Matthews International Corporation — Q1 FY2014 10-Q
Business context and period: The filing covers the three months ended December 31, 2013, the first quarter of fiscal 2014. Matthews designs, manufactures, and markets memorialization products and brand solutions. All financial amounts below are in U.S. dollars; figures are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $229.9 | $225.6 |
| Gross profit / margin | $81.4 / 35.4% | $80.0 / 35.4% |
| Operating profit | $15.0 | $16.5 |
| Income before taxes | $12.0 | $12.4 |
| Net income attributable to Matthews shareholders | $7.9 | $8.3 |
| Diluted earnings per share | $0.29 | $0.30 |
| Cash provided by operating activities | $12.3 | $7.7 |
Operating margin was approximately 6.5%, versus 7.3% a year earlier. Selling and administrative expenses were $66.4 million, or 28.9% of sales, compared with $63.5 million, or 28.1%. The effective tax rate was 34.1%, down from 35.4%.
Cash and cash equivalents were $62.9 million at December 31, 2013, versus $59.0 million at September 30, 2013. Working capital was $234.3 million and the current ratio was 2.3. Cash increased by $3.9 million during the quarter. Capital expenditures were $4.6 million.
Balance-sheet debt, including current maturities, totaled approximately $377.1 million ($24.9 million current and $352.2 million long-term). Domestic revolving-facility borrowings were $310.0 million against a $500.0 million facility maturing in July 2018; the filing also reports European borrowings. The domestic facility requires compliance with leverage and interest-coverage ratios. The current ratio and debt figures are point-in-time measures.
Material changes and segment performance
- Sales increased 1.9% year over year, while operating profit fell 9.1% and Matthews-attributable net income declined 4.1%.
- Memorialization sales fell to $117.4 million from $124.7 million, and operating profit declined to $12.5 million from $14.5 million. Cemetery and Funeral Home Products were affected by lower volume; management cited a decline in U.S. casketed, in-ground burial deaths. Cremation sales also fell, particularly in the U.K. and Europe, and the segment posted a $0.4 million operating loss.
- Brand Solutions sales rose to $112.6 million from $100.9 million, with operating profit up to $2.5 million from $2.0 million. Graphics Imaging benefited from the Wetzel acquisition and favorable currency effects; Marking and Fulfillment Systems benefited from higher North American equipment volume and the Pyramid acquisition. Merchandising Solutions sales and profit declined, partly due to lower sales to several large accounts.
- Acquisitions of Wetzel and Pyramid occurred in November and December 2012, respectively, contributing to year-over-year sales comparisons. The quarter had no acquisition cash outflow, versus $60.6 million of acquisitions in the prior-year quarter.
Outlook, risks, and contingencies
- Management projected fiscal 2014 EPS growth over fiscal 2013, excluding unusual costs; it did not provide a numerical EPS target. Fiscal 2014 capital spending was expected to be approximately $30 million, funded from operating cash flow.
- Management expected continued lean and sourcing initiatives, including associated unusual costs. It forecast a small increase in overall U.S. deaths but a decline in casketed, in-ground burial deaths for the rest of fiscal 2014. It expected European economic challenges to continue; Cremation and Merchandising Solutions’ first-quarter sales declines were viewed as project timing, with full-year growth projected for both segments.
- Risks identified include economic and currency changes, material-cost inflation, death-rate trends, competition and pricing pressure, customer or distribution changes, acquisition risks, and technology factors. A 10% strengthening of the U.S. dollar would have reduced quarterly reported sales by an estimated $9.2 million and operating income by $0.5 million.
- Graphics Imaging’s implied fair value was described as approaching its carrying value; further deterioration could require a goodwill impairment. Environmental remediation accruals were approximately $5.4 million. Management stated that the ultimate outcome of disclosed legal proceedings was not expected to materially adversely affect financial condition, results, or cash flows.
- Unrecognized tax benefits were $4.5 million in the tax footnote, while MD&A separately states approximately $4.9 million; timing of potential payments was not determinable. The filing also notes tax examinations in multiple jurisdictions.
Most important facts for investors to verify
- Whether the projected fiscal 2014 EPS growth, excluding unusual costs, is achieved, and how much lean, sourcing, severance, and litigation-related costs affect reported earnings.
- Whether Memorialization volume trends and European market conditions improve, and whether forecast full-year growth in Cremation and Merchandising Solutions materializes.
- Graphics Imaging goodwill impairment risk, given management’s warning that the reporting unit’s implied fair value is approaching carrying value.
- Debt covenant headroom, borrowing costs, and liquidity needs alongside planned capital spending, dividends, and share repurchases.
- Reconciliation of the $4.5 million tax-footnote figure and approximately $4.9 million MD&A figure for unrecognized tax benefits, and changes in environmental remediation or other contingencies.