Matthews International Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; comparative periods ended June 30, 2021. Amounts below are in U.S. dollars. The company operates Memorialization, Industrial Technologies and SGK Brand Solutions.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Sales | $421.7 million | $428.4 million | $1,305.3 million | $1,232.2 million |
| Gross profit | $120.9 million | $137.3 million | $377.0 million | $403.8 million |
| Gross margin | 28.7% | 32.0% | 28.9% | 32.8% |
| Operating profit | $11.0 million | $9.3 million | $29.1 million | $34.6 million |
| Net income (loss) attributable to Matthews shareholders | $2.9 million | $3.4 million | $(18.8) million | $6.6 million |
| Diluted earnings (loss) per share | $0.09 | $0.10 | $(0.60) | $0.21 |
| Adjusted EBITDA, non-GAAP | $46.0 million | $60.0 million | $154.5 million | $175.7 million |
Nine-month operating cash flow was $84.4 million, versus $106.9 million; capital expenditures were $40.6 million, versus $24.5 million. Cash, cash equivalents and restricted cash totaled $66.1 million at period-end, including $45.8 million of cash and cash equivalents and $20.3 million of current restricted cash.
Total debt was $776.0 million, compared with $763.7 million at September 30, 2021; cash and cash equivalents were $45.8 million. Working capital was $288.8 million and the current ratio was 1.9. The company reported compliance with debt covenants.
Material changes and segment results
- Third-quarter sales declined 1.6% year over year, while nine-month sales grew 5.9%. Nine-month foreign exchange movements reduced sales by an estimated $32.8 million.
- Nine-month gross margin fell 3.9 percentage points. Management cited higher material, labor and transportation costs, production inefficiencies, unfavorable SGK sales mix, lower margins on U.K. cremation and incineration projects, and $10.0 million of Russia-related asset write-downs.
- For the nine months, Memorialization sales increased to $633.9 million from $573.1 million, but adjusted EBITDA declined to $118.4 million from $132.1 million. Industrial Technologies sales rose to $230.9 million from $200.5 million and adjusted EBITDA increased to $33.4 million from $23.4 million. SGK Brand Solutions sales decreased to $440.5 million from $458.6 million and adjusted EBITDA fell to $43.4 million from $67.2 million.
- Nine-month net loss included a $30.9 million non-cash pension settlement charge. The company terminated and fully settled its principal defined-benefit pension plan; it contributed $35.7 million to fund the settlement.
- In the first quarter of fiscal 2022, the company moved its surfaces and engineered products businesses from SGK to Industrial Technologies; prior-period segment figures were revised.
Liquidity, outlook and risks
- The $750 million revolving credit facility matures in March 2025; revolving borrowings were $447.2 million. The company also had $298.2 million of 2025 Senior Notes, bearing 5.25% interest. A new receivables purchase agreement permits up to $125 million of receivables sales and matures in March 2024; $100.0 million of receivables had been sold and derecognized at June 30. Proceeds are reported in operating cash flow.
- Management estimated fiscal 2022 capital spending of approximately $60 million and expected operating cash flow and borrowing capacity to cover anticipated needs. No specific full-year earnings or revenue guidance was provided.
- Management said Industrial Technologies order rates remained strong and were expected to support organic growth objectives for the balance of fiscal 2022 and into the following year. It expected ongoing inflation in materials and labor, with mitigation sought through price realization and cost-reduction actions.
- The company signed an agreement to acquire German engineering firms OLBRICH GmbH and R+S Automotive GmbH for €43 million; closing was expected in fiscal fourth quarter 2022. It also anticipated approximately $24.2 million of fiscal 2023 payments to settle certain remaining retirement-plan obligations.
- Russia-Ukraine conflict, sanctions, supply-chain and currency disruption, inflation, labor constraints, economic weakness in Europe, and changes in demand, pricing and marketing spend are among the cited risks. SGK goodwill fair value exceeded carrying value by about 10% at the annual review; management warned future impairment could result if projections or valuation factors deteriorate.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. Disclosure controls were assessed as effective, with no reported material change in internal controls during the quarter.
Important facts for investors to verify
- How much of operating cash flow reflects recurring operations versus receivables sales under the new agreement, and how the program affects future liquidity.
- Whether price increases and cost-reduction efforts can offset continuing material, wage and transportation inflation, especially in Memorialization and SGK.
- Whether SGK’s results and valuation assumptions remain sufficient to avoid goodwill impairment, particularly given the stated 10% fair-value cushion.
- The cash and earnings effects of the Russia-related asset write-downs, pension-plan settlement and remaining retirement obligations.
- Completion, purchase-price funding and integration of OLBRICH and R+S Automotive, and the company’s debt and covenant capacity as borrowing costs change.