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, 2022, and the results of operations and cash flows for the nine months ended September 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 $509,000 cash on hand at September 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 $37,000 allowance for doubtful accounts is needed at September 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 $129,000 at September 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 $281,000 at September 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 $807,000 at September 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 nine months ended September 30, 2022, the Company recognized no impairments on contract assets. For the nine months ended September 30, 2022, the Company recognized $4,382,000 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 nine months ended September 30, 2022 and September 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 nine months ended September 30, 2022 and September 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 September 30, 2022 and December 31, 2021 of $973,000 and $916,000, 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, "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 $9,156,000 at September 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.
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
September 30, | | Nine months ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) | $ | 1,319 | | | $ | (3,312) | | | $ | 7,371 | | | $ | 4,230 | |
| Less: net income allocated to participating securities | 13 | | | — | | | 122 | | | 234 | |
| Net income (loss) available to common shareholders | $ | 1,306 | | | $ | (3,312) | | | $ | 7,249 | | | $ | 3,996 | |
| | | | | | | |
| Weighted average common shares outstanding — basic | 8,414,000 | | | 8,053,000 | | | 8,337,000 | | | 8,015,000 | |
| Effect of weighted average dilutive securities | 4,000 | | | — | | | 1,000 | | | 32,000 | |
| Weighted average common and potentially issuable common shares outstanding — diluted | 8,418,000 | | | 8,053,000 | | | 8,338,000 | | | 8,047,000 | |
| | | | | | | |
| Basic net income per common share | $ | 0.16 | | | $ | (0.41) | | | $ | 0.87 | | | $ | 0.50 | |
| Diluted net income per common share | $ | 0.16 | | | $ | (0.41) | | | $ | 0.87 | | | $ | 0.50 | |
The computation of basic and diluted net income per participating share is as follows (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
September 30, | | Nine months ended
September 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Net income allocated to participating securities | $ | 13 | | | $ | — | | | $ | 122 | | | $ | 234 | | |
| | | | | | | | |
| Weighted average participating shares outstanding — basic | 82,000 | | | — | | | 140,000 | | | 470,000 | | |
| Effect of dilutive securities | — | | | — | | | — | | | — | | |
| Weighted average common and potentially issuable common shares outstanding — diluted | 82,000 | | | — | | | 140,000 | | | 470,000 | | |
| | | | | | | | |
| Basic net income per participating share | $ | 0.16 | | | $ | 0.00 | | | $ | 0.87 | | | $ | 0.50 | | |
| Diluted net income per participating share | $ | 0.16 | | | $ | 0.00 | | | $ | 0.87 | | | $ | 0.50 | | |
| | | | | | | | |
| | | | | | | | |
5. MAJOR CUSTOMERS
The Company had five major customers during the nine months ended September 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 nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
September 30, | | Nine months ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| BRP product sales | $ | 12,203 | | | $ | 6,907 | | | $ | 38,908 | | | $ | 25,896 | |
| BRP tooling sales | 1,119 | | | 124 | | | 1,456 | | | 362 | |
| Total BRP sales | 13,322 | | | 7,031 | | | 40,364 | | | 26,258 | |
| | | | | | | |
| Navistar product sales | 16,536 | | | 10,027 | | | 44,667 | | | 30,933 | |
| Navistar tooling sales | 285 | | | 6,656 | | | 2,555 | | | 6,962 | |
Total Navistar sales | 16,821 | | | 16,683 | | | 47,222 | | | 37,895 | |
| | | | | | | |
| PACCAR product sales | 10,066 | | | 6,872 | | | 27,971 | | | 27,056 | |
| PACCAR tooling sales | — | | | 715 | | | 185 | | | 1,547 | |
| Total PACCAR sales | 10,066 | | | 7,587 | | | 28,156 | | | 28,603 | |
| | | | | | | |
| UFP product sales | 5,099 | | | 7,551 | | | 29,642 | | | 33,323 | |
| UFP tooling sales | — | | | — | | | — | | | — | |
Total UFP sales | 5,099 | | | 7,551 | | | 29,642 | | | 33,323 | |
| | | | | | | |
| Volvo product sales | 15,468 | | | 7,804 | | | 38,268 | | | 25,359 | |
| Volvo tooling sales | 128 | | | 70 | | | 215 | | | 117 | |
Total Volvo sales | 15,596 | | | 7,874 | | | 38,483 | | | 25,476 | |
| | | | | | | |
| Other product sales | 32,968 | | | 28,482 | | | 96,102 | | | 73,327 | |
| Other tooling sales | 7,734 | | | 5,817 | | | 10,964 | | | 9,433 | |
Total other sales | 40,702 | | | 34,299 | | | 107,066 | | | 82,760 | |
| | | | | | | |
| Total product sales | 92,340 | | | 67,643 | | | 275,558 | | | 215,894 | |
| Total tooling sales | 9,266 | | | 13,382 | | | 15,375 | | | 18,421 | |
Total sales | $ | 101,606 | | | $ | 81,025 | | | $ | 290,933 | | | $ | 234,315 | |
6. INVENTORY
Inventories, net consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 18,429 | | | $ | 17,160 | |
Work in process | 2,685 | | | 1,976 | |
Finished goods | 5,740 | | | 5,993 | |
Total | $ | 26,854 | | | $ | 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 the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's 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 September 30, | | Nine months ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | $ | 419 | | | $ | 390 | | | $ | 1,265 | | | $ | 1,145 | |
Other supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Operating lease right of use assets | $ | 4,317 | | | $ | 5,577 | |
| | | |
Current operating lease liabilities(A) | $ | 1,346 | | | $ | 1,489 | |
Noncurrent operating lease liabilities(B) | 2,923 | | | 4,024 | |
| Total operating lease liabilities | $ | 4,269 | | | $ | 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 | September 30, 2022 | | December 31, 2021 | |
| Weighted average remaining lease term (in years): | 3.5 | | 4.2 | |
| | | | |
| Weighted average discount rate: | 3.9 | % | | 4.1 | % | |
Other information related to leases were as follows (in thousands):
| | | | | | | | | | | |
| Nine months ended
September 30, |
| Cash paid for amounts included in the measurement of lease liabilities | 2022 | | 2021 |
Operating cash flows from operating leases(C) | $ | 1,265 | | | $ | 1,145 | |
(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):
| | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | |
| 2022 (remainder of year) | $ | 371 | | | $ | 1,567 | | |
| 2023 | 1,442 | | | 1,468 | | |
| 2024 | 1,447 | | | 1,473 | | |
| 2025 | 797 | | | 783 | | |
| 2026 | 712 | | | 698 | | |
| Total lease payments | 4,769 | | | 5,989 | | |
| Less: imputed interest | (500) | | | (476) | | |
| Total lease obligations | 4,269 | | | 5,513 | | |
| Less: current obligations | (1,346) | | | (1,489) | | |
| Long-term lease obligations | $ | 2,923 | | | $ | 4,024 | | |
8. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment, net consisted of the following for the periods specified (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Property, plant and equipment | $ | 196,731 | | | $ | 183,500 | |
| Accumulated depreciation | (115,288) | | | (107,603) | |
| Property, plant and equipment — net | $ | 81,443 | | | $ | 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 September 30, 2022 and 2021 was $2,683,000 and $2,471,000, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $7,685,000 and $7,414,000, respectively. Amounts invested in capital additions in progress were $13,019,000 and $6,605,000 at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, purchase commitments for capital expenditures in progress were $1,078,000 and $5,315,000, respectively.
9. GOODWILL AND INTANGIBLES
Goodwill activity for the nine months ended September 30, 2022 consisted of the following (in thousands):
| | | | | |
| Balance at December 31, 2021 | $ | 17,376 | |
| Additions | — | |
| Impairment | — | |
| Balance at September 30, 2022 | $ | 17,376 | |
Intangibles, net at September 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 | | | $ | (75) | | | $ | 175 | |
| Trademarks | 10 Years | | 1,610 | | | (758) | | | 852 | |
| Non-competition agreement | 5 Years | | 1,810 | | | (1,705) | | | 105 | |
| Developed technology | 7 Years | | 4,420 | | | (2,973) | | | 1,447 | |
| Customer relationships | 10-12 Years | | 9,330 | | | (3,803) | | | 5,527 | |
| Total | | | $ | 17,420 | | | $ | (9,314) | | | $ | 8,106 | |
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 and $488,000 for the three months ended September 30, 2022 and 2021, respectively. The aggregate intangible amortization expense was $1,461,000 and $1,462,000 for the nine months ended September 30, 2022 and 2021, respectively.
10. POST-RETIREMENT BENEFITS
The components of expense for the Company’s post-retirement benefit plans are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
September 30, | | Nine months ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Pension expense: | | | | | | | |
Multi-employer plan | $ | 221 | | | $ | 179 | | | $ | 682 | | | $ | 600 | |
Defined contribution plan | 371 | | | 263 | | | 1,122 | | | 881 | |
| Total pension expense | 592 | | | 442 | | | 1,804 | | | 1,481 | |
| Health and life insurance: | | | | | | | |
Interest cost | 50 | | | 41 | | | 149 | | | 122 | |
| Amortization of prior service credits | (124) | | | (124) | | | (372) | | | (372) | |
Amortization of net loss | 43 | | | 43 | | | 130 | | | 130 | |
| Net periodic benefit credit | (31) | | | (40) | | | (93) | | | (120) | |
| Total post-retirement benefits expense | $ | 561 | | | $ | 402 | | | $ | 1,711 | | | $ | 1,361 | |
The Company made payments of $2,349,000 to pension plans and $467,000 for post-retirement healthcare and life insurance during the nine months ended September 30, 2022. For the remainder of 2022, the Company expects to make approximately $741,000 of pension plan payments, of which $259,000 was accrued at September 30, 2022. The Company also expects to make approximately $924,000 of post-retirement healthcare and life insurance payments for the remainder of 2022, all of which were accrued at September 30, 2022.
11. DEBT
Debt consists of the following (in thousands):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| Wells Fargo term loans payable | $ | — | | | $ | 13,992 | |
| FGI term loans payable | — | | | 12,561 | |
| Huntington term loans payable | 24,792 | | | — | |
| Leaf Capital term loan payable | 93 | | | 119 | |
| Total | 24,885 | | 26,672 |
| Less deferred loan costs | (385) | | (1,478) |
| Less current portion | (1,205) | | (3,943) |
| Long-term debt | $ | 23,295 | | | $ | 21,251 | |
Huntington Credit Agreement
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, and the lenders from time to time thereto. 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 ($38,689,000 of which was advanced to the Company on July 22, 2022), comprised of three $25,000,000 commitments: a term loan commitment, a CapEx loan commitment and a revolving loan commitment.
The initial proceeds from the Huntington Credit Agreement were used in part to (i) repay all existing outstanding indebtedness of the Company owing to Wells Fargo Bank, National Association, and FGI Equipment Finance LLC (“FGI”) and (ii) pay certain fees and expenses associated with entering the Huntington Credit Agreement.
At the option of the Company, the Huntington Loans shall be comprised of Alternative Base Rate (ABR) Loans or Secure Overnight Financing Rate (SOFR) Loans.
ABR Loans bear interest at a per annum rate equal to ABR plus a margin of 280 to 380 basis points determined based on the Company’s leverage ratio. ABR is the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50% per annum and (c) Daily Simple SOFR for such day (taking into account any floor set forth in the definition of “Daily Simple SOFR”) plus 1.00% per annum; provided, that if the ABR shall be less than 0.00%, then ABR shall be deemed to be 0.00%.
SOFR Loans bear interest at a per annum rate equal to Daily Simple SOFR plus a margin of 180 to 230 basis points determined based on the Company’s leverage ratio. Daily Simple SOFR means, for any day (a “SOFR Rate Day”), a rate per annum equal to the greater of (a) SOFR for the day (such day, the “SOFR Determination Date”) that is five (5) U.S. Government Securities Business Days prior to (i) if such SOFR Rate Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (ii) if such SOFR Rate Day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website, and (b) 0.00%.
The Company’s obligations under the Huntington Credit Agreement are secured by all of the U.S. and Canadian assets of the Company, including all of its equity interests in each of the Company’s U.S. and Canadian subsidiaries and 65% of the Company’s equity interest in its Mexican subsidiaries, and are unconditionally guaranteed by certain subsidiaries of the Company.
The Huntington Credit Agreement contains certain customary representations and warranties, conditions, affirmative and negative covenants and events of default. The Company is in compliance with such covenants as of September 30, 2022.
Voluntary prepayments of amounts outstanding under the Huntington Loans are permitted at any time without premium or penalty.
The interest rate for the Huntington Revolving Loan and Huntington Term Loan was 4.08% and 4.75% as of September 30, 2022, respectively.
Huntington Term Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a Term Loan commitment (the “Huntington Term Loan”) of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022). The Huntington Term Loan is to be repaid in monthly installments beginning August 2022 of $104,000 per month for the first 24 months, $156,000 per month for the next 24 months, $208,000 for the next 12 months and the remaining balance to be paid on July 22, 2027.
Huntington Capex Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured Capex loan (the “Huntington Capex Loan”) in the maximum aggregate principal amount of $25,000,000 (none of which was advanced to the Company on July 22, 2022 and through September 30, 2022). Proceeds of the Huntington Capex Loan will be used to finance the ongoing capital expenditure needs of the Company.
Any borrowings from the Huntington 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 Huntington Capex Loan being fully due on July 22, 2027.
Huntington Revolving Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a revolving loan commitment (the “Huntington Revolving Loan”) of $25,000,000 ($13,689,000 of which was advanced to the Company on July 22, 2022). The Company has $25,000,000 of available revolving loans of which $4,052,000 is outstanding as of September 30, 2022.
The Huntington Credit Agreement makes available to the Company a revolving commitment in the maximum amount of $25,000,000 at the Company’s option at any time during the five-year period following the closing. The revolving loan commitment terminates, and all outstanding borrowings thereunder must be repaid on July 22, 2027.
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.
Wells Fargo Loan
On December 31, 2021, the Company had term loans ("the WF Term Loans") and a revolving loan (the "WF Revolving loan") with Wells Fargo Bank, National Association, with balances of $13,992,000 and $4,424,000, respectively. The Company’s term and revolving loans had variable interest rates on December 31, 2021 of 3.77% and 4.25%, respectively. On July 22, 2022, all existing outstanding indebtedness of the Company owed to Wells Fargo Bank, National Association was repaid in full as part of the Huntington Credit Agreement.
FGI Equipment Finance LLC Term Loan
On December 31, 2021, the Company had a term loan (the "FGI Term Loan"), evidenced by a promissory note (the "FGI Note") with FGI, with a balance of $12,561,000. The Company’s term loan had a fixed interest rate of 8.25% at December 31, 2021. On July 22, 2022, all existing outstanding indebtedness of the Company owed to FGI was repaid in full as part of the Huntington Credit Agreement.
At September 30, 2022, the company recorded losses of $1,234,000 from writing off outstanding deferred loan costs and approximately $348,000 from prepayment fees associated with the FGI Term Loan.
Interest Rate Swap Agreement
The Company entered into an interest rate swap agreement that became effective July 22, 2022 and continues through July 2027, which was designed as a cash flow hedge for $25,000,000 of the Huntington Term Loan. Under this agreement, the Company will pay a fixed SOFR rate of 2.95% to the swap counterparty in exchange for the Term Loans daily variable SOFR. The fair value of the interest rate swap was an asset of $805,000 at September 30, 2022.
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 $718,000 for the U.S. tax jurisdiction at September 30, 2022. The deferred tax asset is classified in other non-current assets and deferred tax liabilities are in other non-current liabilities. At September 30, 2022, the Company's net deferred tax liability included a valuation allowance of $4,257,000, 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 September 30, 2022 is estimated to be $1,251,000, approximately 48.7% of income before income taxes, and includes tax expense for the Canadian and Mexican tax jurisdictions. U.S. operations incurred a net loss for the three months ended September 30, 2022 and the net loss tax benefit was offset with a full valuation reserve. Income tax expense for the three months ended September 30, 2021 was estimated to be $396,000, approximately 13.6% of loss 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 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 nine months ended September 30, 2022:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Grant Date Fair Value |
| Unvested balance at December 31, 2021 | 459,420 | | | $ | 9.79 | |
| Granted | 287,485 | | | 10.39 | |
| Vested | (226,201) | | | 9.01 | |
| Forfeited | (13,957) | | | 11.28 | |
| Unvested balance at September 30, 2022 | 506,747 | | | $ | 10.43 | |
At September 30, 2022 and 2021, there was $4,199,000 and $3,664,000, respectively, of total unrecognized compensation expense, related to Restricted Stock grants. The unrecognized compensation expense at September 30, 2022 is expected to be recognized over the weighted-average period of 2.0 years. Total compensation cost related to Restricted Stock grants for the three months ended September 30, 2022 and 2021 was $623,000 and $578,000, respectively. Total compensation cost related to Restricted Stock grants for the nine months ended September 30, 2022 and 2021 was $1,660,000 and $1,322,000, respectively, all of which was recorded to selling, general and administrative expense.
During the nine months ended September 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 7,237 shares for the nine months ended September 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 nine months ended September 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 September 30, 2022 | 177,016 | | | $ | 2.57 | |
| Exercisable at end of the period ended September 30, 2022 | 177,016 | | | $ | 2.57 | |
The average remaining contractual term for SARs outstanding at September 30, 2022 is 1.8 years with no aggregate intrinsic value. There was no unrecognized compensation expense, related to SARs at September 30, 2022. For the three months ended September 30, 2022, there was no compensation cost. Total compensation cost related to SARs for the three months ended September 30, 2021 was $34,000. Total Compensation cost related to SARs for the nine months ended September 30, 2022 and 2021 was $45,000 and $94,000, respectively, all of which was recorded to selling, general and administrative expense.
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 hierarchical valuation methodology provides a fair value framework that describes the categorization of assets and liabilities in 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, 2022 and December 31, 2021 approximate fair value due to the short-term maturities of these financial instruments. As of September 30, 2022, the carrying amounts of the Huntington Term Loan and Huntington Revolving Loan approximated fair value due to the short-term nature of the underlying variable rate SOFR agreements. As of December 31, 2021, the carrying amounts of the WF Term Loans and WF Revolving Loan approximated fair value due to the short-term nature of the underlying variable rate LIBOR agreements. The FGI Term Loan approximated fair value as of December 31, 2021 due to the immaterial movement in interest rates since the Company entered into the FGI Note on October 20, 2020. The Company had Level 2 fair value measurements at September 30, 2022 relating to the Company’s interest rate swaps and foreign currency derivatives.
Derivative and hedging activities
Foreign Currency Derivatives
The Company conducted business in foreign countries and paid certain expenses in foreign currencies; therefore, the Company was exposed to foreign currency exchange risk between the U.S. Dollar and foreign currencies, which could impact the Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. Dollars for a fixed amount of foreign currency, which will be used to fund future foreign currency cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period.
Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the foreign currency. As of September 30, 2022, the Company had no ineffective portion related to the cash flow hedges.
Interest Rate Swap
The Company entered into an interest rate swap contract to fix the interest rate on an initial aggregate amount of $25,000,000 thereby reducing exposure to interest rate changes. The interest rate swap pays a fixed rate of 2.95% to the swap counterparty in exchange for daily SOFR. 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 statement impacts
The following table detail amounts related to our derivatives designated as hedging instruments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Derivative Instruments
September 30, 2022 |
| | Asset Derivatives | | Liability Derivatives |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Foreign exchange contracts | | Prepaid expenses other current assets | | $ | — | | | Accrued other liabilities | | $ | 542 | |
| Other non-current assets | | $ | — | | | Other non-current liabilities | | $ | 84 | |
| Notional Contract values | | | | $ | — | | | | | $ | 19,560 | |
| | | | | | | | |
| Interest rate swaps | | Prepaid expenses other current assets | | $ | 40 | | | Accrued other liabilities | | $ | — | |
| | Other non-current assets | | $ | 765 | | | Other non-current liabilities | | $ | — | |
| Notional Contract values | | | | $ | 24,792 | | | | | $ | — | |
At December 31, 2021 the Company had no derivatives designated as hedging instruments.
The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other Comprehensive Income ("AOCI") for the three months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in subtopic 815-20 Cash Flow Hedging Relationship: | | Amount of Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative | | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income(A) | | Amount of Realized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income |
| | 2022 | | 2021 | | | | 2022 | | 2021 |
| Foreign exchange contracts | | $ | (626) | | | $ | — | | | Cost of goods sold | | $ | — | | | $ | — | |
| | | | | | Selling, general and administrative expense | | $ | — | | | $ | — | |
| Interest rate swaps | | $ | 767 | | | $ | — | | | Interest expense | | $ | (38) | | | $ | — | |
The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other Comprehensive Income ("AOCI") for the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in subtopic 815-20 Cash Flow Hedging Relationship: | | Amount of Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative | | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income(A) | | Amount of Realized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income |
| | 2022 | | 2021 | | | | 2022 | | 2021 |
| Foreign exchange contracts | | $ | (626) | | | $ | — | | | Cost of goods sold | | $ | — | | | $ | — | |
| | | | | | Selling, general and administrative expense | | $ | — | | | $ | — | |
| Interest rate swaps | | $ | 767 | | | $ | — | | | Interest expense | | $ | (38) | | | $ | — | |
(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.
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, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| 2021: | Derivative
Hedging
Activities | Post Retirement
Benefit Plan
Items(A) | Accumulated
Other
Comprehensive
Income (Loss) |
| 2021: | | | |
| Balance at December 31, 2020 | $ | — | | $ | 1,375 | | $ | 1,375 | |
| | | |
| Amounts reclassified from accumulated other comprehensive income | — | | (242) | | (242) | |
| Income tax benefit | — | | 51 | | 51 | |
| Balance at September 30, 2021 | $ | — | | $ | 1,184 | | $ | 1,184 | |
| | | |
| 2022: | | | |
| Balance at December 31, 2021 | $ | — | | $ | 1,075 | | $ | 1,075 | |
| Other comprehensive income before reclassifications | 141 | | — | | 141 | |
| Amounts reclassified from accumulated other comprehensive income | 38 | | (242) | | (204) | |
| Income tax benefit (expense) | (7) | | 51 | | 44 | |
| Balance at September 30, 2022 | $ | 172 | | $ | 884 | | $ | 1,056 | |
(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.