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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, 2022
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, 2022, shares of common stock outstanding were: Class A Common Stock 30,419,705 shares.
PART I ‑ FINANCIAL INFORMATION
Item 1. Financial Statements
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | | $ | 42,718 | | | | | $ | 69,016 | |
Accounts receivable, net | | | 221,613 | | | | | 221,015 | |
Inventories, net | | | 245,565 | | | | | 225,440 | |
Restricted cash, current | | | 2,398 | | | | | 2,398 | |
Other current assets | | | 120,950 | | | | | 110,747 | |
| | | | | | | |
Total current assets | | | 633,244 | | | | | 628,616 | |
| | | | | | | |
| | | | | | | |
Investments | | | 26,448 | | | | | 25,976 | |
| | | | | | | |
| | | | | | | |
Property, plant and equipment, net | | | 264,684 | | | | | 256,065 | |
Operating lease right-of-use assets | | | 74,613 | | | | | 71,974 | |
Deferred income taxes | | | 3,159 | | | | | 3,610 | |
Goodwill | | | 692,015 | | | | | 675,421 | |
Other intangible assets, net | | | 193,756 | | | | | 202,154 | |
Other assets | | | 15,023 | | | | | 18,955 | |
| | | | | | | |
Total assets | | | $ | 1,902,942 | | | | | $ | 1,882,771 | |
| | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities: | | | | | | | |
Long-term debt, current maturities | | | $ | 2,977 | | | | | $ | 3,277 | |
Current portion of operating lease liabilities | | | 22,971 | | | | | 22,869 | |
Trade accounts payable | | | 101,279 | | | | | 121,359 | |
Accrued compensation | | | 42,632 | | | | | 58,272 | |
Accrued income taxes | | | 7,582 | | | | | 9,277 | |
Other current liabilities | | | 189,303 | | | | | 196,321 | |
| | | | | | | |
Total current liabilities | | | 366,744 | | | | | 411,375 | |
| | | | | | | |
Long-term debt | | | 834,127 | | | | | 795,291 | |
Operating lease liabilities | | | 54,053 | | | | | 51,445 | |
Accrued pension | | | 13,798 | | | | | 12,437 | |
Postretirement benefits | | | 12,038 | | | | | 11,983 | |
Deferred income taxes | | | 93,034 | | | | | 92,589 | |
Other liabilities | | | 24,231 | | | | | 20,575 | |
Total liabilities | | | 1,398,025 | | | | | 1,395,695 | |
| | | | | | | |
SHAREHOLDERS' EQUITY | | | | | | | |
Shareholders' equity-Matthews: | | | | | | | |
Common stock | $ | 36,334 | | | | | $ | 36,334 | | | |
Additional paid-in capital | 157,393 | | | | | 160,255 | | | |
Retained earnings | 701,658 | | | | | 706,749 | | | |
Accumulated other comprehensive loss | (169,090) | | | | | (190,191) | | | |
Treasury stock, at cost | (221,050) | | | | | (225,795) | | | |
Total shareholders' equity-Matthews | | | 505,245 | | | | | 487,352 | |
Noncontrolling interests | | | (328) | | | | | (276) | |
Total shareholders' equity | | | 504,917 | | | | | 487,076 | |
| | | | | | | |
Total liabilities and shareholders' equity | | | $ | 1,902,942 | | | | | $ | 1,882,771 | |
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, |
| | | | | 2022 | | 2021 |
| | | | | | | |
Sales | | | | | $ | 449,240 | | | $ | 438,579 | |
Cost of sales | | | | | (310,310) | | | (306,942) | |
| | | | | | | |
Gross profit | | | | | 138,930 | | | 131,637 | |
| | | | | | | |
Selling expense | | | | | (33,439) | | | (30,743) | |
Administrative expense | | | | | (77,921) | | | (68,569) | |
Intangible amortization | | | | | (10,342) | | | (21,546) | |
| | | | | | | |
| | | | | | | |
Operating profit | | | | | 17,228 | | | 10,779 | |
| | | | | | | |
| | | | | | | |
Interest expense | | | | | (10,215) | | | (6,507) | |
Other income (deductions), net | | | | | (2,054) | | | (30,710) | |
| | | | | | | |
Income (loss) before income taxes | | | | | 4,959 | | | (26,438) | |
| | | | | | | |
Income tax (provision) benefit | | | | | (1,312) | | | 6,628 | |
| | | | | | | |
Net income (loss) | | | | | 3,647 | | | (19,810) | |
| | | | | | | |
Net loss attributable to noncontrolling interests | | | | | 56 | | | 7 | |
| | | | | | | |
Net income (loss) attributable to Matthews shareholders | | | | | $ | 3,703 | | | $ | (19,803) | |
| | | | | | | |
Earnings (loss) per share attributable to Matthews shareholders: |
Basic | | | | | $ | 0.12 | | | $ | (0.62) | |
| | | | | | | |
Diluted | | | | | $ | 0.12 | | | $ | (0.62) | |
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)
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| Three Months Ended December 31, |
| Matthews | | Noncontrolling Interest | | Total |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
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Net income (loss): | $ | 3,703 | | | $ | (19,803) | | | $ | (56) | | | $ | (7) | | | $ | 3,647 | | | $ | (19,810) | |
Other comprehensive income (loss) ("OCI"), net of tax: | | | | | | | | | | | |
Foreign currency translation adjustment | 20,560 | | | (1,989) | | | 4 | | | 4 | | | 20,564 | | | (1,985) | |
Pension plans and other postretirement benefits | 945 | | | 34,133 | | | — | | | — | | | 945 | | | 34,133 | |
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Unrecognized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Net change from periodic revaluation | 93 | | | 875 | | | — | | | — | | | 93 | | | 875 | |
Net amount reclassified to earnings | (497) | | | 606 | | | — | | | — | | | (497) | | | 606 | |
Net change in unrecognized (loss) gain on cash flow hedges | (404) | | | 1,481 | | | — | | | — | | | (404) | | | 1,481 | |
OCI, net of tax | 21,101 | | | 33,625 | | | 4 | | | 4 | | | 21,105 | | | 33,629 | |
Comprehensive income (loss) | $ | 24,804 | | | $ | 13,822 | | | $ | (52) | | | $ | (3) | | | $ | 24,752 | | | $ | 13,819 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three months ended December 31, 2022 and 2021 (Unaudited)
(Dollar amounts in thousands, except per share data)
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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, 2022 | $ | 36,334 | | | $ | 160,255 | | | $ | 706,749 | | | $ | (190,191) | | | $ | (225,795) | | | $ | (276) | | | $ | 487,076 | |
Net income (loss) | — | | | — | | | 3,703 | | | — | | | — | | | (56) | | | 3,647 | |
Minimum pension liability | — | | | — | | | — | | | 945 | | | — | | | — | | | 945 | |
Translation adjustment | — | | | — | | | — | | | 20,560 | | | — | | | 4 | | | 20,564 | |
Fair value of cash flow hedges | — | | | — | | | — | | | (404) | | | — | | | — | | | (404) | |
Total comprehensive income | | | | | | | | | | | | | 24,752 | |
Stock-based compensation | — | | | 4,334 | | | — | | | — | | | — | | | — | | | 4,334 | |
Purchase of 89,025 shares of treasury stock | — | | | — | | | — | | | — | | | (2,451) | | | — | | | (2,451) | |
Issuance of 245,006 shares of treasury stock | — | | | (9,154) | | | — | | | — | | | 9,154 | | | — | | | — | |
Cancellations of 34,327 shares of treasury stock | — | | | 1,958 | | | — | | | — | | | (1,958) | | | — | | | — | |
Dividends | — | | | — | | | (8,794) | | | — | | | — | | | — | | | (8,794) | |
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Balance, December 31, 2022 | $ | 36,334 | | | $ | 157,393 | | | $ | 701,658 | | | $ | (169,090) | | | $ | (221,050) | | | $ | (328) | | | $ | 504,917 | |
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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, 2021 | $ | 36,334 | | | $ | 149,484 | | | $ | 834,208 | | | $ | (192,739) | | | $ | (190,739) | | | $ | (145) | | | $ | 636,403 | |
Net loss | — | | | — | | | (19,803) | | | — | | | — | | | (7) | | | (19,810) | |
Minimum pension liability | — | | | — | | | — | | | 34,133 | | | — | | | — | | | 34,133 | |
Translation adjustment | — | | | — | | | — | | | (1,989) | | | — | | | 4 | | | (1,985) | |
Fair value of cash flow hedges | — | | | — | | | — | | | 1,481 | | | — | | | — | | | 1,481 | |
Total comprehensive income | | | | | | | | | | | | | 13,819 | |
Stock-based compensation | — | | | 3,709 | | | — | | | — | | | — | | | — | | | 3,709 | |
Purchase of 62,746 shares of treasury stock | — | | | — | | | — | | | — | | | (2,435) | | | — | | | (2,435) | |
Issuance of 174,107 shares of treasury stock | — | | | (6,859) | | | — | | | — | | | 6,859 | | | — | | | — | |
Cancellations of 31,057 shares of treasury stock | — | | | 2,091 | | | — | | | — | | | (2,091) | | | — | | | — | |
Dividends | — | | | — | | | (6,824) | | | — | | | — | | | — | | | (6,824) | |
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Balance, December 31, 2021 | $ | 36,334 | | | $ | 148,425 | | | $ | 807,581 | | | $ | (159,114) | | | $ | (188,406) | | | $ | (148) | | | $ | 644,672 | |
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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)
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| Three Months Ended December 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 3,647 | | | $ | (19,810) | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | |
Depreciation and amortization | 23,729 | | | 33,501 | |
Stock-based compensation expense | 4,334 | | | 3,709 | |
Deferred tax (benefit) provision | (46) | | | 47 | |
Gain on sale of assets, net | (17) | | | (276) | |
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Defined benefit plan settlement losses | 1,271 | | | 30,856 | |
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Defined benefit plan settlement payments | (24,242) | | | (35,706) | |
Changes in working capital items | (43,152) | | | (40,816) | |
Decrease in other assets | 1,524 | | | 2,112 | |
Increase (decrease) in other liabilities | 545 | | | (3,415) | |
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Other operating activities, net | (3,817) | | | 2,642 | |
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Net cash used in operating activities | (36,224) | | | (27,156) | |
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Cash flows from investing activities: | | | |
Capital expenditures | (12,398) | | | (12,640) | |
Acquisitions, net of cash acquired | (1,759) | | | — | |
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Other investing activities, net | 4 | | | 171 | |
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Net cash used in investing activities | (14,153) | | | (12,469) | |
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Cash flows from financing activities: | | | |
Proceeds from long-term debt | 240,826 | | | 174,859 | |
Payments on long-term debt | (208,104) | | | (102,514) | |
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Purchases of treasury stock | (2,451) | | | (2,435) | |
Dividends | (7,003) | | | (6,824) | |
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Other financing activities | (946) | | | (725) | |
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Net cash provided by financing activities | 22,322 | | | 62,361 | |
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Effect of exchange rate changes on cash | 1,757 | | | (928) | |
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Net change in cash, cash equivalents and restricted cash | (26,298) | | | 21,808 | |
Cash, cash equivalents and restricted cash at beginning of year | 71,414 | | | 68,343 | |
Cash, cash equivalents and restricted cash at end of period | $ | 45,116 | | | $ | 90,151 | |
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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, 2022
(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 memorialization products, industrial technologies and brand solutions. The Company manages its businesses under three segments: Memorialization, Industrial Technologies and SGK Brand Solutions. Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets, cremation-related products, and cremation and incineration equipment primarily for the cemetery and funeral home industries. Industrial technologies includes the design, manufacturing, service and distribution of high-tech custom energy storage solutions, product identification and warehouse automation technologies and solutions, including order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products. Brand solutions consists of brand management, pre-media services, printing plates and cylinders, imaging services, digital asset management, merchandising display systems, and marketing and design services primarily for the consumer goods and retail industries.
The 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, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023. 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, 2022. The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control and any variable interest entities for which the Company is the primary beneficiary. 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 Company applies highly inflationary accounting for subsidiaries when the cumulative inflation rate for a three-year period meets or exceeds 100 percent.
Effective April 1, 2022, the Company applies highly inflationary accounting to its Turkish subsidiaries. Under highly inflationary accounting, the financial statements of these subsidiaries are remeasured into the Company's reporting currency (U.S. dollar) and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than accumulated other comprehensive loss on the Consolidated Balance Sheets, until such time as the applicable economy is no longer considered highly inflationary. As of December 31, 2022, the Company had net monetary assets related to its Turkish subsidiaries of $5,229. For the three months ended December 31, 2022, exchange losses related to highly inflationary accounting totaled $1,088 and were included in the Consolidated Statements of Income within other income (deductions), net.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
New Accounting Pronouncements:
Issued
In October 2021, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805) which improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract asset/liability, and payment terms and their effect on subsequent revenue recognized by the acquirer. This ASU is effective for the Company beginning in interim periods starting in fiscal 2024. While the impact of this ASU is dependent on the nature of any future transactions, the Company currently does not expect this ASU to have a significant impact on its consolidated financial statements.
Note 3. Revenue Recognition
The Company delivers a variety of products and services through its business segments. The Memorialization segment produces and delivers bronze and granite memorials and other memorialization products, caskets, cremation-related products, and cremation and incineration equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment designs, manufactures, services and distributes high-tech custom energy storage solutions, product identification and warehouse automation technologies and solutions, including order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products. The SGK Brand Solutions segment delivers brand management, pre-media services, printing plates and cylinders, imaging services, digital asset management, merchandising display systems, and marketing and design services primarily for the consumer goods and retail industries.
The 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, 2022 and 2021 were as follows:
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| | Memorialization | | Industrial Technologies | | SGK Brand Solutions | | Consolidated |
| | Three Months Ended December 31, | | Three Months Ended December 31, | | Three Months Ended December 31, | | Three Months Ended December 31, |
| | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
North America | | $ | 195,199 | | $ | 196,751 | | | $ | 36,140 | | $ | 36,365 | | | $ | 67,580 | | $ | 74,190 | | | $ | 298,919 | | $ | 307,306 | |
Central and South America | | — | | — | | | — | | — | | | 1,337 | | 1,020 | | | 1,337 | | 1,020 | |
Europe | | 8,363 | | 11,514 | | | 71,301 | | 36,555 | | | 48,517 | | 61,002 | | | 128,181 | | 109,071 | |
Australia | | 2,940 | | 2,441 | | | — | | — | | | 2,299 | | 2,868 | | | 5,239 | | 5,309 | |
Asia | | — | | — | | | 1,702 | | 1,411 | | | 13,862 | | 14,462 | | | 15,564 | | 15,873 | |
Total Sales | | $ | 206,502 | | $ | 210,706 | | | $ | 109,143 | | $ | 74,331 | | | $ | 133,595 | | $ | 153,542 | | | $ | 449,240 | | $ | 438,579 | |
Revenue from products or services provided to customers over time accounted for approximately 13% of revenue for the three months ended December 31, 2022 and 2021. As of December 31, 2022 and September 30, 2022, the Company had contract assets of $59,046 and $48,210, respectively, that were recorded in other current assets within the Consolidated Balance Sheets. As of December 31, 2022 and September 30, 2022, the Company had contract liabilities of $23,747 and $31,871, respectively, that were recorded in other current liabilities within the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
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. |
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, 2022 | | September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
Derivatives (1) | $ | — | | | $ | 10,079 | | | $ | — | | | $ | 10,079 | | | $ | — | | | $ | 14,421 | | | $ | — | | | $ | 14,421 | |
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Life insurance policies | — | | | 4,608 | | | — | | | 4,608 | | | — | | | 4,439 | | | — | | | 4,439 | |
Total assets at fair value | $ | — | | | $ | 14,687 | | | $ | — | | | $ | 14,687 | | | $ | — | | | $ | 18,860 | | | $ | — | | | $ | 18,860 | |
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Liabilities: | | | | | | | | | | | | | | | |
Derivatives (1) | $ | — | | | $ | 2,082 | | | $ | — | | | $ | 2,082 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Total liabilities at fair value | $ | — | | | $ | 2,082 | | | $ | — | | | $ | 2,082 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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(1) Interest rate swaps and cross currency swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
The carrying values for other financial assets and liabilities approximated fair value at December 31, 2022 and September 30, 2022.
Note 5. Inventories
Inventories consisted of the following: | | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
Raw materials | $ | 61,017 | | | $ | 52,586 | |
Work in process | 109,732 | | | 94,804 | |
Finished goods | 74,816 | | | 78,050 | |
| $ | 245,565 | | | $ | 225,440 | |
Note 6. Investments
Non-current investments consisted of the following: | | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
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Life insurance policies | $ | 4,608 | | | $ | 4,439 | |
Equity-method investments | 2,974 | | | 2,729 | |
Other (primarily cost-method) investments | 18,866 | | | 18,808 | |
| $ | 26,448 | | | $ | 25,976 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt and Financing Arrangements
Long-term debt at December 31, 2022 and September 30, 2022 consisted of the following:
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| December 31, 2022 | | September 30, 2022 |
Revolving credit facilities | $ | 509,489 | | | $ | 480,107 | |
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2025 Senior Notes | 298,096 | | | 297,961 | |
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Other borrowings | 23,080 | | | 13,434 | |
Finance lease obligations | 6,439 | | | 7,066 | |
Total debt | 837,104 | | | 798,568 | |
Less current maturities | (2,977) | | | (3,277) | |
Long-term debt | $ | 834,127 | | | $ | 795,291 | |
The Company has a domestic credit facility with a syndicate of financial institutions that includes a $750,000 senior secured revolving credit facility, which matures in March 2025. A portion of the revolving credit facility (not to exceed $350,000) can be drawn in foreign currencies. Borrowings under the revolving credit facility bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.25% at December 31, 2022) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs in connection with the domestic credit facility. Unamortized costs were $1,370 and $1,522 at December 31, 2022 and September 30, 2022, respectively.
The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $55,000) 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, 2022 and September 30, 2022 were $495,391 and $472,057, respectively. The weighted-average interest rate on the outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at December 31, 2022 and 2021 was 4.24% and 1.86%, respectively.
The Company has $299,625 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 subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were $1,529 and $1,664 at December 31, 2022 and September 30, 2022, respectively.
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. In March 2022, Matthews RFC entered into a receivables purchase agreement (“RPA”) to sell up to $125,000 of receivables to certain purchasers (the “Purchasers”) on a recurring basis in exchange for cash (referred to as “capital” within the RPA) equal to the gross receivables transferred. The parties intend that the transfers of receivables to the Purchasers constitute purchases and sales of receivables. Matthews RFC has guaranteed to each Purchaser the prompt payment of sold receivables, and has granted a security interest in its assets for the benefit of the Purchasers. Under the RPA, which matures in March 2024, each Purchaser’s share of capital accrues yield at a floating rate plus an applicable margin. The Company is the master servicer under the RPA, and is responsible for administering and collecting receivables.
The proceeds of the RPA are classified as operating activities in the Company’s Consolidated Statements of Cash Flows. Cash received from collections of sold receivables may be used to fund additional purchases of receivables on a revolving basis, or to reduce all or any portion of the outstanding capital of the Purchasers. Gross receivables sold and cash collections reinvested under the RPA program were $203,561 and $89,561 for the three months ended December 31, 2022, respectively. The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded. As of December 31, 2022 and September 30, 2022, the amount sold to the Purchasers was $114,000 and $96,590, respectively, which was derecognized from the Consolidated Balance Sheets. As collateral against sold receivables, Matthews RFC maintains a certain level of unsold receivables, which was $40,766 and $44,262 as of December 31, 2022 and September 30, 2022, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt and Financing Arrangements (continued)
Previously, the Company had a $115,000 accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions that matured in March 2022. The Securitization Facility did not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations remained on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility were based on LIBOR plus 0.75% and the Company was required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility. At December 31, 2021, the interest rate on borrowings under this facility was 0.85%.
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 ($26,771), which includes €8.0 million ($8,567) for bank guarantees. This facility has no stated maturity date and is available until terminated. Outstanding borrowings under the credit facility totaled €13.2 million ($14,098) and €8.2 million ($8,050) at December 31, 2022 and September 30, 2022, respectively. The weighted-average interest rate on outstanding borrowings under this facility was 3.96% at December 31, 2022.
Other borrowings totaled $23,080 and $13,434 at December 31, 2022 and September 30, 2022, respectively. The weighted-average interest rate on all other borrowings was 3.09% and 1.88% at December 31, 2022 and 2021, respectively.
As of December 31, 2022 and September 30, 2022, 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, 2022.
Note 8. Derivatives and Hedging Instruments
The Company operates internationally and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At December 31, 2022 and September 30, 2022, derivative instruments were reflected on a gross-basis in the consolidated balance sheets as follows:
| | | | | | | | | | | | | | | | | | | | |
Derivatives: | | December 31, 2022 | | September 30, 2022 |
| | Interest Rate Swaps | Cross- Currency Swaps | | Interest Rate Swaps | Cross- Currency Swaps |
Current assets: | | | | | | |
Other current assets | | $ | 3,366 | | $ | — | | | $ | 3,358 | | $ | — | |
Long-term assets: | | | | | | |
Other assets | | 6,713 | | — | | | 7,341 | | 3,722 | |
Current liabilities: | | | | | | |
Other current liabilities | | — | | — | | | — | | — | |
Long-term liabilities: | | | | | | |
Other liabilities | | — | | 2,082 | | | — | | — | |
Total derivatives | | $ | 10,079 | | $ | 2,082 | | | $ | 10,699 | | $ | 3,722 | |
The following table presents information related to interest rate swaps entered into by the Company and designated as cash flow hedges:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | September 30, 2022 |
Notional amount | | $ | 125,000 | | | $ | 125,000 | |
| | | | |
Weighted-average maturity period (years) | | 2.6 | | 3.1 |
Weighted-average received rate | | 4.39 | % | | 3.14 | % |
Weighted-average pay rate | | 1.04 | % | | 1.04 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 8. Derivatives and Hedging Instruments (continued)
The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.
The fair value of the interest rate swaps reflected an unrealized gain of $10,079 ($7,533 after tax) at December 31, 2022 and an unrealized gain of $10,699 ($7,937 after tax) at September 30, 2022, 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, 2022, a gain (net of tax) of approximately $2,516 included in AOCI is expected to be recognized in earnings over the next twelve months.
The Company has a U.S. Dollar/Euro cross currency swap with a notional amount of $81,392 as of December 31, 2022 and September 30, 2022, which has been designated as a net investment hedge of foreign operations. The swap contract matures in September 2027. The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices. A loss of $1,556 (net of income taxes of $526) and a gain of $2,782 (net of income taxes of $940), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at December 31, 2022 and September 30, 2022, respectively. Income of $272 and $365, which represented the recognized portion of the fair value of cross currency swaps excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three months ended December 31, 2022 and 2021, respectively. At December 31, 2022 and September 30, 2022, the swap totaled $2,082 and $3,722, respectively, and was included in other accrued liabilities and other assets in the Consolidated Balance Sheets, respectively.
Refer to Note 12, "Accumulated Other Comprehensive Income" for further details regarding amounts recorded in AOCI and the Consolidated Statements of Income (Loss) related to derivatives.
Note 9. Share-Based Payments
The Company maintains an equity incentive plan (as amended and restated, 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 from the date the Company's Board of Directors approved of the amendment and restatement of the 2017 Equity Incentive Plan, the maximum number of shares available for grants or awards is an aggregate of 3,450,000 (subject to adjustment upon certain events such as stock dividends or stock splits), following the amendment and restatement of the 2017 Equity Incentive Plan at the Company's 2022 Annual Shareholder Meeting. At December 31, 2022, 465,613 shares have been issued under the 2017 Equity Incentive Plan. 1,041,215 time-based restricted share units, 1,312,562 performance-based restricted share units, and 75,000 stock options have been granted under the 2017 Equity Incentive Plan. 1,831,042 of these share-based awards are outstanding as of December 31, 2022. The 2017 Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. The number of shares issued under performance-based restricted share units may be up to 200% of the number of performance-based restricted share units, based on the satisfaction of specific criteria established by the plan administrator.
For the three-month periods ended December 31, 2022 and 2021, stock-based compensation cost totaled $4,334 and $3,709, respectively. The associated future income tax benefit recognized for stock-based compensation was $551 and $409 for the three-month periods ended December 31, 2022 and 2021, respectively.
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 43% 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 the units become vested.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Share-Based Payments (continued)
The transactions for restricted shares and restricted share units for the three months ended December 31, 2022 were as follows:
| | | | | | | | | | | |
| Shares /Units | | Weighted- average Grant-date Fair Value |
Non-vested at September 30, 2022 | 1,459,233 | | | $ | 33.78 | |
Granted | 617,050 | | | 27.69 | |
Vested | (180,263) | | | 35.25 | |
Expired or forfeited | (139,978) | | | 40.78 | |
Non-vested at December 31, 2022 | 1,756,042 | | | $ | 30.93 | |
During the third quarter of fiscal 2021, 75,000 stock options were granted under the 2017 Equity Incentive Plan. The option price for each stock option granted was $41.70, which was equal to the fair market value of the Company's Class A Common Stock on the date of grant. These options vest in one-third increments annually over three years from the grant date. Unvested stock options expire on the earlier of five years from the date of grant, or upon employment termination, retirement or death. The Company generally settles employee stock option exercises with treasury shares.
As of December 31, 2022, the total unrecognized compensation cost related to all unvested stock-based awards was $32,573 and is expected to be recognized over a weighted average period of 2.5 years.
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 2023, either cash or shares of the Company's Class A Common Stock with a value equal to $90. The annual retainer fee for fiscal 2023 paid to the non-employee Chairman of the Board is $210. 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). In November 2022, the Board of Directors approved the Amended and Restated 2019 Director Fee Plan (the "Amended 2019 Plan"), which increases the maximum number of shares available for grants or awards to an aggregate of 300,000. The Amended 2019 Plan is subject to shareholder approval at the Company's 2023 Annual Shareholder Meeting. The value of deferred shares is recorded in other liabilities. A total of 45,738 shares and share units had been deferred under the Director Fee Plans as of December 31, 2022. 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 $140 for fiscal 2023. As of December 31, 2022, 305,911 restricted shares and restricted share units have been granted under the Director Fee Plans and are outstanding as of December 31, 2022, 132,682 of which were issued under the 2019 Director Fee Plan. 58,008 restricted shares and restricted share units are unvested at December 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 10. Earnings Per Share Attributable to Matthews' Shareholders
The information used to compute earnings (loss) per share attributable to Matthews' common shareholders was as follows: | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2022 | | 2021 |
Net income (loss) attributable to Matthews shareholders | | | | | $ | 3,703 | | | $ | (19,803) | |
| | | | | | | |
| | | | | | | |
Weighted-average shares outstanding (in thousands): | | | | | | | |
Basic shares | | | | | 30,712 | | | 31,719 | |
Effect of dilutive securities | | | | | 241 | | | — | |
Diluted shares | | | | | 30,953 | | | 31,719 | |
| | | | | | | |
Dividends declared per common share | | | | | $ | 0.23 | | | $ | 0.22 | |
Anti-dilutive securities excluded from the dilution calculation were insignificant for the three months ended December 31, 2022. During periods in which the Company incurs a net loss, diluted weighted-average shares outstanding are equal to basic weighted-average shares outstanding because the effect of all equity awards is anti-dilutive.
Note 11. 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 |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Service cost | $ | 57 | | | $ | 380 | | | $ | 19 | | | $ | 41 | |
Interest cost * | 143 | | | 990 | | | 161 | | | 103 | |
Expected return on plan assets * | — | | | (1,042) | | | — | | | — | |
Amortization: | | | | | | | |
Prior service credit | — | | | 47 | | | (91) | | | (91) | |
Net actuarial loss * | |