CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS AND NON-GAAPFINANCIAL MEASURES:
The following discussion should be read in conjunction with the consolidatedfinancial statements of Matthews International Corporation ("Matthews" or the"Company") and related notes thereto included in this Quarterly Report on Form10-Q and the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021.Any forward-looking statements contained herein areincluded pursuant to the "safe harbor" provisions of the Private SecuritiesLitigation Reform Act of 1995.Such forward-looking statements involve knownand unknown risks and uncertainties that may cause the Company's actual resultsin future periods to be materially different from management's expectations.Although the Company believes that the expectations reflected in suchforward-looking statements are reasonable, no assurance can be given that suchexpectations will prove correct.Factors that could cause the Company's resultsto differ materially from the results discussed in such forward-lookingstatements principally include changes in domestic or international economicconditions, changes in foreign currency exchange rates, changes in the cost ofmaterials used in the manufacture of the Company's products, changes inmortality and cremation rates, changes in product demand or pricing as a resultof consolidation in the industries in which the Company operates, or otherfactors such as supply chain disruptions, labor shortages or labor costincreases, changes in product demand or pricing as a result of domestic orinternational competitive pressures, ability to achieve cost-reductionobjectives, 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 factorsbeyond the Company's control, impact of pandemics or similar outbreaks, or otherdisruptions to our industries, customers or supply chains, and other factorsdescribed in Item 1A - "Risk Factors" in this Form 10-Q and Item 1A - "RiskFactors" in the Company's Form 10-K for the fiscal year ended September 30,2021.In addition, although the Company does not have any customers that wouldbe considered individually significant to consolidated sales, changes in thedistribution of the Company's products or the potential loss of one or more ofthe Company's larger customers are also considered risk factors. Matthewscautions that the foregoing list of important factors is not all inclusive.Readers are also cautioned not to place undue reliance on any forward lookingstatements, which reflect management's analysis only as of the date of thisreport, even if subsequently made available by Matthews on its website orotherwise. 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 ofMatthews to reflect events or circumstances occurring after the date of thisreport.Included in this report are measures of financial performance that are notdefined by generally accepted accounting principles in the United States("GAAP"). These non-GAAP financial measures assist management in comparing theCompany's performance on a consistent basis for purposes of businessdecision-making by removing the impact of certain items that management believesdo not directly reflect the Company's core operations. For additionalinformation and reconciliations from the consolidated financial statementssee "Non-GAAP Financial Measures" below.RESULTS OF OPERATIONS:
The Company manages its businesses under three segments: SGK Brand Solutions,Memorialization and Industrial Technologies. Effective in the first quarter offiscal 2022, the Company transferred its surfaces and engineered productsbusinesses from the SGK Brand Solutions segment to the Industrial Technologiessegment. This business segment change is consistent with internal managementstructure and reporting changes effective for fiscal 2022. Prior periods wererevised to reflect retrospective application of this segment realignment. TheSGK Brand Solutions segment consists of brand management, pre-media services,printing plates and cylinders, imaging services, digital asset management,merchandising display systems, and marketing and design services primarily forthe consumer goods and retail industries. The Memorialization segment consistsprimarily of bronze and granite memorials and other memorialization products,caskets, and cremation and incineration equipment primarily for the cemetery andfuneral home industries. The Industrial Technologies segment includes thedesign, manufacturing, service and distribution of high-tech custom energystorage, marking, coding and industrial automation technologies and solutions,and order fulfillment systems for identifying, tracking, picking and conveyingconsumer and industrial products. 21--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
The Company's primary measure of segment profitability is adjusted earningsbefore interest, income taxes, depreciation and amortization ("adjustedEBITDA"). Adjusted EBITDA is defined by the Company as earnings before interest,income taxes, depreciation, amortization and certain non-cash and/ornon-recurring items that do not contribute directly to management's evaluationof its operating results. These items include stock-based compensation, thenon-service portion of pension and postretirement expense, acquisition costs,ERP integration costs, and strategic initiatives and other charges. Thispresentation is consistent with how the Company's chief operating decision maker(the "CODM") evaluates the results of operations and makes strategic decisionsabout the business. For these reasons, the Company believes that adjusted EBITDArepresents the most relevant measure of segment profit and loss.In addition, the CODM manages and evaluates the operating performance of thesegments, as described above, on a pre-corporate cost allocation basis.Accordingly, for segment reporting purposes, the Company does not allocatecorporate costs to its reportable segments. Corporate costs include managementand administrative support to the Company, which consists of certain aspects ofthe 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 followingtable to reconcile to consolidated adjusted EBITDA and are not considered aseparate reportable segment. Management does not allocate non-operating itemssuch as investment income, other income (deductions), net and noncontrollinginterest to the segments.The following table sets forth the sales and adjusted EBITDA for the Company'sthree reporting segments for the three-month periods ended December 31, 2021 and2020. Refer to Note 13, "Segment Information" in Item 1 - "Financial Statements"for the Company's financial information by segment. Three Months EndedDecember 31,2021 2020Sales: (Dollar amounts in thousands)SGK Brand Solutions $ 153,542 $ 149,959Memorialization 210,706 183,274Industrial Technologies74,33153,424Consolidated Sales$ 438,579 $ 386,657Adjusted EBITDA:SGK Brand Solutions$ 15,414$ 21,833Memorialization43,37044,072Industrial Technologies 7,183 2,996Corporate and Non-Operating (12,634)(14,138)Total Adjusted EBITDA (1)$ 53,333$ 54,763(1) Total Adjusted EBITDA is a non-GAAP financial measure. See the "Non-GAAPFinancial Measures" section below.
Sales for the three months ended December 31, 2021 were $438.6 million, comparedto $386.7 million for the three months ended December 31, 2020, representing anincrease of $51.9 million.The increase in fiscal 2022 sales reflected highersales in all of the Company's segments. Fiscal 2022 sales continued to beimpacted by the global outbreak of coronavirus disease 2019 ("COVID-19"), whichhas caused some commercial impacts in certain of the Company's segments andgeographic locations. These impacts have included higher sales volumes formemorialization products and services, but have also included temporary businessdisruptions and customer project delays for certain of the Company's businesses.Additionally, recent increases in the cost of certain raw materials and otherinflationary pressures have had an unfavorable impact on the Company's resultsof operations. While substantially all of the Company's operations have remainedopen during the COVID-19 pandemic, management expects COVID-19 to continue toimpact its sales and results of operations in the short-term until the pandemicsubsides (see "Forward Looking Information" below).In the SGK Brand Solutions segment, sales for the first three months of fiscal2022 were $153.5 million, compared to $150.0 million for the first three monthsof fiscal 2021.The increase primarily resulted from higher retail-based sales(principally merchandising solutions) and higher brand sales in the Asia-Pacificmarket. These increases were partially offset by lower brand sales in the U.S.and Europe. Changes in foreign currency exchange rates had an unfavorable impactof $2.4 million on the segment's sales compared to the prior year.Memorialization segment sales for the first three months of fiscal 2022 were$210.7 million, compared to $183.3 million for the first three months of fiscal2021. The increase in sales predominantly resulted from increased unit sales ofcaskets and bronze and granite memorial products, due to COVID-19. The segmentalso 22--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
reported higher sales of mausoleums and cremation and incineration equipment.The increase in sales also reflected improved price realization and benefitsfrom the fiscal 2021 acquisition of a small cemetery products business.Industrial Technologies segment sales were $74.3 million for the first threemonths of fiscal 2022, compared to $53.4 million for the first three months offiscal 2021. The sales increase primarily reflected higher sales ofpurpose-built engineered products (primarily energy storage solutions for theelectric vehicle market) and increased sales of warehouse automation solutions.These increases were partially offset by reduced sales of surfaces products.Changes in foreign currency exchange rates had an unfavorable impact of $1.5million on the segment's sales compared to the prior year. On a consolidatedbasis, changes in foreign currency exchange rates were estimated to have anunfavorable impact of $4.1 million on fiscal 2022 sales compared to a year ago.Gross profit for the three months ended December 31, 2021 was $131.6 million,compared to $125.5 million for the same period a year ago.Consolidated grossprofit as a percent of sales was 30.0% and 32.5% for the first three months offiscal 2022 and fiscal 2021, respectively.The increase in gross profitprimarily reflected higher sales, benefits from the realization of productivityimprovements and other cost-reduction initiatives, and improved margins forsurfaces and engineered products within the Industrial Technologies segment.These improvements were partially offset by the impact of higher material, laborand transportation costs, particularly in the Memorialization segment, andunfavorable changes in sales mix within the SGK Brand Solutions segment. Highermaterial costs in the Memorialization segment reflected a significant increasein commodity costs, particularly steel, lumber and bronze ingot. Gross profitalso included acquisition integration costs and other charges primarily inconnection with cost-reduction initiatives totaling $1.5 million and $8.0million for the three months ended December 31, 2021 and 2020, respectively.Selling and administrative expenses for the three months ended December 31, 2021were $99.3 million, compared to $99.9 million for the first three months offiscal 2021.Consolidated selling and administrative expenses, as a percent ofsales, were 22.6% for the three months ended December 31, 2021, compared to25.8% for the same period last year.Fiscal 2022 selling and administrativeexpenses reflected lower performance-based compensation compared to fiscal 2021and benefits from ongoing cost-reduction initiatives, which were partiallyoffset by the impact of higher salaries and wage rates. Selling andadministrative expenses also included acquisition integration and relatedsystems-integration costs, and other charges primarily in connection withcost-reduction initiatives totaling $3.5 million in fiscal 2022, compared to$4.4 million in fiscal 2021. Intangible amortization for the three months endedDecember 31, 2021 was $21.5 million, compared to $15.2 million for the threemonths ended December 31, 2020. The increase in intangible amortizationreflected $4.0 million of incremental amortization resulting from the fiscal2021 reduction in useful lives for certain customer relationships. Intangibleamortization also included accelerated amortization resulting from the fiscal2019 reduction in useful lives for certain trade names that are beingdiscontinued. Amortization for these trade names totaled $9.5 million and $7.0million for the three months ended December 31, 2021 and December 31, 2020,respectively.Adjusted EBITDA was $53.3 million for the three months ended December 31, 2021and $54.8 million for the three months ended December 31, 2020. Adjusted EBITDAfor the SGK Brand Solutions segment was $15.4 million for the first three monthsof fiscal 2022 compared to $21.8 million for the same period a year ago. Thedecrease in segment adjusted EBITDA primarily reflected the impact ofunfavorable changes in sales mix, higher travel and entertainment costs, andproduction inefficiencies related to the COVID-19 remote-work environment. Thesedecreases were partially offset by the impact of higher sales, and benefits fromcost-reduction initiatives. Changes in foreign currency exchange rates had anunfavorable impact of $684,000 on the segment's adjusted EBITDA compared to theprior year. Memorialization segment adjusted EBITDA was $43.4 million for thefirst three months of fiscal 2022 compared to $44.1 million for the first threemonths of fiscal 2021. Fiscal 2022 segment adjusted EBITDA reflected thebenefits of higher sales and productivity initiatives, which were offset by theimpact of higher material, labor and transportation costs. Adjusted EBITDA forthe Industrial Technologies segment was $7.2 million for the three months endedDecember 31, 2021 compared to $3.0 million for the three months endedDecember 31, 2020. Industrial Technologies segment adjusted EBITDA primarilyreflected the impact of higher sales of purpose-built engineered products andwarehouse automation solutions, improved margins for surfaces and engineeredproducts, and benefits from cost-reduction initiatives. Changes in foreigncurrency exchange rates had an unfavorable impact of $191,000 on the segment'sadjusted EBITDA compared to the prior year.Investment income was $1.0 million for the three months ended December 31, 2021and $1.1 million for the three months ended December 31, 2020. Investment incomefor both periods primarily reflected changes in the value of investments(primarily marketable securities) held in trust for certain of the Company'sbenefit plans.Interest expense for the first three months of fiscal 2022 was$6.5 million, compared to $7.7 million for the same period last year.Thedecrease in interest expense reflected a decrease in average borrowing levelsand lower average interest rates in the current fiscal year.Other income(deductions), net, for the three months ended December 31, 2021 represented adecrease in pre-tax income of $31.7 million, compared to a decrease in pre-taxincome of $1.7 million for the same period last year.Other income(deductions), net includes the non-service components of pension andpostretirement expense, which totaled $31.1 million and $1.9 million for 23--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
the three months ended December 31, 2021 and 2020, respectively. Fiscal 2022non-service pension expense included a $30.9 million non-cash charge resultingfrom the full settlement of the Company's principal defined benefit retirementplan ("DB Plan") obligations. Refer to Note 10, "Pension and OtherPostretirement Benefit Plans" in Item 1 - "Financial Statements" for furtherdetails. Other income (deductions), net also includes banking-related fees andthe impact of currency gains and losses on certain intercompany debt and foreigndenominated cash balances.Income tax provisions for the Company's interim periods are based on theeffective income tax rate expected to be applicable for the full year. TheCompany's consolidated income taxes for the first three months of fiscal 2022were a benefit of $6.6 million, compared to an expense of $4.0 million for thefirst three months of fiscal 2021. The difference between the Company'sconsolidated income taxes for the first three months of fiscal 2022 compared tothe same period for fiscal 2021 primarily resulted from a consolidated pre-taxloss in fiscal 2022 compared to pre-tax income in fiscal 2021. Additionally,fiscal 2022 included discrete tax expenses related to the addition of uncertaintax liabilities. Fiscal 2021 included discrete tax expenses related to foreignoperating losses, discrete tax benefits related to the resolution of uncertaintax liabilities, a net operating loss ("NOL") carryback to tax years where theU.S. federal statutory rate was 35%, and additional foreign tax credits. TheCompany's fiscal 2022 three month effective tax rate varied from the U.S.statutory tax rate of 21.0% primarily due to state taxes, foreign statutory ratedifferentials, and tax credits. The Company's fiscal 2021 three-month effectivetax rate varied from the U.S. statutory tax rate of 21.0% primarily due todiscrete tax expenses related to foreign operating losses, discrete tax benefitsrelated to the resolution of uncertain tax liabilities, a NOL carryback to taxyears where the U.S. federal statutory rate was 35%, and additional foreign taxcredits.Net losses attributable to noncontrolling interests were $7,000 for the threemonths ended December 31, 2021 and $234,000 for the three months endedDecember 31, 2020.The net losses attributable to noncontrolling interestsprimarily reflected losses in less than wholly-owned businesses.
NON-GAAP FINANCIAL MEASURES:
Included in this report are measures of financial performance that are notdefined by GAAP. The Company uses non-GAAP financial measures to assist incomparing its performance on a consistent basis for purposes of businessdecision-making by removing the impact of certain items that management believesdo not directly reflect the Company's core operations including acquisitioncosts, ERP integration costs, strategic initiative and other charges (whichincludes non-recurring charges related to operational initiatives and exitactivities), stock-based compensation and the non-service portion of pension andpostretirement expense. Management believes that presenting non-GAAP financialmeasures is useful to investors because it (i) provides investors withmeaningful supplemental information regarding financial performance by excludingcertain items that management believes do not directly reflect the Company'score operations, (ii) permits investors to view performance using the same toolsthat management uses to budget, forecast, make operating and strategicdecisions, and evaluate historical performance, and (iii) otherwise providessupplemental information that may be useful to investors in evaluating theCompany's results. The Company believes that the presentation of these non-GAAPfinancial measures, when considered together with the corresponding GAAPfinancial measures and the reconciliations to those measures, provided herein,provides investors with an additional understanding of the factors and trendsaffecting the Company's business that could not be obtained absent thesedisclosures.The Company believes that adjusted EBITDA provides relevant and usefulinformation, which is used by the Company's management in assessing theperformance of its business. Adjusted EBITDA is defined by the Company asearnings before interest, income taxes, depreciation, amortization and certainnon-cash and/or non-recurring items that do not contribute directly tomanagement's evaluation of its operating results. These items includestock-based compensation, the non-service portion of pension and postretirementexpense, acquisition costs, ERP integration costs, and strategic initiatives andother charges. Adjusted EBITDA provides the Company with an understanding ofearnings before the impact of investing and financing charges and income taxes,and the effects of certain acquisition and ERP integration costs, and items thatdo not reflect the ordinary earnings of the Company's operations. This measuremay be useful to an investor in evaluating operating performance. It is alsouseful as a financial measure for lenders and is used by the Company'smanagement to measure business performance. Adjusted EBITDA is not a measure ofthe Company's financial performance under GAAP and should not be considered asan alternative to net income or other performance measures derived in accordancewith GAAP, or as an alternative to cash flow from operating activities as ameasure of the Company's liquidity. The Company's definition of adjusted EBITDAmay not be comparable to similarly titled measures used by other companies. 24--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
The reconciliation of net income to adjusted EBITDA is as follows:
Three Months Ended December 31,20212020 (Dollar amounts in thousands)Net loss$(19,810) $(1,992)Income tax (benefit) provision(6,628) 3,980(Loss) income before income taxes(26,438) 1,988Net loss attributable to noncontrolling interests7234Interest expense 6,5077,728Depreciation and amortization * 33,501 27,351Strategic initiatives and other charges (1)**3,823 11,192Non-recurring / incremental COVID-19 costs (2)***6901,124Defined benefit plan termination related costs (3) 426-Stock-based compensation 3,7093,246Non-service pension and postretirement expense (4)31,1081,900Total Adjusted EBITDA $ 53,333$54,763(1) Includes certain non-recurring items associated with recent acquisition activities,costs associated with global ERP system integration efforts, and certain non-recurring costsassociated with productivity and cost-reduction initiatives intended to result in improvedoperating performance, profitability and working capital levels.(2) Includes certain non-recurring direct incremental costs (such as costs for purchases ofcomputer peripherals and devices to facilitate working-from-home, additional personalprotective equipment and cleaning supplies and services, etc.) incurred in response toCOVID-19. This amount does not include the impact of any lost sales or underutilization dueto COVID-19.(3) Represents costs associated with the termination of the Company's DB Plan, supplementalretirement plan and the defined benefit portion of the officers retirement restoration plan.(4) Non-service pension and postretirement expense includes interest cost, expected returnon plan assets, amortization of actuarial gains and losses, curtailment gains and losses,and settlement gains and losses. These benefit cost components are excluded from adjustedEBITDA since they are primarily influenced by external market conditions that impactinvestment returns and interest (discount) rates. Curtailment gains and losses andsettlement gains and losses are excluded from adjusted EBITDA since they generally resultfrom certain non-recurring events, such as plan amendments to modify future benefits orsettlements of plan obligations. The service cost and prior service cost components ofpension and postretirement expense are included in the calculation of adjusted EBITDA, sincethey are considered to be a better reflection of the ongoing service-related costs ofproviding these benefits. Please note that GAAP pension and postretirement expense or theadjustment above are not necessarily indicative of the current or future cash flowrequirements related to these employee benefit plans.* Depreciation and amortization was $23.7 million and $17.8 million for the SGKBrand Solutions segment, $5.8 million and $5.5 million for the Memorializationsegment, $2.7 million and $2.7 million for the Industrial Technologies segment,and $1.3 million and $1.3 million for Corporate and Non-Operating, for the threemonths ended December 31, 2021 and 2020, respectively.** Acquisition costs, ERP integration costs, and strategic initiatives and othercharges were $1.2 million and $4.7 million for the SGK Brand Solutions segment,$671,000 and $1.1 million for the Memorialization segment, $32,000 and $2.7million for the Industrial Technologies segment, and $1.9 million and $2.7million for Corporate and Non-Operating, for the three months ended December 31,2021 and 2020, respectively.*** Non-recurring/incremental COVID-19 costs were $220,000 and $409,000 for theSGK Brand Solutions segment, $464,000 and $650,000 for the Memorializationsegment, $4,000 and $18,000 for the Industrial Technologies segment, and $2,000and $47,000 for Corporate and Non-Operating, for the three months endedDecember 31, 2021 and 2020, respectively. 25--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities was $27.2 million for the first threemonths of fiscal 2022, compared to net cash provided by operating activities of$35.3 million for the first three months of fiscal 2021.Operating cash flowfor both periods principally included net loss adjusted for deferred taxes,depreciation and amortization, stock-based compensation expense, net losses(gains) related to investments, non-cash pension expense, other non-cashadjustments, and changes in working capital items. Fiscal 2022 operating cashflow also reflected $35.7 million of DB Plan contributions to fully fund thesettlement of the DB Plan obligations. Net changes in working capital itemsreduced operating cash flow by $40.8 million and $3.7 million in fiscal 2022 andfiscal 2021, respectively. The fiscal 2022 change in working capital primarilyreflected increased fiscal year-end compensation-related payments, and higherinventory levels reflecting increased commodity costs.Cash used in investing activities was $12.5 million for the three months endedDecember 31, 2021, compared to $5.8 million for the three months endedDecember 31, 2020.Investing activities for the first three months of fiscal2022 primarily reflected capital expenditures of $12.6 million and proceeds fromthe sale of assets of $301,000.Investing activities for the first three monthsof fiscal 2021 reflected capital expenditures of $7.5 million and proceeds fromthe sale of assets of $1.7 million.Capital expenditures reflected reinvestment in the Company's business segmentsand 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 regulatoryrequirements.Capital expenditures for the last three fiscal years wereprimarily financed through operating cash.Capital spending for property, plantand equipment has averaged $35.6 million for the last three fiscal years.Capital spending for fiscal 2022 is currently estimated to be approximately $60million.The Company expects to generate sufficient cash from operations tofund all anticipated capital spending projects.Cash provided by financing activities for the three months ended December 31,2021 was $62.4 million, primarily reflecting proceeds, net of repayments, onlong-term debt of $72.3 million, treasury stock purchases of $2.4 million anddividends of $6.8 million to the Company's shareholders. Cash used in financingactivities for the three months ended December 31, 2020 was $31.4 million,primarily reflecting repayments, net of proceeds, on long-term debt of $18.0million, treasury stock purchases of $4.2 million, dividends of $6.8 million tothe Company's shareholders, and $1.6 million of holdback and contingentconsideration payments related to acquisitions from prior years.The Company has a domestic credit facility with a syndicate of financialinstitutions that includes a $750.0 million senior secured revolving creditfacility, which matures in March 2025. A portion of the revolving creditfacility (not to exceed $350.0 million) can be drawn in foreign currencies.Borrowings under the revolving credit facility bear interest at LIBOR plus afactor ranging from 0.75% to 2.00% (1.00% at December 31, 2021) based on theCompany's secured leverage ratio.The secured leverage ratio is defined as netsecured indebtedness divided by EBITDA (earnings before interest, income taxes,depreciation and amortization) as defined within the domestic credit facilityagreement. The Company is required to pay an annual commitment fee ranging from0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion ofthe revolving credit facility. The Company incurred debt issuance costs inconnection with the domestic credit facility. Unamortized costs were $2.0million and $2.2 million at December 31, 2021 and September 30, 2021,respectively.The domestic credit facility requires the Company to maintain certain leverageand interest coverage ratios. A portion of the facility (not to exceed $35.0million) is available for the issuance of trade and standby letters of credit.Outstanding U.S. dollar denominated borrowings on the revolving credit facilityat December 31, 2021 and September 30, 2021 were $405.0 million and $349.8million, respectively. The weighted-average interest rate on outstandingborrowings for the domestic credit facility (including the effects of interestrate swaps and Euro denominated borrowings) at December 31, 2021 and 2020 was1.86% and 2.07%, 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 of5.25% per annum with interest payable semi-annually in arrears on June 1 andDecember 1 of each year. The Company's obligations under the 2025 Senior Notesare guaranteed by certain of the Company's direct and indirect wholly-owneddomestic subsidiaries. The Company is subject to certain covenants and otherrestrictions in connection with the 2025 Senior Notes. The Company incurreddirect financing fees and costs in connection with the 2025 Senior Notes.Unamortized costs were $2.1 million and $2.2 million at December 31, 2021 andSeptember 30, 2021, respectively.The Company has a $115.0 million accounts receivable securitization facility(the "Securitization Facility") with certain financial institutions whichmatures in March 2022 and the Company intends to extend this facility. Under theSecuritization Facility, the Company and certain of its domestic subsidiariessell, on a continuous basis without recourse, their trade receivables toMatthews Receivables Funding Corporation, LLC ("Matthews RFC"), a wholly-ownedbankruptcy-remote 26--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
subsidiary of the Company. Matthews RFC in turn assigns a collateral interest inthese receivables to certain financial institutions, and then may borrow fundsunder the Securitization Facility. The Securitization Facility does not qualifyfor sale treatment. Accordingly, the trade receivables and related debtobligations remain on the Company's Consolidated Balance Sheet. Borrowings underthe Securitization Facility bear interest at LIBOR plus 0.75%. The Company isrequired to pay an annual commitment fee ranging from 0.25% to 0.35% of theunused portion of the Securitization Facility. Outstanding borrowings under theSecuritization Facility at December 31, 2021 and September 30, 2021 were $104.7million and $96.0 million, respectively. At December 31, 2021 and 2020, theinterest rate on borrowings under this facility was 0.85% and 0.89%respectively.
The following table presents information related to interest rate contractsentered into by the Company and designated as cash flow hedges (dollar amountsin thousands):
December 31, 2021September 30, 2021Pay fixed swaps - notional amount $250,000 $
250,000
Net unrealized loss $ (102)$
(2,062)
Weighted-average maturity period (years)2.0 2.2Weighted-average received rate0.10% 0.08%Weighted-average pay rate 1.34% 1.34%The Company enters into interest rate swaps in order to achieve a mix of fixedand variable rate debt that it deems appropriate. The interest rate swaps havebeen designated as cash flow hedges of future variable interest payments, whichare considered probable of occurring.Based on the Company's assessment, all ofthe critical terms of each of the hedges matched the underlying terms of thehedged debt and related forecasted interest payments, and as such, these hedgeswere considered highly effective.The fair value of the interest rate swaps reflected an unrealized loss net ofunrealized gains of $102,000 ($77,000 after tax) at December 31, 2021 and anunrealized loss net of unrealized gains of $2.1 million ($1.6 million after tax)at September 30, 2021, that is included in shareholders' equity as part ofaccumulated other comprehensive income (loss) ("AOCI").Assuming market ratesremain constant with the rates at December 31, 2021, a loss (net of tax) ofapproximately $663,000 included in AOCI is expected to be recognized in earningsover the next twelve months.The Company, through certain of its European subsidiaries, has a credit facilitywith a European bank, which is guaranteed by Matthews. The maximum amount ofborrowing available under this facility is €25.0 million ($28.4 million), whichincludes €8.0 million ($9.1 million) for bank guarantees.In the first quarterof fiscal 2022, the Company extended this facility to a current maturity ofDecember 2022 and the Company intends to continue to extend this facility. Therewere no outstanding borrowings under the credit facility at December 31, 2021.Outstanding borrowings under the credit facility totaled €704,000 ($817,000) atSeptember 30, 2021. The weighted-average interest rate on outstanding borrowingsunder this facility was 2.25% at December 31, 2020.Other borrowings totaled $20.3 million and $10.2 million at December 31, 2021and September 30, 2021, respectively. The weighted-average interest rate onthese borrowings was 1.88% and 2.11% at December 31, 2021 and 2020,respectively.
The Company has a U.S. Dollar/Euro cross currency swap with a notional amount of$94.5 million as of December 31, 2021, which has been designated as a netinvestment hedge of foreign operations. The swap contract matures in September2028. The Company assesses hedge effectiveness for this contract based onchanges in fair value attributable to changes in spot prices. A gain of $2.1million (net of income taxes of $675,000) and a gain of $29,000 (net of incometaxes of $10,000), which represented effective hedges of net investments, werereported as a component of AOCI within currency translation adjustment atDecember 31, 2021 and September 30, 2021, respectively. Income of $365,000,which represented the recognized portion of the fair value excluded from theassessment of hedge effectiveness, was included in current period earnings as acomponent of interest expense for the three months ended December 31, 2021. AtDecember 31, 2021 and September 30, 2021, the swap, which is included in otherassets in the Consolidated Balance Sheets, totaled $2.8 million and $39,000,respectively.The Company has a stock repurchase program. The buy-back program is designed toincrease 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, subjectto the restrictions set forth in the Company's Restated Articles ofIncorporation. Under the current authorization, 2,595,881 shares remainavailable for repurchase as of December 31, 2021. 27--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
Consolidated working capital of the Company was $345.6 million at December 31,2021, compared to $269.9 million at September 30, 2021.Cash and cashequivalents were $71.0 million at December 31, 2021, compared to $49.2 millionat September 30, 2021.The Company's current ratio was 2.0 at December 31, 2021and 1.8 at September 30, 2021.
Long-Term Contractual Obligations:
The following table summarizes the Company's contractual obligations atDecember 31, 2021, and the effect such obligations are expected to have on itsliquidity and cash flows in future periods.
Payments due in fiscal year:2022 (1)After Total Remainder 2023 to 2024 2025 to 20262026Contractual Cash Obligations:(Dollar amounts in thousands)Revolving credit facilities$ 405,000$ -$ -$ 405,000$-Securitization Facility104,690104,690-- -2025 Senior Notes360,9317,875 31,500321,556 -Finance lease obligations (2)8,7972,8303,3471,025 1,595Non-cancelable operating leases (2) 85,063 19,851 38,958 20,821 5,433Other 50,4033,596 34,3362,16910,302Total contractual cash obligations $ 1,014,884$
138,842$ 108,141$ 750,571$ 17,330
(1) The Company maintains certain debt facilities with maturity dates of twelvemonths or less that it intends and has the ability to extend beyond twelvemonths totaling $104.7 million. These balances have been classified asnon-current on the Company's Consolidated Balance Sheet.(2) Lease obligations have not been discounted to their present value.
Benefit payments under the Company's DB Plan are made from plan assets, whilebenefit payments under the supplemental retirement plan ("SERP") andpostretirement benefit plan are made from the Company's operating funds.
In the first quarter of fiscal 2022, the Company terminated its DB Plan and madeplan contributions totaling $35.7 million to fully fund the planned settlementof the DB Plan obligations. Also during the first quarter of fiscal 2022, lumpsum distributions of $186.0 million were made from the DB Plan to planparticipants, and non-participating annuity contracts totaling $56.3 millionwere purchased by the DB Plan for plan participants, resulting in the fullsettlement of the DB Plan obligations. The settlement of the DB Plan obligationsresulted in the recognition of a non-cash charge of $30.9 million, which hasbeen presented as a component of other income (deductions), net for the threemonths ended December 31, 2021. This amount represents the immediate recognitionof the remaining portion of the deferred AOCI balances related to the DB Plan.During the three months ended December 31, 2021 contributions of $199,000 and$83,000 were made under the SERP and postretirement benefit plan, respectively.The Company currently anticipates contributing an additional $561,000 and$801,000 under the SERP and postretirement benefit plan, respectively, for theremainder of fiscal 2022. The Company also expects to make payments totalingapproximately $24.2 million in fiscal 2023 to fully settle the SERP and definedbenefit portion of the officers retirement restoration plan obligations. Theobligations of the SERP are expected to be funded from an existing rabbi trust.The Company believes that its current liquidity sources, combined with itsoperating cash flow and borrowing capacity, will be sufficient to meet itscapital needs for the foreseeable future.Unrecognized tax benefits are positions taken, or expected to be taken, on anincome tax return that may result in additional payments to tax authorities.Ifa tax authority agrees with the tax position taken, or expected to be taken, orthe applicable statute of limitations expires, then additional payments will notbe necessary.As of December 31, 2021, the Company had unrecognized taxbenefits, excluding penalties and interest, of approximately $3.3 million.Thetiming of potential future payments related to the unrecognized tax benefits isnot presently determinable. The Company believes that its current liquiditysources, combined with its operating cash flow and borrowing capacity, will besufficient to meet its capital needs for the foreseeable future. 28
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Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
REGULATORY MATTERS:The Company's operations are subject to various federal, state and local lawsand regulations requiring strict compliance, including, but not limited to, theprotection of the environment. The Company has established numerous internalcompliance programs to further ensure lawful satisfaction of the applicableregulations. In addition, the Company is party to specific environmental matterswhich include obligations to investigate and mitigate the effects on theenvironment of certain materials at operating and non-operating sites. TheCompany is currently performing environmental assessments and remediation atcertain sites, as applicable.
FORWARD-LOOKING INFORMATION:
The Company's current strategy to attain annual operating growth primarilyconsists of the following: internal growth - which includes organic growth, coststructure and productivity improvements, new product development and theexpansion into new markets with existing products - and acquisitions and relatedintegration activities to achieve strategic and synergy benefits.The significant factors (excluding acquisitions) influencing sales growth in theSGK Brand Solutions segment are global economic conditions, brand innovation,the level of marketing spending by the Company's clients, and governmentregulation. Due to the global footprint of this segment, currency fluctuationscan also be a significant factor. Additionally, the retail-based businesses inthe SGK Brand Solutions segment continue to recover from the unfavorable salesimpacts of the pandemic (see below). For the Memorialization segment, salesgrowth will be influenced by North America death rates, and the impact of theincreasing trend toward cremation on the segment's product offerings, includingcaskets, cemetery memorial products and cremation-related products. For theIndustrial Technologies segment, sales growth drivers includeeconomic/industrial market conditions, new product development, and thee-commerce trend. Order rates and backlogs in the warehouse and productidentification businesses are expected to support continued sales growth for theIndustrial Technologies segment in fiscal 2022. In addition, sales for theenergy solutions business in the Industrial Technologies segment, which supportsthe electric vehicle market, grew significantly in fiscal 2021 and, based oncurrent backlogs and significant interest from multiple well-known automanufacturers, are expected to significantly grow again in fiscal 2022.During fiscal 2019, the Company initiated a strategic evaluation to improveprofitability and reduce the Company's cost structure. These actions leveragedthe benefit of the Company's new global ERP platform, primarily targeted at theSGK Brand Solutions segment, both operational and commercial structure, and theCompany's shared financial services and other administrative functions. Thisevaluation identified opportunities for significant cost structure improvements,which the Company expects to achieve throughout the remainder of fiscal 2022.The Company's strategic review has also resulted in improvements to thecommercial structure within the SGK Brand Solutions segment.On January 30, 2020, the World Health Organization declared an outbreak ofCOVID-19 to be a Public Health Emergency of International Concern, andsubsequently recognized COVID-19 as a global pandemic in March 2020. Widespreadefforts have been deployed by multiple countries around the world to prevent thevirus from spreading, including temporary closures of non-essential businesses,event cancellations, travel restrictions, quarantines, and other disruptiveactions. Substantially all of the Company's operations have remained open duringthe COVID-19 pandemic, as they have been considered "essential" businessesduring this time. However, the Company has experienced some commercial impactand business disruptions in certain segments and geographic locations as aresult of COVID-19.Considerable judgment is necessary to assess and predict the potential financialimpacts of COVID-19 on the Company's future operating results. Managementexpects that each of its business segments will experience some level of impactsin the short-term, potentially due to customer business disruptions, supplychain disruptions, facilities shut-downs, changing global economic conditions,and customer project delays. Additionally, recent increases in the cost ofcertain raw materials, labor, and other inflationary impacts are expected toimpact the Company's results for the near future. The Company expects topartially mitigate these cost increases through price realization and thecost-reduction initiatives discussed above. Longer-term financial impacts willdepend on global economic conditions resulting from COVID-19. 29--------------------------------------------------------------------------------
Item 2.Management's Discussion and Analysis of Financial Condition and Resultsof Operations, Continued
CRITICAL ACCOUNTING POLICIES:The preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period.Therefore, the determination of estimatesrequires the exercise of judgment based on various assumptions and other factorssuch as historical experience, economic conditions, and in some cases, actuarialtechniques.Actual results may differ from those estimates. A discussion ofmarket risks affecting the Company can be found in Item 7A - "Quantitative andQualitative Disclosures about Market Risk" in the Company's Annual Report onForm 10-K for the fiscal year ended September 30, 2021.A summary of the Company's significant accounting policies are included in theNotes to Consolidated Financial Statements and in the critical accountingpolicies in Management's Discussion and Analysis included in the Company'sAnnual Report on Form 10-K for the year ended September 30, 2021.Managementbelieves that the application of these policies on a consistent basis enablesthe Company to provide useful and reliable financial information about theCompany's operating results and financial condition.The Company performed its annual impairment review of goodwill andindefinite-lived intangible assets in the second quarter of fiscal 2021 (January1, 2021) and determined that the estimated fair values for all goodwillreporting units exceeded their carrying values, therefore no impairment chargeswere necessary. The estimated fair value of the Company's Graphics Imagingreporting unit, within the SGK Brand Solutions segment, exceeded the carryingvalue (expressed as a percentage of carrying value) by approximately 5%. Ifcurrent projections are not achieved or specific valuation factors outside theCompany's control (such as discount rates and continued economic and industryimpacts of COVID-19) significantly change, goodwill write-downs may be necessaryin future periods.
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