Matthews International Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also provides unaudited fourth-quarter results for the quarter ended September 30, 2017. Matthews operates in SGK Brand Solutions, Memorialization, and Industrial Technologies.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $1,515.6 million | $1,480.5 million |
| Gross profit / margin | $563.4 million / 37.2% | $556.5 million / 37.6% |
| Operating profit / margin | $112.6 million / 7.4% | $118.8 million / 8.0% |
| Net income attributable to Matthews shareholders | $74.4 million | $66.7 million |
| Diluted EPS | $2.28 | $2.03 |
| Operating cash flow | $149.3 million | $140.3 million |
| Cash and cash equivalents at year-end | $57.5 million | $55.7 million |
| Total debt, including current maturities | $911.1 million | $872.6 million |
| Working capital / current ratio | $309.9 million / 2.1 | $314.8 million / 2.2 |
Fiscal 2017 investing cash outflow was $141.6 million, including $98.2 million of acquisition payments and $44.9 million of capital expenditures. Financing cash outflow was $7.2 million; dividends totaled $21.8 million ($0.68 per share). The company reported total assets of $2.245 billion and shareholders’ equity of $790.3 million at year-end.
Segment sales and operating profit were: SGK Brand Solutions, $770.2 million and $24.9 million; Memorialization, $615.9 million and $80.7 million; Industrial Technologies, $129.5 million and $7.0 million.
Fourth-quarter results
| Metric | Q4 FY2017 | Q4 FY2016 |
|---|---|---|
| Sales | $396.1 million | $377.0 million |
| Gross profit | $153.6 million | $146.8 million |
| Operating profit | $29.9 million | $39.7 million |
| Net income attributable to Matthews shareholders | $19.6 million | $23.9 million |
| Diluted EPS | $0.60 | $0.74 |
Fourth-quarter sales increased, but operating profit, attributable net income, and diluted EPS declined year over year.
Material changes and management commentary
- Annual sales rose 2.4%, reflecting growth in cemetery memorial products, cremation equipment, U.K. and Asia Pacific brand markets, marking products, and acquisitions. Currency movements reduced sales by approximately $12.8 million; weaker SGK markets in North America and Europe and lower casket unit sales partly offset growth.
- Operating profit fell 5.2%. SGK operating profit decreased to $24.9 million from $42.9 million, with integration and other charges, acquisition-related amortization, softer markets, and currency effects. Memorialization profit increased to $80.7 million from $68.3 million, while Industrial Technologies profit declined to $7.0 million from $7.7 million.
- Fiscal 2017 included $35.2 million of acquisition integration, systems-integration, and cost-structure charges in selling and administrative expenses; segment disclosures identify $29.7 million of acquisition integration and other charges in SGK and $7.8 million in Memorialization. The company also recorded a $2.0 million inventory step-up expense related to current-year acquisitions.
- Other income included $11.3 million of recoveries related to a former employee’s theft of funds, initially identified in fiscal 2015. The effective tax rate was 23.2%, down from 30.5%, reflecting lower foreign taxes, organizational changes, credits and incentives, and other current-year tax benefits.
- Fiscal 2017 acquisitions included Equator, RAF Technology, VCG, Ungricht, and Guidance. Net acquisition payments were $98.2 million; certain purchase-price allocations remained preliminary at year-end.
Outlook, risks, and contingencies
- Management expected fiscal 2018 capital expenditures of $45 million to $50 million and anticipated funding them from operating cash flow. No specific fiscal 2018 earnings or revenue guidance was provided.
- Management expected significant acquisition and systems-integration work to continue through fiscal 2018 and for an extended period; related costs were expected to affect operating results.
- Year-end borrowings included $525.0 million on the domestic revolving facility, $232.5 million on the term loan, and $95.8 million under a new accounts-receivable securitization facility. The domestic facility matures April 2021 and carries leverage and interest-coverage covenants. Management stated that liquidity, operating cash flow, and borrowing capacity should meet foreseeable capital needs.
- Interest expense increased to $26.4 million from $24.3 million, partly because of higher average rates and borrowing levels. The domestic credit facility’s weighted-average rate, including swaps, was 3.01% at year-end. A 10% adverse currency-rate movement was estimated to reduce reported annual sales by $50.1 million and operating income by $4.2 million.
- A dispute concerns an approximately $11.5 million funded letter of credit for a Saudi Arabia project. A U.K. court ruled in Matthews’ favor, but the customer has not remitted the funds as ordered; the company cautioned that resolution could adversely affect results.
- The company recorded a $2.9 million environmental remediation accrual and said known legal proceedings were not expected to have a material adverse effect. Principal risks include economic conditions, foreign exchange, raw-material costs, competition and pricing, mortality and cremation trends, acquisitions, cybersecurity, regulation, and environmental obligations.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of September 30, 2017. The company was implementing SAP as part of a multi-year systems and process integration program.
Key facts for investors to verify
- Whether the integration of the fiscal 2017 acquisitions delivers expected synergies and whether related costs persist or diminish.
- What drove the year-over-year fourth-quarter decline in operating profit and EPS despite higher sales.
- Debt levels, covenant headroom, refinancing plans, and the effect of variable interest rates and the receivables facility.
- Recoverability and timing of collection of the Saudi project funds, and any subsequent developments in the former-employee theft recoveries.
- Future demand and pricing in SGK markets, casketed-death trends, cremation growth, and exposure to currency and commodity-cost movements.