Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

____________________________________________________________

FORM 10-Q



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended December 31, 2019



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from _____ to _____

Commission File No. 0-09115

____________________________________________________________

MATTHEWS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)



Pennsylvania	25-0644320
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)



Two Northshore Center,	Pittsburgh,	PA	15212‑5851
(Address of principal executive offices)			(Zip Code)

(412)			442-8200
(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $1.00 par value	MATW	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ý

As of December 31, 2019, shares of common stock outstanding were: Class A Common Stock 31,290,095 shares.

PART I ‑ FINANCIAL INFORMATION

Item 1. Financial Statements

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands)



	December 31, 2019					September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents				$	39,384				$	35,302
Accounts receivable, net				312,903					318,756
Inventories, net				185,608					180,274
Other current assets				56,453					49,384

Total current assets				594,348					583,716

Investments				91,286					85,501
Property, plant and equipment, net				239,240					237,442
Deferred income taxes				5,155					5,032
Other assets				112,405					31,455
Goodwill				856,989					846,807
Other intangible assets, net				385,156					400,650

Total assets				$	2,284,579				$	2,190,603

LIABILITIES
Current liabilities:
Long-term debt, current maturities				$	25,532				$	42,503
Trade accounts payable				62,786					74,558
Accrued compensation				33,450					42,545
Accrued income taxes				1,164					5,997
Other current liabilities				160,344					114,276

Total current liabilities				283,276					279,879

Long-term debt				941,395					898,194
Accrued pension				135,790					133,762
Postretirement benefits				19,986					19,963
Deferred income taxes				105,710					102,482
Other liabilities				82,717					37,087
Total liabilities				1,568,874					1,471,367

SHAREHOLDERS' EQUITY
Shareholders' equity-Matthews:
Common stock	$	36,334				$	36,334
Additional paid-in capital	140,526					137,774
Retained earnings	955,593					972,594
Accumulated other comprehensive loss	(215,232		)			(228,361		)
Treasury stock, at cost	(202,801		)			(200,235		)
Total shareholders' equity-Matthews				714,420					718,106
Noncontrolling interests				1,285					1,130
Total shareholders' equity				715,705					719,236

Total liabilities and shareholders' equity				$	2,284,579				$	2,190,603

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share data)



	Three Months Ended December 31,
	2019			2018

Sales	$	364,944		$	374,177
Cost of sales	(249,217		)	(247,766		)

Gross profit	115,727			126,411

Selling expense	(32,263		)	(35,029		)
Administrative expense	(70,465		)	(67,103		)
Intangible amortization	(17,942		)	(8,113		)

Operating (loss) profit	(4,943		)	16,166

Investment income (loss)	1,299			(1,352		)
Interest expense	(9,240		)	(10,301		)
Other income (deductions), net	(2,819		)	(924		)

(Loss) income before income taxes	(15,703		)	3,589

Income tax benefit (provision)	5,397			(605		)

Net (loss) income	(10,306		)	2,984

Net (income) loss attributable to noncontrolling interests	(160		)	113

Net (loss) income attributable to Matthews shareholders	$	(10,466	)	$	3,097

(Loss) earnings per share attributable to Matthews shareholders:
Basic	$	(0.34	)	$	0.10

Diluted	$	(0.34	)	$	0.10

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollar amounts in thousands)



	Three Months Ended December 31,
	Matthews						Noncontrolling Interest						Total
	2019			2018			2019			2018			2019			2018

Net (loss) income:	$	(10,466	)	$	3,097		$	160		$	(113	)	$	(10,306	)	$	2,984
Other comprehensive income (loss) ("OCI"), net of tax:
Foreign currency translation adjustment	11,111			(12,564		)	(5		)	(13		)	11,106			(12,577		)
Pension plans and other postretirement benefits	1,727			729			—			—			1,727			729
Unrecognized gain (loss) on derivatives:
Net change from periodic revaluation	566			(2,346		)	—			—			566			(2,346		)
Net amount reclassified to earnings	(275		)	(555		)	—			—			(275		)	(555		)
Net change in unrecognized gain (loss) on derivatives	291			(2,901		)	—			—			291			(2,901		)
OCI, net of tax	13,129			(14,736		)	(5		)	(13		)	13,124			(14,749		)
Comprehensive income (loss)	$	2,663		$	(11,639	)	$	155		$	(126	)	$	2,818		$	(11,765	)

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

for the three months ended December 31, 2019 and 2018

(Dollar amounts in thousands, except per share data) (Unaudited)



	Shareholders' Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Non- controlling Interests			Total
Balance, September 30, 2019	$	36,334	$	137,774		$	972,594		$	(228,361	)	$	(200,235	)	$	1,130		$	719,236
Net (loss) income	—		—			(10,466		)	—			—			160			(10,306		)
Minimum pension liability	—		—			—			1,727			—			—			1,727
Translation adjustment	—		—			—			11,111			—			(5		)	11,106
Fair value of derivatives	—		—			—			291			—			—			291
Total comprehensive income																		2,818
Stock-based compensation	—		2,031			—			—			—			—			2,031
Purchase of 52,104 shares of treasury stock	—		—			—			—			(1,845		)	—			(1,845		)
Issuance of 11,225 shares of treasury stock	—		(450		)	—			—			450			—			—
Cancellations of 17,509 shares of treasury stock	—		1,171			—			—			(1,171		)	—			—
Dividends, $0.21 per share	—		—			(6,535		)	—			—			—			(6,535		)
Balance, December 31, 2019	$	36,334	$	140,526		$	955,593		$	(215,232	)	$	(202,801	)	$	1,285		$	715,705



	Shareholders' Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Non- controlling Interests			Total
Balance, September 30, 2018	$	36,334	$	129,252		$	1,040,378		$	(164,298	)	$	(173,315	)	$	363		$	868,714
Net income (loss)	—		—			3,097			—			—			(113		)	2,984
Minimum pension liability	—		—			—			729			—			—			729
Translation adjustment	—		—			—			(12,564		)	—			(13		)	(12,577		)
Fair value of derivatives	—		—			—			(2,901		)	—			—			(2,901		)
Total comprehensive loss																		(11,765		)
Stock-based compensation	—		3,647			—			—			—			—			3,647
Purchase of 186,417 shares of treasury stock	—		—			—			—			(7,751		)	—			(7,751		)
Issuance of 2,822 shares of treasury stock	—		(115		)	—			—			115			—			—
Cancellations of 19,433 shares of treasury stock	—		891			—			—			(891		)	—			—
Dividends, $0.20 per share	—		—			(6,414		)	—			—			—			(6,414		)
Acquisitions	—		—			—			—			—			1,760			1,760
Cumulative tax adjustment for intra-entity transfers	—		—			(4,176		)	—			—			—			(4,176		)
Balance, December 31, 2018	$	36,334	$	133,675		$	1,032,885		$	(179,034	)	$	(181,842	)	$	1,997		$	844,015

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollar amounts in thousands)



	Three Months Ended December 31,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(10,306	)	$	2,984
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	28,933			19,226
Stock-based compensation expense	2,031			3,647
Deferred tax provision	2,392			1,050
Gain on sale of assets, net	—			(58		)
Loss on divestiture	—			4,465
Unrealized (gain) loss on investments in mutual funds	(1,048		)	1,990
Loss from equity-method investments	407			—
Changes in working capital items	(13,182		)	(21,060		)
(Increase) decrease in other assets	(1,495		)	1,426
Decrease in other liabilities	(1,073		)	(159		)
Other operating activities, net	(1,302		)	(5,125		)

Net cash provided by operating activities	5,357			8,386

Cash flows from investing activities:
Capital expenditures	(9,722		)	(8,458		)
Acquisitions, net of cash acquired	—			(8,404		)
Proceeds from sale of assets	63			361
Proceeds from divestiture	—			8,254
Purchases of investments	(4,570		)	(7,371		)

Net cash used in investing activities	(14,229		)	(15,618		)

Cash flows from financing activities:
Proceeds from long-term debt	153,567			149,366
Payments on long-term debt	(131,931		)	(128,659		)
Purchases of treasury stock	(1,845		)	(7,751		)
Dividends	(6,535		)	(6,414		)
Acquisition holdback and contingent consideration payments	(652		)	—
Other financing activities	(688		)	(724		)

Net cash provided by financing activities	11,916			5,818

Effect of exchange rate changes on cash	1,038			(322		)

Net change in cash and cash equivalents	$	4,082		$	(1,736	)

The accompanying notes are an integral part of these consolidated financial statements.

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2019

(Dollar amounts in thousands, except per share data)

Note 1. Nature of Operations

Matthews International Corporation ("Matthews" or the "Company"), founded in 1850 and incorporated in Pennsylvania in 1902, is a global provider of brand solutions, memorialization products and industrial technologies. Brand solutions consists of brand management, pre-media services, printing plates and cylinders, engineered products, imaging services, digital asset management, merchandising display systems, and marketing and design services primarily for the consumer goods and retail industries. Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets, and cremation and incineration equipment primarily for the cemetery and funeral home industries. Industrial technologies include marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.

The Company has facilities in North America, Europe, Asia, Australia, and Central and South America.

Note 2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information for commercial and industrial companies and the instructions to Form 10‑Q and Rule 10‑01 of Regulation S‑X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10‑K for the year ended September 30, 2019. The consolidated financial statements include all domestic and foreign subsidiaries in which the Company maintains an ownership interest and has operating control. Investments in certain companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are accounted for as equity method investments. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements:

Issued

In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740) which simplifies the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in Topic 740 and also simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2022. The Company is currently assessing the impact of the ASU on its financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2021. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each report date. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2021. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 2. Basis of Presentation (continued)

Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements including the consideration of costs and benefits. The adoption of this ASU in the first quarter ended December 31, 2019 had no impact on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which provides new guidance intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The adoption of this ASU in the first quarter ended December 31, 2019 had no impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides new guidance on how an entity should account for leases and recognize associated lease assets and liabilities. This ASU requires lessees to recognize assets and liabilities that arise from financing and operating leases on the Consolidated Balance Sheet. Subsequently, the FASB issued several ASUs that address implementation issues and correct or improve certain aspects of the new lease guidance, including ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted Improvements, ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, and ASU 2019-01, Leases (Topic 842): Codification Improvements. These ASUs do not change the core principles in the lease guidance outlined above. ASU No. 2018-11 provides an additional transition method to adopt ASU No. 2016-02. Under the transition method, an entity initially applies the new leases standard at the adoption date versus at the beginning of the earliest period presented and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard using the transition method as of October 1, 2019. Under this approach, the Company recognized and recorded right-of-use ("ROU") assets and related lease liabilities on the Consolidated Balance Sheet of approximately $80 million with no impact to retained earnings. Reporting periods prior to October 1, 2019 continue to be presented in accordance with previous lease accounting guidance under GAAP. As part of the adoption, the Company elected the package of practical expedients permitted under the transition guidance which includes the ability to carry forward historical lease classification. Refer to Note 8, “Leases,” for a further discussion.

Note 3. Revenue Recognition

The Company delivers a variety of products and services through its business segments. The SGK Brand Solutions segment delivers brand management, pre-media services, printing plates and cylinders, engineered products, and imaging services for consumer goods and retail customers, merchandising display systems, and marketing and design services primarily to the consumer goods and retail industries. The Memorialization segment produces and delivers bronze and granite memorials and other memorialization products, caskets, and cremation and incineration equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment delivers marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products for the warehousing and industrial industries.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 3. Revenue Recognition (continued)

The Company disaggregates revenue from contracts with customers by geography, as it believes geographic regions best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated sales by segment and region for the three months ended December 31, 2019 and 2018 were as follows:



	SGK Brand Solutions				Memorialization				Industrial Technologies				Consolidated
	Three Months Ended December 31,				Three Months Ended December 31,				Three Months Ended December 31,				Three Months Ended December 31,
	2019		2018		2019		2018		2019		2018		2019		2018
North America	$	76,230	$	79,582	$	144,045	$	143,293	$	28,299	$	27,714	$	248,574	$	250,589
Central and South America	1,836		1,217		—		—		—		—		1,836		1,217
Europe	82,413		90,518		7,829		8,158		6,926		6,337		97,168		105,013
Australia	3,002		2,959		2,531		2,435		—		—		5,533		5,394
Asia	11,399		11,024		—		—		434		940		11,833		11,964
Total Sales	$	174,880	$	185,300	$	154,405	$	153,886	$	35,659	$	34,991	$	364,944	$	374,177

Note 4. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level fair value hierarchy is used to prioritize the inputs used in valuations, as defined below:

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

The fair values of the Company's assets and liabilities measured on a recurring basis are categorized as follows:



	December 31, 2019								September 30, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives⁽¹⁾	$	—	$	669	$	—	$	669	$	—	$	845	$	—	$	845
Equity and fixed income mutual funds	—		24,014		—		24,014		—		22,986		—		22,986
Life insurance policies	—		4,089		—		4,089		—		4,030		—		4,030
Total assets at fair value	$	—	$	28,772	$	—	$	28,772	$	—	$	27,861	$	—	$	27,861

Liabilities:
Derivatives⁽¹⁾	$	—	$	818	$	—	$	818	$	—	$	1,379	$	—	$	1,379
Total liabilities at fair value	$	—	$	818	$	—	$	818	$	—	$	1,379	$	—	$	1,379
⁽¹⁾Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 5. Inventories

Inventories consisted of the following:



	December 31, 2019		September 30, 2019
Raw materials	$	38,220	$	35,616
Work in process	79,108		76,297
Finished goods	68,280		68,361
	$	185,608	$	180,274

Note 6. Investments

Non-current investments consisted of the following:



	December 31, 2019		September 30, 2019
Equity and fixed income mutual funds	$	24,014	$	22,986
Life insurance policies	4,089		4,030
Equity-method investments	44,273		39,761
Cost-method investments	18,910		18,724
	$	91,286	$	85,501

During fiscal 2020, the Company made additional investments in a non-consolidated subsidiary totaling $4,900 and continued to account for this non-controlling interest as an equity-method investment.

Note 7. Debt

The Company has a domestic credit facility with a syndicate of financial institutions that includes a $900,000 senior secured revolving credit facility and a $250,000 senior secured amortizing term loan. A portion of the revolving credit facility (not to exceed $150,000) can be drawn in foreign currencies. 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. Pursuant to the terms of the domestic credit facility agreement, principal payments may be made on the term loan prior to the scheduled due dates. 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 (Euro LIBOR for balances drawn in Euros) plus a factor ranging from 0.75% to 2.00% (1.50% at December 31, 2019) based on the Company's secured leverage ratio. The secured leverage ratio is defined as net secured indebtedness divided by EBITDA (earnings before interest, income taxes, depreciation and amortization) as defined within the domestic credit facility agreement. 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 U.S. dollar denominated borrowings on the revolving credit facility at December 31, 2019 and September 30, 2019 were $351,689 and $325,638, respectively. Outstanding Euro denominated borrowings on the revolving credit facility at December 31, 2019 and September 30, 2019 were €125.0 million ($140,206) and €125.0 million ($136,470), respectively. Outstanding borrowings on the term loan at December 31, 2019 and September 30, 2019 were $47,287 and $53,497, respectively. The weighted-average interest rate on the outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps and Euro denominated borrowings) at December 31, 2019 and December 31, 2018 was 2.60% and 3.06%, respectively.

The Company has $300,000 of 5.25% senior unsecured notes due December 1, 2025 (the "2025 Senior Notes"). The 2025 Senior Notes bear interest at a rate of 5.25% per annum with interest payable semi-annually in arrears on June 1 and December 1 of each year. The Company's obligations under the 2025 Senior Notes are guaranteed by certain of the Company's direct and indirect wholly-owned domestic subsidiaries. The Company is subject to certain covenants and other restrictions in connection with the 2025 Senior Notes. The Company incurred direct financing fees and costs in connection with the 2025 Senior Notes. Unamortized costs were $3,150 and $3,284 at December 31, 2019 and September 30, 2019, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 7. Debt (continued)

The Company has a $115,000 accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions which matures on April 11, 2020 and the Company intends to extend this facility. Under the Securitization Facility, the Company and certain of its domestic subsidiaries sell, on a continuous basis without recourse, their trade receivables to Matthews Receivables Funding Corporation, LLC (“Matthews RFC”), a wholly-owned bankruptcy-remote subsidiary of the Company. Matthews RFC in turn assigns a collateral interest in these receivables to certain financial institutions, and then may borrow funds under the Securitization Facility. The Securitization Facility does not qualify for sale treatment. Accordingly, the trade receivables and related debt obligations remain on the Company's Consolidated Balance Sheet. Borrowings under the Securitization Facility bear interest at LIBOR plus 0.75%. The Company is required to pay an annual commitment fee ranging from 0.25% to 0.35% of the unused portion of the Securitization Facility. Outstanding borrowings under the Securitization Facility at December 31, 2019 and September 30, 2019 were $106,720 and $93,950, respectively. At December 31, 2019 and 2018, the interest rate on borrowings under this facility was 2.51% and 3.25%, respectively.

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



	December 31, 2019			September 30, 2019
Pay fixed swaps - notional amount	$	287,500		$	293,750
Net unrealized loss	$	(149	)	$	(534	)
Weighted-average maturity period (years)	1.7			1.9
Weighted-average received rate	1.76		%	2.02		%
Weighted-average pay rate	1.43		%	1.41		%

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 loss, net of unrealized gains, of $149 ($112 after tax) at December 31, 2019 and an unrealized loss, net of unrealized gains, of $534 ($403 after tax) at September 30, 2019, that is included in shareholders' equity as part of accumulated other comprehensive income (loss) ("AOCI"). Assuming market rates remain constant with the rates at December 31, 2019, a gain (net of tax) of approximately $118 included in AOCI is expected to be recognized in earnings over the next twelve months.

At December 31, 2019 and September 30, 2019, the interest rate swap contracts were reflected in the Consolidated Balance Sheets as follows:



Derivatives	December 31, 2019			September 30, 2019
Current assets:
Other current assets	$	473		$	548
Long-term assets:
Other assets	196			297
Current liabilities:
Other current liabilities	(316		)	(484		)
Long-term liabilities:
Other liabilities	(502		)	(895		)
Total derivatives	$	(149	)	$	(534	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 7. Debt (continued)

The gains recognized on derivatives were as follows:



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


		Three Months Ended December 31,
		2019		2018
Interest rate swaps	Interest expense	$	364	$	735

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



Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives					Location of Gain Reclassified From AOCI into Income (Effective Portion*)	Amount of Gain Reclassified from AOCI into Income (Effective Portion*)
	December 31, 2019		December 31, 2018				December 31, 2019		December 31, 2018
Interest rate swaps	$	566	$	(2,346	)	Interest expense	$	275	$	555
*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, which is guaranteed by Matthews. The maximum amount of borrowing available under this facility is €35.0 million ($39,258). In the first quarter of fiscal 2020, the Company extended this facility to a current maturity of December 2020 and the Company intends to continue to extend this facility. Outstanding borrowings under the credit facility totaled €18.4 million ($20,680) and €12.8 million ($14,024) at December 31, 2019 and September 30, 2019, respectively. The weighted-average interest rate on outstanding borrowings under this facility at December 31, 2019 and 2018 was 1.25%.

The Company’s German subsidiary, Matthews Europe GmbH, had €15.0 million ($16,533) of senior unsecured notes with European banks. The notes matured in November 2019 at which point they were paid. The weighted-average interest rate on the notes at December 31, 2018 was 1.40%.

Finance lease liabilities included as a component of debt totaled $3,495 and $3,631 at December 31, 2019 and September 30, 2019, respectively. See Note 8, "Leases" for further discussion on the Company's lease obligations. Other debt totaled $395 at September 30, 2019. The weighted-average interest rate on other debt was 5.54% at December 31, 2018.

The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Currency losses of $499 (net of income taxes of $162) and $3,320 (net of income taxes of $1,077), which represent effective hedges of net investments, were reported as a component of AOCI within currency translation adjustment at December 31, 2019 and September 30, 2019, respectively.

In September 2014, a claim was filed by a customer seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($11,301 at December 31, 2019) with respect to a performance guarantee on an environmental solutions project in Saudi Arabia. Management assessed the customer's demand to be without merit and initiated an action with the court in the United Kingdom (the "U.K. Court"). Pursuant to this action, an order was issued by the U.K. Court in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the U.K. 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 U.K. Court as ordered. On June 14, 2016, the U.K Court ruled completely in favor of Matthews following a trial on the merits. However, the ongoing dispute involves litigation in multiple foreign jurisdictions because the contract between the parties includes a venue clause requiring the venue for any litigation to be in the United Kingdom, while the enforcement of any final judgment is required to be executed in Saudi Arabia. The Company continues to pursue a trial on the merits in Saudi Arabia which is now scheduled to conclude in calendar year 2020. It is necessary to obtain an equivalent favorable ruling in the courts of Saudi Arabia to effectively enforce the judgment and commence collection efforts. The Company remains confident regarding the pending trial on the merits in Saudi Arabia and expects to be in a position to enforce the judgment and initiate collection efforts following completion of that trial. However, as the customer has neither yet remitted the funds nor complied with the final, un-appealed orders of the U.K. Court, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. The Company’s level of success in recovering

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 7. Debt (continued)

funds from the customer will depend upon a number of factors including a successful completion of the pending trial on the merits in Saudi Arabia, the availability of recoverable funds, and the subsequent level of cooperation from the Saudi Arabian government to enforce a potential judgment against the customer. The Company has determined that resolution of this matter may take an extended period of time and therefore has classified the funded letter of credit within other assets on the Consolidated Balance Sheets as of December 31, 2019 and September 30, 2019. The Company will continue to assess the accounting and collectability related to this matter as facts and circumstances evolve.

As of December 31, 2019 and September 30, 2019, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheets. The Company was in compliance with all of its debt covenants as of December 31, 2019.

Note 8. Leases

The Company’s lease portfolio includes various contracts for real estate, vehicles, information technology and other equipment. At contract inception, a lease exists if the contract conveys the right to control an identified asset for a period of time in exchange for consideration. Control is considered to exist when the lessee has the right to obtain substantially all of the economic benefits from the use of an identified asset, as well as the right to direct the use of that asset. If a contract is considered to be a lease, the Company recognizes a lease liability based on the present value of the future lease payments, and a corresponding right-of-use asset. As a majority of the Company’s leases do not provide an implicit interest rate within the lease, an incremental borrowing rate is used to determine the ROU asset and lease liability which is based on information available at the commencement date. Options to purchase, extend or terminate a lease are included in the ROU asset and lease liability when it is reasonably certain an option will be exercised. Renewal options are most prevalent in the Company’s real estate leases. In general, the Company has not included renewal options for leases in the ROU asset and lease liability because the likelihood of renewal was not determined to be reasonably certain. In addition, leases may include variable lease payments, for items such as maintenance and utilities, which are expensed as incurred as variable lease expense.

There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. Leases not meeting the finance lease criteria are classified as operating leases. Effective October 1, 2019, ROU assets and corresponding lease liabilities are recorded on the Consolidated Balance Sheet. ROU assets for operating leases are classified in other assets, and ROU assets for finance leases are classified in property, plant and equipment, net on the Consolidated Balance Sheet. For operating leases, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other liabilities on the Consolidated Balance Sheet. For finance leases, short-term lease liabilities are classified in long-term debt, current maturities, and long-term lease liabilities are classified in long-term debt on the Consolidated Balance Sheet. Leases with an initial lease term of twelve months or less have not been recognized on the Consolidated Balance Sheet. Reporting periods prior to October 1, 2019 continue to be presented in accordance with previous lease accounting guidance under GAAP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

(Dollar amounts in thousands, except per share data)

Note 8. Leases (continued)

The following table presents the balance sheet and lease classification for the Company's lease portfolio:



Balance Sheet Classification	Lease Classification	December 31, 2019
Non-current assets:
Property, plant and equipment, net	Finance	$	1,330
Other assets	Operating	76,682
Total lease assets		$	78,012

Current liabilities:
Long-term debt, current maturities	Finance	$	532
Other current liabilities	Operating	26,456
Non-current liabilities:
Long-term debt	Finance	2,963
Other liabilities	Operating	51,007
Total lease liabilities		$	80,958

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation expense and interest expense using the interest method of recognition. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity.

The following table presents the components of lease cost:



	Three Months Ended December 31, 2019
Operating lease cost	$	6,263
Variable lease cost	1,424
Sublease income	(187		)
Total lease cost*	$	7,500