Matthews International Corporation — Q2 FY2011 Form 10-Q
Business context and reporting period. Unaudited quarterly report for the three and six months ended March 31, 2011; the fiscal second quarter ended March 31. Matthews designs, manufactures and markets memorialization products and brand solutions through six segments. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | $220.2 vs. $200.9 (+9.6%) | $427.5 vs. $393.8 (+8.5%) |
| Gross profit | $88.1 vs. $77.8 | $167.9 vs. $151.2 |
| Operating profit | $28.5 vs. $27.1 | $50.5 vs. $49.3 |
| Net income attributable to Matthews shareholders | $16.6 vs. $15.9 | $29.8 vs. $28.9 |
| Diluted EPS | $0.56 vs. $0.53 | $1.01 vs. $0.96 |
- For the first half, gross margin improved to 39.3% from 38.4%; operating margin declined to 11.8% from 12.5%, and net margin attributable to Matthews shareholders declined to 7.0% from 7.3%.
- Six-month operating cash flow was $33.8, down from $55.7. Management attributed the decline principally to working-capital changes, including higher inventory and fiscal year-end compensation payments.
- Cash and cash equivalents were $60.3 at March 31, versus $59.7 at September 30, 2010. Working capital was $211.6 versus $187.5, and the current ratio was 2.5 versus 2.3.
- Balance-sheet debt, including current maturities, was approximately $258.5 ($10.1 current and $248.4 long-term), versus approximately $237.3 at September 30. The domestic revolving facility had $209.5 outstanding; its maximum commitment is $300, matures in December 2015, and carries LIBOR-based pricing. The facility includes leverage and interest-coverage covenants.
- Investing cash outflow was $40.0, including $31.7 of acquisition payments and $7.7 of capital expenditures. Fiscal 2011 capital spending was expected to total $20–$25.
Changes versus the prior comparable period
- Sales increased in all segments. Growth reflected acquisitions and higher Brand Solutions volume; currency movements reduced first-half sales by approximately $3.4.
- First-half gross profit and gross margin rose, supported by Brand Solutions sales and cost-structure initiatives, partly offset by higher bronze and casket commodity costs.
- Selling and administrative expense increased to $117.4 from $101.9; as a share of sales it rose to 27.5% from 25.9%, principally due to acquisitions. Operating profit grew more slowly than revenue.
- Segment performance was mixed: first-half operating profit decreased in Bronze ($20.9 vs. $22.6), while Graphics Imaging ($9.6 vs. $8.6), Marking Products ($2.9 vs. $1.9), Casket ($14.8 vs. $14.5) and Cremation ($2.2 vs. $2.1) increased. Merchandising Solutions reported $14,000 profit versus a $342,000 loss.
Outlook, commentary, risks and contingencies
- Management maintained its expectation for fiscal 2011 EPS growth in the mid-to-high single-digit percentage range over fiscal 2010, excluding unusual charges in both years. The filing does not quantify those charges in this outlook statement.
- Management cited encouraging volume growth in Casket and Brand Solutions and a larger U.S. cremation-equipment order backlog. Challenges include rising commodity costs, the ongoing casketed-death-rate trend, competitive pricing and changing memorial-product mix. U.S. cremation-equipment sales were affected by customer financing and permitting delays.
- Acquisitions included Freeman Metal Products (caskets; $22.8 purchase price plus up to $6.0 contingent consideration), Innovative Picking Technologies (marking products), and the purchase of the remaining 25% of Reproflex. In April 2011, after quarter-end, Matthews purchased the remaining 22% of Saueressig for €19.3 million.
- Annual goodwill and indefinite-lived intangible impairment testing in the second quarter found no additional impairment adjustment. Goodwill increased to $444.1 from $405.2, largely reflecting acquisitions and currency effects.
- Environmental remediation accruals were approximately $6.6. Management said final costs could differ but did not expect the contingencies to significantly affect consolidated results or financial position. Ordinary-course legal proceedings were not expected to have a material adverse effect.
- Unrecognized tax benefits were $3.4, excluding penalties and interest; $0.326 could potentially be recognized within 12 months. Accrued tax penalties and interest were $2.6. The company was under examination in several tax jurisdictions.
- Market risks include variable interest rates, commodity prices, foreign currency and pension assumptions. A 10% strengthening of the U.S. dollar would have reduced first-half reported sales by an estimated $15.9 and operating income by $1.7. Interest-rate swaps had a $3.0 unrealized loss before tax; approximately $1.3 after tax was expected to flow into interest expense over the next 12 months if rates remained at March 31 levels.
- Management stated that operating cash flow, existing liquidity and borrowing capacity should be sufficient for foreseeable capital needs. The company repurchased 211,890 shares for $7.4 during the half and paid $4.7 in dividends.
Important facts for investors to verify
- How much of reported sales growth and expected EPS growth is organic, and how acquisitions, foreign exchange and any unusual charges affect comparisons.
- Whether working-capital investment, particularly inventory, reverses and supports cash conversion in subsequent periods.
- Debt levels, covenant headroom and funding needs following the Saueressig buyout and other acquisitions.
- Whether commodity inflation, casket-market trends, product mix and competitive pricing pressure segment margins or the stated outlook.
- Potential changes in environmental remediation costs, tax examinations and other contingent obligations.