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, 2015

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 the definitions 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, 2015, shares of common stock outstanding were:

  Class A Common Stock 32,964,476 shares


PART I ‑ FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands)


   
June 30, 2015
   
September 30, 2014
 
         
ASSETS
               
Current assets:
               
Cash and cash equivalents
     
$
69,788
       
$
63,003
 
Accounts receivable, net
       
268,306
         
282,730
 
Inventories
       
142,911
         
152,842
 
Deferred income taxes
       
13,589
         
18,197
 
Other current assets
       
54,274
         
49,456
 
                         
Total current assets
       
548,868
         
566,228
 
                         
Investments
       
26,937
         
23,130
 
Property, plant and equipment: Cost
 
$
466,601
           
$
459,388
         
Less accumulated depreciation
   
(267,609
)
           
(250,073
)
       
             
198,992
             
209,315
 
Deferred income taxes
           
6,062
             
4,019
 
Other assets
           
14,271
             
20,027
 
Goodwill
           
788,936
             
819,467
 
Other intangible assets, net
           
346,316
             
381,862
 
                                 
Total assets
         
$
1,930,382
           
$
2,024,048
 
                                 
LIABILITIES
                               
Current liabilities:
                               
Long-term debt, current maturities
         
$
11,981
           
$
15,228
 
Trade accounts payable
           
61,445
             
72,040
 
Accrued compensation
           
63,595
             
60,690
 
Accrued income taxes
           
5,324
             
7,079
 
Deferred income tax
           
111
             
235
 
Other current liabilities
           
106,558
             
98,011
 
                                 
Total current liabilities
           
249,014
             
253,283
 
                                 
Long-term debt
           
676,418
             
714,027
 
Accrued pension
           
80,263
             
78,550
 
Postretirement benefits
           
20,430
             
20,351
 
Deferred income taxes
           
124,291
             
129,335
 
Other liabilities
           
28,444
             
53,296
 
Total liabilities
           
1,178,860
             
1,248,842
 
                                 
SHAREHOLDERS' EQUITY
                               
Shareholders' equity-Matthews:
                               
Common stock
 
$
36,334
           
$
36,334
         
Additional paid-in capital
   
114,428
             
113,225
         
Retained earnings
   
831,914
             
798,353
         
Accumulated other comprehensive loss
   
(124,400
)
           
(66,817
)
       
Treasury stock, at cost
   
(110,451
)
           
(109,950
)
       
Total shareholders' equity-Matthews
           
747,825
             
771,145
 
Noncontrolling interests
           
3,697
             
4,061
 
Total shareholders' equity
           
751,522
             
775,206
 
                                 
Total liabilities and shareholders' equity
         
$
1,930,382
           
$
2,024,048
 


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,
 
   
2015
   
2014
   
2015
   
2014
 
                 
                 
                 
Sales
 
$
364,752
   
$
279,983
   
$
1,057,730
   
$
756,765
 
Cost of sales
   
(229,316
)
   
(175,753
)
   
(669,929
)
   
(480,977
)
                                 
Gross profit
   
135,436
     
104,230
     
387,801
     
275,788
 
                                 
Selling and administrative expenses
   
(108,031
)
   
(72,400
)
   
(315,536
)
   
(208,736
)
                                 
Operating profit
   
27,405
     
31,830
     
72,265
     
67,052
 
                                 
Investment income
   
58
     
456
     
1,031
     
1,683
 
Interest expense
   
(4,849
)
   
(2,785
)
   
(15,116
)
   
(8,240
)
Other income (deductions), net
   
9,845
     
(899
)
   
6,420
     
(2,773
)
                                 
Income before income taxes
   
32,459
     
28,602
     
64,600
     
57,722
 
                                 
Income taxes
   
(9,245
)
   
(9,185
)
   
(18,314
)
   
(19,616
)
                                 
Net income
   
23,214
     
19,417
     
46,286
     
38,106
 
                                 
Net (income) loss attributable to noncontrolling interests
   
(74
)
   
(376
)
   
189
     
(286
)
                                 
Net income attributable to  Matthews shareholders
 
$
23,140
   
$
19,041
   
$
46,475
   
$
37,820
 
                                 
Earnings per share attributable to Matthews shareholders:
                               
                                 
Basic
 
 
$0.70
   
 
$0.70
   
 
$1.41
   
 
$1.38
 
                                 
Diluted
 
 
$0.70
   
 
$0.69
   
 
$1.40
   
 
$1.37
 


 
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
 
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
                         
Net income (loss):
 
$
23,140
   
$
19,041
   
$
74
   
$
376
   
$
23,214
   
$
19,417
 
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
   
8,283
     
477
     
(9
)
   
120
     
8,274
     
597
 
  Pension plans and other postretirement
     benefits
   
876
     
565
     
-
     
-
     
876
     
565
 
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
   
664
     
(1,965
)
   
-
     
-
     
664
     
(1,965
)
     Net amount reclassified to earnings
   
581
     
1,212
     
-
     
-
     
581
     
1,212
 
       Net change in unrecognized gain (loss) on
                                               
         derivatives
   
1,245
     
(753
)
   
-
     
-
     
1,245
     
(753
)
Other comprehensive income (loss), net of tax
   
10,404
     
289
     
(9
)
   
120
     
10,395
     
409
 
Comprehensive income (loss)
 
$
33,544
   
$
19,330
   
$
65
   
$
496
   
$
33,609
   
$
19,826
 


   
Nine Months Ended June 30,  
 
   
Matthews
   
Noncontrolling Interest
   
Total
 
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
                         
Net income (loss):
 
$
46,475
   
$
37,820
   
$
(189
)
 
$
286
   
$
46,286
   
$
38,106
 
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
   
(59,647
)
   
3,246
     
(80
)
   
66
     
(59,727
)
   
3,312
 
  Pension plans and other postretirement
     benefits
   
2,766
     
1,622
     
-
     
-
     
2,766
     
1,622
 
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
   
(2,548
)
   
(2,437
)
   
-
     
-
     
(2,548
)
   
(2,437
)
     Net amount reclassified to earnings
   
1,846
     
2,511
     
-
     
-
     
1,846
     
2,511
 
       Net change in unrecognized gain (loss) on
                                               
         derivatives
   
(702
)
   
74
     
-
     
-
     
(702
)
   
74
 
Other comprehensive income (loss), net of tax
   
(57,583
)
   
4,942
     
(80
)
   
66
     
(57,663
)
   
5,008
 
Comprehensive income (loss)
 
$
(11,108
)
 
$
42,762
   
$
(269
)
 
$
352
   
$
(11,377
)
 
$
43,114
 


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, 2015 and 2014 (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, 2014
 
$
36,334
   
$
113,225
   
$
798,353
   
$
(66,817
)
 
$
(109,950
)
 
$
4,061
   
$
775,206
 
Net income
   
-
     
-
     
46,475
     
-
     
-
     
(189
)
   
46,286
 
Minimum pension liability
   
-
     
-
     
-
     
2,766
     
-
     
-
     
2,766
 
Translation adjustment
   
-
     
-
     
-
     
(59,647
)
   
-
     
(80
)
   
(59,727
)
Fair value of derivatives
   
-
     
-
     
-
     
(702
)
   
-
     
-
     
(702
)
Total comprehensive income
                                                   
(11,377
)
Stock-based compensation
   
-
     
6,838
     
-
     
-
     
-
     
-
     
6,838
 
Purchase of 212,783
    shares of treasury stock
   
-
     
-
     
-
     
-
     
(9,897
)
   
-
     
(9,897
)
Issuance of 332,183
    shares of treasury stock
   
-
     
(6,919
)
   
-
     
-
     
10,680
     
-
     
3,761
 
Cancellations of 34,789
    shares of treasury stock
   
-
     
1,284
     
-
     
-
     
(1,284
)
   
-
     
-
 
Dividends, $.39 per share
   
-
     
-
     
(12,914
)
   
-
     
-
     
-
     
(12,914
)
Distributions to
   noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(95
)
   
(95
)
Balance, June 30, 2015
 
$
36,334
   
$
114,428
   
$
831,914
   
$
(124,400
)
 
$
(110,451
)
 
$
3,697
   
$
751,522
 


   
Shareholders' Equity
 
               
Accumulated
             
       
Additional
       
Other
       
Non-
     
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
controlling
     
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
interests
   
Total
 
Balance,
   September 30, 2013
 
$
36,334
   
$
47,315
   
$
769,124
   
$
(26,940
)
 
$
(283,006
)
 
$
3,465
   
$
546,292
 
Net income
   
-
     
-
     
37,820
     
-
     
-
     
286
     
38,106
 
Minimum pension liability
   
-
     
-
     
-
     
1,622
     
-
     
-
     
1,622
 
Translation adjustment
   
-
     
-
     
-
     
3,246
     
-
     
66
     
3,312
 
Fair value of derivatives
   
-
     
-
     
-
     
74
     
-
     
-
     
74
 
Total comprehensive income
                                                   
43,114
 
Stock-based compensation
   
-
     
4,906
     
-
     
-
     
-
     
-
     
4,906
 
Purchase of 112,863 shares
  of treasury stock
   
-
     
-
     
-
     
-
     
(4,639
)
   
-
     
(4,639
)
Issuance of 218,578 shares
    of treasury stock
   
-
     
(6,796
)
   
-
     
-
     
8,785
     
-
     
1,989
 
Cancellations of 77,597
    shares of treasury stock
   
-
     
3,156
     
-
     
-
     
(3,156
)
   
-
     
-
 
Dividends, $.33 per share
   
-
     
-
     
(9,118
)
   
-
     
-
     
-
     
(9,118
)
Distributions to
   noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(165
)
   
(165
)
Balance, June 30, 2014
 
$
36,334
   
$
48,581
   
$
797,826
   
$
(21,998
)
 
$
(282,016
)
 
$
3,652
   
$
582,379
 


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)

   
Nine Months Ended
 
   
June 30,
 
   
2015
   
2014
 
         
         
Cash flows from operating activities:
       
Net income
 
$
46,286
   
$
38,106
 
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
   
47,071
     
28,020
 
Stock-based compensation expense
   
6,838
     
4,906
 
Change in deferred taxes
   
(12,528
)
   
(751
)
Gain on sale of assets
   
(153
)
   
(571
)
Unrealized gain on investments
   
(617
)
   
(1,283
)
Trade name write-offs
   
4,842
     
-
 
Changes in working capital items
   
22,242
     
(10,987
)
Decrease (increase) in other assets
   
2,792
     
(1,835
)
Decrease in other liabilities
   
(14,416
)
   
(1,125
)
Increase in pension and postretirement benefits
   
6,199
     
6,190
 
Other, net
   
(6,217
)
   
1,745
 
                 
Net cash provided by operating activities
   
102,339
     
62,415
 
                 
Cash flows from investing activities:
               
Capital expenditures
   
(34,665
)
   
(18,754
)
Acquisitions, net of cash acquired
   
(1,703
)
   
-
 
Proceeds from sale of assets
   
912
     
45
 
Proceeds from sale of subsidiary
   
10,418
     
-
 
Restricted cash
   
(12,925
)
   
-
 
                 
Net cash used in investing activities
   
(37,963
)
   
(18,709
)
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
   
47,421
     
20,352
 
Payments on long-term debt
   
(82,325
)
   
(28,479
)
Payments on contingent consideration
   
-
     
(3,703
)
Proceeds from the sale of treasury stock
   
3,907
     
2,045
 
Purchases of treasury stock
   
(9,897
)
   
(4,639
)
Dividends
   
(12,914
)
   
(9,118
)
Distributions to noncontrolling interests
   
(95
)
   
(165
)
                 
Net cash used in financing activities
   
(53,903
)
   
(23,707
)
                 
Effect of exchange rate changes on cash
   
(3,688
)
   
526
 
                 
Net change in cash and cash equivalents
 
$
6,785
   
$
20,525
 
                 
Non-cash investing and financing activities:
               
Acquisition of equipment under capital lease
   
-
   
$
949
 

The accompanying notes are an integral part of these consolidated financial statements.
6


MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2015
(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 provider principally of brand solutions, memorialization products and industrial products.   Brand solutions include brand development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services).  Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries.  Industrial products include marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.

The Company has production and marketing facilities in the United States, Central and South America, 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015. 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, 2014.  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.

Reclassifications and Revisions:

The Company identified a theft of funds by an employee that had occurred over a multi-year period through May 2015 which was not previously reflected in the Company's results of operations.  The cumulative amount of the loss has been determined to be approximately $14,771.  The corresponding pre-tax earnings amounts applicable to fiscal years 2015, 2014 and 2013 were approximately $2,170, $1,720, and $1,257, respectively.

7


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


Note 2.   Basis of Presentation (continued)

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, "Materiality", the Company evaluated the materiality of these amounts quantitatively and qualitatively, and has concluded that the amounts described above were not material to any of its annual or quarterly prior period financial statements or trends of financial results. However, because of the significance of the cumulative out-of-period correction to the fiscal 2015 third quarter, the prior period financial statements have been revised, in accordance with SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements".

The following table reconciles the effect of the adjustments to the previously reported Consolidated Statements of Income for the three and nine month periods ended June 30, 2014:

   
Three months ended
June 30, 2014
   
Nine months ended
June 30, 2014
 
   
Previously Reported
   
Adjustment
   
As Adjusted
   
Previously Reported
   
Adjustment
   
As Adjusted
 
Consolidated Statements of Income
                       
Other income (deductions), net
 
$
(897
)
 
$
(2
)*
 
$
(899
)
 
$
(2,669
)
 
$
(104
)*
 
$
(2,773
)
Income before income taxes
   
28,966
     
(364
)
   
28,602
     
58,854
     
(1,132
)
   
57,722
 
Income taxes
   
(9,327
)
   
142
     
(9,185
)
   
(20,058
)
   
442
     
(19,616
)
Net income
   
19,639
     
(222
)
   
19,417
     
38,796
     
(690
)
   
38,106
 
Net income attributable to Matthews shareholders
   
19,263
     
(222
)
   
19,041
     
38,510
     
(690
)
   
37,820
 
Comprehensive income 20,048 (222 ) 19,826 43,804 (690 ) 43,114
Earnings per share:
                                               
   Basic
   
0.70
     
-
 
   
0.70
     
1.41
     
(0.03
)
   
1.38
 
   Diluted
   
0.70
     
(0.01
)
   
0.69
     
1.40
     
(0.03
)
   
1.37
 

*Certain other reclassification adjustments between other income (deductions), net and selling and administrative expenses totaling $362 and $1,028 for the three and nine months ended June 30, 2014, respectively, are also reflected in the adjustment amounts in order to conform to the current period's presentation, which began in the first quarter of fiscal 2015. These reclassification adjustments are not material to the prior year presentation.

The following table reconciles the effect of the adjustments to the previously reported Consolidated Statement of Cash Flows for the nine month period ended June 30, 2014:

   
Nine months ended
June 30, 2014   
   
Previously Reported
   
Adjustment
   
As Adjusted
 
Consolidated Statements of Cash Flows
           
Net income
 
$
38,796
   
$
(690
)
   
38,106
 
Changes in deferred taxes
   
(309
)
   
(442
)
   
(751
)
Net cash provided by operating activities
   
63,547
     
(1,132
)
   
62,415
 
Net change in cash and cash equivalents
   
21,657
     
(1,132
)
   
20,525
 

There was no impact to the Consolidated Statements of Comprehensive Income or the Consolidated Statements of Shareholders' Equity for any of the respective periods other than the impact on Net Income. The retained earnings balance as of September 30, 2014 and 2013 was adjusted by $(7,687) and $(6,638), respectively, as a result of this matter.  In addition, the immaterial corrections did not affect the Company's compliance with debt covenants.
8


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, 2015
   
September 30, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
Derivatives (1)
   
-
   
$
622
     
-
   
$
622
     
-
   
$
2,457
     
-
   
$
2,457
 
Trading
  securities
 
$
19,438
     
-
     
-
     
19,438
   
$
19,038
     
-
     
-
   
$
19,038
 
Total assets at
  fair value
 
$
19,438
   
$
622
     
-
   
$
20,060
   
$
19,038
   
$
2,457
     
-
   
$
21,495
 
                                                                 
Liabilities:
                                                               
Derivatives (1)
   
-
   
$
1,444
     
-
   
$
1,444
     
-
   
$
2,127
     
-
   
$
2,127
 
Total liabilities
  at fair value
   
-
   
$
1,444
     
-
   
$
1,444
     
-
   
$
2,127
     
-
   
$
2,127
 
                                                                 
(1) Interest rate swaps are valued based on observable market swap rates.
 


Note 4.   Inventories

Inventories consisted of the following:

   
June 30, 2015
   
September 30, 2014
 
         
Raw materials
 
$
44,836
   
$
46,152
 
Work in process
   
34,006
     
38,631
 
Finished goods
   
64,069
     
68,059
 
   
$
142,911
   
$
152,842
 

9


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 connection with the acquisition of Schawk, Inc. ("Schawk") in July 2014, the Company entered into amendments to the Revolving Credit Facility to amend certain terms of the Revolving Credit Facility and increase the maximum amount of borrowings available under the facility from $500,000 to $900,000.  Borrowings under the amended facility bear interest at LIBOR plus a factor ranging from .75% to 2.00% (1.75% at June 30, 2015) 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 .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, 2015 and September 30, 2014 were $655,425 and $680,000, respectively.  The weighted-average interest rate on outstanding borrowings at June 30, 2015 and 2014 was 2.51% and 2.55%, respectively.

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at June 30, 2015
 
Maturity Date
October 2011
  $25,000
1.67%
1.75%
October 2015
June 2012
  $40,000
1.88%
1.75%
June 2022
August 2012
  $35,000
1.74%
1.75%
June 2022
September 2012
  $25,000
3.03%
1.75%
December 2015
September 2012
  $25,000
1.24%
1.75%
March 2017
November 2012
  $25,000
1.33%
1.75%
November 2015
May 2014
  $25,000
1.35%
1.75%
May 2018
November 2014
  $25,000
1.26%
1.75%
June 2018
March 2015
  $25,000
1.49%
1.75%
March 2019

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 loss of $822 ($501 after tax) at June 30, 2015 and an unrealized gain, net of unrealized losses, of $330 ($201 after tax) at September 30, 2014. The net unrealized gain and loss are included in shareholders' equity as part of accumulated other comprehensive income ("AOCI").  Assuming market rates remain constant with the rates at June 30, 2015, a loss (net of tax) of approximately $527 included in AOCI is expected to be recognized in earnings over the next twelve months.
10


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


Note 5.  Debt (continued)

At June 30, 2015 and September 30, 2014, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:
     
Derivatives
 
June 30, 2015
   
September 30, 2014
 
Current assets:
       
Other current assets
 
$
89
   
$
324
 
Long-term assets:
               
 Other assets
   
534
     
2,133
 
Current liabilities:
               
Other current liabilities
   
(953
)
   
(1,808
)
Long-term liabilities:
               
Other liabilities
   
(492
)
   
(319
)
Total derivatives
 
$
(822
)
 
$
330
 
                 

The loss recognized on derivatives was as follows:

 
       
Derivatives in
Location of 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,
 
     
2015
   
2014
   
2015
   
2014
 
                   
Interest rate swaps
Interest expense
 
 
$(953)
 
 
 
$(1,987)
 
 
 
$(3,026)
 
 
 
$(4,117)
 
                                   

The Company recognized the following gains or losses in AOCI:

           
     
Location of
   
     
Gain or
   
     
  (Loss)
 
Amount of Loss
 
     
Reclassified
 
Reclassified from
 
   
Amount of (Loss)
 
From
 
AOCI into
 
Derivatives in
 
Recognized in
 
AOCI into
 
Income
 
Cash Flow
 
AOCI on Derivatives
 
Income
 
(Effective Portion*)
 
Hedging Relationships
 
June 30, 2015
   
June 30, 2014
 
(Effective Portion*)
 
June 30, 2015
   
June 30, 2014
 
                   
Interest rate swaps
 
 
$(2,548)
 
 
 
$(2,437)
 
Interest expense
 
 
$(1,846)
 
 
 
$(2,511)
 
                                   
*There is no ineffective portion or amount excluded from effectiveness testing.
 

11


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


Note 5.  Debt (continued)

The Company, through certain of its European subsidiaries, has a credit facility with a European bank.  The maximum amount of borrowings available under this facility is 35.0 million Euros ($38,994).  Outstanding borrowings under the credit facility totaled 11.3 million Euros ($12,586) and 17.5 million Euros ($22,055) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2015 and 2014 was 1.50% and 1.35%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 1.6 million Euros ($1,790) and 1.2 million Euros ($1,576) at June 30, 2015 and September 30, 2014, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2015 and 2014 was 3.85% and 4.04%, respectively.

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 2.4 million Euros ($2,650) and 2.9 million Euros ($3,624) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2015 and 2014 was 5.82% and 7.62%, respectively.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 4.6 million Euros ($5,094) and 5.5 million Euros ($6,922) at June 30, 2015 and September 30, 2014, respectively.  Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($12,623) with the same Italian banks.  Outstanding borrowings on these lines were 3.6 million Euros ($4,020) and 4.8 million Euros ($6,063) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2015 and 2014 was 3.21% and 3.13%, respectively.

In September 2014, a claim seeking to draw upon a letter of credit issued by the Company of $12,925 was filed with respect to a project for a customer.  In January 2015, the Company made payment on the draw to the financial institution for the letter of credit.  Pursuant to an action initiated by the Company, a court order has been issued requiring these funds to ultimately be remitted to the court pending resolution of the dispute between the parties.  While it is possible the resolution of this matter could be unfavorable to the Company, management has assessed the customer's claim to be without merit and, based on information available as of this filing, expects that the ultimate resolution of this matter will not have a material adverse effect on Matthews' financial condition, results of operations or cash flows.  As of June 30, 2015, the Company has presented the funded letter of credit within other current assets on the Condensed Consolidated Balance Sheet.

As of June 30, 2015 and September 30, 2014 the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Condensed Consolidated Balance Sheet.

12


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


Note 6.   Share-Based Payments

The Company maintains an equity incentive plan (the "2012 Equity Incentive Plan") that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  The Company also maintains an equity incentive plan (the "2007 Equity Incentive Plan") and a stock incentive plan (the "1992 Incentive Stock Plan") that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards.  Under the 2012 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000.  There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan.  At June 30, 2015, there were 1,476,798 shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.

The option price for each stock option granted under any of the plans may not be less than the fair market value of the Company's Class A 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 date, 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 and after 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, 2015 and 2014, total stock-based compensation cost totaled $2,274 and $1,667, respectively.  For the nine-month periods ended June 30, 2015 and 2014, total stock-based compensation cost totaled $6,838 and $4,906, respectively.  The associated future income tax benefit recognized was $887 and $650 for the three-month periods ended June 30, 2015 and 2014, respectively, and $2,667 and $1,913 for the nine-month periods ended June 30, 2015 and 2014, respectively.

For the three-month periods ended June 30, 2015 and 2014, the amount of cash received from the exercise of stock options was $129 and $217, respectively.  For the nine-month periods ended June 30, 2015 and 2014, the amount of cash received from the exercise of stock options was $3,907 and $2,045, respectively. In connection with these exercises, the tax benefits realized by the Company were $16 and $1 for the three-month period ended June 30, 2015 and 2014, respectively, and $337 and $186 for the nine-month periods ended June 30, 2015 and 2014, respectively.

13


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


Note 6.   Share-Based Payments (continued)

The transactions for restricted stock for the nine months ended June 30, 2015 were as follows:

       
Weighted-
 
       
average
 
       
grant-date
 
   
Shares
   
fair value
 
Non-vested at September 30, 2014
   
575,150
   
$
33.83
 
Granted
   
215,370
     
40.07
 
Vested
   
(158,992
)
   
34.42
 
Expired or forfeited
   
(36,294
)
   
28.53
 
Non-vested at June 30, 2015
   
595,234
     
36.26
 

As of June 30, 2015, the total unrecognized compensation cost related to unvested restricted stock was $9,774 and is expected to be recognized over a weighted average period of 1.7 years.

The transactions for shares under options for the nine months ended June 30, 2015 were as follows:

           
Weighted-
     
       
Weighted-
   
average
   
Aggregate
 
       
average
   
remaining
   
intrinsic
 
   
Shares
   
exercise price
   
contractual term
   
value
 
Outstanding, September 30, 2014
   
512,322
   
 
$38.62
         
Exercised
   
(102,544
)
   
38.10
         
Expired or forfeited
   
(69,173
)
   
36.53
         
Outstanding, June 30, 2015
   
340,605
     
39.20
     
1.0
   
 
$4,747
 
Exercisable, June 30, 2015
   
97,000
     
38.78
     
0.8
     
1,392
 

No options vested during the three-month and nine-month periods ended June 30, 2015 and 2014, 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, 2015 and 2014 was $897 and $510, respectively.

The transactions for non-vested options for the nine months ended June 30, 2015 were as follows:

       
Weighted-average
 
       
grant-date
 
   
Shares
   
fair value
 
Non-vested at September 30, 2014
   
312,442
   
 
$11.21
 
Expired or forfeited
   
(68,837
)
   
11.70
 
Non-vested at June 30, 2015
   
243,605
     
11.07
 

14


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


Note 6.   Share-Based Payments (continued)

The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model.  The following table indicates the assumptions used in estimating fair value of restricted stock for the nine months ended June 30, 2015 and 2014.

   
Nine Months Ended June 30,
 
   
2015
   
2014
 
Expected volatility
   
22.2
%
   
26.6
%
Dividend yield
   
1.0
%
   
1.1
%
Average risk-free interest rate
   
1.7
%
   
1.4
%
Average expected term (years)
   
1.8
     
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 for grants in the years ended September 30, 2014, 2013 and 2012 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.

The Company maintains the 1994 Director Fee Plan and the 2014 Director Fee Plan (collectively, the "Director Fee Plans").  Since adoption of the 2014 Director Fee Plan, there have been no further fees or share-based awards granted under the 1994 Director Fee Plan.  Under the 2014 Director Fee Plan, non-employee directors (except for the Chairman of the Board) each receive, as an annual retainer fee for fiscal 2015, either cash or shares of the Company's Class A Common Stock with a value equal to $75.  The annual retainer fee for fiscal 2015 paid to a non-employee Chairman of the Board is $175.  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 Plans at June 30, 2015.  Additionally, non-employee directors each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $110 for fiscal 2015.  A total of 22,300 stock options have been granted under the Director Fee Plans.  At June 30, 2015, there were no options outstanding. Additionally, 136,568 shares of restricted stock have been granted under the Director Fee Plans, 33,418 of which were unvested at June 30, 2015.  A total of 150,000 shares have been authorized under the 2014 Director Fee Plan.




15


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


Note 7.   Earnings Per Share Attributable to Matthews' Shareholders

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

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income attributable to Matthews shareholders
 
$
23,140
   
$
19,041
   
$
46,475
   
$
37,820
 
Less: dividends and undistributed earnings
allocated to participating securities
   
2
     
35
     
8
     
128
 
Net income available to Matthews shareholders
 
$
23,138
   
$
19,006
   
$
46,467
   
$
37,692
 
                                 
Weighted-average shares outstanding (in thousands):
                               
Basic shares
   
32,962
     
27,294
     
32,947
     
27,223
 
Effect of dilutive securities
   
234
     
197
     
258
     
227
 
Diluted shares
   
33,196
     
27,491
     
33,205
     
27,450
 
                                 

There were no anti-dilutive securities for the three and nine months ended June 30, 2015 or 2014.


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
 
   
2015
   
2014
   
2015
   
2014
 
                 
Service cost
 
$
1,655
   
$
1,582
   
$
114
   
$
109
 
Interest cost
   
2,145
     
2,213
     
221
     
230
 
Expected return on plan assets
   
(2,470
)
   
(2,396
)
   
-
     
-
 
Amortization:
                               
   Prior service cost
   
(45
)
   
(52
)
   
(49
)
   
(23
)
   Net actuarial loss (gain)
   
1,564
     
991
     
-
     
(49
)
                                 
Net benefit cost
 
$
2,849
   
$
2,338
   
$
286
   
$
267
 

16


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


Note 8.   Pension and Other Postretirement Benefit Plans (continued)
   
Nine months ended June 30,
 
   
Pension
   
Other Postretirement
 
   
2015
   
2014
   
2015
   
2014
 
                 
Service cost
 
$
4,965
   
$
4,746
   
$
342
   
$
327
 
Interest cost
   
6,435
     
6,639
     
663
     
690
 
Expected return on plan assets
   
(7,410
)
   
(7,188
)
   
-
     
-
 
Amortization:
                               
   Prior service cost
   
(135
)
   
(156
)
   
(147
)
   
(66
)
   Net actuarial loss (gain)
   
4,692
     
2,973
     
-
     
(147
)
                                 
 Net benefit cost
 
$
8,547
   
$
7,014
   
$
858
   
$
804
 

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 2015.

Contributions made and anticipated for fiscal year 2015 are as follows:

Contributions
 
Pension
   
Other Postretirement
 
         
Contributions during the nine months ended June 30, 2015:
       
   Supplemental retirement plan
 
$
543
   
$
-
 
   Other postretirement plan
   
-
     
1,019
 
                 
Additional contributions expected in fiscal 2015:
               
   Supplemental retirement plan
   
190
     
-
 
   Other postretirement plan
   
-
     
250
 

Prior to its acquisition by Matthews, Schawk participated in a multi-employer pension fund pursuant to certain collective bargaining agreements.  In 2012, Schawk bargained to withdraw from the fund, and recorded a withdrawal liability at the conclusion of the negotiations, based on the present value of installment payments expected to be paid through 2034.  During the third quarter of fiscal 2015, the Company finalized an agreement to settle this installment payment obligation in exchange for a lump-sum payment of $18,157.  This settlement liability is recorded within other current liabilities on the Condensed Consolidated Balance Sheet at June 30, 2015, since full payment is expected to be made during the fourth quarter of fiscal 2015.  This settlement also resulted in an $11,522 gain recognized in other income (deductions), net during the third quarter of fiscal 2015.
17


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


Note 9.   Accumulated Other Comprehensive Income

The changes in AOCI by component, net of tax, for the three month periods ended June 30, 2015 and 2014 were as follows:
 
      
Post-retirement benefit plans
   
Currency translation adjustment
   
Derivatives
   
Total
 
Attributable to Matthews:
                 
Balance, March 31, 2015    $ (37,761 )   $ (95,297 )   $ (1,746 )   $ (134,804 )
OCI before reclassification
     
-
     
8,283
     
664
     
8,947
 
Amounts reclassified from AOCI
 
 (a)  
876
     
-
   (b)  
581
     
1,457
 
Net current-period OCI
     
876
     
8,283
     
1,245
     
10,404
 
Balance, June 30, 2015
   
$
(36,885
)
 
$
(87,014
)
 
$
(501
)
 
$
(124,400
)
Attributable to noncontrolling
interest:
                                 
Balance, March 31, 2015
     
-
   
$
445
     
-
   
$
445
 
OCI before reclassification
     
-
     
(9
)
   
-
     
(9
)
Net current-period OCI
     
-
     
(9
)
   
-
     
(9
)
Balance, June 30, 2015
     
-
   
$
436
     
-
   
$
436
 

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

(a) Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see note 8).
(b) Amounts were included in interest expense in the periods the hedged item affected earnings (see note 5).

18


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


Note 9.   Accumulated Other Comprehensive Income (continued)

The changes in AOCI by component, net of tax, for the nine month periods ended June 30, 2015 and 2014 were as follows:
 
      
Post-retirement benefit plans
   
Currency translation adjustment
   
Derivatives
   
Total
 
Attributable to Matthews:
                 
Balance, September 30, 2014    $ (39,651 )   $ (27,367 )   $ 201     $ (66,817 )
OCI before reclassification
     
-
     
(59,647
)
   
(2,548
)
   
(62,195
)
Amounts reclassified from AOCI
 
 (a)  
2,766
     
-
   (b)  
1,846
     
4,612
 
Net current-period OCI
     
2,766
     
(59,647
)
   
(702
)
   
(57,583
)
Balance, June 30, 2015
   
$
(36,885
)
 
$
(87,014
)
 
$
(501
)
 
$
(124,400
)
Attributable to noncontrolling interest:
                                 
Balance, September 30, 2014
     
-
   
$
516
     
-
   
$
516
 
OCI before reclassification
     
-
     
(80
)
   
-
     
(80
)
Net current-period OCI
     
-
     
(80
)
   
-
     
(80
)
Balance, June 30, 2015
     
-
   
$
436
     
-
   
$
436
 

      
Post-retirement benefit plans
   
Currency translation adjustment
   
Derivatives
   
Total
 
Attributable to Matthews:
                 
Balance, September 30, 2013   $ (30,100 )   $ 3,714     $ (554 )   $ (26,940 )
OCI before reclassification
     
-
     
3,246
     
(2,437
)
   
809
 
Amounts reclassified from AOCI
 
 (a)  
1,622
     
-
   (b)  
2,511
     
4,133
 
Net current-period OCI
     
1,622
     
3,246
     
74
     
4,942
 
Balance, June 30, 2014
   
$
(28,478
)
 
$
6,960
   
$
(480
)
 
$
(21,998
)
Attributable to noncontrolling interest:
                                 
Balance, September 30, 2013
     
-
   
$
401
     
-
   
$
401
 
OCI before reclassification
     
-
     
66
     
-
     
66
 
Net current-period OCI
     
-
     
66
     
-
     
66
 
Balance, June 30, 2014
     
-
   
$
467
     
-
   
$
467
 

(a) Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see note 8).
(b) Amounts were included in interest expense in the periods the hedged item affected earnings (see note 5).



19


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


Note 9.   Accumulated Other Comprehensive Income (continued)

Reclassifications out of AOCI for the three and nine month periods ended June 30, 2015 were as follows:

   
Amount reclassified from AOCI
 
Details about AOCI Components
 
Three months ended June 30, 2015
   
Nine months ended June 30, 2015
 
Affected line item in the Statement of income
               
Postretirement benefit plans
            
     Prior service (cost) credit
 
$
94
   (a)
$
282
   
     Actuarial losses
   
(1,564
)
 (a)  
(4,692
)
 
     
(1,470
)
 (b)  
(4,410
)
Total before tax
     
(594
)
   
(1,644
)
Tax provision (benefit)
   
$
(876
)
 
$
(2,766
)
Net of tax
Derivatives
                    
     Interest rate swap contracts
 
$
(953
)
 
$
(3,026
)
Interest expense
     
(953
)
 (b)  
(3,026
)
Total before tax
     
(372
)
   
(1,180
)
Tax provision (benefit)
   
$
(581
)
 
$
(1,846
)
Net of tax

Reclassifications out of AOCI for the three and nine month periods ended June 30, 2014 were as follows:

   
Amount reclassified from AOCI
 
Details about AOCI Components
 
Three months ended June 30, 2014
   
Nine months ended June 30, 2014
 
Affected line item in the Statement of income
               
Postretirement benefit plans
            
     Prior service (cost) credit
 
$
75
   (a)
$
222
   
     Actuarial losses
   
(942
)
 (a)  
(2,826
)
 
     
(867
)
 (b)  
(2,604
)
Total before tax
     
(302
)
   
(982
)
Tax provision (benefit)
   
$
(565
)
 
$
(1,622
)
Net of tax
Derivatives
                    
     Interest rate swap contracts
 
$
(1,987
)
 
$
(4,117
)
Interest expense
     
(1,987
)
 (b)  
(4,117
)
Total before tax
     
(775
)
   
(1,606
)
Tax provision (benefit)
   
$
(1,212
)
 
$
(2,511
)
Net of tax

(a) Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses.  For additional information, see Note 8.
(b) For pre-tax items, positive amounts represent income and negative amounts represent expense.

20


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


Note 10.   Income Taxes

Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's effective tax rate for the nine months ended June 30, 2015 was 28.3%, compared to 34.0% for the nine months ended June 30, 2014.  The decrease in the effective tax rate for the first nine months of fiscal 2015 primarily reflected the benefit of the utilization of certain tax attributes as a result of legal structure reorganization in foreign jurisdictions.  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 $4,337 and $4,311 on June 30, 2015 and September 30, 2014, respectively, all of which, if recorded, would impact the 2015 annual effective tax rate.

Total penalties and interest accrued were $2,060 and $2,135 at June 30, 2015 and September 30, 2014, 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, 2015, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal
2012 and forward
United States – State
2010 and forward
Canada
2009 and forward
Europe
2009 and forward
United Kingdom
2013 and forward
Australia
2010 and forward
Asia
2008 and forward

21


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


Note 11.   Segment Information

In the first quarter of fiscal 2015, the Company changed its segment reporting to reflect a realignment of its operations, and changes in the management of its business.  The Company is now managing and reporting its businesses under three segments: SGK Brand Solutions, Memorialization and Industrial. The SGK Brand Solutions segment is comprised of graphics imaging products and services, including Schawk, merchandising display systems, and marketing and design services. The Memorialization segment is comprised of the Company's cemetery products, funeral home products and cremation operations.  The Industrial segment is comprised of the Company's marking and automation products and fulfillment systems. Prior periods have been restated to conform with the current presentation.  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 noncontrolling interest.

Information about the Company's segments follows:


   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Sales to external customers:
               
SGK Brand Solutions
 
$
205,082
   
$
116,338
   
$
597,638
   
$
305,741
 
Memorialization
   
125,598
     
137,926
     
372,076
     
380,937
 
Industrial
   
34,072
     
25,719
     
88,016
     
70,087
 
   
$
364,752
   
$
279,983
   
$
1,057,730
   
$
756,765
 


   
Three Months Ended
   
Nine Months Ended   
   
June 30,
   
June 30,   
   
2015
   
2014
   
2015
   
2014
 
Operating profit:
               
SGK Brand Solutions
 
$
5,286
   
$
6,614
   
$
5,536
   
$
9,219
 
Memorialization
   
17,715
     
22,410
     
57,374
     
52,057
 
Industrial
   
4,404
     
2,806
     
9,355
     
5,776
 
   
$
27,405
   
$
31,830
   
$
72,265
   
$
67,052
 



22


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


Note 12.   Acquisitions

On June 15, 2015, the Company acquired the remaining interest in ImTech, a business engaged in designing and manufacturing industrial printing products and specialty ink products, for $1,703.

On June 8, 2015, the Company and its wholly-owned subsidiary, The York Group, Inc. ("York"), entered into a purchase agreement with Aurora Products Group, LLC ("Aurora"), the sellers identified therein, and Kohlberg Management VII, L.P., in its capacity as the sellers' representative. Upon the terms and subject to the conditions set forth in the purchase agreement, York will acquire all of the outstanding equity interests of Aurora, resulting in Aurora becoming an indirect wholly-owned subsidiary of Matthews.  Aurora provides burial, cremation, and technology products to funeral home clients and distributors in the United States and Canada. Matthews expects to fund the acquisition through cash on hand and borrowings under its existing credit facility.  The purchase price for the Aurora Transaction is $214.0 million in cash on a debt-free basis subject to a working capital adjustment. Additional consideration of $10.0 million is payable contingent upon the achievement of a specified increased level of adjusted earnings before interest, taxes, depreciation and amortization for the last full twelve (12) months prior to the closing. Matthews expects to consummate the Aurora Transaction in the fourth quarter of fiscal 2015, subject to customary closing conditions, including the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") or early termination of the waiting period under the HSR Act.

On July 29, 2014, the Company acquired Schawk, a leading global brand development, activation and brand deployment company headquartered in Des Plaines, Illinois.  Under the terms of the transaction, Schawk shareholders received $11.80 cash and 0.20582 shares of Matthews' common stock for each Schawk share held.  Based on the closing price of Matthews' stock on July 28, 2014, the transaction represented an implied price of $20.74 per share and a total enterprise value (which included outstanding debt, net of cash acquired) of $616,686.  Schawk provides comprehensive brand development and brand deployment services to clients primarily in the consumer packaged goods, retail and life sciences markets.  Schawk creates and sells its clients' brands, produces brand assets and protects brand equities to help drive brand performance.  Schawk delivers its services through more than 155 locations in over 20 countries across North and South America, Europe, Asia and Australia.  The preliminary purchase price allocation related to the Schawk acquisition is not finalized as of June 30, 2015, and is based upon a preliminary valuation which is subject to change as the Company obtains additional information, including with respect to fixed assets, intangible assets, certain liabilities and related taxes.

The following information presents a summary of the consolidated results of Matthews combined with Schawk as if the acquisition had occurred on October 1, 2013:


   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
Sales
 
$
364,752
   
$
384,292
   
$
1,057,730
   
$
1,077,240
 
Income before income taxes
   
32,459
     
28,647
     
64,600
     
62,725
 
Net income
   
23,140
     
19,531
     
46,475
     
42,813
 
Earnings per share
 
 
$.70
   
 
$.59
   
 
$1.40
   
 
$1.30
 
                                 

The unaudited pro forma results for the three and nine months ended June 30, 2014 have been prepared for comparative purposes only and include certain adjustments, such as interest expense on acquisition debt and acquisition related costs.  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.
23


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


Note 13.   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 may need to be recognized.  For purposes of testing for impairment, the Company uses a combination of valuation techniques, including discounted cash flows.  A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rates.  The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections.  The discount rates used in the discounted cash flow analyses were developed with the assistance of valuation experts and management believes the discount rates appropriately reflect the risks associated with the Company's operating cash flows.  In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.  The Company performed its annual impairment review in the second quarter of fiscal 2015 and determined that the estimated fair value for all reporting units exceeded carrying value, therefore no adjustments to the carrying value of goodwill were necessary at March 31, 2015.

Trade names with indefinite lives are tested for impairment annually in the second quarter. In connection with the integration of Schawk, the Company discontinued the use of certain trade names and recognized write-offs of approximately $4,842 in the SGK Brand Solutions segment during the second quarter of fiscal 2015.

A summary of the carrying amount of goodwill attributable to each segment as well as the changes in such amounts are as follows:
                 
   
SGK Brand Solutions
   
Memorialization
   
Industrial
   
Consolidated
 
                 
Goodwill
 
$
501,050
   
$
278,282
   
$
50,887
   
$
830,219
 
Accumulated impairment losses
   
(5,752
)
   
(5,000
)
   
-
     
(10,752
)
Balance at September 30, 2014
   
495,298
     
273,282
     
50,887
     
819,467
 
                                 
Additions during period
   
-
     
-
     
2,226
     
2,226
 
Translation and other  adjustments
   
(29,094
)
   
(3,556
)
   
(107
)
   
(32,757
)
Goodwill
   
471,956
     
274,726
     
53,006
     
799,688
 
Accumulated impairment losses
   
(5,752
)
   
(5,000
)
   
-
     
(10,752
)
Balance at June 30, 2015
 
$
466,204
   
$
269,726
   
$
53,006
   
$
788,936
 

24


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


Note 13.   Goodwill and Other Intangible Assets (continued)

The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of June 30, 2015 and September 30, 2014, respectively.

   
Carrying
   
Accumulated
     
   
Amount
   
Amortization
   
Net
 
June 30, 2015:
           
Trade names
 
$
137,927
   
$
-
*
 
$
137,927
 
Trade names
   
1,806
     
(1,687
)
   
119
 
Customer relationships
   
244,049
     
(37,123
)
   
206,926
 
Copyrights/patents/other
   
11,480
     
(10,136
)
   
1,344
 
   
$
395,262
   
$
(48,946
)
 
$
346,316
 
                         
September 30, 2014:
                       
Trade names
 
$
142,529
   
$
-
*
 
$
142,529
 
Trade names
   
2,854
     
(2,121
)
   
733
 
Customer relationships
   
258,441
     
(24,785
)
   
233,656
 
Copyrights/patents/other
   
14,528
     
(9,584
)
   
4,944
 
   
$
418,352
   
$
(36,490
)
 
$
381,862
 
* Not subject to amortization
                 

The net change in intangible assets during the nine months ended June 30, 2015 included the impact of foreign currency fluctuations during the period, additional amortization, and trade name write-offs of approximately $4,842 in the SGK Brand Solutions segment.  In addition, the Company completed the sale of a majority ownership in its Schawk Digital Solutions business, which was acquired in 2014 as part of the Schawk acquisition.  Net proceeds from this transaction totaled approximately $10,400, and the sale primarily resulted in the disposal of working capital and intangible assets, and the recognition of a cost-basis investment in this business.  No gain or loss was recognized on the sale.

Amortization expense on intangible assets was $4,651 and $901 for the three-month periods ended June 30, 2015 and 2014, respectively.  For the nine month periods ended June 30, 2015 and 2014, amortization expense was $13,872 and $3,284, respectively. Amortization expense is estimated to be $4,615 for the remainder of 2015, $18,137 in 2016, $17,157 in 2017, $16,018 in 2018 and $15,131 in 2019.


25


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 ("Matthews" or the "Company") 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 fiscal year ended September 30, 2014.  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, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, including the risks associated with the Company's acquisition of Schawk, Inc. ("Schawk") and the pending acquisition of Aurora Products Group, LLC ("Aurora"), and technological factors beyond the Company's control.  In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors.

RESULTS OF OPERATIONS:

In the first quarter of fiscal 2015, the Company changed its segment reporting to reflect a realignment of its operations, and changes in the management of its business.  The Company is now managing and reporting its businesses under three segments: SGK Brand Solutions, Memorialization and Industrial. The SGK Brand Solutions segment is comprised of graphics imaging products and services, including Schawk, merchandising display systems, and marketing and design services. The Memorialization segment is comprised of the Company's cemetery products, funeral home products and cremation operations.  The Industrial segment is comprised of the Company's marking and automation products and fulfillment systems. Prior periods have been restated to conform with the current presentation. Segment information is set forth in this report in Note 11, "Segment Information" in Item 1-"Financial Statements".

The following table sets forth the sales and operating profit for the Company's three reporting segments for the three and nine-month periods ended June 30, 2015 and 2014.

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Sales:
     
(Dollars in thousands)
     
SGK Brand Solutions
 
$
205,082
   
$
116,338
   
$
597,638
   
$
305,741
 
Memorialization
   
125,598
     
137,926
     
372,076
     
380,937
 
Industrial
   
34,072
     
25,719
     
88,016
     
70,087
 
   
$
364,752
   
$
279,983
   
$
1,057,730
   
$
756,765
 

26



   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Operating profit:
               
SGK Brand Solutions
 
$
5,286
   
$
6,614
   
$
5,536
   
$
9,219
 
Memorialization
   
17,715
     
22,410
     
57,374
     
52,057
 
Industrial
   
4,404
     
2,806
     
9,355
     
5,776
 
   
$
27,405
   
$
31,830
   
$
72,265
   
$
67,052
 

Sales for the nine months ended June 30, 2015 were $1.1 billion, compared to $756.8 million for the nine months ended June 30, 2014.  The increase in fiscal 2015 sales principally reflected the acquisition of Schawk, higher sales in the SGK Brand Solutions segment, excluding Schawk, and higher sales in the Industrial segment.  These increases were partially offset by lower sales in the Memorialization segment.  Additionally, consolidated sales for the nine months ended June 30, 2015 were unfavorably impacted by changes in foreign currencies against the U.S. dollar of approximately $39.1 million.

In the SGK Brand Solutions segment, sales for the first nine months of fiscal 2015 were $597.6 million, compared to $305.7 million for the first nine months of fiscal 2014.  The increase resulted principally from the acquisition of Schawk ($310.7 million), and higher sales, excluding the Schawk acquisition, in Europe.  These increases were partially offset by the impact of a large merchandising project in fiscal 2014 that did not repeat in fiscal 2015, and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $29.8 million.  Memorialization segment sales for the first nine months of fiscal 2015 were $372.1 million, compared to $380.9 million for the first nine months of fiscal 2014.  The Memorialization segment sales reflected higher unit volume of caskets, higher sales of bronze and granite memorials and higher cremation equipment sales in the U.S. market.  These increases were more than offset by lower mausoleum sales, lower equipment sales in Europe and the U.K., and the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $7.0 million.  Lower equipment sales in the U.K. reflected a large incinerator project in fiscal 2014 that did not repeat in fiscal 2015.  Industrial segment sales were $88.0 million for the first nine months of fiscal 2015, compared to $70.1 million for the first nine months of fiscal 2014.  The increase resulted principally from higher sales of warehouse control systems and higher unit volume of marking products and related inks, primarily in North America.  These increases were partially offset by the unfavorable impact of changes in foreign currency values against the U.S. dollar of approximately $2.3 million.

Gross profit for the nine months ended June 30, 2015 was $387.8 million, compared to $275.8 million for the same period a year ago.  Consolidated gross profit as a percent of sales was 36.7% and 36.4% for the first nine months of fiscal 2015 and fiscal 2014, respectively.  The increase in gross profit primarily reflected the impact of higher sales.  The improvement in gross profit as a percent of sales reflected the favorable margin impact from the Schawk acquisition.

Selling and administrative expenses for the nine months ended June 30, 2015 were $315.5 million, compared to $208.7 million for the first nine months of fiscal 2014.  Consolidated selling and administrative expenses as a percent of sales were 29.8% for the nine months ended June 30, 2015, compared to 27.6% for the same period last year.  The increase in selling and administrative expenses was primarily attributable to higher sales and the acquisition of Schawk.  In addition, fiscal 2015 selling and administrative expenses included an increase of $10.9 million in intangible asset amortization related to the Schawk acquisition, acquisition-related expenses of $27.9 million primarily related to the Schawk acquisition integration activities, trade name write-offs of $4.8 million and expenses related to strategic cost-structure initiatives of $1.6 million, partially offset by the impact of the favorable settlement of litigation, net of related expenses, in the Memorialization segment of $9.0 million.  Selling and administrative expenses in the first nine months of fiscal 2014 included expenses related to acquisition activities, primarily the Schawk acquisition, of $7.1 million, the Company's strategic cost structure initiatives of $5.1 million and litigation-related expenses in the Memorialization segment of $1.9 million.

27


Operating profit for the nine months ended June 30, 2015 was $72.3 million, compared to $67.1 million for the nine months ended June 30, 2014.  The SGK Brand Solutions segment operating profit for the first nine months of fiscal 2015 was $5.5 million, compared to $9.2 million for the same period a year ago.  Fiscal 2015 operating profit was favorably impacted by the Schawk acquisition, and higher sales, exclusive of the acquisition, in Europe.  The SGK Brand Solutions segment fiscal 2015 operating profit included charges totaling $32.3 million representing acquisition integration expenses, trade name write-offs, and expenses related to strategic cost-structure initiatives.  In addition, the segment reported a $10.9 million increase in intangible asset amortization related to the Schawk acquisition.  Fiscal 2015 SGK Brand Solutions segment operating profit was also unfavorably impacted by changes in foreign currency values against the U.S. dollar of approximately $2.6 million.  Fiscal 2014 operating profit included acquisition-related expenses of $7.0 million and expenses related to strategic cost structure initiatives of $2.0 million, and also reflected the benefit of a significant merchandising project that did not repeat in fiscal 2015.  Memorialization segment operating profit for the first nine months of fiscal 2015 was $57.4 million, compared to $52.1 million for the first nine months of fiscal 2014.  The Memorialization segment fiscal 2015 operating profit included the impact of the favorable settlement of litigation, net of related expenses, of $9.0 million, partially offset by charges totaling $2.0 million, consisting of acquisition related costs, and expenses related to strategic cost-structure initiatives.  Operating profit for the Memorialization segment in fiscal 2014 included $3.0 million of expenses related to strategic cost-structure initiatives and $1.9 million of litigation-related expenses, and also reflected the benefit of a large incineration project that did not repeat in fiscal 2015.  Operating profit for the Industrial segment for the nine months ended June 30, 2015 was $9.4 million, compared to $5.8 million for the same period a year ago.  The increase primarily resulted from the favorable impact of higher sales.

Investment income was $1.0 million for the nine months ended June 30, 2015, compared to $1.7 million for the nine months ended June 30, 2014.  The decrease reflected lower rates of return on investments held in trust for certain of the Company's benefit plans.  Interest expense for the first nine months of fiscal 2015 was $15.1 million, compared to $8.2 million for the same period last year.  The increase in interest expense primarily reflected higher average debt levels resulting from the acquisition of Schawk in July 2014.  Other deductions, net, for the nine months ended June 30, 2015 represented an increase in pre-tax income of $6.4 million, compared to a decrease in pre-tax income of $2.8 million for the same period last year.  Other income and deductions generally include banking related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated receivables and payables. Fiscal 2015 other income and deductions included an $11.5 million gain on the settlement of a multi-employer pension plan installment payment obligation.  Other income and deductions also included losses related to a theft of funds totaling $2.2 million and $1.1 million for the nine months ended June 30, 2015 and 2014, respectively (see below).

As the Company disclosed in a Current Report on Form 8-K filing on July 30, 2015, the Company identified a theft of funds by an employee that had occurred over a multi-year period through May 2015 which was not previously reflected in the Company's results of operations.  The cumulative amount of the loss has been determined to be approximately $14.8 million.  The corresponding pre-tax earnings amounts applicable to fiscal years 2015, 2014 and 2013 were approximately $2.3 million, $1.7 million, and $1.3 million, respectively. The Company expects to recover the loss, primarily through insurance and recovery of assets, and is working with law enforcement agencies.

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, "Materiality", the Company evaluated the materiality of these amounts quantitatively and qualitatively, and has concluded that the amounts described above were not material to any of its annual or quarterly prior period financial statements or trends of financial results. However, because of the significance of the cumulative out-of-period correction to the fiscal 2015 third quarter, the prior period financial statements have been revised, in accordance with SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements".  Additional information, including reconciliations of the effects of these adjustments on previously reported amounts, is set forth in this report in Note 2, "Basis of Presentation" in Item 1-"Financial Statements".

28


The Company's effective tax rate for the nine months ended June 30, 2015 was 28.3%, compared to 34.0% for the first nine months of fiscal 2014 and 34.5% for the fiscal 2014 full year.  The decrease in the effective tax rate for the first nine months of fiscal 2015 primarily reflected the benefit of the utilization of certain tax attributes as a result of legal structure reorganization in foreign jurisdictions.  The effective tax rate in fiscal 2014 included the impact of non-deductible acquisition costs.  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.

Net earnings attributable to noncontrolling interests was a loss of $189,000 in the nine months ended June 30, 2015, compared to income of $286,000 for the same period a year ago.  The change in net earnings attributable to noncontrolling interests primarily reflected losses in less than wholly-owned Industrial and Memorialization businesses.

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 may need to be recognized.  For purposes of testing for impairment, the Company uses a combination of valuation techniques, including discounted cash flows.  A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rates.  The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections.  The discount rates used in the discounted cash flow analyses were developed with the assistance of valuation experts and management believes the discount rates appropriately reflect the risks associated with the Company's operating cash flows.  In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.  The Company performed its annual impairment review in the second quarter of fiscal 2015 and determined that the estimated fair value for all reporting units exceeded carrying value, therefore no adjustments to the carrying value of goodwill were necessary at March 31, 2015.

Trade names with indefinite lives are tested for impairment annually in the second quarter. In connection with the integration of Schawk, the Company discontinued the use of certain trade names and recognized write-offs of approximately $4.8 million in the SGK Brand Solutions segment during the second quarter of fiscal 2015.

LIQUIDITY AND CAPITAL RESOURCES:

Net cash provided by operating activities was $102.3 million for the first nine months of fiscal 2015, compared to $62.4 million for the first nine months of fiscal 2014.  Operating cash flow for both periods reflected net income adjusted for depreciation, amortization, stock-based compensation expense and non-cash pension expense.  Net changes in working capital items, which principally related to decreases in accounts receivable, inventory and accounts payable, resulted in a source of working capital of approximately $22.2 million in fiscal 2015.  Net changes in working capital items, which principally related to increases in accounts receivable and inventory, partially offset by an increase in accounts payable, resulted in a use of working capital of approximately $11.0 million in fiscal 2014.

Cash used in investing activities was $38.0 million for the nine months ended June 30, 2015, compared to $18.7 million for the nine months ended June 30, 2014.  Investing activities for the first nine months of fiscal 2015 primarily reflected capital expenditures of $34.7 million, net proceeds of $10.4 million from the sale of a subsidiary, restricted cash of $12.9 million related to a letter of credit issued for a customer (see below), and acquisition payments (net of cash acquired) of $1.7 million.  Investing activities for the first nine months of fiscal 2014 primarily reflected capital expenditures.

29


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 $29.1 million for the last three fiscal years.  Capital spending for fiscal 2015 is currently expected to be approximately $50.0 million.  The increase in fiscal 2015 expected capital spending reflects the addition of the historical capital requirements of Schawk, and additional information technology capital spending related to the Company's systems integration activities, primarily arising from the Schawk acquisition.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used in financing activities for the nine months ended June 30, 2015 was $53.9 million, primarily reflecting repayment of long-term debt, net of proceeds from borrowings, of $34.9 million, proceeds from the sale of treasury stock (stock option exercises) of $3.9 million, treasury stock purchases of $9.9 million, and dividends of $12.9 million to the Company's shareholders.  Cash used in financing activities for the nine months ended June 30, 2014 was $23.7 million, primarily reflecting repayment of long-term debt, net of proceeds from borrowings, of $8.1 million, proceeds from the sale of treasury stock (stock option exercises) of $2.0 million, treasury stock purchases of $4.6 million, payment of contingent consideration of $3.7 million and dividends of $9.1 million to the Company's shareholders.

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  In connection with the acquisition of Schawk in July 2014, the Company amended certain terms of the Revolving Credit Facility to increase the maximum amount of borrowings available under the facility from $500.0 million to $900.0 million.  Borrowings under the amended facility bear interest at LIBOR plus a factor ranging from .75% to 2.00% (1.75% at June 30, 2015) 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 .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 $30.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30, 2015 and September 30, 2014 were $655.4 million and $680.0 million, respectively.  The weighted-average interest rate on outstanding borrowings at June 30, 2015 and 2014 was 2.51% and 2.55%, respectively.

The Company has entered into the following interest rate swaps (dollars in thousands):

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at June 30, 2015
 
Maturity Date
October 2011
  $25,000
1.67%
1.75%
October 2015
June 2012
  $40,000
1.88%
1.75%
June 2022
August 2012
  $35,000
1.74%
1.75%
June 2022
September 2012
  $25,000
3.03%
1.75%
December 2015
September 2012
  $25,000
1.24%
1.75%
March 2017
November 2012
  $25,000
1.33%
1.75%
November 2015
May 2014
  $25,000
1.35%
1.75%
May 2018
November 2014
  $25,000
1.26%
1.75%
June 2018
March 2015
  $25,000
1.49%
1.75%
March 2019

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 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.

30


The fair value of the interest rate swaps reflected an unrealized loss of $822,000 ($501,000 after tax) at June 30, 2015 that is included in shareholders' equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at June 30, 2015, a loss, net of tax, of approximately $527,000 included in accumulated other comprehensive income is expected to be recognized in earnings over the next twelve months.

The Company, through certain of its European subsidiaries, has a credit facility with a European bank.  The maximum amount of borrowings available under this facility is 35.0 million Euros ($39.0 million).  Outstanding borrowings under the credit facility totaled 11.3 million Euros ($12.6 million) and 17.5 million Euros ($22.1 million) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings under the facility at June 30, 2015 and 2014 was 1.50% and 1.35%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 1.6 million Euros ($1.8 million) and 1.2 million Euros ($1.6 million) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2015 and 2014 was 3.85% and 4.04%, respectively.

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 2.4 million Euros ($2.7 million) and 2.9 million Euros ($3.6 million) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2015 and 2014 was 5.82% and 7.62%, respectively.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 4.6 million Euros ($5.1 million) and 5.5 million Euros ($6.9 million) at June 30, 2015 and September 30, 2014, respectively.  Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($12.6 million) with the same Italian banks.  Outstanding borrowings on these lines were 3.6 million Euros ($4.0 million) and 4.8 million Euros ($6.1 million) at June 30, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2015 and 2014 was 3.21% and 3.13%, respectively.

In September 2014, a claim seeking to draw upon a letter of credit issued by the Company of $12.9 million was filed with respect to a project for a customer.  In January 2015, the Company made payment on the draw to the financial institution for the letter of credit.  Pursuant to an action initiated by the Company, a court order has been issued requiring these funds to ultimately be remitted to the court pending resolution of the dispute between the parties.  While it is possible the resolution of this matter could be unfavorable to the Company, management has assessed the customer's claim to be without merit and, based on information available as of this filing, expects that the ultimate resolution of this matter will not have a material adverse effect on Matthews' financial condition, results of operations or cash flows.  As of June 30, 2015, the Company has presented the funded letter of credit within other current assets on the Condensed Consolidated Balance Sheet.

The Company has a stock repurchase program.  Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews' common stock under the program, of which 753,098 shares remained available for repurchase as of June 30, 2015.  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 Restated Articles of Incorporation.

Consolidated working capital of the Company was $299.9 million at June 30, 2015, compared to $312.9 million at September 30, 2014.  Cash and cash equivalents were $69.8 million at June 30, 2015, compared to $63.0 million at September 30, 2014.  The Company's current ratio was 2.2 at June 30, 2015 and September 30, 2014.

31


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 environmental, health, and safety policies and procedures that include 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.

At June 30, 2015, an accrual of approximately $4.6 million had been recorded for environmental remediation (of which $1.3 million was 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 does not consider the effects of inflation and anticipated expenditures are not discounted to their present value.  Changes in the accrued environmental remediation obligation from the prior fiscal year reflect payments charged against the accrual.

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:

On June 15, 2015, the Company acquired the remaining interest in ImTech, a business engaged in designing and manufacturing industrial printing products and specialty ink products, for $1.7 million.

On June 8, 2015, the Company and its wholly-owned subsidiary, The York Group, Inc. ("York"), entered into a purchase agreement with Aurora Products Group, LLC ("Aurora"), the sellers identified therein, and Kohlberg Management VII, L.P., in its capacity as the sellers' representative. Upon the terms and subject to the conditions set forth in the purchase agreement, York will acquire all of the outstanding equity interests of Aurora, resulting in Aurora becoming an indirect wholly-owned subsidiary of Matthews.  Aurora provides burial, cremation, and technology products to funeral home clients and distributors in the United States and Canada. Matthews expects to fund the acquisition through cash on hand and borrowings under its existing credit facility.  The purchase price for the Aurora Transaction is $214.0 million in cash on a debt-free basis subject to a working capital adjustment. Additional consideration of $10.0 million is payable contingent upon the achievement of a specified increased level of adjusted earnings before interest, taxes, depreciation and amortization for the last full twelve (12) months prior to the closing. Matthews expects to consummate the Aurora Transaction in the fourth quarter of fiscal 2015, subject to customary closing conditions, including the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") or early termination of the waiting period under the HSR Act.

On July 29, 2014, the Company acquired Schawk, a leading global brand development, activation and deployment company headquartered in Des Plaines, Illinois.  Under the terms of the transaction, Schawk shareholders received $11.80 cash and 0.20582 shares of Matthews' common stock for each Schawk share held.  Based on the closing price of Matthews' stock on July 28, 2014, the transaction represented an implied price of $20.74 per share and a total enterprise value (which included outstanding debt, net of cash acquired) of $616.7 million.  Schawk provides comprehensive brand development and brand deployment services to clients primarily in the consumer packaged goods, retail and life sciences markets.  Schawk creates and sells its clients' brands, produces brand assets and protects brand equities to help drive brand performance.  Schawk delivers its services through more than 155 locations in over 20 countries across North and South America, Europe, Asia and Australia.

32


DIVESTITURE:

During the first quarter of fiscal 2015, the Company completed the sale of a majority ownership in its Schawk Digital Solutions business, which was acquired in 2014 as part of the Schawk acquisition.  Net proceeds from this transaction totaled approximately $10.4 million, and the sale primarily resulted in the disposal of working capital and intangible assets, and the recognition of a cost-basis investment in this business. No gain or loss was recognized on the sale.

FORWARD-LOOKING INFORMATION:

Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy consists of the following:  internal growth (which includes organic growth, cost structure and 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 (see "Liquidity and Capital Resources").

With respect to the remainder of fiscal 2015, the Company expects to devote a significant level of effort to the integration of Schawk.  Due to the size of this acquisition and the projected synergy benefits from integration, this effort is anticipated to continue for an extended period of time.  The costs associated with this integration, and acquisition-related step-up expense, will impact the Company's operating results for fiscal 2015.  Consistent with its practice, the Company plans to identify these costs on a quarterly basis as incurred.

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 and in the critical accounting policies in Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year ended September 30, 2014.  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.

33


LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The following table summarizes the Company's contractual obligations at June 30, 2015, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

   
Payments due in fiscal year:
 
       
2015
           
After
 
   
Total
   
Remainder
   
2016 to 2017
   
2018 to 2019
   
2019
 
Contractual Cash Obligations:
 
(Dollar amounts in thousands)
 
Revolving credit facilities
 
$
673,011
   
$
-
   
$
12,586
   
$
660,425
   
$
-
 
Notes payable to banks
   
10,596
     
3,970
     
6,533
     
93
     
-
 
Short-term borrowings
   
4,055
     
4,055
     
-
     
-
     
-
 
Capital lease obligations
   
7,206
     
777
     
1,825
     
764
     
3,840
 
Pension withdrawal settlement
   
18,157
     
18,157
     
-
     
-
     
-
 
Non-cancelable operating leases
   
48,814
     
5,775
     
27,210
     
11,461
     
4,368
 
                                         
Total contractual cash obligations
 
$
761,839
   
$
32,734
   
$
48,154
   
$
672,743
   
$
8,208
 

A significant portion of the loans included in the table above bear interest at variable rates.  At June 30, 2015, the weighted-average interest rate was 2.51% on the Company's domestic Revolving Credit Facility, 1.50% on the credit facility through the Company's European subsidiaries, 3.85% on bank loans to its wholly-owned subsidiary, Saueressig, 5.82% on bank loans to its wholly-owned subsidiary, Wetzel and 3.21% on bank loans to the Company's wholly-owned subsidiary, Matthews International 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 is not required to make any significant contributions to its principal retirement plan in fiscal 2015.  During the nine months ended June 30, 2015, contributions of $543,000 and $1.0 million were made under the supplemental retirement plan and postretirement plan, respectively.  The Company currently anticipates contributing an additional $190,000 and $250,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2015.

Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities.  If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary.  As of June 30, 2015, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $4.3 million.  The timing of potential future payments related to the unrecognized tax benefits is not presently determinable. 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.

ITEM 3.   QUANTITIATIVE AND QUALITATIVE DISCLOSURE 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.

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The Company has entered into interest rate swaps as listed under "Liquidity and Capital Resources".  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 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 a net unrealized loss of $822,000 ($501,000 after tax) at June 30, 2015 that is included in equity as part of accumulated other comprehensive income.  A decrease of 10% in market interest rates (e.g. a decrease from 5.0% to 4.5%) would result in an increase of approximately $234,000 in the fair value liability 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, fuel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available. In addition, based on competitive market conditions and to the extent that the Company has established pricing terms with customers through contracts or similar arrangements, the Company's ability to immediately increase the price of its products to offset the increased costs may be limited.

Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, including the Euro, British Pound, Canadian Dollar, Australian Dollar, Swedish Krona, Chinese Yuan, Hong Kong Dollar, Polish Zloty, Turkish Lira, Indian Rupee and Malaysian Ringgit 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.  A strengthening of the U. S. dollar of 10% would have resulted in a decrease in reported sales of $40.1 million and a decrease in reported operating income of $4.4 million for the nine months ended June 30, 2015.

Actuarial Assumptions – The most significant actuarial assumptions affecting pension expense and pension obligations include the valuation of retirement plan assets, the discount rate and the estimated return on plan assets.  The estimated return on plan assets is currently based upon projections provided by the Company's independent investment advisor, considering the investment policy of the plan and the plan's asset allocation.  The fair value of plan assets and discount rate are "point-in-time" measures, and the recent volatility of the debt and equity markets makes estimating future changes in fair value of plan assets and discount rates more challenging.  The following table summarizes the impact on the September 30, 2014 actuarial valuations of changes in the primary assumptions affecting the Company's principal retirement plan and supplemental retirement plan.

   
Impact of Changes in Actuarial Assumptions
 
   
Change in Discount Rate
   
Change in Expected Return
   
Change in Market Value of Assets
 
     
+1%
 
   
-1%
 
   
+1%
 
   
-1%
 
   
+5%
 
   
-5%
 
   
(Dollar amounts in thousands)
 
Increase (decrease) in net benefit cost
 
 
$(3,399)
 
 
 
$4,319
   
 
$(1,286)
 
 
 
$1,286
   
 
$(1,320)
 
 
 
$1,320
 
                                                 
Increase (decrease) in projected benefit obligation
   
(27,816)
 
   
35,433
     
-
     
-
     
-
     
-
 
                                                 
Increase (decrease) in funded status
   
27,816
     
(35,433)
 
   
-
     
-
     
6,588
     
(6,588)
 

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ITEM 4.  CONTROLS AND PROCEDURES:
 
 
Disclosure Controls and Procedures
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, as amended) are designed to provide reasonable assurance that information required to be disclosed in our reports filed under that Act (the "Exchange Act"), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. These disclosure controls and procedures also are designed to provide reasonable assurance that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of June 30, 2015. Based on that evaluation, the Company's disclosure controls and procedures were determined to be not effective solely due to the material weakness in internal controls over financial reporting described below.

Material Weakness in Internal Control over Financial Reporting

Management previously reported a material weakness in the Company's internal control over financial reporting, related to the design of the internal controls over segregation of duties within the treasury process, in its Annual Report on Form 10-K/A for the period ended September 30, 2014. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The design of the internal controls over segregation of duties within the treasury process was determined to constitute a material weakness, which resulted in a cumulative loss of $14.8 million that was not previously recorded in the Company's financial statements.  Specifically, an individual with the ability to execute cash transactions was responsible for providing the third party source documents used in the cash reconciliation process.  This resulted in an overstatement of our previously reported cash balance and resulted in the revision to our previously issued consolidated financial statements for the years ended September 30, 2014, 2013 and 2012.  Additionally, it was determined that this could have resulted in further misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.  Accordingly, the internal control over segregation of duties within the treasury process was determined to constitute a material weakness in internal control over financial reporting.

Remediation Plan

 In response to the material weakness, management has taken immediate action to remediate the material weakness and implemented changes in the design of this internal control to ensure appropriate segregation of duties within the Company's treasury process.  Specifically, the Company implemented changes over the segregation of duties related to obtaining the third party source documents used in the cash reconciliation process. While these changes have been implemented, a sufficient number of periods must be attained and tested in order for the material weakness to be deemed remediated.  We expect that the material weakness will be deemed remediated by September 30, 2015.

Changes in Internal Control over Financial Reporting
Other than the changes discussed above related to the previously reported material weakness, there have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
 
 
 
 
 
 
 
 

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PART II ‑ OTHER INFORMATION

Item 1. Legal Proceedings

Matthews is subject to various legal proceedings and claims arising in the ordinary course of business.  Management does not expect that the results of any of these legal proceedings will have a material adverse effect on Matthews' financial condition, results of operations or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchase Plan

The Company has a stock repurchase program.  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 Restated Articles of Incorporation.  Under the current authorization, the Company's Board of Directors had authorized the repurchase of a total of 2,500,000 shares of Matthews' common stock under the program, of which 753,098 shares remained available for repurchase as of June 30, 2015.

The following table shows the monthly fiscal 2015 stock repurchase activity:

Period
 
Total number of shares purchased
   
Weighted-average price paid per share
   
Total number of shares purchased as part of a publicly announced plan
   
Maximum number of shares that may yet be purchased under the plan
 
                 
October 2014
   
10,000
   
$
$43.87
     
10,000
     
955,881
 
November 2014
   
65,942
     
46.54
     
65,942
     
889,939
 
December 2014
   
97,807
     
46.10
     
97,807
     
792,132
 
January 2015
   
1,559
     
46.86
     
1,559
     
790,573
 
February 2015
   
10,000
     
48.49
     
10,000
     
780,573
 
March 2015
   
27,318
     
48.17
     
27,318
     
753,255
 
April 2015
   
-
     
-
     
-
     
753,255
 
May 2015
   
157
     
47.97
     
157
     
753,098
 
June 2015
   
-
     
-
     
-
     
753,098
 
    Total
   
212,783
   
 
$46.51
     
212,783
         

Item 4. Mine Safety Disclosures

Not Applicable.

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Item 6. Exhibits and Reports on Form 8‑K

(a)
Exhibits
 
     
 
Exhibit
Description
 
No.
 
     
 
2.1
Purchase Agreement, dated as of June 8, 2015, by and among Matthews International Corporation, a Pennsylvania corporation, The York Group, Inc., a Delaware corporation, Aurora Products Group, LLC, each of the Persons listed on Annex A thereto, and Kohlberg Management VII, L.P., in its capacity as the Sellers' Representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on June 11, 2015)
 
10.1
Fourth Amendment to First Amended and Restated Loan Agreement, dated the 29th day of May, 2015, by and among Matthews International Corporation, a Pennsylvania corporation, the Banks (as defined in the Loan Agreement), Citizens Bank of Pennsylvania, a Pennsylvania banking institution, in its capacity as administrative agent for the Banks (in such capacity, the "Agent"), and PNC Bank, National Association, a national banking association, in its capacity as syndication agent for the Banks
 
10.2
Fifth Amendment to First Amended and Restated Loan Agreement, dated the 14th day of July, 2015, by and among Matthews International Corporation, a Pennsylvania corporation, the Banks (as defined in the Loan Agreement), Citizens Bank of Pennsylvania, a Pennsylvania banking institution, in its capacity as administrative agent for the Banks (in such capacity, the "Agent"), and PNC Bank, National Association, a national banking association, in its capacity as syndication agent for the Banks
 
31.1
Certification of Principal Executive Officer for Joseph C. Bartolacci
 
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 Joseph C. Bartolacci
 
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

38


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 10, 2015
 
/s/ Joseph C. Bartolacci
   
Joseph C. Bartolacci, President
   
and Chief Executive Officer
     
     
     
     
Date:  August 10, 2015
 
/s/ Steven F. Nicola
   
Steven F. Nicola, Chief Financial Officer
   
and Secretary
     



39