Matthews International Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018 unless otherwise noted. Amounts below are in U.S. dollars.
Business context
Matthews operates in SGK Brand Solutions, Memorialization, and Industrial Technologies, serving consumer and retail brands, cemetery and funeral businesses, and industrial and warehouse markets.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Sales | $364.9 million | $374.2 million |
| Gross profit / margin | $115.7 million / 31.7% | $126.4 million / 33.8% |
| Operating income (loss) | $(4.9) million | $16.2 million |
| Net income (loss) attributable to Matthews shareholders | $(10.5) million; $(0.34) per diluted share | $3.1 million; $0.10 per diluted share |
| Adjusted EBITDA (non-GAAP) | $40.2 million | $46.5 million |
| Cash from operating activities | $5.4 million | $8.4 million |
Sales declined 2.5%; gross margin fell 2.1 percentage points. Operating results included $10.3 million of strategic initiatives and other charges, alongside acquisition and ERP integration costs. Intangible amortization rose to $17.9 million from $8.1 million, principally reflecting shortened useful lives for certain trade names. The quarter’s $5.4 million income-tax benefit included discrete benefits from closed tax audits.
Segment sales and adjusted EBITDA were: SGK Brand Solutions $174.9 million and $18.7 million (prior year $185.3 million and $27.4 million); Memorialization $154.4 million and $30.1 million ($153.9 million and $30.3 million); Industrial Technologies $35.7 million and $4.3 million ($35.0 million and $3.6 million). SGK weakness reflected a major U.S. client bringing work in-house, lower European product sales, mix and margin pressure. Memorialization benefited from pricing and cremation equipment sales; Industrial Technologies benefited from product identification sales.
Cash, debt and liquidity
- Cash was $39.4 million at December 31, 2019, versus $35.3 million at September 30, 2019. Working capital was $311.1 million and the current ratio was 2.1.
- Operating cash flow of $5.4 million was below the prior-year $8.4 million; working-capital changes used $13.2 million. Capital expenditures were $9.7 million. Investing activities used $14.2 million, while financing activities provided $11.9 million.
- Balance-sheet debt, including current maturities, totaled approximately $966.9 million, compared with $940.7 million at September 30, 2019; cash-adjusted debt was approximately $927.5 million. The company also had $300 million of 5.25% senior notes due December 2025. Domestic facility borrowing rates averaged 2.60%.
- The $900 million revolving facility and $250 million term loan mature April 26, 2021. The $115 million receivables securitization facility had $106.7 million outstanding and matures April 11, 2020; the company intends to extend it. Management said available liquidity, operating cash flow and borrowing capacity should meet foreseeable capital needs. The company reported compliance with debt covenants.
- Adoption of lease accounting on October 1, 2019 added approximately $80 million of right-of-use assets and related liabilities; this affects balance-sheet comparability with prior periods.
Outlook, risks and unusual items
- Management targeted fiscal 2020 revenue growth in Memorialization and Industrial Technologies and relatively stable revenue in SGK Brand Solutions. It expected cost-structure improvements over fiscal 2020–2021 and estimated fiscal 2020 capital spending of approximately $50 million.
- Management cited economic and currency changes, materials costs, mortality and cremation trends, customer demand and pricing, competition, execution of cost reductions, acquisitions, cybersecurity, regulation and customer concentration/distribution changes as risks.
- A Saudi Arabia environmental-project dispute involves an approximately $11.3 million letter-of-credit payment recorded in other assets. Matthews won in U.K. court but needs a favorable Saudi ruling to enforce collection; the Saudi trial was expected to conclude in calendar 2020. Management expressed confidence, but acknowledged possible adverse financial impact and uncertainty around recovery.
- Following a $77.6 million Graphics Imaging goodwill impairment in fiscal 2019, the reporting unit’s fair value approximated carrying value; further impairment may be needed if projections or valuation assumptions deteriorate.
- The company reported environmental remediation matters and tax examinations. Unrecognized tax benefits were $12.6 million; approximately $3.3 million could decrease within 12 months, primarily through audit resolution or statute expirations.
Important facts for investors to verify
- Whether SGK’s lost client work and European margin pressure persist, and whether planned cost savings offset them.
- Progress on extending the receivables securitization facility before its April 2020 maturity and refinancing or repayment planning for the April 2021 domestic facility maturity.
- Cash conversion and working-capital trends, including funding for planned capital expenditures and dividends.
- Outcome and collectability of the Saudi Arabia claim, plus any change in goodwill impairment indicators.
- The nature, timing and cash costs of the $10.3 million strategic initiatives charge, and the extent to which adjusted EBITDA adjustments recur.