Matthews International Corporation (MATW) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; filed November 22, 2019. The fourth quarter includes a major goodwill impairment that drove the full-year net loss. Matthews operates SGK Brand Solutions, Memorialization, and Industrial Technologies.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $1,537.3 million | $1,602.6 million |
| Gross profit / margin | $542.5 million / 35.3% | $584.2 million / 36.5% |
| Operating profit | $10.3 million | $138.6 million |
| Net income (loss) attributable to Matthews shareholders | $(38.0) million | $107.4 million |
| Diluted EPS | $(1.21) | $3.37 |
| Adjusted EBITDA (non-GAAP) | $220.9 million | $255.1 million |
| Cash provided by operating activities | $131.1 million | $147.6 million |
| Capital expenditures | $37.7 million | $43.2 million |
Sales fell 4.1%; management estimated a $32.6 million adverse currency effect. Lower SGK sales included an approximately $24 million impact from a major brand customer moving work in-house. Higher materials, freight, and currency headwinds weighed on gross margin. Adjusted EBITDA declined 13.4%.
Segment sales and adjusted EBITDA: SGK Brand Solutions $743.9 million and $119.5 million (down from $805.3 million and $150.2 million); Memorialization $636.9 million and $134.3 million (sales modestly higher, EBITDA down from $145.5 million); Industrial Technologies $156.5 million and $24.1 million (both below FY2018). Segment EBITDA is a company-defined non-GAAP measure.
Balance sheet, debt, and liquidity
- Cash was $35.3 million; working capital was $303.8 million, down from $328.7 million; current ratio was 2.1.
- Total debt, including current maturities, was $940.7 million, versus $960.6 million a year earlier. Long-term debt reported as non-current was $898.2 million. Cash and operating cash flow were not sufficient to eliminate substantial reliance on borrowing.
- Operating cash flow declined to $131.1 million. Financing activities used $75.0 million, including $26.1 million of share repurchases and $25.6 million of dividends.
- The $900 million revolving facility and term loan mature April 2021. The $115 million receivables securitization facility matures April 2020; management intended to extend it. European credit facilities and notes also had December and November 2019 maturities, respectively; management intended to extend the facility. The company reported covenant compliance at year-end.
Material changes, outlook, and risks
- In Q4, Matthews recorded a $77.6 million goodwill impairment for SGK’s Graphics Imaging reporting unit; Q4 operating loss was $59.8 million and net loss attributable to shareholders was $71.1 million. The reporting unit’s fair value was approximately equal to carrying value after the charge, leaving sensitivity to forecast performance and valuation assumptions.
- FY2019 also included increased intangible amortization, losses on divestitures and investments, acquisition and ERP integration costs, and strategic cost-reduction charges; gains on property sales partly offset these items. Management’s adjusted EBITDA excludes specified items and is not a GAAP substitute for earnings or cash flow.
- For FY2020, management targeted revenue growth in Memorialization and Industrial Technologies and relatively stable SGK revenue. It expected approximately $50 million of capital expenditures and said operating cash flow should fund planned spending. A strategic review identified cost-structure improvements expected over the next two fiscal years. Trade-name changes are expected to raise amortization substantially over the next three years.
- Key exposures include economic and foreign-exchange shifts, commodity and transportation costs, competitive pricing, customer transitions, cremation and mortality trends, acquisition integration, cybersecurity and regulatory compliance, and environmental obligations. A 10% stronger U.S. dollar was estimated to reduce reported annual sales by $53.3 million and operating income by $3.1 million.
- A Saudi Arabia project dispute concerns a funded letter of credit of approximately $10.5 million. Matthews had won a U.K. court ruling but still needed an equivalent Saudi ruling to enforce collection; resolution could take until 2020 and recovery was uncertain.
- Environmental remediation accrual was $1.4 million. Management did not expect ordinary legal proceedings or known environmental matters to materially affect consolidated results, but outcomes may differ from estimates.
Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of September 30, 2019.
Important facts for investors to verify
- Whether SGK’s revised forecasts and cost-reduction plans support the carrying value of remaining goodwill and prevent further impairment.
- Whether FY2020 segment revenue and planned cost savings materialize, particularly in SGK and Industrial Technologies.
- Facility extensions, refinancing and covenant headroom ahead of the 2020 and 2021 maturities.
- Actual cash conversion, working-capital requirements, and the sustainability of dividends and repurchases alongside debt obligations.
- Progress and recoverability of the $10.5 million Saudi dispute asset, plus developments in environmental and tax contingencies.