UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Quarterly Period Ended December 31, 1996 Commission File Nos. 0-9115 and 0-24494 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 [ ] The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class of Common Stock Outstanding at January 31, 1997 Class A - $1.00 par value 6,353,981 shares Class B - $1.00 par value 2,338,709 shares PART I - FINANCIAL INFORMATION MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
December 31, 1996 September 30, 1996 ----------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 15,153,496 $ 12,418,718 Short-term investments 3,061,761 3,079,084 Accounts and notes receivable, net 24,360,600 26,158,666 Inventories: Materials and finished goods $10,335,481 $10,424,521 Labor and overhead in process 755,738 879,593 Supplies 588,719 669,080 ---------- ---------- 11,679,938 11,973,194 Other current assets 1,861,726 2,130,556 ---------- ---------- Total current assets 56,117,521 55,760,218 Investments 34,750,224 35,333,326 Property, plant and equipment: Cost 64,346,545 63,492,651 Less accumulated depreciation (26,943,587) (26,169,878) ---------- ---------- 37,402,958 37,322,773 Deferred income taxes and other assets 12,811,557 13,569,805 Goodwill 11,268,858 11,425,587 ----------- ----------- Total assets $152,351,118 $153,411,709 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current maturities 191,109 270,092 Accounts payable 4,091,774 6,049,732 Accrued compensation 5,877,846 8,536,221 Accrued income taxes 3,413,812 963,886 Customer prepayments 3,168,478 3,069,904 Other current liabilities 4,757,079 6,021,095 ---------- ---------- Total current liabilities 21,500,098 24,910,930 Long-term debt - - Estimated finishing costs 2,985,613 2,954,299 Postretirement benefits 20,850,818 21,005,067 Other liabilities 2,119,518 2,082,370 Shareholders' equity: Common stock: Class A, par value $1.00 6,401,422 6,039,542 Class B, par value $1.00 2,682,076 3,043,956 Other shareholders' equity 95,811,573 93,375,545 ---------- ---------- 104,895,071 102,459,043 ----------- ----------- Total liabilities and shareholders' equity $152,351,118 $153,411,709 =========== =========== /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended December 31, -------------------------- 1996 1995 ---- ---- Sales $ 42,582,795 $ 41,185,350 Cost of sales 23,719,377 22,602,002 ---------- ---------- Gross profit 18,863,418 18,583,348 Selling and administrative expenses 12,249,660 12,131,095 ---------- ---------- Operating profit 6,613,758 6,452,253 Investment income 604,419 459,391 Interest expense 12,030 21,359 Other income (deductions), net (95,804) (54,766) ---------- ---------- Income before income taxes 7,110,343 6,835,519 Income taxes 2,805,935 2,589,530 ---------- ---------- Net income $ 4,304,408 $ 4,245,989 ========== ========== Earnings per share $ .49 $ .48 ===== ===== Dividends per share $ .08 $ .07 ===== ===== Weighted average number of common shares outstanding 8,748,654 8,850,350 ========= =========
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, -------------------------- 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 4,304,408 $ 4,245,989 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,281,502 1,249,725 Deferred taxes 118,214 (197,098) Net increase in certain working capital items (587,306) (3,403,944) (Increase) decrease in other noncurrent assets 580,837 (159,652) Increase in estimated finishing costs 31,314 133,758 Decrease in other liabilities 37,148 40,321 Increase (decrease) in postretirement benefits (154,249) 224,277 Net loss on sale of property, plant and equipment 5,678 9,474 Net loss on investments 2,034 - Effect of exchange rate changes on operations 74,946 (30,866) ---------- ---------- Net cash provided by operating activities 5,694,526 2,111,984 ---------- ---------- Cash flows from investing activities: Acquisitions of property, plant and equipment (1,366,500) (1,304,795) Proceeds from disposals of property, plant and equipment 3,920 3,931 Investments (535,526) (26,463,478) Proceeds from disposition of investments 1,523,062 - Collections on loans to officers and employees 132,155 485,883 ---------- ---------- Net cash used in investing activities (242,889) (27,278,459) ---------- ---------- Cash flows from financing activities: Payments on long-term debt (78,983) (107,215) Proceeds from the sale of treasury stock - - Purchases of treasury stock (1,858,231) - Dividends paid (698,461) (619,455) ---------- ---------- Net cash used in financing activities (2,635,675) (726,670) ---------- ---------- Effect of exchange rate changes on cash (81,184) (8,991) ---------- ---------- Net increase (decrease) in cash and cash equivalents $ 2,734,778 $(25,902,136) ========== ========== Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 12,030 $ 21,359 Income Taxes 128,364 745,806
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 1. Nature of Operations Matthews International Corporation, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of custom-made products which are used to identify people, places, products and events. The Company's products and operations are comprised of three business segments: Bronze, Graphic Systems and Marking Products. The Bronze segment is a leading manufacturer of cast bronze memorial products, crematories and cremation-related products. The Graphic Systems segment manufactures and provides custom identification-related products, pre-press services and imaging systems used by the corrugated and flexible packaging industries. The Marking Products segment designs, manufactures and distributes a wide range of equipment and consumables used by customers to mark or identify various consumer and industrial products, components and packaging containers. The Company has sales and manufacturing facilities in the United States, Canada, Australia and Sweden as well as sales and distribution operations in France and the United Kingdom. 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-month period ended December 31, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1997. 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, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 3. Income Taxes The income tax provision for the period is based on the effective tax rate expected to be applicable for the full year. The difference between the estimated effective tax rate of 39.5% and the Federal statutory rate of 35% primarily reflects the impact of state and foreign income taxes. MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued DECEMBER 31, 1996 Note 4. Subsequent Event On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz Litho, Inc.("Tukaiz"), a Chicago-based pre-press and pre-media firm. The remaining 50% will continue to be owned by the existing president and chief executive officer of Tukaiz. The transaction was structured as an asset purchase with the purchase price consisting of $4,000,000 cash and the assumption of a 50% interest in certain of the Company's liabilities. The parties have each agreed to contribute their respective 50% interests into a newly-formed Illinois limited liability company, Tukaiz Communications, L.L.C. Matthews also agreed to provide the new company with subordinated convertible debt of $5.5 million. Matthews has accounted for this acquisition using the purchase method and, accordingly, has recorded the acquired assets and liabilities at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets was recorded as goodwill to be amortized on a straight-line basis over 25 years. Note 5. Reclassifications Certain amounts in the 1996 consolidated financial statements have been reclassified to conform to the current year presentation. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods indicated. Three months ended Years ended December 31, September 30, ------------------ -------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- Sales 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit 44.3 45.1 44.6 44.8 45.1 Operating profit 15.5 15.7 15.6 14.7 15.1 Income before income taxes 16.7 16.6 19.5 15.0 14.9 Net income 10.1 10.3 11.8 9.3 8.8 Sales for the three months ended December 31, 1996 were $42.6 million and were $1.4 million, or 3.4%, higher than sales of $41.2 million for the first three months of fiscal 1996. The increase for the first three months of fiscal 1997 reflected higher sales in the Company's Bronze segment. Bronze segment sales were up 18% over the fiscal 1996 first quarter, primarily reflecting higher volume of memorial products as well as sales by Industrial Equipment and Engineering Company, Inc. (IEEC) of crematories and cremation-related products. Fiscal 1997 revenues of IEEC, which was acquired in March 1996, also reflected sales of All Crematory Corporation, which was acquired in August 1996. Sales for the Bronze segment increased over the prior year despite the absence of Sunland Memorial Park, Inc. (the Company's only cemetery/mortuary facility) which was sold in January 1996. Graphic Systems segment sales for the three months ended December 31, 1996 were relatively unchanged from the same period a year ago as demand for this segment's products continues to be flat. Marking Products sales for the first quarter of fiscal 1997 declined approximately 20% from the first three months of fiscal 1996. The decline, which was expected, resulted from the sale of the Division's label printer application business in September 1996 and the Company's decision in September 1996 to liquidate its German subsidiary. The label printer application business had historically produced marginal results for the Company and the German subsidiary had accumulated significant losses during the past few years. Gross profit for the three months ended December 31, 1996 was $18.9 million, or 44.3% of sales, compared to $18.6 million, or 45.1% of sales, for the first three months of fiscal 1996. The increase in gross profit of $280,000, or 1.5%, was attributable principally to the Bronze segment. Bronze gross profit improved as a result of higher sales for the current period while gross profit as a percent of sales approximated the first quarter of last year. Gross profit and gross profit as a percent of sales for the Graphic Systems segment were slightly below the prior period. Gross profit for the Marking Products segment declined from the fiscal 1996 first quarter as a result of lower sales. Gross profit as a percent of sales for the segment was relatively consistent for the periods. Selling and administrative expenses for the three months ended December 31, 1996 were $12.2 million, representing an increase of $119,000, or 1.0%, over $12.1 million for the fiscal 1996 first quarter. Selling and administrative expenses for the Bronze segment increased over the first quarter of fiscal 1996 reflecting the additions of IEEC and All Crematory Corporation. These increases were offset by reductions in Marking Products selling and administrative costs with the disposition of the label printer application business and the liquidation of the German subsidiary. Operating profit for the three months ended December 31, 1996 was $6.6 million and was $162,000, or 2.5%, higher than the first three months of fiscal 1996. Higher sales of the Bronze segment resulted in an increase in its operating profit which more than offset an operating profit decline in the Graphic Systems segment. Operating profit for the Marking Products segment was relatively unchanged from the prior period. However, the segment's operating profit percentage improved as a result of the disposition of the label printer application business and the liquidation of the German subsidiary. Operating profit of the Graphic Systems segment declined from the same period a year ago reflecting flat sales, slightly lower gross profit and increased selling and administrative costs. Consolidated operating profit for the first quarter of fiscal 1997 also reflected the favorable impact of changes to the retiree medical plan which were approved by the Board of Directors in September 1996. These changes, which provide additional plan options while limiting future Company contributions to retiree benefits, have reduced net periodic postretirement benefit cost from the prior year. The reduction was partially offset by costs associated with the Company's planned implementation of a 401(k) employee savings plan and related Company contributions. Investment income for the first quarter of fiscal 1997 was $604,000, compared to $459,000 for the first quarter of fiscal 1996. The increase reflects the Company's higher cash and investment position during the current period and a higher rate of return as a result of a shift in the Company's investments in December 1995 to short-term and intermediate-term securities of the U.S. government and its agencies and corporate obligations. These investments are designed to improve the investment rate of return on the Company's excess cash position while maintaining a sufficient degree of liquidity for future cash needs. Interest expense for the three months ended December 31, 1996 was approximately $12,000, compared to $21,000 for the first three months of fiscal 1996. Interest expense principally relates to the Company's capital lease obligations. Other income (deductions), net for the three months ended December 31, 1996 represented a net reduction to pre-tax income of $96,000 compared to a net reduction of $54,000 for the first three months of fiscal 1996. The Company's effective tax rate for the first quarter of fiscal 1997 was 39.5%, compared to 39.6% for the year ended September 30, 1996. The difference between the Company's effective tax rate and the Federal statutory rate of 35% primarily reflects the impact of state and foreign income taxes. Liquidity and Capital Resources Net cash provided by operating activities was $5.7 million for the three months ended December 31, 1996, compared to $2.1 million for the first three months of fiscal 1996. Operating cash flow was higher for the current period principally as a result of a decrease in consolidated inventory from September 30, 1996 compared to an increase in the prior period and lower income tax payments during the fiscal 1997 first quarter. Operating cash flow for both periods reflected the payment of year-end compensation and profit distribution accruals. Cash used in investing activities was approximately $243,000 for the three months ended December 31, 1996 compared to $27.3 million for the same period a year ago. Investing activities for the fiscal 1997 first quarter primarily reflected capital expenditures of $1.4 million and net proceeds from the disposition of investments of $1.5 million. Investing activities for the three months ended December 31, 1995 included capital expenditures of $1.3 million and investments of $26.5 million in short-term and intermediate-term securities of the U.S. government and its agencies and corporate obligations. The Company's investment strategies are designed to improve the investment rate of return on the Company's excess cash position while maintaining a sufficient degree of liquidity for future cash needs. Capital spending for property, plant and equipment has averaged approximately $5.1 million for the last three fiscal years. The capital budget of the Company for fiscal 1997 is $8.8 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Cash used in financing activities for the three months ended December 31, 1996 was $2.6 million consisting of treasury stock purchases, the Company's quarterly dividend of $.08 per share and repayments under the Company's capital lease agreements. Cash used in financing activities in the first three months of fiscal 1996 was $727,000 consisting of dividends and capital lease payments. Dividends for the fiscal 1996 first quarter were $.07 per share. The Company currently has available lines of credit of approximately $11 million. There were no outstanding borrowings on any of the Company's lines of credit at December 31, 1996. At December 31, 1996 and September 30, 1996 and 1995, the Company's current ratio was 2.6, 2.2 and 3.5, respectively. The Company had cash and cash equivalents at December 31, 1996 and September 30, 1996 of $15.2 million and $12.4 million, respectively. Net working capital at December 31, 1996 was $34.6 million. The Company believes that its current liquidity sources, combined with its operating cash flow and additional borrowing capacity, will be sufficient to meet its capital needs for the next 12 months. Subsequent Event On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz Litho, Inc.("Tukaiz"), a leading Chicago-based pre-press and pre-media firm. A pre-press firm prepares art or digital files for printing or reproduction. The remaining 50% will continue to be owned by the existing president and chief executive officer of Tukaiz. The transaction was structured as an asset purchase with the purchase price consisting of $4,000,000 cash and the assumption of a 50% interest in certain of the Company's liabilities. The parties have each agreed to contribute their respective 50% interests into a newly-formed Illinois limited liability company, Tukaiz Communications, L.L.C. Matthews also agreed to provide the new company with subordinated convertible debt of $5.5 million. Matthews has accounted for this acquisition using the purchase method and, accordingly, has recorded the acquired assets and liabilities at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets was recorded as goodwill to be amortized on a straight-line basis over 25 years. Tukaiz has annual sales of approximately $16.5 million and is headquartered in Franklin Park, Illinois. The combination of the Company's Graphic Systems business and Tukaiz is designed to create a leader in the graphics industry, providing a unique array of pre-press and pre-media services to ad agencies, manufacturers, printers and publishers. These services include creative design, audio, video, animation, multimedia, digital photography, web site service and on-demand digital printing. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following Exhibits to this report are filed herewith: Exhibit No. Description ------- ----------- 10.1 Asset Purchase Agreement among TKZ Holding Corp., Tukaiz Litho, Inc. and Michael Vitallo 10.2 Membership Interest Agreement among TKZ Holding Corp., Tukaiz Litho, Inc., Frank Defino, Sr. and Tukaiz Communications, L.L.C. 10.3 Subordinated Convertible Note from Tukaiz Communications, L.L.C. in favor of Venetian Investment Corporation. 10.4 Operating Agreement of Tukaiz Communications, L.L.C. between TKZ Holding Corp. and Tukaiz Litho, Inc. 11 Computation of Earnings Per Share 27 Financial Data Schedule (via EDGAR) (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTHEWS INTERNATIONAL CORPORATION (Registrant) Date 2/11/97 D.M. Kelly ------------- ----------------------------------------- D.M. Kelly, Chairman of the Board, President and Chief Executive Officer Date 2/11/97 E.J. Boyle ------------- ----------------------------------------- E. J. Boyle, Vice President, Accounting & Finance - Secretary and Treasurer