Form 10q for the 3rd quarter of 2006

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, 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 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 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 July 31, 2006, shares of common stock outstanding were:

Class A Common Stock 31,898,111 shares

PART I - FINANCIAL INFORMATION

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

	June 30, 2006					September 30, 2005*
	(unaudited)					(restated)
ASSETS
Current assets:
Cash and cash equivalents				$	36,951				$	39,555
Short-term investments					85					67
Accounts receivable, net					116,999					115,362
Inventories					86,953					71,333
Other current assets					6,960					5,816

Total current assets					247,948					232,133
Investments					11,160					11,072
Property, plant and equipment: Cost		198,674					186,232
Less accumulated depreciation		(109,975	)				(97,365	)
					88,699					88,867
Deferred income taxes and other assets					27,848					26,314
Goodwill					285,931					260,672
Other intangible assets, net					45,233					46,397

Total assets				$	706,819				$	665,455

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current maturities				$	28,376				$	28,721
Accounts payable					21,117					43,524
Accrued compensation					29,098					32,858
Accrued income taxes					7,994					11,640
Other current liabilities					31,157					28,834

Total current liabilities					117,742					145,577

Long-term debt					133,708					118,952
Postretirement benefits					28,959					25,508
Deferred income taxes					7,894					7,589
Environmental reserve					9,219					9,607
Other liabilities and deferred revenue					17,929					20,473

Shareholders' equity:
Common stock		36,334					36,334
Additional paid-in capital		33,240					29,524
Retained earnings		392,962					350,311
Accumulated other comprehensive income (loss)		4,849					(1,359	)
Treasury stock, at cost		(76,017	)				(77,061	)
					391,368					337,749

Total liabilities and shareholders' equity				$	706,819				$	665,455

*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).

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,
	2006			2005*			2006			2005*
				(restated)						(restated)


Sales	$	181,804		$	158,983		$	532,981		$	463,932
Cost of sales		(111,515	)		(101,863	)		(334,548	)		(304,007	)

Gross profit		70,289			57,120			198,433			159,925

Selling and administrative expenses		(39,766	)		(30,516	)		(116,431	)		(88,320	)

Operating profit		30,523			26,604			82,002			71,605

Investment income		366			366			937			1,005
Interest expense		(1,924	)		(519	)		(4,940	)		(1,540	)
Other income (deductions), net		130			(39	)		79			1,552
Minority interest		(720	)		(1,230	)		(2,012	)		(3,802	)

Income before income taxes		28,375			25,182			76,066			68,820

Income taxes		(10,669	)		(9,569	)		(28,601	)		(26,151	)

Net income	$	17,706		$	15,613		$	47,465		$	42,669

Earnings per share:
Basic	$	.55		$	.49		$	1.48		$	1.33

Diluted	$	.55		$	.49		$	1.47		$	1.32

*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands, except per share data)

	Nine Months Ended
	June 30,
	2006			2005*
				(restated)

Cash flows from operating activities:
Net income	$	47,465		$	42,669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,165			14,724
Minority interest		2,012			3,802
Stock-based compensation expense		3,189			2,377
Change in deferred taxes		(949	)		(1,192	)
Changes in working capital items		(36,651	)		(8,397	)
Increase (decrease) in other assets		(180	)		1,219
Decrease in other liabilities		(581	)		(440	)
Increase in postretirement benefits		3,988			2,842
Net gain on sale of assets		(105	)		(188	)

Net cash provided by operating activities		34,353			57,416

Cash flows from investing activities:
Capital expenditures		(11,978	)		(21,636	)
Proceeds from sale of assets		190			867
Acquisitions, net of cash acquired		(29,946	)		(14,210	)
Purchases of investments		(166	)		(11,554	)
Proceeds from disposition of investments		11			1,519

Net cash used in investing activities		(41,889	)		(45,014	)

Cash flows from financing activities:
Proceeds from long-term debt		52,433			12,518
Payments on long-term debt		(41,394	)		(18,520	)
Proceeds from the sale of treasury stock		1,869			5,351
Purchases of treasury stock		(877	)		(27,932	)
Tax benefit of exercised stock options		816			2,765
Dividends		(4,815	)		(4,323	)
Distributions to minority interests		(4,254	)		(4,394	)

Net cash provided by (used in) financing activities		3,778			(34,535	)

Effect of exchange rate changes on cash		1,154			(3,436	)

Net decrease in cash and cash equivalents	$	(2,604	)	$	(25,569	)

*See Note 3 for discussion of the retrospective adoption of SFAS No. 123(R).

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 nine months ended June 30, 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.

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.

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 4,811,808 shares at June 30, 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 June 30, 2005:
Operating profit	$	26,604	$	27,477
Income before income taxes	$	25,182	$	26,055
Net income	$	15,613	$	16,154
Earnings per share of common stock:
Basic	$	.49	$	.50
Diluted	$	.49	$	.50

For the nine months ended June 30, 2005:
Operating profit	$	71,605	$	73,981
Income before income taxes	$	68,820	$	71,196
Net income	$	42,669	$	44,142
Earnings per share of common stock:
Basic	$	1.33	$	1.37
Diluted	$	1.32	$	1.36
Net cash provided by operating activities	$	57,416	$	60,182
Net cash used in financing activities	$	34,535	$	37,300

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

			As previously
	Restated		reported
At September 30, 2005:
Deferred income taxes and other assets	$	26,314	$	22,926
Total assets	$	665,455	$	662,067
Additional paid-in capital	$	29,524	$	14,113
Retained earnings	$	350,311	$	362,334
Total shareholders’ equity	$	337,749	$	334,361

For the three month periods ended June 30, 2006 and 2005, stock-based compensation cost totaled $741 and $874, respectively. For the nine month periods ended June 30, 2006 and 2005, stock-based compensation cost totaled $3,189 and $2,377, respectively. The associated future income tax benefit recognized was $289 and $332 for the three month periods ended June 30, 2006 and 2005, respectively, and was $1,243 and $903 for the nine month periods ended June 30, 2006 and 2005, respectively.

The amount of cash received from the exercise of stock options was $448 and $874, for the three month periods ended June 30, 2006 and 2005, respectively, and $1,869 and $5,351 for the nine month periods ended June 30, 2006 and 2005, respectively. In connection with these exercises, the tax benefits realized by the Company were $106 and $470 for the three month periods ended June 30, 2006 and 2005, respectively, and $816 and $2,765 for the nine month periods ended June 30, 2006 and 2005, respectively.

The transactions for shares under options for the nine months ended June 30, 2006 were as follows:

					Weighted-
			Weighted-		average		Aggregate
			average		remaining		intrinsic
	Shares		exercise price		contractual term		value
Outstanding, September 30, 2005		2,090,607	$	25.50
Granted		610,500		37.31
Exercised		100,832		16.62
Expired or forfeited		37,556		25.24
Outstanding, June 30, 2006		2,562,719	$	28.66		7.3	$	14,880
Exercisable, June 30, 2006		881,543	$	20.85		5.5	$	12,009
Shares reserved for future options		2,249,089

The weighted-average grant date fair value of options granted for the nine month periods ended June 30, 2006 and 2005 was $9.47 and $11.61, respectively. The fair value of shares earned was $3,594 and $1,723 during the nine month periods ended June 30, 2006 and 2005, respectively. No shares were earned in the three month periods ended June 30, 2006 and 2005. 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, 2006 and 2005 was $2,157 and $8,019, respectively.

The transactions for non-vested shares for the nine months ended June 30, 2006 were as follows:

				Weighted-average
				grant-date
	Shares			fair value
Non-vested at October 1, 2005		1,621,874		$	9.58
Granted		610,500			9.47
Vested		(515,976	)		6.97
Expired or forfeited		(35,222	)		7.97
Non-vested at June 30, 2006		1,681,176		$	9.67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

As of June 30, 2006, the total unrecognized compensation cost related to non-vested stock options was approximately $5,657. This cost is expected to be recognized over a weighted-average period of 3.7 years in accordance with the vesting periods of the options.

As of October 1, 2005, the fair value of each option grant is estimated on the date of grant using a binomial lattice valuation model. Prior to October 1, 2005, the fair value of each option award was estimated on the grant date using a Black-Scholes valuation model. The following table indicates the assumptions used in estimating fair value for the nine month periods ended June 30, 2006 and 2005.

	Nine Months Ended June 30,
	Nine Months Ended June 30,
	2006			2005
	(Binomial Lattice)			(Black-Scholes)
Expected volatility		24.0	%		24.2	%
Dividend yield		.6	%		1.0	%
Average risk free interest rate		4.4	%		3.9	%
Average expected term (years)		5.5			7.9

The risk free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date. Expected volatilities are based on the implied volatility of market traded options and the historical volatility of the Company’s stock price. The expected term represents an estimate of the period of time options are expected to remain outstanding. Separate employee groups and option characteristics are considered separately for valuation purposes.

Under the Company’s Director Fee Plan, directors who are not also officers of the Company each receive, as an annual retainer fee, either cash or shares of the Company's Class A Common Stock equivalent to $30. Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board. Directors may also elect to receive the common stock equivalent of meeting fees credited to a deferred stock account. The value of deferred shares is recorded in other liabilities. A total of 50,441 shares had been deferred under the Director Fee Plan at June 30, 2006. Additionally, beginning in fiscal 2005, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $40. A total of 22,300 stock options have been granted under the plan, all of which were outstanding and unvested at June 30, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

Note 5. Earnings Per Share

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005

Net income	$	17,706	$	15,613	$	47,465	$	42,669

Weighted-average common shares outstanding		32,110,431		31,958,308		32,076,674		32,144,329
Dilutive securities, primarily stock options		184,699		207,064		255,494		227,631
Diluted weighted-average common shares outstanding		32,295,130		32,165,372		32,332,168		32,371,960

Basic earnings per share	$	.55	$	.49	$	1.48	$	1.33
Diluted earnings per share	$	.55	$	.49	$	1.47	$	1.32

Net income and earnings per share for 2005 have been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).

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				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Sales to external customers:
Memorialization:
Bronze	$	57,365	$	55,573	$	159,187	$	150,136
Casket		49,790		29,910		153,188		92,785
Cremation		6,907		5,283		19,289		15,982
		114,062		90,766		331,664		258,903
Brand Solutions:
Graphics Imaging		35,919		36,175		103,467		106,578
Marking Products		13,130		11,864		38,418		32,747
Merchandising Solutions		18,693		20,178		59,432		65,704
		67,742		68,217		201,317		205,029

	$	181,804	$	158,983	$	532,981	$	463,932

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

	Three Months Ended June 30,				Nine Months Ended June 30,
	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
Operating profit:
Memorialization:
Bronze	$	17,032	$	16,590	$	43,983	$	41,332
Casket		5,100		3,351		15,597		11,910
Cremation		1,019		98		2,707		83
		23,151		20,039		62,287		53,325
Brand Solutions:
Graphics Imaging		3,938		3,731		11,556		10,399
Marking Products		2,240		2,342		6,596		5,459
Merchandising Solutions		1,194		492		1,563		2,422
		7,372		6,565		19,715		18,280

	$	30,523	$	26,604	$	82,002	$	71,605

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 June 30, 2006 and 2005, comprehensive income was $24,367 and $8,242, respectively. For the nine months ended June 30, 2006 and 2005, comprehensive income was $53,673 and $39,816, respectively. Comprehensive income for the three and nine month periods ended June 30, 2005 has been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).

Note 8. Goodwill and Other Intangible Assets

Goodwill related to business combinations is not amortized but is subject to annual review for impairment. In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized. For purposes of testing for impairment the Company uses a combination of valuation techniques, including discounted cash flows. Intangible assets are amortized over their estimated useful lives unless such lives are considered to be indefinite. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets. The Company performs its annual impairment review in the second fiscal quarter.

Changes to goodwill, net of accumulated amortization, for the nine months ended June 30, 2006, were as follows.

							Graphics		Marking		Merchandising
	Bronze		Casket		Cremation		Imaging		Products		Solutions		Consolidated

Balance at September 30, 2005	$	73,029	$	91,977	$	6,536	$	73,970	$	5,213	$	9,947	$	260,672
Additions during period		-		13,621		-		6,344		-		-		19,965
Translation and other adjustments		1,342		-		-		3,952		-		-		5,294
Balance at June 30, 2006	$	74,371	$	105,598	$	6,536	$	84,266	$	5,213	$	9,947	$	285,931

The additions to Graphics Imaging goodwill relate primarily to the purchase of the Doyle Group. The additions to Casket goodwill primarily relate to the acquisition of Royal Casket Company and a smaller domestic casket distributor.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of June 30, 2006 and September 30, 2005, respectively.

	Carrying		Accumulated
	Amount		Amortization			Net
June 30, 2006:
Trade names	$	23,914	$	- *		$	23,914
Customer relationships		20,874		(2,414	)		18,460
Copyrights/patents/other		5,088		(2,229	)		2,859
	$	49,876	$	(4,643	)	$	45,233


September 30, 2005:
Trade names	$	23,585	$	- *		$	23,585
Customer relationships		20,778		(1,517	)		19,261
Copyrights/patents/other		4,952		(1,401	)		3,551
	$	49,315	$	(2,918	)	$	46,397
* Not subject to amortization

The decrease in intangible assets during fiscal 2006 was due to amortization, partially offset by the impact of fluctuations in foreign currency exchange rates on intangible assets denominated in foreign currencies.

Amortization expense on intangible assets was $545 and $430 for the three month periods ended June 30, 2006 and 2005, respectively. For the nine month periods ended June 30, 2006 and 2005, amortization expense was $1,635 and $1,262, respectively. Amortization expense is estimated to be $2,150 in 2006, $1,800 in 2007, $1,800 in 2008, $1,750 in 2009 and $1,300 in 2010.

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 June 30, 2006 were $134,000. The weighted-average interest rate on outstanding borrowings at June 30, 2006 and 2005 was 4.94% 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 .75% at June 30, 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 .75% at June 30, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

the Revolving Credit Facility, which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge match the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges are considered highly effective. Equal quarterly principal payments of $3,333 plus interest are due on this $50,000 portion of the borrowing until its maturity in April 2009.

The fair value of the interest rate swaps reflected an unrealized gain of $2,138 ($1,304 after tax) at June 30, 2006 that is included in shareholders’ equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30, 2006, approximately $460 of the $1,304 gain included in accumulated other comprehensive income is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

The Company, through its wholly-owned subsidiary, Matthews International GmbH (“MIGmbH”), has a credit facility with a bank for borrowings up to 10.0 million Euros. At June 30, 2006, outstanding borrowings under the credit facility totaled 10.0 million Euros ($12,792). The weighted-average interest rate on outstanding borrowings of MIGmbH at June 30, 2006 and 2005 was 3.35% and 2.80%, respectively.

The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 8.3 million Euros ($10,600) at June 30, 2006. Caggiati S.p.A. also has three lines of credit totaling 8.4 million Euros ($10,707) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million Euros ($2,836) at June 30, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30, 2006 and 2005 was 3.16% and 2.89%, 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 June 30,		2006			2005			2006			2005

Service cost	$	1,082		$	927		$	158		$	127
Interest cost		1,481			1,404			307			293
Expected return on plan assets		(1,708	)		(1,585	)		-			-
Amortization:
Prior service cost		(4	)		21			(322	)		(322	)
Net actuarial loss		436			344			161			124
Net benefit cost	$	1,287		$	1,111		$	304		$	222

	Pension						Other Postretirement
Nine months ended June 30,		2006			2005			2006			2005

Service cost	$	3,246		$	2,781		$	474		$	380
Interest cost		4,443			4,212			921			879
Expected return on plan assets		(5,124	)		(4,753	)		-			-
Amortization:
Prior service cost		(12	)		63			(966	)		(966	)
Net actuarial loss		1,308			1,033			483			371
Net benefit cost	$	3,861		$	3,336		$	912		$	664

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

Benefit payments 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 June 30, 2006, contributions of $222 and $1,102 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $74 and $350 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2006.

Note 11. Acquisitions

Acquisition spending, net of cash acquired, during the nine months ended June 30, 2006 totaled $29,946, and primarily included the following:

On March 1, 2006, 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 Industries (“Milso”), a leading manufacturer and distributor of caskets in the United States. Milso, headquartered in Brooklyn, New York, has manufacturing operations in Richmond, Indiana and maintains distribution centers throughout the Northeast, Mid-Atlantic, Midwest and Southwest regions of the United States. The transaction was structured as an asset purchase, at an initial purchase price of approximately $95,000. The transaction was also structured to include potential additional consideration of $7,500 contingent on the fiscal 2006 performance of the acquired operations. The Company expects to account for this consideration as additional purchase price. The acquisition was intended to expand Matthews’ products and services in the United States casket market.

Acquired intangible assets of Milso include trade names with an assigned value of $5,800, which are not subject to amortization. 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				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Sales	$	181,804	$	182,776	$	532,981	$	531,332
Income before taxes		28,375		28,334		76,066		73,519
Net income		17,706		17,568		47,465		45,583
Earnings per share	$	.55	$	.55	$	1.47	$	1.41

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.

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.

	Nine months ended						Years ended
	June 30,						September 30,
	2006			2005*			2005*			2004*
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		37.2	%		34.5	%		34.9	%		38.1	%
Operating profit		15.4	%		15.4	%		15.4	%		18.7	%
Income before taxes		14.3	%		14.8	%		14.5	%		17.5	%
Net income		8.9	%		9.2	%		9.1	%		10.7	%

* Restated to reflect the adoption of SFAS No. 123(R).

Results of Operations:

Sales for the nine months ended June 30, 2006 were $533.0 million, or 14.9%, higher than sales of $463.9 million for the nine months ended June 30, 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 nine months ended June 30, 2006, changes in foreign currency values against the U.S. dollar had an unfavorable impact of approximately $5.2 million on the Company’s consolidated sales compared to the nine months ended June 30, 2005.

Bronze segment sales for the first nine months of fiscal 2006 were $159.2 million compared to $150.1 million for the first nine months of fiscal 2005. The increase of 6.0% 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 $153.2 million for the first nine months of fiscal 2006 compared to $92.8 million for the same period in fiscal 2005. The increase reflected the acquisition of Milso. Excluding Milso, fiscal 2006 sales volume was lower than fiscal 2005, partially attributable to a lower death

rate and partially related to the transition to Company-owned distribution in certain territories. Sales for the Cremation segment were $19.3 million for the nine months ended June 30, 2006 compared to $16.0 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 nine months of fiscal 2006 were $103.5 million, compared to $106.6 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. Marking Products segment sales for the nine months ended June 30, 2006 were $38.4 million, compared to $32.7 million for the first nine months of fiscal 2005. The increase of $5.7 million, or 17.3%, was principally due to higher domestic and foreign sales volume, particularly in the segment’s industrial automation business. Sales for the Merchandising Solutions segment were $59.4 million for the first nine months of fiscal 2006, compared to $65.7 million for the same period a year ago. The decline is attributable to lower volume of merchandising systems and displays. In addition, the first nine months of fiscal 2005 included sales for several large customer promotional programs that did not repeat in this fiscal year.

Gross profit for the nine months ended June 30, 2006 was $198.4 million, compared to $159.9 million for the nine months ended June 30, 2005. 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 Casket segment sales excluding Milso, lower sales in the Merchandising Solutions segment and lower foreign currency values against the U.S. dollar. Consolidated gross profit as a percent of sales increased from 34.5% for the first nine months of fiscal 2005 to 37.2% for the same period of fiscal 2006. The increase primarily reflected the Milso acquisition and improved margins in the Cremation, Graphics Imaging and Merchandising Solutions segments. These increases were partially offset by a decline in Bronze gross margin reflecting the significant rise in bronze ingot cost.

Selling and administrative expenses for the nine months ended June 30, 2006 were $116.4 million, compared to $88.3 million for the first nine months of fiscal 2005. Consolidated selling and administrative expenses as a percent of sales were 21.8% for the nine months ended June 30, 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 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. Additionally, Graphics Imaging segment fiscal 2006 selling and administrative expenses declined from fiscal 2005 due to cost structure changes implemented within the segment’s U.S. and U.K. operations in the fourth quarter of fiscal 2005.

Operating profit for the nine months ended June 30, 2006 was $82.0 million, representing an increase of $10.4 million over operating profit of $71.6 million for the nine months ended June 30, 2005. The increase of 14.5% reflected higher operating income in five of the Company’s six operating segments. Bronze segment operating profit for the first nine months of fiscal 2006 was $44.0 million, compared to $41.3 million for the same period in fiscal 2005. Despite a significant increase in bronze metal cost, Bronze segment operating profit improved for the period as a result of higher sales and the effects of cost reduction initiatives. Operating profit for the Casket segment for the nine months ended June 30, 2006 was $15.6 million, compared to $11.9 million for the first nine months 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, operating costs related to the expansion of casket distribution capabilities, and costs incurred in connection with the shut-down of the segment’s Lynn, Indiana manufacturing facility during the second quarter of fiscal 2006. Cremation segment operating profit for the nine months ended June 30, 2006 was $2.7 million, compared to $83,000 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 nine months ended June 30, 2006 was $11.6 million, compared to $10.4 million for the nine months ended June 30, 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 nine months of fiscal 2006 was $6.6 million, compared to $5.5 million for the same period a year ago. The increase primarily resulted from higher sales. The Merchandising Solutions segment operating profit was $1.6 million for the nine months ended June 30, 2006, compared to $2.4 million for the same period in fiscal 2005. The decrease primarily

reflected lower sales in fiscal 2006 compared to fiscal 2005. However, for the quarter, Merchandising Solutions segment operating profit was higher than a year ago, reflecting the benefit of recent productivity initiatives. For the nine months ended June 30, 2006, changes in foreign currency values against the U.S. dollar had an unfavorable impact of approximately $860,000 on the Company’s consolidated operating profit compared to the nine months ended June 30, 2005.

Investment income for the nine months ended June 30, 2006 was $937,000, compared to $1.0 million for the nine months ended June 30, 2005. Interest expense for the first nine months of fiscal 2006 was $4.9 million, compared to $1.5 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 nine-month period compared 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 nine months ended June 30, 2006 represented an increase in pre-tax income of $79,000, compared to an increase in pre-tax income of $1.6 million for the same period last year. Other income in the first nine months of fiscal 2005 primarily reflected foreign currency exchange gains on intercompany advances to foreign affiliates.

Minority interest deduction was $2.0 million for the first nine months of fiscal 2006, compared to $3.8 million for the same period in fiscal 2005. The reduction in minority interest primarily reflected the Company’s acquisition of an additional 30% interest in S+T Gesellschaft fur Reprotechnik GmbH (“S+T”) on September 30, 2005.

The Company's effective tax rate for the nine months ended June 30, 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 adjustments to the carrying values of goodwill were necessary.

Liquidity and Capital Resources:

Net cash provided by operating activities was $34.4 million for the nine months ended June 30, 2006, compared to $57.4 million for the first nine 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 distribution capabilities.

Cash used in investing activities was $41.9 million for the nine months ended June 30, 2006, compared to $45.0 million for the nine months ended June 30, 2005. Investing activities for the first nine months of fiscal 2006 primarily included capital expenditures of $12.0 million and acquisition-related payments of $29.9 million. Investing activities for the first nine months of fiscal 2005 primarily included capital expenditures of $21.6 million, acquisition related payments of $14.2 million and net purchases of investments of $10.0 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.

Cash provided by financing activities for the nine months ended June 30, 2006 was $3.8 million, primarily reflecting net borrowings of long-term debt of $11.0 million, proceeds of $1.9 million from the sale of treasury stock (stock option exercises), a tax benefit of $816,000 from exercised stock options, treasury stock purchases of $877,000, payment of dividends of $4.8 million to the Company's shareholders and distributions of $4.3 million to minority interests. Cash used in financing activities for the nine months ended June 30, 2005 was $34.5 million, reflecting net payments on long-term debt of $6.0 million, treasury stock purchases of $27.9 million, dividends of $4.3 million to the Company's shareholders and distributions of $4.4 million to minority interests. These payments were partially offset by proceeds of $5.4 million from the sale of treasury stock (stock option exercises) and a tax benefit of $2.8 million from exercised stock options.

The Company has a Revolving Credit Facility with a syndicate of financial institutions, which allows for borrowings up to $150.0 million. Borrowings under the facility, which is scheduled to mature on April 30, 2009, bear interest at LIBOR plus a factor ranging from .50% to 1.00% based on the Company’s leverage ratio. The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization). The Company is required to pay an annual commitment fee ranging from .20% to .30% (based on the Company’s leverage ratio) of the unused portion of the facility. The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $10.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30, 2006 were $134.0 million. The weighted-average interest rate on outstanding borrowings at June 30, 2006 and 2005 was 4.94% 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 .75% at June 30, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge matched the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges were considered highly effective. Equal quarterly principal payments of $2.5 million plus interest are due on this $50.0 million borrowing until its maturity in April 2009.

Effective September 30, 2005, the Company entered into an additional interest rate swap that fixed, for the period through maturity of the Revolving Credit Facility, the interest rate on additional borrowings in an initial amount of $50.0 million. The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .75% at June 30, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge match the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges were considered highly effective. Equal quarterly principal payments of $3.3 million plus interest are due on this $50.0 million borrowing until its maturity in April 2009.

The fair value of the interest rate swaps reflected an unrealized gain of $2.1 million ($1.3 million after tax) at June 30, 2006 that is included in equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30, 2006, approximately $460,000 of the $1.3 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 June 30, 2006, outstanding borrowings under the credit facility totaled 10.0 million Euros ($12.8 million). The weighted-average interest rate on outstanding MIGmbH related borrowings at June 30, 2006 and 2005 was 3.35% and 2.80%, respectively.

The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 8.3 million Euros ($10.6 million) at June 30, 2006. Caggiati S.p.A. also has three lines of credit totaling approximately 8.4 million Euros ($10.7 million) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million Euros ($2.8 million) at June 30, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30, 2006 and 2005 was 3.16% and 2.89%, respectively.

The Company has a stock repurchase program, which was initiated in 1996. Under the program, the Company's Board of Directors has authorized the repurchase of a total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 8,676,696 shares have been repurchased as of June 30, 2006. The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company’s Articles of Incorporation.

Consolidated working capital of the Company was $130.2 million at June 30, 2006, compared to $86.6 million at September 30, 2005. Cash and cash equivalents were $37.0 million at June 30, 2006, compared to $39.6 million at September 30, 2005. The Company's current ratio was 2.1 at June 30, 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 June 30, 2006, an accrual of $10.1 million was recorded for environmental remediation (of which $927,000 has been classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations. The accrual, which reflects previously established reserves assumed with the acquisition of York and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value. While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.

Acquisitions:

Acquisition spending, net of cash acquired, during the nine months ended June 30, 2006 totaled $29.9 million, and primarily included the following:

On March 1, 2006, the Company acquired Royal Casket Company (“Royal”), a distributor of primarily York brand caskets in the Southwest region of the United States. The transaction was structured as an asset purchase with potential additional consideration payable contingent upon the operating performance of the acquired operations during the next five years. The Company expects to account for this consideration as additional purchase price. The acquisition was intended to expand Matthews’ casket distribution capabilities in the Southwestern 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 $95.0 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.

Forward-Looking Information:

The Company’s objective with respect to operating performance is to achieve a long-term average annual in crease in annual earnings per share of 12% to 15%. 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 nine 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.

Based on the factors discussed above, the Company’s current projections for diluted earnings per share are in line with our traditional 12 percent to 15 percent growth target.

Critical Accounting Policies:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting the Company can be found in "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q.

A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements 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 Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Stock-Based Payment”, (“SFAS No. 123 (R)”) using the modified retrospective method. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. In accordance with SFAS No. 123(R), financial statements for all periods prior to October 1, 2005 have been adjusted to give effect to the fair-value method of accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as pro-forma adjustments have been reflected in earnings for all prior periods.

Pension Costs:

Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost.

Environmental Reserve:

Environmental liabilities are recorded when the Company's obligation is probable and reasonably estimable. Accruals for losses from environmental remediation obligations do not consider the effects of inflation, and anticipated expenditures are not discounted to their present value.

Revenue Recognition:

Revenues are generally recognized when title and risk of loss pass to the customer, which is typically at the time of product shipment. For pre-need sales of memorials and vases, revenue is recognized when the memorial has been manufactured to the customer’s specifications (e.g., name and birth date), title has been transferred to the customer and the memorial and vase are placed in storage for future delivery. A liability has been recorded in Estimated Finishing Costs for the estimated costs of finishing pre-need bronze memorials and vases that have been manufactured and placed in storage prior to July 1, 2003 for future delivery.

In July 2003, the Emerging Issues Task Force (“EITF”) issued Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables.” Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue generating activities. The provisions of Issue No. 00-21 were effective July 1, 2003 and have been applied prospectively by the Company to the finishing and storage elements of its pre-need sales. Beginning

July 1, 2003, revenue is deferred by the Company on the portion of pre-need sales attributable to the final finishing and storage of the pre-need merchandise. Deferred revenue for final finishing is recognized at the time the pre-need merchandise is finished and shipped to the customer. Deferred revenue related to storage is recognized on a straight-line basis over the estimated average time that pre-need merchandise is held in storage.

At June 30, 2006, the Company held 352,072 memorials and 246,781 vases in its storage facilities under the “pre-need” sales program.

Construction revenues are recognized under the percentage-of-completion method of accounting using the cost-to-cost method. The Company offers rebates to certain customers participating in volume purchase programs. Rebates are estimated and recorded as a reduction in sales at the time the Company’s products are sold.

LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The following table summarizes the Company’s contractual obligations at June 30, 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		2010
Contractual Cash Obligations:	(Dollar amounts in thousands)
Revolving credit facilities	$	146,792	$	5,833	$	46,667	$	94,292	$	-
Notes payable to banks		10,600		316		2,623		2,623		5,038
Short-term borrowings		2,836		2,836		-		-		-
Capital lease obligations		2,028		369		1,630		29		-
Non-cancelable operating leases		30,710		2,245		12,034		7,951		8,480

Total contractual cash obligations	$	192,966	$	11,599	$	62,954	$	104,895	$	13,518

A significant portion of the loans included in the table above bear interest at variable rates. At June 30, 2006, the weighted-average interest rate was 4.94% on the Company’s domestic Revolving Credit Facility, 3.35% on the credit facility through the Company’s wholly-owned German subsidiary, and 3.16% 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 June 30, 2006, contributions of $222,000 and $1,102,000 have been made under the supplemental retirement plan and postretirement plan, respectively. The Company currently anticipates contributing an additional $74,000 and $350,000 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.

Accounting Pronouncements:

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discussion about the Company's market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company has market risk related to changes in interest rates, commodity prices and foreign currency exchange rates. The Company does not generally use derivative financial instruments in connection with these market risks, except as noted below.

Interest Rates - The Company’s most significant long-term debt instrument is the domestic Revolving Credit Facility which bears interest at variable rates based on LIBOR. In April 2004, the Company entered into an interest rate swap that fixed, for a five-year period, the interest rate on borrowings in an initial amount of $50.0 million ($30.0 million outstanding at June 30, 2006). The interest rate was fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor was .75% at June 30, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Effective September 30, 2005, the Company entered into an additional interest rate swap that fixed, for the period through the maturity of the Revolving Credit Facility, the interest rate on the additional borrowings in an initial amount of $50.0 million ($40.0 million outstanding at June 30, 2006). The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .75% at June 30, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. The fair value of the interest rate swaps reflected an unrealized gain of $2.1 million ($1.3 million after tax) at June 30, 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 $488,000 in the fair value of the interest rate swaps.

Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available.

Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, including the Euro, the British Pound, Canadian dollar, Australian dollar and Swedish Krona, in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries. An adverse change of 10% in exchange rates would have resulted in a decrease in sales of $12.0 million and a decrease in operating income of $2.1 million for the nine months ended June 30, 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 June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

In August 2005, The York Group, Inc. (“York”), a wholly-owned subsidiary of the Company, was served with Civil Investigative Demands (“CIDs”) from the Attorneys General in Maryland and Florida. Thereafter, in October 2005, York was also served with a CID from the Attorney General in Connecticut. The pending CIDs are part of a multi-state investigation in which the Attorneys General from Maryland, Florida and Connecticut have requested information from various sources, including several national owners and operators of funeral homes, as well as several manufacturers of caskets, regarding alleged anti-competitive practices in the funeral service industry. As one of many potential sources of information, York has already timely responded to the document production request communicated through the CIDs. Presently, the investigation continues to remain in the preliminary stages and the scope of the investigation has been limited to evaluating the sale of caskets in the funeral service industry.

In October 2005, York filed a complaint and a motion for a special and/or preliminary injunction in the Court of Common Pleas of Allegheny County, Pennsylvania against Yorktowne Caskets, Inc. (“Yorktowne”), the shareholders of Yorktowne, Batesville Casket Company, Inc. and Batesville Services. This action was taken in response to the announcement that Batesville Casket Company, Inc. and/or Batesville Services (collectively “Batesville”) had entered into a definitive agreement to acquire the outstanding stock of Yorktowne, York’s largest independent distributor of wood and metal caskets. The causes of action alleged by York involve the distributor agreement between York and Yorktowne which is in effect 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 filed appeals from the Court’s injunction ruling to the Superior Court of Pennsylvania. The defendants’ appeals were argued orally before the Superior Court in Pittsburgh, Pennsylvania in June of 2006 and a decision addressing the merits of the defendants’ appeal could be issued at any time by the Superior Court. Pending a decision by the Superior Court, the preliminary injunction issued on November 9, 2005 remains in force.

In February 2006, Yorktowne and its shareholders filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against the Company, York and Milso Industries, Inc. (“Milso”) alleging, in part, that the Company, York and Milso breached York’s distributor agreement with Yorktowne dated April 15, 2005, as well as tortuously interfered with Yorktowne’s contractual and prospective contractual relations. Yorktowne alleges entitlement to various monetary damages, including a specific claim for $58 million.

It is possible that resolution of the foregoing matter could be unfavorable to the Company; however, the Company intends to vigorously defend against the allegations set forth in the Complaint. The Company does not presently believe that the ultimate resolution of any of its legal proceedings will have a material adverse impact on the Company’s financial position or results of operations.

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

Stock Repurchase Plan

The Company has a stock repurchase program, which was initiated in 1996. Under the program, the Company's Board of Directors has authorized the repurchase of a total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 8,676,696 shares have been repurchased as of June 30, 2006. Under the program, in fiscal 2006 the Company purchased 1,000 shares in January 2006 at an average price of $36.44 per share and 54,300 shares in June 2006 at an average price of $33.96.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits

	Exhibit
	No.	Description

	31.1	Certification of Principal Executive Officer for David M. 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 April 25, 2006, Matthews filed a Current Report on Form 8-K under Item 2.02 in connection with a press release announcing its earnings for the second fiscal quarter of 2006. On May 10, 2006, Matthews filed a Current Report on Form 8-K under Item 5.02 in connection with a press release announcing the election of Robert G. Neubert to the Matthews Board of Directors, effective May 9, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MATTHEWS INTERNATIONAL CORPORATION
		(Registrant)



Date: August 8, 2006		/s/ David M. Kelly
		David M. Kelly, Chairman of the Board
		and Chief Executive Officer




Date: August 8, 2006		/s/ Steven F. Nicola
		Steven F. Nicola, Chief Financial Officer,
		Secretary and Treasurer