Edgar Filing: MATTHEWS INTERNATIONAL CORP

form10q022014.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended March 31, 2014

Commission File No. 0-9115

MATTHEWS INTERNATIONAL CORPORATION

(Exact Name of registrant as specified in its charter)

PENNSYLVANIA		25-0644320
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

TWO NORTHSHORE CENTER, PITTSBURGH, PA		15212-5851
(Address of principal executive offices)		(Zip Code)


Registrant's telephone number, including area code		(412) 442-8200

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x

No o

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.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

As of April 30, 2014, shares of common stock outstanding were:

Class A Common Stock 27,345,111 shares

PART I - FINANCIAL INFORMATION

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands)

	March 31, 2014					September 30, 2013

ASSETS
Current assets:
Cash and cash equivalents				$	61,590				$	58,959
Accounts receivable, net					185,274					188,405
Inventories					143,005					130,768
Deferred income taxes					9,805					9,826
Other current assets					21,780					18,997

Total current assets					421,454					406,955

Investments					23,122					22,288
Property, plant and equipment: Cost	$	423,414				$	414,522
Less accumulated depreciation		(247,008	)				(233,791	)
					176,406					180,731
Deferred income taxes					1,588					1,871
Other assets					15,275					14,402
Goodwill					527,282					524,551
Other intangible assets, net					62,934					65,102

Total assets				$	1,228,061				$	1,215,900

LIABILITIES
Current liabilities:
Long-term debt, current maturities				$	23,472				$	23,587
Accounts payable					45,936					45,232
Accrued compensation					34,496					41,916
Accrued income taxes					4,010					5,910
Customer prepayments					14,840					13,531
Contingent consideration					-					3,726
Other current liabilities					46,754					51,077

Total current liabilities					169,508					184,979

Long-term debt					354,167					351,068
Accrued pension					63,959					61,642
Postretirement benefits					18,270					17,956
Deferred income taxes					20,640					20,332
Other liabilities					30,296					26,993
Total liabilities					656,840					662,970

SHAREHOLDERS’ EQUITY
Shareholders' equity-Matthews:
Common stock	$	36,334				$	36,334
Additional paid-in capital		46,911					47,315
Retained earnings		788,966					775,762
Accumulated other comprehensive loss		(22,287	)				(26,940	)
Treasury stock, at cost		(281,859	)				(283,006	)
Total shareholders’ equity-Matthews					568,065					549,465
Noncontrolling interests					3,156					3,465
Total shareholders’ equity					571,221					552,930

Total liabilities and shareholders' equity				$	1,228,061				$	1,215,900

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share data)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2014			2013			2014			2013



Sales	$	246,837		$	256,390		$	476,782		$	481,999
Cost of sales		(156,657	)		(161,524	)		(305,226	)		(307,159	)

Gross profit		90,180			94,866			171,556			174,840

Selling and administrative expenses		(69,288	)		(69,796	)		(135,668	)		(133,271	)

Operating profit		20,892			25,070			35,888			41,569

Investment income		353			607			1,227			840
Interest expense		(2,554	)		(3,051	)		(5,455	)		(6,298	)
Other income (deductions), net		(790	)		(1,067	)		(1,772	)		(2,172	)

Income before income taxes		17,901			21,559			29,888			33,939

Income taxes		(6,650	)		(7,504	)		(10,731	)		(11,881	)

Net income		11,251			14,055			19,157			22,058

Net (income) loss attributable to noncontrolling interests		82			137			90			389

Net income attributable to Matthews shareholders	$	11,333		$	14,192		$	19,247		$	22,447

Earnings per share attributable to Matthews shareholders:
Basic		$0.41			$0.51			$0.71			$0.81

Diluted		$0.41			$0.51			$0.70			$0.81

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollar amounts in thousands)

	Three Months Ended March 31,
	Matthews						Noncontrolling Interest						Total
	2014			2013			2014			2013			2014			2013

Net income (loss):	$	11,333		$	14,192		$	(82	)	$	(137	)	$	11,251		$	14,055
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		223			(13,543	)		(197	)		356			26			(13,187	)
Pension plans and other postretirement benefits		529			1,074			-			-			529			1,074
Unrecognized gain (loss) on derivatives:
Net change from periodic revaluation		(1,049	)		486			-			-			(1,049	)		486
Net amount reclassified to earnings		643			626			-			-			643			626
Net change in unrecognized gain (loss) on
derivatives		(406	)		1,112			-			-			(406	)		1,112
Other comprehensive income (loss), net of tax		346			(11,357	)		(197	)		356			149			(11,001	)
Comprehensive income (loss)	$	11,679		$	2,835		$	(279	)	$	219		$	11,400		$	3,054

	Six Months Ended March 31,
	Matthews						Noncontrolling Interest						Total
	2014			2013			2014			2013			2014			2013

Net income (loss):	$	19,247		$	22,447		$	(90	)	$	(389	)	$	19,157		$	22,058
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		2,769			(5,934	)		(54	)		55			2,715			(5,879	)
Pension plans and other postretirement benefits		1,057			2,147			-			-			1,057			2,147
Unrecognized gain (loss) on derivatives:
Net change from periodic revaluation		(472	)		497			-			-			(472	)		497
Net amount reclassified to earnings		1,299			1,238			-			-			1,299			1,238
Net change in unrecognized gain (loss) on
derivatives		827			1,735						-			827			1,735
Other comprehensive income (loss), net of tax		4,653			(2,052	)		(54	)		55			4,599			(1,997	)
Comprehensive income (loss)	$	23,900		$	20,395		$	(144	)	$	(334	)	$	23,756		$	20,061

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

for the six months ended March 31, 2014 and 2013 (Unaudited)

(Dollar amounts in thousands, except per share data)

	Shareholders’ Equity
									Accumulated
			Additional						Other						Non-
	Common		Paid-in			Retained			Comprehensive			Treasury			controlling
	Stock		Capital			Earnings			Income (Loss)			Stock			interests			Total
Balance, September 30, 2012	$	36,334	$	47,893		$	727,176		$	(65,083	)	$	(268,499	)	$	2,613		$	480,434
Net income		-		-			22,447			-			-			(389	)		22,058
Minimum pension liability		-		-			-			2,147			-			-			2,147
Translation adjustment		-		-			-			(5,934	)		-			55			(5,879	)
Fair value of derivatives		-		-			-			1,735			-			-			1,735
Total comprehensive income																			20,061
Stock-based compensation		-		2,757			-			-			-			-			2,757
Purchase of 354,040 shares of treasury stock		-		-			-			-			(7,259	)		-			(7,259	)
Issuance of 279,745 shares of treasury stock		-		(8,102	)		-			-			8,626			-			524
Cancellations of 42,956 shares of treasury stock		-		1,843			-			-			(1,843	)		-			-
Dividends, $.20 per share		-		-			(5,563	)		-			-			-			(5,563	)
Arrangement with noncontrolling interests							4,980									1,653			6,633
Distributions to noncontrolling interests		-		-			-			-			-			(273	)		(273	)
Balance, March 31, 2013	$	36,334	$	44,391		$	749,040		$	(67,135	)	$	(268,975	)	$	3,659		$	497,314

	Shareholders’ Equity
									Accumulated
			Additional						Other						Non-
	Common		Paid-in			Retained			Comprehensive			Treasury			controlling
	Stock		Capital			Earnings			Income (Loss)			Stock			interests			Total
Balance, September 30, 2013	$	36,334	$	47,315		$	775,762		$	(26,940	)	$	(283,006	)	$	3,465		$	552,930
Net income		-		-			19,247			-			-			(90	)		19,157
Minimum pension liability		-		-			-			1,057			-			-			1,057
Translation adjustment		-		-			-			2,769			-			(54	)		2,715
Fair value of derivatives		-		-			-			827			-			-			827
Total comprehensive income																			23,756
Stock-based compensation		-		3,239			-			-						-			3,239
Purchase of 108,605 shares of treasury stock		-		-			-			-			(4,467	)		-			(4,467	)
Issuance of 281,231 shares of treasury stock		-		(6,799	)		-			-			8,770			-			1,971
Cancellations of 77,417 shares of treasury stock				3,156									(3,156	)
Dividends, $.22 per share		-		-			(6,043	)		-			-			-			(6,043	)
Distributions to noncontrolling interests		-		-												(165	)		(165	)
Balance, March 31, 2014	$	36,334	$	46,911		$	788,966		$	(22,287	)	$	(281,859	)	$	3,156		$	571,221

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands, except per share data)

	Six Months Ended
	March 31,
	2014			2013


Cash flows from operating activities:
Net income	$	19,157		$	22,058
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,921			17,314
Stock-based compensation expense		3,239			2,757
Change in deferred taxes		(651	)		(787	)
Gain on sale of assets		(632	)		(660	)
Unrealized gain on investments		(875	)		(450	)
Changes in working capital items		(23,233	)		(10,554	)
Increase in other assets		(805	)		(95	)
Increase (decrease) in other liabilities		4,282			(2,785	)
Increase in pension and postretirement benefits		4,369			6,642
Other, net		(164	)		(3,293	)

Net cash provided by operating activities		23,608			30,147

Cash flows from investing activities:
Capital expenditures		(9,859	)		(10,947	)
Proceeds from sale of assets		29			221
Acquisitions, net of cash acquired		-			(63,769	)

Net cash used in investing activities		(9,830	)		(74,495	)

Cash flows from financing activities:
Proceeds from long-term debt		15,335			117,636
Payments on long-term debt		(14,484	)		(54,055	)
Payments of contingent consideration		(3,703	)		(9,542	)
Proceeds from the sale of treasury stock		1,828			524
Purchases of treasury stock		(4,267	)		(7,259	)
Dividends		(6,043	)		(5,563	)
Distributions to noncontrolling interests		(165	)		(273	)

Net cash (used in) provided by financing activities		(11,499	)		41,468

Effect of exchange rate changes on cash		352			216

Net change in cash and cash equivalents	$	2,631		$	(2,664	)

Non-cash investing and financing activities:
Acquisition of equipment under capital lease	$	949		$	-

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2014

(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 and granite 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 and fulfillment systems and merchandising solutions. The Company's products and operations are comprised of six business segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Marking and Fulfillment Systems and Merchandising Solutions. The Cemetery Products segment is a leading manufacturer of cast bronze and granite memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States. The Funeral Home Products segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood, metal and cremation caskets. The Cremation segment is a leading designer and manufacturer of cremation equipment in North America and Europe. The Graphics Imaging segment manufactures and provides brand management, printing plates, gravure cylinders, pre-press services and imaging services for the primary packaging and corrugated industries. The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products. 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, Mexico, Canada, Europe, Australia and Asia.

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. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014. 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, 2013. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 2. Basis of Presentation (continued)

Reclassifications and Revision:

Certain reclassifications have been made in these financial statements to adjust the effect of exchange rate changes on cash in the Consolidated Statement of Cash Flows for the six-month period ended March 31, 2013. Additionally, reclassifications have been made in these financial statements to adjust for bank overdrafts in the Consolidated Statement of Cash Flows for the six months ended March 31, 2013 and on the Consolidated Balance Sheet for the fiscal year ended September 30, 2013.

Note 3. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level fair value hierarchy is used to prioritize the inputs used in valuations, as defined below:

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

The fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:

	March 31, 2014								September 30, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives (1)	$	-	$	3,850		-	$	3,850	$	-	$	3,736		-	$	3,736
Trading securities	$	18,879		-		-	$	18,879	$	17,929		-		-	$	17,929
Total assets at fair value	$	18,879	$	3,850		-	$	22,729	$	17,929	$	3,736		-	$	21,665

Liabilities:
Derivatives (1)		-	$	3,403		-	$	3,403		-	$	4,644		-	$	4,644
Total liabilities at fair value		-	$	3,403		-	$	3,403		-	$	4,644		-	$	4,644

(1) Interest rate swaps are valued based on observable market swap rates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 4. Inventories

Inventories consisted of the following:

	March 31, 2014		September 30, 2013

Raw Materials	$	44,507	$	40,931
Work in process		30,930		25,293
Finished goods		67,568		64,544
	$	143,005	$	130,768

Note 5. Debt

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions. The maximum amount of borrowings available under the facility is $500,000 and borrowings under the facility bear interest at LIBOR plus a factor ranging from .75% to 1.25% based on the Company’s leverage ratio. The facility’s maturity is July 2018. 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 .15% to .25% (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 $30,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at March 31, 2014 and September 30, 2013 were $310,000 and $305,000, respectively. The weighted-average interest rate on outstanding borrowings on this facility at March 31, 2014 and 2013 was 2.53% and 2.98%, respectively.

In connection with the pending acquisition of Schawk, Inc. (“SGK”) (see Note 12.) the Company entered into a commitment letter with RBS Citizens in March 2014 to amend and increase the maximum amount of borrowings available under the facility to $850,000. The amendment is conditional upon the closing of the SGK acquisition.

The Company has entered into the following interest rate swaps:

Effective Date	Amount	Fixed Interest Rate	Interest Rate Spread at March 31, 2014	Maturity Date
May 2011	$25,000	1.37%	1.00%	May 2014
October 2011	25,000	1.67%	1.00%	October 2015
November 2011	25,000	2.13%	1.00%	November 2014
March 2012	25,000	2.44%	1.00%	March 2015
June 2012	40,000	1.88%	1.00%	June 2022
August 2012	35,000	1.74%	1.00%	June 2022
September 2012	25,000	3.03%	1.00%	December 2015
September 2012	25,000	1.24%	1.00%	March 2017
November 2012	25,000	1.33%	1.00%	November 2015
May 2014	25,000	1.35%	1.00%	May 2018

The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges 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 each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 5. Debt (continued)

The fair value of the interest rate swaps reflected an unrealized gain, net of unrealized losses, of $447 ($273 after tax) at March 31, 2014 and an unrealized loss, net of unrealized gains, of $908 ($554 after tax) at September 30, 2013. The net unrealized gain and loss are included in shareholders’ equity as part of accumulated other comprehensive income (loss) (“AOCI”). Assuming market rates remain consistent with the rates at March 31, 2014, approximately $1,131 net unrealized loss included in AOCI is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

At March 31, 2014 and September 30, 2013, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:


Balance Sheet Location:	March 31, 2014			September 30, 2013
Current assets
Other current assets	$	473		$	427
Long-term assets
Other assets		3,378			3,309
Current liabilities:
Other current liabilities		(2,327	)		(2,590	)
Long-term liabilities:
Other liabilities		(1,077	)		(2,054	)
Total derivatives	$	447		$	(908	)

The loss recognized on derivatives was as follows:

Location of

Derivatives in

Loss

Amount of

Cash Flow

Recognized in

Loss Recognized

Hedging

Income on

in Income

Relationships

Derivative

on Derivatives

Three Months ended March 31,

Six Months ended March 31,

2014

2013

2014

2013

Interest rate swaps

Interest expense

$(1,054)

$(1,026)

$(2,130)

$(2,029)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 5. Debt (continued)

The Company recognized the following losses in AOCI:

Location of

Gain or

(Loss)

Amount of Loss

Reclassified

Reclassified from

Amount of

From

AOCL into

Derivatives in

Gain or (Loss) Recognized in

AOCI into

Income

Cash Flow

AOCL on Derivatives

Income

(Effective Portion*)

Hedging Relationships

March 31,

2014

March 31,

2013

(Effective

Portion*)

March 31, 2014

March 31,

2013

Interest rate swaps

$(472)

$497

Interest expense

$(1,299)

$(1,238)

*There is no ineffective portion or amount excluded from effectiveness testing.

The Company, through certain of its European subsidiaries has a credit facility with a European bank. The maximum amount of borrowing available under this facility was 25.0 million Euros ($34,425). Outstanding borrowings under the credit facility totaled 21.9 million Euros ($30,144) and 22.5 million Euros ($30,454) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings under this facility at March 31, 2014 and 2013 was 1.48% and 1.37%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG (“Saueressig”), has several loans with various European banks. Outstanding borrowings under these loans totaled 1.5 million Euros ($2,001) and 1.7 million Euros ($2,310) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at March 31, 2014 and 2013 was 4.04% and 3.89%, respectively.

The Company, through its German subsidiary, Wetzel GmbH (“Wetzel”), has several loans with various European banks. Outstanding borrowings under these loans totaled 6.5 million Euros ($8,932) and 7.4 million Euros ($10,000) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at March 31, 2014 and 2013 was 7.75% and 7.17%, respectively.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 7.1 million Euros ($9,766) and 5.1 million Euros ($6,871) at March 31, 2014 and September 30, 2013, respectively. Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($15,601) with the same Italian banks. Outstanding borrowings on these lines were 4.3 million Euros ($5,932) and 5.6 million Euros ($7,639) at March 31, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at March 31, 2014 and 2013 was 3.12% and 3.16%, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 6. Share-Based Payments

The Company maintains an equity incentive plan (the “2012 Equity Incentive Plan”) that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards. The Company also maintains an equity incentive plan (the “2007 Equity Incentive Plan”) and a stock incentive plan (the “1992 Incentive Stock Plan”) that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards. Under the 2012 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000. There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan. At March 31, 2014, there were 2,097,550 shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.

The option price for each stock option granted under either plan may not be less than the fair market value of the Company's common stock on the date of grant. Outstanding stock options generally vest in one-third increments upon the attainment of pre-defined levels of appreciation in the market value of the Company’s Class A Common Stock. In addition, options generally vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the market value thresholds). The options expire on the earlier of ten years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company generally settles employee stock option exercises with treasury shares. With respect to outstanding restricted share grants, for grants made prior to fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, with the remaining one-half of the shares vesting in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company’s Class A Common Stock. For grants made in fiscal 2013 and forward, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company’s Class A Common Stock. Additionally, restricted shares cannot vest until the first anniversary of the grant date. Unvested restricted shares generally expire on the earlier of five 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 issues restricted shares from treasury shares.

For the three-month periods ended March 31, 2014 and 2013, total stock-based compensation cost totaled $1,665 and $1,378, respectively. For the six-month periods ended March 31, 2014 and 2013, total stock-based compensation cost totaled $3,239 and $2,757, respectively. The associated future income tax benefit recognized was $649 and $537 for the three-month periods ended March 31, 2014 and 2013, respectively, and $1,263 and $1,075 for the six-month periods ended March 31, 2014 and 2013, respectively.

For the three-month periods ended March 31, 2014 and 2013, the amount of cash received from the exercise of stock options was $173 and $48, respectively. For the six-month periods ended March 31, 2014 and 2013, the amount of cash received from the exercise of stock options was $1,828 and $523, respectively. In connection with these exercises, the tax benefits realized by the Company were $8 and $3 for the three-month periods ended March 31, 2014 and 2013, respectively, and $185 and $66 for the six-month periods ended March 31, 2014 and 2013, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 6. Share-Based Payments (continued)

The transactions for restricted stock for the six months ended March 31, 2014 were as follows:

				Weighted-
				average
				grant-date
	Shares			fair value
Non-vested at September 30, 2013		641,399			$29.46
Granted		201,225			35.71
Vested		(225,503	)		29.44
Expired or forfeited		(77,417	)		30.84
Non-vested at March 31, 2014		539,704			31.60

As of March 31, 2014, the total unrecognized compensation cost related to unvested restricted stock was $7,898 and is expected to be recognized over a weighted average period of 1.8 years.

The transactions for shares under options for the six months ended March 31, 2014 were as follows:

						Weighted-
				Weighted-		average		Aggregate
				average		remaining		intrinsic
	Shares			exercise price		contractual term		value
Outstanding, September 30, 2013		744,824			$37.76
Granted		-			-
Exercised		(62,653	)		32.37
Expired or forfeited		(20,214	)		39.12
Outstanding, March 31, 2014		661,957			38.23		1.8		$1,710
Exercisable, March 31, 2014		349,183			37.77		1.6		$1,063

No options vested during the three-month and six-month periods ended March 31, 2014 and 2013, 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 six-month periods ended March 31, 2014 and 2013 was $509 and $190, respectively.

The transactions for non-vested options for the six months ended March 31, 2014 were as follows:

				Weighted-average
				grant-date
Non-vested shares	Shares			fair value
Non-vested at September 30, 2013		331,755			$11.29
Granted		-			-
Vested		-			-
Expired or forfeited		(18,981	)		12.23
Non-vested at March 31, 2014		312,774			11.23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 6. Share-Based Payments (continued)

The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model. The following table indicates the assumptions used in estimating fair value of restricted stock for the periods ended March 31, 2014 and 2013.

	Six Months Ended March 31,
	2014			2013
Expected volatility		26.6	%		29.5	%
Dividend yield		1.1	%		1.2	%
Average risk free interest rate		1.4	%		0.6	%
Average expected term (years)		2.0			2.0

The risk free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date. Expected volatilities are based on the historical volatility of the Company’s stock price. The expected term represents an estimate of the average period of time for restricted shares to vest. The characteristics for each grant are considered separately for valuation purposes.

Under the Company’s 1994 Director Fee Plan, directors (except for the Chairman of the Board) 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 $60. The equivalent amount paid to a non-employee Chairman of the Board is $130. 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. The value of deferred shares is recorded in other liabilities. A total of 17,005 shares had been deferred under the 1994 Director Fee Plan at March 31, 2014. Additionally, 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 $100. A total of 22,300 stock options have been granted under the plan. At March 31, 2014, 11,800 options were outstanding and vested. Additionally, 120,500 shares of restricted stock have been granted under the plan, 37,457 of which were unvested at March 31, 2014. A total of 300,000 shares have been authorized to be issued under the 1994 Director Fee Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 7. Earnings Per Share Attributable to Matthews’ Shareholders

The information used to compute earnings per share attributable to Matthews’ common shareholders was as follows:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2014		2013		2014		2013
Net income attributable to Matthews shareholders	$	11,333	$	14,192	$	19,247	$	22,447
Less: dividends and undistributed earnings allocated to participating securities		23		145		74		251
Net income available to Matthews shareholders	$	11,310	$	14,047	$	19,173	$	22,196

Weighted-average shares outstanding (in thousands):
Basic shares		27,276		27,369		27,193		27,312
Effect of dilutive securities		194		143		231		99
Diluted shares		27,470		27,512		27,424		27,411

There were no anti-dilutive securities for the three and six months ended March 31, 2014. Options to purchase 730,642 and 749,667 shares of common stock were not included in the computation of diluted earnings per share for the three months and six months ended March 31, 2013, respectively, because the inclusion of these options would be anti-dilutive.

Note 8. Pension and Other Postretirement Benefit Plans

The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:

	Three months ended March 31,
	Pension						Other Postretirement
	2014			2013			2014			2013

Service cost	$	1,582		$	1,685		$	109		$	199
Interest cost		2,213			1,913			230			282
Expected return on plan assets		(2,396	)		(2,243	)		-			-
Amortization:
Prior service cost		(52	)		(52	)		(21	)		(68	)
Net actuarial loss (gain)		991			1,806			(49	)		110

Net benefit cost	$	2,338		$	3,109		$	269		$	523

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 8. Pension and Other Postretirement Benefit Plans (continued)

	Six months ended March 31,
	Pension						Other Postretirement
	2014			2013			2014			2013

Service cost	$	3,164		$	3,370		$	218		$	398
Interest cost		4,426			3,826			460			564
Expected return on plan assets		(4,792	)		(4,486	)		-			-
Amortization:
Prior service cost		(104	)		(104	)		(43	)		(136	)
Net actuarial loss		1,982			3,612			(98	)		220

Net benefit cost	$	4,676		$	6,218		$	537		$	1,046

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 2014.

Contributions made and anticipated for fiscal year 2014 are as follows:

Contributions	Pension		Other Postretirement

Contributions during the six months ended March 31, 2014:
Supplemental retirement plan	$	362	$	-
Other postretirement plan		-		464

Additional contributions expected in fiscal 2014:
Supplemental retirement plan		359		-
Other postretirement plan		-		462

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 9. Accumulated Other Comprehensive Income

The changes in AOCI by component, net of tax, for the three month period ended March 31, 2014 were as follows:

		Post-retirement benefit plans			Currency translation adjustment				Derivatives			Total
Attributable to Matthews:
Balance, December 31, 2013		$	(29,572	)	$	6,260			$	679		$	(22,633	)
OCI before reclassification			-			223				(1,049	)		(826	)
Amounts reclassified from AOCI	(a)		529			-		(b)		643			1,172
Net current-period OCI			529			223				(406	)		346
Balance, March 31, 2014		$	(29,043	)	$	6,483			$	273		$	(22,287	)
Attributable to noncontrolling interest:
Balance, December 31, 2013			-		$	544				-		$	544
OCI before reclassification			-			(197	)			-			(197	)
Net current-period OCI			-			(197	)			-			(197	)
Balance, March 31, 2014			-		$	347				-		$	347

The changes in AOCI by component, net of tax, for the six month period ended March 31, 2014 were as follows:

		Post-retirement benefit plans			Currency translation adjustment				Derivatives			Total
Attributable to Matthews:
Balance, September 30, 2013		$	(30,100	)	$	3,714			$	(554	)	$	(26,940	)
OCI before reclassification			-			2,769				(472	)		2,297
Amounts reclassified from AOCI	(a)		1,057			-		(b)		1,299			2,356
Net current-period OCI			1,057			2,769				827			4,653
Balance, March 31, 2014		$	(29,043	)	$	6,483			$	273		$	(22,287	)
Attributable to noncontrolling interest:
Balance, September 30, 2013			-		$	401				-		$	401
OCI before reclassification			-			(54	)			-			(54	)
Net current-period OCI			-			(54	)			-			(54	)
Balance, March 31, 2014			-		$	347				-		$	347

(a)	Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see note 8).

(b)	Amounts were included in interest expense in the periods the hedged item affected earnings (see note 5).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 9. Accumulated Other Comprehensive Income (continued)

Reclassifications out of AOCI for the three and six month periods ended March 31, 2014 were as follows:

	Amount reclassified from AOCI
Details about AOCI Components	Three months ended March 31, 2014				Six months ended March 31, 2014			Affected line item in the Statement of income

Postretirement benefit plans
Prior service (cost) credit		73		(a)		147
Actuarial losses		(942	)	(a)		(1,884	)
		(869	)	(b)		(1,737	)	Total before tax
		(340	)			(680	)	Tax provision (benefit)
	$	(529	)		$	(1,057	)	Net of tax
Derivatives
Interest rate swap contracts		(1,054	)			(2,130	)	Interest expense
		(1,054	)	(b)		(2,130	)	Total before tax
		(411	)			(831	)	Tax provision (benefit)
		(643	)			(1,299	)	Net of tax

(a)	Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses. For additional information, see Note 8.

(b)	For pre-tax items, positive amounts represent income and negative amounts represent expense.

Note 10. 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 Company's effective tax rate for the six months ended March 31, 2014 was 35.9%, compared to 35.0% for the first half of fiscal 2013. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes and estimated non-deductible transaction costs related to the pending acquisition of Schawk, Inc. (“SGK”) (see Note 12), offset by lower foreign income taxes.

The Company had unrecognized tax benefits (excluding penalties and interest) of $4,386 and $4,516 on March 31, 2014 and September 30, 2013, respectively, all of which, if recorded, would impact the 2014 annual effective tax rate.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The Company included $178 in interest and penalties in the provision for income taxes for the first six months of fiscal 2014. Total penalties and interest accrued were $2,579 and $2,401 at March 31, 2014 and September 30, 2013, respectively. These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.

The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions. As of March 31, 2014, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal		2010 and forward
United States – State		2009 and forward
Canada		2008 and forward
Europe		2008 and forward
United Kingdom		2012 and forward
Australia