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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
____________________________________________________________
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 2020
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File No. 0-09115
____________________________________________________________
MATTHEWS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________
| | | | | | | | |
Pennsylvania | | 25-0644320 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
Two Northshore Center, Pittsburgh, PA 15212-5851
(Address of principal executive offices) (Zip Code)
(412) 442-8200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
| | | | | | | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Class A Common Stock, $1.00 par value | | MATW | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ý | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ý
As of December 31, 2020, shares of common stock outstanding were: Class A Common Stock 31,674,696 shares.
PART I ‑ FINANCIAL INFORMATION
Item 1. Financial Statements
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | | $ | 41,175 | | | | | $ | 41,334 | |
Accounts receivable, net | | | 305,426 | | | | | 295,185 | |
Inventories, net | | | 178,160 | | | | | 175,100 | |
Other current assets | | | 66,201 | | | | | 63,954 | |
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Total current assets | | | 590,962 | | | | | 575,573 | |
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Investments | | | 63,999 | | | | | 63,250 | |
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Property, plant and equipment, net | | | 236,236 | | | | | 236,788 | |
Operating lease right-of-use assets | | | 69,771 | | | | | 72,011 | |
Deferred income taxes | | | 3,752 | | | | | 3,757 | |
Goodwill | | | 778,441 | | | | | 765,388 | |
Other intangible assets, net | | | 320,982 | | | | | 333,498 | |
Other assets | | | 23,311 | | | | | 22,368 | |
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Total assets | | | $ | 2,087,454 | | | | | $ | 2,072,633 | |
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LIABILITIES | | | | | | | |
Current liabilities: | | | | | | | |
Long-term debt, current maturities | | | $ | 26,826 | | | | | $ | 26,824 | |
Current portion of operating lease liabilities | | | 24,258 | | | | | 23,942 | |
Trade accounts payable | | | 73,797 | | | | | 82,921 | |
Accrued compensation | | | 48,450 | | | | | 58,058 | |
Accrued income taxes | | | 3,858 | | | | | 3,612 | |
Other current liabilities | | | 154,938 | | | | | 121,511 | |
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Total current liabilities | | | 332,127 | | | | | 316,868 | |
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Long-term debt | | | 797,805 | | | | | 807,710 | |
Operating lease liabilities | | | 46,838 | | | | | 49,297 | |
Accrued pension | | | 151,457 | | | | | 149,848 | |
Postretirement benefits | | | 19,976 | | | | | 18,600 | |
Deferred income taxes | | | 80,211 | | | | | 78,911 | |
Other liabilities | | | 37,187 | | | | | 39,966 | |
Total liabilities | | | 1,465,601 | | | | | 1,461,200 | |
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SHAREHOLDERS' EQUITY | | | | | | | |
Shareholders' equity-Matthews: | | | | | | | |
Common stock | $ | 36,334 | | | | | $ | 36,334 | | | |
Additional paid-in capital | 140,008 | | | | | 135,187 | | | |
Retained earnings | 850,436 | | | | | 859,002 | | | |
Accumulated other comprehensive loss | (220,505) | | | | | (240,719) | | | |
Treasury stock, at cost | (184,809) | | | | | (178,997) | | | |
Total shareholders' equity-Matthews | | | 621,464 | | | | | 610,807 | |
Noncontrolling interests | | | 389 | | | | | 626 | |
Total shareholders' equity | | | 621,853 | | | | | 611,433 | |
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Total liabilities and shareholders' equity | | | $ | 2,087,454 | | | | | $ | 2,072,633 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
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Sales | | | | | $ | 386,657 | | | $ | 364,944 | |
Cost of sales | | | | | (261,159) | | | (249,217) | |
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Gross profit | | | | | 125,498 | | | 115,727 | |
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Selling expense | | | | | (30,795) | | | (32,263) | |
Administrative expense | | | | | (69,109) | | | (70,465) | |
Intangible amortization | | | | | (15,221) | | | (17,942) | |
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Operating profit (loss) | | | | | 10,373 | | | (4,943) | |
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Investment income | | | | | 1,077 | | | 1,299 | |
Interest expense | | | | | (7,728) | | | (9,240) | |
Other income (deductions), net | | | | | (1,734) | | | (2,819) | |
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Income (loss) before income taxes | | | | | 1,988 | | | (15,703) | |
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Income tax (provision) benefit | | | | | (3,980) | | | 5,397 | |
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Net loss | | | | | (1,992) | | | (10,306) | |
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Net loss (income) attributable to noncontrolling interests | | | | | 234 | | | (160) | |
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Net loss attributable to Matthews shareholders | | | | | $ | (1,758) | | | $ | (10,466) | |
| | | | | | | |
Loss per share attributable to Matthews shareholders: |
Basic | | | | | $ | (0.06) | | | $ | (0.34) | |
| | | | | | | |
Diluted | | | | | $ | (0.06) | | | $ | (0.34) | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
| Matthews | | Noncontrolling Interest | | Total |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | | | |
Net (loss) income: | $ | (1,758) | | | $ | (10,466) | | | $ | (234) | | | $ | 160 | | | $ | (1,992) | | | $ | (10,306) | |
Other comprehensive income (loss) ("OCI"), net of tax: | | | | | | | | | | | |
Foreign currency translation adjustment | 17,055 | | | 11,111 | | | (3) | | | (5) | | | 17,052 | | | 11,106 | |
Pension plans and other postretirement benefits | 2,124 | | | 1,727 | | | — | | | — | | | 2,124 | | | 1,727 | |
Unrecognized gain (loss) on derivatives: | | | | | | | | | | | |
Net change from periodic revaluation | 353 | | | 566 | | | — | | | — | | | 353 | | | 566 | |
Net amount reclassified to earnings | 682 | | | (275) | | | — | | | — | | | 682 | | | (275) | |
Net change in unrecognized gain (loss) on derivatives | 1,035 | | | 291 | | | — | | | — | | | 1,035 | | | 291 | |
OCI, net of tax | 20,214 | | | 13,129 | | | (3) | | | (5) | | | 20,211 | | | 13,124 | |
Comprehensive income (loss) | $ | 18,456 | | | $ | 2,663 | | | $ | (237) | | | $ | 155 | | | $ | 18,219 | | | $ | 2,818 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' Equity |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Non- controlling Interests | | Total |
Balance, September 30, 2020 | $ | 36,334 | | | $ | 135,187 | | | $ | 859,002 | | | $ | (240,719) | | | $ | (178,997) | | | $ | 626 | | | $ | 611,433 | |
Net loss | — | | | — | | | (1,758) | | | — | | | — | | | (234) | | | (1,992) | |
Minimum pension liability | — | | | — | | | — | | | 2,124 | | | — | | | — | | | 2,124 | |
Translation adjustment | — | | | — | | | — | | | 17,055 | | | — | | | (3) | | | 17,052 | |
Fair value of derivatives | — | | | — | | | — | | | 1,035 | | | — | | | — | | | 1,035 | |
Total comprehensive income | | | | | | | | | | | | | 18,219 | |
Stock-based compensation | — | | | 3,246 | | | — | | | — | | | — | | | — | | | 3,246 | |
Purchase of 162,291 shares of treasury stock | — | | | — | | | — | | | — | | | (4,237) | | | — | | | (4,237) | |
Issuance of 10,300 shares of treasury stock | — | | | (407) | | | — | | | — | | | 407 | | | — | | | — | |
Cancellations of 34,727 shares of treasury stock | — | | | 1,982 | | | — | | | — | | | (1,982) | | | — | | | — | |
Dividends, $0.215 per share | — | | | — | | | (6,808) | | | — | | | — | | | — | | | (6,808) | |
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Balance, December 31, 2020 | $ | 36,334 | | | $ | 140,008 | | | $ | 850,436 | | | $ | (220,505) | | | $ | (184,809) | | | $ | 389 | | | $ | 621,853 | |
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| Shareholders' Equity |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Non- controlling Interests | | Total |
Balance, September 30, 2019 | $ | 36,334 | | | $ | 137,774 | | | $ | 972,594 | | | $ | (228,361) | | | $ | (200,235) | | | $ | 1,130 | | | $ | 719,236 | |
Net (loss) income | — | | | — | | | (10,466) | | | — | | | — | | | 160 | | | (10,306) | |
Minimum pension liability | — | | | — | | | — | | | 1,727 | | | — | | | — | | | 1,727 | |
Translation adjustment | — | | | — | | | — | | | 11,111 | | | — | | | (5) | | | 11,106 | |
Fair value of derivatives | — | | | — | | | — | | | 291 | | | — | | | — | | | 291 | |
Total comprehensive income | | | | | | | | | | | | | 2,818 | |
Stock-based compensation | — | | | 2,031 | | | — | | | — | | | — | | | — | | | 2,031 | |
Purchase of 52,104 shares of treasury stock | — | | | — | | | — | | | — | | | (1,845) | | | — | | | (1,845) | |
Issuance of 11,225 shares of treasury stock | — | | | (450) | | | — | | | — | | | 450 | | | — | | | — | |
Cancellations of 17,509 shares of treasury stock | — | | | 1,171 | | | — | | | — | | | (1,171) | | | — | | | — | |
Dividends, $0.21 per share | — | | | — | | | (6,535) | | | — | | | — | | | — | | | (6,535) | |
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Balance, December 31, 2019 | $ | 36,334 | | | $ | 140,526 | | | $ | 955,593 | | | $ | (215,232) | | | $ | (202,801) | | | $ | 1,285 | | | $ | 715,705 | |
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The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
| | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net loss | $ | (1,992) | | | $ | (10,306) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 27,351 | | | 28,933 | |
Stock-based compensation expense | 3,246 | | | 2,031 | |
Deferred tax provision | 707 | | | 2,392 | |
Gain on sale of assets, net | (569) | | | — | |
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Unrealized gain on investments | (654) | | | (1,048) | |
Loss from equity-method investments | — | | | 407 | |
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Changes in working capital items | (3,729) | | | (13,182) | |
Decrease (increase) in other assets | 1,515 | | | (1,495) | |
Increase (decrease) in other liabilities | 8,813 | | | (1,073) | |
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Other operating activities, net | 638 | | | (1,302) | |
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Net cash provided by operating activities | 35,326 | | | 5,357 | |
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Cash flows from investing activities: | | | |
Capital expenditures | (7,535) | | | (9,722) | |
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Proceeds from sale of assets | 1,689 | | | 63 | |
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Investments and advances | — | | | (4,570) | |
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Net cash used in investing activities | (5,846) | | | (14,229) | |
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Cash flows from financing activities: | | | |
Proceeds from long-term debt | 121,596 | | | 153,567 | |
Payments on long-term debt | (139,635) | | | (131,931) | |
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Purchases of treasury stock | (4,237) | | | (1,845) | |
Dividends | (6,808) | | | (6,535) | |
Acquisition holdback and contingent consideration payments | (1,556) | | | (652) | |
Other financing activities | (735) | | | (688) | |
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Net cash (used in) provided by financing activities | (31,375) | | | 11,916 | |
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Effect of exchange rate changes on cash | 1,736 | | | 1,038 | |
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Net change in cash and cash equivalents | (159) | | | 4,082 | |
Cash and cash equivalents at beginning of year | 41,334 | | | 35,302 | |
Cash and cash equivalents at end of period | $ | 41,175 | | | $ | 39,384 | |
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The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2020
(Dollar amounts in thousands, except per share data)
Note 1. Nature of Operations
Matthews International Corporation ("Matthews" or the "Company"), founded in 1850 and incorporated in Pennsylvania in 1902, is a global provider of brand solutions, memorialization products and industrial technologies. Brand solutions 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. Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets, and cremation and incineration equipment primarily for the cemetery and funeral home industries. Industrial technologies include 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 has facilities in North America, Europe, Asia, Australia, and Central and South America.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2020. The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control. Investments in certain companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are accounted for as equity method investments. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. All intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements:
Adopted
In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The adoption of this ASU in the first quarter ended December 31, 2020 had no material impact on the Company's consolidated financial statements and the Form 10-K disclosures for the year ended September 30, 2021 will reflect the adoption of this ASU.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each report date. Subsequently, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses and ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842), that provide certain amendments to the new guidance. The adoption of these ASUs in the first quarter ended December 31, 2020 had no material impact on the Company's consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
The following table summarizes the activity for the accounts receivable allowance for doubtful accounts for the three months ended December 31, 2020:
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| | | Accounts Receivable Allowance for Doubtful Accounts |
| Balance at October 1, 2020 | | $ | 9,618 | |
| Current period expense / (deductions) | | (663) | |
| Translation and other adjustments (1) | | 295 | |
| Balance at December 31, 2020 | | $ | 9,250 | |
(1) Includes the impact of foreign currency fluctuations and amounts determined not to be collectible (including direct write-offs), net of recoveries.
Note 3. Revenue Recognition
The Company delivers a variety of products and services through its business segments. The SGK Brand Solutions segment delivers brand management, pre-media services, printing plates and cylinders, engineered products, and imaging services for consumer goods and retail customers, merchandising display systems, and marketing and design services primarily to the consumer goods and retail industries. The Memorialization segment produces and delivers 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 delivers marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products for the warehousing and industrial industries.
The Company disaggregates revenue from contracts with customers by geography, as it believes geographic regions best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated sales by segment and region for the three months ended December 31, 2020 and 2019 were as follows:
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| | SGK Brand Solutions | | Memorialization | | Industrial Technologies | | Consolidated |
| | Three Months Ended December 31, | | Three Months Ended December 31, | | Three Months Ended December 31, | | Three Months Ended December 31, |
| | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 |
North America | | $ | 70,402 | | $ | 76,230 | | | $ | 170,324 | | $ | 144,045 | | | $ | 27,635 | | $ | 28,299 | | | $ | 268,361 | | $ | 248,574 | |
Central and South America | | 1,375 | | 1,836 | | | — | | — | | | — | | — | | | 1,375 | | 1,836 | |
Europe | | 81,809 | | 82,413 | | | 10,440 | | 7,829 | | | 5,991 | | 6,926 | | | 98,240 | | 97,168 | |
Australia | | 3,481 | | 3,002 | | | 2,510 | | 2,531 | | | — | | — | | | 5,991 | | 5,533 | |
Asia | | 11,073 | | 11,399 | | | — | | — | | | 1,617 | | 434 | | | 12,690 | | 11,833 | |
Total Sales | | $ | 168,140 | | $ | 174,880 | | | $ | 183,274 | | $ | 154,405 | | | $ | 35,243 | | $ | 35,659 | | | $ | 386,657 | | $ | 364,944 | |
Note 4. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level fair value hierarchy is used to prioritize the inputs used in valuations, as defined below:
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| Level 1: | Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets. |
| Level 2: | Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| Level 3: | Unobservable inputs for the asset or liability. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 4. Fair Value Measurements (continued)
The fair values of the Company's assets and liabilities measured on a recurring basis are categorized as follows:
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| December 31, 2020 | | September 30, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
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Equity and fixed income mutual funds | $ | — | | | $ | 25,264 | | | $ | — | | | $ | 25,264 | | | $ | — | | | $ | 24,610 | | | $ | — | | | $ | 24,610 | |
Life insurance policies | — | | | 4,724 | | | — | | | 4,724 | | | — | | | 4,621 | | | — | | | 4,621 | |
Total assets at fair value | $ | — | | | $ | 29,988 | | | $ | — | | | $ | 29,988 | | | $ | — | | | $ | 29,231 | | | $ | — | | | $ | 29,231 | |
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Liabilities: | | | | | | | | | | | | | | | |
Derivatives (1) | $ | — | | | $ | 6,422 | | | $ | — | | | $ | 6,422 | | | $ | — | | | $ | 7,792 | | | $ | — | | | $ | 7,792 | |
Total liabilities at fair value | $ | — | | | $ | 6,422 | | | $ | — | | | $ | 6,422 | | | $ | — | | | $ | 7,792 | | | $ | — | | | $ | 7,792 | |
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy. |
| | | | | | | | | | | | | | | |
Note 5. Inventories
Inventories consisted of the following:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Raw materials | $ | 36,424 | | | $ | 36,157 | |
Work in process | 72,797 | | | 70,128 | |
Finished goods | 68,939 | | | 68,815 | |
| $ | 178,160 | | | $ | 175,100 | |
Note 6. Investments
Non-current investments consisted of the following:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Equity and fixed income mutual funds | $ | 25,264 | | | $ | 24,610 | |
Life insurance policies | 4,724 | | | 4,621 | |
| | | |
Other (primarily cost-method) investments | 34,011 | | | 34,019 | |
| $ | 63,999 | | | $ | 63,250 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt
Long-term debt at December 31, 2020 and September 30, 2020 consisted of the following:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Revolving credit facilities | $ | 413,483 | | | $ | 416,793 | |
Securitization facility | 64,300 | | | 67,700 | |
Senior secured term loan | 22,406 | | | 22,359 | |
2025 Senior Notes | 297,391 | | | 297,256 | |
| | | |
Other borrowings | 18,112 | | | 20,742 | |
Finance lease obligations | 8,939 | | | 9,684 | |
| 824,631 | | | 834,534 | |
Less current maturities | (26,826) | | | (26,824) | |
| $ | 797,805 | | | $ | 807,710 | |
The Company has a domestic credit facility with a syndicate of financial institutions that was amended and restated in March 2020. The amended and restated loan agreement includes a $750,000 senior secured revolving credit facility, which matures in March 2025, and a $35,000 senior secured amortizing term loan, which matures in July 2021. A portion of the revolving credit facility (not to exceed $350,000) 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% (1.25% at December 31, 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 in connection with the amended and restated agreement. Unamortized costs were $2,565 and $2,734 at December 31, 2020 and September 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 $35,000) is available for the issuance of trade and standby letters of credit. Outstanding U.S. dollar denominated borrowings on the revolving credit facility at December 31, 2020 and September 30, 2020 were $262,923 and $257,439, respectively. Outstanding Euro denominated borrowings on the revolving credit facility at December 31, 2020 and September 30, 2020 were €117.0 million ($143,507) and €117.0 million ($137,188), respectively. Outstanding borrowings on the term loan at December 31, 2020 and September 30, 2020 were $22,406 and $22,359, respectively. The weighted-average interest rate on the outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) at December 31, 2020 and December 31, 2019 was 2.07% and 2.60%, respectively.
The Company has $300,000 of 5.25% senior unsecured notes due December 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 on June 1 and December 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 $2,609 and $2,744 at December 31, 2020 and September 30, 2020, respectively.
The Company has a $115,000 accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matures in March 2022. Under the Securitization Facility, the Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables to Matthews 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 at December 31, 2020 and September 30, 2020 were $64,300 and $67,700, respectively. At December 31, 2020 and 2019, the interest rate on borrowings under this facility was 0.89% and 2.51%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt (continued)
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
| | | | | | | | | | | | | | |
| | December 31, 2020 | | September 30, 2020 |
Pay fixed swaps - notional amount | | $ | 262,500 | | | $ | 312,500 | |
Net unrealized loss | | $ | (6,422) | | | $ | (7,792) | |
Weighted-average maturity period (years) | | 2.8 | | 2.6 |
Weighted-average received rate | | 0.14 | % | | 0.15 | % |
Weighted-average pay rate | | 1.31 | % | | 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 of $6,422 ($4,849 after tax) at December 31, 2020 and an unrealized loss of $7,792 ($5,884 after tax) at September 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 at December 31, 2020, a loss (net of tax) of approximately $2,181 included in AOCI is expected to be recognized in earnings over the next twelve months.
At December 31, 2020 and September 30, 2020, the interest rate swap contracts were reflected in the Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
Derivatives | | December 31, 2020 | | September 30, 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
Current liabilities: | | | | |
Other current liabilities | | $ | (2,889) | | | $ | (3,164) | |
Long-term liabilities: | | | | |
Other liabilities | | (3,533) | | | (4,628) | |
Total derivatives | | $ | (6,422) | | | $ | (7,792) | |
The (losses) gains recognized on derivatives were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Location of (Loss) Gain Recognized in Income on Derivative | | Amount of (Loss) Gain Recognized in Income on Derivatives | | |
|
|
| | | | Three Months Ended December 31, | | |
| | | | 2020 | | 2019 | | | | |
Interest rate swaps | | Interest expense | | $ | (903) | | | $ | 364 | | | | | |
The Company recognized the following (losses) gains in AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gain Recognized in AOCI on Derivatives | | Location of (Loss) Gain Reclassified From AOCI into Income (Effective Portion*) | | Amount of (Loss) Gain Reclassified from AOCI into Income (Effective Portion*) |
| | December 31, 2020 | | December 31, 2019 | | | | December 31, 2020 | | December 31, 2019 |
Interest rate swaps | | $ | 353 | | | $ | 566 | | | Interest expense | | $ | (682) | | | $ | 275 | |
*There is no ineffective portion or amount excluded from effectiveness testing. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt (continued)
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 ($30,664), which includes €8.0 million ($9,812) for bank guarantees. In the first quarter of fiscal 2021, the Company extended this facility to a current maturity of December 2021 and the Company intends to continue to extend this facility. Outstanding borrowings under the credit facility totaled €5.8 million ($7,053) and €18.9 million ($22,166) at December 31, 2020 and September 30, 2020, respectively. The weighted-average interest rate on outstanding borrowings under this facility at December 31, 2020 and 2019 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 $9,148 (net of income taxes of $2,968) and currency losses of $4,377 (net of income taxes of $1,420), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at December 31, 2020 and September 30, 2020, respectively.
As of December 31, 2020 and September 30, 2020, the fair value of the Company's long-term debt, including current maturities, which is classified as Level 2 in the fair value hierarchy, approximated the carrying value included in the Consolidated Balance Sheets. The Company was in compliance with all of its debt covenants as of December 31, 2020.
Note 8. Share-Based Payments
The Company maintains an equity incentive plan (the "2017 Equity Incentive Plan") that provides for grants of stock options, restricted shares, restricted share units, stock-based performance units and certain other types of stock-based awards. Under the 2017 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 1,700,000. At December 31, 2020, there were 1,700,000 shares reserved for future issuance under the 2017 Equity Incentive Plan. 1,064,910 restricted share units have been granted under the 2017 Equity Incentive Plan and are outstanding as of December 31, 2020. The 2017 Equity Incentive plan is administered by the Compensation Committee of the Board of Directors.
With respect to the restricted share grants, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. Additionally, restricted shares cannot vest until the first anniversary of the grant date. Unvested restricted shares generally expire on the earlier of three or five years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company issues restricted shares from treasury shares.
With respect to the restricted share unit grants, units generally vest on the third anniversary of the grant date. The number of units that vest depend on certain time and performance thresholds. Such performance thresholds include adjusted earnings per share, return on invested capital, appreciation in the market value of the Company's Class A Common Stock, or other targets established by the Compensation Committee of the Board of Directors. Approximately 45% of the outstanding share units vest based on time, while the remaining vest based on pre-defined performance thresholds. The Company issues common stock from treasury shares once vested.
For the three-month periods ended December 31, 2020 and 2019, stock-based compensation cost totaled $3,246 and $2,031, respectively. The stock-based compensation cost that was recognized for retirement-eligible employees was $883 and $313 for the three-month periods ended December 31, 2020 and 2019, respectively. The associated future income tax benefit recognized for stock-based compensation was $239 and $179 for the three-month periods ended December 31, 2020 and 2019, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 8. Share-Based Payments (continued)
The transactions for restricted shares and restricted share units for the three months ended December 31, 2020 were as follows:
| | | | | | | | | | | |
| Shares /Units | | Weighted- average Grant-date Fair Value |
Non-vested at September 30, 2020 | 750,322 | | | $ | 40.88 | |
Granted | 499,050 | | | 30.06 | |
Vested | (104,895) | | | 56.11 | |
Expired or forfeited | (36,667) | | | 57.05 | |
Non-vested at December 31, 2020 | 1,107,810 | | | $ | 34.03 | |
As of December 31, 2020, the total unrecognized compensation cost related to unvested restricted stock was $22,827 and is expected to be recognized over a weighted average period of 2.5 years.
The fair value of certain restricted share units that are subject to performance conditions are estimated on the date of grant using a binomial lattice valuation model. The following table indicates the assumptions used in estimating the fair value of certain restricted share units granted during the three-month period ended December 31, 2020.
| | | | | | | |
| Three Months Ended December 31, 2020 |
| | | |
Expected volatility | 42.9 | % | | |
Dividend yield | 3.2 | % | | |
Average risk-free interest rate | 0.2 | % | | |
Average expected term (years) | 3.0 | | |
The risk-free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date. Expected volatilities are based on the historical volatility of the Company's stock price. The expected term for grants in the three months ended December 31, 2020 represents an estimate of the average period of time for restricted share units to vest.
The Company maintains the 2019 Director Fee Plan, the Amended and Restated 2014 Director Fee Plan and the 1994 Director Fee Plan (collectively, the "Director Fee Plans"). There will be no further fees or share-based awards granted under the Amended and Restated 2014 Director Fee Plan and the 1994 Director Fee Plan. Under the 2019 Director Fee Plan, non-employee directors (except for the Chairman of the Board) each receive, as an annual retainer fee for fiscal 2021, either cash or shares of the Company's Class A Common Stock with a value equal to $85. The annual retainer fee for fiscal 2021 paid to the non-employee Chairman of the Board is $185. Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board. The total number of shares of stock that have been authorized to be issued under the 2019 Director Fee Plan or credited to a deferred stock compensation account for subsequent issuance is 150,000 shares of Common Stock (subject to adjustment upon certain events such as stock dividends or stock splits). The value of deferred shares is recorded in other liabilities. A total of 30,925 shares and share units had been deferred under the Director Fee Plans as of December 31, 2020. Additionally, non-employee directors each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares or units) with a value of $125 for fiscal 2021. 244,915 restricted shares and restricted share units have been granted under the Director Fee Plans, 71,686 of which were issued under the 2019 Director Fee Plan. 71,686 restricted shares and restricted share units are unvested at December 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Earnings Per Share Attributable to Matthews' Shareholders
The information used to compute loss per share attributable to Matthews' common shareholders was as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
Net loss attributable to Matthews shareholders | | | | | $ | (1,758) | | | $ | (10,466) | |
| | | | | | | |
| | | | | | | |
Weighted-average shares outstanding (in thousands): | | | | | | | |
Basic shares | | | | | 31,725 | | | 31,136 | |
Effect of dilutive securities | | | | | — | | | — | |
Diluted shares | | | | | 31,725 | | | 31,136 | |
Note 10. Pension and Other Postretirement Benefit Plans
The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended December 31, |
| Pension | | Other Postretirement |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Service cost | $ | 2,213 | | | $ | 2,170 | | | $ | 50 | | | $ | 64 | |
Interest cost * | 1,548 | | | 1,933 | | | 94 | | | 140 | |
Expected return on plan assets * | (2,763) | | | (2,232) | | | — | | | — | |
Amortization: | | | | | | | |
Prior service cost | (17) | | | (47) | | | (91) | | | (23) | |
Net actuarial loss * | 3,021 | | | 2,387 | | | — | | | — | |
Net benefit cost | $ | 4,002 | | | $ | 4,211 | | | $ | 53 | | | $ | 181 | |
* Non-service components of pension and postretirement expense are included in other income (deductions), net.
Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company's operating funds. Under IRS regulations, the Company is required to make contributions of approximately $4,191 to its principal retirement plan in fiscal 2021. The Company is also currently evaluating potential additional contributions to its principal retirement plan during fiscal 2021.
Contributions made and anticipated for fiscal year 2021 are as follows:
| | | | | | | | | | | | | | |
Contributions | | Pension | | Other Postretirement |
| | | | |
Contributions during the three months ended December 31, 2020: | | | | |
| | | | |
Supplemental retirement plan | | $ |