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EXCEL - IDEA: XBRL DOCUMENT - MATTHEWS INTERNATIONAL CORPFinancial_Report.xls
EX-32.1 - EXHIBIT 32-1 TO 2ND QTR 10Q 2015 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit32-1jb2015q2.htm
EX-31.2 - EXHIBIT 31-2 TO 2ND QTR 10Q 2015 PRINCIPAL FINANCIAL OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit31-2sn2015q2.htm
EX-31.1 - EXHIBIT 31-1 TO 2ND QTR 10Q 2015 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit31-1jb2015q2.htm
EX-32.2 - EXHIBIT 32-2 TO 2ND QTR 10Q 2015 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPexhibit32-2sn2015q2.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 March 31, 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, or a non-accelerated filer.  See definition of "accelerated filer" and "large accelerated filer" 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 March 31, 2015, shares of common stock outstanding were:

       Class A Common Stock 32,963,427 shares


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


   
March 31, 2015
   
September 30, 2014
 
         
ASSETS
               
Current assets:
               
Cash and cash equivalents
     
$
63,075
       
$
75,604
 
Accounts receivable, net
       
261,922
         
282,730
 
Inventories
       
146,558
         
152,842
 
Deferred income taxes
       
13,549
         
13,283
 
Other current assets
       
55,570
         
49,456
 
                         
Total current assets
       
540,674
         
573,915
 
                         
Investments
       
27,309
         
23,130
 
Property, plant and equipment: Cost
 
$
454,866
           
$
459,388
         
Less accumulated depreciation
   
(256,678
)
           
(250,073
)
       
             
198,188
             
209,315
 
Deferred income taxes
           
5,074
             
4,019
 
Other assets
           
17,549
             
20,027
 
Goodwill
           
783,375
             
819,467
 
Other intangible assets, net
           
348,944
             
381,862
 
                                 
Total assets
         
$
1,921,113
           
$
2,031,735
 
                                 
LIABILITIES
                               
Current liabilities:
                               
Long-term debt, current maturities
         
$
12,618
           
$
15,228
 
Trade accounts payable
           
59,995
             
72,040
 
Accrued compensation
           
52,707
             
60,690
 
Accrued income taxes
           
4,371
             
7,079
 
Deferred income tax
           
215
             
235
 
Other current liabilities
           
98,482
             
98,011
 
                                 
Total current liabilities
           
228,388
             
253,283
 
                                 
Long-term debt
           
684,007
             
714,027
 
Accrued pension
           
78,924
             
78,550
 
Postretirement benefits
           
20,312
             
20,351
 
Deferred income taxes
           
124,905
             
129,335
 
Other liabilities
           
55,869
             
53,296
 
Total liabilities
           
1,192,405
             
1,248,842
 
                                 
SHAREHOLDERS' EQUITY
                               
Shareholders' equity-Matthews:
                               
Common stock
 
$
36,334
           
$
36,334
         
Additional paid-in capital
   
112,056
             
113,225
         
Retained earnings
   
821,957
             
806,040
         
Accumulated other comprehensive loss
   
(134,804
)
           
(66,817
)
       
Treasury stock, at cost
   
(110,467
)
           
(109,950
)
       
Total shareholders' equity-Matthews
           
725,076
             
778,832
 
Noncontrolling interests
           
3,632
             
4,061
 
Total shareholders' equity
           
728,708
             
782,893
 
                                 
Total liabilities and shareholders' equity
         
$
1,921,113
           
$
2,031,735
 

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

2


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


   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
                 
                 
                 
Sales
 
$
349,394
   
$
246,837
   
$
692,978
   
$
476,782
 
Cost of sales
   
(221,699
)
   
(156,657
)
   
(440,613
)
   
(305,226
)
                                 
Gross profit
   
127,695
     
90,180
     
252,365
     
171,556
 
                                 
Selling and administrative expenses
   
(108,420
)
   
(69,637
)
   
(207,505
)
   
(136,334
)
                                 
Operating profit
   
19,275
     
20,543
     
44,860
     
35,222
 
                                 
Investment income
   
702
     
353
     
973
     
1,227
 
Interest expense
   
(4,934
)
   
(2,554
)
   
(10,267
)
   
(5,455
)
Other income (deductions), net
   
(1,238
)
   
(441
)
   
(1,673
)
   
(1,106
)
                                 
Income before income taxes
   
13,805
     
17,901
     
33,893
     
29,888
 
                                 
Income taxes
   
(4,377
)
   
(6,650
)
   
(9,629
)
   
(10,731
)
                                 
Net income
   
9,428
     
11,251
     
24,264
     
19,157
 
                                 
Net (income) loss attributable to  noncontrolling interests
   
148
     
82
     
263
     
90
 
                                 
Net income attributable to  Matthews shareholders
 
$
9,576
   
$
11,333
   
$
24,527
   
$
19,247
 
                                 
Earnings per share attributable to Matthews shareholders:
                               
 
Basic
 
 
$0.29
   
 
$0.41
   
 
$0.74
   
 
$0.71
 
                                 
Diluted
 
 
$0.29
   
 
$0.41
   
 
$0.74
   
 
$0.70
 




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 March 31,
 
   
Matthews
   
Noncontrolling Interest
   
Total
 
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
                         
Net income (loss):
 
$
9,576
   
$
11,333
   
$
(148
)
 
$
(82
)
 
$
9,428
   
$
11,251
 
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
   
(41,648
)
   
223
     
(61
)
   
(197
)
   
(41,709
)
   
26
 
  Pension plans and other postretirement benefits
   
965
     
529
     
-
     
-
     
965
     
529
 
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
   
(1,744
)
   
(1,049
)
   
-
     
-
     
(1,744
)
   
(1,049
)
     Net amount reclassified to earnings
   
608
     
643
     
-
     
-
     
608
     
643
 
        Net change in unrecognized gain (loss) on derivatives
                                               
         
   
(1,136
)
   
(406
)
   
-
     
-
     
(1,136
)
   
(406
)
Other comprehensive income (loss), net of tax
   
(41,819
)
   
346
     
(61
)
   
(197
)
   
(41,880
)
   
149
 
Comprehensive income (loss)
 
$
(32,243
)
 
$
11,679
   
$
(209
)
 
$
(279
)
 
$
(32,452
)
 
$
11,400
 


   
Six Months Ended March 31,
 
   
Matthews
   
Noncontrolling Interest
   
Total
 
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
                         
Net income (loss):
 
$
24,527
   
$
19,247
   
$
(263
)
 
$
(90
)
 
$
24,264
   
$
19,157
 
Other comprehensive income (loss), net of tax:
                                               
  Foreign currency translation adjustment
   
(67,930
)
   
2,769
     
(71
)
   
(54
)
   
(68,001
)
   
2,715
 
  Pension plans and other postretirement benefits
   
1,890
     
1,057
     
-
     
-
     
1,890
     
1,057
 
  Unrecognized gain (loss) on derivatives:
                                               
     Net change from periodic revaluation
   
(3,212
)
   
(472
)
   
-
     
-
     
(3,212
)
   
(472
)
     Net amount reclassified to earnings
   
1,265
     
1,299
     
-
     
-
     
1,265
     
1,299
 
        Net change in unrecognized gain (loss) on derivatives
                                               
        
   
(1,947
)
   
827
             
-
     
(1,947
)
   
827
 
Other comprehensive income (loss), net of tax
   
(67,987
)
   
4,653
     
(71
)
   
(54
)
   
(68,058
)
   
4,599
 
Comprehensive income (loss)
 
$
(43,460
)
 
$
23,900
   
$
(334
)
 
$
(144
)
 
$
(43,794
)
 
$
23,756
 


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 six months ended March 31, 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
   
$
806,040
   
$
(66,817
)
 
$
(109,950
)
 
$
4,061
   
$
782,893
 
Net income
   
-
     
-
     
24,527
     
-
     
-
     
(263
)
   
24,264
 
Minimum pension liability
   
-
     
-
     
-
     
1,890
     
-
     
-
     
1,890
 
Translation adjustment
   
-
     
-
     
-
     
(67,930
)
   
-
     
(71
)
   
(68,001
)
Fair value of derivatives
   
-
     
-
     
-
     
(1,947
)
   
-
     
-
     
(1,947
)
Total comprehensive income
                                                   
(43,794
)
Stock-based compensation
   
-
     
4,564
     
-
     
-
             
-
     
4,564
 
Purchase of 212,626 shares of treasury stock
   
-
     
-
     
-
     
-
     
(9,890
)
   
-
     
(9,890
)
Issuance of 328,927 shares of treasury stock
   
-
     
(6,934
)
   
-
     
-
     
10,574
     
-
     
3,640
 
Cancellations of 32,739 shares of treasury stock
   
-
     
1,201
                     
(1,201
)
               
Dividends, $.26 per share
   
-
     
-
     
(8,610
)
   
-
     
-
     
-
     
(8,610
)
Distributions to
   noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(95
)
   
(95
)
Balance, March 31, 2015
 
$
36,334
   
$
112,056
   
$
821,957
   
$
(134,804
)
 
$
(110,467
)
 
$
3,632
   
$
728,708
 


   
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
   
-
     
-
     
19,247
     
-
     
-
     
(90
)
   
19,157
 
Minimum pension liability
   
-
     
-
     
-
     
1,057
     
-
     
-
     
1,057
 
Translation adjustment
   
-
     
-
     
-
     
2,769
     
-
     
(54
)
   
2,715
 
Fair value of derivatives
   
-
     
-
     
-
     
827
     
-
     
-
     
827
 
Total comprehensive income
                                                   
23,756
 
Stock-based compensation
   
-
     
3,239
     
-
     
-
     
-
     
-
     
3,239
 
Purchase of 108,605 shares of treasury stock
   
-
     
-
     
-
     
-
     
(4,467
)
   
-
     
(4,467
)
Issuance of 281,231 shares of treasury stock
   
-
     
(6,799
)
   
-
     
-
     
8,770
     
-
     
1,971
 
Cancellations of 77,417 shares of treasury stock
   
-
     
3,156
     
-
     
-
     
(3,156
)
   
-
     
-
 
Dividends, $.22 per share
   
-
     
-
     
(6,043
)
   
-
     
-
     
-
     
(6,043
)
Distributions to
    noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(165
)
   
(165
)
Balance, March 31, 2014
 
$
36,334
   
$
46,911
   
$
788,966
   
$
(22,287
)
 
$
(281,859
)
 
$
3,156
   
$
571,221
 



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)

   
Six Months Ended
 
   
March 31,
 
   
2015
   
2014
 
         
         
Cash flows from operating activities:
       
Net income
 
$
24,264
   
$
19,157
 
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
   
31,888
     
18,921
 
Stock-based compensation expense
   
4,564
     
3,239
 
Change in deferred taxes
   
(10,962
)
   
(651
)
Gain on sale of assets
   
(65
)
   
(632
)
Unrealized gain on investments
   
(500
)
   
(875
)
Trade name write-offs
   
4,842
     
-
 
Changes in working capital items
   
10,175
     
(18,371
)
Decrease (Increase) in other assets
   
345
     
(805
)
Decrease in other liabilities
   
(4,607
)
   
(580
)
Increase in pension and postretirement benefits
   
3,273
     
4,369
 
Other, net
   
(9,101
)
   
(164
)
                 
Net cash provided by operating activities
   
54,116
     
23,608
 
                 
Cash flows from investing activities:
               
Capital expenditures
   
(19,598
)
   
(9,859
)
Proceeds from sale of assets
   
690
     
29
 
Proceeds from sale of subsidiary
   
10,418
     
-
 
Restricted cash
   
(12,925
)
   
-
 
                 
Net cash used in investing activities
   
(21,415
)
   
(9,830
)
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
   
27,388
     
15,335
 
Payments on long-term debt
   
(52,815
)
   
(14,484
)
Payments of contingent consideration
   
-
     
(3,703
)
Proceeds from the sale of treasury stock
   
3,778
     
1,828
 
Purchases of treasury stock
   
(9,890
)
   
(4,267
)
Dividends
   
(8,610
)
   
(6,043
)
Distributions to noncontrolling interests
   
(95
)
   
(165
)
                 
Net cash used in financing activities
   
(40,244
)
   
(11,499
)
                 
Effect of exchange rate changes on cash
   
(4,986
)
   
352
 
                 
Net change in cash and cash equivalents
 
$
(12,529
)
 
$
2,631
 
                 
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)
March 31, 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 manufacturing 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 six months ended March 31, 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 Revision:

Certain amounts in the consolidated financial statements of the prior year have been revised to conform to the current period's presentation.  These revisions are not material to the prior year presentation.

7


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


Note 3.   Fair Value Measurements

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

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

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

Level 3:                            Unobservable inputs for the asset or liability.

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

   
March 31, 2015
   
September 30, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
Derivatives (1)
 
$
-
     
-
     
-
   
$
-
   
$
-
   
$
2,457
     
-
   
$
2,457
 
Trading
  securities
 
$
19,538
     
-
     
-
   
$
19,538
   
$
19,038
     
-
     
-
   
$
19,038
 
Total assets at
  fair value
 
$
19,538
     
-
     
-
   
$
19,538
   
$
19,038
   
$
2,457
     
-
   
$
21,495
 
                                                                 
Liabilities:
                                                               
Derivatives (1)
 
$
-
   
$
2,862
     
-
   
$
2,862
   
$
-
   
$
2,127
     
-
   
$
2,127
 
Total liabilities
  at fair value
 
$
-
   
$
2,862
     
-
   
$
2,862
   
$
-
   
$
2,127
     
-
   
$
2,127
 
                                                                 
(1) Interest rate swaps are valued based on observable market swap rates.
 


Note 4.   Inventories

Inventories consisted of the following:

   
March 31, 2015
   
September 30, 2014
 
         
Raw Materials
 
$
46,042
   
$
46,152
 
Work in process
   
35,742
     
38,631
 
Finished goods
   
64,774
     
68,059
 
   
$
146,558
   
$
152,842
 

8


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


Note 5.   Debt

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  In 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 March 31, 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 March 31, 2015 and September 30, 2014 were $660,425 and $680,000, respectively.  The weighted-average interest rate on outstanding borrowings at March 31, 2015 and March 31, 2014 was 2.50% and 2.53%, respectively.

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at March 31, 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 $2,862 ($1,746 after tax) at March 31, 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 March 31, 2015, a loss (net of tax) of approximately $830 included in AOCI is expected to be recognized in earnings over the next twelve months.

9


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


Note 5.  Debt (continued)


At March 31, 2015 and September 30, 2014, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:
     
Derivatives
 
March 31, 2015
   
September 30, 2014
 
Current assets:
       
Other current assets
 
$
-
   
$
324
 
Long-term assets:
               
 Other assets
   
-
     
2,133
 
Current liabilities:
               
Other current liabilities
   
(1,360
)
   
(1,808
)
Long-term liabilities:
               
Other liabilities
   
(1,502
)
   
(319
)
Total derivatives
 
$
(2,862
)
 
$
330
 
                 
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 March 31,
   
Six Months ended March 31,
 
     
2015
   
2014
   
2015
   
2014
 
                   
Interest rate swaps
Interest expense
 
 
$(996)
 
 
 
$(1,054)
 
 
 
$(2,073)
 
 
 
$(2,130)
 
                                   

The Company recognized the following gains or losses in AOCI:
           
     
Location of
   
     
Gain or
   
     
  (Loss)
 
Amount of Loss
 
     
Reclassified
 
Reclassified from
 
   
Amount of
 
From
 
AOCI into
 
Derivatives in
 
(Loss) Recognized in
 
AOCI into
 
Income
 
Cash Flow
 
AOCI on Derivatives
 
Income
 
(Effective Portion*)
 
Hedging Relationships
 
March 31,2015
   
March 31,2014
 
(EffectivePortion*)
 
March 31, 2015
   
March 31, 2014
 
                   
Interest rate swaps
 
 
$(3,212)
 
 
 
$(472)
 
Interest expense
 
 
$(1,265)
 
 
 
$(1,299)
 
                                   
*There is no ineffective portion or amount excluded from effectiveness testing.
 


10


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


Note 5.  Debt (continued)

The Company, through certain of its European subsidiaries has a credit facility with a European bank.  The maximum amount of borrowing available under this facility was 25.0 million Euros ($26,838).  Outstanding borrowings under the credit facility totaled 14.1 million Euros ($15,171) and 17.5 million Euros ($22,055) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at March 31, 2015 and 2014 was 1.74% and 1.48%, 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 1.0 million Euros ($1,073) and 1.2 million Euros ($1,576) at March 31, 2015 and September 30, 2014, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at March 31, 2015 and 2014 was 4.05% 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 2.6 million Euros ($2,749) and 2.9 million Euros ($3,624) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings of Wetzel at March 31, 2015 and 2014 was 5.84% and 7.75%, 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 4.8 million Euros ($5,118) and 5.5 million Euros ($6,922) at March 31, 2015 and September 30, 2014, respectively.  Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($12,163) with the same Italian banks.  Outstanding borrowings on these lines were 4.2 million Euros ($4,496) and 4.8 million Euros ($6,063) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at March 31, 2015 and 2014 was 3.18% and 3.12%, 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 flow.  As of March 31, 2015, the Company has presented the funded letter of credit within other current assets on the Condensed Consolidated Balance Sheet.

As of March 31, 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.
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 March 31, 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 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 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 March 31, 2015 and 2014, total stock-based compensation cost totaled $2,039 and $1,665, respectively.  For the six-month periods ended March 31, 2015 and 2014, total stock-based compensation cost totaled $4,564 and $3,239, respectively.  The associated future income tax benefit recognized was $795 and $649 for the three-month periods ended March 31, 2015 and 2014, respectively, and $1,780 and $1,263 for the six-month periods ended March 31, 2015 and 2014, respectively.

For the three-month periods ended March 31, 2015 and 2014, the amount of cash received from the exercise of stock options was $51 and $173, respectively. For the six-month periods ended March 31, 2015 and 2014, the amount of cash received from the exercise of stock options was $3,778 and $1,828, respectively. In connection with these exercises, the tax benefits realized by the Company were $6 and $8 for the three-month periods ended March 31, 2015 and 2014, respectively, and $321 and $185 for the six-month periods ended March 31, 2015 and 2014, 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 six months ended March 31, 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
   
(34,244
)
   
24.92
 
Non-vested at March 31, 2015
   
597,284
     
36.44
 

As of March 31, 2015, the total unrecognized compensation cost related to unvested restricted stock was $11,867 and is expected to be recognized over a weighted average period of 1.9 years.

The transactions for shares under options for the six months ended March 31, 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
   
(99,144
)
   
38.11
         
Expired or forfeited
   
(68,557
)
   
36.52
         
Outstanding, March 31, 2015
   
344,621
     
39.19
     
1.2
   
 
$4,246
 
Exercisable, March 31, 2015
   
100,633
     
38.76
     
1.1
   
 
$1,284
 


No options vested during the three-month and six-month periods ended March 31, 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 six-month periods ended March 31, 2015 and 2014 was $856 and $509, respectively.

The transactions for non-vested options for the six months ended March 31, 2015 were as follows:

       
Weighted-average
 
       
grant-date
 
Non-vested shares
 
Shares
   
fair value
 
Non-vested at September 30, 2014
   
312,442
   
 
$11.21
 
Expired or forfeited
   
(68,454
)
   
11.70
 
Non-vested at March 31, 2015
   
243,988
     
11.07
 

13


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 periods ended March 31, 2015 and 2014.

   
Six Months Ended March 31,
 
   
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 under the 1994 Director Fee Plan.  Under the 2014 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 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 March 31, 2015.  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 $110 for fiscal 2015.  A total of 22,300 stock options have been granted under the Director Fee Plans.  At March 31, 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 March 31, 2015.  A total of 150,000 shares have been authorized to be issued under the 2014 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
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Net income attributable to Matthews shareholders
 
$
9,576
   
$
11,333
   
$
24,527
   
$
19,247
 
Less: dividends and undistributed earnings
allocated to participating securities
   
1
     
23
     
5
     
74
 
Net income available to Matthews shareholders
 
$
9,575
   
$
11,310
   
$
24,522
   
$
19,173
 
                                 
Weighted-average shares outstanding (in thousands):
                               
Basic shares
   
32,970
     
27,276
     
32,940
     
27,193
 
Effect of dilutive securities
   
212
     
194
     
244
     
231
 
Diluted shares
   
33,182
     
27,470
     
33,184
     
27,424
 
                                 

There were no anti-dilutive securities for the three and six months ended March 31, 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 March 31,
 
   
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
)
   
(21
)
   Net actuarial loss (gain)
   
1,564
     
991
     
-
     
(49
)
                                 
Net benefit cost
 
$
2,849
   
$
2,338
   
$
286
   
$
269
 

15


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


Note 8.   Pension and Other Postretirement Benefit Plans (continued)

   
Six months ended March 31,
 
   
Pension
   
Other Postretirement
 
   
2015
   
2014
   
2015
   
2014
 
                 
Service cost
 
$
3,310
   
$
3,164
   
$
228
   
$
218
 
Interest cost
   
4,290
     
4,426
     
442
     
460
 
Expected return on plan assets
   
(4,940
)
   
(4,792
)
   
-
     
-
 
Amortization:
                               
Prior service cost
   
(90
)
   
(104
)
   
(98
)
   
(43
)
Net actuarial loss
   
3,128
     
1,982
     
-
     
(98
)
                                 
Net benefit cost
 
$
5,698
   
$
4,676
   
$
572
   
$
537
 

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 six months ended March 31, 2015:
       
   Supplemental retirement plan
 
$
362
   
$
-
 
   Other postretirement plan
   
-
     
775
 
                 
Additional contributions expected in fiscal 2015:
               
   Supplemental retirement plan
   
371
     
-
 
   Other postretirement plan
   
-
     
232
 

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 periods ended March 31, 2015 and 2014 were as follows:

      
Post-retirement benefit plans
   
Currency translation adjustment
   
Derivatives
   
Total
 
Attributable to Matthews:
                 
Balance, December 31, 2014    $ (38,726 )   $ (53,649 )   $ (610 )   $ (92,985 )
OCI before reclassification
     
-
     
(41,648
)
   
(1,744
)
   
(43,392
)
Amounts reclassified from AOCI
(a)
   
965
     
-
   (b)  
608
     
1,573
 
Net current-period OCI
     
965
     
(41,648
)
   
(1,136
)
   
(41,819
)
Balance, March 31, 2015
   
$
(37,761
)
 
$
(95,297
)
 
$
(1,746
)
 
$
(134,804
)
Attributable to noncontrolling interest:
                                 
Balance, December 31, 2014
     
-
   
$
506
     
-
   
$
506
 
OCI before reclassification
     
-
     
(61
)
   
-
     
(61
)
Net current-period OCI
     
-
     
(61
)
   
-
     
(61
)
Balance, March 31, 2015
     
-
   
$
445
     
-
   
$
445
 

      
Post-retirement benefit plans
   
Currency translation adjustment
   
Derivatives
   
Total
 
Attributable to Matthews:
                 
Balance, December 31, 2013   $ (29,572 )   $ 6,260     $ 679     $ (22,633 )
OCI before reclassification
     
-
     
223
     
(1,049
)
   
(826
)
Amounts reclassified from AOCI
(a)
   
529
     
-
   (b)  
643
     
1,172
 
Net current-period OCI
     
529
     
223
     
(406
)
   
346
 
Balance, March 31, 2014
   
$
(29,043
)
 
$
6,483
   
$
273
   
$
(22,287
)
Attributable to noncontrolling interest:
                                 
Balance, December 31, 2013
     
-
   
$
544
     
-
   
$
544
 
OCI before reclassification
     
-
     
(197
)
   
-
     
(197
)
Net current-period OCI
     
-
     
(197
)
   
-
     
(197
)
Balance, March 31, 2014
     
-
   
$
347
     
-
   
$
347
 

(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)

The changes in AOCI by component, net of tax, for the six month periods ended March 31, 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
     
-
     
(67,930
)
   
(3,212
)
   
(71,142
)
Amounts reclassified from AOCI
(a)
   
1,890
     
-
   (b)  
1,265
     
3,155
 
Net current-period OCI
     
1,890
     
(67,930
)
   
(1,947
)
   
(67,987
)
Balance, March 31, 2015
   
$
(37,761
)
 
$
(95,297
)
 
$
(1,746
)
 
$
(134,804
)
Attributable to noncontrolling interest:
                                 
Balance, September 30, 2014
     
-
   
$
516
     
-
   
$
516
 
OCI before reclassification
     
-
     
(71
)
   
-
     
(71
)
Net current-period OCI
     
-
     
(71
)
   
-
     
(71
)
Balance, March 31, 2015
     
-
   
$
445
     
-
   
$
445
 
 
 
   
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
     
-
     
2,769
     
(472
)
   
2,297
 
Amounts reclassified from AOCI
(a)
   
1,057
     
-
   (b)  
1,299
     
2,356
 
Net current-period OCI
     
1,057
     
2,769
     
827
     
4,653
 
Balance, March 31, 2014
   
$
(29,043
)
 
$
6,483
   
$
273
   
$
(22,287
)
Attributable to noncontrolling interest:
                                 
Balance, September 30, 2013
     
-
   
$
401
     
-
   
$
401
 
OCI before reclassification
     
-
     
(54
)
   
-
     
(54
)
Net current-period OCI
     
-
     
(54
)
   
-
     
(54
)
Balance, March 31, 2014
     
-
   
$
347
     
-
   
$
347
 
 
 
(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)


Reclassifications out of AOCI for the three and six month periods ended March 31, 2015 were as follows:

   
Amount reclassified from AOCI
 
Details about AOCI Components
 
Three months ended March 31, 2015
   
Six months ended March 31, 2015
 
Affected line item in the Statement of income
               
Postretirement benefit plans
            
     Prior service (cost) credit
 
$
94
   (a)
$
188
   
     Actuarial losses
   
(1,564
)
 (a)  
(3,128
)
 
     
(1,470
)
 (b)  
(2,940
)
Total before tax
     
(505
)
   
(1,050
)
Tax provision (benefit)
   
$
(965
)
 
$
(1,890
)
Net of tax
Derivatives
                    
     Interest rate swap contracts
 
$
(996
)
 
$
(2,073
)
Interest expense
     
(996
)
 (b)  
(2,073
)
Total before tax
     
(388
)
   
(808
)
Tax provision (benefit)
   
$
(608
)
 
$
(1,265
)
Net of tax


Reclassifications out of AOCI for the three and six month periods ended March 31, 2014 were as follows:

   
Amount reclassified from AOCI
 
Details about AOCI Components
 
Three months ended March 31, 2014
   
Six months ended March 31, 2014
 
Affected line item in the Statement of income
               
Postretirement benefit plans
            
     Prior service (cost) credit
 
$
73
   (a)
$
147
   
     Actuarial losses
   
(942
)
 (a)  
(1,884
)
 
     
(869
)
 (b)  
(1,737
)
Total before tax
     
(340
)
   
(680
)
Tax provision (benefit)
   
$
(529
)
 
$
(1,057
)
Net of tax
Derivatives
                    
     Interest rate swap contracts
 
$
(1,054
)
 
$
(2,130
)
Interest expense
     
(1,054
)
 (b)  
(2,130
)
Total before tax
     
(411
)
   
(831
)
Tax provision (benefit)
   
$
(643
)
 
$
(1,299
)
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.

19


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 six months ended March 31, 2015 was 28.4%, compared to 35.9% for the first half of fiscal 2014.  The decrease in the effective tax rate for the first six 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 $4,318 and $4,311 on March 31, 2015 and September 30, 2014, respectively, all of which, if recorded, would impact the 2015 annual effective tax rate.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The Company included $88 in interest and penalties in the provision for income taxes for the first six months of fiscal 2015. Total penalties and interest accrued were $2,046 and $2,135 at March 31, 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 March 31, 2015, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal
 
2011 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


20


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 minority interest.

Information about the Company's segments follows:


   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Sales to external customers:
               
SGK Brand Solutions
 
$
191,722
   
$
98,341
   
$
392,556
   
$
189,403
 
Memorialization
   
130,255
     
125,651
     
246,478
     
243,011
 
Industrial
   
27,417
     
22,845
     
53,944
     
44,368
 
    $
349,394
    $
246,837
    $
692,978
    $
476,782
 


   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Operating profit:
               
SGK Brand Solutions
 
$
(1,600
)
 
$
1,287
   
$
250
   
$
2,605
 
Memorialization
   
18,173
     
17,426
     
39,659
     
29,647