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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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, 2003
Class A - $1.00 par value 32,233,815 shares
2
PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollar amounts in thousands, except per share data)
June 30, 2003 September 30, 2002
------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,938 $ 57,101
Short-term investments 4,591 4,565
Accounts receivable, net 66,584 66,239
Inventories: Materials and finished goods $ 24,069 $ 22,320
Labor and overhead in process 1,727 1,606
Supplies 486 477
---------- ----------
26,282 24,403
Other current assets 2,578 3,712
----------- ----------
Total current assets 163,973 156,020
Investments 4,623 4,699
Property, plant and equipment: Cost 138,368 131,306
Less accumulated depreciation (67,352) (56,163)
---------- ----------
71,016 75,143
Deferred income taxes and other assets 23,481 28,369
Goodwill 153,577 144,960
Other intangible assets, net 13,149 13,410
----------- -----------
Total assets $ 429,819 $ 422,601
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current maturities 6,224 6,127
Accounts payable 17,093 19,462
Accrued compensation 23,960 22,859
Accrued income taxes 4,166 4,114
Accrued rebates 1,752 9,697
Other current liabilities 26,123 24,927
---------- ----------
Total current liabilities 79,318 87,186
Long-term debt 67,333 96,487
Estimated finishing costs 5,721 6,811
Postretirement benefits 17,532 17,907
Environmental reserve 10,993 11,300
Other liabilities 12,947 21,535
Shareholders' equity:
Common stock 36,334 36,334
Additional paid in capital 5,452 2,119
Retained earnings 247,128 216,569
Accumulated other comprehensive income (loss) (4,762) (15,216)
Treasury stock, at cost (48,177) (58,431)
----------- -----------
Total shareholders' equity 235,975 181,375
----------- -----------
Total liabilities and shareholders' equity $ 429,819 $ 422,601
=========== ===========
3
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 116,145 $ 118,825 $ 340,799 $ 314,254
Cost of sales (71,696) (73,681) (214,757) (197,224)
------- ------- -------- --------
Gross profit 44,449 45,144 126,042 117,030
Selling and administrative expenses (22,876) (26,247) (67,157) (67,505)
------- ------- ------- -------
Operating profit 21,573 18,897 58,885 49,525
Investment income 354 119 985 1,204
Interest expense (578) (1,081) (2,250) (3,074)
Other income(deductions), net (84) 72 (129) 88
Minority interest (1,179) (808) (3,280) (2,119)
------- ------- ------- -------
Income before income
taxes and accounting change 20,086 17,199 54,211 45,624
Income taxes (7,797) (6,641) (21,037) (17,612)
------- ------- ------- -------
Income before cumulative
effect of change in accounting 12,289 10,558 33,174 28,012
Cumulative effect of change in
accounting (net of tax) - - - (3,226)
------- ------- ------- -------
Net income $ 12,289 $ 10,558 $ 33,174 $ 24,786
======= ======= ======= =======
Earnings per share before cumulative
effect of change in accounting:
Basic $ .38 $ .34 $1.05 $ .91
===== ===== ===== =====
Diluted $ .38 $ .33 $1.03 $ .88
===== ===== ===== =====
Earnings per share:
Basic $ .38 $ .34 $1.05 $ .81
===== ===== ===== =====
Diluted $ .38 $ .33 $1.03 $ .78
===== ===== ===== =====
Dividends per share: $.0275 $.02625 $.0825 $.07875
===== ====== ===== ======
4
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Nine Months Ended
June 30,
--------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 33,174 $ 24,786
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,044 10,371
Change in deferred taxes 339 (59)
Changes in working capital items (13,086) (5,494)
(Increase) decrease in other assets 2,555 (1,070)
Increase (decrease) in estimated finishing costs (1,090) 331
Increase (decrease) in other liabilities (4,395) 1,697
Decrease in postretirement benefits (375) (314)
Tax benefit of exercised stock options 5,100 5,400
Impairment losses - 5,255
Net (gain) loss on sales of assets (393) 443
Net (gain) loss on investments 57 (456)
---------- ----------
Net cash provided by operating activities 32,930 40,890
---------- ----------
Cash flows from investing activities:
Capital expenditures (6,761) (6,821)
Proceeds from sales of assets 2,216 3,203
Acquisitions, net of cash acquired - (88,237)
Purchases of investment securities (145) (4,739)
Proceeds from disposition of investment securities 16 13,724
---------- ----------
Net cash used in investing activities (4,674) (82,870)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt - 124,500
Payments on long-term debt (31,495) (60,267)
Proceeds from the sale of treasury stock 10,685 6,792
Purchases of treasury stock (2,199) (124)
Dividends (2,615) (2,425)
---------- ----------
Net cash provided by (used in) financing activities (25,624) 68,476
---------- ----------
Effect of exchange rate changes on cash 4,205 1,946
---------- ----------
Net increase in cash and cash equivalents $ 6,837 $ 28,442
========== ==========
5
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Dollar 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, caskets, and cremation equipment 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 five business segments: Bronze, York Casket,
Cremation, Graphics Imaging and Marking Products. The Bronze segment is a
leading manufacturer of cast bronze memorials and other memorialization
products and is a leading builder of mausoleums in the United States. York
Casket is the second leading casket manufacturer in the United States and
produces a wide variety of wood and metal caskets. The Cremation segment is a
leading designer and manufacturer of cremation equipment and cremation-related
products in North America. 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.
Beginning with the first quarter of fiscal 2003, Matthews changed its internal
reporting structure and is reporting a fifth business segment, the Cremation
segment. The Cremation segment consists of the Company's cremation equipment
business (formerly part of the Bronze segment) and the Company's cremation
casket business (formerly part of the York Casket segment). Segment
information for the prior periods contained in these financial statements has
been reclassified to conform to the current period presentation.
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, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30,
2003. 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, 2002.
6
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar 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.
Note 3. Stock-Based Compensation
The Company has accounted for its stock-based compensation plans in accordance
with the intrinsic value provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, the Company did
not record any compensation expense in the consolidated financial statements
for its stock-based compensation plans. The following table illustrates the
effect on net income and earnings per share had compensation expense been
recognized consistent with the fair value provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $12,289 $10,558 $33,174 $24,786
Net income, pro forma 11,919 10,182 32,175 23,778
Basic earnings per share, as reported .38 .34 1.05 .81
Diluted earnings per share, as reported .38 .33 1.03 .78
Basic earnings per share, pro forma .37 .33 1.02 .78
Diluted earnings per share, pro forma .37 .32 1.01 .75
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 38.8% 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, 2003
(Dollar amounts in thousands, except per share data)
Note 5. Earnings Per Share
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 12,289 $ 10,558 $ 33,174 $ 24,786
========== ========== ========== ==========
Weighted-average common
shares outstanding 31,845,791 31,041,705 31,523,848 30,644,509
Dilutive securities,
primarily stock options 497,032 960,063 664,760 1,078,751
---------- ---------- ---------- ----------
Diluted weighted-average
common shares outstanding 32,342,823 32,001,768 32,188,608 31,723,260
========== ========== ========== ==========
Basic earnings per share $ .38 $ .34 $1.05 $ .81
==== ==== ==== ====
Diluted earnings per share $ .38 .33 $1.03 $ .78
==== ==== ==== ====
Diluted earnings per share
before change in accounting $ .38 $ .33 $1.03 $ .88
==== ==== ==== ====
Note 6. Segment Information
The Company is organized into five business segments based on products and
services. The segments, which are Bronze, York Casket, Cremation, Graphics
Imaging and Marking Products, 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.
8
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar amounts in thousands, except per share data)
Note 6. Segment Information, continued
Information about the Company's segments follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales to external customers:
Bronze $ 49,978 $ 50,747 $ 137,699 $ 136,519
York Casket 28,661 31,576 92,437 73,995
Cremation 4,374 4,867 15,052 12,813
Graphics Imaging 24,718 24,228 71,705 70,000
Marking Products 8,414 7,407 23,906 20,927
-------- -------- -------- --------
$ 116,145 $ 118,825 $ 340,799 $ 314,254
======== ======== ======== ========
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Operating profit:
Bronze $ 14,278 $ 12,609 $ 35,461 $ 31,043
York Casket 2,863 3,337 10,013 8,243
Cremation 175 (276) 887 48
Graphics Imaging 3,178 2,423 9,506 7,518
Marking Products 1,079 804 3,018 2,673
-------- -------- -------- --------
$ 21,573 $ 18,897 $ 58,885 $ 49,525
======== ======== ======== ========
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,
2003 and 2002, comprehensive income was $16,878 and $16,328, respectively.
For the nine months ended June 30, 2003 and 2002, comprehensive income was
$43,628 and $29,048 respectively.
9
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar amounts in thousands, except per share data)
Note 8. Restructuring and Relocation Costs
Accrued reserves for restructuring and relocation costs were $2,042 at June
30, 2003 and $3,680 at September 30, 2002. Fiscal 2003 activity reflected
additional restructuring reserves of $325 and charges incurred of $1,963
applied against the reserves.
These reserves have been provided for the restructuring, sale or closure of
certain of the York Casket segment's operations and facilities, including the
disposition of their remaining distribution operations and the relocation of
their administrative functions to Pittsburgh, Pennsylvania. The accrued
liability, which is included in other current liabilities, includes previously
established reserves assumed with the acquisition of the York Casket segment
as well as reserves recorded for costs to be incurred as a result of the
acquisition. The majority of the restructuring and relocation activities
included in the reserves are expected to be completed during calendar 2003.
Restructuring reserves recorded for costs to be incurred as a result of the
acquisition were recorded as a purchase accounting adjustment and did not
affect the fiscal 2002 operating results of the Company. Accrued costs of
$665 related to the relocation of the York Casket segment's administrative
functions to Pittsburgh were expensed during fiscal 2002. Other accrued costs
related to the relocation were recorded as a purchase accounting adjustment.
Note 9. Acquisitions and Disposition
On May 24, 2001, Matthews and The York Group, Inc. ("York Casket") signed a
merger agreement whereby Matthews would acquire 100% of the outstanding common
shares of York Casket 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 the balance sheet of York Casket 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 Casket common
stock outstanding. The transaction was financed by Matthews through
borrowings under a $125,000 Revolving Credit Facility. The acquisition of
York Casket, which is the second leading casket manufacturer in the United
States, was designed to expand Matthews' position in the death care industry.
York Casket operates as a wholly-owned subsidiary and separate segment of
Matthews. Matthews has accounted for this acquisition using the purchase
method and, accordingly, recorded the acquired assets and liabilities at their
estimated fair values at the acquisition date. The excess of the purchase
price over the estimated fair value of the net assets acquired was recorded as
goodwill, which is subject to periodic review for impairment.
10
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar amounts in thousands, except per share data)
Note 9. Acquisitions and Disposition, continued
The following unaudited pro-forma information presents a summary of the
consolidated results of Matthews and York Casket as if the acquisition had
occurred on October 1, 2001:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 116,145 $ 118,825 $ 340,799 $ 335,921
Income before change in 12,289 10,558 33,174 28,014
accounting
Net Income 12,289 10,558 33,174 24,788
Earnings Per Share before
change in accounting 0.38 0.33 1.03 0.88
Earnings Per Diluted Share 0.38 0.33 1.03 0.78
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
Casket of $1,270 for the nine months ended June 30, 2002. 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.
In May 1998, Matthews acquired a 50% interest in O.N.E. Color Communications,
L.L.C. ("O.N.E."), a digital graphics service company located in Oakland,
California. The purchase price consisted of $2,000 cash upon closing plus an
additional $2,750 in 2001, which was based on the attainment of certain
operating performance levels of O.N.E. The purchase agreement also required
Matthews to acquire the remaining 50% interest no later than May 2004, with
the purchase price contingent on the attainment of certain operating
performance levels of O.N.E., but not less than $4,500. The accounts of
O.N.E. have been included in the consolidated financial statements of Matthews
since May 1998 and a liability was recorded for the future minimum payout.
Effective July 31, 2003, Matthews completed the purchase of the remaining 50%
interest in O.N.E. for $5,715.
In July 2003, the Company sold its Graphics Imaging segment facility in La
Palma, California for $3,200. The transaction will be recorded in the
Company's fourth quarter.
In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen
("Reproservice Munich"), a German graphics and flexographic printing plate
manufacturer located in Munich, Germany. Reproservice Munich has annual sales
of approximately U.S.$6,000. Products and services of Reproservice Munich
include pre-press packaging; digital and analog flexographic printing plates;
design, art work, lithography and color separation.
11
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar amounts in thousands, except per share data)
Note 10. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." The Company adopted SFAS No.
142 effective October 1, 2001. Under this standard, goodwill related to
business combinations is no longer amortized, but is subject to periodic
review for impairment. In general, when the carrying value of a reporting
unit exceeds its implied fair value, an impairment loss must be recognized.
For purposes of testing for transitional impairment upon adoption of SFAS No.
142, the Company used a combination of valuation techniques, including
discounted cash flows. Based on this assessment, the Company recorded a pre-
tax charge in the first quarter of fiscal 2002 for transitional goodwill
impairment of $5,255 ($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 implied fair market value. The
Company performed its annual impairment review in the second quarter of fiscal
2003 using a combination of valuation techniques, including discounted cash
flows, and determined that no additional adjustments to the carrying values of
goodwill were necessary.
Changes to goodwill, net of accumulated amortization, during the nine months
ended June 30, 2003 follow.
York Graphics Marking
Bronze Casket Cremation Imaging Products Consolidated
-------- -------- --------- -------- -------- -------------
Goodwill:
Balance at September 30, 2002 $ 68,516 $ 39,313 $ 6,402 $ 30,564 $ 165 $144,960
Additions during period - - - - - -
Translation and
other adjustments 3,321 1,831 - 3,465 - 8,617
------ ------ ------ ------ --- -------
Balance at June 30, 2003 $ 71,837 $ 41,144 $ 6,402 $ 34,029 $ 165 $153,577
====== ====== ====== ====== === =======
The following table summarizes the carrying amount and related accumulated
amortization for intangible assets.
Carrying Accumulated
Amount Amortization
------- ------------
Trade names $ 8,000 $ - *
Customer relationships 4,100 (382)
Copyrights/patents/other 1,600 (169)
------ ---
$ 13,700 $ (551)
====== ===
* Not subject to amortization
Other intangible assets consisted of customer relationships, trade names and
copyrights, patents and other of $12,881 for the York Casket segment and
copyrights, patents and other of $268 for the Cremation segment. The customer
relationships and copyrights, patents and other are amortized over their
estimated useful lives of 17 years and 15 years, respectively.
12
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JUNE 30, 2003
(Dollar amounts in thousands, except per share data)
Note 10. Goodwill and Other Intangible Assets, continued
Amortization expense for the three-month period ended June 30, 2003 for
customer relationships and copyrights, patents, and other was $60 and $27,
respectively. Amortization expense for the nine-month period ended June 30,
2003 for customer relationships and copyrights, patents and other was $181 and
$80, respectively. Amortization expense for intangible assets is expected to
approximate $350 each year between 2003 and 2008.
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 of Matthews International Corporation and related notes
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, 2002. 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
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 competitive pressures, unknown risks in connection
with the Company's acquisitions, 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,
----------------- --------------------
2003 2002 2002 2001(2) 2000
---- ---- ---- ------ ----
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 37.0 37.2 37.5 42.2 44.2
Operating profit 17.3 15.8 15.9 18.8 17.9
Income before taxes (1) 15.9 14.5 14.6 18.2 17.2
Net income (1) 9.7 8.9 8.9 11.2 10.5
(1) Before cumulative effect of change in accounting. The nine months ended
June 30, 2002 reflects a pre-tax charge of $5.3 million ($.10 per share after
tax) for transitional goodwill impairment (see "Goodwill").
(2) Fiscal 2001 included after-tax income of $300,000 ($.01 per share) from
special items, which consisted of a pre-tax gain of $7.1 million on the sale
of a subsidiary and asset impairments, restructuring costs and other special
pre-tax charges totaling $6.6 million.
Sales for the nine months ended June 30, 2003 were $340.8 million and were
$26.5 million, or 8.4%, higher than sales of $314.3 million for the nine
months ended June 30, 2002. The increase primarily related to the acquisition
of The York Group, Inc. ("York Casket") on December 3, 2001 and higher foreign
currency exchange rates. The first nine months of fiscal 2003 reflected nine
months of activity for York Casket compared to seven months for the same
period a year ago. For the third quarter and first nine months of fiscal
2003, higher foreign currency values against the U.S. dollar had a favorable
impact of approximately $4.3 million and $10.5 million, respectively, on the
Company's consolidated sales compared to the same periods in fiscal 2002.
14
Results of Operations, continued:
Sales for the York Casket segment were $92.4 million for the first nine months
of fiscal 2003 compared to $74.0 million for the same period last year.
However, for the quarter ended June 30, 2003, York Casket sales were $2.9
million, or 9.2%, lower than the same quarter a year ago primarily reflecting
a decline in metal casket and casket component sales. Bronze segment sales
for the first nine months of fiscal 2003 were $137.7 million compared to
$136.5 million for the first nine months of fiscal 2002. The slight increase
of approximately 1.0% in Bronze sales reflected the favorable impact of
increases in the values of the Euro and the Australian and Canadian dollars
against the U.S. dollar offset partially by a decline in mausoleums sales, the
divestiture of the segment's granite import business in fiscal 2002 and the
divestiture of a Canadian niche bank and columbarium business in October 2002.
Sales for the Graphics Imaging segment in the first nine months of fiscal 2003
were $71.7 million, compared to $70.0 million for the same period a year ago.
The increase primarily reflected higher sales in the segment's European
operations combined with an increase in the value of the Euro against the U.S.
dollar. These increases were partially offset by lower sales in the segment's
domestic operations, which primarily related to weak demand and price pressure
in the United States primary and corrugated packaging markets and the closure,
in October 2002, of an unprofitable manufacturing business in Southern
California. Marking Products segment sales for the nine months ended June 30,
2003 were $23.9 million, compared to $20.9 million for the first nine months
of fiscal 2002. The increase of $3.0 million, or 14.2%, was principally due
to higher volume, reflecting higher demand in North America and the addition
of new distributors in Europe, and higher foreign currency exchange rates.
Sales for the Cremation segment were $15.1 million for the first nine months
of fiscal 2003 compared to $12.8 million for the same period a year ago. The
increase reflected two additional months of cremation casket sales compared to
the same period last year as a result of the acquisition of York Casket.
Beginning with the first quarter of fiscal 2003, Matthews changed its internal
reporting structure and is reporting a fifth business segment, the Cremation
segment. The Cremation segment consists of the Company's cremation equipment
business (formerly part of the Bronze segment) and the Company's cremation
casket business (formerly part of the York Casket segment). The objective of
the new segment, which is expected to generate approximately $20 million in
sales for fiscal 2003, is to focus on the fastest growing segment of the death
care industry, which is cremation products and services and increase the
Company's participation in this market. Segment information for the prior
periods contained in this report has been reclassified to conform to the
current period presentation.
Gross profit for the nine months ended June 30, 2003 was $126.0 million,
compared to $117.0 million for the nine months ended June 30, 2002. The
increase in consolidated gross profit primarily resulted from the acquisition
of York Casket, higher sales in the Marking Products and European Graphics
Imaging businesses and manufacturing improvements in the Bronze segment.
Gross profit for all of the Company's segments increased for the nine-month
period. In addition, gross profit for the Bronze segment reflected the
benefit of a reduction in the segment's pre-need memorial finishing cost
liability due to manufacturing efficiencies. Consolidated gross profit as a
percent of sales declined slightly from 37.2% for the first nine months of
fiscal 2002 to 37.0% for the first nine months of fiscal 2003. The reduction
in the consolidated gross margin principally related to the additional York
Casket revenues, which generally have lower margins than other Matthews
segments, and an increase in pension and health care costs in fiscal 2003.
15
Results of Operations, continued:
Selling and administrative expenses for the nine months ended June 30, 2003
were $67.2 million, compared to $67.5 million for the first nine months of
fiscal 2002. The slight decline for the period resulted from a combination of
factors including the acquisition of York Casket and higher pension and health
care costs in all of the Company's segments, offset by lower selling and
administrative costs in the Bronze segment. Pension costs were adversely
affected by a decline in the Company's pension fund assets during fiscal 2002.
Pension costs for the Company's domestic defined benefit plans are projected
to be $4.4 million for fiscal 2003, compared to $1.3 million for fiscal 2002.
Selling and administrative costs in the Bronze segment were favorably impacted
by the divestiture of its granite import business in fiscal 2002 and the
divestiture of a Canadian niche bank and columbarium business in October 2002.
In addition, in the second quarter of fiscal 2002, the Company recorded a loss
of approximately $500,000 on the sale of its granite import business.
Consolidated selling and administrative expenses as a percent of sales were
19.7% for the nine months ended June 30, 2003, compared to 21.5% for the same
period last year. The reduction principally reflected the addition of York
Casket, which has the lowest ratio of selling and administrative costs of any
of the Company's segments, as its products are sold primarily through
independent distributors.
Operating profit for the nine months ended June 30, 2003 was $58.9 million,
representing an increase of $9.4 million, or 18.9%, over operating profit of
$49.5 million for the nine months ended June 30, 2002. Bronze segment
operating profit for the first nine months of fiscal 2003 was $35.5 million,
compared to $31.0 million for the first nine months of fiscal 2002. The
increase of 14.2% reflected the segment's higher sales for the period, a
reduction in the segment's pre-need memorial finishing cost liability due to
manufacturing efficiencies, and the favorable impact of increases in the
values of the Euro and the Australian and Canadian dollars against the U.S.
dollar. The Bronze segment results were also favorably impacted by the
divestiture of its granite import business and its Canadian niche bank and
columbarium business. These two businesses generated a combined operating loss
of approximately $600,000 in the first nine months of fiscal 2002. Operating
profit for the York Casket segment for the first nine months of fiscal 2003
was $10.0 million, an increase of $1.8 million over the same period a year
ago. The increase reflected two additional months of results in the first
nine months of fiscal 2003 compared to the same period last year. However,
operating profit for the York Casket segment declined approximately $500,000
for the third quarter of fiscal 2003 compared to the same quarter last year
reflecting lower sales and additional costs (consulting services) incurred for
improvements in manufacturing processes. Graphics Imaging operating profit
for the nine months ended June 30, 2003 was $9.5 million compared to $7.5
million for the nine months ended June 30, 2002. The segment's operating
profit was favorably impacted by sales growth in the Company's European
operations combined with an increase in the value of the Euro against the U.S.
dollar. Operating profit for the Marking Products segment for the first nine
months of fiscal 2003 was $3.0 million, representing an increase of $345,000
over the same period a year ago. The increase of 12.9% resulted from higher
sales combined with an increase in the value of the Swedish Krona against the
U.S. dollar. Higher foreign currency values against the U.S. dollar had a
favorable impact of approximately $2.3 million on the Company's consolidated
operating profit for the nine months ended June 30, 2003 compared to the same
period a year ago.
Investment income for the nine months ended June 30, 2003 was $985,000,
compared to $1.2 million for the nine months ended June 30, 2002. The decline
from the prior period reflected lower investment income rates and the prior
period included a net gain on the sale of securities.
16
Results of Operations, continued:
Interest expense for the first nine months of fiscal 2003 was $2.3 million,
compared to $3.1 million for the same period last year. The decline in
interest expense reflected a lower level of debt during the fiscal 2003 nine-
month period combined with a reduction in the average borrowing rate. Other
income (deductions), net, for the nine months ended June 30, 2003 represented
a reduction in pre-tax income of $129,000, compared to an increase to income
of $88,000 for same period last year. Minority interest deduction for the
first nine months of fiscal 2003 was $3.3 million, compared to $2.1 million
for the first nine months of fiscal 2002. The higher minority interest
deduction for fiscal 2003 resulted from operating income growth in the
Company's four European Graphics Imaging businesses.
The Company's effective tax rate for the nine months ended June 30, 2003 was
38.8%, which remained unchanged from the effective rate of 38.8% for the
fiscal year ended September 30, 2002. The difference between the Company's
effective tax rate and the Federal statutory rate of 35% primarily reflected
the impact of state and foreign income taxes.
Goodwill:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." The Company adopted SFAS No. 142 effective
October 1, 2001. Under this standard, goodwill related to business
combinations is no longer amortized, but is subject to periodic review for
impairment. In general, when the carrying value of a reporting unit exceeds
its implied fair value, an impairment loss must be recognized. For purposes
of testing for transitional impairment upon adoption of SFAS No. 142, the
Company used a combination of valuation techniques, including discounted cash
flows. Based on this assessment, the Company recorded a pre-tax charge in the
first quarter of fiscal 2002 for transitional 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 implied fair market value. The Company
performed its annual impairment review in the second quarter of fiscal 2003
using a combination of valuation techniques, including discounted cash flows,
and determined that no additional adjustments to the carrying values of
goodwill were necessary.
Liquidity And Capital Resources:
Net cash provided by operating activities was $32.9 million for the nine
months ended June 30, 2003, compared to $40.9 million for the first nine
months of fiscal 2002. Operating cash flow for the first nine months of
fiscal 2003 reflected net income adjusted for depreciation and amortization
(non-cash charges), payments to customers under the York Casket segment's
rebate programs, a $7.5 million contribution to the Company's pension plan,
and a tax benefit of $5.1 million from exercised stock options. For the nine
months ended June 30, 2002, operating cash flow primarily reflected net income
adjusted for depreciation, amortization and the non-cash impairment charge
recorded for transitional goodwill impairment (see "Goodwill") and a tax
benefit of $5.4 million from exercised stock options.
17
Liquidity And Capital Resources, continued:
Cash used in investing activities was $4.7 million for the nine months ended
June 30, 2003, compared to $82.9 million for the nine months ended June 30,
2002. Investing activities for the first nine months of fiscal 2003 primarily
included capital expenditures of $6.8 million, which was partially offset by
proceeds of $2.3 million from the sale of assets. Investing activities for
the first nine months of fiscal 2002 principally reflected payments (net of
cash acquired) of $88.2 million in connection with the acquisitions of York
Casket (December 2001) and Rudolf Reproflex GmbH (July 2001). Although
Rudolf, part of the Graphics Imaging segment, was acquired in fiscal 2001, the
purchase price (approximately $11.0 million) was paid in the first quarter of
fiscal 2002. Fiscal 2002 investing activities also included capital
expenditures of $6.8 million, proceeds of $3.2 million from the sale of assets
and proceeds of $9.0 million from the net disposition of investment
securities.
Capital expenditures reflected reinvestment in the Company's business segments
and were made primarily for the purchase of new manufacturing machinery,
equipment and facilities designed to improve product quality, increase
manufacturing efficiency, lower production costs and meet regulatory
requirements. Capital expenditures for the last three fiscal years were
financed through operating cash. Capital spending for property, plant and
equipment has averaged $8.3 million for the last three fiscal years. The
capital budget for fiscal 2003 is $11.5 million. The Company expects to
generate sufficient cash from operations to fund all anticipated capital
spending projects.
Cash used in financing activities for the nine months ended June 30, 2003 was
$25.6 million, reflecting payments on long-term debt of $31.5 million,
treasury stock purchases of $2.2 million and dividends of $2.6 million to the
Company's shareholders. These payments were partially offset by proceeds of
$10.7 million from the sale of treasury stock (stock option exercises). Cash
provided by financing activities for the nine months ended June 30, 2002 was
$68.5 million, consisting of proceeds from long-term debt of $124.5 million,
repayments of $60.3 million on long-term debt, net proceeds of $6.7 million
from the sale of treasury stock (stock option exercises) and dividends of $2.4
million to the Company's shareholders.
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 weighted-average
interest rate on outstanding borrowings under this facility at June 30, 2003
was 2.2%. 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.
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
Casket, and for the repayment of all amounts outstanding under its Revolving
Credit and Term Loan Agreement. The outstanding balance on the Revolving
Credit Facility was $54.5 million at June 30, 2003.
18
Liquidity And Capital Resources, continued:
The Company has a line of credit of $500,000 (Canadian dollars), which
provides for borrowings at the bank's prime interest rate. There were no
borrowings outstanding on this line of credit at June 30, 2003. Caggiati
S.p.A. has four lines of credit totaling approximately U.S.$12.0 million with
various Italian banks. Outstanding borrowings on these lines approximated
$4.5 million at June 30, 2003.
The Company has a stock repurchase program, which was initiated in 1996.
Under the program, the Company's Board of Directors has authorized the
repurchase of a total of 8,000,000 shares (adjusted for stock splits) of
Matthews common stock, of which 7,172,100 shares have been repurchased as of
June 30, 2003. 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.
Consolidated working capital of the Company was $84.7 million at June 30,
2003, compared to $68.8 million at September 30, 2002. Cash and cash
equivalents were $63.9 million at June 30, 2003, compared to $57.1 million at
September 30, 2002. The Company's current ratio was 2.1 at June 30, 2003 and
1.8 at September 30, 2002.
Restructuring And Relocation Costs:
Accrued reserves for restructuring and relocation costs were $2.0 million at
June 30, 2003 and $3.7 million at September 30, 2002. Fiscal 2003 activity
reflected additional restructuring reserves of $325,000 and charges incurred
of $2.0 million applied against the reserve. These reserves have been
provided for the restructuring, sale or closure of certain of the York Casket
segment's operations and facilities, including the disposition of their
remaining distribution operations and the relocation of their administrative
functions to Pittsburgh, Pennsylvania. The accrued liability, which is
included in other current liabilities, includes previously established
reserves assumed with the acquisition of the York Casket segment as well as
reserves recorded for costs to be incurred as a result of the acquisition.
The majority of the restructuring and relocation activities included in the
reserves are expected to be completed during fiscal 2003.
Restructuring reserves recorded for costs to be incurred as a result of the
acquisition were recorded as a purchase accounting adjustment and did not
affect the operating results of the Company. Accrued costs of $665,000 for
the relocation of the York Casket segment's administrative functions to
Pittsburgh were expensed during fiscal 2002. Other accrued costs related to
the relocation were recorded as a purchase accounting adjustment.
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 policies and procedures with respect to environmental,
safety and health, including the proper handling, storage and disposal of
hazardous materials.
19
Environmental Matters, continued:
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. In addition, prior to its acquisition, York
Casket was identified, along with others, by the Environmental Protection
Agency as a potentially responsible party for remediation of a landfill site
in York, PA. At this time, the Company has not been joined in any lawsuit or
administrative order related to the site or its clean-up.
At June 30, 2003, an accrual of $11.7 million was recorded for environmental
remediation (of which $660,000 has been 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 Casket 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. 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 and Disposition:
On May 24, 2001, Matthews and York Casket signed a merger agreement whereby
Matthews would acquire 100% of the outstanding common shares of York Casket
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 the balance sheet of York Casket 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 Casket common stock
outstanding. The transaction was financed by Matthews through borrowings
under a $125.0 million Revolving Credit Facility (see "Liquidity and Capital
Resources"). The acquisition of York Casket was designed to expand Matthews'
position in the death care industry. York Casket operates as a wholly-owned
subsidiary and separate segment of Matthews. Matthews has accounted for this
acquisition using the purchase method and, accordingly, recorded the acquired
assets and liabilities at their estimated fair values at the acquisition date.
The excess of the purchase price over the estimated fair value of the net
assets acquired was recorded as goodwill, which is subject to periodic review
for impairment.
In May 1998, Matthews acquired a 50% interest in O.N.E. Color Communications,
L.L.C. ("O.N.E."), a digital graphics service company located in Oakland,
California. The purchase price consisted of $2.0 million cash upon closing
plus an additional $2.75 million in 2001, which was based on the attainment of
certain operating performance levels of O.N.E. The purchase agreement also
required Matthews to acquire the remaining 50% interest no later than
May 2004, with the purchase price contingent on the attainment of certain
operating performance levels of O.N.E., but not less than $4.5 million. The
accounts of O.N.E. have been included in the consolidated financial statements
of Matthews since May 1998 and a liability was recorded for the future minimum
payout. Effective July 31, 2003, Matthews completed the purchase of the
remaining 50% interest in O.N.E. for $5.7 million.
20
Acquisitions and Disposition, continued:
In July 2003, the Company sold its Graphics Imaging segment facility in La
Palma, California for $3.2 million. The transaction will be recorded in the
Company's fiscal 2003 fourth quarter.
In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen
("Reproservice Munich"), a German graphics and flexographic printing plate
manufacturer located in Munich, Germany. Reproservice Munich has annual sales
of approximately U.S.$6 million. Products and services of Reproservice Munich
include pre-press packaging; digital and analog flexographic printing plates;
design, art work, lithography and color separation. The combination of
Matthews and Reproservice Munich is an important part of the Matthews strategy
to increase its European presence in the graphics industry.
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
eight fiscal years, the Company has achieved an average annual increase in
earnings per share of 15.1%. Matthews has a three-pronged strategy to attain
the annual growth rate objective, which has remained unchanged from the prior
year. This strategy consists of the following: internal growth (which
includes 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.
For the first nine months of fiscal 2003, the Company's earnings of $1.03 per
share were slightly above management's expectations and represented an
increase of 17.0% over earnings per share of $0.88 for the same period last
year (before change in accounting). Based on the expected impact of the
Company's recent acquisitions, anticipated internal growth and also
considering the unfavorable impact of changes in pension and health care
costs, the Company expects to achieve diluted earnings per share of $1.38
(excluding any favorable impact which could result from the sale of its La
Palma facility) for the fiscal year ended September 30, 2003.
FTC Investigation:
Matthews received a preliminary inquiry from the Federal Trade Commission
("FTC") requesting information with respect to its acquisition and merger
related activities during 2001 with The York Group, Inc. On December 20,
2002, the Company was advised by the FTC that no further action was warranted
by the FTC and the investigation had been closed.
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 "Quantitative and Qualitative Disclosures about Market
Risk" in this Quarterly Report on Form 10-Q.
21
Critical Accounting Policies, continued:
A summary of the Company's significant accounting policies is included in the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2002. 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 are considered critical to the
preparation of the Company's consolidated financial statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on an evaluation of specific
customer accounts in which available facts and circumstances indicate
collectibility may be a problem. In addition, the allowance includes a
general reserve for all customers based on historical collection experience.
Long-Lived Assets
Property, plant and equipment, goodwill and other intangible assets are
carried at cost. Depreciation on property, plant and equipment is computed
primarily on the straight-line method over the estimated useful lives of the
assets. Goodwill is no longer amortized, but is subject to periodic review
for impairment. 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.
Pension Costs
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.
Estimated Finishing Costs
Estimated costs for finishing have been provided for bronze memorials, vases
and granite bases which have been manufactured, sold to customers and placed
in storage for future delivery.
Environmental Reserve
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.
Long-Term Contractual Obligations And Commitments:
The following table summarizes the Company's contractual obligations at June
30, 2003, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods.
22
Long-Term Contractual Obligations And Commitments, continued:
Payments due in fiscal year:
------------------------------------------------
2003 After
Total (remainder) 2004 to 2005 2006 to 2007 2007
--------- ----------- ------------ ------------ ------
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facility $ 54,500 $ - $ 54,500 $ - $ -
Notes payable to banks 14,338 811 3,092 2,758 7,677
Short-term borrowings 4,511 4,511 - - -
Capital lease obligations 208 12 168 28 -
Non-cancelable operating leases 8,148 726 3,965 1,589 1,868
------- ------ ------ ----- ------
Total contractual cash obligations $ 81,705 $ 6,060 $ 61,725 $ 4,375 $ 9,545
======= ====== ====== ===== ======
The Company also had an obligation to purchase the remaining interest in its 50%-owned affiliate,
O.N.E. Color Communications, LLC ("O.N.E.") no later than May 2004. The purchase price was
contingent on the attainment of certain operating performance levels of O.N.E., but not less than
$4.5 million. A liability was recorded in the consolidated financial statements for the future
minimum payout. Effective July 31, 2003, Matthews completed the purchase of the remaining 50%
interest in O.N.E. for $5.7 million.
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.
Accounting Pronouncements:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." The principal difference between SFAS No. 146 and EITF Issue
No. 94-3 relates to its requirements for recognition of a liability for costs
associated with an exit or disposal activity. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for
exit costs as defined in Issue No. 94-3 was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146, which was effective for
exit or disposal activities initiated after December 31, 2002, has not had a
material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This pronouncement amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock based employee compensation. SFAS No. 128 also
amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. This
Statement also amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. The
disclosure provisions of SFAS No. 148 have been adopted by the Company and are
included in this Quarterly Report on Form 10-Q.
23
Accounting Pronouncements, continued:
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies existing
guidance relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 requires that, upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45 is applicable on a
prospective basis for guarantees issued or modified after December 31, 2002,
regardless of the guarantor's year-end. The disclosure requirements are
effective for both interim and annual period financial statements that end
after December 15, 2002. FIN 45 did not have a material impact on the
Company's financial statements or disclosures.
24
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, steel
and wood) 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.
Item 4. Controls and Procedures
Based on their evaluation at the end of the period covered by this Quarterly
Report on Form 10-Q, the Company's chief executive officer and chief financial
officer have concluded that the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
25
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
------- -----------
31.1 Certification of Principle Executive Officer
for David M. Kelly
31.2 Certification of Principle Financial Officer
for Edward J. Boyle.
32.1 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.
32.2 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
On April 25, 2003, Matthews filed a Current Report on Form 8-K under Item 5 in
connection with a press release to announce the election of Glenn R. Mahone to
the Matthews Board of Directors.
On April 25, 2003, Matthews filed a Current Report on Form 8-K under Item 9 in
connection with a press release announcing its earnings for the second fiscal
quarter of 2003.
On June 25, 2003, Matthews filed a Current Report on Form 8-K under Item 5 to
report that David M. Kelly, Chairman of the Board of Directors, President and
Chief Executive Officer of Matthews International Corporation, entered into a
Rule 10b5-1 Sales Plan dated June 6, 2003, with Goldman Sachs & Co. (Broker)
for the sale of 383,333 shares of Matthews International Corporation Common
Stock.
26
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 8/12/03 D.M. Kelly
------------ -----------------------------------------
D.M. Kelly, Chairman of the Board,
President and Chief Executive Officer
Date 8/12/03 E.J. Boyle
------------ -----------------------------------------
E.J. Boyle, Chief Financial Officer,
Secretary and Treasurer