Matthews International Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions unless stated otherwise.
Business context
Matthews operates in three segments: SGK Brand Solutions (brand development, packaging graphics and marketing services), Memorialization (memorials, caskets and cremation equipment), and Industrial Technologies (marking, coding, automation and order-fulfillment systems). About 67% of FY2018 sales came from North America, 28% from Europe, and the balance from Asia and other regions.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $1,602.6 | $1,515.6 |
| Gross profit / gross margin | $581.4 / 36.3% | $563.4 / 37.2% |
| Operating profit / operating margin | $132.8 / 8.3% | $112.6 / 7.4% |
| Net income attributable to Matthews shareholders | $107.4 | $74.4 |
| Diluted EPS | $3.37 | $2.28 |
| Cash from operating activities | $147.6 | $149.3 |
| Cash and cash equivalents at year-end | $41.6 | $57.5 |
| Total debt, including current maturities | $960.6 | $911.1 |
| Working capital / current ratio | $312.3 / 2.0 | $309.9 / 2.1 |
Revenue increased 5.7%. Reported net income rose 44.4%, while operating profit increased 18.0%. The FY2018 tax benefit was $9.1 million, versus tax expense of $22.4 million in FY2017; the resulting net-income increase therefore reflects a significant tax benefit as well as operating improvement. Interest expense increased to $37.4 million from $26.4 million. Gross margin declined by 0.9 percentage points despite higher gross profit.
Cash used in investing activities was $162.3 million, principally including $121.1 million of net acquisition payments and $43.2 million of capital expenditures. Financing activities provided $0.9 million. FY2018 dividends totaled $24.6 million ($0.76 per share), and the company repurchased 393,864 shares for $21.2 million.
Fourth-quarter sales were $407.4 million, operating profit $47.2 million, net income attributable to Matthews shareholders $29.6 million, and diluted EPS $0.93. The comparable FY2017 quarter recorded sales of $396.1 million, operating profit of $29.9 million, net income of $19.6 million, and diluted EPS of $0.60.
Segments and changes versus prior year
- SGK Brand Solutions: Sales increased 4.6% to $805.3 million; operating profit rose to $35.4 million from $24.9 million. Growth in Europe, the U.K. and Asia-Pacific, acquisitions, and currency benefits were partly offset by slower North American conditions and lower display sales. The prior-year period included an approximately $18 million display project that did not recur.
- Memorialization: Sales increased 2.5% to $631.4 million; operating profit rose to $86.4 million from $80.7 million. Acquisitions and productivity benefits were partly offset by lower memorial and casket volumes and higher material costs.
- Industrial Technologies: Sales increased 28.1% to $165.9 million; operating profit rose to $11.0 million from $7.0 million, reflecting higher marking and fulfillment-system sales and acquisitions.
Management estimated favorable currency effects of $26.9 million on consolidated sales. Higher material costs, particularly bronze and steel, and acquisition-related amortization and integration costs weighed on results. FY2018 included $27.1 million of net pretax charges, primarily acquisition-related and strategic cost-reduction costs; FY2017 included $38.5 million of such net pretax charges. FY2017 also included $11.3 million of income from recoveries related to a former employee’s theft of funds.
Outlook, risks and contingencies
- Management expects long-term annual consolidated sales growth, excluding acquisitions and foreign-currency effects, to generally be level to low single digits. This is a long-term expectation, not specific FY2019 earnings guidance.
- FY2019 capital expenditures were expected to be approximately $45 million, funded from operating cash flow. The company expected continued significant acquisition-integration and systems-integration work, with related costs affecting FY2019 operating results.
- Management stated that liquidity, operating cash flow and borrowing capacity should cover foreseeable capital needs. The company reported compliance with debt covenants at September 30, 2018. Its revolving facility and term loan mature in April 2021; $300 million of 5.25% senior notes mature in December 2025. The receivables securitization facility matures in April 2020.
- Key business risks include economic and foreign-exchange changes, raw-material price increases, competitive pricing and customer consolidation, acquisitions and integration, changes in mortality and cremation trends, technology shifts, cybersecurity and data-protection compliance, and environmental obligations. A 10% adverse currency move was estimated to reduce reported sales by $57.1 million and operating income by $5.1 million.
- The U.S. Tax Cuts and Jobs Act generated a provisional net tax benefit of $29.2 million in FY2018; the company had not finalized its accounting and awaited further guidance. Estimates may change.
- A Saudi Arabia environmental-solutions customer dispute concerns a funded letter of credit of approximately $11.2 million. Matthews prevailed in court, but the customer had not returned the funds as ordered; management said resolution could still adversely affect results. Environmental remediation accruals were $2.0 million. Management did not expect ordinary-course legal proceedings to materially affect consolidated results or financial condition.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of year-end.
Important facts for investors to verify
- How much of the EPS increase reflects recurring operating performance versus the provisional tax benefit and other unusual items.
- Whether acquisition growth and integration synergies translate into sustainable returns, given $121.1 million of FY2018 net acquisition spending and higher debt.
- Whether gross-margin pressure from material costs, lower volumes and acquisition amortization persists, and how organic segment growth develops.
- Debt maturities, interest-rate exposure and covenant headroom, especially with variable-rate borrowing and FY2018 interest expense of $37.4 million.
- Collection and ultimate recovery of the approximately $11.2 million Saudi project funds, and any changes to environmental or tax contingencies.