form10q032014.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
               
     Prior service (cost) credit
    75   (a)      222    
     Actuarial losses
    (942 ) (a)      (2,826 )  
      (867 ) (b)      (2,604 )
Total before tax
      (302 )       (982 )
Tax provision (benefit)
    $ (565 )     $ (1,622 )
Net of tax
Derivatives
                   
     Interest rate swap contracts
    (1,987 )       (4,117 )
Interest expense
      (1,987 ) (b)      (4,117 )
Total before tax
      (775 )       (1,606 )
Tax provision (benefit)
      (1,212 )       (2,511 )
Net of tax

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

Note 10.   Income Taxes

Income tax provisions for the Company’s interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's effective tax rate for the nine months ended June 30, 2014 was 34.1%, compared to 34.3% for the nine months ended June 30, 2013. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes and estimated non-deductible transaction costs related to the pending acquisition of Schawk, Inc. (“SGK”) (see Note 12), offset by lower foreign income taxes.

The Company had unrecognized tax benefits (excluding penalties and interest) of $4,346 and $4,516 on June 30, 2014 and September 30, 2013, respectively, all of which, if recorded, would impact the 2014 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 $587 in interest and penalties in the income tax provision for the nine months of fiscal 2014. Total penalties and interest accrued were $2,670 and $2,401 at June 30, 2014 and September 30, 2013, respectively.  These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.

The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions.  As of June 30, 2014, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal
 
2011 and forward
United States – State
 
2009 and forward
Canada
 
2008 and forward
Europe
 
2008 and forward
United Kingdom
 
2012 and forward
Australia
 
2009 and forward
Asia
 
2008 and forward

 
18

 

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

Note 11.   Segment Information

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

Information about the Company's segments follows:

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
Sales to external customers:
                       
Memorialization:
                       
Cemetery Products
  $ 58,622     $ 60,913     $ 161,307     $ 169,427  
Funeral Home Products
    58,056       58,523       179,793       187,276  
Cremation
    21,248       11,408       39,837       34,830  
      137,926       130,844       380,937       391,533  
Brand Solutions:
                               
Graphics Imaging
    81,008       78,505       233,958       219,459  
Marking and Fulfillment Systems
    25,719       23,653       70,087       63,918  
Merchandising Solutions
    35,330       17,650       71,783       57,741  
      142,057       119,808       375,828       341,118  
                                 
    $ 279,983     $ 250,652     $ 756,765     $ 732,651  


   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
Operating profit:
                       
Memorialization:
                       
Cemetery Products
  $ 9,982     $ 11,709     $ 24,170     $ 23,932  
Funeral Home Products
    7,986       12,089       23,948       29,533  
Cremation
    4,804       (67 )     4,967       1,405  
      22,772       23,731       53,085       54,870  
Brand Solutions:
                               
Graphics Imaging
    983       4,204       3,334       10,006  
Marking and Fulfillment Systems
    2,806       2,527       5,776       5,310  
Merchandising Solutions
    5,631       298       5,885       2,143  
      9,420       7,029       14,995       17,459  
                                 
    $ 32,192     $ 30,760     $ 68,080     $ 72,329  


 
19

 

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

Note 12.   Acquisitions

In March 2014, the Company signed a definitive agreement to acquire SGK (NYSE: SGK).  SGK is a leading global brand development, activation and brand deployment company.  Under the terms of the transaction, SGK shareholders will receive $11.80 cash and 0.20582 shares of Matthews’ common stock for each SGK share held.  The Company completed the acquisition on July 29, 2014.  Based on the closing price of Matthews’ stock on July 28, 2014, the transaction represents an implied price of $20.74 per share and a total enterprise value (which includes net outstanding debt) of approximately $606,000.  A preliminary purchase price allocation for the acquisition has not been completed at the date of this filing given the proximity to the acquisition date.  Therefore, we have not included all required disclosures related to the acquisition.

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

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

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

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

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

Note 13.   Goodwill and Other Intangible Assets

Goodwill related to business combinations is not amortized, but is subject to annual review for impairment.  In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss may need to be recognized.  For purposes of testing for impairment, the Company uses a discounted cash flow technique.  A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rate.  The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections.  The discount rate used in the discounted cash flow analysis was developed with the assistance of valuation experts and management believes it appropriately reflects the risks associated with the Company’s operating cash flows.  In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.



 
20

 

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


Note 13.   Goodwill and Other Intangible Assets (continued)

The Company performed its annual impairment review in the second quarter of fiscal 2014 and determined that for all reporting units, except Graphics Imaging, the estimated fair value significantly exceeded carrying value so no adjustments to the carrying value of goodwill were necessary at March 31, 2014.  As discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, recent economic conditions in Europe have unfavorably impacted the operating results of the Graphics Imaging business.  For the Graphics Imaging reporting unit, the estimated fair value exceeded its carrying value by less than 10%, resulting in no goodwill impairment for the unit.  While the Graphics Imaging reporting unit passed the first step of the impairment test, if its operating profits or another significant assumption were to deteriorate in the future, it could adversely affect the estimated fair value of the reporting unit.  Factors that could have a negative impact on the estimated fair value of the Graphics Imaging reporting unit include a further delay in the recovery of the European market, continued pricing pressure, declines in expected volumes, and an increase in discount rates.  If the Company is unsuccessful in its plans to recover the profitability of this business, the estimated fair value could decline and lead to a potential goodwill impairment in the future.

Trade names with indefinite lives are tested for impairment annually in the second quarter. Matthews performed a quantitative impairment evaluation of its trade names for 2014, and the test indicated the trade names were not impaired.

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

   
Cemetery
   
Funeral Home
         
Graphics
   
Marking and Fulfillment
   
Merchandising
       
   
Products
   
Products
   
Cremation
   
Imaging
   
Products
   
Solutions
   
Consolidated
 
                                           
Goodwill
  $ 99,707     $ 163,208     $ 17,823     $ 193,281     $ 50,646     $ 9,138     $ 533,803  
Accumulated impairment losses
    (412 )     -       (5,000 )     (3,840 )     -       -       (9,252 )
Balance at September 30, 2013
    99,295       163,208       12,823       189,441       50,646       9,138       524,551  
                                                         
Additions during period
    -       -       -       -       -       -       -  
Translation and other  adjustments
    334       -       269       2,056       (60 )     -       2,599  
Goodwill
    100,041       163,208       18,092       195,337       50,586       9,138       536,402  
Accumulated impairment losses
    (412 )     -       (5,000 )     (3,840 )     -       -       (9,252 )
Balance at June  30, 2014
  $ 99,629     $ 163,208     $ 13,092     $ 191,497     $ 50,586     $ 9,138     $ 527,150  



 
21

 

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


Note 13.   Goodwill and Other Intangible Assets (continued)

The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of June 30, 2014 and September 30, 2013, respectively.

   
Carrying
   
Accumulated
       
   
Amount
   
Amortization
   
Net
 
June 30, 2014:
                 
Trade names
  $ 23,140     $ - *   $ 23,140  
Trade names
    3,042       (2,202 )     840  
Customer relationships
    59,184       (21,763 )     37,421  
Copyrights/patents/other
    10,257       (9,443 )     814  
    $ 95,623     $ (33,408 )   $ 62,215  
                         
September 30, 2013:
                       
Trade names
  $ 22,878     $ - *   $ 22,878  
Trade names
    3,034       (2,142 )     892  
Customer relationships
    59,061       (19,099 )     39,962  
Copyrights/patents/other
    10,116       (8,746 )     1,370  
    $ 95,089     $ (29,987 )   $ 65,102  
* Not subject to amortization
                 

The carrying amount of indefinite-lived trade names as of September 30, 2013 included an impairment loss of approximately $1.6 million in the Graphics Imaging segment that was recorded in the second quarter of fiscal 2013.  The net change in intangible assets during the nine months ended June 30, 2014 included foreign currency fluctuations during the period and additional amortization.

Amortization expense on intangible assets was $830 and $1,169 for the three-month periods ended June 30, 2014 and 2013, respectively.  For the nine-month periods ended June 30, 2014 and 2013, amortization expense was $3,170 and $3,048, respectively. Amortization expense is estimated to be $963 for the remainder of 2014, $3,664 in 2015, $3,374 in 2016, $3,181 in 2017 and $3,163 in 2018.



 
22

 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Cautionary Statement:

The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation (“Matthews” or the “Company”) and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended September 30, 2013.  Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct.  Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company’s products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, including the risks associated with the Company’s recent acquisition of Schawk, Inc. (“SGK”), and technological factors beyond the Company's control.  In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company’s products or the potential loss of one or more of the Company’s larger customers are also considered risk factors.

Results of Operations:

The following table sets forth the sales and operating profit for the Company’s Memorialization and Brand Solutions businesses for the three and nine-month periods ended June 30, 2014 and 2013.

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
Sales:
                       
Memorialization
  $ 137,926     $ 130,844     $ 380,937     $ 391,533  
Brand Solutions
    142,057       119,808       375,828       341,118  
    $ 279,983     $ 250,652     $ 756,765     $ 732,651  
Operating Profit:
                               
Memorialization
  $ 22,772     $ 23,731     $ 53,085     $ 54,870  
Brand Solutions
    9,420       7,029       14,995       17,459  
    $ 32,192     $ 30,760     $ 68,080     $ 72,329  


Sales for the nine months ended June 30, 2014 were $756.8 million, compared to $732.7 million for the nine months ended June 30, 2013.  The increase in sales primarily reflected the impact of significant projects during the fiscal 2014 third quarter in the Cremation and Merchandising Solutions segments, and acquisitions in the Graphics Imaging and Marking and Fulfillment Systems segments.  Consolidated sales for the current period also reflected the benefit of favorable changes in foreign currencies against the U.S. dollar of approximately $7.6 million.

In the Company’s Memorialization business, Cemetery Products segment sales for the first nine months of fiscal 2014 were $161.3 million, compared to $169.4 million for the first nine months of fiscal 2013.  The decrease primarily reflected lower unit volume of memorial products. Sales for the Funeral Home Products segment were $179.8 million for the nine months ended June 30, 2014, compared to $187.3 million a year ago. The decrease resulted principally from lower unit volume.  Based on published CDC data, the Company estimated that the number of casketed, in-ground burial deaths in the U.S. declined in the first nine months of fiscal 2014, compared to a year ago, contributing to the decrease in unit volume in both the Cemetery Products and Funeral Home Products segments in fiscal 2014.  Sales for the Cremation segment were $39.8 million for the first nine months of fiscal 2014, compared to $34.8 million for the same period a year ago.  The increase principally reflected a significant waste incineration equipment project in Saudi Arabia during the third quarter of fiscal 2014.  In the Brand Solutions business, sales for the Graphics Imaging segment were $234.0 million in the first nine months of fiscal 2014, compared to $219.5 million for the same period a year ago.  The acquisition of Wetzel Holding AG, Wetzel GmbH and related affiliates (collectively “Wetzel”) in November 2012 contributed $7.7 million to the segment’s sales increase in the first nine months of fiscal 2014.  In addition, changes in foreign currency values against the U.S. dollar favorably impacted the segment’s fiscal 2014 sales by $6.9 million, compared to fiscal 2013.  Marking and Fulfillment Systems segment sales were $70.1 million for the first nine months of fiscal 2014, compared to $63.9 million for the first nine months of fiscal 2013.  The increase resulted principally from higher unit volume and the acquisition of Pyramid Controls, Inc. (“Pyramid”) in December 2012.  Pyramid contributed $1.8 million to the fiscal 2014 sales increase over fiscal 2013.  Sales for the Merchandising Solutions segment were $71.8 million for the first nine months of fiscal 2014, compared to $57.7 million for the same period a year ago.  The increase principally reflected a significant merchandising display project during the third fiscal quarter of 2014.
 
23

 

Gross profit for the nine months ended June 30, 2014 was $275.8 million, compared to $266.2 million for the same period a year ago.  Consolidated gross profit as a percent of sales was 36.0% and 36.3% for the first nine months of fiscal 2014 and fiscal 2013, respectively.  The increase in consolidated gross profit primarily reflected the impact of higher sales in the Cremation segment and Brand Solutions businesses, partially offset by the impact of lower sales in the Cemetery Products and Funeral Home products segments.

Selling and administrative expenses for the nine months ended June 30, 2014 were $207.7 million, compared to $193.9 million for the first nine months of fiscal 2013.  Consolidated selling and administrative expenses as a percent of sales were 27.4% for the nine months ended June 30, 2014, compared to 26.5% for the same period last year.  Selling and administrative expenses in the first nine months of fiscal 2014 included expenses related to acquisition activities, primarily the SGK acquisition, of $7.1 million, the Company’s strategic cost structure initiatives of $5.1 million and litigation expenses of $1.9 million related to a legal dispute in the Funeral Home Products segment.  Selling and administrative expenses in the first nine months of fiscal 2013 included expenses related to acquisition activities of $2.5 million, strategic cost structure initiatives of $8.3 million, expenses of $1.2 million related to implementation of an ERP system and an impairment charge of approximately $1.6 million related to the carrying value of an intangible asset.  These expenses were partially offset by the benefit of a $3.4 million adjustment to contingent consideration and a gain of $3.3 million on the settlement of the purchase of the remaining ownership interest in one of the Company’s subsidiaries.

Operating profit for the nine months ended June 30, 2014 was $68.1 million, compared to $72.3 million for the nine months ended June 30, 2013.  Cemetery Products segment operating profit for the first nine months of fiscal 2014 was $24.2 million, compared to $23.9 million for the first nine months of fiscal 2013.  Fiscal 2014 operating profit included expenses of $651,000 related to strategic cost-structure initiatives.  Fiscal 2013 operating profit included expenses related to strategic cost-structure initiatives of $3.1 million and ERP implementation costs of $1.4 million.  Excluding these expenses from both periods, the Cemetery Products segment operating profit in the first nine months of fiscal 2014 was approximately $3.5 million lower than in fiscal 2013, reflecting lower sales and losses on several mausoleum projects, partially offset by the benefit of the Company’s recent cost structure initiatives.  Operating profit for the Funeral Home Products segment was $23.9 million for the nine months ended June 30, 2014, compared to $29.5 million for the first nine months of fiscal 2013.  The Funeral Home Products segment fiscal 2014 operating profit included expenses related to the Company’s strategic cost-structure initiatives of $2.3 million and litigation related expenses of $1.9 million related to a legal dispute with one of the Company’s competitors.  The Funeral Home Products fiscal 2013 operating profit included expenses related to the Company’s strategic cost-structure initiatives of $1.8 million and litigation related expenses of $148,000 related to a legal dispute with one of the Company’s competitors.  These fiscal 2013 expenses were offset by a favorable adjustment to the liability for contingent consideration of $3.4 million.  Excluding the aforementioned items from both periods, the Funeral Home Products segment operating profit for the first nine months of fiscal 2014 was approximately equal to the prior year, reflecting the impact of lower sales, offset by the favorable impact of the Company’s strategic cost-structure initiatives.  The Cremation segment reported an operating profit of $5.0 million for the first nine months of
 
 
 
24

 
 
fiscal 2014, compared to $1.4 million for the same period in fiscal 2013. The increase principally reflected the impact higher sales resulting from the waste incineration project.  Graphics Imaging segment operating profit for the nine months ended June 30, 2014 was $3.3 million, compared to $10.0 million for the nine months ended June 30, 2013.  The Graphics Imaging segment’s fiscal 2014 operating profit included acquisition-related expenses of $7.0 million and expenses related to strategic cost structure initiatives of $985,000.  Operating profit for the segment in fiscal 2013 included acquisition-related expenses of $2.2 million, expenses related to strategic cost structure initiatives of approximately $2.0 million and an impairment charge of $1.6 million related to the carrying value of an intangible asset.  These fiscal 2013 expenses were partially offset by a gain of $3.3 million on the settlement of the purchase of the remaining ownership interest in one of the Company’s subsidiaries.  Excluding these items from both fiscal periods, the Graphics Imaging segment operating profit declined approximately $1.1 million, primarily reflecting an unfavorable change in product mix, partially offset by the impact of the Wetzel acquisition of approximately $500,000.  Operating profit for the Marking and Fulfillment Systems segment for the first nine months of fiscal 2014 was $5.8 million, compared to $5.3 million for the same period a year ago.  The increase primarily resulted from the favorable impact of higher sales.  Merchandising Solutions segment operating profit was $5.9 million for the first nine months of fiscal 2014, compared to $2.1 million for the same period in fiscal 2013, primarily reflecting higher sales resulting from the fiscal 2014 third quarter merchandising display project, partially offset by an increase in expenses related to strategic cost structure initiatives of approximately $630,000.

Investment income was $1.7 million for the nine months ended June 30, 2014, compared to $1.5 million for the nine months ended June 30, 2013.  The increase reflected higher rates of return on investments held in trust for certain of the Company’s benefit plans.  Interest expense for the first nine months of fiscal 2014 was $8.2 million, compared to $9.8 million for the same period last year.  The decrease in interest expense primarily reflected lower interest rates.  Other deductions, net, for the nine months ended June 30, 2014 represented a decrease in pre-tax income of $2.7 million, compared to a decrease in pre-tax income of $3.2 million for the same period last year.  Other income and deductions generally include banking related fees and the impact of currency gains and losses on certain intercompany debt.

The Company's effective tax rate for the nine months ended June 30, 2014 was 34.1%, compared to 34.3% for the first nine months of fiscal 2013 and 32.7% for the fiscal 2013 full year.  The fiscal 2013 full year effective tax rate included the benefit of a European tax loss carryback.  The effective tax rate for the first nine months of fiscal 2014 reflected the impact of estimated non-deductible transaction costs related to the pending acquisition of SGK.  The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes and estimated non-deductible acquisition costs, offset by lower foreign income taxes.

The deduction for net income attributable to noncontrolling interests was $286,000 in the nine months ended June 30, 2014, compared to an addition to income of $482,000 for the same period a year ago.  The deduction in the current year primarily reflected the noncontrolling income generated by the Company’s U.K. Cremation segment operation.

Goodwill and Other Intangible Assets:

Goodwill related to business combinations is not amortized, but is subject to annual review for impairment.  In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss may need to be recognized.  For purposes of testing for impairment, the Company uses a discounted cash flow technique.  A number of assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales volumes and pricing, costs to produce, tax rates, capital spending, working capital changes, and discount rate.  The Company estimates future cash flows using volume and pricing assumptions based largely on existing customer relationships and contracts, and operating cost assumptions management believes are reasonable based on historical performance and projected future performance as reflected in its most recent operating plans and projections.  The discount rate used in the discounted cash flow analysis was developed with the assistance of valuation experts and management believes it appropriately reflects the risks associated with the Company’s operating cash flows.  In order to further validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.

The Company performed its annual impairment review in the second quarter of fiscal 2014 and determined that for all reporting units, except Graphics Imaging, the estimated fair value significantly exceeded carrying value so no adjustments to the carrying value of goodwill were necessary at March 31, 2014.  As discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, recent economic conditions in Europe have unfavorably impacted the operating results of the Graphics Imaging business.  For the Graphics Imaging reporting unit, which had $191.6 million of goodwill at March 31, 2014, the estimated fair value exceeded its carrying value by less than 10%, resulting in no goodwill impairment for the unit.  While the Graphics Imaging reporting unit passed the first step of the impairment test, if its operating profits or another significant assumption were to deteriorate in the future, it could adversely affect the estimated fair value of the reporting unit.  Factors that could have a negative impact on the estimated fair value of the Graphics Imaging reporting unit include a further delay in the recovery of the European market, continued pricing pressure, declines in expected volumes, and an increase in discount rates.  If the Company is unsuccessful in its plans to recover the profitability of this business, the estimated fair value could decline and lead to a potential goodwill impairment in the future.

The carrying amount of trade names with indefinite lives as of June 30, 2014 and September 30, 2013 totaled $23.1 million and $22.9 million, respectively. These trade names are tested for impairment annually in the second quarter. Matthews performed a quantitative impairment evaluation of its trade names for 2014, and the test indicated the trade names were not impaired.
 

 
 
25

 
Liquidity and Capital Resources:

Net cash provided by operating activities was $63.5 million for the first nine months of fiscal 2014, compared to $72.9 million for the first nine months of fiscal 2013.  Operating cash flow for both periods reflected net income adjusted for depreciation, amortization, stock-based compensation expense and non-cash pension expense.  Net changes in working capital items, which principally related to increases in accounts receivable and inventory, partially offset by an increase in accounts payable, resulted in a use of working capital of $14.3 million in fiscal 2014.  Net changes in working capital items in fiscal 2013 resulted in a use of working capital of $5.8 million, primarily reflecting a decrease in accounts payable.
 
Cash used in investing activities was $18.7 million for the nine months ended June 30, 2014, compared to $84.6 million for the nine months ended June 30, 2013.  Investing activities for the first nine months of fiscal 2014 primarily reflected capital expenditures.  Investing activities for the first nine months of fiscal 2013 primarily reflected acquisitions, net of cash acquired, of $67.6 million and capital expenditures of $17.3 million.

Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements.  Capital expenditures for the last three fiscal years were primarily financed through operating cash.  Capital spending for property, plant and equipment has averaged $26.9 million for the last three fiscal years.  Capital spending for fiscal 2014 is currently expected to be approximately $30.0 million.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used in financing activities for the nine months ended June 30, 2014 was $23.7 million, primarily reflecting repayments, net of proceeds, of long-term debt of $8.1 million, proceeds from the sale of treasury stock (stock option exercises) of $2.0 million, treasury stock purchases of $4.6 million, payment of contingent consideration of $3.7 million and dividends of $9.1 million to the Company's shareholders.  Cash provided by financing activities for the nine months ended June 30, 2013 was $8.6 million, primarily reflecting long-term debt proceeds, net of repayments, of $39.8 million, payment of contingent consideration of $9.5 million, treasury stock purchases of $13.5 million and dividends of $8.3 million to the Company's shareholders.

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 $500.0 million.  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 $30.0 million) is available for the issuance of commercial and standby letters of credit.  Outstanding borrowings on the Revolving Credit Facility were $305.0 million as of June 30, 2014 and September 30, 2013.  The weighted-average interest rate on outstanding borrowings under the credit facilities was 2.55% and 3.05% at June 30, 2014 and 2013, respectively.

 
26

 
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 $500.0 million to $900.0 million.  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 interest rate swaps have been designated as cash flow hedges of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring.  Based on the Company’s assessment, all the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.

The fair value of the interest rate swaps reflected an unrealized loss, net of unrealized gains, of $787,000 ($480,000 after tax) at June 30, 2014 that is included in shareholders’ equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at June 30, 2014, an approximately $1.2 million net unrealized loss included in accumulated other comprehensive income is expected to be recognized in earnings as interest expense over the next twelve months.

The Company, through certain of its European subsidiaries, has a credit facility with a bank.  The maximum amount of borrowings available under this facility is 25.0 million Euros ($34.2 million).  Outstanding borrowings under the credit facility totaled 20.1 million Euros ($27.5 million) and 22.5 million Euros ($30.4 million) at June 30, 2014 and September 30, 2013, respectively.  The weighted-average interest rate on outstanding borrowings under the 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 ($2.0 million) and 1.7 million Euros ($2.3 million) 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 ($8.6 million) and 7.4 million Euros ($10.0 million) at June 30, 2014 and September 30, 2013.  The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2014 and 2013 was 7.62% and 7.26%, respectively.
 
 
27

 
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 ($8.2million) and 5.1 million Euros ($6.9 million) 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 ($15.5 million) with the same Italian banks.  Outstanding borrowings on these lines were 4.8 million Euros ($6.6 million) and 5.6 million Euros ($7.6 million) 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.

The Company has a stock repurchase program.  Under the current authorization, the Company’s Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews’ common stock under the program, of which 1,081,807 shares remain available for repurchase as of June 30, 2014.  The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share.  Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company’s Restated Articles of Incorporation.

Consolidated working capital of the Company was $262.8 million at June 30, 2014, compared to $222.0 million at September 30, 2013.  Cash and cash equivalents were $80.6 million at June 30, 2014, compared to $59.0 million at September 30, 2013.  The Company's current ratio was 2.4 and 2.2 at June 30, 2014 and September 30, 2013, respectively.
 
ENVIRONMENTAL MATTERS:

The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment.  These laws and regulations impose limitations on the discharge of materials into the environment and require the Company to obtain and operate in compliance with conditions of permits and other government authorizations.  As such, the Company has developed environmental, health, and safety policies and procedures that include the proper handling, storage and disposal of hazardous materials.

The Company is party to various environmental matters.  These include obligations to investigate and mitigate the effects on the environment of the disposal of certain materials at various operating and non-operating sites.  The Company is currently performing environmental assessments and remediation at these sites, as appropriate.

At June 30, 2014, an accrual of approximately $5.1 million had been recorded for environmental remediation (of which $1.3 million was classified in other current liabilities), representing management's best estimate of the probable and reasonably estimable costs of the Company's known remediation obligations.  The accrual, which reflects previously established reserves assumed with the acquisition of York and additional reserves recorded as a purchase accounting adjustment, does not consider the effects of inflation and anticipated expenditures are not discounted to their present value.  Changes in the accrued environmental remediation obligation from the prior fiscal year reflect payments charged against the accrual.

While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.

ACQUISITIONS:

In March 2014, the Company signed a definitive agreement to acquire SGK.  SGK is a leading global brand development, activation and brand deployment company.  Under the terms of the transaction, SGK shareholders will receive $11.80 cash and 0.20582 shares of Matthews’ common stock for each SGK share held.  The Company completed the acquisition on July 29, 2014.  Based on the closing price of Matthews’ stock on July 28, 2014, the transaction represents an implied price of $20.74 per share and a total enterprise value (which includes net outstanding debt) of approximately $606 million.

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

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

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

In December 2012, the Company acquired Pyramid.  Pyramid is a provider of warehouse control systems and conveyor control solutions for distribution centers.  The acquisition is designed to expand Matthews' fulfillment products and services in the warehouse management market.   The initial purchase price for the transaction was approximately $24.5 million, plus potential additional consideration up to $3.7 million based on future operating results. 

In November 2012, the Company completed the acquisition of Wetzel.  Wetzel is a leading European provider of pre-press services and gravure printing forms, with manufacturing operations in Germany and Poland.  Wetzel’s products and services are sold primarily within Europe, and the acquisition is designed to expand Matthews' products and services in the global graphics imaging market.  The purchase price for Wetzel was approximately 42.6 million Euros ($54.7 million) on a cash-free, debt-free basis.
 
Forward-Looking Information:

Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy consists of the following:  internal growth (which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products), acquisitions and share repurchases under the Company’s stock repurchase program (see "Liquidity and Capital Resources").
 
The Company has a significant level of effort focused on the recent acquisition of SGK, which closed on July 29.  Costs associated with the acquisition (including transaction and integration costs) and the impact resulting from acquisition valuation and related step-up expense will impact our results for the fourth quarter.  However, our existing businesses are currently projecting to meet our initial fiscal 2014 consolidated expectations, on a non-GAAP adjusted basis.

 
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Critical Accounting Policies:

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

A summary of the Company's significant accounting policies are included in the Notes to Consolidated Financial Statements and in the critical accounting policies in Management’s Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year ended September 30, 2013.  Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the company's operating results and financial condition.

LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The following table summarizes the Company’s contractual obligations at June 30, 2014, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

   
Payments due in fiscal year:
 
         
2014
               
After
 
   
Total
   
Remainder
   
2015 to 2016
   
2017 to 2018
   
2019
 
Contractual Cash Obligations:
 
(Dollar amounts in thousands)
 
Revolving credit facilities
  $ 332,539     $ -     $ 27,539     $ 305,000     $ -  
Notes payable to banks
    20,317       10,649       6,568       3,100       -  
Short-term borrowings
    7,114       7,114       -       -       -  
Capital lease obligations
    9,966       610       3,340       1,827       4,189  
Non-cancelable operating leases
    21,069       3,086       12,229       3,575       2,179  
                                         
Total contractual cash obligations
  $ 391,005     $ 21,459     $ 49,676     $ 313,502     $ 6,368  

A significant portion of the loans included in the table above bear interest at variable rates.  At June 30, 2014, the weighted-average interest rate was 2.55% on the Company’s domestic Revolving Credit Facility, 1.35% on the credit facility through the Company’s European subsidiaries, 4.04% on bank loans to its wholly-owned subsidiary, Saueressig, 7.62% on bank loans to its wholly-owned subsidiary, Wetzel and 3.13% on bank loans to the Company’s wholly-owned subsidiary, Matthews International S.p.A.

Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company’s operating cash.  The Company is not required to make any significant contributions to its principal retirement plan in fiscal 2014. During the nine months ended June 30, 2014, contributions of $543,000 and $709,000 were made under the supplemental retirement plan and postretirement plan, respectively.  The Company currently anticipates contributing an additional $180,000 and $217,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2014.


 
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Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities.  If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary.  As of June 30, 2014, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $4.3 million. The timing of potential future payments related to the unrecognized tax benefits is not presently determinable. The Company believes that its current liquidity sources, combined with its operating cash flow and borrowing capacity, will be sufficient to meet its capital needs for the foreseeable future.


Item 3.   Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rates - The Company’s most significant long-term debt instrument is the domestic Revolving Credit Facility which bears interest at variable rates based on LIBOR.

The Company has entered into interest rate swaps as listed under “Liquidity and Capital Resources”.

The interest rate swaps have been designated as cash flow hedges of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring.  Based on the Company’s assessment, all the critical terms of each of the hedges matched the underlying terms of the hedged debt and related forecasted interest payments, and as such, these hedges were considered highly effective.

The fair value of the interest rate swaps reflected a net unrealized gain of $787,000 ($480,000 after tax) at June 30, 2014 that is included in equity as part of accumulated other comprehensive income.  A decrease of 10% in market interest rates (e.g. a decrease from 5.0% to 4.5%) would result in a decrease of approximately $571,000 in the net fair value asset of the interest rate swaps.

Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel, fuel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available. In addition, based on competitive market conditions and to the extent that the Company has established pricing terms with customers through contracts or similar arrangements, the Company’s ability to immediately increase the price of its products to offset the increased costs may be limited.

Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, including the Euro, British Pound, Canadian Dollar, Australian Dollar, Swedish Krona, Chinese Yuan, Hong Kong Dollar, Polish Zloty, Turkish Lira and Vietnamese Dong in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries.  A strengthening of the U. S. dollar of 10% would have resulted in a decrease in reported sales of $31.0 million and a decrease in reported operating income of $2.4 million for the nine months ended June 30, 2014.

Actuarial Assumptions – The most significant actuarial assumptions affecting pension expense and pension obligations include the valuation of retirement plan assets, the discount rate and the estimated return on plan assets.  The estimated return on plan assets is currently based upon projections provided by the Company’s independent investment advisor, considering the investment policy of the plan and the plan’s asset allocation.  The fair value of plan assets and discount rate are “point-in-time” measures, and the recent volatility of the debt and equity markets makes estimating future changes in fair value of plan assets and discount rates more challenging.  The following table summarizes the impact on the September 30, 2013 actuarial valuations of changes in the primary assumptions affecting the Company’s principal retirement plan and supplemental retirement plan.


 
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Impact of Changes in Actuarial Assumptions
 
Change in Discount Rate
 
Change in Expected Return
 
Change in Market Value of Assets
 
+1%
 
-1%
 
+1%
 
-1%
 
+5%
 
-5%
 
          (Dollar amounts in thousands)
Increase (decrease) in net benefit cost
$  (2,394)  
 
 $    3,163    
 
$(1,204)
 
$1,204 
 
$(1,097)
 
$1,097 
                       
Increase (decrease) in projected benefit obligation
(23,348)
 
  30,054 
 
-
 
-
 
-
 
-
                       
Increase (decrease) in funded status
23,348 
 
(30,054)
 
-
 
-
 
   6,219 
 
  (6,219)

Item 4.  Controls and Procedures:

The Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to provide reasonable assurance that information required to be disclosed in our reports filed under that Act (the “Exchange Act”), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. These disclosure controls and procedures also are designed to provide reasonable assurance that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of June 30, 2014. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that material information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, and that such information is recorded, summarized and properly reported within the appropriate time period, relating to the Company and its consolidated subsidiaries, required to be included in the Exchange Act reports, including this Quarterly Report on Form 10-Q.

There have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

The following risk factor relating to the Company’s agreement to acquire Schawk, Inc. (the “Acquisition”) updates the risk factors in  the Company’s Annual Report on Form 10-K for the year ended September 30, 2013 and Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014.


 
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Certain risks related to the Acquisition.

In March 2014, the Company signed a definitive agreement to acquire Schawk, Inc. (“SGK”), a leading global brand development, activation and brand deployment company.  The Company completed the acquisition on July 29, 2014.  Due to the acquisition, additional risks and uncertainties could affect the Company’s financial performance and actual results.  Specifically, the acquisition could cause actual results for fiscal 2014 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by the Company’s management.  The risks associated with the acquisition include risks related to combining businesses and achieving expected savings and synergies, assimilating acquired companies and the fact that merger integration costs related to the acquisition are difficult to predict with a level of certainty, and may be greater than expected.

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

Stock Repurchase Plan

The Company has a stock repurchase program.  The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share.  Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company’s Restated Articles of Incorporation.  Under the current authorization, the Company's Board of Directors had authorized the repurchase of a total of 2,500,000 shares of Matthews’ common stock under the program, of which 1,081,807 shares remain available for repurchase as of June 30, 2014.

The following table shows the monthly fiscal 2014 stock repurchase activity:

Period
 
Total number of shares purchased
   
Weighted-average price paid per share
   
Total number of shares purchased as part of a publicly announced plan
   
Maximum number of shares that may yet be purchased under the plan
 
                         
October 2013
    509     $ 40.83       509       1,194,161  
November 2013
    86,287       40.95       86,287       1,107,874  
December 2013
    15,381       41.67       15,381       1,092,493  
January 2014
    6,428       42.39       6,428       1,086,065  
February 2014
    -       -       -       1,086,065  
March 2014
    -       -       -       1,086,065  
April 2014
    -       -       -       1,086,065  
May 2014
    3,806       40.17       3,806       1,082,259  
June 2014
    452       41.09       452       1,081,807  
    Total
    112,863     $ 41.10       112,863          

Item 3.  Defaults Upon Senior Securities

Not Applicable.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

Not Applicable.


 
33

 


(a)
Exhibits
 
     
 
Exhibit
 
 
No.
Description
     
 
31.1
Certification of Principal Executive Officer for Joseph C. Bartolacci*
 
31.2
Certification of Principal Financial Officer for Steven F. Nicola *
 
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Joseph C. Bartolacci*
 
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Steven F. Nicola*
 
101
Interactive Data File (Form 10-Q for the quarterly period ended June 30, 2014 furnished in XBRL)
     
   
* Filed herewith

 
34

 

SIGNATURES


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



   
MATTHEWS INTERNATIONAL CORPORATION
   
(Registrant)
 
     
     
     
Date:  August 7, 2014
 
/s/ Joseph C. Bartolacci
   
Joseph C. Bartolacci, President
   
and Chief Executive Officer
     
     
     
     
Date:  August 7, 2014
 
/s/ Steven F. Nicola
 
 
Steven F. Nicola, Chief Financial Officer,
 
 
Secretary and Treasurer
     















 
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