Matthews International Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017. The company provides brand solutions, memorialization products, and industrial technologies. Dollar figures below are in millions unless noted.
Financial performance
- Q2 revenue: $380.9, up 3.7% from $367.2 a year earlier. Operating profit was $26.8 versus $26.4; net income attributable to Matthews shareholders was $14.9 versus $14.4. Diluted EPS was $0.46 versus $0.43.
- Six-month revenue: $729.9, up 1.2% from $721.4. Gross profit was $265.7 versus $264.3; gross margin was 36.4% versus 36.6%. Operating profit rose to $45.9 from $38.5, and operating margin increased to approximately 6.3% from 5.3%.
- Six-month earnings: Net income attributable to Matthews shareholders was $24.0 versus $19.0; diluted EPS was $0.74 versus $0.57. The effective tax rate was 28.9%, compared with 29.1%.
- Cash flow: Operating cash flow was $44.3 versus $51.9. Capital expenditures were $13.3, yielding operating cash flow less capital expenditures of approximately $31.0. Investing activities used $104.9, principally including $92.6 for acquisitions. Financing activities provided $50.5. Cash declined $12.1 to $43.6 from September 30, 2016.
- Liquidity and debt: Working capital was $305.4, down from $314.8; the current ratio was 2.1 versus 2.2. Long-term debt including current maturities totaled approximately $947.4, up from $872.6 at September 30, 2016. Cash less debt was approximately negative $903.7. Domestic facility borrowings were $645.0 on the revolver and $240.2 on the term loan; the facility matures April 2021 and is subject to leverage and interest-coverage covenants.
Changes and segment results
- Six-month sales growth reflected acquisitions and higher merchandising-display sales, partly offset by approximately $10.8 of unfavorable foreign-currency effects. Gross profit benefited from productivity and acquisition synergies, but margin was affected by currency and a $1.8 inventory step-up write-off related to current-year acquisitions.
- Selling and administrative expense declined to $219.8 from $225.9; as a share of sales it fell to 30.1% from 31.3%. The company cited cost reductions and integration synergies, partly offset by $3.3 of incremental stock compensation for retirement-eligible employees and higher acquisition-related amortization.
- Six-month segment operating profit: SGK Brand Solutions $8.6 versus $8.3; Memorialization $37.3 versus $27.2; Industrial Technologies $0.04 versus $3.1. Memorialization benefited from cemetery memorial and cremation-equipment sales and productivity, while Industrial Technologies was hurt by lower non-acquisition sales, weaker fulfillment margins, and integration costs.
- Five acquisitions were completed between November 2016 and March 2017, for a combined disclosed purchase price of approximately $90.4, net of cash acquired. They expand SGK’s design, pre-press and graphics businesses and Industrial Technologies’ automation and recognition-software offerings. Purchase-price allocations remained preliminary.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expects fiscal 2017 capital expenditures of approximately $45.0 and says operating cash flow and borrowing capacity should meet foreseeable capital needs.
- Management expects significant integration work on recent acquisitions, including Aurora and Schawk, to continue for an extended period; related costs will affect fiscal 2017 results. Six-month integration and related systems costs were $16.1, versus $18.9 a year earlier.
- On April 28, 2017, the company said it expected to receive the full $10.0 of insurance coverage related to an employee theft. This was subsequent to quarter-end.
- A customer’s £8.6 million ($10.7 million) draw on a Saudi-project performance letter of credit remains unresolved. Although a UK court ruled in Matthews’ favor, the customer has not returned the funds as ordered; management warns resolution could adversely affect results.
- Environmental remediation accruals were approximately $3.5. Management does not expect known legal proceedings or environmental matters to materially affect results or financial position, but final costs could differ from accruals. Unrecognized tax benefits were $13.4, excluding penalties and interest.
- Other stated risks include currency movements, material costs, mortality and cremation rates, customer and industry consolidation, competition, acquisition integration, cybersecurity, technology, regulatory compliance, and internal controls. Management reported disclosure controls effective as of March 31, 2017; SAP implementation is changing processes and controls as it proceeds.
- After quarter-end, the company established a two-year $115.0 receivables securitization facility. It does not qualify for sale accounting, so receivables and related borrowings remain on the balance sheet.
Key facts for investors to verify
- Whether acquisition integration produces the anticipated synergies and how long related costs continue.
- Industrial Technologies’ profit recovery and the durability of Memorialization’s improvement.
- Debt levels, covenant headroom, interest-rate exposure, and cash conversion following acquisitions.
- Receipt and accounting treatment of the expected $10.0 insurance recovery, and recovery of the Saudi letter-of-credit funds.
- Final purchase-price allocations and any effects of currency movements, inventory step-up charges, or goodwill and intangible-asset assessments.