NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 4. Fair Value Measurements (continued)
The fair values of the Company's assets and liabilities measured on a recurring basis are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
1,244
|
|
|
$
|
—
|
|
|
$
|
1,244
|
|
|
$
|
—
|
|
|
$
|
845
|
|
|
$
|
—
|
|
|
$
|
845
|
|
Equity and fixed income mutual funds
|
—
|
|
|
24,119
|
|
|
—
|
|
|
24,119
|
|
|
—
|
|
|
22,986
|
|
|
—
|
|
|
22,986
|
|
Life insurance policies
|
—
|
|
|
4,100
|
|
|
—
|
|
|
4,100
|
|
|
—
|
|
|
4,030
|
|
|
—
|
|
|
4,030
|
|
Total assets at fair value
|
$
|
—
|
|
|
$
|
29,463
|
|
|
$
|
—
|
|
|
$
|
29,463
|
|
|
$
|
—
|
|
|
$
|
27,861
|
|
|
$
|
—
|
|
|
$
|
27,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
7,513
|
|
|
$
|
—
|
|
|
$
|
7,513
|
|
|
$
|
—
|
|
|
$
|
1,379
|
|
|
$
|
—
|
|
|
$
|
1,379
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
7,513
|
|
|
$
|
—
|
|
|
$
|
7,513
|
|
|
$
|
—
|
|
|
$
|
1,379
|
|
|
$
|
—
|
|
|
$
|
1,379
|
|
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Raw materials
|
$
|
38,076
|
|
|
$
|
35,616
|
|
Work in process
|
83,552
|
|
|
76,297
|
|
Finished goods
|
60,723
|
|
|
68,361
|
|
|
$
|
182,351
|
|
|
$
|
180,274
|
|
Note 6. Investments
Non-current investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Equity and fixed income mutual funds
|
$
|
24,119
|
|
|
$
|
22,986
|
|
Life insurance policies
|
4,100
|
|
|
4,030
|
|
Equity-method investments
|
386
|
|
|
39,761
|
|
Other investments
|
33,463
|
|
|
18,724
|
|
|
$
|
62,068
|
|
|
$
|
85,501
|
|
During the first six months of fiscal 2020, the Company made $9,482 of additional investments in a non-consolidated subsidiary that was being accounted for as an equity-method investment. During the third quarter of fiscal 2020, the Company sold its ownership interest in this subsidiary for $42,210 of cash and $15,000 of senior preferred shares. The senior preferred shares earn a yield based on an escalating rate ranging from 6% to 14% and are expected to be redeemed before the end of calendar year 2022. In connection with this sale transaction, the Company recognized a pre-tax gain of $11,208 which has been recorded as a component of administrative expenses. The senior preferred shares are included within other investments in the table above along with ownership interests in various entities of less than 20%, which are recorded under the cost-method of accounting.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt
The Company has a domestic credit facility with a syndicate of financial institutions that was amended and restated in March 2020. The amended and restated loan agreement includes a $750,000 senior secured revolving credit facility, which matures in March 2025, and a $35,000 senior secured amortizing term loan, which matures in July 2021. A portion of the revolving credit facility (not to exceed $350,000) can be drawn in foreign currencies. The term loan requires scheduled quarterly principal payments through its maturity date. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.50% at June 30, 2020) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. The Company is required to pay an annual commitment fee ranging from 0.15% to 0.30% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility. The Company incurred debt issuance costs of approximately $2,000 in connection with the amended and restated agreement, which was deferred and is being amortized over the term of the 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 U.S. dollar denominated borrowings on the revolving credit facility at June 30, 2020 and September 30, 2019 were $275,000 and $325,638, respectively. Outstanding Euro denominated borrowings on the revolving credit facility at June 30, 2020 and September 30, 2019 were €125.0 million ($140,371) and €125.0 million ($136,470), respectively. Outstanding borrowings on the term loan at June 30, 2020 and September 30, 2019 were $28,563 and $53,497, respectively. The weighted-average interest rate on the outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) at June 30, 2020 and June 30, 2019 was 2.44% and 2.75%, respectively.
The Company has $300,000 of 5.25% senior unsecured notes due December 1, 2025 (the "2025 Senior Notes"). The 2025 Senior Notes bear interest at a rate of 5.25% per annum with interest payable semi-annually in arrears on June 1 and December 1 of each year. The Company's obligations under the 2025 Senior Notes are guaranteed by certain of the Company's direct and indirect wholly-owned domestic subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were $2,879 and $3,284 at June 30, 2020 and September 30, 2019, respectively.
The Company has a $115,000 accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions. The Securitization Facility, which had a maturity date of April 2020, was amended in March 2020 to extend the maturity date until March 2022. 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 remain on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility bear interest at LIBOR plus 0.75%. The Company is required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility. Outstanding borrowings under the Securitization Facility at June 30, 2020 and September 30, 2019 were $85,270 and $93,950, respectively. At June 30, 2020 and 2019, the interest rate on borrowings under this facility was 0.91% and 3.15%, respectively.
The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Pay fixed swaps - notional amount
|
|
$
|
343,750
|
|
|
$
|
293,750
|
|
Net unrealized loss
|
|
$
|
(6,269)
|
|
|
$
|
(534)
|
|
Weighted-average maturity period (years)
|
|
2.6
|
|
1.9
|
Weighted-average received rate
|
|
0.16
|
%
|
|
2.02
|
%
|
Weighted-average pay rate
|
|
1.33
|
%
|
|
1.41
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt (continued)
The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of future variable interest payments, which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.
The fair value of the interest rate swaps reflected an unrealized loss, net of unrealized gains, of $6,269 ($4,733 after tax) at June 30, 2020 and an unrealized loss, net of unrealized gains, of $534 ($403 after tax) at September 30, 2019, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates at June 30, 2020, a loss (net of tax) of approximately $2,234 included in AOCI is expected to be recognized in earnings over the next twelve months.
At June 30, 2020 and September 30, 2019, the interest rate swap contracts were reflected in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
June 30, 2020
|
|
September 30, 2019
|
Current assets:
|
|
|
|
|
Other current assets
|
|
$
|
249
|
|
|
$
|
548
|
|
Long-term assets:
|
|
|
|
|
Other assets
|
|
995
|
|
|
297
|
|
Current liabilities:
|
|
|
|
|
Other current liabilities
|
|
(3,207)
|
|
|
(484)
|
|
Long-term liabilities:
|
|
|
|
|
Other liabilities
|
|
(4,306)
|
|
|
(895)
|
|
Total derivatives
|
|
$
|
(6,269)
|
|
|
$
|
(534)
|
|
The (losses) gains recognized on derivatives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of (Loss) Gain Recognized in Income on Derivative
|
|
Amount of (Loss) Gain Recognized in Income on Derivatives
|
|
|
|
Amount of Gain Recognized in Income on Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
(438)
|
|
|
$
|
874
|
|
|
$
|
108
|
|
|
$
|
2,489
|
|
The Company recognized the following (losses) gains in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Loss
Recognized in AOCI on Derivatives
|
|
|
|
Location of Gain Reclassified From AOCI into Income (Effective Portion*)
|
|
Amount of Gain
Reclassified from
AOCI into Income
(Effective Portion*)
|
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
Interest rate swaps
|
|
$
|
(4,248)
|
|
|
$
|
(6,074)
|
|
|
Interest expense
|
|
$
|
82
|
|
|
$
|
1,879
|
|
*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, which is guaranteed by Matthews. The maximum amount of borrowing available under this facility is €35.0 million ($39,304). The credit facility matures in December 2020 and the Company intends to continue to extend this facility. Outstanding borrowings under the credit facility totaled €12.1 million ($13,617) and €12.8 million ($14,024) at June 30, 2020 and September 30, 2019, respectively. The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2020 and 2019 was 1.25%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 7. Debt (continued)
The Company’s German subsidiary, Matthews Europe GmbH, had €15.0 million ($16,376 at September 30, 2019) of senior unsecured notes with European banks. The notes matured in November 2019 at which point they were paid. The weighted-average interest rate on the notes at June 30, 2019 was 1.40%.
Finance lease liabilities included as a component of debt totaled $10,235 and $3,631 at June 30, 2020 and September 30, 2019, respectively. See Note 8, "Leases" for further discussion on the Company's lease obligations. Other debt totaled $10,707 and $395 at June 30, 2020 and September 30, 2019 respectively. The weighted-average interest rate on other debt was 2.14% and 5.81% at June 30, 2020 and June 30, 2019, respectively.
The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of $374 (net of income taxes of $121) and $3,320 (net of income taxes of $1,077), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at June 30, 2020 and September 30, 2019, respectively.
In September 2014, a claim was filed by a customer seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($10,566 at June 30, 2020) with respect to a performance guarantee on an incineration equipment 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 "U.K. Court"). Pursuant to this action, an order was issued by the U.K. Court in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the U.K. Court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the U.K. Court as ordered. On June 14, 2016, the U.K. Court ruled completely in favor of Matthews following a trial on the merits. However, the ongoing dispute involves litigation in multiple foreign jurisdictions because the contract between the parties includes a venue clause requiring the venue for any litigation to be in the United Kingdom, while the enforcement of any final judgment is required to be executed in Saudi Arabia. The Company continues to pursue a trial on the merits in Saudi Arabia; however, given the recent coronavirus disease 2019 ("COVID-19") pandemic, the trial is now not likely to conclude until calendar year 2021. As the Company has successfully completed the project and subsequently operated the equipment, the Company remains confident regarding the pending trial on the merits in Saudi Arabia and expects to be in a position to enforce the judgment and initiate collection efforts following completion of that trial. However, the Company’s level of success in recovering funds from the customer will depend upon several factors including a successful completion of the pending trial on the merits in Saudi Arabia, the availability of recoverable funds, and the subsequent level of support of the Saudi Arabian government to enforce a potential judgment against the customer.
During the third quarter of fiscal 2020, the Saudi Arabian government implemented restrictions on travel to Mecca due to the COVID-19 pandemic. As a result, the Company will not be able to support the operation of the incineration equipment for the local agency responsible for its operation during the current year Hajj Pilgrimage. Consequently, the Company is now concerned regarding the level of anticipated support from the government in its collection efforts. Therefore, when considered collectively with the extended delay in the trial date and other collectability risks, the Company established a reserve for the full value of the funded letter of credit as of June 30, 2020. The funded letter of credit was previously classified within other assets on the Consolidated Balance Sheet as of September 30, 2019. The Company will continue to assess the accounting and collectability related to this matter as facts and circumstances evolve.
As of June 30, 2020, the market value of the Company's 2025 Senior Notes was approximately 10% less than the carrying value. The fair value of the Company's remaining long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheets. As of September 30, 2019, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheets. The Company was in compliance with all of its debt covenants as of June 30, 2020.
Note 8. Leases
The Company’s lease portfolio includes various contracts for real estate, vehicles, information technology and other equipment. At contract inception, a lease exists if the contract conveys the right to control an identified asset for a period of time in exchange for consideration. Control is considered to exist when the lessee has the right to obtain substantially all of the economic benefits from the use of an identified asset, as well as the right to direct the use of that asset. If a contract is considered to be a lease, the Company recognizes a lease liability based on the present value of the future lease payments, and a corresponding right-of-use asset. As a majority of the Company’s leases do not provide an implicit interest rate within the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 8. Leases (continued)
lease, an incremental borrowing rate is used to determine the ROU asset and lease liability which is based on information available at the commencement date. Options to purchase, extend or terminate a lease are included in the ROU asset and lease liability when it is reasonably certain an option will be exercised. Renewal options are most prevalent in the Company’s real estate leases. In general, the Company has not included renewal options for leases in the ROU asset and lease liability because the likelihood of renewal was not determined to be reasonably certain. In addition, leases may include variable lease payments, for items such as maintenance and utilities, which are expensed as incurred as variable lease expense.
There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. Leases not meeting the finance lease criteria are classified as operating leases. Effective October 1, 2019, ROU assets and corresponding lease liabilities are recorded on the Consolidated Balance Sheet. ROU assets for operating leases are classified in other assets, and ROU assets for finance leases are classified in property, plant and equipment, net on the Consolidated Balance Sheet. For operating leases, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other liabilities on the Consolidated Balance Sheet. For finance leases, short-term lease liabilities are classified in long-term debt, current maturities, and long-term lease liabilities are classified in long-term debt on the Consolidated Balance Sheet. Leases with an initial lease term of twelve months or less have not been recognized on the Consolidated Balance Sheet. Reporting periods prior to October 1, 2019 continue to be presented in accordance with previous lease accounting guidance under GAAP.
The following table presents the balance sheet and lease classification for the Company's lease portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
Lease Classification
|
|
June 30, 2020
|
Non-current assets:
|
|
|
|
|
Property, plant and equipment, net
|
|
Finance
|
|
$
|
8,338
|
|
Other assets
|
|
Operating
|
|
73,650
|
|
Total lease assets
|
|
|
|
$
|
81,988
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Long-term debt, current maturities
|
|
Finance
|
|
$
|
3,414
|
|
Other current liabilities
|
|
Operating
|
|
23,591
|
|
Non-current liabilities:
|
|
|
|
|
Long-term debt
|
|
Finance
|
|
6,821
|
|
Other liabilities
|
|
Operating
|
|
51,039
|
|
Total lease liabilities
|
|
|
|
$
|
84,865
|
|
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation expense and interest expense using the interest method of recognition. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity.
The following table presents the components of lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2020
|
|
Nine months ended June 30, 2020
|
Finance lease cost:
|
|
|
|
|
|
Amortization of ROU assets
|
$
|
895
|
|
|
$
|
1,246
|
|
|
Interest on lease liabilities
|
72
|
|
|
149
|
|
Operating lease cost
|
|
5,430
|
|
|
18,527
|
|
|
|
|
|
|
Variable lease cost
|
|
1,225
|
|
|
4,106
|
|
Sublease income
|
|
(250)
|
|
|
(649)
|
|
Total lease cost
|
|
$
|
7,372
|
|
|
$
|
23,379
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 8. Leases (continued)
Supplemental information regarding the Company's leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2020
|
Cash paid for finance and operating lease liabilities:
|
|
|
|
Operating cash flows from finance leases
|
$
|
149
|
|
|
Operating cash flows from operating leases
|
$
|
22,519
|
|
|
Financing cash flows from finance leases
|
$
|
1,196
|
|
ROU assets obtained in exchange for new finance lease liabilities
|
|
$
|
2,165
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
|
$
|
11,297
|
|
|
|
|
|
|
June 30, 2020
|
Weighted-average remaining lease term - finance leases (years)
|
|
4.68
|
Weighted-average remaining lease term - operating leases (years)
|
|
4.33
|
Weighted-discount rate - finance leases
|
|
2.81
|
%
|
Weighted-discount rate - operating leases
|
|
2.82
|
%
|
The Company elected the practical expedient to not separate lease components from non-lease components for all asset classes. In addition, the Company elected the practical expedient to utilize a portfolio approach for certain equipment asset classes, primarily information technology, as the application of the lease model to the portfolio would not differ materially from the application of the lease model to the individual leases within the portfolio.
Maturities of lease obligations by fiscal year were as follows as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2020 (remainder)
|
|
$
|
6,738
|
|
|
$
|
957
|
|
2021
|
|
24,211
|
|
|
3,721
|
|
2022
|
|
17,818
|
|
|
2,808
|
|
2023
|
|
11,952
|
|
|
1,119
|
|
2024
|
|
8,113
|
|
|
408
|
|
Thereafter
|
|
10,148
|
|
|
2,100
|
|
Total future minimum lease payments
|
|
78,980
|
|
|
11,113
|
|
Less: Interest
|
|
4,350
|
|
|
878
|
|
Present value of lease liabilities:
|
|
$
|
74,630
|
|
|
$
|
10,235
|
|
Note 9. Share-Based Payments
The Company maintains an equity incentive plan (the "2017 Equity Incentive Plan") that provides for grants of stock options, restricted shares, restricted share units, stock-based performance units and certain other types of stock-based awards. Under the 2017 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 1,700,000. At June 30, 2020, there were 1,700,000 shares reserved for future issuance under the 2017 Equity Incentive Plan. 558,200 restricted share units have been granted under the 2017 Equity Incentive Plan and are outstanding as of June 30, 2020. The 2017 Equity Incentive plan is administered by the Compensation Committee of the Board of Directors.
With respect to the restricted share grants, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 9. Share-Based Payments (continued)
With respect to the restricted share unit grants, units generally vest on the third anniversary of the grant date. The number of units that vest depend on certain time and performance thresholds. Approximately 38% of the shares vest based on time, while the remaining vest based on pre-defined performance thresholds. The Company issues common stock from treasury shares once vested.
For the three-month periods ended June 30, 2020 and 2019, stock-based compensation cost totaled $2,539 and $1,156, respectively. For the nine-month periods ended June 30, 2020 and 2019, stock-based compensation cost totaled $7,078 and $6,169, respectively. The stock-based compensation cost that was recognized for retirement-eligible employees was $625 for the three-month period ended June 30, 2020, and $1,564 and $1,849 for the nine-month periods ended June 30, 2020 and 2019, respectively. The associated future income tax benefit recognized for stock-based compensation was $622 and $283 for the three-month periods ended June 30, 2020 and 2019, respectively, and $1,415 and $1,153 for the nine-month periods ended June 30, 2020 and 2019, respectively.
The transactions for restricted shares and restricted share units for the nine months ended June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares /Units
|
|
Weighted-
average
Grant-date
Fair Value
|
Non-vested at September 30, 2019
|
615,635
|
|
|
$
|
49.61
|
|
Granted
|
296,000
|
|
|
35.29
|
|
Vested
|
(128,795)
|
|
|
64.08
|
|
Expired or forfeited
|
(36,492)
|
|
|
56.55
|
|
Non-vested at June 30, 2020
|
746,348
|
|
|
$
|
41.09
|
|
As of June 30, 2020, the total unrecognized compensation cost related to unvested restricted stock was $10,801 and is expected to be recognized over a weighted average period of 1.9 years.
The Company maintains the 2019 Director Fee Plan, the Amended and Restated 2014 Director Fee Plan and the 1994 Director Fee Plan (collectively, the "Director Fee Plans"). There will be no further fees or share-based awards granted under the Amended and Restated 2014 Director Fee Plan and the 1994 Director Fee Plan. Under the 2019 Director Fee Plan, non-employee directors (except for the Chairman of the Board) each receive, as an annual retainer fee for fiscal 2020, either cash or shares of the Company's Class A Common Stock with a value equal to $85. The annual retainer fee for fiscal 2020 paid to the non-employee Chairman of the Board is $185. 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 total number of shares of stock that have been authorized to be issued under the 2019 Director Fee Plan or credited to a deferred stock compensation account for subsequent issuance is 150,000 shares of Common Stock (subject to adjustment upon certain events such as stock dividends or stock splits). The value of deferred shares is recorded in other liabilities. A total of 30,574 shares and share units had been deferred under the Director Fee Plans as of June 30, 2020. Additionally, non-employee directors each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares or units) with a value of $125 for fiscal 2020. 241,378 restricted shares and restricted share units have been granted under the Director Fee Plans, 68,149 of which were issued under the 2019 Director Fee Plan. 68,149 restricted shares and restricted share units are unvested at June 30, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 10. Earnings Per Share Attributable to Matthews' Shareholders
The information used to compute earnings (loss) per share attributable to Matthews' common shareholders was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income (loss) attributable to Matthews shareholders
|
$
|
2,269
|
|
|
$
|
14,629
|
|
|
$
|
(94,561)
|
|
|
$
|
33,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
Basic shares
|
31,145
|
|
|
31,347
|
|
|
31,143
|
|
|
31,487
|
|
Effect of dilutive securities
|
87
|
|
|
147
|
|
|
—
|
|
|
138
|
|
Diluted shares
|
31,232
|
|
|
31,494
|
|
|
31,143
|
|
|
31,625
|
|
Anti-dilutive securities excluded from the dilution calculation were insignificant for the three and nine months ended June 30, 2020 and 2019.
Note 11. 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 June 30,
|
|
|
|
|
|
|
|
Pension
|
|
|
|
Other Postretirement
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,170
|
|
|
$
|
2,000
|
|
|
$
|
64
|
|
|
$
|
61
|
|
Interest cost *
|
1,933
|
|
|
2,301
|
|
|
140
|
|
|
180
|
|
Expected return on plan assets *
|
(2,232)
|
|
|
(2,596)
|
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
Prior service cost
|
(47)
|
|
|
(46)
|
|
|
(23)
|
|
|
(49)
|
|
Net actuarial loss (gain) *
|
2,386
|
|
|
1,081
|
|
|
—
|
|
|
(15)
|
|
Net benefit cost
|
$
|
4,210
|
|
|
$
|
2,740
|
|
|
$
|
181
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30,
|
|
|
|
|
|
|
|
Pension
|
|
|
|
Other Postretirement
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
6,510
|
|
|
$
|
6,000
|
|
|
$
|
192
|
|
|
$
|
183
|
|
Interest cost *
|
5,799
|
|
|
6,903
|
|
|
420
|
|
|
540
|
|
Expected return on plan assets *
|
(6,696)
|
|
|
(7,788)
|
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
Prior service cost
|
(141)
|
|
|
(138)
|
|
|
(69)
|
|
|
(147)
|
|
Net actuarial loss (gain) *
|
7,159
|
|
|
3,242
|
|
|
—
|
|
|
(45)
|
|
Net benefit cost
|
$
|
12,631
|
|
|
$
|
8,219
|
|
|
$
|
543
|
|
|
$
|
531
|
|
* Non-service components of pension and postretirement expense are included in other income (deductions), net.
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. In response to COVID-19, the federal government passed a modified relief bill, which provides additional funding measures associated with IRS regulations. In accordance with this bill, the Company is no longer required to make contributions for fiscal 2020 to its principal retirement plan. The Company currently expects to make a contribution of approximately $15,000 to its principal retirement plan during the fourth quarter of fiscal 2020, which may consist of cash and/or shares of Matthews Class A Common Stock. The Company is also currently evaluating potential additional cash and/or stock contributions to its principal retirement plan during fiscal 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 11. Pension and Other Postretirement Benefit Plans (continued)
Contributions made and anticipated for fiscal year 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
Pension
|
|
Other Postretirement
|
|
|
|
|
|
Contributions during the nine months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Supplemental retirement plan
|
|
$
|
589
|
|
|
$
|
—
|
|
Other postretirement plan
|
|
—
|
|
|
726
|
|
|
|
|
|
|
Additional contributions expected in fiscal 2020:
|
|
|
|
|
Principal retirement plan *
|
|
$
|
15,000
|
|
|
$
|
—
|
|
Supplemental retirement plan
|
|
293
|
|
|
—
|
|
Other postretirement plan
|
|
—
|
|
|
263
|
|
* Amount represents expected contribution of cash and/or stock (see above).
Note 12. Accumulated Other Comprehensive Income
The changes in AOCI by component, net of tax, for the three-month periods ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
$
|
(68,189)
|
|
|
$
|
(175,751)
|
|
|
$
|
(4,555)
|
|
|
$
|
(248,495)
|
|
OCI before reclassification
|
|
—
|
|
|
11,240
|
|
|
(509)
|
|
|
10,731
|
|
Amounts reclassified from AOCI
|
|
1,743
|
|
(a)
|
—
|
|
|
330
|
|
(b)
|
2,073
|
|
Net current-period OCI
|
|
1,743
|
|
|
11,240
|
|
|
(179)
|
|
|
12,804
|
|
Balance, June 30, 2020
|
|
$
|
(66,446)
|
|
|
$
|
(164,511)
|
|
|
$
|
(4,734)
|
|
|
$
|
(235,691)
|
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
$
|
—
|
|
|
$
|
371
|
|
|
$
|
—
|
|
|
$
|
371
|
|
OCI before reclassification
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period OCI
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, June 30, 2020
|
|
$
|
—
|
|
|
$
|
371
|
|
|
$
|
—
|
|
|
$
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
$
|
(36,413)
|
|
|
$
|
(147,390)
|
|
|
$
|
3,617
|
|
|
$
|
(180,186)
|
|
OCI before reclassification
|
|
—
|
|
|
2,639
|
|
|
(2,372)
|
|
|
267
|
|
Amounts reclassified from AOCI
|
|
705
|
|
(a)
|
—
|
|
|
(660)
|
|
(b)
|
45
|
|
Net current-period OCI
|
|
705
|
|
|
2,639
|
|
|
(3,032)
|
|
|
312
|
|
Balance, June 30, 2019
|
|
$
|
(35,708)
|
|
|
$
|
(144,751)
|
|
|
$
|
585
|
|
|
$
|
(179,874)
|
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
$
|
—
|
|
|
$
|
473
|
|
|
$
|
—
|
|
|
$
|
473
|
|
OCI before reclassification
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
(5)
|
|
Net current-period OCI
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
(5)
|
|
Balance, June 30, 2019
|
|
$
|
—
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
468
|
|
(a) Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 11).
(b) Amounts were included in interest expense in the periods the hedged item affected earnings (see Note 7).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 12. Accumulated Other Comprehensive Income (continued)
The changes in AOCI by component, net of tax, for the nine-month periods ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
$
|
(71,743)
|
|
|
$
|
(156,214)
|
|
|
$
|
(404)
|
|
|
$
|
(228,361)
|
|
OCI before reclassification
|
|
—
|
|
|
(8,297)
|
|
|
(4,248)
|
|
|
(12,545)
|
|
Amounts reclassified from AOCI
|
|
5,297
|
|
(a)
|
—
|
|
|
(82)
|
|
(b)
|
5,215
|
|
Net current-period OCI
|
|
5,297
|
|
|
(8,297)
|
|
|
(4,330)
|
|
|
(7,330)
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
$
|
(66,446)
|
|
|
$
|
(164,511)
|
|
|
$
|
(4,734)
|
|
|
$
|
(235,691)
|
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
$
|
—
|
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
375
|
|
OCI before reclassification
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
(4)
|
|
Net current-period OCI
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
(4)
|
|
Balance, June 30, 2020
|
|
$
|
—
|
|
|
$
|
371
|
|
|
$
|
—
|
|
|
$
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit plans
|
|
Currency translation adjustment
|
|
Derivatives
|
|
Total
|
Attributable to Matthews:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
$
|
(37,876)
|
|
|
$
|
(134,960)
|
|
|
$
|
8,538
|
|
|
$
|
(164,298)
|
|
OCI before reclassification
|
|
—
|
|
|
(9,791)
|
|
|
(6,074)
|
|
|
(15,865)
|
|
Amounts reclassified from AOCI
|
|
2,168
|
|
(a)
|
—
|
|
|
(1,879)
|
|
(b)
|
289
|
|
Net current-period OCI
|
|
2,168
|
|
|
(9,791)
|
|
|
(7,953)
|
|
|
(15,576)
|
|
Balance, June 30, 2019
|
|
$
|
(35,708)
|
|
|
$
|
(144,751)
|
|
|
$
|
585
|
|
|
$
|
(179,874)
|
|
Attributable to noncontrolling interest:
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
$
|
—
|
|
|
$
|
467
|
|
|
$
|
—
|
|
|
$
|
467
|
|
OCI before reclassification
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Net current-period OCI
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance, June 30, 2019
|
|
$
|
—
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
468
|
|
(a) Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 11).
(b) Amounts were included in interest expense in the periods the hedged item affected earnings (see Note 7).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 12. Accumulated Other Comprehensive Income (continued)
Reclassifications out of AOCI for the three and nine-month periods ended June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
|
|
|
|
Details about AOCI Components
|
|
Three Months Ended June 30, 2020
|
|
Nine Months Ended June 30, 2020
|
|
Affected line item in the Statement of income
|
|
|
|
|
|
|
|
Postretirement benefit plans
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
$
|
70
|
|
(a)
|
$
|
210
|
|
|
|
Actuarial losses
|
|
(2,386)
|
|
(a)
|
(7,159)
|
|
|
|
|
|
(2,316)
|
|
(b)
|
(6,949)
|
|
|
Income before income tax
|
|
|
573
|
|
|
1,652
|
|
|
Income taxes
|
|
|
$
|
(1,743)
|
|
|
$
|
(5,297)
|
|
|
Net income
|
Derivatives
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(438)
|
|
|
$
|
108
|
|
|
Interest expense
|
|
|
(438)
|
|
(b)
|
108
|
|
|
Income before income tax
|
|
|
108
|
|
|
(26)
|
|
|
Income taxes
|
|
|
$
|
(330)
|
|
|
$
|
82
|
|
|
Net income
|
Reclassifications out of AOCI for the three and nine-month periods ended June 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
|
|
|
|
Details about AOCI Components
|
|
Three Months Ended June 30, 2019
|
|
Nine Months Ended
June 30, 2019
|
|
Affected line item in the Statement of income
|
|
|
|
|
|
|
|
Postretirement benefit plans
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
95
|
|
(a)
|
$
|
285
|
|
|
|
Actuarial losses
|
|
(1,066)
|
|
(a)
|
(3,197)
|
|
|
|
|
|
(971)
|
|
(b)
|
(2,912)
|
|
|
Income before income tax
|
|
|
266
|
|
|
744
|
|
|
Income taxes
|
|
|
$
|
(705)
|
|
|
$
|
(2,168)
|
|
|
Net income
|
Derivatives
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
874
|
|
|
$
|
2,489
|
|
|
Interest expense
|
|
|
874
|
|
(b)
|
2,489
|
|
|
Income before income tax
|
|
|
(214)
|
|
|
(610)
|
|
|
Income taxes
|
|
|
$
|
660
|
|
|
$
|
1,879
|
|
|
Net income
|
(a)Prior service cost 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. Actuarial losses are reported in other income (deductions), net. For additional information, see Note 11.
(b)For pre-tax items, positive amounts represent income and negative amounts represent expense.
Note 13. 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 consolidated income taxes for the nine months ended June 30, 2020 were a benefit of $22,672, compared to an expense of $4,429 for the first nine months of fiscal 2019. The differences between the Company’s consolidated income taxes for the first nine months of fiscal 2020 versus the same period for fiscal 2019 primarily resulted from
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 13. Income Taxes (continued)
the fiscal 2020 consolidated loss before income taxes, which reflected the goodwill write-down recorded during the second quarter of fiscal 2020, which was partially non-deductible, as well as a benefit for an expected net operating loss (“NOL”) carryback. The NOL will be carried back five years allowing it to offset income that was previously taxed at a federal statutory rate of 35.0%. The Company’s fiscal 2020 nine-month effective tax rate varied from the U.S. statutory tax rate of 21.0% primarily due to state taxes, foreign statutory rate differentials, tax credits, the goodwill write-down, the expected NOL carryback, and discrete tax benefits recognized during the current year. The Company’s fiscal 2019 nine-month effective tax rate varied from the U.S. statutory tax rate of 21.0% primarily due to tax planning completed during the second quarter of fiscal 2019 that resulted in a discrete tax benefit.
The Company had unrecognized tax benefits (excluding penalties and interest) of $11,834 and $15,526 on June 30, 2020 and September 30, 2019, respectively, of which $8,620 and $11,417 would impact the annual effective rate at June 30, 2020 and September 30, 2019, respectively. It is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $9,034 in the next 12 months primarily due to the completion of audits and the expiration of the statute of limitations.
The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. Total penalties and interest accrued were $2,424 and $2,880 at June 30, 2020 and September 30, 2019, 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 June 30, 2020, the tax years that remain subject to examination by major jurisdiction generally are:
|
|
|
|
|
|
United States – Federal
|
2017 and forward
|
United States – State
|
2015 and forward
|
Canada
|
2016 and forward
|
Germany
|
2015 and forward
|
United Kingdom
|
2018 and forward
|
Australia
|
2015 and forward
|
Singapore
|
2016 and forward
|
Note 14. Segment Information
The Company manages its businesses under three segments: SGK Brand Solutions, Memorialization and Industrial Technologies. The SGK Brand Solutions segment consists of brand management, pre-media services, printing plates and cylinders, engineered products, imaging services, digital asset management, merchandising display systems, and marketing and design services primarily for the consumer goods and retail industries. The Memorialization segment consists primarily of bronze and granite memorials and other memorialization products, caskets, and cremation and incineration equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment includes marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.
The Company's primary measure of segment profitability is adjusted earnings before interest, income taxes, depreciation and amortization ("adjusted EBITDA"). Adjusted EBITDA is defined by the Company as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of its operating results. These items include stock-based compensation, the non-service portion of pension and postretirement expense, acquisition costs, ERP integration costs, and strategic initiatives and other charges. This presentation is consistent with how the Company's chief operating decision maker (the “CODM”) evaluates the results of operations and makes strategic decisions about the business. For these reasons, the Company believes that adjusted EBITDA represents the most relevant measure of segment profit and loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 14. Segment Information (continued)
In addition, the CODM manages and evaluates the operating performance of the segments, as described above, on a pre-corporate cost allocation basis. Accordingly, for segment reporting purposes, the Company does not allocate corporate costs to its reportable segments. Corporate costs include management and administrative support to the Company, which consists of certain aspects of the Company’s executive management, legal, compliance, human resources, information technology (including operational support) and finance departments. These costs are included within "Corporate and Non-Operating" in the following table to reconcile to consolidated adjusted EBITDA and are not considered a separate reportable segment. Management does not allocate non-operating items such as investment income, other income (deductions), net and noncontrolling interest to the segments.
The following table sets forth information about the Company's segments, including a reconciliation of adjusted EBITDA to net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales:
|
|
|
|
|
|
|
|
|
SGK Brand Solutions
|
|
$
|
165,780
|
|
|
$
|
181,930
|
|
|
$
|
513,515
|
|
|
$
|
557,881
|
|
Memorialization
|
|
162,118
|
|
|
158,217
|
|
|
478,342
|
|
|
474,279
|
|
Industrial Technologies
|
|
31,524
|
|
|
39,147
|
|
|
107,309
|
|
|
112,711
|
|
Consolidated Sales
|
|
$
|
359,422
|
|
|
$
|
379,294
|
|
|
$
|
1,099,166
|
|
|
$
|
1,144,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
SGK Brand Solutions
|
|
$
|
20,846
|
|
|
$
|
29,891
|
|
|
$
|
61,808
|
|
|
$
|
86,612
|
|
Memorialization
|
|
37,734
|
|
|
36,075
|
|
|
103,020
|
|
|
101,361
|
|
Industrial Technologies
|
|
4,679
|
|
|
7,278
|
|
|
15,205
|
|
|
15,665
|
|
Corporate and Non-Operating
|
|
(13,862)
|
|
|
(14,290)
|
|
|
(41,009)
|
|
|
(42,015)
|
|
Total Adjusted EBITDA
|
|
$
|
49,397
|
|
|
$
|
58,954
|
|
|
$
|
139,024
|
|
|
$
|
161,623
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs (1)**
|
|
(304)
|
|
|
(2,980)
|
|
|
(2,912)
|
|
|
(8,386)
|
|
ERP integration costs (2)**
|
|
(745)
|
|
|
(2,355)
|
|
|
(2,160)
|
|
|
(6,337)
|
|
Strategic initiatives and other charges (3)**
|
|
(5,570)
|
|
|
(1,037)
|
|
|
(25,040)
|
|
|
(3,149)
|
|
Gain (loss) on sale of ownership interests in a subsidiary (4)
|
|
11,208
|
|
|
—
|
|
|
11,208
|
|
|
(4,465)
|
|
Legal matter reserve (5)
|
|
(10,566)
|
|
|
—
|
|
|
(10,566)
|
|
|
—
|
|
Non-recurring / incremental COVID-19 costs (6)
|
|
(1,871)
|
|
|
—
|
|
|
(2,534)
|
|
|
—
|
|
Goodwill write-down (7)
|
|
—
|
|
|
—
|
|
|
(90,408)
|
|
|
—
|
|
Joint Venture depreciation, amortization, interest expense and other charges (8)
|
|
(2,473)
|
|
|
(866)
|
|
|
(4,732)
|
|
|
(866)
|
|
Stock-based compensation
|
|
(2,539)
|
|
|
(1,156)
|
|
|
(7,078)
|
|
|
(6,169)
|
|
Non-service pension and postretirement expense (9)
|
|
(2,227)
|
|
|
(951)
|
|
|
(6,682)
|
|
|
(2,852)
|
|
Depreciation and amortization *
|
|
(30,168)
|
|
|
(20,483)
|
|
|
(88,418)
|
|
|
(60,759)
|
|
Interest expense
|
|
(8,082)
|
|
|
(10,508)
|
|
|
(26,935)
|
|
|
(31,068)
|
|
Net loss attributable to noncontrolling interests
|
|
(420)
|
|
|
(205)
|
|
|
(491)
|
|
|
(541)
|
|
(Loss) income before income taxes
|
|
(4,360)
|
|
|
18,413
|
|
|
(117,724)
|
|
|
37,031
|
|
Income tax benefit (provision)
|
|
6,209
|
|
|
(3,989)
|
|
|
22,672
|
|
|
(4,429)
|
|
Net income (loss)
|
|
$
|
1,849
|
|
|
$
|
14,424
|
|
|
$
|
(95,052)
|
|
|
$
|
32,602
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 14. Segment Information (continued)
|
|
|
(1) Includes certain non-recurring costs associated with recent acquisition activities.
|
(2) Represents costs associated with global ERP system integration efforts.
|
(3) Includes certain non-recurring costs associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels.
|
(4) Represents a gain (loss) on the sale of ownership interests in a subsidiary within the Memorialization segment.
|
(5) Represents a reserve established for a legal matter involving a letter of credit for a customer in Saudi Arabia within the Memorialization segment (see Note 7, "Debt").
|
(6) Includes certain non-recurring direct incremental costs (such as costs for purchases of computer peripherals and devices to facilitate working-from-home, additional personal protective equipment and cleaning supplies and services, etc.) incurred in response to COVID-19. This amount does not include the impact of any lost sales or underutilization due to COVID-19.
|
(7) Represents the goodwill write-down for two reporting units within the SGK Brand Solutions segment (see Note 16, "Goodwill and Other Intangible Assets").
|
(8) Represents the Company's portion of depreciation, intangible amortization, interest expense, and other non-recurring charges incurred by non-consolidated subsidiaries accounted for as equity-method investments within the Memorialization segment.
|
(9) Non-service pension and postretirement expense includes interest cost, expected return on plan assets and amortization of actuarial gains and losses. These benefit cost components are excluded from adjusted EBITDA since they are primarily influenced by external market conditions that impact investment returns and interest (discount) rates. The service cost and prior service cost components of pension and postretirement expense are included in the calculation of adjusted EBITDA, since they are considered to be a better reflection of the ongoing service-related costs of providing these benefits. Please note that GAAP pension and postretirement expense or the adjustment above are not necessarily indicative of the current or future cash flow requirements related to these employee benefit plans.
|
* Depreciation and amortization was $21,833 and $12,757 for the SGK Brand Solutions segment, $5,549 and $4,840 for the Memorialization segment, $1,450 and $1,545 for the Industrial Technologies segment, and $1,336 and $1,341 for Corporate and Non-Operating, for the three months ended June 30, 2020 and 2019, respectively. Depreciation and amortization was $65,274 and $37,364 for the SGK Brand Solutions segment, $15,024 and $14,898 for the Memorialization segment, $4,320 and $4,630 for the Industrial Technologies segment, and $3,800 and $3,867 for Corporate and Non-Operating, for the nine months ended June 30, 2020 and 2019, respectively.
** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $1,794 and $449 for the SGK Brand Solutions segment and $4,128 and $5,923 for Corporate and Non-Operating, for the three months ended June 30, 2020 and 2019, respectively. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $697 for the Memorialization segment for the three months ended June 30, 2020. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $9,058 and $3,858 for the SGK Brand Solutions segment and $19,032 and $14,014 for Corporate and Non-Operating, for the nine months ended June 30, 2020 and 2019, respectively. Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $1,754 for the Memorialization segment and $268 for the Industrial Technologies segment, for the nine months ended June 30, 2020.
Note 15. Acquisitions and Divestitures
Fiscal 2019:
On November 1, 2018 the Company acquired 80% ownership of Frost Converting Systems, Inc. (“Frost”) for a purchase price of approximately $7,162 (net of cash acquired and holdback amounts). Frost is a leading global supplier of high-performance rotary dies for embossing, creasing and cutting of paperboard packaging and is included in the Company's SGK Brand Solutions segment. The Company finalized the allocation of the purchase price related to the Frost acquisition in the fourth quarter of fiscal 2019, resulting in an immaterial adjustment to certain working capital accounts.
During fiscal 2019, the Company completed small acquisitions in the Memorialization segment for a combined purchase price of $3,094 (net of cash acquired and holdback amounts). The Company finalized the purchase price allocations related to these acquisitions in the first quarter of fiscal 2020, resulting in an immaterial adjustment to certain working capital accounts.
During fiscal 2019, the Company completed the sale of a 51% ownership interest in a small Memorialization business. Net proceeds from this sale totaled approximately $8,254, and the transaction resulted in the recognition of a $4,465 loss for the nine months ended June 30, 2019, which is included as a component of administrative expenses. Immediately following the transaction, the Company retained a non-controlling interest in this business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 16. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net goodwill at September 30, 2019
|
$
|
395,704
|
|
|
$
|
359,737
|
|
|
$
|
91,366
|
|
|
$
|
846,807
|
|
Additions during period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Divestiture during period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Translation and other adjustments
|
(1,100)
|
|
|
688
|
|
|
69
|
|
|
(343)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill write-down
|
(90,408)
|
|
|
—
|
|
|
—
|
|
|
(90,408)
|
|
Net goodwill at June 30, 2020
|
$
|
304,196
|
|
|
$
|
360,425
|
|
|
$
|
91,435
|
|
|
$
|
756,056
|
|
The net goodwill balances at June 30, 2020 and September 30, 2019 included $178,732 and $88,324 of accumulated impairment losses, respectively. Accumulated impairment losses at June 30, 2020 were $173,732 and $5,000 for the SGK Brand Solutions and Memorialization segments, respectively. Accumulated impairment losses at September 30, 2019 were $83,324 and $5,000 for the SGK Brand Solutions and Memorialization segments, respectively.
The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2020 (January 1, 2020) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values. The estimated fair values for two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) exceeded their carrying values (expressed as a percentage of carrying value) by less than 10% as of January 1, 2020.
On January 30, 2020, the World Health Organization declared an outbreak of COVID-19 to be a Public Health Emergency of International Concern, and subsequently recognized COVID-19 as a global pandemic on March 11, 2020. Widespread efforts have been deployed by multiple countries around the world to prevent the virus from spreading, including temporary closures of non-essential businesses, event cancellations, travel restrictions, quarantines, and other disruptive actions. Substantially all of the Company’s operations have remained open during the COVID-19 pandemic, as they have been considered “essential” businesses during this time. However, the Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19.
In its assessment of the potential impacts of COVID-19 on the estimated future earnings and cash flows for the SGK Brand Solutions segment, and in light of the limited excess fair values for its two reporting units (discussed above), management determined that COVID-19 represented a triggering event, resulting in a re-evaluation of the goodwill for its reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products), as of March 31, 2020. As a result of this interim assessment, the Company recorded a goodwill write-down totaling $90,408 during the fiscal 2020 second quarter. Subsequent to this write-down, the fair values of the two reporting units within the SGK Brand Solutions segment (Graphics Imaging and Cylinders, Surfaces and Engineered Products) approximated their carrying values at March 31, 2020. The fair values for these reporting units were determined using level 3 inputs (including estimates of revenue growth, EBITDA contribution and the discount rates) and a combination of the income approach using the estimated discounted cash flows and a market-based valuation methodology. If current projections are not achieved or specific valuation factors outside the Company’s control (such as discount rates and continued economic and industry impacts of COVID-19) significantly change, additional goodwill write-downs may be necessary in future periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)
Note 16. Goodwill and Other Intangible Assets (continued)
The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of June 30, 2020 and September 30, 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
June 30, 2020:
|
|
|
|
|
|
Indefinite-lived trade names
|
$
|
30,540
|
|
|
$
|
—
|
|
|
$
|
30,540
|
|
Definite-lived trade names
|
148,672
|
|
|
(53,941)
|
|
|
94,731
|
|
Customer relationships
|
374,448
|
|
|
(158,819)
|
|
|
215,629
|
|
Copyrights/patents/other
|
20,420
|
|
|
(14,115)
|
|
|
6,305
|
|
|
$
|
574,080
|
|
|
$
|
(226,875)
|
|
|
$
|
347,205
|
|
|
|
|
|
|
|
September 30, 2019:
|
|
|
|
|
|
Indefinite-lived trade names
|
$
|
30,540
|
|
|
$
|
—
|
|
|
$
|
30,540
|
|
Definite-lived trade names
|
148,628
|
|
|
(22,653)
|
|
|
125,975
|
|
Customer relationships
|
374,515
|
|
|
(137,330)
|
|
|
237,185
|
|
Copyrights/patents/other
|
20,463
|
|
|
(13,513)
|
|
|
6,950
|
|
|
$
|
574,146
|
|
|
$
|
(173,496)
|
|
|
$
|
400,650
|
|
The net change in intangible assets during the nine months ended June 30, 2020 included the impact of foreign currency fluctuations during the period and additional amortization.
Amortization expense on intangible assets was $17,825 and $9,543 for the three-month periods ended June 30, 2020 and 2019, respectively. For the nine-month periods ended June 30, 2020 and 2019, amortization expense was $53,639 and $27,165, respectively. Amortization expense is estimated to be $17,844 for the remainder of fiscal 2020, $60,156 in 2021, $46,766 in 2022, $27,833 in 2023 and $26,214 in 2024.