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BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 12 Months Ended
Dec. 31, 2017
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Principles of Consolidation

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation.

 

For business combinations, we record net assets acquired and liabilities assumed at their estimated fair values.

Cash and Cash Equivalents

 

Cash and Cash Equivalents

 

Cash and cash equivalents include instruments which are readily convertible into cash (original maturities of three months or less) and which are not subject to significant risk of changes in interest rates.

Accounts Receivable

 

Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.  Activity in the allowance for doubtful accounts for 2017, 2016 and 2015 was as follows (in thousands):

 

 

 

December 31,

 

 

 

2017

 

2016

 

2015

 

Beginning balance

 

$
362

 

$
611

 

$
367

 

Additional reserves

 
39

 
167

 
333

 

Writeoffs

 
(61

)
(414

)
(117

)

Effect of foreign currency translation

 
1

 
(2

)
28

 

 

 

 

 

 

 

 

 

Ending balance

 

$
341

 

$
362

 

$
611

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

Inventories

 

Inventories include costs of materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out basis) or net realizable value, as follows (in thousands):

 

 

 

December 31,

 

 

 

2017

 

2016

 

Parts and raw materials

 

$
24,910

 

$
23,978

 

Work-in-process

 
5,984

 
6,628

 

Finished goods

 
6,075

 
4,928

 

 

 

 

 

 

 

 

 
36,969

 
35,534

 

Less reserves

 
(4,401

)
(4,436

)

 

 

 

 

 

 

Inventories

 

$
32,568

 

$
31,098

 

 

 

 

 

 

 

 

 

 

The Company recorded provisions for excess and obsolete inventories of approximately $480, $351 and $432 for 2017, 2016 and 2015, respectively.

Property, Plant and Equipment

 

Property, Plant and Equipment

 

Property, plant and equipment is classified as follows (in thousands):

 

 

 

 

 

December 31,

 

 

 

Useful lives

 

2017

 

2016

 

Land

 

 

 

$
993

 

$
962

 

Building and improvements

 

5 - 39 years

 
10,678

 
9,911

 

Machinery, equipment, tools and dies

 

3 - 15 years

 
49,083

 
44,247

 

Furniture, fixtures and other

 

3 - 10 years

 
12,931

 
10,088

 

 

 

 

 

 

 

 

 

 

 

 

 
73,685

 
65,208

 

Less accumulated depreciation

 

 

 
(35,282

)
(27,734

)

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

$
38,403

 

$
37,474

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense is provided using the straight-line method over the estimated useful lives of the assets.  Amortization of building improvements is provided using the straight-line method over the life of the lease term or the life of the assets, whichever is shorter.  Maintenance and repair costs are charged to operations as incurred.  Major additions and improvements are capitalized.  The cost and related accumulated depreciation of retired or sold property are removed from the accounts and the resulting gain or loss, if any, is reflected in earnings.

 

Depreciation expense was $7,055, $6,545 and $4,822 in 2017, 2016 and 2015, respectively.

Intangible Assets

 

Intangible Assets

 

Intangible assets, other than goodwill, are recorded at cost and are amortized over their estimated useful lives using the straight-line method.

Impairment of Long-Lived Assets

 

Impairment of Long-Lived Assets

 

The Company reviews the carrying values of its long-lived assets, including property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate that such carrying values may not be recoverable.  Long-lived assets are carried at historical cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest.  If projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value.  Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived assets.

Goodwill

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.

 

Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise.  The Company has defined one reporting unit that is the same as its operating segment.  Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary.  If it is determined, based on qualitative factors, that the fair value of the reporting unit may be more likely than not less than carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required.  Additionally, the Company can elect to forgo the qualitative assessment and perform the quantitative test.

 

The first step of the quantitative test compares the fair value of the reporting unit to its carrying amount, including goodwill.

 

If the carrying amount of a reporting unit exceeds its fair value, there is a potential impairment and the second step must be performed.  The second step compares the implied fair value of goodwill with the carrying amount of goodwill.  If the carrying amount of goodwill exceeds the implied fair value, the excess is required to be recorded as an impairment charge.

 

The implied fair value of goodwill is determined by assigning the fair value of the reporting unit to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if it had been acquired in a business combination.  The Company has elected to perform the annual impairment assessment for goodwill each year in the fourth quarter.

 

At October 31, 2017, we performed our annual assessment of fair value and concluded that there was no impairment related to goodwill.  The Company did not record any impairment charges for the year ended December 31, 2017, 2016 or 2015.

Other Long-Term Assets

 

Other Long-Term Assets

 

Other long-term assets include securities that the Company has purchased with the intent of funding the deferred compensation arrangements for certain executives of the Company.  These items are accounted for at fair value on a recurring basis.  Any changes in value are included in net income in the Company’s consolidated statements of income and comprehensive income.

Warranty

 

Warranty

 

The Company offers warranty coverage for its products.  The length of the warranty period for its products is generally three months to two years, and varies significantly based on the product sold.  The Company estimates the costs of repairing products under warranty based on the historical average cost of the repairs.  The assumptions used to estimate warranty accruals are reevaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted.  Estimated warranty costs are recorded at the time of sale of the related product, and are considered a cost of sale.

 

Changes in the Company’s reserve for product warranty claims during 2017, 2016 and 2015 were as follows (in thousands):

 

 

 

December 31,

 

 

 

2017

 

2016

 

2015

 

Warranty reserve at beginning of the year

 

$
830

 

$
780

 

$
786

 

Warranty reserves acquired

 

—

 
297

 

—

 

Provision

 
234

 
(138

)
142

 

Warranty expenditures

 
(200

)
(96

)
(123

)

Effect of foreign currency translation

 
58

 
(13

)
(25

)

 

 

 

 

 

 

 

 

Warranty reserve at end of year

 

$
922

 

$
830

 

$
780

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued Liabilities

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2017

 

2016

 

Compensation and fringe benefits

 

$
7,459

 

$
7,379

 

Warranty reserve

 
922

 
830

 

Income taxes payable

 
2,397

 
183

 

Other accrued expenses

 
3,492

 
2,286

 

 

 

 

 

 

 

 

 

$
14,270

 

$
10,678

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation

 

Foreign Currency Translation

 

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end of period exchange rates.  Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment.  Foreign currency translation adjustment is included in other comprehensive income, a component of stockholders’ equity in the accompanying consolidated statements of stockholders’ equity.  Revenue and expense transactions use an average rate prevailing during the month of the related transaction.  Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each of the Technology Units (“TUs”) are included in the results of operations as incurred.

Revenue Recognition

 

Revenue Recognition

 

The Company recognizes revenue when products are shipped or delivered (shipping terms may be either FOB shipping point or destination) and title has passed to the customer, persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectability is reasonably assured. The Company’s shipping and handling costs are included in cost of sales for all periods presented.

Engineering and Development Costs

 

Engineering and Development Costs

 

The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies.  Engineering and development costs are expensed as incurred.

Basic and Diluted Income per Share

 

Basic and Diluted Income per Share

 

Basic income per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding.  Diluted income per share is determined by dividing the net income by the sum of (1) the weighted average number of common shares outstanding and (2) if not anti-dilutive, the effect of stock awards determined utilizing the treasury stock method.  The dilutive effect of outstanding awards was 105,000, 94,000 and 10,000 shares for the years 2017, 2016 and 2015, respectively.  Stock awards of 600 and 30,700 were excluded from the calculation of diluted income per share for 2017 and 2016, respectively.  No stock awards were excluded from the calculation of diluted income per share for year 2015.

Comprehensive Income

 

Comprehensive Income

 

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  It includes all changes in equity during a period except those resulting from investments by and distributions to stockholders.

Fair Value Accounting

 

Fair Value Accounting

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

 

The guidance establishes a framework for measuring fair value, which utilizes observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  Preference is given to observable inputs.

 

These two types of inputs create the following three-level fair value hierarchy:

 

Level 1:

 

Quoted prices for identical assets or liabilities in active markets.

 

 

 

Level 2:

 

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

 

 

 

Level 3:

 

Significant inputs to the valuation model that are unobservable.

 

The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, debt obligations, accounts payable, and accrued liabilities.  The carrying amounts reported in the consolidated balance sheets for these assets approximate fair value because of the immediate or short-term maturities of these financial instruments.

 

The following table presents the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2017 and 2016, respectively, by level within the fair value hierarchy (in thousands):

 

 

 

December 31, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets (liabilities)

 

 

 

 

 

 

 

Pension plan assets

 

$
5,362

 

$

—

 

$

—

 

Other long term assets

 
3,929

 

—

 

—

 

Interest rate swaps

 

—

 
196

 

—

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets (liabilities)

 

 

 

 

 

 

 

Pension plan assets

 

$
4,948

 

$

—

 

$

—

 

Other long term assets

 
3,476

 

—

 

—

 

Interest rate swaps

 

—

 
(30

)

—

 

 

Derivative Financial Instruments

 

Derivative Financial Instruments

 

Disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments.

 

The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Income Taxes

 

Income Taxes

 

The Tax Cuts and Jobs Act of 2017 was enacted in the United States on December 22, 2017.   The provisions of the Act significantly revise the U.S. corporate income tax rules and requires companies to record a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and reduces the US federal corporate tax rate from 35% to 21%.   As of December 31, 2017, the Company has not fully completed the accounting for the tax effects of enactment of the Act, however a reasonable estimate of the tax effects has been recorded in 2017.   The amounts are provisional and subject to change as the determination of the impact of the income tax effects will require additional analysis of historical records, annual data, further interpretation of regulatory guidance that may be issued and actions the Company may take as a result of the Act.

 

The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year.  Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, and for operating loss and tax credit carryforwards.  The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period.  Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment.  A valuation allowance may be provided to the extent management deems it is more likely than not that deferred tax assets will not be realized.  The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income, in the appropriate taxing jurisdictions, during the periods in which temporary differences, net operating losses and tax credits become realizable.  Management believes that it is more likely than not that the Company will realize the benefits of these temporary differences and operating loss and tax credit carryforwards, net of valuation allowances.

 

Realization of an uncertain income tax position must have a “more likely than not” probability of being sustained based on technical merits before it can be recognized in the financial statements, assuming a review by tax authorities having all relevant information and applying current conventions.  The Company does not have significant unrecognized tax benefits and does not anticipate a significant increase or decrease in unrecognized tax benefits within the next twelve months.  Income tax related interest and penalties recognized in 2017, 2016 and 2015 are de minimus.

Pension and Postretirement Welfare Plans

 

Pension and Postretirement Welfare Plans

 

The Company reports gains or losses and prior service costs or credits that arise during the period, but are not recognized as components of net periodic benefit cost, as a component of other comprehensive income, net of tax.  Amounts recognized in accumulated other comprehensive income are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements.

Concentration of Credit Risk

 

Concentration of Credit Risk

 

Trade receivables subject the Company to the potential for credit risk.  To reduce this risk, the Company performs evaluations of its customers’ financial condition and creditworthiness at the time of sale, and updates those evaluations when necessary.  See Note 11, Segment Information for additional information regarding customer concentration.

Use of Estimates

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions.  Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications

 

Reclassifications

 

Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2017 presentation.

Recently adopted accounting pronouncements

 

Recently adopted accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers 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. We will adopt ASU 2014-09 and its amendments on a modified retrospective basis effective January 1, 2018.  We do not expect that the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements. A significant majority of our revenue is recorded when we invoice customers and is largely aligned with the meeting of identified performance obligations under ASU 2014-09. We do not expect a material change in our revenue recognition after implementation of the standard.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is early adopting ASU 2017-12 in the first quarter of 2018 and does not expect an impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.  The amendments affect all companies that must determine whether they have acquired or sold a business.  The amendments are intended to help companies and evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments provide a more robust framework to use in determining when a set of assets and activities is a business.  The new standard is effective for the Company beginning on January 1, 2018.  The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The objective of ASU 2016-15 is to reduce existing diversity in practice by addressing eight specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for the Company beginning on January 1, 2018.  The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” The standard applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of the standard at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in ASU 2015-11 more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS).  The standard is effective for fiscal years beginning after December 15, 2016.  The Company adopted ASU 2015-11 effective January 1, 2017 and it had no impact on its consolidated financial statements.

Recently issued accounting pronouncements

 

Recently issued accounting pronouncements

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to address a specific consequence of the Tax Cuts and Jobs Act (TCJA) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. The ASU is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Management has not yet completed its assessment of the impact of the ASU on the Company’s Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.” The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.