form10q3-2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
Form
10-Q
x
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
The
Quarterly Period Ended June 30, 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
July 31, 2007, shares of common stock outstanding were:
Class
A Common Stock 31,302,143
shares
PART
I -
FINANCIAL INFORMATION
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollar
amounts in thousands, except per share data)
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
36,993
|
|
|
|
|
|
$ |
29,720
|
|
Short-term
investments
|
|
|
|
|
|
100
|
|
|
|
|
|
|
92
|
|
Accounts
receivable, net
|
|
|
|
|
|
120,512
|
|
|
|
|
|
|
121,750
|
|
Inventories
|
|
|
|
|
|
93,110
|
|
|
|
|
|
|
85,415
|
|
Deferred
income taxes
|
|
|
|
|
|
1,684
|
|
|
|
|
|
|
1,682
|
|
Other
current assets
|
|
|
|
|
|
6,568
|
|
|
|
|
|
|
4,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
|
|
|
258,967
|
|
|
|
|
|
|
242,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
11,822
|
|
|
|
|
|
|
11,492
|
|
Property,
plant and equipment: Cost
|
|
|
212,828
|
|
|
|
|
|
|
|
202,346
|
|
|
|
|
|
Less
accumulated
depreciation
|
|
|
(124,994 |
) |
|
|
|
|
|
|
(114,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
87,834
|
|
|
|
|
|
|
|
88,099
|
|
Deferred
income taxes and other assets
|
|
|
|
|
|
|
31,112
|
|
|
|
|
|
|
|
30,566
|
|
Goodwill
|
|
|
|
|
|
|
310,484
|
|
|
|
|
|
|
|
298,125
|
|
Other
intangible assets, net
|
|
|
|
|
|
|
45,444
|
|
|
|
|
|
|
|
44,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
$ |
745,663
|
|
|
|
|
|
|
$ |
716,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, current maturities
|
|
|
|
|
|
$ |
27,035
|
|
|
|
|
|
|
$ |
28,451
|
|
Accounts
payable
|
|
|
|
|
|
|
20,908
|
|
|
|
|
|
|
|
26,925
|
|
Accrued
compensation
|
|
|
|
|
|
|
29,191
|
|
|
|
|
|
|
|
33,517
|
|
Accrued
income taxes
|
|
|
|
|
|
|
6,824
|
|
|
|
|
|
|
|
9,230
|
|
Other
current liabilities
|
|
|
|
|
|
|
36,736
|
|
|
|
|
|
|
|
39,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
|
|
|
|
120,694
|
|
|
|
|
|
|
|
137,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
133,170
|
|
|
|
|
|
|
|
120,289
|
|
Pension
and postretirement benefits
|
|
|
|
|
|
|
33,759
|
|
|
|
|
|
|
|
35,142
|
|
Deferred
income taxes
|
|
|
|
|
|
|
10,541
|
|
|
|
|
|
|
|
9,942
|
|
Environmental
reserve
|
|
|
|
|
|
|
8,418
|
|
|
|
|
|
|
|
9,028
|
|
Other
liabilities and deferred revenue
|
|
|
|
|
|
|
13,871
|
|
|
|
|
|
|
|
12,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
36,334
|
|
|
|
|
|
|
|
36,334
|
|
|
|
|
|
Additional
paid-in
capital
|
|
|
40,540
|
|
|
|
|
|
|
|
33,953
|
|
|
|
|
|
Retained
earnings
|
|
|
449,482
|
|
|
|
|
|
|
|
410,203
|
|
|
|
|
|
Accumulated
other comprehensive
income
|
|
|
13,376
|
|
|
|
|
|
|
|
4,386
|
|
|
|
|
|
Treasury
stock, at
cost
|
|
|
(114,522 |
) |
|
|
|
|
|
|
(92,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
425,210
|
|
|
|
|
|
|
|
392,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
|
$ |
745,663
|
|
|
|
|
|
|
$ |
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
|
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
185,477
|
|
|
$ |
181,804
|
|
|
$ |
563,880
|
|
|
$ |
532,981
|
|
Cost
of sales
|
|
|
(116,059 |
) |
|
|
(111,515 |
) |
|
|
(355,321 |
) |
|
|
(334,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
69,418
|
|
|
|
70,289
|
|
|
|
208,559
|
|
|
|
198,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
(48,289 |
) |
|
|
(39,766 |
) |
|
|
(131,601 |
) |
|
|
(116,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
21,129
|
|
|
|
30,523
|
|
|
|
76,958
|
|
|
|
82,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
|
880
|
|
|
|
366
|
|
|
|
1,730
|
|
|
|
937
|
|
Interest
expense
|
|
|
(2,098 |
) |
|
|
(1,924 |
) |
|
|
(5,838 |
) |
|
|
(4,940 |
) |
Other
income, net
|
|
|
88
|
|
|
|
130
|
|
|
|
298
|
|
|
|
79
|
|
Minority
interest
|
|
|
(722 |
) |
|
|
(720 |
) |
|
|
(1,833 |
) |
|
|
(2,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
19,277
|
|
|
|
28,375
|
|
|
|
71,315
|
|
|
|
76,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(7,248 |
) |
|
|
(10,669 |
) |
|
|
(26,814 |
) |
|
|
(28,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,029
|
|
|
$ |
17,706
|
|
|
$ |
44,501
|
|
|
$ |
47,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$.38
|
|
|
|
$.55
|
|
|
|
$1.40
|
|
|
|
$1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$.38
|
|
|
|
$.55
|
|
|
|
$1.40
|
|
|
|
$1.47
|
|
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)
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
44,501
|
|
|
$ |
47,465
|
|
Adjustments
to reconcile net
income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
15,445
|
|
|
|
16,165
|
|
Net
gain on sale of assets
|
|
|
(1,716 |
) |
|
|
(105 |
) |
Minority
interest
|
|
|
1,833
|
|
|
|
2,012
|
|
Stock-based
compensation
expense
|
|
|
2,578
|
|
|
|
3,189
|
|
Change
in deferred
taxes
|
|
|
1,462
|
|
|
|
(713 |
) |
Changes
in working capital
items
|
|
|
(19,049 |
) |
|
|
(36,651 |
) |
Increase
in other
assets
|
|
|
(1,415 |
) |
|
|
(180 |
) |
Increase
(decrease) in other
liabilities
|
|
|
253
|
|
|
|
(359 |
) |
Increase
(decrease) in pension and
postretirement benefits
|
|
|
(1,382 |
) |
|
|
3,766
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
activities
|
|
|
42,510
|
|
|
|
34,589
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(14,198 |
) |
|
|
(11,978 |
) |
Proceeds
from sale of
assets
|
|
|
3,970
|
|
|
|
190
|
|
Acquisitions,
net of cash
acquired
|
|
|
(11,851 |
) |
|
|
(29,946 |
) |
Purchases
of
investments
|
|
|
(1,064 |
) |
|
|
(166 |
) |
Proceeds
from disposition of investments
|
|
|
137
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing
activities
|
|
|
(23,006 |
) |
|
|
(41,889 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term
debt
|
|
|
49,950
|
|
|
|
52,433
|
|
Payments
on long-term
debt
|
|
|
(40,091 |
) |
|
|
(41,394 |
) |
Proceeds
from the sale of treasury
stock
|
|
|
16,054
|
|
|
|
1,869
|
|
Purchases
of treasury
stock
|
|
|
(36,726 |
) |
|
|
(877 |
) |
Tax
benefit of exercised stock
options
|
|
|
3,801
|
|
|
|
580
|
|
Dividends
|
|
|
(5,222 |
) |
|
|
(4,815 |
) |
Distributions
to minority
interests
|
|
|
(1,367 |
) |
|
|
(4,254 |
) |
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by
financing activities
|
|
|
(13,601 |
) |
|
|
3,542
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,370
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
7,273
|
|
|
$ |
(2,604 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
MATTHEWS
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
June
30,
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, Europe and China.
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 nine months
ended June 30, 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 (4,725,011 at June 30, 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 June 30, 2007 and 2006, stock-based compensation
cost
totaled $858 and $741, respectively. For the
nine-month periods ended June 30, 2007 and 2006, stock-based compensation
cost totaled $2,578 and $3,189, respectively. The associated future
income tax benefit recognized was $335 and $289 for the
three-month periods ended June 30, 2007 and 2006, respectively, and was
$1,005 and $1,243 for the nine-month periods ended June 30, 2007 and 2006,
respectively.
The
amount of cash received from the exercise of stock options was $10,274 and
$448
for the three-month periods ended June 30, 2007 and 2006, respectively, and
$16,054 and $1,869 for the nine-month periods ended June 30, 2007 and 2006,
respectively. In connection with these exercises, the tax benefits
realized by the Company were $3,660 and $106 for the three-month periods ended
June 30, 2007 and 2006, respectively, and $5,892 and $816 for the
nine-month periods ended June 30, 2007 and 2006, respectively.
The
transactions for shares under options for the nine-months ended June 30, 2007
were as follows:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
Shares
|
|
|
price
|
|
|
contractual
term
|
|
|
value
|
|
Outstanding,
September 30, 2006
|
|
|
2,529,451
|
|
|
$ |
28.75
|
|
|
|
|
|
|
|
Granted
|
|
|
392,650
|
|
|
|
40.59
|
|
|
|
|
|
|
|
Exercised
|
|
|
(753,744 |
) |
|
|
21.29
|
|
|
|
|
|
|
|
Expired
or forfeited
|
|
|
(36,081 |
) |
|
|
31.53
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2007
|
|
|
2,132,276
|
|
|
$ |
33.52
|
|
|
|
7.4
|
|
|
$ |
21,509
|
|
Exercisable,
June 30, 2007
|
|
|
493,243
|
|
|
$ |
27.03
|
|
|
|
5.9
|
|
|
$ |
8,180
|
|
Shares
reserved for future options
|
|
|
2,578,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average grant date fair value of options granted for the nine-month
periods ended June 30, 2007 and 2006 was $12.29 and $9.47,
respectively. The fair value of shares vested was $1,217 during
the three-month periods ended June 30, 2007 and no shares were earned in the
three months ended June 30, 2006. The fair value of shares vested
was $4,518 and $3,594 during the nine-month periods ended June 30,
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 nine-month periods ended June
30, 2007 and 2006 was $15,127 and $2,157, 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 nine months ended June 30, 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
|
|
|
(533,830 |
) |
|
|
8.46
|
|
Expired
or forfeited
|
|
|
(34,665 |
) |
|
|
9.93
|
|
Non-vested
at June 30, 2007
|
|
|
1,639,033
|
|
|
$ |
10.87
|
|
As
of
June 30, 2007 the total unrecognized compensation cost related to non-vested
stock options was approximately $6,304. This cost is
expected to be recognized over a weighted-average period of 3.7 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 nine-month
periods ended June 30, 2007 and 2006.
|
|
June
30,
|
|
|
|
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. At June 30, 2007, 14,284 shares of restricted
stock were outstanding. The unrecognized compensation cost related to the
unvested shares was approximately $341 at June 30, 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
48,697 shares had been deferred under the Director Fee Plan at June 30,
2007. Directors who are not also officers of the Company each received 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. At June 30, 2007, 21,300 options were outstanding, of which 16,500 are
vested. Additionally, 13,200 shares of restricted stock have been granted
under the plan, all of which are unvested at June 30, 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
|
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,029
|
|
|
$ |
17,706
|
|
|
$ |
44,501
|
|
|
$ |
47,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
31,649,972
|
|
|
|
32,110,431
|
|
|
|
31,690,309
|
|
|
|
32,076,674
|
|
Dilutive
securities, primarily stock options
|
|
|
65,618
|
|
|
|
184,699
|
|
|
|
163,328
|
|
|
|
255,494
|
|
Diluted
weighted-average
common
shares outstanding
|
|
|
31,715,590
|
|
|
|
32,295,130
|
|
|
|
31,853,637
|
|
|
|
32,332,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$.38
|
|
|
|
$.55
|
|
|
|
$1.40
|
|
|
|
$1.48
|
|
Diluted
earnings per share
|
|
|
$.38
|
|
|
|
$.55
|
|
|
|
$1.40
|
|
|
|
$1.47
|
|
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 June 30, 2007 and 2006,
comprehensive income was $14,685 and $24,367, respectively.
For
the nine-months ended June 30, 2007 and 2006, comprehensive income was
$53,490 and $53,673, respectively.
Inventories
consisted of the following:
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
Materials
and finished goods
|
|
$ |
84,908
|
|
|
$ |
79,715
|
|
Labor
and overhead in process
|
|
|
8,202
|
|
|
|
5,700
|
|
|
|
$ |
93,110
|
|
|
$ |
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
|
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Sales
to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Memorialization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bronze
|
|
$ |
61,738
|
|
|
$ |
57,365
|
|
|
$ |
168,325
|
|
|
$ |
159,187
|
|
Casket
|
|
|
49,262
|
|
|
|
49,790
|
|
|
|
161,930
|
|
|
|
153,188
|
|
Cremation
|
|
|
6,212
|
|
|
|
6,907
|
|
|
|
19,507
|
|
|
|
19,289
|
|
|
|
|
117,212
|
|
|
|
114,062
|
|
|
|
349,762
|
|
|
|
331,664
|
|
Brand
Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Imaging
|
|
|
36,725
|
|
|
|
35,919
|
|
|
|
107,366
|
|
|
|
103,467
|
|
Marking
Products
|
|
|
14,149
|
|
|
|
13,130
|
|
|
|
41,926
|
|
|
|
38,418
|
|
Merchandising
Solutions
|
|
|
17,391
|
|
|
|
18,693
|
|
|
|
64,826
|
|
|
|
59,432
|
|
|
|
|
68,265
|
|
|
|
67,742
|
|
|
|
214,118
|
|
|
|
201,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185,477
|
|
|
$ |
181,804
|
|
|
$ |
563,880
|
|
|
$ |
532,981
|
|
Operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memorialization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bronze
|
|
$ |
19,093
|
|
|
$ |
17,032
|
|
|
$ |
46,618
|
|
|
$ |
43,983
|
|
Casket
|
|
|
(3,820 |
) |
|
|
5,100
|
|
|
|
7,668
|
|
|
|
15,597
|
|
Cremation
|
|
|
970
|
|
|
|
1,019
|
|
|
|
2,961
|
|
|
|
2,707
|
|
|
|
|
16,243
|
|
|
|
23,151
|
|
|
|
57,247
|
|
|
|
62,287
|
|
Brand
Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Imaging
|
|
|
2,540
|
|
|
|
3,938
|
|
|
|
8,065
|
|
|
|
11,556
|
|
Marking
Products
|
|
|
2,375
|
|
|
|
2,240
|
|
|
|
6,844
|
|
|
|
6,596
|
|
Merchandising
Solutions
|
|
|
(29 |
) |
|
|
1,194
|
|
|
|
4,802
|
|
|
|
1,563
|
|
|
|
|
4,886
|
|
|
|
7,372
|
|
|
|
19,711
|
|
|
|
19,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,129
|
|
|
$ |
30,523
|
|
|
$ |
76,958
|
|
|
$ |
82,002
|
|
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 June 30, 2007, the maximum amount of borrowings available
under
the facility was $175,000. 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 June 30, 2007 outstanding borrowings on the Revolving
Credit Facility were $141,667. The weighted-average interest rate on outstanding
borrowings at June 30, 2007 and 2006 was 5.24% and 4.94%,
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 June 30,
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 June 30,
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 $918 ($560
after tax) at June 30, 2007 that is included in shareholders’ equity as part of
accumulated other comprehensive income. Assuming market rates remain
constant with the rates at June 30, 2007, approximately $306 of the $560 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 June 30, 2007, outstanding borrowings under the credit
facility totaled 6.5 million Euros ($8,798). The weighted-average
interest rate on outstanding borrowings of MIGmbH at June 30, 2007 and 2006
was
4.2% and 3.35%, 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 5.3 million Euros ($7,168) at June 30, 2007. Caggiati S.p.A.
also has three lines of credit totaling 8.4 million Euros ($11,329) with the
same Italian banks. Outstanding borrowings on these lines were 1.2
million Euros ($1,633) at June 30, 2007. The weighted-average
interest rate on outstanding borrowings of Caggiati S.p.A. at June 30, 2007
and
2006 was 3.26% and 3.16%, 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 June 30,
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1,003
|
|
|
$ |
1,082
|
|
|
$ |
133
|
|
|
$ |
158
|
|
Interest
cost
|
|
|
1,640
|
|
|
|
1,481
|
|
|
|
297
|
|
|
|
307
|
|
Expected
return on plan assets
|
|
|
(1,612 |
) |
|
|
(1,708 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
3
|
|
|
|
(4 |
) |
|
|
(322 |
) |
|
|
(322 |
) |
Net
actuarial loss
|
|
|
385
|
|
|
|
436
|
|
|
|
72
|
|
|
|
161
|
|
Net
benefit cost
|
|
|
1,419
|
|
|
|
1,287
|
|
|
$ |
180
|
|
|
$ |
304
|
|
|
|
Pension
|
|
|
Other
Postretirement
|
|
Nine
months ended June 30,
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3,009
|
|
|
$ |
3,246
|
|
|
$ |
399
|
|
|
$ |
474
|
|
Interest
cost
|
|
|
4,920
|
|
|
|
4,443
|
|
|
|
891
|
|
|
|
921
|
|
Expected
return on plan assets
|
|
|
(4,836 |
) |
|
|
(5,124 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
9
|
|
|
|
(12 |
) |
|
|
(966 |
) |
|
|
(966 |
) |
Net
actuarial loss
|
|
|
1,155
|
|
|
|
1,308
|
|
|
|
216
|
|
|
|
483
|
|
Net
benefit cost
|
|
$ |
4,257
|
|
|
$ |
3,861
|
|
|
$ |
540
|
|
|
$ |
912
|
|
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. In June 2007,
the
Company made a $5,000 contribution to its principal retirement
plan. For the nine months ended June 30, 2007,
contributions of $239 and $865 have been made under the supplemental
retirement plan and postretirement plan, respectively. The Company currently
anticipates contributing an additional $261 and $290 under the supplemental
retirement plan and postretirement plan, respectively, for the remainder of
fiscal 2007.
Note
11. Acquisitions
Acquisition
spending, net of cash acquired, during the nine months ended June 30, 2007
totaled $11,851, and primarily included the following:
In
June
2007, the Company acquired a 60% interest in Beijing Kenuohua Electronic
Technology Co., Ltd. (“Kenuohua”), a marking products manufacturer, located in
Beijing, China. The acquisition was structured as a stock
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 Matthews’ marking products manufacturing and distribution
capabilities in Asia.
In
December 2006, the Company paid additional purchase consideration under the
terms of the Milso Industries acquisition agreement.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
11. Acquisitions (continued)
Acquisition
spending, net of cash acquired, during the nine months ended June 30, 2006
totaled $29,946, and primarily included the following:
In
March
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.
In
February 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
October 2005, the Company paid for the acquisition of an additional 30% interest
in S+T Gesellschaft fur Reprotechnik GmbH.
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.
Changes
to goodwill, net of accumulated amortization, for the nine months ended June
30,
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
|
|
|
|
-
|
|
|
|
885
|
|
|
|
3,744
|
|
|
|
-
|
|
|
|
5,514
|
|
Translation
and other adjustments
|
|
|
1,783
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,062
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,845
|
|
Balance
at
June
30, 2007
|
|
$ |
75,961
|
|
|
$ |
116,867
|
|
|
$ |
6,536
|
|
|
$ |
92,216
|
|
|
$ |
8,957
|
|
|
$ |
9,947
|
|
|
$ |
310,484
|
|
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.
The
addition to Marking Products goodwill related to the purchase of a 60% interest
in Kenuohua.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
12. Goodwill and Other Intangible Assets
(continued)
The
following tables summarize the carrying amounts and related accumulated
amortization for intangible assets as of June 30, 2007 and September 30, 2006,
respectively.
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
June
30, 2007:
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
$ |
24,524
|
|
|
$ |
- |
* |
|
$ |
24,524
|
|
Customer
relationships
|
|
|
21,052
|
|
|
|
(3,633 |
) |
|
|
17,419
|
|
Copyrights/patents/other
|
|
|
6,765
|
|
|
|
(3,264 |
) |
|
|
3,501
|
|
|
|
$ |
52,341
|
|
|
$ |
(6,897 |
) |
|
$ |
45,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-months ended June 30, 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 $554 and $545 for the three-month periods
ended June 30, 2007 and 2006, respectively. For the nine-month
periods ended June 30, 2007 and 2006, amortization expense
was $1,490 and $1,635, respectively. Amortization expense
is estimated to be $2,022 in 2007, $2,233 in 2008, $2,170 in 2009, $1,931 in
2010 and $1,899 in 2011.
Note
13. Subsequent Event
On
July
20, 2007, the Company’s wholly-owned subsidiary, The York Group, Inc.(“York”),
reached a settlement agreement with Yorktowne Caskets, Inc. and its shareholders
(“Yorktowne”) with respect to all outstanding litigation between the
parties. In exchange for the mutual release, the principal terms of
the settlement included the assignment by Yorktowne of certain customer-related
contracts to York and the purchase by York of certain assets, including
York-product inventory, of Yorktowne. The purchase price for the assets was
$7,700, plus the value of inventory acquired.
Note
14. 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.” In May 2007, the FASB issued FSP FIN 48-1
which provides additional guidance to FIN 48. 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.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar
amounts in thousands, except per share data)
Note
14. Accounting
Pronouncements (continued)
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, 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. 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 is also 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.
|
|
Nine
months ended
|
|
|
Years
ended
|
|
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross
profit
|
|
|
37.0 |
% |
|
|
37.2 |
% |
|
|
38.0 |
% |
|
|
34.9 |
% |
Operating
profit
|
|
|
13.6 |
% |
|
|
15.4 |
% |
|
|
15.9 |
% |
|
|
15.4 |
% |
Income
before taxes
|
|
|
12.6 |
% |
|
|
14.3 |
% |
|
|
14.7 |
% |
|
|
14.5 |
% |
Net
income
|
|
|
7.9 |
% |
|
|
8.9 |
% |
|
|
9.3 |
% |
|
|
9.1 |
% |
Results
of Operations:
Sales
for
the nine months ended June 30, 2007 were $563.9 million, compared to $533.0
million for the nine months ended June 30, 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. For
the nine months ended June 30, 2007, changes in foreign currency values against
the U.S. dollar had a favorable impact of approximately $9.7 million on the
Company’s consolidated sales compared to the nine months ended June 30,
2006.
In
the
Memorialization businesses, Bronze segment sales for the first nine months
of
fiscal 2007 were $168.3 million compared to $159.2 million for the first nine
months of fiscal 2006. The increase primarily reflected higher
selling prices and increases in the value of foreign currencies against the
U.S.
dollar. The higher selling prices were generally related to increases
in the cost of bronze ingot. Sales for the Casket segment were $161.9
million for the first nine months of fiscal 2007 compared to $153.2 million
for the same period in fiscal 2006. The increase primarily reflected the
segment’s transition to Company-owned distribution and higher selling
prices. Casket sales for the third quarter of fiscal 2007 were
impacted by the expiration of
the
distributor agreement with the segment’s largest independent distributor in
April 2007. Sales for the Cremation segment were $19.5 million for
the first nine months of fiscal 2007 compared to $19.3 million for the same
period a year ago. The increase primarily reflected higher sales of
cremation caskets. The timing of delivery of several cremation
equipment units impacted the segment’s third quarter 2007 sales. In
the Company’s Brand Solutions businesses, sales for the Graphics Imaging segment
in the first nine months of fiscal 2007 were $107.4 million, compared to $103.5
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. Marking Products segment sales for the nine months
ended June 30, 2007 were $41.9 million, compared to $38.4 million for the first
nine months of fiscal 2006. The increase primarily reflected higher
domestic and international sales volume, the acquisition of an interest in
a
small manufacturing operation in June 2007 and an increase in the value of
foreign currencies against the U.S. dollar. Sales for the
Merchandising Solutions segment were $64.8 million for the first nine months
of
fiscal 2007, compared to $59.4 million for the same period a year
ago. The increase is attributable to a significant project completed
in the second quarter for one of the segment’s customers. Third
quarter sales in fiscal 2007 were $17.4 million, compared to $18.7 million
in
fiscal 2006, reflecting weak market conditions during the quarter.
Gross
profit for the nine months ended June 30, 2007 was $208.6 million, compared
to
$198.4 million for the nine months ended June 30, 2006. 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 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.S. and U.K. graphics
markets, the higher cost of bronze ingot in fiscal 2007 compared to fiscal
2006
and the impact of a portion of special charges incurred by several of the
Company’s segments. Consolidated gross profit as of percent of sales decreased
from 37.2% for the first nine months of fiscal 2006 to 37.0% for the first
nine
months of fiscal 2007, principally resulting from the impact of the special
charges.
Selling
and administrative expenses for the nine months ended June 30, 2007 were $131.6
million, compared to $116.4 million for the first nine months of fiscal
2006. Consolidated selling and administrative expenses as a percent
of sales were 23.3% for the nine months ended June 30, 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 special charges incurred in several of
the Company’s segments, the most significant of which was a Casket segment
charge related to the acceleration of earn-out payments in the resolution of
employment agreements from the fiscal 2005 acquisition of Milso Industries
(“Milso”).
Operating
profit for the nine months ended June 30, 2007 was $77.0 million, compared
to
$82.0 million for the nine months ended June 30, 2006. Operating
profit reflected the positive impact of higher sales, increases in the values
of
foreign currencies against the U.S. dollar, and productivity improvements and
cost reduction initiatives in several of the Company’s
segments. However, these increases were offset by the impact of
special charges of approximately $12.9 million during the first nine months
of
fiscal 2007. The most significant portion of these charges related to
the acceleration of earn-out payments in the resolution of employment agreements
from the Milso acquisition. Bronze segment operating profit for the first
nine months of fiscal 2007 was $46.6 million, compared to $44.0 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. Operating profit for the Casket segment for the first nine
months of fiscal 2007 was $7.7 million, compared to $15.6 million for the first
nine months of fiscal 2006. Casket segment operating profit for the
nine months ended June 30, 2007 reflected special charges of approximately
$10.0
million, including costs related to the resolution of employment agreements
from
the Milso acquisition and severance costs related to cost reduction initiatives
in certain operations. Total special charges for the segment were
approximately $8.4 million for the fiscal 2007 third quarter. In
addition, the segment’s results reflected additional selling and administrative
costs related to the expansion of the segment’s distribution capabilities in
certain territories. The decrease was mitigated by the impact of
manufacturing improvements in the segment’s manufacturing facility in
Mexico. Cremation segment operating profit for the nine months ended
June 30, 2007 was $3.0 million, compared to $2.7 million for the same period
a
year ago. The increase primarily reflected the impact of higher sales
and improved margins. The Graphics Imaging segment operating profit
for the nine months ended June 30, 2007 was $8.1 million, compared to $11.6
million for the nine months ended June 30, 2006. The decrease
primarily reflected the impact of lower sales in the U.S. and U.K. markets,
special charges (principally severance) of approximately $2.2 million related
to
cost reduction initiatives in the segment’s U.S. and U.K. operations, partially
offset by higher sales in the German markets and the increase in foreign
currency values against the U.S. dollar. Operating profit for the
Marking Products segment for the first nine months of fiscal 2007 was $6.8
million, compared to $6.6 million for the same
period
a
year ago. The increase primarily reflected the impact of higher sales
and the acquisition made in June 2007, partially offset by higher overhead
costs
during fiscal 2007. The Merchandising Solutions segment operating
profit was $4.8 million for the nine months ended June 30, 2007, compared to
$1.6 million 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 project
completed in the second quarter for one of the segment’s
customers. The Merchandising Solutions segment operated at
approximately a breakeven level during the third fiscal quarter of 2007 compared
to an operating profit of $1.2 million for the comparable period in fiscal
2006.
The decline principally reflected lower sales during the fiscal 2007 quarter
and
special charges incurred in connection with the segment’s cost reduction
activities. For the nine months ended June 30, 2007, changes in
foreign currency values against the U.S. dollar had a favorable impact of
approximately $1.6 million on the Company’s consolidated operating profit
compared to the nine months ended June 30, 2006.
Investment
income for the nine months ended June 30, 2007 was $1.7 million, compared to
$937,000 for the nine months ended June 30, 2006. The increase
reflected higher average levels of invested funds and higher rates of
return. Interest expense for the first nine months of fiscal 2007 was $5.8
million, compared to $4.9 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 nine-month period
compared to the same period in fiscal 2006.
Other
income, net, for the nine months ended June 30, 2007 represented an increase
in
pre-tax income of $298,000, compared to an increase in pre-tax income of $79,000
for the same period last year. Minority interest deduction was $1.8 million
for the first nine months of fiscal 2007, compared to $2.0 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 nine months ended June 30, 2007 was 37.6%,
which is equivalent to the effective tax rate for the first nine 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.
Liquidity
and Capital Resources:
Net
cash
provided by operating activities was $42.5 million for the nine months ended
June 30, 2007, compared to $34.6 million for the first nine 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 reflected an increase in inventory resulting from the
expansion of the Company’s casket distribution capabilities.
Cash
used
in investing activities was $23.0 million for the nine months ended June 30,
2007, compared to $41.9 million for the nine months ended June 30,
2006. Investing activities for the first nine months of fiscal 2007
primarily included capital expenditures of $14.2 million, acquisition-related
payments of $11.9 million, purchases of investments of $1.1 million and proceeds
from the disposal of assets of $3.9 million. Investing activities for
the first nine months of fiscal 2006 primarily included capital expenditures
of
$12.0 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
used
in financing activities for the nine months ended June 30, 2007 was $13.6
million, reflecting net borrowings of long-term debt of $9.9 million,
purchases of treasury stock of $36.7 million, proceeds of $16.1 million from
the
sale of treasury stock (stock option exercises), a tax benefit of $3.8 million
from exercised stock options, payment of dividends of $5.2 million to the
Company's shareholders and distributions of $1.4 million to minority
interests. Cash provided by financing activities for the nine months
ended June 30, 2006 was $3.5 million, reflecting net borrowings of long-term
debt of $11.0 million, proceeds of $1.9 million from the sale of treasury stock
(stock option exercises), a tax benefit of $580,000 from exercised stock
options, treasury stock purchases of $877,000, payment of dividends of $4.8
million to the Company's shareholders and distributions of $4.3 million to
minority interests.
The
Company has a Revolving Credit Facility with a syndicate of financial
institutions. On June 30, 2007, the maximum amount of borrowings
available under the facility was $175,000. 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 June 30, 2007 were $141.7
million. The weighted-average interest rate on outstanding borrowings
at June 30, 2007 and 2006 was 5.24% and 4.94%, 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 June 30,
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 June 30, 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 $918,000
($560,000 after tax) at June 30, 2007 that is included in equity as part of
accumulated other comprehensive income. Assuming market rates remain
constant with the rates at June 30, 2007, approximately $306,000 of the $560,000
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 June 30, 2007, outstanding borrowings under the credit
facility totaled 6.5 million Euros ($8.8 million). The
weighted-average interest rate on outstanding MIGmbH related borrowings at
June
30, 2007 and 2006 was 4.20% and 3.35%, 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 5.3 million Euros ($7.2 million) at June 30, 2007. Caggiati
S.p.A. also has three lines of credit totaling approximately 8.4 million Euros
($11.3 million) with the same Italian banks. Outstanding borrowings on
these
lines were 1.2 million Euros ($1.6 million) at June 30,
2007. The weighted-average interest rate on outstanding
borrowings of Caggiati S.p.A. at June 30, 2007 and 2006 was 3.26% and 3.16%,
respectively.
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 12,500,000 shares (adjusted for stock
splits) of Matthews common stock, of which 10,049,197 shares have been
repurchased as of June 30, 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 from 10,000,000 shares
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 $138.3 million at June 30, 2007, compared
to
$105.6 million at September 30, 2006. Cash and cash equivalents
were $37.0 million at June 30, 2007, compared to $29.7 million at
September 30, 2006. The Company's current ratio was 2.1 at June
30, 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
June
30, 2007, an accrual of $9.3 million was recorded for environmental remediation
(of which $925,000 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:
Acquisition
spending, net of cash acquired, during the nine months ended June 30, 2007
totaled $11,851, and primarily included the following:
In
June
2007, the Company acquired a 60% interest in Beijing Kenuohua Electronic
Technology Co., Ltd., a marking products manufacturer, located in Beijing,
China. The acquisition was structured as a stock
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 Matthews’ marking products manufacturing and distribution
capabilities in Asia.
In
December 2006, the Company paid additional purchase consideration under the
terms of the Milso Industries acquisition agreement.
Acquisition
spending, net of cash acquired, during the nine months ended June 30, 2006
totaled $29,946, and primarily included the following:
In
March
2006, the Company acquired Royal Casket Company, 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.
In
February 2006, the Company acquired The Doyle Group, 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
October 2005, 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 weakness in the U.S. and U.K. graphics
markets and near-term softness in the Merchandising Solutions
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 diluted earnings per share in the range of $0.55 to $0.58
in
the fiscal 2007 fourth quarter. For fiscal 2008, the Company’s current estimates
project growth within the long-term objective of 12% to 15%. These
expectations do not include the impact of any unusual items, if
any.
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 June 30,
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
|
|
|
2011
|
|
Contractual
Cash Obligations:
|
|
(Dollar
amounts in thousands)
|
|
Revolving
credit facilities
|
|
$ |
150,464
|
|
|
$ |
5,833
|
|
|
$ |
144,631
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Notes
payable to banks
|
|
|
7,168
|
|
|
|
334
|
|
|
|
2,775
|
|
|
|
1,951
|
|
|
|
2,108
|
|
Short-term
borrowings
|
|
|
1,658
|
|
|
|
1,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Capital
lease obligations
|
|
|
943
|
|
|
|
208
|
|
|
|
717
|
|
|
|
18
|
|
|
|
-
|
|
Non-cancelable
operating leases
|
|
|
29,464
|
|
|
|
2,383
|
|
|
|
13,124
|
|
|
|
7,899
|
|
|
|
6,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$ |
189,697
|
|
|
$ |
10,416
|
|
|
$ |
161,247
|
|
|
$ |
9,868
|
|
|
$ |
8,166
|
|
A
significant portion of the loans included in the table above bear interest
at
variable rates. At June 30, 2007, the weighted-average interest rate was 5.24%
on the Company’s domestic Revolving Credit Facility, 4.2% 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. In
June 2007, the Company made a $5.0 million contribution to its principal
retirement plan. For the nine months ended June 30, 2007,
contributions of $239,000 and $865,000 have been made under the supplemental
retirement plan and postretirement plan, respectively. The Company currently
anticipates contributing an additional $261,000 and $290,000 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.” In May 2007, the FASB issued FSP FIN 48-1
which provides additional guidance to FIN 48. 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 ($20.0 million outstanding at June 30,
2007). The interest rate was fixed at 2.66% plus a factor based on
the Company’s leverage ratio (the factor was .50% at June 30,
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 ($26.7
million outstanding at June 30, 2007). The interest rate was fixed at
4.14% plus a factor based on the Company’s leverage ratio (the factor was .50%
at June 30, 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 $918,000 ($560,000
after tax) at June 30, 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 5.0% to 4.5%) would result in a decrease of
approximately $172,000 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, British Pound, Canadian Dollar,
Australian Dollar, Swedish Krona and Chinese Yuan 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 $13.5 million
and a decrease in operating income of $1.8 million for the nine months ended
June 30, 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 June 30, 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.
On
May
30, 2007, York resolved the legal claim filed by Harry Pontone and Scott Pontone
(the “Pontones”) concerning their employment agreements. Under the
resolution, York agreed to accelerate the timing of scheduled payments totaling
$8,000,000 as originally contemplated at the time of the acquisition of Milso
Industries and consistent with the earn-out provisions of the Pontones’
employment agreements.
On
July
20, 2007, York reached a settlement agreement with Yorktowne Caskets, Inc.
(“Yorktowne”) and its shareholders finally resolving all outstanding litigation
between the parties. In exchange for the mutual releases, the
principal terms of the settlement included the assignment by Yorktowne of
certain customer-related contracts to York and the purchase by York of certain
assets, including York-product inventory, of Yorktowne. The purchase
price for the assets was $7.7 million, plus the value of the
inventory.
On
July
30, 2007, Batesville Casket Company, Inc. (“Batesville”) filed a complaint for
damages and injunctive relief in the United States District Court for the
Southern District of Ohio against York alleging, in part, that York’s settlement
with Yorktowne resulted in the commission of the tort of intentional
interference of Batesville’s supply agreement with Yorktowne dated April 15,
2007 (the “Complaint”). The Company intends to vigorously defend
against the allegations set forth in the pending Complaint and the Company
does
not presently believe that the ultimate resolution of this matter will have
a
material adverse impact on the Company’s financial position or results of
operations.
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 12,500,000 shares (adjusted for stock
splits) of Matthews common stock, of which 10,049,197 shares have been
repurchased as of June 30, 2007. All purchases of the Company’s
common stock during the first nine 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
|
|
April
2007
|
|
|
130,000
|
|
|
|
41.95
|
|
|
|
130,000
|
|
|
|
2,883,154
|
|
May
2007
|
|
|
335,604
|
|
|
|
43.22
|
|
|
|
335,604
|
|
|
|
2,547,550
|
|
June
2007
|
|
|
96,747
|
|
|
|
43.28
|
|
|
|
96,747
|
|
|
|
2,450,803
|
|
Total
|
|
|
914,051
|
|
|
$ |
41.54
|
|
|
|
914,051
|
|
|
|
|
|
(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
None
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
April 19, 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
second fiscal quarter of 2007.
|
|
|
|
On
April 20, 2007, Matthews filed a Current Report on Form 8-K under
Item
8.01 in connection with a press release announcing that its Board
of
Directors approved the continuation of the stock repurchase program
and
increased the total authorization for stock repurchases by an additional
2.5 million shares.
|
|
|
|
On
May 30, 2007, Matthews filed a Current Report on Form 8-K under Item
7.01
in connection with a press release announcing the resolution of a
legal
claim filed by Harry and Scott Pontone concerning their employment
agreements.
|
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:
August 6, 2007
|
|
/s/
Joseph C. Bartolacci
|
|
|
Joseph
C. Bartolacci, President
|
|
|
and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
August 6, 2007
|
|
/s/
Steven F. Nicola
|
|
|
Steven
F. Nicola, Chief Financial Officer,
|
|
|
Secretary
and Treasurer
|
|
|
|