Notes to Consolidated Financial Statements
1. Basis of Presentation
Core Molding Technologies and its subsidiaries operate in the plastics market in a family of products known as “reinforced plastics.” Reinforced plastics are combinations of resins and reinforcing fibers (typically glass or carbon) that are molded to shape. Core Molding Technologies is a manufacturer of sheet molding compound ("SMC") and molder of fiberglass reinforced plastics. The Company specializes in large-format moldings and offers a wide range of fiberglass processes, including compression molding of SMC, glass mat thermoplastics ("GMT"), bulk molding compounds ("BMC") and direct long-fiber thermoplastics ("D-LFT"); spray-up, hand-lay-up, and resin transfer molding ("RTM"). Additionally, the Company offers reaction injection molding ("RIM"), utilizing dicyclopentadiene technology. As of December 31, 2017, Core Molding Technologies operated
five
production facilities in Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; and Matamoros, Mexico, which produce reinforced plastic products. Effective as of January 16, 2018, the Company began operating two manufacturing facilities that were acquired as part of the Company’s acquisition of Horizon Plastics, which manufacturing facilities are located in Cobourg, Canada and Escobedo, Mexico, which produce structural foam and structural web molding.
The Company operates in
one
business segment as a manufacturer of SMC and molder of fiberglass reinforced plastics. The Company produces and sells SMC and molded products for varied markets, including medium and heavy-duty trucks, automobiles, marine, construction and other commercial markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
- The accompanying consolidated financial statements include the accounts of all subsidiaries after elimination of all intercompany accounts, transactions, and profits.
Use of Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Significant estimates relate to allowances for doubtful accounts, inventory reserves, self-insurance reserves related to healthcare and workers compensation, deferred taxes, post retirement benefits, goodwill and long-lived assets. Actual results could differ from those estimates.
Revenue Recognition
- Revenue from product sales is recognized at the time products are shipped and title transfers. Allowances for returned products and other credits are estimated and recorded as revenue is recognized. Tooling revenue is recognized when the customer approves the tool and accepts ownership. Progress billings and expenses are shown net as an asset or liability on the Company’s Consolidated Balance Sheet. Tooling in progress can fluctuate significantly from period to period and is dependent upon the stage of tooling projects and the related billing and expense payment timetable for individual projects and therefore does not necessarily reflect projected income or loss from tooling projects. At
December 31, 2017
, the Company had a net asset related to tooling in progress of $
1,917,000
, which represents approximately
$8,724,000
of progress tooling billings and $
10,641,000
of progress tooling expenses. At
December 31, 2016
, the Company had a net liability related to tooling in progress of $
1,084,000
which represents approximately
$11,052,000
of progress tooling billings and
$9,968,000
of progress tooling expenses.
Cash and Cash Equivalents
-
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash is held primarily in
one
bank. The Company had cash on hand of
$26,780,000
at
December 31, 2017
and
$28,285,000
at
December 31, 2016
.
Accounts Receivable Allowances
-
Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has determined that
no
allowance for doubtful accounts is needed at
December 31, 2017
and
December 31, 2016
, respectively. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for estimated chargebacks of
$857,000
at
December 31, 2017
and
$309,000
at
December 31, 2016
. There have been no material changes in the methodology of these calculations.
Inventories
-
Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical
and anticipated usage. The Company has recorded an allowance for slow moving and obsolete inventory of
$624,000
at
December 31, 2017
and
$770,000
at
December 31, 2016
.
Property, Plant, and Equipment
- Property, plant, and equipment are recorded at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the assets. The carrying amount of long‑lived assets is evaluated annually to determine if adjustment to the depreciation period or to the unamortized balance is warranted.
Ranges of estimated useful lives for computing depreciation are as follows:
|
|
|
|
Land improvements
|
|
20 years
|
Buildings and improvements
|
|
20 - 40 years
|
Machinery and equipment
|
|
3 - 15 years
|
Tools, dies and patterns
|
|
3 - 5 years
|
Depreciation expense was
$6,190,000
,
$6,217,000
and
$5,955,000
for the years ended December 31,
2017
,
2016
and
2015
, respectively. The Company capitalized interest costs of approximately
$7,000
and
$0
for the years ended December 31,
2017
and
2016
, respectively.
Long-Lived Assets
- Long-lived assets consist primarily of property, plant and equipment and definite-lived intangibles. The Company acquired substantially all of the assets of CPI on March 20, 2015, which resulted in approximately
$650,000
of definite-lived intangibles and
$12,474,000
of property, plant and equipment, all of which were recorded at fair value. The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. The Company evaluates, whether impairment exists for long-lived assets on the basis of undiscounted expected future cash flows from operations before interest. There was
no
impairment of the Company's long-lived assets for the years ended December 31,
2017
,
2016
and
2015
.
Goodwill
- The Company has recorded $
2,403,000
of goodwill as a result of two acquisitions. In 2001, the Company acquired certain assets of Airshield Corporation, and as a result, recorded goodwill in the amount of
$1,097,000
. The Company also acquired substantially all of the assets of CPI on March 20, 2015, which resulted in approximately
$1,306,000
of goodwill.
The Company evaluates goodwill annually on December 31
st
to determine whether impairment exists, or at interim periods if an indicator of possible impairment exists. The Company evaluates goodwill for impairment utilizing the qualitative assessment. We consider relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, entity specific events and capital markets pricing. The Company places more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform the first step of the impairment test.
If the Company's carrying amount is determined to be more likely than not impaired based on the qualitative approach, a quantitative valuation to estimate the fair value of the Company is performed. Fair value measurements are based on a projected discounted cash flow valuation model, in accordance with ASC 350, “Intangibles-Goodwill and Other.”
There was
no
impairment of the Company's goodwill for the years ended December 31,
2017
,
2016
and
2015
.
Income Taxes
- The Company records deferred income taxes for differences between the financial reporting basis and income tax basis of assets and liabilities. A detailed breakout is located in Note 11.
Self-Insurance
- The Company is self-insured with respect to its Columbus and Batavia, Ohio, Gaffney, South Carolina and Brownsville, Texas medical, dental and vision claims and Columbus and Batavia, Ohio workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at
December 31, 2017
and
December 31, 2016
of $
862,000
and $
1,139,000
, respectively.
Post Retirement Benefits
- Management records an accrual for post retirement costs associated with the health care plan sponsored by the Company for certain employees. Should actual results differ from the assumptions used to determine the reserves, additional provisions may be required. In particular, increases in future healthcare costs above the assumptions could have an adverse effect on the Company's operations. The effect of a change in healthcare costs is described in Note 12 of the Notes to Consolidated
Financial Statements. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $
9,050,000
at
December 31, 2017
and $
8,667,000
at
December 31, 2016
.
Fair Value of Financial Instruments
- The Company's financial instruments consist of long-term debt, interest rate swaps, foreign currency hedges, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value. Further detail is located in Note 14.
Concentration Risks
- The Company has concentration risk related to significant amounts of sales and accounts receivable with certain customers. Sales to
five
major customers comprised
84%
,
85%
and
85%
of total sales in
2017
,
2016
and
2015
, respectively (see Note 4). Concentrations of accounts receivable balances with
five
customers accounted for
84%
and
85%
of accounts receivable at December 31,
2017
and
2016
, respectively. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses, and such bad debt losses have been historically within the Company's expectations. Sales to certain customers' manufacturing and service locations in Mexico and Canada totaled
36%
,
32%
and
35%
of total sales for
2017
,
2016
and
2015
, respectively.
As of December 31,
2017
, the Company employed a total of
1,304
employees, which consisted of
596
employees in its United States operations and
708
employees in its Mexican operations. Of these
1,304
employees,
248
are covered by a collective bargaining agreement with the International Association of Machinists and Aerospace Workers (“IAM”), which extends to August 10, 2019, and
611
are covered by a collective bargaining agreement with Sindicato de Jorneleros y Obreros, which extends to December 31, 2019.
Earnings Per Common Share
- Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed similarly but include the effect of the assumed exercise of dilutive stock options and vesting of restricted stock under the treasury stock method. A detailed computation of earnings per share is located in Note 3.
Research and Development
- Research and development activities focus on developing new material formulations, new products, new production capabilities and processes, and improving existing products and manufacturing processes. The Company does not maintain a separate research and development organization or facility, but uses its production equipment, as necessary, to support these efforts and cooperates with its customers and its suppliers in research and development efforts. Likewise, manpower to direct and advance research and development is integrated with the existing manufacturing, engineering, production, and quality organizations. Research and development costs, which are expensed as incurred, totaled approximately $
848,000
,
$965,000
and
$719,000
in
2017
,
2016
and
2015
.
Foreign Currency Adjustments
- In conjunction with the Company's acquisition of certain assets of Airshield Corporation, the Company established operations in Mexico. The functional currency for the Mexican operations is the United States dollar. All foreign currency asset and liability amounts are remeasured into United States dollars at end-of-period exchange rates. Income statement accounts are translated at the weighted monthly average rates. Gains and losses resulting from translation of foreign currency financial statements into United States dollars and gains and losses resulting from foreign currency transactions are included in current results of operations. Net foreign currency translation and transaction activity is included in selling, general and administrative expense. This activity resulted in a gain of
$30,000
,
$89,000
and $
54,000
in
2017
,
2016
and
2015
, respectively.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASC Topic 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASC Topic 606, as updated by ASU No. 2015-14 in August 2015, has been delayed until the first quarter of fiscal year 2018. The Company will adopt the new revenue standard in the first quarter of 2018 using the modified retrospective adoption method. We have determined that certain tooling programs with customers meet the criteria listed in ASU 2014-09 to recognize revenue over time. Prospectively, the Company expects to recognize revenue related transactions from certain tooling programs earlier than we have historically.
In March 2017, FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). The amendments in this update require that an employer disaggregate the service cost component from the other components of net periodic cost (benefit) and report that
component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net periodic cost (benefit) are required to be presented in the statement of operations separately from the service cost component and outside of operating earnings. The amendment also allows for the service cost component of net periodic cost (benefit) to be eligible for capitalization when applicable. The guidance will be effective for the Company on January 1, 2018 and interim periods within that reporting period; early adoption permitted. The guidance on the income statement presentation of the components of net periodic cost (benefit) must be applied retrospectively, while the guidance limiting the capitalization of net periodic cost (benefit) in assets to the service cost component must be applied prospectively. The Company will adopt this standard update as required and does not expect the adoption of this ASU to have a material impact on our consolidated financial statements. Upon adoption, the Company plans to update the presentation of net periodic cost (benefit) accordingly, noting all components of the Company's net periodic cost (benefit) will be presented outside of operating earnings, as the plan is not active.The estimated impact of adoption of this update will be a reclassification of all components of net periodic benefit from operating earnings to other income in the amount of $49,000 and $18,000 for the years ended December 31, 2017 and December 31, 2016, respectively.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The reclassifications should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The amendments also require certain disclosures about stranded tax effects. This ASU is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and may be early adopted. The Company has elected to early adopt, which resulted in a reclassification of
$162,000
from accumulated other comprehensive income to retained earnings at December 31, 2017.
3. Net Income per Common Share
Net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of dilutive stock options and restricted stock under the treasury stock method.
The computation of basic and diluted net income per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
5,459,000
|
|
|
$
|
7,411,000
|
|
|
$
|
12,050,000
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
7,690,000
|
|
|
7,621,000
|
|
|
7,583,000
|
|
Effect of dilutive securities
|
57,000
|
|
|
40,000
|
|
|
40,000
|
|
Weighted average common and potentially issuable common shares outstanding — diluted
|
7,747,000
|
|
|
7,661,000
|
|
|
7,623,000
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.71
|
|
|
$
|
0.97
|
|
|
$
|
1.59
|
|
Diluted net income per common share
|
$
|
0.70
|
|
|
$
|
0.97
|
|
|
$
|
1.58
|
|
4. Major Customers
The Company had five major customers during
2017
, Navistar, Volvo, PACCAR, Yamaha and BRP. Major customers are defined as customers whose current year sales individually consist of more than ten percent of total sales during any annual or interim reporting period in the current year. The loss of a significant portion of sales to Navistar, Volvo, PACCAR, Yamaha or BRP would have a material adverse effect on the business of the Company.
The following table presents sales revenue for the above-mentioned customers for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Navistar product sales
|
$
|
39,609,000
|
|
|
$
|
39,756,000
|
|
|
$
|
50,169,000
|
|
Navistar tooling sales
|
$
|
159,000
|
|
|
$
|
1,994,000
|
|
|
$
|
6,246,000
|
|
Total Navistar sales
|
39,768,000
|
|
|
41,750,000
|
|
|
56,415,000
|
|
|
|
|
|
|
|
Volvo product sales
|
$
|
27,627,000
|
|
|
$
|
29,520,000
|
|
|
$
|
53,525,000
|
|
Volvo tooling sales
|
8,089,000
|
|
|
20,450,000
|
|
|
1,600,000
|
|
Total Volvo sales
|
35,716,000
|
|
|
49,970,000
|
|
|
55,125,000
|
|
|
|
|
|
|
|
PACCAR product sales
|
26,481,000
|
|
|
24,235,000
|
|
|
33,452,000
|
|
PACCAR tooling sales
|
2,932,000
|
|
|
3,481,000
|
|
|
978,000
|
|
Total PACCAR sales
|
29,413,000
|
|
|
27,716,000
|
|
|
34,430,000
|
|
|
|
|
|
|
|
Yamaha product sales
|
17,137,000
|
|
|
16,205,000
|
|
|
16,766,000
|
|
Yamaha tooling sales
|
—
|
|
|
—
|
|
|
—
|
|
Total Yamaha sales
|
17,137,000
|
|
|
16,205,000
|
|
|
16,766,000
|
|
|
|
|
|
|
|
|
BRP product sales
|
13,024,000
|
|
|
10,870,000
|
|
|
7,082,000
|
|
BRP tooling sales
|
639,000
|
|
|
1,624,000
|
|
|
—
|
|
Total BRP sales
|
13,663,000
|
|
|
12,494,000
|
|
|
7,082,000
|
|
|
|
|
|
|
|
Other product sales
|
24,745,000
|
|
|
26,038,000
|
|
|
28,109,000
|
|
Other tooling sales
|
1,231,000
|
|
|
709,000
|
|
|
1,141,000
|
|
Total other sales
|
25,976,000
|
|
|
26,747,000
|
|
|
29,250,000
|
|
|
|
|
|
|
|
Total product sales
|
148,623,000
|
|
|
146,624,000
|
|
|
189,103,000
|
|
Total tooling sales
|
13,050,000
|
|
|
28,258,000
|
|
|
9,965,000
|
|
Total sales
|
$
|
161,673,000
|
|
|
$
|
174,882,000
|
|
|
$
|
199,068,000
|
|
5. Foreign Operations
In conjunction with the Company's acquisition of certain assets of Airshield Corporation on October 16, 2001, the Company established manufacturing operations in Mexico (under the Maquiladora program). The Mexican operation is a captive manufacturing facility of the Company and the functional currency is United States dollars. Essentially all sales of the Mexican operations are made in United States dollars, which totaled
$50,727,000
,
$49,708,000
and
$69,235,000
in
2017
,
2016
and
2015
, respectively. Expenses are incurred in the United States dollar and the Mexican peso. Expenses incurred in pesos include labor, utilities, supplies and materials, and amounted to approximately
24%
,
22%
and
19%
of sales produced at the Matamoros operations in
2017
,
2016
and
2015
, respectively. The Company's manufacturing operation in Mexico is subject to various political, economic, and other risks and uncertainties including safety and security concerns inherent to Mexico. Among other risks, the Company's Mexican operations are subject to domestic and international customs and tariffs, changing taxation policies, and governmental regulations.
All of the Company's product is sold to U.S. based customers in U.S. dollars. The following table provides information related to sales by country, based on the ship to location of customers' production facilities, for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
103,513,000
|
|
|
$
|
119,018,000
|
|
|
$
|
129,651,000
|
|
Mexico
|
52,496,000
|
|
|
51,389,000
|
|
|
63,586,000
|
|
Canada
|
5,664,000
|
|
|
4,475,000
|
|
|
5,831,000
|
|
Total
|
$
|
161,673,000
|
|
|
$
|
174,882,000
|
|
|
$
|
199,068,000
|
|
The following table provides information related to the location of property, plant and equipment, net, as of December 31:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
United States
|
$
|
40,594,000
|
|
|
$
|
42,547,000
|
|
Mexico
|
28,037,000
|
|
|
28,054,000
|
|
Total
|
$
|
68,631,000
|
|
|
$
|
70,601,000
|
|
6. Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land and land improvements
|
$
|
6,009,000
|
|
|
$
|
5,958,000
|
|
Buildings
|
42,769,000
|
|
|
42,593,000
|
|
Machinery and equipment
|
92,218,000
|
|
|
89,692,000
|
|
Tools, dies, and patterns
|
808,000
|
|
|
808,000
|
|
Additions in progress
|
3,045,000
|
|
|
1,607,000
|
|
Total
|
144,849,000
|
|
|
140,658,000
|
|
Less accumulated depreciation
|
(76,218,000
|
)
|
|
(70,057,000
|
)
|
Property, plant, and equipment - net
|
$
|
68,631,000
|
|
|
$
|
70,601,000
|
|
Additions in progress at December 31,
2017
and
2016
relate to building improvements and equipment purchases that were not yet completed at year end. At December 31,
2017
, commitments for capital expenditures in progress were $
1,071,000
and included
$278,000
recorded on the balance sheet in accounts payable. At December 31,
2016
, commitments for capital expenditures in progress were
$616,000
, and included
$316,000
recorded on the balance sheet in accounts payable. The Company capitalized interest of
$7,000
and
$0
for the years ended December 31,
2017
and
2016
, respectively.
7. Acquisition of CPI
On March 20, 2015, the Company acquired substantially all of the assets of CPI Binani, Inc., a wholly owned subsidiary of Binani Industries Limited, located in Winona, Minnesota for a cash purchase price of
$15,000,000
, which expanded the Company's process capabilities to include D-LFT and diversified the customer base. The purchase price was subject to working capital adjustments resulting in a reduction in the purchase price of
$488,000
.
Cash paid at closing was financed through borrowing under the Company's existing credit facility, as amended and further described in Note 9 below.
Consideration was allocated to assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows:
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
1,615,000
|
|
Inventory
|
|
675,000
|
|
Other Current Assets
|
|
171,000
|
|
Property and Equipment
|
|
12,474,000
|
|
Intangibles
|
|
650,000
|
|
Goodwill
|
|
1,306,000
|
|
Accounts Payable
|
|
(2,277,000
|
)
|
Other Current Liabilities
|
|
(102,000
|
)
|
|
|
$
|
14,512,000
|
|
The purchase price included consideration for strategic benefits, including an assembled workforce, operational infrastructure and synergistic revenue opportunities, which resulted in the recognition of goodwill. The goodwill is deductible for income tax purposes.
The acquisition was not deemed significant to the Company's consolidated balance sheet and results of operations at the time of acquisition. Accordingly, no pro-forma results are provided prior to the effective date of the acquisition. The Company incurred
$303,000
of expenses during the year ended December 31, 2015 associated with the acquisition, which was recorded in selling, general and administrative expense.
8. Goodwill and Intangibles
Goodwill activity for the year ended December 31, 2017 consisted of the following:
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
2,403,000
|
|
Additions
|
|
—
|
|
Impairment
|
|
—
|
|
Balance at December 31, 2017
|
|
$
|
2,403,000
|
|
Intangible assets at December 31, 2017 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
223,000
|
|
Customer Relationships
|
|
10 Years
|
|
400,000
|
|
|
(110,000
|
)
|
|
290,000
|
|
|
|
|
|
$
|
650,000
|
|
|
$
|
(137,000
|
)
|
|
$
|
513,000
|
|
Intangible assets at December 31, 2016 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(17,000
|
)
|
|
$
|
233,000
|
|
Customer Relationships
|
|
10 Years
|
|
400,000
|
|
|
(70,000
|
)
|
|
330,000
|
|
|
|
|
|
$
|
650,000
|
|
|
$
|
(87,000
|
)
|
|
$
|
563,000
|
|
The aggregate intangible asset amortization expense was
$50,000
for the years ended December 31, 2017 and 2016, respectively, and expects amortization expense to be
$50,000
each year for the next five years. The Company incurred $
37,000
amortization expense for the year ended December 31, 2015.
9. Debt and Leases
Long-term debt consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
Term loan payable to a bank, interest at a variable rate (3.36% and 2.55% at December 31, 2017 and 2016, respectively) with monthly payments of interest and principal through March 2020.
|
6,750,000
|
|
|
9,750,000
|
|
Revolving Line of Credit
|
—
|
|
|
—
|
|
Total
|
6,750,000
|
|
|
9,750,000
|
|
Less current portion
|
(3,000,000
|
)
|
|
(3,000,000
|
)
|
Long-term debt
|
$
|
3,750,000
|
|
|
$
|
6,750,000
|
|
Credit Agreement
On December 9, 2008, the Company and its wholly owned subsidiary, Corecomposites de Mexico, S. de R.L. de C.V., entered into a credit agreement, as amended from time to time (the "Credit Agreement"), with a lender to provide various financing facilities.
Under this Credit Agreement the Company received certain loans, subject to the terms and conditions stated in the agreement, which included (1) a
$12,000,000
Capex loan; (2) an
$18,000,000
variable rate revolving line of credit; (3) a term loan in an original amount of
$15,500,000
; and (4) a Letter of Credit Commitment of up to
$250,000
, of which
$175,000
has been issued. The Credit Agreement is secured by a guarantee of each U.S. subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.
On August 4, 2017, the Company and its wholly owned subsidiary, Corecomposites de Mexico, S. de R.L. de C.V., entered into a twelfth amendment (the "Twelfth Amendment") to the Credit Agreement. Pursuant to the terms of the Twelfth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included amending the definition of Consolidated Fixed Charges to include only Capital Distributions made in an aggregate amount in excess of Two Million Dollars ($2,000,000) and amending the restricted payment covenant provisions.
Capex Loan
The $12,000,000 Capex loan was a construction draw loan that converted to a seven-year term loan with fixed monthly principal payments. Borrowings made pursuant to this loan bear interest, payable monthly at
30 day LIBOR
plus 160 basis points and was paid in full May 2016.
Term Loan
The $15,500,000 Term Loan was used to finance the acquisition of CPI. This commitment has fixed monthly principal payments payable over a five-year period. Borrowings made pursuant to this loan bear interest, payable monthly at
30 day LIBOR
plus 180 basis points.
Revolving Line of Credit
At
December 31, 2017
, the Company had available an $18,000,000 variable rate revolving line of credit scheduled to mature on May 31, 2018. The revolving line of credit bears interest at
daily LIBOR
plus 160 basis points and is collateralized by all of the present and future assets of the Company and its U.S. subsidiaries (except that only
65%
of the stock issued by Corecomposites de Mexico, S. de C.V. has been pledged).
Annual maturities of long-term debt are as follows:
|
|
|
|
|
2018
|
$
|
3,000,000
|
|
2019
|
3,000,000
|
|
2020
|
750,000
|
|
Thereafter
|
—
|
|
Total
|
$
|
6,750,000
|
|
Bank Covenants
The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios, fixed charge ratios, and capital expenditures, as well as other customary affirmative and negative covenants. As of
December 31, 2017
, the Company was in compliance with its financial covenants associated with the loans made under the Credit Agreement as described above.
Leases
The Company has entered into an operating lease agreement through July 2019 for the manufacturing facility located in Batavia, Ohio. Additionally, the Company leases a warehouse and distribution center in Brownsville, Texas under a
5
-year operating lease agreement that expired in October 2017. The Company is currently negotiating a renewal to this lease.
Total rental expense was $
825,000
, $
808,000
and $
696,000
for
2017
,
2016
and
2015
, respectively. Included in rental expense are both operating lease payments and rental costs related to the use of equipment during the normal course of business under nonbinding terms. Future minimum operating lease payments are as follows:
|
|
|
|
|
2018
|
$
|
368,000
|
|
2019
|
192,000
|
|
2020
|
—
|
|
Thereafter
|
—
|
|
Total minimum lease payments
|
$
|
560,000
|
|
10. Stock Based Compensation
The Company has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the Company’s stockholders in May 2006. The 2006 Plan allows for grants to directors and employees of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentive awards (“Stock Awards”) up to an aggregate of
3,000,000
awards, each representing a right to buy a share of Core Molding Technologies common stock. Stock Awards can be granted under the 2006 Plan through the earlier of December 31, 2025, or the date the maximum number of available awards under the 2006 Plan have been granted. The number of shares remaining available for future issuance is
1,369,528
.
Restricted stock granted under the 2006 Plan typically require the individuals receiving the grants to maintain certain common stock ownership thresholds and vest over
three
years or upon the date of the participants' sixty-fifth birthday, death, disability or change in control.
Core Molding Technologies follows the provisions of FASB ASC 718 requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award). Core Molding Technologies adopted FASB ASC 718 using the modified prospective method. Under this method, FASB ASC 718 applies to all awards granted or modified after the date of adoption.
Restricted Stock
The Company grants shares of its common stock to certain directors, officers, and key employees in the form of unvested stock (“Restricted Stock”). These awards are recorded at the market value of Core Molding Technologies’ common stock on the date of issuance and amortized ratably as compensation expense over the applicable vesting period.
The following summarizes the status of Restricted Stock and changes during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
Number
of
Shares
|
|
Wtd. Avg.
Grant Date
Fair Value
|
Unvested - beginning of year
|
158,261
|
|
|
$
|
14.55
|
|
|
112,907
|
|
|
$
|
16.86
|
|
|
104,068
|
|
|
$
|
10.79
|
|
Granted
|
84,643
|
|
|
19.17
|
|
|
122,963
|
|
|
12.59
|
|
|
56,662
|
|
|
24.39
|
|
Vested
|
(95,717
|
)
|
|
15.25
|
|
|
(49,183
|
)
|
|
14.16
|
|
|
(46,629
|
)
|
|
11.82
|
|
Forfeited
|
(6,092
|
)
|
|
17.93
|
|
|
(28,426
|
)
|
|
15.93
|
|
|
(1,194
|
)
|
|
24.39
|
|
Unvested - end of year
|
141,095
|
|
|
$
|
16.79
|
|
|
158,261
|
|
|
$
|
14.55
|
|
|
112,907
|
|
|
$
|
16.86
|
|
At
December 31, 2017
and
2016
, there was $
1,601,000
and $
1,356,000
, respectively, of total unrecognized compensation expense related to Restricted Stock granted under the 2006 Plan. That cost is expected to be recognized over the weighted-average period of
1.5
years. Total compensation expense related to restricted stock grants for the years ended
December 31, 2017
,
2016
and
2015
was $
1,331,000
, $
1,003,000
and $
785,000
, respectively, and is recorded as selling, general and administrative expense.
During first quarter 2017, the Company adopted Accounting Standards Update 2016-09, Compensation - Stock Compensation. The new standard provided for changes to accounting for stock compensation, including excess tax benefits and tax deficiencies related to share based payment awards to be recognized in income tax expense in the reporting period in which they occurred. Tax benefits and tax deficiencies before this update were recorded as an increase or decrease in additional paid in capital. Tax benefits and deficiencies for the years ended December 31 2017, 2016 and 2015 were a benefit of
$126,000
, a deficiency of
$16,000
and a benefit of $
202,000
, respectively.
During
2017
,
2016
and
2015
, employees surrendered
19,533
,
10,590
and
12,141
shares, respectfully, of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted stock.
11. Income Taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal - US
|
$
|
1,993,000
|
|
|
$
|
3,408,000
|
|
|
$
|
4,466,000
|
|
Federal - Foreign
|
613,000
|
|
|
—
|
|
|
405,000
|
|
State and local
|
24,000
|
|
|
2,000
|
|
|
18,000
|
|
|
2,630,000
|
|
|
3,410,000
|
|
|
4,889,000
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(407,000
|
)
|
|
490,000
|
|
|
1,143,000
|
|
Federal- Foreign
|
52,000
|
|
|
(86,000
|
)
|
|
27,000
|
|
State and local
|
11,000
|
|
|
22,000
|
|
|
59,000
|
|
|
(344,000
|
)
|
|
426,000
|
|
|
1,229,000
|
|
Provision for income taxes
|
$
|
2,286,000
|
|
|
$
|
3,836,000
|
|
|
$
|
6,118,000
|
|
A reconciliation of the income tax provision based on the federal statutory income tax rate to the Company's income tax provision for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Provision at federal statutory rate - US
|
$
|
2,634,000
|
|
|
$
|
3,823,000
|
|
|
$
|
6,177,000
|
|
Adjustments for US tax law changes
|
(185,000
|
)
|
|
—
|
|
|
—
|
|
Excess tax benefit — equity transactions
|
(126,000
|
)
|
|
—
|
|
|
—
|
|
Effect of foreign taxes
|
(58,000
|
)
|
|
34,000
|
|
|
(84,000
|
)
|
State and local tax expense
|
35,000
|
|
|
24,000
|
|
|
76,000
|
|
Other
|
(14,000
|
)
|
|
(45,000
|
)
|
|
(51,000
|
)
|
Provision for income taxes
|
$
|
2,286,000
|
|
|
$
|
3,836,000
|
|
|
$
|
6,118,000
|
|
The Tax Cuts and Jobs Act (“the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings, provides for acceleration of business asset expensing, and reduces the amount of executive pay that may qualify as a tax deduction, among other changes. FASB ASC 740 requires the recognition of the effects of tax law changes in the period of enactment. However, due to the complexities of the new tax legislation, the SEC has issued SAB 118 which allows for the recognition of provisional amounts during a measurement period.
The Company’s accounting for the income tax effects of the Act is generally complete. Specifically, the charge recorded related to the re-measurement of our deferred tax balance was a net benefit of
$484,000
, which we believe to be complete and accurate. The Act's one-time transition tax calculation is complex, and as such our accounting for this item is provisional at this time. We have made a reasonable estimate of the effects of the one-time transition tax, and the provisional amount recorded related to the transition tax, net of estimated foreign tax credits, was a charge of
$299,000
. A more thorough analysis of the Company’s overall foreign earnings and profits, including expense allocations and foreign tax credit calculations, will be completed to finalize this calculation, which is expected to occur no later than the second quarter of 2018.
During first quarter 2017, the Company adopted Accounting Standards Update 2016-09, Compensation - Stock Compensation. The new standard provided for changes to accounting for stock compensation, including recording excess tax benefits and tax deficiencies related to share based payment awards in income tax expense in the reporting period in which they occurred. Tax benefits and tax deficiencies before this update were recorded in additional paid in capital. Tax benefits and deficiencies for the years ended December 31 2017, 2016 and 2015 were a benefit of
$126,000
, a deficiency of
$16,000
and a benefit of
$211,000
, respectively.
In October 2016, the Internal Revenue Service entered into a unilateral agreement with the Large Taxpayer Division of Mexico's Servicio de Administracion Tributaria (SAT) to provide for a Fast Track methodology to resolve all pending Advanced Pricing Agreements (APA) for the Maquiladora industry. The Company's Mexican subsidiary filed an APA and qualifies for and has adopted this methodology.
The Company performs an analysis to evaluate the balance of deferred tax assets that will be realized. The analysis is based on the premise that the deferred tax benefits will be realized through the generation of future taxable income. Based on the analysis, the Company has not recorded a valuation allowance on the deferred tax assets as of December 31,
2017
and
2016
.
Deferred tax assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Current asset (liability):
|
|
|
|
Accrued liabilities
|
$
|
608,000
|
|
|
$
|
938,000
|
|
Accounts receivable
|
156,000
|
|
|
110,000
|
|
Inventory
|
371,000
|
|
|
588,000
|
|
Other, net
|
(292,000
|
)
|
|
(255,000
|
)
|
Total current asset
|
843,000
|
|
|
1,381,000
|
|
|
|
|
|
Non-current asset (liability):
|
|
|
|
Property, plant, and equipment
|
(3,345,000
|
)
|
|
(5,274,000
|
)
|
Post retirement benefits
|
2,060,000
|
|
|
3,212,000
|
|
Other, net
|
47,000
|
|
|
(311,000
|
)
|
Total non-current liability
|
(1,238,000
|
)
|
|
(2,373,000
|
)
|
Total deferred tax liability - net
|
$
|
(395,000
|
)
|
|
$
|
(992,000
|
)
|
At December 31,
2017
and
2016
the Company had
no
liability for unrecognized tax benefits under guidance relating to tax uncertainties. The Company does not anticipate that the unrecognized tax benefits will significantly change within the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction, Mexico and various state and local jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for the years before 2014, and no longer subject to Mexican income tax examinations by Mexican authorities for the years before 2012.
12. Post Retirement Benefits
The Company provides post retirement benefits to certain of its United States employees, including contributions to a multi-employer defined benefit pension plan, health care and life insurance benefits, and contributions to
three
401(k) defined contribution plans.
The Company contributes to a multi-employer defined benefit pension plan for its employees represented by the International Association of Machinists and Aerospace Workers ("IAM") at the Company’s Columbus, Ohio production facility. The Company does not administer this plan and contributions are determined in accordance with provisions of the collective bargaining agreement. The risks of participating in this multi-employer plan are different from a single-employer plan in the following aspects:
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If the Company chooses to stop participating in its multi-employer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
The Company’s participation in the multi-employer defined benefit pension plan for the years ended December 31,
2017
and
2016
is outlined in the table below. The most recent Pension Protection Act ("PPA") zone status available in
2017
and
2016
is for the plan’s year-end at December 31,
2016
, and December 31,
2015
, respectively. The zone status is based on information the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than
65%
funded, plans in the yellow zone are less than
80%
funded, and plans in the green zone are at least
80%
funded. The “FIP/RP Status Pending/Implemented” column indicates whether a financial improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or has been implemented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension Plan Number
|
|
Pension Protection Act Zone Status
|
|
FIP/RP Status Pending/ Implemented
|
|
Contributions of the Company
|
|
Surcharge Imposed
|
|
Expiration Date of Collective Bargaining Agreement
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
IAM National Pension Fund / National Pension Plan
(A)
|
|
51-6031295 - 002
|
|
Green as of 12/31/16
|
|
Green as of 12/31/15
|
|
No
|
|
$647,000
|
|
$710,000
|
|
No
|
|
8/10/2019
|
|
|
|
|
|
|
Total Contributions:
|
|
$647,000
|
|
$710,000
|
|
|
|
|
(A)
The plan re-certified its zone status after using the amortization provisions of the Code. The Company's contributions to the plan did not represent more than
5%
of total contributions to the plan as indicated in the plan's most recently available annual report for the plan year ended December 31, 2016. Under the terms of the collective-bargaining agreement, the Company is required to make contributions to the plan for each hour worked up to a maximum of
40
hours per person, per week, at the following rates:
$1.45
per hour from August 8, 2016 through August 6, 2017;
$1.50
per hour from August 7, 2017 through August 5, 2018;
$1.55
per hour from August 6, 2018 through August 10, 2019.
Prior to the acquisition of Columbus Plastics, certain of the Company's employees were participants, or were eligible to participate, in Navistar's post retirement health and life insurance benefit plan. This plan provides healthcare and life insurance benefits for certain employees upon their retirement, along with their spouses and certain dependents and requires cost sharing between the Company, Navistar and the participants, in the form of premiums, co-payments, and deductibles. The Company and Navistar share the cost of benefits for these employees, using a formula that allocates the cost based upon the respective portion of time that the employee was an active service participant after the acquisition of Columbus Plastics to the period of active service prior to the acquisition of Columbus Plastics.
The Company also sponsors a post retirement health and life insurance benefit plan for certain union retirees of its Columbus, Ohio production facility. In August 2010, as part of a new collective-bargaining agreement, the post retirement health and life insurance benefits for all current and future represented employees who were not retired were eliminated in exchange for a one-time cash payment. Individuals who retired prior to August 2010 remain eligible for post retirement health and life insurance benefits.
The elimination of post retirement health and life insurance benefits described above resulted in a reduction of the Company’s post retirement benefits liability of approximately
$10,282,000
in 2010. This reduction in post retirement benefits liability was treated as a negative plan amendment and is being amortized as a reduction to net periodic benefit cost over approximately
twenty
years, the actuarial life expectancy of the remaining participants in the plan at the time of the amendment. This negative plan amendment resulted in net periodic benefit cost reductions of approximately
$496,000
in
2017
,
2016
and
2015
, and will result in net periodic benefit cost reductions of approximately
$496,000
in
2018
and each year thereafter during the amortization period.
The funded status of the Company's post retirement health and life insurance benefits plan as of December 31,
2017
and
2016
and reconciliation with the amounts recognized in the consolidated balance sheets are provided below.
|
|
|
|
|
|
|
|
|
|
Post Retirement Benefits
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at January 1
|
$
|
8,667,000
|
|
|
$
|
9,006,000
|
|
Interest cost
|
298,000
|
|
|
323,000
|
|
Unrecognized loss (gain)
|
417,000
|
|
|
(320,000
|
)
|
Benefits paid
|
(332,000
|
)
|
|
(342,000
|
)
|
Benefit obligation at December 31
|
$
|
9,050,000
|
|
|
$
|
8,667,000
|
|
|
|
|
|
Plan Assets
|
—
|
|
|
—
|
|
|
|
|
|
Amounts recorded in accumulated other comprehensive income:
|
|
|
|
Prior service credit
|
$
|
(6,602,000
|
)
|
|
$
|
(7,098,000
|
)
|
Net loss
|
3,733,000
|
|
|
3,464,000
|
|
Total
|
$
|
(2,869,000
|
)
|
|
$
|
(3,634,000
|
)
|
|
|
|
|
Weighted-average assumptions as of December 31:
|
|
|
|
Discount rate used to determine benefit obligation and net
periodic benefit cost
|
3.4
|
%
|
|
3.8
|
%
|
The components of expense for all of the Company's post retirement benefit plans for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Pension expense:
|
|
|
|
|
|
Multi-employer plan
|
$
|
647,000
|
|
|
$
|
710,000
|
|
|
$
|
863,000
|
|
Defined contribution plans
|
752,000
|
|
|
766,000
|
|
|
836,000
|
|
Total pension expense
|
1,399,000
|
|
|
1,476,000
|
|
|
1,699,000
|
|
|
|
|
|
|
|
Health and life insurance:
|
|
|
|
|
|
Interest cost
|
298,000
|
|
|
323,000
|
|
|
316,000
|
|
Amortization of prior service costs
|
(496,000
|
)
|
|
(496,000
|
)
|
|
(496,000
|
)
|
Amortization of net loss
|
149,000
|
|
|
155,000
|
|
|
169,000
|
|
Net periodic benefit cost
|
(49,000
|
)
|
|
(18,000
|
)
|
|
(11,000
|
)
|
Total post retirement benefits expense
|
$
|
1,350,000
|
|
|
$
|
1,458,000
|
|
|
$
|
1,688,000
|
|
The Company accounts for post retirement benefits under FASB ASC 715, which requires the recognition of the funded status of a defined benefit pension or post retirement plan in the consolidated balance sheets. For the year ended December 31,
2017
, the Company recognized a net actuarial
loss
of $
417,000
and for the year ended December 31,
2016
recognized a net actuarial gain of $
320,000
, both of which were recorded in accumulated other comprehensive income.
Amounts not yet recognized as a component of net periodic benefit costs at December 31,
2017
and
2016
were a net credit of $
2,869,000
and $
3,634,000
, respectively. The amount in accumulated other comprehensive income expected to be recognized as components of net periodic post retirement cost during
2018
consists of a prior service credit of $
496,000
, and a net loss of $
171,000
. In addition,
2018
interest expense related to post retirement healthcare is expected to be $
277,000
, for a total post retirement healthcare net
gain
of approximately $
48,000
in
2018
. The Company expects benefits paid in
2018
to be consistent with estimated future benefit payments as shown in the table below.
The weighted average rate of increase in the per capita cost of covered health care benefits is projected to be
7%
. The rate is projected to decrease gradually to
5%
by the year 2025 and remain at that level thereafter. The comparable assumptions for the prior year were
7%
and
5%
, respectively.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
|
|
|
|
|
|
|
|
|
|
1- Percentage
Point Increase
|
|
1-Percentage
Point Decrease
|
Effect on total of service and interest cost components
|
$
|
48,000
|
|
|
$
|
(40,000
|
)
|
Effect on post retirement benefit obligation
|
$
|
1,264,000
|
|
|
$
|
(1,068,000
|
)
|
The estimated future benefit payments of the health care plan for the next ten years are as follows:
|
|
|
|
|
Year
|
Postretirement Health Care Benefits Plan
|
2018
|
$
|
1,096,000
|
|
2019
|
444,000
|
|
2020
|
474,000
|
|
2021
|
495,000
|
|
2022
|
518,000
|
|
2023-2027
|
2,456,000
|
|
13. Commitments and Contingencies
From time to time, the Company is involved in litigation incidental to the conduct of its business. However, the Company is presently not involved in any legal proceedings which in the opinion of management are likely to have a material adverse effect on the Company's consolidated financial position or results of operations.
14. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
The three levels are defined as follows:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets and liabilities.
|
|
|
Level 2 -
|
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
|
|
|
Level 3 -
|
Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
|
The Company’s financial instruments consist of debt, foreign currency derivatives, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value. During 2017, the Company had one Level 2 fair value measurement, which related to the Company’s foreign currency derivatives.
Derivative and hedging activities
The Company conducts business in Mexico and pays certain expenses in Mexican Pesos. The Company is exposed to foreign currency exchange risk between the U.S. dollar and the Mexican Peso, which could impact the Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. dollars for a fixed amount of Mexican Pesos, which will be used to fund future peso cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period. Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other
comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the Mexican Peso. As of
December 31, 2017
and
2016
, the Company had
no
ineffective portion related to the cash flow hedges.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivatives Instruments
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign exchange contracts
|
Prepaid expense other current assets
|
|
—
|
|
|
|
Accrued liabilities other
|
|
$
|
298,000
|
|
Notional contract values
|
|
|
—
|
|
|
|
|
|
$
|
8,766,000
|
|
As of
December 31, 2017
, the Company had foreign exchange contracts related to the Mexican Peso with exchange rates ranging from
19.17
to
20.41
.
The following tables detail amounts related to our derivatives designated as hedging instruments as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivatives Instruments
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign exchange contracts
|
Prepaid expense other current assets
|
|
—
|
|
|
|
Accrued liabilities other
|
|
$
|
303,000
|
|
Notional contract values
|
|
|
—
|
|
|
|
|
|
$
|
6,502,000
|
|
As of
December 31, 2016
, the Company had foreign exchange contracts related to the Mexican Peso with exchange rates ranging from
20.01
to
20.68
.
The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in subtopic 815-20 Cash Flow Hedging Relationship
|
|
Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative
|
|
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
(A)
|
|
Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
|
2017
|
2016
|
2015
|
|
|
2017
|
2016
|
2015
|
Foreign exchange contracts
|
|
$517,000
|
(289,000)
|
—
|
|
Cost of goods sold
|
|
$445,000
|
12,000
|
—
|
|
|
Sales, general and administrative expense
|
|
$67,000
|
2,000
|
—
|
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of Mexican Peso spend.
Non-recurring fair value measurements
There were
no
non-recurring fair value measurements for the year ended
December 31, 2017
or 2016.
15. Accumulated Other Comprehensive Income
The following table presents changes in Accumulated Other Comprehensive Income by component, net of tax, for the years ended December 31,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Derivative Activities
(A)
|
|
Post Retirement Benefit Plan Items
(B)
|
|
Total
|
2016:
|
|
|
|
|
|
Balance at January 1, 2016
|
$
|
—
|
|
|
$
|
2,645,000
|
|
|
$
|
2,645,000
|
|
Other comprehensive income before reclassifications
|
(289,000
|
)
|
|
319,000
|
|
|
30,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
(14,000
|
)
|
|
(336,000
|
)
|
|
(350,000
|
)
|
Income tax (expense) benefit
|
103,000
|
|
|
(14,000
|
)
|
|
89,000
|
|
Balance at December 31, 2016
|
$
|
(200,000
|
)
|
|
$
|
2,614,000
|
|
|
$
|
2,414,000
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
Balance at January 1, 2017
|
$
|
(200,000
|
)
|
|
$
|
2,614,000
|
|
|
$
|
2,414,000
|
|
Other comprehensive income before reclassifications
|
517,000
|
|
|
(417,000
|
)
|
|
100,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
(512,000
|
)
|
|
(347,000
|
)
|
|
(859,000
|
)
|
Income tax (expense) benefit
|
(2,000
|
)
|
|
255,000
|
|
|
253,000
|
|
Adoption of Accounting Standards Update 2018-02
|
—
|
|
|
162,000
|
|
|
162,000
|
|
Balance at December 31, 2017
|
$
|
(197,000
|
)
|
|
$
|
2,267,000
|
|
|
$
|
2,070,000
|
|
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of Mexican Peso spend. The tax effect of the foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income.
(B)
The Company has historically disclosed both interest rate swap activity and post-retirement benefit activity separately, however due to immaterial interest rate swap activity the components associated with interest rate swaps have been combined in the post retirement disclosures above. The effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in total cost of sales on the Consolidated Statements of Income. These Accumulated Other Comprehensive Income components are included in the computation of net periodic benefit cost (see Note 12 "Post Retirement Benefits" for additional details). The tax effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income.
16. Subsequent Events
On January 16, 2018, 1137925 B.C. Ltd. (the “Subsidiary”), a wholly owned subsidiary of Core Molding Technologies, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Agreement”) with Horizon Plastics International Inc., 1541689 Ontario Inc., 2551024 Ontario Inc. and Horizon Plastics de Mexico, S.A. de C.V. (collectively “Horizon Plastics”). Pursuant to the terms of the Agreement the Company acquired substantially all of the assets and assumed certain specified liabilities of Horizon Plastics in exchange for approximately
$63,000,000
in cash, subject to a working capital closing adjustment. The initial accounting for the business combination was not complete at the time the financial statements were issued due to the timing of the acquisition and the filing of this Annual Report on Form 10-K. As a result, disclosures required under ASC 805-10-50, Business Combinations, cannot be made at this time.
The acquisition was funded through a combination of available cash on hand and borrowings under the Amended and Restated Credit Agreement ("A/R Credit Agreement") entered in to on January 16, 2018 with KeyBank National Association as
administrative agent and the various financial institutions party thereto as lenders (the "lenders"). Pursuant to the terms of the A/R Credit Agreement (i) the Company may borrow revolving loans in the aggregate principal amount of up to
$40,000,000
(the “US Revolving Loans”) from the Lenders and term loans in the aggregate principal amount of up to
$32,000,000
from the Lenders, (ii) the Subsidiary may borrow revolving loans in an aggregate principal amount of up to
$10,000,000
from the Lenders (which revolving loans shall reduce the availability of the US Revolving Loans to the Company on a dollar-for-dollar basis) and term loans in an aggregate principal amount of up to
$13,000,000
from the Lenders and (iii) the Company may increase the aggregate principal amount of the aforementioned loans by up to an additional
$25,000,000
.
On January 16, 2018, the Company entered into two interest rate swap agreements that became effective January 18, 2018 and continues through January 2023, one of which was designated as a cash flow hedge for $25,000,000 of the $32,000,000 term loan to the Company mentioned above and the other was designated as a cash flow hedge for $10,000,0000 of the $13,000,000 term loan to the Subsidiary mentioned above. Under these agreements, the Company will pay a fixed rate of
4.58%
to the counterparty and receives daily LIBOR.
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Total Year
|
2017:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
36,336,000
|
|
|
$
|
36,794,000
|
|
|
$
|
37,593,000
|
|
|
$
|
37,900,000
|
|
|
$
|
148,623,000
|
|
Tooling sales
|
410,000
|
|
|
10,574,000
|
|
|
901,000
|
|
|
1,165,000
|
|
|
13,050,000
|
|
Net sales
|
36,746,000
|
|
|
47,368,000
|
|
|
38,494,000
|
|
|
39,065,000
|
|
|
161,673,000
|
|
Gross margin
|
6,491,000
|
|
|
7,353,000
|
|
|
5,764,000
|
|
|
5,072,000
|
|
|
24,680,000
|
|
Operating income
|
2,566,000
|
|
|
3,185,000
|
|
|
1,406,000
|
|
|
833,000
|
|
|
7,990,000
|
|
Net income
|
1,688,000
|
|
|
2,162,000
|
|
|
855,000
|
|
|
754,000
|
|
|
5,459,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.71
|
|
Diluted (1)
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
2016:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
42,530,000
|
|
|
$
|
36,813,000
|
|
|
$
|
33,816,000
|
|
|
$
|
33,465,000
|
|
|
$
|
146,624,000
|
|
Tooling sales
|
2,938,000
|
|
|
2,193,000
|
|
|
7,520,000
|
|
|
15,607,000
|
|
|
28,258,000
|
|
Net sales
|
45,468,000
|
|
|
39,006,000
|
|
|
41,336,000
|
|
|
49,072,000
|
|
|
174,882,000
|
|
Gross margin
|
8,863,000
|
|
|
6,323,000
|
|
|
5,581,000
|
|
|
7,157,000
|
|
|
27,924,000
|
|
Operating income
|
4,442,000
|
|
|
2,307,000
|
|
|
1,657,000
|
|
|
3,139,000
|
|
|
11,545,000
|
|
Net income
|
2,890,000
|
|
|
1,460,000
|
|
|
1,029,000
|
|
|
2,032,000
|
|
|
7,411,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.38
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.27
|
|
|
$
|
0.97
|
|
Diluted (1)
|
$
|
0.38
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.26
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
2015:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
47,854,000
|
|
|
$
|
53,514,000
|
|
|
$
|
44,243,000
|
|
|
$
|
43,492,000
|
|
|
$
|
189,103,000
|
|
Tooling sales
|
1,745,000
|
|
|
1,342,000
|
|
|
3,806,000
|
|
|
3,072,000
|
|
|
9,965,000
|
|
Net sales
|
49,599,000
|
|
|
54,856,000
|
|
|
48,049,000
|
|
|
46,564,000
|
|
|
199,068,000
|
|
Gross margin
|
9,025,000
|
|
|
10,982,000
|
|
|
8,311,000
|
|
|
7,934,000
|
|
|
36,252,000
|
|
Operating income
|
4,890,000
|
|
|
6,232,000
|
|
|
3,902,000
|
|
|
3,474,000
|
|
|
18,498,000
|
|
Net income
|
3,196,000
|
|
|
4,039,000
|
|
|
2,484,000
|
|
|
2,331,000
|
|
|
12,050,000
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.42
|
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
1.59
|
|
Diluted (1)
|
$
|
0.42
|
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
1.58
|
|
(1)
Sum of the quarters may not sum to total year due to rounding.