Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009 (Nine months ended)
Business Overview: A designer, manufacturer, and marketer of memorialization products (bronze memorials, caskets, cremation equipment) and brand solutions (graphics imaging, marking products, merchandising). Operations are divided into six segments: Bronze, Casket, Cremation, Graphics Imaging, Marking Products, and Merchandising Solutions.
Key Financial Metrics (Nine Months Ended June 30, 2009)
| Metric | 2009 (Unaudited) | 2008 (Unaudited) |
|---|---|---|
| Sales | $580.7 million | $599.4 million |
| Gross Profit | $216.4 million (37.3% margin) | $239.1 million (39.9% margin) |
| Operating Profit | $73.3 million (12.6% margin) | $97.9 million (16.3% margin) |
| Net Income | $42.1 million | $59.1 million |
| Diluted EPS | $1.38 | $1.90 |
| Operating Cash Flow | $69.5 million | $78.5 million |
| Cash and Equivalents | $51.9 million | $50.7 million (Sep 30, 2008) |
| Total Debt (Current + Long-term) | $253.1 million | $254.3 million (Sep 30, 2008) |
| Working Capital | $164.5 million | $141.4 million (Sep 30, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 3.1% year-over-year, driven by the global recession, a lower estimated domestic death rate, and unfavorable foreign currency fluctuations ($28.4 million impact).
- Memorialization: Bronze and Casket segments saw significant volume declines due to economic conditions. Cremation sales increased due to a recent acquisition.
- Brand Solutions: Graphics Imaging sales increased due to the inclusion of the Saueressig acquisition. Marking Products and Merchandising Solutions declined due to reduced industrial spending and project delays.
- Margin Compression: Gross profit margin dropped 260 basis points to 37.3%, and operating margin dropped 370 basis points to 12.6%.
- Unusual Charges: Approximately $12.8 million in unusual charges impacted operating profit, including severance, facility consolidation costs, and integration expenses related to the Saueressig acquisition.
- Interest Expense: Increased to $9.1 million from $6.7 million due to higher average debt levels following the Saueressig acquisition.
- Acquisitions: The company acquired the remaining 20% of S+T GmbH in September 2008 and a 78% interest in Saueressig in May 2008. Saueressig results are now fully consolidated.
Outlook, Risks, and Management Commentary
- Guidance: Management maintains a long-term objective of increasing annual earnings per share by 12% to 15%. However, the company remains "very cautious" regarding near-term predictability due to the global economic slowdown.
- Cost Adjustments: The company is adjusting cost structures to align with current revenue run rates. Further unusual charges are expected in coming quarters as part of these restructuring efforts.
- Liquidity: The company maintains a $225 million revolving credit facility with $177.5 million outstanding. Management believes current liquidity and operating cash flow are sufficient to meet capital needs.
- Key Risks:
- Economic Conditions: Severity of the U.S. and global recession impacting consumer and industrial spending.
- Foreign Currency: Strengthening U.S. dollar negatively impacts reported results from overseas operations.
- Demographics: Decline in the estimated casketed death rate.
- Commodity Prices: Exposure to fluctuations in bronze, steel, wood, and photopolymers.
- Contingencies: An accrual of approximately $7.4 million exists for environmental remediation obligations. The company is under examination in several tax jurisdictions with unrecognized tax benefits of $3.8 million.
Investor Verification Checklist
- Unusual Charges: Verify the nature and one-time vs. recurring nature of the $12.8 million in unusual charges impacting operating profit.
- Debt Covenants: Confirm compliance with leverage and interest coverage ratios required by the $225 million revolving credit facility.
- Foreign Currency Impact: Assess the sensitivity of future earnings to continued U.S. dollar strength, given the significant international operations.
- Acquisition Integration: Monitor the integration progress and cost realization of the Saueressig acquisition.
- Stock Repurchases: Note that $27.3 million was spent on treasury stock purchases in the first nine months; verify remaining authorization under the repurchase plan.