Mettler-Toledo International Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The company supplies precision instruments and related services for laboratory, industrial, packaging, logistics, food retailing and process applications. This unaudited 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted. Financial amounts below are in millions of U.S. dollars, except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $650.6 | $604.2 | $1,798.6 | $1,721.9 |
| Gross profit / margin | $369.5 / 56.8% | $339.5 / 56.2% | $1,017.0 / 56.5% | $961.2 / 55.8% |
| Earnings before taxes | $133.3 | $116.9 | $322.9 | $301.9 |
| Net earnings / net margin | $101.3 / 15.6% | $88.9 / 14.7% | $246.6 / 13.7% | $229.5 / 13.3% |
| Diluted EPS | $3.77 | $3.16 | $9.08 | $8.07 |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $290.1 | $289.8 |
Sales increased 8% in U.S. dollars in Q3 and 4% for the nine-month period; in local currencies, growth was 9% and 6%, respectively. Product sales grew 10% in local currency in Q3 and 6% year to date; service revenue grew 6% in local currency in both periods. Management attributed improved gross margin to higher volume, favorable pricing and lower material costs, partly offset by investment in field service.
Cash and cash equivalents were $146.1 at September 30, 2016, versus $98.9 at December 31, 2015. Total debt was $847.8, including $21.8 current and $826.0 long-term, compared with $589.6 at year-end 2015. The $800 million credit agreement had $457.0 of availability. Current assets were $946.1 and current liabilities $620.8.
Nine-month investing cash outflow was $158.5, including $109.7 of acquisitions and $51.2 of capital expenditures. Financing cash outflow was $84.2; the company repurchased $375.0 of shares and reported $254.1 net proceeds from borrowings. Cash increased $47.2 from the start of the period.
Material changes and notable items
- Net earnings and diluted EPS rose in both comparison periods; nine-month net earnings increased to $246.6 from $229.5 and diluted EPS to $9.08 from $8.07.
- Segment profit for the nine months was $382.8, up from $349.9. China and Other recorded notable increases; Swiss segment profit declined 1% in U.S. dollars, while Swiss external-customer sales fell 5% in local currency for the nine months amid soft local market conditions.
- Debt rose substantially from year-end, alongside acquisitions and continued share repurchases. The company bought 1.05 million shares for $375.0 during the nine months; $1.1 billion remained authorized under its repurchase program at September 30.
- In August, the company acquired substantially all assets of laboratory-equipment supplier Henry Troemner for $95.8. The acquisition added $33.8 of goodwill and identifiable intangible assets; management said it contributed about 1% to Q3 sales.
- Nine-month other charges included an $8.2 non-cash pension settlement charge related to a one-time lump-sum offer to former U.S. plan participants. Restructuring expense was $4.6 for the nine months, versus $5.2 in 2015.
Outlook, risks and contingencies
Management said market conditions were currently favorable but remained cautious about sales growth because of uncertainty in global markets; it also cited uncertainty in the Chinese economy. The filing gives no specific numerical earnings or revenue guidance. Management expected operating cash flow, available credit facilities and local working-capital facilities to fund anticipated working-capital and capital-spending needs for the foreseeable future.
Key exposures include foreign exchange movements, especially the Swiss franc, euro and U.S. dollar. The company estimated that a 1% Swiss-franc strengthening against the euro could reduce annual pretax earnings by approximately $1.2–$1.4, and a 1% strengthening against the U.S. dollar by approximately $0.4–$0.6, before considering the stated euro hedges. It estimated a 10% weakening of the U.S. dollar against debt currencies would increase reported debt by approximately $22.7. The company also noted ordinary-course legal and environmental matters, but management did not expect them to materially adversely affect financial condition, results or cash flows. No material risk-factor changes were reported from the 2015 10-K.
Important facts for investors to verify
- Whether sales growth and margin gains persist, particularly given management’s caution on global and Chinese market conditions.
- The drivers, currency composition and cost of the increase in debt, and how acquisition spending and the share-repurchase program affect leverage and liquidity.
- Troemner’s subsequent contribution to sales and earnings, and whether acquired intangible assets or goodwill require reassessment.
- The recurrence or absence of pension settlement charges, restructuring costs and other unusual items.
- The eventual impact of adopting the new revenue-recognition standard, which the company was still evaluating and expected to adopt in 2018.