Matthews International Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; fiscal year ends September 30. Unaudited interim results. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended June 30, 2013 | Prior-year quarter | Nine months ended June 30, 2013 | Prior-year period |
|---|---|---|---|---|
| Sales | $250.7 | $227.5 | $732.7 | $670.2 |
| Gross profit | $91.4 | $87.7 | $266.2 | $250.4 |
| Operating profit | $30.8 | $27.5 | $72.3 | $71.7 |
| Net income attributable to Matthews shareholders | $18.0 | $16.3 | $40.4 | $42.9 |
| Diluted EPS | $0.65 | $0.58 | $1.46 | $1.51 |
| Gross margin | 36.5% | 38.6% | 36.3% | 37.4% |
Quarterly sales rose about 10%, operating profit about 12%, and diluted EPS about 12%. For the nine-month period, sales rose about 9%, but operating profit was nearly flat and diluted EPS declined about 3%. Nine-month operating margin was about 9.9%, versus 10.7% a year earlier.
Nine-month operating cash flow was $72.9, compared with $55.3 a year earlier. Investing activities used $84.6, including $67.6 for acquisitions and $17.3 of capital expenditures. Financing activities provided $8.6; cash declined $3.4 to $54.9. Working capital was $214.9 and the current ratio was 2.2 at June 30.
Total debt, including current maturities, was approximately $377.1 at June 30, versus $319.7 at September 30, 2012. Long-term debt was $359.6 and current maturities were $17.5. Domestic revolving-credit borrowings were $307.5. In July 2013, after quarter-end, the facility was increased to $500 million and extended to July 2018; it has leverage and interest-coverage covenants.
Business and material changes
Matthews operates Memorialization and Brand Solutions businesses across six segments. Nine-month sales growth primarily reflected acquisitions and higher Funeral Home Products sales. Brand Solutions sales increased, but European economic weakness weighed on Graphics Imaging.
- Memorialization nine-month sales were $391.5, up from $366.5; operating profit was $54.9, compared with $51.3. Funeral Home Products improved on higher unit volume, product mix, and production and distribution efficiencies.
- Brand Solutions sales were $341.1, up from $303.8; operating profit declined to $17.5 from $20.4. Graphics Imaging faced soft European markets and unfavorable currency effects; Merchandising Solutions’ third-quarter sales were affected by delayed or postponed customer projects.
- Gross margin fell year over year, primarily due to lower margins in Cremation and Graphics Imaging. Nine-month interest expense increased to $9.8 from $8.2, mainly reflecting higher acquisition-related debt. Investment income declined to $1.5 from $3.0.
Acquisitions included Wetzel, a European graphics-imaging business, and Pyramid, a warehouse-control systems provider. The company also acquired remaining ownership interests in Tact, Kroma, and Furnace Construction Cremators. Preliminary purchase-price allocations for Wetzel and Pyramid remained subject to adjustment.
Outlook, risks, and unusual items
Management projected fiscal 2013 EPS growth over fiscal 2012, excluding unusual costs, based on year-to-date results and current forecasts. It expected fiscal 2013 capital spending of $25–$30 million and anticipated funding planned capital spending from operating cash flow. Management said strategic cost-structure initiatives were ongoing and would result in additional unusual charges.
Nine-month unusual items totaled $6.9, including strategic-initiative and acquisition-related costs and a trade-name impairment, partly offset by a contingent-consideration liability adjustment and a gain related to settling an acquisition of a subsidiary interest. The company recorded an approximately $1.6 impairment of a Graphics Imaging trade name. No goodwill impairment was identified in the annual review, but management said the Graphics Imaging reporting unit’s implied fair value was approaching its carrying value; further deterioration could result in a future impairment charge.
Key risks identified include economic conditions, foreign exchange, materials costs, death rates, competitive and pricing pressures, acquisition risks, technology, and changes in customer distribution or loss of larger customers. A 10% strengthening of the U.S. dollar would have reduced reported nine-month sales by an estimated $28.4 and operating income by $2.2. Environmental remediation accruals were approximately $5.7; management did not expect the ultimate outcome of environmental or ordinary-course legal matters to materially affect results or financial position. Unrecognized tax benefits were $3.2, with tax examinations ongoing.
Important facts for investors to verify
- Whether the projected full-year EPS growth, excluding unusual costs, is achieved, and how management defines and reconciles those costs.
- Whether European weakness persists and whether Graphics Imaging results lead to goodwill impairment.
- Acquisition performance, final purchase-price allocations, and the effect of acquired debt and interest costs.
- Compliance with credit-facility leverage and interest-coverage covenants and the company’s capacity under the amended facility.
- Changes in environmental remediation estimates, tax exposures, and other contingencies.