Matthews International Corporation — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020; fiscal third quarter. Dollar amounts below are in millions unless otherwise noted. The company provides brand solutions, memorialization products and industrial technologies.
Financial performance and position
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $359.4 | $379.3 | $1,099.2 | $1,144.9 |
| Gross profit | $121.0 | $137.2 | $361.4 | $399.9 |
| Gross margin | 33.6% | 36.2% | 32.9% | 34.9% |
| Operating profit (loss) | $5.2 | $29.7 | $(84.8) | $70.1 |
| Net income (loss) attributable to Matthews shareholders | $2.3 | $14.6 | $(94.6) | $33.1 |
| Diluted EPS | $0.07 | $0.46 | $(3.04) | $1.05 |
| Adjusted EBITDA (non-GAAP) | $49.4 | $59.0 | $139.0 | $161.6 |
Cash flow: Nine-month operating cash flow was $123.6, versus $89.4 a year earlier. Working-capital changes contributed $41.7, primarily reflecting lower receivables and enhanced collections. Investing activities provided $7.4, including $42.2 of proceeds from a business-interest sale; capital expenditures were $25.5. Financing activities used $123.1, principally reflecting net debt repayments and dividends. Cash ended the period at $42.9, compared with $35.3 at September 30, 2019.
Liquidity and debt: Working capital was $264.6, down from $303.8 at fiscal year-end; the current ratio was 1.9 versus 2.1. Reported current and long-term debt totaled approximately $860.9, including current maturities. The company had a $750 revolving facility maturing in March 2025, a $35 term loan maturing in July 2021, $300 of 5.25% senior notes due December 2025, and an $85.3 receivables-facility balance. It reported compliance with debt covenants. Management said existing liquidity, operating cash flow and borrowing capacity should meet capital needs for the foreseeable future.
Material changes and segment trends
- Quarterly sales fell 5.2% year over year; nine-month sales declined 4.0%. Management attributed the nine-month decrease mainly to SGK Brand Solutions and Industrial Technologies, partly offset by Memorialization. Currency movements reduced nine-month consolidated sales by an estimated $10.4.
- SGK Brand Solutions: Nine-month sales decreased to $513.5 from $557.9 and adjusted EBITDA to $61.8 from $86.6. Lower U.S. and U.K. brand sales, private-label weakness, European product declines and unfavorable mix and pricing weighed on results.
- Memorialization: Nine-month sales increased to $478.3 from $474.3 and adjusted EBITDA to $103.0 from $101.4. Casket and cremation/incineration sales and productivity gains helped; cemetery memorial demand was affected by COVID-related restrictions.
- Industrial Technologies: Nine-month sales decreased to $107.3 from $112.7 and adjusted EBITDA to $15.2 from $15.7. Warehouse automation project access and applied technologies sales were weaker, although orders for warehouse automation remained strong.
- Nine-month SGK results included a $90.4 goodwill impairment charge, recorded in Q2 after COVID-19 triggered a reassessment of two reporting units. Their fair values were approximately equal to carrying values after the impairment; further impairment may be required if projections or valuation assumptions deteriorate.
Outlook, risks and unusual items
- Management expected COVID-19 to continue adversely affecting sales and results in the short term and for the remainder of FY2020, citing customer disruption, shutdowns, weaker economic conditions and delayed projects. It anticipated higher near-term volatility and a return toward normalized conditions after the pandemic subsides. No specific sales or earnings guidance was provided.
- Fiscal 2020 capital spending was estimated at $35–$40, expected to be funded from operating cash. The company expected to contribute approximately $15 to its principal pension plan in Q4, potentially in cash or shares, and was evaluating additional contributions.
- A $10.6 reserve was recorded for the full funded value of a letter of credit tied to a Saudi Arabian equipment project. A UK court had ruled in Matthews’ favor, but Saudi proceedings were delayed, likely into 2021; COVID-related restrictions also increased uncertainty about government support and collection. Recovery remains contingent on litigation, available funds and enforcement.
- The company sold its interest in a pet cremation business for $42.2 cash and $15.0 in senior preferred shares, recognizing an $11.2 pretax gain. The preferred shares carry an escalating 6%–14% yield and are expected to be redeemed before the end of 2022.
- Cost-reduction and integration-related charges were elevated: strategic initiatives and other charges were $25.0 for nine months, and total adjusted EBITDA adjustments also included acquisition, ERP, COVID-related and other items. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Other risks include potential further goodwill impairment, pandemic-related demand and supply-chain disruption, variable-rate debt and interest-rate hedges, environmental obligations, and uncertain tax positions. The company expected to defer approximately $9.0 of FY2020 taxes, primarily U.S. payroll taxes, under relief provisions.
Investor verification priorities
- Review the drivers of SGK’s sales and margin declines and whether the COVID-affected customer and project trends improved after quarter-end.
- Assess cash conversion, including the $41.7 working-capital benefit, and the sustainability of operating cash flow and debt reduction.
- Monitor the two impaired SGK reporting units’ valuation assumptions and any risk of additional impairment.
- Track the Saudi legal dispute, reserve adequacy and prospects for recovery; the filing indicates material collection uncertainty.
- Confirm liquidity, covenant headroom, upcoming maturities and the planned pension contribution alongside capital spending and dividend commitments.