Mettler-Toledo International Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted. The company supplies precision instruments and related services globally.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $698.8 | $650.6 | $1,947.0 | $1,798.6 |
| Gross profit | $400.3 | $369.5 | $1,118.1 | $1,017.0 |
| Gross margin | 57.3% | 56.8% | 57.4% | 56.5% |
| Earnings before taxes | $139.6 | $133.3 | $380.3 | $322.9 |
| Net earnings | $105.0 | $101.3 | $299.0 | $246.6 |
| Diluted EPS | $3.99 | $3.77 | $11.31 | $9.08 |
- Sales increased 7% in U.S. dollars in Q3 and 8% year to date; local-currency growth was 6% and 9%, respectively. Q3 sales growth was broad-based, while food retailing declined significantly.
- Q3 net earnings rose about 4%, slower than sales, and net margin was 15.0% versus 15.6% a year earlier. Year-to-date net earnings rose about 21%, with net margin improving to 15.4% from 13.7%.
- Q3 gross margin improved 0.5 percentage point; management cited favorable pricing and productivity, partly offset by higher product costs and currency effects. Service margins increased; product margin was flat year over year in Q3.
- Segment performance: China was strongest, with Q3 external sales up 26% and segment profit up 34% in U.S. dollars. Laboratory-related sales rose 10% in Q3; industrial-related sales rose 10%. Food retailing sales fell 18% in local currency.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $351.2, up from $307.3. Capital expenditures were $85.8 versus $51.2; acquisitions used $108.4. Net investing cash outflow was $180.1.
- Cash was $169.1 at September 30. Total debt was $1,069.2, including $18.5 current and $1,050.7 long-term; net debt was approximately $900.1. Availability under the $800 million credit agreement was $238.6.
- The company repurchased $335.0 of stock in the first nine months and had $648.4 remaining under its repurchase authorization. Management said operating cash flow and available financing should cover anticipated working capital and capital spending needs.
Changes, outlook, and notable items
- In September, the company acquired Biotix for an initial $105 cash payment; contingent consideration could reach $65, with a recorded fair value of $30.7. The acquisition contributed to higher goodwill and intangible assets and was primarily debt-funded; credit-agreement borrowings increased $97.9 in Q3.
- Management described global conditions as generally favorable but remained cautious about regional uncertainty and difficult prior-year comparisons, especially entering 2018. It expected China’s local-currency sales growth to be lower in Q4 2017 than year-to-date growth. No specific earnings or revenue forecast was provided.
- The company expects $50–$60 of net investment in new or expanded manufacturing facilities over the next two years. It reported restructuring charges of $8.8 year to date, primarily employee costs, and a $3.4 gain on a Swiss facility sale. Other charges also include acquisition costs and foreign-exchange and hedging effects.
- The estimated 2017 annual tax rate was 22% before discrete items, versus 24% in 2016; adoption of stock-compensation tax guidance was expected to lower the annual rate by 2%. Revenue-standard adoption in 2018 was expected to have an immaterial impact, subject to ongoing evaluation.
- Key risks include currency exposure—particularly the Swiss franc, euro, and renminbi—regional economic uncertainty, and acquisition, execution, and market-comparison risks. Management reported no material change in previously disclosed risk factors; it did not expect pending ordinary-course legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether the Q3 slowdown in food retailing and the expected tougher comparisons affected subsequent sales and growth.
- How much reported growth and profit improvement came from acquisitions, currency translation, and the one-time facility-sale gain versus underlying operations.
- Integration results and contingent payments for Biotix, and the effect of acquisition-related debt and amortization on earnings and cash flow.
- Debt levels, remaining credit capacity, cash generation, and the pace of share repurchases alongside planned facility investment.
- Actual tax-rate effects, foreign-exchange sensitivity, and the final impact and implementation method for new accounting standards.