Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009 (First Quarter of Fiscal Year 2010)
Business Overview: A designer, manufacturer, and marketer of memorialization products (bronze memorials, caskets, cremation equipment) and brand solutions (graphics imaging, marking products, merchandising). Operations are divided into six segments across the U.S., Europe, Asia, and other regions.
Key Financial Metrics
| Metric | Q1 2010 (Dec 31, 2009) | Q1 2009 (Dec 31, 2008) |
|---|---|---|
| Sales | $192,973,000 | $191,286,000 |
| Gross Profit | $73,390,000 (38.0% margin) | $67,852,000 (35.5% margin) |
| Operating Profit | $22,176,000 (11.5% margin) | $20,079,000 (10.5% margin) |
| Net Income | $13,656,000 | $11,280,000 |
| Net Income Attributable to Shareholders | $12,996,000 | $11,289,000 |
| Earnings Per Share (Diluted) | $0.43 | $0.37 |
| Cash and Equivalents | $59,828,000 | $57,732,000 |
| Working Capital | $167,030,000 | $173,082,000 |
| Total Debt (Current + Long-term) | $251,524,000 | $251,718,000 |
| Operating Cash Flow | $23,645,000 | $19,636,000 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 0.9% year-over-year, driven by recent acquisitions and a favorable $6.2 million foreign currency impact. Excluding these factors, sales declined in five of six segments due to the global recession and lower domestic casketed death rates.
- Margin Expansion: Gross profit margin improved to 38.0% from 35.5%, attributed to the absence of unusual charges present in the prior year and cost structure initiatives, particularly in the Saueressig operation.
- Expense Increases: Selling and administrative expenses rose to $51.2 million (26.5% of sales) from $47.8 million (25.0% of sales), primarily due to higher pension expenses and costs associated with a casket distributor acquisition.
- Interest Expense: Decreased to $1.9 million from $3.3 million due to lower interest rates and reduced average debt levels.
- Acquisitions: The company acquired United Memorial Products, Inc. (UMP) in December 2009 for $10 million plus $3.5 million in deferred consideration.
Guidance, Outlook, and Risks
- Outlook: Management maintains its earnings guidance for fiscal 2010, expecting earnings to be relatively consistent with fiscal 2009 (excluding unusual items), despite an anticipated $5.1 million increase in pension expense for the full year.
- Strategy: Growth strategy focuses on internal productivity, new product development, acquisitions, and share repurchases.
- Stock Repurchases: The Board authorized an additional 2.5 million shares for repurchase in January 2010. During Q1 2010, the company repurchased 146,636 shares at an average price of $35.07.
- Risks:
- Economic Conditions: Continued weakness in domestic and global economies negatively impacts sales volume.
- Foreign Currency: A 10% strengthening of the U.S. dollar would decrease sales by $7.5 million and operating income by $816,000 for the quarter.
- Pension Costs: Significant increase in pension expense due to market impacts on plan assets and obligation valuations.
- Environmental: An accrual of $7.2 million exists for environmental remediation obligations, primarily related to the former York Group site.
Investor Verification Checklist
- Acquisition Integration: Verify the financial contribution and integration progress of the United Memorial Products (UMP) acquisition.
- Pension Liability: Monitor the impact of the projected $5.1 million increase in pension expense on full-year 2010 profitability.
- Debt Covenants: Confirm compliance with leverage and interest coverage ratios required by the $225 million Revolving Credit Facility.
- Foreign Exchange Exposure: Assess the sensitivity of future earnings to fluctuations in the Euro and other foreign currencies given the significant international operations.
- Environmental Reserves: Review updates on the $7.2 million environmental remediation accrual and potential for additional costs.