Matthews International Corporation — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014; unaudited. Matthews provides brand solutions, memorialization products and industrial products. Comparisons are with the three months ended December 31, 2013 unless noted.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $343.6 million | $229.9 million |
| Gross profit / margin | $124.7 million / 36.3% | $81.4 million / 35.4% |
| Operating profit | $25.6 million | $14.7 million |
| Income before taxes | $20.1 million | $12.0 million |
| Net income attributable to Matthews shareholders | $15.0 million | $7.9 million |
| Diluted EPS | $0.45 | $0.29 |
| Operating cash flow | $9.3 million | $12.3 million |
Reported sales rose about 49%, principally due to the July 2014 acquisition of Schawk. Pro forma results assuming Schawk was owned in both periods show sales of $343.6 million versus $344.2 million, and EPS of $0.45 versus $0.31. Gross margin improved, partly reflecting Schawk; reported profit also benefited from a $9.0 million net favorable Memorialization litigation settlement. Q1 FY2015 included $6.9 million of Schawk integration costs and a $3.6 million increase in acquisition-related intangible amortization.
Segments and material changes
- SGK Brand Solutions: Sales $200.8 million versus $91.1 million; operating profit $1.9 million versus $1.3 million. Sales growth primarily reflected $106.9 million from Schawk. Excluding Schawk and currency effects, sales increased $8.4 million. Results included integration costs and acquisition-related amortization.
- Memorialization: Sales $116.2 million versus $117.4 million; operating profit $21.5 million versus $12.2 million. The settlement boosted current-period profit; excluding specified settlement and prior-year items, operating profit declined about $1.5 million, mainly due to higher wood and steel costs.
- Industrial: Sales $26.5 million versus $21.5 million; operating profit $2.2 million versus $1.1 million, reflecting higher warehouse systems and marking-product sales.
Foreign exchange reduced reported sales by approximately $7.5 million. The effective tax rate fell to 26.1% from 34.1%, mainly due to tax attributes used following legal-structure reorganization in foreign jurisdictions. Interest expense increased to $5.3 million from $2.9 million, principally reflecting acquisition-related debt.
Cash, liquidity and debt
- Cash was $69.5 million at December 31, 2014, down from $75.6 million at September 30, 2014. Working-capital changes used $12.7 million of cash in the quarter.
- Investing activities provided $1.8 million, including $10.4 million of proceeds from a subsidiary sale and $9.3 million of capital expenditures. Financing activities used $15.6 million, including debt repayments, share repurchases and dividends.
- Working capital was $324.8 million and the current ratio was 2.5 at quarter-end. The filing states management expects liquidity sources, operating cash flow and borrowing capacity to meet foreseeable capital needs.
- Balance-sheet debt was approximately $720.2 million, including $14.7 million of current maturities. Domestic revolver borrowings were $670.0 million under a $900 million facility; the reported weighted-average rate was 2.51%. Additional European and subsidiary borrowings were outstanding.
- Fiscal 2015 capital spending was expected to be approximately $60 million, including Schawk-related and systems-integration spending; management expected operating cash to fund anticipated projects.
Outlook, risks and unusual items
- Management expects significant Schawk integration activity to continue for an extended period; integration costs and acquisition-related step-up expense will affect FY2015 results. No full-year earnings or revenue guidance is provided.
- Schawk Digital Solutions was sold in the quarter for net proceeds of approximately $10.4 million; no gain or loss was recognized.
- Graphics imaging in Europe faces weak conditions, pricing pressure and volume risks. Its reporting unit’s estimated fair value was less than 10% above carrying value in the prior impairment review; deterioration could lead to goodwill impairment. Schawk is to be included in the FY2015 review.
- Other stated risks include foreign-exchange movements, variable interest rates, commodity costs, acquisition integration and customer demand. A 10% strengthening of the U.S. dollar was estimated to reduce quarterly reported sales by $13.6 million and operating income by $1.2 million.
- A customer claim sought to draw on an approximately $13.0 million letter of credit. Matthews initiated payment in January 2015, but a court order requires the funds to be held pending resolution. Management considers the claim without merit and does not expect a material adverse effect.
- Environmental remediation accruals were approximately $4.9 million. Management did not expect the ultimate outcome of environmental or other ordinary-course legal matters to significantly affect consolidated results or financial position.
Important facts for investors to verify
- How much of subsequent sales and earnings performance reflects Schawk versus organic growth, and whether integration costs and projected synergies track expectations.
- Whether Memorialization’s reported profit uplift from the litigation settlement is repeatable; assess underlying segment margins and material-cost trends.
- Debt levels, covenant headroom, interest-rate exposure and cash conversion, given acquisition leverage and lower operating cash flow year over year.
- Progress and assumptions in the FY2015 goodwill impairment review for graphics imaging, including the effect of European conditions and Schawk integration.
- Resolution and cash impact of the letter-of-credit dispute, environmental obligations, and disclosed tax uncertainties.