Notes to Consolidated Financial Statements
1. Basis of Presentation
Core Molding Technologies and its subsidiaries operate in the composites market as one operating segment as a molder of thermoplastic and thermoset structural products. The Company's operating segment consists of two component reporting units, Core Traditional and Horizon Plastics. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, automobiles, marine, construction and other commercial markets. The Company offers customers a wide range of manufacturing processes to fit various program volume and investment requirements. These processes include compression molding of sheet molding compound ("SMC"), bulk molding compounds ("BMC"), resin transfer molding ("RTM"), liquid molding of dicyclopentadiene ("DCPD"), spray-up and hand-lay-up, glass mat thermoplastics ("GMT"), direct long-fiber thermoplastics ("D-LFT") and structural foam and structural web injection molding ("SIM"). As of December 31, 2019, Core Molding Technologies has its headquarters in Columbus, Ohio, and operates seven production facilities in Columbus and Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; Matamoros and Escobedo, Mexico; and Cobourg, Ontario, Canada. All produce structural composite products.
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, progress billings for tooling, goodwill and long-lived assets. Actual results could differ from those estimates.
Going Concern - Under FASB ASU 2014-15, “Presentation of Financial Statements - Going Concern,” management is required to evaluate conditions or events as related to uncertainties that raise substantial doubt about the Company’s ability to continue as a going concern and to provide related financial disclosures, as applicable. Our consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As further discussed in Note 10 - Debt, as of December 31, 2019, the Company was not in compliance with the fixed charge coverage ratio requirement under the Company's Amended and Restated Credit Agreement, dated January 16, 2018 (the “A/R Credit Agreement”), with KeyBank National Association as the administrative agent (the "Administrative Agent") and various other financial institutions thereto as lenders (the "Lenders").
On November 22, 2019, the Company entered into a forbearance agreement (the "Forbearance Agreement") with the Lenders. Pursuant to the Forbearance Agreement, the Borrowers and the Lenders acknowledged and confirmed that an event of default occurred under the A/R Credit Agreement resulting from the Borrowers failure to maintain the required Fixed Charge Coverage Ratio (as defined in the A/R Credit Agreement”) for the fiscal quarter ended September 30, 2019. The Forbearance Agreement provides that the Administrative Agent and Lenders shall forbear from the exercise of rights and remedies pursuant to the Loan Documents described in the A/R Credit Agreement through March 13, 2020, as long as the Company satisfies the conditions set forth in the Forbearance Agreement, including, (i) the Borrowers shall remain current on all loan payments during the forbearance period, (ii) on or before December 6, 2019, the Administrative Agent and Lenders shall each receive a copy of a report of Huron Consulting Group containing findings and observations in respect of the businesses and operations of the Company and the Borrowers shall deliver a strategic alternative assessment in respect of the Borrowers’ operations and financing, (iii) on or before December 15, 2019, the Administrative Agent and Lenders shall each receive a copy of appraisals of machinery and equipment and inventory appraisals, and the Borrowers shall have determined and proposed a new capital structure to the Administrative Agent and Lenders, (iv) on or before February 14, 2020, the Borrowers shall have obtained a definitive, written commitment from involved parties and/or lenders providing the basis for implementation of a new capital structure, and (v) on or before March 13, 2020, the Borrowers shall have closed on a new capital structure, acceptable to the Administrative Agents and Lenders. The Forbearance Agreement also implemented a new availability block with respect to the U.S. Revolving Loans portion of the A/R Credit Agreement, reducing availability from $32,500,000 to $28,000,000 and increasing the applicable margin for existing term and revolving loans, as well as increasing the commitment fees on any unused U.S. Revolving Loans.
On March 13, 2020, the Company entered into the first Amendment to the Forbearance Agreement (the “Amended Forbearance Agreement”) with the Lenders. Pursuant to the terms of the Amended Forbearance Agreement, the Company and Lenders agreed to modify certain terms of the Forbearance Agreement and extend the Forbearance Agreement through May 29, 2020. The modifications include (1) a reduction in the U.S. Revolving Loan to $25,000,000 with an availability block of $5,000,000 which can be borrowed with the approval of the lenders, (2) a change of interest rate to LIBOR rate plus 650 basis points, (3) forebear compliance with the leverage covenant and fixed charge covenant through May 29, 2020, and (4) implementation of a capital expenditure spend limit of $3,500,000 from the effective date of the Amended Forbearance Agreement through May 29, 2020, (5) an increase in the commitment fees on any unused U.S. Revolving Loans.
The Amended Forbearance Agreement provides that the Administrative Agent and Lenders shall forbear from the exercise of rights and remedies pursuant to the Loan Documents described in the Credit Agreement through May 29, 2020, as long as the Company satisfies the conditions set forth in the Amended Forbearance Agreement, including, (i) on or before March 31, 2020, the borrowers shall have obtained an executed term sheet from involved parties and/or lenders providing the basis for implementation of a new capital structure and defined due diligence parameters, (ii) on or before May 15, 2020 the Borrowers shall have obtained an executed definitive, written commitment from the New Lenders to enter into a definitive agreement to effect the refinancing, and (iii) on or before May 29, 2020, the borrowers shall have closed on a new capital structure.
As a result of the Amended Forbearance Agreement not extending beyond a year, the Company’s remaining long-term debt under the A/R Credit Agreement, consisting of $49,451,000 in borrowings under the revolving credit commitment and the loan commitments, was classified as a current liability in the Company’s consolidated balance sheet as of December 31, 2019. As a result, the Company’s current liabilities exceeded its current assets by $22,609,000 as of December 31, 2019. If the Lenders were to call the loans or demand repayment of all existing borrowings, this could result in the Company being unable to meet its working capital obligations.
The Company is evaluating several financing options to refinance some or all of the current obligations under the A/R Credit Agreement. The Company is considering financing options including an asset backed lending facility using the Company’s accounts receivable and inventories as security, term loans secured with the Company’s real estate and machinery and equipment, sale and leaseback of Company owned real estate and potential equity financing. The Company has obtained term sheets as a result of its marketing efforts and are evaluating alternatives. Any new financing remains subject to asset appraisals, field exams, financial projection due diligence, real estate environmental reviews, and other customary legal documentation.
While the Company has executed an Amended Forbearance Agreement with existing Lenders, it can not guarantee that all conditions of the Amended Forbearance Agreement will be met, or predict if the Lenders will exercise their rights and remedies under the A/R Credit Agreement beyond the term of the Amended Forbearance Agreement. Additionally, since the Company has no firm commitments for additional financing, there can be no assurances that the Company will be able to secure additional financing on terms that are acceptable to the Company, or at all. As there can be no assurance that the Company will be able to successfully implement its refinancing plan, these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company's consolidated financial statements do not include adjustments, if any, that might arise from the outcome of this uncertainty.
Management has been executing on its turnaround plan that started in December of 2018 and has been successful in improving equipment uptime, improving employee retention and reducing premium freight costs for expediting shipments to customers. While management believes these improvements have been successful and were the priority of the turnaround plan, operational efficiency improvements at the plants did not result in the level of financial improvements anticipated for 2019. Higher material usage and labor variances have impacted earnings and caused us to not meet forecasts established in the first quarter of 2019 when the Company entered into the First Amendment. Management remains focused on the operational turnaround and improving the financial performance of the Company in 2020. Management has, or is in the process of taking, the following actions to improve financial performance at its operating facilities:
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Reorganized the Company’s leadership through the hiring of a new Chief Executive Officer, Executive Vice President of Operations, and Executive Vice President of Human Resources
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Improved operational management team through hiring of new plant managers at several of our plants to provide stronger leadership
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Developed specific action plans focused on reducing material usage and improving labor productivity
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Implemented business and financial management systems to monitor performance by plant and drive improvement through timely identification of operational challenges
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Engaged Huron Consulting Services to evaluate the Company’s turnaround financial projections, review with management various strategic alternatives that could result in a financing arrangement supported by projected future performance and serve as the Company’s financial adviser to work through modification or refinancing of the existing A/R Credit Agreement
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Engaged a third party firm to appraise the Company’s assets in order to assess the financing capacity available from those assets
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Implemented IATF certification process, which is a quality management system that provides for continual improvement, defect prevention and reduction of variation and waste in manufacturing processes.
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Implemented inventory management systems to reduce stock outage events which cause downtime and labor inefficiency
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Implemented customer price increases where margin on product was not meeting profitability targets, and evaluated relationships with major customers to assess ongoing profitability of those relationships
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Reduced debt outstanding on the revolving line of credit by negotiating improved payment terms with significant customers
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Established revised commercial terms with Volvo to allow for continued supply of product and rescinded the supply termination notification communicated to Volvo in November 2019
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Implemented cost saving measures and actions to align controllable spending and labor workforce to reduced sales volumes in the current truck market
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Implementation of technical training programs specific to the Company’s products and processes
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Improved free cash flow through reduction of working capital
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Utilization of Kaizen techniques, process mapping and multi-functional problem solving teams to improve operational performance and reduce waste
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Revenue Recognition - The Company historically has recognized revenue from two streams, product revenue and tooling revenue. Product revenue is earned from the manufacture and sale of sheet molding compound and thermoset and thermoplastic products. Revenue from product sales is generally recognized as products are shipped, as the Company transfers control to the customer and is entitled to payment upon shipment. In certain circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes control at our production facility.
Tooling revenue is earned from manufacturing multiple tools, molds and assembly equipment as part of a tooling program for a customer. Given that the Company is providing a significant service of producing highly interdependent component parts of the tooling program, each tooling program consists of a single performance obligation to provide the customer the capability to produce a single product. Based on the arrangement with the customer, the Company recognizes revenue either at a point in time or over time. When the Company does not have an enforceable right to payment, the Company recognizes tooling revenue at a point in time. In such cases, the Company recognizes revenue upon customer acceptance, which is when the customer has legal title to the tools. The Company historically recognized all tooling revenue at a point in time, upon customer acceptance, before the adoption of ASU 2014-09.
Certain tooling programs include an enforceable right to payment. In those cases, the Company recognizes revenue over time based on the extent of progress towards completion of its performance obligation. The Company uses a cost-to-cost measure of progress for such contracts because it best depicts the transfer of value to the customer and also correlates with the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
Under the cost-to-cost measure of progress, progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
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 two banks in 2 separate jurisdictions. The Company had $1,856,000 cash on hand at December 31, 2019 and had $1,891,000 on hand at December 31, 2018.
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 a $50,000 allowance for doubtful accounts is needed at December 31, 2019 and $25,000 allowance was needed at December 31, 2018. 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 $476,000 at December 31, 2019 and $2,344,000 at December 31, 2018. 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 net realizable value. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage. The Company has recorded an allowance for slow moving and obsolete inventory of $898,000 at December 31, 2019 and $957,000 at December 31, 2018.
Contract Assets/Liabilities - Contract assets and liabilities represent the net cumulative customer billings, vendor payments and revenue recognized for tooling programs. For tooling programs where net revenue recognized and vendor payments exceed customer billings, the Company recognizes a contract asset. For tooling programs where net customer billings exceed revenue recognized and vendor payments, the Company recognizes a contract liability. Customer payment terms vary by contract and can range from progress payments based on work performed or one single payment once the contract is completed. Contract assets are generally classified as current. During the years ended December 31, 2019 and December 31, 2018, the Company recognized no impairments on contract assets. Contract liabilities are also generally classified as current. The Company recognized revenue related to contract liabilities. of $1,240,000 at December 31, 2019 and $449,000 at December 31, 2018.
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:
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Land improvements
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20 years
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Buildings and improvements
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20 - 40 years
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Machinery and equipment
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3 - 15 years
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Tools, dies and patterns
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3 - 5 years
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Depreciation expense was $8,187,000, $7,361,000 and $6,190,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
Long-Lived Assets - Long-lived assets consist primarily of property, plant and equipment and finite-lived intangibles. The Company acquired substantially all of the assets of Horizon Plastics on January 16, 2018, which resulted in approximately $16,770,000 of finite-lived intangibles and $12,994,000 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, 2019, 2018 and 2017.
Goodwill - The purchase consideration of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates. Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and requires these assets be reviewed for impairment at each reporting unit. As a result of the Horizon Plastics acquisition on January 16, 2018 and the status of its integration, the Company established two reporting units, Core Traditional and Horizon Plastics.
The annual impairment tests of goodwill may be completed through qualitative assessments, however the Company may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit in any period. The Company may resume the qualitative assessment for any reporting unit in any subsequent period.
Under a qualitative and quantitative approach, the impairment test for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. As part of the qualitative assessment, the Company considers relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include changes in economic conditions, industry and market conditions, cost factors, overall financial performance, reporting unit 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 step one of the impairment test. If the Company elects to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, the Company proceeds to a quantitative approach.
Due to the Company's financial performance and continued depressed stock price, the Company performed a quantitative analysis for both of its reporting units at September 30, 2019. During 2019, the Company incurred a loss of margin in its Horizon Plastics reporting unit caused by selling price decreases that the Company has not been able to fully offset with material cost reductions. As a result of the quantitative analysis, the Company concluded that the carrying value of Horizon Plastics was greater than the fair value, which resulted in a goodwill impairment charge of $4,100,000 at September 30, 2019 representing 19% of the goodwill
related to the Horizon Plastics reporting unit. The company performed a qualitative assessment at December 31, 2019, indicating no additional goodwill impairment related to the Horizon Plastics reporting unit.
The Company’s annual impairment assessment at December 31, 2018 consisted of a quantitative analysis for both reporting units. It concluded that the carrying value of Core Traditional was greater than the fair value, which resulted in a goodwill impairment charge of $2,403,000, representing all the goodwill related to the Core Traditional reporting unit. The analysis of the Company’s other reporting unit, Horizon Plastics, indicated no goodwill impairment charge, based on historical performance and financial projections at that time, as the excess of the estimated fair value over the carrying value of its invested capital was approximately 23% of the book value of its net assets.
There was no impairment of the Company's goodwill for the year ended December 2017.
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 12 - Income Taxes.
Self-Insurance - The Company is self-insured with respect to Columbus and Batavia, Ohio, Gaffney, South Carolina, Winona, Minnesota and Brownsville, Texas for medical, dental and vision claims and Columbus and Batavia, Ohio for workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company is also self-insured for dental and vision with respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at December 31, 2019 and December 31, 2018 of $1,203,000 and $960,000, 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 13 - Post Retirement Benefits. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $9,160,000 at December 31, 2019 and $8,076,000 at December 31, 2018.
Fair Value of Financial Instruments - The Company's financial instruments consist of long-term debt, revolving loans, 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 15 - Fair Value of Financial Instruments.
Concentration Risks - The Company has concentration risk related to significant amounts of sales and accounts receivable with certain customers. The Company had four major customers during 2019, Navistar, Volvo, PACCAR, and UFP. 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. Sales to four major customers comprised 62%, 65% and 65% of total sales in 2019, 2018 and 2017, respectively (see Note 4 - Major Customers). Concentrations of accounts receivable balances with four customers accounted for 49% and 64% of accounts receivable at December 31, 2019 and 2018, 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 all customers' manufacturing and service locations in Mexico and Canada totaled 34%, 32% and 36% of total sales for 2019, 2018 and 2017, respectively.
As of December 31, 2019, the Company employed a total of 1,821 employees, which consisted of 764 employees in its United States operations, 795 employees in its Mexican operations and 262 employees in its Canadian operation. Of these 1,821 employees, 341 are covered by a collective bargaining agreement with the International Association of Machinists and Aerospace Workers (“IAM”), which extends to August 7, 2022, and 635 are covered by a collective bargaining agreement with Sindicato de Jorneleros y Obreros, which extends to December 31, 2019. Additionally, 216 employees at the Company's Cobourg, Canada facility are covered by a collective bargaining agreement with United Food & Commercial Workers Canada ("UFCW"), which extends to November 1, 2021; and 35 employees at the Company's Escobedo, Mexico facility are covered by a collective bargaining agreement with Sindicato de trabajadores de la industria metalica y del comercio del estado de Nuevo Leon Presidente Benito Juarez Garcia C.T.M., which extends to February 1, 2020 and an extension is currently being negotiated.
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 - Net Income (Loss) per Common Share.
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 $1,171,000, $1,032,000 and $848,000 in 2019, 2018 and 2017.
Foreign Currency Adjustments - The functional currency for the Mexican and Canadian 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 $229,000, $88,000 and $30,000 in 2019, 2018 and 2017, respectively.
Recent Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period.
In accordance with ASU 2016-02, the Company elected not to recognize lease assets and lease liabilities for leases with a term of twelve months or less. The ASU requires a modified retrospective transition method, or a transition method option further described within ASU 2018-11, with the option to elect a package of practical expedients that permits the Company to: (1) not reassess whether expired or existing contracts contain leases, (2) not reassess lease classification for existing or expired leases and (3) not consider whether previously capitalized initial direct costs would be appropriate under the new standard. The Company elected to apply the package of practical expedients.
The Company adopted ASU No. 2016-02 as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption without restating previously reported periods. In addition, the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification.
In addition, the Company elected the practical expedient to determine the lease term for existing leases. In the application of practical expedient, the Company evaluated the buildings leased and the current financial performance of the plant associated, which resulted in the determination that most renewal options would be reasonably certain in determining the expected lease term.
Adoption of the new standard resulted in the recording of additional net right of use assets and lease liabilities of $4,490,000 and $4,428,000, respectively, as of January 1, 2019. The present value of lease liabilities has been measured using the Company’s revolving loan borrowing rates as of December 31, 2018 (one day prior to initial application). Additionally, ROU assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial prepaid/accrued rent and any ASC Topic 420 liabilities. The standard did not materially impact the Company's consolidated statement of income (loss) or statement of cash flows.
Current expected credit loss (CECL)
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which is effective with the adoption of ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326),” which is also effective with the adoption of ASU 2016-13. In October 2019, the FASB voted to delay the implementation date for certain companies, including those that qualify as a smaller reporting company under
SEC rules, until January 1, 2023, with revised ASU’s expected to be issued in November 2019. We will adopt this ASU on its effective date of January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.
3. Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 Company's restricted shares are entitled to receive dividends and voting rights applicable to the Company's common stock, irrespective of any vesting requirement. Accordingly, the restricted shares are considered a participating security and the Company is required to apply the two-class method to consider the impact of the restricted shares on the calculation of basic and diluted earnings per share. The Company is currently in a net loss position and is therefore not required to present the two-class method; however, in the event the Company is in a net income position, the two-class method must be applied by allocating all earnings during the period to common shares and restricted shares.
The computation of basic and diluted net income (loss) per common share is as follows:
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December 31,
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2019
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2018
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2017
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Net income (loss)
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$
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(15,223,000
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)
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$
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(4,782,000
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)
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$
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5,459,000
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Weighted average common shares outstanding — basic
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7,830,000
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7,750,000
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7,690,000
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Effect of dilutive securities
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—
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—
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57,000
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Weighted average common and potentially issuable common shares outstanding — diluted
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7,830,000
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7,750,000
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7,747,000
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Basic net income (loss) per common share
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$
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(1.94
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)
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$
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(0.62
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)
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$
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0.71
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Diluted net income (loss) per common share
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$
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(1.94
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)
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$
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(0.62
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)
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$
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0.70
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4. Major Customers
The Company had four major customers during 2019, Navistar, Volvo, PACCAR, and UFP. Major customers are defined as customers whose current year sales individually consist of more than ten percent of total sales during any annual or interim reporting period in the current year. The loss of a significant portion of sales to Navistar, Volvo, PACCAR, or UFP 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:
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2019
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2018
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2017
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Navistar product sales
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$
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54,798,000
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$
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52,347,000
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$
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39,609,000
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Navistar tooling sales
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2,084,000
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2,806,000
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159,000
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Total Navistar sales
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56,882,000
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55,153,000
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39,768,000
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Volvo product sales
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48,487,000
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46,063,000
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27,627,000
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Volvo tooling sales
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262,000
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97,000
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|
|
8,089,000
|
|
Total Volvo sales
|
48,749,000
|
|
|
46,160,000
|
|
|
35,716,000
|
|
|
|
|
|
|
|
PACCAR product sales
|
44,543,000
|
|
|
38,027,000
|
|
|
26,481,000
|
|
PACCAR tooling sales
|
1,525,000
|
|
|
6,425,000
|
|
|
2,932,000
|
|
Total PACCAR sales
|
46,068,000
|
|
|
44,452,000
|
|
|
29,413,000
|
|
|
|
|
|
|
|
|
UFP product sales
|
25,395,000
|
|
|
27,906,000
|
|
|
—
|
|
UFP tooling sales
|
—
|
|
|
240,000
|
|
|
—
|
|
Total UFP sales
|
25,395,000
|
|
|
28,146,000
|
|
|
—
|
|
|
|
|
|
|
|
Other product sales
|
95,764,000
|
|
|
91,874,000
|
|
|
54,906,000
|
|
Other tooling sales
|
11,432,000
|
|
|
3,700,000
|
|
|
1,870,000
|
|
Total other sales
|
107,196,000
|
|
|
95,574,000
|
|
|
56,776,000
|
|
|
|
|
|
|
|
Total product sales
|
268,987,000
|
|
|
256,217,000
|
|
|
148,623,000
|
|
Total tooling sales
|
15,303,000
|
|
|
13,268,000
|
|
|
13,050,000
|
|
Total sales
|
$
|
284,290,000
|
|
|
$
|
269,485,000
|
|
|
$
|
161,673,000
|
|
5. Foreign Operations
Primarily 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
178,953,000
|
|
|
$
|
181,207,000
|
|
|
$
|
103,513,000
|
|
Mexico
|
79,761,000
|
|
|
74,029,000
|
|
|
52,496,000
|
|
Canada
|
16,988,000
|
|
|
12,494,000
|
|
|
5,664,000
|
|
Other
|
8,588,000
|
|
|
1,755,000
|
|
|
—
|
|
Total
|
$
|
284,290,000
|
|
|
$
|
269,485,000
|
|
|
$
|
161,673,000
|
|
The following table provides information related to the location of property, plant and equipment, net, as of December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
United States
|
$
|
39,132,000
|
|
|
$
|
37,778,000
|
|
Mexico
|
31,865,000
|
|
|
34,155,000
|
|
Canada
|
8,209,000
|
|
|
8,724,000
|
|
Total
|
$
|
79,206,000
|
|
|
$
|
80,657,000
|
|
6. Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Land and land improvements
|
$
|
6,009,000
|
|
|
$
|
6,009,000
|
|
Buildings
|
43,375,000
|
|
|
43,042,000
|
|
Machinery and equipment
|
118,366,000
|
|
|
108,661,000
|
|
Tools, dies, and patterns
|
1,516,000
|
|
|
1,419,000
|
|
Additions in progress
|
1,615,000
|
|
|
5,014,000
|
|
Total
|
170,881,000
|
|
|
164,145,000
|
|
Less accumulated depreciation
|
(91,675,000
|
)
|
|
(83,488,000
|
)
|
Property, plant and equipment, net
|
$
|
79,206,000
|
|
|
$
|
80,657,000
|
|
Additions in progress at December 31, 2019 and 2018 relate to building improvements and equipment purchases that were not yet completed and placed in service at year end. At December 31, 2019, commitments for capital expenditures in progress were $336,000 and included $158,000 recorded on the balance sheet in accounts payable. At December 31, 2018, commitments for capital expenditures in progress were $3,461,000, and included $871,000 recorded on the balance sheet in accounts payable.
7. Leases
The Company has operating leases with fixed payment terms primarily associated with buildings and warehouses. The Company's leases have remaining lease terms of less than two years to five years, some of which include options to extend the lease for six years. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities on the Consolidated Balance Sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.
The Company used the applicable incremental borrowing rate at implementation date to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads commensurate with the Company’s secured borrowing rate. At each reporting period when there is a new lease initiated, the Company will utilize its incremental borrowing rate to perform lease classification tests on lease components and to measure ROU assets and lease liabilities.
The components of lease expense were as follows:
|
|
|
|
|
|
December 31, 2019
|
Operating lease cost
|
$
|
1,430,000
|
|
Total net lease cost
|
$
|
1,430,000
|
|
Other supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
December 31, 2019
|
Operating lease:
|
|
Current operating lease right of use assets
|
$
|
—
|
|
Noncurrent operating lease right of use assets
|
4,484,000
|
|
Total operating lease right of use assets
|
$
|
4,484,000
|
|
|
|
|
|
|
|
December 31, 2019
|
Current operating lease liabilities (A)
|
$
|
1,304,000
|
|
Noncurrent operating lease liabilities
|
3,119,000
|
|
Total operating lease liabilities
|
$
|
4,423,000
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
Operating leases
|
4.0
|
|
|
|
|
Weighted average discount rate:
|
|
Operating lease
|
4.9
|
%
|
(A) Current operating lease liability included in "Other Accrued Liabilities" on the Consolidated Balance Sheet.
Other information related to leases were as follows:
|
|
|
|
|
|
December 31, 2019
|
Cash Paid for amounts included in the measurement of lease liabilities
|
|
Operating cash flow from operating leases (B)
|
$
|
1,455,000
|
|
(B)Cash flow from operating lease included in "Prepaid and other assets" on the Consolidated Statements of Cash Flows.
As of December 31, 2019, maturities of lease liabilities were as follows:
|
|
|
|
|
|
Operating Leases
|
2020
|
$
|
1,433,000
|
|
2021
|
1,174,000
|
|
2022
|
1,102,000
|
|
2023
|
1,000,000
|
|
2024
|
530,000
|
|
Total lease payments
|
5,239,000
|
|
Less:imputed interest
|
(816,000
|
)
|
Total lease obligations
|
4,423,000
|
|
Less:current obligations
|
(1,304,000
|
)
|
Long-term lease obligations
|
$
|
3,119,000
|
|
As of December 31, 2018, maturities of lease liabilities were as follows:
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
1,291,000
|
|
2020
|
1,099,000
|
|
2021
|
838,000
|
|
2022
|
766,000
|
|
2023
|
661,000
|
|
2024 and Thereafter
|
331,000
|
|
Total minimum lease payments
|
$
|
4,986,000
|
|
8. Horizon Plastics Acquisition
On January 16, 2018, 1137925 B.C Ltd., subsequently renamed Horizon Plastics International Inc., a wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the "Agreement") with Horizon Plastics International Inc., 1541689 Ontario Inc., 2551024 Ontario Inc. and Horizon Plastics de Mexico, S.A. de C.V. (collectively "Horizon Plastics"). Pursuant to the terms of the Agreement the Company acquired substantially all of the assets and assumed certain specified liabilities of Horizon Plastics for a cash purchase of $62,457,000. The purchase price was subject to working capital adjustments resulting in an increase in the purchase price of $548,000.
The acquisition was funded through a combination of cash on hand and borrowings under the Amended and Restated Credit Agreement ("A/R Credit Agreement"), further described in Note 10 - Debt, entered into with KeyBank National Association as Administrative Agent and various other financial institutions on January 16, 2018.
The purpose of the acquisition was to increase the Company's structural composite process capabilities to include structural foam and structural web molding, expand its geographical footprint, and diversify the Company's customer base.
Consideration was allocated to assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows:
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
7,677,000
|
|
Inventory
|
|
6,523,000
|
|
Other Current Assets
|
|
832,000
|
|
Property and Equipment
|
|
12,994,000
|
|
Intangibles
|
|
16,770,000
|
|
Goodwill
|
|
21,476,000
|
|
Accounts Payable
|
|
(3,181,000
|
)
|
Other Current Liabilities
|
|
(86,000
|
)
|
|
|
$
|
63,005,000
|
|
The purchase price included consideration for strategic benefits, including an assembled workforce, operational infrastructure and synergistic revenue opportunities, which resulted in the recognition of goodwill. The goodwill is deductible for income tax purposes.
The company incurred $1,289,000 and $596,000 of expense in 2018 and 2017, respectively, associated with the acquisition, which is recorded in selling, general and administrative expense.
The amount allocated to intangible assets has been attributed to the following categories and will be amortized over the useful lives of each individual asset identified on a straight-line basis as follows:
|
|
|
|
|
|
|
Acquired Intangible Assets
|
|
Estimated Fair Value
|
Estimated Useful Life (Years)
|
Non-competition Agreement
|
|
$
|
1,810,000
|
|
5
|
Trademarks
|
|
1,610,000
|
|
10
|
Developed Technology
|
|
4,420,000
|
|
7
|
Customer Relationships
|
|
8,930,000
|
|
12
|
Total
|
|
$
|
16,770,000
|
|
|
Pro Forma Information
The unaudited pro forma information for the combined results of the Company has been prepared as if the 2018 acquisitions had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2017 and the unaudited pro forma information does not purport to be indicative of future financial operating results.
|
|
|
|
|
|
|
|
|
|
Pro forma for the year ended December 31,
|
|
2018
|
|
2017
|
Net revenue
|
$
|
272,153,000
|
|
|
$
|
222,015,000
|
|
Net income (loss)
|
(3,788,000
|
)
|
|
8,121,000
|
|
Net income (loss) per common share:
|
|
|
|
Basic
|
(0.49
|
)
|
|
1.06
|
|
Diluted
|
(0.49
|
)
|
|
1.05
|
|
The unaudited pro forma net income includes the following adjustments that would have been recorded had the 2018 acquisition taken place on January 1, 2017.
|
|
|
|
|
|
|
|
|
|
Pro forma for the year ended December 31,
|
|
2018
|
|
2017
|
Depreciation expense
|
$
|
55,000
|
|
|
$
|
50,000
|
|
Amortization expense
|
78,000
|
|
|
1,876,000
|
|
Interest (income) expense
|
(208,000
|
)
|
|
1,705,000
|
|
Non-recurring transaction costs
|
(1,289,000
|
)
|
|
(596,000
|
)
|
Income tax expense (benefit)
|
253,000
|
|
|
(880,000
|
)
|
9. Goodwill and Intangibles
Goodwill activity for the year ended December 31, 2019 and December 31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at beginning of year
|
|
$
|
21,476,000
|
|
|
$
|
2,403,000
|
|
Additions
|
|
—
|
|
|
21,476,000
|
|
Impairment
|
|
(4,100,000
|
)
|
|
(2,403,000
|
)
|
Balance at end of year
|
|
$
|
17,376,000
|
|
|
$
|
21,476,000
|
|
Due to the Company's financial performance and continued depressed stock price, the Company performed a quantitative analysis for both of its reporting units at September 30, 2019. During 2019, the Company incurred a decrease in margin in its Horizon Plastics reporting unit caused by selling price decreases that the Company has not yet been able to fully offset with material cost reductions. As a result of the quantitative analysis, the Company concluded that the carrying value of Horizon Plastics was greater than the fair value, which resulted in a goodwill impairment charge of $4,100,000 at September 30, 2019 representing 19% of the
goodwill related to the Horizon Plastics reporting unit. The company performed a qualitative assessment at December 31, 2019, indicating no additional goodwill impairment related to the Horizon Plastics reporting unit.
The Company’s annual impairment assessment at December 31, 2018 consisted of a quantitative analysis for both the Core Traditional and Horizon Plastics reporting units. It concluded that the carrying value of Core Traditional was greater than the fair value, which resulted in a goodwill impairment charge of $2,403,000. The analysis of the Company’s other reporting unit, Horizon Plastics, indicated no goodwill impairment charge as the excess of the estimated fair value over the carrying value of its invested capital was approximately 23% of the book value of its net assets.
Intangible assets at December 31, 2019 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(48,000
|
)
|
|
$
|
202,000
|
|
Trademarks
|
|
10 Years
|
|
1,610,000
|
|
|
(315,000
|
)
|
|
1,295,000
|
|
Non-competition Agreement
|
|
5 Years
|
|
1,810,000
|
|
|
(709,000
|
)
|
|
1,101,000
|
|
Developed Technology
|
|
7 Years
|
|
4,420,000
|
|
|
(1,237,000
|
)
|
|
3,183,000
|
|
Customer Relationships
|
|
10-12 Years
|
|
9,330,000
|
|
|
(1,647,000
|
)
|
|
7,683,000
|
|
Total
|
|
|
|
$
|
17,420,000
|
|
|
$
|
(3,956,000
|
)
|
|
$
|
13,464,000
|
|
Intangible assets at December 31, 2018 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangible Assets
|
|
Amortization Period
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade Name
|
|
25 Years
|
|
$
|
250,000
|
|
|
$
|
(38,000
|
)
|
|
$
|
212,000
|
|
Trademarks
|
|
10 Years
|
|
1,610,000
|
|
|
(154,000
|
)
|
|
1,456,000
|
|
Non-competition Agreement
|
|
5 Years
|
|
1,810,000
|
|
|
(347,000
|
)
|
|
1,463,000
|
|
Developed Technology
|
|
7 Years
|
|
4,420,000
|
|
|
(605,000
|
)
|
|
3,815,000
|
|
Customer Relationships
|
|
10-12 Years
|
|
9,330,000
|
|
|
(863,000
|
)
|
|
8,467,000
|
|
Total
|
|
|
|
$
|
17,420,000
|
|
|
$
|
(2,007,000
|
)
|
|
$
|
15,413,000
|
|
The aggregate intangible asset amortization expense was $1,949,000 for the year ended December 31, 2019 and amortization expense is expected to be same each year through the year ended December 31, 2022 and $1,587,000 for the year ended December 31, 2023. The Company incurred $1,869,000 and $50,000 amortization expense for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2019, future intangible amortization were as follows:
|
|
|
|
|
|
Amortization Expense
|
2020
|
$
|
1,949,000
|
|
2021
|
1,949,000
|
|
2022
|
1,949,000
|
|
2023
|
1,602,000
|
|
2024
|
1,587,000
|
|
2025 and thereafter
|
4,428,000
|
|
Total intangibles as of December 31, 2019
|
13,464,000
|
|
10. Debt
Long-term debt consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Term loans payable, interest at a variable rate (6.30% and 4.34% at December 31, 2019 and 2018, respectively) with monthly payments of interest and quarterly payments of principal through January 2023.
|
$
|
38,250,000
|
|
|
$
|
41,625,000
|
|
Revolving loans, interest at a variable rate (6.04% and 4.39% at December 31, 2019 and 2018, respectively)
|
12,008,000
|
|
|
17,375,000
|
|
Total
|
50,258,000
|
|
|
59,000,000
|
|
Less deferred loan costs
|
(807,000
|
)
|
|
(611,000
|
)
|
Less current portion
|
(49,451,000
|
)
|
|
(3,230,000
|
)
|
Long-term debt
|
$
|
—
|
|
|
$
|
55,159,000
|
|
Credit Agreement
On January 16, 2018, the Company entered into an Amended and Restated Credit Agreement ("A/R Credit Agreement") with KeyBank National Association as administrative agent (the "Administrative Agent") and 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 “U.S. Revolving Loans”) from the Lenders and term loans in the aggregate principal amount of up to $32,000,000 from the Lenders, (ii) the Company's wholly-owned subsidiary, Horizon Plastics International, Inc., (the "Subsidiary") may borrow revolving loans in an aggregate principal amount of up to $10,000,000 from the Lenders (which revolving loans shall reduce the availability of the U.S. Revolving Loans to the Company on a dollar-for-dollar basis) and term loans in an aggregate principal amount of up to $13,000,000 from the Lenders, (iii) the Company obtained a Letter of Credit Commitment of $250,000, of which $160,000 has been issued and (iv) the Company repaid the outstanding term loan balance of $6,750,000. The A/R Credit Agreement is secured by a guarantee of each U.S. and Canadian subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. and Canadian subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.
Concurrent with the closing of the A/R Credit Agreement the Company borrowed the $32,000,000 term loan and $2,000,000 from the U.S. Revolving loan and the Subsidiary borrowed the $13,000,000 term loan and $2,500,000 from revolving loans to provide $49,500,000 of funding for the acquisition of Horizon Plastics.
On March 14, 2019, the Company entered into the first amendment (“First Amendment”) to the A/R Credit Agreement with the Lenders. Pursuant to the terms of the First Amendment, the Company and Lenders agreed to modify certain terms of the A/R Credit Agreement. These modifications included (1) implementation of an availability block on the U.S. Revolving Loans reducing availability from $40,000,000 to $32,500,000, (2) modification to the definition of EBITDA to add back certain one-time expenses, (3) waiver of non-compliance with the leverage covenant as of December 31, 2018 and modification of the leverage ratio definition and covenant to eliminate testing of the leverage ratio until December 31, 2019, (4) waiver of non-compliance with the fixed charge covenant as of December 31, 2018 and modification of the fixed charge coverage ratio definition and covenant requirement, (5) implementation of a capital expenditure spend limit of $7,500,000 during the first six months of 2019 and $12,500,000 for the full year 2019, (6) an increase of the applicable interest margin spread for existing term and revolving loans, and (7) an increase in the commitment fees on any unused U.S. Revolving Loans.
On November 22, 2019, the Company entered into a forbearance agreement (the "Forbearance Agreement") with the Lenders. Pursuant to the Forbearance Agreement, the Borrowers and the Lenders acknowledged and confirmed that an event of default occurred under the A/R Credit Agreement resulting from the Borrowers failure to maintain the required Fixed Charge Coverage Ratio (as defined in the A/R Credit Agreement”) for the fiscal quarter ended September 30, 2019. The Forbearance Agreement provides that the Administrative Agent and Lenders shall forbear from the exercise of rights and remedies pursuant to the Loan Documents described in the A/R Credit Agreement through March 13, 2020, as long as the Company satisfies the conditions set forth in the Forbearance Agreement, including, (i) the Borrowers shall remain current on all loan payments during the forbearance period, (ii) on or before December 6, 2019, the Administrative Agent and Lenders shall each receive a copy of a report of Huron Consulting Group containing findings and observations in respect of the businesses and operations of the Company and the Borrowers shall deliver a strategic alternative assessment in respect of the Borrowers’ operations and financing, (iii) on or before December 15, 2019, the Administrative Agent and Lenders shall each receive a copy of appraisals of machinery and equipment and inventory appraisals, and the Borrowers shall have determined and proposed a new capital structure to the Administrative
Agent and Lenders, (iv) on or before February 14, 2020, the Borrowers shall have obtained a definitive, written commitment from involved parties and/or lenders providing the basis for implementation of a new capital structure, and (v) on or before March 13, 2020, the Borrowers shall have closed on a new capital structure, acceptable to the Administrative Agents and Lenders. The Forbearance Agreement also implemented a new availability block with respect to the U.S. Revolving Loans portion of the A/R Credit Agreement, reducing availability from $32,500,000 to $28,000,000 and increasing the applicable margin for existing term and revolving loans, as well as increasing the commitment fees on any unused U.S. Revolving Loans.
On March 13, 2020, the Company entered into the first Amendment to the Forbearance Agreement (the “Amended Forbearance Agreement”) with the Lenders. Pursuant to the terms of the Amended Forbearance Agreement, the Company and Lenders agreed to modify certain terms of the Forbearance Agreement and extend the Forbearance Agreement through May 29, 2020. The modifications include (1) a reduction in the U.S. Revolving Loan to $25,000,000 with an availability block of $5,000,000 which can be borrowed with the approval of the lenders, (2) a change of interest rate to LIBOR rate plus 650 basis points, (3) forebear compliance with the leverage covenant and fixed charge covenant through May 29,2020, and (4) implementation of a capital expenditure spend limit of $3,500,000 from the effective date of the Amended Forbearance Agreement through May 29, 2020.
The Amended Forbearance Agreement provides that the Administrative Agent and Lenders shall forbear from the exercise of rights and remedies pursuant to the Loan Documents described in the Credit Agreement through May 29, 2020, as long as the Company satisfies the conditions set forth in the Amended Forbearance Agreement, including, (i) on or before March 31, 2020, the borrowers shall have obtained an executed term sheet from involved parties and/or lenders providing the basis for implementation of a new capital structure and defined due diligence parameters, (ii) on or before May 15, 2020 the Borrowers shall have obtained an executed definitive, written commitment from the New Lenders to enter into a definitive agreement to effect the refinancing, and (iii) on or before May 29, 2020, the borrowers shall have closed on a new capital structure.
As a result of the Amended Forbearance Agreement not extending beyond a year, the Company’s remaining long-term debt under the A/R Credit Agreement, consisting of $49,451,000 in borrowings under the revolving credit commitment and the loan commitments, was classified as a current liability in the Company’s consolidated balance sheet as of December 31, 2019. As a result, the Company’s current liabilities exceeded its current assets by $22,609,000 as of December 31, 2019. If the Lenders were to call the loans or demand repayment of all existing borrowings, this could result in the Company being unable to meet its working capital obligations.
Term Loans
The $45,000,000 Term Loans were used to finance the acquisition of Horizon Plastics. This commitment has fixed quarterly principal payments payable over a five-year period. Borrowings made pursuant to these loans bear interest, payable monthly at 30 day LIBOR plus a basis point margin spread from 225 to 450 based on the Company's leverage ratio and was set at 450 basis points as of December 31, 2019.
Revolving Loans
The Company has available $28,000,000 of variable rate revolving loans of which $12,008,000 is outstanding as of December 31, 2019. These revolving loans are scheduled to mature in January 2023, and are classified as current on the balance sheet. Borrowings made on the revolving loans bear interest, payable monthly at 30 day LIBOR plus a basis point margin spread from 225 to 450 based on the Company's leverage ratio and was set at 450 basis points as of December 31, 2019.
Annual maturities of long-term debt are as follows:
Interest Rate Swaps
The Company entered into two interest rate swap agreements that became effective January 18, 2018 and continue through January 2023, one of which was designated as a cash flow hedge for $25,000,000 of the $32,000,000 term loan to the Company mentioned above and the other designated as a cash flow hedge for $10,000,000 of the $13,000,000 term loan to the Subsidiary mentioned above. Under these agreements, the Company pays a fixed rate of 2.49% to the counterparty and receives 30 day LIBOR for both cash flow hedges. The fair value of the interest rate swaps was a liability of $706,000 and $65,000 at December 31, 2019 and 2018, respectively. While the Company is exposed to credit loss on its interest rate swaps in the event of non-performance by the counter party to the swap, management believes that such non-performance is unlikely to occur given the financial resources of the counter party.
Bank Covenants
The Company is required to meet certain financial covenants included in the A/R Credit Agreement with respect to leverage ratios, fixed charge ratios and capital expenditures. As of December 31, 2019, the Company was in default with its fixed charge coverage and leverage ratio covenants associated with the loans made under the A/R Credit Agreement as described above. As a result of this default the Company and the Administrative Agent on behalf of the Lenders entered into a Forbearance Agreement to address the non-compliance and establish milestones for the Company related to restructuring of its existing debt. Effective March 13, 2020, the Company entered into an Amended Forbearance Agreement to modify existing and establish new milestones.
Management is pursuing the restructuring or refinancing of its existing obligations under the A/R Credit Agreement. The Company has engaged Huron Transactional Advisor's to facilitate a full marketing processes for refinancing the A/R Credit Agreement. Management and Huron are evaluating term sheets submitted by potential lending sources. The Company is considering financing options including an asset backed lending facility using the Company’s accounts receivable and inventories as security, term loans secured with the Company’s real estate and machinery and equipment, sale and leaseback of Company owned real estate and potential equity financing. Any new financing remains subject to asset appraisals, field exams, financial projection due diligence, real estate environmental reviews, and other customary legal documentation.
11. 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 744,697.
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).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
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
|
349,885
|
|
|
$
|
10.62
|
|
|
141,095
|
|
|
$
|
16.79
|
|
|
158,261
|
|
|
$
|
14.55
|
|
Granted
|
135,268
|
|
|
7.65
|
|
|
315,429
|
|
|
11.32
|
|
|
84,643
|
|
|
19.17
|
|
Vested
|
(117,828
|
)
|
|
13.81
|
|
|
(82,067
|
)
|
|
16.57
|
|
|
(95,717
|
)
|
|
15.25
|
|
Forfeited
|
(23,406
|
)
|
|
15.02
|
|
|
(24,572
|
)
|
|
16.91
|
|
|
(6,092
|
)
|
|
17.93
|
|
Unvested - end of year
|
343,919
|
|
|
$
|
9.37
|
|
|
349,885
|
|
|
$
|
10.62
|
|
|
141,095
|
|
|
$
|
16.79
|
|
At December 31, 2019 and 2018, there was $1,923,000 and $2,598,000, 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 1.8 years. Total compensation expense related to restricted stock grants for the years ended December 31, 2019, 2018 and 2017 was $1,379,000, $1,774,000 and $1,331,000, respectively, and is recorded as selling, general and administrative expense.
During 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, 2019, 2018 and 2017 were a deficiency of $110,000, a deficiency of $33,000 and a benefit of $126,000, respectively.
During 2019, 2018 and 2017, employees surrendered 16,047, 17,180 and 19,533 shares, respectfully, of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted stock.
Stock Appreciation Rights
As part of the Company's 2019 annual grant, Stock Appreciation Rights (SARs) were granted with a grant price of $10. These awards have a contractual term of five years and vest ratably over a period of three years or immediately vest if the recipient is over 65 years of age. These awards are valued using the Black-Scholes option pricing model.
A summary of the Company's stock appreciation rights activity for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Outstanding as of December 31, 2018
|
—
|
|
|
$
|
—
|
|
Granted
|
226,021
|
|
|
2.57
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited
|
(3,909
|
)
|
|
2.57
|
|
Outstanding at the period ended December 31, 2019
|
222,112
|
|
|
$
|
2.57
|
|
Exercisable at the period ended December 31, 2019
|
29,028
|
|
|
$
|
2.57
|
|
The average remaining contractual term for those SARs outstanding at December 31, 2019 is 4.3 years, with no aggregate intrinsic value. At December 31, 2019 and 2018, there was $386,000 and $0, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to SARs. That cost is expected to be recognized over the weighted-average period of 2.3 years.
Total compensation cost related to SARs for the twelve months ended December 31, 2019 and 2018 was $185,000 and $0, respectively, all of which was recorded to selling, general and administrative expense.
12. Income Taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal - US
|
$
|
—
|
|
|
$
|
11,000
|
|
|
$
|
1,993,000
|
|
Foreign
|
685,000
|
|
|
1,023,000
|
|
|
613,000
|
|
State and local
|
20,000
|
|
|
14,000
|
|
|
24,000
|
|
|
705,000
|
|
|
1,048,000
|
|
|
2,630,000
|
|
Deferred:
|
|
|
|
|
|
Federal
|
738,000
|
|
|
(1,355,000
|
)
|
|
(407,000
|
)
|
Foreign
|
(1,824,000
|
)
|
|
(289,000
|
)
|
|
52,000
|
|
State and local
|
26,000
|
|
|
(68,000
|
)
|
|
11,000
|
|
|
(1,060,000
|
)
|
|
(1,712,000
|
)
|
|
(344,000
|
)
|
Provision (benefit) for income taxes
|
$
|
(355,000
|
)
|
|
$
|
(664,000
|
)
|
|
$
|
2,286,000
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Provision at US federal statutory rate
|
$
|
(3,274,000
|
)
|
|
$
|
(1,145,000
|
)
|
|
$
|
2,634,000
|
|
Adjustments for US tax law changes
|
—
|
|
|
—
|
|
|
(185,000
|
)
|
Valuation allowance
|
3,267,000
|
|
|
—
|
|
|
—
|
|
Effect of foreign taxes
|
(209,000
|
)
|
|
213,000
|
|
|
(58,000
|
)
|
Adoption of ASC 606
|
—
|
|
|
236,000
|
|
|
—
|
|
State and local tax expense
|
(102,000
|
)
|
|
(54,000
|
)
|
|
35,000
|
|
Other
|
(37,000
|
)
|
|
86,000
|
|
|
(140,000
|
)
|
Provision (benefit) for income taxes
|
$
|
(355,000
|
)
|
|
$
|
(664,000
|
)
|
|
2,286,000
|
|
The Tax Cuts and Jobs Act (“the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, created new taxes on certain foreign sourced earnings, provided for acceleration of business asset expensing, and reduced the amount of executive pay that may qualify as a tax deduction, among other changes. FASB ASC 740 required the recognition of the effects of tax law changes in 2017.
During 2017, the Company recorded a net benefit charge related to the re-measurement of the deferred tax balance of $484,000. Additionally, the Company recorded a provisional charge related to the transition tax, net of estimated foreign tax credits, of $299,000.
The Company records 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 deficiencies for the years ended December 31, 2019, 2018 and 2017 were a deficiency of $110,000 and $33,000 and a benefit of $126,000, respectively.
The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the Company is more likely than not to realize deferred tax benefits through the generation of future taxable income. Management makes assumptions, judgments, and estimates to determine our current and deferred tax provision and also the deferred tax assets and liabilities. The Company evaluates provisions and deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence.
As of December 31, 2019 the Company had a deferred tax asset of $5,293,000 of which $3,267,000 is related to tax positions in the United States, $1,555,000 related to tax positions in Canada and $471,000 related to tax positions in Mexico. During 2019, the Company recorded a valuation allowance against all deferred tax assets in the United States, due to cumulative losses over the last three years and uncertainty related to the Company’s ability to realize net loss carryforwards and other net deferred tax assets in the future. The Company believes that the deferred tax assets associated with the Canadian and Mexican tax jurisdictions are more-likely-than-not to be realizable based on estimates of future taxable income and the Company's ability to carryback losses.
Deferred tax assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Current asset (liability):
|
|
|
|
Net operating loss carryforwards
|
$
|
4,928,000
|
|
|
$
|
456,000
|
|
Interest limitation carryforwards
|
686,000
|
|
|
394,000
|
|
Accrued liabilities
|
477,000
|
|
|
568,000
|
|
Accounts receivable
|
108,000
|
|
|
521,000
|
|
Inventory
|
587,000
|
|
|
525,000
|
|
Other, net
|
(190,000
|
)
|
|
(446,000
|
)
|
Total current asset
|
6,596,000
|
|
|
2,018,000
|
|
|
|
|
|
Non-current asset (liability):
|
|
|
|
Property, plant, and equipment
|
(5,580,000
|
)
|
|
(3,941,000
|
)
|
Post retirement benefits
|
2,090,000
|
|
|
1,848,000
|
|
Goodwill and finite-lived assets, net
|
1,973,000
|
|
|
994,000
|
|
Other, net
|
214,000
|
|
|
234,000
|
|
Total non-current liability
|
(1,303,000
|
)
|
|
(865,000
|
)
|
Valuation allowance for deferred tax assets
|
(3,267,000
|
)
|
|
$
|
—
|
|
Total deferred tax asset (liability), net
|
$
|
2,026,000
|
|
|
$
|
1,153,000
|
|
At December 31, 2019, the Company had estimated net operating loss carryforwards and interest limitation carryforwards in the U.S. federal jurisdiction of $17,994,000 and $3,120,000, respectively. Both carryforwards do not expire. At December 31, 2019, the Company had estimated net operating loss carryforwards in Canada of $5,772,000, of which $2,116,000 can be carried back to prior years. The remaining $3,656,000 expire in the year 2039.
At December 31, 2019 and 2018 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, Canada and various state and local jurisdictions. The Company is not subject to U.S. federal and state income tax examinations by tax authorities for the years before 2016, not subject to Mexican income tax examinations by Mexican authorities for the years before 2014 and not subject to Canadian income tax examinations by Canadian authorities for the years before 2018.
13. Post Retirement Benefits
The Company provides post retirement benefits to certain of its United States and Canadian employees, including contributions to a multi-employer defined benefit pension plan, health care and life insurance benefits, and contributions to several defined retirement 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, 2019 and 2018 is outlined in the table below. The most recent Pension Protection Act ("PPA") zone status available in 2019 and 2018 is for the plan’s year-end at December 31, 2018, and December 31, 2017, 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
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
|
IAM National Pension Fund / National Pension Plan (A)
|
|
51-6031295 - 002
|
|
Red as of 12/31/18
|
|
Green as of 12/31/17
|
|
Implemented
|
|
$971,000
|
|
$760,000
|
|
Yes
|
|
8/7/2022
|
|
|
|
|
|
|
Total Contributions:
|
|
$971,000
|
|
$760,000
|
|
|
|
|
(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, 2018. 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 $1.55 per hour from August 10, 2019 through August 6, 2022.
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 2019, 2018 and 2017, and will result in net periodic benefit cost reductions of approximately $496,000 in 2020 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, 2019 and 2018 and reconciliation with the amounts recognized in the consolidated balance sheets are provided below:
|
|
|
|
|
|
|
|
|
|
Post Retirement Benefits
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at January 1
|
$
|
8,076,000
|
|
|
$
|
9,050,000
|
|
Interest cost
|
285,000
|
|
|
277,000
|
|
Unrecognized loss (gain)
|
1,099,000
|
|
|
(910,000
|
)
|
Benefits paid, net
|
(300,000
|
)
|
|
(341,000
|
)
|
Benefit obligation at December 31
|
$
|
9,160,000
|
|
|
$
|
8,076,000
|
|
|
|
|
|
Plan Assets
|
—
|
|
|
—
|
|
|
|
|
|
Amounts recorded in accumulated other comprehensive income:
|
|
|
|
Prior service credit
|
$
|
(5,610,000
|
)
|
|
$
|
(6,106,000
|
)
|
Net loss
|
3,634,000
|
|
|
2,652,000
|
|
Total
|
$
|
(1,976,000
|
)
|
|
$
|
(3,454,000
|
)
|
|
|
|
|
Weighted-average assumptions as of December 31:
|
|
|
|
Discount rate used to determine benefit obligation and net
periodic benefit cost
|
2.9
|
%
|
|
4.0
|
%
|
The components of expense for all of the Company's post retirement benefit plans for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Pension expense:
|
|
|
|
|
|
Multi-employer plan
|
$
|
971,000
|
|
|
$
|
760,000
|
|
|
$
|
647,000
|
|
Defined contribution plans
|
1,258,000
|
|
|
1,059,000
|
|
|
752,000
|
|
Total pension expense
|
2,229,000
|
|
|
1,819,000
|
|
|
1,399,000
|
|
|
|
|
|
|
|
Health and life insurance:
|
|
|
|
|
|
Interest cost
|
285,000
|
|
|
277,000
|
|
|
298,000
|
|
Amortization of prior service costs
|
(496,000
|
)
|
|
(496,000
|
)
|
|
(496,000
|
)
|
Amortization of net loss
|
117,000
|
|
|
171,000
|
|
|
149,000
|
|
Net periodic benefit cost
|
(94,000
|
)
|
|
(48,000
|
)
|
|
(49,000
|
)
|
Total post retirement benefits expense
|
$
|
2,135,000
|
|
|
$
|
1,771,000
|
|
|
$
|
1,350,000
|
|
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, 2019, the Company recognized a net actuarial loss of $1,099,000 and for the year ended December 31, 2018 recognized a net actuarial gain of $910,000, 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, 2019 and 2018 were a net credit of $1,976,000 and $3,454,000, respectively. The amount in accumulated other comprehensive income expected to be recognized as components of net periodic post retirement cost during 2020 consists of a prior service credit of $496,000 and a net loss of $181,000. In addition, 2020 interest expense related to post retirement healthcare is expected to be $237,000, for a total post retirement healthcare net gain of approximately $78,000 in 2020. The Company expects benefits paid in 2020 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 6.0%. The rate is projected to decrease gradually to 5.0% by the year 2025 and remain at that level thereafter. The comparable assumptions for the prior year were 6.2% and 5.0%, 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
|
$
|
39,000
|
|
|
$
|
(33,000
|
)
|
Effect on post retirement benefit obligation
|
$
|
1,169,000
|
|
|
$
|
(997,000
|
)
|
The estimated future benefit payments of the health care plan for the next ten years are as follows:
|
|
|
|
|
Year
|
Postretirement Health Care Benefits Plan
|
2020
|
$
|
1,233,000
|
|
2021
|
470,000
|
|
2022
|
497,000
|
|
2023
|
519,000
|
|
2024
|
496,000
|
|
2025 - 2029
|
2,438,000
|
|
14. 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.
15. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
The three levels are defined as follows:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets and liabilities.
|
|
|
Level 2 -
|
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
|
|
|
Level 3 -
|
Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
|
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, interest rate swaps and foreign currency derivatives. Cash and cash equivalents, accounts receivable and accounts payable carrying values as of December 31, 2019 and December 31, 2018 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of long-term debt and the revolving line of credit approximate fair value as of December 31, 2019 and December 31, 2018 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had Level 2 fair value measurements at December 31, 2019 and December 31, 2018 relating to the Company’s interest rate swaps and foreign currency derivatives.
Derivative and hedging activities
Foreign currency derivatives
The Company conducted business in foreign countries and paid certain expenses in foreign currencies; therefore, the Company was exposed to foreign currency exchange risk between the U.S. Dollar and foreign currencies, which could impact the Company’s
operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. Dollars for a fixed amount of foreign currency, which will be used to fund future foreign currency cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period.
Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the foreign currency. As of December 31, 2019, the Company had no ineffective portion related to the cash flow hedges.
Interest Rate Swaps
The Company entered into interest rate swap contracts to fix the interest rate on an initial aggregate amount of $35,000,000 thereby reducing exposure to interest rate changes. The Company pays a fixed rate of 2.49% to the counterparty and receives 30 day LIBOR for both cash flow hedges. At inception, all interest rate swaps were formally documented as cash flow hedges and are measured at fair value each reporting period. See Note 10 - Debt, for additional information.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
452,000
|
|
|
|
Accrued liabilities other
|
|
$
|
—
|
|
Notional contract values
|
|
|
15,358,000
|
|
|
|
|
|
—
|
|
Interest rate swaps
|
Other non-current assets
|
|
—
|
|
|
|
Other non-current liabilities
|
|
706,000
|
|
Notional swap values
|
|
|
$
|
—
|
|
|
|
|
|
$
|
29,750,000
|
|
As of December 31, 2019, the Company had foreign exchange contracts related to the Mexican Peso and the Candian Dollar with exchange rates ranging from 19.53 to 20.58 and 1.32, respectively
The following tables detail amounts related to our derivatives designated as hedging instruments as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
750,000
|
|
Notional contract values
|
|
|
—
|
|
|
|
|
|
$
|
27,588,000
|
|
Interest rate swaps
|
Other non-current assets
|
|
—
|
|
|
|
Other non-current liabilities
|
|
$
|
65,000
|
|
Notional swap values
|
|
|
—
|
|
|
|
|
|
$
|
32,375,000
|
|
As of December 31, 2018, the Company had foreign exchange contracts related to the Mexican Peso and the Canadian Dollar with exchange rates ranging from 19.52 to 20.47 and 1.28 to 1.33, respectively.
The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in subtopic 815-20 Cash Flow Hedging Relationship
|
|
Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative
|
|
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income(A)
|
|
Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
|
2019
|
2018
|
2017
|
|
|
2019
|
2018
|
2017
|
Foreign exchange contracts
|
|
$1,499,000
|
$(385,000)
|
$517,000
|
|
Cost of goods sold
|
|
$272,000
|
$68,000
|
$445,000
|
|
|
Selling, general and administrative expense
|
|
$25,000
|
$—
|
$67,000
|
Interest rate swaps
|
|
$(708,000)
|
$(223,000)
|
$—
|
|
Interest Expense
|
|
$(67,000)
|
$(159,000)
|
$—
|
(A) The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and selling, general and administrative expense based on the percentage of Mexican Peso spend.
Non-recurring fair value measurements
See Note 8- Horizon Plastics Acquisition, for non-recurring fair value measurements for the year ended December 31, 2018.
16. 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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Derivative Activities
|
|
Post Retirement Benefit Plan Items(A)
|
|
Total
|
2018:
|
|
|
|
|
|
Balance at January 1, 2018
|
$
|
(197,000
|
)
|
|
$
|
2,267,000
|
|
|
$
|
2,070,000
|
|
Other comprehensive income before reclassifications
|
(608,000
|
)
|
|
910,000
|
|
|
302,000
|
|
Amounts reclassified from accumulated other comprehensive income
|
91,000
|
|
|
(325,000
|
)
|
|
(234,000
|
)
|
Income tax (expense) benefit
|
102,000
|
|
|
(123,000
|
)
|
|
(21,000
|
)
|
Balance at December 31, 2018
|
$
|
(612,000
|
)
|
|
$
|
2,729,000
|
|
|
$
|
2,117,000
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
Balance at January 1, 2019
|
$
|
(612,000
|
)
|
|
$
|
2,729,000
|
|
|
$
|
2,117,000
|
|
Other comprehensive income before reclassifications
|
791,000
|
|
|
(1,102,000
|
)
|
|
(311,000
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
(230,000
|
)
|
|
(379,000
|
)
|
|
(609,000
|
)
|
Income tax (expense) benefit
|
(140,000
|
)
|
|
313,000
|
|
|
173,000
|
|
Balance at December 31, 2019
|
$
|
(191,000
|
)
|
|
$
|
1,561,000
|
|
|
$
|
1,370,000
|
|
(A) The effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in total cost of sales on the Consolidated Statements of Income. These Accumulated Other Comprehensive Income components are included in the computation of net periodic benefit cost (see Note 13 - 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.
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Total Year
|
2019:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
71,451,000
|
|
|
$
|
75,440,000
|
|
|
$
|
67,511,000
|
|
|
$
|
54,585,000
|
|
|
$
|
268,987,000
|
|
Tooling sales
|
815,000
|
|
|
5,807,000
|
|
|
7,144,000
|
|
|
1,537,000
|
|
|
15,303,000
|
|
Net sales
|
72,266,000
|
|
|
81,247,000
|
|
|
74,655,000
|
|
|
56,122,000
|
|
|
284,290,000
|
|
Gross margin
|
3,149,000
|
|
|
8,491,000
|
|
|
6,484,000
|
|
|
3,382,000
|
|
|
21,506,000
|
|
Operating income (loss)
|
(4,017,000
|
)
|
|
1,267,000
|
|
|
(4,657,000
|
)
|
|
(4,121,000
|
)
|
|
(11,528,000
|
)
|
Net income (loss)
|
(3,845,000
|
)
|
|
209,000
|
|
|
(6,125,000
|
)
|
|
(5,462,000
|
)
|
|
(15,223,000
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
(0.49
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.78
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(1.94
|
)
|
Diluted (1)
|
$
|
(0.49
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.78
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(1.94
|
)
|
|
|
|
|
|
|
|
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
59,712,000
|
|
|
$
|
65,225,000
|
|
|
$
|
62,305,000
|
|
|
$
|
68,975,000
|
|
|
$
|
256,217,000
|
|
Tooling sales
|
3,334,000
|
|
|
3,376,000
|
|
|
2,371,000
|
|
|
4,187,000
|
|
|
13,268,000
|
|
Net sales
|
63,046,000
|
|
|
68,601,000
|
|
|
64,676,000
|
|
|
73,162,000
|
|
|
269,485,000
|
|
Gross margin
|
7,885,000
|
|
|
7,897,000
|
|
|
4,862,000
|
|
|
6,497,000
|
|
|
27,141,000
|
|
Operating income (loss)
|
1,125,000
|
|
|
1,418,000
|
|
|
(1,487,000
|
)
|
|
(4,156,000
|
)
|
|
(3,100,000
|
)
|
Net income (loss)
|
518,000
|
|
|
445,000
|
|
|
(1,803,000
|
)
|
|
(3,942,000
|
)
|
|
(4,782,000
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.62
|
)
|
Diluted (1)
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
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
|
6,479,000
|
|
|
7,341,000
|
|
|
5,752,000
|
|
|
5,059,000
|
|
|
24,631,000
|
|
Operating income
|
2,554,000
|
|
|
3,173,000
|
|
|
1,394,000
|
|
|
820,000
|
|
|
7,941,000
|
|
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
|
|
(1) Sum of the quarters may not sum to total year due to rounding.