Mettler-Toledo International (MTD) 10-Q2024 Q1 Quarterly report

(Mark One)

        

Three months ended March 31, 2024 and 2023

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include all entities in which the Company has control, which are its wholly-owned subsidiaries. The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The accompanying interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. These financial statements were prepared using information reasonably available as of March 31, 2024 and through the date of this report. Actual results may differ from those estimates due to uncertainty around the ongoing developments related to Ukraine and the Israel-Hamas war, as well as other factors.

All intercompany transactions and balances have been eliminated.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for expected credit losses represents the Company's best estimate based on historical information, current information, and reasonable and supportable forecasts of future events and circumstances.

The Company recognized amortization expense associated with the above intangible assets of $6.8 million and $6.9 million for the three months ended March 31, 2024 and 2023, respectively. The annual aggregate amortization expense based on the current balance of other intangible assets is estimated at $27.2 million for 2024, $26.2 million for 2025, $22.2 million for 2026, $20.7 million for 2027, $19.4 million for 2028 and $17.7 million for 2029. Purchased intangible amortization was $6.6 million, $5.1 million after tax for both three month periods ended March 31, 2024 and 2023.

Product revenue is recognized from contracts with customers when a customer has obtained control of a product. The Company considers control to have transferred based upon shipping terms. To the extent the Company’s arrangements have a separate performance obligation, revenue related to any post-shipment performance obligation is deferred until completed. Shipping and handling costs charged to

Service revenue not under contract is recognized upon the completion of the service performed. Revenue from spare parts sold on a stand-alone basis is recognized when control is transferred to the customer, which is generally at the time of shipment or delivery. Revenue from service contracts is recognized ratably over the contract period using a time-based method. These contracts represent an obligation to perform repair and other services including regulatory compliance qualification, calibration, certification, and preventative maintenance on a customer’s pre-defined equipment over the contract period.

The Company recognizes share-based compensation expense within selling, general and administrative in the consolidated statements of operations and comprehensive income with a corresponding offset to additional paid-in capital in the consolidated balance sheet. The Company recognized $4.7 million and $4.0 million of share-based compensation expense for the three months ended March 31, 2024 and 2023, respectively.

Research and development costs primarily consist of salaries, consulting and other costs. The Company expenses these costs as incurred.

In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the expected contingent payments as of the acquisition date. Subsequent changes in the fair value of the contingent consideration are recorded to other charges (income), net.

In March 2020, January 2021 and December 2022, the FASB issued ASU 2020-04, ASU 2021-01 and ASU 2022-06: Reference Rate Reform, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuance of LIBOR or another referenced rate. The guidance may be applied to any applicable contract entered into before December 31, 2024. The Company amended its credit agreement and cross currency swap agreements in June 2023 to change the interest rate benchmark from LIBOR to SOFR and other non-U.S. dollar references, which did not change the amount or timing of cash flows. As a result, the discontinuation of LIBOR did not have a material impact on the Company's financial statements.

The Company disaggregates revenue from contracts with customers by product, service, timing of revenue recognition, and geography. A summary by the Company’s reportable segments follows:

Changes in the components of deferred revenue and customer prepayments during the periods ended March 31, 2024 and 2023 are as follows:

The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into certain interest rate swap agreements in order to manage its exposure to changes in interest rates. The amount of the Company's fixed obligation interest payments

The Company's cash flow hedges are recorded gross at fair value in the consolidated balance sheet at March 31, 2024 and December 31, 2023, respectively. A derivative gain of $7.2 million based upon interest rates at March 31, 2024, is expected to be reclassified from other comprehensive income (loss) to earnings in the next twelve months. The cash flow hedges remain effective as of March 31, 2024.

The Company enters into foreign currency forward contracts in order to economically hedge short-term trade and non-trade intercompany balances largely denominated in Swiss franc, other major European currencies, and the Chinese renminbi with its foreign businesses. In accordance with U.S. GAAP, these contracts are considered “derivatives not designated as hedging instruments.” Gains or losses on these instruments are reported in current earnings. The foreign currency forward contracts are recorded at fair value in the consolidated balance sheet at March 31, 2024 and December 31, 2023, as disclosed in Note 5. The Company recognized in other charges (income) a net gain of $8.8 million and net gain of $3.5 million during the three months ended March 31, 2024 and 2023, respectively, which offset the related transaction gains (losses) associated with these contracts. At March 31, 2024 and December 31, 2023, these contracts had a notional value of $774.3 million and $793.9 million, respectively.

    

At March 31, 2024 and December 31, 2023, the Company had derivative assets totaling $13.2 million and $8.3 million, respectively, and derivative liabilities totaling $8.1 million and $25.2 million,

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement consists of observable and unobservable inputs that reflect the assumptions that a market participant would use in pricing an asset or liability.

A fair value hierarchy has been established that categorizes these inputs into three levels:

The Company had $5.2 million and $4.0 million of cash equivalents at March 31, 2024 and December 31, 2023, respectively, the fair value of which is determined using Level 2 inputs, through quoted and corroborated prices in active markets. The fair value of cash equivalents approximates cost.

The fair value of the Company's debt is less than the carrying value by approximately $211.5 million as of March 31, 2024. The fair value of the Company's fixed interest rate debt was estimated using Level 2 inputs, primarily utilizing discounted cash flow models based on estimated current rates offered for similar debt under current market conditions for the Company.

The Company's reported tax rate was 19.5% and 16.9% during the three months ended March 31, 2024 and 2023, respectively. The provision for taxes is based upon using the Company's projected annual effective tax rate of 19.0% and 18.5% before non-recurring discrete tax items during 2024 and 2023, respectively. The difference between the Company's projected annual effective tax rate and the reported tax rate is related to the timing of excess tax benefits associated with stock option exercises.

As of March 31, 2024, the Company had $583.6 million of additional borrowings available under its Credit Agreement, and the Company maintained $70.2 million of cash and cash equivalents.     

In December 2022, the Company entered into an agreement to issue and sell $150 million 10-year Senior Notes in a private placement. The Company issued $150 million with a fixed interest rate of 5.45% (5.45% Senior Notes) in March 2023. The 5.45% Senior Notes are senior unsecured obligations of the Company. The 5.45% Senior Notes mature on March 1, 2033. The terms of the 5.45% Senior Notes are consistent with the previous Senior Notes as described in the Company's Annual Report Form 10-K for the year ended December 31, 2023. The Company used the proceeds from the sale of the 5.45% Senior Notes to refinance existing indebtedness and for other general corporate purposes.

The Company has $2.3 billion of remaining availability for its share repurchase program as of March 31, 2024. The share repurchases are expected to be funded from cash generated from operating activities, borrowings, and cash balances. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity, and other factors.

In accordance with the treasury stock method, the Company has included 105,640 and 169,979 common equivalent shares in the calculation of diluted weighted average number of common shares outstanding for the three months ended March 31, 2024 and 2023, respectively, relating to outstanding stock options and restricted stock units.

Outstanding options and restricted stock units to purchase or receive 72,089 and 35,063 shares of common stock for the three months ended March 31, 2024 and 2023, respectively, have been excluded from the calculation of diluted weighted average number of common and common equivalent shares as such options and restricted stock units would be anti-dilutive.

Net periodic pension cost for the Company’s defined benefit pension plans and U.S. post-retirement medical plan includes the following components for the three months ended March 31:

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, the Company expects to make employer contributions of approximately $27.3 million to its non-U.S. pension plan during the year ended December 31, 2024. These estimates may change based upon several factors, including fluctuations in currency exchange rates, actual returns on plan assets and changes in legal requirements.

Other charges (income), net includes non-service pension costs (benefits), (gains) losses from foreign currency transactions and related hedging activities, interest income and other items. Non-service pension benefits for the three months ended March 31, 2024 and 2023 were $2.0 million and $1.8 million, respectively.

As disclosed in Note 18 to the Company's consolidated financial statements for the year ended December 31, 2023, the Company has determined there are five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations and Other.

The Company evaluates segment performance based on Segment Profit (gross profit less research and development and selling, general and administrative expenses, before amortization, interest expense, restructuring charges, other charges (income), net and taxes).

The following tables show the operations of the Company’s reportable segments:

    A reconciliation of earnings before taxes to segment profit for the three months ended March 31 follows:

Our interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.

Changes in local currencies exclude the effect of currency exchange rate fluctuations. Local currency amounts are determined by translating current and previous year consolidated financial information at an index utilizing historical currency exchange rates. We believe local currency information provides a helpful assessment of business performance and a useful measure of results between periods. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We present non-GAAP financial measures in reporting our financial results to provide investors with an additional analytical tool to evaluate our operating results.

The following tables set forth items from our interim consolidated statements of operations and comprehensive income for the three month periods ended March 31, 2024 and 2023 (amounts in thousands).

Net sales were $925.9 million for the three months ended March 31, 2024, compared to $928.7 million for the corresponding period in 2023. Sales in U.S. dollars were flat for the three months ended March 31, 2024. Excluding the effect of currency exchange rate fluctuations, or in local currencies, net sales were also flat for the three months ended March 31, 2024. We estimate that net sales benefited by approximately 6% from the recovery of our previously disclosed shipping delays in 2023 related to a new external European logistics service provider. We also continued to experience reduced market demand, particularly in China. We continue to benefit from the execution

Net sales by geographic destination for the three months ended March 31, 2024 in U.S. dollars increased 3% in the Americas and 8% in Europe, and decreased 12% in Asia/Rest of World. In local currencies, our net sales by geographic destination increased 3% in the Americas, and 6% in Europe, and decreased 8% in Asia/Rest of World, including a 19% decrease in China, for the three months ended March 31, 2024 compared to the corresponding period in 2023. Excluding the benefit of delayed fourth quarter 2023 shipments, local currency sales decreased 5% in Europe, 1% in the Americas, and 12% in Asia/Rest of World, with 21% in China, during the three months ended March 31, 2024. A discussion of sales by operating segment is included below.

As described in Note 18 to our consolidated financial statements for the year ended December 31, 2023, our net sales comprise product sales of precision instruments and related services. Service revenues are primarily derived from repair and other services, including regulatory compliance qualification, calibration, certification, preventative maintenance and spare parts.

Net sales of products decreased 2% in U.S. dollars and 1% in local currency for the three months ended March 31, 2024 compared to the prior year period. Service revenue (including spare parts) increased 6% in both U.S. dollars and local currency during the three months ended March 31, 2024 compared to the corresponding period in 2023.

Net sales of our laboratory product and services, which represented approximately 57% of our total net sales for the three months ended March 31, 2024, increased 1% in U.S. dollars and 2% in local currencies during the three months ended March 31, 2024. Laboratory net sales benefited approximately 8% from the previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the local currency net sales decrease in our laboratory-related products includes a decline in most products, particularly in China.

Net sales of our industrial products and services, which represented approximately 38% of our total net sales for the three months ended March 31, 2024, decreased 1% in U.S. dollars and were flat in local currencies during the three months ended March 31, 2024. Industrial net sales benefited approximately 3% from the previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the local currency net sales decrease in our industrial-related products includes a decline in core-industrial products, particularly in China, which was partially offset by strong project activity in the Americas.

Net sales in our food retailing products and services, which represented approximately 5% of our total net sales for the three months ended March 31, 2024, decreased 8% in U.S. dollars and 9% in local currencies during the three months ended March 31, 2024. Retail net sales benefited approximately 6% from the previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the local currency net sales decrease in food retailing products primarily reflects the timing of project activity related to especially strong growth in the prior year.

Gross profit as a percentage of net sales was 59.2% for the three months ended March 31, 2024 compared to 58.9% for the corresponding period in 2023.

Gross profit as a percentage of net sales for products was 61.2% and 60.1% for the three month periods ended March 31, 2024 and 2023, respectively.

Gross profit as a percentage of net sales for services (including spare parts) was 52.9% for the three months ended March 31, 2024 compared to 54.7% for the corresponding period in 2023.

The increase in gross profit as a percentage of net sales for the three months ended March 31, 2024 primarily reflects favorable price realization and business mix, partially offset by unfavorable foreign currency.

Research and development expenses as a percentage of net sales was 5.0% for the three months ended March 31, 2024 compared to 4.9% in the corresponding period of 2023. Research and development expenses increased 2% in U.S. dollars and were flat in local currencies, during the three months ended March 31, 2024 compared to the corresponding period in 2023.

Selling, general and administrative expenses as a percentage of net sales were 25.3% for both the three months ended March 31, 2024 and the corresponding period during 2023. Selling, general and administrative expense was flat in U.S. dollars and decreased 1% in local currencies during the three months ended March 31, 2024 compared to the corresponding period in 2023. The local currency decrease includes benefits from our cost savings programs.

Amortization expense was $18.2 million for the three months ended March 31, 2024 and $17.8 million for the corresponding period in 2023.

Interest expense was $19.2 million for the three months ended March 31, 2024 and $18.2 million for the corresponding period in 2023. The increase in interest expense is primarily related to higher variable interest rates.

Restructuring charges were $9.7 million and $4.3 million for the three months ended March 31, 2024 and 2023, respectively. Restructuring expenses are primarily comprised of employee-related costs.

Other charges (income), net includes non-service pension costs (benefits), net (gains) losses from foreign currency transactions and hedging activities, interest income and other items. Non-service pension benefits for the three months ended March 31, 2024 and 2023 were $2.0 million and $1.8 million, respectively.

Our reported tax rate was 19.5% and 16.9% during the three months ended March 31, 2024 and 2023, respectively. The provision for taxes is based upon using our projected annual effective tax rate of 19.0% and 18.5% before non-recurring discrete tax items for the three months ended March 31, 2024 and 2023, respectively. The difference between our projected annual effective tax rate and the reported tax rate is related to the timing of excess tax benefits associated with stock option exercises.

The following is a discussion of the financial results of our operating segments. We currently have five reportable segments: U.S. Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other. A more detailed description of these segments is outlined in Note 18 to our consolidated financial statements for the year ended December 31, 2023.

Total net sales and net sales to external customers each increased 3% for the three months ended March 31, 2024 compared with the corresponding period in 2023. Net sales to external customers benefited by approximately 3% from the previously disclosed shipping delays during the

Segment profit increased $11.8 million for the three months ended March 31, 2024 compared to the corresponding period in 2023. Segment profit during the three months ended March 31, 2024 includes benefits from our margin expansion and cost savings initiatives.

1) Represents U.S. dollar growth.

Total net sales increased 12% in U.S. dollars and 6% in local currency for the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers increased 17% in U.S. dollars and 13% in local currency during the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers benefited by approximately 14% from our previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the local currency net sales to external customers decrease for the three months ended March 31, 2024 includes a decline in food retailing related to strong project activity in the prior year, partially offset by modest growth in laboratory products.

Segment profit decreased $17.3 million for the three month period ended March 31, 2024 compared to the corresponding period in 2023. Segment profit during the three months ended March 31, 2024 includes unfavorable inter-segment pricing, increased costs, unfavorable foreign currency translation and mix.

Total net sales increased 7% in U.S. dollars and 6% in local currencies during the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers increased 8% in U.S. dollars and 6% in local currencies during the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales benefited by approximately 10% from our previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the local currency net sales to external customers decrease for the three months ended March 31, 2024 includes declines in most categories.

Segment profit increased $5.8 million for the three month period ended March 31, 2024 compared to the corresponding period in 2023. Segment profit increased during the three months ended March 31, 2024 primarily due to higher volume from our previously disclosed shipping delays, benefits from our margin expansion and cost savings initiatives.

Total net sales decreased 9% in U.S. dollars and 5% in local currency for the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers by origin decreased 23% in U.S. dollars and 20% in local currency for the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers benefited by approximately 2% from our previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the decrease in local currency net sales to external customers during the three months ended March 31, 2024 reflects a significant decline in market demand in most product categories. Uncertainties continue to exist and market conditions may change quickly.

Segment profit decreased $5.4 million for the three month period ended March 31, 2024 compared to the corresponding period in 2023. The decrease in segment profit for the three month period ended March 31, 2024 primarily relates to lower sales volume and unfavorable currency, offset in part by benefits from our margin expansion and cost savings initiatives.

Total net sales increased 6% in U.S. dollars and 9% in local currencies during the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers by origin increased 5% in U.S. dollars and 7% in local currency for the three months ended March 31, 2024 compared to the corresponding period in 2023. Net sales to external customers benefited by approximately 9% from our previously disclosed shipping delays during the three months ended March 31, 2024. Excluding this impact, the decrease in net sales to external customers includes a decline in most product categories.

Segment profit increased $0.9 million for the three months ended March 31, 2024 compared to the corresponding period in 2023. The increase in segment profit is primarily related to our increased sales volume and margin expansion initiatives, offset in part by unfavorable foreign currency translation.

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes available borrowings under our Credit Agreement, the ability to obtain appropriate financing and our cash and cash equivalent balances. Currently, our liquidity needs are primarily driven by working capital requirements, capital expenditures, share repurchases and acquisitions. Global market conditions can be uncertain, and our ability to generate cash flows could be reduced by a deterioration in global markets.

We currently believe that cash flows from operating activities, together with liquidity available under our Credit Agreement, local working capital facilities, and cash balances, will be sufficient to fund currently anticipated working capital needs and spending requirements for at least the foreseeable future.

Cash provided by operating activities totaled $190.0 million during the three months ended March 31, 2024, compared to $153.3 million in the corresponding period in 2023. The increase for the three months ended March 31, 2024 compared to the prior year is primarily related to working capital, including lower cash incentive payments of approximately $35 million.

Capital expenditures are made primarily for investments in information systems and technology, machinery, equipment and the purchase and expansion of facilities. Our capital expenditures totaled $17.4 million for the three months ended March 31, 2024 compared to $23.2 million in the corresponding period in 2023.

In September 2021, we entered into an agreement with the U.S. Department of Defense to increase domestic production capacity of pipette tips and enhance manufacturing automation and logistics. We have received the maximum allowable funding of $35.8 million related to the agreement during prior years, which offset associated capital expenditures.

We continue to explore potential acquisitions. In connection with any acquisition, we may incur additional indebtedness.

Cash flows used in financing activities are primarily comprised of share repurchases. In accordance with our share repurchase program, we spent $212.5 million and $250.0 million on the repurchase of 173,700 shares and 166,628 shares, during the three months ended March 31, 2024 and 2023, respectively.

The Inflation Reduction Act (IRA) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on net share repurchases that occur after December 31, 2022, and introduces a 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income. The financial impact of the IRA is immaterial to our financial statements.

As of March 31, 2024, approximately $583.6 million of additional borrowings was available under our Credit Agreement, and we maintained $70.2 million of cash and cash equivalents.

In May 2023 we amended our Credit Agreement to replace all references of LIBOR to SOFR and other non-U.S. dollar references as the interest rate benchmark.

Changes in exchange rates between the currencies in which we generate cash flows and the currencies in which our borrowings are denominated affect our liquidity. In addition, because we borrow in a variety of currencies, our debt balances fluctuate due to changes in exchange rates. Further, we do not have any downgrade triggers relating to ratings from rating agencies that would accelerate the maturity dates of our debt. We were in compliance with our debt covenants as of March 31, 2024.

In December 2022, we entered into an agreement to issue and sell $150 million 10-year Senior Notes in a private placement. We issued $150 million with a fixed interest rate of 5.45% (5.45% Senior Notes) in March 2023. The 5.45% Senior Notes are senior unsecured obligations of the Company. The 5.45% Senior Notes mature on March 1, 2033. The terms of the 5.45% Senior Notes are consistent with the previous Senior Notes as described in the Company's Annual Report Form 10-K for the year ended December 31, 2023. We used the proceeds from the sale of the 5.45% Senior Notes to refinance existing indebtedness and for other general corporate purposes.

In 2018, two of the Company's non-U.S. pension plans issued loans totaling $39.6 million (Swiss franc 38 million) to a wholly owned subsidiary of the Company. The loans have the same

We have $2.3 billion of remaining availability for our share repurchase program as of March 31, 2024. The share repurchases are expected to be funded from cash generated from operating activities, borrowings, and cash balances. Repurchases will be made through open market transactions, and the amount and timing of purchases will depend on business and market conditions, the stock price, trading restrictions, the level of acquisition activity, and other factors.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For the three months ended March 31, 2024 there were no material changes from risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

*    Filed herewith

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.