Matthews International Corporation — Q3 FY2017 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Figures below are in millions of dollars unless stated otherwise. The interim financial statements are unaudited.
Business context
Matthews provides brand solutions, memorialization products and industrial technologies. Its three reporting segments are SGK Brand Solutions, Memorialization and Industrial Technologies.
Key financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales | $389.6 | $382.1 | $1,119.5 | $1,103.5 |
| Gross profit | $144.1 | $145.3 | $409.8 | $409.6 |
| Gross margin | 37.0% | 38.0% | 36.6% | 37.1% |
| Operating profit | $36.8 | $40.7 | $82.7 | $79.1 |
| Net income attributable to Matthews shareholders | $29.5 | $23.9 | $53.5 | $42.9 |
| Diluted EPS | $0.91 | $0.73 | $1.64 | $1.30 |
- For the nine months, operating cash flow was $95.8 million, versus $98.4 million a year earlier. Capital expenditures were $32.2 million; acquisitions, net of cash acquired, used $96.3 million.
- At June 30, cash was $56.8 million. Current assets were $614.6 million and current liabilities $288.5 million; the company reported a 2.1 current ratio and $326.1 million of working capital.
- Balance-sheet debt, including current maturities, was approximately $942.0 million, compared with $872.6 million at September 30, 2016. Cash-adjusted debt was approximately $885.2 million. The company reported $910.1 million of long-term debt and $31.9 million of current maturities.
Changes and segment performance
- Q3 sales grew about 2%, while operating profit declined about 10%. For the nine months, sales rose about 1.5% and operating profit about 4.5%; diluted EPS increased from $1.30 to $1.64.
- Nine-month SGK sales rose to $566.5 million, but segment operating profit fell to $19.9 million from $26.1 million, reflecting softer North American and European markets, currency effects and acquisition-related costs.
- Memorialization sales increased to $463.6 million and operating profit to $60.8 million from $48.1 million, reflecting stronger cemetery memorial and cremation-equipment sales and productivity benefits; lower casket sales were a partial offset.
- Industrial Technologies sales increased to $89.5 million, while operating profit fell to $2.0 million from $5.0 million, with lower fulfillment-system sales, weaker fulfillment margins, product-development investment and integration costs cited.
- Nine-month gross margin declined 0.5 percentage point. Management cited currency headwinds and a $1.9 million write-off of acquired inventory step-up, partly offset by productivity and acquisition synergies. SG&A declined to $327.1 million from $330.5 million.
Outlook, commentary and notable items
- No earnings or revenue guidance was provided. Management expected fiscal 2017 capital spending of approximately $45 million and said operating cash flow and borrowing capacity should meet foreseeable capital needs.
- Management expected acquisition integration to remain a significant focus for an extended period and said integration costs would continue to affect fiscal 2017 results. Nine-month SG&A included $22.7 million of acquisition integration, systems-integration and other charges, versus $23.0 million a year earlier.
- Five acquisitions completed since November 2016 accounted for $96.3 million of nine-month net acquisition cash outflows; purchase-price allocations remained preliminary at quarter-end.
- Other income and deductions added $7.2 million to nine-month pretax income, versus a $0.6 million deduction in the prior-year period. The current period included $10.0 million of insurance proceeds related to a former employee’s theft; further recovery efforts continued. This recovery is a notable, non-recurring contributor to reported results.
- The effective tax rate for the nine months was 25.9%, versus 31.2%, reflecting acquisition-integration-related organizational changes and other period-specific tax benefits.
- A new two-year, $115 million receivables securitization facility had $102.9 million drawn at June 30. It does not qualify for sale accounting, so receivables and related debt remain on the balance sheet. The domestic credit facility requires compliance with leverage and interest-coverage covenants.
- A customer’s approximately $11.1 million claim under a Saudi-project performance guarantee remains unresolved. A UK court ruled in Matthews’ favor, but the customer had not complied with court orders; management cautioned that the matter could adversely affect results and said collectability would be reassessed if noncompliance continued.
- Environmental remediation accruals were approximately $3.3 million; management did not expect the ultimate outcome of known environmental matters to materially affect consolidated results or financial position. Tax examinations and $7.8 million of unrecognized tax benefits also remain relevant contingencies.
- Management identified economic and foreign-exchange conditions, material costs, mortality and cremation trends, demand and pricing pressures, acquisition risks, cybersecurity, technology, regulatory compliance and customer concentration or loss as risks. No material change in risk factors or market risk was reported.
Most important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the $10 million insurance recovery and the lower tax rate.
- Whether SGK’s weaker operating profit and Industrial Technologies’ profit decline improve as acquisition integration progresses, and whether expected synergies materialize.
- Debt, interest costs, covenant headroom and refinancing needs, particularly following acquisition spending and use of the receivables facility.
- Final purchase-price allocations and any resulting goodwill, intangible-asset amortization or impairment effects.
- Resolution and collectability of the Saudi guarantee dispute, further theft-related recoveries, environmental obligations and tax uncertainties.