Business context and reporting period
Matthews International Corporation filed this Form 10-K for the fiscal year ended September 30, 2012. The company operates six segments across memorialization products and brand solutions. The filing also provides unaudited fourth-quarter results; this is an annual filing, not a standalone quarterly report. Dollar figures below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Sales | $900.3 | $898.8 |
| Gross profit / margin | $336.6 / 37.4% | $351.7 / 39.1% |
| Operating profit / margin | $93.6 / 10.4% | $118.5 / 13.2% |
| Net income attributable to Matthews shareholders | $55.8 | $72.4 |
| Diluted EPS | $1.98 | $2.46 |
| Cash from operating activities | $82.1 | $95.6 |
| Capital expenditures | $33.2 | $22.4 |
| Cash and cash equivalents at year-end | $58.3 | $61.7 |
| Total debt, including current maturities | $319.7 | $317.2 |
Sales were nearly flat, up about 0.2%, while gross profit declined about 4.3% and operating profit about 21.0%. Operating cash flow less capital expenditures was approximately $48.9 million, versus $73.1 million in FY2011. Working capital was $204.4 million (down from $208.1 million); the current ratio was 2.1 versus 2.3. The amended domestic revolving credit facility provides up to $400 million and matures in March 2017; $281.3 million was outstanding at year-end, at a weighted-average rate of 2.83%. The company reported compliance with required leverage and interest-coverage ratios in the supplied text.
Fourth-quarter results
For the quarter ended September 30, 2012, sales were $230.1 million, operating profit $21.9 million, net income attributable to Matthews shareholders $13.0 million, and EPS $0.47. In the comparable FY2011 quarter, these were $239.8 million, $33.0 million, $20.7 million, and $0.71, respectively.
Material changes versus the prior year
- Memorialization sales fell to $492.9 million from $507.3 million; operating profit fell to $63.6 million from $85.0 million. Cemetery Products and Funeral Home Products were affected by fewer estimated casketed deaths, weaker burial-related demand, commodity costs and unusual charges.
- Brand Solutions sales increased to $407.5 million from $391.5 million, but operating profit declined to $30.0 million from $33.5 million. Marking and Fulfillment Systems and Merchandising Solutions grew; Graphics Imaging sales and profit declined, particularly amid weaker European activity.
- Foreign currency movements reduced FY2012 sales by approximately $18.4 million versus FY2011 and operating profit by about $2.1 million. Higher commodity costs and unusual charges also weighed on results.
- Fiscal 2012 included approximately $7.8 million of net pre-tax unusual charges, principally cost-reduction severance and Cemetery Products ERP implementation costs. Management also cited acquisition-related expenses and asset adjustments, partly offset by specified gains and contingent-consideration adjustments.
- Operating cash flow decreased from $95.6 million to $82.1 million, mainly reflecting lower earnings and working-capital use; FY2012 included a $5.0 million contribution to the principal pension plan.
Outlook, risks and contingencies
Management projected FY2013 EPS growth over FY2012 excluding unusual costs. It expected some FY2012 challenges to continue and said further unusual costs were likely in FY2013 as cost-reduction programs and Cemetery Products ERP remediation continued. Management expected solid demand in Merchandising Solutions and Marking and Fulfillment Systems and continued growth in domestic cremation equipment sales. FY2013 capital spending was estimated at approximately $30 million, expected to be funded from operating cash flow.
Key disclosed risks include economic weakness, currency movements, raw-material price volatility and limited ability to pass through cost increases, changes in death and cremation rates, competitive pricing and offshore imports, customer and distribution changes, acquisition integration, and technology or product-development challenges.
Environmental remediation accruals were $5.7 million, including $0.8 million current; management did not expect a material effect from the matters described, though final costs could differ. Management reported no expected material adverse effect from ordinary-course legal proceedings. The company had $2.7 million of unrecognized tax benefits, excluding penalties and interest. The pension plan was underfunded by $79.3 million on the disclosed funded-status measure; discount-rate and asset-return assumptions affect reported obligations and expense.
After year-end, on November 26, 2012, the company completed its acquisition of Wetzel for approximately €42.5 million ($55.0 million) cash-free and debt-free, plus potential contingent consideration. The board had authorized stock repurchases; $31.0 million was spent in FY2012, and 1,814,651 shares remained available under the authorization at year-end. FY2012 dividends were $0.37 per share; a $0.10-per-share fourth-quarter dividend was paid in November 2012.
Important facts for investors to verify
- Whether cost actions and ERP remediation deliver expected savings, and the amount and timing of additional FY2013 unusual charges.
- Whether memorialization demand stabilizes and whether growth in cremation and brand-solutions businesses offsets weaker burial-related sales.
- Trends in commodity costs, foreign exchange and the company’s ability to recover cost increases through pricing.
- Debt levels, facility covenant headroom, interest-rate exposure and the effect of swaps; the filing reports a $9.1 million pre-tax unrealized swap loss at year-end.
- Integration and performance of acquisitions, including Wetzel, and the eventual cost of contingent consideration and the Kroma ownership arrangement.
- Changes in pension funding status, environmental remediation estimates and uncertain tax positions.