1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Quarterly Period Ended June 30, 2002
Commission File Nos. 0-9115 and 0-24494
MATTHEWS INTERNATIONAL CORPORATION
(Exact Name of registrant as specified in its charter)
PENNSYLVANIA 25-0644320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTHSHORE CENTER, PITTSBURGH, PA 15212-5851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 442-8200
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Class of Common Stock Outstanding at July 31, 2002
Class A - $1.00 par value 31,167,406 shares
2
PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Amounts in thousands, except per share data)
June 30, 2002 September 30, 2001
------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,133 $ 28,691
Short-term investments 4,548 240
Accounts receivable 66,429 52,086
Inventories: Materials and finished goods $ 23,508 $ 16,816
Labor and overhead in process 1,252 1,520
Supplies 482 437
---------- ----------
25,242 18,773
Other current assets 4,673 2,538
----------- ----------
Total current assets 158,025 102,328
Investments 4,653 18,048
Property, plant and equipment: Cost 132,774 95,418
Less accumulated depreciation (56,333) (46,409)
---------- ----------
76,441 49,009
Deferred income taxes and other assets 21,295 14,982
Goodwill and other intangible assets, net 158,418 104,585
----------- -----------
Total assets $ 418,832 $ 288,952
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current maturities 6,081 5,023
Accounts payable 18,092 12,971
Accrued compensation 21,600 16,283
Accrued income taxes 5,493 4,962
Customer prepayments 5,435 6,130
Other current liabilities 29,311 21,170
---------- ----------
Total current liabilities 86,012 66,539
Long-term debt 105,706 40,726
Estimated finishing costs 7,732 7,401
Postretirement benefits 18,325 18,639
Other liabilities 18,652 11,931
Shareholders' equity:
Common stock 36,334 36,334
Additional Paid in Capital 2,063 -
Retained earnings 207,206 184,845
Accumulated other comprehensive income (loss) (4,722) (8,983)
Treasury stock, at cost (58,476) (68,480)
----------- -----------
182,405 143,716
----------- -----------
Total liabilities and shareholders' equity $ 418,832 $ 288,952
=========== ===========
3
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 118,825 $ 71,461 $ 314,254 $ 204,356
Cost of sales (73,681) (40,071) (197,224) (116,588)
------- ------- -------- --------
Gross profit 45,144 31,390 117,030 87,768
Selling and administrative expenses (26,247) (16,759) (67,505) (50,241)
Special items - - - 2,177
------- ------- ------- -------
Operating profit 18,897 14,631 49,525 39,704
Investment income 119 525 1,204 1,942
Interest expense (1,081) (390) (3,074) (1,046)
Other income(deductions), net 72 3 88 (554)
Minority interest (808) (504) (2,119) (1,570)
------- ------- ------- -------
Income before income
taxes and accounting change 17,199 14,265 45,624 38,476
Income taxes (6,641) (5,504) (17,612) (14,849)
------- ------- ------- -------
Income before cumulative
effect of change in accounting 10,558 8,761 28,012 23,627
Cumulative effect of change in
accounting (net of tax) - - (3,226) -
------- ------- ------- -------
Net income $ 10,558 $ 8,761 $ 24,786 $ 23,627
======= ======= ======= =======
Earnings per share before cumulative
effect of change in accounting:
Basic $ .34 $ .29 $ .91 $ .77
===== ===== ===== =====
Diluted $ .33 $ .28 $ .88 $ .75
===== ===== ===== =====
Earnings per share:
Basic $ .34 $ .29 $ .81 $ .77
===== ===== ===== =====
Diluted $ .33 $ .28 $ .78 $ .75
===== ===== ===== =====
Dividends per share: $.02625 $.025 $.07875 $.075
====== ===== ====== =====
4
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Amounts in thousands, except per share data)
Nine Months Ended
June 30,
--------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 24,786 $ 23,627
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,371 9,002
Change in deferred taxes (59) 156
Changes in working capital items (5,494) (5,681)
Increase in other assets (1,070) (1,469)
Increase in estimated finishing costs 331 202
Increase in other liabilities 1,697 53
Decrease in postretirement benefits (314) (344)
Tax benefit of exercised stock options 5,400 138
Impairment losses 5,255 2,824
Net (gain) loss on sales of assets 443 (28)
Gain on sale of subsidiary - (7,099)
Net gain on investments (456) (182)
---------- ----------
Net cash provided by operating activities 40,890 21,199
---------- ----------
Cash flows from investing activities:
Capital expenditures (6,821) (5,355)
Proceeds from sales of assets 3,203 38
Acquisitions, net of cash acquired (88,237) (57,193)
Proceeds from sale of subsidiary - 18,581
Purchases of investment securities (4,739) (11,432)
Proceeds from disposition of investment securities 13,724 10,546
Collections on loans to officers and employees - 7
---------- ----------
Net cash used in investing activities (82,870) (44,808)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 124,500 32,743
Payments on long-term debt (60,267) (1,188)
Proceeds from the sale of treasury stock 6,792 220
Purchases of treasury stock (124) (11,373)
Dividends (2,425) (2,283)
---------- ----------
Net cash provided by financing activities 68,476 18,119
---------- ----------
Effect of exchange rate changes on cash 1,946 (781)
---------- ----------
Net increase (decrease) in cash and cash equivalents $ 28,442 $ (6,271)
========== ==========
5
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 1. Nature of Operations
Matthews International Corporation ("Matthews"), founded in 1850 and
incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer
principally of memorialization products and caskets for the cemetery and
funeral home industries and custom-made products which are used to identify
people, places, products and events. The Company's products and operations
are comprised of four business segments: Bronze, Graphics Imaging, Marking
Products, and York Casket. The Bronze segment is a leading manufacturer of
cast bronze memorials and other memorialization products, crematories and
cremation-related products and is a leading builder of mausoleums in the
United States. The Graphics Imaging segment manufactures and provides
printing plates, pre-press services and imaging systems for the corrugated and
flexible packaging industries. The Marking Products segment designs,
manufactures and distributes a wide range of equipment and consumables for
identifying various consumer and industrial products, components and packaging
containers. On December 3, 2001, the Company acquired The York Group, Inc.
("York"), a manufacturer of caskets and casket components in the United States
(see Note 9). York operates as a wholly-owned subsidiary and separate segment
of Matthews.
The Company has manufacturing and marketing facilities in the United States,
Australia, Canada and Europe.
Note 2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information for commercial and industrial companies and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included. Operating results for the three
months and nine months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended September 30, 2001.
The consolidated financial statements include all majority-owned foreign and
domestic subsidiaries. The consolidated financial statements also include the
accounts of the Company's 50%-owned affiliates, O.N.E. Color Communications,
L.L.C., S+T GmbH & Co. KG., and up to its sale on January 19, 2001 (see Note
8), Tukaiz Communications, LLC ("Tukaiz"). All intercompany accounts and
transactions have been eliminated.
In August 2001, the Board of Directors declared a two-for-one stock split on
the Company's Common Stock in the form of a 100% stock distribution.
Shareholder's equity has been adjusted for the stock split by reclassifying
from retained earnings to common stock the par value of the additional shares
arising from the split. All per share amounts and numbers of shares have been
adjusted in this report to reflect the stock split.
6
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 2. Basis of Presentation, continued
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.
Actual results could differ from those estimates.
Certain reclassifications have been made in the June 30, 2001 financial
statements to conform to the current period presentation.
Note 3. Long-Term Debt
On December 3, 2001, the Company entered into a Revolving Credit Facility for
$125,000 with a syndicate of four financial institutions. Borrowings under
the facility, which matures on November 30, 2004, bear interest at LIBOR plus
a factor ranging from .75% to 1.5% based on the Company's leverage ratio. The
leverage ratio is defined as net indebtedness divided by EBITDA (earnings
before interest, taxes, depreciation, and amortization). The Company is
required to pay an annual commitment fee ranging from .20% to .375% (based on
the Company's leverage ratio) of the unused portion of the facility. The
Revolving Credit Facility requires the Company to maintain minimum levels of
consolidated net worth and fixed charge and interest coverage ratios. A
portion of the facility (not to exceed $10,000) is available for the issuance
of trade and standby letters of credit. In addition, the facility provides
for an additional credit line for borrowings up to $10,000 at current market
rates. The Revolving Credit Facility replaced the existing Revolving Credit
and Term Loan Agreement. The Company borrowed $124,500 under the Revolving
Credit Facility on December 3, 2001 in connection with the acquisition of York
(see Note 9) and for the repayment of all amounts outstanding ($30,000) under
the Revolving Credit and Term Loan Agreement. Outstanding borrowings on the
Revolving Credit Facility at June 30, 2002 were $94,500. The weighted-average
interest rate on outstanding borrowings at June 30, 2002 was 3.21%.
The carrying amounts of the Company's borrowings under its financing
arrangements approximated their fair value.
Note 4. Income Taxes
Income tax provisions for the Company's interim periods are based on the
effective income tax rate expected to be applicable for the full year. The
difference between the estimated effective tax rate of 38.6% and the Federal
statutory rate of 35% primarily reflects the impact of state and foreign
income taxes.
7
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 5. Earnings Per Share
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 10,558 $ 8,761 $ 24,786 $ 23,627
========== ========== ========== ==========
Weighted-average common
shares outstanding 31,042 30,362 30,644 30,639
Dilutive securities,
primarily stock options 960 839 1,079 670
---------- ---------- ---------- ----------
Diluted weighted-average
common shares outstanding 32,002 31,201 31,723 31,309
========== ========== ========== ==========
Basic earnings per share $ .34 $ .29 $ .81 $ .77
==== ==== ==== ====
Diluted earnings per share $ .33 .28 $ .78 $ .75
==== ==== ==== ====
Note 6. Segment Information
The Company is organized into four business segments based on products and
services. The segments, which are Bronze, Graphics Imaging, Marking Products,
and York Casket, are described under Nature of Operations (Note 1).
Management evaluates segment performance based on operating profit (before
income taxes) and does not allocate non-operating items such as investment
income, interest expense, other income (deductions),net and minority interest.
Information about the Company's segments follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales to external customers:
Graphics Imaging $ 24,228 $ 20,493 $ 70,000 $ 65,726
Marking Products 7,407 7,209 20,927 22,662
Bronze 53,356 43,759 144,088 115,968
York Casket 33,834 - 79,239 -
----------- ----------- ----------- -----------
$ 118,825 $ 71,461 $ 314,254 $ 204,356
=========== =========== =========== ===========
8
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 6. Segment Information, continued
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating profit:
Graphics Imaging $ 2,423 $ 2,466 $ 7,518 $ 12,026
Marking Products 804 1,060 2,673 2,290
Bronze 12,067 11,105 30,524 25,388
York Casket 3,603 - 8,810 -
----------- ----------- ----------- -----------
$ 18,897 $ 14,631 $ 49,525 $ 39,704
=========== =========== =========== ===========
Operating profit, excluding special
items and other one-time charges:
Graphics Imaging $ 2,423 $ 2,466 $ 7,518 $ 7,625
Marking Products 804 1,060 2,673 3,744
Bronze 12,067 11,105 30,524 27,326
York Casket 3,603 - 8,810 -
----------- ----------- ----------- -----------
$ 18,897 $ 14,631 $ 49,525 $ 38,695
=========== =========== =========== ===========
Note 7. Comprehensive Income
Comprehensive income consists of net income adjusted for changes, net of tax,
in cumulative foreign currency translation, unrealized investment gains and
losses and minimum pension liability. For the three months ended June 30,
2002 and 2001, comprehensive income was $16,328 and $8,492, respectively. For
the nine months ended June 30, 2002 and 2001, comprehensive income was $29,047
and $21,978 respectively.
Note 8. Disposition
On January 19, 2001, Matthews sold its fifty percent interest in Tukaiz.
Proceeds to Matthews from the sale were approximately $18,600, which included
the repayment of intercompany debt of $8,400. All intercompany debt provided
by Matthews to Tukaiz, including a $5,500 Subordinated Convertible Note, was
repaid upon the closing of this transaction. The sale resulted in a pre-tax
gain of $7,099, which was reported in Special Items on the Consolidated
Statement of Income.
Note 9. Acquisition
On May 24, 2001, Matthews and York signed a merger agreement whereby Matthews
would acquire 100% of the outstanding common shares of York for $10 cash per
share. Matthews also agreed to pay up to an additional $1 cash per share
based on excess cash (as defined in the merger agreement) remaining on York's
9
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 9. Acquisition, continued
balance sheet as of October 31, 2001. At December 3, 2001, there were
8,940,950 shares of York common stock outstanding. On December 3, 2001, the
transaction was completed at $11 per share. The acquisition of York, which is
the second leading casket manufacturer in the United States, is expected to
expand Matthews' position in the death care industry. York operates as a
wholly-owned subsidiary and separate segment of Matthews.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. York is in the
process of finalizing third-party valuations of certain accounts thus the
allocation of the purchase price is subject to further refinement.
Cash $ 25,544
Other Current Assets 25,938
Property, Plant and Equipment 30,775
Intangible Assets 14,100
Goodwill 38,835
Other Assets 13,095
-------
Total Assets Acquired 148,287
-------
Other Current Liabilities 39,002
Other Liabilities 9,235
-------
Total Liabilities Assumed 48,237
-------
Net assets acquired $ 100,050
========
Acquired intangible assets include trade names with an assigned value of
$8,400 which is not subject to amortization. Intangible assets also include
patents, copyrights, customer relationships and other intangible assets with
an assigned value of $5,700 and have assigned useful lives ranging from 15 to
17 years.
The following unaudited pro-forma information presents a summary of the
consolidated results of Matthews and York (including the Commemorative
Products business of York acquired by Matthews on May 24, 2001) as if the
acquisition had occurred on October 1, 2000:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 118,825 $ 110,806 $ 335,921 $ 335,354
Net Income 10,558 9,576 24,788 27,791
Earnings Per Share 0.33 0.31 0.78 0.89
These unaudited pro-forma results have been prepared for comparative purposes
only and include certain adjustments, such as interest expense on acquisition
debt. The pro-forma results include non-recurring property, plant and
equipment write-offs and plant closure and restructuring charges for York of
$1,270 and $1,924 for the nine months ended June 30, 2002 and 2001,
respectively. The pro-forma information does not purport to be indicative of
the results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in the future.
10
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 10. Special Items
In January 2001, Matthews sold its fifty percent interest in Tukaiz (see Note
8). The sale resulted in a pre-tax gain of $7,099, which was reported in
Special Items on the Consolidated Statement of Income. In the second quarter
of fiscal 2001, the Company recorded asset impairments, restructuring costs
and other special charges totaling approximately $6,600. The majority of
these charges were classified as Special Items on the Consolidated Statement
of Income, except for $1,168 million classified as selling and administrative
expenses and $500 classified as other deductions.
Note 11. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 addresses the financial statement
accounting for goodwill and other intangible assets upon acquisition and the
accounting subsequent to their initial recognition in the financial
statements. The Company adopted SFAS No. 142 in the first quarter of fiscal
2002. Under this standard, goodwill is no longer amortized, the effect of
which is summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Income before income taxes and
accounting change, as reported $ 17,199 $ 14,265 $ 45,624 $ 38,476
Add back: Goodwill amortization - 879 - 2,295
------ ------ ------ ------
Income before income taxes and
accounting change, as adjusted $ 17,199 $ 15,144 $ 45,624 $ 40,771
====== ====== ====== ======
Net income, as reported $ 10,558 $ 8,761 $ 24,786 $ 23,627
Add back: Effect of goodwill
amortization - 598 - 1,585
------ ------ ------ ------
Net income, as adjusted $ 10,558 $ 9,359 $ 24,786 $ 25,212
====== ====== ====== ======
Basic earnings per share, as reported $ 0.34 $ 0.29 $ 0.81 $ 0.77
Add back: Effect of goodwill
amortization - 0.02 - 0.05
----- ----- ----- -----
Basic earnings per share, as adjusted $ 0.34 $ 0.31 $ 0.81 $ 0.82
===== ===== ===== =====
Diluted earnings per share, as reported $ 0.33 $ 0.28 $ 0.78 $ 0.75
Add back: Effect of goodwill
amortization - 0.02 - 0.05
----- ----- ----- -----
Diluted earnings per share, as adjusted $ 0.33 $ 0.30 $ 0.78 $ 0.80
===== ===== ===== =====
11
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 11. Goodwill and Other Intangible Assets, continued
The new standard also requires a periodic assessment of the carrying value of
goodwill for impairment. If the carrying value of a reporting unit exceeds
its estimated fair value, an impairment loss must be recognized. Based on
this assessment, the Company recorded a pre-tax charge for transitional
goodwill impairment of $5,255 million ($3,226 after-tax). The impairment was
primarily related to a reporting unit within the Company's Bronze segment and
was determined based upon a comparison of carrying value to fair market value
as determined by a combination of valuation techniques, including discounted
cash flows. Prior to the adoption of SFAS No. 142, valuation of impairment
was determined using undiscounted cash flows.
Changes to goodwill and other intangible assets during the nine-month period
ended June 30, 2002, including the effects of adopting SFAS No. 142, follow.
Intangible
Goodwill Assets Total
-------- ----------- --------
Balance at September 30, 2001, net
of accumulated amortization $ 104,585 $ - $ 104,585
Additions during the period 42,099 14,100 56,199
Transitional impairment charge (5,255) - (5,255)
Translation and other adjustments 3,092 - 3,092
Amortization Expense - (203) (203)
------- ------- -------
Balance at June 30, 2002, net
of accumulated amortization $ 144,521 $ 13,897 $ 158,418
======= ======= =======
The additions to goodwill and other intangible assets during the period
related primarily to the acquisition of The York Group, Inc. on December 3,
2001 (see Note 9).
The following table summarizes the carrying amount and related accumulated
amortization for intangible assets.
Carrying Accumulated
Amount Amortization
------- ------------
Trade names $ 8,400 $ *
Customer relationships 4,100 (141)
Copyrights/patents/other 1,600 (62)
------ ------
$ 14,100 $ (203)
====== ======
* Not subject to amortization
Amortization expense for intangible assets is expected to approximate $350
each year between 2003 and 2007.
12
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2002
(Amounts in thousands, except per share data)
Note 12. Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." This pronouncement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of," and will be effective for the Company's fiscal year
beginning October 1, 2002. The Company is currently evaluating the provisions
of SFAS No. 144 to determine the impact, if any, on the Company's consolidated
financial statements.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement:
The following discussion should be read in conjunction with the consolidated
financial statements and footnotes thereto included in this Quarterly Report
on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended
September 30, 2001. Any forward-looking statements contained herein are
included pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks and uncertainties that may cause the Company's actual
results in future periods to be materially different from management's
expectations. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements principally include changes in domestic or
international economic conditions, changes in 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 competitive pressures, and
technological factors beyond the Company's control.
Results of Operations:
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods indicated.
Nine months ended Years ended
June 30, September 30,
----------------- --------------------
2002 2001(2) 2001(2) 2000 1999
---- ------ ------ ---- ----
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 37.2 42.9 42.2 44.2 42.3
Operating profit 15.8 19.4 18.8 17.9 16.8
Income before income taxes (1) 14.5 18.8 18.2 17.2 17.0
Net income (1) 8.9 11.6 11.2 10.5 10.3
(1) Before cumulative effect of change in accounting principle
(2) Fiscal 2001 included after-tax income of $300,000 ($.01 per share) from
special items (see "Special Items").
Sales for the nine months ended June 30, 2002 were $314.3 million and were
$109.9 million, or 53.8%, higher than sales of $204.4 million for the nine
months ended June 30, 2001. The increase primarily relates to the acquisition
of The York Group, Inc. ("York") on December 3, 2001. Sales for the York
Casket segment were $79.2 million from the acquisition date through June 30,
2002. Bronze segment sales for the first nine months of fiscal 2002 were
$144.1 million, or 24.2%, higher than the same period a year ago, primarily
resulting from the acquisition of the commemorative products business of York
in May 2001, higher mausoleum construction revenues and increased sales of
bronze memorial and architectural products. Sales for the Graphics Imaging
segment for the first nine months of fiscal 2002 were $70.0 million,
representing an increase of 6.5% from the nine months ended June 30, 2001.
The increase primarily reflected the acquisitions of Scholler GmbH (January
2001) and Rudolf Reproflex GmbH (July 2001), which were partially offset by
the divestiture in January 2001 of the Company's investment in Tukaiz
Communications, L.L.C. ("Tukaiz"). In addition, sales for the Graphics
Imaging segment's domestic operations continued to be adversely impacted by
price discounting due to the economy and competitive market conditions.
14
Results of Operations, continued:
Marking Products segment sales for the nine months ended June 30, 2002 were
$20.9 million, compared to $22.7 million for the same period last year. The
decline of $1.8 million, or 7.7%, was mainly due to a drop in demand for
equipment products sold to the tire, automotive and building segments of the
economy, which has been the trend during the last two fiscal years.
Gross profit for the nine months ended June 30, 2002 was $117.0 million,
compared to $87.8 million for the first nine months of fiscal 2001. The
increase in consolidated gross profit primarily resulted from the acquisition
of York on December 3, 2001. Gross profit for the Bronze segment increased
from the same period last year due to higher sales. Gross profit for the
Graphics Imaging segment declined from the prior year principally reflecting
the divestiture of Tukaiz combined with the unfavorable impact of price
discounting due to competitive market conditions. These declines were offset
partially by the acquisitions of Scholler GmbH and Rudolf Reproflex GmbH.
Gross profit for the Marking Products segment declined as a result of lower
sales volume. Consolidated gross profit as a percent of sales for the nine
months ended June 30, 2002 declined to 37.2%, compared to 42.9% for the same
period a year ago. Factors contributing to this decline included the addition
of York Casket revenues, which generally have lower margins than other
Matthews segments, changes in product mix within the Bronze segment due to
higher mausoleum sales and an increase in pension and health care costs for
all segments.
Selling and administrative expenses for the nine months ended June 30, 2002
were $67.5 million, representing an increase of $17.3 million, or 34.4%,
compared to the same period a year ago. Fiscal 2001 selling and
administrative expenses included special charges of $1.2 million (see "Special
Items"). Excluding special charges, selling and administrative expenses
increased $18.5 million, or 37.6%, from the same period last year. The
increase primarily resulted from the acquisition of York, including the
commemorative products business. Excluding special charges, selling and
administrative expenses declined in the Graphics Imaging and Marking Products
segments due to cost control efforts, lower domestic sales and the divestiture
of Tukaiz.
In addition, consolidated selling and administrative expenses were favorably
impacted by the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets," in the first quarter of
fiscal 2002. Under SFAS No. 142, the Company discontinued the amortization of
goodwill effective October 1, 2001. Goodwill amortization was $2.3 million
for the first nine months of fiscal 2001. The operating profit impact of SFAS
No. 142 was more than offset by increases in pension and health care costs.
Pension costs were unfavorably impacted by a decline in the Company's pension
fund assets. Consolidated selling and administrative expenses as a percent of
sales was 21.5% for the first nine months of fiscal 2002 compared to 24.0%
(excluding special charges) for the same period a year ago, principally due to
the lower ratio of selling and administrative costs for York Casket sales.
15
Results of Operations, continued:
Operating profit for the nine months ended June 30, 2002 was $49.5 million,
representing an increase of $9.8 million, or 24.7%, over operating profit of
$39.7 million for the first nine months of fiscal 2001. Fiscal 2001 operating
profit was favorably impacted by special items (including special charges
classified as selling and administrative expenses) of $1.0 million. Excluding
these special items, consolidated operating profit for the first nine months
of fiscal 2001 was $38.7 million. Operating profit for the York Casket
segment was $8.8 million from the acquisition date through June 30, 2002.
Bronze segment operating profit was $30.5 million for the first nine months of
fiscal 2002 compared to $27.3 million (excluding special items) for the same
period a year ago. The increase in Bronze operating profit primarily
reflected the acquisition of the commemorative products business of York and
higher sales of memorial and architectural products. Fiscal 2002 operating
profit for the Bronze segment also included a loss of $540,000 on the sale in
March 2002 of its granite import business. Graphics Imaging operating profit
for the first nine months of fiscal 2002 was $7.5 million compared to $7.6
million (excluding special items) for the same period last year. The slight
decline was due primarily to the divestiture of Tukaiz, which was nearly
offset by the acquisitions of Scholler GmbH and Rudolf Reproflex GmbH.
Operating profit for the Marking Products segment for the first nine months of
fiscal 2002 was $2.7 million, compared to $3.7 million (excluding special
items) for the same period a year ago. The decline reflected lower sales
combined with higher employee benefit costs in the current fiscal year.
Investment income for the first nine months of fiscal 2002 was $1.2 million
compared to $1.9 million for the same period a year ago. The decrease
resulted from a lower rate of return and a lower average investment balance
during the period. Interest expense for the nine months ended June 30, 2002
was $3.1 million, compared to $1.0 million for the first nine months of fiscal
2001. The increase in interest expense primarily reflected borrowings of
$124.5 million in December 2001 for the acquisition of York.
Other income (deductions), net, for the nine months ended June 30, 2002
represented an increase to pre-tax income of $88,000, compared to a reduction
of $554,000 for the first nine months of fiscal 2001. Other deductions in
fiscal 2001 included a special contribution to the Company's educational and
charitable trust of $500,000 (see "Special Items"). Minority interest for the
first nine months of fiscal 2002 was $2.1 million compared to $1.6 million for
the same period a year ago. The higher minority interest deduction for the
current year resulted from the acquisitions of Scholler GmbH and Rudolf
Reproflex GmbH, offset partially by the divestiture of Tukaiz.
The Company's effective tax rate for the first six months of fiscal 2002 was
38.6%, compared to 38.6% for the year ended September 30, 2001. The
difference between the Company's effective tax rate and the Federal statutory
rate of 35% primarily reflects the impact of state and foreign income taxes.
Forward-Looking Information:
The Company's objective with respect to operating performance is to increase
annual earnings per share in the range of 12% to 15% annually. For the past
seven fiscal years, the Company has achieved an average annual increase in
earnings per share of 14.6%. As a result of the Company's recent
acquisitions, the impact of higher pension and health care costs and the
elimination of goodwill amortization, the Company expects to achieve earnings
in the range of $1.18 per share for the fiscal year ended September 30, 2002,
which represents an increase of 16.8% over fiscal 2001.
16
Goodwill:
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial statement accounting
for goodwill and other intangible assets upon acquisition and the accounting
subsequent to their initial recognition in the financial statements. The
Company adopted SFAS No. 142 in the first quarter of fiscal 2002. Under this
standard, goodwill related to business combinations is no longer amortized,
but is subject to periodic review for impairment. Excluding goodwill
amortization, income before income taxes and net income for the nine months
ended June 30, 2001 would have been $40.8 million and $25.2 million,
respectively.
The new standard also requires a periodic assessment of the carrying value of
goodwill for impairment. If the carrying value of a reporting unit exceeds
its estimated fair value, an impairment loss must be recognized. For purposes
of testing for transitional impairment, the Company used a combination of
valuation techniques, including discounted cash flows. Based on this
assessment, the Company recorded a pre-tax charge for goodwill impairment of
$5.3 million ($3.2 million after-tax). The impairment was primarily related
to a reporting unit within the Company's Bronze segment and was determined
based upon a comparison of carrying value to fair market value as determined
by a combination of valuation techniques, including discounted cash flows.
Prior to the adoption of SFAS No. 142, valuation for impairment was determined
using undiscounted cash flows.
Special Items:
In January 2001, Matthews sold its fifty percent interest in Tukaiz (see
"Disposition"). The sale resulted in a pre-tax gain of $7.1 million, which
was reported in Special Items on the Consolidated Statement of Income. In the
second quarter of fiscal 2001, the Company recorded asset impairments,
restructuring costs and other special charges totaling $6.6 million. The
majority of these charges were classified as Special Items on the Consolidated
Statement of Income, except for $1.2 million classified as selling and
administrative expenses and $500,000 classified as other deductions.
Liquidity and Capital Resources:
Net cash provided by operating activities was $40.9 million for the nine
months ended June 30, 2002, compared to $21.2 million for the first nine
months of fiscal 2001. Operating cash flow for the first nine months of
fiscal 2002 primarily reflected net income adjusted for depreciation and
amortization (non-cash charges), the tax benefit of stock option exercises and
the impairment of goodwill resulting from the adoption of SFAS No. 142.
Operating cash flow for the nine months ended June 30, 2001 reflected net
income (excluding the pre-tax gain on the sale of Tukaiz) adjusted for
depreciation, amortization and non-cash asset impairment losses in connection
with the special charges recorded in the fiscal 2001 second quarter.
Cash used in investing activities was $82.9 million for the nine months ended
June 30, 2002, compared to $44.8 million for the first nine months of fiscal
2001. Investing activities for the current period included payments (net of
cash acquired) of $88.2 million in connection with the acquisitions of York
(see "Acquisition") and Rudolf Reproflex GmbH. In July 2001, Matthews
acquired a 75% interest in Rudolf Reproflex GmbH for DM 24 million (U.S. $11.0
million). The purchase price, which was recorded in other current liabilities
at September 30, 2001, was paid in October 2001.
17
Liquidity and Capital Resources, continued:
Investing activities for the first nine months of fiscal 2002 also reflected
capital expenditures of $6.8 million, proceeds of $9.0 million from the net
disposition of investment securities and proceeds of $2.0 million from the
sale of the Company's granite import business.
Investing activities for the first nine months of fiscal 2001 principally
reflected capital expenditures of $5.4 million and payments of $57.2 million
for acquisitions, primarily representing the purchase of the commemorative
products business of The York Group, Inc. in May 2001. Investing activities
in fiscal 2001 also included proceeds of $18.6 million from the sale of
Tukaiz. Capital expenditures have averaged $9.4 million for the last three
fiscal years. The capital budget of the Company for fiscal 2002 is
$12.9 million. The Company expects to generate sufficient cash from
operations to fund all anticipated capital spending projects.
Cash provided by financing activities for the nine months ended June 30, 2002
was $68.5 million, reflecting proceeds from long-term debt of $124.5 million,
debt repayments of $60.3 million, proceeds of $6.8 million from the sale of
treasury stock (resulting from stock option exercises), and dividends to
shareholders of $2.4 million. Cash provided by financing activities for the
nine months ended June 30, 2001 was $18.1 million, consisting of proceeds from
long-term debt of $32.7 million, debt repayments of $1.2 million, net treasury
stock purchases of $11.2 million, and dividends of $2.3 million.
On December 3, 2001, the Company entered into a Revolving Credit Facility for
$125.0 million with a syndicate of four financial institutions. Borrowings
under the facility, which matures on November 30, 2004, bear interest at LIBOR
plus a factor ranging from .75% to 1.5% based on the Company's leverage ratio.
The leverage ratio is defined as net indebtedness divided by EBITDA (earnings
before interest, taxes, depreciation and amortization). The Company is
required to pay an annual commitment fee ranging from .20% to .375% (based on
the Company's leverage ratio) of the unused portion of the facility. The
Revolving Credit Facility requires the Company to maintain minimum levels of
consolidated net worth and fixed charge and interest coverage ratios. A
portion of the facility (not to exceed $10.0 million) is available for the
issuance of trade and standby letters of credit. In addition, the facility
provides for an additional credit line for borrowings up to $10.0 million at
current market rates. The Revolving Credit Facility replaced the existing
Revolving Credit and Term Loan Agreement. The Company borrowed $124.5 million
under the Revolving Credit Facility on December 3, 2001 in connection with the
acquisition of York, (see "Acquisition") and for the repayment of all amounts
outstanding under its Revolving Credit and Term Loan Agreement.
At June 30, 2002 and September 30, 2001 and 2000, the Company's current ratio
was 1.8, 1.5 and 2.0, respectively. The Company had cash and cash equivalents
at June 30, 2002 and September 30, 2001 of $57.1 million and $28.7 million,
respectively. Net working capital at June 30, 2002 and September 30, 2001 was
$72.0 million and $35.8 million, respectively. The Company believes that its
current liquidity sources, combined with its operating cash flow and
additional borrowing capacity, will be sufficient to meet its capital needs
for the next 12 months.
18
Acquisition:
On May 24, 2001, Matthews and York signed a merger agreement whereby Matthews
would acquire 100% of the outstanding common shares of York for $10 cash per
share. Matthews also agreed to pay up to an additional $1 cash per share
based on excess cash (as defined in the merger agreement) remaining on York's
balance sheet as of October 31, 2001. On December 3, 2001, this transaction
was completed at $11 per share. At December 3, 2001, there were 8,940,950
shares of York common stock outstanding. York is the second leading casket
manufacturer in the United States and is expected to have annual sales of
approximately $130.0 million. York operates as a wholly-owned subsidiary and
separate segment of Matthews.
Stock Split:
In August 2001, the Board of Directors declared a two-for-one stock split on
the Company's Common Stock in the form of a 100% stock distribution.
Shareholders' equity has been adjusted for the stock split by reclassifying
from retained earnings to common stock the par value of the additional shares
arising from the split. All per share amounts and numbers of shares have been
adjusted in this report to reflect the stock split.
Critical Accounting Policies:
A summary of significant accounting policies is included in Note 2 to the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2001. 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 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.
Actual results may differ from those estimates. A discussion of market risks
affecting the Company can be found in Item 3 of this Form 10-Q, "Quantitative
and Qualitative Disclosures about Market Risk".
Long-term Contractual Obligations and Commitments:
On June 30, 2002, the Company had outstanding borrowings of $94.5 million on
its Revolving Credit Facility, which matures on November 30, 2004 (see
"Liquidity and Capital Resources"). Other long-term debt (excluding short-term
borrowings) consisted primarily of bank borrowings of approximately $10.8
million by Caggiati S.p.A. Annual principal payments on these borrowings
approximate $900,000.
The Company has an obligation to purchase the remaining fifty percent interest
in its 50% owned affiliate, O.N.E. Color Communications, LLC ("O.N.E.") no
later than 2004. The purchase price is contingent on the attainment of
certain operating performance levels of O.N.E. with such payment to be not
less than $4.5 million. A liability has been recorded in the consolidated
financial statements for the present value of the future minimum payout.
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.
19
Item 3. 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 use derivative financial instruments in
connection with these market risks.
The Company's most significant long-term debt instrument, the Revolving Credit
Facility, bears interest at variable rates based on LIBOR and the carrying
amount of such debt approximates fair value. 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) used in
its manufacturing operations. The Company obtains competitive prices for
materials and supplies when available. The Company is subject to foreign
currency exchange rate changes 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.
20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for David M. Kelly.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for Edward J. Boyle.
(b) Reports on Form 8-K
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTHEWS INTERNATIONAL CORPORATION
(Registrant)
Date 8/12/02 D.M. Kelly
------------ -----------------------------------------
D.M. Kelly, Chairman of the Board,
President and Chief Executive Officer
Date 8/12/02 E.J. Boyle
------------ -----------------------------------------
E.J. Boyle, Chief Financial Officer,
Secretary and Treasurer
1
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Matthews International Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
David M. Kelly, President and Chief Executive Officer, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
David M. Kelly
- -------------------------------------
David M. Kelly,
President and Chief Executive Officer
August 12, 2002
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
1
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Matthews International Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Edward J. Boyle, Chief Financial Officer, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Edward J. Boyle
- -------------------------------------
Edward J. Boyle,
Chief Financial Officer
August 12, 2002
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.