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,December 31, 2006
Commission File No. 0-9115
MATTHEWS INTERNATIONAL CORPORATION
(Exact nameName 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 JulyJanuary 31, 2006,2007, shares of common stock outstanding were:
Class A Common Stock 31,898,11132,787,829 shares
PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
| | June 30, 2006 | | September 30, 2005* | | | December 31, 2006 | | September 30, 2006 | |
| | (unaudited) | | (restated) | | | (unaudited) | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | | | $ | 36,951 | | | | | $ | 39,555 | | | | | | $ | 36,061 | | | | | $ | 29,720 | |
Short-term investments | | | | | | 85 | | | | | | 67 | | | | | | | 96 | | | | | | 92 | |
Accounts receivable, net | | | | | | 116,999 | | | | | | 115,362 | | | | | | | 116,373 | | | | | | 121,750 | |
Inventories | | | | | | 86,953 | | | | | | 71,333 | | | | | | | 95,336 | | | | | | 85,415 | |
Deferred income taxes | | | | | | | 1,687 | | | | | | 1,682 | |
Other current assets | | | | | | 6,960 | | | | | | 5,816 | | | | | | | 4,891 | | | | | | 4,184 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total current assets | | | | | | 247,948 | | | | | | 232,133 | | | | | | | 254,444 | | | | | | 242,843 | |
| | | | | | | | | | | | | | |
Investments | | | | | | 11,160 | | | | | | 11,072 | | | | | | | 10,941 | | | | | | 11,492 | |
Property, plant and equipment: Cost | | | 198,674 | | | | | | 186,232 | | | | | | | 204,936 | | | | | | 202,346 | | | | |
Less accumulated depreciation | | | (109,975 | ) | | | | | (97,365 | ) | | | | | | (117,607 | ) | | | | | (114,247 | ) | | | |
| | | | | | 88,699 | | | | | | 88,867 | | | | | | | 87,329 | | | | | | 88,099 | |
Deferred income taxes and other assets | | | | | | 27,848 | | | | | | 26,314 | | |
Deferred income taxes | | | | | | | 24,788 | | | | | | 24,441 | |
Other assets | | | | | | | 8,125 | | | | | | 6,125 | |
Goodwill | | | | | | 285,931 | | | | | | 260,672 | | | | | | | 303,377 | | | | | | 298,125 | |
Other intangible assets, net | | | | | | 45,233 | | | | | | 46,397 | | | | | | | 45,225 | | | | | | 44,965 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | $ | 706,819 | | | | | $ | 665,455 | | | | | | $ | 734,229 | | | | | $ | 716,090 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt, current maturities | | | | | $ | 28,376 | | | | | $ | 28,721 | | | | | | $ | 26,353 | | | | | $ | 28,451 | |
Accounts payable | | | | | | 21,117 | | | | | | 43,524 | | | | | | | 23,893 | | | | | | 26,925 | |
Accrued compensation | | | | | | 29,098 | | | | | | 32,858 | | | | | | | 24,494 | | | | | | 33,517 | |
Accrued income taxes | | | | | | 7,994 | | | | | | 11,640 | | | | | | | 14,601 | | | | | | 9,230 | |
Other current liabilities | | | | | | 31,157 | | | | | | 28,834 | | | | | | | 34,303 | | | | | | 39,086 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | | | | 117,742 | | | | | | 145,577 | | | | | | | 123,644 | | | | | | 137,209 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | | | | 133,708 | | | | | | 118,952 | | | | | | | 130,730 | | | | | | 120,289 | |
Postretirement benefits | | | | | | 28,959 | | | | | | 25,508 | | |
Pension and postretirement benefits | | | | | | | 36,422 | | | | | | 35,142 | |
Deferred income taxes | | | | | | 7,894 | | | | | | 7,589 | | | | | | | 10,314 | | | | | | 9,942 | |
Environmental reserve | | | | | | 9,219 | | | | | | 9,607 | | | | | | | 8,877 | | | | | | 9,028 | |
Other liabilities and deferred revenue | | | | | | 17,929 | | | | | | 20,473 | | | | | | | 13,888 | | | | | | 12,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders' equity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock | | | 36,334 | | | | | | 36,334 | | | | | | | 36,334 | | | | | | 36,334 | | | | |
Additional paid-in capital | | | 33,240 | | | | | | 29,524 | | | | | |
Additional paid in capital | | | | 35,232 | | | | | | 33,953 | | | | |
Retained earnings | | | 392,962 | | | | | | 350,311 | | | | | | | 422,430 | | | | | | 410,203 | | | | |
Accumulated other comprehensive income (loss) | | | 4,849 | | | | | | (1,359 | ) | | | | |
Accumulated other comprehensive income | | | | 9,129 | | | | | | 4,386 | | | | |
Treasury stock, at cost | | | (76,017 | ) | | | | | (77,061 | ) | | | | | | (92,771 | ) | | | | | (92,451 | ) | | | |
| | | | | | 391,368 | | | | | | 337,749 | | | | | | | 410,354 | | | | | | 392,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | | | | $ | 706,819 | | | | | $ | 665,455 | | | | | | $ | 734,229 | | | | | $ | 716,090 | |
*See Note 3 for discussion
The accompanying notes are an integral part of the retrospective adoption of SFAS No. 123(R).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 | | | Three Months Ended | |
| | June 30, | | June 30, | | | December 31, | |
| | 2006 | | 2005* | | 2006 | | 2005* | | | 2006 | | 2005 | |
| | | | (restated) | | | | (restated) | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Sales | | $ | 181,804 | | $ | 158,983 | | $ | 532,981 | | $ | 463,932 | | | $ | 175,424 | | $ | 170,109 | |
Cost of sales | | | (111,515 | ) | | (101,863 | ) | | (334,548 | ) | | (304,007 | ) | | | (110,490 | ) | | (108,912 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 70,289 | | | 57,120 | | | 198,433 | | | 159,925 | | | | 64,934 | | | 61,197 | |
| | | | | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | (39,766 | ) | | (30,516 | ) | | (116,431 | ) | | (88,320 | ) | | | (40,750 | ) | | (38,779 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 30,523 | | | 26,604 | | | 82,002 | | | 71,605 | | | | 24,184 | | | 22,418 | |
| | | | | | | | | | | | | | | | | | | | |
Investment income | | | 366 | | | 366 | | | 937 | | | 1,005 | | | | 411 | | | 327 | |
Interest expense | | | (1,924 | ) | | (519 | ) | | (4,940 | ) | | (1,540 | ) | | | (1,816 | ) | | (1,440 | ) |
Other income (deductions), net | | | 130 | | | (39 | ) | | 79 | | | 1,552 | | | | 131 | | | (33 | ) |
Minority interest | | | (720 | ) | | (1,230 | ) | | (2,012 | ) | | (3,802 | ) | | | (520 | ) | | (588 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 28,375 | | | 25,182 | | | 76,066 | | | 68,820 | | | | 22,390 | | | 20,684 | |
| | | | | | | | | | | | | | | | | | | | |
Income taxes | | | (10,669 | ) | | (9,569 | ) | | (28,601 | ) | | (26,151 | ) | | | (8,419 | ) | | (7,777 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 17,706 | | $ | 15,613 | | $ | 47,465 | | $ | 42,669 | | | $ | 13,971 | | $ | 12,907 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | .55 | | $ | .49 | | $ | 1.48 | | $ | 1.33 | | | | $.44 | | | $.40 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | .55 | | $ | .49 | | $ | 1.47 | | $ | 1.32 | | | | $.44 | | | $.40 | |
*See Note 3 for discussionThe accompanying notes are an integral part of the retrospective adoption of SFAS No. 123(R).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 | | | Three Months Ended | |
| | June 30, | | | December 31, | |
| | 2006 | | 2005* | | | 2006 | | 2005 | |
| | | | (restated) | | | | | | |
| | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 47,465 | | $ | 42,669 | | | $ | 13,971 | | $ | 12,907 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | | | 16,165 | | | 14,724 | | | | 5,311 | | | 5,400 | |
Net gain on sale of assets | | | | (635 | ) | | (72 | ) |
Minority interest | | | 2,012 | | | 3,802 | | | | 520 | | | 588 | |
Stock-based compensation expense | | | 3,189 | | | 2,377 | | | | 872 | | | 1,361 | |
Change in deferred taxes | | | (949 | ) | | (1,192 | ) | | | (181 | ) | | (287 | ) |
Changes in working capital items | | | (36,651 | ) | | (8,397 | ) | | | (10,011 | ) | | (5,424 | ) |
Increase (decrease) in other assets | | | (180 | ) | | 1,219 | | |
Decrease in other liabilities | | | (581 | ) | | (440 | ) | |
Increase in postretirement benefits | | | 3,988 | | | 2,842 | | |
Net gain on sale of assets | | | (105 | ) | | (188 | ) | |
Increase in other assets | | | | (2,311 | ) | | (275 | ) |
Increase in other liabilities | | | | 1,864 | | | 76 | |
Increase in pension and postretirement benefits | | | | 1,280 | | | 1,131 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 34,353 | | | 57,416 | | | | 10,680 | | | 15,405 | |
| | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Capital expenditures | | | (11,978 | ) | | (21,636 | ) | | | (3,531 | ) | | (3,804 | ) |
Proceeds from sale of assets | | | 190 | | | 867 | | | | 784 | | | 53 | |
Acquisitions, net of cash acquired | | | (29,946 | ) | | (14,210 | ) | | | (7,757 | ) | | (9,533 | ) |
Proceeds from sale of investments | | | | 265 | | | - | |
Purchases of investments | | | (166 | ) | | (11,554 | ) | | | (67 | ) | | (49 | ) |
Proceeds from disposition of investments | | | 11 | | | 1,519 | | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (41,889 | ) | | (45,014 | ) | | | (10,306 | ) | | (13,333 | ) |
| | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from long-term debt | | | 52,433 | | | 12,518 | | | | 20,000 | | | 7,327 | |
Payments on long-term debt | | | (41,394 | ) | | (18,520 | ) | | | (12,644 | ) | | (11,357 | ) |
Proceeds from the sale of treasury stock | | | 1,869 | | | 5,351 | | | | 2,121 | | | 326 | |
Purchases of treasury stock | | | (877 | ) | | (27,932 | ) | | | (2,645 | ) | | - | |
Tax benefit of exercised stock options | | | 816 | | | 2,765 | | | | 897 | | | 281 | |
Dividends | | | (4,815 | ) | | (4,323 | ) | | | (1,744 | ) | | (1,603 | ) |
Distributions to minority interests | | | (4,254 | ) | | (4,394 | ) | | | (766 | ) | | (3,726 | ) |
| | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 3,778 | | | (34,535 | ) | | | 5,219 | | | (8,752 | ) |
| | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 1,154 | | | (3,436 | ) | | | 748 | | | (599 | ) |
| | | | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | $ | (2,604 | ) | $ | (25,569 | ) | |
Net increase (decrease) in cash and cash equivalents | | | $ | 6,341 | | $ | (7,279 | ) |
*See Note 3 for discussionThe accompanying notes are an integral part of the retrospective adoption of SFAS No. 123(R).these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,December 31, 2006
(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 corrugatedprimary packaging and primary packagingcorrugated industries. The Marking Products segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, and industrial automation products for identifying, tracking and conveying various consumer and industrial products, components and packaging containers. The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services.
The Company has manufacturing and marketing facilities in the United States, Canada, Mexico, Australia, and Europe.
Note 2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended June 30,December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006.2007. 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, 2005. Certain amounts derived from the Annual Report on Form 10-K for the year ended September 30, 2005 have been restated for the retrospective adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Stock-Based Payment”, (“SFAS No. 123(R)”) (See Note 3).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.
In November 2005,Reclassifications and restatements:
Certain reclassifications have been made in the FASB issued FSP FAS 115-1 and FAS 124-1, "The MeaningConsolidated Statements of Other-Than-Temporary Impairment and Its ApplicationCash Flows for prior periods to Certain Investments" ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequentconform to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 was adopted by the Company in the second quarter of fiscal 2006 as required and had no material impact on the Company’s consolidated financial position and results of operations.current period presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Reclassifications and restatements:
Prior period amounts have been adjusted to reflect the modified retrospective adoption method of SFAS No. 123(R) (See Note 3). In addition, certain reclassifications have been made in the Consolidated Statements of Cash Flows and Consolidated Balance Sheets for prior periods to conform to the current period presentation.
Note 3. Stock-Based CompensationShare-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.stock (4,755,502 at December 31, 2006). 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. The aggregate number of shares of the Company's common stock that may be issued upon exercise of stock options was 4,811,808 shares at June 30, 2006. Outstanding stock options are exercisable in various share amounts based onone-third increments upon the attainment of certain10%, 33% and 60% appreciation in the market value levels 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 certain market value levels)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.
Prior to October 1, 2005, the Company accounted for its stock-based compensation plan in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and provided the required pro-forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation”, (“SFAS No. 123”). Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 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. In accordance with SFAS No. 123(R), financial statements for all periods prior to October 1, 2005 have been adjusted to give effect to the fair-value based method of accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as pro-forma adjustments have been reflected in earnings for all prior periods.
The following table details the impact of retrospective application of SFAS No. 123(R) on previously reported amounts:
| | Restated | | As previously reported | |
For the quarter ended June 30, 2005: | | | | | | | |
Operating profit | | $ | 26,604 | | $ | 27,477 | |
Income before income taxes | | $ | 25,182 | | $ | 26,055 | |
Net income | | $ | 15,613 | | $ | 16,154 | |
Earnings per share of common stock: | | | | | | | |
Basic | | $ | .49 | | $ | .50 | |
Diluted | | $ | .49 | | $ | .50 | |
| | | | | | | |
For the nine months ended June 30, 2005: | | | | | | | |
Operating profit | | $ | 71,605 | | $ | 73,981 | |
Income before income taxes | | $ | 68,820 | | $ | 71,196 | |
Net income | | $ | 42,669 | | $ | 44,142 | |
Earnings per share of common stock: | | | | | | | |
Basic | | $ | 1.33 | | $ | 1.37 | |
Diluted | | $ | 1.32 | | $ | 1.36 | |
Net cash provided by operating activities | | $ | 57,416 | | $ | 60,182 | |
Net cash used in financing activities | | $ | 34,535 | | $ | 37,300 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
| | | | As previously | |
| | Restated | | reported | |
At September 30, 2005: | | | | | | | |
Deferred income taxes and other assets | | $ | 26,314 | | $ | 22,926 | |
Total assets | | $ | 665,455 | | $ | 662,067 | |
Additional paid-in capital | | $ | 29,524 | | $ | 14,113 | |
Retained earnings | | $ | 350,311 | | $ | 362,334 | |
Total shareholders’ equity | | $ | 337,749 | | $ | 334,361 | |
For the three monththree-month periods ended June 30,December 31, 2006 and 2005, stock-based compensation cost totaled $741$872 and $874, respectively. For the nine month periods ended June 30, 2006 and 2005, stock-based compensation cost totaled $3,189 and $2,377,$1,361, respectively. The associated future income tax benefit recognized was $289$340 and $332$531 for the three monththree-month periods ended June 30, 2006 and 2005, respectively, and was $1,243 and $903 for the nine month periods ended June 30,December 31, 2006 and 2005, respectively.
TheFor the three-month periods ended December 31, 2006 and 2005, the amount of cash received from the exercise of stock options was $448$2,121 and $874, for the three month periods ended June 30, 2006 and 2005, respectively, and $1,869 and $5,351 for the nine month periods ended June 30, 2006 and 2005,$326, respectively. In connection with these exercises, the tax benefits realized by the Company were $106 and $470 for the three monththree-month periods ended June 30,December 31, 2006 and 2005 respectively,were $897 and $816 and $2,765 for the nine month periods ended June 30, 2006 and 2005,$281, respectively.
The transactions for shares under options for the nine monthsquarter ended June 30,December 31, 2006 were as follows:
| | | | | | Weighted- | | | | | | | | | Weighted- | | | |
| | | | Weighted- | | average | | Aggregate | | | | | | | average | | Aggregate | |
| | | | average | | remaining | | intrinsic | | | | | Weighted-average | | remaining | | intrinsic | |
| | Shares | | exercise price | | contractual term | | value | | | Shares | | exercise price | | contractual term | | value | |
Outstanding, September 30, 2005 | | | 2,090,607 | | $ | 25.50 | | | | | | | | |
Outstanding, September 30, 2006 | | | | 2,529,451 | | $ | 28.75 | | | | | | | |
Granted | | | 610,500 | | | 37.31 | | | | | | | | | | 372,650 | | | 40.56 | | | | | | | |
Exercised | | | 100,832 | | | 16.62 | | | | | | | | | | (113,843 | ) | | 18.15 | | | | | | | |
Expired or forfeited | | | 37,556 | | | 25.24 | | | | | | | | | | (5,333 | ) | | 32.15 | | | | | | | |
Outstanding, June 30, 2006 | | | 2,562,719 | | $ | 28.66 | | | 7.3 | | $ | 14,880 | | |
Exercisable, June 30, 2006 | | | 881,543 | | $ | 20.85 | | | 5.5 | | $ | 12,009 | | |
Outstanding, December 31, 2006 | | | | 2,782,925 | | $ | 30.76 | | | 7.3 | | $ | 23,905 | |
Exercisable, December 31, 2006 | | | | 830,613 | | $ | 22.06 | | | 5.3 | | $ | 14,360 | |
Shares reserved for future options | | | 2,249,089 | | | | | | | | | | | | | 1,972,577 | | | | | | | | | | |
The weighted-average grant date fair value of options granted for the nine monththree-month periods ended June 30,December 31, 2006 and 2005 was $9.47$12.23 and $11.61,$9.47, respectively. The fair value of shares earned was $3,594 and $1,723 during the nine monththree-month periods ended June 30,December 31, 2006 and 2005 respectively. No shares were earned in the three month periods ended June 30, 2006was $1,820 and 2005.$1,624 , 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 ninethree- month periods ended June 30,December 31, 2006 and 2005 was $2,157$2,300 and $8,019,$787, respectively.
The transactions for non-vested shares for the nine months ended June 30, 2006 were as follows:
| | | | Weighted-average | |
| | | | grant-date | |
| | Shares | | fair value | |
Non-vested at October 1, 2005 | | | 1,621,874 | | $ | 9.58 | |
Granted | | | 610,500 | | | 9.47 | |
Vested | | | (515,976 | ) | | 6.97 | |
Expired or forfeited | | | (35,222 | ) | | 7.97 | |
Non-vested at June 30, 2006 | | | 1,681,176 | | $ | 9.67 | |
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 quarter ended December 31, 2006 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 | | | 372,650 | | | 12.23 | |
Vested | | | (230,299 | ) | | 7.90 | |
Expired or forfeited | | | (4,917 | ) | | 7.97 | |
Non-vested at December 31, 2006 | | | 1,952,312 | | $ | 10.53 | |
As of June 30,December 31, 2006 the total unrecognized compensation cost related to non-vested stock options was approximately $5,657.$7,809. This cost is expected to be recognized over a weighted-average period of 3.74.0 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. Prior to October 1, 2005, the fair value of each option award was estimated on the grant date using a Black-Scholes valuation model. The following table indicates the assumptions used in estimating fair value for the nine month periodsquarters ended June 30,December 31, 2006 and 2005. | | Three Months Ended | |
| | December 31, | |
| | 2006 | | 2005 | |
| | (Binomial Lattice) | | (Binomial Lattice) | |
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 | |
| | Nine Months Ended June 30, | |
| |
| | 2006 | | | | 2005 | |
| | (Binomial Lattice) | | | | (Black-Scholes) | |
Expected volatility | | | 24.0 | % | | | | | 24.2 | % |
Dividend yield | | | .6 | % | | | | | 1.0 | % |
Average risk free interest rate | | | 4.4 | % | | | | | 3.9 | % |
Average expected term (years) | | | 5.5 | | | | | | 7.9 | |
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 implied volatility of market traded options and the historical volatility of the Company’s stock price. The expected term represents an estimate of the period of time options are expected to remain outstanding. Separate employee groups and option characteristics are considered separately for valuation purposes.
In the first quarter of fiscal 2007, 15,209 shares of restricted stock were granted to certain employees. The shares generally vest based upon certain service and performance criteria. The unrecognized compensation cost related to the unvested shares was approximately $380 at December 31, 2006.
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 50,44149,569 shares had been deferred under the Director Fee Plan at June 30,December 31, 2006. Additionally, beginning in fiscal 2005, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $40. A total of 22,300 stock options have been granted under the plan, all of which were outstanding and unvested at June 30,December 31, 2006. Additionally, 4,800 shares of restricted stock werehave been granted in March 2006 under the plan. The restricted shares generally vest two years after the dateplan, all of issuance.which are unvested at December 31, 2006. 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 3. Share-Based Payments (continued)
In 2007, the Company intends to change the value of the annual stock-based grant to $50 and the annual retainer for each Committee chairperson to $5 (or $7.5 in the case of the Audit Committee chairperson). Additionally, a non-employee Chairman of the Board will receive an additional annual retainer fee of $45 which, at the election of the Chairman, may be received in cash, current shares of the Company’s Common Stock or Common Stock credited to a deferred stock account as phantom stock. A non-employee Chairman will not be eligible for meeting fees.
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 20062007 of 37.6% and the Federal statutory rate of 35.0% 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, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Net income | | $ | 17,706 | | $ | 15,613 | | $ | 47,465 | | $ | 42,669 | |
| | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 32,110,431 | | | 31,958,308 | | | 32,076,674 | | | 32,144,329 | |
Dilutive securities, primarily stock options | | | 184,699 | | | 207,064 | | | 255,494 | | | 227,631 | |
Diluted weighted-average common shares outstanding | | | 32,295,130 | | | 32,165,372 | | | 32,332,168 | | | 32,371,960 | |
| | | | | | | | | | | | | |
Basic earnings per share | | $ | .55 | | $ | .49 | | $ | 1.48 | | $ | 1.33 | |
Diluted earnings per share | | $ | .55 | | $ | .49 | | $ | 1.47 | | $ | 1.32 | |
Net income and earnings per share for 2005 have been restated to reflect the adoption of SFAS No. 123(R) (see Note 3). | | Three Months Ended | |
| | December 31, | |
| | 2006 | | 2005 | |
| | | | | |
Net income | | $ | 13,971 | | $ | 12,907 | |
| | | | | | | |
Weighted-average common shares outstanding | | | 31,667,019 | | | 32,037,851 | |
Dilutive securities, primarily stock options | | | 184,265 | | | 261,805 | |
Diluted weighted-average common shares outstanding | | | 31,851,284 | | | 32,299,656 | |
| | | | | | | |
Basic earnings per share | | | $.44 | | | $.40 | |
Diluted earnings per share | | | $.44 | | | $.40 | |
Note 6. Segment InformationComprehensive Income
The Company's productsComprehensive 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 operations consist of two principal businesses that are comprised oflosses and minimum pension liability. For the three operating segments each, as described under Nature of Operations (Note 1): Memorialization Products (Bronze, Casketmonths ended December 31, 2006 and Cremation)2005, comprehensive income was $18,714 and Brand Solutions (Graphics Imaging, Marking Products and 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.
The Company adopted SFAS No. 123(R), effective October 1, 2005 (see Note 3). Accordingly, the impact of stock options granted has been included in the operating results noted below, with prior periods restated to include the pro- forma amounts previously reported under SFAS No. 123 using a Black-Scholes valuation model.
Information about the Company's segments follows:
| | Three Months Ended | | Nine Months Ended | |
| | June 30, | | June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Sales to external customers: | | | | | | | | | | | | | |
Memorialization: | | | | | | | | | | | | | |
Bronze | | $ | 57,365 | | $ | 55,573 | | $ | 159,187 | | $ | 150,136 | |
Casket | | | 49,790 | | | 29,910 | | | 153,188 | | | 92,785 | |
Cremation | | | 6,907 | | | 5,283 | | | 19,289 | | | 15,982 | |
| | | 114,062 | | | 90,766 | | | 331,664 | | | 258,903 | |
Brand Solutions: | | | | | | | | | | | | | |
Graphics Imaging | | | 35,919 | | | 36,175 | | | 103,467 | | | 106,578 | |
Marking Products | | | 13,130 | | | 11,864 | | | 38,418 | | | 32,747 | |
Merchandising Solutions | | | 18,693 | | | 20,178 | | | 59,432 | | | 65,704 | |
| | | 67,742 | | | 68,217 | | | 201,317 | | | 205,029 | |
| | | | | | | | | | | | | |
| | $ | 181,804 | | $ | 158,983 | | $ | 532,981 | | $ | 463,932 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | |
| | | |
| | 2006 | | | | 2005 | | | | 2006 | | | | 2005 | |
Operating profit: | | | | | | | | | | | | | | | | | | | | | | |
Memorialization: | | | | | | | | | | | | | | | | | | | | | | |
Bronze | | $ | 17,032 | | | | | $ | 16,590 | | | | | $ | 43,983 | | | | | $ | 41,332 | |
Casket | | | 5,100 | | | | | | 3,351 | | | | | | 15,597 | | | | | | 11,910 | |
Cremation | | | 1,019 | | | | | | 98 | | | | | | 2,707 | | | | | | 83 | |
| | | 23,151 | | | | | | 20,039 | | | | | | 62,287 | | | | | | 53,325 | |
Brand Solutions: | | | | | | | | | | | | | | | | | | | | | | |
Graphics Imaging | | | 3,938 | | | | | | 3,731 | | | | | | 11,556 | | | | | | 10,399 | |
Marking Products | | | 2,240 | | | | | | 2,342 | | | | | | 6,596 | | | | | | 5,459 | |
Merchandising Solutions | | | 1,194 | | | | | | 492 | | | | | | 1,563 | | | | | | 2,422 | |
| | | 7,372 | | | | | | 6,565 | | | | | | 19,715 | | | | | | 18,280 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | $ | 30,523 | | | | | $ | 26,604 | | | | | $ | 82,002 | | | | | $ | 71,605 | |
$10,807, respectively.
Note 7. Comprehensive IncomeSegment Information
ComprehensiveThe 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 consists oftaxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), 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, 2006 and 2005, comprehensive income was $24,367 and $8,242, respectively. For the nine months ended June 30, 2006 and 2005, comprehensive income was $53,673 and $39,816, respectively. Comprehensive income for the three and nine month periods ended June 30, 2005 has been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).minority interest.
Note 8. 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 performs its annual impairment review in the second fiscal quarter.
Changes to goodwill, net of accumulated amortization, for the nine months ended June 30, 2006, were as follows.
| | | | | | | | Graphics | | Marking | | Merchandising | | | |
| | Bronze | | Casket | | Cremation | | Imaging | | Products | | Solutions | | Consolidated | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2005 | | $ | 73,029 | | $ | 91,977 | | $ | 6,536 | | $ | 73,970 | | $ | 5,213 | | $ | 9,947 | | $ | 260,672 | |
Additions during period | | | - | | | 13,621 | | | - | | | 6,344 | | | - | | | - | | | 19,965 | |
Translation and other adjustments | | | 1,342 | | | - | | | - | | | 3,952 | | | - | | | - | | | 5,294 | |
Balance at June 30, 2006 | | $ | 74,371 | | $ | 105,598 | | $ | 6,536 | | $ | 84,266 | | $ | 5,213 | | $ | 9,947 | | $ | 285,931 | |
The additions to Graphics Imaging goodwill relate primarily to the purchase of the Doyle Group. The additions to Casket goodwill primarily relate to the acquisition of Royal Casket Company and a smaller domestic casket distributor.
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, 2006 and September 30, 2005, respectively.
Note 7. Segment Information (continued)
| | Carrying | | Accumulated | | | |
| | Amount | | Amortization | | Net | |
June 30, 2006: | | | | | | | | | | |
Trade names | | $ | 23,914 | | $ | - * | | $ | 23,914 | |
Customer relationships | | | 20,874 | | | (2,414 | ) | | 18,460 | |
Copyrights/patents/other | | | 5,088 | | | (2,229 | ) | | 2,859 | |
| | $ | 49,876 | | $ | (4,643 | ) | $ | 45,233 | |
| | | | | | | | | | |
| | | | | | | | | | |
September 30, 2005: | | | | | | | | | | |
Trade names | | $ | 23,585 | | $ | - * | | $ | 23,585 | |
Customer relationships | | | 20,778 | | | (1,517 | ) | | 19,261 | |
Copyrights/patents/other | | | 4,952 | | | (1,401 | ) | | 3,551 | |
| | $ | 49,315 | | $ | (2,918 | ) | $ | 46,397 | |
* Not subject to amortization | | | | | | | | | | |
Information about the Company's segments follows:
The decrease in intangible assets during fiscal 2006 was due to amortization, partially offset by the impact of fluctuations in foreign currency exchange rates on intangible assets denominated in foreign currencies. | | Three Months Ended | |
| | December 31, | |
| | 2006 | | 2005 | |
Sales to external customers: | | | | | | | |
Memorialization: | | | | | | | |
Bronze | | $ | 50,428 | | $ | 48,684 | |
Casket | | | 53,823 | | | 48,194 | |
Cremation | | | 6,634 | | | 5,710 | |
| | | 110,885 | | | 102,588 | |
Brand Solutions: | | | | | | | |
Graphics Imaging | | | 33,751 | | | 33,290 | |
Marking Products | | | 13,680 | | | 12,261 | |
Merchandising Solutions | | | 17,108 | | | 21,970 | |
| | | 64,539 | | | 67,521 | |
| | | | | | | |
| | $ | 175,424 | | $ | 170,109 | |
Amortization expense on intangible assets was $545 and $430 for the three month periods ended June 30, 2006 and 2005, respectively. For the nine month periods ended June 30, 2006 and 2005, amortization expense was $1,635 and $1,262, respectively. Amortization expense is estimated to be $2,150 in 2006, $1,800 in 2007, $1,800 in 2008, $1,750 in 2009 and $1,300 in 2010.
Operating profit: | | | | | | | |
Memorialization: | | | | | | | |
Bronze | | $ | 11,626 | | $ | 11,926 | |
Casket | | | 5,911 | | | 3,588 | |
Cremation | | | 776 | | | 573 | |
| | | 18,313 | | | 16,087 | |
Brand Solutions: | | | | | | | |
Graphics Imaging | | | 2,190 | | | 3,554 | |
Marking Products | | | 2,386 | | | 1,935 | |
Merchandising Solutions | | | 1,295 | | | 842 | |
| | | 5,871 | | | 6,331 | |
| | | | | | | |
| | $ | 24,184 | | $ | 22,418 | |
Note 9.8. Debt
The Company has a Revolving Credit Facility with a syndicate of financial institutions which allows for borrowings up to $150,000. 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. Outstanding borrowings on the Revolving Credit Facility at June 30,December 31, 2006 were $134,000.$133,333. The weighted-average interest rate on outstanding borrowings at June 30,December 31, 2006 and 2005 was 4.94%5.10% and 3.16%3.75%, 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 .75%.50% at June 30,December 31, 2006). The interest rate swap
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Note 8. Debt (continued)
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 $2,500 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 .75%.50% at June 30,December 31, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
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 highly 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 $2,138$1,289 ($1,304786 after tax) at June 30,December 31, 2006 that is included in shareholders’ equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30,December 31, 2006, approximately $460$337 of the $1,304$786 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,December 31, 2006, outstanding borrowings under the credit facility totaled 10.08.5 million Euros ($12,792)11,221). The weighted-average interest rate on outstanding borrowings of MIGmbH at June 30,December 31, 2006 and 2005 was 3.35%3.93% and 2.80%2.87%, 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 8.37.8 million Euros ($10,600)10,284) at June 30,December 31, 2006. Caggiati S.p.A. also has three lines of credit totaling 8.4 million Euros ($10,707)11,049) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million645,000 Euros ($2,836)851) at June 30,December 31, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30,December 31, 2006 and 2005 was 3.16%3.24% and 2.89%2.85%, respectively.
Note 9. 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 December 31, | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Service cost | | $ | 1,003 | | $ | 1,127 | | $ | 133 | | $ | 158 | |
Interest cost | | | 1,640 | | | 1,475 | | | 297 | | | 307 | |
Expected return on plan assets | | | (1,612 | ) | | (1,708 | ) | | - | | | - | |
Amortization: | | | | | | | | | | | | | |
Prior service cost | | | 3 | | | (4 | ) | | (322 | ) | | (322 | ) |
Net actuarial loss | | | 385 | | | 499 | | | 72 | | | 161 | |
| | | | | | | | | | | | | |
Net benefit cost | | $ | 1,419 | | $ | 1,389 | | $ | 180 | | $ | 304 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Note 9. Pension and Other Postretirement Benefit Plans (continued)
Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made 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 year 2007. As of December 31, 2006, contributions of $74 and $305 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $241 and $707 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2007.
Note 10. Acquisitions
On March 1, 2006, the Company acquired Royal Casket Company (“Royal”), a distributor of primarily York brand caskets in the Southwest region of the United States. The transaction was structured as an asset purchase, with potential additional consideration payable contingent upon the operating performance of the acquired operations during the next five years. The Company expects to account for this consideration as additional purchase price. The excess of purchase price over the fair market value of net assets acquired was allocated to goodwill. The acquisition was intended to expand Matthews’ casket distribution capabilities in the Southwestern United States.
On February 23, 2006, the Company acquired The Doyle Group (“Doyle”), a provider of reprographic services to the packaging industry, located in Oakland, California. The transaction was structured as an asset purchase, with potential additional consideration payable contingent upon the operating performance of the acquired operations during the next three 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 the Company’s graphics business in the Western United States.
On September 30, 2005, the Company acquired an additional 30% interest in S+T for a price of $8,300, which was paid in October 2005. The Company had acquired a 50% interest in S+T in 1998.
In July 2005, the Company acquired Milso, a leading manufacturer and marketer of caskets in the United States. Milso, headquartered in Brooklyn, New York, has a manufacturing operation in Richmond, Indiana and maintains distribution centers throughout the Northeast, Mid-Atlantic, Midwest and Southwest regions of the United States. The transaction was structured as an asset purchase, at an initial purchase price of approximately $95,000. In connection with the contingent consideration provisions of the acquisition agreement, the Company paid additional purchase consideration of $7,000 in December 2006. The additional consideration was recorded as additional purchase price as of September 30, 2006. The acquisition was intended to expand Matthews’ products and services in the United States casket market.
Note 10. Pension11. Goodwill 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:
Intangible Assets
| | Pension | | Other Postretirement | |
Three months ended June 30, | | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | |
Service cost | | $ | 1,082 | | $ | 927 | | $ | 158 | | $ | 127 | |
Interest cost | | | 1,481 | | | 1,404 | | | 307 | | | 293 | |
Expected return on plan assets | | | (1,708 | ) | | (1,585 | ) | | - | | | - | |
Amortization: | | | | | | | | | | | | | |
Prior service cost | | | (4 | ) | | 21 | | | (322 | ) | | (322 | ) |
Net actuarial loss | | | 436 | | | 344 | | | 161 | | | 124 | |
Net benefit cost | | $ | 1,287 | | $ | 1,111 | | $ | 304 | | $ | 222 | |
| | Pension | | Other Postretirement | |
Nine months ended June 30, | | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | |
Service cost | | $ | 3,246 | | $ | 2,781 | | $ | 474 | | $ | 380 | |
Interest cost | | | 4,443 | | | 4,212 | | | 921 | | | 879 | |
Expected return on plan assets | | | (5,124 | ) | | (4,753 | ) | | - | | | - | |
Amortization: | | | | | | | | | | | | | |
Prior service cost | | | (12 | ) | | 63 | | | (966 | ) | | (966 | ) |
Net actuarial loss | | | 1,308 | | | 1,033 | | | 483 | | | 371 | |
Net benefit cost | | $ | 3,861 | | $ | 3,336 | | $ | 912 | | $ | 664 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Benefit payments underGoodwill related to business combinations is not amortized but is subject to annual review for impairment. In general, when 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. The Company does not currently expect to make any significant contributions tocarrying value of a reporting unit exceeds its principal retirement plan in fiscal 2006. Asimplied fair value, an impairment loss must be recognized. For purposes of June 30, 2006, contributions of $222 and $1,102 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $74 and $350 under the supplemental retirement plan and postretirement plan, respectively,testing for the remainder of fiscal 2006.
Note 11. Acquisitions
Acquisition spending, net of cash acquired, during the nine months ended June 30, 2006 totaled $29,946, and primarily included the following:
On March 1, 2006,impairment the Company acquired Royal Casket Company (“Royal”),uses a distributorcombination 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 acquisition was intended to expand Matthews’ casket distribution capabilities in the Southwestern United States.
On February 23, 2006, the Company acquired the Doyle Group (“Doyle”), a provider of reprographic services to the packaging industry, located in Oakland, California. The transaction was structured as an asset purchase, with potential additional consideration payable contingent upon the operating performance of the acquired operations during the next three years. The acquisition was intended to expand the Company’s graphics business in the Western United States.
On September 30, 2005, the Company acquired an additional 30% interest in S+T, which was paid in October 2005. The Company had acquired a 50% interest in S+T in 1998.
In July 2005, the Company acquired Milso Industries (“Milso”), a leading manufacturer and distributor of caskets in the United States. Milso, headquartered in Brooklyn, New York, has manufacturing operations in Richmond, Indiana and maintains distribution centers throughout the Northeast, Mid-Atlantic, Midwest and Southwest regions of the United States. The transaction was structured as an asset purchase, at an initial purchase price of approximately $95,000. The transaction was also structured to include potential additional consideration of $7,500 contingent on the fiscal 2006 performance of the acquired operations. The Company expects to account for this consideration as additional purchase price. The acquisition was intended to expand Matthews’ products and services in the United States casket market.
Acquired intangible assets of Milso include trade names with an assigned value of $5,800, which are not subject to amortization.valuation techniques, including discounted cash flows. Intangible assets also include customer relationships with an assigned value of $10,400 to beare amortized over their estimated useful lives of 20 years.
The following unaudited pro-forma information presentsunless such lives are considered to be indefinite. A significant decline in cash flows generated from these assets may result in a summarywrite-down of the consolidated resultscarrying values of Matthews combined with Milso as if the acquisition had occurred on October 1, 2004:
| | Three Months Ended | | Nine Months Ended | |
| | June 30, | | June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Sales | | $ | 181,804 | | $ | 182,776 | | $ | 532,981 | | $ | 531,332 | |
Income before taxes | | | 28,375 | | | 28,334 | | | 76,066 | | | 73,519 | |
Net income | | | 17,706 | | | 17,568 | | | 47,465 | | | 45,583 | |
Earnings per share | | $ | .55 | | $ | .55 | | $ | 1.47 | | $ | 1.41 | |
related assets. The Company performs its annual impairment review in the second fiscal quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
These unaudited pro-forma results have been preparedNote 11. Goodwill and Other Intangible Assets (continued)
Changes to goodwill, net of accumulated amortization, for comparative purposes onlythe three months ended December 31, 2006, 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 | | | - | | | 385 | | | - | | | 757 | | | - | | | - | | | 1,142 | |
Translation and other adjustments | | | 1,011 | | | - | | | - | | | 3,099 | | | - | | | - | | | 4,110 | |
Balance at December 31, 2006 | | $ | 75,189 | | $ | 116,367 | | $ | 6,536 | | $ | 90,125 | | $ | 5,213 | | $ | 9,947 | | $ | 303,377 | |
The additions to Graphics Imaging goodwill relate to additional consideration paid in accordance with the purchase agreement related to a European Graphics business. The addition to Casket goodwill relates to the acquisition of small domestic casket distributors.
The following tables summarize the carrying amounts and include certain adjustments, suchrelated accumulated amortization for intangible assets as interestof December 31, 2006 and September 30, 2006, respectively.
| | Carrying | | Accumulated | | | |
| | Amount | | Amortization | | Net | |
December 31, 2006: | | | | | | | | | | |
Trade names | | $ | 24,332 | | $ | - * | | $ | 24,332 | |
Customer relationships | | | 20,996 | | | (3,025 | ) | | 17,971 | |
Copyrights/patents/other | | | 5,831 | | | (2,909 | ) | | 2,922 | |
| | $ | 51,159 | | $ | (5,934 | ) | $ | 45,225 | |
| | | | | | | | | | |
| | | | | | | | | | |
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 quarter ended December 31, 2006 was due to the addition of intellectual property in the Graphics Imaging segment and the impact of fluctuations in foreign currency exchange rates on intangible assets denominated in foreign currencies, offset by additional amortization.
Amortization expense on acquisition debt. The pro-forma information does not purportintangible assets was $627 and $545 for the three-month periods ended December 31, 2006 and 2005, respectively. Amortization expense is estimated to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result$1,995 in the future.2007, $1,996 in 2008, $1,934 in 2009, $1,694 in 2010 and $1,662 in 2011.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
Note 12. Accounting Pronouncements
In June 2005,2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings in the period of adoption. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” which amends SFAS 87, 88, 106 and 132(R). 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 paid additional considerationwill 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 minority ownerplan assets and benefit obligations of Rudolf Reproflex GmbH (“Rudolf”) under the termsdefined benefit postretirement plans as of the original acquisition agreement.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 had acquiredcurrently 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 75% interest in Rudolf in 2001.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 (“Matthews” or the “Company”) 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, 2005.2006. Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company’s products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates or as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, and technological factors beyond the Company's control. In addition, although the Company does not have any single customer that would be considered individually significant to consolidated sales, the potential loss of one or more of the Company’s larger customers could be considered a risk factor.
Results of Operations:
The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods indicated.
| | Nine months ended | | Years ended | | | Three months ended | | Years ended | |
| | June 30, | | September 30, | | | December 31, | | September 30, | |
| | 2006 | | 2005* | | 2005* | | 2004* | | | 2006 | | 2005 | | 2006 | | 2005 | |
Sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | | | 37.2 | % | | 34.5 | % | | 34.9 | % | | 38.1 | % | | | 37.0 | % | | 36.0 | % | | 38.0 | % | | 34.9 | % |
Operating profit | | | 15.4 | % | | 15.4 | % | | 15.4 | % | | 18.7 | % | | | 13.8 | % | | 13.2 | % | | 15.9 | % | | 15.4 | % |
Income before taxes | | | 14.3 | % | | 14.8 | % | | 14.5 | % | | 17.5 | % | | | 12.8 | % | | 12.2 | % | | 14.7 | % | | 14.5 | % |
Net income | | | 8.9 | % | | 9.2 | % | | 9.1 | % | | 10.7 | % | | | 8.0 | % | | 7.6 | % | | 9.3 | % | | 9.1 | % |
* Restated to reflect the adoption of SFAS No. 123(R).
Results of Operations:
Sales for the nine monthsquarter ended June 30,December 31, 2006 were $533.0$175.4 million, or 14.9%, higher than sales of $463.9compared to $170.1 million for the ninethree months ended June 30,December 31, 2005. The increase resulted principally from the acquisition of Milso Industries (“Milso”) in the fourth quarter of fiscal 2005 andreflected higher sales in five of the Bronze, CremationCompany’s six segments and Marking Products segments. These increases were offset partially by the effect of lowerhigher foreign currency values against the U.S. dollar anddollar. The increases were offset by lower sales in the Merchandising Solutions segment. For the nine months ended June 30, 2006,first quarter of fiscal 2007, changes in foreign currency values against the U.S. dollar had an unfavorablea favorable impact of approximately $5.2$3.3 million on the Company’s consolidated sales compared to the nine monthsquarter ended June 30,December 31, 2005.
In the Company’s Memorialization businesses, Bronze segment sales for the fiscal 2007 first nine months of fiscal 2006quarter were $159.2$50.4 million, compared to $150.1$48.7 million for the fiscal 2006 first nine months of fiscal 2005.quarter. The increase of 6.0% in Bronze sales primarily reflected higher selling prices for memorial products and higher mausoleum sales. These increases werean increase in the value of foreign currencies against the U.S. dollar, partially offset by the effects of changesa decline in the valuesvolume of memorial products. Sales for the Casket segment were $53.8 million for the quarter ended December 31, 2006, compared to fiscal 2006 first quarter sales of $48.2 million. The 11.7% increase reflected higher unit volume in territories served by Company-owned distribution, offset partially by lower unit volume in certain territories where the Company’s caskets are sold through independent distributors. Sales for the Cremation segment were $6.6 million for the first quarter of fiscal 2007, compared to $5.7 million for the same period a year ago. The increase principally reflected higher sales of cremation caskets. In the Brand Solutions businesses, sales for the Graphics Imaging segment in the first quarter of fiscal 2007 were $33.8 million, compared to $33.3 million for the same period a year ago. The slight improvement from a year ago principally 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 quarter ended December 31, 2006 were $13.7 million, compared to $12.3 million for the fiscal 2006 first quarter. The 11.6% increase was principally due to higher product demand and an increase in the value of foreign currencies against the U.S. dollar. Sales for the CasketMerchandising Solutions segment were $153.2$17.1 million for the first nine monthsquarter of fiscal 20062007, compared to $92.8 million for the same period in fiscal 2005. The increase reflected the acquisition of Milso. Excluding Milso, fiscal 2006 sales volume was lower than fiscal 2005, partially attributable to a lower death
rate and partially related to the transition to Company-owned distribution in certain territories. Sales for the Cremation segment were $19.3 million for the nine months ended June 30, 2006 compared to $16.0$22.0 million for the same period a year ago. Timing of a significant customer project negatively impacted the segment’s first quarter 2007 sales. The increase primarily reflected higher sales and improved pricingproject was shipped in the second quarter of cremation equipment and cremation caskets. Salesfiscal 2007.
Gross profit for the Graphics Imaging segment in the first nine months of fiscalquarter ended December 31, 2006 were $103.5was $64.9 million, compared to $106.6$61.2 million for the same period a year ago. The decline primarily reflectedConsolidated gross profit as a decrease in the valuepercent of foreign currencies against the U.S. dollar. Marking Products segment sales for the nine months ended June 30, 2006 were $38.4 million, compared to $32.7 millionincreased from 36.0% for the first nine months of fiscal 2005. The increase of $5.7 million, or 17.3%, was principally due to higher domestic and foreign sales volume, particularly in the segment’s industrial automation business. Sales for the Merchandising Solutions segment were $59.4 million for the first nine monthsquarter of fiscal 2006 compared to $65.7 million37.0% for the same period a year ago. The decline is attributable to lower volume of merchandising systems and displays. In addition, thefiscal 2007 first nine months of fiscal 2005 included sales for several large customer promotional programs that did not repeat in this fiscal year.
Gross profit for the nine months ended June 30, 2006 was $198.4 million, compared to $159.9 million for the nine months ended June 30, 2005.quarter. The increase in consolidated gross profit primarily reflected the acquisitionimpact of Milso during the fourth quarter of fiscal 2005, higher sales, higher foreign currency values against the U.S. dollar, productivity improvements in the Bronze, Cremation and Marking Products segments andCasket segment’s manufacturing facility in Mexico, the favorable effects of the Merchandising Solutions segment’s facilities consolidation program and other manufacturing improvements and cost reduction initiatives. These gains were partially offset by operating costs at the Company’s new casket manufacturing facility in Mexico,effect of lower CasketGraphics Imaging segment sales excluding Milso, lower sales in the Merchandising Solutions segmentU.S. and lower foreign currency values againstU.K. markets and the U.S. dollar. Consolidated gross profit as a percentimpact of sales increased from 34.5% forthe higher cost of bronze ingot in fiscal 2007 compared to the first nine months of fiscal 2005 to 37.2% for the same period of fiscal 2006. The increase primarily reflected the Milso acquisition and improved margins in the Cremation, Graphics Imaging and Merchandising Solutions segments. These increases were partially offset by a decline in Bronze gross margin reflecting the significant rise in bronze ingot cost.quarter last year.
Selling and administrative expenses for the ninethree months ended June 30,December 31, 2006 were $116.4$40.8 million, compared to $88.3$38.8 million for the first nine monthsquarter of fiscal 2005.2006. Consolidated selling and administrative expenses as a percent of sales were 21.8%23.2% for the nine monthsquarter ended June 30,December 31, 2006, compared to 19.0%22.8% for the same period last year. The increases in costs and percentage of sales primarily reflected the acquisition of Milso during the fourth quarter of fiscal 2005 andresulted from the expansion of the Casket segment’s distribution capabilities. Bronze segment sellingcapabilities and administrative expenses decreased in fiscal 2006 compared to fiscal 2005 due to cost containment efforts intended to mitigate some ofa provision for earn-out payments under the increase in bronze metal costs. Additionally, Graphics Imaging segment fiscal 2006 selling and administrative expenses declined from fiscal 2005 due to cost structure changes implemented within the segment’s U.S. and U.K. operations in the fourth quarter of fiscal 2005.Milso Industries (“Milso”) acquisition-related agreements.
Operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $82.0$24.2 million, representing an increase of $10.4 million over operating profit of $71.6compared to $22.4 million for the ninethree months ended June 30,December 31, 2005. The increase of 14.5% reflected higher operating income in five of the Company’s six operating segments. Bronze segment operating profit for the fiscal 2007 first nine months of fiscal 2006quarter was $44.0$11.6 million, compared to $41.3$11.9 million for the same periodfirst quarter of fiscal 2006. The decrease primarily reflected the higher cost of bronze ingot in the first quarter of fiscal 2005. Despite a significant increase in bronze metal cost, Bronze segment operating profit improved for2007 compared to the period as a resultfirst quarter of higher sales and the effects of cost reduction initiatives.fiscal 2006. Operating profit for the Casket segment for the nine months ended June 30, 2006first quarter of fiscal 2007 was $15.6$5.9 million, compared to $11.9$3.6 million for the first nine monthsquarter of fiscal 2005.2006. The increase reflectedresulted from higher sales and productivity improvements in the Milso acquisition, offset by lower sales in several territories, operating costs in excess of revenues at the Company’s new casketsegment’s manufacturing facility in Mexico, operating costs related to the expansion of casket distribution capabilities, and costs incurred in connection with the shut-down of the segment’s Lynn, Indiana manufacturing facility during the second quarter of fiscal 2006.Mexico. Cremation segment operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $2.7 million,$776,000, compared to $83,000$573,000 for the same period a year ago. The increase reflected higher sales improved pricing and the continuing favorable impact of cost reduction initiatives.programs initiated early in fiscal 2006. The Graphics Imaging segment operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $11.6$2.2 million, compared to $10.4$3.6 million for the ninethree months ended June 30,December 31, 2005. The increasedecrease reflected cost structure changes implemented withinlower sales in the segment’s U.S. and U.K. operationsmarkets and costs related to developing new primary packaging business in the fiscal 2005 fourth quarter,U.S. These declines were offset partially by lowerhigher foreign currency values against the U.S. dollar. Operating profit for the Marking Products segment for the fiscal 2007 first nine months of fiscal 2006quarter was $6.6$2.4 million, compared to $5.5$1.9 million for the same period a year ago. The increase primarily resulted from higher sales. The Merchandising Solutions segment operating profit was $1.6$1.3 million for the nine months ended June 30, 2006,first quarter of fiscal 2007, compared to $2.4 million$842,000 for the same period in fiscal 2005.2006. The decreaseincrease primarily
reflected the effects of the segment’s facilities consolidation program and other cost structure initiatives, which offset the impact of lower sales in fiscal 2006 compared to fiscal 2005. However, for the quarter, Merchandising Solutions segment operating profit was higher than a year ago, reflecting the benefit of recent productivity initiatives. For the nine months ended June 30, 2006, changes in foreign currency values against the U.S. dollar had an unfavorable impact of approximately $860,000 on the Company’s consolidated operating profit compared to the nine months ended June 30, 2005.volume.
Investment income for the ninethree months ended June 30,December 31, 2006 was $937,000,$411,000, compared to $1.0 million$327,000 for the nine monthsquarter ended June 30,December 31, 2005. The improvement resulted from higher average rates of return compared to a year ago. Interest expense for the fiscal 2007 first nine months of fiscal 2006quarter was $4.9$1.8 million, compared to $1.5$1.4 million for the same period last year. The increase in interest expense primarily reflected a higher average level of debt levels and higher average interest rates during the fiscalquarter ended December 31, 2006 nine-month period compared to the same periodquarter in fiscal 2005. The increased debt level in fiscal 2006 primarily resulted from additional borrowings under the Company’s domestic Revolving Credit Facility in connection with recent acquisitions.2006.
Other income (deductions), net, for the nine monthsquarter ended June 30,December 31, 2006 represented an increase in pre-tax income of $79,000,$131,000, compared to an increasea reduction in pre-tax income of $1.6 million$33,000 for the same periodquarter last year. Other income in the first nine months of fiscal 2005 primarily reflected foreign currency exchange gains on intercompany advances to foreign affiliates.
Minority interest deduction for the fiscal 2007 first quarter was $2.0 million$520,000, compared to $588,000 for the first nine monthsquarter of fiscal 2006, compared to $3.8 million for the same period in fiscal 2005.2006. The reduction in minority interest primarily reflected the Company’s acquisitionpurchase of an additional 30%the remaining ownership interest in S+T Gesellschaft fur Reprotechnik GmbH (“S+T”) onone of its less than wholly-owned German subsidiaries in September 30, 2005.2006.
The Company's effective tax rate for the ninethree months ended June 30,December 31, 2006 was 37.6%, which is the same asequivalent to the effective tax rate for the first quarter of fiscal 2006, but is higher than the effective tax rate of 37.0% for the full fiscal year ended September 30, 2005.2006. 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 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 2006 and determined that no adjustments to the carrying values of goodwill were necessary.
Liquidity and Capital Resources:
Net cash provided by operating activities was $34.4$10.7 million for the ninethree months ended June 30,December 31, 2006, compared to $57.4$15.4 million for the first nine monthsquarter of fiscal 2005.2006. Operating cash flow for both periods primarily reflected net income adjusted for depreciation,non-cash charges (depreciation, amortization, stock-based compensation expense and an increase in minority interest,interest), partially offset by working capital changes. In the fiscal 2007 first quarter, working capital changes included the payment of year end bonus accruals, an increase in working capital. The year-over-year decline in cash provided by operating activities is attributable to an increase in working capital primarilyinventory resulting from the Casket segment’s investmentcontinued expansion of the Company’s casket distribution capabilities and higher inventory related to a significant Merchandising Solutions segment project that shipped in distribution capabilities.the second fiscal quarter. First quarter fiscal 2006 working capital changes primarily reflected the payment of year end bonus accruals.
Cash used in investing activities was $41.9$10.3 million for the ninethree months ended June 30,December 31, 2006, compared to $45.0$13.3 million for the ninethree months ended June 30,December 31, 2005. Investing activities for the first nine monthsquarter of fiscal 20062007 primarily included capital expenditures, of $12.0 million and acquisition-related payments of $29.9$7.8 million and proceeds from the disposition of assets of $1.0 million. Investing activities for the first nine monthsquarter of fiscal 2005 primarily includedconsisted of capital expenditures of $21.6 million, acquisition related payments of $14.2$3.8 million and net purchasesa cash payment of investments$8.3 million for an additional ownership interest in S+T Gesellschaft fur Reprotechnik GmbH (“S+T”), one of $10.0 million.the Company’s less than wholly-owned foreign subsidiaries (see “Acquisitions”).
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 $15.9$19.3 million for the last three fiscal years. The capital budget for fiscal 20062007 is $27.7$27.1 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.
Cash provided by financing activities for the nine monthsquarter ended June 30,December 31, 2006 was $3.8$5.2 million, primarily reflecting net long-term debt borrowings of long-term debt$7.4 million, purchases of $11.0treasury stock of $2.6 million, proceeds of $1.9$2.1 million from the sale of treasury stock (stock option exercises), a tax benefit of $816,000$897,000 from exercised stock options, treasury stock purchases of $877,000, payment of dividends of $4.8$1.7 million to the Company's shareholders and distributions of $4.3 million$766,000 to minority interests. Cash used in financing activities for the nine monthsquarter ended June 30,December 31, 2005 was $34.5$8.8 million, primarily reflecting net payments on long-term debt of $6.0$4.0 million, proceeds of $326,000 from the sale of treasury stock purchases(stock option exercises), a tax benefit of $27.9 million,$281,000 from exercised stock options, dividends of $4.3$1.6 million to the Company's shareholders and distributions of $4.4$3.7 million to minority interests. These payments were partially offset by proceeds of $5.4 million from the sale of treasury stock (stock option exercises) and a tax benefit of $2.8 million from exercised stock options.
The Company has a Revolving Credit Facility with a syndicate of financial institutions, which allows for borrowings up to $150.0 million. Borrowings under the 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,December 31, 2006 were $134.0$133.3 million. The weighted-average interest rate on outstanding borrowings at June 30,December 31, 2006 and 2005 was 4.94%5.10% and 3.16%3.75%, 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 .75%.50% at June 30,December 31, 2006). 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 .75%.50% at June 30,December 31, 2006). 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 $2.1$1.3 million ($1.3 million786,000 after tax) at June 30,December 31, 2006 that is included in equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30,December 31, 2006, approximately $460,000$337,000 of the $1.3 million$786,000 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,December 31, 2006, outstanding borrowings under the credit facility totaled 10.08.5 million Euros ($12.811.2 million). The weighted-average interest rate on outstanding MIGmbH related borrowings was 3.93% and 2.87% at June 30,December 31, 2006 and 2005, was 3.35% and 2.80%, 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 8.37.8 million Euros ($10.610.3 million) at June 30,December 31, 2006. Caggiati S.p.A. also has three lines of credit totaling approximately 8.4 million Euros ($10.711.0 million) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million645,000 Euros ($2.8 million)851,000) at June 30,December 31, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30,December 31, 2006 and 2005 was 3.16%3.24% and 2.89%2.85%, respectively.
The Company has a stock repurchase program, which was initiated in 1996.program. 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 8,676,6969,195,146 shares have been repurchased as of June 30,December 31, 2006. 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 $130.2$130.8 million at June 30,December 31, 2006, compared to $86.6$105.6 million at September 30, 2005.2006. Cash and cash equivalents were $37.0$36.1 million at June 30,December 31, 2006, compared to $39.6$29.7 million at September 30, 2005.2006. The Company's current ratio was 2.1 at June 30,December 31, 2006 compared to 1.61.8 at September 30, 2005.
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,December 31, 2006, an accrual of $10.1$9.8 million was recorded for environmental remediation (of which $927,000$924,000 has been classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual, which reflects previously established reserves assumed with the acquisition of York and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.
Acquisitions:
Acquisition spending, net of cash acquired, during the nine months ended June 30, 2006 totaled $29.9 million, and primarily included the following:
On March 1, 2006, the Company acquired Royal Casket Company (“Royal”), a distributor of primarily York brand caskets in the Southwest region of the United States. The transaction was structured as an asset purchase with potential additional consideration payable contingent upon the operating performance of the acquired operations during the next five years. The Company expects to account for this consideration as additional purchase price. The excess of purchase price over the fair market value of net assets acquired was allocated to goodwill. The acquisition was intended to expand Matthews’ casket distribution capabilities in the Southwestern United States.
On February 23, 2006, the Company acquired theThe Doyle Group (“Doyle”), a provider of reprographic services to the packaging industry, located in Oakland, California. 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 three 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 the Company’s graphics business in the Western United States.
On September 30, 2005, the Company acquired an additional 30% interest in S+T for a price of $8.3 million, which was paid in October 2005. The Company had acquired a 50% interest in S+T in 1998.
In July 2005, the Company acquired Milso, a leading manufacturer and distributormarketer of caskets in the United States. Milso, headquartered in Brooklyn, New York, has manufacturing operations in Richmond, Indiana and maintains distribution centers throughout the Northeast, Mid-Atlantic, Midwest and Southwest regions of the United States. The transaction was structured as an asset purchase, at an initial purchase price of approximately $95.0 million. In connection with the contingent consideration provisions of the acquisition agreement, the Company paid additional purchase consideration of $7.0 million in December 2006. The transaction was also structured to include potential additional consideration of $7.5 million contingent on the fiscal 2006 performance of the acquired operations. The Company expects to account for this considerationwas recorded as additional purchase price.price as of September 30, 2006. The acquisition was intended to expand Matthews’ products and services in the United States casket market.
In June 2005, the Company paid additional consideration to the minority owner of Rudolf Reproflex GmbH (“Rudolf”) under the terms of the original acquisition agreement. The Company had acquired a 75% interest in Rudolf in 2001.
Forward-Looking Information:
The Company’s objective with respect to operating performance is to achieve a long-term average annual in crease inincrease annual earnings per share in the range of 12% to 15%. annually. For the past eleventen fiscal years, the Company has achieved an average annual increase in earnings per share of 15.7%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.
The significantSignificant factors impacting the Company’s results for thefiscal 2007 first nine months of fiscal 2006 were the continued increase inquarter included the cost of bronze ingot, the recent acquisition of Milso, operating costs for the Company’s new casketCasket segment’s continuing transition to Company-owned distribution in certain territories and productivity improvements in its manufacturing facility in Mexico, and the low profitability rateeffects of the Merchandising Solutions segment.segment’s facilities consolidation program. While cost structure initiatives, productivity improvementsthe price of copper has recently declined, the price of bronze has not declined at a similar rate, and facility consolidation efforts are intendedthe Company remains cautious as to address some of this impact, these factors are expected toany future volatility in bronze costs. The Casket segment will continue to betransition to Company-owned distribution in certain territories. In addition, the Company announced in the first quarter of 2007 that it will close a challengedomestic casket manufacturing facility in order to adjust manufacturing capacity to expected requirements. The closure, currently planned for the remainderspring of the fiscal year, particularly2007, could create some issues in the competitive markets served bynear-term as the Company.
Additionally, the Company’s Casket segment is undergoing a transition in strategy for the distribution ofconsolidates its casket products. With the recent acquisitions by this segment, the Company’s casket sales are now made through a combination of independent distributors and Company-owned distribution facilities under both the Milso and York brand names. The Company intends to continue to evaluate its casket distribution strategies for each of its sales territories to determine the appropriate combination of sales through independent distributors and Company-owned operations that will provide the highest opportunity for growthcapacity. Finally, although operating margins in the casket market. Although it is possible any actions takenMerchandising Solutions segment have improved during the past three quarters as a result of this evaluationthe facilities consolidation program, the Company is still cautious that there may result in near-term volatility inbe some continuing challenges during the operating results of this segment, our strategies will be designed toward the long-term growth of this business.next several quarters.
Based on the Company’s growth strategy and factors discussed above, the Company’s current projections forCompany currently expects to achieve fiscal 2007 diluted earnings per share aregrowth in line with our traditional 12 percentthe range of its long-term growth objective of 12% to 15 percent growth target.
15% over fiscal 2006 earnings per share. This earnings expectation excludes the net favorable impact of the gain of the sale of property and the impairment of assets and related costs on the fiscal 2006 fourth quarter. In addition, this expectation does not include the impact of any unusual items in fiscal 2007, such as any payouts that may be earned in fiscal 2007 under the Milso acquisition-related agreements.
Critical Accounting Policies:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q.
A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements and in the critical accounting policies in Management’s Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005.2006. 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. 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.
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.
Share-Based Payment:
Prior to October 1, 2005, the Company accounted for its stock-based compensation plan in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and provided the required pro-forma disclosures of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Stock-Based Payment”, (“SFAS No. 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. In accordance with SFAS No. 123(R), financial statements for all periods prior to October 1, 2005 have been adjusted to give effect to the fair-value method of accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as pro-forma adjustments have been reflected in earnings for all prior periods.
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, 2006, the Company held 352,072 memorials and 246,781 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 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,December 31, 2006, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
| | Payments due in fiscal year: | | | Payments due in fiscal year: | |
| | | | 2006 | | | | | | After | | | | | 2007 | | | | | | After | |
| | Total | | Remainder | | 2007 to 2008 | | 2009 to 2010 | | 2010 | | | Total | | Remainder | | 2008 to 2009 | | 2010 to 2011 | | 2011 | |
Contractual Cash Obligations: | | (Dollar amounts in thousands) | | (Dollar amounts in thousands) |
Revolving credit facilities | | $ | 146,792 | | $ | 5,833 | | $ | 46,667 | | $ | 94,292 | | $ | - | | | $ | 144,554 | | $ | 17,500 | | $ | 127,054 | | $ | - | | $ | - | |
Notes payable to banks | | | 10,600 | | 316 | | 2,623 | | 2,623 | | 5,038 | | | | 10,284 | | 978 | | 2,707 | | 2,707 | | 3,892 | |
Short-term borrowings | | | 2,836 | | 2,836 | | - | | - | | - | | | | 851 | | 851 | | - | | - | | - | |
Capital lease obligations | | | 2,028 | | 369 | | 1,630 | | 29 | | - | | | | 1,445 | | 724 | | 708 | | 13 | | - | |
Non-cancelable operating leases | | | 30,710 | | | 2,245 | | | 12,034 | | | 7,951 | | | 8,480 | | | | 32,461 | | | 6,503 | | | 12,768 | | | 7,311 | | | 5,879 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total contractual cash obligations | | $ | 192,966 | | $ | 11,599 | | $ | 62,954 | | $ | 104,895 | | $ | 13,518 | | | $ | 189,595 | | $ | 26,556 | | $ | 143,237 | | $ | 10,031 | | $ | 9,771 | |
A significant portion of the loans included in the table above bear interest at variable rates. At June 30,December 31, 2006, the weighted-average interest rate was 4.94%5.10% on the Company’s domestic Revolving Credit Facility, 3.35%3.93% on the credit facility through the Company’s wholly-owned German subsidiary, and 3.16%3.24% on bank loans to the Company’s wholly-owned subsidiary, Caggiati S.p.A.
Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company’s operating cash.
The Company does not currently expect to make any significant contributions to its principal retirement plan in fiscal 2006.2007. As of June 30,December 31, 2006, contributions of $222,000$74,000 and $1,102,000$305,000 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $74,000$241,000 and $350,000$707,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2006.2007.
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 November 2005,June 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings in the period of adoption. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48.
In September 2006, the FASB issued FSP FAS 115-1SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and FAS 124-1, "The MeaningOther Postretirement Plans” which amends SFAS 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the over-funded or under-funded status of Other-Than-Temporary Impairmentdefined benefit postretirement plans on the balance sheet and Its Application to Certain Investments" ("FSP 115-1"), which provides guidance on determining when investmentsrecognize the corresponding adjustment in certain debtother 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 securities are considered impaired, whether that impairment(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 other-than-temporary,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 such impairment loss. FSP 115-1 also includesfair value in generally accepted accounting considerations subsequent to the recognition of an other-than-temporary impairmentprinciples, and requires certainexpands disclosures about unrealized lossesfair 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 not been recognized as other-than-temporary impairments. FSP 115-1 was adopted by the Company in the second quarter of fiscal 2006 as required and had noa material impact on the Company’s consolidated financial position andor 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 ($30.025.0 million outstanding at June 30,December 31, 2006). The interest rate was fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006). 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 ($40.036.3 million outstanding at June 30,December 31, 2006). The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006). 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 $2.1$1.3 million ($1.3 million786,000 after tax) at June 30,December 31, 2006, 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%5.0% to 3.15%4.5%) would result in a decrease of approximately $488,000$234,000 in the fair value of the interest rate swaps.
Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available.
Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, including the Euro, the British Pound, Canadian dollar, Australian dollar and Swedish Krona, in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries. An adverse change of 10% in exchange rates would have resulted in a decrease in sales of $12.0$4.2 million and a decrease in operating income of $2.1 million$522,000 for the ninethree months ended June 30,December 31, 2006.
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 (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,December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
In August 2005, The York Group, Inc. (“York”), a wholly-owned subsidiary of the Company, was served with Civil Investigative Demands (“CIDs”) from the Attorneys General in Maryland and Florida. Thereafter, in October 2005, York was also served with a CID from the Attorney General in Connecticut. The pending CIDs are part of a multi-state investigation in which the Attorneys General from Maryland, Florida and Connecticut have requested information from various sources, including several national owners and operators of funeral homes, as well as several manufacturers of caskets, regarding alleged anti-competitive practices in the funeral service industry. As one of many potential sources of information, York has already timely responded to the document production request communicated through the CIDs. Presently, the investigation continues to remain in the preliminary stages and the scope of the investigation has been limited to evaluating the sale of caskets in the funeral service industry.
In October 2005, York filed a complaint and a motion for a special and/or preliminary injunction in the Court of Common Pleas of Allegheny County, Pennsylvania against Yorktowne Caskets, Inc. (“Yorktowne”), the shareholders of Yorktowne, Batesville Casket Company, Inc. and Batesville Services. This action was taken in response to the announcement that Batesville Casket Company, Inc. and/or Batesville Services (collectively “Batesville”) had entered into a definitive agreement to acquire the outstanding stock of Yorktowne, York’s largest independent distributor of wood and metal caskets. The causes of action alleged by York involve the distributor agreement between York and Yorktowne which is in effect throughoriginally executed on April 14, 2007.15, 2005.
The Court issued a Decision and Order on November 9, 2005 concluding that York had demonstrated its entitlement to a preliminary injunction and ordered: (1) Yorktowne, its shareholders and Batesville to refrain from further pursuit or consummation of the proposed sale of Yorktowne to Batesville; (2) Yorktowne and its shareholders to provide York with the right of first refusal as required under the enforceable distributor agreement; (3) Yorktowne and its shareholders to refrain from violating the non-assignment provisions of the distributor agreement; (4) Yorktowne to use its best efforts to promote York products and to refrain from selling, marketing or promoting products in competition with York; and (5) Yorktowne’s shareholders and Batesville from interfering with the distributor agreement between York and Yorktowne.
The lawsuit against Yorktowne, its shareholders and Batesville remains pending and the defendants filed appeals from the Court’s injunction ruling to the Superior Court of Pennsylvania. The defendants’ appeals were argued orally before the Superior Court in Pittsburgh, Pennsylvania in Junelate-June of 2006 and a decision addressing the merits of the defendants’ appeal could be issued at any time by the Superior Court. Pending a decision by the Superior Court, the preliminary injunction issued on November 9, 2005 remains in force.
In February 2006, Yorktowne and its shareholders filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against the Company, York and Milso Industries, Inc. (“Milso”) alleging, in part, that the Company, York and Milso breached York’s distributor agreement with Yorktowne dated April 15, 2005, as well as tortuously interfered with Yorktowne’s contractual and prospective contractual relations. Yorktowne alleges entitlement to various monetary damages, including a specific claim for $58 million.
It is possible that resolution of the foregoing matter could be unfavorable to the Company; however, the Company intends to vigorously defend against the allegations set forth in the Complaint. TheComplaint and the Company does not presently believe that the ultimate resolution of any of its legal proceedings 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 has authorized the repurchase of a total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 8,676,6969,195,146 shares have been repurchased as of June 30,December 31, 2006. UnderAll purchases of the program, inCompany’s common stock during the first quarter of fiscal 20062007 were part of the Company purchased 1,000 shares in January 2006 at an average price of $36.44 per share and 54,300 shares in June 2006 at an average price of $33.96.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 | |
| | | | | | | | | |
October 2006 | | | - | | | - | | | - | | | 864,854 | |
November 2006 | | | 60,000 | | $ | 38.00 | | | 60,000 | | | 804,854 | |
December 2006 | | | - | | | - | | | - | | | 804,854 | |
Total | | | 60,000 | | $ | 38.00 | | | 60,000 | | | | |
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 David M. KellyJoseph 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 David M. Kelly.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.Nicola |
| | |
(b) | Reports on Form 8-K |
| | |
| On April 25,October 19, 2006 Matthews filed a Current Report on Form 8-K under Item 7.01 in connection with a press release announcing a dividend declaration for the fourth quarter of fiscal 2006. On November 17, 2006 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 2006. On May 10,November 20, 2006 Matthews filed a Current Report on Form 8-K under Item 5.028.01 in connection with a press release announcing the election of Robert G. Neubertamendments to the Matthews Board of Directors, effective May 9, 2006.Corporate Governance. On December 7, 2006 Matthews filed a Current Report on Form 8-K under Item 7.01 in connection with a press release announcing its intention to close the metal casket assembly plant in Marshfield, Missouri. |
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 8, 2006February 6, 2007 | | /s/ David M. Kelly Joseph C. Bartolacci |
| | David M. Kelly, Chairman of the BoardJoseph C. Bartolacci, President |
| | and Chief Executive Officer |
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Date: August 8, 2006February 6, 2007 | | /s/ Steven F. Nicola |
| | Steven F. Nicola, Chief Financial Officer, |
| | Secretary and Treasurer |
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