0001026655-18-000058.txt : 20181109 0001026655-18-000058.hdr.sgml : 20181109 20181109162858 ACCESSION NUMBER: 0001026655-18-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 72 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE MOLDING TECHNOLOGIES INC CENTRAL INDEX KEY: 0001026655 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 311481870 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12505 FILM NUMBER: 181173456 BUSINESS ADDRESS: STREET 1: 800 MANOR PARK DRIVE STREET 2: P O BOX 28183 CITY: COLUMBUS STATE: OH ZIP: 43228 BUSINESS PHONE: 8006666960 MAIL ADDRESS: STREET 1: 800 MANOR PARK DR STREET 2: P O BOX 28183 CITY: COLUMBUS STATE: OH ZIP: 43228 FORMER COMPANY: FORMER CONFORMED NAME: CORE MATERIALS CORP DATE OF NAME CHANGE: 19961107 10-Q 1 a9301810-q.htm 10-Q Q3 2018 Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      To                     
Commission File Number 001-12505
CORE MOLDING TECHNOLOGIES, INC.
___________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
 
31-1481870
(State or other jurisdiction
incorporation or organization)
 
(I.R.S. Employer Identification No.)
800 Manor Park Drive, Columbus, Ohio
 
43228-0183
(Address of principal executive office)
 
(Zip Code)
Registrant’s telephone number, including area code (614) 870-5000
N/A
_______________________________________________________________
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No þ
As of November 8, 2018, the latest practicable date, 8,098,983 shares of the registrant’s common stock were issued and outstanding.
 



Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Item 1. Financial Statements
Part I — Financial Information
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(Unaudited)

 
Three Months Ended

Nine Months Ended
 
September 30,

September 30,
 
2018

2017

2018
 
2017
Net sales:
 
 

 
 
 
 
Products
$
62,305,000

 
$
37,593,000

 
$
187,243,000

 
$
110,723,000

Tooling
2,371,000

 
901,000

 
9,081,000

 
11,885,000

Total net sales
64,676,000

 
38,494,000

 
196,324,000

 
122,608,000

 
 
 
 
 
 
 
 
Total cost of sales
59,814,000

 
32,742,000

 
175,679,000

 
103,037,000

 
 
 
 
 
 
 
 
Gross margin
4,862,000


5,752,000


20,645,000


19,571,000

 
 
 
 
 
 
 
 
Total selling, general and administrative expense
6,349,000

 
4,358,000

 
19,587,000

 
12,450,000

 
 
 
 
 
 
 
 
Operating Income (Loss)
(1,487,000
)
 
1,394,000

 
1,058,000

 
7,121,000

 
 
 
 
 
 
 
 
Other income and expense
 
 
 
 
 
 
 
Interest expense
632,000

 
62,000

 
1,705,000

 
191,000

Net periodic post-retirement benefit
(12,000
)
 
(12,000
)
 
(36,000
)
 
(36,000
)
Total other income and expense
620,000

 
50,000

 
1,669,000

 
155,000

 
 
 
 
 
 
 
 
Income (Loss) before taxes
(2,107,000
)
 
1,344,000

 
(611,000
)
 
6,966,000

 
 
 
 
 
 
 
 
Income tax expense (benefit)
(304,000
)

489,000


228,000


2,262,000

 
 
 
 
 
 
 
 
Net income (loss)
$
(1,803,000
)

$
855,000


$
(839,000
)

$
4,704,000

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.23
)

$
0.11


$
(0.11
)

$
0.61

Diluted
$
(0.23
)

$
0.11


$
(0.11
)

$
0.61

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
7,804,000


7,711,000


7,758,000


7,683,000

Diluted
7,804,000


7,757,000


7,758,000


7,739,000

See notes to unaudited consolidated financial statements.


3



Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,803,000
)
 
$
855,000

 
$
(839,000
)
 
$
4,704,000

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency hedging derivatives:
 
 
 
 
 
 
 
Unrealized hedge gain (loss)
907,000

 
(139,000
)
 
561,000

 
657,000

Income tax (expense) benefit
(202,000
)
 
48,000

 
(156,000
)
 
(223,000
)
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
Unrealized hedge gain
175,000

 

 
424,000

 

Income tax benefit (expense)
(40,000
)
 

 
(97,000
)
 

 
 
 
 
 
 
 
 
Post retirement benefit plan adjustments:
 
 
 
 
 
 
 
Net actuarial loss
43,000

 
37,000

 
129,000

 
112,000

Prior service costs
(124,000
)
 
(124,000
)
 
(372,000
)
 
(372,000
)
   Income tax benefit
17,000

 
26,000

 
51,000

 
78,000

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(1,027,000
)
 
$
703,000

 
$
(299,000
)
 
$
4,956,000

See notes to unaudited consolidated financial statements.

4


Core Molding Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
 
September 30, 2018
 
December 31,
 
(Unaudited)
 
2017
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$

 
$
26,780,000

Accounts receivable, net
38,666,000

 
19,846,000

Inventory, net
22,648,000

 
13,459,000

Prepaid expenses and other current assets
8,123,000

 
4,870,000

Total current assets
69,437,000

 
64,955,000

 
 
 
 
Property, plant and equipment, net
80,822,000

 
68,631,000

Goodwill
22,957,000

 
2,403,000

Intangibles, net
16,666,000

 
513,000

Other non-current assets
2,184,000

 
2,076,000

Total Assets
$
192,066,000

 
$
138,578,000

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
3,230,000

 
3,000,000

Accounts payable
29,066,000

 
13,850,000

Compensation and related benefits
5,071,000

 
3,524,000

Accrued other liabilities
4,940,000

 
4,212,000

Total current liabilities
42,307,000

 
24,586,000

 
 
 
 
Long-term debt
38,591,000

 
3,750,000

Deferred tax liability
395,000

 
395,000

Post retirement benefits liability
7,924,000

 
7,954,000

Total Liabilities
$
89,217,000

 
$
36,685,000

Commitments and Contingencies

 

Stockholders’ Equity:
 
 
 
Preferred stock — $0.01 par value, authorized shares — 10,000,000; no shares outstanding at September 30, 2018 and December 31, 2017

 

Common stock — $0.01 par value, authorized shares – 20,000,000; outstanding shares: 7,771,415 at September 30, 2018 and 7,711,277 December 31, 2017
78,000

 
77,000

Paid-in capital
32,693,000

 
31,465,000

Accumulated other comprehensive income, net of income taxes
2,609,000

 
2,070,000

Treasury stock - at cost, 3,790,308 at September 30, 2018 and 3,773,128 at December 31, 2017
(28,403,000
)
 
(28,153,000
)
Retained earnings
95,872,000

 
96,434,000

Total Stockholders’ Equity
102,849,000

 
101,893,000

Total Liabilities and Stockholders’ Equity
$
192,066,000

 
$
138,578,000

See notes to unaudited consolidated financial statements.

5


Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)

 
Common Stock
Outstanding
 
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Treasury Stock
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017, as previously reported
7,711,277

 
$
77,000

 
$
31,465,000

 
$
2,070,000

 
$
(28,153,000
)
 
$
96,434,000

 
$
101,893,000

Impact of change in accounting policy (See Note 2)
 
 
 
 
 
 
 
 
 
 
1,069,000

 
1,069,000

Balance at January 1, 2018
7,711,277

 
$
77,000

 
$
31,465,000

 
$
2,070,000

 
$
(28,153,000
)
 
$
97,503,000

 
$
102,962,000

Net loss
 
 
 
 
 
 
 
 
 
 
(839,000
)
 
(839,000
)
Cash dividends paid
 
 
 
 
 
 
 
 
 
 
(792,000
)
 
(792,000
)
Change in post retirement benefits, net of tax benefit of $51,000
 
 
 
 
 
 
(192,000
)
 
 
 
 
 
(192,000
)
Unrealized foreign currency hedge gain, net of tax of $156,000
 
 
 
 
 
 
404,000

 
 
 
 
 
404,000

Change in interest rate swaps, net of tax of $97,000
 
 
 
 
 
 
327,000

 
 
 
 
 
327,000

Purchase of treasury stock
(17,180
)
 
 
 
 
 
 
 
(250,000
)
 
 
 
(250,000
)
Restricted stock vested
77,318

 
1,000

 
 
 
 
 
 
 
 
 
1,000

Share-based compensation
 
 
 
 
1,228,000

 
 
 
 
 
 
 
1,228,000

Balance at September 30, 2018
7,771,415

 
$
78,000

 
$
32,693,000

 
$
2,609,000

 
$
(28,403,000
)
 
$
95,872,000

 
$
102,849,000

See notes to unaudited consolidated financial statements.


6


Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(839,000
)
 
$
4,704,000

 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,105,000

 
4,814,000

Loss on disposal of assets
6,000

 

Share-based compensation
1,228,000

 
1,061,000

Loss on foreign currency translation
14,000

 
29,000

Change in operating assets and liabilities, net of effects of acquisition:

 
 
Accounts receivable
(12,528,000
)
 
(4,742,000
)
Inventories
(2,265,000
)
 
(1,882,000
)
Prepaid and other assets
3,060,000

 
(1,544,000
)
Accounts payable
13,272,000

 
3,062,000

Accrued and other liabilities
(2,255,000
)
 
(684,000
)
Post retirement benefits liability
(274,000
)
 
(289,000
)
Net cash provided by operating activities
6,524,000

 
4,529,000

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(4,761,000
)
 
(2,259,000
)
Purchase of assets of Horizon Plastics
(62,457,000
)
 

Net cash used in investing activities
(67,218,000
)
 
(2,259,000
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Gross repayments on revolving line of credit
(67,594,000
)
 

Gross borrowings on revolving line of credit
67,594,000

 

Proceeds from term loan
45,000,000

 

Payment of principal on term loans
(9,281,000
)
 
(2,250,000
)
Payment of deferred loan costs
(763,000
)
 

Cash dividends paid
(792,000
)
 
(393,000
)
Payments related to the purchase of treasury stock
(250,000
)
 
(372,000
)
Net cash provided by (used in) financing activities
33,914,000

 
(3,015,000
)
 
 
 
 
Net change in cash and cash equivalents
(26,780,000
)
 
(745,000
)
 
 
 
 
Cash and cash equivalents at beginning of period
26,780,000

 
28,285,000

 
 
 
 
Cash and cash equivalents at end of period
$

 
$
27,540,000

 
 
 
 
Cash paid for:
 
 
 
Interest (net of amounts capitalized)
$
1,612,000

 
$
193,000

Income taxes
$
848,000

 
$
2,394,000

Non Cash:
 
 
 
Fixed asset purchases in accounts payable
$
344,000

 
$
343,000

See notes to unaudited consolidated financial statements.

7


Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position of Core Molding Technologies, Inc. and its subsidiaries (“Core Molding Technologies” or the “Company”) at September 30, 2018, and the results of operations and cash flows for the nine months ended September 30, 2018. The Company has reclassified certain prior-year amounts to conform to the current-year's presentation. The “Notes to Consolidated Financial Statements” contained in the Company's 2017 Annual Report to Shareholders, should be read in conjunction with these consolidated financial statements.

Core Molding Technologies is a manufacturer of sheet molding compound ("SMC") and molder of thermoset and thermoplastic products. The Company produces high quality molded products, assemblies and SMC materials for varied markets, including medium and heavy-duty trucks, automotive, marine, home improvement, water management, agriculture, 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 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 web injection molding. Core Molding Technologies has its headquarters in Columbus, Ohio, and operates production facilities in Columbus and Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; Matamoros and Escobedo, Mexico; and Cobourg, Ontario, Canada.

2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
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 title and risk of ownership to the customer and is entitled to payment upon shipment. In limited circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes title and risk of ownership 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.

8


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.
Income taxes: The Company’s consolidated balance sheets include a net non-current deferred tax liability of $395,000 at September 30, 2018 and December 31, 2017. 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. For more information, refer to Note 11 of the Notes to Consolidated Financial Statements contained in the Company's 2017 Annual Report to Shareholders on Form 10-K.
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 recorded an allowance for doubtful accounts of $18,000 and zero at September 30, 2018 and December 31, 2017, respectively. Management also records estimates for chargebacks for customer returns and deductions, discounts offered to customers, and price adjustments. Should customer chargebacks fluctuate from the estimated amounts, additional allowances may be required. The Company reduced accounts receivable for chargebacks by $2,163,000 at September 30, 2018 and $857,000 at December 31, 2017.
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 $715,000 at September 30, 2018 and $624,000 at December 31, 2017.
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. The Company has recorded contract assets in prepaid expenses and other current assets on the Consolidated Balance Sheet. During the nine months ended September 30, 2018, the Company recognized no impairments on contract assets. Contract liabilities are also generally classified as current. The Company has recorded contract liabilities in other current liabilities on the Consolidated Balance Sheet. For the nine months ended September 30, 2018, the Company recognized revenue of $561,000 related to contract liabilities.
Derivative instruments: Derivative instruments are utilized to manage exposure to fluctuations in foreign currency exchange rates and interest rates on long term debt obligations. All derivative instruments are formally documented as cash flow hedges and are recorded at fair value at each reporting period. Gains and losses related to currency forward contracts and interest rate swaps are deferred and recorded as a component of Accumulated Other Comprehensive Income in the Consolidated Statement of Stockholders' Equity and then subsequently recognized in the Consolidated Statement of Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge, if any, is recognized in income immediately. For additional information on derivative instruments, see Note 14.
Long-Lived Assets: Long-lived assets consist primarily of property, plant and equipment and definite-lived intangibles. 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 property, plant and equipment 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 nine months ended September 30, 2018 or September 30, 2017.
Goodwill and Other Intangibles: The Company evaluates goodwill annually on December 31st to determine whether impairment exists, or at interim periods if an indicator of possible impairment exists. The Company evaluates goodwill for impairment utilizing the one-step 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 macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, entity specific events and capital markets pricing. The Company places more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform the first step of the impairment test.

If the Company's fair value is determined to be more likely than not impaired based on the one-step qualitative approach, a quantitative valuation to estimate the fair value of the Company is performed. Fair value measurements are based on a projected discounted cash flow valuation model, in accordance with ASC 350, “Intangibles-Goodwill and Other.”


9


There was no impairment of the Company's goodwill for the year ended December 31, 2017, and no indicators of impairment for the nine months ended September 30, 2018.
Self-Insurance: The Company is self-insured with respect to its Columbus and Batavia, Ohio, Gaffney, South Carolina, Winona, Minnesota and Brownsville, Texas medical, dental and vision claims and Columbus and Batavia, Ohio workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company 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, vision and worker’s compensation claims incurred but not reported at September 30, 2018 and December 31, 2017 of $949,000 and $862,000, respectively.
Post-retirement benefits: Management records an accrual for post-retirement costs associated with the health care plan sponsored by Core Molding Technologies. 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 Core Molding Technologies’ operations. The effect of a change in healthcare costs is described in Note 12 of the Notes to Consolidated Financial Statements contained in the Company's 2017 Annual Report to Shareholders on Form 10-K. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $9,020,000 at September 30, 2018 and $9,050,000 at December 31, 2017.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASC Topic 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASC Topic 606, as updated by ASU No. 2015-14, is the first quarter of fiscal year 2018. ASU 2014-09 affects the timing of certain revenue-related transactions primarily resulting from the earlier recognition of the Company's tooling sales and costs. The Company adopted this update as required through a cumulative adjustment to equity and contract assets of $1,069,000 on January 1, 2018. The transitional practical expedient related to contract modifications has been applied and the Company has not retrospectively restated contracts that were modified prior to January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. See Note 2, Critical Accounting Policies and Estimates, for the Company's policy on Revenue Recognition and Note 16, Changes in Accounting Policies, for further discussion on the effect of the adoption of ASC Topic 606 on the Company's Consolidated Financial Statements.

In February 2016, the FASB issued 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, we plan to elect 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 under ASU 2018-11, with the option to elect a package of practical expedients that permits the Company to: a. not reassess whether expired or existing contracts contain leases, b. not reassess lease classification for existing or expired leases and c. not consider whether previously capitalized initial direct costs would be appropriate under the new standard. The Company will elect to apply the package of practical expedients. 

The Company is assessing the impact of this pronouncement and revised guidance and anticipates it will impact the presentation of our lease assets and liabilities and associated disclosures related to the recognition of lease assets and liabilities that are not included in the Consolidated Balance Sheets under existing accounting guidance.  The adoption of pronouncement will have a significant impact on our consolidated balance sheet, but is not expected to have a significant impact on our consolidated statement of income or statement of cash flows.  We will adopt this new accounting standard on its effective date of January 1, 2019. We have not yet determined the dollar impact of recording leases on our consolidated balance sheet. 

In March 2017, FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). The amendments in this update require that an employer disaggregate the service cost component from the other components of net periodic cost (benefit) and report that component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net periodic cost (benefit) are required to be presented in the statement of operations separately from the

10


service cost component and outside of operating earnings. The amendment also allows for the service cost component of net periodic cost (benefit) to be eligible for capitalization when applicable. The guidance was effective for the Company on January 1, 2018 and interim periods within that reporting period. The income statement presentation of the components of net periodic cost (benefit) was applied retrospectively, while limiting the capitalization of net periodic cost (benefit) in assets to the service cost component was applied prospectively. The Company adopted this standard update as required on January 1, 2018 and the impact of adoption resulted in a reclassification of all components of net periodic benefit from operating earnings to other income in the amount of $12,000 for the three months ended September 30, 2018 and 2017, respectively, and $36,000 for the nine months ended September 30, 2018 and 2017, respectively.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

4. NET INCOME PER COMMON SHARE
Basic net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of restricted stock under the treasury stock method.
The computation of basic and diluted net income per common share is as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,803,000
)
 
$
855,000

 
$
(839,000
)
 
$
4,704,000

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic
7,804,000

 
7,711,000

 
7,758,000

 
7,683,000

Effect of dilutive securities

 
46,000

 

 
56,000

Weighted average common and potentially issuable common shares outstanding — diluted
7,804,000

 
7,757,000

 
7,758,000

 
7,739,000

 
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
(0.23
)
 
$
0.11

 
$
(0.11
)
 
$
0.61

Diluted net income (loss) per common share
$
(0.23
)
 
$
0.11

 
$
(0.11
)
 
$
0.61



11



5. MAJOR CUSTOMERS
Core Molding Technologies has four major customers, Navistar, Inc. (“Navistar”), Volvo Group North America, LLC (“Volvo”), PACCAR, Inc. (“PACCAR”) and Universal Forest Products, Inc. (“UFP”). Major customers are defined as customers whose sales individually consist of more than ten percent of total sales during any reporting period in the current year. The following table presents sales revenue for the above-mentioned customers for the three and nine months ended September 30, 2018 and 2017:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Navistar product sales
$
14,123,000

 
$
11,319,000

 
$
37,939,000

 
$
30,495,000

Navistar tooling sales
1,031,000

 
12,000

 
1,043,000

 
90,000

Total Navistar sales
15,154,000

 
11,331,000

 
38,982,000

 
30,585,000

 
 
 
 
 
 
 
 
Volvo product sales
11,037,000

 
7,261,000

 
33,222,000

 
20,044,000

Volvo tooling sales
11,000

 
432,000

 
54,000

 
8,011,000

Total Volvo sales
11,048,000

 
7,693,000

 
33,276,000

 
28,055,000

 
 
 
 
 
 
 
 
PACCAR product sales
10,684,000

 
7,316,000

 
25,984,000

 
19,168,000

PACCAR tooling sales
321,000

 
50,000

 
6,384,000

 
2,932,000

Total PACCAR sales
11,005,000

 
7,366,000

 
32,368,000

 
22,100,000

 
 
 
 
 
 
 
 
UFP product sales
7,212,000

 

 
21,261,000

 

UFP tooling sales
240,000

 

 
240,000

 

Total UFP sales
7,452,000

 

 
21,501,000

 

 
 
 
 
 
 
 
 
Other product sales
19,249,000

 
11,697,000

 
68,837,000

 
41,016,000

Other tooling sales
768,000

 
407,000

 
1,360,000

 
852,000

Total other sales
20,017,000

 
12,104,000

 
70,197,000

 
41,868,000

 
 
 
 
 
 
 
 
Total product sales
62,305,000

 
37,593,000

 
187,243,000

 
110,723,000

Total tooling sales
2,371,000

 
901,000

 
9,081,000

 
11,885,000

Total sales
$
64,676,000

 
$
38,494,000

 
$
196,324,000

 
$
122,608,000


6. INVENTORY

Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventories consisted of the following:

 
September 30, 2018
 
December 31, 2017
Raw materials
$
15,048,000

 
$
8,450,000

Work in process
1,360,000

 
2,061,000

Finished goods
6,240,000

 
2,948,000

 
$
22,648,000

 
$
13,459,000


Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage.


12


7. PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment consisted of the following for the periods specified:
 
September 30, 2018
 
December 31, 2017
Property, plant and equipment
$
162,572,000

 
$
144,849,000

Accumulated depreciation
(81,750,000
)
 
(76,218,000
)
Property, plant and equipment — net
$
80,822,000

 
$
68,631,000


Property, plant, and equipment are recorded at cost, unless obtained through acquisition, then assets are recorded at estimated fair value at the date of acquisition. Preliminary estimated fair value amount of $12,994,000 is included in the above table associated with the January 16, 2018 acquisition of Horizon Plastics. These amounts are preliminary, pending finalization of working capital adjustments and the fair value valuation reports. 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 an adjustment to the depreciation period or to the unamortized balance is warranted. Amounts invested in capital additions in progress were $4,178,000 and $3,045,000 at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, purchase commitments for capital expenditures in progress were $1,087,000 and $1,071,000, respectively.

8. HORIZON PLASTICS ACQUISITION

On January 16, 2018, 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, subject to a working capital closing adjustment and other customary holdbacks, which are still pending.

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 11, 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 process capabilities to include structural foam and structural web molding, expand its geographical footprint, and diversify the Company's customer base.

Consideration was preliminarily allocated to assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows:
Accounts Receivable
 
$
7,655,000

Inventory
 
6,567,000

Other Current Assets
 
642,000

Property and Equipment
 
12,994,000

Intangibles
 
17,520,000

Goodwill
 
20,554,000

Accounts Payable
 
(3,181,000
)
Other Current Liabilities
 
(294,000
)
 
 
$
62,457,000

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 of expense for the nine months ended September 30, 2018 associated with the acquisition, which is recorded in selling, general and administrative expense.


13


The amount preliminarily 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
$
1,910,000

5
Trademarks
1,610,000

25
Developed Technology
4,420,000

7
Customer Relationships
9,580,000

12
Total
$
17,520,000

 

The allocation of purchase price is preliminary and subject to completion upon obtaining the necessary remaining information, including (1) the identification and valuation of assets acquired and liabilities assumed, including intangible assets and related goodwill, and (2) the finalization of the opening balance sheet, including working capital settlements which are still pending. We have preliminarily valued the acquired assets and liabilities based on their estimated fair value. These estimates are subject to change as additional information becomes available. Any adjustments to the preliminary fair values will be made as such information becomes available and made within the customary measurement period. 

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 three months ended September 30,
 
Pro forma for the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net revenue
$
64,676,000

 
$
54,348,000

 
$
198,993,000

 
$
170,666,000

Net income (loss)
(1,693,000
)
 
1,570,000

 
142,000

 
7,750,000

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
0.20

 
$
0.02

 
$
1.01

Diluted
$
(0.22
)
 
$
0.20

 
$
0.02

 
$
1.00



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 three months ended September 30,
 
Pro forma for the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Depreciation expense
$

 
$
3,000

 
$
55,000

 
$
41,000

Amortization expense

 
469,000

 
78,000

 
1,407,000

Interest (income) expense
(141,000
)
 
364,000

 
(204,000
)
 
1,301,000

Non-recurring transaction costs

 

 
(1,289,000
)
 

Income tax expense (benefit)
31,000

 
(251,000
)
 
263,000

 
(819,000
)


14


9. GOODWILL AND INTANGIBLES

Goodwill activity for the nine months ended September 30, 2018 consisted of the following:

Balance at December 31, 2017
 
$
2,403,000

Additions
 
20,554,000

Impairment
 

Balance at September 30, 2018
 
$
22,957,000


Intangible assets at September 30, 2018 were comprised of the following:

Definite-lived Intangible Assets
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Trade Name
 
25
 
$
250,000

 
$
(35,000
)
 
$
215,000

Trademarks
 
25
 
1,610,000

 
(46,000
)
 
1,564,000

Non-competition Agreement
 
5
 
1,910,000

 
(270,000
)
 
1,640,000

Developed Technology
 
7
 
4,420,000

 
(447,000
)
 
3,973,000

Customer Relationships
 
10-12
 
9,980,000

 
(706,000
)
 
9,274,000

 
 
 
 
$
18,170,000

 
$
(1,504,000
)
 
$
16,666,000


The aggregate intangible asset amortization expense was $482,000 and $13,000 for the three months ended September 30, 2018 and 2017, respectively. The aggregate intangible asset amortization expense was $1,366,000 and $38,000 for the nine months ended September 30, 2018 and 2017, respectively. Amounts included above related to the January 16, 2018 acquisition of Horizon Plastics are preliminary and subject to change as the Company finalizes working capital settlements and valuation studies.

10. POST RETIREMENT BENEFITS
The components of expense for Core Molding Technologies’ post-retirement benefit plans for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Pension expense:
 
 
 
 
 
 
 
Multi-employer plan
$
186,000

 
$
153,000

 
$
549,000

 
$
479,000

Defined contribution plan
182,000

 
162,000

 
698,000

 
557,000

Total pension expense
368,000

 
315,000

 
1,247,000

 
1,036,000

 
 
 
 
 
 
 
 
Health and life insurance:
 
 
 
 
 
 
 
Interest cost
69,000

 
75,000

 
207,000

 
224,000

Amortization of prior service costs
(124,000
)
 
(124,000
)
 
(372,000
)
 
(372,000
)
Amortization of net loss
43,000

 
37,000

 
129,000

 
112,000

Net periodic benefit cost
(12,000
)
 
(12,000
)
 
(36,000
)
 
(36,000
)
 
 
 
 
 
 
 
 
Total post retirement benefits expense
$
356,000

 
$
303,000

 
$
1,211,000

 
$
1,000,000


The Company made payments of $1,392,000 to pension plans and $238,000 for post-retirement healthcare and life insurance during the nine months ended September 30, 2018. For the remainder of 2018, the Company expects to make approximately $300,000 of pension plan payments, of which $92,000 was accrued at September 30, 2018. The Company also expects to make approximately $858,000 of post-retirement healthcare and life insurance payments for the remainder of 2018, all of which were accrued at September 30, 2018.


15


11. DEBT
Debt consists of the following:
 
September 30,
2018
 
December 31,
2017
Term loan payable to Key Bank, interest at a variable rate (3.36% at December 31, 2017)
$

 
$
6,750,000

Term loans, interest at a variable rate (4.24% at September 30, 2018) with quarterly payments of interest and principal through January 2023
42,469,000

 

Revolving loans, interest at a variable rate (3.92% at September 30, 2018)

 

Total
42,469,000

 
6,750,000

Less deferred loan costs
(648,000
)
 

Less current portion
(3,230,000
)
 
(3,000,000
)
Long-term debt
$
38,591,000

 
$
3,750,000


Credit Agreement

On January 16, 2018, the Company entered into an A/R Credit Agreement with KeyBank National Association as 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 “US Revolving Loans”) from the Lenders and term loans in the aggregate principal amount of up to $32,000,000 from the Lenders, (ii) the 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 US Revolving Loans to the Company on a dollar-for-dollar basis) and term loans in an aggregate principal amount of up to $13,000,000 from the Lenders, (iii) the Company obtained a Letter of Credit Commitment of $250,000, of which $175,000 has been issued and (iv) the Company repaid the outstanding term loan balance of $6,750,000. The 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 US 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. The basis point margin can range from 175 to 225 basis points based on the Company's leverage ratio and was set at 200 basis points as of September 30, 2018.

The Company has available $40,000,000 of variable rate revolving loans of which none is outstanding as of September 30, 2018. These revolving loans are scheduled to mature on January 1, 2022, but are classified, when outstanding, as current on the balance sheet as the Company expects to pay the outstanding balance off within the next twelve months.

Bank Covenants

The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios and fixed charge ratios, as well as other customary affirmative and negative covenants. As of September 30, 2018, the Company was in compliance with its financial covenants associated with the loans made under the Credit Agreement as described above.

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 will pay a fixed rate of approximately 2.49% to the counterparty and receives one month LIBOR resulting in a total initial fixed rate of approximately 4.49% for both cash flow hedges. The fair value of the interest rate swap was an asset of $424,000 at September 30, 2018. 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.


16


12. INCOME TAXES

The Tax Cuts and Jobs Act (“the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings, provides for acceleration of business asset expensing, and reduces the amount of executive pay that may qualify as a tax deduction, among other changes. FASB ASC 740 requires the recognition of the effects of tax law changes in the period of enactment. However, due to the complexities of the new tax legislation, the SEC has issued SAB 118 which allows for the recognition of provisional amounts during a measurement period.

The Act's one-time transition tax calculation is complex, and as such we made a reasonable estimate of the effects of the one-time transition tax, and recognized a provisional amount in the fourth quarter of 2017. We have since finalized our analysis and subsequently filed our 2017 U.S. income tax return. The actual impact of the one-time transition tax was materially consistent with the provisional amount booked at December 31, 2017.
The Company’s consolidated balance sheets include a net non-current deferred tax liability of $395,000 at September 30, 2018 and December 31, 2017. 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. As of September 30, 2018 and December 31, 2017, the Company had no liability for unrecognized tax benefits. The Company does not anticipate that unrecognized tax benefits will significantly change within the next twelve months.
Income tax expense for the nine months ended September 30, 2018 is estimated to be $228,000, on a loss of $611,000 before income taxes. Net income tax expense for the nine months ended September 30, 2018 is a result of taxable income of $4,205,000 in the Company's Canadian and Mexican operations, which has a combined effective tax rate of approximately 29%, combined with operating loss of $4,815,000 in the Company's United States facilities, which has an effective tax rate of 21%. Income tax expense for the nine months ended September 30, 2017 was estimated to be $2,262,000, or approximately 32% of income before income taxes.
The Company files income tax returns in the U.S., Mexico, Canada and various state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2015, and is no longer subject to Mexican income tax examinations by Mexican authorities for years prior to 2012. As a result of the Horizon Plastics acquisition on January 16, 2018, the Company now has filing requirements in Canada.

13. SHARE BASED COMPENSATION
The Company has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the Company’s stockholders in May 2006 and as amended in May 2015. 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.
Restricted Awards
The Company grants shares of its common stock to certain directors, officers, key managers and employees in the form of unvested stock and units (“Restricted Awards”). These awards are recorded at the market value of Core Molding Technologies’ common stock on the date of issuance, net of estimated forfeitures, and amortized ratably as compensation expense over the applicable vesting period, which is typically three years. The Company has applied forfeiture rates, estimated based on historical experience, of 3.5%-6.5% to the restricted stock fair values. These estimated forfeiture rates are applied to grants based on their remaining vesting term and may be revised in subsequent periods if actual forfeitures differ from these estimates.






17


The following summarizes the status of Restricted Stock and changes during the nine months ended September 30, 2018:

 
Number of
Shares
 
Weighted Average
Grant Date
Fair Value
Unvested balance at December 31, 2017
141,095

 
$
16.79

Granted
172,578

 
14.83

Vested
(77,318
)
 
16.31

Forfeited
(15,625
)
 
17.54

Unvested balance at September 30, 2018
220,730

 
$
15.37

At September 30, 2018 and 2017, there was $2,589,000 and $1,871,000, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to Restricted Awards granted under the 2006 Plan. That cost is expected to be recognized over the weighted-average period of 1.6 years. Total compensation cost, net of estimated forfeitures, related to restricted award grants for the three months ended September 30, 2018 and 2017 was $259,000 and $270,000, respectively, all of which was recorded to selling, general and administrative expense. Compensation cost related to restricted stock grants for the nine months ended September 30, 2018 and 2017 was $1,229,000 and $1,061,000, respectively, all of which was recorded to selling, general and administrative expense.

Compensation expense for restricted award is recorded at the fair value at the time of the grant, net of estimated forfeitures, over the vesting period of the restricted award grant. The Company does not receive a tax deduction for restricted award until the restricted award vests. The tax deduction for restricted award is based on the fair market value as of the vesting date. Additional tax expense due for the fair market value on the grant date in excess of the value at time of vesting was $20,000 for the nine months ended September 30, 2018. Tax benefits received for vested restricted award in excess of the fair market value as of the grant date were $136,000 for the nine months ended September 30, 2017.
During the nine months ended September 30, 2018 and 2017, employees surrendered 17,180 and 19,533 shares, respectively, of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

The three levels are defined as follows:

Level 1 -
Quoted prices in active markets for identical assets and liabilities.
Level 2 -
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 -
Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The Company’s financial instruments consist of 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 September 30, 2018 and December 31, 2017 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 September 30, 2018 and December 31, 2017 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had Level 2 fair value measurements at September 30, 2018 and December 31, 2017 relating to the Company’s interest rate swaps and foreign currency derivatives.




18


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 September 30, 2018, 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 interest rate swap has an initial fixed rate of 4.49% and an effective date of January 18, 2018. At inception, all interest rate swaps were formally documented as cash flow hedges and are measured at fair value each reporting period. See Note 11, "Debt", for additional information.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments:
 
Fair Value of Derivative Instruments
 
September 30, 2018
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
Prepaid expense other current assets
 
$
284,000

 
Accrued liabilities other
 
$
21,000

Notional contract values
 
 
$
12,207,000

 
 
 
$
9,318,000

Interest rate swaps
Other non-current assets
 
$
424,000

 
Other non-current liabilities
 
$

Notional swap values
 
 
$
33,032,000

 
 
 
$

 
December 31, 2017
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
Prepaid expense other current assets
 
$

 
Accrued liabilities other
 
$
298,000

Notional contract values
 
 
$

 
 
 
$
8,766,000

Interest rate swaps
Other non-current assets
 
$

 
Other non-current liabilities
 
$

Notional swap values
 
 
$

 
 
 
$








19


The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Other Comprehensive Income (AOCI) for the three months ended September 30, 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


2018
2017

 
2018
2017
Foreign exchange contracts
 
$
887,000

$
113,000

 
Cost of goods sold
 
$
(11,000
)
$
220,000

 
 
Selling, general and administrative expense
 
$
(9,000
)
$
32,000

Interest rate swaps
 
$
114,000

$

 
Interest Expense
 
$
(61,000
)
$


The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Other Comprehensive Income (AOCI) for the nine months ended September 30, 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
 
 
2018
2017
 
 
2018
2017
Foreign exchange contracts
 
$
766,000

$
1,054,000

 
Cost of goods sold
 
$
184,000

$
346,000

 
 
Selling, general and administrative expense
 
$
21,000

$
51,000

Interest rate swaps
 
$
254,000

$

 
Interest Expense
 
$
(169,000
)
$



(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 foreign currency spend.

See Note 8 for non-recurring fair value measurements for the nine months ended September 30, 2018.

20



15. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in Accumulated Other Comprehensive Income, net of tax, for the nine months ended September 30, 2018 and 2017:
2017:
Hedging Derivative Activities(A)
Post Retirement Benefit Plan Items(B)
Accumulated Other Comprehensive Income
Balance at December 31, 2016
$
(200,000
)
$
2,614,000

$
2,414,000

Other Comprehensive Income before reclassifications
1,054,000


1,054,000

Amounts reclassified from accumulated other comprehensive income
(397,000
)
(260,000
)
(657,000
)
Income tax benefit
(223,000
)
78,000

(145,000
)
Balance at September 30, 2017
$
234,000

$
2,432,000

$
2,666,000

 
 
 
 
2018:
 
 
 
Balance at December 31, 2017
$
(197,000
)
$
2,267,000

$
2,070,000

Other Comprehensive Income before reclassifications
1,020,000


1,020,000

Amounts reclassified from accumulated other comprehensive income
(36,000
)
(243,000
)
(279,000
)
Income tax benefit (expense)
(253,000
)
51,000

(202,000
)
Balance at September 30, 2018
$
534,000

$
2,075,000

$
2,609,000


(A) The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of foreign currency spend. The tax effect of the foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income. The interest rate swap activity reclassified from Accumulated Other Comprehensive Income is recorded in Interest Expense. The tax effect of the interest rate swap activity reclassified from Accumulated Other Comprehensive Income is included in income tax expense on the Consolidated Statements of Income.

(B) The effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income is included in other income and expense on the Consolidated Statements of Income. These Accumulated Other Comprehensive Income components are included in the computation of net periodic benefit cost (see Note 10 "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.

21


16. CHANGES IN ACCOUNTING POLICIES

The Company adopted ASC Topic 606 on January 1, 2018 through a cumulative adjustment to equity and contract assets of $1,069,000. Under ASC Topic 606, revenue of certain tooling programs that include an enforceable right to payment are now recognized over time based on the extent of progress towards completion of its performance obligation. Prior to the adoption of ASC Topic 606, the Company recognized revenue for these contracts on a completed contract basis.

The following tables summarize the effects of adopting Topic 606 on our unaudited consolidated financial statements for the three and nine months ended September 30, 2018.

Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
September 30, 2018
 
As Reported
 
Adjustments
 
Without adoption of Topic 606
Net sales:
 
 
 
 
 
Products
$
62,305,000

 
$

 
$
62,305,000

Tooling
2,371,000

 
1,488,000

 
3,859,000

Total net sales
64,676,000

 
1,488,000

 
66,164,000

 
 
 
 
 
 
Total cost of sales
59,814,000

 
1,245,000

 
61,059,000

 
 
 
 
 
 
Gross margin
4,862,000

 
243,000

 
5,105,000

 
 
 
 
 
 
Total selling, general and administrative expense
6,349,000

 

 
6,349,000

 
 
 
 
 
 
Operating Income (Loss)
(1,487,000
)
 
243,000

 
(1,244,000
)
 
 
 
 
 
 
Other income and expense
 
 
 
 
 
Interest expense
632,000

 

 
632,000

Net periodic post-retirement benefit cost
(12,000
)
 

 
(12,000
)
Total other income and expense
620,000

 

 
620,000

 
 
 
 
 
 
Income (loss) before taxes
(2,107,000
)
 
243,000

 
(1,864,000
)
 
 
 
 
 
 
Income tax expense (benefit)
(304,000
)
 
51,000

 
(253,000
)
 
 
 
 
 
 
Net income (loss)
$
(1,803,000
)
 
$
192,000

 
$
(1,611,000
)
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
Basic
$
(0.23
)
 
$

 
$
(0.21
)
Diluted
$
(0.23
)
 
$

 
$
(0.21
)










22



Consolidated Statements of Income (Unaudited)

 
Nine Months Ended
 
September 30, 2018
 
As Reported
 
Adjustments
 
Without adoption of Topic 606
Net sales:
 
 
 
 
 
Products
$
187,243,000

 
$

 
$
187,243,000

Tooling
9,081,000

 
3,850,000

 
12,931,000

Total net sales
196,324,000

 
3,850,000

 
200,174,000

 
 
 
 
 
 
Total cost of sales
175,679,000

 
3,006,000

 
178,685,000

 
 
 
 
 
 
Gross margin
20,645,000

 
844,000

 
21,489,000

 
 
 
 
 
 
Total selling, general and administrative expense
19,587,000

 

 
19,587,000

 
 
 
 
 
 
Operating Income
1,058,000

 
844,000

 
1,902,000

 
 
 
 
 
 
Other income and expense
 
 
 
 
 
Interest expense
1,705,000

 

 
1,705,000

Net periodic post-retirement benefit cost
(36,000
)
 

 
(36,000
)
Total other income and expense
1,669,000

 

 
1,669,000

 
 
 
 
 
 
Income (loss) before taxes
(611,000
)
 
844,000

 
233,000

 
 
 
 
 
 
Income tax expense
228,000

 
177,000

 
405,000

 
 
 
 
 
 
Net income (loss)
$
(839,000
)
 
$
667,000

 
$
(172,000
)
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
Basic
$
(0.11
)
 
$

 
$
(0.02
)
Diluted
$
(0.11
)
 
$

 
$
(0.02
)




23


Consolidated Balance Sheets (Unaudited)

 
September 30, 2018
 
As Reported
 
Adjustments
 
Without adoption of Topic 606
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$

Accounts receivable, net
38,666,000

 

 
38,666,000

Inventory, net
22,648,000

 

 
22,648,000

Prepaid expenses and other current assets
8,123,000

 
(402,000
)
 
7,721,000

Total current assets
69,437,000

 
(402,000
)
 
69,035,000

 
 
 
 
 
 
Property, plant and equipment, net
80,822,000

 

 
80,822,000

Goodwill
22,957,000

 

 
22,957,000

Intangibles, net
16,666,000

 

 
16,666,000

Other non-current assets
2,184,000

 

 
2,184,000

Total Assets
$
192,066,000

 
$
(402,000
)
 
$
191,664,000

 
 
 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Revolving line of credit
$

 
$

 
$

Current portion of long-term debt
3,230,000

 

 
3,230,000

Accounts payable
29,066,000

 

 
29,066,000

Compensation and related benefits
5,071,000

 

 
5,071,000

Accrued other liabilities
4,940,000

 

 
4,940,000

Total current liabilities
42,307,000

 

 
42,307,000

 
 
 
 
 
 
Long-term debt
38,591,000

 

 
38,591,000

Deferred tax liability
395,000

 

 
395,000

Post retirement benefits liability
7,924,000

 

 
7,924,000

Total Liabilities
$
89,217,000

 
$

 
$
89,217,000

Commitments and Contingencies

 
 
 

Stockholders’ Equity:
 
 
 
 
 
Preferred stock — $0.01 par value, authorized shares — 10,000,000; no shares outstanding at September 30, 2018 and December 31, 2017

 

 

Common stock — $0.01 par value, authorized shares – 20,000,000; outstanding shares: 7,771,415 at September 30, 2018 and 7,711,277 December 31, 2017
78,000

 

 
78,000

Paid-in capital
32,693,000

 

 
32,693,000

Accumulated other comprehensive income, net of income taxes
2,609,000

 

 
2,609,000

Treasury stock - at cost, 3,790,308 at September 30, 2018 and 3,773,128 at December 31, 2017
(28,403,000
)
 

 
(28,403,000
)
Retained earnings
95,872,000

 
(402,000
)
 
95,470,000

Total Stockholders’ Equity
102,849,000

 
(402,000
)
 
102,447,000

Total Liabilities and Stockholders’ Equity
$
192,066,000

 
$
(402,000
)
 
$
191,664,000



24


Consolidated Statements of Cash Flows (Unaudited)

 
Nine Months Ended
 
September 30, 2018
 
As Reported
 
Adjustments
 
Without adoption of Topic 606
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(839,000
)
 
$
667,000

 
$
(172,000
)
 
 
 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
7,105,000

 

 
7,105,000

Loss on disposal of assets
6,000

 

 
6,000

Share-based compensation
1,228,000

 

 
1,228,000

Loss on foreign currency translation
14,000

 

 
14,000

Change in operating assets and liabilities:

 
 
 
 
Accounts receivable
(12,528,000
)
 

 
(12,528,000
)
Inventories
(2,265,000
)
 

 
(2,265,000
)
Prepaid and other assets
3,060,000

 
(667,000
)
 
2,393,000

Accounts payable
13,272,000

 

 
13,272,000

Accrued and other liabilities
(2,255,000
)
 

 
(2,255,000
)
Post retirement benefits liability
(274,000
)
 

 
(274,000
)
Net cash used in operating activities
6,524,000

 

 
6,524,000

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Purchase of property, plant and equipment
(4,761,000
)
 

 
(4,761,000
)
Purchase of assets of Horizon Plastics
(62,457,000
)
 

 
(62,457,000
)
Net cash used in investing activities
(67,218,000
)
 

 
(67,218,000
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Gross repayments on revolving line of credit
(67,594,000
)
 

 
(67,594,000
)
Gross borrowings on revolving line of credit
67,594,000

 

 
67,594,000

Proceeds from Horizon Plastics term loan
45,000,000

 

 
45,000,000

Payment of principal on term loans
(9,281,000
)
 

 
(9,281,000
)
Payment of deferred loan costs
(763,000
)
 

 
(763,000
)
Cash dividends paid
(792,000
)
 

 
(792,000
)
Payments related to the purchase of treasury stock
(250,000
)
 

 
(250,000
)
Net cash provided by financing activities
33,914,000

 

 
33,914,000

 
 
 
 
 
 
Net change in cash and cash equivalents
(26,780,000
)
 

 
(26,780,000
)
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
26,780,000

 

 
26,780,000