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 June 30, 2022, and the results of operations and cash flows for the six months ended June 30, 2022. 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 Annual Report on Form 10-K for the year ended December 31, 2021, should be read in conjunction with these consolidated financial statements.
Core Molding Technologies and its subsidiaries operate in the engineered materials market as one operating segment as a molder of thermoplastic and thermoset structural products. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, power sports, building products, industrial and utilities and other commercial markets. Core Molding Technologies has its headquarters in Columbus, Ohio, and operates six production facilities in the United States, Canada and Mexico.
2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Principles of Consolidation: 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.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. 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 and conditions.
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 compounds and thermoset and thermoplastic products. Revenue from product sales is generally recognized when products are shipped, as the Company transfers control to the customer and is entitled to payment upon shipment. In certain circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes control at our production facility.
Tooling revenue is earned from manufacturing multiple tools, molds and assembly equipment as part of a tooling program for a customer. Given that the Company is providing a significant service of producing highly interdependent component parts of the tooling program, each tooling program consists of a single performance obligation to provide the customer the capability to produce a single product. Based on the arrangement with the customer, the Company recognizes revenue either at a point in time or over a given period. 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.
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 titled in exchange for transferring the promised goods or services to the customer. Under the cost-to-cost measure of progress, progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash is held primarily in three banks in three separate jurisdictions. The Company had $114,000 cash on hand at June 30, 2022 and had $6,146,000 cash on hand at December 31, 2021.
Accounts Receivable Allowances: Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has determined that a $53,000 allowance for doubtful accounts is needed at June 30, 2022 and $90,000 at December 31, 2021. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for estimated chargebacks of $311,000 at June 30, 2022 and $222,000 at December 31, 2021. There have been no material changes in the methodology of these calculations.
Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or net realizable value. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage. The Company has recorded an allowance for slow moving and obsolete inventory of $319,000 at June 30, 2022 and $362,000 at December 31, 2021.
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. The Company has recorded contract assets of $679,000 at June 30, 2022, and $17,000 at December 31, 2021. Contract assets are generally classified as current within prepaid expenses and other current assets on the Consolidated Balance Sheets. For the six months ended June 30, 2022, the Company recognized no impairments on contract assets. For the six months ended June 30, 2022, the Company recognized $3,547,000 of revenue from contract liabilities related to open jobs outstanding as of December 31, 2021.
Income Taxes: 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.
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 were no impairment charges of the Company’s long-lived assets for the six months ended June 30, 2022 and June 30, 2021, respectively.
Goodwill: The purchase consideration of acquired businesses has been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates. Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and requires these assets be reviewed for impairment.
The annual impairment tests of goodwill may be completed through qualitative assessments; however, the Company may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any period. The Company may resume the qualitative assessment in any subsequent period.
Under a qualitative and quantitative approach, the impairment test for goodwill consists of an assessment of whether it is more-likely-than-not that the fair value is less than its carrying amount. As part of the qualitative assessment, the Company considers relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include changes in economic conditions, industry and market conditions, cost factors, overall financial performance, and capital markets pricing. The Company places more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform step one of the impairment test. If the Company elects to bypass the qualitative assessment, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value exceeds its fair value, the Company proceeds to a quantitative approach. There were no impairment charges of the Company's goodwill for the six months ended June 30, 2022 and June 30, 2021, respectively.
Self-Insurance: The Company is self-insured with respect to its facilities in Columbus, Ohio; Gaffney, South Carolina; Winona, Minnesota; and Brownsville, Texas for medical, dental and vision claims and Columbus, Ohio for workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company is also self-insured for dental and vision with respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at June 30, 2022 and December 31, 2021 of $898,000 and $916,000, respectively.
Fair Value of Financial Instruments: The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. Cash and cash equivalents, accounts receivable and accounts payable carrying values as of June 30, 2022 and December 31, 2021 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of the Company's debt with Wells Fargo Bank, National Association approximate fair value as of June 30, 2022 and December 31, 2021 due to the short term nature of the underlying variable rate LIBOR agreements. The fair value of the Company's debt with FGI Equipment Finance, LLC was $10,937,000 as of June 30, 2022. As of December 31, 2021 the Company's debt with FGI Equipment Finance, LLC approximated fair value, due to immaterial movement in interest rates since the Company entered into the Promissory Note on October 20, 2020.
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, "Post Retirement Benefits", of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Core Molding Technologies had a liability for post-retirement healthcare benefits based on actuarial computed estimates of $9,113,000 at June 30, 2022 and $9,080,000 at December 31, 2021.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Current Expected Credit Loss (CECL)
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which is effective with the adoption of ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326),” which is also effective with the adoption of ASU 2016-13. In November 2019, the FASB voted to delay the implementation date for certain companies, including those that qualify as a smaller reporting company under the U.S. Securities and Exchange Commission rules, until fiscal years beginning after December 15, 2022. We will adopt this ASU on its effective date of January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.
Facilitation of the Effects of Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-4, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We have done an assessment verifying ASU No. 2020-4 no longer has an impact on the Company due to the Credit Agreement entered into on July 22, 2022 as described in Note 15 - Subsequent Events.
4. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of dilutive stock appreciation rights and restricted stock under the treasury stock method.
On May 13, 2021, the Company's shareholders approved the 2021 Long Term Equity Incentive Plan (the “2021 Plan”) that replaced the 2006 Long Term Equity Incentive Plan (the “2006 Plan”) approved in May 2006 and amended in May 2015. The 2021 Plan provides restricted stock award recipients voting rights equivalent to the Company's common stock and accrual of dividends but not receipt of dividends until all conditions or restrictions related to such award have been satisfied. Accordingly, the restricted shares are not considered participating shares. The 2006 Plan provides restricted stock award recipients voting rights equivalent to the Company’s common stock and accrual and receipt of dividends irrespective of any conditions or restrictions related to such award being satisfied. Accordingly, the restricted shares granted from the 2006 Plan are considered a participating security and the Company is required to apply the two-class method to consider the impact of the restricted shares on the calculation of basic and diluted earnings per share.
The computation of basic and diluted net income per common share (in thousands, except for per share data) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 2,188 | | | $ | 4,086 | | | $ | 6,052 | | | $ | 7,542 | |
| Less: net income allocated to participating securities | 40 | | | 232 | | | 121 | | | 437 | |
| Net income available to common shareholders | $ | 2,148 | | | $ | 3,854 | | | $ | 5,931 | | | $ | 7,105 | |
| | | | | | | |
| Weighted average common shares outstanding — basic | 8,329,000 | | | 8,002,000 | | | 8,298,000 | | | 7,994,000 | |
| Effect of weighted average dilutive securities | — | | | 12,000 | | | — | | | 19,000 | |
| Weighted average common and potentially issuable common shares outstanding — diluted | 8,329,000 | | | 8,014,000 | | | 8,298,000 | | | 8,013,000 | |
| | | | | | | |
| Basic net income per common share | $ | 0.26 | | | $ | 0.48 | | | $ | 0.71 | | | $ | 0.89 | |
| Diluted net income per common share | $ | 0.26 | | | $ | 0.48 | | | $ | 0.71 | | | $ | 0.89 | |
The computation of basic and diluted net income per participating share is as follows (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Net income allocated to participating securities | $ | 40 | | | $ | 232 | | | $ | 121 | | | $ | 437 | | |
| | | | | | | | |
| Weighted average participating shares outstanding — basic | 156,000 | | | 482,000 | | | 170,000 | | | 491,000 | | |
| Effect of dilutive securities | — | | | — | | | — | | | — | | |
| Weighted average common and potentially issuable common shares outstanding — diluted | 156,000 | | | 482,000 | | | 170,000 | | | 491,000 | | |
| | | | | | | | |
| Basic net income per participating share | $ | 0.26 | | | $ | 0.48 | | | $ | 0.71 | | | $ | 0.89 | | |
| Diluted net income per participating share | $ | 0.26 | | | $ | 0.48 | | | $ | 0.71 | | | $ | 0.89 | | |
| | | | | | | | |
| | | | | | | | |
5. MAJOR CUSTOMERS
The Company had five major customers during the six months ended June 30, 2022, BRP, Inc. ("BRP"), Navistar, Inc. ("Navistar"), PACCAR, Inc. ("PACCAR"), Universal Forest Products, Inc. ("UFP") and Volvo Group North America, LLC ("Volvo"). Major customers are defined as customers whose sales individually consist of more than ten percent of the Company's total sales during any annual or interim reporting period in the current year. The loss of a significant portion of sales to these customers could have a material adverse effect on the Company.
The following table presents sales revenue for the above-mentioned customers for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| BRP product sales | $ | 14,498 | | | $ | 10,420 | | | $ | 26,705 | | | $ | 18,989 | |
| BRP tooling sales | 187 | | | 124 | | | 337 | | | 238 | |
| Total BRP sales | 14,685 | | | 10,544 | | | 27,042 | | | 19,227 | |
| | | | | | | |
| Navistar product sales | 14,110 | | | 10,969 | | | 28,132 | | | 20,906 | |
| Navistar tooling sales | 2,260 | | | — | | | 2,270 | | | 306 | |
Total Navistar sales | 16,370 | | | 10,969 | | | 30,402 | | | 21,212 | |
| | | | | | | |
| PACCAR product sales | 9,159 | | | 10,830 | | | 17,905 | | | 20,184 | |
| PACCAR tooling sales | 74 | | | 503 | | | 185 | | | 832 | |
| Total PACCAR sales | 9,233 | | | 11,333 | | | 18,090 | | | 21,016 | |
| | | | | | | |
| UFP product sales | 11,856 | | | 15,115 | | | 24,543 | | | 25,772 | |
| UFP tooling sales | — | | | — | | | — | | | — | |
Total UFP sales | 11,856 | | | 15,115 | | | 24,543 | | | 25,772 | |
| | | | | | | |
| Volvo product sales | 11,885 | | | 7,429 | | | 22,800 | | | 17,554 | |
| Volvo tooling sales | — | | | 27 | | | 87 | | | 47 | |
Total Volvo sales | 11,885 | | | 7,456 | | | 22,887 | | | 17,601 | |
| | | | | | | |
| Other product sales | 31,809 | | | 24,354 | | | 63,133 | | | 44,846 | |
| Other tooling sales | 2,897 | | | 690 | | | 3,229 | | | 3,616 | |
Total other sales | 34,706 | | | 25,044 | | | 66,362 | | | 48,462 | |
| | | | | | | |
| Total product sales | 93,317 | | | 79,117 | | | 183,218 | | | 148,251 | |
| Total tooling sales | 5,418 | | | 1,344 | | | 6,108 | | | 5,039 | |
Total sales | $ | 98,735 | | | $ | 80,461 | | | $ | 189,326 | | | $ | 153,290 | |
6. INVENTORY
Inventories, net consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Raw materials | $ | 20,454 | | | $ | 17,160 | |
Work in process | 1,945 | | | 1,976 | |
Finished goods | 6,558 | | | 5,993 | |
Total | $ | 28,957 | | | $ | 25,129 | |
Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage.
7. LEASES
The Company has operating leases with fixed payment terms for certain buildings and warehouses. The Company's leases have remaining lease terms of less than one year to four years, some of which include options to extend the lease for five years. Operating leases are included in operating lease right-of-use ("ROU") assets, accrued other liabilities and other non-current liabilities in the Consolidated Balance Sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The Company used the applicable incremental borrowing rate at implementation date to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads commensurate with the Company’s secured borrowing rate. At each reporting period when there is a new lease initiated, the Company will utilize its incremental borrowing rate to perform lease classification tests on lease components and to measure ROU assets and lease liabilities.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | $ | 422 | | | $ | 386 | | | $ | 845 | | | $ | 754 | |
Other supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Operating lease right of use assets | $ | 4,694 | | | $ | 5,577 | |
| | | |
Current operating lease liabilities(A) | $ | 1,428 | | | $ | 1,489 | |
Noncurrent operating lease liabilities(B) | 3,309 | | | 4,024 | |
| Total operating lease liabilities | $ | 4,737 | | | $ | 5,513 | |
| | | |
(A)Current operating lease liabilities are included in accrued other liabilities in the Consolidated Balance Sheets.
(B)Noncurrent operating lease liabilities are included in other non-current liabilities in the Consolidated Balance Sheets.
The following table presents certain information related to lease terms and discount rates for leases:
| | | | | | | | | | | | |
| Operating leases | June 30, 2022 | | December 31, 2021 | |
| Weighted average remaining lease term (in years): | 3.7 | | 4.2 | |
| | | | |
| Weighted average discount rate: | 4.0 | % | | 4.1 | % | |
Other information related to leases were as follows (in thousands):
| | | | | | | | | | | |
| Six months ended
June 30, |
| 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases(C) | $ | 845 | | | $ | 754 | |
(C)Cash flow from operating leases are included in prepaid and other assets in the Consolidated Statements of Cash Flows.
Maturities of operating lease liabilities were as follows (in thousands):
| | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | |
| 2022 (remainder of year) | $ | 782 | | | $ | 1,567 | | |
| 2023 | 1,484 | | | 1,468 | | |
| 2024 | 1,489 | | | 1,473 | | |
| 2025 | 798 | | | 783 | | |
| 2026 | 713 | | | 698 | | |
| Total lease payments | 5,266 | | | 5,989 | | |
| Less: imputed interest | (529) | | | (476) | | |
| Total lease obligations | 4,737 | | | 5,513 | | |
| Less: current obligations | (1,428) | | | (1,489) | | |
| Long-term lease obligations | $ | 3,309 | | | $ | 4,024 | | |
8. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment, net consisted of the following for the periods specified (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Property, plant and equipment | $ | 192,012 | | | $ | 183,500 | |
| Accumulated depreciation | (112,605) | | | (107,603) | |
| Property, plant and equipment — net | $ | 79,407 | | | $ | 75,897 | |
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. 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. Depreciation expense for the three months ended June 30, 2022 and 2021 was $2,485,000 and $2,461,000, respectively. Depreciation expense for the six months ended June 30, 2022 and 2021 was $5,002,000 and $4,943,000, respectively. Amounts invested in capital additions in progress were $10,967,000 and $6,605,000 at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022 and December 31, 2021, purchase commitments for capital expenditures in progress were $5,923,000 and $5,315,000, respectively.
9. GOODWILL AND INTANGIBLES
Goodwill activity for the six months ended June 30, 2022 consisted of the following (in thousands):
| | | | | |
| Balance at December 31, 2021 | $ | 17,376 | |
| Additions | — | |
| Impairment | — | |
| Balance at June 30, 2022 | $ | 17,376 | |
Intangibles, net at June 30, 2022 were comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Definite-lived Intangible Assets | Amortization Period | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Trade name | 25 Years | | $ | 250 | | | $ | (73) | | | $ | 177 | |
| Trademarks | 10 Years | | 1,610 | | | (718) | | | 892 | |
| Non-competition agreement | 5 Years | | 1,810 | | | (1,614) | | | 196 | |
| Developed technology | 7 Years | | 4,420 | | | (2,815) | | | 1,605 | |
| Customer relationships | 10-12 Years | | 9,330 | | | (3,607) | | | 5,723 | |
| Total | | | $ | 17,420 | | | $ | (8,827) | | | $ | 8,593 | |
Intangibles, net at December 31, 2021 were comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Definite-lived Intangible Assets | Amortization Period | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Trade name | 25 Years | | $ | 250 | | | $ | (68) | | | $ | 182 | |
| Trademarks | 10 Years | | 1,610 | | | (637) | | | 973 | |
| Non-competition agreement | 5 Years | | 1,810 | | | (1,433) | | | 377 | |
| Developed technology | 7 Years | | 4,420 | | | (2,499) | | | 1,921 | |
| Customer relationships | 10-12 Years | | 9,330 | | | (3,216) | | | 6,114 | |
| Total | | | $ | 17,420 | | | $ | (7,853) | | | $ | 9,567 | |
The aggregate intangible asset amortization expense was $487,000 for the three months ended June 30, 2022 and 2021. The aggregate intangible amortization expense was $974,000 for the six months ended June 30, 2022 and 2021.
10. POST-RETIREMENT BENEFITS
The components of expense for the Company’s post-retirement benefit plans are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
June 30, | | Six months ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Pension expense: | | | | | | | |
Multi-employer plan | $ | 254 | | | $ | 232 | | | $ | 461 | | | $ | 421 | |
Defined contribution plan | 386 | | | 316 | | | 751 | | | 618 | |
| Total pension expense | 640 | | | 548 | | | 1,212 | | | 1,039 | |
| Health and life insurance: | | | | | | | |
Interest cost | 49 | | | 40 | | | 99 | | | 81 | |
| Amortization of prior service credits | (125) | | | (124) | | | (248) | | | (248) | |
Amortization of net loss | 45 | | | 44 | | | 87 | | | 87 | |
| Net periodic benefit credit | (31) | | | (40) | | | (62) | | | (80) | |
| Total post-retirement benefits expense | $ | 609 | | | $ | 508 | | | $ | 1,150 | | | $ | 959 | |
The Company made payments of $1,525,000 to pension plans and $66,000 for post-retirement healthcare and life insurance during the six months ended June 30, 2022. For the remainder of 2022, the Company expects to make approximately $1,506,000 of pension plan payments, of which $630,000 was accrued at June 30, 2022. The Company also expects to make approximately $1,325,000 of post-retirement healthcare and life insurance payments for the remainder of 2022, all of which were accrued at June 30, 2022.
11. DEBT
Debt consists of the following (in thousands):
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| Wells Fargo term loans payable | $ | 12,792 | | | $ | 13,992 | |
| FGI term loans payable | 11,584 | | | 12,561 | |
| Leaf Capital term loan payable | 102 | | | 119 | |
| Total | 24,478 | | 26,672 |
| Less deferred loan costs | (1,234) | | (1,478) |
| Less current portion | (1,146) | | (3,943) |
| Long-term debt | $ | 22,098 | | | $ | 21,251 | |
Term Loans
Wells Fargo Term Loans
On October 27, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, lead arranger and book runner, and the lenders party thereto (the “Lenders”). Pursuant to the terms of the Credit Agreement, the Lenders made available to the Company secured term loans (the “WF Term Loans”) in the maximum aggregate principal amount of $18,500,000 ($16,790,000 of which was advanced to the Company on October 28, 2020). The proceeds from the WF Term Loans were used to pay off the Company’s existing outstanding indebtedness with KeyBank National Association, and to pay certain fees and expenses associated with the financing. On July 22, 2022, all existing outstanding indebtedness of the Company owed to the Lenders was repaid in full as part of the refinancing further described below.
At the option of the Company, the WF Term Loans bears interest at a per annum rate equal to LIBOR plus a margin of 300 basis points or base rate plus a margin of 200 basis points. LIBOR rate means the greater of (a) 0.75% per annum and (b) the per annum published LIBOR rate for interest periods of one, three or six months as chosen by the Company. Base rate is the greater of (a) 1.0% per annum, (b) the Federal Funds Rate plus 0.5%, (c) LIBOR Rate plus 100 basis or (d) prime rate. The weighted average interest rate was 6.75% and 3.77% as of June 30, 2022 and December 31, 2021, respectively.
The WF Term Loans are to be repaid in monthly installments of $200,000 plus interest, with the remaining outstanding balance due on November 30, 2024, subject to certain optional and mandatory repayment terms. The Company’s obligations under the WF Term Loans are unconditionally guaranteed by each of the Company’s U.S. and Canadian subsidiaries, with such obligations of the Company and such subsidiaries being secured by a lien on substantially all of their U.S. and Canadian assets.
The WF Term Loans contains reporting, indebtedness, and financial covenants. The Company is in compliance with such covenants as of June 30, 2022.
Voluntary prepayments of amounts outstanding under the WF Term Loans are permitted at any time without premium or penalty. To the extent applicable, LIBOR breakage fees may be charged in connection with any prepayment.
FGI Equipment Finance LLC Term Loan
On October 20, 2020, the Company entered into a Master Security Agreement, among FGI Equipment Finance LLC, (“FGI”) the Company as debtor, and each of Core Composites Corporation, a subsidiary of the Company organized in Delaware, and CC HPM, S. de R.L. de C.V., a subsidiary of the Company organized in Mexico, as guarantors, for a term loan in the principal amount of $13,200,000 (the “FGI Term Loan”), which loan is evidenced by a Promissory Note, dated October 20, 2020, executed by the Company in favor of FGI. On October 27, 2020, FGI advanced to the Company $12,000,000 which proceeds were used to pay off the Company’s existing outstanding indebtedness with KeyBank National Association, and to pay certain
fees and expenses associated with the transactions, and $1,200,000 which proceeds were used to fund a security deposit to be held by FGI. Interest on the FGI Term Loan is a fixed rate of 8.25% and is payable monthly. The security deposit of $1,200,000 is included in other assets in the Consolidated Balance Sheets. On July 22, 2022, all existing outstanding indebtedness of the Company owed to the FGI was repaid in full as part of the refinancing further described below.
The FGI Term Loan is to be repaid in monthly principal and interest installments of $117,000 for the first 12 months, $246,000 for the subsequent 59 months and $1,446,000 due on October 31, 2026, subject to certain optional and mandatory repayment terms. The Company’s obligations under the Master Security Agreement are secured by certain machinery and equipment of the guarantors located in Mexico, and real property of Core Composites de Mexico, S. de R.L. de C.V.,a subsidiary of the Company organized in Mexico, located in Matamoros, Mexico.
The Company may prepay in full or in part (but not less than the amount equal to 20% of the original principal amount of the loan) outstanding amounts before they are due on any scheduled Payment Date upon at least thirty (30) days’ prior written notice. The Company will pay a “Prepayment Fee” in an amount equal to an additional sum equal to the following percentage of the principal amount to be prepaid for prepayments occurring in the indicated period: four percent (4.0%) for prepayments occurring prior to the first anniversary of the FGI Term Loan; three percent (3.0%) for prepayments occurring on the first anniversary of the FGI Term Loan until the second anniversary of the FGI Term Loan; two percent (2.0%) for prepayments occurring on and after the second anniversary of the FGI Term Loan and prior to the third anniversary of the Loan; and one percent (1.0%) for prepayments occurring any time thereafter.
Leaf Capital Funding
On April 24, 2020 the Company entered into a finance agreement with Leaf Capital Funding of $175,000 for equipment. The parties agreed to a fixed interest rate of 5.50% and a term of 60 months. On July 22, 2022, all existing outstanding indebtedness of the Company owed to Leaf Capital Funding was repaid in full as part of the refinancing further described below.
Revolving Loans
Wells Fargo Revolving Loan
Pursuant to the terms of the Credit Agreement, the Lenders made available to the Company a revolving loan commitment (the “WF Revolving Loan”) of $25,000,000 ($8,745,000 of which was advanced to the Company on October 28, 2020). The proceeds from the WF Revolving Loan were used to pay off the Company’s outstanding indebtedness with KeyBank National Association, and to pay certain fees and expenses associated with the financing. On July 22, 2022, all existing outstanding indebtedness of the Company owed under the WF Revolving Loan was repaid in full as part of the refinancing further described below.
The Credit Agreement also makes available to the Company an incremental revolving commitment in the maximum amount of $10,000,000 at the Company’s option at any time during the three-year period following the closing.
The borrowing availability under the WF Revolving Loan is the lesser of (a) the loan commitment of $25,000,000 or (b) the sum of 90% of eligible investment grade accounts receivable, 85% of non-investment grade eligible accounts receivable and 65% of eligible inventory.
At the option of the Company, the WF Revolving Loan bears interest at a per annum rate equal to LIBOR plus a margin of 200 to 250 basis points or base rate plus a margin of 100 to 150 basis points, with the margin rate being based on the excess availability amount under the line of credit. LIBOR rate means the greater of (a) 0.75% per annum and (b) the per annum published LIBOR rate for interest periods of one, three or six months as chosen by the Company. Base rate is the greater of (a) 1.0% per annum, (b) the Federal Funds Rate plus 0.5%, (c) LIBOR Rate plus 100 basis and (d) prime rate. The weighted average interest rate was 5.75% and 4.25% as of June 30, 2022 and December 31, 2021, respectively.
The WF Revolving Loan commitment terminates, and all outstanding borrowings thereunder must be repaid, by November 30, 2024. The Company has $24,278,000 of available revolving loans of which $6,744,000 is outstanding as of June 30, 2022. As of December 31, 2021, the Company had $24,337,000 of available revolving loans of which $4,424,000 was outstanding.
The WF Revolving Loan contains the same covenants as the WF Term Loans.
Wells Fargo Bank will issue up to $2,000,000 of Letters of Credit in accordance with the terms of the Credit Agreement upon the Company’s request. As of June 30, 2022, the Company had one Letter of Credit outstanding for $160,000.
Credit Refinancing
On July 22, 2022, the Company entered into a Credit Agreement (the “Huntington Credit Agreement”) with The Huntington National Bank (“Huntington”), as the sole lender, administrative agent, lead arranger and book runner. Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured loans (the “Huntington Loans”) in the maximum aggregate principal amount of $75,000,000, consisting of (i) a revolving loan commitment of $25,000,000 (approximately $13,689,000 of which was advanced to the Company on July 22, 2022), (ii) term loan commitments of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022) and (ii) Capex loan commitments of $25,000,000 (none of which was advanced to the Company on July 22, 2022). The initial proceeds of the Huntington Loans were used in part to (i) repay all existing outstanding indebtedness of the Company owing to the Lenders under the Credit Agreement, FGI and Leaf Capital Funding and (ii) pay certain fees and expenses associated with the transactions contemplated by the Huntington Credit Agreement. Additional proceeds of the Huntington Loans will be used to finance the ongoing general needs of the Company. For information on the Huntington Loans, see Note 15 - Subsequent Events, to the consolidated financial statements included herein.
Bank Covenants
The Company is required to meet certain financial covenants included in the Credit Agreement, which covenants include a fixed charge coverage ratio. As of June 30, 2022, the Company was in compliance with its financial covenants associated with the loans made under the Credit Agreement as described above.
12. INCOME TAXES
The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the Company is more-likely-than-not to realize deferred tax benefits through the generation of future taxable income. Management makes assumptions, judgments, and estimates to determine the deferred tax assets and liabilities. The Company evaluates provisions and deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence.
The Company’s Consolidated Balance Sheets include net deferred tax assets of $252,000 for the Canadian and $841,000 for the Mexican tax jurisdictions and a net deferred tax liability of $572,000 for the U.S. tax jurisdiction at June 30, 2022. The deferred tax asset is classified in other non-current assets and deferred tax liabilities are in other non-current liabilities. At June 30, 2022, the Company's net deferred tax liability included a valuation allowance of $3,939,000, due to cumulative losses over the last three years and uncertainty related to the Company's ability to realize United States deferred tax assets. The Company believes that the deferred tax assets associated with the Canadian and Mexican tax jurisdictions are more-likely-than-not to be realizable based on estimates of future taxable income.
Income tax expense for the three months ended June 30, 2022 is estimated to be $1,769,000, approximately 44.7% of income before income taxes, and includes tax expense in Canadian and Mexican tax jurisdictions. U.S. operations incurred a net loss for the three months ended June 30, 2022 and the net loss tax benefit was offset with a full valuation reserve. Income tax benefit for the three months ended June 30, 2021 was estimated to be $1,543,000, approximately 27.4% of income before income taxes.
The Company files income tax returns in the United States, Mexico, Canada and various state and local jurisdictions. The Company is subject to federal income tax examinations for tax years 2014 through 2017 but the scope of examination is limited to adjustments resulting from the Net Operating Loss carry back claims from the 2018, 2019, and 2020 tax years. The Company is subject to federal income tax examinations for years 2018 through 2021 with unlimited scope. The Company is not subject to state examinations for years before 2017. The Company is not subject to Mexican income tax examinations by Mexican authorities for the years before 2017 and is not subject to Canadian income tax examinations by Canadian authorities for the years before 2018.
13. STOCK BASED COMPENSATION
On May 13, 2021, The Company's shareholders approved the 2021 Long Term Equity Incentive Plan (the “2021 Plan”) that replaced the 2006 Long Term Equity Incentive Plan (the “2006 Plan”) approved in May 2006 and amended in May 2015. The 2021 Plan allows for grants to employees, officers, non-employee directors, consultants, independent contractors and advisors of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards (“stock awards”) up to an aggregate of 436,530 awards. Awards can be granted under the 2021 Plan
through the earlier of May 13, 2031, or the date the maximum number of available awards under the 2021 Plan have been granted. No new awards may be granted from the 2006 Plan.
Awards under the 2021 Plan vest over one to three years and shares previously awarded and currently unvested under the 2006 Plan vest over three years. Shares granted under both the 2006 and 2021 Plans vest upon the date of a participant’s death, disability or change in control.
Restricted Stock
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 Stock”). These awards are measured at the fair value of the Company's common stock on the date of issuance and recognized ratably as compensation expense over the applicable vesting period, which is typically three years. The Company adjusts compensation expense for actual forfeitures, as they occur.
The following summarizes the status of Restricted Stock and changes during the six months ended June 30, 2022:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Grant Date Fair Value |
| Unvested balance at December 31, 2021 | 459,420 | | | $ | 9.79 | |
| Granted | 287,485 | | | 10.40 | |
| Vested | (228,022) | | | 9.05 | |
| Forfeited | (9,329) | | | 11.02 | |
| Unvested balance at June 30, 2022 | 509,554 | | | $ | 10.43 | |
At June 30, 2022 and 2021, there was $4,871,000 and $4,783,000, respectively, of total unrecognized compensation expense, related to Restricted Stock grants. The unrecognized compensation expense at June 30, 2022 is expected to be recognized over the weighted-average period of 2.2 years. Total compensation cost related to Restricted Stock grants for the three months ended June 30, 2022 and 2021 was $570,000 and $456,000, respectively. Total compensation cost related to Restricted Stock grants for the six months ended June 30, 2022 and 2021 was $1,037,000 and $745,000, respectively, all of which was recorded to selling, general and administrative expense.
During the six months ended June 30, 2022 employees surrendered 48,286 shares of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted awards. Employees surrendered 3,874 shares for the six months ended June 30, 2021.
Stock Appreciation Rights
As part of the Company's 2019 annual grant, Stock Appreciation Rights ("SARs") were granted with a grant price of $10. These awards have a contractual term of five years and vest ratably over a period of three years or immediately vest if the recipient is over 65 of age. These awards are valued using the Black-Scholes option pricing model, and are recognized ratably as compensation expense over three years.
A summary of the Company's stock appreciation rights activity for the six months ended June 30, 2022 is as follows:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Grant Date Fair Value |
| Outstanding as of December 31, 2021 | 177,016 | | | $ | 2.57 | |
| Granted | — | | | — | |
| Exercised | — | | | — | |
| Forfeited | — | | | — | |
| Outstanding at end of the period ended June 30, 2022 | 177,016 | | | $ | 2.57 | |
| Exercisable at end of the period ended June 30, 2022 | 177,016 | | | $ | 2.57 | |
The average remaining contractual term for SARs outstanding at June 30, 2022 is 1.9 years with no aggregate intrinsic value. There was no unrecognized compensation expense, related to SARs at June 30, 2022. Total compensation cost related to SARs for the three months ended June 30, 2022 and 2021 was $11,000 and $31,000, respectively. Total Compensation cost related to SARs for the six months ended June 30, 2022 and 2021 was $45,000 and $60,000, respectively, all of which was recorded to selling, general and administrative expense.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in Accumulated Other Comprehensive Income, net of tax, for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | |
| 2021: | Post Retirement Benefit Plan Items(A) |
| Balance at December 31, 2020 | $ | 1,375 | |
| |
| Amounts reclassified from accumulated other comprehensive income | (161) | |
| Income tax benefit | 33 | |
| Balance at June 30, 2021 | $ | 1,247 | |
| |
| 2022: | |
| Balance at December 31, 2021 | $ | 1,075 | |
| |
| Amounts reclassified from accumulated other comprehensive income | (161) | |
| Income tax benefit | 34 | |
| Balance at June 30, 2022 | $ | 948 | |
(A)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 Operations. 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 Operations.
15. SUBSEQUENT EVENTS
Credit Refinancing
On July 22, 2022, the Company entered into a Credit Agreement (the "Huntington Credit Agreement") with The Huntington National Bank (“Huntington”), as the sole lender, administrative agent, lead arranger and book runner. Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured loans (the "Huntington Loans") in the maximum aggregate principal amount of $75,000,000, consisting of (i) a revolving loan commitment of $25,000,000 (approximately $13,689,000 of which was advanced to the Company on July 22, 2022), (ii) term loan commitments of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022) and (ii) Capex loan commitments of $25,000,000 (none of which was advanced to the Company on July 22, 2022). The revolving loan commitment terminates, and all outstanding borrowings thereunder must be repaid on July 22, 2027. The term loan is to be repaid in monthly installments beginning in August 2022 of approximately $104,000 per month for the first 24 months, approximately $156,000 per month for the next 24 months, approximately $208,000 for the next 12 months and the remaining balance to be paid in July 2027. Any borrowings from the Capex loan will be converted to new Term Loans annually each February, beginning February 2025, and will have monthly principal repayments based on a sixty month amortization period with all amounts outstanding on the Capex Term Loans being fully due in July 2027. The Company's obligation under the Huntington Credit Agreement and the Loans are secured by each of the Company's U.S. and Canadian assets and 65% of the Company's equity interest in its Mexican subsidiaries and unconditionally guaranteed by certain of its subsidiaries.. Interest is payable monthly and is based on either Daily Simple SOFR or ABR, as defined by the Huntington Credit Agreement, at the discretion of the Company. As of July 22, 2022, the revolving loan and term loan was based on the Daily Simple SOFR resulting in an interest rate of 3.34%.
Concurrent with the closing of the Huntington Credit Agreement, the Company entered into an interest rate swap agreement that became effective July 22, 2022 and continues through July 22, 2027, which was designated as a cash flow hedge for the entire term loan of $25,000,000 mentioned above. Under this agreement, the Company will pay a fixed rate of 4.75% to the counterparty and receives daily simple SOFR.
The initial proceeds of the Huntington Loans were used in part to (i) repay all existing outstanding indebtedness of the Company owing to the Lenders under the Credit Agreement, FGI and Leaf Capital Funding and (ii) pay certain fees and expenses associated with the transactions contemplated by the Huntington Credit Agreement. Additional proceeds of the Huntington Loans will be used to finance the ongoing general needs of the Company.
The Company recorded losses of $1,234,000 from writing off outstanding deferred loan costs and approximately $348,000 from a prepayment fee associated with the FGI Term Loan.