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, 2022 . 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 interest 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, the impact of global conflicts, such as the current war betweenRussia andUkraine , 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, 2022 . In addition, although the Company does not currently 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: Memorialization,
Industrial Technologies and SGK Brand Solutions. The Memorialization segment
consists primarily of bronze and granite memorials and other memorialization
products, caskets, cremation-related products, and cremation and incineration
equipment primarily for the cemetery and funeral home industries. The Industrial
Technologies segment includes the design, manufacturing, service and
distribution of high-tech custom energy storage solutions, product
identification and warehouse automation technologies and solutions, including
order fulfillment systems for identifying, tracking, picking and conveying
consumer and industrial products. 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.
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, 2022 and
2021. Refer to Note 14, "Segment Information" in Item 1 - "Financial Statements"
for the Company's financial information by segment.
Three Months Ended
December 31,
2022 2021
Sales: (Dollar amounts in thousands)
Memorialization $ 206,502 $ 210,706
Industrial Technologies 109,143 74,331
SGK Brand Solutions 133,595 153,542
Consolidated Sales $ 449,240 $ 438,579
Adjusted EBITDA:
Memorialization $ 39,137 $ 43,370
Industrial Technologies 12,202 7,183
SGK Brand Solutions 12,232 15,414
Corporate and Non-Operating (14,280) (12,634)
Total Adjusted EBITDA (1) $ 49,291 $ 53,333 (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, 2022 were$449.2 million , compared to$438.6 million for the three months endedDecember 31, 2021 , representing an increase of$10.7 million . The increase in fiscal 2023 sales reflected higher sales in the Industrial Technologies segment, partially offset by lower sales in the Memorialization and SGK Brand Solutions segments. On a consolidated basis, changes in foreign currency exchange rates were estimated to have an unfavorable impact of$17.0 million on fiscal 2023 sales compared to the prior year. Memorialization segment sales for the first three months of fiscal 2023 were$206.5 million , compared to$210.7 million for the first three months of fiscal 2022. The decrease in sales resulted from lower unit sales of caskets and bronze memorial products, reflecting a decrease in coronavirus disease 2019 ("COVID-19") related deaths in fiscal 2023. These decreases were partially offset by improved price realization, higher sales of granite memorial products and increased cremation equipment sales. Changes in foreign currency exchange rates had an unfavorable impact of$1.5 million on the segment's sales compared to the prior year. Industrial Technologies segment sales were$109.1 million for the first three months of fiscal 2023, compared to$74.3 million for the first three months of fiscal 2022. The sales increase primarily reflected benefits from the recently completed acquisitions ofOLBRICH GmbH ("OLBRICH") and R+S Automotive GmbH ("R+S Automotive") (see Acquisitions below). The increase in sales also reflected higher sales of purpose-built engineered products (primarily energy storage solutions for the electric vehicle market) and higher product identification sales. These increases were partially offset by reduced sales of warehouse automation solutions. Changes in foreign currency exchange rates had an unfavorable impact of$4.8 million on the segment's sales compared to the prior year. In the SGK Brand Solutions segment, sales for the first three 22 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
months of fiscal 2023 were$133.6 million , compared to$153.5 million for the first three months of fiscal 2022, representing a decrease of$19.9 million . Changes in foreign currency exchange rates had an unfavorable impact of$10.7 million on the segment's sales compared to the prior year. The decrease in sales also reflected lower brand sales in theU.S. andEurope , lower retail-based sales (principally merchandising solutions) and sales declines in the private-label brand market. Gross profit for the three months endedDecember 31, 2022 was$138.9 million , compared to$131.6 million for the same period a year ago. Consolidated gross profit as a percent of sales was 30.9% and 30.0% for the first three months of fiscal 2023 and fiscal 2022, respectively. The increase in gross profit primarily reflected the impact of higher sales (including the benefits from the OLBRICH and R+S Automotive acquisitions), benefits from the realization of productivity improvements and other cost-reduction initiatives, and improved margins for engineered products within the Industrial Technologies segment. These increases in gross profit were partially offset by the impact of unfavorable changes in sales mix, higher material, labor and transportation costs, and lower margins onU.K. cremation equipment projects. Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling$855,000 and$1.5 million for the three months endedDecember 31, 2022 and 2021, respectively. Selling and administrative expenses for the three months endedDecember 31, 2022 were$111.4 million , compared to$99.3 million for the first three months of fiscal 2022. Consolidated selling and administrative expenses, as a percent of sales, were 24.8% for the three months endedDecember 31, 2022 , compared to 22.6% for the same period last year. Fiscal 2023 selling and administrative expenses reflected the impact of higher salaries and wage rates, higher travel and entertainment ("T&E") costs, and additional expenses from the recently completed OLBRICH and R+S Automotive acquisitions. These increases in selling and administrative expenses were partially offset by benefits from ongoing cost-reduction initiatives. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling$2.7 million in fiscal 2023, compared to$3.5 million in fiscal 2022. Intangible amortization for the three months endedDecember 31, 2022 was$10.3 million , compared to$21.5 million for the three months endedDecember 31, 2021 . Fiscal 2022 intangible amortization included$9.5 million of amortization related to certain trade names that have been discontinued. Adjusted EBITDA was$49.3 million for the three months endedDecember 31, 2022 and$53.3 million for the three months endedDecember 31, 2021 . Memorialization segment adjusted EBITDA was$39.1 million for the first three months of fiscal 2023 compared to$43.4 million for the first three months of fiscal 2022. Fiscal 2023 segment adjusted EBITDA reflected benefits from improved price realization and productivity initiatives, which were offset by the impact of lower unit sales of caskets and bronze memorials, unfavorable changes in sales mix, higher material, labor, transportation and T&E costs, and lower margins on certain cremation equipment projects. Adjusted EBITDA for the Industrial Technologies segment was$12.2 million for the three months endedDecember 31, 2022 compared to$7.2 million for the three months endedDecember 31, 2021 . Industrial Technologies segment adjusted EBITDA primarily reflected the impact of higher sales and improved margins for engineered products. Changes in foreign currency exchange rates had an unfavorable impact of$1.1 million on the segment's adjusted EBITDA compared to the prior year. Adjusted EBITDA for the SGK Brand Solutions segment was$12.2 million for the first three months of fiscal 2023 compared to$15.4 million for the same period a year ago. The decrease in segment adjusted EBITDA primarily reflected the impact of lower sales and higher labor and T&E costs, partially offset by benefits from cost-reduction initiatives. Changes in foreign currency exchange rates had an unfavorable impact of$1.0 million on the segment's adjusted EBITDA compared to the prior year. Interest expense for the first three months of fiscal 2023 was$10.2 million , compared to$6.5 million for the same period last year. The increase in interest expense reflected an increase in average borrowing levels and higher average interest rates in the current fiscal year. Other income (deductions), net, for the three months endedDecember 31, 2022 represented a decrease in pre-tax income of$2.1 million , compared to a decrease in pre-tax income of$30.7 million for the same period last year. Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled$1.4 million and$31.1 million for the three months endedDecember 31, 2022 and 2021, respectively. Fiscal 2023 non-service pension expense included a$1.3 million non-cash charge resulting from the settlement of the Company's supplemental retirement plan ("SERP") and defined benefit portion of the officers retirement restoration plan ("ORRP") obligations. 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 11, "Pension and Other Postretirement Benefit Plans" in Item 1 - "Financial Statements" for further details. Other income (deductions), net also includes investment income, banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. Fiscal 2023 other income (deductions), net included$1.1 million of currency losses associated with highly inflationary accounting for the Company's subsidiaries inTurkey (see Note 2, "Basis of Presentation" in Item 1 - "Financial Statements"). 23 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 2023 were an expense of$1.3 million , compared to a benefit of$6.6 million for the first three months of fiscal 2022. The difference between the Company's consolidated income taxes for the first three months of fiscal 2023 compared to the same period for fiscal 2022 primarily resulted from consolidated pre-tax income in fiscal 2023 compared to a pre-tax loss in fiscal 2022. The Company's fiscal 2023 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 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.
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,
2022 2021
(Dollar amounts in thousands)
Net income (loss) $ 3,647 $ (19,810)
Income tax provision (benefit) 1,312 (6,628)
Income (loss) before income taxes 4,959 (26,438)
Net loss attributable to noncontrolling interests 56 7
Interest expense 10,215 6,507
Depreciation and amortization * 23,729 33,501
RPA financing fees (1) 456 -
Acquisition costs (2)** 1,285 -
Strategic initiatives and other charges (3)** 1,760 3,823
Non-recurring / incremental COVID-19 costs (4)*** - 690
Exchange losses related to highly inflationary accounting (5) 1,088 -
Defined benefit plan termination related items (6) 21 426
Stock-based compensation 4,334 3,709
Non-service pension and postretirement expense (7) 1,388 31,108
Total Adjusted EBITDA $ 49,291 $ 53,333
(1) Represents fees for receivables sold under the RPA (see "Liquidity and Capital
Resources").
(2) Includes certain non-recurring costs associated with recent acquisition activities.
(3) Includes certain non-recurring costs associated with productivity and cost-reduction
initiatives intended to result in improved operating performance, profitability and working
capital levels, costs associated with global ERP system integration efforts, and asset
write-downs associated with certain operations in Russia , net of recoveries.
(4) 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.
(5) Represents exchange losses associated with highly inflationary accounting related to the
Company's Turkish subsidiaries (see Note 2, "Basis of Presentation" in Item 1 - "Financial
Statements and Supplementary Data").
(6) Represents items associated with the termination of the Company's DB Plan, supplemental
retirement plan and the defined benefit portion of the officers retirement restoration plan.
(7) 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 $5.6 million and $5.8 million for the
Memorialization segment, $5.9 million and $2.7 million for the Industrial
Technologies segment, $11.1 million and $23.7 million for the SGK Brand
Solutions segment, and $1.2 million and $1.3 million for Corporate and
Non-Operating, for the three months ended December 31, 2022 and 2021,
respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other
charges were $378,000 and $671,000 for the Memorialization segment, $937,000 and
$32,000 for the Industrial Technologies segment, $521,000 and $1.2 million for
the SGK Brand Solutions segment, and $1.2 million and $1.9 million for Corporate
and Non-Operating, for the three months ended December 31, 2022 and 2021,
respectively.
*** Non-recurring/incremental COVID-19 costs were $464,000 for the
Memorialization segment, $4,000 for the Industrial Technologies segment,
$220,000 for the SGK Brand Solutions segment, and $2,000 for Corporate and
Non-Operating, for the three months ended December 31, 2021 .
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$36.2 million for the first three months of fiscal 2023, compared to$27.2 million for the first three months of fiscal 2022. Operating cash flow for both periods principally included net income (loss) adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, non-cash pension expense, other non-cash adjustments, and changes in working capital items. Fiscal 2023 operating cash flow also reflected$24.2 million of contributions to fund the settlement of the Company's SERP and ORRP obligations. Fiscal 2022 operating cash flow reflected$35.7 million of contributions to fully fund the settlement of the Company's DB Plan obligations. Net changes in working capital items decreased operating cash flow by$43.2 million and$40.8 million in fiscal 2023 and fiscal 2022, respectively. The fiscal 2023 change in working capital principally reflected fiscal year-end compensation-related payments, decreases in accounts payable, and higher inventory levels, partially offset by proceeds from the sale of receivables under a receivables purchase agreement (see below for further discussion). Cash used in investing activities was$14.2 million for the three months endedDecember 31, 2022 , compared to$12.5 million for the three months endedDecember 31, 2021 . Investing activities for the first three months of fiscal 2023 primarily reflected capital expenditures of$12.4 million and acquisitions, net of cash acquired, of$1.8 million . Investing activities for the first three months of fiscal 2022 primarily reflected capital expenditures of$12.6 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 and capacity, 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$43.5 million for the last three fiscal years. Capital spending for fiscal 2023 is currently estimated to be approximately$75 million . Capital spending in fiscal 2023 reflects additional capital projects to support new production capabilities and increased efficiencies within the Memorialization and Industrial Technologies segments. 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, 2022 was$22.3 million , primarily reflecting proceeds, net of repayments, on long-term debt of$32.7 million , treasury stock purchases of$2.5 million , and cash dividends of$7.0 million to the Company's shareholders. 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. 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% (1.25% atDecember 31, 2022 ) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs in connection with the domestic credit facility. Unamortized costs were$1.4 million and$1.5 million atDecember 31, 2022 andSeptember 30, 2022 , respectively. The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed$55.0 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, 2022 andSeptember 30, 2022 were$495.4 million and$472.1 million , respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) atDecember 31, 2022 and 2021 was 4.24% and 1.86%, respectively. The Company has$299.6 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 subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were$1.5 million and$1.7 million atDecember 31, 2022 andSeptember 30, 2022 , respectively. 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 subsidiary of the Company. InMarch 2022 , Matthews RFC entered into a receivables purchase agreement ("RPA") to sell up to$125.0 million 26 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
of receivables to certain purchasers (the "Purchasers") on a recurring basis in exchange for cash (referred to as "capital" within the RPA) equal to the gross receivables transferred. The parties intend that the transfers of receivables to the Purchasers constitute purchases and sales of receivables. Matthews RFC has guaranteed to each Purchaser the prompt payment of sold receivables, and has granted a security interest in its assets for the benefit of the Purchasers. Under the RPA, which matures inMarch 2024 , each Purchaser's share of capital accrues yield at a floating rate plus an applicable margin. The Company is the master servicer under the RPA, and is responsible for administering and collecting receivables. The proceeds of the RPA are classified as operating activities in the Company's Consolidated Statements of Cash Flows. Cash received from collections of sold receivables may be used to fund additional purchases of receivables on a revolving basis, or to reduce all or any portion of the outstanding capital of the Purchasers. Gross receivables sold and cash collections reinvested under the RPA program were$203.6 million and$89.6 million for the three months endedDecember 31, 2022 , respectively. The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded. As ofDecember 31, 2022 andSeptember 30, 2022 , the amount sold to the Purchasers was$114.0 million and$96.6 million , respectively, which was derecognized from the Consolidated Balance Sheets. As collateral against sold receivables, Matthews RFC maintains a certain level of unsold receivables, which was$40.8 million and$44.3 million as ofDecember 31, 2022 andSeptember 30, 2022 , respectively. Previously, the Company had a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matured inMarch 2022 . The Securitization Facility did not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations remained on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility were based on LIBOR plus 0.75% and the Company was required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility. AtDecember 31, 2021 , the interest rate on borrowings under this facility was 0.85%. The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews. The maximum amount of borrowing available under this facility is €25.0 million ($26.8 million ), which includes €8.0 million ($8.6 million ) for bank guarantees. This facility has no stated maturity date and is available until terminated. Outstanding borrowings under the credit facility totaled €13.2 million ($14.1 million ) and €8.2 million ($8.1 million ) atDecember 31, 2022 andSeptember 30, 2022 , respectively. The weighted-average interest rate on outstanding borrowings under this facility was 3.96% atDecember 31, 2022 .
Other borrowings totaled
The Company operates internationally and utilizes certain derivative financial
instruments to manage its foreign currency, debt and interest rate exposures.
The following table presents information related to interest rate swaps entered
into by the Company and designated as cash flow hedges:
December 31, 2022 September 30, 2022
(Dollar amounts in thousands)
Notional amount $ 125,000 $ 125,000
Weighted-average maturity period (years) 2.6 3.1
Weighted-average received rate 4.39 % 3.14 %
Weighted-average pay rate 1.04 % 1.04 %
The Company enters into interest rate swaps in order to achieve a mix of fixed
and variable rate debt that it deems appropriate. The interest rate swaps have
been designated as cash flow hedges of future variable interest payments, which
are considered probable of occurring. Based on the Company's assessment, all of
the critical terms of each of the hedges matched the underlying terms of the
hedged debt and related forecasted interest payments, and as such, these hedges
were considered highly effective.
The fair value of the interest rate swaps reflected an unrealized gain of $10.1
million ($7.5 million after tax) at December 31, 2022 and an unrealized gain of
$10.7 million ($7.9 million after tax) at September 30, 2022 , that is included
in shareholders' equity as part of accumulated other comprehensive income (loss)
("AOCI"). Assuming market rates remain constant with the rates at December 31,
2022 , a gain (net of tax) of approximately $2.5 million included in AOCI is
expected to be recognized in earnings over the next twelve months.
27
--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
The Company has aU.S. Dollar/Euro cross currency swap with a notional amount of$81.4 million as ofDecember 31, 2022 andSeptember 30, 2022 , which has been designated as a net investment hedge of foreign operations. The swap contract matures inSeptember 2027 . The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices. A loss of$1.6 million (net of income taxes of$526,000 ) and a gain of$2.8 million (net of income taxes of$940,000 ), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atDecember 31, 2022 andSeptember 30, 2022 , respectively. Income of$272,000 and$365,000 , which represented the recognized portion of the fair value of cross currency swaps excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three months endedDecember 31, 2022 and 2021, respectively. AtDecember 31, 2022 andSeptember 30, 2022 , the swap totaled$2.1 million and$3.7 million , respectively, and was included in other accrued liabilities and other assets in the Consolidated Balance Sheets, 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, 1,205,817 shares remain available for repurchase as ofDecember 31, 2022 . Refer to Item 2 - "Unregistered Sales ofEquity Securities and Use of Proceeds" in Part II - "Other Information" for further details on the Company's repurchases in fiscal 2023. Consolidated working capital of the Company was$266.5 million atDecember 31, 2022 , compared to$217.2 million atSeptember 30, 2022 . Cash and cash equivalents were$42.7 million atDecember 31, 2022 , compared to$69.0 million atSeptember 30, 2022 . The Company's current ratio was 1.7 atDecember 31, 2022 and 1.5 atSeptember 30, 2022 , respectively.
Long-Term Contractual Obligations:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
2023 After
Total Remainder 2024 to 2025 2026 to 2027 2027
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 509,489 $ - $ 495,391 $ - $ 14,098
2025 Senior Notes 345,346 7,875 31,500 305,971 -
Finance lease obligations (1) 7,050 1,754 2,494 1,538 1,264
Non-cancelable operating leases (1) 81,365 18,898 39,558 18,890 4,019
Other 23,005 723 11,837 2,155 8,290
Total contractual cash obligations $ 966,255 $ 29,250 (1) Lease obligations have not been discounted to their present value.
Benefit payments under the SERP and postretirement benefit plan are made from the Company's operating funds.
In the first quarter of fiscal 2023, the Company made lump sum payments totaling$24.2 million to fully settle the SERP and defined benefit portion of the ORRP obligations. The settlement of these plan obligations resulted in the recognition of a non-cash charge of$1.3 million , which has been presented as a component of other income (deductions), net for the three months endedDecember 31, 2022 . This amount represents the immediate recognition of the deferred AOCI balances related to the SERP and ORRP. 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, 2022 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$4.2 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 --------------------------------------------------------------------------------
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. ACQUISITIONS:
Refer to Note 15, "Acquisitions" in Item 1 - "Financial Statements" for further details on the Company's acquisitions.
FORWARD-LOOKING INFORMATION:
The Company's current strategy to attain annual operating growth primarily
consists of the following: internal growth - which includes organic growth, cost
structure and productivity improvements, new product development and the
expansion into new markets with existing products - and acquisitions and related
integration activities to achieve synergy benefits.
The significant factors (excluding acquisitions) influencing sales growth in the
Industrial Technologies segment include economic/industrial market conditions,
new product development, and the electric vehicles ("EV") and e-commerce trends.
The Industrial Technologies segment received over $200 million of new orders
during the fiscal 2023 first quarter for its energy storage solutions business.
The orders have been received from multiple EV, fuel cell, and battery
manufacturers and are expected to support the segment's organic growth
objectives. For the Memorialization segment, sales growth will be influenced by
North 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 SGK Brand Solutions
segment, sales growth will be influenced by 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.
Recent labor cost increases, supply chain challenges, and other inflation-related 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 cost-reduction initiatives.
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, 2022 . 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, 2022 . 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 2022 (January 1, 2022 ) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values, therefore no impairment charges were necessary. The Company performed an interim assessment of its SGK Brand Solutions goodwill reporting unit as ofSeptember 1, 2022 and recorded a goodwill write-down totaling$82.5 million during the fiscal 2022 fourth quarter. Subsequent to this write-down, the fair value of the SGK Brand Solutions reporting unit 29 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
approximated its carrying value atSeptember 1, 2022 . If current projections are not achieved or specific valuation factors outside the Company's control (such as discount rates and continued economic and industry challenges) significantly change, additional goodwill write-downs may be necessary in future periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Refer to Note 2, "Basis of Presentation" in Item 1 - "Financial Statements," for further details on recently issued accounting pronouncements.
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