Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position of Core Molding Technologies, Inc. and its subsidiaries (“Core Molding Technologies” or the “Company”) at September 30, 2019, and the results of operations and cash flows for the nine months ended September 30, 2019. The Company has reclassified certain prior-year amounts to conform to the current-year's presentation. The “Notes to Consolidated Financial Statements” contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, should be read in conjunction with these consolidated financial statements.
Core Molding Technologies is a manufacturer of sheet molding compound ("SMC") and molder of thermoset and thermoplastic products. The Company operates in one operating segment as a molder of thermoplastic and thermoset structural products. The Company's operating segment consists of two component reporting units, Core Traditional and Horizon Plastics. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, automobiles, marine, construction and other commercial markets. The Company offers customers a wide range of manufacturing processes to fit various program volume and investment requirements. These processes include compression molding of SMC, bulk molding compounds ("BMC"), resin transfer molding ("RTM"), liquid molding of dicyclopentadiene ("DCPD"), spray-up and hand-lay-up, glass mat thermoplastics ("GMT"), direct long-fiber thermoplastics ("D-LFT") and structural foam and structural web injection molding ("SIM"). Core Molding Technologies has its headquarters in Columbus, Ohio, and operates production facilities in Columbus and Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; Matamoros and Escobedo, Mexico; and Cobourg, Ontario, Canada.
2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Going Concern: Under FASB ASU 2014-15, “Presentation of Financial Statements - Going Concern,” management is required to evaluate conditions or events as related to uncertainties that raise substantial doubt about the Company’s ability to continue as a going concern and to provide related financial disclosures, as applicable. Our consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As further discussed in Note 12 - Debt, as of September 30, 2019, the Company was not in compliance with the fixed charge coverage ratio requirement under the Company's Amended and Restated Credit Agreement, dated January 16, 2018 (the “A/R Credit Agreement”), with KeyBank National Association as the administrative agent (the "Administrative Agent") and various other financial institutions thereto as lenders (the "Lenders"). As a result of this violation, the Company is in negotiations with the Administrative Agent to enter into a forbearance agreement to address the non-compliance and establish milestones related to restructuring or refinancing its existing debt.
The Company continues to have the ability to draw on the revolving line of credit while it is negotiating a forbearance agreement with the Administrative Agent. However, though it is not anticipated, until an agreement between the Company and the Lenders under the A/R Credit Agreement is in effect, the Lenders may terminate their funding and demand repayment of all amounts outstanding under the A/R Credit Agreement. Accordingly, the Company’s remaining long-term debt under the A/R Credit Agreement, consisting of $59,037,000 in borrowings under the revolving credit commitment and the loan commitments, was classified as a current liability in the Company’s consolidated balance sheet as of September 30, 2019. As a result, the Company’s current liabilities exceeded its current assets by $19,739,000 as of September 30, 2019. If the Lenders were to call the loans or demand repayment of all existing borrowings, this could result in the Company being unable to meet its working capital obligations.
Management is pursuing the restructuring or refinancing of its existing obligations under the A/R Credit Agreement. The Company is evaluating several financing options with multiple providers to refinance some or all of the current obligations under the A/R Credit Agreement. The Company is considering financing options including an asset backed lending facility using the Company’s accounts receivable and inventories as security, term loans secured with the Company’s real estate and machinery and equipment, sale and leaseback of Company owned real estate and potential equity financing. The Company has engaged Huron Consulting Services to evaluate the Company’s turnaround financial projections, review with management various strategic alternatives that could result in a financing arrangement supported by projected future performance and serve as the Company’s financial advisor to work through a potential modification of the existing A/R Credit Agreement. The Company has engaged a third party firm to appraise the Company’s assets in order to assess the financing capacity available from those assets. The Company has obtained term sheets for new financing from several potential financers. Any new financing remains subject to asset appraisals, field exams, financial projection due diligence, real estate environmental reviews, and other customary legal documentation. The Company is working to implement alternative financing or execute an amendment to the A/R Credit Agreement within a time period acceptable to its existing Lenders.
While the Company is working with the existing lenders to enter into a forbearance agreement, it can not guarantee the parties will be able to reach mutually agreeable terms, or predict if the Lenders will exercise their rights and remedies under the A/R Credit Agreement beyond the term of any forbearance agreement. Additionally, since the Company has no firm commitments for additional financing, there can be no assurances that the Company will be able to secure additional financing on terms that are acceptable to the Company, or at all. As there can be no assurance that the Company will be able to successfully implement its refinancing plan, these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company's consolidated financial statements do not include adjustments, if any, that might arise from the outcome of this uncertainty.
Management has been executing on its turnaround plan that started in December of 2018 and has been successful in improving equipment uptime, improving employee retention and reducing premium freight costs for expediting shipments to customers. While management believes these improvements have been successful and were the priority of the turnaround plan, operational efficiency improvements at the plants have not resulted in the level of financial improvements anticipated. Higher material usage and labor variances have impacted earnings and caused us to not meet forecasts established in the first quarter of 2019 when the Company entered into the First Amendment to the A/R Credit Agreement. Management has, or is in the process of taking, the following actions to improve financial performance at its operating facilities:
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•
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Improved operational management team through hiring of new plant managers at several of our plants to provide stronger leadership
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•
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Developed specific action plans focused on reducing material usage and improving labor productivity
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•
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Implemented business and financial management systems to monitor performance by plant and drive improvement through timely identification of operational challenges
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•
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Implementation of IATF certification process
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•
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Implemented inventory management systems to reduce stock outage events which cause downtime and labor inefficiency
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•
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Implemented customer price increases where margin on product was not meeting profitability targets, and evaluated relationships with major customers to assess ongoing profitability of those relationships. On November 15, 2019 the Company provided notice to the Volvo Group (“Volvo”) of the Company’s intention to terminate its agreement with Volvo, with such termination to become effective twelve months from the date of notice, absent the parties reaching mutually agreeable terms upon which to continue their relationship. Sales to Volvo amounted to approximately 17%, 22%, and 29% of total sales for 2018, 2017, and 2016, respectively and 18% of sales through the nine-months ended September 30, 2019.
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•
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Implemented cost saving measures and actions to align controllable spending and labor workforce to reduced sales volumes in the current truck market
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Revenue Recognition: The Company recognizes revenue from two streams, product revenue and tooling revenue. Product revenue is earned from the manufacture and sale of sheet molding compound and thermoset and thermoplastic products. Revenue from product sales is generally recognized as products are shipped, as the Company transfers title and risk of ownership to the customer and is entitled to payment. In limited circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes title and risk of ownership at the Company's production facility.
Tooling revenue is earned from manufacturing tools, molds and assembly equipment as part of a tooling program for a customer. Given that the Company is providing a significant service of producing highly interdependent component parts of the tooling program, each tooling program consists of a single performance obligation to provide the customer the capability to produce a single product. Based on the arrangement with the customer, the Company recognizes revenue either at a point in time or over time. When the Company does not have an enforceable right to payment, the Company recognizes tooling revenue at a point in
time. In such cases, the Company recognizes revenue upon customer acceptance, which is when the customer has legal title to the tools.
Certain tooling programs include an enforceable right to payment. In those cases, the Company recognizes revenue over time based on the extent of progress towards completion of its performance obligation. The Company uses a cost-to-cost measure of progress for such contracts because it best depicts the transfer of value to the customer and also correlates with the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. Under the cost-to-cost measure of progress, progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
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 recorded an allowance for doubtful accounts of $51,000 and $25,000 at September 30, 2019 and December 31, 2018, respectively.
Management also records an allowance for estimated customer chargebacks for returns, price discounts and adjustments, premium freight and expediting costs and customer production line disruption costs resulting from late deliveries. At times, customers have asserted a right to significant production line disruption charges to recover damages as a result of late delivery. The Company typically works with its customers to minimize disruption charges, validate damages and negotiate resolution. The Company records accruals for customer chargebacks when a valid charge is probable and the amount of the charge can be reasonably estimated. Should customer chargebacks fluctuate from the estimated amounts, additional allowances may be necessary. The Company reduced accounts receivable for chargebacks by $1,034,000 at September 30, 2019 and $2,344,000 at December 31, 2018.
Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or net realizable value. 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 $836,000 at September 30, 2019 and $957,000 at December 31, 2018.
Contract Assets/Liabilities: Contract assets and liabilities represent the net cumulative customer billings, vendor payments and revenue recognized for tooling programs. For tooling programs where net revenue recognized and vendor payments exceed customer billings, the Company recognizes a contract asset. For tooling programs where net customer billings exceed revenue recognized and vendor payments, the Company recognizes a contract liability. Customer payment terms vary by contract and can range from progress payments based on work performed or one single payment once the contract is completed. The Company has recorded contract assets of $1,061,000 at September 30, 2019, and $3,915,000 at December 31, 2018. The Company records contract assets in prepaid expenses and other current assets on the Consolidated Balance Sheet. During the nine months ended September 30, 2019, the Company recognized no impairments on contract assets. The Company has recorded contract liabilities of $1,344,000 at September 30, 2019 and $1,686,000 at December 31, 2018. The Company records contract liabilities in accrued other liabilities on the Consolidated Balance Sheet. For the nine months ended September 30, 2019, the Company did not recognize a material amount of revenue to settle contract liabilities.
Income Taxes: The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the Company is more likely than not to realize deferred tax benefits through the generation of future taxable income. Management makes assumptions, judgments, and estimates to determine our current and deferred tax provision and also the deferred tax assets and liabilities. The Company evaluates provisions and deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence.
As of September 30, 2019 the Company had a gross deferred tax asset of $3,689,000 of which $1,904,000 is related to tax positions in the United States and $1,395,000 related to tax positions in Canada and $390,000 related to tax positions in Mexico. At September 30 2019, the Company recorded a valuation allowance against all deferred tax assets in the United States, due to cumulative losses over the last three years and uncertainty related to the Company’s ability to realize net loss carryforwards and other net deferred tax assets in the future. The Company believes that the deferred tax assets associated with the Canadian tax jurisdictions are more-likely-than-not to be realizable based on estimates of future taxable income and the Company's ability to carryback losses.
Derivative Instruments: Derivative instruments are utilized to manage exposure to fluctuations in foreign currency exchange rates and interest rates on long term debt obligations. All derivative instruments are formally documented as cash flow hedges and are recorded at fair value at each reporting period. Gains and losses related to currency forward contracts and interest rate swaps are deferred and recorded as a component of Accumulated Other Comprehensive Income in the Consolidated Statement of Stockholders'
Equity and then subsequently recognized on the Consolidated Statement of Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge, if any, is recognized in income immediately. For additional information on derivative instruments, see Note 15.
Long-Lived Assets: Long-lived assets consist primarily of property, plant and equipment and definite-lived intangibles. 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 property, plant and equipment 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 nine months ended September 30, 2019 or September 30, 2018.
Goodwill and Other Intangibles: The Company evaluates goodwill annually on December 31 to determine whether impairment exists, or at interim periods if an indicator of possible impairment exists. As a result of the Horizon Plastics acquisition on January 16, 2018 and the status of its integration, the Company established two reporting units, Core Traditional and Horizon Plastics. The annual impairment tests of goodwill may be completed through qualitative assessments, however the Company may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit in any period. The Company may resume the qualitative assessment for any reporting unit in any subsequent period.
The Company’s annual impairment assessment at December 31, 2018 consisted of a quantitative analysis for both its Core Traditional and Horizon Plastics reporting units. It concluded that the carrying value of Core Traditional was greater than the fair value, which resulted in a goodwill impairment charge of $2,403,000, representing all the goodwill related to the Core Traditional reporting unit. The analysis of the Company’s other reporting unit, Horizon Plastics, indicated no goodwill impairment charge as the excess of the estimated fair value over the carrying value of its invested capital was approximately 23% of the book value of its net assets at December 31, 2018.
Due to the Company's financial performance and continued depressed stock price, the Company performed a quantitative analysis for both of its reporting units at September 30, 2019. During 2019, the Company incurred a loss of margin in its Horizon Plastics reporting unit caused by selling price decreases that the Company has not been able to fully offset with material cost reductions. As a result of the quantitative analysis, the Company concluded that the carrying value of Horizon Plastics was greater than the fair value, which resulted in a goodwill impairment charge of $4,100,000 at September 30, 2019 representing 19% of the goodwill related to the Horizon Plastics reporting unit.
Self-Insurance: The Company is self-insured with respect to its Columbus and Batavia, Ohio, Gaffney, South Carolina, Winona, Minnesota 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 is also self-insured for dental and vision with respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental, vision and worker’s compensation claims incurred but not reported at September 30, 2019 and December 31, 2018 of $1,096,000 and $960,000, respectively.
Post-retirement Benefits: Management records an accrual for post-retirement costs associated with the health care plan sponsored by Core Molding Technologies. 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 Core Molding Technologies’ operations. The effect of a change in healthcare costs is described in Note 12 of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $8,063,000 at September 30, 2019 and $8,076,000 at December 31, 2018.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("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.
In accordance with ASU 2016-02, the Company elected not to recognize lease assets and lease liabilities for leases with a term of twelve months or less. The ASU requires a modified retrospective transition method, or a transition method option further described within ASU 2018-11, with the option to elect a package of practical expedients that permits the Company to: (1) not reassess whether expired or existing contracts contain leases, (2) not reassess lease classification for existing or expired leases and (3) not consider whether previously capitalized initial direct costs would be appropriate under the new standard. The Company elected to apply the package of practical expedients.
The Company adopted ASU No. 2016-02 as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption without restating previously reported periods. In addition, the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification.
In addition, the Company elected the practical expedient to determine the lease term for existing leases. In the application of practical expedient, the Company evaluated the buildings leased and the current financial performance of the plant associated, which resulted in the determination that most renewal options would be reasonably certain in determining the expected lease term.
Adoption of the new standard resulted in the recording of additional net right of use assets and lease liabilities of $4,490,000 and $4,428,000, respectively, as of January 1, 2019. The present value of lease liabilities has been measured using the Company’s revolving loan borrowing rates as of December 31, 2018 (one day prior to initial application). Additionally, ROU assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial prepaid/accrued rent and any ASC Topic 420 liabilities. The standard did not materially impact the Company's consolidated statement of income (loss) or statement of cash flows.
4. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed similarly but includes the effect of the assumed exercise of restricted stock and stock appreciation rights under the treasury stock method.
The computation of basic and diluted net loss per common share is as follows:
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2019
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2018
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|
2019
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2018
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Net loss
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$
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(6,125,000
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)
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$
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(1,802,000
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)
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$
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(9,761,000
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)
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|
$
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(839,000
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)
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|
|
|
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Weighted average common shares outstanding — basic
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7,851,000
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7,804,000
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7,806,000
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|
7,758,000
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Effect of dilutive securities
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—
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—
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|
—
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—
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Weighted average common and potentially issuable common shares outstanding — diluted
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7,851,000
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7,804,000
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7,806,000
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|
7,758,000
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Basic net loss per common share
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$
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(0.78
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)
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$
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(0.23
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)
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$
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(1.25
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)
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|
$
|
(0.11
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)
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Diluted net loss per common share
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$
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(0.78
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)
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$
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(0.23
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)
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$
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(1.25
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)
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$
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(0.11
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)
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5. MAJOR CUSTOMERS
Core Molding Technologies has four major customers, Navistar, Inc. (“Navistar”), Volvo Group North America, LLC (“Volvo”), PACCAR, Inc. (“PACCAR”), and Universal Forest Products, Inc. ("UFP"). Major customers are defined as customers whose sales individually consist of more than ten percent of total sales during any reporting period in the current year. The following table presents sales revenue for the above-mentioned customers for the three and nine months ended September 30, 2019 and 2018:
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2019
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2018
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2019
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2018
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Navistar product sales
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$
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15,115,000
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$
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14,123,000
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$
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46,411,000
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$
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37,939,000
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Navistar tooling sales
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145,000
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|
1,031,000
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927,000
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|
|
1,043,000
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Total Navistar sales
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15,260,000
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15,154,000
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47,338,000
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38,982,000
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Volvo product sales
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11,117,000
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11,037,000
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40,213,000
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|
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33,222,000
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Volvo tooling sales
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61,000
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11,000
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200,000
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54,000
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Total Volvo sales
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11,178,000
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11,048,000
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40,413,000
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33,276,000
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PACCAR product sales
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11,532,000
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10,684,000
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35,779,000
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|
|
25,984,000
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PACCAR tooling sales
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165,000
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|
321,000
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|
|
1,325,000
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|
|
6,384,000
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Total PACCAR sales
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11,697,000
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|
|
11,005,000
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37,104,000
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|
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32,368,000
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|
|
|
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UFP product sales
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6,751,000
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|
|
7,212,000
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|
22,076,000
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|
|
21,261,000
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UFP tooling sales
|
—
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|
240,000
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|
—
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|
|
240,000
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Total UFP sales
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6,751,000
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|
|
7,452,000
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|
|
22,076,000
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|
|
21,501,000
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|
|
|
|
|
|
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Other product sales
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22,996,000
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|
|
19,249,000
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|
|
69,924,000
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|
|
68,837,000
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Other tooling sales
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6,773,000
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|
768,000
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|
11,313,000
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|
|
1,360,000
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Total other sales
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29,769,000
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|
|
20,017,000
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|
81,237,000
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|
|
70,197,000
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|
|
|
|
|
|
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Total product sales
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67,511,000
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|
|
62,305,000
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|
|
214,403,000
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|
|
187,243,000
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Total tooling sales
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7,144,000
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|
|
2,371,000
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|
|
13,765,000
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|
|
9,081,000
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Total sales
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$
|
74,655,000
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|
|
$
|
64,676,000
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|
|
$
|
228,168,000
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|
|
$
|
196,324,000
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|
6. INVENTORY
Inventories consisted of the following:
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|
September 30, 2019
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|
December 31, 2018
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Raw materials
|
$
|
15,431,000
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|
|
$
|
17,278,000
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Work in process
|
1,740,000
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|
|
2,034,000
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Finished goods
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6,242,000
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|
|
6,453,000
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|
|
$
|
23,413,000
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|
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$
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25,765,000
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|
Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage.
7. LEASES
The Company has operating leases with fixed payment terms primarily associated with buildings and warehouses. The Company's leases have remaining lease terms of less than two years to five years, some of which include options to extend the lease for six years. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities on the Consolidated Balance Sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.
The Company used the applicable incremental borrowing rate at implementation date to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads commensurate with the Company’s secured borrowing rate. At each reporting period when there is a new lease initiated, the Company will utilize its incremental borrowing rate to perform lease classification tests on lease components and to measure ROU assets and lease liabilities.
The components of lease expense were as follows:
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Three Months Ended
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Nine Months Ended
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September 30, 2019
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|
September 30, 2019
|
Operating lease cost
|
$
|
358,000
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|
|
$
|
1,073,000
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Total net lease cost
|
$
|
358,000
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|
|
$
|
1,073,000
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|
Other supplemental balance sheet information related to leases was as follows:
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|
September 30, 2019
|
Operating leases:
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Current operating lease right of use assets
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$
|
—
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Noncurrent operating lease right of use assets
|
4,823,000
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|
Total operating lease right of use assets
|
$
|
4,823,000
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|
|
|
|
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Current operating lease liabilities(A)
|
$
|
1,319,000
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|
Noncurrent operating lease liabilities
|
3,445,000
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Total operating lease liabilities
|
$
|
4,764,000
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|
|
|
Weighted average remaining lease term (in years):
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Operating leases
|
4.4
|
|
|
|
Weighted average discount rate:
|
|
Operating leases
|
4.9
|
%
|
Other information related to leases were as follows:
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Operating cash flows from operating leases
|
$
|
1,073,000
|
|
As of September 30, 2019, maturities of lease liabilities were as follows:
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
358,000
|
|
2020
|
1,433,000
|
|
2021
|
1,174,000
|
|
2022
|
1,102,000
|
|
2023
|
1,000,000
|
|
2024 and thereafter
|
530,000
|
|
Total lease payments
|
5,597,000
|
|
Less: imputed interest
|
(833,000
|
)
|
Total lease obligations
|
4,764,000
|
|
Less: current obligations
|
(1,319,000
|
)
|
Long-term lease obligations
|
$
|
3,445,000
|
|
As of December 31, 2018, maturities of lease liabilities were as follows:
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
1,291,000
|
|
2020
|
1,099,000
|
|
2021
|
838,000
|
|
2022
|
766,000
|
|
2023
|
661,000
|
|
2024 and thereafter
|
331,000
|
|
Total lease payments
|
$
|
4,986,000
|
|
8. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consisted of the following for the periods specified:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Property, plant and equipment
|
$
|
169,993,000
|
|
|
$
|
164,145,000
|
|
Accumulated depreciation
|
(89,565,000
|
)
|
|
(83,488,000
|
)
|
Property, plant and equipment — net
|
$
|
80,428,000
|
|
|
$
|
80,657,000
|
|
Property, plant, and equipment are recorded at cost, unless obtained through acquisition, then assets are recorded at estimated fair value at the date of acquisition. 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 an adjustment to the depreciation period or to the unamortized balance is warranted. Depreciation expense for the three months ended September 30, 2019 and 2018 was $1,977,000 and $1,907,000, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $6,077,000 and $5,739,000, respectively. Amounts invested in capital additions in progress were $5,115,000 and $5,014,000 at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, purchase commitments for capital expenditures in progress were $879,000 and $3,461,000, respectively.
9. HORIZON PLASTICS ACQUISITION
On January 16, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with Horizon Plastics International Inc., 1541689 Ontario Inc., 2551024 Ontario Inc. and Horizon Plastics de Mexico, S.A. de C.V. (collectively "Horizon Plastics"). Pursuant to the terms of the Agreement the Company acquired substantially all of the assets and assumed certain specified liabilities of Horizon Plastics for a cash purchase of $62,457,000. The purchase price was subject to working capital adjustments resulting in an increase in the purchase price of $548,000.
The acquisition was funded through a combination of cash on hand and borrowings under the Amended and Restated Credit Agreement ("A/R Credit Agreement"), further described in Note 12, entered into with KeyBank National Association as administrative agent and various other financial institutions on January 16, 2018.
The purpose of the acquisition was to increase the Company's process capabilities to include structural foam and structural web molding, expand its geographical footprint, and diversify the Company's customer base.
Consideration was allocated to assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows:
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
7,677,000
|
|
Inventory
|
|
6,523,000
|
|
Other Current Assets
|
|
832,000
|
|
Property and Equipment
|
|
12,994,000
|
|
Intangibles
|
|
16,770,000
|
|
Goodwill
|
|
21,476,000
|
|
Accounts Payable
|
|
(3,181,000
|
)
|
Other Current Liabilities
|
|
(86,000
|
)
|
Total
|
|
$
|
63,005,000
|
|
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 Company incurred $1,289,000 of expense for the nine months ended September 30, 2018 associated with the acquisition, which was recorded in selling, general and administrative expense.
The amount allocated to intangible assets has been attributed to the following categories and will be amortized over the useful lives of each individual asset identified on a straight-line basis as follows:
|
|
|
|
|
|
|
|
Acquired Intangible Assets
|
|
Estimated Fair Value
|
|
Estimated Useful Life (Years)
|
Non-competition Agreement
|
|
$
|
1,810,000
|
|
|
5
|
Trademarks
|
|
1,610,000
|
|
|
10
|
Developed Technology
|
|
4,420,000
|
|
|
7
|
Customer Relationships
|
|
8,930,000
|
|
|
12
|
Total
|
|
$
|
16,770,000
|
|
|
|
Pro Forma Information
The unaudited pro forma information for the combined results of the Company has been prepared as if the 2018 acquisitions had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2017 and the unaudited pro forma information does not purport to be indicative of future financial operating results.
|
|
|
|
|
|
|
|
|
|
Pro forma for the three months ended September 30,
|
|
Pro forma for the nine months ended September 30,
|
|
2018
|
|
2018
|
Net revenue
|
$
|
64,676,000
|
|
|
$
|
198,993,000
|
|
Net income (loss)
|
(1,693,000
|
)
|
|
142,000
|
|
Basic and diluted net income (loss) per share
|
$
|
(0.22
|
)
|
|
$
|
0.02
|
|
The unaudited pro forma net income includes the following adjustments that would have been recorded had the 2018 acquisition taken place on January 1, 2017.
|
|
|
|
|
|
|
|
|
|
Pro forma for the three months ended September 30,
|
|
Pro forma for the nine months ended September 30,
|
|
2018
|
|
2018
|
Non-recurring transaction costs
|
$
|
—
|
|
|
$
|
(1,289,000
|
)
|
Depreciation expense
|
—
|
|
|
55,000
|
|
Amortization expense
|
—
|
|
|
78,000
|
|
Interest expense
|
(141,000
|
)
|
|
(204,000
|
)
|
Income tax expense
|
31,000
|
|
|
263,000
|
|
10. GOODWILL AND INTANGIBLES
Goodwill activity for the nine months ended September 30, 2019 consisted of the following:
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
21,476,000
|
|
Additions
|
|
—
|
|
Impairment
|
|
(4,100,000
|
)
|
Balance at September 30, 2019
|
|
$
|
17,376,000
|
|
Due to the Company's financial performance and continued depressed stock price, the Company performed a quantitative analysis for both of its reporting units at September 30, 2019. During 2019, the Company incurred a decrease in margin in its Horizon Plastics reporting unit caused by selling price decreases that the Company has not yet been able to fully offset with material cost reductions. As a result of the quantitative analysis, the Company concluded that the carrying value of Horizon Plastics was greater than the fair value, which resulted in a goodwill impairment charge of $4,100,000 at September 30, 2019 representing 19% of the goodwill related to the Horizon Plastics reporting unit.
Intangible assets at September 30, 2019 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
|
|
|
$
|
(45,000
|
)
|
|
$
|
205,000
|
|
Trademarks
|
|
10 Years
|
|
1,610,000
|
|
|
(275,000
|
)
|
|
1,335,000
|
|
Non-competition agreement
|
|
5 Years
|
|
1,810,000
|
|
|
(619,000
|
)
|
|
1,191,000
|
|
Developed technology
|
|
7 Years
|
|
4,420,000
|
|
|
(1,079,000
|
)
|
|
3,341,000
|
|
Customer relationships
|
|
10-12 Years
|
|
9,330,000
|
|
|
(1,450,000
|
)
|
|
7,880,000
|
|
Total
|
|
|
|
$
|
17,420,000
|
|
|
$
|
(3,468,000
|
)
|
|
$
|
13,952,000
|
|
The aggregate intangible asset amortization expense was $487,000 and $482,000 for the three months ended September 30, 2019 and 2018, respectively. The aggregate intangible asset amortization expense was $1,461,000 and $1,366,000 for the nine months ended September 30, 2019 and 2018, respectively.
Intangible assets at December 31, 2018 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
|
|
|
$
|
(37,000
|
)
|
|
$
|
213,000
|
|
Trademarks
|
|
10 Years
|
|
1,610,000
|
|
|
(86,000
|
)
|
|
1,524,000
|
|
Non-competition Agreement
|
|
5 Years
|
|
1,810,000
|
|
|
(360,000
|
)
|
|
1,450,000
|
|
Developed Technology
|
|
7 Years
|
|
4,420,000
|
|
|
(605,000
|
)
|
|
3,815,000
|
|
Customer Relationships
|
|
10-12 Years
|
|
9,330,000
|
|
|
(919,000
|
)
|
|
8,411,000
|
|
Total
|
|
|
|
$
|
17,420,000
|
|
|
$
|
(2,007,000
|
)
|
|
$
|
15,413,000
|
|
11. POST RETIREMENT BENEFITS
The components of expense for Core Molding Technologies’ post-retirement benefit plans for the three and nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pension expense:
|
|
|
|
|
|
|
|
Multi-employer plan
|
$
|
270,000
|
|
|
$
|
186,000
|
|
|
$
|
732,000
|
|
|
$
|
549,000
|
|
Defined contribution plan
|
364,000
|
|
|
182,000
|
|
|
950,000
|
|
|
698,000
|
|
Total pension expense
|
634,000
|
|
|
368,000
|
|
|
1,682,000
|
|
|
1,247,000
|
|
|
|
|
|
|
|
|
|
Health and life insurance:
|
|
|
|
|
|
|
|
Interest cost
|
72,000
|
|
|
69,000
|
|
|
216,000
|
|
|
207,000
|
|
Amortization of prior service costs
|
(125,000
|
)
|
|
(124,000
|
)
|
|
(375,000
|
)
|
|
(372,000
|
)
|
Amortization of net loss
|
30,000
|
|
|
43,000
|
|
|
88,000
|
|
|
129,000
|
|
Net periodic benefit cost
|
(23,000
|
)
|
|
(12,000
|
)
|
|
(71,000
|
)
|
|
(36,000
|
)
|
|
|
|
|
|
|
|
|
Total post retirement benefits expense
|
$
|
611,000
|
|
|
$
|
356,000
|
|
|
$
|
1,611,000
|
|
|
$
|
1,211,000
|
|
The Company made payments of $1,682,000 to pension plans and $224,000 for post-retirement healthcare and life insurance during the nine months ended September 30, 2019. For the remainder of 2019, the Company expects to make approximately $394,000 of pension plan payments, of which $150,000 was accrued at September 30, 2019. The Company also expects to make approximately $933,000 of post-retirement healthcare and life insurance payments for the remainder of 2019, all of which were accrued at September 30, 2019.
12. DEBT
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Term loans, interest at a variable rate (6.11% at September 30, 2019 and 4.34% at December 31, 2018) with monthly payments of interest and quarterly payments of principal through January 2023
|
$
|
39,094,000
|
|
|
$
|
41,625,000
|
|
Revolving loans, interest at a variable rate (5.82% at September 30, 2019 and 4.39% at December 31, 2018)
|
20,817,000
|
|
|
17,375,000
|
|
Total
|
59,911,000
|
|
|
59,000,000
|
|
Less deferred loan costs
|
(874,000
|
)
|
|
(611,000
|
)
|
Less current portion
|
(59,037,000
|
)
|
|
(3,230,000
|
)
|
Long-term debt and long-term revolving debt
|
$
|
—
|
|
|
$
|
55,159,000
|
|
Credit Agreement
On January 16, 2018, the Company entered into the A/R Credit Agreement with the Administrative Agent and the Lenders. Pursuant to the terms of the A/R Credit Agreement (i) the Company may borrow revolving loans in the aggregate principal amount of up to $40,000,000 (the “US Revolving Loans”) from the Lenders and term loans in the aggregate principal amount of up to $32,000,000 from the Lenders, (ii) the Company's wholly-owned subsidiary, Horizon Plastics International, Inc., (the "Subsidiary") may borrow revolving loans in an aggregate principal amount of up to $10,000,000 from the Lenders (which revolving loans shall reduce the availability of the US Revolving Loans to the Company on a dollar-for-dollar basis) and term loans in an aggregate principal amount of up to $13,000,000 from the Lenders, (iii) the Company obtained a Letter of Credit Commitment of $250,000, of which $160,000 has been issued and (iv) the Company repaid the outstanding term loan balance of $6,750,000. The A/R Credit Agreement is secured by a guarantee of each U.S. and Canadian subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. and Canadian subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.
Concurrent with the closing of the A/R Credit Agreement the Company borrowed the $32,000,000 term loan and $2,000,000 from the US Revolving loan and the Subsidiary borrowed the $13,000,000 term loan and $2,500,000 from revolving loans to provide $49,500,000 of funding for the acquisition of Horizon Plastics. Interest is payable monthly at one month LIBOR plus a basis point margin ranging from 175 to 400 basis points based on the Company's leverage ratio. The margin was set at 400 basis points as of September 30, 2019.
On March 14, 2019, the Company entered into the first amendment (“First Amendment”) to the A/R Credit Agreement (as amended by the First Amendment, the "Amended A/R Credit Agreement") with the Lenders. Pursuant to the terms of the First Amendment, the Company and Lenders agreed to modify certain terms of the A/R Credit Agreement. These modifications included (i) implementation of an availability block on the U.S. Revolving Loans reducing availability from $40,000,000 to $32,500,000, (ii) modification to the definition of EBITDA to add back certain one-time expenses, (iii) waiver of non-compliance with the leverage covenant as of December 31, 2018 and modification of the leverage ratio definition and covenant to eliminate testing of the leverage ratio until December 31, 2019, (iv) waiver of non-compliance with the fixed charge covenant as of December 31, 2018 and modification of the fixed charge coverage ratio definition and covenant requirement, (v) implementation of a capital expenditure spend limit of $7,500,000 during the first six months of 2019 and $12,500,000 for the full year 2019, (vi) an increase of the applicable interest margin spread for existing term and revolving loans, and (vii) an increase in the commitment fees on any unused U.S. Revolving Loans.
The Company has available $32,500,000 of variable rate revolving loans of which $20,817,000 is outstanding as of September 30, 2019. These revolving loans are scheduled to mature on January 1, 2023 and are classified as current on the balance sheet.
Bank Covenants
The Company is required to meet certain financial covenants included in the Amended A/R Credit Agreement with respect to leverage ratios, fixed charge ratios and capital expenditures. As of September 30, 2019, the Company was in default with its fixed charge coverage covenant associated with the loans made under the Amended A/R Credit Agreement as described above. As a result of this default the Company and the Administrative Agent on behalf of the Lenders are negotiating a forbearance agreement to address the non-compliance and establish milestones for the Company related to restructuring or refinancing its existing debt.
It is anticipated that in the event of a new default under the Amended A/R Credit Agreement, or an event of default of any of the milestones that may be required by the Lenders under the forbearance agreement once established, the Lenders would retain their rights to immediately exercise all of their rights and remedies.
While it is not anticipated, until a forbearance agreement is in effect, the Lenders may terminate their funding and demand payment of all amounts outstanding under the Amended A/R Credit Agreement. Accordingly, the Company’s remaining long-term debt under the Amended A/R Credit Agreement, consisting of $59,037,000 in borrowings under the revolving credit commitment and the term loan commitments, was classified as a current liability in the Company’s consolidated balance sheet as of September 30, 2019.
Management is pursuing the restructuring or refinancing of its existing obligations under the Amended A/R Credit Agreement. The Company is evaluating several financing options with multiple providers to refinance some or all of the current Amended A/R Credit Agreement. The Company is considering financing options including an asset backed lending facility using the Company’s accounts receivable and inventories as security, term loans secured with the Company’s real estate and machinery and equipment, sale and leaseback of Company owned real estate and potential equity financing. Any new financing remains subject to asset appraisals, field exams, financial projection due diligence, real estate environmental reviews, and other customary legal documentation.
Interest Rate Swaps
The Company entered into two interest rate swap agreements that became effective January 18, 2018 and continue through January 2023, one of which was designated as a cash flow hedge for $25,000,000 of the $32,000,000 term loan to the Company mentioned above and the other designated as a cash flow hedge for $10,000,000 of the $13,000,000 term loan to the Subsidiary mentioned above. Under these agreements, the Company will pay a fixed rate of approximately 2.49% to the counterparty and receives one month LIBOR. The fair value of the interest rate swap was a liability of $873,000 and $65,000 at September 30, 2019 and December 31, 2018, respectively. While the Company is exposed to credit loss on its interest rate swaps in the event of non-performance by the counter party to the swap, management believes that such non-performance is unlikely to occur given the financial resources of the counter party.
13. INCOME TAXES
As of September 30, 2019 the Company had a gross deferred tax asset of $3,689,000 of which $1,904,000 is related to tax positions in the United States and $1,395,000 related to tax position in Canada and $390,000 related to tax positions in Mexico. At September 30 2019, the Company recorded a valuation allowance against all deferred tax assets in the United States, due to cumulative losses over the last three years and uncertainty related to the Company’s ability to realize net loss carryforwards and other net deferred tax assets in the future. The Company believes that the deferred tax assets associated with the Canadian tax jurisdictions, are more-likely-than-not to be realizable based on estimates of future taxable income and the Company's ability to carryback losses.
Income tax benefit for the nine months ended September 30, 2019 is estimated to be $452,000, on a loss of $10,213,000 before income taxes. Income tax expense for the nine months ended September 30, 2018 was estimated to be $228,000, on a loss before income taxes of $611,000. Income tax expense for the nine months ended September 30, 2019 includes a one-time charge of $1,904,000 associated with recording a valuation allowance at September 30, 2019.
The Company files income tax returns in the U.S., Mexico, Canada and various state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2015, and is no longer subject to Mexican income tax examinations by Mexican authorities for years prior to 2013. As a result of the Horizon Plastics acquisition on January 16, 2018, the Company now has additional filing requirements for new entities in Canada and Mexico, and is not subject to Canadian and Mexican tax examinations for those entities for years prior to 2018.
14. 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 and as amended in May 2015. 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 or receive shares 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.
Restricted Awards
The Company grants shares of its common stock to certain directors, officers, key managers and employees in the form of unvested stock and units (“Restricted Awards”). 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, which is typically three years. The Company adjusts compensation expense for actual forfeitures, as they occur.
The following summarizes the status of Restricted Stock and changes during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Unvested balance at December 31, 2018
|
349,885
|
|
|
$
|
10.62
|
|
Granted
|
132,327
|
|
|
7.69
|
|
Vested
|
(86,316
|
)
|
|
13.97
|
|
Forfeited
|
(11,036
|
)
|
|
15.37
|
|
Unvested balance at September 30, 2019
|
384,860
|
|
|
$
|
9.90
|
|
At September 30, 2019 and 2018, there was $2,377,000 and $2,589,000, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to Restricted Awards granted under the 2006 Plan. That cost is expected to be recognized over the weighted-average period of 2.0 years. Total compensation cost related to restricted award grants for the three months ended September 30, 2019 and 2018 was $350,000 and $259,000, respectively, all of which was recorded to selling, general and administrative expense. Total compensation cost related to restricted award grants for the nine months ended September 30, 2019 and 2018 was $1,121,000 and $1,228,000, respectively, all of which was recorded to selling, general, and administrative expense.
Compensation expense for restricted awards is recorded at the fair value at the time of grant, net of estimated forfeitures, over the vesting period of the restricted award grant. The Company does not receive a tax deduction for restricted awards until the restricted award vests. The tax deduction for restricted awards is based on the fair value as of the vesting date. Additional income tax expense due to the fair value on the grant date in excess of the value at time of vesting for the nine months ended September 30, 2019 and 2018 was $95,000 and $20,000, respectively.
During the nine months ended September 30, 2019 and 2018, employees surrendered 7,744 and 17,180 shares, respectively, of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
Stock Appreciation Rights
As part of the Company's 2019 annual grant, Stock Appreciation Rights (SARs) were granted with a grant price of $10. These awards have a contractual term of five years and vest ratably over a period of three years. These awards are valued using the Black-Scholes option pricing model. A summary of the Company's stock appreciation rights activity for the nine month period ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Outstanding as of December 31, 2018
|
—
|
|
|
$
|
—
|
|
Granted
|
226,021
|
|
|
2.57
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at end of the period ended September 30, 2019
|
226,021
|
|
|
$
|
2.57
|
|
Exercisable at end of the period ended September 30, 2019
|
29,028
|
|
|
$
|
2.57
|
|
The average remaining contractual term for those SARs outstanding at September 30, 2019 is 4.6 years, with no aggregate intrinsic value. At September 30, 2019 and 2018, there was $435,000 and $0, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to SARs. That cost is expected to be recognized over the weighted-average period of 2.6 years.
Total compensation cost related to SARs for the three months ended September 30, 2019 and 2018 was $42,000 and $0, respectively, all of which was recorded to selling, general and administrative expense. Total compensation cost related to SARs for the nine months ended September 30, 2019 and 2018 was $145,000 and $0, respectively, all of which was recorded to selling, general and administrative expense.
15. 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 cash and cash equivalents, accounts receivable, accounts payable, debt, interest rate swaps and foreign currency derivatives. Cash and cash equivalents, accounts receivable and accounts payable carrying values as of September 30, 2019 and December 31, 2018 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of long-term debt and the revolving line of credit approximate fair value as of September 30, 2019 and December 31, 2018 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had Level 2 fair value measurements at September 30, 2019 and December 31, 2018 relating to the Company’s interest rate swaps and foreign currency derivatives.
Derivative and hedging activities
Foreign Currency Derivatives
The Company conducted business in foreign countries and paid certain expenses in foreign currencies; therefore, the Company was exposed to foreign currency exchange risk between the U.S. Dollar and foreign currencies, 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 foreign currency, which will be used to fund future
foreign currency 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 foreign currency. As of September 30, 2019, the Company had no ineffective portion related to the cash flow hedges.
Interest Rate Swaps
The Company entered into interest rate swap contracts to fix the interest rate on an initial aggregate amount of $35,000,000 thereby reducing exposure to interest rate changes. The interest rate swap pays a fixed rate of 2.49% to the counterparty and receives 30 day LIBOR for both cash flow hedges. At inception, all interest rate swaps were formally documented as cash flow hedges and are measured at fair value each reporting period. See Note 12, "Debt", for additional information.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
September 30, 2019
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign exchange contracts
|
Prepaid expense other current assets
|
|
$
|
4,000
|
|
|
Accrued other liabilities
|
|
$
|
214,000
|
|
Notional contract values
|
|
|
$
|
3,643,000
|
|
|
|
|
$
|
15,907,000
|
|
Interest rate swaps
|
Prepaid expense other current assets
|
|
$
|
—
|
|
|
Accrued other liabilities
|
|
$
|
873,000
|
|
Notional swap values
|
|
|
$
|
—
|
|
|
|
|
$
|
30,406,000
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign exchange contracts
|
Prepaid expense other current assets
|
|
$
|
—
|
|
|
Accrued other liabilities
|
|
$
|
750,000
|
|
Notional contract values
|
|
|
$
|
—
|
|
|
|
|
$
|
27,588,000
|
|
Interest rate swaps
|
Prepaid expense other current assets
|
|
$
|
—
|
|
|
Accrued other liabilities
|
|
$
|
65,000
|
|
Notional swap values
|
|
|
$
|
—
|
|
|
|
|
$
|
32,375,000
|
|
The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Other Comprehensive Income (AOCI) for the three months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2019
|
2018
|
|
|
2019
|
2018
|
Foreign exchange contracts
|
|
$
|
(192,000
|
)
|
$
|
887,000
|
|
|
Cost of goods sold
|
|
$
|
55,000
|
|
$
|
(11,000
|
)
|
|
|
Selling, general and administrative expense
|
|
$
|
8,000
|
|
$
|
(9,000
|
)
|
Interest rate swaps
|
|
$
|
(101,000
|
)
|
$
|
114,000
|
|
|
Interest expense
|
|
$
|
(14,000
|
)
|
$
|
(61,000
|
)
|
The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Other Comprehensive Income (AOCI) for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2019
|
2018
|
|
|
2019
|
2018
|
Foreign exchange contracts
|
|
$
|
649,000
|
|
$
|
766,000
|
|
|
Cost of goods sold
|
|
$
|
110,000
|
|
$
|
184,000
|
|
|
|
Selling, general and administrative expense
|
|
$
|
—
|
|
$
|
21,000
|
|
Interest rate swaps
|
|
$
|
(823,000
|
)
|
$
|
254,000
|
|
|
Interest expense
|
|
$
|
(13,000
|
)
|
$
|
(169,000
|
)
|
(A) The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and selling, general and administrative expense based on the percentage of foreign currency spend.
16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in Accumulated Other Comprehensive Income, net of tax, for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
Hedging Derivative Activities
|
|
Post Retirement Benefit Plan Items(A)
|
|
Accumulated Other Comprehensive Income
|
Balance at December 31, 2017
|
$
|
(197,000
|
)
|
|
$
|
2,267,000
|
|
|
$
|
2,070,000
|
|
Other Comprehensive Income before reclassifications
|
1,020,000
|
|
|
—
|
|
|
1,020,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
(36,000
|
)
|
|
(243,000
|
)
|
|
(279,000
|
)
|
Income tax benefit (expense)
|
(253,000
|
)
|
|
51,000
|
|
|
(202,000
|
)
|
Balance at September 30, 2018
|
$
|
534,000
|
|
|
$
|
2,075,000
|
|
|
$
|
2,609,000
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(612,000
|
)
|
|
$
|
2,729,000
|
|
|
$
|
2,117,000
|
|
Other Comprehensive Loss before reclassifications
|
(174,000
|
)
|
|
—
|
|
|
(174,000
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
(96,000
|
)
|
|
(284,000
|
)
|
|
(380,000
|
)
|
Income tax benefit
|
40,000
|
|
|
60,000
|
|
|
100,000
|
|
Balance at September 30, 2019
|
$
|
(842,000
|
)
|
|
$
|
2,505,000
|
|
|
$
|
1,663,000
|
|
(A) 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 (Loss). These Accumulated Other Comprehensive Income (Loss) components are included in the computation of net periodic benefit cost (see Note 11 "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 (benefit) on the Consolidated Statements of Income (Loss).
Part I — Financial Information