Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2007
Business Overview: Matthews is 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. Approximately 75% of sales originated in the United States.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 | Change |
|---|---|---|---|
| Net Sales | $749.4 million | $715.9 million | +4.7% |
| Gross Profit | $280.5 million | $271.9 million | +3.1% |
| Gross Margin | 37.4% | 38.0% | -0.6 pts |
| Operating Profit | $111.8 million | $113.9 million | -1.8% |
| Operating Margin | 14.9% | 15.9% | -1.0 pts |
| Net Income | $64.7 million | $66.4 million | -2.6% |
| Diluted EPS | $2.04 | $2.06 | -1.0% |
| Operating Cash Flow | $74.6 million | $66.3 million | +12.5% |
| Long-Term Debt | $142.3 million | $120.3 million | +18.3% |
| Working Capital | $143.1 million | $105.6 million | +35.5% |
| Current Ratio | 2.2 | 1.8 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 4.7% driven by higher sales in five of six segments and favorable foreign currency impacts ($13.6 million). The Bronze segment saw price increases due to higher bronze ingot costs. The Casket segment benefited from a transition to company-owned distribution.
- Profitability Decline: Operating profit decreased 1.8% despite revenue growth. This was primarily due to a net unfavorable impact of $8.8 million from unusual items, including a $9.4 million charge for accelerated earn-out payments related to the Milso Industries acquisition and severance costs. Higher raw material costs (bronze ingot) also pressured margins.
- Segment Performance:
- Bronze: Operating profit increased to $66.3 million (from $65.0 million) due to sales volume and currency, offset by material costs.
- Casket: Operating profit dropped significantly to $11.8 million (from $17.0 million) due to $10.0 million in special charges (earn-out acceleration and severance), partially offset by favorable litigation settlements.
- Merchandising Solutions: Operating profit doubled to $5.7 million (from $2.9 million) due to a significant project and a $1.3 million gain on the sale of its consulting business.
- Balance Sheet: Long-term debt increased due to higher borrowings under the Revolving Credit Facility. Working capital improved significantly due to higher inventory levels associated with the Casket segment's distribution expansion.
Guidance, Outlook, and Risks
- 2008 Guidance: Management expects fiscal 2008 diluted earnings per share in the range of $2.48 to $2.54, representing 12% to 15% growth over fiscal 2007 on an adjusted basis. This excludes unusual items.
- Outlook Factors: The company anticipates continued high bronze metal costs and ongoing integration of company-owned distribution in the Casket segment. Cost structure initiatives in the Graphics Imaging segment are expected to improve profitability in 2008.
- Risks and Contingencies:
- Legal Proceedings: Pending multi-state investigation into alleged anti-competitive practices in the funeral service industry. A lawsuit filed by Batesville Casket Company regarding interference with a supply agreement remains pending, though management does not expect a material adverse impact.
- Environmental: An accrual of $8.7 million exists for environmental remediation obligations, primarily related to a landfill site in York, Pennsylvania.
- Market Risks: Exposure to foreign currency exchange rates (a 10% adverse change would reduce sales by $18.7 million) and commodity price fluctuations (bronze, steel, wood).
Investor Verification Checklist
- Unusual Items Impact: Verify the sustainability of earnings by excluding the $8.8 million net unfavorable impact of unusual items (primarily Milso earn-out acceleration) from the 2007 operating profit.
- Raw Material Costs: Monitor the trajectory of bronze ingot and steel prices, as these directly impact the gross margin of the Bronze and Casket segments.
- Legal Exposure: Track the status of the multi-state Attorney General investigation and the Batesville Casket Company lawsuit for potential future liabilities.
- Debt Covenants: Review the company's leverage ratio compliance under the amended Revolving Credit Facility (increased to $225 million).
- Segment Mix: Assess the long-term profitability impact of the Casket segment's transition to company-owned distribution, which increases both gross margin and selling/administrative expenses.