Mettler-Toledo International Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited consolidated U.S. GAAP results. The company supplies precision instruments and related services for laboratory, industrial, food retailing and other markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $601.1m | $490.2m | $1,661.0m | $1,375.4m |
| Gross profit | $314.4m | $256.1m | $872.1m | $720.6m |
| Gross margin | 52.3% | 52.2% | 52.5% | 52.4% |
| Earnings before taxes | $87.1m | $76.9m | $231.7m | $197.4m |
| Net earnings | $68.2m | $62.1m | $175.2m | $151.3m |
| Diluted EPS | $2.09 | $1.82 | $5.31 | $4.41 |
- Sales grew 23% in U.S. dollars and 15% in local currencies in Q3; nine-month growth was 21% and 14%, respectively. Product sales rose faster than services: Q3 local-currency growth was 18% for products and 6% for services.
- Gross margin edged higher, but net margin declined to 11.4% from 12.7% in Q3 and to 10.5% from 11.0% year to date. Management attributed lower earnings as a percentage of sales primarily to unfavorable currency movements.
- Q3 SG&A was 30.9% of sales versus 29.6% a year earlier, reflecting sales and marketing investment, Blue Ocean program costs, higher variable compensation and acquisition costs. Interest expense increased to $5.9m from $4.8m.
- Operating cash flow was $177.7m for the first nine months, down from $205.3m. Capital expenditures were $64.5m, including $40.6m for Blue Ocean. Cash at September 30 was $262.5m, versus $447.6m at year-end 2010.
- Total debt was $581.7m, including $31.1m current debt; long-term debt was $550.6m. Credit facility availability was $493.0m. Cash less total debt was approximately negative $319.2m.
Changes and business mix
- Q3 local-currency sales increased across regions: Americas 10%, Europe 16%, and Asia/Rest of World 21%. Asia/Rest of World and China remained strong; China external-customer sales rose 23% in local currency in Q3.
- Laboratory and industrial products each represented about 45% of sales. Q3 local-currency growth was 12% for laboratory products and 22% for industrial products. Food retailing, about 10% of sales, grew 2% in local currency; product-line exits reduced food retailing sales by about 5% in Q3.
- Q3 segment profit increased to $98.5m from $85.8m. Western Europe and Other posted strong profit growth; Chinese segment profit increased only 3% in U.S. dollars despite sales growth, partly due to investment, Blue Ocean costs and higher product costs.
- Share repurchases totaled $171.2m for the first nine months, and the company repurchased 1.06m shares. The program had $749.4m remaining; outstanding shares were 31.6m at September 30.
Outlook, commentary and risks
- Management expected local-currency organic sales growth to slow in coming quarters because of weaker global economic forecasts and more difficult comparisons. It cautioned that a global recession could adversely affect sales, potentially causing a year-over-year decline. No specific numerical earnings or sales guidance was provided.
- Management said operating cash flow and available credit were expected to fund anticipated working-capital needs and capital spending for the foreseeable future; acquisitions could require additional borrowing.
- Foreign exchange remains a material exposure. Management estimated that a 1% strengthening of the Swiss franc against the euro could reduce annual pretax earnings by $1.6m–$2.2m. It estimated that a 10% weakening of the U.S. dollar against debt currencies would increase the reported debt balance by about $9m.
- China operations went live on the company-wide Blue Ocean systems program in Q3. Management identified potential operational, customer-facing and financial-reporting disruptions during continued integration, but said the control changes were not in response to an identified deficiency.
- Q3 included a $3.8m discrete tax benefit, primarily from favorable resolution of prior-year tax matters; the reported effective tax rate was 22% for Q3 and 24% year to date. A 2011 German vision-inspection acquisition cost $19.4m, with up to $2.4m additional earn-out consideration possible. The company also paid $7.8m of previously accrued acquisition consideration.
- Restructuring charges were $0.4m in Q3 and $2.8m year to date. Management did not expect pending ordinary-course legal and environmental proceedings, individually or in aggregate, to materially affect financial condition, results or cash flows.
Investor verification points
- Assess whether sales and earnings growth can persist as management anticipates slower organic growth and as foreign-exchange effects and comparison periods change.
- Track operating cash conversion, working-capital investment, capital spending and the impact of Blue Ocean implementation on costs and operations.
- Review debt, credit-facility usage, cash levels and the balance between share repurchases, acquisitions and liquidity needs.
- Separate recurring performance from the Q3 discrete tax benefit and evaluate currency-related impacts, including the Swiss franc exposure.
- Monitor acquisition earn-outs, integration outcomes, restructuring accruals and the company’s stated legal and environmental contingencies.