Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008 (Nine months ended June 30, 2008)
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: Bronze, Casket, Cremation, Graphics Imaging, Marking Products, and Merchandising Solutions.
Key Financial Metrics
| Metric (in thousands) | Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 |
|---|---|---|
| Sales | $599,445 | $563,880 |
| Gross Profit | $239,141 | $208,559 |
| Gross Margin | 39.9% | 37.0% |
| Operating Profit | $97,904 | $76,958 |
| Net Income | $59,092 | $44,501 |
| Diluted EPS | $1.90 | $1.40 |
| Operating Cash Flow | $78,505 | $42,510 |
| Cash and Equivalents (Balance Sheet) | $50,855 | $44,002 |
| Total Debt (Current + Long-term) | $267,142 | $169,330 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 6.3% year-over-year, driven by higher sales in Memorialization businesses, the acquisition of Saueressig GmbH & Co. KG (78% interest) in May 2008, and favorable foreign currency exchange rates ($20.5 million impact).
- Profitability: Operating profit increased 27.2% to $97.9 million. Gross margin expanded to 39.9% from 37.0%, aided by cost structure initiatives and the Saueressig acquisition.
- Segment Performance:
- Memorialization: Bronze and Casket segments saw significant sales and operating profit growth. Casket operating profit improved significantly compared to the prior year, which included $10 million in special charges.
- Brand Solutions: Graphics Imaging sales rose due to the Saueressig acquisition. Merchandising Solutions sales declined due to the absence of a $10 million one-time project from the prior year and the sale of its marketing consultancy business.
- Debt Levels: Total debt increased significantly due to borrowings used to fund the Saueressig acquisition ($90.9 million cash used in investing activities for acquisitions).
- Tax Rate: The effective tax rate decreased to 34.9% from 37.6%, primarily due to a $1.9 million reduction in net deferred tax liabilities reflecting lower statutory rates in Europe.
Guidance, Outlook, and Risks
- Guidance: Management expects fiscal 2008 diluted earnings per share growth in the range of $2.48 to $2.50. This excludes the net impact of unusual items from fiscal 2007 and the one-time tax adjustment.
- Strategy: The company targets 12% to 15% annual earnings per share growth through internal growth, acquisitions, and share repurchases.
- Risks and Contingencies:
- Commodity Prices: Exposure to fluctuations in bronze ingot and steel prices; cold-rolled steel prices increased in the second half of fiscal 2008.
- Market Conditions: Continued weakness in the U.K. graphics market and a slowdown in domestic markets served by the Marking Products segment.
- Acquisition Integration: Risks associated with integrating Saueressig and the Casket segment's transition to direct distribution.
- Environmental: An accrual of approximately $8.4 million exists for environmental remediation obligations.
Investor Verification Checklist
- Verify the integration progress and financial contribution of the Saueressig acquisition to the Graphics Imaging segment.
- Monitor commodity costs (bronze and steel) and their impact on gross margins in the Bronze and Casket segments.
- Assess the sustainability of the Casket segment's operating profit improvement, excluding the one-time charges from the prior year.
- Review the debt service capacity given the increased leverage from the Saueressig acquisition and rising interest rates.
- Confirm the status of the Merchandising Solutions segment recovery following the loss of the one-time project and consultancy business.