Matthews International Corporation — Q1 FY2013 10-Q
Business context and period. The unaudited quarter ended December 31, 2012, compared with the quarter ended December 31, 2011. Matthews operates Memorialization and Brand Solutions businesses, across six segments, serving cemetery, funeral, printing, marking, fulfillment, and merchandising markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $225.6 | $217.2 | +3.9% |
| Gross profit / margin | $80.0 / 35.4% | $78.0 / 35.9% | Margin down 0.5 percentage points |
| Operating profit / margin | $16.5 / 7.3% | $18.9 / 8.7% | Profit down 12.8% |
| Income before taxes | $12.4 | $17.5 | Down 29.1% |
| Net income attributable to Matthews shareholders | $8.3 | $11.3 | Down 26.8% |
| Diluted EPS | $0.30 | $0.40 | Down $0.10 |
| Operating cash flow | $7.2 | $7.1 | Up $0.2 |
Memorialization sales rose to $124.7 million from $113.2 million, and operating profit increased to $14.5 million from $11.8 million. Brand Solutions sales fell to $100.9 million from $104.1 million, while operating profit declined to $2.0 million from $7.1 million. Graphics Imaging was the principal pressure point: sales fell to $62.4 million from $70.4 million and operating profit to $0.3 million from $5.0 million.
Liquidity, debt, and cash flows
- Cash was $53.6 million at December 31, 2012, versus $58.3 million at September 30, 2012. Working capital was $211.7 million, and the reported current ratio was 2.1.
- Total debt, including current maturities, was approximately $402.3 million, compared with $319.7 million at September 30, 2012. Domestic revolving-facility borrowings were $358.8 million, up from $281.3 million; the facility has a $400 million limit and matures in March 2017. Its reported weighted-average borrowing rate was 2.62%.
- Operating cash flow was $7.2 million; investing cash outflow was $65.8 million, including $60.6 million for acquisitions and $5.3 million of capital expenditures. Financing cash inflow was $52.8 million, primarily reflecting net debt proceeds. Cash declined by $4.7 million during the quarter.
- Fiscal 2013 capital spending was expected to be approximately $30 million, with management expecting operating cash flow to fund anticipated capital projects.
Changes, outlook, and notable items
- Sales growth reflected stronger Memorialization results and recent acquisitions, partly offset by lower Graphics Imaging sales. Management cited European market weakness and unfavorable foreign exchange effects in Graphics Imaging.
- Operating profit was affected by unusual charges, including ERP implementation and cost-reduction costs; Graphics Imaging also recorded approximately $1.4 million of unusual charges, including acquisition-related costs. Management said cost-reduction initiatives were ongoing and expected to produce additional unusual charges.
- Investment income fell to $0.2 million from $1.6 million, mainly due to lower returns on benefit-plan trust investments. Interest expense rose to $3.2 million from $2.6 million, primarily because of higher average debt. The effective tax rate was 35.4%, versus 34.6%.
- In November 2012, Matthews acquired Wetzel, a European pre-press and gravure printing-form provider, for approximately $54.3 million, plus potential additional consideration of up to $2.8 million. In December, it acquired Pyramid, a warehouse and conveyor control systems provider, for approximately $24.5 million, plus potential additional consideration of up to $3.7 million. Purchase-price allocations were preliminary.
- Management projected FY2013 EPS growth over FY2012, excluding unusual costs, based on first-quarter results and current forecasts. No specific EPS target or quantified forecast was provided. The filing cautions that the quarter is not necessarily indicative of full-year results.
- Key risks include European economic conditions, foreign-exchange movements, material costs and limits on passing them through, competitive and customer-demand changes, industry consolidation, acquisition risks, interest rates, and pension assumptions. A 10% strengthening of the U.S. dollar was estimated to reduce quarterly reported sales by $8.2 million and operating income by $0.5 million.
- Environmental remediation accruals were approximately $5.7 million. The company reported various ordinary-course legal proceedings and said it did not expect them to materially affect financial condition, results, or cash flows. Tax examinations are ongoing; unrecognized tax benefits were $3.1 million, excluding penalties and interest.
Important facts for investors to verify
- Whether acquisition contributions and cost-reduction actions deliver the projected earnings growth, and how much of future results is affected by additional unusual charges.
- Whether Graphics Imaging stabilizes amid European weakness, lower volume, and currency pressure, and whether the acquired businesses meet expectations.
- Debt and interest-rate exposure: revolving borrowings increased materially, and the facility is subject to leverage and interest-coverage covenants. Interest-rate swaps had an $8.1 million fair-value liability; approximately $1.7 million after tax was expected to enter interest expense over the following 12 months if rates remained unchanged.
- Cash conversion and funding needs, including acquisition spending, planned capital expenditures, dividends, and share repurchases.
- Potential changes to the $5.7 million environmental accrual, tax exposures, and the preliminary purchase-price allocations and contingent consideration for acquisitions.