Matthews International Corporation — Q2 FY2012 10-Q
Reporting period: Quarter and six months ended March 31, 2012; unaudited. Matthews designs, manufactures and markets memorialization products and brand solutions. Dollar amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Sales | $225.5; prior year $220.2 | $442.8; prior year $427.5 |
| Gross profit / margin | $84.7 / 37.6%; prior year $88.1 / 40.0% | $162.7 / 36.7%; prior year $167.9 / 39.3% |
| Operating profit | $25.3; prior year $28.5 | $44.2; prior year $50.5 |
| Net income attributable to Matthews shareholders | $15.3; prior year $16.6 | $26.5; prior year $29.8 |
| Diluted EPS | $0.54; prior year $0.56 | $0.93; prior year $1.01 |
- Six-month operating cash flow was $26.2, down from $33.8, principally reflecting lower net income. Capital expenditures were $15.9, versus $7.7 a year earlier.
- At March 31, cash was $54.7; current assets were $370.3 and current liabilities $160.2. Working capital was $210.2 and the current ratio was 2.3.
- Balance-sheet debt, including current maturities, was $317.7, compared with $317.2 at September 30, 2011. Domestic revolver borrowings were $250.0. Cash less reported debt was approximately $263.0.
- Six-month interest expense increased to $5.3 from $3.8, mainly due to higher debt levels. The effective tax rate was 34.5%, compared with 35.2% in the prior-year first half.
Changes and management commentary
- First-half sales grew 3.6%, but gross margin contracted 2.6 percentage points and operating profit fell 12.4%. Management cited higher commodity costs and weaker sales in Cemetery Products and Funeral Home Products.
- Memorialization sales declined to $239.6 from $249.0; operating profit fell to $30.5 from $37.9. Management attributed weakness primarily to lower estimated casketed and in-ground burial deaths, lower bronze memorial and mausoleum sales, higher bronze ingot and transportation costs, and implementation and severance costs.
- Brand Solutions sales increased to $203.2 from $178.5, while operating profit rose to $13.7 from $12.6. Growth reflected acquisitions and stronger sales in Marking Products and Merchandising Solutions; Graphics Imaging profit was affected by acquisition-related and severance charges.
- In March 2012, the domestic revolving facility’s maximum commitment was raised from $300 to $400 and its maturity extended to March 2017. Borrowings bear LIBOR-based rates and the facility includes leverage and interest-coverage covenants.
- Management expects FY2012 adjusted, non-GAAP EPS of $2.57–$2.62, relatively consistent with FY2011 EPS excluding unusual items. Planned FY2012 capital spending is $25–$30, which management expects to fund from operating cash flow. No revenue or GAAP EPS guidance was provided.
Risks, contingencies and unusual items
- Management identified uneven economic recovery, European financial-market and currency risks, declining death rates, competitive pricing and product mix, volatile input costs, acquisition risks, and customer or distribution changes as factors that could affect results.
- Interest-rate swaps had a $6.8 unrealized loss ($4.2 after tax) in accumulated other comprehensive loss. About $1.6 after tax was expected to be reclassified to interest expense over the next 12 months, assuming market rates remained constant.
- Environmental remediation accruals were approximately $6.0. Management said resolution could differ from accruals but did not expect a significant effect on consolidated results or financial position. The company also reported ongoing tax examinations and $3.6 of unrecognized tax benefits, excluding penalties and interest.
- Management reported no additional goodwill impairment following its second-quarter annual review. On May 4, 2012, the company announced its acquisition of Everlasting Granite Memorial Co., Inc.
Important facts for investors to verify
- Whether Memorialization demand, commodity costs and segment margins improve or further weaken in the second half.
- How the $2.57–$2.62 adjusted EPS outlook reconciles to GAAP results and which unusual items are excluded.
- Compliance with revolving-credit covenants, total debt and interest-rate exposure, including the expected swap-related expense.
- Actual capital spending, operating cash conversion, and the financial terms and contribution of the Everlasting Granite acquisition.
- Potential changes in environmental remediation costs and outcomes of tax examinations or other contingencies.