NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended March 31, 2018, 2017 and 2016
(Amounts in thousands, except per share data)
Note 1 - The Company and Its Accounting Policies:
Graham Corporation, and its operating subsidiaries, (together, the "Company"), is a global designer, manufacturer and supplier of vacuum and heat transfer equipment used in the chemical, petrochemical, petroleum refining, and electric power generating industries. Energy Steel & Supply Co. ("Energy Steel"), a wholly-owned subsidiary, is a nuclear code accredited fabrication and specialty machining company which provides products to the nuclear industry. The Company's significant accounting policies are set forth below.
The Company's fiscal years ended March 31, 2018, 2017 and 2016 are referred to as fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Principles of consolidation and use of estimates in the preparation of financial statements
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Energy Steel, located in Lapeer, Michigan, and Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd., located in China. All intercompany balances, transactions and profits are eliminated in consolidation.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the related revenues and expenses during the reporting period. Actual amounts could differ from those estimated.
Translation of foreign currencies
Assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at currency exchange rates in effect at year-end and revenues and expenses are translated at average exchange rates in effect for the year. Gains and losses resulting from foreign currency transactions are included in results of operations. The Company
'
s sales and purchases in foreign currencies are minimal. Therefore, foreign currency transaction gains and losses are not significant. Gains and losses resulting from translation of foreign subsidiary balance sheets are included in a separate component of stockholders' equity. Translation adjustments are not adjusted for income taxes since they relate to an investment, which is permanent in nature.
Revenue recognition
Percentage-of-Completion Method
The Company recognizes revenue on all contracts with a planned manufacturing process in excess of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion method. The majority of the Company's revenue is recognized under this methodology. The Company has established the systems and procedures essential to developing the estimates required to account for contracts using the percentage-of-completion method. The percentage-of-completion method is determined by comparing actual labor incurred to a specific date to management's estimate of the total labor to be incurred on each contract or completion of operational milestones assigned to each contract.
Contracts in progress are reviewed monthly by management, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated costs at completion. Losses on contracts are recognized immediately when evident to management. Revenue recognized on contracts accounted for utilizing percentage-of-completion are presented in net sales in the Consolidated Statement of Operations and unbilled revenue in the Consolidated Balance Sheets to the extent that the revenue recognized exceeds the amounts billed to customers. See "Inventories" below.
Receivables billed but not paid under retainage provisions in its customer contracts were $1,124 and $971 at March 31, 2018 and 2017, respectively.
Completed Contract Method
Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method. The majority of the Company's contracts (as opposed to revenue) have a planned manufacturing process of less than four weeks and the results reported under this method do not vary materially from the percentage-of-completion method. The
37
Company recognizes revenue and all related costs on these contracts upon substantial completion or shipment to the customer. Substantial
completion is consistently defined as at least 95% complete with regard to direct labor hours. Customer acceptance is generally required throughout the construction process and the Company has no further material obligations under its contracts after the
revenue is recognized.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less.
Shipping and handling fees and costs
Shipping and handling fees billed to the customer are recorded in net sales and the related costs incurred for shipping and handling are included in cost of products sold.
Investments
Investments consist of certificates of deposits with financial institutions. All investments have original maturities of greater than three months and less than one year and are classified as held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity. The investments are stated at amortized cost which approximates fair value. All investments held by the Company at March 31, 2018 are scheduled to mature on or before July 18, 2018.
Inventories
Inventories are stated at the lower of cost or net realizable value, using the average cost method. Unbilled revenue in the Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method. For contracts accounted for on the percentage-of-completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract. Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the excess is presented as customer deposits in the Consolidated Balance Sheets.
A summary of costs and estimated earnings on contracts in progress at March 31, 2018 and 2017 is as follows:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Costs incurred since inception on contracts in progress
|
|
$
|
43,806
|
|
|
$
|
44,263
|
|
Estimated earnings since inception on contracts in progress
|
|
|
8,123
|
|
|
|
4,348
|
|
|
|
|
51,929
|
|
|
|
48,611
|
|
Less billings to date
|
|
|
67,172
|
|
|
|
52,410
|
|
Net under (over) billings
|
|
$
|
(15,243
|
)
|
|
$
|
(3,799
|
)
|
The above activity is included in the accompanying Consolidated Balance Sheets under the following captions at March 31, 2018 and 2017 or Notes to Consolidated Financial Statements:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Unbilled revenue
|
|
$
|
8,079
|
|
|
$
|
15,842
|
|
Progress payments reducing inventory (Note 2)
|
|
|
(10,109
|
)
|
|
|
(7,234
|
)
|
Customer deposits
|
|
|
(13,213
|
)
|
|
|
(12,407
|
)
|
Net under (over) billings
|
|
$
|
(15,243
|
)
|
|
$
|
(3,799
|
)
|
Property, plant, equipment, depreciation and amortization
Property, plant and equipment are stated at cost net of accumulated depreciation and amortization. Major additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided based upon the estimated useful lives, or lease term if shorter, under the straight-line method. Estimated useful lives range from approximately five to eight years for office equipment, eight to 25 years for manufacturing equipment and 40 years for buildings and improvements. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations.
38
Business combinations
The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Direct acquisition-related costs are expensed as incurred.
Intangible assets
Acquired intangible assets other than goodwill consist of permits, customer relationships, and tradenames. The Company amortizes its definite-lived intangible assets on a straight-line basis over their estimated useful lives. The estimated useful life is fifteen years for customer relationships. All other intangibles have indefinite lives and are not amortized.
Impairment of long-lived assets
The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50%.
Recoverability potential is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable through related cash flows, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group's carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
Goodwill and intangible assets with indefinite lives are tested annually for impairment as of December 31. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for reporting units are determined based on discounted cash flows. Indefinite lived intangible assets are assessed for impairment by comparing the fair value of the asset to its carrying value.
Product warranties
The Company estimates the costs that may be incurred under its product warranties and records a liability in the amount of such costs at the time revenue is recognized. The reserve for product warranties is based upon past claims experience and ongoing evaluations of any specific probable claims from customers. A reconciliation of the changes in the product warranty liability is presented in Note 5.
Research and development
Research and development costs are expensed as incurred. The Company incurred research and development costs of $3,211, $3,863 and $3,746 in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Research and development costs are included in the line item “Cost of products sold” in the Consolidated Statements of Operations.
Income taxes
The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using currently enacted tax rates. The Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred income tax assets and records a valuation allowance to reduce deferred income tax assets to an amount that represents the Company's best estimate of the amount of such deferred income tax assets that more likely than not will be realized.
39
The Company accounts for uncertain tax positions using a "more likely than not" recognition threshold. The evaluation of unc
ertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective resolution of matters subject to audit, new audit activity and changes
in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. It is the Company's policy to recognize any interest related to uncertain tax positions in interest expense and any penalties related to uncertai
n tax positions in selling, general and administrative expense.
The Company files federal and state income tax returns in several U.S. and non-U.S. domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed.
Stock-based compensation
The Company records compensation costs related to stock-based awards based on the estimated fair value of the award on the grant date. Compensation cost is recognized in the Company's Consolidated Statements of Operations over the applicable vesting period. The Company uses the Black-Scholes valuation model as the method for determining the fair value of its stock option awards. For service and performance based restricted stock awards, the fair market value of the award is determined based upon the closing value of the Company's stock price on the grant date. The fair market value of market-based performance restricted stock awards is determined using the Monte Carlo valuation model. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates the forfeiture rate at the grant date by analyzing historical data and revises the estimates in subsequent periods if the actual forfeiture rate differs from the estimates.
(Loss)
income per share data
Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding and, when applicable, potential common shares outstanding during the period.
A reconciliation of the numerators and denominators of basic and diluted (loss) income per share is presented below:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Basic (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(9,844
|
)
|
|
$
|
5,023
|
|
|
$
|
6,131
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding
|
|
|
9,764
|
|
|
|
9,716
|
|
|
|
9,976
|
|
Basic (loss) income per share
|
|
$
|
(1.01
|
)
|
|
$
|
0.52
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(9,844
|
)
|
|
$
|
5,023
|
|
|
$
|
6,131
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs
outstanding
|
|
|
9,764
|
|
|
|
9,716
|
|
|
|
9,976
|
|
Stock options outstanding
|
|
|
—
|
|
|
|
12
|
|
|
|
7
|
|
Weighted average common and potential common
shares outstanding
|
|
|
9,764
|
|
|
|
9,728
|
|
|
|
9,983
|
|
Diluted (loss) income per share
|
|
$
|
(1.01
|
)
|
|
$
|
0.52
|
|
|
$
|
0.61
|
|
None of the options to purchase shares of common stock which totaled 69 were included in the computation of diluted loss per share in fiscal 2018 as the affect would be anti-dilutive due to the net loss in the fiscal year. There were 11 and 54 options to purchase shares of common stock at various exercise prices in fiscal 2017 and fiscal 2016, respectively, which were not included in the computation of diluted income per share as the affect would be anti-dilutive given their exercise prices.
Cash flow statement
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.
40
Interest paid was $12 in fiscal 2018, $10 in fiscal 2017, and $10
in fiscal 2016. In addition, income taxes paid were $1,916 in fiscal 2018, $951 in fiscal 2017 and $5,423 in fiscal 2016.
In fiscal 2018, fiscal 2017 and fiscal 2016, non-cash activities included pension and other postretirement benefit adjustments, net of income tax, of $(1,668), $(2,493) and $1,470, respectively. In fiscal 2018, non-cash activities included the reclassification of $1,828 from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”). Also, in fiscal 2018, fiscal 2017 and fiscal 2016, non-cash activities included the issuance of treasury stock valued at $130, $241 and $255, respectively, to the Company's Employee Stock Purchase Plan (See Note 11).
At March 31, 2018, 2017 and 2016, there were $0, $4, and $53, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Consolidated Statements of Cash Flows. In fiscal 2018, fiscal 2017 and fiscal 2016, capital expenditures totaling $0, $95 and $126, respectively, were financed through the issuance of capital leases.
Accumulated other comprehensive loss
Comprehensive income is comprised of net income and other comprehensive income or loss items, which are accumulated as a separate component of stockholders’ equity. For the Company, other comprehensive income or loss items include a foreign currency translation adjustment and pension and other postretirement benefit adjustments.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date. The accounting standard for fair value establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 – Valuations determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates.
41
Accounting and reporting changes
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission ("SEC"), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. The guidance requires companies to apply a five-step model when recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also includes a comprehensive set of disclosure requirements regarding revenue recognition. The guidance allows two methods of adoption: (1) a full retrospective approach where historical financial information is presented in accordance with the new standard and (2) a modified retrospective approach where the guidance is applied to the most current period presented in the financial statements. In August 2015, the FASB issued ASU No 2015-14 "Revenue from Contracts with Customers: Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which clarifies the identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients," which clarifies the implementation guidance related to collectability, presentation of sales tax, noncash consideration, contract modifications and completed contracts at transition.
The Company will adopt these standards using the modified retrospective approach on April 1, 2018. The Company developed a project plan, completed the review of its customer contracts and has evaluated the impact of the guidance on its revenue. The Company believes that the most significant impact of adopting the guidance is the timing of revenue recognition. The Company believes that revenue on the majority of its contracts will continue to be recognized upon shipment while revenue on its larger contracts will be recognized over time as these contracts meet specific criteria established in the new standards. The Company will utilize an input method based upon direct labor hours incurred or an output method based upon completion of operational milestones, depending upon the nature of the contract, to measure progress towards completion on contracts for which revenue is recognized over time. On April 1, 2018 the Company will recognize the cumulative effect of initially applying the amended guidance as a decrease of approximately $1,000 to the opening balance of retained earnings, due primarily to a delay in recognizing $5,000 of net sales. The Company does not expect that the ongoing impact to net sales and net income will be material to the Consolidated Statement of Operations, however, the future impact of the amended guidance is dependent upon the mix and nature of specific customer contracts. Under the existing guidance, progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract and the excess is presented as customer deposits, however, upon adoption of the amended guidance all progress payments exceeding unbilled revenue will be presented as customer deposits. The Company continues to implement changes to its business processes and controls to support the recognition and disclosure requirements under the new guidance.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new guidance in fiscal 2018. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting guidance. As a result, the effect of leases on the consolidated statement of comprehensive income and the consolidated statement of cash flows is largely unchanged from previous generally accepted accounting principles. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company believes the adoption of this ASU may have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to its Consolidated Balance Sheet, however, it does not expect the guidance to have a material impact on its Consolidated Statement of Operations or Cash Flows.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as
42
well as classification in the statement of cash flows. ASU 2016-09 is effecti
ve for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company adopted the new guidance in fiscal 2018. The adoption of this ASU did not have a material impact on the Company’s Consolidated Fin
ancial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230)," which clarifies the presentation and classification of eight specific issues on the cash flow statement. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU will have a material affect on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715)," which amended its guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amended guidance requires the service cost component be disaggregated from the other components of net benefit cost. The service cost component of expense is required to be reported in the income statement in the same line item as other compensation costs within income from operations. The other components of net benefit cost are required to be presented separately from the service cost component outside of income from operations. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows for the reclassification of certain income tax effects related to the Tax Cuts and Jobs Act (the "Tax Act") between accumulated other comprehensive loss and retained earnings. The amendments eliminate the stranded tax effects that were created as a result of the reduction of the U.S. federal corporate income tax rate. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company elected to early adopt this ASU in fiscal 2018 and as a result reclassified $1,828 from accumulated other comprehensive loss to retained earnings on the Consolidated Balance Sheet.
Management does not expect any other recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's consolidated financial statements.
Note 2 – Inventories:
Major classifications of inventories are as follows:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials and supplies
|
|
$
|
3,095
|
|
|
$
|
3,016
|
|
Work in process
|
|
|
17,546
|
|
|
|
12,573
|
|
Finished products
|
|
|
1,034
|
|
|
|
891
|
|
|
|
|
21,675
|
|
|
|
16,480
|
|
Less – progress payments
|
|
|
10,109
|
|
|
|
7,234
|
|
|
|
$
|
11,566
|
|
|
$
|
9,246
|
|
Note 3 – Property, Plant and Equipment:
Major classifications of property, plant and equipment are as follows:
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
|
$
|
210
|
|
|
$
|
210
|
|
Buildings and leasehold improvements
|
|
|
|
19,066
|
|
|
|
18,818
|
|
Machinery and equipment
|
|
|
|
29,579
|
|
|
|
28,854
|
|
Construction in progress
|
|
|
|
34
|
|
|
|
18
|
|
|
|
|
|
48,889
|
|
|
|
47,900
|
|
Less – accumulated depreciation and amortization
|
|
|
|
31,837
|
|
|
|
30,879
|
|
|
|
|
$
|
17,052
|
|
|
$
|
17,021
|
|
Depreciation expense in fiscal 2018, fiscal 2017 and fiscal 2016 was $1,986, $2,092, and $2,201, respectively.
43
Note 4 – Intangible Assets:
Intangible assets are comprised of the following:
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Impairment Loss
|
|
|
Net Carrying Amount
|
|
At March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,700
|
|
|
$
|
1,312
|
|
|
$
|
—
|
|
|
$
|
1,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
$
|
—
|
|
|
$
|
8,600
|
|
|
$
|
1,700
|
|
Tradename
|
|
|
2,500
|
|
|
|
—
|
|
|
|
500
|
|
|
|
2,000
|
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
9,100
|
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,700
|
|
|
$
|
1,132
|
|
|
$
|
—
|
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,300
|
|
Tradename
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,800
|
|
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible amortization expense was $180 in each of fiscal 2018, fiscal 2017 and fiscal 2016. As of March 31, 2018, amortization expense is estimated to be $180 in each of the fiscal years ending March 31, 2019, 2020, 2021, 2022 and 2023.
During the third quarter of fiscal 2018, the Company performed its annual goodwill and intangible asset impairment review. The Company assesses impairment by comparing the fair value of its reporting units and intangible assets to their related carrying value. The Company estimated the fair value of intangible assets and goodwill of its commercial nuclear power business related to the December 2010 acquisition of Energy Steel using the income approach. Under the income approach, the fair value of the business is calculated based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy. The impairment review indicated that the fair value of the permits, tradename and goodwill of the business were substantially lower than the carrying value due to reduced investment from the U.S. nuclear power market, the strength of the Energy Steel brand relative to larger more vertically integrated suppliers, and the bankruptcy of Westinghouse Electric Company which resulted in the stoppage of work at the Summer, South Carolina nuclear facility. As a result, in the third quarter of fiscal 2018 the Company recorded impairment losses of $8,600, $500, and $5,716 for permits, tradename and goodwill, respectively. Goodwill was $1,222 and $6,938 at March 31, 2018 and 2017, respectively.
Note 5 – Product Warranty Liability:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
538
|
|
|
$
|
686
|
|
Expense for product warranties
|
|
|
528
|
|
|
|
106
|
|
Product warranty claims paid
|
|
|
(573
|
)
|
|
|
(254
|
)
|
Balance at end of year
|
|
$
|
493
|
|
|
$
|
538
|
|
The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.
44
Note 6 - Leases:
The Company leases equipment and office space under various operating leases. Lease expense applicable to operating leases was $581, $615 and $677 in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Property, plant and equipment include the following amounts for leases which have been capitalized:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
364
|
|
|
$
|
364
|
|
Less accumulated amortization
|
|
|
192
|
|
|
|
119
|
|
|
|
$
|
172
|
|
|
$
|
245
|
|
Amortization of machinery and equipment under capital leases amounted to $73, $54 and $40 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively, and is included in depreciation expense.
As of March 31, 2018, future minimum payments required under non-cancelable leases are:
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2019
|
|
$
|
549
|
|
|
$
|
93
|
|
2020
|
|
|
424
|
|
|
|
36
|
|
2021
|
|
|
283
|
|
|
|
21
|
|
2022
|
|
|
8
|
|
|
|
—
|
|
2023
|
|
|
—
|
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
1,264
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Less – amount representing interest
|
|
|
|
|
|
|
7
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
$
|
143
|
|
Note 7 - Debt:
Short-Term Debt
The Company and its subsidiaries had no short-term borrowings outstanding at March 31, 2018 and 2017.
On December 2, 2015, the Company entered into a revolving credit facility agreement with JPMorgan Chase Bank, N.A. that provides a $25,000 line of credit, including letters of credit and bank guarantees, expandable at the Company’s option at any time up to $50,000. The agreement has a five-year term.
At the Company's option, amounts outstanding under the agreement will bear interest at either: (i) a rate equal to the bank's prime rate; or (ii) a rate equal to LIBOR plus a margin. The margin is based on the Company's funded debt to earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") and may range from 1.75% to 0.95%. Amounts available for borrowing under the agreement are subject to an unused commitment fee of between 0.30% and 0.20%, depending on the above ratio. The bank’s prime rate was 4.75% and 4.00% at March 31, 2018 and 2017, respectively.
Outstanding letters of credit under the agreement are subject to a fee of between 1.20% and 0.70%, depending on the Company's ratio of funded debt to EBITDA. The agreement allows the Company to reduce the fee on outstanding letters of credit to a fixed rate of 0.40% by securing outstanding letters of credit with cash and cash equivalents. At March 31, 2018, all outstanding letters of credit were secured by cash and cash equivalents. At March 31, 2018, there were $4,669 letters of credit outstanding on the JPMorgan Chase Bank, N.A. revolving credit facility and $2,569 with Bank of America, N.A. Availability under the line of credit was $20,331 at March 31, 2018.
Under the revolving credit facility, the Company covenants to maintain a maximum funded debt to EBITDA ratio, as defined in such credit facility, of 3.5 to 1.0 and a minimum earnings before interest expense and income taxes ("EBIT") to interest ratio, as defined in such credit facility, of 4.0 to 1.0. The agreement also provides that the Company is permitted to pay dividends without limitation if it maintains a maximum funded debt to EBITDA ratio equal to or less than 2.0 to 1.0 and permits the Company to pay dividends in an amount equal to 25% of net income if it maintains a funded debt to EBITDA ratio of greater than 2.0 to 1.0. The
45
Company was in compliance with all such provisions as of and for the years ended March 31, 2018 and 2017. Assets with a book value of $122,122 have
been pledged to secure borrowings under the credit facility.
On March 24, 2014, the Company entered into a letter of credit facility agreement to further support its international operations. The agreement provides a $5,000 line of credit to be used for the issuance of letters of credit. Under the agreement, the Company incurs an annual facility fee of 0.375% of the maximum amount available under the facility and outstanding letters of credit are subject to a fee of between 1.25% and 0.75%, depending on the Company's ratio of funded debt to EBITDA, as defined in such credit facility. The facility requires the Company to maintain a maximum funded debt to EBITDA ratio of 3.5 to 1.0 and a minimum EBIT to interest ratio, as defined in such credit facility, of 4.0 to 1.0. At March 31, 2018 there were $995 letters of credit outstanding, and availability under the letter of credit facility was $4,005.
Long-Term Debt
The Company and its subsidiaries had long-term capital lease obligations outstanding as follows:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Capital lease obligations (Note 6)
|
|
$
|
143
|
|
|
$
|
250
|
|
Less: current amounts
|
|
|
88
|
|
|
|
107
|
|
Total
|
|
$
|
55
|
|
|
$
|
143
|
|
With the exception of capital leases, the Company has no long-term debt payment requirements over the next five years as of March 31, 2018.
Note 8 - Financial Instruments and Derivative Financial Instruments:
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, investments, and trade accounts receivable. The Company places its cash, cash equivalents, and investments with high credit quality financial institutions, and evaluates the credit worthiness of these financial institutions on a regular basis. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Company's customer base and their geographic dispersion. At March 31, 2018 and 2017, the Company had no significant concentrations of credit risk.
Letters of Credit
The Company has entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At March 31, 2018 and 2017, the Company was contingently liable on outstanding standby letters of credit aggregating $8,233 and $8,372, respectively. See Note 7.
Foreign Exchange Risk Management
The Company, as a result of its global operating and financial activities, is exposed to market risks from changes in foreign exchange rates. In seeking to minimize the risks and/or costs associated with such activities, the Company may utilize foreign exchange forward contracts with fixed dates of maturity and exchange rates. The Company does not hold or issue financial instruments for trading or other speculative purposes and only holds contracts with high quality financial institutions. If the counter-parties to any such exchange contracts do not fulfill their obligations to deliver the contracted foreign currencies, the Company could be at risk for fluctuations, if any, required to settle the obligation. At March 31, 2018 and 2017, there were no foreign exchange forward contracts held by the Company.
Fair Value of Financial Instruments
The estimates of the fair value of financial instruments are summarized as follows:
Cash and cash equivalents
: The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments and are considered Level 1 assets in the fair value hierarchy.
46
Investments
: The fair value of investments at March 31, 2018 and 2017 approximated the carrying value
and are considered Level 2 assets in the fair value hierarchy.
Note 9 – Income Taxes:
An analysis of the components of (loss) income before (benefit) provision for income taxes is presented below:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
(12,861
|
)
|
|
$
|
7,346
|
|
|
$
|
8,301
|
|
China
|
|
|
7
|
|
|
|
(297
|
)
|
|
|
429
|
|
|
|
$
|
(12,854
|
)
|
|
$
|
7,049
|
|
|
$
|
8,730
|
|
The (benefit) provision for income taxes related to (loss) income before (benefit) provision for income taxes consists of:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6
|
|
|
$
|
2,834
|
|
|
$
|
3,795
|
|
State
|
|
|
72
|
|
|
|
118
|
|
|
|
54
|
|
Foreign
|
|
|
0
|
|
|
|
(42
|
)
|
|
|
272
|
|
|
|
|
78
|
|
|
|
2,910
|
|
|
|
4,121
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,276
|
)
|
|
|
(861
|
)
|
|
|
(1,319
|
)
|
State
|
|
|
61
|
|
|
|
30
|
|
|
|
(82
|
)
|
Foreign
|
|
|
12
|
|
|
|
(27
|
)
|
|
|
(154
|
)
|
Changes in valuation allowance
|
|
|
115
|
|
|
|
(26
|
)
|
|
|
33
|
|
|
|
|
(3,088
|
)
|
|
|
(884
|
)
|
|
|
(1,522
|
)
|
Total (benefit) provision for income taxes
|
|
$
|
(3,010
|
)
|
|
$
|
2,026
|
|
|
$
|
2,599
|
|
The reconciliation of the (benefit) provision calculated using the U.S. federal tax rate with the (benefit) provision for income taxes presented in the consolidated financial statements is as follows:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(Benefit) provision for income taxes at federal rate
|
|
$
|
(3,958
|
)
|
|
$
|
2,467
|
|
|
$
|
3,055
|
|
State taxes
|
|
|
118
|
|
|
|
129
|
|
|
|
(28
|
)
|
Charges not deductible for income tax purposes
|
|
|
48
|
|
|
|
39
|
|
|
|
64
|
|
Recognition of tax benefit generated by qualified production
activities deduction
|
|
|
4
|
|
|
|
(209
|
)
|
|
|
(245
|
)
|
Research and development tax credits
|
|
|
(102
|
)
|
|
|
(196
|
)
|
|
|
(232
|
)
|
Valuation allowance
|
|
|
(80
|
)
|
|
|
(26
|
)
|
|
|
33
|
|
Difference in federal rate
|
|
|
(2,799
|
)
|
|
|
(194
|
)
|
|
|
—
|
|
Impairment of goodwill and intangible assets
|
|
|
1,760
|
|
|
|
—
|
|
|
|
—
|
|
Stranded tax effects in accumulated other comprehensive loss
|
|
|
1,828
|
|
|
|
—
|
|
|
|
—
|
|
Mandatory repatriation of post-1986 undistributed foreign
subsidiary earnings and profits
|
|
|
185
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(14
|
)
|
|
|
16
|
|
|
|
(48
|
)
|
(Benefit) provision for income taxes
|
|
$
|
(3,010
|
)
|
|
$
|
2,026
|
|
|
$
|
2,599
|
|
The impact on the valuation allowance of the difference in the federal rate as a result of the Tax Act discussed below is reflected in the line item “Difference in federal rate” in the reconciliation above.
47
The net deferred
income tax liability recorded in the Consolidated Balance Sheets results from differences between financial statement and tax reporting of income and deductions. A summary of the composition of the Company's net deferred income tax liability follows:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Depreciation
|
|
$
|
(1,582
|
)
|
|
$
|
(2,201
|
)
|
Accrued compensation
|
|
|
201
|
|
|
|
242
|
|
Prepaid pension asset
|
|
|
(969
|
)
|
|
|
(845
|
)
|
Accrued pension liability
|
|
|
129
|
|
|
|
175
|
|
Accrued postretirement benefits
|
|
|
160
|
|
|
|
299
|
|
Compensated absences
|
|
|
366
|
|
|
|
601
|
|
Inventories
|
|
|
51
|
|
|
|
1,045
|
|
Warranty liability
|
|
|
108
|
|
|
|
191
|
|
Accrued expenses
|
|
|
429
|
|
|
|
937
|
|
Stock-based compensation
|
|
|
332
|
|
|
|
548
|
|
Intangible assets
|
|
|
(1,100
|
)
|
|
|
(5,097
|
)
|
New York State investment tax credit
|
|
|
1,074
|
|
|
|
959
|
|
Research and development tax credit
|
|
|
145
|
|
|
|
—
|
|
Net operating loss carryforwards
|
|
|
271
|
|
|
|
—
|
|
Other
|
|
|
47
|
|
|
|
79
|
|
|
|
|
(338
|
)
|
|
|
(3,067
|
)
|
Less: Valuation allowance
|
|
|
(1,074
|
)
|
|
|
(959
|
)
|
Total
|
|
$
|
(1,412
|
)
|
|
$
|
(4,026
|
)
|
The foreign deferred income tax asset of $15 and $25 at March 31, 2018 and 2017, respectively, is included in the caption "Other Assets" in the Consolidated Balance Sheet. Deferred income taxes include the impact of state investment tax credits of $279, which expire from 2019 to 2032 and state investment tax credits of $795, which have an unlimited carryforward period.
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management determined that a portion of the deferred tax assets as of March 31, 2018 and 2017 related to certain state investment tax credits would not be realized, and recorded a valuation allowance of $1,074 and $959, respectively.
The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to U.S. federal examination for tax years 2015 through 2017 and examination in state tax jurisdictions for tax years 2013 through 2017. The Company is subject to examination in the People's Republic of China for tax years 2014 through 2017. The liability for unrecognized tax benefits was $0 at each of March 31, 2018 and 2017.
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and recorded an income tax benefit of $971 related to such re-measurement in fiscal 2018. The Company is still analyzing certain aspects of the Tax Act, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The one-time transition tax is based on the total post-1986 earnings and profits (“E&P”) of our foreign subsidiary that has previously been deferred from U.S. income taxes. The Company recorded its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of $185 in fiscal 2018. The Company has not yet completed its calculation of the total post-1986 foreign E&P for the foreign subsidiary. The transition tax is based in part on the amount of those earnings held in cash and other specified assets. The amount may change upon completion of the fiscal 2018 tax return when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
48
The Tax Act also includes two new U.S. tax base-erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT) provisions, beginning in 2018. The GILTI provisions
require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has not yet determined if it will be subject to incremental U.S. tax on GILT
I income beginning in 2018. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended March 31, 2018
. The BEAT provisions in the Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax, and there
fore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended March 31, 2018.
The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included this amount in its consolidated financial statements for the year ended March 31, 2018. As of March 31, 2018, the Company has completed the majority of its accounting for the tax effects of the Tax Act. Its preliminary estimate of the deemed repatriated earnings and the re-measurement of its deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters that may require further adjustments and changes in estimates, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and amounts related to the E&P of its foreign subsidiary, the filing of its tax returns, U.S. Treasury regulations expected to be issued, and administrative interpretations or court decisions interpreting the Tax Act.
Note 10 – Employee Benefit Plans:
Retirement Plans
The Company has a qualified defined benefit plan covering U.S. employees hired prior to January 1, 2003, which is non-contributory. Benefits are based on the employee's years of service and average earnings for the five highest consecutive calendar years of compensation in the ten-year period preceding retirement. The Company's funding policy for the plan is to contribute the amount required by the Employee Retirement Income Security Act of 1974, as amended.
The components of pension cost (benefit) are:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost during the period
|
|
$
|
598
|
|
|
$
|
600
|
|
|
$
|
521
|
|
Interest cost on projected benefit obligation
|
|
|
1,423
|
|
|
|
1,450
|
|
|
|
1,437
|
|
Expected return on assets
|
|
|
(2,977
|
)
|
|
|
(2,873
|
)
|
|
|
(3,181
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
1,013
|
|
|
|
1,351
|
|
|
|
1,174
|
|
Net pension cost (benefit)
|
|
$
|
57
|
|
|
$
|
528
|
|
|
$
|
(49
|
)
|
The weighted average actuarial assumptions used to determine net pension cost are:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Discount rate
|
|
|
4.08
|
%
|
|
|
3.93
|
%
|
|
|
3.74
|
%
|
Rate of increase in compensation levels
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Long-term rate of return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The expected long-term rate of return is based on the mix of investments that comprise plan assets and external forecasts of future long-term investment returns, historical returns, correlations and market volatilities.
The Company does not expect to make any contributions to the plan during fiscal 2019.
49
Changes in the Company's benefit obligation, plan
assets and funded status for the pension plan are presented below:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Change in the benefit obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
35,460
|
|
|
$
|
37,444
|
|
Service cost
|
|
|
494
|
|
|
|
496
|
|
Interest cost
|
|
|
1,423
|
|
|
|
1,450
|
|
Actuarial gain
|
|
|
(44
|
)
|
|
|
(994
|
)
|
Benefit payments
|
|
|
(2,002
|
)
|
|
|
(1,818
|
)
|
Liability released through annuity purchase
|
|
|
(890
|
)
|
|
|
(1,118
|
)
|
Projected benefit obligation at end of year
|
|
$
|
34,441
|
|
|
$
|
35,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
37,800
|
|
|
$
|
36,471
|
|
Employer contribution
|
|
|
52
|
|
|
|
—
|
|
Actual return on plan assets
|
|
|
3,958
|
|
|
|
4,393
|
|
Benefit and administrative expense payments
|
|
|
(2,002
|
)
|
|
|
(1,818
|
)
|
Annuities purchased
|
|
|
(998
|
)
|
|
|
(1,246
|
)
|
Fair value of plan assets at end of year
|
|
$
|
38,810
|
|
|
$
|
37,800
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
4,369
|
|
|
$
|
2,340
|
|
Amount recognized in the Consolidated Balance Sheets
|
|
$
|
4,369
|
|
|
$
|
2,340
|
|
The weighted average actuarial assumptions used to determine the benefit obligation are:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
3.95
|
%
|
|
|
4.08
|
%
|
Rate of increase in compensation levels
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
During fiscal 2018 and fiscal 2017, the pension plan released liabilities for vested benefits of certain participants through the purchase of nonparticipating annuity contracts with a third-party insurance company. As a result of these transactions, in fiscal 2018 and fiscal 2017, the projected benefit obligation decreased $890 and $1,118, respectively, and plan assets decreased $998 and $1,246 respectively. The projected benefit obligation is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases. The accumulated benefit obligation reflects the actuarial present value of benefits attributable to employee service rendered to date, but does not include the effects of estimated future pay increases. The accumulated benefit obligation as of March 31, 2018 and 2017 was $30,385 and $30,678, respectively. At March 31, 2018 and 2017, the pension plan was fully funded on an accumulated benefit obligation basis.
Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net actuarial loss
|
|
$
|
8,369
|
|
|
$
|
8,180
|
|
The increase (decrease) in accumulated other comprehensive loss, net of income tax, consists of:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net actuarial gain arising during the year
|
|
$
|
(794
|
)
|
|
$
|
(1,609
|
)
|
Reclassification of stranded tax effects related to the Tax Act
|
|
|
1,771
|
|
|
|
—
|
|
Amortization of actuarial loss
|
|
|
(788
|
)
|
|
|
(873
|
)
|
|
|
$
|
189
|
|
|
$
|
(2,482
|
)
|
50
The estimated net actuarial loss for the pension plan that will be amortized from
accumulated other comprehensive loss into net pension cost in fiscal 2019 is $847.
The following benefit payments, which reflect future service, are expected to be paid:
2019
|
|
$
|
1,206
|
|
2020
|
|
|
1,338
|
|
2021
|
|
|
1,428
|
|
2022
|
|
|
1,471
|
|
2023
|
|
|
1,490
|
|
2024-2028
|
|
|
8,369
|
|
Total
|
|
$
|
15,302
|
|
The weighted average asset allocation of the plan assets by asset category is as follows:
|
|
|
|
March 31,
|
|
Asset Category
|
|
Target Allocation
|
|
2018
|
|
|
2017
|
|
Equity securities
|
|
50-70%
|
|
|
67
|
%
|
|
|
68
|
%
|
Debt securities
|
|
20-50%
|
|
|
33
|
%
|
|
|
32
|
%
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The investment strategy of the plan is to generate a consistent total investment return sufficient to pay present and future plan benefits to retirees, while minimizing the long-term cost to the Company. Target allocations for asset categories are used to earn a reasonable rate of return, provide required liquidity and minimize the risk of large losses. Targets are adjusted when considered necessary to reflect trends and developments within the overall investment environment.
The fair values of the Company's pension plan assets at March 31, 2018 and 2017, by asset category, are as follows:
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Asset Category
|
|
At
March 31, 2018
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Cash
|
|
$
|
98
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
|
20,663
|
|
|
|
20,663
|
|
|
|
—
|
|
|
|
—
|
|
International companies
|
|
|
5,181
|
|
|
|
5,181
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bond funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate-term
|
|
|
10,283
|
|
|
|
10,283
|
|
|
|
—
|
|
|
|
—
|
|
Short-term
|
|
|
2,585
|
|
|
|
2,585
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
38,810
|
|
|
$
|
38,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
51
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Asset Category
|
|
At
March 31, 2017
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Cash
|
|
$
|
154
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
|
20,570
|
|
|
|
20,570
|
|
|
|
—
|
|
|
|
—
|
|
International companies
|
|
|
5,071
|
|
|
|
5,071
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bond funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate-term
|
|
|
9,585
|
|
|
|
9,585
|
|
|
|
—
|
|
|
|
—
|
|
Short-term
|
|
|
2,420
|
|
|
|
2,420
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
37,800
|
|
|
$
|
37,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value of Level 1 pension assets is obtained by reference to the last quoted price of the respective security on the market which it trades. See Note 1 to the Consolidated Financial Statements.
On February 4, 2003, the Company closed the defined benefit plan to all employees hired on or after January 1, 2003. In place of the defined benefit plan, these employees participate in the Company's domestic defined contribution plan. The Company contributes a fixed percentage of employee compensation to this plan on an annual basis for these employees. The Company contribution to the defined contribution plan for these employees in fiscal 2018, fiscal 2017 and fiscal 2016 was $284, $286 and $315, respectively.
The Company has a Supplemental Executive Retirement Plan ("SERP") which provides retirement benefits associated with wages in excess of the legislated qualified plan maximums. Pension expense recorded in fiscal 2018, fiscal 2017, and fiscal 2016 related to this plan was $115, $128 and $76, respectively. At March 31, 2018 and 2017, the related liability was $582 and $493, respectively. The current portion of the related liability of $17 and $26 at March 31, 2018 and 2017 is included in the caption "Accrued Compensation" and the long-term portion is included in "Accrued Pension Liability" in the Consolidated Balance Sheets.
The Company has a domestic defined contribution plan (401k) covering substantially all employees. The Company provides matching contributions equal to 100% of the first 3% of an employee's salary deferral and 50% of the next 2% percent of an employee’s salary deferral. Company contributions are immediately vested. Contributions were $805 in fiscal 2018, $873 in fiscal 2017 and $866 in fiscal 2016.
Other Postretirement Benefits
In addition to providing pension benefits, the Company has a plan in the U.S. that provides health care benefits for eligible retirees and eligible survivors of retirees. The Company's share of the medical premium cost has been capped at $4 for family coverage and $2 for single coverage for early retirees, and $1 for both family and single coverage for regular retirees.
On February 4, 2003, the Company terminated postretirement health care benefits for its U.S. employees. Benefits payable to retirees of record on April 1, 2003 remained unchanged.
The components of postretirement benefit expense are:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest cost on accumulated benefit obligation
|
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
29
|
|
Amortization of actuarial loss
|
|
|
37
|
|
|
|
36
|
|
|
|
40
|
|
Net postretirement benefit expense
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
69
|
|
The weighted average discount rates used to develop the net postretirement benefit cost were 3.23%, 3.16% and 3.11% in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
52
Changes in the Company's benefit obligation, plan assets and funded status for the plan are as follows:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Change in the benefit obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
844
|
|
|
$
|
875
|
|
Interest cost
|
|
|
26
|
|
|
|
26
|
|
Actuarial loss (gain)
|
|
|
(73
|
)
|
|
|
20
|
|
Benefit payments
|
|
|
(74
|
)
|
|
|
(77
|
)
|
Projected benefit obligation at end of year
|
|
$
|
723
|
|
|
$
|
844
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contribution
|
|
|
74
|
|
|
|
77
|
|
Benefit payments
|
|
|
(74
|
)
|
|
|
(77
|
)
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(723
|
)
|
|
$
|
(844
|
)
|
Amount recognized in the Consolidated Balance Sheets
|
|
$
|
(723
|
)
|
|
$
|
(844
|
)
|
The weighted average actuarial assumptions used to develop the accrued postretirement benefit obligation were:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
3.63
|
%
|
|
|
3.23
|
%
|
Medical care cost trend rate
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The medical care cost trend rate used in the actuarial computation ultimately reduces to 5% in 2024 and subsequent years. This was accomplished using 0.5% decrements for the years ended March 31, 2018 through 2024.
The current portion of the accrued postretirement benefit obligation of $81 and $83, at March 31, 2018 and 2017, respectively, is included in the caption "Accrued Compensation" and the long-term portion is separately presented in the Consolidated Balance Sheets.
Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net actuarial loss
|
|
$
|
230
|
|
|
$
|
259
|
|
The decrease in accumulated other comprehensive loss, net of income tax, consists of:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net actuarial loss (gain) arising during the year
|
|
$
|
(57
|
)
|
|
$
|
13
|
|
Reclassification of stranded tax effects related to the Tax Act
|
|
|
57
|
|
|
|
—
|
|
Amortization of actuarial loss
|
|
|
(29
|
)
|
|
|
(24
|
)
|
|
|
$
|
(29
|
)
|
|
$
|
(11
|
)
|
The estimated net actuarial loss for the other postretirement benefit plan that will be amortized from accumulated other comprehensive loss into net postretirement benefit income in fiscal 2019 is $27.
53
The following benefit payments are expected to be paid during the fiscal years ending March 31:
2019
|
|
$
|
81
|
|
2020
|
|
|
77
|
|
2021
|
|
|
73
|
|
2022
|
|
|
69
|
|
2023
|
|
|
64
|
|
2024-2028
|
|
|
257
|
|
Total
|
|
$
|
621
|
|
Assumed medical care cost trend rates could have a significant affect on the amounts reported for the postretirement benefit plan. However, due to the caps imposed on the Company's share of the premium costs, a one percentage point change in assumed medical care cost trend rates would not have a significant affect on the total service and interest cost components or the postretirement benefit obligation.
Employee Stock Ownership Plan
On January 3, 2017, the Company transferred the Company stock and accumulated dividends in its noncontributory Employee Stock Ownership Plan ("ESOP") to its domestic defined contribution plan (401K) and subsequently terminated the ESOP. There were no Company contributions to the ESOP in fiscal 2017 or fiscal 2016.
Self-Insured Medical Plan
Effective January 1, 2014, the Company commenced self-funding the medical insurance coverage provided to its U.S. based employees. The Company has obtained a stop loss insurance policy in an effort to limit its exposure to claims. The Company has specific stop loss coverage per employee for claims incurred during the year exceeding $100 per employee with annual maximum aggregate stop loss coverage per employee of $1,000. The Company also has total plan annual maximum aggregate stop loss coverage of $2,398. The liability of $122 and $174 on March 31, 2018 and 2017, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption "Accrued Compensation" in the Consolidated Balance Sheets.