Mettler-Toledo International Inc. — Q2 2017 Form 10-Q
Business and period. The company supplies precision instruments and related services for laboratory, industrial, packaging, logistics, food retail and process-analytics markets. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $653.7 million | $608.3 million | $1,248.2 million | $1,148.0 million |
| Gross profit | $374.9 million | $347.6 million | $717.8 million | $647.5 million |
| Gross margin | 57.4% | 57.1% | 57.5% | 56.4% |
| Earnings before taxes | $126.8 million | $103.2 million | $240.7 million | $189.6 million |
| Net earnings | $101.6 million | $79.6 million | $194.0 million | $145.3 million |
| Diluted EPS | $3.84 | $2.93 | $7.32 | $5.32 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $205.4 million | $162.4 million |
- Reported sales growth was 7% for Q2 and 9% for the first half; local-currency growth was 10% and 11%, respectively. Excluding the Troemner acquisition, local-currency growth was 8% and 10%.
- Net earnings rose about 28% in Q2 and 34% in the first half. Higher sales, improved margins and lower other charges than in 2016 contributed; the 2017 tax benefit from adopting ASU 2016-09 also reduced the reported tax rate.
- Gross-margin expansion reflected volume, pricing and productivity gains, partly offset by unfavorable mix. SG&A fell as a share of sales, while R&D spending increased with product-development investment.
- First-half operating cash flow less capital expenditures was approximately $156.8 million, versus $133.5 million in 2016. Capital expenditures were $48.5 million, up from $28.9 million.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $146.3 million. Total debt was $969.4 million, including $21.6 million current and $947.8 million long-term; net debt, calculated as total debt less cash, was approximately $823.1 million. Debt increased from $894.0 million at year-end 2016.
- Current assets were $913.8 million and current liabilities $588.8 million. The company reported $336.3 million available under its $800 million credit agreement and said operating cash flow plus available facilities should fund anticipated working capital and capital needs for the foreseeable future.
- First-half financing included $249.9 million of share repurchases. The program had $733.5 million remaining at June 30; repurchases are funded with cash, operating cash flow and borrowings as appropriate.
- The company expects $65–$75 million of net investment in new or expanded manufacturing facilities over the next two years. It reported no numerical full-year earnings or sales guidance in the provided filing text.
Business trends, outlook and risks
- China was a standout: external-customer sales grew 16% in Q2 and 12% in the first half in U.S. dollars; segment profit increased 18% and 20%. U.S. segment sales rose 10% and 12%, respectively. Western Europe’s Q2 external sales declined 2% in U.S. dollars, although they increased 2% in local currency.
- Management described global conditions as generally favorable in the first half but remained cautious about economic uncertainty in some regions. It expects more difficult prior-year comparisons in the second half and a meaningful decline in food-retailing sales, citing project timing.
- Currency is a material exposure. Management estimated that a 1% Swiss franc strengthening against the euro could reduce annual pretax earnings by $1.5–$1.7 million, with a further approximately $0.2 million impact for a 1% strengthening against the U.S. dollar. A 1% weakening of the renminbi against the U.S. dollar could reduce annual pretax earnings by $0.3–$0.5 million.
- Q2 restructuring charges were $4.0 million; first-half charges were $5.5 million, primarily employee-related. A $3.4 million facility-sale gain in Switzerland contributed to first-half other income. In 2016, other charges included an $8.2 million noncash pension-settlement charge.
- Legal proceedings were described as ordinary-course matters, including environmental matters; management did not expect a material adverse effect. The filing reported no material change in previously disclosed risk factors and no material change in market-risk disclosures.
- A cross-currency swap entered in June converted $100 million of credit-facility borrowings into synthetic Swiss-franc debt. The company also uses interest-rate and foreign-currency hedges. Management estimated that a 10% weakening of the U.S. dollar against debt currencies would increase reported U.S.-dollar debt by approximately $22.8 million.
Key investor verification points
- Check whether second-half sales and earnings reflect tougher comparisons and the expected meaningful food-retailing decline.
- Assess how much profit growth reflects underlying operations versus the ASU 2016-09 tax benefit, currency effects and the Swiss facility-sale gain.
- Monitor debt and interest costs, credit-facility availability, and the funding mix for buybacks and planned facility investments.
- Track Chinese and regional demand, foreign-exchange sensitivities, restructuring spending and execution of manufacturing consolidation.