Matthews International Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. Although the request identifies 2015 Q4, this is an annual filing; selected fourth-quarter results are noted below. Dollar amounts are in millions unless stated otherwise.
Business context
Matthews operates in three segments: SGK Brand Solutions (brand development, graphics and merchandising), Memorialization (cemetery, funeral and cremation products), and Industrial (marking, coding, automation and fulfillment systems). The company acquired Schawk in July 2014 and Aurora in August 2015; acquisitions materially affect year-over-year comparisons. Approximately 66% of FY2015 sales were in the U.S.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $1,426.1 | $1,106.6 |
| Gross profit / margin | $529.4 / 37.1% | $392.5 / 35.5% |
| Operating profit / margin | $105.0 / 7.4% | $81.5 / 7.4% |
| Net income attributable to Matthews shareholders | $63.4 | $42.6 |
| Diluted EPS | $1.91 | $1.49 |
| Interest expense | $20.6 | $12.6 |
| Cash from operations | $141.1 | $90.7 |
| Capital expenditures | $48.3 | $29.2 |
Operating cash flow less capital expenditures was approximately $92.8 million. Cash and equivalents were $72.2 million at year-end, versus $63.0 million a year earlier. Working capital was $375.6 million and the current ratio was 2.5, up from 2.2.
Total debt, including current maturities, short-term borrowings and capital leases, was approximately $903.0 million, compared with $729.3 million. Long-term debt, including current maturities, was $903.0 million; the domestic revolving facility had $857.4 million outstanding against a $900 million commitment. The company reported compliance with facility covenants. Its stated net debt-to-EBITDA figure is not provided in the filing text excerpt.
Segment sales and operating profit were: SGK Brand Solutions $798.3 million and $21.9 million; Memorialization $508.1 million and $70.1 million; Industrial $119.7 million and $13.1 million. Segment reporting was realigned in FY2015, with prior periods revised to conform.
Material changes and fourth-quarter results
- Annual sales increased 28.9%, principally from Schawk, Aurora and higher Industrial and SGK sales; currency movements reduced reported sales by approximately $56.9 million.
- Operating profit increased 28.8%; net income attributable to shareholders rose 48.9%. Gross margin improved, while operating margin was broadly unchanged.
- SGK sales rose substantially with Schawk included for a full year; its reported operating profit also reflected substantial integration and other charges. Memorialization sales were nearly flat, while Industrial sales and operating profit increased.
- FY2015 fourth-quarter sales were $368.3 million, operating profit $32.8 million, net income attributable to shareholders $17.0 million and diluted EPS $0.51. FY2014 fourth-quarter figures were $349.8 million, $14.5 million, $4.8 million and $0.15, respectively.
Outlook, risks and unusual items
- Management provided no specific FY2016 earnings or sales guidance. It expected approximately $45 million of FY2016 capital spending, funded from operating cash, and anticipated continued Schawk and Aurora integration work and related costs, including acquisition accounting step-up expense.
- FY2015 included substantial acquisition/integration, strategic cost-reduction and trade-name charges; the selected financial data reports $36.9 million of pre-tax charges affecting operating profit. Other income included an $11.5 million gain from settling a multi-employer pension obligation. A $9.0 million net litigation settlement benefit in Memorialization partly offset segment costs. The company also reported $2.3 million of losses from an employee theft.
- Foreign exchange, raw-material costs, competition and pricing constraints, mortality and cremation trends, acquisition integration, technology, cybersecurity and international regulatory compliance are identified risks. A 10% adverse currency move was estimated to reduce annual reported sales by $53.5 million and operating income by $5.6 million.
- A customer dispute followed a $12.9 million letter-of-credit draw; the amount was recorded in other current assets pending resolution. Management considered the claim without merit and did not expect a material adverse outcome, while acknowledging an unfavorable resolution was possible.
- Environmental remediation accrual was $4.3 million. The pension plan’s reported funded status was a deficit of $96.5 million; management said no significant principal-plan contribution was required for FY2016. Routine legal proceedings were not expected to materially affect results.
- The company disclosed a previously reported treasury-process control material weakness associated with a cumulative $14.8 million loss and prior financial-statement revisions. Management said remediation was completed and internal control was effective at September 30, 2015; Aurora was excluded from the assessment following its recent acquisition.
Most important facts for investors to verify
- Whether Schawk and Aurora integration delivers expected synergies and how much additional acquisition-related expense affects FY2016 results.
- Debt repayment capacity, covenant headroom, interest-rate exposure and refinancing needs, particularly given the increased debt balance.
- The outcome and recoverability of the $12.9 million letter-of-credit dispute, and any changes to environmental or legal contingencies.
- Whether reported earnings growth persists after separating acquisition effects, foreign exchange and unusual gains and charges.
- Progress in integrating Aurora’s controls and the sustained effectiveness of the remediated treasury controls.