Business Context and Reporting Period
Company: Matthews International Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2006
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, and Australia.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Net Sales | $715.9 million | $639.8 million |
| Gross Profit | $271.9 million | $223.1 million |
| Gross Margin | 38.0% | 34.9% |
| Operating Profit | $113.9 million | $98.4 million |
| Operating Margin | 15.9% | 15.4% |
| Net Income | $66.4 million | $58.1 million |
| Diluted EPS | $2.06 | $1.79 |
| Operating Cash Flow | $66.1 million | $70.3 million |
| Total Assets | $716.1 million | $665.5 million |
| Long-Term Debt | $120.3 million | $119.0 million |
| Working Capital | $105.6 million | $86.6 million |
| Current Ratio | 1.8 | 1.6 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 11.9% to $715.9 million, driven primarily by the July 2005 acquisition of Milso Industries (Casket segment) and higher sales in the Cremation, Marking Products, and Bronze segments. This was partially offset by lower sales in Merchandising Solutions and unfavorable foreign currency impacts.
- Profitability: Operating profit rose 15.7% to $113.9 million. Gross margin improved to 38.0% due to the Milso acquisition and cost reduction initiatives, despite rising bronze ingot costs which pressured the Bronze segment margin.
- Segment Performance:
- Casket: Sales jumped 48% to $201.0 million due to Milso; however, organic volume was lower due to distribution transitions and a lower death rate.
- Bronze: Sales increased 6% to $218.0 million, aided by price surcharges for higher metal costs.
- Merchandising Solutions: Sales declined 12% to $77.8 million due to lower system sales and the absence of one-time promotional programs from the prior year.
- Interest Expense: Increased significantly to $7.0 million from $3.0 million due to higher borrowings under the Revolving Credit Facility and rising interest rates.
Guidance, Outlook, Risks, and Unusual Items
- Guidance: Management expects fiscal 2007 diluted earnings per share growth in the range of 12% to 15% over fiscal 2006. This excludes the net favorable impact of a facility sale gain and asset impairment charges in Q4 2006, as well as potential payouts from the Milso acquisition agreement.
- Unusual Items: Fiscal 2006 included a pre-tax gain of $2.7 million on the sale of a Bronze facility and a pre-tax charge of approximately $1.7 million for asset impairments in the Casket segment.
- Legal Proceedings:
- Antitrust Investigation: Civil Investigative Demands (CIDs) from Attorneys General in Maryland, Florida, and Connecticut regarding alleged anti-competitive practices in the funeral service industry. The investigation is in preliminary stages.
- Distributor Litigation: Ongoing lawsuit with Yorktowne Caskets (largest independent distributor) and Batesville regarding a proposed acquisition of Yorktowne. A preliminary injunction remains in force preventing the sale, but defendants have appealed. Yorktowne has filed a counter-complaint alleging $58 million in damages.
- Risks: Key risks include volatility in commodity prices (bronze, steel), foreign currency exchange rates, changes in death rates, and the outcome of the aforementioned legal proceedings.
- Environmental: An accrual of approximately $10.0 million exists for environmental remediation obligations, primarily related to a landfill site in York, Pennsylvania.
Investor Verification Checklist
- Legal Exposure: Monitor the status of the Yorktowne/Batesville litigation and the multi-state antitrust investigation, as outcomes could impact the Casket segment's distribution network and financial position.
- Commodity Costs: Verify the company's ability to pass on rising costs for bronze and steel to customers without eroding volume.
- Acquisition Integration: Assess the progress of the transition to company-owned distribution in the Casket segment and the performance of the Milso acquisition.
- Debt Servicing: Review the impact of rising interest rates on the $123.2 million outstanding balance of the Revolving Credit Facility.
- Merchandising Turnaround: Evaluate the effectiveness of the facilities consolidation program in the Merchandising Solutions segment to reverse sales declines.