Matthews International Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports fourth-quarter results for the three months ended September 30, 2014. Amounts below are in U.S. dollars.
Business context
Matthews designs, manufactures and markets memorialization products and brand solutions. In FY2014 it reported six segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Merchandising Solutions, and Marking and Fulfillment Systems. The July 2014 acquisition of Schawk substantially expanded Graphics Imaging and brand services. Effective October 1, 2014, the company reorganized into SGK Brand Solutions, Memorialization, and Industrial.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $1,106.6 million | $985.4 million |
| Gross profit / margin | $392.5 million / 35.5% | $356.5 million / 36.2% |
| Operating profit / margin | $82.9 million / 7.5% | $95.8 million / 9.7% |
| Net income attributable to Matthews shareholders | $43.7 million | $54.9 million |
| Diluted EPS | $1.53 | $1.98 |
| Operating cash flow | $92.4 million | $109.3 million |
| Capital expenditures | $29.2 million | $24.9 million |
FY2014 sales increased about 12%, primarily reflecting Schawk, other acquisitions, higher Graphics Imaging and Marking and Fulfillment Systems sales, and significant Cremation and Merchandising Solutions projects. Favorable foreign exchange contributed approximately $6.2 million. Operating profit fell about 13%, and diluted EPS fell about 23%, despite sales growth.
Fourth-quarter FY2014 sales were $349.8 million versus $252.7 million in the prior-year quarter; operating profit was $14.8 million versus $23.5 million; net income attributable to shareholders was $5.2 million versus $14.5 million; diluted EPS was $0.16 versus $0.52.
At September 30, 2014, cash and cash equivalents were $75.6 million, working capital was $320.6 million, and the current ratio was 2.3. Total debt was $729.3 million, compared with $374.7 million a year earlier; long-term debt, net of current maturities, was $714.0 million. Domestic revolver borrowings were $680.0 million of a $900.0 million facility. The filing reports no consolidated net-debt or leverage ratio value here.
Material changes and unusual items
- Schawk was acquired July 29, 2014 for an enterprise value of approximately $616.7 million. Matthews funded the transaction with cash, debt repayment and 5.4 million treasury shares issued. Schawk contributed $75.1 million of reported FY2014 sales after acquisition; the purchase-price allocation remained preliminary at year-end.
- FY2014 included approximately $39.6 million of net pre-tax unusual charges, principally acquisition-related costs, strategic cost-reduction initiatives and Funeral Home Products litigation expenses. Graphics Imaging recorded a $9.5 million inventory step-up write-off related to Schawk; the segment reported a $4.6 million operating loss.
- Memorialization sales declined to $508.4 million from $517.9 million, with lower memorial and casket volumes partly reflecting fewer U.S. casketed, in-ground burial deaths. Brand Solutions sales rose to $598.2 million from $467.4 million, while its operating profit declined to $13.6 million from $22.9 million, largely amid acquisition and integration-related charges.
- Investing cash outflow was $411.1 million, including $382.1 million of acquisition spending, mainly for Schawk. Financing cash flow was $338.1 million, chiefly reflecting increased borrowing. Operating cash flow decreased from $109.3 million to $92.4 million.
Outlook, risks and contingencies
- Management expects substantial Schawk integration work in FY2015 and states that integration costs and acquisition-related step-up expenses will affect operating results. The filing provides no specific FY2015 revenue or earnings guidance.
- FY2015 capital expenditures were expected to be approximately $60 million, including Schawk’s historical requirements and systems-integration spending. Management expected operating cash flow to fund anticipated capital spending and considered liquidity sources, operating cash flow and borrowing capacity sufficient for foreseeable capital needs.
- Key risks include successful Schawk integration and realization of synergies; foreign exchange; raw-material costs and pricing constraints; competition and customer consolidation; mortality and cremation trends; and technology and acquisition execution. Graphics Imaging goodwill was particularly sensitive: estimated fair value exceeded carrying value by less than 10%, and weaker European demand, pricing pressure, lower volumes or higher discount rates could create impairment risk.
- Environmental remediation accrual was $4.9 million. Management did not expect known legal proceedings or the environmental matters to materially affect consolidated results or financial position. A September 2014 claim sought to draw on an approximately $14 million letter of credit; management considered it without merit and did not expect a material adverse outcome.
- After year-end, on November 17, 2014, Batesville agreed to pay $17.0 million to Matthews plus $1.75 million for attorneys’ fees, for a stated total settlement value of $18.75 million, resolving litigation.
- The company paid quarterly dividends of $0.11 for the first three FY2014 quarters and $0.13 for the fourth quarter; FY2014 dividends totaled $0.46 per share. The board retains discretion over future dividends.
Important facts for investors to verify
- Whether Schawk integration delivers expected cost savings and synergies, and how ongoing integration and purchase-accounting charges affect FY2015 margins and cash flow.
- Debt repayment capacity, covenant headroom and refinancing exposure, particularly the large revolving facility balance and variable-rate borrowing.
- Underlying segment profitability after adjusting for acquisition, restructuring, inventory step-up and litigation items; Graphics Imaging’s recovery and goodwill impairment sensitivity warrant attention.
- Whether the $60 million FY2015 capital-spending expectation and working-capital needs can be funded while maintaining liquidity and dividends.
- Final Schawk purchase-price allocation, the resolution of the letter-of-credit claim, and the accounting and cash-flow timing of the subsequent litigation settlement.