Matthews International Corporation — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2013; the filing also reports fourth-quarter results. Matthews operates in Memorialization (cemetery, funeral-home and cremation products) and Brand Solutions (graphics imaging, marking and fulfillment, and merchandising). All amounts below are in U.S. dollars.
Financial performance and liquidity
- Revenue: $985.4 million, up 9.4% from $900.3 million in FY2012. The filing attributes growth principally to acquisitions and higher Funeral Home Products and Merchandising Solutions sales.
- Profit and margins: Gross profit was $356.5 million (36.2% of sales), versus $336.6 million (37.4%). Operating profit was $95.8 million (9.7% margin), versus $93.6 million (10.4%). Net income attributable to Matthews shareholders was $54.9 million, down from $55.8 million; diluted EPS was $1.98 versus $1.98.
- Fourth quarter: Sales were $252.7 million, operating profit $23.5 million, shareholder net income $14.5 million, and diluted EPS $0.52. FY2012 fourth-quarter diluted EPS was $0.47.
- Cash flow: Operating cash flow was $109.3 million, up from $83.3 million. Capital expenditures were $24.9 million, implying operating cash flow less capital expenditures of approximately $84.4 million. Acquisitions used $74.0 million, net of cash acquired.
- Debt and liquidity: Total debt, including current maturities, short-term borrowings and capital leases, was $373.7 million, versus $319.7 million. Cash was $58.0 million; working capital was $222.0 million and the current ratio was 2.2. The domestic revolving facility was increased to $500 million and extended to July 2018; domestic borrowings were $305.0 million at year-end.
- Other metrics: Total assets were $1.215 billion. The FY2013 effective tax rate was 32.7%, compared with 34.2%. The annual dividend per share was $0.41; the company repurchased 619,981 shares for $21.6 million.
Material changes versus FY2012
- Revenue increased, but gross margin declined by 1.2 percentage points, primarily due to lower margins in Brand Solutions.
- Operating profit rose modestly despite net unusual pre-tax charges increasing to approximately $14.1 million from $7.8 million. Charges included strategic cost-reduction initiatives, Cemetery Products ERP implementation costs, acquisition costs and a $1.6 million trade-name impairment; gains and contingent-consideration adjustments partly offset them.
- Memorialization operating profit increased to $72.9 million from $63.6 million, led by Funeral Home Products. Brand Solutions operating profit decreased to $22.9 million from $30.0 million, with Graphics Imaging contributing the largest decline.
- Major FY2013 acquisitions included Wetzel, a European graphics imaging business, and Pyramid, a fulfillment-systems provider. Acquisition spending was $74.0 million, and goodwill rose to $524.6 million from $476.2 million.
- Debt increased alongside acquisition activity. Operating cash flow improved, while cash remained broadly stable year over year.
Outlook, risks and contingencies
- FY2014 outlook: Management projected EPS growth over FY2013 excluding unusual costs. It expected lower earnings in the first quarter, with year-over-year growth for the remainder of the year. Cost-structure initiatives and related unusual costs were expected to continue, with benefits anticipated to carry into FY2014. Recent acquisitions were expected to contribute.
- Management expected European economic weakness to persist and anticipated a flat to slightly lower U.S. casketed death rate after the increase that supported FY2013 Memorialization results.
- Key risks include economic and foreign-exchange volatility, raw-material costs and limits on passing through price increases, changes in death and cremation rates, competition and customer purchasing concentration, acquisition integration, and technology or product-demand changes. A 10% strengthening of the U.S. dollar was estimated to reduce reported annual sales by $38.2 million and operating income by $2.9 million.
- Graphics Imaging’s estimated reporting-unit fair value was approaching carrying value; further deterioration could require a future impairment charge. A $1.6 million trade-name impairment was recorded in FY2013.
- Environmental remediation accruals were $5.3 million. Unrecognized tax benefits were approximately $4.5 million. The company was party to ordinary-course legal proceedings; management did not expect these or the environmental matters to materially affect consolidated results or financial position.
- Management and the auditor concluded internal control over financial reporting was effective as of September 30, 2013. The auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- How much of FY2013 revenue and expected FY2014 growth reflects acquired businesses versus organic growth, and whether acquisition synergies materialize.
- Whether Brand Solutions margins recover, particularly in Graphics Imaging amid weak European conditions, and whether further impairment testing results in charges.
- Whether cost initiatives deliver expected savings relative to continuing restructuring and ERP-related costs.
- Debt levels, covenant headroom, interest-rate exposure and the capacity to fund acquisitions, dividends and repurchases; also note that $46.6 million of cash was held by foreign subsidiaries considered permanently reinvested.
- Whether the FY2014 EPS outlook, expressly excluding unusual costs, is achieved; the filing does not provide a numerical EPS target.