Matthews International Corporation — Q2 FY2021 Form 10-Q
Business context and period: The fiscal second quarter and six months ended March 31, 2021 (fiscal year ends September 30). Matthews operates in SGK Brand Solutions, Memorialization and Industrial Technologies. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended Mar. 31, 2021 | Three months ended Mar. 31, 2020 | Six months ended Mar. 31, 2021 | Six months ended Mar. 31, 2020 |
|---|---|---|---|---|
| Sales | $417.2 | $374.8 | $803.8 | $739.7 |
| Gross profit / margin | $141.0 / 33.8% | $124.8 / 33.3% | $266.5 / 33.2% | $240.5 / 32.5% |
| Operating profit (loss) | $15.0 | $(85.1) | $25.3 | $(90.0) |
| Net income (loss) attributable to Matthews shareholders | $5.0 | $(86.4) | $3.2 | $(96.8) |
| Diluted EPS | $0.16 | $(2.77) | $0.10 | $(3.11) |
| Adjusted EBITDA (non-GAAP) | $60.9 | $49.4 | $115.7 | $89.6 |
Cash flow: Six-month operating cash flow was $92.2, versus $66.0 a year earlier. Investing activities used $11.9, including $15.8 of capital expenditures and $13.1 for an acquisition, partly offset by $15.0 of investment-sale proceeds. Financing activities used $75.5, principally reflecting $53.9 of net debt repayments and $14.0 of dividends. Cash ended the period at $47.0, up from $41.3 at September 30, 2020.
Debt and liquidity: Total debt was $782.5 at March 31, compared with $834.5 at September 30, 2020. The $750.0 revolving facility matures in March 2025; the $35.0 term loan was repaid in March 2021. The $115.0 receivables securitization facility, with $97.6 drawn, matures in March 2022. Matthews reported $275.3 of working capital and a 1.8 current ratio; it was in compliance with debt covenants.
Changes and segment performance
- Six-month sales increased 8.7%, with a favorable $14.1 foreign-exchange impact. Memorialization sales rose to $388.7 from $316.2, while SGK sales fell to $339.2 from $347.7; Industrial Technologies sales were essentially flat at $75.9.
- Memorialization growth reflected higher casket volumes associated with COVID-19, higher sales of other memorial products and equipment, improved pricing, and an acquisition. Its six-month adjusted EBITDA increased to $95.7 from $65.3.
- SGK’s six-month adjusted EBITDA increased to $42.2 from $41.0 despite lower sales, reflecting cost initiatives and improved margins in cylinders and engineered products. Industrial Technologies adjusted EBITDA declined to $9.3 from $10.5.
- Consolidated six-month adjusted EBITDA increased to $115.7 from $89.6. Interest expense declined to $15.0 from $18.9, reflecting lower average debt and rates.
- The prior-year comparison includes a $90.4 goodwill impairment charge in SGK; no impairment was recorded in the current six-month period. That charge materially amplified the prior-year GAAP loss.
Outlook, risks and unusual items
- No quantitative earnings or sales guidance is provided. Management expects COVID-19 to continue causing short-term volatility, including customer disruption, project delays and supply-chain or facility impacts, while anticipating a more normalized state as the pandemic subsides.
- Management says rising raw-material prices are expected to affect results for the remainder of fiscal 2021; higher materials and transportation costs already partly offset productivity gains. Cost-structure improvements are expected to continue through at least fiscal 2022.
- Annual goodwill testing found reporting-unit fair values above carrying values, but the Graphics Imaging unit’s estimated fair value exceeded carrying value by only about 5%. Changes in projections, discount rates or economic conditions could lead to future impairment.
- Fiscal 2021 includes strategic and cost-reduction charges, COVID-related costs, acquisition/integration costs, and increased intangible amortization following revised useful lives for certain customer relationships. These items affect comparability and the company’s non-GAAP adjusted EBITDA measure.
- Unrecognized tax benefits were $10.4; approximately $7.6 could decrease within 12 months, principally from audit conclusions or statutes of limitation. Environmental assessments and remediation are ongoing at certain sites; amounts are not specified here. Management does not expect ordinary-course legal proceedings to have a material adverse effect.
- Subsequent to quarter-end, Matthews contributed $15.0 to its principal retirement plan in April and approved a freeze on future benefit accruals in specified supplemental/officer retirement plans, effective April 30, 2021.
Important facts for investors to verify
- Whether Memorialization’s elevated sales and margins persist as pandemic-related demand changes, and how material and transportation inflation affects profitability.
- Progress in SGK’s cost-reduction program and recovery in retail-related demand, alongside the narrow fair-value cushion at Graphics Imaging.
- Debt capacity and refinancing plans, particularly the securitization facility maturity in March 2022, as well as compliance with leverage and interest-coverage covenants.
- The assumptions and exclusions in adjusted EBITDA reconciliations; it is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Potential effects of COVID-19, customer project delays, foreign exchange, tax examinations and environmental remediation on future results and cash flows.