Notes to Consolidated Financial Statements
Note A — Significant Accounting Policies
(
Dollars in thousands)
Organization:
Materion Corporation (the Company) is a holding company with subsidiaries that have operations in the United States, Europe, and Asia. These operations manufacture advanced engineered materials used in a variety of end markets, including consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance. The Company has
four
reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. Other includes unallocated corporate costs.
Refer to Note B of the Consolidated Financial Statements for additional segment details. The Company is vertically integrated and distributes its products through a combination of company-owned facilities and independent distributors and agents.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Consolidation:
The Consolidated Financial Statements include the accounts of Materion Corporation and its subsidiaries. All of the Company’s subsidiaries were wholly owned as of
December 31, 2016
. Intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents:
All highly liquid investments with a maturity of
three months or less
when purchased are considered to be cash equivalents.
Accounts Receivable:
An allowance for doubtful accounts is maintained for the estimated losses resulting from the inability of customers to pay amounts due. The allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends. The allowance for doubtful accounts was
$857
and
$1,197
at December 31, 2016 and 2015, respectfully. The Company extends credit to customers based upon their financial condition, and collateral is not generally required.
Inventories:
Inventories are stated at the lower of cost or market. The cost of the majority of domestic inventories is determined using the last-in, first-out (LIFO) method to reflect a better matching of costs and revenues. The remaining inventories are stated principally at average cost.
Property, Plant, and Equipment:
Property, plant, and equipment is stated on the basis of cost. Depreciation is computed principally by the straight-line method, except certain assets for which depreciation may be computed by the units-of-production method. The depreciable lives that are used in computing the annual provision for depreciation by class of asset are primarily as follows:
|
|
|
|
Years
|
Land improvements
|
10 to 20
|
Buildings
|
20 to 40
|
Leasehold improvements
|
Life of lease
|
Machinery and equipment
|
3 to 15
|
Furniture and fixtures
|
4 to 10
|
Automobiles and trucks
|
3 to 8
|
Research equipment
|
3 to 10
|
Computer hardware
|
3 to 10
|
Computer software
|
3 to 10
|
An asset acquired under a capital lease will be recorded at the lesser of the present value of the projected lease payments or the fair value of the asset and will be depreciated in accordance with the above schedule. Leasehold improvements will be depreciated over the life of the improvement if it is shorter than the life of the lease. Repair and maintenance costs are expensed as incurred.
Mineral Resources and Mine Development:
Property acquisition costs are capitalized as mineral resources on the balance sheet and are depleted using the units-of-production method based upon total estimated recoverable proven reserves of the beryllium-bearing bertrandite ore body. The Company uses beryllium pounds as the unit of accounting measure, and depletion expense is recorded on a pro-rata basis based upon the amount of beryllium pounds extracted as a percentage of total estimated beryllium pounds contained in all ore bodies.
Mine development costs at our open pit surface mines include drilling, infrastructure, other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as Exploration expense. Capitalization of mine development project costs that meet the definition of an asset begins once mineralization is classified as proven and probable reserves.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist, and the activities are directed at obtaining additional information on the ore body or converting mineralized material to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.
The costs of removing overburden and waste materials to access the ore body at an open-pit mine prior to the production phase are referred to as “development costs.” Development costs are capitalized during the development of an open-pit mine and are capitalized at each pit. These costs are amortized as the ore is extracted using the units-of-production method based upon total estimated recoverable proven reserves for the individual pit. The Company uses beryllium pounds as the unit of accounting measure for recording amortization.
To the extent that the aforementioned costs benefit an entire ore body, the costs are amortized over the estimated useful life of the ore body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block area.
Goodwill and Other Intangible Assets:
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. Historically, the Company conducted its annual goodwill and indefinite-lived intangible asset impairment assessment as of December 31 of each fiscal year; however, in 2016, the Company changed the date of its assessment to the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Intangible assets with finite lives are amortized using the straight-line method or effective interest method, as applicable, over the periods estimated to be benefited, which is generally
20 years or less
. Finite-lived intangible assets are also reviewed for impairment if facts and circumstances warrant.
Asset Impairment:
In the event that facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to the associated estimated future undiscounted cash flow. If the carrying value exceeds that cash flow, then the assets are written down to their fair values.
Derivatives:
The Company recognizes all derivatives on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (loss), a component of shareholders’ equity, until the hedged item is recognized in earnings. If the derivative is designated as a fair value hedge, changes in fair value are offset against the change in the fair value of the hedged asset, liability, or commitment through earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in its fair value are adjusted through the income statement.
Asset Retirement Obligation:
The Company records a liability to recognize the legal obligation to remove an asset at the time the asset is acquired or when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense. An asset equal to the fair value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset.
Unearned Income:
Expenditures for capital equipment to be reimbursed under government contracts are recorded in property, plant, and equipment, while the reimbursements for those expenditures are recorded in unearned income, a liability on the balance sheet. When the assets subject to reimbursement are placed in service, the total cost is depreciated over the useful lives, and the unearned income liability is reduced and credited to cost of sales on the Consolidated Statements of Income ratably with the annual depreciation expense. Depreciation and amortization expense on the Consolidated Statements of Cash Flows is shown net of the associated period reduction in the unearned income liability.
Revenue Recognition:
The Company generally recognizes revenue when the goods are shipped and title passes to the customer. The Company requires persuasive evidence that a revenue arrangement exists, delivery of the product has occurred, the
selling price is fixed or determinable, and collectibility is reasonably assured before revenue is realized and earned. Billings in advance of the shipment of the goods are recorded as unearned revenue, which is a liability on the balance sheet. Revenue is recognized for these transactions when the goods are shipped and all other revenue recognition criteria are met.
Shipping and Handling Costs:
The Company records shipping and handling costs for products sold to customers in cost of sales in the Consolidated Statements of Income.
Advertising Costs:
The Company expenses all advertising costs as incurred. Advertising costs were
$1,163
in
2016
,
$1,285
in
2015
, and
$1,188
in
2014
.
Stock-based Compensation:
The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. The fair value of restricted stock units is based on the closing price of the Company's common shares on the grant date. Stock appreciation rights (SARs) are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. The fair value of SARs is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. See Note O for additional information about stock-based compensation.
Capitalized Interest:
Interest expense associated with active capital asset construction and mine development projects is capitalized and amortized over the future useful lives of the related assets.
Income Taxes:
The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The Company will record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized, as warranted by current facts and circumstances. The Company applies a more-likely-than-not recognition threshold for all tax uncertainties and will record a liability for those tax benefits that have a
less than 50%
likelihood of being sustained upon examination by the taxing authorities.
Net Income Per Share:
Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive common stock equivalents as appropriate using the treasury stock method.
New Pronouncements Adopted:
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
. Inventory within the scope of this update is required to be measured at the lower of its cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We early adopted this ASU effective January 1, 2016. The adoption did not have a material effect on the consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07,
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
. Under this update, investments for which fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. The guidance applies to investments for which there is not a readily determinable fair value (market quote) or the investment is in a mutual fund without a publicly available net asset value. We adopted this standard effective January 1, 2016 and have updated our presentation of investments measured at net asset value accordingly. Refer to Note M of the Consolidated Financial Statements for additional details.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which requires companies to present debt issuance costs associated with a debt liability as a deduction from the carrying amount of that debt liability on the balance sheet rather than being capitalized as an asset. The Company adopted this ASU effective January 1, 2016, and applied the new guidance on a retrospective basis, which resulted in a decrease to Intangible assets, Short-term debt, and Long-term debt, at December 31, 2015, of
$347
,
$8
, and
$339
, respectively.
New Pronouncements Issued:
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
. The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The impact of adopting this new guidance is not expected to have a material effect on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which impacts several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement, and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with other income tax cash flows, as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The impact of adopting this new guidance is not expected to have a material effect on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount, and timing of revenue and cash flows arising from contracts. This ASU is effective beginning in fiscal year 2018 with a provision for early adoption in 2017. The standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. To evaluate the impact of adopting this new guidance on the consolidated financial statements, we
established a cross-functional implementation team to assess our revenue streams against the requirements of this ASU. In addition, we are in the process of identifying and implementing changes to our processes and controls to meet the standard's updated reporting and disclosure requirements. The Company continues to update our assessment of the impact of the standard and related updates to the consolidated financial statements, and will disclose material impacts, if any.
No other recently issued ASUs are expected to have a material effect on the Company's results of operations, financial condition, or liquidity.
Note B — Segment Reporting and Geographic Information
The Company has the following operating segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the the availability of discrete financial information and the Company’s organizational and management structure.
Previously, the Company aggregated its businesses into three reportable segments: Performance Alloys and Composites, Advanced Materials, and Other. Precision Coatings was included in the Other segment, which also included unallocated corporate costs. The Company reorganized its operating segments in the fourth quarter of 2016 to more appropriately align with the way its businesses are managed. The Company is now organized into
four
reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Coatings produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
Financial information for reportable segments, which has been recast for all periods presented to reflect the current organizational structure, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance
Alloys and
Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Other
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
387,539
|
|
|
$
|
437,249
|
|
|
$
|
144,448
|
|
|
$
|
—
|
|
|
$
|
969,236
|
|
Intersegment sales
|
|
240
|
|
|
70,457
|
|
|
—
|
|
|
—
|
|
|
70,697
|
|
Value-added sales
|
|
332,012
|
|
|
176,332
|
|
|
97,700
|
|
|
(6,134
|
)
|
|
599,910
|
|
Operating profit (loss)
|
|
6,601
|
|
|
26,282
|
|
|
11,635
|
|
|
(17,414
|
)
|
|
27,104
|
|
Depreciation, depletion, and amortization
|
|
27,059
|
|
|
6,644
|
|
|
9,945
|
|
|
2,003
|
|
|
45,651
|
|
Expenditures for long-lived assets
|
|
26,604
|
|
|
4,931
|
|
|
3,176
|
|
|
2,327
|
|
|
37,038
|
|
Assets
|
|
422,787
|
|
|
133,682
|
|
|
108,788
|
|
|
76,041
|
|
|
741,298
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,760
|
|
|
$
|
482,288
|
|
|
$
|
148,444
|
|
|
$
|
(220
|
)
|
|
$
|
1,025,272
|
|
Intersegment sales
|
|
768
|
|
|
63,669
|
|
|
—
|
|
|
—
|
|
|
64,437
|
|
Value-added sales
|
|
335,136
|
|
|
182,794
|
|
|
101,761
|
|
|
(2,444
|
)
|
|
617,247
|
|
Operating profit (loss)
|
|
23,560
|
|
|
27,805
|
|
|
7,483
|
|
|
(13,580
|
)
|
|
45,268
|
|
Depreciation, depletion, and amortization
|
|
19,748
|
|
|
6,995
|
|
|
9,951
|
|
|
1,777
|
|
|
38,471
|
|
Expenditures for long-lived assets
|
|
38,562
|
|
|
5,286
|
|
|
6,399
|
|
|
1,843
|
|
|
52,090
|
|
Assets
|
|
425,759
|
|
|
131,104
|
|
|
118,953
|
|
|
66,477
|
|
|
742,293
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
433,288
|
|
|
$
|
547,282
|
|
|
$
|
147,659
|
|
|
$
|
(1,339
|
)
|
|
$
|
1,126,890
|
|
Intersegment sales
|
|
743
|
|
|
54,404
|
|
|
—
|
|
|
—
|
|
|
55,147
|
|
Value-added sales
|
|
358,511
|
|
|
181,040
|
|
|
102,378
|
|
|
(4,856
|
)
|
|
637,073
|
|
Operating profit (loss)
|
|
33,290
|
|
|
32,692
|
|
|
9,272
|
|
|
(17,666
|
)
|
|
57,588
|
|
Depreciation, depletion, and amortization
|
|
24,712
|
|
|
6,890
|
|
|
10,175
|
|
|
1,739
|
|
|
43,516
|
|
Expenditures for long-lived assets
|
|
16,998
|
|
|
6,412
|
|
|
5,869
|
|
|
1,280
|
|
|
30,559
|
|
Assets
|
|
433,580
|
|
|
148,303
|
|
|
122,337
|
|
|
57,701
|
|
|
761,921
|
|
Intersegment sales are eliminated in consolidation.
The primary measure of evaluating segment performance is operating profit. In addition to net sales, value-added sales is also reviewed. Value-added sales represents a non-GAAP measure which removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in pass-through metal prices. Value-added sales is a metric of particular importance to the Advanced Materials segment, since a significant portion of Advanced Materials' net sales are based on the value of precious metals which can fluctuate significantly from period to period.
From a segment assets perspective, segments are evaluated based upon a return on assets metric, which includes inventory (excluding the impact of LIFO), accounts receivable, and property, plant, and equipment.
Other geographic information includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
Net sales
|
|
|
|
|
|
|
United States
|
|
$
|
639,675
|
|
|
$
|
639,436
|
|
|
$
|
731,194
|
|
Asia
|
|
193,739
|
|
|
247,174
|
|
|
238,684
|
|
Europe
|
|
121,648
|
|
|
122,554
|
|
|
136,561
|
|
All other
|
|
14,174
|
|
|
16,108
|
|
|
20,451
|
|
Total
|
|
$
|
969,236
|
|
|
$
|
1,025,272
|
|
|
$
|
1,126,890
|
|
Long-lived assets by country deployed
|
|
|
|
|
|
|
United States
|
|
$
|
240,309
|
|
|
$
|
249,976
|
|
|
$
|
233,619
|
|
All other
|
|
12,322
|
|
|
13,653
|
|
|
13,969
|
|
Total
|
|
$
|
252,631
|
|
|
$
|
263,629
|
|
|
$
|
247,588
|
|
Net sales are based on the location of the selling group. No individual country, other than the United States, or customer accounted for
10%
or more of the Company’s net sales for the years presented.
Long-lived assets are comprised of property, plant, and equipment based on physical location.
Note C — Other-net
Other-net is summarized for
2016
,
2015
, and
2014
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) Expense
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
Metal consignment fees
|
|
$
|
6,409
|
|
|
$
|
7,074
|
|
|
$
|
7,332
|
|
Amortization of intangible assets
|
|
4,498
|
|
|
5,112
|
|
|
5,169
|
|
Foreign currency exchange/translation gain
|
|
1,525
|
|
|
(5,461
|
)
|
|
(1,676
|
)
|
Impairment and other cost reduction initiatives
|
|
2,586
|
|
|
—
|
|
|
170
|
|
Net (gain) loss on disposal of fixed assets
|
|
(648
|
)
|
|
768
|
|
|
(2,435
|
)
|
Recovery from insurance
|
|
—
|
|
|
(3,800
|
)
|
|
(6,750
|
)
|
Legal settlement
|
|
—
|
|
|
(1,825
|
)
|
|
(4,000
|
)
|
Other items
|
|
(496
|
)
|
|
907
|
|
|
1,168
|
|
Total
|
|
$
|
13,874
|
|
|
$
|
2,775
|
|
|
$
|
(1,022
|
)
|
Note D — Cost Reduction Initiatives
In 2016, the Company initiated a plan to close the Fukuya, Japan service center which is a part of the Performance Alloys and Composites segment. An asset impairment charge of
$2.6 million
was recorded relating to impairment of land and buildings. The fair value estimates were calculated using the market approach.
In 2014, the Company incurred a charge of
$0.7 million
relating to a plan, which was announced in 2012, to consolidate various small facilities to improve efficiencies and reduce overhead costs in order to improve profitability and cash flows. The plan also involved a reduction in the hourly workforce and management group at other facilities. Costs associated with the consolidation plan, primarily within the Advanced Materials and Precision Coatings segments, included severance and related manpower costs, equipment write-downs, equipment relocations, and other related costs.
These costs are presented in the Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
433
|
|
Selling, general, and administrative (SG&A) expense
|
|
—
|
|
|
—
|
|
|
104
|
|
Other-net
|
|
2,586
|
|
|
—
|
|
|
170
|
|
Total
|
|
$
|
2,586
|
|
|
$
|
—
|
|
|
$
|
707
|
|
Note E — Interest
The following chart summarizes the interest incurred, capitalized, and paid for
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
Interest incurred
|
|
$
|
2,219
|
|
|
$
|
2,685
|
|
|
$
|
3,012
|
|
Less capitalized interest
|
|
430
|
|
|
235
|
|
|
225
|
|
Total net expense
|
|
$
|
1,789
|
|
|
$
|
2,450
|
|
|
$
|
2,787
|
|
Interest paid
|
|
$
|
1,611
|
|
|
$
|
2,042
|
|
|
$
|
2,215
|
|
The difference in expense for
2016
,
2015
, and
2014
was primarily due to changes in the level of outstanding debt and capital leases and the average borrowing rate. Amortization of deferred financing costs within interest expense was
$0.7 million
in
2016
,
$0.7 million
in
2015
, and
$0.8 million
in
2014
.
Note F — Income Taxes
Income before income taxes and income tax expense (benefit) are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
Income before income taxes:
|
|
|
|
|
|
|
Domestic
|
|
$
|
13,934
|
|
|
$
|
31,748
|
|
|
$
|
40,420
|
|
Foreign
|
|
11,381
|
|
|
11,070
|
|
|
14,381
|
|
Total income before income taxes
|
|
$
|
25,315
|
|
|
$
|
42,818
|
|
|
$
|
54,801
|
|
Income tax expense:
|
|
|
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
Domestic
|
|
$
|
6,505
|
|
|
$
|
3,556
|
|
|
$
|
14,487
|
|
Foreign
|
|
2,080
|
|
|
2,736
|
|
|
3,457
|
|
Total current
|
|
$
|
8,585
|
|
|
$
|
6,292
|
|
|
$
|
17,944
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
Domestic
|
|
$
|
(8,842
|
)
|
|
$
|
4,565
|
|
|
$
|
(4,412
|
)
|
Foreign
|
|
(168
|
)
|
|
(197
|
)
|
|
(862
|
)
|
Total deferred
|
|
$
|
(9,010
|
)
|
|
$
|
4,368
|
|
|
$
|
(5,274
|
)
|
Total income tax (benefit) expense
|
|
$
|
(425
|
)
|
|
$
|
10,660
|
|
|
$
|
12,670
|
|
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
U.S. Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal tax effect
|
|
(0.4
|
)
|
|
1.7
|
|
|
0.8
|
|
Effect of excess of percentage depletion over cost depletion
|
|
(10.6
|
)
|
|
(7.1
|
)
|
|
(5.1
|
)
|
Manufacturing production deduction
|
|
(3.3
|
)
|
|
(0.9
|
)
|
|
(2.5
|
)
|
Adjustment to unrecognized tax benefits
|
|
3.2
|
|
|
(1.1
|
)
|
|
0.3
|
|
Foreign rate differential
|
|
(5.9
|
)
|
|
(4.2
|
)
|
|
(3.2
|
)
|
Research and developmental tax credit
|
|
(6.6
|
)
|
|
(1.6
|
)
|
|
(1.3
|
)
|
Foreign tax credit
|
|
(28.1
|
)
|
|
(4.8
|
)
|
|
(0.2
|
)
|
Foreign repatriation
|
|
13.7
|
|
|
5.9
|
|
|
0.6
|
|
Other items
|
|
1.3
|
|
|
2.0
|
|
|
(1.3
|
)
|
Effective tax rate
|
|
(1.7
|
)%
|
|
24.9
|
%
|
|
23.1
|
%
|
The impact of the foreign tax credit line item in the effective income tax rate reconciliation table increased to a benefit of
28.1%
in 2016, primarily due to a benefit relating to dividends paid from foreign earnings of a Japanese subsidiary. In 2015, the Company estimated foreign tax credits of
$1.2 million
based on available historical information that was readily accessible in a timely manner without undue cost. In 2016, the Company recorded
$4.6 million
in foreign tax credits as a change in accounting estimate as the result of new information obtained from an examination of the Japanese subsidiary's historical records and resulted in a foreign tax credit carryforward of
$3.7 million
from 2015.
The Company had domestic and foreign income tax payments of
$3.0 million
,
$6.0 million
, and
$13.1 million
in
2016
,
2015
, and
2014
, respectively.
Deferred tax assets and (liabilities) are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and (liabilities) recorded in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2016
|
|
2015
|
Asset (liability)
|
|
|
|
|
Post-employment benefits other than pensions
|
|
$
|
4,808
|
|
|
$
|
5,094
|
|
Other reserves
|
|
9,333
|
|
|
8,124
|
|
Deferred compensation
|
|
10,243
|
|
|
10,368
|
|
Environmental reserves
|
|
2,231
|
|
|
2,068
|
|
Inventory
|
|
5,876
|
|
|
3,264
|
|
Pensions
|
|
23,540
|
|
|
21,781
|
|
Alternative minimum tax credit
|
|
1,390
|
|
|
709
|
|
Net operating loss and credit carryforwards
|
|
5,607
|
|
|
4,148
|
|
Research and development tax credit carryforward
|
|
627
|
|
|
700
|
|
Foreign tax credit carryforward
|
|
4,545
|
|
|
—
|
|
Subtotal
|
|
68,200
|
|
|
56,256
|
|
Valuation allowance
|
|
(3,990
|
)
|
|
(2,837
|
)
|
Total deferred tax assets
|
|
64,210
|
|
|
53,419
|
|
Depreciation
|
|
(13,064
|
)
|
|
(14,359
|
)
|
Amortization
|
|
(5,073
|
)
|
|
(6,538
|
)
|
Capitalized interest expense
|
|
(242
|
)
|
|
(204
|
)
|
Mine development
|
|
(6,683
|
)
|
|
(6,457
|
)
|
Derivative instruments and hedging activities
|
|
(13
|
)
|
|
(228
|
)
|
Total deferred tax liabilities
|
|
(25,075
|
)
|
|
(27,786
|
)
|
Net deferred tax asset
|
|
$
|
39,135
|
|
|
$
|
25,633
|
|
The Company had deferred income tax assets offset with a valuation allowance for certain state and foreign net operating losses and state investment tax credit carryforwards. The Company intends to maintain a valuation allowance on these deferred tax assets until a realization event occurs to support reversal of all or a portion of the allowance.
At
December 31, 2016
, for income tax purposes, the Company had foreign net operating loss carryforwards of
$4.3 million
that do not expire, and
$9.6 million
that expire in calendar years 2017 through 2025, of which
$1.2 million
expires within the next twelve months. The Company also had state net operating loss carryforwards of
$19.9 million
that expire in calendar years 2018 through 2036 and state tax credits of
$2.6 million
that expire in calendar years 2017 through 2031. A valuation allowance of
$4.0 million
has been provided against certain foreign and state loss carryforwards and state tax credits due to uncertainty of their realization.
The Company has an alternative minimum tax credit of
$1.4 million
that does not expire, research and development tax credits of
$0.6 million
that expire in calendar year 2036, and foreign tax credits of
$4.5 million
, comprised of
$3.7 million
and
$0.8 million
, that expire in calendar years 2025 and 2026, respectively.
The Company files income tax returns in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations for years before 2013, state and local examinations for years before 2012, and foreign examinations for tax years before 2010.
A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ending
December 31, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
Balance at January 1
|
|
$
|
1,285
|
|
|
$
|
1,790
|
|
Additions to tax provisions related to the current year
|
|
35
|
|
|
9
|
|
Additions to tax positions related to prior years
|
|
878
|
|
|
—
|
|
Reduction to tax positions related to prior years
|
|
—
|
|
|
(439
|
)
|
Lapses on statutes of limitations
|
|
(150
|
)
|
|
(75
|
)
|
Balance at December 31
|
|
$
|
2,048
|
|
|
$
|
1,285
|
|
At
December 31, 2016
, the Company had
$2.0 million
of unrecognized tax benefits, of which
$1.4 million
would affect the Company’s effective tax rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on the Consolidated Statement of Income or the Consolidated Balance Sheet.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Income. Accrued interest and penalties are included on the related tax liability line in the Consolidated Balance Sheets. The amount of interest and penalties, net of related federal tax benefits, recognized in earnings was immaterial during
2016
,
2015
, and 2014. As of
December 31, 2016
and
2015
, accrued interest and penalties, net of related federal tax benefits, were
immaterial
.
U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside of the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such unrepatriated earnings totaled
$57.2 million
as of
December 31, 2016
. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation.
Note G — Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
2016
|
|
2015
|
|
2014
|
Numerator for basic and diluted EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
25,740
|
|
|
$
|
32,158
|
|
|
$
|
42,131
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic EPS:
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
19,983
|
|
|
20,097
|
|
|
20,461
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock appreciation rights
|
|
74
|
|
|
156
|
|
|
197
|
|
Restricted stock units
|
|
88
|
|
|
91
|
|
|
125
|
|
Performance-based restricted stock units
|
|
68
|
|
|
58
|
|
|
69
|
|
Diluted potential common shares
|
|
230
|
|
|
305
|
|
|
391
|
|
Denominator for diluted EPS:
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
20,213
|
|
|
20,402
|
|
|
20,852
|
|
Basic EPS
|
|
$
|
1.29
|
|
|
$
|
1.60
|
|
|
$
|
2.06
|
|
Diluted EPS
|
|
$
|
1.27
|
|
|
$
|
1.58
|
|
|
$
|
2.02
|
|
SARs totaling
182,186
in
2016
,
376,550
in
2015
, and
328,611
in
2014
were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.
Note H — Inventories
Inventories in the Consolidated Balance Sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2016
|
|
2015
|
Raw materials and supplies
|
|
$
|
36,233
|
|
|
$
|
37,463
|
|
Work in process
|
|
169,327
|
|
|
180,458
|
|
Finished goods
|
|
38,147
|
|
|
38,135
|
|
Subtotal
|
|
243,707
|
|
|
256,056
|
|
Less: LIFO reserve balance
|
|
42,842
|
|
|
44,236
|
|
Inventories
|
|
$
|
200,865
|
|
|
$
|
211,820
|
|
The liquidation of LIFO inventory layers reduced cost of sales by
$4.1 million
in
2016
,
$6.1 million
in
2015
, and
$0.1 million
in 2014.
Note I — Property, Plant, and Equipment
Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2016
|
|
2015
|
Land
|
|
$
|
5,548
|
|
|
$
|
7,457
|
|
Buildings
|
|
135,729
|
|
|
133,427
|
|
Machinery and equipment
|
|
609,894
|
|
|
597,423
|
|
Software
|
|
39,550
|
|
|
38,505
|
|
Construction in progress
|
|
19,111
|
|
|
15,449
|
|
Allowances for depreciation
|
|
(593,531
|
)
|
|
(565,203
|
)
|
Subtotal
|
|
216,301
|
|
|
227,058
|
|
Capital leases
|
|
10,913
|
|
|
10,913
|
|
Allowances for depreciation
|
|
(2,492
|
)
|
|
(2,242
|
)
|
Subtotal
|
|
8,421
|
|
|
8,671
|
|
Mineral resources
|
|
4,979
|
|
|
4,979
|
|
Mine development
|
|
35,543
|
|
|
25,681
|
|
Allowances for amortization and depletion
|
|
(12,613
|
)
|
|
(2,760
|
)
|
Subtotal
|
|
27,909
|
|
|
27,900
|
|
Property, plant, and equipment — net
|
|
$
|
252,631
|
|
|
$
|
263,629
|
|
The Company received
$63.5 million
from the U.S. Department of Defense (DoD), in previous periods, for reimbursement of the DoD's share of the cost of equipment. This amount was recorded in property, plant, and equipment and the reimbursements are reflected in unearned income on the Consolidated Balance Sheets. The equipment was placed in service during 2012, and its full cost is being depreciated in accordance with Company policy. The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment.
Unearned income was reduced by
$4.6 million
and
$5.8 million
in
2016
and
2015
, respectively, and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.
We recorded depreciation and depletion expense of
$41.2 million
in
2016
,
$32.8 million
in
2015
, and
$37.5 million
in
2014
. The expense is net of the above-referenced reductions in the unearned income liability. Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is also net of the reduction in the unearned income liability in
2016
,
2015
, and 2014. The net book value of capitalized software was
$9.8 million
and
$9.5 million
at
December 31, 2016
and
December 31, 2015
, respectively. Depreciation expense related to software was
$2.4 million
in
2016
,
$2.3 million
in
2015
, and
$1.8 million
in
2014
.
Note J — Intangible Assets and Goodwill
Intangible Assets
The cost and accumulated amortization of intangible assets subject to amortization as of
December 31, 2016
and
2015
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(Thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Customer relationships
|
|
38,428
|
|
|
(33,823
|
)
|
|
$
|
38,428
|
|
|
$
|
(30,466
|
)
|
Technology
|
|
12,092
|
|
|
(10,516
|
)
|
|
12,092
|
|
|
(9,565
|
)
|
Licenses and other
|
|
4,519
|
|
|
(2,441
|
)
|
|
2,989
|
|
|
(2,471
|
)
|
Total
|
|
$
|
55,039
|
|
|
$
|
(46,780
|
)
|
|
$
|
53,509
|
|
|
$
|
(42,502
|
)
|
During 2016, the Company acquired
$1.7 million
in finite-lived intangible assets, consisting primarily of licenses and other, with a weighted average life of
nine years
.
The aggregate a
mortization expense relating to intangible assets for the year ended December 31, 2016 and estimated amortization e
xpense for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
Amortization
|
(Thousands)
|
|
Expense
|
2016
|
|
$
|
4,498
|
|
2017
|
|
4,104
|
|
2018
|
|
1,592
|
|
2019
|
|
760
|
|
2020
|
|
284
|
|
2021
|
|
284
|
|
Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of
$2.8 million
and
$2.4 million
at December 31, 2016 and 2015, respectively.
Goodwill
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. In 2016, the Company acquired one business for total consideration of
$2.0 million
. The business acquired is included in the Precision Coatings segment. The Company recorded
$0.3 million
of goodwill related to this acquisition.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. Historically, the Company conducted its annual goodwill impairment assessment as of December 31 of each year; however, in 2016, the Company changed the date of its assessment to the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31,
2016
and
2015
was
$87.0 million
and
$86.7 million
, respectively, and assigned to the following segments:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
Performance Alloys and Composites
|
|
$
|
1,899
|
|
|
$
|
1,899
|
|
Advanced Materials
|
|
46,570
|
|
|
46,570
|
|
Precision Coatings
|
|
38,481
|
|
|
38,256
|
|
Total
|
|
$
|
86,950
|
|
|
$
|
86,725
|
|
The results of the Company's 2016, 2015, and 2014 goodwill impairment assessments indicated that
no
goodwill impairment existed.
Note K — Debt
Long-term debt in the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2016
|
|
2015
|
Revolving credit agreement
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed rate industrial development revenue bonds payable in annual installments through 2021
|
|
4,615
|
|
|
5,308
|
|
Variable rate industrial development revenue bonds payable in 2016
|
|
—
|
|
|
8,305
|
|
Total debt outstanding
|
|
4,615
|
|
|
13,613
|
|
Current portion of Long-term debt
|
|
(733
|
)
|
|
(8,998
|
)
|
Gross Long-term Debt
|
|
3,882
|
|
|
4,615
|
|
Unamortized deferred financing fees
|
|
(277
|
)
|
|
(339
|
)
|
Long-term debt
|
|
$
|
3,605
|
|
|
$
|
4,276
|
|
Maturities on long-term debt instruments as of
December 31, 2016
are as follows:
|
|
|
|
|
(Thousands)
|
|
2017
|
$
|
733
|
|
2018
|
773
|
|
2019
|
819
|
|
2020
|
864
|
|
2021
|
1,426
|
|
Thereafter
|
—
|
|
Total
|
$
|
4,615
|
|
|
|
In 2015, the Company entered into an Amended and Restated Credit Agreement (Credit Agreement) that matures in 2020 and provides for a
$375.0 million
revolving credit facility comprised of sub-facilities for revolving loans, swing-line loans, letters of credit, and foreign borrowings. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives.The Credit Agreement also provides for an uncommitted incremental facility whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed
$300.0 million
. The Credit Agreement is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows the Company to borrow money at a premium over LIBOR or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the agreement.
The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all of its debt covenants as of
December 31, 2016
and
December 31, 2015
.
At
December 31, 2016
and 2015, respectively, there was
$28.5 million
and
$38.0 million
outstanding against the letters of credit sub-facility. The Company pays a variable commitment fee that may reset quarterly (
0.20%
as of
December 31, 2016
) of the available and unborrowed amounts under the revolving credit line.
The following table summarizes the Company’s short-term lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(Thousands)
|
|
Total
|
|
Outstanding
|
|
Available
|
|
Total
|
|
Outstanding
|
|
Available
|
Domestic
|
|
$
|
346,522
|
|
|
$
|
—
|
|
|
$
|
346,522
|
|
|
$
|
336,955
|
|
|
$
|
—
|
|
|
$
|
336,955
|
|
Foreign
|
|
8,907
|
|
|
—
|
|
|
8,907
|
|
|
9,283
|
|
|
—
|
|
|
9,283
|
|
Total
|
|
$
|
355,429
|
|
|
$
|
—
|
|
|
$
|
355,429
|
|
|
$
|
346,238
|
|
|
$
|
—
|
|
|
$
|
346,238
|
|
While the available borrowings under the individual existing credit lines total
$355.4 million
, the covenants in the domestic Credit Agreement restrict the aggregate available borrowings to
$238.9 million
as of
December 31, 2016
.
The domestic line is committed and includes all sub-facilities in the
$375.0 million
maximum borrowing under the Credit Agreement. The Company has various foreign lines of credit, one of which for
$2.0 million
, is committed and secured. The remaining foreign lines are uncommitted, unsecured, and renewed annually. The average interest rate on short-term debt was
4.90%
and
0.42%
as of
December 31, 2016
and
2015
, respectively.
In April 2011, the Company entered into an agreement with the Toledo-Lucas County Port Authority and the Dayton–Montgomery County Port Authority in Ohio to co-issue
$8.0 million
in taxable development revenue bonds, with a fixed amortization term that will mature in 2021. The interest rate on these bonds was fixed at
4.9%
, and the unamortized balance of the bonds was
$4.6 million
at
December 31, 2016
.
In November 2016, the Company retired the entire
$8.3 million
of variable rate industrial revenue bonds with the Lorain Port Authority in Ohio, at maturity.
Note L — Leasing Arrangements
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with terms ranging up to
25 years
. Operating lease expense amounted to
$8.6 million
,
$8.3 million
, and
$8.7 million
during
2016
,
2015
, and
2014
, respectively. The future estimated minimum payments under capital leases and non-cancelable operating leases with initial lease terms in excess of one year at
December 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
(Thousands)
|
|
Leases
|
|
Leases
|
2017
|
|
$
|
1,064
|
|
|
$
|
6,214
|
|
2018
|
|
1,064
|
|
|
5,300
|
|
2019
|
|
1,064
|
|
|
3,988
|
|
2020
|
|
1,064
|
|
|
3,509
|
|
2021
|
|
1,064
|
|
|
2,922
|
|
2022 and thereafter
|
|
1,508
|
|
|
3,303
|
|
Total minimum lease payments
|
|
6,828
|
|
|
$
|
25,236
|
|
Amounts representing interest
|
|
1,051
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
5,777
|
|
|
|
Note M — Pensions and Other Post-Employment Benefits
The obligation and funded status of the Company’s pension and other post-employment benefit plans are shown below. The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, and England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
259,957
|
|
|
$
|
271,785
|
|
|
$
|
15,200
|
|
|
$
|
16,540
|
|
Service cost
|
|
8,060
|
|
|
9,195
|
|
|
105
|
|
|
115
|
|
Interest cost
|
|
10,820
|
|
|
10,446
|
|
|
562
|
|
|
554
|
|
Actuarial (gain) loss
|
|
11,833
|
|
|
(19,978
|
)
|
|
(191
|
)
|
|
(504
|
)
|
Benefit payments from fund
|
|
(10,509
|
)
|
|
(9,317
|
)
|
|
—
|
|
|
—
|
|
Benefit payments directly by Company
|
|
(1,116
|
)
|
|
(236
|
)
|
|
(1,362
|
)
|
|
(1,542
|
)
|
Expenses paid from assets
|
|
(611
|
)
|
|
(492
|
)
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
(1,633
|
)
|
|
(1,446
|
)
|
|
20
|
|
|
37
|
|
Benefit obligation at end of year
|
|
276,801
|
|
|
259,957
|
|
|
14,334
|
|
|
15,200
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
184,750
|
|
|
187,186
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
|
11,575
|
|
|
(4,657
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
16,136
|
|
|
12,366
|
|
|
—
|
|
|
—
|
|
Benefit payments from fund
|
|
(10,509
|
)
|
|
(9,317
|
)
|
|
—
|
|
|
—
|
|
Expenses paid from assets
|
|
(611
|
)
|
|
(492
|
)
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
(1,349
|
)
|
|
(336
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
|
199,992
|
|
|
184,750
|
|
|
—
|
|
|
—
|
|
Funded status at end of year
|
|
$
|
(76,809
|
)
|
|
$
|
(75,207
|
)
|
|
$
|
(14,334
|
)
|
|
$
|
(15,200
|
)
|
Amounts recognized in the Consolidated
Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
1,148
|
|
|
$
|
1,428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other liabilities and accrued items
|
|
(2,538
|
)
|
|
(960
|
)
|
|
(1,392
|
)
|
|
(1,433
|
)
|
Retirement and post-employment benefits
|
|
(75,419
|
)
|
|
(75,675
|
)
|
|
(12,942
|
)
|
|
(13,767
|
)
|
|
|
$
|
(76,809
|
)
|
|
$
|
(75,207
|
)
|
|
$
|
(14,334
|
)
|
|
$
|
(15,200
|
)
|
Amounts recognized in other comprehensive income (before tax) consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
121,718
|
|
|
$
|
113,368
|
|
|
$
|
(420
|
)
|
|
$
|
(229
|
)
|
Net prior service (credit) cost
|
|
(390
|
)
|
|
(850
|
)
|
|
(9,541
|
)
|
|
(11,038
|
)
|
|
|
$
|
121,328
|
|
|
$
|
112,518
|
|
|
$
|
(9,961
|
)
|
|
$
|
(11,267
|
)
|
Amortizations expected to be recognized during next fiscal year (before tax):
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
$
|
6,591
|
|
|
$
|
6,012
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization of prior service credit
|
|
(485
|
)
|
|
(460
|
)
|
|
(1,497
|
)
|
|
(1,497
|
)
|
|
|
$
|
6,106
|
|
|
$
|
5,552
|
|
|
$
|
(1,497
|
)
|
|
$
|
(1,497
|
)
|
Additional information
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all defined benefit pension plans
|
|
$
|
265,159
|
|
|
$
|
251,956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For defined benefit pension plans with benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Aggregate benefit obligation
|
|
271,199
|
|
|
254,178
|
|
|
—
|
|
|
—
|
|
Aggregate fair value of plan assets
|
|
193,242
|
|
|
177,543
|
|
|
—
|
|
|
—
|
|
For defined benefit pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Aggregate accumulated benefit obligation
|
|
259,982
|
|
|
243,139
|
|
|
—
|
|
|
—
|
|
Aggregate fair value of plan assets
|
|
193,242
|
|
|
177,543
|
|
|
—
|
|
|
—
|
|
Components of net benefit cost and other amounts recognized in other comprehensive income (OCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Net benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
8,060
|
|
|
$
|
9,195
|
|
|
$
|
7,963
|
|
|
$
|
105
|
|
|
$
|
115
|
|
|
$
|
138
|
|
Interest cost
|
|
10,820
|
|
|
10,446
|
|
|
10,339
|
|
|
562
|
|
|
554
|
|
|
675
|
|
Expected return on plan assets
|
|
(14,241
|
)
|
|
(13,611
|
)
|
|
(12,419
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (benefit)
|
|
(460
|
)
|
|
(450
|
)
|
|
(434
|
)
|
|
(1,497
|
)
|
|
(1,497
|
)
|
|
(1,498
|
)
|
Recognized net actuarial loss
|
|
6,005
|
|
|
7,537
|
|
|
5,263
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic cost
|
|
10,184
|
|
|
13,117
|
|
|
10,712
|
|
|
(830
|
)
|
|
(828
|
)
|
|
(685
|
)
|
Settlements
|
|
120
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net benefit cost
|
|
$
|
10,304
|
|
|
$
|
13,117
|
|
|
$
|
10,719
|
|
|
$
|
(830
|
)
|
|
$
|
(828
|
)
|
|
$
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Change in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
OCI at beginning of year
|
$
|
112,518
|
|
|
$
|
121,341
|
|
|
$
|
77,249
|
|
|
$
|
(11,267
|
)
|
|
$
|
(12,261
|
)
|
|
$
|
52
|
|
Increase (decrease) in OCI:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized during year — prior service cost (credit)
|
460
|
|
|
450
|
|
|
434
|
|
|
1,497
|
|
|
1,497
|
|
|
1,498
|
|
Recognized during year — net actuarial (losses) gains
|
(6,005
|
)
|
|
(7,537
|
)
|
|
(5,263
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Occurring during year — prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,034
|
)
|
Occurring during year — net actuarial losses (gains)
|
14,279
|
|
|
(1,697
|
)
|
|
49,037
|
|
|
(191
|
)
|
|
(503
|
)
|
|
223
|
|
Other adjustments
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
(43
|
)
|
|
(39
|
)
|
|
(116
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
OCI at end of year
|
$
|
121,329
|
|
|
$
|
112,518
|
|
|
$
|
121,341
|
|
|
$
|
(9,961
|
)
|
|
$
|
(11,267
|
)
|
|
$
|
(12,261
|
)
|
Summary of key valuation assumptions
In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company used the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.02
|
%
|
|
4.27
|
%
|
|
4.00
|
%
|
|
3.68
|
%
|
|
3.88
|
%
|
|
3.50
|
%
|
Rate of compensation increase
|
|
4.04
|
%
|
|
4.05
|
%
|
|
3.96
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Weighted-average assumptions used to determine net cost for the fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.22
|
%
|
|
4.00
|
%
|
|
4.79
|
%
|
|
3.88
|
%
|
|
3.50
|
%
|
|
4.13
|
%
|
Expected long-term return on plan assets
|
|
6.90
|
%
|
|
7.15
|
%
|
|
7.15
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
3.93
|
%
|
|
3.95
|
%
|
|
4.42
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Discount Rate.
The discount rate used to determine the present value of the projected and accumulated benefit obligation at the end of each year is established based upon the available market rates for high quality, fixed income investments whose maturities match the plan’s projected cash flows.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approach to determine the service and interest cost components. The change will be accounted for as a change in estimate and, accordingly, will be accounted for prospectively starting in 2017. The reductions in service and interest costs for 2017 associated with this change in estimate are expected to total approximately
$1.0
million.
Expected Long-Term Return on Plan Assets.
Management establishes the domestic expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. Consideration is given to both recent plan asset performance as well as plan asset performance over various long-term periods of time, with an emphasis on the assumption being a prospective, long-term rate of return. Management consults with and considers the opinions of its outside investment advisers and actuaries when establishing the rate and reviews assumptions with the Audit Committee of the Board of Directors.
Rate of Compensation Increase.
The rate of compensation increase assumption was
4.0%
in both 2016 and 2015 for the domestic defined benefit pension plan and the domestic retiree medical plan.
Assumptions for the defined benefit pension plans in Germany and England are determined separately from the U.S. plan assumptions, based on historical trends and current and projected market conditions in Germany and England. The plan in Germany is unfunded.
|
|
|
|
|
|
Assumed health care trend rates at fiscal year end
|
|
2016
|
|
2015
|
Health care trend rate assumed for next year
|
|
7.00%
|
|
7.00%
|
Rate that the trend rate gradually declines to (ultimate trend rate)
|
|
5.00%
|
|
5.00%
|
Year that the rate reaches the ultimate trend rate
|
|
2025
|
|
2020
|
Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
Point Increase
|
|
1-Percentage-
Point Decrease
|
(Thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Effect on total of service and interest cost components
|
|
$
|
13
|
|
|
$
|
15
|
|
|
$
|
(12
|
)
|
|
$
|
(14
|
)
|
Effect on post-employment benefit obligation
|
|
259
|
|
|
337
|
|
|
(241
|
)
|
|
(311
|
)
|
Plan Assets
The following tables present the fair values of the Company’s defined benefit pension plan assets as of
December 31, 2016
and
2015
by asset category. The Company has some investments that are valued using NAV as the practical expedient and have not been classified in the fair value hierarchy. Refer to Note P of the Consolidated Financial Statements for definitions of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
|
$
|
10,124
|
|
|
$
|
10,124
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. (a)
|
|
53,983
|
|
|
53,358
|
|
|
625
|
|
|
—
|
|
International (b)
|
|
30,732
|
|
|
27,304
|
|
|
3,428
|
|
|
—
|
|
Emerging markets (c)
|
|
11,792
|
|
|
11,562
|
|
|
230
|
|
|
—
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
Intermediate-term bonds (d)
|
|
48,138
|
|
|
29,429
|
|
|
18,709
|
|
|
—
|
|
Short-term bonds (e)
|
|
3,150
|
|
|
—
|
|
|
3,150
|
|
|
—
|
|
Global bonds (f)
|
|
2,121
|
|
|
—
|
|
|
2,121
|
|
|
—
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate fund (g)
|
|
5,929
|
|
|
5,639
|
|
|
290
|
|
|
—
|
|
Alternative strategies (h)
|
|
9,036
|
|
|
8,981
|
|
|
55
|
|
|
—
|
|
Accrued interest and dividends
|
|
107
|
|
|
107
|
|
|
—
|
|
|
—
|
|
Total
|
|
175,112
|
|
|
146,504
|
|
|
28,608
|
|
|
—
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
Pooled investment fund (i)
|
|
20,418
|
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (j)
|
|
4,320
|
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
199,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
|
$
|
8,848
|
|
|
$
|
8,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. (a)
|
|
51,732
|
|
|
40,476
|
|
|
11,256
|
|
|
—
|
|
International (b)
|
|
29,799
|
|
|
26,744
|
|
|
3,055
|
|
|
—
|
|
Emerging markets (c)
|
|
10,434
|
|
|
10,290
|
|
|
144
|
|
|
—
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
Intermediate-term bonds (d)
|
|
42,994
|
|
|
30,527
|
|
|
12,467
|
|
|
—
|
|
Short-term bonds (e)
|
|
3,875
|
|
|
—
|
|
|
3,875
|
|
|
—
|
|
Global bonds (f)
|
|
2,948
|
|
|
—
|
|
|
2,948
|
|
|
—
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate fund (g)
|
|
5,799
|
|
|
5,722
|
|
|
77
|
|
|
—
|
|
Alternative strategies (h)
|
|
8,819
|
|
|
8,722
|
|
|
97
|
|
|
—
|
|
Accrued interest and dividends
|
|
101
|
|
|
101
|
|
|
—
|
|
|
—
|
|
Total
|
|
165,349
|
|
|
131,430
|
|
|
33,919
|
|
|
—
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
Pooled investment fund (i)
|
|
15,894
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (j)
|
|
3,217
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
290
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
184,750
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Mutual funds that invest in various sectors of the U.S. market.
|
|
|
(b)
|
Mutual funds that invest in non-U.S. companies primarily in developed countries that are generally considered to be value stocks.
|
|
|
(c)
|
Mutual funds that invest in non-U.S. companies in emerging market countries.
|
|
|
(d)
|
Includes a mutual fund that employs a value-oriented approach to fixed income investment management and a mutual fund that invests primarily in investment-grade debt securities.
|
|
|
(e)
|
Includes a mutual fund that seeks a market rate of return for a fixed-income portfolio with low relative volatility of returns, investing generally in U.S. and foreign debt securities maturing in
five years or less
.
|
|
|
(f)
|
Mutual funds that invest in domestic and foreign sovereign securities, fixed income securities, mortgage-backed and asset-backed bonds, convertible bonds, high-yield bonds, and emerging market bonds.
|
|
|
(g)
|
Includes a mutual fund that typically invests at least
80%
of its assets in equity and debt securities of companies in the real estate industry or related industries or in companies which own significant real estate assets at the time of investment.
|
|
|
(h)
|
Includes a mutual fund that tactically allocates assets to global equity, fixed income, and alternative strategies.
|
|
|
(i)
|
Includes a fund that invests in a broad portfolio of hedge funds.
|
|
|
(j)
|
Includes a hedge fund that employs multiple strategies to multiple asset classes with low correlations. Capital may be withdrawn from the multi-strategy hedge fund partnership on a monthly basis with a
ten
-day notice period.
|
The Company’s domestic defined benefit pension plan investment strategy, as approved by the Governance and Organization Committee of the Board of Directors, is to employ an allocation of investments that will generate returns equal to or better than the projected long-term growth of pension liabilities so that the plan will be self-funding. The return objective is to maximize investment return to achieve and maintain a
100%
funded status over time, taking into consideration required cash contributions. The allocation of investments is designed to maximize the advantages of diversification while mitigating the risk and overall portfolio volatility to achieve the return objective. Risk is defined as the annual variability in value and is measured in terms of the standard deviation of investment return. Under the Company’s investment policies, allowable investments include domestic equities, international equities, fixed income securities, cash equivalents, and alternative securities (which include real estate, private venture capital investments, hedge funds, and tactical asset allocation). Ranges, in terms of a percentage of the total assets, are established for each allowable class of security. Derivatives may be used to hedge an existing security or as a risk reduction strategy. Current asset allocation guidelines are to invest
30%
to
60%
in equity securities,
20%
to
50%
in fixed income securities and cash, and up to
25%
in alternative securities. Management reviews the asset allocation on a quarterly or more frequent basis and makes revisions as deemed necessary.
None of the plan assets noted above are invested in the Company’s common stock.
Cash Flows
Employer Contributions.
The Company expects to contribute
$16.0 million
to its domestic defined benefit pension plan and
$1.4 million
to its other benefit plans in
2017
.
Effective in 2016, all plan participants with an accrued benefit may elect an immediate payout in lieu of their future monthly annuity if the lump sum amount does not exceed
$100,000
.
Estimated Future Benefit Payments.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
(Thousands)
|
|
Pension Benefits
|
|
Gross Benefit
Payment
|
|
Net of
Medicare
Part D
Subsidy
|
2017
|
|
$
|
13,197
|
|
|
$
|
1,392
|
|
|
$
|
1,367
|
|
2018
|
|
11,372
|
|
|
1,508
|
|
|
1,485
|
|
2019
|
|
12,616
|
|
|
1,552
|
|
|
1,531
|
|
2020
|
|
12,872
|
|
|
1,510
|
|
|
1,491
|
|
2021
|
|
13,517
|
|
|
1,429
|
|
|
1,412
|
|
2022 through 2026
|
|
79,134
|
|
|
5,319
|
|
|
5,265
|
|
Other Benefit Plans
In addition to the plans shown above, the Company also has certain foreign subsidiaries with accrued unfunded pension and other post-employment arrangements. The liability for these arrangements was
$2.4 million
at
December 31, 2016
and
$2.3 million
at
December 31, 2015
, and was included in retirement and post-employment benefits in the Consolidated Balance Sheets.
The Company also sponsors defined contribution plans available to substantially all U.S. employees. The Company’s annual defined contribution expense, including the expense for the enhanced defined contribution plan, was
$3.6 million
in
2016
,
$3.1 million
in
2015
, and
$3.0 million
in
2014
.
Note N — Accumulated Other Comprehensive Income
Changes in the components of accumulated other comprehensive income, including amounts reclassified out, for
2016
,
2015
, and
2014
, and the balances in accumulated other comprehensive income as of
December 31, 2016
,
2015
, and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses
On Cash Flow Hedges
|
|
Pension and Post- Employment Benefits
|
|
Foreign Currency Translation
|
|
|
(Thousands)
|
|
Foreign Currency
|
|
Precious Metals
|
|
Total
|
Total
|
Balance at December 31, 2013
|
|
$
|
1,346
|
|
|
$
|
(12
|
)
|
|
$
|
1,334
|
|
|
$
|
(61,509
|
)
|
|
$
|
287
|
|
|
$
|
(59,888
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
3,456
|
|
|
19
|
|
|
3,475
|
|
|
(35,109
|
)
|
|
(4,440
|
)
|
|
(36,074
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
87
|
|
|
—
|
|
|
87
|
|
|
3,330
|
|
|
—
|
|
|
3,417
|
|
Other comprehensive income (loss) before tax
|
|
3,543
|
|
|
19
|
|
|
3,562
|
|
|
(31,779
|
)
|
|
(4,440
|
)
|
|
(32,657
|
)
|
Deferred taxes
|
|
1,311
|
|
|
7
|
|
|
1,318
|
|
|
(11,626
|
)
|
|
—
|
|
|
(10,308
|
)
|
Other comprehensive income (loss) after tax
|
|
2,232
|
|
|
12
|
|
|
2,244
|
|
|
(20,153
|
)
|
|
(4,440
|
)
|
|
(22,349
|
)
|
Balance at December 31, 2014
|
|
$
|
3,578
|
|
|
$
|
—
|
|
|
$
|
3,578
|
|
|
$
|
(81,662
|
)
|
|
$
|
(4,153
|
)
|
|
$
|
(82,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
3,578
|
|
|
$
|
—
|
|
|
$
|
3,578
|
|
|
$
|
(81,662
|
)
|
|
$
|
(4,153
|
)
|
|
$
|
(82,237
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
2,995
|
|
|
—
|
|
|
2,995
|
|
|
2,249
|
|
|
(1,335
|
)
|
|
3,909
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(6,169
|
)
|
|
—
|
|
|
(6,169
|
)
|
|
5,580
|
|
|
—
|
|
|
(589
|
)
|
Other comprehensive income (loss) before tax
|
|
(3,174
|
)
|
|
—
|
|
|
(3,174
|
)
|
|
7,829
|
|
|
(1,335
|
)
|
|
3,320
|
|
Deferred taxes
|
|
(1,175
|
)
|
|
—
|
|
|
(1,175
|
)
|
|
2,963
|
|
|
—
|
|
|
1,788
|
|
Other comprehensive income (loss) after tax
|
|
(1,999
|
)
|
|
—
|
|
|
(1,999
|
)
|
|
4,866
|
|
|
(1,335
|
)
|
|
1,532
|
|
Balance at December 31, 2015
|
|
$
|
1,579
|
|
|
$
|
—
|
|
|
$
|
1,579
|
|
|
$
|
(76,796
|
)
|
|
$
|
(5,488
|
)
|
|
$
|
(80,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,579
|
|
|
$
|
—
|
|
|
$
|
1,579
|
|
|
$
|
(76,796
|
)
|
|
$
|
(5,488
|
)
|
|
$
|
(80,705
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(377
|
)
|
|
—
|
|
|
(377
|
)
|
|
(14,165
|
)
|
|
(172
|
)
|
|
(14,714
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
784
|
|
|
—
|
|
|
784
|
|
|
4,048
|
|
|
—
|
|
|
4,832
|
|
Other comprehensive income (loss) before tax
|
|
407
|
|
|
—
|
|
|
407
|
|
|
(10,117
|
)
|
|
(172
|
)
|
|
(9,882
|
)
|
Deferred taxes
|
|
149
|
|
|
—
|
|
|
149
|
|
|
(4,555
|
)
|
|
—
|
|
|
(4,406
|
)
|
Other comprehensive income (loss) after tax
|
|
258
|
|
|
—
|
|
|
258
|
|
|
(5,562
|
)
|
|
(172
|
)
|
|
(5,476
|
)
|
Balance at December 31, 2016
|
|
$
|
1,837
|
|
|
$
|
—
|
|
|
$
|
1,837
|
|
|
$
|
(82,358
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(86,181
|
)
|
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Other-net in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note P for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note M for additional details on pension and other post-employment expenses.
Note O — Stock-based Compensation
Stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) were approved at the May 2006 annual meeting of shareholders. These plans authorize the granting of option rights, stock appreciation rights (SARs), performance-restricted shares, performance shares, performance units, and restricted shares and replaced the 1995 Stock Incentive Plan and the 1997 Stock Incentive Plan for Non-employee Directors. The 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan were amended to, among other things, add additional shares to the plans. These amendments were approved by shareholders at the May 2014 annual meeting.
Stock-based compensation expense, which includes awards settled in shares and in cash and is recognized as a component of SG&A expense, was
$6.7 million
,
$6.2 million
, and
$9.0 million
in 2016, 2015, and 2014, respectively. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards are exercised. The related tax benefit is credited to Shareholders' Equity as the Company is currently in a windfall tax benefit position. The Company
recognized less than
$0.1 million
of tax expense in 2016 and tax benefits of
$0.4 million
and
$0.5 million
in 2015 and 2014, respectively, relating to the issuance of common stock for the exercise/vesting of equity awards.
The following sections provide information on awards settled in shares.
Stock Options/SARs.
The Company grants SARs to certain employees. Upon exercise of vested SARs, the participant will receive a number of shares of common stock equal to the spread (the difference between the market price of the Company’s common shares at the time of the exercise and the strike price established in the SARs agreement) divided by the common share price. The strike price of the SARs is equal to the market value of the Company’s common shares on the day of the grant. The number of SARs available to be issued is established by plans approved by the shareholders. The vesting period and the life of the SARs are established in the SARs agreement at the time of the grant. The exercise of the SARs will be satisfied by the issuance of treasury shares. The SARs vest
three years
from the date of grant. SARs granted prior to 2011 expire in
ten years
, while the SARs granted in 2011 and later expire in
seven years
.
The following table summarizes the Company's SARs activity during 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Exercise
Price Per
Share
|
|
Aggregate
Intrinsic
Value
|
|
Weighted-
average
Remaining
Term (Years)
|
Outstanding at December 31, 2015
|
|
1,046
|
|
|
$
|
30.18
|
|
|
$
|
—
|
|
|
—
|
Granted
|
|
222
|
|
|
25.19
|
|
|
—
|
|
|
—
|
Exercised
|
|
(96
|
)
|
|
24.96
|
|
|
—
|
|
|
—
|
Cancelled
|
|
(30
|
)
|
|
33.33
|
|
|
—
|
|
|
—
|
Outstanding at December 31, 2016
|
|
1,142
|
|
|
29.58
|
|
|
11,612
|
|
|
3.6
|
Vested and expected to vest as of December 31, 2016
|
|
1,142
|
|
|
29.58
|
|
|
11,612
|
|
|
3.6
|
Exercisable at December 31, 2016
|
|
642
|
|
|
28.55
|
|
|
7,262
|
|
|
2.2
|
A summary of the status and changes of shares subject to SARs and the related average price per share follows:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Grant
Date
Fair Value
|
Nonvested as of December 31, 2015
|
|
437
|
|
|
$
|
12.21
|
|
Granted
|
|
222
|
|
|
8.07
|
|
Vested
|
|
(140
|
)
|
|
12.54
|
|
Cancelled
|
|
(19
|
)
|
|
11.33
|
|
Nonvested as of December 31, 2016
|
|
500
|
|
|
10.82
|
|
As of December 31, 2016,
$1.5 million
of expense with respect to nonvested SARs has yet to be recognized as expense over a weighted-average period of approximately
23 months
. The total fair value of shares vested during 2016, 2015, and 2014 was
$1.7 million
,
$2.7 million
, and
$3.2 million
.
The weighted-average grant date fair value for
2016
,
2015
, and
2014
was
$8.07
,
$13.27
, and
$12.48
, respectively. The fair value will be amortized to compensation cost on a straight-line basis over the
three
-year vesting period, or earlier if the employee is retirement eligible as defined in the Plan. Stock-based compensation expense relating to SARs was
$0.9 million
in 2016 and
$2.0 million
in both 2015 and 2014.
The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.25
|
%
|
|
1.47
|
%
|
|
1.64
|
%
|
Dividend yield
|
|
1.4
|
%
|
|
0.9
|
%
|
|
1.0
|
%
|
Volatility
|
|
38.0
|
%
|
|
42.8
|
%
|
|
45.5
|
%
|
Expected lives (in years)
|
|
5.7
|
|
|
5.0
|
|
|
5.0
|
|
The risk-free rate of return was based on U.S. Treasury yields with a maturity equal to the expected life of the award. The dividend yield was based on the Company's historical dividend rate and stock price. The expected volatility of stock was derived by referring to changes in the Company's historical common stock prices over a time-frame similar to the expected life of the award. In addition to considering the vesting period and contractual term of the award for the expected life assumption, the Company analyzes actual historical exercise experience for previously granted awards.
Stock options may be granted to employees or non-employee directors of the Company. There were no stock options outstanding as of year end
2016
or 2015. The cash received from the exercise of stock options
was
$0.4 million
in 2014. The total intrinsic value of options exercised during the year ended December 31, 2014 was
$0.3 million
.
Restricted Stock Units.
The Company may grant restricted stock units to employees and non-employee directors of the Company. These units are restricted and vest over a designated period of time as defined at the date of the grant and are forfeited should the holder’s employment terminate during the restriction period. The fair market value of the restricted shares is determined on the date of the grant and is amortized over the restriction period. The restriction period is typically
three years
unless the recipient is retirement eligible.
The fair value of the restricted stock units settled in stock is based on the closing stock price on the date of grant. The weighted-average grant date fair value for
2016
,
2015
, and
2014
was
$25.96
,
$37.17
, and
$33.29
, respectively. Cash-settled RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stock over the vesting period of
three years
.
Stock-based compensation expense relating to restricted stock units was
$1.3 million
in
2016
,
$2.1 million
in
2015
, and
$1.8 million
in
2014
. The unamortized compensation cost on the outstanding restricted stock was
$1.2 million
as of
December 31, 2016
and is expected to be amortized over a weighted-average period of
19
months. The total fair value of shares vested during 2016, 2015, and 2014 was
$1.9 million
,
$2.3 million
, and
$4.2 million
.
The following table summarizes the stock-settled restricted stock unit activity during
2016
:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2015
|
|
134
|
|
|
$
|
33.32
|
|
Granted
|
|
69
|
|
|
25.96
|
|
Vested
|
|
(60
|
)
|
|
31.30
|
|
Forfeited
|
|
(2
|
)
|
|
35.05
|
|
Outstanding at December 31, 2016
|
|
141
|
|
|
$
|
30.54
|
|
Long-term Incentive Plans.
Under long-term incentive compensation plans, executive officers and selected other employees receive restricted stock unit awards based upon the Company’s performance over the defined period, typically
three years
. Total units earned for grants made in 2016, 2015, and 2014, may vary between
0%
and
200%
of the units granted based on the attainment of performance targets during the related three-year period and continued service. For executive officers, attainment up to
100%
is paid in Materion common shares and is equity classified, while the remainder is classified as a liability award and settled in cash. For all other employees, the entire award is settled in cash. Vesting of performance-based awards is contingent upon the attainment of threshold performance objectives.
The following table summarizes the activity related to equity-based, performance-based restricted stock units during 2016:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2015
|
|
138
|
|
|
$
|
29.56
|
|
Granted
|
|
85
|
|
|
22.77
|
|
Vested
|
|
(35
|
)
|
|
23.90
|
|
Forfeited
|
|
(2
|
)
|
|
33.31
|
|
Outstanding at December 31, 2016
|
|
186
|
|
|
$
|
27.47
|
|
Compensation expense is based upon the performance projections for the
three
-year plan period, the percentage of requisite service rendered, and the fair market value of the Company’s common shares on the date of grant. The offset to the compensation
expense for the portion of the award to be settled in shares is recorded within shareholders’ equity and was
$1.0 million
for
2016
,
$1.4 million
for
2015
, and
$1.0 million
for
2014
.
Directors' Deferred Compensation.
Non-employee directors may defer all or part of their fees into the Company’s common stock. The fair value of the deferred shares is determined at the share acquisition date and is recorded within shareholders’ equity. Subsequent changes in the fair value of the Company’s common shares do not impact the recorded values of the shares.
The following table summarizes the stock activity for the directors' deferred compensation plan during
2016
:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2015
|
|
138
|
|
|
$
|
25.60
|
|
Granted
|
|
20
|
|
|
24.46
|
|
Distributed
|
|
(3
|
)
|
|
22.12
|
|
Outstanding at December 31, 2016
|
|
155
|
|
|
$
|
25.52
|
|
During the years ended
December 31, 2016
,
2015
, and
2014
, the weighted-average grant date fair value was
$24.46
,
$37.08
, and
$33.46
, respectively.
Note P — Fair Value Information and Derivative Financial Instruments
The Company measures and records financial instruments at fair value. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based upon market data (observable inputs) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 — Quoted market prices in active markets for identical assets and liabilities;
Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets at
December 31, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
(Thousands)
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Other
Significant
Unobservable
Inputs
(Level 3)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
1,734
|
|
|
$
|
1,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
691
|
|
|
—
|
|
|
691
|
|
|
—
|
|
Total
|
|
$
|
2,425
|
|
|
$
|
1,734
|
|
|
$
|
691
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
1,734
|
|
|
$
|
1,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total
|
|
$
|
1,735
|
|
|
$
|
1,734
|
|
|
$
|
1
|
|
|
$
|
—
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
2,524
|
|
|
$
|
2,503
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
462
|
|
|
—
|
|
|
462
|
|
|
—
|
|
Total
|
|
$
|
2,986
|
|
|
$
|
2,503
|
|
|
$
|
483
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
2,524
|
|
|
$
|
2,503
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
180
|
|
|
—
|
|
|
180
|
|
|
—
|
|
Total
|
|
$
|
2,704
|
|
|
$
|
2,503
|
|
|
$
|
201
|
|
|
$
|
—
|
|
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values at
December 31, 2016
and 2015.
The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency.
The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.
The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
Precious Metals.
The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions who charge the Company a financing fee based upon the current value of the metal on hand.
In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.
A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.
The use of derivatives is governed by policies adopted by the Audit Committee of the Board of Directors. The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.
The fair values of the outstanding derivatives are recorded as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short term or long term depending upon maturity dates. The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives and balance sheet classification at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
$
|
2,418
|
|
|
$
|
239
|
|
|
$
|
5,138
|
|
|
$
|
60
|
|
Foreign currency forward contracts - euro
|
|
6,493
|
|
|
452
|
|
|
18,181
|
|
|
402
|
|
|
|
8,911
|
|
|
691
|
|
|
23,319
|
|
|
462
|
|
Other liabilities and accrued items
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
—
|
|
|
—
|
|
|
5,102
|
|
|
(94
|
)
|
Foreign currency forward contracts - euro
|
|
537
|
|
|
(1
|
)
|
|
10,514
|
|
|
(86
|
)
|
|
|
537
|
|
|
(1
|
)
|
|
15,616
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,448
|
|
|
$
|
690
|
|
|
$
|
38,935
|
|
|
$
|
282
|
|
All of the foreign currency derivative contracts outstanding at
December 31, 2016
and
2015
were designated and effective as cash flow hedges. There were no precious metal derivative contracts outstanding at
December 31, 2016
and 2015.
There was
no
ineffectiveness associated with the derivative contracts outstanding at
December 31, 2016
or
2015
, and no ineffectiveness expense was recorded in
2016
,
2015
, or
2014
.
The fair value of derivative contracts recorded in accumulated other comprehensive income totaled
$0.7 million
as of
December 31, 2016
. The Company expects to relieve this balance to the Consolidated Statement of Income in
2017
. The fair value of derivative contracts in accumulated other comprehensive income totaled
$0.3 million
at
December 31, 2015
.
Note Q — Contingencies and Commitments
Chronic Beryllium Disease (CBD) Claims
The Company is a defendant from time to time in proceedings in various state and federal courts brought by plaintiffs alleging that they have contracted CBD or related ailments as a result of exposure to beryllium. Plaintiffs in CBD cases seek recovery under theories of negligence and various other legal theories and seek compensatory and punitive damages, in many cases of an unspecified sum. Spouses, if any, often claim loss of consortium.
Employee cases, in which plaintiffs have a high burden of proof, have historically involved relatively small losses to the Company. Third-party plaintiffs (typically employees of customers) face a lower burden of proof than do the Company’s employees, but these cases have generally been covered by varying levels of insurance. Management has vigorously contested the CBD cases brought against the Company.
Non-employee claims for CBD are covered by insurance, subject to certain limitations. The insurance covers defense costs and indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of deductibles. In
2016
and
2015
, defense and indemnity costs were less than the deductible.
There was
one
CBD case outstanding as of December 31, 2015. This case was settled and paid out during 2016. The amount paid for the settlement of this case was not material to the Company's consolidated financial statements.
One
CBD case, originally filed and dismissed during 2015, but reversed and remanded in 2016 to the trial court, was outstanding as of December 31, 2016. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
Although it is not possible to predict the outcome of any pending litigation, the Company provides for costs related to litigation matters when a loss is probable, and the amount is reasonably estimable. Litigation is subject to many uncertainties, and it is possible that some of the actions could be decided unfavorably in amounts exceeding the Company’s reserves. An unfavorable outcome or settlement of a CBD case or adverse media coverage could encourage the commencement of additional similar litigation. The Company is unable to estimate its potential exposure to unasserted claims.
Based upon currently known facts and assuming collectibility of insurance, the Company does not believe that resolution of the current or future beryllium proceedings will have a material adverse effect on the financial condition or cash flow of the Company. However, the Company’s results of operations could be materially affected by unfavorable results in one or more cases.
Insurance Recoverable
After recording and investigating a
$7.4 million
inventory loss in 2012, the Company filed a claim with its insurance provider under existing polices for theft. In 2014, the Company and the insurance company settled the claim, and the Company received a cash payment of
$6.8 million
and recognized the amount in Other-net in the Consolidated Statement of Income.
The Company collected
$5.6 million
and
$4.0 million
during 2015 and 2014, respectively, as part of settlement agreements with contractors and insurance companies for outstanding disputes regarding construction of the Company's beryllium pebble facility located in Elmore, Ohio. The benefit of these settlements was recorded in Other-net in the Consolidated Statements of Income.
Environmental Proceedings
The Company has an active program for environmental compliance that includes the identification of environmental projects and estimating the impact on the Company’s financial performance and available resources. Environmental expenditures that relate to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as appropriate. The Company records reserves for the probable costs for identified environmental remediation projects. The Company’s environmental engineers perform routine ongoing analyses of the remediation sites and will use outside consultants
to assist in their analyses from time to time. Accruals are based upon their analyses and are established based on the reasonably estimable loss or range of loss. The accruals are revised for the results of ongoing studies, changes in strategies, inflation, and for differences between actual and projected costs. The accruals may also be affected by rulings and negotiations with regulatory agencies. The timing of payments often lags the accrual, as environmental projects typically require a number of years to complete.
The environmental reserves recorded represent the Company's best estimate of what is reasonably possible and cover existing or currently foreseen projects based upon current facts and circumstances. The Company does not believe that it is reasonably possible that the cost to resolve environmental matters for sites where the investigative work and work plan development are substantially complete will be materially different than what has been accrued while the ultimate loss contingencies for sites that are in the preliminary stages of investigation cannot be reasonably determined at the present time. As facts and circumstances change, the ultimate cost may be revised, and the recording of additional costs may be material in the period in which the additional costs are accrued. The Company does not believe that the ultimate liability for environmental matters will have a material impact on its financial condition or liquidity due to the nature of known environmental matters and the extended period of time during which environmental remediation normally takes place.
The undiscounted reserve balance at the beginning of the year, the amounts expensed and paid, and the balance at December 31,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
Reserve balance at beginning of year
|
|
$
|
5,714
|
|
|
$
|
4,922
|
|
Expensed
|
|
851
|
|
|
1,445
|
|
Paid
|
|
(524
|
)
|
|
(653
|
)
|
Reserve balance at end of year
|
|
$
|
6,041
|
|
|
$
|
5,714
|
|
Ending balance recorded in:
|
|
|
|
|
Other liabilities and accrued items
|
|
$
|
874
|
|
|
$
|
620
|
|
Other long-term liabilities
|
|
5,167
|
|
|
5,094
|
|
The majority of spending in
2016
and
2015
was for various remediation projects at the Elmore, Ohio plant site.
Asset Retirement Obligations
The following represents a roll forward of our asset retirement obligation liability related to our mine located in Utah for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2016
|
|
2015
|
Asset retirement obligation at beginning of period
|
|
$
|
610
|
|
|
$
|
565
|
|
Accretion expense
|
|
49
|
|
|
45
|
|
Change in liability
|
|
425
|
|
|
—
|
|
Asset retirement obligation at end of period
|
|
$
|
1,084
|
|
|
$
|
610
|
|
Other
The Company is subject to various legal or other proceedings that relate to the ordinary course of its business. The Company believes that the resolution of these proceedings, individually or in the aggregate, will not have a material adverse impact upon the Company’s consolidated financial statements.
At December 31, 2016, the Company has outstanding letters of credit totaling
$28.5 million
related to workers’ compensation, consigned precious metal guarantees, environmental remediation issues, and other matters. The majority of the Company's outstanding letters of credit expire in 2017 and are expected to be renewed.