Matthews International Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014; fiscal year ends September 30. Amounts below are in millions of U.S. dollars unless stated otherwise. The filing is unaudited.
Business context
Matthews makes memorialization products and provides brand solutions through six segments. It operates in North America, Europe, Australia and Asia. The quarter’s reported growth included significant Cremation and Merchandising Solutions projects, acquisitions, and favorable currency effects.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $280.0 vs. $250.7; up 11.7% | $756.8 vs. $732.7; up 3.3% |
| Gross profit | $104.2 vs. $91.4 | $275.8 vs. $266.2 |
| Operating profit | $32.2 vs. $30.8 | $68.1 vs. $72.3 |
| Net income attributable to Matthews shareholders | $19.3 vs. $18.0 | $38.5 vs. $40.4 |
| Diluted EPS | $0.70 vs. $0.65 | $1.40 vs. $1.46 |
Quarterly sales and operating profit increased year over year, but operating margin was approximately 11.5%, down from 12.3%. For the nine-month period, operating profit declined about 5.9% and diluted EPS declined about 4.1%. The filing’s MD&A reports nine-month gross margin of 36.0% versus 36.3%; the financial-statement totals imply approximately 36.4% versus 36.3%, so the stated 2014 margin does not clearly reconcile to the tables.
For the nine months, operating cash flow was $63.5, down from $72.9. Working-capital changes used $14.3, compared with $5.8 used a year earlier. Capital expenditures were $18.8; operating cash flow less capital expenditures was approximately $44.8. Investing activities used $18.7, while financing activities used $23.7. Cash increased $21.7 to $80.6.
At June 30, total current assets were $454.8 and current liabilities $192.1; working capital was $262.8 and the current ratio was 2.4. Balance-sheet debt, including current maturities, totaled approximately $368.2, versus $374.7 at September 30, 2013. Domestic revolving borrowings were $305.0. The domestic facility had $500.0 of capacity before the post-quarter amendment. Cash and debt figures are as of June 30 and do not reflect the completed SGK acquisition.
Material changes and segment trends
- Quarterly sales growth included a Saudi Arabia waste-incineration project in Cremation and a significant Merchandising Solutions display project. Nine-month consolidated sales also benefited from approximately $7.6 of favorable currency movements.
- Nine-month Memorialization sales fell to $380.9 from $391.5, reflecting lower Cemetery Products and Funeral Home Products volumes; management cited fewer U.S. casketed, in-ground burial deaths. Cremation sales increased to $39.8 from $34.8, principally due to the project.
- Nine-month Brand Solutions sales rose to $375.8 from $341.1, while operating profit declined to $15.0 from $17.5. Graphics Imaging operating profit fell to $3.3 from $10.0, including $7.0 of acquisition-related expenses and $1.0 of restructuring costs in 2014. Merchandising Solutions profit increased to $5.9 from $2.1, primarily on higher project sales.
- Nine-month selling and administrative expenses rose to $207.7 from $193.9 and included $7.1 of acquisition-related costs, primarily for SGK, $5.1 of strategic cost-structure costs, and $1.9 of Funeral Home Products litigation expense.
Outlook, transactions and risks
- Matthews completed its acquisition of Schawk, Inc. (SGK) on July 29, 2014, after quarter-end. The stated transaction value was approximately $606 million, including net debt; SGK shareholders received $11.80 cash and 0.20582 Matthews shares per share. Purchase-price allocation was not complete at filing.
- On July 29, Matthews amended its revolving credit facility, increasing maximum capacity from $500 million to $900 million. The filing says the June 30 interest spread of 1.25% would have been 1.75% under the amended terms.
- Management said existing businesses were then projecting to meet initial FY2014 consolidated expectations on a non-GAAP adjusted basis. SGK transaction and integration costs and acquisition-related valuation step-up expense were expected to affect the fourth quarter; no specific numerical earnings guidance was provided.
- Graphics Imaging goodwill had a fair-value cushion of less than 10% at the annual impairment test. Further weakness in Europe, pricing pressure, lower volumes or higher discount rates could lead to impairment. No impairment was recorded in the test.
- Other disclosed exposures include variable-rate debt, interest-rate and foreign-exchange movements, commodity costs, pension assumptions, legal matters, environmental remediation and uncertain tax positions. Environmental remediation accruals were approximately $5.1 million; unrecognized tax benefits were $4.3 million, excluding penalties and interest. Management did not expect ordinary-course legal proceedings or environmental matters to have a significant consolidated effect.
- Management identified acquisition integration, achieving expected savings and synergies, and potentially greater-than-expected integration costs as risks. It also cited economic conditions, currency, material costs, death rates, competitive and pricing pressures, customer and distribution changes, and technology risks.
Most important facts for investors to verify
- SGK’s post-close purchase accounting, financing, integration costs, expected synergies and resulting debt and covenant headroom.
- Whether project-driven Cremation and Merchandising sales are repeatable, and whether working-capital use and operating cash flow improve.
- Graphics Imaging’s operating recovery and goodwill valuation sensitivity, given the narrow impairment cushion.
- The filing’s stated nine-month gross-margin percentage versus the percentage implied by its reported financial-statement totals.
- Developments in the Funeral Home Products litigation, environmental remediation obligations and uncertain tax positions.