Matthews International Corporation — Q3 FY2010 Form 10-Q
Business context and period: The company designs, manufactures and markets memorialization products and brand solutions through six segments. This filing covers the fiscal quarter and nine months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Dollar amounts below are in millions, except per-share data.
Financial performance and position
- Quarter: Sales were $213.3 million, up 11.1%; gross profit was $85.0 million; operating profit was $34.5 million; and net income attributable to Matthews shareholders was $20.4 million, versus $18.1 million. Diluted EPS was $0.68, versus $0.60.
- Nine months: Sales were $607.2 million, up 4.6%; gross profit was $236.1 million, up from $216.4 million; operating profit was $83.8 million, up from $73.3 million; and net income attributable to Matthews shareholders was $49.3 million, versus $42.1 million. Diluted EPS was $1.64, versus $1.38.
- Margins, nine months: Gross margin improved to 38.9% from 37.3%; operating margin rose to 13.8% from 12.6%. The filing reports shareholders’ net income margin of 8.1%, versus 7.3%.
- Cash flow, nine months: Operating cash flow was $83.5 million, versus $69.5 million. Investing activities used $40.0 million, including $28.2 million for acquisitions and $11.1 million of capital expenditures. Financing activities used $35.0 million, including $20.9 million of share repurchases, $8.3 million of net debt repayments and $6.3 million of dividends. Cash decreased $1.8 million to $56.0 million.
- Debt and liquidity: Total debt, including current maturities, was $232.3 million at June 30, down from $251.7 million at September 30, 2009. The $225 million domestic revolving facility had $183.0 million drawn and matures in September 2012. Working capital was $168.1 million, down from $173.1 million; the current ratio was 2.1, versus 2.3.
- Other balance-sheet items: Total assets were $947.6 million; shareholders’ equity was $460.6 million. Accrued pension liabilities were $56.9 million and postretirement benefit liabilities were $25.4 million.
Changes versus prior period
- Nine-month sales increased mainly on higher volume in several segments, acquisitions and $8.3 million of favorable foreign-exchange impact, partly offset by lower U.S. casketed-death estimates. Management estimated U.S. casketed deaths declined more than 4% year over year.
- Five of six segments reported higher nine-month sales. Cremation, Marking Products and Casket sales increased; Merchandising Solutions sales declined. Quarter sales were higher year over year in every segment except Graphics Imaging, which was nearly flat.
- Operating profit growth reflected improved gross margin and lower prior-year unusual costs. Fiscal 2009 included approximately $12.8 million of unusual operating charges; fiscal 2010 included approximately $3.9 million higher pension costs.
- Interest expense fell to $5.6 million from $9.1 million for the nine months, primarily reflecting lower average borrowing rates. The effective tax rate rose to 35.3% from 34.0%.
Outlook, commentary and risks
- Management projected fiscal 2010 earnings to be slightly ahead of its original estimates, after previously expecting earnings to be relatively consistent with fiscal 2009 excluding unusual items. No specific earnings guidance amount was provided.
- Management remained cautious about declining casketed-death rates, uncertain economic conditions and Euro volatility. It also cited higher fiscal 2010 pension expense, expected to be approximately $5.2 million above fiscal 2009.
- The company said operating cash flow and borrowing capacity should be sufficient for foreseeable capital needs; it expected operations to fund its $25.8 million fiscal 2010 capital budget.
- Acquisitions included Reynoldsville Casket Company, A.J. Distribution, United Memorial Products and an 80% interest in U.K.-based Furnace Construction Cremators. Reynoldsville and UMP include contingent consideration. Matthews also agreed to buy Saueressig’s remaining 22% interest for €17.4 million in October 2011.
- Interest-rate swaps had a $4.8 million fair-value liability; approximately $1.6 million of the related after-tax accumulated loss was expected to be recognized as interest expense over the next 12 months, assuming market rates remained unchanged.
- Environmental remediation accruals totaled approximately $6.9 million. Management did not expect known environmental matters or ordinary-course legal proceedings to materially affect results or financial position. Unrecognized tax benefits were $3.3 million; the company was under examination in several tax jurisdictions.
- Key risks include economic and foreign-exchange changes, material costs, death rates and product demand, competitive pricing, acquisition risks, customer or distribution changes, interest rates, pension assumptions and technology. A 10% stronger U.S. dollar would have reduced nine-month reported sales by $22.7 million and operating income by $2.7 million, based on the filing’s sensitivity analysis.
Important facts for investors to verify
- Whether sales and margin gains persist after separating acquisitions, currency effects and prior-year unusual charges.
- Future casketed-death rates and their impact on Bronze and Casket volumes.
- Integration, performance and contingent-payment terms for recent acquisitions, and funding of the €17.4 million Saueressig purchase.
- Revolver covenant headroom, facility availability and the effect of variable rates as debt is refinanced or swaps mature.
- Actual pension expense and required contributions, environmental remediation costs, and outcomes of tax examinations.
- Execution of management’s fiscal 2010 outlook; the filing gives no numerical earnings target.