MATW

Business Context and Reporting Period

Company: Matthews International Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2002
Business Overview: Matthews designs, manufactures, and markets memorialization products, caskets, and custom identification products. Operations are organized into four segments for fiscal 2002: Bronze, Graphics Imaging, Marking Products, and York Casket. The company plans to report a fifth segment, Cremation, beginning in fiscal 2003.

Key Financial Metrics

Note: Fiscal 2002 Net Income includes a $3.2 million after-tax charge for transitional goodwill impairment due to the adoption of SFAS No. 142.

Material Changes vs. Prior Period

• Acquisition Impact: The 51% sales increase was primarily driven by the acquisition of The York Group, Inc. (York Casket segment) on December 3, 2001. York contributed $107.5 million in sales and $10.0 million in operating profit for the partial year.
• Segment Performance:
  • Bronze: Sales rose 20.1% to $197.1 million, driven by higher mausoleum construction revenues and increased architectural product sales following September 11, 2001.
  • Graphics Imaging: Sales increased 5.9% to $94.8 million, aided by European acquisitions (Scholler, Rudolf), though domestic operations faced weak demand and price pressure.
  • Marking Products: Sales declined 3.3% to $28.7 million due to reduced demand in the tire, automotive, and building sectors.
• Margin Compression: Consolidated gross margin declined to 37.5% from 42.2% in 2001. This was attributed to the lower-margin York Casket business mix, price pressure in Graphics Imaging, and increased pension/healthcare costs.
• Debt Increase: Long-term debt increased significantly to fund the York acquisition, resulting in higher interest expense ($4.2 million vs. $1.6 million).

Guidance, Outlook, and Risks

• Guidance: Management expects diluted earnings per share of $1.36 for fiscal 2003. The company aims for annual EPS growth of 12% to 15%.
• Strategy: Growth will be driven by internal expansion, acquisitions, and share repurchases. However, the company has scaled back repurchases to focus on debt repayment.
• Segment Restructuring: Starting in Q1 2003, the company will report a new "Cremation" segment, combining cremation equipment (from Bronze) and cremation caskets (from York Casket), expected to generate ~$20 million in sales.
• Risks & Contingencies:
  • Environmental: An accrual of $12.2 million exists for environmental remediation, including a landfill site in York, PA, associated with the York acquisition.
  • Regulatory: An FTC investigation regarding the York acquisition was closed in December 2002 with no further action warranted.
  • Market Risks: Exposure to commodity price fluctuations (bronze, steel, wood) and foreign currency exchange rates. The company does not use derivatives to hedge these risks.

Investor Verification Checklist

• York Integration: Verify the realization of synergies and margin improvement in the York Casket segment as integration costs are incurred.
• Debt Servicing: Monitor the company's ability to service the $84.5 million outstanding balance on its Revolving Credit Facility and meet leverage ratio covenants.
• Goodwill Impairment: Assess the impact of the $5.3 million transitional goodwill impairment charge and future impairment testing under SFAS No. 142.
• Environmental Liabilities: Track the $12.2 million environmental reserve to ensure actual remediation costs do not exceed current estimates.
• Segment Margins: Evaluate whether the lower margins of the York Casket segment will persist or improve as the business matures.