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

Annual report pursuant to Section 13 and 15(d)

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

12 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company operates internationally and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At September 30, 2023 and 2022, derivative instruments were reflected on a gross-basis in the consolidated balance sheets as follows:


Derivatives:	September 30, 2023				September 30, 2022
	Interest Rate Swaps		Cross-Currency Swaps		Interest Rate Swaps		Cross-Currency Swaps
Current assets:
Other current assets	$	920	$	—	$	3,358	$	—
Long-term assets:
Other assets	3,086		—		7,341		3,722


Long-term liabilities:
Other liabilities	—		(2,766)		—		—
Total derivatives	$	4,006	$	(2,766)	$	10,699	$	3,722

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


	September 30, 2023			September 30, 2022
Notional amount	$	175,000		$	125,000

Weighted-average maturity period (years)	4.1			3.1
Weighted-average received rate	5.32		%	3.14		%
Weighted-average pay rate	3.83		%	1.04		%

The Company enters into interest rate swaps in order to achieve a mix of fixed and variable rate debt that it deems appropriate. In order to transition the Company's swaps from LIBOR-based to SOFR-based rates, the LIBOR-based swaps were settled during the second quarter of fiscal 2023, resulting in cash proceeds of $10,474. Concurrently, the Company entered into new interest rate swaps with SOFR-based rates with a notional amount of $175,000. 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 a net unrealized gain of $4,006 ($2,991 after tax) and $10,699 ($7,937 after tax) at September 30, 2023 and 2022, respectively, that is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI"). Unrecognized gains of $8,084 ($6,041 after tax) related to the terminated LIBOR-based swaps were also included in AOCI as of September 30, 2023. Assuming market rates remain constant with the rates at September 30, 2023, a gain (net of tax) of approximately $3,850 included in AOCI is expected to be recognized in earnings over the next twelve months.

The Company has a U.S. Dollar/Euro cross currency swap with a notional amount of $81,392 as of September 30, 2023 and 2022, which has been designated as a net investment hedge of foreign operations. The swap contract matures in September 2027. The Company assesses hedge effectiveness for this contract based on changes in fair value attributable to changes in spot prices. A loss of $2,065 (net of income taxes of $701) and a gain of $2,782 (net of income taxes of $940), which represented effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at September 30, 2023 and 2022, respectively. Income of $1,159 and $1,645, which represented the recognized portion of the fair value of cross currency swaps excluded from the assessment of hedge effectiveness, was included in current period earnings as a component of interest expense for fiscal 2023 and fiscal 2022, respectively. At September 30, 2023 and 2022, the swap totaled $2,766 and $3,722, respectively, and was included in other accrued liabilities and other assets in the Consolidated Balance Sheets, respectively.

The Company previously used certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of $5,370 (net of income taxes of $1,743), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at September 30, 2021.

The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the economic impact of largely mitigating foreign currency exposure. Changes in the fair value of these economic hedges are recorded in current period earnings as a component of other income (deductions), net. During fiscal 2022, net gains from economic hedges (which largely offset losses from underlying foreign currency exposures) totaled $4,677. No such economic hedge contracts were outstanding as of September 30, 2023 or 2022.

Refer to Note 16, "Accumulated Other Comprehensive Income" for further details regarding amounts recorded in AOCI and the Consolidated Statements of Income (Loss) related to derivatives.