1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2003
Commission File Number 0-09115
MATTHEWS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock, $1.00 par value NASDAQ National Market System
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 if disclosure of delinquent filers pursuant to Item
405a of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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 aggregate market value of the Class A Common Stock outstanding and held
by non-affiliates of the registrant, based upon the closing sale price of the
Class A Common Stock on the NASDAQ National Market System on March 31, 2003,
the last business day of the registrant's most recently completed second fiscal
quarter, was approximately $706 million.
As of November 30, 2003, shares of common stock outstanding were:
Class A Common Stock 32,042,917 shares
Documents incorporated by reference: Specified portions of the Proxy Statement
for the 2004 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Report.
The index to exhibits is on pages 77-79.
2
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
Any forward-looking statements contained in this Annual Report on Form 10-K
(specifically those contained in Item 1, "Business" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations") are
included in this report pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties that may cause
the 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 foreign currency
exchange rates, 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.
ITEM 1. BUSINESS.
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. The York
Casket segment, which was acquired by the Company on December 3, 2001, is a
leading casket manufacturer in the United States. The Cremation segment is a
leading designer and manufacturer of cremation equipment and cremation caskets
primarily in North America. The Graphics Imaging segment manufactures and
provides printing plates, pre-press services and imaging services for the
corrugated and flexible packaging industries. The Marking Products segment
designs, manufactures and distributes a wide range of marking equipment and
consumables for identifying various consumer and industrial products,
components and packaging containers.
At November 30, 2003, the Company and its majority-owned subsidiaries had
approximately 3,000 employees. The Company's principal executive offices are
located at Two NorthShore Center, Pittsburgh, Pennsylvania 15212 and its
telephone number is (412) 442-8200.
The following table sets forth reported sales and operating profit for the
Company's business segments for the past three fiscal years. Detailed
financial information relating to business segments and to domestic and
international operations is presented in Note 16 (Segment Information) to the
Consolidated Financial Statements included in Part II of this Annual Report on
Form 10-K. Segment information for prior years has been reclassified for
comparative purposes to reflect the new Cremation segment.
3
ITEM 1. BUSINESS, continued.
Years Ended September 30,
--------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Sales to unaffiliated customers:
Bronze $186,950 40.8% $185,883 43.4% $153,499 54.2%
York Casket 120,398 26.2 100,415 23.5 - -
Cremation 20,189 4.4 18,306 4.3 10,579 3.7
Graphics Imaging 99,065 21.6 94,814 22.1 89,568 31.6
Marking Products 32,263 7.0 28,668 6.7 29,636 10.5
------- ----- ------- ----- ------- -----
Total $458,865 100.0% $428,086 100.0% $283,282 100.0%
======= ===== ======= ===== ======= =====
Operating profit:
Bronze $ 50,433 63.0% $ 46,589 68.3% $ 35,415 66.4%
York Casket 12,740 15.9 9,354 13.7 - -
Cremation 1,242 1.6 (1,075) (1.6) 391 .7
Graphics Imaging 11,562 14.4 9,724 14.3 14,443 27.1
Marking Products 4,107 5.1 3,595 5.3 3,108 5.8
------- ----- ------- ----- ------- -----
Total $ 80,084 100.0% $ 68,187 100.0% $ 53,357 100.0%
======= ===== ======= ===== ======= =====
In fiscal 2003, approximately 78% of the Company's sales were made from the
United States, and 19%, 2% and 1% were made from Europe, Canada and Australia,
respectively. Bronze segment products are sold throughout the world with the
segment's principal operations located in the United States, Italy, Canada and
Australia. The York Casket segment products are primarily sold in the United
States and Canada. The Cremation segment products and services are sold
primarily in North America, as well as Asia, Australia, and Europe. Products
and services of the Graphics Imaging segment are sold primarily in the United
States, Germany and Austria. The Marking Products segment sells equipment and
consumables directly to industrial consumers in the United States and
internationally through the Company's wholly-owned subsidiaries in Canada and
Sweden and through other foreign distributors. Matthews owns a minority
interest in distributors in Asia, Australia, France, Germany, the Netherlands
and the United Kingdom.
PRODUCTS AND MARKETS:
Bronze:
The Bronze segment manufactures and markets in the United States, Europe,
Canada and Australia products used primarily in the cemetery and funeral home
industries. The segment's principal products include cast bronze memorials
and other memorialization products used primarily in cemeteries. The segment
also manufactures and markets cast and etched architectural products, that are
produced from bronze, aluminum and other metals, which are used to identify or
commemorate people, places, events and accomplishments.
4
ITEM 1. BUSINESS, continued.
Memorial products, which comprise the majority of the Bronze segment's sales,
include flush bronze memorials, flower vases, crypt letters, cremation urns,
niche units, cemetery features and statues, along with other related
products. Flush bronze memorials are bronze plaques which contain personal
information about a deceased individual such as name, birth date and death
date. These memorials are used in cemeteries as an alternative to upright and
flush granite monuments. The memorials are even or "flush" with the ground
and therefore are preferred by many cemeteries for easier mowing and other
maintenance. In order to provide products for the granite memorial and
mausoleum markets, the Company's other memorial products include community and
family mausoleums, granite monuments and benches, and bronze plaques, letters,
emblems, vases, lights and photoceramics that can be affixed to granite
monuments, mausoleums and crypts. Matthews is a leading builder of mausoleums
within North America. Principal customers for memorial products are
cemeteries and memorial parks, which in turn sell the Company's products to
the consumer.
Customers of the Bronze segment can also purchase memorials and vases on a
"pre-need" basis. The "pre-need" concept permits families to arrange for
these purchases in advance of their actual need. Upon request, the Company
will manufacture the memorial to the customer's specifications (e.g., name and
birth date) and place it in storage for future delivery. All memorials in
storage have been paid in full with title conveyed to each pre-need purchaser.
The Bronze segment manufactures a full line of memorial products for
cremation, including urns in a variety of sizes, styles and shapes. The
segment also manufactures bronze and granite niche units, which are comprised
of numerous compartments used to display cremation urns in mausoleums and
churches. In addition, the Company also markets "turnkey" cremation gardens,
which include the design and all related products for a cremation garden.
Architectural products include cast bronze and aluminum plaques, etchings and
letters that are used to recognize, commemorate and identify people, places,
events and accomplishments. The Company's plaques are frequently used to
identify the name of a building or the names of companies or individuals
located within a building. Such products are also used to commemorate events
or accomplishments, such as military service or financial donations. The
principal markets for the segment's architectural products are corporations,
fraternal organizations, contractors, churches, hospitals, schools and
government agencies. These products are sold to and distributed through a
network of independent dealers including sign suppliers, recognition companies
and trophy dealers.
Raw materials used by the Bronze segment consist principally of bronze and
aluminum ingot, sheet metal, coating materials, photopolymers and construction
materials and are generally available in adequate supply. Ingot is obtained
from various North American, European and Australian smelters.
5
ITEM 1. BUSINESS, continued.
Competition from other bronze memorialization product manufacturers is on
the basis of reputation, product quality, delivery, price and design
availability. The Company also competes with upright granite monument and
flush granite memorial providers. The Company believes that its superior
quality, broad product lines, innovative designs, delivery capability,
customer responsiveness, experienced personnel and customer-oriented
merchandising systems are competitive advantages in its markets. Competition
in the mausoleum construction industry includes various construction companies
throughout North America and is on the basis of design, quality and price.
Competitors in the architectural market are numerous and include companies
that manufacture cast and painted signs, plastic materials, sand-blasted wood
and other fabricated products.
York Casket:
The York Casket segment, acquired by Matthews in December 2001, is a leading
manufacturer of caskets in the United States. The segment produces two types
of caskets: metal and wood. Caskets can be customized with many different
options such as color, interior design, handles and trim in order to
accommodate specific religious, ethnic or other personal preferences.
Metal caskets are made from various gauges of cold rolled steel, stainless
steel, copper and bronze. Metal caskets are generally categorized by whether
the casket is non-gasketed or gasketed, and by material (i.e., bronze, copper,
or steel) and in the case of steel, by the gauge, or thickness, of the metal.
The segment's wood caskets are manufactured from eight different species of
wood, as well as from veneer. The species of wood used are poplar, pine, ash,
oak, maple, cherry, walnut and mahogany. The York Casket segment is a leading
manufacturer of all-wood constructed caskets, which are manufactured using
pegged and dowelled construction, and include no metal parts. All-wood
constructed caskets are preferred by certain religious groups.
The segment also produces casket components. Casket components include
stamped metal parts, metal locking mechanisms for gasketed metal caskets,
adjustable beds, interior panels, and plastic handles and corners.
Metal casket parts are produced by stamping cold rolled steel, stainless
steel, copper and bronze sheets into casket body parts. Locking mechanisms
and adjustable beds are produced by stamping and assembling a variety of steel
parts. Certain styles of casket handles and corners are produced from
injection molded plastic. The segment purchases from sawmills various species
of uncured wood, which it dries and cures. The cured wood is processed into
casket components.
The segment markets its casket products primarily through independent
distributors. The segment provides product planning and merchandising and
display products to funeral service businesses. These products assist funeral
service professionals in providing value and satisfaction to their client
families.
6
ITEM 1. BUSINESS, continued.
The primary materials required for casket manufacturing are cold rolled steel
and lumber. The segment also purchases copper, bronze, stainless steel, cloth,
casket handles and corners, and coating materials. Purchase orders or supply
agreements are typically negotiated with large, integrated steel producers
that have demonstrated timely delivery, high quality material and competitive
prices. Lumber is purchased from a number of sawmills and distributors. The
Company purchases most of its lumber from sawmills within 150 miles of its
wood casket manufacturing facility in York, Pennsylvania.
The casket business is highly competitive. The segment competes with other
manufacturers on the basis of product quality, price, service, design
availability and breadth of product line. The segment provides a line of
casket products that it believes is as comprehensive as any of its major
competitors. Although there are a large number of casket industry
participants, the York Casket segment and its two largest competitors account
for a substantial portion of the finished caskets produced.
Historically, the segment's operations have experienced seasonal variations.
Generally, casket sales are highest in the second quarter and lowest in the
fourth quarter of each fiscal year. These fluctuations are due in part to the
seasonal variance in the death rate, with a greater number of deaths generally
occurring in cold weather months.
Cremation:
Effective October 1, 2002, Matthews changed its internal reporting structure
and began reporting a fifth business segment, the Cremation segment. The
Cremation segment consists of the Company's cremation equipment business
located in Apopka, Florida (formerly part of the Bronze segment) and the
Company's cremation casket business located in Richmond, Indiana (formerly
part of the York Casket segment). The objective of the Cremation segment 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.
The Cremation segment has four major groups of products and services:
cremation equipment, cremation caskets, equipment service and repair, and
supplies and urns.
The Cremation segment is the leading designer and manufacturer of cremation
equipment in North America. Cremation equipment includes systems for
cremation of humans and animals, as well as equipment for processing the
cremated remains and other related equipment such as handling equipment
(tables, cooler racks, vacuums). Cremation equipment and products are sold
primarily to funeral homes, cemeteries, crematories, animal disposers and
veterinarians within North America, Asia, Australia and Europe.
7
ITEM 1. BUSINESS, continued.
Cremation casket products consist primarily of three types of caskets: cloth-
covered wood, cloth-covered corrugated material and veneer-covered
particleboard. These products are used mainly, although not exclusively, in
cremation. These products are marketed principally to funeral homes through
independent distributors in the United States.
Service and repair consists of maintenance work performed on various makes and
models of cremation equipment. This work can be as simple as routine
maintenance or as complex as complete on site reconstruction. The principal
markets for these services are the owners and operators of cremation
equipment. These services are marketed principally in North America through
Company sales representatives.
Supplies and urns are consumable items associated with cremation operations.
Supplies distributed by the segment include operator safety equipment,
identification discs and combustible roller tubes. Urns distributed by the
segment include products ranging from plastic containers to bronze urns for
cremated remains. These products are marketed primarily in North America.
Raw materials used by the Cremation segment consist principally of structural
steel, sheet metal, electrical components, cloth, wood, particleboard,
corrugated materials, veneer and masonry materials and are generally available
in adequate supply from numerous suppliers.
The Company competes with several manufacturers in the cremation equipment
market principally on the basis of product quality and price. The Cremation
segment and its three largest competitors account for a substantial portion of
the domestic cremation equipment market. The cremation casket business is
highly competitive. The segment competes with other cremation casket
manufacturers on the basis of product quality, price and design availability.
Although there are a large number of casket industry participants, the
Cremation segment and its two largest competitors account for a substantial
portion of the cremation caskets produced.
Historically, the segment's cremation casket operations have experienced
seasonal variations. These fluctuations are due in part to the seasonal
variance in the death rate, with a greater number of deaths generally
occurring in cold weather months.
Graphics Imaging:
The Graphics Imaging segment provides printing plates, pre-press services and
imaging services to the corrugated and primary packaging industries. The
corrugated packaging industry consists of manufacturers of printed corrugated
containers. The primary packaging industry consists of manufacturers of
printed packaging materials such as boxes, folding cartons and bags commonly
seen at retailers of consumer goods.
ITEM 1. BUSINESS, continued.
The principal products and services of this segment include printing plates,
pre-press graphics services, print process assistance, print production
management, digital asset and content management, and package design. These
products and services are used by packaging manufacturers and end-users to
develop and print packaging graphics that identify and help sell the product.
Other packaging graphics can include nutritional information, directions for
product use, consumer warning statements and UPC codes. The corrugated
packaging manufacturer produces printed containers from corrugated sheets.
Using the Company's products, this sheet is printed and die cut to make a
finished container. The primary packaging manufacturer produces printed
packaging from paper, film, foil and other composite materials used to
display, protect and market the product.
The Company works closely with manufacturers to provide the proper printing
plates and tooling used to print the packaging to the user's specifications.
The segment's printing plate products are made principally from photopolymer
resin and sheet materials. Upon customer request, plates can be pre-mounted
press-ready in a variety of configurations that maximize print quality and
minimize press set-up time.
The segment offers a wide array of value-added services and products. These
include print process and print production management services; pre-press
preparation, which includes computer-generated art, film and proofs; plate
mounting accessories and various press aids; and rotary and flat cutting dies
used to cut out intricately designed containers and point-of-purchase
displays. The segment also provides creative digital graphics services to
advertising agencies and packaging markets through its Studio M design studio
in Pittsburgh and its Oakland, California operation.
The Graphics Imaging segment customer base consists primarily of packaging
industry converters and "national accounts." National accounts are generally
large, well-known consumer products companies with a national presence. These
types of companies tend to purchase their graphics needs directly and supply
the printing plates, or the film to make the printing plates, to the packaging
printer for their products. The Graphics Imaging segment serves customers
primarily in the United States and Europe. In Europe, Matthews has a wholly-
owned subsidiary in Munich, Germany; a 50%-owned affiliate in Julich, Germany;
and 75%-owned subsidiaries in Vienna, Austria; Nuremberg, Germany and Goslar,
Germany. Products and services of these operations include pre-press
packaging, digital and analog flexographic printing plates, design, artwork,
lithography and color separation.
Major raw materials for this segment's products include photopolymers, film
and graphic art supplies. All such materials are presently available in
adequate supply from various industry sources.
9
ITEM 1. BUSINESS, continued.
Graphics Imaging is one of several manufacturers of printing plates and
providers of pre-press services with a national presence in the United States.
The segment competes in a fragmented industry consisting of a few multi-plant
regional printing plate suppliers and a large number of local single-facility
companies located across the United States. The combination of the Company's
Graphics Imaging business in the United States and Europe is an important part
of Matthews' strategy to become a worldwide leader in the graphics industry
and service multinational customers on a global basis. Competition is on the
basis of product quality, timeliness of delivery, price and value-added
services. The Company differentiates itself from the competition by
consistently meeting customer demands, its ability to service customers
nationally and globally and its ability to provide value-added services.
Marking Products:
The Marking Products segment designs, manufactures and distributes a wide
range of marking equipment and consumables used by customers to identify
various consumer and industrial products, components and packaging containers.
Marking products range from simple indent hand stamps made from a special
alloy steel to a wide variety of sophisticated microprocessor-based ink-jet
printing systems. The segment manufactures and markets products and systems
that employ the following marking methods to meet customer needs: contact
printing, indenting, etching, and ink-jet printing. Customers will often use
a combination of these methods in order to achieve an appropriate mark. These
methods apply product information required for identification and traceability
as well as to facilitate inventory and quality control, regulatory compliance
and brand name communication.
A significant portion of the revenue of the Marking Products segment is
attributable to the sale of consumables and replacement parts in connection
with the marking hardware sold by the Company. The Company develops inks,
rubber and steel consumables in harmony with the marking equipment in which
they are used, which is critical to assure ongoing equipment reliability and
mark quality. Many marking equipment customers also use the Company's inks,
solvents and cleaners.
The principal customers for the Company's marking products include food and
beverage processors, metal fabricators, producers of health and beauty
products and manufacturers of cloth, plastic, rubber and building products.
A large percentage of the segment's sales are outside the United States and
are distributed through the Company's subsidiaries in Canada and Sweden in
addition to other international distributors. Matthews owns a minority
interest in distributors in Asia, Australia, France, Germany, the Netherlands
and the United Kingdom.
10
ITEM 1. BUSINESS, continued.
The marking products industry is diverse, with many companies offering limited
product lines focusing only on well-defined specialty markets. Other industry
participants, like the Company, have broad product offerings and compete in
various product markets and countries. In the United States, the Company has
manufactured and sold marking products and related consumable items for over
150 years.
Major raw materials for this segment's products include printing components,
tool steels, rubber and chemicals, all of which are presently available in
adequate supply from various sources.
Competition for marking products is intense and based on product performance,
service and price. The Company normally competes with specialty companies in
specific marking applications. The Company believes that, in general, it
offers the broadest line of marking products to address a wide variety of
industrial marking applications.
PATENTS, TRADEMARKS AND LICENSES:
The Company holds a number of domestic and foreign patents and trademarks.
However, the Company believes the loss of any or a significant number of
patents or trademarks would not have a material impact on consolidated
operations or revenues.
BACKLOG:
Because the nature of the Company's Bronze and Graphics Imaging businesses are
primarily custom products made to order with short lead times, backlogs are
not generally material except for mausoleums. Backlogs vary in a range of
approximately one year of sales for mausoleums. The York Casket segment and
the cremation casket business normally fill sales orders within one month and,
therefore, do not have a significant backlog of unfilled orders. Cremation
equipment sales backlogs vary in a range of eight to ten months of sales.
Backlogs generally vary in a range of up to four weeks of sales in the Marking
Products segment.
11
ITEM 1. BUSINESS, continued.
REGULATORY MATTERS:
The Company's operations are subject to various federal, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations impose limitations on the discharge of materials into the
environment and require the Company to obtain and operate in compliance with
conditions of permits and other government authorizations. As such, the
Company has developed environmental, health and safety policies and procedures
that include the proper handling, storage and disposal of hazardous materials.
The Company is party to various environmental matters. These include
obligations to investigate and mitigate the effects on the environment of the
disposal of certain materials at various operating and non-operating sites.
The Company is currently performing environmental assessments and remediation
at these sites, as appropriate. In addition, prior to its acquisition, the
York Casket segment was identified, along with others, by the Environmental
Protection Agency as a potentially responsible party for remediation of a
landfill site in York, Pennsylvania. At this time, the Company has not been
joined in any lawsuit or administrative order related to the site or its
clean-up.
At September 30, 2003, an accrual of $12.0 million has been recorded for
environmental remediation (of which $860,000 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 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.
12
ITEM 2. PROPERTIES.
Principal properties of the Company and its majority-owned subsidiaries as of
November 30, 2003 were as follows (properties are owned by the Company except
as noted):
Location Description of Property Square Feet
- -------- ----------------------- -----------
Bronze:
Pittsburgh, PA Manufacturing / Division Offices 97,000
Kingwood, WV Manufacturing 77,500
Kingwood, WV Manufacturing 43,500(1)
Melbourne, Australia Manufacturing 26,000(1)
Milton, Ontario, Canada Manufacturing 30,000
Parma, Italy Manufacturing / Warehouse 231,000(1)
Searcy, AR Manufacturing 113,000
Seneca Falls, NY Manufacturing 21,000
Graphics Imaging:
Pittsburgh, PA Manufacturing / Division Offices 56,000
Atlanta, GA Manufacturing 16,000
Dallas, TX Manufacturing 15,000(1)
Denver, CO Manufacturing 12,000(1)
Goslar, Germany Manufacturing 39,000(1)
Julich, Germany Manufacturing 20,400(1)
Kansas City, MO Manufacturing 42,000(1)
Munich, Germany Manufacturing 10,000(1)
Nuremberg, Germany Manufacturing 27,000(1)
Oakland, CA Manufacturing 40,000(1)
St. Louis, MO Manufacturing 25,000
Vienna, Austria Manufacturing 12,000(1)
Marking Products:
Pittsburgh, PA Manufacturing / Division Offices 85,000
Gothenburg, Sweden Manufacturing / Distribution 28,000(1)
York Casket:
York, PA Manufacturing 307,000
Marshfield, MO Manufacturing 86,000
Lynn, IN Manufacturing 76,000
Richmond, IN Manufacturing / Metal Stamping 92,000
Richmond, IN Injection Molding 18,000(1)
Cremation:
Apopka, FL Manufacturing 40,000
Richmond, IN Manufacturing 164,000(1)
Corporate Office:
Pittsburgh, PA General Offices 48,000
(1) These properties are leased by the Company under operating lease
arrangements. Rent expense incurred by the Company for leased facilities
was $2,600,000 in fiscal 2003.
13
ITEM 2. PROPERTIES, continued.
All of the owned properties are unencumbered. The Company believes its
facilities are generally well suited for their respective uses and are of
adequate size and design to provide the operating efficiencies necessary for
the Company to be competitive. The Company's facilities provide adequate
space for meeting its near-term production requirements and have availability
for additional capacity. The Company intends to continue to expand and
modernize its facilities as necessary to meet the demand for its products.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings, the eventual outcome of
which are not predictable. It is possible that an unfavorable resolution of
these matters could have a material impact to the Company. Although the
ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that they should not result in liabilities in an
amount which would materially affect the Company's consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal year 2003.
14
OFFICERS AND EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following information is furnished with respect to officers and executive
management as of December 1, 2003:
Name Age Positions with Registrant
- ---- --- -------------------------
David M. Kelly 61 Chairman of the Board, President and
Chief Executive Officer
Joseph C. Bartolacci 43 Executive Vice President
David F. Beck 51 Controller
David J. DeCarlo 58 President, Bronze Division
and Director
Brian J. Dunn 46 President, Marking Products Division
Lawrence W. Keeley, Jr. 42 President, Graphic Systems Division
Jonathan H. Maurer 48 President, York Casket Division
Steven F. Nicola 43 Chief Financial Officer, Secretary
and Treasurer
Paul F. Rahill 46 President, Cremation Division
David M. Kelly has been Chairman of the Board since March 1996. He was
appointed President and Chief Operating Officer of the Company in April 1995
and President and Chief Executive Officer in October 1995.
Joseph C. Bartolacci has been appointed Executive Vice President, effective
January 1, 2004. He had been President, Matthews Europe since April 2002. He
had also been President, Caggiati, S.p.A. (a wholly-owned subsidiary of
Matthews International Corporation) since June 1999. Prior thereto, he was
General Counsel of Matthews.
David F. Beck was appointed Controller effective September 15, 2003. He had
been Vice President, Finance for the Company's York Casket segment since
December 2001. Prior thereto, he held various financial positions as an
officer with The York Group, Inc.
David J. DeCarlo, a Director of the Company since 1987, has been President,
Bronze Division since November 1993.
Brian J. Dunn was appointed President, Marking Products Division in 2002.
Prior thereto, he was President, Marking Products, North America since
November 2000. He had been National Sales Manager, Marking Products, North
America since joining the Company in November 1998.
OFFICERS AND EXECUTIVE MANAGEMENT OF THE REGISTRANT, continued
Lawrence W. Keeley, Jr. joined the Company in September 1999 as President,
Graphic Systems Division. Prior thereto, he was a Vice President for
Container Graphics Corporation, a provider of printing plates, cutting dies
and services to the packaging industry.
Jonathan H. Maurer joined the Company as President, York Casket Division in
April 2002. He had been an independent business consultant since April 2000.
Prior thereto, he was a Senior Vice President of Calgon Carbon Corporation, a
supplier of purification systems.
Steven F. Nicola was appointed Chief Financial Officer, Secretary and
Treasurer effective December 1, 2003. Prior thereto, he was Vice President,
Accounting and Finance since December 2001. He had been Controller of the
Company since December 1995.
Paul F. Rahill rejoined the Company as President, Cremation Division in
October 2002. He previously was President of Industrial Equipment and
Engineering Company (a wholly-owned subsidiary of Matthews International
Corporation) until his retirement in April 2000. He performed independent
consulting services from April 2000 until October 2002.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information:
The authorized common stock of the Company consists of 70,000,000 shares of
Class A Common Stock, $1 par value. The Company's Class A Common Stock is
traded on the NASDAQ National Market System under the symbol "MATW". The
following table sets forth the high, low and closing prices as reported by
NASDAQ (adjusted for the stock split) for the periods indicated:
High Low Close
---- --- -----
Fiscal 2003:
Quarter ended: September 30, 2003 $28.46 $24.10 $26.42
June 30, 2003 25.00 22.56 24.76
March 31, 2003 25.65 21.51 23.10
December 31, 2002 25.00 20.94 22.33
Fiscal 2002:
Quarter ended: September 30, 2002 $25.10 $20.85 $23.37
June 30, 2002 29.00 23.01 23.35
March 31, 2002 25.71 23.00 25.10
December 31, 2001 25.58 20.65 24.58
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 7,331,932 shares have been repurchased as of
September 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.
(b) Holders:
Based on records available to the Company, the number of registered holders of
the Company's common stock was 597 at November 30, 2003.
(c) Dividends:
A quarterly dividend of $.04 per share was paid for the fourth quarter of
fiscal 2003 to shareholders of record on October 31, 2003. The Company paid
quarterly dividends of $.02750 per share for the first three quarters of
fiscal 2003 and the fourth quarter of fiscal 2002. The Company paid quarterly
dividends of $.02625 per share for the first three quarters of fiscal 2002.
17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS, continued.
Cash dividends have been paid on common shares in every year for at least the
past forty years. It is the present intention of the Company to continue to
pay quarterly cash dividends on its common stock. However, there is no
assurance that dividends will be declared and paid as the declaration and
payment of dividends is at the discretion of the Board of Directors of the
Company and is dependent upon the Company's financial condition, results of
operations, cash requirements, future prospects and other factors deemed
relevant by the Board.
18
ITEM 6. SELECTED FINANCIAL DATA.
Years Ended September 30,
------------------------------------------------------------------
2003 (1) 2002 (2) 2001 (3) 2000 1999
---------- ---------- ---------- ---------- ----------
(Amounts in thousands, except per share data)
(Not Covered by Report of Independent Accountants)
Net sales $458,865 $428,086 $283,282 $266,987 $243,370
Gross profit 170,302 160,364 119,436 118,089 103,037
Operating profit 80,084 68,187 53,357 47,776 40,948
Interest expense 2,852 4,171 1,647 1,488 867
Income before income taxes
and change in accounting 73,354 62,457 51,458 45,938 41,277
Income taxes 28,461 24,225 19,859 18,015 16,261
------- ------- ------- ------- -------
Income before change in accounting 44,893 38,232 31,599 27,923 25,016
Cumulative effect of change in
accounting, net of tax - (3,226) - - -
------- ------- ------- ------- -------
Net income $ 44,893 $ 35,006 $ 31,599 $ 27,923 $ 25,016
======= ======= ======= ======= =======
Earnings per common share:
Diluted, before change
in accounting $ 1.39 $ 1.20 $ 1.01 $ .88 $ .77
Diluted 1.39 1.10 1.01 .88 .77
Basic 1.42 1.14 1.03 .90 .79
Weighted-average common
shares outstanding:
Basic 31,686 30,765 30,560 31,031 31,703
Diluted 32,315 31,796 31,320 31,703 32,482
Cash dividends per share $ .123 $ .106 $ .101 $ .096 $ .091
Total assets $436,741 $422,601 $288,952 $220,665 $225,678
Long-term debt, noncurrent 57,023 96,487 40,726 13,908 14,144
(1) Fiscal 2003 included a net pre-tax charge of approximately $1,000 ($.02 per share after-
tax) from special items which consisted of a pre-tax gain of $2,600 on the sale of a facility
and a goodwill impairment charge of $3,600 (see Note 19 to the Consolidated Financial Statements).
(2) In fiscal 2002, the Company recorded a pre-tax charge of $5,255 ($.10 per share after-tax)
for transitional goodwill impairment as a result of the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
(3) The second quarter of fiscal 2001 included net pre-tax income of $500($.01 per share after-
tax) from special items which consisted of a pre-tax gain of $7,099 on the sale of a
subsidiary and asset impairments, restructuring costs and other special pre-tax charges
totaling $6,600 (see Note 19 to the Consolidated Financial Statements).
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of Matthews International Corporation and related notes
thereto. In addition, see "Cautionary Statement Regarding Forward-Looking
Information" included in Part I of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods indicated and the
percentage change in such income statement data from year to year.
Years Ended
September 30, Percentage Change
---------------------- -----------------
2003- 2002-
2003(1) 2002 2001(2) 2002 2001
------ ---- ------ ----- -----
Sales 100.0% 100.0% 100.0% 7.2% 51.1%
Gross profit 37.1 37.5 42.2 6.2 34.3
Operating profit 17.5 15.9 18.8 17.4 27.8
Income before taxes (3) 16.0 14.6 18.2 17.4 21.4
Net income (3) 9.8 8.9 11.2 17.4 21.0
(1) Fiscal 2003 included a net pre-tax charge of approximately $1.0 million
($.02 per share after-tax) from special items (see "Special Items").
(2) Fiscal 2001 included pre-tax income of approximately $500,000 ($.01 per
share after-tax) from special items (see "Special Items").
(3) Before cumulative effect of change in accounting. In fiscal 2002, the
Company recorded a pre-tax charge of $5.3 million ($.10 per share after-tax)
for transitional goodwill impairment (see "Goodwill").
Comparison of Fiscal 2003 and Fiscal 2002:
Sales for the year ended September 30, 2003 were $458.9 million and were
$30.8 million, or 7.2%, higher than sales of $428.1 million for the year ended
September 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. Fiscal 2003 reflected twelve months of activity for
the York Casket segment compared to ten months for fiscal 2002. Fiscal 2003
sales for the York Casket segment were $120.4 million compared to $100.4
million for fiscal 2002. For the year ended September 30, 2003, higher
foreign currency values against the U.S. dollar had a favorable impact of
approximately $14.7 million on the Company's consolidated sales compared to
fiscal 2002. Bronze segment sales for the year ended September 30, 2003 were
$187.0 million compared to $185.9 million in fiscal 2002. The increase of
$1.1 million in Bronze segment 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Fiscal 2003 sales for the Graphics Imaging segment were $99.1 million,
compared to $94.8 million last year. The increase primarily reflected higher
sales in the segment's European operations, which included the acquisition of
Reproservice Eurodigital GmbH M?nchen ("Reproservice Munich") in August 2003
(see "Acquisitions"), 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 packaging markets and the closure, in
October 2002, of an unprofitable manufacturing business in Southern
California. Marking Products segment sales for the year ended September 30,
2003 were $32.3 million, compared to $28.7 million for the year ended
September 30, 2002. The increase of $3.6 million, or 12.5%, was principally
due to higher volume, reflecting higher demand and the addition of new
distributors in Europe, and higher foreign currency exchange rates. Sales for
the Cremation segment were $20.2 million for fiscal 2003 compared to $18.3
million a year ago. The increase reflected two additional months of cremation
casket sales compared to last year as a result of the acquisition of York
Casket.
Effective October 1, 2002, Matthews changed its internal reporting structure
and began 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
Cremation segment 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 prior years contained
in this report has been reclassified to conform to current year presentation.
Gross profit for the year ended September 30, 2003 was $170.3 million,
compared to $160.4 million for the year ended September 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 year. In
addition, gross profit for the Bronze segment reflected the benefit of a
reduction in the segment's pre-need memorial finishing cost liability as a
result of manufacturing efficiency improvements. Consolidated gross profit as
a percent of sales declined slightly from 37.5% for fiscal 2002 to 37.1% for
fiscal 2003. The reduction in the consolidated gross margin for fiscal 2003
principally related to the additional York Casket revenues, which generally
have lower gross margins than other Matthews segments, and an increase in
pension and health care costs over fiscal 2002. 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 were $4.6
million for fiscal 2003, compared to $1.3 million for fiscal 2002.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Selling and administrative expenses for the year ended September 30, 2003 were
$89.2 million, compared to $92.2 million for the year ended September 30,
2002. The decline of $3.0 million from the prior year primarily reflected
lower selling and administrative costs in the Bronze segment and the domestic
Graphics Imaging operations. 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. Lower selling and administrative costs in the
domestic Graphics Imaging operations resulted from a decline in sales and the
closure, in October 2002, of an unprofitable manufacturing business in
Southern California. Consolidated selling and administrative expenses as a
percent of sales were 19.4% for the year ended September 30, 2003, compared to
21.5% last year. The reduction principally reflected the additional two
months' business 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 year ended September 30, 2003 was $80.1 million,
representing an increase of $11.9 million, or 17.4%, over operating profit of
$68.2 million for the year ended September 30, 2002. Bronze segment operating
profit for fiscal 2003 was $50.4 million, compared to $46.6 million for fiscal
2002. The increase of $3.8 million, or 8.3%, reflected the segment's higher
sales for the year, 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 $700,000 in fiscal 2002. Operating profit for
the York Casket segment for the year ended September 30, 2003 was $12.7
million, representing an increase of $3.4 million, or 36.2%, over fiscal 2002.
The increase reflected two additional months of results in fiscal 2003
compared to last year. Operating profit as a percent of sales for the York
Casket segment increased to 10.6% for fiscal 2003 from 9.3% for fiscal 2002,
reflecting improvements in certain of the segment's manufacturing processes
and a lower percentage of administrative costs as a result of the integration
with Matthews. Graphics Imaging operating profit for the year ended September
30, 2003 was $11.6 million compared to $9.7 million for fiscal 2002. The
segment's fiscal 2003 operating profit reflected a net pre-tax charge of $1.0
million (classified under Special Items), representing a pre-tax gain of $2.6
million on the sale of the segment's building in Southern California and a
pre-tax charge of $3.6 million for impairment of goodwill related to O.N.E.
Color Communications (see "Special Items). Fiscal 2003 operating profit for
the Graphics Imaging segment was favorably impacted by sales growth in the
Company's European operations, which included the acquisition of Reproservice
Munich in August 2003, combined with an increase in the value of the Euro
against the U.S. dollar. However, the European gains were partially offset by
the adverse impact of lower domestic sales and costs related to the closure of
the segment's operation in North Carolina. Fiscal 2003 operating profit for
the Marking Products segment was $4.1 million, representing an increase of
$500,000 over fiscal 2002 operating profit of $3.6 million. The increase of
14.2% resulted from higher sales combined with an increase in the value of the
Swedish Krona against the U.S. dollar. Operating profit for the Cremation
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
segment in fiscal 2003 was $1.2 million compared to an operating loss of $1.1
million for fiscal 2002. Fiscal 2002 operating results reflected costs of
$2.2 million incurred in connection with a potential acquisition in the
cremation equipment business, which was terminated and not completed. Higher
foreign currency values against the U.S. dollar had a favorable impact of
approximately $3.3 million on the Company's consolidated operating profit for
the year ended September 30, 2003 compared to a year ago.
Investment income for the year ended September 30, 2003 was $1.3 million,
compared to $1.6 million for the year ended September 30, 2002. The decline
from the prior year reflected lower investment income rates and the prior year
included a net gain on the sale of securities.
Interest expense for the year ended September 30, 2003 was $2.9 million,
compared to $4.2 million a year ago. The decline in interest expense
reflected a lower level of debt during fiscal 2003 combined with a reduction
in the average borrowing rate. Other income (deductions), net, for the year
ended September 30, 2003 represented a reduction in pre-tax income of
$381,000, compared to $119,000 for fiscal 2002. Fiscal 2003 included a
contribution of $100,000 to the Company's charitable trust. Minority interest
deduction for fiscal 2003 was $4.8 million, compared to $3.0 million for
fiscal 2002. The higher minority interest deduction for fiscal 2003 resulted
from an increase in operating income in the Company's European Graphics
Imaging businesses combined with higher currency exchange rates.
The Company's effective tax rate for the year ended September 30, 2003 was
38.8%, which remained unchanged from fiscal 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.
Special Items:
In July 2003, the Company sold its Graphics Imaging segment facility (which
was closed in October 2002) in Southern California for $3.2 million. The
transaction resulted in a pre-tax gain of $2.6 million, which was recorded in
Special Items on the Consolidated Statement of Income. In addition, Special
Items for fiscal 2003 also included a pre-tax charge of $3.6 million for
goodwill impairment. The impairment, which was recorded in the fiscal 2003
fourth quarter, related to O.N.E. Color Communications ("O.N.E."), a wholly-
owned subsidiary in the Company's Graphics Imaging segment (see "Goodwill").
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. 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, except for $1.2 million classified as selling and
administrative expenses and $500,000 classified as other deductions.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Goodwill:
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 effective October 1, 2001.
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 year
ended September 30, 2001 would have been $55.0 million and $34.0 million,
respectively.
The standard also requires a periodic assessment of the carrying value of
goodwill 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. Prior to the adoption of SFAS No. 142, valuation for
impairment was determined using undiscounted future cash flows. Based on this
assessment, the Company recorded a pre-tax charge under Cumulative Effect of
Change in Accounting 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 and determined that no additional adjustments to the carrying
values of goodwill were necessary at that time. However, due to operating
conditions that transpired during the second half of fiscal 2003 and the
Company's purchase of the remaining 50% interest in O.N.E., the Company
determined that an impairment review of O.N.E. was necessary as of September
30, 2003. Based on this assessment, the Company recorded a pre-tax charge of
$3.6 million in the fourth quarter of fiscal 2003 for goodwill impairment.
The impairment was determined based upon a comparison of the carrying value of
this reporting unit to its implied fair market value.
Comparison of Fiscal 2002 and Fiscal 2001:
Sales for the year ended September 30, 2002 were $428.1 million and were
$144.8 million, or 51.1%, higher than sales of $283.3 million for the year
ended September 30, 2001. The increase primarily related to the acquisition
of York Casket on December 3, 2001. Sales for the York Casket segment totaled
$100.4 million from the acquisition date through September 30, 2002. Bronze
segment sales for fiscal 2002 were $185.9 million, which was $32.4 million, or
21.1%, higher than fiscal 2001. The increase in Bronze sales primarily
resulted from the acquisition of the commemorative products business of The
York Group, Inc. ("York Bronze") in May 2001, higher mausoleum construction
revenues and increased sales of bronze memorial and architectural products.
Mausoleum sales for fiscal 2002 were 29% higher than fiscal 2001.
Architectural product sales were higher in fiscal 2002 as orders for
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
architectural commemorative and tribute products increased following the
events of September 11, 2001. Fiscal 2002 sales for the Graphics Imaging
segment were $94.8 million, representing an increase of $5.2 million, or 5.9%,
over fiscal 2001. The increase primarily reflected the acquisitions of
Scholler GmbH ("Scholler") in January 2001 and Rudolf Reproflex GmbH
("Rudolf") in 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 were adversely impacted by weak demand and price pressure for
printing plates sold into the corrugated and primary packaging markets.
Marking Products segment sales for the year ended September 30, 2002 were
$28.7 million, compared to $29.6 million for fiscal 2001. The decline of
$970,000, or 3.3%, was mainly due to a drop in demand for equipment products
sold to the tire, automotive and building segments of the economy. Fiscal
2002 sales for the Cremation segment were $18.3 million, representing an
increase of $7.7 million over fiscal 2001 sales of $10.6 million. The
increase primarily related to the acquisition of the cremation casket business
(part of York Casket) on December 3, 2001. For fiscal 2002, higher foreign
currency values against the U.S. dollar had a favorable impact of
approximately $2.0 million on the Company's consolidated sales compared to
fiscal 2001.
Gross profit for the year ended September 30, 2002 was $160.4 million,
compared to $119.4 million for the year ended September 30, 2001. The
increase in consolidated gross profit primarily resulted from the acquisition
of York Casket on December 3, 2001. Gross profit for the Bronze segment for
fiscal 2002 increased from fiscal 2001 due to higher sales. Gross margin
percentages for the segment were consistent with fiscal 2001. Fiscal 2002
gross profit for the Graphics Imaging segment declined from fiscal 2001
principally reflecting the divestiture of Tukaiz combined with the unfavorable
impact of price pressure on printing plate sales. These declines were offset
partially by the acquisitions of Scholler and Rudolf. Gross profit for the
Marking Products segment for fiscal 2002 declined as a result of lower sales
volume. Consolidated gross profit as a percent of sales for the year ended
September 30, 2002 declined to 37.5%, compared to 42.2% for fiscal 2001.
Factors contributing to this decline included the addition of York Casket
revenues, which generally have lower gross margins than other Matthews
segments, price pressure in the Graphics Imaging segment and an increase in
pension and health care costs for all segments.
Selling and administrative expenses for the year ended September 30, 2002 were
$92.2 million, representing an increase of $23.9 million, or 35.0%, over
fiscal 2001. Fiscal 2001 selling and administrative expenses included special
charges of $1.2 million (see "Special Items"). Excluding special charges,
selling and administrative expenses increased $25.1 million, or 37.4%, from
fiscal 2001. The increase primarily resulted from the acquisitions of York
Casket in December 2001 and York Bronze in May 2001. In addition, selling and
administrative expenses for the Cremation segment included one-time costs of
$2.2 million incurred in connection with a potential acquisition, which was
terminated and not completed. 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.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Fiscal 2002 consolidated selling and administrative expenses were favorably
impacted by the adoption SFAS No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, the Company discontinued the amortization of goodwill
effective October 1, 2001. Goodwill amortization was $3.6 million for the
year ended September 30, 2001. The favorable impact of SFAS No. 142 on
operating profit was more than offset by increases in pension and health care
costs. Pension costs were adversely affected by a decline in the Company's
pension fund assets. Consolidated selling and administrative expenses as a
percent of sales were 21.5% for the year ended September 30, 2002 compared to
23.7% (excluding special charges) in fiscal 2001, principally due to the lower
ratio of selling and administrative costs for York Casket sales.
Operating profit for the year ended September 30, 2002 was $68.2 million,
representing an increase of $14.8 million, or 27.8%, over operating profit of
$53.4 million for the year ended September 30, 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 year ended
September 30, 2001 was $52.4 million. A significant portion of the increase
in fiscal 2002 operating profit resulted from the addition of York Casket in
December 2001. Operating profit for the York Casket segment was $9.4 million
from the acquisition date through September 30, 2002. Bronze segment
operating profit was $46.6 million for the year ended September 30, 2002
compared to $37.4 million (excluding special items) for fiscal 2001. The
increase in Bronze operating profit primarily reflected the acquisition of
York Bronze 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 year ended September 30, 2002 was $9.7 million
compared to $10.0 million (excluding special items) for fiscal 2001. The
slight decline was due primarily to the divestiture of Tukaiz, which was
nearly offset by the acquisitions of Scholler and Rudolf. Fiscal 2002
operating profit for the Marking Products segment was $3.6 million, compared
to $4.6 million (excluding special items) a year ago. The decline reflected
lower sales combined with higher employee benefit costs in the current fiscal
year. The Cremation segment incurred an operating loss of $1.1 million for
the year ended September 30, 2002, compared to an operating profit of $400,000
for fiscal 2001. Fiscal 2002 results reflected the acquisition of the
cremation casket business (part of York Casket) on December 3, 2001. In
addition, fiscal 2002 selling and administrative expenses for the Cremation
segment included one-time costs of $2.2 million incurred in connection with a
potential acquisition, which was terminated and not completed. Higher foreign
currency values against the U.S. dollar had a favorable impact of
approximately $460,000 on the Company's consolidated operating profit for the
year ended September 30, 2002 compared to fiscal 2001.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Investment income for the year ended September 30, 2002 was $1.6 million
compared to $2.4 million for the year ended September 30, 2001. The decrease
resulted from a lower rate of return on investments during the year. Interest
expense for the year ended September 30, 2002 was $4.2 million, compared to
$1.6 million for the year ended September 30, 2001. The increase in interest
expense principally reflected borrowings of $124.5 million in December 2001
primarily in connection with the acquisition of York Casket.
Other income (deductions), net, for the year ended September 30, 2002
represented a reduction in pre-tax income of $119,000, compared to $279,000
for fiscal 2001. Minority interest deduction for fiscal 2002 was $3.0 million
compared to $2.3 million for fiscal 2001. The higher minority interest
deduction for fiscal 2002 resulted from the acquisitions of Scholler and
Rudolf, offset partially by the divestiture of Tukaiz.
The Company's effective tax rate for the year ended September 30, 2002 was
38.8%, compared to 38.6% for the year ended September 30, 2001. The slight
increase resulted primarily from higher foreign income taxes for the year.
The difference between the Company's effective tax rate in fiscal 2002 and the
Federal statutory rate of 35% primarily reflected the impact of state and
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash provided by operating activities was $58.5 million for the year ended
September 30, 2003, compared to $55.5 million and $39.0 million for fiscal
2002 and 2001, respectively. Operating cash flow for fiscal 2003 reflected
net income adjusted for depreciation, amortization and a goodwill impairment
charge (non-cash items), a $7.5 million cash contribution to the Company's
principal pension plan, and a tax benefit of $5.8 million from exercised stock
options. The Company's contribution to its pension plan was the maximum
allowed under current tax regulations (as determined by the Company's
actuarial consultant) and, as a result, plan assets at the plan's year-end
(July 31, 2003) exceeded the actuarial present value of vested benefit
obligations. In addition, fiscal 2003 operating cash flow included final
payouts to customers under various rebate programs of the York Casket segment.
Most of these programs were replaced in calendar 2003 with a new discount
program. Operating cash flow for fiscal 2002 primarily reflected net income
adjusted for depreciation and amortization and the impairment of goodwill
resulting from the adoption of SFAS No. 142. Operating cash flow for fiscal
2002 also included a tax benefit of $5.5 million from exercised stock options.
For the year ended September 30, 2001, operating cash flow reflected net
income, excluding the gain on the sale of Tukaiz, adjusted for depreciation,
amortization and impairment losses (non-cash items) in connection with the
special charges recorded in the fiscal 2001 second quarter.
Cash used in investing activities was $13.3 million for the year ended
September 30, 2003, compared to $86.6 million and $54.5 million for fiscal
years 2002 and 2001, respectively. Investing activities for fiscal 2003
primarily included capital expenditures of $9.3 million, which was partially
offset by proceeds of $5.6 million from sales of assets. Fiscal 2003
investing activities also included the acquisitions of Reproservice Munich in
August 2003 and the remaining fifty percent interest in O.N.E. on July 31,
2003. Investing activities for fiscal 2002 included payments (net of cash
acquired) of $88.8 million in connection with acquisitions, principally
related to York Casket (December 2001) and Rudolf (July 2001).
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Although Rudolf 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 reflected capital expenditures of $10.1 million,
proceeds of $9.0 million from the net disposition of investment securities and
proceeds of $3.2 million from the sale of assets.
Investing activities for fiscal 2001 principally included acquisitions of
$63.6 million, proceeds of $18.6 million from the sale of Tukaiz and capital
expenditures of $7.3 million. Fiscal 2001 acquisitions primarily reflected
cash payments in connection with the acquisitions of O.N.E., Scholler and York
Bronze. See "Acquisitions" for further discussion of the Company's
acquisitions during the last three fiscal years.
Capital expenditures were $9.3 million for the year ended September 30, 2003,
compared to $10.1 million and $7.3 million for fiscal 2002 and 2001,
respectively. Capital expenditures in each of the last three fiscal years
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. The
higher level of capital expenditures in fiscal years 2003 and 2002 resulted
primarily from the addition of the York Casket segment. Capital expenditures
for the last three fiscal years were primarily financed through operating
cash. Capital spending for property, plant and equipment has averaged $8.9
million for the last three fiscal years. The capital budget for fiscal 2004
is $13.9 million. The Company expects to generate sufficient cash from
operations to fund all anticipated capital spending projects.
Cash used in financing activities for the year ended September 30, 2003 was
$41.7 million, reflecting payments on long-term debt of $44.0 million,
treasury stock purchases of $6.6 million and dividends of $3.9 million
($0.123 per share) to the Company's shareholders. In October 2003, the Board
of Directors approved a 45% increase in the quarterly dividend rate reflecting
the Company's higher operating cash flow and recent changes in the taxation of
dividends in the United States. These payments were partially offset by
proceeds of $12.8 million from the sale of treasury stock (stock option
exercises). Cash provided by financing activities for the year ended
September 30, 2002 was $58.5 million, reflecting proceeds from long-term debt
of $126.4 million, debt repayments of $71.3 million, net proceeds of $6.7
million from the sale of treasury stock (stock option exercises), and
dividends of $3.3 million ($0.106 per share) 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 September 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 Company borrowed $124.5 million under the Revolving Credit Facility on
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
December 3, 2001 primarily in connection with the acquisition of York Casket.
The outstanding balance on the Revolving Credit Facility was $44.5 million at
September 30, 2003.
Cash provided by financing activities for fiscal 2001 was $16.0 million,
consisting of proceeds from long-term debt of $32.4 million, offset partially
by net treasury stock purchases of $12.0 million, repayments of $1.3 million
on long-term debt, and dividends of $3.1 million ($0.101 per share) to the
Company's shareholders. Fiscal 2001 proceeds from long-term debt primarily
reflected bank borrowings of $30.0 million in connection with the acquisition
of York Bronze.
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 September 30, 2003 and 2002.
Caggiati S.p.A. has four lines of credit totaling 10.8 million Euros
(U.S.$12.6 million) with various banks. Outstanding borrowings on these lines
of credit approximated $3.6 million and $4.1 million at September 30, 2003 and
2002, respectively. The weighted-average interest rate on these borrowings,
which are collateralized by certain trade accounts receivable, was 2.8% at
September 30, 2003.
The Company has a stock repurchase program, which was initiated in 1996. As
of September 30, 2003, the Company's Board of Directors had authorized the
repurchase of a total of 8,000,000 shares (adjusted for stock splits) of
Matthews' common stock under the program, of which 7,331,932 shares had been
repurchased as of September 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 $89.7 million at September 30,
2003, compared to $68.8 million and $35.8 million at September 30, 2002
and 2001, respectively. Working capital at September 30, 2003 reflected a
higher level of cash and cash equivalents compared to September 30, 2002 and a
reduction in current liabilities resulting from final payouts to customers
under various rebate programs of the York Casket segment. The increase in
working capital from September 30, 2001 to September 30, 2002 reflected the
acquisition of York Casket. In addition, working capital at September 30,
2001 reflected a liability of approximately $11.0 million for the acquisition
of Rudolf, which was paid in the first quarter of fiscal 2002. Cash and cash
equivalents were $67.0 million at September 30, 2003, compared to $57.1
million and $28.7 million at September 30, 2002 and 2001, respectively. The
Company's current ratio at September 30, 2003 was 2.2, compared to 1.8 and 1.5
at September 30, 2002 and 2001, respectively.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
RESTRUCTURING AND RELOCATION COSTS:
Accrued reserves for restructuring and relocation costs, which are included in
other current liabilities, were $1.0 million and $3.7 million at September 30,
2003 and 2002, respectively. Fiscal 2003 activity reflected additional
restructuring reserves of $325,000 and charges incurred of $3.0 million
applied against the reserve. The reserves were 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 initial liability included previously
established reserves assumed with the acquisition of York Casket as well as
reserves recorded for costs to be incurred as a result of the acquisition.
Restructuring reserves recorded for costs to be incurred as a result of the
York Casket 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 environmental, health, and safety policies and
procedures that include the proper handling, storage and disposal of hazardous
materials.
The Company is party to various environmental matters. These include
obligations to investigate and mitigate the effects on the environment of the
disposal of certain materials at various operating and non-operating sites.
The Company is currently performing environmental assessments and remediation
at these sites, as appropriate. 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, Pennsylvania. At this time, the Company has not been joined in any
lawsuit or administrative order related to the site or its clean-up.
At September 30, 2003, an accrual of $12.0 million has been recorded for
environmental remediation (of which $860,000 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.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
ACQUISITIONS:
In August 2003, Matthews acquired Reproservice Munich, a German graphics and
flexographic printing plate manufacturer located in Munich, Germany. The
transaction was structured as a stock purchase, at an acquisition price of 4.1
million Euros (U.S.$4.8 million). The combination of Matthews and
Reproservice Munich is an important part of the Matthews strategy to increase
its European presence in the graphics industry. Reproservice Munich, a
family-owned business with annual sales of approximately U.S.$6.0 million, was
established in 1983. Products and services of Reproservice Munich include
pre-press packaging, digital and analog flexographic printing plates, design,
art work, lithography and color separation.
In May 1998, Matthews acquired a 50% interest in 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.
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.
On May 24, 2001, Matthews acquired York Bronze for $45.0 million. The
transaction was completed through the purchase of certain assets (pursuant to
an asset purchase agreement) and stock of subsidiaries under the commemorative
products segment of The York Group, Inc. (pursuant to a stock purchase
agreement). As part of the transaction, Matthews acquired the York Bronze
manufacturing facilities in Kingwood, West Virginia and Bryan, Texas. The
acquisition of York Bronze is intended to expand Matthews' product offerings
to the death care industry. The transaction was financed by Matthews through
existing cash on hand and a $30.0 million bank loan.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Effective July 1, 2001, Matthews acquired a 75% interest in Rudolf, which is
headquartered in Goslar, Germany. The purchase price of approximately
U.S.$11.0 million was paid in October 2001. In January 2001, Matthews
acquired a 75% interest in Scholler, which is located in Nuremberg, Germany.
The acquisitions of Rudolf and Scholler are an important part of the Matthews
strategy to become a worldwide leader in the graphics industry and serve
existing multinational customers on a global basis.
Matthews has accounted for these acquisitions using the purchase method and,
accordingly, recorded the acquired assets and liabilities at their estimated
fair values at the acquisition dates. The excess of the purchase price over
the estimated fair value of the net assets acquired was recorded as goodwill,
which, until September 30, 2001, had been amortized on a straight-line basis
over periods ranging from 20 to 25 years, except for Rudolf, which was
acquired July 1, 2001 (subsequent to the effective date of SFAS No. 141). In
June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting (instead of pooling-of-
interests) for all business combinations initiated after June 30, 2001. In
addition, goodwill related to business combinations after June 30, 2001 is not
amortized, but is subject to periodic review for impairment. Effective
October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." As a result, goodwill from acquisitions prior to July 1,
2001 is no longer amortized and is also subject to periodic review for
impairment (see "Results of Operations - Goodwill").
DISPOSITIONS:
In July 2003, the Company sold its Graphics Imaging segment facility (which
was closed in October 2002) in Southern California for $3.2 million. The
transaction resulted in a pre-tax gain of $2.6 million, which was recorded in
Special Items on the Consolidated Statement of Income.
In January 2001, Matthews sold its fifty percent interest in Tukaiz. Proceeds
to Matthews from the sale were $18.6 million, which included the repayment of
intercompany debt of approximately $8.4 million. All intercompany debt
provided by Matthews to Tukaiz, including a $5.5 million Subordinated
Convertible Note, was repaid upon the closing of this transaction. The sale
resulted in a pre-tax gain of $7.1 million, which was reported in Special
Items on the Consolidated Statement of Income.
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
nine fiscal years, the Company has achieved an average annual increase in
earnings per share of 15.2%.
Matthews International Corporation 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 (see "Liquidity and Capital
Resources").
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
Based on anticipated internal growth and the impact of the Company's recent
acquisitions, the Company expects to achieve diluted earnings per share of
approximately $1.58 for the fiscal year ended September 30, 2004.
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 Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk," of this Annual Report on Form 10-K.
The Company's significant accounting policies are included in the Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K.
Management believes that the application of these policies on a consistent
basis enables the Company to provide useful and reliable financial information
about the company's operating results and financial condition. The following
accounting policies involve significant estimates, which are considered
critical to the preparation of the Company's consolidated financial statements
for the year ended September 30, 2003.
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. Under SFAS No. 142, 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.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
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.
The Company's principal pension plan maintains a substantial portion of its
assets in equity securities. Based on an analysis of the historical
performance of the plan's assets and consultation with its independent
investment advisor, the Company has maintained the long-term rate of return
assumption for these assets at 9.0% for purposes of determining pension cost
and funded status under SFAS No. 87, "Employers' Accounting for Pensions."
The discount rate assumption used in determining the present value of the
projected benefit obligation was reduced from 7.0% in fiscal 2002 to 6.5% in
fiscal 2003, reflecting a decline in long-term bond rates.
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.
Revenue Recognition:
Revenues are generally recognized when title and risk of loss pass to the
customer, which is typically at the time of product shipment. For pre-need
sales of memorials and vases, revenue is recognized when the memorial has been
manufactured to the customer's specifications (e.g., name and birth date),
title has been transferred to the customer and the memorial and vase are
placed in storage for future delivery. A liability has been recorded in
Estimated Finishing Costs for the estimated costs of finishing pre-need bronze
memorials and vases that have been manufactured and placed in storage for
future delivery.
Construction revenues are recognized under the percentage-of-completion method
of accounting. The Company offers rebates to certain customers participating
in volume purchase programs. Rebates are estimated and recorded as a
reduction in sales at the time the Company's products are sold.
In July 2003, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") issued Issue No. 00-21 "Revenue Arrangements with
Multiple Deliverables." Issue No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue generating activities. The provisions of Issue No. 00-21, which were
effective for the Company on July 1, 2003, did not have a material impact on
the Company's results of operations or financial position.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
September 30, 2003, and the effect such obligations are expected to have on
its liquidity and cash flows in future periods.
Payments due in fiscal year:
------------------------------------------------
After
Total 2004 2005 to 2006 2007 to 2008 2008
--------- ----------- ------------ ------------ ------
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facility $ 44,500 $ - $ 44,500 $ - $ -
Notes payable to banks 13,770 1,716 2,860 2,569 6,625
Short-term borrowings 3,575 3,575 - - -
Capital lease obligations 1,207 738 455 14 -
Non-cancelable operating leases 9,533 2,778 3,023 2,006 1,726
------- ----- ------ ----- ------
Total contractual cash obligations $ 72,585 $ 8,807 $ 50,838 $ 4,589 $ 8,351
======= ===== ====== ===== ======
The Company estimates that payments under its principal retirement plan
(including its supplemental retirement plan) and postretirement benefit
payments will be $3.7 million and $926,000, respectively, in fiscal 2004.
These amounts are not expected to change materially thereafter. The Company
believes that its current liquidity sources, combined with its operating cash
flow and borrowing capacity, will be sufficient to meet its capital needs for
the foreseeable future.
INFLATION:
Inflation has not had a material impact on the Company over the past three
years nor is it anticipated to have a material impact for the foreseeable
future.
ACCOUNTING PRONOUNCEMENTS:
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
including long-lived assets to be held and used, long-lived assets to be
disposed of other than by sale and long-lived assets to be disposed of by
sale. This statement, which is effective for the Company's fiscal year ended
September 30, 2003, did not have a material impact on the Company's results of
operations or financial position.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS, continued.
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 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.
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. 148 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 were adopted by the Company beginning
with the fiscal 2003 second quarter.
In July 2003, the EITF issued Issue No. 00-21 "Revenue Arrangements with
Multiple Deliverables." Issue No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue generating activities. The provisions of Issue No. 00-21 were
effective July 1, 2003, and have been applied prospectively by the Company.
Issue No. 00-21 did not have a material impact on the Company's results of
operations or financial position.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about the Company's market risk involves forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company has market risk
related to changes in interest rates, commodity prices and foreign currency
exchange rates. The Company generally 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.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Description Pages
- ----------- -----
Report of Independent Auditors 38
Consolidated Balance Sheet 39-40
Consolidated Statement of Income 41
Consolidated Statement of Shareholders' Equity 42
Consolidated Statement of Cash Flows 43
Notes to Consolidated Financial Statements 44-68
Supplementary Financial Information 69
Report of Independent Auditors
on Financial Statement Schedule 70
Financial Statement Schedule 71
38
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and
Board of Directors of
Matthews International Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Matthews
International Corporation and subsidiaries at September 30, 2003 and 2002, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 20 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets." Accordingly, the Company changed its method of
accounting for goodwill in 2002.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
November 13, 2003
39
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2003 and 2002
(Dollar amounts in thousands, except per share data)
----------
ASSETS 2003 2002
---- ----
Current assets:
Cash and cash equivalents $ 66,954 $ 57,101
Short-term investments 4,588 4,565
Accounts receivable, net of allowance
for doubtful accounts of $6,013
and $8,289, respectively 62,883 66,239
Inventories (Note 3) 27,065 24,403
Deferred income taxes 1,517 1,741
Other current assets 3,047 1,971
------- -------
Total current assets 166,054 156,020
Investments (Note 4) 4,561 4,699
Property, plant and equipment, net (Note 5) 69,633 75,143
Deferred income taxes (Note 11) 6,055 18,095
Other assets 22,686 10,274
Goodwill (Note 20) 154,690 144,960
Other intangible assets, net of
accumulated amortization of $638
and $290, respectively (Note 20) 13,062 13,410
------- -------
Total assets $436,741 $422,601
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
40
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
September 30, 2003 and 2002
(Dollar amounts in thousands, except per share data)
----------
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
---- ----
Current liabilities:
Long-term debt, current maturities $ 6,029 $ 6,127
Trade accounts payable 19,805 19,462
Accrued compensation 24,745 22,859
Accrued income taxes 1,274 4,114
Customer prepayments 2,488 2,675
Accrued rebates 1,306 9,697
Other current liabilities 20,676 22,252
------- -------
Total current liabilities 76,323 87,186
Long-term debt (Note 6) 57,023 96,487
Estimated finishing costs 4,863 6,811
Postretirement benefits other than pensions
(Note 10) 17,644 17,907
Environmental reserve (Note 14) 11,154 11,300
Other liabilities and deferred revenue 13,506 21,535
Commitments and contingent liabilities (Note 12)
Shareholders' equity (Notes 2, 7 and 8):
Class A common stock, $1.00 par value; authorized
70,000,000 shares; 36,333,992 shares issued 36,334 36,334
Preferred stock, $100 par value, authorized
10,000 shares, none issued - -
Additional paid-in capital 6,476 2,119
Retained earnings 257,559 216,569
Accumulated other comprehensive income (loss) 6,643 (15,216)
Treasury stock, 4,171,943 and 5,166,586 shares,
respectively, at cost (50,784) (58,431)
------- -------
Total shareholders' equity 256,228 181,375
------- -------
Total liabilities and shareholders' equity $436,741 $422,601
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
41
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the years ended September 30, 2003, 2002 and 2001
(Dollar amounts in thousands, except per share data)
----------
2003 2002 2001
---- ---- ----
Sales $ 458,865 $ 428,086 $ 283,282
Cost of sales (288,563) (267,722) (163,846)
------- ------- -------
Gross profit 170,302 160,364 119,436
Selling expense (43,334) (43,468) (38,100)
Administrative expense (45,840) (48,709) (30,156)
Special items (Note 19) (1,044) - 2,177
------- ------- -------
Operating profit 80,084 68,187 53,357
Investment income 1,283 1,587 2,365
Interest expense (2,852) (4,171) (1,647)
Other income (deductions), net (381) (119) (279)
Minority interest (4,780) (3,027) (2,338)
------- ------- -------
Income before income
taxes and change in accounting 73,354 62,457 51,458
Income taxes (Note 11) (28,461) (24,225) (19,859)
------- ------- -------
Income before cumulative
effect of change in accounting 44,893 38,232 31,599
Cumulative effect of change in
accounting, net of tax - (3,226) -
------- ------- -------
Net income $ 44,893 $ 35,006 $ 31,599
======= ======= =======
Earnings per share before cumulative
effect of change in accounting:
Basic $ 1.42 $ 1.24 $ 1.03
==== ==== ====
Diluted $ 1.39 $ 1.20 $ 1.01
==== ==== ====
Earnings per share (Notes 2 and 9):
Basic $ 1.42 $ 1.14 $ 1.03
==== ==== ====
Diluted $ 1.39 $ 1.10 $ 1.01
==== ==== ====
The accompanying notes are an integral part of these consolidated financial
statements.
42
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended September 30, 2003, 2002 and 2001
(Dollar amounts in thousands, except per share data)
----------
Accumulated
Other
Common Additional Comprehensive
Stock Paid-in Retained Income (Loss) Treasury
(Note 7) Capital Earnings (net of tax) Stock Total
-------- ---------- -------- ------------ --------- ----------
Balance, September 30, 2000 $18,167 $ - $174,689 $ (9,184) $(56,816) $126,856
Net income - - 31,599 - - 31,599
Unrealized gains (losses) - - - 402 - 402
Minimum pension liability - - - 787 - 787
Translation adjustment - - - (988) - (988)
Total comprehensive income 31,800
Treasury stock transactions:
Purchase of 778,462 shares - - - - (12,305) (12,305)
Issuance of 44,538 shares
under stock plans - - (198) - 641 443
Stock split, two-for-one 18,167 - (18,167) - - -
Dividends, $.101 per share - - (3,078) - - (3,078)
------ ------ ------- ------ ------ -------
Balance, September 30, 2001 36,334 - 184,845 (8,983) (68,480) 143,716
Net income - - 35,006 - - 35,006
Unrealized gains (losses) - - - (342) - (342)
Minimum pension liability - - - (10,042) - (10,042)
Translation adjustment - - - 4,151 - 4,151
Total comprehensive income 28,773
Treasury stock transactions:
Purchase of 6,000 shares - - - - (124) (124)
Issuance of 899,572 shares
under stock plans - 2,119 - - 10,173 12,292
Dividends, $.106 per share - - (3,282) - - (3,282)
------ ------ ------- ------ ------ -------
Balance, September 30, 2002 36,334 2,119 216,569 (15,216) (58,431) 181,375
Net income - - 44,893 - - 44,893
Unrealized gains (losses) - - - (17) - (17)
Minimum pension liability - - - 10,011 - 10,011
Translation adjustment - - - 11,865 - 11,865
Total comprehensive income 66,752
Treasury stock transactions:
Purchase of 256,468 shares - - - - (6,623) (6,623)
Issuance of 1,251,111 shares
under stock plans - 4,357 - - 14,270 18,627
Dividends, $.123 per share - - (3,903) - - (3,903)
------ ------ ------- ------ ------ -------
Balance, September 30, 2003 $36,334 $ 6,476 $257,559 $ 6,643 $ (50,784) $256,228
====== ====== ======= ====== ====== =======
The accompanying notes are an integral part of these consolidated financial statements.
43
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended September 30, 2003, 2002 and 2001
(Dollar amounts in thousands, except per share data)
----------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 44,893 $ 35,006 $ 31,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,872 13,856 12,932
Change in deferred taxes 5,128 5,286 709
Changes in working capital items (Note 15) (12,460) (4,050) 768
(Increase) decrease in other assets 5,594 (3,786) (2,813)
Increase (decrease) in estimated finishing costs (1,948) (590) 126
Increase (decrease) in other liabilities (4,553) (1,060) 107
Decrease in postretirement benefits (263) (376) (317)
Tax benefit on exercised stock options 5,832 5,473 174
Impairment losses 3,840 5,776 2,824
Net (gain) loss on dispositions of assets (2,504) 401 248
Gain on sale of subsidiary - - (7,099)
Net (gain) loss on investments 55 (456) (209)
------ ------ ------
Net cash provided by operating activities 58,486 55,480 39,049
------ ------ ------
Cash flows from investing activities:
Capital expenditures (9,280) (10,063) (7,264)
Proceeds from dispositions of assets 5,572 3,228 75
Proceeds from sale of subsidiary - - 18,582
Acquisitions, net of cash acquired (9,455) (88,767) (63,567)
Purchases of investment securities (185) (4,771) (12,883)
Proceeds from dispositions of investments 21 13,730 10,553
Payments on notes receivable - - 7
------ ------ ------
Net cash used in investing activities (13,327) (86,643) (54,497)
------ ------ ------
Cash flows from financing activities:
Proceeds from long-term debt - 126,433 32,430
Payments on long-term debt (43,993) (71,310) (1,320)
Proceeds from the sale of treasury stock 12,795 6,819 269
Purchases of treasury stock (6,623) (124) (12,305)
Dividends (3,903) (3,282) (3,078)
------ ------ ------
Net cash provided by (used in) financing activities (41,724) 58,536 15,996
------ ------ ------
Effect of exchange rate changes on cash 6,418 1,037 (1,007)
------ ------ ------
Net change in cash and cash equivalents 9,853 28,410 (459)
Cash and cash equivalents at beginning of year 57,101 28,691 29,150
------ ------ ------
Cash and cash equivalents at end of year $ 66,954 $ 57,101 $ 28,691
====== ====== ======
Cash paid during the year for:
Interest $ 3,007 $ 3,952 $ 1,630
Income taxes 20,902 10,080 13,227
The accompanying notes are an integral part of these consolidated financial statements.
44
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
----------
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. The
York Casket segment is a 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 caskets
primarily 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.
Effective October 1, 2002, Matthews changed its internal reporting structure
and began 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
Cremation segment 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 prior years contained
in this report has been reclassified to conform to current year presentation.
The Company has manufacturing and marketing facilities in the United States,
Australia, Canada and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
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 affiliate, S+T GmbH & Co. KG ("S+T"). All
intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Stock Split:
In August 2001, the Board of Directors declared a two-for-one stock split on
the Company's Class A and Class B 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.
Foreign Currency:
Balance sheet accounts for foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at the consolidated balance sheet date.
Gains or losses that result from this process are recorded in other
comprehensive income. The cumulative translation adjustment at September 30,
2003 was an increase in accumulated other comprehensive income of $6,608. The
cumulative translation adjustment at September 30, 2002 was a reduction in
accumulated other comprehensive income of $5,256. The revenue and expense
accounts of foreign subsidiaries are translated into U.S. dollars at the
average exchange rates that prevailed during the period.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Company
considers all investments purchased with a remaining maturity of three months
or less to be cash equivalents. The carrying amount of cash and cash
equivalents approximates fair value due to the short-term maturities of these
instruments.
Inventories:
Inventories are stated at the lower of cost or market with cost generally
determined under the average cost method.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is computed
primarily on the straight-line method over the estimated useful lives of the
assets, which generally range from 10 to 45 years for buildings and 3 to 12
years for machinery and equipment. Gains or losses from the disposition of
assets are generally reflected in operating profit. The cost of maintenance
and repairs is charged against income as incurred. Renewals and betterments
of a nature considered to extend the useful lives of the assets are
capitalized.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Goodwill and Other Intangible Assets:
Prior to fiscal 2002, goodwill, which represents the excess of cost over the
estimated fair value of net assets of acquired businesses, was amortized using
the straight-line method over periods ranging from 20 to 25 years. Effective
October 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under
this standard, 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.
Environmental:
Costs that mitigate or prevent future environmental issues or extend the life
or improve equipment utilized in current operations are capitalized and
depreciated on a straight-line basis over the estimated useful lives of the
related assets. Costs that relate to current operations or an existing
condition caused by past operations are expensed. Environmental liabilities
are recorded when the Company's obligation is probable and reasonably
estimable. Accruals for losses from environmental remediation obligations do
not consider the effects of inflation, and anticipated expenditures are not
discounted to their present value.
Treasury Stock:
Treasury stock is carried at cost. The cost of treasury shares sold is
determined under the average cost method.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. Deferred income taxes for U.S. tax purposes have not been provided
on the undistributed earnings of foreign subsidiaries, as such earnings are
considered to be reinvested indefinitely. At September 30, 2003,
undistributed earnings for which deferred U.S. income taxes have not been
provided approximated $31,539. Determination of the amount of unrecognized
U.S. deferred tax liability on these unremitted earnings is not practical as
any taxes paid upon distribution to the Company would be offset, at least in
part, by foreign tax credits under U.S. tax regulations.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Revenue Recognition:
Revenues are generally recognized when title and risk of loss pass to the
customer, which is typically at the time of product shipment. For pre-need
sales of memorials and vases, revenue is recognized when the memorial has been
manufactured to the customer's specifications (e.g., name and birth date),
title has been transferred to the customer and the memorial and vase are
placed in storage for future delivery. A liability has been recorded in
Estimated Finishing Costs for the estimated costs of finishing pre-need bronze
memorials and vases that have been manufactured and placed in storage for
future delivery.
Construction revenues are recognized under the percentage-of-completion method
of accounting. The Company offers rebates to certain customers participating
in volume purchase programs. Rebates are estimated and recorded as a
reduction in sales at the time the Company's products are sold.
In July 2003, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") issued Issue No. 00-21 "Revenue Arrangements with
Multiple Deliverables." Issue No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue generating activities. The provisions of Issue No. 00-21, which were
effective for the Company on July 1, 2003, did not have a material impact on
the Company's results of operations or financial position.
Research and Development Expenses:
Research and development costs are expensed as incurred and approximated
$4,200, $2,800 and $2,500 for the years ended September 30, 2003, 2002 and
2001, respectively.
Earnings Per Share:
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding. Diluted earnings per share is computed
using the treasury stock method, which assumes the issuance of common stock
for all dilutive securities.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Stock Plan:
The Company has a stock incentive plan that provides for grants of incentive
stock options, nonstatutory stock options and restricted share awards. The
Company has elected to account for its stock incentive plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
If compensation cost had been determined under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and diluted earnings per
share would have been as follows:
2003 2002 2001
---- ---- ----
Net income, as reported $ 44,893 $35,006 $31,599
Net income, pro forma 43,504 33,620 30,198
Earnings per share, as reported $1.39 $1.10 $1.01
Earnings per share, pro forma 1.35 1.06 .97
The weighted-average fair value of options granted was $7.19 per share in
2003, $7.77 per share in 2002 and $5.28 per share in 2001.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes based pricing model with the following assumptions:
2003 2002 2001
---- ---- ----
Expected volatility 24.4% 26.7% 27.0%
Dividend yield 1.0% 1.0% 0.8%
Average risk-free interest rate 3.8% 3.0% 4.5%
Average expected term (years) 8.0 7.6 8.1
3. INVENTORIES:
Inventories at September 30 consisted of the following:
2003 2002
---- ----
Materials and finished goods $25,165 $22,320
Labor and overhead in process 1,489 1,606
Supplies 411 477
------ ------
$27,065 $24,403
====== ======
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
4. INVESTMENTS:
Investment securities are recorded at estimated market value at the
consolidated balance sheet date and are classified as available-for-sale.
Short-term investments consisted principally of corporate obligations with
purchased maturities of over three months but less than one year. The cost of
short-term investments approximated market value at September 30, 2003 and
2002. Investments classified as non-current consisted of securities of the
U.S. government and its agencies and corporate obligations with purchased
maturities in the range of one to five years. Accrued interest on all
investment securities was classified with short-term investments.
At September 30, 2003 and 2002, investments classified as non-current were as
follows:
Book Value Gross Gross
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
---------- ---------- ---------- ------
September 30, 2003:
- ------------------
U.S. government and
its agencies $ 986 $ 19 $ - $ 1,005
Corporate obligations 2,055 64 - 2,119
Other 36 - - 36
----- --- --- -----
Total $ 3,077 $ 83 $ - $ 3,160
===== === === =====
September 30, 2002:
- ------------------
U.S. government and
its agencies $ 1,184 $ 52 $ - $ 1,236
Corporate obligations 1,255 69 - 1,324
Other 487 - - 487
----- --- --- -----
Total $ 2,926 $121 $ - $ 3,047
===== === === =====
Unrealized gains and losses on investment securities, including related
deferred taxes, are reflected in accumulated other comprehensive income.
Realized gains and losses are based on the specific identification method and
are recorded in investment income. Realized gains for fiscal 2003, 2002 and
2001 were $2, $456, and $225, respectively. Bond premiums and discounts are
amortized on the straight-line method, which does not significantly differ
from the interest method.
In addition, investments included the Company's 49% ownership interest in
Applied Technology Developments, Ltd. ("ATD"), which was $647 at September 30,
2003 and 2002. The investment in ATD is recorded under the equity method of
accounting. Income under the equity method of accounting is recorded in
investment income. Investments also included ownership interests in various
entities of less than 20%, which totaled $754 and $1,005 at September 30, 2003
and 2002, respectively. Investments of less than 20% ownership interest are
recorded under the cost method of accounting.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and the related accumulated depreciation at
September 30, 2003 and 2002 were as follows:
2003 2002
---- ----
Buildings $ 36,534 $ 35,562
Machinery and equipment 96,978 88,916
------- -------
133,512 124,478
Less accumulated depreciation (70,854) (56,163)
------- -------
62,658 68,315
Land 5,283 5,379
Construction in progress 1,692 1,449
------- -------
$ 69,633 $ 75,143
======= =======
6. LONG-TERM DEBT:
Long-term debt at September 30, 2003 and 2002 consisted of the following:
2003 2002
---- ----
Revolving Credit Facility $ 44,500 $ 84,500
Note payable to bank 13,770 13,586
Short-term borrowings 3,575 4,150
Capital lease obligations 1,207 378
------- -------
63,052 102,614
Less current maturities (6,029) (6,127)
------- -------
$ 57,023 $ 96,487
======= =======
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 weighted-average
interest rate on outstanding borrowings under this facility at September 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
$10,000) is available for the issuance of trade and standby letters of credit.
The Company borrowed $124,500 under the Revolving Credit Facility on December
3, 2001 primarily in connection with the acquisition of The York Group Inc.
("York"). Outstanding borrowings on the Revolving Credit Facility at September
30, 2003 and 2002 were $44,500 and $84,500, respectively. The interest rate
on outstanding borrowings at September 30, 2003 was 2.2%.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
In June 1999, Caggiati S.p.A. borrowed Lit. 20.2 billion (U.S.$10,900) from an
Italian bank, UniCredito Italiano, Parma, Italy. The loan amortization period
is 15 years with interest at an annual rate of 4.145%, subject to renewal
after five and ten years at an interest rate approximating current market
rates. In June 2000, a deferred payment due in connection with the purchase
of Caggiati S.p.A. was financed through a bank loan of Lit. 7.9 billion
(U.S.$3,600). The loan amortization period is 14 years, subject to renewal
after five and ten years, with a variable interest rate which approximates
market. The interest rate on this loan was 3.1% at September 30, 2003.
In fiscal 2002, Caggiati S.p.A. obtained additional financing of 2.1 million
Euros (U.S.$2,024) through two bank loans. The first loan was obtained in
June 2002 for 1.0 million Euros and has an amortization period of 18 months
with interest at 3.3%. The second loan was obtained in September 2002 for 1.1
million Euros and has an amortization period of five years with interest at
3.3%.
Aggregate maturities of long-term debt, including short-term borrowings and
capital leases, follows:
2004 $ 6,029
2005 46,398
2006 1,417
2007 1,431
2008 1,152
Thereafter 6,625
-------
$ 63,052
=======
The carrying amounts of the Company's borrowings under its financing
arrangements approximated their fair value.
Long-term debt, current maturities, also included short-term borrowings by
Caggiati S.p.A. of $3,576 and $4,150 at September 30, 2003 and 2002,
respectively. These short-term borrowings consisted principally of several
line of credit arrangements for working capital requirements. The
weighted-average interest rate on these borrowings, which are collateralized
by certain trade accounts receivable, was 2.8% at September 30, 2003.
The Company has a line of credit of $500 (Canadian dollars), which provides
for borrowings at the bank's prime interest rate. There were no borrowings
outstanding on this line of credit at September 30, 2003 and 2002. Caggiati
S.p.A. has four lines of credit totaling 10.8 million Euros (U.S. $12,600)
with various banks. Outstanding borrowings on these lines at September 30,
2003 and 2002 were $3,576 and $4,150, respectively.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
7. SHAREHOLDERS' EQUITY:
The authorized common stock of the Company consists of 70,000,000 shares of
Class A Common Stock, $1 par value. Prior to September 2001, the authorized
common stock of the Company was divided into two classes consisting of Class A
Common Stock, 70,000,000 shares, $1 par value, and Class B Common Stock,
30,000,000 shares, $1 par value. Shares of Class A stock have one vote per
share and are freely transferable subject to applicable securities laws.
Shares of Class B stock had ten votes per share and were only transferable by
a shareholder to the Company or to an active employee of the Company. In
September 2001, the number of outstanding shares of Class B stock declined
below 5% of the aggregate outstanding shares of Class A and Class B stock. As
a result, in accordance with the Company's Restated Articles of Incorporation,
all shares of Class B stock were immediately converted to an equivalent number
of shares of Class A stock.
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 7,331,932 shares have been repurchased as of
September 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.
Comprehensive income consists of net income adjusted for changes, net of any
related income tax effect, in cumulative foreign currency translation,
unrealized investment gains and losses and minimum pension liability.
8. STOCK PLANS:
The Company has a stock incentive plan that provides for grants of incentive
stock options, nonstatutory stock options and restricted share awards in an
aggregate number not to exceed 15% of the outstanding shares of the Company's
common stock. The plan is administered by the Compensation Committee of the
Board of Directors. The option price for each stock option that may be
granted under the plan may not be less than the fair market value of the
Company's common stock on the date of grant. The aggregate number of shares
of the Company's common stock that may be issued upon exercise of outstanding
stock options was 4,824,307 shares at September 30, 2003.
Outstanding stock options are exercisable in various share amounts based on
the attainment of certain market value levels of Class A Common Stock but, in
the absence of such events, are exercisable in full for a one-week period
beginning five years from the date of grant. In addition, options granted
after September 1996 vest in one-third increments after three, four and five
years, respectively, from the grant date (but, in any event, not until the
attainment of the certain market value levels described above). The options
expire on the earlier of ten years from the date of grant, upon employment
termination, or within specified time limits following voluntary employment
termination (with the consent of the Company), retirement or death.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
The transactions for shares under options were as follows:
2003 2002 2001
---- ---- ----
Outstanding, beginning of year:
Number 3,216,433 3,698,866 3,397,866
Weighted-average exercise price $13.77 $10.92 $10.53
Granted:
Number 607,525 459,700 402,000
Weighted-average exercise price $21.81 $24.55 $14.03
Exercised:
Number 1,245,239 898,700 43,666
Weighted-average exercise price $10.28 $ 7.58 $ 6.05
Expired or forfeited:
Number 123,147 43,433 57,334
Weighted-average exercise price $18.68 $13.14 $13.43
Outstanding, end of year:
Number 2,455,572 3,216,433 3,698,866
Weighted-average exercise price $17.28 $13.77 $10.92
Exercisable, end of year:
Number 561,135 1,187,077 1,103,955
Weighted-average exercise price $12.53 $ 9.84 $ 7.27
Shares reserved for future options,
end of year 2,368,735 1,458,678 842,209
The following tables summarize certain stock option information at
September 30, 2003:
Options outstanding:
- -------------------
Range of Weighted-average Weighted-average
exercise price Number remaining life exercise price
- -------------- -------- ---------------- ----------------
$3.56 17,000 1.2 $ 3.56
$7.03 50,334 3.2 7.03
$10.70 76,333 4.2 10.70
$13.84 and $15.34 105,834 5.1 13.99
$12.84 and $13.98 845,796 5.6 13.78
$14.03 357,900 7.1 14.03
$24.37 and $28.49 426,000 8.3 24.56
$21.81 576,375 9.2 21.81
--------- --- -----
2,455,572 7.0 $17.28
========= === =====
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Options exercisable:
- -------------------
Range of Weighted-average
exercise price Number exercise price
- -------------- ------- ----------------
$3.56 17,000 $ 3.56
$7.03 50,334 7.03
$10.70 76,333 10.70
$13.84 and $15.34 30,498 14.17
$12.84 and $13.98 386,970 13.87
------- -----
561,135 12.53
======= =====
Under the Company's Director Fee Plan, directors who are not also officers of
the Company each receive, as an annual retainer fee, shares of the Company's
Class A Common Stock equivalent to approximately $18. Directors may also
elect to receive the common stock equivalent of meeting fees. Each director
may elect to be paid these shares on a current basis or have such shares
credited to a deferred stock account as phantom stock, with such shares to be
paid to the director subsequent to leaving the Board. The value of deferred
shares is recorded in other liabilities. Shares deferred under the
Director Fee Plan at September 30, 2003, 2002 and 2001 were 58,900, 56,288 and
53,218, respectively.
9. EARNINGS PER SHARE:
2003 2002 2001
---- ---- ----
Net income $44,893 $35,006 $31,599
====== ====== ======
Weighted-average common
shares outstanding 31,685,756 30,765,177 30,560,339
Dilutive securities,
primarily stock options 628,940 1,030,813 759,715
---------- ---------- ----------
Diluted weighted-average
common shares outstanding 32,314,696 31,795,990 31,320,054
========== ========== ==========
Basic earnings per share $1.42 $1.14 $1.03
==== ==== ====
Diluted earnings per share $1.39 $1.10 $1.01
==== ==== ====
Diluted earnings per share before
change in accounting $1.39 $1.20 $1.01
==== ==== ====
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
10. PENSION AND OTHER POSTRETIREMENT PLANS:
The Company provides defined benefit pension and other postretirement plans to
certain employees. The following provides a reconciliation of benefit
obligations, plan assets and funded status of the plans:
Pension Other Postretirement
------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Change in benefit obligation:
Benefit obligation, beginning $ 70,975 $ 67,856 $ 15,741 $ 13,569
Service cost 3,036 2,948 289 357
Interest cost 4,830 4,619 1,058 916
Assumption changes 5,279 (1) 1,531 534
Actuarial (gain) loss (982) (1,017) (853) 1,119
Benefit payments (3,436) (3,430) (817) (754)
------ ------ ------ ------
Benefit obligation, ending 79,702 70,975 16,949 15,741
------ ------ ------ ------
Change in plan assets:
Fair value, beginning 53,683 74,059 - -
Actual return 9,855 (20,820) - -
Benefit payments (3,436) (3,430) (817) (754)
Employer contributions 8,080 3,874 817 754
------ ------ ------ ------
Fair value, ending 68,182 53,683 - -
------ ------ ------ ------
Funded status (11,520) (17,292) (16,949) (15,741)
Unrecognized actuarial (gain) loss 23,871 25,627 7,499 4,402
Unrecognized prior service cost (91) 411 (9,366) (7,740)
------ ------ ------ ------
Net amount recognized $ 12,260 $ 8,746 $(18,816) $(19,079)
====== ====== ====== ======
Amounts recognized in the
balance sheet:
Prepaid pension cost $ 15,237 $ 11,581 $ - $ -
Accrued benefit liability (3,052) (19,674) (18,816) (19,079)
Intangible asset - 377 - -
Accumulated other
comprehensive income 75 16,462 - -
------ ------ ------ ------
Net amount recognized $ 12,260 $ 8,746 $ (18,816) $(19,079)
====== ====== ====== ======
The Company has an unfunded defined benefit pension plan, which had a benefit
obligation at September 30, 2003 and 2002 of $3,488 and $2,934, respectively.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions," the
Company recorded an obligation at September 30, 2003 and 2002 for the
underfunded status of the pension plans, principally through a charge to
accumulated other comprehensive income.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Net periodic pension and other postretirement benefit cost (income) for the
plans included the following:
Pension Other Postretirement
-------------------------- --------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
Service cost $ 3,036 $ 2,948 $ 3,059 $ 289 $ 357 $ 303
Interest cost 4,830 4,619 4,384 1,058 916 913
Expected return on
plan assets (4,617) (6,461) (8,807) - - -
Amortization:
Prior service cost 111 162 162 (1,288) (1,009) (1,009)
Net actuarial (gain) loss 1,253 - (1,948) 495 114 136
----- ----- ----- ----- ----- -----
Net benefit cost (income) $ 4,613 $ 1,268 $(3,150) $ 554 $ 378 $ 343
===== ===== ===== ===== ===== =====
Weighted-average assumptions for the pension and other postretirement benefit
plans were:
Pension Other Postretirement
---------------------------- ----------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- -------- -------- --------
Discount rate 6.50% 7.00% 7.00% 6.50% 7.00% 7.00%
Return on plan assets 9.00 9.00 9.00 - - -
Compensation increase 4.25 4.25 4.25 - - -
For measurement purposes, annual rates of increase of 13.2% and 20.0% in the
per capita cost of health care benefits for those under 65 years of age and
those over 65 years of age, respectively, were assumed for 2003; the rates
were assumed to decrease gradually to 5.0% for 2008 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported. An increase in the assumed health care cost trend rates
by one percentage point would have increased the accumulated postretirement
benefit obligation as of September 30, 2003 by $808 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $95. A decrease in the assumed health care
cost trend rates by one percentage point would have decreased the accumulated
postretirement benefit obligation as of September 30, 2003 by $721 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $83.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
11. INCOME TAXES:
The provision for income taxes (before cumulative effect of change in
accounting) consisted of the following:
2003 2002 2001
---- ---- ----
Current:
Federal $ 14,867 $ 14,531 $ 13,694
State 2,477 1,907 2,006
Foreign 5,606 2,812 3,435
------ ------ ------
22,950 19,250 19,135
Deferred 5,511 4,975 724
------ ------ ------
Total $ 28,461 $ 24,225 $ 19,859
====== ====== ======
The components of the net deferred tax asset at September 30 were as follows:
2003 2002
---- ----
Deferred tax assets:
Postretirement benefits $ 7,339 $ 7,441
Environmental reserve 4,658 4,820
Bad debt reserve 2,688 3,600
Deferred compensation 2,575 3,138
Impairments/other provisions 2,683 2,369
Estimated finishing costs 1,644 2,304
Accrued vacation pay 1,405 1,450
Accrued rebates 490 868
Other 1,761 1,701
------ ------
25,243 27,691
------ ------
Deferred tax liabilities:
Depreciation (7,581) (6,675)
Pension costs (4,678) 3,093
Goodwill amortization (5,370) (4,220)
Unrealized investment gain (42) (53)
------ ------
(17,671) (7,855)
------ ------
Net deferred tax asset 7,572 19,836
Less current portion (1,517) (1,741)
------ ------
$ 6,055 $ 18,095
====== ======
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
The components of the provision for deferred income taxes were as follows:
2003 2002 2001
---- ---- ----
Postretirement benefits $ 102 $ 147 $ 99
Environmental reserve 162 141 -
Bad debt reserve 853 208 (506)
Deferred compensation 563 766 51
Pension costs 1,370 1,059 1,473
Impairments/other provisions (330) 189 (53)
Estimated finishing costs 660 220 (170)
Accrued vacation pay 40 55 131
Accrued rebates 378 699 -
Depreciation 264 293 (186)
Goodwill amortization 1,151 1,445 26
Other 298 (247) (141)
----- ----- -----
$5,511 $4,975 $ 724
===== ===== =====
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate was as follows:
2003 2002 2001
---- ---- ----
Federal statutory tax rate 35.0 % 35.0 % 35.0 %
Effect of state income taxes,
net of federal deduction 2.8 2.7 2.6
Foreign taxes in excess of
federal statutory rate .6 .6 .4
Goodwill amortization .2 .2 .4
Other .2 .3 .2
---- ---- ----
Effective tax rate 38.8 % 38.8 % 38.6 %
==== ==== ====
The Company's foreign subsidiaries had income before income taxes for the
years ended September 30, 2003, 2002 and 2001 of approximately $16,300,
$10,200 and $8,400, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company operates various production and office facilities and equipment
under operating lease agreements. Annual rentals under these and other
operating leases were $6,000, $5,400 and $4,300 in 2003, 2002 and 2001,
respectively. Future minimum rental commitments under non-cancelable
operating lease arrangements for fiscal years 2004 through 2008 are $2,778,
$1,874, $1,149, $1,035 and $971, respectively, and $1,726 thereafter.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
The Company is party to various legal proceedings, the eventual outcome of
which are not predictable. It is possible that an unfavorable resolution of
these matters could have a material impact to the Company. Although the
ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that they should not result in liabilities in an
amount which would materially affect the Company's consolidated financial
position, results of operations or cash flows.
The Company has employment agreements with certain employees, the terms of
which expire at various dates between 2004 and 2006. The agreements generally
provide for base salary and bonus levels and include a non-compete clause.
The aggregate commitment for salaries under these agreements at September 30,
2003 was approximately $980.
13. RESTRUCTURING AND RELOCATION COSTS:
Accrued reserves for restructuring and relocation costs were $1,010 and $3,680
at September 30, 2003 and 2002, respectively. Fiscal 2003 activity reflected
additional restructuring reserves of $325 and charges incurred of $2,995
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 the segment's
remaining distribution operations and the relocation of the segment's
administrative functions to Pittsburgh, Pennsylvania. The accrued liability,
which has been reported in other current liabilities, includes previously
established reserves assumed with the acquisition of York Casket as well as
reserves recorded for costs to be incurred as a result of the acquisition.
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.
14. ENVIRONMENTAL MATTERS:
The Company's operations are subject to various federal, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations impose limitations on the discharge of materials into the
environment and require the Company to obtain and operate in compliance with
conditions of permits and other government authorizations. As such, the
Company has developed environmental, health and safety policies and procedures
that include the proper handling, storage and disposal of hazardous materials.
The Company is party to various environmental matters. These include
obligations to investigate and mitigate the effects on the environment of the
disposal of certain materials at various operating and non-operating sites.
The Company is currently performing environmental assessments and remediation
at these sites, as appropriate. In addition, prior to its acquisition, York
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
was identified, along with others, by the Environmental Protection Agency as a
potentially responsible party for remediation of a landfill site in York,
Pennsylvania. At this time, the Company has not been joined in any lawsuit or
administrative order related to the site or its clean-up.
At September 30, 2003, an accrual of $12,014 has been recorded for
environmental remediation (of which $860 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 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.
15. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in working capital items as presented in the Consolidated Statement of
Cash Flows consisted of the following:
2003 2002 2001
---- ---- ----
Current assets:
Accounts receivable $ 3,989 $ 2,906 $ (4,854)
Inventories (2,624) 1,301 728
Other current assets (1,414) (417) 709
------ ------ ------
(49) 3,790 (3,417)
------ ------ ------
Current liabilities:
Trade accounts payable (61) (2,910) 806
Accrued compensation 1,626 1,232 (680)
Accrued income taxes (3,226) (1,623) 4,503
Customer prepayments (187) (3,456) 257
Accrued rebates (8,391) 642 -
Accrued shutdown (2,670) (251) -
Other current liabilities 498 (1,474) (701)
------ ------ ------
(12,411) (7,840) 4,185
------ ------ ------
Net change $(12,460) $ (4,050) $ 768
====== ====== ======
In July 2001, Matthews acquired a 75% interest in Rudolf Reproflex GmbH
("Rudolf") (see Note 17). The purchase price of DM 24.0 million
(U.S.$11,000), which was paid in October 2001, was recorded in other current
liabilities at September 30, 2001 and reflected as a non-cash adjustment in
the Consolidated Statement of Cash Flows.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
16. 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.
The accounting policies of the segments are the same as those described in
Summary of Significant Accounting Policies (Note 2). Intersegment sales are
accounted for at negotiated prices. Operating profit is total revenue less
operating expenses. Segment assets include those assets that are used in the
Company's operations within each segment. Assets classified under Other
principally consist of cash and cash equivalents, investments, deferred income
taxes and corporate headquarters' assets. Long-lived assets include property,
plant and equipment (net of accumulated depreciation), goodwill, and other
intangible assets (net of accumulated amortization).
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Information about the Company's segments follows:
York Graphics Marking
Bronze Casket Cremation Imaging Products Other Consolidated
-------- -------- -------- -------- ---------- ------- ------------
Sales to external customers:
2003 $186,950 $120,398 $ 20,189 $ 99,065 $ 32,263 $ - $458,865
2002 185,883 100,415 18,306 94,814 28,668 - 428,086
2001 153,499 - 10,579 89,568 29,636 - 283,282
Intersegment sales:
2003 79 307 194 3 42 - 625
2002 10 - - 9 46 - 65
2001 26 - - 5 46 - 77
Depreciation and amortization:
2003 4,815 4,209 213 4,712 479 444 14,872
2002 4,612 3,549 216 4,508 539 432 13,856
2001 6,068 - 558 5,264 613 429 12,932
Operating profit:
2003 50,433 12,740 1,242 11,562 4,107 - 80,084
2002 46,589 9,354 (1,075) 9,724 3,595 - 68,187
2001 35,415 - 391 14,443 3,108 - 53,357
Total assets:
2003 139,543 109,106 11,153 92,135 20,431 64,373 436,741
2002 137,433 124,715 14,151 83,414 15,908 46,980 422,601
2001 138,444 - 10,963 75,572 17,417 46,556 288,952
Capital expenditures:
2003 3,509 1,667 153 3,683 115 153 9,280
2002 4,092 2,110 46 3,129 253 433 10,063
2001 3,811 - 14 2,752 307 380 7,264
Information about the Company's operations by geographic area follows:
United States Canada Australia Europe Consolidated
------------- ------ --------- ------ ------------
Sales to external customers:
2003 $357,354 $8,568 $5,566 $87,377 $458,865
2002 348,986 8,547 4,883 65,670 428,086
2001 221,326 9,140 4,511 48,305 283,282
Long-lived assets:
2003 174,773 2,244 3,034 57,334 237,385
2002 183,658 2,001 2,442 45,412 233,513
2001 109,830 2,186 2,135 39,443 153,594
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
17. ACQUISITIONS:
In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen
("Reproservice Munich"), a German graphics and flexographic printing plate
manufacturer located in Munich, Germany. The transaction was structured as a
stock purchase, at an acquisition price of 4.1 million Euros (U.S.$4,800).
The combination of Matthews and Reproservice Munich is an important part of
the Matthews strategy to increase its European presence in the graphics
industry. Reproservice Munich, a family-owned business with annual sales of
approximately U.S. $6,000, was established in 1983. Products and services of
Reproservice Munich include pre-press packaging, digital and analog
flexographic printing plates, design, art work, lithography and color
separation.
In May 1998, Matthews acquired a 50% interest in O.N.E. Color Communications
("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 $5,700.
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, the transaction
was completed at $11 per share. At December 3, 2001, there were 8,940,950
shares of York common stock outstanding. The transaction was financed by
Matthews through borrowings under a $125,000 Revolving Credit Facility. The
acquisition of York, which is a 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.
Acquired intangible assets include trade names with an assigned value of
$8,000 which are 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 acquired goodwill is not deductible for tax purposes.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed of York at the date of acquisition.
Cash $ 25,544
Other current assets 27,275
Property, plant and equipment 29,516
Intangible assets 13,700
Goodwill 39,318
Other assets 18,099
-------
Total assets acquired 153,452
-------
Other current liabilities 38,215
Environmental reserve 12,150
Other liabilities 2,747
-------
Total liabilities assumed 53,112
-------
Net assets acquired $100,340
=======
On May 24, 2001, Matthews acquired the commemorative products business of York
for $45,000. The transaction was completed through the purchase of certain
assets (pursuant to an asset purchase agreement) and stock of subsidiaries
under the commemorative products segment of York (pursuant to a stock purchase
agreement). As part of the transaction, Matthews acquired York's
manufacturing facilities in Kingwood, West Virginia and Bryan, Texas. The
acquisition of the commemorative products business of York is intended to
expand Matthews' product offerings to the death care industry. The
transaction was financed by Matthews through existing cash on hand and a
$30,000 bank loan.
The following unaudited pro forma information presents a summary of the
consolidated results of Matthews and York (including the commemorative
products business of York) as if the acquisitions had occurred on October 1,
2000:
2002 2001
---- ----
Sales $449,753 $414,280
Income before change in accounting 38,216 35,124
Net income 34,990 35,124
Earnings per share before change in accounting 1.20 1.12
Earnings per share 1.10 1.12
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
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 years ended September 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.
Effective July 1, 2001, Matthews acquired a 75% interest in Rudolf, which is
headquartered in Goslar, Germany. The purchase price of DM 24.0 million
(U.S.$11,000) was paid in October 2001. In January 2001, Matthews acquired a
75% interest in Scholler GmbH ("Scholler"), which is located in Nuremberg,
Germany. In August 2000, Matthews purchased a 75% interest in Repro-Busek
GmbH ("Busek"), which is headquartered in Vienna, Austria. Products and
services of Rudolf, Scholler and Busek include pre-press packaging, digital
and analog flexographic printing plates, design, artwork, lithography and
color separation.
Matthews has accounted for these acquisitions using the purchase method and,
accordingly, recorded the acquired assets and liabilities at their estimated
fair values at the acquisition dates. The excess of the purchase price over
the estimated fair value of the net assets acquired was recorded as goodwill,
which, until September 30, 2001, had been amortized on a straight-line basis
over periods ranging from 20 to 25 years, except for Rudolf, which was
acquired July 1, 2001 (subsequent to the effective date of SFAS No. 141). In
June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting (instead of pooling-of-
interests) for all business combinations initiated after June 30, 2001. In
addition, goodwill related to business combinations after June 30, 2001 is not
amortized, but subject to periodic review for impairment. Effective October
1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." As a result, goodwill from acquisitions prior to July 1, 2001 is no
longer amortized and is also subject to periodic review for impairment (see
Note 20).
18. DISPOSITIONS:
In July 2003, the Company sold its Graphics Imaging segment facility (which
was closed in October 2002) in Southern California for $3,200. The
transaction resulted in a pre-tax gain of $2,600, which was recorded in
Special Items on the Consolidated Statement of Income.
In January 2001, Matthews sold its fifty percent interest in Tukaiz
Communications, L.L.C. ("Tukaiz"). Proceeds to Matthews from the sale were
$18,582, which included the repayment of intercompany debt of approximately
$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 has been
reported in Special Items on the Consolidated Statement of Income.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
19. SPECIAL ITEMS:
In July 2003, the Company recorded a pre-tax gain of $2,600 on the sale of a
facility (see Note 18), which was recorded in Special Items on the
Consolidated Statement of Income. In addition, Special Items for fiscal 2003
also included a pre-tax charge of $3,600 for goodwill impairment related to
O.N.E. (see Note 20).
In the second quarter of fiscal 2001, the Company recorded asset impairments,
restructuring costs and other special charges of approximately $6,600. The
majority of these charges were classified as Special Items on the Consolidated
Statement of Income, except for $1,168 classified as selling and
administrative expenses and $500 classified as other income (deductions), net.
20. GOODWILL AND OTHER INTANGIBLE ASSETS:
In June 2001, the Financial Accounting Standards Board issued 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 effective October 1, 2001.
Under this standard, goodwill is no longer amortized and accordingly, goodwill
amortization is not reflected in the Company's financial results for fiscal
2003 and 2002. Excluding goodwill amortization in fiscal 2001, income before
income taxes and net income would have been $55,040 and $33,974, respectively;
and basic earnings per share, diluted earnings per share and diluted earnings
per share before change in accounting would have been $1.11, $1.09 and $1.09,
respectively.
The standard also requires a periodic assessment of the carrying value of
goodwill 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. Prior to the adoption of SFAS No. 142, valuation for
impairment was determined using undiscounted future cash flows. Based on this
assessment, the Company recorded a pre-tax charge under Cumulative Effect of
Change in Accounting 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.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
Matthews performed its annual impairment review in the second quarter of
fiscal 2003 and determined that no additional adjustments to the carrying
values of goodwill were necessary at that time. However, due to operating
conditions that transpired during the second half of fiscal 2003 and the
Company's purchase of the remaining 50% interest in O.N.E., the Company
determined that an impairment review of O.N.E., a reporting unit within the
Graphics Imaging segment, was necessary as of September 30, 2003. Based on
this assessment, the Company recorded a pre-tax charge of $3,600 in the fourth
quarter of fiscal 2003 for goodwill impairment. The impairment was determined
based upon a comparison of the carrying value of this reporting unit to its
implied fair market value. Changes to goodwill, net of accumulated
amortization, during the years ended September 30, 2003 and 2002, follow.
York Graphics Marking
Bronze Casket Cremation Imaging Products Consolidated
-------- -------- --------- -------- --------- ------------
Goodwill:
Balance at September 30, 2001 $ 69,665 $ - $ 6,402 $ 28,353 $ 165 $ 104,585
Additions during period 2,914 39,179 134 557 - 42,784
Transitional impairment charge (5,255) - - - - (5,255)
Translation and other
adjustments 1,192 - - 1,654 - 2,846
------ ------ ----- ------ --- -------
Balance at September 30, 2002 $ 68,516 $ 39,179 $ 6,536 $ 30,564 $ 165 $ 144,960
Additions during period - 1,527 - 4,815 - 6,342
Impairment charges - - - (3,840) - (3,840)
Translation and other
adjustments 3,606 - - 3,622 - 7,228
------ ------ ----- ------ --- -------
Balance at September 30, 2003 $ 72,122 $ 40,706 $ 6,536 $ 35,161 $ 165 $ 154,690
====== ====== ===== ====== === =======
The additions to goodwill during fiscal 2003 related primarily to the
acquisition of Reproservice Munich and the remaining 50% interest in O.N.E.,
and the additions to goodwill during fiscal 2002 related primarily to the
acquisition of York (see Note 17).
The Company also acquired $13,700 of intangible assets related to the
acquisition of York, of which $13,400 relates to the York Casket segment and
$300 relates to the Cremation segment. In fiscal 2003, amortization expense on
intangible assets was $328 and $20 for the York Casket and Cremation segments,
respectively. In fiscal 2002, amortization expense on intangible assets was
$273 and $17 for the York Casket and Cremation segments, respectively.
Amortization expense for intangible assets is expected to approximate $350
each year between 2004 and 2008.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
----------
The following tables summarize the carrying amounts and related accumulated
amortization for intangible assets as of September 30, 2003 and 2002,
respectively.
York Casket Segment Cremation Segment
-------------------- ------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------- ------------ -------- ------------
September 30, 2003:
- ------------------
Trade names $ 8,000 $ - * $ - $ -
Customer relationships 4,100 (442) - -
Copyrights/patents/other 1,300 (159) 300 (37)
------ ---- --- ---
$13,400 $(601) $ 300 $(37)
====== ==== === ===
September 30, 2002:
- ------------------
Trade names $ 8,000 $ - * $ - $ -
Customer relationships 4,100 (201) - -
Copyrights/patents/other 1,300 (72) 300 (17)
------ ---- --- ---
$13,400 $(273) $ 300 $(17)
====== ==== === ===
* Not subject to amortization
69
SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Financial Data (Unaudited):
The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of fiscal 2003
and fiscal 2002.
Quarter Ended
----------------------------------------------------- Year Ended
December 31 March 31 June 30 September 30 September 30
-------------- ----------- ----------- ------------ ------------
(Dollar amounts in thousands, except per share data)
FISCAL YEAR 2003 (1):
Sales $109,073 $115,581 $116,145 $118,066 $458,865
Gross profit 38,202 43,391 44,449 44,260 170,302
Operating profit 16,834 20,478 21,573 21,199 80,084
Net income 9,273 11,612 12,289 11,719 44,893
Earnings per share .29 .36 .38 .36 1.39
FISCAL YEAR 2002 (2):
Sales $ 85,319 $110,110 $118,825 $113,832 $428,086
Gross profit 31,624 40,262 45,144 43,334 160,364
Operating profit 13,327 17,301 18,897 18,662 68,187
Net income 4,595 9,633 10,558 10,220 35,006
Earnings per share .15 .30 .33 .32 1.10
Earnings per share
before change in
accounting .25 .30 .33 .32 1.20
(1) The fourth quarter of fiscal 2003 included a net pre-tax charge of approximately
$1,000 ($.02 per share after-tax) from special items which consisted of a pre-tax
gain of $2,600 on the sale of a facility and a goodwill impairment charge
of $3,600 (see Note 19 to the Consolidated Financial Statements).
(2) The first quarter of fiscal 2002 reflects an after-tax charge of $3,226 for
transitional goodwill impairment (see Note 20 to the Consolidated Financial
Statements).
70
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and
Board of Directors of
Matthews International Corporation:
Our audits of the consolidated financial statements referred to in our report
dated November 13, 2003 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 8 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
November 13, 2003
71
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL.A COL.B COL. C COL. D COL.E
- -----------------------------------------------------------------------------------------
Additions
-----------------------
Balance at Charged to
beginning of Charged to other Balance at
Description period expense accounts Deductions end of period
- ----------- ------------ ---------- ---------- ---------- -------------
(1) (2)
Allowance for Doubtful Accounts:
- -------------------------------
Fiscal Year Ended:
September 30, 2003 $ 8,289 $ 827 $ (817) $(2,286) $ 6,013
September 30, 2002 3,725 1,134 5,039 (1,609) 8,289
September 30, 2001 2,468 1,427 300 (470) 3,725
(1) Purchase accounting adjustments in connection with acquisitions.
(2) Amounts determined not to be collectible, net of recoveries. Fiscal 2002 amount also
includes a reduction of $107 in the reserve from the sale of a business.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in accountants or disagreements on accounting or
financial disclosure between the Company and PricewaterhouseCoopers LLP,
Certified Public Accountants, for the fiscal years ended September 30, 2003,
2002 and 2001.
PART III
ITEM 10. DIRECTORS, OFFICERS and EXECUTIVE MANAGEMENT OF THE REGISTRANT.
In addition to the information reported in Part I of this Form 10-K, under the
caption "Officers and Executive Management of the Registrant", the information
required by this item as to the directors of the Company is hereby
incorporated by reference from the information appearing under the captions
"Proposal No. 1 - Elections of Directors" and "General Information Regarding
Corporate Governance - Audit Committee" in the Company's definitive proxy
statement, which involves the election of the directors and is to be filed
with the Securities and Exchange Commission pursuant to the Exchange Act of
1934, as amended (the "Exchange Act"), within 120 days of the end of the
Company's fiscal year ended September 30, 2003.
The Company's Code of Ethics Applicable to Executive Management is set forth
in Exhibit 14.1 hereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item as to the compensation of directors and
executive management of the Company is hereby incorporated by reference from
the information appearing under the captions "Compensation of Executive
Management and Retirement Benefits" and "Compensation of Directors" in the
Company's definitive proxy statement which involves the election of directors
and is to be filed with the Commission pursuant to the Exchange Act, within
120 days of the end of the Company's fiscal year ended September 30, 2003.
The information contained in the "Report of the Compensation Committee" and
the "Comparison of Five Year Cumulative Return (Performance Graph)" is
specifically not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Stock Ownership" in the Company's
definitive proxy statement which involves the election of directors and is to
be filed with the Commission pursuant to the Exchange Act, within 120 days of
the end of the Company's fiscal year ended September 30, 2003.
73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
continued.
Equity Compensation Plans:
The Company has a stock incentive plan that provides for grants of incentive
stock options, nonstatutory stock options and restricted share awards in an
aggregate number not to exceed 15% of the outstanding shares of the Company's
common stock. The option price for each stock option that may be granted
under the plan may not be less than the fair market value of the Company's
common stock on the date of grant. Outstanding stock options are exercisable
in various share amounts based on the attainment of certain market value
levels of Class A Common Stock but, in the absence of such events, are
exercisable in full for a one-week period beginning five years from the date
of grant. In addition, options granted after September 1996 vest in one-third
increments after three, four and five years, respectively, from the grant date
(but, in any event, not until the attainment of the certain market value
levels described above). The options expire on the earlier of ten years from
the date of grant, upon employment termination, or within specified time
limits following voluntary employment termination (with the consent of the
Company), retirement or death.
Under the Company's Director Fee Plan, directors who are not also officers of
the Company each receive, as an annual retainer fee, shares of the Company's
Class A Common Stock equivalent to approximately $18,000. Directors may also
elect to receive the common stock equivalent of meeting fees. Each director
may elect to be paid these shares on a current basis or have such shares
credited to a deferred stock account as phantom stock, with such shares to be
paid to the director subsequent to leaving the Board.
The following table provides information about grants under the Company's
equity compensation plans as of September 30, 2003:
Equity Compensation Plan Information
------------------------------------
Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price compensation plans
exercise of of outstanding (excluding
outstanding options, options, warrants securities reflected
Plan category warrants and rights and rights in column (a))
- ------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 2,514,472 (1) $17.28 4,320,004 (2)(3)
Equity compensation
plans not approved
by security holders None None None
--------- ----- ---------
Total 2,514,472 $17.28 4,320,004
========= ===== =========
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
continued.
Equity Compensation Plans, continued:
(1) Includes 58,900 shares under the Director Fee Plan.
(2) The number of shares remaining available under the stock incentive plan at September 30,
2003 was 2,368,735. The aggregate number of shares available for grant under such plan
cannot exceed 15% of the outstanding shares of the Company's common stock.
(3) Includes (i) up to 1,000,000 shares that can be issued as restricted stock under the
Company's 1992 Stock Incentive Plan, (ii) 125,408 shares that can be issued as deferred
stock under the Company's 1994 Director Fee Plan and (iii) 1,825,861 shares that can be
sold to employees through the Company under the Company's 1994 Employee Stock Purchase
Plan, which is an open market purchase plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain relationships and
transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Proposal No. 1 - Election of Directors" in the Company's definitive
proxy statement which involves the election of directors and is to be filed
with the Commission pursuant to the Exchange Act, within 120 days of the end
of the Company's fiscal year ended September 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
Based on their evaluation at the end of the period covered by this Annual
Report on Form 10-K, 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 September 30, 2003
that have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
75
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following items are included in Part II, Item 8:
Pages
-----
Report of Independent Auditors 38
Consolidated Balance Sheet 39-40
Consolidated Statement of Income 41
Consolidated Statement of Shareholders' Equity 42
Consolidated Statement of Cash Flows 43
Notes to Consolidated Financial Statements 44-68
Supplementary Financial Information 69
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and the related report of
independent auditors are included on pages 70 and 71 in Part II, Item 8 of
this Annual Report on Form 10-K.
3. Exhibits Filed:
The index to exhibits is on pages 77-79.
(b) Reports on Form 8-K:
On July 23, 2003, Matthews filed a Current Report on Form 8-K under Item 12 in
connection with a press release announcing its earnings for the third fiscal
quarter of 2003.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on December 18, 2003.
MATTHEWS INTERNATIONAL CORPORATION
----------------------------------
(Registrant)
By David M. Kelly
-------------------------------------
David M. Kelly, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 18, 2003:
David M. Kelly Steven F. Nicola
- ------------------------------------ ------------------------------------
David M. Kelly Steven F. Nicola
Chairman of the Board, President Chief Financial Officer, Secretary
and Chief Executive Officer and Treasurer (Principal Financial
(Principal Executive Officer) and Accounting Officer)
David J. DeCarlo John P. O'Leary, Jr.
- ------------------------------------ ------------------------------------
David J. DeCarlo, Director John P. O'Leary, Jr., Director
Robert J. Kavanaugh William J. Stallkamp
- ------------------------------------ ------------------------------------
Robert J. Kavanaugh, Director William J. Stallkamp, Director
Glenn R. Mahone John D. Turner
- ------------------------------------ ------------------------------------
Glenn R. Mahone, Director John D. Turner, Director
77
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
EXHIBITS
INDEX
----------
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated by reference. Exhibits marked with an "a"
represent a management contract or compensatory plan, contract or arrangement
required to be filed by Item 601(b)(10)(iii) of Regulation S-K.
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
3.1 Restated Articles of Incorporation * Exhibit Number 3.1 to Form
10-K for the year ended
September 30, 1994
3.2 Restated By-laws * Exhibit Number 3.1 to Form
8-K dated July 22, 1999
4.1 a Form of Revised Option Agreement Exhibit Number 4.5 to Form
of Repurchase (effective 10-K for the year ended
October 1, 1993) * September 30, 1993
4.2 Form of Share Certificate for Exhibit Number 4.9 to Form
Class A Common Stock * 10-K for the year ended
September 30, 1994
4.3 Form of Share Certificate for Exhibit Number 4.10 to Form
Class B Common Stock * 10-K for the year ended
September 30, 1994
10.1 Revolving Credit Facility * Exhibit Number 10.1 to Form
10-K for the year ended
September 30, 2001
10.2 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form
10-K for the year ended
September 30, 1988
10.3 a 1992 Stock Incentive Plan (as Exhibit A to Definitive
amended through December 23, 1998) * Proxy Statement filed on
January 20, 1999
10.4 a Form of Stock Option Agreement * Exhibit Number 10.1 to Form
10-Q for the quarter ended
December 31, 1994
10.5 a 1994 Director Fee Plan (as Exhibit Number 10.7 to Form
amended through April 22, 1999) * 10-K for the year ended
September 30, 1999
10.6 a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form
10-Q for the quarter ended
March 31, 1995
78
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.7 Asset Purchase and Membership Exhibit Number 10.1 to Form
Interest Agreement, O.N.E. Color 10-Q for the quarter ended
Communications, L.L.C. * June 30, 1998
10.8 Loan Agreement, Caggiati S.p.A. * Exhibit Number 10.20 to
Form 10-K for the year
ended September 30, 1999
10.9 Purchase Agreement among priNexus, Exhibit Number 10.17 to
Inc., Matt-One Holding Corporation, Form 10-K for the year
Tukaiz Litho, Inc. and Tukaiz ended September 30, 2000
Communications, LLC *
10.10 Stock Purchase Agreement among Exhibit Number 10.1 to
Matthews International Corporation, Form 8-K dated May 24, 2001
Empire Stock Corp., and The York
Group, Inc., dated as of May 24, 2001 *
10.11 Asset Purchase Agreement among Exhibit Number 10.2 to
Matthews International Corporation, Form 8-K dated May 24, 2001
Empire Stock Corp., The York Group,
Inc., York Bronze Company and OMC
Industries, Inc., dated as of
May 24, 2001 *
10.12 Agreement and Plan of Merger By and Exhibit Number 10.3 to
Among Matthews International Form 8-K dated May 24, 2001
Corporation, Empire Merger Corp.,
and The York Group, Inc., dated as
of May 24, 2001 *
14.1 Form of Code of Ethics Applicable Filed Herewith
to Executive Management
21 Subsidiaries of the Registrant Filed Herewith
23 Consent of Independent Auditors Filed Herewith
31.1 Certification of Principal Executive Filed Herewith
Officer for David M. Kelly
31.2 Certification of Principal Financial Filed Herewith
Officer for Steven F. Nicola
32.1 Certification Pursuant to 18 U.S.C. Filed Herewith
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002, of David M. Kelly
32.2 Certification Pursuant to 18 U.S.C. Filed Herewith
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002, of Steven F. Nicola
79
INDEX, Continued
----------
Copies of any Exhibits will be furnished to shareholders upon written request.
Requests should be directed to Mr. Steven F. Nicola, Chief Financial Officer,
Secretary and Treasurer of the Registrant.