Matthews International Corporation — Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2012; fiscal year ends September 30. Unless noted, amounts below are in millions of U.S. dollars. The filing is unaudited.
Business context
Matthews designs, manufactures and markets memorialization products and brand solutions through six segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Marking Products and Merchandising Solutions. The filing reorganized cremation casket operations into Funeral Home Products effective October 1, 2011; prior-period segment figures were reclassified.
Financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Sales | $227.5 | $231.5 | $670.2 | $659.0 |
| Gross profit | $87.7 | $91.9 | $250.4 | $259.8 |
| Gross margin | 38.6% | 39.7% | 37.4% | 39.4% |
| Operating profit | $27.5 | $35.1 | $71.7 | $85.5 |
| Income before taxes | $24.2 | $33.0 | $64.8 | $80.2 |
| Net income attributable to Matthews shareholders | $16.3 | $21.9 | $42.9 | $51.7 |
| Diluted EPS | $0.58 | $0.74 | $1.51 | $1.75 |
For the nine months, operating cash flow was $56.3 million, versus $62.0 million; capital expenditures were $24.6 million, versus $15.9 million. Cash used in investing activities was $36.9 million, including $12.5 million for acquisitions. Cash used in financing activities was $24.5 million, including $18.9 million of share repurchases and $7.6 million of dividends. Cash declined $7.0 million to $54.7 million from September 30, 2011.
At June 30, 2012, working capital was $208.8 million and the current ratio was 2.2, compared with $208.1 million and 2.3 at September 30, 2011. Current and long-term debt totaled $320.3 million, compared with $317.2 million at September 30; cash-adjusted debt was approximately $265.6 million. The domestic revolving facility was expanded from $300 million to $400 million and extended to March 2017. Domestic borrowings were $250 million; covenants require leverage and interest-coverage ratios. The filing does not state covenant headroom.
For the nine months, the effective tax rate was 33.7%, versus 34.2%. The filing attributes the current-period rate partly to favorable tax-accrual adjustments. Pension and postretirement benefit costs totaled $10.8 million for the nine months, compared with $9.2 million in the prior-year period.
Changes versus the prior comparable period
- Third-quarter sales fell 1.7%, while operating profit declined 21.6% and diluted EPS fell from $0.74 to $0.58. For the nine months, sales grew 1.7%, but operating profit fell 16.1% and diluted EPS declined from $1.75 to $1.51.
- YTD Memorialization sales decreased to $366.5 million from $381.2 million; Brand Solutions sales increased to $303.8 million from $277.8 million. Segment operating profit declined in both businesses, to $51.3 million from $64.0 million for Memorialization and to $20.4 million from $21.5 million for Brand Solutions.
- Management cited lower estimated U.S. casketed and in-ground burial deaths, lower bronze memorial and casket sales, higher commodity costs, and currency effects. Brand Solutions growth and higher Cremation sales partly offset these pressures.
- Operating cash flow decreased, primarily due to lower net income, partly offset by less cash used for working capital. Capital spending increased; acquisition spending declined from $31.5 million in the prior-year period to $12.5 million.
Outlook, risks and unusual items
- Management projected fiscal Q4 2012 non-GAAP EPS to be lower than the year-earlier quarter, citing U.S. death trends, a slowing European economy and Cemetery Products’ ERP implementation. The filing provides no specific EPS estimate. Management said it planned more aggressive cost reductions and to accelerate resolution of ERP issues, and expected to return to traditional consolidated performance over the longer term.
- Notable YTD segment items included Cemetery Products ERP implementation and severance costs, partly offset by a favorable granite-business claim settlement. Graphics Imaging results were affected by acquisition-related and severance costs, weaker European Q3 sales and unfavorable currency movements.
- In May 2012, the company acquired Everlasting Granite Memorial Co. to expand its granite-market presence. The company also reported other goodwill additions related to acquisitions and purchase-price adjustments. Its second-quarter annual goodwill impairment review found no further adjustment necessary.
- Environmental remediation accruals were approximately $5.8 million in the MD&A; the balance sheet separately reports an environmental reserve of $5.0 million. The company is assessing and remediating sites and noted a landfill matter in York, Pennsylvania; it had not been joined in a lawsuit or administrative order concerning that site. Management did not expect known environmental or ordinary-course legal matters to materially affect results or financial position.
- Unrecognized tax benefits were approximately $3.0 million, excluding penalties and interest; $0.222 million might be recognized within 12 months. The company was under examination in several tax jurisdictions.
- Interest-rate swaps had an $8.2 million unrealized loss ($5.0 million after tax) in accumulated other comprehensive loss. Approximately $1.7 million after tax was expected to be reclassified to interest expense over the next 12 months, assuming market rates remained unchanged. A 10% strengthening of the U.S. dollar was estimated to reduce nine-month reported sales by $22.4 million and operating income by $2.4 million.
- Key stated risks include economic conditions, foreign exchange, materials costs, death rates, demand and pricing pressures, acquisition risks, technology, and potential changes involving larger customers. The company reported effective disclosure controls as of June 30, 2012 and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Verify the source and persistence of operating-profit and margin deterioration, especially in Cemetery Products and Graphics Imaging, and the expected costs and timing of ERP remediation.
- Check actual fiscal Q4 non-GAAP EPS against management’s directional warning; the filing gives no numerical forecast.
- Review debt, covenant headroom, interest-rate exposure, swap maturities and the distinction between reported debt and cash-adjusted debt.
- Reconcile the approximately $5.8 million environmental accrual in the MD&A with the $5.0 million balance-sheet environmental reserve, and monitor remediation developments.
- Assess acquisition performance and integration, working-capital needs, higher capital spending, and the effect of share repurchases and dividends on liquidity.