Business context and reporting period
Matthews International Corporation’s unaudited Form 10-Q covers the three and six months ended March 31, 2014, the second quarter and first half of fiscal 2014. The company operates in Memorialization (Cemetery Products, Funeral Home Products and Cremation) and Brand Solutions (Graphics Imaging, Marking and Fulfillment Systems, and Merchandising Solutions).
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Quarter and six-month comparisons are against the periods ended March 31, 2013.
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $246.8 | $256.4 | $476.8 | $482.0 |
| Gross profit / margin | $90.2 / 36.5% | $94.9 / 37.0% | $171.6 / 36.0% | $174.8 / 36.3% |
| Operating profit / margin | $20.9 / 8.5% | $25.1 / 9.8% | $35.9 / 7.5% | $41.6 / 8.6% |
| Net income attributable to Matthews shareholders | $11.3 | $14.2 | $19.2 | $22.4 |
| Diluted EPS | $0.41 | $0.51 | $0.70 | $0.81 |
First-half operating cash flow was $23.6 million, versus $30.1 million; working-capital changes used $23.2 million, compared with $10.6 million in the prior period. Investing activities used $9.8 million, versus $74.5 million, which included substantial acquisition spending in 2013. Financing activities used $11.5 million, compared with $41.5 million provided in 2013. Cash increased $2.6 million to $61.6 million from September 30, 2013.
At March 31, 2014, working capital was $251.9 million and the current ratio was 2.5. Balance-sheet debt was approximately $377.6 million, including $23.5 million of current maturities and $354.2 million of long-term debt; cash was $61.6 million. Domestic revolving-facility borrowings were $310 million, with a 2.53% weighted-average rate. The $500 million facility matures in July 2018 and requires leverage and interest-coverage covenant compliance.
Material changes versus prior comparable periods
- Second-quarter sales fell 3.7% and operating profit fell 16.7%; first-half sales declined 1.1% and operating profit declined 13.7%. First-half diluted EPS decreased from $0.81 to $0.70.
- Memorialization first-half sales declined to $243.0 million from $260.7 million, principally due to lower unit volumes in cemetery and funeral products and weaker cremation-equipment sales. Management cited lower U.S. casketed, in-ground burial deaths.
- Brand Solutions first-half sales rose to $233.8 million from $221.3 million, supported by Wetzel and Pyramid acquisitions, foreign exchange, and higher Marking and Fulfillment Systems volume. Brand Solutions operating profit nevertheless fell to $5.6 million from $10.4 million; Graphics Imaging and Merchandising Solutions were notable sources of weakness.
- First-half selling and administrative expense rose to $135.7 million from $133.3 million and increased to 28.5% of sales from 27.6%. Current-period costs included $3.6 million of acquisition activity expenses, principally for SGK, $3.3 million of strategic cost initiatives and $1.1 million of litigation expense.
- Interest expense declined to $5.5 million from $6.3 million, while the effective tax rate increased to 35.9% from 35.0%, partly reflecting estimated nondeductible SGK transaction costs.
Outlook, risks, contingencies and unusual items
- Management projected fiscal 2014 EPS growth over fiscal 2013 on a non-GAAP basis; the filing gives no specific EPS target. Management expected continued SGK-related costs and ongoing strategic cost-structure initiatives.
- Management expected Cremation and Merchandising Solutions to recover first-half sales declines based on backlog; it also noted that lower U.S. casketed burial deaths and difficult European conditions could continue to weigh on results.
- In March 2014, Matthews agreed to acquire Schawk, Inc. (SGK) for $11.80 cash and 0.20582 Matthews shares per SGK share, an indicated enterprise value of approximately $577 million. Closing was expected in the quarter ending September 30, 2014, subject to SGK shareholder approval and customary conditions. A proposed increase in the domestic facility to $850 million is conditional on closing.
- Graphics Imaging goodwill was $191.6 million; estimated fair value exceeded carrying value by less than 10%. Management reported no impairment, but warned that weaker European recovery, pricing pressure, lower volumes or higher discount rates could lead to future impairment.
- The company recorded approximately $5.2 million for environmental remediation. Management did not expect pending legal proceedings or environmental contingencies to materially affect consolidated results or financial position, while noting ultimate costs could differ from accruals. A separate Funeral Home Products legal dispute contributed $1.1 million of first-half expense.
- Key exposures include interest rates, commodities, foreign exchange, pension assumptions and acquisition execution/integration. Management estimated that a 10% strengthening of the U.S. dollar would have reduced first-half reported sales by $17.4 million and operating income by $1.3 million. Unrecognized tax benefits, excluding penalties and interest, were approximately $4.4 million.
- Fiscal 2014 capital spending was projected at approximately $30 million. Management expected operating cash flow and borrowing capacity to meet foreseeable capital needs; no significant contribution to the principal retirement plan was required for fiscal 2014.
Most important facts for investors to verify
- Whether SGK closed on the expected timetable and the ultimate acquisition financing, dilution, integration costs and realized synergies.
- Whether reported and non-GAAP earnings trends improved, including the impact of transaction costs and strategic cost initiatives.
- Whether Memorialization volumes and the projected Cremation and Merchandising Solutions recoveries materialized, and whether Graphics Imaging profitability and goodwill valuation improved.
- Cash conversion and working-capital needs, debt and covenant headroom after any SGK financing, and the effect of interest-rate and foreign-exchange movements.
- Developments in environmental remediation, the Funeral Home Products dispute and tax examinations or uncertain tax positions.