Matthews International Corporation — Q1 FY2017 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015 unless stated otherwise. Matthews provides brand solutions, memorialization products, and industrial technologies. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Sales | $349.0 million | $354.2 million |
| Gross profit / margin | $127.3 million / 36.5% | $126.6 million / 35.7% |
| Operating profit / margin | $19.1 million / 5.5% | $12.0 million / 3.4% |
| Net income attributable to Matthews shareholders | $9.1 million | $4.6 million |
| Diluted EPS | $0.28 | $0.14 |
| Operating cash flow | $16.0 million | $10.0 million |
- Sales declined about 1.5%, primarily reflecting approximately $5.2 million of unfavorable foreign-currency effects. Gross profit increased modestly and operating profit rose about 58%, supported by lower selling and administrative costs, productivity gains, and acquisition synergies.
- Segment sales and operating profit: SGK Brand Solutions $175.8 million and $4.2 million; Memorialization $145.6 million and $14.4 million; Industrial Technologies $27.6 million and $0.5 million. Versus the prior year, segment profit improved in SGK and Memorialization but declined in Industrial Technologies.
- Cash and equivalents were $106.4 million at December 31, up from $55.7 million at September 30, 2016. Working capital was $373.0 million and the current ratio was 2.6, compared with $314.8 million and 2.2, respectively, at fiscal year-end.
- Cash used in investing was $15.8 million, including $10.7 million for acquisitions and $5.1 million of capital expenditures. Fiscal 2017 capital spending was expected to be approximately $45 million; management expected operating cash flow to fund planned capital projects.
- Total balance-sheet debt, including current maturities, was approximately $937.8 million, versus $872.6 million at September 30, 2016. Domestic revolving-facility borrowings were $634.0 million and term-loan borrowings were $243.3 million. Domestic facility borrowings carried a 2.65% weighted-average rate; the facility matures in April 2021 and requires compliance with leverage and interest-coverage ratios.
Material changes, outlook, and risks
- SGK sales excluding currency effects increased, reflecting U.K. and Asia-Pacific growth and merchandising-display projects, partly offset by softer U.S. brand conditions. Memorialization had higher cemetery memorial sales but lower casket units. Industrial Technologies faced lower fulfillment-systems sales.
- Fiscal 2017 first-quarter integration and other charges were $8.6 million, compared with $10.6 million a year earlier. Management said Aurora and Schawk integration work would continue through fiscal 2017 and related costs would continue to affect results. The quarter also included $3.3 million of incremental stock-based compensation expense related to retirement-eligible employees.
- Guidance Automation was acquired in November 2016 for approximately $9.7 million net of cash acquired. After quarter-end, Matthews acquired Ungricht for approximately $27.5 million and VCG for approximately $12.5 million. The Guidance purchase-price allocation remained preliminary.
- No earnings or revenue forecast was provided. The company described its growth strategy as organic growth and productivity, acquisitions, and share repurchases. It repurchased 95,229 shares during the quarter and paid dividends of $0.17 per share.
- Risks highlighted include foreign-exchange movements, material costs, demand and pricing pressures, changes in mortality and cremation rates, acquisition and integration risks, cybersecurity, and customer or distribution changes. Management reported no material changes to previously disclosed risk factors.
- A Saudi-project customer had drawn on a $10.6 million performance-guarantee letter of credit. Matthews prevailed in court in June 2016, but the customer had not remitted the funds as ordered; the amount remained in other current assets, and an unfavorable financial impact remained possible.
- Environmental remediation accruals were approximately $3.6 million. Unrecognized tax benefits were $13.7 million, excluding penalties and interest. Management did not expect ordinary-course legal proceedings or environmental matters to have a significant overall effect, while noting final outcomes could differ from accruals.
- Comprehensive loss included a $31.3 million foreign-currency translation loss. The filing states interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether improved segment profitability and integration savings continue, particularly given lower Industrial Technologies profit and ongoing integration charges.
- Performance, financing, and final purchase accounting for Guidance, Ungricht, and VCG, and the expected returns from these acquisitions.
- Debt growth, covenant headroom, variable-rate exposure, and the company’s capacity to fund acquisitions, capital spending, dividends, and repurchases.
- Recovery prospects and timing for the $10.6 million Saudi-project claim and any resulting financial-statement impact.
- Whether the $45 million fiscal 2017 capital-spending expectation and management’s operating-cash-flow assumptions are achieved.