Matthews International Corporation — Q1 FY2019 10-Q
Business context and period: Global provider of brand solutions, memorialization products and industrial technologies. This unaudited quarter covers the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017. Amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Sales | $374.2 | $369.5 |
| Gross profit / margin | $126.4 / 33.8% | $131.4 / 35.6% |
| Operating profit | $16.2 | $19.3 |
| Adjusted EBITDA (non-GAAP) | $46.5 | $46.5 |
| Income before taxes | $3.6 | $9.9 |
| Net income attributable to Matthews shareholders | $3.1 | $35.2 |
| Diluted EPS | $0.10 | $1.10 |
| Operating cash flow | $8.4 | $7.6 |
- Sales increased 1.3%, while gross profit fell 3.8% and operating profit fell 16.5%. Gross margin contracted 1.8 percentage points.
- Cash used in investing activities was $15.6 million; cash provided by financing activities was $5.8 million. Cash declined $1.7 million to $39.8 million from September 30, 2018.
- At December 31, current assets were $614.5 million and current liabilities $300.7 million; working capital was $313.8 million and the current ratio was 2.0. Total debt, including current maturities, was approximately $983.0 million.
- Debt included $322.5 million outstanding on the revolving facility, $205.9 million on the term loan, $300.0 million of 5.25% senior notes, and $109.2 million under the receivables securitization facility. The company reported compliance with its debt covenants.
Material changes and segment performance
- SGK Brand Solutions sales declined to $185.3 million from $191.8 million; adjusted EBITDA declined to $27.4 million from $30.9 million. Management cited delayed U.S. client projects, a major client bringing work in-house and currency headwinds, partly offset by European growth and Frost acquisition contributions.
- Memorialization sales rose to $153.9 million from $144.9 million; adjusted EBITDA increased to $30.3 million from $28.4 million, supported by U.S. demand, Star Granite and productivity benefits.
- Industrial Technologies sales rose to $35.0 million from $32.8 million, while adjusted EBITDA was $3.6 million versus $3.7 million. Warehouse automation growth and Compass contributions were partly offset by lower product-identification sales and higher product-development investment.
- The company changed its primary segment profitability measure to adjusted EBITDA and stopped allocating corporate costs to segments; prior-year segment figures were revised for comparability. Adjusted EBITDA is non-GAAP and excludes specified costs and items.
Outlook, commentary and risks
- Management expects long-term annual consolidated sales, excluding acquisitions and foreign-exchange effects, to generally be flat to low-single-digit growth. No specific full-year earnings guidance is provided in the supplied filing text.
- Fiscal 2019 capital spending was expected to be approximately $45 million, with management expecting operating cash flow to fund anticipated projects. Integration of recent acquisitions, including systems integration, is expected to require significant effort and affect fiscal 2019 results.
- Management attributed gross-margin pressure to lower U.S. SGK sales, higher material and transportation costs, and unfavorable currency movements. Foreign exchange reduced consolidated sales by an estimated $5.8 million year over year.
- Net income comparisons are substantially affected by the prior-year $25.2 million tax benefit related primarily to implementation of the Tax Act; Q1 FY2019 recorded a $0.6 million tax expense. The company completed its Tax Act analysis in this quarter.
- Q1 included a $4.5 million loss on divestiture of a controlling interest in a small Memorialization business. Matthews retained a 49% interest. It also acquired 80% of Frost for approximately $7.2 million.
- A Saudi Arabia project dispute remains unresolved: Matthews says a customer has not returned approximately $10.9 million drawn under a letter of credit despite a favorable court ruling. The filing warns that resolution could adversely affect results. Environmental remediation accruals were approximately $1.9 million; management did not expect a significant overall effect.
- Risks cited include economic and foreign-exchange changes, materials costs, mortality and cremation trends, pricing and competition, acquisition integration, cybersecurity, regulation, technology, and potential loss or distribution changes among larger customers. Management said there were no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether SGK’s U.S. client-project delays and the client transition to in-house work persist, and whether European growth offsets them.
- Whether gross margins recover from Q1 pressure and whether management realizes projected acquisition synergies and productivity benefits.
- Debt maturities and refinancing plans, particularly the domestic credit facility due April 2021, European borrowings due in 2019 and securitization facility due in April 2020; also monitor variable-rate exposure and covenant headroom.
- Cash conversion and working capital: Q1 operating cash flow included a $21.1 million working-capital use, including increased amounts recognized in excess of billings on certain customer projects.
- Outcome and collectability of the Saudi letter-of-credit dispute, final environmental obligations, and the impact of acquisition/divestiture accounting and integration costs.