|
|
Item 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
OVERVIEW
We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share data)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
1,139,447
|
|
|
$
|
969,236
|
|
|
$
|
1,025,272
|
|
Value-added sales
|
|
677,697
|
|
|
599,910
|
|
|
617,247
|
|
Gross margin
|
|
211,494
|
|
|
183,463
|
|
|
190,780
|
|
Gross margin as a % of Value-added sales
|
|
31
|
%
|
|
31
|
%
|
|
31
|
%
|
Selling, general, and administrative (SG&A) expense
|
|
146,170
|
|
|
129,683
|
|
|
129,941
|
|
SG&A expense as a % of Value-added sales
|
|
22
|
%
|
|
22
|
%
|
|
21
|
%
|
Research and development (R&D) expense
|
|
13,981
|
|
|
12,802
|
|
|
12,796
|
|
R&D expense as a % of Value-added sales
|
|
2
|
%
|
|
2
|
%
|
|
2
|
%
|
Other — net
|
|
12,764
|
|
|
13,874
|
|
|
2,775
|
|
Operating profit
|
|
38,579
|
|
|
27,104
|
|
|
45,268
|
|
Interest expense — net
|
|
2,183
|
|
|
1,789
|
|
|
2,450
|
|
Effective tax rate
|
|
68.5
|
%
|
|
(1.7
|
)%
|
|
24.9
|
%
|
Net income
|
|
11,451
|
|
|
25,740
|
|
|
32,158
|
|
Diluted earnings per share
|
|
0.56
|
|
|
1.27
|
|
|
1.58
|
|
2017
Compared to
2016
Net sales
were
$1,139.4 million
in
2017
, reflecting
an increase
of
18%
from
2016
. Changes in precious metal and copper prices favorably impacted net sales in 2017 by approximately $13.1 million when compared to 2016. Net sales in the Performance Alloys and Composites segment increased $41.9 million due to higher sales volume, including shipments of raw material beryllium hydroxide. Net sales of $119.7 million during 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net sales in the Advanced Materials segment increased $33.9 million due to higher sales volume in the consumer electronics and industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the Precision Coatings segment.
Value-added sales were
$677.7 million
in
2017
, an increase of $77.8 million as compared to
2016
value-added sales of
$599.9 million
. Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices. Internally, we manage our business on this basis, and a reconciliation of net sales to value-added sales is included herein.
Value-added sales from the HTB acquisition totaled approximately $36.5 million in 2017. Excluding the HTB acquisition, value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during 2017, increased $17.2 million from the prior year. Also, value-added sales in the industrial components end market increased $12.3 million from the prior year.
Gross margin
was
$211.5 million
in
2017
, or a
15%
increase from the
$183.5 million
gross margin recorded in
2016
. Gross margin expressed as a percentage of value-added sales was 31% in both
2017
and
2016
. The increase in gross margin was primarily due to higher sales volume.
SG&A expenses
totaled
$146.2 million
in
2017
as compared to
$129.7 million
in
2016
. Expressed as a percentage of value-added sales, SG&A expenses were 22% in both
2017
and
2016
. The increase is attributable to normal course of business expenses from the HTB acquisition of $5.9 million, $4.1 million of CEO transition costs, and higher variable compensation expense related to improved financial performance.
R&D expenses
consist primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense was flat as a percentage of value-added sales at approximately 2% in both 2017 and 2016.
Other-net
totaled expense of
$12.8 million
and
$13.9 million
in 2017 and
2016
, respectively. In 2017, we recorded a $1.4 million gain on the sale of our service center located in Fukaya, Japan compared to an asset impairment charge of $2.6 million in 2016 for land and buildings relating to its closure. Refer to Notes D and E of the Consolidated Financial Statements for the details of the major components of Other-net and Restructuring.
Interest expense - net
was
$2.2 million
in
2017
and
$1.8 million
in
2016
. The lower expense in 2016 resulted from lower average outstanding debt levels.
Income tax expense
for
2017
was
$24.9 million
versus a benefit of $0.4 million in 2016. The effective tax rate for 2017 was 68.5% compared to a negative effective tax rate of 1.7% for 2016.
On December 22, 2017, the TCJA was signed into law. The TCJA includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. The TCJA also includes provisions that may partially offset the benefit of such rate reduction, including the repeal of the deduction for domestic production activities. The international provisions of the TCJA establish a territorial-style system for taxing foreign-source income of domestic multinational corporations. As a result of the TCJA, we recorded adjustments for the re-measurement of deferred tax assets (liabilities) and the deemed repatriation tax on unremitted foreign earnings and profits. Refer to Note G of the Consolidated Financial Statements for a discussion of the impact of compliance with the TCJA and a reconciliation of the statutory and effective tax rates.
2016
Compared to
2015
Net sales
were $969.2 million in 2016, reflecting a decrease of 5% from 2015. The decrease in net sales in 2016 was primarily due to lower sales volume. Sales volume was lower primarily due to decreased shipments of raw material beryllium hydroxide, weaker demand in the oil and gas sector of the energy end market, and weakness in the medical, industrial components, and automotive electronics end markets. These decreases were partially offset by stronger sales in the defense, consumer electronics, and telecom infrastructure end markets and changes in precious metal and copper prices, which favorably impacted net sales in 2016 by approximately $16.2 million when compared to 2015.
Value-added sales were $599.9 million in 2016, a decrease of $17.3 million as compared to 2015 value-added sales of $617.2 million.
Value-added sales to the consumer electronics end market, our largest end market accounting for approximately 28% of our total value-added sales in 2016, increased $7.3 million or 5% in 2016 as compared to 2015. Additionally, value-added sales to the defense end market increased $6.7 million or 14% year-over-year. These increases were offset by decreased shipments of raw material beryllium hydroxide of $12.4 million and lower value-added sales in several end markets. The industrial components and automotive electronics end market sales, which collectively accounted for 24% of our total value-added sales in 2016, decreased $7.4 million or 5% compared to 2015.
Gross margin
was
$183.5 million
in
2016
, or a 4% decrease from the
$190.8 million
gross margin recorded in
2015
. Gross margin expressed as a percentage of value-added sales was 31% in both 2016 and
2015
. The decrease in gross margin was primarily due to a combination of lower sales volume and unfavorable product mix.
SG&A expenses
totaled $129.7 million in
2016
as compared to $129.9 million in
2015
. Expressed as a percentage of value-added sales, SG&A expenses were 22% and 21% in
2016
and
2015
, respectively. Lower selling expenses of $2.0 million due to the decrease in sales volume were offset by higher stock-based and annual incentive compensation expense of $1.6 million driven by stock price fluctuation and financial performance.
R&D expenses
was flat as a percentage of value-added sales at approximately 2% in both 2016 and 2015.
Other-net
totaled expense of
$13.9 million
and
$2.8 million
in 2016 and 2015, respectively. In 2016, we recorded an asset impairment charge of $2.6 million for land and buildings relating to the future closure of our service center located in Fukaya, Japan. Other-net in 2015 included foreign currency hedge gains of $6.2 million compared to a foreign currency hedge loss of $0.8 million in 2016. Additionally, Other-net in 2015 included recognized gains of $5.6 million from settlement agreements for insurance and legal claims in connection with construction of our beryllium pebble facility in Elmore, Ohio. Refer to Notes D and E of the Consolidated Financial Statements for the details of the major components of Other-net and Restructuring.
Interest expense - net
was
$1.8 million
in
2016
and
$2.5 million
in
2015
. The lower expense in 2016 resulted from lower average outstanding debt levels.
Income tax expense
for
2016
was a benefit of $0.4 million versus expense of $10.7 million in 2015. The negative effective tax rate for 2016 was 1.7% compared to an effective tax rate of 24.9% in 2015. The effects of a discrete benefit relating to dividends paid from undistributed foreign earnings, percentage depletion (a tax benefit resulting from our mining operations), the foreign
rate differential, and other items were the primary factors for the difference between the effective and statutory rates in 2016 and 2015. Refer to Note G of the Consolidated Financial Statements for a reconciliation of the statutory and effective tax rates.
Segment Disclosures
The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Other reportable segment includes unallocated corporate costs.
Performance Alloys and Composites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
429,442
|
|
|
$
|
387,539
|
|
|
$
|
394,760
|
|
Value-added sales
|
|
363,465
|
|
|
332,012
|
|
|
335,136
|
|
Operating profit
|
|
21,978
|
|
|
6,601
|
|
|
23,560
|
|
2017
Compared to
2016
Net sales from the Performance Alloys and Composites segment of
$429.4 million
in
2017
were 11% higher than net sales of
$387.5 million
in
2016
primarily due to higher sales volume primarily related to the industrial components, consumer electronics, and automotive electronics end markets and higher raw material sales of beryllium hydroxide. In addition, the impact of higher pass-through metal prices favorably impacted net sales by approximately $8.9 million.
Value-added sales of $363.5 million in 2017 were 9% higher than value-added sales of $332.0 million in 2016. Stronger demand in the consumer electronics and industrial components end markets increased value-added sales by $14.7 million compared to 2016. Also, the increase in value-added sales was driven by higher raw material sales of beryllium hydroxide of approximately $7.1 million.
Performance Alloys and Composites generated operating profit of
$22.0 million
, or 6% of value-added sales, in
2017
as compared to
$6.6 million
, or 2% of value-added sales, in
2016
. Operating profit in 2017 was favorably impacted by higher sales volume, favorable product mix, and productivity improvements. Additionally, a $1.4 million gain was realized on the sale of our service center located in Fukaya, Japan. Operating profit in 2016 was negatively impacted by unfavorable product mix and manufacturing yields, the negative impact of foreign exchange rate movements, and a $2.6 million impairment charge relating to the closure of our service center located in Fukaya, Japan.
2016
Compared to
2015
Net sales from the Performance Alloys and Composites segment of $387.5 million in 2016 were 2% lower than net sales of $394.8 million in 2015. Value-added sales of $332.0 million in 2016 were 1% lower than value-added sales of $335.1 million in 2015. Value-added sales to the consumer electronics end market accounted for 21% of total segment value-added sales in 2016 compared to 18% in 2015, which was an increase of $9.3 million. This increase was primarily due to higher demand for base connector material applications. Value-added sales in the defense end market increased $5.1 million from 2015 primarily due to higher sales into satellite surveillance and missile projects. These increases were offset by lower raw material sales of beryllium hydroxide of $12.4 million and lower value-added sales of $5.8 million in the industrial components end market.
Performance Alloys and Composites generated operating profit of $6.6 million, or 2% of value-added sales, in 2016 as compared to $23.6 million, or 7% of value-added sales, in 2015. The decline in operating profit in 2016 as compared to 2015 was primarily due to unfavorable product mix and manufacturing yields, the negative impact of foreign exchange rate movements of $5.5 million, and a $2.6 million impairment charge relating to the future closure of our service center located in Fukaya, Japan.
Advanced Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
590,789
|
|
|
$
|
437,249
|
|
|
$
|
482,288
|
|
Value-added sales
|
|
228,062
|
|
|
176,332
|
|
|
182,794
|
|
Operating profit
|
|
32,763
|
|
|
26,282
|
|
|
27,805
|
|
2017
Compared to
2016
Net sales from the Advanced Materials segment of
$590.8 million
in
2017
were 35% higher than net sales of
$437.2 million
in
2016
. Net sales of $119.7 million during 2017 were attributable to the HTB acquisition. Also, net sales increased due to a combination of new product sales growth and demand in the consumer electronics end market. In addition, the impact of higher pass-through metal prices favorably impacted net sales by approximately $1.9 million.
Value-added sales of
$228.1 million
were 29% higher than value-added sales of
$176.3 million
in
2016
. This increase included value-added sales of $36.5 million attributable to our HTB acquisition. The increase in value-added sales was also driven by higher value-added sales to the consumer electronics end market. Value-added sales to the consumer electronics end market, which represents approximately 49% of total segment value-added sales in 2017, increased $11.0 million primarily due to higher demand, excluding the HTB acquisition.
Advanced Materials generated operating profit of
$32.8 million
in 2017 as compared to
$26.3 million
in 2016. Operating profit as a percentage of value-added sales was 14% in 2017 compared to 15% in 2016. The increase in operating profit in 2017 versus 2016 was primarily due to higher sales volume.
2016
Compared to
2015
Net sales from the Advanced Materials segment of $437.2 million in 2016 were 9% lower than net sales of $482.3 million in 2015 primarily due to the impact of lower volume of $55.0 million and changes in mix for customer supplied material, offset by the impact of higher pass-through metal prices of $17.6 million.
Value-added sales of $176.3 million were 4% lower than value-added sales of $182.8 million in 2015. The decrease in value-added sales was primarily driven by lower value-added sales to the consumer electronics and energy end markets. Value-added sales to the consumer electronics end market, which represents approximately 46% of total segment value-added sales in both 2016 and 2015, decreased $2.2 million primarily due to lower demand in the wireless market. Value-added sales to the energy end market decreased $2.6 million in 2016 compared to 2015 primarily due to lower demand from the solar segments of the market.
Advanced Materials generated operating profit of $26.3 million, or 15% of value-added sales, in 2016 as compared to $27.8 million, or 15% of value-added sales, in 2015. The decrease in operating profit in 2016 versus 2015 was due to lower volume and slightly unfavorable product mix, partially offset by improved manufacturing yields.
Precision Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
119,216
|
|
|
$
|
144,448
|
|
|
$
|
148,444
|
|
Value-added sales
|
|
90,678
|
|
|
97,700
|
|
|
101,761
|
|
Operating profit
|
|
8,445
|
|
|
11,635
|
|
|
7,483
|
|
2017
Compared to
2016
Net sales for the Precision Coatings segment were
$119.2 million
in
2017
as compared to
$144.4 million
in
2016
, and value-added sales were
$90.7 million
in
2017
versus
$97.7 million
in
2016
. Higher sales from new imaging and sensing applications were more than offset by lower sales in the medical end market. Sales decreased $8.4 million primarily due to lower volume in the blood glucose test strip segment of the medical end market.
The Precision Coatings segment reported an operating profit of
$8.4 million
, or 9% of value-added sales, in
2017
versus
$11.6 million
, or 12% of value-added sales, in
2016
. The decrease in operating profit in 2017 versus 2016 was due to lower sales volume and the absence of a gain on the sale of equipment of $0.7 million realized during 2016.
2016
Compared to
2015
Net sales for the Precision Coatings segment were $144.4 million in 2016 as compared to $148.4 million in 2015, and value-added sales were $97.7 million in 2016 versus $101.8 million in 2015. Higher sales in the defense end market were more than offset by lower sales in the medical end market. Defense end market sales were higher due to new Paveway optical filters utilized in defense missile applications. Sales decreased $6.4 million primarily due to lower volume in the blood glucose test strip segment of the medical end market.
The Precision Coatings segment reported an operating profit of $11.6 million, or 12% of value-added sales, in 2016 versus $7.5 million, or 7% of value-added sales, in 2015. The increase is primarily due to improved yields on optical coating products, favorable product mix, cost reduction initiatives, and a gain on the sale of equipment of $0.7 million. These increases more than offset the impact of lower sales volume.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(220
|
)
|
Value-added sales
|
|
(4,508
|
)
|
|
(6,134
|
)
|
|
(2,444
|
)
|
Operating loss
|
|
(24,607
|
)
|
|
(17,414
|
)
|
|
(13,580
|
)
|
2017
Compared to
2016
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of
$24.6 million
in
2017
increased $7.2 million as compared to $17.4 million in
2016
. As a percent of total Company value-added sales, corporate costs increased to 4% in 2017 from 3% in 2016. The increase in 2017 was primarily due to costs associated with the CEO transition of $4.1 million and higher variable compensation expense relating to improved performance levels.
2016
Compared to
2015
Corporate costs of $17.4 million in 2016 increased $3.8 million as compared to $13.6 million in 2015. As a percent of total Company value-added sales, corporate costs increased to 3% in 2016 from 2% in 2015. Higher unallocated corporate costs in 2016 were primarily due to the $5.6 million insurance and legal settlement gains realized in 2015.
International Sales and Operations
We operate in worldwide markets, and our international customer base continues to expand geographically. In Asia, we have strategically located our facilities in Japan, Singapore, China, Korea, Taiwan, and the Philippines, while our European facilities are in Germany, the United Kingdom, and Ireland.
Our international operations provide a combination of manufacturing, finishing operations, local sales support, and distribution services and are designed to provide a cost-effective method of capturing the growing overseas demand for our products over the long term. We also augment our sales and distribution efforts with an established network of independent distributors and agents throughout the world.
The following table summarizes total international sales by region for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Asia
|
|
$
|
265,991
|
|
|
$
|
193,739
|
|
|
$
|
247,174
|
|
Europe
|
|
205,118
|
|
|
121,648
|
|
|
122,554
|
|
Rest of world
|
|
17,663
|
|
|
14,174
|
|
|
16,108
|
|
Total
|
|
$
|
488,772
|
|
|
$
|
329,561
|
|
|
$
|
385,836
|
|
Percent of total net sales
|
|
43
|
%
|
|
34
|
%
|
|
38
|
%
|
International sales include sales from international operations and direct exports from our U.S. operations. The international sales in the above chart are included in the individual segment sales previously discussed.
Total international sales increased 48% in
2017
from
2016
. The increase was primarily due to the HTB acquisition and the impact of higher sales in the consumer electronics end market in Asia.
Sales from European and certain Asian operations are primarily denominated in local currencies. Exports from the U.S. and the balance of the sales from the Asian operations are typically denominated in U.S. dollars. Local competition generally limits our ability to adjust selling prices upwards to compensate for short-term unfavorable exchange rate movements.
We have a hedge program with the objective of minimizing the short-term impact of fluctuating currency values on our consolidated operating profit. Refer to Note Q of the Consolidated Financial Statements.
Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the Company in total for
2017
,
2016
, and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
429,442
|
|
|
$
|
387,539
|
|
|
$
|
394,760
|
|
Advanced Materials
|
|
590,789
|
|
|
437,249
|
|
|
482,288
|
|
Precision Coatings
|
|
119,216
|
|
|
144,448
|
|
|
148,444
|
|
Other
|
|
—
|
|
|
—
|
|
|
(220
|
)
|
Total
|
|
$
|
1,139,447
|
|
|
$
|
969,236
|
|
|
$
|
1,025,272
|
|
|
|
|
|
|
|
|
Less: pass-through metal costs
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
65,977
|
|
|
$
|
55,527
|
|
|
$
|
59,624
|
|
Advanced Materials
|
|
362,727
|
|
|
260,917
|
|
|
299,494
|
|
Precision Coatings
|
|
28,538
|
|
|
46,748
|
|
|
46,683
|
|
Other
|
|
4,508
|
|
|
6,134
|
|
|
2,224
|
|
Total
|
|
$
|
461,750
|
|
|
$
|
369,326
|
|
|
$
|
408,025
|
|
|
|
|
|
|
|
|
Value-added sales
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
363,465
|
|
|
$
|
332,012
|
|
|
$
|
335,136
|
|
Advanced Materials
|
|
228,062
|
|
|
176,332
|
|
|
182,794
|
|
Precision Coatings
|
|
90,678
|
|
|
97,700
|
|
|
101,761
|
|
Other
|
|
(4,508
|
)
|
|
(6,134
|
)
|
|
(2,444
|
)
|
Total
|
|
$
|
677,697
|
|
|
$
|
599,910
|
|
|
$
|
617,247
|
|
The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.
Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis, and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.
FINANCIAL POSITION
Cash Flow
A summary of cash flows provided from (used in) operating, investing, and financing activities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net cash provided from operating activities
|
|
$
|
67,795
|
|
|
$
|
68,180
|
|
|
$
|
91,010
|
|
Net cash (used in) investing activities
|
|
(43,358
|
)
|
|
(37,355
|
)
|
|
(52,032
|
)
|
Net cash (used in) financing activities
|
|
(15,445
|
)
|
|
(23,118
|
)
|
|
(26,877
|
)
|
Effects of exchange rate changes
|
|
1,388
|
|
|
(479
|
)
|
|
(1,015
|
)
|
Net change in cash and cash equivalents
|
|
$
|
10,380
|
|
|
$
|
7,228
|
|
|
$
|
11,086
|
|
Net cash provided from operating activities
totaled $67.8 million in 2017 versus $68.2 million in 2016. Lower net income of $14.3 million was primarily due to non-cash charges related to income taxes.
Working capital requirements provided cash of $6.5 million during 2017 compared to providing $9.5 million in 2016. Cash flows used for accounts receivable were $14.4 million higher than 2016 due to the HTB acquisition, which accounted for approximately $10.0 million of the increase. Three-month trailing days sales outstanding (DSO) was approximately 37 days at December 31, 2017 versus 41 days at December 31, 2016. Cash flows used for inventory increased $20.3 million primarily within the Performance Alloys and Composites and Advanced Materials segments to respond to anticipated orders and demand. Cash flows from accounts payable and accrued expenses provided cash of approximately $34.4 million compared to $2.8 million in the prior year primarily due to a higher accounts payable balance due to the timing of payments, higher incentive compensation accruals, and the HTB acquisition.
Price movements of precious and base metals are essentially passed to customers. Therefore, while sudden movements in the price of metals can cause a temporary imbalance in our cash receipts and payments in either direction, once prices stabilize, our cash flow tends to stabilize as well.
Net cash used in investing activities
was $43.4 million in 2017 compared to $37.4 million in 2016, reflecting a $16.5 million payment for the HTB acquisition offset by lower payments for property, plant, and equipment and mine development of $8.0 million.
Net cash used in financing activities
decreased $7.7 million from 2016 due to the prior year repayment of the Company's $8.3 million variable rate industrial revenue bonds with the Lorain Port Authority in Ohio.
Dividends per common share increased 5% to $0.395 per share in 2017. Total dividend payments to common shareholders were $7.9 million in 2017 and $7.5 million in 2016. In May 2017, the Board of Directors declared an increase in our quarterly dividend from $0.095 to $0.100 per share. We intend to pay a quarterly dividend on an ongoing basis, subject to a continuing strong capital structure and a determination that the dividend remains in the best interest of our shareholders.
Liquidity
We believe that cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs, environmental remediation projects, and strategic acquisitions. At December 31, 2017, cash and cash equivalents held by our foreign operations totaled $16.6 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or the results of operations for the foreseeable future.
A summary of key data relative to our liquidity, including the outstanding debt, cash balances, available borrowing capacity, and the debt-to-debt-plus-equity ratio, as of
December 31, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2017
|
|
2016
|
Total outstanding debt
|
|
$
|
3,818
|
|
|
$
|
4,615
|
|
Cash
|
|
41,844
|
|
|
31,464
|
|
Net (cash) debt
|
|
(38,026
|
)
|
|
(26,849
|
)
|
Available borrowing capacity
|
|
$
|
254,777
|
|
|
$
|
238,886
|
|
Debt-to-debt-plus-equity ratio
|
|
1
|
%
|
|
1
|
%
|
Net (cash) debt is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each year depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.
The Company's revolving credit agreement (Credit Agreement) expires in 2020 and is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows us to borrow money at a premium over LIBOR or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the agreement. The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of
December 31, 2017
and
December 31, 2016
. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.
Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. As a result we have negotiated increases in the available capacity under existing lines, added additional lines, and extended the maturity dates of existing lines in recent years. The most recent amendment, completed in the third quarter of 2016 with our largest precious metals consignment facility, extended the maturity date from September 30, 2016 to September 30, 2019 and provided for more favorable pricing for fixed rate consignments. The available and unused capacity under the metal financing lines totaled approximately $130.0 million as of
December 31, 2017
. The availability is determined by Board approved levels and actual line capacity.
Contractual Obligations
A summary of payments to be made under long-term debt agreements, operating leases, significant capital leases, pension plan contributions, and material purchase commitments by year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
There-
after
|
|
Total
|
Total debt
(1)
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
0.9
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.8
|
|
Capital lease payments
(2)
|
|
2.2
|
|
|
2.2
|
|
|
2.2
|
|
|
2.2
|
|
|
2.1
|
|
|
22.6
|
|
|
33.5
|
|
Interest payments on total debt
(3)
|
|
0.2
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Non-cancelable lease payments
(4)
|
|
8.1
|
|
|
6.3
|
|
|
5.5
|
|
|
4.6
|
|
|
5.6
|
|
|
3.3
|
|
|
33.4
|
|
Pension plan contribution
(5)
|
|
21.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21.0
|
|
Other benefit payments
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
Other long-term liabilities
(6)
|
|
1.0
|
|
|
0.9
|
|
|
2.8
|
|
|
0.7
|
|
|
0.6
|
|
|
0.5
|
|
|
6.5
|
|
Tax Cuts and Jobs Act transition
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
0.9
|
|
|
2.0
|
|
Purchase obligations
|
|
9.7
|
|
|
0.9
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
1.7
|
|
|
13.2
|
|
Total
|
|
$
|
45.5
|
|
|
$
|
11.5
|
|
|
$
|
12.0
|
|
|
$
|
9.3
|
|
|
$
|
8.9
|
|
|
$
|
29.0
|
|
|
$
|
116.2
|
|
(1) Total debt relates to installment payments on our fixed rate industrial development revenue bonds that mature in 2021.
(2) The capital lease payments include facilities relating to our Elmore, Ohio and Alzenau, Germany sites.
(3) These amounts represent future interest payments related to our total debt.
(4) The non-cancelable lease payments represent payments under operating leases with initial lease terms in excess of one year
as of
December 31, 2017
.
|
|
(5)
|
Our domestic defined benefit pension plan is underfunded as of
December 31, 2017
. Contributions in future periods will be dependent upon regulatory requirements, the plan funded ratio, plan investment performance, discount rates, actuarial assumptions, plan amendments, our contribution objectives, and other factors. Federal legislation enacted during 2012 resulted in a reduction in mandatory contributions in the short term from levels under the previous regulations, but we may elect to contribute funds in excess of the mandatory levels in a given year depending upon our cash flow from operations and other considerations. In 2018, we anticipate contributing approximately $21.0 million to our domestic defined benefit plan. This estimate is in excess of the mandatory contributions. This higher contribution level is designed to minimize our PBGC premium payments, as well as to maintain the plan funded ratio in line with our long-term objectives. We also
|
anticipate funding those contributions with cash on hand, cash generated from operations, or borrowings under our existing lines of credit. It is not practical to estimate the required contributions beyond 2018 at the present time.
|
|
(6)
|
Other long-term liabilities include environmental remediation costs. We have an active environmental compliance program. We estimate the probable cost of identified environmental remediation projects and establish reserves accordingly. The environmental remediation reserve balance was $6.5 million at December 31, 2017 and $6.0 million at December 31, 2016. Environmental projects tend to be long term, and the associated payments are typically made over a number of years. Refer to Note R of the Consolidated Financial Statements for further discussion.
|
Off-balance Sheet Obligations
We maintain the majority of the precious metals and copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. Refer to Item 7A “Quantitative and Qualitative Disclosures about Market Risk.” The notional value of off-balance sheet precious metals and copper was $320.0 million as of
December 31, 2017
versus $194.8 million as of
December 31, 2016
. We were in compliance with all of the covenants contained in the consignment agreements as of
December 31, 2017
and
December 31, 2016
.
ORE RESERVES
We have proven and probable reserves of beryllium-bearing bertrandite ore in Juab County, Utah. We own approximately 90 percent of the proven reserves, with the remaining reserves leased from the State of Utah. We augment our proven reserves of bertrandite ore through the purchase of imported beryl ore from time to time. This beryl ore, which is approximately four percent beryllium, is also processed at the Utah extraction facility. Approximately 88 percent of the beryllium in ore is recovered in the extraction process. Estimating the quantity and/or grade of ore reserves requires the size, shape, and depth of ore bodies to be determined by analyzing geological data such as drilling samples. Economic assumptions used to estimate reserves change from period to period, and as additional geological and operational data is generated during the course of operations, estimates of reserves may change from period to period.
The term “proven reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral content of reserves are well-established and (c) for which are commercially recoverable through open-pit methods.
The term “probable reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
|
|
Probable
|
|
Total
|
As of December 31, 2017
|
|
|
|
|
|
|
Tonnage (in thousands)
|
|
8,119
|
|
|
945
|
|
|
9,064
|
|
Grade (% beryllium)
|
|
0.248
|
%
|
|
0.257
|
%
|
|
0.249
|
%
|
Beryllium pounds (in millions)
|
|
40.34
|
|
|
4.85
|
|
|
45.19
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
Tonnage (in thousands)
|
|
7,991
|
|
|
739
|
|
|
8,730
|
|
Grade (% beryllium)
|
|
0.249
|
%
|
|
0.269
|
%
|
|
0.251
|
%
|
Beryllium pounds (in millions)
|
|
39.85
|
|
|
3.98
|
|
|
43.83
|
|
Based upon average production levels in recent years and our near-term production forecasts, proven reserves would last a minimum of seventy-five years. The table below details our production of beryllium at our Utah location.
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Pounds of Beryllium)
|
|
2017
|
|
2016
|
|
2015
|
Domestic ore
|
|
326
|
|
|
339
|
|
|
439
|
|
Non-domestic ore
|
|
12
|
|
|
23
|
|
|
26
|
|
Unyielded total
|
|
338
|
|
|
362
|
|
|
465
|
|
Annual yield
|
|
88
|
%
|
|
88
|
%
|
|
89
|
%
|
Beryllium produced
|
|
296
|
|
|
318
|
|
|
412
|
|
% of mill capacity
|
|
47
|
%
|
|
42
|
%
|
|
55
|
%
|
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. The following policies are considered by management to be critical because adherence to these policies relies significantly upon our judgment.
Accrued Liabilities
We have various accruals on our balance sheet that are based in part upon our judgment, including accruals for litigation, environmental remediation, and workers’ compensation costs. When a loss is probable, we establish accrual balances based on the reasonably estimable loss or range of loss as determined by a review of the available facts and circumstances by management and independent advisors and specialists, as appropriate. When no point of loss is more likely than another, the accrual is established
at the low end of the estimated reasonable range. Litigation and environmental accruals are established only for identified and/or asserted claims; future claims, therefore, could give rise to increases to the accruals. The accruals are adjusted as facts and circumstances change, as well as for changes in our strategies or the pertinent regulatory requirements. Since these accruals are estimates, the ultimate resolution may be greater or less than the established accrual balance for a variety of reasons, including court decisions, additional discovery, inflation levels, cost control efforts, and resolution of similar cases. Changes to the accruals would then result in an additional charge or credit to the income statement in the period when the change is made. Refer to Note R of the Consolidated Financial Statements.
Legal claims may be subject to partial or complete insurance recovery. The accrued liability is recorded at the gross amount of the estimated cost and the insurance recoverable, if any, is recorded as an asset and is not netted against the liability. The accrued legal liability includes the estimated indemnity cost only, if any, to resolve the claim through a settlement or court verdict. The legal defense costs are not included in the accrual and are expensed in the period incurred, with the level of expense in a given year affected by the number and types of claims we are actively defending.
Non-employee claims for CBD are covered by insurance, subject to certain limitations. The insurance covers defense costs and indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of deductibles. In
2017
and
2016
, defense and indemnity costs were less than the deductible.
Pensions
The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels, and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates (along the yield curve) for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approach to determine the service and interest components of its net periodic benefit costs. The change was accounted for as a change in estimate and, accordingly, has been accounted for prospectively starting in 2017. The reductions in service and interest costs for 2017 associated with this change in estimate totaled approximately $1.0 million.
Our pension plan investment strategies are governed by a policy adopted by the Board of Directors. A senior management team oversees a group of outside investment analysts and brokerage firms that implement these strategies. The future return on pension assets is dependent upon the plan’s asset allocation, which changes from time to time, and the performance of the underlying investments. As a result of our review of various factors, we used an expected rate of return on plan assets assumption of 7.00% at
December 31, 2017
and 7.25% at December 31, 2016. This assumption is reflective of management’s view of the long-term returns in the marketplace, as well as changes in risk profiles and available investments. Should the assets earn an average return less than the expected return assumption over time, in all likelihood the future pension expense would increase.
The impact of a change in the discount rate or expected rate of return assumption on pension expense can vary from year to year depending upon the undiscounted liability level, the current discount rate, the asset balance, other changes to the plan, and other factors. A 0.25 percentage point decrease to the discount rate would increase the 2018 projected pension expense approximately $0.9 million. A 0.25 percentage point decrease in the expected rate of return assumption would increase the 2018 projected pension expense by approximately $0.6 million.
Refer to Note N of the Consolidated Financial Statements for additional details on our pension and other post-employment benefit plans.
Last In, First Out (LIFO) Inventory
The prices of certain major raw materials that we use, including copper, nickel, gold, silver, and other precious metals, fluctuate during a given year. Where possible, such changes in material costs, in either direction, are generally reflected in selling price adjustments, particularly with precious metals and copper.
The prices of labor and other factors of production, including supplies and utilities, generally increase with inflation. Portions of these cost increases may be offset by manufacturing improvements and other efficiencies. From time to time, we will revise our billing practices to include an energy surcharge in an attempt to recover a portion of our higher energy costs from our customers.
However, market factors, alternative materials, and competitive pricing may limit our ability to offset all or a portion of a cost increase with higher prices.
We use the LIFO method for costing the majority of our domestic inventories. Under the LIFO method, inflationary cost increases are charged against the current period cost of goods sold in order to more closely match the cost with the associated revenue. The carrying value of the inventory is based upon older costs and, as a result, the LIFO cost of the inventory on the balance sheet is typically, but not always, lower than it would be under most alternative costing methods. The LIFO cost may also be lower than the current replacement cost of the inventory. The LIFO inventory value tends to be less volatile during years of fluctuating costs than the inventory value would be using other costing methods.
The LIFO impact on the income statement in any given year is dependent upon the inflation rate effect on raw material purchases and manufacturing conversion costs, the level of purchases in a given year, and changes in the inventory mix and quantities.
Deferred Taxes
We record deferred tax assets and liabilities based upon the temporary difference between the financial reporting and tax basis of assets and liabilities. If it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is established. All available evidence, both positive and negative, is considered to determine whether a valuation allowance is needed. We review the expiration dates of certain deferred tax assets against projected income levels to determine if a valuation allowance is needed. Certain deferred tax assets do not have an expiration date. We also evaluate deferred tax assets for realizability due to cumulative operating losses by jurisdiction and record a valuation allowance as warranted. A valuation allowance may increase tax expense and reduce net income in the period it is recorded. If a valuation allowance is no longer required, it will reduce tax expense and increase net income in the period that it is reversed.
We had valuation allowances of $16.2 million associated with certain federal, state and foreign deferred tax assets as of year-end
2017
, primarily for the foreign tax credit and net operating loss carryforwards.
Refer to Note G of the Consolidated Financial Statements for additional deferred tax details.
Unearned Revenue
Billings to customers in advance of the shipment of the goods are initially recorded as unearned revenue, which is a liability on our Consolidated Balance Sheets. This liability is subsequently reversed and the revenue, cost of sales, and gross margin are recorded when the goods are shipped, title passes to the customer, and all other revenue recognition criteria are satisfied. The related inventory also remains on our balance sheet until these revenue recognition criteria are met. Advanced billings are typically made in association with products with long manufacturing times and/or products paid with funds from a customer’s contract with the government. Billings in advance of the shipments allow us to collect cash earlier than billing at the time of the shipment and, therefore, the collected cash can be used to reduce our investment in working capital. The unearned revenue balance was
$5.5 million
as of year-end
2017
.
Precious Metal Physical Inventory Counts
We take and record the results of a physical inventory count of our precious metals on a quarterly basis. Our precious metal operations include a refinery that processes precious metal-containing scrap and other materials from our customers, as well as our own internally generated scrap. We also outsource portions of our refining requirements to other vendors, particularly those materials with longer processing times. The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters. The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from our refine vendors, and other factors. The resulting calculated weight of the precious metals in our refine operations may differ, in either direction, from what our records indicate that we should have on hand, which would then result in an adjustment to our pre-tax income in the period when the physical inventory was taken and the related estimates were made.
Derivatives
We may use derivative financial instruments to hedge our foreign currency, commodity and precious metal price, and interest rate exposures. We apply hedge accounting when an effective hedge relationship can be documented and maintained. The effective portion of the change in a cash flow hedge’s fair value is recorded in other comprehensive income, a component of shareholders’ equity, until the underlying hedged item matures. If a hedge does not qualify as effective, changes in its fair value are recorded against income in the current period. If a derivative is deemed to be a hedge of the fair value of a balance sheet item, the change
in the derivative’s value will be recorded in income and will offset the change in the fair value of the hedged item to the extent that the hedge is effective.
We secure derivatives with the intention of hedging existing or forecasted transactions only and do not engage in speculative trading or holding derivatives for investment purposes. Hedge contracts are typically held until maturity unless there is a change in the underlying hedged transaction. Our annual budget, quarterly forecasts, monthly estimates, customer agreements, and other analyses serve as the basis for determining forecasted transactions. The use of derivatives is governed by policies established by the Audit Committee of the Board of Directors. These policies provide guidance on the allowable types of hedge contracts, the allowable duration of the contracts, the maximum allowable notional amount of the outstanding contracts, and other related matters. Hedge contracts are approved by senior financial managers at our corporate office. The amount of derivatives outstanding at a particular point in time may also be limited by the availability of credit from financial institutions.
Our practice has been to secure hedge contracts denominated in the same manner as the underlying exposure; for example, a yen exposure will only be hedged with a yen contract and not with a surrogate currency and a silver exposure will only be hedged with a silver contract and not a gold contract. We also typically secure contracts through financial institutions that support us in our Credit Agreement.
Refer to Note Q of the Consolidated Financial Statements and Item 7A “Quantitative and Qualitative Disclosures About Market Risk."
Impairment of Goodwill and Long-Lived Assets
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducted its annual goodwill impairment assessment as of first day of the fourth quarter.
Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill within the Advanced Materials segment totaled
$50.3 million
. Within the Precision Coatings segment, goodwill totaled $17.9 million and $20.6 million relating to the Precision Optics and Large Area Coatings reporting units, respectively. The remaining $1.9 million is related to the Beryllium reporting unit within the Performance Alloys and Composites segment.
For the purpose of the goodwill impairment assessment, we have the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary. We opted to bypass step zero and proceeded to perform a "step one" quantitative assessment for each of our reporting units. The results of the step one indicated that no goodwill impairment existed.
In the step one, we estimated the fair value of each of our reporting units using a discounted cash flow (DCF) model. Each reporting unit prepared operating forecasts which include several assumptions including future sales growth from new products and applications, as well as assumptions regarding future industry-specific market conditions, capital expenditures, and working capital changes. These forecasts are reviewed and approved by management and serve as the basis for the assumptions used in the DCF. The DCF included three years of forecasted cash flows from this process, plus cash flows projected to be generated from the end of the forecasted period into perpetuity. In addition to the estimates of future cash flows, other significant estimates involved in the determination of fair value of the reporting units were the discount rates and growth rates used in the DCF model. The discount rates used in the DCF model consider market and industry data as well as specific risk premiums for each reporting unit. The growth rate for each reporting unit, for the purpose of calculating cash flows through perpetuity, was set after the forecasted period.
Changes in market conditions could increase the discount rate in the future, thus decreasing the fair value of the reporting unit. A hypothetical 1% increase in the discount rate, holding all other assumptions constant, would not have decreased the fair value of any reporting unit below that of its carrying value. The sales growth assumption for each reporting unit was based on future secured orders, as well as growth in certain markets due to the introduction of new products. The key uncertainty in the sales growth assumption, as discussed in Item 1A "Risk Factors," is our inability to accurately predict the timing and magnitude of sales of our products, especially newly introduced products. The assumed growth rate for cash flows beyond the forecast period was approximately 3%. A hypothetical 1% decrease in the growth rate, holding all other assumptions constant, would not have decreased the fair value of any reporting unit below that of its carrying value.
We also compared the market capitalization as of December 31, 2017 to the carrying value of our equity, noting no impairment indicators or triggering events.
We are unaware of any current market trends that are contrary to the assumptions made in the valuation of our reporting units. If actual results are not consistent with the assumptions made in the determination of the fair value of our reporting units, especially assumptions regarding future sales growth from new products and applications, it is possible that the estimated fair value of certain reporting units could fall below their carrying value and cause the reporting unit to fail step one of the goodwill impairment test.
|
|
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Financial Statements
|
Page
|
Management’s Report on Internal Control over Financial Reporting
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016, and 2015
|
|
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016, and 2015
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015
|
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
|
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015
|
|
Notes to Consolidated Financial Statements
|
|
Schedule II - Valuation and Qualifying Accounts
|
81
|
Management’s Report on Internal Control over Financial Reporting
The management of Materion Corporation and subsidiaries are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Materion Corporation and subsidiaries’ internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Materion Corporation and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017
. In making this assessment, it used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria) in Internal Control - Integrated Framework (2013).
The Company completed the acquisition of the high-performance target materials business of the Heraeus Group (HTB) on February 28, 2017. As permitted by SEC guidance, the scope of our evaluation of internal control over financial reporting as of December 31, 2017 did not include the internal control over financial reporting of HTB. The results of HTB are included in our consolidated financial statements from the date of acquisition and constituted 2.7% of total assets as of December 31, 2017 and 10.5% and (2.6%) of revenues and income before income taxes, respectively, for the year ended December 31, 2017.
Based on our assessment we believe that, as of
December 31, 2017
, the Company’s internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of
December 31, 2017
has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Materion Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Materion Corporation and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since at least 1958, but we are unable to determine the specific year.
Cleveland, Ohio
February 15, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Materion Corporation
Opinion on Internal Control over Financial Reporting
We have audited Materion Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Materion Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the high-performance target materials business of the Heraeus Group (HTB), which is included in the 2017 consolidated financial statements of the Company and constituted 2.7% of total assets, as of December 31, 2017 and 10.5% and (2.6%) of revenues and income before income taxes, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of HTB.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Materion Corporation and subsidiaries
as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”) of the Company and our report dated February 15, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 15, 2018
Materion Corporation and Subsidiaries
Years Ended
December 31, 2017
,
2016
, and
2015
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
2017
|
|
2016
|
|
2015
|
Net sales
|
$
|
1,139,447
|
|
|
$
|
969,236
|
|
|
$
|
1,025,272
|
|
Cost of sales
|
927,953
|
|
|
785,773
|
|
|
834,492
|
|
Gross margin
|
211,494
|
|
|
183,463
|
|
|
190,780
|
|
Selling, general, and administrative expense
|
146,170
|
|
|
129,683
|
|
|
129,941
|
|
Research and development expense
|
13,981
|
|
|
12,802
|
|
|
12,796
|
|
Other — net
(Note D)
|
12,764
|
|
|
13,874
|
|
|
2,775
|
|
Operating profit
|
38,579
|
|
|
27,104
|
|
|
45,268
|
|
Interest expense — net
(Note F)
|
2,183
|
|
|
1,789
|
|
|
2,450
|
|
Income before income taxes
|
36,396
|
|
|
25,315
|
|
|
42,818
|
|
Income tax expense (benefit)
(Note G)
|
24,945
|
|
|
(425
|
)
|
|
10,660
|
|
Net income
|
$
|
11,451
|
|
|
$
|
25,740
|
|
|
$
|
32,158
|
|
Basic earnings per share:
|
|
|
|
|
|
Net income per share of common stock
|
$
|
0.57
|
|
|
$
|
1.29
|
|
|
$
|
1.60
|
|
Diluted earnings per share:
|
|
|
|
|
|
Net income per share of common stock
|
$
|
0.56
|
|
|
$
|
1.27
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
Cash dividends per share
|
$
|
0.395
|
|
|
$
|
0.375
|
|
|
$
|
0.355
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding:
|
|
|
|
|
|
Basic
|
20,027
|
|
|
19,983
|
|
|
20,097
|
|
Diluted
|
20,415
|
|
|
20,213
|
|
|
20,402
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Materion Corporation and Subsidiaries
Years Ended
December 31, 2017
,
2016
, and
2015
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
11,451
|
|
|
$
|
25,740
|
|
|
$
|
32,158
|
|
Other comprehensive income:
|
|
|
|
|
|
Foreign currency translation adjustment
|
1,552
|
|
|
(172
|
)
|
|
(1,335
|
)
|
Derivative and hedging activity, net of tax (expense) benefit of ($271), ($149), and $1,175
|
(1,074
|
)
|
|
258
|
|
|
(1,999
|
)
|
Pension and post-employment benefit adjustment, net of tax (expense) benefit of ($13,820), $4,555, and ($2,963)
|
(17,234
|
)
|
|
(5,562
|
)
|
|
4,866
|
|
Other comprehensive (loss) income
|
(16,756
|
)
|
|
(5,476
|
)
|
|
1,532
|
|
Comprehensive income
|
$
|
(5,305
|
)
|
|
$
|
20,264
|
|
|
$
|
33,690
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Materion Corporation and Subsidiaries
Years Ended
December 31, 2017
,
2016
, and
2015
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
11,451
|
|
|
$
|
25,740
|
|
|
$
|
32,158
|
|
Adjustments to reconcile net income to net cash provided from operating activities:
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
42,751
|
|
|
45,651
|
|
|
37,817
|
|
Amortization of deferred financing costs in interest expense
|
919
|
|
|
666
|
|
|
654
|
|
Stock-based compensation expense (non-cash)
|
4,957
|
|
|
3,174
|
|
|
5,491
|
|
(Gain) loss on sale of property, plant, and equipment
|
(1,150
|
)
|
|
(648
|
)
|
|
768
|
|
Deferred tax expense (benefit)
|
20,256
|
|
|
(9,010
|
)
|
|
4,368
|
|
Changes in assets and liabilities net of acquired assets and liabilities:
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
(18,484
|
)
|
|
(4,096
|
)
|
|
14,777
|
|
Decrease (increase) in inventory
|
(9,462
|
)
|
|
10,791
|
|
|
19,372
|
|
Decrease (increase) in prepaid and other current assets
|
(11,606
|
)
|
|
658
|
|
|
2,139
|
|
Increase (decrease) in accounts payable and accrued expenses
|
34,433
|
|
|
2,758
|
|
|
(17,989
|
)
|
Increase (decrease) in unearned revenue
|
4,336
|
|
|
(2,590
|
)
|
|
(1,184
|
)
|
Increase (decrease) in interest and taxes payable
|
(514
|
)
|
|
2,511
|
|
|
(910
|
)
|
Increase (decrease) in long-term liabilities
|
(4,264
|
)
|
|
(684
|
)
|
|
(8,923
|
)
|
Other — net
|
(5,828
|
)
|
|
(6,741
|
)
|
|
2,472
|
|
Net cash provided from operating activities
|
67,795
|
|
|
68,180
|
|
|
91,010
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Payments for purchase of property, plant, and equipment
|
(27,516
|
)
|
|
(27,177
|
)
|
|
(29,505
|
)
|
Payments for mine development
|
(1,560
|
)
|
|
(9,861
|
)
|
|
(22,585
|
)
|
Payments for acquisition
|
(16,504
|
)
|
|
(1,750
|
)
|
|
—
|
|
Proceeds from sale of property, plant, and equipment
|
2,222
|
|
|
1,433
|
|
|
58
|
|
Net cash (used in) investing activities
|
(43,358
|
)
|
|
(37,355
|
)
|
|
(52,032
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayment of short-term debt
|
—
|
|
|
(8,305
|
)
|
|
(653
|
)
|
Proceeds from issuance of long-term debt
|
55,000
|
|
|
10,000
|
|
|
78,000
|
|
Repayment of long-term debt
|
(55,797
|
)
|
|
(10,694
|
)
|
|
(88,000
|
)
|
Principal payments under capital lease obligations
|
(843
|
)
|
|
(736
|
)
|
|
(759
|
)
|
Cash dividends paid
|
(7,913
|
)
|
|
(7,496
|
)
|
|
(7,132
|
)
|
Deferred financing costs
|
(300
|
)
|
|
(1,000
|
)
|
|
(838
|
)
|
Repurchase of common stock
|
(1,086
|
)
|
|
(3,798
|
)
|
|
(7,129
|
)
|
Payments of withholding taxes for stock-based compensation awards
|
(4,506
|
)
|
|
(1,089
|
)
|
|
(366
|
)
|
Net cash (used in) financing activities
|
(15,445
|
)
|
|
(23,118
|
)
|
|
(26,877
|
)
|
Effects of exchange rate changes
|
1,388
|
|
|
(479
|
)
|
|
(1,015
|
)
|
Net change in cash and cash equivalents
|
10,380
|
|
|
7,228
|
|
|
11,086
|
|
Cash and cash equivalents at beginning of period
|
31,464
|
|
|
24,236
|
|
|
13,150
|
|
Cash and cash equivalents at end of period
|
$
|
41,844
|
|
|
$
|
31,464
|
|
|
$
|
24,236
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Materion Corporation and Subsidiaries
December 31, 2017
and
2016
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
(Thousands)
|
2017
|
|
2016
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
(Note A)
|
$
|
41,844
|
|
|
$
|
31,464
|
|
Accounts receivable
(Note A)
|
124,014
|
|
|
100,817
|
|
Inventories
(Notes A and I)
|
220,352
|
|
|
200,865
|
|
Prepaid and other current assets
|
24,733
|
|
|
12,138
|
|
Total current assets
|
410,943
|
|
|
345,284
|
|
Long-term deferred income taxes
(Notes A and G)
|
17,047
|
|
|
39,409
|
|
Property, plant, and equipment
(Notes A and J)
|
891,789
|
|
|
861,267
|
|
Less allowances for depreciation, depletion, and amortization
|
(636,211
|
)
|
|
(608,636
|
)
|
Property, plant, and equipment — net
|
255,578
|
|
|
252,631
|
|
Intangible assets
(Notes A and K)
|
9,847
|
|
|
11,074
|
|
Other assets
|
6,992
|
|
|
5,950
|
|
Goodwill
(Notes A and K)
|
90,677
|
|
|
86,950
|
|
Total Assets
|
$
|
791,084
|
|
|
$
|
741,298
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current liabilities
|
|
|
|
Short-term debt
(Note L)
|
$
|
777
|
|
|
$
|
733
|
|
Accounts payable
|
49,059
|
|
|
32,533
|
|
Salaries and wages
|
42,694
|
|
|
29,885
|
|
Taxes other than income taxes
|
2,492
|
|
|
1,395
|
|
Other liabilities and accrued items
|
25,552
|
|
|
19,945
|
|
Income taxes
(Notes A and G)
|
1,084
|
|
|
4,781
|
|
Unearned revenue
|
5,451
|
|
|
1,105
|
|
Total current liabilities
|
127,109
|
|
|
90,377
|
|
Other long-term liabilities
|
30,967
|
|
|
17,979
|
|
Retirement and post-employment benefits
(Note N)
|
93,225
|
|
|
91,505
|
|
Unearned income
(Note A)
|
36,905
|
|
|
41,369
|
|
Long-term income taxes
(Notes A and G)
|
4,857
|
|
|
2,100
|
|
Deferred income taxes
(Notes A and G)
|
213
|
|
|
274
|
|
Long-term debt
(Note L)
|
2,827
|
|
|
3,605
|
|
Shareholders’ equity
|
|
|
|
Serial preferred stock (no par value; 5,000 authorized shares, none issued)
|
—
|
|
|
—
|
|
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 for both 2017 and 2016)
|
223,484
|
|
|
212,702
|
|
Retained earnings
|
536,116
|
|
|
517,903
|
|
Common stock in treasury (7,042 shares for 2017 and 7,200 shares for 2016)
|
(166,128
|
)
|
|
(154,399
|
)
|
Accumulated other comprehensive loss
(Note O)
|
(102,937
|
)
|
|
(86,181
|
)
|
Other equity transactions
|
4,446
|
|
|
4,064
|
|
Total shareholders’ equity
|
494,981
|
|
|
494,089
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
791,084
|
|
|
$
|
741,298
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Materion Corporation and Subsidiaries
Years Ended
December 31, 2017
,
2016
, and
2015
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
Common
Stock
|
|
Retained
Earnings
|
|
Common
Stock In
Treasury
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Other
Equity
Transactions
|
|
Total
|
Balance at January 1, 2015
|
$
|
204,634
|
|
|
$
|
474,633
|
|
|
$
|
(140,938
|
)
|
|
$
|
(82,237
|
)
|
|
$
|
2,927
|
|
|
$
|
459,019
|
|
Net income
|
—
|
|
|
32,158
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,158
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,532
|
|
|
—
|
|
|
1,532
|
|
Cash dividends declared
|
—
|
|
|
(7,132
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,132
|
)
|
Stock-based compensation activity
|
4,260
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,260
|
|
Repurchase of 212 shares
|
—
|
|
|
—
|
|
|
(7,129
|
)
|
|
—
|
|
|
—
|
|
|
(7,129
|
)
|
Directors' deferred compensation
|
73
|
|
|
—
|
|
|
(492
|
)
|
|
—
|
|
|
668
|
|
|
249
|
|
Balance at December 31, 2015
|
$
|
208,967
|
|
|
$
|
499,659
|
|
|
$
|
(148,559
|
)
|
|
$
|
(80,705
|
)
|
|
$
|
3,595
|
|
|
$
|
482,957
|
|
Net income
|
—
|
|
|
25,740
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,740
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,476
|
)
|
|
—
|
|
|
(5,476
|
)
|
Cash dividends declared
|
—
|
|
|
(7,496
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,496
|
)
|
Stock-based compensation activity
|
3,764
|
|
|
—
|
|
|
(1,762
|
)
|
|
—
|
|
|
—
|
|
|
2,002
|
|
Repurchase of 147 shares
|
—
|
|
|
—
|
|
|
(3,798
|
)
|
|
—
|
|
|
—
|
|
|
(3,798
|
)
|
Directors’ deferred compensation
|
(29
|
)
|
|
—
|
|
|
(280
|
)
|
|
—
|
|
|
469
|
|
|
160
|
|
Balance at December 31, 2016
|
$
|
212,702
|
|
|
$
|
517,903
|
|
|
$
|
(154,399
|
)
|
|
$
|
(86,181
|
)
|
|
$
|
4,064
|
|
|
$
|
494,089
|
|
Net income
|
—
|
|
|
11,451
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,451
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,081
|
)
|
|
—
|
|
|
(2,081
|
)
|
Tax Cuts and Jobs Act Reclassification
|
—
|
|
|
14,675
|
|
|
—
|
|
|
(14,675
|
)
|
|
—
|
|
|
—
|
|
Cash dividends declared
|
—
|
|
|
(7,913
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,913
|
)
|
Stock-based compensation activity
|
10,750
|
|
|
—
|
|
|
(10,300
|
)
|
|
—
|
|
|
—
|
|
|
450
|
|
Repurchase of 32 shares
|
—
|
|
|
—
|
|
|
(1,086
|
)
|
|
—
|
|
|
—
|
|
|
(1,086
|
)
|
Directors’ deferred compensation
|
32
|
|
|
—
|
|
|
(343
|
)
|
|
—
|
|
|
382
|
|
|
71
|
|
Balance at December 31, 2017
|
$
|
223,484
|
|
|
$
|
536,116
|
|
|
$
|
(166,128
|
)
|
|
$
|
(102,937
|
)
|
|
$
|
4,446
|
|
|
$
|
494,981
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note A — Significant Accounting Policies
(
Dollars in thousands)
Organization:
Materion Corporation (the Company) is a holding company with subsidiaries that have operations in the United States, Europe, and Asia. These operations manufacture advanced engineered materials used in a variety of end markets, including consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance. The Company has
four
reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. Other includes unallocated corporate costs.
Refer to Note C of the Consolidated Financial Statements for additional segment details. The Company is vertically integrated and distributes its products through a combination of company-owned facilities and independent distributors and agents.
Business Combinations:
The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Consolidation:
The Consolidated Financial Statements include the accounts of Materion Corporation and its subsidiaries. All of the Company’s subsidiaries were wholly owned as of
December 31, 2017
. Intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents:
All highly liquid investments with a maturity of
three months or less
when purchased are considered to be cash equivalents. At December 31, 2017, the Company had
$18.0 million
of cash equivalents invested in institutional money market funds. The carrying value of the money market funds approximates fair value due to their short-term maturities.
Accounts Receivable:
An allowance for doubtful accounts is maintained for the estimated losses resulting from the inability of customers to pay amounts due. The allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends. The allowance for doubtful accounts was
$640
and
$857
at December 31, 2017 and 2016, respectfully. The Company extends credit to customers based upon their financial condition, and collateral is not generally required.
Inventories:
Inventories are stated at the lower of cost or market. The cost of the majority of domestic inventories is determined using the last-in, first-out (LIFO) method to reflect a better matching of costs and revenues. The remaining inventories are stated principally at average cost.
Property, Plant, and Equipment:
Property, plant, and equipment is stated on the basis of cost. Depreciation is computed principally by the straight-line method, except certain assets for which depreciation may be computed by the units-of-production method. The depreciable lives that are used in computing the annual provision for depreciation by class of asset are primarily as follows:
|
|
|
|
Years
|
Land improvements
|
10 to 20
|
Buildings
|
20 to 40
|
Leasehold improvements
|
Life of lease
|
Machinery and equipment
|
3 to 15
|
Furniture and fixtures
|
4 to 10
|
Automobiles and trucks
|
3 to 8
|
Research equipment
|
3 to 10
|
Computer hardware
|
3 to 10
|
Computer software
|
3 to 10
|
An asset acquired under a capital lease will be recorded at the lesser of the present value of the projected lease payments or the fair value of the asset and will be depreciated in accordance with the above schedule. Leasehold improvements will be depreciated over the life of the improvement if it is shorter than the life of the lease. Repair and maintenance costs are expensed as incurred.
Mineral Resources and Mine Development:
Property acquisition costs are capitalized as mineral resources on the balance sheet and are depleted using the units-of-production method based upon total estimated recoverable proven reserves of the beryllium-bearing bertrandite ore body. The Company uses beryllium pounds as the unit of accounting measure, and depletion expense is recorded on a pro-rata basis based upon the amount of beryllium pounds extracted as a percentage of total estimated beryllium pounds contained in all ore bodies.
Mine development costs at our open pit surface mines include drilling, infrastructure, other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as Exploration expense. Capitalization of mine development project costs that meet the definition of an asset begins once mineralization is classified as proven and probable reserves.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist, and the activities are directed at obtaining additional information on the ore body or converting mineralized material to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.
The costs of removing overburden and waste materials to access the ore body at an open-pit mine prior to the production phase are referred to as “development costs.” Development costs are capitalized during the development of an open-pit mine and are capitalized at each pit. These costs are amortized as the ore is extracted using the units-of-production method based upon total estimated recoverable proven reserves for the individual pit. The Company uses beryllium pounds as the unit of accounting measure for recording amortization.
To the extent that the aforementioned costs benefit an entire ore body, the costs are amortized over the estimated useful life of the ore body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block area.
Goodwill and Other Intangible Assets:
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill and indefinite-lived intangible asset impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Intangible assets with finite lives are amortized using the straight-line method or effective interest method, as applicable, over the periods estimated to be benefited, which is generally
20 years or less
. Finite-lived intangible assets are also reviewed for impairment if facts and circumstances warrant.
Asset Impairment:
In the event that facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to the associated estimated future undiscounted cash flow. If the carrying value exceeds that cash flow, then the assets are written down to their fair values.
Derivatives:
The Company recognizes all derivatives on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (loss), a component of shareholders’ equity, until the hedged item is recognized in earnings. If the derivative is designated as a fair value hedge, changes in fair value are offset against the change in the fair value of the hedged asset, liability, or commitment through earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in its fair value are adjusted through the income statement.
Asset Retirement Obligation:
The Company records a liability to recognize the legal obligation to remove an asset at the time the asset is acquired or when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense. An asset equal to the fair value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset.
Unearned Income:
Expenditures for capital equipment to be reimbursed under government contracts are recorded in property, plant, and equipment, while the reimbursements for those expenditures are recorded in unearned income, a liability on the balance sheet. When the assets subject to reimbursement are placed in service, the total cost is depreciated over the useful lives, and the unearned income liability is reduced and credited to cost of sales on the Consolidated Statements of Income ratably with the annual depreciation expense. Depreciation and amortization expense on the Consolidated Statements of Cash Flows is shown net of the associated period reduction in the unearned income liability.
Revenue Recognition:
The Company generally recognizes revenue when the goods are shipped and title passes to the customer. The Company requires persuasive evidence that a revenue arrangement exists, delivery of the product has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured before revenue is realized and earned. Billings in advance of the shipment of the goods are recorded as unearned revenue, which is a liability on the balance sheet. Revenue is recognized for these transactions when the goods are shipped and all other revenue recognition criteria are met.
Shipping and Handling Costs:
The Company records shipping and handling costs for products sold to customers in cost of sales in the Consolidated Statements of Income.
Advertising Costs:
The Company expenses all advertising costs as incurred. Advertising costs were
$1,252
in
2017
,
$1,163
in
2016
, and
$1,285
in
2015
.
Stock-based Compensation:
The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. The fair value of restricted stock units is based on the closing price of the Company's common shares on the grant date. Stock appreciation rights (SARs) are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. The fair value of SARs is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. See Note P for additional information about stock-based compensation.
Capitalized Interest:
Interest expense associated with active capital asset construction and mine development projects is capitalized and amortized over the future useful lives of the related assets.
Income Taxes:
The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The Company will record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized, as warranted by current facts and circumstances. The Company applies a more-likely-than-not recognition threshold for all tax uncertainties and will record a liability for those tax benefits that have a
less than 50%
likelihood of being sustained upon examination by the taxing authorities.
Net Income Per Share:
Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive common stock equivalents as appropriate using the treasury stock method.
New Pronouncements Adopted:
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02,
Income Statement - Reporting Comprehensive Income
,
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate under the TCJA. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted
21 percent
corporate income tax rate. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December
15, 2018 with early adoption in any interim period permitted. The Company adopted the new guidance during the fourth quarter of 2017 and elected to make the reclassification. As a result, Retained earnings increased
$14,675
with a corresponding decrease to Accumulated other comprehensive income.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which impacts several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under this standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement, and the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. An entity must also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the reporting period. Excess tax benefits are classified, along with other income tax cash flows, as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The ASU, which is required to be applied on a modified retrospective basis, is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted the new guidance during the first quarter of 2017. An impact of adoption was the recognition of excess tax benefits in Income tax expense rather than Shareholders' equity in 2017. As a result, the Company recognized discrete tax benefits of
$2.0 million
in Income tax expense during 2017. The cash flow classification requirements of ASU 2016-09 were applied retrospectively. As a result cash flows from operating activities increased by
$1,006
and
$782
in 2016 and 2015, respectively, with a corresponding decrease to cash flows from financing activities. None of the other provisions in this ASU had a material effect on the Company's consolidated financial statements.
New Pronouncements Issued:
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments also allow only the service cost component to be eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied retrospectively for the presentation of service cost and other components of net benefit cost on the income statement and prospectively for the capitalization of service cost and net periodic postretirement benefits in assets. The adoption of ASU 2017-07 will result in a change to the Company's pension expense reported within Operating profit, which will be offset by a corresponding change in Other non-operating expense, net to reflect the impact of presenting the interest cost, expected return on plan assets, amortization of prior service credit, and net actuarial loss components of net periodic benefit costs outside of Operating profit. The Company does not expect ASU 2017-07 to have a material effect on its financial condition or liquidity.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation.
The Company will adopt the new standard using the modified retrospective method as of January 1, 2018. Prior periods will not be retrospectively adjusted. This approach will be applied to all contracts not completed as of January 1, 2018. In addition to the enhanced footnote disclosures related to customer contracts, the new standard will impact the Company's timing of revenue recognition for certain contracts and subcontracts with the United States government that contain termination for convenience clauses. However, this impact will not have a material impact to our consolidated financial statements.
No other recently issued ASUs are expected to have a material effect on the Company's results of operations, financial condition, or liquidity.
Note B — Acquisitions
On February 28, 2017, the Company acquired the target materials business of the Heraeus Group (HTB), of Hanau, Germany, for
$16.5 million
. This business manufactures precious and non-precious metal target materials for the architectural and automotive glass, electronic display, photovoltaic, and semiconductor markets at facilities in Germany, Taiwan, and the United States. This business operates within the Advanced Materials segment, and the results of operations are included as of the date of acquisition.
The Company will make adjustments to the purchase price allocation prior to completion of the measurement period, as necessary. Only items identified as of the acquisition date will be considered for subsequent adjustment. The purchase price allocation for the acquisition is as follows:
|
|
|
|
|
(Thousands)
|
Amount
|
Assets:
|
|
Inventories
|
$
|
7,221
|
|
Prepaid and other current assets
|
2,270
|
|
Long-term deferred income taxes
|
14
|
|
Property, plant, and equipment
|
6,501
|
|
Intangible assets
|
3,649
|
|
Goodwill
|
3,574
|
|
Total assets acquired
|
$
|
23,229
|
|
|
|
Liabilities:
|
|
Other liabilities and accrued items
|
$
|
984
|
|
Other long-term liabilities
|
449
|
|
Retirement and post-employment benefits
|
5,292
|
|
Total liabilities assumed
|
$
|
6,725
|
|
|
|
Total purchase price
|
$
|
16,504
|
|
As part of the acquisition, the Company recorded approximately
$3.6 million
of goodwill. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired. Also, the Company acquired approximately
$3.6 million
of other intangible assets, which will be amortized using the straight-line method over an average life of about
10 years
. The following table reports the intangible assets by asset category and useful life:
|
|
|
|
|
|
|
|
(Thousands)
|
|
Value at Acquisition
|
|
Useful Life
|
Customer relationships
|
|
$
|
2,274
|
|
|
15 years
|
Technology
|
|
1,375
|
|
|
3 years
|
Total
|
|
$
|
3,649
|
|
|
|
Note C — Segment Reporting and Geographic Information
The Company has the following operating segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the availability of discrete financial information and the Company’s organizational and management structure.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Coatings produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
Financial information for reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance
Alloys and
Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Other
|
|
Total
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
429,442
|
|
|
$
|
590,789
|
|
|
$
|
119,216
|
|
|
$
|
—
|
|
|
$
|
1,139,447
|
|
Intersegment sales
|
|
114
|
|
|
58,056
|
|
|
—
|
|
|
—
|
|
|
58,170
|
|
Value-added sales
|
|
363,465
|
|
|
228,062
|
|
|
90,678
|
|
|
(4,508
|
)
|
|
677,697
|
|
Operating profit (loss)
|
|
21,978
|
|
|
32,763
|
|
|
8,445
|
|
|
(24,607
|
)
|
|
38,579
|
|
Depreciation, depletion, and amortization
|
|
23,209
|
|
|
7,354
|
|
|
9,721
|
|
|
2,467
|
|
|
42,751
|
|
Expenditures for long-lived assets
|
|
10,427
|
|
|
13,318
|
|
|
3,048
|
|
|
2,283
|
|
|
29,076
|
|
Assets
|
|
418,798
|
|
|
202,389
|
|
|
97,504
|
|
|
72,393
|
|
|
791,084
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
387,539
|
|
|
$
|
437,249
|
|
|
$
|
144,448
|
|
|
$
|
—
|
|
|
$
|
969,236
|
|
Intersegment sales
|
|
240
|
|
|
70,457
|
|
|
—
|
|
|
—
|
|
|
70,697
|
|
Value-added sales
|
|
332,012
|
|
|
176,332
|
|
|
97,700
|
|
|
(6,134
|
)
|
|
599,910
|
|
Operating profit (loss)
|
|
6,601
|
|
|
26,282
|
|
|
11,635
|
|
|
(17,414
|
)
|
|
27,104
|
|
Depreciation, depletion, and amortization
|
|
27,059
|
|
|
6,644
|
|
|
9,945
|
|
|
2,003
|
|
|
45,651
|
|
Expenditures for long-lived assets
|
|
26,604
|
|
|
4,931
|
|
|
3,176
|
|
|
2,327
|
|
|
37,038
|
|
Assets
|
|
422,787
|
|
|
133,682
|
|
|
108,788
|
|
|
76,041
|
|
|
741,298
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,760
|
|
|
$
|
482,288
|
|
|
$
|
148,444
|
|
|
$
|
(220
|
)
|
|
$
|
1,025,272
|
|
Intersegment sales
|
|
768
|
|
|
63,669
|
|
|
—
|
|
|
—
|
|
|
64,437
|
|
Value-added sales
|
|
335,136
|
|
|
182,794
|
|
|
101,761
|
|
|
(2,444
|
)
|
|
617,247
|
|
Operating profit (loss)
|
|
23,560
|
|
|
27,805
|
|
|
7,483
|
|
|
(13,580
|
)
|
|
45,268
|
|
Depreciation, depletion, and amortization
|
|
19,748
|
|
|
6,995
|
|
|
9,951
|
|
|
1,777
|
|
|
38,471
|
|
Expenditures for long-lived assets
|
|
38,562
|
|
|
5,286
|
|
|
6,399
|
|
|
1,843
|
|
|
52,090
|
|
Assets
|
|
425,759
|
|
|
131,104
|
|
|
118,953
|
|
|
66,477
|
|
|
742,293
|
|
Intersegment sales are eliminated in consolidation.
The primary measure of evaluating segment performance is operating profit. In addition to net sales, value-added sales is also reviewed. Value-added sales represents a non-GAAP financial measure which removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in pass-through metal prices. Value-added sales is a metric of particular importance to the Advanced Materials segment, since a significant portion of Advanced Materials' net sales are based on the value of precious metals which can fluctuate significantly from period to period.
From a segment assets perspective, segments are evaluated based upon a return on assets metric, which includes inventory (excluding the impact of LIFO), accounts receivable, and property, plant, and equipment.
Other geographic information includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
United States
|
|
$
|
650,675
|
|
|
$
|
639,675
|
|
|
$
|
639,436
|
|
Asia
|
|
265,991
|
|
|
193,739
|
|
|
247,174
|
|
Europe
|
|
205,118
|
|
|
121,648
|
|
|
122,554
|
|
All other
|
|
17,663
|
|
|
14,174
|
|
|
16,108
|
|
Total
|
|
$
|
1,139,447
|
|
|
$
|
969,236
|
|
|
$
|
1,025,272
|
|
Long-lived assets by country deployed
|
|
|
|
|
|
|
United States
|
|
$
|
227,412
|
|
|
$
|
240,309
|
|
|
$
|
249,976
|
|
All other
|
|
28,166
|
|
|
12,322
|
|
|
13,653
|
|
Total
|
|
$
|
255,578
|
|
|
$
|
252,631
|
|
|
$
|
263,629
|
|
Net sales are based on the location of the selling group. No individual country, other than the United States, or customer accounted for
10%
or more of the Company’s net sales for the years presented.
Long-lived assets are comprised of property, plant, and equipment based on physical location.
Note D — Other-net
Other-net is summarized for
2017
,
2016
, and
2015
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) Expense
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Metal consignment fees
|
|
$
|
8,782
|
|
|
$
|
6,409
|
|
|
$
|
7,074
|
|
Amortization of intangible assets
|
|
4,629
|
|
|
4,498
|
|
|
5,112
|
|
Foreign currency exchange/translation (gain) loss
|
|
(722
|
)
|
|
1,525
|
|
|
(5,461
|
)
|
Impairment and other cost reduction initiatives
|
|
255
|
|
|
2,586
|
|
|
—
|
|
Net (gain) loss on disposal of fixed assets
|
|
(1,150
|
)
|
|
(648
|
)
|
|
768
|
|
Recovery from insurance
|
|
—
|
|
|
—
|
|
|
(3,800
|
)
|
Legal settlement
|
|
—
|
|
|
—
|
|
|
(1,825
|
)
|
Other items
|
|
970
|
|
|
(496
|
)
|
|
907
|
|
Total
|
|
$
|
12,764
|
|
|
$
|
13,874
|
|
|
$
|
2,775
|
|
Note E — Restructuring
In 2017, the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with these actions within the Other and Precision Coatings segments included severance associated with approximately
twenty-three
employees and other related costs.
In 2016, the Company initiated a plan to close the Fukaya, Japan service center, which is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately
thirteen
employees and related facility exit costs.
These costs are presented in the Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Cost of sales
|
|
$
|
463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Selling, general, and administrative (SG&A) expense
|
|
1,310
|
|
|
—
|
|
|
—
|
|
Other-net
|
|
255
|
|
|
2,586
|
|
|
—
|
|
Total
|
|
$
|
2,028
|
|
|
$
|
2,586
|
|
|
$
|
—
|
|
Remaining severance payments related to these initiatives of
$0.3 million
are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company does not expect to incur additional costs related to these initiatives.
Note F — Interest
The following chart summarizes the interest incurred, capitalized, and paid for
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Interest incurred
|
|
$
|
2,608
|
|
|
$
|
2,219
|
|
|
$
|
2,685
|
|
Less: Capitalized interest
|
|
425
|
|
|
430
|
|
|
235
|
|
Total net expense
|
|
$
|
2,183
|
|
|
$
|
1,789
|
|
|
$
|
2,450
|
|
Interest paid
|
|
$
|
1,646
|
|
|
$
|
1,611
|
|
|
$
|
2,042
|
|
The difference in expense for
2017
,
2016
, and
2015
was primarily due to changes in the level of outstanding debt and capital leases and the average borrowing rate. Amortization of deferred financing costs within interest expense was
$0.9 million
in
2017
,
$0.7 million
in
2016
, and
$0.7 million
in
2015
.
Note G — Income Taxes
On December 22, 2017, the TCJA was signed into law. The TCJA includes a number of provisions, including the lowering of the U.S. corporate tax rate from
35 percent
to
21 percent
, effective January 1, 2018. The TCJA also includes provisions that may partially offset the benefit of such rate reduction, including the repeal of the deduction for domestic production activities. The international provisions of the TCJA establish a territorial-style system for taxing foreign-source income of domestic multinational corporations. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the TCJA; however, as described below, the Company recorded adjustments for the re-measurement of deferred tax assets (liabilities) and the deemed repatriation tax on unremitted foreign earnings and profits. For the items for which the Company was able to determine a reasonable estimate, a provisional amount of
$17.1 million
was recognized and included as a component of income tax expense. The Company will continue to assess the provision for income taxes as future guidance is issued. Any revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118 (SAB 118).
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In accordance with SAB 118, the Company has determined that the
$5.0 million
of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the
$6.1 million
of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings were provisional amounts and reasonable estimates at December 31, 2017. Additional work is necessary for a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustments to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P) that were previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax liability for its foreign subsidiaries, resulting in an increase in income tax expense of
$6.1 million
. The Company has not yet completed the calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
The Company will continue to assess the impact of the TCJA to determine the impact on any remaining undistributed foreign earnings and any basis differences in our foreign jurisdictions.
While the TCJA provides for a territorial tax system, beginning in 2018, it includes a new U.S. tax, the global intangible low-taxed income (GILTI). The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company may be subject to incremental U.S. tax on GILTI income. The Company has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017 and will continue to further assess this portion of the TCJA.
Income before income taxes and income tax expense (benefit) are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
Income before income taxes:
|
|
|
|
|
|
|
Domestic
|
|
$
|
28,327
|
|
|
$
|
13,934
|
|
|
$
|
31,748
|
|
Foreign
|
|
8,069
|
|
|
11,381
|
|
|
11,070
|
|
Total income before income taxes
|
|
$
|
36,396
|
|
|
$
|
25,315
|
|
|
$
|
42,818
|
|
Income tax expense:
|
|
|
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,912
|
|
|
$
|
6,505
|
|
|
$
|
3,556
|
|
Foreign
|
|
2,777
|
|
|
2,080
|
|
|
2,736
|
|
Total current
|
|
$
|
4,689
|
|
|
$
|
8,585
|
|
|
$
|
6,292
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
Domestic
|
|
$
|
19,935
|
|
|
$
|
(8,842
|
)
|
|
$
|
4,565
|
|
Foreign
|
|
321
|
|
|
(168
|
)
|
|
(197
|
)
|
Total deferred
|
|
$
|
20,256
|
|
|
$
|
(9,010
|
)
|
|
$
|
4,368
|
|
Total income tax expense (benefit)
|
|
$
|
24,945
|
|
|
$
|
(425
|
)
|
|
$
|
10,660
|
|
The domestic deferred tax expense of
$19.9 million
consists of
$5.0 million
relating to the TCJA reduction of the U.S. corporate income tax rate from
35 percent
to
21 percent
. The Company's U.S. deferred tax assets and liabilities were remeasured to reflect this tax rate change.
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
U.S. federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal tax effect
|
|
2.3
|
|
|
(0.4
|
)
|
|
1.7
|
|
Effect of excess of percentage depletion over cost depletion
|
|
(10.0
|
)
|
|
(10.6
|
)
|
|
(7.1
|
)
|
Manufacturing production deduction
|
|
(0.8
|
)
|
|
(3.3
|
)
|
|
(0.9
|
)
|
Foreign rate differential
|
|
(3.4
|
)
|
|
(5.9
|
)
|
|
(4.2
|
)
|
Tax Cuts and Jobs Act impact
|
|
47.1
|
|
|
—
|
|
|
—
|
|
Research and development tax credit
|
|
(2.6
|
)
|
|
(6.6
|
)
|
|
(1.6
|
)
|
Foreign tax credit
|
|
(1.1
|
)
|
|
(28.1
|
)
|
|
(4.8
|
)
|
Foreign repatriation
|
|
1.3
|
|
|
13.7
|
|
|
5.9
|
|
Incremental fixed asset basis
|
|
(3.4
|
)
|
|
—
|
|
|
—
|
|
Adjustment to unrecognized tax benefits
|
|
2.8
|
|
|
3.2
|
|
|
(1.1
|
)
|
Stock compensation - excess tax benefits
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance
|
|
2.4
|
|
|
0.1
|
|
|
(0.9
|
)
|
Other items
|
|
0.8
|
|
|
1.2
|
|
|
2.9
|
|
Effective tax rate
|
|
68.5
|
%
|
|
(1.7
|
)%
|
|
24.9
|
%
|
Pursuant to the TCJA, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%
. The Company continues to analyze and interpret the Act, which could
potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was
$5.0 million
.
Due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies related to share-based payment transactions are recognized as income tax expense in the Company's Consolidated Statements of Income. This will result in volatility in the Company's effective tax rate.
The Company had domestic and foreign income tax payments of
$8.1 million
,
$3.0 million
, and
$6.0 million
in
2017
,
2016
, and
2015
, respectively.
Deferred tax assets and (liabilities) are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and (liabilities) recorded in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2017
|
|
2016
|
Asset (liability)
|
|
|
|
|
Post-employment benefits other than pensions
|
|
$
|
2,787
|
|
|
$
|
4,808
|
|
Other reserves
|
|
4,223
|
|
|
9,333
|
|
Deferred compensation
|
|
5,054
|
|
|
10,243
|
|
Environmental reserves
|
|
1,452
|
|
|
2,231
|
|
Inventory
|
|
4,636
|
|
|
5,876
|
|
Pensions
|
|
14,307
|
|
|
23,540
|
|
Alternative minimum tax credit
|
|
—
|
|
|
1,390
|
|
Net operating loss and credit carryforwards
|
|
6,374
|
|
|
5,607
|
|
Research and development tax credit carryforward
|
|
2,466
|
|
|
627
|
|
Foreign tax credit carryforward
|
|
9,481
|
|
|
4,545
|
|
Subtotal
|
|
50,780
|
|
|
68,200
|
|
Valuation allowance
|
|
(16,246
|
)
|
|
(3,990
|
)
|
Total deferred tax assets
|
|
34,534
|
|
|
64,210
|
|
Depreciation
|
|
(10,250
|
)
|
|
(13,064
|
)
|
Amortization
|
|
(2,900
|
)
|
|
(5,073
|
)
|
Capitalized interest expense
|
|
(112
|
)
|
|
(242
|
)
|
Mine development
|
|
(3,621
|
)
|
|
(6,683
|
)
|
Derivative instruments and hedging activities
|
|
(817
|
)
|
|
(13
|
)
|
Total deferred tax liabilities
|
|
(17,700
|
)
|
|
(25,075
|
)
|
Net deferred tax asset
|
|
$
|
16,834
|
|
|
$
|
39,135
|
|
The Company had deferred income tax assets offset with a valuation allowance for certain state and foreign net operating losses, the foreign tax credit, and state investment tax credit carryforwards. As of December 31, 2017, the Company recorded a valuation allowance of
$9.5 million
related to foreign tax credits that are not likely to be realized as a result of the TCJA, which is the primary incremental amount in 2017. The Company intends to maintain a valuation allowance on these deferred tax assets until a realization event occurs to support reversal of all or a portion of the allowance.
At
December 31, 2017
, for income tax purposes, the Company had foreign net operating loss carryforwards of
$6.9 million
that do not expire, and
$8.6 million
that expire in calendar years 2018 through 2025, of which
$1.0 million
expires within the next twelve months. The Company also had state net operating loss carryforwards of
$21.7 million
that expire in calendar years 2018 through 2037 and state tax credits of
$3.2 million
that expire in calendar years 2018 through 2033. A valuation allowance of
$6.7 million
has been provided against certain foreign and state loss carryforwards and state tax credits due to uncertainty of their realization.
The Company has an alternative minimum tax credit of
$1.9 million
that is fully refundable by 2022, research and development tax credits of
$2.5 million
that expire in calendar year 2036, and foreign tax credits of
$9.5 million
, comprised of
$3.7 million
,
$2.1 million
, and
$3.7 million
that expire in calendar years 2025, 2026, and 2027, respectively.
The Company files income tax returns in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2012, and foreign examinations for tax years before 2010.
A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ending
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
Balance at January 1
|
|
$
|
2,048
|
|
|
$
|
1,285
|
|
Additions to tax provisions related to the current year
|
|
163
|
|
|
35
|
|
Additions to tax positions related to prior years
|
|
1,210
|
|
|
878
|
|
Reduction to tax positions related to prior years
|
|
(121
|
)
|
|
—
|
|
Lapses on statutes of limitations
|
|
(356
|
)
|
|
(150
|
)
|
Balance at December 31
|
|
$
|
2,944
|
|
|
$
|
2,048
|
|
At
December 31, 2017
, the Company had
$2.9 million
of unrecognized tax benefits, of which
$2.4 million
would affect the Company’s effective tax rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of reasonably possible adjustments cannot be made.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Income. Accrued interest and penalties are included on the related tax liability line in the Consolidated Balance Sheets. The amount of interest and penalties, net of related federal tax benefits, recognized in earnings was immaterial during
2017
,
2016
, and 2015. As of
December 31, 2017
and
2016
, accrued interest and penalties, net of related federal tax benefits, were
immaterial
.
Note H — Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
2017
|
|
2016
|
|
2015
|
Numerator for basic and diluted EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
11,451
|
|
|
$
|
25,740
|
|
|
$
|
32,158
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic EPS:
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
20,027
|
|
|
19,983
|
|
|
20,097
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock appreciation rights
|
|
174
|
|
|
74
|
|
|
156
|
|
Restricted stock units
|
|
96
|
|
|
88
|
|
|
91
|
|
Performance-based restricted stock units
|
|
118
|
|
|
68
|
|
|
58
|
|
Diluted potential common shares
|
|
388
|
|
|
230
|
|
|
305
|
|
Denominator for diluted EPS:
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
20,415
|
|
|
20,213
|
|
|
20,402
|
|
Basic EPS
|
|
$
|
0.57
|
|
|
$
|
1.29
|
|
|
$
|
1.60
|
|
Diluted EPS
|
|
$
|
0.56
|
|
|
$
|
1.27
|
|
|
$
|
1.58
|
|
SARs totaling
124,319
in
2017
,
818,268
in
2016
, and
376,550
in
2015
were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.
Note I — Inventories
Inventories in the Consolidated Balance Sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2017
|
|
2016
|
Raw materials and supplies
|
|
$
|
42,958
|
|
|
$
|
36,233
|
|
Work in process
|
|
187,719
|
|
|
169,327
|
|
Finished goods
|
|
34,418
|
|
|
38,147
|
|
Subtotal
|
|
265,095
|
|
|
243,707
|
|
Less: LIFO reserve balance
|
|
44,743
|
|
|
42,842
|
|
Inventories
|
|
$
|
220,352
|
|
|
$
|
200,865
|
|
The liquidation of LIFO inventory layers reduced cost of sales by
$0.8 million
in
2017
,
$4.1 million
in
2016
, and
$6.1 million
in 2015.
Note J — Property, Plant, and Equipment
Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2017
|
|
2016
|
Land
|
|
$
|
4,874
|
|
|
$
|
5,548
|
|
Buildings
|
|
137,196
|
|
|
135,729
|
|
Machinery and equipment
|
|
626,186
|
|
|
609,894
|
|
Software
|
|
40,575
|
|
|
39,550
|
|
Construction in progress
|
|
29,963
|
|
|
19,111
|
|
Allowances for depreciation
|
|
(615,134
|
)
|
|
(593,531
|
)
|
Subtotal
|
|
223,660
|
|
|
216,301
|
|
Capital leases
|
|
10,912
|
|
|
10,913
|
|
Allowances for depreciation
|
|
(2,741
|
)
|
|
(2,492
|
)
|
Subtotal
|
|
8,171
|
|
|
8,421
|
|
Mineral resources
|
|
4,979
|
|
|
4,979
|
|
Mine development
|
|
37,103
|
|
|
35,543
|
|
Allowances for amortization and depletion
|
|
(18,335
|
)
|
|
(12,613
|
)
|
Subtotal
|
|
23,747
|
|
|
27,909
|
|
Property, plant, and equipment — net
|
|
$
|
255,578
|
|
|
$
|
252,631
|
|
The Company received
$63.5 million
from the U.S. Department of Defense (DoD), in previous periods, for reimbursement of the DoD's share of the cost of equipment. This amount was recorded in property, plant, and equipment and the reimbursements are reflected in Unearned income on the Consolidated Balance Sheets. The equipment was placed in service during 2012, and its full cost is being depreciated in accordance with Company policy. The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment.
Unearned income was reduced by
$4.5 million
and
$4.6 million
in
2017
and
2016
, respectively, and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.
We recorded depreciation and depletion expense of
$38.1 million
in
2017
,
$41.2 million
in
2016
, and
$32.8 million
in
2015
. The expense is net of the above-referenced reductions in the unearned income liability. Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is also net of the reduction in the unearned income liability in
2017
,
2016
, and 2015. The net book value of capitalized software was
$8.3 million
and
$9.8 million
at
December 31, 2017
and
December 31, 2016
, respectively. Depreciation expense related to software was
$2.4 million
in
2017
,
$2.4 million
in
2016
, and
$2.3 million
in
2015
.
Note K — Intangible Assets and Goodwill
Intangible Assets
The cost and accumulated amortization of intangible assets subject to amortization as of
December 31, 2017
and
2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(Thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Customer relationships
|
|
$
|
40,751
|
|
|
$
|
(36,949
|
)
|
|
$
|
38,428
|
|
|
$
|
(33,823
|
)
|
Technology
|
|
13,467
|
|
|
(11,495
|
)
|
|
12,092
|
|
|
(10,516
|
)
|
Licenses and other
|
|
4,519
|
|
|
(2,672
|
)
|
|
4,519
|
|
|
(2,441
|
)
|
Total
|
|
$
|
58,737
|
|
|
$
|
(51,116
|
)
|
|
$
|
55,039
|
|
|
$
|
(46,780
|
)
|
During 2017, the Company acquired
$2.3 million
in customer relationships and
$1.4 million
in technology intangible assets, with useful lives of
fifteen
and
three years
, respectively. During 2016, the Company acquired
$1.7 million
in finite-lived intangible assets, consisting primarily of licenses and other, with a weighted-average life of
nine years
.
The aggregate a
mortization expense relating to intangible assets for the year ended December 31, 2017 and estimated amortization e
xpense for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
Amortization
|
(Thousands)
|
|
Expense
|
2017
|
|
$
|
4,629
|
|
2018
|
|
1,932
|
|
2019
|
|
1,089
|
|
2020
|
|
642
|
|
2021
|
|
620
|
|
2022
|
|
620
|
|
Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of
$2.2 million
and
$2.8 million
at December 31, 2017 and 2016, respectively.
Goodwill
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. In 2017, the Company acquired HTB for total consideration of
$16.5 million
and recorded goodwill of
$3.6 million
. HTB is included in the Advanced Materials segment. In 2016, the Company acquired one business for total consideration of
$2.0 million
. The business acquired is included in the Precision Coatings segment. The Company recorded
$0.3 million
of goodwill related to this acquisition.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31,
2017
and
2016
was
$90.7 million
and
$87.0 million
, respectively, and assigned to the following segments:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
Performance Alloys and Composites
|
|
$
|
1,899
|
|
|
$
|
1,899
|
|
Advanced Materials
|
|
50,296
|
|
|
46,570
|
|
Precision Coatings
|
|
38,482
|
|
|
38,481
|
|
Total
|
|
$
|
90,677
|
|
|
$
|
86,950
|
|
The results of the Company's 2017, 2016, and 2015 goodwill impairment assessments indicated that
no
goodwill impairment existed.
Note L — Debt
Long-term debt in the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Thousands)
|
|
2017
|
|
2016
|
Revolving credit agreement
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed rate industrial development revenue bonds payable in annual installments through 2021
|
|
3,818
|
|
|
4,615
|
|
Total debt outstanding
|
|
3,818
|
|
|
4,615
|
|
Current portion of long-term debt
|
|
(777
|
)
|
|
(733
|
)
|
Gross long-term debt
|
|
3,041
|
|
|
3,882
|
|
Unamortized deferred financing fees
|
|
(214
|
)
|
|
(277
|
)
|
Long-term debt
|
|
$
|
2,827
|
|
|
$
|
3,605
|
|
Maturities on long-term debt instruments as of
December 31, 2017
are as follows:
|
|
|
|
|
(Thousands)
|
|
2018
|
$
|
777
|
|
2019
|
823
|
|
2020
|
868
|
|
2021
|
1,350
|
|
2022
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
3,818
|
|
In 2015, the Company entered into an Amended and Restated Credit Agreement (Credit Agreement) that matures in 2020 and provides for a
$375.0 million
revolving credit facility comprised of sub-facilities for revolving loans, swing-line loans, letters of credit, and foreign borrowings. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives.The Credit Agreement also provides for an uncommitted incremental facility whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed
$300.0 million
. The Credit Agreement is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows the Company to borrow money at a premium over LIBOR or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the Credit Agreement.
The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all of its debt covenants as of
December 31, 2017
and
December 31, 2016
.
At
December 31, 2017
and 2016, respectively, there was
$27.3 million
and
$28.5 million
outstanding against the letters of credit sub-facility. The Company pays a variable commitment fee that may reset quarterly (
0.20%
as of
December 31, 2017
) of the available and unborrowed amounts under the revolving credit line.
The following table summarizes the Company’s short-term lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(Thousands)
|
|
Total
|
|
Outstanding
|
|
Available
|
|
Total
|
|
Outstanding
|
|
Available
|
Domestic
|
|
$
|
347,746
|
|
|
$
|
—
|
|
|
$
|
347,746
|
|
|
$
|
346,522
|
|
|
$
|
—
|
|
|
$
|
346,522
|
|
Foreign
|
|
6,182
|
|
|
—
|
|
|
6,182
|
|
|
8,907
|
|
|
—
|
|
|
8,907
|
|
Total
|
|
$
|
353,928
|
|
|
$
|
—
|
|
|
$
|
353,928
|
|
|
$
|
355,429
|
|
|
$
|
—
|
|
|
$
|
355,429
|
|
While the available borrowings under the individual existing credit lines total
$353.9 million
, the covenants in the domestic Credit Agreement restrict the aggregate available borrowings to
$254.8 million
as of
December 31, 2017
.
The domestic line is committed and includes all sub-facilities in the
$375.0 million
maximum borrowing under the Credit Agreement. The Company has various foreign lines of credit all of which are uncommitted, unsecured, and renewed annually. The average interest rate on short-term debt was
4.90%
at both
December 31, 2017
and
2016
.
In April 2011, the Company entered into an agreement with the Toledo-Lucas County Port Authority and the Dayton–Montgomery County Port Authority in Ohio to co-issue
$8.0 million
in taxable development revenue bonds, with a fixed amortization term that will mature in 2021. The interest rate on these bonds was fixed at
4.90%
, and the unamortized balance of the bonds was
$3.8 million
at
December 31, 2017
.
In November 2016, the Company repaid the entire
$8.3 million
of variable rate industrial revenue bonds with the Lorain Port Authority in Ohio, at maturity.
Note M — Leasing Arrangements
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with terms ranging up to
25 years
. Operating lease expense amounted to
$9.3 million
,
$8.6 million
, and
$8.3 million
during
2017
,
2016
, and
2015
, respectively. The future estimated minimum payments under capital leases and non-cancelable operating leases with initial lease terms in excess of one year at
December 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
(Thousands)
|
|
Leases
|
|
Leases
|
2018
|
|
$
|
2,172
|
|
|
$
|
8,096
|
|
2019
|
|
2,172
|
|
|
6,297
|
|
2020
|
|
2,172
|
|
|
5,471
|
|
2021
|
|
2,172
|
|
|
4,605
|
|
2022
|
|
2,172
|
|
|
5,636
|
|
2023 and thereafter
|
|
22,609
|
|
|
3,281
|
|
Total minimum lease payments
|
|
33,469
|
|
|
$
|
33,386
|
|
Amounts representing interest
|
|
20,661
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
12,808
|
|
|
|
During 2017, in connection with the HTB acquisition, the Company entered into an agreement to relocate the German operations from Hanau, Germany to a new, leased facility in Alzenau, Germany. In order for this manufacturing facility to meet the Company's operating specifications, both the landlord and the Company are making structural improvements to the facility, and as a result, the Company has concluded that it is the deemed owner of the building for accounting purposes only during the construction period. Accordingly, as of December 31, 2017, the Company recorded an asset of
$12 million
in Property, Plant, and Equipment as construction in progress, representing its estimate of construction costs incurred to date, and a corresponding liability, recorded as a component of Other long-term liabilities. The future estimated minimum payments related to this lease are included in the above table under the caption of Capital Leases.
Note N — Pensions and Other Post-Employment Benefits
The obligation and funded status of the Company’s pension and other post-employment benefit plans are shown below. The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, and England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
276,801
|
|
|
$
|
259,957
|
|
|
$
|
14,334
|
|
|
$
|
15,200
|
|
Acquisition
|
|
7,645
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Service cost
|
|
8,760
|
|
|
8,060
|
|
|
91
|
|
|
105
|
|
Interest cost
|
|
9,949
|
|
|
10,820
|
|
|
398
|
|
|
562
|
|
Plan amendments
|
|
3,804
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial loss (gain)
|
|
18,549
|
|
|
11,833
|
|
|
444
|
|
|
(191
|
)
|
Benefit payments from fund
|
|
(13,072
|
)
|
|
(10,509
|
)
|
|
—
|
|
|
—
|
|
Benefit payments directly by Company
|
|
(387
|
)
|
|
(1,116
|
)
|
|
(1,107
|
)
|
|
(1,362
|
)
|
Expenses paid from assets
|
|
(1,133
|
)
|
|
(611
|
)
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
2,812
|
|
|
(1,633
|
)
|
|
6
|
|
|
20
|
|
Benefit obligation at end of year
|
|
313,728
|
|
|
276,801
|
|
|
14,166
|
|
|
14,334
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
199,992
|
|
|
184,750
|
|
|
—
|
|
|
—
|
|
Acquisition
|
|
2,353
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
|
29,428
|
|
|
11,575
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
16,338
|
|
|
16,136
|
|
|
—
|
|
|
—
|
|
Employee contributions
|
|
162
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefit payments from fund
|
|
(13,072
|
)
|
|
(10,509
|
)
|
|
—
|
|
|
—
|
|
Expenses paid from assets
|
|
(1,133
|
)
|
|
(611
|
)
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
908
|
|
|
(1,349
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
|
234,976
|
|
|
199,992
|
|
|
—
|
|
|
—
|
|
Funded status at end of year
|
|
$
|
(78,752
|
)
|
|
$
|
(76,809
|
)
|
|
$
|
(14,166
|
)
|
|
$
|
(14,334
|
)
|
Amounts recognized in the Consolidated
Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
1,797
|
|
|
$
|
1,148
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other liabilities and accrued items
|
|
(2,490
|
)
|
|
(2,538
|
)
|
|
(1,412
|
)
|
|
(1,392
|
)
|
Retirement and post-employment benefits
|
|
(78,059
|
)
|
|
(75,419
|
)
|
|
(12,754
|
)
|
|
(12,942
|
)
|
|
|
$
|
(78,752
|
)
|
|
$
|
(76,809
|
)
|
|
$
|
(14,166
|
)
|
|
$
|
(14,334
|
)
|
Amounts recognized in other comprehensive income (before tax) consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
119,114
|
|
|
$
|
121,719
|
|
|
$
|
24
|
|
|
$
|
(420
|
)
|
Net prior service (credit) cost
|
|
3,688
|
|
|
(390
|
)
|
|
(8,044
|
)
|
|
(9,541
|
)
|
|
|
$
|
122,802
|
|
|
$
|
121,329
|
|
|
$
|
(8,020
|
)
|
|
$
|
(9,961
|
)
|
Amortizations expected to be recognized during next fiscal year (before tax):
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
$
|
8,077
|
|
|
$
|
6,591
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization of prior service credit
|
|
(123
|
)
|
|
(485
|
)
|
|
(1,497
|
)
|
|
(1,497
|
)
|
|
|
$
|
7,954
|
|
|
$
|
6,106
|
|
|
$
|
(1,497
|
)
|
|
$
|
(1,497
|
)
|
Additional information
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all defined benefit pension plans
|
|
$
|
302,942
|
|
|
$
|
265,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For defined benefit pension plans with benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Aggregate benefit obligation
|
|
304,814
|
|
|
271,199
|
|
|
—
|
|
|
—
|
|
Aggregate fair value of plan assets
|
|
227,115
|
|
|
193,242
|
|
|
—
|
|
|
—
|
|
For defined benefit pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Aggregate accumulated benefit obligation
|
|
296,878
|
|
|
259,982
|
|
|
—
|
|
|
—
|
|
Aggregate fair value of plan assets
|
|
227,115
|
|
|
193,242
|
|
|
—
|
|
|
—
|
|
Components of net benefit cost and other amounts recognized in other comprehensive income (OCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
8,760
|
|
|
$
|
8,060
|
|
|
$
|
9,195
|
|
|
$
|
91
|
|
|
$
|
105
|
|
|
$
|
115
|
|
Interest cost
|
|
9,949
|
|
|
10,820
|
|
|
10,446
|
|
|
398
|
|
|
562
|
|
|
554
|
|
Expected return on plan assets
|
|
(14,933
|
)
|
|
(14,241
|
)
|
|
(13,611
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (benefit)
|
|
(274
|
)
|
|
(460
|
)
|
|
(450
|
)
|
|
(1,497
|
)
|
|
(1,497
|
)
|
|
(1,497
|
)
|
Recognized net actuarial loss
|
|
6,636
|
|
|
6,005
|
|
|
7,537
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic cost
|
|
10,138
|
|
|
10,184
|
|
|
13,117
|
|
|
(1,008
|
)
|
|
(830
|
)
|
|
(828
|
)
|
Settlements
|
|
—
|
|
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net benefit cost
|
|
$
|
10,138
|
|
|
$
|
10,304
|
|
|
$
|
13,117
|
|
|
$
|
(1,008
|
)
|
|
$
|
(830
|
)
|
|
$
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Thousands)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Change in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
OCI at beginning of year
|
$
|
121,329
|
|
|
$
|
112,518
|
|
|
$
|
121,341
|
|
|
$
|
(9,961
|
)
|
|
$
|
(11,267
|
)
|
|
$
|
(12,261
|
)
|
Increase (decrease) in OCI:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized during year — prior service cost (credit)
|
274
|
|
|
460
|
|
|
450
|
|
|
1,497
|
|
|
1,497
|
|
|
1,497
|
|
Recognized during year — net actuarial (losses) gains
|
(6,636
|
)
|
|
(6,005
|
)
|
|
(7,537
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Occurring during year — prior service cost
|
3,804
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Occurring during year — net actuarial losses (gains)
|
4,055
|
|
|
14,279
|
|
|
(1,697
|
)
|
|
444
|
|
|
(191
|
)
|
|
(503
|
)
|
Other adjustments
|
—
|
|
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
(24
|
)
|
|
(43
|
)
|
|
(39
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
OCI at end of year
|
$
|
122,802
|
|
|
$
|
121,329
|
|
|
$
|
112,518
|
|
|
$
|
(8,020
|
)
|
|
$
|
(9,961
|
)
|
|
$
|
(11,267
|
)
|
Summary of key valuation assumptions
In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company used the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.53
|
%
|
|
4.02
|
%
|
|
4.27
|
%
|
|
3.43
|
%
|
|
3.68
|
%
|
|
3.88
|
%
|
Rate of compensation increase
|
|
3.93
|
%
|
|
4.04
|
%
|
|
4.05
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Weighted-average assumptions used to determine net cost for the fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.93
|
%
|
|
4.22
|
%
|
|
4.00
|
%
|
|
3.68
|
%
|
|
3.88
|
%
|
|
3.50
|
%
|
Expected long-term return on plan assets
|
|
6.89
|
%
|
|
6.90
|
%
|
|
7.15
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
3.91
|
%
|
|
3.93
|
%
|
|
3.95
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Discount Rate.
The discount rate used to determine the present value of the projected and accumulated benefit obligation at the end of each year is established based upon the available market rates for high quality, fixed income investments whose maturities match the plan’s projected cash flows.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approach to determine the service and interest cost components. The change was accounted for as a change in estimate and, accordingly, was accounted for prospectively starting in 2017. The reductions in service and interest costs for 2017 associated with this change in estimate totaled approximately
$1.0
million.
Expected Long-Term Return on Plan Assets.
Management establishes the domestic expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. Consideration is given to both recent plan asset performance as well as plan asset performance over various long-term periods of time, with an emphasis on the assumption being a prospective, long-term rate of return. Management consults with and considers the opinions of its outside investment advisers and actuaries when establishing the rate and reviews assumptions with the Audit Committee of the Board of Directors.
Rate of Compensation Increase.
The rate of compensation increase assumption was
4.0%
in both 2017 and 2016 for the domestic defined benefit pension plan and the domestic retiree medical plan.
Assumptions for the defined benefit pension plans in Germany and England are determined separately from the U.S. plan assumptions, based on historical trends and current and projected market conditions in Germany and England. The plan in Germany is unfunded.
|
|
|
|
|
|
Assumed health care trend rates at fiscal year end
|
|
2017
|
|
2016
|
Health care trend rate assumed for next year
|
|
6.75%
|
|
7.00%
|
Rate that the trend rate gradually declines to (ultimate trend rate)
|
|
5.00%
|
|
5.00%
|
Year that the rate reaches the ultimate trend rate
|
|
2025
|
|
2025
|
Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
Point Increase
|
|
1-Percentage-
Point Decrease
|
(Thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Effect on total of service and interest cost components
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
(8
|
)
|
|
$
|
(12
|
)
|
Effect on post-employment benefit obligation
|
|
212
|
|
|
259
|
|
|
(198
|
)
|
|
(241
|
)
|
Plan Assets
The following tables present the fair values of the Company’s defined benefit pension plan assets as of
December 31, 2017
and
2016
by asset category. The Company has some investments that are valued using net asset value (NAV) as the practical expedient and have not been classified in the fair value hierarchy. Refer to Note Q of the Consolidated Financial Statements for definitions of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
|
$
|
10,604
|
|
|
$
|
10,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. (a)
|
|
54,376
|
|
|
53,659
|
|
|
717
|
|
|
—
|
|
International (b)
|
|
39,010
|
|
|
35,016
|
|
|
3,994
|
|
|
—
|
|
Emerging markets (c)
|
|
15,843
|
|
|
15,586
|
|
|
257
|
|
|
—
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
Intermediate-term bonds (d)
|
|
34,187
|
|
|
25,653
|
|
|
8,534
|
|
|
—
|
|
Short-term bonds (e)
|
|
612
|
|
|
—
|
|
|
612
|
|
|
—
|
|
Global bonds (f)
|
|
7,492
|
|
|
4,986
|
|
|
2,506
|
|
|
—
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate fund (g)
|
|
6,617
|
|
|
6,284
|
|
|
333
|
|
|
—
|
|
Alternative strategies (h)
|
|
9,948
|
|
|
9,893
|
|
|
55
|
|
|
—
|
|
Accrued interest and dividends
|
|
114
|
|
|
114
|
|
|
—
|
|
|
—
|
|
Total
|
|
178,803
|
|
|
161,795
|
|
|
17,008
|
|
|
—
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
Pooled investment fund (i)
|
|
21,378
|
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (j)
|
|
3,970
|
|
|
|
|
|
|
|
|
|
|
Common/Collective trusts (k)
|
|
8,942
|
|
|
|
|
|
|
|
Intermediate-term bonds (d)
|
|
21,771
|
|
|
|
|
|
|
|
Private equity funds
|
|
112
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
234,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
|
$
|
10,124
|
|
|
$
|
10,124
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. (a)
|
|
53,983
|
|
|
53,358
|
|
|
625
|
|
|
—
|
|
International (b)
|
|
30,732
|
|
|
27,304
|
|
|
3,428
|
|
|
—
|
|
Emerging markets (c)
|
|
11,792
|
|
|
11,562
|
|
|
230
|
|
|
—
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
Intermediate-term bonds (d)
|
|
48,138
|
|
|
29,429
|
|
|
18,709
|
|
|
—
|
|
Short-term bonds (e)
|
|
3,150
|
|
|
—
|
|
|
3,150
|
|
|
—
|
|
Global bonds (f)
|
|
2,121
|
|
|
—
|
|
|
2,121
|
|
|
—
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate fund (g)
|
|
5,929
|
|
|
5,639
|
|
|
290
|
|
|
—
|
|
Alternative strategies (h)
|
|
9,036
|
|
|
8,981
|
|
|
55
|
|
|
—
|
|
Accrued interest and dividends
|
|
107
|
|
|
107
|
|
|
—
|
|
|
—
|
|
Total
|
|
175,112
|
|
|
146,504
|
|
|
28,608
|
|
|
—
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
Pooled investment fund (i)
|
|
20,418
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (j)
|
|
4,320
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
142
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
199,992
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Mutual funds that invest in various sectors of the U.S. market.
|
|
|
(b)
|
Mutual funds that invest in non-U.S. companies primarily in developed countries that are generally considered to be value stocks.
|
|
|
(c)
|
Mutual funds that invest in non-U.S. companies in emerging market countries.
|
|
|
(d)
|
Includes a mutual fund that employs a value-oriented approach to fixed income investment management and a mutual fund that invests primarily in investment-grade debt securities.
|
|
|
(e)
|
Includes a mutual fund that seeks a market rate of return for a fixed-income portfolio with low relative volatility of returns, investing generally in U.S. and foreign debt securities maturing in
five years or less
.
|
|
|
(f)
|
Mutual funds that invest in domestic and foreign sovereign securities, fixed income securities, mortgage-backed and asset-backed bonds, convertible bonds, high-yield bonds, and emerging market bonds.
|
|
|
(g)
|
Includes a mutual fund that typically invests at least
80%
of its assets in equity and debt securities of companies in the real estate industry or related industries or in companies which own significant real estate assets at the time of investment.
|
|
|
(h)
|
Includes a mutual fund that tactically allocates assets to global equity, fixed income, and alternative strategies.
|
|
|
(i)
|
Includes a fund that invests in a broad portfolio of hedge funds.
|
|
|
(j)
|
Includes a hedge fund that employs multiple strategies to multiple asset classes with low correlations. Capital may be withdrawn from the multi-strategy hedge fund partnership on a monthly basis with a
ten
-day notice period.
|
|
|
(k)
|
Common/collective trust is valued based on the NAV per unit of the funds. The common/collective trust’s investment objective is to invest in fixed income and equity securities to provide income and/or total investment return through investments in U.S. and non-U.S. securities. The common/collective trust requires that the plan provide a 30-day notice to redeem any number of units from the trust.
|
The Company’s domestic defined benefit pension plan investment strategy, as approved by the Governance and Organization Committee of the Board of Directors, is to employ an allocation of investments that will generate returns equal to or better than the projected long-term growth of pension liabilities so that the plan will be self-funding. The return objective is to maximize investment return to achieve and maintain a
100%
funded status over time, taking into consideration required cash contributions. The allocation of investments is designed to maximize the advantages of diversification while mitigating the risk and overall portfolio volatility to achieve the return objective. Risk is defined as the annual variability in value and is measured in terms of the standard deviation of investment return. Under the Company’s investment policies, allowable investments include domestic equities, international equities, fixed income securities, cash equivalents, and alternative securities (which include real estate, private venture capital investments, hedge funds, and tactical asset allocation). Ranges, in terms of a percentage of the total assets, are established for each allowable class of security. Derivatives may be used to hedge an existing security or as a risk reduction strategy. Current asset allocation guidelines are to invest
30%
to
60%
in equity securities,
20%
to
50%
in fixed income securities and cash, and up to
25%
in alternative securities. Management reviews the asset allocation on a quarterly or more frequent basis and makes revisions as deemed necessary.
None of the plan assets noted above are invested in the Company’s common stock.
Cash Flows
Employer Contributions.
The Company expects to contribute
$21.0 million
to its domestic defined benefit pension plan and
$1.4 million
to its other benefit plans in
2018
.
Effective in 2016, all plan participants with an accrued benefit may elect an immediate payout in lieu of their future monthly annuity if the lump sum amount does not exceed
$100,000
.
Estimated Future Benefit Payments.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
(Thousands)
|
|
Pension Benefits
|
|
Gross Benefit
Payment
|
|
Net of
Medicare
Part D
Subsidy
|
2018
|
|
$
|
13,820
|
|
|
$
|
1,412
|
|
|
$
|
1,390
|
|
2019
|
|
12,827
|
|
|
1,478
|
|
|
1,458
|
|
2020
|
|
13,048
|
|
|
1,507
|
|
|
1,489
|
|
2021
|
|
13,681
|
|
|
1,426
|
|
|
1,410
|
|
2022
|
|
15,156
|
|
|
1,257
|
|
|
1,244
|
|
2023 through 2027
|
|
83,342
|
|
|
4,953
|
|
|
4,909
|
|
Other Benefit Plans
In addition to the plans shown above, the Company also has certain foreign subsidiaries with accrued unfunded pension and other post-employment arrangements. The liability for these arrangements was
$2.1 million
at
December 31, 2017
and
$2.4 million
at
December 31, 2016
, and was included in retirement and post-employment benefits in the Consolidated Balance Sheets.
The Company also sponsors defined contribution plans available to substantially all U.S. employees. The Company’s annual defined contribution expense, including the expense for the enhanced defined contribution plan, was
$4.5 million
in
2017
,
$3.6 million
in
2016
, and
$3.1 million
in
2015
.
Note O — Accumulated Other Comprehensive Income
Changes in the components of accumulated other comprehensive income, including amounts reclassified out, for
2017
,
2016
, and
2015
, and the balances in accumulated other comprehensive income as of
December 31, 2017
,
2016
, and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses
On Cash Flow Hedges
|
|
Pension and Post- Employment Benefits
|
|
Foreign Currency Translation
|
|
|
(Thousands)
|
|
Foreign Currency
|
|
Precious Metals
|
|
Total
|
Total
|
Balance at December 31, 2014
|
|
$
|
3,578
|
|
|
$
|
—
|
|
|
$
|
3,578
|
|
|
$
|
(81,662
|
)
|
|
$
|
(4,153
|
)
|
|
$
|
(82,237
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
2,995
|
|
|
—
|
|
|
2,995
|
|
|
2,249
|
|
|
(1,335
|
)
|
|
3,909
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(6,169
|
)
|
|
—
|
|
|
(6,169
|
)
|
|
5,580
|
|
|
—
|
|
|
(589
|
)
|
Other comprehensive income (loss) before tax
|
|
(3,174
|
)
|
|
—
|
|
|
(3,174
|
)
|
|
7,829
|
|
|
(1,335
|
)
|
|
3,320
|
|
Deferred taxes on current period activity
|
|
(1,175
|
)
|
|
—
|
|
|
(1,175
|
)
|
|
2,963
|
|
|
—
|
|
|
1,788
|
|
Other comprehensive income (loss) after tax
|
|
(1,999
|
)
|
|
—
|
|
|
(1,999
|
)
|
|
4,866
|
|
|
(1,335
|
)
|
|
1,532
|
|
Balance at December 31, 2015
|
|
$
|
1,579
|
|
|
$
|
—
|
|
|
$
|
1,579
|
|
|
$
|
(76,796
|
)
|
|
$
|
(5,488
|
)
|
|
$
|
(80,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,579
|
|
|
$
|
—
|
|
|
$
|
1,579
|
|
|
$
|
(76,796
|
)
|
|
$
|
(5,488
|
)
|
|
$
|
(80,705
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(377
|
)
|
|
—
|
|
|
(377
|
)
|
|
(14,165
|
)
|
|
(172
|
)
|
|
(14,714
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
784
|
|
|
—
|
|
|
784
|
|
|
4,048
|
|
|
—
|
|
|
4,832
|
|
Other comprehensive income (loss) before tax
|
|
407
|
|
|
—
|
|
|
407
|
|
|
(10,117
|
)
|
|
(172
|
)
|
|
(9,882
|
)
|
Deferred taxes on current period activity
|
|
149
|
|
|
—
|
|
|
149
|
|
|
(4,555
|
)
|
|
—
|
|
|
(4,406
|
)
|
Other comprehensive income (loss) after tax
|
|
258
|
|
|
—
|
|
|
258
|
|
|
(5,562
|
)
|
|
(172
|
)
|
|
(5,476
|
)
|
Balance at December 31, 2016
|
|
$
|
1,837
|
|
|
$
|
—
|
|
|
$
|
1,837
|
|
|
$
|
(82,358
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(86,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,837
|
|
|
$
|
—
|
|
|
$
|
1,837
|
|
|
$
|
(82,358
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(86,181
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(1,180
|
)
|
|
(463
|
)
|
|
(1,643
|
)
|
|
(8,279
|
)
|
|
1,552
|
|
|
(8,370
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
632
|
|
|
208
|
|
|
840
|
|
|
4,865
|
|
|
—
|
|
|
5,705
|
|
Other comprehensive income (loss) before tax
|
|
(548
|
)
|
|
(255
|
)
|
|
(803
|
)
|
|
(3,414
|
)
|
|
1,552
|
|
|
(2,665
|
)
|
Deferred taxes on current period activity
|
|
330
|
|
|
(59
|
)
|
|
271
|
|
|
13,820
|
|
|
—
|
|
|
14,091
|
|
Other comprehensive income (loss) after tax
|
|
(878
|
)
|
|
(196
|
)
|
|
(1,074
|
)
|
|
(17,234
|
)
|
|
1,552
|
|
|
(16,756
|
)
|
Balance at December 31, 2017
|
|
$
|
959
|
|
|
$
|
(196
|
)
|
|
$
|
763
|
|
|
$
|
(99,592
|
)
|
|
$
|
(4,108
|
)
|
|
$
|
(102,937
|
)
|
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Other-net in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note Q for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note N for additional details on pension and other post-employment expenses.
Note P — Stock-based Compensation
Stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) were approved at the May 2006 annual meeting of shareholders. These plans authorize the granting of option rights, stock appreciation rights (SARs),
performance-restricted shares, performance shares, performance units, and restricted shares. The 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan were amended to, among other things, add additional shares to the plans. These amendments were last approved by shareholders at the May 2017 annual meeting.
Stock-based compensation expense, which includes awards settled in shares and in cash and is recognized as a component of SG&A expense, was
$7.7 million
,
$6.7 million
, and
$6.2 million
in
2017
,
2016
, and
2015
, respectively. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards vest or are exercised. The Company recognized
$2.0 million
and
$0.4 million
of tax benefits in 2017 and 2015, respectively, compared to less than
$0.1 million
of tax expense in 2016 relating to the issuance of common stock for the exercise/vesting of equity awards.
The following sections provide information on awards settled in shares.
SARs.
The Company grants SARs to certain employees. Upon exercise of vested SARs, the participant will receive a number of shares of common stock equal to the spread (the difference between the market price of the Company’s common shares at the time of exercise and the strike price established on the grant date) divided by the common share price. The strike price of the SARs is equal to the market value of the Company’s common shares on the day of the grant. The number of SARs available to be issued is established by plans approved by the shareholders. The vesting period and the life of the SARs are established at the time of grant. The exercise of the SARs is generally satisfied by the issuance of treasury shares. The SARs generally vest
three years
from the date of grant. SARs granted prior to 2011 expire in
ten years
, while the SARs granted in 2011 and later expire in
seven years
.
The following table summarizes the Company's SARs activity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Exercise
Price Per
Share
|
|
Aggregate
Intrinsic
Value (thousands)
|
|
Weighted-
average
Remaining
Term (Years)
|
Outstanding at December 31, 2016
|
|
1,142
|
|
|
$
|
29.58
|
|
|
|
|
|
Granted
|
|
97
|
|
|
35.26
|
|
|
|
|
|
Exercised
|
|
(560
|
)
|
|
28.19
|
|
|
|
|
|
Cancelled
|
|
(63
|
)
|
|
36.90
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
616
|
|
|
30.97
|
|
|
$
|
10,858
|
|
|
4.1
|
Vested and expected to vest as of December 31, 2017
|
|
616
|
|
|
30.97
|
|
|
10,858
|
|
|
4.1
|
Exercisable at December 31, 2017
|
|
190
|
|
|
30.53
|
|
|
3,441
|
|
|
2.1
|
A summary of the status and changes of shares subject to SARs and the related average price per share follows:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Grant
Date
Fair Value
|
Nonvested as of December 31, 2016
|
|
500
|
|
|
$
|
10.82
|
|
Granted
|
|
97
|
|
|
10.89
|
|
Vested
|
|
(132
|
)
|
|
12.48
|
|
Cancelled
|
|
(39
|
)
|
|
10.35
|
|
Nonvested as of December 31, 2017
|
|
426
|
|
|
$
|
10.54
|
|
As of December 31,
2017
,
$0.9 million
of expense with respect to non-vested SARs has yet to be recognized as expense over a weighted-average period of approximately
20 months
. The total fair value of shares vested during each of
2017
and
2016
was
$1.7 million
, compared to
$2.7 million
in 2015.
The weighted-average grant date fair value for
2017
,
2016
, and
2015
was
$10.89
,
$8.07
, and
$13.27
, respectively. The fair value will be amortized to compensation cost on a straight-line basis over the
three
-year vesting period, or earlier if the employee is retirement eligible as defined in the Plan. Stock-based compensation expense relating to SARs was
$1.4 million
in 2017,
$0.9 million
in 2016,
$2.0 million
in 2015.
The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
|
1.92
|
%
|
|
1.25
|
%
|
|
1.47
|
%
|
Dividend yield
|
|
1.1
|
%
|
|
1.4
|
%
|
|
0.9
|
%
|
Volatility
|
|
34.0
|
%
|
|
38.0
|
%
|
|
42.8
|
%
|
Expected lives (in years)
|
|
5.6
|
|
|
5.7
|
|
|
5.0
|
|
The risk-free rate of return was based on U.S. Treasury yields with a maturity equal to the expected life of the award. The dividend yield was based on the Company's historical dividend rate and stock price. The expected volatility of stock was derived by referring to changes in the Company's historical common stock prices over a time-frame similar to the expected life of the award. In addition to considering the vesting period and contractual term of the award for the expected life assumption, the Company analyzes actual historical exercise experience for previously granted awards.
Restricted Stock Units.
The Company may grant restricted stock units to employees and non-employee directors of the Company. These units are restricted and vest over a designated period of time as defined at the date of the grant and are forfeited should the holder’s employment terminate during the restriction period. The fair market value of the restricted shares is determined on the date of the grant and is amortized over the restriction period. The restriction period is typically
three years
unless the recipient is retirement eligible.
The fair value of the restricted stock units settled in stock is based on the closing stock price on the date of grant. The weighted-average grant date fair value for
2017
,
2016
, and
2015
was
$34.95
,
$25.96
, and
$37.17
, respectively. Cash-settled RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stock over the vesting period of
three years
.
Stock-based compensation expense relating to restricted stock units was
$2.1 million
in
2017
,
$1.3 million
in
2016
, and
$2.1 million
in
2015
. The unamortized compensation cost on the outstanding restricted stock was
$1.2 million
as of
December 31, 2017
and is expected to be amortized over a weighted-average period of
20
months. The total fair value of shares vested during 2017, 2016, and 2015 was
$2.0 million
,
$1.9 million
, and
$2.3 million
.
The following table summarizes the stock-settled restricted stock unit activity during
2017
:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2016
|
|
141
|
|
|
$
|
30.54
|
|
Granted
|
|
62
|
|
|
34.95
|
|
Vested
|
|
(64
|
)
|
|
30.75
|
|
Forfeited
|
|
(2
|
)
|
|
30.36
|
|
Outstanding at December 31, 2017
|
|
137
|
|
|
$
|
32.45
|
|
Long-term Incentive Plans.
Under long-term incentive compensation plans, executive officers and selected other employees receive restricted stock unit awards based upon the Company’s performance over the defined period, typically
three years
. Total units earned for grants made in 2017, 2016, and 2015, may vary between
0%
and
200%
of the units granted based on the attainment of performance targets during the related three-year period and continued service. For executive officers, attainment up to
100%
is paid in Materion common shares and is equity classified, while the remainder is classified as a liability award and settled in cash. For all other employees, the entire award is settled in cash. Vesting of performance-based awards is contingent upon the attainment of threshold performance objectives.
The following table summarizes the activity related to equity-based, performance-based restricted stock units during 2017:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2016
|
|
186
|
|
|
$
|
27.47
|
|
Granted
|
|
65
|
|
|
30.28
|
|
Vested
|
|
(25
|
)
|
|
26.02
|
|
Forfeited
|
|
(3
|
)
|
|
25.38
|
|
Outstanding at December 31, 2017
|
|
223
|
|
|
$
|
28.49
|
|
Compensation expense is based upon the performance projections for the
three
-year plan period, the percentage of requisite service rendered, and the fair market value of the Company’s common shares on the date of grant. The offset to the compensation expense for the portion of the award to be settled in shares is recorded within shareholders’ equity and was
$1.5 million
for
2017
,
$1.0 million
for
2016
, and
$1.4 million
for
2015
.
Directors' Deferred Compensation.
Non-employee directors may defer all or part of their compensation into the Company’s common stock. The fair value of the deferred shares is determined at the share acquisition date and is recorded within shareholders’ equity. Subsequent changes in the fair value of the Company’s common shares do not impact the recorded values of the shares.
The following table summarizes the stock activity for the directors' deferred compensation plan during
2017
:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
Outstanding at December 31, 2016
|
|
155
|
|
|
$
|
25.52
|
|
Granted
|
|
15
|
|
|
35.34
|
|
Distributed
|
|
(6
|
)
|
|
38.94
|
|
Outstanding at December 31, 2017
|
|
164
|
|
|
$
|
25.96
|
|
During the years ended
December 31, 2017
,
2016
, and
2015
, the weighted-average grant date fair value was
$35.34
,
$24.46
, and
$37.08
, respectively.
Note Q — Fair Value Information and Derivative Financial Instruments
The Company measures and records financial instruments at fair value. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based upon market data (observable inputs) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 — Quoted market prices in active markets for identical assets and liabilities;
Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
(Thousands)
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Other
Significant
Unobservable
Inputs
(Level 3)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
2,310
|
|
|
$
|
2,310
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
254
|
|
|
—
|
|
|
254
|
|
|
—
|
|
Precious metal swaps
|
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
Total
|
|
$
|
2,578
|
|
|
$
|
2,310
|
|
|
$
|
268
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
2,310
|
|
|
$
|
2,310
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
201
|
|
|
—
|
|
|
201
|
|
|
—
|
|
Precious metal swaps
|
|
269
|
|
|
—
|
|
|
269
|
|
|
—
|
|
Total
|
|
$
|
2,780
|
|
|
$
|
2,310
|
|
|
$
|
470
|
|
|
$
|
—
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
1,734
|
|
|
$
|
1,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
691
|
|
|
—
|
|
|
691
|
|
|
—
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2,425
|
|
|
$
|
1,734
|
|
|
$
|
691
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
1,734
|
|
|
$
|
1,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,735
|
|
|
$
|
1,734
|
|
|
$
|
1
|
|
|
$
|
—
|
|
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values at
December 31, 2017
and
2016
.
The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency.
The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.
The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for
an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
Precious Metals.
The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions who charge the Company a financing fee based upon the current value of the metal on hand.
In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.
A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.
The use of derivatives is governed by policies adopted by the Audit Committee of the Board of Directors. The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.
All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments and balance sheet classification as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - euro
|
|
$
|
13,981
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
13,981
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
These outstanding foreign currency derivatives were related to intercompany loans. Other-net included foreign currency losses relating to these derivatives of
$1.1 million
in 2017.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges and balance sheet classification at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
$
|
5,673
|
|
|
$
|
91
|
|
|
$
|
2,418
|
|
|
$
|
239
|
|
Foreign currency forward contracts - euro
|
|
5,026
|
|
|
36
|
|
|
6,493
|
|
|
452
|
|
|
|
10,699
|
|
|
127
|
|
|
8,911
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Precious metal swaps
|
|
880
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other liabilities and accrued items
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - euro
|
|
13,583
|
|
|
(201
|
)
|
|
537
|
|
|
(1
|
)
|
Precious metal swaps
|
|
10,067
|
|
|
(255
|
)
|
|
—
|
|
|
—
|
|
|
|
23,650
|
|
|
(456
|
)
|
|
537
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
Precious metal swaps
|
|
789
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,018
|
|
|
$
|
(329
|
)
|
|
$
|
9,448
|
|
|
$
|
690
|
|
All of these contracts were designated and effective as cash flow hedges.
No
ineffectiveness expense was recorded in
2017
,
2016
, or
2015
.
The fair value of derivative contracts recorded in accumulated other comprehensive loss totaled
$0.3 million
as of
December 31, 2017
, compared to
$0.7 million
in accumulated other comprehensive income as of
December 31, 2016
. Deferred losses of
$0.3 million
at December 31, 2017 are expected to be reclassified to earnings within the next 18-month period.
Note R — Contingencies and Commitments
Chronic Beryllium Disease (CBD) Claims
The Company is a defendant from time to time in proceedings in various state and federal courts brought by plaintiffs alleging that they have contracted CBD or related ailments as a result of exposure to beryllium. Plaintiffs in CBD cases seek recovery under theories of negligence and various other legal theories and seek compensatory and punitive damages, in many cases of an unspecified sum. Spouses, if any, often claim loss of consortium.
Employee cases, in which plaintiffs have a high burden of proof, have historically involved relatively small losses to the Company. Third-party plaintiffs (typically employees of customers) face a lower burden of proof than do the Company’s employees, but these cases have generally been covered by varying levels of insurance. Management has vigorously contested the CBD cases brought against the Company.
Non-employee claims for CBD are covered by insurance, subject to certain limitations. The insurance covers defense costs and indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of deductibles. In
2017
and
2016
, defense and indemnity costs were less than or equal to the deductible.
One
CBD case, originally filed and dismissed during 2015, but reversed and remanded in 2016 to the trial court, was outstanding as of December 31, 2017 and 2016. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
Although it is not possible to predict the outcome of any pending litigation, the Company provides for costs related to litigation matters when a loss is probable, and the amount is reasonably estimable. Litigation is subject to many uncertainties, and it is possible that some of the actions could be decided unfavorably in amounts exceeding the Company’s reserves. An unfavorable outcome or settlement of a CBD case or adverse media coverage could encourage the commencement of additional similar litigation. The Company is unable to estimate its potential exposure to unasserted claims.
Based upon currently known facts and assuming collectibility of insurance, the Company does not believe that resolution of the current or potential future beryllium proceedings will have a material adverse effect on the financial condition or cash flow of the Company. However, the Company’s results of operations could be materially affected by unfavorable results in one or more cases.
Insurance Recoverable
The Company collected
$5.6 million
during 2015 as part of settlement agreements with contractors and insurance companies for outstanding disputes regarding construction of the Company's beryllium pebble facility located in Elmore, Ohio. The benefit of these settlements was recorded in Other-net in the Consolidated Statements of Income.
Environmental Proceedings
The Company has an active program for environmental compliance that includes the identification of environmental projects and estimating the impact on the Company’s financial performance and available resources. Environmental expenditures that relate to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as appropriate. The Company records reserves for the probable costs for identified environmental remediation projects. The Company’s environmental engineers perform routine ongoing analyses of the remediation sites and will use outside consultants to assist in their analyses from time to time. Accruals are based upon their analyses and are established based on the reasonably estimable loss or range of loss. The accruals are revised for the results of ongoing studies, changes in strategies, inflation, and for differences between actual and projected costs. The accruals may also be affected by rulings and negotiations with regulatory agencies. The timing of payments often lags the accrual, as environmental projects typically require a number of years to complete.
The environmental reserves recorded represent the Company's best estimate of what is reasonably possible and cover existing or currently foreseen projects based upon current facts and circumstances. The Company does not believe that it is reasonably possible that the cost to resolve environmental matters for sites where the investigative work and work plan development are substantially complete will be materially different than what has been accrued while the ultimate loss contingencies for sites that are in the preliminary stages of investigation cannot be reasonably determined at the present time. As facts and circumstances change, the ultimate cost may be revised, and the recording of additional costs may be material in the period in which the additional costs are accrued. The Company does not believe that the ultimate liability for environmental matters will have a material impact on its financial condition or liquidity due to the nature of known environmental matters and the extended period of time during which environmental remediation normally takes place.
The undiscounted reserve balance at the beginning of the year, the amounts expensed and paid, and the balance at December 31,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
Reserve balance at beginning of year
|
|
$
|
6,041
|
|
|
$
|
5,714
|
|
Expensed
|
|
1,006
|
|
|
851
|
|
Paid
|
|
(548
|
)
|
|
(524
|
)
|
Reserve balance at end of year
|
|
$
|
6,499
|
|
|
$
|
6,041
|
|
Ending balance recorded in:
|
|
|
|
|
Other liabilities and accrued items
|
|
$
|
987
|
|
|
$
|
874
|
|
Other long-term liabilities
|
|
5,512
|
|
|
5,167
|
|
The majority of spending in
2017
and
2016
was for various remediation projects at the Elmore, Ohio plant site.
Asset Retirement Obligations
The following represents a roll forward of our asset retirement obligation liability related to our mine located in Utah for the years ended December 31,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2017
|
|
2016
|
Asset retirement obligation at beginning of period
|
|
$
|
1,084
|
|
|
$
|
610
|
|
Accretion expense
|
|
83
|
|
|
49
|
|
Change in liability
|
|
—
|
|
|
425
|
|
Asset retirement obligation at end of period
|
|
$
|
1,167
|
|
|
$
|
1,084
|
|
Other
The Company is subject to various legal or other proceedings that relate to the ordinary course of its business. The Company believes that the resolution of these proceedings, individually or in the aggregate, will not have a material adverse impact upon the Company’s consolidated financial statements.
At December 31, 2017, the Company has outstanding letters of credit totaling
$27.3 million
related to workers’ compensation, consigned precious metal guarantees, environmental remediation issues, and other matters. The majority of the Company's outstanding letters of credit expire in 2018 and are expected to be renewed.
Note S — Quarterly Data (Unaudited)
The following tables summarize selected quarterly financial data for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
(Thousands except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Net sales
|
|
$
|
240,669
|
|
|
$
|
295,842
|
|
|
$
|
294,268
|
|
|
$
|
308,668
|
|
|
$
|
1,139,447
|
|
Gross margin
|
|
42,996
|
|
|
54,557
|
|
|
55,203
|
|
|
58,738
|
|
|
211,494
|
|
Percent of net sales
|
|
17.9
|
%
|
|
18.4
|
%
|
|
18.8
|
%
|
|
19.0
|
%
|
|
18.6
|
%
|
Net income (loss)
|
|
$
|
3,050
|
|
|
$
|
7,313
|
|
|
$
|
9,320
|
|
|
$
|
(8,232
|
)
|
|
$
|
11,451
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
$
|
0.15
|
|
|
$
|
0.37
|
|
|
$
|
0.47
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.57
|
|
Diluted
(1)(2)
|
|
0.15
|
|
|
0.36
|
|
|
0.46
|
|
|
(0.41
|
)
|
|
0.56
|
|
Cash dividends per share of common stock
|
|
0.095
|
|
|
0.100
|
|
|
0.100
|
|
|
0.100
|
|
|
0.395
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
41.10
|
|
|
$
|
38.85
|
|
|
$
|
43.43
|
|
|
$
|
52.10
|
|
|
|
Low
|
|
31.05
|
|
|
33.00
|
|
|
36.60
|
|
|
42.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Net sales
|
|
$
|
235,511
|
|
|
$
|
249,776
|
|
|
$
|
249,619
|
|
|
$
|
234,330
|
|
|
$
|
969,236
|
|
Gross margin
|
|
43,357
|
|
|
45,306
|
|
|
50,755
|
|
|
44,045
|
|
|
183,463
|
|
Percent of net sales
|
|
18.4
|
%
|
|
18.1
|
%
|
|
20.3
|
%
|
|
18.8
|
%
|
|
18.9
|
%
|
Net income
|
|
$
|
5,368
|
|
|
$
|
5,549
|
|
|
$
|
8,045
|
|
|
$
|
6,778
|
|
|
$
|
25,740
|
|
Net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.40
|
|
|
$
|
0.34
|
|
|
$
|
1.29
|
|
Diluted
|
|
0.27
|
|
|
0.27
|
|
|
0.40
|
|
|
0.33
|
|
|
1.27
|
|
Cash dividends per share of common stock
|
|
0.090
|
|
|
0.095
|
|
|
0.095
|
|
|
0.095
|
|
|
0.375
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
28.26
|
|
|
$
|
31.83
|
|
|
$
|
32.28
|
|
|
$
|
41.23
|
|
|
|
Low
|
|
20.62
|
|
|
22.36
|
|
|
24.18
|
|
|
28.50
|
|
|
|
(1)
Net income (loss) per basic and diluted share for the fourth quarter 2017 includes the impact of
$17.1 million
in income tax expense as a result of the TCJA signed into law on December 22, 2017. For additional information refer to Refer to Note G of the Consolidated Financial Statements.
(2)
Since the Company reported a net loss for the fourth quarter of 2017, the effects of potential common shares were excluded from diluted earnings per share, as their inclusion would have been anti-dilutive.
The Company follows a 13-week quarterly accounting cycle pursuant to which the first three fiscal quarters end on a Friday and the fiscal year always ends on December 31.