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, 2018

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, 2018 and 2017:



	Pension						Other Postretirement
	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation, beginning of year	$	259,672		$	263,566		$	20,316		$	23,290
Service cost	8,159			8,553			335			392
Interest cost	8,210			7,362			631			626
Actuarial gain	(15,229		)	(4,264		)	(907		)	(2,600		)
Exchange (gain) loss	(180		)	589			—			—
Benefit payments	(19,079		)	(16,134		)	(1,549		)	(1,392		)
Benefit obligation, end of year	241,553			259,672			18,826			20,316

Change in plan assets:
Fair value, beginning of year	155,634			151,864			—			—
Actual return	10,914			12,586			—			—
Benefit payments (1)	(19,079		)	(16,134		)	(1,549		)	(1,392		)
Employer contributions	11,193			7,318			1,549			1,392
Fair value, end of year	158,662			155,634			—			—

Funded status	(82,892		)	(104,039		)	(18,828		)	(20,317		)
Unrecognized actuarial loss (gain)	53,405			73,616			(2,376		)	(1,469		)
Unrecognized prior service cost	(552		)	(690		)	(525		)	(720		)
Net amount recognized	$	(30,039	)	$	(31,113	)	$	(21,729	)	$	(22,506	)

Amounts recognized in the consolidated balance sheet:
Current liability	$	(857	)	$	(766	)	$	(1,075	)	$	(1,044	)
Noncurrent benefit liability	(82,035		)	(103,273		)	(17,753		)	(19,273		)
Accumulated other comprehensive loss (income)	52,853			72,926			(2,901		)	(2,189		)
Net amount recognized	$	(30,039	)	$	(31,113	)	$	(21,729	)	$	(22,506	)

Amounts recognized in accumulated
other comprehensive loss (income):
Net actuarial loss (income)	$	53,405		$	73,616		$	(2,376	)	$	(1,469	)
Prior service cost	(552		)	(690		)	(525		)	(720		)
Net amount recognized	$	52,853		$	72,926		$	(2,901	)	$	(2,189	)

(1) Pension benefit payments in fiscal 2018 and 2017 includes $6,800 and $5,655 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, 2018 and 2017, the accumulated benefit obligation for the Company's defined benefit pension plans was $224,265 and $238,307 at September 30, 2018 and 2017, respectively, and the projected benefit obligation for the Company's defined benefit pension plans was $241,553 and $259,672 at September 30, 2018 and 2017, respectively.

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



	Pension									Other Postretirement
	2018			2017			2016			2018			2017			2016
Service cost	$	8,159		$	8,553		$	7,446		$	335		$	392		$	402
Interest cost	8,210			7,362			9,725			631			626			845
Expected return on plan assets	(10,136		)	(9,249		)	(9,625		)	—			—			—
Amortization:
Prior service cost	(138		)	(181		)	(183		)	(195		)	(195		)	(195		)
Net actuarial loss	7,018			10,034			7,468			—			—			—
Net benefit cost	$	13,113		$	16,519		$	14,831		$	771		$	823		$	1,052

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 not required to make any significant contributions to its principal retirement plan in fiscal 2018. The Company is not required to make any significant cash contributions to its principal retirement plan in fiscal 2019.

Contributions made in fiscal 2018 are as follows:



Contributions	Pension		Other Postretirement
Principal retirement plan	$	10,000	$	—
Supplemental retirement plan	749		—
Other retirement plans	444		—
Other postretirement plan	—		1,549

Amounts of AOCI expected to be recognized in net periodic benefit costs in fiscal 2019 include:



	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	4,246		$	(59	)
Prior service cost	(186		)	(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 2018, 2017 and 2016. The weighted-average assumptions for those plans were:



	Pension						Other Postretirement
	2018		2017		2016		2018		2017		2016
Discount rate	4.21	%	3.76	%	3.51	%	4.19	%	3.72	%	3.42	%
Return on plan assets	6.75	%	6.75	%	7.25	%	—		—		—
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 2018, 2017 and 2016, 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, 2018 and 2017 and weighted-average target allocation were as follows:



	Plan Assets at				Target
Asset Category	2018		2017		Allocation*
Equity securities	$	92,745	$	77,245	50	%
Fixed income, cash and cash equivalents	44,250		49,008		30	%
Other investments	21,667		29,381		20	%
	$	158,662	$	155,634	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 2018 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, 2018 and 2017 were as follows:



	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



	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

Changes in the fair value of Level 3 assets at September 30, 2018 and 2017 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, 2018	$	9,480	$	—	$	(149	)	$	261	$	523		$	10,115
September 30, 2017	12,816		—		(3,286		)	418		(468		)	9,480

Benefit payments expected to be paid are as follows:



Years ending September 30:	Pension Benefits		Other Postretirement Benefits

2019	$	10,348	$	1,075
2020	10,602		1,036
2021	11,141		1,062
2022	12,408		1,098
2023	12,772		1,117
2024-2028	72,916		6,062
	$	130,187	$	11,450

For measurement purposes, a rate of increase of 7.8% in the per capita cost of health care benefits was assumed for 2019; 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, 2018 by $705 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $46. 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, 2018 by $622 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $40.

The Company sponsors defined contribution plans for hourly and salary employees. The expense associated with the contributions made to these plans was $8,685, $8,620, and $8,117 for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.