Matthews International Corporation — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020 unless otherwise noted. Matthews provides brand solutions, memorialization products, and industrial technologies. The company moved its surfaces and engineered products businesses from SGK Brand Solutions to Industrial Technologies for fiscal 2022 and retrospectively revised prior-period segment reporting.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $438.6 million | $386.7 million |
| Gross profit / margin | $131.6 million / 30.0% | $125.5 million / 32.5% |
| Operating profit | $10.8 million | $10.4 million |
| Adjusted EBITDA (non-GAAP) | $53.3 million | $54.8 million |
| Net loss attributable to Matthews shareholders | $19.8 million; $0.62 per diluted share | $1.8 million; $0.06 per diluted share |
| Operating cash flow | $(27.2) million | $35.3 million |
| Capital expenditures | $12.6 million | $7.5 million |
Sales increased 13.4%. Gross margin declined 2.5 percentage points, and adjusted EBITDA fell 2.6%. Higher sales, productivity improvements, and cost reductions supported gross profit, but inflation in materials, labor, and transportation and unfavorable SGK sales mix weighed on margins. Selling and administrative costs were nearly flat at $99.3 million, while intangible amortization rose to $21.5 million from $15.2 million.
Segments
- SGK Brand Solutions: Sales rose to $153.5 million from $150.0 million, while adjusted EBITDA declined to $15.4 million from $21.8 million. Management cited mix, travel and entertainment costs, and COVID-related production inefficiencies.
- Memorialization: Sales rose to $210.7 million from $183.3 million, primarily on higher casket and memorial product volumes, improved pricing, and an acquisition. Adjusted EBITDA edged down to $43.4 million from $44.1 million as input and labor costs offset sales and productivity benefits.
- Industrial Technologies: Sales increased to $74.3 million from $53.4 million and adjusted EBITDA to $7.2 million from $3.0 million, reflecting growth in energy storage and warehouse automation and improved margins.
Liquidity, debt, and cash flow
Cash and cash equivalents were $71.0 million at December 31, 2021, versus $49.2 million at September 30, 2021; restricted cash was an additional $19.2 million. Working capital was $345.6 million, up from $269.9 million, and the current ratio was 2.0 versus 1.8.
Total debt was $836.1 million, up from $763.7 million at September 30, 2021, including $405.0 million drawn on a $750.0 million revolving facility and $104.7 million under the receivables securitization facility. Matthews reported compliance with debt covenants. Operating cash flow was reduced by $40.8 million in working-capital changes and a $35.7 million contribution to settle the principal defined benefit plan. Net cash from financing was $62.4 million, including net debt proceeds of $72.3 million. Management said existing liquidity, operating cash flow, and borrowing capacity should meet foreseeable capital needs.
Outlook, risks, and unusual items
- Management estimated fiscal 2022 capital spending at approximately $60 million and expected operating cash flow to fund anticipated capital projects.
- Management expected warehouse automation and product-identification backlogs to support Industrial Technologies growth in fiscal 2022; energy solutions sales serving electric vehicles were also expected to grow significantly, based on backlog and customer interest. Cost-reduction initiatives were expected to continue through the remainder of fiscal 2022.
- COVID-19 disruptions, customer delays, supply-chain constraints, inflation in materials and labor, and foreign exchange may affect results. Management expected near-term impacts and said pricing and cost reductions would partially mitigate inflation.
- The principal defined benefit plan was terminated and settled during the quarter. The settlement generated a $30.9 million non-cash charge, largely the recognition of deferred pension losses, and contributed to the reported net loss. Matthews also made a $35.7 million plan contribution.
- The $115 million securitization facility matures in March 2022; the company said it intended to extend it. The company also anticipated approximately $24.2 million of fiscal 2023 payments to settle other retirement-plan obligations.
- Management identified potential goodwill impairment if projections or valuation assumptions deteriorate; Graphics Imaging’s estimated fair value exceeded carrying value by approximately 5% in the latest annual review. Environmental remediation obligations and tax examinations are ongoing; management did not expect ordinary-course legal proceedings to have a material adverse effect. No material changes to previously disclosed risk factors or market risks were reported.
Important facts for investors to verify
- Whether gross-margin pressure from input, labor, and transportation costs is offset by pricing and productivity improvements.
- Whether SGK profitability recovers and the Industrial Technologies growth outlook is supported by realized orders and sales.
- Progress on extending the securitization facility before its March 2022 maturity and the effect of higher borrowings on leverage and interest costs.
- Cash conversion after the quarter’s working-capital outflow and pension settlement contribution, including delivery against the approximately $60 million fiscal 2022 capital-spending estimate.
- The non-cash pension settlement charge and management’s adjusted EBITDA exclusions; adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Goodwill valuation sensitivity, remaining retirement-plan payments, and the outcome of tax and environmental matters.