UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K10‑K
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405a of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oYes ☒
No ☐
Yes ☒No ☐
32,141,685 shares.
The index to exhibits is on pages 82-84.
Beginning October 1, 2014, the Company realigned its operations into three reporting segments, SGK Brand Solutions, Memorialization, and Industrial. The SGK Brand Solutions segment is comprised of the graphics imaging business, including Schawk, and the merchandising solutions operations. The Memorialization segment is comprised of the Company's cemetery products, funeral home products and cremation operations. The Industrial segment is comprised of the Company's marking and automation products and fulfillment systems.2
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MEMORIALIZATION PRODUCTS AND MARKETS:
Cemetery Products:SGK Brand Solutions:
Memorial products, which comprise the majority of the Cemetery Products segment's sales, include flush bronze and granite memorials, upright granite memorials and monuments, cremation memorialization products, granite benches, flower vases, crypt plates and letters, cremation urns, niche units, cemetery features and statues, along with other related products and services. Flush memorials are bronze plaques or granite memorials which contain personal information about a deceased individual (such as name, birth date, and death date), photos and emblems. Flush bronze and granite memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier mowing and general maintenance. The segment's memorial products also include community and family mausoleums within North America. In addition, the segment's other memorial products include bronze plaques, letters, emblems, vases, lights and photo ceramics that can be affixed to granite monuments, mausoleums, crypts and flush memorials. Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer.
Customers of the Cemetery Products segment can also purchase memorials and vases on a "pre-need" basis. The "pre-need" concept permits families to arrange for these purchases in advance of their actual need. Upon request, the Company will manufacture the memorial to the customer's specifications (e.g., name and birth date) and place it in storage for future delivery. Memorials in storage have been paid in full with title conveyed to each pre-need purchaser.
The Cemetery Products segment manufactures a full line of memorial products for cremation, including urns in a variety of sizes, styles and shapes as well as standard and custom designed granite cremation pedestals and benches. The segment also manufactures bronze and granite niche units, which are comprised of numerous compartments used to display cremation urns in mausoleums and churches. In addition, the Company also markets turnkey cremation gardens, which include the design and all related products for a cremation memorial garden. As part of the Memorialization group, the segment works with the Funeral Home Products and Cremation segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.
Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are sold to and distributed through a network of independent dealers including sign suppliers, awards and recognition companies, and trophy dealers.4
Raw materials used by the Cemetery Products segment consist principally of bronze and aluminum ingot, granite, sheet metal, coating materials, photopolymers and construction materials and are generally available in adequate supply. Ingot is obtained from various North American, European and Australian smelters.
Competition from other cemetery product manufacturers is on the basis of reputation, product quality, delivery, price, and design availability. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and consumer-oriented merchandising systems are competitive advantages in its markets. Competition in the mausoleum construction industry includes various construction companies throughout North America and is on the basis of design, quality and price. Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials, sand-blasted wood and other fabricated products.
Funeral Home Products:
The Funeral Home Products segment is a leading manufacturer and distributor of caskets and other funeral home products in North America. The segment produces and markets metal, wood and cremation caskets. Caskets are offered in a variety of colors, interior designs, handles and trim in order to accommodate specific religious, ethnic or other personal preferences. The segment also markets other funeral home products such as urns, jewelry, stationery and other funeral home products. The segment offers individually personalized caskets and urns through the Company-owned distribution network.
Metal caskets are made from various gauges of cold-rolled steel, stainless steel, copper and bronze. Metal caskets are generally categorized by whether the casket is non-gasketed or gasketed, and by material (i.e., bronze, copper, or steel) and in the case of steel, by the gauge (thickness) of the metal. Wood caskets are manufactured from nine different species of wood, as well as from veneer. The species of wood used are poplar, pine, ash, oak, pecan, maple, cherry, walnut and mahogany. The Funeral Home Products segment is a leading manufacturer of all-wood constructed caskets, which are manufactured using pegged and dowelled construction, and include no metal parts. All-wood constructed caskets are preferred by certain religious groups. Cremation caskets are made primarily from wood or cardboard covered with cloth or veneer. These caskets appeal primarily to cremation consumers, the environmentally concerned, and value buyers.
The Funeral Home Products segment also produces casket components. Casket components include stamped metal parts, metal locking mechanisms for gasketed metal caskets, adjustable beds and interior panels. Metal casket parts are produced by stamping cold-rolled steel, stainless steel, copper and bronze sheets into casket body parts. Locking mechanisms and adjustable beds are produced by stamping and assembling a variety of steel parts. The segment purchases from sawmills and lumber distributors various species of uncured wood, which it dries and cures. The cured wood is processed into casket components.
The segment provides product and service assortment planning, as well as merchandising and display products to funeral service businesses. These products assist funeral service professionals in providing information, value and satisfaction to their client families.
The primary materials required for casket manufacturing are cold-rolled steel and lumber. The segment also purchases copper, bronze, stainless steel, particleboard, corrugated materials, paper veneer, cloth, ornamental hardware and coating materials. Purchase orders or supply agreements are typically negotiated with large, integrated steel producers that have demonstrated timely delivery, high quality material and competitive prices. Lumber is purchased from a number of sawmills and lumber distributors. The Company purchases most of its lumber from sawmills within 150 miles of its wood casket manufacturing facility in York, Pennsylvania.5
The segment markets its casket products in the United States through a combination of Company-owned and independent casket distribution facilities. The Company operates approximately 60 distribution centers in the United States. Over 70% of the segment's casket products are currently sold through Company-owned distribution centers. As part of the Memorialization group, the segment works with the Cemetery Products and Cremation segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.
The casket business is highly competitive. The segment competes with other manufacturers on the basis of product quality, price, service, design availability and breadth of product line. The segment provides a line of casket products that it believes is as comprehensive as any of its major competitors. There are a large number of casket industry participants operating in North America, and the industry has recently seen a few new foreign casket manufacturers, primarily from China, enter the North American market.
Cremation:
The Cremation segment provides the following groups of products and services:
Servicing the human, pet and specialized incineration markets, the segment's primary market areas are North America and Europe. The segment also sells into Latin America and the Caribbean, Australia and Asia.
Cremation systems includes both traditional flame-based and water-based bio-cremation systems for cremation of humans and pets, as well as equipment for processing the cremated remains and other related equipment (ventilated work stations, tables, cooler racks, vacuums). The principal markets for these products are funeral homes, cemeteries, crematories, pet crematories, animal disposers and veterinarians. These products primarily are marketed directly by segment personnel.
Waste management/incineration systems encompass both batch load and continuous feed, static and rotary systems for incineration of all waste types, as well as equipment for in-loading waste, out-loading ash and energy recovery. The principal markets for these products are medical waste disposal, oil and gas "work camp" wastes, industrial wastes and bio mass generators.
Environmental and energy systems include emissions filtration units, waste heat recovery equipment, waste gas treatment products, as well as energy recovery. The principal markets are municipalities or public/state agencies, the cremation industry and other industries which utilize incinerators for waste reduction and energy production.
Service and supplies consists of operator training, preventative maintenance and "at need" service work performed on various makes and models of equipment. This work can be as simple as replacing defective bulbs or as complex as complete reconstruction and upgrading or retro-fitting on site. Supplies are consumable items associated with normal operations.
Crematory management/operations represent the actual operation and management of client-owned crematories. Currently the segment provides these services primarily to municipalities in Europe and private operators in the U.S.
Cremation urns and memorialization products include urns which support various forms of memorialization (burial, niche, scattering, and home décor). Merchandise includes any other family-related products such as cremation jewelry, mementos, remembrance products and other assorted at-need merchandise.
Raw materials used by the Cremation segment consist principally of structural steel, sheet metal, electrical components, combustion devices and refractory materials. These are generally available in adequate supply from numerous suppliers.6
The Company competes with several manufacturers in the cremation and accessory equipment market principally on the basis of product design, quality and price. The Cremation segment and its three largest global competitors account for a substantial portion of the U.S. and European cremation equipment market. As part of the Memorialization group, the segment works with the Cemetery Products and Funeral Home Products segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.
BRAND SOLUTIONS PRODUCTS AND MARKETS:
Graphics Imaging:
The Graphics ImagingSGK Brand Solutions segment provides brand development, deployment and delivery (consisting of brand management, pre-media services, printing plates and cylinders, embossing tools,pre-media services and creative designimaging services principally tofor consumer packaged goods and retail customers, merchandising display systems, and the primary packagingmarketing and corrugated industries.design services). With the acquisition of Schawk, Inc. ("Schawk") in Julyfiscal 2014, the Company significantly expanded its product offerings and capabilities related to brand development and brand management serving the consumer packaged goods and retail industries. The primary packaging industry consists of manufacturers of printed packaging materials such as boxes, flexible packaging, folding cartons and bags commonly displayed at retailers of consumer goods. The corrugated packaging industry consists of manufacturers of printed corrugated containers. Other major industries served include the wallpaper, flooring, automotive, and textile industries.
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ITEM.1.BUSINESS, (continued)
Merchandising Solutions:
The Merchandising Solutions segment provides merchandising, retail graphics and printing solutions for brand owners and retailers. The segment designs, manufactures and installs merchandising and display systems, and provides total turnkey project management services. The segment also provides creative merchandising and marketing solutions services.
The majority of the segment's sales are derived from the design, engineering, manufacturing and execution of merchandising and display systems. These systems include permanent and temporary displays, custom store fixtures, brand concept shops, interactive media, custom packaging, and screen and digitally printed promotional signage. Design and engineering services include concept and model development, graphics design and prototyping. Merchandising and display systems are manufactured to specifications developed by the segment in conjunction with the customer. These products are marketed and sold primarily in the United States.
The segmentbusiness operates in a fragmented industry consisting primarily of a number of small, locally operated companies. Industry competition is intense and theThe segment competes on the basis of reliability, creativity and providingability to provide a broad array of merchandising products and services. The segment is unique in its ability to provide in-depth marketing and merchandising services as well as design, engineering and manufacturing capabilities. These capabilities allow the segment to deliver complete turnkey merchandising solutions quickly and cost effectively. The Company differentiates itself from the competition by consistently meeting these customer demands, providing service to customers both nationally and globally, and providing a variety of value-added support services.
Major raw materialsMemorialization:
MarkingCompetition from other manufacturers of memorial products is on the basis of reputation, product quality, delivery, price, and Fulfillment Systemsdesign availability. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and consumer-oriented merchandising systems are competitive advantages in its markets. Competition in the mausoleum construction industry includes various construction companies throughout North America and is on the basis of design, quality and price. Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials, sand-blasted wood and other fabricated products.
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ITEM 1A.RISK FACTORS, (continued)
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In July 2014, theThe Company completed the acquisition of Schawk.Aurora in August 2015. In connection with the acquisition, additional risks and uncertainties could affect the Company's financial performance and actual results. Specifically, the acquisition could cause actual results for fiscal 20152017 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by the Company's management. The risks associated with the Schawk acquisition include risks related to combining the businesses and achieving expected cost savings and synergies, assimilating the Schawk businesses,Aurora business, and the fact that merger integration costs related to the acquisition are difficult to predict with a level of certainty, and may be greater than expected.
ChangesCybersecurity and Data Breaches. In the course of our business, we collect and store sensitive data and proprietary business information. We could be subject to service outages or breaches of security systems which may result in the Distributiondisruption, unauthorized access, misappropriation, or corruption of the Company's Productsthis information. Security breaches of our network or the Lossdata including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of a Large Customer.confidential information. Although the Company doeswe are not have any customer that is considered individually significant to consolidated sales, it does have contracts with several large customers in both the Memorialization and Brand Solutions businesses. While these contracts provide important access to large purchasersaware of the Company's products, they can obligate the Company to sell products at contracted prices for extended periods of time. Additionally, any significant divestiture of business propertiesincidents to date, if we are unable to prevent such security or privacy breaches, our operations by current customers could result in abe disrupted or we may suffer legal claims, loss of business if the Company is not able to maintain the business with the subsequent ownersreputation, financial loss, property damage, or regulatory penalties because of the properties.lost or misappropriated information.
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ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, (continued)
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** Fiscal year ended September 30
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Comparison of Fiscal 2013 and Fiscal 2012:
Sales for the year ended September 30, 2013 were $985.4 million, compared to $900.3Net cash provided byoperating activities was $140.3 million for the year ended September 30, 2012. The increase in fiscal 2013 sales principally reflected higher sales in the Funeral Home Products and Merchandising Solutions segments and the benefit of acquisitions.
In the Memorialization businesses, Cemetery Products segment sales for fiscal 2013 were $226.6 million2016, compared to $215.9$141.1 million and $90.7 million for fiscal 2012. The increase primarily reflected the full year impact of the acquisition of Everlasting Granite Memorial Co., Inc. ("Everlasting Granite") in May 2012. Sales for the Funeral Home Products segment were $242.8 million2015 and 2014, respectively. Operating cash flow for fiscal 2013 compared to $230.9 million2016 principally included net income adjusted for fiscal 2012. The increase principally resulted from higher unit volumedepreciation and an improvementamortization, stock-based compensation expense, and non-cash pension expense, and a decrease in product mix. Sales for the Cremation segment were $48.5 million for fiscal 2013 compared to $46.0 million for fiscal 2012. The increase principally resulted from higher sales of cremation equipment in the U.S. and the benefit of a small U.K. acquisition completed in fiscal 2012,working capital items, partially offset by lower international sales. Incash contributions of $18.9 million to the Company's Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2013 were $294.6 million, compared to $259.9 millionpension and other postretirement plans. Operating cash flow for fiscal 2012. The increase resulted2015 principally from the acquisition of Wetzel in November 2012, partially offset by lower sales volume in the segment's principal markets due to soft economic conditions, particularly in Europe. Salesincluded net income adjusted for the Merchandising Solutions segment were $79.4 million for fiscal 2013, compared to $73.0 million for fiscal 2012. The improvement was attributable todepreciation and amortization, stock-based compensation expense, trade name write-offs, and an increase in sales to several large customers in fiscal 2013. Marking and Fulfillment Systems segment sales for the year ended September 30, 2013 were $93.5 million, compared to $74.6 million for fiscal 2012. The increase resulted principally from higher sales in the U.S. market and the acquisition of Pyramid in December 2012.
Gross profit for the year ended September 30, 2013 was $356.5 million, or 36.2% of sales, compared to $336.6 million, or 37.4% of sales, for fiscal 2012. The increase in fiscal 2013 consolidated gross profit compared to fiscal 2012 reflected higher sales and the benefit of acquisitions,deferred taxes, partially offset by expenses of $2.3 million related to the Company's strategic cost reduction initiatives. Gross profit for fiscal 2012 included expenses of $3.0 million related to the Company's strategic cost reduction initiatives. The decrease in gross profit as a percentage of sales primarily reflected lower margins in the Brand Solutions businesses.
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Selling and administrative expenses for the year ended September 30, 2013 were $260.7 million, or 26.5% of sales, compared to $243.0 million, or 27.0% of sales, for fiscal 2012. The increase in selling and administrative expenses was attributable to the impacts of acquisitions and higher sales in the Funeral Home Products segment. In addition, fiscal 2013 selling and administrative expenses included expenses of $13.6 million related to strategic cost-structure initiatives, $3.4 million related to acquisition activities, $1.8 million related to litigation-related expenses in the Funeral Home Products segment, and $2.2 million related to asset adjustments. These expenses were partially offset by the benefit of adjustments to contingent consideration of $6.2 million and a gain of $3.0 million on the settlement of the purchase price of the remaining ownership interest in one of the Company's subsidiaries. Selling and administrative expenses for the year ended September 30, 2012 included expenses of $5.0 million related to strategic cost-structure initiatives, $3.8 million related to acquisition activities, and $1.5 million related to asset adjustments. These expenses were partially offset by the benefit of adjustments to contingent consideration of $3.7 million, a gain of $884,000 on the sale of a business investment and a gain of $837,000 on the settlement of the purchase price of one of the Company's subsidiaries. The reduction in selling and administrative costs as a percent of sales was due primarily to the benefit of adjustments to contingent consideration and the Company's cost containment efforts in fiscal 2013.
Operating profit for fiscal 2013 was $95.8 million, compared to $93.6 million for fiscal 2012. Cemetery Products segment operating profit for fiscal 2013 was $32.6 million, compared to $33.2 million for fiscal 2012. The decrease in fiscal 2013 operating profit compared to fiscal 2012 resulted mainly from expenses related primarily to the Company's strategic cost-structure initiatives that totaled $5.9 million and $6.2 million in fiscal 2013 and fiscal 2012, respectively, and a gain of $837,000 on the settlement of the purchase price of one of the Company's subsidiaries in fiscal 2012. Operating profit for the Funeral Home Products segment for fiscal 2013 was $37.3 million, compared to $26.5 million for fiscal 2012. The increase in Funeral Home Products segment operating profit for fiscal 2013 primarily reflected the impact of higher sales, the benefit of improved production and distribution efficiencies, and the $6.3 million benefit of adjustments to contingent consideration. These increases were partially offset by expenses of $3.0 million related to strategic cost-structure initiatives and litigation expenses $1.8 million related to a legal dispute. Fiscal 2012 also included $3.0 million benefit of an adjustment to contingent consideration, partially offset by expenses of $1.7 million related to strategic cost-structure initiatives. Cremation segment operating profit for the year ended September 30, 2013 was $3.1 million, compared to $3.9 million for fiscal 2012. Fiscal 2013 operating profit reflected the impact of higher sales in the U.S. market, partially offset by lower sales in the European and U.K. markets. In addition, Cremation segment fiscal 2013 operating profit included expenses of $1.1 million related primarily to strategic cost-structure initiatives. Cremation segment fiscal 2012 operating profit included expenses of $326,000 related to strategic cost-structure initiatives. Graphics Imaging segment operating profit for fiscal 2013 was $9.7 million, compared to $14.8 million for 2012. The decrease in fiscal 2013 reflected lower sales (excluding the Wetzel acquisition), expenses of $3.2 million related to acquisition activities and $4.5 million related to strategic cost-structure initiatives and a $1.6 million impairment charge related to the carrying value of a trade name. The decreases were partially offset by a gain on the settlement of the purchase price of the remaining ownership interest in one of the Company's subsidiaries. Graphics Imaging segment operating profit in fiscal 2012 included expenses of $3.8 million related to acquisition activities and $1.3 million related to strategic cost-structure initiatives, partially offset by a $740,000 benefit from an adjustment to contingent consideration and a gain of $884,000 on the sale of a business investment. The Merchandising Solutions segment operating profit was $4.3 million for fiscal 2013, compared to $5.1 million for fiscal 2012. The decrease principally reflected the impact of higher sales, offset by an increase in employee-related costsworking capital items and expensesa cash contribution of $841,000 related$3.3 million to strategic cost-structure initiatives. Operating profit for the Marking and Fulfillment Systems segment for fiscal 2013 was $8.9 million, compared to $10.1 million for fiscal 2012. The decrease in Marking and Fulfillment Systems segment operating profit principally reflected the impact of expenses of $1.4 million related to strategic cost-structure initiatives, partially offset by the benefit of the Pyramid acquisition and higher sales in the U.S.
Investment income for the year ended September 30, 2013 was $2.3 million, compared to $3.9 million for the year ended September 30, 2012. The decrease principally reflected lower rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2013 was $12.9 million, compared to $11.5 million for fiscal 2012. The increase in interest expense reflected higher average debt levels.23
Other income (deductions), net, for the year ended September 30, 2013 represented a decrease in pre-tax income of $3.7 million, compared to a decrease in pre-tax income of $2.1 million in 2012. Other income and deductions generally include banking-related fees and the impact of currency gains or losses on certain intercompany debt.
The Company's effective tax rate for fiscal 2013 was 32.7%, compared to 34.2% for fiscal 2013. Fiscal 2012 included the favorable impact of adjustments totaling $528,000 in income tax expense primarily related to changes in the estimated tax accruals for open tax periods. Excluding this adjustment from fiscal 2012, the Company's effective tax rate was 34.8%. The decrease in the fiscal 2013 effective tax rate, compared to fiscal 2012 primarily reflected the impact of the Company's European tax structure initiatives, including the fiscal 2013 benefit of a European tax loss carryback. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.
Net earnings attributable to noncontrolling interest represented income of $116,000 for fiscal 2013, compared to income of $639,000 in fiscal 2012. The decrease related principally to higher operating income recorded by the Company's Turkish operation in fiscal 2013.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was $92.4 million for the year ended September 30, 2014, compared to $109.3 million and $83.3 million for fiscal 2013 and 2012, respectively.principal pension plan. Operating cash flow for fiscal 2014 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items and a cash contribution of $3.0 million to the Company's principal pension plan. Operating cash flow for fiscal 2013 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items (primarily accounts receivable and inventory) and a cash contribution of $2.5 million to the Company's principal pension plan. Operating cash flow for fiscal 2012 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items (primarily accounts receivable and inventory) and a cash contribution of $5.0 million to the Company's principal pension plan.
Capital spending for property, plant and equipment has averaged $29.1 million for the last three fiscal years. Capital spending for fiscal 20152017 is currently expected to be approximately $60.0$45.0 million. The increase in fiscal 2015 expected capital spending reflects the addition of the historical capital requirements of Schawk, and additional information technology capital spending related to the Company's systems integration activities arising from the Schawk acquisition. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.24
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Fiscal 2013:
Acquisition spending, net of cash acquired, during the year ended September 30, 2013 totaled $74.0 million. The acquisitions were not individually significant to the Company's consolidated financial position or results of operations, and primarily included the following:
In March 2013, the Company completed the purchase of the remaining 38.5% interest in Kroma, completing the option arrangement in connection with the July 2011 acquisition of a 61.5% interest in Kroma.
In December 2012, the Company acquired Pyramid, a provider of warehouse control systems and conveyor control solutions for distribution centers. The acquisition is designed to expand Matthews' fulfillment products and services in the warehouse management market. The initial purchase price for the transaction was $26.2 million, plus additional consideration of $3.7 million paid in fiscal 2014 based on operating results. 27
In November 2012, the Company acquired Wetzel, a leading European provider of pre-press services and gravure printing forms, with manufacturing operations in Germany and Poland. Wetzel's products and services are sold primary within Europe, and the acquisition is designed to expand Matthews' products and services in the global graphics imaging market. The purchase price for Wetzel was 42.6 million Euros ($54.7 million) on a cash-free, debt-free basis.
The Company has completed the allocation of purchase price for all fiscal 2013 acquisitions.
Fiscal 2012:
In May 2012, the Company acquired Everlasting Granite, a supplier of granite memorials, columbariums and private mausoleum estates. The transaction is intended to expand the Company's presence and product breadth in the granite memorial business.
Beginning October 1, 2014, the Company realigned its operations into three reporting segments, SGK Brand Solutions, Memorialization and Industrial. The SGK Brand Solutions segment is comprised of the graphics imaging business, including Schawk, and the merchandising solutions operations. The Memorialization segment is comprised of the Company's cemetery products, funeral home products and cremation operations. The Industrial segment is comprised of the Company's marking and automation products and fulfillment systems.SUBSEQUENT EVENT:On November 17, 2014, the Company entered into a Release, Settlement Agreement, and Covenant Not To Sue (the "Settlement Agreement"), which concludes litigation arising out of allegations initiated against Harry Pontone, Scott Pontone, Pontone Casket Company and Batesville Casket Company ("Batesville"). Under the terms of the Settlement Agreement, Batesville will pay $17.0 million in one lump sum payment to the Company and an additional $1.75 million for attorney fees of Harry and Scott Pontone, for a total settlement value of $18.75 million. The Settlement Agreement contains customary mutual releases of claims.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)Trade Receivables and Allowance for Doubtful Accounts:
Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are more than 30 days past due. The allowance for doubtful accounts is based on an evaluation of specific customer accounts for which available facts and circumstances indicate collectability may be uncertain. In addition, the allowance includes a reserve for all customers based on historical collection experience.2016.
Property, plant and equipment, goodwill and other intangibleLong-lived assets are carriedrecorded at cost.their respective cost basis on the date of acquisition. Depreciation on property, plant and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Property,Intangible assets with finite useful lives are amortized over their estimated useful lives. The Company reviews long-lived assets, including property, plant and equipment, are reviewed for impairmentand intangibles with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets is determined by evaluating the estimated undiscounted net cash flows of the operations to which the assets relate. An impairment loss would be recognized when the carrying amount of the assets exceeds the fair value, which is based on a discounted cash flow analysis.
The Carrying amount of trade names with indefinite lives as of September 30, 2014 and 2013 totaled $142.5 million and $22.9 million, respectively. The carrying amount as of September 30, 2014 includes $119.7 million related to the acquisition of Schawk in July 2014. These trade names are tested for impairment annually in the second quarter. Matthews performed a quantitative impairment evaluation of its trade names for 2014, and the test indicated the trade names were not impaired.
Share-Based Payment:
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. A binomial lattice model is utilized to determine the fair value of awards.indefinite-lived intangible assets.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)Environmental:
Environmental liabilities are recorded whenQualitative Disclosures about Market Risk," of this Annual Report on Form 10-K, for disclosure about the Company's obligation is probable and reasonably estimable. Accruals for losses from environmental remediation obligations do not consider the effectshypothetical impact of inflation and anticipated expenditures are not discounted to their present value.changes in actuarial assumptions.
Revenue Recognition:
Revenues are generally recognized when title, ownership, and risk of loss pass to the customer, which is typically at the time of product shipment and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product and customer.
For pre-need sales of memorials and vases, revenue is recognized when the memorial has been manufactured to the customer's specifications (e.g., name and birth date), title has been transferred to the customer and the memorial and vase are placed in storage for future delivery. A liability has been recorded for the estimated costs of finishing pre-need bronze memorials and vases that have been manufactured and placed in storage prior to July 1, 2003 for future delivery. Beginning July 1, 2003, revenue is deferred by the Company on the portion of pre-need sales attributable to the final finishing and storage of the pre-need merchandise. Deferred revenue for final finishing is recognized at the time the pre-need merchandise is finished and shipped to the customer. Deferred revenue related to storage is recognized on a straight-line basis over the estimated average time that pre-need merchandise is held in storage. At September 30, 2014, the Company held 319,134 memorials and 224,204 vases in its storage facilities under the pre-need sales program.
Revenues from mausoleum construction and significant engineering projects, including certain cremation units, are recognized under the percentage-of-completion method of accounting using the cost-to-cost basis for measuring progress toward completion. As work is performed under contracts, estimates of the costs to complete are regularly reviewed and updated. As changes in estimates of total costs at completion on projects are identified, appropriate earnings adjustments are recorded using the cumulative catch-up method. Provisions for estimated losses on uncompleted contracts are recorded during the period in which such losses become evident.
Revenues from brand development and deployment services are recognized using the completed performance method, which is typically when the customer receives the final deliverable. For arrangements with customer acceptance provisions, revenue is recognized when the customer approves the final deliverable.
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Schawk, Inc.Management, under the supervision and its subsidiaries (collectively, "Schawk") have been excluded from management's assessmentwith the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of September 30, 2014, because it was acquiredbased on criteria in Internal Control – Integrated Framework (2013) issued by the Company in a purchase business combination in July 2014. Schawk is a 100% owned subsidiary whose total assetsCOSO, and total sales represent approximately 9% and 7%, respectively, of the related consolidated financial statement amounts of the Company as of and for the year ended September 30, 2014.
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2014, based on criteria in Internal Control – Integrated Framework (1992) issued by the COSO.2016. The effectiveness of the Company's internal control over financial reporting as of September 30, 20142016 has been audited by PricewaterhouseCoopersErnst & Young, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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To the Shareholders andThe Board of Directors of Matthews International Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial positionand Shareholders of Matthews International Corporation and its subsidiaries at September 30, 2014Subsidiaries:
36
As describedWe have audited the accompanying consolidated balance sheet of Matthews International Corporation and Subsidiaries as of September 30, 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year ended September 30, 2016. Our audit also included the financial statement schedule listed in "Management's Reportthe Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to Shareholders"express an opinion on these financial statements and schedule based on our audit.
37
38
39
40
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEfor the years ended September 30, 2014, 2013 and 2012(Dollar amounts in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.41
42
43
Foreign Currency:
The functional currency of the Company's foreign subsidiaries is the local currency. Balance sheet accounts for foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the consolidated balance sheet date. Gains or losses that result from this process are recorded in accumulated other comprehensive income (loss). The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevailed during the period. Gains and losses from foreign currency transactions are recorded in other income (deductions), net.44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(Dollar amounts in thousands, except per share data)
For purposes of the consolidated statements of cash flows, theThe Company considers all investments purchased with a remaining maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of these instruments.
45
Derivatives are held as part of a formal documented hedging program. All derivatives are held for purposes other than trading. Matthews measures effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or future cash flows of the hedged item. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains and losses on the derivative will be recorded in other income (deductions) at that time.
Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), net of tax, and are reclassified to earnings in a manner consistent with the underlying hedged item. The cash flows from derivative activities are recognized in the statement of cash flows in a manner consistent with the underlying hedged item.
Foreign Currency:
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income taxes for U.S. tax purposes have not been provided on certain undistributed earnings of foreign subsidiaries, as such earnings are considered to be reinvested indefinitely. To the extent earnings are expected to be returned in the foreseeable future, the associated deferred tax liabilities are provided. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.
Share-Based Payment:Shipping and Handling Fees and Costs:
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(Dollar amountsDeferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in thousands, except per share data)
Derivatives and Hedging:
Derivatives are held as part of a formal documented hedging program. All derivatives are straight forward and held for purposes other than trading. Matthews measures effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or future cash flows of the hedged item. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains and losses on the derivative will be recorded in other income (deductions) at that time.
Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), net of tax, and are reclassified to earnings in a manner consistent with the underlying hedged item. The cash flows from derivative activities are recognized in the statement of cash flows in a manner consistent with the underlying hedged item.
Research and Development Expenses:
Research and development costs are expensed as incurred and were approximately $7,814, $11,449 and $9,274effect for the years ended September 30, 2014, 2013 and 2012, respectively.in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income taxes for U.S. tax purposes have not been provided on certain undistributed earnings of foreign subsidiaries, as such earnings are considered to be reinvested indefinitely. To the extent earnings are expected to be returned in the foreseeable future, the associated deferred tax liabilities are provided. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable, due to the complexities of the hypothetical calculation.
Certain amounts in3. ACCOUNTING PRONOUNCEMENTS:
47
| ☒ | Annual Report Pursuant to Section 13 |
For the Fiscal Year Ended September 30, 2016
or
| ☐ | Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended September 30, 2014Transition Period from _____ to _____
Commission File Number 0-09115No. 0‑09115
MATTHEWS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
| PENNSYLVANIA | 25‑0644320 | |
| (State or other jurisdiction of | ||
| incorporation or organization) | (I.R.S. Employer Identification No.) | |
| TWO NORTHSHORE CENTER, PITTSBURGH, PA | 15212‑5851 | |
| (Address of principal executive offices) | (Zip Code) | |
| (412) 442-8200 | ||
| (Registrant's telephone number, including area | ||
| Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Name of each exchange on which registered | |
| Class A Common Stock, $1.00 par value | NASDAQ Global Select Market | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x
No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitionthe definitions of "large accelerated filer",filer," "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o☐ No x☒
The aggregate market value of the Class A Common Stock outstanding and held by non-affiliates of the registrant, based upon the closing sale price of the Class A Common Stock on the NASDAQ Global Select Market on March 31, 2014,2016, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $1.1$1.6 billion.
As of October 31, 2014,2016, shares of common stock outstanding were: Class A Common Stock 32,874,065 shares
32,141,685 shares.
Documents incorporated by reference: Specified portions of the Proxy Statement for the 20152017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
Any forward-looking statements contained in this Annual Report on Form 10-K (specifically those contained in Item 1, "Business","Business," Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations") are included in this report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the actual results of Matthews International Corporation ("Matthews" or the "Company") in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. FactorsIn addition to the risk factors previously disclosed and those discussed elsewhere in this Annual Report on Form 10-K, factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, including the risks associated with the Company's recent acquisition of Schawk, Inc.Aurora Products Group, LLC ("Schawk"Aurora"), in August 2015, cybersecurity concerns, effectiveness of the Company's internal controls, compliance with domestic and foreign laws and regulations, technological factors beyond the Company's control.control, and other factors described in Item 1A, "Risk Factors" in this Form 10-K. In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors.
ITEM 1. BUSINESS.
Matthews, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketerprovider principally of brand solutions, memorialization products and industrial technologies. Brand solutions include brand solutions.development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services). Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment primarily for the cemetery and funeral home industries. Brand solutionsIndustrial technologies include graphics imaging products and services, merchandising solutions, and marking and fulfillment systems products. The Company's products and operations are comprised of six business segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Merchandising Solutions and Marking and Fulfillment Systems. The Cemetery Products segment is a leading manufacturer of cast bronze and granite memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States. The Funeral Home Products segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood, metal and cremation caskets. The Cremation segment is a leading designer and manufacturer of cremation equipment in North America and Europe. The Graphics Imaging segment provides brand development, brand management, printing plates, gravure cylinders, pre-media services and imaging services. At September 30, 2014, the Graphics Imaging segment included the acquisition of Schawk, a global brand development, activation and deployment company, in July 2014 (see "Acquisitions" in Management's Discussion and Analysis). The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services. The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, industrial automation products and order fulfillment systems that are used for identifying, tracking, picking and conveying consumer and industrial products.
At October 31, 2014,2016, the Company and its majority-owned subsidiaries had approximately 9,40010,300 employees. The Company's principal executive offices are located at Two NorthShore Center, Pittsburgh, Pennsylvania 15212, its telephone number is
(412) 442-8200 and itsinternet website is www.matw.com.www.matw.com. The Company files or furnishes all required reports with the Securities and Exchange Commission ("SEC") in accordance with the Exchange Act. The Company's Annual Report on Form 10-K, Quarterly reportsReports on Form 10-Q, current reportsCurrent Reports on Form 8-K and amendments to those reports are available free of charge on the Company's website as soon as reasonably practicable after being filed or furnished to the SEC. The Company's reports filed or furnished with the SEC, including exhibits attached to such reports, are also available to read and copy at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by contacting the SEC at 1-800-732-0330. All Company reports filed with or furnished to the SEC can be found on its website at www.sec.gov.
(412) 442-8200 and its
The Company has three reporting segments, SGK Brand Solutions, Memorialization, and Industrial Technologies. The following table sets forth reported sales and operating profit for the Company's business segments for the past three fiscal years. Detailed financial information relating to business segments and to domestic and international operations is presented in Note 17 ("Segment18, "Segment Information") to the Consolidated Financial in Item 8 - "Financial Statements included in Part II of this Annual Report on Form 10-K.and Supplemental Data."
ITEM 1.BUSINESS, (continued)
| Years Ended September 30, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Sales to unaffiliated customers: | ||||||||||||||||||||||||
Memorialization: | ||||||||||||||||||||||||
| Cemetery Products | $ | 221,992 | 20.0 | % | $ | 226,586 | 23.0 | % | $ | 215,943 | 24.0 | % | ||||||||||||
| Funeral Home Products | 234,583 | 21.2 | 242,803 | 24.6 | 230,943 | 25.6 | ||||||||||||||||||
| Cremation | 51,845 | 4.7 | 48,522 | 4.9 | 45,981 | 5.1 | ||||||||||||||||||
| 508,420 | 45.9 | 517,911 | 52.5 | 492,867 | 54.7 | |||||||||||||||||||
Brand Solutions: | ||||||||||||||||||||||||
| Graphics Imaging | 398,223 | 36.0 | 294,571 | 29.9 | 259,865 | 28.9 | ||||||||||||||||||
| Merchandising Solutions | 99,105 | 9.0 | 79,370 | 8.1 | 72,964 | 8.1 | ||||||||||||||||||
| Marking and Fulfillment Systems | 100,849 | 9.1 | 93,505 | 9.5 | 74,621 | 8.3 | ||||||||||||||||||
| 598,177 | 54.1 | 467,446 | 47.5 | 407,450 | 45.3 | |||||||||||||||||||
| Total | $ | 1,106,597 | 100.0 | % | $ | 985,357 | 100.0 | % | $ | 900,317 | 100.0 | % | ||||||||||||
| Operating profit: | ||||||||||||||||||||||||
Memorialization: | ||||||||||||||||||||||||
| Cemetery Products | $ | 36,165 | 43.6 | % | $ | 32,571 | 34.0 | % | $ | 33,195 | 35.5 | % | ||||||||||||
| Funeral Home Products | 28,025 | 33.8 | 37,263 | 38.9 | 26,525 | 28.3 | ||||||||||||||||||
| Cremation | 5,116 | 6.2 | 3,097 | 3.2 | 3,869 | 4.1 | ||||||||||||||||||
| 69,306 | 83.6 | 72,931 | 76.1 | 63,589 | 67.9 | |||||||||||||||||||
Brand Solutions: | ||||||||||||||||||||||||
| Graphics Imaging | (4,617 | ) | (5.5 | ) | 9,724 | 10.2 | 14,843 | 15.9 | ||||||||||||||||
| Merchandising Solutions | 7,153 | 8.6 | 4,275 | 4.5 | 5,084 | 5.4 | ||||||||||||||||||
| Marking and Fulfillment Systems | 11,049 | 13.3 | 8,862 | 9.2 | 10,061 | 10.8 | ||||||||||||||||||
| 13,585 | 16.4 | 22,861 | 23.9 | 29,988 | 32.1 | |||||||||||||||||||
| Total | $ | 82,891 | 100.0 | % | $ | 95,792 | 100.0 | % | $ | 93,577 | 100.0 | % | ||||||||||||
| Years Ended September 30, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Sales to unaffiliated customers: | ||||||||||||||||||||
| SGK Brand Solutions | $ | 755,975 | 51.1 | % | $ | 798,339 | 56.0 | % | $ | 497,328 | 44.9 | % | ||||||||
| Memorialization | 610,142 | 41.2 | 508,058 | 35.6 | 508,420 | 45.9 | ||||||||||||||
| Industrial Technologies | 114,347 | 7.7 | 119,671 | 8.4 | 100,849 | 9.2 | ||||||||||||||
| Total | $ | 1,480,464 | 100.0 | % | $ | 1,426,068 | 100.0 | % | $ | 1,106,597 | 100.0 | % | ||||||||
| Operating profit: | ||||||||||||||||||||
| SGK Brand Solutions | $ | 42,909 | 36.1 | % | $ | 21,864 | 20.8 | % | $ | 2,536 | 3.1 | % | ||||||||
| Memorialization | 68,252 | 57.4 | 70,064 | 66.7 | 67,937 | 83.3 | ||||||||||||||
| Industrial Technologies | 7,654 | 6.5 | 13,095 | 12.5 | 11,049 | 13.6 | ||||||||||||||
| Total | $ | 118,815 | 100.0 | % | $ | 105,023 | 100.0 | % | $ | 81,522 | 100.0 | % | ||||||||
In fiscal 2014,2016, approximately 61% 69%of the Company's sales were made from the United States, and 35%24%, 3%, 2%, 1%, and 1% were made from Europe, Asia, Canada, Australia, and Canada,Central and South America, respectively. For further information on segments, see Note 17 ("Segment18, "Segment Information") in Item 8 - "Financial Statements and Supplementary Data" on pages 65-67page 72 of this report. CemeteryReport. Products and services of the SGK Brand Solutions segment are sold throughout the world, with principal locations in the United States, Europe and Asia. Memorialization segment products are sold throughout the world, with the segment's principal operations located in the United States, Europe, Canada, and Australia. Funeral Home Products segment products are primarily sold in North America. Cremation segment products and services are sold primarily in North America, Europe, Asia, and Australia. Products and services of the Graphics Imaging segment are sold primarily in Europe, the United States and Asia. Merchandising Solutions segment products and services are sold principally in the United States. The Marking and Fulfillment SystemsIndustrial Technologies segment sells equipment and consumables directly to industrial consumers and distributors in the United States and internationally through the Company's subsidiaries in Canada, Sweden, Germany and China, and through other foreign distributors. Matthews owns a minority interest in Marking and Fulfillment SystemsIndustrial Technologies product distributors in Asia, Australia and Europe.
The Cemetery Products segment manufactures and markets a full line of memorialization products used primarily in cemeteries. The segment's products, which are sold principally in the United States, Europe, Canada and Australia, include cast bronze memorials, granite memorials and other memorialization products. The segment also manufactures and markets architectural products that are produced from bronze, aluminum and other metals, which are used to identify or commemorate people, places, events and accomplishments.
The principal products and services of this segment include brand development, deployment, delivery, brand management, pre-media graphics services, printing plates, gravure cylinders, steel bases, embossing tools, special purpose machinery, engineering assistance, print process assistance, print production management, digital asset management, content management, and package design. These products and services are used by brand owners and packaging manufacturers to develop and print packaging graphics that help identify and sell the product in the marketplace. Other packaging graphics can include nutritional information, directions for product use, consumer warning statements and UPC codes. The primary packaging manufacturer produces printed packaging from paper, film, foil and other composite materials used to display, protect and market the product. The corrugated packaging manufacturer produces printed containers from corrugated sheets. Using the Company's products, these sheets are printed and die cut to make finished containers.
ITEM 1.BUSINESS, (continued)
The segment offers a wide array of value-added services and products. These include print process and print production management services; print engineering consultation; pre-media preparation, which includes computer-generated art, film and proofs; plate mounting accessories and various press aids; and press-side print production assurance. The segment also provides creative digital graphics services to brand owners and packaging markets.
The segment's sales are also derived from the design, engineering, manufacturing and execution of merchandising and display systems. These systems include permanent and temporary displays, custom store fixtures, brand concept shops, interactive media, custom packaging, and screen and digitally printed promotional signage. Design and engineering services include concept and model development, graphics design and prototyping. Merchandising and display systems are manufactured to specifications developed by the segment in collaboration with the customer.
The Company works closely with manufacturers to provide the proper printing forms and tooling required to print the packaging to the user's specifications. The segment's printing plate products are made principally from photopolymer resin and sheet materials. Upon customer request, plates can be pre-mounted press-ready in a variety of configurations that maximize print quality and minimize press set‑up time. Gravure cylinders, manufactured from steel, copper and chrome, can be custom engineered for multiple print processes and specific customer print applications.
The Graphics ImagingSGK Brand Solutions segment customer base consists primarily of brand owners and packaging industry converters. Brand owners are generally large, well-known consumer products companies and retailers with a national or global presence. These types of companies tend to purchase their graphics needs directly, and supply the printing forms, or the electronic files to make the printing plates and gravure cylinders, to the packaging printer for their products. The Graphics ImagingSGK Brand Solutions segment serves customers primarilythroughout the world, with principal locations in Europe, the United States, Europe and Asia.
Major raw materials for this segment's products include photopolymers, steel, copper, film, wood, particleboard, corrugated materials, structural steel, plastic, laminates, inks and graphic art supplies. All such materials are presently available in adequate supply from various industry sources.
The Graphics ImagingSGK Brand Solutions segment is one of several providers of brand management, brand development and pre-media services and manufacturers of printing plates and cylinders with an international presence. The combination of the Company's Graphics Imaging businessbusinesses in North America, Europe the United States and Asia is an important part of Matthews' strategy to become a worldwide leader in the graphics industry inby providing consistent service to multinational customers on a global basis. Competition is on the basis of product quality, timeliness of delivery and price. The Company differentiates itself from the competition by consistently meeting these customer demands, its ability to service customers both nationally and globally, and its ability to provide a variety of value-added support services.
The Memorialization segment manufactures and markets a full line of memorialization products used primarily in cemeteries, funeral homes and crematories. The segment's products, which are sold principally in the United States, Europe, Canada and Australia, include cast bronze memorials, granite memorials, caskets, cremation equipment and other memorialization products. The segment also manufactures and markets architectural products that are used to identify or commemorate people, places, events and accomplishments.
ITEM 1.BUSINESS, (continued)
Memorial products include flush bronze and granite memorials, upright granite memorials and monuments, cremation memorialization products, granite benches, flower vases, crypt plates and letters, cremation urns, niche units, cemetery features and statues, along with other related products and services. Flush memorials are bronze plaques or granite memorials which contain personal information about a deceased individual (such as name, birth date, and death date), photos and emblems. Flush bronze and granite memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier lawn mowing and general maintenance. The segment's memorial products also include community and family mausoleums within North America. In addition, the segment's other memorial products include bronze plaques, letters, emblems, vases, lights and photo ceramics that can be affixed to granite monuments, mausoleums, crypts and flush memorials. Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer.
Customers of the Memorialization segment can also purchase memorials and vases on a "pre-need" basis. The "pre-need" concept permits families to arrange for these purchases in advance of their actual need. Upon request, the Company will manufacture the memorial to the customer's specifications (e.g., name and birth date) and place it in storage for future delivery. Memorials in storage have been paid in full with title conveyed to each pre-need purchaser.
The segment is also a leading manufacturer and distributor of caskets and other funeral home products in North America. The segment produces and markets metal, wood and cremation caskets. Caskets are offered in a variety of colors, interior designs, handles and trim in order to accommodate specific religious, ethnic or other personal preferences. The segment also markets other funeral home products such as urns, jewelry, stationery and other funeral home products. The segment offers individually personalized caskets through the Company-owned distribution network.
Metal caskets are made from various gauges of cold-rolled steel, stainless steel, copper and bronze. Metal caskets are generally categorized by whether the casket is non-gasketed or gasketed, and by material (i.e., bronze, copper, or steel) and in the case of steel, by the gauge (thickness) of the metal. Wood caskets are primarily manufactured from nine different species of wood. The species of wood used are poplar, pine, ash, oak, pecan, maple, cherry, walnut and mahogany. The Memorialization segment is a leading manufacturer of all-wood constructed caskets, which are manufactured using pegged and dowelled construction, and include no metal parts. All-wood constructed caskets are preferred by certain religious groups. Cremation caskets are made primarily from wood or cardboard covered with cloth or veneer. These caskets appeal primarily to cremation consumers, the environmentally concerned consumers, and value buyers.
The Memorialization segment also produces casket components. Casket components include stamped metal parts, metal locking mechanisms for gasketed metal caskets, adjustable beds and interior panels. Metal casket parts are produced by stamping cold-rolled steel, stainless steel, copper and bronze sheets into casket body parts. Locking mechanisms and adjustable beds are produced by stamping and assembling a variety of steel parts. The segment purchases from sawmills and lumber distributors various species of uncured wood, which it dries and cures. The cured wood is processed into casket components.
In addition, the segment provides product and service assortment planning, as well as merchandising and display products to funeral service businesses. These products assist funeral service professionals in providing information, value and satisfaction to their client families.
The segment also provides cremation systems, crematory management, cremation service and supplies, waste management and incineration systems, and environmental and energy solutions to the human, pet and specialized incineration markets. The primary market areas for these products and services are North America and Europe, although the segment also sells into Latin America and the Caribbean, Australia and Asia.
ITEM 1.BUSINESS, (continued)
Cremation systems include both traditional flame-based and water-based bio-cremation systems for cremation of humans and pets, as well as equipment for processing the cremated remains and other related equipment (ventilated work stations, tables, cooler racks, vacuums). The principal markets for these products are funeral homes, cemeteries, crematories, pet crematories, animal disposers and veterinarians. These products primarily are marketed directly by segment personnel. Crematory management/operations represent the actual operation and management of client-owned crematories. Currently the segment provides these services primarily to municipalities in Europe and private operators in the United States. Cremation service and supplies consists of operator training, preventative maintenance and "at need" service work performed on various makes and models of equipment. This work can be as simple as replacing defective bulbs or as complex as complete reconstruction and upgrading or retro-fitting on site. Supplies are consumable items associated with normal operations.
Waste management/incineration systems encompass both batch load and continuous feed, static and rotary systems for incineration of all waste types, as well as equipment for in-loading waste, out-loading ash and energy recovery. The principal markets for these products are medical waste disposal, oil and gas "work camp" wastes, industrial wastes and bio-mass generators. Environmental and energy systems include emissions filtration units, waste heat recovery equipment, waste gas treatment products, as well as energy recovery. The principal markets are municipalities or public/state agencies, the cremation industry and other industries which utilize incinerators for waste reduction and energy production.
The Memorialization segment also manufactures a full line of products for cremation, including urns in a variety of sizes, styles and shapes as well as standard and custom designed granite cremation pedestals and benches. The segment also manufactures bronze and granite niche units, which are comprised of numerous compartments used to display cremation urns in mausoleums and churches. In addition, the Company also markets turnkey cremation gardens, which include the design and all related products for a cremation memorial garden.
Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products include wood,are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are sold to and distributed through a network of independent dealers including sign suppliers, awards and recognition companies, and trophy dealers.
Raw materials used by the Memorialization segment to manufacture memorials consist principally of bronze and aluminum ingot, granite, sheet metal, coating materials, photopolymers and construction materials and are generally available in adequate supply. Ingot is obtained from various North American, European and Australian smelters. The primary materials required for casket manufacturing are cold-rolled steel and lumber. The segment also purchases copper, bronze, stainless steel, particleboard, corrugated materials, paper veneer, cloth, ornamental hardware and coating materials. Purchase orders or supply agreements are typically negotiated with large, integrated steel producers that have demonstrated timely delivery, high quality material and competitive prices. Lumber is purchased from a number of sawmills and lumber distributors. Raw materials used to manufacture cremation and incineration products consist principally of structural steel, plastic, laminates, inks, filmsheet metal, electrical components, combustion devices and graphic art supplies. All of these raw materialsrefractory materials. These are presentlygenerally available in adequate supply from various sources.numerous suppliers.
ITEM 1.:BUSINESS, (continued)
The MarkingMemorialization segment markets its casket products in the United States through a combination of Company-owned and Fulfillment Systemsindependent casket distribution facilities. The Company operates over 100 distribution centers in the United States. Over 85% of the segment's casket products are currently sold through Company-owned distribution centers. The casket business is highly competitive and the Company competes with other manufacturers on the basis of product quality, price, service, design availability and breadth of product line. The Memorialization segment provides a line of casket products that it believes is as comprehensive as any of its major competitors. There are a large number of casket industry participants operating in North America, and the industry has in the last five years seen a few new foreign casket manufacturers, primarily from China, enter the North American market. The Memorialization segment and its principal competitor account for a substantial portion of the U.S. casket market.
The Company competes with several manufacturers in the cremation and accessory equipment market principally on the basis of product design, quality and price. The Memorialization segment and its three largest global competitors account for a substantial portion of the U.S. and European cremation equipment market.
The Memorialization segment works to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.
Industrial Technologies:
The Industrial Technologies segment designs, manufactures and distributes a wide range of marking, coding and industrial automation solutions, order fulfillment systems, and related consumables. Manufacturers, suppliers and distributors worldwide rely on Matthews' integrated systems to identify, track, control and pick their products.
Marking systems range from mechanical marking solutions to microprocessor-based ink-jet printing systems that integrate into a customer's manufacturing, inventory tracking and material handling control systems. The Company manufactures and markets products and systems that employ different marking technologies, including contact printing, indenting, etching, laser and ink-jet printing. Customers frequently use a combination of these methods to achieve an appropriate mark. These technologies apply product information required for identification and traceability, as well as to facilitate inventory and quality control, regulatory compliance and brand name communication.
Fulfillment systems complement the tracking and distribution of a customer's products with automated order fulfillment technologies, motor-driven rollers for product conveyance, and controls for material handling systems. Material handling customers include some of the largest automated assembly distribution and mail sortingdistribution companies in the United States. The Company also
engineers innovative, custom solutions to address specific customer requirements in a variety of industries, including oil exploration and security scanning.
A significant portion of the revenue of the Marking and Fulfillment SystemsIndustrial Technologies segment is attributable to the sale of consumables and replacement parts required by the marking, coding and tracking hardware sold by Matthews. The Company develops inks, rubber and steel consumables in conjunction with the marking equipment in which they are used, which is critical to ensure ongoing equipment reliability and mark quality. Most marking equipment customers use Matthews' inks, solvents and cleaners.
The principal customers for the Company's marking and fulfillment systems products are manufacturers, suppliers and distributors of durable goods, building products, consumer goods manufacturers (including food and beverage processors) and producers of pharmaceuticals. The Company also serves a wide variety of industrial markets, including metal fabricators, manufacturers of woven and non-woven fabrics, plastic, rubber and automotive products.
A portion of this segment's sales are outside the United States, with distribution sourced through the Company's subsidiaries in Canada, Sweden, Germany and China in addition to other international distributors. The Company owns a minority interest in distributors in Asia, Australia and Europe.
ITEM 1.BUSINESS, (continued)
Major raw materials for this segment's products include precision components, electronics, printing components, tool steels, rubber and chemicals, all of which are presently available in adequate supply from various sources.
Competitors in the marking and fulfillment systems industries are diverse, with some companies offering limited product lines for well-defined specialty markets, while others operate similarly to the Company, offering a broad product line and competing in multiple product markets and countries. Competition for marking and fulfillment systems products is based on product performance, ease of integration into the manufacturing and/or distribution process, service and price. The Company typically competes with specialty companies in specific brand marking solutions and traceability applications. The Company believes that, in general, itits Industrial Technologies segment offers one of the broadest lines of products to address a wide variety of marking, coding and industrial automation applications.
PATENTS, TRADEMARKS AND LICENSES:
The Company holds a number of domestic and foreign patents and trademarks. However, the Company believes the loss of any individual or a significant number of patents or trademarks would not have a material impact on consolidated operations or revenues.
BACKLOG:
Because the nature of the Company's Cemetery Products, Graphics ImagingSGK Brand Solutions, Memorialization and Merchandising SolutionsIndustrial Technologies businesses are primarily custom products made to order and services with short lead times, backlogs are not generally material except for mausoleums in the Cemetery Products segment, cremation equipment in the Cremation segment, roto-gravure engineering projects in the Graphics ImagingSGK Brand Solutions segment, mausoleums and cremation equipment in the Memorialization segment and industrial automation and order fulfillment systems in the Marking and FulfillmentIndustrial Technologies segment. Backlogs vary in a range of approximately one yearsix to twelve months of sales for mausoleums and roto-gravure engineering projects. Backlogs for the Funeral Home Products segment are not material.projects and mausoleums. Cremation equipment sales backlogs vary in a range of eight to ten months of sales. Backlogs for Marking and Fulfillment SystemsIndustrial Technologies segment sales generally vary in a range of up to six weeks for standard products and twelve weeks for custom systems. The Company's backlog is expected to be substantially filled in fiscal 2015.2017.
REGULATORY MATTERS:
The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations. As such, the Company has developed environmental, health and safety policies and procedures that include the proper handling, storage and disposal of hazardous materials.
The Company is party to various environmental matters. These include obligations to investigate and mitigate the effects on the environment of the disposal of certain materials at various operating and non-operating sites. The Company is currently performing environmental assessments and remediation at these sites, as appropriate.
At September 30, 2014,2016, an accrual of approximately $4.9$3.7 million had been recorded for environmental remediation (of which $1.1$1.0 million was classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.
ITEM 1A. RISK FACTORS.
There are inherent risks and uncertainties associated with the Company's businesses that could adversely affect its operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that the Company currently believes to be material. Additional risks not currently known or deemed immaterial may also result in adverse effects on the Company.
Changes in Economic Conditions. Generally, changes in domestic and international economic conditions affect the industries in which the Company and its customers and suppliers operate. These changes include changes in the rate of consumption or use of the Company's products due to economic downturns, volatility in currency exchange rates, and changes in raw material prices resulting from supply and/or demand conditions.
Uncertainty about current global economic conditions poses a risk, as consumers and businesses may continue to postpone or cancel spending. Other factors that could influence customer spending include energy costs, conditions in the credit markets, consumer confidence and other factors affecting consumer spending behavior. These and other economic factors could have an effect on demand for the Company's products and services and negatively impact the Company's financial condition and results of operations.
Foreign Operations. The Company conducts business in more than 25 countries around the world, and in fiscal 2016 approximately 31% of the Company's sales to external customers were to customers outside the United States. In addition, the Company's manufacturing operations, suppliers and employees are located in many places around the world. As such, the Company's future success depends in part on its ability to grow sales in non-U.S. markets. Sales and operations outside of the United States are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, global economic uncertainties, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations, potentially adverse tax consequences, and required compliance with non-U.S. laws and regulations.
Changes in Foreign Currency Exchange Rates. Manufacturing and sales of a significant portion of the Company's products are outside the United States, and accordingly, the Company holds assets, incurs liabilities, earns revenue and pays expenses in a variety of currencies. The Company's consolidated financial statements are presented in U.S. dollars, and therefore, the Company must translate the reported values of its foreign assets, liabilities, revenue and expenses into U.S. dollars. Increases or decreases in the value of the U.S. dollar compared to foreign currencies may negatively affect the value of these items in the Company's consolidated financial statements, even though their value has not changed in local currency.
Increased Prices for Raw Materials. The Company's profitability is affected by the prices of the raw materials used in the manufacture of its products. These prices may fluctuate based on a number of factors, including changes in supply and demand, domestic and global economic conditions, and volatility in commodity markets, currency exchange rates, labor costs and fuel-related costs. If suppliers increase the price of critical raw materials, alternative sources of supply, or an alternative material,materials, may not exist.exist or be readily available.
The Company has standard selling price structures (i.e., list prices) in severalcertain of its segments, which are reviewed for adjustment generally on an annual basis. In addition, the Company has established pricing terms with several of its customers through contracts or similar arrangements. Based on competitive market conditions and to the extent that the Company has established pricing terms with customers, the Company's ability to immediately increase the price of its products to offset the increased costs may be limited. Significant raw material price increases that cannot be mitigated by selling price increases or productivity improvements will negatively affect the Company's results of operations.
ITEM 1A.RISK FACTORS, (continued)
Changes in Mortality and Cremation Rates. Generally, life expectancy in the United States and other countries in which the Company's Memorialization businesses operatesegment operates has increased steadily for several decades and is expected to continue to do so in the future. The increase in life expectancy is also expected to impact the number of deaths in the future. Additionally, cremations have steadily grown as a percentage of total deaths in the United States since the 1960's, and are expected to continue to increase in the future. The Company expects that these trends will continue in the future and although sales of the resultCompany's Memorialization segment may benefit from the continued growth in the number of cremations, such trends may adversely affect the volume of bronze and granite memorialization products and burial caskets sold in the United States. However, sales of the Company's Cremation segment may benefit from the growth in cremations.
Changes in Product Demand or Pricing.The Company's businesses have and will continue to operate in competitive markets. Changes in product demand or pricing are affected by domestic and foreign competition and an increase in consolidated purchasing by large customers operating in both domestic and global markets. The Memorialization businesses generally operate in markets with ample supply capacity and demand which is correlated to death rates. The Brand Solutions businesses serve global customers
that are requiring their suppliers to be global in scope and price competitive.price-competitive. Additionally, in recent years the Company has witnessed an increase in products manufactured offshore, primarily in China, and imported into the Company's U.S. markets. It is expected that these trends will continue and may affect the Company's future results of operations.
Changes in the Distribution of the Company's Products or the Loss of a Large Customer. Although the Company does not have any customer that is considered individually significant to consolidated sales, it does have contracts with several large customers in both the Memorialization and SGK Brand Solutions segments. While these contracts provide important access to large purchasers of the Company's products, they can obligate the Company to sell products at contracted prices for extended periods of time. Additionally, any significant divestiture of business properties or operations by current customers could result in a loss of business if the Company is not able to maintain the business with the subsequent owners of the businesses.
Risks in Connection with Acquisitions. The Company has grown in part through acquisitions, and continues to evaluate acquisition opportunities that have the potential to support and strengthen its businesses. There is no assurance however that future acquisition opportunities will arise, or that if they do, that they will be consummated. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with expectations, or that synergies expected from the integration of the acquisitions will not be achieved as rapidly as expected, if at all. Failure to effectively integrate acquired businesses could prevent the realization of expected rates of return on the acquisition investment and could have a negative effect on the Company's results of operations and financial condition.
ITEM 1A.RISK FACTORS, (continued)
Protection of Intellectual Property. Certain of the Company's businesses rely on various intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as confidentiality provisions and licensing arrangements, to establish proprietary rights. If the Company does not enforce its intellectual property rights successfully, its competitive position may suffer which could harm the Company's operating results. In addition, the Company's patents, copyrights, trademarks and other intellectual property rights may not provide a significant competitive advantage. The Company may need to spend significant resources monitoring its intellectual property rights and may or may not be able to detect infringement by third parties. The Company's competitive position may be harmed if it cannot detect infringement and enforce its intellectual property rights quickly or at all. In some circumstances, the Company may choose to not pursue enforcement because an infringer has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by designing around the Company's intellectual property rights or by developing non-infringing competing technologies. Intellectual property rights and the Company's ability to enforce them may be unavailable or limited in some countries which could make it easier for competitors to capture market share and could result in lost revenues.
Environmental Remediation and Compliance. The Company is subject to the risk of environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of potentially substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate, and there is no assurance that significant expenditures related to such compliance may not be required in the future.
From time to time, we may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged noncompliance with or liability under environmental, health and safety laws, property damage or personal injury. New laws and regulations, including those which may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.
Technological Factors Beyond the Company's Control. The Company operates in certain markets in which technological product development contributes to its ability to compete effectively. There can be no assurance that the Company will be able to develop new products, that new products can be manufactured and marketed profitably, or that new products will successfully meet the expectations of customers.
ITEM 1A.RISK FACTORS, (continued)
Compliance with Foreign Laws and Regulations. Due to the international scope of our operations, the Company is subject to a complex system of commercial and trade regulations around the world, and our foreign operations are governed by laws, rules and business practices that often differ from those of the United States. We cannot predict the nature, scope or effect of future regulatory requirements to which the Company's operations might be subject or the manner in which existing laws might be administered or interpreted, which could have a material and negative impact on our business and our results of operation. For example, recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws in other countries. While we maintain a variety of internal policies and controls and take steps, including periodic training and internal audits, that we believe are reasonably calculated to discourage, prevent and detect violations of such laws, we cannot guarantee that such actions will be effective or that individual employees will not engage in inappropriate behavior in contravention of our policies and instructions. Such conduct, or even the allegation thereof, could result in costly investigations and the imposition of severe criminal or civil sanctions, could disrupt our business, and could materially and adversely affect our reputation, business and results of operations or financial condition.
Further, we are subject to laws and regulations worldwide affecting our operations outside the United States in areas including, but not limited to, intellectual property ownership and infringement, tax, customs, import and export requirements, anti-corruption and anti-bribery, foreign exchange controls and cash repatriation restrictions, foreign investment, data privacy requirements, anti-competition, pensions and social insurance, employment, and environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive and requirements may differ among jurisdictions. Further, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, certain laws and regulations are relatively new and their interpretation and enforcement involve significant uncertainties. There can be no assurance that any of these factors will not have a material adverse effect on our business, results of operations or financial condition.
Effectiveness of our Internal Controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct a comprehensive evaluation of our internal control over financial reporting. To comply with this statute, we are required to document and test our internal control over financial reporting, our management is required to assess and issue a report concerning our internal control over financial reporting, and our independent registered public accounting firm is required to attest to and report on our assessment of the effectiveness of internal control over financial reporting. Any failure to maintain or implement required new or improved controls could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our consolidated financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business, financial condition, and reputation could be harmed.
Compliance with Securities Laws and Regulations; Conflict Minerals Reporting. The Company is required to comply with various securities laws and regulations, including but not limited to the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Dodd-Frank contains provisions, among others, designed to improve transparency and accountability concerning the supply chains of certain minerals originating from the Democratic Republic of Congo and adjoining countries that are believed to be benefiting armed groups ("Conflict Minerals"). While Dodd-Frank does not prohibit companies from using Conflict Minerals, the SEC mandates due diligence, disclosure and reporting requirements for companies for which Conflict Minerals are necessary to the functionality or production of a product. Our efforts to comply with Dodd-Frank and other evolving laws, regulations and standards could result in increased costs and expenses related to compliance and potential violations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
Principal properties of the Company and its majority-owned subsidiaries as of October 31, 20142016 were as follows (properties are owned by the Company except as noted):
| Location | Description of Property | ||
| Antwerp, Belgium | Manufacturing | ||
| Appleton, WI | Manufacturing | (1) | |
| Atlanta, GA | Manufacturing | ||
| Atlanta, GA | Operating facility | (1) | |
| Battle Creek, MI | Operating facility | (1) | |
| Bristol, England | |||
| Budapest, Hungary | Manufacturing | (1) | |
| Operating facility | (1) | ||
| Chicago, IL | Operating facility | (1) | |
| Chicago, IL | Operating facility | ||
| (1) | |||
| Cincinnati, OH | Operating facility | (1) | |
| Cincinnati, OH | Operating facility | (1) | |
| Cincinnati, OH | Manufacturing | (1) | |
| Des Plaines, IL | Operating facility | (1) | |
| Manufacturing | |||
| East Butler, PA | Manufacturing | ||
| Goslar, Germany | Manufacturing | (1) | |
| Grenzach-Wyhlen, Germany | Manufacturing | ||
| Hilversum, Netherlands | Operating facility | (1) | |
| Istanbul, Turkey | Manufacturing | (1) | |
| Izmir, Turkey | Manufacturing | ||
| Julich, Germany | Manufacturing | ||
| Kalamazoo, MI | Operating facility | ||
| Kowloon, Hong Kong | Operating facility | (1) | |
| Leeds, England | Operating facility | (1) | |
| Leipzig, Germany | Operating facility | (1) | |
| London, England | Operating facility | (1) | |
| Manchester, England | Manufacturing | (1) | |
| Minneapolis, MN | |||
| Mississauga, Canada | Operating facility | (1) | |
| Monchengladbach, Germany | Manufacturing | ||
| Munich, Germany | Manufacturing | (1) | |
| New Berlin, WI | Manufacturing | (1) | |
| New York, NY | Operating facility | (1) | |
| Newcastle, England | Operating facility | ||
| (1) | |||
| North Sydney, Australia | Operating facility | (1) | |
| Novgorod, Russia | Manufacturing | ||
| Nuremberg, Germany | Manufacturing | ||
| (1) | |||
| Paris, France | Operating facility | (1) | |
| Penang, Malaysia | Operating facility | ||
| Portland, OR | Operating facility | (1) | |
| Portland, OR | Sales Office | (1) | |
| Poznan, Poland | Manufacturing |
ITEM 2. PROPERTIES, (continued)
| Location | Description of Property | ||
| SGK Brand Solutions (continued): | |||
| Queretaro, Mexico | |||
| Redmond, WA | Operating facility | (1) | |
| St. Louis, MO | Manufacturing | ||
| San Francisco, CA | Operating facility | (1) | |
| Shanghai, China | Operating facility | (1) | |
| Shenzhen, China | (1) | ||
| Singapore, Singapore | |||
| Operating facility | (1) | ||
| Sterling Heights, MI | Operating facility | (1) | |
| (1) | |||
| Toronto, Canada | (1) | ||
| Vienna, Austria | (1) | ||
| Vreden, Germany | Manufacturing | ||
| (1) | |||
| Woburn, MA | Operating facility | (1) | |
| Pittsburgh, PA | Manufacturing / Division Offices | ||
| Pittsburgh, PA | Division Offices | (1) | |
| Apopka, FL | Manufacturing / Division Offices | ||
| Aurora, IN | Manufacturing | ||
| Braddock, PA | Distribution | ||
| Bristol, TN | Distribution | ||
| Columbus, OH | Distribution | ||
| Edmunston, Canada | Manufacturing | ||
| Elberton, GA | Manufacturing | (1) | |
| Fargo, ND | Distribution | ||
| Hastings, NE | Distribution | ||
| Kingwood, WV | Manufacturing | ||
| Libertyville, IL | Distribution | ||
| Manchester, England | Manufacturing | (1) | |
| Melbourne, Australia | Manufacturing | (1) | |
| Monterrey, Mexico | Manufacturing | (1) | |
| Parma, Italy | Manufacturing / Warehouse | (1) | |
| Piney Flats, TN | Manufacturing | ||
| Richmond, IN | Manufacturing | (1) | |
| Richmond, IN | Manufacturing | ||
| Searcy, AR | Manufacturing | ||
| Shakopee, MN | Distribution | ||
| Udine, Italy | Manufacturing | (1) | |
| Vestone, Italy | Manufacturing | (1) | |
| Walton, KY | Distribution | ||
| West Point, MS | Distribution | ||
| Whittier, CA | Manufacturing | (1) | |
| York, PA | Manufacturing | ||
ITEM 2. PROPERTIES, (continued)
| Location | Description of Property | ||
| Industrial Technologies: | |||
| Pittsburgh, PA | Manufacturing / Division Offices | ||
| Beijing, China | Manufacturing | (1) | |
| Cincinnati, OH | Manufacturing | (1) | |
| Germantown, WI | Manufacturing | (1) | |
| Gothenburg, Sweden | Manufacturing / Distribution | (1) | |
| Ixonia, WI | Manufacturing | (1) | |
| Manufacturing | (1) | ||
| Portland, OR | Manufacturing | ||
| Tianjin City, China | Manufacturing | ||
| (1) | |||
| Corporate Office: | |||
| Pittsburgh, PA | General Offices |
| (1) | These properties are leased by the Company under operating lease arrangements. |
| (2) | In addition to the properties listed, the |
Rent expense incurred by the Company for all leased facilities was approximately $32.7 million in fiscal 2016.
All of the owned properties are unencumbered. The Company believes its facilities are generally well suited for their respective uses and are of adequate size and design to provide the operating efficiencies necessary for the Company to be competitive. The Company's facilities provide adequate space for meeting its near-term production requirements and have availability for additional capacity. The Company intends to continue to expand and modernize its facilities as necessary to meet the demand for its products.
ITEM 3. LEGAL PROCEEDINGS.
Matthews is subject to various legal proceedings and claims arising in the ordinary course of business. Management does not expect that the results of any of these legal proceedings will have a material adverse effect on Matthews' financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
OFFICERS AND EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following information is furnished with respect to officers and executive management as of November 15, 2014:October 31, 2016:
| Name | Age | Positions with Registrant | ||
| Joseph C. Bartolacci | President and Chief Executive Officer | |||
| Gregory S. Babe | 58 | Chief Technology Officer | ||
| David F. Beck | Vice President and Controller | |||
| Marcy L. Campbell | Vice President, Human Resources | |||
| Brian J. Dunn | Executive Vice President, Strategy and Corporate Development | |||
| Steven D. Gackenbach | Group President, Memorialization | |||
| Robert M. Marsh | 48 | Vice President and Treasurer | ||
| Steven F. Nicola | Chief Financial Officer | |||
| Secretary | ||||
| Paul F. Rahill | President, | |||
| David A. Schawk | President, | |||
| SGK Brand Solutions | ||||
| Brian D. Walters | Vice President and General Counsel | |||
Joseph C. Bartolacci was appointed President and Chief Executive Officer effective October 2006.
Gregory S. Babe was appointed Chief Technology Officer effective November 2015. Prior thereto he had been the interim Executive Vice President, Global Information Technology and Integration since November 2014 when he joined the Company. Prior to joining the Company, Mr. Babe was the President and Chief Executive Officer of Liquid X Printed Metals, Inc., from June 2013 to November 2014, Chief Executive Officer of Orbital Engineering, Inc., from July 2012 to June 2013 and President and Chief Executive Officer of Bayer Corporation and Bayer MaterialScience LLC from October 2008 to June 2012.
David F. Beck was appointed Vice President and Controller effective February 2010. Prior thereto he had been Controller since September 15, 2003.
Marcy L. Campbell was appointed Vice President, Human Resources effective November 2014. Ms. Campbell served as Director, Regional Human Resources from January 2013, and as Manager, Regional Human Resources from November 2005 to December 2012.
Brian J. Dunn was appointed Executive Vice President, Strategy and Corporate Development effective July 24, 2014. Prior thereto, he served as Group President, Brand Solutions since February 2010, and Group President, Graphics and Marking Products from September 2007 to January 2010.
Steven D. Gackenbach was appointed Group President, Memorialization effective October 31, 2011. Prior thereto he had been Chief Commercial Officer, Memorialization since January 2011 when he joined the Company.
Robert M. Marsh was appointed Vice President and Treasurer in February 2016. He served as Treasurer since December 2014 when he joined the Company. Prior to joining the Company, Mr. Gackenbach served asMarsh was a partner of PNC Mezzanine Capital, the Senior Directorprincipal mezzanine investment business of Strategy for Kraft Foods' Cheese and Dairy Division from 2002 to 2010.The PNC Financial Services Group, LLC ("PNC"). Mr. Marsh joined PNC in 1997.
Steven F. Nicola was appointed Chief Financial Officer Secretary and TreasurerSecretary effective December 2003.
Paul F. Rahill was appointed President, CremationEnvironmental Solutions Division in October 2002.
David A. Schawkjoined the Company in July 2014 as President, Graphics ImagingSGK Brand Solutions upon Matthews' acquisition of Schawk. Mr. Schawk served as Schawk's Chief Executive Officer from July 2012, and Chief Executive Officer and President for more than five years prior thereto. Mr. Schawk was a member of the Schawk Board of Directors since 1992.
Brian D. Walters was appointed Vice President and General Counsel effective February 2009.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information:
The authorized common stock of the Company consists of 70,000,000 shares of Class A Common Stock, $1$1.00 par value. At September 30, 2014, 32,879,8652016, 32,141,685 shares were outstanding. The Company's Class A Common Stock is traded on the NASDAQ Global Select Market under the symbol "MATW". The following table sets forth the high, low and closing prices as reported by NASDAQ for the periods indicated:
| High | Low | Close | ||||||||||
| Fiscal 2014: | ||||||||||||
Quarter ended: September 30, 2014 | $ | 47.60 | $ | 40.99 | $ | 43.89 | ||||||
| June 30, 2014 | 43.32 | 39.54 | 41.57 | |||||||||
| March 31, 2014 | 44.33 | 37.08 | 40.81 | |||||||||
| December 31, 2013 | 42.80 | 37.58 | 42.61 | |||||||||
| Fiscal 2013: | ||||||||||||
| Quarter ended: September 30, 2013 | $ | 40.50 | $ | 36.27 | $ | 38.08 | ||||||
| June 30, 2013 | 39.37 | 32.81 | 37.70 | |||||||||
| March 31, 2013 | 35.31 | 31.43 | 34.92 | |||||||||
| December 31, 2012 | 32.95 | 27.42 | 32.10 | |||||||||
| High | Low | Close | |||||||||
| Fiscal 2016: | |||||||||||
| Quarter ended: September 30, 2016 | $ | 62.85 | $ | 54.76 | $ | 60.76 | |||||
| June 30, 2016 | 56.05 | 49.37 | 55.64 | ||||||||
| March 31, 2016 | 54.80 | 45.00 | 51.47 | ||||||||
| December 31, 2015 | 61.10 | 46.05 | 53.45 | ||||||||
| Fiscal 2015: | |||||||||||
| Quarter ended: September 30, 2015 | $ | 55.70 | $ | 47.46 | $ | 48.97 | |||||
| June 30, 2015 | 55.40 | 47.00 | 53.14 | ||||||||
| March 31, 2015 | 52.63 | 44.48 | 51.51 | ||||||||
| December 31, 2014 | 49.69 | 41.10 | 48.67 | ||||||||
The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews' common stock under the program, of which 965,881 shares remain available for repurchase as of September 30, 2014. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company's Restated Articles of Incorporation.
Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 2,028,570 shares remain available for repurchase as of September 30, 2016. All purchases of the Company's common stock during fiscal 20142016 were part of this repurchase program.
In May 2016, the Company purchased 970,000 common shares under the buy-back program from members of the Schawk family, including David A. Schawk (who is a member of the Board of Directors of the Company and the Company's President, SGK Brand Solutions) and certain family members of Mr. Schawk and/or trusts established for the benefit of Mr. Schawk or his family members. The purchase price for the shares purchase was $50.6921625 per share, which was equal to 96.76% of the average of the high and low trading prices for the common stock as reported on the NASDAQ Global Select Market on May 12, 2016.
The following table shows the monthly fiscal 20142016 stock repurchase activity:
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of a publicly announced plan | Maximum number of shares that may yet be purchased under the plan | ||||||||||||
| October 2013 | 509 | $ | 40.83 | 509 | 1,194,161 | |||||||||||
| November 2013 | 86,287 | 40.95 | 86,287 | 1,107,874 | ||||||||||||
| December 2013 | 15,381 | 41.67 | 15,381 | 1,092,493 | ||||||||||||
| January 2014 | 6,428 | 42.39 | 6,428 | 1,086,065 | ||||||||||||
| February 2014 | - | - | - | 1,086,065 | ||||||||||||
| March 2014 | - | - | - | 1,086,065 | ||||||||||||
| April 2014 | - | - | - | 1,086,065 | ||||||||||||
| May 2014 | 3,806 | 40.17 | 3,806 | 1,082,259 | ||||||||||||
| June 2014 | 452 | 41.09 | 452 | 1,081,807 | ||||||||||||
| July 2014 | - | - | - | 1,081,807 | ||||||||||||
| August 2014 | 46,060 | 45.12 | 46,060 | 1,035,747 | ||||||||||||
| September 2014 | 69,866 | 45.63 | 69,866 | 965,881 | ||||||||||||
| Total | 228,789 | $ | 43.29 | 228,789 | ||||||||||||
| Period | Total number of shares purchased | Weighted-average price paid per share | Total number of shares purchased as part of a publicly announced plan | Maximum number of shares that may yet be purchased under the plan | |||||||||
| October 2015 | 7,574 | $ | 50.66 | 7,574 | 3,153,448 | ||||||||
| November 2015 | 112,582 | 56.37 | 112,582 | 3,040,866 | |||||||||
| December 2015 | — | — | — | 3,040,866 | |||||||||
| January 2016 | 1,669 | 48.60 | 1,669 | 3,039,197 | |||||||||
| February 2016 | 29,434 | 47.53 | 29,434 | 3,009,763 | |||||||||
| March 2016 | — | — | — | 3,009,763 | |||||||||
| April 2016 | — | — | — | 3,009,763 | |||||||||
| May 2016 | 971,216 | 50.69 | 971,216 | 2,038,547 | |||||||||
| June 2016 | 8,400 | 54.75 | 8,400 | 2,030,147 | |||||||||
| July 2016 | — | — | — | 2,030,147 | |||||||||
| August 2016 | 507 | 59.28 | 507 | 2,029,640 | |||||||||
| September 2016 | 1,070 | 60.55 | 1,070 | 2,028,570 | |||||||||
| Total | 1,132,452 | $ | 51.21 | 1,132,452 | |||||||||
Holders:
Based on records available to the Company, the number of registered holders of the Company's common stock was 596 631at
October 31,2014.2016.
October 31,
Dividends:
A quarterly dividend of $.13$0.17 per share was paiddeclared for the fourth quarter of fiscal 20142016 to shareholders of record on November 24,28, 2016. The Company paid quarterly dividends of $0.15 per share for each of the first three quarters of fiscal 2016 and the fourth quarter of fiscal 2015. The Company paid quarterly dividends of $0.13 per share for each of the first three quarters of fiscal 2015 and the fourth quarter of fiscal 2014. The Company paid quarterly dividends of $.11$0.11 per share for each of the first three quarters of fiscal 2014 and the fourth quarter of fiscal 2013. The Company paid quarterly dividends of $.10 per share for the first three quarters of fiscal 2013 and the fourth quarter of fiscal 2012. The Company paid quarterly dividends of $.09 per share for the first three quarters of fiscal 2012 and the fourth quarter of fiscal 2011.
Cash dividends have been paid on common shares in every year for at least the past forty-fiveforty-seven years. It is the present intention of the Company to continue to pay quarterly cash dividends on its common stock. However, there is no assurance that dividends will be declared and paid as the declaration and payment of dividends is at the discretion of the Board of Directors of the Company and is dependent upon many factors, including but not limited to the Company's financial condition, results of operations, cash requirements, future prospects and other factors deemed relevant by the Board.
Securities Authorized for Issuance Under Equity Compensation Plans:
See Equity Compensation Plans in Item 12 "Security Ownership of Certain Beneficial Owners and Management" on page 76 80of this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, (continued)
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN *
AMONG MATTHEWS INTERNATIONAL CORPORATION,
S&P 500 INDEX, S&P MIDCAP 400 INDEX AND S&P SMALLCAP 600 INDEX **
* Total return assumes dividend reinvestment
Note: Performance graph assumes $100 invested on October 1, 20092011 in Matthews International Corporation Common Stock, Standard & Poor's (S&P) 500 Index, S&P MidCap 400 Index and S&P SmallCap 600 Index. The results are not necessarily indicative of future performance.
ITEM 6. SELECTED FINANCIAL DATA.
| Years Ended September 30, | |||||||||||||||||||
| 2016(1) | 2015(2) | 2014(3) | 2013(4) | 2012(5) | |||||||||||||||
(Amounts in thousands, except per share data) (Unaudited) | |||||||||||||||||||
| Net sales | $ | 1,480,464 | $ | 1,426,068 | $ | 1,106,597 | $ | 985,357 | $ | 900,317 | |||||||||
| Operating profit | 118,815 | 105,023 | 81,522 | 94,615 | 92,585 | ||||||||||||||
| Interest expense | 24,344 | 20,610 | 12,628 | 12,925 | 11,476 | ||||||||||||||
Net income attributable to Matthews shareholders | $ | 66,749 | $ | 63,449 | $ | 42,625 | $ | 54,121 | $ | 55,276 | |||||||||
| Earnings per common share: | |||||||||||||||||||
| Basic | $ | 2.04 | $ | 1.93 | $ | 1.51 | $ | 1.96 | $ | 1.96 | |||||||||
| Diluted | 2.03 | 1.91 | 1.49 | 1.95 | 1.95 | ||||||||||||||
| Weighted-average common | |||||||||||||||||||
| shares outstanding: | |||||||||||||||||||
| Basic | 32,642 | 32,939 | 28,209 | 27,255 | 27,753 | ||||||||||||||
| Diluted | 32,904 | 33,196 | 28,483 | 27,423 | 27,839 | ||||||||||||||
| Cash dividends per share | $ | 0.60 | $ | 0.54 | $ | 0.46 | $ | 0.41 | $ | 0.37 | |||||||||
| Total assets (6) | $ | 2,091,041 | $ | 2,143,611 | $ | 2,008,026 | $ | 1,209,245 | $ | 1,121,774 | |||||||||
| Long-term debt, non-current | 844,807 | 891,217 | 714,027 | 351,068 | 298,148 | ||||||||||||||
| Years Ended September 30, | ||||||||||||||||||||
2014(1) | 2013(2) | 2012(3) | 2011(4) | 2010(5) | ||||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Net sales | $ | 1,106,597 | $ | 985,357 | $ | 900,317 | $ | 898,821 | $ | 821,829 | ||||||||||
| Operating profit | 82,891 | 95,792 | 93,577 | 118,516 | 116,581 | |||||||||||||||
| Interest expense | 12,628 | 12,925 | 11,476 | 8,241 | 7,419 | |||||||||||||||
| Net income attributable to Matthews shareholders | 43,674 | 54,888 | 55,843 | 72,372 | 69,057 | |||||||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Basic | $1.54 | $1.99 | $1.98 | $2.47 | $2.32 | |||||||||||||||
| Diluted | 1.53 | 1.98 | 1.98 | 2.46 | 2.31 | |||||||||||||||
| Weighted-average common | ||||||||||||||||||||
| shares outstanding: | ||||||||||||||||||||
| Basic | 28,209 | 27,255 | 27,753 | 28,775 | 29,656 | |||||||||||||||
| Diluted | 28,483 | 27,423 | 27,839 | 28,812 | 29,706 | |||||||||||||||
| Cash dividends per share | $.460 | $.410 | $.370 | $.330 | $.290 | |||||||||||||||
| Total assets | $ | 2,031,735 | $ | 1,215,900 | $ | 1,128,042 | $ | 1,097,455 | $ | 993,825 | ||||||||||
| Long-term debt, non-current | 714,027 | 351,068 | 298,148 | 299,170 | 225,256 | |||||||||||||||
| (1) | Fiscal 2016 included net pre-tax charges of $36,057 and income of $78, which impacted operating profit and other deductions, respectively. These amounts primarily consisted of acquisition-related costs and strategic cost-reduction initiatives. |
| (2) | Fiscal 2015 included pre-tax charges of $36,883 and income of $8,726, which impacted operating profit and other deductions, respectively, and also included the unfavorable effect of related adjustments of $1,334 to income tax expense. These amounts primarily consisted of acquisition-related costs, trade name write-offs, strategic cost-reduction initiatives, and losses related to a theft of funds, partially offset by a gain on the settlement of a multi-employer pension plan obligation, and the impact of the favorable settlement of litigation, net of related expenses. |
| (3) | Fiscal 2014 included net charges of approximately |
| (4) | Fiscal 2013 included net charges of approximately |
| (5) | Fiscal 2012 included net charges of approximately |
| (6) | Fiscal |
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated financial statements of Matthews and related notes thereto. In addition, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS:OPERATIONS:
The following table sets forth sales and operating profit for the Company's SGK Brand Solutions, Memorialization and Brand Solutions businessesIndustrial Technologies segments for each of the last three fiscal years.
| Years Ended September 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Sales: | ||||||||||||
| Memorialization | $ | 508,420 | $ | 517,911 | $ | 492,867 | ||||||
| Brand Solutions | 598,177 | 467,446 | 407,450 | |||||||||
| Consolidated | $ | 1,106,597 | $ | 985,357 | $ | 900,317 | ||||||
Operating Profit: | ||||||||||||
| Memorialization | $ | 69,306 | $ | 72,931 | $ | 63,589 | ||||||
| Brand Solutions | 13,585 | 22,861 | 29,988 | |||||||||
| Consolidated | $ | 82,891 | $ | 95,792 | $ | 93,577 | ||||||
| Years Ended September 30, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (Dollars in thousands) | |||||||||||
| Sales: | |||||||||||
| SGK Brand Solutions | $ | 755,975 | $ | 798,339 | $ | 497,328 | |||||
| Memorialization | 610,142 | 508,058 | 508,420 | ||||||||
| Industrial Technologies | 114,347 | 119,671 | 100,849 | ||||||||
| Consolidated | $ | 1,480,464 | $ | 1,426,068 | $ | 1,106,597 | |||||
| Operating Profit: | |||||||||||
| SGK Brand Solutions | $ | 42,909 | $ | 21,864 | $ | 2,536 | |||||
| Memorialization | 68,252 | 70,064 | 67,937 | ||||||||
| Industrial Technologies | 7,654 | 13,095 | 11,049 | ||||||||
| Consolidated | $ | 118,815 | $ | 105,023 | $ | 81,522 | |||||
Comparison of Fiscal 20142016 and Fiscal 2013:2015:
Sales for the year ended September 30, 20142016 were $1.1$1.48 billion, compared to $985.4 million$1.43 billion for the year ended September 30, 2013.2015. The increase in fiscal 20142016 sales of $54.4 million principally reflected the acquisition of Schawk, Inc.Aurora Products Group, LLC ("Schawk"Aurora") in July 2014,and higher sales in the Company's Graphics Imaging and Marking and Fulfillment Systems segments, the incrementalvolume of memorial products. The unfavorable impact of acquisitions completed in fiscal 2013 and the impact of significant projects in the Cremation and Merchandising Solutions segments. Consolidated sales for fiscal 2014 also reflected the benefit of favorable changes in foreign currencies against the U.S. dollar of approximately $6.2 million.$25.2 million partially offset this increase.
In the Memorialization businesses, Cemetery ProductsSGK Brand Solutions segment, sales for fiscal 20142016 were $222.0$756.0 million, compared to $226.6$798.3 million in fiscal 2015. The decrease in sales reflected the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $21.4 million and the prior year divestiture of a small software business. In addition, the segment experienced slower market conditions in the U.S. and Europe. Memorialization segment sales for fiscal 2016 were $610.1 million compared to $508.1 million for fiscal 2013.2015. The decrease primarily reflected lower unit volumeincrease in sales resulted principally from the acquisition of Aurora ($113.3 million) and higher sales of bronze and granite memorials, partially offset by higher mausoleum sales. Sales for the Funeral Home Products segment were $234.6 million for fiscal 2014 compared to $242.8 million for fiscal 2013. The decrease principally resulted from lower unit volumesales of caskets.caskets and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $2.8 million. Based on published CDC data, the Company estimated that the number of casketed in-ground burial deaths in the U.S. declined in fiscal 2014 compared to a year ago, which was the primary factor in the decrease in unit volume in both the Cemetery Products and Funeral Home Products segments inago. Industrial Technologies segment sales for fiscal 2014. Sales for the Cremation segment2016 were $51.8$114.3 million, compared to $119.7 million for fiscal 2014 compared2015. Industrial Technologies segment sales reflected lower fulfillment systems sales primarily due to $48.5slower market conditions in the current year. Changes in foreign currency values against the U.S. dollar also had an unfavorable impact of approximately $1.0 million a year ago. The increase principally resulted from a large waste incineration projecton the segment's sales. These declines in Saudi Arabia,segment sales were partially offset by lower sales volume in the segment's traditional cremator businesses. In the Company's Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2014 were $398.2 million, compared to $294.6 million a year ago. The increase resulted principally from the acquisition of Schawk in July 2014 ($75.1 million), higher sales volume in the segment's principal markets, the incrementalfavorable impact of the acquisition of Wetzel Holding AG, Wetzel GmbH and certain related affiliates (collectively, "Wetzel"Digital Designs, Inc. ("DDI") in November 2012 and a $5.9 million favorable impact of changes in foreign currency against the U.S. dollar. Sales for the Merchandising Solutions segment were $99.1 million for fiscal 2014, compared to $79.4 million a year ago. The improvement was attributable to higher volume, including a significant merchandising display project during the third and fourth fiscal quarters of 2014. Marking and Fulfillment Systems segment sales for the year ended September 30, 2014 were $100.8 million, compared to $93.5 million for fiscal 2013. The increase resulted principally from higher sales in the U.S. and the incremental impact of the acquisition of Pyramid Control Systems ( "Pyramid") in December 2012.
acquisition.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Gross profit for the year ended September 30, 20142016 was $392.5$556.5 million, or 35.5%compared to $529.4 million for fiscal 2015. Consolidated gross profit as a percent of sales was 37.6% and 37.1% for fiscal 2016 and fiscal 2015, respectively. The increase in gross profit primarily reflected the impact of higher sales. Gross profit included expenses for the write-off of inventory step-up value related to the Aurora acquisition totaling $4.0 million and $1.8 million in fiscal 2016 and 2015, respectively. The improvement in gross profit as a percent of sales reflected the favorable impact of cost-reduction initiatives (including acquisition synergy realization), and lower commodity costs, partially offset by the write-off of Aurora inventory step-up value.
Selling and administrative expenses for the year ended September 30, 2016 were $437.6 million, compared to $356.5$424.4 million or 36.2%for fiscal 2015. Consolidated selling and administrative expenses as a percent of sales were 29.6% for fiscal 2013.2016, compared to 29.8% in fiscal 2015. The increase in selling and administrative expenses was primarily attributable to the acquisition of Aurora, partially offset by benefits from cost-reduction initiatives in the SGK Brand Solutions segment, resulting primarily from acquisition integration activities. In addition, fiscal 2016 selling and administrative expenses included acquisition integration costs and other charges totaling $32.1 million, and an increase of $3.1 million in intangible asset amortization related to the Aurora acquisition. Fiscal 2015 selling and administrative expenses included acquisition-related expenses of $37.1 million primarily related to the Schawk, Inc. ("Schawk") acquisition integration activities and Aurora transaction expenses, trade name write-offs of $4.8 million and expenses related to strategic cost-reduction initiatives of $2.2 million, partially offset by the impact of the favorable settlement of litigation, net of related expenses, in the Memorialization segment of $9.0 million.
Operating profit for fiscal 2016 was $118.8 million, compared to $105.0 million for fiscal 2015. The SGK Brand Solutions segment operating profit for fiscal 2016 was $42.9 million, compared to $21.9 million for fiscal 2015. The increase in segment operating profit principally resulted from cost reductions primarily as a result of acquisition integration activities, partially offset by a decline in sales, and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $1.2 million. Additionally, operating profit for the SGK Brand Solutions segment included expenses of $25.0 million for cost reduction initiatives (primarily related to acquisition integration) in fiscal 2016. SGK Brand Solutions operating profit in fiscal 2015 included charges totaling $39.5 million representing acquisition integration expenses, trade name write-offs, and expenses related to strategic cost-reduction initiatives. Memorialization segment operating profit for fiscal 2016 was $68.3 million, compared to $70.1 million for fiscal 2015. Segment operating profit was favorably impacted by the Aurora acquisition, which was more than offset by charges totaling $10.4 million primarily representing acquisition integration costs, a $3.1 million increase in intangible asset amortization as a result of the Aurora acquisition, and lower casket sales. Memorialization segment operating profit in fiscal 2015 was unfavorably impacted by charges totaling $6.4 million, primarily consisting of acquisition-related costs, and expenses related to productivity improvements and strategic cost-reduction initiatives. Memorialization segment operating profit in fiscal 2015 also reflected the favorable impact of the settlement of litigation, net of related expenses, of $9.0 million. Operating profit for the Industrial Technologies segment for fiscal 2016 was $7.7 million, compared to $13.1 million in fiscal 2015, primarily reflecting lower sales and an unfavorable change in product mix in fiscal 2016.
Investment income for the year ended September 30, 2016 was $2.1 million, compared to $175,000 for the year ended September 30, 2015. The increase reflected higher rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for fiscal 2016 was $24.3 million, compared to $20.6 million in fiscal 2015. The increase in interest expense primarily reflected higher average debt levels resulting from the acquisition of Aurora in August 2015. Other income (deductions), net, for the year ended September 30, 2016 represented a decrease in pre-tax income of $1.3 million, compared to an increase in pre-tax income of $5.1 million in fiscal 2015. Other income and deductions generally include banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated receivables and payables. Fiscal 2015 other income and deductions included an $11.5 million gain on the settlement of a multi-employer pension plan installment payment obligation, and $2.3 million of losses related to a theft of funds by an employee that had occurred over a multi-year period.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company's effective tax rate for fiscal 2016 was 30.5%, compared to 29.4% for fiscal 2015. The effective tax rates for both years primarily reflected the favorable impact of the utilization of certain tax attributes with the Company’s U.S. and foreign legal entity structure. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected lower foreign income taxes offset by the impact of state taxes.
Net losses attributable to noncontrolling interests was $588,000 in fiscal 2016, compared to $161,000 in fiscal 2015. The net losses attributable to noncontrolling interests primarily reflected losses in less than wholly-owned Memorialization and Industrial Technologies businesses.
Comparison of Fiscal 2015 and Fiscal 2014:
Sales for the year ended September 30, 2015 were $1.4 billion, compared to $1.1 billion for the year ended September 30, 2014. The increase in fiscal 2015 sales principally reflected the acquisitions of Schawk in July 2014 consolidated gross profit compared to fiscal 2013 reflectedand Aurora in August 2015, higher sales in the Industrial segment, and higher sales in the benefitSGK Brand Solutions segment, exclusive of recent acquisitions,the Schawk acquisition. These increases were partially offset by higher material costslower sales in the Funeral Home Products segment. Memorialization segment, excluding Aurora. Additionally, consolidated sales for fiscal 2015 were unfavorably impacted by changes in foreign currencies against the U.S. dollar of approximately $56.9 million.
In addition,the SGK Brand Solutions segment, sales for fiscal 2015 were $798.3 million, compared to $497.3 million in fiscal 2014. The increase resulted principally from the acquisition of Schawk ($339.1 million), and higher sales, excluding the Schawk acquisition, in Europe. These increases were partially offset by the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $44.1 million. Memorialization segment sales for fiscal 2015 were $508.1 million compared to $508.4 million for fiscal 2014. The Memorialization segment sales reflected higher unit volume of caskets, higher sales of bronze and granite memorials, higher cremation equipment sales in the U.S. market, and the incremental impact of the Aurora acquisition ($14.4 million). These increases were offset by lower mausoleum sales, lower equipment sales in Europe and the U.K., and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $9.7 million. Lower equipment sales in the U.K. reflected a large waste incinerator project in fiscal 2014 that did not repeat in fiscal 2015. Industrial segment sales for the year ended September 30, 2015 were $119.7 million, compared to $100.8 million for fiscal 2014. The increase resulted principally from higher sales of warehouse control systems and higher unit volume of marking products and related consumables, primarily in North America. These increases were partially offset by the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $3.0 million.
Gross profit for the year ended September 30, 2015 was $529.4 million, compared to $392.5 million for fiscal 2014. Consolidated gross profit as a percent of sales was 37.1% and 35.5% for fiscal 2015 and fiscal 2014, respectively. The increase in gross profit primarily reflected the impact of higher sales. Fiscal 2015 gross profit also included an expense of $1.8 million for the partial write-off of inventory step-up value related to the Aurora acquisition. Fiscal 2014 gross profit included an expense of $9.5 million for the write-off of inventory step-up value related to the Schawk acquisition. The decreaseimprovement in gross profit as a percentagepercent of sales primarily reflected the impact of thehigher fiscal 2014 write-off of the inventory step-up value, and higher material costs in the Funeral Home Products segment.favorable margin impact from the Schawk acquisition.
Selling and administrative expenses for the year ended September 30, 20142015 were $309.6$424.4 million, or 28.0%compared to $311.0 million for fiscal 2014. Consolidated selling and administrative expenses as a percent of sales were 29.8% for fiscal 2015, compared to $260.728.1% in fiscal 2014. The increase in selling and administrative expenses was primarily attributable to higher sales and the acquisitions of Schawk and Aurora. In addition, fiscal 2015 selling and administrative expenses included an increase of $12.1 million or 26.5%in intangible asset amortization related to the Schawk and Aurora acquisitions, acquisition-related expenses of sales, for fiscal 2013.$37.1 million primarily related to the Schawk acquisition integration activities and Aurora transaction expenses, trade name write-offs of $4.8 million and expenses related to strategic cost-reduction initiatives of $2.2 million, partially offset by the impact of the favorable settlement of litigation, net of related expenses, in the Memorialization segment of $9.0 million. Fiscal 2014 selling and administrative expenses included expenses related to acquisition activities, (primarilyprimarily the Schawk acquisition)acquisition, of $18.2 million, the Company's strategic cost structurecost-reduction initiatives of $4.5 million and litigation expenses of $3.0 million related to a legal dispute in the Funeral Home Products segment. Fiscal 2013 selling and administrative expenses included expenses of $13.6 million related to strategic cost-structure initiatives, $3.4 million related to acquisition activities, $1.8 million related to litigation-related expenses in the Funeral Home ProductsMemorialization segment and $2.2 million related to asset adjustments. These fiscal 2013 expenses were partially offset by the benefit of adjustments to contingent consideration of $6.2 million and a gain of $3.0 million on the settlement of the purchase price of the remaining ownership interest in one of the Company's subsidiaries.million.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Operating profit for fiscal 20142015 was $82.9$105.0 million, compared to $95.8$81.5 million for fiscal 2013. Cemetery Products2014. The SGK Brand Solutions segment operating profit for fiscal 20142015 was $36.2$21.9 million, compared to $32.6$2.5 million for fiscal 2013.2014. The increase in the Cemetery Productssegment's fiscal 2015 operating profit resulted principally from a declinewas favorably impacted by the Schawk acquisition, and higher sales, exclusive of the acquisition, in Europe. The SGK Brand Solutions segment fiscal 2015 operating profit included charges totaling $39.5 million representing acquisition integration expenses, trade name write-offs, and expenses related to strategic cost-reduction initiatives. In addition, the Company's strategic cost structure initiatives from $5.9segment reported an $11.7 million increase in fiscal 2013intangible asset amortization related to $771,000 in fiscal 2014. Excluding the impact of these expenses from both years, fiscal 2014 operating profit decreased by $1.6 million, compared to fiscal 2013 primarily reflecting lower sales. Operating profit for the Funeral Home Products segment for fiscal 2014 was $28.0 million, compared to $37.3 million for fiscal 2013. The decrease in Funeral Home ProductsSchawk acquisition. Fiscal 2015 SGK Brand Solutions segment operating profit for fiscalwas also unfavorably impacted by changes in foreign currency values against the U.S. dollar of approximately $4.4 million. Fiscal 2014 primarily reflected the impact of $3.1 million of expenses primarily related to strategic cost-structure initiatives and litigation expenses of $3.0 million related to a legal dispute with one of its competitors. Fiscal 2013 Funeral Home ProductSGK Brand solutions segment operating profit included the impact of expenses of $3.0$17.8 million related to acquisition activities, $4.1 million related to strategic cost-structurecost-reduction initiatives, litigation expenses of $1.8 million, and a $6.3 million benefit of adjustments to contingent consideration. Excluding the impact of these items from both years, Funeral Home Products operating profit decreased $1.7 million, primarily resulting from lower sales, partially offset by the productivity benefits from strategic cost-structure initiatives. Cremation segment operating profit for the year ended September 30, 2014 was $5.1 million, compared to $3.1 million a year ago. The increase in operating profit reflected the impact of higher sales, and $100,000 of expenses related to strategic cost-structure initiatives in fiscal 2014, compared to $1.1 million of similar expenses in fiscal 2013. The Graphics Imaging segment reported an operating loss of $4.6 million for fiscal 2014, compared to operating profit of $9.7 million for 2013. The decrease in fiscal 2014 primarily reflected the impact of acquisition-related expenses of $17.8 million, the $9.5 million write-off of inventory step-up value, and also reflected the benefit of a merchandising display project that did not repeat to the same level in fiscal 2015. Memorialization segment operating profit for fiscal 2015 was $70.1 million, compared to $67.9 million for fiscal 2014. The Memorialization segment fiscal 2015 operating profit included the incremental impact of the Aurora acquisition, and the impact of the favorable settlement of litigation, net of related expenses, of $9.0 million. The fiscal 2015 Memorialization segment operating profit was unfavorably impacted by charges totaling $6.4 million, primarily consisting of acquisition-related costs, and expenses related to strategic cost-structure initiatives of $2.9 million. Fiscal 2013 Graphics Imagingcost reduction initiatives. In addition, the segment reported a $403,000 increase in intangible asset amortization related to the Aurora acquisition. Memorialization segment fiscal 2014 operating profit included expenses$4.0 million of $3.2 million related to acquisition activities, $4.5 million related to strategic cost-structure initiatives and a $1.6 million impairment charge related to the carrying value of a trade name. These fiscal 2013 expenses were partially offset by a gain of $3.0 million on the settlement of the purchase price of the remaining ownership interest in one the Company's subsidiaries. Excluding these net charges from both years, Graphics Imaging operating profit increased $9.6 million as a result of higher sales and the acquisition of Schawk. The Merchandising Solutions segment operating profit was $7.2 million for fiscal 2014, compared to $4.3 million for fiscal 2013. The increase principally reflected the impact of higher sales, partially offset by a $370,000 increase in expenses related to strategic cost-structure initiatives.cost-reduction initiatives and $3.0 million of litigation-related expenses, and also reflected the benefit of a large incineration project that did not repeat in fiscal 2015. Operating profit for the Marking and Fulfillment SystemsIndustrial segment for fiscal 20142015 was $11.0$13.1 million, compared to $8.9$11.0 million a year ago.in fiscal 2014. The segment's fiscal 2014 and 2013 operating profit included expenses related to strategic cost-structure initiatives of $220,000 and $1.4 million respectively. Excluding these expensesincrease primarily resulted from both years, Marking and Fulfillment Systems segment operating profit increased $1.0 million, primarily as a resultthe favorable impact of higher sales.
Investment income for the year ended September 30, 20142015 was $2.1 million,$175,000, compared to $2.3$2.1 million for the year ended September 30, 2013.2014. The decrease reflected lower rates of return on investments held in trust for certain of the Company's benefit plans. Interest expense for fiscal 20142015 was $12.6$20.6 million, compared to $12.9$12.6 million last year.in fiscal 2014. The decreaseincrease in interest expense primarily reflected lower interest rates, partially offset by increasedhigher average debt levels resulting from the acquisitions of Schawk in the fourth fiscal quarter ofJuly 2014 to finance the Schawk acquisition.and Aurora in August 2015.
Other income (deductions), net, for the year ended September 30, 20142015 represented a decreasean increase in pre-tax income of $4.5$5.1 million, compared to a decrease in pre-tax income of $3.7$4.9 million in 2013.fiscal 2014. Other income and deductions generally include banking-related fees and the impact of currency gains or losses on certain intercompany debt. The increase indebt and foreign denominated receivables and payables. Fiscal 2015 other income and deductions net, principally reflectedincluded an $11.5 million gain on the settlement of a multi-employer pension plan installment payment obligation. Fiscal 2014 other income and deductions included a write-off of prior deferred bank fees recognized upon the amendment of the Company's domestic Revolving Credit Facilitycredit facility in conjunction with the Schawk acquisition. Other income and deductions also included losses related to a theft of funds by an employee that had occurred over a multi-year period, totaling $2.3 million and $1.7 million in fiscal 2015 and fiscal 2014, respectively.
The Company's effective tax rate for fiscal 20142015 was 34.6%29.4%, compared to 32.7%34.5% for fiscal 2013.2014. The increasedecrease in the fiscal 20142015 effective tax rate, compared to fiscal 2013,2014, primarily reflected the benefit of the utilization of certain tax attributes as a result of legal structure reorganization in foreign jurisdictions and a relative increase in the amount of earnings generated from non-U.S. locations. The effective tax rate in fiscal 2014 included the impact of non-deductible acquisition expenses in fiscal 2014.costs relating to the Schawk acquisition. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.
Net earnings attributable to noncontrolling interests was a deductionloss of $646,000 for$161,000 in fiscal 2014,2015, compared to income of $116,000$646,000 in fiscal 2013.2014. The change related principallyin net earnings attributable to higher operating income recorded by the Company'snoncontrolling interests primarily reflected losses in less than wholly-owned operations in the U.K.Industrial and Memorialization businesses.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in investing activities was $411.1$47.1 million for the year ended September 30, 2014,2016, compared to $98.6$263.2 million and $45.3$411.1 million for fiscal years 20132015 and 2012,2014, respectively. Investing activities for fiscal 2016 primarily reflected capital expenditures of $41.7 million and acquisition payments (net of cash acquired or received from sellers) of $6.9 million, primarily for the DDI acquisition. Investing activities for fiscal 2015 primarily reflected capital expenditures of $48.3 million, acquisition payments (net of cash acquired) of $213.5 million, primarily for the Aurora acquisition, net proceeds of $10.4 million from the sale of a subsidiary, and payment of $12.9 million related to a letter of credit issued for a customer (see discussion below). Investing activities for fiscal 2014 primarily included payments (net of cash acquired) of $382.1 million, primarily for the Schawk acquisition, and $29.2 million for capital expenditures. Investing activities for fiscal 2013 primarily included payments (net of cash acquired) of $74.0 million for acquisitions and $24.9 million for capital expenditures. Investing activities for fiscal 2012 primarily reflected capital expenditures of $33.2 million and payments (net of cash acquired) of $12.5 million for acquisitions.
Capital expenditures were $29.2$41.7 million for the year ended September 30, 2014,2016, compared to $24.9$48.3 million and $33.2$29.2 million for fiscal 20132015 and 2012,2014, respectively. Capital expenditures in fiscal 2012 were higher due to new investments in gravure equipment in Germany and Turkey and investments in information technology systems. Capital expenditures in each of the last three fiscal years reflected reinvestments in the Company's business segments and were made primarily for the purchase of new manufacturingproduction machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital spending for property, plant and equipment has averaged $39.7 million for the last three fiscal years. Capital expenditures for the last three fiscal years were primarily financed through operating cash.
Cash used in financing activities for the year ended September 30, 2016 was $108.8 million, and reflected repayments, net of proceeds, on long-term debt of $30.0 million, purchases of treasury stock of $58.0 million, proceeds from stock option exercises of $6.4 million, payment of dividends to the Company's shareholders of $19.4 million ($0.60 per share), acquisition of noncontrolling interest of $5.6 million, and payment of deferred financing fees of $2.3 million (see below). Cash provided by financing activities for the year ended September 30, 2015 was $131.2 million, and reflected proceeds, net of repayments, on long-term debt of $179.2 million, purchases of treasury stock of $14.6 million, payment of contingent consideration of $484,000, proceeds from stock option exercises of $4.0 million, payment of dividends to the Company's shareholders of $17.8 million ($0.54 per share), and payment of $18.2 million to settle a multi-employer pension plan installment payment obligation. Cash provided by financing activities for the year ended September 30, 2014 was $338.1 million, reflectingand reflected proceeds, net of repayments, on long-term debt of $357.3 million, purchases of treasury stock of $9.9 million, payment of contingent consideration of $3.7 million, proceeds from the sale of treasury stock (stock option exercises)exercises of $8.0 million, and payment of dividends to the Company's shareholders of $13.4 million ($0.46 per share). Cash used in financing activities for the year ended September 30, 2013 was $10.8 million, reflecting proceeds, net of repayments, on long-term debt of $33.2 million, purchases of treasury stock of $21.6 million, payment of contingent consideration of $11.3 million and payment of dividends to the Company's shareholders of $11.3 million ($0.41 per share). Cash used in financing activities for the year ended September 30, 2012 was $41.0 million, reflecting purchases of treasury stock of $31.0 million, and payment of dividends to the Company's shareholders of $10.3 million ($0.37 per share).
The Company has a domestic Revolving Credit Facilitycredit facility with a syndicate of financial institutions. Ininstitutions that was amended and restated in April 2016 to increase the total borrowing capacity from $900.0 million to $1.15 billion. The Company incurred debt issuance costs of approximately $2.3 million in connection with the acquisition of Schawk in July 2014,amended and restated agreement, which will be deferred and amortized over the Company amended certain termsterm of the Revolving Credit Facility to increasefacility.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The amended and restated agreement includes a $900.0 million senior secured revolving credit facility and a $250.0 million senior secured term loan. The term loan requires scheduled principal payments of 5.0% of the maximum amountoutstanding principal in year one, 7.5% in year two, and 10.0% in years three through five, payable in quarterly installments. The balance of borrowings available under the revolving credit facility from $500.0 million to $900.0 million.and the term loan are due on the maturity date of April 26, 2021. Borrowings under both the amendedrevolving credit facility and the term loan bear interest at LIBOR plus a factor ranging from .75%0.75% to 2.00% (1.75% at September 30, 2014)2016) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). The Company is required to pay an annual commitment fee ranging from .15%0.15% to .25%0.25% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility.
The Revolving Credit Facilityamended and restated agreement requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $30.0$35.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facilityrevolving credit facility at September 30, 20142016 and 20132015 were $680.0$608.0 million and $305.0$857.4 million, respectively. Outstanding borrowings on the term loan at September 30, 2016 was $246.4 million. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at September 30, 20142016 and 20132015 was 2.53%2.59% and 2.81%2.41%, respectively.
The Company hasfollowing table presents information related to interest rate contracts entered into by the followingCompany and designated as cash flow hedges:
| Year Ended September 30, 2016 | Year Ended September 30, 2015 | |||||||
| (Dollars in thousands) | ||||||||
| Pay fixed swaps - notional amount | $ | 403,125 | $ | 300,000 | ||||
| Net unrealized loss | $ | 5,834 | $ | 3,686 | ||||
| Weighted-average maturity period (years) | 3.9 | 3.4 | ||||||
| Weighted-average received rate | 0.53 | % | 0.20 | % | ||||
| Weighted-average pay rate | 1.26 | % | 1.65 | % | ||||
The Company enters into interest rate swaps:
| Effective Date | Amount | Fixed Interest Rate | Interest Rate Spread at September 30, 2014 | Maturity Date |
| October 2011 | $25 million | 1.67% | 1.75% | October 2015 |
| November 2011 | 25 million | 2.13% | 1.75% | November 2014 |
| March 2012 | 25 million | 2.44% | 1.75% | March 2015 |
| June 2012 | 40 million | 1.88% | 1.75% | June 2022 |
| August 2012 | 35 million | 1.74% | 1.75% | June 2022 |
| September 2012 | 25 million | 3.03% | 1.75% | December 2015 |
| September 2012 | 25 million | 1.24% | 1.75% | March 2017 |
| November 2012 | 25 million | 1.33% | 1.75% | November 2015 |
| May 2014 | 25 million | 1.35% | 1.75% | May 2018 |
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 the future variable interest payments under the Revolving Credit Facility 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 $330,000$5.8 million ($201,0003.6 million after tax) and $908,000an unrealized loss, net of unrealized gains, of $3.7 million ($554,0002.2 million after tax) at September 30, 20142016 and 2013,2015, respectively, that is included in shareholders' equity as part of accumulated other comprehensive income.income ("AOCI"). Assuming market rates remain constant with the rates at September 30, 2014,2016, a loss (net of tax) of approximately $905,000$906,000 included in accumulated other comprehensive incomeAOCI is expected to be recognized in earnings as interest expense over the next twelve months.
The Company, through certain of its European subsidiaries, has a credit facility with a European bank. The maximum amount of borrowings available under this facility is 25.035.0 million Euros ($31.639.2 million). OutstandingThere were no outstanding borrowings under the credit facility totaled 17.5at September 30, 2016. Outstanding borrowings under this facility were 23.9 million Euros ($22.1 million) and 22.5 million Euros ($30.426.8 million) at September 30, 2014 and 2013, respectively.2015. The weighted-average interest rate on outstanding borrowings under thethis facility at September 30, 20142016 and 20132015 was 1.35%1.75% and 1.37%1.50%, respectively.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings onunder these loans totaled 1.2 million255,200 Euros ($1.6 million)286,000) and 1.7 million734,452 Euros ($2.3 million)824,000) at September 30, 20142016 and 2013,2015, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at September 30, 20142016 and 20132015 was 3.96%4.06% and 4.04%, respectively.
The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled 2.9830,220 Euros ($931,000) and 1.9 million Euros ($3.6 million) and 7.4 million Euros ($10.02.1 million) at September 30, 20142016 and 2013,2015, respectively. The weighted averageweighted-average interest rate on outstanding borrowings of Wetzel at September 30, 20142016 and 20132015 was 5.67%6.22% and 7.48%5.96%, respectively.
The Company, through its wholly-ownedItalian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 5.53.2 million Euros ($6.93.5 million) and 5.14.3 million Euros ($6.94.8 million) at September 30, 20142016 and 2013,2015, respectively. Matthews International S.p.A. also has threemultiple lines of credit totaling 11.3 million Euros ($14.312.7 million) with the same Italian banks. Outstanding borrowings on these lines were 4.85.2 million Euros ($6.15.8 million) and 5.64.6 million Euros ($7.65.2 million) at September 30, 20142016 and 2013,2015, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at September 30, 20142016 and 20132015 was 3.15%1.8% and 3.16%3.33%, respectively.
In September 2014, a claim was filed seeking to draw upon a letter of credit issued by the Company approximating $14.0of £8.6 million was filed($11.1 million) at September 30, 2016) with respect to a performance guarantee on a project for a customer.customer in Saudi Arabia. Management has assessed the customer's claim to be without merit and basedinitiated an action with the U.K. court. Pursuant to this action, a court order was issued in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the court pending resolution of the dispute between the parties. As a result, the Company made payment on information availablethe draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the court as ordered. On June 14, 2016, the court ruled completely in favor of this filing, expects thatMatthews following a trial on the ultimatemerits. However, as the customer has not yet remitted the funds, it is possible the resolution of this matter will notcould have a material adverse effectan unfavorable financial impact on Matthews' financial condition,Matthews’ results of operations or cash flows.operations. As of September 30, 2016 and 2015, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.
The Company has a stock repurchase program. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews' common stock under the program, of which 965,881 shares remain available for repurchase as of September 30, 2014. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company's Restated Articles of Incorporation. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 5,000,000 shares of Matthews' common stock under the program, of which 2,028,570 shares remain available for repurchase as of September 30, 2016.
In May 2016, the Company purchased 970,000 common shares under the buy-back program from members of the Schawk family, including David A. Schawk (who is a member of the Board of Directors of the Company and the Company's President, SGK Brand Solutions) and certain family members of Mr. Schawk and/or trusts established for the benefit of Mr. Schawk or his family members. The purchase price for the shares purchase was $50.6921625 per share, which was equal to 96.76% of the average of the high and low trading prices for the common stock as reported on the NASDAQ Global Select Market on May 12, 2016.
At September 30, 2014,2016, approximately $48.0$55.6 million of cash and cash equivalents were held by international subsidiaries whose undistributed earnings are considered permanently reinvested. The Company's intent is to reinvest these funds in our international operations and current plans do not demonstrate a need to repatriate them to fund U.S. operations. If the Company decides at a later date to repatriate these funds to the U.S., it wouldmay be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Consolidated working capital was $320.6$314.8 million at September 30, 2014,2016, compared to $219.2$356.2 million at September 30, 2013. The increase in working capital at September 30, 2014 primarily reflected the acquisition of Schawk.2015. Cash and cash equivalents were $75.6$55.7 million at September 30, 2014,2016, compared to $59.0$72.2 million at September 30, 2013.2015. The Company's current ratio was 2.32.2 and 2.22.4 at September 30, 20142016 and 2013,2015, respectively.
ENVIRONMENTAL MATTERS:
The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations. As such, the Company has developed environmental, health, and safety policies and procedures that include the proper handling, storage and disposal of hazardous materials.
The Company is party to various environmental matters. These include obligations to investigate and mitigate the effects on the environment of the disposal of certain materials at various operating and non-operating sites. The Company is currently performing environmental assessments and remediation at these sites, as appropriate.
At September 30, 2014,2016, an accrual of approximately $4.9$3.7 million had been recorded for environmental remediation (of which $1.1$1.0 million was classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual which reflects previously established reserves assumed with the acquisition of York and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. Changes in the accrued environmental remediation obligation from the prior fiscal year reflect payments charged against the accrual.
While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.
ACQUISITIONS:
Fiscal 20142016:
On February 1, 2016, the Company acquired certain net assets of DDI for $7.7 million (net of cash acquired and holdback amount). DDI is a manufacturer and seller of ink jet printing systems and is included in the Company's Industrial Technologies segment.
Fiscal 2015:
On August 19, 2015, the Company acquired Aurora for $210.0 million (net of cash acquired). Aurora provides burial, cremation, and technology products to funeral home clients and distributors in the United States and Canada. The acquisition was designed to expand the Company's memorialization product offerings and geographic distribution footprint in the United States. The final allocation of the purchase price resulted in goodwill of $73.9 million, which was assigned to the Memorialization segment, $76.3 million of intangible assets, of which $30.5 million is not subject to amortization, $26.3 million of property, plant and equipment, and $33.5 million of other net assets, primarily working capital. Approximately $44.0 million of the goodwill is expected to be deductible for tax purposes.
Fiscal 2014:
On July 29, 2014, the Company acquired Schawk, a leading global brand development, activation and brand deployment company headquartered in Des Plaines, Illinois. Under the terms of the transaction, Schawk shareholders received $11.80 cash and 0.20582 shares of Matthews' common stock for each Schawk share held. Based on the closing price of Matthews' stock on July 28, 2014, the transaction represented an implied price of $20.74 per share and a total enterprise value (which included net outstanding debt, net of cash acquired) of $616.7 million. Schawk provides comprehensive brand development and brand deployment services to clients primarily in the consumer packaged goods, retail and life sciences markets. Schawk creates and sells its clients' brands, produces brand assets and protects brand equities to help drive brand performance. Schawk currently delivers its services through more than 155 locations in over 20 countries across North and South America, Europe, Asia and Australia.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
FORWARD-LOOKING INFORMATION:
Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy consists of the following: internal growth (which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products), acquisitions and share repurchases under the Company's stock repurchase program (see "Liquidity and Capital Resources").
With respect to fiscal 2015,2017, the Company expects to continue to devote a significant level of effort to the integration of Schawk.Aurora. Due to the size of this acquisition and the projected synergy benefits from integration, this effort isthese efforts are anticipated to continue for an extended period of time. The costs associated with this integration, and acquisition-related step-up expense, will impact the Company's operating results for fiscal 2015.2017. Consistent with its practice, the Company plans to identify these costs on a quarterly basis as incurred.
CRITICAL ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Annual Report on Form 10-K.
The Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition. The following accounting policies involve significant estimates, which were considered critical to the preparation of the Company's consolidated financial statements for the year ended September 30, 2014.
Long-Lived Assets:Assets, including Property, Plant and Equipment:
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
Goodwill isand Indefinite-Lived Intangibles:
Goodwill and intangible assets with indefinite useful lives are not amortized, but is subject to periodic revieware tested annually for impairment.impairment, or when circumstances indicate that a possible impairment may exist. In general, when the carrying value of a reporting unitthese assets exceeds itsthe implied fair value, an impairment loss must be recognized. For purposes of testing for impairment, the Company uses a combination of valuation techniques, including discounted cash flows. Intangible assets are amortized over their estimated useful lives, unless such lives are considered to be indefinite. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. For purposes of testing goodwill for impairment, the Company uses a combination of valuation techniques, including discounted cash flows. A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rates. The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections. The discount rates used in the discounted cash flow analyses are developed with the assistance of valuation experts and management believes the discount rates appropriately reflect the risks associated with the Company's operating cash flows. In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization is performed using a reasonable control premium.
The Company performed its annual impairment reviewsreview of goodwill and indefinite-lived intangible assets in the second quartersquarter of fiscal 2014, 2013 and 2012 and2016. The Company determined that the estimated fair value for all goodwill reporting units exceeded carrying value, therefore no adjustments to the carrying valuesvalue of goodwill were necessary at those times. Recent economic conditions in Europe have unfavorably impactedMarch 31, 2016. There were no impairments identified during the operating resultsCompany's annual assessment of the Graphics Imaging business. For the Graphics Imaging reporting unit, the estimated fair value exceeded its carrying value by less than 10%, resulting in no goodwill impairment for the unit. While the Graphics Imaging reporting unit passed the first step of the impairment test, if its operating profits or another significant assumption were to deteriorate in the future, it could adversely affect the estimated fair value of the reporting unit. Factors that could have a negative impact on the estimated fair value of the Graphics Imaging reporting unit include a further delay in the recovery of the European market, continued pricing pressure, declines in expected volumes, and an increase in discount rates. If the Company is unsuccessful in its plans to recover the profitability of this business, the estimated fair value could decline and lead to a potential goodwill impairment in the future.
Pension and Postretirement Benefits:
Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost.
The Company's principal pension plan maintains a substantial portion of its assets in equity securities in accordance with the investment policy established by the Company's pension board. Based on an analysis of the historical performance of the plan's assets and information provided by its independent investment advisor, the Company set the long-term rate of return assumption for these assets at 7.75%7.25% at September 30, 20142015 for purposes of determining fiscal 2016 pension cost and funded status.cost. The Company's discount rate assumption used in determining the present value of the projected benefit obligation is based upon published indices as of September 30, 20142016 and September 30, 20132015 for the fiscal year end valuation. The discount rate was 4.25%3.51%, 5.00%4.25% and 4.00%4.25% in fiscal 2016, 2015 and 2014, 2013respectively. Refer to Item 7A, "Quantitative and 2012, respectively.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income taxes for U.S. tax purposes have not been provided on certain undistributed earnings of foreign subsidiaries, as such earnings are considered to be reinvested indefinitely. To the extent earnings are expected to be returned in the foreseeable future, the associated deferred tax liabilities are provided. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.practicable, due to the complexities of the hypothetical calculation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at September 30, 2014,2016, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
| Payments due in fiscal year: | ||||||||||||||||||||
| After | ||||||||||||||||||||
| Total | 2015 | 2016 to 2017 | 2018 to 2019 | 2020 | ||||||||||||||||
| Contractual Cash Obligations: | (Dollar amounts in thousands) | |||||||||||||||||||
| Revolving credit facility | $ | 702,055 | $ | - | $ | 22,055 | $ | 680,000 | $ | - | ||||||||||
| Notes payable to banks | 13,315 | 6,674 | 6,115 | 526 | - | |||||||||||||||
| Short-term borrowings | 6,410 | 6,410 | - | - | - | |||||||||||||||
| Capital lease obligations | 9,167 | 2,400 | 2,154 | 773 | 3,840 | |||||||||||||||
| Pension withdrawal liability | 38,645 | 1,973 | 3,946 | 3,946 | 28,780 | |||||||||||||||
| Non-cancelable operating leases | 65,067 | 21,410 | 27,199 | 11,894 | 4,564 | |||||||||||||||
| Total contractual cash obligations | $ | 834,659 | $ | 38,867 | $ | 61,469 | $ | 697,139 | $ | 37,184 | ||||||||||
| Payments due in fiscal year: | |||||||||||||||||||
| Total | 2017 | 2018 to 2019 | 2020 to 2021 | After 2021 | |||||||||||||||
| Contractual Cash Obligations: | (Dollar amounts in thousands) | ||||||||||||||||||
| Revolving credit facility | $ | 608,000 | $ | — | $ | — | $ | 608,000 | $ | — | |||||||||
| Senior secured term loan | 246,449 | 14,063 | 45,313 | 187,073 | — | ||||||||||||||
| Notes payable to banks | 5,301 | 4,451 | 850 | — | — | ||||||||||||||
| Short-term borrowings | 8,617 | 8,617 | — | — | — | ||||||||||||||
| Capital lease obligations | 5,381 | 778 | 763 | 698 | 3,142 | ||||||||||||||
| Non-cancelable operating leases | 63,630 | 20,461 | 24,761 | 12,082 | 6,326 | ||||||||||||||
| Other | 5,109 | 5,109 | — | — | — | ||||||||||||||
| Total contractual cash obligations | $ | 942,487 | $ | 53,479 | $ | 71,687 | $ | 807,853 | $ | 9,468 | |||||||||
A significant portion of the loans included in the table above bear interest at variable rates. At September 30, 2014,2016, the weighted-average interest rate was 2.53%2.59% on the Company's domestic Revolving Credit Facility, 1.35%credit facility, 1.75% on the credit facility through the Company's European subsidiaries, 3.96%4.06% on bank loans to its wholly-owned subsidiary, Saueressig, 5.67%6.22% on bank loans to its wholly-owned subsidiary, Wetzel,, and 3.15%1.8% on bank loans to the Company's wholly-owned subsidiary, Matthews International S.p.A.
Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company's operating cash. Under I.R.S. regulations, the Company was not required to make any significant contributionsa contribution to its principal retirement plan in fiscal 2014, however, in fiscal 2014, the Company made a contribution of $3.0 million to its principal retirement plan.2016.
The Company is not required to make any significant cash contributions of approximately $5.1 million to its principal retirement plan in fiscal 2015.2017. The Company estimates that benefit payments to participants under its retirement plans (including its supplemental retirement plan) and postretirement benefit payments will be approximately $7.7$9.8 million and $1.0$1.1 million, respectively, in fiscal 2015.2017. The amounts are expected to increase incrementally each year thereafter, to $9.6$11.7 million and $1.3$1.2 million, respectively, in 2019.2021. 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.
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 September 30, 2014,2016, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $4.3$13.8 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.
INFLATION:
Except for the volatility in the cost of bronze ingot, steel, wood and fuel (see "Results of Operations"), inflation has not had a material impact on the Company over the past three years nor is it anticipated to have a material impact for the foreseeable future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Issued
In June 2014,August 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides new guidance onintended to clarify the accounting for share-basedpresentation of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, when the terms of an award provide that a performance target could be achieved after the requisite service period.and insurance proceeds, among other things. This guidanceASU is effective for Matthewsthe Company beginning in interim periods starting in fiscal year 2019, and early adoption is permitted. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In January 1, 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and willMeasurement of Financial Assets and Financial Liabilities, which provides new guidance intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides new guidance on how an entity should account for leases and recognize associated lease assets and liabilities. This ASU requires lessees to recognize assets and liabilities that arise from financing and operating leases on the consolidated balance sheet. The implementation of this standard will require application of the new guidance at the beginning of the earliest comparative period presented, once adopted. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2020, and does allow for early adoption. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principle versus Agent Considerations (Reporting Revenue Gross versus Net), which coincides with ASU 2014-09 and provides additional guidance in the determination of principles versus agents. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which provides new guidance intended to simplify the accounting surrounding share-based compensation. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2018. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.
In April and May 2016, the FASB issued ASU Nos. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, respectively. Both of these ASUs coincide with ASU 2014-09 and provide additional guidance in the determination of performance obligations and implementation expedients. The Company is in the process of assessing the impact these ASUs, along with ASU 2014-09, will have on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which provides new guidance to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new inventory measurement requirements are effective for the Company's 2017 fiscal year, and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)
In May 2014, the FASB issued Accounting Standards Update (ASU)ASU No. 2014-09, "RevenueRevenue from Contracts with Customers: Topic 606"606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. This standard is now effective for Matthews beginning October 1, 2017.2018. The Company is in the process of assessing the impact the adoption of this ASU will have on its consolidated financial statements.
Adopted
In January 2014,November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Income Taxes - Topic 740), which provides new guidance intended to simplify the presentation of deferred income taxes in a classified statement of financial position. The new deferred income tax guidance requires that all deferred income tax balances be classified as non-current assets and liabilities on accounting for certain receive-variable, pay-fixed interest rate swaps. Thisthe classified statement of financial position. The Company adopted this standard in fiscal 2016, and retrospectively adjusted the prior period presentation to conform to the new standard. The adoption resulted in a $19.8 million decrease in current deferred tax assets and a $340,000 decrease in current deferred tax liabilities, and a corresponding increase to non-current deferred tax assets of $346,000 and a decrease to non-current deferred tax liabilities of $19.1 million in the September 30, 2015 Consolidated Balance Sheet.
In March 2016, the FASB issued ASU No. 2016-7, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which provides new guidance provides companies with a practical expedientintended to simplify equity method accounting. Investments that qualify for cash flow hedge accounting.equity method accounting will no longer apply the equity method retrospectively to previously recorded cost investments. The guidance is effective for Matthews beginningadoption of this ASU in fiscal 2015, and will not have a2016 had no material impact on the Company's consolidated financial statements.
In July 2013,April and August 2015, the FASB issued ASU Nos. 2015-3, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Lines-of-Credit Arrangements, respectively. The new guidance on the presentation in the financial statements of an unrecognized tax benefit whenrequires that debt issuance costs related to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance takes into account these losses and carryfowards as well as the intended or likelihood of use of the unrecognized tax benefit in determiningrecognized debt liability be presented on the balance sheet classificationas a direct deduction from the carrying amount of debt, consistent with debt discounts. The guidance also allows for debt issuance costs related to line-of-credit arrangements to be presented as an asset, or liability. Thisregardless of whether there are any outstanding borrowings on the line-of-credit arrangements. The adoption of this guidance was effective for Matthews beginning January 1, 2014 and did not have ain fiscal 2016 had no material impact.impact on the Company's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The following discussion about the Company's market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company has market risk related to changes in interest rates, commodity prices and foreign currency exchange rates. The Company does not generally use derivative financial instruments in connection with these market risks, except as noted below.
Interest Rates - The Company's most significant long-term debt instrument is the domestic Revolving Credit Facility,credit facility, which bears interest at variable rates based on LIBOR.
The Company hasfollowing table presents information related to interest rate contracts entered into by the following interest rate swaps:Company and designated as cash flow hedges:
| Effective Date | Amount | Fixed Interest Rate | Interest Rate Spread at September 30, 2014 | Maturity Date |
| October 2011 | $25 million | 1.67% | 1.75% | October 2015 |
| November 2011 | 25 million | 2.13% | 1.75% | November 2014 |
| March 2012 | 25 million | 2.44% | 1.75% | March 2015 |
| June 2012 | 40 million | 1.88% | 1.75% | June 2022 |
| August 2012 | 35 million | 1.74% | 1.75% | June 2022 |
| September 2012 | 25 million | 3.03% | 1.75% | December 2015 |
| September 2012 | 25 million | 1.24% | 1.75% | March 2017 |
| November 2012 | 25 million | 1.33% | 1.75% | November 2015 |
| May 2014 | 25 million | 1.35% | 1.75% | May 2018 |
| Year Ended September 30, 2016 | Year Ended September 30, 2015 | |||||||
| (Dollars in thousands) | ||||||||
| Pay fixed swaps - notional amount | $ | 403,125 | $ | 300,000 | ||||
| Net unrealized loss | $ | 5,834 | $ | 3,686 | ||||
| Weighted-average maturity period (years) | 3.9 | 3.4 | ||||||
| Weighted-average received rate | 0.53 | % | 0.20 | % | ||||
| Weighted-average pay rate | 1.26 | % | 1.65 | % | ||||
The interest rate swaps have been designated as cash flow hedges of the future variable interest payments under the Revolving Credit Facilitydomestic credit facility which are considered probable of occurring. Based on the Company's assessment, all 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,loss, net of unrealized losses,gains, of $330,000$5.8 million ($201,000 after tax)3.6 million after-tax) at September 30, 20142016 that is included in equity as part of accumulated other comprehensive income. A decrease of 10% in market interest rates (e.g. a decrease from 5.0% to 4.5%) would result in an increase of approximately $500,000$849,000 in the fair value liability of the interest rate swaps.
Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel, fuel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available. In addition, based on competitive market conditions and to the extent that the Company has established pricing terms with customers through contracts or similar arrangements, the Company's ability to immediately increase the price of its products to offset the increased costs may be limited.
Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, primarily including the Euro, British Pound, Canadian Dollar, Australian Dollar, Swedish Krona, Chinese Yuan, Hong Kong Dollar, Polish Zloty, Turkish Lira, Indian Rupee and Malaysian Ringgit in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries. An adverse change (strengthening dollar) of 10% in exchange rates would have resulted in a decrease in reported sales of $45.5$46.2 million and a decrease in reported operating income of $1.2$5.5 million for the year ended September 30, 2014.2016.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, (continued)
Actuarial Assumptions - The most significant actuarial assumptions affecting pension expense and pension obligations include the valuation of retirement plan assets, the discount raterates and the estimated return on plan assets. The estimated return on plan assets is currently based upon projections provided by the Company's independent investment advisor, considering the investment policy of the plan and the plan's asset allocation. The fair value of plan assets and discount raterates are "point-in-time" measures, and the recent volatility of the debt and equity markets makes estimating future changes in fair value of plan assets and discount rates more challenging. The Company elected to value its principal retirement and other postretirement benefit plan liabilities using a modified assumption of future mortality that reflects a significant improvement in life expectancy over the previous mortality assumptions. Refer to Note 12, "Pension and Other Postretirement Plans" in Item 8 – "Financial Statements and Supplementary Data" for additional information.
The following table summarizes the impact on the September 30, 20142016 actuarial valuations of changes in the primary assumptions affecting the Company's retirement plans and supplemental retirement plan.
| Impact of Changes in Actuarial Assumptions | ||||||||||||||||||||||||
| Change in Discount Rate | Change in Expected Return | Change in Market Value of Assets | ||||||||||||||||||||||
| +1% | -1% | +1% | -1% | +5% | -5% | |||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
| Increase (decrease) in net benefit cost | $ (3,399) | $ 4,319 | $(1,286) | $1,286 | $(1,320) | $1,320 | ||||||||||||||||||
| Increase (decrease) in projected benefit obligation | (27,816) | 35,433 | - | - | - | - | ||||||||||||||||||
| Increase (decrease) in funded status | 27,816 | (35,433) | - | - | 6,588 | (6,588) | ||||||||||||||||||
| Impact of Changes in Actuarial Assumptions | |||||||||||||||||||||||
| Change in Discount Rates | Change in Expected Return | Change in Market Value of Assets | |||||||||||||||||||||
| +1% | -1% | +1% | -1% | +5% | -5% | ||||||||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||||||
| Increase (decrease) in net benefit cost | $ | (2,894 | ) | $ | 4,535 | $ | (1,489 | ) | $ | 1,489 | $ | (1,274 | ) | $ | 1,274 | ||||||||
| Increase (decrease) in projected benefit obligation | (33,022 | ) | 41,268 | — | — | — | — | ||||||||||||||||
| Increase (decrease) in funded status | 33,022 | (41,268 | ) | — | — | 7,593 | (7,593 | ) | |||||||||||||||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| Description | Pages | |
| Management's Report to Shareholders | ||
| Report of Independent Registered Public Accounting Firm | ||
| Report of Independent Registered Public Accounting Firm | ||
| 2015 Report of Independent Registered Public Accounting Firm | ||
| Financial Statements: | ||
| Consolidated Balance Sheets as of September 30, | ||
| Consolidated Statements of Income for the years ended September 30, | ||
| Consolidated Statements of Comprehensive Income for the years ended September 30, | ||
| Consolidated Statements of Shareholders' Equity for the years ended September 30, | ||
| Consolidated Statements of Cash Flows for the years ended September 30, | ||
| Notes to Consolidated Financial Statements | ||
| Supplementary Financial Information (unaudited) | ||
| Financial Statement Schedule – Schedule II-Valuation and Qualifying | ||
| Accounts for the years ended September 30, | ||
MANAGEMENT'S REPORT TO SHAREHOLDERS
To the Shareholders and Board of Directors of
Matthews International Corporation:
Management's Report on Financial Statements
The accompanying consolidated financial statements of Matthews International Corporation and its subsidiaries (collectively, the "Company") were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. The other financial information included in this Annual Report on Form 10-K is consistent with that in the financial statements.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.Company, as such term is defined in Exchange Act Rule 13a-15f. In order to evaluate the effectiveness of internal control over financial reporting management has conducted an assessment using the criteria in Internal Control – Integrated Framework (1992)(2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's internalInternal controls over financial reporting is a process under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's Certifications
The certifications of the Company's Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act have been included as Exhibits 31 and 32 in the Company'sthis Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited Matthews International Corporation and 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effectiveSubsidiaries’ internal control over financial reporting as of September 30, 2014,2016, based on criteria established in Internal Control - IntegratedControl-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework), (the COSO criteria). The Company'sMatthews International Corporation and Subsidiaries’ management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management'sthe accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 8.Reporting. Our responsibility is to express opinions on these financial statements,an opinion on the financial statement schedule, and on the Company'scompany’s internal control over financial reporting based on our integrated audits. audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Matthews International Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Matthews International Corporation and Subsidiaries as of September 30, 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year ended September 30, 2016 of Matthews International Corporation and Subsidiaries and our report dated November 22, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
November 22, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)
The Board of Directors and Shareholders of Matthews International Corporation and Subsidiaries:
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matthews International Corporation and Subsidiaries at September 30, 2016, and the consolidated results of their operations and their cash flows for the year ended September 30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), management has excluded Schawk, Inc. ("Schawk") from its assessment ofMatthews International Corporation and Subsidiaries’ internal control over financial reporting as of September 30, 2014 because it was acquired2016, based on criteria established in Internal Control-Integrated Framework issued by the CompanyCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 22, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
November 22, 2016
2015 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directorsof Matthews International Corporation:
In our opinion, the consolidated balance sheet as of September 30, 2015and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of two years in a purchase business combinationthe period ended September 30, 2015, present fairly, in July 2014. We have also excluded Schawk fromall material respects, the financial position of Matthews International Corporation and its subsidiaries at September 30, 2015 and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2015, in conformity with accounting principles generally accepted in the United States of America. In addition, in our auditopinion, the financial statement schedule listed in the accompanying index for each of internal control over financial reporting. Schawk is a 100% owned subsidiary whose total assets and total sales represent approximately 9% and 7%, respectively, ofthe two years in the period ended September 30, 2015 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement amountsscheduleare the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedulebased on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company asAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the year ended September 30, 2014.our opinion.
/s/PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
November 25, 2014
24, 2015
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 20142016 and 20132015
(Dollar amounts in thousands, except per share data)
| ASSETS | 2014 | 2013 | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 75,604 | $ | 58,959 | ||||
Accounts receivable, net of allowance for doubtful accounts of $10,937 and $10,009, respectively | 282,730 | 177,623 | ||||||
| Inventories | 152,842 | 129,811 | ||||||
| Deferred income taxes | 13,283 | 9,826 | ||||||
| Other current assets | 49,456 | 30,736 | ||||||
| Total current assets | 573,915 | 406,955 | ||||||
| Investments | 23,130 | 22,288 | ||||||
| Property, plant and equipment, net | 209,315 | 180,731 | ||||||
| Deferred income taxes | 4,019 | 1,871 | ||||||
| Other assets | 20,027 | 14,402 | ||||||
| Goodwill | 819,467 | 524,551 | ||||||
| Other intangible assets, net | 381,862 | 65,102 | ||||||
| Total assets | $ | 2,031,735 | $ | 1,215,900 | ||||
| ASSETS | 2016 | 2015 | |||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 55,711 | $ | 72,196 | |||
Accounts receivable, net of allowance for doubtful accounts of $11,516 and $10,015, respectively | 294,915 | 283,963 | |||||
| Inventories | 162,472 | 171,423 | |||||
| Other current assets | 61,086 | 77,319 | |||||
| Total current assets | 574,184 | 604,901 | |||||
| Investments | 31,365 | 25,517 | |||||
| Property, plant and equipment, net | 219,492 | 227,408 | |||||
| Deferred income taxes | 775 | 1,284 | |||||
| Other assets | 19,895 | 13,773 | |||||
| Goodwill | 851,489 | 855,728 | |||||
| Other intangible assets, net | 393,841 | 415,000 | |||||
| Total assets | $ | 2,091,041 | $ | 2,143,611 | |||
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
September 30, 20142016 and 20132015
(Dollar amounts in thousands, except per share data)
| LIABILITIES AND SHAREHOLDERS' EQUITY | 2016 | 2015 | |||||
| Current liabilities: | |||||||
| Long-term debt, current maturities | $ | 27,747 | $ | 11,737 | |||
| Trade accounts payable | 58,118 | 68,896 | |||||
| Accrued compensation | 63,737 | 63,931 | |||||
| Accrued income taxes | 15,527 | 11,448 | |||||
| Other current liabilities | 94,219 | 92,731 | |||||
| Total current liabilities | 259,348 | 248,743 | |||||
| Long-term debt | 844,807 | 891,217 | |||||
| Accrued pension | 110,941 | 95,753 | |||||
| Postretirement benefits | 22,143 | 19,415 | |||||
| Deferred income taxes | 107,038 | 125,298 | |||||
| Other liabilities | 37,430 | 29,139 | |||||
| Total liabilities | 1,381,707 | 1,409,565 | |||||
| Shareholders' equity-Matthews: | |||||||
Class A common stock, $1.00 par value; authorized 70,000,000 shares; 36,333,992 shares issued | 36,334 | 36,334 | |||||
| Preferred stock, $100 par value, authorized 10,000 shares, none issued | — | — | |||||
| Additional paid-in capital | 117,088 | 115,890 | |||||
| Retained earnings | 896,224 | 843,955 | |||||
| Accumulated other comprehensive loss | (181,868 | ) | (150,326 | ) | |||
| Treasury stock, 4,192,307 and 3,458,925 shares, respectively, at cost | (159,113 | ) | (115,033 | ) | |||
| Total shareholders' equity-Matthews | 708,665 | 730,820 | |||||
| Noncontrolling interests | 669 | 3,226 | |||||
| Total shareholders' equity | 709,334 | 734,046 | |||||
| Total liabilities and shareholders' equity | $ | 2,091,041 | $ | 2,143,611 | |||
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 2016, 2015 and 2014
(Dollar amounts in thousands, except per share data)
| LIABILITIES AND SHAREHOLDERS' EQUITY | 2014 | 2013 | ||||||
| Current liabilities: | ||||||||
| Long-term debt, current maturities | $ | 15,228 | $ | 23,587 | ||||
| Trade accounts payable | 72,040 | 45,232 | ||||||
| Accrued compensation | 60,690 | 41,916 | ||||||
| Accrued income taxes | 7,079 | 5,910 | ||||||
| Deferred income taxes | 235 | - | ||||||
| Other current liabilities | 98,011 | 71,139 | ||||||
| Total current liabilities | 253,283 | 187,784 | ||||||
| Long-term debt | 714,027 | 351,068 | ||||||
| Accrued pension | 78,550 | 61,642 | ||||||
| Postretirement benefits | 20,351 | 17,956 | ||||||
| Deferred income taxes | 129,335 | 20,332 | ||||||
| Other liabilities | 53,296 | 24,188 | ||||||
| Total liabilities | 1,248,842 | 662,970 | ||||||
| Shareholders' equity-Matthews: | ||||||||
Class A common stock, $1.00 par value; authorized 70,000,000 shares; 36,333,992 shares issued | 36,334 | 36,334 | ||||||
| Preferred stock, $100 par value, authorized 10,000 shares, none issued | - | - | ||||||
| Additional paid-in capital | 113,225 | 47,315 | ||||||
| Retained earnings | 806,040 | 775,762 | ||||||
| Accumulated other comprehensive loss | (66,817 | ) | (26,940 | ) | ||||
| Treasury stock, 3,454,127 and 9,083,910 shares, respectively, at cost | (109,950 | ) | (283,006 | ) | ||||
| Total shareholders' equity-Matthews | 778,832 | 549,465 | ||||||
| Noncontrolling interests | 4,061 | 3,465 | ||||||
| Total shareholders' equity | 782,893 | 552,930 | ||||||
| Total liabilities and shareholders' equity | $ | 2,031,735 | $ | 1,215,900 | ||||
| 2016 | 2015 | 2014 | |||||||||
| Sales | $ | 1,480,464 | $ | 1,426,068 | $ | 1,106,597 | |||||
| Cost of sales | (924,010 | ) | (896,693 | ) | (714,101 | ) | |||||
| Gross profit | 556,454 | 529,375 | 392,496 | ||||||||
| Selling expense | (140,924 | ) | (143,299 | ) | (119,274 | ) | |||||
| Administrative expense | (296,715 | ) | (281,053 | ) | (191,700 | ) | |||||
| Operating profit | 118,815 | 105,023 | 81,522 | ||||||||
| Investment income | 2,061 | 175 | 2,063 | ||||||||
| Interest expense | (24,344 | ) | (20,610 | ) | (12,628 | ) | |||||
| Other income (deductions), net | (1,298 | ) | 5,064 | (4,881 | ) | ||||||
| Income before income taxes | 95,234 | 89,652 | 66,076 | ||||||||
| Income taxes | (29,073 | ) | (26,364 | ) | (22,805 | ) | |||||
| Net income | 66,161 | 63,288 | 43,271 | ||||||||
| Net loss (income) attributable to noncontrolling interests | 588 | 161 | (646 | ) | |||||||
| Net income attributable to Matthews shareholders | $ | 66,749 | $ | 63,449 | $ | 42,625 | |||||
| Earnings per share attributable to Matthews shareholders: | |||||||||||
| Basic | $ | 2.04 | $ | 1.93 | $ | 1.51 | |||||
| Diluted | $ | 2.03 | $ | 1.91 | $ | 1.49 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the years ended September 30, 2014, 20132016, 2015 and 20122014
(Dollar amounts in thousands, except per share data)thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Sales | $ | 1,106,597 | $ | 985,357 | $ | 900,317 | ||||||
| Cost of sales | (714,101 | ) | (628,839 | ) | (563,747 | ) | ||||||
| Gross profit | 392,496 | 356,518 | 336,570 | |||||||||
| Selling expense | (117,905 | ) | (105,963 | ) | (103,659 | ) | ||||||
| Administrative expense | (191,700 | ) | (154,763 | ) | (139,334 | ) | ||||||
| Operating profit | 82,891 | 95,792 | 93,577 | |||||||||
| Investment income | 2,063 | 2,284 | 3,891 | |||||||||
| Interest expense | (12,628 | ) | (12,925 | ) | (11,476 | ) | ||||||
| Other income (deductions), net | (4,530 | ) | (3,715 | ) | (2,071 | ) | ||||||
| Income before income taxes | 67,796 | 81,436 | 83,921 | |||||||||
| Income taxes | (23,476 | ) | (26,664 | ) | (28,717 | ) | ||||||
| Net income | 44,320 | 54,772 | 55,204 | |||||||||
| Net (income) loss attributable to noncontrolling interests | (646 | ) | 116 | 639 | ||||||||
| Net income attributable to Matthews shareholders | $ | 43,674 | $ | 54,888 | $ | 55,843 | ||||||
| Earnings per share attributable to Matthews shareholders: | ||||||||||||
| Basic | $1.54 | $1.99 | $1.98 | |||||||||
| Diluted | $1.53 | $1.98 | $1.98 | |||||||||
| Year Ended September 30, 2016 | |||||||||||
| Matthews | Noncontrolling Interest | Total | |||||||||
| Net income (loss) | $ | 66,749 | $ | (588 | ) | $ | 66,161 | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustment | (17,655 | ) | (89 | ) | (17,744 | ) | |||||
| Pension plans and other postretirement benefits | (12,576 | ) | — | (12,576 | ) | ||||||
| Unrecognized gain (loss) on derivatives: | |||||||||||
| Net change from periodic revaluation | (3,230 | ) | — | (3,230 | ) | ||||||
| Net amount reclassified to earnings | 1,919 | — | 1,919 | ||||||||
Net change in unrecognized gain (loss) on derivatives | (1,311 | ) | — | (1,311 | ) | ||||||
| Other comprehensive income (loss), net of tax | (31,542 | ) | (89 | ) | (31,631 | ) | |||||
| Comprehensive income (loss) | $ | 35,207 | $ | (677 | ) | $ | 34,530 | ||||
| Year Ended September 30, 2015 | |||||||||||
| Matthews | Noncontrolling Interest | Total | |||||||||
| Net income (loss) | $ | 63,449 | $ | (161 | ) | $ | 63,288 | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustment | (77,237 | ) | (150 | ) | (77,387 | ) | |||||
| Pension plans and other postretirement benefits | (3,823 | ) | — | (3,823 | ) | ||||||
| Unrecognized gain (loss) on derivatives: | |||||||||||
| Net change from periodic revaluation | (4,841 | ) | — | (4,841 | ) | ||||||
| Net amount reclassified to earnings | 2,392 | — | 2,392 | ||||||||
Net change in unrecognized gain (loss) on derivatives | (2,449 | ) | — | (2,449 | ) | ||||||
| Other comprehensive income (loss), net of tax | (83,509 | ) | (150 | ) | (83,659 | ) | |||||
| Comprehensive loss | $ | (20,060 | ) | $ | (311 | ) | $ | (20,371 | ) | ||
| Year Ended September 30, 2014 | |||||||||||
| Matthews | Noncontrolling Interest | Total | |||||||||
| Net income (loss) | $ | 42,625 | $ | 646 | $ | 43,271 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustment | (31,081 | ) | 115 | (30,966 | ) | ||||||
| Pension plans and other postretirement benefits | (9,551 | ) | — | (9,551 | ) | ||||||
| Unrecognized gain (loss) on derivatives: | |||||||||||
| Net change from periodic revaluation | (1,879 | ) | — | (1,879 | ) | ||||||
| Net amount reclassified to earnings | 2,634 | — | 2,634 | ||||||||
Net change in unrecognized gain (loss) on derivatives | 755 | — | 755 | ||||||||
| Other comprehensive income (loss), net of tax | (39,877 | ) | 115 | (39,762 | ) | ||||||
| Comprehensive income | $ | 2,748 | $ | 761 | $ | 3,509 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| Year Ended September 30, 2012 | ||||||||||||
Matthews | Noncontrolling Interest | Total | ||||||||||
| Net income (loss) | $ | 55,843 | $ | (639 | ) | $ | 55,204 | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustment | (1,895 | ) | (29 | ) | (1,924 | ) | ||||||
| Pension plans and other postretirement benefits | (3,327 | ) | - | (3,327 | ) | |||||||
| Unrecognized gain (loss) on derivatives: | ||||||||||||
| Net change from periodic revaluation | (3,288 | ) | - | (3,288 | ) | |||||||
| Net amount reclassified to earnings | 2,085 | - | 2,085 | |||||||||
Net change in unrecognized gain (loss) on derivatives | (1,203 | ) | - | (1,203 | ) | |||||||
| Other comprehensive income (loss), net of tax | (6,425 | ) | (29 | ) | (6,454 | ) | ||||||
| Comprehensive income (loss) | $ | 49,418 | $ | (668 | ) | $ | 48,750 | |||||
| Year Ended September 30, 2013 | ||||||||||||
Matthews | Noncontrolling Interest | Total | ||||||||||
| Net income (loss) | $ | 54,888 | $ | (116 | ) | $ | 54,772 | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustment | 3,779 | 82 | 3,861 | |||||||||
| Pension plans and other postretirement benefits | 29,347 | - | 29,347 | |||||||||
| Unrecognized gain (loss) on derivatives: | ||||||||||||
| Net change from periodic revaluation | 2,474 | - | 2,474 | |||||||||
| Net amount reclassified to earnings | 2,543 | - | 2,543 | |||||||||
Net change in unrecognized gain (loss) on derivatives | 5,017 | - | 5,017 | |||||||||
| Other comprehensive income (loss), net of tax | 38,143 | 82 | 38,225 | |||||||||
| Comprehensive income (loss) | $ | 93,031 | $ | (34 | ) | $ | 92,997 | |||||
| Year Ended September 30, 2014 | ||||||||||||
Matthews | Noncontrolling Interest | Total | ||||||||||
| Net income (loss) | $ | 43,674 | $ | 646 | $ | 44,320 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustment | (31,081 | ) | 115 | (30,966 | ) | |||||||
| Pension plans and other postretirement benefits | (9,551 | ) | - | (9,551 | ) | |||||||
| Unrecognized gain (loss) on derivatives: | ||||||||||||
| Net change from periodic revaluation | (1,879 | ) | - | (1,879 | ) | |||||||
| Net amount reclassified to earnings | 2,634 | - | 2,634 | |||||||||
Net change in unrecognized gain (loss) on derivatives | 755 | - | 755 | |||||||||
| Other comprehensive income (loss), net of tax | (39,877 | ) | 115 | (39,762 | ) | |||||||
| Comprehensive income (loss) | $ | 3,797 | $ | 761 | $ | 4,558 | ||||||
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 2014, 20132016, 2015 and 20122014
(Dollar amounts in thousands, except per share data)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income (net of tax) | Treasury Stock | Non- controlling Interests | Total | |||||||||||||||||||||
| Balance, September 30, 2013 | $ | 36,334 | $ | 47,315 | $ | 769,124 | $ | (26,940 | ) | $ | (283,006 | ) | $ | 3,465 | $ | 546,292 | |||||||||||
| Net income | — | — | 42,625 | — | — | 646 | 43,271 | ||||||||||||||||||||
| Minimum pension liability | — | — | — | (9,551 | ) | — | — | (9,551 | ) | ||||||||||||||||||
| Translation adjustment | — | — | — | (31,081 | ) | — | 115 | (30,966 | ) | ||||||||||||||||||
| Fair value of derivatives | — | — | — | 755 | — | — | 755 | ||||||||||||||||||||
| Total comprehensive income | 3,509 | ||||||||||||||||||||||||||
| Stock-based compensation | — | 6,812 | — | — | — | — | 6,812 | ||||||||||||||||||||
| Purchase of 228,789 shares of treasury stock | — | — | — | — | (9,905 | ) | — | (9,905 | ) | ||||||||||||||||||
| Issuance of 5,936,169 shares of treasury stock | — | 55,942 | — | — | 186,117 | — | 242,059 | ||||||||||||||||||||
| Cancellation of 77,597 shares of treasury stock | — | 3,156 | — | — | (3,156 | ) | — | — | |||||||||||||||||||
| Dividends, $.46 per share | — | — | (13,396 | ) | — | — | — | (13,396 | ) | ||||||||||||||||||
Distribution to noncontrolling interests | — | — | — | — | — | (165 | ) | (165 | ) | ||||||||||||||||||
| Balance, September 30, 2014 | 36,334 | 113,225 | 798,353 | (66,817 | ) | (109,950 | ) | 4,061 | 775,206 | ||||||||||||||||||
| Net income | — | — | 63,449 | — | — | (161 | ) | 63,288 | |||||||||||||||||||
| Minimum pension liability | — | — | — | (3,823 | ) | — | — | (3,823 | ) | ||||||||||||||||||
| Translation adjustment | — | — | — | (77,237 | ) | — | (150 | ) | (77,387 | ) | |||||||||||||||||
| Fair value of derivatives | — | — | — | (2,449 | ) | — | — | (2,449 | ) | ||||||||||||||||||
| Total comprehensive income | (20,371 | ) | |||||||||||||||||||||||||
| Stock-based compensation | — | 9,097 | — | — | — | — | 9,097 | ||||||||||||||||||||
| Purchase of 304,859 shares of treasury stock | — | — | — | — | (14,567 | ) | — | (14,567 | ) | ||||||||||||||||||
| Issuance of 334,850 shares of treasury stock | — | (7,336 | ) | — | — | 10,768 | — | 3,432 | |||||||||||||||||||
| Cancellation of 34,789 shares of treasury stock | — | 1,284 | — | — | (1,284 | ) | — | — | |||||||||||||||||||
| Dividends, $.54 per share | — | — | (17,847 | ) | — | — | — | (17,847 | ) | ||||||||||||||||||
Distribution to noncontrolling interests | — | — | — | — | — | (95 | ) | (95 | ) | ||||||||||||||||||
Acquisition of noncontrolling interests | — | (380 | ) | — | — | — | (429 | ) | (809 | ) | |||||||||||||||||
| Balance, September 30, 2015 | 36,334 | 115,890 | 843,955 | (150,326 | ) | (115,033 | ) | 3,226 | 734,046 | ||||||||||||||||||
| Net income | — | — | 66,749 | — | — | (588 | ) | 66,161 | |||||||||||||||||||
| Minimum pension liability | — | — | — | (12,576 | ) | — | — | (12,576 | ) | ||||||||||||||||||
| Translation adjustment | — | — | — | (17,655 | ) | — | (89 | ) | (17,744 | ) | |||||||||||||||||
| Fair value of derivatives | — | — | — | (1,311 | ) | — | — | (1,311 | ) | ||||||||||||||||||
| Total comprehensive income | 34,530 | ||||||||||||||||||||||||||
| Stock-based compensation | — | 10,612 | — | — | — | — | 10,612 | ||||||||||||||||||||
| Purchase of 1,132,452 shares of treasury stock | — | — | — | — | (57,998 | ) | — | (57,998 | ) | ||||||||||||||||||
| Issuance of 404,307 shares of treasury stock | — | (5,972 | ) | — | — | 14,162 | — | 8,190 | |||||||||||||||||||
| Cancellation of 5,237 shares of treasury stock | — | 244 | — | — | (244 | ) | — | — | |||||||||||||||||||
| Dividends | — | — | (14,480 | ) | — | — | — | (14,480 | ) | ||||||||||||||||||
Transactions with noncontrolling interests | — | (3,686 | ) | — | — | — | (1,880 | ) | (5,566 | ) | |||||||||||||||||
| Balance, September 30, 2016 | $ | 36,334 | $ | 117,088 | $ | 896,224 | $ | (181,868 | ) | $ | (159,113 | ) | $ | 669 | $ | 709,334 | |||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Additional | Comprehensive | Non- | ||||||||||||||||||||||||||
| Common | Paid-in | Retained | Income (Loss) | Treasury | controlling | |||||||||||||||||||||||
| Stock | Capital | Earnings | (net of tax) | Stock | interests | Total | ||||||||||||||||||||||
| Balance, September 30, 2011 | $ | 36,334 | $ | 48,554 | $ | 681,658 | $ | (58,658 | ) | $ | (243,246 | ) | $ | 3,451 | $ | 468,093 | ||||||||||||
| Net income | - | - | 55,843 | - | - | (639 | ) | 55,204 | ||||||||||||||||||||
| Minimum pension liability | - | - | - | (3,327 | ) | - | - | (3,327 | ) | |||||||||||||||||||
| Translation adjustment | - | - | - | (1,895 | ) | - | (29 | ) | (1,924 | ) | ||||||||||||||||||
| Fair value of derivatives | - | - | - | (1,203 | ) | - | - | (1,203 | ) | |||||||||||||||||||
| Total comprehensive income | 48,750 | |||||||||||||||||||||||||||
| Stock-based compensation | - | 5,472 | - | - | - | - | 5,472 | |||||||||||||||||||||
| Purchase of 1,015,879 shares | ||||||||||||||||||||||||||||
| of treasury stock | - | - | - | - | (31,017 | ) | - | (31,017 | ) | |||||||||||||||||||
Issuance of 196,076 shares of treasury stock | - | (6,426 | ) | - | - | 6,057 | - | (369 | ) | |||||||||||||||||||
| Cancellations of 7,931 shares | ||||||||||||||||||||||||||||
| of treasury stock | - | 293 | - | - | (293 | ) | - | - | ||||||||||||||||||||
| Dividends, $.37 per share | - | - | (10,325 | ) | - | - | - | (10,325 | ) | |||||||||||||||||||
| Distribution to noncontrolling interests | - | - | - | - | - | (170 | ) | (170 | ) | |||||||||||||||||||
| Balance, September 30, 2012 | 36,334 | 47,893 | 727,176 | (65,083 | ) | (268,499 | ) | 2,613 | 480,434 | |||||||||||||||||||
| Net income | - | - | 54,888 | - | - | (116 | ) | 54,772 | ||||||||||||||||||||
| Minimum pension liability | - | - | - | 29,347 | - | - | 29,347 | |||||||||||||||||||||
| Translation adjustment | - | - | - | 3,779 | - | 82 | 3,861 | |||||||||||||||||||||
| Fair value of derivatives | - | - | - | 5,017 | - | - | 5,017 | |||||||||||||||||||||
| Total comprehensive income | 92,997 | |||||||||||||||||||||||||||
| Stock-based compensation | - | 5,562 | - | - | - | - | 5,562 | |||||||||||||||||||||
Purchase of 619,981 shares of treasury stock | - | - | - | - | (21,622 | ) | - | (21,622 | ) | |||||||||||||||||||
Issuance of 295,079 shares of treasury stock | - | (8,125 | ) | - | - | 9,100 | - | 975 | ||||||||||||||||||||
| Cancellation of 47,084 shares | ||||||||||||||||||||||||||||
| of treasury stock | - | 1,985 | - | - | (1,985 | ) | - | - | ||||||||||||||||||||
| Dividends, $.41 per share | - | - | (11,282 | ) | - | - | - | (11,282 | ) | |||||||||||||||||||
| Distribution to noncontrolling interests | - | - | - | - | - | (767 | ) | (767 | ) | |||||||||||||||||||
| Arrangement-noncontrolling interest | - | - | 4,980 | - | - | 1,653 | 6,633 | |||||||||||||||||||||
| Balance, September 30, 2013 | 36,334 | 47,315 | 775,762 | (26,940 | ) | (283,006 | ) | 3,465 | 552,930 | |||||||||||||||||||
| Net income | - | - | 43,674 | - | - | 646 | 44,320 | |||||||||||||||||||||
| Minimum pension liability | - | - | - | (9,551 | ) | - | - | (9,551 | ) | |||||||||||||||||||
| Translation adjustment | - | - | - | (31,081 | ) | - | 115 | (30,966 | ) | |||||||||||||||||||
| Fair value of derivatives | - | - | - | 755 | - | - | 755 | |||||||||||||||||||||
| Total comprehensive income | 4,558 | |||||||||||||||||||||||||||
| Stock-based compensation | - | 6,812 | - | - | - | - | 6,812 | |||||||||||||||||||||
Purchase of 228,789 shares treasury stock | - | - | - | - | (9,905 | ) | - | (9,905 | ) | |||||||||||||||||||
Issuance of 5,936,169 shares treasury stock | - | 55,942 | - | - | 186,117 | - | 242,059 | |||||||||||||||||||||
| Cancellations of 77,597 shares | ||||||||||||||||||||||||||||
| of treasury stock | 3,156 | - | - | (3,156 | ) | - | - | |||||||||||||||||||||
| Dividends, $.46 per share | - | - | (13,396 | ) | - | - | - | (13,396 | ) | |||||||||||||||||||
| Distribution to noncontrolling interests | - | - | - | - | - | (165 | ) | (165 | ) | |||||||||||||||||||
| Balance, September 30, 2014 | $ | 36,334 | $ | 113,225 | $ | 806,040 | $ | (66,817 | ) | $ | (109,950 | ) | $ | 4,061 | $ | 782,893 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 2014, 20132016, 2015 and 20122014
(Dollar amounts in thousands, except per share data)thousands)
| 2014 | 2013 | 2012 | 2016 | 2015 | 2014 | ||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income | $ | 44,320 | $ | 54,772 | $ | 55,204 | $ | 66,161 | $ | 63,288 | $ | 43,271 | |||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Depreciation and amortization | 42,864 | 37,865 | 28,821 | 65,480 | 62,620 | 42,864 | |||||||||||||||||
| Stock-based compensation expense | 6,812 | 5,562 | 5,472 | 10,612 | 9,097 | 6,812 | |||||||||||||||||
| Increase in deferred taxes | 5,893 | 3,812 | 6,050 | ||||||||||||||||||||
| Change in deferred taxes | (3,971 | ) | 9,188 | 5,222 | |||||||||||||||||||
| Gain on sale of assets | (228 | ) | (347 | ) | (2,418 | ) | (73 | ) | (276 | ) | (228 | ) | |||||||||||
| Gain on sale of investment | (1,064 | ) | (1,666 | ) | (2,839 | ) | |||||||||||||||||
| Unrealized (gain) loss on investments | (1,426 | ) | 377 | (1,064 | ) | ||||||||||||||||||
| Trade name write-offs | — | 4,842 | — | ||||||||||||||||||||
| Changes in working capital items | (6,165 | ) | (3,003 | ) | (16,403 | ) | 13,715 | (2,751 | ) | (6,165 | ) | ||||||||||||
| Decrease in other assets | 944 | 1,628 | 4,456 | ||||||||||||||||||||
| (Decrease) increase in other liabilities | (3,568 | ) | 2,789 | (3,854 | ) | ||||||||||||||||||
Increase in pension and postretirement benefit obligations | 3,755 | 11,839 | 7,634 | ||||||||||||||||||||
| (Increase) decrease in other assets | (5,591 | ) | 4,064 | 944 | |||||||||||||||||||
| Increase (decrease) in other liabilities | 5,397 | (8,041 | ) | (3,568 | ) | ||||||||||||||||||
(Decrease) increase in pension and postretirement benefit obligations | (2,465 | ) | 8,652 | 3,755 | |||||||||||||||||||
| Other, net | (1,164 | ) | (3,925 | ) | 1,203 | (7,565 | ) | (9,996 | ) | (1,164 | ) | ||||||||||||
| Net cash provided by operating activities | 92,399 | 109,326 | 83,326 | 140,274 | 141,064 | 90,679 | |||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Capital expenditures | (29,237 | ) | (24,924 | ) | (33,236 | ) | (41,682 | ) | (48,251 | ) | (29,237 | ) | |||||||||||
| Acquisitions, net of cash acquired | (382,104 | ) | (73,959 | ) | (12,541 | ) | (6,937 | ) | (213,470 | ) | (382,104 | ) | |||||||||||
| Proceeds from sale of assets | 262 | 252 | 1,461 | 1,478 | 1,062 | 262 | |||||||||||||||||
| Purchases of investment securities | - | - | (958 | ) | |||||||||||||||||||
| Proceeds from dispositions of investments | - | - | - | ||||||||||||||||||||
| Proceeds from sale of subsidiary | — | 10,418 | — | ||||||||||||||||||||
| Restricted cash | — | (12,925 | ) | — | |||||||||||||||||||
| Net cash used in investing activities | (411,079 | ) | (98,631 | ) | (45,274 | ) | (47,141 | ) | (263,166 | ) | (411,079 | ) | |||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from long-term debt | 415,709 | 116,482 | 53,330 | 90,421 | 279,377 | 415,709 | |||||||||||||||||
| Payments on long-term debt | (58,431 | ) | (83,293 | ) | (53,056 | ) | (120,380 | ) | (100,218 | ) | (58,431 | ) | |||||||||||
| Payment on contingent consideration | (3,703 | ) | (11,315 | ) | - | — | (484 | ) | (3,703 | ) | |||||||||||||
| Purchases of treasury stock | (9,905 | ) | (21,622 | ) | (31,017 | ) | (57,998 | ) | (14,567 | ) | (9,905 | ) | |||||||||||
| Proceeds from the sale of treasury stock | 7,951 | 974 | 267 | ||||||||||||||||||||
| Proceeds from the exercise of stock options | 6,406 | 4,015 | 7,951 | ||||||||||||||||||||
| Dividends | (13,396 | ) | (11,282 | ) | (10,325 | ) | (19,413 | ) | (17,847 | ) | (13,396 | ) | |||||||||||
| Distributions to noncontrolling interests | (165 | ) | (767 | ) | (170 | ) | |||||||||||||||||
| Net cash provided by (used in) financing activities | 338,060 | (10,823 | ) | (40,971 | ) | ||||||||||||||||||
| Transactions with noncontrolling interests | (5,566 | ) | (904 | ) | (165 | ) | |||||||||||||||||
| Settlement of multi-employer pension plan obligation | — | (18,157 | ) | — | |||||||||||||||||||
| Other financing activities | (2,318 | ) | — | — | |||||||||||||||||||
| Net cash (used in) provided by financing activities | (108,848 | ) | 131,215 | 338,060 | |||||||||||||||||||
| Effect of exchange rate changes on cash | (2,735 | ) | 828 | (484 | ) | (770 | ) | 80 | (2,735 | ) | |||||||||||||
| Net change in cash and cash equivalents | 16,645 | 700 | (3,403 | ) | (16,485 | ) | 9,193 | 14,925 | |||||||||||||||
| Cash and cash equivalents at beginning of year | 58,959 | 58,259 | 61,662 | 72,196 | 63,003 | 48,078 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 75,604 | $ | 58,959 | $ | 58,259 | $ | 55,711 | $ | 72,196 | $ | 63,003 | |||||||||||
| Cash paid during the year for: | |||||||||||||||||||||||
| Interest | $ | 12,570 | $ | 13,059 | $ | 11,464 | $ | 24,133 | $ | 19,663 | $ | 12,570 | |||||||||||
| Income taxes | 16,177 | 29,428 | 22,765 | 11,855 | 11,663 | 16,177 | |||||||||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||||||||
| Acquisition of equipment under capital lease | $ | 949 | $ | 1,276 | $ | 1,125 | $ | — | $ | — | $ | 949 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Matthews International Corporation ("Matthews" or the "Company"), founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principallyglobal provider of brand solutions, memorialization products and industrial technologies. Brand solutions include brand solutions.development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services). Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment primarily for the cemetery and funeral home industries. Brand solutionsIndustrial technologies include graphics imaging products and services, merchandising solutions, and marking and fulfillment systems products. The Company's products and operations are comprised of six business segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Merchandising Solutions, and Marking and Fulfillment Systems. The Cemetery Products segment is a leading manufacturer of cast bronze and granite memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States. The Funeral Home Products segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood, metal and cremation caskets. The Cremation segment is a leading designer and manufacturer of cremation equipment in North America and Europe. The Graphics Imaging segment provides brand development, brand management, printing plates, gravure cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, and the primary packaging and corrugated industries. At September 30, 2014, the Graphics Imaging segment included the acquisition of Schawk, Inc. ("Schawk"), a global brand development, activation and deployment company, in July 2014. The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services. The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of 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 has manufacturingproduction and marketing facilities in the United States, Mexico,Europe, Asia, Canada, Europe, Australia, and Asia.Central and South America.
| 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Principles of Consolidation:
The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control. All intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Trade Receivables and Allowance for Doubtful Accounts:
Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are more than 30 days past due. The allowance for doubtful accounts is based on an evaluation of specific customer accounts for which available facts and circumstances indicate collectability may be uncertain. In addition, the allowance includes a reserve for all customers based on historical collection experience.
Inventories:
Inventories are stated at the lower of cost or market with cost generally determined under the average cost method. Inventory costs include material, labor, and applicable manufacturing overhead and other direct costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the assets, which generally range from 10 to 45 years for buildings and 3 to 12 years for machinery and equipment. Gains or losses from the disposition of assets are reflected in operating profit. The cost of maintenance and repairs is charged against incometo expense as incurred. Renewals and betterments of a nature considered to extend the useful lives of the assets are capitalized. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets is determined by evaluating the estimated undiscounted net cash flows of the operations to which the assets relate. An impairment loss would be recognized when the carrying amount of the assets exceeds the fair value, which is based on a discounted cash flow analysis. No such charges were recognized during the years presented.
Goodwill and Other Intangible Assets:
Intangible assets with finite useful lives are amortized over their estimated useful lives, ranging from 2 to 20 years, and are reviewed when appropriate for possible impairment, similar to property, plant and equipment. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to annual reviewtested annually for impairment. Other intangible assets are amortized over their estimated useful lives, ranging from 2 to 20 years.impairment, or when circumstances indicate that a possible impairment may exist. In general, when the carrying value of a reporting unitthese assets exceeds itsthe implied fair value, an impairment loss must be recognized. For purposes of testing for impairment, the Company uses a combination of valuation techniques, including discounted cash flows. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. For purposes of testing indefinite–livedgoodwill for impairment, the Company uses a combination of valuation techniques, including discounted cash flows. For purposes of testing indefinite-lived intangible assets, the Company generally uses a relief from royalty method.
Pension and Other Postretirement Plans:
Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost.
Environmental:
Costs that mitigate or prevent future environmental issues or extend the life or improve equipment utilized in current operations are capitalized and depreciated on a straight-line basis over the estimated useful lives of the related assets. Costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company's obligation is probable and reasonably estimable. Accruals for losses from environmental remediation obligations do not consider the effects of inflation, and anticipated expenditures are not discounted to their present value.
Derivatives and Hedging:
Derivatives are held as part of a formal documented hedging program. All derivatives are held for purposes other than trading. Matthews measures effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or future cash flows of the hedged item. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains and losses on the derivative will be recorded in other income (deductions) at that time.
Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), net of tax, and are reclassified to earnings in a manner consistent with the underlying hedged item. The cash flows from derivative activities are recognized in the statement of cash flows in a manner consistent with the underlying hedged item.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
The functional currency of the Company's foreign subsidiaries is the local currency. Balance sheet accounts for foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the consolidated balance sheet date. Gains or losses that result from this process are recorded in accumulated other comprehensive income (loss). The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevailed during the period. Realized gains and losses from foreign currency transactions are presented in the Statement of Income in a consistent manner with the underlying transaction based upon the provisions of Accounting Standards Codification ("ASC") 830 "Foreign Currency Matters."
Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income adjusted for changes, net of any related income tax effect, in cumulative foreign currency translation, the fair value of derivatives, unrealized investment gains and losses and minimum pension liability.
Treasury Stock:
Treasury stock is carried at cost. The cost of treasury shares sold is determined under the average cost method.
Revenue Recognition:
Revenues are generally recognized when title, ownership, and risk of loss pass to the customer, which is typically at the time of product shipment and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product and customer.
For pre-need sales of memorials and vases, revenue is recognized when the memorial has been manufactured to the customer's specifications (e.g., name and birth date), title has been transferred to the customer and the memorial and vase are placed in storage for future delivery. A liability has been recorded for the estimated costs of finishing pre-need bronze memorials and vases that have been manufactured and placed in storage prior to July 1, 2003 for future delivery. Beginning July 1, 2003, revenue is deferred by the Company on the portion of pre-need sales attributable to the final finishing and storage of the pre-need merchandise. Deferred revenue for final finishing is recognized at the time the pre-need merchandise is finished and shipped to the customer. Deferred revenue related to storage is recognized on a straight-line basis over the estimated average time that pre-need merchandise is held in storage. At September 30, 2014,2016, the Company held 319,134307,946 memorials and 224,204214,583 vases in its storage facilities under the pre-need sales program.
Revenues from mausoleum construction and significant engineering projects, including certain roto-gravure projects, cremation units and marking and industrial automation projects, are recognized under the percentage-of-completion method of accounting using the cost-to-cost basis for measuring progress toward completion. As work is performed under contracts, estimates of the costs to complete are regularly reviewed and updated. As changes in estimates of total costs at completion on projects are identified, appropriate earnings adjustments are recorded using the cumulative catch-up method. Provisions for estimated losses on uncompleted contracts are recorded during the period in which such losses become evident.
Revenues from brand development and deployment services are recognized using the completed performance method, which is typically when the customer receives the final deliverable. For arrangements with customer acceptance provisions, revenue is recognized when the customer approves the final deliverable.
All fees billed to the customer for shipping and handling are classified as a component of net revenues. All costs associated with shipping and handling are classified as a component of cost of sales or selling expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
Research and Development Expenses:
Research and development costs are expensed as incurred and were approximately $14,793, $13,033 and $7,814 for the years ended September 30, 2016, 2015 and 2014, respectively.
Stock-Based Compensation:
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. A binomial lattice model is utilized to determine the fair value of awards that have vesting conditions based on market targets.
Income Taxes:
Earnings Per Share:
Basic earnings per share is computed by dividing net income by the average number of common shares outstanding. Diluted earnings per share is computed using the treasury stock method, which assumes the issuance of common stock for all dilutive securities.
Issued
In August 2016, the consolidated financial statements of prior years have been revised to conform to the current period's presentation. Specifically, costs in excess of billings related to the Company's percentage-of-completion arrangements are presented in Other Current Assets for all periods. Additionally, billings in excess of costs and customer prepayments related to the Company's percentage-of-completion arrangements are presented in Other Current Liabilities for all periods. The revision resulted in an $11,739 increase to Other Current Assets with a corresponding decrease to Accounts Receivable and Inventory at September 30, 2013. It also resulted in a $2,805 increase to Other Current Liabilities with a decrease to Other Liabilities at September 30, 2013. In addition, certain reclassifications have been made to adjust for bank overdrafts in the Consolidated Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides new guidance intended to clarify the presentation of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, and insurance proceeds, among other things. This ASU is effective for the year ended September 30, 2013 and 2012 and on the Consolidated Balance Sheet for theCompany beginning in interim periods starting in fiscal year ended September 30, 2013. These revisions are not material to any2019, and early adoption is permitted. The Company is in the process of assessing the prior years presented.impact this ASU will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
3. ACCOUNTING PRONOUNCEMENTS, (continued)
| In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides new guidance on how an entity should account for leases and recognize associated lease assets and liabilities. This ASU requires lessees to recognize assets and liabilities that arise from financing and operating leases on the consolidated balance sheet. The implementation of this standard will require application of the new guidance at the beginning of the earliest comparative period presented, once adopted. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2020, and does allow for early adoption. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principle versus Agent Considerations (Reporting Revenue Gross versus Net), which coincides with ASU 2014-09 and provides additional guidance in the determination of principles versus agents. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The Company is in the process of assessing the impact this ASU, along with ASU 2014-09, will have on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which provides new guidance intended to simplify the accounting surrounding share-based compensation. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2018. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements. In April and May 2016, the FASB issued ASU Nos. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, respectively. Both of these ASUs coincide with ASU 2014-09 and provide additional guidance in the determination of performance obligations and implementation expedients. The Company is in the process of assessing the impact these ASUs, along with ASU 2014-09, will have on its consolidated financial statements. In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which provides new guidance to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new inventory measurement requirements are effective for the Company's 2017 fiscal year, and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. This standard is now effective for Matthews beginning October 1, 2018. The Company is in the process of assessing the impact the adoption of this ASU will have on its consolidated financial statements. Adopted In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Income Taxes - Topic 740), which provides new guidance intended to simplify the presentation of deferred income taxes in a classified statement of financial position. The new deferred income tax guidance requires that all deferred income tax balances be classified as non-current assets and liabilities on the classified statement of financial position. The Company adopted this standard in fiscal 2016, and retrospectively adjusted the prior period presentation to conform to the new standard. The adoption resulted in a $19,753 decrease in current deferred tax assets and a $340 decrease in current deferred tax liabilities, and a corresponding increase to non-current deferred tax assets of $346 and a decrease to non-current deferred tax liabilities of $19,067 in the September 30, 2015 Consolidated Balance Sheet. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands, except per share data) 3. ACCOUNTING PRONOUNCEMENTS, (continued) In March 2016, the FASB issued ASU No. 2016-7, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which provides new guidance intended to simplify equity method accounting. Investments that qualify for equity method accounting will no longer apply the equity method retrospectively to previously recorded cost investments. The adoption of this ASU in fiscal 2016 had no material impact on the Company's consolidated financial statements. In April and August 2015, the FASB issued ASU Nos. 2015-3, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Lines-of-Credit Arrangements, respectively. The new guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of debt, consistent with debt discounts. The guidance also allows for debt issuance costs related to line-of-credit arrangements to be presented as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements. The adoption of this guidance in fiscal 2016 had no material impact on the Company's consolidated financial statements. 4. FAIR VALUE MEASUREMENTS: |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes aA three level fair value hierarchy is used to prioritize the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.
As of September 30, 20142016 and 2013,2015, the fair values of the Company's assets and liabilities measured on a recurring basis were categorized as follows:
| September 30, 2014 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 2,457 | $ | - | $ | 2,457 | ||||||||
| Trading securities | 19,038 | - | - | 19,038 | ||||||||||||
| Total assets at fair value | $ | 19,038 | $ | 2,457 | $ | - | $ | 21,495 | ||||||||
| Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 2,127 | $ | - | $ | 2,127 | ||||||||
| Total liabilities at fair value | $ | - | $ | 2,127 | $ | - | $ | 2,127 | ||||||||
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy. | ||||||||||||||||
| September 30, 2013 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 3,736 | $ | - | $ | 3,736 | ||||||||
| Trading securities | 17,929 | - | $ | - | 17,929 | |||||||||||
| Total assets at fair value | $ | 17,929 | $ | 3,736 | - | $ | 21,665 | |||||||||
| Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 4,644 | $ | - | $ | 4,644 | ||||||||
| Total liabilities at fair value | $ | - | $ | 4,644 | $ | - | $ | 4,644 | ||||||||
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy. | ||||||||||||||||
| September 30, 2016 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | |||||||||||||||
| Derivatives (1) | $ | — | $ | 193 | $ | — | $ | 193 | |||||||
| Equity and fixed income mutual funds | — | 19,790 | — | 19,790 | |||||||||||
| Other investments | — | 5,127 | — | 5,127 | |||||||||||
| Total assets at fair value | $ | — | $ | 25,110 | $ | — | $ | 25,110 | |||||||
| Liabilities: | |||||||||||||||
| Derivatives (1) | $ | — | $ | 6,027 | $ | — | $ | 6,027 | |||||||
| Total liabilities at fair value | $ | — | $ | 6,027 | $ | — | $ | 6,027 | |||||||
| (1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy. | |||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
4. FAIR VALUE MEASUREMENTS, (continued):
5. INVENTORIES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories at September 30, 20142016 and 20132015 consisted of the following:
| 2014 | 2013 | |||||||
| Raw materials | $ | 46,152 | $ | 40,931 | ||||
| Work in process | 38,631 | 24,336 | ||||||
| Finished goods | 68,059 | 64,544 | ||||||
| $ | 152,842 | $ | 129,811 | |||||
| 2016 | 2015 | ||||||
| Raw materials | $ | 29,597 | $ | 48,636 | |||
| Work in process | 54,357 | 32,567 | |||||
| Finished goods | 78,518 | 90,220 | |||||
| $ | 162,472 | $ | 171,423 | ||||
Investment securities are recorded at estimated marketfair value at the consolidated balance sheet date and are classified as trading securities. Short-term investments consisted principally of corporate obligations with purchased maturities of over three months but less than one year. The cost of short-term investments approximated market value at September 30, 2014 and 2013. Accrued interest on these investment securities was classified with short-term investments. Investments classified as non-current and trading securities primarily consisted of equity and fixed income mutual funds.
| 2014 | 2013 | |||||||
| Trading securities: | ||||||||
| Mutual funds | $ | 19,038 | $ | 17,929 | ||||
| Equity investments | 4,092 | 4,359 | ||||||
| $ | 23,130 | $ | 22,288 | |||||
At September 30, 2016 and 2015, non-current investments were as follows:
| 2016 | 2015 | ||||||
| Trading securities | $ | 19,790 | $ | 18,444 | |||
| Other investments | 11,575 | 7,073 | |||||
| $ | 31,365 | $ | 25,517 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and the related accumulated depreciation at September 30, 20142016 and 20132015 were as follows:
| 2014 | 2013 | |||||||
| Buildings | $ | 91,540 | $ | 77,936 | ||||
| Machinery and equipment | 340,942 | 303,674 | ||||||
| 432,482 | 381,610 | |||||||
| Less accumulated depreciation | (250,073 | ) | (233,791 | ) | ||||
| 182,409 | 147,819 | |||||||
| Land | 16,453 | 15,534 | ||||||
| Construction in progress | 10,453 | 17,378 | ||||||
| $ | 209,315 | $ | 180,731 | |||||
| 2016 | 2015 | ||||||
| Buildings | $ | 102,153 | $ | 101,291 | |||
| Machinery and equipment | 378,650 | 350,890 | |||||
| 480,803 | 452,181 | ||||||
| Less accumulated depreciation | (305,613 | ) | (274,187 | ) | |||
| 175,190 | 177,994 | ||||||
| Land | 19,705 | 19,847 | |||||
| Construction in progress | 24,597 | 29,567 | |||||
| $ | 219,492 | $ | 227,408 | ||||
Depreciation expense, including amortization of assets under capital lease, was $35,546, $31,303$44,659, $43,820 and $24,630$35,546 for each of the three years ended September 30, 2014, 20132016, 2015 and 2012,2014, respectively.
Long-term debt at September 30, 20142016 and 20132015 consisted of the following:
| 2014 | 2013 | |||||||
| Revolving credit facilities | $ | 702,055 | $ | 335,420 | ||||
| Notes payable to banks | 13,315 | 21,530 | ||||||
| Short-term borrowings | 6,410 | 8,612 | ||||||
| Capital lease obligations | 7,475 | 9,093 | ||||||
| 729,255 | 374,655 | |||||||
| Less current maturities | (15,228 | ) | (23,587 | ) | ||||
| $ | 714,027 | $ | 351,068 | |||||
| 2016 | 2015 | ||||||
| Revolving credit facilities | $ | 608,000 | $ | 884,254 | |||
| Senior secured term loan | 246,449 | — | |||||
| Notes payable to banks | 5,301 | 8,506 | |||||
| Short-term borrowings | 8,617 | 5,199 | |||||
| Capital lease obligations | 4,187 | 4,995 | |||||
| 872,554 | 902,954 | ||||||
| Less current maturities | (27,747 | ) | (11,737 | ) | |||
| $ | 844,807 | $ | 891,217 | ||||
The Company has a domestic Revolving Credit Facilitycredit facility with a syndicate of financial institutions. Ininstitutions that was amended and restated in April 2016 to increase the total borrowing capacity from $900,000 to $1,150,000. The Company incurred debt issuance costs of approximately $2,318 in connection with the acquisition of Schawk in July 2014,amended and restated agreement, which will be deferred and amortized over the Company entered into amendments to the Revolving Credit Facility to amend certain termsterm of the Revolving Credit Facilityfacility.
The amended and increaserestated agreement includes a $900,000 senior secured revolving credit facility and a $250,000 senior secured term loan. The term loan requires scheduled principal payments of 5.0% of the maximum amountoutstanding principal in year one, 7.5% in year two, and 10.0% in years three through five, payable in quarterly installments. The balance of borrowings available under the revolving credit facility from $500,000 to $900,000.and the term loan are due on the maturity date of April 26, 2021. Borrowings under both the amendedrevolving credit facility and the term loan bear interest at LIBOR plus a factor ranging from .75%0.75% to 2.00% (1.75% at September 30, 2014)2016) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). The Company is required to pay an annual commitment fee ranging from .15%0.15% to .25%0.25% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
8. LONG-TERM DEBT, (continued)
The Revolving Credit Facilityamended and restated agreement requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $30,000)$35,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facilityrevolving credit facility at September 30, 20142016 and 20132015 were $680,000$608,000 and $305,000,$857,425, respectively. Outstanding borrowings on the term loan at September 30, 2016 was $246,449. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at September 30, 20142016 and 20132015 was 2.53%2.59% and 2.81%2.41%, respectively.
The Company hasfollowing table presents information related to interest rate contracts entered into by the following interest rate swaps:Company and designated as cash flow hedges:
| Effective Date | Amount | Fixed Interest Rate | Interest Rate Spread at September 30, 2014 | Maturity Date |
| October 2011 | $25,000 | 1.67% | 1.75% | October 2015 |
| November 2011 | 25,000 | 2.13% | 1.75% | November 2014 |
| March 2012 | 25,000 | 2.44% | 1.75% | March 2015 |
| June 2012 | 40,000 | 1.88% | 1.75% | June 2022 |
| August 2012 | 35,000 | 1.74% | 1.75% | June 2022 |
| September 2012 | 25,000 | 3.03% | 1.75% | December 2015 |
| September 2012 | 25,000 | 1.24% | 1.75% | March 2017 |
| November 2012 | 25,000 | 1.33% | 1.75% | November 2015 |
| May 2014 | 25,000 | 1.35% | 1.75% | May 2018 |
| Year Ended September 30, 2016 | Year Ended September 30, 2015 | |||||||
| Pay fixed swaps - notional amount | $ | 403,125 | $ | 300,000 | ||||
| Net unrealized loss | $ | 5,834 | $ | 3,686 | ||||
| Weighted-average maturity period (years) | 3.9 | 3.4 | ||||||
| Weighted-average received rate | 0.53 | % | 0.20 | % | ||||
| Weighted-average pay rate | 1.26 | % | 1.65 | % | ||||
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 the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company's assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.
The fair value of the interest rate swaps reflected an unrealized gain,loss, net of unrealized losses,gains, of $330$5,834 ($2013,559 after tax) and an unrealized loss, net of unrealized gains, of $908$3,686 ($5542,248 after tax) at September 30, 20142016 and 2013,2015, respectively, that is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI"). Assuming market rates remain constant with the rates at September 30, 2014,2016, a loss (net of tax) of approximately $905$906 included in AOCI is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.
At September 30, 20142016 and 2013,2015, the interest rate swap contracts were reflected on a gross-basis in the consolidated balance sheets as follows:
Derivatives | 2014 | 2013 | ||||||
| Current assets | ||||||||
| Other current assets | $ | 324 | $ | 427 | ||||
| Long-term assets | ||||||||
| Other assets | 2,133 | 3,309 | ||||||
| Current liabilities: | ||||||||
| Other current liabilities | (1,808 | ) | (2,590 | ) | ||||
| Long-term liabilities: | ||||||||
| Other liabilities | (319 | ) | (2,054 | ) | ||||
| Total derivatives | $ | 330 | $ | (908 | ) | |||
| Derivatives: | 2016 | 2015 | |||||
| Current assets: | |||||||
| Other current assets | $ | 43 | $ | — | |||
| Long-term assets: | |||||||
| Other assets | 150 | — | |||||
| Current liabilities: | |||||||
| Other current liabilities | (1,529 | ) | (1,165 | ) | |||
| Long-term liabilities: | |||||||
| Other liabilities | (4,498 | ) | (2,521 | ) | |||
| Total derivatives | $ | (5,834 | ) | $ | (3,686 | ) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
8. LONG-TERM DEBT, (continued)
The loss recognized on derivatives was as follows:
| Location of | Amount of | ||
| Derivatives in | Loss | Loss | |
| Cash Flow Hedging | Recognized in | Recognized in Income | |
| Relationships | Income on Derivatives | on Derivatives | |
| 2014 | 2013 | ||
| Interest rate swaps | Interest expense | $(4,318) | $(4,170) |
| Derivatives in Cash Flow Hedging Relationships | Location of Loss Recognized in Income on Derivatives | Amount of Loss Recognized in Income on Derivatives | ||||
| 2016 | 2015 | |||||
| Interest rate swaps | Interest expense | $(3,146) | $(3,922) | |||
The Company recognized the following losses in accumulated other comprehensive income ("AOCI"):AOCI:
| Location of Gain | Amount of Loss | ||||||||||||||||
| or (Loss) | Reclassified from | ||||||||||||||||
| Derivatives in | Amount of Gain or | Reclassified from | AOCI | ||||||||||||||
| Cash Flow | (Loss) Recognized in | AOCI | into Income | ||||||||||||||
| Hedging | AOCI on Derivatives | into Income | (Effective Portion*) | ||||||||||||||
| Relationships | 2014 | 2013 | (Effective Portion*) | 2014 | 2013 | ||||||||||||
| Interest rate swaps | $(1,879) | $2,474 | Interest expense | $(2,634) | $(2,544) | ||||||||||||
*There is no ineffective portion or amount excluded from effectiveness testing. | |||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | Amount of Loss Recognized in AOCI on Derivatives | Location of Gain or (Loss) Reclassified from AOCI into Income | Amount of Loss Reclassified from AOCI into Income(Effective Portion*) | |||||||
| 2016 | 2015 | (Effective Portion*) | 2016 | 2015 | ||||||
| Interest rate swaps | $(3,230) | $(4,841) | Interest expense | $(1,919) | $(2,392) | |||||
| *There is no ineffective portion or amount excluded from effectiveness testing. | ||||||||||
The Company, through certain of its European subsidiaries, has a credit facility with a European bank. The maximum amount of borrowings available under this facility is 25.035.0 million Euros ($31,580)39,237). OutstandingThere were no outstanding borrowings under the credit facility totaled 17.5at September 30, 2016. Outstanding borrowings under this facility were 23.9 million Euros ($22,055) and 22.5 million Euros ($30,434)26,829) at September 30, 2014 and 2013, respectively.2015. The weighted-average interest rate on outstanding borrowings under this facility at September 30, 20142016 and 20132015 was 1.35%1.75% and 1.37%1.50%, respectively.
The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings onunder these loans totaled 1.2 million255,200 Euros ($1,576)286) and 1.7 million734,452 Euros ($2,310)824) at September 30, 20142016 and 2013,2015, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at September 30, 20142016 and 20132015 was 3.96%4.06% and 4.04%, respectively.
The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled 2.9830,220 Euros ($931) and 1.9 million Euros ($3,624) and 7.4 million Euros ($10,000)2,110) at September 30, 20142016 and 2013,2015, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at September 30, 20142016 and 20132015 was 5.67%6.22% and 7.48%5.96%, respectively.
The Company, through its wholly-ownedItalian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 5.53.2 million Euros ($6,922)3,538) and 5.14.3 million Euros ($6,871)4,772) at September 30, 20142016 and 2013,2015, respectively. Matthews International S.p.A. also has threemultiple lines of credit totaling 11.3 million Euros ($14,312)12,701) with the same Italian banks. Outstanding borrowings on these lines were 4.85.2 million Euros ($6,063)5,801) and 5.64.6 million Euros ($7,639)5,166) at September 30, 20142016 and 2013,2015, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at September 30, 20142016 and 20132015 was 3.15%1.8% and 3.16%3.33%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
8. LONG-TERM DEBT, (continued)
In September 2014, a claim was filed seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($11,115 at September 30, 2016) with respect to a performance guarantee on a project for a customer in Saudi Arabia. Management assessed the customer's claim to be without merit and initiated an action with the U.K. court. Pursuant to this action, a court order was issued in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the court as ordered. On June 14, 2016, the court ruled completely in favor of Matthews following a trial on the merits. However, as the customer has not yet remitted the funds, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. As of September 30, 2016 and 2015, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.
As of September 30, 20142016 and 2013,2015, the fair value of the Company's long-term debt, including current maturities, which is classified as Level 2 in the fair value hierarchy, approximated the carrying value included in the Consolidated Balance Sheets.
Aggregate maturities of long-term debt, including short-term borrowings and capital leases, is as follows:
| 2015 | $ | 15,228 | ||
| 2016 | 6,115 | |||
| 2017 | 23,853 | |||
| 2018 | 680,803 | |||
| 2019 | 213 | |||
| Thereafter | 3,043 | |||
| $ | 729,255 |
| 2017 | $ | 27,747 | |
| 2018 | 21,470 | ||
| 2019 | 25,212 | ||
| 2020 | 25,222 | ||
| 2021 | 770,304 | ||
| Thereafter | 2,599 | ||
| $ | 872,554 | ||
The authorized common stock of the Company consists of 70,000,000 shares of Class A Common Stock, $1$1.00 par value.
The Company has a stock repurchase program. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company's Restated Articles of Incorporation. Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,0005,000,000 shares of Matthews' common stock under the program, of which 965,8812,028,570 shares remain available for repurchase as of September 30, 2014.2016.
| 2014 | 2013 | |||||||
| Cumulative foreign currency translation | $ | (27,367 | ) | $ | 3,714 | |||
| Fair value of derivatives, net of tax of $129 and $354, respectively | 201 | (554 | ) | |||||
| Minimum pension liabilities, net of tax of $25,058 and $18,979, respectively | (39,651 | ) | (30,100 | ) | ||||
| $ | (66,817 | ) | $ | (26,940 | ) | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
10. SHARE-BASED PAYMENTS:
The Company maintains an equity incentive plan (the "2012 Equity Incentive Plan") that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards. The Company also maintains an equity incentive plan (the "2007 Equity Incentive Plan") and a stock incentive plan (the "1992 Incentive Stock Plan") that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards. Under the 2012 Equity Incentive Plan, which has a ten-yearten years term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000. There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan. At September 30, 2014,2016, there were 1,907,538 1,022,548shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.
The option price for each stock option granted under any of the plans may not be less than the fair market value of the Company's common stockClass A Common Stock on the date of grant. Outstanding stock options are generally exercisable in one-third increments upon the attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. In addition, options generally vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the market value thresholds). The options expire on the earlier of ten 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 generally settles employee stock option exercises with treasury shares.
With respect to outstanding restricted share grants, for grants made prior to fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, with the remaining one-half of the shares vesting in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. For grants made in and after fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock. Additionally, restricted shares cannot vest until the first anniversary of the grant date. Unvested restricted shares generally expire on the earlier of five years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company issues restricted shares from treasury shares.
For the years ended September 30, 2014, 20132016, 2015 and 2012,2014, stock-based compensation cost totaled $6,812, $5,562$10,612, $9,097 and $5,472,$6,812, respectively. The associated future income tax benefit recognized was $2,657, $2,169$4,139, $3,548 and $2,134$2,657 for the years ended September 30, 2014, 20132016, 2015 and 2012,2014, respectively.
The amount of cash received from the exercise of stock options was $7,951, $974$6,406, $4,015 and $267,$7,951, for the years ended September 30, 2014, 20132016, 2015 and 2012,2014, respectively. In connection with these exercises, the tax benefits realized by the Company were $698, $99$932, $350 and $22$698 for the years ended September 30, 2014, 20132016, 2015 and 2012,2014, respectively.
| Weighted- | ||||||||
| average | ||||||||
| grant-date | ||||||||
| Shares | fair value | |||||||
| Non-vested at September 30, 2013 | 641,399 | $29.46 | ||||||
| Granted | 296,231 | 38.23 | ||||||
| Vested | (285,063 | ) | 29.39 | |||||
| Expired or forfeited | (77,417 | ) | 30.84 | |||||
| Non-vested at September 30, 2014 | 575,150 | 33.83 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
10.SHARE-BASED PAYMENTS, (continued)