Matthews International Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. The filing also presents unaudited fourth-quarter results. Matthews designs, manufactures and markets memorialization products and brand solutions through six segments: Bronze, Casket, Cremation, Graphics Imaging, Marking Products and Merchandising Solutions.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $821.8 million | $780.9 million | +5.2% |
| Gross profit / margin | $323.4 million / 39.3% | $294.8 million / 37.7% | Margin +1.6 percentage points |
| Operating profit / margin | $116.6 million / 14.2% | $101.0 million / 12.9% | +15.4% |
| Net income attributable to Matthews shareholders | $69.1 million | $57.7 million | +19.6% |
| Diluted EPS | $2.31 | $1.90 | +$0.41 |
| Cash from operations | $106.5 million | $90.9 million | +$15.6 million |
| Capital expenditures | $21.4 million | $19.4 million | +$2.0 million |
| Cash and cash equivalents | $59.7 million | $57.7 million | +$2.0 million |
| Total debt, including current maturities | $237.3 million | $251.7 million | -$14.4 million |
| Working capital / current ratio | $187.5 million / 2.3 | $173.1 million / 2.3 | Working capital +$14.4 million |
FY2010 Q4: Sales were $214.7 million versus $200.2 million in Q4 FY2009; operating profit was $32.8 million versus $27.7 million; shareholder net income was $19.7 million versus $15.6 million; diluted EPS was $0.67 versus $0.52. Quarterly information is unaudited.
Material changes and drivers
- Sales growth reflected acquisitions, higher volume in several businesses and a favorable $3.9 million foreign-currency translation effect. Acquisitions contributed across memorialization and brand solutions; fiscal 2010 acquisition spending, net of cash acquired, was $32.3 million.
- Margins and operating profit improved partly because FY2009 included approximately $16.5 million of unusual charges and because cost-structure initiatives begun in FY2009 benefited FY2010. FY2010 operating profit also absorbed about $5.2 million of higher pension cost.
- Segment results were mixed: Casket and Marking Products operating profit rose materially; Merchandising Solutions returned to a small profit. Bronze profit declined, while Cremation profit was slightly lower. Graphics Imaging profit increased in reported terms, but declined excluding FY2009 unusual charges.
- Interest expense fell to $7.4 million from $12.1 million, reflecting lower rates and average debt. The effective tax rate was 35.0%; FY2010 included a favorable $0.8 million tax adjustment.
Outlook, risks and unusual items
- Management forecast FY2011 EPS growth in the mid-to-high single-digit percentage range versus FY2010, excluding unusual charges in both years. It expected Q1 earnings to be relatively consistent with FY2010 Q1, with comparable-quarter results improving as the year progressed. Management cautioned that economic conditions could make quarterly results uneven.
- Management cited ongoing challenges from declining U.S. casketed deaths and in-ground burials, commodity costs, volatile foreign exchange rates and uncertain economic conditions. It noted stable-to-improving Brand Solutions order rates and encouraging performance from recent acquisitions.
- Fiscal 2011 capital spending was expected to be $20–$25 million, funded from operating cash. The domestic revolving facility had a $225 million maximum and matured in September 2012; reported outstanding borrowings on it were $187.0 million, with a 2.69% weighted-average rate. The filing says liquidity, operating cash flow and borrowing capacity should meet foreseeable needs.
- Environmental remediation accrual was approximately $6.8 million. Management did not expect known legal proceedings or environmental matters to materially affect consolidated results or financial position, but final remediation costs could differ from accruals.
- In October 2010, after fiscal year-end, Matthews acquired Freeman Metal Products for $22.8 million plus up to $8.0 million contingent consideration. Matthews also agreed to buy the remaining 22% of Saueressig for €17.4 million in October 2011; the filing recorded approximately $23.7 million for this arrangement in equity.
- Key exposures include raw-material prices, foreign exchange, interest rates, pension assumptions, customer pricing and competition. A 10% adverse currency move was estimated to reduce reported FY2010 sales by $30.4 million and operating income by $3.9 million.
Most important facts for investors to verify
- How much of reported growth and margin improvement was organic and sustainable, versus acquired revenue and comparison against FY2009 unusual charges?
- Whether the FY2011 EPS outlook was achieved, particularly given mortality and burial trends, commodity inflation and currency volatility.
- Debt maturities, revolving-credit covenant headroom and refinancing plans ahead of the September 2012 facility maturity.
- Integration and returns from FY2010 acquisitions and the subsequent Freeman acquisition, including contingent payments and the Saueressig minority-interest purchase.
- Potential changes in pension funding costs and environmental remediation obligations beyond recorded estimates.
- The filing reports 1,070,173 shares repurchased during FY2010, while another disclosure states 850,095 shares repurchased under the authorization as of year-end; verify the applicable authorization and cumulative repurchase figures.
The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at September 30, 2010.