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, 2016

Compensation and Retirement Disclosure [Abstract]

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, 2016 and 2015:



	Pension						Other Postretirement
	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation, beginning of year	$	238,727		$	211,036		$	20,424		$	21,358
Acquisitions	—			27,162			—			—
Service cost	7,446			6,764			402			454
Interest cost	9,725			8,740			845			885
Actuarial (gain) loss	26,841			4,087			2,931			(814		)
Exchange gain	(6		)	(1,206		)	—			—
Benefit payments	(19,167		)	(17,856		)	(1,312		)	(1,459		)
Benefit obligation, end of year	263,566			238,727			23,290			20,424

Change in plan assets:
Fair value, beginning of year	142,225			131,753			—			—
Acquisitions	—			25,897			—			—
Actual return	11,244			625			—			—
Benefit payments (1)	(19,167		)	(17,856		)	(1,312		)	(1,459		)
Employer contributions	17,562			1,806			1,312			1,459
Fair value, end of year	151,864			142,225			—			—

Funded status	(111,701		)	(96,502		)	(23,291		)	(20,424		)
Unrecognized actuarial loss (gain)	92,310			77,368			1,130			(1,801		)
Unrecognized prior service cost	(1,048		)	(1,231		)	(916		)	(1,111		)
Net amount recognized	$	(20,439	)	$	(20,365	)	$	(23,077	)	$	(23,336	)

Amounts recognized in the consolidated balance sheet:
Current liability	$	(760	)	$	(749	)	$	(1,148	)	$	(1,009	)
Noncurrent benefit liability	(110,941		)	(95,753		)	(22,143		)	(19,415		)
Accumulated other comprehensive loss (income)	91,262			76,137			214			(2,912		)
Net amount recognized	$	(20,439	)	$	(20,365	)	$	(23,077	)	$	(23,336	)

Amounts recognized in accumulated
other comprehensive loss (income):
Net actuarial loss (income)	$	92,310		$	77,368		$	1,130		$	(1,801	)
Prior service cost	(1,048		)	(1,231		)	(916		)	(1,111		)
Net amount recognized	$	91,262		$	76,137		$	214		$	(2,912	)

(1) Pension benefit payments in fiscal 2016 and 2015 include $9,300 and $10,000 of lump sum distributions, respectively, that were made to certain terminated vested employees as a settlement of the employees' pension obligations. These distributions did not meet the threshold to qualify as a settlement under U.S. GAAP and therefore, no unamortized actuarial loss was recognized in the Statement of Income upon completion of the lump sum distributions.

Based upon actuarial valuations performed as of September 30, 2016 and 2015, the accumulated benefit obligation for the Company's defined benefit pension plans was $240,329 and $208,407 at September 30, 2016 and 2015, respectively, and the projected benefit obligation for the Company's defined benefit pension plans was $263,566 and $238,727 at September 30, 2016 and 2015, respectively.

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



	Pension									Other Postretirement
	2016			2015			2014			2016			2015			2014
Service cost	$	7,446		$	6,764		$	6,150		$	402		$	454		$	436
Interest cost	9,725			8,740			8,927			845			885			919
Expected return on plan assets	(9,625		)	(10,151		)	(9,666		)	—			—			—
Amortization:
Prior service cost	(183		)	(180		)	(206		)	(195		)	(195		)	(195		)
Net actuarial loss (gain)	7,468			6,203			3,927			—			—			(87		)
Net benefit cost	$	14,831		$	11,376		$	9,132		$	1,052		$	1,144		$	1,073

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, will result 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 is being 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. The impact from this change is expected to be a reduction of service and interest costs of approximately $1,960 beginning 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 2016. The Company is required to make contributions of approximately $5,109 to its principal retirement plan in fiscal 2017.

Contributions made in fiscal 2016 are as follows:



Contributions	Pension		Other Postretirement
Principal retirement plan	$	15,800	$	—
Supplemental retirement plan	725		—
Other retirement plans	1,037		—
Other postretirement plan	—		1,312

Amounts of AOCI expected to be recognized in net periodic benefit costs in fiscal 2017 include:



	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	10,035		$	—
Prior service cost	(181		)	(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 2016, 2015 and 2014. The weighted-average assumptions for those plans were:



	Pension						Other Postretirement
	2016		2015		2014		2016		2015		2014
Discount rate	3.51	%	4.25	%	4.25	%	3.42	%	4.25	%	4.25	%
Return on plan assets	7.25	%	7.75	%	7.75	%	—		—		—
Compensation increase	3.50	%	3.50	%	3.50	%	—		—		—

In October 2014, the Society of Actuaries' Retirement Plans Experience Committee released new mortality tables known as RP 2014. The Company considered these new tables and performed a review of its own mortality history to assess future improvements in mortality rates. In fiscal 2016 and 2015, the Company elected to value its principal retirement and other postretirement benefit plan liabilities using a slightly modified assumption of future mortality which better approximates the plan participant population and reflects significant improvement in life expectancy over the previous mortality table, known as RP 2000.

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, 2016 and 2015 and weighted-average target allocation were as follows:



	Plan Assets at				Target
Asset Category	2016		2015		Allocation
Equity securities	$	58,849	$	60,460	50	%
Fixed income, cash and cash equivalents	72,495		59,612		30	%
Other investments	20,520		22,153		20	%
	$	151,864	$	142,225	100	%

The target asset allocation relates to the Company's primary defined benefit pension plan. Plan assets in the table include the assets of the Aurora Casket Company, LLC pension plan, which has a target asset allocation of 15% equity securities and 85% fixed income, cash and cash equivalents.

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 7.25% in 2016 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, 2016 and 2015 were as follows:



	September 30, 2016
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	35,912	$	—	$	—	$	35,912
Equity securities - mutual funds	22,937		—		—		22,937
Fixed income securities	41,099		11,732		—		52,831
Cash and cash equivalents	19,664		—		—		19,664
Other investments	7,694		10		12,816		20,520
Total	$	127,306	$	11,742	$	12,816	$	151,864



	September 30, 2015
Asset Category	Level 1		Level 2		Level 3		Total
Equity securities - stocks	$	31,559	$	—	$	—	$	31,559
Equity securities - mutual funds	27,846		1,055		—		28,901
Fixed income securities	39,644		15,474		—		55,118
Cash and cash equivalents	4,494		—		—		4,494
Other investments	8,171		—		13,982		22,153
Total	$	111,714	$	16,529	$	13,982	$	142,225

Changes in the fair value of Level 3 assets at September 30, 2016 and 2015 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, 2016	$	13,982	$	—	$	(941	)	$	449	$	(674	)	$	12,816
September 30, 2015	14,330		—		(1,661		)	608		705			13,982

Benefit payments expected to be paid are as follows:



Years ending September 30:	Pension Benefits		Other Postretirement Benefits

2017	$	9,772	$	1,148
2018	10,066		1,181
2019	10,672		1,210
2020	11,229		1,217
2021	11,665		1,243
2022-2026	70,164		6,769
	$	123,568	$	12,768

For measurement purposes, a rate of increase of 7.5% in the per capita cost of health care benefits was assumed for 2017; 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, 2016 by $909 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $59. 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, 2016 by $797 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $51.

Prior to its acquisition by Matthews, Schawk, Inc. ("Schawk") participated in a multi-employer pension fund pursuant to certain collective bargaining agreements. In 2012, Schawk bargained to withdraw from the fund, and recorded a withdrawal liability at the conclusion of the negotiations, based on the present value of the installment payments expected to be paid through 2034. During fiscal 2015, the Company finalized an agreement to settle this installment payment obligation in exchange for a lump-sum payment of $18,157, which is presented within cash flows from financing activities on the Consolidated Statement of Cash Flows. This settlement also resulted in an $11,522 gain recognized in other income (deductions), net during fiscal 2015.

The Company sponsors defined contribution plans for hourly and salary employees. The expense associated with the contributions made to these plans was $8,117, $6,819, and $2,398 for the fiscal years ended September 30, 2016, 2015 and 2014, respectively.