Mettler-Toledo International Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited U.S. GAAP interim results; comparisons are with Q1 2019 unless stated otherwise. The company supplies precision instruments and related services for laboratory, industrial, retail, packaging, logistics and process applications.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $649.2 million | $679.5 million | Down 4% reported; down 3% in local currencies |
| Gross profit / margin | $374.4 million / 57.7% | $388.3 million / 57.2% | Margin up 0.5 percentage points |
| Earnings before taxes | $118.5 million | $125.7 million | Down 6% |
| Net earnings | $98.1 million | $111.8 million | Down 12% |
| Diluted EPS | $4.03 | $4.42 | Down 9% |
| Operating cash flow | $65.5 million | $98.8 million | Down $33.3 million |
| Capital expenditures | $18.8 million | $22.3 million | Down $3.5 million |
Gross margin improvement reflected favorable price realization and lower material costs. Product sales fell 5% in local currencies; service revenue rose 5%. Laboratory sales were approximately flat in local currencies (+1%), industrial sales declined 5%, and retail sales declined 16%. Reported tax rates were 17% in 2020 and 11% in 2019; management attributed the difference from projected annual effective rates to the timing of excess stock-option tax benefits.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $323.6 million at March 31, 2020, versus $207.8 million at December 31, 2019. The company also reported $342.9 million of additional borrowing availability under its credit agreement.
- Total debt was $1.569 billion, including $56.4 million current and $1.513 billion long-term, compared with $1.291 billion at year-end. Approximate debt less cash was $1.246 billion. The company was in compliance with debt covenants.
- Operating cash flow was lower year over year, reflecting lower earnings, approximately $13 million of higher tax payments, and inventory increases that used approximately $8 million more cash than in the prior-year period. Operating cash flow less capital expenditures was approximately $46.7 million.
- Q1 financing included $832.3 million of borrowings and $551.3 million of repayments. In January, the company issued $50 million of 3.19% senior notes due 2035, using proceeds to refinance debt and for general corporate purposes.
- The company repurchased 268,161 shares for $200.0 million at an average $745.80 per share. The repurchase program had approximately $1.1 billion remaining. Outstanding shares were 23.9 million at quarter-end.
Material changes and segment trends
- Geographic sales by customer destination, in local currencies, increased 3% in the Americas, declined 5% in Europe, and declined 8% in Asia/Rest of World. China sales declined 13% in local currency.
- U.S. segment sales increased 3% and segment profit increased 18%, supported by industrial and laboratory sales, margin expansion and cost savings.
- Chinese segment sales declined 14% in local currency and segment profit declined 23%, primarily due to COVID-19-related demand reductions, especially in industrial and retail.
- Western European segment sales declined 4% in local currency and segment profit declined 6%. Swiss segment sales declined 4% in local currency, while segment profit increased 1%. “Other” segment profit declined 16%.
- Accumulated other comprehensive loss increased to $347.7 million from $323.7 million at year-end, principally reflecting currency translation and pension-related movements.
Outlook, commentary and risks
The filing provides no quantified revenue or earnings guidance. Management expects COVID-19 and weaker customer demand to reduce global sales volume in future quarters, and cautions that the eventual effects on results and financial condition could be material. The company said its facilities were operating, supply-chain disruption was minimal at the time of filing, inventory and safety stock were adequate, and it continued serving essential customers through on-site and remote support. China activity had begun to improve after restrictions were removed, but management warned conditions could change quickly.
Temporary cost measures included reduced work hours, salary freezes, voluntary senior-leadership salary reductions and lower discretionary spending. Principal risks include renewed or expanded shutdowns, employee illness or restrictions, supply-chain interruption, weaker customer demand, delayed or uncollectible customer payments, global recession effects and foreign-exchange movements. A 1% strengthening of the Swiss franc against the euro was estimated to reduce annual pretax earnings by $1.6–$1.8 million; a 1% weakening of the renminbi against the U.S. dollar by $1.7–$1.9 million. Routine legal proceedings, including environmental matters, were not expected to have a material adverse effect. No material risk-factor changes beyond the COVID-19 update were reported.
Unusual items included $1.9 million of restructuring charges and a $7.3 million net foreign-currency-related loss in other charges, partly offset within the line by $3.0 million of non-service pension benefits. Management stated that operating cash flow, available credit and cash were expected to fund anticipated working capital and capital needs for the foreseeable future. It expected $15–$20 million of net investment in manufacturing facilities over the next two years. The filing notes that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How COVID-19 affected Q2 and subsequent demand, especially in China, industrial markets and food retailing.
- Whether cash conversion improves after Q1’s lower operating cash flow and inventory build, and whether receivables remain collectible.
- Debt levels, borrowing availability, interest costs and the company’s continued covenant compliance.
- Whether margin gains and cost actions can offset lower sales volumes, foreign-exchange effects and restructuring costs.
- The pace and funding of share repurchases relative to liquidity needs, acquisitions and planned capital investment.