Mettler-Toledo International Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited U.S. GAAP results. The company supplies precision instruments and related services for laboratory, industrial, retail and other applications.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $753.9 million | $734.8 million | $2,164.7 million | $2,117.7 million |
| Gross profit | $435.1 million | $419.3 million | $1,242.9 million | $1,206.8 million |
| Gross margin | 57.7% | 57.1% | 57.4% | 57.0% |
| Earnings before taxes | $169.4 million | $160.4 million | $450.3 million | $421.4 million |
| Net earnings | $129.4 million | $126.7 million | $368.4 million | $331.4 million |
| Diluted EPS | $5.20 | $4.93 | $14.67 | $12.81 |
- Sales grew 3% in U.S. dollars in both periods, or 4% in Q3 and 5% year to date in local currencies. Net earnings rose 2% in Q3 and 11% year to date.
- Q3 operating performance reflected higher gross margin and earnings before taxes as a percentage of sales (22.5%, versus 21.8%); net margin was 17.2% in both periods. Year-to-date net margin increased to 17.0% from 15.7%.
- For the first nine months, operating cash flow was $401.7 million, compared with $366.4 million. Capital expenditures were $71.6 million, versus $96.7 million; operating cash flow less capital expenditures was $330.1 million, versus $269.8 million.
- Cash was $120.5 million at September 30, down from $178.1 million at year-end 2018. Total debt was $1,172.9 million, including $48.6 million current; long-term debt was $1,124.3 million. Credit-agreement availability was $529.2 million. Current assets were $963.8 million and current liabilities $719.3 million.
- Share repurchases used $558.7 million in the first nine months, compared with $356.2 million a year earlier. The company repurchased 794,603 shares at an average $703.16 per share; $1.5 billion remained authorized. Outstanding shares fell to 24.4 million from 24.9 million at December 31, 2018.
Material changes and operating trends
- Service revenue grew faster than product sales: Q3 service revenue rose 5% and product revenue 2% in U.S. dollars. Laboratory sales increased 5%; industrial sales declined 3% in U.S. dollars but rose 5% in local currencies; food retailing sales fell 17% in U.S. dollars and 15% in local currencies.
- Food retailing weakness reduced total sales by 2% in both the quarter and nine-month period. Management attributed the decline mainly to unfavorable market conditions and project timing.
- Gross-margin improvement reflected pricing, productivity and business mix, partly offset by tariffs and initial new-product costs. The company estimated annualized tariff costs of approximately $25 million at a 25% tariff rate and said it was taking steps to mitigate them.
- Q3 restructuring expense increased to $6.7 million from $2.2 million; nine-month expense decreased to $11.1 million from $14.0 million. Nine-month interest expense rose to $27.8 million from $25.7 million.
- Segment profit increased year to date in U.S. and Swiss operations, was slightly higher in Western Europe, and declined in Chinese and Other operations. Chinese segment profit decreased 2% in U.S. dollars, while sales to external customers grew 3%.
Outlook, risks and unusual items
- Management described global market conditions as generally favorable but said it remained cautious about greater macroeconomic uncertainty, particularly in emerging markets. It also flagged tougher Q4 comparisons following strong prior-year growth. The filing does not provide a specific full-year sales or EPS forecast.
- Management expects $10–$15 million of net investment in new or expanded manufacturing facilities over the next two years and stated that available cash flow and credit facilities should fund anticipated working capital and capital spending for the foreseeable future.
- In November 2019, after quarter-end, the company agreed to issue EUR 135 million of 1.30% notes due 2034 and $50 million of 3.19% notes due 2035. Proceeds are intended to repay credit-facility borrowings and fund operations; the dollar notes were scheduled for issuance in January 2020.
- Swiss cantonal tax changes enacted in October 2019 are expected to produce a non-cash deferred tax benefit in Q4; the company could not yet estimate the amount. The reported tax rate was 23.6% in Q3 and 18.2% year to date, versus 21.0% and 21.4%, respectively, in 2018.
- Currency movements can affect earnings and reported debt. Management estimated that a 1% strengthening of the Swiss franc against the euro would reduce annual pretax earnings by $1.6–$1.8 million; a 1% weakening of the Chinese renminbi against the U.S. dollar would reduce annual pretax earnings by $1.3–$1.5 million.
- The company reported no material change in risk factors, no material expected adverse effect from disclosed legal proceedings, and effective disclosure controls. Its stated risks include macroeconomic uncertainty, food-retailing weakness, tariffs, currency exposure and execution of restructuring and growth investments.
Investor verification priorities
- Track whether food-retailing weakness and project timing persist, and whether local-currency growth converts into reported-dollar growth.
- Assess tariff mitigation against the estimated $25 million annualized cost and its effect on gross margin.
- Monitor debt, cash, credit-facility usage and the impact of the post-quarter-end note issuances, alongside substantial ongoing share repurchases.
- Confirm the amount and timing of the expected Q4 Swiss tax benefit and evaluate the effect of changing tax rates on earnings.
- Compare future results with management’s caution on macroeconomic uncertainty and tougher fourth-quarter comparisons; the filing gives no specific full-year earnings guidance.