Matthews International Corporation — Q2 FY2018 10-Q
Business context and period. Matthews provides brand solutions, memorialization products, and industrial technologies. This unaudited report covers the three and six months ended March 31, 2018; the comparable periods ended March 31, 2017. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Sales | $414.1, up 8.7% from $380.9 | $783.5, up 7.3% from $729.9 |
| Gross profit / margin | $150.0 / 36.2% (prior-year margin 36.3%) | $280.7 / 35.8% (prior-year margin 36.4%) |
| Operating profit / margin | $29.8 / 7.2%, versus $26.8 / 7.0% | $47.7 / 6.1%, versus $45.9 / 6.3% |
| Income attributable to Matthews shareholders | $18.2 versus $14.9; diluted EPS $0.57 versus $0.46 | $53.4 versus $25.2; diluted EPS $1.68 versus $0.77 |
| Interest expense | $9.3 versus $6.6 | $17.1 versus $12.8 |
- Cash flow, six months: Operating cash flow was $56.3 versus $44.3. Capital expenditures were $21.9, implying operating cash flow less capital expenditures of approximately $34.4. Investing activities used $151.6, including $119.7 for acquisitions; financing activities provided $101.7.
- Liquidity: At March 31, cash was $64.8, working capital was $336.3, and the current ratio was 2.1. Current assets were $647.4 and current liabilities $311.1.
- Debt: Balance-sheet current and long-term debt totaled approximately $1,046.3, compared with $911.1 at September 30, 2017. This includes $300.0 of 5.25% senior notes issued in December 2017, primarily to repay the domestic credit facility. The company reported compliance with debt covenants.
Material changes and management commentary
- Sales growth reflected acquisitions, favorable foreign exchange (estimated $22.2 benefit to six-month consolidated sales), and higher marking products, fulfillment systems, OEM solutions, and cremation equipment. North American SGK brand markets were slower; memorial and casket unit sales were lower.
- Six-month segment sales were $398.8 for SGK Brand Solutions, $313.6 for Memorialization, and $71.1 for Industrial Technologies. Segment operating profit was $8.2, $38.4, and $1.1, respectively. Industrial Technologies improved from near breakeven; SGK profit declined year over year.
- Six-month selling, administrative, and intangible amortization expense rose to $233.0 from $219.8, while the expense ratio improved to 29.7% from 30.1%. Acquisition integration, systems-integration, and other cost-reduction charges were $12.7 versus $16.1. Higher amortization and material costs, alongside lower gross margin, weighed on profitability.
- Six-month net income benefited materially from tax reform: the company recorded a provisional net tax benefit of $29.9, including a $38.0 benefit from deferred-tax remeasurement, partly offset by transition-tax expense. The tax accounting remained under review, so reported six-month earnings are not a straightforward measure of operating growth.
- Fiscal 2018 capital spending was expected to be $45–$50. Management expected significant acquisition and systems integration work, and related costs, to continue for an extended period. The filing gives no specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- A disputed £8.57 million ($12.0 million) letter-of-credit payment related to a Saudi Arabia project remains classified in other assets. A UK court ruled in Matthews’ favor, but the customer has not returned the funds as ordered; management said eventual resolution could adversely affect results.
- Environmental remediation accruals were approximately $2.6 million. Management did not expect the ultimate outcome to significantly affect consolidated results or financial position, but actual costs could differ from the accrual.
- The company cited risks including economic and foreign-exchange changes, materials costs, mortality and cremation rates, customer and competitive pressures, acquisition integration, cybersecurity, technology, and regulatory compliance. It also reported implementation of a multi-year SAP systems program.
- The company recorded $10.0 million for a principal retirement-plan contribution in April 2018, after quarter-end. Its $115.0 million receivables securitization facility was amended after quarter-end to extend maturity to April 11, 2020.
Investor verification priorities
- Assess underlying operating and cash-generation trends separately from the provisional $29.9 million tax benefit and acquisition-related effects.
- Review acquisition purchase-price allocations, integration charges, synergies, and the effect of higher debt and interest expense.
- Verify debt maturities, variable-rate exposure, covenant headroom, and the planned extension of the European credit facility due to mature in December 2018.
- Monitor collection of the disputed $12.0 million letter-of-credit amount and changes in environmental or tax contingencies.