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EX-31.2 - EXHIBIT 31-2 TO 3RD QTR 10Q 2014 PRINCIPAL FINANCIAL OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit31-2sn2014snq3.htm
EX-32.2 - EXHIBIT 32-2 TO 3RD QTR 10Q 2014 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit32-2sn2014q3.htm
EX-32.1 - EXHIBIT 32-1 TO 3RD QTR 10Q 2014 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit32-1jb2014q3.htm
EXCEL - IDEA: XBRL DOCUMENT - MATTHEWS INTERNATIONAL CORPFinancial_Report.xls
EX-31.1 - EXHIBIT 31-1 TO 3RD QTR 10Q 2014 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit31-1jb2014q3.htm
 
 



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-Q

x
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For The Quarterly Period Ended June 30, 2014

Commission File No. 0-9115

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

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

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

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

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

 
Yes x
No o
 

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

 
Yes x
No o
 

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

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

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

 
Yes o
No x
 

As of July 31, 2014, shares of common stock outstanding were:

  Class A Common Stock 32,830,618 shares

 
 

 

PART I - FINANCIAL INFORMATION
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands, except per share data)
 
   
June 30, 2014
   
September 30, 2013
 
             
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
        $ 80,616           $ 58,959  
Accounts receivable, net
          199,472             188,405  
Inventories
          141,908             130,768  
Deferred income taxes
          9,866             9,826  
Other current assets
          22,973             18,997  
                             
Total current assets
          454,835             406,955  
                             
Investments
          23,550             22,288  
Property, plant and equipment: Cost
  $ 426,767             $ 414,522          
Less accumulated depreciation
    (251,737 )             (233,791 )        
              175,030               180,731  
Deferred income taxes
            1,211               1,871  
Other assets
            14,879               14,402  
Goodwill
            527,150               524,551  
Other intangible assets, net
            62,215               65,102  
                                 
Total assets
          $ 1,258,870             $ 1,215,900  
                                 
LIABILITIES
                               
Current liabilities:
                               
Long-term debt, current maturities
          $ 22,812             $ 23,587  
Accounts payable
            53,389               45,232  
Accrued compensation
            40,326               41,916  
Accrued income taxes
            7,439               5,910  
Customer prepayments
            19,626               13,531  
Contingent consideration
            -               3,726  
Other current liabilities
            48,469               51,077  
                                 
Total current liabilities
            192,061               184,979  
                                 
Long-term debt
            345,407               351,068  
Accrued pension
            64,903               61,642  
Postretirement benefits
            18,278               17,956  
Deferred income taxes
            20,491               20,332  
Other liabilities
            28,023               26,993  
Total liabilities
            669,163               662,970  
                                 
SHAREHOLDERS’ EQUITY
                               
Shareholders' equity-Matthews:
                               
Common stock
  $ 36,334             $ 36,334          
Additional paid-in capital
    48,581               47,315          
Retained earnings
    805,154               775,762          
Accumulated other comprehensive loss
    (21,998 )             (26,940 )        
Treasury stock, at cost
    (282,016 )             (283,006 )        
Total shareholders’ equity-Matthews
            586,055               549,465  
Noncontrolling interests
            3,652               3,465  
Total shareholders’ equity
            589,707               552,930  
                                 
Total liabilities and shareholders' equity
          $ 1,258,870             $ 1,215,900  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
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,
 
   
2014
   
2013
   
2014
   
2013
 
                         
                         
                         
Sales
  $ 279,983     $ 250,652     $ 756,765     $ 732,651  
Cost of sales
    (175,753 )     (159,261 )     (480,977 )     (466,420 )
                                 
Gross profit
    104,230       91,391       275,788       266,231  
                                 
Selling and administrative expenses
    (72,038 )     (60,631 )     (207,708 )     (193,902 )
                                 
Operating profit
    32,192       30,760       68,080       72,329  
                                 
Investment income
    456       634       1,683       1,474  
Interest expense
    (2,785 )     (3,486 )     (8,240 )     (9,784 )
Other income (deductions), net
    (897 )     (986 )     (2,669 )     (3,158 )
                                 
Income before income taxes
    28,966       26,922       58,854       60,861  
                                 
Income taxes
    (9,327 )     (9,024 )     (20,058 )     (20,905 )
                                 
Net income
    19,639       17,898       38,796       39,956  
                                 
Net (income) loss attributable to noncontrolling interests
    (376 )     93       (286 )     482  
                                 
Net income attributable to  Matthews shareholders
  $ 19,263     $ 17,991     $ 38,510     $ 40,438  
                                 
Earnings per share attributable to Matthews shareholders:
                               
Basic
    $0.70       $0.65       $1.41       $1.47  
                                 
Diluted
    $0.70       $0.65       $1.40       $1.46  




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


 
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
 
   
2014
   
2013
   
2014
   
2013
   
2014
   
2013
 
                                     
Net income (loss):
  $ 19,263     $ 17,991     $ 376     $ (93 )   $ 19,639     $ 17,898  
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
    477       (1,653 )     120       44       597       (1,609 )
  Pension plans and other postretirement
     benefits
    565       1,073       -       -       565       1,073  
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
    (1,965 )     2,463       -       -       (1,965 )     2,463  
     Net amount reclassified to earnings
    1,212       649       -       -       1,212       649  
       Net change in unrecognized gain (loss) on
                                               
         derivatives
    (753 )     3,112       -       -       (753 )     3,112  
Other comprehensive income (loss), net of tax
    289       2,532       120       44       409       2,576  
Comprehensive income (loss)
  $ 19,552     $ 20,523     $ 496     $ (49 )   $ 20,048     $ 20,474  


   
Nine Months Ended June 30,
 
 
 
Matthews
   
Noncontrolling Interest
   
Total
 
   
2014
   
2013
   
2014
   
2013
   
2014
   
2013
 
                                     
Net income (loss):
  $ 38,510     $ 40,438     $ 286     $ (482 )   $ 38,796     $ 39,956  
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
    3,246       (7,587 )     66       99       3,312       (7,488 )
  Pension plans and other postretirement
     benefits
    1,622       3,220       -       -       1,622       3,220  
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
    (2,437 )     2,960       -       -       (2,437 )     2,960  
     Net amount reclassified to earnings
    2,511       1,887       -       -       2,511       1,887  
       Net change in unrecognized gain (loss) on
                                               
         derivatives
    74       4,847       -       -       74       4,847  
Other comprehensive income (loss), net of tax
    4,942       480       66       99       5,008       579  
Comprehensive income (loss)
  $ 43,452     $ 40,918     $ 352     $ (383 )   $ 43,804     $ 40,535  


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




 
4

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the nine months ended June 30, 2014 and 2013 (Unaudited)
(Dollar amounts in thousands, except per share data)


   
Shareholders’ Equity
 
                     
Accumulated
                   
         
Additional
         
Other
         
Non-
       
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
controlling
       
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
interests
   
Total
 
Balance,
   September 30, 2012
  $ 36,334     $ 47,893     $ 727,176     $ (65,083   $ (268,499   $ 2,613     $ 480,434  
Net income
    -       -       40,438       -       -       (482     39,956  
Minimum pension liability
    -       -       -       3,220       -       -       3,220  
Translation adjustment
    -       -       -       (7,587     -       99       (7,488
Fair value of derivatives
    -       -       -       4,847       -       -       4,847  
Total comprehensive income
                                                    40,535  
Stock-based compensation
    -       4,153       -       -       -       -       4,153  
Purchase of 405,116
    shares of treasury stock
    -       -       -       -       (13,529     -       (13,529
Issuance of  294,478
    shares of treasury stock
    -       (8,125     -       -       9,081       -       956  
Cancellations of 44,006
    shares of treasury stock
            1,884                       (1,884             -  
Dividends, $.30 per share
    -       -       (8,300     -       -       -       (8,300
Arrangement with noncontrolling interests
                    4,980                       1,653       6,633  
Distributions to
   noncontrolling interests
    -       -       -       -       -       (766     (766
Balance, June 30, 2013
  $ 36,334     $ 45,805     $ 764,294     $ (64,603   $ (274,831   $ 3,117     $ 510,116  
 
 
   
Shareholders’ Equity
 
                     
Accumulated
                   
         
Additional
         
Other
         
Non-
       
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
controlling
       
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
interests
   
Total
 
Balance,
   September 30, 2013
  $ 36,334     $ 47,315     $ 775,762     $ (26,940   $ (283,006 )   $ 3,465     $ 552,930  
Net income
    -       -       38,510       -       -       286       38,796  
Minimum pension liability
    -       -       -       1,622       -       -       1,622  
Translation adjustment
    -       -       -       3,246       -       66       3,312  
Fair value of derivatives
    -       -       -       74       -       -       74  
Total comprehensive income
                                                    43,804  
Stock-based compensation
    -       4,906       -       -       -       -       4,906  
Purchase of 112,863 shares
  of treasury stock
    -       -       -       -       (4,639 )     -       (4,639 )
Issuance of 218,578 shares
    of treasury stock
    -       (6,796     -       -       8,785       -       1,989  
Cancellations of 77,597
    shares of treasury stock
            3,156                       (3,156 )                
Dividends, $.33 per share
    -       -       (9,118     -       -       -       (9,118 )
Distributions to
   noncontrolling interests
    -       -       -       -       -       (165     (165 )
Balance, June 30, 2014
  $ 36,334     $ 48,581     $ 805,154     $ (21,998   $ (282,016 )   $ 3,652     $ 589,707  


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

 
5

 

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


   
Nine Months Ended
 
   
June 30,
 
   
2014
   
2013
 
             
             
Cash flows from operating activities:
           
Net income
  $ 38,796     $ 39,956  
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
    28,020       26,481  
Stock-based compensation expense
    4,906       4,153  
Change in deferred taxes
    (309 )     137  
Gain on sale of assets
    (571 )     (630 )
Unrealized gain on investments
    (1,283 )     (952 )
Changes in working capital items
    (14,348 )     (5,827 )
(Increase) decrease in other assets
    (1,835 )     370  
Decrease in other liabilities
    2,236       2,864  
Increase in pension and postretirement benefits
    6,190       10,043  
Other, net
    1,745       (3,657 )
                 
Net cash provided by operating activities
    63,547       72,938  
                 
Cash flows from investing activities:
               
Capital expenditures
    (18,754 )     (17,268 )
Proceeds from sale of assets
    45       251  
Acquisitions, net of cash acquired
    -       (67,587 )
                 
Net cash used in investing activities
    (18,709 )     (84,604 )
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
    20,352       113,906  
Payments on long-term debt
    (28,479 )     (74,122 )
Payment on contingent consideration
    (3,703 )     (9,542 )
Proceeds from the sale of treasury stock
    2,045       956  
Purchases of treasury stock
    (4,639 )     (13,529 )
Dividends
    (9,118 )     (8,300 )
Distributions to noncontrolling interests
    (165 )     (766 )
                 
Net cash provided by (used in) financing activities
    (23,707 )     8,603  
                 
Effect of exchange rate changes on cash
    526       (335 )
                 
Net change in cash and cash equivalents
  $ 21,657     $ (3,398 )
                 
Non-cash investing and financing activities:
               
Acquisition of equipment under capital lease
  $ 949     $ -  

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

 
6

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2014
(Dollar amounts in thousands, except per share data)


Note 1.   Nature of Operations

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

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

Note 2.   Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2013.  The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control.  All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


 
7

 

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



Note 2.  Basis of Presentation (continued)

Reclassifications and Revision:

Certain reclassifications have been made in these financial statements to adjust for bank overdrafts in the Consolidated Statement of Cash Flows for the nine months ended June 30, 2013 and on the Consolidated Balance Sheet for the fiscal year ended September 30, 2013.


Note 3.   Fair Value Measurements

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

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

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

Level 3:                      Unobservable inputs for the asset or liability.

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

   
June 30, 2014
   
September 30, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                                               
Derivatives (1)
    -     $ 2,230       -     $ 2,230       -     $ 3,736       -     $ 3,736  
Trading
  securities
  $ 19,279       -       -       19,279     $ 17,929       -       -     $ 17,929  
Total assets at
  fair value
  $ 19,279     $ 2,230       -     $ 21,509     $ 17,929     $ 3,736       -     $ 21,665  
                                                                 
Liabilities:
                                                               
Derivatives (1)
    -     $ 3,017       -     $ 3,017       -     $ 4,644       -     $ 4,644  
Total liabilities
  at fair value
    -     $ 3,017       -     $ 3,017       -     $ 4,644       -     $ 4,644  
                                                                 
(1) Interest rate swaps are valued based on observable market swap rates.
 




 
8

 

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


Note 4.   Inventories

Inventories consisted of the following:

   
June 30, 2014
   
September 30, 2013
 
             
Raw materials
  $ 42,825     $ 40,931  
Work in process
    31,590       25,293  
Finished goods
    67,493       64,544  
    $ 141,908     $ 130,768  

Note 5.   Debt

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  The maximum amount of borrowings available under the facility at June 30, 2014 was $500,000.  Borrowings under the facility bear interest at LIBOR plus a factor ranging from .75% to 1.25% based on the Company’s leverage ratio.  The facility’s maturity is July 2018.  The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization).  The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company’s leverage ratio) of the unused portion of the facility.

The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios.  A portion of the facility (not to exceed $30,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30, 2014 and September 30, 2013 were $305,000.  The weighted-average interest rate on outstanding borrowings on this facility at June 30, 2014 and 2013 was 2.55% and 3.05%, respectively.

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

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at June 30, 2014
 
Maturity Date
October 2011
  $25,000
1.67%
1.25%
October 2015
November 2011
  25,000
2.13%
1.25%
November 2014
March 2012
  25,000
2.44%
1.25%
March 2015
June 2012
  40,000
1.88%
1.25%
June 2022
August 2012
  35,000
1.74%
1.25%
June 2022
September 2012
  25,000
3.03%
1.25%
December 2015
September 2012
  25,000
1.24%
1.25%
March 2017
November 2012
  25,000
1.33%
1.25%
November 2015
May 2014
  25,000
1.35%
1.25%
May 2018

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

 
9

 

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


Note 5.  Debt (continued)

The fair value of the interest rate swaps reflected an unrealized net loss, net of unrealized gains of $787 ($480 after tax) at June 30, 2014 and an unrealized loss, net of unrealized gains, of $908 ($554 after tax) at September 30, 2013.  The net unrealized gain and loss are included in shareholders’ equity as part of accumulated other comprehensive income (loss) (“AOCI”).  Assuming market rates remain constant with the rates at June 30, 2014, approximately $1,152 net unrealized loss included in AOCI is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

At June 30, 2014 and September 30, 2013, the interest rate swap contracts were reflected as net asset and net liability on the balance sheets.  The following derivatives are designated as hedging instruments:

       
Balance Sheet Location:
 
June 30, 2014
   
September 30, 2013
 
Current assets
           
Other current assets
  $ 279     $ 427  
Long-term assets
               
Other assets
    1,951       3,309  
Current liabilities:
               
Other current liabilities
    (2,167 )     (2,590 )
Long-term liabilities
               
Other liabilities
    (850 )     (2,054 )
Total derivatives
  $ (787 )   $ (908 )

The loss recognized on derivatives was as follows:

 
Location of
           
Derivatives in
Loss
 
Amount of
   
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,
 
     
2014
   
2013
   
2014
   
2013
 
                           
Interest rate swaps
Interest expense
    $(1,987)       $(1,065)       $(4,117)       $(3,094)  
                                   


 
10

 

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


Note 5.  Debt (continued)

The Company recognized the following losses in AOCI:

               
       
Location of
     
       
Gain or
     
       
(Loss)
 
Amount of Loss
 
       
Reclassified
 
Reclassified from
 
   
Amount of Gain or (Loss)
 
From
 
AOCI into
 
Derivatives in
 
Recognized in
 
AOCI into
 
Income
 
Cash Flow
 
AOCI on Derivatives
 
Income
 
(Effective Portion*)
 
Hedging Relationships
 
June 30, 2014
   
June 30, 2013
 
(Effective
Portion*)
 
June 30, 2014
   
June 30, 2013
 
                           
Interest rate swaps
    $(2,437)       $2,960  
Interest expense
    $(2,511)       $(1,887)  
                                   
*There is no ineffective portion or amount excluded from effectiveness testing.
 

The Company, through certain of its European subsidiaries, has a credit facility with a European bank.  The maximum amount of borrowings available under this facility is 25.0 million Euros ($34,233).  Outstanding borrowings under the credit facility totaled 20.1 million Euros ($27,539) and 22.5 million Euros ($30,454) at June 30, 2014 and September 30, 2013, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2014 and 2013 was 1.35% and 1.37%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG (“Saueressig”), has several loans with various European banks.  Outstanding borrowings under these loans totaled 1.5 million Euros ($2,007) and 1.7 million Euros ($2,310) at June 30, 2014 and September 30, 2013, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2014 and 2013 was 4.04% and 3.92%, respectively.

The Company, through its German subsidiary, Wetzel GmbH (“Wetzel”), has several loans with various European banks.  Outstanding borrowings under these loans totaled 6.3 million Euros ($8,581) and 7.4 million Euros ($10,000) at June 30, 2014 and September 30, 2013, respectively.  The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2014 and 2013 was 7.62% and 7.26%, respectively.

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

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


 
11

 

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


Note 6.   Share-Based Payments

The Company maintains an equity incentive plan (the “2012 Equity Incentive Plan”) that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  The Company also maintains an equity incentive plan (the “2007 Equity Incentive Plan”) and a stock incentive plan (the “1992 Incentive Stock Plan”) that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards.  Under the 2012 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000.  There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan.  At June 30, 2014, there were 2,097,550 shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.

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

For the three-month periods ended June 30, 2014 and 2013, total stock-based compensation cost totaled $1,667 and $1,396, respectively.  For the nine-month periods ended June 30, 2014 and 2013, total stock-based compensation cost totaled $4,906 and $4,153, respectively.  The associated future income tax benefit recognized was $650 and $545 for the three-month periods ended June 30, 2014 and 2013, respectively, and $1,913 and $1,620 for the nine-month periods ended June 30, 2014 and 2013, respectively.

For the three-month period ended June 30, 2014 and 2013, the amount of cash received from the exercise of stock options was $217 and $432, respectively.  For the nine-month periods ended June 30, 2014 and 2013, the amount of cash received from the exercise of stock options was $2,045 and $956, respectively. In connection with these exercises, the tax benefits realized by the Company were $1 and $32 for the three-month period ended June 30, 2014 and 2013, respectively, and $186 and $98 for the nine-month periods ended June 30, 2014 and 2013, respectively.


 
12

 

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


Note 6.   Share-Based Payments (continued)

The transactions for restricted stock for the nine months ended June 30, 2014 were as follows:

         
Weighted-
 
         
average
 
         
grant-date
 
   
Shares
   
fair value
 
Non-vested at September 30, 2013
    641,399       $29.46  
Granted
    201,225       35.71  
Vested
    (236,888     29.48  
Expired or forfeited
    (77,417     30.84  
Non-vested at June 30, 2014
    528,319       31.63  

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

The transactions for shares under options for the nine months ended June 30, 2014 were as follows:

               
Weighted-
       
         
Weighted-
   
average
   
Aggregate
 
         
average
   
remaining
   
intrinsic
 
   
Shares
   
exercise price
   
contractual term
   
value
 
Outstanding, September 30, 2013
    744,824       $37.76              
Granted
    -       -              
Exercised
    (63,121 )     32.40              
Expired or forfeited
    (20,546 )     39.08              
Outstanding, June 30, 2014
    661,157       38.23       1.5       2,213  
Exercisable, June 30, 2014
    348,715       37.77       1.4       1,326  

No options vested during the three-month and nine-month periods ended June 30, 2014 and 2013, respectively.  The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the nine-month periods ended June 30, 2014 and 2013 was $510 and $291, respectively.
 
 
 
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 non-vested options for the nine months ended June 30, 2014 were as follows:

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

 
The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model.  The following table indicates the assumptions used in estimating fair value of restricted stock for the nine months ended June 30, 2014 and 2013.

   
Nine Months Ended June 30,
 
   
2014
   
2013
 
Expected volatility
    26.6 %     29.5 %
Dividend yield
    1.1 %     1.2 %
Average risk free interest rate
    1.4 %     0.6 %
Average expected term (years)
    2.0       2.0  

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

Under the Company’s Director Fee Plan, directors (except for the Chairman of the Board) who are not also officers of the Company each receive, as an annual retainer fee, either cash or shares of the Company's Class A Common Stock with a value equal to $60.  The annual retainer fee paid to a non-employee Chairman of the Board is $130.  Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board.  The value of deferred shares is recorded in other liabilities.  A total of 17,005 shares had been deferred under the Director Fee Plan at June 30, 2014.  Additionally, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $100.  A total of 22,300 stock options have been granted under the plan.  At June 30, 2014, 11,800 options were outstanding and vested. Additionally, 120,503 shares of restricted stock have been granted under the plan, 37,457 of which were unvested at June 30, 2014.  A total of 300,000 shares have been authorized to be issued under the Director Fee Plan.



 
14

 

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


Note 7.   Earnings Per Share Attributable to Matthews’ Shareholders

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

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income attributable to Matthews shareholders
  $ 19,263     $ 17,991     $ 38,510     $ 40,438  
Less: dividends and undistributed earnings
allocated to participating securities
    35       178       128       438  
Net income available to Matthews shareholders
  $ 19,228     $ 17,813     $ 38,382     $ 40,000  
                                 
Weighted-average shares outstanding (in thousands):
                               
Basic shares
    27,294       27,299       27,223       27,303  
Effect of dilutive securities
    197       161       227       116  
Diluted shares
    27,491       27,460       27,450       27,419  
                                 
There were no anti-dilutive securities for the three and nine months ended June 30, 2014.  Options to purchase 550,366 and 563,022 shares of common stock were not included in the computation of diluted earnings per share for the three months and nine months ended June 30, 2013, respectively, because the inclusion of these options would be anti-dilutive.

 
15

 

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

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

 
   
Three months ended June 30,
 
   
Pension
   
Other Postretirement
 
   
2014
   
2013
   
2014
   
2013
 
                         
Service cost
  $ 1,582     $ 1,685     $ 109     $ 199  
Interest cost
    2,213       1,913       230       282  
Expected return on plan assets
    (2,396 )     (2,243 )     -       -  
Amortization:
                               
   Prior service cost
    (52 )     (52 )     (23 )     (68 )
   Net actuarial loss
    991       1,806       (49 )     110  
                                 
Net benefit cost
  $ 2,338     $ 3,109     $ 267     $ 523  

   
Nine months ended June 30,
 
   
Pension
   
Other Postretirement
 
   
2014
   
2013
   
2014
   
2013
 
                         
Service cost
  $ 4,746     $ 5,055     $ 327     $ 597  
Interest cost
    6,639       5,739       690       846  
Expected return on plan assets
    (7,188 )     (6,729 )     -       -  
Amortization:
                               
   Prior service cost
    (156 )     (156 )     (66 )     (204 )
   Net actuarial loss
    2,973       5,418       (147 )     330  
                                 
 Net benefit cost
  $ 7,014     $ 9,327     $ 804     $ 1,569  

Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company’s operating funds.  Under IRS regulations, the Company is not required to make any significant contributions to its principal retirement plan in fiscal year 2014.

Contributions made and anticipated for fiscal year 2014 are as follows:

Contributions
 
Pension
   
Other Postretirement
 
             
Contributions during the nine months ended June 30, 2014:
           
   Supplemental retirement plan
  $ 543     $ -  
   Other postretirement plan
    -       709  
                 
Additional contributions expected in fiscal 2014:
               
   Supplemental retirement plan
    180       -  
   Other postretirement plan
    -       217  


 
16

 

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


Note 9.   Accumulated Other Comprehensive Income

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

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

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

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

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


 
17

 

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

 
Note 9.   Accumulated Other Comprehensive Income (continued)

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

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