Matthews International Corporation — Q2 FY2019 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2019. The quarter is the three months ended March 31; figures are unaudited. Amounts below are in millions except per-share data and percentages.
Business context and performance
Matthews supplies brand solutions, memorialization products, and industrial technologies. It reported results in three segments: SGK Brand Solutions, Memorialization, and Industrial Technologies.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $391.4 | $414.1 | $765.6 | $783.5 |
| Gross profit | $136.3 | $150.7 | $262.7 | $282.1 |
| Operating profit | $24.3 | $31.2 | $40.4 | $50.6 |
| Net income attributable to Matthews shareholders | $15.4 | $18.2 | $18.5 | $53.4 |
| Diluted EPS | $0.48 | $0.57 | $0.58 | $1.68 |
| Adjusted EBITDA (non-GAAP) | $56.2 | $62.5 | $102.7 | $109.0 |
In Q2, gross margin was approximately 34.8% versus 36.4% a year earlier; operating margin was approximately 6.2% versus 7.5%. For the six-month period, gross margin was 34.3% versus 36.0%. Six-month operating cash flow was $45.3, compared with $56.3; capital expenditures were $19.2.
Material changes and management commentary
- Six-month sales declined $17.9, with unfavorable foreign currency effects estimated at $18.6. The company also cited lower U.S. SGK sales, including a significant client moving work in-house, and reduced casket sales. Higher European and private-label SGK sales, U.S. memorial sales, warehouse automation sales, and acquisitions partly offset declines.
- Six-month adjusted EBITDA fell $6.3. SGK EBITDA declined to $56.7 from $66.0; Memorialization to $65.3 from $67.9; Industrial Technologies to $8.4 from $8.6. Corporate and non-operating costs improved to $(27.7) from $(33.5).
- Management attributed weaker gross profit to lower SGK U.S. sales, lower casket sales, higher material and transportation costs, and currency. Cost reductions, productivity improvements, and acquisition synergies partly offset these pressures. Six-month selling and administrative expenses, excluding amortization, declined to $204.6 from $216.6.
- Interest expense rose to $20.6 for the six months from $17.1, reflecting higher average borrowing and rates, acquisitions, and financing costs. The prior-year six-month tax benefit of $23.0 largely reflected implementation of the U.S. Tax Cuts and Jobs Act; FY2019 recorded a $0.4 tax expense.
Liquidity, debt, and capital allocation
- At March 31, cash was $37.7; working capital was $310.2, down from $328.7 at September 30, 2018. The reported current ratio was 2.0.
- Balance-sheet debt, including current maturities, was approximately $975.7, versus $960.6 at September 30, 2018. Cash less debt was approximately $938.0 net debt. The company reported compliance with all debt covenants.
- The $900 revolving facility and $250 term loan mature April 26, 2021; $342.5 was drawn on the revolver and $199.7 on the term loan. Other significant facilities include $300 of 5.25% notes due 2025 and $102.2 of securitization borrowings due under a facility maturing April 2020. The domestic facility’s weighted-average borrowing rate, including swaps, was 3.25%.
- Operating cash flow was below the prior-year period, with working capital using $17.6. Investing activities used $33.5; financing activities used $15.4. Cash declined $3.8 over the six months.
- Fiscal 2019 capital spending was expected to be approximately $45.0; management said operating cash flow and borrowing capacity should cover foreseeable capital needs. The company paid $12.9 in dividends and purchased $13.3 of treasury stock in the six-month period.
Outlook, risks, and unusual items
- Management’s long-term sales expectation, excluding acquisitions and currency effects, was generally level to low-single-digit annual growth. It provided no specific full-year FY2019 earnings or EPS guidance in the supplied filing text.
- Management expected substantial continued effort and costs for acquisition and systems integration during the remainder of FY2019. Reported six-month results included a $4.5 loss on divestiture; acquisition, ERP integration, and strategic initiative charges also affected results. Adjusted EBITDA is non-GAAP and excludes specified items.
- Goodwill was $933.7. The annual impairment review found no impairment, but one SGK reporting unit’s estimated fair value exceeded carrying value by only about 10%; further deterioration could lead to an impairment charge.
- A long-running Saudi Arabia project letter-of-credit dispute remains unresolved. Although a UK court ruled in Matthews’ favor, the customer has not returned the funds; the company warned that resolution could adversely affect results.
- Environmental remediation accruals were approximately $1.7. The company stated the ultimate outcome was not expected to materially affect consolidated results or financial position. Unrecognized tax benefits were $14.5, excluding accrued interest and penalties.
- On April 1, 2019, after quarter-end, Matthews invested $18.6 in a Memorialization business accounted for under the equity method. Key risks cited include economic and currency conditions, materials costs, customer demand and pricing, mortality and cremation trends, competition, acquisitions, cybersecurity, and regulatory compliance.
Important facts for investors to verify
- Whether SGK’s lost client work, foreign exchange pressure, and weaker U.S. sales persist, and whether private-label growth and cost savings compensate.
- Trends in Memorialization casket demand, material and freight costs, and Industrial Technologies warehouse automation and product-development spending.
- Cash conversion and working-capital needs, debt maturities and borrowing costs, covenant headroom, and refinancing or extension of facilities maturing in 2020 and 2021.
- Progress on acquisition and ERP integration, including recurring versus excluded costs in adjusted EBITDA and realization of expected synergies.
- Developments in the Saudi letter-of-credit dispute, the SGK goodwill valuation cushion, environmental obligations, tax examinations, and the post-quarter investment.