Matthews International Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Debt

Debt

3 Months Ended

Dec. 31, 2016

The Company has a domestic credit facility with a syndicate of financial institutions that was amended in April 2016 and includes a $900,000 senior secured revolving credit facility and a $250,000 senior secured amortizing term loan. The term loan requires scheduled principal payments of 5.0% of the outstanding principal in year one, 7.5% in year two, and 10.0% in years three through five, payable in quarterly installments. The balance of the revolving credit facility and the term loan are due on the maturity date of April 26, 2021. Borrowings under both the revolving credit facility and the term loan bear interest at LIBOR plus a factor ranging from 0.75% to 2.00% (1.75% at December 31, 2016) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). The Company is required to pay an annual commitment fee ranging from 0.15% to 0.25% (based on the Company's leverage ratio) of the unused portion of the revolving credit facility.

The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $35,000) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the revolving credit facility at December 31, 2016 and September 30, 2016 were $634,000 and $608,000, respectively. Outstanding borrowings on the term loan at December 31, 2016 and September 30, 2016 were $243,347 and $246,449, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility at December 31, 2016 and December 31, 2015 was 2.65% and 2.31%, respectively.

The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:



	December 31, 2016			September 30, 2016
Pay fixed swaps - notional amount	$	400,000		$	403,125
Net unrealized gain (loss)	$	3,334		$	(5,834	)
Weighted-average maturity period (years)	3.6			3.9
Weighted-average received rate	0.77		%	0.53		%
Weighted-average pay rate	1.26		%	1.26		%

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

The fair value of the interest rate swaps reflected an unrealized gain, net of unrealized losses, of $3,334 ($2,034 after tax) at December 31, 2016 and an unrealized loss, net of unrealized gains, of $5,834 ($3,559 after tax) at September 30, 2016. The net unrealized gain/loss is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI"). Assuming market rates remain constant with the rates at December 31, 2016, a gain (net of tax) of approximately $385 included in AOCI is expected to be recognized in earnings over the next twelve months.

Note 5. Debt (continued)

At December 31, 2016 and September 30, 2016, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:



Derivatives	December 31, 2016			September 30, 2016
Current assets:
Other current assets	$	833		$	43
Long-term assets:
Other assets	2,854			150
Current liabilities:
Other current liabilities	(201		)	(1,529		)
Long-term liabilities:
Other liabilities	(152		)	(4,498		)
Total derivatives	$	3,334		$	(5,834	)

The gains (losses) recognized on derivatives were as follows:



Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivatives


		Three Months Ended December 31,
		2016		2015

Interest rate swaps	Interest expense	$	807	$	(830	)

The Company recognized the following gains (losses) in AOCI:



Derivatives in Cash Flow Hedging Relationships	Amount of Gain Recognized in AOCI on Derivatives				Location of Loss Reclassified From AOCI into Income (Effective Portion*)	Amount of Loss Reclassified from AOCI into Income (Effective Portion*)
	December 31, 2016		December 31, 2015			December 31, 2016			December 31, 2015

Interest rate swaps	$	5,100	$	1,076	Interest expense	$	(493	)	$	(506	)

*There is no ineffective portion or amount excluded from effectiveness testing.

The Company, through certain of its European subsidiaries, has a credit facility with a European bank. The maximum amount of borrowing available under this facility is 35.0 million Euros ($36,804). Outstanding borrowings under the credit facility totaled 29.1 million Euros ($30,579) at December 31, 2016. There were no outstanding borrowings under the credit facility at September 30, 2016. The weighted-average interest rate on outstanding borrowings under this facility at December 31, 2016 and 2015 was 1.75% and 1.50%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled 240,100 Euros ($252) and 255,200 Euros ($286) at December 31, 2016 and September 30, 2016, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at December 31, 2016 and 2015 was 4.03% and 4.00%, respectively.

Note 5. Debt (continued)

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled 904,400 Euros ($951) and 830,220 Euros ($931) at December 31, 2016 and September 30, 2016, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at December 31, 2016 and 2015 was 6.38% and 6.12%, respectively.

In November 2016, the Company’s German subsidiary, Matthews Europe GmbH & Co. KG, issued 15.0 million Euros ($15,793 at December 31, 2016) of senior unsecured notes with European banks. The notes are guaranteed by Matthews International Corporation and mature in November 2019. A portion of the notes (5.0 million Euros) have a fixed interest rate of 1.4%, and the remainder bear interest at Euro LIBOR plus 1.4%. The weighted-average interest rate on the notes at December 31, 2016 was 1.40%.

The Company, through its Italian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 2.8 million Euros ($2,991) and 3.2 million Euros ($3,538) at December 31, 2016 and September 30, 2016, respectively. Matthews International S.p.A. also has multiple lines of credit totaling 11.3 million Euros ($11,914) with the same Italian banks. Outstanding borrowings on these lines were 5.2 million Euros ($5,445) and 5.2 million Euros ($5,801) at December 31, 2016 and September 30, 2016, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at December 31, 2016 and 2015 was 1.58% and 3.33%, respectively.

In September 2014, a claim was filed seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($10,572 at December 31, 2016) with respect to a performance guarantee on a project for a customer in Saudi Arabia. Management assessed

the customer's claim to be without merit and initiated an action with the U.K. court. Pursuant to this action, a court order was issued in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit and the funds were ultimately received by the customer. The customer did not remit the funds to the court as ordered. On June 14, 2016, the court ruled completely in favor of Matthews following a trial on the merits. However, as the customer has not yet remitted the funds, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. As of December 31, 2016 and September 30, 2016, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.

As of December 31, 2016 and September 30, 2016, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheet.