013 and December 31, 2012, respectively
448

 
448

Additional paid-in capital
644,557

 
638,705

Treasury stock at cost (14,480,763 shares at June 30, 2013 and 14,376,005 shares
(1,588,676
)
 
(1,463,924
)
at December 31, 2012)
 
Retained earnings
1,863,514

 
1,749,451

Accumulated other comprehensive income (loss)
(108,741
)
 
(97,461
)
Total shareholders’ equity
811,102

 
827,219

Total liabilities and shareholders’ equity
$
2,133,437

 
$
2,117,400



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

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
six months ended June 30, 2013 and twelve months ended December 31, 2012
(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, 2011
31,590,101

 
$
448

 
$
616,202

 
$
(1,225,125
)
 
$
1,476,550

 
$
(86,938
)
 
$
781,137

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
457,732

 

 

 
39,873

 
(17,946
)
 

 
21,927

Repurchases of common stock
(1,637,827
)
 

 

 
(278,672
)
 

 

 
(278,672
)
Tax benefit resulting from exercise of
 
 
 
 
 
 
 
 
 
 
 
 
 
certain employee stock options

 

 
9,318

 

 

 

 
9,318

Share-based compensation

 

 
13,185

 

 

 

 
13,185

Net earnings

 

 

 

 
290,847

 

 
290,847

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax (Note 8)

 

 

 

 

 
(10,523
)
 
(10,523
)
Balance at December 31, 2012
30,410,006

 
$
448

 
$
638,705

 
$
(1,463,924
)
 
$
1,749,451

 
$
(97,461
)
 
$
827,219

Exercise of stock options and restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
216,176

 

 

 
20,092

 
(7,543
)
 

 
12,549

Repurchases of common stock
(680,934
)
 

 

 
(144,844
)
 

 

 
(144,844
)
Share-based compensation

 

 
5,852

 

 

 

 
5,852

Net earnings

 

 

 

 
121,606

 

 
121,606

Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
 
 
net of tax (Note 8)

 

 

 

 

 
(11,280
)
 
(11,280
)
Balance at June 30, 2013
29,945,248

 
$
448

 
$
644,557

 
$
(1,588,676
)
 
$
1,863,514

 
$
(108,741
)
 
$
811,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

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Table of Contents

METTLER-TOLEDO INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
six months ended June 30, 2013 and 2012
(In thousands)
(unaudited)

 
June 30,
2013
 
June 30,
2012
Cash flows from operating activities:
 
 
 
Net earnings
$
121,606

 
$
114,031

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
17,447

 
16,106

Amortization
10,929

 
10,556

Deferred tax benefit
(5,687
)
 
(4,758
)
Excess tax benefits from share-based payment arrangements
(519
)
 
(340
)
Share-based compensation
5,852

 
5,954

Other
408

 
1,258

Increase (decrease) in cash resulting from changes in:
 
 
 
Trade accounts receivable, net
12,583

 
23,645

Inventories
(8,158
)
 
21,832

Other current assets
(5,690
)
 
2,220

Trade accounts payable
(19,806
)
 
(37,727
)
Taxes payable
(2,820
)
 
4,369

Accruals and other
(11,513
)
 
(45,097
)
Net cash provided by operating activities
114,632

 
112,049

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
115

 
153

Purchase of property, plant and equipment
(36,781
)
 
(43,233
)
Acquisitions
(213
)
 
(1,541
)
Net cash used in investing activities
(36,879
)
 
(44,621
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
211,112

 
81,552

Repayments of borrowings
(136,330
)
 
(127,351
)
Proceeds from stock option exercises
12,549

 
13,264

Repurchases of common stock
(144,844
)
 
(135,766
)
Excess tax benefits from share-based payment arrangements
519

 
340

Other financing activities
(1,170
)
 
(543
)
Net cash used in financing activities
(58,164
)
 
(168,504
)
Effect of exchange rate changes on cash and cash equivalents
(1,074
)
 
241

Net increase (decrease) in cash and cash equivalents
18,515

 
(100,835
)
Cash and cash equivalents:
 
 
 
Beginning of period
101,702

 
235,601

End of period
$
120,217

 
$
134,766



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

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited
(In thousands, except share data, unless otherwise stated)


1.
BASIS OF PRESENTATION
Mettler-Toledo International Inc. ("Mettler-Toledo" or the "Company") is a leading global supplier of precision instruments and services. The Company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics and food retailing applications. The Company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the Company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications. The Company's primary manufacturing facilities are located in China, Germany, Switzerland, the United Kingdom and the United States. The Company's principal executive offices are located in Columbus, Ohio and Greifensee, Switzerland.
The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include all entities in which the Company has control, which are its wholly-owned subsidiaries. The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements as of June 30, 2013 and for the three and six month periods ended June 30, 2013 and 2012 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, 2012.
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 six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
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, 2012.
All intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses in its existing trade accounts receivable. The Company determines the allowance based upon a review of both specific accounts for collection and the age of the accounts receivable portfolio.

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – 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:
 
June 30,
2013
 
December 31,
2012
Raw materials and parts
$
92,959

 
$
94,809

Work-in-progress
39,535

 
33,608

Finished goods
70,794

 
70,522

 
$
203,288

 
$
198,939

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

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Other intangible assets consisted of the following:
 
June 30, 2013
 
December 31, 2012
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Customer relationships
$
96,357

 
$
(23,522
)
 
$
96,575

 
$
(21,928
)
Proven technology and patents
42,210

 
(28,491
)
 
42,960

 
(28,014
)
Tradename (finite life)
4,137

 
(1,469
)
 
3,972

 
(1,345
)
Tradename (indefinite life)
25,038

 

 
25,061

 

Other
745

 
(509
)
 
745

 
(462
)
 
$
168,487

 
$
(53,991
)
 
$
169,313

 
$
(51,749
)
The Company recognized amortization expense associated with the above intangible assets of $1.5 million and $1.9 million for the three months ended June 30, 2013 and 2012, respectively and $2.9 million and $3.7 million for the six months ended June 30, 2013 and 2012, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $5.8 million for 2013, $5.8 million for 2014, $5.2 million for 2015, $5.0 million for 2016, $4.8 million for 2017 and $4.5 million for 2018. Purchased intangible amortization was $1.3 million ($0.9 million after tax) and $1.7 million ($1.1 million after tax) for the three months ended June 30, 2013 and 2012, respectively and $2.7 million ($1.8 million after tax) and $3.5 million ($2.3 million after tax) for the six months ended June 30, 2013 and 2012, respectively.
In addition to the above amortization, the Company recorded amortization expense associated with capitalized software of $4.3 million and $3.4 million for the three months ended June 30, 2013 and 2012, respectively and $8.0 million and $6.7 million for the six months ended June 30, 2013 and 2012, respectively.
Revenue Recognition
Revenue is recognized when title to a product has transferred and any significant customer obligations have been fulfilled. Standard shipping terms are generally FOB shipping point in most countries and, accordingly, title and risk of loss transfers upon shipment. In countries where title cannot legally transfer before delivery, the Company defers revenue recognition until delivery has occurred. The Company generally maintains the right to accept or reject a product return in its terms and conditions and also maintains appropriate accruals for outstanding credits. Shipping and handling costs charged to customers are included in total net sales and the associated expense is recorded in cost of sales for all periods presented. Other than a few small software applications, the Company does not sell software products without the related hardware instrument as the software is embedded in the instrument. The Company’s products typically require no significant production, modification or customization of the hardware or software that is essential to the functionality of the products. To the extent the Company’s solutions have a post-shipment obligation, such as customer acceptance, revenue is deferred until the obligation has been completed. The Company defers product revenue where installation is required, unless such installation is deemed perfunctory. The Company also sometimes enters into certain arrangements that require the separate delivery of multiple goods and/or services. These deliverables are accounted for separately if the deliverables have standalone value and the performance of undelivered items is probable and within the Company's control. The allocation of revenue between the separate deliverables is typically based on the relative selling price at the time of the sale in accordance with a number of factors including service technician billing rates, time to install and geographic location.
Further, certain products are also sold through indirect distribution channels whereby the distributor assumes any further obligations to the customer upon title transfer. Revenue is recognized on

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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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 programs and processes, its warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure.
The Company’s accrual for product warranties is included in accrued and other liabilities in the consolidated balance sheets. Changes to the Company’s accrual for product warranties for the six months ended June 30 are as follows:
 
June 30,
2013
 
June 30,
2012
Balance at beginning of period
$
16,295

 
$
16,748

Accruals for warranties
9,467

 
8,094

Foreign currency translation
(185
)
 
(305
)
Payments / utilizations
(9,815
)
 
(8,444
)
Balance at end of period
$
15,762

 
$
16,093


Employee Termination Benefits
In situations where contractual termination benefits exist, the Company records accruals for employee termination benefits when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. All other employee termination arrangements are recognized and measured at their fair value at the communication date unless the employee is required to render additional service beyond the legal notification period, in which case the liability is recognized ratably over the future service period.
Share-Based Compensation
The Company recognizes share-based compensation expense within selling, general and administrative in the consolidated statement of operations with a corresponding offset to additional paid-in capital in the consolidated balance sheet. The Company recorded $3.0 million and $5.8 million of share-based compensation expense for the three and six months ended June 30, 2013, respectively, compared to $2.7 million and $6.0 million for the corresponding periods in 2012.
Research and Development
Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.


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Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

3.
FINANCIAL INSTRUMENTS
As more fully described below, the Company enters into certain interest rate swap agreements in order to manage its exposure to changes in interest rates. The amount of the Company’s fixed obligation interest payments may change based upon the expiration dates of its interest rate swap agreements and the level and composition of its debt. The Company also enters into certain foreign currency forward contracts to limit the Company’s exposure to currency fluctuations on the respective hedged items. The Company does not use derivative financial instruments for trading purposes. For additional disclosures on the fair value of financial instruments, also see Note 4 to the interim consolidated financial statements.
Cash Flow Hedges
The Company has an interest rate swap agreement, designated as a cash flow hedge. The agreement changes the floating rate LIBOR-based interest payments associated with $100 million in borrowings under the Company’s credit agreement to a fixed obligation of 3.24%. The swap is recorded gross in other non-current liabilities in the consolidated balance sheet at its fair value at June 30, 2013 and December 31, 2012 of $6.5 million and $8.2 million, respectively. The amount recognized in other comprehensive income (loss) during the three month periods ended June 30, 2013 and 2012 was a gain of $0.2 million ($0.1 million after tax) and a loss of $1.0 million ($0.6 million after tax), respectively, and during the six month periods ended June 30, 2013 and 2012 was a gain of $0.2 million ($0.1 million after tax) and loss of $1.4 million ($0.9 million after tax) , respectively. The effective portion of the loss reclassified from accumulated other comprehensive income (loss) to interest expense was $0.8 million ($0.5 million after tax) for both the three month periods ended June 30, 2013 and 2012, respectively, and $1.5 million ($0.9 million after tax) for both the six month periods ended June 30, 2013 and 2012, respectively. A derivative loss of $3.0 million ($1.9 million after tax) based upon interest rates at June 30, 2013, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through June 30, 2013 no hedge ineffectiveness has occurred in relation to this hedge.
In June 2013, the Company entered into a forward starting interest rate swap agreement, designated as a cash flow hedge. The agreement which will change the floating rate LIBOR-based interest payments associated with $50 million in forecasted borrowings under the Company's credit agreement to a fixed obligation of 2.52% beginning in October 2015. The swap is recorded in other non-current assets in the consolidated balance sheet at its fair value at June 30, 2013 of $0.9 million.
In July 2012, the Company began entering into foreign currency forward contracts, designated as cash flow hedges, to hedge certain forecasted intercompany sales denominated in euro with its Swiss-based businesses. The notional amount of foreign currency forward contracts outstanding at June 30, 2013 and December 31, 2013 was $74.1 million and $78.0 million, respectively. The foreign currency forward contracts are recorded gross at their fair value in the consolidated balance sheet at June 30, 2013 in other current assets of $0.1 million and in accrued and other liabilities of $0.9 million, respectively. At December, 31, 2012, the foreign currency forward contracts are recorded gross at their fair value in the consolidated balance sheet in accrued and other liabilities of $0.4 million, respectively. The Company records the effective portion of the cash flow derivative hedging gains and losses in accumulated other comprehensive income (loss), net of tax and reclassifies these amounts into earnings in the period in which the transactions affect earnings. The amount recognized in other comprehensive income (loss) during the three month period ended June 30, 2013 was a loss of $0.5 million ($0.4 million after tax), and a loss of $1.3 million ($1.1 million after tax) for the six months ended June 30, 2013. The effective portion of the loss reclassified from accumulated other comprehensive income (loss) to cost of sales was $0.6 million ($0.4 million after tax) during the three months ending June 30, 2013 and a loss of $1.0 million ($0.8 million after tax) for the six months ended June 30, 2013. A derivative loss of $0.7 million ($0.6 million after tax) based upon foreign currency rates at June 30, 2013, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. Through June 30, 2013 no hedge ineffectiveness has occurred in relation to this hedge.

- 12 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

Other Derivatives
The Company enters into foreign currency forward contracts in order to economically hedge short-term intercompany balances largely denominated in Swiss franc and other major European currencies with its foreign businesses. In accordance with U.S. GAAP, these contracts are considered “derivatives not designated as hedging instruments.” Gains or losses on these instruments are reported in current earnings. The foreign currency forward contracts were reported at their fair value in the consolidated balance sheet at June 30, 2013 and December 31, 2012 in other current assets of $0.5 million and $0.4 million, respectively, and other liabilities of $1.1 million and $0.3 million, respectively. The Company recognized in other charges (income), net, a gain of $1.5 million and net loss of $1.6 million during the three months ended June 30, 2013 and 2012, respectively. The Company recognized a net loss of $0.7 million and net gain of $0.3 million during the six months ended June 30, 2013 and June 30, 2012, respectively. At June 30, 2013 and December 31, 2012, these contracts had a notional value of $148.8 million and $132.3 million, respectively.

4.
FAIR VALUE MEASUREMENTS
At June 30, 2013 and December 31, 2012, the Company had derivative assets totaling $1.5 million and $0.4 million, respectively, and derivative liabilities totaling $8.5 million and $8.9 million, respectively. The fair values of the interest rate swap agreement and foreign currency forward contracts are estimated based upon inputs from current valuation information obtained from dealer quotes and priced with observable market assumptions and appropriate valuation adjustments for credit risk. The Company has evaluated the valuation methodologies used to develop the fair values by dealers in order to determine whether such valuations are representative of an exit price in the Company’s principal market. In addition, the Company uses an internally developed model to perform testing on the valuations received from brokers. The fair value of the foreign currency forward contract hedging forecasted intercompany sales is priced with observable market assumptions with appropriate valuations for credit risk. The Company has also considered both its own credit risk and counterparty credit risk in determining fair value and determined these adjustments were insignificant at June 30, 2013 and December 31, 2012.
At June 30, 2013 and December 31, 2012, the Company had $14.5 million and $13.6 million of cash equivalents, respectively, the fair value of which is determined through quoted and corroborated prices in active markets. The fair value of cash equivalents approximates cost.
The difference between the fair value and carrying value of the Company's long-term debt is not material and is classified in Level 2 and Level 3 of the fair value hierarchy. The fair value of the Company's debt is estimated based on either similar issues or other inputs derived from available market information, including interest rates, term of debt and creditworthiness.
    
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

- 13 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The following table presents for each of these hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
14,466

 
$

 
$
14,466

 
$

 
$
13,636

 
$

 
$
13,636

 
$

Interest rate swap agreement
916

 

 
916

 

 

 

 

 

Foreign currency forwards contracts designed as cash flow hedges
141

 

 
141

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments
463

 

 
463

 

 
448

 

 
448

 

Total
$
15,986

 
$

 
$
15,986

 
$

 
$
14,084

 
$

 
$
14,084

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreement
$
6,493

 
$

 
$
6,493

 
$

 
$
8,172

 
$

 
$
8,172

 
$

Foreign currency forwards contracts designed as cash flow hedges
868

 

 
868

 

 
421

 

 
421

 

Foreign currency forward contracts not designated as hedging instruments
1,097

 

 
1,097

 

 
280

 

 
280

 

Total
$
8,458

 
$

 
$
8,458

 
$

 
$
8,873

 
$

 
$
8,873

 
$



5.
INCOME TAXES
The provision for taxes for both the three and six month periods ended June 30, 2013 is based upon the Company’s projected annual effective rate of 24%.

6.
DEBT
Debt consisted of the following at June 30, 2013:
 
June 30, 2013
 
U.S. Dollar
 
Other Principal Trading Currencies
 
Total
6.30% $100 million senior notes
$
100,000

 
$

 
$
100,000

3.67% $50 million senior notes
50,000

 

 
50,000

Credit agreement
270,342

 
23,385

 
293,727

Other local arrangements

 
17,931

 
17,931

Total debt
420,342

 
41,316

 
461,658

Less: current portion

 
(17,931
)
 
(17,931
)
Total long-term debt
$
420,342

 
$
23,385

 
$
443,727

As of June 30, 2013, the Company had $582.4 million of availability remaining under the credit agreement.

- 14 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

7.
SHARE REPURCHASE PROGRAM AND TREASURY STOCK
As of June 30, 2013, the Company had $292.5 million of remaining availability under the Company's share repurchase program. In July 2013, the Company announced that the Board of Directors has authorized a $750 million increase to the share repurchase program. The Company expects the new authorization will be utilized over the next several years. The share repurchases are expected to be funded from cash balances, borrowings and cash generated from operating activities. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity and other factors. The Company has purchased 20.8 million shares since the inception of the program through June 30, 2013.
During the six months ended June 30, 2013 and 2012, the Company spent $144.8 million and $135.8 million on the repurchase of 680,934 shares and 797,095 shares at an average price per share of $212.69 and $170.31, respectively. The Company reissued 216,176 shares and 233,146 shares held in treasury for the exercise of stock options and restricted stock units during the six months ended June 30, 2013 and 2012, respectively.

8.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in accumulated other comprehensive income by component for the period ended June 30, 2013:
 
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, 2012
$
56,012

 
$
(5,438
)
 
$
(148,035
)
 
$
(97,461
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (loss) on cash flow hedging arrangements

 
(398
)
 

 
(398
)
Foreign currency translation adjustment
(19,393
)
 
(4
)
 
2,872

 
(16,525
)
Amounts recognized from accumulated other comprehensive income (loss), net of tax

 
1,756

 
3,887

 
5,643

Net change in other comprehensive income (loss), net of tax
(19,393
)
 
1,354

 
6,759

 
(11,280
)
Balance at June 30, 2013
$
36,619

 
$
(4,084
)
 
$
(141,276
)
 
$
(108,741
)


- 15 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – 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 six month periods ended June 30, 2013:
 
 
June 30, 2013
 
 
Three Months Ended
 
Six Months Ended
 
Location of Amounts Recognized in Earnings
Effective portion of losses on cash flow hedging arrangements:
 
 
 
 
 
 
Interest rate swap agreements
 
$
766

 
$
1,522

 
Interest expense
Foreign currency forward contracts
 
557

 
1,031

 
Cost of sales - products
Total before taxes
 
1,323

 
2,553

 
 
Provision for taxes
 
409

 
797

 
Provision for taxes
Total, net of taxes
 
$
914

 
$
1,756

 
 
 
 
 
 
 
 
 
Recognition of defined benefit pension and post-retirement items:
 
 
 
 
 
 
Recognition of actuarial losses, plan amendments and prior service cost, before taxes
 
$
2,564

 
$
5,136

 
(a)
Provision for taxes
 
632

 
1,249

 
Provision for taxes
Total, net of taxes
 
$
1,932

 
$
3,887

 
 
(a)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and post-retirement cost. See Note 10 for additional details for the three and six months ended June 30, 2013.
Comprehensive income (loss), net of tax consisted of the following as of June 30:
 
Three Months Ended
 
Six Months Ended
 
2013
 
2012
 
2013
 
2012
Net earnings
$
69,062

 
$
61,704

 
$
121,606

 
$
114,031

Other comprehensive income (loss), net of tax
5,835

 
(24,735
)
 
(11,280
)
 
$
(3,944
)
Comprehensive income, net of tax
$
74,897

 
$
36,969

 
$
110,326

 
$
110,087



9.
EARNINGS PER COMMON SHARE
In accordance with the treasury stock method, the Company has included the following common equivalent shares in the calculation of diluted weighted average number of common shares outstanding for the three and six month periods ended June 30, solely relating to outstanding stock options and restricted stock units:
 
2013
 
2012
Three months ended
730,045

 
771,268

Six months ended
766,228

 
813,139

Outstanding options and restricted stock units to purchase or receive 141,650 and 269,154 shares of common stock for the three month periods ended June 30, 2013 and 2012, respectively, and options and restricted stock units to purchase or receive 141,636 and 210,607 shares of common stock for the six

- 16 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

month periods ended June 30, 2013 and 2012, respectively, have been excluded from the calculation of diluted weighted average number of common and common equivalent shares as such options and restricted stock units would be anti-dilutive.

10.
NET PERIODIC BENEFIT COST
Net periodic pension cost for the Company’s defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the three months ended June 30:
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other U.S. Post-retirement Benefits
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost, net
$
123

 
$
114

 
$
4,257

 
$
3,588

 
$
54

 
$
83

Interest cost on projected benefit obligations
1,439

 
1,523

 
4,822

 
5,535

 
101

 
135

Expected return on plan assets
(1,788
)
 
(1,741
)
 
(8,570
)
 
(8,141
)
 

 

Recognition of prior service cost

 

 
(979
)
 
(353
)
 
22

 

Recognition of actuarial losses/(gains)
1,945

 
1,916

 
1,823

 
609

 
(247
)
 
(188
)
Net periodic pension cost/(credit)
$
1,719

 
$
1,812

 
$
1,353

 
$
1,238

 
$
(70
)
 
$
30


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 six months ended June 30:

 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other U.S. Post-retirement Benefits
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost, net
$
247

 
$
228

 
$
8,627

 
$
7,226

 
$
108

 
$
166

Interest cost on projected benefit obligations
2,878

 
3,046

 
9,705

 
11,139

 
202

 
270

Expected return on plan assets
(3,576
)
 
(3,483
)
 
(17,262
)
 
(16,375
)
 

 

Recognition of prior service cost

 

 
(1,973
)
 
(710
)
 
43

 

Recognition of actuarial losses/(gains)
3,891

 
3,832

 
3,669

 
1,223

 
(494
)
 
(377
)
Net periodic pension cost/(credit)
$
3,440

 
$
3,623

 
$
2,766

 
$
2,503

 
$
(141
)
 
$
59


The Company expects to make employer contributions of approximately $5.1 million and $20.6 million to its U.S. pension plan and non-U.S. pension plans and employer contributions of approximately $1.1 million to its U.S. post-retirement medical plan during the year ended December 31, 2012. These estimates may change based upon several factors, including fluctuations in currency exchange rates, actual returns on plan assets and changes in legal requirements.

11.
RESTRUCTURING CHARGES
During 2012, we initiated additional cost reduction measures in response to global economic conditions. For the three and six months ended June 30, 2013, we have incurred $3.2 million and $8.2 million, respectively 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.

- 17 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

A rollforward of the Company’s accrual for restructuring activities for the six months ended June 30, 2013 is as follows:

 
Employee
Related
 
Other
 
Total
Balance at December 31, 2012
$
11,655

 
$
290

 
$
11,945

Restructuring charges
6,885

 
1,313

 
8,198

Cash payments and utilization
(8,338
)
 
(969
)
 
(9,307
)
Impact of foreign currency
(230
)
 

 
(230
)
Balance at June 30, 2013
$
9,972

 
$
634

 
$
10,606


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

13.
SEGMENT REPORTING
As disclosed in Note 18 to the Company's consolidated financial statements for the year ended December 31, 2012, 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 June 30,
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
2013
June 30, 2013
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
187,395

 
$
16,897

 
$
204,292

 
$
33,481

 
$
307,933

Swiss Operations
31,166

 
103,519

 
134,685

 
37,171

 
22,966

Western European Operations
156,796

 
26,481

 
183,277

 
23,494

 
102,114

Chinese Operations
97,771

 
37,743

 
135,514

 
29,374

 
733

Other (a)
105,552

 
1,509

 
107,061

 
9,166

 
13,420

Eliminations and Corporate (b)

 
(186,149
)
 
(186,149
)
 
(26,280
)
 

Total
$
578,680

 
$

 
$
578,680

 
$
106,406

 
$
447,166



- 18 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the six months ended
External
 
Other
 
Total Net
 
Segment
 
 
June 30, 2013
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
345,781

 
$
35,273

 
$
381,054

 
$
58,124

 
 
Swiss Operations
61,863

 
200,642

 
262,505

 
72,574

 
 
Western European Operations
302,964

 
54,593

 
357,557

 
41,792

 
 
Chinese Operations
188,498

 
68,145

 
256,643

 
54,022

 
 
Other (a)
203,927

 
2,929

 
206,856

 
18,653

 
 
Eliminations and Corporate (b)

 
(361,582
)
 
(361,582
)
 
(53,326
)
 
 
Total
$
1,103,033

 
$

 
$
1,103,033

 
$
191,839

 
 

 
Net Sales to
 
Net Sales to
 
 
 
 
 
As of June 30,
For the three months ended
External
 
Other
 
Total Net
 
Segment
 
2012
June 30, 2012
Customers
 
Segments
 
Sales
 
Profit
 
Goodwill
U.S. Operations
$
177,182

 
$
16,626

 
$
193,808

 
$
35,403

 
$
307,618

Swiss Operations
28,420

 
93,750

 
122,170

 
26,312

 
22,530

Western European Operations
156,284

 
24,838

 
181,122

 
21,978

 
100,859

Chinese Operations
108,479

 
26,122

 
134,601

 
30,931

 
716

Other (a)
99,918

 
1,345

 
101,263

 
8,506

 
14,557

Eliminations and Corporate (b)

 
(162,681
)
 
(162,681
)
 
(22,073
)
 

Total
$
570,283

 
$

 
$
570,283

 
$
101,057

 
$
446,280


 
Net Sales to
 
Net Sales to
 
 
 
 
 
 
For the six months ended
External
 
Other
 
Total Net
 
Segment
 
 
June 30, 2012
Customers
 
Segments
 
Sales
 
Profit
 
 
U.S. Operations
$
334,480

 
$
34,737

 
$
369,217

 
$
59,360

 
 
Swiss Operations
60,025

 
191,269

 
251,294

 
55,454

 
 
Western European Operations
309,289

 
48,685

 
357,974

 
40,243

 
 
Chinese Operations
199,773

 
55,935

 
255,708

 
56,249

 
 
Other (a)
202,116

 
2,994

 
205,110

 
18,830

 
 
Eliminations and Corporate (b)

 
(333,620
)
 
(333,620
)
 
(48,285
)
 
 
Total
$
1,105,683

 
$

 
$
1,105,683

 
$
181,851

 
 

(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.

- 19 -

Table of Contents
METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2013 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

A reconciliation of earnings before taxes to segment profit for the three and six month periods ended June 30 follows:

 
Three Months Ended
 
Six Months Ended
 
2013
 
2012
 
2013
 
2012
Earnings before taxes
$
90,873

 
$
81,726

 
$
160,009

 
$
151,034

Amortization
5,807

 
5,357

 
10,929

 
10,556

Interest expense
5,543

 
5,706

 
10,943

 
11,529

Restructuring charges
3,196

 
7,835

 
8,198

 
8,143

Other charges (income), net
987

 
433

 
1,760

 
589

Segment profit
$
106,406

 
$
101,057

 
$
191,839

 
$
181,851


During the three months ended June 30, 2013, restructuring charges of $3.2 million were recognized, of which $0.2 million, $2.4 million, $0.6 million, and $0.1 million related to the Company’s U.S., Swiss, Western European, and Chinese operations, respectively. Restructuring charges of $7.8 million were recognized during the three months ended June 30, 2012, of which $0.5 million, $3.9 million, $3.3 million, and $0.1 million related to the Company’s U.S., Swiss, Western European, and Chinese operations, respectively. Restructuring charges of $8.2 million were recognized during the six months ended June 30, 2013, of which $0.6 million, $5.2 million, $1.3 million, $0.8 million, and $0.2 million related to the Company’s U.S., Swiss, Western European, Chinese, and Other operations, respectively. Restructuring charges of $8.1 million were recognized during the six months ended June 30, 2012, of which $0.8 million, $3.9 million, $3.3 million, and $0.1 million related to the Company’s U.S., Swiss, Western European, and Chinese operations, respectively.

14.
CONTINGENCIES
The Company is party to various legal proceedings, including certain environmental matters, incidental to the normal course of business. Management does not expect that any of such proceedings, either individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

- 20 -


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Interim Consolidated Financial Statements included herein.
General
Our interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Local currency changes exclude the effect of currency exchange rate fluctuations. Local currency amounts are determined by translating current and previous year consolidated financial information at an index utilizing historical currency exchange rates. We believe local currency information provides a helpful assessment of business performance and a useful measure of results between periods. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We present non-GAAP financial measures in reporting our financial results to provide investors with an additional analytical tool to evaluate our operating results.
Results of Operations – Consolidated
The following tables set forth certain items from our interim consolidated statements of operations for the three and six month periods ended June 30, 2013 and 2012 (amounts in thousands).
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
 
(unaudited)
 
%
Net sales
$
578,680

 
100.0
 
$
570,283

 
100.0

 
$
1,103,033

 
100.0
 
$
1,105,683

 
100.0
Cost of sales
269,837

 
46.6
 
271,275

 
47.6

 
514,937

 
46.7
 
529,573

 
47.9
Gross profit
308,843

 
53.4
 
299,008

 
52.4

 
588,096

 
53.3
 
576,110

 
52.1
Research and development
29,003

 
5.0
 
27,966

 
4.9

 
56,703

 
5.1
 
56,633

 
5.1
Selling, general and administrative
173,434

 
30.0
 
169,985

 
29.8

 
339,554

 
30.8
 
337,626

 
30.5
Amortization
5,807

 
1.0
 
5,357

 
0.9

 
10,929

 
1.0
 
10,556

 
1.0
Interest expense
5,543

 
1.0
 
5,706

 
1.0

 
10,943

 
1.0
 
11,529

 
1.0
Restructuring charges
3,196

 
0.6
 
7,835

 
1.4

 
8,198

 
0.7
 
8,143

 
0.7
Other charges (income), net
987

 
0.1
 
433

 
0.1

 
1,760

 
0.2
 
589

 
0.1
Earnings before taxes
90,873

 
15.7
 
81,726

 
14.3

 
160,009

 
14.5
 
151,034

 
13.7
Provision for taxes
21,811

 
3.8
 
20,022

 
3.5

 
38,403

 
3.5
 
37,003

 
3.4
Net earnings
$
69,062

 
11.9
 
$
61,704

 
10.8

 
$
121,606

 
11.0
 
$
114,031

 
10.3

Net sales
Net sales were $578.7 million and $1.103 billion for the three and six months ended June 30, 2013, compared to $570.3 million and $1.106 billion for the corresponding periods in 2012. This represents an increase of 1% in U.S. dollars and local currencies for the three months ended June 30, 2013, while sales remained flat with 2012 in U.S. dollars and local currencies for the six months ended June 30, 2013, as compared to the prior year comparable periods. Global economic conditions remain uncertain and we expect sales will continue to be adversely impacted.
Net sales by geographic destination for the three and six months ended June 30, 2013, in U.S. dollars increased 5% and 4% in the Americas, increased 4% and were flat in Europe, and decreased 5% and 4% in Asia/Rest of World. In local currencies, our net sales by geographic

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destination for the three and six months ended June 30, 2013, increased 5% and 3% in the Americas, increased 2% and decreased 1% in Europe, and decreased 5% and 3% in Asia/Rest of World. A discussion of sales by operating segment is included below.
As described in Note 18 to our consolidated financial statements for the year ended December 31, 2012, 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 were flat in U.S. dollars and local currencies for the three months ended June 30, 2013 and decreased 2% in U.S. dollars and local currencies for the six months ended June 30, 2013, respectively, compared to the corresponding prior periods. Service revenue (including spare parts) increased in U.S. dollars 7% and 6% during the three and six months ended June 30, 2013, and increased in local currencies by 6% for both the three and six months ended June 30, 2013, compared to the corresponding prior year periods.
Net sales of our laboratory-related products, which represented approximately 46% of our total net sales for both the three and six months ended June 30, 2013, increased 3% for the three months ended June 30, 2013 and were flat in U.S. dollars for the six months ended June 30, 2013, and increased 3% and 1% in local currencies during the three and six months ended June 30, 2013, respectively. Net sales of our laboratory-related products for the three months ended June 30, 2013 included solid growth in Europe and the Americas. These results were partly offset by reduced sales volume in Asia Pacific, particularly China, primarily related to difficult economic conditions. Net sales growth during the three month period also included particularly strong growth related to increased sales volume and favorable price realization in analytical instruments.
Net sales of our industrial-related products, which represented approximately 45% of our total net sales for both the three and six months ended June 30, 2013, decreased 1% for the three months ended June 30, 2013, and were flat in U.S. dollars for the six months ended June 30, 2013, respectively. In local currency industrial-related products decreased 1% and 2% for the three and six months ended June 30, 2013, compared to the corresponding prior year periods. The decrease in net sales of our industrial-related products included sales volume declines in Asia Pacific, particularly China, primarily due to difficult economic conditions. These results were partly offset by strong growth and project activity in our core-industrial business in the Americas, while Europe experienced a modest local currency increase versus the prior year three month comparable period.
Net sales in our food retailing markets, which represented approximately 9% of our total net sales for both the three and six months ended June 30, 2013, increased 6% for the three months ended June 30, 2013, and decreased 2% for the six months ended June 30, 2013, respectively. In local currency our food retailing markets increased 5% for the three month period ended June 30, 2013 and decreased 2% for the six months ended June 30, 2013, compared to the corresponding prior year periods. The increase in net sales of our food retailing markets for the three months ended June 30, 2013 related to strong project activity in the Americas, as well as increased sales volume in Asia Pacific. These results were partly offset by a sales volume decline in Europe that is primarily related to unfavorable economic conditions, as well as the timing of project activity.
Gross profit
Gross profit as a percentage of net sales was 53.4% and 52.4% for the three months ended June 30, 2013 and 2012, respectively, and 53.3% and 52.1% for the six months ended June 30, 2013 and 2012, respectively.
Gross profit as a percentage of net sales for products was 57.1% for both the three and six months ended June 30, 2013, respectively, compared to 55.9% and 55.6% for the corresponding periods in 2012.

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Gross profit as a percentage of net sales for services (including spare parts) was 40.4% and 40.3% for the three and six months ended June 30, 2013, respectively, compared to 39.6% and 39.3% for the corresponding periods in 2012.
The increase in gross profit as a percentage of net sales for the three and six months ended June 30, 2013, primarily reflects increased price realization, reduced material costs and favorable business mix.
Research and development and selling, general and administrative expenses
Research and development expenses as a percentage of net sales were 5.0% and 5.1% for the three and six months ended June 30, 2013, respectively, compared to 4.9% and 5.1% for the the corresponding periods during 2012. Research and development expenses increased 4% in both U.S. dollars and local currencies for the three months ended June 30, 2013, and were flat in both U.S. dollars and local currencies for the six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012 relating to the timing of research and development project and product launch activity, as well as benefits from our increased activities in low-cost countries.
Selling, general and administrative expenses as a percentage of net sales were 30.0% and 30.8% for the three and six months ended June 30, 2013, respectively, compared to 29.8% and 30.5% in the corresponding periods during 2012. Selling, general and administrative expenses increased 2% and 1% in both U.S. dollars and local currencies during the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012. The increase is primarily due to increased sales and marketing investments and higher employee incentive expense, offset in part by benefits from our cost reduction activities.
Interest expense, other charges (income), net and taxes
Interest expense was $5.5 million and $10.9 million for the three and six months ended June 30, 2013, respectively, and $5.7 million and $11.5 million for the corresponding periods in 2012. Interest expense decreased for the three and six months ended June 30, 2013 primarily as a result of a decrease in average borrowings.
Other charges (income), net consist primarily of interest income, (gains) losses from foreign currency transaction and other items.

The provision for taxes is based upon using our projected annual effective tax rate of 24% for the three and six months periods ended June 30, 2013, as compared to 24.5% for the three and six months ended June 30, 2012. Our consolidated income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed non-U.S. operations. The most significant of these lower-taxed operations are in Switzerland and China.

Results of Operations – by Operating Segment

The following is a discussion of the financial results of our operating segments. We currently have five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations and Other. A more detailed description of these segments is outlined in Note 18 to our consolidated financial statements for the year ended December 31, 2012.

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U.S. Operations (amounts in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
%
 
2013
 
2012
 
%
Total net sales
$
204,292

 
$
193,808

 
5
 %
 
$
381,054

 
$
369,217

 
3
 %
Net sales to external customers
$
187,395

 
$
177,182

 
6
 %
 
$
345,781

 
$
334,480

 
3
 %
Segment profit
$
33,481

 
$
35,403

 
(5
)%
 
$
58,124

 
$
59,360

 
(2
)%

Total net sales increased 5% and 3% for the three and six months ended June 30, 2013, respectively, and net sales to external customers increased 6% and 3% for the three and six months ended June 30, 2013, respectively, compared with the corresponding periods in 2012. The increase in total net sales and net sales to external customers for the three and six months ended June 30, 2013, reflected increased sales volume and favorable price realization in most product categories. We experienced particularly strong growth during the three months ended June 30, 2013 in food retailing and core-industrial products which included incremental project activity, as well as analytical instruments.
Segment profit decreased $1.9 million and $1.2 million for the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012. The decrease in segment profit was primarily due to a reduction in inter-segment royalty income, unfavorable business mix, and investments in our field service organization, partially offset by increased sales volume and favorable price realization.
Swiss Operations (amounts in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
%1)
 
2013
 
2012
 
%1)
Total net sales
$
134,685

 
$
122,170

 
10
%
 
$
262,505

 
$
251,294

 
4
%
Net sales to external customers
$
31,166

 
$
28,420

 
10
%
 
$
61,863

 
$
60,025

 
3
%
Segment profit
$
37,171

 
$
26,312

 
41
%
 
$
72,574

 
$
55,454

 
31
%

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

    
Total net sales increased 10% and 4% in U.S. dollars for the three and six months ended June 30, 2013, respectively. Total net sales in local currency increased 11% and 5% for the three and six months ended June 30, 2013, compared to the corresponding periods in 2012. Net sales to external customers increased 10% and 3% in U.S. dollars and 10% and 4% in local currency during the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012. The increase in local currency net sales to external customers for the three months periods ended June 30, 2013 reflected strong volume growth in most product categories.
 
Segment profit increased $10.9 million and $17.1 million for the three and six month periods ended June 30, 2013, respectively, compared to the corresponding periods in 2012. Segment profit includes favorable inter-segment price realization and royalty income, increased productivity, reduced material costs and benefits from our cost reduction initiatives.

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Western European Operations (amounts in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
%1)
 
2013
 
2012
 
%1)
Total net sales
$
183,277

 
$
181,122

 
1
%
 
$
357,557

 
$
357,974

 
0
 %
Net sales to external customers
$
156,796

 
$
156,284

 
0
%
 
$
302,964

 
$
309,289