UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

For The Quarterly Period Ended June 30,December 31, 2006

Commission File No. 0-9115

MATTHEWS INTERNATIONAL CORPORATION

(Exact nameName of registrant as specified in its charter)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

As of JulyJanuary 31, 2006,2007, shares of common stock outstanding were:

PART I - FINANCIAL INFORMATION

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands, except per share data)

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30,December 31, 2006

(Dollar amounts in thousands, except per share data)

Note 1. Nature of Operations

Matthews International Corporation ("Matthews" or the “Company”), founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of memorialization products and brand solutions. Memorialization products consist primarily of bronze memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries. Brand solutions include graphics imaging products and services, marking products, and merchandising solutions. The Company's products and operations are comprised of six business segments: Bronze, Casket, Cremation, Graphics Imaging, Marking Products and Merchandising Solutions. The Bronze segment is a leading manufacturer of cast bronze memorials and other memorialization products, cast and etched architectural products and is a leading builder of mausoleums in the United States. The Casket segment is a leading casket manufacturer in the United States and produces a wide variety of wood and metal caskets. The Cremation segment is a leading designer and manufacturer of cremation equipment and cremation caskets primarily in North America. The Graphics Imaging segment manufactures and provides brand solutions, printing plates, pre-press services and imaging services for the corrugatedprimary packaging and primary packagingcorrugated industries. The Marking Products segment designs, manufactures and distributes a wide range of marking and coding equipment and consumables, and industrial automation products for identifying, tracking and conveying various consumer and industrial products, components and packaging containers. The Merchandising Solutions segment designs and manufactures merchandising displays and systems and provides creative merchandising and marketing solutions services.

The Company has manufacturing and marketing facilities in the United States, Canada, Mexico, Australia, and Europe.

Note 2. Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended June 30,December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006.2007. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005. Certain amounts derived from the Annual Report on Form 10-K for the year ended September 30, 2005 have been restated for the retrospective adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Stock-Based Payment”, (“SFAS No. 123(R)”) (See Note 3).2006. The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control. All intercompany accounts and transactions have been eliminated.

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

Certain reclassifications have been made in the FASB issued FSP FAS 115-1 and FAS 124-1, "The MeaningConsolidated Statements of Other-Than-Temporary Impairment and Its ApplicationCash Flows for prior periods to Certain Investments" ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequentconform to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 was adopted by the Company in the second quarter of fiscal 2006 as required and had no material impact on the Company’s consolidated financial position and results of operations.current period presentation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

Note 3. Stock-Based CompensationShare-Based Payments

The Company has a stock incentive plan that provides for grants of incentive stock options, non-statutory stock options and restricted share awards in an aggregate number not to exceed 15% of the outstanding shares of the Company’s common stock.stock (4,755,502 at December 31, 2006). The plan is administered by the Compensation Committee of the Board of Directors. The option price for each stock option that may be granted under the plan may not be less than the fair market value of the Company's common stock on the date of grant. The aggregate number of shares of the Company's common stock that may be issued upon exercise of stock options was 4,811,808 shares at June 30, 2006. Outstanding stock options are exercisable in various share amounts based onone-third increments upon the attainment of certain10%, 33% and 60% appreciation in the market value levels of the Company’s Class A Common Stock. In addition, options generally vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the certain market value levels)thresholds). The options expire on the earlier of ten years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company generally settles employee stock option exercises with treasury shares.

Prior to October 1, 2005, the Company accounted for its stock-based compensation plan in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and provided the required pro-forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation”, (“SFAS No. 123”). Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the modified retrospective method. Accordingly, 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. In accordance with SFAS No. 123(R), financial statements for all periods prior to October 1, 2005 have been adjusted to give effect to the fair-value based method of accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as pro-forma adjustments have been reflected in earnings for all prior periods.

For the three monththree-month periods ended June 30,December 31, 2006 and 2005, stock-based compensation cost totaled $741$872 and $874, respectively. For the nine month periods ended June 30, 2006 and 2005, stock-based compensation cost totaled $3,189 and $2,377,$1,361, respectively. The associated future income tax benefit recognized was $289$340 and $332$531 for the three monththree-month periods ended June 30, 2006 and 2005, respectively, and was $1,243 and $903 for the nine month periods ended June 30,December 31, 2006 and 2005, respectively.

TheFor the three-month periods ended December 31, 2006 and 2005, the amount of cash received from the exercise of stock options was $448$2,121 and $874, for the three month periods ended June 30, 2006 and 2005, respectively, and $1,869 and $5,351 for the nine month periods ended June 30, 2006 and 2005,$326, respectively. In connection with these exercises, the tax benefits realized by the Company were $106 and $470 for the three monththree-month periods ended June 30,December 31, 2006 and 2005 respectively,were $897 and $816 and $2,765 for the nine month periods ended June 30, 2006 and 2005,$281, respectively.

The transactions for shares under options for the nine monthsquarter ended June 30,December 31, 2006 were as follows:

The weighted-average grant date fair value of options granted for the nine monththree-month periods ended June 30,December 31, 2006 and 2005 was $9.47$12.23 and $11.61,$9.47, respectively. The fair value of shares earned was $3,594 and $1,723 during the nine monththree-month periods ended June 30,December 31, 2006 and 2005 respectively. No shares were earned in the three month periods ended June 30, 2006was $1,820 and 2005.$1,624 , respectively. The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the ninethree- month periods ended June 30,December 31, 2006 and 2005 was $2,157$2,300 and $8,019,$787, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

As of June 30,December 31, 2006 the total unrecognized compensation cost related to non-vested stock options was approximately $5,657.$7,809. This cost is expected to be recognized over a weighted-average period of 3.74.0 years in accordance with the vesting periods of the options.

 

The risk free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date. Expected volatilities are based on the implied volatility of market traded options and the historical volatility of the Company’s stock price. The expected term represents an estimate of the period of time options are expected to remain outstanding. Separate employee groups and option characteristics are considered separately for valuation purposes.

Under the Company’s Director Fee Plan, directors who are not also officers of the Company each receive, as an annual retainer fee, either cash or shares of the Company's Class A Common Stock equivalent to $30. Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board. Directors may also elect to receive the common stock equivalent of meeting fees credited to a deferred stock account. The value of deferred shares is recorded in other liabilities. A total of 50,44149,569 shares had been deferred under the Director Fee Plan at June 30,December 31, 2006. Additionally, beginning in fiscal 2005, directors who are not also officers of the Company each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $40. A total of 22,300 stock options have been granted under the plan, all of which were outstanding and unvested at June 30,December 31, 2006. Additionally, 4,800 shares of restricted stock werehave been granted in March 2006 under the plan. The restricted shares generally vest two years after the dateplan, all of issuance.which are unvested at December 31, 2006. A total of 500,000 shares have been authorized to be issued under the Director Fee Plan.

Note 4. Income Taxes

Income tax provisions for the Company’s interim periods are based on the effective income tax rate expected to be applicable for the full year. The difference between the estimated effective tax rate for fiscal 20062007 of 37.6% and the Federal statutory rate of 35.0% primarily reflects the impact of state and foreign income taxes.

Note 6. Segment InformationComprehensive Income

The Company's productsComprehensive income consists of net income adjusted for changes, net of the related income tax effect, in cumulative foreign currency translation, the fair value of derivatives, unrealized investment gains and operations consist of two principal businesses that are comprised oflosses and minimum pension liability. For the three operating segments each, as described under Nature of Operations (Note 1): Memorialization Products (Bronze, Casketmonths ended December 31, 2006 and Cremation)2005, comprehensive income was $18,714 and Brand Solutions (Graphics Imaging, Marking Products and Merchandising Solutions). Management evaluates segment performance based on operating profit (before income taxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net and minority interest.

Note 7. Comprehensive IncomeSegment Information

ComprehensiveThe Company's products and operations consist of two principal businesses that are comprised of three operating segments each, as described under Nature of Operations (Note 1): Memorialization Products (Bronze, Casket, Cremation) and Brand Solutions (Graphics Imaging, Marking Products, Merchandising Solutions). Management evaluates segment performance based on operating profit (before income consists oftaxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net income adjusted for changes, net of the related income tax effect, in cumulative foreign currency translation, the fair value of derivatives, unrealized investment gains and losses and minimum pension liability. For the three months ended June 30, 2006 and 2005, comprehensive income was $24,367 and $8,242, respectively. For the nine months ended June 30, 2006 and 2005, comprehensive income was $53,673 and $39,816, respectively. Comprehensive income for the three and nine month periods ended June 30, 2005 has been restated to reflect the adoption of SFAS No. 123(R) (see Note 3).minority interest.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

Note 9.8. Debt

The Company has a Revolving Credit Facility with a syndicate of financial institutions which allows for borrowings up to $150,000. Borrowings under the amended facility, which is scheduled to mature on April 30, 2009, bear interest at LIBOR plus a factor ranging from .50% to 1.00% 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 $10,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30,December 31, 2006 were $134,000.$133,333.  The weighted-average interest rate on outstanding borrowings at June 30,December 31, 2006 and 2005 was 4.94%5.10% and 3.16%3.75%, respectively.

In April 2004, the Company entered into an interest rate swap that fixed, for a five-year period, the interest rate on borrowings in an initial amount of $50,000. The interest rate was fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006). The interest rate swap

was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge matched the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges were considered highly effective. Equal quarterly principal payments of $2,500 plus interest are due on this $50,000 borrowing until its maturity in April 2009.

Effective September 30, 2005, the Company entered into an interest rate swap that fixed, for the period through the maturity of the Revolving Credit Facility, the interest rate on additional borrowings in an initial amount of $50,000. The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006).  The interest rate swap was designated as a cash flow hedge of the future variable interest payments under

The fair value of the interest rate swaps reflected an unrealized gain of $2,138$1,289 ($1,304786 after tax) at June 30,December 31, 2006 that is included in shareholders’ equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30,December 31, 2006, approximately $460$337 of the $1,304$786 gain included in accumulated other comprehensive income is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

The Company, through its wholly-owned subsidiary, Matthews International GmbH (“MIGmbH”), has a credit facility with a bank for borrowings up to 10.0 million Euros. At June 30,December 31, 2006, outstanding borrowings under the credit facility totaled 10.08.5 million Euros ($12,792)11,221). The weighted-average interest rate on outstanding borrowings of MIGmbH at June 30,December 31, 2006 and 2005 was 3.35%3.93% and 2.80%2.87%, respectively.

The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 8.37.8 million Euros ($10,600)10,284) at June 30,December 31, 2006. Caggiati S.p.A. also has three lines of credit totaling 8.4 million Euros ($10,707)11,049) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million645,000 Euros ($2,836)851) at June 30,December 31, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30,December 31, 2006 and 2005 was 3.16%3.24% and 2.89%2.85%, respectively.

Note 10. Pension11. Goodwill and Other Postretirement Benefit Plans

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(Dollar amounts in thousands, except per share data)

Changes to goodwill, net of accumulated amortization, for comparative purposes onlythe three months ended December 31, 2006, were as follows.

The following tables summarize the carrying amounts and include certain adjustments, suchrelated accumulated amortization for intangible assets as interestof December 31, 2006 and September 30, 2006, respectively.

Amortization expense on acquisition debt. The pro-forma information does not purportintangible assets was $627 and $545 for the three-month periods ended December 31, 2006 and 2005, respectively. Amortization expense is estimated to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result$1,995 in the future.2007, $1,996 in 2008, $1,934 in 2009, $1,694 in 2010 and $1,662 in 2011.

In June 2005,2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” which amends SFAS 87, 88, 106 and 132(R).  SFAS No. 158 requires employers to recognize the over-funded or under-funded status of defined benefit postretirement plans on the balance sheet and to recognize the corresponding adjustment in other comprehensive income. In addition, the statement requires recognition in other comprehensive income of gains or loss and prior service costs or credits that are not included as components of periodic benefit expense. These provisions of the statement are effective for public companies for fiscal years ending after December 15, 2006.  Accordingly, the Company paid additional considerationwill adopt this provision of SFAS No. 158 prospectively for the year-end financial statements dated September 30, 2007.  If the Company had adopted SFAS No. 158 as of September 30, 2006, the liability for pension and postretirement benefits would have increased approximately $10,000, deferred tax assets would have increased approximately $3,900 and equity (other accumulated comprehensive income) would have decreased by approximately $6,100.

Further, SFAS No. 158 requires the Company to measure the minority ownerplan assets and benefit obligations of Rudolf Reproflex GmbH (“Rudolf”) under the termsdefined benefit postretirement plans as of the original acquisition agreement.date of its year-end balance sheet. This provision of the SFAS No. 158 is effective for public companies for fiscal years beginning after December 15, 2008.  The Company had acquiredcurrently measures plan assets and benefit obligations as of July 31 of each year. The Company is considering the implications of this provision and the feasibility of earlier adoption of this portion of the statement.  Upon adoption, this provision is not expected to have a 75% interest in Rudolf in 2001.material effect on the financial statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement:

The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation (“Matthews” or the “Company”) and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended September 30, 2005.2006. Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company’s products, changes in death rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates or 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 single customer that would be considered individually significant to consolidated sales, the potential loss of one or more of the Company’s larger customers could be considered a risk factor.

Results of Operations:

The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods indicated.

Sales for the nine monthsquarter ended June 30,December 31, 2006 were $533.0$175.4 million, or 14.9%, higher than sales of $463.9compared to $170.1 million for the ninethree months ended June 30,December 31, 2005. The increase resulted principally from the acquisition of Milso Industries (“Milso”) in the fourth quarter of fiscal 2005 andreflected higher sales in five of the Bronze, CremationCompany’s six segments and Marking Products segments. These increases were offset partially by the effect of lowerhigher foreign currency values against the U.S. dollar anddollar. The increases were offset by lower sales in the Merchandising Solutions segment. For the nine months ended June 30, 2006,first quarter of fiscal 2007, changes in foreign currency values against the U.S. dollar had an unfavorablea favorable impact of approximately $5.2$3.3 million on the Company’s consolidated sales compared to the nine monthsquarter ended June 30,December 31, 2005.

In the Company’s Memorialization businesses, Bronze segment sales for the fiscal 2007 first nine months of fiscal 2006quarter were $159.2$50.4 million, compared to $150.1$48.7 million for the fiscal 2006 first nine months of fiscal 2005.quarter. The increase of 6.0% in Bronze sales primarily reflected higher selling prices for memorial products and higher mausoleum sales. These increases werean increase in the value of foreign currencies against the U.S. dollar, partially offset by the effects of changesa decline in the valuesvolume of memorial products. Sales for the Casket segment were $53.8 million for the quarter ended December 31, 2006, compared to fiscal 2006 first quarter sales of $48.2 million. The 11.7% increase reflected higher unit volume in territories served by Company-owned distribution, offset partially by lower unit volume in certain territories where the Company’s caskets are sold through independent distributors. Sales for the Cremation segment were $6.6 million for the first quarter of fiscal 2007, compared to $5.7 million for the same period a year ago. The increase principally reflected higher sales of cremation caskets. In the Brand Solutions businesses, sales for the Graphics Imaging segment in the first quarter of fiscal 2007 were $33.8 million, compared to $33.3 million for the same period a year ago. The slight improvement from a year ago principally reflected an increase in the value

Gross profit for the Graphics Imaging segment in the first nine months of fiscalquarter ended December 31, 2006 were $103.5was $64.9 million, compared to $106.6$61.2 million for the same period a year ago. The decline primarily reflectedConsolidated gross profit as a decrease in the valuepercent of foreign currencies against the U.S. dollar. Marking Products segment sales for the nine months ended June 30, 2006 were $38.4 million, compared to $32.7 millionincreased from 36.0% for the first nine months of fiscal 2005. The increase of $5.7 million, or 17.3%, was principally due to higher domestic and foreign sales volume, particularly in the segment’s industrial automation business. Sales for the Merchandising Solutions segment were $59.4 million for the first nine monthsquarter of fiscal 2006 compared to $65.7 million37.0% for the same period a year ago. The decline is attributable to lower volume of merchandising systems and displays. In addition, thefiscal 2007 first nine months of fiscal 2005 included sales for several large customer promotional programs that did not repeat in this fiscal year.

Selling and administrative expenses for the ninethree months ended June 30,December 31, 2006 were $116.4$40.8 million, compared to $88.3$38.8 million for the first nine monthsquarter of fiscal 2005.2006. Consolidated selling and administrative expenses as a percent of sales were 21.8%23.2% for the nine monthsquarter ended June 30,December 31, 2006, compared to 19.0%22.8% for the same period last year. The increases in costs and percentage of sales primarily reflected the acquisition of Milso during the fourth quarter of fiscal 2005 andresulted from the expansion of the Casket segment’s distribution capabilities. Bronze segment sellingcapabilities and administrative expenses decreased in fiscal 2006 compared to fiscal 2005 due to cost containment efforts intended to mitigate some ofa provision for earn-out payments under the increase in bronze metal costs. Additionally, Graphics Imaging segment fiscal 2006 selling and administrative expenses declined from fiscal 2005 due to cost structure changes implemented within the segment’s U.S. and U.K. operations in the fourth quarter of fiscal 2005.Milso Industries (“Milso”) acquisition-related agreements.

Operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $82.0$24.2 million, representing an increase of $10.4 million over operating profit of $71.6compared to $22.4 million for the ninethree months ended June 30,December 31, 2005. The increase of 14.5% reflected higher operating income in five of the Company’s six operating segments. Bronze segment operating profit for the fiscal 2007 first nine months of fiscal 2006quarter was $44.0$11.6 million, compared to $41.3$11.9 million for the same periodfirst quarter of fiscal 2006. The decrease primarily reflected the higher cost of bronze ingot in the first quarter of fiscal 2005. Despite a significant increase in bronze metal cost, Bronze segment operating profit improved for2007 compared to the period as a resultfirst quarter of higher sales and the effects of cost reduction initiatives.fiscal 2006. Operating profit for the Casket segment for the nine months ended June 30, 2006first quarter of fiscal 2007 was $15.6$5.9 million, compared to $11.9$3.6 million for the first nine monthsquarter of fiscal 2005.2006. The increase reflectedresulted from higher sales and productivity improvements in the Milso acquisition, offset by lower sales in several territories, operating costs in excess of revenues at the Company’s new casketsegment’s manufacturing facility in Mexico, operating costs related to the expansion of casket distribution capabilities, and costs incurred in connection with the shut-down of the segment’s Lynn, Indiana manufacturing facility during the second quarter of fiscal 2006.Mexico. Cremation segment operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $2.7 million,$776,000, compared to $83,000$573,000 for the same period a year ago. The increase reflected higher sales improved pricing and the continuing favorable impact of cost reduction initiatives.programs initiated early in fiscal 2006. The Graphics Imaging segment operating profit for the nine monthsquarter ended June 30,December 31, 2006 was $11.6$2.2 million, compared to $10.4$3.6 million for the ninethree months ended June 30,December 31, 2005. The increasedecrease reflected cost structure changes implemented withinlower sales in the segment’s U.S. and U.K. operationsmarkets and costs related to developing new primary packaging business in the fiscal 2005 fourth quarter,U.S. These declines were offset partially by lowerhigher foreign currency values against the U.S. dollar. Operating profit for the Marking Products segment for the fiscal 2007 first nine months of fiscal 2006quarter was $6.6$2.4 million, compared to $5.5$1.9 million for the same period a year ago. The increase primarily resulted from higher sales. The Merchandising Solutions segment operating profit was $1.6$1.3 million for the nine months ended June 30, 2006,first quarter of fiscal 2007, compared to $2.4 million$842,000 for the same period in fiscal 2005.2006. The decreaseincrease primarily

Investment income for the ninethree months ended June 30,December 31, 2006 was $937,000,$411,000, compared to $1.0 million$327,000 for the nine monthsquarter ended June 30,December 31, 2005. The improvement resulted from higher average rates of return compared to a year ago. Interest expense for the fiscal 2007 first nine months of fiscal 2006quarter was $4.9$1.8 million, compared to $1.5$1.4 million for the same period last year. The increase in interest expense primarily reflected a higher average level of debt levels and higher average interest rates during the fiscalquarter ended December 31, 2006 nine-month period compared to the same periodquarter in fiscal 2005. The increased debt level in fiscal 2006 primarily resulted from additional borrowings under the Company’s domestic Revolving Credit Facility in connection with recent acquisitions.2006.

Other income (deductions), net, for the nine monthsquarter ended June 30,December 31, 2006 represented an increase in pre-tax income of $79,000,$131,000, compared to an increasea reduction in pre-tax income of $1.6 million$33,000 for the same periodquarter last year. Other income in the first nine months of fiscal 2005 primarily reflected foreign currency exchange gains on intercompany advances to foreign affiliates.

The Company's effective tax rate for the ninethree months ended June 30,December 31, 2006 was 37.6%, which is the same asequivalent to the effective tax rate for the first quarter of fiscal 2006, but is higher than the effective tax rate of 37.0% for the full fiscal year ended September 30, 2005.2006. The fiscal 2006 full year effective tax rate reflected the favorable tax impact from the sale of property in the fourth quarter. The difference between the Company's effective tax rate and the Federal statutory rate of 35.0% primarily reflected the impact of state and foreign income taxes.

Liquidity and Capital Resources:

Net cash provided by operating activities was $34.4$10.7 million for the ninethree months ended June 30,December 31, 2006, compared to $57.4$15.4 million for the first nine monthsquarter of fiscal 2005.2006. Operating cash flow for both periods primarily reflected net income adjusted for depreciation,non-cash charges (depreciation, amortization, stock-based compensation expense and an increase in minority interest,interest), partially offset by working capital changes. In the fiscal 2007 first quarter, working capital changes included the payment of year end bonus accruals, an increase in working capital. The year-over-year decline in cash provided by operating activities is attributable to an increase in working capital primarilyinventory resulting from the Casket segment’s investmentcontinued expansion of the Company’s casket distribution capabilities and higher inventory related to a significant Merchandising Solutions segment project that shipped in distribution capabilities.the second fiscal quarter. First quarter fiscal 2006 working capital changes primarily reflected the payment of year end bonus accruals.

Cash used in investing activities was $41.9$10.3 million for the ninethree months ended June 30,December 31, 2006, compared to $45.0$13.3 million for the ninethree months ended June 30,December 31, 2005. Investing activities for the first nine monthsquarter of fiscal 20062007 primarily included capital expenditures, of $12.0 million and acquisition-related payments of $29.9$7.8 million and proceeds from the disposition of assets of $1.0 million. Investing activities for the first nine monthsquarter of fiscal 2005 primarily includedconsisted of capital expenditures of $21.6 million, acquisition related payments of $14.2$3.8 million and net purchasesa cash payment of investments$8.3 million for an additional ownership interest in S+T Gesellschaft fur Reprotechnik GmbH (“S+T”), one of $10.0 million.the Company’s less than wholly-owned foreign subsidiaries (see “Acquisitions”).

Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for the last three fiscal years were primarily financed through operating cash. Capital spending for property, plant and equipment has averaged $15.9$19.3 million for the last three fiscal years. The capital budget for fiscal 20062007 is $27.7$27.1 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

The Company has a Revolving Credit Facility with a syndicate of financial institutions, which allows for borrowings up to $150.0 million. Borrowings under the facility, which is scheduled to mature on April 30, 2009, bear interest at LIBOR plus a factor ranging from .50% to 1.00% 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 $10.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the Revolving Credit Facility at June 30,December 31, 2006 were $134.0$133.3 million. The weighted-average interest rate on outstanding borrowings at June 30,December 31, 2006 and 2005 was 4.94%5.10% and 3.16%3.75%, respectively.

In April 2004, the Company entered into an interest rate swap that fixed, for a five-year period, the interest rate on borrowings in an initial amount of $50.0 million. The interest rate was fixed at 2.66% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge matched the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges were considered highly effective. Equal quarterly principal payments of $2.5 million plus interest are due on this $50.0 million borrowing until its maturity in April 2009.

Effective September 30, 2005, the Company entered into an additional interest rate swap that fixed, for the period through maturity of the Revolving Credit Facility, the interest rate on additional borrowings in an initial amount of $50.0 million. The interest rate was fixed at 4.14% plus a factor based on the Company’s leverage ratio (the factor was .75%.50% at June 30,December 31, 2006). The interest rate swap was designated as a cash flow hedge of the future variable interest payments under the Revolving Credit Facility which are considered probable of occurring. Based on the Company’s assessment, all of the critical terms of the hedge match the underlying terms of the hedged debt and related forecasted interest payments and as such, these hedges were considered highly effective. Equal quarterly principal payments of $3.3 million plus interest are due on this $50.0 million borrowing until its maturity in April 2009.

The fair value of the interest rate swaps reflected an unrealized gain of $2.1$1.3 million ($1.3 million786,000 after tax) at June 30,December 31, 2006 that is included in equity as part of accumulated other comprehensive income. Assuming market rates remain constant with the rates at June 30,December 31, 2006, approximately $460,000$337,000 of the $1.3 million$786,000 gain included in accumulated other comprehensive income is expected to be recognized in earnings as an adjustment to interest expense over the next twelve months.

The Company, through its wholly-owned subsidiary, Matthews International GmbH (“MIGmbH”), has a credit facility with a bank for borrowings up to 10.0 million Euros. At June 30,December 31, 2006, outstanding borrowings under the credit facility totaled 10.08.5 million Euros ($12.811.2 million). The weighted-average interest rate on outstanding MIGmbH related borrowings was 3.93% and 2.87% at June 30,December 31, 2006 and 2005, was 3.35% and 2.80%, respectively.

The Company, through its wholly-owned subsidiary, Caggiati S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 8.37.8 million Euros ($10.610.3 million) at June 30,December 31, 2006. Caggiati S.p.A. also has three lines of credit totaling approximately 8.4 million Euros ($10.711.0 million) with the same Italian banks. Outstanding borrowings on these lines were 2.2 million645,000 Euros ($2.8 million)851,000) at June 30,December 31, 2006. The weighted-average interest rate on outstanding borrowings of Caggiati S.p.A. at June 30,December 31, 2006 and 2005 was 3.16%3.24% and 2.89%2.85%, respectively.

The Company has a stock repurchase program, which was initiated in 1996.program. Under the program, the Company's Board of Directors has authorized the repurchase of a total of 10,000,000 shares (adjusted for stock splits) of Matthews common stock, of which 8,676,6969,195,146 shares have been repurchased as of June 30,December 31, 2006. 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 Articles of Incorporation.

Consolidated working capital of the Company was $130.2$130.8 million at June 30,December 31, 2006, compared to $86.6$105.6 million at September 30, 2005.2006. Cash and cash equivalents were $37.0$36.1 million at June 30,December 31, 2006, compared to $39.6$29.7 million at September 30, 2005.2006. The Company's current ratio was 2.1 at June 30,December 31, 2006 compared to 1.61.8 at September 30, 2005.

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 policies and procedures with respect to environmental, safety and health, including 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 June 30,December 31, 2006, an accrual of $10.1$9.8 million was recorded for environmental remediation (of which $927,000$924,000 has been 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. 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.