MATTHEWS INTERNATIONAL CORPORATION CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS AND NON-GAAP FINANCIAL MEASURES:
The following discussion should be read in conjunction with the consolidated financial statements ofMatthews International Corporation ("Matthews" or the "Company") and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in mortality and cremation rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, or other factors such as supply chain disruptions, labor shortages or labor cost increases, changes in product demand or pricing as a result of domestic or international competitive pressures, ability to achieve cost-reduction objectives, unknown risks in connection with the Company's acquisitions, cybersecurity concerns, effectiveness of the Company's internal controls, compliance with domestic and foreign laws and regulations, technological factors beyond the Company's control, impact of pandemics or similar outbreaks, or other disruptions to our industries, customers or supply chains, the impact of global conflicts, such as the current war betweenRussia andUkraine , and other factors described in Item 1A - "Risk Factors" in this Form 10-Q and Item 1A - "Risk Factors" in the Company's Form 10-K for the fiscal year endedSeptember 30, 2021 . In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors. Matthews cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward looking statements, which reflect management's analysis only as of the date of this report, even if subsequently made available by Matthews on its website or otherwise. Matthews does not undertake to update any forward looking statement, whether written or oral, that may be made from time to time by or on behalf of Matthews to reflect events or circumstances occurring after the date of this report. Included in this report are measures of financial performance that are not defined by generally accepted accounting principles inthe United States ("GAAP"). These non-GAAP financial measures assist management in comparing the Company's performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company's core operations. For additional information and reconciliations from the consolidated financial statements see "Non-GAAP Financial Measures" below.
RESULTS OF OPERATIONS:
The Company manages its businesses under three segments: SGK Brand Solutions,
Memorialization and Industrial Technologies. Effective in the first quarter of
fiscal 2022, the Company transferred its surfaces and engineered products
businesses from the SGK Brand Solutions segment to the Industrial Technologies
segment. This business segment change is consistent with internal management
structure and reporting changes effective for fiscal 2022. Prior periods were
revised to reflect retrospective application of this segment realignment. The
SGK Brand Solutions segment consists of brand management, pre-media services,
printing plates and cylinders, imaging services, digital asset management,
merchandising display systems, and marketing and design services primarily for
the consumer goods and retail industries. The Memorialization segment consists
primarily of bronze and granite memorials and other memorialization products,
caskets, and cremation and incineration equipment primarily for the cemetery and
funeral home industries. The Industrial Technologies segment includes the
design, manufacturing, service and distribution of high-tech custom energy
storage, marking, coding and industrial automation technologies and solutions,
and order fulfillment systems for identifying, tracking, picking and conveying
consumer and industrial products.
24
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
The Company's primary measure of segment profitability is adjusted earnings
before interest, income taxes, depreciation and amortization ("adjusted
EBITDA"). Adjusted EBITDA is defined by the Company as earnings before interest,
income taxes, depreciation, amortization and certain non-cash and/or
non-recurring items that do not contribute directly to management's evaluation
of its operating results. These items include stock-based compensation, the
non-service portion of pension and postretirement expense, acquisition costs,
ERP integration costs, and strategic initiatives and other charges. This
presentation is consistent with how the Company's chief operating decision maker
(the "CODM") evaluates the results of operations and makes strategic decisions
about the business. For these reasons, the Company believes that adjusted EBITDA
represents the most relevant measure of segment profit and loss.
In addition, the CODM manages and evaluates the operating performance of the
segments, as described above, on a pre-corporate cost allocation basis.
Accordingly, for segment reporting purposes, the Company does not allocate
corporate costs to its reportable segments. Corporate costs include management
and administrative support to the Company, which consists of certain aspects of
the Company's executive management, legal, compliance, human resources,
information technology (including operational support) and finance departments.
These costs are included within "Corporate and Non-Operating" in the following
table to reconcile to consolidated adjusted EBITDA and are not considered a
separate reportable segment. Management does not allocate non-operating items
such as investment income, other income (deductions), net and noncontrolling
interest to the segments.
The following table sets forth the sales and adjusted EBITDA for the Company's
three reporting segments for the three and six-month periods ended March 31,
2022 and 2021. Refer to Note 13, "Segment Information" in Item 1 - "Financial
Statements" for the Company's financial information by segment.
Three Months Ended Six Months Ended
March 31, March 31,
2022 2021 2022 2021
Sales: (Dollar amounts in thousands)
SGK Brand Solutions $ 146,820 $ 146,415 $ 300,362 $ 296,374
Memorialization 220,004 205,457 430,710 388,731
Industrial Technologies 78,154 65,282 152,485 118,706
Consolidated Sales $ 444,978 $ 417,154 $ 883,557 $ 803,811
Adjusted EBITDA:
SGK Brand Solutions $ 13,462 $ 18,364 $ 28,876 $ 40,197
Memorialization 42,944 51,606 86,314 95,678
Industrial Technologies 14,385 8,277 21,568 11,273Corporate and Non-Operating (15,601) (17,307) (28,235)
(31,445)
Total Adjusted EBITDA (1)
(1) Total Adjusted EBITDA is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.
Sales for the six months endedMarch 31, 2022 were$883.6 million , compared to$803.8 million for the six months endedMarch 31, 2021 , representing an increase of$79.7 million . The increase in fiscal 2022 sales reflected higher sales in all of the Company's segments. Fiscal 2022 sales continued to be impacted by the global outbreak of coronavirus disease 2019 ("COVID-19"), which has caused some commercial impacts in certain of the Company's segments and geographic locations. Recent impacts have included higher sales volumes for memorialization products and services. Additionally, recent increases in the cost of certain raw materials and other inflationary pressures have had an unfavorable impact on the Company's results of operations. On a consolidated basis, changes in foreign currency exchange rates were estimated to have an unfavorable impact of$15.2 million on fiscal 2022 sales compared to the prior year. In the SGK Brand Solutions segment, sales for the first six months of fiscal 2022 were$300.4 million , compared to$296.4 million for the first six months of fiscal 2021. The increase primarily resulted from higher retail-based sales (principally merchandising solutions), higher brand sales in theAsia-Pacific market, and increased sales volume for cylinder (primarily packaging) products. These increases were partially offset by lower brand sales in theU.S. Changes in foreign currency exchange rates had an unfavorable impact of$9.4 million on the segment's sales compared to the prior year. Memorialization segment sales for the first six months of fiscal 2022 were$430.7 million , compared to$388.7 million for the first six months of fiscal 2021. The increase in sales predominantly resulted from increased unit sales of caskets and bronze and granite memorial products, primarily due to COVID-19. The segment also reported higher sales of mausoleums and cremation and incineration equipment. The increase in sales also reflected improved price realization and benefits from the fiscal 2021 acquisition of a 25 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
small cemetery products business. Changes in foreign currency exchange rates had an unfavorable impact of$1.2 million on the segment's sales compared to the prior year. Industrial Technologies segment sales were$152.5 million for the first six months of fiscal 2022, compared to$118.7 million for the first six months of fiscal 2021. The sales increase primarily reflected higher sales of purpose-built engineered products (primarily energy storage solutions for the electric vehicle market), increased sales of warehouse automation solutions, and higher product identification sales. These increases were partially offset by reduced sales of surfaces products. Changes in foreign currency exchange rates had an unfavorable impact of$4.6 million on the segment's sales compared to the prior year. Gross profit for the six months endedMarch 31, 2022 was$256.2 million , compared to$266.5 million for the same period a year ago. Consolidated gross profit as a percent of sales was 29.0% and 33.2% for the first six months of fiscal 2022 and fiscal 2021, respectively. The decrease in gross profit primarily reflected the impact of higher material (steel, lumber and bronze ingot), labor and transportation costs, particularly in the Memorialization segment, production inefficiencies related to onsite/remote-work transitions and unfavorable changes in sales mix within the SGK Brand Solutions segment. Fiscal 2022 gross profit also included$9.7 million of asset write-downs related to the current war betweenRussia andUkraine (see below for further details). These decreases in gross profit were partially offset by the impact of higher sales, benefits from the realization of productivity improvements and other cost-reduction initiatives, and improved margins for surfaces and engineered products within the Industrial Technologies segment. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling$6.4 million and$10.7 million for the six months endedMarch 31, 2022 and 2021, respectively. Selling and administrative expenses for the six months endedMarch 31, 2022 were$204.5 million , compared to$203.0 million for the first six months of fiscal 2021. Consolidated selling and administrative expenses, as a percent of sales, were 23.1% for the six months endedMarch 31, 2022 , compared to 25.3% for the same period last year. Fiscal 2022 selling and administrative expenses reflected lower performance-based compensation compared to fiscal 2021 and benefits from ongoing cost-reduction initiatives, which were offset by the impacts of higher salaries and wage rates and higher travel and entertainment ("T&E") costs. Fiscal 2022 selling and administrative expenses included$800,000 of asset write-downs related to the current war betweenRussia andUkraine (see below). Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling$6.5 million in fiscal 2022, compared to$8.3 million in fiscal 2021. Intangible amortization for the six months endedMarch 31, 2022 was$33.5 million , compared to$38.2 million for the six months endedMarch 31, 2021 . Fiscal 2022 intangible amortization included$4.0 million of incremental amortization resulting from the fiscal 2021 reduction in useful lives for certain customer relationships. Intangible amortization also included accelerated amortization related to certain trade names that have been discontinued. Amortization for these trade names totaled$9.5 million and$16.5 million for the six months endedMarch 31, 2022 andMarch 31, 2021 , respectively. Adjusted EBITDA was$108.5 million for the six months endedMarch 31, 2022 and$115.7 million for the six months endedMarch 31, 2021 . Adjusted EBITDA for the SGK Brand Solutions segment was$28.9 million for the first six months of fiscal 2022 compared to$40.2 million for the same period a year ago. The decrease in segment adjusted EBITDA primarily reflected the impact of production inefficiencies related to onsite/remote-work transitions, unfavorable changes in sales mix, and higher T&E costs. These decreases were partially offset by the impact of higher sales, and benefits from cost-reduction initiatives. Changes in foreign currency exchange rates had an unfavorable impact of$2.1 million on the segment's adjusted EBITDA compared to the prior year. Memorialization segment adjusted EBITDA was$86.3 million for the first six months of fiscal 2022 compared to$95.7 million for the first six months of fiscal 2021. Fiscal 2022 segment adjusted EBITDA reflected the benefits of higher sales and productivity initiatives, which were offset by the impact of higher material, labor and transportation costs. Adjusted EBITDA for the Industrial Technologies segment was$21.6 million for the six months endedMarch 31, 2022 compared to$11.3 million for the six months endedMarch 31, 2021 . Industrial Technologies segment adjusted EBITDA primarily reflected the impact of higher sales, improved margins for surfaces and engineered products and benefits from cost-reduction initiatives, which were partially offset by the impact of higher T&E costs. Changes in foreign currency exchange rates had an unfavorable impact of$1.0 million on the segment's adjusted EBITDA compared to the prior year. Investment income was$676,000 for the six months endedMarch 31, 2022 and$2.0 million for the six months endedMarch 31, 2021 . Investment income for both periods primarily reflected changes in the value of investments (primarily marketable securities) held in trust for certain of the Company's benefit plans. Interest expense for the first six months of fiscal 2022 was$12.8 million , compared to$15.0 million for the same period last year. The decrease in interest expense reflected a decrease in average borrowing levels and lower average interest rates in the current fiscal year. Other income (deductions), net, for the six months endedMarch 31, 2022 represented a decrease in pre-tax income of$31.2 million , compared to a decrease in pre-tax income of$4.3 million for the same period last year. Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled$31.4 million and$3.8 million for the six months ended 26 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
March 31, 2022 and 2021, respectively. Fiscal 2022 non-service pension expense included a$30.9 million non-cash charge resulting from the full settlement of the Company's principal defined benefit retirement plan ("DB Plan") obligations. Refer to Note 10, "Pension and Other Postretirement Benefit Plans" in Item 1 - "Financial Statements" for further details. Other income (deductions), net also includes banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's consolidated income taxes for the first six months of fiscal 2022 were a benefit of$3.4 million , compared to an expense of$5.0 million for the first six months of fiscal 2021. The difference between the Company's consolidated income taxes for the first six months of fiscal 2022 compared to the same period for fiscal 2021 primarily resulted from a consolidated pre-tax loss in fiscal 2022 compared to pre-tax income in fiscal 2021. Additionally, fiscal 2022 included discrete tax expenses related to non-tax deductible asset write-downs inRussia , due to the full valuation allowance for the Russian entity. Fiscal 2021 included discrete tax expenses related to foreign operating losses, discrete tax benefits related to the resolution of uncertain tax liabilities, a net operating loss ("NOL") carryback to tax years where theU.S. federal statutory rate was 35%, and additional foreign tax credits. The Company's fiscal 2022 six-month effective tax rate varied from theU.S. statutory tax rate of 21.0% primarily due to the non-deductible asset write-downs inRussia , state taxes, foreign statutory rate differentials, and tax credits. The Company's fiscal 2021 six-month effective tax rate varied from theU.S. statutory tax rate of 21.0% primarily due to discrete tax expenses related to foreign operating losses, discrete tax benefits related to the resolution of uncertain tax liabilities, a NOL carryback to tax years where theU.S. federal statutory rate was 35%, and additional foreign tax credits.
Net losses attributable to noncontrolling interests were
Asset Write-Downs:
The Company has certain operations inRussia within its SGK Brand Solutions segment. In light of the current war betweenRussia andUkraine , and the resulting regional instability and evolving political and economic conditions within the region, the Company evaluated certain of its assets for recoverability and impairment. As a result of this assessment, and due to the uncertainty in projecting future cash flows for the Company's operations inRussia , the Company recorded asset write-downs totaling$10.5 million during the second quarter of fiscal 2022 to reduce the carrying value of these assets to zero. Asset write-downs (primarily related to property, plant and equipment) totaling$9.7 million and$800,000 were reported within cost of sales and administrative expense, respectively, for the three and six months endedMarch 31, 2022 . 27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
NON-GAAP FINANCIAL MEASURES: Included in this report are measures of financial performance that are not defined by GAAP. The Company uses non-GAAP financial measures to assist in comparing its performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company's core operations including acquisition costs, ERP integration costs, strategic initiative and other charges (which includes non-recurring charges related to operational initiatives and exit activities), stock-based compensation and the non-service portion of pension and postretirement expense. Management believes that presenting non-GAAP financial measures is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items that management believes do not directly reflect the Company's core operations, (ii) permits investors to view performance using the same tools that management uses to budget, forecast, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating the Company's results. The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provided herein, provides investors with an additional understanding of the factors and trends affecting the Company's business that could not be obtained absent these disclosures. The Company believes that adjusted EBITDA provides relevant and useful information, which is used by the Company's management in assessing the performance of its business. Adjusted EBITDA is defined by the Company as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management's evaluation of its operating results. These items include stock-based compensation, the non-service portion of pension and postretirement expense, acquisition costs, ERP integration costs, and strategic initiatives and other charges. Adjusted EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes, and the effects of certain acquisition and ERP integration costs, and items that do not reflect the ordinary earnings of the Company's operations. This measure may be useful to an investor in evaluating operating performance. It is also useful as a financial measure for lenders and is used by the Company's management to measure business performance. Adjusted EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of the Company's liquidity. The Company's definition of adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
The reconciliation of net income to adjusted EBITDA is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2022 2021 2022 2021
(Dollar amounts in thousands)
Net (loss) income $ (1,936) $ 5,152 $ (21,746) $ 3,160
Income tax provision (benefit) 3,277 972 (3,351) 4,952
Income (loss) before income taxes 1,341 6,124 (25,097) 8,112
Net loss (income) attributable to noncontrolling
interests 31 (163) 38 71
Interest expense 6,260 7,233 12,767 14,961
Depreciation and amortization * 23,724 35,179 57,225 62,530
Strategic initiatives and other charges (1)** 6,750 5,093 10,573 16,285
Non-recurring / incremental COVID-19 costs
(2)*** 1,213 1,572 1,903 2,696
Defined benefit plan termination related items
(3) (79) - 347 -
Asset write-downs (4) 10,486 - 10,486 -
Stock-based compensation 5,222 4,001 8,931 7,247
Non-service pension and postretirement expense
(5) 242 1,901 31,350 3,801
Total Adjusted EBITDA $ 55,190 $ 60,940 $ 108,523 $ 115,703
28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
(1) Includes certain non-recurring items associated with recent acquisition activities, costs associated with global ERP system integration efforts, and certain non-recurring costs associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels. (2) Includes certain non-recurring direct incremental costs (such as costs for purchases of computer peripherals and devices to facilitate working-from-home, additional personal protective equipment and cleaning supplies and services, etc.) incurred in response to COVID-19. This amount does not include the impact of any lost sales or underutilization due to COVID-19. (3) Represents items associated with the termination of the Company's DB Plan, supplemental retirement plan and the defined benefit portion of the officers retirement restoration plan. (4) Represents asset write-downs within the SGK Brand Solutions segment (see Note 15, "Asset Write-Downs" in Item 1 - "Financial Statements"). (5) Non-service pension and postretirement expense includes interest cost, expected return on plan assets, amortization of actuarial gains and losses, curtailment gains and losses, and settlement gains and losses. These benefit cost components are excluded from adjusted EBITDA since they are primarily influenced by external market conditions that impact investment returns and interest (discount) rates. Curtailment gains and losses and settlement gains and losses are excluded from adjusted EBITDA since they generally result from certain non-recurring events, such as plan amendments to modify future benefits or settlements of plan obligations. The service cost and prior service cost components of pension and postretirement expense are included in the calculation of adjusted EBITDA, since they are considered to be a better reflection of the ongoing service-related costs of providing these benefits. Please note that GAAP pension and postretirement expense or the adjustment above are not necessarily indicative of the current or future cash flow requirements related to these employee benefit plans. * Depreciation and amortization was$14.1 million and$25.3 million for the SGK Brand Solutions segment,$5.8 million and$5.7 million for the Memorialization segment,$2.5 million and$2.9 million for the Industrial Technologies segment, and$1.3 million and$1.3 million for Corporate and Non-Operating, for the three months endedMarch 31, 2022 and 2021, respectively. Depreciation and amortization was$37.8 million and$43.1 million for the SGK Brand Solutions segment,$11.6 million and$11.2 million for the Memorialization segment,$5.2 million and$5.6 million for the Industrial Technologies segment, and$2.6 million and$2.6 million for Corporate and Non-Operating, for the six months endedMarch 31, 2022 and 2021, respectively. ** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were$4.5 million and$2.9 million for the SGK Brand Solutions segment, charges of$516,000 and income of$335,000 for the Memorialization segment, charges of$161,000 and$126,000 for the Industrial Technologies segment, and$1.6 million and$2.4 million for Corporate and Non-Operating, for the three months endedMarch 31, 2022 and 2021, respectively. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were$5.7 million and$7.6 million for the SGK Brand Solutions segment,$1.2 million and$795,000 for the Memorialization segment,$193,000 and$2.8 million for the Industrial Technologies segment, and$3.5 million and$5.1 million for Corporate and Non-Operating, for the six months endedMarch 31, 2022 and 2021, respectively. *** Non-recurring/incremental COVID-19 costs were$170,000 and$297,000 for the SGK Brand Solutions segment,$579,000 and$1.2 million for the Memorialization segment,$1,000 and$12,000 for the Industrial Technologies segment, and$463,000 and$23,000 for Corporate and Non-Operating, for the three months endedMarch 31, 2022 and 2021, respectively. Non-recurring/incremental COVID-19 costs were$390,000 and$706,000 for the SGK Brand Solutions segment,$1.0 million and$1.9 million for the Memorialization segment,$5,000 and$30,000 for the Industrial Technologies segment, and$465,000 and$70,000 for Corporate and Non-Operating, for the six months endedMarch 31, 2022 and 2021, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was$72.7 million for the first six months of fiscal 2022, compared to net cash provided by operating activities of$92.2 million for the first six months of fiscal 2021. Operating cash flow for both periods principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses (gains) related to investments, non-cash pension expense, asset write-downs, other non-cash adjustments, and changes in working capital items. Fiscal 2022 operating cash flow also reflected$35.7 million of DB Plan contributions to fully fund the settlement of the DB Plan obligations. Net changes in working capital items increased operating cash flow by$18.8 million and$2.7 million in fiscal 2022 and fiscal 2021, respectively. The fiscal 2022 change in working capital principally reflected proceeds from the sale of receivables under a receivables purchase agreement (see below for further discussion), increased fiscal year-end compensation-related payments, higher inventory levels reflecting increased commodity costs, and changes in other accounts (primarily income taxes). Cash used in investing activities was$24.7 million for the six months endedMarch 31, 2022 , compared to$11.9 million for the six months endedMarch 31, 2021 . Investing activities for the first six months of fiscal 2022 primarily reflected capital expenditures of$28.1 million and proceeds from the sale of investments of$3.1 million . Investing activities for the first six months of fiscal 2021 reflected capital expenditures of$15.8 million , acquisitions payments (net of cash acquired) totaling$13.1 million , proceeds from the sale of investments of$15.0 million and proceeds from the sale of assets of$2.1 million . Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new production machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for property, plant and equipment has averaged$35.6 million for the last three fiscal years. Capital spending for fiscal 2022 is currently estimated to be approximately$70 million . The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Cash used in financing activities for the six months endedMarch 31, 2022 was$38.7 million , primarily reflecting repayments, net of proceeds, on long-term debt of$10.5 million , treasury stock purchases of$12.1 million , dividends of$14.0 million to the Company's shareholders, and$613,000 of holdback and deferred payments related to acquisitions from prior years. Cash used 29 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
in financing activities for the six months endedMarch 31, 2021 was$75.5 million , primarily reflecting repayments, net of proceeds, on long-term debt of$53.9 million , treasury stock purchases of$4.5 million , dividends of$14.0 million to the Company's shareholders, and$1.6 million of holdback and deferred payments related to acquisitions from prior years. The Company has a domestic credit facility with a syndicate of financial institutions that includes a$750.0 million senior secured revolving credit facility, which matures inMarch 2025 . A portion of the revolving credit facility (not to exceed$350.0 million ) can be drawn in foreign currencies. Borrowings under the revolving credit facility bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.00% atMarch 31, 2022 ) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs in connection with the domestic credit facility. Unamortized costs were$1.8 million and$2.2 million atMarch 31, 2022 andSeptember 30, 2021 , respectively. The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed$35.0 million ) is available for the issuance of trade and standby letters of credit. OutstandingU.S. dollar denominated borrowings on the revolving credit facility atMarch 31, 2022 andSeptember 30, 2021 were$380.5 million and$349.8 million , respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) atMarch 31, 2022 and 2021 was 1.89% and 2.17%, respectively. The Company has$300.0 million of 5.25% senior unsecured notes dueDecember 1, 2025 (the "2025 Senior Notes"). The 2025 Senior Notes bear interest at a rate of 5.25% per annum with interest payable semi-annually in arrears onJune 1 andDecember 1 of each year. The Company's obligations under the 2025 Senior Notes are guaranteed by certain of the Company's direct and indirect wholly-owned subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were$1.9 million and$2.2 million atMarch 31, 2022 andSeptember 30, 2021 , respectively. The Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables toMatthews Receivables Funding Corporation, LLC ("Matthews RFC"), a wholly-owned bankruptcy-remote subsidiary of the Company. InMarch 2022 , Matthews RFC entered into a receivables purchase agreement ("RPA") to sell up to$125.0 million of receivables to certain purchasers (the "Purchasers") on a recurring basis in exchange for cash (referred to as "capital" within the RPA) equal to the gross receivables transferred. The parties intend that the transfers of receivables to the Purchasers constitute purchases and sales of receivables. Matthews RFC has guaranteed to each Purchaser the prompt payment of sold receivables, and has granted a security interest in its assets for the benefit of the Purchasers. Under the RPA, which matures inMarch 2024 , each Purchaser's share of capital accrues yield at a floating rate plus an applicable margin. The Company is the master servicer under the RPA, and is responsible for administering and collecting receivables. The proceeds of the RPA are classified as operating activities in the Company's Consolidated Statements of Cash Flows. Cash received from collections of sold receivables may be used to fund additional purchases of receivables on a revolving basis, or to reduce all or any portion of the outstanding capital of the Purchasers. Gross receivables sold and cash collections reinvested under the RPA program were$121.6 million and$46.6 million for the six months endedMarch 31, 2022 , respectively. The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded. As ofMarch 31, 2022 , the amount sold to the Purchasers was$75.0 million , which was derecognized from the Consolidated Balance Sheets. As collateral against sold receivables, Matthews RFC maintains a certain level of unsold receivables, which was$29.3 million as ofMarch 31, 2022 . Previously, the Company had a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions that matured inMarch 2022 . The Securitization Facility did not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations remained on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility were based on LIBOR plus 0.75% and the Company was required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility. Outstanding borrowings under the Securitization Facility atSeptember 30, 2021 totaled$96.0 million . AtMarch 31, 2021 , the interest rate on borrowings under this facility was 0.86%. 30 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges (dollar amounts in thousands):
March 31, 2022 September 30, 2021
Pay fixed swaps - notional amount $ 225,000 $ 250,000
Net unrealized gain (loss)$ 5,318 $
(2,062)
Weighted-average maturity period (years) 1.9
2.2
Weighted-average received rate 0.45 % 0.08 % Weighted-average pay rate 1.37 % 1.34 % The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments, which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective. The fair value of the interest rate swaps reflected an unrealized gain net of unrealized losses of$5.3 million ($4.0 million after tax) atMarch 31, 2022 and an unrealized loss net of unrealized gains of$2.1 million ($1.6 million after tax) atSeptember 30, 2021 , that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates atMarch 31, 2022 , a gain (net of tax) of approximately$839,000 included in AOCI is expected to be recognized in earnings over the next twelve months. The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews. The maximum amount of borrowing available under this facility is €25.0 million ($27.8 million ), which includes €8.0 million ($8.9 million ) for bank guarantees. In the first quarter of fiscal 2022, the Company extended this facility to a current maturity ofDecember 2022 and the Company intends to continue to extend this facility.March 31, 2022 . Outstanding borrowings under the credit facility totaled €7.8 million ($8.7 million ) and €704,000 ($817,000 ) atMarch 31, 2022 andSeptember 30, 2021 , respectively. The weighted-average interest rate on outstanding borrowings under this facility was 2.25% atMarch 31, 2022 andMarch 31, 2021 . Other borrowings totaled$58.5 million and$10.2 million atMarch 31, 2022 andSeptember 30, 2021 , respectively. Other borrowings atMarch 31, 2022 included$37.8 million of collateralized borrowings in connection with the RPA arrangement discussed above. The weighted-average interest rate on these borrowings was 1.92% and 2.18% atMarch 31, 2022 and 2021, respectively. The Company has aU.S. Dollar/Euro cross currency swap with a notional amount of$94.5 million as ofMarch 31, 2022 , which has been designated as a net investment hedge of foreign operations. The swap contract matures inSeptember 2028 . The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices. A gain of$2.9 million (net of income taxes of$939,000 ) and a gain of$29,000 (net of income taxes of$10,000 ), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atMarch 31, 2022 andSeptember 30, 2021 , respectively. Income of$420,000 and$785,000 , which represented the recognized portion of the fair value excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three and six months endedMarch 31, 2022 , respectively. AtMarch 31, 2022 andSeptember 30, 2021 , the swap, which is included in other assets in the Consolidated Balance Sheets, totaled$3.8 million and$39,000 , respectively. The Company has a stock repurchase program. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions set forth in the Company's Restated Articles of Incorporation. Under the current authorization, 2,306,697 shares remain available for repurchase as ofMarch 31, 2022 . Consolidated working capital of the Company was$273.7 million atMarch 31, 2022 , compared to$269.9 million atSeptember 30, 2021 . Cash and cash equivalents were$53.8 million atMarch 31, 2022 , compared to$49.2 million atSeptember 30, 2021 . The Company's current ratio was 1.8 atMarch 31, 2022 andSeptember 30, 2021 . 31
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
Long-Term Contractual Obligations:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
2022 (1) After
Total Remainder 2023 to 2024 2025 to 2026 2026
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 389,216 $ 8,676 $ - $ 380,540 $ -
2025 Senior Notes 361,066 7,875 31,500 321,691 -
Finance lease obligations (2) 7,761 1,795 3,344 1,026 1,596
Non-cancelable operating leases (2) 84,806 13,573 41,692 23,452 6,089
Other 87,878 2,616 73,699 2,169 9,394
Total contractual cash obligations $ 930,727 $ 34,535 (1) The Company maintains certain debt facilities with maturity dates of twelve months or less that it intends and has the ability to extend beyond twelve months totaling$8.7 million . These balances have been classified as non-current on the Company's Consolidated Balance Sheet.
(2) Lease obligations have not been discounted to their present value.
Benefit payments under the Company's DB Plan were made from plan assets, while benefit payments under the supplemental retirement plan ("SERP") and postretirement benefit plan are made from the Company's operating funds.
In the first quarter of fiscal 2022, the Company terminated its DB Plan and made plan contributions totaling$35.7 million to fully fund the planned settlement of the DB Plan obligations. Also during the first quarter of fiscal 2022, lump sum distributions of$186.0 million were made from the DB Plan to plan participants, and non-participating annuity contracts totaling$56.3 million were purchased by the DB Plan for plan participants, resulting in the full settlement of the DB Plan obligations. The settlement of the DB Plan obligations resulted in the recognition of a non-cash charge of$30.9 million , which has been presented as a component of other income (deductions), net for the six months endedMarch 31, 2022 . This amount represents the immediate recognition of the remaining portion of the deferred AOCI balances related to the DB Plan. During the six months endedMarch 31, 2022 contributions of$387,000 and$340,000 were made under the SERP and postretirement benefit plan, respectively. The Company currently anticipates contributing an additional$373,000 and$544,000 under the SERP and postretirement benefit plan, respectively, for the remainder of fiscal 2022. The Company also expects to make payments totaling approximately$24.2 million in fiscal 2023 to fully settle the SERP and defined benefit portion of the officers retirement restoration plan obligations. The obligations of the SERP are expected to be funded from an existing rabbi trust. The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future. Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities. If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary. As ofMarch 31, 2022 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$3.2 million . The timing of potential future payments related to the unrecognized tax benefits is not presently determinable. The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.
REGULATORY MATTERS:
The Company's operations are subject to various federal, state and local laws
and regulations requiring strict compliance, including, but not limited to, the
protection of the environment. The Company has established numerous internal
compliance programs to further ensure lawful satisfaction of the applicable
regulations. In addition, the Company is party to specific environmental matters
which include obligations to investigate and mitigate the effects on the
environment of certain materials at operating and non-operating sites. The
Company is currently performing environmental assessments and remediation at
certain sites, as applicable.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
FORWARD-LOOKING INFORMATION: The Company's current strategy to attain annual operating growth primarily consists of the following: internal growth - which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products - and acquisitions and related integration activities to achieve strategic and synergy benefits. The significant factors (excluding acquisitions) influencing sales growth in the SGK Brand Solutions segment are global economic conditions, brand innovation, the level of marketing spending by the Company's clients, and government regulation. Due to the global footprint of this segment, currency fluctuations can also be a significant factor. Additionally, the retail-based businesses in the SGK Brand Solutions segment continue to recover from the unfavorable sales impacts of the pandemic (see below). For the Memorialization segment, sales growth will be influenced byNorth America death rates, and the impact of the increasing trend toward cremation on the segment's product offerings, including caskets, cemetery memorial products and cremation-related products. For the Industrial Technologies segment, sales growth drivers include economic/industrial market conditions, new product development, and the e-commerce trend. Order rates and backlogs in the warehouse and product identification businesses are expected to support continued sales growth for the Industrial Technologies segment in fiscal 2022. In addition, sales for the energy solutions business in the Industrial Technologies segment, which supports the electric vehicle market, grew significantly in fiscal 2021 and, based on current backlogs and significant interest from multiple well-known auto manufacturers, are expected to significantly grow again in fiscal 2022. During fiscal 2019, the Company initiated a strategic evaluation to improve profitability and reduce the Company's cost structure. These actions leveraged the benefit of the Company's new global ERP platform, primarily targeted at the SGK Brand Solutions segment, both operational and commercial structure, and the Company's shared financial services and other administrative functions. This evaluation identified opportunities for significant cost structure improvements, which the Company expects to achieve throughout the remainder of fiscal 2022. The Company's strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment. OnJanuary 30, 2020 , theWorld Health Organization declared an outbreak of COVID-19 to be a Public Health Emergency of International Concern, and subsequently recognized COVID-19 as a global pandemic inMarch 2020 . The Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19. Recent impacts have included higher sales volumes for memorialization products and services. Additionally, recent increases in the cost of certain raw materials, labor, and other inflationary impacts are expected to impact the Company's results for the near future. The Company expects to partially mitigate these cost increases through price realization and the cost-reduction initiatives discussed above.
CRITICAL ACCOUNTING POLICIES:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements and in the critical accounting policies in Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2021 . Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition. The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2022 (January 1, 2022 ) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values, therefore no impairment charges were necessary. The estimated fair value of the Company's Graphics Imaging reporting unit, within the SGK Brand Solutions segment, exceeded the carrying value (expressed as a percentage of carrying value) by approximately 10%. If current projections are not achieved or specific valuation factors outside the Company's control (such as discount rates and continued economic and industry impacts of COVID-19) significantly change, goodwill write-downs may be necessary in future periods. 33
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