Matthews International Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. Dollar amounts are in millions unless otherwise stated. The company operates in SGK Brand Solutions, Memorialization and Industrial Technologies.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $428.4 | $359.4 | $1,232.2 | $1,099.2 |
| Gross profit / margin | $137.3 / 32.0% | $121.0 / 33.7% | $403.8 / 32.8% | $361.4 / 32.9% |
| Operating profit (loss) | $9.3 | $5.2 | $34.6 | $(84.8) |
| Net income attributable to Matthews shareholders | $3.4 | $2.3 | $6.6 | $(94.6) |
| Diluted earnings (loss) per share | $0.10 | $0.07 | $0.21 | $(3.04) |
| Adjusted EBITDA (non-GAAP) | $60.0 | $49.4 | $175.7 | $139.0 |
Q3 sales increased about 19% year over year, while gross margin declined. Nine-month sales rose about 12%; the prior-year operating and net losses included a $90.4 million goodwill impairment charge. Nine-month operating cash flow was $106.9 million, versus $123.6 million, and capital expenditures were $24.5 million. Cash increased to $46.2 million from $41.3 million at September 30, 2020.
At June 30, total debt was $792.5 million, compared with $834.5 million at September 30, 2020; net debt was approximately $746.3 million. Working capital was $291.3 million and the current ratio was 1.9. The $750 million revolving facility had $382.3 million drawn; the $115 million receivables securitization facility had $90.7 million drawn. The company reported compliance with debt covenants.
Material changes and management commentary
- Nine-month sales and adjusted EBITDA increased across the business overall. Memorialization benefited from higher casket volumes, higher memorial-product sales, improved pricing and an acquisition; SGK benefited from engineered-products demand and stronger Europe and Asia-Pacific sales; Industrial Technologies benefited from warehouse automation and product identification.
- Reported nine-month gross margin was nearly flat year over year: productivity and SGK product-margin improvements were offset by higher material and transportation costs and weaker margins on U.K. cremation and incineration projects. Management expects inflationary costs to affect near-term results and expects partial mitigation through pricing and cost reductions.
- COVID-19 continued to cause customer project delays and business disruptions, while also contributing to higher memorialization volumes. Management expected short-term effects to continue as the pandemic subsided.
- The company expects fiscal 2021 capital spending of approximately $40 million and stated it expects operating cash flow to fund anticipated capital projects. No earnings or revenue guidance was provided in the filing.
- Fiscal 2021 acquisitions included a small hydrogen fuel-cell business and a cemetery-products business. The company also redeemed a preferred-share investment for $15 million.
Risks, contingencies and unusual items
- The January 2021 goodwill review found reporting-unit fair values above carrying amounts, but Graphics Imaging headroom was only about 5%; weaker projections or adverse valuation assumptions could lead to future impairment.
- Amortization increased, including charges associated with shortened customer-relationship useful lives; accelerated amortization of certain discontinued trade names is expected to continue through fiscal Q1 2022.
- The company froze future accruals effective April 30, 2021 for its supplemental retirement plan and the defined-benefit portion of its officers retirement restoration plan. The resulting curtailment and prior-service-cost items affected pension expense.
- The $115 million securitization facility matures in March 2022 and the company intends to extend it. A European credit facility matures in December 2021 and the company also intends to extend it.
- Unrecognized tax benefits were $8.1 million; approximately $5.7 million could decrease within 12 months, principally following audits or statute expirations. Environmental remediation obligations and ordinary-course legal matters are also disclosed; management did not expect the legal proceedings to materially adversely affect results or financial condition.
- Other stated risks include economic and foreign-exchange changes, material costs, demand and pricing pressures, mortality and cremation trends, acquisition integration, cybersecurity, regulation, and pandemic-related supply-chain or customer disruption. Management reported no material change in risk factors or market risk and said disclosure controls were effective.
Investor verification priorities
- Track whether pricing and cost-reduction actions offset material, transportation and other inflationary costs, and whether gross margins recover.
- Assess sustainability of Memorialization’s elevated volumes and the extent to which pandemic-related demand influenced comparisons.
- Review Graphics Imaging’s narrow impairment headroom and assumptions used in goodwill valuations.
- Verify extension or refinancing of the 2022 securitization facility and near-term European facility, and monitor borrowing levels and covenant headroom.
- Reconcile adjusted EBITDA with GAAP earnings, including recurring cost-reduction charges, amortization and pension-related items.
- Monitor operating cash conversion, working-capital needs, planned capital spending and remaining tax and environmental exposures.