Mettler-Toledo International Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company supplies precision instruments and related services globally. Financial figures below are in U.S. dollars; the interim statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $582.1M | $608.8M | $1,117.8M | $1,159.5M |
| Gross profit | $322.9M | $328.2M | $621.7M | $620.8M |
| Gross margin | 55.5% | 53.9% | 55.6% | 53.5% |
| Earnings before taxes | $102.0M | $97.4M | $185.0M | $173.8M |
| Net earnings | $77.6M | $74.0M | $140.6M | $132.1M |
| Diluted EPS | $2.73 | $2.49 | $4.91 | $4.41 |
Reported sales fell 4% in both Q2 and the first half, while sales in local currencies rose 3% and 4%, respectively. Currency translation, particularly the weaker euro, weighed on reported results. Q2 net earnings increased about 5%; first-half net earnings increased about 6%. Product gross margin was 59.3% in Q2 and 59.7% for the first half; service gross margin was 42.6% and 41.9%, respectively.
For the first half, operating cash flow was $163.8M, versus $151.0M a year earlier. Capital expenditures were $35.9M, implying operating cash flow less capital expenditures of approximately $127.9M. Cash and equivalents were $149.3M at June 30, 2015, up from $85.3M at year-end 2014. Total debt was $628.5M, including $23.4M current and $605.1M long-term debt. The company reported $680.1M of availability under its credit agreement and compliance with its covenants. Current assets were $912.7M and current liabilities $579.5M.
Changes and operating drivers
- Higher margins reflected hedging gains and currency translation, favorable pricing, increased volume and lower material costs, partly offset by investment in field service.
- U.S. operations grew: external sales rose 5% in Q2 and 7% in the first half. Western Europe’s external sales declined 11% in U.S. dollars in both periods, but rose 8% in local currencies.
- China external sales fell 9% in Q2 and 7% in the first half in U.S. dollars; local-currency declines were 10% and 8%. Industrial-related sales in China fell 20% in local currency in both periods.
- Interest expense increased to $6.9M in Q2 and $13.7M in the first half, mainly due to higher average borrowings. First-half SG&A declined 2% in U.S. dollars but rose 5% in local currencies, reflecting sales-force investment and higher employee benefit costs.
- The company repurchased 777,248 shares for $247.5M in the first half, compared with $184.0M spent in the prior-year period. At June 30, $230.9M remained authorized.
Outlook, risks and notable items
- Management described market conditions as stable to favorable in most regions but cautious about sales growth because conditions in China, Russia and Brazil were unfavorable and the timing of recovery uncertain. No numerical sales or earnings guidance was provided.
- Management believes operating cash flow and available credit will fund anticipated working capital and capital spending needs for the foreseeable future; it also continues to explore acquisitions, which could involve additional debt.
- Currency is a significant exposure. The filing estimates that a 1% strengthening of the Swiss franc against the euro could reduce annual pretax earnings by approximately $1.1M–$1.3M, and a 1% strengthening against the U.S. dollar by $0.5M–$0.7M, before considering relevant hedges. A 1% weakening of the renminbi against the dollar could reduce annual pretax earnings by $0.7M–$0.9M. The company also reported that a 10% weakening of the dollar against debt currencies would increase the reported dollar value of debt by about $19.8M.
- In June, the company issued $125M of 4.24% senior notes, used to repay $100M of 6.30% notes, and €125M of 1.47% senior notes due in 2030. The euro notes hedge part of the company’s net investment in euro-denominated subsidiaries.
- First-half restructuring charges were $2.6M; the restructuring accrual was $8.6M at June 30. Management said ongoing legal and environmental proceedings were not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported.
- Foreign-exchange and hedging effects were notable: derivative-related gains contributed to other comprehensive income, while the company recorded $9.5M of net losses on non-designated currency forwards in the first half, primarily offset by underlying intercompany transaction gains.
Important facts for investors to verify
- Whether local-currency sales growth continues and reported results remain pressured by foreign exchange.
- Recovery trends in China, Russia and Brazil, especially China’s industrial-related businesses.
- Margin durability as hedging benefits, pricing, costs and investment spending evolve.
- Debt, interest expense and the scale and pace of share repurchases relative to cash generation and acquisition plans.
- Currency-hedge coverage, maturities and potential effects on earnings, debt balances and comprehensive income.