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Item 2. Management’s Discussion and Analysis

2023-01-27 compared with 2022-07-29 · 161 added, 99 removed, 86 unchanged (75% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

(1) Includes certain non-recurring items associated with recent acquisition activities, costs associated with global ERP system integration efforts, certain non-recurring costs associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels, and exchange losses associated with highly inflationary accounting (see Note 2, "Basis of Presentation" in Item 1 - "Financial Statements").

months of fiscal 2023 were $133.6 million, compared to $153.5 million for the first three months of fiscal 2022, representing a decrease of $19.9 million.

Changes in foreign currency exchange rates had an unfavorable impact of $10.7 million on the segment's sales compared to the prior year.

The decrease in sales also reflected lower brand sales in the U.S.

and Europe, lower retail-based sales (principally merchandising solutions) and sales declines in the private-label brand market.

Gross profit for the three months ended December 31, 2022 was $138.9 million, compared to $131.6 million for the same period a year ago.

Consolidated gross profit as a percent of sales was 30.9% and 30.0% for the first three months of fiscal 2023 and fiscal 2022, respectively.

The increase in gross profit primarily reflected the impact of higher sales (including the benefits from the OLBRICH and R+S Automotive acquisitions), benefits from the realization of productivity improvements and other cost-reduction initiatives, and improved margins for engineered products within the Industrial Technologies segment.

These increases in gross profit were partially offset by the impact of unfavorable changes in sales mix, higher material, labor and transportation costs, and lower margins on U.K.

cremation equipment projects.

Gross profit also included acquisition integration costs and other charges primarily in connection with cost-reduction initiatives totaling $855,000 and $1.5 million for the three months ended December 31, 2022 and 2021, respectively.

Selling and administrative expenses for the three months ended December 31, 2022 were $111.4 million, compared to $99.3 million for the first three months of fiscal 2022.

Consolidated selling and administrative expenses, as a percent of sales, were 24.8% for the three months ended December 31, 2022, compared to 22.6% for the same period last year.

Fiscal 2023 selling and administrative expenses reflected the impact of higher salaries and wage rates, higher travel and entertainment ("T&E") costs, and additional expenses from the recently completed OLBRICH and R+S Automotive acquisitions.

These increases in selling and administrative expenses were partially offset by benefits from ongoing cost-reduction initiatives.

Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges primarily in connection with cost-reduction initiatives totaling $2.7 million in fiscal 2023, compared to $3.5 million in fiscal 2022.

Intangible amortization for the three months ended December 31, 2022 was $10.3 million, compared to $21.5 million for the three months ended December 31, 2021.

Fiscal 2022 intangible amortization included $9.5 million of amortization related to certain trade names that have been discontinued.

Adjusted EBITDA was $49.3 million for the three months ended December 31, 2022 and $53.3 million for the three months ended December 31, 2021.

Memorialization segment adjusted EBITDA was $39.1 million for the first three months of fiscal 2023 compared to $43.4 million for the first three months of fiscal 2022.

Fiscal 2023 segment adjusted EBITDA reflected benefits from improved price realization and productivity initiatives, which were offset by the impact of lower unit sales of caskets and bronze memorials, unfavorable changes in sales mix, higher material, labor, transportation and T&E costs, and lower margins on certain cremation equipment projects.

Adjusted EBITDA for the Industrial Technologies segment was $12.2 million for the three months ended December 31, 2022 compared to $7.2 million for the three months ended December 31, 2021.

Industrial Technologies segment adjusted EBITDA primarily reflected the impact of higher sales and improved margins for engineered products.

Changes in foreign currency exchange rates had an unfavorable impact of $1.1 million on the segment's adjusted EBITDA compared to the prior year.

Adjusted EBITDA for the SGK Brand Solutions segment was $12.2 million for the first three months of fiscal 2023 compared to $15.4 million for the same period a year ago.

The decrease in segment adjusted EBITDA primarily reflected the impact of lower sales and higher labor and T&E costs, partially offset by benefits from cost-reduction initiatives.

Changes in foreign currency exchange rates had an unfavorable impact of $1.0 million on the segment's adjusted EBITDA compared to the prior year.

Interest expense for the first three months of fiscal 2023 was $10.2 million, compared to $6.5 million for the same period last year.

The increase in interest expense reflected an increase in average borrowing levels and higher average interest rates in the current fiscal year.

Other income (deductions), net, for the three months ended December 31, 2022 represented a decrease in pre-tax income of $2.1 million, compared to a decrease in pre-tax income of $30.7 million for the same period last year.

Other income (deductions), net includes the non-service components of pension and postretirement expense, which totaled $1.4 million and $31.1 million for the three months ended December 31, 2022 and 2021, respectively.

Fiscal 2023 non-service pension expense included a $1.3 million non-cash charge resulting from the settlement of the Company's supplemental retirement plan ("SERP") and defined benefit portion of the officers retirement restoration plan ("ORRP") obligations.

Fiscal 2022 non-service pension expense included a $30.9 million non-cash charge resulting from the full settlement of the Company's principal defined benefit retirement plan ("DB Plan") obligations.

Refer to Note 11, "Pension and Other Postretirement Benefit Plans" in Item 1 - "Financial Statements" for further details.

Other income (deductions), net also includes investment income, banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances.

Fiscal 2023 other income (deductions), net included $1.1 million of currency losses associated with highly inflationary accounting for the Company's subsidiaries in Turkey (see Note 2, "Basis of Presentation" in Item 1 - "Financial Statements").

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year.

The Company's consolidated income taxes for the first three months of fiscal 2023 were an expense of $1.3 million, compared to a benefit of $6.6 million for the first three months of fiscal 2022.

The difference between the Company’s consolidated income taxes for the first three months of fiscal 2023 compared to the same period for fiscal 2022 primarily resulted from consolidated pre-tax income in fiscal 2023 compared to a pre-tax loss in fiscal 2022.

The Company’s fiscal 2023 three month effective tax rate varied from the U.S.

statutory tax rate of 21.0% primarily due to state taxes, foreign statutory rate differentials, and tax credits.

The Company’s fiscal 2022 three month effective tax rate varied from the U.S.

statutory tax rate of 21.0% primarily due to state taxes, foreign statutory rate differentials, and tax credits.

Net losses attributable to noncontrolling interests were $56,000 for the three months ended December 31, 2022 and $7,000 for the three months ended December 31, 2021.

The net losses attributable to noncontrolling interests primarily reflected losses in less than wholly-owned businesses.

NON-GAAP FINANCIAL MEASURES:

Included in this report are measures of financial performance that are not defined by GAAP.

The Company uses non-GAAP financial measures to assist in comparing its performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the Company’s core operations including acquisition costs, ERP integration costs, strategic initiative and other charges (which includes non-recurring charges related to operational initiatives and exit activities), stock-based compensation and the non-service portion of pension and postretirement expense.

Management believes that presenting non-GAAP financial measures is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items that management believes do not directly reflect the Company's core operations, (ii) permits investors to view performance using the same tools that management uses to budget, forecast, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating the Company’s results.

The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provided herein, provides investors with an additional understanding of the factors and trends affecting the Company’s business that could not be obtained absent these disclosures.

The Company believes that adjusted EBITDA provides relevant and useful information, which is used by the Company’s management in assessing the performance of its business.

Adjusted EBITDA is defined by the Company as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of its operating results.

These items include stock-based compensation, the non-service portion of pension and postretirement expense, acquisition costs, ERP integration costs, and strategic initiatives and other charges.

Adjusted EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes, and the effects of certain acquisition and ERP integration costs, and items that do not reflect the ordinary earnings of the Company’s operations.

This measure may be useful to an investor in evaluating operating performance.

It is also useful as a financial measure for lenders and is used by the Company’s management to measure business performance.

Adjusted EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of the Company's liquidity.

The Company's definition of adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

The reconciliation of net income to adjusted EBITDA is as follows:

Three Months Ended

(Dollar amounts in thousands)

Net income (loss) $ 3,647 $ (19,810)

Income tax provision (benefit) 1,312 (6,628)

Income (loss) before income taxes 4,959 (26,438)

Net loss attributable to noncontrolling interests 56 7

Interest expense 10,215 6,507

Depreciation and amortization *

23,729 33,501

RPA financing fees (1)

Acquisition costs (2)**

Strategic initiatives and other charges (3)**

Non-recurring / incremental COVID-19 costs (4)***

Exchange losses related to highly inflationary accounting (5)

Defined benefit plan termination related items (6)

Stock-based compensation 4,334 3,709

Non-service pension and postretirement expense (7)

Total Adjusted EBITDA $ 49,291 $ 53,333

(1) Represents fees for receivables sold under the RPA (see "Liquidity and Capital Resources").

(2) Includes certain non-recurring costs associated with recent acquisition activities.

(3) Includes certain non-recurring costs associated with productivity and cost-reduction initiatives intended to result in improved operating performance, profitability and working capital levels, costs associated with global ERP system integration efforts, and asset write-downs associated with certain operations in Russia, net of recoveries.

(4) Includes certain non-recurring direct incremental costs (such as costs for purchases of computer peripherals and devices to facilitate working-from-home, additional personal protective equipment and cleaning supplies and services, etc.) incurred in response to COVID-19.

This amount does not include the impact of any lost sales or underutilization due to COVID-19.

(5) Represents exchange losses associated with highly inflationary accounting related to the Company's Turkish subsidiaries (see Note 2, "Basis of Presentation" in Item 1 - "Financial Statements and Supplementary Data").

(6) Represents items associated with the termination of the Company's DB Plan, supplemental retirement plan and the defined benefit portion of the officers retirement restoration plan.

(4) Represents asset write-downs, net of recoveries within the SGK Brand Solutions segment (see Note 15, "Asset Write-Downs" in Item 1 - "Financial Statements").

(7) Non-service pension and postretirement expense includes interest cost, expected return on plan assets, amortization of actuarial gains and losses, curtailment gains and losses, and settlement gains and losses.

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Please note that GAAP pension and postretirement expense or the adjustment above are not necessarily indicative of the current or future cash flow requirements related to these employee benefit plans.

* Depreciation and amortization was $5.8 million and $5.8 million for the Memorialization segment, $2.5 million and $2.8 million for the Industrial Technologies segment, $13.3 million and $25.4 million for the SGK Brand Solutions segment, and $1.3 million and $1.3 million for Corporate and Non-Operating, for the three months ended June 30, 2022 and 2021, respectively.

Depreciation and amortization was $17.4 million and $17.0 million for the Memorialization segment, $7.6 million and $8.4 million for the Industrial Technologies segment, $51.1 million and $68.5 million for the SGK Brand Solutions segment, and $4.0 million and $4.0 million for Corporate and Non-Operating, for the nine months ended June 30, 2022 and 2021, respectively.

** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $902,000 and $484,000 for the Memorialization segment, $1.2 million and $881,000 for the Industrial Technologies segment, $2.0 million and $2.9 million for the SGK Brand Solutions segment, and $3.2 million and $2.9 million for Corporate and Non-Operating, for the three months ended June 30, 2022 and 2021, respectively.

Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $2.1 million and $1.3 million for the Memorialization segment, $1.4 million and $3.7 million for the Industrial Technologies segment, $7.7 million and $10.5 million for the SGK Brand Solutions segment, and $6.7 million and $8.1 million for Corporate and Non-Operating, for the nine months ended June 30, 2022 and 2021, respectively.

*** Non-recurring/incremental COVID-19 costs were $225,000 and $1.3 million for the Memorialization segment, $1,000 and $6,000 for the Industrial Technologies segment, $74,000 and $638,000 for the SGK Brand Solutions segment, and $1,000 and $16,000 for Corporate and Non-Operating, for the three months ended June 30, 2022 and 2021, respectively.

Non-recurring/incremental COVID-19 costs were $1.3 million and $3.2 million for the Memorialization segment, $6,000 and $36,000 for the Industrial Technologies segment, $464,000 and $1.3 million for the SGK Brand Solutions segment, and $466,000 and $86,000 for Corporate and Non-Operating, for the nine months ended June 30, 2022 and 2021, respectively.

* Depreciation and amortization was $5.6 million and $5.8 million for the Memorialization segment, $5.9 million and $2.7 million for the Industrial Technologies segment, $11.1 million and $23.7 million for the SGK Brand Solutions segment, and $1.2 million and $1.3 million for Corporate and Non-Operating, for the three months ended December 31, 2022 and 2021, respectively.

** Acquisition costs, ERP integration costs, and strategic initiatives and other charges were $378,000 and $671,000 for the Memorialization segment, $937,000 and $32,000 for the Industrial Technologies segment, $521,000 and $1.2 million for the SGK Brand Solutions segment, and $1.2 million and $1.9 million for Corporate and Non-Operating, for the three months ended December 31, 2022 and 2021, respectively.

*** Non-recurring/incremental COVID-19 costs were $464,000 for the Memorialization segment, $4,000 for the Industrial Technologies segment, $220,000 for the SGK Brand Solutions segment, and $2,000 for Corporate and Non-Operating, for the three months ended December 31, 2021.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

LIQUIDITY AND CAPITAL RESOURCES:

Net cash provided by operating activities was $84.4 million for the first nine months of fiscal 2022, compared to $106.9 million for the first nine months of fiscal 2021.

Operating cash flow for both periods principally included net (loss) income adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, net losses (gains) related to investments, non-cash pension expense, asset write-downs, other non-cash adjustments, and changes in working capital items.

Fiscal 2022 operating cash flow also reflected $35.7 million of DB Plan contributions to fully fund the settlement of the DB Plan obligations.

Net cash used in operating activities was $36.2 million for the first three months of fiscal 2023, compared to $27.2 million for the first three months of fiscal 2022.

Operating cash flow for both periods principally included net income (loss) adjusted for deferred taxes, depreciation and amortization, stock-based compensation expense, non-cash pension expense, other non-cash adjustments, and changes in working capital items.

Fiscal 2023 operating cash flow also reflected $24.2 million of contributions to fund the settlement of the Company's SERP and ORRP obligations.

Fiscal 2022 operating cash flow reflected $35.7 million of contributions to fully fund the settlement of the Company's DB Plan obligations.

Net changes in working capital items decreased operating cash flow by $43.2 million and $40.8 million in fiscal 2023 and fiscal 2022, respectively.

The fiscal 2022 change in working capital principally reflected proceeds from the sale of receivables under a receivables purchase agreement (see below for further discussion), offset by increased fiscal year-end compensation-related payments, higher inventory levels reflecting increased commodity costs, and changes in other accounts.

Cash used in investing activities was $38.9 million for the nine months ended June 30, 2022, compared to $22.9 million for the nine months ended June 30, 2021.

Investing activities for the first nine months of fiscal 2022 primarily reflected capital expenditures of $40.6 million, proceeds from the sale of investments of $3.1 million, and purchases of investments of $2.2 million.

Investing activities for the first nine months of fiscal 2021 reflected capital expenditures of $24.5 million, acquisitions payments (net of cash acquired and holdback amounts) totaling $15.6 million, proceeds from the sale of investments of $15.0 million, and proceeds from the sale of assets of $2.2 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.

The fiscal 2023 change in working capital principally reflected fiscal year-end compensation-related payments, decreases in accounts payable, and higher inventory levels, partially offset by proceeds from the sale of receivables under a receivables purchase agreement (see below for further discussion).

Cash used in investing activities was $14.2 million for the three months ended December 31, 2022, compared to $12.5 million for the three months ended December 31, 2021.

Investing activities for the first three months of fiscal 2023 primarily reflected capital expenditures of $12.4 million and acquisitions, net of cash acquired, of $1.8 million.

Investing activities for the first three months of fiscal 2022 primarily reflected capital expenditures of $12.6 million.

Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new production machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency and capacity, lower production costs and meet regulatory requirements.

Capital expenditures for the last three fiscal years were primarily financed through operating cash.

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Capital spending for fiscal 2023 is currently estimated to be approximately $75 million.

Capital spending in fiscal 2023 reflects additional capital projects to support new production capabilities and increased efficiencies within the Memorialization and Industrial Technologies segments.

The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used in financing activities for the nine months ended June 30, 2022 was $43.8 million, primarily reflecting proceeds, net of repayments, on long-term debt of $13.8 million, treasury stock purchases of $34.0 million, dividends of $20.8 million to the Company's shareholders, and $613,000 of holdback and deferred payments related to acquisitions from prior years.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

in financing activities for the nine months ended June 30, 2021 was $79.8 million, primarily reflecting repayments, net of proceeds, on long-term debt of $49.0 million, treasury stock purchases of $6.1 million, dividends of $20.9 million to the Company's shareholders, and $1.6 million of holdback and deferred payments related to acquisitions from prior years.

Cash provided by financing activities for the three months ended December 31, 2022 was $22.3 million, primarily reflecting proceeds, net of repayments, on long-term debt of $32.7 million, treasury stock purchases of $2.5 million, and cash dividends of $7.0 million to the Company's shareholders.

Cash provided by financing activities for the three months ended December 31, 2021 was $62.4 million, primarily reflecting proceeds, net of repayments, on long-term debt of $72.3 million, treasury stock purchases of $2.4 million and dividends of $6.8 million to the Company's shareholders.

The Company has a domestic credit facility with a syndicate of financial institutions that includes a $750.0 million senior secured revolving credit facility, which matures in March 2025.

A portion of the revolving credit facility (not to exceed $350.0 million) can be drawn in foreign currencies.

Borrowings under the revolving credit facility bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.00% at June 30, 2022) based on the Company's secured leverage ratio.

Borrowings under the revolving credit facility bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.25% at December 31, 2022) based on the Company's secured leverage ratio.

The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement.

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The Company incurred debt issuance costs in connection with the domestic credit facility.

Unamortized costs were $1.7 million and $2.2 million at June 30, 2022 and September 30, 2021, respectively.

Unamortized costs were $1.4 million and $1.5 million at December 31, 2022 and September 30, 2022, respectively.

The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios.

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Outstanding U.S.

dollar denominated borrowings on the revolving credit facility at June 30, 2022 and September 30, 2021 were $436.3 million and $349.8 million, respectively.

The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) at June 30, 2022 and 2021 was 1.92% and 1.94%, respectively.

dollar denominated borrowings on the revolving credit facility at December 31, 2022 and September 30, 2022 were $495.4 million and $472.1 million, respectively.

The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at December 31, 2022 and 2021 was 4.24% and 1.86%, respectively.

The Company has $299.6 million of 5.25% senior unsecured notes due December 1, 2025 (the "2025 Senior Notes").

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The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes.

Unamortized costs were $1.8 million and $2.2 million at June 30, 2022 and September 30, 2021, respectively.

Unamortized costs were $1.5 million and $1.7 million at December 31, 2022 and September 30, 2022, respectively.

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.

In March 2022, Matthews RFC entered into a receivables purchase agreement (“RPA”) to sell up to $125.0 million of receivables to certain purchasers (the “Purchasers”) on a recurring basis in exchange for cash (referred to as “capital” within the RPA) equal to the gross receivables transferred.

In March 2022, Matthews RFC entered into a receivables purchase agreement (“RPA”) to sell up to $125.0 million

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

of receivables to certain purchasers (the “Purchasers”) on a recurring basis in exchange for cash (referred to as “capital” within the RPA) equal to the gross receivables transferred.

The parties intend that the transfers of receivables to the Purchasers constitute purchases and sales of receivables.

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Cash received from collections of sold receivables may be used to fund additional purchases of receivables on a revolving basis, or to reduce all or any portion of the outstanding capital of the Purchasers.

Gross receivables sold and cash collections reinvested under the RPA program were $247.2 million and $147.2 million for the nine months ended June 30, 2022, respectively.

Gross receivables sold and cash collections reinvested under the RPA program were $203.6 million and $89.6 million for the three months ended December 31, 2022, respectively.

The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded.

As of June 30, 2022, the amount sold to the Purchasers was $100.0 million, which was derecognized from the Consolidated Balance Sheets.

As collateral against sold receivables, Matthews RFC maintains a certain level of unsold receivables, which was $39.7 million as of June 30, 2022.

Previously, the Company had a $115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions that matured in March 2022.

As of December 31, 2022 and September 30, 2022, the amount sold to the Purchasers was $114.0 million and $96.6 million, respectively, which was derecognized from the Consolidated Balance Sheets.

As collateral against sold receivables, Matthews RFC maintains a certain level of unsold receivables, which was $40.8 million and $44.3 million as of December 31, 2022 and September 30, 2022, respectively.

Previously, the Company had a $115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matured in March 2022.

The Securitization Facility did not qualify for sale treatment.

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Borrowings under the Securitization Facility were based on LIBOR plus 0.75% and the Company was required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility.

Outstanding borrowings under the Securitization Facility at September 30, 2021 totaled $96.0 million.

At June 30, 2021, the interest rate on borrowings under this facility was 0.85%.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

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):

June 30, 2022 September 30, 2021

Pay fixed swaps - notional amount $ 125,000 $ 250,000

Net unrealized gain (loss) $ 7,407 $ (2,062)

At December 31, 2021, the interest rate on borrowings under this facility was 0.85%.

The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews.

The maximum amount of borrowing available under this facility is €25.0 million ($26.8 million), which includes €8.0 million ($8.6 million) for bank guarantees.

This facility has no stated maturity date and is available until terminated.

Outstanding borrowings under the credit facility totaled €13.2 million ($14.1 million) and €8.2 million ($8.1 million) at December 31, 2022 and September 30, 2022, respectively.

The weighted-average interest rate on outstanding borrowings under this facility was 3.96% at December 31, 2022.

Other borrowings totaled $23.1 million and $13.4 million at December 31, 2022 and September 30, 2022, respectively.

The weighted-average interest rate on these borrowings was 3.09% and 1.88% at December 31, 2022 and 2021, respectively.

The Company operates internationally and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures.

The following table presents information related to interest rate swaps entered into by the Company and designated as cash flow hedges:

December 31, 2022 September 30, 2022

(Dollar amounts in thousands)

Notional amount $ 125,000 $ 125,000

Weighted-average maturity period (years) 2.6 3.1

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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 $7.4 million ($5.6 million after tax) at June 30, 2022 and an unrealized loss net of unrealized gains of $2.1 million ($1.6 million after tax) at September 30, 2021, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI").

Assuming market rates remain constant with the rates at June 30, 2022, a gain (net of tax) of approximately $1.6 million included in AOCI is expected to be recognized in earnings over the next twelve months.

The Company, through certain of its European subsidiaries, has a credit facility with a European bank, which is guaranteed by Matthews.

The maximum amount of borrowing available under this facility is €25.0 million ($26.1 million), which includes €8.0 million ($8.4 million) for bank guarantees.

In the first quarter of fiscal 2022, the Company extended this facility to a current maturity of December 2022 and the Company intends to continue to extend this facility.

Outstanding borrowings under the credit facility totaled €10.5 million ($11.0 million) and €704,000 ($817,000) at June 30, 2022 and September 30, 2021, respectively.

The weighted-average interest rate on outstanding borrowings under this facility was 2.25% at June 30, 2022 and June 30, 2021.

Other borrowings totaled $24.4 million and $10.2 million at June 30, 2022 and September 30, 2021, respectively.

Other borrowings at June 30, 2022 included $3.4 million of collateralized borrowings in connection with the RPA arrangement discussed above.

The weighted-average interest rate on these borrowings was 1.90% and 2.19% at June 30, 2022 and 2021, respectively.

The fair value of the interest rate swaps reflected an unrealized gain of $10.1 million ($7.5 million after tax) at December 31, 2022 and an unrealized gain of $10.7 million ($7.9 million after tax) at September 30, 2022, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI").

Assuming market rates remain constant with the rates at December 31, 2022, a gain (net of tax) of approximately $2.5 million included in AOCI is expected to be recognized in earnings over the next twelve months.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

The Company has a U.S.

Dollar/Euro cross currency swap with a notional amount of $94.5 million as of June 30, 2022, which has been designated as a net investment hedge of foreign operations.

Dollar/Euro cross currency swap with a notional amount of $81.4 million as of December 31, 2022 and September 30, 2022, which has been designated as a net investment hedge of foreign operations.

The swap contract matures in September 2027.

The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices.

A gain of $8.7 million (net of income taxes of $2.8 million) and a gain of $29,000 (net of income taxes of $10,000), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at June 30, 2022 and September 30, 2021, respectively.

Income of $428,000 and $1.2 million, which represented the recognized portion of the fair value excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three and nine months ended June 30, 2022, respectively.

At June 30, 2022 and September 30, 2021, the swap, which is included in other assets in the Consolidated Balance Sheets, totaled $11.5 million and $39,000, respectively.

The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the economic impact of largely mitigating foreign currency exposure.

Changes in the fair value of these economic hedges are recorded in current period earnings as a component of other income (deductions), net.

During the third quarter of fiscal 2022, the Company entered into a three-year U.S.

Dollar/Euro cross currency swap with a notional amount of $52.8 million, which did not meet the criteria for hedge accounting.

An unrealized gain of $495,000 related to this swap was included in other assets in the Consolidated Balance Sheet at June 30, 2022.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

A loss of $1.6 million (net of income taxes of $526,000) and a gain of $2.8 million (net of income taxes of $940,000), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at December 31, 2022 and September 30, 2022, respectively.

Income of $272,000 and $365,000, which represented the recognized portion of the fair value of cross currency swaps excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for the three months ended December 31, 2022 and 2021, respectively.

At December 31, 2022 and September 30, 2022, the swap totaled $2.1 million and $3.7 million, respectively, and was included in other accrued liabilities and other assets in the Consolidated Balance Sheets, respectively.

The Company has a stock repurchase program.

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Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions set forth in the Company's Restated Articles of Incorporation.

Under the current authorization, 1,602,166 shares remain available for repurchase as of June 30, 2022.

Consolidated working capital of the Company was $288.8 million at June 30, 2022, compared to $269.9 million at September 30, 2021.

Cash and cash equivalents were $45.8 million at June 30, 2022, compared to $49.2 million at September 30, 2021.

The Company's current ratio was 1.9 at June 30, 2022 and 1.8 at September 30, 2021.

Under the current authorization, 1,205,817 shares remain available for repurchase as of December 31, 2022.

Refer to Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds" in Part II - "Other Information" for further details on the Company's repurchases in fiscal 2023.

Consolidated working capital of the Company was $266.5 million at December 31, 2022, compared to $217.2 million at September 30, 2022.

Cash and cash equivalents were $42.7 million at December 31, 2022, compared to $69.0 million at September 30, 2022.

The Company's current ratio was 1.7 at December 31, 2022 and 1.5 at September 30, 2022, respectively.

Long-Term Contractual Obligations:

The following table summarizes the Company's contractual obligations at June 30, 2022, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

The following table summarizes the Company's contractual obligations at December 31, 2022, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Payments due in fiscal year:

Total 2022 (1)

2023 to 2024 2025 to 2026 After

Remainder 2024 to 2025 2026 to 2027 After

Contractual Cash Obligations:

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81,365 18,898 39,558 18,890 4,019

Acquisition (3)

44,940 44,940 — — —

Other 23,005 723 11,837 2,155 8,290

Total contractual cash obligations $ 966,255 $ 29,250 $ 580,780 $ 328,554 $ 27,671

(1) The Company maintains certain debt facilities with maturity dates of twelve months or less that it intends and has the ability to extend beyond twelve months totaling $11.0 million.

These balances have been classified as non-current on the Company's Consolidated Balance Sheet.

(1) Lease obligations have not been discounted to their present value.

(3) During the third quarter of fiscal 2022, the Company signed an agreement to acquire German based engineering firms, OLBRICH GmbH (“OLBRICH”) and R+S Automotive GmbH (“R+S Automotive”), for €43 million.

The closing of the transaction is expected in the fourth quarter of fiscal 2022.

Benefit payments under the Company's DB Plan were made from plan assets, while benefit payments under the supplemental retirement plan ("SERP") and postretirement benefit plan are made from the Company's operating funds.

In the first quarter of fiscal 2022, the Company terminated its DB Plan and made plan contributions totaling $35.7 million to fully fund the planned settlement of the DB Plan obligations.

Also during the first quarter of fiscal 2022, lump sum distributions of $186.0 million were made from the DB Plan to plan participants, and non-participating annuity contracts totaling $56.3 million were purchased by the DB Plan for plan participants, resulting in the full settlement of the DB Plan obligations.

The settlement of the DB Plan obligations resulted in the recognition of a non-cash charge of $30.9 million, which has been presented as a component of other income (deductions), net for the nine months ended June 30, 2022.

This amount represents the immediate recognition of the remaining portion of the deferred AOCI balances related to the DB Plan.

During the nine months ended June 30, 2022 contributions of $575,000 and $472,000 were made under the SERP and postretirement benefit plan, respectively.

The Company currently anticipates contributing an additional $185,000 and $412,000 under the SERP and postretirement benefit plan, respectively, for the remainder of fiscal 2022.

The Company also expects to make payments totaling approximately $24.2 million in fiscal 2023 to fully settle the SERP and defined benefit portion of the officers retirement restoration plan obligations.

The obligations of the SERP are expected to be funded from an existing rabbi trust.

The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Benefit payments under the SERP and postretirement benefit plan are made from the Company's operating funds.

In the first quarter of fiscal 2023, the Company made lump sum payments totaling $24.2 million to fully settle the SERP and defined benefit portion of the ORRP obligations.

The settlement of these plan obligations resulted in the recognition of a non-cash charge of $1.3 million, which has been presented as a component of other income (deductions), net for the three months ended December 31, 2022.

This amount represents the immediate recognition of the deferred AOCI balances related to the SERP and ORRP.

Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities.

If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary.

As of June 30, 2022, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $3.0 million.

As of December 31, 2022, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $4.2 million.

The timing of potential future payments related to the unrecognized tax benefits is not presently determinable.

The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

REGULATORY MATTERS:

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The Company is currently performing environmental assessments and remediation at certain sites, as applicable.

ACQUISITIONS:

Refer to Note 15, "Acquisitions" in Item 1 - "Financial Statements" for further details on the Company's acquisitions.

FORWARD-LOOKING INFORMATION:

The Company's current strategy to attain annual operating growth primarily consists of the following:

internal growth - which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products - and investments (including acquisitions and related integration activities) to achieve strategic and synergy benefits.

The significant factors (excluding acquisitions) influencing sales growth in the Industrial Technologies segment include economic/industrial market conditions, new product development, and the e-commerce trend.

Order rates for the Company's Industrial Technologies businesses remained strong through the fiscal 2022 third quarter and, as a result, are currently expected to support the segment’s organic growth objectives for the balance of fiscal 2022 and into next year.

internal growth - which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products - and acquisitions and related integration activities to achieve synergy benefits.

The Industrial Technologies segment received over $200 million of new orders during the fiscal 2023 first quarter for its energy storage solutions business.

The orders have been received from multiple EV, fuel cell, and battery manufacturers and are expected to support the segment’s organic growth objectives.

For the Memorialization segment, sales growth will be influenced by North America death rates, and the impact of the increasing trend toward cremation on the segment's product offerings, including caskets, cemetery memorial products and cremation-related products.

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Due to the global footprint of this segment, currency fluctuations can also be a significant factor.

Additionally, the retail-based businesses in the SGK Brand Solutions segment continue to recover from the unfavorable sales impacts of the pandemic (see below).

During fiscal 2019, the Company initiated a strategic evaluation to improve profitability and reduce the Company's cost structure.

These actions leveraged the benefit of the Company's new global ERP platform, primarily targeted at the SGK Brand Solutions segment, both operational and commercial structure, and the Company's shared financial services and other administrative functions.

This evaluation identified opportunities for significant cost structure improvements, which the Company expects to achieve throughout the remainder of fiscal 2022.

The Company's strategic review has also resulted in improvements to the commercial structure within the SGK Brand Solutions segment.

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 in March 2020.

The Company has experienced some commercial impact and business disruptions in certain segments and geographic locations as a result of COVID-19.

Recent impacts have included higher sales volumes for memorialization products and services.

Additionally, recent increases in the cost of certain raw materials, labor, and other inflationary impacts are expected to impact the Company's results for the near future.

The Company expects to partially mitigate these cost increases through price realization and the cost-reduction initiatives discussed above.

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Recent labor cost increases, supply chain challenges, and other inflation-related impacts are expected to impact the Company's results for the near future.

The Company expects to partially mitigate these cost increases through price realization and cost-reduction initiatives.

CRITICAL ACCOUNTING POLICIES:

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The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets in the second quarter of fiscal 2022 (January 1, 2022) and determined that the estimated fair values for all goodwill reporting units exceeded their carrying values, therefore no impairment charges were necessary.

The estimated fair value of the Company's SGK Brand Solutions reporting unit (formerly the Graphics Imaging reporting unit) exceeded the carrying value (expressed as a percentage of carrying value) by approximately 10%.

The SGK Brand Solutions reporting unit has experienced recent declines, primarily resulting from weakened economic conditions (particularly in Europe) and unfavorable changes in foreign exchange rates.

Additionally, recent increases in the cost of certain materials, labor, and other inflationary pressures have had an unfavorable impact on the reporting unit's results of operations.

If current projections are not achieved or specific valuation factors outside the Company’s control (such as discount rates and continued economic and industry challenges) significantly change, goodwill write-downs may be necessary in future periods.

The Company performed an interim assessment of its SGK Brand Solutions goodwill reporting unit as of September 1, 2022 and recorded a goodwill write-down totaling $82.5 million during the fiscal 2022 fourth quarter.

Subsequent to this write-down, the fair value of the SGK Brand Solutions reporting unit

Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

approximated its carrying value at September 1, 2022.

If current projections are not achieved or specific valuation factors outside the Company's control (such as discount rates and continued economic and industry challenges) significantly change, additional goodwill write-downs may be necessary in future periods.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

Refer to Note 2, "Basis of Presentation" in Item 1 - "Financial Statements," for further details on recently issued accounting pronouncements.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Company’s market risk during the three months ended December 31, 2022.

For additional information see 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, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis