Matthews International Corporation — Fiscal 2019 Third-Quarter 10-Q
Reporting period: Three and nine months ended June 30, 2019; fiscal year ends September 30. Financial statements are unaudited. Amounts below are in millions except per-share data and percentages.
Business context and results
Matthews operates three segments: SGK Brand Solutions, Memorialization, and Industrial Technologies. For fiscal 2019, management changed its primary segment profitability measure to adjusted EBITDA and stopped allocating corporate costs to the segments; prior-year segment figures were revised for comparison.
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $379.3 | $411.6 | $1,144.9 | $1,195.1 |
| Gross profit | $137.2 | $152.6 | $399.9 | $434.7 |
| Gross margin | 36.2% | 37.1% | 34.9% | 36.4% |
| Operating profit | $29.7 | $39.3 | $70.1 | $89.9 |
| Net income attributable to Matthews shareholders | $14.6 | $24.4 | $33.1 | $77.8 |
| Diluted EPS | $0.46 | $0.77 | $1.05 | $2.44 |
| Adjusted EBITDA | $59.0 | $69.2 | $161.6 | $178.2 |
Third-quarter sales fell 7.9% year over year; operating margin was 7.8% versus 9.5%, and net margin was 3.8% versus 5.9%. For the nine months, sales decreased 4.2%, while operating margin declined to 6.1% from 7.5% and net margin to 2.8% from 6.5%. The prior-year nine-month net result included an $18.7 million income-tax benefit, versus a $4.4 million tax expense in 2019.
Segments and drivers
- SGK Brand Solutions: Nine-month sales declined to $557.9 million from $601.8 million and adjusted EBITDA to $86.6 million from $103.0 million. Management cited currency headwinds, lower U.S. and U.K. sales, and a major U.S. client bringing work in-house (about $19 million of sales impact); private-label growth, surfaces and engineered products, and the Frost acquisition partly offset declines.
- Memorialization: Sales were $474.3 million versus $475.6 million; adjusted EBITDA was $101.4 million versus $107.6 million. Lower casket and mausoleum sales, foreign exchange, and divestiture impacts were partly offset by U.K. cremation and incineration equipment and the Star Granite acquisition.
- Industrial Technologies: Sales fell to $112.7 million from $117.8 million; adjusted EBITDA was $15.7 million versus $16.8 million. Lower product-identification and applied-technologies sales were partly offset by warehouse automation.
Consolidated sales declines also reflected an estimated $27.1 million unfavorable foreign-exchange impact for the nine months. Gross profit was pressured by lower sales, materials and transportation costs, and currency; cost reductions, acquisition synergies, and productivity improvements provided offsets. Selling and administrative expense declined, but included a $4.5 million divestiture loss. Intangible amortization increased to $27.2 million from $23.3 million for the nine months.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $89.4 million, up from $82.8 million. Working capital used approximately $14.5 million, versus $5.9 million in the prior-year period.
- Investing activities used $66.8 million, compared with $160.6 million, reflecting $32.0 million of capital expenditures, $11.5 million of net acquisition payments, $33.1 million of investment purchases, and $8.3 million of divestiture proceeds.
- Financing activities used $30.2 million. Net debt proceeds were $16.4 million; the company also spent $21.8 million on share repurchases and paid $19.3 million in dividends. Cash declined by $8.0 million to $33.6 million.
- At June 30, total current and long-term debt on the balance sheet was approximately $979.6 million; cash was $33.6 million. Working capital was $300.4 million and the current ratio was 2.0, versus $328.7 million and 2.1 at September 30, 2018.
- The company reported compliance with debt covenants. Domestic revolving credit and term facilities mature April 2021; $300 million of 5.25% notes mature in 2025. The $115 million receivables securitization facility had $98.9 million outstanding and matures April 2020; management intends to extend it. European credit facilities and notes also mature in late 2019, and management intends to extend the European facility.
Outlook, risks, and unusual items
- Management expected fiscal 2019 capital spending of about $45 million and said operating cash flow should fund anticipated capital projects. It stated that acquisition and systems-integration work would continue to incur costs through the remainder of fiscal 2019. No full-year earnings or revenue guidance was provided in the filing.
- Management’s strategy emphasizes organic growth, cost and productivity improvements, product development, acquisitions and integration, and share repurchases. Segment outlook drivers include client marketing and brand activity, death rates and cremation trends, industrial conditions, product development, and e-commerce.
- A customer dispute over an approximately $10.9 million funded letter of credit tied to a Saudi Arabia project remains unresolved. Matthews prevailed in U.K. court but needs a favorable Saudi ruling to pursue effective enforcement and collection; recovery and timing remain uncertain, and an unfavorable outcome could affect results.
- Annual goodwill testing found no impairment, but one SGK reporting unit’s estimated fair value exceeded carrying value by only about 10%; further deterioration could trigger a future impairment charge.
- Environmental remediation accruals were approximately $1.6 million. Unrecognized tax benefits were $14.5 million, excluding accrued interest and penalties. The company also cited exposure to economic conditions, currency movements, input costs, mortality and cremation trends, competition, customer demand, acquisitions, cybersecurity, and regulatory matters.
Most important facts for investors to verify
- Whether sales and adjusted EBITDA stabilize, especially in SGK, and whether the major client transition causes further revenue losses.
- How much of the year-over-year earnings decline reflects ongoing operations versus tax comparisons, integration charges, the divestiture loss, and other adjustments excluded from adjusted EBITDA.
- Debt maturities, refinancing or extension of the securitization and European facilities, covenant headroom, and the effect of variable rates.
- Progress, collectability, and potential financial exposure in the Saudi Arabia litigation and customer recovery matter.
- Performance of the SGK reporting unit with limited goodwill valuation headroom, and any resulting impairment risk.
- Whether the stated $45 million fiscal-year capital spending expectation and sufficient operating cash flow remain achievable.