MATTHEWS INTERNATIONAL CORPORATION 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2019 . 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, 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, 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, 2019 . 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. The SGK Brand Solutions segment
consists of brand management, pre-media services, printing plates and cylinders,
engineered products, imaging services, digital asset management, merchandising
display systems, and marketing and design services primarily for the consumer
goods and retail industries. The Memorialization segment consists primarily of
bronze and granite memorials and other memorialization products, caskets, and
cremation and incineration equipment primarily for the cemetery and funeral home
industries. The Industrial Technologies segment includes marking and coding
equipment and consumables, industrial automation products and order fulfillment
systems for identifying, tracking, picking and conveying consumer and industrial
products.
The Company's primary measure of segment profitability is adjusted earnings
before interest, income taxes, depreciation and amortization ("adjusted
EBITDA"). Adjusted EBITDA is defined by the Company as earnings before interest,
income taxes, depreciation, amortization and certain non-cash and/or
non-recurring items that do not contribute directly to management's evaluation
of its operating results. These items include stock-based compensation, the
non-service portion of pension and postretirement expense, acquisition costs,
ERP integration costs, and strategic initiatives and other charges. This
presentation is consistent with how the Company's chief operating decision maker
(the "CODM") evaluates the results of operations and makes strategic decisions
about the business. For these reasons, the Company believes that adjusted EBITDA
represents the most relevant measure of segment profit and loss.
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--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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 endedDecember 31, 2019 and 2018. Refer to Note 14, "Segment Information" in Item 1 - "Financial Statements" for the Company's financial information by segment. Three Months Ended December 31, 2019 2018 Sales: (Dollar amounts in thousands) SGK Brand Solutions $ 174,880$ 185,300 Memorialization 154,405 153,886 Industrial Technologies 35,659 34,991 Consolidated Sales $ 364,944$ 374,177 Adjusted EBITDA: SGK Brand Solutions$ 18,738 $ 27,351 Memorialization 30,093 30,321
Industrial Technologies 4,314 3,595
Corporate and Non-Operating (12,915 ) (14,786 )
Total Adjusted EBITDA (1)
(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, 2019 were$364.9 million , compared to$374.2 million for the three months endedDecember 31, 2018 , representing a decrease of$9.3 million . Changes in foreign currency rates were estimated to have an unfavorable impact of$2.5 million on fiscal 2020 consolidated sales compared to a year ago. The decrease in fiscal 2020 sales also reflected lower brand sales in theU.S. and decreased sales of cylinders, surfaces and engineered products inEurope for the SGK Brand Solutions segment. These decreases were partially offset by higher brand sales in theAsia-Pacific region and increased sales of merchandising solutions for the SGK Brand Solutions segment, higher casket revenues and increased sales of cremation and incineration equipment for the Memorialization segment, and increased product identification sales for the Industrial Technologies segment. In the SGK Brand Solutions segment, sales for the first three months of fiscal 2020 were$174.9 million , compared to$185.3 million for the first three months of fiscal 2019. The decrease primarily resulted from lower sales in theU.S. , reflecting a significant brand client electing to transition their work internally, and lower sales of cylinders, surfaces and engineered products inEurope . These decreases were partially offset by sales growth in theAsia-Pacific region and increased sales of merchandising solutions. Changes in foreign currency exchange rates had an unfavorable impact of$1.9 million on the segment's sales compared to the prior year. Memorialization segment sales for the first three months of fiscal 2020 were$154.4 million , compared to$153.9 million for the first three months of fiscal 2019. The sales increase primarily resulted from improved price realization on caskets and memorial products, and higher sales of cremation and incineration equipment, partially offset by lower unit sales of caskets and memorial products. Changes in foreign currency exchange rates had an unfavorable impact of$322,000 on the segment's sales compared to the prior year. Industrial Technologies segment sales were$35.7 million for the first three months of fiscal 2020, compared to$35.0 million for the first three months of fiscal 2019. The increase reflected higher product identification sales, partially offset by lower sales of warehouse automation systems and decreased applied technologies sales. Changes in foreign currency exchange rates had an unfavorable impact of$322,000 on the segment's sales compared to the prior year. Gross profit for the three months endedDecember 31, 2019 was$115.7 million , compared to$126.4 million for the same period a year ago. Consolidated gross profit as a percent of sales was 31.7% and 33.8% for the first three months of fiscal 2020 and fiscal 2019, respectively. The decrease in gross profit primarily reflected lower sales, and unfavorable changes in margins for 25 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
merchandising solutions and for cylinders, surfaces and engineered products within the SGK Brand Solutions segment. These declines were partially offset by the realization of productivity improvements and acquisition synergies, primarily in the Memorialization segment. Gross profit also included acquisition integration costs and other charges totaling$1.1 million and$402,000 for the three months endedDecember 31, 2019 and 2018, respectively. Selling and administrative expenses for the three months endedDecember 31, 2019 were$102.7 million , compared to$102.1 million for the first three months of fiscal 2019. Consolidated selling and administrative expenses, as a percent of sales, were 28.1% for the three months endedDecember 31, 2019 , compared to 27.3% for the same period last year. Selling and administrative expenses included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling$12.5 million in fiscal 2020, compared to$3.8 million in fiscal 2019. These increases in selling and administrative expenses were partially offset by the impact of lower sales in fiscal 2020, and benefits from ongoing cost-reduction initiatives. Fiscal 2019 selling and administrative expenses also included a$4.5 million loss recognized on the sale of a controlling interest in a Memorialization business. Intangible amortization for the three months endedDecember 31, 2019 was$17.9 million , compared to$8.1 million for the three months endedDecember 31, 2018 . The increase in intangible amortization primarily reflected$9.4 million of incremental amortization resulting from the fiscal 2019 reduction in useful lives for certain trade names that are being discontinued. Adjusted EBITDA was$40.2 million for the three months endedDecember 31, 2019 and$46.5 million for the three months endedDecember 31, 2018 . Adjusted EBITDA for the SGK Brand Solutions segment was$18.7 million for the first three months of fiscal 2020 compared to$27.4 million for the same period a year ago. The decrease in segment adjusted EBITDA primarily reflected the impact of lower sales, unfavorable changes in product mix, ongoing pricing pressures, and a decline in margins for merchandising solutions and for cylinders, surfaces and engineered products. These decreases were partially offset by the impact of sales growth in theAsia-Pacific region and benefits from cost-reduction initiatives. Memorialization segment adjusted EBITDA was$30.1 million for the first three months of fiscal 2020 compared to$30.3 million for the first three months of fiscal 2019. The decrease in segment adjusted EBITDA primarily reflected lower margins on sales of cremation and incineration products, partially offset by improved price realization on caskets and memorial products, and the favorable impact of acquisition synergies and other productivity initiatives. Adjusted EBITDA for the Industrial Technologies segment for the three months endedDecember 31, 2019 was$4.3 million , compared to$3.6 million for the same period a year ago. Industrial Technologies segment adjusted EBITDA reflected the impact of higher product identification sales, partially offset by the impact of lower sales of warehouse automation systems and decreased applied technologies sales. Investment income was$1.3 million for the three months endedDecember 31, 2019 , compared to investment losses of$1.4 million for the three months endedDecember 31, 2018 . The change primarily reflected increases 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 2020 was$9.2 million , compared to$10.3 million for the same period last year. The decrease in interest expense reflected lower average interest rates and a decrease in average borrowing levels in the current fiscal year. Other income (deductions), net, for the three months endedDecember 31, 2019 represented a decrease in pre-tax income of$2.8 million , compared to a decrease in pre-tax income of$924,000 for the same period last year. Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled$2.2 million and$931,000 for the three months endedDecember 31, 2019 and 2018, respectively. Refer to Note 11, "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 three months endedDecember 31, 2019 were a benefit of$5.4 million , compared to an expense of$605,000 for the first three months of fiscal 2019. The differences between the Company's consolidated income taxes for the first three months of fiscal 2020 versus the same period for fiscal 2019 primarily resulted from the fiscal 2020 consolidated loss before income taxes and higher fiscal 2020 discrete benefits resulting from the closure of several tax audits during the current quarter. The Company's fiscal 2020 three month effective tax rate varied from theU.S. statutory tax rate of 21.0% primarily due to state taxes, foreign statutory rate differentials, the benefit of tax credits, and discrete tax benefits recognized in the quarter. Net income attributable to noncontrolling interests was$160,000 for the three months endedDecember 31, 2019 , compared to net losses of$113,000 for the same period a year ago. The net income (losses) attributable to noncontrolling interests primarily reflected income (losses) in less than wholly-owned businesses. 26
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
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.
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--------------------------------------------------------------------------------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,
2019 2018
(Dollar amounts in thousands)
Net (loss) income $ (10,306 ) $ 2,984
Income tax (benefit) provision (5,397 ) 605
(Loss) income before income taxes (15,703 ) 3,589
Net (income) loss attributable to noncontrolling interests (160 ) 113
Interest expense 9,240 10,301
Depreciation and amortization * 28,933 19,226
Acquisition costs (1)** 1,948 2,032
ERP integration costs (2)** 665 2,177
Strategic initiatives and other charges (3)** 10,251 -
Loss on divestiture (4) - 4,465
Joint Venture depreciation, amortization, interest expense and other charges (5)
797 -
Stock-based compensation 2,031 3,647
Non-service pension and postretirement expense (6) 2,228 931
Total Adjusted EBITDA $ 40,230 $ 46,481
(1) Includes certain non-recurring costs associated with recent acquisition
activities.
(2) Represents costs associated with global ERP system integration efforts.
(3) Includes certain non-recurring costs associated with productivity and
cost-reduction initiatives intended to result in improved operating performance,
profitability and working capital levels.
(4) Represents a loss on the sale of a controlling interest in a subsidiary
within the Memorialization segment.
(5) Represents the Company's portion of depreciation, intangible amortization,
interest expense, and other non-recurring charges incurred by non-consolidated
subsidiaries accounted for as equity-method investments within the
Memorialization segment.
(6) Non-service pension and postretirement expense includes interest cost,
expected return on plan assets and amortization of actuarial gains and losses.
These benefit cost components are excluded from adjusted EBITDA since they are
primarily influenced by external market conditions that impact investment
returns and interest (discount) rates. The service cost and prior service cost
components of pension and postretirement expense are included in the calculation
of adjusted EBITDA, since they are considered to be a better reflection of the
ongoing service-related costs of providing these benefits. Please note that GAAP
pension and postretirement expense or the adjustment above are not necessarily
indicative of the current or future cash flow requirements related to these
employee benefit plans.
* Depreciation and amortization was $21.7 million and $11.4 million for the SGK
Brand Solutions segment, $4.6 million and $5.0 million for the Memorialization
segment, $1.4 million and $1.5 million for the Industrial Technologies segment,
and $1.2 million and $1.2 million for Corporate and Non-Operating, for the three
months ended December 31, 2019 and 2018, respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other
charges were $3.4 million and $601,000 for the SGK Brand Solutions segment and
$9.1 million and $3.6 million for Corporate and Non-Operating, for the three
months ended December 31, 2019 and 2018, respectively. Acquisition costs, ERP
integration costs, and strategic initiatives and other charges were $328,000 for
the Memorialization segment for the three months ended December 31, 2019 .
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was$5.4 million for the first three months of fiscal 2020, compared to$8.4 million for the first three months of fiscal 2019. Operating cash flow for both periods principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net (gains) losses related to investments, non-cash pension expense, other non-cash adjustments, and changes in working capital items. Net changes in working capital items resulted in a use of working capital of approximately$13.2 million in fiscal 2020, reflecting decreases in accounts receivable, accounts payable and accrued compensation, increases in inventory, and changes in other accounts. Net changes in working capital items resulted in a use of working capital of approximately$21.1 million in fiscal 2019, reflecting fiscal year-end compensation-related payments and increased amounts recognized in excess of billings for certain customer projects. 28 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
Cash used in investing activities was$14.2 million for the three months endedDecember 31, 2019 , compared to$15.6 million for the three months endedDecember 31, 2018 . Investing activities for the first three months of fiscal 2020 primarily reflected capital expenditures of$9.7 million and cash investments made in non-consolidated subsidiaries of$4.6 million . Investing activities for the first three months of fiscal 2019 primarily reflected capital expenditures of$8.5 million , acquisition payments (net of cash acquired or received from sellers) totaling$8.4 million , proceeds of$8.3 million from the divestiture of a controlling interest in a small Memorialization business, and investments and advances of$7.4 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$41.9 million for the last three fiscal years. Capital spending for fiscal 2020 is currently estimated to be approximately$50 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, 2019 was$11.9 million , primarily reflecting proceeds, net of repayments, on long-term debt of$21.6 million , treasury stock purchases of$1.8 million , and dividends of$6.5 million to the Company's shareholders. Cash provided by financing activities for the three months endedDecember 31, 2018 was$5.8 million , primarily reflecting proceeds, net of repayments, on long-term debt of$20.7 million , treasury stock purchases of$7.8 million , and dividends of$6.4 million to the Company's shareholders. The Company has a domestic credit facility with a syndicate of financial institutions that includes a$900.0 million senior secured revolving credit facility and a$250.0 million senior secured amortizing term loan. A portion of the revolving credit facility (not to exceed$150.0 million ) can be drawn in foreign currencies. The term loan requires scheduled principal payments of 5.0% of the outstanding principal in year one, 7.5% in year two, and 10.0% in years three through five, payable in quarterly installments. Pursuant to the terms of the domestic credit facility agreement, principal payments may be made on the term loan prior to the scheduled due dates. The balance of the revolving credit facility and the term loan are due on the maturity date ofApril 26, 2021 . Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.5% atDecember 31, 2019 ) 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 0.25% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed$35.0 million ) is available for the issuance of trade and standby letters of credit. OutstandingU.S. dollar denominated borrowings on the revolving credit facility atDecember 31, 2019 andSeptember 30, 2019 were$351.7 million and$325.6 million , respectively. Outstanding Euro denominated borrowings on the revolving credit facility atDecember 31, 2019 andSeptember 30, 2019 were €125.0 million ($140.2 million ) and €125.0 million ($136.5 million ), respectively. Outstanding borrowings on the term loan atDecember 31, 2019 andSeptember 30, 2019 were$47.3 million and$53.5 million , respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) atDecember 31, 2019 and 2018 was 2.60% and 3.06%, 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$3.2 million and$3.3 million atDecember 31, 2019 andSeptember 30, 2019 , respectively. The Company has a$115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matures onApril 11, 2020 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 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, 2019 29
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
andSeptember 30, 2019 were$106.7 million and$94.0 million , respectively. AtDecember 31, 2019 and 2018, the interest rate on borrowings under this facility was 2.51% and 3.25%, 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, 2019 September 30, 2019
Pay fixed swaps - notional amount $ 287,500 $ 293,750
Net unrealized loss $ (149 ) $ (534 )
Weighted-average maturity period (years) 1.7 1.9
Weighted-average received rate 1.76 % 2.02 % Weighted-average pay rate 1.43 % 1.41 % The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments, which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective. The fair value of the interest rate swaps reflected an unrealized loss, net of unrealized gains, of$149,000 ($112,000 after tax) atDecember 31, 2019 and an unrealized loss, net of unrealized gains, of$534,000 ($403,000 after tax) atSeptember 30, 2019 . The net unrealized loss is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates atDecember 31, 2019 , a gain (net of tax) of approximately$118,000 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 €35.0 million ($39.3 million ).
In
the first quarter of fiscal 2020, the Company extended this facility to a current maturity ofDecember 2020 and the Company intends to continue to extend this facility. Outstanding borrowings under the credit facility totaled €18.4 million ($20.7 million ) and €12.8 million ($14.0 million ) atDecember 31, 2019 andSeptember 30, 2019 , respectively. The weighted-average interest rate on outstanding borrowings under this facility atDecember 31, 2019 and 2018 was 1.25%. The Company's German subsidiary,Matthews Europe GmbH , had €15.0 million ($16.5 million ) of senior unsecured notes with European banks. The notes matured inNovember 2019 at which point they were paid. The weighted-average interest rate on the notes atDecember 31, 2018 was 1.40%. Finance lease liabilities included as a component of debt totaled$3.5 million and$3.6 million atDecember 31, 2019 andSeptember 30, 2019 , respectively. See Note 8, "Leases" in Item 1 - "Financial Statements" for further discussion on the Company's lease obligations. Other debt totaled$395,000 atSeptember 30, 2019 . The weighted-average interest rate on other debt was 5.54% atDecember 31, 2018 . The Company was in compliance with all of its debt covenants as ofDecember 31, 2019 . The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of$499,000 (net of income taxes of$162,000 ) and$3.3 million (net of income taxes of$1.1 million ), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment atDecember 31, 2019 andSeptember 30, 2019 , respectively. InSeptember 2014 , a claim was filed by a customer seeking to draw upon a letter of credit issued by the Company of £8.6 million ($11.3 million atDecember 31, 2019 ) with respect to a performance guarantee on an environmental solutions project inSaudi Arabia . Management assessed the customer's demand to be without merit and initiated an action with the court in theUnited Kingdom (the "U.K. Court"). Pursuant to this action, an order was issued by theU.K. Court inJanuary 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to theU.K. Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to theU.K. Court as ordered. OnJune 14, 2016 , the U.K Court ruled completely in favor of Matthews following a trial on the merits. However, the ongoing dispute involves litigation in multiple foreign jurisdictions because the contract between the parties includes a venue clause requiring the venue for any litigation to be in theUnited Kingdom , while the enforcement of any final judgment is required to be executed inSaudi Arabia . The Company continues to pursue a trial on the merits inSaudi Arabia which is now scheduled to conclude in calendar year 2020. It is necessary to obtain an equivalent favorable ruling in the courts ofSaudi Arabia to effectively enforce the judgment and 30 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
commence collection efforts. The Company remains confident regarding the pending trial on the merits inSaudi Arabia and expects to be in a position to enforce the judgment and initiate collection efforts following completion of that trial. However, as the customer has neither yet remitted the funds nor complied with the final,un -appealed orders of theU.K. Court, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews' results of operations. The Company's level of success in recovering funds from the customer will depend upon a number of factors including a successful completion of the pending trial on the merits inSaudi Arabia , the availability of recoverable funds, and the subsequent level of cooperation from the Saudi Arabian government to enforce a potential judgment against the customer. The Company has determined that resolution of this matter may take an extended period of time and therefore has classified the funded letter of credit within other assets on the Consolidated Balance Sheets as ofDecember 31, 2019 andSeptember 30, 2019 . The Company will continue to assess the accounting and collectability related to this matter as facts and circumstances evolve. The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 660,208 shares remain available for repurchase as ofDecember 31, 2019 . 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. Consolidated working capital of the Company was$311.1 million atDecember 31, 2019 , compared to$303.8 million atSeptember 30, 2019 . Cash and cash equivalents were$39.4 million atDecember 31, 2019 , compared to$35.3 million atSeptember 30, 2019 . The Company's current ratio was 2.1 atDecember 31, 2019 andSeptember 30, 2019 . ENVIRONMENTAL MATTERS: The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations. As such, the Company has developed environmental, health, and safety policies and procedures that include the proper handling, storage and disposal of hazardous materials. The Company is party to various environmental matters. These include obligations to investigate and mitigate the effects on the environment of non-operating former manufacturing sites acquired through corporate acquisitions and the disposal of certain materials at non-owned waste management facilities. The Company is currently performing environmental assessments and remediation at these sites, as appropriate.
ACQUISITIONS AND DIVESTITURES:
Refer to Note 15, "Acquisitions and Divestitures" in Item 1 - "Financial Statements" for further details on the Company's acquisitions and divestitures.
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--------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
FORWARD-LOOKING INFORMATION: The Company's current strategy to attain annual growth in earnings per share 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), acquisitions and integration activities to achieve synergy benefits and share repurchases. The significant factors (excluding acquisitions) influencing sales growth in the SGK Brand Solutions segment are global economic conditions, brand innovation, the level of marketing spending by the Company's clients, and government regulation. Due to the global footprint of this segment, currency fluctuations can also be a significant factor. For the Memorialization segment,North America death rates, the cremation trend, and price realization impact sales growth for the Company's bronze and granite memorials, caskets and cremation and incineration-related products. For the Industrial Technologies segment, sales growth drivers include economic/industrial market conditions, new product development, and the e-commerce trend. At present, the Company is currently targeting revenue growth in fiscal 2020 in its Industrial Technologies and Memorialization segments, with relatively stable year-over-year revenues for the SGK Brand Solutions segment. 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 over the fiscal 2020 to fiscal 2021 period. The Company's recent strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment, including the consolidation of several of the segment's trade names. As a result, the amortization of these intangible assets will significantly increase in fiscal 2020 through fiscal 2022. CRITICAL ACCOUNTING POLICIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . 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, 2019 . 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 in the second quarter of fiscal 2019 and determined that estimated fair value for all reporting units exceeded carrying value. The Company performed an interim assessment of its Graphics Imaging reporting unit goodwill during the fourth quarter of fiscal 2019 and recorded a$77.6 million goodwill write-down. Subsequent to this write-down, the fair value of the Graphics Imaging reporting unit, within the SGK Brand Solutions segment, approximated carrying value atSeptember 30, 2019 . If current projections are not achieved or specific valuation factors outside the Company's control (such as discount rates) significantly change, additional goodwill write-downs may be necessary in future periods. 32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
Payments due in fiscal year:
2020(1) After
Total Remainder 2021 to 2022 2023 to 2024 2024
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facilities $ 512,575 $ - $ 512,575 $ - $ -
Securitization Facility 106,720 106,720 - - -
Senior secured term loan 47,287 18,750 28,537 - -
2025 Senior Notes 391,351 7,875 31,500 31,500 320,476
Finance lease obligations(2) 4,253 517 884 757 2,095
Non-cancelable operating leases(2) 82,113 22,089 37,744 14,893 7,387
Other 10,066 2,235 5,873 966 992
Total contractual cash obligations
(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
A significant portion of the loans included in the table above bear interest at variable rates. AtDecember 31, 2019 , the weighted-average interest rate was 2.60% on the Company's domestic credit facility, 2.51% on the Company's Securitization Facility and 1.25% on the credit facility through the Company's European subsidiaries. Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company's operating cash. UnderIRS regulations, the Company is required to make contributions of approximately$4.3 million to its principal retirement plan in fiscal 2020. During the three months endedDecember 31, 2019 contributions of$176,000 and$206,000 were made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional$4.3 million ,$706,000 and$783,000 under the principal retirement plan, supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2020. 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, 2019 , the Company had unrecognized tax benefits, excluding penalties and interest, of approximately$12.6 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.
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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