MATTHEWS INTERNATIONAL CORPORATION The following discussion should be read in conjunction with the consolidated financial statements of Matthews and related notes thereto. In addition, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
The Company manages its businesses under three segments: SGK Brand Solutions,
Memorialization and Industrial Technologies. The SGK Brand Solutions segment
consists of brand management, pre-media services, printing plates and cylinders,
engineered products, 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 marking and coding
equipment and consumables, industrial automation products and order fulfillment
systems for identifying, tracking, picking and conveying consumer and industrial
products.
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.
19
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The following table sets forth sales and adjusted EBITDA for the Company's SGK
Brand Solutions, Memorialization and Industrial Technologies segments for each
of the last three fiscal years. Refer to Note 19, "Segment Information" in Item
8 - "Financial Statements and Supplemental Data" for the Company's financial
information by segment.
Years Ended September 30,
2020 2019 2018
(Dollar amounts in thousands)
Sales to external customers:
SGK Brand Solutions $ 693,093 $ 743,869 $ 805,274
Memorialization 656,035 636,892 631,392
Industrial Technologies 149,178 156,515 165,914
Consolidated Sales $ 1,498,306 $ 1,537,276 $ 1,602,580
Adjusted EBITDA:
SGK Brand Solutions $ 90,644 $ 119,493 $ 150,233
Memorialization 146,285 134,286 145,487
Industrial Technologies 22,753 24,082 25,864
Corporate and Non-Operating (56,602) (56,989) (66,470)
Total Adjusted EBITDA(1)
(1) Total Adjusted EBITDA is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.
Comparison of Fiscal 2020 and Fiscal 2019:
Sales for the year endedSeptember 30, 2020 were$1.50 billion , compared to$1.54 billion for the year endedSeptember 30, 2019 , representing a decrease of$39.0 million . The decrease in fiscal 2020 sales reflected lower sales in the SGK Brand Solutions and Industrial Technologies segments, partially offset by increased sales in the Memorialization segment. Changes in foreign currency rates were estimated to have an unfavorable impact of$6.9 million on fiscal 2020 consolidated sales compared to a year ago. Fiscal 2020 sales were unfavorably impacted by the global outbreak of COVID-19, which has caused some commercial impact and business disruptions in certain of the Company's segments and geographic locations. While substantially all of the Company's operations have remained open during the COVID-19 pandemic, management expects COVID-19 to continue to impact its sales and results of operations in the short-term until the pandemic subsides (see "Forward Looking Information" below). In the SGK Brand Solutions segment, sales for fiscal 2020 were$693.1 million , compared to$743.9 million in fiscal 2019. The decrease primarily resulted from lower brand sales in theU.S. and theU.K. , sales declines in the private label brand market, and lower sales of cylinders and surfaces products inEurope . These decreases were partially offset by increased revenues from purpose-built machinery projects and higher sales in theAsia-Pacific region . Changes in foreign currency exchange rates had an unfavorable impact of$5.9 million on the segment's sales compared to the prior year. Memorialization segment sales for fiscal 2020 were$656.0 million , compared to$636.9 million for fiscal 2019. The increase in sales primarily resulted from increased unit sales of caskets due to COVID-19, improved price realization on caskets and cemetery memorial products, and higher sales of cremation and incineration equipment. These increases were partially offset by lower unit sales of cemetery memorial products, which were impacted by COVID-19 related stay-at-home orders that limited families' access with cemeteries to arrange for their memorials. Changes in foreign currency exchange rates had an unfavorable impact of$615,000 on the segment's sales compared to the prior year. Industrial Technologies segment sales for fiscal 2020 were$149.2 million , compared to$156.5 million for fiscal 2019. The decrease primarily reflected lower sales of warehouse automation systems. Orders for warehouse automation solutions remained strong, but access to job sites to complete these projects has been restricted due to COVID-19. Changes in foreign currency exchange rates had an unfavorable impact of$356,000 on the segment's sales compared to the prior year. Gross profit for the year endedSeptember 30, 2020 was$497.8 million , compared to$542.5 million for fiscal 2019. Consolidated gross profit as a percent of sales was 33.2% and 35.3% in fiscal 2020 and fiscal 2019, respectively. The decrease in gross profit primarily reflected lower sales, unfavorable changes in product mix, ongoing price competition in the brand market, and unfavorable changes in margins for cylinders, surfaces and engineered products. These declines were partially offset by the realization of productivity improvements and cost-reduction initiatives. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling$12.4 million and$2.4 million in fiscal 2020 and 2019, respectively. 20 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Selling and administrative expenses for the year endedSeptember 30, 2020 were$400.0 million , compared to$408.8 million for fiscal 2019. Consolidated selling and administrative expenses as a percent of sales were 26.7% for fiscal 2020, compared to 26.6% in fiscal 2019. The decrease in selling and administrative expenses reflected the impact of lower sales in fiscal 2020, reduced travel and entertainment ("T&E") costs resulting from the COVID-19 pandemic, and benefits from ongoing cost-reduction initiatives, partially offset by increased performance-based compensation compared to fiscal 2019. Fiscal 2020 selling and administrative expenses included a$10.6 million charge for a legal matter involving a letter of credit for a customer inSaudi Arabia (see "Liquidity and Capital Resources" below). Fiscal 2019 selling and administrative expenses included$7.3 million of net gains from the sale of buildings and vacant properties. Selling and administrative expenses included an$11.2 million gain and$6.5 million of losses recognized on the sales of ownership interests in Memorialization businesses completed in fiscal 2020 and 2019, respectively. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling$31.5 million in fiscal 2020, compared to$30.5 million in fiscal 2019. Intangible amortization for the year endedSeptember 30, 2020 was$71.5 million , compared to$45.8 million for fiscal 2019. The increase in intangible amortization primarily reflected$24.4 million of incremental amortization resulting from the fiscal 2019 reduction in useful lives for certain trade names that are being discontinued. The Company recorded goodwill write-downs within the SGK Brand Solutions segment totaling$90.4 million and$77.6 million for the years endedSeptember 30, 2020 and 2019, respectively. Refer to Note 21, "Goodwill and Other Intangible Assets" in Item 8 - "Financial Statements and Supplementary Data" for further details. Adjusted EBITDA for fiscal 2020 was$203.1 million , compared to$220.9 million for fiscal 2019. Adjusted EBITDA for the SGK Brand Solutions segment for fiscal 2020 was$90.6 million , compared to$119.5 million for fiscal 2019. The decrease in segment adjusted EBITDA primarily reflected the impact of lower sales, unfavorable changes in product mix, ongoing price competition, a decline in margins for cylinders, surfaces and engineered products, and increased performance-based compensation compared to fiscal 2019. Changes in foreign currency exchange rates had an unfavorable impact of$1.8 million on the segment's adjusted EBITDA compared to the prior year. These decreases in segment adjusted EBITDA were partially offset by benefits from cost-reduction initiatives, and reduced T&E costs resulting from COVID-19. Memorialization segment adjusted EBITDA for fiscal 2020 was$146.3 million , compared to$134.3 million for fiscal 2019. The increase in segment adjusted EBITDA primarily reflected the impact of higher sales, benefits from productivity initiatives and lower T&E costs, partially offset by increased performance-based compensation compared to fiscal 2019. Adjusted EBITDA for the Industrial Technologies segment for fiscal 2020 was$22.8 million , compared to$24.1 million in fiscal 2019. Industrial Technologies segment adjusted EBITDA primarily reflected the impact of lower sales, partially offset by benefits from cost-reduction initiatives and reduced T&E costs. Investment income for the fiscal year endedSeptember 30, 2020 was$2.0 million , compared to$1.5 million for the year endedSeptember 30, 2019 . The increase primarily reflected higher rates of return on investments (primarily marketable securities) held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2020 was$34.9 million , compared to$41.0 million in fiscal 2019. The decrease in interest expense reflected lower average interest rates and a decrease in average borrowing levels in the current fiscal year. Other income (deductions), net for the year endedSeptember 30, 2020 represented a decrease in pre-tax income of$9.2 million , compared to a decrease in pre-tax income of$8.9 million in fiscal 2019. Other income (deductions), net includes banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. Other income (deductions), net also includes the non-service components of pension and postretirement expense, which totaled$7.8 million and$3.8 million in fiscal years 2020 and 2019, respectively. Fiscal 2019 other income (deductions), net also included a$3.7 million loss from the write-down of a cost-method investment and related assets. The Company's consolidated income taxes for the year endedSeptember 30, 2020 were a benefit of$18.7 million , compared to an expense of$806,000 for fiscal 2019. The difference between the Company's consolidated income taxes for fiscal 2020 versus fiscal 2019 primarily resulted from the fiscal 2020 consolidated loss before income taxes, which reflected the goodwill write-down recorded in the second quarter of fiscal 2020, which was partially non-deductible, as well as a benefit for an expected net operating loss ("NOL") carryback. The NOL will be carried back five years allowing it to offset income that was previously taxed at a federal statutory tax rate of 35%. The Company's fiscal 2020 effective tax rate was negatively affected by the non-deductible portion of the goodwill write-down along with certain other non-deductible expenses. The fiscal 2020 effective tax rate benefited from research and development and foreign tax credits, the reduction of uncertain tax positions due to the completion of a foreign tax audit, and the tax benefit of the NOL carryback. Refer to Note 16, "Income Taxes" in Item 8 - "Financial Statements and Supplementary Data" for further details regarding income taxes.
Net losses attributable to noncontrolling interests were
21
--------------------------------------------------------------------------------ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Comparison of Fiscal 2019 and Fiscal 2018:
For a comparison of the Company's results of operations for the fiscal years endedSeptember 30, 2019 andSeptember 30, 2018 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" of the Company's annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 filed with theSEC onNovember 22, 2019 .
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.
22
--------------------------------------------------------------------------------ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The reconciliation of net income to adjusted EBITDA is as follows:
Years Ended
2020 2019 2018
(Dollar amounts in thousands)
Net (loss) income $ (87,652) $ (38,889) $ 107,111
Income tax (benefit) provision (18,685) 806 (9,118)
(Loss) income before income taxes (106,337) (38,083) 97,993
Net loss attributable to noncontrolling interests 497 901 260
Interest expense 34,885 40,962 37,427
Depreciation and amortization * 119,058 90,793 76,974
Acquisition costs (1)** 3,844 10,872 10,918
ERP integration costs (2)** 2,296 7,508 10,864
Strategic initiatives and other charges (3)** 33,799 13,449 5,266
Legal matter reserve (4) 10,566 - -
Non-recurring / incremental COVID-19 costs (5) 4,655 - -
Goodwill write-downs (6) 90,408 77,572 -
Net realized (gains) losses on divestitures and asset
dispositions:
(Gain) loss on sale of ownership interests in
subsidiaries (7) (11,208) 6,469 -
Realized loss (gain) on cost-method investments (8) - 4,731 (3,771)
Net gains from the sale of buildings and vacant
properties (9) - (7,347) -
Joint Venture depreciation, amortization, interest expense and other charges (10)
4,732 1,514 -
Stock-based compensation 8,096 7,729 13,460
Non-service pension and postretirement expense (11) 7,789 3,802 5,723
Total Adjusted EBITDA $ 203,080 (1) Includes certain non-recurring costs associated with recent acquisition activities. (2) Represents costs associated with global ERP system integration efforts. (3) Includes certain non-recurring costs primarily associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels. (4) Represents a reserve established for a legal matter involving a letter of credit for a customer inSaudi Arabia within the Memorialization segment (see Note 9, "Long Term Debt" in Item 8 - "Financial Statements and Supplementary Data"). (5) 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. (6) Represents goodwill write-downs within the SGK Brand Solutions segment (see Note 21, "Goodwill and Other Intangible Assets" in Item 8 - "Financial Statements and Supplementary Data"). (7) Represents the (gain) loss on the sale of ownership interests in subsidiaries within the Memorialization segment. (8) Includes gains/losses related to cost-method investments, and related assets, within the SGK Brand Solutions and Memorialization segments. (9) Includes significant building and vacant property transactions resulting in a gain of$8.7 million within the Industrial Technologies segment and losses of$0.9 million and$0.4 million within the SGK Brand Solutions and Memorialization segments, respectively. (10) Represents the Company's portion of depreciation, intangible amortization, interest expense, and other non-recurring charges incurred by non-consolidated subsidiaries accounted for as equity-method investments within the Memorialization segment. (11) Non-service pension and postretirement expense includes interest cost, expected return on plan assets and amortization of actuarial 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. 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$87.6 million ,$59.7 million , and$46.3 million for the SGK Brand Solutions segment,$20.5 million ,$19.7 million , and$20.0 million for the Memorialization segment,$5.8 million ,$6.2 million , and$5.8 million for the Industrial Technologies segment, and$5.2 million ,$5.2 million , and$4.9 million for Corporate and Non-Operating, for the fiscal years endedSeptember 30, 2020 , 2019, and 2018, respectively. ** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were$14.0 million ,$8.9 million , and$11.0 million for the SGK Brand Solutions segment,$0.3 million ,$3.1 million , and$0.6 million for the Industrial Technologies segment, and$23.0 million ,$19.9 million , and$14.0 million for Corporate and Non-Operating, for the fiscal years endedSeptember 30, 2020 , 2019, and 2018, respectively. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were$2.7 million , and$1.4 million for the Memorialization segment for the fiscal years endedSeptember 30, 2020 and 2018, respectively. 23 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was$180.4 million for the year endedSeptember 30, 2020 , compared to$131.1 million and$147.6 million for fiscal years 2019 and 2018, respectively. Operating cash flow for fiscal 2020 principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses related to goodwill and investments, and non-cash pension expense, and changes in working capital items. The favorable movements in working capital in fiscal 2020 primarily reflected enhanced accounts receivable collection efforts and effective management of trade accounts payable, as the Company has been focusing its efforts on cash management. The fiscal 2020 decrease in other assets reflects changes in operating leases assets. Operating cash flow for fiscal 2019 principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses related to goodwill and investments, net gains from the sale of buildings and other property, and non-cash pension expense, and changes in working capital items. Operating cash flow for fiscal 2018 principally included net income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net gains related to investments, and non-cash pension expense, and changes in working capital items. Fiscal 2018 operating cash flow also included cash contributions of$12.7 million to the Company's pension and other postretirement plans. Cash used in investing activities was$2.7 million for the year endedSeptember 30, 2020 , compared to$60.8 million and$162.3 million for fiscal years 2019 and 2018, respectively. Investing activities for fiscal 2020 primarily reflected capital expenditures of$34.8 million , acquisition payments (net of cash acquired or received from sellers) of$1.0 million , proceeds of$42.2 million from the sale of an ownership interest in a pet cremation business, and investments and advances of$9.7 million . Investing activities for fiscal 2019 primarily reflected capital expenditures of$37.7 million , acquisition payments (net of cash acquired or received from sellers) of$11.5 million , proceeds of$13.3 million from the sale of assets, proceeds of$8.3 million from the sale of a controlling interest in a Memorialization business, and additional investments made in non-consolidated subsidiaries of$33.1 million . Investing activities for fiscal 2018 primarily reflected capital expenditures of$43.2 million , acquisition payments (net of cash acquired or received from sellers) of$121.1 million , proceeds of$9.2 million from the sale of certain cost-method investments, and cash payments of$11.9 million for purchases of investments. Capital expenditures were$34.8 million for the year endedSeptember 30, 2020 , compared to$37.7 million and$43.2 million for fiscal years 2019 and 2018, respectively. Capital expenditures in each of the last three fiscal years reflected reinvestments 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 spending for property, plant and equipment has averaged$38.6 million for the last three fiscal years. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for fiscal 2021 is currently estimated to be approximately$40 million . The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Cash used in financing activities for the year endedSeptember 30, 2020 was$172.3 million , and principally reflected repayments, net of proceeds, on long-term debt of$126.3 million , purchases of treasury stock of$4.4 million , payment of dividends to the Company's shareholders of$26.4 million ($0.84 per share),$10.2 million of holdback and contingent consideration payments related to acquisitions from prior years, and payment of deferred financing fees of$2.0 million (see below). Cash used in financing activities for the year endedSeptember 30, 2019 was$75.0 million , and principally reflected repayments, net of proceeds, on long-term debt of$16.0 million , purchases of treasury stock of$26.1 million , payment of dividends to the Company's shareholders of$25.6 million ($0.80 per share), and$4.4 million of holdback and contingent consideration payments related to a fiscal 2018 acquisition. Cash provided by financing activities for the year endedSeptember 30, 2018 was$0.9 million , and primarily reflected proceeds, net of repayments on long-term debt of$53.0 million , purchases of treasury stock of$21.2 million , payment of dividends to the Company's shareholders of$24.6 million ($0.76 per share), and payment of deferred financing fees of$4.1 million . 24 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company has a domestic credit facility with a syndicate of financial institutions that was amended and restated inMarch 2020 . The amended and restated loan agreement includes a$750.0 million senior secured revolving credit facility, which matures inMarch 2025 , and a$35.0 million senior secured amortizing term loan, which matures inJuly 2021 . A portion of the revolving credit facility (not to exceed$350.0 million ) can be drawn in foreign currencies. The term loan requires scheduled quarterly principal payments through its maturity date. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.50% atSeptember 30, 2020 ) 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 of approximately$2.0 million in connection with the amended and restated agreement, which was deferred and is being amortized over the term of the facility. 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 atSeptember 30, 2020 and 2019 were$257.4 million and$325.6 million , respectively. Outstanding Euro denominated borrowings on the revolving credit facility atSeptember 30, 2020 and 2019 were €117.0 million ($137.2 million ) and €125.0 million ($136.5 million ), respectively. Outstanding borrowings on the term loan atSeptember 30, 2020 and 2019 were$22.4 million and$53.5 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) atSeptember 30, 2020 and 2019 was 2.41% and 2.65%, 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 domestic 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 2025 Senior Notes. Unamortized costs were$2.7 million and$3.3 million atSeptember 30, 2020 and 2019, respectively. The Company has a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions. The Securitization Facility, which had a maturity date ofApril 2020 , was amended inMarch 2020 to extend the maturity date untilMarch 2022 . Under the Securitization Facility, 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. Matthews RFC in turn assigns a collateral interest in these receivables to certain financial institutions, and then may borrow funds under the Securitization Facility. The Securitization Facility does not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations remain on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility bear interest at LIBOR plus 0.75%. The Company is 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, 2020 and 2019 were$67.7 million and$94.0 million , respectively. The interest rate on borrowings under this facility atSeptember 30, 2020 and 2019 was 0.90% and 2.77%, respectively.
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
September 30, 2020
(Dollar amounts in thousands)
Pay fixed swaps - notional amount $ 312,500 $
293,750
Net unrealized loss $ (7,792) $
(534)
Weighted-average maturity period (years) 2.6 1.9
Weighted-average received rate 0.15 % 2.02 %
Weighted-average pay rate 1.34 % 1.41 %
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.
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--------------------------------------------------------------------------------ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The fair value of the interest rate swaps reflected an unrealized loss of$7.8 million ($5.9 million after tax) and an unrealized loss net of unrealized gains of$534,000 ($403,000 after tax) atSeptember 30, 2020 and 2019, respectively, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates atSeptember 30, 2020 , a loss (net of tax) of approximately$2.4 million 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 borrowings available under this facility is €35.0 million ($41.0 million ). The credit facility matures inDecember 2020 and the Company intends to extend this facility. Outstanding borrowings under the credit facility totaled €18.9 million ($22.2 million ) and €12.8 million ($14.0 million ) atSeptember 30, 2020 and 2019, respectively. The weighted-average interest rate on outstanding borrowings under this facility atSeptember 30, 2020 and 2019 was 1.25%. The Company's German subsidiary,Matthews Europe GmbH , had €15.0 million ($16.4 million atSeptember 30, 2019 ) of senior unsecured notes with European banks. The notes matured inNovember 2019 at which point they were paid. The weighted-average interest rate on the notes atSeptember 30, 2019 was 1.40%. Finance lease liabilities included as a component of debt totaled$9.7 million and$3.6 million atSeptember 30, 2020 and 2019, respectively. See Note 10, "Leases" in Item 8 - "Financial Statements and Supplementary Data" for further discussion on the Company's lease obligations. Other borrowings totaled$20.7 million and$395,000 atSeptember 30, 2020 and 2019, respectively. The weighted-average interest rate on other borrowings was 2.10% and 2.17% atSeptember 30, 2020 and 2019, respectively. The Company was in compliance with all of its debt covenants as ofSeptember 30, 2020 . The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of$4.4 million (net of income taxes of$1.4 million ) and currency gains of$3.3 million (net of income taxes of$1.1 million ), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atSeptember 30, 2020 and 2019, respectively. InSeptember 2014 , a claim was filed by a customer seeking to draw upon a letter of credit issued by the Company of £8.6 million ($11.0 million atSeptember 30, 2020 ) with respect to a performance guarantee on an incineration equipment project inSaudi Arabia . Management assessed the customer's demand to be without merit and initiated an action with the court in theUnited Kingdom (the "U.K. Court"). Pursuant to this action, an order was issued by theU.K. Court inJanuary 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to theU.K. Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to theU.K. Court as ordered. OnJune 14, 2016 , theU.K. Court ruled completely in favor of Matthews following a trial on the merits. However, the ongoing dispute involves litigation in multiple foreign jurisdictions because the contract between the parties includes a venue clause requiring the venue for any litigation to be in theUnited Kingdom , while the enforcement of any final judgment is required to be executed inSaudi Arabia . The Company continues to pursue a trial on the merits inSaudi Arabia ; however, given the recent COVID-19 pandemic, the case has been further delayed. As the Company has successfully completed the project and subsequently operated the equipment, the Company remains confident regarding the pending trial on the merits inSaudi Arabia and expects to be in a position to enforce the judgment and initiate collection efforts following completion of that trial. However, the Company's level of success in recovering funds from the customer will depend upon several factors including a successful completion of the pending trial on the merits inSaudi Arabia , the availability of recoverable funds, and the subsequent level of support of the Saudi Arabian government to enforce a potential judgment against the customer. During the third quarter of fiscal 2020, the Saudi Arabian government implemented restrictions on travel toMecca due to the COVID-19 pandemic. As a result, the Company was not able to support the operation of the incineration equipment for the local agency responsible for its operation during the current year Hajj Pilgrimage. Consequently, as of the filing of this report, the Company is now concerned regarding the level of anticipated support from the government in its collection efforts. Therefore, when considered collectively with the potential delay in completing the trial and other collectability risks, the Company established a reserve for the full value of the funded letter of credit as ofJune 30, 2020 . The funded letter of credit was previously classified within other assets on the Consolidated Balance Sheet as ofSeptember 30, 2019 . The Company will continue to assess the accounting and collectability related to this matter as facts and circumstances evolve. 26 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 538,736 shares remain available for repurchase as ofSeptember 30, 2020 . 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. The Company utilized certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (commonly referred to as the CARES Act) and other similar economic relief initiatives that were enacted in response to COVID-19. Under the CARES Act, the Company elected to defer payments for certain taxes, primarilyU.S. payroll taxes, which were$8.4 million for fiscal 2020. Consolidated working capital was$258.7 million atSeptember 30, 2020 , compared to$303.8 million atSeptember 30, 2019 . Cash and cash equivalents were$41.3 million atSeptember 30, 2020 , compared to$35.3 million atSeptember 30, 2019 . The Company's current ratio was 1.8 and 2.1 atSeptember 30, 2020 and 2019, respectively.
ACQUISITIONS AND DIVESTITURES:
Refer to Note 20, "Acquisitions and Divestitures" in Item 8 - "Financial Statements and Supplementary Data," for further details on the Company's acquisitions.
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 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. For the Memorialization segment,North America death rates, the cremation trend, and price realization impact sales growth for the Company's bronze and granite memorials, caskets and cremation and incineration-related products. For the Industrial Technologies segment, sales growth drivers include economic/industrial market conditions, new product development, and the e-commerce trend. 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 through fiscal 2022. The Company's recent strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment, including the consolidation of several of the segment's trade names. As a result, the amortization of these intangible assets will significantly increase for fiscal 2020 through fiscal 2022. 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 onMarch 11, 2020 . Widespread efforts have been deployed by multiple countries around the world to prevent the virus from spreading, including temporary closures of non-essential businesses, event cancellations, travel restrictions, quarantines, and other disruptive actions. Substantially all of the Company's operations have remained open during the COVID-19 pandemic, as they have been considered "essential" businesses during this time. However, the Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19. Considerable judgement is necessary to assess and predict the potential financial impacts of COVID-19 on the Company's future operating results. Management expects that each of its business segments will experience some level of sales impacts in the short-term, potentially due to customer business disruptions, facilities shut-downs, weaker global economic conditions, and possible customer project delays. Longer-term financial impacts will depend on global economic conditions eventually resulting from COVID-19. Management expects each of its businesses to experience increased financial volatility in the short-term, but currently anticipates its core businesses will return to a more normalized future state once the COVID-19 pandemic subsides. 27 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
CRITICAL ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally accepted accounting principles 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," of this Annual Report on Form 10-K. The Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. 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 following accounting policies involve significant estimates, which were considered critical to the preparation of the Company's consolidated financial statements for the year endedSeptember 30, 2020 .
Long-Lived Assets, including Property, Plant and Equipment:
Long-lived assets are recorded at their respective cost basis on the date of acquisition. Depreciation on property, plant and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Intangible assets with finite useful lives are amortized over their estimated useful lives. The Company reviews long-lived assets, including property, plant and equipment, and intangibles with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets is determined by evaluating the estimated undiscounted net cash flows of the operations to which the assets relate. An impairment loss would be recognized when the carrying amount of the assets exceeds the fair value, which is based on a discounted cash flow analysis. No such charges were recognized during the years presented.
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested annually for impairment, or when circumstances indicate that a possible impairment may exist. In general, when the carrying value of these assets exceeds the implied fair value, an impairment loss must be recognized. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. For purposes of testing goodwill for impairment, the Company uses a combination of valuation techniques, including discounted cash flows and other market indicators. A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rates. The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections. The discount rates used in the discounted cash flow analyses are developed with the assistance of valuation experts and management believes the discount rates appropriately reflect the risks associated with the Company's operating cash flows. In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization is performed using a reasonable control premium. The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2020 (January 1, 2020 ) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values. The estimated fair values for two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) exceeded their carrying values (expressed as a percentage of carrying value) by less than 10% as ofJanuary 1, 2020 . In its assessment of the potential impacts of COVID-19 on the estimated future earnings and cash flows for the SGK Brand Solutions segment, and in light of the limited excess fair values for its two reporting units (discussed above), management determined that COVID-19 represented a triggering event, resulting in a re-evaluation of the goodwill for its reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products), as ofMarch 31, 2020 . As a result of this interim assessment, the Company recorded a goodwill write-down totaling$90.4 million during the fiscal 2020 second quarter. Subsequent to this write-down, the fair values of the two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) approximated their carrying values atMarch 31, 2020 . The fair values for these reporting units were determined using level 3 inputs (including estimates of revenue 28 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
growth, EBITDA contribution and the discount rates) and a combination of the income approach using the estimated discounted cash flows and a market-based valuation methodology. 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, additional goodwill write-downs may be necessary in future periods. During the fourth quarter of fiscal 2019, the Company initiated an in-depth review of the commercial and cost structure of the SGK Brand Solutions segment as a result of continued challenging market conditions affecting the segment. This review identified certain opportunities to improve the segment's profitability and reduce its operating cost structure and, as a result, the Company revised its estimates of future earnings and cash flows for the Graphics Imaging reporting unit. In response to these revised projections, the Company re-evaluated the goodwill for the Graphics Imaging reporting unit, as ofSeptember 1, 2019 . As a result of this interim assessment, the Company recorded a goodwill write-down of$77.6 million during the fiscal 2019 fourth quarter.
Pension and Postretirement Benefits:
Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost. The Company's principal pension plan maintains a substantial portion of its assets in equity securities in accordance with the investment policy established by the Company's pension board. Based on an analysis of the historical performance of the plan's assets and information provided by its independent investment advisor, the Company set the long-term rate of return assumption for these assets at 6.75% atSeptember 30, 2019 for purposes of determining fiscal 2020 pension cost. The Company's discount rate assumption used in determining the present value of the projected benefit obligation is based upon published indices as ofSeptember 30, 2020 andSeptember 30, 2019 for the fiscal year end valuation. The discount rate was 2.62%, 3.13% and 4.21% in fiscal 2020, 2019 and 2018, respectively. Refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Annual Report on Form 10-K, for disclosure about the hypothetical impact of changes in actuarial assumptions.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries since they have either been previously taxed, or are now exempt from tax, under theU.S. Tax Cuts and Jobs Act, and such earnings are considered to be reinvested indefinitely in foreign operations. 29 --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
After
Total 2021(1) 2022 to 2023 2024 to 2025 2025
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 416,793 $ 22,166 $ - $ 394,627 $ -
Securitization facility 67,700 - 67,700 - -
Senior secured term loan 22,359 22,359 - - -
2025 Senior Notes 383,881 15,750 31,500 31,500 305,131
Finance lease obligations (2) 10,514 3,847 4,045 869 1,753
Non-cancelable operating leases (2) 77,161 25,804 31,912 14,221 5,224
Other 27,338 13,970 5,594 2,168 5,606
Total contractual cash obligations $ 1,005,746 $
103,896
(1)The Company maintains certain debt facilities with current maturity dates in fiscal 2021 that it intends and has the ability to extend beyond fiscal 2021 totaling$32.3 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. A significant portion of the loans included in the table above bear interest at variable rates. AtSeptember 30, 2020 , the weighted-average interest rate was 2.41% on the Company's domestic credit facility, 0.90% on the Company's Securitization Facility, 1.25% on the credit facility through the Company's European subsidiaries, and 2.10% on other outstanding borrowings. Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company's operating cash. In response to COVID-19, the federal government passed a modified relief bill, which provides additional funding measures associated withIRS regulations. In accordance with this bill, the Company was not required to make contributions to its principal retirement plan in fiscal 2020. However, the Company contributed 668,000 shares of its Class A Common Stock to its principal retirement plan during the fourth quarter of fiscal 2020. The shares had a market value of approximately$15.0 million at the time of the contribution. The Company is required to make cash contributions of approximately$4.2 million to its principal retirement plan in fiscal 2021. The Company estimates that benefit payments to participants under its retirement plans (including its supplemental retirement plan) and postretirement benefit payments will be approximately$11.4 million and$831,000 , respectively, in fiscal 2021. The amounts are expected to increase incrementally each year thereafter, to$14.3 million and$931,000 , respectively, in 2025. 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 ofSeptember 30, 2020 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$10.5 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.
INFLATION:
Except for the volatility in the cost of bronze ingot, steel, wood, granite and
fuel (see "Results of Operations"), inflation has not had a material impact on
the Company over the past three years nor is it anticipated to have a material
impact for the foreseeable future.
30
--------------------------------------------------------------------------------ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Refer to Note 3, "Accounting Pronouncements" in Item 8 - "Financial Statements and Supplementary Data," for further details on recently issued accounting pronouncements.
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