Matthews International Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

PENSION AND OTHER POSTRETIREMENT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS

12 Months Ended

Sep. 30, 2017

PENSION AND OTHER POSTRETIREMENT PLANS:

The Company provides defined benefit pension and other postretirement plans to certain employees. Effective January 1, 2014, the Company's principal retirement plan was closed to new participants. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans as of the Company's actuarial valuation as of September 30, 2017 and 2016:



	Pension						Other Postretirement
	2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation, beginning of year	$	263,566		$	238,727		$	23,290		$	20,424
Service cost	8,553			7,446			392			402
Interest cost	7,362			9,725			626			845
Actuarial (gain) loss	(4,264		)	26,841			(2,600		)	2,931
Exchange loss (gain)	589			(6		)	—			—
Benefit payments	(16,134		)	(19,167		)	(1,392		)	(1,312		)
Benefit obligation, end of year	259,672			263,566			20,316			23,290

Change in plan assets:
Fair value, beginning of year	151,864			142,225			—			—
Actual return	12,586			11,244			—			—
Benefit payments (1)	(16,134		)	(19,167		)	(1,392		)	(1,312		)
Employer contributions	7,318			17,562			1,392			1,312
Fair value, end of year	155,634			151,864			—			—

Funded status	(104,039		)	(111,701		)	(20,317		)	(23,291		)
Unrecognized actuarial loss (gain)	73,616			92,310			(1,469		)	1,130
Unrecognized prior service cost	(690		)	(1,048		)	(720		)	(916		)
Net amount recognized	$	(31,113	)	$	(20,439	)	$	(22,506	)	$	(23,077	)

Amounts recognized in the consolidated balance sheet:
Current liability	$	(766	)	$	(760	)	$	(1,044	)	$	(1,148	)
Noncurrent benefit liability	(103,273		)	(110,941		)	(19,273		)	(22,143		)
Accumulated other comprehensive loss (income)	72,926			91,262			(2,189		)	214
Net amount recognized	$	(31,113	)	$	(20,439	)	$	(22,506	)	$	(23,077	)

Amounts recognized in accumulated
other comprehensive loss (income):
Net actuarial loss (income)	$	73,616		$	92,310		$	(1,469	)	$	1,130
Prior service cost	(690		)	(1,048		)	(720		)	(916		)
Net amount recognized	$	72,926		$	91,262		$	(2,189	)	$	214

(1) Pension benefit payments in fiscal 2017 and 2016 include $5,655 and $9,300 of lump sum distributions, respectively, that were made to certain terminated vested employees as settlements of the employees' pension obligations. These distributions did not meet the threshold to qualify as settlements under U.S. GAAP and therefore, no unamortized actuarial losses were recognized in the Statements of Income upon completion of the lump sum distributions.

Based upon actuarial valuations performed as of September 30, 2017 and 2016, the accumulated benefit obligation for the Company's defined benefit pension plans was $238,307 and $240,329 at September 30, 2017 and 2016, respectively, and the projected benefit obligation for the Company's defined benefit pension plans was $259,672 and $263,566 at September 30, 2017 and 2016, respectively.

Net periodic pension and other postretirement benefit cost for the plans included the following:



	Pension									Other Postretirement
	2017			2016			2015			2017			2016			2015
Service cost	$	8,553		$	7,446		$	6,764		$	392		$	402		$	454
Interest cost	7,362			9,725			8,740			626			845			885
Expected return on plan assets	(9,249		)	(9,625		)	(10,151		)	—			—			—
Amortization:
Prior service cost	(181		)	(183		)	(180		)	(195		)	(195		)	(195		)
Net actuarial loss (gain)	10,034			7,468			6,203			—			—			—
Net benefit cost	$	16,519		$	14,831		$	11,376		$	823		$	1,052		$	1,144

Effective September 30, 2016, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for its pensions. This change, compared to the previous method, resulted in a decrease in the service and interest components for pension cost beginning in fiscal 2017. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Matthews has elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This change was made to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of the total benefit obligations. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly, has accounted for it prospectively. This change resulted in a reduction of service and interest costs of approximately $1,960 in fiscal 2017.

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 made from the Company's operating cash. Under I.R.S. regulations, the Company was required to make a $5,109 contribution to its principal retirement plan in fiscal 2017. The Company is not required to make any significant cash contributions to its principal retirement plan in fiscal 2018.

Contributions made in fiscal 2017 are as follows:



Contributions	Pension		Other Postretirement
Principal retirement plan	$	6,180	$	—
Supplemental retirement plan	725		—
Other retirement plans	413		—
Other postretirement plan	—		1,392

Amounts of AOCI expected to be recognized in net periodic benefit costs in fiscal 2018 include:



	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	7,010		$	—
Prior service cost	(138		)	(195		)

The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. The measurement date of annual actuarial valuations for the Company's principal retirement and other postretirement benefit plans was September 30, for fiscal 2017, 2016 and 2015. The weighted-average assumptions for those plans were:



	Pension						Other Postretirement
	2017		2016		2015		2017		2016		2015
Discount rate	3.76	%	3.51	%	4.25	%	3.72	%	3.42	%	4.25	%
Return on plan assets	6.75	%	7.25	%	7.75	%	—		—		—
Compensation increase	3.50	%	3.50	%	3.50	%	—		—		—

In October 2014, the Society of Actuaries' Retirement Plans Experience Committee (RPEC) released new mortality tables known as RP 2014. Each year, RPEC releases an update to the mortality improvement assumption that was released with the RP 2014 tables. The Company considered the RPEC mortality and mortality improvement tables and performed a review of its own mortality history to assess the appropriateness of the RPEC tables for use in generating financial results. In fiscal years 2017, 2016 and 2015 , the Company elected to value its principal retirement and other postretirement benefit plan liabilities using the base RP 2014 mortality table and a slightly modified fully generational mortality improvement assumption. The revised assumption uses the most recent RPEC mortality improvement table for all years where the RPEC tables are based on finalized data, and the most recently published Social Security Administration Intermediate mortality improvement for subsequent years.

The underlying basis of the investment strategy of the Company's defined benefit plans is to ensure the assets are invested to achieve a positive rate of return over the long term sufficient to meet the plans' actuarial interest rate and provide for the payment of benefit obligations and expenses in perpetuity in a secure and prudent fashion, maintain a prudent risk level that balances growth with the need to preserve capital, diversify plan assets so as to minimize the risk of large losses or excessive fluctuations in market value from year to year, achieve investment results over the long term that compare favorably with other pension plans and appropriate indices. The Company's investment policy, as established by the Company's pension board, specifies the types of investments appropriate for the plans, asset allocation guidelines, criteria for the selection of investment managers, procedures to monitor overall investment performance as well as investment manager performance. It also provides guidelines enabling plan fiduciaries to fulfill their responsibilities.

Effective August 1, 2017, the Company merged the IDL, Inc. retirement income plan and the Aurora Casket Company, LLC pension plan into the Company’s principal pension plan. No changes were made to the benefit formulas, vesting provisions, or to the employees covered by the plans.

The Company's defined benefit pension plans' weighted-average asset allocation at September 30, 2017 and 2016 and weighted-average target allocation were as follows:



	Plan Assets at				Target
Asset Category	2017		2016		Allocation*
Equity securities	$	77,245	$	58,849	50	%
Fixed income, cash and cash equivalents	49,008		72,495		30	%
Other investments	29,381		20,520		20	%
	$	155,634	$	151,864	100	%

* Target allocation relates to the Company's primary defined benefit pension plan

Based on an analysis of the historical and expected future 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 its primary defined benefit pension plans' assets at 6.75% in 2017 for purposes of determining pension cost and funded status under current guidance. The Company's discount rate assumption used in determining the present value of the projected benefit obligation is based upon published indices.

The Company categorizes plan assets within a three level fair value hierarchy (see Note 4 for a further discussion of the fair value hierarchy). The valuation methodologies used to measure the fair value of pension assets, including the level in the fair value hierarchy in which each type of pension plan asset is classified as follows.

Equity securities consist of direct investments in the stocks of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.

Mutual funds are valued at the closing price of shares held by the Plan at year end. As such, these mutual fund investments are classified as Level 1.

Fixed income securities consist of publicly traded fixed interest obligations (primarily U.S. government notes and corporate and agency bonds). Such investments are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data. As such, U.S. government notes are included in Level 1, and the remainder of the fixed income securities are included in Level 2.

Cash and cash equivalents consist of direct cash holdings and short-term money market mutual funds. These values are valued based on cost, which approximates fair value, and as such, are classified as Level 1.

Other investments consist primarily of real estate, commodities, private equity holdings and hedge fund investments. These holdings are valued by investment managers based on the most recent information available. The valuation information used by investment managers may not be readily observable. As such, these investments are classified as Level 3.

The Company's defined benefit pension plans' asset categories at September 30, 2017 and 2016 were as follows:



	September 30, 2017
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	42,731	$	—	$	—	$	42,731
Equity securities - mutual funds	34,514		—		—		34,514
Fixed income securities	30,032		14,870		—		44,902
Cash and cash equivalents	4,106		—		—		4,106
Other investments	19,901		—		9,480		29,381
Total	$	131,284	$	14,870	$	9,480	$	155,634



	September 30, 2016
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	35,912	$	—	$	—	$	35,912
Equity securities - mutual funds	22,937		—		—		22,937
Fixed income securities	41,099		11,732		—		52,831
Cash and cash equivalents	19,664		—		—		19,664
Other investments	7,694		10		12,816		20,520
Total	$	127,306	$	11,742	$	12,816	$	151,864

Changes in the fair value of Level 3 assets at September 30, 2017 and 2016 are summarized as follows:



Asset Category	Fair Value, Beginning of Period		Acquisitions		Dispositions			Realized Gains		Unrealized Gains (Losses)			Fair Value, End of Period
Other investments:
Fiscal Year Ended:
September 30, 2017	$	12,816	$	—	$	(3,286	)	$	418	$	(468	)	$	9,480
September 30, 2016	13,982		—		(941		)	449		(674		)	12,816

Benefit payments expected to be paid are as follows:



Years ending September 30:	Pension Benefits		Other Postretirement Benefits

2018	$	10,137	$	1,044
2019	10,586		1,072
2020	10,983		1,013
2021	11,447		1,044
2022	12,811		1,094
2023-2027	72,463		6,004
	$	128,427	$	11,271

For measurement purposes, a rate of increase of 7.3% in the per capita cost of health care benefits was assumed for 2018; the rate was assumed to decrease gradually to 4.0% for 2058 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported. An increase in the assumed health care cost trend rates by one percentage point would have increased the accumulated postretirement benefit obligation as of September 30, 2017 by $718 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $47. A decrease in the assumed health care cost trend rates by one percentage point would have decreased the accumulated postretirement benefit obligation as of September 30, 2017 by $822 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $54.

Prior to its acquisition by Matthews, Schawk, Inc. ("Schawk") participated in a multi-employer pension fund pursuant to certain collective bargaining agreements. In 2012, Schawk bargained to withdraw from the fund, and recorded a withdrawal liability at the conclusion of the negotiations, based on the present value of the installment payments expected to be paid through 2034. During fiscal 2015, the Company finalized an agreement to settle this installment payment obligation in exchange for a lump-sum payment of $18,157, which is presented within cash flows from financing activities on the Consolidated Statement of Cash Flows. This settlement also resulted in an $11,522 gain recognized in other income (deductions), net during fiscal 2015.

The Company sponsors defined contribution plans for hourly and salary employees. The expense associated with the contributions made to these plans was $8,620, $8,117, and $6,819 for the fiscal years ended September 30, 2017, 2016 and 2015, respectively.