10-K 1 form10k-2012.htm MATTHEWS 2012 FORM 10-K form10k-2012.htm
 
 



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

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2012
Commission File Number 0-09115

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

COMMONWEALTH OF 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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A Common Stock, $1.00 par value
 
NASDAQ Global Select Market System

Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x           No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o           No x

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.  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405a of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x
No o
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No x

The aggregate market value of the Class A Common Stock outstanding and held by non-affiliates of the registrant, based upon the closing sale price of the Class A Common Stock on the NASDAQ Global Select Market System on March 31, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $874 million.

As of October 31, 2012, shares of common stock outstanding were: Class A Common Stock 27,498,968 shares

Documents incorporated by reference: Specified portions of the Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

The index to exhibits is on pages 75-76.

 
 

 

PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:

Any forward-looking statements contained in this Annual Report on Form 10-K (specifically those contained in Item 1, "Business", Item 1A, “Risk Factors” and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations") are included in this report 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 actual results of Matthews International Corporation (“Matthews” or the “Company”) in future periods to be materially different from management's expectations.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct.  Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company’s products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions 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.

 
ITEM 1.  BUSINESS.

Matthews, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of memorialization products and brand solutions.  Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries.  Brand solutions include graphics imaging products and services, marking and fulfillment systems products, and merchandising solutions. In fiscal 2012 the Company changed the name of its Bronze, Casket and Marking Products segments to the Cemetery Products segment, the Funeral Home Products segment and the Marking and Fulfillment Systems segment, respectively. Also effective October 1, 2011, the Company’s cremation casket operations, previously included in the Cremation segment, are included in the Funeral Home Products segment.  The Company's products and operations are comprised of six business segments:  Cemetery Products (formerly Bronze), Funeral Home Products (formerly Casket), Cremation, Graphics Imaging, Marking and Fulfillment Systems (formerly Marking Products) and Merchandising Solutions.  The Cemetery Products segment is a leading manufacturer of cast bronze and granite memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States.  The Funeral Home Products segment is a leading casket manufacturer and distributor in North America and produces a wide variety of wood, metal and cremation caskets.  The Cremation segment is a leading designer and manufacturer of cremation equipment in North America and Europe. The Graphics Imaging segment manufactures and provides brand solutions, printing plates, gravure cylinders, pre-press services and imaging services for the primary packaging and corrugated industries.  The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, industrial automation products and order fulfillment systems that are used for identifying, tracking, picking and conveying  consumer and industrial products.  The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services.

At October 31, 2012, the Company and its majority-owned subsidiaries had approximately 5,400 employees.  The Company's principal executive offices are located at Two NorthShore Center, Pittsburgh, Pennsylvania 15212, its telephone number is
(412) 442-8200 and its internet website is www.matw.com.  The Company files all required reports with the Securities and Exchange Commission (“SEC”) in accordance with the Exchange Act.  These reports are available free of charge on the Company’s website as soon as practicable after being filed or furnished to the SEC. The reports filed with the SEC are also available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by contacting the SEC at 1-800-732-0330.  All reports filed with the SEC can be found on its website at www.sec.gov.

The following table sets forth reported sales and operating profit for the Company's business segments for the past three fiscal years.  Detailed financial information relating to business segments and to domestic and international operations is presented in Note 16 (“Segment Information”) to the Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K.

 
2

 

ITEM 1.                      BUSINESS, (continued)

   
Years Ended September 30,
 
   
2012
   
2011
   
2010
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in Thousands)
 
Sales to unaffiliated customers:
                         
Memorialization:
                                   
Cemetery Products
    $215,943       24.0 %     $224,773       25.0 %     $224,247       27.3 %
Funeral Home Products
    230,943       25.6       243,291       27.1       216,849       26.4  
Cremation
    45,981       5.1       39,278       4.4       32,786       4.0  
      492,867       54.7       507,342       56.5       473,882       57.7  
Brand Solutions:
                                               
Graphics Imaging
    259,865       28.9       268,975       29.9       239,957       29.2  
Marking and Fulfillment Systems
    74,621       8.3       61,938       6.9       51,069       6.2  
Merchandising Solutions
    72,964       8.1       60,566       6.7       56,921       6.9  
      407,450       45.3       391,479       43.5       347,947       42.3  
Total
    $900,317       100.0 %     $898,821       100.0 %     $821,829       100.0 %
                                                 
Operating profit:
                                               
Memorialization:
                                               
Cemetery Products
    $33,195       35.5 %     $52,474       44.3 %     $56,167       48.2 %
Funeral Home Products
    26,525       28.3       29,039       24.5       27,506       23.6  
Cremation
    3,869       4.1       3,479       2.9       3,646       3.1  
      63,589       67.9       84,992       71.7       87,319       74.9  
Brand Solutions:
                                               
Graphics Imaging
    14,843       15.9       22,427       18.9       21,077       18.1  
Marking and Fulfillment Systems
    10,061       10.8       7,819       6.6       5,817       5.0  
Merchandising Solutions
    5,084       5.4       3,278       2.8       2,368       2.0  
      29,988       32.1       33,524       28.3       29,262       25.1  
Total
    $93,577       100.0 %     $118,516       100.0 %     $116,581       100.0 %


In fiscal 2012, approximately 63% of the Company's sales were made from the United States, and 32%, 2%, 2% and 1% were made from Europe, Australia, Asia and Canada, respectively. For further information on Segments, see Note 16 (“Segment Information”) in Item 8 “Financial Statements and Supplementary Data” on pages 60 and 61 of this report. Cemetery Products segment products are sold throughout the world with the segment's principal operations located in the United States, Europe, Canada, and Australia.  Funeral Home Products segment products are primarily sold in North America. Cremation segment products and services are sold primarily in North America, Europe, Asia, and Australia.  Products and services of the Graphics Imaging segment are sold primarily in Europe, the United States and Asia.  The Marking and Fulfillment Systems segment sells equipment and consumables directly to industrial consumers and distributors in the United States and internationally through the Company's subsidiaries in Canada, Sweden and China, and through other foreign distributors.  Matthews owns a minority interest in Marking and Fulfillment Systems distributors in Asia, Australia and Europe.  Merchandising Solutions segment products and services are sold principally in the United States.



 
3

 

ITEM 1.
BUSINESS, (continued)

MEMORIALIZATION PRODUCTS AND MARKETS:

Cemetery Products:

The Cemetery Products segment manufactures and markets a full line of memorialization products used primarily in cemeteries.  The segment's products, which are sold principally in the United States, Europe, Canada and Australia, include cast bronze memorials, granite memorials and other memorialization products.  The segment also manufactures and markets architectural products that are produced from bronze, aluminum and other metals, which are used to identify or commemorate people, places, events and accomplishments.

Memorial products, which comprise the majority of the Cemetery Products segment's sales, include flush bronze and granite memorials, upright granite memorials and monuments, cremation memorialization products, granite benches, flower vases, crypt plates and letters, cremation urns, niche units, cemetery features and statues, along with other related products and services. Flush memorials are bronze plaques or granite memorials which contain personal information about a deceased individual (such as name, birth date, and death date), photos and emblems.  Flush bronze and granite memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier mowing and general maintenance.  The segment's memorial products also include community and family mausoleums within North America.  In addition, the segment’s other memorial products include bronze plaques, letters, emblems, vases, lights and photo ceramics that can be affixed to granite monuments, mausoleums, crypts and flush memorials.  Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer.

Customers of the Cemetery Products segment can also purchase memorials and vases on a “pre-need” basis.  The “pre-need” concept permits families to arrange for these purchases in advance of their actual need.  Upon request, the Company will manufacture the memorial to the customer’s specifications (e.g., name and birth date) and place it in storage for future delivery.  Memorials in storage have been paid in full with title conveyed to each pre-need purchaser.

The Cemetery products segment manufactures a full line of memorial products for cremation, including urns in a variety of sizes, styles and shapes as well as standard and custom designed granite cremation pedestals and benches.  The segment also manufactures bronze and granite niche units, which are comprised of numerous compartments used to display cremation urns in mausoleums and churches.  In addition, the Company also markets turnkey cremation gardens, which include the design and all related products for a cremation memorial garden. As part of the Memorialization group, the segment works with the Funeral Home Products and Cremation segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.

Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments.  The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building.  Such products are also used to commemorate events or accomplishments, such as military service or financial donations.  The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies.  These products are sold to and distributed through a network of independent dealers including sign suppliers, awards and recognition companies, and trophy dealers.

Raw materials used by the Cemetery Products segment consist principally of bronze and aluminum ingot, granite, sheet metal, coating materials, photopolymers and construction materials and are generally available in adequate supply.  Ingot is obtained from various North American, European and Australian smelters.

Competition from other cemetery product manufacturers is on the basis of reputation, product quality, delivery, price, and design availability. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and consumer-oriented merchandising systems are competitive advantages in its markets.  Competition in the mausoleum construction industry includes various construction companies throughout North America and is on the basis of design, quality and price.  Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials, sand-blasted wood and other fabricated products.
 
 

 
4

 

ITEM 1.                      BUSINESS, (continued)

Funeral Home Products:

The Funeral Home Products segment is a leading manufacturer and distributor of caskets and other funeral home products in North America.  The segment produces and markets metal, wood and cremation caskets. Caskets are offered in a variety of colors, interior designs, handles and trim in order to accommodate specific religious, ethnic or other personal preferences. The segment also markets other funeral home products such as urns, jewelry, stationery and other funeral home products. The segment offers individually personalized caskets and urns through the Company-owned distribution network.

Metal caskets are made from various gauges of cold-rolled steel, stainless steel, copper and bronze.  Metal caskets are generally categorized by whether the casket is non-gasketed or gasketed, and by material (i.e., bronze, copper, or steel) and in the case of steel, by the gauge (thickness) of the metal.  Wood caskets are manufactured from nine different species of wood, as well as from veneer.  The species of wood used are poplar, pine, ash, oak, pecan, maple, cherry, walnut and mahogany.  The Funeral Home Products segment is a leading manufacturer of all-wood constructed caskets, which are manufactured using pegged and dowelled construction, and include no metal parts.  All-wood constructed caskets are preferred by certain religious groups. Cremation caskets are made primarily from wood or cardboard covered with cloth or veneer.  These caskets appeal primarily to cremation consumers, the environmentally concerned, and value buyers.

The Funeral Home Products segment also produces casket components.  Casket components include stamped metal parts, metal locking mechanisms for gasketed metal caskets, adjustable beds and interior panels.  Metal casket parts are produced by stamping cold-rolled steel, stainless steel, copper and bronze sheets into casket body parts.  Locking mechanisms and adjustable beds are produced by stamping and assembling a variety of steel parts.  The segment purchases from sawmills and lumber distributors various species of uncured wood, which it dries and cures.  The cured wood is processed into casket components.

The segment provides product and service assortment planning and merchandising and display products to funeral service businesses. These products assist funeral service professionals in providing information, value and satisfaction to their client families.

The primary materials required for casket manufacturing are cold-rolled steel and lumber. The segment also purchases copper, bronze, stainless steel, particleboard, corrugated materials, paper veneer, cloth, ornamental hardware and coating materials. Purchase orders or supply agreements are typically negotiated with large, integrated steel producers that have demonstrated timely delivery, high quality material and competitive prices.  Lumber is purchased from a number of sawmills and lumber distributors.  The Company purchases most of its lumber from sawmills within 150 miles of its wood casket manufacturing facility in York, Pennsylvania.

The segment markets its casket products in the United States through a combination of Company-owned and independent casket distribution facilities.  The Company operates approximately 60 distribution centers in the United States.  Over 70% of the segment’s casket products are currently sold through Company-owned distribution centers.  As part of the Memorialization group, the segment works with the Cemetery Products and Cremation segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.

The casket business is highly competitive. The segment competes with other manufacturers on the basis of product quality, price, service, design availability and breadth of product line.  The segment provides a line of casket products that it believes is as comprehensive as any of its major competitors.  There are a large number of casket industry participants operating in North America, and the industry has recently seen a few new foreign casket manufacturers, primarily from China, enter the North American market. The Funeral Home Products segment and its two largest competitors account for a substantial portion of the finished caskets produced and sold in North America.

 
5

 

ITEM 1.
BUSINESS, (continued)

Cremation:

The Cremation segment provides distinct, yet complementary, groups of products and services:

·  
Cremation Systems
·  
Waste Management/Incineration Systems
·  
Environmental and Energy Systems
·  
Service and Supplies
·  
Crematory Management/Operations
·  
Cremation Columbarium and Niche Units
·  
Cremation Urns and Memorialization Products

Servicing the human, pet and specialized incineration markets, the segment’s primary market areas are North America and Europe.  The segment also sells into Latin America and the Caribbean, Australia and Asia.

Cremation systems includes both traditional flame-based and water-based bio-cremation systems for cremation of humans and pets, as well as equipment for processing the cremated remains and other related equipment (ventilated work stations, tables, cooler racks, vacuums).  The principal markets for these products are funeral homes, cemeteries, crematories, pet crematories, animal disposers and veterinarians. These products are marketed mostly direct by segment personnel.

Waste management/incineration systems encompass both batch load and continuous feed, static and rotary systems for incineration of all waste types, as well as equipment for in-loading waste, out-loading ash and energy recovery. The principal markets for these products are medical waste disposal, oil and gas “work camp” wastes, industrial wastes and bio mass generators.

Environmental and energy systems include emissions filtration units, waste heat recovery equipment, waste gas treatment products, as well as energy recovery and renewable power generation. The principal markets are municipalities or public/state agencies, the cremation industry and waste to energy and other industries which utilize incinerators for waste reduction and energy production.

Service and supplies consists of operator training, preventative maintenance and “at need” service work performed on various makes and models of equipment. This work can be as simple as replacing defective bulbs or as complex as complete reconstruction and upgrading or retro-fitting on site. Supplies are consumable items associated with normal operations.

Crematory management/operations represent the actual operation and management of client-owned crematories.  Currently the segment provides these services primarily to municipalities in Europe.

Cremation columbarium and niche units are produced by the segment for the placement/display of urns and other containers of cremated remains.  The principal markets targeted by the segment include church and university markets, affinity groups and other emerging memorialization markets.

Cremation urns and memorialization products include urns which support various forms of memorialization (burial, niche, scattering, and home décor). Merchandise includes any other family-related products such as cremation jewelry, mementos, remembrance products and other assorted at-need merchandise.

Raw materials used by the Cremation segment consist principally of structural steel, sheet metal, electrical components, combustion devices and refractory materials. These are generally available in adequate supply from numerous suppliers.

The Company competes with several manufacturers in the cremation and accessory equipment market principally on the basis of product design, quality and price.  The Cremation segment and its three largest global competitors account for a substantial portion of the U.S. and European cremation equipment market.  As part of the Memorialization group, the segment works with the Cemetery Products and Funeral Home Products segments to provide a total solution to customers that own and operate businesses in both the cemetery and funeral home markets.


 
6

 

ITEM 1.
BUSINESS, (continued)

BRAND SOLUTIONS PRODUCTS AND MARKETS:

Graphics Imaging:

The Graphics Imaging segment provides brand management, pre-press services, printing plates and cylinders, embossing tools, and creative design services principally to the primary packaging and corrugated industries. The primary packaging industry consists of manufacturers of printed packaging materials such as boxes, flexible packaging, folding cartons and bags commonly seen at retailers of consumer goods. The corrugated packaging industry consists of manufacturers of printed corrugated containers.  Other major industries served include the wallpaper, flooring, automotive, and textile industries.

The principal products and services of this segment include brand management, pre-press graphics services, printing plates, gravure cylinders, steel bases, embossing tools, special purpose machinery, engineering assistance, print process assistance, print production management, digital asset management, content management, and package design.  These products and services are used by brand owners and packaging manufacturers to develop and print packaging graphics that identify and help sell the product in the marketplace.  Other packaging graphics can include nutritional information, directions for product use, consumer warning statements and UPC codes. The primary packaging manufacturer produces printed packaging from paper, film, foil and other composite materials used to display, protect and market the product. The corrugated packaging manufacturer produces printed containers from corrugated sheets.  Using the Company's products, these sheets are printed and die cut to make finished containers.

The segment offers a wide array of value-added services and products.  These include print process and print production management services; print engineering consultation; pre-press preparation, which includes computer-generated art, film and proofs; plate mounting accessories and various press aids; and rotary and flat cutting dies used to cut out intricately designed containers and point-of-purchase displays.  The segment also provides creative digital graphics services to brand owners and packaging markets.

The Company works closely with manufacturers to provide the proper printing forms and tooling used to print the packaging to the user's specifications.  The segment's printing plate products are made principally from photopolymer resin and sheet materials.  Upon customer request, plates can be pre-mounted press-ready in a variety of configurations that maximize print quality and minimize press set-up time.  Gravure cylinders, manufactured from steel, copper and chrome, can be custom engineered for multiple print processes.

The Graphics Imaging segment customer base consists primarily of brand owners and packaging industry converters.  Brand owners are generally large, well-known consumer products companies and retailers with a national or global presence.  These types of companies tend to purchase their graphics needs directly and supply the printing forms, or the electronic files to make the printing plates and gravure cylinders, to the packaging printer for their products.  The Graphics Imaging segment serves customers primarily in Europe, the United States and Asia.

Major raw materials for this segment's products include photopolymers, steel, copper, film and graphic art supplies.  All such materials are presently available in adequate supply from various industry sources.

The Graphics Imaging segment is one of several manufacturers of printing plates and cylinders and providers of pre-press services with an international presence.  The segment competes in a fragmented industry consisting of a few multi-plant regional printing form suppliers and a large number of local single-facility companies located across Europe and the United States.  The combination of the Company's Graphics Imaging business in Europe, the United States and Asia is an important part of Matthews’ strategy to become a worldwide leader in the graphics industry and service multinational customers on a global basis.  Competition is on the basis of product quality, timeliness of delivery and price.  The Company differentiates itself from the competition by consistently meeting these customer demands, its ability to service customers both nationally and globally, and its ability to provide value-added services.


 
7

 

ITEM 1.
BUSINESS, (continued)

Marking and Fulfillment Systems:

The Marking and Fulfillment Systems segment designs, manufactures and distributes a wide range of equipment and related consumables used by manufacturers and suppliers to identify, track, and brand their products.  Marking products can range from a mechanical marking solution to microprocessor-based ink-jet printing systems that can integrate into the customer’s manufacturing, inventory tracking and material handling control systems.  The Company manufactures and markets products and systems that employ different marking technologies including contact printing, indenting, etching, laser, and ink-jet printing.  Customers will often use a combination of these methods in order to achieve an appropriate mark.  These methods apply product information required for identification and traceability as well as to facilitate inventory and quality control, regulatory compliance and brand name communication.

Fulfillment systems provided by the Company complement the tracking and distribution of customer’s products and include order fulfillment systems, motor-driven rollers and controls for material handling systems, and other innovative custom solutions that address specific customer requirements.  Some of the industries for which custom products are produced include oil exploration, material handling and security scanning.  Material handling industry customers include some of the largest automated assembly, distribution and mail sorting companies in the United States.

A significant portion of the revenue of the Marking and Fulfillment Systems segment is attributable to the sale of consumables and replacement parts in connection with the marking, coding and tracking hardware sold by the Company.  The Company develops inks, rubber and steel consumables in harmony with the marking equipment in which they are used, which is critical to assure ongoing equipment reliability and mark quality.  Many marking equipment customers also use the Company's inks, solvents and cleaners.

The principal customers for the Company's marking and fulfillment products are manufacturers of durable goods and building products, consumer goods manufacturers, including food and beverage processors and producers of pharmaceuticals.  The Company also serves a wide variety of industrial markets, including metal fabricators, manufacturers of woven and non-woven fabrics, plastic, rubber and automotive products.

A portion of the segment's sales are outside the United States and are distributed through the Company's subsidiaries in Canada, Sweden, Germany and China in addition to other international distributors.  Matthews owns a minority interest in distributors in Asia, Australia and Europe.

The marking and fulfillment products industries are diverse, with companies either offering limited product lines for well-defined specialty markets, or similar to the Company, offering a broad product line and competing in various product markets and countries.  In the United States, the Company has manufactured and sold marking products and related consumable items since 1850.

Major raw materials for this segment's products include precision components, electronics, printing components, tool steels, rubber and chemicals, all of which are presently available in adequate supply from various sources.

Competition for marking and fulfillment products is based on product performance, integration into the manufacturing process, service and price.  The Company normally competes with specialty companies in specific brand marking solutions and traceability applications.  The Company believes that, in general, it offers one of the broadest lines of products to address a wide variety of marking, coding and tracking applications.


 
8

 

ITEM 1.
BUSINESS, (continued)

Merchandising Solutions:

The Merchandising Solutions segment provides merchandising, retail graphics and printing solutions for brand owners and retailers.  The segment designs, manufactures and installs merchandising and display systems, and provides total turnkey project management services.  The segment also provides creative merchandising and marketing solutions services.
 
 
The majority of the segment’s sales are derived from the design, engineering, manufacturing and execution of merchandising and display systems.  These systems include permanent and temporary displays, custom store fixtures, brand concept shops, interactive media, custom packaging, and screen and digitally printed promotional signage.  Design and engineering services include concept and model development, graphics design and prototyping.  Merchandising and display systems are manufactured to specifications developed by the segment in conjunction with the customer.  These products are marketed and sold primarily in the United States.

The segment operates in a fragmented industry consisting primarily of a number of small, locally operated companies.  Industry competition is intense and the segment competes on the basis of reliability, creativity and providing a broad array of merchandising products and services.  The segment is unique in its ability to provide in-depth marketing and merchandising services as well as design, engineering and manufacturing capabilities.  These capabilities allow the segment to deliver complete turnkey merchandising solutions quickly and cost effectively.

Major raw materials for the segment’s products include wood, particleboard, corrugated materials, structural steel, plastic, laminates, inks, film and graphic art supplies.  All of these raw materials are presently available in adequate supply from various sources.

PATENTS, TRADEMARKS AND LICENSES:

The Company holds a number of domestic and foreign patents and trademarks.  However, the Company believes the loss of any or a significant number of patents or trademarks would not have a material impact on consolidated operations or revenues.

BACKLOG:

Because the nature of the Company's Cemetery Products, Graphics Imaging and Merchandising Solutions businesses are primarily custom products made to order with short lead times, backlogs are not generally material except for mausoleums in the Cemetery Products segment. Backlogs vary in a range of approximately one year of sales for mausoleums. Backlogs for the Funeral Home Products segment and the cremation casket businesses are not material. Cremation equipment sales backlogs vary in a range of eight to ten months of sales.  Backlogs generally vary in a range of up to four weeks of sales in the Marking and Fulfillment Systems segment.  The Company’s backlog is expected to be substantially filled in fiscal 2013.

REGULATORY 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. 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.


 
9

 

ITEM 1.
BUSINESS, (continued)

At September 30, 2012, an accrual of approximately $5.7 million had been recorded for environmental remediation (of which $781,000 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 does not consider the effects of inflation and anticipated expenditures are not discounted to their present value.  While final resolution of these contingencies could result in costs different than current accruals, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.


ITEM 1A.  RISK FACTORS.

There are inherent risks and uncertainties associated with the Company’s businesses that could adversely affect its operating performance and financial condition.  Set forth below are descriptions of those risks and uncertainties that the Company currently believes to be material.  Additional risks not currently known or deemed immaterial may also result in adverse effects on the Company.

Changes in Economic Conditions.  Generally, changes in domestic and international economic conditions affect the industries in which the Company and its customers and suppliers operate.  These changes include changes in the rate of consumption or use of the Company’s products due to economic downturns, volatility in currency exchange rates, and changes in raw material prices resulting from supply and/or demand conditions.

Uncertainty about current global economic conditions poses a risk, as consumers and businesses may continue to postpone or cancel spending.  Other factors that could influence customer spending include energy costs, conditions in the credit markets, consumer confidence and other factors affecting consumer spending behavior.  These and other economic factors could have an effect on demand for the Company’s products and services and negatively impact the Company’s financial condition and results of operations.

Changes in Foreign Currency Exchange Rates. Manufacturing and sales of a significant portion of the Company’s products are outside the United States, and accordingly, the Company holds assets, incurs liabilities, earns revenue and pays expenses in a variety of currencies.  The Company’s consolidated financial statements are presented in U.S. dollars, and therefore, the Company must translate the reported values of its foreign assets, liabilities, revenue and expenses into U.S. dollars.  Increases or decreases in the value of the U.S. dollar compared to foreign currencies may negatively affect the value of these items in the Company’s consolidated financial statements, even though their value has not changed in local currency.

Increased Prices for Raw Materials. The Company’s profitability is affected by the prices of the raw materials used in the manufacture of its products.  These prices may fluctuate based on a number of factors, including changes in supply and demand, domestic and global economic conditions, and volatility in commodity markets, currency exchange rates, labor costs and fuel-related costs.  If suppliers increase the price of critical raw materials, alternative sources of supply, or an alternative material, may not exist.

The Company has standard selling price structures (i.e., list prices) in several of its segments, which are reviewed for adjustment generally on an annual basis.  In addition, the Company has established pricing terms with several of its customers through contracts or similar arrangements.  Based on competitive market conditions and to the extent that the Company has established pricing terms with customers, the Company’s ability to immediately increase the price of its products to offset the increased costs may be limited.  Significant raw material price increases that cannot be mitigated by selling price increases or productivity improvements will negatively affect the Company’s results of operations.





 
10

 

ITEM 1A.                      RISK FACTORS, (continued)

Changes in Mortality and Cremation Rates. Generally, life expectancy in the United States and other countries in which the Company’s Memorialization businesses operate has increased steadily for several decades and is expected to continue to do so in the future.  The increase in life expectancy is also expected to impact the number of deaths in the future.  Additionally, cremations have steadily grown as a percentage of total deaths in the United States since the 1960’s, and are expected to continue to increase in the future.  The Company expects that these trends will continue in the future, and the result may affect the volume of bronze and granite memorialization products and burial caskets sold in the United States.  However, sales of the Company’s Cremation segment may benefit from the growth in cremations.

Changes in Product Demand or Pricing. The Company’s businesses have and will continue to operate in competitive markets. Changes in product demand or pricing are affected by domestic and foreign competition and an increase in consolidated purchasing by large customers operating in both domestic and global markets. The Memorialization businesses generally operate in markets with ample supply capacity and demand which is correlated to death rates.  The Brand Solutions businesses serve global customers that are requiring their suppliers to be global in scope and price competitive.  Additionally, in recent years the Company has witnessed an increase in products manufactured offshore, primarily in China, and imported into the Company’s U.S. markets.  It is expected that these trends will continue and may affect the Company’s future results of operations.

Risks in Connection with Acquisitions. The Company has grown in part through acquisitions, and continues to evaluate acquisition opportunities that have the potential to support and strengthen its businesses.  There is no assurance however that future acquisition opportunities will arise, or that if they do, that they will be consummated.  In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with expectations, or that synergies expected from the integration of the acquisitions will not be achieved as rapidly as expected, if at all. Failure to effectively integrate acquired businesses could prevent the realization of expected rates of return on the acquisition investment and could have a negative effect on the Company’s results of operations and financial condition.

Technological Factors Beyond the Company’s Control. The Company operates in certain markets in which technological product development contributes to its ability to compete effectively.  There can be no assurance that the Company will be able to develop new products, that new products can be manufactured and marketed profitably, or that new products will successfully meet the expectations of customers.

Changes in the Distribution of the Company’s Products or the Loss of a Large Customer. Although the Company does not have any customer that is considered individually significant to consolidated sales, it does have contracts with several large customers in both the Memorialization and Brand Solutions businesses.  While these contracts provide important access to large purchasers of the Company’s products, they can obligate the Company to sell products at contracted prices for extended periods of time.  Additionally, any significant divestiture of business properties or operations by current customers could result in a loss of business if the Company is not able to maintain the business with the subsequent owners of the properties.


ITEM 1B.  UNRESOLVED STAFF COMMENTS.

Not Applicable.


 
 


 
11

 

 
 ITEM 2.  PROPERTIES.

Principal properties of the Company and its majority-owned subsidiaries as of October 31, 2012 were as follows (properties are owned by the Company except as noted):

Location
 
Description of Property
 
Cemetery Products:
     
Pittsburgh, PA
 
Manufacturing / Division Offices
 
Elberton, GA
 
Manufacturing
 
Kingwood, WV
 
Manufacturing
 
Melbourne, Australia
 
Manufacturing
(1)
Monterrey, Mexico
Parma, Italy
 
Manufacturing
Manufacturing / Warehouse
(1)
(1)
Searcy, AR
 
Manufacturing
 
Whittier, CA
 
Manufacturing
(1)
       
Funeral Home Products (2):
     
Monterrey, Mexico
 
Manufacturing
(1)
Richmond, IN
 
Manufacturing
(1)
Richmond, IN
 
Manufacturing
(1)
Richmond, IN
 
Manufacturing / Metal Stamping
 
Richmond, IN
 
Injection Molding
(1)
York, PA
 
Manufacturing
 
       
Cremation:
     
Apopka, FL
 
Manufacturing / Division Offices
 
Manchester, England
 
Manufacturing
(1)
Manchester, England
Udine, Italy
 
Manufacturing
Manufacturing
(1)
(1)
 
 
Graphics Imaging:
     
Pittsburgh, PA
 
Manufacturing / Division Offices
 
Julich, Germany
 
Manufacturing / Division Offices
 
Atlanta, GA
 
Manufacturing
 
Woburn, MA
 
Manufacturing
(1)
Bristol, England
 
Manufacturing
 
Goslar, Germany
 
Manufacturing
(1)
Leeds, England
 
Manufacturing
(1)
Monchengladbach, Germany
 
Manufacturing
 
Munich, Germany
 
Manufacturing
(1)
Nuremberg, Germany
 
Manufacturing
(1)
Oakland, CA
 
Manufacturing
(1)
Poznan, Poland
 
Manufacturing
 
St. Louis, MO
 
Manufacturing
 
Shenzhen, China
 
Manufacturing
(1)
Vienna, Austria
 
Manufacturing
(1)
Vreden, Germany
 
Manufacturing
 
Wan Chai, Hong Kong
 
Manufacturing
(1)
Izmir, Turkey
 
Manufacturing
 
       


 
12

 

ITEM 2.
PROPERTIES, (continued)

Location
 
Description of Property
 
       
Marking and Fulfillment Systems:
     
Pittsburgh, PA
 
Manufacturing / Division Offices
 
Gothenburg, Sweden
 
Manufacturing / Distribution
(1)
Tualatin, OR
 
Manufacturing
(1)
Beijing, China
 
Manufacturing
(1)
Ixonia, WI
 
Manufacturing
(1)
Germantown, WI
 
Manufacturing
(1)
       
Merchandising Solutions:
     
East Butler, PA
 
Manufacturing / Division Offices
 
Portland, OR
 
Sales Office
(1)
       
Corporate Office:
     
Pittsburgh, PA
 
General Offices
 


(1)
These properties are leased by the Company under operating lease arrangements. Rent expense incurred by the Company for all leased facilities was approximately $16.9 million in fiscal 2012.
(2)
In addition to the properties listed, the Funeral Home Products segment leases warehouse facilities totaling approximately 1.0 million square feet in 27 states under operating leases.

All of the owned properties are unencumbered.  The Company believes its facilities are generally well suited for their respective uses and are of adequate size and design to provide the operating efficiencies necessary for the Company to be competitive.  The Company's facilities provide adequate space for meeting its near-term production requirements and have availability for additional capacity.  The Company intends to continue to expand and modernize its facilities as necessary to meet the demand for its products.

 
ITEM 3.  LEGAL PROCEEDINGS.

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


ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

 
13

 

 
OFFICERS AND EXECUTIVE MANAGEMENT OF THE REGISTRANT

The following information is furnished with respect to officers and executive management as of October 31, 2012:

Name
 
Age
 
Positions with Registrant
         
Joseph C. Bartolacci
 
52
 
President and Chief Executive Officer
         
David F. Beck
 
60
 
Vice President and Controller
 
Jennifer A. Ciccone
 
45
 
Vice President, Human Resources
         
Brian J. Dunn
 
55
 
Group President, Brand Solutions
         
Steven D. Gackenbach
 
49
 
Group President, Memorialization
         
Steven F. Nicola
 
52
 
Chief Financial Officer, Secretary and Treasurer
         
Paul F. Rahill
 
55
 
President, Cremation Division
         
Brian D. Walters
 
43
 
Vice President and General Counsel


Joseph C. Bartolacci was appointed President and Chief Executive Officer effective October 1, 2006.

David F. Beck was appointed Vice President and Controller effective February 18, 2010.  Prior thereto he had been Controller since September 15, 2003.

Jennifer A. Ciccone was appointed Vice President, Human Resources effective February 19, 2009.  Prior thereto, Ms. Ciccone had been Director, Corporate Human Resources since 2006.

Brian J. Dunn was appointed Group President, Brand Solutions effective February 18, 2010.  Prior thereto, he was appointed Group President, Graphics and Marking Products effective September 1, 2007 and had been President, Marking Products Division prior thereto.

Steven D. Gackenbach was appointed Group President, Memorialization effective October 31, 2011.  Prior thereto he had been Chief Commercial Officer, Memorialization since January 3, 2011 when he joined the Company.  Prior to joining the Company, Mr. Gackenbach served as the Senior Director of Strategy for Kraft Foods’ Cheese and Dairy Division from 2002 to 2010.

Steven F. Nicola was appointed Chief Financial Officer, Secretary and Treasurer effective December 1, 2003.

Paul F. Rahill was appointed President, Cremation Division in October 2002.

Brian D. Walters was appointed Vice President and General Counsel effective February 19, 2009.  Mr. Walters joined the Company as Legal Counsel in 2005.

 
14

 

PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 
Market Information:

The authorized common stock of the Company consists of 70,000,000 shares of Class A Common Stock, $1 par value.  The Company's Class A Common Stock is traded on the NASDAQ Global Select Market System under the symbol “MATW”.  The following table sets forth the high, low and closing prices as reported by NASDAQ for the periods indicated:

   
High
   
Low
   
Close
 
Fiscal 2012:
                 
Quarter ended:      September 30, 2012
  $ 32.90     $ 27.88     $ 29.82  
June 30, 2012
    32.63       28.95       32.49  
March 31, 2012
    34.36       30.00       31.64  
December 31, 2011
    37.65       28.59       31.43  
                         
Fiscal 2011:
                       
Quarter ended:      September 30, 2011
  $ 41.08     $ 28.57     $ 30.73  
June 30, 2011
    40.49       35.60       40.17  
March 31, 2011
    38.65       33.56       38.55  
December 31, 2010
    36.00       31.62       34.98  


The Company has a stock repurchase program.  Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews’ common stock under the program, of which 1,814,651 shares remain available for repurchase as of September 30, 2012.  The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share.  Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company’s Restated Articles of Incorporation.

All purchases of the Company’s common stock during fiscal 2012 were part of this repurchase program.

 
15

 

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, (continued)

The following table shows the monthly fiscal 2012 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
 
                         
October 2011
    10,000     $ 29.58       10,000       320,530  
November 2011
    97,570       33.48       97,570       2,722,960  
December 2011
    118,248       31.51       118,248       2,604,712  
January 2012
    18,222       31.49       18,222       2,586,490  
February 2012
    30,000       31.20       30,000       2,556,490  
March 2012
    80,000       31.24       80,000       2,476,490  
April 2012
    83,259       29.92       83,259       2,393,291  
May 2012
    109,594       29.92       109,594       2,283,637  
June 2012
    61,141       30.11       61,141       2,222,496  
July 2012
    93,411       28.87       93,411       2,129,085  
August 2012
    168,830       29.54       168,830       1,960,255  
September 2012
    145,604       30.39       145,604       1,814,651  
    Total
    1,015,879     $ 30.53       1,015,879          


Holders:

Based on records available to the Company, the number of registered holders of the Company's common stock was 498 at October 31, 2012.

Dividends:

A quarterly dividend of $.10 per share was paid for the fourth quarter of fiscal 2012 to shareholders of record on November 26, 2012. The Company paid quarterly dividends of $.09 per share for the first three quarters of fiscal 2012 and the fourth quarter of fiscal 2011.  The Company paid quarterly dividends of $.08 per share for the first three quarters of fiscal 2011 and the fourth quarter of fiscal 2010.  The Company paid quarterly dividends of $.07 per share for the first three quarters of fiscal 2010 and the fourth quarter of fiscal 2009.

Cash dividends have been paid on common shares in every year for at least the past forty-five years.  It is the present intention of the Company to continue to pay quarterly cash dividends on its common stock.  However, there is no assurance that dividends will be declared and paid as the declaration and payment of dividends is at the discretion of the Board of Directors of the Company and is dependent upon the Company's financial condition, results of operations, cash requirements, future prospects and other factors deemed relevant by the Board.

Securities Authorized for Issuance Under Equity Compensation Plans:

See Equity Compensation Plans in Item 12 “Security Ownership of Certain Beneficial Owners and Management” on page 70 of this report.

 
16

 

ITEM 5.                       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, (continued)



PERFORMANCE GRAPH


COMPARISON OF FIVE-YEAR CUMULATIVE RETURN *
AMONG MATTHEWS INTERNATIONAL CORPORATION,
S&P 500 INDEX, S&P MIDCAP 400 INDEX AND S&P SMALLCAP 600 INDEX **


 
 
 
 
 


 
*  Total return assumes dividend reinvestment
** Fiscal year ended September 30



Note: Performance graph assumes $100 invested on October 1, 2007 in Matthews International Corporation Common Stock, Standard & Poor's (S&P) 500 Index, S&P MidCap 400 Index and S&P SmallCap 600 Index.  The results are not necessarily indicative of future performance.


 
17

 

ITEM 6.  SELECTED FINANCIAL DATA.



   
Years Ended September 30,
 
   
2012(1)
   
2011(2)
   
2010(3)
   
2009(4)
 
2008(5)
 
   
(Amounts in thousands, except per share data)
 
   
(Not Covered by Report of Independent Registered Public Accounting Firm)
 
                               
Net sales
  $ 900,317     $ 898,821     $ 821,829     $ 780,908     $ 818,623  
                                         
Operating profit
    93,577       118,516       116,581       101,011       132,952  
                                         
Interest expense
    11,476       8,241       7,419       12,053       10,405  
                                         
Net income attributable to Matthews shareholders
    55,843       72,372       69,057       57,732       79,484  
                                         
                                         
Earnings per common share:
                                       
Basic
    $1.98       $2.47       $2.32       $1.91       $2.57  
Diluted
    1.98       2.46       2.31       1.90       2.55  
                                         
Weighted-average common
                                       
shares outstanding:
                                       
Basic
    27,753       28,775       29,656       30,245       30,928  
Diluted
    27,839       28,812       29,706       30,318       31,184  
                                         
Cash dividends per share
    $.370       $.330       $.290       $.265       $.245  
                                         
Total assets
  $ 1,128,042     $ 1,097,455     $ 993,825     $ 949,653     $ 914,282  
Long-term debt, non-current
    298,148       299,170       225,256       237,530       219,124  


(1)
Fiscal 2012 included net unusual charges of approximately $7,850 (pre-tax), which primarily consisted of charges related to cost reduction initiatives and incremental costs related to an ERP implementation in the Cemetery Products segment.  In addition, fiscal 2012 included the favorable effect of an adjustment of $528 to income tax expense primarily related to changes in estimated tax accruals for open tax periods.
(2)
Fiscal 2011 included the favorable effect of an adjustment of $606 to income tax expense primarily related to changes in estimated tax accruals for open tax periods.
(3)
Fiscal 2010 included the favorable effect of an adjustment of $838 to income tax expense primarily related to changes in estimated tax accruals for open tax periods.
(4)
Fiscal 2009 included pre-tax unusual charges of approximately $16,500, which primarily consisted of severance and other costs related to the consolidation of certain production operations within the Company’s Cemetery Products segment, costs related to operational and systems improvements in several of the Company’s other businesses, and asset adjustments resulting from current market conditions.  In addition, fiscal 2009 earnings included the favorable effect of an adjustment of $1,255 to income tax expense primarily related to the Company’s ability to utilize a European tax loss carryover generated in prior years and changes in the estimated tax accruals for open tax periods.
(5)
Fiscal 2008 included a reduction in income taxes of $1,882 to reflect the adjustment of net deferred tax liabilities resulting from the enactment of lower statutory income tax rates in certain European countries.

 
18

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 
The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation and related notes thereto.  In addition, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K.


RESULTS OF OPERATIONS:

 
The following table sets forth sales and operating profit for the Company’s Memorialization and Brand Solutions businesses for each of the last three fiscal years.

   
Years Ended September 30,
 
   
2012
   
2011
   
2010
 
Sales:
                 
    Memorialization
  $ 492,867     $ 507,342     $ 473,882  
    Brand Solutions
    407,450       391,479       347,947  
    $ 900,317     $ 898,821     $ 821,829  
                         
Operating Profit:
                       
    Memorialization
  $ 63,589     $ 84,992     $ 87,319  
    Brand Solutions
    29,988       33,524       29,262  
    $ 93,577     $ 118,516     $ 116,581  
                         

Comparison of Fiscal 2012 and Fiscal 2011:

In fiscal 2012, the Company changed the name of its Bronze, Casket and Marking Products segments to the Cemetery Products segment, Funeral Home Products segment and Marking and Fulfillment Systems segment, respectively.  Also effective October 1, 2011, the Company’s cremation casket operations, previously included in the Cremation segment, are included in the Funeral Home Products segment. Prior period financial information has been reclassified to reflect the current presentation.

Sales for the year ended September 30, 2012 were $900.3 million, compared to $898.8 million for the year ended September 30, 2011.  Fiscal 2012 included the impact of recent acquisitions, and higher sales in the Cremation, Marking and Fulfillment Systems and Merchandising Solutions segments. These increases were offset by lower sales in the Cemetery Products, Funeral Home Products and Graphics Imaging segments, and by the unfavorable impact of changes in the values of foreign currencies of approximately $18.4 million compared to fiscal 2011.  Sales in the Cemetery Products and Funeral Home Products segments were negatively impacted by a decline in the estimated number of casketed and in-ground burial (non-cremation) deaths.
 
 
In the Memorialization businesses, Cemetery Products segment sales for fiscal 2012 were $215.9 million compared to $224.8 million for fiscal 2011.  The decrease primarily reflected lower sales of memorial products in North America, a decrease in mausoleum sales and the unfavorable impact of changes in foreign currencies against the U.S. dollar.  These declines were partially offset by the acquisition of Everlasting Granite in May 2012.  Sales for the Funeral Home Products segment were $230.9 million for fiscal 2012 compared to $243.3 million for fiscal 2011, which principally resulted from a reduction in sales volume. Lower sales volume of bronze memorials and caskets reflected the impact of a decline in the estimated number of casketed deaths compared to the prior year.  Sales for the Cremation segment were $46.0 million for fiscal 2012 compared to $39.3 million a year ago.  The increase principally resulted from higher sales of cremation equipment, primarily in the U.S., partially offset by the unfavorable impact of changes in foreign currency values.  In the Company’s Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2012 were $259.9 million, compared to $269.0 million a year ago.  The decrease resulted principally from lower sales in the European market, and the unfavorable impact of changes in foreign currency values against the U.S. dollar. These declines were partially offset by the impact of the acquisition of Kroma Pre-Press Preparation Systems Industry & Trade, Inc. (“Kroma”) which was purchased in July 2011.  Marking and Fulfillment Systems segment sales for the year ended September 30, 2012 were $74.6 million, compared to $61.9 million for fiscal 2011.  The increase was principally due to higher equipment sales and the full year impact of two small acquisitions completed in fiscal 2011, partially offset by the unfavorable impact of changes in foreign currency values.

 
19

 


ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Sales for the Merchandising Solutions segment were $73.0 million for fiscal 2012, compared to $60.6 million a year ago.  The improvement was attributable to an increase in sales to several large customers in fiscal 2012.

Gross profit for the year ended September 30, 2012 was $336.6 million, or 37.4% of sales, compared to $351.7 million, or 39.1% of sales, for fiscal 2011.  The decrease in fiscal 2012 consolidated gross profit compared to fiscal 2011 reflected lower sales, higher commodity costs, and unusual charges in several of the Company’s segments.  The unusual charges related primarily to severance costs in several of the Company’s businesses as a result of cost structure initiatives and incremental costs related to the Company’s ERP implementation in the Cemetery Products segment.

Selling and administrative expenses for the year ended September 30, 2012 were $243.0 million, or 27.0% of sales, compared to $233.1 million, or 25.9% of sales, for fiscal 2011.  The increase in selling and administrative expenses was attributable to higher sales in the Cremation, Marking and Fulfillment Systems and Merchandising Solutions segments, and the impact of acquisitions in the Cemetery Products and Marking and Fulfillment Systems segments.  In addition, fiscal 2012 selling and administrative expenses include net unusual charges in several segments.  Unusual charges primarily included severance costs, incremental costs related to the Company’s ERP implementation in the Cemetery Products segment, acquisition-related expenses and asset adjustments.  These charges were partially offset by unusual gains consisting of adjustments to contingent consideration liabilities, a favorable settlement on a claim related to the Company’s granite business and a gain on the sale of a business investment in China.
 
 
Operating profit for fiscal 2012 was $93.6 million, compared to $118.5 million for fiscal 2011.  The decrease in operating profit for fiscal 2012 reflected the impact of lower consolidated sales, higher commodity costs, a $2.1 million unfavorable impact of changes in foreign currency values against the U.S. dollar and net unusual charges totaling approximately $7.8 million.

Cemetery Products segment operating profit for fiscal 2012 was $33.2 million, compared to $52.5 million for fiscal 2011.  The decrease in fiscal 2012 operating profit compared to fiscal 2011 reflected lower sales, higher bronze ingot costs, the unfavorable impact of changes in foreign currency values and net unusual charges of approximately $5.4 million related to severance and ERP implementation costs.  Operating profit for the Funeral Home products segment for fiscal 2012 was $26.5 million, compared to $29.0 million for fiscal 2011.  The decrease in Funeral Home Products segment operating profit for fiscal 2012 primarily reflected the impact of lower sales, higher commodity (primarily fuel) costs and unusual charges of approximately $1.7 million related to severance costs.  These declines were partially offset by the benefit of selling and distribution cost structure initiatives and an adjustment to the liability for contingent consideration.  Cremation segment operating profit for the year ended September 30, 2012 was $3.9 million, compared to $3.5 million a year ago.  Fiscal 2012 operating profit reflected higher sales in the U.S. market, partially offset by lower margins on sales in the European market.  Graphics Imaging segment operating profit for fiscal 2012 was $14.8 million, compared to $22.4 million for 2011.  The decrease in fiscal 2012 reflected lower sales, and unusual charges of approximately $5.1 million related to severance costs and the unfavorable impact of changes in foreign currency values.  The unusual charges related primarily to severance and acquisition-related costs.  The declines were partially offset by an adjustment to the liability for contingent consideration and a gain on the sale of a business investment in China.  Operating profit for the Marking and Fulfillment Systems segment for fiscal 2012 was $10.1 million, compared to $7.8 million a year ago.  The increase in Marking and Fulfillment Systems segment operating profit principally reflected the impact of acquisitions and higher sales. The Merchandising Solutions segment operating profit was $5.1 million for fiscal 2012, compared to $3.3 million for fiscal 2011.  The increase principally reflected the impact of higher sales.

Investment income for the year ended September 30, 2012 was $3.9 million, compared to $1.4 million for the year ended September 30, 2011.  The increase principally reflected increases in the market value of investments held in trust for certain of the Company’s benefit plans.  Interest expense for fiscal 2012 was $11.5 million, compared to $8.2 million last year.  The increase in interest expense reflected higher average debt levels.

Other income (deductions), net, for the year ended September 30, 2012 represented a decrease in pre-tax income of $2.1 million, compared to an increase in pre-tax income of $298,000 in 2011.  Other income and deductions generally include banking-related fees and the impact of currency gains or losses on certain intercompany debt.

 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

The Company's effective tax rate for fiscal 2012 was 34.2%, compared to 34.4% for fiscal 2011. Fiscal 2012 and 2011 included the favorable impact of adjustments totaling $528,000 and $606,000, respectively, in income tax expense primarily related to changes in the estimated tax accruals for open tax periods.  Excluding these adjustments from both periods, the Company’s effective tax rate was 34.8% for fiscal year 2012 and 35.0% for fiscal year 2011. The decrease in the fiscal 2012 effective tax rate, compared to fiscal 2011 primarily reflected the impact of the Company’s European tax structure initiatives. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.

Net earnings attributable to noncontrolling interest was a loss of $639,000 for fiscal 2012, compared to net income of $1.1 million in fiscal 2011.  The decrease related principally to the Company’s acquisition of the remaining 22% interest in Saueressig GmbH & Co. KG (“Saueressig”) in April 2011 and a net loss recorded by the Company’s Turkish operation in fiscal 2012.

Comparison of Fiscal 2011 and Fiscal 2010:

Sales for the year ended September 30, 2011 were $898.8 million, compared to $821.8 million for the year ended September 30, 2010.  The increase resulted principally from the impact of acquisitions, higher sales volume in the Company’s Brand Solutions businesses and changes in the values of foreign currencies against the U.S. dollar, which had a favorable impact of approximately $11.4 million on the Company’s consolidated sales compared to fiscal 2010.

In the Memorialization businesses, Cemetery Products segment sales for fiscal 2011 were $224.8 million compared to $224.2 million for fiscal 2010.  The increase primarily reflected the December 2009 acquisition of United Memorial Products, Inc. (“UMP”) and the favorable impact of changes in foreign currency values against the U.S. dollar.  Excluding the impact of acquisitions and currency changes, fiscal 2011 Cemetery Products segment sales declined compared to fiscal 2010, reflecting lower sales volume of bronze memorial and architectural products and an unfavorable change in product mix.  Sales for the Funeral Home Products segment were $243.3 million for fiscal 2011 compared to $216.8 million for fiscal 2010.  The increase resulted principally from acquisitions.  Excluding the impact of acquisitions, fiscal 2011 Funeral Home Products segment sales declined, principally reflecting slightly lower unit volume and an unfavorable change in product mix.  Lower sales (excluding acquisitions) for both the Cemetery Products and Funeral Home Products segments reflected the impact of a decline in the estimated number of casketed deaths compared to the prior year.  Based on available published data, U.S. deaths for the year ended September 30, 2011 were estimated to have increased from fiscal 2010; however, casketed deaths (non-cremation) were estimated to have declined from the prior year.  Sales for the Cremation segment were $39.3 million for fiscal 2011 compared to $32.8 million for fiscal 2010.  The increase principally resulted from higher sales in all of the segment’s principal markets (U.S., U.K. and Europe) and the acquisition of a small manufacturer of cremation equipment in the U.K. in March 2010.  In the Company’s Brand Solutions businesses, sales for the Graphics Imaging segment in fiscal 2011 were $269.0 million, compared to $240.0 million for fiscal 2010.  The increase resulted principally from higher sales in all markets (Europe, U.S., U.K. and Asia), the July 2011 acquisition of Kroma and the favorable impact from changes in the values of foreign currencies against the U.S. dollar. Marking and Fulfillment Systems segment sales for the year ended September 30, 2011 were $61.9 million, compared to $51.1 million for fiscal 2010.  The increase was principally due to higher sales of equipment and consumables in the U.S. and China, two small acquisitions in fiscal 2011 and the favorable impact of changes in foreign currency values.  Sales for the Merchandising Solutions segment were $60.6 million for fiscal 2011, compared to $56.9 million for fiscal 2010.  The improvement was attributable to an increase in project volume to several large global customers in fiscal 2011, compared to fiscal 2010.
 
 
Gross profit for the year ended September 30, 2011 was $351.7 million, or 39.1% of sales, compared to $323.4 million, or 39.3% of sales, for fiscal 2010.  The increase in fiscal 2011 consolidated gross profit compared to fiscal 2010 reflected higher sales in the Brand Solutions businesses and the benefit of cost structure initiatives.  The increases were partially offset by higher commodity costs, primarily in the Cemetery Products and Funeral Home Products segments.
 
 
Selling and administrative expenses for the year ended September 30, 2011 were $233.1 million, or 25.9% of sales, compared to $206.8 million, or 25.2% of sales, for fiscal 2010.  The increase primarily resulted from higher sales and the impact of acquisitions.


 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Operating profit for fiscal 2011 was $118.5 million, compared to $116.6 million for fiscal 2010.  The increase in operating profit for fiscal 2011 reflected the impact of acquisitions and a favorable impact of $1.4 million from changes in foreign currency values against the U.S. dollar.  These increases were partially offset by higher commodity costs, primarily in the Cemetery Products and Funeral Home Products segments.  Cemetery Products segment operating profit for fiscal 2011 was $52.5 million, compared to $56.2 million for fiscal 2010.  The decrease in fiscal 2011 operating profit compared to fiscal 2010 reflected lower sales, including an unfavorable shift in product mix, and a significant increase in bronze metal costs in fiscal 2011.  Operating profit for the Funeral Home Products segment for fiscal 2011 was $29.0 million, compared to $27.5 million for fiscal 2010.  The increase in Funeral Home Products segment operating profit for fiscal 2011 primarily reflected the benefit of acquisitions.  Excluding acquisitions, Funeral Home Products segment operating profit declined, primarily reflecting an unfavorable change in product mix and the impact of higher steel and fuel costs, partially offset by the benefit of recent cost structure initiatives.  Cremation segment operating profit for the year ended September 30, 2011 was $3.5 million, compared to $3.6 million a year ago.  Fiscal 2011 operating profit reflected the impact of higher equipment sales in the U.S. market and the March 2010 acquisition of a small cremation equipment manufacturer in the U.K., offset by lower margins on sales in the European market.  Graphics Imaging operating profit for fiscal 2011 was $22.4 million, compared to $21.1 million for 2010.  The increase in fiscal 2011 reflected higher sales, improvements in the segment’s U.S. cost structure, the acquisition of Kroma and the favorable impact of changes in foreign currency values, partially offset by higher manufacturing costs in the segment’s European gravure manufacturing operations.

Operating profit for the Marking and Fulfillment Systems segment for fiscal 2011 was $7.8 million, compared to $5.8 million a year ago.  The increase in Marking and Fulfillment Systems segment operating profit principally reflected the impact of acquisitions and higher sales in the U.S. and China. These increases were partially offset by an increase in research and development costs.  The Merchandising Solutions segment operating profit was $3.3 million for fiscal 2011, compared to $2.4 million for fiscal 2010.  The increase principally reflected the impact of higher sales.

Investment income for the year ended September 30, 2011 was $1.4 million, compared to $2.5 million for the year ended September 30, 2010.  The decrease principally reflected a decline in the market value of investments held in trust for certain of the Company’s benefit plans.  Interest expense for fiscal 2011 was $8.2 million, compared to $7.4 million last year.  The increase in interest expense reflected higher average debt levels resulting primarily from recent acquisitions.

Other income (deductions), net, for the year ended September 30, 2011 represented an increase in pre-tax income of $298,000, compared to a reduction in pre-tax income of $1.3 million in 2010.  The favorable impact on other income (deductions), net in fiscal 2011 primarily reflected a foreign currency exchange gain on the settlement of an intercompany loan.

The Company's effective tax rate for fiscal 2011 was 34.4%, compared to 35.0% for fiscal 2010. Fiscal 2011 and 2010 included the favorable impact of adjustments totaling $606,000 and $838,000, respectively, in income tax expense primarily related to changes in the estimated tax accruals for open tax periods.  Excluding these adjustments from both periods, the Company’s effective tax rate was 35.0% for fiscal year 2011 and 35.8% for fiscal year 2010. The decrease in the fiscal 2011 effective tax rate, compared to fiscal 2010 primarily reflected the impact of the Company’s European tax structure initiatives. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state taxes, offset by lower foreign income taxes.

Net income attributable to noncontrolling interest was $1.1 million for fiscal 2011, compared to $2.7 million in fiscal 2010.  The decrease related principally to the Company’s acquisition, effective as of the beginning of fiscal 2011, of the remaining 25% interest in one of its less than wholly-owned German graphics businesses and the acquisition of the remaining 22% interest in Saueressig in April 2011.

 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

LIQUIDITY AND CAPITAL RESOURCES:

Net cash provided by operating activities was $82.1 million for the year ended September 30, 2012, compared to $95.6 million and $106.5 million for fiscal 2011 and 2010, respectively.  The decline in fiscal 2012 operating cash flow primarily reflected lower net income.  Operating cash flow for fiscal 2012 principally included net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by an increase in working capital items (primarily accounts receivable and inventory) and a cash contribution of $5.0 million to the Company’s principal pension plan.  Operating cash flow for fiscal 2011 primarily reflected net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by a net increase in working capital items.  In addition the Company made a cash contribution of $9.0 million to its principal pension plan.  Operating cash flow for fiscal 2010 primarily reflected net income adjusted for depreciation and amortization, stock-based compensation expense, and an increase in deferred taxes, partially offset by a cash contribution of $9.0 million to the Company’s principal pension plan.

Cash used in investing activities was $45.3 million for the year ended September 30, 2012, compared to $106.8 million and $54.3 million for fiscal years 2011 and 2010, respectively. Investing activities for fiscal 2012 primarily reflected capital expenditures of $33.2 million and payments (net of cash acquired) of $12.5 million for acquisitions.  Investing activities for fiscal 2011 primarily reflected payments (net of cash acquired) of $84.4 million for acquisitions and capital expenditures of $22.4 million. Investing activities for fiscal 2010 primarily reflected payments (net of cash acquired) of $32.3 million for acquisitions, capital expenditures of $21.4 million.

Capital expenditures were $33.2 million for the year ended September 30, 2012, compared to $22.4 million and $21.4 million for fiscal 2011 and 2010, respectively.  The increase in capital expenditures for fiscal 2012 primarily reflected new investments in gravure equipment in Germany and Turkey, and investments in ERP and e-commerce systems.  Capital expenditures in each of the last three fiscal years 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 $25.7 million for the last three fiscal years.  Capital spending for fiscal 2013 is currently expected to be approximately $30.0 million.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash used by financing activities for the year ended September 30, 2012 was $41.0 million, reflecting purchases of treasury stock of $31.0 million, and payment of dividends to the Company’s shareholders of $10.3 million ($0.37 per share).  Cash provided by financing activities for the year ended September 30, 2011 was $10.4 million, reflecting proceeds, net of repayments, on long-term debt of $68.9 million, purchases of treasury stock of $44.6 million, proceeds from the sale of treasury stock (stock option exercises) of $1.9 million, payment of dividends to the Company’s shareholders of $9.6 million ($0.33 per share) and distributions of $6.2 million to noncontrolling interests.  Cash used in financing activities for the year ended September 30, 2010 was $51.5 million, reflecting repayments, net of proceeds, on long-term debt of $8.8 million, purchases of treasury stock of $35.3 million, proceeds from the sale of treasury stock (stock option exercises) of $1.5 million, payment of dividends to the Company’s shareholders of $8.7 million ($0.29 per share) and distributions of $234,000 to noncontrolling interests.

The Company has a domestic Revolving Credit Facility with a syndicate of financial institutions.  In March 2012, the maximum amount of borrowings available under the facility was increased from $300.0 million to $400.0 million and the facility’s maturity was extended to March 2017.  Borrowings under the amended facility bear interest at LIBOR plus a factor ranging from 1.00% to 1.50% 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 .20% to .30% (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 $25.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at September 30, 2012 and 2011 were $281.3 million and $250.0 million, respectively.  The weighted-average interest rate on outstanding borrowings at September 30, 2012 and 2011 was 2.83% and 2.59%, respectively.

 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at September 30, 2012
 
Maturity Date
May 2011
  $25 million
1.37%
1.25%
May 2014
October 2011
  25 million
1.67%
1.25%
October 2015
November 2011
  25 million
2.13%
1.25%
November 2014
March 2012
  25 million
2.44%
1.25%
March 2015
June 2012
  40 million
1.88%
1.25%
June 2022
August 2012
  35 million
1.74%
1.25%
June 2022
September 2012
  25 million
3.03%
1.25%
December 2015
September 2012
  25 million
1.24%
1.25%
March 2017
November 2012
  25 million
1.33%
1.25%
November 2015

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 $9.1 million ($5.6 million after tax) at September 30, 2012 that is included in equity as part of accumulated other comprehensive loss.  Assuming market rates remain constant with the rates at September 30, 2012, approximately $1.7 million of the $5.6 million loss included in accumulated other comprehensive loss is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

The Company, through certain of its German subsidiaries, had a credit facility with a European bank that expired in September 2012. The maximum amount of borrowings available under this facility was 25.0 million Euros. Outstanding borrowings under the credit facility totaled 23.6 million Euros ($31.6 million) at September 30, 2011.  The weighted-average interest rate on outstanding borrowings under the facility at September 30, 2011 was 2.38%.

The Company, through its German subsidiary, Saueressig, has several loans with various European banks.  Outstanding borrowings on these loans totaled 8.2 million Euros ($10.5 million) and 8.3 million Euros ($11.2 million) at September 30, 2012 and 2011, respectively.  The weighted-average interest rate on outstanding borrowings of Saueressig at September 30, 2012 and 2011 was 6.10% and 6.05%, respectively.

The Company, through its wholly-owned subsidiary Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled 6.3 million Euros ($8.1 million) and 8.7 million Euros ($11.6 million) at September 30, 2012 and 2011, respectively.  Matthews International S.p.A. also has three lines of credit totaling 11.4 million Euros ($14.6 million) with the same Italian banks.  Outstanding borrowings on these lines were 3.4 million Euros ($4.3 million) and 493,000 Euros ($661,000) at September 30, 2012 and 2011, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at September 30, 2012 and 2011 was 3.08% and 3.11%, respectively.

The Company has a stock repurchase program.  Under the current authorization, the Company's Board of Directors has authorized the repurchase of a total of 2,500,000 shares of Matthews’ common stock under the program, of which 1,814,651 shares remain available for repurchase as of September 30, 2012.  The buy-back program is designed to increase shareholder value, enlarge the Company's holdings of its common stock, and add to earnings per share.  Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Company’s Restated Articles of Incorporation.


 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Consolidated working capital was $204.4 million at September 30, 2012, compared to $208.1 million and $187.5 million at September 30, 2011 and 2010, respectively. Working capital at September 30, 2012 reflected an increase in accounts receivable and inventory, and an increase in the current portion of estimated contingent consideration related to acquisitions.  Working capital at September 30, 2011 reflected an increase in accounts receivable and inventory in connection with recent acquisitions. Working capital at September 30, 2010 reflected an increase in accounts receivable and inventory in connection with recent acquisitions. Cash and cash equivalents were $58.3 million at September 30, 2012, compared to $61.7 million and $59.7 million at September 30, 2011 and 2010, respectively.  The Company's current ratio was 2.1 at September 30, 2012 and 2.3 at September 30, 2011 and 2010.

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”) 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.

At September 30, 2012, an accrual of approximately $5.7 million had been recorded for environmental remediation (of which $781,000 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, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations or financial position.

ACQUISITIONS:

Fiscal 2012:

Acquisition spending, net of cash acquired, during the year ended September 30, 2012 totaled $12.5 million.  The acquisitions were not individually material to the Company’s consolidated financial position or results of operations, and primarily included the following:

In May 2012, the Company announced that it had acquired Everlasting Granite Memorial Co., Inc., a supplier of granite memorials, columbariums and private mausoleum estates. The transaction is intended to expand the Company’s presence and product breadth in the granite memorial business.

Fiscal 2011:

Acquisition spending, net of cash acquired, during the year ended September 30, 2011 totaled $84.4 million.  The acquisitions were not individually material to the Company’s consolidated financial position or results of operations, and primarily included the following:

 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

In August 2011, the Company acquired Lightning Pick Technologies, Inc. (“LPT”), a manufacturer that develops, installs and supports paperless order fulfillment solutions.  The transaction is intended to expand the Company’s presence and product breadth in the fulfillment systems industry.

In July 2011, the Company purchased a 61.5% interest in Kroma, a leading provider of pre-press services and roto-gravure printing cylinders in Turkey.  The acquisition is designed to further extend Matthews' presence as the leading provider of reprographic pre-press products and services to the European packaging and tobacco markets.  The Company also has an arrangement to acquire an additional 8.5% interest and an option agreement related to the remaining 30% interest in Kroma.

 
In April 2011, the Company completed the purchase of the remaining 22% interest in Saueressig for 19.3 million Euros ($27.4 million), completing the option agreement in connection with the May 2008 acquisition of a 78% interest in Saueressig.

 
In March 2011, the Company acquired Innovative Picking Technologies, Inc. (“IPTI”), a manufacturer of paperless order fulfillment systems.  The transaction is intended to expand the Company’s presence into the fulfillment systems industry.

 
In October 2010, the Company acquired Freeman Metal Products, Inc. and its affiliated companies (“Freeman”), a manufacturer and distributor of caskets.  The purchase price for the acquisition was $22.8 million, plus additional consideration up to $6.0 million contingent on operating performance over the next three years.  The transaction is intended to provide synergies in the manufacturing and distribution of caskets and expand the Company’s market presence in the Southeast and South Central regions of the United States.

 
In October 2010, the Company acquired the remaining 25% interest in Rudolf Reproflex GmbH & Co. KG (“Reproflex”).  The Company acquired a 75% interest in Reproflex in 2001.

Fiscal 2010:

Acquisition spending, net of cash acquired, during the year ended September 30, 2010 totaled $32.3 million. The acquisitions primarily included the following:

In August 2010, the Company acquired Newmark of Colorado and its affiliated companies (“Newmark”), a distributor of primarily York brand caskets in the West region of the United States.  The transaction was designed as an asset purchase and was intended to expand the Company’s casket distribution capabilities in the western United States.

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.

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 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 and caskets in the West region of the United States. The transaction was structured as an asset purchase and was designed to extend Matthews’ presence in the broad granite market.


 
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ITEM 7.                      MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

FORWARD-LOOKING INFORMATION:

Matthews has a three-pronged strategy to attain annual growth in earnings per share. This strategy consists of the following:  internal growth (which includes organic growth, cost structure and productivity improvements, new product development and the expansion into new markets with existing products), acquisitions and share repurchases under the Company’s stock repurchase program (see "Liquidity and Capital Resources").

The Company’s results for fiscal 2012 were impacted by several significant factors, including:
·  
the impact of the decline in U.S. deaths on sales of bronze memorial and casket products;
·  
a slow-down in our European markets (including a recent further decline in the value of the Euro);
·  
an ERP implementation in our Cemetery Products segment.

Many of these challenges are expected to continue in fiscal 2013.  As a result, the Company initiated more aggressive cost reduction programs and accelerated initiatives to resolve the remaining ERP implementation issues, which resulted in additional one-time costs in the fiscal 2012 fourth quarter.  These initiatives are progressing well but are still ongoing, which will result in further unusual costs during fiscal 2013.

However, demand for the products and services of our Merchandising Solutions and Marking and Fulfillment Systems businesses remained solid through fiscal 2012.  Cremation equipment sales volume also continued to grow domestically.  These trends are expected to continue.

Based on the aforementioned, excluding unusual costs, the Company is projecting growth in fiscal 2013 earnings per share over fiscal 2012.

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 Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Annual Report on Form 10-K.

The Company's significant accounting policies are included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.  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.  The following accounting policies involve significant estimates, which were considered critical to the preparation of the Company's consolidated financial statements for the year ended September 30, 2012.

Trade Receivables and Allowance for Doubtful Accounts:

Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are more than 30 days past due. The allowance for doubtful accounts is based on an evaluation of specific customer accounts for which available facts and circumstances indicate collectibility may be uncertain.  In addition, the allowance includes a reserve for all customers based on historical collection experience.

 
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ITEM 7.              MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Long-Lived Assets:

Property, plant and equipment, goodwill and other intangible assets are carried at cost.  Depreciation on property, plant and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets.  Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Recoverability of assets is determined by evaluating the estimated undiscounted net cash flows of the operations to which the assets relate.  An impairment loss would be recognized when the carrying amount of the assets exceeds the fair value which is based on a discounted cash flow analysis.

Goodwill is not amortized, but is subject to periodic 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 combination of valuation techniques, including discounted cash flows.  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 reviews in the second quarters of fiscal 2012, 2011 and 2010 and determined that no adjustments to the carrying values of goodwill or other intangibles with indefinite lives were necessary at those times.

Share-Based Payment:

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period.

Pension and Postretirement Benefits:

Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of benefit obligations.  Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension cost.

The Company's principal pension plan maintains a substantial portion of its assets in equity securities in accordance with the investment policy established by the Company’s pension board.  Based on an analysis of the historical performance of the plan's assets and information provided by its independent investment advisor, the Company set the long-term rate of return assumption for these assets at 8.0% at September 30, 2012 for purposes of determining pension cost and funded status.   The Company’s discount rate assumption used in determining the present value of the projected benefit obligation is based upon published indices as of September 30, 2012 and September 30, 2011 for the fiscal year end valuation. The discount rate was 4.00%, 4.75% and 5.25% in fiscal 2012, 2011 and 2010, respectively.

Environmental:

Environmental liabilities are recorded when the Company's obligation is probable and reasonably estimable.  Accruals for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value.

 
28

 


ITEM 7.              MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

Revenue Recognition:

Revenues are generally recognized when title and risk of loss pass to the customer, which is typically at the time of product shipment.  For pre-need sales of memorials and vases, revenue is recognized when the memorial has been manufactured to the customer’s specifications (e.g., name and birth date), title has been transferred to the customer and the memorial and vase are placed in storage for future delivery.  A liability has been recorded for the estimated costs of finishing pre-need bronze memorials and vases that have been manufactured and placed in storage prior to July 1, 2003 for future delivery.  Beginning July 1, 2003, revenue is deferred by the Company on the portion of pre-need sales attributable to the final finishing and storage of the pre-need merchandise.  Deferred revenue for final finishing is recognized at the time the pre-need merchandise is finished and shipped to the customer.  Deferred revenue related to storage is recognized on a straight-line basis over the estimated average time that pre-need merchandise is held in storage.  At September 30, 2012, the Company held 328,870 memorials and 234,115 vases in its storage facilities under the pre-need sales program.

Construction revenues are recognized under the percentage-of-completion method of accounting using the cost-to-cost method.

The Company offers rebates to certain customers participating in volume purchase programs.  Rebates are estimated and recorded as a reduction in sales at the time the Company’s products are sold.

LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The following table summarizes the Company’s contractual obligations at September 30, 2012, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

   
Payments due in fiscal year:
 
                           
After
 
   
Total
   
2013
   
2014 to 2015
   
2016 to 2017
   
2017
 
Contractual Cash Obligations:
 
(Dollar amounts in thousands)
 
Revolving credit facility
  $ 281,323     $ -     $ -     $ 281,323     $ -  
Notes payable to banks
    26,626       15,905       9,457       1,089       175  
Short-term borrowings
    4,322       4,322       -       -       -  
Capital lease obligations
    9,486       1,586       2,471       891       4,538  
Non-cancelable operating leases
    24,826       9,993       10,557       3,851       425  
Total contractual cash obligations
  $ 346,583     $ 31,806     $ 22,485     $ 287,154     $ 5,138  

A significant portion of the loans included in the table above bear interest at variable rates. At September 30, 2012, the weighted-average interest rate was 2.83% on the Company’s domestic Revolving Credit Facility, 6.10% on bank loans to its wholly-owned subsidiary, Saueressig, and 3.08% on bank loans to the Company’s wholly-owned subsidiary, Matthews International S.p.A.

Benefit payments under the Company’s principal retirement plan are made from plan assets, while benefit payments under the supplemental retirement plan and postretirement benefit plan are funded from the Company’s operating cash. Under I.R.S. regulations, the Company was not required to make any significant contributions to its principal retirement plan in fiscal 2012, however, in fiscal 2012, the Company made a contribution of $5.0 million to its principal retirement plan. The Company is not required to make any significant cash contributions to its principal retirement plan in fiscal 2013.  The Company estimates that benefit payments to participants under its retirement plans (including its supplemental retirement plan) and postretirement benefit payments will be approximately $6.3 million and $1.1 million, respectively, in fiscal 2013.  The amounts are expected to increase incrementally each year thereafter, to $7.9 million and $1.5 million in 2017.  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.

In connection with several recent acquisitions, the Company has recorded contingent consideration of approximately $16.1 million.  The fair value of the contingent consideration expected to be settled in fiscal 2013 is approximately $13.3 million, with the remainder scheduled to be settled in fiscal 2014.

 
29

 


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS, (continued)

In connection with its July 2011 acquisition of a 70% interest in Kroma, the Company entered into an option agreement related to the remaining 30% interest in Kroma.  The option agreement contains put and call provisions for the purchase of the remaining 30% interest in future years at a price to be determined by a formula based upon future operating results of Kroma.  The Company has recorded an estimate of $10.5 million in “Arrangement with noncontrolling interest” on the September 30, 2012 Consolidated Balance Sheet representing the current estimate of the future purchase price.  The timing of the exercise of the put and call provisions is not presently determinable.

Unrecognized tax benefits are positions taken, or expected to be taken, on an income tax return that may result in additional payments to tax authorities.  If a tax authority agrees with the tax position taken, or expected to be taken, or the applicable statute of limitations expires, then additional payments will not be necessary.  As of September 30, 2012, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $2.7 million.  The timing of potential future payments related to the unrecognized tax benefits is not presently determinable.

INFLATION:

Except for the volatility in the cost of bronze ingot, steel and fuel (see “Results of Operations”), inflation has not had a material impact on the Company over the past three years nor is it anticipated to have a material impact for the foreseeable future.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance for goodwill and other intangibles. The amendment applies to the goodwill impairment test and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  The more likely than not threshold is defined as a likelihood of more than 50 percent. The amendment was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  This amendment was adopted by the Company for the quarter ended March 31, 2012.  Adoption of this amendment did not have a material effect on the financial statements.

In June 2011, the FASB issued an amendment to the guidance on the presentation of comprehensive income.  The amendment requires that comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and other comprehensive income are presented. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Adoption of this amendment did not have a material effect on the financial statements.

In May 2011, the FASB issued an amendment to revise the wording used to describe many of the requirements for measuring fair value and disclosing information about fair value measurements.  This amendment clarifies the FASB’s intention about the application of fair value.  In addition, the amendment changes certain principles or requirements for measuring fair value and disclosure of such measurements.  The amendment was effective for annual and interim reporting periods beginning after December 15, 2011, and was adopted by the Company for the quarter ended March 31, 2012. Adoption of this amendment did not have a material effect on the financial statements.

In December 2010, the FASB issued an amendment to the disclosure requirements for business combinations. This amendment specifies that if comparative financial statements are presented in connection with a business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendment also expands the disclosure requirement to include the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The amendment was effective for business combinations consummated on or before the beginning of the first annual reporting period beginning on or after December 15, 2010, and early adoption is permitted.  This amendment was adopted by the Company for the fiscal year ended September 30, 2012.  Adoption of this amendment did not have a material effect on the financial statements.

 
30

 


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

The Company has entered into the following interest rate swaps:

Effective Date
Amount
Fixed Interest Rate
Interest Rate Spread at September 30, 2012
 
Maturity Date
May 2011
  $25 million
1.37%
1.25%
May 2014
October 2011
  25 million
1.67%
1.25%
October 2015
November 2011
  25 million
2.13%
1.25%
November 2014
March 2012
  25 million
2.44%
1.25%
March 2015
June 2012
  40 million
1.88%
1.25%
June 2022
August 2012
  35 million
1.74%
1.25%
June 2022
September 2012
  25 million
3.03%
1.25%
December 2015
September 2012
  25 million
1.24%
1.25%
March 2017
November 2012
  25 million
1.33%
1.25%
November 2015

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 $9.1 million ($5.6 million after tax) at September 30, 2012 that is included in equity as part of accumulated other comprehensive loss.  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 $1.0 million 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, fuel and wood) used in its manufacturing operations. The Company obtains competitive prices for materials and supplies when available.  In addition, based on competitive market conditions and to the extent that the Company has established pricing terms with customers through contracts or similar arrangements, the Company’s ability to immediately increase the price of its products to offset the increased costs may be limited.

Foreign Currency Exchange Rates - The Company is subject to changes in various foreign currency exchange rates, primarily including the Euro, British Pound, Canadian Dollar, Australian Dollar, Swedish Krona, Chinese Yuan, Hong Kong Dollar, Polish Zloty, Turkish Lira and Vietnamese Dong in the conversion from local currencies to the U.S. dollar of the reported financial position and operating results of its non-U.S. based subsidiaries.  An adverse change (strengthening dollar) of 10% in exchange rates would have resulted in a decrease in reported sales of $34.1 million and a decrease in reported operating income of $3.2 million for the year ended September 30, 2012.

 
31

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, (continued)

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, 2012 actuarial valuations of changes in the primary assumptions affecting the Company’s retirement plans 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
    $(2,747 )       $  3,339               $(1,056)                $1,056                $  (965)      $ $    965  
                                                                         
Increase (decrease) in projected benefit obligation
    (24,551 )     30,652                                                 -  
                                                                         
Increase (decrease) in funded status
    24,551       (30,652 )                                         5,438        (5,438 )






 
32

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
 
Description
 
Pages
     
Management’s Report to Shareholders
 
34
     
Report of Independent Registered Public Accounting Firm
 
35
     
Financial Statements:
   
     
     Consolidated Balance Sheets as of September 30, 2012 and 2011
 
36-37
     
     Consolidated Statements of Income for the years ended September 30, 2012, 2011 and 2010
 
38
     
     Consolidated Statements of Shareholders' Equity for the years ended September 30, 2012, 2011 and 2010
 
39
     
     Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010
 
40
     
     Notes to Consolidated Financial Statements
 
41-66
     
Supplementary Financial Information (unaudited)
 
67
     
Financial Statement Schedule – Schedule II-Valuation and Qualifying
   
     Accounts for the years ended September 30, 2012, 2011 and 2010
 
68


 
33

 




MANAGEMENT’S REPORT TO SHAREHOLDERS

To the Shareholders and Board of Directors of
Matthews International Corporation:

Management’s Report on Financial Statements
 
The accompanying consolidated financial statements of Matthews International Corporation and its subsidiaries (collectively, the “Company”) were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management’s best judgments and estimates. The other financial information included in this Annual Report on Form 10-K is consistent with that in the financial statements.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting management has conducted an assessment using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s internal controls over financial reporting include those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2012, based on criteria in Internal Control – Integrated Framework issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of September 30, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
Management’s Certifications
 
The certifications of the Company’s Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act have been included as Exhibits 31 and 32 in the Company’s Form 10-K.





 
34

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Shareholders and Board of Directors of
   Matthews International Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Matthews International Corporation and its subsidiaries at September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8.  Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
November 26, 2012

 
35

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2012 and 2011
(Dollar amounts in thousands, except per share data)


ASSETS
 
2012
   
2011
 
Current assets:
           
Cash and cash equivalents
  $ 58,259     $ 61,662  
Accounts receivable, net of allowance for doubtful
accounts of $11,177 and $10,736, respectively
    174,632       164,738  
Inventories
    130,690       125,567  
Deferred income taxes
    1,694       1,722  
Other current assets
    19,950       16,157  
                 
Total current assets
    385,225       369,846  
                 
Investments
    18,842       15,105  
                 
Property, plant and equipment, net
    144,049       134,504  
                 
Deferred income taxes
    32,647       33,818  
                 
Other assets
    12,083       16,354  
                 
Goodwill
    476,181       465,003  
                 
Other intangible assets, net
    59,015       62,825  
                 
Total assets
  $ 1,128,042     $ 1,097,455  


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

 
36

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
September 30, 2012 and 2011
(Dollar amounts in thousands, except per share data)


LIABILITIES AND SHAREHOLDERS' EQUITY
 
2012
   
2011
 
Current liabilities:
           
Long-term debt, current maturities
  $ 21,566     $ 18,014  
Trade accounts payable
    44,294       43,001  
Accrued compensation
    30,222       31,339  
Accrued income taxes
    7,632       10,272  
Customer prepayments
    15,883       14,320  
Contingent consideration
    13,298       -  
Other current liabilities
    47,978       44,795  
Total current liabilities
    180,873       161,741  
                 
Long-term debt
    298,148       299,170  
                 
Accrued pension
    78,563       66,714  
                 
Postretirement benefits
    27,725       26,417  
                 
Deferred income taxes
    18,624       17,007  
                 
Other liabilities
    33,194       48,151  
Total liabilities
    637,127       619,200  
                 
Arrangement with noncontrolling interest
    10,481       10,162  
                 
Shareholders' equity-Matthews:
               
Class A common stock, $1.00 par value; authorized
70,000,000 shares; 36,333,992 shares issued
    36,334       36,334  
Preferred stock, $100 par value, authorized 10,000 shares, none issued
    -       -  
Additional paid-in capital
    47,893       48,554  
Retained earnings
    727,176       681,658  
Accumulated other comprehensive loss
    (65,083 )     (58,658 )
Treasury stock, 8,711,924 and 7,884,190 shares, respectively, at cost
    (268,499 )     (243,246 )
Total shareholders' equity-Matthews
    477,821       464,642  
Noncontrolling interests
    2,613       3,451  
Total shareholders' equity
    480,434       468,093  
                 
Total liabilities and shareholders' equity
  $ 1,128,042     $ 1,097,455  


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

 
37

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 2012, 2011 and 2010
(Dollar amounts in thousands, except per share data)


   
2012
   
2011
   
2010
 
Sales
  $ 900,317     $ 898,821     $ 821,829  
Cost of sales
    (563,747     (547,161     (498,442
                         
Gross profit
    336,570       351,660       323,387  
                         
Selling expense
    (103,659     (99,251     (91,215
Administrative expense
    (139,334     (133,893     (115,591
                         
Operating profit
    93,577       118,516       116,581  
                         
Investment income
    3,891       1,443       2,536  
Interest expense
    (11,476     (8,241     (7,419
Other income (deductions), net
    (2,071     298       (1,285
                         
Income before income taxes
    83,921       112,016       110,413  
                         
Income taxes
    (28,717     (38,556     (38,639
                         
Net income
    55,204       73,460       71,774  
                         
Net (income) loss attributable to noncontrolling interests
    639       (1,088     (2,717
                         
Net income attributable to Matthews shareholders
  $ 55,843     $ 72,372     $ 69,057  
                         
Earnings per share attributable to Matthews shareholders:
                       
                         
Basic
    $1.98       $2.47       $2.32  
                         
Diluted
    $1.98       $2.46       $2.31  


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

 
38

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 2012, 2011 and 2010
(Dollar amounts in thousands, except per share data)


                     
Accumulated
                   
                     
Other
                   
         
Additional
         
Comprehensive
         
Non-
       
   
Common
   
Paid-in
   
Retained
   
Income (Loss)
   
Treasury
   
controlling
       
   
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  
Net income
    -       -       69,057       -       -       2,717       71,774  
Minimum pension liability
    -       -       -       3,929       -       -       3,929  
Translation adjustment
    -       -       -       (11,952     -       901       (11,051
Fair value of derivatives
    -       -       -       771       -       -       771  
Total comprehensive income
                                                    65,423  
Stock-based compensation
    -       6,567       -       -       -       -       6,567  
Purchase of 1,070,173 shares
 treasury stock
    -       -       -       -       (35,305 )     -       (35,305
Issuance of 246,178 shares
 treasury stock
    -       (5,709     -       -       7,289       -       1,580  
Dividends, $.29 per share
    -       -       (8,688     -       -       -       (8,688
Distribution to noncontrolling interests
    -       -       -       -       -       (234     (234
Arrangement-noncontrolling interest
    -       -       1,768       -       -       23,723       25,491  
Balance, September 30, 2010
    36,334       48,294       621,923       (37,136     (207,470     31,783       493,728  
Net income
    -       -       72,372       -       -       1,088       73,460  
Minimum pension liability
    -       -       -       (11,255     -       -       (11,255
Translation adjustment
    -       -       -       (8,607     -       523       (8,084
Fair value of derivatives
    -       -       -       (1,660     -       -       (1,660
Total comprehensive income
                                                    52,461  
Stock-based compensation
    -       6,972       -       -       -       -       6,972  
Purchase of 1,319,375 shares
 treasury stock
    -       -       -       -       (44,567     -       (44,567
Issuance of 290,854 shares
 treasury stock
    -       (6,712     -       -       8,791       -       2,079  
Dividends, $.33 per share
    -       -       (9,632     -       -       -       (9,632
Distribution to noncontrolling interests
    -       -       -       -       -       (6,220     (6,220
Arrangement-noncontrolling interest
    -       -       (3,005     -       -       (23,723     (26,728
Balance, September 30, 2011
    36,334       48,554       681,658       (58,658     (243,246     3,451       468,093  
Net income
    -       -       55,843       -       -       (639     55,204  
Minimum pension liability
    -       -       -       (3,327     -       -       (3,327
Translation adjustment
    -       -       -       (1,895     -       (29     (1,924
Fair value of derivatives
    -       -       -       (1,203     -       -       (1,203
Total comprehensive income
                                                    48,750  
Stock-based compensation
    -       5,472       -       -       -       -       5,472  
Purchase of 1,015,879 shares
 treasury stock
    -       -       -       -       (31,017     -       (31,017
Issuance of 188,145 shares
 treasury stock
    -       (6,133     -       -       5,764       -       (369
Dividends, $.37 per share
    -       -       (10,325     -       -       -       (10,325
Distribution to noncontrolling interests
    -       -       -       -       -       (170     (170
Balance, September 30, 2012
  $ 36,334     $ 47,893     $ 727,176     $ (65,083   $ (268,499   $ 2,613     $ 480,434  


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

 
39

 

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 2012, 2011 and 2010
(Dollar amounts in thousands, except per share data)


   
2012
   
2011
   
2010
 
Cash flows from operating activities:
                 
Net income
  $ 55,204     $ 73,460     $ 71,774  
Adjustments to reconcile net income to net cash
  provided by operating activities: