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MATW > SEC Filings for MATW > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for MATTHEWS INTERNATIONAL CORP

Form 10-Q for MATTHEWS INTERNATIONAL CORP


1-May-2014

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, 2013. 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, including the risks associated with the Company's pending acquisition of Schawk, Inc. ("SGK"), 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 the sales and operating profit for the Company's
Memorialization and Brand Solutions businesses for the three and six-month
periods ended March 31, 2014 and 2013.

                      Three Months Ended           Six Months Ended
                           March 31,                   March 31,
                      2014          2013          2014          2013
Sales:
Memorialization     $ 125,651     $ 136,006     $ 243,011     $ 260,689
Brand Solutions       121,186       120,384       233,771       221,310
                    $ 246,837     $ 256,390     $ 476,782     $ 481,999
Operating Profit:
Memorialization     $  17,775     $  16,599     $  30,313     $  31,139
Brand Solutions         3,117         8,471         5,575        10,430
                    $  20,892     $  25,070     $  35,888     $  41,569

Sales for the six months ended March 31, 2014 were $476.8 million, compared to $482.0 million for the six months ended March 31, 2013. The decrease in sales primarily reflected lower sales in the Memorialization businesses and Merchandising Solutions segment, partially offset by higher sales volume in the Marking and Fulfillment Systems segment and the impact of acquisitions. Consolidated sales for the current period also reflected the benefit of favorable changes in foreign currencies against the U.S. dollar of approximately $4.0 million.

In the Company's Memorialization business, Cemetery Products segment sales for the first six months of fiscal 2014 were $102.7 million, compared to $108.5 million for the first six months of fiscal 2013. The decrease primarily reflected lower unit volume of memorial products. Sales for the Funeral Home Products segment were $121.7 million for the six months ended March 31, 2014, compared to $128.8 million a year ago. The decrease resulted principally from lower unit volume. Based on published CDC data, the Company estimated that the number of casketed, in-ground burial deaths in the U.S. declined in the first six months of fiscal 2014, compared to a year ago, contributing to the decrease in unit volume in both the Cemetery Products and Funeral Home Products segments in fiscal 2014. Sales for the Cremation segment were $18.6 million for the first six months of fiscal 2014, compared to $23.4 million for the same period a year ago. The decrease principally reflected lower sales volume of cremation equipment, primarily in the U.K. and Europe. However, based on current backlog, including a significant incinerator project, the segment expects to recover the first half decline during the remaining six months of fiscal 2014. In the Brand Solutions business, sales for the Graphics Imaging segment were $153.0 million in the first six months of fiscal 2014, compared to $141.0 million for the same period a year ago. The acquisition of Wetzel Holding AG, Wetzel GmbH and related affiliates (collectively "Wetzel") in November 2012 contributed $7.7 million to the segment's sales increase in the first six months of fiscal 2014. In addition, changes in foreign currency values against the U.S. dollar favorably impacted the segment's fiscal 2014 sales by $3.8 million, compared to fiscal 2013. Marking and Fulfillment Systems segment sales were $44.4 million for the first six months of fiscal 2014, compared to $40.3 million for the first six months of fiscal 2013. The increase resulted principally from higher unit volume of equipment in North America and the acquisition of Pyramid Controls, Inc. ("Pyramid") in December 2012. Pyramid contributed $1.8 million to the fiscal 2014 sales increase over fiscal 2013. Sales for the Merchandising Solutions segment were $36.5 million for the first six months of fiscal 2014, compared to $40.1 million for the same period a year ago. The decrease principally reflected lower sales to several large, national accounts. However, based upon current backlog, the Company expects the segment to recover the current decline by the end of fiscal 2014.


Gross profit for the six months ended March 31, 2014 was $171.6 million, compared to $174.8 million for the same period a year ago. Consolidated gross profit as a percent of sales was 36.0% and 36.3% for the first six months of fiscal 2014 and fiscal 2013, respectively. The decrease in consolidated gross profit primarily reflected the impact of lower sales in the Memorialization businesses and the Merchandising Solutions segment.

Selling and administrative expenses for the six months ended March 31, 2014 were $135.7 million, compared to $133.3 million for the first six months of fiscal 2013. Consolidated selling and administrative expenses as a percent of sales were 28.5% for the six months ended March 31, 2014, compared to 27.6% for the same period last year. Selling and administrative expenses in the first six months of fiscal 2014 included expenses related to acquisition activities, primarily the SGK acquisition, of $3.6 million, the Company's strategic cost structure initiatives of $3.3 million and litigation expenses of $1.1 million related to a legal dispute in the Funeral Home Products segment. Selling and administrative expenses in the first six months of fiscal 2013 included expenses related to acquisition activities of $2.3 million, strategic cost structure initiatives of $3.6 million, expenses of $1.2 million related to implementation of an ERP system and an impairment charge of approximately $1.6 million related to the carrying value of an intangible asset. These expenses were partially offset by a gain of $3.3 million on the settlement of the purchase of the remaining ownership interest in one of the Company's subsidiaries.

Operating profit for the six months ended March 31, 2014 was $35.9 million, compared to $41.6 million for the six months ended March 31, 2013. Cemetery Products segment operating profit for the first six months of fiscal 2014 was $14.2 million, compared to $12.2 million for the first six months of fiscal 2013. Fiscal 2014 operating profit included expenses of $570,000 related to strategic cost-structure initiatives. Fiscal 2013 operating profit included expenses related to strategic cost-structure initiatives of $1.7 million and ERP implementation costs of $1.2 million. Excluding these expenses from both periods, the Cemetery Products segment operating profit in the first six months of fiscal 2014 was approximately the same as in the prior year. The impact on operating profit of lower sales was offset by the benefit of the Company's recent cost structure initiatives. Operating profit for the Funeral Home Products segment was $16.0 million for the six months ended March 31, 2014, compared to $17.4 million for the first six months of fiscal 2013. The Funeral Home Products segment operating profit included expenses related to the Company's strategic cost-structure initiatives of $1.7 million and $762,000 for the first six months of fiscal 2014 and 2013, respectively. In addition, the fiscal 2014 period includes litigation expenses of $1.1 million related to a legal dispute with one of the Company's competitors. Excluding the aforementioned expenses from both periods, the Funeral Home Products segment operating profit increased $614,000 despite lower sales, reflecting the benefit of the Company's recent cost structure initiatives. The Cremation segment reported an operating profit of $163,000 for the first six months of fiscal 2014, compared to $1.5 million for the same period in fiscal 2013. The decrease principally reflected the impact of lower sales. Graphics Imaging segment operating profit for the six months ended March 31, 2014 was $2.4 million, compared to $5.8 million for the six months ended March 31, 2013. The Graphics Imaging segment's fiscal 2014 operating profit included acquisition-related expenses of $3.5 million and expenses related to strategic cost structure initiatives of $585,000. Operating profit for the segment in fiscal 2013 included acquisition-related expenses of $2.1 million, expenses related to strategic cost structure initiatives of approximately $850,000 and an impairment charge of $1.6 million related to the carrying value of an intangible asset. These fiscal 2013 expenses were partially offset by a gain of $3.3 million on the settlement of the purchase of the remaining ownership interest in one of the Company's subsidiaries. Excluding these items from both fiscal periods, the Graphics Imaging segment operating profit declined approximately $600,000, primarily reflecting an unfavorable change in product mix, partially offset by the impact of the Wetzel acquisition of approximately $500,000. Operating profit for the Marking and Fulfillment Systems segment for the first six months of fiscal 2014 was $3.0 million, compared to $2.8 million for the same period a year ago. The increase primarily resulted from the favorable impact of higher sales. Merchandising Solutions segment operating profit was $254,000 for the first six months of fiscal 2014, compared to $1.8 million for the same period in fiscal 2013, primarily reflecting lower sales and an increase in expenses related to strategic cost structure initiatives of approximately $600,000.


Investment income was $1.2 million for the six months ended March 31, 2014, compared to $840,000 for the six months ended March 31, 2013. The increase reflected higher rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for the first six months of fiscal 2014 was $5.5 million, compared to $6.3 million for the same period last year. The decrease in interest expense primarily reflected lower interest rates. Other deductions, net, for the six months ended March 31, 2014 represented a decrease in pre-tax income of $1.8 million, compared to a decrease in pre-tax income of $2.2 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 six months ended March 31, 2014 was 35.9%, compared to 35.0% for the first six months of fiscal 2013 and 32.7% for the fiscal 2013 full year. The fiscal 2013 full year effective tax rate included the benefit of a European tax loss carryback. The increase in the effective tax rate for the first six months of fiscal 2014 primarily reflected the impact of estimated non-deductible transaction costs related to the pending acquisition of SGK. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes and estimated non-deductible acquisition costs, offset by lower foreign income taxes.

Net earnings attributable to noncontrolling interests was a loss of $90,000 in the six months ended March 31, 2014, compared to a loss of $389,000 for the same period a year ago. The decrease related principally to the Company's acquisition of the remaining ownership interest in its Turkish subsidiary in March 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 may need to be recognized. For purposes of testing for impairment, the Company uses a discounted cash flow technique. A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rate. The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections. The discount rate used in the discounted cash flow analysis was developed with the assistance of valuation experts and management believes it appropriately reflects the risks associated with the Company's operating cash flows. In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.

The Company performed its annual impairment review in the second quarter of fiscal 2014 and determined that for all reporting units, except Graphics Imaging, the estimated fair value significantly exceeded carrying value so no adjustments to the carrying value of goodwill were necessary at March 31, 2014. As discussed in the Company's Annual Report on Form 10-K for the year ended September 30, 2013, recent economic conditions in Europe have unfavorably impacted the operating results of the Graphics Imaging business. For the Graphics Imaging reporting unit, which had $191.6 million of goodwill at March 31, 2014, the estimated fair value exceeded its carrying value by less than 10%, resulting in no goodwill impairment for the unit. While the Graphics Imaging reporting unit passed the first step of the impairment test, if its operating profits or another significant assumption were to deteriorate in the future, it could adversely affect the estimated fair value of the reporting unit. Factors that could have a negative impact on the estimated fair value of the Graphics Imaging reporting unit include a further delay in the recovery of the European market, continued pricing pressure, declines in expected volumes, and an increase in discount rates. If the Company is unsuccessful in its plans to recover the profitability of this business, the estimated fair value could decline and lead to a potential goodwill impairment in the future.

The carrying amount of trade names with indefinite lives as of March 31, 2014 and September 30, 2013 totaled $23.0 million and $22.9 million, respectively. These trade names are tested for impairment annually in the second quarter. Matthews performed a quantitative impairment evaluation of its trade names for 2014, and the test indicated the trade names were not impaired.


Liquidity and Capital Resources:

Net cash provided by operating activities was $23.6 million for the first six months of fiscal 2014, compared to $30.1 million for the first six months of fiscal 2013. Operating cash flow for both periods reflected net income adjusted for depreciation, amortization, stock-based compensation expense and non-cash pension expense. Net changes in working capital items, which principally related to increases in inventory and fiscal year-end compensation-related payments, resulted in a use of working capital of approximately $23.2 million in fiscal 2014, compared to $10.6 million a year ago.

Cash used in investing activities was $9.8 million for the six months ended March 31, 2014, compared to $74.5 million for the six months ended March 31, 2013. Investing activities for the first six months of fiscal 2014 primarily reflected capital expenditures. Investing activities for the first six months of fiscal 2013 primarily reflected acquisitions, net of cash acquired, of $63.8 million and capital expenditures of $10.9 million.

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 $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 six months ended March 31, 2014 was $11.5 million, primarily reflecting long-term debt proceeds, net of repayments, of $851,000, proceeds from the sale of treasury stock (stock option exercises) of $1.8 million, treasury stock purchases of $4.3 million, payment of contingent consideration of $3.7 million and dividends of $6.0 million to the Company's shareholders. Cash provided by financing activities for the six months ended March 31, 2013 was $41.5 million, primarily reflecting long-term debt proceeds, net of repayments, of $63.6 million, payment of contingent consideration of $9.5 million, treasury stock purchases of $7.3 million and dividends of $5.6 million to the Company's shareholders.

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions. The maximum amount of borrowings available under the facility is $500.0 million and borrowings under the facility bear interest at LIBOR plus a factor ranging from .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 March 31, 2014 and September 30, 2013 were $310.0 million and $305.0 million, respectively. The weighted-average interest rate on outstanding borrowings under the credit facilities was 2.53% and 2.98% at March 31, 2014 and 2013, respectively.

In connection with the pending acquisition of SGK (see "Acquisitions"), the Company entered into a commitment letter with RBS Citizens, N.A. in March 2014 to amend and increase the maximum amount of borrowings available under the facility to $850.0 million. The amendment is conditional upon the closing of the SGK acquisition.

The Company has entered into the following interest rate swaps:

                          Fixed   Interest Rate
                         Interest   Spread at
Effective Date  Amount     Rate   March 31, 2014 Maturity Date
May 2011        $25,000   1.37%       1.00%      May 2014
October 2011     25,000   1.67%       1.00%      October 2015
November 2011    25,000   2.13%       1.00%      November 2014
March 2012       25,000   2.44%       1.00%      March 2015
June 2012        40,000   1.88%       1.00%      June 2022
August 2012      35,000   1.74%       1.00%      June 2022
September 2012   25,000   3.03%       1.00%      December 2015
September 2012   25,000   1.24%       1.00%      March 2017
November 2012    25,000   1.33%       1.00%      November 2015
May 2014         25,000   1.35%       1.00%      May 2018

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 gain, net of unrealized losses, of $447,000 ($273,000 after tax) at March 31, 2014 that is included in shareholders' equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at March 31, 2014, an approximately $1.1 million net unrealized loss included in accumulated other comprehensive income is expected to be recognized in earnings as interest expense over the next twelve months.

The Company, through certain of its European subsidiaries, has a credit facility with a bank. The maximum amount of borrowings available under this facility is 25.0 million Euros ($34.4 million). Outstanding borrowings under the credit facility totaled 21.9 million Euros ($30.1 million) and 22.5 million Euros ($30.4 million) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings under the facility at March 31, 2014 and 2013 was 1.48% and 1.37%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled 1.5 million Euros ($2.0 million) and 1.7 million Euros ($2.3 million) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at March 31, 2014 and 2013 was 4.04% and 3.89%, respectively.

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled 6.5 million Euros ($8.9 million) and 7.4 million Euros ($10.0 million) at March 31, 2014 and September 30, 2013. The weighted-average interest rate on outstanding borrowings of Wetzel at March 31, 2014 and 2013 was 7.75% and 7.17%, 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 7.1 million Euros ($9.8 million) and 5.1 million Euros ($6.9 million) at March 31, 2014 and September 30, 2013, respectively. Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($15.6 million) with the same Italian banks. Outstanding borrowings on these lines were 4.3 million Euros ($5.9 million) and 5.6 million Euros ($7.6 million) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at March 31, 2014 and 2013 was 3.12% and 3.16%, 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 1,086,065 shares remain available for repurchase as of March 31, 2014. 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 $251.9 million at March 31, 2014, compared to $222.0 million at September 30, 2013. Cash and cash equivalents were $61.6 million at March 31, 2014, compared to $59.0 million at September 30, 2013. The Company's current ratio was 2.5 and 2.2 at March 31, 2014 and September 30, 2013, 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") 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 March 31, 2014, an accrual of approximately $5.2 million had been recorded for environmental remediation (of which $1.4 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 March 2014, the Company signed a definitive agreement to acquire Schawk, Inc. ("SGK") (NYSE: SGK). SGK is a leading global brand development, activation and brand deployment company. Under the terms of the transaction, SGK shareholders will receive $11.80 cash and 0.20582 shares of Matthews' common stock for each SGK share held. Based on the closing price of Matthews' stock at the time the agreement was signed, the transaction represents an implied price of $20.00 per share and a total enterprise value of approximately $577 million. The transaction is expected to close in the quarter ending September 30, 2014, subject to approval by the shareholders of SGK and other customary closing . . .

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