Item 1. Financial Statements
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
43,603
|
|
|
|
|
$
|
55,711
|
|
Accounts receivable, net
|
|
|
302,558
|
|
|
|
|
294,915
|
|
Inventories
|
|
|
174,796
|
|
|
|
|
162,472
|
|
Other current assets
|
|
|
63,118
|
|
|
|
|
61,086
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
584,075
|
|
|
|
|
574,184
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
34,180
|
|
|
|
|
31,365
|
|
Property, plant and equipment: Cost
|
$
|
542,445
|
|
|
|
|
|
$
|
525,105
|
|
|
|
|
Less accumulated depreciation
|
(318,824
|
)
|
|
|
|
|
(305,613
|
)
|
|
|
|
|
|
|
|
223,621
|
|
|
|
|
|
219,492
|
|
Deferred income taxes
|
|
|
|
1,195
|
|
|
|
|
|
775
|
|
Other assets
|
|
|
|
32,647
|
|
|
|
|
|
19,895
|
|
Goodwill
|
|
|
|
867,883
|
|
|
|
|
|
851,489
|
|
Other intangible assets, net
|
|
|
|
430,258
|
|
|
|
|
|
393,841
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
2,173,859
|
|
|
|
|
|
$
|
2,091,041
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, current maturities
|
|
|
|
$
|
29,653
|
|
|
|
|
|
$
|
27,747
|
|
Trade accounts payable
|
|
|
|
62,502
|
|
|
|
|
|
58,118
|
|
Accrued compensation
|
|
|
|
54,047
|
|
|
|
|
|
63,737
|
|
Accrued income taxes
|
|
|
|
23,531
|
|
|
|
|
|
15,527
|
|
Other current liabilities
|
|
|
|
108,903
|
|
|
|
|
|
94,219
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
278,636
|
|
|
|
|
|
259,348
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
917,698
|
|
|
|
|
|
844,807
|
|
Accrued pension
|
|
|
|
113,317
|
|
|
|
|
|
110,941
|
|
Postretirement benefits
|
|
|
|
22,548
|
|
|
|
|
|
22,143
|
|
Deferred income taxes
|
|
|
|
106,320
|
|
|
|
|
|
107,038
|
|
Other liabilities
|
|
|
|
31,017
|
|
|
|
|
|
37,430
|
|
Total liabilities
|
|
|
|
1,469,536
|
|
|
|
|
|
1,381,707
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity-Matthews:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
36,334
|
|
|
|
|
|
$
|
36,334
|
|
|
|
|
Additional paid-in capital
|
118,024
|
|
|
|
|
|
117,088
|
|
|
|
|
Retained earnings
|
909,423
|
|
|
|
|
|
896,224
|
|
|
|
|
Accumulated other comprehensive loss
|
(199,838
|
)
|
|
|
|
|
(181,868
|
)
|
|
|
|
Treasury stock, at cost
|
(160,191
|
)
|
|
|
|
|
(159,113
|
)
|
|
|
|
Total shareholders' equity-Matthews
|
|
|
|
703,752
|
|
|
|
|
|
708,665
|
|
Noncontrolling interests
|
|
|
|
571
|
|
|
|
|
|
669
|
|
Total shareholders' equity
|
|
|
|
704,323
|
|
|
|
|
|
709,334
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
|
|
$
|
2,173,859
|
|
|
|
|
|
$
|
2,091,041
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
$
|
380,916
|
|
|
$
|
367,176
|
|
|
$
|
729,914
|
|
|
$
|
721,408
|
|
Cost of sales
|
(242,494
|
)
|
|
(229,416
|
)
|
|
(464,225
|
)
|
|
(457,081
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
138,422
|
|
|
137,760
|
|
|
265,689
|
|
|
264,327
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
(111,594
|
)
|
|
(111,325
|
)
|
|
(219,798
|
)
|
|
(225,854
|
)
|
|
|
|
|
|
|
|
|
Operating profit
|
26,828
|
|
|
26,435
|
|
|
45,891
|
|
|
38,473
|
|
|
|
|
|
|
|
|
|
Investment income
|
780
|
|
|
235
|
|
|
1,117
|
|
|
936
|
|
Interest expense
|
(6,614
|
)
|
|
(6,049
|
)
|
|
(12,762
|
)
|
|
(11,889
|
)
|
Other income (deductions), net
|
(153
|
)
|
|
(192
|
)
|
|
(708
|
)
|
|
(1,066
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
20,841
|
|
|
20,429
|
|
|
33,538
|
|
|
26,454
|
|
|
|
|
|
|
|
|
|
Income taxes
|
(5,973
|
)
|
|
(6,163
|
)
|
|
(9,696
|
)
|
|
(7,685
|
)
|
|
|
|
|
|
|
|
|
Net income
|
14,868
|
|
|
14,266
|
|
|
23,842
|
|
|
18,769
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
52
|
|
|
91
|
|
|
166
|
|
|
202
|
|
|
|
|
|
|
|
|
|
Net income attributable to Matthews shareholders
|
$
|
14,920
|
|
|
$
|
14,357
|
|
|
$
|
24,008
|
|
|
$
|
18,971
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Matthews shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
|
$
|
0.44
|
|
|
$
|
0.74
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.43
|
|
|
$
|
0.74
|
|
|
$
|
0.57
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Matthews
|
|
Noncontrolling Interest
|
|
Total
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
$
|
14,920
|
|
|
$
|
14,357
|
|
|
$
|
(52
|
)
|
|
$
|
(91
|
)
|
|
$
|
14,868
|
|
|
$
|
14,266
|
|
Other comprehensive (loss) income ("OCI"), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
4,108
|
|
|
15,412
|
|
|
9
|
|
|
(1
|
)
|
|
4,117
|
|
|
15,411
|
|
Pension plans and other postretirement benefits
|
1,462
|
|
|
1,058
|
|
|
—
|
|
|
—
|
|
|
1,462
|
|
|
1,058
|
|
Unrecognized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluation
|
979
|
|
|
(3,294
|
)
|
|
—
|
|
|
—
|
|
|
979
|
|
|
(3,294
|
)
|
Net amount reclassified to earnings
|
(306
|
)
|
|
455
|
|
|
—
|
|
|
—
|
|
|
(306
|
)
|
|
455
|
|
Net change in unrecognized gain (loss) on derivatives
|
673
|
|
|
(2,839
|
)
|
|
—
|
|
|
—
|
|
|
673
|
|
|
(2,839
|
)
|
OCI, net of tax
|
6,243
|
|
|
13,631
|
|
|
9
|
|
|
(1
|
)
|
|
6,252
|
|
|
13,630
|
|
Comprehensive (loss) income
|
$
|
21,163
|
|
|
$
|
27,988
|
|
|
$
|
(43
|
)
|
|
$
|
(92
|
)
|
|
$
|
21,120
|
|
|
$
|
27,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
Matthews
|
|
Noncontrolling Interest
|
|
Total
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
$
|
24,008
|
|
|
$
|
18,971
|
|
|
$
|
(166
|
)
|
|
$
|
(202
|
)
|
|
$
|
23,842
|
|
|
$
|
18,769
|
|
OCI, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(27,234
|
)
|
|
5,343
|
|
|
68
|
|
|
(54
|
)
|
|
(27,166
|
)
|
|
5,289
|
|
Pension plans and other postretirement benefits
|
2,998
|
|
|
2,160
|
|
|
—
|
|
|
—
|
|
|
2,998
|
|
|
2,160
|
|
Unrecognized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluation
|
7,065
|
|
|
(2,218
|
)
|
|
—
|
|
|
—
|
|
|
7,065
|
|
|
(2,218
|
)
|
Net amount reclassified to earnings
|
(799
|
)
|
|
961
|
|
|
—
|
|
|
—
|
|
|
(799
|
)
|
|
961
|
|
Net change in unrecognized gain (loss) on derivatives
|
6,266
|
|
|
(1,257
|
)
|
|
—
|
|
|
—
|
|
|
6,266
|
|
|
(1,257
|
)
|
OCI, net of tax
|
(17,970
|
)
|
|
6,246
|
|
|
68
|
|
|
(54
|
)
|
|
(17,902
|
)
|
|
6,192
|
|
Comprehensive (loss) income
|
$
|
6,038
|
|
|
$
|
25,217
|
|
|
$
|
(98
|
)
|
|
$
|
(256
|
)
|
|
$
|
5,940
|
|
|
$
|
24,961
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the six months ended March 31, 2017 and 2016 (Unaudited)
(Dollar amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Treasury
Stock
|
|
Non-
controlling
interests
|
|
Total
|
Balance,
September 30, 2016
|
$
|
36,334
|
|
|
$
|
117,088
|
|
|
$
|
896,224
|
|
|
$
|
(181,868
|
)
|
|
$
|
(159,113
|
)
|
|
$
|
669
|
|
|
$
|
709,334
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
24,008
|
|
|
—
|
|
|
—
|
|
|
(166
|
)
|
|
23,842
|
|
Minimum pension liability
|
—
|
|
|
—
|
|
|
—
|
|
|
2,998
|
|
|
—
|
|
|
—
|
|
|
2,998
|
|
Translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(27,234
|
)
|
|
—
|
|
|
68
|
|
|
(27,166
|
)
|
Fair value of derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
6,266
|
|
|
—
|
|
|
—
|
|
|
6,266
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,940
|
|
Stock-based compensation
|
—
|
|
|
9,017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,017
|
|
Purchase of 135,147 shares of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,173
|
)
|
|
—
|
|
|
(9,173
|
)
|
Issuance of 215,058 shares of treasury stock
|
—
|
|
|
(8,260
|
)
|
|
—
|
|
|
—
|
|
|
8,274
|
|
|
—
|
|
|
14
|
|
Cancellations of 2,640 shares of treasury stock
|
—
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
(179
|
)
|
|
—
|
|
|
—
|
|
Dividends, $0.34 per share
|
—
|
|
|
—
|
|
|
(10,809
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,809
|
)
|
Balance,
March 31, 2017
|
$
|
36,334
|
|
|
$
|
118,024
|
|
|
$
|
909,423
|
|
|
$
|
(199,838
|
)
|
|
$
|
(160,191
|
)
|
|
$
|
571
|
|
|
$
|
704,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Treasury
Stock
|
|
Non-
controlling
interests
|
|
Total
|
Balance,
September 30, 2015
|
$
|
36,334
|
|
|
$
|
115,890
|
|
|
$
|
843,955
|
|
|
$
|
(150,326
|
)
|
|
$
|
(115,033
|
)
|
|
$
|
3,226
|
|
|
$
|
734,046
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
18,971
|
|
|
—
|
|
|
—
|
|
|
(202
|
)
|
|
18,769
|
|
Minimum pension liability
|
—
|
|
|
—
|
|
|
—
|
|
|
2,160
|
|
|
—
|
|
|
—
|
|
|
2,160
|
|
Translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
5,343
|
|
|
—
|
|
|
(54
|
)
|
|
5,289
|
|
Fair value of derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,257
|
)
|
|
—
|
|
|
—
|
|
|
(1,257
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,961
|
|
Stock-based compensation
|
—
|
|
|
5,267
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,267
|
|
Purchase of 151,259 shares of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,209
|
)
|
|
—
|
|
|
(8,209
|
)
|
Issuance of 287,681 shares of treasury stock
|
—
|
|
|
(7,862
|
)
|
|
—
|
|
|
—
|
|
|
9,758
|
|
|
—
|
|
|
1,896
|
|
Cancellations of 3,957 shares of treasury stock
|
—
|
|
|
182
|
|
|
—
|
|
|
—
|
|
|
(182
|
)
|
|
—
|
|
|
—
|
|
Dividends,
$0.30 per share
|
—
|
|
|
—
|
|
|
(9,646
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,646
|
)
|
Acquisition of
noncontrolling interest
|
—
|
|
|
(2,727
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,434
|
)
|
|
(4,161
|
)
|
Balance,
March 31, 2016
|
$
|
36,334
|
|
|
$
|
110,750
|
|
|
$
|
853,280
|
|
|
$
|
(144,080
|
)
|
|
$
|
(113,666
|
)
|
|
$
|
1,536
|
|
|
$
|
744,154
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
23,842
|
|
|
$
|
18,769
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
32,294
|
|
|
32,158
|
|
Stock-based compensation expense
|
9,017
|
|
|
5,267
|
|
Change in deferred taxes
|
(829
|
)
|
|
107
|
|
Gain on sale of assets
|
(403
|
)
|
|
(347
|
)
|
Unrealized gain on investments
|
(1,411
|
)
|
|
(557
|
)
|
Changes in working capital items
|
(5,095
|
)
|
|
(6,635
|
)
|
Increase in other assets
|
(9,105
|
)
|
|
(3,181
|
)
|
Decrease in other liabilities
|
(2,041
|
)
|
|
(267
|
)
|
Increase in pension and postretirement benefits
|
7,696
|
|
|
6,751
|
|
Other, net
|
(9,679
|
)
|
|
(174
|
)
|
|
|
|
|
Net cash provided by operating activities
|
44,286
|
|
|
51,891
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(13,250
|
)
|
|
(23,946
|
)
|
Acquisitions, net of cash acquired
|
(92,564
|
)
|
|
(6,081
|
)
|
Proceeds from sale of assets
|
960
|
|
|
1,121
|
|
|
|
|
|
Net cash used in investing activities
|
(104,854
|
)
|
|
(28,906
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
239,427
|
|
|
22,055
|
|
Payments on long-term debt
|
(168,977
|
)
|
|
(37,960
|
)
|
Proceeds from the exercise of stock options
|
14
|
|
|
1,798
|
|
Purchases of treasury stock
|
(9,173
|
)
|
|
(8,209
|
)
|
Dividends
|
(10,809
|
)
|
|
(9,646
|
)
|
Transaction with noncontrolling interests
|
—
|
|
|
(4,161
|
)
|
|
|
|
|
Net cash provided by (used in) financing activities
|
50,482
|
|
|
(36,123
|
)
|
|
|
|
|
Effect of exchange rate changes on cash
|
(2,022
|
)
|
|
274
|
|
|
|
|
|
Net change in cash and cash equivalents
|
$
|
(12,108
|
)
|
|
$
|
(12,864
|
)
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2017
(Dollar amounts in thousands, except per share data)
Note 1. Nature of Operations
Matthews International Corporation ("Matthews" or the "Company"), founded in 1850 and incorporated in Pennsylvania in 1902, is a global provider of brand solutions, memorialization products and industrial technologies. Brand solutions include brand development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services). Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment primarily for the cemetery and funeral home industries. Industrial technologies include marking and coding equipment and related consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.
The Company has facilities in the United States, Europe, Asia, Canada, Australia, and Central and South America.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information for commercial and industrial companies and the instructions to Form 10‑Q and Rule 10‑01 of Regulation S‑X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the
six
months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending
September 30, 2017
. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10‑K for the year ended
September 30, 2016
. The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control. All intercompany accounts and transactions have been eliminated.
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. Actual results could differ from those estimates.
New Accounting Pronouncements:
Issued
In February 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07,
Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which provides new guidance intended to improve the disclosure requirements related to the service cost component of net benefit cost. This ASU is effective for the Company beginning in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
, which provides new guidance intended to simplify the subsequent measurement of goodwill and removing Step 2 from the goodwill impairment process. This ASU is effective for the Company beginning in fiscal year 2021, and does allow for early adoption. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
, which provides new guidance intended to make the definition of a business more operable and allow for more consistency in application. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. This ASU coincides with ASU 2014-09 and provides technical corrections and improvements to clarify guidance and correct unintended applications of the guidance. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
, which provides new guidance intended to clarify the presentation of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, and insurance proceeds, among other things. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019, and early adoption is permitted. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In April and May 2016, the FASB issued ASU Nos. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
and 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, respectively. Both of these ASUs coincide with ASU 2014-09 and provide additional guidance in the determination of performance obligations and implementation expedients. The Company is in the process of assessing the impact these ASUs, along with ASU 2014-09, will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which provides new guidance intended to simplify the accounting surrounding share-based compensation. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2018. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
which coincides with ASU 2014-09 and provides additional guidance in the determination of principals versus agents. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which provides new guidance on how an entity should account for leases and recognize associated lease assets and liabilities. This ASU requires lessees to recognize assets and liabilities that arise from financing and operating leases on the Consolidated Balance Sheet. The implementation of this standard will require application of the new guidance at the beginning of the earliest comparative period presented, once adopted. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2020, and does allow for early adoption. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides new guidance intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
, which provides new guidance to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new inventory measurement requirements are effective for the Company's 2018 fiscal year, and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606
. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. This standard is effective for Matthews beginning October 1, 2018. The Company is in the process of assessing the impact the adoption of this ASU will have on its consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
Adopted
In June 2014, the FASB issued ASU No. 2014-12,
Compensation - Stock Compensation (Topic 718),
which provides new guidance intended to clarify the diverse accounting treatment for certain share-based payments. Share-based payments with performance targets that could be achieved after the requisite service period should be treated as performance conditions under the existing guidance in ASC Topic 718. The adoption of this ASU in the first quarter ended December 31, 2016 had no impact on the Company's consolidated financial statements.
Note 3. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level fair value hierarchy is used to prioritize the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.
The fair values of the Company's assets and liabilities measured on a recurring basis are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
4,481
|
|
|
$
|
—
|
|
|
$
|
4,481
|
|
|
$
|
—
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
193
|
|
Equity and fixed income mutual funds
|
—
|
|
|
20,677
|
|
|
—
|
|
|
20,677
|
|
|
—
|
|
|
19,790
|
|
|
—
|
|
|
19,790
|
|
Other investments
|
—
|
|
|
5,374
|
|
|
—
|
|
|
5,374
|
|
|
—
|
|
|
5,127
|
|
|
—
|
|
|
5,127
|
|
Total assets at fair value
|
$
|
—
|
|
|
$
|
30,532
|
|
|
$
|
—
|
|
|
$
|
30,532
|
|
|
$
|
—
|
|
|
$
|
25,110
|
|
|
$
|
—
|
|
|
$
|
25,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
6,027
|
|
|
$
|
—
|
|
|
$
|
6,027
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
6,027
|
|
|
$
|
—
|
|
|
$
|
6,027
|
|
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
|
Note 4. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
|
|
|
|
Raw materials
|
$
|
34,331
|
|
|
$
|
29,597
|
|
Work in process
|
64,382
|
|
|
54,357
|
|
Finished goods
|
76,083
|
|
|
78,518
|
|
|
$
|
174,796
|
|
|
$
|
162,472
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 5. Debt
The Company has a domestic credit facility with a syndicate of financial institutions that was amended in April 2016 and includes a
$900,000
senior secured revolving credit facility and a
$250,000
senior secured amortizing term loan. 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. The balance of the revolving credit facility and the term loan are due on the maturity date of
April 26, 2021
. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR plus a factor ranging from
0.75%
to
2.00%
(
1.75%
at
March 31, 2017
) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). 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
$35,000
) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the revolving credit facility at
March 31, 2017
and
September 30, 2016
were
$645,000
and
$608,000
, respectively. Outstanding borrowings on the term loan at
March 31, 2017
and
September 30, 2016
were
$240,245
and
$246,449
, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility at
March 31, 2017
and
March 31, 2016
was
2.70%
and
2.52%
, respectively.
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
Pay fixed swaps - notional amount
|
|
$
|
371,875
|
|
|
$
|
403,125
|
|
Net unrealized gain (loss)
|
|
$
|
4,438
|
|
|
$
|
(5,834
|
)
|
Weighted-average maturity period (years)
|
|
3.6
|
|
|
3.9
|
|
Weighted-average received rate
|
|
0.98
|
%
|
|
0.53
|
%
|
Weighted-average pay rate
|
|
1.27
|
%
|
|
1.26
|
%
|
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, net of unrealized losses, of
$4,438
(
$2,707
after tax) at
March 31, 2017
and an unrealized loss, net of unrealized gains, of
$5,834
(
$3,559
after tax) at
September 30, 2016
. The net unrealized gain/loss is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI").
Assuming market rates remain constant with the rates at
March 31, 2017
, a gain (net of tax) of approximately
$635
included in AOCI is expected to be recognized in earnings over the next twelve months.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 5. Debt (continued)
At
March 31, 2017
and
September 30, 2016
, the interest rate swap contracts were reflected in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
March 31, 2017
|
|
September 30, 2016
|
Current assets:
|
|
|
|
|
Other current assets
|
|
$
|
1,074
|
|
|
$
|
43
|
|
Long-term assets:
|
|
|
|
|
|
|
Other assets
|
|
3,407
|
|
|
150
|
|
Current liabilities:
|
|
|
|
|
|
|
Other current liabilities
|
|
(33
|
)
|
|
(1,529
|
)
|
Long-term liabilities:
|
|
|
|
|
|
|
Other liabilities
|
|
(10
|
)
|
|
(4,498
|
)
|
Total derivatives
|
|
$
|
4,438
|
|
|
$
|
(5,834
|
)
|
The gains (losses) recognized on derivatives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of Gain (Loss) Recognized in Income on Derivative
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
503
|
|
|
$
|
(746
|
)
|
|
$
|
1,310
|
|
|
$
|
(1,576
|
)
|
The Company recognized the following gains (losses) in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss)
Recognized in AOCI on Derivatives
|
|
Location of Loss Reclassified From AOCI into Income (Effective Portion*)
|
|
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion*)
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
7,065
|
|
|
$
|
(2,218
|
)
|
|
Interest expense
|
|
$
|
799
|
|
|
$
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
*There is no ineffective portion or amount excluded from effectiveness testing.
|
The Company, through certain of its European subsidiaries, has a credit facility with a European bank. The maximum amount of borrowing available under this facility is
€35.0 million
(
$37,386
). Outstanding borrowings under the credit facility totaled
€26.3 million
(
$28,063
) at
March 31, 2017
. There were
no
outstanding borrowings under the credit facility at
September 30, 2016
. The weighted-average interest rate on outstanding borrowings under this facility at
March 31, 2017
and
2016
was
1.75%
.
The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled
€36,300
(
$39
) and
€255,200
(
$286
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at
March 31, 2017
and
2016
was
4.50%
and
4.16%
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 5. Debt (continued)
The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled
€584,100
(
$624
) and
€830,220
(
$931
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at
March 31, 2017
and
2016
was
6.01%
and
6.11%
, respectively.
In November 2016, the Company’s German subsidiary, Matthews Europe GmbH & Co. KG, issued
€15.0 million
(
$16,022
at
March 31, 2017
) of senior unsecured notes with European banks. The notes are guaranteed by Matthews International Corporation and mature in November 2019. A portion of the notes (
€5.0 million
) have a fixed interest rate of
1.4%
, and the remainder bear interest at Euro LIBOR plus
1.4%
. The weighted-average interest rate on the notes at
March 31, 2017
was
1.40%
.
The Company, through its Italian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled
€2.4 million
(
$2,528
) and
€3.2 million
(
$3,538
) at
March 31, 2017
and
September 30, 2016
, respectively. Matthews International S.p.A. also has multiple lines of credit totaling
€11.3 million
(
$12,102
) with the same Italian banks. Outstanding borrowings on these lines were
€6.1 million
(
$6,469
) and
€5.2 million
(
$5,801
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at
March 31, 2017
and
2016
was
2.31%
and
3.47%
, respectively.
In September 2014, a demand was filed by a customer seeking to draw upon a letter of credit issued by the Company of
£8,570,000
(
$10,701
at
March 31, 2017
) with respect to a performance guarantee on a project in Saudi Arabia. Management assessed the customer's demand to be without merit and initiated an action with the court in the United Kingdom (the "Court"). Pursuant to this action, an order was issued by the Court in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the Court as ordered. On June 14, 2016, the Court ruled completely in favor of Matthews following a trial on the merits. However, as the customer has neither yet remitted the funds nor complied with the final, un-appealed orders of the Court, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. As of
March 31, 2017
and
September 30, 2016
, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.
As of
March 31, 2017
and
September 30, 2016
, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheet.
Note 6. Share-Based Payments
The Company maintains an equity incentive plan (the "2012 Equity Incentive Plan") that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards. The Company also maintains an equity incentive plan (the "2007 Equity Incentive Plan") and a stock incentive plan (the "1992 Incentive Stock Plan") that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards. Under the 2012 Equity Incentive Plan, which has a
ten
-year term, the maximum number of shares available for grants or awards is an aggregate of
2,500,000
. There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan. At
March 31, 2017
, there were
589,238
shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.
The option price for each stock option granted under any of the plans may not be less than the fair market value of the Company's Class A Common Stock on the date of grant. As of
March 31, 2017
, there were
no
stock options outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 6. Share-Based Payments (continued)
With respect to outstanding restricted share grants, for grants made prior to fiscal 2013, generally one-half of the shares vested on the third anniversary of the grant, with the remaining one-half of the shares vesting in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. For grants made in and after fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. Additionally, restricted shares cannot vest until the first anniversary of the grant date. Unvested restricted shares generally expire on the earlier of
three
or
five
years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company issues restricted shares from treasury shares.
For the three-month periods ended
March 31, 2017
and
2016
, stock-based compensation cost totaled
$2,920
and
$2,741
, respectively. For the
six
-month periods ended
March 31, 2017
and
2016
, stock-based compensation cost totaled
$9,017
and
$5,267
, respectively. The
six
-month period ended
March 31, 2017
included
$3,337
of stock-based compensation cost that was recognized at the time of grant for retirement-eligible employees. The associated future income tax benefit recognized was
$1,139
and
$1,069
for the three-month periods ended March 31, 2017 and 2016, respectively, and
$3,517
and
$2,054
for the
six
-month periods ended
March 31, 2017
and
2016
, respectively.
There were
no
stock options exercised during the three-month periods ended March 31, 2017 and 2016, respectively. For the
six
-month periods ended
March 31, 2017
and
2016
, the amount of cash received from the exercise of stock options was
$14
and
$1,798
, respectively.
In connection with these exercises, the tax benefits realized by the Company were
$3
and
$283
for the
six
-month periods ended
March 31, 2017
and
2016
, respectively.
The transactions for restricted stock for the
six
months ended
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
average
grant-date
fair value
|
Non-vested at September 30, 2016
|
522,710
|
|
|
$
|
45.10
|
|
Granted
|
216,655
|
|
|
66.61
|
|
Vested
|
(185,180
|
)
|
|
47.24
|
|
Expired or forfeited
|
(6,950
|
)
|
|
50.29
|
|
Non-vested at March 31, 2017
|
547,235
|
|
|
$
|
52.83
|
|
As of
March 31, 2017
, the total unrecognized compensation cost related to unvested restricted stock was
$12,339
and is expected to be recognized over a weighted average period of
1.6
years.
The transactions for shares under options for the
six
months ended
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
average
exercise price
|
|
Weighted-
average
remaining
contractual term
|
|
Aggregate
intrinsic
value
|
Outstanding, September 30, 2016
|
77,733
|
|
|
$
|
40.56
|
|
|
|
|
|
Exercised
|
(333
|
)
|
|
40.56
|
|
|
|
|
|
Expired or forfeited
|
(77,400
|
)
|
|
40.56
|
|
|
|
|
|
Outstanding, March 31, 2017
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable, March 31, 2017
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
No options vested during the three-month and
six
-month periods ended
March 31, 2017
and
2016
, respectively. The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the
six
-month periods ended
March 31, 2017
and
2016
was
$9
and
$898
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 6. Share-Based Payments (continued)
The transactions for non-vested options for the
six
-months ended
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
grant-date
|
|
Shares
|
|
fair value
|
Non-vested at September 30, 2016
|
77,400
|
|
|
$
|
12.29
|
|
Expired or forfeited
|
(77,400
|
)
|
|
12.29
|
|
Non-vested at March 31, 2017
|
—
|
|
|
$
|
—
|
|
The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model. The following table indicates the assumptions used in estimating the fair value of restricted stock granted during the
six
-month periods ended
March 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
Expected volatility
|
20.2
|
%
|
|
20.7
|
%
|
Dividend yield
|
1.1
|
%
|
|
1.0
|
%
|
Average risk-free interest rate
|
1.7
|
%
|
|
1.7
|
%
|
Average expected term (years)
|
2.1
|
|
|
2.1
|
|
The risk-free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date. Expected volatilities are based on the historical volatility of the Company's stock price. The expected term for grants in the years ended
September 30, 2016
,
2015
and
2014
represents an estimate of the average period of time for restricted shares to vest. The option characteristics for each grant are considered separately for valuation purposes.
The Company maintains the 1994 Director Fee Plan and the Amended and Restated 2014 Director Fee Plan (collectively, the "Director Fee Plans"). There will be no further fees or share-based awards granted under the 1994 Director Fee Plan. Under the Amended and Restated 2014 Director Fee Plan, non-employee directors (except for the Chairman of the Board) each receive, as an annual retainer fee for fiscal
2017
, either cash or shares of the Company's Class A Common Stock with a value equal to
$75
. The annual retainer fee for fiscal
2017
paid to a non-employee Chairman of the Board is
$175
. Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board. The value of deferred shares is recorded in other liabilities. A total of
22,942
shares had been deferred under the Director Fee Plans as of
March 31, 2017
. Additionally, non-employee directors each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of
$125
for fiscal
2017
. A total of
22,300
stock options have been granted under the Director Fee Plans. At
March 31, 2017
, there were
no
options outstanding. Additionally,
161,724
shares of restricted stock have been granted under the Director Fee Plans,
58,574
of which were issued under the Amended and Restated 2014 Director Fee Plan.
25,157
share of restricted stock are unvested at
March 31, 2017
. A total of
150,000
shares have been authorized to be issued under the Amended and Restated 2014 Director Fee Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Earnings Per Share Attributable to Matthews' Shareholders
The information used to compute earnings per share attributable to Matthews' common shareholders was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributable to Matthews shareholders
|
$
|
14,920
|
|
|
$
|
14,357
|
|
|
$
|
24,008
|
|
|
$
|
18,971
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
32,283
|
|
|
33,005
|
|
|
32,247
|
|
|
32,970
|
|
Effect of dilutive securities
|
286
|
|
|
197
|
|
|
333
|
|
|
250
|
|
Diluted shares
|
32,569
|
|
|
33,202
|
|
|
32,580
|
|
|
33,220
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from the dilution calculation were insignificant for the
three and six
months ended
March 31, 2017
and
2016
.
Note 8. Pension and Other Postretirement Benefit Plans
The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Pension
|
|
Other Postretirement
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,138
|
|
|
$
|
1,813
|
|
|
$
|
98
|
|
|
$
|
101
|
|
Interest cost
|
1,841
|
|
|
2,406
|
|
|
157
|
|
|
211
|
|
Expected return on plan assets
|
(2,312
|
)
|
|
(2,407
|
)
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
(45
|
)
|
|
(46
|
)
|
|
(49
|
)
|
|
(49
|
)
|
Net actuarial loss
|
2,509
|
|
|
1,866
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
$
|
4,131
|
|
|
$
|
3,632
|
|
|
$
|
206
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
Pension
|
|
Other Postretirement
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
4,276
|
|
|
$
|
3,626
|
|
|
$
|
196
|
|
|
$
|
202
|
|
Interest cost
|
3,682
|
|
|
4,812
|
|
|
314
|
|
|
422
|
|
Expected return on plan assets
|
(4,624
|
)
|
|
(4,814
|
)
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
(90
|
)
|
|
(92
|
)
|
|
(98
|
)
|
|
(98
|
)
|
Net actuarial loss
|
5,018
|
|
|
3,732
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
$
|
8,262
|
|
|
$
|
7,264
|
|
|
$
|
412
|
|
|
$
|
526
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 8. Pension and Other Postretirement Benefit Plans (continued)
On September 30, 2016, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for its pensions. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Matthews has elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This change is being made to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of the total benefit obligations. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly, is recognizing its effects prospectively beginning in fiscal
2017
. The impact of this change was not material for the
three and six
months ended
March 31, 2017
.
Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company's operating funds. Under IRS regulations, the Company is required to make contributions of approximately
$5,109
to its principal retirement plan in fiscal year
2017
.
Contributions made and anticipated for fiscal year
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
Pension
|
|
Other Postretirement
|
|
|
|
|
|
Contributions during the six months ended March 31, 2017:
|
|
|
|
|
Principal retirement plan
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental retirement plan
|
|
362
|
|
|
—
|
|
Other postretirement plan
|
|
—
|
|
|
456
|
|
|
|
|
|
|
Additional contributions expected in fiscal 2017:
|
|
|
|
|
|
|
Principal retirement plan
|
|
$
|
5,109
|
|
|
$
|
—
|
|
Supplemental retirement plan
|
|
398
|
|
|
—
|
|
Other postretirement plan
|
|
—
|
|
|
692
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Accumulated Other Comprehensive Income
The changes in AOCI by component, net of tax, for the three-month periods ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
(54,514
|
)
|
|
$
|
(153,601
|
)
|
|
$
|
2,034
|
|
|
$
|
(206,081
|
)
|
OCI before reclassification
|
|
—
|
|
|
4,108
|
|
|
979
|
|
|
5,087
|
|
Amounts reclassified from AOCI
|
(a)
|
1,462
|
|
|
—
|
|
(b)
|
(306
|
)
|
|
1,156
|
|
Net current-period OCI
|
|
1,462
|
|
|
4,108
|
|
|
673
|
|
|
6,243
|
|
Balance, March 31, 2017
|
|
$
|
(53,052
|
)
|
|
$
|
(149,493
|
)
|
|
$
|
2,707
|
|
|
$
|
(199,838
|
)
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
—
|
|
|
$
|
336
|
|
|
—
|
|
|
$
|
336
|
|
OCI before reclassification
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Net current-period OCI
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Balance, March 31, 2017
|
|
—
|
|
|
$
|
345
|
|
|
—
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
(42,372
|
)
|
|
$
|
(114,673
|
)
|
|
$
|
(666
|
)
|
|
$
|
(157,711
|
)
|
OCI before reclassification
|
|
—
|
|
|
15,412
|
|
|
(3,294
|
)
|
|
12,118
|
|
Amounts reclassified from AOCI
|
(a)
|
1,058
|
|
|
—
|
|
(b)
|
455
|
|
|
1,513
|
|
Net current-period OCI
|
|
1,058
|
|
|
15,412
|
|
|
(2,839
|
)
|
|
13,631
|
|
Balance, March 31, 2016
|
|
$
|
(41,314
|
)
|
|
$
|
(99,261
|
)
|
|
$
|
(3,505
|
)
|
|
$
|
(144,080
|
)
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
—
|
|
|
$
|
313
|
|
|
—
|
|
|
$
|
313
|
|
OCI before reclassification
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Net current-period OCI
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance, March 31, 2016
|
|
—
|
|
|
$
|
312
|
|
|
—
|
|
|
$
|
312
|
|
|
|
(a)
|
Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 8).
|
|
|
(b)
|
Amounts were included in interest expense in the periods the hedged item affected earnings (see Note 5).
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Accumulated Other Comprehensive Income (continued)
The changes in AOCI by component, net of tax, for the
six
-month periods ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
$
|
(56,050
|
)
|
|
$
|
(122,259
|
)
|
|
$
|
(3,559
|
)
|
|
$
|
(181,868
|
)
|
OCI before reclassification
|
|
—
|
|
|
(27,234
|
)
|
|
7,065
|
|
|
(20,169
|
)
|
Amounts reclassified from AOCI
|
(a)
|
2,998
|
|
|
—
|
|
(b)
|
(799
|
)
|
|
2,199
|
|
Net current-period OCI
|
|
2,998
|
|
|
(27,234
|
)
|
|
6,266
|
|
|
(17,970
|
)
|
Balance, March 31, 2017
|
|
$
|
(53,052
|
)
|
|
$
|
(149,493
|
)
|
|
$
|
2,707
|
|
|
$
|
(199,838
|
)
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
—
|
|
|
$
|
277
|
|
|
—
|
|
|
$
|
277
|
|
OCI before reclassification
|
|
—
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Net current-period OCI
|
|
—
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Balance, March 31, 2017
|
|
—
|
|
|
$
|
345
|
|
|
—
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
$
|
(43,474
|
)
|
|
$
|
(104,604
|
)
|
|
$
|
(2,248
|
)
|
|
$
|
(150,326
|
)
|
OCI before reclassification
|
|
—
|
|
|
5,343
|
|
|
(2,218
|
)
|
|
3,125
|
|
Amounts reclassified from AOCI
|
(a)
|
2,160
|
|
|
—
|
|
(b)
|
961
|
|
|
3,121
|
|
Net current-period OCI
|
|
2,160
|
|
|
5,343
|
|
|
(1,257
|
)
|
|
6,246
|
|
Balance, March 31, 2016
|
|
$
|
(41,314
|
)
|
|
$
|
(99,261
|
)
|
|
$
|
(3,505
|
)
|
|
$
|
(144,080
|
)
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
—
|
|
|
$
|
366
|
|
|
—
|
|
|
$
|
366
|
|
OCI before reclassification
|
|
—
|
|
|
(54
|
)
|
|
—
|
|
|
(54
|
)
|
Net current-period OCI
|
|
—
|
|
|
(54
|
)
|
|
—
|
|
|
(54
|
)
|
Balance, March 31, 2016
|
|
—
|
|
|
$
|
312
|
|
|
—
|
|
|
$
|
312
|
|
|
|
(a)
|
Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 8).
|
|
|
(b)
|
Amounts were included in interest expense in the periods the hedged item affected earnings (see Note 5).
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Accumulated Other Comprehensive Income (continued)
Reclassifications out of AOCI for the
three and six
-month periods ended
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
Details about AOCI Components
|
|
Three Months Ended March 31, 2017
|
|
Six Months Ended March 31, 2017
|
|
Affected line item in the Statement of income
|
|
|
|
|
|
|
|
Postretirement benefit plans
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
$
|
94
|
|
(a)
|
$
|
188
|
|
|
|
Actuarial losses
|
|
(2,509
|
)
|
(a)
|
(5,018
|
)
|
|
|
|
|
(2,415
|
)
|
(b)
|
(4,830
|
)
|
|
Income before income tax
|
|
|
(953
|
)
|
|
(1,832
|
)
|
|
Income taxes
|
|
|
$
|
(1,462
|
)
|
|
$
|
(2,998
|
)
|
|
Net income
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
503
|
|
|
$
|
1,310
|
|
|
Interest expense
|
|
|
503
|
|
(b)
|
1,310
|
|
|
Income before income tax
|
|
|
197
|
|
|
511
|
|
|
Income taxes
|
|
|
$
|
306
|
|
|
$
|
799
|
|
|
Net income
|
|
|
(a)
|
Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses. For additional information, see Note 8.
|
|
|
(b)
|
For pre-tax items, positive amounts represent income and negative amounts represent expense.
|
Reclassifications out of AOCI for the
three and six
-month periods ended
March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
Details about AOCI Components
|
|
Three Months Ended
March 31, 2016
|
|
Six Months Ended
March 31, 2016
|
|
Affected line item in the Statement of income
|
|
|
|
|
|
|
|
Postretirement benefit plans
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
$
|
95
|
|
(a)
|
$
|
190
|
|
|
|
Actuarial losses
|
|
(1,866
|
)
|
(a)
|
(3,732
|
)
|
|
|
|
|
(1,771
|
)
|
(b)
|
(3,542
|
)
|
|
Income before income tax
|
|
|
(713
|
)
|
|
(1,382
|
)
|
|
Income taxes
|
|
|
$
|
(1,058
|
)
|
|
$
|
(2,160
|
)
|
|
Net income
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(746
|
)
|
|
$
|
(1,576
|
)
|
|
Interest expense
|
|
|
(746
|
)
|
(b)
|
(1,576
|
)
|
|
Income before income tax
|
|
|
(291
|
)
|
|
(615
|
)
|
|
Income taxes
|
|
|
$
|
(455
|
)
|
|
$
|
(961
|
)
|
|
Net income
|
|
|
(a)
|
Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses. For additional information, see Note 8.
|
|
|
(b)
|
For pre-tax items, positive amounts represent income and negative amounts represent expense.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 10. Income Taxes
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 effective tax rate for the
six
months ended
March 31, 2017
was
28.9%
, compared to
29.1%
for the
six
months ended
March 31, 2016
. The difference between the Company's fiscal
2017
second
quarter effective tax rate and the Federal statutory rate of
35.0%
primarily reflected lower foreign income taxes, offset by the impact of state taxes.
The Company had unrecognized tax benefits (excluding penalties and interest) of
$13,410
and
$13,820
on
March 31, 2017
and
September 30, 2016
, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate were
$6,253
and
$6,663
at
March 31, 2017
and
September 30, 2016
, respectively.
The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. Total penalties and interest accrued were
$2,168
and
$2,088
at
March 31, 2017
and
September 30, 2016
, respectively. These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.
The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions. As of
March 31, 2017
, the tax years that remain subject to examination by major jurisdiction generally are:
|
|
|
United States – Federal
|
2013 and forward
|
United States – State
|
2012 and forward
|
Canada
|
2013 and forward
|
Germany
|
2009 and forward
|
United Kingdom
|
2014 and forward
|
Australia
|
2012 and forward
|
Singapore
|
2012 and forward
|
Note 11. Segment Information
The Company manages its businesses under
three
segments: SGK Brand Solutions, Memorialization and Industrial Technologies. The SGK Brand Solutions segment includes brand development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services). The Memorialization segment consists primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment includes marking and coding equipment and related consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products. Management evaluates segment performance based on operating profit (before income taxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net and noncontrolling interest amongst the segments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 11. Segment Information (continued)
Information about the Company's segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales:
|
|
SGK Brand Solutions
|
$
|
190,120
|
|
|
$
|
184,384
|
|
|
$
|
365,921
|
|
|
$
|
362,675
|
|
Memorialization
|
162,108
|
|
|
157,376
|
|
|
307,730
|
|
|
304,987
|
|
Industrial Technologies
|
28,688
|
|
|
25,416
|
|
|
56,263
|
|
|
53,746
|
|
|
$
|
380,916
|
|
|
$
|
367,176
|
|
|
$
|
729,914
|
|
|
$
|
721,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
SGK Brand Solutions
|
$
|
4,361
|
|
|
$
|
5,500
|
|
|
$
|
8,551
|
|
|
$
|
8,255
|
|
Memorialization
|
22,938
|
|
|
19,470
|
|
|
37,305
|
|
|
27,159
|
|
Industrial Technologies
|
(471
|
)
|
|
1,465
|
|
|
35
|
|
|
3,059
|
|
|
$
|
26,828
|
|
|
$
|
26,435
|
|
|
$
|
45,891
|
|
|
$
|
38,473
|
|
Note 12. Acquisitions
On March 1, 2017, the Company acquired GJ Creative Limited ("Equator") for
£30.4 million
(
$37,540
) (net of cash acquired, subject to a working capital true-up). Equator provides design expertise capable of taking brands from creation to shelf under one roof, and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the Equator acquisition is not finalized as of
March 31, 2017
, and is subject to changes as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On February 28, 2017, the Company acquired certain net assets of RAF Technology, Inc. ("RAF") for
$8,746
(net of cash acquired, subject to a working capital true-up). RAF is a global leader in pattern and optical character recognition software, and is included in the Company's Industrial Technologies segment. The preliminary purchase price allocation related to the RAF acquisition is not finalized as of
March 31, 2017
, and is subject to changes as the Company obtains additional information related to working capital items, intangible assets and other assets and liabilities.
On January 13, 2017, the Company acquired VCG (Holdings) Limited ("VCG") for
£8.8 million
(
$10,695
) (net of cash acquired). VCG is a leading graphics, plate making, and creative design company and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the VCG acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On January 3, 2017, the Company acquired A. + E. Ungricht GmbH + Co KG ("Ungricht") for
€22.7 million
(
$23,736
) (net of cash acquired, subject to a working capital true-up). Ungricht is a leading European provider of pre-press services and gravure printing forms, located in Germany, and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the Ungricht acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On November 30, 2016, the Company acquired Guidance Automation Limited ("Guidance") for
£7.8 million
(
$9,732
) (net of cash acquired). Guidance provides technological solutions for autonomous warehouse vehicles and is included in the Company's Industrial Technologies segment. The preliminary purchase price allocation related to the Guidance acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On February 1, 2016, the Company acquired certain net assets of Digital Design, Inc. ("DDI") for
$8,773
(net of cash acquired and holdback amount). DDI is a manufacturer and seller of ink jet printing systems and is included in the Company's Industrial Technologies segment. The Company finalized the allocation of purchase price related to the DDI acquisition in the second quarter of fiscal 2017, resulting in an immaterial adjustment to certain working capital accounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 13. Goodwill and Other Intangible Assets
A summary of the carrying amount of goodwill attributable to each segment as well as the changes in such amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SGK Brand
Solutions
|
|
Memorialization
|
|
Industrial Technologies
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
458,510
|
|
|
$
|
347,116
|
|
|
$
|
56,615
|
|
|
$
|
862,241
|
|
Accumulated impairment losses
|
(5,752
|
)
|
|
(5,000
|
)
|
|
—
|
|
|
(10,752
|
)
|
Balance at September 30, 2016
|
452,758
|
|
|
342,116
|
|
|
56,615
|
|
|
851,489
|
|
|
|
|
|
|
|
|
|
Additions during period
|
16,059
|
|
|
—
|
|
|
11,727
|
|
|
27,786
|
|
Translation and other adjustments
|
(8,983
|
)
|
|
(2,449
|
)
|
|
40
|
|
|
(11,392
|
)
|
Goodwill
|
465,586
|
|
|
344,667
|
|
|
68,382
|
|
|
878,635
|
|
Accumulated impairment losses
|
(5,752
|
)
|
|
(5,000
|
)
|
|
—
|
|
|
(10,752
|
)
|
Balance at March 31, 2017
|
$
|
459,834
|
|
|
$
|
339,667
|
|
|
$
|
68,382
|
|
|
$
|
867,883
|
|
The Company performed its annual impairment review in the second quarter of fiscal 2017 and has determined that estimated fair value for all reporting units exceeded carrying value, therefore no adjustments to the carrying value of goodwill were necessary.
The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of
March 31, 2017
and
September 30, 2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
March 31, 2017:
|
|
|
|
|
|
Trade names
|
$
|
168,467
|
|
|
$
|
—
|
|
*
|
$
|
168,467
|
|
Trade names
|
1,756
|
|
|
(1,756
|
)
|
|
—
|
|
Customer relationships
|
329,925
|
|
|
(71,597
|
)
|
|
258,328
|
|
Copyrights/patents/other
|
14,206
|
|
|
(10,743
|
)
|
|
3,463
|
|
|
$
|
514,354
|
|
|
$
|
(84,096
|
)
|
|
$
|
430,258
|
|
|
|
|
|
|
|
September 30, 2016
:
|
|
|
|
|
|
|
|
|
Trade names
|
$
|
168,467
|
|
|
$
|
—
|
|
*
|
$
|
168,467
|
|
Trade names
|
1,814
|
|
|
(1,802
|
)
|
|
12
|
|
Customer relationships
|
286,595
|
|
|
(61,706
|
)
|
|
224,889
|
|
Copyrights/patents/other
|
11,066
|
|
|
(10,593
|
)
|
|
473
|
|
|
$
|
467,942
|
|
|
$
|
(74,101
|
)
|
|
$
|
393,841
|
|
* Not subject to amortization
|
|
|
|
|
|
|
The net change in intangible assets during the
six
months ended
March 31, 2017
included the impact of foreign currency fluctuations during the period, additional amortization, and additions related to the Guidance, Ungricht, VCG, RAF and Equator acquisitions.
Amortization expense on intangible assets was
$5,634
and
$5,190
for the three-month periods ended
March 31, 2017
and
2016
, respectively. For the
six
-month periods ended
March 31, 2017
and
2016
, amortization expense was
$10,575
and
$10,406
, respectively. Amortization expense is estimated to be
$11,886
for the remainder of fiscal
2017
,
$21,724
in
2018
,
$20,677
in
2019
,
$19,561
in
2020
and
$18,802
in
2021
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 14. Subsequent Events
On April 28, 2017, subsequent to the end of the second fiscal quarter, the Company received communication that it should expect to receive the full extent of its insurance coverage (
$10,000
) related to the previously disclosed theft of funds by an employee.
On April 4, 2017, subsequent to the end of the second fiscal quarter, the Company entered into a
two
-year
$115,000
accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions. Under the Securitization Facility, the Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables to Matthews Receivables Funding Corporation, LLC (“Matthews RFC”), a wholly-owned bankruptcy-remote subsidiary of the Company. Matthews RFC in turn assigns a collateral interest in these receivables to certain financial institutions, and then may borrow funds under the Securitization Facility. The Securitization Facility does not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations will 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%
(based on the unused amount of the facility) of the unused portion of the Securitization Facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT:
The following discussion should be read in conjunction with the consolidated financial statements of Matthews 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 ended
September 30, 2016
. 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, 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 ended September 30,
2016
. 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.
RESULTS OF OPERATIONS:
The following table sets forth the sales and operating profit for the Company's three reporting segments for the
three and six
-month periods ended
March 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales:
|
(Dollar amounts in thousands)
|
SGK Brand Solutions
|
$
|
190,120
|
|
|
$
|
184,384
|
|
|
$
|
365,921
|
|
|
$
|
362,675
|
|
Memorialization
|
162,108
|
|
|
157,376
|
|
|
307,730
|
|
|
304,987
|
|
Industrial Technologies
|
28,688
|
|
|
25,416
|
|
|
56,263
|
|
|
53,746
|
|
|
$
|
380,916
|
|
|
$
|
367,176
|
|
|
$
|
729,914
|
|
|
$
|
721,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
SGK Brand Solutions
|
$
|
4,361
|
|
|
$
|
5,500
|
|
|
$
|
8,551
|
|
|
$
|
8,255
|
|
Memorialization
|
22,938
|
|
|
19,470
|
|
|
37,305
|
|
|
27,159
|
|
Industrial Technologies
|
(471
|
)
|
|
1,465
|
|
|
35
|
|
|
3,059
|
|
|
$
|
26,828
|
|
|
$
|
26,435
|
|
|
$
|
45,891
|
|
|
$
|
38,473
|
|
Sales for the
six
months ended
March 31, 2017
were
$729.9 million
, compared to
$721.4 million
for the
six
months ended
March 31, 2016
. The
increase
in fiscal
2017
sales principally reflected the benefits from recently completed acquisitions (see "Acquisitions" below), partially offset by the unfavorable impact of changes in foreign currencies against the U.S. dollar of $10.8 million compared to a year ago.
In the SGK Brand Solutions segment, sales for the first
six
months of fiscal
2017
were
$365.9 million
, compared to
$362.7 million
for the first
six
months of fiscal
2016
. The
increase
in sales resulted from higher sales of merchandising display projects, sales growth in the U.K. and Asia Pacific markets, and the completion of three acquisitions during the second quarter of fiscal 2017. These sales increases were partially offset by slower brand market conditions in the U.S. and Europe, and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $9.9 million. Memorialization segment sales for the first
six
months of fiscal
2017
were
$307.7 million
, compared to
$305.0 million
for the first
six
months of fiscal
2016
. The sales
increase
reflected higher sales of cemetery memorial products and cremation equipment, partially offset by lower unit sales of caskets. Industrial Technologies segment sales were
$56.3 million
for the first
six
months of fiscal
2017
, compared to
$53.7 million
for the first
six
months of fiscal
2016
. The
increase
reflected higher sales of marking products and the favorable impact of recently completed acquisitions, partially offset by lower sales of fulfillment systems and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $545,000.
Gross profit for the
six
months ended
March 31, 2017
was
$265.7 million
, compared to
$264.3 million
for the same period a year ago. Consolidated gross profit as a percent of sales was
36.4%
and
36.6%
for the first
six
months of fiscal
2017
and fiscal
2016
, respectively. The
increase
in gross profit reflected the impact of higher sales, the benefits of productivity initiatives, and realization of acquisition synergies, partially offset by unfavorable changes in foreign currency values against the U.S. dollar. Fiscal 2017 gross profit also included an expense of $1.8 million for the write-off of inventory step-up value related to the current year acquisitions. Fiscal 2016 gross profit included an expense of approximately $4.0 million for the partial write-off of inventory step-up value related to the acquisition of Aurora Products Group, LLC ("Aurora") in August 2015.
Selling and administrative expenses for the
six
months ended
March 31, 2017
were
$219.8 million
, compared to
$225.9 million
for the first
six
months of fiscal
2016
. Consolidated selling and administrative expenses, as a percent of sales, were
30.1%
for the
six
months ended
March 31, 2017
, compared to
31.3%
for the same period last year. The
decrease
in selling and administrative expenses reflected the benefits from cost-reduction initiatives, including acquisition integration synergies. The decrease in fiscal 2017 selling and administrative expenses was partially offset by $3.3 million of incremental stock-based compensation expense that was recognized in the first fiscal quarter of the current year as a result of required accounting treatment for retirement-eligible employees. In addition, fiscal 2017 selling and administrative expenses included an increase of $752,000 in intangible asset amortization related to recently completed acquisitions. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges totaling $16.1 million in fiscal 2017, compared to $18.9 million in fiscal 2016.
Operating profit for the
six
months ended
March 31, 2017
was
$45.9 million
, compared to
$38.5 million
for the
six
months ended
March 31, 2016
. The SGK Brand Solutions segment operating profit for the first
six
months of fiscal
2017
was
$8.6 million
, compared to
$8.3 million
for the same period a year ago. The
increase
in segment operating profit reflected the impact of recent acquisitions, partially offset by the unfavorable impact of changes in foreign currencies against the U.S. dollar of approximately $829,000. Additionally, fiscal 2017 operating profit for the SGK Brand Solutions segment included acquisition integration costs and other charges totaling $13.1 million, compared to $14.9 million in fiscal 2016. Fiscal 2017 segment operating profit also included an increase of $752,000 in intangible asset amortization related to recently completed acquisitions. Memorialization segment operating profit for the first
six
months of fiscal
2017
was
$37.3 million
, compared to
$27.2 million
for the first
six
months of fiscal
2016
. The
increase
in segment operating profit reflected higher cemetery memorial and cremation equipment sales, and the benefits of acquisition synergies and other productivity initiatives, partially offset by the impact of lower casket sales. Fiscal 2017 operating profit for the Memorialization segment also included acquisition integration costs and other charges totaling $4.7 million, compared to $7.9 million in fiscal 2016. Operating profit for the Industrial Technologies segment for the
six
months ended
March 31, 2017
was
$35,000
, compared to
$3.1 million
for the same period a year ago, primarily reflecting lower sales (excluding acquisitions), lower margins on fulfillment sales, and acquisition and systems integration costs of $444,000 in fiscal 2017.
Investment income was
$1.1 million
for the
six
months ended
March 31, 2017
, compared to
$936,000
for the
six
months ended
March 31, 2016
. The
increase
reflected higher rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for the first
six
months of fiscal
2017
was
$12.8 million
, compared to
$11.9 million
for the same period last year. The
increase
in interest expense primarily reflected
higher
average interest rates in the current fiscal year and an
increase
in average borrowing levels. Other income and deductions, net, for the
six
months ended
March 31, 2017
represented a
decrease
in pre-tax income of
$708,000
, compared to a
decrease
in pre-tax income of
$1.1 million
for the same period last year. Other income and deductions generally include banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances.
The Company's effective tax rate for the
six
months ended
March 31, 2017
was
28.9%
, compared to
29.1%
for the first
six
months of fiscal
2016
, and
30.5%
for the fiscal
2016
full year.
The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected lower foreign income taxes, offset by the impact of state taxes.
Net losses attributable to noncontrolling interests was
$166,000
for the
six
months ended
March 31, 2017
, compared to
$202,000
for the same period a year ago. The net losses attributable to noncontrolling interests primarily reflected losses in less than wholly-owned Memorialization and Industrial Technologies businesses.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash
provided by
operating activities was
$44.3 million
for the first
six
months of fiscal
2017
, compared to
$51.9 million
for the first
six
months of fiscal
2016
. Operating cash flow for both periods reflected net income adjusted for depreciation, amortization, stock-based compensation expense and non-cash pension expense. Net changes in working capital items, which reflected decreases in accounts receivable, increases in inventory and changes in other accounts, resulted in a use of working capital of approximately
$5.1 million
in fiscal
2017
. Net changes in working capital items, which reflected decreases in accounts receivable, inventory and accounts payable, resulted in a use of working capital of approximately
$6.6 million
in fiscal
2016
.
Cash
used in
investing activities was
$104.9 million
for the
six
months ended
March 31, 2017
, compared to
$28.9 million
for the
six
months ended
March 31, 2016
. Investing activities for the first
six
months of fiscal
2017
primarily reflected capital expenditures of
$13.3 million
, and acquisition payments (net of cash acquired or received from sellers) totaling
$92.6 million
.
Investing activities for the first
six
months of fiscal
2016
primarily reflected capital expenditures of
$23.9 million
, and acquisition payments (net of cash acquired or received from sellers) of
$6.1 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 $39.7 million for the last three fiscal years. Capital spending for fiscal
2017
is currently expected to be approximately $45.0 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.
Cash
provided by
financing activities for the
six
months ended
March 31, 2017
was
$50.5 million
, primarily reflecting
proceeds, net of repayments
, on long-term debt of
$70.5 million
, treasury stock purchases of
$9.2 million
, and dividends of
$10.8 million
to the Company's shareholders. Cash
used in
financing activities for the
six
months ended
March 31, 2016
was
$36.1 million
, primarily reflecting
repayments, net of proceeds
, on long-term debt of
$15.9 million
, proceeds from stock option exercises of
$1.8 million
, treasury stock purchases of
$8.2 million
, dividends of
$9.6 million
to the Company's shareholders, and noncontrolling interest payments of
$4.2 million
.
The Company has a domestic credit facility with a syndicate of financial institutions that was amended in April 2016 and includes a
$900.0 million
senior secured revolving credit facility and a
$250.0 million
senior secured amortizing term loan. 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. The balance of the revolving credit facility and the term loan are due on the maturity date of
April 26, 2021
. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR plus a factor ranging from
0.75%
to
2.00%
(
1.75%
at
March 31, 2017
) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). 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. Outstanding borrowings on the revolving credit facility at
March 31, 2017
and
September 30, 2016
were
$645.0 million
and
$608.0 million
, respectively. Outstanding borrowings on the term loan at
March 31, 2017
and
September 30, 2016
were
$240.2 million
and
$246.4 million
, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility at
March 31, 2017
and
March 31, 2016
was
2.70%
and
2.52%
, 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
):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
Pay fixed swaps - notional amount
|
|
$
|
371,875
|
|
|
$
|
403,125
|
|
Net unrealized gain (loss)
|
|
$
|
4,438
|
|
|
$
|
(5,834
|
)
|
Weighted-average maturity period (years)
|
|
3.6
|
|
|
3.9
|
|
Weighted-average received rate
|
|
0.98
|
%
|
|
0.53
|
%
|
Weighted-average pay rate
|
|
1.27
|
%
|
|
1.26
|
%
|
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, net of unrealized losses, of
$4.4 million
(
$2.7 million
after tax) at
March 31, 2017
and an unrealized loss, net of unrealized gains, of
$5.8 million
(
$3.6 million
after tax) at
September 30, 2016
. The net unrealized gain/loss is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI"). Assuming market rates remain constant with the rates at
March 31, 2017
, a gain (net of tax) of approximately
$635,000
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. The maximum amount of borrowing available under this facility is
€35.0 million
(
$37.4 million
). Outstanding borrowings under the credit facility totaled
€26.3 million
(
$28.1 million
) at
March 31, 2017
. There were no outstanding borrowings under the credit facility at
September 30, 2016
. The weighted-average interest rate on outstanding borrowings under this facility at
March 31, 2017
and
2016
was
1.75%
.
The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled
€36,000
(
$38,800
) and
€255,000
(
$286,000
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at
March 31, 2017
and
2016
was
4.50%
and
4.16%
, respectively.
The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled
€584,100
(
$623,900
) and
€830,220
(
$931,000
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at
March 31, 2017
and
2016
was
6.01%
and
6.11%
, respectively.
In November 2016, the Company’s German subsidiary, Matthews Europe GmbH & Co. KG, issued
€15.0 million
(
$16.0 million
at
March 31, 2017
) of senior unsecured notes with European banks. The notes are guaranteed by Matthews International Corporation and mature in November 2019. A portion of the notes (
€5.0 million
) have a fixed interest rate of 1.4%, and the remainder bear interest at Euro LIBOR plus 1.4%. The weighted-average interest rate on the notes at
March 31, 2017
was
1.40%
.
The Company, through its Italian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled
€2.4 million
(
$2.5 million
) and
€3.2 million
(
$3.5 million
) at
March 31, 2017
and
September 30, 2016
, respectively. Matthews International S.p.A. also has multiple lines of credit totaling
€11.3 million
(
$12.1 million
) with the same Italian banks. Outstanding borrowings on these lines were
€6.1 million
(
$6.5 million
) and
€5.2 million
(
$5.8 million
) at
March 31, 2017
and
September 30, 2016
, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at
March 31, 2017
and
2016
was
2.31%
and
3.47%
, respectively.
In September 2014, a demand was filed by a customer seeking to draw upon a letter of credit issued by the Company of
£8.6 million
(
$10.7 million
at
March 31, 2017
) with respect to a performance guarantee on a project in Saudi Arabia. Management assessed the customer's demand to be without merit and initiated an action with the court in the United Kingdom (the "Court"). Pursuant to this action, an order was issued by the Court in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the Court as ordered. On June 14, 2016, the Court ruled completely in favor of Matthews following a trial on the merits. However, as the customer has neither yet remitted the funds nor complied with the final, un-appealed orders of the Court, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. As of
March 31, 2017
and
September 30, 2016
, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.
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
1,893,423
shares remain available for repurchase as of
March 31, 2017
. 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
$305.4 million
at
March 31, 2017
, compared to
$314.8 million
at
September 30, 2016
. Cash and cash equivalents were
$43.6 million
at
March 31, 2017
, compared to
$55.7 million
at
September 30, 2016
. The Company's current ratio was
2.1
and
2.2
at
March 31, 2017
and
September 30, 2016
, respectively.
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 the disposal of certain materials at various operating and non-operating sites. The Company is currently performing environmental assessments and remediation at these sites, as appropriate.
At
March 31, 2017
, an accrual of approximately $3.5 million had been recorded for environmental remediation (of which $1.0 million was classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. Changes in the accrued environmental remediation obligation from the prior fiscal year reflect payments charged against the accrual.
While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.
ACQUISITIONS:
On March 1, 2017, the Company acquired GJ Creative Limited ("Equator") for
£30.4 million
(
$37.5 million
) (net of cash acquired, subject to a working capital true-up). Equator provides design expertise capable of taking brands from creation to shelf under one roof, and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the Equator acquisition is not finalized as of
March 31, 2017
, and is subject to changes as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On February 28, 2017, the Company acquired certain net assets of RAF Technology, Inc. ("RAF") for
$8.7 million
(net of cash acquired, subject to a working capital true-up). RAF is a global leader in pattern and optical character recognition software, and is included in the Company's Industrial Technologies segment. The preliminary purchase price allocation related to the RAF acquisition is not finalized as of
March 31, 2017
, and is subject to changes as the Company obtains additional information related to working capital items, intangible assets and other assets and liabilities.
On January 13, 2017, the Company acquired VCG (Holdings) Limited ("VCG") for
£8.8 million
(
$10.7 million
) (net of cash acquired). VCG is a leading graphics, plate making, and creative design company and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the VCG acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On January 3, 2017, the Company acquired A. + E. Ungricht GmbH + Co KG ("Ungricht") for
€22.7 million
(
$23.7 million
) (net of cash acquired, subject to a working capital true-up). Ungricht is a leading European provider of pre-press services and gravure printing forms, located in Germany, and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the Ungricht acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On November 30, 2016, the Company acquired Guidance Automation Limited ("Guidance") for
£7.8 million
(
$9.7 million
) (net of cash acquired). Guidance provides technological solutions for autonomous warehouse vehicles and is included in the Company's Industrial Technologies segment. The preliminary purchase price allocation related to the Guidance acquisition is not finalized as of
March 31, 2017
, and is subject to change as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.
On February 1, 2016, the Company acquired certain net assets of Digital Designs, Inc. ("DDI") for
$8.8 million
(net of cash acquired and holdback amount). DDI is a manufacturer and seller of ink jet printing systems and is included in the Company's Industrial Technologies segment. The Company finalized the allocation of purchase price related to the DDI acquisition in the second quarter of fiscal 2017, resulting in an immaterial adjustment to certain working capital accounts.
SUBSEQUENT EVENTS:
On April 28, 2017, subsequent to the end of the second fiscal quarter, the Company received communication that it should expect to receive the full extent of its insurance coverage (
$10.0 million
) related to the previously disclosed theft of funds by an employee.
On April 4, 2017, subsequent to the end of the second fiscal quarter, the Company entered into a
two
-year
$115.0 million
accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions. Under the Securitization Facility, the Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables to Matthews Receivables Funding Corporation, LLC (“Matthews RFC”), a wholly-owned bankruptcy-remote subsidiary of the Company. Matthews RFC in turn assigns a collateral interest in these receivables to certain financial institutions, and then may borrow funds under the Securitization Facility. The Securitization Facility does not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations will 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%
(based on the unused amount of the facility) of the unused portion of the Securitization Facility.
FORWARD-LOOKING INFORMATION:
Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy 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 share repurchases under the Company's stock repurchase program (see "Liquidity and Capital Resources").
With respect to the remainder of fiscal
2017
, the Company expects to continue to devote a significant level of effort to the integrations of recent acquisitions including, Aurora and Schawk, Inc. ("Schawk"). Due to the size of these acquisitions and the projected synergy benefits from integration, these efforts are anticipated to continue for an extended period of time. The costs associated with these integrations will impact the Company's operating results for fiscal
2017
. Consistent with its practice, the Company plans to identify these costs on a quarterly basis as incurred.
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 ended
September 30, 2016
.
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 ended
September 30, 2016
. 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.
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
March 31, 2017
, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in fiscal year:
|
|
Total
|
|
2017
Remainder
|
|
2018 to 2019
|
|
2020 to 2021
|
|
After
2021
|
Contractual Cash Obligations:
|
(Dollar amounts in thousands)
|
Revolving credit facilities
|
$
|
673,063
|
|
|
$
|
—
|
|
|
$
|
28,063
|
|
|
$
|
645,000
|
|
|
$
|
—
|
|
Senior secured term loan
|
240,245
|
|
|
7,813
|
|
|
45,313
|
|
|
187,119
|
|
|
—
|
|
Notes payable to banks
|
21,720
|
|
|
4,145
|
|
|
17,575
|
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
6,844
|
|
|
6,844
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital lease obligations
|
6,673
|
|
|
752
|
|
|
1,741
|
|
|
1,038
|
|
|
3,142
|
|
Non-cancelable operating leases
|
70,711
|
|
|
11,990
|
|
|
31,135
|
|
|
15,799
|
|
|
11,787
|
|
Other
|
5,109
|
|
|
5,109
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
$
|
1,024,365
|
|
|
$
|
36,653
|
|
|
$
|
123,827
|
|
|
$
|
848,956
|
|
|
$
|
14,929
|
|
A significant portion of the loans included in the table above bear interest at variable rates. At
March 31, 2017
, the weighted-average interest rate was
2.70%
on the Company's domestic credit facility,
1.75%
on the credit facility through the Company's European subsidiaries,
4.50%
on bank loans to its wholly-owned subsidiary, Saueressig,
6.01%
on bank loans to its wholly-owned subsidiary, Wetzel,
1.40%
on notes issued by the Company's wholly-owned subsidiary, Matthews Europe GmbH & Co. KG, and
2.31%
on bank loans to the Company's wholly-owned subsidiary, Matthews International S.p.A.
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. The Company is required to make contributions of approximately $5.1 million to its principal retirement plan in fiscal
2017
.
During the
six
months ended
March 31, 2017
, contributions of
$362,000
and
$456,000
were made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional
$5.1 million
,
$398,000
and
$692,000
under the principal retirement plan, the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal
2017
.
Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities. If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary. As of
March 31, 2017
, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately
$13.4 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:
Issued
In February 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07,
Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which provides new guidance intended to improve the disclosure requirements related to the service cost component of net benefit cost. This ASU is effective for the Company beginning in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
, which provides new guidance intended to simplify the subsequent measurement of goodwill and removing Step 2 from the goodwill impairment process. This ASU is effective for the Company beginning in fiscal year 2021, and does allow for early adoption. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
, which provides new guidance intended to make the definition of a business more operable and allow for more consistency in application. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. This ASU coincides with ASU 2014-09 and provides technical corrections and improvements to clarify guidance and correct unintended applications of the guidance. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
, which provides new guidance intended to clarify the presentation of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, and insurance proceeds, among other things. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019, and early adoption is permitted. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In April and May 2016, the FASB issued ASU Nos. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
and 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, respectively. Both of these ASUs coincide with ASU 2014-09 and provide additional guidance in the determination of performance obligations and implementation expedients. The Company is in the process of assessing the impact these ASUs, along with ASU 2014-09, will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which provides new guidance intended to simplify the accounting surrounding share-based compensation. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2018. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
which coincides with ASU 2014-09 and provides additional guidance in the determination of principals versus agents. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which provides new guidance on how an entity should account for leases and recognize associated lease assets and liabilities. This ASU requires lessees to recognize assets and liabilities that arise from financing and operating leases on the Consolidated Balance Sheet. The implementation of this standard will require application of the new guidance at the beginning of the earliest comparative period presented, once adopted. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2020, and does allow for early adoption. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides new guidance intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
, which provides new guidance to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new inventory measurement requirements are effective for the Company's 2018 fiscal year, and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606
. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. This standard is effective for Matthews beginning October 1, 2018. The Company is in the process of assessing the impact the adoption of this ASU will have on its consolidated financial statements.
Adopted
In June 2014, the FASB issued ASU No. 2014-12,
Compensation - Stock Compensation (Topic 718),
which provides new guidance intended to clarify the diverse accounting treatment for certain share-based payments. Share-based payments with performance targets that could be achieved after the requisite service period should be treated as performance conditions under the existing guidance in ASC Topic 718. The adoption of this ASU in the first quarter ended December 31, 2016 had no impact on the Company's consolidated financial statements.