Matthews International Corporation - 10-Q quarterly report FY2015 Q2

For The Quarterly Period Ended March 31, 2015

Commission File No. 0‑9115

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.

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

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.

As of March 31, 2015, shares of common stock outstanding were:

       Class A Common Stock 32,963,427 shares

Matthews International Corporation ("Matthews" or the "Company"), founded in 1850 and incorporated in Pennsylvania in 1902, is a provider principally of brand solutions, memorialization products and industrial products.   Brand solutions include brand development, deployment and delivery (consisting of brand management, printing plates and cylinders, pre-media services and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services).  Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries.  Industrial products include marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10‑Q and Rule 10‑01 of Regulation S‑X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10‑K for the year ended September 30, 2014.  The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control.  All intercompany accounts and transactions have been eliminated.

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

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

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

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

Inventories consisted of the following:

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  In connection with the acquisition of Schawk, Inc. ("Schawk") in July 2014, the Company entered into amendments to the Revolving Credit Facility to amend certain terms of the Revolving Credit Facility and increase the maximum amount of borrowings available under the facility from $500,000 to $900,000.  Borrowings under the amended facility bear interest at LIBOR plus a factor ranging from .75% to 2.00% (1.75% at March 31, 2015) based on the Company's leverage ratio.  The leverage ratio is defined as net indebtedness divided by EBITDA (earnings before interest, taxes, depreciation and amortization).  The Company is required to pay an annual commitment fee ranging from .15% to .25% (based on the Company's leverage ratio) of the unused portion of the facility.

The Revolving Credit Facility requires the Company to maintain certain leverage and interest coverage ratios.  A portion of the facility (not to exceed $30,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at March 31, 2015 and September 30, 2014 were $660,425 and $680,000, respectively.  The weighted-average interest rate on outstanding borrowings at March 31, 2015 and March 31, 2014 was 2.50% and 2.53%, respectively.

The Company has entered into the following interest rate swaps:

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

The fair value of the interest rate swaps reflected an unrealized loss of $2,862 ($1,746 after tax) at March 31, 2015 and an unrealized gain, net of unrealized losses, of $330 ($201 after tax) at September 30, 2014. The net unrealized gain and loss are included in shareholders' equity as part of accumulated other comprehensive income ("AOCI").  Assuming market rates remain constant with the rates at March 31, 2015, a loss (net of tax) of approximately $830 included in AOCI is expected to be recognized in earnings over the next twelve months.

At March 31, 2015 and September 30, 2014, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:

The loss recognized on derivatives was as follows:

The Company, through certain of its European subsidiaries has a credit facility with a European bank.  The maximum amount of borrowing available under this facility was 25.0 million Euros ($26,838).  Outstanding borrowings under the credit facility totaled 14.1 million Euros ($15,171) and 17.5 million Euros ($22,055) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings under this facility at March 31, 2015 and 2014 was 1.74% and 1.48%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 1.0 million Euros ($1,073) and 1.2 million Euros ($1,576) at March 31, 2015 and September 30, 2014, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at March 31, 2015 and 2014 was 4.05% and 4.04%, respectively.

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks.  Outstanding borrowings under these loans totaled 2.6 million Euros ($2,749) and 2.9 million Euros ($3,624) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding borrowings of Wetzel at March 31, 2015 and 2014 was 5.84% and 7.75%, respectively.

The Company, through its wholly-owned subsidiary, Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 4.8 million Euros ($5,118) and 5.5 million Euros ($6,922) at March 31, 2015 and September 30, 2014, respectively.  Matthews International S.p.A. also has three lines of credit totaling 11.3 million Euros ($12,163) with the same Italian banks.  Outstanding borrowings on these lines were 4.2 million Euros ($4,496) and 4.8 million Euros ($6,063) at March 31, 2015 and September 30, 2014, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at March 31, 2015 and 2014 was 3.18% and 3.12%, respectively.

In September 2014, a claim seeking to draw upon a letter of credit issued by the Company of $12,925 was filed with respect to a project for a customer.  In January 2015, the Company made payment on the draw to the financial institution for the letter of credit.  Pursuant to an action initiated by the Company, a court order has been issued requiring these funds to ultimately be remitted to the court pending resolution of the dispute between the parties.  While it is possible the resolution of this matter could be unfavorable to the Company, management has assessed the customer's claim to be without merit and, based on information available as of this filing, expects that the ultimate resolution of this matter will not have a material adverse effect on Matthews' financial condition, results of operations or cash flow.  As of March 31, 2015, the Company has presented the funded letter of credit within other current assets on the Condensed Consolidated Balance Sheet.

As of March 31, 2015 and September 30, 2014 the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Condensed Consolidated Balance Sheet.

The Company maintains an equity incentive plan (the "2012 Equity Incentive Plan") that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  The Company also maintains an equity incentive plan (the "2007 Equity Incentive Plan") and a stock incentive plan (the "1992 Incentive Stock Plan") that previously provided for grants of stock options, restricted shares and certain other types of stock-based awards.  Under the 2012 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000.  There will be no further grants under the 2007 Equity Incentive Plan or the 1992 Incentive Stock Plan.  At March 31, 2015, there were 1,476,798 shares reserved for future issuance under the 2012 Equity Incentive Plan. All plans are administered by the Compensation Committee of the Board of Directors.

The option price for each stock option granted under any of the plans may not be less than the fair market value of the Company's common stock on the date of grant.  Outstanding stock options are generally exercisable in one-third increments upon the attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock.  In addition, options generally vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the market value thresholds).  The options expire on the earlier of ten years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death.  The Company generally settles employee stock option exercises with treasury shares.

With respect to outstanding restricted share grants, for grants made prior to fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, with the remaining one-half of the shares vesting in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock.  For grants made in and after fiscal 2013, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock.  Additionally, restricted shares cannot vest until the first anniversary of the grant date.  Unvested restricted shares generally expire on the earlier of five years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death.  The Company issues restricted shares from treasury shares.

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

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

The transactions for restricted stock for the six months ended March 31, 2015 were as follows:

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

The transactions for shares under options for the six months ended March 31, 2015 were as follows:

No options vested during the three-month and six-month periods ended March 31, 2015 and 2014, respectively.  The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the six-month periods ended March 31, 2015 and 2014 was $856 and $509, respectively.

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

The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model.  The following table indicates the assumptions used in estimating fair value of restricted stock for the periods ended March 31, 2015 and 2014.

The risk-free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date.  Expected volatilities are based on the historical volatility of the Company's stock price.  The expected term for grants in the years ended September 30, 2014, 2013 and 2012 represents an estimate of the average period of time for restricted shares to vest.  The option characteristics for each grant are considered separately for valuation purposes.

The Company maintains the 1994 Director Fee Plan and the 2014 Director Fee Plan (collectively, the "Director Fee Plans").  Since adoption of the 2014 Director Fee Plan, there have been no further fees or share-based awards under the 1994 Director Fee Plan.  Under the 2014 Director Fee Plan, directors (except for the Chairman of the Board) who are not also officers of the Company each receive, as an annual retainer fee for fiscal 2015, either cash or shares of the Company's Class A Common Stock with a value equal to $75.  The annual retainer fee for fiscal 2015 paid to a non-employee Chairman of the Board is $175.  Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board.  The value of deferred shares is recorded in other liabilities.  A total of 17,005 shares had been deferred under the Director Fee Plans at March 31, 2015.  Additionally, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $110 for fiscal 2015.  A total of 22,300 stock options have been granted under the Director Fee Plans.  At March 31, 2015, there were no options outstanding. Additionally, 136,568 shares of restricted stock have been granted under the Director Fee Plans, 33,418 of which were unvested at March 31, 2015.  A total of 150,000 shares have been authorized to be issued under the 2014 Director Fee Plan.

There were no anti-dilutive securities for the three and six months ended March 31, 2015 or 2014.

The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:

Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company's operating funds.  Under IRS regulations, the Company is not required to make any significant contributions to its principal retirement plan in fiscal year 2015.

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

The changes in AOCI by component, net of tax, for the three month periods ended March 31, 2015 and 2014 were as follows: