Mettler Toledo - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

Im Langacher, P.O. Box MT-100
CH 8606 Greifensee, Switzerland

(Zip Code)

+41-44-944-22-11

not applicable

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

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

The Registrant had 39,293,670 shares of Common Stock outstanding at September 30, 2006.

 

Item 1. Financial Statements

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

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

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

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

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

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited
(In thousands, except share data, unless otherwise stated)

     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 Greifensee, Switzerland and Columbus, Ohio.

     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 of the Company’s wholly owned subsidiaries. The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements as of September 30, 2006 and for the three and nine month periods ended September 30, 2006 and 2005 should be read in conjunction with the December 31, 2005 and 2004 consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The accompanying interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

     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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     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. Historically the Company has had minimal bad debt write-offs due to its strong customer base.

     Inventory is 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 inventory are made for excess and obsolete items based on forecast 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.

     Inventory consisted of the following:

     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 and the continued accounting for previously recognized intangible assets in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.”

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     Other intangible assets consisted of the following:

     The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $4.4 million for 2006 through 2010. The Company had amortization expense associated with the above intangible assets of $3.4 million and $3.1 million for the nine months ended September 30, 2006 and 2005, respectively.

     In addition to the above amortization, the Company recorded amortization expense associated with capitalized software of $5.1 million and $5.5 million for the nine months ended September 30, 2006 and 2005, respectively.

     The Company generally offers one-year warranties on most of its products. Product warranties are recorded at the time revenue is recognized for certain product shipments. While the Company engages in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure.

     The Company’s accrual for product warranties is included in accrued and other liabilities in the consolidated balance sheets. Changes to the Company’s accrual for product warranties for the nine months ended September 30 are as follows:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as they are incurred.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement process for recording, in the financial statements, uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for uncertain tax positions. This interpretation will be effective for the Company beginning January 1, 2007. The Company is in the process of determining the effect, if any, FIN 48 will have on its financial statements.

     In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 requires the Company to record the funded status of its defined benefit pension and other postretirement plans in its financial statements. The Company will be required to record an asset in its financial statements if a plan is overfunded or record a liability in its financial statements if a plan is underfunded with a corresponding offset to shareholders’ equity. Previously unrecognized assets and liabilities will be recorded as a component of shareholders’ equity in accumulated other comprehensive income, net of applicable income taxes. SFAS 158 will also require the Company to measure the value of its assets and liabilities as of the end of its fiscal year ending after December 15, 2008. The Company will implement SFAS 158 using the required prospective method. The recognition provisions of SFAS 158 are effective for the Company for the fiscal year ending after December 15, 2006. The Company does not believe the implementation of SFAS 158 will have a material impact on its statement of financial position or financial covenants.

     Income tax expense was $3.0 million and $18.7 million for the three month periods ending September 30, 2006 and 2005, respectively, and $28.1 million and $32.4 million for the nine month periods ending September 30, 2006 and 2005, respectively.

     During the third quarter of 2006, the Company implemented a legal reorganization that resulted in a reduction of the estimated annual effective tax rate before discrete items from 30% to approximately 27%. In addition to the change in the Company’s estimated annual effective tax rate, the Company recorded four discrete tax items: a charge of $10.5 million related to the establishment of a valuation allowance on foreign tax credit carryforwards, a benefit of $13.4 million associated with a reduction of a liability previously established for estimated costs to repatriate unremitted earnings of foreign subsidiaries, a favorable tax law change resulting in a benefit of $5.1 million and a cumulative tax benefit adjustment of $2.5 million, associated with the six months ended June 30, 2006, for the estimated annual effective tax rate change described above.

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

The net impact of the items described above has decreased the effective tax rate to 6.0% and 21.0% for the three and nine months ended September 30, 2006, respectively.

     As a result of the American Jobs Creation Act of 2004, the Company repatriated approximately $160 million of cash that has been generated over time by its foreign operations during the quarter ended September 30, 2005. As a result of this planned repatriation, the Company recorded additional income tax expense during the quarter ended September 30, 2005 of $13.1 million. This amount reflects the federal tax impact in the United States (including certain state taxes) of $12.3 million, foreign withholding taxes of $2.0 million and a net decrease of $1.2 million of deferred tax liabilities associated with the reassessment of pre-existing and future dividend repatriations.

     In addition, during the quarter ended September 30, 2005 the Company recorded tax benefits of $7.7 million related to the favorable resolution of certain tax matters. The net impact of the items described above increased the effective tax rate to 42.2% and 33.3% for the three and nine months ended September 30, 2005, respectively.

     Excluding the effects of the previously mentioned discrete items, the Company’s annual effective tax rate would have been 27.0% and 30.0% for 2006 and 2005, respectively. Including these items, the annual effective tax rate is 23.0% and 32.0% for 2006 and 2005, respectively.

     The Company’s 2004 equity incentive plan provides for the grant of options, restricted stock, restricted stock units and other equity-based awards. The exercise price of options granted shall not be less than the fair market value of the common stock on the date of grant. Options generally vest equally over a five-year period from the date of grant and have a maximum term of up to 10 years and six months. Restricted stock units vest equally over a five-year period from the date of grant.

     On January 1, 2006, the Company adopted SFAS 123R and Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payments”, applying the modified prospective method. SFAS 123R requires all share-based compensation arrangements granted to employees, including stock option grants, to be recognized in the consolidated statement of operations based on the grant date fair value of the award. Under the modified prospective method, the Company is required to record share-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption.

     Share-based compensation expense is recorded 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. Prior year periods have not been restated. The effect on net earnings and net earnings per share for the three and nine months ended September 30, 2006 is as follows:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     The fair values of stock options granted were calculated using the Black-Scholes pricing model. The following table summarizes all stock option activity from December 31, 2005 through September 30, 2006:

     The following table details the weighted average remaining contractual life of options outstanding at September 30, 2006 by range of exercise prices:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     As of the date granted, the weighted average grant-date fair value of the options granted during the nine months ended September 30, 2006 was approximately $19.69. Such weighted average grant-date fair value was determined using the Black-Scholes pricing model that incorporated the following assumptions:

     The following table summarizes all restricted stock unit activity from December 31, 2005 through September 30, 2006:

     As of September 30, 2006, the unrecorded deferred share-based compensation balance related to both stock options and restricted stock units was $16.6 million and will be recognized using a straight-line method over an estimated weighted average amortization period of 2.2 years.

     Prior to January 1, 2006, the Company applied the intrinsic valuation methodology under Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its share-based compensation plan.

     Had compensation cost for the Company’s share-based plan been determined based upon the fair value of such awards at the grant date, consistent with the methods of SFAS 123, the Company’s net earnings and basic and diluted net earnings per common share for the three and nine month periods ended September 30, 2005 would have been as follows:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     The Company has a share repurchase program whereby the Company has been authorized to buy back up to $900 million of equity shares. As of September 30, 2006, there were $449.2 million of remaining equity shares authorized to be repurchased under the plan by December 31, 2008. 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 timing will depend on the level of acquisition activity, business and market conditions, the stock price, trading restrictions and other factors. The Company has purchased 8.4 million shares since the inception of the program through September 30, 2006.

     The Company spent $182.4 million and $106.7 million on the repurchase of 3,008,300 shares and 2,181,800 shares at an average price of $60.62 and $48.89 during the nine months ended September 30, 2006 and 2005, respectively, as well as an additional $4.2 million and $1.4 million during the nine month periods ended September 30, 2006 and 2005, respectively, relating to the settlement of the liability for shares repurchased as of December 31, 2005 and 2004. The Company reissued 896,899 shares and 367,945 shares held in treasury for the exercise of stock options for the nine months ended September 30, 2006 and 2005, respectively.

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     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.

     Outstanding options to purchase 426,000 and 0 shares of common stock for the three month periods ended September 30, 2006 and 2005, respectively, and options to purchase 434,333 and 169,500 shares of common stock for the nine month periods ended September 30, 2006 and 2005, respectively, have been excluded from the calculation of diluted weighted average number of common and common equivalent shares as such options would be anti-dilutive.

     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:

     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:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     As previously disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2005, the Company expects to make normal employer contributions of approximately $11 million to its non-U.S. pension plans and $2 million to its U.S. post-retirement medical plan during the year ended December 31, 2006.

     Other charges (income), net consists primarily of interest income, (gains) losses from foreign currency transactions, (gains) losses from sales of assets and other items.

     For the nine months ended September 30, 2005, other charges (income), net included a $21.8 million charge related to litigation. The Company wrote off a non-cash $19.9 million ($12 million after-tax) intangible asset relating to an intellectual property license that was subject to litigation with the grantor in June 2005 which is included as a component of Other in the interim consolidated statements of cash flows. This license enabled a wholly owned subsidiary of the Company exclusive rights to distribute certain third-party manufactured pipettes in the United States. A judgment entered on June 6, 2005 terminated the license agreement and awarded damages to the other party. The Company also incurred $1.9 million of related legal costs during the nine months ended September 30, 2005, which included damages of $0.6 million. The damages of $0.6 million were subsequently reversed during 2006.

     As disclosed in Note 16 to the Company’s consolidated financial statements for the year ending December 31, 2005, operating segments are the individual reporting units within the Company. These units are managed separately and it is at this level where the determination of resource allocation is made. The units have been aggregated based on operating segments in geographic regions that have similar economic characteristics and meet the aggregation criteria of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). 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 (earnings before taxes before share-based compensation expense, amortization, interest expense and other charges).

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     The following tables show the operations of the Company’s reportable segments:

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

     A reconciliation of Earnings before taxes to Segment profit for the three and nine month periods ended September 30 follows:

     As part of the Rainin acquisition in 2001, the Company entered into an agreement to lease certain property from the former owner and former General Manager of Rainin. During the three and nine months ended September 30, 2006 and 2005, the Company made lease payments in respect of this agreement of $0.6 million and $1.9 million, respectively. All of the Company’s transactions with the former owner of Rainin were in the normal course of business.

     During the third quarter of 2006, a wholly owned subsidiary of the Company issued and sold $10 million of redeemable instruments to one of the Company’s non-U.S. sponsored defined benefit plans. These instruments are redeemable beginning in July 2011 and, as such, are classified as long-term debt on the Company’s Interim Consolidated Balance Sheet.

METTLER-TOLEDO INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2006 – Unaudited (Continued)
(In thousands, except share data, unless otherwise stated)

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

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.

     Our interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a basis which reflects the interim consolidated financial statements of Mettler-Toledo International Inc. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

     The following tables set forth certain items from our interim consolidated statements of operations for the three and nine month periods ended September 30, 2006 and 2005 (amounts in thousands).

Notes:

     Net sales

     Net sales were $397.3 million and $1,132.6 million for the three and nine months ended September 30, 2006, compared to $365.4 million and $1,071.2 million for the corresponding periods in 2005. This represents an increase in U.S. dollars of 9% and 6% for the three and nine months ended September 30, 2006. Excluding the effect of currency exchange rate fluctuations, or in local currencies, net sales increased 7% and 6% for the three and nine months ended September 30, 2006.

     During the three and nine months ended September 30, 2006, our net sales by geographic destination in local currencies increased by 6% and 5% in the Americas, by 5% and 7% in Europe and by 11% and 9% in Asia/Rest of World. A discussion of sales by operating segment is included below.

     As described in Note 16 to our consolidated financial statements for the year ending December 31, 2005, our net sales comprise product sales of precision instruments and related services. Service revenues are primarily derived from regulatory compliance qualification, calibration, certification and repair services, some of which is provided under separately priced contracts, as well as sales of spare parts.

     Net sales of products increased in U.S. dollars by 9% and 6% during the three and nine months ended September 30, 2006 compared to the corresponding period in 2005. Excluding the effect of currency exchange rate fluctuations for the three and nine month periods then ended net sales of products increased 7% and 6%, respectively. Service revenue (including spare parts) increased in U.S. dollars by 6% for both the three and nine months ended September 30, 2006 compared to the corresponding period in 2005. Excluding currency exchange rate fluctuations for the three and nine month period then ended net service revenues increased 4% and 6%, respectively.

     Net sales for our laboratory-related products increased 5% and 6% in local currencies during the three and nine months ended September 30, 2006, principally driven by strong growth in process analytics, laboratory balances and analytical instruments.

     Net sales of our industrial-related products increased 6% and 4% in local currencies for the three and nine months ended September 30, 2006, particularly due to growth in our product inspection and core industrial products.

     In our food retailing markets, net sales increased 13% and 15% in local currencies during the three and nine months ended September 30, 2006. The increase for the three and nine months ended September 30, 2006 is due to strong project activity in the Americas, while sales growth for the nine months ended September 30, 2006 also includes strong project activity in Europe. Retail sales also continue to experience improved sales growth in our in-store retail item management software solutions.

     Gross profit

     Gross profit as a percentage of net sales was 48.8% and 49.2% for the three and nine months ended September 30, 2006, compared to 49.0% and 48.8% for the corresponding periods in 2005.

     Gross profit as a percentage of net sales for products was 51.9% and 53.0% for the three and nine months ended September 30, 2006, compared to 53.1% and 53.0% for the corresponding periods in 2005.

     Gross profit as a percentage of net sales for services (including spare parts) was 38.3% and 36.5% for the three and nine months ended September 30, 2006, compared to 35.4% and 34.7% for the corresponding periods in 2005.

     The decrease in gross profit percentage for the three months ended September 30, 2006 was driven by lower margins associated with our food retailing project activity and unfavorable mix offset in part by the benefits of leveraging our fixed production costs, as well as improved pricing and our cost rationalization initiatives.

     The increase in gross profit percentage for the nine months ended September 30, 2006 reflects benefits from our sales volume leveraging our fixed production costs, as well as improved pricing and our cost rationalization initiatives.

     Research and development and selling, general and administrative expenses

     Research and development expenses increased 4% and 1%, in local currencies, during the three and nine months ended September 30, 2006, respectively, compared to the corresponding periods in 2005. The increase in the current quarter reflects the timing of project activity.

     Selling, general and administrative expenses increased 4% and 6%, in local currencies, during the three and nine months ended September 30, 2006, respectively, compared to the corresponding periods in 2005. This is primarily due to share-based compensation expense, performance related compensation costs and our continued sales and marketing investments, especially in China.

     Interest expense was $4.4 million and $12.8 million for the three and nine months ended September 30, 2006, respectively, and $4.0 million and $11.3 million for the corresponding periods in 2005. The increase is due to higher average borrowings in 2006 over the comparable period in 2005.

     Other charges (income), net consists primarily of interest income, as well as (gains) losses from foreign currency transactions, and other items. The increase in other charges (income), net over the prior year comparable period is due to higher interest income associated with the increase in cash balances resulting from our earnings repatriation associated with the American Jobs Creation Act of 2004. For the nine months ended September 30, 2005, other charges (income), net includes a $21.8 million ($13.1 million after-tax) charge related to litigation. We wrote-off a $19.9 million intangible asset relating to an intellectual property license that was subject to litigation with the grantor in June 2005. This license enabled a wholly owned subsidiary of the Company exclusive rights to distribute certain third-party manufactured pipettes in the United States. A judgment entered on June 6, 2005 terminated the license agreement and awarded damages to the other party. We also incurred $1.9 million of related legal costs during the nine months ended September 30, 2005, which includes damages of $0.6 million. The damages of $0.6 million were subsequently reversed during 2006.

     Income tax expense was $3.0 million and $18.7 million for the three month periods ending September 30, 2006 and 2005, respectively, and $28.1 million and $32.4 million for the nine month periods ending September 30, 2006 and 2005, respectively. The provision for taxes is based upon

our projected annual effective tax rate for the related periods. During the third quarter of 2006, the Company implemented a legal reorganization that resulted in a reduction of the estimated annual effective tax rate before discrete items from 30% to approximately 27%. In addition to the change in the Company’s estimated annual effective tax rate, the Company recorded four discrete tax items: a charge of $10.5 million related to the establishment of a valuation allowance on foreign tax credit carryforwards, a benefit of $13.4 million associated with a reduction of a liability previously established for estimated costs to repatriate unremitted earnings of foreign subsidiaries, a favorable tax law change resulting in a benefit of $5.1 million and a cumulative tax benefit adjustment of $2.5 million, associated with the six months ended June 30, 2006, for the estimated annual effective tax rate change described above. The net impact of the items described above has decreased the effective tax rate to 6.0% and 21.0% for the three and nine months ended September 30, 2006, respectively. We estimate the effective tax rate, excluding discrete items, will be 27% for the year ending December 31, 2006.

     During the three months ended September 30, 2005 we recorded two tax items discrete to the quarter consisting of a charge of approximately $13.1 million relating to the impact of earnings repatriation associated with the American Jobs Creation Act of 2004 (net of certain benefits associated with the reduction of previously established deferred liabilities on remitted earnings), and a tax benefit of approximately $7.7 million relating to the favorable resolution of certain tax matters. Our tax rate for the nine months ended September 30, 2005 also included a tax benefit associated with the previously described pipette litigation. The net impact of the items described above increased the effective tax rate to 42.2% and 33.3% for the three and nine months ended September 30, 2005, respectively.

     Excluding the effects of the previously mentioned discrete items, our annual effective tax rate would have been 27.0% and 30.0% for 2006 and 2005, respectively. Including these items, our estimated annual effective tax rate is 23.0% and 32.0% for 2006 and 2005, respectively.

     Net earnings were $47.0 million and $105.5 million during the three and nine months ended September 30, 2006, respectively, compared to net earnings of $25.6 million and $64.7 million during the three and nine months ended September 30, 2005. Net earnings for the three and nine months ended September 30, 2006 include $1.3 million and $4.1 million of share-based compensation expense, after tax. Net earnings for the nine months ended September 30, 2005 included the previously described $13.1 million one-time litigation charge. Net earnings for the three and nine months ended September 30, 2006 and 2005 also included the previously described discrete tax items of $8.0 million and $5.4 million, respectively, as well as the cumulative discrete tax benefit adjustment of $2.5 million associated with the six months ended June 30, 2006, for the estimated annual effective tax rate change during the three months ended September 30, 2006. Net earnings, as reported, increased 84% and 63% for the three and nine months ended September 30, 2006 compared to the same periods in 2005. Excluding the effect of share-based compensation expense, the one-time litigation charge and the discrete tax items, net earnings would have increased 22% for the three and nine months ended September 30, 2006. This increase primarily reflects improved sales volume in 2006, improved productivity in our cost structure and a lower tax rate.

     Net earnings per diluted share were $1.16 and $2.56 during the three and nine months ended September 30, 2006 compared to $0.60 and $1.49 during the three and nine months ended September 30, 2005. Net earnings per diluted share for the three and nine months ended September 30, 2006 include $0.03 and $0.10 of share-based compensation expense and a $0.19 tax benefit related to the previously described discrete tax items associated with a legal reorganization and the

favorable tax law change. The three months ended September 30, 2006 also include a $0.06 cumulative discrete tax benefit adjustment related to the estimated annual effective tax rate change associated with the six month period ended June 30, 2006. Net earnings per diluted share for the three and nine months ended September 30, 2005 included the previously described $0.12 discrete tax items and the nine months ended September 30, 2005 included the $0.30 one-time litigation charge. Net earnings per diluted share, as reported, increased 93% and 72% for the three and nine months ended September 30, 2006 compared to the same periods in 2005. Excluding the effect of share-based compensation expense, the one-time litigation charge and the discrete tax items, net earnings per diluted share would have increased 31% and 29% for the three and nine months ended September 30, 2006. The increase in net earnings per diluted share primarily reflects improved sales volume in 2006, the benefits from leveraging our fixed production costs, improved productivity in our cost structure, a lower tax rate and the benefits from our share repurchase program.

     U.S. Operations

     The increase in total net sales and net sales to external customers for the three months ended September 30, 2006 reflects particularly solid results in food retailing due to strong project activity, offset in part by difficult prior year transportation and logistics comparisons and business transfers to other segments. Our U.S. Operations have also experienced solid results in process analytics, analytical instruments and product inspection products. Net sales growth to external customers for the nine months ended September 30, 2006 includes growth across most product lines, particularly our food retailing products due to strong project activity as well as continued growth in our in-store retail software solutions.

     Segment profit decreased 2% and increased 15% for the three and nine month periods ended September 30, 2006, respectively, compared to the corresponding periods in 2005. The decline in the three months ended September 30, 2006, was primarily due to lower margin project activity within our food retailing markets. The increase for the nine months ended September 30, 2006, was primarily due to increased sales volume and our ability to leverage our fixed production costs, benefits of our cost rationalization initiatives and improved profitability in our liquid handling business.

     Swiss Operations

     Total net sales in local currency increased 8% and 7% for the three and nine month periods ended September 30, 2006. Net sales to external customers in local currency increased 12% and 9% for the same periods versus the prior year comparable period. The increase in sales to external customers relates to continued growth in our laboratory-related and industrial-related products. We also experienced strong export sales growth to emerging markets for the nine months ended September 30, 2006.

     The increase in segment profit during the three and nine month periods ending September 30, 2006 is primarily due to increased sales volume, our ability to leverage our fixed production costs particularly for laboratory balances and favorable currency translation fluctuations. These items were partially offset by increased selling, general and administrative expenses due to investments in our global sales and marketing initiatives, as well as increased performance related compensation. The increase in segment profit for the nine months ended September 30, 2006 is also partially offset by lower research and development expense in the previous year.

     Western European Operations

     Total net sales increased 3% and 6% in local currency for the three and nine months ended September 30, 2006. Net sales in local currency to external customers increased 3% and 4% for the three and nine month periods compared to the corresponding periods in 2005 primarily due to solid growth in our laboratory-related products as well as strong sales growth in our food retailing products primarily related to strong project activity for the nine months ended September 30, 2006. We also experienced improved growth in our product inspection products for the three months ended September 30, 2006.

     The increase in segment profit for the three and nine months ended September 30, 2006 is principally a result of increased net sales volume, our ability to leverage our fixed production costs and benefits of our cost rationalization initiatives. These benefits were partly offset by costs associated with our ongoing cost rationalization activities.

     Chinese Operations