Matthews International Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing is an annual report, not a standalone fourth-quarter filing. Matthews provides brand solutions, memorialization products and industrial technologies.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,480.5 million | $1,426.1 million |
| Gross profit / margin | $556.5 million / 37.6% | $529.4 million / 37.1% |
| Operating profit / margin | $118.8 million / 8.0% | $105.0 million / 7.4% |
| Net income attributable to Matthews shareholders | $66.7 million | $63.4 million |
| Diluted EPS | $2.03 | $1.91 |
| Operating cash flow | $140.3 million | $141.1 million |
| Capital expenditures | $41.7 million | $48.3 million |
Fourth-quarter FY2016 results were revenue of $377.0 million, operating profit of $39.7 million, net income attributable to shareholders of $23.9 million, and diluted EPS of $0.74.
At year-end, cash was $55.7 million, working capital was $314.8 million, and the current ratio was 2.2. Debt totaled $872.6 million, including current maturities; long-term debt, non-current, was $844.8 million. Cash less reported debt was approximately $816.8 million of net debt. The company reported $140.3 million of operating cash flow and $41.7 million of capital spending.
Changes versus the prior year
- Revenue rose 3.8%, principally from the Aurora acquisition and higher memorial-product sales, partly offset by $25.2 million of unfavorable currency translation.
- SGK Brand Solutions revenue declined to $756.0 million from $798.3 million, while operating profit increased to $42.9 million from $21.9 million, mainly reflecting integration-related cost reductions despite slower markets and lower sales.
- Memorialization revenue increased to $610.1 million from $508.1 million, largely due to Aurora and higher bronze and granite memorial sales. Operating profit declined to $68.3 million from $70.1 million, affected by integration costs, higher amortization and lower casket sales.
- Industrial Technologies revenue declined to $114.3 million from $119.7 million and operating profit fell to $7.7 million from $13.1 million, mainly due to weaker fulfillment-system sales and unfavorable product mix.
- Interest expense increased to $24.3 million from $20.6 million, primarily reflecting acquisition-related borrowing. Operating cash flow was broadly flat; cash declined to $55.7 million from $72.2 million.
Outlook, risks and unusual items
- Management said substantial Aurora integration work would continue in FY2017; integration costs and acquisition-related inventory step-up expense were expected to affect results. No specific consolidated revenue or earnings guidance is provided.
- FY2017 capital spending was expected to be approximately $45 million. Management said operating cash flow and borrowing capacity should be sufficient for anticipated capital needs. Backlog was expected to be substantially filled during FY2017.
- FY2016 included $36.1 million of net pre-tax charges, primarily acquisition-related costs and strategic cost-reduction initiatives. SGK reported $25.0 million of cost-reduction charges; Memorialization reported $10.4 million of charges, primarily integration costs. Aurora inventory step-up write-offs were $4.0 million.
- Foreign currency, raw-material costs, economic conditions, competition and industry consolidation may pressure performance. Approximately 31% of FY2016 sales were outside the U.S.; management estimated a 10% adverse currency move would reduce reported annual sales by $46.2 million and operating income by $5.5 million.
- Memorialization is exposed to death-rate and cremation trends; the company estimated U.S. casketed deaths declined year over year. Higher cremation rates may benefit cremation-related offerings but weigh on burial caskets and traditional memorial products.
- A customer dispute concerns an $11.1 million letter-of-credit payment for a Saudi Arabia project. A U.K. court ruled in Matthews’ favor in June 2016, but the customer had not returned the funds; recovery remained uncertain and could adversely affect results.
- Environmental remediation accruals were $3.7 million. Management did not expect known environmental or ordinary-course legal matters to materially affect consolidated results or financial position, while acknowledging ultimate costs could differ from estimates.
- The company repurchased $58.0 million of shares, including 970,000 shares bought from members of the Schawk family, including a director and company executive. The quarterly dividend increased to $0.17 per share for Q4.
Important facts for investors to verify
- Whether Aurora integration delivers expected synergies and whether FY2017 integration and purchase-accounting costs exceed expectations.
- Debt reduction, covenant headroom and exposure to variable interest rates; domestic credit-facility borrowings were $608.0 million on the revolver and $246.4 million on the term loan.
- Recovery of the $11.1 million Saudi project letter-of-credit funds and the timing or outcome of related proceedings.
- Underlying segment trends after separating acquisitions, currency effects, restructuring charges and other unusual items.
- Progress on pension funding and assumptions: the pension funded status was a deficit of $111.7 million, and the discount rate declined to 3.51% from 4.25%.
- Management’s estimates for environmental obligations, uncertain tax positions ($13.8 million of unrecognized tax benefits), and the ongoing effects of foreign exchange and raw-material prices.