Matthews International Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Debt

Debt

9 Months Ended

Jun. 30, 2016

The Company has a domestic credit facility with a syndicate of financial institutions that was amended and restated in April 2016 to increase the total borrowing capacity from $900,000 to $1,150,000. The Company incurred debt issuance costs of approximately $2,318 in connection with the amended and restated agreement, which will be deferred and amortized over the term of the facility.

The amended and restated agreement includes a $900,000 senior secured revolving credit facility and a $250,000 senior secured term loan. 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. 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 plus a factor ranging from 0.75% to 2.00% (1.75% at June 30, 2016) based on the Company's leverage ratio. The leverage ratio is defined as net indebtedness divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). 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 amended and restated agreement 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 borrowings on the revolving credit facility at June 30, 2016 and September 30, 2015 were $645,000 and $857,425, respectively. Outstanding borrowings on the term loan at June 30, 2016 was $249,551. The weighted-average interest rate on outstanding borrowings for the domestic credit facility at June 30, 2016 and June 30, 2015 was 2.55% and 2.51%, respectively.

Note 5. Debt (continued)

The Company has entered into the following interest rate swaps:



Effective Date	Amount		Fixed Interest Rate	Interest Rate Spread at June 30, 2016	Maturity Date
June 2012	$	40,000	1.88%	1.75%	June 2022
August 2012	35,000		1.74%	1.75%	June 2022
September 2012	25,000		1.24%	1.75%	March 2017
May 2014	25,000		1.35%	1.75%	May 2018
November 2014	25,000		1.26%	1.75%	June 2018
March 2015	25,000		1.49%	1.75%	March 2019
September 2015	25,000		1.39%	1.75%	September 2020
November 2015	25,000		1.32%	1.75%	November 2020
December 2015	25,000		1.59%	1.75%	December 2020
February 2016	25,000		0.99%	1.75%	February 2020
February 2016	25,000		1.03%	1.75%	February 2022
June 2016	51,563		0.77%	1.75%	April 2021
June 2016	25,781		0.77%	1.75%	April 2021
June 2016	25,781		0.78%	1.75%	April 2021

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 the future variable interest payments under the domestic credit facility, 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 of $8,297 ($5,061 after tax) at June 30, 2016 and an unrealized loss, net of unrealized gains, of $3,686 ($2,248 after tax) at September 30, 2015. The net unrealized loss is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI"). Assuming market rates remain constant with the rates at June 30, 2016, a loss (net of tax) of approximately $1,244 included in AOCI is expected to be recognized in earnings over the next twelve months.

At June 30, 2016 and September 30, 2015, the interest rate swap contracts were reflected in the consolidated balance sheets as follows:



Derivatives	June 30, 2016			September 30, 2015
Current assets:
Other current assets	$	—		$	—
Long-term assets:
Other assets	—			—
Current liabilities:
Other current liabilities	(2,040		)	(1,165		)
Long-term liabilities:
Other liabilities	(6,257		)	(2,521		)
Total derivatives	$	(8,297	)	$	(3,686	)

Note 5. Debt (continued)

The losses recognized on derivatives were as follows:



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



		Three Months Ended June 30,						Nine Months Ended June 30,
		2016			2015			2016			2015

Interest rate swaps	Interest expense	$	(848	)	$	(953	)	$	(2,424	)	$	(3,026	)

The Company recognized the following gains or losses in AOCI:



Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives						Location of Gain or (Loss) Reclassified From AOCI into Income (Effective Portion*)	Amount of Loss Reclassified from AOCI into Income (Effective Portion*)
	June 30, 2016			June 30, 2015				June 30, 2016			June 30, 2015

Interest rate swaps	$	(4,292	)	$	(2,548	)	Interest expense	$	(1,479	)	$	(1,846	)

*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. The maximum amount of borrowing available under this facility is 35.0 million Euros ($38,863). Outstanding borrowings under the credit facility totaled 7.7 million Euros ($8,574) and 23.9 million Euros ($26,829) at June 30, 2016 and September 30, 2015, respectively. The weighted-average interest rate on outstanding borrowings under this facility at June 30, 2016 and 2015 was 1.75% and 1.50%, respectively.

The Company, through its German subsidiary, Saueressig GmbH & Co. KG ("Saueressig"), has several loans with various European banks. Outstanding borrowings under these loans totaled 527,262 Euros ($585) and 734,452 Euros ($824) at June 30, 2016 and September 30, 2015, respectively. The weighted-average interest rate on outstanding borrowings of Saueressig at June 30, 2016 and 2015 was 4.07% and 3.85%, respectively.

The Company, through its German subsidiary, Wetzel GmbH ("Wetzel"), has several loans with various European banks. Outstanding borrowings under these loans totaled 1.1 million Euros ($1,252) and 1.9 million Euros ($2,110) at June 30, 2016 and September 30, 2015, respectively. The weighted-average interest rate on outstanding borrowings of Wetzel at June 30, 2016 and 2015 was 6.12% and 5.82%, respectively.

The Company, through its Italian subsidiary, Matthews International S.p.A., has several loans with various Italian banks. Outstanding borrowings on these loans totaled 3.5 million Euros ($3,871) and 4.3 million Euros ($4,772) at June 30, 2016 and September 30, 2015, respectively. Matthews International S.p.A. also has four lines of credit totaling 11.3 million Euros ($12,581) with the same Italian banks. Outstanding borrowings on these lines were 5.0 million Euros ($5,525) and 4.6 million Euros ($5,166) at June 30, 2016 and September 30, 2015, respectively. The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at June 30, 2016 and 2015 was 3.44% and 3.21%, respectively.

Note 5. Debt (continued)

In September 2014, a claim was filed seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($11,475 at June 30, 2016) with respect to a performance guarantee on a project for a customer in Saudi Arabia. Management assessed the customer's claim to be without merit and initiated an action with the court. Pursuant to this action, a court order was issued in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the 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 court as ordered. On June 14, 2016, the court ruled completely in favor of Matthews following a trial on the merits. However, as the customer has not yet remitted the funds, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. As of June 30, 2016 and September 30, 2015, the Company has presented the funded letter of credit within other current assets on the Consolidated Balance Sheet.

As of June 30, 2016 and September 30, 2015, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheet.