NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
March 31, 2017
NOTE 1—Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended
December 31, 2016
.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
Change in Estimate
Beginning in January 2017, we changed the method we use to calculate the service and interest cost components of net periodic benefit cost for our U.S. pension and other post-retirement benefit plans. Previously, we calculated the service and interest cost components using a single weighted-average discount rate derived from the yield curve to measure the benefit obligation at the beginning of the period. In 2017, we began using a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot-rates along the yield curve to the relevant projected cash flows. This approach better aligns each of the projected benefit cash flows to the corresponding spot rates on the yield curve, resulting in a more precise measurement of service and interest costs. The change in method will result in a decrease in the service and interest components of pension costs in 2017. Any decrease to these components as a result of adoption of this approach is equally offset by a decrease in the actuarial losses included in our accumulated other comprehensive loss, with no impact on the measurement of the benefit obligation. This change is accounted for prospectively as a change in accounting estimate.
Subsequent Events
We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the consolidated financial statements are issued.
NOTE 2 – Accounts Receivable
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts receivable, gross
|
$
|
63,176
|
|
|
$
|
62,782
|
|
Less: Allowance for doubtful accounts
|
(160
|
)
|
|
(170
|
)
|
Accounts receivable, net
|
$
|
63,016
|
|
|
$
|
62,612
|
|
NOTE 3 – Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Finished goods
|
$
|
7,005
|
|
|
$
|
7,513
|
|
Work-in-process
|
11,661
|
|
|
9,596
|
|
Raw materials
|
19,277
|
|
|
17,680
|
|
Less: Inventory reserves
|
(6,989
|
)
|
|
(6,137
|
)
|
Inventories, net
|
$
|
30,954
|
|
|
$
|
28,652
|
|
NOTE 4 – Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Land
|
$
|
2,330
|
|
|
$
|
2,330
|
|
Buildings and improvements
|
63,875
|
|
|
63,621
|
|
Machinery and equipment
|
216,636
|
|
|
213,198
|
|
Less: Accumulated depreciation
|
(199,573
|
)
|
|
(197,038
|
)
|
Property, plant and equipment, net
|
$
|
83,268
|
|
|
$
|
82,111
|
|
|
|
|
|
Depreciation expense for the three months ended March 31, 2017
|
|
|
$
|
3,172
|
|
Depreciation expense for the three months ended March 31, 2016
|
|
|
$
|
2,926
|
|
NOTE 5 – Retirement Plans
Pension Plans
Net pension income for our domestic and foreign plans was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Net pension income
|
$
|
(433
|
)
|
|
$
|
(392
|
)
|
The components of net pension (income) expense for our domestic and foreign plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Pension Plans
|
|
Foreign Pension Plans
|
|
Three Months Ended
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Interest cost
|
2,068
|
|
|
2,756
|
|
|
8
|
|
|
11
|
|
Expected return on plan assets
(1)
|
(4,061
|
)
|
|
(4,744
|
)
|
|
(5
|
)
|
|
7
|
|
Amortization of loss
|
1,446
|
|
|
1,498
|
|
|
38
|
|
|
34
|
|
Other cost due to retirement
|
61
|
|
|
12
|
|
|
—
|
|
|
—
|
|
(Income) expense, net
|
$
|
(486
|
)
|
|
$
|
(456
|
)
|
|
$
|
53
|
|
|
$
|
64
|
|
(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
40
|
|
|
52
|
|
Amortization of gain
|
(25
|
)
|
|
(38
|
)
|
Post-retirement expense
|
$
|
16
|
|
|
$
|
15
|
|
NOTE 6 – Other Intangible Assets
Intangible assets consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
Customer lists/relationships
|
$
|
63,386
|
|
|
$
|
(31,142
|
)
|
|
$
|
32,244
|
|
Patents
|
10,319
|
|
|
(10,319
|
)
|
|
—
|
|
Technology and other intangibles
|
36,255
|
|
|
(7,866
|
)
|
|
28,389
|
|
In process research and development
|
2,200
|
|
|
—
|
|
|
2,200
|
|
Other intangible assets, net
|
$
|
112,160
|
|
|
$
|
(49,327
|
)
|
|
$
|
62,833
|
|
Amortization expense for the three months ended March 31, 2017
|
|
|
|
$
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
Customer lists/relationships
|
$
|
63,386
|
|
|
$
|
(30,318
|
)
|
|
$
|
33,068
|
|
Patents
|
10,319
|
|
|
(10,319
|
)
|
|
—
|
|
Technology and other intangibles
|
36,715
|
|
|
(7,613
|
)
|
|
29,102
|
|
In process research and development
|
2,200
|
|
|
—
|
|
|
2,200
|
|
Other intangible assets, net
|
$
|
112,620
|
|
|
$
|
(48,250
|
)
|
|
$
|
64,370
|
|
Amortization expense for the three months ended March 31, 2016
|
|
|
|
$
|
1,095
|
|
|
|
|
Amortization expense remaining for other intangible assets is as follows:
|
|
|
|
|
|
Amortization
expense
|
2017
|
$
|
4,528
|
|
2018
|
5,956
|
|
2019
|
5,947
|
|
2020
|
5,947
|
|
2021
|
5,867
|
|
Thereafter
|
34,588
|
|
Total amortization expense
|
$
|
62,833
|
|
NOTE 7 – Costs Associated with Exit and Restructuring Activities
Costs associated with exit and restructuring activities are recorded in the Condensed Consolidated Statement of Earnings as a separate component of Operating earnings.
Total restructuring charges, all related to the June 2016 Plan described below, were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Restructuring and impairment charges
|
777
|
|
|
—
|
|
In June 2016, we announced plans to restructure operations by phasing out production at the Elkhart facility by mid-2018 and transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional organizational changes will also occur in various other locations. The cost of the plan is expected to be approximately
$12,300
and will impact approximately
230
employees. The total restructuring liability related to severance and other one-time benefit arrangements under the June 2016 Plan was
$1,722
at
March 31, 2017
and $
1,739
at
December 31, 2016
. Additional costs related to line movements, asset impairment and equipment charges, and other costs will be expensed as incurred.
The following table displays the planned restructuring charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Actual costs
|
|
Planned
|
|
incurred through
|
June 2016 Plan
|
Costs
|
|
March 31, 2017
|
Workforce reduction
|
3,075
|
|
|
2,581
|
|
Equipment relocation
|
7,925
|
|
|
822
|
|
Other charges
|
1,300
|
|
|
422
|
|
Restructuring and impairment charges
|
12,300
|
|
|
3,825
|
|
In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify its business model and rationalize our global footprint (“April 2014 Plan”). These restructuring actions, which were completed during 2015, impacted approximately
120
positions. The remaining restructuring liability related to the April 2014 Plan was
$429
at
March 31, 2017
and $
423
at
December 31, 2016
.
The following table displays the restructuring liability activity for all plans for the three months ended
March 31, 2017
:
|
|
|
|
|
Combined Plans
|
|
Restructuring liability at January 1, 2017
|
$
|
2,162
|
|
Restructuring and impairment charges
|
777
|
|
Cost paid
|
(795
|
)
|
Other activity
(1)
|
7
|
|
Restructuring liability at March 31, 2017
|
$
|
2,151
|
|
(1) Other activity includes the effects of currency translation and other charges that do not flow through restructuring expense.
NOTE 8 – Accrued Liabilities
The components of accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Accrued product related costs
|
$
|
5,217
|
|
|
$
|
5,556
|
|
Accrued income taxes
|
10,209
|
|
|
9,826
|
|
Accrued property and other taxes
|
1,853
|
|
|
1,917
|
|
Accrued professional fees
|
1,341
|
|
|
1,633
|
|
Dividends payable
|
1,314
|
|
|
1,309
|
|
Remediation reserves
|
17,922
|
|
|
18,176
|
|
Other accrued liabilities
|
4,607
|
|
|
7,291
|
|
Total accrued liabilities
|
$
|
42,463
|
|
|
$
|
45,708
|
|
NOTE 9 – Contingencies
Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Some sites, such as Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable remediation activities and for claims and proceedings against us with respect to other environmental matters. We record reserves on an undiscounted basis. In the opinion of management, based upon presently available information relating to such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, we cannot provide assurance that our ultimate environmental liability will not materially exceed the amount of its current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.
A roll forward of remediation reserves included in accrued liabilities on the balance sheet is comprised of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Balance at beginning of period
|
$
|
18,176
|
|
|
$
|
20,603
|
|
Remediation expense
|
97
|
|
|
556
|
|
Remediation payments
|
(351
|
)
|
|
(2,983
|
)
|
Balance at end of the period
|
$
|
17,922
|
|
|
$
|
18,176
|
|
Unrelated to the environmental claims described above, certain other claims are pending against us with respect to matters arising out of the ordinary conduct of our business. Although the ultimate outcome of any potential litigation resulting from these claims cannot be predicted with certainty, and some may be disposed of unfavorably to us, we believe that adequate provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations, or cash flows.
NOTE 10 - Debt
Long-term debt was comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Revolving credit facility due in 2020
|
$
|
94,000
|
|
|
$
|
89,100
|
|
Weighted average interest rate
|
2.0
|
%
|
|
1.9
|
%
|
Amount available
|
$
|
203,835
|
|
|
$
|
208,735
|
|
Total credit facility
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Standby letters of credit
|
$
|
2,165
|
|
|
$
|
2,165
|
|
Commitment fee percentage per annum
|
0.25
|
%
|
|
0.25
|
%
|
On August 10, 2015, we entered into a new
five
-year credit agreement (“Revolving Credit Facility”) with a group of banks in order to support our financing needs. The Revolving Credit Facility originally provided for a credit line of
$200,000
. On May 23, 2016, we requested and received a
$100,000
increase in the aggregate revolving credit commitments under its existing credit agreement, which increased the credit line from
$200,000
to
$300,000
.
The Revolving Credit Facility includes a swing line sublimit of
$15,000
and a letter of credit sublimit of
$10,000
. Borrowings under the Revolving Credit Facility bear interest, at our option, at the base rate plus the applicable margin for base rate loans or LIBOR plus the applicable margin for LIBOR loans. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from
0.20%
to
0.40%
based on the our total leverage ratio.
The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at
March 31, 2017
. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditors certifications and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the Revolving Credit Facility fluctuate based upon the London Interbank Offered Rate and the Company’s quarterly total leverage ratio.
We have debt issuance costs related to our long-term debt that is being amortized using the straight-line method over the life of the debt. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. Amortization expense was approximately
$46
and
$32
for the three months ended
March 31, 2017
and
March 31, 2016
, respectively.
Note 11 - Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
Foreign Currency Hedges
In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive income (loss) until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. Ineffectiveness is recorded in other income (expense) in our Condensed Consolidated Statement of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the
end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income (loss) to other income (expense).
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At
March 31, 2017
, we had a net unrealized gain of $
486
in accumulated other comprehensive income, of which
$482
is expected to be reclassified to income within the next 12 months. At
March 31, 2016
we had a net unrealized gain of $378 in accumulated other comprehensive income (loss). The notional amount of foreign currency forward contracts outstanding was
$16.5 million
at
March 31, 2017
.
Interest Rate Swaps
We use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into
four
separate interest rate swap agreements to fix interest rates on
$50,000
of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into
four
additional interest rate swap agreements to fix interest rates on
$25,000
of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into
three
additional forward-starting interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately
$64
.
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of
March 31, 2017
, are shown in the following table:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Foreign currency hedges reported in Accrued liabilities
|
$
|
—
|
|
|
$
|
601
|
|
Foreign currency hedges reported in Other current assets
|
$
|
522
|
|
|
$
|
—
|
|
Interest rate swaps reported in Other current assets
|
$
|
64
|
|
|
$
|
2
|
|
Interest rate swaps reported in Other assets
|
$
|
758
|
|
|
$
|
751
|
|
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of
$548
and foreign currency derivative liabilities of
$26
.
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Foreign Exchange Contracts:
|
|
|
|
Loss recognized in Net Sales
|
$
|
(2
|
)
|
|
$
|
(7
|
)
|
(Loss) gain recognized in Cost of Goods Sold
|
(144
|
)
|
|
1
|
|
(Loss) gain recognized in Selling, General and Administrative expense
|
(3
|
)
|
|
4
|
|
Loss recognized in Other (expenses) income
|
(8
|
)
|
|
6
|
|
|
|
|
|
Interest Rate Swaps:
|
|
|
|
Benefit recorded in Interest Expense
|
$
|
—
|
|
|
$
|
152
|
|
Total
|
$
|
(157
|
)
|
|
$
|
156
|
|
NOTE 12 – Accumulated Other Comprehensive (Loss) Income
Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
Unrealized gains (losses) on hedges
relate to interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs, at which time amounts are reclassified into earnings. Further information related to CTS’ derivative financial instruments is included in Note 11 - Derivative Financial Instruments and Note 15 – Fair Value Measurements.
Unrealized gains (losses) on pension obligations
are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension income / (expense). Further information related to our pension obligations is included in Note 5 – Retirement Plans.
Cumulative translation adjustment
relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income.
Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction gains for the
three
months ended
March 31, 2017
were
$395
and transaction losses for the
three
months ended
March 31, 2016
were
$231
, which have been included in other income (expense) in the Condensed Consolidated Statement of Earnings.
The components of accumulated other comprehensive (loss) income for the three months ended
March 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
As of
|
|
Gain (Loss)
|
|
Reclassified
|
|
As of
|
|
December 31,
|
|
Recognized
|
|
from AOCI
|
|
March 31,
|
|
2016
|
|
in OCI
|
|
to Income
|
|
2017
|
Changes in fair market value of hedges:
|
|
|
|
|
|
|
|
Gross
|
$
|
116
|
|
|
$
|
1,042
|
|
|
$
|
150
|
|
|
$
|
1,308
|
|
Income tax benefit
|
(42
|
)
|
|
(378
|
)
|
|
(54
|
)
|
|
(474
|
)
|
Net
|
74
|
|
|
664
|
|
|
96
|
|
|
834
|
|
|
|
|
|
|
|
|
|
Changes in unrealized pension cost:
|
|
|
|
|
|
|
|
Gross
|
(151,618
|
)
|
|
—
|
|
|
1,296
|
|
|
(150,322
|
)
|
Income tax expense (benefit)
|
60,672
|
|
|
—
|
|
|
(480
|
)
|
|
60,192
|
|
Net
|
(90,946
|
)
|
|
—
|
|
|
816
|
|
|
(90,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
(2,414
|
)
|
|
86
|
|
|
—
|
|
|
(2,328
|
)
|
Income tax expense
|
92
|
|
|
2
|
|
|
—
|
|
|
94
|
|
Net
|
(2,322
|
)
|
|
88
|
|
|
—
|
|
|
(2,234
|
)
|
Total accumulated other comprehensive (loss) income
|
$
|
(93,194
|
)
|
|
$
|
752
|
|
|
$
|
912
|
|
|
$
|
(91,530
|
)
|
The components of accumulated other comprehensive (loss) income for the three months ended
March 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
As of
|
|
Gain (Loss)
|
|
Reclassified
|
|
As of
|
|
December 31,
|
|
Recognized
|
|
from AOCI
|
|
March 31,
|
|
2015
|
|
in OCI
|
|
to Income
|
|
2016
|
Changes in fair market value of hedges:
|
|
|
|
|
|
|
|
Gross
|
$
|
(768
|
)
|
|
$
|
242
|
|
|
$
|
231
|
|
|
$
|
(295
|
)
|
Income tax expense (benefit)
|
289
|
|
|
(91
|
)
|
|
(88
|
)
|
|
110
|
|
Net
|
(479
|
)
|
|
151
|
|
|
143
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
Changes in unrealized pension cost:
|
|
|
|
|
|
|
|
Gross
|
(161,719
|
)
|
|
—
|
|
|
1,451
|
|
|
(160,268
|
)
|
Income tax expense (benefit)
|
64,361
|
|
|
—
|
|
|
(543
|
)
|
|
63,818
|
|
Net
|
(97,358
|
)
|
|
—
|
|
|
908
|
|
|
(96,450
|
)
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
(1,279
|
)
|
|
(406
|
)
|
|
—
|
|
|
(1,685
|
)
|
Income tax expense (benefit)
|
111
|
|
|
(3
|
)
|
|
—
|
|
|
108
|
|
Net
|
(1,168
|
)
|
|
(409
|
)
|
|
—
|
|
|
(1,577
|
)
|
Total accumulated other comprehensive (loss) income
|
$
|
(99,005
|
)
|
|
$
|
(258
|
)
|
|
$
|
1,051
|
|
|
$
|
(98,212
|
)
|
NOTE 13 – Shareholders’ Equity
Share count and par value data related to shareholders’ equity are as follows:
|
|
|
|
|
|
|
|
As of
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Preferred Stock
|
|
|
|
Par value per share
|
No par value
|
|
|
No par value
|
|
Shares authorized
|
25,000,000
|
|
|
25,000,000
|
|
Shares outstanding
|
—
|
|
|
—
|
|
Common Stock
|
|
|
|
Par value per share
|
No par value
|
|
|
No par value
|
|
Shares authorized
|
75,000,000
|
|
|
75,000,000
|
|
Shares issued
|
56,544,741
|
|
|
56,456,516
|
|
Shares outstanding
|
32,850,719
|
|
|
32,762,494
|
|
Treasury stock
|
|
|
|
Shares held
|
23,694,022
|
|
|
23,694,022
|
|
No
common stock repurchases were made during the
three
months ended
March 31, 2017
. Through
March 31, 2017
, we had purchased an aggregate of
$7,446
under a previously board-authorized share repurchase plan allowing for up to $25,000 in stock repurchases. Approximately
$17,554
is available for future purchases.
A roll-forward of common shares outstanding is as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Balance at the beginning of the year
|
32,762,494
|
|
|
32,548,477
|
|
Repurchases
|
—
|
|
|
—
|
|
Shares issued upon exercise of stock options
|
—
|
|
|
—
|
|
Restricted share issuances
|
88,225
|
|
|
210,166
|
|
Balance at the end of the period
|
32,850,719
|
|
|
32,758,643
|
|
Certain potentially dilutive restricted stock units are excluded from diluted earning per share because they are anti-dilutive. The number of awards that were anti-dilutive at
March 31, 2017
and
March 31, 2016
were
88,592
and
83,148
, respectively.
NOTE 14 - Stock-Based Compensation
At
March 31, 2017
, we had
four
active stock-based compensation plans: the Nonemployee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), and the 2014 Performance & Incentive Plan (“2014 Plan”). Future grants can only be made under the 2014 Plan.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Service-Based RSUs
|
$
|
550
|
|
|
$
|
512
|
|
Performance-Based RSUs
|
384
|
|
|
(182
|
)
|
Cash-settled RSUs
|
$
|
(54
|
)
|
|
$
|
(48
|
)
|
Total
|
$
|
880
|
|
|
$
|
282
|
|
Income tax benefit
|
$
|
331
|
|
|
$
|
106
|
|
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
compensation
|
|
Weighted-
|
|
expense at
|
|
average
|
|
March 31, 2017
|
|
period
|
Service-Based RSUs
|
$
|
1,790
|
|
|
1.36
|
Performance-Based RSUs
|
3,810
|
|
|
2.20
|
Total
|
$
|
5,600
|
|
|
1.93
|
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the status of these plans as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Plan
|
|
2009 Plan
|
|
2004 Plan
|
|
Directors' Plan
|
Awards originally available
|
1,500,000
|
|
|
3,400,000
|
|
|
6,500,000
|
|
|
N/A
|
|
Performance-based options outstanding
|
315,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Maximum potential RSU and cash settled awards outstanding
|
747,417
|
|
|
156,022
|
|
|
78,947
|
|
|
25,985
|
|
Maximum potential awards outstanding
|
1,062,417
|
|
|
156,022
|
|
|
78,947
|
|
|
25,985
|
|
RSUs and cash settled awards vested and released
|
157,212
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Awards available for grant
|
280,371
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock Options
We have no stock options exercisable or outstanding as of
March 31, 2017
, other than the performance-based stock options described below.
Performance-Based Stock Options
During 2015 and 2016, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted a total of
350,000
performance-based stock option awards (“Performance-Based Option Awards”) for certain employees under the 2014 Plan, of which
315,000
remain outstanding after considering forfeitures. The Performance-Based Option Awards have an exercise price of
$18.37
, a term of
five years
, and generally will become exercisable (provided the optionee remains employed by the Company or an affiliate) upon our attainment of at least
$600,000
in revenues during any of our
four
-fiscal-quarter trailing periods (as determined by the Committee) during the term. We have not recognized any expense on these Performance-Based Option Awards for the
three
-month periods ended
March 31, 2017
and
2016
, since the revenue target was not deemed likely to be attained based on our current forecast.
Service-Based Restricted Stock Units
The following table summarizes the service-based RSU activity as of and for the three months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2017
|
554,478
|
|
|
$
|
13.37
|
|
Granted
|
33,040
|
|
|
23.00
|
|
Vested and released
|
(114,847
|
)
|
|
15.11
|
|
Forfeited
|
(2,536
|
)
|
|
17.46
|
|
Outstanding at March 31, 2017
|
470,135
|
|
|
$
|
13.59
|
|
Releasable at March 31, 2017
|
304,883
|
|
|
$
|
11.38
|
|
Performance and Market-Based Restricted Stock Units
The following table summarizes the performance and market-based RSU activity as of and for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2017
|
201,900
|
|
|
$
|
16.48
|
|
Granted
|
123,919
|
|
|
23.83
|
|
Attained by performance
|
15,285
|
|
|
21.66
|
|
Released
|
(41,264
|
)
|
|
21.66
|
|
Forfeited
|
(15,070
|
)
|
|
21.66
|
|
Outstanding at March 31, 2017
|
284,770
|
|
|
$
|
18.99
|
|
Releasable at March 31, 2017
|
2,011
|
|
|
$
|
21.66
|
|
The following table summarizes each grant of performance awards outstanding at
March 31, 2017
.
|
|
|
|
|
|
|
|
|
Description
|
Grant Date
|
Vesting Year
|
Vesting Dependency
|
Target Units Outstanding
|
Maximum Number of Units to be Granted
|
2015 - 2017 Performance RSUs
|
February 5, 2015
|
2017
|
35% RTSR, 35% sales growth, 30% cash flow
|
62,000
|
|
124,000
|
|
2016 - 2018 Performance RSUs
|
February 16, 2016
|
2018
|
35% RTSR, 35% sales growth, 30% cash flow
|
92,840
|
|
185,680
|
|
2017 - 2019 Performance RSUs
|
February 9, 2017
|
2019
|
35% RTSR, 35% sales growth, 30% cash flow
|
78,341
|
|
156,682
|
|
2017 - 2019 Performance RSUs
|
February 9, 2017
|
2018 - 2020
|
Operating Income
|
45,578
|
|
45,578
|
|
Single Crystal Performance RSUs
|
March 31, 2016
|
2018
|
Various
|
4,000
|
|
8,000
|
|
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At
March 31, 2017
and
March 31, 2016
we had
16,285
and
12,074
cash-settled RSUs outstanding, respectively. At
March 31, 2017
and
March 31, 2016
, liabilities of $
115
and $
46
, respectively were included in Accrued liabilities on our Condensed Consolidated Balance Sheets.
NOTE 15 — Fair Value Measurements
We use interest rate swaps to convert our line revolving credit facility’s variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis.
The table below summarizes our financial assets that were measured at fair value on a recurring basis at
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
Asset
|
|
in Active
|
|
Significant
|
|
|
|
|
Carrying
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
Value at
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
March 31,
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Interest rate swaps
|
$
|
822
|
|
|
$
|
—
|
|
|
$
|
822
|
|
|
$
|
—
|
|
|
Foreign currency hedges
|
$
|
522
|
|
|
$
|
—
|
|
|
$
|
522
|
|
|
$
|
—
|
|
|
The table below summarizes the financial assets (liabilities) that were measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
Asset
|
|
Prices
|
|
|
|
|
|
(Liability)
|
|
in Active
|
|
Significant
|
|
|
|
Carrying
|
|
Markets for
|
|
Other
|
|
Significant
|
|
Value at
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
December 31,
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Interest rate swaps
|
$
|
753
|
|
|
$
|
—
|
|
|
$
|
753
|
|
|
$
|
—
|
|
Foreign currency hedges
|
$
|
(601
|
)
|
|
$
|
—
|
|
|
$
|
(601
|
)
|
|
$
|
—
|
|
The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within level 2 of the fair value hierarchy.
The table below provides a reconciliation of the recurring financial assets (liabilities) for our derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Interest
|
|
Currency
|
|
Rate Swaps
|
|
Hedges
|
Balance at January 1, 2016
|
$
|
(768
|
)
|
|
$
|
—
|
|
Settled in cash
|
—
|
|
|
54
|
|
Included in earnings
|
928
|
|
|
(18
|
)
|
Included in other comprehensive earnings
|
593
|
|
|
(637
|
)
|
Balance at December 31, 2016
|
$
|
753
|
|
|
$
|
(601
|
)
|
Settled in cash
|
—
|
|
|
(157
|
)
|
Included in earnings
|
—
|
|
|
157
|
|
Included in other comprehensive earnings
|
69
|
|
|
1,123
|
|
Balance at March 31, 2017
|
$
|
822
|
|
|
$
|
522
|
|
Our long-term debt consists of the Revolving Credit Facility which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
NOTE 16 — Income Taxes
The effective tax rates for the
three
-month periods ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Effective tax rate
|
30.6
|
%
|
|
34.3
|
%
|
Our effective income tax rate was
30.6%
and
34.3%
in the first quarter of 2017 and 2016, respectively. The tax rate in the first quarter 2017 was lower than the U.S. statutory tax rate due primarily to tax benefits recorded upon vesting of restricted stock units and favorable tax rates on foreign earnings, offset by the impact of state taxes, tax expense for withholding taxes on the anticipated distribution of earnings in China, and other various permanent items.
Our continuing practice is to recognize interest and/or penalties related to income tax matters as income tax expense. For the three months ended
March 31, 2017
, and
March 31, 2016
, we recorded
$176
and
$184
, respectively, of interest or penalties in income tax expense.
Note 17 - Business Combinations
On March 11, 2016, we acquired all of the outstanding membership interests in CTG Advanced Materials, LLC (“CTG-AM”), a privately-held company, for
$73 million
in cash plus a working capital adjustment. CTG-AM, formerly operated as H.C. Materials, is the market leading designer and manufacturer of single crystal piezoelectric materials, serving major original equipment manufacturers throughout the medical marketplace. These materials enable high definition ultrasound imaging (3D and 4D), as well as intravascular ultrasound applications. Other applications for these materials include wireless pacemakers, implantable hearing aids, and defense technologies.
With the CTG-AM acquisition, we gain technology and proprietary manufacturing methods that expand its offering of piezoelectric materials. This allows us to become the leading large-scale commercial producer of both single crystal materials and traditional piezoelectric ceramics.
The purchase price of
$73,063
, net of cash acquired of
$4
, has been allocated to the fair values of assets and liabilities acquired as of March 11, 2016.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
Fair Values at March 11, 2016
|
Current assets
|
|
$
|
4,215
|
|
Property, plant and equipment
|
|
6,173
|
|
Other assets
|
|
37
|
|
Goodwill
|
|
27,879
|
|
Intangible assets
|
|
35,427
|
|
Fair value of assets acquired
|
|
73,731
|
|
Less fair value of liabilities acquired
|
|
(668
|
)
|
Net cash paid
|
|
$
|
73,063
|
|
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
|
|
|
|
|
|
Intangible Asset Type
|
Fair Value
|
|
Weighted Average Amortization Period (in years)
|
Developed Technology
|
$
|
23,730
|
|
|
15.0
|
Customer Relationships and Contracts
|
11,502
|
|
|
14.6
|
Other
|
195
|
|
|
0.8
|
Total
|
$
|
35,427
|
|
|
14.8
|
We incurred
$804
in transaction related costs during in the year ended December 31, 2016. These costs are included in selling, general, and administrative costs in our Condensed Consolidated Statement of Earnings.
Results of operations for CTG-AM are included in our consolidated condensed financial statements beginning on March 11, 2016. The amount of net sales and net loss from CTG-AM in the quarter ended March 31, 2016 that have been included in the Condensed Consolidated Statement of Earnings are as follows:
|
|
|
|
|
|
|
|
For the period
March 11, 2016
through
March 31, 2016
|
Net sales
|
|
$
|
758
|
|
Net earnings
|
|
$
|
(64
|
)
|
NOTE 18 — Recent Accounting Pronouncements
ASU 2017-07
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost"
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and net Periodic Post-retirement Benefit Cost"
. This ASU is meant to improve the presentation of net periodic pension and net periodic post-retirement benefits costs. Currently, pension and post-retirement benefit costs are comprised of several components reflecting the different aspects of an employer's financial arrangements and cost of providing benefits to employees. These components are aggregated for reporting, but prior guidance does not prescribe where the net cost should be presented in the income statement or capitalized in assets. This ASU requires disaggregation of the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost and other components in the income statement, allowing only the service cost component of net benefit costs to be eligible for capitalization. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. These amendments should be applied retrospectively for the presentation of the service cost and other components of net periodic pension and net post-retirement benefit cost in the income statement and prospectively for the capitalization of the service cost and net periodic pension cost and periodic post-retirement benefit in assets. This ASU is not expected to have a material impact on our financial statements because the service cost component of our pension cost is expected to be immaterial to our financial results on a prospective basis.
ASU 2017-04
"Intangibles -Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
In January 2017, the FASB issued ASU No. 2017-04
"Intangibles - Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
. This ASU is meant to simplify the subsequent measurement of goodwill for impairment by eliminating the current Step 2 analysis in computing the implied fair value of goodwill. In addition, this ASU requires an entity to consider income tax effects on any tax deductible goodwill on the carrying amount of the reporting unit when measuring an impairment loss, if applicable. Under this ASU, impairment is determined by comparing the reporting unit's fair value to the carrying value. This amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have an impact on our financial statements.
ASU 2017-01
"Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01
"Business Combinations (Topic 805): Clarifying the Definition of Business"
. This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should be accounted for as a sale of assets or business. This ASU provides a more robust framework to use in determining when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset acquisitions. This ASU is effective for public companies, for fiscal years beginning after December 15, 2017, including interim periods within those periods. The ASU will be applied prospectively.
ASU 2016-16
"Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"
In October 2016, the FASB issued ASU No. 2016-16,
"Intra-Entity Transfers of Assets Other Than Inventory"
. This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, US GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers until the asset is sold to a third party. This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs. This ASU is effective for public companies, for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods. Early adoption is permitted and is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This guidance is not expected to have a material impact on our consolidated financial statements.
ASU 2016-15
"Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance is not expected to have a material impact on our consolidated financial statements.
ASU 2016-02
"Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability on the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees, the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.
The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be based on the present value of the lease payments. If a lease term is less than twelve months, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized straight-line over the expected term of the lease.
Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.
Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.
These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date.
The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those periods. Early adoption is allowed. We have not yet commenced the process for evaluating the impact of this ASU on our financial statements, and therefore it's impact has not yet been determined.
ASU 2014-09
, "Revenue from Contracts with Customers (Topic 606)"
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)".
The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The new revenue recognition guidance more closely aligns U.S. GAAP with International Financial Reporting Standards
("IFRS"). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
|
|
Step 1:
|
Identify the contract(s) with a customer.
|
|
|
Step 2:
|
Identify the performance obligations in the contract.
|
|
|
Step 3:
|
Determine the transaction price.
|
|
|
Step 4:
|
Allocate the transaction price to the performance obligations in the contract.
|
|
|
Step 5:
|
Recognize revenue when (or as) the entity satisfies a performance obligation.
|
In August 2015, the FASB issued ASU 2015-14: Accounting for Revenue from Contracts with Customers (Topic 606)
"
The amended guidance deferred the effective date of ASU 2014-9 to annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2016 and interim periods within those fiscal years. In addition, four other ASUs have been issued amending and clarifying ASU 2014-09 and must be adopted concurrently.
|
|
•
|
ASU 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
|
|
|
•
|
ASU 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
|
|
|
•
|
ASU 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients"
|
|
|
•
|
ASU 2016-20 "Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements"
|
This update can either be applied under a cumulative effect or retrospective method. We are in the process of reviewing customer contracts and agreements to determine the potential effects of the standard based on our revenue streams and current revenue recognition practices. Following review of customer contracts, we will summarize contract terms, reference the findings to the applicable new guidance, determine the financial statement impact, and then update policies and controls to ensure application of the new provisions will be applied consistently throughout the Company. While the impact of the adoption of this ASU has not yet been determined, we expect there to be minor differences in the timing of revenue recognition, due primarily to changes in how variable consideration is estimated. The Company expects to adopt the provisions of this standard using the modified retrospective approach, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption. The Company will adopt ASU 2014-09 effective January 1, 2018.