Matthews International Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparisons are to the periods ended June 30, 2017. Amounts are in millions unless otherwise noted. The company provides brand solutions, memorialization products and industrial technologies.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $411.6 | $389.6 | $1,195.1 | $1,119.5 |
| Gross profit | $151.9 | $144.1 | $432.6 | $409.8 |
| Operating profit | $37.9 | $36.8 | $85.6 | $82.7 |
| Income before taxes | $28.7 | $38.2 | $58.9 | $71.7 |
| Net income attributable to Matthews shareholders | $24.4 | $29.5 | $77.8 | $54.7 |
| Diluted EPS | $0.77 | $0.91 | $2.44 | $1.68 |
- Q3 sales rose 5.6% and operating profit rose 3.0%, but attributable net income fell 17.2%. Q3 interest expense increased to $9.7 million from $7.0 million; other income/deductions was nearly zero versus $7.9 million of other income a year earlier.
- Nine-month sales increased 6.8%; gross margin was 36.2% versus 36.6%. Selling, administrative and amortization expense totaled $347.0 million, or 29.0% of sales, versus $327.1 million, or 29.2%.
- Nine-month net income benefited from an $18.7 million income-tax benefit, including a provisional $29.9 million net benefit from U.S. tax reform. The company said its tax accounting remained subject to refinement. Fiscal 2017 included $10.0 million of recoveries related to a former employee’s theft, contributing to prior-year other income and operating cash flow.
Segments and drivers
- SGK Brand Solutions: Nine-month sales increased to $601.8 million from $566.5 million, while operating profit decreased to $16.6 million from $19.9 million. Growth from acquisitions, international markets and currency was offset by weaker North American conditions, lower display sales and higher acquisition-related amortization and costs.
- Memorialization: Sales increased to $475.6 million from $463.6 million and operating profit to $63.3 million from $60.8 million. Cremation equipment and acquisitions helped; lower memorial and casket volumes and higher material costs partly offset gains.
- Industrial Technologies: Sales rose to $117.8 million from $89.5 million and operating profit to $5.8 million from $2.0 million, reflecting growth in marking products, fulfillment systems and OEM solutions, including acquisition contributions.
- Management estimated foreign exchange added $30.3 million to nine-month consolidated sales. Nine-month results included $19.2 million of acquisition integration, systems-integration and other cost-reduction-related charges, compared with $22.7 million a year earlier.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $82.8 million, down from $95.8 million; capital expenditures were $32.2 million. Investing activities used $160.6 million, including $120.0 million for acquisitions and $11.9 million for investments. Financing activities provided $75.8 million.
- Cash was $53.7 million at June 30, 2018, compared with $57.5 million at September 30, 2017. Working capital was $323.3 million; the current ratio was 2.1 at both dates.
- Balance-sheet debt, including current maturities, was approximately $1,026.4 million, versus $911.1 million at September 30, 2017. The company reported compliance with debt covenants. Its $900 million revolving facility and $250 million term loan mature April 2021; it also had $300 million of 5.25% senior notes due 2025 and $102.5 million outstanding under its receivables securitization facility, extended to April 2020.
- Management expected fiscal 2018 capital spending of $45–$50 million and said operating cash flow and borrowing capacity should meet foreseeable capital needs.
Outlook, risks and unusual items
- Management expects significant acquisition and systems-integration efforts to continue for an extended period and to affect fiscal 2018 operating results. No specific earnings or revenue guidance was provided.
- Key stated risks include economic and currency changes, materials costs, mortality and cremation trends, competition and customer demand, acquisition integration, cybersecurity, internal controls, regulation and technology. Management reported no material change in risk factors from its prior annual report.
- A disputed $11.3 million funded letter of credit tied to a Saudi Arabia project remains recorded in other assets. A UK court ruled in Matthews’ favor, but the customer has not returned the funds; management warned eventual resolution could adversely affect results.
- The company recorded a $2.5 million environmental remediation accrual and said it did not expect the ultimate outcome to materially affect consolidated results or financial position. It also reported $15.3 million of unrecognized tax benefits.
- Fiscal 2018 acquisitions included Star Granite, Compass Engineering and several smaller businesses, with approximately $120.0 million of acquisition cash outflow in the nine-month period. Purchase-price allocations remained preliminary. The company reported effective disclosure controls and no material change in internal controls during the quarter.
Most important facts for investors to verify
- How much of sales and segment growth is organic versus acquisition- and foreign-exchange-driven, and whether integration costs and expected synergies develop as management anticipates.
- The durability of margins amid higher bronze and steel costs, weaker North American conditions and lower memorial and casket volumes.
- The final tax-reform accounting and its effect on the unusually favorable nine-month tax result and reported earnings.
- Debt levels, interest expense, covenant headroom and refinancing or extension of the European credit facility due in December 2018.
- Collectability and potential financial consequences of the Saudi project letter-of-credit dispute, plus changes in environmental and tax contingencies.