NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 1 — Summary of Significant Accounting Policies
Description of Business:
CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronic components, and actuators. We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.
CTS consists of
one
reportable business segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of CTS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Calendar:
We began using a calendar period end in 2016. Prior to that, we operated on a 4 week/ 4 week/ 5 week fiscal quarter, and each fiscal quarter ended on a Sunday. The fiscal year always began on January 1 and ended on December 31. Our fiscal calendar resulted in some fiscal quarters being either longer or shorter than 13 weeks, depending on the days of the week on which those dates fell.
Use of Estimates:
The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents:
All highly liquid investments with maturities of
three months
or less at the date of purchase are considered to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts:
Accounts receivable consists primarily of amounts due from normal business activities. We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable. Our reserves for estimated credit losses are based upon historical experience and specific customer collection issues. Accounts are written off against the allowance account when they are determined to no longer be collectible.
Concentration of Credit Risk:
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on cash and cash equivalents.
Trade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally in the transportation, industrial, medical, defense and aerospace, information technology, and communications markets, primarily in North America, Europe, and Asia. We perform ongoing credit evaluations of our customers to minimize credit risk. We do not require collateral. The allowance for doubtful accounts is based on management's estimates of the collectability of its accounts receivable after analyzing historical bad debts, customer concentrations, customer creditworthiness, and current economic trends. Uncollectible trade receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.
Our net sales to significant customers as a percentage of total net sales were as follows:
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Cummins Inc.
|
13.4%
|
9.9%
|
9.3%
|
Honda Motor Co.
|
11.2%
|
10.7%
|
10.7%
|
Toyota Motor Corporation
|
10.2%
|
10.4%
|
10.1%
|
We sell automotive parts to these three customers for certain vehicle platforms under purchase agreements that have no volume commitments and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
Inventories:
We value our inventories at the lower of the actual cost to purchase or manufacture or the net realizable value using the first-in, first-out ("FIFO") method. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements.
Retirement Plans:
We have various defined benefit and defined contribution retirement plans. Our policy is to annually fund the defined benefit pension plans at or above the minimum required by law. We: 1) recognize the funded status of a benefit plan (measured as the difference between plan assets at fair value and the benefit obligation) in our Consolidated Balance Sheets; 2) recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost as a component of other comprehensive earnings; and 3) measure defined benefit plan assets and obligations as of the date of our fiscal year-end. See NOTE 5, "Retirement Plans" for further information.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Depreciation and amortization is computed primarily over the estimated useful lives of the various classes of assets using the straight-line method. Useful lives for buildings and improvements range from
10
to
45 years
. Machinery and equipment useful lives range from
3
to
15 years
. Depreciation on leasehold improvements is computed over the lesser of the lease term or estimated useful lives of the assets. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, any related gains or losses are included in operating earnings.
Income Taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. In 2016, we elected to early adopt ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on a retrospective basis allowing for all deferred tax items to be classified as non-current. Certain non-current deferred tax assets and non-current deferred tax liabilities were not netted since these items relate to different tax jurisdictions.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Operations. Accrued interest and penalties are included on the related tax liability line in the Consolidated Balance Sheets.
See NOTE 17, "Income Taxes" for further information.
Goodwill and Indefinite-lived Intangible Assets:
Goodwill represents the excess of the purchase price over the fair values of the net assets acquired in a business combination. We test the impairment of goodwill at least annually, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment evaluation utilizes a two-step test. The first step compares the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is equal to or greater than its carrying value, goodwill is not impaired and no further testing is required. If the carrying value exceeds fair value, then the second step of the impairment test is performed in order to determine if the implied fair value of the goodwill of the reporting unit exceeds the carrying value of that goodwill. Goodwill is impaired when the carrying value of the goodwill exceeds its implied fair value. Impaired goodwill is written down to its implied fair value through a non-cash expense recorded in results of operations in the period the impairment is identified.
In 2015, we changed the date of our annual impairment test from the last day of our fiscal year to the first day of our fourth quarter. This change did not have a material effect on the results of our impairment test. We completed our annual impairment test during
2017
and determined that our goodwill was not impaired as of the measurement date.
No
goodwill impairment was recorded for the years ended December 31,
2017
,
2016
and
2015
.
We also have acquired in-process research and development ("IPR&D") intangible assets that are treated as indefinite-lived intangible assets and therefore not subject to amortization until the completion or abandonment of the associated research and development efforts. If these efforts are abandoned in the future, the carrying value of the IPR&D asset will be expensed. If the research and development efforts are successfully completed, the IPR&D will be reclassified as a finite-lived asset and amortized over its useful life.
No
significant impairments were recorded in the years ended December 31,
2017
,
2016
and
2015
.
Other Intangible Assets and Long-lived Assets:
We account for long-lived assets (excluding indefinite-lived intangible assets) in accordance with the provisions of ASC 360. This statement requires that long-lived assets, which includes fixed assets and finite-lived intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment test is warranted, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Intangible assets (excluding indefinite-lived intangible assets) consist primarily of technology, customer lists and relationships, patents, and trade names. These assets are recorded at cost and usually amortized on a straight-line basis over their estimated lives. We assess useful lives based on the period over which the asset is expected to contribute to cash flows.
Revenue Recognition:
Product revenue is recognized once four criteria are met: 1) we have persuasive evidence that an arrangement exists; 2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment provided that no significant obligations remain; 3) the price is fixed and determinable; and 4) collectability is reasonably assured.
Research and Development:
Research and development ("R&D") costs include expenditures for planned search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes. R&D costs also include the implementation of new knowledge through design, testing of product alternatives, or construction of prototypes. We expense all R&D costs as incurred, net of customer reimbursements for sales of prototypes and non-recurring engineering charges.
We create prototypes and tools related to R&D projects. A prototype is defined as a constructed product not intended for production resulting in a commercial sale. We also incur engineering costs related to R&D activities. Such costs are incurred to support such activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications. Furthermore, we may engage in activities that develop tooling machinery and equipment for our customers.
Costs of molds, dies and other tools used to make products sold for which we have a contractual guarantee for lump sum reimbursement from the customer are included in other current assets on the Consolidated Balance Sheets until reimbursement is received from the customer. A summary of amounts to be received from customers is as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
2016
|
Cost of molds, dies and other tools included in other current assets
|
$
|
3,382
|
|
$
|
2,837
|
|
Reimbursements received from customers are netted against such costs and included in our Consolidated Statements of Earnings if the amount received is in excess of the costs that we incur. A summary of amounts received from customers is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Reimbursements received from customers
|
$
|
4,299
|
|
$
|
2,036
|
|
$
|
1,861
|
|
Financial Instruments:
We use forward contracts to mitigate currency risk related to forecasted foreign currency revenue and costs. These forward contracts are designed as cash flow hedges. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. In addition, we use interest rate swaps to convert a portion of our revolving credit facility's variable rate of interest into a fixed rate. As a result of the use of these derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors and by using netting agreements. Our established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties.
We estimate the fair value of our financial instruments as follows:
|
|
|
|
Instrument
|
|
Method for determining fair value
|
Cash, cash equivalents, accounts receivable and accounts payable
|
|
Cost, approximates fair value due to the short-term nature of these instruments.
|
Revolving credit facility
|
|
The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our credit facility.
|
Interest rate swaps and forward contracts
|
|
The fair value of our interest rate swaps and forward contracts are measured using a market approach which uses current industry information.
|
Debt Issuance Costs:
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt.
Stock-Based Compensation:
We recognize expense related to the fair value of stock-based compensation awards, consisting of restricted stock units ("RSUs"), cash-settled restricted stock units, and stock options, in the Consolidated Statements of Earnings.
We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model. A number of assumptions are used by the Black-Scholes option pricing model to compute the grant date fair value of an award, including expected price volatility, option term, risk-free interest rate, and dividend yield. These assumptions are established at each grant date based upon current information at that time. Expected volatilities are based on historical volatilities of CTS' common stock. The expected option term is derived from historical data of exercise behavior. Actual option terms can differ from the expected option terms as a result of different groups of employees exhibiting different exercise behavior. The dividend yield is based on historical dividend payments. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The fair value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods of the awards in the Consolidated Statements of Earnings.
The grant date fair values of our service-based and performance-based RSUs are the closing price of our common stock on the date of grant. The grant date fair value of our market-based RSUs is determined by using a simulation, or Monte Carlo, approach. Under this approach, stock returns from a comparative group of companies are simulated over the performance period, considering both stock price volatility and the correlation of returns. The simulated results are then used to estimate the future payout based on the performance and payout relationship established by the conditions of the award. The future payout is discounted to the measurement date using the risk-free interest rate.
Both our stock option and RSU awards primarily have a graded vesting schedule. We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. See NOTE 15, "Stock-Based Compensation" for further information.
In 2016, we elected to early adopt the provisions of ASU 2016-09
"Compensation-Stock Compensation (Topic 718): Improvement to Employee Share based Payment Accounting"
. Pursuant to this adoption, we recorded excess tax benefits within income tax expense for the year ended December 31, 2016, where previously these were recorded as increases or decreases to additional contributed capital. In addition, we have elected to account for forfeitures of awards as they occur. Both of these changes have been applied prospectively, and therefore no adjustments were made to prior periods. In accordance with the guidance, we retrospectively reported cash paid on behalf of employees for withholding shares for tax-withholding purposes as a financing activity in the Consolidated Statements of Cash Flows. Additionally, excess tax benefits were classified as an operating activity, applied prospectively. Adoption of this ASU did not result in a material change in our earnings, cash flows, or financial position.
Earnings Per Share:
Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if dilutive securities, such as stock options and unvested restricted stock units, were exercised or resulted in the issuance of common stock. Diluted earnings per share is calculated by adding all potentially dilutive shares to the weighted average number of common shares outstanding for the numerator. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share.
Our antidilutive stock options and RSUs consist of the following:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(units)
|
2017
|
2016
|
2015
|
Antidilutive stock options and RSUs
|
22,110
|
|
35,189
|
|
13,979
|
|
Foreign Currencies:
The financial statements of our non-U.S. subsidiaries, except the United Kingdom ("U.K.") subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings.
Foreign currency gains (losses) recorded in the Consolidated Statement of Earnings includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Foreign currency gains (losses)
|
$
|
3,052
|
|
$
|
(3,714
|
)
|
$
|
(6,299
|
)
|
The assets and liabilities of our U.K. subsidiary are translated into U.S. dollars at the current exchange rate at period end, with the resulting translation adjustments made directly to the "accumulated other comprehensive loss" component of shareholders' equity. Consolidated Statement of Earnings accounts are translated at the average rates during the period.
Shipping and Handling:
All fees billed to the customer for shipping and handling is classified as a component of net sales. All costs associated with shipping and handling is classified as a component of cost of goods sold.
Sales Taxes:
We classify sales taxes on a net basis in our consolidated financial statements.
Change in Estimate:
Beginning in January 2017, we changed the method we use to calculate the service and interest cost components of net periodic benefit cost for our U.S. pension and other post-retirement benefit plans. Previously, we calculated the service and interest cost components using a single weighted-average discount rate derived from the yield curve to measure the benefit obligation at the beginning of the period. In 2017, we began using a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot-rates along the yield curve to the relevant projected cash flows. This approach better aligns each of the projected benefit cash flows to the corresponding spot rates on the yield curve, resulting in a more precise measurement of service and interest costs. The change in method resulted in a decrease in the service and interest components of pension costs in 2017. Any decrease to these components as a result of adoption of this approach is equally offset by a decrease in the actuarial losses included in our accumulated other comprehensive loss, with no impact on the measurement of the benefit obligation. This change is accounted for prospectively as a change in accounting estimate.
Reclassifications:
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications had no impact on previously reported net earnings.
Recently Issued Accounting Pronouncements
ASU 2017-12
"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accountings Standards Update ("ASU") No 2017-12
"Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities"
. This ASU is meant to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. Any changes should be applied to all hedging relationships that exist at the date of adoption by applying a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. Presentation and disclosure guidance is to be applied prospectively. We are still evaluating the impact this ASU may have on our financial statements.
ASU 2017-07
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost"
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and net Periodic Post-retirement Benefit Cost"
. This ASU is meant to improve the presentation of net periodic pension and net periodic post-retirement benefits costs. Currently, pension and post-retirement benefit costs are comprised of several components reflecting the different aspects of an employer's financial arrangements and cost of providing benefits to employees. These components are aggregated for reporting, but prior guidance does not prescribe where the net cost should be presented in the income statement or capitalized in assets. This ASU requires disaggregation of the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost and other components in the income statement, allowing only the service cost component of net benefit costs to be eligible for capitalization. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted as of the beginning of an annual period for
which financial statements have not been issued or made available for issuance. These amendments should be applied retrospectively for the presentation of the service cost and other components of net periodic pension and net post-retirement benefit cost in the income statement and prospectively for the capitalization of the service cost and net periodic pension cost and periodic post-retirement benefit in assets. This ASU is not expected to have a material impact on our financial statements because the service cost component of our pension cost is expected to be immaterial to our financial results on a prospective basis.
ASU 2017-04
"Intangibles -Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
In January 2017, the FASB issued ASU No. 2017-04
"Intangibles - Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
. This ASU is meant to simplify the subsequent measurement of goodwill for impairment by eliminating the current Step 2 analysis in computing the implied fair value of goodwill. In addition, this ASU requires an entity to consider income tax effects on any tax deductible goodwill on the carrying amount of the reporting unit when measuring an impairment loss, if applicable. Under this ASU, impairment is determined by comparing the reporting unit's fair value to the carrying value. This amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have an impact on our financial statements.
ASU 2017-01
"Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01
"Business Combinations (Topic 805): Clarifying the Definition of Business"
. This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should be accounted for as a sale or purchase of assets or a business. This ASU provides a more robust framework to use in determining when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset acquisitions. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those periods. The ASU will be applied prospectively and it is not expected to have an impact on our financial statements.
ASU 2016-16
"Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-16,
"Intra-Entity Transfers of Assets Other Than Inventory"
. This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, U.S. GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers until the asset is sold to a third party. This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs. This ASU is effective, for public companies for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods. Early adoption is permitted and is to be applied on a modified retrospective bases through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This guidance is not expected to have a material impact on our consolidated financial statements.
ASU 2016-15
"Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance is not expected to have a material impact on our consolidated financial statements.
ASU 2016-02
"Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability on the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees; the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.
The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be based on the present value of the lease payments. If a lease term is less than twelve months, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized straight-line over the term of the lease.
Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.
Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.
These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date.
The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those periods. Early adoption is allowed. The provisions of this guidance are still being evaluated and the impact on our financial statements has not yet been determined.
ASU 2014-09
, "Revenue from Contracts with Customers (Topic 606)"
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)", which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605,
Revenue Recognition
effective January 1, 2018. Several additional ASUs have subsequently been issued amending and clarifying the standard. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle.
We adopted this standard on January 1, 2018 using the modified retrospective approach, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption. We have completed our review of customer contracts and agreements for revenue recognized in 2017. We have assessed the impact of the new standard on our existing revenue recognition policies and have concluded that the standard will not have a material impact on our financial position or results of operations. We will include the additional required disclosures beginning with our Form 10-Q for the first quarter of 2018.
Subsequent Events:
We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements are issued.
NOTE 2 — Accounts Receivable
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Accounts receivable, gross
|
$
|
70,941
|
|
$
|
62,782
|
|
Less: Allowance for doubtful accounts
|
(357
|
)
|
(170
|
)
|
Accounts receivable, net
|
$
|
70,584
|
|
$
|
62,612
|
|
NOTE 3 — Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Finished goods
|
$
|
9,203
|
|
$
|
7,513
|
|
Work-in-process
|
12,065
|
|
9,596
|
|
Raw materials
|
21,150
|
|
17,680
|
|
Less: Inventory reserves
|
(5,822
|
)
|
(6,137
|
)
|
Inventories, net
|
$
|
36,596
|
|
$
|
28,652
|
|
NOTE 4 — Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Land
|
$
|
1,130
|
|
$
|
2,330
|
|
Buildings and improvements
|
64,201
|
|
63,621
|
|
Machinery and equipment
|
223,650
|
|
213,198
|
|
Less: Accumulated depreciation
|
(200,734
|
)
|
(197,038
|
)
|
Property, plant and equipment, net
|
$
|
88,247
|
|
$
|
82,111
|
|
Depreciation expense recorded in the Consolidated Statements of Earnings includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
2017
|
2016
|
2015
|
Depreciation expense
|
$
|
14,071
|
|
$
|
13,177
|
|
$
|
12,219
|
|
NOTE 5 — Retirement Plans
We have a number of noncontributory defined benefit pension plans ("pension plans") covering approximately
5%
of our active employees. Pension plans covering salaried employees provide pension benefits that are based on the employees´ years of service and compensation prior to retirement. Pension plans covering hourly employees generally provide benefits of stated amounts for each year of service.
We also provide post-retirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain domestic union employees are eligible for life insurance benefits upon retirement. We fund life insurance benefits through term life insurance policies and intend to continue funding all of the premiums on a pay-as-you-go basis.
We recognize the funded status of a benefit plan in our consolidated balance sheets. The funded status is measured as the difference between plan assets at fair value and the projected benefit obligation. We also recognize, as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost.
The measurement dates for the pension plans for our U.S. and non-U.S. locations were
December 31, 2017
, and
2016
.
During 2017, we offered certain former vested employees in our U.S. pension plan a one-time option to receive a lump sum distribution of their benefits from pension plan assets. The pension plan made approximately $
23,912
in lump sum payments to settle its obligation to these participants. These settlement payments decreased the projected benefit obligation and plan assets by $
23,912
, and resulted in a non-cash settlement charge of $
13,476
related to unrecognized net actuarial losses that were previously included in accumulated other comprehensive loss. The measurement date of this settlement was
December 31, 2017
.
During 2014, we approved a plan to terminate the U.K. Limited Retirement Benefits Scheme ("the U.K. Plan"). The pension liability was settled in a purchased annuity. We completed the termination of the pension plan by the end of 2015, and a loss on settlement of this pension in the amount of
$8,280
was recorded in restructuring and impairment charges in 2015.
The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the pension plans for U.S. and non-U.S. locations at the measurement dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
Non-U.S.
Pension Plans
|
|
2017
|
2016
|
|
2017
|
2016
|
Accumulated benefit obligation
|
$
|
228,934
|
|
$
|
247,276
|
|
|
$
|
2,535
|
|
$
|
2,295
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at January 1
|
$
|
247,276
|
|
$
|
256,924
|
|
|
$
|
2,866
|
|
$
|
2,796
|
|
Service cost
|
—
|
|
87
|
|
|
48
|
|
51
|
|
Interest cost
|
8,273
|
|
11,024
|
|
|
34
|
|
46
|
|
Benefits paid
|
(39,177
|
)
|
(20,537
|
)
|
|
(210
|
)
|
(289
|
)
|
Actuarial loss (gain)
|
12,562
|
|
(222
|
)
|
|
164
|
|
229
|
|
Foreign exchange impact
|
—
|
|
—
|
|
|
238
|
|
33
|
|
Projected benefit obligation at December 31
|
$
|
228,934
|
|
$
|
247,276
|
|
|
$
|
3,140
|
|
$
|
2,866
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Assets at fair value at January 1
|
$
|
292,044
|
|
$
|
289,315
|
|
|
$
|
1,523
|
|
$
|
1,480
|
|
Actual return on assets
|
31,559
|
|
23,163
|
|
|
17
|
|
11
|
|
Company contributions
|
336
|
|
103
|
|
|
319
|
|
303
|
|
Benefits paid
|
(39,177
|
)
|
(20,537
|
)
|
|
(210
|
)
|
(289
|
)
|
Foreign exchange impact
|
—
|
|
—
|
|
|
128
|
|
18
|
|
Assets at fair value at December 31
|
$
|
284,762
|
|
$
|
292,044
|
|
|
$
|
1,777
|
|
$
|
1,523
|
|
Funded status (plan assets less projected benefit obligations)
|
$
|
55,828
|
|
$
|
44,768
|
|
|
$
|
(1,363
|
)
|
$
|
(1,343
|
)
|
The measurement dates for the post-retirement life insurance plan were
December 31, 2017
, and
2016
. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those measurement dates.
|
|
|
|
|
|
|
|
|
Post-Retirement
Life Insurance Plan
|
|
2017
|
2016
|
Accumulated benefit obligation
|
$
|
5,134
|
|
$
|
4,952
|
|
Change in projected benefit obligation:
|
|
|
|
|
Projected benefit obligation at January 1
|
$
|
4,952
|
|
$
|
4,886
|
|
Service cost
|
2
|
|
3
|
|
Interest cost
|
161
|
|
207
|
|
Benefits paid
|
(165
|
)
|
(165
|
)
|
Actuarial loss
|
184
|
|
21
|
|
Projected benefit obligation at December 31
|
$
|
5,134
|
|
$
|
4,952
|
|
Change in plan assets:
|
|
|
|
|
Assets at fair value at January 1
|
$
|
—
|
|
$
|
—
|
|
Actual return on assets
|
—
|
|
—
|
|
Company contributions
|
165
|
|
165
|
|
Benefits paid
|
(165
|
)
|
(165
|
)
|
Other
|
—
|
|
—
|
|
Assets at fair value at December 31
|
$
|
—
|
|
$
|
—
|
|
Funded status (plan assets less projected benefit obligations)
|
$
|
(5,134
|
)
|
$
|
(4,952
|
)
|
The components of the prepaid (accrued) cost of the domestic and foreign pension plans are classified in the following lines in the Consolidated Balance Sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Pension Plans
|
|
Non-U.S. Pension Plans
|
|
2017
|
2016
|
|
2017
|
2016
|
Prepaid pension asset
|
$
|
57,050
|
|
$
|
46,183
|
|
|
$
|
—
|
|
$
|
—
|
|
Accrued expenses and other liabilities
|
(100
|
)
|
(317
|
)
|
|
—
|
|
—
|
|
Long-term pension obligations
|
(1,122
|
)
|
(1,098
|
)
|
|
(1,363
|
)
|
(1,343
|
)
|
Net prepaid (accrued) cost
|
$
|
55,828
|
|
$
|
44,768
|
|
|
$
|
(1,363
|
)
|
$
|
(1,343
|
)
|
The components of the accrued cost of the post-retirement life insurance plan are classified in the following lines in the Consolidated Balance Sheets at December 31:
|
|
|
|
|
|
|
|
|
Post-Retirement
Life Insurance Plan
|
|
2017
|
2016
|
Accrued expenses and other liabilities
|
$
|
(418
|
)
|
$
|
(387
|
)
|
Long-term pension obligations
|
(4,716
|
)
|
(4,565
|
)
|
Total accrued cost
|
$
|
(5,134
|
)
|
$
|
(4,952
|
)
|
We have also recorded the following amounts to accumulated other comprehensive loss for the U.S. and non-U.S. pension plans, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Unrecognized
Loss
|
Prior
Service
Cost
|
Total
|
|
Unrecognized
Loss
|
Balance at January 1, 2016
|
$
|
96,388
|
|
$
|
—
|
|
$
|
96,388
|
|
|
$
|
1,639
|
|
Amortization of retirement benefits, net of tax
|
(3,817
|
)
|
—
|
|
(3,817
|
)
|
|
85
|
|
Net actuarial (loss) gain
|
(2,808
|
)
|
—
|
|
(2,808
|
)
|
|
12
|
|
Foreign exchange impact
|
—
|
|
—
|
|
—
|
|
|
7
|
|
Balance at January 1, 2017
|
$
|
89,763
|
|
$
|
—
|
|
$
|
89,763
|
|
|
$
|
1,743
|
|
Amortization of retirement benefits, net of tax
|
(3,685
|
)
|
—
|
|
(3,685
|
)
|
|
10
|
|
Settlements
|
(8,585
|
)
|
—
|
|
(8,585
|
)
|
|
—
|
|
Net actuarial (loss) gain
|
(1,753
|
)
|
—
|
|
(1,753
|
)
|
|
2
|
|
Foreign exchange impact
|
—
|
|
—
|
|
—
|
|
|
143
|
|
Balance at December 31, 2017
|
$
|
75,740
|
|
$
|
—
|
|
$
|
75,740
|
|
|
$
|
1,898
|
|
We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax:
|
|
|
|
|
|
Unrecognized
Gain
|
Balance at January 1, 2016
|
$
|
(669
|
)
|
Amortization of retirement benefits, net of tax
|
95
|
|
Net actuarial gain
|
14
|
|
Balance at January 1, 2017
|
$
|
(560
|
)
|
Amortization of retirement benefits, net of tax
|
64
|
|
Net actuarial gain
|
117
|
|
Balance at December 31, 2017
|
$
|
(379
|
)
|
The accumulated actuarial gains and losses and prior service costs and credits included in other comprehensive income are amortized in the following manner:
The component of unamortized net gains or losses related to our qualified pension plans is amortized based on the expected future life expectancy of the plan participants (estimated to be approximately
18 years
at
December 31, 2017
), because substantially all of the participants in those plans are inactive. The component of unamortized net gains or losses related to our post-retirement life insurance plan is amortized based on the estimated remaining future service period of the plan participants (estimated to be approximately
3 years
at
December 31, 2017
). The Company uses a market-related approach to value plan assets, reflecting changes in the fair value of plan assets over a five-year period. The variance resulting from the difference between the expected and actual return on plan assets is included in the amortization calculation upon reflection in the market-related value of plan assets.
In
2018
, we expect to recognize approximately
$5,888
of pre-tax losses included in accumulated other comprehensive loss related to our Pension Plans. We do not expect to recognize any significant such amounts related to the post-retirement life insurance plan in
2018
.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with accumulated benefit obligation in excess of fair value of plan assets is shown below:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Projected benefit obligation
|
$
|
4,361
|
|
$
|
4,281
|
|
Accumulated benefit obligation
|
3,757
|
|
3,710
|
|
Fair value of plan assets
|
1,776
|
|
1,523
|
|
Net pension (income) expense includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
Years Ended
December 31,
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
Service cost
|
$
|
—
|
|
$
|
87
|
|
$
|
171
|
|
|
$
|
48
|
|
$
|
51
|
|
$
|
63
|
|
Interest cost
|
8,273
|
|
11,024
|
|
11,258
|
|
|
34
|
|
46
|
|
465
|
|
Expected return on plan assets
(1)
|
(16,243
|
)
|
(18,976
|
)
|
(20,272
|
)
|
|
(20
|
)
|
(26
|
)
|
(446
|
)
|
Amortization of unrecognized loss
|
5,785
|
|
5,994
|
|
6,339
|
|
|
155
|
|
140
|
|
7,492
|
|
Additional cost due to early retirement
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
651
|
|
Settlement loss
|
13,476
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Net expense (income)
|
$
|
11,291
|
|
$
|
(1,871
|
)
|
$
|
(2,504
|
)
|
|
$
|
217
|
|
$
|
211
|
|
$
|
8,225
|
|
Weighted-average actuarial assumptions
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.63
|
%
|
4.16
|
%
|
4.43
|
%
|
|
1.38
|
%
|
1.13
|
%
|
1.63
|
%
|
Rate of compensation increase
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|
2.00
|
%
|
2.00
|
%
|
2.00
|
%
|
Pension income/expense assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.16
|
%
|
4.43
|
%
|
4.07
|
%
|
|
1.13
|
%
|
1.63
|
%
|
3.13
|
%
|
Expected return on plan assets
(1)
|
5.61
|
%
|
6.63
|
%
|
7.00
|
%
|
|
1.13
|
%
|
1.63
|
%
|
2.00
|
%
|
Rate of compensation increase
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|
2.00
|
%
|
2.00
|
%
|
0.48
|
%
|
|
|
(1)
|
Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
|
|
|
(2)
|
During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.
|
Net post-retirement expense includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement
Life Insurance Plan
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Service cost
|
$
|
2
|
|
$
|
3
|
|
$
|
5
|
|
Interest cost
|
161
|
|
207
|
|
204
|
|
Amortization of unrecognized gain
|
(101
|
)
|
(149
|
)
|
(101
|
)
|
Net expense
|
$
|
62
|
|
$
|
61
|
|
$
|
108
|
|
Weighted-average actuarial assumptions
(1)
|
|
|
|
|
|
|
Benefit obligation assumptions:
|
|
|
|
|
|
|
Discount rate
|
3.59
|
%
|
4.10
|
%
|
4.43
|
%
|
Rate of compensation increase
|
0
|
%
|
0
|
%
|
0
|
%
|
Pension income/post-retirement expense assumptions:
|
|
|
|
|
|
|
Discount rate
|
4.10
|
%
|
4.43
|
%
|
4.07
|
%
|
Rate of compensation increase
|
0
|
%
|
0
|
%
|
0
|
%
|
|
|
(1)
|
During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.
|
The discount rate utilized to estimate our pension and post-retirement obligations is based on market conditions at
December 31, 2017
, and is determined using a model consisting of high quality bond portfolios that match cash flows of the plans' projected benefit payments based on the plan participants' service to date and their expected future compensation. Use of the rate produced
by this model generates a projected benefit obligation that equals the current market value of a portfolio of high quality bonds whose maturity dates match the timing and amount of expected future benefit payments.
The discount rate used to determine
2017
pension income and post-retirement expense for our pension and post-retirement plans is based on market conditions at
December 31, 2016
, and is the interest rate used to estimate interest incurred on the outstanding projected benefit obligations during the period.
We utilize a building block approach in determining the long-term rate of return for plan assets. Historical markets are reviewed and long-term relationships between equities and fixed-income are preserved consistent with the generally accepted capital market principle that assets with higher volatility generate a greater return over the long term. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to ensure for reasonableness and appropriateness.
Our pension plan asset allocation at
December 31, 2017
, and
2016
, and target allocation for
2018
by asset category are as follows:
|
|
|
|
|
|
|
Target Allocations
|
|
Percentage of Plan Assets
at December 31,
|
Asset Category
|
2018
|
|
2017
|
2016
|
Equity securities
(1)
|
13%
|
|
11%
|
25%
|
Debt securities
|
83%
|
|
82%
|
59%
|
Other
|
4%
|
|
7%
|
16%
|
Total
|
100%
|
|
100%
|
100%
|
|
|
(1)
|
Equity securities include CTS common stock in the amount of $
0
at
December 31, 2017
and approximately
$17,700
(
6%
of total plan assets) at
December 31, 2016
.
|
We employ a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities. Risk tolerance is established through careful consideration of plan liabilities and funded status. The investment portfolio primarily contains a diversified mix of equity and fixed-income investments. Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.
The following table summarizes the fair values of our pension plan assets:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Equity securities - U.S. holdings
(1)
|
$
|
19,487
|
|
$
|
43,708
|
|
Equity securities - non-U.S. holdings
(1)
|
1,131
|
|
819
|
|
Equity funds - U.S. holdings
(1)
|
1,314
|
|
28,052
|
|
Bond funds - government
(5)
|
3,126
|
|
22,237
|
|
Bond funds - other
(6)
|
231,710
|
|
150,712
|
|
Real estate
(7)
|
1,235
|
|
3,812
|
|
Cash and cash equivalents
(2)
|
11,145
|
|
7,823
|
|
Partnerships
(4)
|
10,787
|
|
12,862
|
|
International hedge funds
(3)
|
6,604
|
|
23,542
|
|
Total fair value of plan assets
|
$
|
286,539
|
|
$
|
293,567
|
|
The fair values at
December 31, 2017
, are classified within the following categories in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Not Leveled
|
Total
|
Equity securities - U.S. holdings
(1)
|
$
|
19,487
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19,487
|
|
Equity securities - non-U.S. holdings
(1)
|
1,131
|
|
—
|
|
—
|
|
—
|
|
1,131
|
|
Equity funds - U.S. holdings
(1)
|
—
|
|
1,314
|
|
—
|
|
—
|
|
1,314
|
|
Bond funds - government
(5)
|
—
|
|
3,126
|
|
—
|
|
—
|
|
3,126
|
|
Bond funds - other
(6)
|
—
|
|
231,710
|
|
—
|
|
—
|
|
231,710
|
|
Real estate
(7) (8)
|
—
|
|
—
|
|
—
|
|
1,235
|
|
1,235
|
|
Cash and cash equivalents
(2)
|
11,145
|
|
—
|
|
—
|
|
—
|
|
11,145
|
|
Partnerships
(4)
|
—
|
|
—
|
|
10,787
|
|
—
|
|
10,787
|
|
International hedge funds
(3) (8)
|
—
|
|
—
|
|
—
|
|
6,604
|
|
6,604
|
|
Total
|
$
|
31,763
|
|
$
|
236,150
|
|
$
|
10,787
|
|
$
|
7,839
|
|
$
|
286,539
|
|
The fair values at
December 31, 2016
, are classified within the following categories in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Not Leveled
|
Total
|
Equity securities - U.S. holdings
(1)
|
$
|
43,708
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
43,708
|
|
Equity securities - non-U.S. holdings
(1)
|
819
|
|
—
|
|
—
|
|
—
|
|
819
|
|
Equity funds - U.S.holdings
(1)
|
—
|
|
28,052
|
|
—
|
|
—
|
|
28,052
|
|
Bond funds - government
(5)
|
—
|
|
22,237
|
|
—
|
|
—
|
|
22,237
|
|
Bond funds - other
(6)
|
—
|
|
150,712
|
|
—
|
|
—
|
|
150,712
|
|
Real estate
(7) (8)
|
—
|
|
—
|
|
—
|
|
3,812
|
|
3,812
|
|
Cash and cash equivalents
(2)
|
7,823
|
|
—
|
|
—
|
|
—
|
|
7,823
|
|
Partnerships
(4)
|
—
|
|
—
|
|
12,862
|
|
—
|
|
12,862
|
|
International hedge funds
(3) (8)
|
—
|
|
—
|
|
—
|
|
23,542
|
|
23,542
|
|
Total
|
$
|
52,350
|
|
$
|
201,001
|
|
$
|
12,862
|
|
$
|
27,354
|
|
$
|
293,567
|
|
|
|
(1)
|
Comprised of common stocks of companies in various industries. The Pension Plan fund manager may shift investments from value to growth strategies or vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan's investment objectives, which are to provide for a reasonable amount of long-term growth of capital without undue exposure to volatility, and protect the assets from erosion of purchasing power.
|
|
|
(2)
|
Comprised of investment grade short-term investment and money-market funds.
|
|
|
(3)
|
This fund allocates its capital across several direct hedge-fund organizations. This fund invests with hedge funds that employ "non-directional" strategies. These strategies do not require the direction of the markets to generate returns. The majority of these hedge funds generate returns by the occurrence of key events such as bankruptcies, mergers, spin-offs, etc. Investments can be redeemed at the Share Net Asset Value ("NAV") as of the last business day of each calendar quarter with at least a sixty-five day prior written notice to the administrator.
|
|
|
(4)
|
Comprised of partnerships that invest in various U.S. and international industries.
|
|
|
(5)
|
Comprised of long-term government bonds with a minimum maturity of 10 years and zero-coupon Treasury securities ("Treasury Strips") with maturities greater than 20 years.
|
|
|
(6)
|
Comprised predominately of investment grade U.S. corporate bonds with maturities greater than 10 years and U.S. high-yield corporate bonds; emerging market debt (local currency sovereign bonds, U.S. dollar-denominated sovereign bonds and U.S. dollar-denominated corporate bonds); and U.S. bank loans.
|
|
|
(7)
|
Comprised of investments in securities of U.S. and non-U.S. real estate investment trusts (REITs), real estate operating companies and other companies that are principally engaged in the real estate industry and of investments in global private direct commercial real estate. Investments can be redeemed immediately following the valuation date with a notice of at least fifteen business days before valuation.
|
|
|
(8)
|
Comprised of investments that are measured at fair value using the NAV per share practical expedient. In accordance with the provisions of ASC 820-10, these investments have not been classified in the fair value hierarchy. The fair value amount not leveled is presented to allow reconciliation of the fair value hierarchy to total fund pension plan assets.
|
The pension plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below:
|
|
•
|
Level 1:
Fair value measurements that are based on quoted prices (unadjusted) in active markets that the pension plan trustees have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
|
|
|
•
|
Level 2:
Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active or inactive markets,
|
and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
•
|
Level 3:
Fair value measurements based on valuation techniques that use significant inputs that are unobservable.
|
The table below reconciles the Level 3 partnership assets within the fair value hierarchy:
|
|
|
|
|
|
Amount
|
Fair value of Level 3 partnership assets at January 1, 2016
|
$
|
13,360
|
|
Capital contributions
|
1,419
|
|
Realized and unrealized gain
|
584
|
|
Capital distributions
|
(2,501
|
)
|
Fair value of Level 3 partnership assets at December 31, 2016
|
12,862
|
|
Capital contributions
|
343
|
|
Realized and unrealized gain
|
2,107
|
|
Capital distributions
|
(4,525
|
)
|
Fair value of Level 3 partnership assets at December 31, 2017
|
$
|
10,787
|
|
The partnership fund manager uses a market approach in estimating the fair value of the plan's Level 3 asset. The market approach estimates fair value by first determining the entity's earnings before interest, taxes, depreciation and amortization and then multiplying that value by an estimated multiple. When establishing an appropriate multiple, the fund manager considers recent comparable private company transactions and multiples paid. The entity's net debt is then subtracted from the calculated amount to arrive at an estimated fair value for the entity.
We expect to make
$101
of contributions to the U.S. plans and
$331
of contributions to the non-U.S. plans during
2018
.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Pension
Plans
|
Non-U.S.
Pension
Plans
|
Post-Retirement
Life Insurance Plan
|
2018
|
$
|
15,693
|
|
$
|
67
|
|
$
|
418
|
|
2019
|
15,705
|
|
72
|
|
405
|
|
2020
|
15,673
|
|
242
|
|
392
|
|
2021
|
15,548
|
|
63
|
|
378
|
|
2022
|
15,361
|
|
69
|
|
363
|
|
2023-2026
|
72,669
|
|
532
|
|
1,610
|
|
Total
|
$
|
150,649
|
|
$
|
1,045
|
|
$
|
3,566
|
|
Defined Contribution Plans
We sponsor a 401(k) plan that covers substantially all of our U.S. employees. Contributions and costs are generally determined as a percentage of the covered employee's annual salary.
Expenses related to defined contribution plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
401(k) and other plan expense
|
$
|
3,141
|
|
$
|
2,841
|
|
$
|
3,352
|
|
NOTE 6 — Goodwill and Other Intangible Assets
We evaluate finite-lived intangible assets for impairment if indicators of impairment exist. No indicators were identified for the years ended
December 31, 2017
, or
December 31, 2016
.
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Amount
|
|
Weighted Average Remaining Amortization Period (in years)
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Customer lists / relationships
|
$
|
64,323
|
|
$
|
(33,685
|
)
|
$
|
30,638
|
|
|
10.5
|
|
Patents
|
10,319
|
|
(10,319
|
)
|
—
|
|
|
—
|
|
Technology and other intangibles
|
44,460
|
|
(10,355
|
)
|
34,105
|
|
|
8.3
|
|
In process research and development
|
2,200
|
|
—
|
|
2,200
|
|
|
—
|
|
Other intangible assets, net
|
$
|
121,302
|
|
$
|
(54,359
|
)
|
$
|
66,943
|
|
|
10.5
|
|
Amortization expense for the year ended December 31, 2017
|
|
|
$
|
6,603
|
|
|
|
|
|
|
Amortization expense remaining for other intangible assets is as follows:
|
|
|
|
|
|
Amortization
expense
|
2018
|
$
|
6,763
|
|
2019
|
6,754
|
|
2020
|
6,624
|
|
2021
|
6,467
|
|
2022
|
6,230
|
|
Thereafter
|
34,105
|
|
Total future amortization expense
|
$
|
66,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Amount
|
Other intangible assets:
|
|
|
|
|
|
|
Customer lists / relationships
|
$
|
63,386
|
|
$
|
(30,318
|
)
|
$
|
33,068
|
|
Patents
|
10,319
|
|
(10,319
|
)
|
—
|
|
Technology and other intangibles
|
36,715
|
|
(7,613
|
)
|
29,102
|
|
In process research and development
|
2,200
|
|
—
|
|
2,200
|
|
Other intangible assets, net
|
$
|
112,620
|
|
$
|
(48,250
|
)
|
$
|
64,370
|
|
Amortization expense for the year ended December 31, 2016
|
|
|
$
|
5,815
|
|
|
|
Amortization expense for the year ended December 31, 2015
|
|
|
$
|
4,035
|
|
|
|
In 2017, a goodwill impairment test was performed by management with the assistance of a third-party valuation firm. As of
December 31, 2017
, it was concluded that the fair value of each of our reporting units exceeded their carrying values, and accordingly, no goodwill impairment was required.
Changes in the net carrying value amount of goodwill were as follows:
|
|
|
|
|
|
Total
|
Goodwill as of December 31, 2015
|
$
|
33,865
|
|
Increase from acquisitions
|
27,879
|
|
Goodwill as of December 31, 2016
|
61,744
|
|
Increase from acquisition
|
9,313
|
|
Goodwill as of December 31, 2017
|
$
|
71,057
|
|
NOTE 7 — Costs Associated with Exit and Restructuring Activities
Restructuring and impairment charges are reported as a separate line within operating earnings in the Consolidated Statements of Earnings. Restructuring-related charges are recorded as a component of cost of goods sold. Total restructuring, impairment and restructuring-related charges were:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Restructuring-related charges
|
$
|
—
|
|
$
|
—
|
|
$
|
631
|
|
Restructuring and impairment charges
|
4,139
|
|
3,048
|
|
14,564
|
|
Total restructuring, impairment, and restructuring-related charges
|
$
|
4,139
|
|
$
|
3,048
|
|
$
|
15,195
|
|
In June 2016, we announced plans to restructure operations by phasing out production at the Elkhart facility by mid-2018 and transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional organizational changes will also occur in various other locations. In 2017, we amended this plan to include costs related to the relocation of our corporate headquarters and Bolingbrook, Illinois manufacturing operations. The cost of the plan is expected to be approximately
$13,400
including severance and other one-time benefit arrangements. We have recorded $
2,927
of termination and other one-time benefit charges impacting approximately
230
employees as of
December 31, 2017
. Additional costs related to line movements, equipment charges, and other costs will be expensed as incurred. The total restructuring liability related to the June 2016 Plan was $
1,460
at
December 31, 2017
.
The following table displays the planned restructuring and impairment charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through
December 31, 2017
:
|
|
|
|
|
|
|
|
|
June 2016 Plan
|
Planned Costs
|
|
Actual costs
incurred through
December 31,
2017
|
Workforce reduction
|
$
|
3,075
|
|
|
$
|
2,927
|
|
Building and equipment relocation
|
9,025
|
|
|
3,574
|
|
Other charges
|
1,300
|
|
|
686
|
|
Restructuring and impairment charges
|
$
|
13,400
|
|
|
$
|
7,187
|
|
Total restructuring and impairment charges for the June 2016 Plan were as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
Restructuring and impairment charges
|
$
|
4,139
|
|
|
$
|
3,048
|
|
Not included in restructuring and impairment charges, but directly attributable to the June 2016 Plan, is an increase in tax expense of $2,316 relating to increases in valuation allowances on deferred tax assets for state net operating losses and tax credits and the revaluation of U.S. deferred taxes as a result of a change in our expected future tax rate as discussed in Note 17 "Income Taxes" in 2016.
During April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint ("April 2014 Plan"). These restructuring actions, which were substantially completed during 2015, resulted in the elimination of approximately
120
positions.
The following table displays the planned restructuring and restructuring-related charges associated with the April 2014 Plan, as well as a summary of the actual costs incurred through
December 31, 2017
:
|
|
|
|
|
|
|
|
April 2014 Plan
|
Planned
Costs
|
Actual costs
incurred through
December 31,
2017
|
Inventory write-down
|
$
|
850
|
|
$
|
—
|
|
Equipment relocation
|
1,800
|
|
444
|
|
Other charges
|
1,400
|
|
113
|
|
Restructuring-related charges, included in cost of goods sold
|
4,050
|
|
557
|
|
Workforce reduction
|
4,200
|
|
4,423
|
|
Other charges, including pension termination costs
|
1,700
|
|
3,413
|
|
Restructuring and impairment charges
|
5,900
|
|
7,836
|
|
Total restructuring, impairment and restructuring-related charges
|
$
|
9,950
|
|
$
|
8,393
|
|
Under the April 2014 Plan, there were
no
restructuring, impairment, and restructuring-related charges for the years ended
December 31, 2017
and
December 31, 2016
. Restructuring, impairment, and restructuring-related charges were
$4,923
for the year ended
December 31, 2015
. The total restructuring liability related to the April 2014 Plan was $
453
at
December 31, 2017
.
During June 2013, we announced a restructuring plan to simplify our global footprint by consolidating manufacturing facilities into existing locations. This Plan included (1) the consolidation of operations from the U.K. manufacturing facility into the Czech Republic facility, (2) the consolidation of operations from the Carol Stream, Illinois manufacturing facility into the Juarez, Mexico facility, and (3) the discontinuation of manufacturing at the Singapore facility. Certain corporate functions were consolidated or eliminated as a result of the June 2013 Plan and also as a result of the sale of our EMS business. These restructuring actions called for the elimination of approximately
480
positions.
The following table displays the planned restructuring and restructuring-related charges associated with the June 2013 Plan, as well as a summary of the actual costs incurred through completion of the plan as of December 31, 2015:
|
|
|
|
|
|
|
|
June 2013 Plan
|
Planned
Costs
|
Actual costs
incurred through
December 31,
2015
|
Inventory write-down
|
$
|
800
|
|
$
|
1,143
|
|
Equipment relocation
|
900
|
|
1,792
|
|
Other charges
|
100
|
|
702
|
|
Restructuring-related charges, included in cost of goods sold
|
1,800
|
|
3,637
|
|
Workforce reduction
|
10,150
|
|
9,615
|
|
Asset impairment charge
|
3,000
|
|
4,139
|
|
Other charges, including pension termination costs
|
7,650
|
|
10,205
|
|
Restructuring and impairment charges
|
20,800
|
|
23,959
|
|
Total restructuring and restructuring-related charges
|
$
|
22,600
|
|
$
|
27,596
|
|
Under the June 2013 Plan, restructuring, impairment and restructuring-related charges were
$10,272
for the year ended December 31, 2015.
Actions under this plan were complete by the end of 2015 and
no
liability remains related to the June 2013 Plan as of
December 31, 2017
.
The following table displays the restructuring liability activity for the year ended
December 31, 2017
:
|
|
|
|
|
June 2013 Plan and April 2014 Plan and June 2016 Plan
|
Restructuring Liability
|
Restructuring liability at January 1, 2017
|
$
|
2,162
|
|
Restructuring charges
|
4,139
|
|
Cost paid
|
(4,445
|
)
|
Other activities
(1)
|
57
|
|
Restructuring liability at December 31, 2017
|
$
|
1,913
|
|
(1) Other activities includes currency translation adjustments not recorded through restructuring expense.
Total restructuring liability included in Other long-term obligations is
$187
at
December 31, 2017
. The remaining liability of
$1,726
is included in Accrued expenses and other liabilities at
December 31, 2017
.
NOTE 8 — Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Accrued product-related costs
|
$
|
5,297
|
|
$
|
5,556
|
|
Accrued income taxes
|
5,475
|
|
9,826
|
|
Accrued property and other taxes
|
997
|
|
1,917
|
|
Dividends payable
|
1,318
|
|
1,309
|
|
Remediation reserves
|
17,067
|
|
18,176
|
|
Other accrued liabilities
|
11,190
|
|
8,924
|
|
Total accrued expenses and other liabilities
|
$
|
41,344
|
|
$
|
45,708
|
|
NOTE 9 — Contingencies
Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we are potentially liable for environmental contamination at several sites currently and formerly owned or operated by CTS. Some sites, such as Asheville, North Carolina and Mountain View, California, are designated National Priorities List Superfund sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable remediation activities at these sites and for claims and proceedings against CTS with respect to other environmental matters. We record reserves on an undiscounted basis. In the opinion of management, based upon presently available information relating to such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, we cannot provide assurance that our ultimate environmental liability will not materially exceed the amount of our current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.
A roll forward of remediation reserves on the balance sheet is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Balance at beginning of period
|
$
|
18,176
|
|
$
|
20,603
|
|
$
|
3,918
|
|
Remediation expense
|
307
|
|
556
|
|
18,591
|
|
Remediation payments
|
(1,416
|
)
|
(2,983
|
)
|
(1,906
|
)
|
Balance at end of the period
|
$
|
17,067
|
|
$
|
18,176
|
|
$
|
20,603
|
|
Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business. Although the ultimate outcome of any potential litigation resulting from these claims cannot be predicted with certainty, and some may be disposed of unfavorably to CTS, management believes that adequate provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations or cash flows.
NOTE 10 — Leases
Minimum future obligations under all non-cancelable operating leases as of
December 31, 2017
, are as follows:
|
|
|
|
|
|
Operating
Leases
|
2018
|
$
|
3,631
|
|
2019
|
2,887
|
|
2020
|
1,722
|
|
2021
|
996
|
|
2022
|
954
|
|
Thereafter
|
11,161
|
|
Total minimum lease obligations
|
$
|
21,351
|
|
Rent expense for operating leases charged to operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Rent expense
|
$
|
4,762
|
|
$
|
5,694
|
|
$
|
3,550
|
|
Operating leases include a variety of properties around the world. These properties are used as manufacturing facilities, distribution centers and sales offices. Lease expirations range from 2018 to 2033 with breaking periods specified in the lease agreements. Sublease income was $
445
in
2017
. Future sublease income is $
500
in
2018
, $
487
in
2019
, and
$1,404
thereafter. Some of our operating leases include renewal options and escalation clauses.
In the fourth quarter of 2012, one of our foreign locations entered into a sale-leaseback transaction. As a result of this transaction, a deferred gain of approximately
$4,500
was being amortized over the 6 year expected lease term. During 2015, we terminated the lease and recognized the remaining unamortized deferred gain into income. A gain of
$2,108
was included in the Consolidated Statements of Earnings for the year ended December 31, 2015.
NOTE 11 — Debt
Long-term debt was comprised of the following:
|
|
|
|
|
|
|
|
|
As of December 31
|
|
2017
|
2016
|
Total credit facility
|
$
|
300,000
|
|
$
|
300,000
|
|
Balance outstanding
|
$
|
76,300
|
|
$
|
89,100
|
|
Standby letters of credit
|
$
|
2,065
|
|
$
|
2,165
|
|
Amount available
|
$
|
221,635
|
|
$
|
208,735
|
|
Weighted-average interest rate
|
2.30
|
%
|
1.90
|
%
|
Commitment fee percentage per annum
|
0.25
|
%
|
0.25
|
%
|
The revolving credit facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the revolving credit facility. We were in compliance with all debt covenants as of
December 31, 2017
. The revolving credit facility requires us to deliver quarterly financial statements, annual financial statements, auditors certifications and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the revolving credit facility contains restrictions limiting our ability to dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the revolving credit facility fluctuate based upon the London Interbank Offered Rate and the Company's quarterly total leverage ratio. We pay a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly leverage ratio.
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense was approximately
$185
in
2017
,
$163
in
2016
, and
$175
in
2015
, and was recognized as interest expense.
We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 12. These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.
Interest rate swaps activity recorded in other comprehensive earnings before tax included the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Unrealized (loss) gain
|
$
|
(255
|
)
|
$
|
593
|
|
$
|
(516
|
)
|
Realized gain reclassified to interest expense
|
$
|
37
|
|
$
|
928
|
|
$
|
768
|
|
NOTE 12 — Derivatives
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
Foreign Currency Hedges
In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign Euro denominated revenues and Mexican Peso denominated expenses. The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to net sales and cost of goods sold. Ineffectiveness is recorded in other income (expense) in our Consolidated Statements of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive loss to other income (expense).
As of
December 31, 2017
, we were hedging a portion of our forecasted Peso expenses and Euro denominated revenue for the following twelve months. We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At
December 31, 2017
, we had a net unrealized loss of $
683
in accumulated other comprehensive loss, of which $
567
is expected to be reclassified to income within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $
33.2
million at
December 31, 2017
.
Interest Rate Swaps
We use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate on a portion of our debt balance. In the second quarter of 2012, we entered into
four
separate one-year interest rate swap agreements to fix interest rates on
$50,000
of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into
four
additional one-year interest rate swap agreements to fix interest rates on
$25,000
of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into
three
additional one-year interest rate swap agreements to fix interest rates on
$50,000
of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately $
278
.
The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of
December 31, 2017
, are shown in the following table:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Foreign currency hedges reported in Accrued expenses and other liabilities
|
$
|
742
|
|
|
$
|
601
|
|
Interest rate swaps reported in Other current assets
|
$
|
278
|
|
|
$
|
2
|
|
Interest rate swaps reported in Other assets
|
$
|
693
|
|
|
$
|
751
|
|
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were $
97
foreign currency derivative assets and foreign currency derivative liabilities were $
839
.
The effect of derivative instruments on the Consolidated Statements of Earnings is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Foreign Exchange Contracts:
|
|
|
|
|
|
Amounts reclassified from AOCI to earnings
|
|
|
|
|
|
Net sales
|
$
|
(488
|
)
|
|
$
|
(124
|
)
|
|
$
|
—
|
|
Cost of goods sold
|
497
|
|
|
111
|
|
|
—
|
|
Selling, general and administrative
|
45
|
|
|
1
|
|
|
—
|
|
Total amounts reclassified from AOCI to earnings
|
54
|
|
|
(12
|
)
|
|
—
|
|
Loss recognized in other expense for hedge ineffectiveness
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Loss recognized in other expense for derivatives not designated as cash flow hedges
|
(15
|
)
|
|
(5
|
)
|
|
—
|
|
Total derivative gain (loss) on foreign exchange contracts recognized in earnings
|
38
|
|
|
(18
|
)
|
|
—
|
|
|
|
|
|
|
|
Interest Rate Swaps:
|
|
|
|
|
|
Interest Expense
|
$
|
(37
|
)
|
|
$
|
(928
|
)
|
|
$
|
(768
|
)
|
Total income (loss) on derivatives recognized in earnings
|
$
|
1
|
|
|
$
|
(946
|
)
|
|
$
|
(768
|
)
|
NOTE 13 — Accumulated Other Comprehensive Loss
Shareholders' equity includes certain items classified as accumulated other comprehensive loss ("AOCI") in the Consolidated Balance Sheets, including:
|
|
•
|
Unrealized gains (losses) on hedges
relate to interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction is settled. Amounts reclassified to income from AOCI for hedges are included in interest expense. Further information related to our interest rate swaps is included in NOTE 12, "Derivatives".
|
|
|
•
|
Unrealized gains (losses) on pension obligations
are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension expense. Further information related to our pension obligations is included in NOTE 5, "Retirement Plans".
|
|
|
•
|
Cumulative translation adjustment
relates to our non-U.S. subsidiaries that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income. Transfer of foreign currency translation gains and losses from AOCI to income are included in other income (expense) in our Consolidated Statements of Earnings.
|
The components of AOCI for
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Gain (Loss)
Recognized
in OCI
|
Gain (Loss)
reclassified
from AOCI
to income
|
As of December 31, 2017
|
Changes in fair market value of hedges:
|
|
|
|
|
|
|
|
|
Gross
|
$
|
116
|
|
$
|
264
|
|
$
|
(91
|
)
|
$
|
289
|
|
Income tax expense (benefit)
|
(42
|
)
|
(96
|
)
|
33
|
|
(105
|
)
|
Net
|
74
|
|
168
|
|
(58
|
)
|
184
|
|
Changes in unrealized pension cost:
|
|
|
|
|
|
|
|
|
Gross
|
(151,618
|
)
|
—
|
|
21,522
|
|
(130,096
|
)
|
Income tax expense (benefit)
|
60,672
|
|
—
|
|
(7,835
|
)
|
52,837
|
|
Net
|
(90,946
|
)
|
—
|
|
13,687
|
|
(77,259
|
)
|
Cumulative translation adjustment:
|
|
|
|
|
|
|
|
|
Gross
|
(2,414
|
)
|
429
|
|
—
|
|
(1,985
|
)
|
Income tax expense (benefit)
|
92
|
|
8
|
|
—
|
|
100
|
|
Net
|
(2,322
|
)
|
437
|
|
—
|
|
(1,885
|
)
|
Total accumulated other comprehensive (loss) income
|
$
|
(93,194
|
)
|
$
|
605
|
|
$
|
13,629
|
|
$
|
(78,960
|
)
|
The components of AOCI for
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
(Loss) Gain
recognized
in OCI
|
Gain (Loss)
reclassified
from AOCI
to income
|
As of December 31, 2016
|
Changes in fair market value of hedges:
|
|
|
|
|
|
|
|
|
Gross
|
$
|
(768
|
)
|
$
|
(56
|
)
|
$
|
940
|
|
$
|
116
|
|
Income tax expense (benefit)
|
289
|
|
20
|
|
(351
|
)
|
(42
|
)
|
Net
|
(479
|
)
|
(36
|
)
|
589
|
|
74
|
|
Changes in unrealized pension cost:
|
|
|
|
|
|
|
|
|
Gross
|
(161,719
|
)
|
—
|
|
10,101
|
|
(151,618
|
)
|
Income tax expense (benefit)
|
64,361
|
|
—
|
|
(3,689
|
)
|
60,672
|
|
Net
|
(97,358
|
)
|
—
|
|
6,412
|
|
(90,946
|
)
|
Cumulative translation adjustment:
|
|
|
|
|
|
|
|
|
Gross
|
(1,279
|
)
|
(1,135
|
)
|
—
|
|
(2,414
|
)
|
Income tax expense (benefit)
|
111
|
|
(19
|
)
|
—
|
|
92
|
|
Net
|
(1,168
|
)
|
(1,154
|
)
|
—
|
|
(2,322
|
)
|
Total accumulated other comprehensive (loss) income
|
$
|
(99,005
|
)
|
$
|
(1,190
|
)
|
$
|
7,001
|
|
$
|
(93,194
|
)
|
NOTE 14 — Shareholders' Equity
Share count and par value data related to shareholders' equity are as follows:
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Preferred Stock
|
|
|
Par value per share
|
No par value
|
No par value
|
Shares authorized
|
25,000,000
|
25,000,000
|
Shares outstanding
|
—
|
—
|
Common Stock
|
|
|
Par value per share
|
No par value
|
No par value
|
Shares authorized
|
75,000,000
|
75,000,000
|
Shares issued
|
56,632,488
|
56,456,516
|
Shares outstanding
|
32,938,466
|
32,762,494
|
Treasury stock
|
|
|
Shares held
|
23,694,022
|
23,694,022
|
We use the cost method to account for our common stock purchases. During the years ended
December 31, 2017
, and
December 31, 2016
, we did not purchase any shares of common stock under our board-authorized share repurchase program. Approximately
$17,554
is available for future purchases.
A roll forward of common shares outstanding is as follows:
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Balance at beginning of the year
|
32,762,494
|
|
32,548,477
|
|
Restricted stock unit issuances
|
175,972
|
|
214,017
|
|
Balance at end of period
|
32,938,466
|
|
32,762,494
|
|
NOTE 15 — Stock-Based Compensation
At
December 31, 2017
, we had
four
stock-based compensation plans: the Non-Employee Directors' Stock Retirement Plan ("Directors' Plan"), the 2004 Omnibus Long-Term Incentive Plan ("2004 Plan"), the 2009 Omnibus Equity and Performance Incentive Plan ("2009 Plan"), and the 2014 Performance & Incentive Plan ("2014 Plan"). Future grants can only be made under the 2014 Plan.
The 2009 Plan, and previously the 2004 Plan, provided for grants of incentive stock options or nonqualified stock options to officers, key employees, and non-employee members of the Board of Directors. In addition, the 2014 Plan, the 2009 Plan, and the 2004 Plan allow for grants of stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance-based restricted stock units, and other stock awards.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Consolidated Statements of Earnings related to stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Service-Based RSUs
|
$
|
1,762
|
|
$
|
1,997
|
|
$
|
1,944
|
|
Performance-Based RSUs
|
2,350
|
|
665
|
|
1,235
|
|
Cash-settled awards
|
72
|
|
76
|
|
16
|
|
Total
|
$
|
4,184
|
|
$
|
2,738
|
|
$
|
3,195
|
|
Income tax benefit
|
1,573
|
|
1,029
|
|
1,201
|
|
Net
|
$
|
2,611
|
|
$
|
1,709
|
|
$
|
1,994
|
|
The fair value of all equity awards that vested during the periods ended
December 31, 2017
,
2016
, and
2015
were
$5,471
,
$4,959
, and
$2,803
, respectively. We recorded a tax deduction related to equity awards that vested during the year ended
December 31, 2017
, in the amount of
$1,927
.
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
|
|
|
|
|
|
|
Unrecognized
compensation
expense at
December 31,
2017
|
Weighted-
average
period
|
Service-Based RSUs
|
$
|
1,079
|
|
1.11 years
|
Performance-Based RSUs
|
2,313
|
|
1.62 years
|
Total
|
$
|
3,392
|
|
1.46 years
|
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the status of these plans as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
2014 Plan
|
2009 Plan
|
2004 Plan
|
Directors' Plan
|
Awards originally available to be granted
|
1,500,000
|
|
3,400,000
|
|
6,500,000
|
|
N/A
|
|
|
|
|
|
|
Performance stock options outstanding
|
295,000
|
|
—
|
|
—
|
|
—
|
|
Maximum potential RSU and cash settled awards outstanding
|
725,759
|
|
122,600
|
|
57,391
|
|
9,620
|
|
Maximum potential awards outstanding
|
1,020,759
|
|
122,600
|
|
57,391
|
|
9,620
|
|
RSUs and cash settled awards vested and released
|
176,221
|
|
—
|
|
—
|
|
—
|
|
Awards available to be granted
|
303,020
|
|
—
|
|
—
|
|
—
|
|
Stock Options
Stock options are exercisable in cumulative annual installments over a maximum
10
-year period, commencing at least one year from the date of grant. Stock options are generally granted with an exercise price equal to the market price of our stock on the date of grant. The stock options generally vest over
four years
and have a
10
-year contractual life. The awards generally contain provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age requirements are met. The awards also provide for accelerated vesting if there is a change in control event.
We estimate the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for expected price volatility, option term, risk-free interest rate, and dividend yield. Expected price volatilities are based on historical volatilities of our common stock. The expected option term was derived from historical data of exercise behavior. The dividend yield was based on historical dividend payments. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant.
There were
no
outstanding stock options at
December 31, 2017
, or
2016
other than the performance-based stock options described below.
Performance-Based Stock Options
During 2015 and 2016, the Compensation committee of the Board of Directors (the "Committee") granted a total of
295,000
performance-based stock options (including forfeitures). The Performance-Based Option Awards have an exercise price of $
18.37
, a term of
five years
and generally will become exercisable (provided the optionee remains employed by the Company or an affiliate) upon our attainment of at least $600,000 in revenues during any of our four-fiscal-quarter trailing periods (as determined by the Committee) during the term. We have not recognized any expense on these Performance-Based Option Awards for the years ended
December 31, 2017
and
2016
, since the revenue target is not deemed likely to be attained based on our current forecast.
Service-Based Restricted Stock Units
Service-based RSUs entitle the holder to receive one share of common stock for each unit when the unit vests. RSUs are issued to officers, key employees and non-employee directors as compensation. Generally, the RSUs vest over a
three
-year period. RSUs granted to non-employee directors have historically vested one month after being granted, except beginning in 2016 they vest one year after being granted. Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU immediately, or defer receipt of the stock to a future date. The fair value of the RSUs is equivalent to the trading value of our common stock on the grant date.
A summary of RSUs for all Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
Weighted
Average
Grant Date
Fair Value
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2017
|
554,478
|
|
$
|
13.37
|
|
|
|
|
Granted
|
57,740
|
|
24.32
|
|
|
|
|
Released
|
(201,918
|
)
|
13.85
|
|
|
|
|
Forfeited
|
(10,953
|
)
|
17.11
|
|
|
|
|
Outstanding at December 31, 2017
|
399,347
|
|
$
|
14.60
|
|
24.58
|
$
|
10,283
|
|
Releasable at December 31, 2017
|
259,811
|
|
$
|
12.48
|
|
33.88
|
$
|
6,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Weighted-average grant date fair value
|
$
|
24.32
|
|
$
|
15.07
|
|
$
|
17.31
|
|
Intrinsic value of RSUs released
|
$
|
4,485
|
|
$
|
1,520
|
|
$
|
2,933
|
|
A summary of nonvested RSUs is presented below:
|
|
|
|
|
|
|
|
RSUs
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at January 1, 2017
|
251,245
|
|
$
|
15.81
|
|
Granted
|
57,740
|
|
$
|
24.32
|
|
Vested
|
(158,496
|
)
|
$
|
16.40
|
|
Forfeited
|
(10,953
|
)
|
$
|
17.11
|
|
Nonvested at December 31, 2017
|
139,536
|
|
$
|
18.56
|
|
Performance-Based Restricted Stock Units
We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees. Units are usually awarded in the range from
zero percent
to
200%
of a targeted number of shares. The award rate for the 2015-2017, 2016-2018, and 2017-2019 PSUs is dependent upon our achievement of sales growth targets, cash flow targets, and relative total shareholder return ("RTSR") using a matrix based on the percentile ranking of our stock price performance compared to a peer group over a
three
-year period. These awards are weighted
35
% for achievement of the sales growth metric, 30% for achievement of the cash flow metric, and 35% for achievement of the RTSR metric. Other PSUs are granted from time to time based on other performance criteria.
A summary of PSUs for all Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
Weighted
Average
Grant Date
Fair Value
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2016
|
201,900
|
|
$
|
16.48
|
|
|
|
|
Granted
|
123,919
|
|
$
|
23.83
|
|
|
|
|
Released
|
(43,275
|
)
|
$
|
21.66
|
|
|
|
|
Forfeited
|
(26,524
|
)
|
$
|
22.56
|
|
|
|
|
Added by performance factor
|
15,285
|
|
$
|
21.66
|
|
|
|
Outstanding at December 31, 2017
|
271,305
|
|
$
|
18.77
|
|
1.62
|
$
|
6,986
|
|
Releasable at December 31, 2017
|
—
|
|
$
|
—
|
|
—
|
$
|
—
|
|
The following table summarizes each grant of performance awards outstanding at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Description
|
Grant Date
|
Vesting
Year
|
Vesting
Dependency
|
Target
Units
Outstanding
|
Maximum Number of Units to be Granted
|
2015-2017 Performance RSUs
|
February 5, 2015
|
2018
|
35% RTSR, 35% sales growth, 30% cash flow
|
62,000
|
|
124,000
|
|
2016-2018 Performance RSUs
|
February 16, 2016
|
2019
|
35% RTSR, 35% sales growth, 30% cash flow
|
92,840
|
|
185,680
|
|
2017-2019 Performance RSUs
|
February 9, 2017
|
2020
|
35% RTSR, 35% sales growth, 30% cash flow
|
71,796
|
|
143,592
|
|
2017-2019 Performance RSUs
|
February 9, 2017
|
2018- 2020
|
Operating Income
|
40,669
|
|
40,669
|
|
Single Crystal Performance RSUs
|
March 31, 2016
|
2019
|
Various
|
4,000
|
|
8,000
|
|
Total
|
|
|
|
271,305
|
|
501,941
|
|
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a
three
-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At
December 31, 2017
, and
2016
, we had
14,082
and
12,074
cash-settled RSUs outstanding, respectively. At
December 31, 2017
, and
2016
, liabilities of
$241
and
$170
, respectively were included in Accrued expenses and other liabilities on our Consolidated Balance Sheets.
NOTE 16 — Fair Value Measurements
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of
December 31, 2017
and the (gain) loss recorded during the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability) Carrying
Value at
December 31,
2017
|
Quoted Prices
in Active
Markets for
Identical
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
(Gain) loss for Year Ended
December 31,
2017
|
Interest rate swap — cash flow hedge
|
$
|
971
|
|
$
|
—
|
|
$
|
971
|
|
$
|
—
|
|
$
|
37
|
|
Foreign currency hedges
|
$
|
(742
|
)
|
$
|
—
|
|
$
|
(742
|
)
|
$
|
—
|
|
$
|
(38
|
)
|
The table below summarizes the financial liability that was measured at fair value on a recurring basis as of
December 31, 2016
and the (gain) loss recorded during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability) Carrying
Value at
December 31,
2016
|
Quoted Prices
in Active
Markets for
Identical
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
(Gain) loss for
Year Ended
December 31,
2016
|
Interest rate swap — cash flow hedge
|
$
|
753
|
|
$
|
—
|
|
$
|
753
|
|
$
|
—
|
|
$
|
(928
|
)
|
Foreign currency hedges
|
$
|
(601
|
)
|
|
|
$
|
(601
|
)
|
|
|
$
|
18
|
|
The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but the market is not active and therefore they are classified within level 2 of the fair value hierarchy.
The table below provides a reconciliation of the recurring financial assets and liabilities related to interest rate swaps and foreign currency hedges:
|
|
|
|
|
|
|
|
|
Interest Rate
Swaps
|
Foreign Currency Hedges
|
Balance at January 1, 2016
|
$
|
(768
|
)
|
$
|
—
|
|
Settled in cash
|
—
|
|
54
|
|
Total gains (losses) for the period:
|
|
|
|
|
Included in earnings
|
928
|
|
(18
|
)
|
Included in other comprehensive earnings (loss)
|
593
|
|
(637
|
)
|
Balance at January 1, 2017
|
$
|
753
|
|
$
|
(601
|
)
|
Settled in cash
|
—
|
|
(132
|
)
|
Total gains (losses) for the period:
|
|
|
|
|
Included in earnings
|
—
|
|
38
|
|
Included in other comprehensive earnings (loss)
|
218
|
|
(47
|
)
|
Balance at December 31, 2017
|
$
|
971
|
|
$
|
(742
|
)
|
Our long-term debt consists of a revolving debt facility which is recorded at its carrying value. There is a readily determinable market for our revolving credit debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our credit facility.
NOTE 17 — Income Taxes
Earnings before income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
U.S.
|
$
|
9,315
|
|
$
|
25,746
|
|
$
|
(141
|
)
|
Non-U.S.
|
30,938
|
|
31,499
|
|
12,402
|
|
Total
|
$
|
40,253
|
|
$
|
57,245
|
|
$
|
12,261
|
|
Significant components of income tax provision/(benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Current:
|
|
|
|
|
|
|
U.S.
|
$
|
1,635
|
|
$
|
(1,312
|
)
|
$
|
329
|
|
Non-U.S.
|
7,150
|
|
13,729
|
|
12,482
|
|
Total Current
|
8,785
|
|
12,417
|
|
12,811
|
|
Deferred:
|
|
|
|
|
|
|
U.S.
|
17,597
|
|
13,245
|
|
(15,795
|
)
|
Non-U.S.
|
(577
|
)
|
(2,797
|
)
|
8,291
|
|
Total Deferred
|
17,020
|
|
10,448
|
|
(7,504
|
)
|
Total provision for income taxes
|
$
|
25,805
|
|
$
|
22,865
|
|
$
|
5,307
|
|
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Post-retirement benefits
|
$
|
1,160
|
|
$
|
1,798
|
|
Inventory reserves
|
1,128
|
|
1,834
|
|
Loss carry-forwards
|
5,401
|
|
7,279
|
|
Credit carry-forwards
|
10,793
|
|
22,743
|
|
Nondeductible accruals
|
7,062
|
|
11,629
|
|
Research expenditures
|
20,002
|
|
31,380
|
|
Stock compensation
|
1,803
|
|
2,681
|
|
Foreign exchange loss
|
1,373
|
|
1,780
|
|
Other
|
220
|
|
648
|
|
Gross deferred tax assets
|
48,942
|
|
81,772
|
|
Depreciation and amortization
|
9,819
|
|
9,960
|
|
Pensions
|
12,387
|
|
16,024
|
|
Subsidiaries' unremitted earnings
|
1,662
|
|
1,292
|
|
Gross deferred tax liabilities
|
23,868
|
|
27,276
|
|
Net deferred tax assets
|
25,074
|
|
54,496
|
|
Deferred tax asset valuation allowance
|
(8,182
|
)
|
(11,024
|
)
|
Total net deferred tax assets
|
$
|
16,892
|
|
$
|
43,472
|
|
The long-term deferred tax assets and long-term deferred tax liabilities are as follows below:
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
2016
|
Non-current deferred tax assets
|
20,694
|
|
45,839
|
|
Non-current deferred tax liabilities
|
(3,802
|
)
|
(2,367
|
)
|
Total net deferred tax assets
|
16,892
|
|
43,472
|
|
In 2016, we elected to early adopt ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on a retrospective basis allowing for all deferred tax items to be classified as non-current. Certain non-current deferred tax assets and non-current deferred tax liabilities were not netted since these items relate to different tax jurisdictions.
At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the various jurisdictions in which it operates, will be realized. As of December 31,
2017
, and
2016
, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carryforwards of
$5,401
and
$7,279
, respectively, and U.S. and non-U.S. tax credits of
$10,793
and $
22,743
, respectively. The deferred tax assets expire in various years primarily between 2022 and 2035.
The Company remeasured its U.S. deferred tax assets and liabilities at the applicable federal tax rate of 21% in accordance with the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total decrease in these assets of $
6,267
.
Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward periods. As a result, we have determined that valuation allowances of
$8,182
and
$11,024
should be provided for certain deferred tax assets at
December 31, 2017
, and
2016
, respectively. As of
December 31, 2017
, the valuation allowances relate to certain U.S. state and non-U.S. loss carry-forwards and certain U.S. state tax credits that management does not anticipate will be utilized. The increase in the valuation allowance from December 31, 2015, to December 31, 2016, is primarily due to the June 2016 restructuring activities and changes in management's judgment regarding realizability of the related assets.
No valuation allowance was recorded in 2017 against the U.S. federal foreign tax credit carryforwards of
$3,711
, which expire in 2024 and 2025 as well as the research and development tax credits of
$7,249
. which expire in varying amounts between 2022 and 2037. We assessed the anticipated realization of those tax credits utilizing future taxable income projections. Based on those projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.
The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Taxes at the U.S. statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
1.1
|
%
|
1.4
|
%
|
(0.1
|
)%
|
Non-U.S. income taxed at rates different than the U.S. statutory rate
|
(9.0
|
)%
|
(7.5
|
)%
|
(16.7
|
)%
|
Foreign source income, net of associated foreign tax credits
|
0.1
|
%
|
5.3
|
%
|
6.9
|
%
|
Benefit of tax credits
|
(1.4
|
)%
|
(1.0
|
)%
|
(4.6
|
)%
|
Non-deductible expenses
|
1.5
|
%
|
0.7
|
%
|
1.3
|
%
|
Stock compensation - excess tax benefits
|
(1.5
|
)%
|
(0.8
|
)%
|
—
|
%
|
Adjustment to valuation allowances
|
(4.4
|
)%
|
3.8
|
%
|
37.8
|
%
|
Benefit from prior period foreign tax credits
|
—
|
%
|
—
|
%
|
(133.0
|
)%
|
Change in unrecognized tax benefits
|
2.0
|
%
|
3.3
|
%
|
59.5
|
%
|
Impacts of unremitted foreign earnings
|
0.9
|
%
|
0.6
|
%
|
60.8
|
%
|
Impacts related to the 2017 Tax Cuts and Jobs Act
|
44.7
|
%
|
—
|
%
|
—
|
%
|
Other
|
(4.9
|
)%
|
(0.9
|
)%
|
(3.6
|
)%
|
Effective income tax rate
|
64.1
|
%
|
39.9
|
%
|
43.3
|
%
|
During 2015, we changed our position regarding the U.S. federal tax treatment of foreign taxes paid. We claimed a foreign tax credit on our 2014 and 2015 U.S. federal income tax returns and filed amended tax returns for 2006 through 2013 in order to claim non-U.S. taxes paid as a credit against income tax, rather than as a deduction. The filing of the amended returns reduced the deferred tax asset for federal loss carryforwards by
$8,214
, and increased our available foreign tax credit carryforward by
$24,519
, resulting in a net tax benefit of
$16,305
, recorded in 2015.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing, and as a result has recorded $
18,001
as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $6,267. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $
11,734
.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $6,267 of deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $11,734 of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings are provisional amounts and reasonable estimates at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
In general, outside of Canada and the United Kingdom, it is our historical practice to permanently reinvest the earnings of our non-U.S. subsidiaries in those operations. Although we plan to permanently reinvest the earnings of our Chinese facilities outside the U.S., we have determined that we will not maintain those earnings in China in order to mitigate future currency risk. Therefore, as of December 31,
2017
, a provision for the expected tax expense on repatriation of those earnings of $
370
was recorded. However, as a result of the Act, we can repatriate our cumulative undistributed foreign earnings to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undisributed foreign earnings based on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as a change in estimate related to the enactment of the Act.
The Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5%
tax rate. Because of the complexity of these provisions, we have not completed our analysis of their potential impact to our deferred tax assets and liabilities, or whether to (i) account for GILTI as a component of tax expense in the period in which the company is subject to the rules (the “period cost method”), or (ii) account for GILTI in the company’s measurement of deferred taxes (the “deferred method”). We continue to evaluate the impacts of GILTI as we further understand its implications as well as related, and yet to be issued, regulatory rules, regulations and interpretations.
We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit recognized in the financial statements. As of December 31,
2017
, we have approximately
$7,306
of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes in our unrecognized tax benefits within the next 12 months.
A reconciliation of the beginning and ending unrecognized tax benefits is provided below:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Balance at January 1
|
$
|
12,347
|
|
$
|
11,008
|
|
Increase related to current year tax positions
|
—
|
|
1,088
|
|
Increase related to prior year tax positions
|
1,290
|
|
251
|
|
Decrease related to settlements with taxing authorities
|
(6,331
|
)
|
—
|
|
Balance at December 31
|
$
|
7,306
|
|
$
|
12,347
|
|
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As of
December 31, 2017
, and
2016
,
$2,596
and
$1,772
, respectively, of interest and penalties were accrued.
We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2013 through 2016; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from
2008
through
2016
based on local statutes.
NOTE 18 - Business Acquisitions
On May 15, 2017, we acquired 100% of the equity interests in Noliac A/S, a privately-held company, for $19.3 million in cash. Noliac A/S is a designer and manufacturer of tape cast and bulk piezoelectric material as well as transducers for use in the telecommunications, industrial, medical, and defense industries. This acquisition will enable us to increase our product base within our ceramics product lines as well as expand our presence in the European market.
The purchase price of $19,121, net of cash acquired of $
199
, has been allocated to the assets acquired and liabilities assumed on the acquisition date based on their fair values.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
Fair Values at May 15, 2017
|
Current assets
|
|
$
|
2,836
|
|
Property, plant and equipment
|
|
580
|
|
Other assets
|
|
395
|
|
Goodwill
|
|
9,313
|
|
Intangible assets
|
|
9,142
|
|
Fair value of assets acquired
|
|
22,266
|
|
Less fair value of liabilities acquired
|
|
(3,145
|
)
|
Net cash paid
|
|
$
|
19,121
|
|
Goodwill recorded in connection with this acquisition represents the value we expect to be created by combining the operations of the acquired business with our existing operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to this acquisition is expected to be deductible for tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
|
|
|
|
|
|
|
Carrying Value
|
|
Weighted Average Amortization Period (in years)
|
Developed technology
|
$
|
7,581
|
|
|
15.0
|
Customer relationships
|
937
|
|
|
10.0
|
Other
|
624
|
|
|
3.0
|
Total
|
$
|
9,142
|
|
|
13.7
|
We incurred $
291
in transaction related costs during the year ended December 31, 2017. These costs are included in selling, general, and administrative costs in our Consolidated Statements of Earnings.
On March 11, 2016, we acquired all of the outstanding membership interests in CTG Advanced Materials, LLC (“CTG-AM”), a privately-held company, for $73 million in cash plus a working capital adjustment. CTG-AM, formerly operated as H.C. Materials, is the market leading designer and manufacturer of single crystal piezoelectric materials, serving major original equipment manufacturers throughout the medical marketplace. These materials enable high definition ultrasound imaging (3D and 4D), as well as intravascular ultrasound applications. Other applications for these materials include wireless pacemakers, implantable hearing aids, and defense technologies.
With the CTG-AM acquisition, we gained technology and proprietary manufacturing methods that expand our offering of piezoelectric materials. This allows us to become the leading large-scale commercial producer of both single crystal materials and traditional piezoelectric ceramics.
The purchase price of $73,063, net of cash acquired of $
4
, has been allocated to the fair values of assets and liabilities acquired as of March 11, 2016.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
Fair Values at March 11, 2016
|
Current assets
|
|
$
|
4,215
|
|
Property, plant and equipment
|
|
6,173
|
|
Other assets
|
|
37
|
|
Goodwill
|
|
27,879
|
|
Intangible assets
|
|
35,427
|
|
Fair value of assets acquired
|
|
73,731
|
|
Less fair value of liabilities acquired
|
|
(668
|
)
|
Net cash paid
|
|
$
|
73,063
|
|
Goodwill recorded in connection with this acquisition represents the value we expect to be created by combining the operations of the acquired business with our existing operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to this acquisition is expected to be deductible for tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
|
|
|
|
|
|
|
Carrying Value
|
|
Weighted Average Amortization Period (in years)
|
Developed technology
|
$
|
23,730
|
|
|
15.0
|
Customer relationships and contracts
|
11,502
|
|
|
14.6
|
Other
|
195
|
|
|
0.8
|
Total
|
$
|
35,427
|
|
|
14.8
|
We incurred $
804
in transaction related costs during the year ended December 31, 2016. These costs are included in selling, general, and administrative costs in our Consolidated Statements of Earnings.
NOTE 19 — Geographic Data
Financial information relating to our operations by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
Years Ended December 31,
|
2017
|
2016
|
2015
|
United States
|
$
|
287,092
|
|
$
|
276,033
|
|
$
|
238,796
|
|
Singapore
|
5,596
|
|
6,668
|
|
8,379
|
|
China
|
66,510
|
|
59,506
|
|
55,825
|
|
Canada
|
—
|
|
—
|
|
24,519
|
|
Czech Republic
|
34,476
|
|
34,767
|
|
36,348
|
|
Other non-U.S.
|
29,319
|
|
19,705
|
|
18,443
|
|
Consolidated net sales
|
$
|
422,993
|
|
$
|
396,679
|
|
$
|
382,310
|
|
Sales are attributed to countries based upon the origin of the sale.
|
|
|
|
|
|
|
|
Long-Lived Assets
|
Years Ended December 31,
|
2017
|
2016
|
United States
|
$
|
45,354
|
|
$
|
42,488
|
|
China
|
32,464
|
|
33,013
|
|
United Kingdom
|
590
|
|
569
|
|
Taiwan
|
3,540
|
|
2,755
|
|
Czech Republic
|
5,518
|
|
2,634
|
|
Other non-U.S
|
781
|
|
652
|
|
Consolidated long-lived assets
|
$
|
88,247
|
|
$
|
82,111
|
|
NOTE 20 — Quarterly Financial Data