MATTHEWS INTERNATIONAL CORPORATION CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS AND NON-GAAP FINANCIAL MEASURES:
The following discussion should be read in conjunction with the consolidated financial statements ofMatthews International Corporation ("Matthews" or the "Company") and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in mortality and cremation rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, or other factors such as supply chain disruptions, labor shortages or labor cost increases, changes in product demand or pricing as a result of domestic or international competitive pressures, ability to achieve cost-reduction objectives, unknown risks in connection with the Company's acquisitions, cybersecurity concerns, effectiveness of the Company's internal controls, compliance with domestic and foreign laws and regulations, technological factors beyond the Company's control, impact of pandemics or similar outbreaks, or other disruptions to our industries, customers or supply chains, and other factors described in Item 1A - "Risk Factors" in this Form 10-Q and Item 1A - "Risk Factors" in the Company's Form 10-K for the fiscal year endedSeptember 30, 2021 . In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors. Matthews cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward looking statements, which reflect management's analysis only as of the date of this report, even if subsequently made available by Matthews on its website or otherwise. Matthews does not undertake to update any forward looking statement, whether written or oral, that may be made from time to time by or on behalf of Matthews to reflect events or circumstances occurring after the date of this report. Included in this report are measures of financial performance that are not defined by generally accepted accounting principles inthe United States ("GAAP"). These non-GAAP financial measures assist management in comparing the Company's performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company's core operations. For additional information and reconciliations from the consolidated financial statements see "Non-GAAP Financial Measures" below.
RESULTS OF OPERATIONS:
The Company manages its businesses under three segments: SGK Brand Solutions,
Memorialization and Industrial Technologies. Effective in the first quarter of
fiscal 2022, the Company transferred its surfaces and engineered products
businesses from the SGK Brand Solutions segment to the Industrial Technologies
segment. This business segment change is consistent with internal management
structure and reporting changes effective for fiscal 2022. Prior periods were
revised to reflect retrospective application of this segment realignment. The
SGK 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 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 the
design, manufacturing, service and distribution of high-tech custom energy
storage, marking, coding and industrial automation technologies and solutions,
and order fulfillment systems for identifying, tracking, picking and conveying
consumer and industrial products.
21
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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.
The following table sets forth the sales and adjusted EBITDA for the Company's
three reporting segments for the three-month periods ended December 31, 2021 and
2020. Refer to Note 13, "Segment Information" in Item 1 - "Financial Statements"
for the Company's financial information by segment.
Three Months Ended
December 31,
2021 2020
Sales: (Dollar amounts in thousands)
SGK Brand Solutions $ 153,542 $ 149,959
Memorialization 210,706 183,274
Industrial Technologies 74,331 53,424
Consolidated Sales $ 438,579 $ 386,657
Adjusted EBITDA:
SGK Brand Solutions $ 15,414 $ 21,833
Memorialization 43,370 44,072
Industrial Technologies 7,183 2,996
Corporate 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-GAAP Financial Measures" section below.
Sales for the three months endedDecember 31, 2021 were$438.6 million , compared to$386.7 million for the three months endedDecember 31, 2020 , representing an increase of$51.9 million . The increase in fiscal 2022 sales reflected higher sales in all of the Company's segments. Fiscal 2022 sales continued to be impacted by the global outbreak of coronavirus disease 2019 ("COVID-19"), which has caused some commercial impacts in certain of the Company's segments and geographic locations. These impacts have included higher sales volumes for memorialization products and services, but have also included temporary business disruptions and customer project delays for certain of the Company's businesses. Additionally, recent increases in the cost of certain raw materials and other inflationary pressures have had an unfavorable impact on the Company's results of operations. While substantially all of the Company's operations have remained open during the COVID-19 pandemic, management expects COVID-19 to continue to impact its sales and results of operations in the short-term until the pandemic subsides (see "Forward Looking Information" below). In the SGK Brand Solutions segment, sales for the first three months of fiscal 2022 were$153.5 million , compared to$150.0 million for the first three months of fiscal 2021. The increase primarily resulted from higher retail-based sales (principally merchandising solutions) and higher brand sales in theAsia-Pacific market. These increases were partially offset by lower brand sales in theU.S. andEurope . Changes in foreign currency exchange rates had an unfavorable impact of$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 fiscal 2021. The increase in sales predominantly resulted from increased unit sales of caskets and bronze and granite memorial products, due to COVID-19. The segment also 22
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
reported higher sales of mausoleums and cremation and incineration equipment. The increase in sales also reflected improved price realization and benefits from the fiscal 2021 acquisition of a small cemetery products business. Industrial Technologies segment sales were$74.3 million for the first three months of fiscal 2022, compared to$53.4 million for the first three months of fiscal 2021. The sales increase primarily reflected higher sales of purpose-built engineered products (primarily energy storage solutions for the electric 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$1.5 million on the segment's sales compared to the prior year. On a consolidated basis, changes in foreign currency exchange rates were estimated to have an unfavorable impact of$4.1 million on fiscal 2022 sales compared to a year ago. Gross profit for the three months endedDecember 31, 2021 was$131.6 million , compared to$125.5 million for the same period a year ago. Consolidated gross profit as a percent of sales was 30.0% and 32.5% for the first three months of fiscal 2022 and fiscal 2021, respectively. The increase in gross profit primarily reflected higher sales, benefits from the realization of productivity improvements and other cost-reduction initiatives, and improved margins for surfaces and engineered products within the Industrial Technologies segment. These improvements were partially offset by the impact of higher material, labor and transportation costs, particularly in the Memorialization segment, and unfavorable changes in sales mix within the SGK Brand Solutions segment. Higher material costs in the Memorialization segment reflected a significant increase in commodity costs, particularly steel, lumber and bronze ingot. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling$1.5 million and$8.0 million for the three months endedDecember 31, 2021 and 2020, respectively. Selling and administrative expenses for the three months endedDecember 31, 2021 were$99.3 million , compared to$99.9 million for the first three months of fiscal 2021. Consolidated selling and administrative expenses, as a percent of sales, were 22.6% for the three months endedDecember 31, 2021 , compared to 25.8% for the same period last year. Fiscal 2022 selling and administrative expenses reflected lower performance-based compensation compared to fiscal 2021 and benefits from ongoing cost-reduction initiatives, which were partially offset by the impact of higher salaries and wage rates. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-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 three months endedDecember 31, 2020 . The increase in intangible amortization reflected$4.0 million of incremental amortization resulting from the fiscal 2021 reduction in useful lives for certain customer relationships. Intangible amortization also included accelerated amortization resulting from the fiscal 2019 reduction in useful lives for certain trade names that are being discontinued. Amortization for these trade names totaled$9.5 million and$7.0 million for the three months endedDecember 31, 2021 andDecember 31, 2020 , respectively. Adjusted EBITDA was$53.3 million for the three months endedDecember 31, 2021 and$54.8 million for the three months endedDecember 31, 2020 . Adjusted EBITDA for the SGK Brand Solutions segment was$15.4 million for the first three months of fiscal 2022 compared to$21.8 million for the same period a year ago. The decrease in segment adjusted EBITDA primarily reflected the impact of unfavorable changes in sales mix, higher travel and entertainment costs, and production inefficiencies related to the COVID-19 remote-work environment. These decreases were partially offset by the impact of higher sales, and benefits from cost-reduction initiatives. Changes in foreign currency exchange rates had an unfavorable impact of$684,000 on the segment's adjusted EBITDA compared to the prior year. Memorialization segment adjusted EBITDA was$43.4 million for the first three months of fiscal 2022 compared to$44.1 million for the first three months of fiscal 2021. Fiscal 2022 segment adjusted EBITDA reflected the benefits of higher sales and productivity initiatives, which were offset by the impact of higher material, labor and transportation costs. Adjusted EBITDA for the 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 primarily reflected the impact of higher sales of purpose-built engineered products and warehouse automation solutions, improved margins for surfaces and engineered products, and benefits from cost-reduction initiatives. Changes in foreign currency exchange rates had an unfavorable impact of$191,000 on the segment's adjusted EBITDA compared to the prior year. Investment income was$1.0 million for the three months endedDecember 31, 2021 and$1.1 million for the three months endedDecember 31, 2020 . Investment income for both periods primarily reflected changes in the value of investments (primarily marketable securities) held in trust for certain of the Company's benefit plans. Interest expense for the first three months of fiscal 2022 was$6.5 million , compared to$7.7 million for the same period last year. The decrease in interest expense reflected a decrease in average borrowing levels and lower average interest rates in the current fiscal year. Other income (deductions), net, for the three months endedDecember 31, 2021 represented a decrease in pre-tax income of$31.7 million , compared to a decrease in pre-tax income of$1.7 million for the same period last year. Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled$31.1 million and$1.9 million for 23 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
the three months endedDecember 31, 2021 and 2020, respectively. Fiscal 2022 non-service pension expense included a$30.9 million non-cash charge resulting from the full settlement of the Company's principal defined benefit retirement plan ("DB Plan") obligations. Refer to Note 10, "Pension and Other Postretirement Benefit Plans" in Item 1 - "Financial Statements" for further details. Other income (deductions), net also includes banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's consolidated income taxes for the first three months of fiscal 2022 were a benefit of$6.6 million , compared to an expense of$4.0 million for the first three months of fiscal 2021. The difference between the Company's consolidated income taxes for the first three months of fiscal 2022 compared to the same period for fiscal 2021 primarily resulted from a consolidated pre-tax loss in fiscal 2022 compared to pre-tax income in fiscal 2021. Additionally, fiscal 2022 included discrete tax expenses related to the addition of uncertain tax liabilities. Fiscal 2021 included discrete tax expenses related to foreign operating losses, discrete tax benefits related to the resolution of uncertain tax liabilities, a net operating loss ("NOL") carryback to tax years where theU.S. federal statutory rate was 35%, and additional foreign tax credits. The Company's fiscal 2022 three month effective tax rate varied from theU.S. statutory tax rate of 21.0% primarily due to state taxes, foreign statutory rate differentials, and tax credits. The Company's fiscal 2021 three-month effective tax rate varied from theU.S. statutory tax rate of 21.0% primarily due to discrete tax expenses related to foreign operating losses, discrete tax benefits related to the resolution of uncertain tax liabilities, a NOL carryback to tax years where theU.S. federal statutory rate was 35%, and additional foreign tax credits.
Net losses attributable to noncontrolling interests were
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.
24
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
The reconciliation of net income to adjusted EBITDA is as follows:
Three Months Ended
December 31,
2021 2020
(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) 1,988
Net loss attributable to noncontrolling interests 7 234
Interest expense 6,507 7,728
Depreciation and amortization * 33,501 27,351
Strategic initiatives and other charges (1)** 3,823 11,192
Non-recurring / incremental COVID-19 costs (2)*** 690 1,124
Defined benefit plan termination related costs (3) 426 -
Stock-based compensation 3,709 3,246
Non-service pension and postretirement expense (4) 31,108 1,900
Total 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 costs
associated with productivity and cost-reduction initiatives intended to result in improved
operating performance, profitability and working capital levels.
(2) 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.
(3) Represents costs associated with the termination of the Company's DB Plan, supplemental
retirement plan and the defined benefit portion of the officers retirement restoration plan.
(4) Non-service pension and postretirement expense includes interest cost, expected return
on plan assets, amortization of actuarial gains and losses, curtailment gains and losses,
and settlement 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. Curtailment gains and losses and
settlement gains and losses are excluded from adjusted EBITDA since they generally result
from certain non-recurring events, such as plan amendments to modify future benefits or
settlements of plan obligations. 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 $23.7 million and $17.8 million for the SGK
Brand Solutions segment, $5.8 million and $5.5 million for the Memorialization
segment, $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 three
months ended December 31, 2021 and 2020, respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other
charges 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 $2.7
million for the Industrial Technologies segment, and $1.9 million and $2.7
million 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 the
SGK Brand Solutions segment, $464,000 and $650,000 for the Memorialization
segment, $4,000 and $18,000 for the Industrial Technologies segment, and $2,000
and $47,000 for Corporate and Non-Operating, for the three months ended
December 31, 2021 and 2020, respectively.
25
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities was$27.2 million for the first three months 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 flow for 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-cash adjustments, and changes in working capital items. Fiscal 2022 operating cash flow also reflected$35.7 million of DB Plan contributions to fully fund the settlement of the DB Plan obligations. Net changes in working capital items reduced operating cash flow by$40.8 million and$3.7 million in fiscal 2022 and fiscal 2021, respectively. The fiscal 2022 change in working capital primarily reflected increased fiscal year-end compensation-related payments, and higher inventory 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 fiscal 2022 primarily reflected capital expenditures of$12.6 million and proceeds from the sale of assets of$301,000 . Investing activities for the first three months of fiscal 2021 reflected capital expenditures of$7.5 million and proceeds from the sale of assets of$1.7 million . Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new production machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for property, plant and equipment has averaged$35.6 million for the last three fiscal years. Capital spending for fiscal 2022 is currently estimated to be approximately$60 million . The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Cash provided by financing activities for the three months endedDecember 31, 2021 was$62.4 million , primarily reflecting proceeds, net of repayments, on long-term debt of$72.3 million , treasury stock purchases of$2.4 million and dividends of$6.8 million to the Company's shareholders. Cash used in financing activities for the three months endedDecember 31, 2020 was$31.4 million , primarily reflecting repayments, net of proceeds, on long-term debt of$18.0 million , treasury stock purchases of$4.2 million , dividends of$6.8 million to the Company's shareholders, and$1.6 million of holdback and contingent consideration payments related to acquisitions from prior years. The Company has a domestic credit facility with a syndicate of financial institutions that includes a$750.0 million senior secured revolving credit facility, which matures inMarch 2025 . A portion of the revolving credit facility (not to exceed$350.0 million ) can be drawn in foreign currencies. Borrowings under the revolving credit facility bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.00% atDecember 31, 2021 ) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs in connection with the domestic credit facility. Unamortized costs were$2.0 million and$2.2 million atDecember 31, 2021 andSeptember 30, 2021 , respectively. The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed$35.0 million ) is available for the issuance of trade and standby letters of credit. OutstandingU.S. dollar denominated borrowings on the revolving credit facility atDecember 31, 2021 andSeptember 30, 2021 were$405.0 million and$349.8 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) atDecember 31, 2021 and 2020 was 1.86% and 2.07%, respectively. The Company has$300.0 million of 5.25% senior unsecured notes dueDecember 1, 2025 (the "2025 Senior Notes"). The 2025 Senior Notes bear interest at a rate of 5.25% per annum with interest payable semi-annually in arrears onJune 1 andDecember 1 of each year. The Company's obligations under the 2025 Senior Notes are guaranteed by certain of the Company's direct and indirect wholly-owned domestic subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were$2.1 million and$2.2 million atDecember 31, 2021 andSeptember 30, 2021 , respectively. The Company has a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matures inMarch 2022 and the Company intends to extend this facility. Under the Securitization Facility, the Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables toMatthews Receivables Funding Corporation, LLC ("Matthews RFC"), a wholly-owned bankruptcy-remote 26
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 atDecember 31, 2021 andSeptember 30, 2021 were$104.7 million and$96.0 million , respectively. AtDecember 31, 2021 and 2020, the interest rate on borrowings under this facility was 0.85% and 0.89% respectively.
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges (dollar amounts in thousands):
December 31, 2021 September 30, 2021
Pay fixed swaps - notional amount $ 250,000 $ 250,000
Net unrealized loss $ (102) $
(2,062)
Weighted-average maturity period (years) 2.0 2.2 Weighted-average received rate 0.10 % 0.08 % Weighted-average pay rate 1.34 % 1.34 % The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments, which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective. The fair value of the interest rate swaps reflected an unrealized loss net of unrealized gains of$102,000 ($77,000 after tax) atDecember 31, 2021 and an unrealized loss net of unrealized gains of$2.1 million ($1.6 million after tax) atSeptember 30, 2021 , that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates atDecember 31, 2021 , a loss (net of tax) of approximately$663,000 included in AOCI is expected to be recognized in earnings over the next twelve months. The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews. The maximum amount of borrowing available under this facility is €25.0 million ($28.4 million ), which includes €8.0 million ($9.1 million ) for bank guarantees. In the first quarter of fiscal 2022, the Company extended this facility to a current maturity ofDecember 2022 and the Company intends to continue to extend this facility. There were no outstanding borrowings under the credit facility atDecember 31, 2021 . Outstanding borrowings under the credit facility totaled €704,000 ($817,000 ) atSeptember 30, 2021 . The weighted-average interest rate on outstanding borrowings under this facility was 2.25% atDecember 31, 2020 .
Other borrowings totaled
The Company has aU.S. Dollar/Euro cross currency swap with a notional amount of$94.5 million as ofDecember 31, 2021 , which has been designated as a net investment hedge of foreign operations. The swap contract matures inSeptember 2028 . The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices. A gain of$2.1 million (net of income taxes of$675,000 ) and a gain of$29,000 (net of income taxes of$10,000 ), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atDecember 31, 2021 andSeptember 30, 2021 , respectively. Income of$365,000 , which represented the recognized portion of the fair value excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three months endedDecember 31, 2021 . AtDecember 31, 2021 andSeptember 30, 2021 , the swap, which is included in other assets 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 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, 2,595,881 shares remain available for repurchase as ofDecember 31, 2021 . 27 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
Consolidated working capital of the Company was$345.6 million atDecember 31, 2021 , compared to$269.9 million atSeptember 30, 2021 . Cash and cash equivalents were$71.0 million atDecember 31, 2021 , compared to$49.2 million atSeptember 30, 2021 . The Company's current ratio was 2.0 atDecember 31, 2021 and 1.8 atSeptember 30, 2021 .
Long-Term Contractual Obligations:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
2022 (1) After
Total Remainder 2023 to 2024 2025 to 2026 2026
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 405,000 $ - $ - $ 405,000 $ -
Securitization Facility 104,690 104,690 - - -
2025 Senior Notes 360,931 7,875 31,500 321,556 -
Finance lease obligations (2) 8,797 2,830 3,347 1,025 1,595
Non-cancelable operating leases (2) 85,063 19,851 38,958 20,821 5,433
Other 50,403 3,596 34,336 2,169 10,302
Total contractual cash obligations $ 1,014,884 $
138,842
(1) The Company maintains certain debt facilities with maturity dates of twelve
months or less that it intends and has the ability to extend beyond twelve
months totaling
Benefit payments under the Company's DB Plan are made from plan assets, while benefit payments under the supplemental retirement plan ("SERP") and postretirement benefit plan are made from the Company's operating funds.
In the first quarter of fiscal 2022, the Company terminated its DB Plan and made plan contributions totaling$35.7 million to fully fund the planned settlement of the DB Plan obligations. Also during the first quarter of fiscal 2022, lump sum distributions of$186.0 million were made from the DB Plan to plan participants, and non-participating annuity contracts totaling$56.3 million were purchased by the DB Plan for plan participants, resulting in the full settlement of the DB Plan obligations. The settlement of the DB Plan obligations resulted in the recognition of a non-cash charge of$30.9 million , which has been presented as a component of other income (deductions), net for the three months endedDecember 31, 2021 . This amount represents the immediate recognition of the remaining portion of the deferred AOCI balances related to the DB Plan. During the three months endedDecember 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 the remainder of fiscal 2022. The Company also expects to make payments totaling approximately$24.2 million in fiscal 2023 to fully settle the SERP and defined benefit portion of the officers retirement restoration plan obligations. The obligations of the SERP are expected to be funded from an existing rabbi trust. 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 ofDecember 31, 2021 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$3.3 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. 28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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.
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 strategic and 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. Additionally, the retail-based businesses in the SGK Brand Solutions segment continue to recover from the unfavorable sales impacts of the pandemic (see below). For the Memorialization segment, sales growth will be influenced byNorth America death rates, and the impact of the increasing trend toward cremation on the segment's product offerings, including caskets, cemetery memorial products and cremation-related products. For the Industrial Technologies segment, sales growth drivers include economic/industrial market conditions, new product development, and the e-commerce trend. Order rates and backlogs in the warehouse and product identification businesses are expected to support continued sales growth for the Industrial Technologies segment in fiscal 2022. In addition, sales for the energy solutions business in the Industrial Technologies segment, which supports the electric vehicle market, grew significantly in fiscal 2021 and, based on current backlogs and significant interest from multiple well-known auto manufacturers, are expected to significantly grow again in fiscal 2022. 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 throughout the remainder of fiscal 2022. The Company's strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment. OnJanuary 30, 2020 , theWorld Health Organization declared an outbreak of COVID-19 to be a Public Health Emergency of International Concern, and subsequently recognized COVID-19 as a global pandemic inMarch 2020 . Widespread efforts have been deployed by multiple countries around the world to prevent the virus from spreading, including temporary closures of non-essential businesses, event cancellations, travel restrictions, quarantines, and other disruptive actions. Substantially all of the Company's operations have remained open during the COVID-19 pandemic, as they have been considered "essential" businesses during this time. However, the Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19. Considerable judgment is necessary to assess and predict the potential financial impacts of COVID-19 on the Company's future operating results. Management expects that each of its business segments will experience some level of impacts in the short-term, potentially due to customer business disruptions, supply chain disruptions, facilities shut-downs, changing global economic conditions, and customer project delays. Additionally, recent increases in the cost of certain raw materials, labor, and other inflationary impacts are expected to impact the Company's results for the near future. The Company expects to partially mitigate these cost increases through price realization and the cost-reduction initiatives discussed above. Longer-term financial impacts will depend on global economic conditions resulting from COVID-19. 29 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
CRITICAL ACCOUNTING POLICIES: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements and in the critical accounting policies in Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2021 . Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition. The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2021 (January 1, 2021 ) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values, therefore no impairment charges were necessary. The estimated fair value of the Company's Graphics Imaging reporting unit, within the SGK Brand Solutions segment, exceeded the carrying value (expressed as a percentage of carrying value) by approximately 5%. If current projections are not achieved or specific valuation factors outside the Company's control (such as discount rates and continued economic and industry impacts of COVID-19) significantly change, goodwill write-downs may be necessary in future periods.
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