Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007 (Third Quarter of Fiscal 2007)
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
| Metric (in thousands) | Three Months Ended June 30, 2007 |
Nine Months Ended June 30, 2007 |
Nine Months Ended June 30, 2006 |
|---|---|---|---|
| Sales | $185,477 | $563,880 | $532,981 |
| Gross Profit | $69,418 | $208,559 | $198,433 |
| Gross Margin | 37.4% | 37.0% | 37.2% |
| Operating Profit | $21,129 | $76,958 | $82,002 |
| Operating Margin | 11.4% | 13.6% | 15.4% |
| Net Income | $12,029 | $44,501 | $47,465 |
| Diluted EPS | $0.38 | $1.40 | $1.47 |
| Operating Cash Flow (9mo) | $42,510 | ||
| Free Cash Flow (9mo) | $28,312 (Op Cash Flow - CapEx) | ||
| Total Debt (Current + Long-term) | $160,205 | ||
| Cash and Equivalents | $36,993 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 5.8% year-over-year for the nine months ended June 30, 2007, driven by higher sales in all six segments and a favorable foreign currency impact of approximately $9.7 million.
- Profitability Decline: Despite revenue growth, Operating Profit decreased 6.2% to $77.0 million. This was primarily due to special charges of approximately $12.9 million, including $10.0 million in the Casket segment related to accelerated earn-out payments from the Milso Industries acquisition and severance costs.
- Segment Performance:
- Memorialization: Bronze sales rose due to higher prices (passing through bronze ingot costs) and currency effects. Casket sales increased due to distribution expansion but faced margin pressure from special charges.
- Brand Solutions: Graphics Imaging saw lower sales in U.S./U.K. markets offset by German growth. Marking Products grew due to volume and a new acquisition in China.
- Cost Structure: Selling and administrative expenses rose to 23.3% of sales (from 21.8% prior year) due to distribution expansion and special charges.
Guidance, Outlook, and Risks
- Outlook: Management expects diluted earnings per share of $0.55 to $0.58 for the fourth quarter of fiscal 2007. For fiscal 2008, the company projects growth within its long-term objective of 12% to 15% annually.
- Strategic Focus: Growth strategy relies on internal growth (productivity, new products), acquisitions, and share repurchases.
- Risks and Contingencies:
- Legal Proceedings: Ongoing multi-state investigation into alleged anti-competitive practices in the funeral service industry. A new lawsuit was filed by Batesville Casket Company alleging intentional interference with a supply agreement following a settlement with Yorktowne Caskets.
- Market Risks: Exposure to commodity price fluctuations (bronze, steel, wood) and foreign currency exchange rates. A 10% adverse currency change would reduce sales by $13.5 million and operating income by $1.8 million.
- Environmental: Accrual of $9.3 million for environmental remediation obligations.
- Unusual Items: Approximately $12.9 million in special charges impacted the nine-month results, primarily related to the Casket segment.
Investor Verification Checklist
- Special Charges: Verify the nature and recurrence of the $12.9 million in special charges, specifically the $10.0 million Casket segment charge related to Milso Industries earn-outs.
- Legal Exposure: Monitor the status of the multi-state anti-competitive investigation and the new Batesville Casket Company lawsuit filed in July 2007.
- Debt Covenants: Review leverage ratios against the Revolving Credit Facility requirements (net indebtedness/EBITDA) given the increase in debt to $160.2 million.
- Acquisition Integration: Assess the performance of the June 2007 acquisition of Beijing Kenuohua and the impact of the Yorktowne Caskets asset purchase ($7.7 million).
- Commodity Costs: Track the pass-through of rising bronze ingot costs in the Bronze segment and its effect on future margins.