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EX-31.1 - EXHIBIT 31.1 TO 1ST QUARTER 10Q 2018 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPmatw-123117xex311.htm
EX-32.2 - EXHIBIT 32.2 TO 1ST QUARTER 10Q 2018 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPmatw-123117xex322.htm
EX-32.1 - EXHIBIT 32.1 TO 1ST QUARTER 10Q 2018 SARBANES OXLEY CERTIFICATION - MATTHEWS INTERNATIONAL CORPmatw-123117xex321.htm
EX-31.2 - EXHIBIT 31.2 TO 1ST QUARTER 10Q 2018 PRINCIPAL FINANCIAL OFFICER CERTIFICATION - MATTHEWS INTERNATIONAL CORPmatw-123117xex312.htm
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, 2017
or   
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)
 
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 ☒
 
No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 ☒
 
No ☐
 
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
 ☒
 
Smaller reporting company
 ☐
Accelerated filer
 ☐
 
Emerging growth company
 ☐
Non-accelerated filer
 ☐
(Do not check if a smaller reporting 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 ☒
 
As of December 31, 2017, shares of common stock outstanding were: Class A Common Stock 32,291,571 shares



PART I ‑ FINANCIAL INFORMATION
Item 1.   Financial Statements

MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands)
 
December 31, 2017
 
September 30, 2017
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
60,142

 
 
 
$
57,515

Accounts receivable, net
 
 
320,115

 
 
 
319,566

Inventories
 
 
179,336

 
 
 
171,445

Other current assets
 
 
53,784

 
 
 
46,533

 
 
 
 
 
 
 
 
Total current assets
 
 
613,377

 
 
 
595,059

 
 
 
 
 
 
 
 
Investments
 
 
49,946

 
 
 
37,667

Property, plant and equipment: Cost
$
596,107

 
 

 
$
570,879

 
 

Less accumulated depreciation
(342,263
)
 
 

 
(335,346
)
 
 

 
 

 
253,844

 
 

 
235,533

Deferred income taxes
 

 
1,890

 
 

 
2,456

Other assets
 

 
58,887

 
 

 
51,758

Goodwill
 

 
948,687

 
 

 
897,794

Other intangible assets, net
 

 
455,744

 
 

 
424,382

 
 
 
 
 
 
 
 
Total assets
 

 
$
2,382,375

 
 

 
$
2,244,649

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

Long-term debt, current maturities
 

 
$
31,390

 
 

 
$
29,528

Trade accounts payable
 

 
57,267

 
 

 
66,607

Accrued compensation
 

 
45,471

 
 

 
62,210

Accrued income taxes
 

 
31,211

 
 

 
21,386

Other current liabilities
 

 
127,332

 
 

 
105,401

 
 
 
 
 
 
 
 
Total current liabilities
 

 
292,671

 
 

 
285,132

 
 
 
 
 
 
 
 
Long-term debt
 

 
994,255

 
 

 
881,602

Accrued pension
 

 
104,341

 
 

 
103,273

Postretirement benefits
 

 
19,366

 
 

 
19,273

Deferred income taxes
 

 
101,449

 
 

 
139,430

Other liabilities
 

 
39,664

 
 

 
25,680

Total liabilities
 

 
1,551,746

 
 

 
1,454,390

 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

 
 

 
 

Shareholders' equity-Matthews:
 

 
 

 
 

 
 

Common stock
$
36,334

 
 

 
$
36,334

 
 

Additional paid-in capital
120,294

 
 

 
123,432

 
 

Retained earnings
977,939

 
 

 
948,830

 
 

Accumulated other comprehensive loss
(143,904
)
 
 

 
(154,115
)
 
 

Treasury stock, at cost
(160,577
)
 
 

 
(164,774
)
 
 

Total shareholders' equity-Matthews
 

 
830,086

 
 

 
789,707

Noncontrolling interests
 

 
543

 
 

 
552

Total shareholders' equity
 

 
830,629

 
 

 
790,259

 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 

 
$
2,382,375

 
 

 
$
2,244,649


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


2



MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)

 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Sales
$
369,454

 
$
348,998

Cost of sales
(238,755
)
 
(221,731
)
 
 
 
 
Gross profit
130,699

 
127,267

 
 
 
 
Selling and administrative expenses
(112,775
)
 
(108,204
)
 
 
 
 
Operating profit
17,924

 
19,063

 
 
 
 
Investment income
467

 
337

Interest expense
(7,801
)
 
(6,148
)
Other income (deductions), net
(659
)
 
(555
)
 
 
 
 
Income before income taxes
9,931

 
12,697

 
 
 
 
Income tax benefit (provision)
25,227

 
(2,489
)
 
 
 
 
Net income
35,158

 
10,208

 
 
 
 
Net loss attributable to noncontrolling interests
22

 
114

 
 
 
 
Net income attributable to Matthews shareholders
$
35,180

 
$
10,322

 
 
 
 
Earnings per share attributable to Matthews shareholders:
 

 
 

 
Basic
$
1.11

 
$
0.32

 
 
 
 
Diluted
$
1.10

 
$
0.32


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


3



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
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss):
$
35,180

 
$
10,322

 
$
(22
)
 
$
(114
)
 
$
35,158

 
$
10,208

Other comprehensive income (loss) ("OCI"), net of tax:
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustment
7,598

 
(31,342
)
 
13

 
59

 
7,611

 
(31,283
)
Pension plans and other postretirement benefits
1,018

 
1,536

 

 

 
1,018

 
1,536

Unrecognized gain on derivatives:
 

 
 

 
 

 
 

 
 

 
 

Net change from periodic revaluation
1,633

 
5,100

 

 

 
1,633

 
5,100

Net amount reclassified to earnings
(38
)
 
493

 

 

 
(38
)
 
493

Net change in unrecognized gain on derivatives
1,595

 
5,593

 

 

 
1,595

 
5,593

OCI, net of tax
10,211

 
(24,213
)
 
13

 
59

 
10,224

 
(24,154
)
Comprehensive income (loss)
$
45,391

 
$
(13,891
)
 
$
(9
)
 
$
(55
)
 
$
45,382

 
$
(13,946
)

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


4



MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three months ended December 31, 2017 and 2016 (Unaudited)
(Dollar amounts in thousands, except per share data)

 
Shareholders' Equity
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Non-
controlling
interests
 
Total
Balance,
September 30, 2017
$
36,334

 
$
123,432

 
$
948,830

 
$
(154,115
)
 
$
(164,774
)
 
$
552

 
$
790,259

Net income (loss)

 

 
35,180

 

 

 
(22
)
 
35,158

Minimum pension liability

 

 

 
1,018

 

 

 
1,018

Translation adjustment

 

 

 
7,598

 

 
13

 
7,611

Fair value of derivatives

 

 

 
1,595

 

 

 
1,595

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
45,382

Stock-based compensation

 
5,474

 

 

 

 

 
5,474

Purchase of 75,765 shares of treasury stock

 

 

 

 
(4,415
)
 

 
(4,415
)
Issuance of 223,971 shares of treasury stock

 
(8,922
)
 

 

 
8,922

 

 

Cancellations of 5,214 shares of treasury stock

 
310

 

 

 
(310
)
 

 

Dividends, $0.19 per share

 

 
(6,071
)
 

 

 

 
(6,071
)
Balance,
December 31, 2017
$
36,334

 
$
120,294

 
$
977,939

 
$
(143,904
)
 
$
(160,577
)
 
$
543

 
$
830,629

 
Shareholders' Equity
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Non-
controlling
interests
 
Total
Balance,
September 30, 2016
$
36,334

 
$
117,088

 
$
896,224

 
$
(181,868
)
 
$
(159,113
)
 
$
669

 
$
709,334

Net income (loss)

 

 
10,322

 

 

 
(114
)
 
10,208

Minimum pension liability

 

 

 
1,536

 

 

 
1,536

Translation adjustment

 

 

 
(31,342
)
 

 
59

 
(31,283
)
Fair value of derivatives

 

 

 
5,593

 

 

 
5,593

Total comprehensive loss
 

 
 

 
 

 
 

 
 

 
 

 
(13,946
)
Stock-based compensation

 
6,097

 

 

 

 

 
6,097

Purchase of 95,229 shares of treasury stock

 

 

 

 
(6,499
)
 

 
(6,499
)
Issuance of 205,623 shares of treasury stock

 
(7,893
)
 

 

 
7,907

 

 
14

Dividends, $0.17 per share

 

 
(5,389
)
 

 

 

 
(5,389
)
Balance,
December 31, 2016
$
36,334

 
$
115,292

 
$
901,157

 
$
(206,081
)
 
$
(157,705
)
 
$
614

 
$
689,611

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


5



MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)

 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
35,158

 
$
10,208

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
17,238

 
15,159

Stock-based compensation expense
5,474

 
6,097

Deferred tax benefit
(38,052
)
 
(1,861
)
(Gain) loss on sale of assets
(576
)
 
55

Unrealized gain on investments
(489
)
 
(809
)
Changes in working capital items
(9,999
)
 
(12,808
)
Increase in other assets
(5,336
)
 
(1,177
)
Decrease in other liabilities
(1,931
)
 
(928
)
Increase in pension and postretirement benefits
2,833

 
3,318

Other operating activities, net
3,317

 
(1,208
)
 
 
 
 
Net cash provided by operating activities
7,637

 
16,046

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(11,647
)
 
(5,069
)
Acquisitions, net of cash acquired
(85,964
)
 
(10,733
)
Proceeds from sale of assets
1,163

 
7

Purchases of investments
(11,730
)
 

 
 
 
 
Net cash used in investing activities
(108,178
)
 
(15,795
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
509,622

 
133,454

Payments on long-term debt
(396,321
)
 
(67,533
)
Proceeds from the exercise of stock options

 
14

Purchases of treasury stock
(4,415
)
 
(6,499
)
Dividends
(6,071
)
 
(5,389
)
 
 
 
 
Net cash provided by financing activities
102,815

 
54,047

 
 
 
 
Effect of exchange rate changes on cash
353

 
(3,602
)
 
 
 
 
Net change in cash and cash equivalents
$
2,627

 
$
50,696

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Acquisition of long-term asset under financing arrangement
$
14,544

 
$


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


6



MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2017
(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 include brand development, deployment and delivery (consisting of brand management, pre-media services, printing plates and cylinders, and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services). Memorialization products consist primarily of bronze and granite memorials and other memorialization products, caskets and cremation 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 the United States, Europe, Asia, Canada, 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, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2018. 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, 2017.  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 August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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. This ASU is effective for the Company beginning in fiscal year 2020. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), which provides new guidance intended to clarify and reduce complexities in applying stock compensation guidance to a change to the terms or conditions of share-based payment awards. This ASU is effective for the Company beginning in fiscal year 2019. The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides new guidance intended to improve the disclosure requirements related to the service cost component of net benefit cost.  This ASU is effective for the Company beginning in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.


7



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 2.   Basis of Presentation (continued)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides new guidance intended to make the definition of a business more operable and allow for more consistency in application.  This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides new guidance intended to clarify the presentation of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, and insurance proceeds, among other things. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019, and early adoption is permitted.  The adoption of this ASU is not expected to have a material 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. The implementation of this standard will require application of the new guidance at the beginning of the earliest comparative period presented, once adopted. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2020, and does allow for early adoption.  The Company is in the process of assessing the impact this ASU will have on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for the Company beginning in interim periods starting in fiscal year 2019. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. During 2016 and 2017, the FASB issued six ASUs that address implementation issues and correct or improve certain aspects of the new revenue recognition guidance, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) and ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). These ASUs do not change the core principles in the revenue recognition guidance outlined above. ASU No. 2014-09 and the related ASUs referenced above are effective for Matthews beginning October 1, 2018. The Company has completed its initial detailed assessment of all global revenue arrangements and related impact of the new standard compared to historical accounting policies on a representative sample of contracts and it does not expect the adoption of these ASUs will have a material impact on its consolidated financial statements. The Company is continuing to assess the ultimate impact that the adoption of this standard will have on its consolidated financial statements and related disclosure. In addition, the Company is evaluating the changes that will be required in its internal controls as a result of the adoption of this new standard. The Company is planning to adopt the provisions of these ASUs using the modified retrospective method for existing transactions on October 1, 2018.

Adopted

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which provides new guidance intended to simplify the subsequent measurement of goodwill and removing Step 2 from the goodwill impairment process.  The Company has early adopted this ASU in the first quarter ended December 31, 2017. The adoption of this ASU had no impact on the Company's consolidated financial statements, but modifies the methodology to assess and measure goodwill impairment prospectively.



8



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 2.   Basis of Presentation (continued)

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Company early adopted this ASU in the fourth quarter of fiscal 2017, which resulted in a reduction to income tax expense of $1,234, and a corresponding favorable impact on diluted earnings per share of $0.04, both of which have been retroactively included in the first quarter results for fiscal 2017.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which provides new guidance to simplify the measurement of inventory valuation at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this ASU in the first quarter ended December 31, 2017 had no impact on the Company's consolidated financial statements.


Note 3.   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, 2017
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
6,573

 
$

 
$
6,573

 
$

 
$
3,990

 
$

 
$
3,990

Equity and fixed income mutual funds

 
22,029

 

 
22,029

 

 
21,649

 

 
21,649

Other investments

 
5,895

 

 
5,895

 

 
5,810

 

 
5,810

Total assets at fair value
$

 
$
34,497

 
$

 
$
34,497

 
$

 
$
31,449

 
$

 
$
31,449

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivatives (1)
$

 
$

 
$

 
$

 
$

 
$
31

 
$

 
$
31

Total liabilities at fair value
$

 
$

 
$

 
$

 
$

 
$
31

 
$

 
$
31

(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.



9



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 4.   Inventories

Inventories consisted of the following:
 
December 31, 2017
 
September 30, 2017
 
 
 
 
Raw materials
$
30,622

 
$
29,396

Work in process
64,645

 
61,917

Finished goods
84,069

 
80,132

 
$
179,336

 
$
171,445



Note 5.   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. 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% (1.25% at December 31, 2017) based on the Company's secured leverage ratio.  The secured leverage ratio is defined as net secured 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 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 borrowings on the revolving credit facility at December 31, 2017 and September 30, 2017 were $337,000 and $525,000, respectively. Outstanding borrowings on the term loan at December 31, 2017 and September 30, 2017 were $227,591 and $232,479, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at December 31, 2017 and December 31, 2016 was 2.93% and 2.65%, respectively.

In December 2017, the Company issued $300,000 aggregate principal amount 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 beginning on June 1, 2018. 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 proceeds from the 2025 Senior Notes were used primarily to reduce indebtedness under the Company's domestic credit facility. The Company incurred direct financing fees and costs in connection with 2025 Senior Notes of $4,068, which will be deferred and amortized over the term of the 2025 Senior Notes.

The Company has a $115,000 accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions, which matures on April 4, 2019. 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, 2017 and September 30, 2017 were $101,400 and $95,825, respectively. At December 31, 2017, the interest rate on borrowings under this facility was 2.31%.



10



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 5.   Debt (continued)

The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges:
 
 
December 31, 2017
 
September 30, 2017
Pay fixed swaps - notional amount
 
$
409,375

 
$
414,063

Net unrealized gain (loss)
 
$
6,573

 
$
3,959

Weighted-average maturity period (years)
 
3.1

 
3.3

Weighted-average received rate
 
1.56
%
 
1.23
%
Weighted-average pay rate
 
1.34
%
 
1.34
%

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 gain of $6,573 ($4,010 after tax) at December 31, 2017 and an unrealized gain, net of unrealized losses, of $3,959 ($2,415 after tax) at September 30, 2017. The net unrealized gain is included in shareholders' equity as part of accumulated other comprehensive income ("AOCI").  Assuming market rates remain constant with the rates at December 31, 2017, a gain (net of tax) of approximately $1,178 included in AOCI is expected to be recognized in earnings over the next twelve months.

At December 31, 2017 and September 30, 2017, the interest rate swap contracts were reflected in the Consolidated Balance Sheets as follows:
Derivatives
 
December 31, 2017
 
September 30, 2017
Current assets:
 
 
 
 
Other current assets
 
$
1,931

 
$
1,098

Long-term assets:
 
 

 
 

Other assets
 
4,642

 
2,892

Current liabilities:
 
 

 
 

Other current liabilities
 

 
(7
)
Long-term liabilities:
 
 

 
 

Other liabilities
 

 
(24
)
Total derivatives
 
$
6,573

 
$
3,959


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,
 
 
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
63

 
$
807










11



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 5.   Debt (continued)

The Company recognized the following gains (losses) in AOCI:
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain
Recognized in AOCI on Derivatives
 
Location of Gain (Loss) Reclassified From AOCI into Income (Effective Portion*)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion*)
 
 
December 31, 2017
 
December 31, 2016
 
 
 
December 31, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,633

 
$
5,100

 
Interest expense
 
$
38

 
$
(493
)
 
 
 
 
 
 
 
 
 
 
 
*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 International Corporation.  The maximum amount of borrowing available under this facility is €35.0 million ($41,931).  The credit facility matures in December 2018 and the Company intends to extend this facility. Outstanding borrowings under the credit facility totaled €26.2 million ($31,416) and €22.1 million ($26,126) at December 31, 2017 and September 30, 2017, respectively. The weighted-average interest rate on outstanding borrowings under this facility at December 31, 2017 and 2016 was 2.00% and 1.75%, respectively.

The Company’s German subsidiary, Matthews Europe GmbH & Co. KG, has €15.0 million ($17,971) of senior unsecured notes with European banks.  The notes are guaranteed by Matthews International Corporation and mature in November 2019.  A portion of the notes (€5.0 million) have a fixed interest rate of 1.40%, and the remainder bear interest at Euro LIBOR plus 1.40%.  The weighted-average interest rate on the notes at December 31, 2017 and 2016 was 1.40%.

The Company, through its Italian subsidiary, Matthews International S.p.A., has several loans with various Italian banks.  Outstanding borrowings on these loans totaled €2.1 million ($2,500) and €2.6 million ($3,079) at December 31, 2017 and September 30, 2017, respectively. The maturity dates for these loans range from January 2018 through November 2019.  Matthews International S.p.A. also has multiple on-demand lines of credit totaling €11.3 million ($13,574) with the same Italian banks.  Outstanding borrowings on these lines were €4.1 million ($4,885) and €4.0 million ($4,735) at December 31, 2017 and September 30, 2017, respectively.  The weighted-average interest rate on outstanding Matthews International S.p.A. borrowings at December 31, 2017 and 2016 was 2.27% and 1.58%, respectively.

Other debt totaled $926 and $1,032 at December 31, 2017 and September 30, 2017, respectively. The weighted-average interest rate on these outstanding borrowings was 4.62% and 5.77% at December 31, 2017 and 2016, respectively.

In September 2014, a claim was filed seeking to draw upon a letter of credit issued by the Company of £8,570,000 ($11,564 at December 31, 2017) with respect to a performance guarantee on a 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 "Court"). Pursuant to this action, an order was issued by the Court 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 neither yet remitted the funds nor complied with the final, un-appealed orders of the Court, it is possible the resolution of this matter could have an unfavorable financial impact on Matthews’ results of operations. 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, 2017 and September 30, 2017. The Company will continue to assess collectability related to this matter as facts and circumstances evolve.

As of December 31, 2017 and September 30, 2017, the fair value of the Company's long-term debt, including current maturities, approximated the carrying value included in the Consolidated Balance Sheets.


12



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 6.   Share-Based Payments

The Company maintains an equity incentive plan (the "2012 Equity Incentive Plan") that provides for grants of stock options, restricted shares, stock-based performance units and certain other types of stock-based awards.  Under the 2012 Equity Incentive Plan, which has a ten-year term, the maximum number of shares available for grants or awards is an aggregate of 2,500,000.  At December 31, 2017, there were 121,038 shares reserved for future issuance under the 2012 Equity Incentive Plan.  The 2012 Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors.

With respect to outstanding restricted share grants, generally one-half of the shares vest on the third anniversary of the grant, one-quarter of the shares vest in one-third increments upon the attainment of pre-defined levels of adjusted earnings per share, and the remaining one-quarter of the shares vest in one-third increments upon attainment of pre-defined levels of appreciation in the market value of the Company's Class A Common Stock.  Additionally, restricted shares cannot vest until the first anniversary of the grant date.  Unvested restricted shares generally expire on the earlier of three or five years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death.  The Company issues restricted shares from treasury shares.

For the three-month periods ended December 31, 2017 and 2016, stock-based compensation cost totaled $5,474 and $6,097, respectively.  The three-month periods ended December 31, 2017 and 2016 included $2,850 and $3,337 of stock-based compensation cost, respectively, that was recognized at the time of grant for retirement-eligible employees. The associated future income tax benefit recognized for stock-based compensation was $1,341 and $2,378 for the three-month periods ended December 31, 2017 and 2016, respectively.

There were no stock options exercised during the three-month period ended December 31, 2017. For the three-month period ended December 31, 2016, the amount of cash received from the exercise of stock options was $14. In connection with these exercises, the tax benefits realized by the Company was $3 for the three-month period ended December 31, 2016. The intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the three-month period ended December 31, 2016 and was $9.

The transactions for restricted stock for the three months ended December 31, 2017 were as follows:
 
Shares
 
Weighted-
average
Grant-date
Fair Value
Non-vested at September 30, 2017
501,184

 
$
53.65

Granted
234,100

 
57.05

Vested
(168,280
)
 
51.54

Expired or forfeited
(5,214
)
 
59.51

Non-vested at December 31, 2017
561,790

 
$
55.64


As of December 31, 2017, the total unrecognized compensation cost related to unvested restricted stock was $13,338 and is expected to be recognized over a weighted average period of 1.8 years.

The fair value of each restricted stock grant is estimated on the date of grant using a binomial lattice valuation model.  The following table indicates the assumptions used in estimating the fair value of restricted stock granted during the three-month periods ended December 31, 2017 and 2016.
 
Three Months Ended
December 31,
 
2017
 
2016
Expected volatility
20.5
%
 
20.2
%
Dividend yield
1.0
%
 
1.1
%
Average risk-free interest rate
2.0
%
 
1.7
%
Average expected term (years)
2.1

 
2.1



13



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 6.   Share-Based Payments (continued)

The risk-free interest rate is based on United States Treasury yields at the date of grant. The dividend yield is based on the most recent dividend payment and average stock price over the 12 months prior to the grant date.  Expected volatilities are based on the historical volatility of the Company's stock price.  The expected term for grants in the years ended September 30, 2018, 2017 and 2016 represents an estimate of the average period of time for restricted shares to vest.  The option characteristics for each grant are considered separately for valuation purposes.

The Company maintains the 1994 Director Fee Plan and the Amended and Restated 2014 Director Fee Plan (collectively, the "Director Fee Plans").  There will be no further fees or share-based awards granted under the 1994 Director Fee Plan.  Under the Amended and Restated 2014 Director Fee Plan, non-employee directors (except for the Chairman of the Board) each receive, as an annual retainer fee for fiscal 2018, either cash or shares of the Company's Class A Common Stock with a value equal to $85.  The annual retainer fee for fiscal 2018 paid to a non-employee Chairman of the Board is $185.  Where the annual retainer fee is provided in shares, each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board.  The value of deferred shares is recorded in other liabilities.  A total of 16,139 shares had been deferred under the Director Fee Plans as of December 31, 2017.  Additionally, non-employee directors each receive an annual stock-based grant (non-statutory stock options, stock appreciation rights and/or restricted shares) with a value of $125 for fiscal 2018.  A total of 22,300 stock options have been granted under the Director Fee Plans.  At December 31, 2017, there were no options outstanding. Additionally, 161,724 shares of restricted stock have been granted under the Director Fee Plans, 58,574 of which were issued under the Amended and Restated 2014 Director Fee Plan.  25,157 share of restricted stock are unvested at December 31, 2017.  A total of 150,000 shares have been authorized to be issued under the Amended and Restated 2014 Director Fee Plan.


Note 7.   Earnings Per Share Attributable to Matthews' Shareholders

The information used to compute earnings per share attributable to Matthews' common shareholders was as follows:

 
Three Months Ended
December 31,
 
2017
 
2016
Net income attributable to Matthews shareholders
$
35,180

 
$
10,322

 
 
 
 
Weighted-average shares outstanding (in thousands):
 

 
 

Basic shares
31,738

 
32,250

Effect of dilutive securities
132

 
198

Diluted shares
31,870

 
32,448

 
 
 
 

Anti-dilutive securities excluded from the dilution calculation were insignificant for the three months ended December 31, 2017 and 2016.



14



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 8.   Pension and Other Postretirement Benefit Plans

The Company provides defined benefit pension and other postretirement plans to certain employees. Net periodic pension and other postretirement benefit cost for the plans included the following:
 
 
Three months ended December 31,
 
Pension
 
Other Postretirement
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Service cost
$
2,039

 
$
2,138

 
$
84

 
$
98

Interest cost
2,049

 
1,841

 
158

 
157

Expected return on plan assets
(2,534
)
 
(2,312
)
 

 

Amortization:
 

 
 

 
 

 
 

Prior service cost
(35
)
 
(45
)
 
(49
)
 
(49
)
Net actuarial loss
1,752

 
2,509

 

 

 
 
 
 
 
 
 
 
Net benefit cost
$
3,271

 
$
4,131

 
$
193

 
$
206


Benefit payments under the Company's principal retirement plan are made from plan assets, while benefit payments under the postretirement benefit plan are made from the Company's operating funds.  Under IRS regulations, the Company is not required to make any significant contributions to its principal retirement plan in fiscal year 2018.

Contributions made and anticipated for fiscal year 2018 are as follows:
Contributions
 
Pension
 
Other Postretirement
 
 
 
 
 
Contributions during the three months ended December 31, 2017:
 
 
 
 
Supplemental retirement plan
 
$
184

 
$

Other postretirement plan
 

 
437

 
 
 
 
 
Additional contributions expected in fiscal 2018:
 
 

 
 

Supplemental retirement plan
 
$
582

 
$

Other postretirement plan
 

 
607




15



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 9.   Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The changes in AOCI by component, net of tax, for the three-month periods ended December 31, 2017 and 2016 were as follows:
 
  
Post-retirement benefit plans
 
Currency translation adjustment
 
Derivatives
 
Total
Attributable to Matthews:
 
 
 
 
 
 
 
 
Balance, September 30, 2017
 
$
(43,623
)
 
$
(112,907
)
 
$
2,415

 
$
(154,115
)
OCI before reclassification
 

 
7,598

 
1,633

 
9,231

Amounts reclassified from AOCI
(a)
1,018

 

(b)
(38
)
 
980

Net current-period OCI
 
1,018

 
7,598

 
1,595

 
10,211

Balance, December 31, 2017
 
$
(42,605
)
 
$
(105,309
)
 
$
4,010

 
$
(143,904
)
Attributable to noncontrolling interest:
 
 

 
 

 
 

 
 

Balance, September 30, 2017
 

 
$
396

 

 
$
396

OCI before reclassification
 

 
13

 

 
13

Net current-period OCI
 

 
13

 

 
13

Balance, December 31, 2017
 

 
$
409

 

 
$
409


 
  
Post-retirement benefit plans
 
Currency translation adjustment
 
Derivatives
 
Total
Attributable to Matthews:
 
 
 
 
 
 
 
 
Balance, September 30, 2016
 
$
(56,050
)
 
$
(122,259
)
 
$
(3,559
)
 
$
(181,868
)
OCI before reclassification
 

 
(31,342
)
 
5,100

 
(26,242
)
Amounts reclassified from AOCI
(a)
1,536

 

(b)
493

 
2,029

Net current-period OCI
 
1,536

 
(31,342
)
 
5,593

 
(24,213
)
Balance, December 31, 2016
 
$
(54,514
)
 
$
(153,601
)
 
$
2,034

 
$
(206,081
)
Attributable to noncontrolling interest:
 
 

 
 

 
 

 
 

Balance, September 30, 2016
 

 
$
277

 

 
$
277

OCI before reclassification
 

 
59

 

 
59

Net current-period OCI
 

 
59

 

 
59

Balance, December 31, 2016
 

 
$
336

 

 
$
336


(a)
Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 8).
(b)
Amounts were included in interest expense in the periods the hedged item affected earnings (see Note 5).



16



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 9.   Accumulated Other Comprehensive Income (continued)
 
 
 
 
 
 
 
Reclassifications out of AOCI for the three-month periods ended December 31, 2017 and 2016 were as follows:
 
 
 
Amount reclassified from AOCI
 
Details about AOCI Components
 
Three Months Ended
December 31, 2017
 
Three Months Ended
December 31, 2016
 
Affected line item in the Statement of income
 
 
 
 
 
 
 
Postretirement benefit plans
 
 
 
 
 
    
Prior service (cost) credit
 
$
84

(a)
$
94

 
 
Actuarial losses
 
(1,752
)
(a)
(2,509
)
 
 
 
 
(1,668
)
(b)
(2,415
)
 
Income before income tax
 
 
(650
)
 
(879
)
 
Income taxes
 
 
$
(1,018
)
 
$
(1,536
)
 
Net income
Derivatives
 
 

 
 

 
    
Interest rate swap contracts
 
$
63

 
$
(807
)
 
Interest expense
 
 
63

(b)
(807
)
 
Income before income tax
 
 
25

 
(314
)
 
Income taxes
 
 
$
38

 
$
(493
)
 
Net income

(a)
Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses.  For additional information, see Note 8.
(b)
For pre-tax items, positive amounts represent income and negative amounts represent expense.


Note 10.   Income Taxes

Income tax provisions for the Company's interim periods are based on the effective income tax rate expected to be applicable for the full year. The Company's consolidated income taxes for the three months ended December 31, 2017 were a benefit of $25,227, compared to income tax expense of $2,489 for the first three months of fiscal 2017. The differences between the Company's fiscal 2018 first quarter effective tax rate and the fiscal 2017 first quarter effective tax rate, as well as the Company’s fiscal 2018 blended U.S. Federal statutory rate of 24.5% primarily resulted from the impacts of the U.S. tax reform enactment discussed below. The current quarter income tax benefit also reflected the impact of the realization of certain tax credits in connection with the Company's recent international structuring.

The U.S. Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018, which results in a blended U.S. statutory tax rate of 24.5% for the Company in fiscal 2018. The Act also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, and creates new taxes on certain foreign-sourced earnings. At December 31, 2017, the Company has not finalized its accounting for the tax effects of the Act; however, as described below, management has made a reasonable estimate of the effects on existing deferred tax balances and has recorded an estimated amount for its one-time transition tax. For the items for which the Company was able to determine a reasonable estimate, a provisional net tax benefit of $24,553 was recognized, which is included entirely as a component of income tax benefit (provision) for the three months ended December 31, 2017. The two main components of this provisional amount are discussed below.

Provisional amounts

Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the rates at which these deferred tax amounts are expected to reverse in the future, which is generally 21.0% or 24.5%. This remeasurement resulted in a tax benefit of $38,010 being recognized during the three months ended December 31, 2017. The Company is still analyzing certain aspects of the Act, estimating the timing of reversals, and refining its calculations, which could potentially affect the measurement of these balances, or potentially generate new deferred tax amounts.


17



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 10.   Income Taxes (continued)

Foreign tax effects: The Company recorded a provisional amount for its one-time transition tax for all of its foreign subsidiaries, resulting in an increase in income tax expense of $13,457 for the three months ended December 31, 2017. The one-time transition tax was calculated using an estimate of the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company has not yet finalized its calculation of the total post-1986 E&P and tax pools for its foreign subsidiaries and has not fully analyzed the state income tax effects. The calculation of the one-time transition tax is also impacted by the amount of foreign E&P held in cash and other specified assets. The tax amount may change when the Company finalizes its calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation. No additional income taxes have been provided for any remaining undistributed foreign earnings or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

The Company had unrecognized tax benefits (excluding penalties and interest) of $7,994 and $7,968 on December 31, 2017 and September 30, 2017, respectively, which would impact the annual effective rate. It is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $3,699 in the next 12 months primarily due to the completion of an audit.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. Total penalties and interest accrued were $1,786 and $1,779 at December 31, 2017 and September 30, 2017, respectively.  These accruals may potentially be applicable in the event of an unfavorable outcome of uncertain tax positions.

The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations expires for those tax jurisdictions.  As of December 31, 2017, the tax years that remain subject to examination by major jurisdiction generally are:
United States – Federal
2013 and forward
United States – State
2013 and forward
Canada
2013 and forward
Germany
2009 and forward
United Kingdom
2015 and forward
Australia
2013 and forward
Singapore
2013 and forward


Note 11.   Segment Information

The Company manages its businesses under three segments: SGK Brand Solutions, Memorialization and Industrial Technologies. The SGK Brand Solutions segment includes brand development, deployment and delivery (consisting of brand management, pre-media services, printing plates and cylinders and imaging services for consumer packaged goods and retail customers, merchandising display systems, and marketing and design services).  The Memorialization segment consists primarily of bronze and granite memorials and other memorialization products, caskets and cremation equipment primarily for the cemetery and funeral home industries. The Industrial Technologies segment includes marking and coding equipment and consumables, industrial automation products and order fulfillment systems for identifying, tracking, picking and conveying consumer and industrial products.  Management evaluates segment performance based on operating profit (before income taxes) and does not allocate non-operating items such as investment income, interest expense, other income (deductions), net and noncontrolling interest amongst the segments.


18



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 11.   Segment Information (continued)

Information about the Company's segments is as follows:
 
Three Months Ended
December 31,
 
2017
 
2016
Sales:
 
SGK Brand Solutions
$
191,766

 
$
175,801

Memorialization
144,889

 
145,622

Industrial Technologies
32,799

 
27,575

 
$
369,454

 
$
348,998

Operating profit:
 
 
 
SGK Brand Solutions
$
3,152

 
$
4,190

Memorialization
14,454

 
14,367

Industrial Technologies
318

 
506

 
$
17,924

 
$
19,063



Note 12.   Acquisitions

Fiscal 2018:

On November 28, 2017, the Company acquired Compass Engineering Group, Inc. ("Compass") for $49,793 (net of cash acquired, subject to a working capital true-up). Compass provides high-quality material handling control solutions and is included in the Company's Industrial Technologies segment. The preliminary purchase price allocation related to the Compass acquisition is not finalized as of December 31, 2017, and is subject to changes as the Company obtains additional information related to fixed assets, intangible assets, and other assets and liabilities.

During the first quarter of fiscal 2018, the Company completed several additional smaller acquisitions for an aggregate purchase price of $36,171 (net of cash acquired and holdback amounts, subject to working capital true-ups). These additional acquisitions strengthen the Company's operations across the SGK Brand Solutions and Memorialization segments. The preliminary purchase price allocations for the acquisitions are not finalized as of December 31, 2017 and are subject to change as the Company obtains additional information related to fixed assets, intangible assets, and other assets and liabilities.

Fiscal 2017:

On March 1, 2017, the Company acquired GJ Creative Limited ("Equator") for £30.5 million ($37,596) (net of cash acquired). Equator provides design expertise capable of taking brands from creation to shelf under one roof, and is included in the Company's SGK Brand Solutions segment. The preliminary purchase price allocation related to the Equator acquisition is not finalized as of December 31, 2017, and is subject to changes as the Company obtains additional information related to working capital items, fixed assets, intangible assets, and other assets and liabilities.

On February 28, 2017, the Company acquired certain net assets of RAF Technology, Inc. ("RAF") for $8,717 (net of cash acquired). RAF is a global leader in pattern and optical character recognition software, and is included in the Company's Industrial Technologies segment. The Company finalized the allocation of purchase price related to the RAF acquisition in the fourth quarter of fiscal 2017, resulting in an immaterial adjustment to certain working capital accounts.

On January 13, 2017, the Company acquired VCG (Holdings) Limited ("VCG") for £8.8 million ($10,695) (net of cash acquired). VCG is a leading graphics, plate-making, and creative design company and is included in the Company's SGK Brand Solutions segment. The Company finalized the allocation of purchase price related to the VCG acquisition in the first quarter of fiscal 2018, resulting in an immaterial adjustment to certain working capital and intangible asset amounts.


19



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 12.   Acquisitions (continued)

On January 3, 2017, the Company acquired A. + E. Ungricht GmbH + Co KG ("Ungricht") for €24.0 million ($25,185) (net of cash acquired). Ungricht is a leading European provider of pre-press services and gravure printing forms, located in Germany, and is included in the Company's SGK Brand Solutions segment. The Company finalized the allocation of purchase price related to the Ungricht acquisition in the first quarter of fiscal 2018, resulting in an immaterial adjustment to certain working capital and intangible asset amounts.

On November 30, 2016, the Company acquired Guidance Automation Limited ("Guidance") for £8.0 million ($9,974) (net of cash acquired). Guidance provides technological solutions for autonomous warehouse vehicles and is included in the Company's Industrial Technologies segment.  The Company finalized the allocation of purchase price related to the Guidance acquisition in the fourth quarter of fiscal 2017, resulting in an immaterial adjustment to certain working capital and intangible asset accounts.


Note 13.   Goodwill and Other Intangible Assets

A summary of the carrying amount of goodwill attributable to each segment as well as the changes in such amounts are as follows:
 
SGK Brand
Solutions
 
Memorialization
 
Industrial Technologies
 
Consolidated
 
 
 
 
 
 
 
 
Goodwill
$
491,895

 
$
347,507

 
$
69,144

 
$
908,546

Accumulated impairment losses
(5,752
)
 
(5,000
)
 

 
(10,752
)
Balance at September 30, 2017
486,143

 
342,507

 
69,144

 
897,794

 
 
 
 
 
 
 
 
Additions during period
8,603

 
17,152

 
21,112

 
46,867

Translation and other adjustments
2,795

 
1,055

 
176

 
4,026

Goodwill
503,293

 
365,714

 
90,432

 
959,439

Accumulated impairment losses
(5,752
)
 
(5,000
)
 

 
(10,752
)
Balance at December 31, 2017
$
497,541

 
$
360,714

 
$
90,432

 
$
948,687

The Company performed its annual impairment review in the second quarter of fiscal 2017 and determined that estimated fair value for all reporting units exceeded carrying value, therefore no adjustments to the carrying value of goodwill were necessary.


20



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
(Dollar amounts in thousands, except per share data)


Note 13.   Goodwill and Other Intangible Assets (continued)

The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of December 31, 2017 and September 30, 2017, respectively.
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
December 31, 2017:
 
 
 
 
 
Trade names
$
168,467

 
$

*
$
168,467

Trade names
8,504

 
(2,284
)
 
6,220

Customer relationships
364,554

 
(90,611
)
 
273,943

Copyrights/patents/other
19,092

 
(11,978
)
 
7,114

 
$
560,617

 
$
(104,873
)
 
$
455,744

 
 
 
 
 
 
September 30, 2017:
 

 
 

 
 

Trade names
$
168,467

 
$

*
$
168,467

Trade names
5,522

 
(2,030
)
 
3,492

Customer relationships
333,632

 
(84,560
)
 
249,072

Copyrights/patents/other
14,787

 
(11,436
)
 
3,351

     *Not subject to amortization
$
522,408

 
$
(98,026
)
 
$
424,382


The net change in intangible assets during the three months ended December 31, 2017 included the impact of foreign currency fluctuations during the period, additional amortization, and additions related to the fiscal 2018 acquisitions.

Amortization expense on intangible assets was $6,681 and $4,941 for the three-month periods ended December 31, 2017 and 2016, respectively.  Amortization expense is estimated to be $22,201 for the remainder of fiscal 2018, $27,747 in 2019, $25,925 in 2020, $24,350 in 2021 and $22,928 in 2022.



21




Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued


Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT:

The following discussion should be read in conjunction with the consolidated financial statements of Matthews International Corporation ("Matthews" or the "Company") and related notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017.  Any forward-looking statements contained herein are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct.  Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include changes in domestic or international economic conditions, changes in foreign currency exchange rates, changes in the cost of materials used in the manufacture of the Company's products, changes in mortality and cremation rates, changes in product demand or pricing as a result of consolidation in the industries in which the Company operates, changes in product demand or pricing as a result of domestic or international competitive pressures, unknown risks in connection with the Company's acquisitions, cybersecurity concerns, effectiveness of the Company's internal controls, compliance with domestic and foreign laws and regulations, technological factors beyond the Company's control, and other factors described in Item 1A - "Risk Factors" in this Form 10-Q and Item 1A - "Risk Factors" in the Company's Form 10-K for the fiscal year ended September 30, 2017.  In addition, although the Company does not have any customers that would be considered individually significant to consolidated sales, changes in the distribution of the Company's products or the potential loss of one or more of the Company's larger customers are also considered risk factors.


RESULTS OF OPERATIONS:

The following table sets forth the sales and operating profit for the Company's three reporting segments for the three-month periods ended December 31, 2017 and 2016.
 
Three Months Ended
December 31,
 
2017
 
2016
Sales:
(Dollar amounts in thousands)
SGK Brand Solutions
$
191,766

 
$
175,801

Memorialization
144,889

 
145,622

Industrial Technologies
32,799

 
27,575

 
$
369,454

 
$
348,998


Operating profit:
 
 
 
SGK Brand Solutions
$
3,152

 
$
4,190

Memorialization
14,454

 
14,367

Industrial Technologies
318

 
506

 
$
17,924

 
$
19,063


Sales for the three months ended December 31, 2017 were $369.5 million, compared to $349.0 million for the three months ended December 31, 2016.  The increase in fiscal 2018 sales principally reflected higher sales of marking products (Industrial Technologies) and cremation equipment (Memorialization), benefits from recently completed acquisitions (see "Acquisitions" below) and the favorable impact of changes in foreign currencies against the U.S. dollar. Changes in foreign currency rates were estimated to have a favorable impact of $7.4 million on fiscal 2018 first quarter consolidated sales compared to a year ago. These increases were partially offset by slower market conditions in North America and Europe for the SGK Brand Solutions segment and lower unit sales of memorials and caskets.


22




Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued



In the SGK Brand Solutions segment, sales for the first three months of fiscal 2018 were $191.8 million, compared to $175.8 million for the first three months of fiscal 2017.  The increase in sales reflected sales growth in the U.K. and Asia Pacific markets, and benefits from recently completed acquisitions. Changes in foreign currency exchange rates also had a favorable impact of $6.0 million on the segment's sales compared to the same quarter last year. These increases were partially offset by slower brand market conditions in the U.S. and Europe. Memorialization segment sales for the first three months of fiscal 2018 were $144.9 million, compared to $145.6 million for the first three months of fiscal 2017.  The sales decrease reflected lower unit sales of memorials and caskets, partially offset by higher sales of cremation equipment, and the benefits of recently completed acquisitions. Industrial Technologies segment sales were $32.8 million for the first three months of fiscal 2018, compared to $27.6 million for the first three months of fiscal 2017. The increase reflected higher sales of marking products, and benefits from recently completed acquisitions. Changes in foreign currency exchange rates also had a favorable impact of $530,000 on the segment's sales compared to the same quarter last year.

Gross profit for the three months ended December 31, 2017 was $130.7 million, compared to $127.3 million for the same period a year ago.  Consolidated gross profit as a percent of sales was 35.4% and 36.5% for the first three months of fiscal 2018 and fiscal 2017, respectively.   The increase in gross profit primarily reflected the impact of higher sales from recent acquisitions, the benefits of productivity initiatives, and realization of acquisition synergies. These increases were partially offset by lower sales (excluding acquisitions) in North America and Europe for the SGK Brand Solutions segment.

Selling and administrative expenses for the three months ended December 31, 2017 were $112.8 million, compared to $108.2 million for the first three months of fiscal 2017.  Consolidated selling and administrative expenses, as a percent of sales, were 30.5% for the three months ended December 31, 2017, compared to 31.0% for the same period last year.  The increase in selling and administrative expenses reflected the impact of recently completed acquisitions, including $2.1 million of incremental intangible asset amortization recognized in the first quarter of fiscal 2018, partially offset by the benefits from cost reduction initiatives, including acquisition-integration synergies. Selling and administrative expenses also included acquisition integration and related systems-integration costs, and other charges in connection with cost reduction initiatives totaling $4.7 million in fiscal 2018, compared to $8.6 million in fiscal 2017. 

Operating profit for the three months ended December 31, 2017 was $17.9 million, compared to $19.1 million for the three months ended December 31, 2016.  The SGK Brand Solutions segment operating profit for the first three months of fiscal 2018 was $3.2 million, compared to $4.2 million for the same period a year ago.  The decrease in segment operating profit reflected lower sales (excluding acquisitions) in North America and Europe, and an increase of $1.5 million in intangible asset amortization related to recently completed acquisitions, partially offset by the favorable impact of changes in foreign currencies against the U.S. dollar of approximately $560,000. Additionally, fiscal 2018 operating profit for the SGK Brand Solutions segment included acquisition integration costs and other charges totaling $3.8 million, compared to $6.2 million in fiscal 2017. Memorialization segment operating profit for the first three months of fiscal 2018 was $14.5 million, compared to $14.4 million for the first three months of fiscal 2017.  The increase in segment operating profit reflected higher cremation equipment sales, and the benefits of acquisition synergies and other productivity initiatives, partially offset by the impact of lower memorial and casket sales volume. Fiscal 2018 operating profit for the Memorialization segment also included acquisition integration costs and other charges totaling $807,000, compared to $2.1 million in fiscal 2017. Operating profit for the Industrial Technologies segment for the three months ended December 31, 2017 was $318,000, compared to $506,000 for the same period a year ago. The benefits of higher sales were offset by higher investments in the segment's product development, and $450,000 of incremental intangible asset amortization related to recently completed acquisitions.

Investment income was $467,000 for the three months ended December 31, 2017, compared to $337,000 for the three months ended December 31, 2016, principally reflecting the return on investments held in trust for certain of the Company's benefit plans.  Interest expense for the first three months of fiscal 2018 was $7.8 million, compared to $6.1 million for the same period last year.  The increase in interest expense reflected an increase in average borrowing levels, primarily related to acquisitions, higher average interest rates in the current fiscal year, and incremental financing costs associated with the 5.25% senior notes (see "Liquidity and Capital Resources" below).  Other income and deductions, net, for the three months ended December 31, 2017 represented an decrease in pre-tax income of $659,000, compared to a decrease in pre-tax income of $555,000 for the same period last year.  Other income and deductions generally include banking-related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances. 


23




Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued



The Company's consolidated income taxes for the three months ended December 31, 2017 were a benefit of $25.2 million, compared to income tax expense of $2.5 million for the first three months of fiscal 2017. The differences between the Company's fiscal 2018 first quarter effective tax rate and the fiscal 2017 first quarter effective tax rate, as well as the Company’s fiscal 2018 blended U.S. Federal statutory rate of 24.5%, primarily resulted from the impacts of the U.S. Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018, which results in a blended U.S. statutory tax rate of 24.5% for the Company in fiscal 2018. The Act also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, and creates new taxes on certain foreign-sourced earnings. At December 31, 2017, the Company has not finalized its accounting for the tax effects of the Act; however, management has made a reasonable estimate of the effects on existing deferred tax balances and has recorded an estimated amount for its one-time transition tax. For the items for which the Company was able to determine a reasonable estimate, a provisional net tax benefit of $24.6 million was recognized, which is included entirely as a component of income tax benefit (provision) for the three months ended December 31, 2017. The current quarter income tax benefit also reflected the impact of the realization of certain tax credits in connection with the Company's recent international structuring. Refer to Note 10, “Income Taxes” in Item 1 - “Financial Statements” for further details regarding income taxes.

Net losses attributable to noncontrolling interests were $22,000 for the three months ended December 31, 2017, compared to $114,000 for the same period a year ago.  The net losses attributable to noncontrolling interests primarily reflected losses in less than wholly-owned Memorialization and Industrial Technologies businesses.


LIQUIDITY AND CAPITAL RESOURCES:

Net cash provided by operating activities was $7.6 million for the first three months of fiscal 2018, compared to $16.0 million for the first three months of fiscal 2017.  Operating cash flow for both periods reflected net income adjusted for deferred taxes, depreciation, amortization, stock-based compensation expense and non-cash pension expense.  Net changes in working capital items, which principally related to fiscal year-end compensation-related payments, resulted in a use of working capital of approximately $10.0 million and $12.8 million in the first three months of fiscal 2018 and fiscal 2017, respectively.

Cash used in investing activities was $108.2 million for the three months ended December 31, 2017, compared to $15.8 million for the three months ended December 31, 2016.  Investing activities for the first three months of fiscal 2018 primarily reflected capital expenditures of $11.6 million, acquisition payments (net of cash acquired or received from sellers) totaling $86.0 million, and the purchase of a cost method investment of $11.7 million.  Investing activities for the first three months of fiscal 2017 primarily reflected capital expenditures of $5.1 million, and acquisition payments (net of cash acquired or received from sellers) of $10.7 million.

Capital expenditures reflected reinvestment in the Company's business segments and were made primarily for the purchase of new production machinery, equipment, software and systems, and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements.  Capital expenditures for the last three fiscal years were primarily financed through operating cash.  Capital spending for property, plant and equipment has averaged $45.0 million for the last three fiscal years.  Capital spending for fiscal 2018 is currently expected to be in the range of $45.0 million to $50.0 million.  The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects.

Cash provided by financing activities for the three months ended December 31, 2017 was $102.8 million, primarily reflecting proceeds, net of repayments, on long-term debt of $113.3 million, treasury stock purchases of $4.4 million, and dividends of $6.1 million to the Company's shareholders.  Cash provided by financing activities for the three months ended December 31, 2016 was $54.0 million, primarily reflecting proceeds, net of repayments, on long-term debt of $65.9 million, treasury stock purchases of $6.5 million, and dividends of $5.4 million to the Company's shareholders.

The Company has a domestic credit facility with a syndicate of financial institutions that includes a $900.0 million senior secured revolving credit facility and a $250.0 million senior secured amortizing 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% (1.25% at December 31, 2017) based on the Company's secured leverage ratio.  The secured leverage ratio is defined as net secured 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.


24




Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued



The domestic credit facility requires the Company to maintain certain leverage and interest coverage ratios. A portion of the facility (not to exceed $35.0 million) is available for the issuance of trade and standby letters of credit. Outstanding borrowings on the revolving credit facility at December 31, 2017 and September 30, 2017 were $337.0 million and $525.0 million, respectively. Outstanding borrowings on the term loan at December 31, 2017 and September 30, 2017 were $227.6 million and $232.5 million, respectively. The weighted-average interest rate on outstanding borrowings for the domestic credit facility (including the effects of interest rate swaps) at December 31, 2017 and December 31, 2016 was 2.93% and 2.65%, respectively.

In December 2017, the Company issued $300.0 million aggregate principal amount 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 beginning on June 1, 2018. 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 proceeds from the 2025 Senior Notes were used primarily to reduce indebtedness under the Company's domestic credit facility. The Company incurred direct financing fees and costs in connection with 2025 Senior Notes of $4.1 million, which will be deferred and amortized over the term of the 2025 Senior Notes.

The Company has a $115.0 million accounts receivable securitization facility (the "Securitization Facility") with certain financial institutions, which matures on April 4, 2019. 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, 2017 and September 30, 2017 were $101.4 million and $95.8 million, respectively. At December 31, 2017, the interest rate on borrowings under this facility was 2.31%.

The following table presents information related to interest rate contracts entered into by the Company and designated as cash flow hedges (dollar amounts in thousands):
 
 
December 31, 2017
 
September 30, 2017
Pay fixed swaps - notional amount
 
$
409,375

 
$
414,063

Net unrealized gain (loss)
 
$
6,573

 
$
3,959

Weighted-average maturity period (years)
 
3.1

 
3.3

Weighted-average received rate
 
1.56
%
 
1.23
%
Weighted-average pay rate
 
1.34
%
 
1.34
%

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