Matthews International Corporation — Q3 FY2015 10-Q
Reporting period: Quarter and nine months ended June 30, 2015. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context and results
Matthews operates in SGK Brand Solutions, Memorialization and Industrial. Comparisons were affected by the July 2014 Schawk acquisition, foreign exchange, integration costs and revised prior-period results related to an employee theft.
- Quarter: Sales were $364.8 million, up 30.3% from $280.0 million. Gross profit was $135.4 million (37.1% margin) versus $104.2 million (37.2%). Operating profit fell 13.9% to $27.4 million; operating margin declined to 7.5% from 11.4%. Net income attributable to Matthews was $23.1 million versus $19.0 million. Basic EPS was $0.70 in both periods; diluted EPS was $0.70 versus $0.69.
- Nine months: Sales were $1,057.7 million, up 39.8% from $756.8 million. Gross profit was $387.8 million (36.7% margin) versus $275.8 million (36.4%). Operating profit rose to $72.3 million from $67.1 million, while operating margin declined to 6.8% from 8.9%. Net income attributable to Matthews increased to $46.5 million from $37.8 million. Diluted EPS was $1.40 versus $1.37.
- Segment trends: For the nine-month period, SGK sales rose to $597.6 million, primarily from Schawk, but segment operating profit declined to $5.5 million from $9.2 million. Memorialization sales fell to $372.1 million from $380.9 million, while operating profit increased to $57.4 million from $52.1 million, including a favorable litigation settlement. Industrial sales increased to $88.0 million from $70.1 million and operating profit to $9.4 million from $5.8 million.
Cash flow, financial position and debt
- Nine-month operating cash flow was $102.3 million, up from $62.4 million. Capital expenditures were $34.7 million; operating cash flow less capital expenditures was approximately $67.7 million.
- Cash was $69.8 million at June 30, 2015, compared with $63.0 million at September 30, 2014. Working capital was $299.9 million, down from $312.9 million; the current ratio was 2.2 at both dates.
- Total debt, including current maturities, was approximately $688.4 million, down from $729.3 million at September 30, 2014. Domestic revolver borrowings were $655.4 million under a $900 million facility. The company reported compliance with required debt covenants in connection with the theft-related corrections.
- Management said operating cash flow and borrowing capacity should be sufficient for foreseeable capital needs. Fiscal 2015 capital spending was expected to be approximately $50 million.
Material changes, outlook and notable items
- Schawk materially increased reported revenue and debt, and brought significant integration and amortization costs. Nine-month SGK operating profit included $32.3 million of integration, trade-name write-off and strategic cost-initiative charges, plus $10.9 million of increased intangible amortization. Management expected integration work and related costs to continue for an extended period.
- Quarterly other income included an $11.5 million gain from settling Schawk’s multi-employer pension withdrawal obligation for a lump-sum payment of $18.2 million. This gain helped lift quarterly pretax income despite lower operating profit. The settlement was expected to be paid in Q4 FY2015.
- The company agreed to acquire Aurora Products Group for $214 million cash, subject to working-capital adjustment, with up to $10 million additional contingent consideration. Closing was expected in Q4 FY2015, subject to customary conditions; funding was expected from cash and revolver borrowings.
- Foreign currency reduced nine-month sales by approximately $39.1 million. Management identified currency movements, material costs, demand and pricing, acquisition and integration risks, competition and customer or distribution changes as risks.
- An employee theft totaling approximately $14.8 million over multiple years was identified through May 2015. The company recorded approximately $2.2 million of fiscal 2015 pretax loss and revised prior-period financial statements; it said prior-period effects were not material individually. Management expected recovery primarily through insurance and asset recovery.
- Disclosure controls were determined not effective because of a material weakness in treasury-process segregation of duties associated with the theft. Remediation changes had been implemented, but management said further testing was required and expected remediation by September 30, 2015.
- A $12.9 million customer letter-of-credit draw had been paid and placed with the court pending dispute resolution. Management considered the customer’s claim without merit and did not expect a material adverse effect, while acknowledging an unfavorable outcome was possible. Environmental remediation accruals were $4.6 million; management did not expect known legal and environmental matters to materially affect results or financial position.
- The nine-month effective tax rate was 28.3%, down from 34.0%, principally due to use of tax attributes following a foreign legal-structure reorganization. Tax examinations and $4.3 million of unrecognized tax benefits remained outstanding.
Important facts for investors to verify
- Whether Schawk integration delivers expected benefits and how long elevated integration, amortization and related costs continue.
- Aurora’s closing, final purchase price and contingent consideration, and the resulting effect on debt and liquidity.
- Progress and independent testing of treasury-control remediation, and the timing and amount of any recovery of the $14.8 million theft.
- Resolution and recovery of the $12.9 million letter-of-credit payment, plus developments in environmental and tax contingencies.
- Underlying segment profitability and cash generation, separating acquisition effects, one-time items and foreign exchange from recurring performance.