Mettler-Toledo International Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Amounts are in U.S. dollars unless otherwise noted. The company supplies precision instruments and related services across laboratory, industrial, food retailing, and other markets.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $591.7 million | $578.6 million | $1,694.7 million | $1,684.2 million |
| Gross profit | $318.6 million | $308.2 million | $906.7 million | $884.3 million |
| Gross margin | 53.8% | 53.3% | 53.5% | 52.5% |
| Earnings before taxes | $97.8 million | $95.6 million | $257.8 million | $246.6 million |
| Net earnings | $74.3 million | $72.2 million | $195.9 million | $186.2 million |
| Diluted EPS | $2.43 | $2.28 | $6.35 | $5.82 |
Q3 sales rose 2% in reported dollars and 1% in local currencies; nine-month sales rose 1% in dollars and were flat in local currencies. Gross margin improved in both periods. Management attributed the improvement primarily to stronger price realization and lower material costs, partly offset by unfavorable currency; Q3 also faced unfavorable mix. The effective tax rate was 24% in 2013 versus 24.5% in 2012.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $237.4 million, up from $216.0 million. Management cited lower cash incentive payments and increased deferred revenue/customer prepayments, partly offset by higher inventory and the timing of tax and pension payments.
- Capital expenditures were $57.0 million, compared with $64.3 million. Cash and equivalents were $92.2 million at September 30, 2013, down from $101.7 million at year-end 2012.
- Total debt was $400.9 million, including $16.0 million current debt; long-term debt was $384.9 million. The company reported $690.9 million available under its credit agreement. Cash less total debt was approximately $308.7 million.
- Q3 included issuance of $50 million of 4.10% senior notes due 2023. The company reported compliance with debt covenants. It believed operating cash flow and available facilities would cover anticipated working capital and capital spending needs for the foreseeable future.
- Nine-month share repurchases were $217.4 million for approximately 1.00 million shares, at an average $216.44 per share. Remaining authorization was $969.9 million at September 30.
Changes and operating trends
- Service revenue grew 6% in reported dollars in both periods (3% in local currencies in Q3; 5% for nine months). Product sales increased 1% in Q3 but declined 1% for nine months.
- Food retailing sales increased 17% in Q3 and 5% year to date in reported dollars. Laboratory-related sales grew 3% in Q3 and 1% year to date. Industrial-related sales declined 2% in Q3 and 1% year to date.
- Asia/Rest of World sales declined 9% in reported dollars in Q3 and 6% year to date; China remained weak. The exit of certain China industrial businesses reduced local-currency sales by about 1% in Q3 and 1% year to date overall, with greater effects on the China segment.
- Segment results were mixed: Swiss and Western European segment profit improved, while U.S. segment profit fell 10% in Q3 and Chinese segment profit was nearly flat in Q3 and down 3% year to date. Segment profit is the company’s measure before amortization, interest, restructuring, other charges, and taxes.
- Restructuring charges were $5.5 million in Q3 and $13.7 million for nine months, primarily employee-related, versus $3.1 million and $11.3 million in the comparable 2012 periods.
Outlook, risks, and other matters
- Management said global economic conditions remained uncertain and it was cautious about sales growth. It noted weak Chinese market conditions, reduced credit availability for some local customers, and the possibility that weakness in certain Chinese segments could persist. No specific earnings or sales guidance was provided in the supplied filing text.
- Currency exposure is material: management said a 1% Swiss franc strengthening against the euro could reduce annual pretax earnings by $0.8–$1.2 million before hedging; existing forwards reduce this exposure by about 75%. A 1% strengthening against the U.S. dollar could reduce annual pretax earnings by $0.7–$0.9 million. The company also estimated a 10% weakening of the U.S. dollar against debt currencies would raise reported debt by about $4.1 million.
- The company uses interest-rate and foreign-exchange derivatives. It expected derivative losses of $3.0 million after tax related to interest-rate hedges and $0.5 million after tax related to currency hedges to be reclassified to earnings within 12 months.
- Management reported no material expected adverse effect from ongoing legal proceedings, including environmental matters. It reported no material changes to previously disclosed risk factors and no material change in market-risk disclosures.
- Disclosure controls were deemed effective. Implementation of the Blue Ocean program changed certain controls in the U.S. sales and marketing organization and a European logistics hub; management said this was not in response to an identified control deficiency.
Investor verification priorities
- Assess whether the reported margin gains and earnings growth continue, particularly as local-currency sales were flat year to date.
- Track China and broader Asia/Rest of World demand, including the effects of exited industrial businesses and local customer credit constraints.
- Monitor cash conversion, inventory levels, capital spending, debt, and the use of substantial remaining buyback authorization.
- Review currency sensitivity, hedge balances and reclassifications, and refinancing needs, including the $100 million notes due in 2015.
- Check restructuring costs and savings, and any developments in legal, environmental, pension, or other contingencies.