Business context and reporting period
Matthews International Corporation filed this unaudited Form 10-Q for the quarter and six months ended March 31, 2015, its fiscal second quarter and first half. The company operates in SGK Brand Solutions, Memorialization and Industrial. Results include Schawk, acquired in July 2014 for an enterprise value of approximately $616.7 million; prior-period segment data was recast to the current segment structure.
Financial performance
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended March 31, 2015 | Prior year | Six months ended March 31, 2015 | Prior year |
|---|---|---|---|---|
| Sales | $349.4 | $246.8 | $693.0 | $476.8 |
| Gross profit | $127.7 | $90.2 | $252.4 | $171.6 |
| Operating profit | $19.3 | $20.5 | $44.9 | $35.2 |
| Net income attributable to Matthews shareholders | $9.6 | $11.3 | $24.5 | $19.2 |
| Diluted EPS | $0.29 | $0.41 | $0.74 | $0.70 |
| Operating cash flow | Not provided by quarter in the filing excerpt | $54.1 | $23.6 |
- First-half gross margin was 36.4%, versus 36.0% a year earlier. Operating margin was approximately 6.5%, versus 7.4%; second-quarter operating profit fell despite sharply higher sales.
- First-half interest expense rose to $10.3 million from $5.5 million, primarily reflecting higher debt following the Schawk acquisition. The effective tax rate declined to 28.4% from 35.9%, mainly due to use of tax attributes after a foreign legal-structure reorganization.
- First-half operating cash flow was $54.1 million; capital expenditures were $19.6 million. Investing cash outflow was $21.4 million and financing cash outflow was $40.2 million.
- At March 31, cash was $63.1 million, working capital $312.3 million and the current ratio 2.4. Total debt, including current maturities, was approximately $696.6 million, down from $729.3 million at September 30, 2014. Revolver borrowings were $660.4 million against a $900 million facility.
Changes versus the prior comparable period
- First-half sales rose approximately 45%, principally from Schawk. The filing estimates that foreign exchange reduced first-half consolidated sales by $22.5 million.
- In the second quarter, sales grew about 42%, but operating profit declined about 6% and diluted EPS fell from $0.41 to $0.29. First-half Matthews-attributable income and diluted EPS increased, but the comparison includes the acquired business and a lower tax rate.
- First-half SGK Brand Solutions sales more than doubled to $392.6 million, including $205.8 million from Schawk, while segment operating profit was only $0.25 million versus $2.6 million. Memorialization operating profit increased to $39.7 million from $29.6 million, including a $9.0 million favorable net litigation settlement. Industrial operating profit rose to $5.0 million from $3.0 million.
- Foreign-currency translation reduced first-half other comprehensive income by $68.0 million, contributing to a comprehensive loss of $43.8 million. Goodwill and intangible assets also declined, with currency effects among the factors in the reported balance changes.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management expects substantial Schawk integration work to continue for an extended period; integration costs and acquisition-related step-up expenses are expected to affect fiscal 2015 results.
- First-half selling and administrative expenses included $14.7 million of acquisition-related costs, $4.8 million of trade-name write-offs and $1.0 million of strategic cost-structure costs, partly offset by the $9.0 million favorable net litigation settlement. SGK segment operating profit included $19.8 million of integration, trade-name and cost-initiative charges, as well as $7.2 million of additional Schawk-related intangible amortization.
- Management expects fiscal 2015 capital spending of approximately $50 million and says operating cash flow should fund anticipated projects. It also states current liquidity sources, operating cash flow and borrowing capacity should meet capital needs for the foreseeable future.
- A $12.9 million customer letter-of-credit draw was paid in January and placed with the court pending resolution of a dispute. Management considers the claim without merit and does not expect a material adverse effect, while acknowledging an unfavorable outcome is possible.
- Environmental remediation accruals were approximately $4.8 million. Unrecognized tax benefits were $4.3 million, and the company was under examination in several tax jurisdictions. Management does not expect ordinary-course legal proceedings or known environmental matters to materially affect results or financial position.
- Key stated exposures include foreign exchange, variable interest rates, commodity costs, demand and pricing pressures, acquisition and integration risks, and customer or industry changes. A 10% strengthening of the U.S. dollar would have reduced reported first-half sales by an estimated $30.5 million and operating income by $2.0 million.
Important facts for investors to verify
- How Schawk integration progresses and whether SGK profitability improves after the disclosed charges and higher amortization.
- Debt repayment capacity, covenant headroom under the revolving facility and the effect of interest-rate changes.
- Resolution and recoverability of the $12.9 million court-held letter-of-credit funds.
- Whether the $50 million capital-spending plan and expected cash generation remain consistent with management’s liquidity assessment.
- Future currency effects, environmental and tax exposures, and the assumptions supporting the goodwill impairment review; no goodwill impairment was recorded at March 31, 2015.