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, 2006
 
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 NORTHSHORECENTER, 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 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).    
 
           Yes o      No x  
 
 
 
 
 
 
As of April 30, 2006, shares of common stock outstanding were:
 
                Class A Common Stock 32,120,370 shares


PART I ‑ FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
 
 
 
March 31, 2006
 
September 30, 2005*
 
 
 
(unaudited)
 
(restated)
 
ASSETS
   
   
   
   
 
Current assets:
   
   
   
   
 
Cash and cash equivalents
   
 
$
36,640
   
 
$
39,555
 
Short-term investments
   
   
68
   
   
67
 
Accounts receivable, net
   
   
108,562
   
   
115,362
 
Inventories
   
   
81,624
   
   
71,333
 
Other current assets
   
   
7,590
   
   
5,816
 
 
   
   
   
   
 
        Total current assets
   
   
234,484
   
   
232,133
 
Investments
   
   
11,076
   
   
11,072
 
Property, plant and equipment: Cost
   
192,956
   
   
186,232
   
 
    Less accumulated depreciation
   
(104,389)
 
 
   
(97,365)
 
 
 
 
   
   
88,567
   
   
88,867
 
Deferred income taxes and other assets
   
   
27,709
   
   
26,314
 
Goodwill
   
   
280,125
   
   
260,672
 
Other intangible assets, net
   
   
45,153
   
   
46,397
 
 
   
   
   
   
 
Total assets
   
 
$
687,114
   
 
$
665,455
 
 
   
   
   
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY
   
   
   
   
 
Current liabilities:
   
   
   
   
 
Long-term debt, current maturities
   
 
$
30,084
   
 
$
28,721
 
Accounts payable
   
   
20,821
   
   
43,524
 
Accrued compensation
   
   
28,520
   
   
32,858
 
Accrued income taxes
   
   
10,244
   
   
11,640
 
Other current liabilities
   
   
29,958
   
   
28,834
 
 
   
   
   
   
 
        Total current liabilities
   
   
119,627
   
   
145,577
 
 
   
   
   
   
 
Long-term debt
   
   
136,757
   
   
118,952
 
Postretirement benefits
   
   
28,084
   
   
25,508
 
Deferred income taxes
   
   
7,621
   
   
7,589
 
Environmental reserve
   
   
9,437
   
   
9,607
 
Other liabilities and deferred revenue
   
   
17,405
   
   
20,473
 
 
   
   
   
   
 
Shareholders' equity:
   
   
   
   
 
    Common stock
   
36,334
   
   
36,334
   
 
    Additional paid-in capital
   
32,382
   
   
29,524
   
 
    Retained earnings
   
376,860
   
   
350,311
   
 
    Accumulated other comprehensive income
   
(1,812)
 
 
   
(1,359)
 
 
 
    Treasury stock, at cost
   
(75,581)
 
 
   
(77,061)
 
 
 
 
   
   
368,183
   
   
337,749
 
 
   
   
   
   
 
Total liabilities and shareholders' equity
   
 
$
687,114
   
 
$
665,455
 
 
 
 
 
*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).
2


MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 31,
 
March 31,
 
 
 
2006
 
2005*
 
 
 
2006
 
2005*
 
 
 
 
 
(restated)
 
 
 
 
 
(restated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 
$
181,068
 
$
156,243
   
 
$
351,177
 
$
304,949
 
Cost of sales
   
(114,121)
 
 
(101,857)
 
 
   
(223,033)
 
 
(202,144)
 
 
   
   
   
   
   
 
Gross profit
   
66,947
   
54,386
   
   
128,144
   
102,805
 
 
   
   
   
   
   
 
Selling and administrative expenses
   
(37,886)
 
 
(28,875)
 
 
   
(76,665)
 
 
(57,804)
 
 
   
   
   
   
   
 
Operating profit
   
29,061
   
25,511
   
   
51,479
   
45,001
 
 
   
   
   
   
   
 
Investment income
   
244
   
316
   
   
571
   
639
 
Interest expense
   
(1,576)
 
 
(538)
 
 
   
(3,016)
 
 
(1,021)
 
Other income (deductions), net
   
(18)
 
 
(335)
 
 
   
(51)
 
 
1,591
 
Minority interest
   
(704)
 
 
(1,212)
 
 
   
(1,292)
 
 
(2,572)
 
 
   
   
   
   
   
 
Income before income taxes
   
27,007
   
23,742
   
   
47,691
   
43,638
 
 
   
   
   
   
   
 
Income taxes
   
(10,155)
 
 
(9,021)
 
 
   
(17,932)
 
 
(16,582)
 
 
   
   
   
   
   
 
Net income
 
$
16,852
 
$
14,721
   
 
$
29,759
 
$
27,056
 
 
   
   
   
   
   
 
Earnings per share:
   
   
   
   
   
 
    Basic
 
$
.53
 
$
.46
   
 
$
.93
 
$
.84
 
 
   
   
   
   
   
 
    Diluted
 
$
.52
 
$
.45
   
 
$
.92
 
$
.83
 
 
 
 
*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).
3


MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
 
 
 
Six Months Ended
 
 
 
March 31,
 
 
 
2006
 
2005*
 
 
 
 
 
(restated)
 
 
 
 
 
 
 
Cash flows from operating activities:
   
   
 
    Net income
 
$
29,759
 
$
27,056
 
    Adjustments to reconcile net income to net cash
provided by operating activities:
   
   
 
    Depreciation and amortization
   
10,706
   
9,832
 
    Minority interest
   
1,292
   
2,572
 
    Stock-based compensation expense
   
2,448
   
1,503
 
    Change in deferred taxes
   
(899)
 
 
(618)
 
    Changes in working capital items
   
(22,342)
 
 
(13,904)
 
    Increase (decrease) in other assets
   
(271)
 
 
906
 
    Increase (decrease) in other liabilities
   
(400)
 
 
190
 
    Increase in postretirement benefits
   
2,576
   
1,940
 
    Net (gain) loss on sale of assets
   
67
   
(320)
 
 
   
   
 
        Net cash provided by operating activities
   
22,936
   
29,157
 
 
   
   
 
Cash flows from investing activities:
   
   
 
    Capital expenditures
   
(7,488)
 
 
(7,909)
 
    Proceeds from sale of assets
   
90
   
735
 
    Acquisitions, net of cash acquired
   
(29,900)
 
 
(6,693)
 
    Purchases of investments
   
(104)
 
 
(467)
 
Proceeds from disposition of investments
   
7
   
1,514
 
 
   
   
 
        Net cash used in investing activities
   
(37,395)
 
 
(12,820)
 
 
   
   
 
Cash flows from financing activities:
   
   
 
    Proceeds from long-term debt
   
38,299
   
1,622
 
    Payments on long‑term debt
   
(21,019)
 
 
(10,474)
 
    Proceeds from the sale of treasury stock
   
1,421
   
4,477
 
    Purchases of treasury stock
   
(36)
 
 
(27,078)
 
    Tax benefit of exercised stock options
   
710
   
2,295
 
    Dividends
   
(3,210)
 
 
(2,886)
 
    Distributions to minority interests
   
(3,910)
 
 
(3,926)
 
 
   
   
 
        Net cash (used in) provided by financing activities
   
12,255
   
(35,970)
 
 
   
   
 
Effect of exchange rate changes on cash
   
(711)
 
 
(50)
 
 
   
   
 
Net decrease in cash and cash equivalents
 
$
(2,915)
 
$
(19,683)
 
 
 
 
 
*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).
4


MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 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 printing plates, pre-press services and imaging services for the corrugated and primary packaging 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 six months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006. 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).  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, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application 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 subsequent 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. 
 
5

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 Compensation
 
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.  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 4,817,765 shares at March 31, 2006.  Outstanding stock options are exercisable in various share amounts based on the attainment of certain market value levels of 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).  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 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 March 31, 2005:
   
   
 
Operating profit
 
$
25,511
 
$
26,385
 
Income before income taxes
 
$
23,742
 
$
24,616
 
Net income
 
$
14,721
 
$
15,263
 
Earnings per share of common stock:
   
   
 
Basic
 
$
.46
 
$
.47
 
Diluted 
 
$
.45
 
$
.47
 
 
   
   
 
For the six months ended March 31, 2005:
   
   
 
Operating profit
 
$
45,001
 
$
46,504
 
Income before income taxes
 
$
43,638
 
$
45,141
 
Net income
 
$
27,056
 
$
27,988
 
Earnings per share of common stock:
   
   
 
Basic
 
$
.84
 
$
.87
 
Diluted
 
$
.83
 
$
.86
 
Net cash provided by operating activities
 
$
29,157
 
$
27,526
 
Net cash used in financing activities
 
$
35,970
 
$
34,339
 
 
   
   
 
 
6

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 month periods ended March 31, 2006 and 2005, stock-based compensation cost totaled $1,087 and $874, respectively.  For the six month periods ended March 31, 2006 and 2005, stock-based compensation cost totaled $2,448 and $1,503, respectively.  The associated future income tax benefit recognized was $424 and $332 for the three month periods ended March 31, 2006 and 2005, respectively, and was $955 and $571 for the six month periods ended March 31, 2006 and 2005, respectively.
 
The amount of cash received from the exercise of stock options was $1,095 and $1,275, for the three month periods ended March 31, 2006 and 2005, respectively, and $1,421 and $4,477, for the six month periods ended March 31, 2006 and 2005, respectively.  In connection with these exercises, the tax benefits realized by the Company were $429 and $405 for the three month periods ended March 31, 2006 and 2005, respectively, and $710 and $2,295 for the six month periods ended March 31, 2006 and 2005, respectively.       
 
The transactions for shares under options for the six months ended March 31, 2006 were as follows:
 
                 Weighted-              
 
     
Weighted-
 
 
 
average
 
 
     
 
 
 
     
average
 
 
 
remaining
 
Aggregate
 
 
 
 
     
exercise
 
 
 
contractual
 
intrinsic
 
 
 
 
 
Shares
 
price
 
 
 
term
 
value
 
Outstanding, September 30, 2005
   
2,090,607
 
$
25.50
   
   
     
Granted
   
610,500
   
37.31
   
   
     
Exercised
   
87,116
   
16.66
   
   
     
Expired or forfeited
   
24,390
   
24.03
   
   
     
Outstanding, March 31, 2006
   
2,589,601
 
$
28.59
   
   
7.7
 
$
25,034
 
Exercisable, March 31, 2006
   
856,759
 
$
20.40
   
   
5.9
 
$
15,299
 
Shares reserved for future options
   
2,228,164
   
   
   
     
 
The weighted-average grant date fair value of options granted for the six month periods ended March 31, 2006 and 2005 was $9.47 and $11.61, respectively.  The fair value of shares earned was $915 and $1,148, during the three month periods ended March 31, 2006 and 2005, respectively, and $3,594 and $1,723 during the six month periods ended March 31, 2006 and 2005, 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, 2006 and 2005 was $1,887 and $6,681, respectively.   
 
The transactions for non-vested shares for the six months ended March 31, 2006 were as follows:
 
 
 
 
 
Weighted-average
 
 
 
 
 
grant-date
 
Non-vested shares
 
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
 
(23,556)
 
7.97
 
Non-vested at March 31, 2006
 
1,692,842
 
$9.66
 
 
7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
 
As of March 31, 2006 the total unrecognized compensation cost related to non-vested stock options was approximately $6,358.   This cost is expected to be recognized over a weighted-average period of 3.8 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 six month periods ended March 31, 2006 and 2005. 
 
 
 
Six Months Ended
March 31,
 
 
 
 
 
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.  
 
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 51,313 shares had been deferred under the Director Fee Plan at March 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 March 31, 2006.  Additionally, 4,800 shares of restricted stock were granted in March 2006 under the plan.  The restricted shares generally vest two years after the date of issuance.  A total of 500,000 shares have been authorized to be issued under the Director Fee Plan.
 
 
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 2006 of 37.6% and the Federal statutory rate of 35.0% primarily reflects the impact of state and foreign income taxes.
 
 
 
 
8

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
 
Note 5.   Earnings Per Share
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 31,
 
March 31,
 
 
 
2006
 
2005
 
 
 
2006
 
2005
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
16,852
   
14,721
   
 
$
29,759
 
$
27,056
 
 
   
   
   
   
   
 
Weighted-average common shares outstanding
   
32,087,041
   
32,141,437
       
32,063,349
   
32,219,152
 
Dilutive securities, primarily stock options
   
206,038
   
203,639
       
263,975
   
209,471
 
Diluted weighted-average
common shares outstanding
   
32,293,079
   
32,345,076
       
32,327,324
   
32,428,623
 
 
                     
Basic earnings per share
 
$
.53
 
$
.46
     
$
.93
 
$
.84
 
Diluted earnings per share
 
$
.52
 
$
.45
     
$
.92
 
$
.83
 
 
Net income and earnings per share for 2005 have been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).
 
 
Note 6.   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 Products (Bronze, Casket and Cremation) 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
 
Six Months Ended
 
 
 
March 31,
 
March 31,
 
 
 
2006
 
2005
 
 
 
2006
 
2005
 
Sales to external customers:
 
 
 
 
 
 
 
 
 
 
 
Memorialization:
   
   
   
   
   
 
    Bronze
 
$
53,138
 
$
50,584
   
 
$
101,822
 
$
94,563
 
    Casket
   
55,204
   
33,176
   
   
103,398
   
62,875
 
    Cremation
   
6,672
   
5,552
   
   
12,382
   
10,699
 
 
   
115,014
   
89,312
   
   
217,602
   
168,137
 
Brand Solutions:
   
   
   
   
   
 
    Graphics Imaging
   
34,258
   
35,496
   
   
67,548
   
70,403
 
    Marking Products
   
13,027
   
10,459
   
   
25,288
   
20,883
 
    Merchandising Solutions
   
18,769
   
20,976
   
   
40,739
   
45,526
 
 
   
66,054
   
66,931
   
   
133,575
   
136,812
 
 
   
   
   
   
   
 
 
 
$
181,068
 
$
156,243
   
 
$
351,177
 
$
304,949
 
 
9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
                                                                       
 
 
Three Months Ended
March 31,
 
 
 
Six Months Ended
March 31,
 
 
 
 
 
 
 
2006
 
 
 
2005
 
 
 
2006
 
 
 
2005
 
Operating profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorialization:
   
   
   
   
   
   
   
 
    Bronze
 
$
15,025
   
 
$
14,601
   
 
$
26,951
   
 
$
24,742
 
    Casket
   
6,909
   
   
5,193
   
   
10,497
   
   
8,559
 
    Cremation
   
1,115
   
   
180
   
   
1,688
   
   
(15)
 
 
   
23,049
   
   
19,974
   
   
39,136
   
   
33,286
 
Brand Solutions:
   
   
   
   
   
   
   
 
    Graphics Imaging
   
4,064
   
   
3,511
   
   
7,618
   
   
6,668
 
    Marking Products
   
2,421
   
   
1,525
   
   
4,356
   
   
3,117
 
    Merchandising Solutions
   
(473)
 
 
   
501
   
   
369
   
   
1,930
 
 
   
6,012
   
   
5,537
   
   
12,343
   
   
11,715
 
 
   
   
   
   
   
   
   
 
 
 
$
29,061
   
 
$
25,511
   
 
$
51,479
   
 
$
45,001
 
 
 
Note 7.   Comprehensive Income
 
Comprehensive 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 losses and minimum pension liability. For the three months ended March 31, 2006 and 2005, comprehensive income was $18,717 and $11,008, respectively.For the six months ended March 31, 2006 and 2005, comprehensive income was $29,306 and $31,574, respectively.Comprehensive income for the three and six month periods ended March 31, 2005 has been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).
 
 
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 six months ended March 31, 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
 
 
-
 
 
13,019
 
 
-
 
 
6,302
 
 
-
 
 
-
 
 
19,321
 
Translation and other adjustments
 
 
66
 
 
-
 
 
-
 
 
66
 
 
-
 
 
-
 
 
132
 
Balance at
  March 31, 2006
 
$
73,095
 
$
104,996
 
$
6,536
 
$
80,338
 
$
5,213
 
$
9,947
 
$
280,125
 
 
The additions to Graphics Imaging goodwill relate primarily to the purchase of the Doyle Group.  The additions to Casket goodwill relate to the acquisition of Royal Casket and a smaller domestic casket distributor.  
  
 
10

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 March 31, 2006 and September 30, 2005, respectively.
 
   
  Carrying
 
 Accumulated
     
 
 
 Amount
 
 Amortization
      Net   
 March 31, 2006              
 Trade names   $ 23,480   $ -*   $ 23,480  
 Customer relationships     20,748     (2,104 )   18,644  
 Copyrights/patents/other     4,921     (1,892 )   3,029  
    $ 49,149   $ (3,996 ) $ 45,153  
                     
 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                    
 
 Note 9.   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 March 31, 2006 were $137,833.  The weighted-average interest rate on outstanding borrowings at March 31, 2006 and 2005 was 4.45% and 3.16%, 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 .50% at March 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 $2,500 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 .50% at March 31, 2006).  The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the
 
11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
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 $2,028 ($1,237 after tax) at March 31, 2006 that is included in shareholders’ equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at March 31, 2006, approximately $401 of the $1,237 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 March 31, 2006, outstanding borrowings under the credit facility totaled 10.0 million Euros ($12,121).  The weighted-average interest rate on outstanding borrowings of MIGmbH was 3.07% at March 31, 2006.
 
The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 8.5 million Euros ($10,344) at March 31, 2006.  Caggiati S.p.A. also has three lines of credit totaling 8.4 million Euros ($10,145) with the same Italian banks.  Outstanding borrowings on these lines were 3.7 million Euros ($4,456) at March 31, 2006.  The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at March 31, 2006 and 2005 was 3.12% and 3.20%, respectively. 
 
 
Note 10.  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 March 31,
   
2006
   
2005
   
2006
   
2005
 
 
   
   
   
   
 
Service cost
 
$
1,037
 
$
927
 
$
158
 
$
127
 
Interest cost
   
1,487
   
1,404
   
307
   
293
 
Expected return on plan assets
   
(1,708)
 
 
(1,585)
 
 
-
   
-
 
Amortization:
                 
Prior service cost
   
(4)
 
 
21
   
(322)
 
 
(322)
 
Net actuarial loss
   
373
   
344
   
161
   
124
 
 Net benefit cost
 
$
1,185
 
$
1,111
 
$
304
 
$
222
 
 
 
 
 
Pension
 
Other Postretirement
 
Six months ended March 31,
 
2006
 
2005
 
2006
 
2005
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
2,164
 
$
1,854
 
$
316
 
$
253
 
Interest cost
   
2,962
   
2,808
   
614
   
586
 
Expected return on plan assets
   
(3,416)
 
 
(3,168)
 
 
-
   
-
 
Amortization:
   
   
   
   
 
Prior service cost
   
(8)
 
 
42
   
(644)
 
 
(644)
 
Net actuarial loss
   
872
   
689
   
322
   
247
 
 Net benefit cost
 
$
2,574
 
$
2,225
 
$
608
 
$
442
 
 
 
12

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
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 funds. The Company does not currently expect to make any significant contributions to its principal retirement plan in fiscal 2006. As of March 31, 2006, contributions of $148 and $790 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $197 and $171 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2006.
 
Note 11.  Acquisitions
 
Acquisition spending, net of cash acquired, during the six months ended March 31, 2006 totaled $29,900, 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 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, 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.  Intangible assets also include customer relationships with an assigned value of $10,400 to be amortized over their estimated useful lives of 20 years.
 
The following unaudited pro-forma information presents a summary of the consolidated results of Matthews combined with Milso as if the acquisition had occurred on October 1, 2004:
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 31,
 
March 31,
 
 
 
2006
 
2005
 
2006
 
2005
 
Sales
 
$
181,068
 
$
181,914
 
$
351,177
 
$
348,556
 
Income before taxes
   
27,007
   
28,797
   
47,691
   
48,367
 
Net income
   
16,852
   
17,392
   
29,759
   
29,988
 
Earnings per share
 
$
.52
 
$
.53
 
$
.92
 
$
.92
 
 
 
 
13

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollar amounts in thousands, except per share data)
 
 
These unaudited pro-forma results have been prepared for comparative purposes only and include certain adjustments, such as interest expense on acquisition debt.  The pro-forma information does not purport 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 in the future.
 
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.
 
 
 
 

 
 
14

 
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 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.  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.
 
                                               
 
 
Six months ended
 
Years ended
 
 
 
March 31,
 
September 30,
 
 
 
2006
 
2005
 
2005
 
2004
 
Sales
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Gross profit
   
36.5
%
 
33.7
%
 
34.9
%
 
38.1
%
Operating profit
   
14.7
%
 
14.8
%
 
15.4
%
 
18.7
%
Income before taxes
   
13.6
%
 
14.3
%
 
14.5
%
 
17.5
%
Net income
   
8.5
%
 
8.9
%
 
9.1
%
 
10.7
%
 
 
Results of Operations:
 
Sales for the six months ended March 31, 2006 were $351.2 million, or 15.2%, higher than sales of $304.9 million for the six months ended March 31, 2005.  The increase resulted principally from the acquisition of Milso Industries (“Milso”) in the fourth quarter of fiscal 2005 and higher sales in the Bronze, Cremation and Marking Products segments.  These increases were offset partially by the effect of lower foreign currency values against the U.S. dollar and lower sales in the Merchandising Solutions segment.  For the six months ended March 31, 2006, changes in foreign currency values against the U.S. dollar had an unfavorable impact of approximately $5.7 million on the Company’s consolidated sales compared to the six months ended March 31, 2005.
 
15

Bronze segment sales for the first six months of fiscal 2006 were $101.8 million compared to $94.6 million for the first six months of fiscal 2005.  The increase of 7.7% in Bronze sales primarily reflected higher prices for memorial products and higher mausoleum sales.  These increases were partially offset by the effects of changes in the values of foreign currencies against the U.S. dollar.  Sales for the Casket segment were $103.4 million for the first six months of fiscal 2006 compared to $62.9 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 $12.4 million for the first half of fiscal 2006 compared to $10.7 million for the same period a year ago.  The increase primarily reflected higher sales and improved pricing of cremation equipment and cremation caskets.  Sales for the Graphics Imaging segment in the first half of fiscal 2006 were $67.5 million, compared to $70.4 million for the same period a year ago.  The decline primarily reflected a decrease in the value of foreign currencies against the U.S. dollar, offset by higher sales in domestic markets.  Marking Products segment sales for the six months ended March 31, 2006 were $25.3 million, compared to $20.9 million for the first six months of fiscal 2005.  The increase of $4.4 million, or 21.1%, was principally due to higher sales volume, particularly in the segment’s industrial automation business.  Sales for the Merchandising Solutions segment were $40.7 million for the first half of fiscal 2006, compared to $45.5 million for the same period a year ago.  The decline is attributable to lower volume of merchandising systems and displays.  In addition, the first half of fiscal 2005 included sales for several large customer promotional programs that did not repeat in this fiscal year.
 
Gross profit for the six months ended March 31, 2006 was $128.1 million, compared to $102.8 million for the six months ended March 31, 2005.  The increase in consolidated gross profit primarily reflected the acquisition of Milso during the fourth quarter of fiscal 2005, higher sales in the Bronze, Cremation and Marking Products segments and the effects of manufacturing improvements and cost reduction initiatives.  These gains were partially offset by operating costs at the Company’s new casket manufacturing facility in Mexico, lower sales in the Merchandising Solutions segment and lower foreign currency values against the U.S. dollar.  Consolidated gross profit as of percent of sales increased from 33.7% for the first half of fiscal 2005 to 36.5% for the first six months of fiscal 2006.  The increase primarily reflected the Milso acquisition and improved margins in the Graphics Imaging and Cremation segments.  These increases were partially offset by a decline in Bronze gross margin reflecting the significant rise in bronze ingot cost.
 
Selling and administrative expenses for the six months ended March 31, 2006 were $76.7 million, compared to $57.8 million for the first half of fiscal 2005.  Consolidated selling and administrative expenses as a percent of sales were 21.8%for the six months ended March 31, 2006, compared to 19.0% for the same period last year.  The increases primarily reflected the acquisition of Milso during the fourth quarter of fiscal 2005 and the expansion of the Casket segment’s casket distribution capabilities.  Bronze segment selling and administrative expenses decreased in fiscal 2006 compared to fiscal 2005 due to cost containment efforts intended to mitigate some of the increase in bronze metal costs.
 
Operating profit for the six months ended March 31, 2006 was $51.5 million, representing an increase of $6.5 million over operating profit of $45.0 million for the six months ended March 31, 2005.  The increase of 14.4% reflected higher operating income in five of the Company’s six operating segments.  Bronze segment operating profit for the first half of fiscal 2006 was $26.9 million, compared to $24.7 million for the same period in fiscal 2005.  However, for the second quarter of fiscal 2006, the increase in Bronze segment operating profit over the fiscal 2005 quarter was less than 3%, and operating profit as a percentage of sales declined from the second quarter a year ago.  The reduction in margin is directly attributable to the significant increase in bronze metal costs.  Operating profit for the Casket segment for the first six months of fiscal 2006 was $10.5 million, compared to $8.6 million for the first half of fiscal 2005.  The increase reflected the Milso acquisition, offset by lower sales in several territories, operating costs in excess of revenues at the Company’s new casket manufacturing facility in Mexico and costs incurred in connection with the shut-down of the segment’s Lynn, Indiana manufacturing facility during the second quarter of fiscal 2006.  Cremation segment operating profit for the six months ended March 31, 2006 was $1.7 million, compared to an operating loss of $15,000 for the same period a year ago.  The increase reflected higher sales, improved pricing and cost reduction initiatives.  The Graphics Imaging segment operating profit for the six months ended March 31, 2006 was $7.6 million, compared to $6.7 million for the six months ended March 31, 2005.  The increase reflected cost structure changes implemented within the segment’s U.S. and U.K. operations in the fiscal 2005 fourth quarter, offset partially by lower foreign currency values against the U.S. dollar.  Operating profit for the Marking Products segment for the first six months of fiscal 2006 was $4.4 million, compared to $3.1 million for the same period a year ago.  The increase primarily resulted from higher sales.  The Merchandising Solutions segment operating profit was $369,000 for the six months ended March 31, 2006, compared to $1.9 million for the same period in fiscal 2005.  The decrease primarily reflected lower sales in fiscal 2006 compared to fiscal 2005.  For the six months ended March 31, 2006, changes in foreign currency values against the U.S. dollar had an unfavorable impact of approximately $1.0 million on the Company’s consolidated operating profit compared to the six months ended March 31, 2005.
 
16

Investment income for the six months ended March 31, 2006 was $571,000, compared to $639,000 for the six months ended March 31, 2005.  Interest expense for the first half of fiscal 2006 was $3.0 million, compared to $1.0 million for the same period last year.  The increase in interest expense primarily reflected a higher average level of debt and higher average interest rates during the fiscal 2006 six-month periodcompared to the same period 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.
 
Other income (deductions), net, for the six months ended March 31, 2006 represented a reduction in pre-tax income of $51,000, compared to an increase in pre-tax income of $1.6 million for the same period last year.  Other income in the first six months of fiscal 2005 primarily reflected foreign currency exchange gains on intercompany advances to foreign affiliates. 
 
Minority interest deduction was $1.3 million for the first half of fiscal 2006, compared to $2.6 million for the same period in fiscal 2005.  The reduction in minority interest reflects the Company’s acquisition of an additional 30% interest in S+T Gesellschaft fur Reprotechnik GmbH (“S+T”) on September 30, 2005, and lower earnings from the Company’s other less than wholly-owned subsidiaries. 
 
The Company's effective tax rate for the six months ended March 31, 2006 was 37.6% which is the same as the effective tax rate for the fiscal year ended September 30, 2005.  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:
 
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 additional adjustments to the carrying values of goodwill were necessary at March 31, 2006.
 
 
Liquidity and Capital Resources:
 
Net cash provided by operating activities was $22.9 million for the six months ended March 31, 2006, compared to $29.2 million for the first six months of fiscal 2005.  Operating cash flow for both periods primarily reflected net income adjusted for depreciation, amortization, stock-based compensation expense and an increase in minority interest, partially offset by an increase in working capital.  The year-over-year decline in cash provided by operating activities is attributable to an increase in working capital primarily resulting from the Casket segment’s investment in casket distribution capabilities.
 
Cash used in investing activities was $37.4 million for the six months ended March 31, 2006, compared to $12.8 million for the six months ended March 31, 2005.  Investing activities for the first six months of fiscal 2006 primarily included capital expenditures of $7.5 million and acquisition related payments of $29.9 million.  Investing activities for the first six months of fiscal 2005 primarily included capital expenditures of $7.9 million, acquisition related payments of $6.7 million and proceeds from the net disposition of assets of $1.8 million.
 
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 million for the last three fiscal years.  The capital budget for fiscal 2006 is $27.7 million.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.
 
17

Cash provided by financing activities for the six months ended March 31, 2006 was $12.3 million, primarily reflecting net borrowings of long-term debt of $17.3 million, proceeds of $1.4 million from the sale of treasury stock (stock option exercises), a tax benefit of $710,000 from exercised stock options, payment of dividends of $3.2 million to the Company's shareholders and distributions of $3.9 million to minority interests.  Cash used in financing activities for the six months ended March 31, 2005 was $36.0 million, primarily reflecting net payments on long-term debt of $8.9 million, purchases of treasury stock of $27.1 million, payment of dividends of $2.9 million to the Company's shareholders and distributions of $3.9 million to minority interests, partially offset by proceeds of $4.5million from the sale of treasury stock (stock option exercises) and a tax benefit of $2.3 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 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 $10.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at March 31, 2006 were $137.8 million.  The weighted-average interest rate on outstanding borrowings at March 31, 2006 and 2005 was 4.45% and 3.16%, 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 .50% at March 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 .50% at March 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 $2.0 million ($1.2 million after tax) at March 31, 2006 that is included in equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at March 31, 2006, approximately $401,000 of the $1.2 million 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 March 31, 2006, outstanding borrowings under the credit facility totaled 10.0 million Euros ($12.1 million).  The weighted-average interest rate on outstanding MIGmbH related borrowings was 3.07% at March 31, 2006.
 
The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 8.5 million Euros ($10.3 million) at March 31, 2006.  Caggiati S.p.A. also has three lines of credit totaling approximately 8.4 million Euros ($10.1 million) with the same Italian banks.  Outstanding borrowings on these lines were 3.7 million Euros ($4.5 million) at March 31, 2006.   The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at March 31, 2006 and 2005 was 3.12% and 3.20%, respectively.
 
18

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 8,622,396 shares have been repurchased as of March 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 $114.9 million at March 31, 2006, compared to $86.6 million at September 30, 2005.  Cash and cash equivalents were $36.6 million at March 31, 2006, compared to $39.6 million at September 30, 2005.  The Company's current ratio was 2.0 at March 31, 2006, compared to 1.6 at September 30, 2005.
 
 
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 March 31, 2006, an accrual of $10.2 million was recorded for environmental remediation (of which $769,000 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 six months ended March 31, 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 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. 
 
19

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, 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 $95.0 million.  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 consideration as additional purchase price.  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 increase annual earnings per share in the range of 12% to 15% annually.  For the past eleven fiscal years, the Company has achieved an average annual increase in earnings per share of 15.7%.  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 significant factors impacting the Company’s results for the first six months of fiscal 2006 were the continued increase in the cost of bronze ingot, the recent acquisition of Milso, operating costs for the Company’s new casket facility in Mexico and the low profitability rate of the Merchandising Solutions segment.  While cost structure initiatives, productivity improvements and facility consolidation efforts are intended to address some of this impact, these factors are expected to continue to be a challenge for the remainder of the fiscal year, particularly in the competitive markets served by the Company.
 
Additionally, the Company’s Casket segment is undergoing a transition in strategy for the distribution of 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 growth in the casket market.  Although it is possible any actions taken as a result of this evaluation may result in near-term volatility in the operating results of this segment, our strategies will be designed toward the long-term growth of this business.
 
Earlier in the fiscal year the Company was cautiously optimistic that diluted earnings per share growth in fiscal 2006 would exceed our annual long-term target.  However, based on current anticipated internal growth, the impact of the Company’s recent acquisitions and the factors discussed above, the Company’s current projections for diluted earnings per share are more in line with our traditional 12 percent to 15 percent growth target and are expected to be in the range of $2.00 to $2.10 per share.
 
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.
 
20

 
A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005.  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 SFAS No. 123, “Accounting for Stock-Based Compensation”.  Effective October 1, 2005, the Company adopted 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.
 
21

 
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 March 31, 2006, the Company held 351,267 memorials and 246,748 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 March 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:
 
 
 
 
 
2006
 
 
 
 
 
After
 
 
 
Total
 
Remainder
 
2007 to 2008
 
2009 to 2010
 
2011
 
Contractual Cash Obligations:
 
(Dollar amounts in thousands)
Revolving credit facilities
 
$
149,955
 
$
11,667
 
$
46,667
 
$
91,621
 
$
-
 
Notes payable to banks
   
10,265
   
621
   
2,486
   
2,486
   
4,672
 
Short-term borrowings
   
4,456
   
4,456
   
-
   
-
   
-
 
Capital lease obligations
   
2,265
   
603
   
1,626
   
36
   
-
 
Non-cancelable operating leases
   
32,379
   
4,250
   
12,198
   
7,705
   
8,226
 
 
   
   
   
   
   
 
Total contractual cash obligations
 
$
199,320
 
$
21,597
 
$
62,977
 
$
101,848
 
$
12,898
 
 
A significant portion of the loans included in the table above bear interest at variable rates. At March 31, 2006, the weighted-average interest rate was 4.45% on the Company’s domestic Revolving Credit Facility, 3.07% on the credit facility through the Company’s wholly-owned German subsidiary, and 3.12% 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. As of March 31, 2006, contributions of $148,000 and $790,000 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $197,000 and $171,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2006.
 
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.
 
22

Accounting Pronouncements:
 
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application 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 subsequent 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. 
 
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 ($32.5 million outstanding at March 31, 2006).  The interest rate was fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor was .50% at March 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 ($43.3 million outstanding at March 31, 2006).  The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .50% at March 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 $2.0 million ($1.2 million after tax) at March 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% to 3.15%) would result in a decrease of approximately $732,000 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 $7.7 million and a decrease in operating income of $1.4 million for the six months ended March 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 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 March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
23


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 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 through April 14, 2007. 
 
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 have filed appeals of the Court’s injunction ruling to the Superior Court of Pennsylvania.   The Superior Court has not, as of yet, set a date to address the merits of the defendants’ appeals and, accordingly, 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 $58.0 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 and the Company does not presently believe that the ultimate resolution will have a material adverse impact on the Company’s financial position or results of operations.
 

 
24

 
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 8,622,396 shares have been repurchased as of March 31, 2006.  The Company purchased 1,000 shares of Matthews common stock in January 2006 at an average price of $36.44 per share under the program in fiscal 2006.      
 
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
The Annual Meeting of the Shareholders of Matthews International Corporation was held on February 16, 2006.  A total of 32,056,128 shares of Class A Common Stock were eligible to vote at such meeting.
 
The matters voted upon at such meeting were as follows:
 
1.   Election of Directors:
   
The following individuals were nominated for election to the Board of Directors for a term expiring at the Annual Meeting of  Shareholders in the year indicated. 
               
 
Term
 
 
Votes
Nominee
Expiration
 
Votes For
Withheld
Joseph C. Bartolacci
2009
 
21,632,636
7,374,995
Glenn R. Mahone
2009
 
19,770,425
9,237,206
William J. Stallkamp
2009
 
28,210,899
796,732
 
     The nominations were made by the Board of Directors and no other nominations were made by any shareholder.  The nominees had currently been members of the Board of Directors at the date of the Annual Meeting.
 
The terms of the following additional directors continued after the meeting:  D.M. Kelly, D.J. DeCarlo, R.J. Kavanaugh, J.P. O’Leary, Jr. and J.D. Turner.
 
 
3.     Selection of Auditors:
 
     The shareholders voted to ratify the appointment by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as independent registered public accountants to audit the records of the Company for the fiscal year ending September 30, 2006.
                    
Votes For
Votes Against
Votes Abstained
28,450,439
545,093
12,098
 
 
Item 6.  Exhibits and Reports on Form 8‑K
 
(a)
Exhibits
 
 
 
 
 
Exhibit
 
 
No.
Description
 
 
10.1
10.2
 
1992 Stock Incentive Plan (as amended through April 25, 2006).
1994 Director Fee Plan (as amended through April 25, 2006).
 
31.1
Certification of Principal Executive Officer for David M. Kelly
 
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.
 
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.
 
 
 
(b)
Reports on Form 8‑K
 
 
 
 
On January 19, 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 first fiscal quarter of 2006. 

 
 
25

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:  May 9, 2006
 
/s/ David M. Kelly
 
 
David M. Kelly, Chairman of the Board
 
 
and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
Date:  May 9, 2006
 
/s/ Steven F. Nicola
 
 
Steven F. Nicola, Chief Financial Officer,
 
 
Secretary and Treasurer
 
 
 
 
26