Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Six months ended March 31, 2009)
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, except per share) | Six Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2008 |
|---|---|---|
| Sales | $388,648 | $380,175 |
| Gross Profit | $140,969 | $152,222 |
| Gross Margin | 36.3% | 40.0% |
| Operating Profit | $43,518 | $61,170 |
| Operating Margin | 11.2% | 16.1% |
| Net Income | $24,031 | $37,714 |
| Diluted EPS | $0.79 | $1.21 |
| Net Cash from Operating Activities | $44,718 | $55,805 |
| Cash and Cash Equivalents (Mar 31, 2009) | $49,580 | $50,667 (Sep 30, 2008) |
| Total Debt (Current + Long-term) | $259,241 | $254,268 (Sep 30, 2008) |
Material Changes vs. Prior Period
- Revenue: Sales increased 2.2% year-over-year, primarily driven by the May 2008 acquisition of Saueressig GmbH (contributing $50.2 million in sales). Excluding this acquisition, consolidated sales declined due to global economic downturns and unfavorable foreign currency fluctuations ($8.9 million impact).
- Profitability: Operating profit decreased 28.9% to $43.5 million. This decline was attributed to lower sales volumes in most segments, unfavorable currency impacts ($1.9 million), and approximately $10.7 million in unusual charges (severance, facility consolidation, and bad debt).
- Segment Performance:
- Memorialization: Bronze and Casket segments saw sales declines due to volume drops and currency headwinds. Cremation sales increased due to a small European acquisition.
- Brand Solutions: Graphics Imaging sales rose significantly due to Saueressig. Marking Products and Merchandising Solutions declined due to reduced industrial capital spending and U.S. economic weakness.
- Interest Expense: Increased to $6.3 million from $4.0 million, reflecting higher debt levels associated with the Saueressig acquisition.
Guidance, Outlook, and Risks
- Guidance Update: In March 2009, the company updated its fiscal 2009 guidance to project a modest decline (less than 8%) in earnings per share compared to fiscal 2008, excluding unusual items. Management maintains this guidance.
- Outlook: Management expects the global economic slowdown to continue impacting results in the near term. Buying patterns in both Memorialization and Brand Solutions are affected by the recession. The company anticipates further unusual charges in coming quarters as it adjusts cost structures.
- Long-Term Strategy: The company targets a long-term annual earnings per share growth rate of 12% to 15%, driven by internal growth, acquisitions, and share repurchases.
- Risks and Contingencies:
- Market Risk: Exposure to foreign currency exchange rates (a 10% strengthening of the USD would decrease sales by $12.9 million) and interest rate fluctuations.
- Environmental: An accrual of approximately $7.7 million exists for environmental remediation obligations, including a landfill site in York, Pennsylvania.
- Derivatives: Interest rate swaps resulted in an unrealized loss of $7.3 million ($4.4 million after tax) recorded in accumulated other comprehensive income.
Investor Verification Checklist
- Acquisition Integration: Verify the ongoing impact and integration costs of the Saueressig acquisition on the Graphics Imaging segment.
- Unusual Charges: Monitor the magnitude and frequency of "unusual charges" (severance, consolidation) which totaled $10.7 million in the first half of the year.
- Currency Sensitivity: Assess the impact of the strengthening U.S. dollar on international operations, which negatively affected sales and operating income.
- Debt Levels: Review the increase in total debt and interest expense relative to EBITDA to ensure compliance with credit facility covenants.
- Stock Repurchases: Note the aggressive buyback activity ($23.1 million in the first six months) and its impact on cash reserves versus liquidity needs.