Matthews International Corporation — Form 10-Q Summary
Business and period: The company designs, manufactures and markets memorialization products and brand solutions. This unaudited report covers the fiscal second quarter and six months ended March 31, 2013; balance-sheet comparisons are with September 30, 2012. Amounts below are U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Six months ended March 31, 2013 | Six months ended March 31, 2012 |
|---|---|---|---|---|
| Sales | $256.4 million | $225.5 million | $482.0 million | $442.8 million |
| Gross profit / margin | $94.9 million / 37.0% | $84.7 million / 37.6% | $174.8 million / 36.3% | $162.7 million / 36.7% |
| Operating profit / margin | $25.1 million / 9.8% | $25.3 million / 11.2% | $41.6 million / 8.6% | $44.2 million / 10.0% |
| Net income attributable to Matthews shareholders | $14.2 million | $15.3 million | $22.4 million | $26.5 million |
| Diluted earnings per share | $0.51 | $0.54 | $0.81 | $0.93 |
First-half operating cash flow was $33.4 million, versus $26.2 million a year earlier. Investing used $74.5 million, including $63.8 million for acquisitions and $10.9 million of capital expenditures. Financing provided $37.4 million, largely from net debt proceeds; cash declined $6.7 million to $51.5 million.
At March 31, total debt, including current maturities, was approximately $395.8 million, versus $319.7 million at September 30, 2012. Cash was $51.5 million; the domestic revolving facility had $325.0 million outstanding against a $400.0 million limit and matures in March 2017. The company reported working capital of $217.5 million and a current ratio of 2.2.
Changes and management commentary
- First-half sales rose 8.9%, reflecting segment volume growth and acquisitions. Brand Solutions sales increased to $221.3 million from $203.2 million; Memorialization sales increased to $260.7 million from $239.6 million.
- Despite higher sales, first-half operating profit fell to $41.6 million. Management cited $5.7 million of unusual charges, primarily strategic initiatives, acquisition-related activities and an approximately $1.6 million trade-name impairment. Higher selling and administrative costs and lower gross margin also weighed on results.
- First-half segment results were mixed: Funeral Home Products operating profit rose to $17.4 million from $13.8 million, while Cemetery Products fell to $12.2 million from $14.7 million and Graphics Imaging fell to $5.8 million from $8.7 million. Management cited ERP and strategic-initiative costs, European market weakness, lower segment margins and other items.
- Wetzel, acquired in November 2012 for €42.6 million, and Pyramid, acquired in December for $24.5 million plus possible additional consideration, contributed to sales growth. The company also acquired remaining interests in Kroma and FCC. Purchase-price allocations for Wetzel and Pyramid remained preliminary.
Outlook, risks and contingencies
Management projected fiscal 2013 EPS growth over fiscal 2012, excluding unusual costs, based on year-to-date results and current forecasts. No specific EPS target was provided. The company expected approximately $30 million in fiscal 2013 capital spending and said operating cash flow should fund anticipated projects. Management also noted that strategic initiatives are ongoing and will result in additional unusual charges.
- Risks identified include economic weakness in Europe, foreign-exchange movements, changes in material costs, customer demand or pricing, competitive pressure, acquisition risks, technological factors and changes in death rates. The company also faces commodity-price exposure; contractual pricing may limit its ability to pass cost increases to customers.
- Graphics Imaging goodwill remained unimpaired at March 31, but management said the reporting unit’s estimated fair value was approaching its carrying value; further deterioration could lead to a future impairment charge.
- Environmental remediation accruals were approximately $5.9 million. Management did not expect environmental matters or ordinary-course legal proceedings to materially affect consolidated results or financial position, while noting final costs could differ from accruals.
- The company had $3.1 million of unrecognized tax benefits, excluding penalties and interest, and was under examination in multiple jurisdictions. It also had $2.1 million accrued for tax penalties and interest.
- Variable-rate debt and interest-rate swaps expose the company to interest-rate risk. The swaps had a $6.3 million fair-value liability; approximately $1.7 million after tax was expected to be reclassified to interest expense over the next 12 months, assuming rates remained unchanged.
Management concluded disclosure controls were effective as of March 31, 2013, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the forecast of fiscal-year EPS growth excluding unusual costs is achieved, and the amount and timing of further strategic or acquisition-related charges.
- Acquisition performance and final purchase-price allocations, particularly for Wetzel and Pyramid, including contingent consideration.
- Graphics Imaging results and goodwill headroom, given European weakness and the trade-name impairment.
- Debt levels, revolving-facility covenant compliance, interest expense and the company’s ability to fund acquisitions, capital spending, dividends and repurchases from cash flow.
- Whether environmental remediation, tax examinations or other contingencies ultimately require costs beyond recorded accruals.