Matthews International Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; comparison is with the three months ended December 31, 2019 unless otherwise noted. Matthews provides brand solutions, memorialization products and industrial technologies.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Sales | $386.7 million | $364.9 million |
| Gross profit / margin | $125.5 million / 32.5% | $115.7 million / 31.7% |
| Operating profit (loss) | $10.4 million | ($4.9 million) |
| Net loss attributable to Matthews shareholders | ($1.8 million); ($0.06) per diluted share | ($10.5 million); ($0.34) per diluted share |
| Adjusted EBITDA (non-GAAP) | $54.8 million | $40.2 million |
| Operating cash flow | $35.3 million | $5.4 million |
| Capital expenditures | $7.5 million | $9.7 million |
Sales rose 6.0%. Gross margin improved by 0.8 percentage points; selling and administrative expenses fell to 25.8% of sales from 28.1%. Adjusted EBITDA margin was approximately 14.2%, versus 11.0%. Operating cash flow improved, including because working-capital changes reduced cash by $3.7 million, compared with $13.2 million in the prior-year quarter.
Segments and drivers
- SGK Brand Solutions: Sales of $168.1 million, down from $174.9 million; adjusted EBITDA increased to $21.3 million from $18.7 million. Lower merchandising solutions and European products sales were partly offset by cost savings and lower travel costs.
- Memorialization: Sales of $183.3 million, up from $154.4 million; adjusted EBITDA increased to $44.1 million from $30.1 million. Growth reflected higher casket volumes amid COVID-19, improved pricing and higher cremation-equipment sales.
- Industrial Technologies: Sales of $35.2 million, versus $35.7 million; adjusted EBITDA declined to $3.5 million from $4.3 million. COVID-related limits on job-site access delayed warehouse automation project completion despite strong orders.
Balance sheet, debt and liquidity
At December 31, 2020, cash was $41.2 million, working capital was $258.8 million and the current ratio was 1.8. Total debt, including current maturities, was $824.6 million (versus $834.5 million at September 30, 2020); cash less total debt implies net debt of approximately $783.5 million. Matthews reported compliance with debt covenants. Operating cash flow funded investment and debt repayment; financing cash outflow was $31.4 million, including $18.0 million of net debt repayments, $4.2 million of share repurchases and $6.8 million of dividends.
The domestic revolving facility provides $750 million and matures in March 2025; the $35 million term loan matures in July 2021. The $115 million receivables securitization facility matures in March 2022, with $64.3 million drawn. The company also has $300 million of 5.25% senior notes due in December 2025. Management said available liquidity, operating cash flow and borrowing capacity should be sufficient for foreseeable capital needs.
Outlook, risks and notable items
- Management expects COVID-19 to continue affecting near-term sales and results, with customer disruptions, project delays and possible facility shutdowns contributing to volatility. It anticipates a return to a more normalized state after the pandemic subsides, but provides no specific earnings or revenue guidance.
- Fiscal 2021 capital spending was estimated at approximately $40 million; management expected operating cash to fund anticipated capital projects.
- Cost-structure improvements are expected to continue through fiscal 2022. Accelerated amortization of certain SGK trade names is expected to continue at least through fiscal 2022.
- Fiscal 2021 included $7.0 million of workforce-reduction costs, $3.7 million of other cost-reduction charges and $1.1 million of incremental COVID-19 costs in the adjusted EBITDA reconciliation. Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified costs.
- SGK goodwill fair values were close to carrying values following a $90.4 million impairment recorded in fiscal 2020. Further impairment may be required if projections or valuation assumptions deteriorate.
- In January 2021, Matthews received $15.5 million from redemption of a preferred-share investment and separately acquired a cemetery-products business for $13.1 million, subject to customary adjustments.
- Other risks include foreign-exchange and material-cost changes, demand and competitive pressures, execution of cost reductions and acquisitions, and tax, environmental and legal matters. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether Memorialization’s COVID-related volume gains persist and whether SGK and Industrial Technologies recover from project delays and weaker demand.
- How much of the adjusted EBITDA improvement reflects recurring operating progress versus excluded restructuring, integration and other costs.
- Debt repayment and covenant capacity, especially the July 2021 term-loan maturity and variable-rate exposure.
- Progress against the fiscal 2021 capital-spending estimate and management’s continuing cash-flow expectations.
- Whether SGK goodwill assumptions remain supportable, and the effects of ongoing tax examinations and uncertain tax benefits.