Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
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. The company operates globally with significant presence in the U.S., Europe, Canada, Australia, and Asia.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Net Sales | $780.9 million | $818.6 million | (4.6)% |
| Gross Profit | $294.8 million | $323.0 million | (8.7)% |
| Gross Margin | 37.7% | 39.5% | -180 bps |
| Operating Profit | $101.0 million | $133.0 million | (24.0)% |
| Operating Margin | 12.9% | 16.2% | -330 bps |
| Net Income | $57.7 million | $79.5 million | (27.4)% |
| Diluted EPS | $1.90 | $2.55 | (25.5)% |
| Operating Cash Flow | $90.9 million | $104.5 million | (13.0)% |
| Long-Term Debt | $237.5 million | $219.1 million | +8.4% |
| Total Assets | $949.7 million | $914.3 million | +3.9% |
| Working Capital | $173.1 million | $141.4 million | +22.4% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales decreased 4.6% primarily due to the global recession, a lower estimated domestic casketed death rate, and unfavorable foreign currency fluctuations (approx. $24.6 million negative impact). Sales declined in all segments excluding Cremation (which grew due to acquisition) and Graphics Imaging (which grew due to the Saueressig acquisition).
- Profitability Compression: Operating profit fell 24.0% to $101.0 million. This decline was driven by lower sales volumes, unfavorable currency impacts ($3.1 million), and unusual charges totaling approximately $16.5 million. These charges included severance, facility consolidation costs (Bronze segment), bad debt, and integration costs related to the Saueressig acquisition.
- Segment Performance:
- Memorialization: Bronze sales dropped 11.2%; Casket sales dropped 7.5%. Both segments faced volume declines and currency headwinds.
- Brand Solutions: Graphics Imaging sales rose 15.3% (driven by Saueressig), while Marking Products sales fell 29.5% due to reduced industrial capital spending. Merchandising Solutions sales fell 18.0% due to project delays/cancellations.
- Debt and Liquidity: Long-term debt increased due to borrowings related to the Saueressig acquisition. However, working capital improved significantly to $173.1 million, and the current ratio strengthened to 2.3.
Guidance, Outlook, and Risks
- Outlook: Management expects fiscal 2010 overall earnings to be at a level relatively consistent with fiscal 2009 (excluding unusual charges from both years). Results are expected to improve relative to comparable interim periods in fiscal 2009 as the year progresses.
- Key Challenges: Continued weakness in U.S. and global economies, volatility in commodity costs (bronze, steel, fuel), and increased pension costs (estimated $5.1 million increase in fiscal 2010).
- Risk Factors:
- Economic Conditions: Sensitivity to consumer spending and industrial capital expenditures.
- Foreign Currency: A 10% strengthening of the U.S. dollar would decrease sales by $28.5 million and operating income by $3.3 million.
- Raw Materials: Fluctuations in the cost of bronze, steel, and fuel.
- Mortality Rates: Changes in death rates and the shift toward cremation impact the Memorialization segments.
- Unusual Items: Fiscal 2009 included $16.5 million in pre-tax unusual charges. Fiscal 2008 included a $1.9 million tax benefit from statutory rate changes in Europe.
Investor Verification Checklist
- Unusual Charges: Verify the specific composition of the $16.5 million in unusual charges and their impact on segment profitability.
- Foreign Currency Impact: Assess the sensitivity of future earnings to exchange rate fluctuations, given the significant international exposure (36% of sales outside the U.S.).
- Pension Obligations: Review the funded status of the pension plan, which showed a significant unfunded liability increase, and the projected $5.1 million cost increase for fiscal 2010.
- Debt Covenants: Confirm compliance with leverage and interest coverage ratios under the $225 million Revolving Credit Facility.
- Acquisition Integration: Monitor the performance and integration of the Saueressig acquisition (Graphics Imaging) and the remaining 22% minority interest option agreement.
- Environmental Liabilities: Note the $7.3 million accrual for environmental remediation, primarily related to the York Group acquisition.