Matthews International Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020; fiscal year ends September 30. Amounts below are in USD millions unless stated otherwise. The company operates in SGK Brand Solutions, Memorialization, and Industrial Technologies.
Financial performance and liquidity
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Sales | $374.8 | $739.7 | $391.4 / $765.6 |
| Gross profit; gross margin | $124.8; 33.3% | $240.5; 32.5% | $136.3; 34.8% / $262.7; 34.3% |
| Operating income (loss) | $(85.1) | $(90.0) | $24.3 / $40.4 |
| Net income (loss) attributable to Matthews shareholders | $(86.4) | $(96.8) | $15.4 / $18.5 |
| Diluted earnings (loss) per share | $(2.77) | $(3.11) | $0.48 / $0.58 |
| Adjusted EBITDA, non-GAAP | $49.4 | $89.6 | $56.2 / $102.7 |
Second-quarter sales declined 4.2% year over year, while six-month sales fell 3.4%. Six-month operating cash flow was $66.0 million, compared with $45.3 million; capital expenditures were $19.1 million. Investing activities used $28.5 million and financing activities provided $0.6 million. Cash increased to $72.3 million from $35.3 million at September 30, 2019.
At March 31, current assets were $625.9 million and current liabilities were $322.3 million; reported working capital was $303.6 million and the current ratio was 1.9. Balance-sheet debt, including current maturities, totaled approximately $965.8 million, versus $940.7 million at September 30, 2019. This excludes operating lease liabilities. The company reported compliance with debt covenants. Its amended domestic revolving facility provides up to $750 million and matures in March 2025; a $115 million receivables securitization facility was extended to March 2022. The filing states that existing liquidity, operating cash flow, and borrowing capacity are expected to cover foreseeable capital needs.
Material changes and segment performance
- A $90.4 million goodwill impairment in SGK Brand Solutions drove the reported quarterly and six-month GAAP losses. The impairment followed COVID-19-related reassessment of two reporting units whose estimated fair values had been less than 10% above carrying value at the January annual review.
- Six-month SGK sales declined to $347.7 million from $376.0 million and adjusted EBITDA fell to $41.0 million from $56.7 million. Management cited a major client’s prior transition of work in-house, weaker UK brand sales, European cylinders/surfaces/engineered-products performance, pricing pressure, and unfavorable product mix.
- Memorialization six-month sales were essentially flat at $316.2 million and adjusted EBITDA was $65.3 million, unchanged. Improved pricing and cremation/incineration equipment sales were offset by lower casket and memorial unit sales and weaker cremation-product margins.
- Industrial Technologies six-month sales rose to $75.8 million from $73.6 million and adjusted EBITDA increased to $10.5 million from $8.4 million, mainly on stronger product-identification sales, partly offset by weaker warehouse automation and applied technologies.
- Six-month gross margin fell to 32.5% from 34.3%. Management attributed the decline to lower sales, mix, brand-market pricing pressure, and weaker margins in certain SGK product lines; productivity gains and acquisition synergies, mainly in Memorialization, partly offset the pressure.
Outlook, risks, and unusual items
- Management expected COVID-19 to adversely affect sales and operating results in the short term and for the remainder of fiscal 2020, citing customer disruptions, facility shutdowns, weaker global economic conditions, and delayed projects. It anticipated greater near-term volatility; longer-term effects remained uncertain. No numerical earnings or sales guidance was provided.
- Substantially all operations remained open and were considered essential at the time of filing. The company reported $0.7 million of direct incremental COVID-19 costs in the six-month period; this excludes lost sales and underutilization.
- Following the $90.4 million impairment, the two affected SGK reporting units’ fair values approximated carrying values. Management warned that additional impairment may be required if projections or valuation factors, including discount rates and pandemic-related economic conditions, deteriorate.
- Strategic cost-reduction initiatives are expected to continue through fiscal 2022. Six-month strategic initiatives and other charges were $19.5 million; management described the program as intended to improve profitability and working capital.
- The CARES Act was under evaluation; the company expected to defer approximately $9.0 million of certain taxes, primarily U.S. payroll taxes, during the remainder of fiscal 2020. Federal relief also removed required fiscal 2020 contributions to the principal retirement plan.
- A long-running Saudi Arabia project dispute involves a funded letter of credit of approximately $10.6 million. Matthews had prevailed in UK court but needed a favorable Saudi ruling to enforce collection; the trial was expected to conclude in calendar 2020. The company cautioned that recovery was uncertain and an unfavorable resolution could affect results.
- Other notable items include higher intangible amortization ($35.8 million for six months versus $17.6 million), reflecting shortened useful lives of certain trade names; adoption of lease accounting added approximately $80 million of right-of-use assets and lease liabilities; and the quarterly dividend was $0.21 per share.
Important facts for investors to verify
- Whether COVID-19 sales disruption, customer delays, and operational impacts exceeded management’s expectations, and whether the company issued later quantitative guidance.
- Whether SGK’s two impaired reporting units met their projections and whether further goodwill impairment was recorded.
- Debt levels, facility availability, covenant headroom, and refinancing or extension of the European facility maturing in December 2020.
- Progress and recoverability of the $10.6 million Saudi Arabia claim, including the status and outcome of the Saudi proceedings.
- Cash conversion and the durability of working-capital benefits, alongside the costs and realized savings from strategic initiatives.
- Whether the company’s adjusted EBITDA exclusions are recurring or growing; this non-GAAP measure is not a substitute for GAAP results or operating cash flow.