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, 2020 . 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, 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, 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, 2020 . 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. 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.
22
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 endedMarch 31, 2021 and 2020. 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, 2021 2020 2021 2020 Sales: (Dollar amounts in thousands) SGK Brand Solutions$ 171,024 $ 172,855 $ 339,164 $ 347,735 Memorialization 205,457 161,819 388,731 316,224 Industrial Technologies 40,673 40,126 75,916 75,785 Consolidated Sales$ 417,154 $ 374,800 $ 803,811 $ 739,744 Adjusted EBITDA: SGK Brand Solutions$ 20,832 $ 22,224 $
42,168
Memorialization 51,606 35,193 95,678 65,286
Industrial Technologies 5,809 6,212 9,302 10,526
Corporate and Non-Operating (17,307) (14,232) (31,445) (27,147)
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, 2021 were$803.8 million , compared to$739.7 million for the six months endedMarch 31, 2020 , representing an increase of$64.1 million . The increase in fiscal 2021 sales primarily reflected higher sales in the Memorialization segment partially offset by lower sales in the SGK Brand Solutions segment. Changes in foreign currency exchange rates were estimated to have a favorable impact of$14.1 million on fiscal 2021 consolidated sales compared to a year ago. Fiscal 2021 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. These impacts have included higher sales volumes for memorialization products and services, but have also included temporary business disruptions and customer project delays for certain of the Company's businesses. 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 the first six months of fiscal 2021 were$339.2 million , compared to$347.7 million for the first six months of fiscal 2020. The decrease primarily resulted from lower retail-based sales (principally merchandising solutions and private label brand market sales), and reduced sales of cylinders and surfaces products, all of which continued to be unfavorably impacted by COVID-19. These decreases were partially offset by higher sales of purpose-built engineered products (primarily in support of the automobile and energy storage industries). Changes in foreign currency exchange rates had a favorable impact of$10.4 million on the segment's sales compared to the prior year. Memorialization segment sales for the first six months of fiscal 2021 were$388.7 million , compared to$316.2 million for the first six months of fiscal 2020. The increase in sales predominantly resulted from increased unit sales of caskets due to COVID-19. The segment also reported higher sales of bronze and granite memorial products, mausoleums, and cremation equipment. The increase in sales also reflected improved price realization and benefits from a recently completed acquisition of a small cemetery products business. Changes in foreign currency exchange rates had a favorable impact of$2.3 million on the segment's sales compared to the prior year. Industrial Technologies segment sales were$75.9 million for the first six months of fiscal 2021, compared to$75.8 million for the first six months of fiscal 2020. The sales increase primarily reflected a$1.4 million favorable impact from 23 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
changes in foreign exchange rates, partially offset by lower product identification sales. Orders for warehouse automation solutions remained strong, but access to job sites to complete these projects has been restricted due to COVID-19. Gross profit for the six months endedMarch 31, 2021 was$266.5 million , compared to$240.5 million for the same period a year ago. Consolidated gross profit as a percent of sales was 33.2% and 32.5% for the first six months of fiscal 2021 and fiscal 2020, respectively. The increase in gross profit primarily reflected higher sales, benefits from the realization of productivity improvements and cost-reduction initiatives, and improved margins for cylinders and engineered products within the SGK Brand Solutions segment. These improvements were partially offset by the impact of higher material and transportation costs, particularly in the Memorialization segment. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling$10.7 million and$4.4 million for the six months endedMarch 31, 2021 and 2020, respectively. Selling and administrative expenses for the six months endedMarch 31, 2021 were$203.0 million , compared to$204.3 million for the first six months of fiscal 2020. Consolidated selling and administrative expenses, as a percent of sales, were 25.3% for the six months endedMarch 31, 2021 , compared to 27.6% for the same period last year. The decrease in selling and administrative expenses reflected benefits from ongoing cost-reduction initiatives, and reduced travel and entertainment ("T&E") costs resulting from the COVID-19 pandemic, partially offset by increased performance-based compensation compared to fiscal 2020. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling$8.3 million in fiscal 2021, compared to$19.2 million in fiscal 2020. Intangible amortization for the six months endedMarch 31, 2021 was$38.2 million , compared to$35.8 million for the six months endedMarch 31, 2020 . The increase in intangible amortization reflected$5.1 million of incremental amortization resulting from a reduction in useful lives for certain customer relationships. Refer to Note 15, "Goodwill and Other Intangible Assets" in Item 1 - "Financial Statements" for further details. Intangible amortization also included accelerated amortization resulting from the fiscal 2019 reduction in useful lives for certain trade names that are being discontinued. Amortization for these trade names totaled$16.5 million and$18.7 million for the six months endedMarch 31, 2021 andMarch 31, 2020 , respectively. During the second quarter of fiscal 2020, the Company recorded a goodwill write-down totaling$90.4 million related to its two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products). Adjusted EBITDA was$115.7 million for the six months endedMarch 31, 2021 and$89.6 million for the six months endedMarch 31, 2020 . Adjusted EBITDA for the SGK Brand Solutions segment was$42.2 million for the first six months of fiscal 2021 compared to$41.0 million for the same period a year ago. The increase in segment adjusted EBITDA primarily reflected benefits from cost-reduction initiatives, reduced T&E costs resulting from COVID-19, and improved margins for cylinders and engineered products. These increases were partially offset by the impact of lower sales and increased performance-based compensation compared to fiscal 2020. Memorialization segment adjusted EBITDA was$95.7 million for the first six months of fiscal 2021 compared to$65.3 million for the first six months of fiscal 2020. 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 the impact of higher material and transportation costs and increased performance-based compensation compared to fiscal 2020. Adjusted EBITDA for the Industrial Technologies segment for the six months endedMarch 31, 2021 was$9.3 million , compared to$10.5 million for the same period a year ago. Industrial Technologies segment adjusted EBITDA primarily reflected the impact of lower product identification sales, increased performance-based compensation expense and higher product development costs, partially offset by benefits from cost-reduction initiatives and reduced T&E costs. Investment income was$2.0 million for the six months endedMarch 31, 2021 and$191,000 for the six months endedMarch 31, 2020 . 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 2021 was$15.0 million , compared to$18.9 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, 2021 represented a decrease in pre-tax income of$4.3 million , compared to a decrease in pre-tax income of$4.7 million for the same period last year. Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled$3.8 million and$4.5 million for the six months endedMarch 31, 2021 and 2020, respectively. 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 six months endedMarch 31, 2021 were an expense of$5.0 million , compared to a benefit of$16.5 million for the first six months of fiscal 2020. The difference between the Company's consolidated income taxes for the first six months of fiscal 2021 versus the same period for fiscal 2020 primarily resulted from 24 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
fiscal 2021 having consolidated pre-tax income while fiscal 2020 had a pre-tax
loss. Additionally, fiscal 2021 included discrete tax expenses related to
foreign operating losses, discrete tax benefits related to expirations of
uncertain tax liabilities, a net operating loss ("NOL") carryback to tax years
where the U.S. federal statutory rate was 35%, and additional foreign tax
credits. Fiscal 2020 included discrete tax benefits resulting from the closure
of several tax audits. The Company's fiscal 2021 six-month effective tax rate
varied from the U.S. statutory tax rate of 21.0% primarily due to discrete tax
expenses related to foreign operating losses, discrete tax benefits related to
expirations of uncertain tax liabilities, a NOL carryback to tax years where the
U.S. federal statutory rate was 35%, and additional foreign tax credits.
Additionally, state taxes, foreign statutory rate differentials, and tax credits
all affected the fiscal 2021 effective tax rate. The Company's fiscal 2020
six-month effective tax rate varied from the U.S. statutory tax rate of 21.0%
primarily due to state taxes, foreign statutory rate differentials, tax credits,
the goodwill write-down, and discrete tax benefits recognized in fiscal 2020.
Net losses attributable to noncontrolling interests were $71,000 for the six
months ended March 31, 2021 and the six months ended March 31, 2020 . The net
losses attributable to noncontrolling interests primarily reflected losses in
less than wholly-owned businesses.
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.
25
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
The reconciliation of net income to adjusted EBITDA is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2021 2020 2021 2020
(Dollar amounts in thousands)
Net income (loss) $ 5,152 $ (86,595) $ 3,160 $ (96,901)
Income tax provision (benefit) 972 (11,066) 4,952 (16,463)
Income (loss) before income taxes 6,124 (97,661) 8,112 (113,364)
Net (income) loss attributable
to noncontrolling interests (163) 231 71 71
Interest expense 7,233 9,613 14,961 18,853
Depreciation and amortization * 35,179 29,317 62,530 58,250
Acquisition related items (1)** (702) 742 (360) 2,221
ERP integration costs (2)** 216 750 359 1,415
Strategic initiatives and other charges: (3)**
Workforce reductions and related costs 1,792 1,387 8,818 3,649
Other cost-reduction initiatives 3,787 7,750 7,468 16,208
Non-recurring / incremental COVID-19 costs (4) 1,572 663 2,696 663
Goodwill write-down (5) - 90,408 - 90,408
Joint Venture depreciation, amortization,
interest expense and other charges (6) - 1,462 - 2,259
Stock-based compensation 4,001 2,508 7,247 4,539
Non-service pension and postretirement expense
(7) 1,901 2,227 3,801 4,455
Total Adjusted EBITDA $ 60,940 $ 49,397 $ 115,703 $ 89,627
(1) Includes certain non-recurring items associated with recent acquisition activities.
(2) Represents costs associated with global ERP system integration efforts.
(3) Includes certain non-recurring costs associated with productivity and cost-reduction
initiatives intended to result in improved operating performance, profitability and working
capital levels.
(4) 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.
(5) Represents the goodwill write-down for two reporting units within the SGK Brand
Solutions segment.
(6) 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.
(7) 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 $26.7 million and $21.8 million for the SGK
Brand Solutions segment, $5.7 million and $4.8 million for the Memorialization
segment, $1.4 million and $1.4 million for the Industrial Technologies segment,
and $1.3 million and $1.3 million for Corporate and Non-Operating, for the three
months ended March 31, 2021 and 2020, respectively. Depreciation and
amortization was $45.9 million and $43.4 million for the SGK Brand Solutions
segment, $11.2 million and $9.5 million for the Memorialization segment, $2.8
million and $2.9 million for the Industrial Technologies segment, and $2.6
million and $2.5 million for Corporate and Non-Operating, for the six months
ended March 31, 2021 and 2020, respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other
charges were $3.0 million and $3.8 million for the SGK Brand Solutions segment,
income of $335,000 and charges of $730,000 for the Memorialization segment, and
charges of $2.4 million and $5.8 million for Corporate and Non-Operating, for
the three months ended March 31, 2021 and 2020, respectively. Acquisition costs,
ERP integration costs, and strategic initiatives and other charges were $268,000
for the Industrial Technologies segment, for the three months ended March 31,
2020 . Acquisition costs, ERP integration costs, and strategic initiatives and
other charges were $10.3 million and $7.3 million for the SGK Brand Solutions
segment, $795,000 and $1.1 million for the Memorialization segment, and $5.1
million and $14.9 million for Corporate and Non-Operating, for the six months
ended March 31, 2021 and 2020, respectively. Acquisition costs, ERP integration
costs, and strategic initiatives and other charges were $268,000 for the
Industrial Technologies segment, for the six months ended March 31, 2020 .
26
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was$92.2 million for the first six months of fiscal 2021, compared to$66.0 million for the first six months of fiscal 2020. Fiscal 2021 operating cash flow reflected improved earnings compared to a year ago, as well as the Company's continued focus on working capital management. Operating cash flow for both periods principally included net income (loss) adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net gains (losses) related to investments, non-cash pension expense, other non-cash adjustments, and changes in working capital items. Net changes in working capital items increased operating cash flow by$2.7 million and$19.4 million in fiscal 2021 and fiscal 2020, respectively. Cash used in investing activities was$11.9 million for the six months endedMarch 31, 2021 , compared to cash used in investing activities of$28.5 million for the six months endedMarch 31, 2020 . 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 . Investing activities for the first six months of fiscal 2020 primarily reflected capital expenditures of$19.1 million and investments and advances of$9.6 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$38.6 million for the last three fiscal years. 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 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. Cash provided by financing activities for the six months endedMarch 31, 2020 was$585,000 , primarily reflecting proceeds, net of repayments, on long-term debt of$21.3 million , treasury stock purchases of$2.4 million , dividends of$13.2 million to the Company's shareholders,$1.7 million of holdback and contingent consideration payments related to acquisitions from prior years, and payment of deferred financing fees of$2.0 million . 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 , and a$35.0 million senior secured amortizing term loan. The senior secured amortizing term loan was paid in full inMarch 2021 . 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 (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.25% atMarch 31, 2021 ) 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$2.5 million and$2.7 million atMarch 31, 2021 andSeptember 30, 2020 , 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, 2021 andSeptember 30, 2020 were$250.0 million and$257.4 million , respectively. Outstanding Euro denominated borrowings on the revolving credit facility atMarch 31, 2021 andSeptember 30, 2020 were €97.0 million ($113.8 million ) and €117.0 million ($137.2 million ), respectively. There were no outstanding borrowings on the term loan as ofMarch 31, 2021 . Outstanding borrowings on the term loan atSeptember 30, 2020 were$22.4 million . 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, 2021 and 2020 was 2.17% and 2.40%, respectively. 27 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 the 2025 Senior Notes. Unamortized costs were$2.5 million and$2.7 million atMarch 31, 2021 andSeptember 30, 2020 , respectively. The Company has a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matures inMarch 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 atMarch 31, 2021 andSeptember 30, 2020 were$97.6 million and$67.7 million , respectively. AtMarch 31, 2021 and 2020, the interest rate on borrowings under this facility was 0.86% and 1.74% respectively.
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, 2021 September 30, 2020
Pay fixed swaps - notional amount $ 250,000 $ 312,500
Net unrealized loss$ (2,905) $
(7,792)
Weighted-average maturity period (years) 2.7
2.6
Weighted-average received rate 0.11 % 0.15 % Weighted-average pay rate 1.34 % 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 loss, net of unrealized gains, of$2.9 million ($2.2 million after tax) atMarch 31, 2021 and an unrealized loss of$7.8 million ($5.9 million after tax) atSeptember 30, 2020 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, 2021 , a loss (net of tax) of approximately$1.8 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 borrowing available under this facility is €25.0 million ($29.3 million ), which includes €8.0 million ($9.4 million ) for bank guarantees. The credit facility matures inDecember 2021 and the Company intends to continue to extend this facility. Outstanding borrowings under the credit facility totaled €3.1 million ($3.6 million ) and €18.9 million ($22.2 million ) atMarch 31, 2021 andSeptember 30, 2020 , respectively. The weighted-average interest rate on outstanding borrowings under this facility atMarch 31, 2021 and 2020 was 2.25% and 1.25%, respectively. The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of$4.9 million (net of income taxes of$1.6 million ) and currency losses of$4.4 million (net of income taxes of$1.4 million ), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atMarch 31, 2021 andSeptember 30, 2020 , respectively. 28 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 370,445 shares remain available for repurchase as ofMarch 31, 2021 . 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. Consolidated working capital of the Company was$275.3 million atMarch 31, 2021 , compared to$258.7 million atSeptember 30, 2020 . Cash and cash equivalents were$47.0 million atMarch 31, 2021 , compared to$41.3 million atSeptember 30, 2020 . The Company's current ratio was 1.8 atMarch 31, 2021 andSeptember 30, 2020 . 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. ACQUISITIONS:
Refer to Note 14, "Acquisitions" in Item 1 - "Financial Statements" for further details on the Company's acquisitions.
SUBSEQUENT EVENT:
OnApril 20, 2021 , subsequent to the date of the balance sheet, the Compensation Committee of the Company's Board of Directors approved a resolution to freeze all future benefit accruals for all participants in the Company's supplemental retirement plan and the defined benefit portion of the officers retirement restoration plan, effectiveApril 30, 2021 . Consequently, participants in these plans will no longer earn additional benefits afterApril 30, 2021 .
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 at least fiscal 2022. The Company's recent strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment. 29 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 . 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 judgment 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 impacts in the short-term, potentially due to customer business disruptions, supply chain disruptions, facilities shut-downs, weaker global economic conditions, and customer project delays. Additionally, recent price increases for certain raw materials are expected to impact the Company's results for the remainder of fiscal 2021. Longer-term financial impacts will depend on global economic conditions eventually resulting from COVID-19. Management expects each of its businesses to experience some level of financial volatility in the short-term, but currently anticipates its core businesses will return to a more normalized future state as COVID-19 subsides.
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" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . 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, 2020 . 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 2021 (January 1, 2021 ) 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 5%. 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. 30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
2021 2022 (1) to After
Total Remainder 2023 2024 to 2025 2025
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 367,352 $ - $ 3,587 $ 363,765 $ -
Securitization Facility 97,590 - 97,590 - -
2025 Senior Notes 376,276 7,875 31,500 31,500 305,401
Finance lease obligations (2) 8,703 1,905 4,147 897 1,754
Non-cancelable operating leases (2) 84,435 13,667 40,508 20,509 9,751
Other 30,114 11,900 10,231 2,105 5,878
Total contractual cash obligations $ 964,470 $ 35,347 (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$3.6 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. AtMarch 31, 2021 , the weighted-average interest rate was 2.17% on the Company's domestic credit facility, 0.86% on the Company's Securitization Facility and 2.25% on the credit facility through the Company's European subsidiaries. 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. During the six months endedMarch 31, 2021 contributions of$408,000 and$228,000 were made under the supplemental retirement plan and postretirement plan, respectively. InApril 2021 , subsequent to the date of the balance sheet, the Company contributed$15.0 million to its principal retirement plan. UnderIRS regulations, no further contributions are required to be made to the Company's principal retirement plan during fiscal 2021. The Company currently anticipates contributing an additional$497,000 and$603,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2021. 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, 2021 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$10.4 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Refer to Note 2, "Basis of Presentation" in Item 1 - "Financial Statements," for further details on recently issued accounting pronouncements.
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