Matthews International Corporation — FY2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2011 (not a standalone fourth-quarter filing). Matthews operates six segments across Memorialization—Bronze, Casket and Cremation—and Brand Solutions—Graphics Imaging, Marking Products and Merchandising Solutions. About 62% of FY2011 sales were generated in the U.S.; Europe accounted for 33%.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $898.8 million | $821.8 million | +9.4% |
| Gross profit / margin | $351.7 million / 39.1% | $323.4 million / 39.3% | Profit +8.7%; margin -0.2 percentage point |
| Operating profit / margin | $118.5 million / 13.2% | $116.6 million / 14.2% | Profit +1.7%; margin -1.0 point |
| Net income attributable to Matthews shareholders | $72.4 million | $69.1 million | +4.8% |
| Diluted EPS | $2.46 | $2.31 | +6.5% |
| Operating cash flow | $95.6 million | $106.5 million | Down $10.9 million |
- Fourth-quarter FY2011 sales were $239.8 million, operating profit $33.0 million, attributable net income $20.7 million and EPS $0.71. In Q4 FY2010, these were $214.7 million, $32.8 million, $19.7 million and $0.67, respectively.
- FY2011 operating cash flow was reduced in part by a $23.1 million working-capital use and a $9.0 million contribution to the principal pension plan. Capital expenditures were $22.4 million; acquisition spending, net of cash acquired, was $84.4 million.
- At September 30, 2011, cash and cash equivalents were $60.3 million, working capital $208.1 million and the current ratio 2.3. Total debt, including current maturities, was $317.2 million, versus $237.3 million a year earlier; cash less total debt was approximately $256.9 million net debt.
- Segment sales and operating profit: Bronze $224.8 million and $52.5 million; Casket $238.8 million and $26.8 million; Cremation $43.8 million and $5.7 million; Graphics Imaging $269.0 million and $22.4 million; Marking Products $61.9 million and $7.8 million; Merchandising Solutions $60.6 million and $3.3 million.
Material changes versus FY2010
- Sales growth reflected acquisitions, stronger Brand Solutions volumes and a favorable $11.4 million currency impact. Acquisitions were a major contributor; excluding acquisitions and currency effects, Bronze and Casket sales declined.
- Higher Brand Solutions sales and cost initiatives supported gross-profit growth. Higher bronze and steel costs, unfavorable product mix in Bronze and Casket, and increased selling and administrative expenses constrained profitability.
- Brand Solutions operating profit increased to $33.5 million from $29.3 million; Memorialization operating profit decreased to $85.0 million from $87.3 million. Bronze operating profit fell $3.7 million, while Marking Products and Merchandising Solutions improved.
- Debt increased alongside acquisition activity. The company repurchased 1.32 million shares for $44.6 million and paid $9.6 million in dividends during FY2011.
Outlook, risks and unusual items
- Management estimated FY2012 EPS growth in the mid-single-digit percentage range over FY2011, excluding unusual items in both years. It expected FY2012 first-quarter earnings to be below the prior-year quarter, with growth later in the year supporting the full-year objective. FY2012 capital spending was estimated at approximately $30 million.
- Management cited uneven economic recovery, European financial-market uncertainty and currency exposure, relatively flat death rates, competitive pricing and product mix, and volatile commodity costs. Cost-reduction and productivity initiatives and recent acquisitions were expected to support results.
- Raw-material cost increases may not be promptly passed through to customers. A 10% adverse currency move was estimated to reduce reported annual sales by $34.7 million and operating income by $4.0 million. The company also faces interest-rate, pension-assumption, acquisition-integration and changing cremation-rate risks.
- Environmental remediation accruals were $6.2 million at year-end; management did not expect the ultimate outcome to significantly affect consolidated results or financial position, though final costs could differ. Management also did not expect ordinary-course legal proceedings to have a material adverse effect. Unrecognized tax benefits were $2.9 million.
- FY2011 included a favorable $0.6 million income-tax adjustment. Interest-rate swaps had a $7.2 million fair-value liability at year-end; approximately $1.3 million after tax was expected to affect interest expense over the next 12 months.
Key facts for investors to verify
- How much FY2012 growth is expected to come from acquired businesses versus organic performance, and whether integration benefits materialize.
- Whether commodity costs, especially bronze and steel, and product mix improve enough to stabilize margins.
- Debt levels, covenant headroom, refinancing/renewal of the European facility maturing in September 2012, and the cash impact of the Kroma minority-interest option.
- Cash conversion and working-capital trends, pension funding and assumptions, and the adequacy of environmental reserves.
- Whether management’s mid-single-digit FY2012 EPS outlook, including the expected weaker first quarter, is achieved.