Matthews International Corporation — Q1 FY2016 Form 10-Q
Business context and period. The quarter ended December 31, 2015. Matthews operates in SGK Brand Solutions, Memorialization, and Industrial. The company acquired Aurora Products Group in August 2015 for $211.6 million, expanding its memorialization offerings and North American reach. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Sales | $354.2 | $343.6 |
| Gross profit / margin | $126.6 / 35.7% | $124.7 / 36.3% |
| Operating profit / margin | $12.0 / 3.4% | $25.6 / 7.4% |
| Income before taxes | $6.0 | $19.2 |
| Net income attributable to Matthews shareholders | $4.6 | $14.4 |
| Diluted EPS | $0.14 | $0.43 |
| Operating cash flow | $10.0 | $8.4 |
| Capital expenditures | $14.2 | $9.3 |
Sales increased about 3.1%, but operating profit and diluted EPS fell substantially. Cash used in investing activities was $13.3 million, versus $1.8 million provided in the prior-year quarter, which included $10.4 million from a subsidiary sale. Cash used in financing was $2.7 million. Cash and cash equivalents were $65.1 million at December 31, versus $72.2 million at September 30; restricted cash was $12.9 million. Working capital was $361.1 million and the current ratio was 2.6.
At December 31, total reported debt, including current maturities, was approximately $913.8 million, compared with approximately $903.0 million at September 30. Domestic revolver borrowings were $872.4 million of the $900 million facility; the facility is subject to leverage and interest-coverage covenants. The reported weighted-average rate on domestic revolver borrowings was 2.31%. Management said operating cash flow and borrowing capacity should meet capital needs for the foreseeable future.
Material changes and segment results
- SGK Brand Solutions: Sales declined to $178.3 million from $200.8 million; operating profit rose to $2.8 million from $1.9 million. Lower sales reflected approximately $11.4 million of adverse currency effects, a prior-year divestiture, and slower U.S. and European markets.
- Memorialization: Sales rose to $147.6 million from $116.2 million, including $33.2 million from Aurora and stronger memorial and cremation-equipment sales. Operating profit fell to $7.7 million from $21.5 million; the prior period benefited from a $9.0 million net litigation settlement.
- Industrial: Sales increased to $28.3 million from $26.5 million, while operating profit declined to $1.6 million from $2.2 million, as higher sales were outweighed by increased product-development costs.
Consolidated sales benefited from Aurora and higher Industrial and memorial-product sales, but were reduced by approximately $13.8 million from unfavorable currency movements. Gross profit included a $4.0 million expense for partial write-off of Aurora inventory step-up value. Selling and administrative expense increased to $114.5 million from $99.1 million and included acquisition integration costs and $0.9 million of higher Aurora-related amortization. Q1 FY2016 operating profit included $7.3 million of SGK acquisition-related expenses and $7.2 million of Memorialization charges, primarily acquisition-related.
Outlook, risks, contingencies, and unusual items
- Management expected continued substantial integration work on Schawk and Aurora through the rest of FY2016; integration costs and acquisition-related step-up expenses were expected to affect results. The filing provides no numeric earnings or revenue guidance.
- Fiscal 2016 capital spending was expected to be approximately $45 million, reflecting acquired businesses and systems integration. Management expected operations to fund anticipated capital projects.
- Key risks identified include economic conditions, foreign exchange, material costs, mortality and cremation trends, competitive and pricing pressures, customer or distribution changes, acquisition integration risks, and technology. A 10% stronger U.S. dollar was estimated to reduce quarterly reported sales by $11.8 million and operating income by $0.9 million.
- A customer drew $12.9 million under a letter of credit relating to a disputed project. The amount was held as restricted cash under court order pending resolution. Management considered the claim without merit and did not expect a material adverse outcome, while acknowledging an unfavorable resolution was possible.
- Environmental remediation accruals were approximately $4.3 million. Management did not expect environmental or ordinary-course legal proceedings to materially affect consolidated results or financial position.
- Q1 FY2015 comparison figures were revised for a multi-year employee theft: the adjustment reduced pretax income by $0.9 million and net income by $0.6 million. The prior-year quarter also included the $9.0 million Memorialization litigation benefit.
- The effective tax rate was 25.3%, versus 25.9%. The quarter’s rate reflected lower rates in certain foreign jurisdictions and the U.S. R&D tax-credit extension. Pension and postretirement benefit costs totaled $3.9 million, versus $3.1 million.
Important facts for investors to verify
- Whether Aurora and Schawk integration delivers the expected synergies, and how long related expenses and acquisition-accounting charges continue.
- Debt covenant headroom and refinancing or interest-rate exposure given the high revolver utilization; assess the effect of variable rates despite interest-rate swaps.
- Underlying segment trends, especially SGK demand and Memorialization profitability excluding Aurora, acquisition charges, and the prior-year litigation settlement.
- Resolution of the $12.9 million customer dispute and whether restricted cash becomes available or is lost.
- Progress against the $45 million capital-spending expectation and management’s cash-flow and liquidity assumptions.
- Potential changes in foreign exchange, commodity costs, environmental obligations, and tax examinations or uncertain tax positions.