Mettler-Toledo International Inc. — Q3 2010 Form 10-Q
Business and period: Mettler-Toledo supplies precision instruments and related services for laboratory, industrial, packaging, logistics, food retailing and process analytics applications. This unaudited filing covers the three and nine months ended September 30, 2010; comparisons are with the same 2009 periods. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $490.2 million, up 13% reported and 14% in local currencies | $1,375.4 million, up 13% reported and 12% in local currencies |
| Gross profit / margin | $256.1 million / 52.2%, versus 51.7% | $720.6 million / 52.4%, versus 50.9% |
| Earnings before taxes | $76.9 million, versus $56.9 million | $197.4 million, versus $129.9 million |
| Net earnings | $62.1 million, versus $41.5 million | $151.3 million, versus $103.2 million |
| Diluted EPS | $1.82, versus $1.21 | $4.41, versus $3.02 |
| Operating cash flow | Not provided for the quarter | $205.3 million, versus $188.5 million |
- Products drove most sales growth: product sales increased 17% in Q3 and 16% year to date in U.S. dollars. Service revenue was flat in Q3 and up 5% for the first nine months.
- Gross margin improved year over year, primarily on higher volume, operating efficiencies and pricing. Q3 margin was partly pressured by unfavorable mix and higher material costs, including certain steel-related items.
- Research and development was 5.1% of sales in both 2010 periods. Selling, general and administrative expense was 29.6% of Q3 sales and 30.8% year to date.
- Interest expense declined to $4.8 million in Q3 and $14.8 million year to date, reflecting lower average borrowings and lower swap costs; 2009 year-to-date expense also included financing and tender-offer charges.
Financial position and cash flows
- At September 30, 2010, cash and cash equivalents were $142.9 million; current assets were $786.7 million and current liabilities were $606.0 million.
- Total debt was $335.2 million, comprising $89.4 million current and $245.9 million long-term debt. Cash less total debt was approximately $192.3 million net debt. Debt at December 31, 2009 was approximately $293.6 million.
- The company had $812.2 million of availability under its credit facility and reported compliance with debt covenants. The $75 million 4.85% Senior Notes were due November 15, 2010; management said credit-facility borrowings would be used to repay them.
- Nine-month operating cash flow of $205.3 million was offset by $51.0 million of investing outflows and $98.5 million of financing outflows. Capital expenditures were $38.6 million, including $17.4 million for the Blue Ocean information-technology program; acquisitions used $12.6 million.
- Working capital absorbed cash, including a $41.6 million inventory increase. Management attributed higher inventory to supplier constraints, system changes, product transfers and new product introductions.
Changes, outlook and risks
- Chinese Operations was the strongest reported segment: external-customer sales rose 30% in Q3 and 29% year to date in U.S. dollars; segment profit rose 34% and 46%, respectively. Management also described improved activity in the Americas and Asia/Rest of World.
- The global cost-reduction program was substantially complete. Cumulative charges were $40.3 million, with $2.5 million recorded in the first nine months of 2010 versus $28.4 million in the comparable 2009 period; approximately 1,000 employees and temporary personnel had been reduced.
- A U.K. pipette distributor was acquired in January 2010 for approximately $12.5 million, with up to $1.2 million additional contingent consideration. Acquisitions contributed an estimated 1% to consolidated sales growth in both reported periods.
- Q3 included a $5.2 million net discrete tax benefit, primarily from favorable resolution of prior-year tax matters; the effective tax rate was 19% for Q3 and 23% year to date. These benefits boosted reported earnings and are not a stated recurring outlook item.
- No quantified sales or earnings guidance is provided in the filing. Management said cash from operations and available credit facilities should fund anticipated working-capital and capital-spending needs for the foreseeable future, while warning that a prolonged global slowdown could reduce cash generation.
- Currency exposure is material. Management estimated that a 1% strengthening of the Swiss franc against the euro could reduce annual pretax earnings by approximately $1.1–$1.8 million; a 10% weakening of the U.S. dollar against debt currencies could increase reported debt by about $4.7 million. The filing also cites economic uncertainty, supplier and material costs, and changing customer demand.
- In November 2010, after quarter-end, the board authorized an additional $750 million share-repurchase capacity, expected to be used over several years. The company had spent $148.8 million repurchasing shares during the first nine months and had $261.8 million remaining under the existing program at September 30.
- Management did not expect pending legal or environmental proceedings to materially adversely affect financial condition, results or cash flows. No material change in reported risk factors or market-risk disclosures was identified.
Key facts for investors to verify
- Whether sales and margin growth persist after separating currency effects, acquisitions, and the Q3 tax benefit.
- Whether elevated inventory and other working-capital needs convert into cash as sales grow.
- Repayment of the November 2010 note maturity, debt levels and covenant headroom, particularly alongside the expanded buyback authorization.
- Exposure to Swiss-franc/euro movements, materials costs and any continued pressure from product mix.
- Execution of the announced repurchases and any effects on liquidity, leverage and share count.