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

Form 10-Q

xQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended March 31,June 30, 2010

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 Web site, 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 an post such files.

 
Yes ox
No o
 

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

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

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

 
Yes o
No x
 

As of April 30,July 31, 2010, shares of common stock outstanding were:

Class A Common Stock 30,209,25729,778,189 shares

 
 

 

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

 March 31, 2010  September 30, 2009  June 30, 2010  September 30, 2009 
 (unaudited)     (unaudited)    
ASSETS                        
Current assets:                        
Cash and cash equivalents    $60,934     $57,732     $55,974     $57,732 
Short-term investments     1,392      62      1,396      62 
Accounts receivable, net     129,520      138,927      142,633      138,927 
Inventories     95,339      94,455      99,462      94,455 
Deferred income taxes     1,797      1,816      1,183      1,816 
Other current assets     15,112      12,430      14,070      12,430 
                            
Total current assets
     304,094      305,422      314,718      305,422 
                            
Investments     13,619      13,389      13,062      13,389 
Property, plant and equipment: Cost  302,671       305,098       292,485       305,098     
Less accumulated depreciation
  (171,016)      (167,038)      (168,574)      (167,038)    
      131,655       138,060       123,911       138,060 
Deferred income taxes      33,240       32,563       35,518       32,563 
Other assets      24,588       19,999       23,618       19,999 
Goodwill      385,550       385,219       380,848       385,219 
Other intangible assets, net      53,749       55,001       55,911       55,001 
                                
Total assets     $946,495      $949,653      $947,586      $949,653 
                                
LIABILITIES                                
Current liabilities:                                
Long-term debt, current maturities     $13,921      $14,188      $12,379      $14,188 
Accounts payable      32,826       28,604       38,110       28,604 
Accrued compensation      34,055       35,592       34,797       35,592 
Accrued income taxes      13,383       8,120       15,211       8,120 
Other current liabilities      43,285       45,836       46,149       45,836 
                                
Total current liabilities
      137,470       132,340       146,646       132,340 
                                
Long-term debt      218,981       237,530       219,951       237,530 
Accrued pension      55,826       53,734       56,884       53,734 
Postretirement benefits      25,090       24,599       25,364       24,599 
Deferred income taxes      12,429       13,464       11,267       13,464 
Environmental reserve      6,186       6,482       6,067       6,482 
Other liabilities and deferred revenue      18,708       15,489 
Other liabilities      20,842       15,489 
                
Total liabilities      474,690       483,638       487,021       483,638 
                                
Arrangement with noncontrolling interest      25,036       27,121       -       27,121 
                                
SHAREHOLDERS’ EQUITY                                
Shareholders' equity-Matthews:                                
Common stock
  36,334       36,334       36,334       36,334     
Additional paid in capital
  44,886       47,436     
Additional paid-in capital
  46,509       47,436     
Retained earnings
  584,469       559,786       604,557       559,786     
Accumulated other comprehensive loss
  (42,292)      (29,884)      (60,595)      (29,884)    
Treasury stock, at cost
  (182,207)      (179,454)      (193,724)      (179,454)    
Total shareholders’ equity-Matthews      441,190       434,218       433,081       434,218 
Noncontrolling interests      5,579       4,676       27,484       4,676 
                
Total shareholders’ equity      446,769       438,894       460,565       438,894 
                                
Total liabilities and shareholders' equity     $946,495      $949,653      $947,586      $949,653 



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  Six Months Ended 
 March 31,  March 31,  Three Months Ended  Nine Months Ended 
 2010  2009  2010  2009  June 30,  June 30, 
             2010  2009  2010  2009 
                        
                        
Sales $200,866  $197,362  $393,839  $388,648  $213,329  $192,047  $607,168  $580,695 
Cost of sales  (123,085)  (124,245)  (242,668)  (247,679)  (128,360)  (116,581)  (371,028)  (364,260)
                                
Gross profit  77,781   73,117   151,171   140,969   84,969   75,466   236,140   216,435 
                                
Selling and administrative expenses  (50,663)  (49,678)  (101,877)  (97,451)  (50,455)  (45,656)  (152,332)  (143,107)
                                
Operating profit  27,118   23,439   49,294   43,518   34,514   29,810   83,808   73,328 
                                
Investment income (loss)  809   (307)  2,004   (695)  (96  1,324   1,908   629 
Interest expense  (1,812)  (3,030)  (3,751)  (6,294)  (1,869)  (2,759)  (5,620)  (9,053)
Other income (deductions), net  (633)  114   (731)  3   (329)  80   (1,060)  83 
                                
Income before income taxes  25,482   20,216   46,816   36,532   32,220   28,455   79,036   64,987 
                                
Income taxes  (9,187)  (7,388)  (16,865)  (12,424)  (11,011)  (9,645)  (27,876)  (22,069)
                                
Net income  16,295   12,828   29,951   24,108   21,209   18,810   51,160   42,918 
Less: net income attributable to noncontrolling interests  (364)  (86)  (1,024  (77)  (798)  (742)  (1,822  (819)
                                
Net income attributable to Matthews’ shareholders $15,931  $12,742  $28,927  $24,031  $20,411  $18,068  $49,338  $42,099 
                                
Earnings per share attributable to Matthews' shareholders:                
Earnings per share attributable to Matthews’ shareholders:                
Basic
  $.53   $.42   $0.97   $0.79   $.68   $.60   $1.65   $1.39 
                                
Diluted
  $.53   $.42   $0.96   $0.79   $.68   $.60   $1.64   $1.38 




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






 
3

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the SixNine Months Ended March 31,June 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)
__________

 Shareholders’ Equity – Matthews        Shareholders’ Equity – Matthews       
          Accumulated                    Accumulated          
          Other                    Other          
    Additional     Comprehensive     Non-        Additional     Comprehensive     Non-    
 Common  Paid-in  Retained  Income (Loss)  Treasury  controlling     Common  Paid-in  Retained  Income (Loss)  Treasury  controlling    
 Stock  Capital  Earnings  (net of tax)  Stock  interests  Total  Stock  Capital  Earnings  (net of tax)  Stock  interests�� Total 
Balance,
September 30, 2009
 $36,334  $47,436  $559,786  $(29,884 $(179,454 $4,676  $438,894  $36,334  $47,436  $559,786  $(29,884 $(179,454 $4,676  $438,894 
Net income  -   -   28,927   -   -   1,024   29,951   -   -   49,338   -   -   1,822   51,160 
Minimum pension liability  -   -   -   1,578   -   -   1,578   -   -   -   2,367   -   -   2,367 
Translation adjustment  -   -   -   (14,410  -   113   (14,297  -   -   -   (33,653  -   (58  (33,711
Fair value of derivatives  -   -   -   424   -   -   424   -   -   -   575   -   -   575 
Total comprehensive income                          17,656                           20,391 
Stock-based compensation  -   3,293   -   -   -   -   3,293   -   4,926   -   -   -   -   4,926 
Treasury stock transactions:                            
Purchase of 272,125 shares  -   -   -   -   (9,386  -   (9,386
Issuance of 30,790 shares under stock plans  -   (5,843  -   -   6,633   -   790 
Purchase of 634,300
shares treasury stock
  -   -   -   -   (20,942  -   (20,942
Issuance of 32,090 shares
treasury stock under stock
plans
  -   (5,853  -   -   6,672   -   819 
Dividends, $.14 per share  -   -   (4,244  -   -   -   (4,244  -   -   (6,336  -   -   -   (6,336
Distributions to
noncontrolling interests
                      (234)  (234)                      (234)  (234)
Balance,
March 31, 2010
 $36,334  $44,886  $584,469  $(42,292 $(182,207 $5,579  $446,769 
Adjustment for arrangement
with noncontrolling
interest
          1,769           21,278   23,047 
Balance, June 30, 2010 $36,334  $46,509  $604,557  $(60,595 $(193,724 $27,484  $460,565 
 
 Shareholders’ Equity - Matthews        Shareholders’ Equity - Matthews       
          Accumulated                    Accumulated          
          Other                    Other          
    Additional     Comprehensive     Non-        Additional     Comprehensive     Non-    
 Common  Paid-in  Retained  Income (Loss)  Treasury  controlling     Common  Paid-in  Retained  Income (Loss)  Treasury  controlling    
 Stock  Capital  Earnings  (net of tax)  Stock  interests  Total  Stock  Capital  Earnings  (net of tax)  Stock  interests  Total 
Balance,
September 30, 2008
 $36,334  $47,250  $511,130  $(2,979 $(157,780 $4,963  $438,918  $36,334  $47,250  $511,130  $(2,979 $(157,780 $4,963  $438,918 
Net income  -   -   24,031   -   -   77   24,108   -   -   42,099   -   -   819   42,918 
Minimum pension liability  -           259   -   -   259   -           388   -   -   388 
Translation adjustment  -           (18,881  -   (265)  (19,146  -           (5,873  -   (282)  (6,155
Fair value of derivatives  -           (3,605  -   -   (3,605  -           (2,558  -   -   (2,558
Total comprehensive income                          1,616                           34,593 
Stock-based compensation  -   2,858   -   -   -   -   2,858   -   4,358   -   -   -   -   4,358 
Pension liability adjustment  -   -   (702)  -   -   -   (702  -   -   (702)  -   -   -   (702
Arrangement with noncontrolling interest  -   -   (174)  -   -   -   (174  -   -   (175)  -   -   -   (175
Treasury stock transactions:                            
Purchase of 615,266 shares  -   -   -   -   (23,133  -   (23,133
Issuance of 59,611 shares under stock plans  -   (5,621)  -   -   6,997   -   1,376 
Purchase of 756,896 shares
treasury stock
  -   -   -   -   (27,348  -   (27,348
Issuance of 59,611 shares
treasury stock under stock
plans
  -   (5,621)  -   -   6,997   -   1,376 
Dividends, $.13 per share  -   -   (4,109)  -   -   -   (4,109  -   -   (6,078)  -   -   -   (6,078
Distributions to
noncontrolling interests
                      (2,291)  (2,291)                      (2,291)  (2,291)
Balance,
March 31, 2009
 $36,334  $44,487  $530,176  $(25,206)   $(173,916 $2,484  $414,359 
Balance, June 30, 2009 $36,334  $45,987  $546,274  $(11,022)   $(178,131 $3,209  $442,651 
The accompanying notes are an integral part of these consolidated financial statements.
4

 

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


 Six Months Ended  Nine Months Ended 
 March 31,  June 30, 
 2010  2009  2010  2009 
            
            
Cash flows from operating activities:            
Net income
 $29,951  $24,108  $51,160  $42,918 
Adjustments to reconcile net income to net cash
provided by operating activities:
                
Depreciation and amortization
  12,543   15,854   20,021   23,118 
(Gain) loss on investments  (601)  1,375   (226)  354 
Loss on sale of assets  68   21   131   39 
Stock-based compensation expense
  3,293   2,858   4,926   4,358 
Change in deferred taxes
  (2,372)  (1,293)  (4,473)  (1,757)
Changes in working capital items
  10,966   1,220   7,618   (837)
Increase in other assets
  (3,513)  (513)  (2,543)  (1,426)
Increase (decrease) in other liabilities
  175   (1,265
Decrease in other liabilities
  (871  (833)
Increase in pension and postretirement benefits
  5,170   2,353   7,795   3,561 
                
Net cash provided by operating activities
  55,680   44,718   83,538   69,495 
                
Cash flows from investing activities:                
Capital expenditures
  (8,410)  (6,605)  (11,050)  (11,556)
Proceeds from sale of assets
  100   160   172   311 
Acquisitions, net of cash acquired
  (14,606)  (865)  (28,249)  (4,843)
Proceeds from sale of investments
  638   -   756   - 
Purchases of investments
  (1,612)  (2,611)  (1,616)  (2,615)
                
Net cash used in investing activities  (23,890)  (9,921)  (39,987)  (18,703)
                
Cash flows from financing activities:                
Proceeds from long-term debt
  25,484   35,336   38,465   45,156 
Payments on long-term debt
  (38,812)  (35,926)  (46,790)  (56,309)
Proceeds from the sale of treasury stock
  726   1,143   749   1,143 
Purchases of treasury stock
  (9,386)  (23,133)  (20,942)  (27,348)
Tax benefit of exercised stock options
  64   98   70   98 
Dividends
  (4,244)  (4,109)  (6,336)  (6,078)
Distributions to minority interests
  (234)  (2,291)
Distributions to noncontrolling interests
  (234)  (2,291)
                
Net cash used in financing activities  (26,402)  (28,882)  (35,018)  (45,629)
                
Effect of exchange rate changes on cash  (2,186)  (7,002  (10,291)  (3,937
                
Net increase (decrease) in cash and cash equivalents $3,202  $(1,087
Net (decrease) increase in cash and cash equivalents $(1,758) $1,226 
                
Non-cash investing and financing activities:                
Acquisition of equipment under capital lease $-  $2,068  $-  $5,130 


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

 
5

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,June 30, 2010
(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 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 products and merchandising solutions. The Company's products and operations are comprised of six business segments:  Bronze, Casket, Cremation, Graphics Imaging, Marking Products and Merchandising Solutions.  The Bronze segment is a leading manufacturer of cast bronze memorials and other memorialization products, cas t and etched architectural products, granite memorials and is a leading builder of mausoleums in the United States.  The Casket segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood and metal caskets.  The Cremation segment is a leading designer and manufacturer of cremation equipment (primarily in North America and Europe) and cremation caskets primarily(primarily in North America.America). 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 Products segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, and industrial automation products for identifying, tracking and conveying various consumer and industrial products, components and packaging containers.  The Merchandising Solutions segment designs and manufactures merchandisingm erchandising displays and systems and prov idesprovides 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 (“GAAP”) 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. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the sixnine months ended March 31,June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010. For further information, refer to the consolidated financial statementsstateme nts and footnote sfootnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2009.  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.

 
 


 
6

 

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


Note 3.   Fair Value Measurements

The Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) on fairFair value measurements as of October 1, 2008 for financial assets and liabilities. This new guidance defines fair valueis 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. It establishes aThe three level fair value hierarchy to prioritizeprioritizes 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.

As of March 31,June 30, 2010, the fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:

 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Assets:                        
Short term investments $1,392   -   -  $1,392  $1,396   -   -  $1,396 
Trading securities  11,655   -   -   11,655   11,280   -   -   11,280 
Total assets at fair value $13,047   -   -  $13,047  $12,676   -   -  $12,676 
                                
Liabilities:                                
Derivatives (1)
  -  $5,014   -  $5,014   -  $4,765   -  $4,765 
Total liabilities at fair value  -  $5,014   -  $5,014   -  $4,765   -  $4,765 
                                
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
 
(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.
 


Note 4.   Inventories

Inventories consisted of the following:

 March 31, 2010  September 30, 2009  June 30, 2010  September 30, 2009 
            
Materials and finished goods $80,773  $80,692  $85,992  $80,692 
Labor and overhead in process  14,566   13,763   13,470   13,763 
 $95,339  $94,455  $99,462  $94,455 


 
7

 

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


Note 5.   Debt

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  The maximum amount of borrowings available under the facility is $225,000 and the facility’s maturity is September 2012. Borrowings under the facility bear interest at LIBOR plus a factor ranging from .40% to .80% based on the Company’s leverage ratio.  The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization).  The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company’s leverage ratio) of the unused portion of the facility.   The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios.  A portion of the facility (not to exceed $20,000) is available for the issuance of trade and standby letters of credit.  Outstanding borrowings on the Revolving Credit Facility as of March 31,June 30, 2010 and September 30, 2009 were $173,000$183,000 and $177,500, respectively.  The weighted-average interest rate on outstanding borrowings at March 31,June 30, 2010 and 2009 was 3.01%2.94% and 3.92%3.95%, respectively.

The Company has entered into the following interest rate swaps:

Date Initial Amount  Fixed Interest Rate  Interest Rate Spread at March 31, 2010 
 
Maturity Date
 Initial Amount  Fixed Interest Rate  Interest Rate Spread at June 30, 2010 
 
Maturity Date
September 2007 $25,000   4.77%   .60% September 2012 $25,000   4.77%  .60%September 2012
May 2008  40,000   3.72%   .60% September 2012  40,000   3.72%  .60%September 2012
October 2008  20,000   3.21%   .60% October 2010  20,000   3.21%  .60%October 2010
October 2008  20,000   3.46%   .60% October 2011  20,000   3.46%  .60%October 2011

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

The fair value of the interest rate swaps reflected an unrealized loss of $5,014$4,765 ($3,0582,907 after tax) at March 31,June 30, 2010 that is included in shareholders’ equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at March 31,June 30, 2010, approximately $1,522$1,566 of the $3,058$2,907 loss included in accumulated other comprehensive income is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

On January 1, 2009, the Company adopted guidance issued by the FASB regarding disclosures about derivative instruments and hedging activities.  This guidance amends and expands the disclosure requirements of previous guidance to require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative agreements.

At March 31,June 30, 2010 and September 30, 2009, the interest rate swap contracts were reflected as a liability on the balance sheets.  The following derivatives are designated as hedging instruments:


Liability Derivatives      
Balance Sheet Location: March 31, 2010  September 30, 2009  June 30, 2010  September 30, 2009 
Current liabilities:            
Other current liabilities $2,495  $2,441  $2,567  $2,441 
Long-term liabilities:                
Other accrued liabilities and deferred revenue  2,519   3,267 
Other liabilities  2,198   3,267 
Total derivatives $5,014  $5,708  $4,765  $5,708 
                

 
8

 

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


Note 5.  Debt (continued)

The loss recognized on derivatives was as follows:

Location of      Location of      
Derivatives inGain or (Loss) Amount of  Amount of Gain or (Loss) Amount of  Amount of 
Cash FlowRecognized in Loss  Loss Recognized in Loss  Loss 
HedgingIncome on Recognized in Income  Recognized in Income Income on Recognized in Income  Recognized in Income 
RelationshipsDerivative on Derivatives  on Derivatives Derivative on Derivatives  on Derivatives 
 Three Months ended March 31,  Six Months ended March 31,  Three Months ended June 30,  Nine Months ended June 30, 
 2010  2009  2010  2009  2010  2009  2010  2009 
                        
Interest rate swapsInterest expense $(946) $(1,079) $(1,893) $(1,445)Interest expense $(926) $(1,110) $(2,819) $(2,555)
                                  

The Company recognized the following losses in accumulated other comprehensive loss (“OCL”):
            
   Location of      Location of   
   Loss      Loss   
   Reclassified Amount of Loss    Reclassified Amount of Loss 
   from Reclassified from    from Reclassified from 
 Amount of Loss Accumulated Accumulated OCL into  Amount of Loss Accumulated Accumulated OCL into 
Derivatives in Recognized in OCL into Income  Recognized in OCL into Income 
Cash Flow OCL on Derivatives Income (Effective Portion*)  OCL on Derivatives Income (Effective Portion*) 
Hedging Relationships March 31, 2010  September 30, 2009 
(Effective
Portion*)
 March 31, 2010  September 30, 2009  June 30, 2010  September 30, 2009 
(Effective
Portion*)
 June 30, 2010  September 30, 2009 
                        
Interest rate swaps $(3,058) $(3,482)Interest expense $(1,155) $(2,134) $(2,907) $(3,482)Interest expense $(1,720) $(2,134)
                                  
*There is no ineffective portion or amount excluded from effectiveness testing.
*There is no ineffective portion or amount excluded from effectiveness testing.
 
*There is no ineffective portion or amount excluded from effectiveness testing.
 


The Company, through certain of its German subsidiaries, has a credit facility with a European bank.  The maximum amount of borrowings available under this facility was 25.0 million Euros ($33,773)30,573).  Outstanding borrowings under the credit facility totaled 15.012.5 million Euros ($20,264)15,286) and 18.0 million Euros ($26,341) at March 31,June 30, 2010 and September 30, 2009, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at March 31,June 30, 2010 and 2009 was 1.58% and 2.93%2.74%, 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 9.28.7 million Euros ($12,425)10,674) and 10.0 million Euros ($14,717) at March 31,June 30, 2010 and September 30, 2009, respectively.  The weighted-average interest rate on outstanding borrowings of Saueressig at March 31,June 30, 2010 and 2009 was 5.99%6.05% and 5.82%5.84%, 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 10.810.0 million Euros ($14,549)12,251) and 12.2 million Euros ($17,962) at March 31,June 30, 2010 and September 30, 2009, respectively.  Matthews International S.p.A. also has three lines of credit totaling 8.4 million Euros ($11,307)10,236) with the same Italian banks.  Outstanding borrowings on these lines were 2.93.2 million Euros ($3,912)3,879) and 2.0 million Euros ($2,855) at March 31,June 30, 2010 and September 30, 2009, respectively.

 
9

 

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


Note 5.  Debt (continued)

The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at March 31,June 30, 2010 and 2009 was 3.66%3.61% and 3.82%3.80%, respectively.

As of March 31,June 30, 2010 and September 30, 2009, the fair value of the Company’s long-term debt, including current maturities, was as follows:

  Carrying Value included    
  in the Balance Sheet  Fair Value 
  March 31, 2010  September 30, 2009  March 31, 2010  September 30, 2009 
             
Long-term debt, including current maturities $232,902  $251,718  $213,719  $230,482 
  Carrying Value included    
  in the Balance Sheet  Fair Value 
  June 30, 2010  September 30, 2009  June 30, 2010  September 30, 2009 
             
Long-term debt,  including current maturities $232,331  $251,718  $217,944  $230,482 


Note 6.   Share-Based Payments

The Company maintains a stock incentive plan (the “1992 Incentive Stock Plan”) that provided for grants of stock options, restricted shares and certain other types of stock-based awards.  In February 2008, the Company’s shareholders approved the adoption of a new plan, the 2007 Equity Incentive Plan (the “2007 Plan”), that provides for the grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards. Under the 2007 Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,200,000. There will be no further grants under the 1992 Incentive Stock Plan.  At March 31,June 30, 2010, there were 1,534,764 shares reserved for future issuance under the 2007 Plan. Both plans are administe redadminister ed by the Compensation Committee of the Board of Directors.

The option price for each stock option granted under either plan 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 10%, 33% and 60% 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, generally one-half of the shares vest on the third anniversary of the grant.  The remaining one-half of the shares vest in one-third increments upon attainment of 10%, 25% and 40% appreciation in the market value of the Company’s Class A Common Stock. Additionally, beginning in fiscal 2009, restricted shares cannot vest until the first anniversary of the grant date.  Unvested restricted shares generally expire on the earlier of five years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death.  The Company issues restricted shares from treasury shares.

For the three-month periods ended March 31,June 30, 2010 and 2009, total stock-based compensation cost totaled $1,684$1,633 and $1,522,$1,500, respectively.  For the six-monthnine-month periods ended March 31,June 30, 2010 and 2009, total stock-based compensation cost totaled $3,293$4,926 and $2,858,$4,358, respectively.  The associated future income tax benefit recognized was $656$636 and $593$585 for the three-month periods ended March 31,June 30, 2010 and 2009, respectively, and $1,284$1,921 and $1,115$1,700 for the six-monthnine-month periods ended March 31,June 30, 2010 and 2009, respectively.

 
10

 

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


Note 6.   Share-Based Payments (continued)

For the three-month period ended June 30, 2010, the amount of cash received from the exercise of stock options was $23. There was no cash received from the exercise of stock options for the three months ended June 30, 2009.  For the nine-month periods ended March 31,June 30, 2010 and 2009, the amount of cash received from the exercise of stock options was $54 and $888, respectively. For the six-month periods ended March 31, 2010 and 2009, the amount of cash received from the exercise of stock options was $726$749 and $1,143, respectively. In connection with these exercises, the
tax benefits realized by the Company were $15 and $153$8 for the three-month periodsperiod ended March 31,June 30, 2010, and 2009, respectively, and $151$159 and $242 for the six-monthnine-month periods ended March 31,June 30, 2010 and 2009, respectively.

Changes to restricted stock for the sixnine months ended March 31,June 30, 2010 were as follows:

    Weighted-     Weighted- 
    average     average 
    grant-date     grant-date 
 Shares  fair value  Shares  fair value 
Non-vested at September 30, 2009  271,656   $37.61   271,656   $37.61 
Granted  178,009    33.65   178,009    33.65 
Vested  -   -   -   - 
Expired or forfeited  (1,110  34.28   (1,110  34.28 
Non-vested at March 31, 2010  448,555    36.05 
Non-vested at June 30, 2010  448,555    36.05 

As of March 31,June 30, 2010, the total unrecognized compensation cost related to unvested restricted stock was $6,835$5,516 and is expected to be recognized over a weighted average period of 1.71.6 years.

The transactions for shares under options for the sixnine months ended March 31,June 30, 2010 were as follows:

       Weighted-           Weighted-    
    Weighted-  average  Aggregate     Weighted-  average  Aggregate 
    average  remaining  intrinsic     average  remaining  intrinsic 
 Shares  exercise price  contractual term  value  Shares  exercise price  contractual term  value 
Outstanding, September 30, 2009  1,224,909  $35.94         1,224,909  $35.94       
Granted  -   -         -   -       
Exercised  (31,600)  22.99         (32,900)  22.76       
Expired or forfeited  (197,417)  37.90         (205,484)  37.79       
Outstanding, March 31, 2010  995,892   35.96   5.3  $- 
Exercisable, March 31, 2010  692,024   34.45   4.8  $727 
Outstanding, June 30, 2010  986,525   35.99   5.0  $- 
Exercisable, June 30, 2010  683,524   34.48   4.6  $- 

The fair value of shares earned during the three-month period ended June 30, 2009 was $77. There were no shares earned during the three-month period ended June 30, 2010.  During the nine-month periods ended March 31,June 30, 2010 and 2009, the fair value of shares earned was $86 and $73, respectively, and $3,120 and $2,799 during the six-month periods ended March 31, 2010 and 2009,$2,722, respectively. The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the six-monthnine-month periods ended March 31,June 30, 2010 and 2009 was $457$479 and $657, respectively.

 
11

 

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


Note 6.   Share-Based Payments (continued)

The transactions for non-vested options for the sixnine months ended March 31,June 30, 2010 were as follows:

    Weighted-average     Weighted-average 
    grant-date     grant-date 
Non-vested shares Shares  fair value  Shares  fair value 
Non-vested at September 30, 2009  673,035  $12.17   673,035  $12.17 
Granted  -   -   -   - 
Vested  (283,018)  11.03   (283,018)  11.03 
Expired or forfeited  (86,149)  9.79   (87,016)  9.79 
Non-vested at March 31, 2010  303,868   13.92 
Non-vested at June 30, 2010  303,001   13.92 

As of March 31,June 30, 2010, the total unrecognized compensation cost related to non-vested stock options was approximately $714.$522. This cost is expected to be recognized over a weighted-average period of 1.41.2 years in accordance with the vesting periods of the options.

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 quartersperiods ended March 31,June 30, 2010 and 2009.

 Six Months Ended March 31,  Nine Months Ended June 30, 
 2010  2009  2010  2009 
Expected volatility  30.0%  27.0%  30.0%  27.0%
Dividend yield  .8%  .6%  .8%  .6%
Average risk free interest rate  2.3%  2.4%  2.3%  2.4%
Average expected term (years)  2.2   2.3   2.2   2.3 


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 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 equivalent to $60.  An additional annual retainer fee of $70 is paid to a non-employee Chairman of the Board. 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 25,013 shares had been deferred under the Director Fee Plan at March 31,June 30, 2010.  Additionally, directors who are not also officers of the Company ea cheac h receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $70. A total of 22,300 stock options have been granted under the plan.  At March 31,June 30, 2010, 17,800 options were outstanding and vested. Additionally, 51,525 shares of restricted stock have been granted under the plan, 27,695 of which were unvested at March 31,June 30, 2010.  A total of 300,000 shares have been authorized to be issued under the Director Fee Plan.


 
12

 

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


Note 7.   Earnings Per Share Attributable to Matthews’ Shareholders

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 March 31,  March 31,  June 30,  June 30, 
 2010  2009  2010  2009  2010  2009  2010  2009 
                        
Net income attributable to
Matthews’ shareholders
 $15,931  $12,742  $28,927  $24,031  $20,411  $18,068  $49,338  $42,099 
                                
Weighted-average common shares outstanding  29,841,709   30,314,212   29,910,728   30,403,150   29,640,501   30,117,360   29,816,009   30,311,529 
Dilutive securities, stock options and restricted shares  182,664   122,928   220,402   181,041   196,960   104,750   231,048   192,229 
Diluted weighted-average
common shares outstanding
  30,024,373   30,437,140   30,131,130   30,584,191   29,837,461   30,222,110   30,047,057   30,503,758 
                                
Basic earnings per share  $.53   $.42   $.97   $.79   $.68   $.60   $1.65   $1.39 
Diluted earnings per share  $.53   $.42   $.96   $.79   $.68   $.60   $1.64��  $1.38 


Options to purchase 621,050616,783 and 812,071805,671 shares of common stock were not included in the computation of diluted earnings per share for the three months and sixnine months ended March 31,June 30, 2010, respectively, because the inclusion of these options would be anti-dilutive.  Options to purchase 1,016,836 of shares of common stock1,009,421 and 7,399 restricted stock shares were not included in the computation of diluted earnings per share for the three-month period ended March 31, 2009 because the inclusion of these options and restricted stock would be anti-dilutive. Options to purchase 771,316764,650 shares of common stock were not included in the computation of diluted earnings per share for the six-month periodthree months and nine months ended March 31,June 30, 2009, respectively, because the inclusion of these options would be anti-dilutive.


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

 
 Pension  Other Postretirement  Pension  Other Postretirement 
Three months ended March 31, 2010  2009  2010  2009 
Three months ended June 30, 2010  2009  2010  2009 
                        
Service cost $1,078  $856  $173  $143  $1,078  $856  $173  $143 
Interest cost  1,853   1,868   346   386   1,853   1,868   346   386 
Expected return on plan assets  (1,717)  (1,900)  -   -   (1,717)  (1,900)  -   - 
Amortization:                                
Prior service cost  (10)  (9)  (181)  (322)  (10)  (9)  (181)  (322)
Net actuarial loss  1,338   456   130   71   1,338   456   130   71 
                                
Net benefit cost $2,542  $1,271  $468  $278  $2,542  $1,271  $468  $278 


 
13

 

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


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

 Pension  Other Postretirement  Pension  Other Postretirement 
Six months ended March 31, 2010  2009  2010  2009 
Nine months ended June 30, 2010  2009  2010  2009 
                        
Service cost $2,156  $1,712  $346  $286  $3,234  $2,568  $519  $429 
Interest cost  3,706   3,736   692   772   5,559    5,604    1,038    1,158  
Expected return on plan assets  (3,434)  (3,800)  -   -   (5,151)  (5,700)  -   - 
Amortization:                                
Prior service cost  (20  (18  (362)  (644)  (30)  (27)  (543)  (966)
Net actuarial loss  2,676   912   260   142   4,014    1,368    390    213  
                                
Net benefit cost $5,084  $2,542  $936  $556  $7,626  $3,813  $1,404  $834 

Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and 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 2010.  During the sixnine months ended March 31,June 30, 2010, contributions of $387$579 and $434$672 were made under the supplemental retirement plan and postretirement plan, respectively.  The Company currently anticipates contributing an additional $386$193 and $617$379 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2010.

On October 1, 2008, the Company adopted the FASB guidance on accounting for defined benefit pension and other postretirement benefit plans. The measurement date for the Company’s pension and postretirement plans was changed from July 31 to September 30.  Accordingly, an additional pension liability of $577 and postretirement liability of $125, net of tax, was recorded as of December 31, 2008 to recognize the additional expense through September 30, 2008, with a corresponding adjustment to retained earnings.


Note 9.   Income Taxes

Income tax provisions for the Company’s interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's effective tax rate for the sixnine months ended March 31,June 30, 2010 was 36.0%35.3%, compared to 34.0% for the first sixnine months of fiscal 2009. The sixtax rate for the first nine months of fiscal 2009 included a one-time reduction2010 reflected the favorable impact of adjustments totaling $656 in income tax expense related to changes in the estimated tax accruals for the closure of $923open tax periods. The nine-month period ended June 30, 2009 included the favorable impact of adjustments totaling $1.2 million in income tax expense related to reflect the Company’s ability to utilize a European tax loss carryover.carryover in Europe and changes in the estimated tax accrual for open tax periods.   The difference between the Company'sCompany 's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state and foreign income taxes.

The Company had unrecognized tax benefits (excluding penalties and interest) of $3,418$3,335 and $3,575 at March 31,June 30, 2010 and September 30, 2009, respectively, all of which, if recorded, would impact the fiscal 2010 annual effective tax rate.  It is reasonably possible that the amount of unrecognized tax benefits could change by approximately $342$438 in the next 12 months primarily due to tax examinations and the expiration of statutes related to specific tax positions.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The Company included $126a credit of $475 in interest and penalties in the provision for income taxes for the first sixnine months of fiscal 2010. Total penalties and interest accrued were $2,964$2,363 and $2,838 at March 31,June 30, 2010 and September 30, 2009, respectively.  These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.


 
14

 

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


The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions.  As of March 31,June 30, 2010, the tax years that remain subject to examination by major jurisdiction generally are:

United States – Federal2007 and forward
United States – State2006 and forward
Canada2004 and forward
Europe2002 and forward
United Kingdom2008 and forward
Australia2005 and forward
Asia2004 and forward


Note 10.   Segment Information

The Company's products and operations consist of two principal businesses that are comprised of three operating segments each, as described under Nature of Operations (Note 1):  Memorialization Products (Bronze, Casket, Cremation) and Brand Solutions (Graphics Imaging, Marking Products, 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 net income attributable to noncontrolling interests.

Information about the Company's segments follows:


 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 March 31,  March 31,  
             June 30,
  June 30, 
 2010  2009  2010  2009  2010  2009  2010  2009 
Sales to external customers:                        
Memorialization:                        
Bronze
 $53,719  $52,711  $102,978  $102,445  $62,001  $56,678  $164,979  $159,123 
Casket
  55,249   54,972   105,913   107,571   52,358   48,159   158,270   155,730 
Cremation
  8,991   8,011   17,491   14,294   10,906   7,698   28,397   21,992 
  117,959   115,694   226,382   224,310   125,265   112,535   351,646   336,845 
Brand Solutions:                                
Graphics Imaging
  60,335   55,627   120,141   112,821   57,993   57,768   178,134   170,589 
Marking Products
  11,867   9,517   23,433   21,102   13,223   9,870   36,656   30,972 
Merchandising Solutions
  10,705   16,524   23,883   30,415   16,848   11,874   40,732   42,289 
  82,907   81,668   167,457   164,338   88,064   79,512   255,522   243,850 
                                
 $200,866  $197,362  $393,839  $388,648  $213,329  $192,047  $607,168  $580,695 



 
15

 

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


Note 10.   Segment Information (continued)

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 March 31,  March 31,  
June 30,
  June 30, 
 2010  2009  2010  2009  2010  2009  2010  2009 
Operating profit:                        
Memorialization:                        
Bronze
 $12,200  $12,275  $22,560  $21,535  $18,464  $18,531  $41,024  $40,066 
Casket
  8,740   5,414   14,548   11,815   5,472   3,848   20,020   15,663 
Cremation
  953   1,297   2,083   2,110   1,265   1,464   3,348   3,574 
  21,893   18,986   39,191   35,460   25,201   23,843   64,392   59,303 
Brand Solutions:                                
Graphics Imaging
  4,577   3,102   8,566   5,737   5,533   5,336   14,099   11,073 
Marking Products
  1,279   374   1,879   1,045   2,118   445   3,997   1,490 
Merchandising Solutions
  (631)  977   (342)  1,276   1,662   186   1,320   1,462 
  5,225   4,453   10,103   8,058   9,313   5,967   19,416   14,025 
                                
 $27,118  $23,439  $49,294  $43,518  $34,514  $29,810  $83,808  $73,328 


Note 11.   Acquisitions

Acquisition spending, net of cash acquired, during the sixnine months ended March 31,June 30, 2010 totaled $14,606,$28,249, and primarily included the following:

In April 2010, the Company acquired Reynoldsville Casket Company (“Reynoldsville”), a manufacturer and distributor of caskets primarily in the Northeast region of the United States.  The acquisition was structured as an asset purchase and was intended to expand the Company’s casket distribution capabilities in the Northeastern United States. The purchase price for the acquisition was $13,600, plus additional consideration up to $3,500 contingent on operating performance over the next three years.  Reynoldsville reported sales of approximately $13,000 in calendar 2009.

In March 2010, the Company acquired an 80% interest in Furnace Construction Cremators Limited (“FCC”), a manufacturer of cremation equipment located in the United Kingdom.  The acquisition was structured as an asset purchase and was designed to expand the Company’s global presence in the European cremation markets.

In February 2010, the Company acquired A.J. Distribution, Inc. (“A.J. Distribution”), a distributor of primarily York brand caskets in the Northwest region of the United States.  The transaction was structured as an asset purchase and was intended to expand the Company’s casket distribution capabilities in the Northwestern United States.

In December 2009, the Company acquired United Memorial Products, Inc. (“UMP”), primarily a supplier of granite memorial products burial vaults and caskets in the westernWest region of the United States. UMP reported sales of approximately $11,000 in calendar 2009.  The transaction was structured as an asset purchase and was designed to extend Matthews’ presence in the broad granite market. The purchase price for the acquisition iswas $10,000, plus additional consideration of up to $3,500 payable over five years.

In May 2008, the Company acquired a 78% interest in Saueressig, a manufacturer of gravure printing cylinders.  The transaction was structured as a stock purchase with a purchase price of approximately 58.1 million Euros ($90,783). In addition, the Company entered into an option agreement related to the remaining 22% interest in Saueressig.  The option agreement contains certain put and call provisions for the purchase of the remaining 22% interest in future years at a price to be determined by a specified formula based on future operating results of Saueressig.  The initial carrying value of minority interest was adjusted to the estimated future purchase price (“Redemption Value”) of the minority interest, with a corresponding charge to retained earnings. For subsequent periods, the carrying value of minority interest reflected on the Company’s balance sheet will be adjusted for changes in Redemption Value, with a corresponding

 
16

 

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


Note 11.   Acquisitions (continued)

adjustmentIn connection with its May 2008 acquisition of a 78% interest in Saueressig, the Company entered into an option agreement related to retained earnings.  To the extent Redemption Valueremaining 22% interest in Saueressig.  The option agreement contained certain put and call provisions for the purchase of the remaining 22% interest in future periods is less than or greater thanyears at a price to be determined by a specified formula based on future operating results of Saueressig.  During the estimated fair valuethird fiscal quarter of 2010, the Company reached an agreement to purchase the remaining 22% interest in Saueressig for 17.4 million Euros in October 2011. The Company has included the purchase price of 17.4 million Euros ($21,300) as a part of noncontrolling interests in the shareholders’ equity section of the minority interest, income available to common shareholders in the determinationCondensed Consolidated Balance Sheet as of earnings per share will increase or decrease, respectively, by such amount.  However, income available to common shareholders will only increase to the extent that a decrease was previously recognized.  In any case, net income will not be affected by such amounts. At March 31, 2010, Redemption Value was equal to fair value, and there was no impact on income available to common shareholders.June 30, 2010.


Note 12.   Goodwill and Other Intangible Assets

Goodwill related to business combinations is not amortized but is subject to annual review for impairment. In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized. For purposes of testing for impairment, the Company uses a discounted cash flow technique. Intangible assets are amortized over their estimated useful lives unless such lives are considered to be indefinite. A significant decline in cash flows generated from these assets may result in a write-down of the carrying values of the related assets.  The Company performed its annual impairment review in the second fiscal quarter of 2010 and determined that no additional adjustments to the carrying values of goodwill or indefinite-lived intangible assets were necessary.

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

          Graphics  Marking  Merchandising              Graphics  Marking  Merchandising    
 Bronze  Casket  Cremation  Imaging  Products  Solutions  Consolidated  Bronze  Casket  Cremation  Imaging  Products  Solutions  Consolidated 
                                          
Goodwill $79,707  $122,896  $13,887  $158,863  $9,980  $9,138  $394,471  $79,707  $122,896  $13,887  $158,863  $9,980  $9,138  $394,471 
Accumulated impairment losses  (412)  -   (5,000)  (3,840)  -   -   (9,252)  (412)  -   (5,000)  (3,840)  -   -   (9,252)
Balance at
September 30, 2009
  79,295   122,896   8,887   155,023   9,980   9,138   385,219   79,295   122,896   8,887   155,023   9,980   9,138   385,219 
                                                        
Additions during period  7,399   3,525   2,968   (1,464)  36   -   12,464   7,399   12,275   2,968   (1,449)  36   -   21,229 
Translation and other adjustments  (1,991)      (181)  (9,929)  (32)  -   (12,133)  (4,583)      (431)  (20,548)  (38)  -   (25,600)
Goodwill  85,115   126,421   16,674   147,470   9,984   9,138   394,802   82,523   135,171   16,424   136,866   9,978   9,138   390,100 
Accumulated impairment losses  (412)  -   (5,000)  (3,840)  -   -   (9,252)  (412)  -   (5,000)  (3,840)  -   -   (9,252)
Balance at
March 31, 2010
 $84,703  $126,421  $11,674  $143,630  $9,984  $9,138  $385,550 
Balance at June 30, 2010 $82,111  $135,171  $11,424  $133,026  $9,978  $9,138  $380,848 

The addition to Bronze goodwill represents the acquisition of UMP; the addition to Casket goodwill primarily represents the acquisition of A.J. Distribution;Distribution and Reynoldsville; the addition to Cremation goodwill represents the acquisition of FCC; and the change in Graphics goodwill represents the effect of an adjustment to the purchase price for the Saueressig acquisition.



 
17

 

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


Note 12.   Goodwill and Other Intangible Assets (continued)

The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of March 31,June 30, 2010 and September 30, 2009, respectively.


 Carrying  Accumulated     Carrying  Accumulated    
 Amount  Amortization  Net  Amount  Amortization  Net 
March 31, 2010:         
June 30, 2010:         
Trade names $24,308  $-* $24,308  $24,017  $-* $24,017 
Trade names  1,475   (593)  882   1,535   (621)  914 
Customer relationships  35,513   (9,306)  26,207   38,069   (9,743)  28,326 
Copyrights/patents/other  8,113   (5,761)  2,352   8,526   (5,872)  2,654 
 $69,409  $(15,660) $53,749  $72,147  $(16,236) $55,911 
                        
September 30, 2009:                        
Trade names $24,418  $-* $24,418  $24,418  $-* $24,418 
Trade names  1,598   (458)  1,140   1,598   (458)  1,140 
Customer relationships  35,568   (8,232)  27,336   35,568   (8,232)  27,336 
Copyrights/patents/other  7,777   (5,670)  2,107   7,777   (5,670)  2,107 
 $69,361  $(14,360) $55,001  $69,361  $(14,360) $55,001 
* Not subject to amortization
                        

The net change in intangible assets during fiscal 2010 included an increase for the acquisition of UMP, A.J. Distribution, and Reynoldsville offset by the impact of changes in foreign currency exchange rates and additional amortization.

Amortization expense on intangible assets was $937$954 and $1,048$1,067 for the three-month periods ended March 31,June 30, 2010 and 2009, respectively.  For the six-monthnine-month periods ended March 31,June 30, 2010 and 2009, amortization expense was $1,787$2,741 and    $2,111,$3,178, respectively.  Amortization expense is estimated to be $1,741 in$926 for the remainder of 2010, $3,131$3,429 in 2011, $2,673$2,977 in 2012, $2,338$2,644 in 2013 and $2,158$2,464 in 2014.


Note 13.   Accounting Pronouncements

 
On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of generally accepted accounting principles (“GAAP”).GAAP.  These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the U.S. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption had no material impact on the Company’s consolidated results of operations or financial cond ition.condition.

The Company adopted changes issued by the FASB regarding accounting for income tax benefits of dividends on share-based payment awards on October 1, 2008.  The changes require that tax benefits generated by dividends on equity classified non-vested equity shares, non-vested equity share units, and outstanding equity share options be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards.  The adoption had no material impact on the Company’s consolidated results of operations or financial condition.

18


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


Note 13.   Accounting Pronouncements (continued)

In December 2007, the FASB issued new guidance regarding business combinations.  This guidance requires recognition and measurement of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in a business combination, goodwill acquired or a gain from a bargain purchase.  It is effective for fiscal years beginning on or after December 15, 2008.  The Company adopted the new guidance effective October 1, 2009. See Note 12.


18


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


Note 13.   Accounting Pronouncements (continued)


In December 2007, the FASB issued new guidance regarding noncontrolling interests in consolidated financial statements.  This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary. It requires that consolidated net income reflect the amounts attributable to both the parent and the noncontrolling interest, and also includes additional disclosure requirements. It was effective for fiscal years beginning on or after December 15, 2008.and2008 and is to be applied prospectively as of the beginning of the fiscal year in which the guidance is initially applied, except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented.  The Company adopted the new guidance effective October 1, 2009, as reflected in the Condensed Consoli dated Balance Sheets, the Consolidated Statements of Income and the Consolidated Statements of Changes in Shareholders’ Equity.

In December 2008, the FASB issued changes to employers’ disclosures about postretirement benefit plan assets. These changes require enhanced disclosures regarding assets in defined benefit pension or other postretirement plans.  It is effective for fiscal years ending after December 31, 2009.  Earlier application is permitted. The Company is currently evaluating the impact of adopting these changes, which is effective for the Company’s Annual Report on Form 10-K for fiscal 2010.

In April 2009, the FASB issued changes to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also requires those disclosures in summarized financial information at interim reporting periods. These changes are effective for interim reporting periods ending after June 15, 2009 and were adopted by the Company as of June 30, 2009.  See Notes 3 and 5.
 
 
Effective September 30, 2007, the Company adopted the recognition and related disclosure provisions of guidance on employers’ accounting for defined benefit pension and other postretirement plans which amended earlier guidance.  In the first quarter of fiscal 2009, the Company adopted the provision requiring the Company to measure the plan assets and benefit obligations of defined benefit postretirement plans as of the date of its year-end balance sheet.  Adoption of this provision did not have a material effect on the Company’s consolidated results of operations or financial condition. See Note 8.

In May 2009, the FASB issued new guidance regarding subsequent events, which was subsequently revised in February 2010.  The guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The adoption of this guidance had no material impact on the Company’s consolidated results of operations or financial condition.  See Note 14.

In June 2008, the FASB issued guidance regarding instruments granted in share-based payments.  The guidance requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and therefore included in the computation of earnings per share pursuant to the two-class method.  This guidance is effective for years beginning after December 31, 2008.  The Company adopted the provisions of this guidance effective October 1, 2009, which did not have a material effect on the Company’s financial statements.


19


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


Note 14.   Subsequent Events:

On April 9, 2010, the Company acquired Reynoldsville Casket Company, a manufacturer and distributor of caskets primarily in the Northeast region of the United States.   The purchase price for the acquisition was $13,600, plus additional consideration up to $3,500 contingent on operating performance over the next three years.  Reynoldsville reported sales of approximately $13,000 in calendar 2009.

Management has evaluated subsequent events and has concluded that all events that would require recognition or disclosure are appropriately reflected in the consolidated financial statements.






 
2019

 

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, 2009.  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 re asonable, 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, 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 certain income statement data of the Company expressed as a percentage of net sales for the periods indicated.

 Six months ended  Years ended  Nine months ended  Years ended 
 
March 31,
  
September 30,
  
June 30,
  
September 30,
 
 2010  2009  2009  2008  2010  2009  2009  2008 
Sales  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Gross profit  38.4%  36.3%  37.7%  39.5%  38.9%  37.3%  37.7%  39.5%
Operating profit  12.5%  11.2%  12.9%  16.2%  13.8%  12.6%  12.9%  16.2%
Income before taxes  11.9%  9.4%  11.3%  14.9%
Net income  7.6%  6.2%  7.6%  10.0%
Net income attributable to Matthews’ shareholders  7.3%  6.2%  7.4%  9.7%  8.1%  7.3%  7.4%  9.7%


Sales for the sixnine months ended March 31,June 30, 2010 were $393.8$607.2 million, compared to $388.6$580.7 million for the sixnine months ended March 31,June 30, 2009.  The increase principally reflected higher sales in five of the Company’s six segments.  The increase mainly reflected higher unit volume in several segments, the impact of recent acquisitions, and a favorable impact of approximately $11.3 million from changes in foreign currency values against the U.S. dollar.  These increases were partially offset by the effects of a decline in the estimated number of U.S. casketed deaths on bronze memorial and casket unit volume andvolume.  For the nine months ended June 30, 2010, changes in foreign currency values against the U.S. dollar had a favorable impact of the global recessionapproximately $8.3 million on the Company’s operations.consolidated sales compared to the nine months ende d June 30, 2009.

In the Memorialization businesses, Bronze segment sales for the first sixnine months of fiscal 2010 were $102.9$165.0 million compared to $102.4$159.1 million for the first sixnine months of fiscal 2009.  The increase primarily reflected the acquisition of United Memorial Products, Inc. (“UMP”), primarily a supplier of granite memorial manufacturerproducts and distributor locatedcaskets in California,the West region of the United States, and increases in the value of foreign currencies against the U.S. dollar, partially offset partially by a decline in thebronze memorial unit volume ofon a year-to-date basis.  For the fiscal 2010 third quarter, bronze memorial and architectural product sales.unit volume was higher than a year ago.   Sales for the Casket segment were $105.9$158.3 million for the first sixnine months of fiscal 2010 compared to $107.6$155.7 million for the same period in fiscal 2009.  The decreasei ncrease resulted principally from the acquisition of several casket businesses, partially offset by lower unit volume and an unfavorable change in product mix, partially offset by the recent acqui sition of several small casket businesses.mix. The decline in unit sales volume for both the Bronze and Casket segments reflected(excluding acquisitions) reflects a decline in the estimated number of casketed deaths compared to the same period a year ago.  Based on available published data, U.S.


 
2120

 


estimated number of U. S. casketed deaths compared to the prior year.  Based on available published data, U.S. deaths for the sixnine months ended March 31,June 30, 2010 were estimated to have declined approximately 2%. The “casketed death rate”“Casketed deaths” (non-cremation) waswere estimated to have declined over 4%, from the same period last year.  Sales for the Cremation segment were $17.5$28.4 million for the first half of fiscalnine months ended June 30, 2010, compared to $14.3$22.0 million for the same period a year ago.  The increase primarilyprincipally reflected the impact of the acquisition of a small Europeanmanufacturer of cremation equipment manufacturer in fiscal 2009the U.K. and higher sales of urnsin the U.S. and supplies.European markets.  In the Company’s Brand Solutions businesses, sales for the Graphics Imaging segment in the first sixnine months of fiscal 2010 were $120.1$178.1 million, compared to $112.8$170 .6 million for the same period a year ago.  The increase resulted principally from an increase i n the value of foreign currencies against the U.S. dollar,higher sales by Saueressig GmbH KG & Co (“Saueressig”), the impact of the acquisition of a small graphics operation headquartered in Hong Kong in the fiscal 2009 fourth quarter and higher sales by Saueressig GmbH KG & Co (“Saueressig”).an increase of the value of foreign currencies against the U.S. dollar.  These increases were partially offset by lower sales in the U.S. and U.K. markets, primarily reflecting the current economic environment.markets.  Marking Products segment sales for the sixnine months ended March 31,June 30, 2010 were $23.4$36.7 million, compared to $21.1$31.0 million for the first sixnine months of fiscal 2009.  The increase was principally due to higher unit sales of consumables, the acquisition of a small European distributor and the favorable impact of an increase in the value of foreign currencies against the U.S. dollar.  In addition, sales volume in the U.S. market improved compared to a year ago, particularly in the second fiscal quarter.  Sales for the Merchandising Solutions segment were $23.9$40.7 million for the first halfnine months of fiscal 2010, compar edcompared to $30.4$42.3 million for the same period a yearye ar ago.  The decrease principally reflected a decline inis attributable to lower project volume resulting fromin the current U.S. economic conditions.  In addition,first and second quarters of fiscal 2010, including a large project in the second fiscal quarter of fiscal 2009 included several large projects that did not repeat in fiscal 2010.  However, sales for the three months ended June 30, 2010 were higher than in the same period last year as a result of increased project volume compared to the fiscal 2009 third quarter.

Gross profit for the sixnine months ended March 31,June 30, 2010 was $151.2$236.1 million, compared to $141.0$216.4 million for the sixnine months ended March 31,June 30, 2009.  Consolidated gross profit as a percent of sales increased from 36.3%37.3% for the first halfnine months of fiscal 2009 to 38.4%38.9% for the first sixnine months of fiscal 2010.   Gross profit for the first sixnine months of fiscal 2009 included the impact of unusual charges totaling approximately $5.8$7.1 million.  The unusual charges included expenses related to the consolidation of certain Bronze segment production facilities and cost structure initiatives in several of the Company’s other segments.  The increase in fiscal 2010 consolidated gross profit and gross profit percentage compared to fiscal 2009 also reflected the current year benefits of the fiscal 2009 cost structu re changes,structure change s, particularly in the Saueressig operation and the Casket and Marking Products segment.segments.

Selling and administrative expenses for the sixnine months ended March 31,June 30, 2010 were $101.9$152.3 million, compared to $97.5$143.1 million for the first halfnine months of fiscal 2009.  Consolidated selling and administrative expenses as a percent of sales were 25.9%25.1% for the sixnine months ended March 31,June 30, 2010, compared to 25.1%24.7% for the same period last year.  The increase in selling and administrative expenses primarily resulted from higher pension expense and the impact of recent acquisitions.  Unusual charges included in selling and administrative expenses totaled $4.9$5.7 million of the first sixnine months of fiscal 2009, and consisted primarily of Saueressig integration costs, increased bad debt expense, termination relatedtermination-related expenses and costs related to operational and systems improvements.  These unusual charges included consul tinginclud ed consulting fees incurred for assistance in the operational and financial integration of Saueressig into Matthews.  Bad debt expense, particularly in the Casket segment, was significantly higher in fiscal 2009, reflecting economic conditions.  The increase resulted from the deterioration in the aging of outstanding accounts receivable.  Employee termination-related and the other costs in connection with operational and systems improvements primarily reflected the Company’s initiatives as a result of the recession.  The principal objectives of these initiatives were to better align the cost structures of the Company’s businesses with their respective revenue run rates.

Operating profit for the sixnine months ended March 31,June 30, 2010 was $49.3$83.8 million, compared to $43.5$73.3 million for the sixnine months ended March 31,June 30, 2009. Operating profit for the first halfnine months of fiscal 2010 included an increase of $2.6approximately $3.9 million in pension cost.  Operating profit for the first sixnine months of fiscalended June 30, 2009 included unusual charges of approximately $10.7$12.8 million.  In addition, changes in the values of foreign currency ratescurrencies against the U.S. dollar had a favorable impact of approximately $1.0 million$891,000 on consolidated operating profit for the first six months of fiscal 2010,current year-to-date period, compared to the same period a year ago.

In the Memorialization businesses, Bronze segment operating profit for the first halfnine months of fiscal 2010 was $22.6$41.0 million, compared to $21.5$40.1 million for the same period in fiscal 2009.  Bronze segment operating profit for the first sixnine months of fiscal 2009 included unusual charges of $5.5$6.7 million, principally related to facilities consolidations.  Excluding these unusual charges, operating profit was lower in the first sixnine months of fiscal 2010 than the same period in fiscal 2009, primarily reflecting


21


the impact of lower sales volume and higher pension cost.   Operating profit for the Casket segment for the first sixnine months of fiscal 2010 was $14.5$20.0 million, compared to $11.8$15.7 million for the first halfnine months of fiscal 2009.  The first six

22


nine months of fiscal 2009 included unusual charges of approximately $2.4$2.6 million which were principally related to an increase in bad debt expense and severance expenses.  Excluding the impact of the unusual charges in fiscal 2009, Casket segment operating profit in the first sixnine months of fiscal 2010 was relatively unchanged fromincreased by $1.7 million.  The increase reflected the prior year, reflecting lower sales volume and unfavorable product mix, offset by the favorable impactbenefit of cost structure changes initiated in fiscal 2009.2009 and the impact of recent acquisitions.  Cremation segment operating profit approximated $2.1was $3.3 million for the first sixnine months ofended June 30, 2010, c ompared to $3.6 million for the same period in fiscal 2010 and 2009.  Fiscal 2010 first half operating profit reflected higher sales and the impact of the recent acquisition of a small Europeancremation equipment manufacturer in fiscal 2009,the U.K., offset by the impact of an unfavorable change in product mix and higher pen sionpension cost.  In the Brand Solutions businesses,  Graphics Imaging segment operating profit for the sixnine months ended March 31,June 30, 2010 was $8.6$14.1 million, compared to $5.7$11.1 million for the sixnine months ended March 31,June 30, 2009.  Operating profit in the first sixnine months of fiscal 2009 included unusual charges of approximately $1.8$2.3 million.  Excluding the effect of the unusual charges, operating profit increased approximately $1.1 million$700,000 in the first sixnine months of fiscal 2010 compared to the same period in fiscal 2009.  The increase resulted primarily from higher operating profit from Saueressig, the favorable effect of foreign currency exchange rate changes and the acquisition of a small graphics business headquartered in Hong Kong.  These increases were partially offset by a decline in operating profit for the U.S. operations.  Operating profit for the Marking Products segment for the first sixnine months of fiscal 2010 was $1.9$4.0 million, compared to $1.0$1.5 million for the same period a year ago.  Operating profit for the first sixnine months of fiscal 2009 included unusual charges of approximately $467,000.$665,000.  The increase in year-over yearyear-over-year operating profit, excluding unusual charges, primarily reflected higher sales particularly in the second quarter of fiscal 2010, and the favorable impact of fiscal 2009 cost structure initiatives.  The Merchandising Solutions segment reported an operating loss of $342,000profit was $1.3 million for the sixnine months ended March 31,June 30, 2010, compared to operating profit of $1.3$1.5 million for the same period in fiscal 2009.  The decrease primarilyprincipally reflected lower sales.  In addition, unusual charges for this segment approximated $300,000 for the first nine months of fiscal 2009.

Investment income was $2.0 million for the sixnine months ended March 31,June 30, 2010 was $1.9 million, compared to an investment loss of $695,000$629,000 for the sixnine months ended March 31,June 30, 2009.  The fiscal 2010 investment income reflectsincrease primarily reflected improved investment performance.  The investment loss in fiscal 2009 included unusual charges of approximately $1.2 million, representing unrealized losses in the value of investments held in long-term trusts for certain employee benefit plans.  Interest expense for the first halfnine months of fiscal 2010 was $3.8$5.6 million, compared to $6.3$9.1 million for the same period last year.  The decrease in interest expense primarily reflected declines in average borrowing rates during the first halfnine months of fiscal 2010, compared to the same period a year ago.

Other income (deductions), net for the sixnine months ended March 31,June 30, 2010 was a reduction of income of $731,000,$1.1 million, compared to an increase in income of $3,000$83,000 for the same period last year.  The fiscal 2010 reduction in income primarily reflected foreign currency exchange losses on intercompany loans.

The Company'sCompany’s effective tax rate for the sixfirst nine months ended March 31,of fiscal 2010 was 36.0%35.3%, compared to 34.0% for the same period last year. The effective tax rate for the six-monthfirst nine months of fiscal 2010 reflected the favorable impact of adjustments totaling $656,000 in income tax expense related to changes in the estimated tax accruals for the closure of open tax periods.  The nine-month period ended March 31,June 30, 2009 included the favorable impact of a $923,000$1.2 million reduction in income tax expense related to reflect the Company’s ability to utilize a tax loss carryover in Europe.Europe and changes in the estimated tax accruals for open tax periods.  Excluding the one-time adjustment to income taxesthese adjustments in fiscal 2010 and 2009, the Company’s effective tax rate was 36.5% for the first sixnine months of fiscal 2009.  Excluding the one-time adjustment, the Company’s effective tax rate2010 was 36.1%, compared to 35.9% for the fiscal year ended September 30, 2009 was 35.9%.2009.& #160; The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state and foreign income taxes.

Net income attributable to noncontrolling interests in the first sixnine months of fiscal 2010 was $1.0$1.8 million, compared to $77,000$819,000 for the same period in the first six months of fiscal 2009.  The increase primarily related to the improvement in operating results for Saueressig.


Goodwill:

Goodwill related to business combinations is not amortized, but is subject to annual review for impairment.  In general, when the carrying value of a reporting unit exceeds its implied fair value, an impairment loss must be recognized.  For purposes of testing for impairment, the Company uses a discounted cash flow technique.  The Company performed its annual impairment review in the second quarter of fiscal 2010 and determined that no additional adjustments to the carrying values of goodwill were necessary at March 31, 2010.


necessary.

 
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Liquidity and Capital Resources:

Net cash provided by operating activities was $55.7$83.5 million for the sixnine months ended March 31,June 30, 2010, compared to $44.7$69.5 million for the first sixnine months of fiscal 2009.  Operating cash flow for both periods primarily reflected net income adjusted for depreciation, amortization and stock-based compensation expense, partially offset by decreases in deferred taxes.  Additionally, in the first six months of fiscal 2010 a decrease in accounts receivable (reflected in working capital changes) contributed to the increase in operating cash flow.

Cash used in investing activities was $23.9$40.0 million for the sixnine months ended March 31,June 30, 2010, compared to $9.9$18.7 million for the sixnine months ended March 31,June 30, 2009.  Investing activities for the first sixnine months of fiscal 2010 primarily included capital expenditures of $8.4$11.1 million, payments (net of cash acquired) of $14.6$28.2 million for acquisitions and net purchases of investments of $974,000.$860,000.  Investing activities for the first sixnine months of fiscal 2009 primarily included capital expenditures of $6.6$11.6 million, andacquisition-related payments of $4.8 million, purchases of investments of $2.6 million.million and proceeds from the disposal of assets of $311,000.

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 $17.4 million for the last three fiscal years.  The capital budget for fiscal 2010 is $25.8 million.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used in financing activities for the sixnine months ended March 31,June 30, 2010 was $26.4$35.0 million, primarily reflecting net repayments of long-term debt of $13.3$8.3 million, purchases of treasury stock purchases of $9.4$20.9 million, proceeds of $726,000$749,000 from the sale of treasury stock (stock option exercises), a tax benefit of $64,000 from exercised stock options, payment of dividends of $4.2$6.3 million to the Company's shareholders and distributions of $234,000 to noncontrolling interests.  Cash used in financing activities for the sixnine months ended March 31,June 30, 2009 was $28.9$45.6 million, primarily reflecting net repayments of long-term debt of $11.2 million, purchases of treasury stock purchases of $23.1$27.3 million, proceeds of $1.1 million from the sale of treasury stock (stock option exercises), payment of dividends of $4.1$6.1 million to the Company's shareholders and distributions of $2.3 million to noncontrolling   ;interests.minority interests.

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  The maximum amount of borrowings available under the facility is $225.0 million and the facility’s maturity is September 2012. Borrowings under the facility bear interest at LIBOR plus a factor ranging from .40% to .80% based on the Company’s leverage ratio.  The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization).  The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company’s leverage ratio) of the unused portion of the facility.  The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios.  A portion of the facility (not to exceed $20$20.0 million) is available for the issuance of trade and standby letters of credit.  Outstanding borrowings on the Revolving Credit Facility at March 31,June 30, 2010 and September 30, 2009 were $173.0$183.0 million and $177.5 million, respectively.  The weighted-average interest rate on outstanding borrowings at March 31,June 30, 2010 and 2009 was 3.01%2.94% and 3.92%3.95%, respectively.

The Company has entered into the following interest rate swaps:

DateInitial AmountFixed Interest RateInterest Rate Spread at March 31, 2010
 
Maturity Date
Initial AmountFixed Interest RateInterest Rate Spread at June 30, 2010
 
Maturity Date
September 2007$25 million4.77%.60%September 2012$25 million4.77%.60%September 2012
May 2008  40 million3.72%.60%September 2012 40 million3.72%.60%September 2012
October 2008  20 million3.21%.60%October 2010 20 million3.21%.60%October 2010
October 2008  20 million3.46%.60%October 2011 20 million3.46%.60%October 2011

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.

 
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The fair value of the interest rate swaps reflected an unrealized loss of $5.0$4.8 million ($3.12.9 million after tax) at March 31,June 30, 2010 that is included in shareholders’ equity as part of accumulated other comprehensive income.  Assuming market rates remain constant with the rates at March 31,June 30, 2010, approximately $1.5$1.6 million of the $3.1$2.9 million 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 German subsidiaries, has a credit facility with a European bank for borrowings up to 25.0 million Euros ($33.830.6 million).  Outstanding borrowings under the credit facility totaled 15.012.5 million Euros ($20.315.3 million) and 18.0 million Euros ($26.3 million) at March 31,June 30, 2010 and September 30, 2009, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at March 31,June 30, 2010 and 2009 was 1.58% and 2.93%2.74%, respectively.

The Company, through its German subsidiary, Saueressig, has several loans with various European banks.  Outstanding borrowings under these loans totaled 9.28.7 million Euros ($12.410.7 million) and 10.0 million Euros ($14.7 million) at March 31,June 30, 2010 and September 30, 2009, respectively.  The weighted-average interest rate on outstanding borrowings of Saueressig at March 31,June 30, 2010 and 2009 was 5.99%6.05% and 5.82%5.84%, 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 10.810.0 million Euros ($14.512.3 million) and 12.2 million Euros ($18.0 million) at March 31,June 30, 2010 and September 30, 2009, respectively.  Matthews International S.p.A. also has three lines of credit totaling approximately 8.4 million Euros ($11.310.2 million) with the same Italian banks.  Outstanding borrowings on these lines were 2.93.2 million Euros ($3.9 million) and 2.0 million Euros ($2.9 million) at March 31,June 30, 2010 and September 30, 2009, respectively.  The weighted-average interest rate on outstanding borrowings of Matthews International S.p.A. at March 31,June 30, 2010 and 2009 was 3.66%3.61% and 3.82%3.80%, respectively.

The Company has a stock repurchase program, which was initiated in 1996.  Under the program, the Company's Board of Directors had authorized the repurchase of a total of 12,500,000 shares of Matthews common stock.  On January 22, 2010, the Company announced that its Board of Directors approved an additional 2,500,000 shares to the Company’s repurchase authorization, increasing the total authorization to 15,000,000 shares.  As of March 31,June 30, 2010, 2,448,2032,085,778 shares remained to be purchased under the current authorization. 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 tot o the restrictions of the Company’s Articles of Incorporation.

Consolidated working capital of the Company was $166.6$168.1 million at March 31,June 30, 2010, compared to $173.1 million at September 30, 2009.  Cash and cash equivalents were $60.9$56.0 million at March 31,June 30, 2010, compared to $57.7 million at September 30, 2009.  The Company's current ratio was 2.22.1 at March 31,June 30, 2010, compared to 2.3 at September 30, 2009.


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.  In addition, prior to its acquisition, The York Group, Inc. (“York”), a wholly-owned subsidiary of the Company, was identified, along with others, by the Environmental Protection Agency as a potentially responsible party for remediation of a landfill site in York, Pennsylvania.  At this time, the Company has not been joined in any lawsuit or administrative order related to the site or its clean-up.

 
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At March 31,June 30, 2010, an accrual of approximately $6.9 million had been recorded for environmental remediation (of which $836,000 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,a ccruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.


Acquisitions:

Acquisition spending, net of cash acquired, during the sixnine months ended March 31,June 30, 2010 totaled $14.6$28.2 million, and primarily included the following:

In April 2010, the Company acquired Reynoldsville Casket Company, a manufacturer and distributor of caskets primarily in the Northeast region of the United States.   The purchase price for the acquisition was $13.6 million plus additional consideration up to $3.5 million contingent on operating performance over the next three years.  Reynoldsville reported sales of approximately $13.0 million in calendar 2009.

In March 2010, the Company acquired an 80% interest in Furnace Construction Cremators Limited, (“FCC”), a manufacturer of cremation equipment located in the United Kingdom.  The acquisition was structured as an asset purchase and was designed to expand the Company’s global presence in the European cremation markets.

In February 2010, the Company acquired A.J. Distribution, Inc. (“A.J. Distribution”), a distributor of primarily York brand caskets in the Northwest region of the United States.  The transaction was structured as an asset purchase and was intended to expand the Company’s casket distribution capabilities in the Northwestern United States.

In December 2009, the Company acquired UMP, primarily a supplier of granite memorial products burial vaults and caskets in the westernWest region of the United States. UMP reported sales of approximately $11,000$11.0 million in calendar 2009.  The transaction was structured as an asset purchase and was designed to extend Matthews’ presence in the broad granite market. The purchase price for the acquisition is $10$10.0 million, plus additional consideration of up to $3.5 million payable over five years.

In connection with its acquisition of a 78% interest in Saueressig, the Company entered into an option agreement related to the remaining 22% interest.  The option agreement contained certain put and call provisions for the purchase of the remaining 22% interest in future years at a price to be determined by a specified formula based on future operating results of Saueressig.  During the third fiscal quarter of 2010, the Company reached an agreement to purchase the remaining 22% interest in Saueressig for 17.4 million Euros in October 2011.  The Company has included the purchase price of 17.4 million Euros ($21.3 million) as a part of noncontrolling interests in the shareholders’ equity section of the Consolidated Balance Sheet as of June 30, 2010.


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 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”).  For the past ten fiscal years, the Company has achieved an average annual increase in earnings per share of 11.1%.

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One of the most significant factors expected to impactaffecting fiscal 2010 results is the continued weakness incondition of the domestic and global economies.  The current recession unfavorably affected sales and profits in botheconomies, including the Memorialization and Brand Solutions businesses in fiscal 2009, and has continued to affect the Company’s segments in the first six monthsrecent volatility of fiscal 2010.foreign currency exchange rates.  Additionally, pension expense will increase by approximately $5.2 million in fiscal 2010 compared to fiscal 2009 as a result of the market’s impact on plan assets and the valuation of the pension obligation as of September 30, 2009.  With these challenges, each of the Company’s segments continues to emphasize the importance of cost structure relative to revenue run rates.

In November 2009, the Company indicated that, despite the increase in fiscal 2010 pension expense, fiscal 2010 earnings were expected to be relatively consistent with fiscal 2009 earnings, excluding unusual items.  Based on the Company’s year-to-date results through March 31,June 30, 2010 and current projections for the remainder of the fiscal year, the Company is maintainingnow projecting its earnings guidance at this time.for fiscal 2010 to be slightly ahead of its original estimates.  The Company continues to remain cautious given the continued decline in casketed death rates, uncertain economic conditions and rising commodity costs.the recent volatility in the value of the Euro.


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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, 2009.  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 March 31,June 30, 2010, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

 Payments due in fiscal year:  Payments due in fiscal year: 
    2010        After     2010        After 
 Total  Remainder  2011 to 2012  2013 to 2014  2014  Total  Remainder  2011 to 2012  2013 to 2014  2014 
Contractual Cash Obligations: (Dollar amounts in thousands)  (Dollar amounts in thousands) 
Revolving credit facilities $193,264  $-  $193,264  $-  $-  $198,286  $-  $198,286  $-  $- 
Notes payable to banks  29,241   2,946   12,419   10,140   3,736   24,863   1,214   11,149   8,260   4,240 
Short-term borrowings  3,914   3,914   -   -   -   3,879   3,879   -   -   - 
Capital lease obligations  5,627   1,682   3,564   381   -   4,478   804   3,319   355   - 
Non-cancelable operating leases  20,914   4,583   11,195   4,338   798   18,970   2,412   11,582   4,197   779 
Other  1,284   1,284   -   -   -   1,163   1,163   -   -   - 
                                        
Total contractual cash obligations $254,244  $14,409  $220,442  $14,859  $4,534  $251,639  $9,472  $224,336  $12,812  $5,019 

A significant portion of the loans included in the table above bear interest at variable rates. At March 31,June 30, 2010, the weighted-average interest rate was 3.01%2.94% on the Company’s domestic Revolving Credit Facility, 1.58% on the credit facility through the Company’s German subsidiaries, 3.66%3.61% on bank loans to the Company’s wholly-owned subsidiary, Matthews International S.p.A.,S.p.A, and 5.99%6.05% on bank loans to its majority-ownedthe Company’s subsidiary, Saueressig.

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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 2010.  During the sixnine months ended March 31,June 30, 2010, contributions of $387,000$579,000 and $434,000$672,000 were made under the supplemental retirement plan and postretirement plan, respectively.  The Company currently anticipates contributing an additional $386,000$193,000 and $617,000$379,000 under the supplemental retirement plan and postretirement plan, respectively, for the remainder of fiscal 2010.

In connection with its acquisition of a 78% interest in Saueressig, the Company entered into an option agreement related to the remaining 22% interest.  The option agreement containscontained certain put and call provisions for the purchase of the remaining 22% interest in future years at a price to be determined by a specified formula based on future operating results of Saueressig.  TheDuring the third fiscal quarter of 2010, the Company has recordedreached an estimate of $25.0agreement to purchase the remaining 22% interest in Saueressig for 17.4 million Euros in “Arrangement with noncontrolling interest” in the Consolidated Balance Sheet as of March 31, 2010 representing the current estimate of the future purchase price.October 2011.

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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.  The Company had unrecognized tax benefits, excluding penalties and interest, of approximately $3.4$3.3 million and $3.6 million at March 31,June 30, 2010 and September 30, 2009, respectively.  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.


Accounting Pronouncements:

On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of generally accepted accounting principles (“GAAP”).  These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the U.S. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption had no material impact on the Company’s consolidated results of operations or financial cond ition.

The Company adopted changes issued by the FASB regarding accounting for income tax benefits of dividends on share-based payment awards on October 1, 2008.  The changes require that tax benefits generated by dividends on equity classified non-vested equity shares, non-vested equity share units, and outstanding equity share options be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards.  The adoption had no material impact on the Company’s consolidated results of operations or financial condition.

In December 2007, the FASB issued new guidance regarding business combinations.  This guidance requires recognition and measurement of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in a business combination, goodwill acquired or a gain from a bargain purchase.  It is effective for fiscal years beginning on or after December 15, 2008.  The Company adopted the new guidance effective October 1, 2009.

In December 2007, the FASB issued new guidance regarding noncontrolling interests in consolidated financial statements.  This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary. It requires that consolidated net income reflect the amounts attributable to both the parent and the noncontrolling interest, and also includes additional disclosure requirements. It was effective for fiscal years beginning on or after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the guidance is initially applied, except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented.  The Company adopted the new guidance effective October 1, 2009.

In December 2008, the FASB issued changes to employers’ disclosures about postretirement benefit plan assets. These changes require enhanced disclosures regarding assets in defined benefit pension or other postretirement plans.  It is effective for fiscal years ending after December 31, 2009.  Earlier application is permitted. The Company is currently evaluating the impact of the adoption of these changes, which is effective for the Company’s Annual Report on Form 10-K for fiscal 2010.

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In April 2009, the FASB issued changes to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also requires those disclosures in summarized financial information at interim reporting periods. These changes are effective for interim reporting periods ending after June 15, 2009 and were adopted by the Company as of June 30, 2009.

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On September 30, 2007, the Company adopted the recognition and related disclosure provisions of guidance on employers’ accounting for defined benefit pension and other postretirement plans which amended earlier guidance.  In the first quarter of fiscal 2009, the Company adopted the provision requiring the Company to measure the plan assets and benefit obligations of defined benefit postretirement plans as of the date of its year-end balance sheet.  Adoption of this provision did not have a material effect on the Company’s consolidated results of operations or financial condition.

 In May 2009, the FASB issued new guidance regarding subsequent events, which was subsequently revised in February 2010.  The guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The adoption of this guidance had no material impact on the Company’s consolidated results of operations or financial condition.

In June 2008, the FASB issued guidance regarding instruments granted in share-based payments.  The guidance requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and therefore included in the computation of earnings per share pursuant to the two-class method.  This guidance is effective for years beginning after December 31, 2008.  The Company adopted the provisions of this guidance effective October 1, 2009, which did not have a material effect on the Company’s financial statements.


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, foreign currency exchange rates and actuarial assumptions  for pension and other postretirement plans.  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, as amended, 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 an unrealized loss of $5. 0$4. 8 million ($3.12.9 million after tax) at March 31,June 30, 2010 that is included in equity as part of accumulated other comprehensive income.  A decrease of 10% in market interest rates (e.g. a decrease from 5.0% to 4.5%) would result in an increase of approximately $532,000$521,000 in the fair value liability of the interest rate swaps.

Commodity Price Risks - In the normal course of business, the Company is exposed to commodity price fluctuations related to the purchases of certain materials and supplies (such as bronze ingot, steel, wood and photopolymers) 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 contract 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 and Polish Zloty, 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

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decrease in reported sales of $15.0$22.7 million and a decrease in reported operating income of $1.6$2.7 million for the sixnine months ended March 31,June 30, 2010.

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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, 2009 actuarial valuations of changes in the primary assumptions affecting the Company’s principal retirement plan and supplemental retirement plan.

  Impact of Changes in Actuarial Assumptions 
  Change in Discount Rate  Change in Expected Return  Change in Market Value of Assets 
   +1%   -1%   +1%   -1%   +5%   -5% 
  (Dollar amounts in thousands) 
Increase (decrease) in net benefit cost $(1,909) $2,287  $(766) $766  $(692) $692 
                         
Increase (decrease) in projected benefit obligation  (16,440)  20,566   -   -   -   - 
                         
Increase (decrease) in funded status  16,440   (20,566)  -   -   3,940   (3,940)


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 March 31,June 30, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31,June 30, 2010, 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 F ormFor m 10-Q.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter ended March 31,June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls 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.


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

Stock Repurchase Plan

The Company has a stock repurchase program, which was initiated in 1996.  Under the program, the Company's Board of Directors had authorized the repurchase of a total of 12,500,000 shares of Matthews common stock., On January 22, 2010, the Company announced that its Board of Directors approved the continuation of its stock repurchase program and increased the total authorization for stock repurchases by an additional 2,500,000 shares, increasing the total authorization to 15,000,000 shares.  As of March 31,June 30, 2010, 2,448,2032,085,778 shares remained to be purchased under the current authorization.  All purchases of the Company’s common stock during the first sixnine months of fiscal 2010 were part of the repurchase program.

The following table shows the monthly fiscal 2010 stock repurchase activity:

Period 
Total number
 of shares
 purchased
  
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
  Total number of shares purchased  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 2009  -   $      -    -   220,078   -   $       -   -   220,078 
November 2009  65,000   35.50   65,000   155,078   65,000   35.50   65,000   155,078 
December 2009  81,636   34.73   81,636   73,442   81,636   34.73   81,636   73,442 
January 2010  6,475   34.05   6,475   2,566,967   6,475   34.05   6,475   2,566,967 
February 2010  66,708   32.42   66,708   2,500,259   66,708   32.42   66,708   2,500,259 
March 2010  52,056   35.73   52,056   2,448,203   52,056   35.73   52,056   2,448,203 
April 2010  45,000   35.66   45,000   2,403,203 
May 2010  97,200   33.15   97,200   2,306,003 
June 2010  220,225   30.55   220,225   2,085,778 
Total  271,875   $34.52   271,875       634,300   $33.01   634,300     


Item 6.  Exhibits and Reports on Form 8-K

(a)Exhibits 
   
 Exhibit 
 No.Description
10.1Revolving Credit Facility FormSale and Purchase and Transfer Agreement Regarding the Sale and Purchase and Transfer of Revolving Credit Note
10.2Revolving Credit Facility Swing Line Note
10.3Revolving Credit Facility Form of Guaranty and Suretyship Agreement
10.4Revolving Credit Facility Form of Assignment Agreement
10.5Revolving Credit Facility Form of Compliance Certificate
10.6First Amendment to Revolving Credit Facility Form of Term Loan
10.7First Amendment to Revolving Credit Facility Form of Compliance Certificatea Partnership Interest in Saueressig GMBH + Co. KG
 31.1Certification of Principal Executive Officer for Joseph C. Bartolacci
 31.2Certification of Principal Financial Officer for Steven F. Nicola
 32.1Certification 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
 32.2Certification 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
   


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(b)Reports on Form 8-K
   
 
On January 21,April 23, 2010, Matthews filed a Current Report on Form 8-K under Item 2.02 in connection with a press release announcing its earnings for the firstsecond fiscal quarter of 2010.
 
On January 22,April 12, 2010, Matthews filed a Current Report on Form 8-K under Item 8.017.01 in connection with a press release announcing that its Boardacquisition of Directors approved the continuation of its stock repurchase program and increased the total authorization for stock repurchases by an additional two million five hundred thousand shares.
On February 19, 2010, Matthews filed a Current Report on Form 8-K under Item 5.02 in connection with a press release announcing that John D. Turner was named as the Company’s new Chairman of the Board of Directors and that William J. Stallkamp had retired from the Board of Directors.
On March 1, 2010 Matthews filed a Current Report on Form 8-K under Item 5.07 reporting the results of the matters voted on at the Company’s Annual Meeting of Shareholders held on February 18, 2010.Reynoldsville Casket Company.
 


 
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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:  May 5,August 4, 2010 /s/ Joseph C. Bartolacci
  Joseph C. Bartolacci, President
  and Chief Executive Officer
   
   
   
   
Date:  May 5,August 4, 2010 /s/ Steven F. Nicola
  Steven F. Nicola, Chief Financial Officer,
  Secretary and Treasurer
   





 
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