Matthews International Corporation — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022. Matthews is a global provider of memorialization products, industrial technologies and SGK Brand Solutions. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales | $449.2 | $438.6 |
| Gross profit / margin | $138.9 / 30.9% | $131.6 / 30.0% |
| Operating profit | $17.2 | $10.8 |
| Net income (loss) attributable to Matthews shareholders | $3.7 | $(19.8) |
| Diluted earnings (loss) per share | $0.12 | $(0.62) |
| Adjusted EBITDA (non-GAAP) | $49.3 | $53.3 |
| Net cash used in operating activities | $(36.2) | $(27.2) |
| Capital expenditures | $12.4 | $12.6 |
Adjusted EBITDA margin was approximately 11.0%, compared with 12.2%. Operating cash use included a $24.2 million payment to settle retirement-plan obligations and a $43.2 million working-capital outflow. Investing cash use was $14.2 million, including capital expenditures and $1.8 million for acquisitions. Financing activities provided $22.3 million, including net long-term debt proceeds of $32.7 million, dividends of $7.0 million and share repurchases of $2.5 million.
At December 31, 2022, cash was $42.7 million, working capital was $266.5 million and the current ratio was 1.7. Total debt was $837.1 million, up from $798.6 million at September 30, 2022; long-term debt was $834.1 million. The company reported compliance with debt covenants. Its $750 million revolving credit facility matures in March 2025; $495.4 million of U.S.-dollar borrowings was outstanding. The $299.6 million 5.25% senior notes mature in December 2025. Interest expense rose to $10.2 million from $6.5 million, reflecting higher average debt and rates.
Material changes versus the prior period
- Sales increased 2.4%, despite an estimated $17.0 million unfavorable foreign-exchange effect. Industrial Technologies sales rose to $109.1 million from $74.3 million, primarily reflecting the OLBRICH and R+S Automotive acquisitions and higher engineered-product sales. Memorialization sales declined to $206.5 million from $210.7 million; SGK Brand Solutions declined to $133.6 million from $153.5 million.
- Gross margin improved to 30.9% from 30.0%, supported by pricing, productivity and Industrial Technologies mix; higher input costs, unfavorable mix and lower margins on certain U.K. cremation equipment projects partly offset those gains. Selling and administrative expense increased to $111.4 million from $99.3 million.
- Adjusted EBITDA fell to $49.3 million from $53.3 million. Memorialization and SGK declined, while Industrial Technologies improved to $12.2 million from $7.2 million.
- GAAP net income improved from a prior-year loss, when results included a $30.9 million non-cash pension settlement charge. The current period included a $1.3 million non-cash charge from settling other retirement-plan obligations. Intangible amortization decreased to $10.3 million from $21.5 million, partly because the prior period included amortization of discontinued trade names.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided. Management estimated fiscal 2023 capital spending at approximately $75 million and expected operating cash generation to fund planned capital projects.
- Industrial Technologies received more than $200 million of first-quarter orders for energy-storage solutions from EV, fuel-cell and battery manufacturers; management said these orders are expected to support the segment’s organic-growth objectives.
- Management expects labor-cost increases, supply-chain challenges and other inflationary impacts to affect results in the near term, with partial mitigation expected from pricing and cost-reduction initiatives.
- Risk factors include demand and pricing conditions, input costs, foreign exchange and interest rates, supply-chain and labor issues, acquisitions and integration, and geopolitical disruption. Turkish subsidiaries are subject to highly inflationary accounting; related exchange losses were $1.1 million in the quarter.
- SGK Brand Solutions’ goodwill reporting unit had a $82.5 million impairment in fiscal 2022 and its fair value was then approximately its carrying value. The filing cautions that further impairment may be required if forecasts or valuation assumptions deteriorate. The company also describes ongoing environmental assessments and remediation; management does not expect ordinary-course legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether Industrial Technologies’ acquisition-led growth and reported order pipeline translate into sustained organic revenue, margins and cash flow.
- Whether SGK’s sales and profitability stabilize, and whether the segment’s goodwill valuation remains supportable.
- Debt levels, borrowing costs, covenant headroom and refinancing plans ahead of the 2025 facility and notes maturities.
- Working-capital trends and reliance on the receivables purchase agreement, which had $114.0 million of receivables sold at quarter-end and matures in March 2024.
- Progress toward offsetting inflation and labor costs through pricing and productivity, alongside the cash impact of the approximately $75 million fiscal-year capital-spending plan.