Form 10Q for the 2nd Quarter of 2007
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 March 31, 2007
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
|
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
March 31, 2007, shares of common stock outstanding were:
Class
A
Common Stock 31,594,913
shares
PART
I -
FINANCIAL INFORMATION
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollar
amounts in thousands, except per share data)
|
|
March
31, 2007
|
|
September
30, 2006
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
43,510
|
|
|
|
|
$
|
29,720
|
|
Short-term
investments
|
|
|
|
|
|
91
|
|
|
|
|
|
92
|
|
Accounts
receivable, net
|
|
|
|
|
|
119,212
|
|
|
|
|
|
121,750
|
|
Inventories
|
|
|
|
|
|
93,523
|
|
|
|
|
|
85,415
|
|
Deferred
income taxes
|
|
|
|
|
|
1,680
|
|
|
|
|
|
1,682
|
|
Other
current assets
|
|
|
|
|
|
6,890
|
|
|
|
|
|
4,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
264,906
|
|
|
|
|
|
242,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
11,356
|
|
|
|
|
|
11,492
|
|
Property,
plant and equipment: Cost
|
|
|
208,353
|
|
|
|
|
|
202,346
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(120,475
|
)
|
|
|
|
|
(114,247
|
)
|
|
|
|
|
|
|
|
|
|
87,878
|
|
|
|
|
|
88,099
|
|
Deferred
income taxes and other assets
|
|
|
|
|
|
31,673
|
|
|
|
|
|
30,566
|
|
Goodwill
|
|
|
|
|
|
305,078
|
|
|
|
|
|
298,125
|
|
Other
intangible assets, net
|
|
|
|
|
|
45,303
|
|
|
|
|
|
44,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
$
|
746,194
|
|
|
|
|
$
|
716,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, current maturities
|
|
|
|
|
$
|
25,544
|
|
|
|
|
$
|
28,451
|
|
Accounts
payable
|
|
|
|
|
|
24,815
|
|
|
|
|
|
26,925
|
|
Accrued
compensation
|
|
|
|
|
|
29,972
|
|
|
|
|
|
33,517
|
|
Accrued
income taxes
|
|
|
|
|
|
8,173
|
|
|
|
|
|
9,230
|
|
Other
current liabilities
|
|
|
|
|
|
30,588
|
|
|
|
|
|
39,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
119,092
|
|
|
|
|
|
137,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
134,640
|
|
|
|
|
|
120,289
|
|
Pension
and postretirement benefits
|
|
|
|
|
|
37,806
|
|
|
|
|
|
35,142
|
|
Deferred
income taxes
|
|
|
|
|
|
10,390
|
|
|
|
|
|
9,942
|
|
Environmental
reserve
|
|
|
|
|
|
8,502
|
|
|
|
|
|
9,028
|
|
Other
liabilities and deferred revenue
|
|
|
|
|
|
12,878
|
|
|
|
|
|
12,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
36,334
|
|
|
|
|
|
36,334
|
|
|
|
|
Additional
paid-in capital
|
|
|
37,261
|
|
|
|
|
|
33,953
|
|
|
|
|
Retained
earnings
|
|
|
439,189
|
|
|
|
|
|
410,203
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
10,719
|
|
|
|
|
|
4,386
|
|
|
|
|
Treasury
stock, at cost
|
|
|
(100,617
|
)
|
|
|
|
|
(92,451
|
)
|
|
|
|
|
|
|
|
|
|
422,886
|
|
|
|
|
|
392,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
$
|
746,194
|
|
|
|
|
$
|
716,090
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
(Dollar
amounts in thousands, except per share data)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
202,979
|
|
$
|
181,068
|
|
$
|
378,403
|
|
$
|
351,177
|
|
Cost
of sales
|
|
|
(128,772
|
)
|
|
(114,121
|
)
|
|
(239,262
|
)
|
|
(223,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
74,207
|
|
|
66,947
|
|
|
139,141
|
|
|
128,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
(42,562
|
)
|
|
(37,886
|
)
|
|
(83,312
|
)
|
|
(76,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
31,645
|
|
|
29,061
|
|
|
55,829
|
|
|
51,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
|
439
|
|
|
244
|
|
|
850
|
|
|
571
|
|
Interest
expense
|
|
|
(1,924
|
)
|
|
(1,576
|
)
|
|
(3,740
|
)
|
|
(3,016
|
)
|
Other
income (deductions), net
|
|
|
79
|
|
|
(18
|
)
|
|
210
|
|
|
(51
|
)
|
Minority
interest
|
|
|
(591
|
)
|
|
(704
|
)
|
|
(1,111
|
)
|
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
29,648
|
|
|
27,007
|
|
|
52,038
|
|
|
47,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(11,147
|
)
|
|
(10,155
|
)
|
|
(19,566
|
)
|
|
(17,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
18,501
|
|
$
|
16,852
|
|
$
|
32,472
|
|
$
|
29,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$.58
|
|
|
$.53
|
|
|
$1.02
|
|
|
$.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$.58
|
|
|
$.52
|
|
|
$1.02
|
|
|
$.92
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar
amounts in thousands, except per share data)
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
32,472
|
|
$
|
29,759
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10,274
|
|
|
10,706
|
|
Net
(gain) loss on sale of assets
|
|
|
(1,525
|
)
|
|
67
|
|
Minority
interest
|
|
|
1,111
|
|
|
1,292
|
|
Stock-based
compensation expense
|
|
|
1,720
|
|
|
2,448
|
|
Change
in deferred taxes
|
|
|
331
|
|
|
(695
|
)
|
Changes
in working capital items
|
|
|
(19,333
|
)
|
|
(22,342
|
)
|
Increase
in other assets
|
|
|
(963
|
)
|
|
(271
|
)
|
Increase
(decrease) in other liabilities
|
|
|
71
|
|
|
(253
|
)
|
Increase
in pension and postretirement benefits
|
|
|
2,664
|
|
|
2,429
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
26,822
|
|
|
23,140
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(10,679
|
)
|
|
(7,488
|
)
|
Proceeds
from sale of assets
|
|
|
3,764
|
|
|
90
|
|
Acquisitions,
net of cash acquired
|
|
|
(8,361
|
)
|
|
(29,900
|
)
|
Purchases
of investments
|
|
|
(596
|
)
|
|
(104
|
)
|
Proceeds
from disposition of investments
|
|
|
134
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(15,738
|
)
|
|
(37,395
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
32,343
|
|
|
38,299
|
|
Payments
on long-term debt
|
|
|
(22,184
|
)
|
|
(21,019
|
)
|
Proceeds
from the sale of treasury stock
|
|
|
5,780
|
|
|
1,421
|
|
Purchases
of treasury stock
|
|
|
(11,901
|
)
|
|
(36
|
)
|
Tax
benefit of exercised stock options
|
|
|
1,469
|
|
|
506
|
|
Dividends
|
|
|
(3,486
|
)
|
|
(3,210
|
)
|
Distributions
to minority interests
|
|
|
(895
|
)
|
|
(3,910
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,126
|
|
|
12,051
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,580
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
13,790
|
|
$
|
(2,915
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
March
31,
2007
(Dollar
amounts in thousands, except per share data)
Note
1. Nature of Operations
Matthews
International Corporation ("Matthews" or the “Company”), founded in 1850 and
incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer
principally of memorialization products and brand solutions. Memorialization
products consist primarily of bronze memorials and other memorialization
products, caskets and cremation equipment for the cemetery and funeral home
industries. Brand solutions include graphics imaging products and services,
marking products, and merchandising solutions. The Company's products and
operations are comprised of six business segments: Bronze, Casket, Cremation,
Graphics Imaging, Marking Products and Merchandising Solutions. 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 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 brand solutions,
printing plates, pre-press services and imaging services for the primary
packaging and corrugated industries. The Marking Products segment designs,
manufactures and distributes a wide range of marking and coding equipment and
consumables, and industrial automation products for identifying, tracking and
conveying various consumer and industrial products, components and packaging
containers. The Merchandising Solutions segment designs and manufactures
merchandising displays and systems and provides creative merchandising and
marketing solutions services.
The
Company has manufacturing and marketing facilities in the United States, Canada,
Mexico, Australia, 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 and six months
ended March 31, 2007 are not necessarily indicative of the results that may
be
expected for the fiscal year ending September 30, 2007. 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,
2006. The consolidated financial statements include all domestic and foreign
subsidiaries in which the Company maintains an ownership interest and has
operating control. All intercompany accounts and transactions have
been eliminated.
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.
Reclassifications
and restatements:
Certain
reclassifications have been made in the Consolidated Statements of Cash Flows
for prior periods to conform to the current period presentation.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
3. Share-Based Payments
The
Company has a stock incentive plan that provides for grants of incentive stock
options, non-statutory stock options and restricted share awards in an aggregate
number not to exceed 15% of the outstanding shares of the Company’s common stock
(4,739,237 at
March
31, 2007). 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. Outstanding stock options are exercisable in
one-third increments upon the attainment of 10%, 33% and 60% appreciation in
the
market value of the Company’s Class A Common Stock. In addition, options
generally vest in one-third increments after three, four and five years,
respectively, from the grant date (but, in any event, not until the attainment
of the market value thresholds). The options expire on the earlier of ten years
from the date of grant, upon employment termination, or within specified time
limits following voluntary employment termination (with the consent of the
Company), retirement or death. The Company generally settles employee stock
option exercises with treasury shares.
Effective
October 1, 2005, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), using the
modified retrospective method. Accordingly, stock-based compensation cost is
measured at grant date, based on the fair value of the award, and is recognized
as expense over the employee requisite service period.
For
the
three-month periods ended March 31, 2007 and 2006, stock-based compensation
cost
totaled $848 and $1,087, respectively. For the six-month periods ended March
31,
2007 and 2006, stock-based compensation cost totaled $1,720 and $2,448,
respectively. The associated future income tax benefit recognized was $331
and
$424 for the three-month periods ended March 31, 2007 and 2006, respectively,
and was $671 and $955 for the six-month periods ended March 31, 2007 and 2006,
respectively.
The
amount of cash received from the exercise of stock options was $3,659 and $1,095
for the three-month periods ended March 31, 2007 and 2006, respectively and
$5,780 and $1,421 for the six-month periods ended March 31, 2007 and 2006,
respectively. In
connection with these exercises, the tax benefits realized by the Company were
$1,335 and $429 for the three-month periods ended March 31, 2007 and 2006,
respectively, and $2,232 and $710 for the six-month periods ended March 31,
2007
and 2006, respectively.
The
transactions for shares under options for the six-months ended March 31, 2007
were as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
average
|
|
Aggregate
|
|
|
|
|
|
Weighted-average
|
|
remaining
|
|
intrinsic
|
|
|
|
Shares
|
|
exercise
price
|
|
contractual
term
|
|
value
|
|
Outstanding,
September 30, 2006
|
|
|
2,529,451
|
|
$
|
28.75
|
|
|
|
|
|
|
|
Granted
|
|
|
392,650
|
|
|
40.59
|
|
|
|
|
|
|
|
Exercised
|
|
|
(287,177
|
)
|
|
19.85
|
|
|
|
|
|
|
|
Expired
or forfeited
|
|
|
(16,316
|
)
|
|
31.17
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2007
|
|
|
2,618,608
|
|
$
|
31.49
|
|
|
7.2
|
|
$
|
24,119
|
|
Exercisable,
March 31, 2007
|
|
|
822,143
|
|
$
|
23.49
|
|
|
5.3
|
|
$
|
14,145
|
|
Shares
reserved for future options
|
|
|
2,120,629
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average grant date fair value of options granted for the six-month
periods ended March 31, 2007 and 2006 was
$12.29 and $9.47, respectively. The
fair
value of shares earned was $1,481 and $915, during the three-month periods
ended
March 31, 2007 and 2006, respectively, and $3,301 and $3,594 during the
six-month periods ended March 31, 2007 and 2006, respectively. The intrinsic
value of options (which is the amount by which the stock price exceeded the
exercise price of the options on the date of exercise) exercised during the
six-month periods ended March 31, 2007 and 2006 was $5,742
and $1,887, respectively.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
3. Share-Based Payments (continued)
The
transactions for non-vested shares for the six months ended March 31, 2007
were
as follows:
|
|
|
|
Weighted-average
|
|
|
|
|
|
grant-date
|
|
Non-vested
shares
|
|
Shares
|
|
fair
value
|
|
Non-vested
at September 30, 2006
|
|
|
1,814,878
|
|
$
|
9.84
|
|
Granted
|
|
|
392,650
|
|
|
12.29
|
|
Vested
|
|
|
(395,163
|
)
|
|
8.35
|
|
Expired
or forfeited
|
|
|
(15,900
|
)
|
|
9.63
|
|
Non-vested
at March 31, 2007
|
|
|
1,796,465
|
|
$
|
10.70
|
|
As
of
March 31, 2007 the total unrecognized compensation cost related to non-vested
stock options was approximately $7,157.
This cost is expected to be recognized over a weighted-average period of 3.9
years in accordance with the vesting periods of the options.
As
of
October 1, 2005, the fair value of each option grant is estimated on the date
of
grant using a binomial lattice valuation model. The following table indicates
the assumptions used in estimating fair value for the six-month periods ended
March 31, 2007 and 2006.
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Expected
volatility
|
|
|
24.0
|
%
|
|
24.0
|
%
|
Dividend
yield
|
|
|
.6
|
%
|
|
.6
|
%
|
Average
risk free interest rate
|
|
|
4.7
|
%
|
|
4.4
|
%
|
Average
expected term (years)
|
|
|
6.3
|
|
|
5.5
|
|
The
risk
free interest rate is based on United States Treasury yields at the date of
grant. The dividend yield is based on the most recent dividend payment and
average stock price over the 12 months prior to the grant date. Expected
volatilities are based on the historical volatility of the Company’s stock
price. The expected term represents an estimate of the period of time options
are expected to remain outstanding. Separate employee groups and option
characteristics are considered separately for valuation purposes.
In
the
first quarter of fiscal 2007, 15,209 shares of restricted stock were granted
to
certain employees. The shares generally vest based upon certain service and
performance criteria. The unrecognized compensation cost related to the unvested
shares was approximately $361 at March 31, 2007.
Under
the
Company’s Director Fee Plan, directors who are not also officers of the Company
each receive, as an annual retainer fee, either cash or shares of the Company's
Class A Common Stock equivalent to $30. Where the annual retainer fee is
provided in shares, 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.
Directors may also elect to receive the common stock equivalent of meeting
fees
credited to a deferred stock account. The value of deferred shares is recorded
in other liabilities. A total of 49,569 shares had been deferred under the
Director Fee Plan at March
31,
2007. Directors
who are not also officers of the Company each receive an annual stock-based
grant (non-statutory stock options, stock appreciation rights and/or restricted
shares) with a value of $50 in fiscal 2007 and $40 in fiscal 2006. A total
of
22,300 stock options have been granted under the plan, all of which were
outstanding and unvested at March 31, 2007. Additionally, 13,200 shares of
restricted stock have been granted under the plan, all of which are unvested
at
March 31, 2007. A total of 500,000 shares have been authorized to be issued
under the Director Fee Plan.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
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 2007 of 37.6% and the
Federal statutory rate of 35.0% primarily reflects the impact of state and
foreign income taxes.
Note
5. Earnings Per Share
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
18,501
|
|
$
|
16,852
|
|
$
|
32,472
|
|
$
|
29,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
31,733,347
|
|
|
32,087,041
|
|
|
31,699,731
|
|
|
32,063,349
|
|
Dilutive
securities, primarily stock options
|
|
|
135,651
|
|
|
206,038
|
|
|
184,776
|
|
|
263,975
|
|
Diluted
weighted-average
common
shares outstanding
|
|
|
31,868,998
|
|
|
32,293,079
|
|
|
31,884,507
|
|
|
32,327,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$.58
|
|
|
$.53
|
|
|
$1.02
|
|
|
$.93
|
|
Diluted
earnings per share
|
|
|
$.58
|
|
|
$.52
|
|
|
$1.02
|
|
|
$.92
|
|
Note
6. Comprehensive
Income
Comprehensive
income consists of net income adjusted for changes, net of the related income
tax effect, in cumulative foreign currency translation, the fair value of
derivatives, unrealized investment gains and losses and minimum pension
liability.
For
the
three-months ended March 31, 2007 and 2006, comprehensive income was $20,091 and
$18,717, respectively. For
the
six-months ended March 31, 2007 and 2006, comprehensive income was $38,805 and
$29,306, respectively.
Note
7. Inventories:
Inventories
consisted of the following:
|
|
March
31, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Materials
and finished goods
|
|
$
|
86,030
|
|
$
|
79,715
|
|
Labor
and overhead in process
|
|
|
7,493
|
|
|
5,700
|
|
|
|
$
|
93,523
|
|
$
|
85,415
|
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
8. Segment Information
The
Company's products and operations consist of two principal businesses that
are
comprised of three operating segments each, as described under Nature of
Operations (Note 1): Memorialization Products (Bronze, Casket, Cremation) and
Brand Solutions (Graphics Imaging, Marking Products, Merchandising Solutions).
Management evaluates segment performance based on operating profit (before
income taxes) and does not allocate non-operating items such as investment
income, interest expense, other income (deductions), net and minority
interest.
Information
about the Company's segments follows:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Sales
to external customers:
|
|
|
|
|
|
|
|
|
|
Memorialization:
|
|
|
|
|
|
|
|
|
|
Bronze
|
|
$
|
56,159
|
|
$
|
53,138
|
|
$
|
106,587
|
|
$
|
101,822
|
|
Casket
|
|
|
58,845
|
|
|
55,204
|
|
|
112,668
|
|
|
103,398
|
|
Cremation
|
|
|
6,661
|
|
|
6,672
|
|
|
13,295
|
|
|
12,382
|
|
|
|
|
121,665
|
|
|
115,014
|
|
|
232,550
|
|
|
217,602
|
|
Brand
Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Imaging
|
|
|
36,890
|
|
|
34,258
|
|
|
70,641
|
|
|
67,548
|
|
Marking
Products
|
|
|
14,097
|
|
|
13,027
|
|
|
27,777
|
|
|
25,288
|
|
Merchandising
Solutions
|
|
|
30,327
|
|
|
18,769
|
|
|
47,435
|
|
|
40,739
|
|
|
|
|
81,314
|
|
|
66,054
|
|
|
145,853
|
|
|
133,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,979
|
|
$
|
181,068
|
|
$
|
378,403
|
|
$
|
351,177
|
|
Operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memorialization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bronze
|
|
$
|
15,899
|
|
$
|
15,025
|
|
$
|
27,525
|
|
$
|
26,951
|
|
Casket
|
|
|
5,577
|
|
|
6,909
|
|
|
11,488
|
|
|
10,497
|
|
Cremation
|
|
|
1,215
|
|
|
1,115
|
|
|
1,991
|
|
|
1,688
|
|
|
|
|
22,691
|
|
|
23,049
|
|
|
41,004
|
|
|
39,136
|
|
Brand
Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Imaging
|
|
|
3,335
|
|
|
4,064
|
|
|
5,525
|
|
|
7,618
|
|
Marking
Products
|
|
|
2,083
|
|
|
2,421
|
|
|
4,469
|
|
|
4,356
|
|
Merchandising
Solutions
|
|
|
3,536
|
|
|
(473
|
)
|
|
4,831
|
|
|
369
|
|
|
|
|
8,954
|
|
|
6,012
|
|
|
14,825
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,645
|
|
$
|
29,061
|
|
$
|
55,829
|
|
$
|
51,479
|
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
9. Debt
The
Company has a Revolving Credit Facility with a syndicate of financial
institutions. On March 30, 2007, the maximum amount of borrowings available
under the facility was increased from $150,000 to $175,000 in accordance with
the terms of the facility. Borrowings under the amended facility, which is
scheduled to mature on April 30, 2009, bear interest at LIBOR plus a factor
ranging from .50% to 1.00% based on the Company’s leverage ratio. The leverage
ratio is defined as net indebtedness divided by EBITDA (earnings before
interest, taxes, depreciation and amortization). The Company is required to
pay
an annual commitment fee ranging from .20% to .30% (based on the Company’s
leverage ratio) of the unused portion of the facility. The Revolving Credit
Facility requires the Company to maintain certain leverage 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. As of March 31, 2007
outstanding borrowings on the Revolving Credit Facility were $137,500. The
weighted-average interest rate on outstanding borrowings at March 31, 2007
and
2006 was 5.14% and
4.45%, respectively.
In
April
2004, the Company entered into an interest rate swap that fixed, for a five-year
period, the interest rate on borrowings in an initial amount of $50,000. The
interest rate was fixed at 2.66% plus a factor based on the Company’s leverage
ratio (the factor was .50% at March 31, 2007). The
interest rate swap was designated as a cash flow hedge of the future variable
interest payments under the Revolving Credit Facility which are considered
probable of occurring. Based on the Company’s assessment, all of the critical
terms of the hedge matched the underlying terms of the hedged debt and related
forecasted interest payments and as such, these hedges were considered
effective. Equal quarterly principal payments of $2,500 plus interest are due
on
this $50,000 borrowing until its maturity in April 2009.
Effective
September 30, 2005, the Company entered into an interest rate swap that fixed,
for the period through the maturity of the Revolving Credit Facility, the
interest rate on additional borrowings in an initial amount of $50,000. The
interest rate was fixed at 4.14% plus a factor based on the Company’s leverage
ratio (the factor was .50% at
March
31, 2007).
The interest rate swap was designated as a cash flow hedge of the future
variable interest payments under the Revolving Credit Facility, which are
considered probable of occurring. Based on the Company’s assessment, all of the
critical terms of the hedge match the underlying terms of the hedged debt and
related forecasted interest payments and as such, these hedges are considered
effective. Equal quarterly principal payments of $3,333 plus interest are due
on
this $50,000 portion of the borrowing until its maturity in April
2009.
The
fair
value of the interest rate swaps reflected an
unrealized gain of $996 ($608 after tax) at
March
31, 2007 that is included in shareholders’ equity as part of accumulated other
comprehensive income. Assuming market rates remain constant with the rates
at
March 31, 2007, approximately $292
of
the $608 gain included in accumulated other comprehensive income is expected
to
be recognized in earnings as an adjustment to interest expense over the next
twelve months.
The
Company, through its wholly-owned subsidiary, Matthews International GmbH
(“MIGmbH”), has a credit facility with a bank for borrowings up to 10.0 million
Euros. At March 31, 2007, outstanding borrowings under the credit facility
totaled 8.5
million Euros ($11,354). The
weighted-average interest rate on outstanding borrowings of MIGmbH at March
31,
2007 and 2006 was 4.0% and
3.07%, respectively.
The
Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several
loans
with various Italian banks. Outstanding
borrowings on these loans totaled 7.5 million Euros ($10,076) at
March
31, 2007. Caggiati S.p.A. also has three lines of credit totaling 8.4 million
Euros ($11,181) with the same Italian banks. Outstanding borrowings on
these lines
were 120,500
Euros ($161) at
March
31, 2007. The weighted-average interest rate on outstanding borrowings of
Caggiati S.p.A. at March 31, 2007 and 2006 was 3.26% and 3.12%, respectively.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
10. Pension and Other Postretirement Benefit Plans
The
Company provides defined benefit pension and other postretirement plans to
certain employees. The following represents the net periodic pension and other
postretirement benefit cost for the plans:
|
|
Pension
|
|
Other
Postretirement
|
|
Three
months ended March 31,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,003
|
|
$
|
1,037
|
|
$
|
133
|
|
$
|
158
|
|
Interest
cost
|
|
|
1,640
|
|
|
1,487
|
|
|
297
|
|
|
307
|
|
Expected
return on plan assets
|
|
|
(1,612
|
)
|
|
(1,708
|
)
|
|
-
|
|
|
-
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
3
|
|
|
(4
|
)
|
|
(322
|
)
|
|
(322
|
)
|
Net
actuarial loss
|
|
|
385
|
|
|
373
|
|
|
72
|
|
|
161
|
|
Net
benefit cost
|
|
|
1,419
|
|
|
1,185
|
|
$
|
180
|
|
$
|
304
|
|
|
|
Pension
|
|
Other
Postretirement
|
|
Six
months ended March 31,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2,006
|
|
$
|
2,164
|
|
$
|
266
|
|
$
|
316
|
|
Interest
cost
|
|
|
3,280
|
|
|
2,962
|
|
|
594
|
|
|
614
|
|
Expected
return on plan assets
|
|
|
(3,224
|
)
|
|
(3,416
|
)
|
|
-
|
|
|
-
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
6
|
|
|
(8
|
)
|
|
(644
|
)
|
|
(644
|
)
|
Net
actuarial loss
|
|
|
770
|
|
|
872
|
|
|
144
|
|
|
322
|
|
Net
benefit cost
|
|
$
|
2,838
|
|
$
|
2,574
|
|
$
|
360
|
|
$
|
608
|
|
Benefit
payments under the Company’s principal retirement plan are made from plan
assets, while benefit payments under the supplemental retirement plan and
postretirement benefit plan are funded from the Company’s operating funds. Under
IRS regulations, the Company is not required to make any significant
contributions to its principal retirement plan in fiscal 2007. As of March
31,
2007, contributions of $148 and $571 have been made under the supplemental
retirement plan and postretirement plan, respectively. The Company currently
anticipates contributing an additional $329
and
$441 under the supplemental retirement plan and postretirement plan,
respectively, for the remainder of fiscal 2007.
Note
11. Acquisitions
On
March
1, 2006, the Company acquired Royal Casket Company (“Royal”), a distributor of
primarily York brand caskets in the Southwest region of the United States.
The
transaction was structured as an asset purchase, with potential additional
consideration payable contingent upon the operating performance of the acquired
operations during the next five years. The Company expects to account for this
consideration as additional purchase price. The excess of purchase price over
the fair market value of net assets acquired was allocated to goodwill. The
acquisition was intended to expand Matthews’ casket distribution capabilities in
the Southwestern United States.
On
February 23, 2006, the Company acquired The Doyle Group (“Doyle”), a provider of
reprographic services to the packaging industry, located in Oakland, California.
The transaction was structured as an asset purchase. The excess of purchase
price over the fair market value of net assets acquired was allocated to
goodwill. The acquisition was intended to expand the Company’s graphics business
in the Western United States.
In
December 2006, the Company paid additional purchase consideration under the
terms of the Milso Industries acquisition agreement. In October 2005, the
Company paid for the acquisition of an additional 30% interest in S+T
Gesellschaft fur Reprotechnik GmbH.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
12. Goodwill and Other Intangible Assets
Goodwill
related to business combinations is not 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. A significant decline in cash flows generated from these assets
may
result in a write-down of the carrying values of the related assets. The Company
performed its annual impairment review in the second quarter of fiscal 2007
and
determined that no additional adjustments to the carrying values of goodwill
were necessary at March 31, 2007.
Changes
to goodwill, net of accumulated amortization, for the six months ended March
31,
2007, were as follows.
|
|
|
|
|
|
|
|
Graphics
|
|
Marking
|
|
Merchandising
|
|
|
|
|
|
Bronze
|
|
Casket
|
|
Cremation
|
|
Imaging
|
|
Products
|
|
Solutions
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September
30, 2006
|
|
$
|
74,178
|
|
$
|
115,982
|
|
$
|
6,536
|
|
$
|
86,269
|
|
$
|
5,213
|
|
$
|
9,947
|
|
$
|
298,125
|
|
Additions
during period
|
|
|
-
|
|
|
885
|
|
|
-
|
|
|
861
|
|
|
-
|
|
|
-
|
|
|
1,746
|
|
Translation
and other adjustments
|
|
|
1,341
|
|
|
-
|
|
|
-
|
|
|
3,866
|
|
|
-
|
|
|
-
|
|
|
5,207
|
|
Balance
at March
31, 2007
|
|
$
|
75,519
|
|
$
|
116,867
|
|
$
|
6,536
|
|
$
|
90,996
|
|
$
|
5,213
|
|
$
|
9,947
|
|
$
|
305,078
|
|
The
additions to Graphics Imaging goodwill relate to additional consideration paid
in accordance with the purchase agreement related to a European Graphics
business. The additions to Casket goodwill relate primarily to additional
consideration paid in accordance with the acquisition of Royal
Casket.
The
following tables summarize the carrying amounts and related accumulated
amortization for intangible assets as of March 31, 2007 and September 30, 2006,
respectively.
|
|
Carrying
|
|
Accumulated
|
|
|
|
|
|
Amount
|
|
Amortization
|
|
Net
|
|
March
31, 2007:
|
|
|
|
|
|
|
|
Trade
names
|
|
$
|
24,370
|
|
$
|
-
*
|
|
$
|
24,370
|
|
Customer
relationships
|
|
|
21,007
|
|
|
(3,326
|
)
|
|
17,681
|
|
Copyrights/patents/other
|
|
|
6,246
|
|
|
(2,994
|
)
|
|
3,252
|
|
|
|
$
|
51,623
|
|
$
|
(6,320
|
)
|
$
|
45,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
$
|
24,003
|
|
$
|
-
*
|
|
$
|
24,003
|
|
Customer
relationships
|
|
|
20,900
|
|
|
(2,714
|
)
|
|
18,186
|
|
Copyrights/patents/other
|
|
|
5,322
|
|
|
(2,546
|
)
|
|
2,776
|
|
|
|
$
|
50,225
|
|
$
|
(5,260
|
)
|
$
|
44,965
|
|
*
Not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
The
increase in intangible assets during the six-months ended March 31, 2007 was
due
to the addition of intellectual property in the Bronze and Marking Products
segments and the impact of fluctuations in foreign currency exchange rates
on
intangible assets denominated in foreign currencies, offset by additional
amortization.
Amortization
expense on intangible assets was $421
and
$545 for the three-month periods ended March 31, 2007 and 2006, respectively.
For the six-month periods ended March 31, 2007
and
2006, amortization expense was $1,048 and $1,090, respectively. Amortization
expense is estimated to be $1,908 in
2007,
$1,996 in
2008,
$1,934 in 2009, $1,694 in
2010
and $1,662 in 2011.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
13. Accounting Pronouncements
In
June
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48) which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting
in
interim periods, disclosure and transition. Any resulting cumulative effect
of
applying the provisions of FIN 48 upon adoption will be reported as an
adjustment to beginning retained earnings in the period of adoption. The
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is currently evaluating the impact of the adoption of FIN
48.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” which amends SFAS 87, 88, 106
and 132(R). In February 2007, the FASB issued FSP FAS 158-1 providing additional
guidance to Statement 158. SFAS No. 158 requires employers to recognize the
over-funded or under-funded status of defined benefit postretirement plans
on
the balance sheet and to recognize the corresponding adjustment in other
comprehensive income. In addition, the statement requires recognition in other
comprehensive income of gains or loss and prior service costs or credits that
are not included as components of periodic benefit expense. These provisions
of
the statement are effective for public companies for fiscal years ending after
December 15, 2006. Accordingly, the Company will adopt this provision of
SFAS No. 158 prospectively for the year-end financial statements dated September
30, 2007. If the Company had adopted SFAS No. 158 as of September 30,
2006, the liability for pension and postretirement benefits would have increased
approximately $10,000, deferred tax assets would have increased approximately
$3,900 and equity (other accumulated comprehensive income) would have decreased
by approximately $6,100.
Further,
SFAS No. 158 requires the Company to measure the plan assets and benefit
obligations of defined benefit postretirement plans as of the date of its
year-end balance sheet. This provision of the SFAS No. 158 is effective for
public companies for fiscal years beginning after December 15, 2008. The
Company currently measures plan assets and benefit obligations as of July 31
of
each year. The Company is considering the implications of this provision and
the
feasibility of earlier adoption of this portion of the statement. Upon
adoption, this provision is not expected to have a material effect on the
financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. The Statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new
fair
value measurements. The Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The adoption of SFAS No.
157
is not expected to have a material impact on the Company’s consolidated
financial position or results of operations.
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, 2006. 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 foreign currency
exchange rates, changes in the cost of materials used in the manufacture of
the
Company’s products, changes in death rates, changes in product demand or pricing
as a result of consolidation in the industries in which the Company operates
or
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. In addition, although the Company does not have any single
customer that would be considered individually significant to consolidated
sales, the potential loss of one or more of the Company’s larger customers could
be considered a risk factor.
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.
|
|
Six
months ended
|
|
Years
ended
|
|
|
|
March
31,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
Sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Gross
profit
|
|
|
36.8
|
%
|
|
36.5
|
%
|
|
38.0
|
%
|
|
34.9
|
%
|
Operating
profit
|
|
|
14.8
|
%
|
|
14.7
|
%
|
|
15.9
|
%
|
|
15.4
|
%
|
Income
before taxes
|
|
|
13.8
|
%
|
|
13.6
|
%
|
|
14.7
|
%
|
|
14.5
|
%
|
Net
income
|
|
|
8.6
|
%
|
|
8.5
|
%
|
|
9.3
|
%
|
|
9.1
|
%
|
Results
of Operations:
Sales
for
the six months ended March 31, 2007 were $378.4 million, compared to $351.2
million for the six months ended March 31, 2006. The increase reflected higher
sales in all of the Company’s six segments, and included the effect of higher
foreign currency values against the U.S. dollar. These increases were offset
by
lower sales volume in the Graphics Imaging segment. For the six months ended
March 31, 2007, changes in foreign currency values against the U.S. dollar
had a
favorable impact of approximately $6.8 million
on the Company’s consolidated sales compared to the six months ended March 31,
2006.
In
the
Memorialization businesses, Bronze segment sales for the first six months of
fiscal 2007 were $106.6 million compared to $101.8 million for the first six
months of fiscal 2006. The increase primarily reflected higher selling prices
and increases in the value of foreign currencies against the U.S. dollar,
partially offset by a decline in the volume of memorial products and lower
mausoleum sales. The higher selling prices were generally related to increases
in the cost of bronze ingot. Sales for the Casket segment were $112.7 million
for the first six months of fiscal 2007 compared to $103.4 million for the
same
period in fiscal 2006. The increase reflected higher unit volume in territories
served by Company-owned distribution, offset
partially
by lower unit volume in certain of the territories served through independent
distributors. Sales for the Cremation segment were $13.3 million for the first
half of fiscal 2007 compared to $12.4 million for the same period a year ago.
The increase primarily reflected higher sales of cremation equipment and
cremation caskets. In the Company’s Brand Solutions businesses, sales for the
Graphics Imaging segment in the first half of fiscal 2007 were $70.6 million,
compared to $67.5 million for the same period a year ago. The increase primarily
reflected an increase in the value of foreign currencies against the U.S. dollar
and higher sales in the German markets, partially offset by lower sales in
the
U.S. and U.K. markets. However, sales in the U.S. market during the second
quarter of fiscal 2007 were slightly higher than in the second quarter of fiscal
2006. Marking Products segment sales for the six months ended March 31, 2007
were $27.8 million, compared to $25.3 million for the first six months of fiscal
2006. The increase primarily reflected higher domestic and international sales
volume and an increase in the value of the foreign currencies against the U.S.
dollar. Sales for the Merchandising Solutions segment were $47.4 million for
the
first half of fiscal 2007, compared to $40.7 million for the same period a
year
ago. The increase is attributable to a significant promotional program for
one
of the segment’s customers.
Gross
profit for the six months ended March 31, 2007 was $139.1 million, compared
to
$128.1 million for the six months ended March 31, 2006. Consolidated gross
profit as of percent of sales increased from 36.5% for the first half of fiscal
2006 to 36.8% for the first six months of fiscal 2007. The increase in
consolidated gross profit primarily reflected the impact of higher sales, higher
foreign currency values against the U.S. dollar, productivity improvements
in
the Merchandising Solutions segment and the Casket segment’s manufacturing
facility in Mexico, and other manufacturing and cost reduction initiatives.
These gains were partially offset by the impact of lower sales in the U.K.
graphics market and the higher cost of bronze ingot in fiscal 2007 compared
to
fiscal 2006.
Selling
and administrative expenses for the six months ended March 31, 2007 were $83.3
million, compared to $76.7 million for the first half of fiscal 2006.
Consolidated selling and administrative expenses as a percent of sales were
22.0% for
the
six months ended March 31, 2007, compared to 21.8% for the same period last
year. The
increases in costs and percentage of sales primarily resulted from the expansion
of the Casket segment’s distribution capabilities and a provision for earn-out
payments under the Milso Industries (“Milso”) acquisition-related
agreements.
Operating
profit for the six months ended March 31, 2007 was $55.8 million, compared
to
$51.5 million for the six months ended March 31, 2006. The increase reflected
higher operating income in five of the Company’s six operating segments. Bronze
segment operating profit for the first half of fiscal 2007 was $27.5 million,
compared to $26.9 million for the same period in fiscal 2006. The increase
reflected the impact of higher sales and an increase in the value of foreign
currencies against the U.S. dollar. Bronze segment operating profit for the
first six months of fiscal 2007 was slightly higher compared to the same period
in fiscal 2006 with operating profit as a percentage of sales lower than a
year
ago. The reduction in operating margin is directly attributable to the increase
in bronze metal costs. Operating profit for the Casket segment for the first
six
months of fiscal 2007 was $11.5 million, compared to $10.5 million for the
first
half of fiscal 2006. The increase resulted from higher sales and productivity
improvements in the segment’s manufacturing facility in Mexico, partially offset
by an accrual related to the Milso earn-out and additional selling and
administrative costs related to the expansion of the segment’s distribution
capabilities in certain territories. The Casket segment’s operating profit for
the second quarter of fiscal 2007 was $5.6 million, compared to $6.9 million
for
the second quarter of fiscal 2006. The decrease in profitability primarily
reflected the continuing investment in distribution capabilities. Cremation
segment operating profit for the six months ended March 31, 2007 was $2.0
million, compared $1.7 million for the same period a year ago. The increase
primarily reflected the impact of higher sales. The Graphics Imaging segment
operating profit for the six months ended March 31, 2007 was $5.5 million,
compared to $7.6 million for the six months ended March 31, 2006. The decrease
primarily reflected the impact of lower sales in the U.K. market, partially
offset by higher foreign currency values against the U.S. dollar. Operating
profit for the Marking Products segment for the first six months of fiscal
2007
was $4.5 million, compared to $4.4 million for the same period a year ago.
The
increase primarily reflected the impact of higher sales, partially offset by
higher overhead costs during fiscal 2007. The Merchandising Solutions segment
operating profit was $4.8 million for the six months ended March 31, 2007,
compared to $369,000 for the same period in fiscal 2006. The increase primarily
reflected the effects of the segment’s facilities consolidation program and the
impact of higher sales attributable to a significant promotional program by
one
of the segment’s customers. For the six months ended March 31, 2007, changes in
foreign currency values against the U.S. dollar had a favorable impact of
approximately $1.2 million on the Company’s consolidated operating profit
compared to the six months ended March 31, 2006.
Investment
income for the six months ended March 31, 2007 was $850,000, compared to
$571,000 for the six months ended March 31, 2006. The increase reflected higher
average levels of invested funds and higher rates of return. Interest expense
for the first half of fiscal 2007 was $3.7 million, compared to $3.0 million
for
the same period last year. The increase in interest expense primarily reflected
a higher average level of debt and higher average interest rates during the
fiscal 2007 six-month period compared to the same period in fiscal
2006.
Other
income (deductions), net, for the six months ended March 31, 2007 represented
an
increase in pre-tax income of $210,000, compared to a reduction in pre-tax
income of $51,000 for the same period last year. Minority interest deduction
was
$1.1 million for the first half of fiscal 2007, compared to $1.3 million for
the
same period in fiscal 2006. The reduction reflected the Company’s purchase of
the remaining ownership interest in one of its less than wholly-owned German
subsidiaries in September 2006.
The
Company's effective tax rate for the six months ended March 31, 2007 was 37.6%,
which is equivalent to the effective tax rate for the first six months of fiscal
2006, but is higher than the effective tax rate of 37.0% for the full fiscal
year ended September 30, 2006. The fiscal 2006 full year effective tax rate
reflected the favorable tax impact from the sale of property in the fourth
quarter. The difference between the Company's effective tax rate and the Federal
statutory rate of 35.0% primarily reflected the impact of state and foreign
income taxes.
Goodwill:
Goodwill
related to business combinations is not 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 performed its annual
impairment review in the second quarter of fiscal 2007 and determined that
no
additional adjustments to the carrying values of goodwill were necessary at
March 31, 2007.
Liquidity
and Capital Resources:
Net
cash
provided by operating activities was $26.8 million for the six months ended
March 31, 2007, compared to $23.1 million for the first six months of fiscal
2006. Operating cash flow for both periods primarily reflected net income
adjusted for non-cash charges (depreciation, amortization, stock-based
compensation expense and an increase in minority interest), partially offset
by
working capital changes. Working capital changes during both periods primarily
reflected the payment of year end bonus accruals and an increase in inventory
resulting from the expansion of the Company’s casket distribution capabilities.
Cash
used
in investing activities was $15.7 million for the six months ended
March 31, 2007, compared to $37.4 million for the six months ended March
31, 2006. Investing activities for the first six months of fiscal 2007 primarily
included capital expenditures of $10.7 million, acquisition-related payments
of
$8.4 million and proceeds from the disposal of assets of $3.8 million. Investing
activities for the first six months of fiscal 2006 primarily included capital
expenditures of $7.5 million and acquisition-related payments of $29.9
million.
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
$19.3 million for the last three fiscal years. The capital budget for fiscal
2007 is $27.1 million. The Company expects to generate sufficient cash from
operations to fund all anticipated capital spending projects.
Cash
provided by financing activities for the six months ended March 31, 2007 was
$1.1 million, reflecting net borrowings of long-term debt of $10.2 million,
purchases of treasury stock of $11.9 million, proceeds of $5.8 million from
the
sale of treasury stock (stock option exercises), a
tax
benefit of $1.5 million from exercised stock options,
payment
of dividends of $3.5 million to the Company's shareholders and distributions
of
$895,000 to minority interests. Cash provided by financing activities for the
six months ended March 31, 2006 was $12.1 million, reflecting net borrowings
of
long-term debt of $17.3 million, proceeds of $1.4 million from the sale of
treasury stock (stock option exercises), a tax benefit of $506,000 from
exercised stock options, payment of dividends of $3.2 million to the Company's
shareholders and distributions of $3.9 million to minority interests.
The
Company has a Revolving Credit Facility with a syndicate of financial
institutions. On March 30, 2007, the maximum amount of borrowings available
under the facility was increased from $150.0 million to $175.0 million in
accordance with the terms of the facility. Borrowings under the amended
facility, which is scheduled to mature on April 30, 2009, bear interest at
LIBOR
plus a factor ranging from .50% to 1.00% based on the Company’s leverage ratio.
The leverage ratio is defined as net indebtedness divided by EBITDA (earnings
before interest, taxes, depreciation and amortization). The Company is required
to pay an annual commitment fee ranging from .20% to .30% (based on the
Company’s leverage ratio) of the unused portion of the facility. The Revolving
Credit Facility requires the Company to maintain certain leverage 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. Outstanding
borrowings on the Revolving Credit Facility at March 31, 2007 were $137.5
million. The weighted-average interest rate on outstanding borrowings at March
31, 2007 and 2006 was 5.14% and 4.45%, respectively.
In
April
2004, the Company entered into an interest rate swap that fixed, for a five-year
period, the interest rate on borrowings in an initial amount of $50.0 million.
The interest rate was fixed at 2.66% plus a factor based on the Company’s
leverage ratio (the factor was .50% at March 31, 2007). The interest rate swap
was designated as a cash flow hedge of the future variable interest payments
under the Revolving Credit Facility which are considered probable of occurring.
Based on the Company’s assessment, all of the critical terms of the hedge
matched the underlying terms of the hedged debt and related forecasted interest
payments and as such, these hedges were considered highly effective. Equal
quarterly principal payments of $2.5 million plus interest are due on this
$50.0
million borrowing until its maturity in April 2009.
Effective
September 30, 2005, the Company entered into an additional interest rate swap
that fixed, for the period through maturity of the Revolving Credit Facility,
the interest rate on additional borrowings in an initial amount of $50.0
million. The interest rate was fixed at 4.14% plus a factor based on the
Company’s leverage ratio (the factor was .50% at March 31, 2007). The interest
rate swap was designated as a cash flow hedge of the future variable interest
payments under the Revolving Credit Facility which are considered probable
of
occurring. Based on the Company’s assessment, all of the critical terms of the
hedge match the underlying terms of the hedged debt and related forecasted
interest payments and as such, these hedges were considered highly effective.
Equal quarterly principal payments of $3.3 million plus interest are due on
this
$50.0 million borrowing until its maturity in April 2009.
The
fair
value of the interest rate swaps reflected an unrealized gain of $1.0 million
($608,000 after tax) at March 31, 2007 that is included in equity as part of
accumulated other comprehensive income. Assuming market rates remain constant
with the rates at March 31, 2007, approximately $292,000 of the $608,000 gain
included in accumulated other comprehensive income is expected to be recognized
in earnings as an adjustment to interest expense over the next twelve
months.
The
Company, through its wholly-owned subsidiary, Matthews International GmbH
(“MIGmbH”), has a credit facility with a bank for borrowings up to 10.0 million
Euros. At March 31, 2007, outstanding borrowings under the credit facility
totaled 8.5 million Euros ($11.4 million). The weighted-average interest rate
on
outstanding MIGmbH related borrowings at March 31, 2007 and 2006 was 4.00%
and
3.07%, respectively.
The
Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several
loans
with various Italian banks. Outstanding borrowings on these loans totaled 7.5
million Euros ($10.1 million) at March 31, 2007. Caggiati S.p.A. also has three
lines of credit totaling approximately 8.4 million Euros ($11.2 million) with
the same Italian banks. Outstanding borrowings on these lines were 120,500
Euros
($161,000) at March 31, 2007. The weighted-average interest rate on outstanding
borrowings of Caggiati S.p.A. at March 31, 2007 and 2006 was 3.26% and 3.12%,
respectively.
The
Company has a stock repurchase program, which was initiated in 1996. Under
the
program, the Company's Board of Directors had authorized the repurchase of
a
total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock,
of which 9,486,846 shares have been repurchased as of March 31, 2007. On April
20, 2007, the Company announced that its Board of Directors authorized the
continuance of the repurchase program and increased the total authorization
for
stock repurchase to 12,500,000 shares. 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 $145.8 million at March 31, 2007, compared
to
$105.6 million at September 30, 2006. Cash and cash equivalents were
$43.5 million
at March 31, 2007, compared to $29.7 million at September 30, 2006. The
Company's current ratio was 2.2 at March 31, 2007, compared to 1.8 at September
30, 2006.
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.
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 Group, Inc.
(“York”) 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
March
31, 2007, an accrual of $9.4 million was recorded for environmental remediation
(of which $924,000 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
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:
On
March
1, 2006, the Company acquired Royal Casket Company (“Royal”), a distributor of
primarily York brand caskets in the Southwest region of the United States.
The
transaction was structured as an asset purchase with potential additional
consideration payable contingent upon the operating performance of the acquired
operations during the next five years. The Company expects to account for this
consideration as additional purchase price. The excess of purchase price over
the fair market value of net assets acquired was allocated to goodwill. The
acquisition was intended to expand Matthews’ casket distribution capabilities in
the Southwestern United States.
On
February 23, 2006, the Company acquired The Doyle Group (“Doyle”), a provider of
reprographic services to the packaging industry, located in Oakland, California.
The transaction was structured as an asset purchase. The excess of purchase
price over the fair market value of net assets acquired was allocated to
goodwill. The acquisition was intended to expand the Company’s graphics business
in the Western United States.
In
December 2006, the Company paid additional purchase consideration under the
terms of the Milso Industries acquisition agreement. In October 2006, the
Company paid for the acquisition of an additional 30% interest in S+T
Gesellschaft fur Reprotechnik GmbH.
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 ten fiscal
years, the Company has achieved an average annual increase in earnings per
share
of 16.3%. 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.
Significant
factors impacting the Company’s fiscal 2007 financial results
included the
cost
of bronze ingot, recent actions in the casket business relating to manufacturing
capacity and product distribution, and continuing weakness in the U.K. graphics
market. As a result of these factors, the predictability of near-term earnings
has become more difficult.
Based
on
the Company’s growth strategy and factors discussed above, the Company currently
expects to achieve fiscal 2007 diluted earnings per share growth in the range
of
its long-term growth objective of 12% to 15% over fiscal 2006 earnings per
share. This earnings expectation excludes the net favorable impact of the gain
of the sale of property and the impairment of assets and related costs on the
fiscal 2006 fourth quarter. In addition, this expectation does not include
the
impact of any unusual items in fiscal 2007, such as any payouts that may be
earned in fiscal 2007 under the Milso acquisition-related
agreements.
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, 2006. 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.
LONG-TERM
CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The
following table summarizes the Company’s contractual obligations at March 31,
2007, and the effect such obligations are expected to have on its liquidity
and
cash flows in future periods.
|
|
Payments
due in fiscal year:
|
|
|
|
|
|
2007
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
Remainder
|
|
2008
to 2009
|
|
2010
to 2011
|
|
2012
|
|
Contractual
Cash Obligations:
|
|
(Dollar
amounts in thousands)
|
|
Revolving
credit facilities
|
|
$
|
148,854
|
|
$
|
11,667
|
|
$
|
137,187
|
|
$
|
-
|
|
$
|
-
|
|
Notes
payable to banks
|
|
|
10,076
|
|
|
660
|
|
|
2,739
|
|
|
2,739
|
|
|
3,938
|
|
Short-term
borrowings
|
|
|
188
|
|
|
188
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital
lease obligations
|
|
|
1,103
|
|
|
398
|
|
|
682
|
|
|
23
|
|
|
-
|
|
Non-cancelable
operating leases
|
|
|
30,112
|
|
|
4,284
|
|
|
12,585
|
|
|
7,345
|
|
|
5,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$
|
190,333
|
|
$
|
17,197
|
|
$
|
153,193
|
|
$
|
10,107
|
|
$
|
9,836
|
|
A
significant portion of the loans included in the table above bear interest
at
variable rates. At March 31, 2007, the weighted-average interest rate
was 5.14% on
the
Company’s domestic Revolving Credit Facility, 4.0% on
the
credit facility through the Company’s wholly-owned German subsidiary,
and 3.26%
on
bank loans to the Company’s wholly-owned subsidiary, Caggiati
S.p.A.
Benefit
payments under the Company’s principal retirement plan are made from plan
assets, while benefit payments under the supplemental retirement plan and
postretirement benefit plan are funded from the Company’s operating cash. The
Company does not currently expect to make any significant contributions to
its
principal retirement plan in fiscal 2007. As of March 31, 2007, contributions
of
$148,000 and $571,000 have been made under the supplemental retirement plan
and
postretirement plan, respectively. The Company currently anticipates
contributing an additional $329,000 and $441,000 under the supplemental
retirement plan and postretirement plan, respectively, for the remainder of
fiscal 2007.
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
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48) which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. Any resulting cumulative effect of applying the provisions of FIN
48
upon adoption will be reported as an adjustment to beginning retained earnings
in the period of adoption. The Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of the adoption of FIN 48.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” which amends SFAS 87, 88, 106
and 132(R). In February 2007, the FASB issued FSP FAS 158-1 providing additional
guidance to Statement 158. SFAS No. 158 requires employers to recognize the
over-funded or under-funded status of defined benefit postretirement plans
on
the balance sheet and to recognize the corresponding adjustment in other
comprehensive income. In addition, the statement requires recognition in other
comprehensive income of gains or loss and prior service costs or credits that
are not included as components of periodic benefit expense. These provisions
of
the statement are effective for public companies for fiscal years ending after
December 15, 2006. Accordingly, the Company will adopt this provision of
SFAS No. 158 prospectively for the year-end financial statements dated September
30, 2007. If the Company had adopted SFAS No. 158 as of September 30,
2006, the liability for pension and postretirement benefits would have increased
approximately $10.0 million deferred tax assets would have increased
approximately $3.9 million and equity (other accumulated comprehensive income)
would have decreased by approximately $6.1 million.
Further,
SFAS No. 158 requires the Company to measure the plan assets and benefit
obligations of defined benefit postretirement plans as of the date of its
year-end balance sheet. This provision of the SFAS No. 158 is effective for
public companies for fiscal years beginning after December 15, 2008. The
Company currently measures plan assets and benefit obligations as of July 31
of
each year. The Company is considering the implications of this provision and
the
feasibility of earlier adoption of this portion of the statement. Upon
adoption, this provision is not expected to have a material effect on the
financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. The Statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new
fair
value measurements. The Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The adoption of SFAS No.
157
is not expected to have a material impact on the Company’s consolidated
financial position or results of operations.
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, except as noted below.
Interest
Rates - The Company’s most significant long-term debt instrument is the domestic
Revolving Credit Facility which bears interest at variable rates based on LIBOR.
In April 2004, the Company entered into an interest rate swap that fixed, for
a
five-year period, the interest rate on borrowings in an initial amount of $50.0
million ($22.5 million outstanding at March 31, 2007). The interest rate was
fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor
was .50% at March 31, 2007). The interest rate swap was designated as a cash
flow hedge of the future variable interest payments under the Revolving Credit
Facility which are considered probable of occurring. Effective September 30,
2005, the Company entered into an additional interest rate swap that fixed,
for
the period through the maturity of the Revolving Credit Facility, the interest
rate on the additional borrowings in an initial amount of $50.0 million ($30.0
million outstanding at March 31, 2007). The interest rate was fixed at 4.14%
plus a factor based on the Company’s leverage ratio (the factor was .50% at
March 31, 2007). The
interest rate swap was designated as a cash flow hedge of the future variable
interest payments under the Revolving Credit Facility which are considered
probable of occurring. The fair value of the interest rate swaps reflected
an
unrealized gain of $1.0 million ($608,000 after tax) at March 31, 2007, that
is
included in equity as part of accumulated other comprehensive income. A decrease
of 10% in market interest rates (i.e. a decrease from 3.5% to 3.15%) would
result in a decrease of approximately $179,000 in the fair value of the interest
rate swaps.
Commodity
Price Risks - In the normal course of business, the Company is exposed to
commodity price fluctuations related to the purchases of certain materials
and
supplies (such as bronze ingot, steel and wood) used in its manufacturing
operations. The Company obtains competitive prices for materials and supplies
when available.
Foreign
Currency Exchange Rates - The Company is subject to changes in various foreign
currency exchange rates, including the Euro, the British Pound, Canadian dollar,
Australian dollar and Swedish Krona, in the conversion from local currencies
to
the U.S. dollar of the reported financial position and operating results of
its
non-U.S. based subsidiaries. An adverse change of 10% in exchange rates would
have resulted in a decrease in sales of $8.7 million and a decrease in operating
income of $1.1 million for the six months ended March 31, 2007.
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 Rules 13a-15(e) and 15d-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 March 31, 2007 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
PART
II -
OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
In
August
2005, The York Group, Inc. (“York”), a wholly-owned subsidiary of the Company,
was served with Civil Investigative Demands (“CIDs”) from the Attorneys General
in Maryland and Florida. Thereafter, in October 2005, York was also served
with
a CID from the Attorney General in Connecticut. The pending CIDs are part of
a
multi-state investigation in which the Attorneys General from Maryland, Florida
and Connecticut have requested information from various sources, including
several national owners and operators of funeral homes, as well as several
manufacturers of caskets, regarding alleged anti-competitive practices in the
funeral service industry. As one of many potential sources of information,
York
has already timely responded to the document production request communicated
through the CIDs. Presently, the investigation continues to remain in the
preliminary stages and the scope of the investigation has been limited to
evaluating the sale of caskets in the funeral service industry.
In
October 2005, York filed a complaint and a motion for a special and/or
preliminary injunction in the Court of Common Pleas of Allegheny County,
Pennsylvania against Yorktowne Caskets, Inc. (“Yorktowne”), the shareholders of
Yorktowne, Batesville Casket Company, Inc. and Batesville Services. This action
was taken in response to the announcement that Batesville Casket Company, Inc.
and/or Batesville Services (collectively “Batesville”) had entered into a
definitive agreement to acquire the outstanding stock of Yorktowne, York’s
largest independent distributor of wood and metal caskets. The causes of action
alleged by York involve the distributor agreement between York and Yorktowne
originally executed on April 15, 2005.
The
Court
issued a Decision and Order on November 9, 2005 concluding that York had
demonstrated its entitlement to a preliminary injunction and ordered: (1)
Yorktowne, its shareholders and Batesville to refrain from further pursuit
or
consummation of the proposed sale of Yorktowne to Batesville; (2) Yorktowne
and
its shareholders to provide York with the right of first refusal as required
under the enforceable distributor agreement; (3) Yorktowne and its shareholders
to refrain from violating the non-assignment provisions of the distributor
agreement; (4) Yorktowne to use its best efforts to promote York products and
to
refrain from selling, marketing or promoting products in competition with York;
and (5) Yorktowne’s shareholders and Batesville from interfering with the
distributor agreement between York and Yorktowne.
In
March
2007, the Superior Court of Pennsylvania circulated a Decision and Order
dismissing the appeal filed by the defendants and concluding that the evidence
of record established reasonable grounds to sustain the injunction against
Batesville and the individual shareholders of Yorktowne based on their
intentional interference with the distributor agreement between York and
Yorktowne. As a result of the favorable Superior Court ruling, the preliminary
injunction issued on November 9, 2005 remained in force through the expiration
of the distributor agreement on April 15, 2007. However, it is possible that
the
defendants may attempt once again to pursue additional appellate
remedies.
In
February 2006, Yorktowne and its shareholders filed a complaint in the Court
of
Common Pleas of Allegheny County, Pennsylvania against the Company, York and
Milso Industries, Inc. (“Milso”) alleging, in part, that the Company, York and
Milso breached York’s distributor agreement with Yorktowne dated April 15, 2005,
as well as tortuously interfered with Yorktowne’s contractual and prospective
contractual relations. Yorktowne alleges entitlement to various monetary
damages, including a specific claim for $58 million.
In
March
2007, Harry Pontone and Scott Pontone filed a Complaint in the Supreme Court
of
the State of New York County of New York with respect to their employment
agreements, including the earn-out provisions which provide for a potential
payment of up to $8 million.
It
is
possible that resolution of the foregoing matters, individually or in the
aggregate, could be unfavorable and material to the business, financial
position, result of operations or cash flow of the Company. The Company intends
to vigorously defend against the allegations set forth in the pending matters
and the Company does not presently believe that the ultimate resolution will
have a material adverse impact on the Company.
Item
2. Changes
in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities
Stock
Repurchase Plan
The
Company has a stock repurchase program, which was initiated in 1996. Under
the
program, the Company's Board of Directors had authorized the repurchase of
a
total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock,
of which 9,486,846 shares have been repurchased as of March 31, 2007. All
purchases of the Company’s common stock during the first six months of fiscal
2007 were part of the repurchase program.
The
following table shows the monthly fiscal 2007 stock repurchase
activity:
Period
|
|
Total
number of shares purchased
|
|
Average
price paid per share
|
|
Total
number of shares purchased as part of a publicly announced
plan
|
|
Maximum
number of shares that may yet be purchased under the plan (1)
|
|
|
|
|
|
|
|
|
|
|
|
October
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
864,854
|
|
November
2006
|
|
|
60,000
|
|
$
|
38.00
|
|
|
60,000
|
|
|
804,854
|
|
December
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
804,854
|
|
January
2007
|
|
|
11,500
|
|
|
39.64
|
|
|
11,500
|
|
|
793,354
|
|
February
2007
|
|
|
8,300
|
|
|
40.30
|
|
|
8,300
|
|
|
785,054
|
|
March
2007
|
|
|
271,900
|
|
|
39.54
|
|
|
271,900
|
|
|
513,154
|
|
Total
|
|
|
351,700
|
|
$
|
39.30
|
|
|
351,700
|
|
|
|
|
(1)
In
April 2007, the Company’s Board of Directors authorized the purchase of an
additional 2,500,000 shares of Matthews common stock, bringing the total
authorization for stock repurchases to 12,500,000 shares.
Item
4.
Submission of Matters to a Vote of Security Holders
The
Annual Meeting of the Shareholders of Matthews International Corporation was
held on February 15, 2007. A total of 31,703,347 shares of Class A Common Stock
were eligible to vote at such meeting.
The
matters voted upon at such meeting were as follows:
1.
Election
of Directors:
The
following individuals were nominated for election to the Board of Directors
for
a term expiring at the Annual Meeting of Shareholders in the year indicated.
|
|
Term
|
|
|
|
Votes
|
|
Nominee
|
|
Expiration
|
|
Votes
For
|
|
Withheld
|
|
David
J. DeCarlo
|
|
|
2010
|
|
|
19,247,172
|
|
|
8,746,614
|
|
John
P. O’Leary, Jr.
|
|
|
2010
|
|
|
21,380,536
|
|
|
6,613,250
|
|
The
nominations were made by the Board of Directors and no other nominations
were
made by any shareholder. The nominees had currently been members of the Board
of
Directors at the date of the Annual Meeting.
The
terms
of the following additional directors continued after the meeting: D.M.
Kelly,
R.G. Neubert, J.D. Turner, J.C. Bartolacci, G. R. Mahone, and W.J.
Stallkamp.
2. |
Selection
of Auditors:
|
The
shareholders
voted to ratify the appointment by the Audit Committee of the Board of Directors
of PricewaterhouseCoopers LLP as independent registered public accountants
to
audit the records of the Company for the fiscal year ending September 30,
2007.
Votes
For
|
Votes
Against
|
Votes
Abstained
|
27,732,542
|
242,315
|
18,929
|
Item
6.
Exhibits and Reports on Form 8-K
(a)
|
Exhibits
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
Description
|
|
31.1
|
Certification
of Principal Executive Officer for Joseph C. Bartolacci
|
|
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 Joseph C.
Bartolacci.
|
|
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
January 18, 2007, Matthews filed a Current Report on Form 8-K under
Item
2.02 in connection with a press release announcing its earnings for
the
first fiscal quarter of 2007.
|
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:
April 30, 2007
|
|
/s/
Joseph C. Bartolacci
|
|
|
Joseph
C. Bartolacci, President
|
|
|
and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
April 30, 2007
|
|
/s/
Steven F. Nicola
|
|
|
Steven
F. Nicola, Chief Financial Officer,
|
|
|
Secretary
and Treasurer
|
|
|
|