Matthews International Corporation — Form 10-Q
Business context and period: The company designs and manufactures memorialization products and brand solutions. This unaudited report covers the third quarter and first nine months of fiscal 2011, ended June 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Sales | $231.5 | $213.3 | $659.0 | $607.2 |
| Gross profit | $91.9 | $85.0 | $259.8 | $236.1 |
| Operating profit | $35.1 | $34.5 | $85.5 | $83.8 |
| Net income attributable to Matthews shareholders | $21.9 | $20.4 | $51.7 | $49.3 |
| Diluted EPS | $0.74 | $0.68 | $1.75 | $1.64 |
- Third-quarter sales grew 8.5%, attributable net income 7.2%, and diluted EPS 8.8% year over year. For the first nine months, sales grew 8.5%, attributable net income 4.7%, and diluted EPS 6.7%.
- Nine-month gross margin increased to 39.4% from 38.9%; operating margin was approximately 13.0% versus 13.8%. Gross-profit gains reflected stronger Brand Solutions sales and cost initiatives, partly offset by higher commodity costs. Higher selling and administrative expenses, including acquisition impacts, weighed on operating margin.
- Nine-month operating cash flow was $62.0, down from $83.5, principally due to working-capital changes, especially higher receivables and inventory. Investing cash outflow was $47.8, including $31.5 of net acquisition spending and $15.9 of capital expenditures; financing cash outflow was $28.5, including $34.2 of distributions to noncontrolling interests.
- Cash was $54.7 at June 30, 2011, versus $59.7 at September 30, 2010. Working capital was $212.1 versus $187.5, and the current ratio was 2.4 versus 2.3.
- Total debt, including current maturities, was approximately $268.7 at June 30, 2011, versus $237.3 at September 30, 2010. Domestic revolving-credit borrowings were $204.0; the facility provides up to $300.0 and matures in December 2015. Reported weighted-average borrowing rate on the domestic facility was 2.98%.
Changes and business developments
- Sales increased in all segments for the nine-month period. Growth was led by Casket, Graphics Imaging, and Marking Products, with acquisitions contributing materially. Bronze sales were nearly flat; excluding acquisition and currency effects, the company reported lower volume and an unfavorable product mix.
- Operating profit increased in Casket, Cremation, Graphics Imaging, and Marking Products, but declined in Bronze and Merchandising Solutions. Bronze faced lower sales, unfavorable mix, and higher bronze costs; Merchandising Solutions was affected by mix and delayed projects.
- Acquisitions included Freeman Metal Products (caskets), Innovative Picking Technologies (marking products), and purchases of remaining interests in Saueressig and Reproflex. The company completed the purchase of the remaining 22% of Saueressig for €19.3 million ($27.4 million) in April.
- After quarter-end, the company completed acquisition of a 61.5% interest in Turkey-based Kroma; it expects to acquire an additional 8.5% in fiscal 2012.
- Goodwill rose to $447.5 from $405.2, largely reflecting acquisitions and currency translation. The fiscal 2011 second-quarter annual impairment review resulted in no additional impairment.
Outlook, risks, and contingencies
- Management maintained its estimate for fiscal 2011 EPS growth in the mid-to-high single-digit percentage range versus fiscal 2010, excluding unusual items. It expected acquisitions and cost initiatives to benefit fourth-quarter earnings year over year.
- Management cited rising commodity costs, casketed-death-rate trends, competitive pricing, and shifting product mix as ongoing challenges. Recent volume growth in Casket and Brand Solutions and higher U.S. cremation-equipment deliveries were described as encouraging.
- Key exposures include commodity prices, foreign exchange, interest rates, acquisitions, demand and pricing changes, and customer or distribution risks. A 10% strengthening of the U.S. dollar would have reduced nine-month reported sales by an estimated $24.9 and operating income by $2.9.
- Interest-rate swaps had a $4.6 unrealized loss ($2.8 after tax); about $1.3 was expected to be recognized as interest expense over the next 12 months if rates remained unchanged. Credit facilities require leverage and interest-coverage ratios.
- Environmental remediation accruals were approximately $6.6. The company is involved in environmental matters and ordinary-course legal proceedings; management did not expect the outcomes to materially affect consolidated results, financial position, or cash flows. Tax examinations are ongoing; unrecognized tax benefits were $3.1, excluding penalties and interest.
- Management stated that operating cash flow and borrowing capacity should be sufficient for foreseeable capital needs. Fiscal 2011 capital spending was expected to be about $20.0. Interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Whether working-capital investment, particularly receivables and inventory, converts into cash in subsequent periods.
- Whether acquisitions deliver expected growth and synergies, and how resulting debt and interest costs evolve.
- Whether commodity inflation, pricing, and product mix continue to pressure Bronze and Casket profitability.
- Progress against fiscal 2011 EPS guidance and the stated fourth-quarter improvement expectations.
- Developments in environmental remediation, tax examinations, and compliance with credit-facility covenants.