Matthews International(MATW) - 2023 Q4 - Annual Report

Part I Business Overview Matthews International is a global provider of memorialization products, industrial technologies, and brand solutions, operating through three segments - The company is a global provider of memorialization products, industrial technologies, and brand solutions, operating under three corresponding business segments[13] Consolidated Sales by Segment (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Memorialization | $842,997 | $840,124 | $769,016 | | Industrial Technologies | $505,751 | $335,523 | $284,495 | | SGK Brand Solutions | $532,148 | $586,756 | $617,519 | | Consolidated Sales | $1,880,896 | $1,762,403 | $1,671,030 | - As of October 31, 2023, the company employed approximately 12,000 people globally across more than 300 locations in 30 countries[53] Memorialization Segment This segment manufactures and markets memorialization products, including memorials, caskets, and cremation equipment, serving funeral homes globally - The segment produces a full line of memorial products such as cast bronze and granite memorials, caskets, and cremation equipment[15] - It is a leading manufacturer of caskets in North America, offering metal, wood, and cremation caskets with various personalization options[19][20] - The segment also provides cremation systems for both human and pet sectors, waste incineration systems, and related environmental systems, primarily in North America and Europe[23][24][25] Industrial Technologies Segment This segment provides high-tech custom solutions, including energy storage systems, product identification, and coating/converting lines - The segment designs and manufactures custom energy storage solutions, product identification systems, warehouse automation, and coating/converting lines[32] - The energy storage solutions business has experienced significant growth due to increasing demand for electric vehicles and has nearly a decade of experience in developing dry electrode battery solutions[36] - A significant portion of revenue comes from consumables and replacement parts, particularly inks developed exclusively for its marking equipment[39] SGK Brand Solutions Segment This segment offers comprehensive packaging and brand experience solutions, including design, premedia, and printing plate production - Provides end-to-end packaging and brand experience solutions, including design, production art, premedia services, and printing plate production[43][45] - Principal clients are global, multinational, and regional companies in highly regulated industries such as food & beverage, pharmaceuticals, and beauty[47] - The ability to offer consistent service on a global basis is a key competitive differentiator[49] Human Capital Resources The company's human capital strategy focuses on talent building, employee engagement, D&I, and health and safety - The company's D&I strategy focuses on seven key areas: Talent Acquisition, Employee Engagement, Learning and Awareness, Supplier Diversity, Connection to Customers, Normalizing Courageous Conversations, and Community Engagement[55] - A robust talent review process is in place to identify critical talent for succession planning and leadership development programs[61] - Employee health and safety is a core value and the company's highest priority, managed by a global team and supported at the local level[64] Risk Factors The company faces material risks from foreign operations, supply chain, goodwill impairment, economic conditions, and cybersecurity - Company-specific risks include those arising from foreign operations (currency fluctuations, political instability), changes in interest rates, increased raw material prices, and potential impairment of significant goodwill and intangible assets[69][72][75][76] - The Memorialization segment is sensitive to changes in mortality and cremation rates, with rising cremation rates potentially affecting sales of traditional burial products[77][78] - General risks include disruptions to the global supply chain, the impact of pandemics and global conflicts, labor shortages, cybersecurity breaches, and failure to maintain effective internal controls[81][82][83][100] - The SGK Brand Solutions reporting unit had a goodwill impairment of $82.5 million in fiscal 2022, and future impairment charges could occur if performance deteriorates[76] Properties The company's principal properties, including manufacturing facilities and offices, are located across North America, Europe, and Asia - The company lists its significant principal properties as of October 31, 2023, categorized by its three segments: Memorialization, Industrial Technologies, and SGK Brand Solutions, noting which are owned versus leased[108] Officers and Executive Management This section lists the company's executive officers as of October 31, 2023, including their names, ages, and positions Executive Officers (as of Oct 31, 2023) | Name | Age | Position | | :--- | :--- | :--- | | Joseph C. Bartolacci | 63 | President and Chief Executive Officer | | Steven F. Nicola | 63 | Chief Financial Officer and Secretary | | Gregory S. Babe | 66 | Chief Technology Officer and Group President, Industrial Technologies | | Steven D. Gackenbach | 60 | Group President, Memorialization | | Gary R. Kohl | 60 | President, SGK Brand Solutions | Part II Market for Common Equity and Related Stockholder Matters The company's Class A Common Stock trades on Nasdaq under 'MATW', with an active stock repurchase program and performance graph - The company's Class A Common Stock trades on the Nasdaq Global Select Market under the symbol 'MATW'[120] Fiscal 2023 Stock Repurchase Activity | Metric | Value | | :--- | :--- | | Total Shares Purchased | 99,829 | | Weighted Average Price Paid | $28.61 | | Shares Remaining for Repurchase (as of Sep 30, 2023) | 1,195,013 | Management's Discussion and Analysis (MD&A) MD&A details fiscal 2023 sales growth to $1.88 billion, Adjusted EBITDA, liquidity, and critical accounting policies Results of Operations: Fiscal 2023 vs. 2022 Consolidated sales for fiscal 2023 increased to $1.88 billion, driven by Industrial Technologies, with gross profit and Adjusted EBITDA rising Financial Performance Comparison (FY2023 vs. FY2022) | Metric (in millions) | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Consolidated Sales | $1,880.9 | $1,762.4 | +$118.5 | | Gross Profit | $577.7 | $522.3 | +$55.4 | | Adjusted EBITDA | $225.8 | $210.4 | +$15.4 | - Industrial Technologies sales surged, primarily due to the impact of the OLBRICH and R+S Automotive acquisitions and higher sales of energy storage solutions for the electric vehicle market[138] - SGK Brand Solutions sales decreased due to lower brand sales in the U.S. and Europe and a decline in cylinder packaging products in Europe, partially offset by growth in the Asia-Pacific market[138] - Interest expense increased to $44.6 million from $27.7 million, primarily due to higher average interest rates[143] Non-GAAP Financial Measures The company uses non-GAAP measures, primarily Adjusted EBITDA, to evaluate performance, with a detailed reconciliation provided Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income (loss) | $39,136 | $(99,828) | $2,858 | | Adjustments (Interest, Taxes, D&A, etc.) | $186,673 | $310,236 | $224,892 | | Total Adjusted EBITDA | $225,809 | $210,408 | $227,750 | Liquidity and Capital Resources Net cash from operating activities decreased to $79.5 million, with liquidity supported by credit facility and receivables financing - Net cash provided by operating activities decreased to $79.5 million in FY2023 from $126.9 million in FY2022[152] - The company utilizes a receivables purchase agreement (RPA) and a non-recourse factoring arrangement, which provided net cash proceeds of $5.2 million and sold receivables of $55.2 million, respectively, in FY2023[159][161][162] - Total debt outstanding was $790.2 million as of September 30, 2023, consisting mainly of a $750 million revolving credit facility and 5.25% senior notes due 2025[157][158][278] - Capital spending for fiscal 2024 is estimated to be approximately $75 million, reflecting investments in new production capabilities and efficiencies[154] Critical Accounting Policies Key accounting policies involve significant estimates for long-lived assets, goodwill, and income taxes, with SGK Brand Solutions goodwill at risk - The company's critical accounting policies involve significant estimates for long-lived assets, goodwill, and income taxes[181] - An interim goodwill impairment test for the SGK Brand Solutions reporting unit as of September 1, 2023, indicated its fair value exceeded its carrying value by approximately 4%. This narrow margin suggests a risk of future write-downs if performance falters or economic conditions worsen[184] Market Risk Disclosures The company is exposed to market risks from interest rates, foreign currency, and commodity prices, using swaps to manage debt - The company uses interest rate swaps to manage exposure on its variable-rate debt, with a notional amount of $175 million in pay-fixed swaps as of September 30, 2023[191] - A hypothetical 10% strengthening of the U.S. dollar would have reduced reported sales by $69.5 million and operating income by $3.4 million for fiscal 2023[193] - The company is exposed to commodity price risks for materials such as bronze ingot, steel, granite, fuel, and wood, which can impact profitability[195] Financial Statements and Supplementary Data This section presents consolidated financial statements for fiscal years 2021-2023, with goodwill valuation noted as a critical audit matter Consolidated Financial Statements Consolidated financial statements show total assets of $1.887 billion and net income of $39.3 million for fiscal 2023 Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $648,257 | $628,616 | | Total Assets | $1,887,381 | $1,882,771 | | Total Current Liabilities | $394,600 | $411,375 | | Total Liabilities | $1,362,100 | $1,395,695 | | Total Shareholders' Equity | $525,281 | $487,076 | Consolidated Income Statement Highlights (in thousands, except EPS) | | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Sales | $1,880,896 | $1,762,403 | $1,671,030 | | Gross Profit | $577,672 | $522,278 | $541,832 | | Operating Profit (Loss) | $88,117 | $(43,937) | $42,034 | | Net Income (Loss) Attributable to Shareholders | $39,291 | $(99,774) | $2,910 | | Diluted EPS | $1.26 | $(3.18) | $0.09 | Note 21: Acquisitions and Divestitures Fiscal 2023 acquisitions included Eagle Granite for $18.4 million, and fiscal 2022 saw OLBRICH and R+S Automotive acquired - In February 2023, acquired Eagle Granite Company for the Memorialization segment for a total purchase price of $18.4 million[350] - In August 2022, acquired German firms OLBRICH and R+S Automotive for the Industrial Technologies segment for approximately €43.7 million ($44.5 million)[352] Note 22: Goodwill and Other Intangible Assets Goodwill totaled $698.1 million, with a $82.5 million write-down in fiscal 2022 for SGK Brand Solutions, which remains at impairment risk Goodwill by Segment (in thousands) | Segment | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Memorialization | $366,015 | $361,782 | | Industrial Technologies | $115,073 | $107,022 | | SGK Brand Solutions | $217,021 | $206,617 | | Total Goodwill | $698,109 | $675,421 | - In fiscal 2022, the company recorded a goodwill write-down of $82.5 million for the SGK Brand Solutions reporting unit due to weakened economic conditions and other pressures[360] - A Q4 2023 interim assessment of the SGK Brand Solutions reporting unit indicated its estimated fair value exceeded its carrying value by approximately 4%, highlighting the risk of future impairment charges[358] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2023 - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[370] - Management's report on internal control over financial reporting, and the corresponding audit report from Ernst & Young LLP, confirmed that the company maintained effective internal control over financial reporting as of September 30, 2023[371][372] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Information required for this item is incorporated by reference from the Company's definitive proxy statement[378] Executive Compensation Details on executive and director compensation are incorporated by reference from the proxy statement - Information regarding executive compensation is incorporated by reference from the Company's definitive proxy statement[380] Security Ownership and Equity Compensation Plans This section details the company's equity compensation plans, with 4,548,853 securities available for future issuance - The company maintains several equity compensation plans, with the primary active plans being the 2017 Equity Incentive Plan and the Amended and Restated 2019 Director Fee Plan[382][385] Equity Compensation Plan Information (as of Sep 30, 2023) | Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 120,218 | $41.70 | 4,548,853 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides a comprehensive list of all financial statements, the financial statement schedule (Schedule II - Valuation and Qualifying Accounts), and all exhibits filed with the report[391]