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, 2019

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, 2019 and 2018:



	Pension						Other Postretirement
	2019			2018			2019			2018
Change in benefit obligation:
Benefit obligation, beginning of year	$	241,553		$	259,672		$	18,826		$	20,316
Service cost	7,998			8,159			244			335
Interest cost	9,202			8,210			718			631
Actuarial loss (gain)	43,198			(15,229		)	2,212			(907		)
Exchange gain	(581		)	(180		)	—			—
Benefit payments	(11,413		)	(19,079		)	(1,048		)	(1,549		)
Benefit obligation, end of year	289,957			241,553			20,952			18,826

Change in plan assets:
Fair value, beginning of year	158,662			155,634			—			—
Actual return	6,852			10,914			—			—
Benefit payments ⁽¹⁾	(11,413		)	(19,079		)	(1,048		)	(1,549		)
Employer contributions	1,212			11,193			1,048			1,549
Fair value, end of year	155,313			158,662			—			—

Funded status	(134,644		)	(82,892		)	(20,952		)	(18,828		)
Unrecognized actuarial loss (gain)	95,741			53,405			(106		)	(2,376		)
Unrecognized prior service cost	(367		)	(552		)	(330		)	(525		)
Net amount recognized	$	(39,270	)	$	(30,039	)	$	(21,388	)	$	(21,729	)

Amounts recognized in the consolidated balance sheet:
Current liability	$	(882	)	$	(857	)	$	(989	)	$	(1,075	)
Noncurrent benefit liability	(133,762		)	(82,035		)	(19,963		)	(17,753		)
Accumulated other comprehensive loss (income)	95,374			52,853			(436		)	(2,901		)
Net amount recognized	$	(39,270	)	$	(30,039	)	$	(21,388	)	$	(21,729	)

Amounts recognized in accumulated
other comprehensive loss (income):
Net actuarial loss (income)	$	95,741		$	53,405		$	(106	)	$	(2,376	)
Prior service cost	(367		)	(552		)	(330		)	(525		)
Net amount recognized	$	95,374		$	52,853		$	(436	)	$	(2,901	)

⁽¹⁾ Pension benefit payments in fiscal 2018 included approximately $6,800 of lump sum distributions 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.

13. PENSION AND OTHER POSTRETIREMENT PLANS, (continued)

Based upon actuarial valuations performed as of September 30, 2019 and 2018, the accumulated benefit obligation for the Company's defined benefit pension plans was $270,140 and $224,265 at September 30, 2019 and 2018, respectively, and the projected benefit obligation for the Company's defined benefit pension plans was $289,957 and $241,553 at September 30, 2019 and 2018, respectively.

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



	Pension									Other Postretirement
	2019			2018			2017			2019			2018			2017
Service cost	$	7,998		$	8,159		$	8,553		$	244		$	335		$	392
Interest cost *	9,202			8,210			7,362			718			631			626
Expected return on plan assets *	(10,304		)	(10,136		)	(9,249		)	—			—			—
Amortization:
Prior service cost	(186		)	(138		)	(181		)	(195		)	(195		)	(195		)
Net actuarial loss *	4,245			7,018			10,034			(59		)	—			—
Net benefit cost	$	10,955		$	13,113		$	16,519		$	708		$	771		$	823

^*Non-service components of pension and postretirement expense are included in other income (deductions), net.

Matthews has elected to utilize a full yield curve approach in the estimation of the service and interest cost components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

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 not required to make any significant contributions to its principal retirement plan in fiscal 2019. The Company is required to make contributions of approximately $4,333 to its principal retirement plan in fiscal 2020.

Contributions made in fiscal 2019 are as follows:



Contributions	Pension		Other Postretirement
Supplemental retirement plan	$	793	$	—
Other retirement plans	419		—
Other postretirement plan	—		1,048

Amounts of AOCI expected to be recognized in net periodic benefit costs in fiscal 2020 include:



	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	9,790		$	—
Prior service cost	(186		)	(94		)

13. PENSION AND OTHER POSTRETIREMENT PLANS, (continued)

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 2019, 2018 and 2017. The weighted-average assumptions for those plans were:



	Pension						Other Postretirement
	2019		2018		2017		2019		2018		2017
Discount rate	3.13	%	4.21	%	3.76	%	3.10	%	4.19	%	3.72	%
Return on plan assets	6.75	%	6.75	%	6.75	%	—		—		—
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 2019, 2018 and 2017, 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.

The Company's defined benefit pension plans' weighted-average asset allocation at September 30, 2019 and 2018 and weighted-average target allocation were as follows:



	Plan Assets at				Target
Asset Category	2019		2018		Allocation^*
Equity securities	$	105,297	$	92,745	65	%
Fixed income, cash and cash equivalents	39,156		44,250		25	%
Other investments	10,860		21,667		10	%
	$	155,313	$	158,662	100	%

^*Target allocation relates to the Company's primary defined benefit pension plan as of September 30, 2019.

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 2019 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 5 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.

13. PENSION AND OTHER POSTRETIREMENT PLANS, (continued)

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, 2019 and 2018 were as follows:



	September 30, 2019
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	54,985	$	—	$	—	$	54,985
Equity securities - mutual funds	50,312		—		—		50,312
Fixed income securities	15,829		18,968		—		34,797
Cash and cash equivalents	4,359		—		—		4,359
Other investments	—		—		10,860		10,860
Total	$	125,485	$	18,968	$	10,860	$	155,313



	September 30, 2018
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	46,628	$	—	$	—	$	46,628
Equity securities - mutual funds	46,117		—		—		46,117
Fixed income securities	26,789		14,785		—		41,574
Cash and cash equivalents	2,676		—		—		2,676
Other investments	11,552		—		10,115		21,667
Total	$	133,762	$	14,785	$	10,115	$	158,662

Changes in the fair value of Level 3 assets at September 30, 2019 and 2018 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, 2019	$	10,115	$	4,162	$	(2,786	)	$	685	$	(1,316	)	$	10,860
September 30, 2018	9,480		—		(149		)	261		523			10,115

13. PENSION AND OTHER POSTRETIREMENT PLANS, (continued)

Benefit payments expected to be paid are as follows:



Years ending September 30:	Pension Benefits		Other Postretirement Benefits

2020	$	10,733	$	989
2021	11,057		1,021
2022	12,360		1,051
2023	12,690		1,082
2024	14,038		1,127
2025-2029	75,514		5,832
	$	136,392	$	11,102

For measurement purposes, a rate of increase of 7.3% in the per capita cost of health care benefits was assumed for 2020; the rate was assumed to decrease gradually to 4.0% for 2070 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, 2019 by $718 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $39. 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, 2019 by $629 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $34.

The Company sponsors defined contribution plans for hourly and salary employees. The expense associated with the contributions made to these plans was $8,176, $8,685, and $8,620 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.