Mettler-Toledo International, Inc.

    • Spruce Point has significant concerns about Mettler-Toledo. Since CEO Olivier Filliol took over in 2008, Mettler’s ability to never miss quarterly Wall St earnings estimates raises doubts about the quality of its financial statements. Run by secretive management in Switzerland, and with key U.S.-based financial, tax, and audit managers all having worked at current auditor PwC, we worry that adequate, independent questioning of its financial results are lacking. Prior allegations of financial misreporting 15yrs ago may hold weight in light of our fresh look at the allegations and broader information available today. We find strong evidence of aggressive financial, tax and accounting policies used to bolster earnings, notably outlandish share repurchases that are being conducted at 36x P/E, which rewards management with cash bonuses for buying stock. Our diligence into Mettler’s China business through tax filings shows evidence of significant profit overstatement, and cash running through shell entities, and an empty office, and a location where individuals on site had never heard of Mettler. We call for an independent committee to evaluate our findings.
    • MTD trades 14% above the current average analyst price targets of $705/sh and at an all-time high valuation multiples, yet is not expected to grow any faster than its peers such as Thermo Fisher (TMO), Ametek (AME), Agilent (A), Waters (WAT), PerkinElmer (PKI), Bruker (BRKR) and Bio-Rad (BIO) to name a few. A rotation into perceived safety stocks provides an incredible short-term inflation in the share price.
    • Insiders are selling a record amount of stock despite owning <4% of the company. Notably, one of the biggest holders is the Chairman, who signaled his intention to sell 33% of his holdings in Feb 2019
    • Mettler has exceeded sell-side quarterly EPS targets 100% of the time since 2008, and by no coincidence, management has always met 100% of its annual cash bonus targets. This is a miraculous achievement given our belief it has a ruthless culture that fires business managers quickly that don’t hit numbers:
    • Able to navigate black swan currency events: EUR/CHF and USD/CHF are two of its biggest FX exposures. In 2015, during the unexpected Swiss Franc revaluation, causing a 20%+ move, Mettler claimed only a modest guidance revision, and that it had miraculously timed an increase to 90% of its EUR/CHF hedge. Yet, it rapidly borrowed money and its audit director abruptly resigned thereafter.
    • No material customer concentrations: Mettler claims no customer is >1%, however, we believe it may be exposed to Pitney Bowes, a significant customer based on import trade records, who is facing increasing bankruptcy risk and a disruption headwind is not priced in.
    • While claiming no need for financial restatement, Mettler stated further “the Audit Committee and the Board have determined that it would be in the best interests of the Company to make changes in the leadership for the oversight and control of its financial operations to correct the “tone at the top” and ensure it is consistent with the Board’s commitment to maintaining strong corporate governance. The Company will enhance the accounting organization, both by adding personnel to that function and by increasing training for all members of the organization.” Many of the same managers are still at Mettler (notably CEO Filliol) from the time of this investigation
    • Relationship Too Close With PwC, An Auditor Slapped With Dozens of Lawsuits For Failing To Catch Fraud
    • CEO With A Potentially Misrepresented Bio Undermines Confidence
    • Various company sources suggest he ran the Analytics Division, was Head of Marketing, Sales, Service, and ran the China business too all at the same time, a major concern we will detail further. With a CEO in charge of so many aspects of the business, we worry that Mettler does not have the appropriate separation of duties in place. This concern is mirrored by the fact that long time CFO William Donnelly was in charge of Investor Relations, Finance, Supply Chain Management, Information Technology, and the Blue Ocean Program all at the same time
    • Employee allegation of financial misconduct came weeks after Filliol was promoted to Head of Marketing, Sales, & Service. We estimate Filliol has extracted $257m from Mettler (salary, bonus, stock sales) and controls another $270m of stock post the implementation of aggressive financial, accounting and tax policies, notably diverting billions of cash flow to buybacks while always hitting cash-incentive based Adjusted EPS targets that don’t adjust for excessive stock repurchases
    • Evidence of Massive Cost Capitalization of Software And A 12yr ERP Implementation Dubbed “Blue Ocean”. Around the time CEO Filliol took charge in 2007, Mettler embarked on its “Blue Ocean Program” described as “a new global operating model, with standardized, automated and integrated processes, with high levels of global data transparency”.  12yrs later, Mettler claims the program has another 15-20% to completion. Mettler stopped disclosing direct costs related to the program in 2012, and has made $133m of total restructuring payments since 2009 (recognizing them every single year
    • Numerous Signs of Aggressive Accounting and Financial Policies To Embellish Margins. From our experience, it is more common to see companies fudge financial data – sales and EBITDA – than employee data. We observe that Mettler’s EBITDA margins are slightly above the average of its industry peers. However, its revenue and EBITDA per employee is the worst among peers. This is atypical among the data observed, where companies with above average margins tend to have above average sales and EBITDA per employee results, while those with below average margins exhibit below average per employee metrics. Most of Mettler’s lab products are <$10k, though claimed to be premium and market-leading
    • We sent our investigators to China to see what we could learn. Mettler has a complex structure of 10 entities, but there are three entities that account for a substantial portion of financial activity. When investigators visited Mettler’s two registered addresses in Shanghai accounting for >$700m of sales, they found an empty office in a building, and another gated building with no signs of Mettler. When asked, people on site had never heard of Mettler. This raises the possibility Mettler is engaging in a tax dodge scheme
    • Mettler’s total assets in China per its tax filings are lower than reported in SEC filings. The Chinese fillings of the 10 subsidiaries record $564m in assets vs $1.2bn in SEC filings. We estimate inflated asset values could be a hallmark of inflated profits of $50m/yr
    • Mettler has largely eschewed a balanced M&A program and greater R&D spend in favor of share buybacks. We estimate since 2008, it has deployed 83% of operating cash flow to stock repurchases, a percentage far in excess of its analytical instrument peers
    • Part of management’s annual cash bonus is tied to “Adjusted EPS”, which ironically doesn’t adjust for it artificially increasing EPS with repurchases at ever increasing multiples. The repurchase strategy is experiencing diminishing returns
    • Now trading at 37x book value, 7x, 26x, and 36x 2019E sales, EBITDA, and P/E, Mettler is the most expensive stock among its peer group, and will face significant comp challenges and headwinds from slower growth being signaled in Lab spending and in China
    • Six analysts are a “Hold” and two are “Underweight”, and two are “Sell”. With the average analyst price target at $705, there’s an implied 14% downside on valuation alone
    • However, we believe investors will re-calibrate Mettler’s true EPS once they re-think the past allegations of financial issues raised by a former employee, proof of a qualified audit opinion in India, and reassess the probability and risk of financial restatement.
    • By normalizing street estimates for aggressive accounting choices, never-ending restructuring charges, and lower sales and profits in China, we estimate normalized Adj EPS of $18.09 – $20.31, materially lower than consensus at $22.70. Mettler’s valuation premium should contract as investors re-think the quality of earnings and management. By valuing shares at our normalized earnings and a slight discount to industry multiples, it’s easy to justify 30%-50% downside risk ($410-$575/sh).