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, 2004 Commission File No. 0-9115 MATTHEWS INTERNATIONAL CORPORATION (Exact Name of registrant as specified in its charter) PENNSYLVANIA 25-0644320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) TWO NORTHSHORE CENTER, PITTSBURGH, PA 15212-5851 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (412) 442-8200 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of July 31, 2004, shares of common stock outstanding were: Class A Common Stock 32,267,330 shares PART I - FINANCIAL INFORMATION MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollar amounts in thousands, except per share data)
June 30, 2004 September 30, 2003 ------------- ------------------ ASSETS Current assets: Cash and cash equivalents $109,481 $66,954 Short-term investments 16,634 4,588 Accounts receivable, net 66,141 62,883 Inventories: Materials and finished goods $27,884 $25,576 Labor and overhead in process 2,859 1,489 ------- ------- 30,743 27,065 Other current assets 3,751 4,564 ------- ------- Total current assets 226,750 166,054 Investments 7,650 4,561 Property, plant and equipment: Cost 147,967 140,487 Less accumulated depreciation (82,941) (70,854) ------- ------- 65,026 69,633 Deferred income taxes and other assets 26,061 32,182 Goodwill 156,847 154,690 Other intangible assets, net 12,801 13,062 ------- ------- Total assets $495,135 $440,182 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current maturities $ 18,209 $ 6,029 Accounts payable 17,913 19,805 Accrued compensation 26,786 24,745 Accrued income taxes 17,197 1,274 Customer prepayments 2,367 2,488 Other current liabilities 19,056 21,982 ------ ------ Total current liabilities 101,528 76,323 Long-term debt 51,795 57,023 Estimated finishing costs 4,798 4,863 Postretirement benefits 17,678 17,644 Environmental reserve 10,713 11,154 Deferred income taxes 2,274 3,441 Other liabilities and deferred revenue 13,245 13,506 Shareholders' equity: Common stock 36,334 36,334 Additional paid in capital 10,250 6,476 Retained earnings 293,264 257,559 Accumulated other comprehensive income 10,309 6,643 Treasury stock, at cost (57,053) (50,784) ------- ------- 293,104 256,228 ------- ------- Total liabilities and shareholders' equity $495,135 $440,182 ======= =======
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (Dollar amounts in thousands, except per share data)
Three Months Ended Nine Months Ended June 30, June 30, --------------------- ----------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Sales $120,635 $116,145 $362,524 $340,799 Cost of sales (72,181) (71,696) (223,815) (214,757) ------- ------- -------- -------- Gross profit 48,454 44,449 138,709 126,042 Selling and administrative expenses (23,242) (22,876) (69,478) (67,157) ------- ------- ------- ------- Operating profit 25,212 21,573 69,231 58,885 Investment income 435 354 1,097 985 Interest expense (613) (578) (1,493) (2,250) Other income (deductions), net (118) (84) (203) (129) Minority interest (1,418) (1,179) (3,984) (3,280) ------- ------- ------- ------- Income before income taxes 23,498 20,086 64,648 54,211 Income taxes (9,118) (7,797) (25,084) (21,037) ------- ------- ------- ------- Net income $14,380 $12,289 $39,564 $33,174 ======= ======= ======= ======= Earnings per share: Basic $ .45 $ .38 $1.23 $1.05 ===== ===== ===== ===== Diluted $ .44 $ .38 $1.21 $1.03 ===== ===== ===== ===== Dividends per share: $.04 $.0275 $.12 $.0825 ===== ===== ===== =====
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands, except per share data)
Nine Months Ended June 30, -------------------------- 2004 2003 ---- ---- Cash flows from operating activities: Net income $39,564 $33,174 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,138 11,044 Change in deferred taxes 165 339 Changes in working capital items 7,526 (13,086) Decrease in other assets 5,138 2,555 Decrease in estimated finishing costs (65) (1,090) Decrease in other liabilities (585) (4,395) Decrease in postretirement benefits (212) (375) Tax benefit of exercised stock options 2,805 5,100 Net gain on sales of assets (133) (336) ------- ------- Net cash provided by operating activities 65,341 32,930 ------- ------- Cash flows from investing activities: Capital expenditures (6,826) (6,761) Proceeds from sales of assets 850 2,216 Purchases of investment securities (15,193) (145) Proceeds from disposition of investment securities 17 16 ------ ------ Net cash used in investing activities (21,152) (4,674) ------ ------ Cash flows from financing activities: Proceeds from long-term debt 52,066 - Payments on long-term debt (45,907) (31,495) Proceeds from the sale of treasury stock 7,271 10,685 Purchases of treasury stock (12,570) (2,199) Dividends (3,859) (2,615) ------- ------- Net cash used in financing activities (2,999) (25,624) ------- ------- Effect of exchange rate changes on cash 1,337 4,205 ------- ------- Net increase in cash and cash equivalents $42,527 $ 6,837 ====== ======
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (Dollar amounts in thousands, except per share data) Note 1. Nature of Operations Matthews International Corporation ("Matthews"), founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of memorialization products, caskets and cremation equipment for the cemetery and funeral home industries; merchandising solutions; and custom- made products which are used to identify people, places, products and events. The Company's products and operations are comprised of six business segments: Bronze, York Casket, Cremation, Graphics Imaging, Marking Products and, as of July 19,2004, Merchandising Solutions (see Note 13). The Bronze segment is a leading manufacturer of cast bronze memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States. The York Casket segment is a leading casket manufacturer in the United States and produces a wide variety of wood and metal caskets. The Cremation segment is a leading designer and manufacturer of cremation equipment and cremation caskets primarily in North America. The Graphics Imaging segment manufactures and provides printing plates, pre-press services and imaging services for the corrugated and flexible packaging industries. The Marking Products segment designs, manufactures and distributes a wide range of marking equipment and consumables for identifying various consumer and industrial products, components and packaging containers. The Company has manufacturing and marketing facilities in the United States, Australia, Canada and Europe. Note 2. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months and nine months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2003. The consolidated financial statements include all majority-owned foreign and domestic subsidiaries. The consolidated financial statements also include the accounts of the Company's 50%-owned affiliate, S+T GmbH & Co. KG. All intercompany accounts and transactions have been eliminated. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. Note 3. Stock-Based Compensation The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company did not record any compensation expense in the consolidated financial statements for its stock-based compensation plans. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", the following table illustrates the effect on net income and earnings per share had compensation expense been recognized consistent with the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $14,380 $12,289 $39,564 $33,174 Net income, pro forma 13,939 11,919 38,359 32,175 Basic earnings per share, as reported .45 .38 1.23 1.05 Diluted earnings per share, as reported .44 .38 1.21 1.03 Basic earnings per share, pro forma .43 .37 1.19 1.02 Diluted earnings per share, pro forma .43 .37 1.18 1.01
Note 4. Income Taxes Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year. The difference between the estimated effective tax rate for fiscal 2004 of 38.8% and the Federal statutory rate of 35% primarily reflects the impact of state and foreign income taxes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) Note 5. Earnings Per Share
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income $14,380 $12,289 $39,564 $33,174 ========== ========== ========== ========== Weighted-average common shares outstanding 32,252,258 31,845,791 32,172,931 31,523,848 Dilutive securities, primarily stock options 466,418 497,032 486,574 664,760 ---------- ---------- ---------- ---------- Diluted weighted-average common shares outstanding 32,718,676 32,342,823 32,659,505 32,188,608 ========== ========== ========== ========== Basic earnings per share $ .45 $ .38 $1.23 $1.05 ==== ==== ==== ==== Diluted earnings per share $ .44 $ .38 $1.21 $1.03 ==== ==== ==== ====
Note 6. Segment Information The Company's products and operations are comprised of six business segments: Bronze, York Casket, Cremation, Graphics Imaging, Marking Products and, as of July 19, 2004, Merchandising Solutions (see Note 13). The segments are described under Nature of Operations (Note 1). Management evaluates segment performance based on operating profit (before income taxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net and minority interest. Information about the Company's segments follows:
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Sales to external customers: Bronze $51,666 $49,978 $144,271 $137,699 York Casket 27,013 28,661 91,155 92,437 Cremation 5,163 4,374 16,552 15,052 Graphics Imaging 27,495 24,718 82,420 71,705 Marking Products 9,298 8,414 28,126 23,906 ----------- ----------- ----------- ----------- $120,635 $116,145 $362,524 $340,799 =========== =========== =========== =========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) Three Months Ended Nine Months Ended June 30, June 30, ------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Operating profit: Bronze $14,948 $14,278 $35,338 $35,461 York Casket 3,763 2,863 13,390 10,013 Cremation (128) 175 829 887 Graphics Imaging 4,959 3,178 14,634 9,506 Marking Products 1,670 1,079 5,040 3,018 ----------- ----------- ----------- ----------- $25,212 $21,573 $69,231 $58,885 =========== =========== =========== ===========
Note 7. Comprehensive Income Comprehensive income consists of net income adjusted for changes, net of tax, in cumulative foreign currency translation, unrealized gains and losses on investments, unrealized gains and losses on a derivative instrument and minimum pension liability. For the three months ended June 30, 2004 and 2003, comprehensive income was $13,672 and $16,878, respectively. For the nine months ended June 30, 2004 and 2003, comprehensive income was $43,230 and $43,628, respectively. Note 8. Goodwill and Other Intangible Assets Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized but is subject to annual review for impairment. In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized. For purposes of testing for impairment the Company uses a combination of valuation techniques, including discounted cash flows. Intangible assets are amortized over their estimated useful lives unless such lives are considered to be indefinite. The Company performs its annual impairment review in its second fiscal quarter. Changes to goodwill, net of accumulated amortization, for the nine months ended June 30, 2004, are as follows.
York Graphics Marking Bronze Casket Cremation Imaging Products Consolidated -------- -------- --------- -------- -------- ------------- Balance at September 30, 2003 $ 72,122 $ 40,706 $ 6,536 $ 35,161 $ 165 $154,690 Additions during period - - - - - - Translation and other adjustments 985 - - 1,172 - 2,157 ------ ------ ------ ------ --- ------- Balance at June 30, 2004 $ 73,107 $ 40,706 $ 6,536 $ 36,333 $ 165 $156,847 ====== ====== ====== ====== === =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of June 30, 2004 and September 30, 2003, respectively. York Casket Segment Cremation Segment -------------------- ------------------ Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------- ------------ -------- ------------ June 30, 2004: - ------------------ Trade names $ 8,000 $ - * $ - $ - Customer relationships 4,100 (623) - - Copyrights/patents/other 1,300 (224) 300 (52) ------ ---- --- --- $13,400 $(847) $ 300 $(52) ====== ==== === === September 30, 2003: - ------------------ Trade names $ 8,000 $ - * $ - $ - Customer relationships 4,100 (442) - - Copyrights/patents/other 1,300 (159) 300 (37) ------ ---- --- --- $13,400 $(601) $ 300 $(37) ====== ==== === === * Not subject to amortization Intangible assets established for customer relationships and copyrights, patents and other are amortized over their estimated useful lives of 17 years and 15 years, respectively. For the three-month period ended June 30, 2004, amortization expense on intangible assets was $82 for the York Casket segment and $5 for the Cremation segment. For the nine-month period ended June 30, 2004, amortization expense was $246 for the York Casket segment and $15 for the Cremation segment. Amortization expense on intangible assets is expected to approximate $350 each year between 2004 and 2008. Note 9. Long-term Debt On December 3, 2001, the Company entered into a Revolving Credit Facility for $125.0 million with a syndicate of financial institutions. The facility was scheduled to mature on November 30, 2004. On April 21, 2004, the Company signed an amendment to the facility which extended its maturity to April 30, 2009. Borrowings under the amended facility 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, as amended, 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. Effective April 30, 2004, the Company increased its outstanding borrowings under the facility to $50.0 million and simultaneously entered into an interest rate swap that fixed the interest rate on such borrowings at 3.16% for a five-year period. The interest rate swap has been designated as a cash NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) 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. The fair value of the interest rate swap reflected an unrealized gain of $934,000 ($570,000 after tax) at June 30, 2004 that is included in equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30, 2004, approximately $115,000 of the $570,000 gain included in accumulated other comprehensive income is expected to be recognized in earnings over the next 12 months. At June 30, 2004 the outstanding balance on the Revolving Credit Facility was $50,000 and the weighted-average interest rate on the outstanding borrowings under this facility was 3.16%. Equal quarterly payments of $2,500 plus interest are due on the facility until its maturity in April 2009. Caggiati S.p.A. has financed several acquisitions through loans with various Italian banks. Outstanding borrowings on these loans totaled U.S.$14,800 at June 30, 2004. Caggiati also has four lines of credit totaling approximately U.S.$12,000 with the same Italian banks. Outstanding borrowings on these lines approximated $4,500 at June 30, 2004. 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 (income) for the plans in accordance with the revised version of SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," as described in Note 12:
Pension Other Postretirement ---------------- -------------------- Three months ended June 30, 2004 2003 2004 2003 ------ ------ ------ ------ Service cost $906 $759 $99 $72 Interest cost 1,266 1,208 262 265 Expected return on plan assets (1,484) (1,154) - - Amortization: Prior service cost 28 28 (322) (322) Net actuarial loss 293 313 112 124 ----- ----- ----- ----- Net benefit cost $1,009 $ 1,154 $151 $139 ===== ===== ===== ===== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) Pension Other Postretirement ---------------- -------------------- Nine months ended June 30, 2004 2003 2004 2003 ------ ------ ------ ------ Service cost $ 2,719 $2,277 $296 $216 Interest cost 3,797 3,624 786 795 Expected return on plan assets (4,452) (3,462) - - Amortization: Prior service cost 84 84 (966) (966) Net actuarial loss 879 939 335 372 ----- ----- ----- ----- Net benefit cost $ 3,027 $3,462 $451 $417 ===== ===== ===== =====
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 made from the Company's operating funds. Due to the IRS full funding limitations, the Company is not required to make any contributions to its principal retirement plan in fiscal year 2004. As of June 30, 2004, contributions of $258 and $588 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $96 and $338 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2004. Note 11. Acquisitions In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen ("Reproservice Munich"), a German graphics and flexographic printing plate manufacturer in Munich, Germany. The transaction was structured as a stock purchase, at an acquisition price of 4.1 million Euros (U.S.$4,800). Products and services of Reproservice Munich include pre-press packaging, digital and analog flexographic printing plates, design, art work, lithography and color separation. The combination of Matthews and Reproservice Munich is an important part of the Matthews strategy to increase its European presence in the graphics industry. In May 1998, Matthews acquired a 50% interest in O.N.E. Color Communications ("O.N.E."), a digital graphics service company located in Oakland, California. The purchase price consisted of $2,000 cash upon closing plus an additional $2,750 in 2001, which was based upon the attainment of certain operating performance levels of O.N.E. The purchase agreement also required Matthews to acquire the remaining 50% interest no later than May 2004, with the purchase price contingent on the attainment of certain operating performance levels of O.N.E., but not less than $4,500. The accounts of O.N.E. have been included in the consolidated financial statements of Matthews since May 1998 and a liability was recorded for the future minimum payout. Effective July 31, 2003, Matthews completed the purchase of the remaining 50% interest in O.N.E. for $5,700. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) Note 12. Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation addresses consolidation by business enterprises of variable interest entities with certain characteristics. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. In October 2003, the FASB agreed to defer the effective date of FIN 46 for variable interest entities held by public companies that were acquired before February 1, 2003. The deferral will require that public companies adopt the provisions of FIN 46 for periods ending after December 15, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial position and results of operations. In July 2003, the EITF issued Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables." Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue generating activities. The provisions of Issue No. 00-21 were effective July 1, 2003, and have been applied prospectively by the Company to the finishing and storage elements of its pre-need sales. In December 2003, the FASB issued a revised version of SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits." This statement requires additional disclosures about assets, obligations, cash flows and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The disclosure requirements are effective for annual financial statements with fiscal years ending after December 15, 2003 and for interim periods beginning after December 15, 2003. The disclosure requirements of the revised version of SFAS No. 132 have been adopted by the Company and are included in this Quarterly Report on Form 10-Q. In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. When adopted, FSP 106-2 will supersede FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was issued in January 2004 and permitted a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act until more authoritative guidance on the accounting for the federal subsidy was issued. The Company elected the one-time deferral allowed under FSP 106-1 and, as a result, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on post-retirement health care benefit plans. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. FSP 106-2 is effective for the Company's fourth quarter of fiscal 2004, but it is not expected to have a material impact on the Company's consolidated financial position or results of operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollar amounts in thousands, except per share data) Note 13. Subsequent Events In July 2004, the Company acquired Cloverleaf Group, Inc. ("Cloverleaf"), a provider of merchandising solutions. Cloverleaf was formed by the recent merger of iDL, Inc., which is a merchandising solutions company headquartered near Pittsburgh, PA and Big Red Rooster, which is a marketing and design services organization located in Columbus, OH. The transaction was structured as an asset purchase, at a cost of approximately $34,000. The transaction was also structured to include potential additional consideration during the next six years contingent on the future growth in value of the acquired operations. The acquisition is designed to expand the Company's products and services into the merchandising solutions market. In July 2004, the Company acquired Holjeron Corporation, an industrial controls manufacturer located in Wilsonville, OR. The transaction was structured as a stock purchase, and is a part of Matthews' strategy to increase its presence in the marking products industry. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement: The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended September 30, 2003. Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in raw material prices, changes in death rates, changes in foreign currency translation 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 foreign competitive pressures, unknown risks in connection with the Company's acquisitions, and technological factors beyond the Company's control. Results Of Operations: The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods indicated. Nine months ended Years ended June 30, September 30, ----------------- -------------------- 2004 2003 2003(1) 2002 2001(2) ---- ---- ------ ---- ------ Sales 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit 38.3 37.0 37.1 37.5 42.2 Operating profit 19.1 17.3 17.5 15.9 18.8 Income before taxes (3) 17.8 15.9 16.0 14.6 18.2 Net income (3) 10.9 9.7 9.8 8.9 11.2 (1) The fourth quarter of fiscal 2003 included a net pre-tax charge of approximately $1.0 million from special items which consisted of a pre-tax gain of $2.6 million on the sale of a facility and a goodwill impairment charge of $3.6 million. (2) Fiscal 2001 included pre-tax income of $500,000 from special items, which consisted of a pre-tax gain of $7.1 million on the sale of a subsidiary and asset impairments, restructuring costs and other special pre-tax charges totaling $6.6 million. (3) Before cumulative effect of change in accounting. Fiscal 2002 reflected a pre-tax charge of $5.3 million ($.10 per share after tax) for transitional goodwill impairment. Sales for the nine months ended June 30, 2004 were $362.5 million and were $21.7 million, or 6.4%, higher than sales of $340.8 million for the nine months ended June 30, 2003. Bronze segment sales for the first nine months of fiscal 2004 were $144.3 million compared to $137.7 million for the first Results Of Operations, continued: nine months of fiscal 2003. The higher level of Bronze sales principally reflected the favorable impact of increases in the values of foreign currencies against the U.S. dollar and the effect of a temporary price surcharge instituted in April 2004 in response to increases in the cost of bronze ingot. These increases were offset partially by a decline in mausoleums sales. Sales for the York Casket segment were $91.1 million for the first nine months of fiscal 2004 compared to $92.4 million for the same period last year. The decrease primarily reflected the divestiture of a small manufacturing facility and several distribution operations in fiscal 2003. Sales for the Cremation segment were $16.6 million for the first nine months of fiscal 2004 compared to $15.1 million for the same period a year ago. The increase reflected higher sales volume of cremation equipment and cremation caskets compared to the same period a year ago. Sales for the Graphics Imaging segment in the first nine months of fiscal 2004 were $82.4 million, compared to $71.7 million for the same period a year ago. The increase reflected the acquisition of Reproservice Eurodigital GmbH Munchen ("Reproservice Munich") in August 2003, higher sales in the segment's other European operations and an increase in the value of the Euro against the U.S. dollar. These increases were partially offset by lower sales in the segment's domestic operations, which primarily related to the closure, in September 2003, of an unprofitable manufacturing business in North Carolina. Marking Products segment sales for the nine months ended June 30, 2004 were $28.1 million, compared to $23.9 million for the first nine months of fiscal 2003. The increase of $4.2 million, or 17.7%, was principally due to higher volume, reflecting higher demand in North America and in Europe as a result of improving economic conditions, and the increase in value of the Swedish Krona against the U.S. dollar. Higher foreign currency values against the U.S. dollar had a favorable impact of approximately $11.0 million on the Company's consolidated sales for the nine months ended June 30, 2004, compared to the same period a year ago. Gross profit for the nine months ended June 30, 2004 was $138.7 million, compared to $126.0 million for the nine months ended June 30, 2003. Consolidated gross profit as of percent of sales increased from 37.0% for the first nine months of fiscal 2003 to 38.3% for the first nine months of fiscal 2004. The increase in consolidated gross profit and gross profit percentage primarily resulted from higher sales in the Marking Products and European Graphics Imaging businesses and manufacturing efficiency improvements in several of the Company's segments. Selling and administrative expenses for the nine months ended June 30, 2004 were $69.5 million, compared to $67.2 million for the first nine months of fiscal 2003. The increase resulted from higher sales, the acquisition of Reproservice Munich in August 2003 and the increase in values of foreign currencies against the U.S. dollar. Consolidated selling and administrative expenses as a percent of sales were 19.2% for the nine months ended June 30, 2004 compared to 19.7% for the same period last year. Operating profit for the nine months ended June 30, 2004 was $69.2 million, representing an increase of $10.3 million, or 17.6%, over operating profit of $58.9 million for the nine months ended June 30, 2003. Bronze segment operating profit for the first nine months of fiscal 2004 was $35.4 million, compared to $35.5 million for the first nine months of fiscal 2003. The slight decrease reflected the absence of a one-time favorable adjustment recorded in fiscal 2003 related to the segment's pre-need memorial finishing cost liability, early retirement and severance costs incurred in March 2004, and increased bronze ingot costs. Bronze ingot costs at June 30, 2004 were approximately 60% higher than a year ago. These increases were partially offset by favorable impact in the third quarter of March 2004 personnel Results Of Operations, continued: reduction initiatives and the favorable impact of increases in the values of foreign currencies against the U.S. dollar. Operating profit for the York Casket segment for the first nine months of fiscal 2004 was $13.4 million, an increase of $3.4 million, or 33.7%, over the same period a year ago. The increase reflected the favorable impact of the divestiture of unprofitable manufacturing and distribution operations during fiscal 2003, operating efficiencies realized in connection with productivity and quality initiatives at several of the segment's manufacturing facilities and a reduction in administrative expenses. Cremation segment operating profit was $829,000 for the first nine months of fiscal 2004 compared to $887,000 for the same period in fiscal 2003. The decrease primarily reflected the benefit of higher sales offset by changes in employee benefit costs in fiscal 2004 compared to fiscal 2003. Graphics Imaging operating profit for the nine months ended June 30, 2004 was $14.6 million compared to $9.5 million for the nine months ended June 30, 2003, an increase of 53.9%. The segment's operating profit was favorably impacted by the acquisition of Reproservice Munich, sales growth in the Company's other European operations, an increase in the value of the Euro against the U.S. dollar and the results of cost structure initiatives in the segment's domestic operations. Operating profit for the Marking Products segment for the first nine months of fiscal 2004 was $5.0 million, representing an increase of $2.0 million, or 67.0%, over the same period a year ago. The increase resulted from higher sales combined with an increase in the value of the Swedish Krona against the U.S. dollar. Higher foreign currency values against the U.S. dollar had a favorable impact of approximately $2.5 million on the Company's consolidated operating profit for the nine months ended June 30, 2004 compared to the same period a year ago. Investment income for the nine months ended June 30, 2004 was $1.1 million, compared to $985,000 for the nine months ended June 30, 2003. The increase over the prior period reflected higher levels of invested cash. Interest expense for the first nine months of fiscal 2004 was $1.5 million, compared to $2.3 million for the same period last year. The decline in interest expense reflected a lower average level of debt during the fiscal 2004 nine-month period combined with a reduction in the average borrowing rate. Other deductions, net, for the nine months ended June 30, 2004 was $203,000 compared to $129,000 for same period last year. Minority interest deduction for the first nine months of fiscal 2004 was $4.0 million, compared to $3.3 million for the first nine months of fiscal 2003. The higher minority interest deduction for fiscal 2004 resulted from operating income growth in the Company's four European Graphics Imaging businesses that are not wholly owned. The Company's effective tax rate for the nine months ended June 30, 2004 was 38.8%, which remained unchanged from the effective rate of 38.8% for the fiscal year ended September 30, 2003. The difference between the Company's effective tax rate and the Federal statutory rate of 35% primarily reflected the impact of state and foreign income taxes. Goodwill: Under Statement of Financial Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", goodwill related to business combinations is no longer amortized, but is subject to periodic review for impairment. In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized. For purposes of testing for impairment, the Company uses a combination of valuation techniques, including discounted cash flows. The Company performed its annual impairment review in the second Results Of Operations, continued: quarter of fiscal 2004 and determined that no adjustments to the carrying values of goodwill were necessary at that time. Liquidity And Capital Resources: Net cash provided by operating activities was $65.3 million for the nine months ended June 30, 2004, compared to $32.9 million for the first nine months of fiscal 2003. Operating cash flow for the first nine months of fiscal 2004 reflected net income adjusted for depreciation and amortization (non-cash charges), an increase in accrued income taxes and a tax benefit of $2.8 million from exercised stock options. Accrued income taxes at June 30, 2004 were higher due to the current provision and overpayments of fiscal 2003 taxes that have been applied to future periods. For the nine months ended June 30, 2003, operating cash flow primarily reflected net income adjusted for depreciation, amortization, payments to customers under York Casket segment's rebate programs, a $7.5 million contribution to the Company's pension plan, and a tax benefit of $5.1 million from exercised stock options. Cash used in investing activities was $21.2 million for the nine months ended June 30, 2004, compared to $4.7 million for the nine months ended June 30, 2003. Investing activities for the first nine months of fiscal 2004 included capital expenditures of $6.8 million and net purchases of investments of $15.2 million, partially offset by proceeds of $850,000 from the sale of assets. Investing activities for the first nine months of fiscal 2003 primarily included capital expenditures of $6.8 million, which was partially offset by proceeds of $2.2 million from the sale of assets. Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for property, plant and equipment has averaged $8.9 million for the last three fiscal years. The capital budget for fiscal 2004 is $13.9 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Cash used in financing activities for the nine months ended June 30, 2004 was $3.0 million, reflecting repayment of long-term debt of $45.9 million, stock repurchases of $12.6 million and dividends of $3.9 million to the Company's shareholders, partially offset by proceeds from long-term debt of $52.1 million and net proceeds from the sale of treasury stock of $7.3 million (stock option exercises). Cash used in financing activities for the nine months ended June 30, 2003 was $25.6 million, reflecting payments on long-term debt of $31.5 million, treasury stock purchases of $2.2 million and dividends of $2.6 million to the Company's shareholders. These payments were partially offset by proceeds of $10.7 million from the sale of treasury stock (stock option exercises). On December 3, 2001, the Company entered into a Revolving Credit Facility for $125.0 million with a syndicate of financial institutions. The facility was scheduled to mature on November 30, 2004. On April 21, 2004, the Company signed an amendment to the facility which extended its maturity to April 30, 2009. Borrowings under the amended facility 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 Liquidity and Capital Resources, continued: 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, as amended, 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. Effective April 30, 2004, the Company increased its outstanding borrowings under the facility to $50.0 million and simultaneously entered into an interest rate swap that fixed the interest rate on such borrowings at 3.16% for a five-year period. The interest rate swap has been designated as a cash flow hedge of the future variable interest payments under the revolving credit facility. At June 30, 2004 the outstanding balance on the Revolving Credit Facility was $50.0 million and the weighted-average interest rate on the outstanding borrowings under this facility was 3.16%. Equal quarterly payments of $2.5 million plus interest are due on the facility until its final maturity in April 2009. Caggiati S.p.A. has four lines of credit totaling approximately U.S.$12.0 million with various Italian banks. Outstanding borrowings on these lines approximated $4.5 million at June 30, 2004. 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 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 7,759,895 shares have been repurchased as of June 30, 2004. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company's Restated Articles of Incorporation. Consolidated working capital of the Company was $125.2 million at June 30, 2004, compared to $89.7 million at September 30, 2003. Cash and cash equivalents were $109.5 million at June 30, 2004, compared to $67.0 million at September 30, 2003. The increase in working capital reflected the extension of the maturity on the Revolving Credit Facility. The increase in cash resulted from the Company's earnings during the current period and additional borrowings under its credit facility. The Company's current ratio was 2.2 at June 30, 2004 and September 30, 2003. Environmental Matters: The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations. As such, the Company has developed policies and procedures with respect to environmental, safety and health, including the proper handling, storage and disposal of hazardous materials. 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 Environmental Matters, continued: at these sites, as appropriate. In addition, prior to its acquisition, York Casket was identified, along with others, by the Environmental Protection Agency as a potentially responsible party for remediation of a landfill site in York, PA. At this time, the Company has not been joined in any lawsuit or administrative order related to the site or its clean-up. At June 30, 2004, an accrual of $11.5 million was recorded for environmental remediation (of which $786,000 has been classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual, which reflects previously established reserves assumed with the acquisition of York Casket and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position. Acquisitions: In July 2004, the Company acquired Cloverleaf Group, Inc. ("Cloverleaf"), a provider of merchandising solutions. Cloverleaf was formed by the recent merger of iDL, Inc., which is a merchandising solutions company headquartered near Pittsburgh, PA and Big Red Rooster, which is a marketing and design services organization located in Columbus, OH. The transaction was structured as an asset purchase, at a cost of approximately $34.0 million. The transaction was also structured to include potential additional consideration during the next six years contingent on the future growth in value of the acquired operations. The acquisition is designed to expand the Company's products and services into the merchandising solutions market. In July 2004, the Company acquired Holjeron Corporation, an industrial controls manufacturer located in Wilsonville, OR. The transaction was structured as a stock purchase, and is a part of Matthews' strategy to increase its presence in the marking products industry. In August 2003, Matthews acquired Reproservice Eurodigital GmbH Munchen ("Reproservice Munich"), a German graphics and flexographic printing plate manufacturer in Munich, Germany. The transaction was structured as a stock purchase, at an acquisition price of 4.1 million Euros (U.S.$4.8 million). The combination of Matthews and Reproservice Munich is an important part of the Matthews strategy to increase its European presence in the graphics industry. Reproservice Munich, a family-owned business with annual sales of approximately U.S.$6.0 million, was established in 1983. Products and services of Reproservice Munich include pre-press packaging, digital and analog flexographic printing plates, design, art work, lithography and color separation. In May 1998, Matthews acquired a 50% interest in O.N.E. Color Communications ("O.N.E."), a digital graphics service company located in Oakland, California. The purchase price consisted of $2.0 million cash upon closing plus an additional $2.75 million in 2001, which was based upon the attainment of certain operating performance levels of O.N.E. The purchase agreement also required Matthews to acquire the remaining 50% interest no later than May 2004, with the purchase price contingent on the attainment of certain operating performance levels of O.N.E., but not less than $4.5 million. The accounts of O.N.E. have been included in the consolidated financial statements Acquisitions, continued: of Matthews since May 1998 and a liability was recorded for the future minimum payout. Effective July 31, 2003, Matthews completed the purchase of the remaining 50% interest in O.N.E. for $5.7 million. Forward-Looking Information: The Company's objective with respect to operating performance is to increase annual earnings per share in the range of 12% to 15% annually. For the past nine fiscal years, the Company has achieved an average annual increase in earnings per share of 15.2%. Matthews has a three-pronged strategy to attain the annual growth rate objective, which has remained unchanged from the prior year. This strategy consists of the following: internal growth (which includes productivity improvements, new product development and the expansion into new markets with existing products), acquisitions and share repurchases under the Company's stock repurchase program. For the first nine months of fiscal 2004, the Company's earnings of $1.21 per share were in line with management's original expectations for the year and represented an increase of 17.5% over earnings per share of $1.03 for the same period last year. Based on the expected impact of the Company's recent acquisitions, anticipated internal growth and also considering recent significant increases in bronze ingot and steel costs, the Company expects to achieve diluted earnings per share of $1.58 for the fiscal year ending September 30, 2004. Critical Accounting Policies: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q. A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2003. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition. The following accounting policies involve significant estimates, which are considered critical to the preparation of the Company's consolidated financial statements. Allowance for Doubtful Accounts The allowance for doubtful accounts is based on an evaluation of specific customer accounts in which available facts and circumstances indicate collectibility may be a problem. In addition, the allowance includes a general reserve for all customers based on historical collection experience. Critical Accounting Policies, continued: Long-Lived Assets Property, plant and equipment, goodwill and other intangible assets are carried at cost. Depreciation on property, plant and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Goodwill is no longer amortized, but is subject to periodic review for impairment. Intangible assets are amortized over their estimated useful lives, unless such lives are considered to be indefinite. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. Pension Costs Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost. Environmental Reserve Environmental liabilities are recorded when the Company's obligation is probable and reasonably estimable. Accruals for losses from environmental remediation obligations do not consider the effects of inflation, and anticipated expenditures are not discounted to their present value. Revenue Recognition Revenues are generally recognized when title and risk of loss pass to the customer, which is typically at the time of product shipment. For pre-need sales of memorials and vases, revenue is recognized when the memorial has been manufactured to the customer's specifications (e.g., name and birth date), title has been transferred to the customer and the memorial and vase are placed in storage for future delivery. A liability has been recorded in Estimated Finishing Costs for the estimated costs of finishing pre-need bronze memorials and vases that have been manufactured and placed in storage prior to July 1, 2003 for future delivery. In July 2003, the Emerging Issues Task Force ("EITF") issued Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables." Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue generating activities. The provisions of Issue No. 00-21 were effective July 1, 2003 and have been applied prospectively by the Company to the finishing and storage elements of its pre-need sales. Beginning July 1, 2003, revenue is deferred by the Company on the portion of pre-need sales attributable to the final finishing and storage of the pre-need merchandise. Deferred revenue for final finishing is recognized at the time the pre-need merchandise is finished and shipped to the customer. Deferred revenue related to storage is recognized on a straight-line basis over the estimated average time that pre-need merchandise is held in storage. At June 30, 2004, the Company held 359,181 memorials and 236,844 vases in its storage facilities under the pre-need sales program. Construction revenues are recognized under the percentage-of-completion method of accounting using the cost-to-cost method. The Company offers rebates to certain customers participating in volume purchase programs. Rebates are Critical Accounting Policies, continued: estimated and recorded as a reduction in sales at the time the Company's products are sold. LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS: The following table summarizes the Company's contractual obligations at June 30, 2004, and the effect such obligations are expected to have on its liquidity and cash flows in future periods. Long Term Contractual Obligations, continued:
Payments due in fiscal year: ------------------------------------------------ 2004 After Total (remainder) 2005 to 2006 2007 to 2008 2008 --------- ----------- ------------ ------------ ------ Contractual Cash Obligations: (Dollar amounts in thousands) Revolving credit facility $50,000 $2,500 $20,000 $20,000 $ 7,500 Notes payable to banks 14,866 537 4,650 2,609 7,070 Short-term borrowings 4,536 4,536 - - - Capital lease obligations 602 147 443 12 - Non-cancelable operating leases 13,223 832 5,251 4,066 3,074 ------- ------ ------- ------- ------- Total contractual cash obligations $83,227 $8,552 $30,344 $26,687 $17,644 ======= ====== ======= ======= =======
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 made from the Company's operating funds. Due to IRS full funding limitations, the Company is not required to make any contributions to its principal retirement plan in fiscal year 2004. As of June 30, 2004, contributions of $258,000 and $588,000 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $96,000 and $338,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2004. 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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation addresses consolidation by business enterprises of variable interest entities with certain characteristics. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. In October 2003, the FASB agreed to defer the effective date of FIN 46 for variable interest entities held by public companies that were acquired before February 1, 2003. The deferral will require that public companies adopt the provisions of FIN 46 for periods ending after December 15, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial position and results of operations. Accounting Pronouncements, continued: In December 2003, the FASB issued a revised version of SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits." This statement requires additional disclosures about assets, obligations, cash flows and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The disclosure requirements are effective for annual financial statements with fiscal years ending after December 15, 2003 and for interim periods beginning after December 15, 2003. The disclosure requirements of the revised version of SFAS No. 132 have been adopted by the Company and are included in this Quarterly Report on Form 10-Q. In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. When adopted, FSP 106-2 will supersede FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was issued in January 2004 and permitted a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act until more authoritative guidance on the accounting for the federal subsidy was issued. The Company elected the one-time deferral allowed under FSP 106-1 and, as a result, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on post-retirement health care benefit plans. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. FSP 106-2 is effective for the Company's fourth quarter of fiscal 2004, but it 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 Revolving Credit Facility, as amended, which bears interest at variable rates based on LIBOR. Effective April 30, 2004, the Company increased its outstanding borrowings under the facility to $50.0 million and simultaneously entered into an interest rate swap that fixed the interest rate on such borrowings at 3.16% for a five-year period. The interest rate swap has been designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility. The fair value of the interest rate swap reflected an unrealized gain of $934,000 ($570,000 after tax) at June 30, 2004 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 $360,000 in the fair value of the interest rate swap. Quantitative And Qualitative Disclosures About Market Risk, continued: 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 Canadian dollar, the Australian dollar and the 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 $9.1 million and a decrease in operating income of $3.4 million for the nine months ended June 30, 2004. Item 4. Controls and Procedures Based on their evaluation at the end of the period covered by this Quarterly Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II - OTHER INFORMATION 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 has authorized the repurchase of a total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 7,759,895 shares have been repurchased as of June 30, 2004. All purchases of the Company's common stock during the first nine months of fiscal 2004 were part of this repurchase program. The following table shows the monthly fiscal 2004 stock repurchase activity:
Total number of Average shares purchased Maximum number Total number price as part of a of shares that yet of shares paid per publicly announced may be purchased Period purchased share plan under the plan (1) - ------ ------------ -------- ------------------ ----------------- October 2003 158,300 $27.63 158,300 509,768 November 2003 60,700 28.62 60,700 449,068 December 2003 79 28.70 79 448,989 January 2004 - - - 448,989 February 2004 - - - 448,989 March 2004 12,300 32.03 12,300 436,689 April 2004 196,584 31.04 196,584 2,240,105 May 2004 - - - 2,240,105 June 2004 - - - 2,240,105 ------- ----- ------- ========= Total 427,963 29.46 427,963 ======= ===== ======= (1) In April 2004 the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares of Matthews common stock, bringing the total authorization for stock repurchases to 10,000,000 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 ------- ----------- 10.1 Asset Purchase Agreement Between I.D.L. Incorporated and Hugh Andrew, L.P. and Big Red Rooster, Inc. and Cloverleaf Group, L.P. and the iDL Shareholders and the BRR Shareholders and Cloverleaf Group, Inc. and Matthews International Corporation dated as of July 19, 2004. 31.1 Certification of Principal Executive Officer for David M. Kelly. 31.2 Certification of Principal Financial Officer for Steven F. Nicola. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for David M. Kelly. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Steven F. Nicola. (b) Reports on Form 8-K On April 26, 2004, Matthews filed a Current Report on Form 8-K under Item 9 in connection with a press release announcing the continuation of the Company's stock repurchase program and an increase in the authorization for stock repurchases by 2 million shares. On April 21, 2004, Matthews filed a Current Report on Form 8-K under Item 12 in connection with a press release announcing its earnings for the quarter ended March 31, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTHEWS INTERNATIONAL CORPORATION (Registrant) Date 8/10/04 David M. Kelly ------------ ----------------------------------------- David M. Kelly, Chairman of the Board, President and Chief Executive Officer Date 8/10/04 Steven F. Nicola ------------ ----------------------------------------- Steven F. Nicola, Chief Financial Officer, Secretary and Treasurer