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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________________________________________________________________________________________________________________________
FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 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)
| | | | | | | | | | | | | | |
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 |
| | | | |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 ☒ No ☐
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 | ☒ | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant, based upon the closing sale price of the Class A Common Stock on the Nasdaq Global Select Market on March 31, 2020, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $730 million.
As of October 31, 2020, shares of common stock outstanding were: Class A Common Stock 31,791,571 shares.
Documents incorporated by reference: Specified portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS AND NON-GAAP FINANCIAL MEASURES:
Any forward-looking statements contained in this Annual Report on Form 10-K (including, but not limited to, those contained in Item 1, "Business," Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations") are included in this report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the actual results of Matthews International Corporation ("Matthews" or the "Company") in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. In addition to the risk factors previously disclosed and those discussed elsewhere in this Annual Report on Form 10-K, factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in mortality and cremation rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, ability to achieve cost-reduction objectives, unknown risks in connection with the Company's acquisitions, cybersecurity concerns, effectiveness of the Company's internal controls, compliance with domestic and foreign laws and regulations, technological factors beyond the Company's control, impact of pandemics or similar outbreaks, such as coronavirus disease 2019 ("COVID-19") or other disruptions to our industries, customers or supply chains, and other factors described in Item 1A, "Risk Factors" in this Form 10-K. In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors. Matthews cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward looking statements, which reflect management's analysis only as of the date of this report, even if subsequently made available by Matthews on its website or otherwise. Matthews does not undertake to update any forward looking statement, whether written or oral, that may be made from time to time by or on behalf of Matthews to reflect events or circumstances occurring after the date of this report. Matthews posts important information on its investor relations website, available at matw.com/investors. The Company's shareholders are encouraged to review the contents of such website. Notwithstanding the foregoing, the contents of such website are not incorporated into this Annual Report on Form 10-K.
Included in this report are measures of financial performance that are not defined by generally accepted accounting principles in the United States ("GAAP"). These non-GAAP financial measures assist management in comparing the Company's performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company's core operations. Refer to "Non-GAAP Financial Measures" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 1. BUSINESS.
Matthews, 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.
ITEM 1. BUSINESS, (continued)
The Company manages its business under three reporting segments, SGK Brand Solutions, Memorialization, and Industrial Technologies. The following table sets forth reported sales for the Company's business segments for the past three fiscal years. Detailed financial information relating to business segments and to domestic and international operations is presented in Note 19, "Segment Information" in Item 8 - "Financial Statements and Supplemental Data."
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| Years Ended September 30, |
| 2020 | | 2019 | | 2018 |
Sales to external customers: | (Dollar amounts in thousands) |
SGK Brand Solutions | $ | 693,093 | | | $ | 743,869 | | | $ | 805,274 | |
Memorialization | 656,035 | | | 636,892 | | | 631,392 | |
Industrial Technologies | 149,178 | | | 156,515 | | | 165,914 | |
Consolidated Sales | $ | 1,498,306 | | | $ | 1,537,276 | | | $ | 1,602,580 | |
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In fiscal 2020, approximately 69% of the Company's sales were made from North America, 26% were made from Europe, 3% were made from Asia, and 2% were made from other regions. For further information on segments, see Note 19, "Segment Information" in Item 8 - "Financial Statements and Supplementary Data." Products and services of the SGK Brand Solutions segment are sold throughout the world, with principal locations in North America, Europe and Asia. Memorialization segment products are sold throughout the world, with the segment's principal operations located in North America, Europe, and Australia. The Industrial Technologies segment sells equipment and consumables directly to industrial consumers and distributors in North America and internationally through the Company's subsidiaries in Sweden, Germany and China, and other foreign distributors. Matthews owns a minority interest in Industrial Technologies product distributors in Asia, Australia and Europe.
SGK Brand Solutions:
The SGK Brand Solutions segment provides packaging solutions, brand experience services, and cylinder production and engineering expertise. The SGK Brand Solutions segment re-organized its operations and rebranded as a global packaging and brand experience business that simplifies marketing, amplifies brands and delivers value. Matthews has more than 100 years in the packaging business, which is comprised of a broad technical expertise relating to the creation and production of graphics, their workflows and best practices for the packaging marketing channel. This combination of knowledge, experience and skill helps the SGK Brand Solutions segment differentiate itself from competitors. The expertise in the rotary processing of banded materials has also allowed expansion into engineered purpose-built machines for new applications.
The SGK Brand Solutions segment helps companies to define, create, produce and transform their packaging and marketing supply chains and the brand assets that flow through them. By simplifying marketing, the segment helps deliver greater speed through workflow efficiency, enabling clients to get new product introductions and campaigns to market faster which can result in a competitive advantage for the brand. By amplifying brands, the segment helps brands create meaningful experiences online and offline that enable them to stand out in the marketplace which can result in a stronger connection between consumers and the brand. The SGK Brand Solutions segment also helps clients deliver improved marketing productivity and profitability through innovative technology solutions.
The packaging solutions part of its business integrates all packaging-related services from the beginning to end of the packaging development workflow process. Clients may purchase stand-alone services or a combination of services that are designed to fulfill larger, more strategic objectives. These services include design and adaptive packaging design, production art, photography, retouching, eCommerce assets, premedia, print technical services, cylinders and surfaces engineering, workflow efficiency consulting, change management and technology workflow solutions. Largely, a print media-based business, the business leverages their 100+ years of packaging expertise to create packaging assets required for the eCommerce channel.
The brand experience part of the business integrates all marketing-related services from the beginning to the end of the marketing development workflow process. Clients may purchases stand-alone services or a combination of services that are designed to fulfill larger, more strategic objectives. These services include all the services that help create brand experiences: consumer insights, brand strategy, brand identity, content marketing strategy, marketing content creation, campaign strategy and development, online and in-store retail experiences and merchandising fabrication, creative process management and technology workflow solutions. Largely, an ideation and digital media-based business, the business leverages its branding expertise to drive the creation of digital experiences that “stick” with consumers.
ITEM 1. BUSINESS, (continued)
The SGK Brand Solutions segment’s principal clients are global, multinational and regional companies in highly-regulated industries such as food and beverage, pharmaceutical and healthcare, beauty and cosmetics, and alcohol and tobacco. The segment also serves clients in a diverse range of sectors which includes leaders in home improvement, personal care, technology and electronics, snack food and confections, telecommunications, and apparel, as well as a diverse range of shopping formats which include big-box stores, department stores, specialty stores, grocery stores, pharmacy chains, and online retailers. These large, well-known companies represent a variety of brands across the marketplace covering both national and private label brands with numerous packaging and marketing requirements.
The segment is also a leading international supplier of pre-press, rotogravure and embossing tooling, with principal clients representing brand manufacturers, printers and converters. The segment produces engineered products, which primarily represents purpose-built machines to support the automotive and energy storage industries.
The segment’s products, services and solutions are purchased in part or whole by companies with operations in and/or across the North America, Europe and Asia regions. A large portion of these purchases result in annual or multi-year contracts; others are initiative-based. The segment generates new business opportunities through referrals and relationships, marketing and lead generation and select industry partnerships. The Company has many long-standing relationships among its client base that span decades and has new relationships with well-known global technology companies that are driving change in how consumers engage with brands and use devices like smartphones to shop and buy online and in-store.
Major raw materials for this segment’s products include photopolymers, steel, copper, film, wood, particleboard, corrugated materials, structural steel, plastic, laminates, inks and graphic art supplies. All such materials are presently available in adequate supply from various industry sources. Competition is on the basis of product quality, timeliness of delivery and price, and increasingly, the ability to provide a holistic solution for brand content beyond its use for packaging, while at the same time elevating the role of packaging in the marketing mix. The segment's ability to offer consistent service on a global basis is a key differentiator.
The segment competes in an industry that is constantly challenged by emerging technologies that impact packaging and marketing. These challenges can create new opportunities for the segment to create, produce and manage large volumes of brand content. They also provide the segment with opportunities to advise its clients on how to plan for, manage and execute the digital transformation of their packaging and marketing operations.
Memorialization:
The Memorialization segment manufactures and markets a full line of memorialization products used primarily in cemeteries, funeral homes and crematories. The segment's products, which are sold principally in North America, Europe and Australia, include cast bronze memorials, granite memorials, caskets, cremation and incineration equipment and other memorialization products. The segment also manufactures and markets architectural products that are used to identify or commemorate people, places, events and accomplishments.
Memorial products include flush bronze and granite memorials, upright granite memorials and monuments, cremation memorialization products, granite benches, flower vases, crypt plates and letters, cremation urns, niche units, cemetery features and statues, along with other related products and services. Flush memorials are bronze plaques or granite memorials which contain personal information about a deceased individual (such as name, birth date, and death date), photos and emblems. Flush bronze and granite memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier lawn mowing and general maintenance. The segment's memorial products also include community and family mausoleums within North America. In addition, the segment's other memorial products include bronze plaques, letters, emblems, vases, lights and photo ceramics that can be affixed to granite monuments, mausoleums, crypts and flush memorials. Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer.
Customers of the Memorialization segment can also purchase memorials and vases on a "pre-need" basis. The "pre-need" concept permits families to arrange for these purchases in advance of their actual need. Upon request, the Company will manufacture the memorial to the customer's specifications (e.g., name and birth date) and place it in storage for future delivery. Memorials in storage have been paid in full with title conveyed to each pre-need purchaser.
ITEM 1. BUSINESS, (continued)
The segment is also a leading manufacturer and distributor of caskets and other funeral home products in North America. The segment produces and markets metal, wood and cremation caskets. Caskets are offered in a variety of colors, interior designs, handles and trim in order to accommodate specific religious, ethnic or other personal preferences. The segment also markets other funeral home products such as urns, jewelry, interior panels, and stationery. The segment offers individually personalized caskets through its distribution network.
Metal caskets are made from various gauges of cold-rolled steel, stainless steel, copper and bronze. Metal caskets are generally categorized by whether the casket is non-gasketed or gasketed, and by material (i.e., bronze, copper, or steel) and in the case of steel, by the gauge (thickness) of the metal. Wood caskets are primarily manufactured from nine different species of wood. The species of wood used are poplar, pine, ash, oak, pecan, maple, cherry, walnut and mahogany. The Memorialization segment is a leading manufacturer of all-wood constructed caskets, which are manufactured using pegged and dowelled construction, and include no metal parts. Cremation caskets are made primarily from wood or cardboard covered with cloth or veneer. These caskets appeal primarily to cremation consumers, environmentally concerned consumers, and value buyers.
The Memorialization segment also produces casket components. Casket components include stamped metal parts, metal locking mechanisms for gasketed metal caskets, and adjustable beds. Metal casket parts are produced by stamping cold-rolled steel, stainless steel, copper and bronze sheets into casket component parts. Locking mechanisms and adjustable beds are produced by stamping and assembling a variety of steel parts. The segment purchases from sawmills and lumber distributors various species of uncured wood, which it dries and cures. The cured wood is processed into casket components.
In addition, the segment provides product and service assortment planning, as well as merchandising and display products to funeral service businesses. The Memorialization segment also develops and sells technology solutions which help funeral homes manage their businesses and serve families through these digital platforms. Solutions are delivered as software as a service and include funeral home management systems, and web-based arrangement and presentation systems. These products assist funeral service professionals in providing information, value and satisfaction to their client families.
The segment also provides cremation systems, crematory management, and cremation service and supplies to the pet and human sector, and standard and specialized incineration systems, including abated filtration systems to satisfy strict environmental requirements. The primary market areas for these products and services are North America and Europe, although the segment also sells into Latin America and the Caribbean, Australia, the Middle East and Asia.
Cremation systems include flame-based systems for cremation of humans and pets, as well as equipment for processing the cremated remains and other related equipment (ventilated work stations, tables, cooler racks, vacuums). The principal markets for these products are funeral homes, cemeteries, crematories, pet crematories, animal disposers and veterinarians. These products primarily are marketed directly by segment personnel. Human crematory management/operations represent the actual operation and management of client-owned crematories. Currently the segment provides these services primarily to municipalities and private operators in the United States and Europe. Cremation service and supplies consist of operator training, preventative maintenance and on-demand service work performed on various makes and models of equipment. This work can be as simple as replacing defective bulbs or as complex as complete reconstruction and upgrading or retro-fitting on site. Supplies are consumable items and replacement parts associated with normal crematory operations.
Waste incineration systems encompass both batch load and continuous feed, static and rotary systems for incineration of all waste types, as well as equipment for in-loading waste, out-loading ash and energy recovery. The principal markets for these products are animal and medical waste disposal, oil and gas "work camp" wastes, industrial wastes and bio-mass generators. Environmental and energy systems include emissions filtration units, waste heat recovery equipment, waste gas treatment products, as well as energy recovery. The segment also provides commissioning, training and user support for customers of incineration systems. The principal markets are municipalities or public/state agencies, the cremation industry and other industries which utilize incinerators for waste reduction and energy production.
The Memorialization segment also manufactures a full line of other products, including urns in a variety of sizes, styles and shapes as well as standard and custom designed granite cremation pedestals and benches. The segment manufactures bronze and granite niche units, which are comprised of numerous compartments used to display cremation urns in mausoleums and churches. The Company also markets turnkey cremation gardens, which include the design and all related products for a cremation memorial garden.
ITEM 1. BUSINESS, (continued)
Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are sold to and distributed through a network of independent dealers including sign suppliers, awards and recognition companies, and trophy dealers.
Raw materials used by the Memorialization segment to manufacture memorials consist principally of bronze and aluminum ingot, granite, sheet metal, coating materials, photopolymers and construction materials and are generally available in adequate supply. Ingot is obtained from various North American, European and Australian smelters. The primary materials required for casket manufacturing are cold-rolled steel and lumber. The segment also purchases copper, bronze, stainless steel, particleboard, corrugated materials, paper veneer, cloth, ornamental hardware and coating materials. Purchase orders or supply agreements are typically negotiated with large, integrated steel producers that have demonstrated timely delivery, high quality material and competitive prices. Lumber is purchased from a number of sawmills and lumber distributors. Raw materials used to manufacture cremation and incineration products consist principally of structural steel, sheet metal, electrical components, combustion devices and refractory materials. These are generally available in adequate supply from numerous suppliers.
Competition from other manufacturers of memorial products is on the basis of reputation, product quality, delivery, price, and design availability. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and consumer-oriented merchandising systems are competitive advantages in its markets. Competition in the mausoleum construction industry includes various construction companies throughout North America and is on the basis of design, quality and price. Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials, sand-blasted wood and other fabricated products.
The Memorialization segment markets its casket products in the United States through a combination of Company-owned and independent casket distribution facilities. The Company operates approximately 100 distribution centers in the United States. Approximately 85% of the segment's casket products are currently sold through Company-owned distribution centers. The casket business is highly competitive and the Company competes with other manufacturers on the basis of product quality, price, service, design availability and breadth of product line. The Memorialization segment provides a line of casket products that it believes is as comprehensive as any of its major competitors. There are a large number of casket industry participants operating in North America and also a few foreign casket manufacturers, primarily from China, participating in the North American market.
The Company competes with several manufacturers in the cremation and accessory equipment market principally on the basis of product design, quality and price. The Memorialization segment and its three largest global competitors account for a substantial portion of the United States and European cremation equipment market.
The Memorialization segment works to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets. The Company's memorial and casket products serve the relatively stable casketed and in-ground burial death market, while its memorial products and cremation and incineration equipment also serve the growing cremation market.
Industrial Technologies:
The Industrial Technologies segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, industrial automation solutions, and warehouse automation systems. Manufacturers, suppliers and distributors worldwide rely on Matthews' integrated systems to identify, track and pick their products.
Marking systems range from stand-alone marking products to complex ink-jet printing systems that integrate into a customer's production process. The Company manufactures and markets products and systems that employ different marking technologies, including laser and ink-jet printing. These technologies apply product information required for identification and traceability, as well as to facilitate inventory and quality control, regulatory compliance and brand name communication.
Warehouse automation systems complement the tracking and distribution of a customer's products with automated order fulfillment technologies, and controls for material handling systems. Material handling customers include some of the largest retail, eCommerce, and automated assembly companies in the United States. The Company also engineers innovative, custom solutions to address specific customer requirements in a variety of industries, including oil field services and security scanning.
ITEM 1. BUSINESS, (continued)
A significant portion of the revenue of the Industrial Technologies segment is attributable to the sale of consumables and replacement parts required by the marking, coding and tracking products sold by Matthews. The Company develops inks exclusively for the use with its marking equipment which is critical to ensure ongoing equipment reliability and mark quality.
The principal customers for the Company's marking and fulfillment systems products are manufacturers, suppliers and distributors of durable goods, building products, consumer goods manufacturers (including food and beverage processors) and producers of pharmaceuticals. The Company also serves a wide variety of industrial markets, including metal fabricators, manufacturers of woven and non-woven fabrics, plastic, rubber and automotive products.
A portion of this segment's sales are outside the United States, with distribution sourced through the Company's subsidiaries in Sweden, Germany and China in addition to other international distributors. The Company owns a minority interest in distributors in Asia, Australia and Europe.
Major raw materials for this segment's products include precision components, electronics, printing components and chemicals, all of which are presently available in adequate supply from various sources.
Competitors in the marking and fulfillment systems industries are diverse, with some companies offering limited product lines for well-defined specialty markets, while others operate similarly to the Company, offering a broad product line and competing in multiple product markets and countries. Competitive differentiation for marking and fulfillment systems products is based on product performance, ease of integration into the manufacturing and/or distribution process, service and price. The Company typically competes with specialty companies in specific brand marking solutions and traceability applications. The Company believes that, in general, its Industrial Technologies segment offers one of the broadest lines of products to address a wide variety of marking, coding and industrial automation applications.
PATENTS, TRADEMARKS AND LICENSES:
The Company holds a number of trademarks and in excess of 100 domestic and foreign patents for its products and related technologies. However, the Company believes the loss of any individual or a significant number of patents or trademarks would not have a material impact on consolidated operations or revenues.
HUMAN CAPITAL RESOURCES:
At October 31, 2020, the Company and its majority-owned subsidiaries employed approximately 11,000 people globally. The Company's diverse team of talented employees possess a vast array of skills including creative design, photography, engineering, manufacturing, research and development, plant operations, production, logistics and administrative support, such as information technology, human resources and finance. Certain of the Company's employees have highly specialized skills and subject-matter expertise in their respective fields, which helps enable the Company to deliver industry leading products and services to its customers throughout the world.
The Company attracts and maintains talent by offering market rate competitive salaries for the locations in which it operates, and by engaging employees with rewarding opportunities to contribute to the success of the Company. The Company is committed to supporting and developing its employees through global learning and development programs. These programs are designed to build and strengthen employees’ skills, including leadership and professional competencies. Leadership development programs include intensive learning programs for emerging leaders, as well as mid-level and senior leaders. The Company also strategically partners with educational institutions and nonprofit organizations to help provide current and future workers with the knowledge and skills they need to succeed. Such efforts also include routine and consistent compliance training, covering a wide-range of relevant subjects. The Company has consistently re-invested in necessary resources to effectively staff and efficiently support its three business segments.
Employee health and safety in the workplace is one of the Company’s core values. Safety efforts are led by the Global Health and Safety team and supported by individuals at the local site level. Hazards in the workplace are timely identified and management actively tracks incidents so remedial actions may be implemented to improve workplace safety. In response to the COVID-19 pandemic, the Company has taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention to protect its workforce so they can more safely and effectively perform their work. In so doing, the Company has prioritized the initiation of comprehensive health and safety protocols, further ensuring strict adherence to responsive measures for mitigating the spread of COVID-19.
ITEM 1. BUSINESS, (continued)
The Company is committed to efforts to increase diversity and foster an inclusive work environment that supports the Company’s large global workforce. The Company has taken actions to enhance diversity, including the formation of a Diversity and Inclusion (“D&I”) council, comprised of a diverse group of talented individuals across the Company’s various businesses and geographic locations. The D&I council is responsible for helping to shape the Company’s D&I objectives, prioritize the Company’s actions and programs in this important area, and support the Company’s efforts in building a more inclusive workplace. The efforts of the D&I council are further guided by the Company’s Executive leadership team.
BACKLOG:
Because the nature of the Company's SGK Brand Solutions, Memorialization and Industrial Technologies businesses are primarily custom products made to order and services with short lead times, backlogs are not generally material except for purpose built machinery projects in the SGK Brand Solutions segment, mausoleums and cremation and incineration equipment in the Memorialization segment and industrial automation and order fulfillment systems in the Industrial Technologies segment. Backlogs vary in a range of approximately six to twelve months of sales for purpose built machinery projects and mausoleums. Cremation and incineration equipment sales backlogs vary in a range of ten to twelve months of sales. Backlogs for Industrial Technologies segment sales generally vary in a range of up to four weeks for standard products and twenty-four weeks for custom systems. The Company's current backlog is expected to be substantially filled in fiscal 2021, absent any disruptions related to COVID-19.
REGULATORY MATTERS:
The Company’s operations are subject to various federal, state and local laws and regulations requiring strict compliance, including, but not limited to, the protection of the environment. The Company has established numerous internal compliance programs to further ensure lawful satisfaction of the applicable regulations. In addition, the Company is party to specific environmental matters which include obligations to investigate and mitigate the effects on the environment of certain materials at operating and non-operating sites. The Company is currently performing environmental assessments and remediation at certain sites, as applicable.
AVAILABLE INFORMATION:
The Company's principal executive offices are located at Two NorthShore Center, Pittsburgh, Pennsylvania 15212, its telephone number is (412) 442-8200 and its website is www.matw.com. The Company files or furnishes all required reports with the Securities and Exchange Commission ("SEC") in accordance with the Exchange Act. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports are available free of charge on the Company's website as soon as reasonably practicable after being filed or furnished to the SEC. The Company's reports filed or furnished with the SEC, including exhibits attached to such reports, are also available on the SEC's website at www.sec.gov.
ITEM 1A. RISK FACTORS.
There are inherent risks and uncertainties associated with the Company's businesses that could adversely affect its operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that the Company currently believes to be material. Additional risks not currently known or deemed immaterial may also result in adverse effects on the Company.
Company-Specific Risk Factors:
Foreign Operations. The Company conducts business in more than 25 countries around the world, and in fiscal 2020 approximately 33% of the Company's sales to external customers were to customers outside the United States. In addition, the Company's manufacturing operations, suppliers and employees are located in many places around the world. As such, the Company's future success depends in part on its ability to grow sales in non-U.S. markets. Sales and operations outside of the United States are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, global economic uncertainties, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations, potentially adverse tax consequences, and required compliance with non-U.S. laws and regulations.
ITEM 1A. RISK FACTORS, (continued)
Changes in Foreign Currency Exchange Rates. Manufacturing and sales of a significant portion of the Company's products are outside the United States, and accordingly, the Company holds assets, incurs liabilities, earns revenue and pays expenses in a variety of currencies. The Company's consolidated financial statements are presented in U.S. dollars, and therefore, the Company must translate the reported values of its foreign assets, liabilities, revenue and expenses into U.S. dollars. Increases or decreases in the value of the U.S. dollar compared to foreign currencies may negatively affect the value of these items in the Company's consolidated financial statements, even though their value has not changed in local currency.
Increased Prices for Raw Materials. The Company's profitability is affected by the prices of the raw materials used in the manufacture of its products. These prices may fluctuate based on a number of factors, including changes in supply and demand, domestic and global economic conditions, volatility in commodity markets, currency exchange rates, labor costs, tariffs and fuel-related costs. If suppliers increase the price of critical raw materials, alternative sources of supply, or alternative materials, may not exist or be readily available.
The Company has standard selling price structures (i.e., list prices) in certain of its segments, which are reviewed for adjustment generally on an annual basis. In addition, the Company has established pricing terms with several of its customers through contracts or similar arrangements. Based on competitive market conditions and to the extent that the Company has established pricing terms with customers, the Company's ability to immediately increase the price of its products to offset the increased costs may be limited. Significant raw material price increases that cannot be mitigated by selling price increases or productivity improvements will negatively affect the Company's results of operations.
Changes in Mortality and Cremation Rates. Generally, life expectancy in the United States and other countries in which the Company's Memorialization segment operates has increased steadily for several decades and is expected to continue to do so in the future. The increase in life expectancy is also expected to impact the number of deaths in the future. Additionally, cremations have steadily grown as a percentage of total deaths in the United States since the 1960's, and are expected to continue to increase in the future. The Company expects that these trends will continue in the future and sales of the Company's Memorialization segment may benefit from the continued growth in the number of cremations; however, such trends may adversely affect the volume of bronze and granite memorialization products and burial caskets sold in the United States.
Changes in Product Demand or Pricing. The Company's businesses have and will continue to operate in competitive markets. Changes in product demand or pricing are affected by domestic and foreign competition and an increase in consolidated purchasing by large customers operating in both domestic and global markets. The Memorialization businesses generally operate in markets with ample supply capacity and demand which is correlated to death rates. The SGK Brand Solutions businesses serve global customers that are requiring their suppliers to be global in scope and price-competitive. Additionally, in recent years the Company has witnessed an increase in products manufactured offshore, primarily in China, and imported into the Company's U.S. markets. It is expected that these trends will continue and may affect the Company's future results of operations.
Changes in the Distribution of the Company's Products or the Loss of a Large Customer. Although the Company does not have any customer that is individually significant to consolidated sales, it does have contracts with several large customers in both the Memorialization and SGK Brand Solutions segments. While these contracts provide important access to large purchasers of the Company's products, they can obligate the Company to sell products at contracted prices for extended periods of time. Additionally, any significant divestiture of business properties or operations by current customers could result in a loss of business if the Company is not able to maintain the business with the subsequent owners of the businesses.
Pandemics or similar outbreaks may cause unfavorable economic or market conditions which could impact demand patterns and/or disrupt global supply chains and production operations. Collectively, these outcomes could materially and adversely affect the Company’s business, results of operations and financial condition. Pandemics or similar outbreaks, such as COVID-19, could adversely affect the economies of developed and emerging markets, potentially resulting in an economic downturn that could affect customers’ demand for the Company’s products and services, as well as the Company's ability to access capital at acceptable interest rates. The spread of pandemics or similar outbreaks may also disrupt the Company’s manufacturing and production operations, as well as its distribution systems, which include import and export for delivery of the Company’s products to its customers. These factors could materially and adversely affect the Company’s business, financial condition and results of operations.
ITEM 1A. RISK FACTORS, (continued)
Due to the uncertainty relating to a pandemic or similar outbreak, the Company, its customers or its suppliers may be required, or believe that it is advantageous, to take precautionary measures intended to minimize the risk of a virus or disease spreading to employees, customers, and the communities in which they operate, and these measures could negatively impact the Company’s business. Further, if the scope and severity of an outbreak, such as COVID-19, worsens and the Company’s contingency plans prove ineffective, its global operations could potentially experience disruptions, such as temporary closure of facilities or delays or suspensions in product offerings and services, which may materially and adversely affect the Company’s business, financial condition and results of operations.
Risks in Connection with Acquisitions. The Company has grown, in part, through acquisitions, and continues to evaluate acquisition opportunities that have the potential to support and strengthen its businesses. There is no assurance however that future acquisition opportunities will arise, or that if they do, that they will be consummated. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with expectations, or that synergies expected from the integration of the acquisitions will not be achieved as rapidly as expected, if at all. Failure to effectively integrate acquired businesses could prevent the realization of expected rates of return on the acquisition investment, including the achievement of cost-reduction objectives, and could have a negative effect on the Company's results of operations and financial condition.
Protection of Intellectual Property. Certain of the Company's businesses rely on various intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as confidentiality provisions and licensing arrangements, to establish proprietary rights. If the Company does not enforce its intellectual property rights successfully, its competitive position may suffer which could harm the Company's operating results. In addition, the Company's patents, copyrights, trademarks and other intellectual property rights may not provide a significant competitive advantage. The Company may need to spend significant resources monitoring its intellectual property rights and may or may not be able to detect infringement by third parties. The Company's competitive position may be harmed if it cannot detect infringement and enforce its intellectual property rights quickly or at all. In some circumstances, the Company may choose to not pursue enforcement because an infringer has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by designing around the Company's intellectual property rights or by developing non-infringing competing technologies. Intellectual property rights and the Company's ability to enforce them may be unavailable or limited in some countries which could make it easier for competitors to capture market share and could result in lost revenues.
Environmental Remediation and Compliance. The Company is subject to the risk of environmental liability and limitations on its operations due to environmental laws and regulations. The Company is subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of potentially substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of the Company's business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than the Company anticipates, and there is no assurance that significant expenditures related to such compliance may not be required in the future.
From time to time, the Company may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged noncompliance with or liability under environmental, health and safety laws, property damage or personal injury. New laws and regulations, including those which may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require the Company to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on the Company's business, financial condition or results of operations.
Technological Factors Beyond the Company's Control. The Company operates in certain markets in which technological product development contributes to its ability to compete effectively. There can be no assurance that the Company will be able to develop new products, that new products can be manufactured and marketed profitably, or that new products will successfully meet the expectations of customers.
Changes in Laws and Regulations Governing Data Privacy and Data Protection. The Company is subject to many data privacy, data protection, and data breach notification laws, including the European Union General Data Protection Regulation (the “GDPR”), which became effective in May of 2018, and the California Consumer Privacy Act (the "CCPA"), which became effective in January 2020. The GDPR and the CCPA contain numerous requirements, including more robust obligations and increased documentation requirements for data protection compliance programs by companies. Complying with the GDPR and the CCPA may cause the Company to incur substantial operational costs or require the Company to change its business practices. The Company’s measures to assess the requirements of, and to comply with, the GDPR and the CCPA, as
ITEM 1A. RISK FACTORS, (continued)
well as new and existing data-related laws and regulations of other jurisdictions, could be challenged, including by authorities that regulate data-related compliance. The Company’s ongoing compliance measures could result in the incurrence of significant expense in facilitating and responding to regulatory investigations, and if the measures initiated by the Company are deemed to be inadequate, the Company could be subject to enforcement actions that may require operational changes, fines, penalties or damages, which could have an adverse impact on the Company’s business or results of operations.
Changes in Tax Rules. The enactment of the U.S. Tax Cuts and Jobs Act (the “Act”) in December 2017 significantly affected U.S. tax law by changing how the U.S. imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under the Act to issue regulations and interpretive guidance. The Company has applied available guidance to estimate its tax obligations, but new guidance issued by the U.S. Treasury Department may cause the Company to make adjustments to its tax estimates in future periods.
Compliance with Foreign Laws and Regulations. Due to the international scope of the Company's operations, Matthews is subject to a complex system of commercial and trade regulations around the world, and the Company's foreign operations are governed by laws, rules and business practices that often differ from those of the United States. The Company cannot predict the nature, scope or effect of future regulatory requirements to which the Company's operations might be subject or the manner in which existing laws might be administered or interpreted, which could have a material and negative impact on the Company's business and results of operation. For example, recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws in other countries. While Matthews maintains a variety of internal policies and controls and takes steps, including periodic training and internal audits, that the Company believes are reasonably calculated to discourage, prevent and detect violations of such laws, the Company cannot guarantee that such actions will be effective or that individual employees will not engage in inappropriate behavior in contravention of the Company's policies and instructions. Such conduct, or even the allegation thereof, could result in costly investigations and the imposition of severe criminal or civil sanctions, could disrupt the Company's business, and could materially and adversely affect the Company's reputation, business and results of operations or financial condition.
Further, the Company is subject to laws and regulations worldwide affecting its operations outside the United States in areas including, but not limited to, intellectual property ownership and infringement, tax, customs, import and export requirements, anti-corruption and anti-bribery, foreign exchange controls and cash repatriation restrictions, foreign investment, data privacy requirements, anti-competition, pensions and social insurance, employment, and environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive and requirements may differ among jurisdictions. Further, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative impact on the Company's business and prospects. In addition, certain laws and regulations are relatively new and their interpretation and enforcement involve significant uncertainties. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, results of operations or financial condition.
General Risk Factors:
Changes in Economic Conditions. Generally, changes in domestic and international economic conditions affect the industries in which the Company and its customers and suppliers operate. These changes include changes in the rate of consumption or use of the Company's products due to economic downturns, volatility in currency exchange rates, and changes in raw material prices resulting from supply and/or demand conditions.
Uncertainty about current global economic conditions poses a risk, as consumers and businesses may continue to postpone or cancel spending. Other factors that could influence customer spending include energy costs, conditions in the credit markets, consumer confidence, global pandemics, and other factors affecting consumer spending behavior. These and other economic factors could have an effect on demand for the Company's products and services and negatively impact the Company's financial condition and results of operations.
Cybersecurity and Data Breaches. In the course of business, the Company collects and stores sensitive data and proprietary business information. The Company could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of the Company's network or data including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although the Company is not aware of any significant incidents to date, if it is unable to prevent such security or privacy breaches, its operations could be disrupted or the Company may suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
ITEM 1A. RISK FACTORS, (continued)
Effectiveness of Internal Controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires a comprehensive evaluation of the Company's internal control over financial reporting. To comply with this statute, the Company is required to document and test its internal control over financial reporting, management is required to assess and issue a report concerning internal control over financial reporting, and the Company's independent registered public accounting firm is required to attest to and report on the Company's assessment of the effectiveness of internal control over financial reporting. Any failure to maintain or implement required new or improved controls could cause the Company to fail to meet its periodic reporting obligations or result in material misstatements in the consolidated financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If the Company cannot produce reliable financial reports, investors could lose confidence in the Company's reported financial information, the market price of the Company's common stock could decline significantly, and its business, financial condition, and reputation could be harmed.
Compliance with Securities Laws and Regulations; Conflict Minerals Reporting. The Company is required to comply with various securities laws and regulations, including but not limited to the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Dodd-Frank contains provisions, among others, designed to improve transparency and accountability concerning the supply chains of certain minerals originating from the Democratic Republic of Congo and adjoining countries that are believed to be benefiting armed groups ("Conflict Minerals"). While Dodd-Frank does not prohibit companies from using Conflict Minerals, the SEC mandates due diligence, disclosure and reporting requirements for companies for which Conflict Minerals are necessary to the functionality or production of a product. The Company's efforts to comply with Dodd-Frank and other evolving laws, regulations and standards could result in increased costs and expenses related to compliance and potential violations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
The Company's facilities provide adequate space for meeting its near-term production requirements. Significant principal properties of the Company and its majority-owned subsidiaries as of October 31, 2020 were as follows (properties, which are unencumbered, are owned by the Company except as noted):
| | | | | | | | | | | |
Location | | Description of Property | |
| | | |
SGK Brand Solutions: | | | |
Chennai, India | | Operating facility | (1) |
Cleckheaton, England | | Operating facility | (1) |
Dachnow, Poland | | Manufacturing | (1) |
East Butler, PA | | Manufacturing | (1) |
Goslar, Germany | | Manufacturing | (1) |
Grenzach-Wyhlen, Germany | | Manufacturing | |
Izmir, Turkey | | Manufacturing | |
Manchester, England | | Manufacturing | (1) |
Minneapolis, MN | | Operating facility | |
Mississauga, Canada | | Operating facility | (1) |
Mönchengladbach, Germany | | Manufacturing | (1) |
Novgorod, Russia | | Manufacturing | |
Penang, Malaysia | | Operating facility | |
Vreden, Germany | | Manufacturing and Operating facilities | |
Memorialization: | | | |
Pittsburgh, PA | | Manufacturing / Division Offices | |
Apopka, FL | | Manufacturing / Division Offices | |
Aurora, IN | | Manufacturing | |
Colorno, Italy | | Manufacturing | (1) |
Dallas, TX | | Distribution Hub | (1) |
Dandenong, Australia | | Manufacturing | (1) |
Elberton, GA | | Manufacturing | |
Fontana, CA | | Distribution Hub | (1) |
Harrisburg, PA | | Distribution Hub | (1) |
Hyde, England | | Manufacturing | (1) |
Indianapolis, IN | | Distribution Hub | (1) |
Monterrey, Mexico | | Manufacturing | (1) |
Richmond, IN | | Manufacturing | |
Searcy, AR | | Manufacturing | |
Stone Mountain, GA | | Distribution Hub | (1) |
Whittier, CA | | Manufacturing | (1) |
York, PA | | Manufacturing | |
Industrial Technologies: | | | |
Pittsburgh, PA | | Manufacturing / Division Offices | |
Cincinnati, OH | | Manufacturing / Distribution | |
Gothenburg, Sweden | | Manufacturing / Distribution | (1) |
Lima, Costa Rica | | Manufacturing | (1) |
Pewaukee, WI | | Manufacturing | (1) |
Wilsonville, OR | | Manufacturing | |
Corporate and Administrative Offices: | | | |
Pittsburgh, PA | | General Offices | |
Des Plaines, IL | | General Offices | |
(1)These properties are leased by the Company under operating lease arrangements.
ITEM 3. LEGAL PROCEEDINGS.
Matthews is subject to various legal proceedings and claims arising in the ordinary course of business. Management does not expect that the results of any of these legal proceedings will have a material adverse effect on Matthews' financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
OFFICERS AND EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following information is furnished with respect to officers and executive management as of October 31, 2020:
| | | | | | | | | | | | | | |
Name | | Age | | Positions with Registrant |
Joseph C. Bartolacci | | 60 | | President and Chief Executive Officer |
Gregory S. Babe | | 63 | | Chief Technology Officer |
Davor Brkovich | | 52 | | Head of IT and Chief Information Officer |
Marcy L. Campbell | | 57 | | Senior Vice President, Human Resources |
Brian J. Dunn | | 63 | | Executive Vice President, Strategy and Corporate Development |
Steven D. Gackenbach | | 57 | | Group President, Memorialization |
Gary R. Kohl | | 57 | | President, SGK Brand Solutions |
Robert M. Marsh | | 52 | | Vice President and Treasurer |
Steven F. Nicola | | 60 | | Chief Financial Officer and Secretary |
Brian D. Walters | | 51 | | Senior Vice President and General Counsel |
Joseph C. Bartolacci was appointed President and Chief Executive Officer effective October 2006.
Gregory S. Babe was appointed Chief Technology Officer effective November 2015. Prior thereto, he had been interim Executive Vice President, Global Information Technology and Integration since November 2014 when he joined the Company.
Davor Brkovich was appointed Head of IT and Chief Information Officer effective November 2019. Prior thereto, he had been interim Head of IT and Chief Information Officer since February 2019 and prior thereto he served as Director, Global IT Infrastructure since January 2017, when he joined the Company. Prior to joining the Company, he served as the Head of IT Operations at the Kraft Heinz Company since August 2015.
Marcy L. Campbell was appointed Senior Vice President, Human Resources effective February 2018. Prior thereto, Ms. Campbell served as Vice President, Human Resources since November 2014.
Brian J. Dunn was appointed Executive Vice President, Strategy and Corporate Development effective July 2014.
Steven D. Gackenbach was appointed Group President, Memorialization effective October 31, 2011.
Gary R. Kohl was appointed President, SGK Brand Solutions effective May 2017. Prior thereto, he served as Executive Vice President, SGK Global Business Development since December 2015 when he joined the Company. Prior to joining the Company, Mr. Kohl was the Group Senior Vice President of R. R. Donnelley & Sons Company.
Robert M. Marsh was appointed Vice President and Treasurer in February 2016. He served as Treasurer since December 2014 when he joined the Company.
Steven F. Nicola was appointed Chief Financial Officer and Secretary effective December 2003.
Brian D. Walters was appointed Senior Vice President and General Counsel effective February 2018. Prior thereto, Mr. Walters served as Vice President and General Counsel since February 2009.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information:
The authorized common stock of the Company consists of 70,000,000 shares of Class A Common Stock, $1.00 par value. At September 30, 2020, 31,831,571 shares were outstanding. The Company's Class A Common Stock is traded on the Nasdaq Global Select Market under the symbol "MATW".
The Company has a stock repurchase program. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions set forth in the Company's Restated Articles of Incorporation. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 538,736 shares remain available for repurchase as of September 30, 2020. All purchases of the Company's common stock during fiscal 2020 were part of this repurchase program.
The following table shows the monthly fiscal 2020 stock repurchase activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Weighted-average price paid per share | | Total number of shares purchased as part of a publicly announced plan | | Maximum number of shares that may yet be purchased under the plan |
October 2019 | | 9,800 | | | $ | 35.87 | | | 9,800 | | | 702,512 | |
November 2019 | | 38,425 | | | 35.02 | | | 38,425 | | | 664,087 | |
December 2019 | | 3,879 | | | 38.10 | | | 3,879 | | | 660,208 | |
January 2020 | | 750 | | | 37.04 | | | 750 | | | 659,458 | |
February 2020 | | — | | | — | | | — | | | 659,458 | |
March 2020 | | 20,000 | | | 23.91 | | | 20,000 | | | 639,458 | |
April 2020 | | — | | | — | | | — | | | 639,458 | |
May 2020 | | 486 | | 34.02 | | | 486 | | | 638,972 | |
June 2020 | | 236 | | 20.93 | | | 236 | | | 638,736 | |
July 2020 | | 45,000 | | | 18.80 | | | 45,000 | | | 593,736 | |
August 2020 | | — | | | — | | | — | | | 593,736 | |
September 2020 | | 55,000 | | | 22.00 | | | 55,000 | | | 538,736 | |
Total | | 173,576 | | | $ | 25.51 | | | 173,576 | | | |
Holders:
Based on records available to the Company, the number of record holders of the Company's common stock was 551 at October 31, 2020.
Securities Authorized for Issuance Under Equity Compensation Plans:
See Equity Compensation Plans in Item 12 "Security Ownership of Certain Beneficial Owners and Management."
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, (continued)
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN *
AMONG MATTHEWS INTERNATIONAL CORPORATION,
S&P 500 INDEX, RUSSELL 2000 VALUE INDEX, S&P MIDCAP 400 INDEX AND S&P SMALLCAP 600 INDEX
This graph compares the return on Matthews’ Common Stock with that of the Standard & Poor’s 500 Index, Russell 2000 Value Index, S&P MidCap 400 Index and S&P SmallCap 600 Index for the period from October 1, 2015 through September 30, 2020. The graph assumes that on October 1, 2015, $100 was invested in each of the Company’s Common Stock, Standard & Poor’s 500 Index, Russell 2000 Value Index, S&P MidCap 400 Index and S&P SmallCap 600 Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are invested in like securities.
The Russell 2000 Value Index replaces the S&P MidCap 400 Index and S&P SmallCap 600 Index, which were used as the industry market index in the Company’s 2019 Annual Report on Form 10-K. The Company believes that the Russell 2000 Value Index, which measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values, is a more appropriate industry market index because, among other reasons, it better reflects the price volatility that a share of Matthews International Corporation Common Stock experiences.
The following graph compares the total return on the Company’s Common Stock with that of the Standard & Poor’s 500 Index, the newly selected Russell 2000 Value Index, and each of the S&P MidCap 400 Index and S&P SmallCap 600 Index used in Matthews’ 2019 Annual Report on Form 10-K. The results are not necessarily indicative of future performance.
* Total return assumes dividend reinvestment
ITEM 6. SELECTED FINANCIAL DATA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2020(1) | | 2019(2) | | 2018(3) | | 2017(4) | | 2016(5) |
| (Amounts in thousands, except per share data) (Unaudited) |
Net sales | $ | 1,498,306 | | | $ | 1,537,276 | | | $ | 1,602,580 | | | $ | 1,515,608 | | | $ | 1,480,464 | |
| | | | | | | | | |
Operating (loss) profit | (64,193) | | | 10,303 | | | 138,557 | | | 121,376 | | | 127,228 | |
| | | | | | | | | |
Interest expense | 34,885 | | | 40,962 | | | 37,427 | | | 26,371 | | | 24,344 | |
| | | | | | | | | |
Net (loss) income attributable to Matthews shareholders | $ | (87,155) | | | $ | (37,988) | | | $ | 107,371 | | | $ | 74,368 | | | $ | 66,749 | |
| | | | | | | | | |
(Loss) earnings per common share: | | | | | | | | | |
Basic | $ | (2.79) | | | $ | (1.21) | | | $ | 3.39 | | | $ | 2.31 | | | $ | 2.04 | |
Diluted | (2.79) | | | (1.21) | | | 3.37 | | | 2.28 | | | 2.03 | |
| | | | | | | | | |
Weighted-average common shares outstanding: | | | | | | | | | |
Basic | 31,190 | | | 31,416 | | | 31,674 | | | 32,240 | | | 32,642 | |
Diluted | 31,190 | | | 31,416 | | | 31,861 | | | 32,570 | | | 32,904 | |
| | | | | | | | | |
Cash dividends per share | $ | 0.84 | | | $ | 0.80 | | | $ | 0.76 | | | $ | 0.68 | | | $ | 0.60 | |
| | | | | | | | | |
Total assets (6) | $ | 2,072,633 | | | $ | 2,190,603 | | | $ | 2,357,744 | | | $ | 2,244,649 | | | $ | 2,091,041 | |
Long-term debt, non-current (6) | 807,710 | | | 898,194 | | | 929,342 | | | 881,602 | | | 844,807 | |
(1)Fiscal 2020 included net pre-tax charges of $139,092, primarily related to a goodwill write-down, a legal matter reserve, non-recurring / incremental coronavirus disease 2019 ("COVID-19") costs, a gain on sale of ownership interests in a subsidiary, acquisition-related costs, and strategic cost-reduction initiatives. Charges of $138,556 and $536 impacted operating profit and other deductions, respectively.
(2)Fiscal 2019 included net pre-tax charges of $114,768, primarily related to a goodwill write-down, losses from cost-method investments, losses on divestitures, acquisition-related costs, strategic cost-reduction initiatives, and net gains from the sale of buildings and vacant properties. Charges of $111,069 and $3,699 impacted operating profit and other deductions, respectively.
(3)Fiscal 2018 included net pre-tax charges of $27,115 and income of $3,771, which impacted operating profit and other deductions, respectively. These pre-tax charges primarily consisted of acquisition-related costs, and strategic cost-reduction initiatives. The pre-tax income primarily consisted of gains recognized on the disposition of certain cost-method investments.
(4)Fiscal 2017 included net pre-tax charges of $38,458 and income of $10,483, which impacted operating profit and other deductions, respectively. These pre-tax charges primarily consisted of acquisition-related costs, and strategic cost-reduction initiatives. The pre-tax income primarily consisted of loss recoveries, net of related costs, related to the previously disclosed theft of funds by a former employee.
(5)Fiscal 2016 included net pre-tax charges of $36,057 and income of $78, which impacted operating profit and other deductions, respectively. These amounts primarily consisted of acquisition-related costs and strategic cost-reduction initiatives.
(6) Reporting periods prior to fiscal year 2020 were not revised to reflect the adoption of Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". Prior periods continue to be presented in accordance with previous lease accounting guidance under GAAP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated financial statements of Matthews and related notes thereto. In addition, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
The Company manages its businesses under three segments: SGK Brand Solutions, Memorialization and Industrial Technologies. The SGK Brand Solutions segment consists of brand management, pre-media services, printing plates and cylinders, engineered products, imaging services, digital asset management, merchandising display systems, and marketing and design services primarily for the consumer goods and retail industries. The Memorialization segment consists primarily of bronze and granite memorials and other memorialization products, caskets and cremation and incineration equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment includes marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.
The Company's primary measure of segment profitability is adjusted earnings before interest, income taxes, depreciation and amortization ("adjusted EBITDA"). Adjusted EBITDA is defined by the Company as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of its operating results. These items include stock-based compensation, the non-service portion of pension and postretirement expense, acquisition costs, ERP integration costs, and strategic initiatives and other charges. This presentation is consistent with how the Company's chief operating decision maker (the “CODM”) evaluates the results of operations and makes strategic decisions about the business. For these reasons, the Company believes that adjusted EBITDA represents the most relevant measure of segment profit and loss.
In addition, the CODM manages and evaluates the operating performance of the segments, as described above, on a pre-corporate cost allocation basis. Accordingly, for segment reporting purposes, the Company does not allocate corporate costs to its reportable segments. Corporate costs include management and administrative support to the Company, which consists of certain aspects of the Company’s executive management, legal, compliance, human resources, information technology (including operational support) and finance departments. These costs are included within "Corporate and Non-Operating" in the following table to reconcile to consolidated adjusted EBITDA and are not considered a separate reportable segment. Management does not allocate non-operating items such as investment income, other income (deductions), net and noncontrolling interest to the segments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The following table sets forth sales and adjusted EBITDA for the Company's SGK Brand Solutions, Memorialization and Industrial Technologies segments for each of the last three fiscal years. Refer to Note 19, "Segment Information" in Item 8 - "Financial Statements and Supplemental Data" for the Company's financial information by segment.
| | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2020 | | 2019 | | 2018 |
| (Dollar amounts in thousands) |
Sales to external customers: | | | | | |
SGK Brand Solutions | $ | 693,093 | | | $ | 743,869 | | | $ | 805,274 | |
Memorialization | 656,035 | | | 636,892 | | | 631,392 | |
Industrial Technologies | 149,178 | | | 156,515 | | | 165,914 | |
Consolidated Sales | $ | 1,498,306 | | | $ | 1,537,276 | | | $ | 1,602,580 | |
| | | | | |
Adjusted EBITDA: | | | | | |
SGK Brand Solutions | $ | 90,644 | | | $ | 119,493 | | | $ | 150,233 | |
Memorialization | 146,285 | | | 134,286 | | | 145,487 | |
Industrial Technologies | 22,753 | | | 24,082 | | | 25,864 | |
Corporate and Non-Operating | (56,602) | | | (56,989) | | | (66,470) | |
Total Adjusted EBITDA(1) | $ | 203,080 | | | $ | 220,872 | | | $ | 255,114 | |
(1) Total Adjusted EBITDA is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.
Comparison of Fiscal 2020 and Fiscal 2019:
Sales for the year ended September 30, 2020 were $1.50 billion, compared to $1.54 billion for the year ended September 30, 2019, representing a decrease of $39.0 million. The decrease in fiscal 2020 sales reflected lower sales in the SGK Brand Solutions and Industrial Technologies segments, partially offset by increased sales in the Memorialization segment. Changes in foreign currency rates were estimated to have an unfavorable impact of $6.9 million on fiscal 2020 consolidated sales compared to a year ago. Fiscal 2020 sales were unfavorably impacted by the global outbreak of COVID-19, which has caused some commercial impact and business disruptions in certain of the Company's segments and geographic locations. While substantially all of the Company's operations have remained open during the COVID-19 pandemic, management expects COVID-19 to continue to impact its sales and results of operations in the short-term until the pandemic subsides (see "Forward Looking Information" below).
In the SGK Brand Solutions segment, sales for fiscal 2020 were $693.1 million, compared to $743.9 million in fiscal 2019. The decrease primarily resulted from lower brand sales in the U.S. and the U.K., sales declines in the private label brand market, and lower sales of cylinders and surfaces products in Europe. These decreases were partially offset by increased revenues from purpose-built machinery projects and higher sales in the Asia-Pacific region. Changes in foreign currency exchange rates had an unfavorable impact of $5.9 million on the segment's sales compared to the prior year. Memorialization segment sales for fiscal 2020 were $656.0 million, compared to $636.9 million for fiscal 2019. The increase in sales primarily resulted from increased unit sales of caskets due to COVID-19, improved price realization on caskets and cemetery memorial products, and higher sales of cremation and incineration equipment. These increases were partially offset by lower unit sales of cemetery memorial products, which were impacted by COVID-19 related stay-at-home orders that limited families' access with cemeteries to arrange for their memorials. Changes in foreign currency exchange rates had an unfavorable impact of $615,000 on the segment's sales compared to the prior year. Industrial Technologies segment sales for fiscal 2020 were $149.2 million, compared to $156.5 million for fiscal 2019. The decrease primarily reflected lower sales of warehouse automation systems. Orders for warehouse automation solutions remained strong, but access to job sites to complete these projects has been restricted due to COVID-19. Changes in foreign currency exchange rates had an unfavorable impact of $356,000 on the segment's sales compared to the prior year.
Gross profit for the year ended September 30, 2020 was $497.8 million, compared to $542.5 million for fiscal 2019. Consolidated gross profit as a percent of sales was 33.2% and 35.3% in fiscal 2020 and fiscal 2019, respectively. The decrease in gross profit primarily reflected lower sales, unfavorable changes in product mix, ongoing price competition in the brand market, and unfavorable changes in margins for cylinders, surfaces and engineered products. These declines were partially offset by the realization of productivity improvements and cost-reduction initiatives. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling $12.4 million and $2.4 million in fiscal 2020 and 2019, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Selling and administrative expenses for the year ended September 30, 2020 were $400.0 million, compared to $408.8 million for fiscal 2019. Consolidated selling and administrative expenses as a percent of sales were 26.7% for fiscal 2020, compared to 26.6% in fiscal 2019. The decrease in selling and administrative expenses reflected the impact of lower sales in fiscal 2020, reduced travel and entertainment ("T&E") costs resulting from the COVID-19 pandemic, and benefits from ongoing cost-reduction initiatives, partially offset by increased performance-based compensation compared to fiscal 2019. Fiscal 2020 selling and administrative expenses included a $10.6 million charge for a legal matter involving a letter of credit for a customer in Saudi Arabia (see "Liquidity and Capital Resources" below). Fiscal 2019 selling and administrative expenses included $7.3 million of net gains from the sale of buildings and vacant properties. Selling and administrative expenses included an $11.2 million gain and $6.5 million of losses recognized on the sales of ownership interests in Memorialization businesses completed in fiscal 2020 and 2019, respectively. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling $31.5 million in fiscal 2020, compared to $30.5 million in fiscal 2019. Intangible amortization for the year ended September 30, 2020 was $71.5 million, compared to $45.8 million for fiscal 2019. The increase in intangible amortization primarily reflected $24.4 million of incremental amortization resulting from the fiscal 2019 reduction in useful lives for certain trade names that are being discontinued. The Company recorded goodwill write-downs within the SGK Brand Solutions segment totaling $90.4 million and $77.6 million for the years ended September 30, 2020 and 2019, respectively. Refer to Note 21, "Goodwill and Other Intangible Assets" in Item 8 - "Financial Statements and Supplementary Data" for further details.
Adjusted EBITDA for fiscal 2020 was $203.1 million, compared to $220.9 million for fiscal 2019. Adjusted EBITDA for the SGK Brand Solutions segment for fiscal 2020 was $90.6 million, compared to $119.5 million for fiscal 2019. The decrease in segment adjusted EBITDA primarily reflected the impact of lower sales, unfavorable changes in product mix, ongoing price competition, a decline in margins for cylinders, surfaces and engineered products, and increased performance-based compensation compared to fiscal 2019. Changes in foreign currency exchange rates had an unfavorable impact of $1.8 million on the segment's adjusted EBITDA compared to the prior year. These decreases in segment adjusted EBITDA were partially offset by benefits from cost-reduction initiatives, and reduced T&E costs resulting from COVID-19. Memorialization segment adjusted EBITDA for fiscal 2020 was $146.3 million, compared to $134.3 million for fiscal 2019. The increase in segment adjusted EBITDA primarily reflected the impact of higher sales, benefits from productivity initiatives and lower T&E costs, partially offset by increased performance-based compensation compared to fiscal 2019. Adjusted EBITDA for the Industrial Technologies segment for fiscal 2020 was $22.8 million, compared to $24.1 million in fiscal 2019. Industrial Technologies segment adjusted EBITDA primarily reflected the impact of lower sales, partially offset by benefits from cost-reduction initiatives and reduced T&E costs.
Investment income for the fiscal year ended September 30, 2020 was $2.0 million, compared to $1.5 million for the year ended September 30, 2019. The increase primarily reflected higher rates of return on investments (primarily marketable securities) held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2020 was $34.9 million, compared to $41.0 million in fiscal 2019. The decrease in interest expense reflected lower average interest rates and a decrease in average borrowing levels in the current fiscal year. Other income (deductions), net for the year ended September 30, 2020 represented a decrease in pre-tax income of $9.2 million, compared to a decrease in pre-tax income of $8.9 million in fiscal 2019. Other income (deductions), net includes banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. Other income (deductions), net also includes the non-service components of pension and postretirement expense, which totaled $7.8 million and $3.8 million in fiscal years 2020 and 2019, respectively. Fiscal 2019 other income (deductions), net also included a $3.7 million loss from the write-down of a cost-method investment and related assets.
The Company's consolidated income taxes for the year ended September 30, 2020 were a benefit of $18.7 million, compared to an expense of $806,000 for fiscal 2019. The difference between the Company's consolidated income taxes for fiscal 2020 versus fiscal 2019 primarily resulted from the fiscal 2020 consolidated loss before income taxes, which reflected the goodwill write-down recorded in the second quarter of fiscal 2020, which was partially non-deductible, as well as a benefit for an expected net operating loss (“NOL”) carryback. The NOL will be carried back five years allowing it to offset income that was previously taxed at a federal statutory tax rate of 35%. The Company’s fiscal 2020 effective tax rate was negatively affected by the non-deductible portion of the goodwill write-down along with certain other non-deductible expenses. The fiscal 2020 effective tax rate benefited from research and development and foreign tax credits, the reduction of uncertain tax positions due to the completion of a foreign tax audit, and the tax benefit of the NOL carryback. Refer to Note 16, “Income Taxes” in Item 8 - “Financial Statements and Supplementary Data” for further details regarding income taxes.
Net losses attributable to noncontrolling interests were $497,000 in fiscal 2020, compared to $901,000 in fiscal 2019. The net losses attributable to noncontrolling interests primarily reflected losses in less than wholly-owned businesses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Comparison of Fiscal 2019 and Fiscal 2018:
For a comparison of the Company's results of operations for the fiscal years ended September 30, 2019 and September 30, 2018, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" of the Company's annual report on Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC on November 22, 2019.
NON-GAAP FINANCIAL MEASURES:
Included in this report are measures of financial performance that are not defined by GAAP. The Company uses non-GAAP financial measures to assist in comparing its performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company’s core operations including acquisition costs, ERP integration costs, strategic initiative and other charges (which includes non-recurring charges related to operational initiatives and exit activities), stock-based compensation and the non-service portion of pension and postretirement expense. Management believes that presenting non-GAAP financial measures is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items that management believes do not directly reflect the Company's core operations, (ii) permits investors to view performance using the same tools that management uses to budget, forecast, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating the Company’s results. The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provided herein, provides investors with an additional understanding of the factors and trends affecting the Company’s business that could not be obtained absent these disclosures.
The Company believes that adjusted EBITDA provides relevant and useful information, which is used by the Company’s management in assessing the performance of its business. Adjusted EBITDA is defined by the Company as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of its operating results. These items include stock-based compensation, the non-service portion of pension and postretirement expense, acquisition costs, ERP integration costs, and strategic initiatives and other charges. Adjusted EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes, and the effects of certain acquisition and ERP integration costs, and items that do not reflect the ordinary earnings of the Company’s operations. This measure may be useful to an investor in evaluating operating performance. It is also useful as a financial measure for lenders and is used by the Company’s management to measure business performance. Adjusted EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of the Company's liquidity. The Company's definition of adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The reconciliation of net income to adjusted EBITDA is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended September 30, |
| 2020 | | 2019 | | 2018 |
| (Dollar amounts in thousands) |
Net (loss) income | $ | (87,652) | | | $ | (38,889) | | | $ | 107,111 | |
Income tax (benefit) provision | (18,685) | | | 806 | | | (9,118) | |
(Loss) income before income taxes | (106,337) | | | (38,083) | | | 97,993 | |
Net loss attributable to noncontrolling interests | 497 | | | 901 | | | 260 | |
Interest expense | 34,885 | | | 40,962 | | | 37,427 | |
Depreciation and amortization * | 119,058 | | | 90,793 | | | 76,974 | |
Acquisition costs (1)** | 3,844 | | | 10,872 | | | 10,918 | |
ERP integration costs (2)** | 2,296 | | | 7,508 | | | 10,864 | |
Strategic initiatives and other charges (3)** | 33,799 | | | 13,449 | | | 5,266 | |
Legal matter reserve (4) | 10,566 | | | — | | | — | |
Non-recurring / incremental COVID-19 costs (5) | 4,655 | | | — | | | — | |
Goodwill write-downs (6) | 90,408 | | | 77,572 | | | — | |
Net realized (gains) losses on divestitures and asset dispositions: | | | | | |
(Gain) loss on sale of ownership interests in subsidiaries (7) | (11,208) | | | 6,469 | | | — | |
Realized loss (gain) on cost-method investments (8) | — | | | 4,731 | | | (3,771) | |
Net gains from the sale of buildings and vacant properties (9) | — | | | (7,347) | | | — | |
Joint Venture depreciation, amortization, interest expense and other charges (10) | 4,732 | | | 1,514 | | | — | |
Stock-based compensation | 8,096 | | | 7,729 | | | 13,460 | |
Non-service pension and postretirement expense (11) | 7,789 | | | 3,802 | | | 5,723 | |
Total Adjusted EBITDA | $ | 203,080 | | | $ | 220,872 | | | $ | 255,114 | |
| | |
(1) Includes certain non-recurring costs associated with recent acquisition activities. |
(2) Represents costs associated with global ERP system integration efforts. |
(3) Includes certain non-recurring costs primarily associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels. |
(4) Represents a reserve established for a legal matter involving a letter of credit for a customer in Saudi Arabia within the Memorialization segment (see Note 9, "Long Term Debt" in Item 8 - “Financial Statements and Supplementary Data”). |
(5) Includes certain non-recurring direct incremental costs (such as costs for purchases of computer peripherals and devices to facilitate working-from-home, additional personal protective equipment and cleaning supplies and services, etc.) incurred in response to COVID-19. This amount does not include the impact of any lost sales or underutilization due to COVID-19. |
(6) Represents goodwill write-downs within the SGK Brand Solutions segment (see Note 21, "Goodwill and Other Intangible Assets" in Item 8 - “Financial Statements and Supplementary Data”). |
(7) Represents the (gain) loss on the sale of ownership interests in subsidiaries within the Memorialization segment. |
(8) Includes gains/losses related to cost-method investments, and related assets, within the SGK Brand Solutions and Memorialization segments. |
(9) Includes significant building and vacant property transactions resulting in a gain of $8.7 million within the Industrial Technologies segment and losses of $0.9 million and $0.4 million within the SGK Brand Solutions and Memorialization segments, respectively. |
(10) Represents the Company's portion of depreciation, intangible amortization, interest expense, and other non-recurring charges incurred by non-consolidated subsidiaries accounted for as equity-method investments within the Memorialization segment. |
(11) Non-service pension and postretirement expense includes interest cost, expected return on plan assets and amortization of actuarial gains and losses. These benefit cost components are excluded from adjusted EBITDA since they are primarily influenced by external market conditions that impact investment returns and interest (discount) rates. The service cost and prior service cost components of pension and postretirement expense are included in the calculation of adjusted EBITDA, since they are considered to be a better reflection of the ongoing service-related costs of providing these benefits. Please note that GAAP pension and postretirement expense or the adjustment above are not necessarily indicative of the current or future cash flow requirements related to these employee benefit plans. |
* Depreciation and amortization was $87.6 million, $59.7 million, and $46.3 million for the SGK Brand Solutions segment, $20.5 million, $19.7 million, and $20.0 million for the Memorialization segment, $5.8 million, $6.2 million, and $5.8 million for the Industrial Technologies segment, and $5.2 million, $5.2 million, and $4.9 million for Corporate and Non-Operating, for the fiscal years ended September 30, 2020, 2019, and 2018, respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $14.0 million, $8.9 million, and $11.0 million for the SGK Brand Solutions segment, $0.3 million, $3.1 million, and $0.6 million for the Industrial Technologies segment, and $23.0 million, $19.9 million, and $14.0 million for Corporate and Non-Operating, for the fiscal years ended September 30, 2020, 2019, and 2018, respectively. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $2.7 million, and $1.4 million for the Memorialization segment for the fiscal years ended September 30, 2020 and 2018, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was $180.4 million for the year ended September 30, 2020, compared to $131.1 million and $147.6 million for fiscal years 2019 and 2018, respectively. Operating cash flow for fiscal 2020 principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses related to goodwill and investments, and non-cash pension expense, and changes in working capital items. The favorable movements in working capital in fiscal 2020 primarily reflected enhanced accounts receivable collection efforts and effective management of trade accounts payable, as the Company has been focusing its efforts on cash management. The fiscal 2020 decrease in other assets reflects changes in operating leases assets. Operating cash flow for fiscal 2019 principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses related to goodwill and investments, net gains from the sale of buildings and other property, and non-cash pension expense, and changes in working capital items. Operating cash flow for fiscal 2018 principally included net income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net gains related to investments, and non-cash pension expense, and changes in working capital items. Fiscal 2018 operating cash flow also included cash contributions of $12.7 million to the Company's pension and other postretirement plans.
Cash used in investing activities was $2.7 million for the year ended September 30, 2020, compared to $60.8 million and $162.3 million for fiscal years 2019 and 2018, respectively. Investing activities for fiscal 2020 primarily reflected capital expenditures of $34.8 million, acquisition payments (net of cash acquired or received from sellers) of $1.0 million, proceeds of $42.2 million from the sale of an ownership interest in a pet cremation business, and investments and advances of $9.7 million. Investing activities for fiscal 2019 primarily reflected capital expenditures of $37.7 million, acquisition payments (net of cash acquired or received from sellers) of $11.5 million, proceeds of $13.3 million from the sale of assets, proceeds of $8.3 million from the sale of a controlling interest in a Memorialization business, and additional investments made in non-consolidated subsidiaries of $33.1 million. Investing activities for fiscal 2018 primarily reflected capital expenditures of $43.2 million, acquisition payments (net of cash acquired or received from sellers) of $121.1 million, proceeds of $9.2 million from the sale of certain cost-method investments, and cash payments of $11.9 million for purchases of investments.
Capital expenditures were $34.8 million for the year ended September 30, 2020, compared to $37.7 million and $43.2 million for fiscal years 2019 and 2018, respectively. Capital expenditures in each of the last three fiscal years reflected reinvestments in the Company's business segments and were made primarily for the purchase of new production machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital spending for property, plant and equipment has averaged $38.6 million for the last three fiscal years. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for fiscal 2021 is currently estimated to be approximately $40 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.
Cash used in financing activities for the year ended September 30, 2020 was $172.3 million, and principally reflected repayments, net of proceeds, on long-term debt of $126.3 million, purchases of treasury stock of $4.4 million, payment of dividends to the Company's shareholders of $26.4 million ($0.84 per share), $10.2 million of holdback and contingent consideration payments related to acquisitions from prior years, and payment of deferred financing fees of $2.0 million (see below). Cash used in financing activities for the year ended September 30, 2019 was $75.0 million, and principally reflected repayments, net of proceeds, on long-term debt of $16.0 million, purchases of treasury stock of $26.1 million, payment of dividends to the Company's shareholders of $25.6 million ($0.80 per share), and $4.4 million of holdback and contingent consideration payments related to a fiscal 2018 acquisition. Cash provided by financing activities for the year ended September 30, 2018 was $0.9 million, and primarily reflected proceeds, net of repayments on long-term debt of $53.0 million, purchases of treasury stock of $21.2 million, payment of dividends to the Company's shareholders of $24.6 million ($0.76 per share), and payment of deferred financing fees of $4.1 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company has a domestic credit facility with a syndicate of financial institutions that was amended and restated in March 2020. The amended and restated loan agreement includes a $750.0 million senior secured revolving credit facility, which matures in March 2025, and a $35.0 million senior secured amortizing term loan, which matures in July 2021. A portion of the revolving credit facility (not to exceed $350.0 million ) can be drawn in foreign currencies. The term loan requires scheduled quarterly principal payments through its maturity date. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.50% at September 30, 2020) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs of approximately $2.0 million in connection with the amended and restated agreement, which was deferred and is being amortized over the term of the facility.
The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $35.0 million) is available for the issuance of trade and standby letters of credit. Outstanding U.S. dollar denominated borrowings on the revolving credit facility at September 30, 2020 and 2019 were $257.4 million and $325.6 million, respectively. Outstanding Euro denominated borrowings on the revolving credit facility at September 30, 2020 and 2019 were €117.0 million ($137.2 million) and €125.0 million ($136.5 million), respectively. Outstanding borrowings on the term loan at September 30, 2020 and 2019 were $22.4 million and $53.5 million, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) at September 30, 2020 and 2019 was 2.41% and 2.65%, respectively.
The Company has $300.0 million 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 2025 Senior Notes. Unamortized costs were $2.7 million and $3.3 million at September 30, 2020 and 2019, respectively.
The Company has a $115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions. The Securitization Facility, which had a maturity date of April 2020, was amended in March 2020 to extend the maturity date until 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 September 30, 2020 and 2019 were $67.7 million and $94.0 million, respectively. The interest rate on borrowings under this facility at September 30, 2020 and 2019 was 0.90% and 2.77%, respectively.
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | September 30, 2019 |
| | (Dollar amounts in thousands) |
Pay fixed swaps - notional amount | | $ | 312,500 | | | $ | 293,750 | |
Net unrealized loss | | $ | (7,792) | | | $ | (534) | |
Weighted-average maturity period (years) | | 2.6 | | 1.9 |
Weighted-average received rate | | 0.15 | % | | 2.02 | % |
Weighted-average pay rate | | 1.34 | % | | 1.41 | % |
The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The fair value of the interest rate swaps reflected an unrealized loss of $7.8 million ($5.9 million after tax) and an unrealized loss net of unrealized gains of $534,000 ($403,000 after tax) at September 30, 2020 and 2019, respectively, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates at September 30, 2020, a loss (net of tax) of approximately $2.4 million included in AOCI is expected to be recognized in earnings over the next twelve months.
The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews. The maximum amount of borrowings available under this facility is €35.0 million ($41.0 million). The credit facility matures in December 2020 and the Company intends to extend this facility. Outstanding borrowings under the credit facility totaled €18.9 million ($22.2 million) and €12.8 million ($14.0 million) at September 30, 2020 and 2019, respectively. The weighted-average interest rate on outstanding borrowings under this facility at September 30, 2020 and 2019 was 1.25%.
The Company’s German subsidiary, Matthews Europe GmbH, had €15.0 million ($16.4 million at September 30, 2019) of senior unsecured notes with European banks. The notes matured in November 2019 at which point they were paid. The weighted-average interest rate on the notes at September 30, 2019 was 1.40%.
Finance lease liabilities included as a component of debt totaled $9.7 million and $3.6 million at September 30, 2020 and 2019, respectively. See Note 10, "Leases" in Item 8 - “Financial Statements and Supplementary Data” for further discussion on the Company's lease obligations. Other borrowings totaled $20.7 million and $395,000 at September 30, 2020 and 2019, respectively. The weighted-average interest rate on other borrowings was 2.10% and 2.17% at September 30, 2020 and 2019, respectively. The Company was in compliance with all of its debt covenants as of September 30, 2020.
The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of $4.4 million (net of income taxes of $1.4 million) and currency gains of $3.3 million (net of income taxes of $1.1 million), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at September 30, 2020 and 2019, respectively.
In September 2014, a claim was filed by a customer seeking to draw upon a letter of credit issued by the Company of £8.6 million ($11.0 million at September 30, 2020) with respect to a performance guarantee on an incineration equipment project in Saudi Arabia. Management assessed the customer's demand to be without merit and initiated an action with the court in the United Kingdom (the "U.K. Court"). Pursuant to this action, an order was issued by the U.K. Court in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the U.K. Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the U.K. Court as ordered. On June 14, 2016, the U.K. Court ruled completely in favor of Matthews following a trial on the merits. However, the ongoing dispute involves litigation in multiple foreign jurisdictions because the contract between the parties includes a venue clause requiring the venue for any litigation to be in the United Kingdom, while the enforcement of any final judgment is required to be executed in Saudi Arabia. The Company continues to pursue a trial on the merits in Saudi Arabia; however, given the recent COVID-19 pandemic, the case has been further delayed. As the Company has successfully completed the project and subsequently operated the equipment, the Company remains confident regarding the pending trial on the merits in Saudi Arabia and expects to be in a position to enforce the judgment and initiate collection efforts following completion of that trial. However, the Company’s level of success in recovering funds from the customer will depend upon several factors including a successful completion of the pending trial on the merits in Saudi Arabia, the availability of recoverable funds, and the subsequent level of support of the Saudi Arabian government to enforce a potential judgment against the customer.
During the third quarter of fiscal 2020, the Saudi Arabian government implemented restrictions on travel to Mecca due to the COVID-19 pandemic. As a result, the Company was not able to support the operation of the incineration equipment for the local agency responsible for its operation during the current year Hajj Pilgrimage. Consequently, as of the filing of this report, the Company is now concerned regarding the level of anticipated support from the government in its collection efforts. Therefore, when considered collectively with the potential delay in completing the trial and other collectability risks, the Company established a reserve for the full value of the funded letter of credit as of June 30, 2020. The funded letter of credit was previously classified within other assets on the Consolidated Balance Sheet as of September 30, 2019. The Company will continue to assess the accounting and collectability related to this matter as facts and circumstances evolve.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 538,736 shares remain available for repurchase as of September 30, 2020. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions set forth in the Company's Restated Articles of Incorporation.
The Company utilized certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (commonly referred to as the CARES Act) and other similar economic relief initiatives that were enacted in response to COVID-19. Under the CARES Act, the Company elected to defer payments for certain taxes, primarily U.S. payroll taxes, which were $8.4 million for fiscal 2020.
Consolidated working capital was $258.7 million at September 30, 2020, compared to $303.8 million at September 30, 2019. Cash and cash equivalents were $41.3 million at September 30, 2020, compared to $35.3 million at September 30, 2019. The Company's current ratio was 1.8 and 2.1 at September 30, 2020 and 2019, respectively.
ACQUISITIONS AND DIVESTITURES:
Refer to Note 20, "Acquisitions and Divestitures" in Item 8 - "Financial Statements and Supplementary Data," for further details on the Company's acquisitions.
FORWARD-LOOKING INFORMATION:
The Company's current strategy to attain annual operating growth primarily consists of the following: internal growth - which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products - and acquisitions and related integration activities to achieve synergy benefits.
The significant factors (excluding acquisitions) influencing sales growth in the SGK Brand Solutions segment are global economic conditions, brand innovation, the level of marketing spending by the Company's clients, and government regulation. Due to the global footprint of this segment, currency fluctuations can also be a significant factor. For the Memorialization segment, North America death rates, the cremation trend, and price realization impact sales growth for the Company's bronze and granite memorials, caskets and cremation and incineration-related products. For the Industrial Technologies segment, sales growth drivers include economic/industrial market conditions, new product development, and the e-commerce trend.
During fiscal 2019, the Company initiated a strategic evaluation to improve profitability and reduce the Company's cost structure. These actions leveraged the benefit of the Company's new global ERP platform, primarily targeted at the SGK Brand Solutions segment, both operational and commercial structure, and the Company's shared financial services and other administrative functions. This evaluation identified opportunities for significant cost structure improvements, which the Company expects to achieve through fiscal 2022. The Company's recent strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment, including the consolidation of several of the segment's trade names. As a result, the amortization of these intangible assets will significantly increase for fiscal 2020 through fiscal 2022.
On January 30, 2020, the World Health Organization declared an outbreak of COVID-19 to be a Public Health Emergency of International Concern, and subsequently recognized COVID-19 as a global pandemic on March 11, 2020. Widespread efforts have been deployed by multiple countries around the world to prevent the virus from spreading, including temporary closures of non-essential businesses, event cancellations, travel restrictions, quarantines, and other disruptive actions. Substantially all of the Company’s operations have remained open during the COVID-19 pandemic, as they have been considered “essential” businesses during this time. However, the Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19.
Considerable judgement is necessary to assess and predict the potential financial impacts of COVID-19 on the Company’s future operating results. Management expects that each of its business segments will experience some level of sales impacts in the short-term, potentially due to customer business disruptions, facilities shut-downs, weaker global economic conditions, and possible customer project delays. Longer-term financial impacts will depend on global economic conditions eventually resulting from COVID-19. Management expects each of its businesses to experience increased financial volatility in the short-term, but currently anticipates its core businesses will return to a more normalized future state once the COVID-19 pandemic subsides.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
CRITICAL ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Annual Report on Form 10-K.
The Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition. The following accounting policies involve significant estimates, which were considered critical to the preparation of the Company's consolidated financial statements for the year ended September 30, 2020.
Long-Lived Assets, including Property, Plant and Equipment:
Long-lived assets are recorded at their respective cost basis on the date of acquisition. Depreciation on property, plant and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Intangible assets with finite useful lives are amortized over their estimated useful lives. The Company reviews long-lived assets, including property, plant and equipment, and intangibles with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets is determined by evaluating the estimated undiscounted net cash flows of the operations to which the assets relate. An impairment loss would be recognized when the carrying amount of the assets exceeds the fair value, which is based on a discounted cash flow analysis. No such charges were recognized during the years presented.
Goodwill and Indefinite-Lived Intangibles:
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested annually for impairment, or when circumstances indicate that a possible impairment may exist. In general, when the carrying value of these assets exceeds the implied fair value, an impairment loss must be recognized. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. For purposes of testing goodwill for impairment, the Company uses a combination of valuation techniques, including discounted cash flows and other market indicators. A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rates. The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections. The discount rates used in the discounted cash flow analyses are developed with the assistance of valuation experts and management believes the discount rates appropriately reflect the risks associated with the Company's operating cash flows. In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization is performed using a reasonable control premium.
The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2020 (January 1, 2020) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values. The estimated fair values for two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) exceeded their carrying values (expressed as a percentage of carrying value) by less than 10% as of January 1, 2020.
In its assessment of the potential impacts of COVID-19 on the estimated future earnings and cash flows for the SGK Brand Solutions segment, and in light of the limited excess fair values for its two reporting units (discussed above), management determined that COVID-19 represented a triggering event, resulting in a re-evaluation of the goodwill for its reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products), as of March 31, 2020. As a result of this interim assessment, the Company recorded a goodwill write-down totaling $90.4 million during the fiscal 2020 second quarter. Subsequent to this write-down, the fair values of the two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) approximated their carrying values at March 31, 2020. The fair values for these reporting units were determined using level 3 inputs (including estimates of revenue
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
growth, EBITDA contribution and the discount rates) and a combination of the income approach using the estimated discounted cash flows and a market-based valuation methodology. If current projections are not achieved or specific valuation factors outside the Company’s control (such as discount rates and continued economic and industry impacts of COVID-19) significantly change, additional goodwill write-downs may be necessary in future periods.
During the fourth quarter of fiscal 2019, the Company initiated an in-depth review of the commercial and cost structure of the SGK Brand Solutions segment as a result of continued challenging market conditions affecting the segment. This review identified certain opportunities to improve the segment’s profitability and reduce its operating cost structure and, as a result, the Company revised its estimates of future earnings and cash flows for the Graphics Imaging reporting unit. In response to these revised projections, the Company re-evaluated the goodwill for the Graphics Imaging reporting unit, as of September 1, 2019. As a result of this interim assessment, the Company recorded a goodwill write-down of $77.6 million during the fiscal 2019 fourth quarter.
Pension and Postretirement Benefits:
Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost.
The Company's principal pension plan maintains a substantial portion of its assets in equity securities in accordance with the investment policy established by the Company's pension board. Based on an analysis of the historical performance of the plan's assets and information provided by its independent investment advisor, the Company set the long-term rate of return assumption for these assets at 6.75% at September 30, 2019 for purposes of determining fiscal 2020 pension cost. The Company's discount rate assumption used in determining the present value of the projected benefit obligation is based upon published indices as of September 30, 2020 and September 30, 2019 for the fiscal year end valuation. The discount rate was 2.62%, 3.13% and 4.21% in fiscal 2020, 2019 and 2018, respectively. Refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Annual Report on Form 10-K, for disclosure about the hypothetical impact of changes in actuarial assumptions.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries since they have either been previously taxed, or are now exempt from tax, under the U.S. Tax Cuts and Jobs Act, and such earnings are considered to be reinvested indefinitely in foreign operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at September 30, 2020, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due in fiscal year: |
| Total | | 2021(1) | | 2022 to 2023 | | 2024 to 2025 | | After 2025 |
Contractual Cash Obligations: | (Dollar amounts in thousands) |
Revolving credit facilities | $ | 416,793 | | | $ | 22,166 | | | $ | — | | | $ | 394,627 | | | $ | — | |
Securitization facility | 67,700 | | | — | | | 67,700 | | | — | | | — | |
Senior secured term loan | 22,359 | | | 22,359 | | | — | | | — | | | — | |
2025 Senior Notes | 383,881 | | | 15,750 | | | 31,500 | | | 31,500 | | | 305,131 | |
| | | | | | | | | |
| | | | | | | | | |
Finance lease obligations (2) | 10,514 | | | 3,847 | | | 4,045 | | | 869 | | | 1,753 | |
Non-cancelable operating leases (2) | 77,161 | | | 25,804 | | | 31,912 | | | 14,221 | | | 5,224 | |
Other | 27,338 | | | 13,970 | | | 5,594 | | | 2,168 | | | 5,606 | |
Total contractual cash obligations | $ | 1,005,746 | | | $ | 103,896 | | | $ | 140,751 | | | $ | 443,385 | | | $ | 317,714 | |
(1)The Company maintains certain debt facilities with current maturity dates in fiscal 2021 that it intends and has the ability to extend beyond fiscal 2021 totaling $32.3 million. These balances have been classified as non-current on the Company's Consolidated Balance Sheet.
(2)Lease obligations have not been discounted to their present value.
A significant portion of the loans included in the table above bear interest at variable rates. At September 30, 2020, the weighted-average interest rate was 2.41% on the Company's domestic credit facility, 0.90% on the Company's Securitization Facility, 1.25% on the credit facility through the Company's European subsidiaries, and 2.10% on other outstanding borrowings.
Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company's operating cash. In response to COVID-19, the federal government passed a modified relief bill, which provides additional funding measures associated with IRS regulations. In accordance with this bill, the Company was not required to make contributions to its principal retirement plan in fiscal 2020. However, the Company contributed 668,000 shares of its Class A Common Stock to its principal retirement plan during the fourth quarter of fiscal 2020. The shares had a market value of approximately $15.0 million at the time of the contribution.
The Company is required to make cash contributions of approximately $4.2 million to its principal retirement plan in fiscal 2021. The Company estimates that benefit payments to participants under its retirement plans (including its supplemental retirement plan) and postretirement benefit payments will be approximately $11.4 million and $831,000, respectively, in fiscal 2021. The amounts are expected to increase incrementally each year thereafter, to $14.3 million and $931,000, respectively, in 2025. The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.
Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities. If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary. As of September 30, 2020, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $10.5 million. The timing of potential future payments related to the unrecognized tax benefits is not presently determinable. The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.
INFLATION:
Except for the volatility in the cost of bronze ingot, steel, wood, granite and fuel (see "Results of Operations"), inflation has not had a material impact on the Company over the past three years nor is it anticipated to have a material impact for the foreseeable future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Refer to Note 3, "Accounting Pronouncements" in Item 8 - "Financial Statements and Supplementary Data," for further details on recently issued accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The following discussion about the Company's market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company has market risk related to changes in interest rates, commodity prices and foreign currency exchange rates. The Company does not generally use derivative financial instruments in connection with these market risks, except as noted below.
Interest Rates - The Company's most significant long-term instrument is the domestic credit facility, which bears interest at variable rates based on LIBOR (Euro-LIBOR for balances drawn in Euros).
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | September 30, 2019 |
| | (Dollar amounts in thousands) |
Pay fixed swaps - notional amount | | $ | 312,500 | | | $ | 293,750 | |
Net unrealized loss | | $ | (7,792) | | | $ | (534) | |
Weighted-average maturity period (years) | | 2.6 | | 1.9 |
Weighted-average received rate | | 0.15 | % | | 2.02 | % |
Weighted-average pay rate | | 1.34 | % | | 1.41 | % |
The interest rate swaps have been designated as cash flow hedges of the future variable interest payments which are considered probable of occurring. Based on the Company's assessment, all 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 $7.8 million ($5.9 million after-tax) at September 30, 2020 that is included in equity as part of AOCI. A decrease of 10% in market interest rates (e.g., a decrease from 5.0% to 4.5%) would result in a decrease of approximately $1.0 million in the fair value of the interest rate swaps.
Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel, granite, fuel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available. In addition, based on competitive market conditions and to the extent that the Company has established pricing terms with customers through contracts or similar arrangements, the Company's ability to immediately increase the price of its products to offset the increased costs may be limited.
Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, primarily including the Euro, British Pound, Canadian Dollar, and Australian Dollar in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries. An adverse change (strengthening U.S. dollar) of 10% in exchange rates would have resulted in a decrease in reported sales of $49.1 million and a decrease in reported operating income of $5.6 million for the year ended September 30, 2020.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, (continued)
Actuarial Assumptions - The most significant actuarial assumptions affecting pension expense and pension obligations include the valuation of retirement plan assets, the discount rates and the estimated return on plan assets. The estimated return on plan assets is currently based upon projections provided by the Company's independent investment advisor, considering the investment policy of the plan and the plan's asset allocation. The fair value of plan assets and discount rates are "point-in-time" measures, and volatility of the debt and equity markets makes estimating future changes in fair value of plan assets and discount rates challenging. The Company elected to value its principal retirement and other postretirement benefit plan liabilities using a modified assumption of future mortality that reflects a significant improvement in life expectancy over the previous mortality assumptions. Refer to Note 14, "Pension and Other Postretirement Plans" in Item 8 – "Financial Statements and Supplementary Data" for additional information.
The following table summarizes the impact on the September 30, 2020 actuarial valuations of changes in the primary assumptions affecting the Company's retirement plans and supplemental retirement plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impact of Changes in Actuarial Assumptions |
| Change in Discount Rates | | Change in Expected Return | | Change in Market Value of Assets |
| +1% | | -1% | | +1% | | -1% | | +5% | | -5% |
| (Dollar amounts in thousands) |
(Decrease) increase in net benefit cost | $ | (5,098) | | | $ | 6,250 | | | $ | (1,638) | | | $ | 1,638 | | | $ | (1,717) | | | $ | 1,717 | |
| | | | | | | | | | | |
(Decrease) increase in projected benefit obligation | (40,284) | | | 50,506 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Increase (decrease) in funded status | 40,284 | | | (50,506) | | | — | | | — | | | 8,407 | | | (8,407) | |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| | | | | | | | |
Description | | Pages |
| | |
Management's Report to Shareholders | | |
| | |
Report of Independent Registered Public Accounting Firm | | |
| | |
Report of Independent Registered Public Accounting Firm | | |
| | |
Financial Statements: | | |
| | |
Consolidated Balance Sheets as of September 30, 2020 and 2019 | | |
| | |
Consolidated Statements of Income for the years ended September 30, 2020, 2019 and 2018 | | |
| | |
Consolidated Statements of Comprehensive Income for the years ended September 30, 2020, 2019 and 2018 | | |
| | |
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2020, 2019 and 2018 | | |
| | |
Consolidated Statements of Cash Flows for the years ended September 30, 2020, 2019 and 2018 | | |
| | |
Notes to Consolidated Financial Statements | | |
| | |
Supplementary Financial Information (unaudited) | | |
| | |
Financial Statement Schedule – Schedule II-Valuation and Qualifying | | |
Accounts for the years ended September 30, 2020, 2019 and 2018 | | |
MANAGEMENT'S REPORT TO SHAREHOLDERS
To the Shareholders and the Board of Directors of
Matthews International Corporation and Subsidiaries
Management's Report on Financial Statements
The accompanying consolidated financial statements of Matthews International Corporation and its subsidiaries (collectively, the "Company") were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. The other financial information included in this Annual Report on Form 10-K is consistent with that in the financial statements.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15f. In order to evaluate the effectiveness of internal control over financial reporting management has conducted an assessment using the criteria in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Internal controls over financial reporting is a process under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting based on criteria in Internal Control – Integrated Framework (2013) issued by the COSO, and has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2020. The effectiveness of the Company's internal control over financial reporting as of September 30, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Management's Certifications
The certifications of the Company's Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act have been included as Exhibits 31 and 32 in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Matthews International Corporation and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Matthews International Corporation and Subsidiaries’ internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Matthews International Corporation and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated November 20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
November 20, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Matthews International Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Matthews International Corporation and Subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 20, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 3 to the consolidated financial statements, effective October 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Valuation of Graphics Imaging Reporting Unit Goodwill |
Description of the Matter | | As more fully described in Note 21 to the consolidated financial statements, during 2020, the Company recorded a $29.9 million goodwill impairment charge attributable to its Graphics Imaging (Graphics) reporting unit within the Company’s SGK Brand Solutions segment. The continuation of challenging market conditions affecting Graphics, combined with the impact of the COVID-19 pandemic and adverse foreign currency trends, unfavorably impacted the financial results and forecasts for this reporting unit. Because of these challenging market conditions, as of March 31, 2020, the Company evaluated the goodwill attributable to this reporting unit, determining that the reporting unit’s carrying value exceeded its estimated fair value and, therefore, goodwill was impaired. Significant assumptions used in the Company’s fair value estimate included revenue growth, operating profit margin, market participant assumptions, and the discount rate.
Auditing the goodwill impairment charge was complex, as it included estimating the fair value of the reporting unit. In particular, the fair value estimates are sensitive to the significant assumptions named above, which are affected by expected future market or economic conditions.
|
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s goodwill impairment review process. These controls include management’s assessment of indicators of impairment, management's review of the assumptions utilized to develop the estimate, and management’s verification of the completeness and accuracy of the underlying data utilized to project future operating results for the reporting unit.
To test the fair value of the reporting unit, our audit procedures included, among others, involving our valuation specialists to assist in assessing the valuation methodologies utilized by the Company and its valuation expert and testing the significant assumptions and underlying data used by the Company. We compared the significant assumptions used by management to current industry and economic trends, changes in the Company’s business model, and other relevant factors. We also assessed the historical accuracy of management’s estimates. We performed sensitivity analyses of significant assumptions to evaluate the sensitivity of the fair value of the reporting unit resulting from changes in key assumptions. We reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and assessed the resulting control premium. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Pittsburgh, Pennsylvania
November 20, 2020
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | |
ASSETS | 2020 | | 2019 |
Current assets: | | | |
Cash and cash equivalents | $ | 41,334 | | | $ | 35,302 | |
Accounts receivable, net of allowance for doubtful accounts of $9,618 and $10,846, respectively | 295,185 | | | 318,756 | |
Inventories | 175,100 | | | 180,274 | |
Other current assets | 63,954 | | | 49,384 | |
| | | |
Total current assets | 575,573 | | | 583,716 | |
| | | |
Investments | 63,250 | | | 85,501 | |
| | | |
Property, plant and equipment, net | 236,788 | | | 237,442 | |
| | | |
Deferred income taxes | 3,757 | | | 5,032 | |
| | | |
Other assets | 94,379 | | | 31,455 | |
| | | |
Goodwill | 765,388 | | | 846,807 | |
| | | |
Other intangible assets, net | 333,498 | | | 400,650 | |
| | | |
Total assets | $ | 2,072,633 | | | $ | 2,190,603 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
September 30, 2020 and 2019
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | 2020 | | 2019 |
Current liabilities: | | | |
Long-term debt, current maturities | $ | 26,824 | | | $ | 42,503 | |
Trade accounts payable | 82,921 | | | 74,558 | |
Accrued compensation | 58,058 | | | 42,545 | |
Accrued income taxes | 3,612 | | | 5,997 | |
Other current liabilities | 145,453 | | | 114,276 | |
Total current liabilities | 316,868 | | | 279,879 | |
| | | |
Long-term debt | 807,710 | | | 898,194 | |
| | | |
Accrued pension | 149,848 | | | 133,762 | |
| | | |
Postretirement benefits | 18,600 | | | 19,963 | |
| | | |
Deferred income taxes | 78,911 | | | 102,482 | |
| | | |
Other liabilities | 89,263 | | | 37,087 | |
Total liabilities | 1,461,200 | | | 1,471,367 | |
| | | |
Shareholders' equity-Matthews: | | | |
Class A common stock, $1.00 par value; authorized 70,000,000 shares; 36,333,992 shares issued | 36,334 | | | 36,334 | |
Preferred stock, $100 par value, authorized 10,000 shares, none issued | — | | | — | |
Additional paid-in capital | 135,187 | | | 137,774 | |
Retained earnings | 859,002 | | | 972,594 | |
Accumulated other comprehensive loss | (240,719) | | | (228,361) | |
Treasury stock, 4,502,420 and 4,985,508 shares, respectively, at cost | (178,997) | | | (200,235) | |
Total shareholders' equity-Matthews | 610,807 | | | 718,106 | |
Noncontrolling interests | 626 | | | 1,130 | |
Total shareholders' equity | 611,433 | | | 719,236 | |
| | | |
Total liabilities and shareholders' equity | $ | 2,072,633 | | | $ | 2,190,603 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 2020, 2019 and 2018
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Sales | $ | 1,498,306 | | | $ | 1,537,276 | | | $ | 1,602,580 | |
Cost of sales | (1,000,537) | | | (994,810) | | | (1,018,359) | |
| | | | | |
Gross profit | 497,769 | | | 542,466 | | | 584,221 | |
| | | | | |
Selling expense | (125,117) | | | (133,368) | | | (141,570) | |
Administrative expense | (274,923) | | | (275,467) | | | (272,532) | |
Intangible amortization | (71,514) | | | (45,756) | | | (31,562) | |
Goodwill write-downs | (90,408) | | | (77,572) | | | — | |
| | | | | |
Operating (loss) profit | (64,193) | | | 10,303 | | | 138,557 | |
| | | | | |
Investment income | 1,962 | | | 1,494 | | | 1,570 | |
Interest expense | (34,885) | | | (40,962) | | | (37,427) | |
Other income (deductions), net | (9,221) | | | (8,918) | | | (4,707) | |
| | | | | |
(Loss) income before income taxes | (106,337) | | | (38,083) | | | 97,993 | |
| | | | | |
Income tax benefit (provision) | 18,685 | | | (806) | | | 9,118 | |
| | | | | |
Net (loss) income | (87,652) | | | (38,889) | | | 107,111 | |
| | | | | |
Net loss attributable to noncontrolling interests | 497 | | | 901 | | | 260 | |
| | | | | |
Net (loss) income attributable to Matthews shareholders | $ | (87,155) | | | $ | (37,988) | | | $ | 107,371 | |
| | | | | |
(Loss) earnings per share attributable to Matthews shareholders: | | | | | |
| | | | | |
Basic | $ | (2.79) | | | $ | (1.21) | | | $ | 3.39 | |
| | | | | |
Diluted | $ | (2.79) | | | $ | (1.21) | | | $ | 3.37 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the years ended September 30, 2020, 2019 and 2018
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, 2020 |
| Matthews | | Noncontrolling Interest | | Total |
Net loss | $ | (87,155) | | | $ | (497) | | | $ | (87,652) | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation adjustment | 4,333 | | | (7) | | | 4,326 | |
Pension plans and other postretirement benefits | (11,211) | | | — | | | (11,211) | |
Unrecognized (loss) gain on derivatives: | | | | | |
Net change from periodic revaluation | (6,130) | | | — | | | (6,130) | |
Net amount reclassified to earnings | 650 | | | — | | | 650 | |
Net change in unrecognized loss on derivatives | (5,480) | | | — | | | (5,480) | |
Other comprehensive loss, net of tax | (12,358) | | | (7) | | | (12,365) | |
Comprehensive loss | $ | (99,513) | | | $ | (504) | | | $ | (100,017) | |
| | | | | |
| Year Ended September 30, 2019 |
| Matthews | | Noncontrolling Interest | | Total |
| | | | | |
Net loss | $ | (37,988) | | | $ | (901) | | | $ | (38,889) | |
Other comprehensive loss, net of tax: | | | | | |
Foreign currency translation adjustment | (21,254) | | | (92) | | | (21,346) | |
Pension plans and other postretirement benefits | (33,867) | | | — | | | (33,867) | |
Unrecognized loss on derivatives: | | | | | |
Net change from periodic revaluation | (6,540) | | | — | | | (6,540) | |
Net amount reclassified to earnings | (2,402) | | | — | | | (2,402) | |
Net change in unrecognized loss on derivatives | (8,942) | | | — | | | (8,942) | |
Other comprehensive loss, net of tax | (64,063) | | | (92) | | | (64,155) | |
Comprehensive loss | $ | (102,051) | | | $ | (993) | | | $ | (103,044) | |
| | | | | |
| Year Ended September 30, 2018 |
| Matthews | | Noncontrolling Interest | | Total |
| | | | | |
Net income (loss) | $ | 107,371 | | | $ | (260) | | | $ | 107,111 | |
Other comprehensive (loss) income, net of tax: | | | | | |
Foreign currency translation adjustment | (22,053) | | | 71 | | | (21,982) | |
Pension plans and other postretirement benefits | 15,631 | | | — | | | 15,631 | |
Unrecognized gain (loss) on derivatives: | | | | | |
Net change from periodic revaluation | 6,095 | | | — | | | 6,095 | |
Net amount reclassified to earnings | (1,042) | | | — | | | (1,042) | |
Net change in unrecognized gain (loss) on derivatives | |