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MATW > SEC Filings for MATW > Form 10-K on 27-Nov-2013All Recent SEC Filings

Show all filings for MATTHEWS INTERNATIONAL CORP

Form 10-K for MATTHEWS INTERNATIONAL CORP


27-Nov-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the consolidated financial statements of Matthews and related notes thereto. In addition, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS:

The following table sets forth sales and operating profit for the Company's Memorialization and Brand Solutions businesses for each of the last three fiscal years.

                          Years Ended September 30,
                      2013          2012          2011
Sales:
  Memorialization   $ 517,911     $ 492,867     $ 507,342
  Brand Solutions     467,446       407,450       391,479
  Consolidated      $ 985,357     $ 900,317     $ 898,821

Operating Profit:
  Memorialization   $  72,931     $  63,589     $  84,992
  Brand Solutions      22,861        29,988        33,524
  Consolidated      $  95,792     $  93,577     $ 118,516

Comparison of Fiscal 2013 and Fiscal 2012:

Sales for the year ended September 30, 2013 were $985.4 million, compared to $900.3 million for the year ended September 30, 2012. The increase in fiscal 2013 sales principally reflected higher sales in the Funeral Home Products and Merchandising Solutions segments and the benefit of recent acquisitions.

In the Memorialization businesses, Cemetery Products segment sales for fiscal 2013 were $226.6 million compared to $215.9 million for fiscal 2012. The increase primarily reflected the full year impact of the acquisition of Everlasting Granite Memorial Co., Inc. ("Everlasting Granite") in May 2012. Sales for the Funeral Home Products segment were $242.8 million for fiscal 2013 compared to $230.9 million for fiscal 2012. The increase principally resulted from higher unit volume and an improvement in product mix. Sales for the Cremation segment were $48.5 million for fiscal 2013 compared to $46.0 million a year ago. The increase principally resulted from 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 Company's Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2013 were $294.6 million, compared to $259.9 million a year ago. The increase resulted principally from the acquisition of Wetzel Holding AG, Wetzel GmbH and certain related affiliates (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. Marking and Fulfillment Systems segment sales for the year ended September 30, 2013 were $93.5 million, compared to $74.6 million for fiscal 2012. The increase resulted principally from higher sales in the U.S. market and the acquisition of Pyramid Controls, Inc. and its affiliate, Pyramid Control Systems (collectively, "Pyramid") in December 2012. Sales for the Merchandising Solutions segment were $79.4 million for fiscal 2013, compared to $73.0 million a year ago. The improvement was attributable to an increase in sales to several large customers in fiscal 2013.

Gross profit for the year ended September 30, 2013 was $356.5 million, or 36.2% of sales, compared to $336.6 million, or 37.4% of sales, for fiscal 2012. The increase in fiscal 2013 consolidated gross profit compared to fiscal 2012 reflected higher sales and the benefit of recent acquisitions. The decrease in gross profit as a percentage of sales primarily reflected lower margins in the Brand Solutions businesses.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Selling and administrative expenses for the year ended September 30, 2013 were $260.7 million, or 26.5% of sales, compared to $243.0 million, or 27.0% of sales, for fiscal 2012. The increase in selling and administrative expenses was attributable to the impacts of recent acquisitions, unusual charges and higher sales in the Funeral Home Products segment. The reduction in selling and administrative costs as a percent of sales was due primarily to the benefit of adjustments to contingent consideration and the Company's cost containment efforts in fiscal 2013. Unusual charges primarily included costs related to strategic cost-structure initiatives, acquisition-related expenses and asset adjustments.

Operating profit for fiscal 2013 was $95.8 million, compared to $93.6 million for fiscal 2012. The increase in operating profit for fiscal 2013 reflected higher sales and the impact of recent acquisitions, partially offset by net unusual charges totaling approximately $14.1 million in fiscal 2013. Fiscal 2012 included net unusual charges of approximately $7.8 million.

Cemetery Products segment operating profit for fiscal 2013 was $32.6 million, compared to $33.2 million for fiscal 2012. The decrease in fiscal 2013 operating profit compared to fiscal 2012 resulted mainly from unusual charges of approximately $5.9 million related to strategic cost-structure initiatives, compared to similar unusual charges in fiscal 2012 of approximately $5.4 million. Operating profit for the Funeral Home products segment for fiscal 2013 was $37.3 million, compared to $26.5 million for fiscal 2012. The increase in Funeral Home Products segment operating profit for fiscal 2013 primarily reflected the impact of higher sales, the benefit of improved production and distribution efficiencies and the benefit of adjustments to contingent consideration. These increases were partially offset by unusual charges related to strategic cost-structure initiatives. Fiscal 2012 also included the benefit of adjustments to contingent consideration, partially offset by unusual charges for severance. Net unusual items for the Funeral Home Products segment were approximately the same aggregate amount in fiscal 2013 and 2012. Cremation segment operating profit for the year ended September 30, 2013 was $3.1 million, compared to $3.9 million a year ago. Fiscal 2013 operating profit reflected the impact of higher sales in the U.S. market, partially offset by lower sales in the European and U.K. markets. In addition, Cremation segment fiscal 2013 operating profit included unusual charges related to strategic cost-structure initiatives. Graphics Imaging segment operating profit for fiscal 2013 was $9.7 million, compared to $14.8 million for 2012. The decrease in fiscal 2013 reflected lower sales (excluding the Wetzel acquisition) and the unfavorable impact of unusual items of approximately $6.3 million. The unusual charges related to acquisition activities and strategic initiatives, and an impairment charge related to the carrying value of a trade name. Graphics Imaging segment operating profit in fiscal 2012 included net unusual charges of approximately $3.4 million primarily related to acquisition activities and severance costs, partially offset by the benefit of an adjustment to contingent consideration. Operating profit for the Marking and Fulfillment Systems segment for fiscal 2013 was $8.9 million, compared to $10.1 million a year ago. The decrease in Marking and Fulfillment Systems segment operating profit principally reflected the impact of unusual charges related to cost-structure strategic initiatives, partially offset by the benefit of the Pyramid acquisition and higher sales in the U.S. The Merchandising Solutions segment operating profit was $4.3 million for fiscal 2013, compared to $5.1 million for fiscal 2012. The decrease principally reflected the impact of higher sales, offset by an increase in employee-related costs and unusual charges related to strategic cost-structure initiatives.

Investment income for the year ended September 30, 2013 was $2.3 million, compared to $3.9 million for the year ended September 30, 2012. The decrease principally reflected lower rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2013 was $12.9 million, compared to $11.5 million last year. The increase in interest expense reflected higher average debt levels.

Other income (deductions), net, for the year ended September 30, 2013 represented a decrease in pre-tax income of $3.7 million, compared to a decrease in pre-tax income of $2.1 million in 2012. Other income and deductions generally include banking-related fees and the impact of currency gains or losses on certain intercompany debt.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

The Company's effective tax rate for fiscal 2013 was 32.7%, compared to 34.2% for fiscal 2012. Fiscal 2012 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 this adjustment from fiscal 2012, the Company's effective tax rate was 34.8%. The decrease in the fiscal 2013 effective tax rate, compared to fiscal 2012 primarily reflected the impact of the Company's European tax structure initiatives, including the fiscal 2013 benefit of a European tax loss carryback. 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 earnings attributable to noncontrolling interest represented a loss of $116,000 for fiscal 2013, compared to a loss of $639,000 in fiscal 2012. The decrease related principally to higher operating income recorded by the Company's Turkish operation in fiscal 2013.

Comparison of Fiscal 2012 and Fiscal 2011:

Sales for the year ended September 30, 2012 were $900.3 million, compared to $898.8 million for the year ended September 30, 2011. Fiscal 2012 included the impact of recent acquisitions, and higher sales in the Cremation, Marking and Fulfillment Systems and Merchandising Solutions segments. These increases were offset by lower sales in the Cemetery Products, Funeral Home Products and Graphics Imaging segments, and by the unfavorable impact of changes in the values of foreign currencies of approximately $18.4 million compared to fiscal 2011. Sales in the Cemetery Products and Funeral Home Products segments were negatively impacted by a decline in the estimated number of casketed and in-ground burial (non-cremation) deaths.

In the Memorialization businesses, Cemetery Products segment sales for fiscal 2012 were $215.9 million compared to $224.8 million for fiscal 2011. The decrease primarily reflected lower sales of memorial products in North America, a decrease in mausoleum sales and the unfavorable impact of changes in foreign currencies against the U.S. dollar. These declines were partially offset by the acquisition of Everlasting Granite in May 2012. Sales for the Funeral Home Products segment were $230.9 million for fiscal 2012 compared to $243.3 million for fiscal 2011, which principally resulted from a reduction in sales volume. Lower sales volume of bronze memorials and caskets reflected the impact of a decline in the estimated number of casketed and in-ground burial (non-cremation) deaths compared to the prior year. Sales for the Cremation segment were $46.0 million for fiscal 2012 compared to $39.3 million for fiscal 2011. The increase principally resulted from higher sales of cremation equipment, primarily in the U.S., partially offset by the unfavorable impact of changes in foreign currency values. In the Company's Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2012 were $259.9 million, compared to $269.0 million for fiscal 2011. The decrease resulted principally from lower sales in the European market, and the unfavorable impact of changes in foreign currency values against the U.S. dollar. These declines were partially offset by the impact of the acquisition of Kroma Pre-Press Preparation Systems Industry & Trade, Inc. ("Kroma") which was purchased in July 2011. Marking and Fulfillment Systems segment sales for the year ended September 30, 2012 were $74.6 million, compared to $61.9 million for fiscal 2011. The increase was principally due to higher equipment sales and the full year impact of two small acquisitions completed in fiscal 2011, partially offset by the unfavorable impact of changes in foreign currency values. Sales for the Merchandising Solutions segment were $73.0 million for fiscal 2012, compared to $60.6 million for fiscal 2011. The improvement was attributable to an increase in sales to several large customers in fiscal 2012.

Gross profit for the year ended September 30, 2012 was $336.6 million, or 37.4% of sales, compared to $351.7 million, or 39.1% of sales, for fiscal 2011. The decreases in fiscal 2012 consolidated gross profit and gross profit as a percentage of sales compared to fiscal 2011 reflected lower sales, higher commodity costs, and unusual charges in several of the Company's segments. The unusual charges related primarily to severance costs in several of the Company's businesses as a result of cost structure initiatives and incremental costs related to the Company's ERP implementation in the Cemetery Products segment.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Selling and administrative expenses for the year ended September 30, 2012 were $243.0 million, or 27.0% of sales, compared to $233.1 million, or 25.9% of sales, for fiscal 2011. The increase in selling and administrative expenses was attributable to higher sales in the Cremation, Marking and Fulfillment Systems and Merchandising Solutions segments, and the impact of acquisitions in the Cemetery Products and Marking and Fulfillment Systems segments. In addition, fiscal 2012 selling and administrative expenses include net unusual charges in several segments. Unusual charges primarily included severance costs, incremental costs related to the Company's ERP implementation in the Cemetery Products segment, acquisition-related expenses and asset adjustments. These charges were partially offset by unusual gains consisting of adjustments to contingent consideration liabilities, a favorable settlement on a claim related to the Company's granite business and a gain on the sale of a business investment in China.

Operating profit for fiscal 2012 was $93.6 million, compared to $118.5 million for fiscal 2011. The decrease in operating profit for fiscal 2012 reflected the impact of lower consolidated sales, higher commodity costs, a $2.1 million unfavorable impact of changes in foreign currency values against the U.S. dollar and net unusual charges totaling approximately $7.8 million.

Cemetery Products segment operating profit for fiscal 2012 was $33.2 million, compared to $52.5 million for fiscal 2011. The decrease in fiscal 2012 operating profit compared to fiscal 2011 reflected lower sales, higher bronze ingot costs, the unfavorable impact of changes in foreign currency values and net unusual charges of approximately $5.4 million related to severance and ERP implementation costs. Operating profit for the Funeral Home products segment for fiscal 2012 was $26.5 million, compared to $29.0 million for fiscal 2011. The decrease in Funeral Home Products segment operating profit for fiscal 2012 primarily reflected the impact of lower sales, higher commodity (primarily fuel) costs and unusual charges of approximately $1.7 million related to severance costs. These declines were partially offset by the benefit of selling and distribution cost structure initiatives and an adjustment to the liability for contingent consideration. Cremation segment operating profit for the year ended September 30, 2012 was $3.9 million, compared to $3.5 million for fiscal 2011. Fiscal 2012 operating profit reflected higher sales in the U.S. market, partially offset by lower margins on sales in the European market. Graphics Imaging segment operating profit for fiscal 2012 was $14.8 million, compared to $22.4 million for fiscal 2011. The decrease in fiscal 2012 reflected lower sales, and unusual charges of approximately $5.1 million related to severance costs and the unfavorable impact of changes in foreign currency values. The unusual charges related primarily to severance and acquisition-related costs. The declines were partially offset by an adjustment to the liability for contingent consideration and a gain on the sale of a business investment in China. Operating profit for the Marking and Fulfillment Systems segment for fiscal 2012 was $10.1 million, compared to $7.8 million for fiscal 2011. The increase in Marking and Fulfillment Systems segment operating profit principally reflected the impact of acquisitions and higher sales. The Merchandising Solutions segment operating profit was $5.1 million for fiscal 2012, compared to $3.3 million for fiscal 2011. The increase principally reflected the impact of higher sales.

Investment income for the year ended September 30, 2012 was $3.9 million, compared to $1.4 million for the year ended September 30, 2011. The increase principally reflected increases in the market value of investments held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2012 was $11.5 million, compared to $8.2 million for fiscal 2011. The increase in interest expense reflected higher average debt levels.

Other income (deductions), net, for the year ended September 30, 2012 represented a decrease in pre-tax income of $2.1 million, compared to an increase in pre-tax income of $298,000 in fiscal 2011. Other income and deductions generally include banking-related fees and the impact of currency gains or losses on certain intercompany debt.

The Company's effective tax rate for fiscal 2012 was 34.2%, compared to 34.4% for fiscal 2011. Fiscal 2012 and 2011 included the favorable impact of adjustments totaling $528,000 and $606,000, respectively, in income tax expense primarily related to changes in the estimated tax accruals for open tax periods. Excluding these adjustments from both periods, the Company's effective tax rate was 34.8% for fiscal year 2012 and 35.0% for fiscal 2011. The decrease in the fiscal 2012 effective tax rate, compared to fiscal 2011 primarily reflected the impact of the Company's European tax structure initiatives. 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.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Net earnings attributable to noncontrolling interest was a loss of $639,000 for fiscal 2012, compared to net income of $1.1 million in fiscal 2011. The decrease related principally to the Company's acquisition of the remaining 22% interest in Saueressig GmbH & Co. KG ("Saueressig") in April 2011 and a net loss recorded by the Company's Turkish operation in fiscal 2012.

LIQUIDITY AND CAPITAL RESOURCES:

Net cash provided by operating activities was $109.3 million for the year ended September 30, 2013, compared to $83.3 million and $97.8 million for fiscal 2012 and 2011, respectively. Operating cash flow for fiscal 2013 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items (primarily accounts receivable and inventory) and a cash contribution of $2.5 million to the Company's principal pension plan. Operating cash flow for fiscal 2012 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items (primarily accounts receivable and inventory) and a cash contribution of $5.0 million to the Company's principal pension plan. Operating cash flow for fiscal 2011 primarily reflected net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by a net increase in working capital items. In addition the Company made a cash contribution of $9.0 million to its principal pension plan.

Cash used in investing activities was $98.6 million for the year ended September 30, 2013, compared to $45.3 million and $106.8 million for fiscal years 2012 and 2011, respectively. Investing activities for fiscal 2013 primarily included payments (net of cash acquired) of $74.0 million for acquisitions and $24.9 million for capital expenditures. Investing activities for fiscal 2012 primarily reflected capital expenditures of $33.2 million and payments (net of cash acquired) of $12.5 million for acquisitions. Investing activities for fiscal 2011 primarily reflected payments (net of cash acquired) of $84.4 million for acquisitions and capital expenditures of $22.4 million.

Capital expenditures were $24.9 million for the year ended September 30, 2013, compared to $33.2 million and $22.4 million for fiscal 2012 and 2011, respectively. Capital expenditures in fiscal 2012 were higher due to new investments in gravure equipment in Germany and Turkey and investments in ERP and e-commerce systems. Capital expenditures in each of the last three fiscal years reflected reinvestments 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 $26.9 million for the last three fiscal years. Capital spending for fiscal 2014 is currently expected to be approximately $30.0 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used in financing activities for the year ended September 30, 2013 was $11.8 million, reflecting proceeds, net of repayments, on long-term debt of $32.2 million, purchases of treasury stock of $21.6 million, payment of contingent consideration of $11.3 million and payment of dividends to the Company's shareholders of $11.3 million ($0.41 per share). Cash used in financing activities for the year ended September 30, 2012 was $41.0 million, reflecting purchases of treasury stock of $31.0 million, and payment of dividends to the Company's shareholders of $10.3 million ($0.37 per share). Cash provided by financing activities for the year ended September 30, 2011 was $10.4 million, reflecting proceeds, net of repayments, on long-term debt of $68.9 million, purchases of treasury stock of $44.6 million, proceeds from the sale of treasury stock (stock option exercises) of $1.9 million, payment of dividends to the Company's shareholders of $9.6 million ($0.33 per share) and distributions of $6.2 million to noncontrolling interests.

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 from $400.0 million to $500.0 million and the facility's maturity was extended to July 2018. Borrowings under the amended facility bear interest at LIBOR plus a factor ranging from .75% to 1.25% based on the Company's leverage ratio. 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.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $25.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at September 30, 2013 and 2012 were $305.0 million and $281.3 million, respectively. The weighted-average interest rate on outstanding borrowings at September 30, 2013 and 2012 was 2.81% and 2.83%, respectively.

The Company has entered into the following interest rate swaps:

                                     Interest Rate
                             Fixed     Spread at
                            Interest September 30,
Effective Date    Amount      Rate        2013      Maturity Date
May 2011        $25 million  1.37%       1.25%      May 2014
October 2011    25 million   1.67%       1.25%      October 2015
November 2011   25 million   2.13%       1.25%      November 2014
March 2012      25 million   2.44%       1.25%      March 2015
June 2012       40 million   1.88%       1.25%      June 2022
August 2012     35 million   1.74%       1.25%      June 2022
September 2012  25 million   3.03%       1.25%      December 2015
September 2012  25 million   1.24%       1.25%      March 2017
November 2012   25 million   1.33%       1.25%      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 an unrealized loss, net of unrealized gains, of $908,000 ($554,000 after tax) and $9.1 million ($5.6 million after tax) at September 30, 2013 and 2012, respectively, that is included in equity as part of accumulated other comprehensive loss. Assuming market rates remain constant with the rates at September 30, 2013, a loss (net of tax) of approximately $1.6 million included in accumulated other comprehensive loss is expected to be recognized in earnings as an adjustment to 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 bank. The maximum amount of borrowings available under this facility is 25.0 million Euros ($33.8 million). Outstanding borrowings under the credit facility totaled 22.5 million Euros ($30.4 million) at September 30, 2013. The weighted-average interest rate on outstanding borrowings under the facility at September 30, 2013 was 1.37%.

The Company, through its German subsidiary, Saueressig, has several loans with various European banks. Outstanding borrowings on these loans totaled 1.7 million Euros ($2.3 million) and 8.2 million Euros ($10.5 million) at September 30, 2013 and 2012, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at September 30, 2013 and 2012 was 4.04% and 6.10%, respectively.

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 5.1 million Euros ($6.9 million) and 6.3 million Euros ($8.1 million) at September 30, 2013 and 2012, respectively. Matthews International S.p.A. also has four lines of credit totaling 11.4 million Euros ($15.4 million) with the same Italian banks. Outstanding borrowings on these lines were 5.6 million Euros ($7.6 million) and 3.4 million Euros ($4.3 million) at September 30, 2013 and 2012, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at September 30, 2013 and 2012 was 3.16% and 3.08%, 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 1,194,670 shares remain available for repurchase as of September 30, 2013. The buy-back . . .

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