1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Quarterly Period Ended December 31, 2003
Commission File No. 0-9115
MATTHEWS INTERNATIONAL CORPORATION
(Exact Name of registrant as specified in its charter)
PENNSYLVANIA 25-0644320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTHSHORE CENTER, PITTSBURGH, PA 15212-5851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 442-8200
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of January 31, 2004, shares of common stock outstanding were:
Class A Common Stock 32,163,399 shares
2
PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollar amounts in thousands, except per share data)
December 31, 2003 September 30, 2003
------------------------ ------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 67,442 $ 66,954
Short-term investments 4,605 4,588
Accounts receivable, net 60,322 62,883
Inventories: Materials and finished goods $25,941 $25,165
Labor and overhead in process 2,627 1,489
Supplies 370 411
------- -------
28,938 27,065
Other current assets 3,962 4,564
------- -------
Total current assets 165,269 166,054
Investments 4,624 4,561
Property, plant and equipment: Cost 148,057 140,487
Less accumulated depreciation (79,498) (70,854)
------- -------
68,559 69,633
Deferred income taxes and other assets 26,911 28,741
Goodwill 158,580 154,690
Other intangible assets, net 12,975 13,062
------- -------
Total assets $436,918 $436,741
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current maturities $ 40,653 $ 6,029
Accounts payable 16,950 19,805
Accrued compensation 20,664 24,745
Accrued income taxes 6,164 1,274
Customer prepayments 2,646 2,488
Other current liabilities 19,815 21,982
------- -------
Total current liabilities 106,892 76,323
Long-term debt 13,119 57,023
Estimated finishing costs 4,932 4,863
Postretirement benefits 17,762 17,644
Environmental reserve 10,940 11,154
Other liabilities and deferred revenue 13,148 13,506
Shareholders' equity:
Common stock 36,334 36,334
Additional Paid in Capital 7,507 6,476
Retained earnings 267,662 257,559
Accumulated other comprehensive income 13,328 6,643
Treasury stock, at cost (54,706) (50,784)
------- -------
270,125 256,228
------- -------
Total liabilities and shareholders' equity $436,918 $436,741
======= =======
3
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Three Months Ended
December 31,
------------------------
2003 2002
---- ----
Sales $116,902 $109,073
Cost of sales (74,279) (70,871)
------- -------
Gross profit 42,623 38,202
Selling and administrative expenses (22,770) (21,368)
------- -------
Operating profit 19,853 16,834
Investment income 351 275
Interest expense (451) (969)
Other income (deductions), net (86) (17)
Minority interest (1,067) (970)
------- -------
Income before income taxes 18,600 15,153
Income taxes (7,217) (5,880)
------- -------
Net income $ 11,383 $ 9,273
======= =======
Earnings per share:
Basic $.35 $.30
=== ===
Diluted $.35 $.29
=== ===
4
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Three Months Ended
December 31,
--------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 11,383 $ 9,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,782 3,642
Change in deferred taxes 280 117
Changes in working capital items (2,302) 3,328
Decrease in other assets 1,342 507
Increase (decrease) in estimated finishing costs 69 (43)
Increase (decrease) in other liabilities (573) 1,365
Decrease in postretirement benefits (128) (50)
Tax benefit of exercised stock options 870 1,050
Net (gain) loss on sale of assets 2 (305)
Net loss on investments - 56
------- -------
Net cash provided by operating activities 14,725 18,940
------- -------
Cash flows from investing activities:
Capital expenditures (1,762) (2,811)
Proceeds from sale of assets - 941
Purchases of investment securities (83) (54)
Proceeds from disposition of investment securities 6 5
------- -------
Net cash used in investing activities (1,839) (1,919)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 303 -
Payments on long-term debt (10,946) (10,804)
Proceeds from the sale of treasury stock 2,352 1,351
Purchases of treasury stock (6,113) -
Dividends (1,280) (862)
------- -------
Net cash used in financing activities (15,684) (10,315)
------- -------
Effect of exchange rate changes on cash 3,286 (1,164)
------- -------
Net increase in cash and cash equivalents $ 488 $ 5,542
======= =======
5
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Dollar amounts in thousands, except per share data)
Note 1. Nature of Operations
Matthews International Corporation ("Matthews"), founded in 1850 and
incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer
principally of memorialization products, caskets and cremation equipment for
the cemetery and funeral home industries and custom-made products which are
used to identify people, places, products and events. The Company's products
and operations are comprised of five business segments: Bronze, York Casket,
Cremation, Graphics Imaging, and Marking Products. The Bronze segment is a
leading manufacturer of cast bronze memorials and other memorialization
products, cast and etched architectural 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 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.
The Company has manufacturing and marketing facilities in the United States,
Australia, Canada and Europe.
Note 2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information for commercial and industrial companies and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included. Operating results for the three
months ended December 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 2003.
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. All
intercompany accounts and transactions have been eliminated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3. Stock-Based Compensation
The Company has accounted for its stock-based compensation plans in accordance
with the intrinsic value provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, the Company did
not record any compensation expense in the consolidated financial statements
for its stock-based compensation plans. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", the following table illustrates the
effect on net income and earnings per share had compensation expense been
recognized consistent with the fair value provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
Three Months Ended
December 31,
--------------------------
2003 2002
---- ----
Net income, as reported $11,383 $9,273
Net income, pro forma 11,061 9,015
Basic earnings per share, as reported $0.35 $0.30
Diluted earnings per share, as reported 0.35 0.29
Basic earnings per share, pro forma $0.34 $0.29
Diluted earnings per share, pro forma 0.34 0.28
Note 4. Income Taxes
Income tax provisions for the Company's interim periods are based on the
effective income tax rate expected to be applicable for the full year. The
difference between the estimated effective tax rate for fiscal 2004 of 38.8%
and the Federal statutory rate of 35% primarily reflects the impact of state
and foreign income taxes.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Note 5. Earnings Per Share
Three Months Ended
December 31,
--------------------------
2003 2002
---- ----
Net income $11,383 $9,273
====== =====
Weighted-average common
shares outstanding 32,088,646 31,240,366
Dilutive securities,
primarily stock options 513,509 786,757
---------- ----------
Diluted weighted-average
common shares outstanding 32,602,155 32,027,123
========== ==========
Basic earnings per share $.35 $.30
=== ===
Diluted earnings per share $.35 $.29
=== ===
Note 6. Segment Information
The Company is organized into five business segments based on products and
services. The segments, which are Bronze, York Casket, Cremation, Graphics
Imaging and Marking Products, are described under Nature of Operations (Note
1). Management evaluates segment performance based on operating profit
(before income taxes) and does not allocate non-operating items such as
investment income, interest expense, other income (deductions), net and
minority interest.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Information about the Company's segments follows:
Three Months Ended
December 31,
--------------------------
2003 2002
---- ----
Sales to external customers:
Bronze $ 45,434 $ 42,901
York Casket 30,175 30,159
Cremation 5,862 5,178
Graphics Imaging 26,182 23,242
Marking Products 9,249 7,593
------- -------
$116,902 $109,073
======= =======
Operating profit:
Bronze $ 9,736 $ 9,373
York Casket 3,963 3,395
Cremation 446 457
Graphics Imaging 3,928 2,628
Marking Products 1,780 981
------ ------
$19,853 $16,834
====== ======
Note 7. Comprehensive Income
Comprehensive income consists of net income adjusted for changes, net of tax,
in cumulative foreign currency translation, unrealized investment gains and
losses and minimum pension liability. For the three-month periods ended
December 31, 2003 and 2002, comprehensive income was $18,069 and $9,916,
respectively.
Note 8. Acquisitions
In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen
("Reproservice Munich"), a German graphics and flexographic printing plate
manufacturer in Munich, Germany. The transaction was structured as a stock
purchase, at an acquisition price of 4.1 million Euros (U.S.$4,800). Products
and services of Reproservice Munich include pre-press packaging, digital and
analog flexographic printing plates, design, art work, lithography and color
separation. The combination of Matthews and Reproservice Munich is an
important part of the Matthews strategy to increase its European presence in
the graphics industry.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
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 upon 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.
Note 9. Goodwill and Other Intangible Assets
Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," goodwill is no longer amortized but is subject
to annual review for impairment. In general, when the carrying value of a
reporting unit exceeds its implied fair value, an impairment loss must be
recognized. For purposes of testing for impairment the Company uses a
combination of valuation techniques, including discounted cash flows.
Intangible assets are amortized over their estimated useful lives unless such
lives are considered to be indefinite. The Company performs its annual
impairment review in its second fiscal quarter.
Changes to goodwill, net of accumulated amortization, for the three months
ended December 31, 2003, are as follows.
York Graphics Marking
Bronze Casket Cremation Imaging Products Consolidated
-------- -------- --------- -------- -------- -------------
Balance at September 30, 2003 $ 72,122 $ 40,706 $ 6,536 $ 35,161 $ 165 $154,690
Additions during period - - - - - -
Translation and
other adjustments 1,806 - - 2,084 - 3,890
------ ------ ------ ------ --- -------
Balance at December 31, 2003 $ 73,928 $ 40,706 $ 6,536 $ 37,245 $ 165 $158,580
====== ====== ====== ====== === =======
10
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 December 31, 2003 and September 30,
2003, respectively.
York Casket Segment Cremation Segment
-------------------- ------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------- ------------ -------- ------------
December 31, 2003:
- ------------------
Trade names $ 8,000 $ - * $ - $ -
Customer relationships 4,100 (502) - -
Copyrights/patents/other 1,300 (181) 300 (42)
------ ---- --- ---
$13,400 $(683) $ 300 $(42)
====== ==== === ===
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)
====== ==== === ===
* Not subject to amortization
Intangible assets established for customer relationships and copyrights,
patents and other are amortized over their estimated useful lives of 17 years
and 15 years, respectively. For the three-month period ended December 31,
2003, amortization expense on intangible assets was $82 for the York Casket
segment and $5 for the Cremation segment. Amortization expense on intangible
assets is expected to approximate $350 each year between 2004 and 2008.
Note 10. Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("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.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation addresses
consolidation by business enterprises of variable interest entities with
certain characteristics. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. In October 2003, the FASB
agreed to defer the effective date of FIN 46 for variable interest entities
held by public companies that were acquired before February 1, 2003. The
deferral will require that public companies adopt the provisions of FIN 46 for
periods ending after December 15, 2003. The adoption of FIN 46 did not have a
material impact on the Company's consolidated financial position and results
of operations.
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 to
the finishing and storage elements of its pre-need sales. Issue No. 00-21 did
not have a material impact on the Company's results of operations or financial
position.
In December 2003, the FASB issued a revised version of SFAS No. 132
"Employer's Disclosures about Pensions and Other Postretirement Benefits."
This statement requires additional disclosures about assets, obligations, cash
flows and net periodic benefit costs of defined benefit plans and other
defined benefit postretirement plans. The disclosure requirements are
effective for annual financial statements with fiscal years ending after
December 15, 2003 and for interim periods beginning after December 15, 2003.
The disclosure requirements of the revised SFAS No. 132 will be adopted by the
Company for the quarter ending March 31, 2004.
In January 2004, the FASB issued FASB Staff Position No. 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-1"). FSP 106-1 permits
the sponsor of a postretirement health care plan that provides prescription
drug benefits to make a one time election to defer accounting for the effects
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
("the Act"). FSP 106-1 also requires certain other disclosures, whether the
deferral is elected or not. In accordance with FSP 106-1, the Company has
elected to defer accounting for the Act since the effects of the Act on the
Company's postretirement benefit plan have not been calculated. The FASB is
expected to issue specific guidance on the accounting for certain elements of
the Act which, when adopted by the Company, could require a change to
previously reported information regarding the Company's postretirement benefit
plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement:
The following discussion should be read in conjunction with the consolidated
financial statements of Matthews International Corporation and related notes
thereto included in this Quarterly Report on Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended September 30, 2003. Any
forward-looking statements contained herein are included pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from management's expectations. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements principally
include changes in domestic or international economic conditions, changes in
death rates, changes in product demand or pricing as a result of consolidation
in the industries in which the Company operates, changes in product demand or
pricing as a result of domestic or international competitive pressures,
unknown risks in connection with the Company's acquisitions, and technological
factors beyond the Company's control.
Results Of Operations:
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods indicated.
Three months ended Years ended
December 31, September 30,
------------------ --------------------
2003 2002 2003(1) 2002 2001(2)
---- ---- ------ ---- ------
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 36.5 35.0 37.1 37.5 42.2
Operating profit 17.0 15.4 17.5 15.9 18.8
Income before taxes (3) 15.9 13.9 16.0 14.6 18.2
Net income (3) 9.7 8.5 9.8 8.9 11.2
(1) The fourth quarter of fiscal 2003 included a net pre-tax charge of
approximately $1 million from special items which consisted of a pre-tax gain
of $2.6 million on the sale of a facility and a goodwill impairment charge of
$3.6 million.
(2) Fiscal 2001 included pre-tax income of $500,000 from special items, which
consisted of a pre-tax gain of $7.1 million on the sale of a subsidiary and
asset impairments, restructuring costs and other special pre-tax charges
totaling $6.6 million.
(3) Before cumulative effect of change in accounting. Fiscal 2002 reflected
a pre-tax charge of $5.3 million ($.10 per share after-tax) for transitional
goodwill impairment.
13
Results of Operations, continued:
Sales for the quarter ended December 31, 2003 were $116.9 million and were
$7.8 million, or 7.2%, higher than sales of $109.1 million for the three
months ended December 31, 2002. Bronze segment sales for the fiscal 2004
first quarter were $45.4 million compared to $42.9 million for the fiscal 2003
first quarter. The increase of 5.9% in Bronze sales reflected higher sales of
memorialization products in domestic and international markets, and an
increase in the values of foreign currencies against the U.S. dollar. The
increase was partially offset by a decline in mausoleum sales in fiscal 2004
compared to the fiscal 2003 first quarter. Sales for the York Casket segment
were $30.2 million for the quarter ended December 31, 2003, which was slightly
higher than the fiscal 2003 first quarter. York Casket sales reflected a
combination of higher unit volume and price, offset by the impact of the
divestiture of a small manufacturing facility and several distribution
operations in fiscal 2003. Sales for the Cremation segment were $5.9 million
for the first quarter of fiscal 2004 compared to $5.2 million for the same
period a year ago. The increase reflected increases in the sales of both
cremation equipment and cremation caskets. New product introductions during
fiscal 2003 contributed to the increase in cremation casket sales. Sales for
the Graphics Imaging segment in the first quarter of fiscal 2004 were $26.2
million, an increase of $2.9 million, or 12.6%, from the same period a year
ago. The increase primarily resulted from the acquisition of Eurodigital
Reproservice GmbH Munchen ("Reproservice Munich") in August 2003 and the
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 the closure of two unprofitable facilities in
fiscal 2003. Marking Products segment sales for the quarter ended December
31, 2003 were $9.2 million, compared to $7.6 million for the fiscal 2003 first
quarter. The increase of $1.6 million, or 21.8%, was principally due to an
increase in demand for the segment's products, reflecting an improvement in
the domestic economy and new product introductions. In addition, the
segment's sales were favorably impacted by an increase in the value of the
Swedish Krona against the U.S. dollar. For the first quarter of fiscal 2004,
higher foreign currency values against the U.S. dollar had a favorable impact
of approximately $4.6 million on the Company's consolidated sales compared to
the quarter ended December 31, 2002.
Gross profit for the quarter ended December 31, 2003 was $42.6 million
compared to $38.2 million for the same period a year ago, representing an
increase of $4.4 million, or 11.6%. Consolidated gross profit as a percent of
sales increased from 35.0% for the first quarter of fiscal 2003 to 36.5% for
the fiscal 2004 first quarter. The increase in consolidated gross profit and
gross margin percentage principally related to higher sales and improved
operating efficiencies in several of the Company's segments.
Selling and administrative expenses for the three months ended December 31,
2003 were $22.8 million, compared to $21.4 million for the first quarter of
fiscal 2003. The increase of $1.4 million, or 6.6%, primarily resulted from
the impact of the increase in the value of foreign currencies against the U.S.
dollar, the acquisition of Reproservice Munich in August of 2003 and higher
sales. Consolidated selling and administrative expenses, as a percent of
sales, were 19.5% for the quarter ended December 31, 2003, compared to 19.6%
for the same period last year.
14
Results of Operations, continued:
Operating profit for the quarter ended December 31, 2003 was $19.8 million
compared to $16.8 million for the three months ended December 31, 2002,
representing an increase of 17.9%. Bronze segment operating profit for the
fiscal 2004 first quarter was $9.7 million, compared to $9.4 million for the
first quarter of fiscal 2003. The increase of 3.9% reflected the segment's
higher sales for the quarter and the favorable impact on the results of
Caggiati S.p.A. of an increase in the value of the Euro against the U.S.
dollar. Operating profit for the York Casket segment for the first quarter of
fiscal 2004 was $4.0 million, an increase of $600,000 over the same period a
year ago. The increase reflected higher sales combined with the favorable
impact of the divestiture of unprofitable manufacturing and distribution
operations during fiscal 2003 and operating efficiencies realized in
connection with the segment's quality and productivity initiatives. Cremation
segment operating profit was $446,000 for the first quarter of fiscal 2004
compared to $457,000 for the quarter ended December 31, 2002. The current
period reflected the segment's higher sales during the quarter offset by the
effects of a change in employee benefit programs in fiscal 2004 which resulted
in a slight increase in related expense. Graphics Imaging operating profit
for the quarter ended December 31, 2003 was $3.9 million compared to $2.6
million for the three months ended December 31, 2002, an increase of 49.5%.
The segment's operating profit was favorably impacted by sales growth in the
Company's European operations combined with an increase in the value of the
Euro against the U.S. dollar. Operating profit for the segment's domestic
businesses improved as a result of the closure of unprofitable operations in
fiscal 2003 and recent cost structure improvements. Operating profit for the
Marking Products segment for the fiscal 2004 first quarter was $1.8 million
compared to $1.0 million for the same period a year ago. The increase of
81.5% reflected an improved product mix, an increase in the value of the
Swedish Krona against the U.S. dollar and higher sales from domestic
operations. Higher foreign currency values against the U.S. dollar had a
favorable impact of approximately $936,000 on the Company's consolidated
operating profit for the quarter ended December 31, 2003 compared to the
quarter ended December 31, 2002.
Investment income for the three months ended December 31, 2003 was $351,000
compared to $275,000 for the quarter ended December 31, 2002 primarily
resulting from a higher cash and investment balance. Interest expense for the
fiscal 2004 first quarter was $451,000, compared to $969,000 for the same
period last year. The decrease in interest expense primarily reflected lower
debt levels and average interest rates during the three months ended December
31, 2003 compared to the comparable quarter in fiscal 2003.
Other income (deductions), net, for the quarter ended December 31, 2003
represented a reduction in pre-tax income of $86,000, compared to a reduction
in pre-tax income of $17,000 for same quarter last year. Minority interest
deduction for fiscal 2004 first quarter was $1.1 million, compared to $1.0
million for the first quarter of fiscal 2003. The higher minority interest
deduction for the fiscal 2004 first quarter resulted from operating income
growth in the Company's European Graphics Imaging businesses.
The Company's effective tax rate for the three months ended December 31, 2003
was 38.8%, which remained unchanged from the effective rate of 38.8% for the
fiscal year ended September 30, 2003. 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.
15
Goodwill:
Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," goodwill related to business combinations is no
longer amortized, but is subject to annual review for impairment. In general,
when the carrying value of a reporting unit exceeds its implied fair value, an
impairment loss must be recognized. For purposes of testing for impairment
the Company uses a combination of valuation techniques, including discounted
cash flows. The Company performs its annual impairment review in its second
fiscal quarter.
Liquidity and Capital Resources:
Net cash provided by operating activities was $14.7 million for the three
months ended December 31, 2003, compared to $18.9 million for the first
quarter of fiscal 2003. Operating cash flow for the fiscal 2004 first quarter
primarily reflected net income adjusted for depreciation and amortization
(non-cash charges). Operating cash flow for first quarter of fiscal 2004 also
included a tax benefit of $870,000 from exercised stock options. For the
quarter ended December 31, 2002, operating cash flow primarily reflected net
income adjusted for depreciation, amortization, higher collections on accounts
receivable and a tax benefit of $1.1 million from exercised stock options.
Cash used in investing activities was $1.8 million for the three months ended
December 31, 2003 compared to $1.9 million for the three months ended December
31, 2002. Investing activities for the fiscal 2004 first quarter primarily
included capital expenditures of $1.8 million. Investing activities for the
first quarter of fiscal 2003 principally reflected capital expenditures of
$2.8 million, which was partially offset by proceeds of $941,000 from the sale
of assets.
Capital expenditures reflected reinvestment in the Company's business segments
and were made primarily for the purchase of new manufacturing machinery,
equipment and facilities designed to improve product quality, increase
manufacturing efficiency, lower production costs and meet regulatory
requirements. Capital expenditures for the last three fiscal years were
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 quarter ended December 31, 2003 was
$15.7 million, primarily reflecting net payments on long-term debt of $10.7
million, proceeds of $2.4 million from the sale of treasury stock (stock
option exercises), purchases of treasury stock of $6.1 million and dividends
of $1.3 million to the Company's shareholders. Cash used in financing
activities for the quarter ended December 31, 2002 was $10.3 million,
reflecting payments on long-term debt of $10.8 million, net proceeds of $1.4
million from the sale of treasury stock (stock option exercises), and
dividends of $862,000 to the Company's shareholders.
16
Liquidity And Capital Resources, continued:
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 December 31,
2003 was 2.12%. 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 outstanding balance on the Revolving Credit Facility at December 31, 2003
was $34.5 million, which has been classified as a current liability.
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 December 31, 2003. Caggiati
S.p.A. has four lines of credit totaling approximately U.S.$13.6 million with
various Italian banks. Outstanding borrowings on these lines approximated
U.S.$3.8 million at December 31, 2003.
The Company has a stock repurchase program, which was initiated in 1996.
Under the program, the Company's Board of Directors has authorized the
repurchase of a total of 8,000,000 shares (adjusted for stock splits) of
Matthews common stock, of which 7,551,011 shares have been repurchased as of
December 31, 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 Articles of Incorporation.
Consolidated working capital of the Company was $58.4 million at December 31,
2003, compared to $89.7 million at September 30, 2003. The decline in working
capital primarily reflects the classification of the $34.5 million outstanding
balance under the Company's Revolving Credit Facility as a current liability
at December 31, 2003. Cash and cash equivalents were $67.4 million at
December 31, 2003, compared to $67.0 million at September 30, 2003. The
Company's current ratio was 1.5 at December 31, 2003 compared to 2.2 at
September 30, 2003.
Environmental Matters:
The Company's operations are subject to various federal, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations impose limitations on the discharge of materials into the
environment and require the Company to obtain and operate in compliance with
conditions of permits and other government authorizations. As such, the
Company has developed policies and procedures with respect to environmental,
safety and health, including the proper handling, storage and disposal of
hazardous materials.
17
Environmental Matters, continued:
The Company is party to various environmental matters. These include
obligations to investigate and mitigate the effects on the environment of the
disposal of certain materials at various operating and non-operating sites.
The Company is currently performing environmental assessments and remediation
at these sites, as appropriate. In addition, prior to its acquisition, York
Casket was identified, along with others, by the Environmental Protection
Agency as a potentially responsible party for remediation of a landfill site
in York, PA. At this time, the Company has not been joined in any lawsuit or
administrative order related to the site or its clean-up.
At December 31, 2003, an accrual of $11.8 million was 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.
Acquisitions:
In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen
("Reproservice Munich"), a German graphics and flexographic printing plate
manufacturer in Munich, Germany. The transaction was structured as a stock
purchase, at an acquisition price of 4.1 million Euros (U.S.$4,800). Products
and services of Reproservice Munich include pre-press packaging, digital and
analog flexographic printing plates, design, art work, lithography and color
separation. The combination of Matthews and Reproservice Munich is an
important part of the Matthews strategy to increase its European presence in
the graphics industry.
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 upon 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.
18
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 has a three-pronged strategy to attain
the annual growth rate objective, which has remained unchanged from the prior
year. This strategy consists of the following: internal growth (which
includes productivity improvements, new product development and the expansion
into new markets with existing products), acquisitions and share repurchases
under the Company's stock repurchase program.
For the first quarter of fiscal 2004, the Company's earnings of $0.35 per
share were 20.7% higher than earnings per share of $0.29 for the same period
last year, and were in line with management's internal expectations. Based on
anticipated internal growth and considering the favorable impact of the recent
changes in the values of foreign currencies against the U.S. dollar, the
Company expects to achieve diluted earnings per share of $1.58 for the fiscal
year ended September 30, 2004.
Critical Accounting Policies:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Therefore, the determination of estimates requires the exercise of judgment
based on various assumptions and other factors such as historical experience,
economic conditions, and in some cases, actuarial techniques. Actual results
may differ from those estimates. A discussion of market risks affecting the
Company can be found in "Quantitative and Qualitative Disclosures about Market
Risk" in this Quarterly Report on Form 10-Q.
A summary of the Company's significant accounting policies are included in the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003. Management
believes that the application of these policies on a consistent basis enables
the Company to provide useful and reliable financial information about the
company's operating results and financial condition. The following accounting
policies involve significant estimates, which are considered critical to the
preparation of the Company's consolidated financial statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on an evaluation of specific
customer accounts in which available facts and circumstances indicate
collectibility may be a problem. In addition, the allowance includes a
general reserve for all customers based on historical collection experience.
19
Critical Accounting Policies, continued:
Long-Lived Assets
Property, plant and equipment, goodwill and other intangible assets are
carried at cost. Depreciation on property, plant and equipment is computed
primarily on the straight-line method over the estimated useful lives of the
assets. Goodwill is no longer amortized, but is subject to periodic review
for impairment. Intangible assets are amortized over their estimated useful
lives, unless such lives are considered to be indefinite. A significant
decline in cash flows generated from these assets may result in a write-down
of the carrying values of the related assets.
Pension Costs
Pension assets and liabilities are determined on an actuarial basis and are
affected by the market value of plan assets, estimates of the expected return
on plan assets and the discount rate used to determine the present value of
benefit obligations. Actual changes in the fair market value of plan assets
and differences between the actual return on plan assets, the expected return
on plan assets and changes in the selected discount rate will affect the
amount of pension cost.
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 prior to
July 1, 2003 for future delivery.
In July 2003, the Emerging Issues Task Force ("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 to the finishing and storage elements of its pre-need sales.
Issue No. 00-21 did not have a material impact on the Company's results of
operations or financial position.
At December 31, 2003, the Company held 357,863 memorials and 238,470 vases in
its storage facilities under the "pre-need" sales program.
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.
20
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The following table summarizes the Company's contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods.
Payments due in fiscal year:
------------------------------------------------
2004 After
Total (remainder) 2005 to 2006 2007 to 2008 2008
--------- ----------- ------------ ------------ ------
Contractual Cash Obligations: (Dollar amounts in thousands)
Revolving credit facility $ 34,500 $ - $34,500 $ - $ -
Notes payable to banks 14,470 1,255 3,127 2,820 7,268
Short-term borrowings 3,781 3,781 - - -
Capital lease obligations 1,021 560 448 13 -
Non-cancelable operating leases 8,830 1,978 3,110 2,016 1,726
------ ----- ------ ----- -----
Total contractual cash obligations $62,602 $7,574 $41,185 $4,849 $8,994
====== ===== ====== ===== =====
The Company estimates that benefit 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, and
based on current employment levels these amounts are not expected to change
significantly in the next five years. Benefit payments under the Company's
principal retirement plan are made from plan assets, while benefit payments
under the supplemental retirement plan and the postretirement benefit plan are
made from the Company's operating funds. The Company believes that its
current liquidity sources, combined with its operating cash flow and borrowing
capacity, will be sufficient to meet its capital needs for the foreseeable
future.
Accounting Pronouncements:
In June 2002, the Financial Accounting Standards Board ("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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation addresses
consolidation by business enterprises of variable interest entities with
certain characteristics. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. In October 2003, the FASB
agreed to defer the effective date of FIN 46 for variable interest entities
held by public companies that were acquired before February 1, 2003. The
deferral will require that public companies adopt the provisions of FIN 46 for
periods ending after December 15, 2003. The adoption of FIN 46 did not have a
material impact on the Company's consolidated financial position and results
of operations.
21
Accounting Pronouncements, continued:
In December 2003, the FASB issued a revised version of SFAS No. 132
"Employer's Disclosures about Pensions and Other Postretirement Benefits."
This statement requires additional disclosures about assets, obligations, cash
flows and net periodic benefit costs of defined benefit plans and other
defined benefit postretirement plans. The disclosure requirements are
effective for annual financial statements with fiscal years ending after
December 15, 2003 and for interim periods beginning after December 15, 2003.
The disclosure requirements of the revised SFAS No. 132 will be adopted by the
Company for the quarter ending March 31, 2004.
In January 2004, the FASB issued FASB Staff Position No. 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-1"). FSP 106-1 permits
the sponsor of a postretirement health care plan that provides prescription
drug benefits to make a one time election to defer accounting for the effects
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
("the Act"). FSP 106-1 also requires certain other disclosures, whether the
deferral is elected or not. In accordance with FSP 106-1, the Company has
elected to defer accounting for the Act since the effects of the Act on the
Company's postretirement benefit plan have not been calculated. The FASB is
expected to issue specific guidance on the accounting for certain elements of
the Act which, when adopted by the Company, could require a change to
previously reported information regarding the Company's postretirement benefit
plan.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following discussion about the Company's market risk involves forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company has market risk
related to changes in interest rates, commodity prices and foreign currency
exchange rates. The Company does not generally 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.
22
Item 4. Controls and Procedures
Based on their evaluation at the end of the period covered by this Quarterly
Report on Form 10-Q, the Company's chief executive officer and chief financial
officer have concluded that the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
31.1 Certification of Principal Executive Officer for
David M. Kelly
31.2 Certification of Principal Financial Officer for
Steven F. Nicola
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for David M. Kelly.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for Steven F. Nicola.
(b) Reports on Form 8-K
On November 14, 2003, Matthews filed a Current Report on Form 8-K
under Item 12 in connection with a press release announcing its
earnings for fiscal 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTHEWS INTERNATIONAL CORPORATION
(Registrant)
Date 2/11/04 D.M. Kelly
------------ -----------------------------------------
D.M. Kelly, Chairman of the Board,
President and Chief Executive Officer
Date 2/11/04 S.F. Nicola
------------ -----------------------------------------
S.F. Nicola, Chief Financial Officer,
Secretary and Treasurer