Notes to Consolidated Financial Statements
1. Basis of Presentation
Core Molding Technologies and its subsidiaries operate in the plastics market in a family of products known as “reinforced plastics.” Reinforced plastics are combinations of resins and reinforcing fibers (typically glass or carbon) that are molded to shape. Core Molding Technologies is a manufacturer of sheet molding compound ("SMC") and molder of fiberglass reinforced plastics. The Company specializes in large-format moldings and offers a wide range of fiberglass processes, including compression molding of SMC, glass mat thermoplastics ("GMT"), bulk molding compounds ("BMC") and direct long-fiber thermoplastics ("D-LFT"); spray-up, hand-lay-up, and resin transfer molding ("RTM"). Additionally, the Company offers reaction injection molding ("RIM"), utilizing dicyclopentadiene technology. Core Molding Technologies operates
five
production facilities in Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; and Matamoros, Mexico.
The Company operates in
one
business segment as a manufacturer of SMC and molder of fiberglass reinforced plastics. The Company produces and sells SMC and molded products for varied markets, including medium and heavy-duty trucks, automobiles, marine, construction and other commercial markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
- The accompanying consolidated financial statements include the accounts of all subsidiaries after elimination of all intercompany accounts, transactions, and profits.
Use of Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Significant estimates relate to allowances for doubtful accounts, inventory reserves, self-insurance reserves related to healthcare and workers compensation, deferred taxes, post retirement benefits, goodwill and long-lived assets. Actual results could differ from those estimates.
Revenue Recognition
- Revenue from product sales is recognized at the time products are shipped and title transfers. Allowances for returned products and other credits are estimated and recorded as revenue is recognized. Tooling revenue is recognized when the customer approves the tool and accepts ownership. Progress billings and expenses are shown net as an asset or liability on the Company’s Consolidated Balance Sheet. Tooling in progress can fluctuate significantly from period to period and is dependent upon the stage of tooling projects and the related billing and expense payment timetable for individual projects and therefore does not necessarily reflect projected income or loss from tooling projects. At
December 31, 2016
, the Company had a net liability related to tooling in progress of $
1,084,000
, which represents approximately
$11,052,000
of progress tooling billings and $
9,968,000
of progress tooling expenses. At
December 31, 2015
, the Company had a net liability related to tooling in progress of $
2,271,000
which represents approximately
$21,967,000
of progress tooling billings and
$19,696,000
of progress tooling expenses.
Cash and Cash Equivalents
-
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash is held primarily in
one
bank. The Company had cash on hand of
$28,285,000
at
December 31, 2016
and
$8,943,000
at
December 31, 2015
.
Accounts Receivable Allowances
-
Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has determined that
no
allowance for doubtful accounts is needed at
December 31, 2016
and had recorded allowance for doubtful accounts of$
40,000
at
December 31, 2015
. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for estimated chargebacks of
$309,000
at
December 31, 2016
and
$523,000
at
December 31, 2015
. There have been no material changes in the methodology of these calculations.
Inventories
-
Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical
and anticipated usage. The Company has recorded an allowance for slow moving and obsolete inventory of
$770,000
at
December 31, 2016
and
$863,000
at
December 31, 2015
.
Property, Plant, and Equipment
- Property, plant, and equipment are recorded at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the assets. The carrying amount of long‑lived assets is evaluated annually to determine if adjustment to the depreciation period or to the unamortized balance is warranted.
Ranges of estimated useful lives for computing depreciation are as follows:
|
|
|
|
Land improvements
|
|
20 years
|
Buildings and improvements
|
|
20 - 40 years
|
Machinery and equipment
|
|
3 - 15 years
|
Tools, dies and patterns
|
|
3 - 5 years
|
Depreciation expense was
$6,217,000
,
$5,955,000
and
$5,009,000
for the years ended December 31,
2016
,
2015
and
2014
, respectively. The Company capitalized interest costs of approximately
$0
and
$2,000
for the years ended December 31,
2016
and
2015
, respectively.
Long-Lived Assets
- Long-lived assets consist primarily of property, plant and equipment and definite-lived intangibles. The Company acquired substantially all of the assets of CPI on March 20, 2015, which resulted in approximately
$650,000
of definite-lived intangibles and
$12,474,000
of property, plant and equipment, all of which were recorded at fair value. The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. The Company evaluates, whether impairment exists for long-lived assets on the basis of undiscounted expected future cash flows from operations before interest. There was
no
impairment of the Company's long-lived assets for the years ended December 31,
2016
,
2015
and
2014
.
Goodwill
- The Company has recorded $
2,403,000
of goodwill as a result of two acquisitions. In 2001, the Company acquired certain assets of Airshield Corporation, and as a result, recorded goodwill in the amount of
$1,097,000
. The Company also acquired substantially all of the assets of CPI on March 20, 2015, which resulted in approximately
$1,306,000
of goodwill.
The Company evaluates goodwill annually on December 31
st
to determine whether impairment exists, or at interim periods if an indicator of possible impairment exists. The Company evaluates goodwill for impairment utilizing the one-step qualitative assessment. We consider relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, entity specific events and capital markets pricing. The Company places more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform the first step of the impairment test.
If the Company's carrying amount is determined to be more likely than not impaired based on the one-step qualitative approach, a quantitative valuation to estimate the fair value of the Company is performed. Fair value measurements are based on a projected discounted cash flow valuation model, in accordance with ASC 350, “Intangibles-Goodwill and Other.”
There was
no
impairment of the Company's goodwill for the years ended December 31,
2016
,
2015
and
2014
.
Income Taxes
- The Company records deferred income taxes for differences between the financial reporting basis and income tax basis of assets and liabilities. A detailed breakout is located in Note 11.
Self-Insurance
- The Company is self-insured with respect to its Columbus and Batavia, Ohio, Gaffney, South Carolina and Brownsville, Texas medical, dental and vision claims and Columbus and Batavia, Ohio workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at
December 31, 2016
and
December 31, 2015
of $
1,139,000
and $
1,074,000
, respectively.
Post Retirement Benefits
- Management records an accrual for post retirement costs associated with the health care plan sponsored by the Company for certain employees. Should actual results differ from the assumptions used to determine the reserves, additional provisions may be required. In particular, increases in future healthcare costs above the assumptions could have an adverse effect on the Company's operations. The effect of a change in healthcare costs is described in Note 12 of the Notes to Consolidated
Financial Statements. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $
8,667,000
at
December 31, 2016
and $
9,006,000
at
December 31, 2015
.
Fair Value of Financial Instruments
- The Company's financial instruments consist of long-term debt, interest rate swaps, foreign currency hedges, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value. Further detail is located in Note 14.
Concentration Risks
- The Company has concentration risk related to significant amounts of sales and accounts receivable with certain customers. Sales to
four
major customers comprised
78%
,
82%
and
87%
of total sales in
2016
,
2015
and
2014
, respectively (see Note 4). Concentrations of accounts receivable balances with
four
customers accounted for
75%
and
88%
of accounts receivable at December 31,
2016
and
2015
, respectively. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses, and such bad debt losses have been historically within the Company's expectations. Sales to certain customers' manufacturing and service locations in Mexico and Canada totaled
32%
,
35%
and
30%
of total sales for
2016
,
2015
and
2014
, respectively.
As of December 31,
2016
, the Company employed a total of
1,247
employees, which consisted of
568
employees in its United States operations and
679
employees in its Mexican operations. Of these
1,247
employees,
246
are covered by a collective bargaining agreement with the International Association of Machinists and Aerospace Workers (“IAM”), which extends to August 10, 2019, and
583
are covered by a collective bargaining agreement with Sindicato de Jorneleros y Obreros, which extends to January 1, 2018.
Earnings Per Common Share
- Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed similarly but include the effect of the assumed exercise of dilutive stock options and vesting of restricted stock under the treasury stock method. A detailed computation of earnings per share is located in Note 3.
Research and Development
- Research and development activities focus on developing new material formulations, new products, new production capabilities and processes, and improving existing products and manufacturing processes. The Company does not maintain a separate research and development organization or facility, but uses its production equipment, as necessary, to support these efforts and cooperates with its customers and its suppliers in research and development efforts. Likewise, manpower to direct and advance research and development is integrated with the existing manufacturing, engineering, production, and quality organizations. Research and development costs, which are expensed as incurred, totaled approximately $
965,000
,
$719,000
and
$475,000
in
2016
,
2015
and
2014
.
Foreign Currency Adjustments
- In conjunction with the Company's acquisition of certain assets of Airshield Corporation, the Company established operations in Mexico. The functional currency for the Mexican operations is the United States dollar. All foreign currency asset and liability amounts are remeasured into United States dollars at end-of-period exchange rates. Income statement accounts are translated at the weighted monthly average rates. Gains and losses resulting from translation of foreign currency financial statements into United States dollars and gains and losses resulting from foreign currency transactions are included in current results of operations. Net foreign currency translation and transaction activity is included in selling, general and administrative expense. This activity resulted in a gain of
$89,000
and $
54,000
in
2016
and
2015
, respectively, and a loss of $
108,000
in
2014
.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASC Topic 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASC Topic 606, as updated by ASU No. 2015-14 in August 2015, has been delayed until the first quarter of fiscal year 2018. ASU 2014-09 will affect the timing of certain revenue related transactions primarily resulting from the earlier recognition of the Company's tooling sales and costs. Upon adoption of ASU 2014-09 tooling sales and costs will be recorded over time on a percentage of completion methodology instead of completed contract methodology. We have not yet determined whether we will adopt the provisions of ASU 2014-09 on a retrospective basis or through a cumulative adjustment to equity. We continue to assess the overall impact the adoption of ASU 2014-09 will have on our consolidated financial statements, and anticipate testing our new controls and processes designed to comply with ASU 2014-09 throughout 2017 to permit adoption by January 1, 2018.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. The ASU simplifies the current standard, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company will adopt this standard's update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. The Company will adopt this standard's update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) ("ASU 2016-09") as part of the FASB simplification initiative. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flow; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) increases the tax withholding requirement threshold to qualify for equity classification. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and early adoption is permitted. The Company will adopt this standard update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). The new standard provides clarification on the classification of the following eight specific cash flow issues: 1) debt prepayments or debt extinguishment costs, 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of borrowing, 3) contingent consideration payments made after a business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this standard update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, Intangible - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard eliminates step 2, which required companies to determine the implied fair value of the reporting unit's goodwill, of the goodwill impairment test. Under this new guidance, companies will perform their annual goodwill impairment test by comparing the reporting unit's carrying value, including goodwill, to the fair value. An impairment charge would be recorded if the carrying value exceeds the reporting unit's fair value. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020 and early adoption is permitted. The Company will adopt this standard update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
3. Net Income per Common Share
Net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of dilutive stock options and restricted stock under the treasury stock method.
The computation of basic and diluted net income per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
$
|
7,411,000
|
|
|
$
|
12,050,000
|
|
|
$
|
9,634,000
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
7,621,000
|
|
|
7,583,000
|
|
|
7,508,000
|
|
Effect of dilutive securities
|
40,000
|
|
|
40,000
|
|
|
45,000
|
|
Weighted average common and potentially issuable common shares outstanding — diluted
|
7,661,000
|
|
|
7,623,000
|
|
|
7,553,000
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.97
|
|
|
$
|
1.59
|
|
|
$
|
1.28
|
|
Diluted net income per common share
|
$
|
0.97
|
|
|
$
|
1.58
|
|
|
$
|
1.28
|
|
At December 31,
2016
and
2015
there were
no
outstanding stock options. At December 31,
2014
all unexercised stock options were included in diluted earnings per share.
4. Major Customers
The Company had four major customers during
2016
, Volvo, Navistar, PACCAR and Yamaha. Major customers are defined as customers whose current year sales individually consist of more than ten percent of total sales during any annual or interim reporting period in the current year. The loss of a significant portion of sales to Navistar, Volvo, PACCAR or Yamaha would have a material adverse effect on the business of the Company.
The following table presents sales revenue for the above-mentioned customers for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Volvo product sales
|
$
|
29,520,000
|
|
|
$
|
53,525,000
|
|
|
$
|
46,340,000
|
|
Volvo tooling sales
|
20,450,000
|
|
|
1,600,000
|
|
|
2,519,000
|
|
Total Volvo sales
|
49,970,000
|
|
|
55,125,000
|
|
|
48,859,000
|
|
|
|
|
|
|
|
Navistar product sales
|
39,756,000
|
|
|
50,169,000
|
|
|
51,254,000
|
|
Navistar tooling sales
|
1,994,000
|
|
|
6,246,000
|
|
|
76,000
|
|
Total Navistar sales
|
41,750,000
|
|
|
56,415,000
|
|
|
51,330,000
|
|
|
|
|
|
|
|
PACCAR product sales
|
24,235,000
|
|
|
33,452,000
|
|
|
35,602,000
|
|
PACCAR tooling sales
|
3,481,000
|
|
|
978,000
|
|
|
526,000
|
|
Total PACCAR sales
|
27,716,000
|
|
|
34,430,000
|
|
|
36,128,000
|
|
|
|
|
|
|
|
Yamaha product sales
|
16,205,000
|
|
|
16,766,000
|
|
|
16,911,000
|
|
Yamaha tooling sales
|
—
|
|
|
—
|
|
|
—
|
|
Total Yamaha sales
|
16,205,000
|
|
|
16,766,000
|
|
|
16,911,000
|
|
|
|
|
|
|
|
|
Other product sales
|
36,908,000
|
|
|
35,191,000
|
|
|
19,637,000
|
|
Other tooling sales
|
2,333,000
|
|
|
1,141,000
|
|
|
2,339,000
|
|
Total other sales
|
39,241,000
|
|
|
36,332,000
|
|
|
21,976,000
|
|
|
|
|
|
|
|
Total product sales
|
146,624,000
|
|
|
189,103,000
|
|
|
169,744,000
|
|
Total tooling sales
|
28,258,000
|
|
|
9,965,000
|
|
|
5,460,000
|
|
Total sales
|
$
|
174,882,000
|
|
|
$
|
199,068,000
|
|
|
$
|
175,204,000
|
|
5. Foreign Operations
In conjunction with the Company's acquisition of certain assets of Airshield Corporation on October 16, 2001, the Company established manufacturing operations in Mexico (under the Maquiladora program). The Mexican operation is a captive manufacturing facility of the Company and the functional currency is United States dollars. Essentially all sales of the Mexican operations are made in United States dollars, which totaled
$49,708,000
,
$69,235,000
and
$61,313,000
in
2016
,
2015
and
2014
, respectively. Expenses are incurred in the United States dollar and the Mexican peso. Expenses incurred in pesos include labor, utilities, supplies and materials, and amounted to approximately
22%
,
19%
and
22%
of sales produced at the Matamoros operations in
2016
,
2015
and
2014
, respectively. The Company's manufacturing operation in Mexico is subject to various political, economic, and other risks and uncertainties including safety and security concerns inherent to Mexico. Among other risks, the Company's Mexican operations are subject to domestic and international customs and tariffs, changing taxation policies, and governmental regulations.
All of the Company's product is sold to U.S. based customers in U.S. dollars. The following table provides information related to sales by country, based on the ship to location of customers' production facilities, for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
119,018,000
|
|
|
$
|
129,651,000
|
|
|
$
|
123,317,000
|
|
Mexico
|
51,389,000
|
|
|
63,586,000
|
|
|
47,772,000
|
|
Canada
|
4,475,000
|
|
|
5,831,000
|
|
|
4,115,000
|
|
Total
|
$
|
174,882,000
|
|
|
$
|
199,068,000
|
|
|
$
|
175,204,000
|
|
The following table provides information related to the location of property, plant and equipment, net, as of December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
United States
|
$
|
42,547,000
|
|
|
$
|
44,191,000
|
|
Mexico
|
28,054,000
|
|
|
29,912,000
|
|
Total
|
$
|
70,601,000
|
|
|
$
|
74,103,000
|
|
6. Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land and land improvements
|
$
|
5,958,000
|
|
|
$
|
5,958,000
|
|
Buildings
|
42,593,000
|
|
|
41,417,000
|
|
Machinery and equipment
|
89,692,000
|
|
|
87,482,000
|
|
Tools, dies, and patterns
|
808,000
|
|
|
808,000
|
|
Additions in progress
|
1,607,000
|
|
|
2,331,000
|
|
Total
|
140,658,000
|
|
|
137,996,000
|
|
Less accumulated depreciation
|
(70,057,000
|
)
|
|
(63,893,000
|
)
|
Property, plant, and equipment - net
|
$
|
70,601,000
|
|
|
$
|
74,103,000
|
|
Additions in progress at December 31,
2016
and
2015
relate to building improvements and equipment purchases that were not yet completed at year end. At December 31,
2016
, commitments for capital expenditures in progress were $
616,000
and included
$316,000
recorded on the balance sheet in accounts payable. At December 31,
2015
, commitments for capital expenditures in progress were
$1,102,000
, and included
$464,000
recorded on the balance sheet in accounts payable. The Company capitalized interest of
$0
and
$2,000
for the years ended December 31,
2016
and
2015
, respectively.
7. Acquisition of CPI
On March 20, 2015, the Company acquired substantially all of the assets of CPI Binani, Inc., a wholly owned subsidiary of Binani Industries Limited, located in Winona, Minnesota for a cash purchase price of
$15,000,000
, which expanded the Company's process capabilities to include D-LFT and diversified the customer base. The purchase price was subject to working capital adjustments resulting in a reduction in the purchase price of
$488,000
.
Cash paid at closing was financed through borrowing under the Company's existing credit facility, as amended and further described in Note 9 below.
Consideration was allocated to assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows:
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
1,615,000
|
|
Inventory
|
|
675,000
|
|
Other Current Assets
|
|
171,000
|
|
Property and Equipment
|
|
12,474,000
|
|
Intangibles
|
|
650,000
|
|
Goodwill
|
|
1,306,000
|
|
Accounts Payable
|
|
(2,277,000
|
)
|
Other Current Liabilities
|
|
(102,000
|
)
|
|
|
$
|
14,512,000
|
|
The purchase price included consideration for strategic benefits, including an assembled workforce, operational infrastructure and synergistic revenue opportunities, which resulted in the recognition of goodwill. The goodwill is deductible for income tax purposes.
The acquisition was not deemed significant to the Company's consolidated balance sheet and results of operations at the time of acquisition. Accordingly, no pro-forma results are provided prior to the effective date of the acquisition. The Company incurred
$303,000
of expenses during the year ended December 31, 2015 associated with the acquisition, which was recorded in selling, general and administrative expense.
8. Goodwill and Intangibles
Goodwill activity for the year ended December 31, 2016 consisted of the following:
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
2,403,000
|
|
Additions
|
|
—
|
|
Impairment
|
|
—
|
|
Balance at December 31, 2016
|
|
$
|
2,403,000
|
|
Intangible assets at December 31, 2016 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(17,000
|
)
|
|
$
|
233,000
|
|
Customer Relationships
|
|
10 Years
|
|
400,000
|
|
|
(70,000
|
)
|
|
330,000
|
|
|
|
|
|
$
|
650,000
|
|
|
$
|
(87,000
|
)
|
|
$
|
563,000
|
|
Intangible assets at December 31, 2015 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(7,000
|
)
|
|
$
|
243,000
|
|
Customer Relationships
|
|
10 Years
|
|
400,000
|
|
|
(30,000
|
)
|
|
370,000
|
|
|
|
|
|
$
|
650,000
|
|
|
$
|
(37,000
|
)
|
|
$
|
613,000
|
|
The aggregate intangible asset amortization expense was
$50,000
and
$37,000
for the years ended December 31, 2016 and 2015 and expects amortization expense to be
$50,000
each year for the next five years. The Company incurred
no
amortization expense for the year ended December 31, 2014.
9. Debt and Leases
Long-term debt consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Capex loan payable to a bank, interest at a variable rate (2.04% at December 31, 2015) with monthly payments of interest and principal over a seven-year period through May 2016.
|
$
|
—
|
|
|
$
|
714,000
|
|
Term loan payable to a bank, interest at a variable rate (2.55% and 2.24% at December 31, 2016 and 2015, respectively) with monthly payments of interest and principal through March 2020.
|
9,750,000
|
|
|
12,750,000
|
|
Revolving Line of Credit
|
—
|
|
|
—
|
|
Total
|
9,750,000
|
|
|
13,464,000
|
|
Less current portion
|
(3,000,000
|
)
|
|
(3,714,000
|
)
|
Long-term debt
|
$
|
6,750,000
|
|
|
$
|
9,750,000
|
|
Credit Agreement
On December 9, 2008, the Company and its wholly owned subsidiary, Corecomposites de Mexico, S. de R.L. de C.V., entered into a credit agreement, as amended from time to time (the "Credit Agreement"), with a lender to provide various financing facilities.
Under this Credit Agreement, as amended most recently with the eleventh amendment on June 21, 2016, the Company received certain loans, subject to the terms and conditions stated in the agreement, which included (1) a
$12,000,000
Capex loan; (2) an
$8,000,000
Mexican loan; (3) an
$18,000,000
variable rate revolving line of credit; (4) a term loan in an original amount of
$15,500,000
; and (5) a Letter of Credit Commitment of up to $250,000, of which $155,000 has been issued. The Credit Agreement is secured by a guarantee of each U.S. subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.
Capex Loan
The
$12,000,000
Capex loan was a construction draw loan that converted to a seven-year term loan with fixed monthly principal payments. Borrowings made pursuant to this loan bear interest, payable monthly at
30 day LIBOR
plus 160 basis points and was paid in full May 2016.
Term Loan
The $15,500,000 Term Loan was used to finance the acquisition of CPI. This commitment has fixed monthly principal payments payable over a five-year period. Borrowings made pursuant to this loan bear interest, payable monthly at
30 day LIBOR
plus 180 basis points.
Mexican Loan
The $8,000,000 Mexican loan was also a construction draw loan to finance the production facility in Matamoros, Mexico that was converted to a five-year term loan with annual payments commencing January 2010. This commitment bore interest at
LIBOR
plus 160 basis points and was paid in full in January 2014.
Revolving Line of Credit
At
December 31, 2016
, the Company had available an
$18,000,000
variable rate revolving line of credit scheduled to mature on May 31, 2018. The revolving line of credit bears interest at
daily LIBOR
plus 160 basis points and is collateralized by all of the present and future assets of the Company and its U.S. subsidiaries (except that only
65%
of the stock issued by Corecomposites de Mexico, S. de C.V. has been pledged).
Annual maturities of long-term debt are as follows:
|
|
|
|
|
2017
|
$
|
3,000,000
|
|
2018
|
3,000,000
|
|
2019
|
3,000,000
|
|
2020
|
750,000
|
|
Thereafter
|
—
|
|
Total
|
$
|
9,750,000
|
|
Interest Rate Swap
On December 18, 2008, the Company entered into an interest rate swap agreement that became effective May 1, 2009 and continued through May 2016, which was designated as a cash flow hedge of the
$12,000,000
Capex loan. Under this agreement, the Company paid a fixed rate of
2.295%
to the counterparty and received 30 day
LIBOR
(
0.44%
at December 31, 2015). Effective March 31, 2009, the interest terms in the Company’s Credit Agreement related to the
$12,000,000
Capex loan were amended. The Company then determined this interest rate swap was no longer highly effective. As a result, the Company discontinued the use of hedge accounting effective March 31, 2009 related to this swap, and began recording mark-to-market adjustments within interest expense in the Company’s Consolidated Statements of Income.
The pre-tax loss previously recognized in Accumulated Other Comprehensive Income (Loss), totaling $146,000 as of March 31, 2009, was being amortized as an increase to interest expense of $2,000 per month, or $1,000 net of tax, over the remaining term of the interest rate swap agreement.
The fair value of the swap as of
December 31, 2016
and
December 31, 2015
was a liability of
$0
and
$2,000
, respectively. The Company recorded interest income of
$2,000
, $
35,000
and $
66,000
for mark-to-market adjustments of fair value related to this swap for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The notional amount of the swap at
December 31, 2016
and
December 31, 2015
was
$0
and
$714,000
, respectively.
For the years ended
December 31, 2016
,
2015
and
2014
, interest expense includes expense of $
2,000
, $
32,000
and $
70,000
, respectively, for settlements related to the Company’s swaps.
Bank Covenants
The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios, fixed charge ratios, and capital expenditures, as well as other customary affirmative and negative covenants. As of
December 31, 2016
, the Company was in compliance with its financial covenants associated with the loans made under the Credit Agreement as described above.
Leases
The Company has entered into an operating lease agreement through July 2019 for the manufacturing facility located in Batavia, Ohio. Additionally, the Company leases a warehouse and distribution center in Brownsville, Texas under a
5
-year operating lease agreement expiring in October 2017.
Total rental expense was $
808,000
, $
696,000
and $
767,000
for
2016
,
2015
and
2014
, respectively. Included in rental expense are both operating lease payments and rental costs related to the use of equipment during the normal course of business under nonbinding terms. Future minimum operating lease payments are as follows:
|
|
|
|
|
2017
|
$
|
482,000
|
|
2018
|
328,000
|
|
2019
|
192,000
|
|
Thereafter
|
—
|
|
Total minimum lease payments
|
$
|
1,002,000
|
|
10. Stock Based Compensation
The Company has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the Company’s stockholders in May 2006. The 2006 Plan allows for grants to directors and employees of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentive awards (“Stock Awards”) up to an aggregate of
3,000,000
awards, each representing a right to buy a share of Core Molding Technologies common stock. Stock Awards can be granted under the 2006 Plan through the earlier of December 31, 2025, or the date the maximum number of available awards under the 2006 Plan have been granted. The number of shares remaining available for future issuance is
1,448,079
.
The options that were granted under the 2006 Plan had vesting schedules of
five
or nine and one-half years from the date of grant, or immediately upon change in ownership, were not exercisable after
ten
years from the date of grant, and were granted at prices which equal or exceed the fair market value of Core Molding Technologies common stock at the date of grant. Restricted stock granted under the 2006 Plan require the individuals receiving the grants to maintain certain common stock ownership thresholds and vest over
three
years or upon the date of the participants' sixty-fifth birthday, death, disability or change in control.
Core Molding Technologies follows the provisions of FASB ASC 718 requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award). Core Molding Technologies adopted FASB ASC 718 using the modified prospective method. Under this method, FASB ASC 718 applies to all awards granted or modified after the date of adoption. In addition, compensation expense has been recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period.
Stock Options
There was
no
compensation expense related to incentive stock options in the years ended December 31,
2016
,
2015
, and
2014
.
During the years ended December 31,
2016
,
2015
and
2014
Core Molding Technologies received approximately
$0
, $
19,000
and $
328,000
, respectively, in cash from the exercise of stock options. The aggregate intrinsic value of these options was approximately $
0
, $
26,000
and $
915,000
, respectively, in each of those years. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
In 2016 there were no unexercised options outstanding, therefore the Company did not incur any tax effect related to disqualified dispositions. Tax benefit received as a result of disqualified dispositions related to stock options was
$9,000
, for the year ended December 31, 2015, which was recorded as a credit to income tax expense of
$6,000
and a credit to additional paid in capital of
$3,000
. For the year ended December 31, 2014 the tax benefit received as a result of disqualified dispositions related to stock options was $
311,000
, which was recorded as a credit to income tax expense of $
84,000
and a credit to additional paid in capital of $
227,000
.
The following summarizes the activity relating to stock options under the plans mentioned above for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Number
of
Options
|
|
Wtd. Avg.
Exercise Price
|
|
Number
of
Options
|
|
Wtd. Avg.
Exercise Price
|
|
Number
of
Options
|
|
Wtd. Avg.
Exercise Price
|
Outstanding - beginning of year
|
—
|
|
|
$
|
—
|
|
|
3,000
|
|
|
$
|
6.40
|
|
|
227,750
|
|
|
$
|
3.57
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
(3,000
|
)
|
|
6.40
|
|
|
(224,750
|
)
|
|
3.53
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding - end of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
3,000
|
|
|
$
|
6.40
|
|
Exercisable at December 31
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
3,000
|
|
|
$
|
6.40
|
|
Vested or expected to vest at December 31
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
3,000
|
|
|
$
|
6.40
|
|
There was no unvested stock options and no unrecognized compensation cost related to stock options after 2013.
Restricted Stock
The Company grants shares of its common stock to certain directors, officers, and key managers in the form of unvested stock (“Restricted Stock”). These awards are recorded at the market value of Core Molding Technologies’ common stock on the date of issuance and amortized ratably as compensation expense over the applicable vesting period.
The following summarizes the status of Restricted Stock and changes during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
Unvested - beginning of year
|
112,907
|
|
|
$
|
16.86
|
|
|
104,068
|
|
|
$
|
10.79
|
|
|
98,281
|
|
|
$
|
8.91
|
|
Granted
|
122,963
|
|
|
12.59
|
|
|
56,662
|
|
|
24.39
|
|
|
81,763
|
|
|
12.04
|
|
Vested
|
(49,183
|
)
|
|
14.16
|
|
|
(46,629
|
)
|
|
11.82
|
|
|
(75,976
|
)
|
|
10.03
|
|
Forfeited
|
(28,426
|
)
|
|
15.93
|
|
|
(1,194
|
)
|
|
24.39
|
|
|
—
|
|
|
—
|
|
Unvested - end of year
|
158,261
|
|
|
$
|
14.55
|
|
|
112,907
|
|
|
$
|
16.86
|
|
|
104,068
|
|
|
$
|
10.79
|
|
At
December 31, 2016
and
2015
, there was $
1,356,000
and $
1,263,000
, respectively, of total unrecognized compensation expense related to Restricted Stock granted under the 2006 Plan. That cost is expected to be recognized over the weighted-average period of
1.5
years. Total compensation expense related to restricted stock grants for the years ended
December 31, 2016
,
2015
and
2014
was $
1,003,000
, $
785,000
and $
744,000
, respectively, and is recorded as selling, general and administrative expense.
Compensation expense for restricted stock is recorded at the fair market value at the time of the grant over vesting period of the restricted stock grant. The Company does not receive a tax deduction for restricted stock until the restricted stock vests. The tax deduction for restricted stock is based on the fair market value on the vesting date. Taxes payable for vested restricted stock value below the fair market value at grant date amounted to $
16,000
for the year ended
December 31, 2016
. Tax benefits received for vested restricted stock in excess of the fair market value at grant date amounted to $
202,000
and $
84,000
for the years ended
December 31, 2015
and
2014
, respectively.
During
2016
,
2015
and
2014
, employees surrendered
10,590
,
12,141
and
21,797
shares, respectfully, of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted stock.
11. Income Taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal - US
|
$
|
3,408,000
|
|
|
$
|
4,466,000
|
|
|
$
|
1,875,000
|
|
Federal - Foreign
|
—
|
|
|
405,000
|
|
|
453,000
|
|
State and local
|
2,000
|
|
|
18,000
|
|
|
42,000
|
|
|
3,410,000
|
|
|
4,889,000
|
|
|
2,370,000
|
|
Deferred:
|
|
|
|
|
|
Federal
|
490,000
|
|
|
1,143,000
|
|
|
2,423,000
|
|
Federal- Foreign
|
(86,000
|
)
|
|
27,000
|
|
|
(29,000
|
)
|
State and local
|
22,000
|
|
|
59,000
|
|
|
127,000
|
|
|
426,000
|
|
|
1,229,000
|
|
|
2,521,000
|
|
Provision for income taxes
|
$
|
3,836,000
|
|
|
$
|
6,118,000
|
|
|
$
|
4,891,000
|
|
A reconciliation of the income tax provision based on the federal statutory income tax rate to the Company's income tax provision for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Provision at federal statutory rate - US
|
$
|
3,823,000
|
|
|
$
|
6,177,000
|
|
|
$
|
4,938,000
|
|
Effect of foreign taxes
|
34,000
|
|
|
(84,000
|
)
|
|
(115,000
|
)
|
Disqualified stock options
|
—
|
|
|
(5,000
|
)
|
|
(84,000
|
)
|
State and local tax expense, net of federal benefit
|
24,000
|
|
|
76,000
|
|
|
170,000
|
|
Other
|
(45,000
|
)
|
|
(46,000
|
)
|
|
(18,000
|
)
|
Provision for income taxes
|
$
|
3,836,000
|
|
|
$
|
6,118,000
|
|
|
$
|
4,891,000
|
|
In October 2016, the Internal Revenue Service entered into a unilateral agreement with the Large Taxpayer Division of Mexico's Servicio de Administracion Tributaria (SAT) to provide for a Fast Track methodology to resolve all pending Advanced Pricing Agreements (APA) for the Maquiladora industry. The Company's Mexican subsidiary filed an APA and qualifies for and has adopted this methodology. The cumulative change for 2014 through 2016 results in a transfer pricing adjustment in 2016 increasing the parent company's income and a resulting reduction in income for the Mexican subsidiary. This resulted in creating a
$321,000
operating loss in 2016 for the Mexican subsidiary. This net operating loss carryforward ("NOL") is available to offset future taxable income in Mexico. The Company anticipates utilizing this NOL in 2017, therefore
no
valuation allowance has been recorded.
Taxes payable for vested restricted stock value below the fair market value at grant date amounted to
$16,000
for the year ended
December 31, 2016
. Certain tax benefits related to incentive stock options and vesting of restricted stock totaled
$211,000
and
$395,000
for the years ended December 31,
2015
and
2014
, respectively.
The Company performs an analysis to evaluate the balance of deferred tax assets that will be realized. The analysis is based on the premise that the deferred tax benefits will be realized through the generation of future taxable income. Based on the analysis, the Company has not realized a valuation allowance on the deferred tax assets as of December 31,
2016
and
2015
.
Deferred tax assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Current asset (liability):
|
|
|
|
Accrued liabilities
|
$
|
938,000
|
|
|
$
|
820,000
|
|
Accounts receivable
|
110,000
|
|
|
202,000
|
|
Inventory
|
588,000
|
|
|
698,000
|
|
Other, net
|
(255,000
|
)
|
|
(122,000
|
)
|
Total current asset
|
1,381,000
|
|
|
1,598,000
|
|
|
|
|
|
Non-current asset (liability):
|
|
|
|
Property, plant, and equipment
|
(5,274,000
|
)
|
|
(4,844,000
|
)
|
Post retirement benefits
|
3,212,000
|
|
|
3,350,000
|
|
Other, net
|
(311,000
|
)
|
|
(758,000
|
)
|
Total non-current asset (liability)
|
(2,373,000
|
)
|
|
(2,252,000
|
)
|
Total deferred tax asset (liability) - net
|
$
|
(992,000
|
)
|
|
$
|
(654,000
|
)
|
At December 31,
2016
, a provision has not been made for U.S. taxes on accumulated undistributed earnings of approximately
$6,965,000
of the Company's Mexican subsidiary that would become payable upon repatriation to the United States. It is the intention of the Company to reinvest all such earnings in operations and facilities outside of the United States.
At December 31,
2016
and
2015
the Company had
no
liability for unrecognized tax benefits under guidance relating to tax uncertainties. The Company does not anticipate that the unrecognized tax benefits will significantly change within the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction, Mexico and various state and local jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for the years before 2013, and no longer subject to Mexican income tax examinations by Mexican authorities for the years before 2011.
12. Post Retirement Benefits
The Company provides post retirement benefits to certain of its United States employees, including contributions to a multi-employer defined benefit pension plan, health care and life insurance benefits, and contributions to
three
401(k) defined contribution plans.
The Company contributes to a multi-employer defined benefit pension plan for its employees represented by the International Association of Machinists and Aerospace Workers ("IAM") at the Company’s Columbus, Ohio production facility. The Company does not administer this plan and contributions are determined in accordance with provisions of the collective bargaining agreement. The risks of participating in this multi-employer plan are different from a single-employer plan in the following aspects:
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If the Company chooses to stop participating in its multi-employer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
The Company’s participation in the multi-employer defined benefit pension plan for the years ended December 31,
2016
and
2015
is outlined in the table below. The most recent Pension Protection Act ("PPA") zone status available in
2016
and
2015
is for the plan’s year-end at December 31,
2015
, and December 31,
2014
, respectively. The zone status is based on information the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than
65%
funded, plans in the yellow zone are less than
80%
funded, and plans in the green zone are at least
80%
funded. The “FIP/RP Status Pending/Implemented” column indicates whether a financial improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or has been implemented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension Plan Number
|
|
Pension Protection Act Zone Status
|
|
FIP/RP Status Pending/ Implemented
|
|
Contributions of the Company
|
|
Surcharge Imposed
|
|
Expiration Date of Collective Bargaining Agreement
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
|
IAM National Pension Fund / National Pension Plan
(A)
|
|
51-6031295 - 002
|
|
Green as of 12/31/15
|
|
Green as of 12/31/14
|
|
No
|
|
$710,000
|
|
$863,000
|
|
No
|
|
8/10/2019
|
|
|
|
|
|
|
Total Contributions:
|
|
$710,000
|
|
$863,000
|
|
|
|
|
(A)
The plan re-certified its zone status after using the amortization provisions of the Code. The Company's contributions to the plan did not represent more than
5%
of total contributions to the plan as indicated in the plan's most recently available annual report for the plan year ended December 31, 2015. Under the terms of the collective-bargaining agreement, the Company is required to make contributions to the plan for each hour worked up to a maximum of
40
hours per person, per week, at the following rates:
$1.45
per hour from August 8, 2016 through August 6, 2017;
$1.50
per hour from August 7, 2017 through August 5, 2018;
$1.55
per hour from August 6, 2018 through August 10, 2019.
Prior to the acquisition of Columbus Plastics, certain of the Company's employees were participants, or were eligible to participate, in Navistar's post retirement health and life insurance benefit plan. This plan provides healthcare and life insurance benefits for certain employees upon their retirement, along with their spouses and certain dependents and requires cost sharing between the Company, Navistar and the participants, in the form of premiums, co-payments, and deductibles. The Company and Navistar share the cost of benefits for these employees, using a formula that allocates the cost based upon the respective portion of time that the employee was an active service participant after the acquisition of Columbus Plastics to the period of active service prior to the acquisition of Columbus Plastics.
The Company also sponsors a post retirement health and life insurance benefit plan for certain union retirees of its Columbus, Ohio production facility. In August 2010, as part of a new collective-bargaining agreement, the post retirement health and life insurance benefits for all current and future represented employees who were not retired were eliminated in exchange for a one-time cash payment. Individuals who retired prior to August 2010 remain eligible for post retirement health and life insurance benefits.
The elimination of post retirement health and life insurance benefits described above resulted in a reduction of the Company’s post retirement benefits liability of approximately
$10,282,000
in 2010. This reduction in post retirement benefits liability was treated as a negative plan amendment and is being amortized as a reduction to net periodic benefit cost over approximately
twenty
years, the actuarial life expectancy of the remaining participants in the plan at the time of the amendment. This negative plan
amendment resulted in net periodic benefit cost reductions of approximately
$496,000
in
2016
,
2015
and
2014
, and will result in net periodic benefit cost reductions of approximately
$496,000
in
2017
and each year thereafter during the amortization period.
The funded status of the Company's post retirement health and life insurance benefits plan as of December 31,
2016
and
2015
and reconciliation with the amounts recognized in the consolidated balance sheets are provided below.
|
|
|
|
|
|
|
|
|
|
Post Retirement Benefits
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at January 1
|
$
|
9,006,000
|
|
|
$
|
9,172,000
|
|
Interest cost
|
323,000
|
|
|
316,000
|
|
Unrecognized gain
|
(320,000
|
)
|
|
(48,000
|
)
|
Benefits paid
|
(342,000
|
)
|
|
(434,000
|
)
|
Benefit obligation at December 31
|
$
|
8,667,000
|
|
|
$
|
9,006,000
|
|
|
|
|
|
Plan Assets
|
—
|
|
|
—
|
|
|
|
|
|
Amounts recorded in accumulated other comprehensive income:
|
|
|
|
Prior service credit
|
$
|
(7,098,000
|
)
|
|
$
|
(7,594,000
|
)
|
Net loss
|
3,464,000
|
|
|
3,939,000
|
|
Total
|
$
|
(3,634,000
|
)
|
|
$
|
(3,655,000
|
)
|
|
|
|
|
Weighted-average assumptions as of December 31:
|
|
|
|
Discount rate used to determine benefit obligation and net
periodic benefit cost
|
3.8
|
%
|
|
4.1
|
%
|
The components of expense for all of the Company's post retirement benefit plans for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Pension expense:
|
|
|
|
|
|
Multi-employer plan
|
$
|
710,000
|
|
|
$
|
863,000
|
|
|
$
|
719,000
|
|
Defined contribution plans
|
766,000
|
|
|
836,000
|
|
|
701,000
|
|
Total pension expense
|
1,476,000
|
|
|
1,699,000
|
|
|
1,420,000
|
|
|
|
|
|
|
|
Health and life insurance:
|
|
|
|
|
|
Interest cost
|
323,000
|
|
|
316,000
|
|
|
277,000
|
|
Amortization of prior service costs
|
(496,000
|
)
|
|
(496,000
|
)
|
|
(496,000
|
)
|
Amortization of net loss
|
155,000
|
|
|
169,000
|
|
|
47,000
|
|
Net periodic benefit cost
|
(18,000
|
)
|
|
(11,000
|
)
|
|
(172,000
|
)
|
Total post retirement benefits expense
|
$
|
1,458,000
|
|
|
$
|
1,688,000
|
|
|
$
|
1,248,000
|
|
The Company accounts for post retirement benefits under FASB ASC 715, which requires the recognition of the funded status of a defined benefit pension or post retirement plan in the consolidated balance sheets. For the year ended December 31,
2016
and
2015
, the Company recognized a net actuarial
gain
of $
320,000
and $
48,000
, respectively, which was recorded in accumulated other comprehensive income.
Amounts not yet recognized as a component of net periodic benefit costs at December 31,
2016
and
2015
were a net credit of $
3,634,000
and $
3,655,000
, respectively. The amount in accumulated other comprehensive income expected to be recognized as components of net periodic post retirement cost during
2017
consists of a prior service credit of $
496,000
, and a net loss of $
149,000
. In addition,
2017
interest expense related to post retirement healthcare is expected to be $
298,000
, for a total post retirement healthcare net
gain
of approximately $
49,000
in
2017
. The Company expects benefits paid in
2017
to be consistent with estimated future benefit payments as shown in the table below.
The weighted average rate of increase in the per capita cost of covered health care benefits is projected to be
7%
. The rate is projected to decrease gradually to
5%
by the year 2025 and remain at that level thereafter. The comparable assumptions for the prior year were
6%
and
5%
, respectively.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
|
|
|
|
|
|
|
|
|
|
1- Percentage
Point Increase
|
|
1-Percentage
Point Decrease
|
Effect on total of service and interest cost components
|
$
|
43,000
|
|
|
$
|
(50,000
|
)
|
Effect on post retirement benefit obligation
|
$
|
941,000
|
|
|
$
|
(800,000
|
)
|
The estimated future benefit payments of the health care plan are as follows:
|
|
|
|
|
Year
|
Postretirement Health Care Benefits Plan
|
2017
|
$
|
1,018,000
|
|
2018
|
411,000
|
|
2019
|
432,000
|
|
2020
|
461,000
|
|
2021
|
485,000
|
|
2022-2026
|
2,515,000
|
|
13. Commitments and Contingencies
From time to time, the Company is involved in litigation incidental to the conduct of its business. However, the Company is presently not involved in any legal proceedings which in the opinion of management are likely to have a material adverse effect on the Company's consolidated financial position or results of operations.
14. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
The three levels are defined as follows:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets and liabilities.
|
|
|
Level 2 -
|
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
|
|
|
Level 3 -
|
Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
|
The Company’s financial instruments consist of debt, interest rate swap, foreign currency derivatives, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value. During 2016, the Company had two Level 2 fair value measurements, which related to the Company’s interest rate swap and foreign currency derivatives.
Interest rate swap
The Company utilized an interest rate swap contract to manage its targeted mix of fixed and floating rate debt, and this swap was valued using observable benchmark rates at commonly quoted intervals for the full term of the swap (market approach). The interest rate swap, discussed in detail in Note 9, was deemed immaterial to the financial statements.
Derivative and hedging activities
The Company conducts business in Mexico and pays certain expenses in Mexican Pesos. The Company is exposed to foreign currency exchange risk between the U.S. dollar and the Mexican Peso, which could impact the Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. dollars for a fixed amount of Mexican Pesos, which will be used to fund future peso cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period. Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the Mexican Peso. As of
December 31, 2016
, the Company had
no
ineffective portion related to the cash flow hedges.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivatives Instruments
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign exchange contracts
|
Prepaid expense other current assets
|
|
—
|
|
|
|
Accrued liabilities other
|
|
$
|
303,000
|
|
Notional contract values
|
|
|
—
|
|
|
|
|
|
$
|
6,502,000
|
|
The Company had
no
derivatives designated as hedging instruments as of
December 31, 2015
. As of
December 31, 2016
, the Company had foreign exchange contracts related to the Mexican Peso with exchange rates ranging from 20.01 to 20.68.
The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in subtopic 815-20 Cash Flow Hedging Relationship
|
|
Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative
|
|
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
(A)
|
|
Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
|
2016
|
2015
|
2014
|
|
|
2016
|
2015
|
2014
|
Foreign exchange contracts
|
|
$(289,000)
|
—
|
—
|
|
Cost of goods sold
|
|
$12,000
|
—
|
—
|
|
|
Sales, general and administrative expense
|
|
$2,000
|
—
|
—
|
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of Mexican Peso spend.
Non-recurring fair value measurements
There were
no
non-recurring fair value measurements for the year ended
December 31, 2016
. At
December 31, 2015
the Company's assets measured at fair value on a non-recurring basis related to the acquisition of substantially all of the assets of CPI, as disclosed in Note 7.
15. Accumulated Other Comprehensive Income
The following table presents changes in Accumulated Other Comprehensive Income by component, net of tax, for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Derivative Activities
(A)
|
|
Post Retirement Benefit Plan Items
(B)
|
|
Total
|
2015:
|
|
|
|
|
|
Balance at January 1, 2015
|
$
|
—
|
|
|
$
|
2,830,000
|
|
|
$
|
2,830,000
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
48,000
|
|
|
48,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(306,000
|
)
|
|
(306,000
|
)
|
Income tax (expense) benefit
|
—
|
|
|
73,000
|
|
|
73,000
|
|
Balance at December 31, 2015
|
$
|
—
|
|
|
$
|
2,645,000
|
|
|
$
|
2,645,000
|
|
|
|
|
|
|
|
2016:
|
|
|
|
|
|
Balance at January 1, 2016
|
$
|
—
|
|
|
$
|
2,645,000
|
|
|
$
|
2,645,000
|
|
Other comprehensive income before reclassifications
|
(289,000
|
)
|
|
319,000
|
|
|
30,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
(14,000
|
)
|
|
(336,000
|
)
|
|
(350,000
|
)
|
Income tax (expense) benefit
|
103,000
|
|
|
(14,000
|
)
|
|
89,000
|
|
Balance at December 31, 2016
|
$
|
(200,000
|
)
|
|
$
|
2,614,000
|
|
|
$
|
2,414,000
|
|
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of Mexican Peso spend. The tax effect of the foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income.
(B)
The Company has historically disclosed both interest rate swap activity and post-retirement benefit activity separately, however due to immaterial interest rate swap activity the components associated with interest rate swaps have been combined in the post retirement disclosures above. The effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in total cost of sales on the Consolidated Statements of Income. These Accumulated Other Comprehensive Income components are included in the computation of net periodic benefit cost (see Note 12 "Post Retirement Benefits" for additional details). The tax effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income.
16. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2016
,
2015
and
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Total Year
|
2016:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
42,530,000
|
|
|
$
|
36,813,000
|
|
|
$
|
33,816,000
|
|
|
$
|
33,465,000
|
|
|
$
|
146,624,000
|
|
Tooling sales
|
2,938,000
|
|
|
2,193,000
|
|
|
7,520,000
|
|
|
15,607,000
|
|
|
28,258,000
|
|
Net sales
|
45,468,000
|
|
|
39,006,000
|
|
|
41,336,000
|
|
|
49,072,000
|
|
|
174,882,000
|
|
Gross margin
|
8,863,000
|
|
|
6,323,000
|
|
|
5,581,000
|
|
|
7,157,000
|
|
|
27,924,000
|
|
Operating income
|
4,442,000
|
|
|
2,307,000
|
|
|
1,657,000
|
|
|
3,139,000
|
|
|
11,545,000
|
|
Net income
|
2,890,000
|
|
|
1,460,000
|
|
|
1,029,000
|
|
|
2,032,000
|
|
|
7,411,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.38
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.27
|
|
|
$
|
0.97
|
|
Diluted (1)
|
$
|
0.38
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.26
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
2015:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
47,854,000
|
|
|
$
|
53,514,000
|
|
|
$
|
44,243,000
|
|
|
$
|
43,492,000
|
|
|
$
|
189,103,000
|
|
Tooling sales
|
1,745,000
|
|
|
1,342,000
|
|
|
3,806,000
|
|
|
3,072,000
|
|
|
9,965,000
|
|
Net sales
|
49,599,000
|
|
|
54,856,000
|
|
|
48,049,000
|
|
|
46,564,000
|
|
|
199,068,000
|
|
Gross margin
|
9,025,000
|
|
|
10,982,000
|
|
|
8,311,000
|
|
|
7,934,000
|
|
|
36,252,000
|
|
Operating income
|
4,890,000
|
|
|
6,232,000
|
|
|
3,902,000
|
|
|
3,474,000
|
|
|
18,498,000
|
|
Net income
|
3,196,000
|
|
|
4,039,000
|
|
|
2,484,000
|
|
|
2,331,000
|
|
|
12,050,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.42
|
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
1.59
|
|
Diluted (1)
|
$
|
0.42
|
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
2014:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
40,664,000
|
|
|
$
|
43,317,000
|
|
|
$
|
43,171,000
|
|
|
$
|
42,592,000
|
|
|
$
|
169,744,000
|
|
Tooling sales
|
411,000
|
|
|
2,807,000
|
|
|
420,000
|
|
|
1,822,000
|
|
|
5,460,000
|
|
Net sales
|
41,075,000
|
|
|
46,124,000
|
|
|
43,591,000
|
|
|
44,414,000
|
|
|
175,204,000
|
|
Gross margin
|
6,645,000
|
|
|
7,599,000
|
|
|
8,147,000
|
|
|
7,795,000
|
|
|
30,186,000
|
|
Operating income
|
3,116,000
|
|
|
3,873,000
|
|
|
3,704,000
|
|
|
3,954,000
|
|
|
14,647,000
|
|
Net income
|
2,120,000
|
|
|
2,520,000
|
|
|
2,428,000
|
|
|
2,566,000
|
|
|
9,634,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.29
|
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
1.28
|
|
Diluted (1)
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
1.28
|
|
(1)
Sum of the quarters may not sum to total year due to rounding.