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, 2013

Commission File No. 0-9115

MATTHEWS INTERNATIONAL CORPORATION
(Exact Name of registrant as specified in its charter)

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

TWO NORTHSHORE CENTER, PITTSBURGH, PA
 
15212-5851
(Address of principal executive offices)
 
(Zip Code)
     
     
Registrant's telephone number, including area code
 
(412) 442-8200

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

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

 
Yes x
No o
 

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

 
Yes x
No o
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

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

 
Yes o
No x
 

As of July 31, 2013, shares of common stock outstanding were:

  Class A Common Stock 27,434,613 shares

 
 

 

PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands, except per share data)


   
June 30, 2013
   
September 30, 2012
 
             
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
        $ 54,861           $ 58,259  
Accounts receivable, net
          183,437             174,632  
Inventories
          131,839             130,690  
Deferred income taxes
          1,648             1,694  
Other current assets
          20,399             19,950  
                             
Total current assets
          392,184             385,225  
                             
Investments
          19,709             18,842  
Property, plant and equipment: Cost
  $ 382,338             $ 350,521          
Less accumulated depreciation
    (214,807 )             (206,472 )        
              167,531               144,049  
Deferred income taxes
            29,669               32,647  
Other assets
            15,375               12,083  
Goodwill
            532,926               476,181  
Other intangible assets, net
            53,166               59,015  
                                 
Total assets
          $ 1,210,560             $ 1,128,042  
                                 
LIABILITIES
                               
Current liabilities:
                               
Long-term debt, current maturities
          $ 17,520             $ 21,566  
Accounts payable
            41,644               44,294  
Accrued compensation
            36,985               30,222  
Accrued income taxes
            11,284               7,632  
Customer prepayments
            12,409               15,883  
Contingent Consideration
            8,559               13,298  
Other current liabilities
            48,854               47,978  
                                 
Total current liabilities
            177,255               180,873  
                                 
Long-term debt
            359,561               298,148  
Accrued pension
            87,028               78,563  
Postretirement benefits
            28,633               27,725  
Deferred income taxes
            19,431               18,624  
Other liabilities
            28,536               33,194  
Total liabilities
            700,444               637,127  
                                 
Arrangement with noncontrolling interest
            -               10,481  
                                 
SHAREHOLDERS’ EQUITY
                               
Shareholders' equity-Matthews:
                               
Common stock
  $ 36,334             $ 36,334          
Additional paid-in capital
    45,805               47,893          
Retained earnings
    764,294               727,176          
Accumulated other comprehensive loss
    (64,603 )             (65,083 )        
Treasury stock, at cost
    (274,831 )             (268,499 )        
Total shareholders’ equity-Matthews
            506,999               477,821  
Noncontrolling interests
            3,117               2,613  
Total shareholders’ equity
            510,116               480,434  
                                 
Total liabilities and shareholders' equity
          $ 1,210,560             $ 1,128,042  


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

 
2

 

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,
 
   
2013
   
2012
   
2013
   
2012
 
                         
                         
                         
Sales
  $ 250,652     $ 227,478     $ 732,651     $ 670,236  
Cost of sales
    (159,261 )     (139,769 )     (466,420 )     (419,825 )
                                 
Gross profit
    91,391       87,709       266,231       250,411  
                                 
Selling and administrative expenses
    (60,631 )     (60,196 )     (193,902 )     (178,686 )
                                 
Operating profit
    30,760       27,513       72,329       71,725  
                                 
Investment income
    634       176       1,474       3,020  
Interest expense
    (3,486 )     (2,881 )     (9,784 )     (8,165 )
Other income (deductions), net
    (986 )     (602 )     (3,158 )     (1,755 )
                                 
Income before income taxes
    26,922       24,206       60,861       64,825  
                                 
Income taxes
    (9,024 )     (7,821 )     (20,905 )     (21,828 )
                                 
Net income
    17,898       16,385       39,956       42,997  
 
Net (income) loss attributable to noncontrolling interests
    93       (60 )     482       (129 )
                                 
Net income attributable to  Matthews shareholders
  $ 17,991     $ 16,325     $ 40,438     $ 42,868  
                                 
Earnings per share attributable to Matthews shareholders:
                               
Basic
    $0.65       $0.58       $1.47       $1.51  
                                 
Diluted
    $0.65       $0.58       $1.46       $1.51  




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






 
3

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollar amounts in thousands)


   
Three Months Ended June 30,
 
 
 
Matthews
   
Noncontrolling Interest
   
Total
 
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
                                     
Net income (loss):
  $ 17,991     $ 16,325     $ (93 )   $ 60     $ 17,898     $ 16,385  
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
    (1,653 )     (11,441 )     44       (33 )     (1,609 )     (11,474 )
  Pension plans and other postretirement
     benefits
    1,073       1,023       -       -       1,073       1,023  
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
    2,463       (1,407 )     -       -       2,463       (1,407 )
     Net amount reclassified to earnings
    649       542       -       -       649       542  
       Net change in unrecognized gain (loss)
                                               
         on derivatives
    3,112       (865 )     -       -       3,112       (865 )
Other comprehensive income (loss), net of tax
    2,532       (11,283 )     44       (33 )     2,576       (11,316 )
Comprehensive income (loss)
  $ 20,523     $ 5,042     $ (49 )   $ 27     $ 20,474     $ 5,069  


   
Nine Months Ended June 30,
 
 
 
Matthews
   
Noncontrolling Interest
   
Total
 
   
2013
   
2012
   
2013
   
2012
   
2013
   
2012
 
                                     
Net income (loss):
  $ 40,438     $ 42,868     $ (482 )   $ 129     $ 39,956     $ 42,997  
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
    (7,587 )     (8,239 )     99       (101 )     (7,488 )     (8,340 )
  Pension plans and other postretirement
     benefits
    3,220       3,068       -       -       3,220       3,068  
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
    2,960       (2,068 )     -       -       2,960       (2,068 )
     Net amount reclassified to earnings
    1,887       1,408       -       -       1,887       1,408  
       Net change in unrecognized gain (loss)
                                               
         on derivatives
    4,847       (660 )     -       -       4,847       (660 )
Other comprehensive income (loss), net of tax
    480       (5,831 )     99       (101 )     579       (5,932 )
Comprehensive income (loss)
  $ 40,918     $ 37,037     $ (383 )   $ 28     $ 40,535     $ 37,065  


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




 
4

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the nine months ended June 30, 2013 and 2012 (Unaudited)
(Dollar amounts in thousands, except per share data)


   
Shareholders’ Equity
 
                     
Accumulated
                   
         
Additional
         
Other
         
Non-
       
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
controlling
       
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
interests
   
Total
 
Balance,
   September 30, 2011
  $ 36,334     $ 48,554     $ 681,658     $ (58,658   $ (243,246   $ 3,451     $ 468,093  
Net income
    -       -       42,868       -       -       129       42,997  
Minimum pension liability
    -       -       -       3,068       -       -       3,068  
Translation adjustment
    -       -       -       (8,239     -       (101     (8,340
Fair value of derivatives
    -       -       -       (660     -       -       (660
Total comprehensive income
                                                    37,065  
Stock-based compensation
    -       4,097       -       -       -       -       4,097  
Purchase of 618,366
   shares of treasury stock
    -       -       -       -       (18,908     -       (18,908
Issuance of  184,806
   shares of treasury stock
    -       (6,149     -       -       6,022       -       (127
Dividends, $.27 per share
    -       -       (7,597     -       -       -       (7,597
Distributions to
   noncontrolling interests
    -       -       -       -       -       (170     (170
Balance, June 30, 2012
  $ 36,334     $ 46,502     $ 716,929     $ (64,489   $ (256,132   $ 3,309     $ 482,453  


   
Shareholders’ Equity
 
                     
Accumulated
                   
         
Additional
         
Other
         
Non-
       
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
controlling
       
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
interests
   
Total
 
Balance,
   September 30, 2012
  $ 36,334     $ 47,893     $ 727,176     $ (65,083   $ (268,499 )   $ 2,613     $ 480,434  
Net income
    -       -       40,438       -       -       (482     39,956  
Minimum pension liability
    -       -       -       3,220       -       -       3,220  
Translation adjustment
    -       -       -       (7,587     -       99       (7,488
Fair value of derivatives
    -       -       -       4,847       -       -       4,847  
Total comprehensive income
                                                    40,535  
Stock-based compensation
    -       4,153       -       -       -       -       4,153  
Purchase of 405,116 shares of treasury stock
    -       -       -       -       (13,529 )     -       (13,529 )
Issuance of 250,472 shares of treasury stock
    -       (6,241     -       -       7,197       -       956  
Dividends, $.30 per share
    -       -       (8,300     -       -       -       (8,300 )
Arrangement with noncontrolling interests
                    4,980       -       -       1,653       6,633  
Distributions to
   noncontrolling interests
    -       -       -       -       -       (766     (766 )
Balance, June 30, 2013
  $ 36,334     $ 45,805     $ 764,294     $ (64,603   $ (274,831 )   $ 3,117     $ 510,116  



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


 
5

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands, except per share data)


   
Nine Months Ended
 
   
June 30,
 
   
2013
   
2012
 
             
             
Cash flows from operating activities:
           
Net income
  $ 39,956     $ 42,997  
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
    26,481       21,858  
Stock-based compensation expense
    4,153       4,097  
Gain on sale of assets
    (1,582 )     (4,633 )
Change in deferred taxes
    137       (2,711 )
Changes in working capital items
    (5,827 )     (15,749 )
Decrease in other assets
    370       3,586  
Decrease in other liabilities
    2,864       (2,575 )
Increase in pension and postretirement benefits
    10,043       9,479  
Other, net
    (3,657 )     (1,088 )
                 
Net cash provided by operating activities
    72,938       55,261  
                 
Cash flows from investing activities:
               
Capital expenditures
    (17,268 )     (24,641 )
Proceeds from sale of assets
    251       1,229  
Acquisitions, net of cash acquired
    (67,587 )     (12,541 )
Purchases of investments
    -       (950 )
                 
Net cash used in investing activities
    (84,604 )     (36,903 )
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
    113,906       21,000  
Payments on long-term debt
    (74,122 )     (19,051 )
Payment on contingent consideration
    (9,542 )     -  
Proceeds from the sale of treasury stock
    956       267  
Purchases of treasury stock
    (13,529 )     (18,908 )
Dividends
    (8,300 )     (7,597 )
Distributions to noncontrolling interests
    (766 )     (170 )
                 
Net cash provided by (used in) financing activities
    8,603       (24,459 )
                 
Effect of exchange rate changes on cash
    (335 )     (869 )
                 
Net change in cash and cash equivalents
  $ (3,398 )   $ (6,970 )
                 
Non-cash investing and financing activities:
               
Acquisition of equipment under capital lease
  $ -     $ 420  

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

 
6

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2013
(Dollar amounts in thousands, except per share data)


Note 1.   Nature of Operations

Matthews International Corporation ("Matthews" or the “Company”), founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of memorialization products and brand solutions.  Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries.  Brand solutions include graphics imaging products and services, marking and fulfillment systems and merchandising solutions.  The Company's products and operations are comprised of six business segments:  Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Marking and Fulfillment Systems and Merchandising Solutions.  The Cemetery Products segment is a leading manufacturer of cast bronze and granite memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States.  The Funeral Home Products segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood, metal and cremation caskets.  The Cremation segment is a leading designer and manufacturer of cremation equipment in North America and Europe. The Graphics Imaging segment manufactures and provides brand management, printing plates, gravure cylinders, pre-press services and imaging services for the primary packaging and corrugated industries.  The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.  The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services.

The Company has manufacturing and marketing facilities in the United States, Mexico, Canada, Europe, Australia and Asia.

Note 2.   Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2013. 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, 2012.  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.

A reclassification has been made in the Consolidated Statement of Cash Flows for the nine-month period ended June 30, 2012 to conform to the current period presentation.  The reclassification adjusted the effect of exchange rate changes on cash with a corresponding change in net cash flows from operating activities.

 
7

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 3.   Fair Value Measurements

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

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

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

Level 3:                      Unobservable inputs for the asset or liability.

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

   
June 30, 2013
   
September 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                                               
Derivatives (1)
    -     $ 3,745       -     $ 3,745       -       -       -       -  
Trading
  securities
  $ 17,215       -       -       17,215     $ 16,265       -       -     $ 16,265  
Total assets at
  fair value
  $ 17,215     $ 3,745       -     $ 20,960     $ 16,265       -       -     $ 16,265  
                                                                 
Liabilities:
                                                               
Derivatives (1)
    -     $ 4,932       -     $ 4,932       -     $ 9,133       -     $ 9,133  
Total liabilities
  at fair value
    -     $ 4,932       -     $ 4,932       -     $ 9,133       -     $ 9,133  
                                                                 
(1) Interest rate swaps are valued based on observable market swap rates.
 

Note 4.   Inventories

Inventories consisted of the following:

   
June 30, 2013
   
September 30, 2012
 
             
Raw materials
  $ 40,898     $ 41,003  
Work in process
    25,804       22,772  
Finished goods
    65,137       66,915  
    $ 131,839     $ 130,690  


 
8

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 5.   Debt

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  In July 2013, the maximum amount of borrowings available under the facility was increased to $500,000 and borrowings under the new facility bear interest at LIBOR plus a factor ranging from .75% to 1.25% based on the Company’s leverage ratio.  The facility’s maturity is July 2018.  The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization).  The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company’s leverage ratio) of the unused portion of the facility.

The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios.  A portion of the facility (not to exceed $30,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30, 2013 and September 30, 2012 were $307,500 and $281,323, respectively.  The weighted-average interest rate on outstanding borrowings on this facility at June 30, 2013 and 2012 was 3.05% and 3.15%, respectively.

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at June 30, 2013
 
Maturity Date
May 2011
$25,000
1.37%
1.50%
May 2014
October 2011
  25,000
1.67%
1.50%
October 2015
November 2011
  25,000
2.13%
1.50%
November 2014
March 2012
  25,000
2.44%
1.50%
March 2015
June 2012
  40,000
1.88%
1.50%
June 2022
August 2012
  35,000
1.74%
1.50%
June 2022
September 2012
  25,000
3.03%
1.50%
December 2015
September 2012
  25,000
1.24%
1.50%
March 2017
November 2012
  25,000
1.33%
1.50%
November 2015

The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. The interest rate swaps have been designated as cash flow hedges of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring.  Based on the Company’s assessment, all of the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.

The fair value of the interest rate swaps reflected an unrealized net loss of $1,187 ($724 after tax) and $8,244 ($5,029 after tax) at June 30, 2013 and 2012, respectively, that is included in shareholders’ equity as part of accumulated other comprehensive loss (“AOCL”).  Assuming market rates remain constant with the rates at June 30, 2013, approximately $1,273 of the $724 net unrealized loss included in AOCL is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.


 
9

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 5.  Debt (continued)

At June 30, 2013 and September 30, 2012, the interest rate swap contracts were reflected as net asset and net liability on the balance sheets.  The following derivatives are designated as hedging instruments:

Liability Derivatives
     
Balance Sheet Location:
 
June 30, 2013
   
September 30, 2012
 
Current assets
           
Other current assets
  $ 416     $ -  
Long-term assets
               
Other assets
    3,329       -  
Current liabilities:
               
Other current liabilities
    2,503       2,851  
Long-term liabilities
               
Other liabilities
    2,429       6,282  
Total derivatives
  $ 1,187     $ 9,133  

The loss recognized on derivatives was as follows:

 
Location of
           
Derivatives in
Loss
 
Amount of
   
Amount of
 
Cash Flow
Recognized in
 
Loss Recognized
   
Loss Recognized
 
Hedging
Income on
 
in Income
   
in Income
 
Relationships
Derivative
 
on Derivatives
   
on Derivatives
 
     
Three Months ended June 30,
   
Nine Months ended June 30,
 
     
2013
   
2012
   
2013
   
2012
 
                           
Interest rate swaps
Interest expense
    $(1,065)       $(888)       $(3,094)       $(2,308)  
                                   

The Company recognized the following losses in AOCL:

               
       
Location of
     
       
Gain or
     
       
(Loss)
 
Amount of Loss
 
       
Reclassified
 
Reclassified from
 
   
Amount of Gain or (Loss)
 
From
 
AOCL into
 
Derivatives in
 
Recognized in
 
AOCL into
 
Income
 
Cash Flow
 
AOCL on Derivatives
 
Income
 
(Effective Portion*)
 
Hedging Relationships
 
June 30,
2013
   
June 30,
2012
 
(Effective
Portion*)
 
June 30,     2013
   
June 30,
2012
 
                           
Interest rate swaps
    $2,960       $(2,068)  
Interest expense
    $(1,887)       $(1,408)  
                                   
*There is no ineffective portion or amount excluded from effectiveness testing.
 


 
10

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 5.  Debt (continued)


In March 2013, the Company, through certain of its European subsidiaries, entered into a credit facility with a European bank.  The maximum amount of borrowing available under this facility is 25.0 million Euros ($32,525).  Outstanding borrowings under the credit facility totaled 25.0 million Euros ($32,525) at June 30, 2013. The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2013 was 1.37%.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG (“Saueressig”), has several loans with various European banks.  Outstanding borrowings under these loans totaled 2.9 million Euros ($3,725) and 8.2 million Euros ($10,514) at June 30, 2013 and September 30, 2012, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2013 and 2012 was 3.92% and 6.11%, respectively.

The Company, through its German subsidiary, Wetzel GmbH (“Wetzel”), acquired in November 2012, has several loans with various European banks.  Outstanding borrowings under these loans totaled 8.0 million Euros ($10,353) at June 30, 2013.  The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2013 was 7.26%.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 4.1 million Euros ($5,351) and 6.3 million Euros ($8,080) at June 30, 2013 and September 30, 2012, respectively.  Matthews International S.p.A. also has four lines of credit totaling 11.4 million Euros ($14,792) with the same Italian banks.  Outstanding borrowings on these lines were 5.7 million Euros ($7,375) and 3.4 million Euros ($4,322) at June 30, 2013 and September 30, 2012, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2013 and 2012 was 3.17% and 3.09%, respectively.

As of June 30, 2013 and September 30, 2012 the fair value of the Company’s long-term debt, including current maturities, which is classified as level 2 in the fair value hierarchy, approximated the carrying value included in the Condensed Consolidated Balance Sheet.

Note 6.   Share-Based Payments

The Company maintains an equity incentive plan (the “2007 Equity Incentive Plan”) that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  The Company also maintains a stock incentive plan (the “1992 Incentive Stock Plan”) that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards.  In February 2013, the Company’s shareholders approved the adoption of a new plan, the 2012 Equity Incentive Plan (the “2012 Plan”), that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  Under the 2012 Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000.  There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan.  At June 30, 2013, there were 2,500,000 shares reserved for future issuance under the 2012 Plan. All plans are administered by the Compensation Committee of the Board of Directors.

 
11

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 6.   Share-Based Payments (continued)

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

For the three-month periods ended June 30, 2013 and 2012, total stock-based compensation cost totaled $1,396 and $1,366, respectively.  For the nine-month periods ended June 30, 2013 and 2012, total stock-based compensation cost totaled $4,153 and $4,097, respectively.  The associated future income tax benefit recognized was $545 and $533 for the three-month periods ended June 30, 2013 and 2012, respectively, and $1,620 and $1,598 for the nine-month periods ended June 30, 2013 and 2012, respectively.

For the three-month period ended June 30, 2013, the amount of cash received from the exercise of stock options was $432.  For the three-month period ended June 30, 2012, no stock options were exercised.  For the nine-month periods ended June 30, 2013 and 2012, the amount of cash received from the exercise of stock options was $956 and $265, respectively. In connection with these exercises, the tax benefits realized by the Company were $32 for the three-month period ended June 30, 2013, and $98 and $19 for the nine-month periods ended June 30, 2013 and 2012, respectively.

The transactions for restricted stock for the nine months ended June 30, 2013 were as follows:

         
Weighted-
 
         
average
 
         
grant-date
 
   
Shares
   
fair value
 
Non-vested at September 30, 2012
    551,389       $32.56  
Granted
    236,500       25.22  
Vested
    (99,226     35.95  
Expired or forfeited
    (44,006     30.83  
Non-vested at June 30, 2013
    644,657       29.46  


 
12

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 6.   Share-Based Payments (continued)

As of June 30, 2013, the total unrecognized compensation cost related to unvested restricted stock was $5,274 and is expected to be recognized over a weighted average period of 1.7 years.

The transactions for shares underlying options for the nine months ended June 30, 2013 were as follows:

               
Weighted-
       
         
Weighted-
   
average
   
Aggregate
 
         
average
   
remaining
   
intrinsic
 
   
Shares
   
exercise price
   
contractual term
   
value
 
Outstanding, September 30, 2012
    840,282       $37.15              
Granted
    -       -              
Exercised
    (37,874 )     25.44              
Expired or forfeited
    (56,067 )     37.10              
Outstanding, June 30, 2013
    746,341       37.75       2.4         $ -  
Exercisable, June 30, 2013
    414,170       36.93       2.2       $ -  

No shares were earned during the nine-month periods ended June 30, 2013 and 2012, respectively.  The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the nine-month periods ended June 30, 2013 and 2012 was $291 and $57, respectively.

The transactions for non-vested options for the nine months ended June 30, 2013 were as follows:

         
Weighted-average
 
         
grant-date
 
   
Shares
   
fair value
 
Non-vested at September 30, 2012
    355,872       $11.35  
Granted
    -       -  
Vested
    -       -  
Expired or forfeited
    (23,701 )     12.16  
Non-vested at June 30, 2013
    332,171       11.29  

The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model.  The following table indicates the assumptions used in estimating fair value of restricted stock for the nine months ended June 30, 2013 and 2012.

   
Nine Months Ended June 30,
 
   
2013
   
2012
 
Expected volatility
    29.5 %     30.4 %
Dividend yield
    1.2 %     1.0 %
Average risk free interest rate
    0.6 %     0.9 %
Average expected term (years)
    2.0       2.0  

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

 
13

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 6.   Share-Based Payments (continued)

Under the Company’s Director Fee Plan, directors (except for the Chairman of the Board) who are not also officers of the Company each receive, as an annual retainer fee, either cash or shares of the Company's Class A Common Stock with a value equal to $60.  The annual retainer fee paid to a non-employee Chairman of the Board is $130.  Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board.  The value of deferred shares is recorded in other liabilities.  A total of 17,005 shares had been deferred under the Director Fee Plan at June 30, 2013.  Additionally, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $100.  A total of 22,300 stock options have been granted under the plan.  At June 30, 2013, 11,800 options were outstanding and vested. Additionally, 103,150 shares of restricted stock have been granted under the plan, 38,227 of which were unvested at June 30, 2013.  A total of 300,000 shares have been authorized to be issued under the Director Fee Plan.


Note 7.   Earnings Per Share Attributable to Matthews’ Shareholders

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

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income attributable to Matthews shareholders
  $ 17,991     $ 16,325     $ 40,438     $ 42,868  
Less: dividends and undistributed earnings
allocated to participating securities
    178       235       438       677  
Net income available to Matthews shareholders
  $ 17,813     $ 16,090     $ 40,000     $ 42,191  
                                 
Weighted-average shares outstanding (in thousands):
                               
Basic shares
    27,299       27,749       27,303       27,865  
Effect of dilutive securities
    161       37       116       83  
Diluted shares
    27,460       27,786       27,419       27,948  
                                 
Options to purchase 550,366 and 563,022 shares of common stock were not included in the computation of diluted earnings per share for the three months and nine months ended June 30, 2013, respectively, because the inclusion of these options would be anti-dilutive.  Options to purchase 783,092 and 785,475 shares of common stock were not included in the computation of diluted earnings per share for the three months and nine months ended June 30, 2012, respectively, because the inclusion of these options would be anti-dilutive.

 
14

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 8.   Pension and Other Postretirement Benefit Plans
 
The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:

 
   
Three months ended June 30,
 
   
Pension
   
Other Postretirement
 
   
2013
   
2012
   
2013
   
2012
 
                         
Service cost
  $ 1,685     $ 1,424     $ 199     $ 182  
Interest cost
    1,913       1,950       282       321  
Expected return on plan assets
    (2,243 )     (1,953 )     -       -  
Amortization:
                               
   Prior service cost
    (52 )     (11 )     (68 )     (113 )
   Net actuarial loss
    1,806       1,680       110       134  
                                 
Net benefit cost
  $ 3,109     $ 3,090     $ 523     $ 524  

   
Nine months ended June 30,
 
   
Pension
   
Other Postretirement
 
   
2013
   
2012
   
2013
   
2012
 
                         
Service cost
  $ 5,055     $ 4,272     $ 597     $ 546  
Interest cost
    5,739       5,850       846       963  
Expected return on plan assets
    (6,729 )     (5,859 )     -       -  
Amortization:
                               
   Prior service cost
    (156 )     (33 )     (204 )     (339 )
   Net actuarial loss
    5,418       5,040       330       402  
                                 
 Net benefit cost
  $ 9,327     $ 9,270     $ 1,569     $ 1,572  

Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company’s operating funds.  Under IRS regulations, the Company is not required to make any significant contributions to its principal retirement plan in fiscal year 2013.

Contributions made and anticipated for fiscal year 2013 are as follows:

Contributions
 
Pension
   
Other Postretirement
 
             
Contributions during the nine months ended June 30, 2013:
           
   Supplemental retirement plan
  $ 543     $ -  
   Other postretirement plan
    -       594  
                 
Additional contributions expected in fiscal 2013:
               
   Supplemental retirement plan
    177       -  
   Other postretirement plan
    -       300  


 
15

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 9.   Income Taxes

Income tax provisions for the Company’s interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's effective tax rate for the nine months ended June 30, 2013 was 34.3%, compared to 33.7% for the nine months ended June 30, 2012. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.

The Company had unrecognized tax benefits (excluding penalties and interest) of $3,197 and $2,708 on June 30, 2013 and September 30, 2012, respectively, all of which, if recorded, would impact the 2013 annual effective tax rate.  The Company does not expect any of the unrecognized tax benefits to be recognized in the next 12 months.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The Company included $434 in interest and penalties in the provision for income taxes for the first nine months of fiscal 2013. Total penalties and interest accrued were $2,305 and $1,871 at June 30, 2013 and September 30, 2012, respectively.  These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.

The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions.  As of June 30, 2013, the tax years that remain subject to examination, by major jurisdiction, generally are:

United States – Federal
2010 and forward
United States – State
2009 and forward
Canada
2008 and forward
Europe
2004 and forward
United Kingdom
2010 and forward
Australia
2009 and forward
Asia
2008 and forward



 
16

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 10.   Segment Information

The Company's products and operations consist of two principal businesses that are comprised of three operating segments each, as described under Nature of Operations (Note 1):  Memorialization (Cemetery Products, Funeral Home Products, Cremation) and Brand Solutions (Graphics Imaging, Marking and Fulfillment Systems, Merchandising Solutions).  Management evaluates segment performance based on operating profit (before income taxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net and minority interests.

Information about the Company's segments follows:

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Sales to external customers:
                       
Memorialization:
                       
Cemetery Products
  $ 60,913     $ 58,423     $ 169,427     $ 157,148  
Funeral Home Products
    58,523       56,115       187,276       176,453  
Cremation
    11,408       12,342       34,830       32,874  
      130,844       126,880       391,533       366,475  
Brand Solutions:
                               
Graphics Imaging
    78,505       62,429       219,459       197,711  
Marking and Fulfillment Systems
    23,653       19,310       63,918       53,449  
Merchandising Solutions
    17,650       18,859       57,741       52,601  
      119,808       100,598       341,118       303,761  
                                 
    $ 250,652     $ 227,478     $ 732,651     $ 670,236  


   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Operating profit:
                       
Memorialization:
                       
Cemetery Products
  $ 11,709     $ 12,591     $ 23,932     $ 27,291  
Funeral Home Products
    12,089       6,936       29,533       20,751  
Cremation
    (67 )     1,314       1,405       3,303  
      23,731       20,841       54,870       51,345  
Brand Solutions:
                               
Graphics Imaging
    4,204       2,588       10,006       11,300  
Marking and Fulfillment Systems
    2,527       2,862       5,310       6,275  
Merchandising Solutions
    298       1,222       2,143       2,805  
      7,029       6,672       17,459       20,380  
                                 
    $ 30,760     $ 27,513     $ 72,329     $ 71,725  


 
17

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)

Note 11.   Acquisitions

In April 2013, the Company completed the purchase of the remaining 20% interest in Tact Group Limited (“Tact”).  The Company had acquired an 80% interest in Tact in July 2009.

In March 2013, the Company completed the purchase of the remaining 38.5% interest in Kroma Pre-Press Preparation Systems Industry & Trade, Inc. (“Kroma”), completing the option arrangement in connection with the July 2011 acquisition of a 61.5% interest in Kroma.

In March 2013, the Company completed the purchase of the remaining 20% interest in Furnace Construction Cremators Limited (“FCC”).  The Company had acquired an 80% interest in FCC in March 2010.

In December 2012, the Company acquired Pyramid Controls, Inc. and its affiliate, Pyramid Control Systems (collectively, “Pyramid”).  Pyramid is a provider of warehouse control systems and conveyor control solutions for distribution centers.  The acquisition is designed to expand Matthews' fulfillment products and services in the warehouse management market.   The initial purchase price for the transaction was $24,532, plus potential additional consideration up to $3,700 based on future operating results. 

In November 2012, the Company acquired Wetzel Holding AG, Wetzel GmbH and certain related affiliates (collectively “Wetzel”).  Wetzel is a leading European provider of pre-press services and gravure printing forms, with manufacturing operations in Germany and Poland.  Wetzel’s products and services are sold primary within Europe, and the acquisition is designed to expand Matthews' products and services in the global graphics imaging market.  The purchase price for Wetzel was 42.6 million Euros ($54,748) on a cash-free, debt-free basis.

The allocation of purchase price for the Wetzel and Pyramid acquisitions are preliminary.  The Company has allocated the additional purchase price to goodwill.  Adjustments are expected to other intangibles, property, plant and equipment once the valuations are finalized.


 
18

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 12.   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 discounted cash flow technique. 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 performed its annual impairment review in the second fiscal quarter and determined that no additional adjustments to the carrying value of goodwill were necessary.

A summary of the carrying amount of goodwill attributable to each segment as well as the changes in such amounts are as follows:

   
Cemetery
   
Funeral Home
         
Graphics
   
Marking and Fulfillment
   
Merchandising
       
   
Products
   
Products
   
Cremation
   
Imaging
   
Products
   
Solutions
   
Consolidated
 
                                           
Goodwill
  $ 97,783     $ 162,876     $ 17,558     $ 167,262     $ 30,816     $ 9,138     $ 485,433  
Accumulated impairment losses
    (412 )     -       (5,000 )     (3,840 )     -       -       (9,252 )
Balance at September 30, 2012
    97,371       162,876       12,558       163,422       30,816       9,138       476,181