Matthews International Corporation — Q1 FY2018
Reporting period: Three months ended December 31, 2017, compared with the three months ended December 31, 2016. Matthews provides brand solutions, memorialization products and industrial technologies. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Sales | $369.5 | $349.0 |
| Gross profit / margin | $130.7 / 35.4% | $127.3 / 36.5% |
| Operating profit / margin | $17.9 / 4.9% | $19.1 / 5.5% |
| Income before taxes | $9.9 | $12.7 |
| Income tax benefit (expense) | $25.2 | ($2.5) |
| Net income attributable to Matthews shareholders | $35.2 | $10.3 |
| Diluted EPS | $1.10 | $0.32 |
| Operating cash flow | $7.6 | $16.0 |
| Capital expenditures | $11.6 | $5.1 |
- Sales increased 5.9%; management estimated favorable foreign-exchange effects of $7.4 million. Gross margin fell 1.1 percentage points, while selling and administrative expenses were 30.5% of sales versus 31.0%.
- Net income growth was driven principally by the tax benefit, not stronger pretax earnings. The quarter included a provisional $24.6 million net benefit related to U.S. tax reform, including a $38.0 million deferred-tax remeasurement benefit and a $13.5 million transition-tax expense; the accounting was not finalized.
- Operating cash flow declined by $8.4 million. Working-capital changes used approximately $10.0 million, partly reflecting fiscal year-end compensation-related payments. Investing cash use was $108.2 million, including $86.0 million for acquisitions and $11.7 million for an investment. Financing provided $102.8 million, mainly through net debt proceeds.
Segments and changes versus prior period
| Segment | Sales | Operating profit | Key comparison |
|---|---|---|---|
| SGK Brand Solutions | $191.8 vs. $175.8 | $3.2 vs. $4.2 | Sales benefited from acquisitions, U.K. and Asia-Pacific growth, and currency; weaker U.S. and European markets and acquisition amortization weighed on profit. |
| Memorialization | $144.9 vs. $145.6 | $14.5 vs. $14.4 | Lower memorial and casket volumes were largely offset by cremation equipment, acquisitions and productivity benefits. |
| Industrial Technologies | $32.8 vs. $27.6 | $0.3 vs. $0.5 | Marking products and acquisitions lifted sales; product-development investment and acquisition amortization pressured profit. |
Consolidated operating profit fell despite higher sales, reflecting lower SGK profit and lower Industrial Technologies profit. Acquisition integration and related systems-integration costs, plus other cost-reduction charges, totaled $4.7 million versus $8.6 million a year earlier.
Liquidity, debt and capital resources
- Cash was $60.1 million at December 31, 2017. Working capital was $320.7 million and the current ratio was 2.1, both compared with a 2.1 current ratio at September 30, 2017.
- Balance-sheet debt, including current maturities, totaled approximately $1.026 billion, versus approximately $911.1 million at September 30, 2017; cash less this debt implies net debt of approximately $965.5 million. Long-term debt was $994.3 million and current maturities were $31.4 million.
- In December, Matthews issued $300 million of 5.25% senior unsecured notes due December 2025, primarily to reduce borrowings on its domestic credit facility. Domestic revolver borrowings were $337.0 million and term-loan borrowings were $227.6 million at quarter-end. The $115 million receivables securitization facility had $101.4 million outstanding.
- The domestic facility requires leverage and interest-coverage covenant compliance. Management said current liquidity sources, operating cash flow and borrowing capacity should meet capital needs for the foreseeable future. Fiscal 2018 capital spending was expected to be $45–$50 million.
Outlook, risks and unusual items
- Management’s stated growth strategy centers on internal growth, productivity and cost improvements, new products and markets, and acquisitions. It expected substantial integration and systems-integration work to continue for an extended period, with related costs affecting FY2018 results; no specific earnings or revenue guidance was provided.
- Management cited slower brand-market conditions in North America and Europe, lower memorial and casket volumes, material-cost changes, foreign exchange, competitive and pricing pressures, mortality and cremation trends, acquisition execution, cybersecurity and internal controls among relevant risks.
- A Saudi Arabia project dispute involves a funded letter of credit of approximately $11.6 million. A U.K. court ruled in Matthews’ favor, but the customer has not returned the funds as ordered; Matthews warned resolution could still adversely affect results.
- Environmental remediation accruals were approximately $2.9 million; management did not expect the ultimate outcome to materially affect consolidated results or financial position. Management reported disclosure controls were effective and noted ongoing SAP implementation.
Important facts for investors to verify
- How much of sales growth and future earnings comes from acquired businesses, currency effects and realized integration synergies, versus organic demand?
- Whether margins recover as integration costs decline, particularly in SGK and Industrial Technologies.
- The final tax-reform accounting and the extent to which the reported tax benefit affects recurring earnings.
- Debt trajectory, interest expense, covenant headroom and refinancing or extension plans for facilities approaching maturity.
- Cash conversion and working-capital performance, and the eventual recoverability of the Saudi letter-of-credit funds.