Mettler-Toledo International Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Comparisons are with Q1 2010 unless noted. The company supplies precision instruments and related services globally.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $498.8 million | $416.7 million | +20% reported; +17% local currency |
| Product sales | $387.1 million | $313.4 million | +24% reported; +20% local currency |
| Service sales | $111.7 million | $103.2 million | +8% reported; +6% local currency |
| Gross profit / margin | $261.5 million / 52.4% | $217.9 million / 52.3% | Margin +0.1 percentage point |
| Earnings before taxes | $63.3 million | $51.2 million | +24% |
| Net earnings | $46.8 million | $37.9 million | +24% |
| Diluted EPS | $1.41 | $1.10 | +28% |
| Operating cash flow | $6.5 million | $44.5 million | Down $38.0 million |
| Capital expenditures | $17.6 million | $10.5 million | Up $7.1 million |
Net margin was 9.4%, compared with 9.1%. Product gross margin eased to 56.7% from 57.1%; service gross margin was 37.7% versus 37.6%. Management attributed the modest overall gross-margin improvement to volume, operating efficiencies and pricing, partly offset by unfavorable currency and higher material costs.
Liquidity and capital resources
- At March 31, cash and equivalents were $388.1 million, down from $447.6 million at year-end 2010. Total debt was $700.4 million, including $22.6 million current; long-term debt was $677.8 million.
- Cash less total debt was approximately negative $312.3 million. Current assets were $1.12 billion and current liabilities $524.4 million.
- Credit-facility availability was $380.8 million. The company said operating cash flow and available facilities should cover anticipated working capital and capital spending needs for the foreseeable future.
- Q1 cash use included $32.9 million for investing activities and $34.6 million for financing activities. The company repurchased $57.2 million of shares and paid $14.5 million for acquisitions.
Material changes and management commentary
- Sales increased across major geographies: local-currency growth was 12% in the Americas, 16% in Europe and 25% in Asia/Rest of World. Laboratory-related sales rose 16% in local currency; industrial-related sales rose 21%. Food retailing grew 5% locally, partly offset by product-line exits.
- Swiss Operations segment profit rose 62% in U.S. dollars; Chinese Operations rose 39%, Western European Operations 23%, and Other 123%. U.S. Operations segment profit fell 5%, reflecting sales and marketing investment, compensation, Blue Ocean program costs and higher product costs.
- Operating cash flow fell mainly because of approximately $39 million in incentive payments relating to prior-year performance, higher inventory and tax-payment timing, partly offset by higher earnings and cash receipts.
- Capital expenditures included $11.1 million for the multi-year Blue Ocean information-technology program. SG&A growth also reflected performance-related compensation, sales and marketing investment, and Blue Ocean expenses.
- March acquisitions totaled $15.4 million, including a $12.0 million X-ray inspection solutions business. The company recorded $4.4 million of goodwill and $9.9 million of identified intangible assets.
Outlook, risks and contingencies
- The filing gives no specific sales, earnings or EPS guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Currency is a notable exposure: management estimated a 1% strengthening of the Swiss franc against the euro could reduce annual pretax earnings by $1.5 million to $1.9 million. A 10% weakening of the U.S. dollar against currencies in which debt is denominated could increase reported debt by about $11.6 million.
- Japan represented approximately 3% of sales and is an important source of electronic components. The filing said the effects of the March 2011 earthquakes on the business and supply chain were uncertain; Q1 external sales in Japan were flat year over year.
- The company has a $2.25 billion repurchase program, with $863.4 million remaining. Repurchases depend on business and market conditions and may be funded by cash, borrowings and operating cash flow.
- Legal proceedings, including environmental matters, were described as incidental to ordinary business; management did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Q1 restructuring charges were $0.5 million; the restructuring program initiated in 2008 was substantially complete. The company reported no material impact from adopting new multiple-element revenue guidance.
Key facts for investors to verify
- Whether the sharp decline in operating cash flow was primarily timing-related and how quickly cash conversion recovers.
- Whether sales momentum and margin performance persist amid higher material costs, currency movements and continued investment spending.
- The effect of Swiss franc strength and the Japan earthquake on operating costs, component availability and future results.
- Debt levels, credit-facility availability and the cash and borrowing capacity required to support acquisitions and share repurchases.
- Acquisition integration and the returns expected from the X-ray inspection business and Blue Ocean investments.