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MATW > SEC Filings for MATW > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for MATTHEWS INTERNATIONAL CORP


5-Aug-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement:

The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation ("Matthews" or the "Company") and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended September 30, 2012. Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, and technological factors beyond the Company's control. In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors.

Results of Operations:

The following table sets forth sales and operating profit for the Company's
Memorialization and Brand Solutions businesses for the periods indicated.

                      Three Months Ended           Nine Months Ended
                           June 30,                    June 30,
                      2013          2012          2013          2012
Sales:
Memorialization     $ 130,844     $ 126,880     $ 391,533     $ 366,475
Brand Solutions       119,808       100,598       341,118       303,761
                    $ 250,652     $ 227,478     $ 732,651     $ 670,236

Operating Profit:
Memorialization     $  23,731     $  20,841     $  54,870     $  51,345
Brand Solutions         7,029         6,672        17,459        20,380
                    $  30,760     $  27,513     $  72,329     $  71,725

Sales for the nine months ended June 30, 2013 were $732.7 million, compared to $670.2 million for the nine months ended June 30, 2012. The increase in sales principally reflected the impact of recent acquisitions and higher sales in the Funeral Home Products segment.

In the Memorialization businesses, Cemetery Products segment sales for the first nine months of fiscal 2013 were $169.4 million, compared to $157.1 million for the first nine months of fiscal 2012. The increase resulted primarily from the acquisition of Everlasting Granite in May 2012. Sales for the Funeral Home Products segment were $187.3 million for the first nine months of fiscal 2013 compared to $176.5 million for the same period in fiscal 2012. The increase resulted principally from higher unit volume and an improvement in product
mix. Sales for the Cremation segment were $34.8 million for the first nine months of fiscal 2013 compared to $32.9 million for the same period a year ago. The increase principally reflected higher sales of cremation equipment in the U.S. and the benefit of a small U.K. acquisition completed in fiscal 2012, partially offset by lower international sales.


In the Brand Solutions businesses, sales for the Graphics Imaging segment in the first nine months of fiscal 2013 were $219.5 million, compared to $197.7 million for the same period a year ago. The increase resulted principally from the acquisition of Wetzel Holding AG and certain of its subsidiaries (collectively "Wetzel") in November 2012, partially offset by lower sales volume in the segment's principal markets due to soft economic conditions, particularly in Europe. In addition, changes in foreign currency values (principally the Euro) had an unfavorable impact on sales, compared to a year ago. Marking and Fulfillment Systems segment sales for the nine months ended June 30, 2013 were $63.9 million, compared to $53.4 million for the first nine months of fiscal 2012. The increase resulted principally from the acquisition of Pyramid Controls, Inc. ("Pyramid") in December 2012 and higher sales in the U.S. market. Sales for the Merchandising Solutions segment were $57.7 million for the first nine months of fiscal 2013, compared to $52.6 million for the same period a year ago. The increase principally reflected higher sales volume. However, sales in the third quarter of fiscal 2013 declined from the same period a year ago, as several projects were delayed or postponed by customers.

Consolidated gross profit for the nine months ended June 30, 2013 was $266.2 million, compared to $250.4 million for the nine months ended June 30, 2012. Consolidated gross profit as a percent of sales for the first nine months of fiscal 2013 decreased to 36.3% from 37.4% for the first nine months of fiscal 2012. The increase in consolidated gross profit primarily reflected the impact of recent acquisitions and higher sales in the Funeral Home Products segment. The decrease in consolidated gross profit as a percentage of sales primarily reflected lower margins in the Cremation and Graphics Imaging segments.

Selling and administrative expenses for the nine months ended June 30, 2013 were $193.9 million, compared to $178.7 million for the first nine months of fiscal 2012. Consolidated selling and administrative expenses as a percent of sales were 26.4% for the nine months ended June 30, 2013, compared to 26.7% for the same period last year. The increase in selling and administrative expenses was primarily attributable to the impacts of recent acquisitions and unusual charges in fiscal 2013, compared to fiscal 2012, partially offset by the benefit of an adjustment to the liability for contingent consideration (in connection with a Funeral Home Products segment acquisition) in the fiscal 2013 third quarter. The decrease in selling and administrative expenses as a percentage of sales primarily reflects the adjustment to the liability for contingent consideration.

Operating profit for the nine months ended June 30, 2013 was $72.3 million, compared to $71.7 million for the nine months ended June 30, 2012. Unusual items totaled $6.9 million for the current period, primarily reflecting charges in connection with the Company's strategic cost-structure initiatives and other charges, acquisition-related activities and an impairment of a trade name. These charges were partially offset by an adjustment to the liability for contingent consideration and a gain on the settlement of the purchase of the remaining ownership interest in one of the Company's Graphics Imaging segment subsidiaries. Unusual charges last year primarily reflected ERP implementation and acquisition-related costs. Excluding unusual items from both years, fiscal 2013 operating profit increased from a year ago, primarily reflecting higher sales in the Funeral Home Products segment and the impact of recent acquisitions. Cemetery Products segment operating profit for the nine months ended June 30, 2013 was $23.9 million, compared to $27.3 million for the nine months ended June 30, 2012. The decrease primarily reflected unusual charges of approximately $4.3 million associated with the Company's strategic initiatives, including the segment's ERP implementation. In addition, fiscal 2012 included a favorable settlement on a claim related to the Company's granite business. Funeral Home Products segment operating profit was $29.5 million for the nine months ended June 30, 2013, compared to $20.8 million for the same period in fiscal 2012. The increase primarily reflected the impact of higher sales, the benefit of improved production and distribution efficiencies and the benefit of an adjustment to the liability for contingent consideration. Cremation segment operating profit for the nine months ended June 30, 2013 was $1.4 million, compared to $3.3 million for the same period in the prior year. The decrease principally reflected lower margins on several European-based projects, higher material costs and charges in connection with strategic initiatives. Graphics Imaging segment operating profit for the nine months ended June 30, 2013 was $10.0 million, compared to $11.3 million for the same period in fiscal 2012. The decrease resulted mainly from lower sales (excluding the Wetzel acquisition) and the unfavorable impact of unusual items of approximately $2.4 million. The segment's unusual items included charges related to acquisition activities and strategic initiatives, and an impairment charge related to the


carrying value of a trade name. These charges were partially offset by a gain on the final settlement of the purchase of the remaining ownership interest in one of the Company's subsidiaries. Operating profit for the Marking and Fulfillment Systems segment for the nine months ended June 30, 2013 was $5.3 million, compared to $6.3 million for the same period a year ago. The decrease primarily resulted from an unfavorable change in product mix, higher research and development expenses and charges related to strategic initiatives. Merchandising Solutions segment operating profit was $2.1 million for the first nine months of fiscal 2013, compared to $2.8 million for the same period in fiscal 2012, primarily reflecting the decline in sales in the fiscal 2013 third quarter, severance costs and charges related to strategic initiatives.

Investment income was $1.5 million for the nine months ended June 30, 2013, compared to $3.0 million for the nine months ended June 30, 2012. The decrease reflected lower rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense was approximately $9.8 million for the first nine months of fiscal 2013, compared to $8.2 million for the first nine months of fiscal 2012. The increase primarily reflected higher debt levels compared to a year ago, which was primarily due to borrowings for acquisitions in fiscal 2013. Other income (deductions), net for the nine months ended June 30, 2013 represented a decrease in pre-tax income of $3.2 million, compared to $1.8 million for the same period last year. Other income and deductions generally include banking-related fees and the impact of currency gains and losses on certain intercompany debt.

The Company's effective tax rate for the nine months ended June 30, 2013 was 34.3%, compared to 33.7% for the first nine months of fiscal 2012 and 34.2% for the fiscal 2012 full year. The fiscal 2012 full year effective tax rate included the favorable impact of adjustments totaling $528,000 in income tax expense, primarily related to changes in the estimated tax accruals for open tax periods. Excluding those adjustments, the Company's effective tax rate for fiscal 2012 was 34.8%. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.

Net loss attributable to noncontrolling interests was $482,000 for the nine months ended June 30, 2013 compared to net income of $129,000 for the same period a year ago. The change related principally to net losses recorded by the Company's Italian cremation operation and Turkish graphics business in fiscal 2013.

Goodwill and Other Intangible Assets:

Goodwill related to business combinations is not amortized, but is subject to annual review for impairment. In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized. For purposes of testing for impairment, the Company uses a discounted cash flow technique. The Company performed its annual impairment review in the second quarter of fiscal 2013 and determined that no additional adjustments to the carrying values of goodwill were necessary at March 31, 2013. As discussed under "Results of Operations", recent economic conditions in Europe have unfavorably impacted the operating results of the Graphics Imaging segment. Consequently, the Graphics Imaging reporting unit's implied fair value is approaching the unit's carrying value. If the segment's operating results deteriorate further, an impairment charge could be required in future periods.

The Company also performed its annual impairment review of other intangible assets in the second quarter of fiscal 2013. Based on this assessment, the Company recorded an impairment charge of approximately $1.6 million related to the carrying value of a trade name of one of its European Graphics businesses. The impairment was determined based upon a comparison of the carrying value of the trade name to its implied fair market value.

Liquidity and Capital Resources:

Net cash provided by operating activities was $72.9 million for the nine months ended June 30, 2013, compared to $55.2 million for the first nine months of fiscal 2012. Operating cash flow for both periods reflected net income adjusted for depreciation, amortization, stock-based compensation expense and pension expense, partially offset by decreases in deferred taxes. The increase in operating cash flows primarily reflected higher depreciation and amortization and a reduction in cash used to fund working capital items.


Cash used in investing activities was $84.6 million for the nine months ended June 30, 2013, compared to $36.9 million for the nine months ended June 30, 2012. Investing activities for the first nine months of fiscal 2013 primarily reflected capital expenditures of $17.3 million and payments (net of cash acquired) of $67.6 million for acquisitions (primarily Wetzel and Pyramid). Investing activities for the first nine months of fiscal 2012 reflected capital expenditures of $24.6 million and payments (net of cash acquired) of $12.5 million for acquisitions.

Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for property, plant and equipment has averaged $25.7 million for the last three fiscal years. Capital spending for fiscal 2013 is currently expected to be in the range of $25.0 million to $30.0 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash provided by financing activities for the nine months ended June 30, 2013 was $8.6 million, primarily reflecting long-term debt proceeds, net of repayments, of $39.8 million, contingent consideration payments of $9.5 million in connection with acquisitions, treasury stock purchases of $13.5 million and dividends of $8.3 million to the Company's shareholders. Cash used in financing activities for the nine months ended June 30, 2012 was $24.5 million, primarily reflecting long-term debt proceeds, net of repayments, of $1.9 million, treasury stock purchases of $18.9 million and dividends of $7.6 million to the Company's shareholders.

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions. In July 2013, the maximum amount of borrowings available under the facility was increased to $500.0 million and borrowings under the new facility bear interest at LIBOR plus a factor ranging from 0.75% to 1.25% based on the Company's leverage ratio. The facility's maturity is July 2018. The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization). The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company's leverage ratio) of the unused portion of the facility. The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $30.0 million) is available for the issuance of commercial and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility as of June 30, 2013 and September 30, 2012 were $307.5 million and $281.3 million, respectively. The weighted-average interest rate on outstanding borrowings under this facility was 3.05% and 3.15% at June 30, 2013 and 2012, respectively.

The Company has entered into the following interest rate swaps:

                          Fixed   Interest Rate
                         Interest Spread at June
Effective Date  Amount     Rate      30, 2013    Maturity Date
May 2011        $25,000   1.37%       1.50%      May 2014
October 2011     25,000   1.67%       1.50%      October 2015
November 2011    25,000   2.13%       1.50%      November 2014
March 2012       25,000   2.44%       1.50%      March 2015
June 2012        40,000   1.88%       1.50%      June 2022
August 2012      35,000   1.74%       1.50%      June 2022
September 2012   25,000   3.03%       1.50%      December 2015
September 2012   25,000   1.24%       1.50%      March 2017
November 2012    25,000   1.33%       1.50%      November 2015

The interest rate swaps have been designated as cash flow hedges of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company's assessment, all the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.

The fair value of the interest rate swaps reflected a net unrealized loss of $1.2 million ($724,000 after tax) at June 30, 2013 that is included in shareholders' equity as part of accumulated other comprehensive loss. Assuming market rates remain constant with the rates at June 30, 2013, approximately $1.3 million of the $724,000 net unrealized loss included in accumulated other comprehensive loss is expected to be recognized in earnings as interest expense over the next twelve months.


In March 2013, the Company, through certain of its European subsidiaries, entered into a credit facility with a European bank. The maximum amount of borrowings available under this facility is 25.0 million Euros ($32.5 million). Outstanding borrowings under the credit facility totaled 25.0 million Euros ($32.5 million) at June 30, 2013. The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2013 was 1.37%.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled 2.9 million Euros ($3.7 million) and 8.2 million Euros ($10.5 million) at June 30, 2013 and September 30, 2012, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2013 and 2012 was 3.92% and 6.11%, respectively.

The Company, through its German subsidiary, Wetzel, has several loans with various European banks. Outstanding borrowings under these loans totaled 8.0 million Euros ($10.4 million) at June 30, 2013. The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2013 was 7.26%.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 4.1 million Euros ($5.4 million) and 6.3 million Euros ($8.1 million) at June 30, 2013 and September 30, 2012, respectively. Matthews International S.p.A. also has four lines of credit totaling 11.4 million Euros ($14.8 million) with the same Italian banks. Outstanding borrowings on these lines were 5.7 million Euros ($7.4 million) and 3.4 million Euros ($4.3 million) at June 30, 2013 and September 30, 2012, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2013 and 2012 was 3.17% and 3.09%, respectively.

The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews' common stock under the program, of which 1,409,535 shares remain available for repurchase as of June 30, 2013. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company's Restated Articles of Incorporation.

Consolidated working capital of the Company was $214.9 million at June 30, 2013, compared to $204.4 million at September 30, 2012. Cash and cash equivalents were $54.9 million at June 30, 2013, compared to $58.3 million at September 30, 2012. The Company's current ratio was 2.2 and 2.1 at June 30, 2013 and September 30, 2012, respectively.

Environmental Matters:

The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations. As such, the Company has developed environmental, health, and safety policies and procedures that include the proper handling, storage and disposal of hazardous materials.

The Company is party to various environmental matters. These include obligations to investigate and mitigate the effects on the environment of the disposal of certain materials at various operating and non-operating sites. The Company is currently performing environmental assessments and remediation at these sites, as appropriate. In addition, prior to its acquisition, The York Group, Inc. ("York"), a wholly-owned subsidiary of the Company, was identified, along with others, by the Environmental Protection Agency as a potentially responsible party for remediation of a landfill site in York, Pennsylvania. At this time, the Company has not been joined in any lawsuit or administrative order related to the site or its clean-up.

At June 30, 2013, an accrual of approximately $5.7 million had been recorded for environmental remediation (of which $1.2 million was classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual, which reflects previously established reserves assumed with the acquisition of York and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. Changes in the accrued environmental remediation obligation from the prior fiscal year reflect payments charged against the accrual.


While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.

Acquisitions:

In April 2013, the Company completed the purchase of the remaining 20% interest in Tact Group Limited ("Tact"). The Company had acquired an 80% interest in Tact in July 2009.

In March 2013, the Company completed the purchase of the remaining 38.5% interest in Kroma Pre-Press Preparation Systems Industry & Trade, Inc. ("Kroma"), completing the option arrangement in connection with the July 2011 acquisition of a 61.5% interest in Kroma.

In March 2013, the Company completed the purchase of the remaining 20% interest in Furnace Construction Cremators Limited ("FCC"). The Company had acquired an 80% interest in FCC in March 2010.

In December 2012, the Company acquired Pyramid, a provider of warehouse control systems and conveyor control solutions for distribution centers. The acquisition is designed to expand Matthews' fulfillment products and services in the warehouse management market. The initial purchase price for the transaction was $24.5 million, plus potential additional consideration up to $3.7 million based on future operating results.

In November 2012, the Company completed the acquisition of Wetzel, a leading European provider of pre-press services and gravure printing forms, with manufacturing operations in Germany and Poland. Wetzel's products and services are sold primary within Europe, and the acquisition is designed to expand Matthews' products and services in the global graphics imaging market. The purchase price for Wetzel was 42.6 million Euros ($54.7 million) on a cash-free, debt-free basis.

Forward-Looking Information:

Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy consists of the following: internal growth (which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products), acquisitions and share repurchases under the Company's stock repurchase program (see "Liquidity and Capital Resources").

The Company's results for the first nine months of fiscal 2013 were impacted by several significant factors, including:
Funeral Home Products segment reported higher sales due mainly to increased unit volume of caskets, and generated improved operating margins;

recent acquisitions contributed to the Company's growth for the third quarter;

market conditions in Europe continued to unfavorably impact several of our businesses, particularly the Graphics Imaging segment;

strategic initiatives are being implemented which are affecting all of the Company's businesses (these initiatives are ongoing and will result in additional unusual charges); and

several non-operating items (such as investment income and interest expense) affected the comparability of the Company's year-over-year earnings per share.

Based on the Company's year-to-date operating results and current forecasts, excluding unusual costs, the Company is projecting growth in fiscal 2013 earnings per share over fiscal 2012.


Critical Accounting Policies:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q.

. . .

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