Mettler-Toledo International Inc. — Q3 2012 Form 10-Q
Business and period: The company supplies precision instruments and related services for laboratory, industrial, packaging, logistics, food-retailing and process-analytics markets. This unaudited report covers the three and nine months ended September 30, 2012; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $578.6m | $601.1m | $1,684.2m | $1,661.0m |
| Gross profit / margin | $308.2m / 53.3% | $314.4m / 52.3% | $884.3m / 52.5% | $872.1m / 52.5% |
| Earnings before taxes / margin | $95.6m / 16.5% | $87.1m / 14.5% | $246.6m / 14.6% | $231.7m / 13.9% |
| Net earnings | $72.2m | $68.2m | $186.2m | $175.2m |
| Diluted EPS | $2.28 | $2.09 | $5.82 | $5.31 |
- Q3 sales fell 4% in reported dollars but rose 1% in local currencies. Nine-month sales rose 1% in dollars and 4% in local currencies. Currency movements therefore materially affected reported sales.
- Q3 gross margin improved by 1.0 percentage point; nine-month gross margin was unchanged. Management attributed the Q3 improvement principally to pricing, favorable currency translation and business mix, partly offset by geographic mix and higher field-service investment.
- For the nine months, operating cash flow was $216.0m versus $177.7m. Capital expenditures were $64.3m; operating cash flow less capital expenditures was approximately $151.7m (derived), versus $113.2m in 2011.
- Cash was $105.4m at September 30, down from $235.6m at year-end 2011. Total debt was $415.6m, including $36.6m current, versus approximately $505.0m at year-end; credit-facility availability was $596.2m.
- Working-capital and liquidity indicators: current assets were $838.4m and current liabilities $555.2m. The filing states that operating cash flow and available facilities should fund anticipated working-capital and capital-spending needs for the foreseeable future.
Material changes and operating trends
- Regional local-currency sales in Q3: Americas +1%, Asia/Rest of World +7%, and Europe −5%. Europe’s reported-dollar sales fell 15%. Management cited deteriorating economic conditions, especially in Europe.
- Food-retailing sales declined 9% in local currency in Q3, with declines in each region, amid reduced project activity and economic weakness. Management said declines could continue.
- Chinese Operations showed continued growth: Q3 external-customer sales rose 6% in local currency; laboratory products were particularly strong. Growth moderated from the prior-year comparison.
- Western European Operations’ Q3 external sales fell 4% in local currency; Swiss Operations’ fell 15%. Both faced weak demand and management expected adverse effects to persist through the remainder of 2012.
- Q3 reported-dollar sales of laboratory-related products fell 4%, while local-currency sales rose 1%. Industrial-related sales declined 1% in dollars but rose 3% in local currency. Service revenue was flat in dollars and up 5% in local currency.
- SG&A fell to 29.6% of Q3 sales from 30.9%; management cited cost-reduction savings and lower cash incentives. Nine-month net earnings benefited from higher sales and improved expense ratios, while 2011 comparisons included a $3.8m discrete tax benefit.
Outlook, risks and notable items
- Management expected 2012 local-currency organic sales growth to remain below 2011 and 2010 levels, with possible sales declines in future quarters depending on economic conditions. No specific full-year revenue or EPS guidance is provided in the filing text.
- A 2012 cost-reduction program is expected to incur approximately $20m–$25m in charges, primarily severance; $11.3m had been recorded in the first nine months. The program was expected to be substantially complete by the end of 2013.
- In October 2012, after quarter-end, the company agreed to issue $50m of ten-year senior notes at 3.67%, maturing in December 2022. The agreement includes interest-coverage and leverage covenant thresholds of 3.5-to-1.0.
- The company spent $207.9m repurchasing 1.24m shares in the first nine months. $508.2m remained under its $2.25bn repurchase authorization at September 30; repurchases may be funded with cash, borrowings and operating cash flow.
- Foreign-exchange exposure remains material. Management estimated that, absent specified hedges, a 1% Swiss-franc strengthening against the euro could reduce annual pretax earnings by $0.8m–$1.2m; hedges reduced that exposure by about 75%. Debt balances also fluctuate with exchange rates.
- Legal proceedings, including environmental matters, were described as ordinary-course matters; management did not expect a material adverse effect. No material risk-factor changes were reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether European demand, food-retailing activity and the broader economic slowdown further affect sales and margins.
- Progress and total costs of the restructuring program, and whether expected savings offset its charges.
- Cash generation, capital spending, debt reduction and the effect of continuing share repurchases on liquidity.
- Compliance with the new note covenants and the eventual terms and timing of the $50m note issuance.
- Currency exposure and hedge effectiveness, along with the basis for management’s stated sales and liquidity expectations.