Matthews International Corporation — Q1 FY2011 Form 10-Q
Reporting period: Three months ended December 31, 2010; compared with the three months ended December 31, 2009. Balance-sheet comparisons are with September 30, 2010. Amounts below are in U.S. dollars; financial results are rounded to millions unless noted.
Business context
Matthews designs, manufactures, and markets memorialization products and brand solutions through six segments: Bronze, Casket, Cremation, Graphics Imaging, Marking Products, and Merchandising Solutions. The company operates in the U.S. and internationally.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Sales | $207.3 million | $193.0 million | +7.4% |
| Gross profit / margin | $79.7 million / 38.5% | $73.4 million / 38.0% | Margin +0.5 percentage points |
| Operating profit / margin | $22.0 million / 10.6% | $22.2 million / 11.5% | Profit slightly lower |
| Net income attributable to Matthews shareholders | $13.2 million | $13.0 million | +1.7% |
| Diluted EPS | $0.45 | $0.43 | +$0.02 |
| Operating cash flow | $19.8 million | $23.6 million | -$3.8 million |
Gross-margin improvement reflected higher sales and cost-structure initiatives, partly offset by higher commodity costs. Selling and administrative expenses increased to $57.8 million from $51.2 million, largely due to acquisitions; as a share of sales, they rose to 27.9% from 26.5%. Income before taxes was $21.1 million versus $21.3 million; the effective tax rate was 35.9% versus 36.0%.
Operating cash flow declined principally because of working-capital changes, including year-end compensation-related payments. Investing activities used $31.9 million, including $26.7 million for acquisitions and $3.7 million of capital expenditures. Financing activities provided $6.3 million. Cash decreased $6.0 million during the quarter to $53.7 million.
At December 31, 2010, working capital was $188.5 million and the current ratio was 2.4. Total debt, including current maturities, was approximately $248.2 million, compared with $237.3 million at September 30; cash was $53.7 million. The company’s new domestic revolving facility provides up to $300 million, with $203 million outstanding. It matures in December 2015 and has leverage- and interest-coverage covenants.
Changes versus the prior-year quarter
- Sales increased across all business segments, mainly from acquisitions and higher Brand Solutions volume; unfavorable currency movements reduced sales by about $4.4 million.
- Memorialization sales rose to $120.4 million from $108.4 million, chiefly reflecting acquisitions. Casket sales excluding acquisitions were slightly lower, and management estimated casketed deaths declined year over year.
- Brand Solutions sales increased to $86.9 million from $84.6 million. Graphics Imaging sales were nearly flat, with currency headwinds offsetting growth in several markets.
- Despite higher sales and gross profit, operating profit edged lower as higher selling and administrative costs offset some gross-margin gains. Segment performance was mixed: Marking Products improved, while Bronze, Cremation, Graphics Imaging, and Merchandising Solutions operating profit declined.
Outlook, risks, and unusual items
- Management maintained its fiscal 2011 EPS growth estimate at mid-to-high single digits versus fiscal 2010, excluding unusual charges. It expected fiscal Q2 EPS growth in the mid-single-digit range versus Q2 FY2010, also excluding unusual charges.
- Management cited rising commodity costs and the casketed-death-rate trend as challenges for Bronze and Casket, and remained cautious about the recovery and sales consistency in Brand Solutions.
- In October 2010, Matthews acquired Freeman Metal Products for $22.8 million, with up to $6.0 million of additional contingent consideration tied to performance over three years. It also acquired the remaining 25% of Reproflex.
- The company entered a new $300 million domestic revolver, replacing its former $225 million facility. Interest-rate swaps had a $3.7 million fair-value loss; approximately $1.4 million after tax was expected to be reclassified to interest expense over the next twelve months, assuming rates stayed at period-end levels.
- Environmental remediation accruals were approximately $6.7 million in the MD&A disclosure. Management said final costs could differ but did not expect the ultimate outcome to materially affect consolidated results or financial position. Legal proceedings were described as ordinary-course matters with no material adverse effect expected.
- Other risks include currency movements, material costs and the ability to pass them through, competition and pricing pressure, acquisition risks, customer or distribution changes, and pension assumptions. A 10% stronger U.S. dollar was estimated to reduce quarterly reported sales by $7.6 million and operating income by $782,000.
- The company agreed to purchase the remaining 22% of Saueressig for €17.4 million in October 2011. The amount was included in noncontrolling interests in equity at December 31, 2010.
Important facts for investors to verify
- Whether acquisition-driven sales growth translates into sustained operating-profit and margin improvement as acquisition costs and commodity pressures evolve.
- Progress against the EPS outlook, including the assumptions behind the “excluding unusual charges” comparison.
- Debt levels, revolver availability, covenant headroom, variable-rate exposure, and the planned Saueressig minority-interest purchase.
- Cash conversion and working-capital trends, given lower operating cash flow and acquisition-related investment outlays.
- Environmental remediation exposure, tax uncertainties, and the performance-based contingent payment for Freeman.
- Effects of casketed-death trends, foreign exchange, and commodity costs on segment sales and profitability.