Edgar Filing: MATTHEWS INTERNATIONAL CORP

form10q032014.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 June 30, 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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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 July 31, 2014, shares of common stock outstanding were:

Class A Common Stock 32,830,618 shares

PART I - FINANCIAL INFORMATION

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands, except per share data)

	June 30, 2014					September 30, 2013

ASSETS
Current assets:
Cash and cash equivalents				$	80,616				$	58,959
Accounts receivable, net					199,472					188,405
Inventories					141,908					130,768
Deferred income taxes					9,866					9,826
Other current assets					22,973					18,997

Total current assets					454,835					406,955

Investments					23,550					22,288
Property, plant and equipment: Cost	$	426,767				$	414,522
Less accumulated depreciation		(251,737	)				(233,791	)
					175,030					180,731
Deferred income taxes					1,211					1,871
Other assets					14,879					14,402
Goodwill					527,150					524,551
Other intangible assets, net					62,215					65,102

Total assets				$	1,258,870				$	1,215,900

LIABILITIES
Current liabilities:
Long-term debt, current maturities				$	22,812				$	23,587
Accounts payable					53,389					45,232
Accrued compensation					40,326					41,916
Accrued income taxes					7,439					5,910
Customer prepayments					19,626					13,531
Contingent consideration					-					3,726
Other current liabilities					48,469					51,077

Total current liabilities					192,061					184,979

Long-term debt					345,407					351,068
Accrued pension					64,903					61,642
Postretirement benefits					18,278					17,956
Deferred income taxes					20,491					20,332
Other liabilities					28,023					26,993
Total liabilities					669,163					662,970

SHAREHOLDERS’ EQUITY
Shareholders' equity-Matthews:
Common stock	$	36,334				$	36,334
Additional paid-in capital		48,581					47,315
Retained earnings		805,154					775,762
Accumulated other comprehensive loss		(21,998	)				(26,940	)
Treasury stock, at cost		(282,016	)				(283,006	)
Total shareholders’ equity-Matthews					586,055					549,465
Noncontrolling interests					3,652					3,465
Total shareholders’ equity					589,707					552,930

Total liabilities and shareholders' equity				$	1,258,870				$	1,215,900

The accompanying notes are an integral part of 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
	June 30,						June 30,
	2014			2013			2014			2013



Sales	$	279,983		$	250,652		$	756,765		$	732,651
Cost of sales		(175,753	)		(159,261	)		(480,977	)		(466,420	)

Gross profit		104,230			91,391			275,788			266,231

Selling and administrative expenses		(72,038	)		(60,631	)		(207,708	)		(193,902	)

Operating profit		32,192			30,760			68,080			72,329

Investment income		456			634			1,683			1,474
Interest expense		(2,785	)		(3,486	)		(8,240	)		(9,784	)
Other income (deductions), net		(897	)		(986	)		(2,669	)		(3,158	)

Income before income taxes		28,966			26,922			58,854			60,861

Income taxes		(9,327	)		(9,024	)		(20,058	)		(20,905	)

Net income		19,639			17,898			38,796			39,956

Net (income) loss attributable to noncontrolling interests		(376	)		93			(286	)		482

Net income attributable to Matthews shareholders	$	19,263		$	17,991		$	38,510		$	40,438

Earnings per share attributable to Matthews shareholders:
Basic		$0.70			$0.65			$1.41			$1.47

Diluted		$0.70			$0.65			$1.40			$1.46

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 June 30,
	Matthews						Noncontrolling Interest					Total
	2014			2013			2014		2013			2014			2013

Net income (loss):	$	19,263		$	17,991		$	376	$	(93	)	$	19,639		$	17,898
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		477			(1,653	)		120		44			597			(1,609	)
Pension plans and other postretirement benefits		565			1,073			-		-			565			1,073
Unrecognized gain (loss) on derivatives:
Net change from periodic revaluation		(1,965	)		2,463			-		-			(1,965	)		2,463
Net amount reclassified to earnings		1,212			649			-		-			1,212			649
Net change in unrecognized gain (loss) on
derivatives		(753	)		3,112			-		-			(753	)		3,112
Other comprehensive income (loss), net of tax		289			2,532			120		44			409			2,576
Comprehensive income (loss)	$	19,552		$	20,523		$	496	$	(49	)	$	20,048		$	20,474

	Nine Months Ended June 30,
	Matthews						Noncontrolling Interest					Total
	2014			2013			2014		2013			2014			2013

Net income (loss):	$	38,510		$	40,438		$	286	$	(482	)	$	38,796		$	39,956
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		3,246			(7,587	)		66		99			3,312			(7,488	)
Pension plans and other postretirement benefits		1,622			3,220			-		-			1,622			3,220
Unrecognized gain (loss) on derivatives:
Net change from periodic revaluation		(2,437	)		2,960			-		-			(2,437	)		2,960
Net amount reclassified to earnings		2,511			1,887			-		-			2,511			1,887
Net change in unrecognized gain (loss) on
derivatives		74			4,847			-		-			74			4,847
Other comprehensive income (loss), net of tax		4,942			480			66		99			5,008			579
Comprehensive income (loss)	$	43,452		$	40,918		$	352	$	(383	)	$	43,804		$	40,535

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

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

for the nine months ended June 30, 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		-		-			40,438			-			-			(482	)		39,956
Minimum pension liability		-		-			-			3,220			-			-			3,220
Translation adjustment		-		-			-			(7,587	)		-			99			(7,488	)
Fair value of derivatives		-		-			-			4,847			-			-			4,847
Total comprehensive income																			40,535
Stock-based compensation		-		4,153			-			-			-			-			4,153
Purchase of 405,116 shares of treasury stock		-		-			-			-			(13,529	)		-			(13,529	)
Issuance of 294,478 shares of treasury stock		-		(8,125	)		-			-			9,081			-			956
Cancellations of 44,006 shares of treasury stock				1,884									(1,884	)					-
Dividends, $.30 per share		-		-			(8,300	)		-			-			-			(8,300	)
Arrangement with noncontrolling interests							4,980									1,653			6,633
Distributions to noncontrolling interests		-		-			-			-			-			(766	)		(766	)
Balance, June 30, 2013	$	36,334	$	45,805		$	764,294		$	(64,603	)	$	(274,831	)	$	3,117		$	510,116

	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		-		-			38,510			-			-			286			38,796
Minimum pension liability		-		-			-			1,622			-			-			1,622
Translation adjustment		-		-			-			3,246			-			66			3,312
Fair value of derivatives		-		-			-			74			-			-			74
Total comprehensive income																			43,804
Stock-based compensation		-		4,906			-			-			-			-			4,906
Purchase of 112,863 shares of treasury stock		-		-			-			-			(4,639	)		-			(4,639	)
Issuance of 218,578 shares of treasury stock		-		(6,796	)		-			-			8,785			-			1,989
Cancellations of 77,597 shares of treasury stock				3,156									(3,156	)
Dividends, $.33 per share		-		-			(9,118	)		-			-			-			(9,118	)
Distributions to noncontrolling interests		-		-			-			-			-			(165	)		(165	)
Balance, June 30, 2014	$	36,334	$	48,581		$	805,154		$	(21,998	)	$	(282,016	)	$	3,652		$	589,707

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)

	Nine Months Ended
	June 30,
	2014			2013


Cash flows from operating activities:
Net income	$	38,796		$	39,956
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,020			26,481
Stock-based compensation expense		4,906			4,153
Change in deferred taxes		(309	)		137
Gain on sale of assets		(571	)		(630	)
Unrealized gain on investments		(1,283	)		(952	)
Changes in working capital items		(14,348	)		(5,827	)
(Increase) decrease in other assets		(1,835	)		370
Decrease in other liabilities		2,236			2,864
Increase in pension and postretirement benefits		6,190			10,043
Other, net		1,745			(3,657	)

Net cash provided by operating activities		63,547			72,938

Cash flows from investing activities:
Capital expenditures		(18,754	)		(17,268	)
Proceeds from sale of assets		45			251
Acquisitions, net of cash acquired		-			(67,587	)

Net cash used in investing activities		(18,709	)		(84,604	)

Cash flows from financing activities:
Proceeds from long-term debt		20,352			113,906
Payments on long-term debt		(28,479	)		(74,122	)
Payment on contingent consideration		(3,703	)		(9,542	)
Proceeds from the sale of treasury stock		2,045			956
Purchases of treasury stock		(4,639	)		(13,529	)
Dividends		(9,118	)		(8,300	)
Distributions to noncontrolling interests		(165	)		(766	)

Net cash provided by (used in) financing activities		(23,707	)		8,603

Effect of exchange rate changes on cash		526			(335	)

Net change in cash and cash equivalents	$	21,657		$	(3,398	)

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)

June 30, 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 nine months ended June 30, 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 for bank overdrafts in the Consolidated Statement of Cash Flows for the nine months ended June 30, 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:

	June 30, 2014								September 30, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives (1)		-	$	2,230		-	$	2,230		-	$	3,736		-	$	3,736
Trading securities	$	19,279		-		-		19,279	$	17,929		-		-	$	17,929
Total assets at fair value	$	19,279	$	2,230		-	$	21,509	$	17,929	$	3,736		-	$	21,665

Liabilities:
Derivatives (1)		-	$	3,017		-	$	3,017		-	$	4,644		-	$	4,644
Total liabilities at fair value		-	$	3,017		-	$	3,017		-	$	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:

	June 30, 2014		September 30, 2013

Raw materials	$	42,825	$	40,931
Work in process		31,590		25,293
Finished goods		67,493		64,544
	$	141,908	$	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 at June 30, 2014 was $500,000. 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 June 30, 2014 and September 30, 2013 were $305,000. The weighted-average interest rate on outstanding borrowings on this facility at June 30, 2014 and 2013 was 2.55% and 3.05%, respectively.

In connection with the recent acquisition of SGK (see “Acquisitions”), on July 29, 2014 the Company entered into the first and second amendments to the Revolving Credit Facility to amend certain terms of the Revolving Credit Facility and increase the maximum amount of borrowings available under the facility from $500,000 to $900,000. Under the terms of the amended facility, the interest rate spread at June 30, 2014 of 1.25% would have increased to 1.75%.

The Company has entered into the following interest rate swaps:

Effective Date	Amount	Fixed Interest Rate	Interest Rate Spread at June 30, 2014	Maturity Date
October 2011	$25,000	1.67%	1.25%	October 2015
November 2011	25,000	2.13%	1.25%	November 2014
March 2012	25,000	2.44%	1.25%	March 2015
June 2012	40,000	1.88%	1.25%	June 2022
August 2012	35,000	1.74%	1.25%	June 2022
September 2012	25,000	3.03%	1.25%	December 2015
September 2012	25,000	1.24%	1.25%	March 2017
November 2012	25,000	1.33%	1.25%	November 2015
May 2014	25,000	1.35%	1.25%	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 net loss, net of unrealized gains of $787 ($480 after tax) at June 30, 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 constant with the rates at June 30, 2014, approximately $1,152 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 June 30, 2014 and September 30, 2013, the interest rate swap contracts were reflected as net asset and net liability on the balance sheets. The following derivatives are designated as hedging instruments:


Balance Sheet Location:	June 30, 2014			September 30, 2013
Current assets
Other current assets	$	279		$	427
Long-term assets
Other assets		1,951			3,309
Current liabilities:
Other current liabilities		(2,167	)		(2,590	)
Long-term liabilities
Other liabilities		(850	)		(2,054	)
Total derivatives	$	(787	)	$	(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 June 30,

Nine Months ended June 30,

2014

2013

2014

2013

Interest rate swaps

Interest expense

$(1,987)

$(1,065)

$(4,117)

$(3,094)

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 Gain or (Loss)

From

AOCI into

Derivatives in

Recognized in

AOCI into

Income

Cash Flow

AOCI on Derivatives

Income

(Effective Portion*)

Hedging Relationships

June 30, 2014

June 30, 2013

(Effective

Portion*)

June 30, 2014

June 30, 2013

Interest rate swaps

$(2,437)

$2,960

Interest expense

$(2,511)

$(1,887)

*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 borrowings available under this facility is 25.0 million Euros ($34,233). Outstanding borrowings under the credit facility totaled 20.1 million Euros ($27,539) and 22.5 million Euros ($30,454) at June 30, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2014 and 2013 was 1.35% 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 ($2,007) and 1.7 million Euros ($2,310) at June 30, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2014 and 2013 was 4.04% and 3.92%, respectively.

The Company, through its German subsidiary, Wetzel GmbH (“Wetzel”), has several loans with various European banks. Outstanding borrowings under these loans totaled 6.3 million Euros ($8,581) and 7.4 million Euros ($10,000) at June 30, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2014 and 2013 was 7.62% and 7.26%, 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 6.0 million Euros ($8,182) and 5.1 million Euros ($6,871) at June 30, 2014 and September 30, 2013, respectively. Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($15,514) with the same Italian banks. Outstanding borrowings on these lines were 4.8 million Euros ($6,555) and 5.6 million Euros ($7,639) at June 30, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2014 and 2013 was 3.13% and 3.17%, respectively.

As of June 30, 2014 and September 30, 2013 the fair value of the Company’s long-term debt, including current maturities, which is classified as level 2 in the fair value hierarchy, approximated the carrying value included in the Condensed Consolidated Balance Sheet.

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 June 30, 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 any of the plans may not be less than the fair market value of the Company's common stock on the date of grant. Outstanding stock options are generally exercisable 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, 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 June 30, 2014 and 2013, total stock-based compensation cost totaled $1,667 and $1,396, respectively. For the nine-month periods ended June 30, 2014 and 2013, total stock-based compensation cost totaled $4,906 and $4,153, respectively. The associated future income tax benefit recognized was $650 and $545 for the three-month periods ended June 30, 2014 and 2013, respectively, and $1,913 and $1,620 for the nine-month periods ended June 30, 2014 and 2013, respectively.

For the three-month period ended June 30, 2014 and 2013, the amount of cash received from the exercise of stock options was $217 and $432, respectively. For the nine-month periods ended June 30, 2014 and 2013, the amount of cash received from the exercise of stock options was $2,045 and $956, respectively. In connection with these exercises, the tax benefits realized by the Company were $1 and $32 for the three-month period ended June 30, 2014 and 2013, respectively, and $186 and $98 for the nine-month periods ended June 30, 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 nine months ended June 30, 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		(236,888	)		29.48
Expired or forfeited		(77,417	)		30.84
Non-vested at June 30, 2014		528,319			31.63

As of June 30, 2014, the total unrecognized compensation cost related to unvested restricted stock was $6,387 and is expected to be recognized over a weighted average period of 1.7 years.

The transactions for shares under options for the nine months ended June 30, 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		(63,121	)		32.40
Expired or forfeited		(20,546	)		39.08
Outstanding, June 30, 2014		661,157			38.23		1.5		2,213
Exercisable, June 30, 2014		348,715			37.77		1.4		1,326

No options vested during the three-month and nine-month periods ended June 30, 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 nine-month periods ended June 30, 2014 and 2013 was $510 and $291, 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 non-vested options for the nine months ended June 30, 2014 were as follows:

				Weighted-average
				grant-date
	Shares			fair value
Non-vested at September 30, 2013		331,755			$11.29
Granted		-			-
Vested		-			-
Expired or forfeited		(19,313	)		12.65
Non-vested at June 30, 2014		312,442			11.21

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 nine months ended June 30, 2014 and 2013.

	Nine Months Ended June 30,
	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 option characteristics for each grant are considered separately for valuation purposes.

Under the Company’s 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 with a value equal to $60. The annual retainer fee 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 Director Fee Plan at June 30, 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 June 30, 2014, 11,800 options were outstanding and vested. Additionally, 120,503 shares of restricted stock have been granted under the plan, 37,457 of which were unvested at June 30, 2014. A total of 300,000 shares have been authorized to be issued under the 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				Nine Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Net income attributable to Matthews shareholders	$	19,263	$	17,991	$	38,510	$	40,438
Less: dividends and undistributed earnings allocated to participating securities		35		178		128		438
Net income available to Matthews shareholders	$	19,228	$	17,813	$	38,382	$	40,000

Weighted-average shares outstanding (in thousands):
Basic shares		27,294		27,299		27,223		27,303
Effect of dilutive securities		197		161		227		116
Diluted shares		27,491		27,460		27,450		27,419

There were no anti-dilutive securities for the three and nine months ended June 30, 2014. Options to purchase 550,366 and 563,022 shares of common stock were not included in the computation of diluted earnings per share for the three months and nine months ended June 30, 2013, respectively, because the inclusion of these options would be anti-dilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

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 June 30,
	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	)		(23	)		(68	)
Net actuarial loss		991			1,806			(49	)		110

Net benefit cost	$	2,338		$	3,109		$	267		$	523

	Nine months ended June 30,
	Pension						Other Postretirement
	2014			2013			2014			2013

Service cost	$	4,746		$	5,055		$	327		$	597
Interest cost		6,639			5,739			690			846
Expected return on plan assets		(7,188	)		(6,729	)		-			-
Amortization:
Prior service cost		(156	)		(156	)		(66	)		(204	)
Net actuarial loss		2,973			5,418			(147	)		330

Net benefit cost	$	7,014		$	9,327		$	804		$	1,569

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 nine months ended June 30, 2014:
Supplemental retirement plan	$	543	$	-
Other postretirement plan		-		709

Additional contributions expected in fiscal 2014:
Supplemental retirement plan		180		-
Other postretirement plan		-		217

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 June 30, 2014 were as follows:

		Post-retirement benefit plans			Currency translation adjustment			Derivatives			Total
Attributable to Matthews:
Balance, March 31, 2014		$	(29,043	)	$	6,483		$	273		$	(22,287	)
OCI before reclassification			-			477			(1,965	)		(1,488	)
Amounts reclassified from AOCI	(a)		565			-	(b)		1,212			1,777
Net current-period OCI			565			477			(753	)		289
Balance, June 30, 2014		$	(28,478	)	$	6,960		$	(480	)	$	(21,998	)
Attributable to noncontrolling interest:
Balance, March 31, 2014			-		$	347			-		$	347
OCI before reclassification			-			120			-			120
Net current-period OCI			-			120			-			120
Balance, June 30, 2014			-		$	467			-		$	467

The changes in AOCI by component, net of tax, for the nine month period ended June 30, 2014 were as follows:

		Post-retirement benefit plans			Currency translation adjustment			Derivatives			Total
Attributable to Matthews:
Balance, September 30, 2013		$	(30,000	)	$	3,714		$	(554	)	$	(26,940	)
OCI before reclassification			-			3,246			(2,437	)		809
Amounts reclassified from AOCI	(a)		1,622			-	(b)		2,511			4,133
Net current-period OCI			1,622			3,246			74			4,942
Balance, June 30, 2014		$	(28,478	)	$	6,960		$	(480	)	$	(21,998	)
Attributable to noncontrolling interest:
Balance, September 30, 2013			-		$	401			-		$	401
OCI before reclassification			-			66			-			66
Net current-period OCI			-			66			-			66
Balance, June 30, 2014			-		$	467			-		$	467

(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 nine month periods ended June 30, 2014 were as follows:

	Amount reclassified from AOCI
Details about AOCI Components	Three months ended June 30, 2014				Nine months ended June 30, 2014			Affected line item in the Statement of income

Postretirement benefit plans
Prior service (cost) credit		75		(a)		222
Actuarial losses		(942	)	(a)		(2,826	)
		(867	)	(b)		(2,604	)	Total before tax
		(302	)			(982	)	Tax provision (benefit)
	$	(565	)		$	(1,622	)	Net of tax
Derivatives
Interest rate swap contracts		(1,987	)			(4,117	)	Interest expense
		(1,987	)	(b)		(4,117	)	Total before tax
		(775	)			(1,606	)	Tax provision (benefit)
		(1,212	)			(2,511	)	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 nine months ended June 30, 2014 was 34.1%, compared to 34.3% for the nine months ended June 30, 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 $4,346 and $4,516 on June 30, 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 $587 in interest and penalties in the income tax provision for the nine months of fiscal 2014. Total penalties and interest accrued were $2,670 and $2,401 at June 30, 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 June 30, 2014, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal		2011 and forward
United States – State		2009 and forward
Canada		2008 and forward
Europe		2008 and forward
United Kingdom		2012 and forward
Australia		2009 and forward
Asia		2008 and forward

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 11. Segment Information

The 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 (Cemetery Products, Funeral Home Products, Cremation) and Brand Solutions (Graphics Imaging, Marking and Fulfillment Systems, 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 interests.

Information about the Company's segments follows:

Three Months Ended

Nine Months Ended

June 30,

2014