Matthews International Corporation — Q1 FY2012 Form 10-Q
Business and period: Three months ended December 31, 2011; filed February 3, 2012. Matthews operates six segments spanning Memorialization and Brand Solutions, with operations in the U.S. and internationally. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $217.2 | $207.3 | +4.8% |
| Gross profit / margin | $78.0 / 35.9% | $79.7 / 38.5% | Profit down $1.8; margin down 2.6 points |
| Operating profit / margin | $18.9 / 8.7% | $22.0 / 10.6% | Profit down 13.8% |
| Net income attributable to Matthews shareholders | $11.3 | $13.2 | Down 14.6% |
| Diluted EPS | $0.40 | $0.45 | Down $0.05 |
| Operating cash flow | $7.1 | $19.8 | Down $12.8 |
Cash, liquidity and debt: Balance-sheet cash was $54.5 million at December 31, versus $61.7 million at September 30, 2011. Working capital was $210.5 million and the current ratio was 2.3, per MD&A. Current and long-term debt totaled $316.8 million ($18.9 million current); domestic revolver borrowings were $252.5 million against a $300 million facility maturing in December 2015. The company reported a 2.68% weighted-average rate on domestic revolver borrowings. It had $6.999 million of interest-rate-swap liabilities, with approximately $1.6 million of after-tax accumulated loss expected to enter interest expense over the next 12 months, assuming rates remain unchanged.
Investing cash use was $5.7 million, including $5.7 million of capital expenditures. Financing cash use was $8.1 million, including $7.3 million of share repurchases and $2.5 million of dividends. Cash declined $7.2 million during the quarter. Fiscal 2012 capital spending was projected at $25–30 million.
Comparative developments and segment results
- Sales growth reflected higher results across Brand Solutions and in Cremation, partly offset by declines in Cemetery Products and Funeral Home Products. Brand Solutions sales rose to $104.1 million from $86.9 million; Memorialization sales fell to $113.2 million from $120.4 million.
- Cemetery Products sales declined to $45.2 million from $50.5 million and operating profit to $4.5 million from $10.1 million. Management cited lower bronze memorial volume, unfavorable mix, lower mausoleum sales, higher bronze costs, ERP implementation and severance costs.
- Funeral Home Products sales fell to $58.6 million from $61.7 million; operating profit was approximately flat at $6.5 million. Lower casketed deaths and unfavorable mix pressured sales, offset in profit by productivity and cost-control initiatives.
- Graphics Imaging sales rose to $70.4 million from $60.0 million and operating profit to $5.0 million from $3.7 million, reflecting volume growth, particularly in Europe, and the Kroma acquisition. Marking Products and Merchandising Solutions also increased sales and operating profit, with acquisitions contributing to Marking Products growth.
- Gross margin contracted primarily from lower Memorialization sales and higher commodity costs. Interest expense increased to $2.6 million from $1.8 million, mainly due to higher debt levels. The effective tax rate was 34.6%, versus 35.9%.
- Operating cash flow fell mainly because working capital used approximately $11.0 million, including inventory increases and fiscal year-end compensation-related payments.
Outlook, risks and contingencies
Management forecast fiscal 2012 EPS growth in the mid-single-digit percentage range over fiscal 2011, excluding unusual items in both years. The forecast anticipated lower Q1 earnings year over year, with growth expected in the remainder of the fiscal year. Management said acquisitions were expected to benefit FY2012 and described ongoing productivity and cost-reduction efforts; the filing does not provide specific quarterly or full-year revenue guidance.
Risks highlighted include uneven economic recovery, European financial-market and currency volatility, relatively flat death rates, competitive pricing and product mix, commodity-cost volatility, acquisition risks, and technology and customer-distribution risks. A 10% strengthening of the U.S. dollar was estimated to reduce quarterly reported sales by $8.7 million and operating income by $0.771 million. Management expected available liquidity, operating cash flow and borrowing capacity to cover foreseeable capital needs.
Environmental remediation accruals totaled approximately $6.1 million; management believed the ultimate outcome would not materially affect results or financial position, but final costs could differ from reserves. The company also disclosed $3.685 million of unrecognized tax benefits, excluding interest and penalties, and ongoing tax examinations. Management did not expect ordinary-course legal proceedings to have a material adverse effect. Disclosure controls were deemed effective, with no reported material change in internal controls during the quarter.
Important facts for investors to verify
- Whether the projected second-half earnings growth can offset the weaker first quarter and support the mid-single-digit FY2012 EPS outlook.
- Whether Memorialization demand, bronze and other commodity costs, ERP-related delays, and segment margins improve.
- Working-capital trends and the ability to generate stronger operating cash flow while funding planned capital spending and repurchases.
- Debt levels, covenant compliance and interest-rate exposure, including the timing and impact of swap-related losses.
- Potential changes in environmental remediation costs and resolution of uncertain tax positions.
- The filing reports balance-sheet cash of $54.5 million, while MD&A cites $53.1 million for December 31; the source text does not explain this difference.